Escrow Requirements Under the Truth in Lending Act (Regulation Z), 4725-4757 [2013-00734]
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Vol. 78
Tuesday,
No. 14
January 22, 2013
Part III
Bureau of Consumer Financial Protection
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12 CFR Part 1026
Escrow Requirements Under the Truth in Lending Act (Regulation Z); Final
Rule
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Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations
BUREAU OF CONSUMER FINANCIAL
PROTECTION
12 CFR Part 1026
[Docket No. CFPB–2013–0001]
RIN 3170–AA16
Escrow Requirements Under the Truth
in Lending Act (Regulation Z)
Bureau of Consumer Financial
Protection.
ACTION: Final rule; official
interpretations.
AGENCY:
The Bureau of Consumer
Financial Protection (Bureau) is
publishing a final rule that amends
Regulation Z (Truth in Lending) to
implement certain amendments to the
Truth in Lending Act made by the
Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank
Act). Regulation Z currently requires
creditors to establish escrow accounts
for higher-priced mortgage loans
secured by a first lien on a principal
dwelling. The rule implements statutory
changes made by the Dodd-Frank Act
that lengthen the time for which a
mandatory escrow account established
for a higher-priced mortgage loan must
be maintained. The rule also exempts
certain transactions from the statute’s
escrow requirement. The primary
exemption applies to mortgage
transactions extended by creditors that
operate predominantly in rural or
underserved areas, originate a limited
number of first-lien covered
transactions, have assets below a certain
threshold, and do not maintain escrow
accounts on mortgage obligations they
currently service.
DATES: Effective date: The rule is
effective June 1, 2013.
Applicability date: Its requirements
apply to transactions for which creditors
receive applications on or after that
date.
FOR FURTHER INFORMATION CONTACT:
David Friend or Ebunoluwa Taiwo,
Counsels, Office of Regulations, at (202)
435–7700.
SUPPLEMENTARY INFORMATION:
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SUMMARY:
I. Summary of the Final Rule
In response to the recent mortgage
crisis, Congress enacted the Dodd-Frank
Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) to
strengthen certain consumer protections
under existing law. The Bureau of
Consumer Financial Protection (Bureau)
is issuing this final rule to implement
provisions of the Dodd-Frank Act
requiring creditors to establish escrow
accounts for certain mortgage
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transactions to help ensure that
consumers set aside funds to pay
property taxes, and premiums for
homeowners insurance, and other
mortgage-related insurance required by
the creditor. The final rule takes effect
on June 1, 2013.
The final rule has three main
elements:
• As directed by the Dodd-Frank Act,
the rule amends existing regulations
that require creditors to establish and
maintain escrow accounts for at least
one year after originating a ‘‘higherpriced mortgage loan’’ to require
generally that the accounts be
maintained for at least five years.
• The rule creates an exemption from
the escrow requirement for small
creditors that operate predominately in
rural or underserved areas. Specifically,
to be eligible for the exemption, a
creditor must: (1) Make more than half
of its first-lien mortgages in rural or
underserved areas; (2) have an asset size
less than $2 billion; (3) together with its
affiliates, have originated 500 or fewer
first-lien mortgages during the
preceding calendar year; and (4)
together with its affiliates, not escrow
for any mortgage it or its affiliates
currently services, except in limited
instances. Under the rule, eligible
creditors need not establish escrow
accounts for mortgages intended at
consummation to be held in portfolio,
but must establish accounts at
consummation for mortgages that are
subject to a forward commitment to be
purchased by an investor that does not
itself qualify for the exemption.
• Finally, the rule expands upon an
existing exemption from escrowing for
insurance premiums (though not for
property taxes) for condominium units
to extend the partial exemption to other
situations in which an individual
consumer’s property is covered by a
master insurance policy.
II. Background
A. TILA and Regulation Z
Congress enacted the Truth in
Lending Act (TILA), 15 U.S.C. 1601 et
seq., based on findings that economic
stability would be enhanced and
competition among consumer credit
providers would be strengthened by the
informed use of credit resulting from
consumers’ awareness of the cost of
credit. One of the purposes of TILA is
to provide meaningful disclosure of
credit terms to enable consumers to
compare credit terms available in the
marketplace more readily and avoid the
uninformed use of credit. TILA’s
disclosures differ depending on whether
credit is an open-end (revolving) plan or
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a closed-end (installment) transaction.
TILA also contains certain procedural
and substantive protections for
consumers.
With the enactment of the DoddFrank Act, general rulemaking authority
under TILA transferred from the Board
of Governors of the Federal Reserve
System (Board) to the Bureau on July 21,
2011. Pursuant to the Dodd-Frank Act
and TILA, as amended, the Bureau
published for public comment an
interim final rule establishing a new
Regulation Z, 12 CFR part 1026,
implementing TILA (except with respect
to persons excluded from coverage by
section 1029 of the Dodd-Frank Act).
See 76 FR 79768 (Dec. 22, 2011). This
rule did not impose any new
substantive obligations but did make
technical and conforming changes to
reflect the transfer of authority and
certain other changes made by the
Dodd-Frank Act. The Bureau’s
Regulation Z took effect on December
30, 2011. An official commentary
interprets the requirements of
Regulation Z. By statute, creditors that
follow in good faith official
interpretations contained in the
commentary are insulated from civil
liability, criminal penalties, and
administrative sanction.
On July 30, 2008, the Board published
a final rule amending Regulation Z to
establish new regulatory protections for
consumers in the residential mortgage
market pursuant to authority originally
granted to the Board by the Home
Ownership and Equity Protection Act of
1994 (HOEPA). See 73 FR 44522 (July
30, 2008) (2008 HOEPA Final Rule).
Among other things, the 2008 HOEPA
Final Rule defined a class of higherpriced mortgage loans that are subject to
certain protections. A higher-priced
mortgage loan was established by the
2008 HOEPA Final Rule as a closed-end
transaction secured by a consumer’s
principal dwelling with an annual
percentage rate that exceeds an ‘‘average
prime offer rate’’ for a comparable
transaction by 1.5 or more percentage
points for transactions secured by a first
lien, or by 3.5 or more percentage points
for transactions secured by a
subordinate lien.1 Under the 2008
HOEPA Final Rule, such transactions
are subject to a number of special
requirements, including that creditors
1 The ‘‘average prime offer rate’’ is derived from
average interest rates, points, and other loan pricing
terms currently offered to consumers by a
representative sample of creditors for mortgage
transactions that have low-risk pricing
characteristics. The Bureau publishes average prime
offer rates for a broad range of types of transactions
in a table updated at least weekly, as well as the
methodology the Bureau uses to derive these rates.
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assess consumers’ ability to repay such
transactions before extending credit,
that creditors establish escrow accounts
for higher-priced mortgage loans
secured by a first lien on a principal
dwelling (with some exceptions), and
imposes significant restrictions on the
use of prepayment penalties.
Specifically with regard to escrows, the
rule required that creditors establish
and maintain escrow accounts for
property taxes and premiums for
mortgage-related insurance required by
the creditor for a minimum of one year
after originating a higher-priced
mortgage loan secured by a first lien on
a principal dwelling. The escrow
requirement was effective on April 1,
2010, for transactions secured by sitebuilt homes, and on October 1, 2010, for
transactions secured by manufactured
housing.
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B. The Dodd-Frank Act
On July 21, 2010, Congress enacted
the Dodd-Frank Act after a cycle of
unprecedented expansion and
contraction in the mortgage market
sparked the most severe U.S. recession
since the Great Depression.2 The DoddFrank Act created the Bureau and
consolidated various rulemaking and
supervisory authorities in the new
agency, including the authority to
implement HOEPA and TILA.3 At the
same time, Congress significantly
amended the statutory requirements
governing mortgage practices with the
intent to restrict the practices that
contributed to the crisis.
As part of these changes, the DoddFrank Act enacted several substantive
requirements designed to address
questionable practices in the mortgage
market. Several of these provisions
expanded upon elements of the 2008
HOEPA Final Rule. For instance, among
other provisions, title XIV of the DoddFrank Act amends TILA to establish
certain requirements for escrow
accounts for consumer credit
transactions secured by a first lien on a
consumer’s principal dwelling. Sections
1461 and 1462 of the Dodd-Frank Act
create new TILA section 129D, 15 U.S.C.
1639d, which substantially codifies
Regulation Z’s escrow requirement for
higher-priced mortgage loans but
lengthens the period for which escrow
accounts are required, adjusts the rate
2 For a more in-depth discussion of the mortgage
market, the financial crisis, and mortgage
origination generally, see the Bureau’s 2013 ATR
Final Rule, discussed below in part III.C.
3 Sections 1011, 1021, and 1061 of title X of the
Dodd-Frank Act, the ‘‘Consumer Financial
Protection Act,’’ Public Law 111–203, sections
1001–1100H, codified at 12 U.S.C. 5491, 5511,
5581. The Consumer Financial Protection Act is
substantially codified at 12 U.S.C. 5481–5603.
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threshold for determining whether
escrow accounts are required for ‘‘jumbo
loans,’’ whose principal amounts exceed
the maximum eligible for purchase by
the Federal Home Loan Mortgage
Corporation (Freddie Mac), and adds
two disclosure requirements. The new
section also authorizes the Bureau to
create an exemption from the escrow
requirement for transactions originated
and held in portfolio by creditors that
operate predominantly in ‘‘rural or
underserved’’ areas and meet certain
other prescribed criteria.
The Dodd-Frank Act also expanded
upon the 2008 HOEPA Final Rule to
require that creditors assess all
consumers’ ability to repay mortgage
transactions, even if they are not higherpriced mortgage loans. Sections 1411
and 1412 set forth these ability-to-repay
requirements and provide a
presumption of compliance for certain
‘‘qualified mortgages,’’ including certain
balloon-payment mortgages originated
and held in portfolio by creditors that
operate predominantly in ‘‘rural or
underserved’’ areas and meet certain
other prescribed criteria. The provisions
for balloon-payment qualified mortgages
and for the potential escrow exemption
are similar but not identical under the
statute.
In the spring of 2011, the Board
issued two proposals to implement the
escrow and ability-to-repay/qualified
mortgage provisions. Specifically, on
March 2, 2011, the Board published a
proposed rule to implement the
requirements of sections 1461 and 1462
of the Dodd-Frank Act. 76 FR 11598
(Mar. 2, 2011) (the Board’s 2011
Escrows Proposal). The Board’s 2011
Escrows Proposal would have amended
the escrow requirement of Regulation Z,
by creating an exemption for
transactions by certain creditors
operating in rural or underserved areas,
and by establishing two new disclosure
requirements relating to escrow
accounts. The proposal also would have
adjusted the threshold for ‘‘higherpriced mortgage loans’’ based on a
loan’s ‘‘transaction coverage rate,’’
rather than its annual percentage rate
(APR). This element of the proposal
grew out of a separate initiative by the
Board in which it had proposed to
expand the definition of finance charge
to include more fees and charges, and
thus also generally to increase APRs,
under Regulation Z to make disclosures
more useful to consumers. Because
those changes would have caused more
transactions to exceed the thresholds for
higher-priced mortgage loans, the Board
proposed using a ‘‘transaction coverage
rate’’ metric to keep coverage levels
relatively constant. See 74 FR 43232
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4727
(Aug. 26, 2009); 75 FR 58539, 58660–61
(Sept. 24, 2010).
On May 11, 2011, the Board
published a proposal 2011 ATR
Proposal to implement the ability-torepay/qualified mortgage provisions
added to TILA by the Dodd Frank Act,
as discussed above. See 76 FR 27390
(May 11, 2011) (the Board’s 2011 ATR
Proposal). The Board’s 2011 Escrows
and 2011 ATR Proposals used similar
definitions of ‘‘rural’’ and
‘‘underserved’’ but varied with regard to
certain other proposed provisions for
the balloon-payment qualified mortgage
and escrow exemptions.
On July 21, 2011, section 1061 of the
Dodd-Frank Act transferred to the
Bureau the ‘‘consumer financial
protection functions’’ previously vested
in certain other Federal agencies,
including the Board. On November 23,
2012, the Bureau published a final rule
that delays the implementation of
certain disclosure requirements
contained in title XIV of the Dodd-Frank
Act, including those contained in TILA
section 129D, as added by Dodd-Frank
Act sections 1461 and 1462. See 77 FR
70105 (Nov. 23, 2012). Consequently,
the disclosure portions of the Board’s
2011 Escrows Proposal will be the
subject of future rulemaking by the
Bureau and are not finalized in this rule.
C. Size and Volume of the Current
Mortgage Origination Market
Even with the economic downturn
and tightening of credit standards,
approximately $1.28 trillion in mortgage
loans were originated in 2011.4 In
exchange for an extension of mortgage
credit, consumers promise to make
regular mortgage payments and provide
their home or real property as collateral.
The overwhelming majority of
homebuyers continue to use mortgages
to finance at least some of the purchase
price of their property. In 2011, 93
percent of all home purchases were
financed with a mortgage credit
transaction.5
Consumers may obtain mortgage
credit to purchase a home, to refinance
an existing mortgage, to access home
equity, or to finance home
improvement. Purchase transactions
and refinancings together produced 6.3
million new first-lien mortgage
originations in 2011.6 The proportion of
4 Credit Forecast 2012, Moody’s Analytics (2012),
available at: http://www.economy.com/default.asp
(reflects first-lien mortgage loans) (data service
accessibly only through paid subscription).
5 1 Inside Mortg. Fin., The 2012 Mortgage Market
Statistical Annual 12 (2012).
6 Credit Forecast 2012; 1 Inside Mortg. Fin., The
2012 Mortgage Market Statistical Annual 17 (2012).
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transactions that are for purchases as
opposed to refinancings varies with the
interest rate environment and other
market factors. In 2011, 65 percent of
the market was refinance transactions
and 35 percent was purchase
transactions, by volume.7 Historically
the distribution has been more even. In
2000, refinancings accounted for 44
percent of the market while purchase
transactions comprised 56 percent; in
2005, the two products were split
evenly.8
With a home equity transaction, a
homeowner uses his or her equity as
collateral to secure consumer credit.
The credit proceeds can be used, for
example, to pay for home
improvements. Home equity credit
transactions and home equity lines of
credit resulted in an additional 1.3
million mortgage originations in 2011.9
The market for higher-priced
mortgage loans remains significant. Data
reported under the Home Mortgage
Disclosure Act (HMDA) show that in
2011 approximately 332,000
transactions, including subordinate
liens, were reportable as higher-priced
mortgage loans. Of these transactions,
refinancings accounted for
approximately 44 percent of the higherpriced mortgage loan market, and 90
percent of the overall higher-priced
mortgage loan market involved first-lien
transactions. The median first-lien
higher-priced mortgage loan was for
$81,000, while the interquartile range
(where one quarter of the transactions
are below, and one quarter of the
transactions are above) was $47,000 to
$142,000.
III. Summary of the Rulemaking
Process
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A. The Board’s 2011 Escrows Proposal
The Board’s 2011 Escrows Proposal
would have made certain amendments
to Regulation Z’s escrow requirement, in
accordance with the Dodd-Frank Act.
First, the Board’s 2011 Escrows Proposal
would have expanded the minimum
period for mandatory escrow accounts
from one to five years, and under certain
circumstances longer. Second, the
Board’s 2011 Escrows Proposal would
have extended the partial exemption for
certain transactions secured by a
condominium unit to planned unit
developments and other, similar
property types that have governing
associations that maintain a master
insurance policy. Third, the Board’s
7 Inside Mortg. Fin., Mortgage Originations by
Product, Mortgage Market Statistical Annual (2012).
8 Id. These percentages are based on the dollar
amounts of the transactions.
9 Credit Forecast 2012.
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2011 Escrows Proposal would have
created an exemption from the escrow
requirement for any transaction
extended by a creditor that makes most
of its first-lien higher-priced mortgage
loans in counties designated by the
Board as ‘‘rural’’ or ‘‘underserved,’’ has
annual originations (together with
affiliates) of 100 or fewer first-lien
mortgage transactions originated and
retained servicing rights in either the
current or prior year, and does not
escrow for any mortgage obligation it
services. The Board’s 2011 Escrows
Proposal would have limited the
definition of ‘‘rural’’ areas to those
based on the ‘‘urban influence codes’’
numbered 7, 10, 11, and 12, maintained
by the Economic Research Service (ERS)
of the United States Department of
Agriculture. Additionally, the Board’s
2011 Escrows Proposal would also have
designated a county as ‘‘underserved’’
where no more than two creditors
extend consumer credit secured by a
first lien on real property or a dwelling
five or more times in that county during
either of the two previous calendar
years.
The Board’s 2011 Escrows Proposal
also would have established two new
disclosure requirements relating to
escrow accounts. One disclosure would
have been required to be given three
business days before consummation of a
mortgage transaction for which an
escrow account would have been
established, explaining what an escrow
account is, how it works, and the risks
of not having an escrow account. The
disclosure would also have contained
the estimated amount of the first year’s
disbursements, the amount to be paid at
consummation to fund the escrow
account initially, the amount of the
consumer’s regular mortgage payments
to be paid into the escrow account, as
well as a statement that the amount of
the regular escrow payment could
change in the future.
In addition, the Board’s 2011 Escrows
Proposal would have created a second
disclosure to be given for mortgage
transactions where an escrow account
would not be established or when an
escrow account on an existing mortgage
obligation was to be cancelled. This
disclosure would have explained what
an escrow account is, how it works, the
risk of not having an escrow account, as
well as the potential consequences of
failing to pay home-related costs such as
taxes and insurance in the absence of an
escrow account. Further, it would have
stated why there would be no escrow
account or why it was being cancelled,
as applicable, the amount of any fee
imposed for not having an escrow
account, and how the consumer could
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request that an escrow account be
established or left in place, along with
any deadline for such requests. The
Board’s 2011 Escrows Proposal would
have required that this disclosure be
delivered at least three business days
before consummation or cancellation of
the existing escrow account, as
applicable.
B. Overview of Comments Received
The Bureau reviewed the
approximately 70 comment letters
submitted to the Board and in one case
directly to the Bureau concerning the
Board’s 2011 Escrows Proposal. These
comments came from mortgage
creditors, banks, savings associations,
credit unions, industry trade groups,
Federal agencies and officials,
individual consumers, and consumer
advocates. In addition to this overview,
comments received are discussed in
more detail, where applicable, in part V
below.
Commenters generally supported the
Board’s effort to implement the new
Dodd-Frank Act escrow requirements.
However, industry commenters
expressed concerns about the costs of
implementation, particularly with
respect to the proposed disclosure
requirements. In addition, several
industry commenters recommended that
the proposed exemptions from the
escrow requirement for higher-priced
mortgage loans be broadened to include:
(1) Transactions a creditor holds in
portfolio; (2) transactions made by
community banks and local credit
unions; (3) transactions made in broader
areas than the Board’s proposed
definitions of ‘‘rural’’ and
‘‘underserved’’; and (4) transactions for
certain chattel dwellings, including
manufactured homes, trailers, and
house boats.
In contrast, consumer advocates were
concerned that certain provisions could
allow creditors to skirt the proposed
rule. Consumer advocates suggested a
narrower exemption than the one
proposed by the Board to ensure that
higher-priced mortgage loans made in
well-served rural areas would be subject
to the escrow requirement.
C. Other Rulemakings
In addition to this final rule, the
Bureau is adopting several other final
rules and issuing one proposal, all
relating to mortgage credit to implement
requirements of title XIV of the DoddFrank Act. The Bureau is also issuing a
final rule jointly with other Federal
agencies to implement requirements for
mortgage appraisals in title XIV. Each of
the final rules follows a proposal issued
in 2011 by the Board or in 2012 by the
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Bureau alone or jointly with other
Federal agencies. Collectively, these
proposed and final rules are referred to
as the Title XIV Rulemakings.
• Ability to Repay: The Bureau is
finalizing a rule, following a May 2011
proposal issued by the Board (the
Board’s 2011 ATR Proposal),10 to
implement provisions of the DoddFrank Act (1) requiring creditors to
determine that a consumer has a
reasonable ability to repay covered
transactions and establishing standards
for compliance, such as by making a
‘‘qualified mortgage,’’ and (2)
establishing certain limitations on
prepayment penalties, pursuant to TILA
section 129C as established by DoddFrank Act sections 1411, 1412, and
1414. 15 U.S.C. 1639c. The Bureau’s
final rule is referred to as the 2013 ATR
Final Rule. Simultaneously with the
2013 ATR Final Rule, the Bureau is
issuing a proposal to amend the final
rule implementing the ability-to-repay
requirements, including by the addition
of exemptions for certain nonprofit
creditors and certain homeownership
stabilization programs and a definition
of a ‘‘qualified mortgage’’ for certain
mortgages made and held in portfolio by
small creditors (the 2013 ATR
Concurrent Proposal). The Bureau
expects to act on the 2013 ATR
Concurrent Proposal on an expedited
basis, so that any exceptions or
adjustments to the 2013 ATR Final Rule
can take effect simultaneously with that
rule.
• HOEPA: Following its July 2012
proposal (the 2012 HOEPA Proposal),11
the Bureau is issuing a final rule to
implement Dodd-Frank Act
requirements expanding protections for
‘‘high-cost mortgages’’ under the
Homeownership and Equity Protection
Act (HOEPA), pursuant to TILA sections
103(bb) and 129, as amended by DoddFrank Act sections 1431 through 1433.
15 U.S.C. 1602(bb) and 1639. The
Bureau also is finalizing rules to
implement certain title XIV
requirements concerning
homeownership counseling, including a
requirement that lenders provide lists of
homeownership counselors to
applicants for federally related mortgage
loans, pursuant to RESPA section 5(c),
as amended by Dodd-Frank Act section
1450. 12 U.S.C. 2604(c). The Bureau’s
final rule is referred to as the 2013
HOEPA Final Rule.
• Servicing: Following its August
2012 proposals (the 2012 RESPA
Servicing Proposal and 2012 TILA
12 77 FR 57200 (Sept. 17, 2012) (RESPA); 77 FR
57318 (Sept. 17, 2012) (TILA).
13 77 FR 55272 (Sept. 7, 2012).
10 76
FR 27390 (May 11, 2011).
11 77 FR 49090 (Aug. 15,2012).
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Servicing Proposal),12 the Bureau is
adopting final rules to implement DoddFrank Act requirements regarding forceplaced insurance, error resolution,
information requests, and payment
crediting, as well as requirements for
mortgage loan periodic statements and
adjustable-rate mortgage reset
disclosures, pursuant to section 6 of
RESPA and sections 128, 128A, 129F,
and 129G of TILA, as amended or
established by Dodd-Frank Act sections
1418, 1420, 1463, and 1464. 12 U.S.C.
2605; 15 U.S.C. 1638, 1638a, 1639f, and
1639g. The Bureau also is finalizing
rules on early intervention for troubled
and delinquent borrowers, and loss
mitigation procedures, pursuant to the
Bureau’s authority under section 6 of
RESPA, as amended by Dodd-Frank Act
section 1463, to establish obligations for
mortgage servicers that it finds to be
appropriate to carry out the consumer
protection purposes of RESPA, and its
authority under section 19(a) of RESPA
to prescribe rules necessary to achieve
the purposes of RESPA. The Bureau’s
final rule under RESPA with respect to
mortgage servicing also establishes
requirements for general servicing
standards policies and procedures and
continuity of contact pursuant to its
authority under section 19(a) of RESPA.
The Bureau’s final rules are referred to
as the 2013 RESPA Servicing Final Rule
and the 2013 TILA Servicing Final Rule,
respectively.
• Loan Originator Compensation:
Following its August 2012 proposal (the
2012 Loan Originator Proposal),13 the
Bureau is issuing a final rule to
implement provisions of the DoddFrank Act requiring certain creditors
and loan originators to meet certain
duties of care, including qualification
requirements; requiring the
establishment of certain compliance
procedures by depository institutions;
prohibiting loan originators, creditors,
and the affiliates of both from receiving
compensation in various forms
(including based on the terms of the
transaction) and from sources other than
the consumer, with specified
exceptions; and establishing restrictions
on mandatory arbitration and financing
of single premium credit insurance,
pursuant to TILA sections 129B and
129C as established by Dodd-Frank Act
sections 1402, 1403, and 1414(a). 15
U.S.C. 1639b, 1639c. The Bureau’s final
rule is referred to as the 2013 Loan
Originator Final Rule.
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• Appraisals: The Bureau, jointly
with other Federal agencies,14 is issuing
a final rule implementing Dodd-Frank
Act requirements concerning appraisals
for higher-risk mortgages, pursuant to
TILA section 129H as established by
Dodd-Frank Act section 1471. 15 U.S.C.
1639h. This rule follows the agencies’
August 2012 joint proposal (the 2012
Interagency Appraisals Proposal).15 The
agencies’ joint final rule is referred to as
the 2013 Interagency Appraisals Final
Rule. In addition, following its August
2012 proposal (the 2012 ECOA
Appraisals Proposal),16 the Bureau is
issuing a final rule to implement
provisions of the Dodd-Frank Act
requiring that creditors provide
applicants with a free copy of written
appraisals and valuations developed in
connection with applications for
transactions secured by a first lien on a
dwelling, pursuant to section 701(e) of
the Equal Credit Opportunity Act
(ECOA) as amended by Dodd-Frank Act
section 1474. 15 U.S.C. 1691(e). The
Bureau’s final rule is referred to as the
2013 ECOA Appraisals Final Rule.
The Bureau is not at this time
finalizing proposals concerning various
disclosure requirements that were
added by title XIV of the Dodd-Frank
Act, integration of mortgage disclosures
under TILA and RESPA, or a simpler,
more inclusive definition of the finance
charge for purposes of disclosures for
closed-end mortgage transactions under
Regulation Z. The Bureau expects to
finalize these proposals and to consider
whether to adjust regulatory thresholds
under the Title XIV Rulemakings in
connection with any change in the
calculation of the finance charge later in
2013, after it has completed quantitative
testing, and any additional qualitative
testing deemed appropriate, of the forms
that it proposed in July 2012 to combine
TILA mortgage disclosures with the
good faith estimate (RESPA GFE) and
settlement statement (RESPA settlement
statement) required under the Real
Estate Settlement Procedures Act
(RESPA), pursuant to Dodd-Frank Act
section 1032(f) and sections 4(a) of
RESPA and 105(b) of TILA, as amended
by Dodd-Frank Act sections 1098 and
1100A, respectively (the 2012 TILA–
RESPA Proposal).17 Accordingly, the
Bureau already has issued a final rule
delaying implementation of various
14 Specifically, the Board of Governors of the
Federal Reserve System, the Office of the
Comptroller of the Currency, the Federal Deposit
Insurance Corporation, the National Credit Union
Administration, and the Federal Housing Finance
Agency.
15 77 FR 54722 (Sept. 5, 2012).
16 77 FR 50390 (Aug. 21, 2012).
17 77 FR 51116 (Aug. 23, 2012).
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affected title XIV disclosure
provisions.18 The Bureau’s approaches
to coordinating the implementation of
the Title XIV Rulemakings and to the
finance charge proposal are discussed in
turn below.
Coordinated Implementation of Title
XIV Rulemakings
As noted in all of its foregoing
proposals, the Bureau regards each of
the Title XIV Rulemakings as
components of a single, comprehensive
undertaking; each of them affecting
aspects of the mortgage industry and its
regulation. Many of these rules intersect
with one or more of the others.
Accordingly, as noted in its proposals,
the Bureau is coordinating carefully the
Title XIV Rulemakings, both in terms of
their interrelated substantive provisions
and, in recognition thereof, particularly
with respect to their effective dates. The
Dodd-Frank Act requirements to be
implemented by the Title XIV
Rulemakings generally will take effect
on January 21, 2013, unless final rules
implementing those requirements are
issued on or before that date and
provide for a different effective date. See
Dodd-Frank Act section 1400(c), 15
U.S.C. 1601 note. In addition, some of
the Title XIV Rulemakings are to take
effect no later than one year after they
are issued. Id.
The comments on the appropriate
implementation date for this final rule
are discussed in detail below in part VI
of this notice. In general, however,
consumer advocates requested that the
Bureau put the protections in the Title
XIV Rulemakings into effect as soon as
practicable. In contrast, the Bureau
received some industry comments
indicating that implementing so many
new requirements at the same time
would create a significant cumulative
burden for creditors. In addition, many
commenters also acknowledged the
advantages of implementing multiple
revisions to the regulations in a
coordinated fashion.19 Thus, a tension
18 77
FR 70105 (Nov. 23, 2012).
the several final rules being adopted under
the Title XIV Rulemakings, six entail amendments
to Regulation Z, with the only exceptions being the
2013 RESPA Servicing Final Rule (Regulation X)
and the 2013 ECOA Appraisals Final Rule
(Regulation B); the 2013 HOEPA Final Rule also
amends Regulation X, in addition to Regulation Z.
The six Regulation Z final rules involve numerous
instances of intersecting provisions, either by crossreferences to each other’s provisions or by adopting
parallel provisions. Thus, adopting some of those
amendments without also adopting certain other,
closely related provisions would create significant
technical issues, e.g., new provisions containing
cross-references to other provisions that do not yet
exist, which could undermine the ability of
creditors and other parties subject to the rules to
understand their obligations and implement
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19 Of
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exists between coordinating the
adoption of the Title XIV Rulemakings
and facilitating industry’s
implementation of such a large set of
new requirements. Some have suggested
that the Bureau resolve this tension by
adopting a sequenced implementation,
while others have requested that the
Bureau simply provide a longer
implementation period for all of the
final rules.
The Bureau recognizes that many of
the new provisions will require
creditors to make changes to automated
systems and, further, that most
administrators of large systems are
reluctant to make too many changes to
their systems at once. At the same time,
however, the Bureau notes that the
Dodd-Frank Act established virtually all
of these changes to institutions’
compliance responsibilities, and
contemplated that they be implemented
in a relatively short period of time. And,
as already noted, the extent of
interaction among many of the Title XIV
Rulemakings necessitates that many of
their provisions take effect together.
Finally, notwithstanding commenters’
expressed concerns for cumulative
burden, the Bureau expects that
creditors actually may realize some
efficiencies from adapting their systems
for compliance with multiple new,
closely related requirements at once,
especially if given sufficient overall
time to do so.
Accordingly, the Bureau is requiring
that, as a general matter, creditors and
other affected persons begin complying
with the final rules on January 10, 2014.
As noted above, section 1400(c) of the
Dodd-Frank Act requires that some
provisions of the Title XIV Rulemakings
take effect no later than one year after
the Bureau issues them. Accordingly,
the Bureau is establishing January 10,
2014, one year after issuance of the
Bureau’s 2013 ATR, Escrows, and
HOEPA Final Rules (i.e., the earliest of
the title XIV final rules), as the baseline
effective date for most of the Title XIV
Rulemakings. The Bureau believes that,
on balance, this approach will facilitate
the implementation of the rules’
provisions, while also affording
creditors sufficient time to implement
the more complex or resource-intensive
new requirements.
The Bureau has identified certain
rulemakings or selected aspects thereof,
however, that do not present significant
implementation burdens for industry.
Accordingly, the Bureau is setting
earlier effective dates for those final
rules or certain aspects thereof, as
appropriate systems changes in an integrated and
efficient manner.
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applicable. Those effective dates are set
forth and explained in the Federal
Register notices for those final rules.
More Inclusive Finance Charge Proposal
As noted above, the Bureau proposed
in the 2012 TILA–RESPA Proposal to
make the definition of finance charge
more inclusive, thus rendering the
finance charge and annual percentage
rate a more useful tool for consumers to
compare the cost of credit across
different alternatives. 77 FR 51116,
51143 (Aug. 23, 2012). Because the new
definition would include additional
costs that are not currently counted, it
would cause the finance charges and
APRs on many affected transactions to
increase. This in turn could cause more
such transactions to become subject to
various compliance regimes under
Regulation Z. Specifically, the finance
charge is central to the calculation of a
transaction’s ‘‘points and fees,’’ which
in turn has been (and remains) a
coverage threshold for the special
protections afforded ‘‘high-cost
mortgages’’ under HOEPA. Points and
fees also will be subject to a 3-percent
limit for purposes of determining
whether a transaction is a ‘‘qualified
mortgage’’ under the 2013 ATR Final
Rule. Meanwhile, the APR serves as a
coverage threshold for HOEPA
protections as well as for certain
protections afforded ‘‘higher-priced
mortgage loans’’ under § 1026.35,
including the mandatory escrow
account requirements being amended by
this final rule. Finally, because the 2013
Interagency Appraisals Final Rule uses
the same APR-based coverage test as is
used for identifying higher-priced
mortgage loans, the APR affects that
rulemaking as well. Thus, the proposed
more inclusive finance charge would
have had the indirect effect of
increasing coverage under HOEPA and
the escrow and appraisal requirements
for higher-priced mortgage loans, as
well as decreasing the number of
transactions that may be qualified
mortgages—even holding actual loan
terms constant—simply because of the
increase in calculated finance charges,
and consequently APRs, for closed-end
mortgage transactions generally.
As noted above, these expanded
coverage consequences were not the
intent of the more inclusive finance
charge proposal. Accordingly, as
discussed more extensively in the
Escrows Proposal, the HOEPA Proposal,
the ATR Proposal, and the Interagency
Appraisals Proposal, the Board and
subsequently the Bureau (and other
agencies) sought comment on certain
adjustments to the affected regulatory
thresholds to counteract this
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unintended effect. First, the Board and
then the Bureau proposed to adopt a
‘‘transaction coverage rate’’ for use as
the metric to determine coverage of
these regimes in place of the APR. The
transaction coverage rate would have
been calculated solely for coverage
determination purposes and would not
have been disclosed to consumers, who
still would have received only a
disclosure of the expanded APR. The
transaction coverage rate calculation
would exclude from the prepaid finance
charge all costs otherwise included for
purposes of the APR calculation except
charges retained by the creditor, any
mortgage broker, or any affiliate of
either. Similarly, the Board and Bureau
proposed to reverse the effects of the
more inclusive finance charge on the
calculation of points and fees; the points
and fees figure is calculated only as a
HOEPA and qualified mortgage coverage
metric and is not disclosed to
consumers. The Bureau also sought
comment on other potential mitigation
measures, such as adjusting the numeric
thresholds for particular compliance
regimes to account for the general shift
in affected transactions’ APRs.
The Bureau’s 2012 TILA–RESPA
Proposal sought comment on whether to
finalize the more inclusive finance
charge proposal in conjunction with the
Title XIV Rulemakings or with the rest
of the TILA–RESPA Proposal
concerning the integration of mortgage
disclosure forms. See 77 FR 51116,
51125 (Aug. 23, 2012). Upon additional
consideration and review of comments
received, the Bureau decided to defer a
decision whether to adopt the more
inclusive finance charge proposal and
any related adjustments to regulatory
thresholds until it later finalizes the
TILA–RESPA Proposal. See 77 FR 54843
(Sept. 6, 2012); 77 FR 54844 (Sept. 6,
2012).20 Accordingly, this final rule as
well as the 2013 HOEPA, ATR, and
Interagency Appraisals Final Rules all
are deferring any action on their
respective proposed adjustments to
regulatory thresholds.
IV. Legal Authority
The Bureau is issuing this final rule
on January 10, 2013, in accordance with
12 CFR 1074.1, pursuant to its authority
under TILA and the Dodd-Frank Act.
See TILA section 105(a), 15 U.S.C.
1604(a). On July 21, 2011, section 1061
of the Dodd-Frank Act transferred to the
Bureau the ‘‘consumer financial
protection functions’’ previously vested
in certain other Federal agencies,
including the Board. The term
‘‘consumer financial protection
function’’ is defined to include ‘‘all
authority to prescribe rules or issue
orders or guidelines pursuant to any
Federal consumer financial law,
including performing appropriate
functions to promulgate and review
such rules, orders, and guidelines.’’ 21
TILA is defined as a Federal consumer
financial law. 22 Accordingly, the
Bureau has general authority to issue
regulations pursuant to TILA.
A. Escrow Provisions Under the DoddFrank Act
As discussed above, the Dodd-Frank
Act amended TILA to mandate escrow
accounts for certain consumer credit
transactions secured by a first lien on a
consumer’s principal dwelling. Sections
1461 and 1462 of the Dodd-Frank Act
create new TILA section 129D, which
establishes a minimum period for which
escrows must be held for higher-priced
mortgage loans, creates a rate threshold
for determining whether escrow
accounts are required for ‘‘jumbo
loans,’’ whose principal amounts exceed
the maximum eligible for purchase by
Freddie Mac, and adds two disclosure
requirements concerning escrow
accounts. The Dodd-Frank Act further
provides that the Bureau may exempt
certain creditors from the escrow
requirement by regulation. See TILA
section 129D(c), 15 U.S.C. 1639(c). In
addition, the Dodd-Frank Act provides
the Bureau with authority to prescribe
regulations that revise, add to, or
subtract from the criteria that describe
when an escrow account is required
upon a finding that such regulations are
in the interest of the consumers and in
the public interest. See 15 U.S.C. 1639d
note.
B. Other Rulemaking and Exception
Authorities
This final rule also relies on other
rulemaking and exception authorities
specifically granted to the Bureau by
TILA and the Dodd-Frank Act,
including the authorities discussed
below.
TILA Section 105(a)
As amended by the Dodd-Frank Act,
TILA section 105(a), 15 U.S.C. 1604(a),
21 12
U.S.C. 5581(a)(1).
Dodd-Frank Act section 1002(14), 12 U.S.C.
5481(14) (defining ‘‘Federal consumer financial
law’’ to include the ‘‘enumerated consumer laws’’
and the provisions of title X of the Dodd-Frank Act);
Dodd-Frank Act section 1002(12), 12 U.S.C.
5481(12) (defining ‘‘enumerated consumer laws’’ to
include TILA).
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22 See
20 These notices extended the comment period on
the more inclusive finance charge and
corresponding regulatory threshold adjustments
under the 2012 TILA–RESPA and HOEPA
Proposals. It did not change any other aspect of
either proposal.
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4731
directs the Bureau to prescribe
regulations to carry out the purposes of
TILA, and provides that such
regulations may contain additional
requirements, classifications,
differentiations, or other provisions and
may provide for such adjustments and
exceptions for all or any class of
transactions that the Bureau judges are
necessary or proper to effectuate the
purposes of TILA, to prevent
circumvention or evasion thereof, or to
facilitate compliance therewith. A
purpose of TILA is ‘‘ * * * to assure a
meaningful disclosure of credit terms so
that the consumer will be able to
compare more readily the various credit
terms available to him and avoid the
uninformed use of credit* * * .’’ TILA
section 102(a), 15 U.S.C. 1601(a). This
stated purpose is informed by
Congress’s finding that ‘‘* * *
economic stabilization would be
enhanced and the competition among
the various financial institutions and
other firms engaged in the extension of
consumer credit would be strengthened
by the informed use of credit.’’ Id. Thus,
strengthened competition among
financial institutions is a goal of TILA,
achieved through the effectuation of
TILA’s purposes.
Historically, TILA section 105(a) has
served as a broad source of authority for
rules that promote the informed use of
credit through required disclosures and
substantive regulation of certain
practices. However, Dodd-Frank Act
section 1100A clarified the Bureau’s
section 105(a) authority by amending
that section to provide express authority
to prescribe regulations that contain
‘‘additional requirements’’ that the
Bureau finds are necessary or proper to
effectuate the purposes of TILA, to
prevent circumvention or evasion
thereof, or to facilitate compliance
therewith. This amendment clarified the
Bureau’s authority under TILA section
105(a) to prescribe requirements beyond
those specifically listed in the statute
that meet the standards outlined in
section 105(a), which include
effectuating all of TILA’s purposes.
Therefore, the Bureau believes that its
authority under TILA section 105(a) to
make exceptions, adjustments, and
additional provisions that the Bureau
finds are necessary or proper to
effectuate the purposes of TILA applies
with respect to the purpose of section
129D. That purpose is to ensure that
consumers understand and appreciate
the full cost of home ownership. The
purpose of TILA section 129D is also
informed by the findings articulated in
section 129B(a) that economic
stabilization would be enhanced by the
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protection, limitation, and regulation of
the terms of residential mortgage credit
and the practices related to such credit,
while ensuring that responsible and
affordable mortgage credit remains
available to consumers. See 15 U.S.C.
1639b(a).
As discussed in the section-by-section
analysis below, the Bureau is issuing
regulations to carry out TILA’s
purposes, including such additional
requirements, adjustments, and
exceptions as, in the Bureau’s judgment,
are necessary and proper to carry out
the purposes of TILA, prevent
circumvention or evasion thereof, or to
facilitate compliance therewith. In
developing these aspects of the final
rule pursuant to its authority under
TILA section 105(a), the Bureau has
considered the purposes of TILA,
including the purposes of TILA section
129D, and the findings of TILA,
including strengthening competition
among financial institutions and
promoting economic stabilization, and
the findings of TILA section 129B(a)(1)
that economic stabilization would be
enhanced by the protection, limitation,
and regulation of the terms of
residential mortgage credit and the
practices related to such credit, while
ensuring that responsible, affordable
mortgage credit remains available to
consumers.
Dodd-Frank Act Section 1022(b)
Section 1022(b)(1) of the Dodd-Frank
Act authorizes the Bureau to prescribe
rules ‘‘as may be necessary or
appropriate to enable the Bureau to
administer and carry out the purposes
and objectives of the Federal consumer
financial laws, and to prevent evasions
thereof[.]’’ 12 U.S.C. 5512(b)(1). TILA
and title X of the Dodd-Frank Act are
Federal consumer financial laws.23
Accordingly, in adopting this final rule,
the Bureau is exercising its authority
under Dodd-Frank Act section 1022(b)
to prescribe rules that carry out the
purposes and objectives of TILA and
title X of the Dodd-Frank Act and
prevent evasion of those laws.
V. Section-by-Section Analysis
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Section 1026.19 Certain Mortgage and
Variable-Rate Transactions
In the 2011 Escrows Proposal, the
Board proposed a new § 226.19(f) to
implement the account disclosure
requirements of TILA section 129D, as
23 See Dodd-Frank Act section 1002(14), 12 U.S.C.
5481(14) (defining ‘‘Federal consumer financial
law’’ to include the ‘‘enumerated consumer laws’’
and the provisions of title X of the Dodd-Frank Act);
Dodd-Frank Act section 1002(12), 12 U.S.C.
5481(12) (defining ‘‘enumerated consumer laws’’ to
include TILA).
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enacted by Sections 1461 and 1462 of
the Dodd- Frank Act. Proposed
§ 226.19(f) 24 would have required
disclosures for the establishment or
non-establishment of an escrow account
in connection with consummation of a
transaction secured by a first lien, but
not a subordinate lien. As discussed
above, on November 23, 2012, the
Bureau published in the Federal
Register a rule that delays the
implementation of certain disclosure
requirements contained in title XIV of
the Dodd-Frank Act, including those
contained in sections 1461 and 1462.
See 77 FR 70105 (Nov. 23, 2012).
Consequently, the Bureau will not be
adopting a new § 1026.19(f) in this rule.
proposed removing and reserving
§ 226.35(b)(3)(i) and preserving the
substance of that provision in the
proposed new § 226.45(b)(1), the Board
made conforming amendments to
§ 226.34(a)(4)(i) and staff comment
34(a)(4)(i))–1 to reflect the new crossreference. Section 1026.34(a)(4)(i) and
staff comment 34(a)(4)(i)–1 are being
amended under the 2013 HOEPA Final
Rule to remove the cross-reference to
§ 1026.35(b)(3)(i). Consequently, the
Bureau will not be adopting conforming
amendments in this rule.
Section 1026.20 Subsequent
Disclosure Requirements
35(a)(1)
As noted above, the Dodd-Frank Act
substantially codified the Board’s
escrow requirement for higher-priced
mortgage loans, but with certain
differences. One of those differences is
the higher threshold above the average
prime offer rate established by the
Dodd-Frank Act for determining when
escrow accounts are required for
transactions that exceed the maximum
principal balance eligible for sale to
Freddie Mac (‘‘jumbo’’ transactions). In
general, the coverage thresholds are 1.5
percentage points above the average
prime offer rate for first-lien
transactions and 3.5 percentage points
above the average prime offer rate for
subordinate-lien transactions. Under
section 1461 of the Dodd-Frank Act,
however, Congress established a new
threshold of 2.5 percentage points above
the average prime offer rate for ‘‘jumbo’’
transactions. Under an interim final rule
published concurrently with the Board’s
2011 Escrows Proposal, the Board
implemented this special coverage test
for ‘‘jumbo’’ transactions by amending
its existing escrow requirement for
higher-priced mortgage loans in
§ 226.35(b)(3). See 76 FR 11319 (Mar. 2,
2011) (the Board’s 2011 ‘‘Jumbo’’ Final
Rule).
Under the Board’s 2011 Escrows
Proposal, proposed § 226.45(a)(1) would
have provided that a higher-priced
mortgage loan is a consumer credit
transaction secured by the consumer’s
principal dwelling that exceeds the
applicable pricing threshold as of the
date the transaction’s rate is set. The
Board’s proposed § 226.45(a)(1)
incorporated the special, separate
coverage threshold for ‘‘jumbo’’
transactions, as provided by the DoddFrank Act. In addition, as discussed
above, the Board’s proposed
§ 226.45(a)(1) would have based
‘‘higher-priced mortgage loan’’ status on
a comparison of the transaction’s
In the 2011 Escrows Proposal, the
Board proposed a new § 226.20(d) to
implement the disclosure requirements
of TILA sections 129D(j)(1)(B) and
129D(j)(2), as enacted by section 1462 of
the Dodd-Frank Act. TILA section
129D(j)(1)(B) requires a creditor or
servicer to provide the disclosures set
forth in TILA section 129D(j)(2) when a
consumer requests closure of an escrow
account that was established in
connection with a transaction secured
by real property. Proposed § 226.20(d)
would have directed the creditor or
servicer to disclose the information
about escrow accounts in accordance
with certain format and timing
requirements. As previously noted, the
Bureau has delayed the implementation
of certain disclosure requirements
contained in title XIV of the Dodd-Frank
Act, including those contained in
sections 1461 and 1462. See 77 FR
70105 (Nov. 23, 2012). Consequently,
the Bureau will not be adopting a new
§ 1026.20(d) in this rule.
Section 1026.34 Prohibited Acts or
Practices in Connection With High-Cost
Mortgages
34(a) Prohibited Acts or Practices for
High-Cost Mortgages 34(a)(4)(i)
Mortgage-Related Obligations
In the 2011 Escrows Proposal, the
Board proposed amendments to the
definition of mortgage-related
obligations in § 226.34(a)(4)(i) and
comment 34(a)(4)(i)–1, which contained
cross-references to the definition of
mortgage-related insurance in
§ 226.35(b)(3)(i). Because the Board
24 This section-by-section analysis discusses the
Board’s 2011 Escrows Proposal by reference to the
Board’s Regulation Z, 12 CFR part 226, which the
Board proposed to amend, and discusses this final
rule by reference to the Bureau’s Regulation Z, 12
CFR part 1026, which this final rule amends.
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Section 1026.35 Requirements for
Higher-Priced Mortgage Loans
35(a) Definitions
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‘‘transaction coverage rate,’’ rather than
its APR, to the average prime offer rate.
A few commenters suggested that the
proposed thresholds should be
reconsidered. However, the Bureau
believes the current thresholds capture
the expansion intended by Congress and
is therefore generally adopting proposed
§ 226.45(a)(1) as § 1026.35(a)(1). As
discussed above, however, the Bureau is
suspending consideration of the
transaction coverage rate until it
considers the proposed expansion of the
definition of finance charge in
connection with the TILA–RESPA Final
Rule. Accordingly, the final rule
continues to base the definition of
higher-priced mortgage loans on a
comparison of the transaction’s APR to
the average prime offer rate. The Bureau
will consider comments received
concerning the transaction coverage rate
proposal in connection with the TILA–
RESPA Final Rule. Comment 35(a)(1)–1
clarifies how to determine if a
transaction is a higher-priced mortgage
loan by comparing the annual
percentage rate to the average prime
offer rate. Comment 35(a)(1)–2 clarifies
when the comparison between the
annual percentage rate and the average
prime offer rate should occur. Comment
35(a)(1)–3 clarifies how to determine
whether a transaction is a higher-priced
mortgage loan when the principal
balance exceeds the limit in effect as of
the date the transaction’s rate is set for
the maximum principal obligation
eligible for purchase by Freddie Mac.
35(a)(2)
The Bureau is not altering current
§ 1026.35(a)(2), which defines the
‘‘average prime offer rate’’ as the annual
percentage rate derived from average
interest rates, points, and other
transaction pricing terms currently
offered to consumers by a representative
sample of creditors for mortgage
transactions that have low-risk pricing
characteristics. The Bureau is, however,
adding comment 35(a)(2)–3 to clarify
that the average prime offer rate in
§ 1026.35 has the same meaning as in
Regulation C, 12 CFR part 1003. See 12
CFR 1003.4(a)(12)(ii).
35(b) Escrow Accounts
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35(b)(1)
As amended by the Dodd-Frank Act,
TILA section 129D(a) contains the
general requirement that an escrow
account be established for any consumer
credit transaction secured by a first lien
on a consumer’s principal dwelling.
TILA section 129D(b), however, restricts
that general requirement to four
specified circumstances: (1) Where an
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escrow account is required by Federal or
State law; (2) where the transaction is
made, guaranteed, or insured by a State
or Federal agency; (3) where the
transaction’s annual percentage rate
exceeds the average prime offer rate by
prescribed amounts; and (4) where an
escrow account is ‘‘required pursuant to
regulation.’’
The Board’s proposed § 226.45(b)(1)
implemented only the third of the four
circumstances, pursuant to TILA section
129D(b)(3), because the other three
either are self-effectuating or are
effectuated by other agencies’
regulations. Nonetheless, the Bureau
recognizes that those other three
provisions may have implications for
existing State and Federal credit
programs, under which the applicable
agencies may need to revise their own
underlying guidelines to accommodate
or otherwise reflect the statutory
changes. Moreover, the Board’s
proposed § 226.45(b)(1) would have
stated that, for purposes of § 226.45(b),
‘‘escrow account’’ has the same meaning
as under Regulation X. This proposed
provision paralleled existing
§ 226.35(b)(3)(iv).
No comments were received on the
scope and structure of § 226.45(b)(1).
The Bureau is adopting the proposed
language with certain technical changes
as § 1026.35(b)(1).
35(b)(2) Exemptions
Under existing regulations, certain
categories of transactions are exempt
from the escrow requirement. The Board
proposed § 226.45(a)(3) and (b)(2)(i) and
(ii) to reflect these provisions. The
Board’s proposed § 226.45(a)(3) would
have provided that a ‘‘higher-priced
mortgage loan’’ does not include a
transaction to finance the initial
construction of a dwelling, a temporary
or ‘‘bridge’’ transaction with a term of
twelve months or less, a reverse
mortgage transaction, or a home equity
line of credit. This provision is identical
to existing § 1026.35(a)(3) (adopted as
§ 226.35(a)(3) in the 2008 HOEPA Final
Rule), which provides that the term
‘‘higher-priced mortgage loan’’ does not
include a transaction to finance the
initial construction of a dwelling, a
temporary or ‘‘bridge’’ transaction with
a term of twelve months or less, a
reverse mortgage transaction, or a home
equity line of credit. The Board’s
proposed § 226.45(b)(2)(i) would have
provided that escrow accounts need not
be established for transactions secured
by shares in a cooperative. This
provision would track existing
§ 1026.35(b)(3)(ii)(A). It also is
consistent with new TILA section
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4733
129D(e), as added by section 1461 of the
Dodd-Frank Act.
In light of the way in which the DoddFrank Act has expanded on various
elements of the 2008 HOEPA Final Rule,
the Bureau believes that a more tailored
approach is appropriate to specify what
types of transactions are exempt from
specific substantive requirements in
Regulation Z. Accordingly, with the
exception of home equity lines of credit
(HELOCs), the Bureau is using its
exemption authority under TILA section
129D 25 to recodify the exemptions that
were formerly located in § 1026.35(a)(3)
and § 1026.35(b)(3)(ii)(A) in the
exemptions from coverage of the escrow
requirement under new § 1026.35(b)(2).
The separate exemption for HELOCs is
no longer necessary because
§ 1026.35(a)(1) has been modified to
apply only to closed-end consumer
credit transactions.26 The Bureau
believes that the use of its exemption
authority is appropriate given the nature
of the transactions at issue and would
benefit consumers and industry alike.
Given that reverse mortgages are unique
transactions that are currently addressed
by § 1026.33,27 the Bureau believes it is
in the interest of consumers and the
public interest to pursue a course
involving further review of § 1026.33
and to consider whether new or
different protections would be
appropriate for reverse mortgages at a
later date.28 In addition, because of the
nature of construction-only and bridge
loan transactions, the Bureau believes
that exempting these transactions is in
the interest of consumers and the public
interest. In both cases, the payments and
amounts of property taxes and hazard
insurance will depend on various timesensitive factors for loan transactions
that generally do not exist for more than
one or two years, making maintaining
25 The Bureau may prescribe rules that revise, add
to, or subtract from the criteria of section 129D(b)
of TILA if the Bureau determines that such rules are
in the interest of consumers and the public interest.
See 15 U.S.C. 1639d note. These exceptions are also
justified by section 105(a) of TILA which provides
that the Bureau in its regulations to carry out the
purposes of TILA may provide for such adjustments
and exceptions for all or any class of transactions
that the Bureau judges are necessary or proper to
effectuate the purposes of TILA, to prevent
circumvention or evasion thereof, or to facilitate
compliance therewith. See 15 U.S.C. 1604(a).
26 The Bureau notes that open-end credit
transactions are excluded from section 129D(a) of
TILA under Dodd-Frank Act section 1461. See 15
U.S.C. 1639d.
27 Reverse mortgages are also excluded from
section 129D(a) of TILA under Dodd-Frank Act
section 1461. See 15 U.S.C. 1639d.
28 See, e.g., Consumer Financial Protection
Bureau, Reverse Mortgages: Report to Congress
(June 28, 2012) available at: http://
files.consumerfinance.gov/a/assets/documents/
201206_cfpb_Reverse_Mortgage_Report.pdf.
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an escrow account for a minimum of
five years impractical. The
recodification of the other exemptions
from the escrows requirements is purely
for organizational purposes and has no
substantive effect. Exemptions from the
new appraisal requirements are being
finalized separately by the 2013
Interagency Appraisals Final Rule, in
§ 1026.35(c).
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35(b)(2)(i)
The Board’s proposed § 226.45(b)(2)(i)
would have provided that escrow
accounts need not be established for
transactions secured by shares in a
cooperative, tracking the existing
regulation, which is now located at
§ 1026.35(b)(3)(ii)(A). The Bureau is
adopting this proposal with certain
conforming changes as
§ 1026.35(b)(2)(i)(A). The Bureau is
adopting the Board’s proposed
exemption for transactions to finance
the initial construction of a dwelling as
§ 1026.35(b)(2)(i)(B). The Bureau is
adopting the Board’s proposed
exemption for ‘‘bridge’’ loan
transactions as § 1026.35(b)(2)(i)(C).
Finally, the Bureau is adopting the
Board’s proposed exemption for reverse
mortgage transactions as
§ 1026.35(b)(2)(i)(D) with certain
conforming changes. Comment
35(b)(2)(i)–1 clarifies the operation of
the exemption for transactions to
finance the initial construction of a
dwelling under § 1026.35(b)(2)(i)(B) in
relation to a construction-to-permanent
mortgage transaction, noting that where
a transaction is determined to be a
higher-priced mortgage loan, only the
permanent phase of the transaction is
subject to § 1026.35.
35(b)(2)(ii)
As added by section 1461 of the
Dodd- Frank Act, new TILA section
129D(e) codifies the current provision
stating that escrow accounts that are
established in connection with
transactions secured by condominium
units need not reserve funds to cover
mortgage-related insurance, found in
existing § 1026.35(b)(3)(ii)(B), and
expands it to other, similar ownership
arrangements involving governing
associations that have an obligation to
maintain a master insurance policy. The
Board’s proposed § 226.45(b)(2)(ii)
would have provided that insurance
premiums need not be included in
escrow accounts for transactions
secured by dwellings in condominiums,
planned unit developments (PUDs), or
similar arrangements in which
ownership requires participation in a
governing association, where the
governing association has an obligation
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to the dwelling owners to maintain a
master policy insuring all dwellings.
Several commenters suggested that
even with this expanded definition
other ownership structures might not be
captured by the Board’s proposed
exemption. The Bureau is responding to
these comments by revising the
proposed language to adopt the
umbrella term ‘‘common interest
community,’’ which one commenter had
suggested would be sufficiently broad to
capture the various arrangements under
which a governing association has an
obligation to the dwelling owners to
maintain a master policy insuring all
dwellings. The Bureau is adopting the
Board’s proposed comment 45(b)(2)(ii)–
1 as comment 35(b)(2)(ii)–1, which
parallels existing comment
35(b)(3)(ii)(B)–1, but with conforming
amendments to reflect the expanded
scope of the exemption. The Bureau also
is adopting the Board’s proposed
comment 45(b)(2)(ii)–2 as comment
A22b)(2)(ii)–2 to provide details about
the nature of PUDs and to clarify that
the exemption is available for not only
condominiums and PUDs but also any
other type of property ownership
arrangement that has a governing
association with an obligation to
maintain a master insurance policy.
Following a request from one
commenter, the Bureau additionally
adds comment 35(b)(2)(ii)–3 to clarify
that properties with multiple governing
associations would also qualify for the
limited exemption provided in
§ 1026.35(b)(2)(ii).
35(b)(2)(iii)
As adopted by Dodd-Frank Act
section 1461, TILA section 129D(c)
authorizes the Bureau to exempt from
the higher-priced mortgage loan escrow
requirement a creditor that:
(1) Operates predominantly in rural or
underserved areas; (2) together with all
affiliates, has total annual mortgage loan
originations that do not exceed a limit
set by the Bureau; (3) retains its
mortgage obligations in portfolio; and
(4) meets any asset-size threshold and
any other criteria as the Bureau may
establish. As discussed above, DoddFrank Act section 1412 ability-to-repay
provisions contain a similar set of
criteria with regard to certain balloonpayment mortgages originated and held
in portfolio by creditors that operate
predominantly in rural or underserved
areas. The statute authorizes the Bureau
to issue regulations permitting certain
balloon-payment mortgages issued by
the specified creditors to receive a
presumption of compliance with the
ability-to-repay requirements as
‘‘qualified mortgages,’’ even though the
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general qualified mortgage criteria
prohibit balloon-payment features.
Specifically, in addition to having to
meet certain transaction-specific
features and underwriting requirements,
balloon-payment qualified mortgages
may be made only by a creditor that:
(1) Operates predominantly in rural or
underserved areas; (2) together with all
affiliates, has total annual residential
mortgage transaction originations that
do not exceed a limit set by the Bureau;
(3) retains the balloon-payment
mortgages in portfolio; and (4) meets
any asset-size threshold and any other
criteria as the Bureau may establish. See
TILA section 129C(b)(2)(E), 15 U.S.C.
1639c(b)(2)(E).
The Board interpreted the two
provisions as serving similar but not
identical purposes, and thus varied
certain aspects of the proposals to
implement the balloon qualified
mortgage and escrow provisions.
Specifically, the Board interpreted the
escrow provision as being designed to
exempt creditors that do not possess
economies of scale to offset costeffectively the burden of establishing
escrow accounts by maintaining a
certain minimum portfolio size from
being required to establish escrow
accounts on higher-priced mortgage
loans, and the balloon-payment
qualified mortgage provision to ensure
access to credit in rural and
underserved areas where consumers
may be able to obtain credit only from
community banks offering balloonpayment mortgages. Accordingly, the
two Board proposals would have used
similar definitions of ‘‘rural’’ and
‘‘underserved,’’ but did not provide
uniformity in calculating and defining
various other elements. Specifically, the
Board’s proposed § 226.45(b)(2)(iii)
would have implemented the escrow
exemption in TILA section 129D(c) by
requiring that the creditor have (1) in
the prior year made more than 50
percent of its first-lien higher-priced
mortgage loans in rural or underserved
areas, (2) together with all affiliates,
originated and retained servicing rights
to no more than 100 first-lien mortgage
obligations in either the current or prior
calendar year, and (3) together with all
affiliates, not maintained an escrow
account on any consumer credit
transaction secured by real property or
a dwelling that is currently serviced by
the creditor or its affiliates. The Board
also sought comment on whether to add
a requirement for the creditor to meet an
asset-size limit and what that size
should be.
In contrast, the Board’s proposal for
balloon qualified mortgages would have
required that the creditor (1) in the
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preceding calendar year, have made
more than 50 percent of its balloonpayment mortgages in rural or
underserved areas; and (2) have assets
that did not exceed $2 billion. The
Board proposed two alternatives for
qualifications relating to (1) the total
annual originations limit; and (2) the
retention of balloon-payment mortgages
in portfolio.
In both cases, the Board proposed to
use a narrow definition of rural based
on the Economic Research Service (ERS)
of the United States Department of
Agriculture’s (USDA) ‘‘urban influence
codes’’ (UICs). The UICs are based on
the definitions of ‘‘metropolitan’’ and
‘‘micropolitan’’ as developed by the
Office of Management and Budget, along
with other factors reviewed by the ERS
that place counties into twelve
separately defined UICs depending on
the size of the largest city and town in
the county. The Board’s proposal would
have limited the definition of rural to
certain ‘‘non-core’’ counties, which are
areas outside of any metropolitan or
micropolitan area, excluding those
adjacent to a metropolitan area of at
least one million residents or adjacent to
a micropolitan area with a town of at
least 2,500 residents. This definition
corresponded with UICs of 7, 10, 11,
and 12, which would have covered
areas in which only 2.3 percent of the
nation’s population lives.
In light of the overlap in criteria
between the escrow exemption and
balloon qualified mortgage provisions,
the Bureau considered comments
responding to both proposals in
determining how to finalize the
particular elements of each rule as
discussed further below. With regard to
exercising the Bureau’s authority to
create an escrows exemption in general,
the bulk of the comments received
asserted that the Bureau should exercise
such authority but that the scope of the
proposal was too limited and would
lead to reduced access to credit or
increased costs for consumers in rural
areas because of increased compliance
costs for creditors. Two industry
commenters suggested a blanket
exemption for community banks, but
did not identify any criteria to define a
community bank. Five industry
commenters suggested the exemption
should be based solely on loan-to-value
ratio of the transaction being originated,
ranging from 50 percent to 80 percent,
without using any of the statutory
requirements. Four trade association
commenters suggested that the
exemption should be based solely on
whether the debt obligation was being
kept in the creditor’s portfolio. One
consumer advocacy group stated that
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the exemption was too broad because,
under its reading of section 1461 of the
Dodd-Frank Act, the exemption was not
meant to protect access to credit but,
rather, to protect communities that need
credit but cannot find credit with terms
better than the terms of higher-priced
mortgage loans.
The Bureau believes that escrows
generally provide meaningful consumer
protections, as consumers may not
incorporate recurring costs related to the
ownership of a dwelling to their
monthly mortgage payments to
anticipate the total costs associated with
the dwelling. For consumers who
struggle with their monthly mortgage
payments, there is a higher probability
of foreclosure as a result. Based on
recent research,29 consumers that do not
have an escrow account in the first year
after consummation result in 0.35
percent more foreclosures per year for
first-lien, higher-priced mortgages.
However, in rural and underserved
areas where there are fewer creditors
that may be willing to extend higherpriced mortgage loans, the number of
providers could be further reduced
when additional costs associated with
establishing and maintaining escrow
accounts are taken into account. The
reduction in the number of providers
could lead to some consumers being
unable to obtain higher-priced mortgage
loans, or to increase the costs of the
higher-priced mortgage loans as a result
of a concentrated market with limited
competition to a point where the
consumer would be unable to repay the
higher-priced mortgage loan.
There are also substantial data
suggesting that the small portfolio
creditors that are most likely to have
difficulty maintaining escrow accounts
(or to rely on balloon loan transactions
to manage their interest rate risks) have
a significantly better track record than
larger creditors with regard to the
performance of their mortgage
transactions. As discussed in more
depth in the 2013 ATR Concurrent
Proposal, because small portfolio
creditors retain a higher percentage of
their transactions on their own books,
they have strong incentives to engage in
thorough underwriting. To minimize
performance risk, small community
creditors have developed underwriting
standards that differ from those
employed by larger institutions. Small
creditors generally engage in
29 Nathan B. Anderson and Jane B. Dokko,
Liquidity Problems and Early Payment Default
Among Subprime Mortgages, Finance and
Economics Discussion Series, Federal Reserve
Board (2011), available at: http://
www.federalreserve.gov/pubs/feds/2011/201109/
201109pap.pdf.
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4735
‘‘relationship banking,’’ in which
underwriting decisions rely at least in
part on qualitative information gained
from personal relationships between
creditors and consumers. This
qualitative information focuses on
subjective factors such as consumer
character and reliability which ‘‘may be
difficult to quantify, verify, and
communicate through the normal
transmission channels of banking
organization.’’ 30 While it is not possible
to disaggregate the impact of each of the
elements of the community banking
model, the combined effect is highly
beneficial. Moreover, where consumers
have trouble paying their mortgage
obligations, small portfolio creditors
have stronger incentives to work with
the consumers to get them back on
track, to protect both the creditors’
balance sheets and their reputations in
their local communities. Market-wide
data demonstrate that mortgage
delinquency and charge-off rates are
significantly lower at smaller banks than
at larger banks.31
The Bureau believes that Congress
carefully weighed these considerations
in authorizing the Bureau to establish an
exemption in TILA section 129D(c) to
ensure access to credit in rural and
underserved areas where consumers
may be able to obtain credit only from
community banks that cannot maintain
escrow accounts on a cost-effective
basis. Thus, the Bureau concludes that
exercising its authority is appropriate,
but also that the exemption should
implement the statutory criteria to
ensure it effectuates Congress’s intent.
Accordingly, as discussed in more detail
below, the Bureau is adopting
§ 1026.35(b)(2)(iii) largely as proposed,
but with certain changes described
below, to implement TILA section
129D(c).
In particular, the Bureau has
concluded that it is appropriate to make
the specific creditor qualifications much
more consistent between the balloonpayment qualified mortgage and escrow
exemptions than originally proposed by
the Board.32 The Bureau believes that
30 See Allen N. Berger and Gregory F. Udell,
Small Business Credit Availability and Relationship
Lending: The Importance of Bank Organizational
Structure, Economic Journal (2002).
31 See 2013 ATR Concurrent Proposal; FDIC,
Community Banking Study, December 2012,
available at: http://www.fdic.gov/regulations/
resources/cbi/report/cbi-full.pdf.
32 The Bureau has similarly attempted to maintain
consistency between the asset-size limit, annual
originations threshold, and requirements
concerning portfolio transactions as between the
final rules that it is adopting with regard to balloon
qualified mortgages and the escrow exemption and
its separate proposal to create a new type of
qualified mortgage originated and held by small
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this approach is justified by several
considerations, including the very
similar statutory language, the similar
congressional intents underlying the
two provisions, and the fact that
requiring small creditors operating
predominantly in rural or underserved
areas to track overlapping but not
identical sets of technical criteria for
each separate provision could create
unwarranted compliance burden that
itself would frustrate the intent of the
statutes. Although the Bureau has recast
and loosened some of the criteria to
promote consistency, the Bureau has
carefully calibrated the changes to
further the purpose of each rulemaking.
Further, the Bureau believes that any
risk to consumers from the
modifications is minimal given the
nature of the small creditors’ operations
and in particular the fact that they are
required to hold the affected
transactions in portfolio (in this final
rule’s case, indirectly, by virtue of the
requirement that a transaction
originated under the escrow exemption
not be subject to a forward commitment
at consummation). As discussed in more
detail below and in the 2013 ATR
Concurrent Proposal, which also
proposes to adopt several of the criteria
to define a new type of qualified
mortgage, the creditors at issue have
strong motivations to provide vigorous
underwriting and high levels of
customer service to protect their balance
sheets and reputations in their local
communities. This motivation is
manifest in the fact that they have
demonstrably lower credit losses on
their mortgage originations than larger
institutions.
For the foregoing reasons, the Bureau
is adopting § 1026.35(b)(2)(iii) to
implement TILA section 129D(c) by
providing that a transaction is exempt
from the escrow account requirement
otherwise applicable to a higher-priced
mortgage loan if the creditor: (1) In the
preceding calendar year made more
than 50 percent of its first-lien covered
transactions in counties designated by
the Bureau as ‘‘rural’’ or ‘‘underserved’’;
(2) together with all affiliates extended
500 or fewer first-lien covered
transactions in the preceding calendar
year; and (3) has total assets that are less
than $2 billion, adjusted annually for
inflation. The final rule also creates
greater parallelism with the balloon
qualified mortgage provision with
regard to the requirement that the
portfolio creditors. The Bureau is seeking comment
in that proposal on these elements and on whether
other adjustments are appropriate to the existing
rules to maintain continuity and reduce compliance
burden. See the 2013 ATR Concurrent Proposal.
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affected transactions be held in portfolio
by requiring in both rules that the
transactions not be subject to a ‘‘forward
commitment’’ agreement at the time of
consummation. These qualifications and
the other requirements under the final
rule are discussed in more detail below.
35(b)(2)(iii)(A)
‘‘Operates Predominantly in Rural or
Underserved Areas’’
Under TILA section 129D(c)(1), to
qualify for the exemption, a creditor
must ‘‘operate predominantly in rural or
underserved areas.’’ The Board’s 2011
Escrows Proposal would have required
a creditor to have made during the
preceding calendar year more than 50
percent of its first-lien higher-priced
mortgage loans in ‘‘rural or
underserved’’ counties. One industry
commenter agreed with the Board’s
proposal. Numerous commenters to the
Board’s proposal in this rule and the
Board’s 2011 ATR Proposal objected to
the proposed definition of ‘‘rural or
undeserved’’ as discussed below, but
commenters did not generally dispute
the definition of ‘‘predominantly’’ as
meaning more than 50 percent of
originations of its first-lien higherpriced mortgage loans in rural or
underserved counties.
The Bureau believes Congress enacted
the exemption in TILA section
129D(c)(1) to ensure access to credit in
rural and underserved areas where
consumers may be able to obtain credit
only from community banks or other
small creditors serving those areas. The
‘‘operates predominantly in’’
requirement serves to limit the
exemption to these institutions. To
remove this portion of the qualifications
of the creditor would be to circumvent
Congress’s stated requirement that the
exemption was intended for creditors
operating predominantly in rural or
underserved areas. The Bureau believes
that ‘‘predominantly’’ indicates a
portion greater than half, hence the
regulatory requirement of more than 50
percent.
Upon further analysis of the
differences in the proposals for the
escrows exemption and the balloonpayment qualified mortgage provisions,
however, the Bureau believes that
further harmonization between the two
sets of requirements is warranted. The
Board’s 2011 Escrows Proposal would
have required creditors to track first-lien
higher-priced mortgage loans by county,
while the qualified mortgage proposal
would have required creditors to track
balloon-payment mortgages. Given that
the underlying statutory language
regarding ‘‘operates predominantly’’ is
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the same in each instance and that
tracking each type of mortgage
separately would increase
administrative burden, the Bureau
believes it is appropriate to base the
threshold for both rules on the
distribution of all first-lien ‘‘covered
transactions’’ as defined in
§ 1026.43(b)(1). As provided in the 2013
ATR Final Rule, a covered transaction is
defined in § 1026.43(b)(1) as a consumer
credit transaction that is secured by a
dwelling, as defined in § 1026.2(a)(19),
other than a transaction exempt from
coverage under § 1026.43(a). The Bureau
believes that counting only first-lien
transactions will facilitate compliance,
as well as promote consistency in
applying to creditors the two
exemptions under both rulemakings,
since both exemptions relate to first-lien
transactions. Balloon-payment
mortgages that will meet the
qualifications of the balloon-payment
qualified mortgage exemption will be
first-lien covered transactions, as having
subordinate financing along with the
balloon-payment mortgage would be
rare since it further constrains a
consumers’ ability to build equity in the
property and to refinance the balloonpayment mortgage when it becomes
due. Subordinate-lien, higher-priced
mortgage loans are not required to
establish escrow accounts, as only firstlien higher priced mortgage loans must
establish escrow accounts under
§ 1026.35(b)(1).
Accordingly, § 1026.35(b)(2)(iii)(A)
provides that, during the preceding
calendar year, a creditor must have
made more than 50 percent of its total
first-lien covered transactions in
counties designated ‘‘rural’’ or
‘‘underserved’’ as defined by
§ 1026.35(b)(2)(iv), discussed below.
Comment 35(b)(2)(iii)–1.i states that the
Bureau publishes annually a list of
counties that qualify as rural or
underserved.
35(b)(2)(iii)(B)
Total Annual Mortgage Originations
TILA section 129D(c)(3) provides that,
to qualify for the exemption, a creditor
together with its affiliates must have
total annual mortgage originations that
do not exceed a limit set by the Bureau.
The Board’s proposed
§ 226.45(b)(2)(iii)(B) required that the
creditor and its affiliates, during either
of the preceding two calendar years,
have originated and retained servicing
rights to 100 or fewer mortgage
obligations secured by a first lien on real
property or a dwelling. Although the
Dodd-Frank Act requirement to
establish escrow accounts applies only
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to higher-priced mortgage loans that are
secured by first liens, the Board
reasoned that it was appropriate to base
the threshold on all first-lien
originations because creditors are free to
establish escrow accounts for all of their
first-lien mortgages voluntarily to
achieve the scale necessary to escrow
cost-effectively. The Board estimated
that a minimum servicing portfolio size
of 500 is necessary to escrow costeffectively, and assumed that the
average life expectancy of a mortgage
loan is about five years. Based on this
reasoning, the Board believed that
creditors would no longer need the
benefit of the exemption if they
originated and serviced more than 100
first-lien transactions per year. In
contrast, the Board did not propose a
specific annual originations threshold in
connection with the balloon-payment
qualified mortgages, but rather sought
comment on whether to adopt a
threshold based on the number of
transactions or dollar volume and what
numeric threshold would be
appropriate.
In connection with the Board’s 2011
Escrows Proposal, trade association and
industry commenters generally said that
the proposed maximum annual volume
of originations would be insufficient to
make the escrow accounts cost effective
for creditors. No commenters provided
information to support their suggestions
for alternative thresholds or to refute the
Board’s analysis that creditors can
provide escrow accounts cost-effectively
when they annually originate and retain
servicing rights to more than 100
mortgage obligations secured by a first
lien on real property or a dwelling.
Suggestions for higher thresholds
ranged from 200 to 1,000 mortgage
obligations per year originated and
serviced. One consumer advocacy
commenter suggested the proposed
threshold was too high because it
counted only first-lien mortgage
transactions, instead of all mortgage
obligations, but offered no specific
alternative amount. Two industry
commenters also suggested that the
origination limit should measure only
the number of higher-priced mortgage
loans originated and serviced by the
creditor and its affiliates.
In response to the Board’s 2011 ATR
Proposal, two trade associations and one
group of State bank regulators, argued
that other criteria, such as the asset-size
limit or portfolio requirement, were
sufficient and that neither a volume nor
a total annual originations limit would
be necessary. One industry trade
association suggested combining the
proposed alternatives and permitting
creditors to elect under which limit they
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would operate. Other trade group and
industry commenters indicated that the
total annual originations limit would be
preferable because of the varying dollar
amount of transactions originated,
which would constrain the number of
consumers with limited credit options
who could obtain balloon-payment
mortgages in rural or underserved areas.
Four trade group and industry
commenters suggested a range for the
total annual originations limit of 250 to
1,000 transactions.
The Bureau believes that the
requirement of TILA section 129D(c)(2)
reflects a recognition that larger
creditors have the systems capability
and operational scale to establish costefficient escrow accounts. Similarly, the
Bureau believes the requirement of
TILA section 129C(b)(2)(E)(iv)(II)
reflects Congress’s recognition that
larger creditors who operate in rural or
underserved areas should be able to
make credit available without resorting
to balloon-payment mortgages. In light
of the strong concerns expressed in both
rulemakings about the potential
negative impacts on small creditors in
rural and underserved areas, the Bureau
conducted further analysis to try to
determine the most appropriate
thresholds, although it was significantly
constrained by the fact that data are
limited with regard to mortgage
originations in rural and underserved
areas generally and in particular with
regard to originations of balloonpayment mortgages.
The Bureau started with the premise
that it would be preferable to use the
same annual originations threshold in
both rules to reflect the consistent
language in both statutory provisions
focusing on total annual mortgage loan
originations, to facilitate compliance by
not requiring institutions to track
multiple metrics and to promote
consistent application of the two
exemptions. This approach requires
significant reconciliation between the
two proposals, however, because the
escrows proposal focused specifically
on transactions originated and serviced
to gauge creditors’ ability to maintain
escrow accounts over time, while
retention of servicing is not directly
relevant to the balloon-payment
qualified mortgage. However, to the
extent that creditors chose to offer
balloon-payment mortgages to manage
their interest rate risk without having to
undertake the compliance burdens
involved in administering adjustable
rate mortgages over time, the Bureau
believes that both provisions are
focused in a broad sense on
accommodating creditors whose
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4737
systems constraints might otherwise
cause them to exit the market.
With this in mind, the Bureau
ultimately decided to adopt a threshold
of 500 or fewer annual originations of
first-lien transactions for both rules. The
Bureau believes that this threshold will
provide greater flexibility and reduce
concerns that the specific threshold that
had been proposed in the Board’s 2011
Escrows Proposal (100 higher-priced
mortgage loans originated and serviced
annually in either of the preceding two
years) would reduce access to credit by
excluding creditors that need special
accommodations in light of their
capacity constraints. At the same time,
the increase is not as dramatic as it may
first appear because the Bureau’s
analysis of HMDA data suggests that
even small creditors are likely to sell a
significant number of their originations
in the secondary market. Assuming that
most mortgage transactions that are
retained in portfolio are also serviced in
house, the Bureau estimates that a
creditor originating no more than 500
first-lien transactions per year would
maintain and service a portfolio of about
670 mortgage obligations over time,
assuming an average obligation life
expectancy of five years.33 Thus, the
higher threshold will help to ensure that
creditors that are subject to the escrow
requirement do in fact maintain
portfolios of sufficient size to maintain
the escrow accounts on a cost efficient
basis over time, in the event that the
Board’s estimate of a minimum portfolio
of 500 transactions was too low.
However, the Bureau believes that the
500 annual originations threshold in
combination with the other
requirements will still ensure that the
balloon-payment qualified mortgage and
escrow exemptions are available only to
small creditors that focus primarily on
a relationship-lending model and face
significant systems constraints.
The Bureau also believes that it is
appropriate to focus the annual
originations threshold on all first-lien
originations. Given that escrow accounts
are typically not maintained for
transactions secured by subordinate
liens, the Bureau does not believe that
it makes sense to count such
transactions toward the threshold
because they would not contribute to a
creditor’s ability to achieve costefficiency. At the same time, the Bureau
believes it is appropriate to count all
33 A review of 2011 HMDA data shows creditors
that otherwise meet the criteria of § 1026.43(f)(1)(vi)
and originate between 200 and 500 or fewer firstlien covered transactions per year average 134
transactions per year retained in portfolio. Over a
five year period, the total portfolio for these
creditors would average 670 mortgage obligations.
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first-lien transactions toward the
threshold because creditors can
voluntarily establish escrow accounts
for such transactions to increase the
cost-effectiveness of their program even
though the mandatory account
requirements under the Dodd-Frank Act
apply only to first-lien, higher-priced
mortgage loans. Focusing on all firstlien originations also provides a metric
that is useful for gauging the relative
scale of creditors’ operations for
purposes of the balloon-payment
qualified mortgages, while focusing
solely on the number of higher-priced
mortgage loan originations would not.
Accordingly, the Bureau adopts
§ 1026.35(b)(2)(iii)(B) requiring to
creditor and its affiliates to have
originated 500 or fewer covered
transactions secured by a first lien.
35(b)(2)(iii)(C)
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Asset-Size Threshold
TILA section 129D(c)(4) provides that,
to qualify for the exemption, a creditor
must meet any asset-size threshold
established by the Bureau. The Board’s
2011 Escrows Proposal did not establish
an asset-size threshold but did request
comment on whether one should be
added and, if so, what threshold level
would be appropriate. In contrast, the
Board proposed a $2 billion threshold
for the balloon qualified mortgage
exception. This number was based on
the limited data available to the Board
at the time of the proposal. Based on
that limited information, the Board
reasoned that none of the entities it
identified as operating predominantly in
rural or underserved areas had total
assets as of the end of 2009 greater than
$2 billion, and therefore, the limitation
should be set at $2 billion. The Board
expressly proposed setting the asset-size
threshold at the highest level currently
held by any of the institutions that
appear to be smaller institutions that
served areas with otherwise limited
credit options.
In response to the Board’s 2011
Escrows Proposal, a group of State bank
regulators and a trade association
advocated including an asset-size
prerequisite in the exemption. The
group of State bank regulators suggested
that the asset-size prerequisite be the
sole requirement to obtain the
exemption but did not propose a
specific dollar threshold. The industry
commenter suggested the asset-size be
$1 billion in assets, but did not provide
a rationale for the amount.
Based on the Board’s 2011 ATR
Proposal, one group of State bank
regulators suggested that the asset-size
threshold be included and be the only
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requirement for a creditor to qualify for
the balloon-mortgage qualified mortgage
exemption. Two trade association
commenters suggested that a $2 billion
asset-size threshold was appropriate,
with one also suggesting that the assetsize threshold be the only requirement
for a creditor to qualify for the balloonpayment qualified mortgage exemption.
One industry commenter suggested that
the asset-size threshold be $10 billion.
For reasons discussed above, the
Bureau is adopting an annual
originations limit as contemplated by
the statute. Given that limitation,
restricting the asset size of institutions
that can claim the exemption is of
limited importance. Nonetheless, the
Bureau believes that an asset-size
limitation is still helpful because very
large institutions should have sufficient
resources to adapt their systems to make
mortgages without a balloon payment
and to establish and maintain escrow
accounts even if the scale of their
mortgage operations is relatively
modest. A very large institution with a
relatively modest mortgage operation
also does not have the same type of
reputational and balance-sheet
incentives to maintain the same kind of
relationship-banking model as a smaller
community-based creditor. An asset-size
limitation can guard against
circumvention of the rule if a larger
institution were to elect to enter a rural
area to make a limited number of
higher-priced mortgage loans or balloonpayment mortgages. Therefore, the
Bureau believes that the $2 billion asset
limitation proposed by the Board in the
Board’s 2011 ATR Proposal remains an
appropriate limitation and should be
adopted in both this final rule and the
2013 ATR Final Rule.34
Accordingly, the Bureau adopts
§ 1026.35(b)(2)(iii)(C) to require
creditors to have total assets as of the
end of the preceding calendar year that
are less than $2 billion and is effectively
adopting the same threshold by crossreference to § 1026.35(b)(2)(iii) for
purposes of the balloon-payment
qualified mortgage exemption in the
2013 ATR Final Rule. As provided in
§ 1026.35(b)(2)(iii)(C), this threshold
dollar amount will adjust automatically
each year based on the year-to-year
change in the average of the Consumer
Price Index for Urban Wage Earners and
Clerical Workers (CPI–W), not
34 The $2 billion threshold reflects the purposes
of the exemption and the structure of the mortgage
servicing industry. The Bureau’s choice of $2
billion in assets as a threshold for purposes of TILA
section 129D(c)(4) does not imply that a threshold
of that type or of that magnitude would be an
appropriate way to distinguish small firms for other
purposes or in other industries.
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seasonally adjusted, for each 12-month
period ending in November, with
rounding to the nearest million dollars.
Comment 35(b)(2)(iii)–1.iii recites this
initial threshold and further clarifies
that a creditor that had total assets
below the threshold on December 31 of
the preceding year satisfies this criterion
for purposes of the exemption during
the current calendar year. The comment
also notes that the Bureau will publish
notice of each year’s asset threshold by
amending the comment.
35(b)(2)(iii)(D)
Creditor and Affiliates Do Not Maintain
Escrows
As adopted by section 1461 of the
Dodd-Frank Act, TILA section
129D(c)(4) provides that, to qualify for
the exemption, a creditor must meet any
other criteria established by the Bureau
consistent with the provisions of TILA.
The Board’s proposed
§ 226.45(b)(2)(iii)(C) would have
required that, to obtain the exemption,
the creditor and its affiliates not
maintain an escrow account for any
mortgage they currently service through
at least such mortgage obligation’s
second installment due date. The Board
used the second installment due date as
a cutoff point because it recognized that
a creditor may sometimes hold a
mortgage obligation for a short period
after consummation to take steps
necessary before transferring and
assigning the mortgage debt obligation
to the intended investor. The Board
recognized that the process of
transferring and assigning the mortgage
obligation could extend beyond the
mortgage obligation’s first payment due
date, especially when the first payment
is due shortly after consummation.
The Board believed this additional
condition was necessary to effectuate
the purpose of the exemption. The
Board reasoned that, if a creditor
already establishes and maintains
escrow accounts, it has the capacity to
escrow and therefore has no need for the
exemption. Moreover, the Board
concluded that a creditor’s capacity to
escrow should reflect not only its own
activities but those of any affiliate
because it assumed that a creditor could
rely on its affiliate to help meet the
escrow requirement. The Board sought
comment, however, on three aspects:
first, whether affiliates’ capacities to
escrow should be considered; second,
whether the second payment due date is
the appropriate cutoff point for whether
a creditor has established an escrow
account for purposes of the exemption;
and third, whether the proposal should
allow some de minimis number of
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mortgage obligations for which escrows
are maintained and, if so, what that
number should be.
Six trade association commenters, five
industry commenters and a Federal
agency submitted comments noting that
many creditors had only begun to
establish escrow accounts for mortgage
transactions after the Board adopted the
2008 HOEPA Final Rule, which took
effect for most transactions in April
2010. Many of the same commenters
argued that it would be unfair to deny
the exemption in TILA section 129D(c)
to those creditors that established
escrow accounts only to comply with
the current escrow requirements. Two
trade association commenters and one
industry commenter suggested a de
minimis number of mortgage obligations
ranging from 10 to 50 mortgage
obligations to address the exclusion of
creditors currently escrowing that
would otherwise qualify for the
exemption. In addition, one industry
commenter suggested that a creditor that
establishes escrow accounts for
distressed mortgage obligations should
still be eligible for the exemption, as
these creditors are doing so as an
accommodation to the consumer to
attempt to avoid foreclosure. No
comments were received as to whether
the second payment due date is the
appropriate cutoff point for whether a
creditor has established an escrow
account for purposes of the exemption.
The Bureau is adopting the Board’s
proposal in § 1026.35(b)(2)(iii)(D), with
the addition of two exceptions based on
comments received. The Bureau agrees
with the Board generally that creditors
that currently provide escrow accounts
can afford to establish and maintain
escrow accounts for higher-priced
mortgage loans. Thus, to qualify for the
exemption, a creditor and its affiliates
must not maintain escrow accounts for
any extensions of consumer credit
secured by real property or a dwelling
that the creditor, or its affiliates,
currently services through at least the
second installment due date. However,
the Bureau agrees with commenters that
those creditors that would otherwise
qualify for the exemption but for their
compliance with the current regulation,
and creditors that establish escrow
accounts as an accommodation to
distressed consumers, should still be
able to qualify for the exemption in
TILA section 129D(c). In particular, the
Bureau notes that Congress’s decision to
codify and expand upon the escrow
requirement from the 2008 HOEPA
Final Rule while simultaneously
providing authority to exempt certain
mortgage transactions by creditors
operating predominantly in rural or
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underserved areas suggests that
Congress intended to provide relief to
creditors that were struggling to meet
the existing requirements. Accordingly,
the Bureau is adopting
§ 1026.35(b)(2)(iii)(D)(1) and (2) to
provide exceptions to the exemption’s
general prerequisite that a creditor and
its affiliates not maintain an escrow
account.
Comment 35(b)(2)(iii)–1.iv clarifies
that the limitation excluding creditors
and their affiliates who currently
maintain escrow accounts for other
mortgage obligations they service
applies only to mortgage obligations
serviced at the time a transaction
purporting to invoke the escrows
exemption is consummated. Thus, the
exemption still could apply even if the
creditor or its affiliates previously
established and maintained escrows for
mortgage obligations it no longer
services. However, if a creditor or an
affiliate escrows for mortgage
obligations currently serviced, those
institutions are ineligible to invoke the
escrows exemption until the escrow
accounts are no longer maintained. The
comment also clarifies that a creditor or
its affiliate ‘‘maintains’’ an escrow
account for a mortgage obligation only
if it services the mortgage obligation at
least through the due date of the second
periodic payment under the terms of the
legal obligation.
Comment 35(b)(2)(iii)(D)(1)–1 clarifies
that escrow accounts created by a
creditor and its affiliates established
between April 1, 2010, and June 1, 2013
are not counted for purposes of
§ 1026.35(b)(2)(iii)(D). In addition, the
comment clarifies that creditors that
continue to maintain escrow accounts
that were established between April 1,
2010, and June 1, 2013 until the
termination of those escrow accounts
will still qualify for the exemption, so
long as they or their affiliates do not
establish escrow accounts for other
mortgage obligations that the creditor
and its affiliates service after June 1,
2013 and they otherwise qualify under
§ 1026.35(b)(2)(iii). Comment
35(b)(2)(iii)(D)(2)–1 clarifies that escrow
accounts established after
consummation for distressed consumers
are not considered to be maintaining
escrow accounts for purposes of
§ 1026.35(b)(2)(iii)(D), although
creditors that establish escrow accounts
after consummation as a regular
business practice are considered to be
maintaining escrow accounts and
cannot qualify for the exception under
§ 1026.35(b)(2)(iii).
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35(b)(2)(iv)
‘‘Rural’’ and ‘‘Underserved’’ Defined
As adopted in the Dodd-Frank Act,
TILA section 129D(c)(1) requires, among
other criteria for the escrows exemption,
that the creditor operate predominantly
in ‘‘rural’’ and ‘‘underserved’’ areas, but
does not define either term. As
discussed above, the Board proposed
separate definitions for ‘‘rural’’ and
‘‘underserved,’’ respectively, in both the
Board’s 2011 Escrows Proposal and the
2011 ATR Proposal, and the definitions
for the two terms were similar across the
two proposals.
Commenters on the two proposals
addressed the specific definitions
themselves but not the necessity of
creating a definition for ‘‘rural’’ that is
separate from ‘‘underserved.’’ The
Bureau is adopting the Board’s approach
in § 1026.35(b)(2)(iv) which establishes
a definition of rural that is separate from
underserved. Thus, creditors’ activity in
either type of area will count toward
their eligibility for the escrows
exemption and for making balloonpayment qualified mortgages.
‘‘Rural.’’ As described above, the
Board’s proposed definition of rural for
purposes of both the balloon-payment
qualified mortgage and escrows
exemptions would have relied upon the
ERS’s ‘‘urban influence codes’’ (UICs),
which in turn are based on the
definitions of ‘‘metropolitan statistical
area’’ and ‘‘micropolitan statistical
area.’’ 35 The Board’s proposal would
have limited the definition of rural to
certain ‘‘non-core’’ counties, which are
areas outside of any metropolitan or
micropolitan area that are not adjacent
to a metropolitan area with at least one
million residents or to a micropolitan
area with a town of at least 2,500
residents. This definition corresponded
to UICs 7, 10, 11, and 12. The counties
that would have been covered under the
Board’s proposed definition contain 2.3
percent of the United States population
under the 2000 census. The Board
believed this approach limited the
definition of ‘‘rural’’ to those properties
most likely to have only limited sources
of mortgage credit because of their
remoteness from urban centers and their
resources. However, the Board sought
comment on all aspects of this approach
to defining rural, including whether the
definition should be broader or
35 The ERS places counties into twelve separately
defined UICs depending on the size of the largest
city or town in the county or in adjacent counties.
Descriptions of UICs can be found on the ERS Web
site at http://www.ers.usda.gov/data-products/
urban-influence-codes/documentation.aspx.
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narrower or based on information other
than UIC codes.
Many commenters to both the 2011
ATR Proposal and the 2011 Escrows
Proposal, including more than a dozen
trade group commenters, several
individual industry commenters, one
association of State banking regulators,
and a United States Senator, stated that
the rural definition was too narrow. The
trade association and industry
commenters, and the group of State
banking regulators, had various
proposals to broaden the definition,
from the addition of other UICs and a
combination of county population and
asset size to the adoption of other
regulatory definitions of ‘‘rural,’’ such as
those governing credit unions. The
comment from a United States Senator
suggested using the eligibility of a
property to secure a single-family
mortgage under the USDA’s Rural
Housing Loan program as the definition
of a rural property.
The Bureau agrees that a broader
definition of ‘‘rural’’ is appropriate to
ensure access to credit with regard to
both the escrows and balloon-payment
qualified mortgage exemptions. In
particular, the Bureau believes that all
‘‘non-core’’ counties should be
encompassed in the definition of rural,
including counties adjacent to a
metropolitan area of at least one million
residents or a county with a town of at
least 2,500 residents (i.e., counties with
a UIC of 4, 6, or 9 in addition to the
counties with the UICs included in the
Board’s definition). The Bureau also
believes that micropolitan areas that are
not adjacent to a metropolitan area
should be included within the
definition of rural (i.e., counties with a
UIC of 8), as these areas are not located
adjacent to metropolitan areas that are
served by many creditors. These
counties have significantly fewer
creditors originating higher-priced
mortgage loans and balloon-payment
mortgages than other counties.36
36 A review of data from HMDA reporters
indicates that there were 700 creditors in 2011 that
otherwise meet the requirements of new
§ 1026.35(b)(2)(iii), of which 391 originate higherpriced mortgage loans in counties that meet the
definition of rural, compared to 2,110 creditors that
otherwise meet the requirements of
§ 1026.35(b)(2)(iii) that originate balloon-payment
mortgages in counties that would not be rural. The
391 creditors originated 12,921 higher-priced
mortgage loans, representing 30 percent of their
43,359 total mortgage loan originations. A review of
data from credit unions indicates that there were
830 creditors in 2011 that otherwise meet the
requirements of § 1026.35(b)(2)(iii), of which 415
originate balloon-payment and hybrid mortgages in
counties that meet the definition of rural, compared
to 3,551 creditors that otherwise meet the
requirements of § 1026.35(b)(2)(iii) that originate
balloon-payment mortgages in counties that would
not be rural. The 415 creditors originated 4,980
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Including these counties within the
definition of rural would result in 9.7
percent of the U.S. population being
located within rural areas. Under this
definition, only counties in
metropolitan areas or in micropolitan
areas adjacent to metropolitan areas
would be excluded from the definition
of rural.
The Bureau also considered adopting
the definition of rural used to determine
the eligibility of a property to secure a
single-family mortgage under the
USDA’s Rural Housing Loan program.
This definition subdivides counties into
rural and non-rural areas based upon
whether certain areas are open country,
or contain a town, village, city or place,
with certain population criteria, and
excludes areas associated with an urban
area. Given the size of some counties,
particularly in western States, this
approach may provide a more nuanced
measure of access to credit in some
areas than a county-by-county metric.
However, use of the Rural Housing Loan
metrics would incorporate such
significant portions of metropolitan and
micropolitan counties that 37 percent of
the United States population would be
within areas defined as rural. Based on
a review of HMDA data and the location
of mortgage transactions originated by
HMDA reporting entities, the average
number of creditors in the areas that
would meet the USDA’s Rural Housing
Loan program definition of rural is ten.
The Bureau believes that a wholesale
adoption of the Rural Housing Loan
definitions would therefore expand the
definition of rural beyond the intent of
the escrow and balloon-payment
qualified mortgage exemptions under
sections 1412 and 1461 of the DoddFrank Act by incorporating areas in
which there is robust access to credit.
Accordingly, the final rule
implements § 1026.35(b)(2)(iv)(A) to
provide that a county is rural if it is
neither in a metropolitan statistical area,
nor in a micropolitan statistical area that
is adjacent to a metropolitan statistical
area. The Bureau intends to continue
studying over time the possible selective
use of the Rural Housing Loan program
definitions and tools provided on the
USDA Web site to determine whether a
particular property is located within a
‘‘rural’’ area. For purposes of initial
implementation, however, the Bureau
believes that defining ‘‘rural’’ to include
more UIC categories creates an
appropriate balance to preserve access
to credit and create a system that is easy
for creditors to implement.
balloon-payment mortgage originations,
representing 20 percent of their 24,968 total
mortgage loan originations.
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‘‘Underserved.’’ The Board’s proposed
§ 226.45(b)(2)(iv)(B) would have defined
a county as ‘‘underserved’’ during a
calendar year if no more than two
creditors extend credit secured by a first
lien on real property or a dwelling five
or more times in that county. The
definition was based on the Board’s
judgment that, where no more than two
creditors are significantly active, the
inability of one creditor to offer a
higher-priced mortgage loan would be
detrimental to consumers who would
have limited credit options because only
one creditor, or no creditors, would be
left to provide the higher-priced
mortgage loan. Essentially, a consumer
who could only qualify for a higherpriced mortgage loan would be required
to obtain credit from the remaining
creditor in that area or would be left
with no credit options at all. Most of the
same commenters that stated that the
proposed definition of rural was too
narrow, as discussed above, also stated
that this definition of underserved was
too narrow. The commenters proposed
various different standards, including
standards that considered the extent to
which the property was in a rural area,
as an alternate definition of
underserved.
The Bureau agrees with the Board that
the purpose of the exemption is to
permit creditors to continue to offer
credit to consumers, rather than to
refuse to make higher-priced mortgage
loans if such creditors’ withdrawal
would significantly limit consumers’
ability to obtain mortgage credit. In light
of this rationale, the Bureau believes
that ‘‘underserved’’ should be
implemented in a way that protects
consumers from losing meaningful
access to mortgage credit and that it is
appropriate to focus the definition on
identifying areas where the withdrawal
of a creditor from the market could
leave no meaningful competition for
consumers’ mortgage business. The
Bureau notes that the final rule’s
expanded definition of ‘‘rural,’’ as
discussed above, will also address
concerns about access to credit in many
areas. Accordingly, the Bureau is
adopting § 1026.35(b)(2)(iv)(B) to define
a property as ‘‘underserved’’ if it is
located in a county where no more than
two creditors extend covered
transactions secured by a first lien five
or more times in that county during a
calendar year, substantially consistent
with the Board’s proposal. As adopted,
§ 1026.35(b)(2)(iv)(B) also expressly
states that the numbers of creditors and
of their originations in counties for
purposes of this definition is as reported
in HMDA data for the year in question.
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The Bureau adopted this definition
based on HMDA data to provide an
objective, easily administered rule and
one that is consistent with the purpose
of preserving credit access in
underserved areas. Given that many
smaller creditors may not be subject to
HMDA reporting requirements, the
Bureau recognizes that many counties
may be underserved under the
definition being adopted, because it is
based on HMDA data, yet additional
information (if it were available) could
reveal that more than two creditors are
significantly active in such counties.
The Bureau may examine further
whether a refinement to the
underserved definition is warranted.
Commentary guidance on ‘‘rural’’ and
‘‘underserved’’ definitions. Comment
35(b)(2)(iv)–1 clarifies that the Bureau
will annually update on its Web site a
list of counties deemed rural or
underserved under the definitions of
rural and underserved in
§ 1026.35(b)(2)(iv). It also clarifies that
the definition of rural corresponds to
UICs 4, 6, 7, 8, 9, 10, 11, and 12, as
determined by the Economic Research
Service of the USDA. It further clarifies
that the definition of underserved
counties is based on HMDA data.
Finally, the comment provides that the
Bureau also publishes a list of only
those counties that are rural but not also
underserved, to facilitate compliance
with § 1026.35(c).37 As this final rule
takes effect on June 1, 2013, the Bureau
expects to publish lists applicable for
the current year within approximately
four to six weeks after publication of
this final rule, but in any event before
this final rule takes effect.
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As established by the Dodd-Frank
Act, TILA section 129D(c)(3) requires
that the exemption from the escrow
requirements apply only where a
creditor ‘‘retains its mortgage loan
originations in portfolio’’ and meets the
other statutory requirements. Because
the escrow requirements must be
applied at the time that a transaction is
consummated, while qualified mortgage
status may continue for the life of the
37 Section 1026.35(c) is being adopted separately
by the Bureau jointly with other Federal agencies,
to implement the new appraisal requirements in
TILA section 129H, in the 2013 Interagency
Appraisals Final Rule, as discussed in part III.C,
above. That new section provides an exemption for
creditors operating in rural, but not underserved,
areas. Consequently, the single, combined list of all
counties that are either rural or underserved that
the Bureau will publish annually for purposes of
the exemption from this final rule’s escrow
requirement is inadequate for the analogous
purpose under the new appraisal requirements in
§ 1026.35(c).
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mortgage obligation, the Board did not
propose to implement this requirement
consistently with the 2011 ATR
Proposal. The Board’s proposed
§ 226.45(b)(2)(v) would have provided
that the escrow exemption is not
available for certain transactions that, at
consummation, are subject to ‘‘forward
commitments.’’ Forward commitments
are agreements entered into at or before
consummation of a transaction under
which a purchaser is committed to
acquire the mortgage obligation from the
creditor after consummation. In
addition, the Board included a proposed
comment to § 226.45(b)(2)(v) which
would have clarified that the forward
commitment provision would have
applied whether the forward
commitment refers to the specific
transaction or the higher-priced
mortgage loan meets prescribed criteria
of the forward commitment in order to
address a potential method to avoid
compliance. The Board’s 2011 ATR
Proposal, in contrast, proposed two
alternatives for comment, either
prohibiting a creditor to qualify if it has
sold any balloon-payment qualified
mortgages at any time or prohibiting a
creditor to qualify if it has sold any
balloon-payment qualified mortgages in
the current or prior calendar year.
The Board considered requiring that a
transaction be held in portfolio after
consummation as a condition of the
escrows exemption, but concluded that
this approach would have raised
operational problems. Whether a
mortgage obligation is held in portfolio
can be determined only after
consummation, but a creditor making a
higher-priced mortgage loan must know
by consummation whether it is subject
to the escrow requirement. The Board
expressed concern that requiring an
escrow account to be established
sometime after consummation if the
creditor in fact sells the mortgage
obligation could put a significant
burden on consumers, who may not
have the money available to make a
significant advance payment. In
contrast, the Board reasoned that the
forward commitment test would be easy
to apply at consummation, and would
be unlikely to be circumvented by small
creditors because they would be
reluctant to extend credit for
transactions they do not intend to keep
in portfolio unless they have the
assurance of a committed buyer before
extending the credit. Thus, proposed
§ 226.45(b)(2)(v) would have served as a
means of indirectly limiting the
exemption to mortgage obligations that
are to be held in portfolio. The Board
sought comment, however, on whether
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institutions could easily evade the
escrow requirement by making higherpriced mortgage loans without a forward
commitment in place and thereafter
selling them to non-exempt purchasers
and how to address this possibility
without relying on post-consummation
events.
Among the commenters, there was a
divergence of opinion on how this
provision would work in practice. One
trade association commenter stated that
the forward commitment requirement
would prevent creditors from selling
portfolio mortgage obligations in the
future. This appears to be a misreading
of the Board’s proposal, as it would not
have restricted the sale of higher-priced
mortgage loans. The Board’s proposed
§ 226.45(b)(2)(v) instead merely
provided that, so long as the higherpriced mortgage loan was not subject to
a forward commitment at the time of
consummation, the higher-priced
mortgage loan could later be sold on the
secondary market without requiring an
escrow account to be established at that
time. One consumer advocacy group,
concerned about the possibility that
creditors would use the provision to
skirt the escrow requirements, suggested
a blanket rule that higher-priced
mortgage loans that are exempt must be
maintained in the portfolio of the
creditor or, alternatively, that upon sale
secondary market purchasers be
required to establish escrow accounts
for such mortgage obligations.
After reviewing the comments
received, the Bureau believes that the
Board’s proposal is an appropriate
method to implement the requirements
of TILA section 129D(c)(3), as both
creditor and consumer benefit if an
escrow account is established at
consummation of the transaction, rather
than months or years later. Indeed,
allowing a consumer to avoid having to
make a single large lump-sum payment
after consummation is part of the basic
purpose of establishing an escrow
account. Accordingly, the Bureau is
following the approach in the Board’s
proposal by adopting § 1026.35(b)(2)(v)
to require that for a higher-priced
mortgage loan to be exempt from the
requirements under § 1026.35(b)(1), the
higher-priced mortgage loan must not be
subject to a forward commitment to be
acquired by a creditor that does not
satisfy the conditions of
§ 1026.35(b)(2)(iii). Comment
35(b)(2)(v)–1 clarifies that a higherpriced mortgage loan that is subject to
a forward commitment is subject to the
escrow requirement under
§ 1026.35(b)(1), whether the forward
commitment refers to the specific
transaction or the higher-priced
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mortgage loan meets prescribed criteria
of the forward commitment, along with
an example. As discussed separately in
the Bureau’s 2013 ATR Final Rule, the
Bureau is also adopting language in
§ 1026.43(f) to provide that qualified
mortgage status is not available to
balloon-payment mortgages that would
otherwise qualify for the exemption if
the transactions are subject to a forward
commitment at the time of
consummation.
35(b)(3) Cancellation
Under TILA section 129D(d), a
creditor or servicer of a higher-priced
mortgage loan must maintain an escrow
account for a minimum of five years
following consummation, unless the
underlying debt obligation is terminated
earlier under certain prescribed
circumstances. In addition, even after
five years have elapsed, TILA section
129D(d) provides that an escrow
account shall remain in existence unless
and until the consumer is current on the
obligation and has accrued sufficient
equity in the dwelling securing the
consumer credit transaction ‘‘so as to no
longer be required to maintain private
mortgage insurance.’’
The Board’s proposed § 226.45(b)(3)
would have implemented TILA section
129D(d) by permitting cancellation of
the escrow account only upon the
earlier of termination of the legal
obligation or five years after
consummation, provided that at least 20
percent of the original value of the
property securing the underlying debt
obligation is unencumbered and the
consumer currently is not delinquent or
in default on the underlying debt
obligation. The Board modeled its
proposal after the prerequisites for
cancellation of private mortgage
insurance coverage under the
Homeowners Protection Act of 1998
(HPA), 12 U.S.C. 4901–4910. Under the
HPA, the consumer may initiate
cancellation of private mortgage
insurance (PMI) once the outstanding
balance of the mortgage obligation is
first scheduled to reach 80 percent of
the original value of the property,
regardless of the outstanding balance,
based on the amortization schedule or
actual payments. In addition, servicers
must automatically terminate PMI for
residential mortgage transactions on the
earliest date that the principal balance
of the mortgage is first scheduled to
reach 78 percent of the original value of
the secured property securing the
mortgage obligation, where the
consumer is current. The Board sought
comment on this proposal, as well as
whether TILA section 129D(d)(1) should
be interpreted narrowly to mean that,
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among consumers with escrow accounts
required pursuant to proposed
§ 226.45(b)(1), only those that in fact
have private mortgage insurance must
meet the minimum equity requirement
under the HPA as a prerequisite for
cancelling their escrow accounts.
Commenters generally agreed with the
Board’s approach of requiring the 80
percent loan-to-value (LTV) ratio for
consumer-requested PMI termination,
rather than the 78 percent LTV ratio for
automatic PMI termination. Several
commenters remarked, however, that
the proposed language defining the
equity cancellation requirement as ‘‘at
least 20% of the original value of the
property securing the underlying debt
obligation is unencumbered’’ was
confusing, if not misleading.
The final rule follows the general
approach in the Board’s proposal by
adopting § 1026.35(b)(3) to establish the
cancellation criteria for escrow accounts
as provided by TILA section 129D(d). In
response to comments, § 1026.35(b)(3)
contains revised language describing the
equity necessary for cancellation as an
unpaid principal balance that is less
than 80 percent of the original value of
the property securing the underlying
debt obligation. Additionally, the
Bureau is adopting the Board’s proposed
comment 45(b)(3)–1 as comment
35(b)(3)–1 to clarify that termination of
the underlying credit obligation could
include, among other things, repayment,
refinancing, rescission, and foreclosure.
Comment 35(b)(3)–2 clarifies that
§ 1026.35(b)(3) does not affect the right
or obligation of a creditor or servicer,
pursuant to the terms of the legal
obligation or applicable law, to offer or
require an escrow account after the
minimum period dictated by
§ 1026.35(b)(3). Finally, comment
35(b)(3)–3 notes that the term ‘‘original
value’’ in § 1026.35(b)(3)(ii)(A), as
adopted from section 2(12) of the HPA,
12 U.S.C. 4901(12), means the lesser of
the sales price reflected in the sales
contract for the property, if any, or the
appraised value of the property at the
time the transaction was consummated.
35(c)
The Board proposed to reserve
§ 226.45(c) for future use in
implementing section 1471 of the DoddFrank Act, which creates new TILA
section 129H to establish certain
appraisal requirements applicable to
‘‘higher-risk mortgages.’’ Consistent
with that proposal, the Bureau is
reserving § 1026.35(c) in this final rule,
thus permitting that section to be
finalized separately in the 2013
Interagency Appraisals Final Rule,
discussed above. As discussed in part
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III.C, the 2013 Interagency Appraisals
Final Rule will take effect subsequent to
this final rule.
35(d) Evasion; Open-End Credit
The Board’s proposed § 226.45(d)
would have paralleled existing
§ 1026.35(b)(4) in prohibiting a creditor
from structuring a home-secured
transaction as an open-end plan to
evade the requirements of proposed
§ 226.45 in connection with credit
secured by a consumer’s principal
dwelling that does not meet the
definition of open-end credit in
§ 226.2(a)(20). No comments were
received regarding the scope or
substance of this proposal. The Bureau
has adopted the Board’s proposal in
§ 1026.35(d), with certain technical
edits.
VI. Effective Date
As indicated above, this final rule is
effective June 1, 2013. Thus, compliance
with this final rule will be mandatory
over eight months earlier than the
January 21, 2014 baseline mandatory
compliance date that the Bureau is
adopting for most of the Title XIV
Rulemakings, as discussed above in part
III.C. As that discussion notes, the
Bureau is carefully coordinating the
implementation of the Title XIV
Rulemakings, including their effective
dates. The Bureau is including this final
rule, however, among a subset of the
new requirements of the Title XIV
Rulemakings that will have earlier
effective dates because they do not
present significant implementation
burdens for industry. For the following
reasons, the Bureau believes that this
final rule presents little or no
compliance burden for creditors and
therefore that an accelerated
implementation period is appropriate.
Although the Board’s 2011 Escrows
Proposal did not expressly solicit
comment on an appropriate
implementation period, four industry
trade associations commented on this
question. Of the four, one represents
financial services companies, and three
represent credit unions. All four
expressed concern that sufficient time
be afforded industry to implement the
new requirements when finalized, either
as a general matter or specifically
because of system changes that would
be required. The trade association
representing financial services
companies merely stated that sufficient
time to implement the final rule would
be necessary without stating any
specific period. Of the other three trade
associations, one recommended an
implementation period of one year and
two recommend 6 to 12 months. The
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Bureau notes, however, that these
commenters’ concerns regarding the
implementation period, particularly
those relating to necessary system
changes, were largely centered around
two aspects of the Board’s proposal:
(1) The proposed new disclosures, and
(2) the new ‘‘transaction coverage rate’’
proposed to be used instead of the
annual percentage rate for determining
whether a transaction is a higher-priced
mortgage loan subject to the escrow
requirements. As discussed above in the
applicable section-by-section analyses,
the Bureau is not adopting either of
those aspects of the Board’s proposal in
this final rule.
The final rule does not expand either
the universe of transactions to which
the escrow requirements apply or the
universe of creditors subject to them.
Indeed, the new exemption adopted by
this final rule for higher-priced
mortgage loans extended by small
creditors that operate in rural or
underserved areas represents a
reduction in compliance burden for
creditors that meet the exemption’s
prerequisites. Moreover, the expansion
of the partial exemption for
condominiums to other property types
where the governing association has an
obligation to maintain a master policy
insuring all dwellings, such as planned
unit developments, also represents
additional compliance burden relief for
creditors.
The only expansion of substantive
requirements under this final rule is the
extension from one to five years of the
minimum duration generally applicable
to escrow accounts required by the rule.
The Bureau believes that even this
expansion of the protection afforded
consumers by escrow accounts will
impose at most a modest increase in
compliance burden for creditors because
it simply extends an otherwise already
applicable requirement by four
additional years. Even this minimal
additional burden will not be
encountered by any creditor until at
least one year after the rule’s effective
date, when cancellation of mandatory
escrow accounts otherwise first would
have become permissible for the earliest
higher-priced mortgage loans to be made
after this final rule takes effect.
The Bureau believes that both the
burden relief for certain small creditors
and the expanded protection for
consumers of maintaining escrows for
four additional years warrant expedited
implementation to avoid any
unnecessary delay of either. Such
expedited implementation especially is
warranted given that, in particular
where the Bureau is not adopting the
two aspects of the Board’s proposal that
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commenters identified as requiring
significant time to implement, little or
no new compliance burden
accompanies such implementation. For
these reasons, the Bureau is limiting the
implementation period for this final rule
by making it effective on June 1, 2013.
VII. Dodd-Frank Act Section 1022(b)(2)
A. Overview
In developing the final rule, the
Bureau has considered potential
benefits, costs, and impacts,38 and has
consulted or offered to consult with the
prudential regulators, the U.S.
Department of Housing and Urban
Development, and the Federal Trade
Commission (FTC), including with
respect to consistency with any
prudential, market, or systemic
objectives that may be administered by
such agencies. The Bureau is issuing
this final rule to finalize the Board’s
2011 Escrows Proposal, which the
Board issued prior to the transfer of
rulemaking authority to the Bureau. As
the Board was not subject to DoddFrank Act section 1022(b)(2)(B), the
Board’s 2011 Escrows Proposal did not
contain a proposed Dodd-Frank Act
section 1022 analysis. The Board did
generally request comment on projected
implementation and compliance costs,
although commenters provided little
information in response. As discussed
above, the Bureau’s final rule
implements certain amendments to the
Truth in Lending Act made by the
Dodd-Frank Act. Specifically, the final
rule lengthens the time for which a
mandatory escrow account established
for a higher-priced mortgage loan must
be maintained from a minimum period
of one year to five years. In addition, the
final rule creates an exemption from the
escrow requirement for certain
transactions extended by a creditor that
meets four conditions. Those conditions
are that the creditor: (1) Makes most of
its first-lien covered transactions in
rural or underserved counties; (2)
during the preceding calendar year,
together with its affiliates, originated
500 or fewer first-lien covered
transactions; (3) has an asset size less
than $2 billion; and (4) together with its
affiliates, generally does not escrow for
any mortgage obligation that it or its
affiliates currently services, except in
limited circumstances. For eligible
38 Section
1022(b)(2) of the Dodd-Frank Act calls
for the Bureau to consider the potential benefits and
costs of a regulation to consumers and covered
persons, including the potential reduction of access
by consumers to consumer financial products and
services; the impact on depository institutions and
credit unions with $10 billion or less in total assets
as described in section 1026 of the Dodd-Frank Act;
and the impact on consumers in rural areas.
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creditors, the final rule provides the
exemption from the escrow
requirements for transactions held in
portfolio, but not for transactions that, at
consummation, are subject to a forward
commitment to be purchased by an
investor that does not itself qualify for
the exemption.
The analysis below considers the
benefits, costs, and impacts of key
provisions of the final rule. With respect
to these provisions, the analysis
considers costs and benefits to
consumers and costs and benefits to
covered persons. The analysis also
considers certain alternative provisions
that were considered by the Bureau in
the development of the final rule.
Because the Bureau’s final rule
implements certain self-effectuating
amendments to TILA, the costs and
benefits of the final rule will arise
largely from the statute and not from the
final rule that implements them. The
Bureau’s final rule would provide
benefits compared to allowing these
TILA amendments to take effect alone,
however, by clarifying parts of the
statute that call for interpretation and
using the Bureau’s exemption authority
to exempt certain creditors who would
otherwise be required to implement the
escrow provisions. Greater clarity on
these amendments, as provided by the
final rule, should reduce the compliance
burdens on covered persons by, for
example, reducing costs for attorneys
and compliance officers as well as
potential costs of over-compliance and
unnecessary litigation.39 Exempting
certain financial institutions from the
escrow requirement should reduce
compliance costs and regulatory
burdens for such institutions as well as
provide greater access to credit for
consumers in rural and underserved
areas. The Bureau notes that any costs
that these provisions impose beyond the
statute itself are likely to be minimal.
Section 1022 of the Dodd-Frank Act
permits the Bureau to consider the
benefits, costs and impacts of the final
rule solely compared the effects of the
statute taking effect without an
implementing regulation. To provide
the public better information about the
benefits and costs of the statute,
however, the Bureau has chosen to
consider the benefits, costs, and impacts
of these major provisions of the
39 The Bureau notes that it is focused here on the
fact that regulatory provisions that clarify statutory
provisions mitigate certain compliance costs
associated with uncertainty over what the statutory
provisions require. While it is possible that some
clarifications would put greater burdens on
creditors as compared to what the statute would
ultimately be found to mandate, the Bureau believes
that the rule’s clarifying provisions generally
mitigate burden.
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proposed rule against a pre-statutory
baseline (i.e., the benefits, costs, and
impacts of the statute and the regulation
combined). The Bureau notes at the
outset that there are only limited data
that are publicly available and
representative of the full universe of
mortgage credit, including in particular
with respect to rural and underserved
communities. Additionally, there are
limited data regarding the use of escrow
accounts subsequent to the Board’s 2008
HOEPA Final Rule.
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B. Potential Benefits and Costs to
Consumers and Covered Persons
Congress enacted sections 1461 and
1462 of the Dodd-Frank Act as
amendments to TILA. As amended,
TILA requires the establishment of
escrow accounts for certain transactions,
establishes minimum periods for which
such required escrow accounts must be
maintained, and requires certain
disclosures relating to escrow accounts.
The Bureau’s final rule implements
certain of these requirements. In
addition, the amendments authorize the
Board, and now the Bureau, to create
certain exemptions from the escrow
requirements for transactions originated
by creditors meeting certain prescribed
criteria. These amendments are being
adopted in furtherance of the Bureau’s
charge to prescribe regulations to carry
out the purposes of TILA, including
promoting consumers’ awareness of the
cost of credit and their informed use
thereof.
The Bureau has relied on a variety of
data sources to analyze the potential
benefits, costs, and impacts of the final
rule. However, in some instances, the
requisite data are not available or are
quite limited. Data with which to
quantify the benefits of the final rule are
particularly limited. As a result,
portions of this analysis rely in part on
general economic principles to provide
a qualitative discussion of the benefits,
costs, and impacts of the final rule. The
primary source of data used in this
analysis is HMDA.40 Because the latest
40 The Home Mortgage Disclosure Act (HMDA),
enacted by Congress in 1975, as implemented by
the Bureau’s Regulation C requires lending
institutions annually to report public loan-level
data regarding mortgage originations. For more
information, see http://www.ffiec.gov/hmda. It
should be noted that not all mortgage creditors
report HMDA data. The HMDA data capture
roughly 90–95 percent of lending by the Federal
Housing Administration and 75–85 percent of other
first-lien home loan originations, in both cases
including first liens on manufactured homes
(transactions which also are subject to the final
rule). U.S. Department of Housing and Urban
Development, Office of Policy Development and
Research (2011), A Look at the FHA’s Evolving
Market Shares by Race and Ethnicity, U.S. Housing
Market Conditions (May), pp. 6–12, Depository
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data available are for originations made
in calendar year 2011, the empirical
analysis generally uses the 2011 market
as the baseline. Data from the fourth
quarter 2011 bank and thrift Call
Reports,41 the fourth quarter 2011 credit
union call reports from the National
Credit Union Administration (NCUA),
and de-identified data from the National
Mortgage Licensing System (NMLS)
Mortgage Call Reports (MCR) 42 for the
fourth quarter of 2011 were also used to
identify financial institutions and their
characteristics. The unit of observation
in this analysis is the entity: If there are
multiple subsidiaries of a parent
company, then their originations are
summed, and revenues are total
revenues for all subsidiaries.
The estimates in this analysis are
based upon data and statistical analyses
performed by the Bureau. To estimate
counts and properties of mortgages for
entities that do not report under HMDA,
the Bureau has matched HMDA data to
Call Report data and MCR data and has
statistically projected estimated
transaction counts for those depository
institutions that do not report these data
either under HMDA or on the NCUA
call report. The Bureau has projected
originations of higher-priced mortgage
loans for depositories that do not report
HMDA in a similar fashion. These
projections use Poisson regressions that
estimate transaction volumes as a
function of an institution’s total assets,
institutions (including credit unions) with assets
less than $40 million (in 2011), for example, and
those with branches exclusively in nonmetropolitan areas and those that make no home
purchase originations or originations refinancing a
home purchase obligations secured by a first lien
on a dwelling are not required to report under
HMDA. Reporting requirements for non-depository
institutions depend on several factors, including
whether the company made fewer than 100 home
purchase loans or refinancings of home purchase
loans, the dollar volume of mortgage lending as
share of total lending, and whether the institution
had at least five applications, originations, or
purchased loans from metropolitan areas. Robert B.
Avery, Neil Bhutta, Kenneth P. Brevoort & Glenn B.
Canner, The Mortgage Market in 2011: Highlights
from the Data Reported under the Home Mortgage
Disclosure Act, 98 Fed. Res. Bull., December 2012,
n.6.
41 Every national bank, State member bank, and
insured nonmember bank is required by its primary
Federal regulator to file consolidated Reports of
Condition and Income, also known as Call Reports,
for each quarter as of the close of business on the
last day of each calendar quarter (the report date).
The specific reporting requirements depend upon
the size of the bank and whether it has any foreign
offices. For more information, see http://
www2.fdic.gov/call_tfr_rpts/.
42 The Nationwide Mortgage Licensing System is
a national registry of non-depository financial
institutions including mortgage loan originators.
Portions of the registration information are public.
The Mortgage Call Report data are reported at the
institution level and include information on the
number and dollar amount of loans originated, and
the number and dollar amount of loans brokered.
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employment, mortgage holdings and
geographic presence.
The discussion below describes four
categories of benefits and costs. First,
the Bureau reviews the benefits and
costs to consumers whose creditors are
subject to the escrow requirement.
Second, the Bureau reviews the
potential benefits and costs to those
consumers whose creditors are exempt
from the escrow requirements. Third,
the Bureau analyzes the benefits and
costs to creditors subject to the Bureau’s
escrow requirements. Fourth, the
Bureau outlines the benefits and costs to
creditors exempt from the Bureau’s
escrow requirements.
1. Potential Costs and Benefits to
Consumers of Non-Exempt Creditors
For consumers whose mortgage
transactions are originated by nonexempt creditors, the main effect of this
final rule is that the creditor generally
must provide an escrow account for four
additional years, i.e., for five years
instead of for one year. The Bureau
estimates that these creditors originated
217,260 first-lien higher-priced
mortgage loans in 2011. The Bureau
believes that the benefits for consumers
of having mandatory escrow accounts
established include: (1) The
convenience of paying one bill instead
of several; (2) a budgeting device to
enable consumers not to incur a major
expense later; and (3) a lower
probability of default and possible
foreclosure. Mandatory escrow accounts
already must be established for higherpriced mortgage loans pursuant to
existing Regulation Z requirements
adopted in the Board’s 2008 HOEPA
Final Rule, but to the extent such
accounts are beneficial to consumers the
extension of the accounts’ minimum
durations enhances and extends those
benefits.
Consumers may find it more
convenient to pay one mortgage bill
instead of paying a mortgage bill, an
insurance bill, and potentially several
tax bills. Consumers then can address
any questions or concerns about
payment to a single company, the
mortgage servicer, thus reducing
transaction costs, and having a single
bill to pay reduces the likelihood that
the consumer forget to pay either the
insurance or the tax bill. The servicer
effectively assumes the burden of
tracking whom to pay, how much, and
when, across multiple payees. These
benefits, and all the benefits and costs
listed below unless specified otherwise,
last for as long as the escrow account
exists. Thus, the final rule simply
extends the duration of these benefits
and costs from one year to five. The
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value of this benefit will vary across
consumers, and there is no current
research to estimate it. An
approximation may be found, however,
in a recent estimate of around $20 per
month per consumer, depending on the
household’s income, coming from the
value of paying the same bill for phone,
cable television, and Internet services
(the ‘‘Bundle Study’’).43
Additionally, extending the duration
of the mandatory escrow period ensures
that the consumer does not face a
sizable, unanticipated fee later, for the
four additional years of escrow account
provision. Recent research suggests that
many consumers value the overwithholding of personal income taxes
through periodic payroll deductions and
receiving a check from the IRS in the
spring despite foregoing the interest on
the overpaid taxes throughout the
previous year.44 A mortgage escrow
account works in a similar fashion;
consumers pay the same fixed amount,
sometimes interest-free, throughout the
year in return for not having to pay a
large lump-sum payment in the end.
Consequently, consumers with an
escrow account are much less likely to
experience potentially unexpected cost
shocks associated with paying a large
property tax and/or home insurance
bills, that could lead other consumers to
default on their mortgage. Based on
recent research on the value of receiving
a refund check from the IRS in the
spring,45 the Bureau estimates that the
average value of the benefit of overwithholding resulting from the
extension of the escrow period for lowto moderate-income households is 2.65
percent of the yearly amount paid for
property taxes and insurance. The
analogy is not exact because a tax
refund can be used for other purposes
whereas an escrow account is calibrated
to meet only the consumer’s insurance
and property tax obligations. However,
the Bureau believes consumers may
experience similar benefit from this
forced-savings method because they are
likely to use any forced savings from the
tax refund for the most pressing needs
first, and not paying property taxes on
one’s dwelling can result in foreclosure.
The Bureau recognizes that any benefit
may not be the same for all consumers
43 H. Liu, P. Chintagunta, & T. Zhu,
Complementarities and the Demand for Home
Broadband Internet Services, Marketing Science,
29(4), 701–720 (2010).
44 Michael A. Barr & Jane B. Dokko, Paying to
Save: Tax Withholding and Asset Allocation Among
Low- and Moderate-Income Taxpayers, Finance and
Economics Discussion Series, Federal Reserve
Board (2008), available at: http://
www.federalreserve.gov/pubs/feds/2008/200811/
200811pap.pdf.
45 Id.
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and that some consumers may prefer to
manage their own payments.
Finally, the final rule may lead to a
lower probability of default (on average)
resulting from the budgeting benefits of
escrow accounts. However, based on
recent research,46 this benefit may be
most valuable in the first year after
originating the mortgage and thus is
already provided by the existing escrow
requirement. The Bureau nevertheless
believes that, although difficult to
quantify, some further benefit of default
and foreclosure avoidance extending
into the second through fifth years
exists for at least some consumers.
At least for some consumers, the
lengthening of the minimum period
under which an escrow must be
maintained may have certain costs. The
Bureau believes these costs may include
(1) foregone interest; (2) increased prices
resulting from creditors passing-through
their costs; and (3) potentially less
access to credit.
Under some State regulations,
creditors are not required to pay interest
on consumers’ funds held in escrow
accounts. Therefore, consumers may be
foregoing interest on such amounts.
While, on average, consumers value the
budgeting device described above, it is
likely that at least some consumers
would rather invest their funds and
make their tax and insurance payments
on their own. The Bureau, however,
believes that any returns on amounts
that would have been foregone under
the escrow requirements are likely to be
modest.
The Bureau additionally notes that
the servicing costs of maintaining an
escrow account may be passed on to
consumers, resulting in a greater overall
cost to consumers of effecting the proper
and timely payment of their tax and
insurance obligations. The magnitude of
this pass-through should be small,
however, because the marginal increase
in overall servicing costs resulting
specifically from the escrow
requirement is likely to be minor
compared to those overall servicing
costs. Some creditors might mistakenly
allocate the fixed costs of escrow
provisions (software changes, personnel
training, and so on), to each consumer
getting an escrow account, even though
these costs should not affect the
creditor’s profit-maximizing price. This
results in a less-profitable pricing
46 Nathan B. Anderson and Jane B. Dokko,
Liquidity Problems and Early Payment Default
Among Subprime Mortgages, Finance and
Economics Discussion Series, Federal Reserve
Board (2011), available at: http://
www.federalreserve.gov/pubs/feds/2011/201109/
201109pap.pdf.
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4745
scheme, hurting both the creditor and
the consumers.47
Finally, it is possible that some
creditors might consider the additional
four years for which escrow accounts
must be maintained a sufficiently high
burden to exit the market for higherpriced mortgage loans altogether.
However, given that these creditors
already provide escrows for the first
year of a higher-priced mortgage loan,
the Bureau believes it is unlikely that a
significant number of creditors will exit
the market for this reason and that, even
if a creditor exits the market, consumers
generally should be able to find other
creditors. The Bureau believes that,
overall, the final rule will not materially
reduce consumers’ access to consumer
financial products or services.
2. Potential Costs and Benefits to
Consumers of Exempt Creditors
For consumers who get a higherpriced mortgage loan from an exempt
creditor, the final rule will result in no
escrow account being required, as
opposed to the creditor being required
to escrow for a year. The Bureau
estimates that these creditors originated
50,468 first-lien higher-priced mortgage
loans in 2011. The Bureau
acknowledges that it is likely some of
these transactions were not eligible for
the exemption, because they were
subject to a forward commitment to be
sold. To further its analysis, however,
the Bureau conservatively assumes that
none of the transactions were subject to
a forward commitment.48
The Bureau believes these consumers
may benefit from less restricted access
to credit; lower prices resulting from
creditors not passing through the cost of
escrowing to the consumers; and the
ability to invest their money and earn a
return. As noted earlier, a small
mortgage originator operating
predominantly in rural or underserved
areas may be better able to compete with
incumbent originators who escrow
because it will not have to incur the
47 Nabil Al-Najjar, Sandeep Baliga, & David
Besanko. Market forces meet behavioral biases: cost
misallocation and irrational pricing, RAND Journal
of Economics, 39(1), 214–237 (2008), available at:
http://www.kellogg.northwestern.edu/faculty/
baliga/htm/sunkcost.pdf.
48 While small creditors operating predominantly
in rural or underserved areas originate some higherpriced mortgage loans subject to a forward
commitment, based on HMDA 2011 the Bureau
believes that the magnitude of these transactions is
small, relative to the overall higher-priced mortgage
loan market. Moreover, if the transaction is subject
to a forward commitment, then the creditor is likely
to pass-through the escrow cost to the (eventual)
buyer, and thus the creditor’s cost is not going to
be affected significantly. On the other hand, for
consumer benefits this is an unambiguously
conservative assumption, see below.
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costs of establishing and maintaining an
escrow account. This may provide an
extra incentive for small originators to
enter the market, creating greater access
to credit for consumers living in rural
and underserved areas. The Bureau does
not have the data to be able to estimate
the magnitude of this effect.
Additionally, the price for such
consumers may be reduced as mortgage
providers would not pass the costs of
providing escrows to consumers. The
magnitude of this pass-through should
be small, because firms should
optimally pass through only the
increase in marginal costs that tend to
be small for escrow provision, as
opposed to the fixed (overhead) costs.
However, some creditors might
mistakenly spread the overhead costs of
escrow provision over all consumers,
resulting in higher prices to such
consumers, lower mortgage transaction
volume for the creditor, and lower
creditor profit overall.
Another benefit for consumers may be
the ability to invest their money and
earn a return on amounts that might,
depending on State regulations, be
forgone under an escrow. While, as
discussed above, on average, consumers
value the budgeting device that the
escrow provides, it is likely that at least
some consumers would rather have
flexibility with regard to payment terms.
The Bureau believes that any returns on
amounts that would have been foregone
under the escrow requirements are
likely to be modest. The exemption
allows certain creditors not to escrow
for the first year after mortgage
origination, thus the magnitude of this
benefit is even smaller because the
creditors would have cancelled the
escrow right after one year otherwise.
For some consumers, providing an
exemption for creditors operating in
rural or underserved communities
would create certain costs. These costs
include: The inconvenience of paying
several bills instead of one; the lack of
a budgeting device to enable consumers
not to incur a major expense later; a
higher probability of foreclosure; and
the possibility of underestimating the
overall cost of maintaining their
residence.
Because the consumer must pay not
only a mortgage bill, but also an
insurance bill and, potentially, several
tax bills, there is a higher probability
that the consumer may forget or neglect
to pay one or more of the bills.
Moreover, there may be higher
transaction costs for the consumer who
no longer has a single organization to
consult regarding payments, but rather
must deal with several organizations as
payment questions arise. The value of
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this cost will vary across consumers,
and there is no current research to
estimate it. An approximation is a
recent estimate of around $20 per month
per consumer, depending on the
household’s income, coming from the
value of paying the same bill for phone,
cable television, and Internet services as
described in the Bundle Study, noted
above.
Additionally, without a budgeting
device, consumers will need to selfmanage the payment of intermittent
large bills. As described above, recent
research suggests that many consumers
value the over-withholding of personal
income taxes through periodic payroll
deductions and receiving a check from
the IRS in the spring despite foregoing
the interest on the overpaid taxes
throughout the previous year. A
mortgage escrow works in a similar
fashion; consumers pay the same fixed
amount, sometimes interest-free,
throughout the year, without having to
pay a large lump-sum payment in the
end. Based on the recent research of the
value of receiving a refund check from
the IRS in the spring, the Bureau
estimates the average value of having an
escrow for low to moderate income
households to be 2.65 percent of the
yearly amount paid for property taxes
and insurance. The cost will not be the
same for all consumers as some
consumers could find cost savings in
managing payments on their own.
However, for those consumers who do
struggle with payments, there is a higher
probability of foreclosure (on average)
resulting from the lack of a budgeting
device. Based on the recent research,49
consumers not having an escrow
account in the first year after mortgage
originations will result in 0.35 percent
more foreclosures per year for the firstlien higher-priced mortgage loans.
Having an escrow account for the first
year of the mortgage obligation’s term
appears to be particularly important for
consumer protection considerations
because often the consumer has
depleted savings as a part of the
mortgage origination process and may
not have prepared adequately for the
upcoming semi-annual or annual
property tax and home insurance bills.
Both of these effects, and thus the
benefits of having (or the costs of not
having) an escrow account, appear to
diminish after the first year. As noted
above, some consumers might be
49 Nathan B. Anderson and Jane B. Dokko,
Liquidity Problems and Early Payment Default
Among Subprime Mortgages, Finance and
Economics Discussion Series, Federal Reserve
Board (2011), available at: http://
www.federalreserve.gov/pubs/feds/2011/201109/
201109pap.pdf.
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unaware of the amount of the property
tax and home insurance that they will
have to pay every year. Having an
escrow illustrates to consumers exactly
how much they have to pay per month
for the mortgage, property tax, and
home insurance. If consumers
underestimate the cost of the property
tax and the home insurance, then some
consumers will buy a house that they
cannot afford, or buy a more expensive
house than they would ideally want.
The Bureau does not have the data to
estimate the magnitude of this cost.
3. Potential Costs and Benefits for NonExempt Creditors
For the non-exempt creditors, the
main effect of the final rule is that
creditors need to provide an escrow
account for four additional years: for
five years instead of for one year. The
Bureau does not have the data on how
many creditors do not already provide
escrow accounts up to the fifth year
after a mortgage origination. The Bureau
estimates that there are 7,434 nonexempt creditors who originated any
first-lien higher-priced mortgage loans
in 2011.50 A median creditor in this
group originated six first-lien higherpriced mortgage loans in 2011.51 The
Bureau notes that some creditors who
might otherwise qualify for the Bureau’s
exemption may decide to continue to
provide escrows for first-lien higherpriced mortgage loans. The Bureau
cannot estimate the number of these
creditors, and conservatively estimates
this number to be insignificant. The
benefits and costs described in this part
of the analysis would also apply to these
creditors.
The two main benefits for this group
of creditors are: Assurance that
consumers have met their obligations;
and the potential for interest earnings in
the escrow account subject to State
regulations. If consumers are late on
their property taxes, the government
often has the first claim on the dwelling
that secures the transaction in case of
consumer default. If consumers do not
pay their home insurance premiums,
then the creditor might end up with
nothing if something happens to the
dwelling that secures the transaction.
Because of this potential, many
creditors currently verify whether or not
the consumer made the requisite
50 Out of those, there are 3,235banks, 562 thrifts,
1,372 credit unions, and 2,265 non-depository
institutions.
51 A median bank or thrift originated 7 first lien
higher-priced mortgage loans, a median credit
union originated 3 first lien higher-priced mortgage
loans, and a median non-depository institution
originated 13 first lien higher-priced mortgage
loans.
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insurance premiums and tax payments
every year even where the consumer did
not set up an escrow account. The final
rule will allow creditors to forego this
verification process as the funds would
be escrowed.
Moreover, the creditor may be able to
gain returns on the money that the
consumers keep in their escrow
account. Depending on the State, the
creditor might not be required to pay
interest on the money in the escrow
account. The amount that the consumer
is required to have in the consumer’s
escrow account is generally limited to
two months’ worth of property taxes
and home insurance. However, some
States require a fixed interest rate to be
paid on escrow accounts, resulting in an
additional cost to the creditors. This
cost is higher if the required interest rate
is not updated frequently and current
interest rates are low compared to the
rate set by the State.
There are startup and operational
costs of providing escrow accounts.
Creditors are already required to
provide the escrow account for a year,
and thus the Bureau believes that there
are few startup costs implicated by the
final rule or that any startup costs are
relatively minor given that these
creditors probably have already set up a
system capable of escrowing in response
to the current regulation. There are,
however, operating costs implicated in
maintaining an escrow account for an
additional four years. These costs vary
widely with the size of the institution
and the local jurisdictions served. For
the bigger creditors, with up-to-date
information technology systems, the
Bureau believes the cost of maintaining
escrows for four additional years is
negligible, and that many of these
creditors may already do so. For a small
creditor, that does not invest as much in
technology, and serves a jurisdiction
that does not process taxes
automatically, the cost of providing the
escrow account could be larger.52
However, the Bureau believes that
escrow accounts become cost-effective
once operations reach a certain scale,
and thus even this operating cost is
relatively minor. The Board’s
calculation and the Bureau’s subsequent
adjustments to the minimal portfolio
size necessary to escrow ensure that the
non-exempt creditors with over 500
originations per year can achieve the
scale necessary for cost-efficient escrow
provision. Additionally, the creditors
can outsource escrowing to servicing
52 The Bureau is aware that some jurisdictions
still process taxes by hand and/or impose fees on
the creditors seeking access to the tax information,
significantly adding to the burden of establishing
escrow accounts in these jurisdictions.
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firms and pass through at least some of
these costs to the consumer.
4. Potential Costs and Benefits for
Exempt Creditors
For the exempt creditors, the main
effect of the final rule is that the creditor
does not need to provide an escrow
account at all for the first year after
mortgage origination. The Bureau
estimates that there are 2,612 exempt
creditors who originated any first-lien
higher-priced mortgage loans in 2011.53
A median creditor in this group
originated 13 first-lien higher-priced
mortgage loans in 2011. A median bank
or thrift originated 13, a median credit
union originated 10, and a median nondepository institution originated 6
mortgage obligations.54
The main benefit for this group of
creditors is in eliminating or greatly
reducing the accounting and
compliance costs of providing the
escrow accounts. It is not clear whether
this saving is significant, resulting from
the fact that these creditors already
provide escrows for the first year, and
thus have already undertaken the effort
to set up a system capable of escrowing.
The exemption from the final rule is
likely to lead to less employee time
being devoted to complying with the
regulation; however, the Bureau
believes that benefit is likely to be
negligible resulting from the number of
first-lien higher-priced mortgage loans
originated at a median institution.
Because the creditors in this group
who currently extend higher-priced
mortgage loans have already expended
the start-up costs of providing escrows,
many of these creditors might be willing
to continue providing escrows to their
consumers if the ongoing costs of
providing escrows are low. For these
creditors the costs and benefits are akin
to those described above for the nonexempt creditors, with the stipulation
that the benefits of providing escrows
for five years clearly outweigh the costs.
However, there are several costs
associated with this group of creditors,
including: The uncertainty over whether
a consumer has met his obligations, a
higher probability of foreclosure, and
foregoing the additional funds that
escrows may provide. Because creditors
that do not provide escrow accounts are
not certain whether consumers have
53 Out of those, there are 2,112 banks, 141 thrifts,
355 credit unions, and 4 non-depository
institutions. The Bureau does not possess the
information on whether HMDA non-reporting nondepository institutions are rural, and conservatively
assumes that they are not.
54 A median bank or thrift originated 13, a median
credit union originated 10, and a median nondepository institution originated 6 mortgage
obligations.
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4747
paid their property taxes and home
insurance, they carry a considerable
amount of risk. As noted previously, if
consumers are late on their property
taxes, the government often has the first
claim on the dwelling that secures the
transaction in case of consumer default.
If consumers do not pay their home
insurance premiums, then the creditor
might end up with nothing if something
happens to the dwelling that secures the
transaction.
Moreover, all else being equal, these
consumers have a higher probability of
defaulting. Consumers, on average,
value a budgeting device to enable
consumers not to incur a major expense
later. As noted above, recent research
suggests that many consumers value the
over-withholding of personal income
taxes through periodic payroll
deductions and receiving a check from
the IRS in the spring despite foregoing
the interest on the overpaid taxes
throughout the previous year. A
mortgage escrow works in a similar
fashion; consumers pay the same fixed
amount, sometimes interest-free,
throughout the year, without having to
pay a large lump-sum payment in the
end. As previously noted, research
suggests that consumers not having an
escrow in the first year after mortgage
originations will result in 0.35 percent
more foreclosures per year for first-lien
higher-priced mortgage loans.
Finally, creditors who do not escrow
forego the opportunity to invest the
money in the consumers’ escrow
accounts. Depending on the State, the
creditor might not have to pay interest
on the money in the escrow account.
The excess amount that the consumer is
required to have in the consumer’s
escrow account is generally limited to
two months’ worth of property taxes
and home insurance. However, some
States require a fixed interest rate to be
paid on escrow accounts. Laws setting
rates may not be updated frequently
enough, resulting in an additional cost
to creditors, especially when the interest
rates are exceptionally low.55
C. Impact of the Final Rule on
Depository Institutions and Credit
Unions With $10 Billion or Less in Total
Assets, as Described in Section 1026
The discussion below describes
certain consequences of the final rule
based on the particular characteristics of
the creditor. First, the Bureau analyzes
the impact of the final rule on creditors
with $10 billion or less in total assets,
55 The Bureau acknowledges that this creditor
cost is also a consumer benefit. However, as
described above, the Bureau believes the benefit per
consumer is fairly modest.
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which are subject to the Bureau’s
escrow requirements. Then, the Bureau
outlines the impact of the final rule on
creditors with $10 billion or less in total
assets, which are exempt from the
Bureau’s escrow requirements. For both
of these groups the benefits, the costs,
and the median origination counts are
identical to the discussion above.
For the non-exempt creditors, the
main effect of the final rule is that the
creditor needs to provide an escrow
account for four additional years: For
five years instead of for one year. The
Bureau estimates that there are 5,087
non-exempt creditors with $10 billion
or less in total assets, who originated
any first-lien higher-priced mortgage
loans in 2011.56 These creditors
originated 91,142 first-lien higher-price
mortgage loans in 2011. The Bureau
additionally notes that some creditors
who might otherwise qualify for the
Bureau’s exemption may decide to
continue to provide escrows for firstlien higher-priced mortgage loans. The
Bureau cannot estimate the number of
these creditors, and conservatively
estimates this number to be
insignificant. The benefits and costs
described in this part of the analysis
would also apply to these creditors. The
impact described below would also
apply to these creditors.
For creditors that qualify for the new
exemption for creditors that operate
predominantly in rural or underserved
areas, the regulation will allow them,
post-effective date, to avoid having to
comply with both the existing
requirement to establish escrow
accounts for covered higher-priced
mortgage loans for at least one year and
the new general requirement to establish
accounts for at least five years for new
consumer transactions if the creditors
determine that it is in their best interest
to do so. A creditor in this group could
voluntarily require an escrow account
for five years if they choose to, and thus
this rule does not impose any significant
costs on this group of creditors. These
creditors originated 50,468 first-lien
higher-priced mortgage loans in 2011.
D. Impact of the Final Rule on
Consumers in Rural Areas
The Bureau expects that for the
consumers in rural areas, the costs and
benefits are largely the same as for the
consumers in the not necessarily rural
areas described above. The single
biggest difference is the availability of
credit; rural consumers have
significantly fewer options for getting a
higher-priced mortgage loan. Even for
56 These include 3,170 banks, 548 thrifts, and
1,369 credit unions.
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the densest counties included in the
rural definition (UIC code 8 counties
with micropolitans), the median county
has only 10 creditors making higherpriced mortgage loans, as opposed to 16
for the least dense UIC code not
included in the rural definition (UIC 5).
Given the scope of the rural and
underserved exemption, the Bureau
believes that any rural consumer can,
but need not, get a mortgage transaction
from an exempt creditor as opposed to
getting a mortgage transaction from a
non-exempt creditor, and that there will
be sufficiently many creditors left in any
given market to ensure a proper
competitive process. As a result of the
final rule, the Bureau believes that
consumers in rural areas may benefit
from greater access to credit, because
there may be more competition between
incumbent originators who escrow and
smaller mortgage originators who may
benefit from the Bureau’s exemption
requirement. Some consumers might
prefer to get a mortgage with an escrow,
for all the benefits described above.
However, the Bureau conservatively
estimates that all rural consumers will
choose to get their mortgages from an
exempt creditor and that none of these
consumers’ transactions will be subject
to forward commitment.
For these consumers, the final rule
will result in no escrow account being
required, as opposed to the creditor
being required to escrow for a year. The
Bureau estimates that there were 50,468
first-lien higher-priced mortgage loans
originated in rural areas in 2011.
The Bureau believes these consumers
may benefit from less restricted access
to credit; lower prices resulting from
creditors not passing through the cost of
escrowing to the consumers; and the
ability to invest their money and earn a
return. Because a small mortgage
originator operating predominantly in
rural or underserved areas will not have
to incur the costs of establishing and
maintaining escrow accounts for higherpriced mortgage loans, it may be willing
to keep making such transactions where
it is not willing to do so under the
current regulation. This may provide
stronger incentives for small originators
to continue making higher-priced
mortgage loans (or to resume doing so
where they have previously decided to
stop), creating greater access to credit
for consumers living in rural and
underserved areas. The Bureau does not
have the data to be able to estimate the
magnitude of this effect.
E. Consideration of Alternatives
To implement the statutory changes
the Bureau considered different
definitions of rural and the size
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exemption, both for the asset size and
for the number of originations. As
described above, the definition of rural
proposed in the Board’s 2011 Escrows
Proposal included counties with
USDA’s urban influence codes of 7, 10,
11, and 12. Taking into account the
comments received on the proposal, the
Bureau believed this definition was too
narrow to capture fully Congress’s
apparent concern regarding access to
credit.
In finalizing the rule the Bureau
considered using an alternative
definition of rural that would have used
the same definition as provided under
USDA’s section 502 Rural Housing
program. Under the USDA section 502
Rural Housing definition of ‘‘rural’’,
approximately 37 percent of the U.S.
population lives in an area considered
to be rural, compared to approximately
10 percent according to the definition
used in the final rule, which defines
rural as counties with UICs 4, 6, 7, 8, 9,
10, 11, and 12. The Bureau considered
the trade-off of exempting more
creditors and thus potentially mitigating
consumer access to credit issues versus
exempting fewer creditors and
providing more consumers with the
consumer protections represented by
escrow accounts. The Bureau’s analysis
of the 2011 HMDA data showed that,
even with the definition of rural in the
final rule that includes counties with
codes of 4, 6, 7, 8, 9, 10, 11, and 12, a
median county in the least dense county
code that is not exempt (code 5) had 16
creditors that extended any higherpriced mortgage loans in 2011. In light
of these data, the Bureau believes that,
even if some of these creditors exit the
higher-priced mortgage loan market for
lack of an exemption, there will still be
enough competition in those counties,
and therefore the risk of potential access
to credit issues for consumers in these
areas is mitigated. Consequently, the
Bureau believes that expanding the
definition of rural in the final rule to the
USDA section 502 Rural Housing
definition would have allowed creditors
to originate mortgage obligations
without the escrow protections
mandated by the Congress, while access
to credit would not be significantly
improved. In light of these
considerations, the Bureau believes the
final rule reflects the Bureau’s judgment
based upon all of the evidence it has
obtained regarding the areas included,
such as the urban influence, density of
the population, and the number of
higher-priced mortgage loan creditors in
the county, in how best to effectuate the
purposes of the law Congress enacted.
In addition, the Bureau considered
alternative origination thresholds. The
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Board’s proposal extended the
exemption to creditors that, together
with their affiliates, originate and retain
servicing rights to 100 or fewer first-lien
mortgage obligations in either of the
preceding two years. As discussed more
fully above, the Board noted its belief
from the available information that the
economies of scale necessary to escrow
cost-effectively, or else to satisfy the
escrow requirement by outsourcing to a
sub-servicer, generally exist when a
mortgage servicer has a portfolio of at
least 500 mortgage obligations.
Consequently, the Board proposed
setting the cut-off at 100 or fewer firstlien mortgage obligations originated and
for which servicing rights are retained,
assuming an average of five years until
an institution’s mortgage obligations are
paid off. After reviewing the comments
submitted by many creditors in rural
areas regarding the adverse conditions
they face, such as idiosyncratic
accounting systems (including
calculations by hand) employed by
some of the jurisdictions, the Bureau
believes that many such creditors may
need a larger number of mortgage
obligations in portfolio to be able to
provide escrow accounts costeffectively. The Bureau has expanded
the exemption to include creditors that,
together with their affiliates, originate
500 or fewer first-lien covered
transactions. The Bureau believes that
defining the limit in terms of originated
transactions, as opposed to transactions
originated and serviced, facilitates
compliance by not requiring institutions
to track multiple metrics for purposes of
this final rule and the 2013 ATR Final
Rule and to promote consistent
application of the two exemptions.
However, this change by itself would
have severely restricted the scope of the
exemption, as there are more creditors
that originate and service 100 or fewer
transactions than there are creditors that
simply originate 100 or fewer.57 Based
on 2011 HMDA data, setting the annual
originations limit at 500 ensures that
89.5% of the creditors that originated
and serviced 100 transactions are also
under the 500 first-lien origination
limit.
Because of the changes in the
originations limit, the Bureau
considered whether an asset-size limit
would be appropriate, to prevent larger
creditors with sophisticated information
technology systems and the capacity to
escrow from taking unintended
advantage of the exemption. As noted
above, in the Board’s 2011 Escrows
57 Consider, for example, a creditor that originates
300 mortgage obligations, but services only 80 of
them.
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Proposal, no asset-size limit was
proposed, although the Board solicited
comment on whether such a limit was
appropriate. The Bureau initially
considered a $1 billion asset-size limit,
believing organizations of at least that
size had the capacity to implement the
escrow requirements. However, in
accordance with its goal to harmonize
the final rule as much as practicable
with the 2013 ATR Final Rule,
discussed above, the Bureau has
adopted a $2 billion asset-size limit.
Based on a review of HMDA data, the
Bureau believes that there is an
insignificant number of creditors that
operate predominantly in rural or
underserved areas, have fewer than 500
first-lien originations, and have between
$1 and $2 billion in assets.
Consequently, the Bureau believes that
harmonizing the approaches between
the two final rules will simplify
compliance and reduce associated
compliance costs, while having a
negligible impact on the scope of the
exemptions.
VIII. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
generally requires an agency to conduct
an initial regulatory flexibility analysis
(IRFA) and a final regulatory flexibility
analysis (FRFA) of any rule subject to
notice-and-comment rulemaking
requirements, unless the agency certifies
that the rule will not have a significant
economic impact on a substantial
number of small entities.58 The Bureau
also is subject to certain additional
procedures under the RFA involving the
convening of a panel to consult with
small business representatives prior to
proposing a rule for which an IRFA is
required.59 An entity is considered
‘‘small’’ if it has $175 million or less in
assets for the banks, and $7 million or
less in revenue for non-bank mortgage
creditors, mortgage brokers, and
mortgage servicers.60 In the Board’s
2011 Escrows Proposal, the Board
58 For purposes of assessing the impacts of the
final rule on small entities, ‘‘small entities’’ is
defined in the RFA to include small businesses,
small not-for-profit organizations, and small
government jurisdictions. 5 U.S.C. 601(6). A ‘‘small
business’’ is determined by application of Small
Business Administration regulations and reference
to the North American Industry Classification
System (NAICS) classifications and size standards.
5 U.S.C. 601(3). A ‘‘small organization’’ is any ‘‘notfor-profit enterprise which is independently owned
and operated and is not dominant in its field.’’ 5
U.S.C. 601(4). A ‘‘small governmental jurisdiction’’
is the government of a city, county, town, township,
village, school district, or special district with a
population of less than 50,000. 5 U.S.C. 601(5).
59 5 U.S.C. 609.
60 The current SBA size standards are found on
SBA’s Web site at http://www.sba.gov/content/
table-small-business-size-standards.
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conducted an initial regulatory
flexibility analysis (IRFA) and
concluded that the proposed rule would
have a significant economic impact on
a substantial number of small entities.
The Board solicited comments on the
number of small entities likely to be
affected by the proposal, as well as the
costs, compliance requirements, and
any changes in operating procedures
arising from the application of the
proposed rules to small businesses. The
Board additionally solicited comments
regarding a number of proposed
provisions that could minimize
compliance burdens on small entities by
relying on other disclosure requirements
with which they already must comply
and/or exempting certain classes of
small creditors from the proposed
regulations. The Board also welcomed
comment on any significant alternatives
that would minimize the impact of the
proposed rules on small entities.
The Bureau has reviewed the
comments on the Board’s IRFA and the
broader Notice of Proposed Rulemaking
addressing the burden imposed by the
proposed rule and potential mitigation
measures and alternatives. As described
further below, the Bureau carefully
considered the comments received and
performed its own independent analysis
of the potential impacts of the final rule
on small entities and alternatives to the
final rule. Based on the comments
received, the Bureau’s own analysis,
and for the reasons stated in section 4
below, the undersigned certifies that
this final rule will not have a significant
economic impact on a substantial
number of small entities. Nevertheless,
to better inform the rulemaking, the
Bureau has prepared the following final
regulatory flexibility analysis.
1. Statement of the Need for, and
Objectives of, the Final Rule
The Bureau is publishing final rules
to implement certain amendments to
TILA made by the Dodd-Frank Act.
Congress enacted TILA based on
findings that economic stability would
be enhanced and competition among
consumer credit providers would be
strengthened by the informed use of
credit resulting from consumers’
awareness of the cost of credit. The
Bureau’s final rule requires creditors to
establish escrow accounts for taxes and
insurance for at least five years after
consummation. The final rule also
creates an exemption from the escrow
requirement for certain mortgage
transactions extended by a creditor that
meets four conditions. Those conditions
are that the creditor: (1) Makes most of
its first-lien covered transactions in
rural or underserved counties; (2)
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together with all affiliates, has annual
originations of 500 or fewer first-lien
covered transactions; (3) has an asset
size less than $2 billion; and (4) together
with its affiliates, does not escrow for
any mortgage that it or its affiliates
currently services, except in limited
instances.
These amendments are intended to
improve consumers’ understanding of
the overall costs of a given higher-priced
mortgage loan and, in turn, facilitate
their ability to shop for mortgages.
Moreover, requiring escrow accounts for
certain higher-priced mortgage loans
may reduce the likelihood that a
consumer faces a sizable, unanticipated
fee or increase in payments.
tkelley on DSK3SPTVN1PROD with
2. Summary of Significant Issues Raised
by Comments in Response to the Initial
Regulatory Flexibility Analysis
In accordance with section 3(a) of the
RFA, 5 U.S.C. 603(a), the Board
prepared an IRFA in connection with
the proposed rule, and acknowledged
that the projected reporting,
recordkeeping, and other compliance
requirements of the proposed rule on
the whole would have a significant
economic impact on a substantial
number of small entities, including
small mortgage creditors and servicers.
In addition, the Board recognized that
the precise compliance costs would be
difficult to ascertain because they would
depend on a number of unknown
factors, including, among other things,
the specifications of the current systems
used by small entities to prepare and
provide disclosures and/or solicitations
and to administer and maintain
accounts. The Board sought information
and comment on any costs, compliance
requirements, or changes in operating
procedures arising from the application
of the proposed rule to small businesses.
The Bureau reviewed comments
submitted by various financial
institutions and trade organizations in
order to ascertain the economic impact
of the proposed rule on small entities.
Although only a few commenters
focused on the Board’s IRFA analysis,
such commenters expressed concern
that the Board had underestimated the
costs of compliance. In one comment
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letter a trade organization noted that one
large creditor implementing the
Regulation Z amendments that became
effective October 1, 2009, indicated that
it required over 70,000 hours to change
its systems. Smaller financial
institutions also suggested that
compliance costs would be significant
given the need to change systems and
train personnel. In addition, the Office
of Advocacy of the U.S. Small Business
Administration (Advocacy) submitted a
comment on the Board’s IRFA.
Advocacy expressed concern about
the level of information the Board
provided in its IRFA regarding the
impact of the proposed rule on small
entities and it encouraged the Board to
provide additional information.
Advocacy also raised concerns
concerning the scope of the exception
and made suggestions to ease burdens in
connection with the proposed
disclosures. For the reasons stated
below, the Bureau believes that the
Board’s IRFA complied with the
requirements of the RFA and the Bureau
has modified certain aspects of the
proposal in order to mitigate some of the
impact on small entities, including
some identified by Advocacy.
Section 3(a) of the RFA requires
agencies to publish for comment an
IRFA which shall describe the impact of
the proposed rule on small entities. See
5 U.S.C. 603(a). In addition, section 3(b)
requires the IRFA to contain certain
information including a description of
the projected reporting, recordkeeping
and other compliance requirements of
the proposed rule, including an estimate
of the classes of small entities which
will be subject to the requirement and
the type of professional skills necessary
for preparation of the report or record.
See 5 U.S.C. 603(b). The Bureau believes
that the Board’s IRFA complied with the
requirements of the RFA. The Board
described the impact of the proposed
rule on small entities by describing the
rule’s proposed requirements in detail
throughout the supplementary
information for the proposed rule.
Additionally, the Board described the
projected compliance requirements of
the rule in its IRFA, noting the need for
small entities to update systems,
PO 00000
Frm 00026
Fmt 4701
Sfmt 4700
operating procedures, and disclosures
under the proposed rule. In the
proposal, the Board described the
projected impact of the proposed rule
and sought comments from small
entities specifically regarding the effect
the proposed rule would have on their
activities. In their comments, small
entities have described to varying
degrees the increased costs associated
with the Board’s proposed rules
particularly with respect to the
proposed disclosure requirements
concerning escrow accounts.
As a result of the Bureau’s review of
Advocacy’s and other comments
regarding the potential compliance
burdens of adopting the disclosure
portions of the Board’s 2011 Escrows
Proposal before resolution of the
Bureau’s TILA–RESPA integration
rulemaking, the final rule does not
adopt the Board’s proposed disclosures
provisions. In addition, as discussed
further below, the Bureau has also
considered additional measures as
suggested by Advocacy to broaden the
proposed exemption so that more small
entities can qualify.
3. Description and Estimate of Small
Entities to Which the Final Rule Would
Apply
The final rule applies generally to
institutions and entities that engage in
originating or extending home-secured
credit, as well as servicers of these
mortgage obligations. The Board
acknowledged in its IRFA the lack of a
reliable source for the total number of
small entities likely to be affected by the
proposal, because the credit provisions
of TILA and Regulation Z have broad
applicability to individuals and
businesses that originate, extend and
service even small numbers of homesecured transactions. The Board
identified through data from Reports of
Condition and Income (Call Reports)
approximate numbers of small entities
that would be subject to the proposed
rules. The summary of institutions
considered small according to the
criteria described above, regardless of
whether they are exempt from the rule,
is in the table below.
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4. Reporting, Recordkeeping, and Other
Compliance Requirements
tkelley on DSK3SPTVN1PROD with
The costs to the non-exempt creditors
are described in the section 1022
analysis above, and mainly include the
ongoing operating costs of extending the
61 This figure includes 1,432 banks, 203 thrifts,
817 credit unions, and 1,325 non-depository
institutions.
62 The median first-lien higher-priced mortgage
loan by institution is as follows: 5 for banks and
thrifts; 2 for credit unions; and 5 for non-depository
institutions.
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escrow account provision from one to
four years. For the creditors who are
processing escrows in-house, this cost is
negligible, given that these creditors
probably have already set up a system
capable of escrowing in response to the
current regulation. For the creditors that
outsource escrowing, the fixed cost of
contracting has already been incurred.
The creditors that operate
predominantly in rural or underserved
areas are exempted, unless they have
reached the scale at which the Bureau
believes that it is cost-efficient to set up
escrow accounts.
The Bureau does not possess
nationally representative information
regarding this cost. However, the cost of
escrowing is a part of the overall
servicing cost of a mortgage obligation.
The most recent estimate of the
servicing cost of a mortgage obligation is
$100 per transaction per year, if the
servicing is outsourced.63 The Bureau
does not possess reliable information on
what fraction of the $100 is attributable
to maintaining escrow accounts.
However, none of the several examined
industry, regulatory, and academic
studies of servicing singled out
escrowing as the first or the main
component of the overall servicing
costs.64 Thus, the Bureau conservatively
63 National Association of Federal Credit Unions,
Top 10 Questions about Mortgage Subservicing
(Podcast), available at: http://www.nafcu.org/
NSCTertiary.aspx?id=23703.
64 Mortgage Bankers Association, Residential
Mortgage Servicing for the 21st Century, May 2011.
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assumes that the cost of this rule per
transaction is at most $50, and over the
four years is at most $200. According to
the Bureau’s projections, 85 percent of
the affected non-exempt small
institutions originate less than 14
higher-priced mortgage loans, resulting
in an at most a $2800 cost per
institution.65 Therefore, the Bureau
believes that the rule will not have a
significant impact on small entities.
Examining the ratios of these costs to
the revenues 66 of the institutions, for
85% of small creditors these costs
represent less than 0.3% of their
revenues.67
If there are creditors who have not
already implemented the Board’s 2008
HOEPA Final Rule and would not be
Amy Crews Cutts & Richard K. Green, Innovative
Servicing Technology: Smart Enough to Keep
People in Their Houses? Freddie Mac Working
Paper #04–03 (2004). Prime Alliance Loan
Servicing, Re-Thinking Loan Servicing, (2010).
Adam Levitin & Tara Twomey, Mortgage Servicing,
28 Yale J. on Reg. 1 (2011).
65 Breaking this down by small creditor type, 85
percent of banks originate less than 14, and 85
percent of thrifts originate less than 9 higher-priced
mortgage loans, 85 percent of credit unions
originate less than 10 higher-priced mortgage loans,
and 85 percent of non-depository institutions
originate less than 16 higher-priced mortgage loans.
66 Revenue has been used in other analyses of
economic impacts under the RFA. For purposes of
this analysis, the Bureau uses revenue as a measure
of economic impact. In the future, the Bureau will
consider whether an alternative quantifiable or
numerical measure may be available that would be
more appropriate for financial firms.
67 The ratio is below 0.5 percent for 85 percent
of the creditors among any of the four small creditor
types.
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ER22JA13.000
The Bureau estimates that there are
3,777 non-exempt creditors who
originated any first-lien higher-priced
mortgage loans in 2011.61 A median
creditor in this group originated four
first-lien higher-priced mortgage loans
in 2011.62 The Bureau does not have
data on how many creditors do not
already provide escrow accounts up to
the fifth year after a mortgage
origination. Moreover, no commenters
submitted nationally-representative data
including this information. The Bureau
additionally notes that some creditors
who might otherwise qualify for the
Bureau’s exemption may decide
voluntarily to continue to provide
escrows for first-lien higher-priced
mortgage loans. The Bureau cannot
estimate the number of these creditors,
and conservatively estimates this
number to be insignificant, but notes
that the impacts described in this part
of the analysis would also apply to these
creditors.
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tkelley on DSK3SPTVN1PROD with
eligible for the exemption for creditors
who operate predominantly in rural or
underserved areas, there may be a need
for the creditors’ staff to develop new
professional skills and new
recordkeeping regimes to comply with
the revised requirements. These costs
will depend on a number of unknown
factors, including, among other things,
the specifications of the current systems
used by such entities. The Bureau
believes that the number of such
institutions would be small and does
not affect its judgment that the rule will
not impose a significant impact on a
substantial number of small entities.
Finally, as discussed above, the rule
allows exempted creditors to stop
establishing escrow accounts even for
the first year of the mortgage obligation,
which will allow creditors to eliminate
the compliance costs of their current
programs for new loans going forward if
they decide it makes sense to do so.
5. Steps Taken To Minimize the
Economic Impact on Small Entities
The steps the Bureau has taken to
minimize the economic impact and
compliance burden on small entities,
including the factual, policy, and legal
reasons for selecting the alternatives
adopted and why each one of the other
significant alternatives was not
accepted, are described above in the
section-by-section analysis, in part VII,
and in the summary of issues raised by
the public comments in response to the
proposal’s IRFA. The final rule’s
modifications from the proposed rule
that minimize economic impact on
small entities are discussed below.
Additionally, the Bureau considered
significant alternatives to most of the
dimensions of the small creditor
exemption: the definition of rural, the
transaction origination limit, and the
asset-size threshold.
First, the Bureau has declined to
implement at this time the amendments
to TILA concerning certain new
disclosure requirements concerning
escrows accounts. The Bureau believes
that this decision to coordinate these
disclosures with the finalization of the
TILA–RESPA integration rulemaking
will decrease the economic impact of
the final rule on small entities by
limiting their compliance costs.
Moreover, the Bureau believes that
harmonizing certain title XIV required
disclosures may provide greater clarity
to the market and better fulfill TILA’s
stated purpose of enabling consumers to
better understand the cost of credit.
Second, upon reviewing public
comment, the Bureau has expanded the
exemption for creditors who operate
predominantly in rural or underserved
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areas to include a broader range of areas
than previously identified in the
proposal. The Bureau believes that will
decrease the number of small entities
covered by the regulation. The Bureau
considered different definitions of
‘‘rural’’ and the size exemption, both for
the asset size and for the number of
originations.
In finalizing the rule the Bureau
considered using an alternative
definition of rural that would have used
the same definition as provided under
USDA’s section 502 Rural Housing
program. Under the USDA section 502
Rural Housing definition of ‘‘rural’’,
approximately 37 percent of the U.S.
population lives in an area considered
to be rural, compared to approximately
10 percent according to the definition
used in the final rule, which defines
rural as counties with UICs 4, 6, 7, 8, 9,
10, 11, 12. The Bureau considered the
trade-off of exempting more creditors
and thus potentially mitigating
consumer access to credit issues versus
exempting fewer creditors and
providing consumers with the consumer
protections represented by escrow
accounts. The Bureau’s analysis of the
2011 HMDA data showed that, even
with the definition of rural in the final
rule that includes counties with codes
of 4, 6, 7, 8, 9, 10, 11, and 12, a median
county in the least dense county code
that is not exempt (code 5) had 16
creditors that extended any higherpriced mortgage loans in 2011. In light
of these data, the Bureau believes that,
even if some of these creditors exit the
higher-priced mortgage loan market for
lack of an exemption, there will still be
enough competition in those counties,
and therefore the risk of potential access
to credit issues for consumers in these
areas is mitigated. The Bureau believes
that the current definition better reflects
the intention of the statute’s
authorization to create a rural exception,
and facts about the areas included, such
as the urban influence, density of the
population, and the number of higherpriced mortgage loan creditors in the
county.
In addition, the Bureau considered
alternative origination thresholds. The
Board’s 2011 Escrows Proposal would
have extended the exemption to
creditors that, together with their
affiliates, originated and retained
servicing rights to 100 or fewer mortgage
obligations secured by a first-lien on
real property or a dwelling. In the
Board’s 2011 Escrows Proposal the
Board noted its belief from the available
information that the economies of scale
necessary to escrow cost-effectively, or
else to satisfy the escrow requirement by
outsourcing to a sub-servicer, generally
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exist when a mortgage servicer has a
portfolio of at least 500 mortgage
obligations. Consequently, the Board
proposed setting the cut-off at 100 or
fewer first-lien mortgage obligations
originated annually and for which
servicing rights are retained, assuming
an average of five years until an
institution’s mortgage obligations are
paid off. The Bureau has expanded the
exemption to include creditors that,
together with their affiliates, originate
500 or fewer first-lien covered
transactions annually. The Bureau
believes that defining the limit in terms
of originated transactions, as opposed to
transactions originated and serviced,
facilitates compliance by not requiring
institutions to track multiple metrics for
the escrow and qualified mortgage rules
and to promote consistent application of
the two exemptions. However, this
change by itself would have severely
restricted the scope of the exemption, as
there are more creditors that originate
and service less than 100 transactions
than there are creditors that simply
originate 100 transactions.68 From the
2011 HMDA data, setting the new limit
at 500 transactions ensures that 89.5
percent of the creditors that originated
and serviced 100 transactions are under
the new 500 first-lien origination limit.
However, as discussed more fully above,
to prevent larger creditors with
sophisticated information technology
systems from taking unintended
advantage of this exemption and to
further the benefits from coordinated
compliance across this final rule and the
2013 ATR Final Rule, the Bureau
decided to adopt the $2 billion assetsize limit in both final rules.
The Bureau notes that by expanding
the exemption for certain transactions
and deferring implementation of the
escrow disclosure requirements the
Bureau has largely addressed the areas
where small entity commenters
expressed concern about the costs of
compliance. The Bureau believes that
these changes minimize the economic
impact on small entities while still
meeting the stated objectives of TILA
and the Dodd-Frank Act.
The small creditor exemption is
partially designed to mitigate the rule’s
costs to small creditors. Providing
escrows cost-effectively requires a scale
that small creditors do not have, and the
500 first-lien origination limit allows
the creditors to reach that scale before
they are required to provide escrows.
This scale might be much lower in more
urban areas, but the Bureau believes that
68 Consider, for example, a creditor who
originates 300 transactions, but services only 80 of
them.
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because many creditors in rural areas
face adverse conditions, such as
idiosyncratic accounting systems
(including calculations by hand)
employed by some of the jurisdictions,
such institutions would especially need
this number of originations, and
consequently a large number of
mortgage obligations to be able to
provide escrow accounts costeffectively.
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6. Impact on Small Business Credit
The Bureau does not believe that the
final rule will result in an increase in
the cost of business credit for small
entities. Instead, the final rule will
apply only to mortgage transactions
obtained by consumers primarily for
personal, family, or household purposes
and the final rule will not apply to
transactions obtained primarily for
business purposes. Given that the final
rule does not increase the cost of credit
for small entities, the Bureau has not
taken additional steps to minimize the
cost of credit for small entities.
IX. Paperwork Reduction Act
The Bureau may not conduct or
sponsor, and a respondent is not
required to respond to, an information
collection unless it displays a currently
valid OMB control number. The Board’s
2011 Escrows Proposal contained
information collection requirements
under the Paperwork Reduction Act
(PRA), which have been previously
approved by OMB under the following
OMB control number issued to the
Board: 7100–0199. There are no new
information collection requirements in
the Bureau’s final rule.
On March 2, 2011, a notice of the
proposed rulemaking was published in
the Federal Register. As discussed
above, the Board proposed certain new
disclosures for escrow accounts
including format, timing, and content
requirements as well as proposed
certain model forms regarding escrow
accounts for closed-end mortgages
secured by a first lien on real property
or a dwelling. The Board invited
comment on: (1) Whether the proposed
collection of information is necessary
for the proper performance of agency
functions, including whether the
information has practical utility; (2) the
accuracy of the estimate of the burden
of the proposed information collection,
including the cost of compliance; (3)
ways to enhance the quality, utility, and
clarity of the information to be
collected; and (4) ways to minimize the
burden of information collection on
respondents, including through the use
of automated collection techniques or
other forms of information technology.
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The comment period for the proposed
rule expired on May 2, 2011.
The Bureau reviewed the comments
received regarding the merits of various
aspects of the Board’s 2011 Escrows
Proposal, including the burden of
compliance generally, and whether the
proposed disclosure requirements
should be finalized. Commenters in
particular contended that the new
disclosure requirements would be
redundant of existing information
collections and would likely be of
limited utility given the Bureau’s
mandate to integrate the TILA–RESPA
disclosures. Given the potential
compliance burden of integrating new
disclosures in piecemeal fashion, on
November 23, 2012, the Bureau
published in the Federal Register a rule
that delays the implementation of
certain disclosure requirements
contained in title XIV of the Dodd-Frank
Act, including those contained in
sections 1461 and 1462. See 77 FR
70105 (Nov. 23, 2012). Accordingly,
because this final rule does not
implement the disclosure amendments,
the Bureau has determined that this
final rule does not impose any new
recordkeeping, reporting or disclosure
requirements on covered entities or
members of the public that would be
collections of information requiring
OMB approval under 44 U.S.C. 3501, et
seq.
List of Subjects in 12 CFR Part 1026
Advertising, Consumer protection,
Mortgages, Recordkeeping requirements,
Reporting, Truth in lending.
Authority and Issuance
For the reasons set forth in the
preamble, the Bureau amends
Regulation Z, 12 CFR part 1026, as set
forth below:
PART 1026—TRUTH IN LENDING
(REGULATION Z)
1. The authority citation for part 1026
continues to read as follows:
■
Authority: 12 U.S.C. 2601; 2603–2605,
2607, 2609, 2617, 5511, 5512, 5581; 15 U.S.C.
1601 et seq.
Subpart E—Special Rules for Certain
Home Mortgage Transactions
2. Section 1026.35 is revised to read
as follows:
■
§ 1026.35 Requirements for higher-priced
mortgage loans.
(a) Definitions. For purposes of this
section:
(1) ‘‘Higher-priced mortgage loan’’
means a closed-end consumer credit
transaction secured by the consumer’s
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principal dwelling with an annual
percentage rate that exceeds the average
prime offer rate for a comparable
transaction as of the date the interest
rate is set:
(i) By 1.5 or more percentage points
for loans secured by a first lien with a
principal obligation at consummation
that does not exceed the limit in effect
as of the date the transaction’s interest
rate is set for the maximum principal
obligation eligible for purchase by
Freddie Mac;
(ii) By 2.5 or more percentage points
for loans secured by a first lien with a
principal obligation at consummation
that exceeds the limit in effect as of the
date the transaction’s interest rate is set
for the maximum principal obligation
eligible for purchase by Freddie Mac; or
(iii) By 3.5 or more percentage points
for loans secured by a subordinate lien.
(2) ‘‘Average prime offer rate’’ means
an annual percentage rate that is derived
from average interest rates, points, and
other loan pricing terms currently
offered to consumers by a representative
sample of creditors for mortgage
transactions that have low-risk pricing
characteristics. The Bureau publishes
average prime offer rates for a broad
range of types of transactions in a table
updated at least weekly as well as the
methodology the Bureau uses to derive
these rates.
(b) Escrow accounts—(1) Requirement
to escrow for property taxes and
insurance. Except as provided in
paragraph (b)(2) of this section, a
creditor may not extend a higher-priced
mortgage loan secured by a first lien on
a consumer’s principal dwelling unless
an escrow account is established before
consummation for payment of property
taxes and premiums for mortgagerelated insurance required by the
creditor, such as insurance against loss
of or damage to property, or against
liability arising out of the ownership or
use of the property, or insurance
protecting the creditor against the
consumer’s default or other credit loss.
For purposes of this paragraph (b), the
term ‘‘escrow account’’ has the same
meaning as under Regulation X (24 CFR
3500.17(b)), as amended.
(2) Exemptions. Notwithstanding
paragraph (b)(1) of this section:
(i) An escrow account need not be
established for:
(A) A transaction secured by shares in
a cooperative;
(B) A transaction to finance the initial
construction of a dwelling;
(C) A temporary or ‘‘bridge’’ loan with
a loan term of twelve months or less,
such as a loan to purchase a new
dwelling where the consumer plans to
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sell a current dwelling within twelve
months; or
(D) A reverse mortgage transaction
subject to § 1026.33(c).
(ii) Insurance premiums described in
paragraph (b)(1) of this section need not
be included in escrow accounts for
loans secured by dwellings in
condominiums, planned unit
developments, or other common interest
communities in which dwelling
ownership requires participation in a
governing association, where the
governing association has an obligation
to the dwelling owners to maintain a
master policy insuring all dwellings.
(iii) Except as provided in paragraph
(b)(2)(v) of this section, an escrow
account need not be established for a
transaction if, at the time of
consummation:
(A) During the preceding calendar
year, the creditor extended more than 50
percent of its total covered transactions,
as defined by § 1026.43(b)(1), secured by
a first lien, on properties that are located
in counties designated either ‘‘rural’’ or
‘‘underserved’’ by the Bureau, as set
forth in paragraph (b)(2)(iv) of this
section;
(B) During the preceding calendar
year, the creditor and its affiliates
together originated 500 or fewer covered
transactions, as defined by
§ 1026.43(b)(1), secured by a first lien;
and
(C) As of the end of the preceding
calendar year, the creditor had total
assets of less than $2,000,000,000; this
asset threshold shall adjust
automatically each year, based on the
year-to-year change in the average of the
Consumer Price Index for Urban Wage
Earners and Clerical Workers, not
seasonally adjusted, for each 12-month
period ending in November, with
rounding to the nearest million dollars
(see comment 35(b)(2)(iii)–1.iii for the
current threshold); and
(D) Neither the creditor nor its
affiliate maintains an escrow account of
the type described in paragraph (b)(1) of
this section for any extension of
consumer credit secured by real
property or a dwelling that the creditor
or its affiliate currently services, other
than:
(1) Escrow accounts established for
first-lien higher-priced mortgage loans
on or after April 1, 2010, and before
June 1, 2013; or
(2) Escrow accounts established after
consummation as an accommodation to
distressed consumers to assist such
consumers in avoiding default or
foreclosure.
(iv) For purposes of paragraph
(b)(2)(iii)(A) of this section:
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(A) A county is ‘‘rural’’ during a
calendar year if it is neither in a
metropolitan statistical area nor in a
micropolitan statistical area that is
adjacent to a metropolitan statistical
area, as those terms are defined by the
U.S. Office of Management and Budget
and applied under currently applicable
Urban Influence Codes (UICs),
established by the United States
Department of Agriculture’s Economic
Research Service (USDA–ERS). A
creditor may rely as a safe harbor on the
list of counties published by the Bureau
to determine whether a county qualifies
as ‘‘rural’’ for a particular calendar year.
(B) A county is ‘‘underserved’’ during
a calendar year if, according to Home
Mortgage Disclosure Act (HMDA) data
for that year, no more than two creditors
extend covered transactions, as defined
in § 1026.43(b)(1), secured by a first lien
five or more times in the county. A
creditor may rely as a safe harbor on the
list of counties published by the Bureau
to determine whether a county qualifies
as ‘‘underserved’’ for a particular
calendar year.
(v) Notwithstanding paragraph
(b)(2)(iii) of this section, an escrow
account must be established pursuant to
paragraph (b)(1) of this section for any
first-lien higher-priced mortgage loan
that, at consummation, is subject to a
commitment to be acquired by a person
that does not satisfy the conditions in
paragraph (b)(2)(iii) of this section,
unless otherwise exempted by this
paragraph (b)(2).
(3) Cancellation—(i) General. Except
as provided in paragraph (b)(3)(ii) of
this section, a creditor or servicer may
cancel an escrow account required in
paragraph (b)(1) of this section only
upon the earlier of:
(A) Termination of the underlying
debt obligation; or
(B) Receipt no earlier than five years
after consummation of a consumer’s
request to cancel the escrow account.
(ii) Delayed cancellation.
Notwithstanding paragraph (b)(3)(i) of
this section, a creditor or servicer shall
not cancel an escrow account pursuant
to a consumer’s request described in
paragraph (b)(3)(i)(B) of this section
unless the following conditions are
satisfied:
(A) The unpaid principal balance is
less than 80 percent of the original value
of the property securing the underlying
debt obligation; and
(B) The consumer currently is not
delinquent or in default on the
underlying debt obligation.
(c) [Reserved]
(d) Evasion; open-end credit. In
connection with credit secured by a
consumer’s principal dwelling that does
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not meet the definition of open-end
credit in § 1026.2(a)(20), a creditor shall
not structure a home-secured loan as an
open-end plan to evade the
requirements of this section.
3. In Supplement I to Part 1026—
Official Interpretations:
A. The heading for Section 1026.35—
Prohibited Acts or Practices in
Connection with Higher-Priced
Mortgage Loans is revised.
B. Under newly designated Section
1026.35—Requirements for HigherPriced Mortgage Loans:
i. Under 35(a) Higher-Priced Mortgage
Loans:
a. Paragraph 35(a)(1) and paragraphs
1, 2, and 3 are added.
b. Under Paragraph 35(a)(2),
paragraphs 2 and 3 are revised, and
paragraph 4 is removed.
ii. The heading for 35(b) Rules for
higher-priced mortgage loans is revised.
iii. Under newly designated 35(b)
Escrow accounts:
a. Paragraph 1 is revised.
b. 35(b)(1) Requirement to escrow for
property taxes and insurance and
paragraphs 1, 2, and 3 are added.
c. 35(b)(2) Exemptions is added.
d. Paragraph 35(b)(2)(i) and paragraph
1 are added.
e. Paragraph 35(b)(2)(ii) and
paragraphs 1, 2, and 3 are added.
f. Paragraph 35(b)(2)(ii)(C) and
paragraphs 1 and 2 are removed.
g. Paragraph 35(b)(2)(iii) and
paragraph 1 are added.
h. Paragraph 35(b)(2)(iii)(D)(1) and
paragraph 1 are added.
i. Paragraph 35(b)(2)(iii)(D)(2) and
paragraph 1 are added.
j. Paragraph 35(b)(2)(iv) and
paragraph 1 are added.
k. Paragraph 35(b)(2)(v) and
paragraph 1 are added.
iv. The heading for 35(b)(3) Escrows is
revised.
v. Under newly designated 35(b)(3)
Cancellation:
a. Paragraphs 1, 2, and 3 are added.
b. 35(b)(3)(i) Failure to escrow for
property taxes and insurance and
paragraphs 1, 2, and 3 are removed.
c. Paragraph 35(b)(3)(ii)(B) and
paragraph 1 are removed.
d. 35(b)(3)(v) ‘‘Jumbo’’ loans and
paragraphs 1 and 2 are removed.
The revisions and additions read as
follows:
Supplement I to Part 1026—Official
Interpretations
*
*
*
*
*
Subpart E—Special Rules for Certain
Home Mortgage Transactions
*
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Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations
§ 1026.35—Requirements for HigherPriced Mortgage Loans
35(a) Definitions.
Paragraph 35(a)(1).
1. Comparable transaction. A higherpriced mortgage loan is a consumer
credit transaction secured by the
consumer’s principal dwelling with an
annual percentage rate that exceeds the
average prime offer rate for a
comparable transaction as of the date
the interest rate is set by the specified
margin. The table of average prime offer
rates published by the Bureau indicates
how to identify the comparable
transaction.
2. Rate set. A transaction’s annual
percentage rate is compared to the
average prime offer rate as of the date
the transaction’s interest rate is set (or
‘‘locked’’) before consummation.
Sometimes a creditor sets the interest
rate initially and then re-sets it at a
different level before consummation.
The creditor should use the last date the
interest rate is set before consummation.
3. Threshold for ‘‘jumbo’’ loans.
Section 1026.35(a)(1)(ii) provides a
separate threshold for determining
whether a transaction is a higher-priced
mortgage loan subject to § 1026.35 when
the principal balance exceeds the limit
in effect as of the date the transaction’s
rate is set for the maximum principal
obligation eligible for purchase by
Freddie Mac (a ‘‘jumbo’’ loan). The
Federal Housing Finance Agency
(FHFA) establishes and adjusts the
maximum principal obligation pursuant
to rules under 12 U.S.C. 1454(a)(2) and
other provisions of federal law.
Adjustments to the maximum principal
obligation made by FHFA apply in
determining whether a mortgage loan is
a ‘‘jumbo’’ loan to which the separate
coverage threshold in § 1026.35(a)(1)(ii)
applies.
Paragraph 35(a)(2).
*
*
*
*
*
2. Bureau table. The Bureau publishes
on the Internet, in table form, average
prime offer rates for a wide variety of
transaction types. The Bureau calculates
an annual percentage rate, consistent
with Regulation Z (see § 1026.22 and
appendix J), for each transaction type
for which pricing terms are available
from a survey. The Bureau estimates
annual percentage rates for other types
of transactions for which direct survey
data are not available based on the loan
pricing terms available in the survey
and other information. The Bureau
publishes on the Internet the
methodology it uses to arrive at these
estimates.
3. Additional guidance on
determination of average prime offer
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rates. The average prime offer rate has
the same meaning in § 1026.35 as in
Regulation C, 12 CFR part 1003. See 12
CFR 1003.4(a)(12)(ii). Guidance on the
average prime offer rate under
§ 1026.35(a)(2), such as when a
transaction’s rate is set and
determination of the comparable
transaction, is provided in the official
commentary under Regulation C, the
publication entitled ‘‘A Guide to HMDA
Reporting: Getting it Right!’’, and the
relevant ‘‘Frequently Asked Questions’’
on Home Mortgage Disclosure Act
(HMDA) compliance posted on the
FFIEC’s Web site at http://
www.ffiec.gov/hmda.
35(b) Escrow Accounts.
1. Principal dwelling. Section
1026.35(b)(1) applies to principal
dwellings, including structures that are
classified as personal property under
State law. For example, an escrow
account must be established on a
higher-priced mortgage loan secured by
a first lien on a manufactured home,
boat, or trailer used as the consumer’s
principal dwelling. See the commentary
under §§ 1026.2(a)(19) and(24), 1026.15,
and 1026.23. Section 1026.35(b)(1) also
applies to a higher-priced mortgage loan
secured by a first lien on a
condominium if it is in fact used as the
consumer’s principal dwelling. But see
§ 1026.35(b)(2) for exemptions from the
escrow requirement that may apply to
such transactions.
35(b)(1) Requirement to escrow for
property taxes and insurance.
1. Administration of escrow accounts.
Section 1026.35(b)(1) requires creditors
to establish an escrow account for
payment of property taxes and
premiums for mortgage-related
insurance required by the creditor
before the consummation of a higherpriced mortgage loan secured by a first
lien on a principal dwelling. Section 6
of RESPA, 12 U.S.C. 2605, and
Regulation X, 12 CFR 1024.17, address
how escrow accounts must be
administered.
2. Optional insurance items. Section
1026.35(b)(1) does not require that an
escrow account be established for
premiums for mortgage-related
insurance that the creditor does not
require in connection with the credit
transaction, such as earthquake
insurance or credit life insurance, even
if the consumer voluntarily obtains such
insurance.
3. Transactions not subject to
§ 1026.35(b)(1). Section 1026.35(b)(1)
requires a creditor to establish an
escrow account before consummation of
a first-lien higher-priced mortgage loan.
This requirement does not affect a
creditor’s ability, right, or obligation,
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4755
pursuant to the terms of the legal
obligation or applicable law, to offer or
require an escrow account for a
transaction that is not subject to
§ 1026.35(b)(1).
35(b)(2) Exemptions.
Paragraph 35(b)(2)(i).
1. Construction-permanent loans.
Under § 1026.35(b)(2)(ii)(B), § 1026.35
does not apply to a transaction to
finance the initial construction of a
dwelling. Section 1026.35 may apply,
however, to permanent financing that
replaces a construction loan, whether
the permanent financing is extended by
the same or a different creditor. When
a construction loan may be permanently
financed by the same creditor,
§ 1026.17(c)(6)(ii) permits the creditor to
give either one combined disclosure for
both the construction financing and the
permanent financing, or a separate set of
disclosures for each of the two phases
as though they were two separate
transactions. See also comment
17(c)(6)–2. Section 1026.17(c)(6)(ii)
addresses only how a creditor may elect
to disclose a construction-permanent
transaction. Which disclosure option a
creditor elects under § 1026.17(c)(6)(ii)
does not affect the determination of
whether the permanent phase of the
transaction is subject to § 1026.35.
When the creditor discloses the two
phases as separate transactions, the
annual percentage rate for the
permanent phase must be compared to
the average prime offer rate for a
transaction that is comparable to the
permanent financing to determine
whether the transaction is a higherpriced mortgage loan under
§ 1026.35(a). When the creditor
discloses the two phases as a single
transaction, a single annual percentage
rate, reflecting the appropriate charges
from both phases, must be calculated for
the transaction in accordance with
§ 1026.22(a)(1) and appendix D to part
1026. This annual percentage rate must
be compared to the average prime offer
rate for a transaction that is comparable
to the permanent financing to determine
the transaction is a higher-priced
mortgage loan under § 1026.35(a). If the
transaction is determined to be a higherpriced mortgage loan, only the
permanent phase is subject to the
requirement of § 1026.35(b)(1) to
establish and maintain an escrow
account, and the period for which the
escrow account must remain in place
under § 1026.35(b)(3) is measured from
the time the conversion to the
permanent phase financing occurs.
Paragraph 35(b)(2)(ii).
1. Limited exemption. A creditor is
required to escrow for payment of
property taxes for all first-lien higher-
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priced mortgage loans secured by
condominium, planned unit
development, or similar dwellings or
units regardless of whether the creditor
escrows for insurance premiums for
such dwellings or units.
2. Planned unit developments.
Planned unit developments (PUDs) are
a form of property ownership often used
in retirement communities, golf
communities, and similar communities
made up of homes located within a
defined geographical area. PUDs usually
have a homeowners’ association or some
other governing association, analogous
to a condominium association and with
similar authority and obligations. Thus,
as with condominiums, PUDs often
have master insurance policies that
cover all units in the PUD. Under
§ 1026.35(b)(2)(ii), if a PUD’s governing
association is obligated to maintain such
a master insurance policy, an escrow
account required by § 1026.35(b)(1) for a
transaction secured by a unit in the PUD
need not include escrows for insurance.
This exemption applies not only to
condominiums and PUDs but also to
any other type of property ownership
arrangement that has a governing
association with an obligation to
maintain a master insurance policy.
3. More than one governing
association associated with a dwelling.
The limited exemption provided
pursuant to § 1026.35(b)(2)(ii) applies to
each master insurance policy for
properties with multiple governing
associations, to the extent each
governing association has an obligation
to maintain a master insurance policy.
Paragraph 35(b)(2)(iii).
1. Requirements for exemption. Under
§ 1026.35(b)(2)(iii), except as provided
in § 1026.35(b)(2)(v), a creditor need not
establish an escrow account for taxes
and insurance for a higher-priced
mortgage loan, provided the following
four conditions are satisfied when the
higher-priced mortgage loan is
consummated:
i. During the preceding calendar year,
more than 50 percent of the creditor’s
total first-lien covered transactions, as
defined in § 1026.43(b)(1), on properties
located in counties that are either
‘‘rural’’ or ‘‘underserved,’’ as set forth in
§ 1026.35(b)(2)(iv). Pursuant to that
section, the Bureau determines annually
which counties in the United States are
rural or underserved and publishes a list
of those counties to enable creditors to
determine whether they meet this
condition for the exemption. Thus, for
example, if a creditor originated 90 firstlien covered transactions, as defined by
§ 1026.43(b)(1), during 2013, the
creditor meets this condition for an
exemption in 2014 if at least 46 of those
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transactions are secured by first liens on
properties that are located in counties
that are on the Bureau’s lists of rural or
underserved counties for 2013.
ii. The creditor and its affiliates
together originated 500 or fewer firstlien covered transactions, as defined in
§ 1026.43(b)(1), during the preceding
calendar year.
iii. As of the end of the preceding
calendar year, the creditor had total
assets that are less than the asset
threshold for the relevant calendar year.
For calendar year 2013, the asset
threshold is $2,000,000,000. Creditors
that had total assets of less than
$2,000,000,000 on December 31, 2012,
satisfy this criterion for purposes of the
exemption during 2013. This asset
threshold shall adjust automatically
each year based on the year-to-year
change in the average of the Consumer
Price Index for Urban Wage Earners and
Clerical Workers, not seasonally
adjusted, for each 12-month period
ending in November, with rounding to
the nearest million dollars. The Bureau
will publish notice of the asset
threshold each year by amending this
comment.
iv. The creditor and its affiliates do
not maintain an escrow account for any
mortgage transaction being serviced by
the creditor or its affiliate at the time the
transaction is consummated, except as
provided in § 1026.35(b)(2)(iii)(D)(1)
and (2). Thus, the exemption applies,
provided the other conditions of
§ 1026.35(b)(2)(iii) are satisfied, even if
the creditor previously maintained
escrow accounts for mortgage loans,
provided it no longer maintains any
such accounts except as provided in
§ 1026.35(b)(2)(iii)(D)(1) and (2). Once a
creditor or its affiliate begins escrowing
for loans currently serviced other than
those addressed in
§ 1026.35(b)(2)(iii)(D)(1) and (2),
however, the creditor and its affiliate
become ineligible for the exemption in
§ 1026.35(b)(2)(iii) on higher-priced
mortgage loans they make while such
escrowing continues. Thus, as long as a
creditor (or its affiliate) services and
maintains escrow accounts for any
mortgage loans, other than as provided
in § 1026.35(b)(2)(iii)(D)(1) and (2), the
creditor will not be eligible for the
exemption for any higher-priced
mortgage loan it may make. For
purposes of § 1026.35(b)(2)(iii), a
creditor or its affiliate ‘‘maintains’’ an
escrow account only if it services a
mortgage loan for which an escrow
account has been established at least
through the due date of the second
periodic payment under the terms of the
legal obligation.
Paragraph 35(b)(2)(iii)(D)(1).
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1. Exception for certain accounts.
Escrow accounts established for firstlien higher-priced mortgage loans on or
after April 1, 2010, and before June 1,
2013, are not counted for purposes of
§ 1026.35(b)(2)(iii)(D). On and after June
1, 2013, creditors, together with their
affiliates, that establish new escrow
accounts, other than those described in
§ 1026.35(b)(2)(iii)(D)(2), do not qualify
for the exemption provided under
§ 1026.35(b)(2)(iii). Creditors, together
with their affiliates, that continue to
maintain escrow accounts established
between April 1, 2010, and June 1, 2013,
still qualify for the exemption provided
under § 1026.35(b)(2)(iii) so long as they
do not establish new escrow accounts
for transactions consummated on or
after June 1, 2013, other than those
described in § 1026.35(b)(2)(iii)(D)(2),
and they otherwise qualify under
§ 1026.35(b)(2)(iii).
Paragraph 35(b)(2)(iii)(D)(2).
1. Exception for post-consummation
escrow accounts for distressed
consumers. An escrow account
established after consummation for a
distressed consumer does not count for
purposes of § 1026.35(b)(2)(iii)(D).
Distressed consumers are consumers
who are working with the creditor or
servicer to attempt to bring the loan into
a current status through a modification,
deferral, or other accommodation to the
consumer. A creditor, together with its
affiliates, that establishes escrow
accounts after consummation as a
regular business practice, regardless of
whether consumers are in distress, does
not qualify for the exception described
in § 1026.35(b)(2)(iii)(D)(2).
Paragraph 35(b)(2)(iv).
1. Requirements for ‘‘rural’’ or
‘‘underserved’’ status. A county is
considered to be ‘‘rural’’ or
‘‘underserved’’ for purposes of
§ 1026.35(b)(2)(iii)(A) if it satisfies either
of the two tests in § 1026.35(b)(2)(iv).
The Bureau applies both tests to each
county in the United States and, if a
county satisfies either test, the Bureau
will include the county on a published
list of ‘‘rural’’ or ‘‘underserved’’
counties for a particular calendar year.
To facilitate compliance with
§ 1026.35(c), the Bureau also creates a
list of only those counties that are
‘‘rural’’ but not also ‘‘underserved.’’ The
Bureau will post on its public Web site
the applicable lists for each calendar
year by the end of that year. A creditor
may rely as a safe harbor, pursuant to
section 130(f) of the Truth in Lending
Act, on the lists of counties published
by the Bureau to determine whether a
county qualifies as ‘‘rural’’ or
‘‘underserved’’ for a particular calendar
year. A creditor’s originations of
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covered transactions, as defined by
§ 1026.43(b)(1), in such counties during
that year are considered in determining
whether the creditor satisfies the
condition in § 1026.35(b)(2)(iii)(A) and
therefore will be eligible for the
exemption during the following
calendar year.
i. Under § 1026.35(b)(2)(iv)(A), a
county is rural during a calendar year if
it is neither in a metropolitan statistical
area nor in a micropolitan statistical
area that is adjacent to a metropolitan
statistical area. These areas are defined
by the Office of Management and
Budget and applied under currently
applicable Urban Influence Codes
(UICs), established by the United States
Department of Agriculture’s Economic
Research Service (USDA–ERS).
Specifically, the Bureau classifies a
county as ‘‘rural’’ if the USDA–ERS
categorizes the county under UIC 4, 6,
7, 8, 9, 10, 11, or 12. Descriptions of
UICs are available on the USDA–ERS
Web site at http://www.ers.usda.gov/
data-products/urban-influence-codes/
documentation.aspx.
ii. Under § 1026.35(b)(2)(iv)(B), a
county is underserved during a calendar
year if, according to Home Mortgage
Disclosure Act (HMDA) data for that
year, no more than two creditors extend
first-lien covered transactions, as
defined in § 1026.43(b)(1), secured by a
first lien five or more times in the
county. These areas are defined by
reference to the specific calendar year’s
HMDA data. Specifically, a county is
‘‘underserved’’ if, in the applicable
calendar year’s public HMDA aggregate
dataset, no more than two creditors have
reported five or more first-lien covered
transactions with HMDA geocoding that
places the properties in that county. For
purposes of this determination, because
only covered transactions are counted,
all first-lien originations (and only firstlien originations) reported in the HMDA
data are counted except those for which
the owner-occupancy status is reported
as ‘‘Not owner-occupied’’ (HMDA code
2), the property type is reported as
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‘‘Multifamily’’ (HMDA code 3), the
applicant’s or co-applicant’s race is
reported as ‘‘Not applicable’’ (HMDA
code 7), or the applicant’s or coapplicant’s sex is reported as ‘‘Not
applicable’’ (HMDA code 4). The most
recent HMDA data are available at
http://www.ffiec.gov/hmda.
Paragraph 35(b)(2)(v).
1. Forward commitments. A creditor
may make a mortgage loan that will be
transferred or sold to a purchaser
pursuant to an agreement that has been
entered into at or before the time the
loan is consummated. Such an
agreement is sometimes known as a
‘‘forward commitment.’’ Even if a
creditor is otherwise eligible for the
exemption in § 1026.35(b)(2)(iii), a firstlien higher-priced mortgage loan that
will be acquired by a purchaser
pursuant to a forward commitment is
subject to the requirement to establish
an escrow account under § 1026.35(b)(1)
unless the purchaser is also eligible for
the exemption in § 1026.35(b)(2)(iii) or
the transaction is otherwise exempt
under § 1026.35(b)(2). The escrow
requirement applies to any such
transaction, whether the forward
commitment provides for the purchase
and sale of the specific transaction or for
the purchase and sale of mortgage
obligations with certain prescribed
criteria that the transaction meets. For
example, assume a creditor that
qualifies for the exemption in
§ 1026.35(b)(2)(iii) makes a higherpriced mortgage loan that meets the
purchase criteria of an investor with
which the creditor has an agreement to
sell such mortgage obligations after
consummation. If the investor is
ineligible for the exemption in
§ 1026.35(b)(2)(iii), an escrow account
must be established for the transaction
before consummation in accordance
with § 1026.35(b)(1) unless the
transaction is otherwise exempt (such as
a reverse mortgage or home equity line
of credit).
35(b)(3) Cancellation.
PO 00000
Frm 00033
Fmt 4701
Sfmt 9990
4757
1. Termination of underlying debt
obligation. Section 1026.35(b)(3)(i)
provides that, in general, an escrow
account required by § 1026.35(b)(1) may
not be cancelled until the underlying
debt obligation is terminated or the
consumer requests cancellation at least
five years after consummation. Methods
by which an underlying debt obligation
may be terminated include, among other
things, repayment, refinancing,
rescission, and foreclosure.
2. Minimum durations. Section
1026.35(b)(3) establishes minimum
durations for which escrow accounts
established pursuant to § 1026.35(b)(1)
must be maintained. This requirement
does not affect a creditor’s right or
obligation, pursuant to the terms of the
legal obligation or applicable law, to
offer or require an escrow account
thereafter.
3. Less than eighty percent unpaid
principal balance. The term ‘‘original
value’’ in § 1026.35(b)(3)(ii)(A) means
the lesser of the sales price reflected in
the sales contract for the property, if
any, or the appraised value of the
property at the time the transaction was
consummated. In determining whether
the unpaid principal balance has
reached less than 80 percent of the
original value of the property securing
the underlying debt, the creditor or
servicer shall count any subordinate
lien of which it has reason to know. If
the consumer certifies in writing that
the equity in the property securing the
underlying debt obligation is
unencumbered by a subordinate lien,
the creditor or servicer may rely upon
the certification in making its
determination unless it has actual
knowledge to the contrary.
*
*
*
*
*
Dated: January 10, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial
Protection.
[FR Doc. 2013–00734 Filed 1–16–13; 11:15 am]
BILLING CODE 4810–AM–P
E:\FR\FM\22JAR2.SGM
22JAR2
Agencies
[Federal Register Volume 78, Number 14 (Tuesday, January 22, 2013)]
[Rules and Regulations]
[Pages 4725-4757]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00734]
[[Page 4725]]
Vol. 78
Tuesday,
No. 14
January 22, 2013
Part III
Bureau of Consumer Financial Protection
-----------------------------------------------------------------------
12 CFR Part 1026
Escrow Requirements Under the Truth in Lending Act (Regulation Z);
Final Rule
Federal Register / Vol. 78 , No. 14 / Tuesday, January 22, 2013 /
Rules and Regulations
[[Page 4726]]
-----------------------------------------------------------------------
BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1026
[Docket No. CFPB-2013-0001]
RIN 3170-AA16
Escrow Requirements Under the Truth in Lending Act (Regulation Z)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Final rule; official interpretations.
-----------------------------------------------------------------------
SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is
publishing a final rule that amends Regulation Z (Truth in Lending) to
implement certain amendments to the Truth in Lending Act made by the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act). Regulation Z currently requires creditors to establish escrow
accounts for higher-priced mortgage loans secured by a first lien on a
principal dwelling. The rule implements statutory changes made by the
Dodd-Frank Act that lengthen the time for which a mandatory escrow
account established for a higher-priced mortgage loan must be
maintained. The rule also exempts certain transactions from the
statute's escrow requirement. The primary exemption applies to mortgage
transactions extended by creditors that operate predominantly in rural
or underserved areas, originate a limited number of first-lien covered
transactions, have assets below a certain threshold, and do not
maintain escrow accounts on mortgage obligations they currently
service.
DATES: Effective date: The rule is effective June 1, 2013.
Applicability date: Its requirements apply to transactions for
which creditors receive applications on or after that date.
FOR FURTHER INFORMATION CONTACT: David Friend or Ebunoluwa Taiwo,
Counsels, Office of Regulations, at (202) 435-7700.
SUPPLEMENTARY INFORMATION:
I. Summary of the Final Rule
In response to the recent mortgage crisis, Congress enacted the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act) to strengthen certain consumer protections under existing law. The
Bureau of Consumer Financial Protection (Bureau) is issuing this final
rule to implement provisions of the Dodd-Frank Act requiring creditors
to establish escrow accounts for certain mortgage transactions to help
ensure that consumers set aside funds to pay property taxes, and
premiums for homeowners insurance, and other mortgage-related insurance
required by the creditor. The final rule takes effect on June 1, 2013.
The final rule has three main elements:
As directed by the Dodd-Frank Act, the rule amends
existing regulations that require creditors to establish and maintain
escrow accounts for at least one year after originating a ``higher-
priced mortgage loan'' to require generally that the accounts be
maintained for at least five years.
The rule creates an exemption from the escrow requirement
for small creditors that operate predominately in rural or underserved
areas. Specifically, to be eligible for the exemption, a creditor must:
(1) Make more than half of its first-lien mortgages in rural or
underserved areas; (2) have an asset size less than $2 billion; (3)
together with its affiliates, have originated 500 or fewer first-lien
mortgages during the preceding calendar year; and (4) together with its
affiliates, not escrow for any mortgage it or its affiliates currently
services, except in limited instances. Under the rule, eligible
creditors need not establish escrow accounts for mortgages intended at
consummation to be held in portfolio, but must establish accounts at
consummation for mortgages that are subject to a forward commitment to
be purchased by an investor that does not itself qualify for the
exemption.
Finally, the rule expands upon an existing exemption from
escrowing for insurance premiums (though not for property taxes) for
condominium units to extend the partial exemption to other situations
in which an individual consumer's property is covered by a master
insurance policy.
II. Background
A. TILA and Regulation Z
Congress enacted the Truth in Lending Act (TILA), 15 U.S.C. 1601 et
seq., based on findings that economic stability would be enhanced and
competition among consumer credit providers would be strengthened by
the informed use of credit resulting from consumers' awareness of the
cost of credit. One of the purposes of TILA is to provide meaningful
disclosure of credit terms to enable consumers to compare credit terms
available in the marketplace more readily and avoid the uninformed use
of credit. TILA's disclosures differ depending on whether credit is an
open-end (revolving) plan or a closed-end (installment) transaction.
TILA also contains certain procedural and substantive protections for
consumers.
With the enactment of the Dodd-Frank Act, general rulemaking
authority under TILA transferred from the Board of Governors of the
Federal Reserve System (Board) to the Bureau on July 21, 2011. Pursuant
to the Dodd-Frank Act and TILA, as amended, the Bureau published for
public comment an interim final rule establishing a new Regulation Z,
12 CFR part 1026, implementing TILA (except with respect to persons
excluded from coverage by section 1029 of the Dodd-Frank Act). See 76
FR 79768 (Dec. 22, 2011). This rule did not impose any new substantive
obligations but did make technical and conforming changes to reflect
the transfer of authority and certain other changes made by the Dodd-
Frank Act. The Bureau's Regulation Z took effect on December 30, 2011.
An official commentary interprets the requirements of Regulation Z. By
statute, creditors that follow in good faith official interpretations
contained in the commentary are insulated from civil liability,
criminal penalties, and administrative sanction.
On July 30, 2008, the Board published a final rule amending
Regulation Z to establish new regulatory protections for consumers in
the residential mortgage market pursuant to authority originally
granted to the Board by the Home Ownership and Equity Protection Act of
1994 (HOEPA). See 73 FR 44522 (July 30, 2008) (2008 HOEPA Final Rule).
Among other things, the 2008 HOEPA Final Rule defined a class of
higher-priced mortgage loans that are subject to certain protections. A
higher-priced mortgage loan was established by the 2008 HOEPA Final
Rule as a closed-end transaction secured by a consumer's principal
dwelling with an annual percentage rate that exceeds an ``average prime
offer rate'' for a comparable transaction by 1.5 or more percentage
points for transactions secured by a first lien, or by 3.5 or more
percentage points for transactions secured by a subordinate lien.\1\
Under the 2008 HOEPA Final Rule, such transactions are subject to a
number of special requirements, including that creditors
[[Page 4727]]
assess consumers' ability to repay such transactions before extending
credit, that creditors establish escrow accounts for higher-priced
mortgage loans secured by a first lien on a principal dwelling (with
some exceptions), and imposes significant restrictions on the use of
prepayment penalties. Specifically with regard to escrows, the rule
required that creditors establish and maintain escrow accounts for
property taxes and premiums for mortgage-related insurance required by
the creditor for a minimum of one year after originating a higher-
priced mortgage loan secured by a first lien on a principal dwelling.
The escrow requirement was effective on April 1, 2010, for transactions
secured by site-built homes, and on October 1, 2010, for transactions
secured by manufactured housing.
---------------------------------------------------------------------------
\1\ The ``average prime offer rate'' is derived from average
interest rates, points, and other loan pricing terms currently
offered to consumers by a representative sample of creditors for
mortgage transactions that have low-risk pricing characteristics.
The Bureau publishes average prime offer rates for a broad range of
types of transactions in a table updated at least weekly, as well as
the methodology the Bureau uses to derive these rates.
---------------------------------------------------------------------------
B. The Dodd-Frank Act
On July 21, 2010, Congress enacted the Dodd-Frank Act after a cycle
of unprecedented expansion and contraction in the mortgage market
sparked the most severe U.S. recession since the Great Depression.\2\
The Dodd-Frank Act created the Bureau and consolidated various
rulemaking and supervisory authorities in the new agency, including the
authority to implement HOEPA and TILA.\3\ At the same time, Congress
significantly amended the statutory requirements governing mortgage
practices with the intent to restrict the practices that contributed to
the crisis.
---------------------------------------------------------------------------
\2\ For a more in-depth discussion of the mortgage market, the
financial crisis, and mortgage origination generally, see the
Bureau's 2013 ATR Final Rule, discussed below in part III.C.
\3\ Sections 1011, 1021, and 1061 of title X of the Dodd-Frank
Act, the ``Consumer Financial Protection Act,'' Public Law 111-203,
sections 1001-1100H, codified at 12 U.S.C. 5491, 5511, 5581. The
Consumer Financial Protection Act is substantially codified at 12
U.S.C. 5481-5603.
---------------------------------------------------------------------------
As part of these changes, the Dodd-Frank Act enacted several
substantive requirements designed to address questionable practices in
the mortgage market. Several of these provisions expanded upon elements
of the 2008 HOEPA Final Rule. For instance, among other provisions,
title XIV of the Dodd-Frank Act amends TILA to establish certain
requirements for escrow accounts for consumer credit transactions
secured by a first lien on a consumer's principal dwelling. Sections
1461 and 1462 of the Dodd-Frank Act create new TILA section 129D, 15
U.S.C. 1639d, which substantially codifies Regulation Z's escrow
requirement for higher-priced mortgage loans but lengthens the period
for which escrow accounts are required, adjusts the rate threshold for
determining whether escrow accounts are required for ``jumbo loans,''
whose principal amounts exceed the maximum eligible for purchase by the
Federal Home Loan Mortgage Corporation (Freddie Mac), and adds two
disclosure requirements. The new section also authorizes the Bureau to
create an exemption from the escrow requirement for transactions
originated and held in portfolio by creditors that operate
predominantly in ``rural or underserved'' areas and meet certain other
prescribed criteria.
The Dodd-Frank Act also expanded upon the 2008 HOEPA Final Rule to
require that creditors assess all consumers' ability to repay mortgage
transactions, even if they are not higher-priced mortgage loans.
Sections 1411 and 1412 set forth these ability-to-repay requirements
and provide a presumption of compliance for certain ``qualified
mortgages,'' including certain balloon-payment mortgages originated and
held in portfolio by creditors that operate predominantly in ``rural or
underserved'' areas and meet certain other prescribed criteria. The
provisions for balloon-payment qualified mortgages and for the
potential escrow exemption are similar but not identical under the
statute.
In the spring of 2011, the Board issued two proposals to implement
the escrow and ability-to-repay/qualified mortgage provisions.
Specifically, on March 2, 2011, the Board published a proposed rule to
implement the requirements of sections 1461 and 1462 of the Dodd-Frank
Act. 76 FR 11598 (Mar. 2, 2011) (the Board's 2011 Escrows Proposal).
The Board's 2011 Escrows Proposal would have amended the escrow
requirement of Regulation Z, by creating an exemption for transactions
by certain creditors operating in rural or underserved areas, and by
establishing two new disclosure requirements relating to escrow
accounts. The proposal also would have adjusted the threshold for
``higher-priced mortgage loans'' based on a loan's ``transaction
coverage rate,'' rather than its annual percentage rate (APR). This
element of the proposal grew out of a separate initiative by the Board
in which it had proposed to expand the definition of finance charge to
include more fees and charges, and thus also generally to increase
APRs, under Regulation Z to make disclosures more useful to consumers.
Because those changes would have caused more transactions to exceed the
thresholds for higher-priced mortgage loans, the Board proposed using a
``transaction coverage rate'' metric to keep coverage levels relatively
constant. See 74 FR 43232 (Aug. 26, 2009); 75 FR 58539, 58660-61 (Sept.
24, 2010).
On May 11, 2011, the Board published a proposal 2011 ATR Proposal
to implement the ability-to-repay/qualified mortgage provisions added
to TILA by the Dodd Frank Act, as discussed above. See 76 FR 27390 (May
11, 2011) (the Board's 2011 ATR Proposal). The Board's 2011 Escrows and
2011 ATR Proposals used similar definitions of ``rural'' and
``underserved'' but varied with regard to certain other proposed
provisions for the balloon-payment qualified mortgage and escrow
exemptions.
On July 21, 2011, section 1061 of the Dodd-Frank Act transferred to
the Bureau the ``consumer financial protection functions'' previously
vested in certain other Federal agencies, including the Board. On
November 23, 2012, the Bureau published a final rule that delays the
implementation of certain disclosure requirements contained in title
XIV of the Dodd-Frank Act, including those contained in TILA section
129D, as added by Dodd-Frank Act sections 1461 and 1462. See 77 FR
70105 (Nov. 23, 2012). Consequently, the disclosure portions of the
Board's 2011 Escrows Proposal will be the subject of future rulemaking
by the Bureau and are not finalized in this rule.
C. Size and Volume of the Current Mortgage Origination Market
Even with the economic downturn and tightening of credit standards,
approximately $1.28 trillion in mortgage loans were originated in
2011.\4\ In exchange for an extension of mortgage credit, consumers
promise to make regular mortgage payments and provide their home or
real property as collateral. The overwhelming majority of homebuyers
continue to use mortgages to finance at least some of the purchase
price of their property. In 2011, 93 percent of all home purchases were
financed with a mortgage credit transaction.\5\
---------------------------------------------------------------------------
\4\ Credit Forecast 2012, Moody's Analytics (2012), available
at: http://www.economy.com/default.asp (reflects first-lien mortgage
loans) (data service accessibly only through paid subscription).
\5\ 1 Inside Mortg. Fin., The 2012 Mortgage Market Statistical
Annual 12 (2012).
---------------------------------------------------------------------------
Consumers may obtain mortgage credit to purchase a home, to
refinance an existing mortgage, to access home equity, or to finance
home improvement. Purchase transactions and refinancings together
produced 6.3 million new first-lien mortgage originations in 2011.\6\
The proportion of
[[Page 4728]]
transactions that are for purchases as opposed to refinancings varies
with the interest rate environment and other market factors. In 2011,
65 percent of the market was refinance transactions and 35 percent was
purchase transactions, by volume.\7\ Historically the distribution has
been more even. In 2000, refinancings accounted for 44 percent of the
market while purchase transactions comprised 56 percent; in 2005, the
two products were split evenly.\8\
---------------------------------------------------------------------------
\6\ Credit Forecast 2012; 1 Inside Mortg. Fin., The 2012
Mortgage Market Statistical Annual 17 (2012).
\7\ Inside Mortg. Fin., Mortgage Originations by Product,
Mortgage Market Statistical Annual (2012).
\8\ Id. These percentages are based on the dollar amounts of the
transactions.
---------------------------------------------------------------------------
With a home equity transaction, a homeowner uses his or her equity
as collateral to secure consumer credit. The credit proceeds can be
used, for example, to pay for home improvements. Home equity credit
transactions and home equity lines of credit resulted in an additional
1.3 million mortgage originations in 2011.\9\
---------------------------------------------------------------------------
\9\ Credit Forecast 2012.
---------------------------------------------------------------------------
The market for higher-priced mortgage loans remains significant.
Data reported under the Home Mortgage Disclosure Act (HMDA) show that
in 2011 approximately 332,000 transactions, including subordinate
liens, were reportable as higher-priced mortgage loans. Of these
transactions, refinancings accounted for approximately 44 percent of
the higher-priced mortgage loan market, and 90 percent of the overall
higher-priced mortgage loan market involved first-lien transactions.
The median first-lien higher-priced mortgage loan was for $81,000,
while the interquartile range (where one quarter of the transactions
are below, and one quarter of the transactions are above) was $47,000
to $142,000.
III. Summary of the Rulemaking Process
A. The Board's 2011 Escrows Proposal
The Board's 2011 Escrows Proposal would have made certain
amendments to Regulation Z's escrow requirement, in accordance with the
Dodd-Frank Act. First, the Board's 2011 Escrows Proposal would have
expanded the minimum period for mandatory escrow accounts from one to
five years, and under certain circumstances longer. Second, the Board's
2011 Escrows Proposal would have extended the partial exemption for
certain transactions secured by a condominium unit to planned unit
developments and other, similar property types that have governing
associations that maintain a master insurance policy. Third, the
Board's 2011 Escrows Proposal would have created an exemption from the
escrow requirement for any transaction extended by a creditor that
makes most of its first-lien higher-priced mortgage loans in counties
designated by the Board as ``rural'' or ``underserved,'' has annual
originations (together with affiliates) of 100 or fewer first-lien
mortgage transactions originated and retained servicing rights in
either the current or prior year, and does not escrow for any mortgage
obligation it services. The Board's 2011 Escrows Proposal would have
limited the definition of ``rural'' areas to those based on the ``urban
influence codes'' numbered 7, 10, 11, and 12, maintained by the
Economic Research Service (ERS) of the United States Department of
Agriculture. Additionally, the Board's 2011 Escrows Proposal would also
have designated a county as ``underserved'' where no more than two
creditors extend consumer credit secured by a first lien on real
property or a dwelling five or more times in that county during either
of the two previous calendar years.
The Board's 2011 Escrows Proposal also would have established two
new disclosure requirements relating to escrow accounts. One disclosure
would have been required to be given three business days before
consummation of a mortgage transaction for which an escrow account
would have been established, explaining what an escrow account is, how
it works, and the risks of not having an escrow account. The disclosure
would also have contained the estimated amount of the first year's
disbursements, the amount to be paid at consummation to fund the escrow
account initially, the amount of the consumer's regular mortgage
payments to be paid into the escrow account, as well as a statement
that the amount of the regular escrow payment could change in the
future.
In addition, the Board's 2011 Escrows Proposal would have created a
second disclosure to be given for mortgage transactions where an escrow
account would not be established or when an escrow account on an
existing mortgage obligation was to be cancelled. This disclosure would
have explained what an escrow account is, how it works, the risk of not
having an escrow account, as well as the potential consequences of
failing to pay home-related costs such as taxes and insurance in the
absence of an escrow account. Further, it would have stated why there
would be no escrow account or why it was being cancelled, as
applicable, the amount of any fee imposed for not having an escrow
account, and how the consumer could request that an escrow account be
established or left in place, along with any deadline for such
requests. The Board's 2011 Escrows Proposal would have required that
this disclosure be delivered at least three business days before
consummation or cancellation of the existing escrow account, as
applicable.
B. Overview of Comments Received
The Bureau reviewed the approximately 70 comment letters submitted
to the Board and in one case directly to the Bureau concerning the
Board's 2011 Escrows Proposal. These comments came from mortgage
creditors, banks, savings associations, credit unions, industry trade
groups, Federal agencies and officials, individual consumers, and
consumer advocates. In addition to this overview, comments received are
discussed in more detail, where applicable, in part V below.
Commenters generally supported the Board's effort to implement the
new Dodd-Frank Act escrow requirements. However, industry commenters
expressed concerns about the costs of implementation, particularly with
respect to the proposed disclosure requirements. In addition, several
industry commenters recommended that the proposed exemptions from the
escrow requirement for higher-priced mortgage loans be broadened to
include: (1) Transactions a creditor holds in portfolio; (2)
transactions made by community banks and local credit unions; (3)
transactions made in broader areas than the Board's proposed
definitions of ``rural'' and ``underserved''; and (4) transactions for
certain chattel dwellings, including manufactured homes, trailers, and
house boats.
In contrast, consumer advocates were concerned that certain
provisions could allow creditors to skirt the proposed rule. Consumer
advocates suggested a narrower exemption than the one proposed by the
Board to ensure that higher-priced mortgage loans made in well-served
rural areas would be subject to the escrow requirement.
C. Other Rulemakings
In addition to this final rule, the Bureau is adopting several
other final rules and issuing one proposal, all relating to mortgage
credit to implement requirements of title XIV of the Dodd-Frank Act.
The Bureau is also issuing a final rule jointly with other Federal
agencies to implement requirements for mortgage appraisals in title
XIV. Each of the final rules follows a proposal issued in 2011 by the
Board or in 2012 by the
[[Page 4729]]
Bureau alone or jointly with other Federal agencies. Collectively,
these proposed and final rules are referred to as the Title XIV
Rulemakings.
Ability to Repay: The Bureau is finalizing a rule,
following a May 2011 proposal issued by the Board (the Board's 2011 ATR
Proposal),\10\ to implement provisions of the Dodd-Frank Act (1)
requiring creditors to determine that a consumer has a reasonable
ability to repay covered transactions and establishing standards for
compliance, such as by making a ``qualified mortgage,'' and (2)
establishing certain limitations on prepayment penalties, pursuant to
TILA section 129C as established by Dodd-Frank Act sections 1411, 1412,
and 1414. 15 U.S.C. 1639c. The Bureau's final rule is referred to as
the 2013 ATR Final Rule. Simultaneously with the 2013 ATR Final Rule,
the Bureau is issuing a proposal to amend the final rule implementing
the ability-to-repay requirements, including by the addition of
exemptions for certain nonprofit creditors and certain homeownership
stabilization programs and a definition of a ``qualified mortgage'' for
certain mortgages made and held in portfolio by small creditors (the
2013 ATR Concurrent Proposal). The Bureau expects to act on the 2013
ATR Concurrent Proposal on an expedited basis, so that any exceptions
or adjustments to the 2013 ATR Final Rule can take effect
simultaneously with that rule.
---------------------------------------------------------------------------
\10\ 76 FR 27390 (May 11, 2011).
---------------------------------------------------------------------------
HOEPA: Following its July 2012 proposal (the 2012 HOEPA
Proposal),\11\ the Bureau is issuing a final rule to implement Dodd-
Frank Act requirements expanding protections for ``high-cost
mortgages'' under the Homeownership and Equity Protection Act (HOEPA),
pursuant to TILA sections 103(bb) and 129, as amended by Dodd-Frank Act
sections 1431 through 1433. 15 U.S.C. 1602(bb) and 1639. The Bureau
also is finalizing rules to implement certain title XIV requirements
concerning homeownership counseling, including a requirement that
lenders provide lists of homeownership counselors to applicants for
federally related mortgage loans, pursuant to RESPA section 5(c), as
amended by Dodd-Frank Act section 1450. 12 U.S.C. 2604(c). The Bureau's
final rule is referred to as the 2013 HOEPA Final Rule.
---------------------------------------------------------------------------
\11\ 77 FR 49090 (Aug. 15,2012).
---------------------------------------------------------------------------
Servicing: Following its August 2012 proposals (the 2012
RESPA Servicing Proposal and 2012 TILA Servicing Proposal),\12\ the
Bureau is adopting final rules to implement Dodd-Frank Act requirements
regarding force-placed insurance, error resolution, information
requests, and payment crediting, as well as requirements for mortgage
loan periodic statements and adjustable-rate mortgage reset
disclosures, pursuant to section 6 of RESPA and sections 128, 128A,
129F, and 129G of TILA, as amended or established by Dodd-Frank Act
sections 1418, 1420, 1463, and 1464. 12 U.S.C. 2605; 15 U.S.C. 1638,
1638a, 1639f, and 1639g. The Bureau also is finalizing rules on early
intervention for troubled and delinquent borrowers, and loss mitigation
procedures, pursuant to the Bureau's authority under section 6 of
RESPA, as amended by Dodd-Frank Act section 1463, to establish
obligations for mortgage servicers that it finds to be appropriate to
carry out the consumer protection purposes of RESPA, and its authority
under section 19(a) of RESPA to prescribe rules necessary to achieve
the purposes of RESPA. The Bureau's final rule under RESPA with respect
to mortgage servicing also establishes requirements for general
servicing standards policies and procedures and continuity of contact
pursuant to its authority under section 19(a) of RESPA. The Bureau's
final rules are referred to as the 2013 RESPA Servicing Final Rule and
the 2013 TILA Servicing Final Rule, respectively.
---------------------------------------------------------------------------
\12\ 77 FR 57200 (Sept. 17, 2012) (RESPA); 77 FR 57318 (Sept.
17, 2012) (TILA).
---------------------------------------------------------------------------
Loan Originator Compensation: Following its August 2012
proposal (the 2012 Loan Originator Proposal),\13\ the Bureau is issuing
a final rule to implement provisions of the Dodd-Frank Act requiring
certain creditors and loan originators to meet certain duties of care,
including qualification requirements; requiring the establishment of
certain compliance procedures by depository institutions; prohibiting
loan originators, creditors, and the affiliates of both from receiving
compensation in various forms (including based on the terms of the
transaction) and from sources other than the consumer, with specified
exceptions; and establishing restrictions on mandatory arbitration and
financing of single premium credit insurance, pursuant to TILA sections
129B and 129C as established by Dodd-Frank Act sections 1402, 1403, and
1414(a). 15 U.S.C. 1639b, 1639c. The Bureau's final rule is referred to
as the 2013 Loan Originator Final Rule.
---------------------------------------------------------------------------
\13\ 77 FR 55272 (Sept. 7, 2012).
---------------------------------------------------------------------------
Appraisals: The Bureau, jointly with other Federal
agencies,\14\ is issuing a final rule implementing Dodd-Frank Act
requirements concerning appraisals for higher-risk mortgages, pursuant
to TILA section 129H as established by Dodd-Frank Act section 1471. 15
U.S.C. 1639h. This rule follows the agencies' August 2012 joint
proposal (the 2012 Interagency Appraisals Proposal).\15\ The agencies'
joint final rule is referred to as the 2013 Interagency Appraisals
Final Rule. In addition, following its August 2012 proposal (the 2012
ECOA Appraisals Proposal),\16\ the Bureau is issuing a final rule to
implement provisions of the Dodd-Frank Act requiring that creditors
provide applicants with a free copy of written appraisals and
valuations developed in connection with applications for transactions
secured by a first lien on a dwelling, pursuant to section 701(e) of
the Equal Credit Opportunity Act (ECOA) as amended by Dodd-Frank Act
section 1474. 15 U.S.C. 1691(e). The Bureau's final rule is referred to
as the 2013 ECOA Appraisals Final Rule.
---------------------------------------------------------------------------
\14\ Specifically, the Board of Governors of the Federal Reserve
System, the Office of the Comptroller of the Currency, the Federal
Deposit Insurance Corporation, the National Credit Union
Administration, and the Federal Housing Finance Agency.
\15\ 77 FR 54722 (Sept. 5, 2012).
\16\ 77 FR 50390 (Aug. 21, 2012).
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The Bureau is not at this time finalizing proposals concerning
various disclosure requirements that were added by title XIV of the
Dodd-Frank Act, integration of mortgage disclosures under TILA and
RESPA, or a simpler, more inclusive definition of the finance charge
for purposes of disclosures for closed-end mortgage transactions under
Regulation Z. The Bureau expects to finalize these proposals and to
consider whether to adjust regulatory thresholds under the Title XIV
Rulemakings in connection with any change in the calculation of the
finance charge later in 2013, after it has completed quantitative
testing, and any additional qualitative testing deemed appropriate, of
the forms that it proposed in July 2012 to combine TILA mortgage
disclosures with the good faith estimate (RESPA GFE) and settlement
statement (RESPA settlement statement) required under the Real Estate
Settlement Procedures Act (RESPA), pursuant to Dodd-Frank Act section
1032(f) and sections 4(a) of RESPA and 105(b) of TILA, as amended by
Dodd-Frank Act sections 1098 and 1100A, respectively (the 2012 TILA-
RESPA Proposal).\17\ Accordingly, the Bureau already has issued a final
rule delaying implementation of various
[[Page 4730]]
affected title XIV disclosure provisions.\18\ The Bureau's approaches
to coordinating the implementation of the Title XIV Rulemakings and to
the finance charge proposal are discussed in turn below.
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\17\ 77 FR 51116 (Aug. 23, 2012).
\18\ 77 FR 70105 (Nov. 23, 2012).
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Coordinated Implementation of Title XIV Rulemakings
As noted in all of its foregoing proposals, the Bureau regards each
of the Title XIV Rulemakings as components of a single, comprehensive
undertaking; each of them affecting aspects of the mortgage industry
and its regulation. Many of these rules intersect with one or more of
the others. Accordingly, as noted in its proposals, the Bureau is
coordinating carefully the Title XIV Rulemakings, both in terms of
their interrelated substantive provisions and, in recognition thereof,
particularly with respect to their effective dates. The Dodd-Frank Act
requirements to be implemented by the Title XIV Rulemakings generally
will take effect on January 21, 2013, unless final rules implementing
those requirements are issued on or before that date and provide for a
different effective date. See Dodd-Frank Act section 1400(c), 15 U.S.C.
1601 note. In addition, some of the Title XIV Rulemakings are to take
effect no later than one year after they are issued. Id.
The comments on the appropriate implementation date for this final
rule are discussed in detail below in part VI of this notice. In
general, however, consumer advocates requested that the Bureau put the
protections in the Title XIV Rulemakings into effect as soon as
practicable. In contrast, the Bureau received some industry comments
indicating that implementing so many new requirements at the same time
would create a significant cumulative burden for creditors. In
addition, many commenters also acknowledged the advantages of
implementing multiple revisions to the regulations in a coordinated
fashion.\19\ Thus, a tension exists between coordinating the adoption
of the Title XIV Rulemakings and facilitating industry's implementation
of such a large set of new requirements. Some have suggested that the
Bureau resolve this tension by adopting a sequenced implementation,
while others have requested that the Bureau simply provide a longer
implementation period for all of the final rules.
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\19\ Of the several final rules being adopted under the Title
XIV Rulemakings, six entail amendments to Regulation Z, with the
only exceptions being the 2013 RESPA Servicing Final Rule
(Regulation X) and the 2013 ECOA Appraisals Final Rule (Regulation
B); the 2013 HOEPA Final Rule also amends Regulation X, in addition
to Regulation Z. The six Regulation Z final rules involve numerous
instances of intersecting provisions, either by cross-references to
each other's provisions or by adopting parallel provisions. Thus,
adopting some of those amendments without also adopting certain
other, closely related provisions would create significant technical
issues, e.g., new provisions containing cross-references to other
provisions that do not yet exist, which could undermine the ability
of creditors and other parties subject to the rules to understand
their obligations and implement appropriate systems changes in an
integrated and efficient manner.
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The Bureau recognizes that many of the new provisions will require
creditors to make changes to automated systems and, further, that most
administrators of large systems are reluctant to make too many changes
to their systems at once. At the same time, however, the Bureau notes
that the Dodd-Frank Act established virtually all of these changes to
institutions' compliance responsibilities, and contemplated that they
be implemented in a relatively short period of time. And, as already
noted, the extent of interaction among many of the Title XIV
Rulemakings necessitates that many of their provisions take effect
together. Finally, notwithstanding commenters' expressed concerns for
cumulative burden, the Bureau expects that creditors actually may
realize some efficiencies from adapting their systems for compliance
with multiple new, closely related requirements at once, especially if
given sufficient overall time to do so.
Accordingly, the Bureau is requiring that, as a general matter,
creditors and other affected persons begin complying with the final
rules on January 10, 2014. As noted above, section 1400(c) of the Dodd-
Frank Act requires that some provisions of the Title XIV Rulemakings
take effect no later than one year after the Bureau issues them.
Accordingly, the Bureau is establishing January 10, 2014, one year
after issuance of the Bureau's 2013 ATR, Escrows, and HOEPA Final Rules
(i.e., the earliest of the title XIV final rules), as the baseline
effective date for most of the Title XIV Rulemakings. The Bureau
believes that, on balance, this approach will facilitate the
implementation of the rules' provisions, while also affording creditors
sufficient time to implement the more complex or resource-intensive new
requirements.
The Bureau has identified certain rulemakings or selected aspects
thereof, however, that do not present significant implementation
burdens for industry. Accordingly, the Bureau is setting earlier
effective dates for those final rules or certain aspects thereof, as
applicable. Those effective dates are set forth and explained in the
Federal Register notices for those final rules.
More Inclusive Finance Charge Proposal
As noted above, the Bureau proposed in the 2012 TILA-RESPA Proposal
to make the definition of finance charge more inclusive, thus rendering
the finance charge and annual percentage rate a more useful tool for
consumers to compare the cost of credit across different alternatives.
77 FR 51116, 51143 (Aug. 23, 2012). Because the new definition would
include additional costs that are not currently counted, it would cause
the finance charges and APRs on many affected transactions to increase.
This in turn could cause more such transactions to become subject to
various compliance regimes under Regulation Z. Specifically, the
finance charge is central to the calculation of a transaction's
``points and fees,'' which in turn has been (and remains) a coverage
threshold for the special protections afforded ``high-cost mortgages''
under HOEPA. Points and fees also will be subject to a 3-percent limit
for purposes of determining whether a transaction is a ``qualified
mortgage'' under the 2013 ATR Final Rule. Meanwhile, the APR serves as
a coverage threshold for HOEPA protections as well as for certain
protections afforded ``higher-priced mortgage loans'' under Sec.
1026.35, including the mandatory escrow account requirements being
amended by this final rule. Finally, because the 2013 Interagency
Appraisals Final Rule uses the same APR-based coverage test as is used
for identifying higher-priced mortgage loans, the APR affects that
rulemaking as well. Thus, the proposed more inclusive finance charge
would have had the indirect effect of increasing coverage under HOEPA
and the escrow and appraisal requirements for higher-priced mortgage
loans, as well as decreasing the number of transactions that may be
qualified mortgages--even holding actual loan terms constant--simply
because of the increase in calculated finance charges, and consequently
APRs, for closed-end mortgage transactions generally.
As noted above, these expanded coverage consequences were not the
intent of the more inclusive finance charge proposal. Accordingly, as
discussed more extensively in the Escrows Proposal, the HOEPA Proposal,
the ATR Proposal, and the Interagency Appraisals Proposal, the Board
and subsequently the Bureau (and other agencies) sought comment on
certain adjustments to the affected regulatory thresholds to counteract
this
[[Page 4731]]
unintended effect. First, the Board and then the Bureau proposed to
adopt a ``transaction coverage rate'' for use as the metric to
determine coverage of these regimes in place of the APR. The
transaction coverage rate would have been calculated solely for
coverage determination purposes and would not have been disclosed to
consumers, who still would have received only a disclosure of the
expanded APR. The transaction coverage rate calculation would exclude
from the prepaid finance charge all costs otherwise included for
purposes of the APR calculation except charges retained by the
creditor, any mortgage broker, or any affiliate of either. Similarly,
the Board and Bureau proposed to reverse the effects of the more
inclusive finance charge on the calculation of points and fees; the
points and fees figure is calculated only as a HOEPA and qualified
mortgage coverage metric and is not disclosed to consumers. The Bureau
also sought comment on other potential mitigation measures, such as
adjusting the numeric thresholds for particular compliance regimes to
account for the general shift in affected transactions' APRs.
The Bureau's 2012 TILA-RESPA Proposal sought comment on whether to
finalize the more inclusive finance charge proposal in conjunction with
the Title XIV Rulemakings or with the rest of the TILA-RESPA Proposal
concerning the integration of mortgage disclosure forms. See 77 FR
51116, 51125 (Aug. 23, 2012). Upon additional consideration and review
of comments received, the Bureau decided to defer a decision whether to
adopt the more inclusive finance charge proposal and any related
adjustments to regulatory thresholds until it later finalizes the TILA-
RESPA Proposal. See 77 FR 54843 (Sept. 6, 2012); 77 FR 54844 (Sept. 6,
2012).\20\ Accordingly, this final rule as well as the 2013 HOEPA, ATR,
and Interagency Appraisals Final Rules all are deferring any action on
their respective proposed adjustments to regulatory thresholds.
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\20\ These notices extended the comment period on the more
inclusive finance charge and corresponding regulatory threshold
adjustments under the 2012 TILA-RESPA and HOEPA Proposals. It did
not change any other aspect of either proposal.
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IV. Legal Authority
The Bureau is issuing this final rule on January 10, 2013, in
accordance with 12 CFR 1074.1, pursuant to its authority under TILA and
the Dodd-Frank Act. See TILA section 105(a), 15 U.S.C. 1604(a). On July
21, 2011, section 1061 of the Dodd-Frank Act transferred to the Bureau
the ``consumer financial protection functions'' previously vested in
certain other Federal agencies, including the Board. The term
``consumer financial protection function'' is defined to include ``all
authority to prescribe rules or issue orders or guidelines pursuant to
any Federal consumer financial law, including performing appropriate
functions to promulgate and review such rules, orders, and
guidelines.'' \21\ TILA is defined as a Federal consumer financial law.
\22\ Accordingly, the Bureau has general authority to issue regulations
pursuant to TILA.
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\21\ 12 U.S.C. 5581(a)(1).
\22\ See Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14)
(defining ``Federal consumer financial law'' to include the
``enumerated consumer laws'' and the provisions of title X of the
Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12)
(defining ``enumerated consumer laws'' to include TILA).
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A. Escrow Provisions Under the Dodd-Frank Act
As discussed above, the Dodd-Frank Act amended TILA to mandate
escrow accounts for certain consumer credit transactions secured by a
first lien on a consumer's principal dwelling. Sections 1461 and 1462
of the Dodd-Frank Act create new TILA section 129D, which establishes a
minimum period for which escrows must be held for higher-priced
mortgage loans, creates a rate threshold for determining whether escrow
accounts are required for ``jumbo loans,'' whose principal amounts
exceed the maximum eligible for purchase by Freddie Mac, and adds two
disclosure requirements concerning escrow accounts. The Dodd-Frank Act
further provides that the Bureau may exempt certain creditors from the
escrow requirement by regulation. See TILA section 129D(c), 15 U.S.C.
1639(c). In addition, the Dodd-Frank Act provides the Bureau with
authority to prescribe regulations that revise, add to, or subtract
from the criteria that describe when an escrow account is required upon
a finding that such regulations are in the interest of the consumers
and in the public interest. See 15 U.S.C. 1639d note.
B. Other Rulemaking and Exception Authorities
This final rule also relies on other rulemaking and exception
authorities specifically granted to the Bureau by TILA and the Dodd-
Frank Act, including the authorities discussed below.
TILA Section 105(a)
As amended by the Dodd-Frank Act, TILA section 105(a), 15 U.S.C.
1604(a), directs the Bureau to prescribe regulations to carry out the
purposes of TILA, and provides that such regulations may contain
additional requirements, classifications, differentiations, or other
provisions and may provide for such adjustments and exceptions for all
or any class of transactions that the Bureau judges are necessary or
proper to effectuate the purposes of TILA, to prevent circumvention or
evasion thereof, or to facilitate compliance therewith. A purpose of
TILA is `` * * * to assure a meaningful disclosure of credit terms so
that the consumer will be able to compare more readily the various
credit terms available to him and avoid the uninformed use of credit* *
* .'' TILA section 102(a), 15 U.S.C. 1601(a). This stated purpose is
informed by Congress's finding that ``* * * economic stabilization
would be enhanced and the competition among the various financial
institutions and other firms engaged in the extension of consumer
credit would be strengthened by the informed use of credit.'' Id. Thus,
strengthened competition among financial institutions is a goal of
TILA, achieved through the effectuation of TILA's purposes.
Historically, TILA section 105(a) has served as a broad source of
authority for rules that promote the informed use of credit through
required disclosures and substantive regulation of certain practices.
However, Dodd-Frank Act section 1100A clarified the Bureau's section
105(a) authority by amending that section to provide express authority
to prescribe regulations that contain ``additional requirements'' that
the Bureau finds are necessary or proper to effectuate the purposes of
TILA, to prevent circumvention or evasion thereof, or to facilitate
compliance therewith. This amendment clarified the Bureau's authority
under TILA section 105(a) to prescribe requirements beyond those
specifically listed in the statute that meet the standards outlined in
section 105(a), which include effectuating all of TILA's purposes.
Therefore, the Bureau believes that its authority under TILA section
105(a) to make exceptions, adjustments, and additional provisions that
the Bureau finds are necessary or proper to effectuate the purposes of
TILA applies with respect to the purpose of section 129D. That purpose
is to ensure that consumers understand and appreciate the full cost of
home ownership. The purpose of TILA section 129D is also informed by
the findings articulated in section 129B(a) that economic stabilization
would be enhanced by the
[[Page 4732]]
protection, limitation, and regulation of the terms of residential
mortgage credit and the practices related to such credit, while
ensuring that responsible and affordable mortgage credit remains
available to consumers. See 15 U.S.C. 1639b(a).
As discussed in the section-by-section analysis below, the Bureau
is issuing regulations to carry out TILA's purposes, including such
additional requirements, adjustments, and exceptions as, in the
Bureau's judgment, are necessary and proper to carry out the purposes
of TILA, prevent circumvention or evasion thereof, or to facilitate
compliance therewith. In developing these aspects of the final rule
pursuant to its authority under TILA section 105(a), the Bureau has
considered the purposes of TILA, including the purposes of TILA section
129D, and the findings of TILA, including strengthening competition
among financial institutions and promoting economic stabilization, and
the findings of TILA section 129B(a)(1) that economic stabilization
would be enhanced by the protection, limitation, and regulation of the
terms of residential mortgage credit and the practices related to such
credit, while ensuring that responsible, affordable mortgage credit
remains available to consumers.
Dodd-Frank Act Section 1022(b)
Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to
prescribe rules ``as may be necessary or appropriate to enable the
Bureau to administer and carry out the purposes and objectives of the
Federal consumer financial laws, and to prevent evasions thereof[.]''
12 U.S.C. 5512(b)(1). TILA and title X of the Dodd-Frank Act are
Federal consumer financial laws.\23\ Accordingly, in adopting this
final rule, the Bureau is exercising its authority under Dodd-Frank Act
section 1022(b) to prescribe rules that carry out the purposes and
objectives of TILA and title X of the Dodd-Frank Act and prevent
evasion of those laws.
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\23\ See Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14)
(defining ``Federal consumer financial law'' to include the
``enumerated consumer laws'' and the provisions of title X of the
Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12)
(defining ``enumerated consumer laws'' to include TILA).
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V. Section-by-Section Analysis
Section 1026.19 Certain Mortgage and Variable-Rate Transactions
In the 2011 Escrows Proposal, the Board proposed a new Sec.
226.19(f) to implement the account disclosure requirements of TILA
section 129D, as enacted by Sections 1461 and 1462 of the Dodd- Frank
Act. Proposed Sec. 226.19(f) \24\ would have required disclosures for
the establishment or non-establishment of an escrow account in
connection with consummation of a transaction secured by a first lien,
but not a subordinate lien. As discussed above, on November 23, 2012,
the Bureau published in the Federal Register a rule that delays the
implementation of certain disclosure requirements contained in title
XIV of the Dodd-Frank Act, including those contained in sections 1461
and 1462. See 77 FR 70105 (Nov. 23, 2012). Consequently, the Bureau
will not be adopting a new Sec. 1026.19(f) in this rule.
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\24\ This section-by-section analysis discusses the Board's 2011
Escrows Proposal by reference to the Board's Regulation Z, 12 CFR
part 226, which the Board proposed to amend, and discusses this
final rule by reference to the Bureau's Regulation Z, 12 CFR part
1026, which this final rule amends.
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Section 1026.20 Subsequent Disclosure Requirements
In the 2011 Escrows Proposal, the Board proposed a new Sec.
226.20(d) to implement the disclosure requirements of TILA sections
129D(j)(1)(B) and 129D(j)(2), as enacted by section 1462 of the Dodd-
Frank Act. TILA section 129D(j)(1)(B) requires a creditor or servicer
to provide the disclosures set forth in TILA section 129D(j)(2) when a
consumer requests closure of an escrow account that was established in
connection with a transaction secured by real property. Proposed Sec.
226.20(d) would have directed the creditor or servicer to disclose the
information about escrow accounts in accordance with certain format and
timing requirements. As previously noted, the Bureau has delayed the
implementation of certain disclosure requirements contained in title
XIV of the Dodd-Frank Act, including those contained in sections 1461
and 1462. See 77 FR 70105 (Nov. 23, 2012). Consequently, the Bureau
will not be adopting a new Sec. 1026.20(d) in this rule.
Section 1026.34 Prohibited Acts or Practices in Connection With High-
Cost Mortgages
34(a) Prohibited Acts or Practices for High-Cost Mortgages 34(a)(4)(i)
Mortgage-Related Obligations
In the 2011 Escrows Proposal, the Board proposed amendments to the
definition of mortgage-related obligations in Sec. 226.34(a)(4)(i) and
comment 34(a)(4)(i)-1, which contained cross-references to the
definition of mortgage-related insurance in Sec. 226.35(b)(3)(i).
Because the Board proposed removing and reserving Sec. 226.35(b)(3)(i)
and preserving the substance of that provision in the proposed new
Sec. 226.45(b)(1), the Board made conforming amendments to Sec.
226.34(a)(4)(i) and staff comment 34(a)(4)(i))-1 to reflect the new
cross-reference. Section 1026.34(a)(4)(i) and staff comment
34(a)(4)(i)-1 are being amended under the 2013 HOEPA Final Rule to
remove the cross-reference to Sec. 1026.35(b)(3)(i). Consequently, the
Bureau will not be adopting conforming amendments in this rule.
Section 1026.35 Requirements for Higher-Priced Mortgage Loans
35(a) Definitions
35(a)(1)
As noted above, the Dodd-Frank Act substantially codified the
Board's escrow requirement for higher-priced mortgage loans, but with
certain differences. One of those differences is the higher threshold
above the average prime offer rate established by the Dodd-Frank Act
for determining when escrow accounts are required for transactions that
exceed the maximum principal balance eligible for sale to Freddie Mac
(``jumbo'' transactions). In general, the coverage thresholds are 1.5
percentage points above the average prime offer rate for first-lien
transactions and 3.5 percentage points above the average prime offer
rate for subordinate-lien transactions. Under section 1461 of the Dodd-
Frank Act, however, Congress established a new threshold of 2.5
percentage points above the average prime offer rate for ``jumbo''
transactions. Under an interim final rule published concurrently with
the Board's 2011 Escrows Proposal, the Board implemented this special
coverage test for ``jumbo'' transactions by amending its existing
escrow requirement for higher-priced mortgage loans in Sec.
226.35(b)(3). See 76 FR 11319 (Mar. 2, 2011) (the Board's 2011
``Jumbo'' Final Rule).
Under the Board's 2011 Escrows Proposal, proposed Sec.
226.45(a)(1) would have provided that a higher-priced mortgage loan is
a consumer credit transaction secured by the consumer's principal
dwelling that exceeds the applicable pricing threshold as of the date
the transaction's rate is set. The Board's proposed Sec. 226.45(a)(1)
incorporated the special, separate coverage threshold for ``jumbo''
transactions, as provided by the Dodd-Frank Act. In addition, as
discussed above, the Board's proposed Sec. 226.45(a)(1) would have
based ``higher-priced mortgage loan'' status on a comparison of the
transaction's
[[Page 4733]]
``transaction coverage rate,'' rather than its APR, to the average
prime offer rate.
A few commenters suggested that the proposed thresholds should be
reconsidered. However, the Bureau believes the current thresholds
capture the expansion intended by Congress and is therefore generally
adopting proposed Sec. 226.45(a)(1) as Sec. 1026.35(a)(1). As
discussed above, however, the Bureau is suspending consideration of the
transaction coverage rate until it considers the proposed expansion of
the definition of finance charge in connection with the TILA-RESPA
Final Rule. Accordingly, the final rule continues to base the
definition of higher-priced mortgage loans on a comparison of the
transaction's APR to the average prime offer rate. The Bureau will
consider comments received concerning the transaction coverage rate
proposal in connection with the TILA-RESPA Final Rule. Comment
35(a)(1)-1 clarifies how to determine if a transaction is a higher-
priced mortgage loan by comparing the annual percentage rate to the
average prime offer rate. Comment 35(a)(1)-2 clarifies when the
comparison between the annual percentage rate and the average prime
offer rate should occur. Comment 35(a)(1)-3 clarifies how to determine
whether a transaction is a higher-priced mortgage loan when the
principal balance exceeds the limit in effect as of the date the
transaction's rate is set for the maximum principal obligation eligible
for purchase by Freddie Mac.
35(a)(2)
The Bureau is not altering current Sec. 1026.35(a)(2), which
defines the ``average prime offer rate'' as the annual percentage rate
derived from average interest rates, points, and other transaction
pricing terms currently offered to consumers by a representative sample
of creditors for mortgage transactions that have low-risk pricing
characteristics. The Bureau is, however, adding comment 35(a)(2)-3 to
clarify that the average prime offer rate in Sec. 1026.35 has the same
meaning as in Regulation C, 12 CFR part 1003. See 12 CFR
1003.4(a)(12)(ii).
35(b) Escrow Accounts
35(b)(1)
As amended by the Dodd-Frank Act, TILA section 129D(a) contains the
general requirement that an escrow account be established for any
consumer credit transaction secured by a first lien on a consumer's
principal dwelling. TILA section 129D(b), however, restricts that
general requirement to four specified circumstances: (1) Where an
escrow account is required by Federal or State law; (2) where the
transaction is made, guaranteed, or insured by a State or Federal
agency; (3) where the transaction's annual percentage rate exceeds the
average prime offer rate by prescribed amounts; and (4) where an escrow
account is ``required pursuant to regulation.''
The Board's proposed Sec. 226.45(b)(1) implemented only the third
of the four circumstances, pursuant to TILA section 129D(b)(3), because
the other three either are self-effectuating or are effectuated by
other agencies' regulations. Nonetheless, the Bureau recognizes that
those other three provisions may have implications for existing State
and Federal credit programs, under which the applicable agencies may
need to revise their own underlying guidelines to accommodate or
otherwise reflect the statutory changes. Moreover, the Board's proposed
Sec. 226.45(b)(1) would have stated that, for purposes of Sec.
226.45(b), ``escrow account'' has the same meaning as under Regulation
X. This proposed provision paralleled existing Sec. 226.35(b)(3)(iv).
No comments were received on the scope and structure of Sec.
226.45(b)(1). The Bureau is adopting the proposed language with certain
technical changes as Sec. 1026.35(b)(1).
35(b)(2) Exemptions
Under existing regulations, certain categories of transactions are
exempt from the escrow requirement. The Board proposed Sec.
226.45(a)(3) and (b)(2)(i) and (ii) to reflect these provisions. The
Board's proposed Sec. 226.45(a)(3) would have provided that a
``higher-priced mortgage loan'' does not include a transaction to
finance the initial construction of a dwelling, a temporary or
``bridge'' transaction with a term of twelve months or less, a reverse
mortgage transaction, or a home equity line of credit. This provision
is identical to existing Sec. 1026.35(a)(3) (adopted as Sec.
226.35(a)(3) in the 2008 HOEPA Final Rule), which provides that the
term ``higher-priced mortgage loan'' does not include a transaction to
finance the initial construction of a dwelling, a temporary or
``bridge'' transaction with a term of twelve months or less, a reverse
mortgage transaction, or a home equity line of credit. The Board's
proposed Sec. 226.45(b)(2)(i) would have provided that escrow accounts
need not be established for transactions secured by shares in a
cooperative. This provision would track existing Sec.
1026.35(b)(3)(ii)(A). It also is consistent with new TILA section
129D(e), as added by section 1461 of the Dodd-Frank Act.
In light of the way in which the Dodd-Frank Act has expanded on
various elements of the 2008 HOEPA Final Rule, the Bureau believes that
a more tailored approach is appropriate to specify what types of
transactions are exempt from specific substantive requirements in
Regulation Z. Accordingly, with the exception of home equity lines of
credit (HELOCs), the Bureau is using its exemption authority under TILA
section 129D \25\ to recodify the exemptions that were formerly located
in Sec. 1026.35(a)(3) and Sec. 1026.35(b)(3)(ii)(A) in the exemptions
from coverage of the escrow requirement under new Sec. 1026.35(b)(2).
The separate exemption for HELOCs is no longer necessary because Sec.
1026.35(a)(1) has been modified to apply only to closed-end consumer
credit transactions.\26\ The Bureau believes that the use of its
exemption authority is appropriate given the nature of the transactions
at issue and would benefit consumers and industry alike. Given that
reverse mortgages are unique transactions that are currently addressed
by Sec. 1026.33,\27\ the Bureau believes it is in the interest of
consumers and the public interest to pursue a course involving further
review of Sec. 1026.33 and to consider whether new or different
protections would be appropriate for reverse mortgages at a later
date.\28\ In addition, because of the nature of construction-only and
bridge loan transactions, the Bureau believes that exempting these
transactions is in the interest of consumers and the public interest.
In both cases, the payments and amounts of property taxes and hazard
insurance will depend on various time-sensitive factors for loan
transactions that generally do not exist for more than one or two
years, making maintaining
[[Page 4734]]
an escrow account for a minimum of five years impractical. The
recodification of the other exemptions from the escrows requirements is
purely for organizational purposes and has no substantive effect.
Exemptions from the new appraisal requirements are being finalized
separately by the 2013 Interagency Appraisals Final Rule, in Sec.
1026.35(c).
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\25\ The Bureau may prescribe rules that revise, add to, or
subtract from the criteria of section 129D(b) of TILA if the Bureau
determines that such rules are in the interest of consumers and the
public interest. See 15 U.S.C. 1639d note. These exceptions are also
justified by section 105(a) of TILA which provides that the Bureau
in its regulations to carry out the purposes of TILA may provide for
such adjustments and exceptions for all or any class of transactions
that the Bureau judges are necessary or proper to effectuate the
purposes of TILA, to prevent circumvention or evasion thereof, or to
facilitate compliance therewith. See 15 U.S.C. 1604(a).
\26\ The Bureau notes that open-end credit transactions are
excluded from section 129D(a) of TILA under Dodd-Frank Act section
1461. See 15 U.S.C. 1639d.
\27\ Reverse mortgages are also excluded from section 129D(a) of
TILA under Dodd-Frank Act section 1461. See 15 U.S.C. 1639d.
\28\ See, e.g., Consumer Financial Protection Bureau, Reverse
Mortgages: Report to Congress (June 28, 2012) available at: http://files.consumerfinance.gov/a/assets/documents/201206_cfpb_Reverse_Mortgage_Report.pdf.
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35(b)(2)(i)
The Board's proposed Sec. 226.45(b)(2)(i) would have provided that
escrow accounts need not be established for transactions secured by
shares in a cooperative, tracking the existing regulation, which is now
located at Sec. 1026.35(b)(3)(ii)(A). The Bureau is adopting this
proposal with certain conforming changes as Sec. 1026.35(b)(2)(i)(A).
The Bureau is adopting the Board's proposed exemption for transactions
to finance the initial construction of a dwelling as Sec.
1026.35(b)(2)(i)(B). The Bureau is adopting the Board's proposed
exemption for ``bridge'' loan transactions as Sec.
1026.35(b)(2)(i)(C). Finally, the Bureau is adopting the Board's
proposed exemption for reverse mortgage transactions as Sec.
1026.35(b)(2)(i)(D) with certain conforming changes. Comment
35(b)(2)(i)-1 clarifies the operation of the exemption for transactions
to finance the initial construction of a dwelling under Sec.
1026.35(b)(2)(i)(B) in relation to a construction-to-permanent mortgage
transaction, noting that where a transaction is determined to be a
higher-priced mortgage loan, only the permanent phase of the
transaction is subject to Sec. 1026.35.
35(b)(2)(ii)
As added by section 1461 of the Dodd- Frank Act, new TILA section
129D(e) codifies the current provision stating that escrow accounts
that are established in connection with transactions secured by
condominium units need not reserve funds to cover mortgage-related
insurance, found in existing Sec. 1026.35(b)(3)(ii)(B), and expands it
to other, similar ownership arrangements involving governing
associations that have an obligation to maintain a master insurance
policy. The Board's proposed Sec. 226.45(b)(2)(ii) would have provided
that insurance premiums need not be included in escrow accounts for
transactions secured by dwellings in condominiums, planned unit
developments (PUDs), or similar arrangements in which ownership
requires participation in a governing association, where the governing
association has an obligation to the dwelling owners to maintain a
master policy insuring all dwellings.
Several commenters suggested that even with this expanded
definition other ownership structures might not be captured by the
Board's proposed exemption. The Bureau is responding to these comments
by revising the proposed language to adopt the umbrella term ``common
interest community,'' which one commenter had suggested would be
sufficiently broad to capture the various arrangements under which a
governing association has an obligation to the dwelling owners to
maintain a master policy insuring all dwellings. The Bureau is adopting
the Board's proposed comment 45(b)(2)(ii)-1 as comment 35(b)(2)(ii)-1,
which parallels existing comment 35(b)(3)(ii)(B)-1, but with conforming
amendments to reflect the expanded scope of the exemption. The Bureau
also is adopting the Board's proposed comment 45(b)(2)(ii)-2 as comment
A22b)(2)(ii)-2 to provide details about the nature of PUDs and to
clarify that the exemption is available for not only condominiums and
PUDs but also any other type of property ownership arrangement that has
a governing association with an obligation to maintain a master
insurance policy. Following a request from one commenter, the Bureau
additionally adds comment 35(b)(2)(ii)-3 to clarify that properties
with multiple governing associations would also qualify for the limited
exemption provided in Sec. 1026.35(b)(2)(ii).
35(b)(2)(iii)
As adopted by Dodd-Frank Act section 1461, TILA section 129D(c)
authorizes the Bureau to exempt from the higher-priced mortgage loan
escrow requirement a creditor that: (1) Operates predominantly in rural
or underserved areas; (2) together with all affiliates, has total
annual mortgage loan originations that do not exceed a limit set by the
Bureau; (3) retains its mortgage obligations in portfolio; and (4)
meets any asset-size threshold and any other criteria as the Bureau may
establish. As discussed above, Dodd-Frank Act section 1412 ability-to-
repay provisions contain a similar set of criteria with regard to
certain balloon-payment mortgages originated and held in portfolio by
creditors that operate predominantly in rural or underserved areas. The
statute authorizes the Bureau to issue regulations permitting certain
balloon-payment mortgages issued by the specified creditors to receive
a presumption of compliance with the ability-to-repay requirements as
``qualified mortgages,'' even though the general qualified mortgage
criteria prohibit balloon-payment features. Specifically, in addition
to having to meet certain transaction-specific features and
underwriting requirements, balloon-payment qualified mortgages may be
made only by a creditor that: (1) Operates predominantly in rural or
underserved areas; (2) together with all affiliates, has total annual
residential mortgage transaction originations that do not exceed a
limit set by the Bureau; (3) retains the balloon-payment mortgages in
portfolio; and (4) meets any asset-size threshold and any other
criteria as the Bureau may establish. See TILA section 129C(b)(2)(E),
15 U.S.C. 1639c(b)(2)(E).
The Board interpreted the two provisions as serving similar but not
identical purposes, and thus varied certain aspects of the proposals to
implement the balloon qualified mortgage and escrow provisions.
Specifically, the Board interpreted the escrow provision as being
designed to exempt creditors that do not possess economies of scale to
offset cost-effectively the burden of establishing escrow accounts by
maintaining a certain minimum portfolio size from being required to
establish escrow accounts on higher-priced mortgage loans, and the
balloon-payment qualified mortgage provision to ensure access to credit
in rural and underserved areas where consumers may be able to obtain
credit only from community banks offering balloon-payment mortgages.
Accordingly, the two Board proposals would have used similar
definitions of ``rural'' and ``underserved,'' but did not provide
uniformity in calculating and defining various other elements.
Specifically, the Board's proposed Sec. 226.45(b)(2)(iii) would have
implemented the escrow exemption in TILA section 129D(c) by requiring
that the creditor have (1) in the prior year made more than 50 percent
of its first-lien higher-priced mortgage loans in rural or underserved
areas, (2) together with all affiliates, originated and retained
servicing rights to no more than 100 first-lien mortgage obligations in
either the current or prior calendar year, and (3) together with all
affiliates, not maintained an escrow account on any consumer credit
transaction secured by real property or a dwelling that is currently
serviced by the creditor or its affiliates. The Board also sought
comment on whether to add a requirement for the creditor to meet an
asset-size limit and what that size should be.
In contrast, the Board's proposal for balloon qualified mortgages
would have required that the creditor (1) in the
[[Page 4735]]
preceding calendar year, have made more than 50 percent of its balloon-
payment mortgages in rural or underserved areas; and (2) have assets
that did not exceed $2 billion. The Board proposed two alternatives for
qualifications relating to (1) the total annual originations limit; and
(2) the retention of balloon-payment mortgages in portfolio.
In both cases, the Board proposed to use a narrow definition of
rural based on the Economic Research Service (ERS) of the United States
Department of Agriculture's (USDA) ``urban influence codes'' (UICs).
The UICs are based on the definitions of ``metropolitan'' and
``micropolitan'' as developed by the Office of Management and Budget,
along with other factors reviewed by the ERS that place counties into
twelve separately defined UICs depending on the size of the largest
city and town in the county. The Board's proposal would have limited
the definition of rural to certain ``non-core'' counties, which are
areas outside of any metropolitan or micropolitan area, excluding those
adjacent to a metropolitan area of at least one million residents or
adjacent to a micropolitan area with a town of at least 2,500
residents. This definition corresponded with UICs of 7, 10, 11, and 12,
which would have covered areas in which only 2.3 percent of the
nation's population lives.
In light of the overlap in criteria between the escrow exemption
and balloon qualified mortgage provisions, the Bureau considered
comments responding to both proposals in determining how to finalize
the particular elements of each rule as discussed further below. With
regard to exercising the Bureau's authority to create an escrows
exemption in general, the bulk of the comments received asserted that
the Bureau should exercise such authority but that the scope of the
proposal was too limited and would lead to reduced access to credit or
increased costs for consumers in rural areas because of increased
compliance costs for creditors. Two industry commenters suggested a
blanket exemption for community banks, but did not identify any
criteria to define a community bank. Five industry commenters suggested
the exemption should be based solely on loan-to-value ratio of the
transaction being originated, ranging from 50 percent to 80 percent,
without using any of the statutory requirements. Four trade association
commenters suggested that the exemption should be based solely on
whether the debt obligation was being kept in the creditor's portfolio.
One consumer advocacy group stated that the exemption was too broad
because, under its reading of section 1461 of the Dodd-Frank Act, the
exemption was not meant to protect access to credit but, rather, to
protect communities that need credit but cannot find credit with terms
better than the terms of higher-priced mortgage loans.
The Bureau believes that escrows generally provide meaningful
consumer protections, as consumers may not incorporate recurring costs
related to the ownership of a dwelling to their monthly mortgage
payments to anticipate the total costs associated with the dwelling.
For consumers who struggle with their monthly mortgage payments, there
is a higher probability of foreclosure as a result. Based on recent
research,\29\ consumers that do not have an escrow account in the first
year after consummation result in 0.35 percent more foreclosures per
year for first-lien, higher-priced mortgages. However, in rural and
underserved areas where there are fewer creditors that may be willing
to extend higher-priced mortgage loans, the number of providers could
be further reduced when additional costs associated with establishing
and maintaining escrow accounts are taken into account. The reduction
in the number of providers could lead to some consumers being unable to
obtain higher-priced mortgage loans, or to increase the costs of the
higher-priced mortgage loans as a result of a concentrated market with
limited competition to a point where the consumer would be unable to
repay the higher-priced mortgage loan.
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\29\ Nathan B. Anderson and Jane B. Dokko, Liquidity Problems
and Early Payment Default Among Subprime Mortgages, Finance and
Economics Discussion Series, Federal Reserve Board (2011), available
at: http://www.federalreserve.gov/pubs/feds/2011/201109/201109pap.pdf.
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There are also substantial data suggesting that the small portfolio
creditors that are most likely to have difficulty maintaining escrow
accounts (or to rely on balloon loan transactions to manage their
interest rate risks) have a significantly better track record than
larger creditors with regard to the performance of their mortgage
transactions. As discussed in more depth in the 2013 ATR Concurrent
Proposal, because small portfolio creditors retain a higher percentage
of their transactions on their own books, they have strong incentives
to engage in thorough underwriting. To minimize performance risk, small
community creditors have developed underwriting standards that differ
from those employed by larger institutions. Small creditors generally
engage in ``relationship banking,'' in which underwriting decisions
rely at least in part on qualitative information gained from personal
relationships between creditors and consumers. This qualitative
information focuses on subjective factors such as consumer character
and reliability which ``may be difficult to quantify, verify, and
communicate through the normal transmission channels of banking
organization.'' \30\ While it is not possible to disaggregate the
impact of each of the elements of the community banking model, the
combined effect is highly beneficial. Moreover, where consumers have
trouble paying their mortgage obligations, small portfolio creditors
have stronger incentives to work with the consumers to get them back on
track, to protect both the creditors' balance sheets and their
reputations in their local communities. Market-wide data demonstrate
that mortgage delinquency and charge-off rates are significantly lower
at smaller banks than at larger banks.\31\
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\30\ See Allen N. Berger and Gregory F. Udell, Small Business
Credit Availability and Relationship Lending: The Importance of Bank
Organizational Structure, Economic Journal (2002).
\31\ See 2013 ATR Concurrent Proposal; FDIC, Community Banking
Study, December 2012, available at: http://www.fdic.gov/regulations/resources/cbi/report/cbi-full.pdf.
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The Bureau believes that Congress carefully weighed these
considerations in authorizing the Bureau to establish an exemption in
TILA section 129D(c) to ensure access to credit in rural and
underserved areas where consumers may be able to obtain credit only
from community banks that cannot maintain escrow accounts on a cost-
effective basis. Thus, the Bureau concludes that exercising its
authority is appropriate, but also that the exemption should implement
the statutory criteria to ensure it effectuates Congress's intent.
Accordingly, as discussed in more detail below, the Bureau is adopting
Sec. 1026.35(b)(2)(iii) largely as proposed, but with certain changes
described below, to implement TILA section 129D(c).
In particular, the Bureau has concluded that it is appropriate to
make the specific creditor qualifications much more consistent between
the balloon-payment qualified mortgage and escrow exemptions than
originally proposed by the Board.\32\ The Bureau believes that
[[Page 4736]]
this approach is justified by several considerations, including the
very similar statutory language, the similar congressional intents
underlying the two provisions, and the fact that requiring small
creditors operating predominantly in rural or underserved areas to
track overlapping but not identical sets of technical criteria for each
separate provision could create unwarranted compliance burden that
itself would frustrate the intent of the statutes. Although the Bureau
has recast and loosened some of the criteria to promote consistency,
the Bureau has carefully calibrated the changes to further the purpose
of each rulemaking. Further, the Bureau believes that any risk to
consumers from the modifications is minimal given the nature of the
small creditors' operations and in particular the fact that they are
required to hold the affected transactions in portfolio (in this final
rule's case, indirectly, by virtue of the requirement that a
transaction originated under the escrow exemption not be subject to a
forward commitment at consummation). As discussed in more detail below
and in the 2013 ATR Concurrent Proposal, which also proposes to adopt
several of the criteria to define a new type of qualified mortgage, the
creditors at issue have strong motivations to provide vigorous
underwriting and high levels of customer service to protect their
balance sheets and reputations in their local communities. This
motivation is manifest in the fact that they have demonstrably lower
credit losses on their mortgage originations than larger institutions.
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\32\ The Bureau has similarly attempted to maintain consistency
between the asset-size limit, annual originations threshold, and
requirements concerning portfolio transactions as between the final
rules that it is adopting with regard to balloon qualified mortgages
and the escrow exemption and its separate proposal to create a new
type of qualified mortgage originated and held by small portfolio
creditors. The Bureau is seeking comment in that proposal on these
elements and on whether other adjustments are appropriate to the
existing rules to maintain continuity and reduce compliance burden.
See the 2013 ATR Concurrent Proposal.
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For the foregoing reasons, the Bureau is adopting Sec.
1026.35(b)(2)(iii) to implement TILA section 129D(c) by providing that
a transaction is exempt from the escrow account requirement otherwise
applicable to a higher-priced mortgage loan if the creditor: (1) In the
preceding calendar year made more than 50 percent of its first-lien
covered transactions in counties designated by the Bureau as ``rural''
or ``underserved''; (2) together with all affiliates extended 500 or
fewer first-lien covered transactions in the preceding calendar year;
and (3) has total assets that are less than $2 billion, adjusted
annually for inflation. The final rule also creates greater parallelism
with the balloon qualified mortgage provision with regard to the
requirement that the affected transactions be held in portfolio by
requiring in both rules that the transactions not be subject to a
``forward commitment'' agreement at the time of consummation. These
qualifications and the other requirements under the final rule are
discussed in more detail below.
35(b)(2)(iii)(A)
``Operates Predominantly in Rural or Underserved Areas''
Under TILA section 129D(c)(1), to qualify for the exemption, a
creditor must ``operate predominantly in rural or underserved areas.''
The Board's 2011 Escrows Proposal would have required a creditor to
have made during the preceding calendar year more than 50 percent of
its first-lien higher-priced mortgage loans in ``rural or underserved''
counties. One industry commenter agreed with the Board's proposal.
Numerous commenters to the Board's proposal in this rule and the
Board's 2011 ATR Proposal objected to the proposed definition of
``rural or undeserved'' as discussed below, but commenters did not
generally dispute the definition of ``predominantly'' as meaning more
than 50 percent of originations of its first-lien higher-priced
mortgage loans in rural or underserved counties.
The Bureau believes Congress enacted the exemption in TILA section
129D(c)(1) to ensure access to credit in rural and underserved areas
where consumers may be able to obtain credit only from community banks
or other small creditors serving those areas. The ``operates
predominantly in'' requirement serves to limit the exemption to these
institutions. To remove this portion of the qualifications of the
creditor would be to circumvent Congress's stated requirement that the
exemption was intended for creditors operating predominantly in rural
or underserved areas. The Bureau believes that ``predominantly''
indicates a portion greater than half, hence the regulatory requirement
of more than 50 percent.
Upon further analysis of the differences in the proposals for the
escrows exemption and the balloon-payment qualified mortgage
provisions, however, the Bureau believes that further harmonization
between the two sets of requirements is warranted. The Board's 2011
Escrows Proposal would have required creditors to track first-lien
higher-priced mortgage loans by county, while the qualified mortgage
proposal would have required creditors to track balloon-payment
mortgages. Given that the underlying statutory language regarding
``operates predominantly'' is the same in each instance and that
tracking each type of mortgage separately would increase administrative
burden, the Bureau believes it is appropriate to base the threshold for
both rules on the distribution of all first-lien ``covered
transactions'' as defined in Sec. 1026.43(b)(1). As provided in the
2013 ATR Final Rule, a covered transaction is defined in Sec.
1026.43(b)(1) as a consumer credit transaction that is secured by a
dwelling, as defined in Sec. 1026.2(a)(19), other than a transaction
exempt from coverage under Sec. 1026.43(a). The Bureau believes that
counting only first-lien transactions will facilitate compliance, as
well as promote consistency in applying to creditors the two exemptions
under both rulemakings, since both exemptions relate to first-lien
transactions. Balloon-payment mortgages that will meet the
qualifications of the balloon-payment qualified mortgage exemption will
be first-lien covered transactions, as having subordinate financing
along with the balloon-payment mortgage would be rare since it further
constrains a consumers' ability to build equity in the property and to
refinance the balloon-payment mortgage when it becomes due.
Subordinate-lien, higher-priced mortgage loans are not required to
establish escrow accounts, as only first-lien higher priced mortgage
loans must establish escrow accounts under Sec. 1026.35(b)(1).
Accordingly, Sec. 1026.35(b)(2)(iii)(A) provides that, during the
preceding calendar year, a creditor must have made more than 50 percent
of its total first-lien covered transactions in counties designated
``rural'' or ``underserved'' as defined by Sec. 1026.35(b)(2)(iv),
discussed below. Comment 35(b)(2)(iii)-1.i states that the Bureau
publishes annually a list of counties that qualify as rural or
underserved.
35(b)(2)(iii)(B)
Total Annual Mortgage Originations
TILA section 129D(c)(3) provides that, to qualify for the
exemption, a creditor together with its affiliates must have total
annual mortgage originations that do not exceed a limit set by the
Bureau. The Board's proposed Sec. 226.45(b)(2)(iii)(B) required that
the creditor and its affiliates, during either of the preceding two
calendar years, have originated and retained servicing rights to 100 or
fewer mortgage obligations secured by a first lien on real property or
a dwelling. Although the Dodd-Frank Act requirement to establish escrow
accounts applies only
[[Page 4737]]
to higher-priced mortgage loans that are secured by first liens, the
Board reasoned that it was appropriate to base the threshold on all
first-lien originations because creditors are free to establish escrow
accounts for all of their first-lien mortgages voluntarily to achieve
the scale necessary to escrow cost-effectively. The Board estimated
that a minimum servicing portfolio size of 500 is necessary to escrow
cost-effectively, and assumed that the average life expectancy of a
mortgage loan is about five years. Based on this reasoning, the Board
believed that creditors would no longer need the benefit of the
exemption if they originated and serviced more than 100 first-lien
transactions per year. In contrast, the Board did not propose a
specific annual originations threshold in connection with the balloon-
payment qualified mortgages, but rather sought comment on whether to
adopt a threshold based on the number of transactions or dollar volume
and what numeric threshold would be appropriate.
In connection with the Board's 2011 Escrows Proposal, trade
association and industry commenters generally said that the proposed
maximum annual volume of originations would be insufficient to make the
escrow accounts cost effective for creditors. No commenters provided
information to support their suggestions for alternative thresholds or
to refute the Board's analysis that creditors can provide escrow
accounts cost-effectively when they annually originate and retain
servicing rights to more than 100 mortgage obligations secured by a
first lien on real property or a dwelling. Suggestions for higher
thresholds ranged from 200 to 1,000 mortgage obligations per year
originated and serviced. One consumer advocacy commenter suggested the
proposed threshold was too high because it counted only first-lien
mortgage transactions, instead of all mortgage obligations, but offered
no specific alternative amount. Two industry commenters also suggested
that the origination limit should measure only the number of higher-
priced mortgage loans originated and serviced by the creditor and its
affiliates.
In response to the Board's 2011 ATR Proposal, two trade
associations and one group of State bank regulators, argued that other
criteria, such as the asset-size limit or portfolio requirement, were
sufficient and that neither a volume nor a total annual originations
limit would be necessary. One industry trade association suggested
combining the proposed alternatives and permitting creditors to elect
under which limit they would operate. Other trade group and industry
commenters indicated that the total annual originations limit would be
preferable because of the varying dollar amount of transactions
originated, which would constrain the number of consumers with limited
credit options who could obtain balloon-payment mortgages in rural or
underserved areas. Four trade group and industry commenters suggested a
range for the total annual originations limit of 250 to 1,000
transactions.
The Bureau believes that the requirement of TILA section 129D(c)(2)
reflects a recognition that larger creditors have the systems
capability and operational scale to establish cost-efficient escrow
accounts. Similarly, the Bureau believes the requirement of TILA
section 129C(b)(2)(E)(iv)(II) reflects Congress's recognition that
larger creditors who operate in rural or underserved areas should be
able to make credit available without resorting to balloon-payment
mortgages. In light of the strong concerns expressed in both
rulemakings about the potential negative impacts on small creditors in
rural and underserved areas, the Bureau conducted further analysis to
try to determine the most appropriate thresholds, although it was
significantly constrained by the fact that data are limited with regard
to mortgage originations in rural and underserved areas generally and
in particular with regard to originations of balloon-payment mortgages.
The Bureau started with the premise that it would be preferable to
use the same annual originations threshold in both rules to reflect the
consistent language in both statutory provisions focusing on total
annual mortgage loan originations, to facilitate compliance by not
requiring institutions to track multiple metrics and to promote
consistent application of the two exemptions. This approach requires
significant reconciliation between the two proposals, however, because
the escrows proposal focused specifically on transactions originated
and serviced to gauge creditors' ability to maintain escrow accounts
over time, while retention of servicing is not directly relevant to the
balloon-payment qualified mortgage. However, to the extent that
creditors chose to offer balloon-payment mortgages to manage their
interest rate risk without having to undertake the compliance burdens
involved in administering adjustable rate mortgages over time, the
Bureau believes that both provisions are focused in a broad sense on
accommodating creditors whose systems constraints might otherwise cause
them to exit the market.
With this in mind, the Bureau ultimately decided to adopt a
threshold of 500 or fewer annual originations of first-lien
transactions for both rules. The Bureau believes that this threshold
will provide greater flexibility and reduce concerns that the specific
threshold that had been proposed in the Board's 2011 Escrows Proposal
(100 higher-priced mortgage loans originated and serviced annually in
either of the preceding two years) would reduce access to credit by
excluding creditors that need special accommodations in light of their
capacity constraints. At the same time, the increase is not as dramatic
as it may first appear because the Bureau's analysis of HMDA data
suggests that even small creditors are likely to sell a significant
number of their originations in the secondary market. Assuming that
most mortgage transactions that are retained in portfolio are also
serviced in house, the Bureau estimates that a creditor originating no
more than 500 first-lien transactions per year would maintain and
service a portfolio of about 670 mortgage obligations over time,
assuming an average obligation life expectancy of five years.\33\ Thus,
the higher threshold will help to ensure that creditors that are
subject to the escrow requirement do in fact maintain portfolios of
sufficient size to maintain the escrow accounts on a cost efficient
basis over time, in the event that the Board's estimate of a minimum
portfolio of 500 transactions was too low. However, the Bureau believes
that the 500 annual originations threshold in combination with the
other requirements will still ensure that the balloon-payment qualified
mortgage and escrow exemptions are available only to small creditors
that focus primarily on a relationship-lending model and face
significant systems constraints.
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\33\ A review of 2011 HMDA data shows creditors that otherwise
meet the criteria of Sec. 1026.43(f)(1)(vi) and originate between
200 and 500 or fewer first-lien covered transactions per year
average 134 transactions per year retained in portfolio. Over a five
year period, the total portfolio for these creditors would average
670 mortgage obligations.
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The Bureau also believes that it is appropriate to focus the annual
originations threshold on all first-lien originations. Given that
escrow accounts are typically not maintained for transactions secured
by subordinate liens, the Bureau does not believe that it makes sense
to count such transactions toward the threshold because they would not
contribute to a creditor's ability to achieve cost-efficiency. At the
same time, the Bureau believes it is appropriate to count all
[[Page 4738]]
first-lien transactions toward the threshold because creditors can
voluntarily establish escrow accounts for such transactions to increase
the cost-effectiveness of their program even though the mandatory
account requirements under the Dodd-Frank Act apply only to first-lien,
higher-priced mortgage loans. Focusing on all first-lien originations
also provides a metric that is useful for gauging the relative scale of
creditors' operations for purposes of the balloon-payment qualified
mortgages, while focusing solely on the number of higher-priced
mortgage loan originations would not. Accordingly, the Bureau adopts
Sec. 1026.35(b)(2)(iii)(B) requiring to creditor and its affiliates to
have originated 500 or fewer covered transactions secured by a first
lien.
35(b)(2)(iii)(C)
Asset-Size Threshold
TILA section 129D(c)(4) provides that, to qualify for the
exemption, a creditor must meet any asset-size threshold established by
the Bureau. The Board's 2011 Escrows Proposal did not establish an
asset-size threshold but did request comment on whether one should be
added and, if so, what threshold level would be appropriate. In
contrast, the Board proposed a $2 billion threshold for the balloon
qualified mortgage exception. This number was based on the limited data
available to the Board at the time of the proposal. Based on that
limited information, the Board reasoned that none of the entities it
identified as operating predominantly in rural or underserved areas had
total assets as of the end of 2009 greater than $2 billion, and
therefore, the limitation should be set at $2 billion. The Board
expressly proposed setting the asset-size threshold at the highest
level currently held by any of the institutions that appear to be
smaller institutions that served areas with otherwise limited credit
options.
In response to the Board's 2011 Escrows Proposal, a group of State
bank regulators and a trade association advocated including an asset-
size prerequisite in the exemption. The group of State bank regulators
suggested that the asset-size prerequisite be the sole requirement to
obtain the exemption but did not propose a specific dollar threshold.
The industry commenter suggested the asset-size be $1 billion in
assets, but did not provide a rationale for the amount.
Based on the Board's 2011 ATR Proposal, one group of State bank
regulators suggested that the asset-size threshold be included and be
the only requirement for a creditor to qualify for the balloon-mortgage
qualified mortgage exemption. Two trade association commenters
suggested that a $2 billion asset-size threshold was appropriate, with
one also suggesting that the asset-size threshold be the only
requirement for a creditor to qualify for the balloon-payment qualified
mortgage exemption. One industry commenter suggested that the asset-
size threshold be $10 billion.
For reasons discussed above, the Bureau is adopting an annual
originations limit as contemplated by the statute. Given that
limitation, restricting the asset size of institutions that can claim
the exemption is of limited importance. Nonetheless, the Bureau
believes that an asset-size limitation is still helpful because very
large institutions should have sufficient resources to adapt their
systems to make mortgages without a balloon payment and to establish
and maintain escrow accounts even if the scale of their mortgage
operations is relatively modest. A very large institution with a
relatively modest mortgage operation also does not have the same type
of reputational and balance-sheet incentives to maintain the same kind
of relationship-banking model as a smaller community-based creditor. An
asset-size limitation can guard against circumvention of the rule if a
larger institution were to elect to enter a rural area to make a
limited number of higher-priced mortgage loans or balloon-payment
mortgages. Therefore, the Bureau believes that the $2 billion asset
limitation proposed by the Board in the Board's 2011 ATR Proposal
remains an appropriate limitation and should be adopted in both this
final rule and the 2013 ATR Final Rule.\34\
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\34\ The $2 billion threshold reflects the purposes of the
exemption and the structure of the mortgage servicing industry. The
Bureau's choice of $2 billion in assets as a threshold for purposes
of TILA section 129D(c)(4) does not imply that a threshold of that
type or of that magnitude would be an appropriate way to distinguish
small firms for other purposes or in other industries.
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Accordingly, the Bureau adopts Sec. 1026.35(b)(2)(iii)(C) to
require creditors to have total assets as of the end of the preceding
calendar year that are less than $2 billion and is effectively adopting
the same threshold by cross-reference to Sec. 1026.35(b)(2)(iii) for
purposes of the balloon-payment qualified mortgage exemption in the
2013 ATR Final Rule. As provided in Sec. 1026.35(b)(2)(iii)(C), this
threshold dollar amount will adjust automatically each year based on
the year-to-year change in the average of the Consumer Price Index for
Urban Wage Earners and Clerical Workers (CPI-W), not seasonally
adjusted, for each 12-month period ending in November, with rounding to
the nearest million dollars. Comment 35(b)(2)(iii)-1.iii recites this
initial threshold and further clarifies that a creditor that had total
assets below the threshold on December 31 of the preceding year
satisfies this criterion for purposes of the exemption during the
current calendar year. The comment also notes that the Bureau will
publish notice of each year's asset threshold by amending the comment.
35(b)(2)(iii)(D)
Creditor and Affiliates Do Not Maintain Escrows
As adopted by section 1461 of the Dodd-Frank Act, TILA section
129D(c)(4) provides that, to qualify for the exemption, a creditor must
meet any other criteria established by the Bureau consistent with the
provisions of TILA. The Board's proposed Sec. 226.45(b)(2)(iii)(C)
would have required that, to obtain the exemption, the creditor and its
affiliates not maintain an escrow account for any mortgage they
currently service through at least such mortgage obligation's second
installment due date. The Board used the second installment due date as
a cutoff point because it recognized that a creditor may sometimes hold
a mortgage obligation for a short period after consummation to take
steps necessary before transferring and assigning the mortgage debt
obligation to the intended investor. The Board recognized that the
process of transferring and assigning the mortgage obligation could
extend beyond the mortgage obligation's first payment due date,
especially when the first payment is due shortly after consummation.
The Board believed this additional condition was necessary to
effectuate the purpose of the exemption. The Board reasoned that, if a
creditor already establishes and maintains escrow accounts, it has the
capacity to escrow and therefore has no need for the exemption.
Moreover, the Board concluded that a creditor's capacity to escrow
should reflect not only its own activities but those of any affiliate
because it assumed that a creditor could rely on its affiliate to help
meet the escrow requirement. The Board sought comment, however, on
three aspects: first, whether affiliates' capacities to escrow should
be considered; second, whether the second payment due date is the
appropriate cutoff point for whether a creditor has established an
escrow account for purposes of the exemption; and third, whether the
proposal should allow some de minimis number of
[[Page 4739]]
mortgage obligations for which escrows are maintained and, if so, what
that number should be.
Six trade association commenters, five industry commenters and a
Federal agency submitted comments noting that many creditors had only
begun to establish escrow accounts for mortgage transactions after the
Board adopted the 2008 HOEPA Final Rule, which took effect for most
transactions in April 2010. Many of the same commenters argued that it
would be unfair to deny the exemption in TILA section 129D(c) to those
creditors that established escrow accounts only to comply with the
current escrow requirements. Two trade association commenters and one
industry commenter suggested a de minimis number of mortgage
obligations ranging from 10 to 50 mortgage obligations to address the
exclusion of creditors currently escrowing that would otherwise qualify
for the exemption. In addition, one industry commenter suggested that a
creditor that establishes escrow accounts for distressed mortgage
obligations should still be eligible for the exemption, as these
creditors are doing so as an accommodation to the consumer to attempt
to avoid foreclosure. No comments were received as to whether the
second payment due date is the appropriate cutoff point for whether a
creditor has established an escrow account for purposes of the
exemption.
The Bureau is adopting the Board's proposal in Sec.
1026.35(b)(2)(iii)(D), with the addition of two exceptions based on
comments received. The Bureau agrees with the Board generally that
creditors that currently provide escrow accounts can afford to
establish and maintain escrow accounts for higher-priced mortgage
loans. Thus, to qualify for the exemption, a creditor and its
affiliates must not maintain escrow accounts for any extensions of
consumer credit secured by real property or a dwelling that the
creditor, or its affiliates, currently services through at least the
second installment due date. However, the Bureau agrees with commenters
that those creditors that would otherwise qualify for the exemption but
for their compliance with the current regulation, and creditors that
establish escrow accounts as an accommodation to distressed consumers,
should still be able to qualify for the exemption in TILA section
129D(c). In particular, the Bureau notes that Congress's decision to
codify and expand upon the escrow requirement from the 2008 HOEPA Final
Rule while simultaneously providing authority to exempt certain
mortgage transactions by creditors operating predominantly in rural or
underserved areas suggests that Congress intended to provide relief to
creditors that were struggling to meet the existing requirements.
Accordingly, the Bureau is adopting Sec. 1026.35(b)(2)(iii)(D)(1) and
(2) to provide exceptions to the exemption's general prerequisite that
a creditor and its affiliates not maintain an escrow account.
Comment 35(b)(2)(iii)-1.iv clarifies that the limitation excluding
creditors and their affiliates who currently maintain escrow accounts
for other mortgage obligations they service applies only to mortgage
obligations serviced at the time a transaction purporting to invoke the
escrows exemption is consummated. Thus, the exemption still could apply
even if the creditor or its affiliates previously established and
maintained escrows for mortgage obligations it no longer services.
However, if a creditor or an affiliate escrows for mortgage obligations
currently serviced, those institutions are ineligible to invoke the
escrows exemption until the escrow accounts are no longer maintained.
The comment also clarifies that a creditor or its affiliate
``maintains'' an escrow account for a mortgage obligation only if it
services the mortgage obligation at least through the due date of the
second periodic payment under the terms of the legal obligation.
Comment 35(b)(2)(iii)(D)(1)-1 clarifies that escrow accounts
created by a creditor and its affiliates established between April 1,
2010, and June 1, 2013 are not counted for purposes of Sec.
1026.35(b)(2)(iii)(D). In addition, the comment clarifies that
creditors that continue to maintain escrow accounts that were
established between April 1, 2010, and June 1, 2013 until the
termination of those escrow accounts will still qualify for the
exemption, so long as they or their affiliates do not establish escrow
accounts for other mortgage obligations that the creditor and its
affiliates service after June 1, 2013 and they otherwise qualify under
Sec. 1026.35(b)(2)(iii). Comment 35(b)(2)(iii)(D)(2)-1 clarifies that
escrow accounts established after consummation for distressed consumers
are not considered to be maintaining escrow accounts for purposes of
Sec. 1026.35(b)(2)(iii)(D), although creditors that establish escrow
accounts after consummation as a regular business practice are
considered to be maintaining escrow accounts and cannot qualify for the
exception under Sec. 1026.35(b)(2)(iii).
35(b)(2)(iv)
``Rural'' and ``Underserved'' Defined
As adopted in the Dodd-Frank Act, TILA section 129D(c)(1) requires,
among other criteria for the escrows exemption, that the creditor
operate predominantly in ``rural'' and ``underserved'' areas, but does
not define either term. As discussed above, the Board proposed separate
definitions for ``rural'' and ``underserved,'' respectively, in both
the Board's 2011 Escrows Proposal and the 2011 ATR Proposal, and the
definitions for the two terms were similar across the two proposals.
Commenters on the two proposals addressed the specific definitions
themselves but not the necessity of creating a definition for ``rural''
that is separate from ``underserved.'' The Bureau is adopting the
Board's approach in Sec. 1026.35(b)(2)(iv) which establishes a
definition of rural that is separate from underserved. Thus, creditors'
activity in either type of area will count toward their eligibility for
the escrows exemption and for making balloon-payment qualified
mortgages.
``Rural.'' As described above, the Board's proposed definition of
rural for purposes of both the balloon-payment qualified mortgage and
escrows exemptions would have relied upon the ERS's ``urban influence
codes'' (UICs), which in turn are based on the definitions of
``metropolitan statistical area'' and ``micropolitan statistical
area.'' \35\ The Board's proposal would have limited the definition of
rural to certain ``non-core'' counties, which are areas outside of any
metropolitan or micropolitan area that are not adjacent to a
metropolitan area with at least one million residents or to a
micropolitan area with a town of at least 2,500 residents. This
definition corresponded to UICs 7, 10, 11, and 12. The counties that
would have been covered under the Board's proposed definition contain
2.3 percent of the United States population under the 2000 census. The
Board believed this approach limited the definition of ``rural'' to
those properties most likely to have only limited sources of mortgage
credit because of their remoteness from urban centers and their
resources. However, the Board sought comment on all aspects of this
approach to defining rural, including whether the definition should be
broader or
[[Page 4740]]
narrower or based on information other than UIC codes.
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\35\ The ERS places counties into twelve separately defined UICs
depending on the size of the largest city or town in the county or
in adjacent counties. Descriptions of UICs can be found on the ERS
Web site at http://www.ers.usda.gov/data-products/urban-influence-codes/documentation.aspx.
---------------------------------------------------------------------------
Many commenters to both the 2011 ATR Proposal and the 2011 Escrows
Proposal, including more than a dozen trade group commenters, several
individual industry commenters, one association of State banking
regulators, and a United States Senator, stated that the rural
definition was too narrow. The trade association and industry
commenters, and the group of State banking regulators, had various
proposals to broaden the definition, from the addition of other UICs
and a combination of county population and asset size to the adoption
of other regulatory definitions of ``rural,'' such as those governing
credit unions. The comment from a United States Senator suggested using
the eligibility of a property to secure a single-family mortgage under
the USDA's Rural Housing Loan program as the definition of a rural
property.
The Bureau agrees that a broader definition of ``rural'' is
appropriate to ensure access to credit with regard to both the escrows
and balloon-payment qualified mortgage exemptions. In particular, the
Bureau believes that all ``non-core'' counties should be encompassed in
the definition of rural, including counties adjacent to a metropolitan
area of at least one million residents or a county with a town of at
least 2,500 residents (i.e., counties with a UIC of 4, 6, or 9 in
addition to the counties with the UICs included in the Board's
definition). The Bureau also believes that micropolitan areas that are
not adjacent to a metropolitan area should be included within the
definition of rural (i.e., counties with a UIC of 8), as these areas
are not located adjacent to metropolitan areas that are served by many
creditors. These counties have significantly fewer creditors
originating higher-priced mortgage loans and balloon-payment mortgages
than other counties.\36\ Including these counties within the definition
of rural would result in 9.7 percent of the U.S. population being
located within rural areas. Under this definition, only counties in
metropolitan areas or in micropolitan areas adjacent to metropolitan
areas would be excluded from the definition of rural.
---------------------------------------------------------------------------
\36\ A review of data from HMDA reporters indicates that there
were 700 creditors in 2011 that otherwise meet the requirements of
new Sec. 1026.35(b)(2)(iii), of which 391 originate higher-priced
mortgage loans in counties that meet the definition of rural,
compared to 2,110 creditors that otherwise meet the requirements of
Sec. 1026.35(b)(2)(iii) that originate balloon-payment mortgages in
counties that would not be rural. The 391 creditors originated
12,921 higher-priced mortgage loans, representing 30 percent of
their 43,359 total mortgage loan originations. A review of data from
credit unions indicates that there were 830 creditors in 2011 that
otherwise meet the requirements of Sec. 1026.35(b)(2)(iii), of
which 415 originate balloon-payment and hybrid mortgages in counties
that meet the definition of rural, compared to 3,551 creditors that
otherwise meet the requirements of Sec. 1026.35(b)(2)(iii) that
originate balloon-payment mortgages in counties that would not be
rural. The 415 creditors originated 4,980 balloon-payment mortgage
originations, representing 20 percent of their 24,968 total mortgage
loan originations.
---------------------------------------------------------------------------
The Bureau also considered adopting the definition of rural used to
determine the eligibility of a property to secure a single-family
mortgage under the USDA's Rural Housing Loan program. This definition
subdivides counties into rural and non-rural areas based upon whether
certain areas are open country, or contain a town, village, city or
place, with certain population criteria, and excludes areas associated
with an urban area. Given the size of some counties, particularly in
western States, this approach may provide a more nuanced measure of
access to credit in some areas than a county-by-county metric. However,
use of the Rural Housing Loan metrics would incorporate such
significant portions of metropolitan and micropolitan counties that 37
percent of the United States population would be within areas defined
as rural. Based on a review of HMDA data and the location of mortgage
transactions originated by HMDA reporting entities, the average number
of creditors in the areas that would meet the USDA's Rural Housing Loan
program definition of rural is ten. The Bureau believes that a
wholesale adoption of the Rural Housing Loan definitions would
therefore expand the definition of rural beyond the intent of the
escrow and balloon-payment qualified mortgage exemptions under sections
1412 and 1461 of the Dodd-Frank Act by incorporating areas in which
there is robust access to credit.
Accordingly, the final rule implements Sec. 1026.35(b)(2)(iv)(A)
to provide that a county is rural if it is neither in a metropolitan
statistical area, nor in a micropolitan statistical area that is
adjacent to a metropolitan statistical area. The Bureau intends to
continue studying over time the possible selective use of the Rural
Housing Loan program definitions and tools provided on the USDA Web
site to determine whether a particular property is located within a
``rural'' area. For purposes of initial implementation, however, the
Bureau believes that defining ``rural'' to include more UIC categories
creates an appropriate balance to preserve access to credit and create
a system that is easy for creditors to implement.
``Underserved.'' The Board's proposed Sec. 226.45(b)(2)(iv)(B)
would have defined a county as ``underserved'' during a calendar year
if no more than two creditors extend credit secured by a first lien on
real property or a dwelling five or more times in that county. The
definition was based on the Board's judgment that, where no more than
two creditors are significantly active, the inability of one creditor
to offer a higher-priced mortgage loan would be detrimental to
consumers who would have limited credit options because only one
creditor, or no creditors, would be left to provide the higher-priced
mortgage loan. Essentially, a consumer who could only qualify for a
higher-priced mortgage loan would be required to obtain credit from the
remaining creditor in that area or would be left with no credit options
at all. Most of the same commenters that stated that the proposed
definition of rural was too narrow, as discussed above, also stated
that this definition of underserved was too narrow. The commenters
proposed various different standards, including standards that
considered the extent to which the property was in a rural area, as an
alternate definition of underserved.
The Bureau agrees with the Board that the purpose of the exemption
is to permit creditors to continue to offer credit to consumers, rather
than to refuse to make higher-priced mortgage loans if such creditors'
withdrawal would significantly limit consumers' ability to obtain
mortgage credit. In light of this rationale, the Bureau believes that
``underserved'' should be implemented in a way that protects consumers
from losing meaningful access to mortgage credit and that it is
appropriate to focus the definition on identifying areas where the
withdrawal of a creditor from the market could leave no meaningful
competition for consumers' mortgage business. The Bureau notes that the
final rule's expanded definition of ``rural,'' as discussed above, will
also address concerns about access to credit in many areas.
Accordingly, the Bureau is adopting Sec. 1026.35(b)(2)(iv)(B) to
define a property as ``underserved'' if it is located in a county where
no more than two creditors extend covered transactions secured by a
first lien five or more times in that county during a calendar year,
substantially consistent with the Board's proposal. As adopted, Sec.
1026.35(b)(2)(iv)(B) also expressly states that the numbers of
creditors and of their originations in counties for purposes of this
definition is as reported in HMDA data for the year in question.
[[Page 4741]]
The Bureau adopted this definition based on HMDA data to provide an
objective, easily administered rule and one that is consistent with the
purpose of preserving credit access in underserved areas. Given that
many smaller creditors may not be subject to HMDA reporting
requirements, the Bureau recognizes that many counties may be
underserved under the definition being adopted, because it is based on
HMDA data, yet additional information (if it were available) could
reveal that more than two creditors are significantly active in such
counties. The Bureau may examine further whether a refinement to the
underserved definition is warranted.
Commentary guidance on ``rural'' and ``underserved'' definitions.
Comment 35(b)(2)(iv)-1 clarifies that the Bureau will annually update
on its Web site a list of counties deemed rural or underserved under
the definitions of rural and underserved in Sec. 1026.35(b)(2)(iv). It
also clarifies that the definition of rural corresponds to UICs 4, 6,
7, 8, 9, 10, 11, and 12, as determined by the Economic Research Service
of the USDA. It further clarifies that the definition of underserved
counties is based on HMDA data. Finally, the comment provides that the
Bureau also publishes a list of only those counties that are rural but
not also underserved, to facilitate compliance with Sec.
1026.35(c).\37\ As this final rule takes effect on June 1, 2013, the
Bureau expects to publish lists applicable for the current year within
approximately four to six weeks after publication of this final rule,
but in any event before this final rule takes effect.
---------------------------------------------------------------------------
\37\ Section 1026.35(c) is being adopted separately by the
Bureau jointly with other Federal agencies, to implement the new
appraisal requirements in TILA section 129H, in the 2013 Interagency
Appraisals Final Rule, as discussed in part III.C, above. That new
section provides an exemption for creditors operating in rural, but
not underserved, areas. Consequently, the single, combined list of
all counties that are either rural or underserved that the Bureau
will publish annually for purposes of the exemption from this final
rule's escrow requirement is inadequate for the analogous purpose
under the new appraisal requirements in Sec. 1026.35(c).
---------------------------------------------------------------------------
35(b)(2)(v)
As established by the Dodd-Frank Act, TILA section 129D(c)(3)
requires that the exemption from the escrow requirements apply only
where a creditor ``retains its mortgage loan originations in
portfolio'' and meets the other statutory requirements. Because the
escrow requirements must be applied at the time that a transaction is
consummated, while qualified mortgage status may continue for the life
of the mortgage obligation, the Board did not propose to implement this
requirement consistently with the 2011 ATR Proposal. The Board's
proposed Sec. 226.45(b)(2)(v) would have provided that the escrow
exemption is not available for certain transactions that, at
consummation, are subject to ``forward commitments.'' Forward
commitments are agreements entered into at or before consummation of a
transaction under which a purchaser is committed to acquire the
mortgage obligation from the creditor after consummation. In addition,
the Board included a proposed comment to Sec. 226.45(b)(2)(v) which
would have clarified that the forward commitment provision would have
applied whether the forward commitment refers to the specific
transaction or the higher-priced mortgage loan meets prescribed
criteria of the forward commitment in order to address a potential
method to avoid compliance. The Board's 2011 ATR Proposal, in contrast,
proposed two alternatives for comment, either prohibiting a creditor to
qualify if it has sold any balloon-payment qualified mortgages at any
time or prohibiting a creditor to qualify if it has sold any balloon-
payment qualified mortgages in the current or prior calendar year.
The Board considered requiring that a transaction be held in
portfolio after consummation as a condition of the escrows exemption,
but concluded that this approach would have raised operational
problems. Whether a mortgage obligation is held in portfolio can be
determined only after consummation, but a creditor making a higher-
priced mortgage loan must know by consummation whether it is subject to
the escrow requirement. The Board expressed concern that requiring an
escrow account to be established sometime after consummation if the
creditor in fact sells the mortgage obligation could put a significant
burden on consumers, who may not have the money available to make a
significant advance payment. In contrast, the Board reasoned that the
forward commitment test would be easy to apply at consummation, and
would be unlikely to be circumvented by small creditors because they
would be reluctant to extend credit for transactions they do not intend
to keep in portfolio unless they have the assurance of a committed
buyer before extending the credit. Thus, proposed Sec. 226.45(b)(2)(v)
would have served as a means of indirectly limiting the exemption to
mortgage obligations that are to be held in portfolio. The Board sought
comment, however, on whether institutions could easily evade the escrow
requirement by making higher-priced mortgage loans without a forward
commitment in place and thereafter selling them to non-exempt
purchasers and how to address this possibility without relying on post-
consummation events.
Among the commenters, there was a divergence of opinion on how this
provision would work in practice. One trade association commenter
stated that the forward commitment requirement would prevent creditors
from selling portfolio mortgage obligations in the future. This appears
to be a misreading of the Board's proposal, as it would not have
restricted the sale of higher-priced mortgage loans. The Board's
proposed Sec. 226.45(b)(2)(v) instead merely provided that, so long as
the higher-priced mortgage loan was not subject to a forward commitment
at the time of consummation, the higher-priced mortgage loan could
later be sold on the secondary market without requiring an escrow
account to be established at that time. One consumer advocacy group,
concerned about the possibility that creditors would use the provision
to skirt the escrow requirements, suggested a blanket rule that higher-
priced mortgage loans that are exempt must be maintained in the
portfolio of the creditor or, alternatively, that upon sale secondary
market purchasers be required to establish escrow accounts for such
mortgage obligations.
After reviewing the comments received, the Bureau believes that the
Board's proposal is an appropriate method to implement the requirements
of TILA section 129D(c)(3), as both creditor and consumer benefit if an
escrow account is established at consummation of the transaction,
rather than months or years later. Indeed, allowing a consumer to avoid
having to make a single large lump-sum payment after consummation is
part of the basic purpose of establishing an escrow account.
Accordingly, the Bureau is following the approach in the Board's
proposal by adopting Sec. 1026.35(b)(2)(v) to require that for a
higher-priced mortgage loan to be exempt from the requirements under
Sec. 1026.35(b)(1), the higher-priced mortgage loan must not be
subject to a forward commitment to be acquired by a creditor that does
not satisfy the conditions of Sec. 1026.35(b)(2)(iii). Comment
35(b)(2)(v)-1 clarifies that a higher-priced mortgage loan that is
subject to a forward commitment is subject to the escrow requirement
under Sec. 1026.35(b)(1), whether the forward commitment refers to the
specific transaction or the higher-priced
[[Page 4742]]
mortgage loan meets prescribed criteria of the forward commitment,
along with an example. As discussed separately in the Bureau's 2013 ATR
Final Rule, the Bureau is also adopting language in Sec. 1026.43(f) to
provide that qualified mortgage status is not available to balloon-
payment mortgages that would otherwise qualify for the exemption if the
transactions are subject to a forward commitment at the time of
consummation.
35(b)(3) Cancellation
Under TILA section 129D(d), a creditor or servicer of a higher-
priced mortgage loan must maintain an escrow account for a minimum of
five years following consummation, unless the underlying debt
obligation is terminated earlier under certain prescribed
circumstances. In addition, even after five years have elapsed, TILA
section 129D(d) provides that an escrow account shall remain in
existence unless and until the consumer is current on the obligation
and has accrued sufficient equity in the dwelling securing the consumer
credit transaction ``so as to no longer be required to maintain private
mortgage insurance.''
The Board's proposed Sec. 226.45(b)(3) would have implemented TILA
section 129D(d) by permitting cancellation of the escrow account only
upon the earlier of termination of the legal obligation or five years
after consummation, provided that at least 20 percent of the original
value of the property securing the underlying debt obligation is
unencumbered and the consumer currently is not delinquent or in default
on the underlying debt obligation. The Board modeled its proposal after
the prerequisites for cancellation of private mortgage insurance
coverage under the Homeowners Protection Act of 1998 (HPA), 12 U.S.C.
4901-4910. Under the HPA, the consumer may initiate cancellation of
private mortgage insurance (PMI) once the outstanding balance of the
mortgage obligation is first scheduled to reach 80 percent of the
original value of the property, regardless of the outstanding balance,
based on the amortization schedule or actual payments. In addition,
servicers must automatically terminate PMI for residential mortgage
transactions on the earliest date that the principal balance of the
mortgage is first scheduled to reach 78 percent of the original value
of the secured property securing the mortgage obligation, where the
consumer is current. The Board sought comment on this proposal, as well
as whether TILA section 129D(d)(1) should be interpreted narrowly to
mean that, among consumers with escrow accounts required pursuant to
proposed Sec. 226.45(b)(1), only those that in fact have private
mortgage insurance must meet the minimum equity requirement under the
HPA as a prerequisite for cancelling their escrow accounts.
Commenters generally agreed with the Board's approach of requiring
the 80 percent loan-to-value (LTV) ratio for consumer-requested PMI
termination, rather than the 78 percent LTV ratio for automatic PMI
termination. Several commenters remarked, however, that the proposed
language defining the equity cancellation requirement as ``at least 20%
of the original value of the property securing the underlying debt
obligation is unencumbered'' was confusing, if not misleading.
The final rule follows the general approach in the Board's proposal
by adopting Sec. 1026.35(b)(3) to establish the cancellation criteria
for escrow accounts as provided by TILA section 129D(d). In response to
comments, Sec. 1026.35(b)(3) contains revised language describing the
equity necessary for cancellation as an unpaid principal balance that
is less than 80 percent of the original value of the property securing
the underlying debt obligation. Additionally, the Bureau is adopting
the Board's proposed comment 45(b)(3)-1 as comment 35(b)(3)-1 to
clarify that termination of the underlying credit obligation could
include, among other things, repayment, refinancing, rescission, and
foreclosure. Comment 35(b)(3)-2 clarifies that Sec. 1026.35(b)(3) does
not affect the right or obligation of a creditor or servicer, pursuant
to the terms of the legal obligation or applicable law, to offer or
require an escrow account after the minimum period dictated by Sec.
1026.35(b)(3). Finally, comment 35(b)(3)-3 notes that the term
``original value'' in Sec. 1026.35(b)(3)(ii)(A), as adopted from
section 2(12) of the HPA, 12 U.S.C. 4901(12), means the lesser of the
sales price reflected in the sales contract for the property, if any,
or the appraised value of the property at the time the transaction was
consummated.
35(c)
The Board proposed to reserve Sec. 226.45(c) for future use in
implementing section 1471 of the Dodd- Frank Act, which creates new
TILA section 129H to establish certain appraisal requirements
applicable to ``higher-risk mortgages.'' Consistent with that proposal,
the Bureau is reserving Sec. 1026.35(c) in this final rule, thus
permitting that section to be finalized separately in the 2013
Interagency Appraisals Final Rule, discussed above. As discussed in
part III.C, the 2013 Interagency Appraisals Final Rule will take effect
subsequent to this final rule.
35(d) Evasion; Open-End Credit
The Board's proposed Sec. 226.45(d) would have paralleled existing
Sec. 1026.35(b)(4) in prohibiting a creditor from structuring a home-
secured transaction as an open-end plan to evade the requirements of
proposed Sec. 226.45 in connection with credit secured by a consumer's
principal dwelling that does not meet the definition of open-end credit
in Sec. 226.2(a)(20). No comments were received regarding the scope or
substance of this proposal. The Bureau has adopted the Board's proposal
in Sec. 1026.35(d), with certain technical edits.
VI. Effective Date
As indicated above, this final rule is effective June 1, 2013.
Thus, compliance with this final rule will be mandatory over eight
months earlier than the January 21, 2014 baseline mandatory compliance
date that the Bureau is adopting for most of the Title XIV Rulemakings,
as discussed above in part III.C. As that discussion notes, the Bureau
is carefully coordinating the implementation of the Title XIV
Rulemakings, including their effective dates. The Bureau is including
this final rule, however, among a subset of the new requirements of the
Title XIV Rulemakings that will have earlier effective dates because
they do not present significant implementation burdens for industry.
For the following reasons, the Bureau believes that this final rule
presents little or no compliance burden for creditors and therefore
that an accelerated implementation period is appropriate.
Although the Board's 2011 Escrows Proposal did not expressly
solicit comment on an appropriate implementation period, four industry
trade associations commented on this question. Of the four, one
represents financial services companies, and three represent credit
unions. All four expressed concern that sufficient time be afforded
industry to implement the new requirements when finalized, either as a
general matter or specifically because of system changes that would be
required. The trade association representing financial services
companies merely stated that sufficient time to implement the final
rule would be necessary without stating any specific period. Of the
other three trade associations, one recommended an implementation
period of one year and two recommend 6 to 12 months. The
[[Page 4743]]
Bureau notes, however, that these commenters' concerns regarding the
implementation period, particularly those relating to necessary system
changes, were largely centered around two aspects of the Board's
proposal: (1) The proposed new disclosures, and (2) the new
``transaction coverage rate'' proposed to be used instead of the annual
percentage rate for determining whether a transaction is a higher-
priced mortgage loan subject to the escrow requirements. As discussed
above in the applicable section-by-section analyses, the Bureau is not
adopting either of those aspects of the Board's proposal in this final
rule.
The final rule does not expand either the universe of transactions
to which the escrow requirements apply or the universe of creditors
subject to them. Indeed, the new exemption adopted by this final rule
for higher-priced mortgage loans extended by small creditors that
operate in rural or underserved areas represents a reduction in
compliance burden for creditors that meet the exemption's
prerequisites. Moreover, the expansion of the partial exemption for
condominiums to other property types where the governing association
has an obligation to maintain a master policy insuring all dwellings,
such as planned unit developments, also represents additional
compliance burden relief for creditors.
The only expansion of substantive requirements under this final
rule is the extension from one to five years of the minimum duration
generally applicable to escrow accounts required by the rule. The
Bureau believes that even this expansion of the protection afforded
consumers by escrow accounts will impose at most a modest increase in
compliance burden for creditors because it simply extends an otherwise
already applicable requirement by four additional years. Even this
minimal additional burden will not be encountered by any creditor until
at least one year after the rule's effective date, when cancellation of
mandatory escrow accounts otherwise first would have become permissible
for the earliest higher-priced mortgage loans to be made after this
final rule takes effect.
The Bureau believes that both the burden relief for certain small
creditors and the expanded protection for consumers of maintaining
escrows for four additional years warrant expedited implementation to
avoid any unnecessary delay of either. Such expedited implementation
especially is warranted given that, in particular where the Bureau is
not adopting the two aspects of the Board's proposal that commenters
identified as requiring significant time to implement, little or no new
compliance burden accompanies such implementation. For these reasons,
the Bureau is limiting the implementation period for this final rule by
making it effective on June 1, 2013.
VII. Dodd-Frank Act Section 1022(b)(2)
A. Overview
In developing the final rule, the Bureau has considered potential
benefits, costs, and impacts,\38\ and has consulted or offered to
consult with the prudential regulators, the U.S. Department of Housing
and Urban Development, and the Federal Trade Commission (FTC),
including with respect to consistency with any prudential, market, or
systemic objectives that may be administered by such agencies. The
Bureau is issuing this final rule to finalize the Board's 2011 Escrows
Proposal, which the Board issued prior to the transfer of rulemaking
authority to the Bureau. As the Board was not subject to Dodd-Frank Act
section 1022(b)(2)(B), the Board's 2011 Escrows Proposal did not
contain a proposed Dodd-Frank Act section 1022 analysis. The Board did
generally request comment on projected implementation and compliance
costs, although commenters provided little information in response. As
discussed above, the Bureau's final rule implements certain amendments
to the Truth in Lending Act made by the Dodd-Frank Act. Specifically,
the final rule lengthens the time for which a mandatory escrow account
established for a higher-priced mortgage loan must be maintained from a
minimum period of one year to five years. In addition, the final rule
creates an exemption from the escrow requirement for certain
transactions extended by a creditor that meets four conditions. Those
conditions are that the creditor: (1) Makes most of its first-lien
covered transactions in rural or underserved counties; (2) during the
preceding calendar year, together with its affiliates, originated 500
or fewer first-lien covered transactions; (3) has an asset size less
than $2 billion; and (4) together with its affiliates, generally does
not escrow for any mortgage obligation that it or its affiliates
currently services, except in limited circumstances. For eligible
creditors, the final rule provides the exemption from the escrow
requirements for transactions held in portfolio, but not for
transactions that, at consummation, are subject to a forward commitment
to be purchased by an investor that does not itself qualify for the
exemption.
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\38\ Section 1022(b)(2) of the Dodd-Frank Act calls for the
Bureau to consider the potential benefits and costs of a regulation
to consumers and covered persons, including the potential reduction
of access by consumers to consumer financial products and services;
the impact on depository institutions and credit unions with $10
billion or less in total assets as described in section 1026 of the
Dodd-Frank Act; and the impact on consumers in rural areas.
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The analysis below considers the benefits, costs, and impacts of
key provisions of the final rule. With respect to these provisions, the
analysis considers costs and benefits to consumers and costs and
benefits to covered persons. The analysis also considers certain
alternative provisions that were considered by the Bureau in the
development of the final rule.
Because the Bureau's final rule implements certain self-
effectuating amendments to TILA, the costs and benefits of the final
rule will arise largely from the statute and not from the final rule
that implements them. The Bureau's final rule would provide benefits
compared to allowing these TILA amendments to take effect alone,
however, by clarifying parts of the statute that call for
interpretation and using the Bureau's exemption authority to exempt
certain creditors who would otherwise be required to implement the
escrow provisions. Greater clarity on these amendments, as provided by
the final rule, should reduce the compliance burdens on covered persons
by, for example, reducing costs for attorneys and compliance officers
as well as potential costs of over-compliance and unnecessary
litigation.\39\ Exempting certain financial institutions from the
escrow requirement should reduce compliance costs and regulatory
burdens for such institutions as well as provide greater access to
credit for consumers in rural and underserved areas. The Bureau notes
that any costs that these provisions impose beyond the statute itself
are likely to be minimal.
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\39\ The Bureau notes that it is focused here on the fact that
regulatory provisions that clarify statutory provisions mitigate
certain compliance costs associated with uncertainty over what the
statutory provisions require. While it is possible that some
clarifications would put greater burdens on creditors as compared to
what the statute would ultimately be found to mandate, the Bureau
believes that the rule's clarifying provisions generally mitigate
burden.
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Section 1022 of the Dodd-Frank Act permits the Bureau to consider
the benefits, costs and impacts of the final rule solely compared the
effects of the statute taking effect without an implementing
regulation. To provide the public better information about the benefits
and costs of the statute, however, the Bureau has chosen to consider
the benefits, costs, and impacts of these major provisions of the
[[Page 4744]]
proposed rule against a pre-statutory baseline (i.e., the benefits,
costs, and impacts of the statute and the regulation combined). The
Bureau notes at the outset that there are only limited data that are
publicly available and representative of the full universe of mortgage
credit, including in particular with respect to rural and underserved
communities. Additionally, there are limited data regarding the use of
escrow accounts subsequent to the Board's 2008 HOEPA Final Rule.
B. Potential Benefits and Costs to Consumers and Covered Persons
Congress enacted sections 1461 and 1462 of the Dodd-Frank Act as
amendments to TILA. As amended, TILA requires the establishment of
escrow accounts for certain transactions, establishes minimum periods
for which such required escrow accounts must be maintained, and
requires certain disclosures relating to escrow accounts. The Bureau's
final rule implements certain of these requirements. In addition, the
amendments authorize the Board, and now the Bureau, to create certain
exemptions from the escrow requirements for transactions originated by
creditors meeting certain prescribed criteria. These amendments are
being adopted in furtherance of the Bureau's charge to prescribe
regulations to carry out the purposes of TILA, including promoting
consumers' awareness of the cost of credit and their informed use
thereof.
The Bureau has relied on a variety of data sources to analyze the
potential benefits, costs, and impacts of the final rule. However, in
some instances, the requisite data are not available or are quite
limited. Data with which to quantify the benefits of the final rule are
particularly limited. As a result, portions of this analysis rely in
part on general economic principles to provide a qualitative discussion
of the benefits, costs, and impacts of the final rule. The primary
source of data used in this analysis is HMDA.\40\ Because the latest
data available are for originations made in calendar year 2011, the
empirical analysis generally uses the 2011 market as the baseline. Data
from the fourth quarter 2011 bank and thrift Call Reports,\41\ the
fourth quarter 2011 credit union call reports from the National Credit
Union Administration (NCUA), and de-identified data from the National
Mortgage Licensing System (NMLS) Mortgage Call Reports (MCR) \42\ for
the fourth quarter of 2011 were also used to identify financial
institutions and their characteristics. The unit of observation in this
analysis is the entity: If there are multiple subsidiaries of a parent
company, then their originations are summed, and revenues are total
revenues for all subsidiaries.
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\40\ The Home Mortgage Disclosure Act (HMDA), enacted by
Congress in 1975, as implemented by the Bureau's Regulation C
requires lending institutions annually to report public loan-level
data regarding mortgage originations. For more information, see
http://www.ffiec.gov/hmda. It should be noted that not all mortgage
creditors report HMDA data. The HMDA data capture roughly 90-95
percent of lending by the Federal Housing Administration and 75-85
percent of other first-lien home loan originations, in both cases
including first liens on manufactured homes (transactions which also
are subject to the final rule). U.S. Department of Housing and Urban
Development, Office of Policy Development and Research (2011), A
Look at the FHA's Evolving Market Shares by Race and Ethnicity, U.S.
Housing Market Conditions (May), pp. 6-12, Depository institutions
(including credit unions) with assets less than $40 million (in
2011), for example, and those with branches exclusively in non-
metropolitan areas and those that make no home purchase originations
or originations refinancing a home purchase obligations secured by a
first lien on a dwelling are not required to report under HMDA.
Reporting requirements for non-depository institutions depend on
several factors, including whether the company made fewer than 100
home purchase loans or refinancings of home purchase loans, the
dollar volume of mortgage lending as share of total lending, and
whether the institution had at least five applications,
originations, or purchased loans from metropolitan areas. Robert B.
Avery, Neil Bhutta, Kenneth P. Brevoort & Glenn B. Canner, The
Mortgage Market in 2011: Highlights from the Data Reported under the
Home Mortgage Disclosure Act, 98 Fed. Res. Bull., December 2012,
n.6.
\41\ Every national bank, State member bank, and insured
nonmember bank is required by its primary Federal regulator to file
consolidated Reports of Condition and Income, also known as Call
Reports, for each quarter as of the close of business on the last
day of each calendar quarter (the report date). The specific
reporting requirements depend upon the size of the bank and whether
it has any foreign offices. For more information, see http://www2.fdic.gov/call_tfr_rpts/.
\42\ The Nationwide Mortgage Licensing System is a national
registry of non-depository financial institutions including mortgage
loan originators. Portions of the registration information are
public. The Mortgage Call Report data are reported at the
institution level and include information on the number and dollar
amount of loans originated, and the number and dollar amount of
loans brokered.
---------------------------------------------------------------------------
The estimates in this analysis are based upon data and statistical
analyses performed by the Bureau. To estimate counts and properties of
mortgages for entities that do not report under HMDA, the Bureau has
matched HMDA data to Call Report data and MCR data and has
statistically projected estimated transaction counts for those
depository institutions that do not report these data either under HMDA
or on the NCUA call report. The Bureau has projected originations of
higher-priced mortgage loans for depositories that do not report HMDA
in a similar fashion. These projections use Poisson regressions that
estimate transaction volumes as a function of an institution's total
assets, employment, mortgage holdings and geographic presence.
The discussion below describes four categories of benefits and
costs. First, the Bureau reviews the benefits and costs to consumers
whose creditors are subject to the escrow requirement. Second, the
Bureau reviews the potential benefits and costs to those consumers
whose creditors are exempt from the escrow requirements. Third, the
Bureau analyzes the benefits and costs to creditors subject to the
Bureau's escrow requirements. Fourth, the Bureau outlines the benefits
and costs to creditors exempt from the Bureau's escrow requirements.
1. Potential Costs and Benefits to Consumers of Non-Exempt Creditors
For consumers whose mortgage transactions are originated by non-
exempt creditors, the main effect of this final rule is that the
creditor generally must provide an escrow account for four additional
years, i.e., for five years instead of for one year. The Bureau
estimates that these creditors originated 217,260 first-lien higher-
priced mortgage loans in 2011. The Bureau believes that the benefits
for consumers of having mandatory escrow accounts established include:
(1) The convenience of paying one bill instead of several; (2) a
budgeting device to enable consumers not to incur a major expense
later; and (3) a lower probability of default and possible foreclosure.
Mandatory escrow accounts already must be established for higher-priced
mortgage loans pursuant to existing Regulation Z requirements adopted
in the Board's 2008 HOEPA Final Rule, but to the extent such accounts
are beneficial to consumers the extension of the accounts' minimum
durations enhances and extends those benefits.
Consumers may find it more convenient to pay one mortgage bill
instead of paying a mortgage bill, an insurance bill, and potentially
several tax bills. Consumers then can address any questions or concerns
about payment to a single company, the mortgage servicer, thus reducing
transaction costs, and having a single bill to pay reduces the
likelihood that the consumer forget to pay either the insurance or the
tax bill. The servicer effectively assumes the burden of tracking whom
to pay, how much, and when, across multiple payees. These benefits, and
all the benefits and costs listed below unless specified otherwise,
last for as long as the escrow account exists. Thus, the final rule
simply extends the duration of these benefits and costs from one year
to five. The
[[Page 4745]]
value of this benefit will vary across consumers, and there is no
current research to estimate it. An approximation may be found,
however, in a recent estimate of around $20 per month per consumer,
depending on the household's income, coming from the value of paying
the same bill for phone, cable television, and Internet services (the
``Bundle Study'').\43\
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\43\ H. Liu, P. Chintagunta, & T. Zhu, Complementarities and the
Demand for Home Broadband Internet Services, Marketing Science,
29(4), 701-720 (2010).
---------------------------------------------------------------------------
Additionally, extending the duration of the mandatory escrow period
ensures that the consumer does not face a sizable, unanticipated fee
later, for the four additional years of escrow account provision.
Recent research suggests that many consumers value the over-withholding
of personal income taxes through periodic payroll deductions and
receiving a check from the IRS in the spring despite foregoing the
interest on the overpaid taxes throughout the previous year.\44\ A
mortgage escrow account works in a similar fashion; consumers pay the
same fixed amount, sometimes interest-free, throughout the year in
return for not having to pay a large lump-sum payment in the end.
Consequently, consumers with an escrow account are much less likely to
experience potentially unexpected cost shocks associated with paying a
large property tax and/or home insurance bills, that could lead other
consumers to default on their mortgage. Based on recent research on the
value of receiving a refund check from the IRS in the spring,\45\ the
Bureau estimates that the average value of the benefit of over-
withholding resulting from the extension of the escrow period for low-
to moderate-income households is 2.65 percent of the yearly amount paid
for property taxes and insurance. The analogy is not exact because a
tax refund can be used for other purposes whereas an escrow account is
calibrated to meet only the consumer's insurance and property tax
obligations. However, the Bureau believes consumers may experience
similar benefit from this forced-savings method because they are likely
to use any forced savings from the tax refund for the most pressing
needs first, and not paying property taxes on one's dwelling can result
in foreclosure. The Bureau recognizes that any benefit may not be the
same for all consumers and that some consumers may prefer to manage
their own payments.
---------------------------------------------------------------------------
\44\ Michael A. Barr & Jane B. Dokko, Paying to Save: Tax
Withholding and Asset Allocation Among Low- and Moderate-Income
Taxpayers, Finance and Economics Discussion Series, Federal Reserve
Board (2008), available at: http://www.federalreserve.gov/pubs/feds/2008/200811/200811pap.pdf.
\45\ Id.
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Finally, the final rule may lead to a lower probability of default
(on average) resulting from the budgeting benefits of escrow accounts.
However, based on recent research,\46\ this benefit may be most
valuable in the first year after originating the mortgage and thus is
already provided by the existing escrow requirement. The Bureau
nevertheless believes that, although difficult to quantify, some
further benefit of default and foreclosure avoidance extending into the
second through fifth years exists for at least some consumers.
---------------------------------------------------------------------------
\46\ Nathan B. Anderson and Jane B. Dokko, Liquidity Problems
and Early Payment Default Among Subprime Mortgages, Finance and
Economics Discussion Series, Federal Reserve Board (2011), available
at: http://www.federalreserve.gov/pubs/feds/2011/201109/201109pap.pdf.
---------------------------------------------------------------------------
At least for some consumers, the lengthening of the minimum period
under which an escrow must be maintained may have certain costs. The
Bureau believes these costs may include (1) foregone interest; (2)
increased prices resulting from creditors passing-through their costs;
and (3) potentially less access to credit.
Under some State regulations, creditors are not required to pay
interest on consumers' funds held in escrow accounts. Therefore,
consumers may be foregoing interest on such amounts. While, on average,
consumers value the budgeting device described above, it is likely that
at least some consumers would rather invest their funds and make their
tax and insurance payments on their own. The Bureau, however, believes
that any returns on amounts that would have been foregone under the
escrow requirements are likely to be modest.
The Bureau additionally notes that the servicing costs of
maintaining an escrow account may be passed on to consumers, resulting
in a greater overall cost to consumers of effecting the proper and
timely payment of their tax and insurance obligations. The magnitude of
this pass-through should be small, however, because the marginal
increase in overall servicing costs resulting specifically from the
escrow requirement is likely to be minor compared to those overall
servicing costs. Some creditors might mistakenly allocate the fixed
costs of escrow provisions (software changes, personnel training, and
so on), to each consumer getting an escrow account, even though these
costs should not affect the creditor's profit-maximizing price. This
results in a less-profitable pricing scheme, hurting both the creditor
and the consumers.\47\
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\47\ Nabil Al-Najjar, Sandeep Baliga, & David Besanko. Market
forces meet behavioral biases: cost misallocation and irrational
pricing, RAND Journal of Economics, 39(1), 214-237 (2008), available
at: http://www.kellogg.northwestern.edu/faculty/baliga/htm/sunkcost.pdf.
---------------------------------------------------------------------------
Finally, it is possible that some creditors might consider the
additional four years for which escrow accounts must be maintained a
sufficiently high burden to exit the market for higher-priced mortgage
loans altogether. However, given that these creditors already provide
escrows for the first year of a higher-priced mortgage loan, the Bureau
believes it is unlikely that a significant number of creditors will
exit the market for this reason and that, even if a creditor exits the
market, consumers generally should be able to find other creditors. The
Bureau believes that, overall, the final rule will not materially
reduce consumers' access to consumer financial products or services.
2. Potential Costs and Benefits to Consumers of Exempt Creditors
For consumers who get a higher-priced mortgage loan from an exempt
creditor, the final rule will result in no escrow account being
required, as opposed to the creditor being required to escrow for a
year. The Bureau estimates that these creditors originated 50,468
first-lien higher-priced mortgage loans in 2011. The Bureau
acknowledges that it is likely some of these transactions were not
eligible for the exemption, because they were subject to a forward
commitment to be sold. To further its analysis, however, the Bureau
conservatively assumes that none of the transactions were subject to a
forward commitment.\48\
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\48\ While small creditors operating predominantly in rural or
underserved areas originate some higher-priced mortgage loans
subject to a forward commitment, based on HMDA 2011 the Bureau
believes that the magnitude of these transactions is small, relative
to the overall higher-priced mortgage loan market. Moreover, if the
transaction is subject to a forward commitment, then the creditor is
likely to pass-through the escrow cost to the (eventual) buyer, and
thus the creditor's cost is not going to be affected significantly.
On the other hand, for consumer benefits this is an unambiguously
conservative assumption, see below.
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The Bureau believes these consumers may benefit from less
restricted access to credit; lower prices resulting from creditors not
passing through the cost of escrowing to the consumers; and the ability
to invest their money and earn a return. As noted earlier, a small
mortgage originator operating predominantly in rural or underserved
areas may be better able to compete with incumbent originators who
escrow because it will not have to incur the
[[Page 4746]]
costs of establishing and maintaining an escrow account. This may
provide an extra incentive for small originators to enter the market,
creating greater access to credit for consumers living in rural and
underserved areas. The Bureau does not have the data to be able to
estimate the magnitude of this effect.
Additionally, the price for such consumers may be reduced as
mortgage providers would not pass the costs of providing escrows to
consumers. The magnitude of this pass-through should be small, because
firms should optimally pass through only the increase in marginal costs
that tend to be small for escrow provision, as opposed to the fixed
(overhead) costs. However, some creditors might mistakenly spread the
overhead costs of escrow provision over all consumers, resulting in
higher prices to such consumers, lower mortgage transaction volume for
the creditor, and lower creditor profit overall.
Another benefit for consumers may be the ability to invest their
money and earn a return on amounts that might, depending on State
regulations, be forgone under an escrow. While, as discussed above, on
average, consumers value the budgeting device that the escrow provides,
it is likely that at least some consumers would rather have flexibility
with regard to payment terms. The Bureau believes that any returns on
amounts that would have been foregone under the escrow requirements are
likely to be modest. The exemption allows certain creditors not to
escrow for the first year after mortgage origination, thus the
magnitude of this benefit is even smaller because the creditors would
have cancelled the escrow right after one year otherwise.
For some consumers, providing an exemption for creditors operating
in rural or underserved communities would create certain costs. These
costs include: The inconvenience of paying several bills instead of
one; the lack of a budgeting device to enable consumers not to incur a
major expense later; a higher probability of foreclosure; and the
possibility of underestimating the overall cost of maintaining their
residence.
Because the consumer must pay not only a mortgage bill, but also an
insurance bill and, potentially, several tax bills, there is a higher
probability that the consumer may forget or neglect to pay one or more
of the bills. Moreover, there may be higher transaction costs for the
consumer who no longer has a single organization to consult regarding
payments, but rather must deal with several organizations as payment
questions arise. The value of this cost will vary across consumers, and
there is no current research to estimate it. An approximation is a
recent estimate of around $20 per month per consumer, depending on the
household's income, coming from the value of paying the same bill for
phone, cable television, and Internet services as described in the
Bundle Study, noted above.
Additionally, without a budgeting device, consumers will need to
self-manage the payment of intermittent large bills. As described
above, recent research suggests that many consumers value the over-
withholding of personal income taxes through periodic payroll
deductions and receiving a check from the IRS in the spring despite
foregoing the interest on the overpaid taxes throughout the previous
year. A mortgage escrow works in a similar fashion; consumers pay the
same fixed amount, sometimes interest-free, throughout the year,
without having to pay a large lump-sum payment in the end. Based on the
recent research of the value of receiving a refund check from the IRS
in the spring, the Bureau estimates the average value of having an
escrow for low to moderate income households to be 2.65 percent of the
yearly amount paid for property taxes and insurance. The cost will not
be the same for all consumers as some consumers could find cost savings
in managing payments on their own.
However, for those consumers who do struggle with payments, there
is a higher probability of foreclosure (on average) resulting from the
lack of a budgeting device. Based on the recent research,\49\ consumers
not having an escrow account in the first year after mortgage
originations will result in 0.35 percent more foreclosures per year for
the first-lien higher-priced mortgage loans. Having an escrow account
for the first year of the mortgage obligation's term appears to be
particularly important for consumer protection considerations because
often the consumer has depleted savings as a part of the mortgage
origination process and may not have prepared adequately for the
upcoming semi-annual or annual property tax and home insurance bills.
Both of these effects, and thus the benefits of having (or the costs of
not having) an escrow account, appear to diminish after the first year.
As noted above, some consumers might be unaware of the amount of the
property tax and home insurance that they will have to pay every year.
Having an escrow illustrates to consumers exactly how much they have to
pay per month for the mortgage, property tax, and home insurance. If
consumers underestimate the cost of the property tax and the home
insurance, then some consumers will buy a house that they cannot
afford, or buy a more expensive house than they would ideally want. The
Bureau does not have the data to estimate the magnitude of this cost.
---------------------------------------------------------------------------
\49\ Nathan B. Anderson and Jane B. Dokko, Liquidity Problems
and Early Payment Default Among Subprime Mortgages, Finance and
Economics Discussion Series, Federal Reserve Board (2011), available
at: http://www.federalreserve.gov/pubs/feds/2011/201109/201109pap.pdf.
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3. Potential Costs and Benefits for Non-Exempt Creditors
For the non-exempt creditors, the main effect of the final rule is
that creditors need to provide an escrow account for four additional
years: for five years instead of for one year. The Bureau does not have
the data on how many creditors do not already provide escrow accounts
up to the fifth year after a mortgage origination. The Bureau estimates
that there are 7,434 non-exempt creditors who originated any first-lien
higher-priced mortgage loans in 2011.\50\ A median creditor in this
group originated six first-lien higher-priced mortgage loans in
2011.\51\ The Bureau notes that some creditors who might otherwise
qualify for the Bureau's exemption may decide to continue to provide
escrows for first-lien higher-priced mortgage loans. The Bureau cannot
estimate the number of these creditors, and conservatively estimates
this number to be insignificant. The benefits and costs described in
this part of the analysis would also apply to these creditors.
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\50\ Out of those, there are 3,235banks, 562 thrifts, 1,372
credit unions, and 2,265 non-depository institutions.
\51\ A median bank or thrift originated 7 first lien higher-
priced mortgage loans, a median credit union originated 3 first lien
higher-priced mortgage loans, and a median non-depository
institution originated 13 first lien higher-priced mortgage loans.
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The two main benefits for this group of creditors are: Assurance
that consumers have met their obligations; and the potential for
interest earnings in the escrow account subject to State regulations.
If consumers are late on their property taxes, the government often has
the first claim on the dwelling that secures the transaction in case of
consumer default. If consumers do not pay their home insurance
premiums, then the creditor might end up with nothing if something
happens to the dwelling that secures the transaction. Because of this
potential, many creditors currently verify whether or not the consumer
made the requisite
[[Page 4747]]
insurance premiums and tax payments every year even where the consumer
did not set up an escrow account. The final rule will allow creditors
to forego this verification process as the funds would be escrowed.
Moreover, the creditor may be able to gain returns on the money
that the consumers keep in their escrow account. Depending on the
State, the creditor might not be required to pay interest on the money
in the escrow account. The amount that the consumer is required to have
in the consumer's escrow account is generally limited to two months'
worth of property taxes and home insurance. However, some States
require a fixed interest rate to be paid on escrow accounts, resulting
in an additional cost to the creditors. This cost is higher if the
required interest rate is not updated frequently and current interest
rates are low compared to the rate set by the State.
There are startup and operational costs of providing escrow
accounts. Creditors are already required to provide the escrow account
for a year, and thus the Bureau believes that there are few startup
costs implicated by the final rule or that any startup costs are
relatively minor given that these creditors probably have already set
up a system capable of escrowing in response to the current regulation.
There are, however, operating costs implicated in maintaining an escrow
account for an additional four years. These costs vary widely with the
size of the institution and the local jurisdictions served. For the
bigger creditors, with up-to-date information technology systems, the
Bureau believes the cost of maintaining escrows for four additional
years is negligible, and that many of these creditors may already do
so. For a small creditor, that does not invest as much in technology,
and serves a jurisdiction that does not process taxes automatically,
the cost of providing the escrow account could be larger.\52\ However,
the Bureau believes that escrow accounts become cost-effective once
operations reach a certain scale, and thus even this operating cost is
relatively minor. The Board's calculation and the Bureau's subsequent
adjustments to the minimal portfolio size necessary to escrow ensure
that the non-exempt creditors with over 500 originations per year can
achieve the scale necessary for cost-efficient escrow provision.
Additionally, the creditors can outsource escrowing to servicing firms
and pass through at least some of these costs to the consumer.
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\52\ The Bureau is aware that some jurisdictions still process
taxes by hand and/or impose fees on the creditors seeking access to
the tax information, significantly adding to the burden of
establishing escrow accounts in these jurisdictions.
---------------------------------------------------------------------------
4. Potential Costs and Benefits for Exempt Creditors
For the exempt creditors, the main effect of the final rule is that
the creditor does not need to provide an escrow account at all for the
first year after mortgage origination. The Bureau estimates that there
are 2,612 exempt creditors who originated any first-lien higher-priced
mortgage loans in 2011.\53\ A median creditor in this group originated
13 first-lien higher-priced mortgage loans in 2011. A median bank or
thrift originated 13, a median credit union originated 10, and a median
non-depository institution originated 6 mortgage obligations.\54\
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\53\ Out of those, there are 2,112 banks, 141 thrifts, 355
credit unions, and 4 non-depository institutions. The Bureau does
not possess the information on whether HMDA non-reporting non-
depository institutions are rural, and conservatively assumes that
they are not.
\54\ A median bank or thrift originated 13, a median credit
union originated 10, and a median non-depository institution
originated 6 mortgage obligations.
---------------------------------------------------------------------------
The main benefit for this group of creditors is in eliminating or
greatly reducing the accounting and compliance costs of providing the
escrow accounts. It is not clear whether this saving is significant,
resulting from the fact that these creditors already provide escrows
for the first year, and thus have already undertaken the effort to set
up a system capable of escrowing. The exemption from the final rule is
likely to lead to less employee time being devoted to complying with
the regulation; however, the Bureau believes that benefit is likely to
be negligible resulting from the number of first-lien higher-priced
mortgage loans originated at a median institution.
Because the creditors in this group who currently extend higher-
priced mortgage loans have already expended the start-up costs of
providing escrows, many of these creditors might be willing to continue
providing escrows to their consumers if the ongoing costs of providing
escrows are low. For these creditors the costs and benefits are akin to
those described above for the non-exempt creditors, with the
stipulation that the benefits of providing escrows for five years
clearly outweigh the costs.
However, there are several costs associated with this group of
creditors, including: The uncertainty over whether a consumer has met
his obligations, a higher probability of foreclosure, and foregoing the
additional funds that escrows may provide. Because creditors that do
not provide escrow accounts are not certain whether consumers have paid
their property taxes and home insurance, they carry a considerable
amount of risk. As noted previously, if consumers are late on their
property taxes, the government often has the first claim on the
dwelling that secures the transaction in case of consumer default. If
consumers do not pay their home insurance premiums, then the creditor
might end up with nothing if something happens to the dwelling that
secures the transaction.
Moreover, all else being equal, these consumers have a higher
probability of defaulting. Consumers, on average, value a budgeting
device to enable consumers not to incur a major expense later. As noted
above, recent research suggests that many consumers value the over-
withholding of personal income taxes through periodic payroll
deductions and receiving a check from the IRS in the spring despite
foregoing the interest on the overpaid taxes throughout the previous
year. A mortgage escrow works in a similar fashion; consumers pay the
same fixed amount, sometimes interest-free, throughout the year,
without having to pay a large lump-sum payment in the end. As
previously noted, research suggests that consumers not having an escrow
in the first year after mortgage originations will result in 0.35
percent more foreclosures per year for first-lien higher-priced
mortgage loans.
Finally, creditors who do not escrow forego the opportunity to
invest the money in the consumers' escrow accounts. Depending on the
State, the creditor might not have to pay interest on the money in the
escrow account. The excess amount that the consumer is required to have
in the consumer's escrow account is generally limited to two months'
worth of property taxes and home insurance. However, some States
require a fixed interest rate to be paid on escrow accounts. Laws
setting rates may not be updated frequently enough, resulting in an
additional cost to creditors, especially when the interest rates are
exceptionally low.\55\
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\55\ The Bureau acknowledges that this creditor cost is also a
consumer benefit. However, as described above, the Bureau believes
the benefit per consumer is fairly modest.
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C. Impact of the Final Rule on Depository Institutions and Credit
Unions With $10 Billion or Less in Total Assets, as Described in
Section 1026
The discussion below describes certain consequences of the final
rule based on the particular characteristics of the creditor. First,
the Bureau analyzes the impact of the final rule on creditors with $10
billion or less in total assets,
[[Page 4748]]
which are subject to the Bureau's escrow requirements. Then, the Bureau
outlines the impact of the final rule on creditors with $10 billion or
less in total assets, which are exempt from the Bureau's escrow
requirements. For both of these groups the benefits, the costs, and the
median origination counts are identical to the discussion above.
For the non-exempt creditors, the main effect of the final rule is
that the creditor needs to provide an escrow account for four
additional years: For five years instead of for one year. The Bureau
estimates that there are 5,087 non-exempt creditors with $10 billion or
less in total assets, who originated any first-lien higher-priced
mortgage loans in 2011.\56\ These creditors originated 91,142 first-
lien higher-price mortgage loans in 2011. The Bureau additionally notes
that some creditors who might otherwise qualify for the Bureau's
exemption may decide to continue to provide escrows for first-lien
higher-priced mortgage loans. The Bureau cannot estimate the number of
these creditors, and conservatively estimates this number to be
insignificant. The benefits and costs described in this part of the
analysis would also apply to these creditors. The impact described
below would also apply to these creditors.
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\56\ These include 3,170 banks, 548 thrifts, and 1,369 credit
unions.
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For creditors that qualify for the new exemption for creditors that
operate predominantly in rural or underserved areas, the regulation
will allow them, post-effective date, to avoid having to comply with
both the existing requirement to establish escrow accounts for covered
higher-priced mortgage loans for at least one year and the new general
requirement to establish accounts for at least five years for new
consumer transactions if the creditors determine that it is in their
best interest to do so. A creditor in this group could voluntarily
require an escrow account for five years if they choose to, and thus
this rule does not impose any significant costs on this group of
creditors. These creditors originated 50,468 first-lien higher-priced
mortgage loans in 2011.
D. Impact of the Final Rule on Consumers in Rural Areas
The Bureau expects that for the consumers in rural areas, the costs
and benefits are largely the same as for the consumers in the not
necessarily rural areas described above. The single biggest difference
is the availability of credit; rural consumers have significantly fewer
options for getting a higher-priced mortgage loan. Even for the densest
counties included in the rural definition (UIC code 8 counties with
micropolitans), the median county has only 10 creditors making higher-
priced mortgage loans, as opposed to 16 for the least dense UIC code
not included in the rural definition (UIC 5). Given the scope of the
rural and underserved exemption, the Bureau believes that any rural
consumer can, but need not, get a mortgage transaction from an exempt
creditor as opposed to getting a mortgage transaction from a non-exempt
creditor, and that there will be sufficiently many creditors left in
any given market to ensure a proper competitive process. As a result of
the final rule, the Bureau believes that consumers in rural areas may
benefit from greater access to credit, because there may be more
competition between incumbent originators who escrow and smaller
mortgage originators who may benefit from the Bureau's exemption
requirement. Some consumers might prefer to get a mortgage with an
escrow, for all the benefits described above. However, the Bureau
conservatively estimates that all rural consumers will choose to get
their mortgages from an exempt creditor and that none of these
consumers' transactions will be subject to forward commitment.
For these consumers, the final rule will result in no escrow
account being required, as opposed to the creditor being required to
escrow for a year. The Bureau estimates that there were 50,468 first-
lien higher-priced mortgage loans originated in rural areas in 2011.
The Bureau believes these consumers may benefit from less
restricted access to credit; lower prices resulting from creditors not
passing through the cost of escrowing to the consumers; and the ability
to invest their money and earn a return. Because a small mortgage
originator operating predominantly in rural or underserved areas will
not have to incur the costs of establishing and maintaining escrow
accounts for higher-priced mortgage loans, it may be willing to keep
making such transactions where it is not willing to do so under the
current regulation. This may provide stronger incentives for small
originators to continue making higher-priced mortgage loans (or to
resume doing so where they have previously decided to stop), creating
greater access to credit for consumers living in rural and underserved
areas. The Bureau does not have the data to be able to estimate the
magnitude of this effect.
E. Consideration of Alternatives
To implement the statutory changes the Bureau considered different
definitions of rural and the size exemption, both for the asset size
and for the number of originations. As described above, the definition
of rural proposed in the Board's 2011 Escrows Proposal included
counties with USDA's urban influence codes of 7, 10, 11, and 12. Taking
into account the comments received on the proposal, the Bureau believed
this definition was too narrow to capture fully Congress's apparent
concern regarding access to credit.
In finalizing the rule the Bureau considered using an alternative
definition of rural that would have used the same definition as
provided under USDA's section 502 Rural Housing program. Under the USDA
section 502 Rural Housing definition of ``rural'', approximately 37
percent of the U.S. population lives in an area considered to be rural,
compared to approximately 10 percent according to the definition used
in the final rule, which defines rural as counties with UICs 4, 6, 7,
8, 9, 10, 11, and 12. The Bureau considered the trade-off of exempting
more creditors and thus potentially mitigating consumer access to
credit issues versus exempting fewer creditors and providing more
consumers with the consumer protections represented by escrow accounts.
The Bureau's analysis of the 2011 HMDA data showed that, even with the
definition of rural in the final rule that includes counties with codes
of 4, 6, 7, 8, 9, 10, 11, and 12, a median county in the least dense
county code that is not exempt (code 5) had 16 creditors that extended
any higher-priced mortgage loans in 2011. In light of these data, the
Bureau believes that, even if some of these creditors exit the higher-
priced mortgage loan market for lack of an exemption, there will still
be enough competition in those counties, and therefore the risk of
potential access to credit issues for consumers in these areas is
mitigated. Consequently, the Bureau believes that expanding the
definition of rural in the final rule to the USDA section 502 Rural
Housing definition would have allowed creditors to originate mortgage
obligations without the escrow protections mandated by the Congress,
while access to credit would not be significantly improved. In light of
these considerations, the Bureau believes the final rule reflects the
Bureau's judgment based upon all of the evidence it has obtained
regarding the areas included, such as the urban influence, density of
the population, and the number of higher-priced mortgage loan creditors
in the county, in how best to effectuate the purposes of the law
Congress enacted.
In addition, the Bureau considered alternative origination
thresholds. The
[[Page 4749]]
Board's proposal extended the exemption to creditors that, together
with their affiliates, originate and retain servicing rights to 100 or
fewer first-lien mortgage obligations in either of the preceding two
years. As discussed more fully above, the Board noted its belief from
the available information that the economies of scale necessary to
escrow cost-effectively, or else to satisfy the escrow requirement by
outsourcing to a sub-servicer, generally exist when a mortgage servicer
has a portfolio of at least 500 mortgage obligations. Consequently, the
Board proposed setting the cut-off at 100 or fewer first-lien mortgage
obligations originated and for which servicing rights are retained,
assuming an average of five years until an institution's mortgage
obligations are paid off. After reviewing the comments submitted by
many creditors in rural areas regarding the adverse conditions they
face, such as idiosyncratic accounting systems (including calculations
by hand) employed by some of the jurisdictions, the Bureau believes
that many such creditors may need a larger number of mortgage
obligations in portfolio to be able to provide escrow accounts cost-
effectively. The Bureau has expanded the exemption to include creditors
that, together with their affiliates, originate 500 or fewer first-lien
covered transactions. The Bureau believes that defining the limit in
terms of originated transactions, as opposed to transactions originated
and serviced, facilitates compliance by not requiring institutions to
track multiple metrics for purposes of this final rule and the 2013 ATR
Final Rule and to promote consistent application of the two exemptions.
However, this change by itself would have severely restricted the scope
of the exemption, as there are more creditors that originate and
service 100 or fewer transactions than there are creditors that simply
originate 100 or fewer.\57\ Based on 2011 HMDA data, setting the annual
originations limit at 500 ensures that 89.5% of the creditors that
originated and serviced 100 transactions are also under the 500 first-
lien origination limit.
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\57\ Consider, for example, a creditor that originates 300
mortgage obligations, but services only 80 of them.
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Because of the changes in the originations limit, the Bureau
considered whether an asset-size limit would be appropriate, to prevent
larger creditors with sophisticated information technology systems and
the capacity to escrow from taking unintended advantage of the
exemption. As noted above, in the Board's 2011 Escrows Proposal, no
asset-size limit was proposed, although the Board solicited comment on
whether such a limit was appropriate. The Bureau initially considered a
$1 billion asset-size limit, believing organizations of at least that
size had the capacity to implement the escrow requirements. However, in
accordance with its goal to harmonize the final rule as much as
practicable with the 2013 ATR Final Rule, discussed above, the Bureau
has adopted a $2 billion asset-size limit. Based on a review of HMDA
data, the Bureau believes that there is an insignificant number of
creditors that operate predominantly in rural or underserved areas,
have fewer than 500 first-lien originations, and have between $1 and $2
billion in assets. Consequently, the Bureau believes that harmonizing
the approaches between the two final rules will simplify compliance and
reduce associated compliance costs, while having a negligible impact on
the scope of the exemptions.
VIII. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires an agency
to conduct an initial regulatory flexibility analysis (IRFA) and a
final regulatory flexibility analysis (FRFA) of any rule subject to
notice-and-comment rulemaking requirements, unless the agency certifies
that the rule will not have a significant economic impact on a
substantial number of small entities.\58\ The Bureau also is subject to
certain additional procedures under the RFA involving the convening of
a panel to consult with small business representatives prior to
proposing a rule for which an IRFA is required.\59\ An entity is
considered ``small'' if it has $175 million or less in assets for the
banks, and $7 million or less in revenue for non-bank mortgage
creditors, mortgage brokers, and mortgage servicers.\60\ In the Board's
2011 Escrows Proposal, the Board conducted an initial regulatory
flexibility analysis (IRFA) and concluded that the proposed rule would
have a significant economic impact on a substantial number of small
entities. The Board solicited comments on the number of small entities
likely to be affected by the proposal, as well as the costs, compliance
requirements, and any changes in operating procedures arising from the
application of the proposed rules to small businesses. The Board
additionally solicited comments regarding a number of proposed
provisions that could minimize compliance burdens on small entities by
relying on other disclosure requirements with which they already must
comply and/or exempting certain classes of small creditors from the
proposed regulations. The Board also welcomed comment on any
significant alternatives that would minimize the impact of the proposed
rules on small entities.
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\58\ For purposes of assessing the impacts of the final rule on
small entities, ``small entities'' is defined in the RFA to include
small businesses, small not-for-profit organizations, and small
government jurisdictions. 5 U.S.C. 601(6). A ``small business'' is
determined by application of Small Business Administration
regulations and reference to the North American Industry
Classification System (NAICS) classifications and size standards. 5
U.S.C. 601(3). A ``small organization'' is any ``not-for-profit
enterprise which is independently owned and operated and is not
dominant in its field.'' 5 U.S.C. 601(4). A ``small governmental
jurisdiction'' is the government of a city, county, town, township,
village, school district, or special district with a population of
less than 50,000. 5 U.S.C. 601(5).
\59\ 5 U.S.C. 609.
\60\ The current SBA size standards are found on SBA's Web site
at http://www.sba.gov/content/table-small-business-size-standards.
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The Bureau has reviewed the comments on the Board's IRFA and the
broader Notice of Proposed Rulemaking addressing the burden imposed by
the proposed rule and potential mitigation measures and alternatives.
As described further below, the Bureau carefully considered the
comments received and performed its own independent analysis of the
potential impacts of the final rule on small entities and alternatives
to the final rule. Based on the comments received, the Bureau's own
analysis, and for the reasons stated in section 4 below, the
undersigned certifies that this final rule will not have a significant
economic impact on a substantial number of small entities.
Nevertheless, to better inform the rulemaking, the Bureau has prepared
the following final regulatory flexibility analysis.
1. Statement of the Need for, and Objectives of, the Final Rule
The Bureau is publishing final rules to implement certain
amendments to TILA made by the Dodd-Frank Act. Congress enacted TILA
based on findings that economic stability would be enhanced and
competition among consumer credit providers would be strengthened by
the informed use of credit resulting from consumers' awareness of the
cost of credit. The Bureau's final rule requires creditors to establish
escrow accounts for taxes and insurance for at least five years after
consummation. The final rule also creates an exemption from the escrow
requirement for certain mortgage transactions extended by a creditor
that meets four conditions. Those conditions are that the creditor: (1)
Makes most of its first-lien covered transactions in rural or
underserved counties; (2)
[[Page 4750]]
together with all affiliates, has annual originations of 500 or fewer
first-lien covered transactions; (3) has an asset size less than $2
billion; and (4) together with its affiliates, does not escrow for any
mortgage that it or its affiliates currently services, except in
limited instances.
These amendments are intended to improve consumers' understanding
of the overall costs of a given higher-priced mortgage loan and, in
turn, facilitate their ability to shop for mortgages. Moreover,
requiring escrow accounts for certain higher-priced mortgage loans may
reduce the likelihood that a consumer faces a sizable, unanticipated
fee or increase in payments.
2. Summary of Significant Issues Raised by Comments in Response to the
Initial Regulatory Flexibility Analysis
In accordance with section 3(a) of the RFA, 5 U.S.C. 603(a), the
Board prepared an IRFA in connection with the proposed rule, and
acknowledged that the projected reporting, recordkeeping, and other
compliance requirements of the proposed rule on the whole would have a
significant economic impact on a substantial number of small entities,
including small mortgage creditors and servicers. In addition, the
Board recognized that the precise compliance costs would be difficult
to ascertain because they would depend on a number of unknown factors,
including, among other things, the specifications of the current
systems used by small entities to prepare and provide disclosures and/
or solicitations and to administer and maintain accounts. The Board
sought information and comment on any costs, compliance requirements,
or changes in operating procedures arising from the application of the
proposed rule to small businesses.
The Bureau reviewed comments submitted by various financial
institutions and trade organizations in order to ascertain the economic
impact of the proposed rule on small entities. Although only a few
commenters focused on the Board's IRFA analysis, such commenters
expressed concern that the Board had underestimated the costs of
compliance. In one comment letter a trade organization noted that one
large creditor implementing the Regulation Z amendments that became
effective October 1, 2009, indicated that it required over 70,000 hours
to change its systems. Smaller financial institutions also suggested
that compliance costs would be significant given the need to change
systems and train personnel. In addition, the Office of Advocacy of the
U.S. Small Business Administration (Advocacy) submitted a comment on
the Board's IRFA.
Advocacy expressed concern about the level of information the Board
provided in its IRFA regarding the impact of the proposed rule on small
entities and it encouraged the Board to provide additional information.
Advocacy also raised concerns concerning the scope of the exception and
made suggestions to ease burdens in connection with the proposed
disclosures. For the reasons stated below, the Bureau believes that the
Board's IRFA complied with the requirements of the RFA and the Bureau
has modified certain aspects of the proposal in order to mitigate some
of the impact on small entities, including some identified by Advocacy.
Section 3(a) of the RFA requires agencies to publish for comment an
IRFA which shall describe the impact of the proposed rule on small
entities. See 5 U.S.C. 603(a). In addition, section 3(b) requires the
IRFA to contain certain information including a description of the
projected reporting, recordkeeping and other compliance requirements of
the proposed rule, including an estimate of the classes of small
entities which will be subject to the requirement and the type of
professional skills necessary for preparation of the report or record.
See 5 U.S.C. 603(b). The Bureau believes that the Board's IRFA complied
with the requirements of the RFA. The Board described the impact of the
proposed rule on small entities by describing the rule's proposed
requirements in detail throughout the supplementary information for the
proposed rule. Additionally, the Board described the projected
compliance requirements of the rule in its IRFA, noting the need for
small entities to update systems, operating procedures, and disclosures
under the proposed rule. In the proposal, the Board described the
projected impact of the proposed rule and sought comments from small
entities specifically regarding the effect the proposed rule would have
on their activities. In their comments, small entities have described
to varying degrees the increased costs associated with the Board's
proposed rules particularly with respect to the proposed disclosure
requirements concerning escrow accounts.
As a result of the Bureau's review of Advocacy's and other comments
regarding the potential compliance burdens of adopting the disclosure
portions of the Board's 2011 Escrows Proposal before resolution of the
Bureau's TILA-RESPA integration rulemaking, the final rule does not
adopt the Board's proposed disclosures provisions. In addition, as
discussed further below, the Bureau has also considered additional
measures as suggested by Advocacy to broaden the proposed exemption so
that more small entities can qualify.
3. Description and Estimate of Small Entities to Which the Final Rule
Would Apply
The final rule applies generally to institutions and entities that
engage in originating or extending home-secured credit, as well as
servicers of these mortgage obligations. The Board acknowledged in its
IRFA the lack of a reliable source for the total number of small
entities likely to be affected by the proposal, because the credit
provisions of TILA and Regulation Z have broad applicability to
individuals and businesses that originate, extend and service even
small numbers of home-secured transactions. The Board identified
through data from Reports of Condition and Income (Call Reports)
approximate numbers of small entities that would be subject to the
proposed rules. The summary of institutions considered small according
to the criteria described above, regardless of whether they are exempt
from the rule, is in the table below.
[[Page 4751]]
[GRAPHIC] [TIFF OMITTED] TR22JA13.000
The Bureau estimates that there are 3,777 non-exempt creditors who
originated any first-lien higher-priced mortgage loans in 2011.\61\ A
median creditor in this group originated four first-lien higher-priced
mortgage loans in 2011.\62\ The Bureau does not have data on how many
creditors do not already provide escrow accounts up to the fifth year
after a mortgage origination. Moreover, no commenters submitted
nationally-representative data including this information. The Bureau
additionally notes that some creditors who might otherwise qualify for
the Bureau's exemption may decide voluntarily to continue to provide
escrows for first-lien higher-priced mortgage loans. The Bureau cannot
estimate the number of these creditors, and conservatively estimates
this number to be insignificant, but notes that the impacts described
in this part of the analysis would also apply to these creditors.
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\61\ This figure includes 1,432 banks, 203 thrifts, 817 credit
unions, and 1,325 non-depository institutions.
\62\ The median first-lien higher-priced mortgage loan by
institution is as follows: 5 for banks and thrifts; 2 for credit
unions; and 5 for non-depository institutions.
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4. Reporting, Recordkeeping, and Other Compliance Requirements
The costs to the non-exempt creditors are described in the section
1022 analysis above, and mainly include the ongoing operating costs of
extending the escrow account provision from one to four years. For the
creditors who are processing escrows in-house, this cost is negligible,
given that these creditors probably have already set up a system
capable of escrowing in response to the current regulation. For the
creditors that outsource escrowing, the fixed cost of contracting has
already been incurred. The creditors that operate predominantly in
rural or underserved areas are exempted, unless they have reached the
scale at which the Bureau believes that it is cost-efficient to set up
escrow accounts.
The Bureau does not possess nationally representative information
regarding this cost. However, the cost of escrowing is a part of the
overall servicing cost of a mortgage obligation. The most recent
estimate of the servicing cost of a mortgage obligation is $100 per
transaction per year, if the servicing is outsourced.\63\ The Bureau
does not possess reliable information on what fraction of the $100 is
attributable to maintaining escrow accounts. However, none of the
several examined industry, regulatory, and academic studies of
servicing singled out escrowing as the first or the main component of
the overall servicing costs.\64\ Thus, the Bureau conservatively
assumes that the cost of this rule per transaction is at most $50, and
over the four years is at most $200. According to the Bureau's
projections, 85 percent of the affected non-exempt small institutions
originate less than 14 higher-priced mortgage loans, resulting in an at
most a $2800 cost per institution.\65\ Therefore, the Bureau believes
that the rule will not have a significant impact on small entities.
Examining the ratios of these costs to the revenues \66\ of the
institutions, for 85% of small creditors these costs represent less
than 0.3% of their revenues.\67\
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\63\ National Association of Federal Credit Unions, Top 10
Questions about Mortgage Subservicing (Podcast), available at:
http://www.nafcu.org/NSCTertiary.aspx?id=23703.
\64\ Mortgage Bankers Association, Residential Mortgage
Servicing for the 21st Century, May 2011. Amy Crews Cutts & Richard
K. Green, Innovative Servicing Technology: Smart Enough to Keep
People in Their Houses? Freddie Mac Working Paper 04-03
(2004). Prime Alliance Loan Servicing, Re-Thinking Loan Servicing,
(2010). Adam Levitin & Tara Twomey, Mortgage Servicing, 28 Yale J.
on Reg. 1 (2011).
\65\ Breaking this down by small creditor type, 85 percent of
banks originate less than 14, and 85 percent of thrifts originate
less than 9 higher-priced mortgage loans, 85 percent of credit
unions originate less than 10 higher-priced mortgage loans, and 85
percent of non-depository institutions originate less than 16
higher-priced mortgage loans.
\66\ Revenue has been used in other analyses of economic impacts
under the RFA. For purposes of this analysis, the Bureau uses
revenue as a measure of economic impact. In the future, the Bureau
will consider whether an alternative quantifiable or numerical
measure may be available that would be more appropriate for
financial firms.
\67\ The ratio is below 0.5 percent for 85 percent of the
creditors among any of the four small creditor types.
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If there are creditors who have not already implemented the Board's
2008 HOEPA Final Rule and would not be
[[Page 4752]]
eligible for the exemption for creditors who operate predominantly in
rural or underserved areas, there may be a need for the creditors'
staff to develop new professional skills and new recordkeeping regimes
to comply with the revised requirements. These costs will depend on a
number of unknown factors, including, among other things, the
specifications of the current systems used by such entities. The Bureau
believes that the number of such institutions would be small and does
not affect its judgment that the rule will not impose a significant
impact on a substantial number of small entities. Finally, as discussed
above, the rule allows exempted creditors to stop establishing escrow
accounts even for the first year of the mortgage obligation, which will
allow creditors to eliminate the compliance costs of their current
programs for new loans going forward if they decide it makes sense to
do so.
5. Steps Taken To Minimize the Economic Impact on Small Entities
The steps the Bureau has taken to minimize the economic impact and
compliance burden on small entities, including the factual, policy, and
legal reasons for selecting the alternatives adopted and why each one
of the other significant alternatives was not accepted, are described
above in the section-by-section analysis, in part VII, and in the
summary of issues raised by the public comments in response to the
proposal's IRFA. The final rule's modifications from the proposed rule
that minimize economic impact on small entities are discussed below.
Additionally, the Bureau considered significant alternatives to most of
the dimensions of the small creditor exemption: the definition of
rural, the transaction origination limit, and the asset-size threshold.
First, the Bureau has declined to implement at this time the
amendments to TILA concerning certain new disclosure requirements
concerning escrows accounts. The Bureau believes that this decision to
coordinate these disclosures with the finalization of the TILA-RESPA
integration rulemaking will decrease the economic impact of the final
rule on small entities by limiting their compliance costs. Moreover,
the Bureau believes that harmonizing certain title XIV required
disclosures may provide greater clarity to the market and better
fulfill TILA's stated purpose of enabling consumers to better
understand the cost of credit.
Second, upon reviewing public comment, the Bureau has expanded the
exemption for creditors who operate predominantly in rural or
underserved areas to include a broader range of areas than previously
identified in the proposal. The Bureau believes that will decrease the
number of small entities covered by the regulation. The Bureau
considered different definitions of ``rural'' and the size exemption,
both for the asset size and for the number of originations.
In finalizing the rule the Bureau considered using an alternative
definition of rural that would have used the same definition as
provided under USDA's section 502 Rural Housing program. Under the USDA
section 502 Rural Housing definition of ``rural'', approximately 37
percent of the U.S. population lives in an area considered to be rural,
compared to approximately 10 percent according to the definition used
in the final rule, which defines rural as counties with UICs 4, 6, 7,
8, 9, 10, 11, 12. The Bureau considered the trade-off of exempting more
creditors and thus potentially mitigating consumer access to credit
issues versus exempting fewer creditors and providing consumers with
the consumer protections represented by escrow accounts. The Bureau's
analysis of the 2011 HMDA data showed that, even with the definition of
rural in the final rule that includes counties with codes of 4, 6, 7,
8, 9, 10, 11, and 12, a median county in the least dense county code
that is not exempt (code 5) had 16 creditors that extended any higher-
priced mortgage loans in 2011. In light of these data, the Bureau
believes that, even if some of these creditors exit the higher-priced
mortgage loan market for lack of an exemption, there will still be
enough competition in those counties, and therefore the risk of
potential access to credit issues for consumers in these areas is
mitigated. The Bureau believes that the current definition better
reflects the intention of the statute's authorization to create a rural
exception, and facts about the areas included, such as the urban
influence, density of the population, and the number of higher-priced
mortgage loan creditors in the county.
In addition, the Bureau considered alternative origination
thresholds. The Board's 2011 Escrows Proposal would have extended the
exemption to creditors that, together with their affiliates, originated
and retained servicing rights to 100 or fewer mortgage obligations
secured by a first-lien on real property or a dwelling. In the Board's
2011 Escrows Proposal the Board noted its belief from the available
information that the economies of scale necessary to escrow cost-
effectively, or else to satisfy the escrow requirement by outsourcing
to a sub-servicer, generally exist when a mortgage servicer has a
portfolio of at least 500 mortgage obligations. Consequently, the Board
proposed setting the cut-off at 100 or fewer first-lien mortgage
obligations originated annually and for which servicing rights are
retained, assuming an average of five years until an institution's
mortgage obligations are paid off. The Bureau has expanded the
exemption to include creditors that, together with their affiliates,
originate 500 or fewer first-lien covered transactions annually. The
Bureau believes that defining the limit in terms of originated
transactions, as opposed to transactions originated and serviced,
facilitates compliance by not requiring institutions to track multiple
metrics for the escrow and qualified mortgage rules and to promote
consistent application of the two exemptions. However, this change by
itself would have severely restricted the scope of the exemption, as
there are more creditors that originate and service less than 100
transactions than there are creditors that simply originate 100
transactions.\68\ From the 2011 HMDA data, setting the new limit at 500
transactions ensures that 89.5 percent of the creditors that originated
and serviced 100 transactions are under the new 500 first-lien
origination limit. However, as discussed more fully above, to prevent
larger creditors with sophisticated information technology systems from
taking unintended advantage of this exemption and to further the
benefits from coordinated compliance across this final rule and the
2013 ATR Final Rule, the Bureau decided to adopt the $2 billion asset-
size limit in both final rules.
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\68\ Consider, for example, a creditor who originates 300
transactions, but services only 80 of them.
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The Bureau notes that by expanding the exemption for certain
transactions and deferring implementation of the escrow disclosure
requirements the Bureau has largely addressed the areas where small
entity commenters expressed concern about the costs of compliance. The
Bureau believes that these changes minimize the economic impact on
small entities while still meeting the stated objectives of TILA and
the Dodd-Frank Act.
The small creditor exemption is partially designed to mitigate the
rule's costs to small creditors. Providing escrows cost-effectively
requires a scale that small creditors do not have, and the 500 first-
lien origination limit allows the creditors to reach that scale before
they are required to provide escrows. This scale might be much lower in
more urban areas, but the Bureau believes that
[[Page 4753]]
because many creditors in rural areas face adverse conditions, such as
idiosyncratic accounting systems (including calculations by hand)
employed by some of the jurisdictions, such institutions would
especially need this number of originations, and consequently a large
number of mortgage obligations to be able to provide escrow accounts
cost-effectively.
6. Impact on Small Business Credit
The Bureau does not believe that the final rule will result in an
increase in the cost of business credit for small entities. Instead,
the final rule will apply only to mortgage transactions obtained by
consumers primarily for personal, family, or household purposes and the
final rule will not apply to transactions obtained primarily for
business purposes. Given that the final rule does not increase the cost
of credit for small entities, the Bureau has not taken additional steps
to minimize the cost of credit for small entities.
IX. Paperwork Reduction Act
The Bureau may not conduct or sponsor, and a respondent is not
required to respond to, an information collection unless it displays a
currently valid OMB control number. The Board's 2011 Escrows Proposal
contained information collection requirements under the Paperwork
Reduction Act (PRA), which have been previously approved by OMB under
the following OMB control number issued to the Board: 7100-0199. There
are no new information collection requirements in the Bureau's final
rule.
On March 2, 2011, a notice of the proposed rulemaking was published
in the Federal Register. As discussed above, the Board proposed certain
new disclosures for escrow accounts including format, timing, and
content requirements as well as proposed certain model forms regarding
escrow accounts for closed-end mortgages secured by a first lien on
real property or a dwelling. The Board invited comment on: (1) Whether
the proposed collection of information is necessary for the proper
performance of agency functions, including whether the information has
practical utility; (2) the accuracy of the estimate of the burden of
the proposed information collection, including the cost of compliance;
(3) ways to enhance the quality, utility, and clarity of the
information to be collected; and (4) ways to minimize the burden of
information collection on respondents, including through the use of
automated collection techniques or other forms of information
technology. The comment period for the proposed rule expired on May 2,
2011.
The Bureau reviewed the comments received regarding the merits of
various aspects of the Board's 2011 Escrows Proposal, including the
burden of compliance generally, and whether the proposed disclosure
requirements should be finalized. Commenters in particular contended
that the new disclosure requirements would be redundant of existing
information collections and would likely be of limited utility given
the Bureau's mandate to integrate the TILA-RESPA disclosures. Given the
potential compliance burden of integrating new disclosures in piecemeal
fashion, on November 23, 2012, the Bureau published in the Federal
Register a rule that delays the implementation of certain disclosure
requirements contained in title XIV of the Dodd-Frank Act, including
those contained in sections 1461 and 1462. See 77 FR 70105 (Nov. 23,
2012). Accordingly, because this final rule does not implement the
disclosure amendments, the Bureau has determined that this final rule
does not impose any new recordkeeping, reporting or disclosure
requirements on covered entities or members of the public that would be
collections of information requiring OMB approval under 44 U.S.C. 3501,
et seq.
List of Subjects in 12 CFR Part 1026
Advertising, Consumer protection, Mortgages, Recordkeeping
requirements, Reporting, Truth in lending.
Authority and Issuance
For the reasons set forth in the preamble, the Bureau amends
Regulation Z, 12 CFR part 1026, as set forth below:
PART 1026--TRUTH IN LENDING (REGULATION Z)
0
1. The authority citation for part 1026 continues to read as follows:
Authority: 12 U.S.C. 2601; 2603-2605, 2607, 2609, 2617, 5511,
5512, 5581; 15 U.S.C. 1601 et seq.
Subpart E--Special Rules for Certain Home Mortgage Transactions
0
2. Section 1026.35 is revised to read as follows:
Sec. 1026.35 Requirements for higher-priced mortgage loans.
(a) Definitions. For purposes of this section:
(1) ``Higher-priced mortgage loan'' means a closed-end consumer
credit transaction secured by the consumer's principal dwelling with an
annual percentage rate that exceeds the average prime offer rate for a
comparable transaction as of the date the interest rate is set:
(i) By 1.5 or more percentage points for loans secured by a first
lien with a principal obligation at consummation that does not exceed
the limit in effect as of the date the transaction's interest rate is
set for the maximum principal obligation eligible for purchase by
Freddie Mac;
(ii) By 2.5 or more percentage points for loans secured by a first
lien with a principal obligation at consummation that exceeds the limit
in effect as of the date the transaction's interest rate is set for the
maximum principal obligation eligible for purchase by Freddie Mac; or
(iii) By 3.5 or more percentage points for loans secured by a
subordinate lien.
(2) ``Average prime offer rate'' means an annual percentage rate
that is derived from average interest rates, points, and other loan
pricing terms currently offered to consumers by a representative sample
of creditors for mortgage transactions that have low-risk pricing
characteristics. The Bureau publishes average prime offer rates for a
broad range of types of transactions in a table updated at least weekly
as well as the methodology the Bureau uses to derive these rates.
(b) Escrow accounts--(1) Requirement to escrow for property taxes
and insurance. Except as provided in paragraph (b)(2) of this section,
a creditor may not extend a higher-priced mortgage loan secured by a
first lien on a consumer's principal dwelling unless an escrow account
is established before consummation for payment of property taxes and
premiums for mortgage-related insurance required by the creditor, such
as insurance against loss of or damage to property, or against
liability arising out of the ownership or use of the property, or
insurance protecting the creditor against the consumer's default or
other credit loss. For purposes of this paragraph (b), the term
``escrow account'' has the same meaning as under Regulation X (24 CFR
3500.17(b)), as amended.
(2) Exemptions. Notwithstanding paragraph (b)(1) of this section:
(i) An escrow account need not be established for:
(A) A transaction secured by shares in a cooperative;
(B) A transaction to finance the initial construction of a
dwelling;
(C) A temporary or ``bridge'' loan with a loan term of twelve
months or less, such as a loan to purchase a new dwelling where the
consumer plans to
[[Page 4754]]
sell a current dwelling within twelve months; or
(D) A reverse mortgage transaction subject to Sec. 1026.33(c).
(ii) Insurance premiums described in paragraph (b)(1) of this
section need not be included in escrow accounts for loans secured by
dwellings in condominiums, planned unit developments, or other common
interest communities in which dwelling ownership requires participation
in a governing association, where the governing association has an
obligation to the dwelling owners to maintain a master policy insuring
all dwellings.
(iii) Except as provided in paragraph (b)(2)(v) of this section, an
escrow account need not be established for a transaction if, at the
time of consummation:
(A) During the preceding calendar year, the creditor extended more
than 50 percent of its total covered transactions, as defined by Sec.
1026.43(b)(1), secured by a first lien, on properties that are located
in counties designated either ``rural'' or ``underserved'' by the
Bureau, as set forth in paragraph (b)(2)(iv) of this section;
(B) During the preceding calendar year, the creditor and its
affiliates together originated 500 or fewer covered transactions, as
defined by Sec. 1026.43(b)(1), secured by a first lien; and
(C) As of the end of the preceding calendar year, the creditor had
total assets of less than $2,000,000,000; this asset threshold shall
adjust automatically each year, based on the year-to-year change in the
average of the Consumer Price Index for Urban Wage Earners and Clerical
Workers, not seasonally adjusted, for each 12-month period ending in
November, with rounding to the nearest million dollars (see comment
35(b)(2)(iii)-1.iii for the current threshold); and
(D) Neither the creditor nor its affiliate maintains an escrow
account of the type described in paragraph (b)(1) of this section for
any extension of consumer credit secured by real property or a dwelling
that the creditor or its affiliate currently services, other than:
(1) Escrow accounts established for first-lien higher-priced
mortgage loans on or after April 1, 2010, and before June 1, 2013; or
(2) Escrow accounts established after consummation as an
accommodation to distressed consumers to assist such consumers in
avoiding default or foreclosure.
(iv) For purposes of paragraph (b)(2)(iii)(A) of this section:
(A) A county is ``rural'' during a calendar year if it is neither
in a metropolitan statistical area nor in a micropolitan statistical
area that is adjacent to a metropolitan statistical area, as those
terms are defined by the U.S. Office of Management and Budget and
applied under currently applicable Urban Influence Codes (UICs),
established by the United States Department of Agriculture's Economic
Research Service (USDA-ERS). A creditor may rely as a safe harbor on
the list of counties published by the Bureau to determine whether a
county qualifies as ``rural'' for a particular calendar year.
(B) A county is ``underserved'' during a calendar year if,
according to Home Mortgage Disclosure Act (HMDA) data for that year, no
more than two creditors extend covered transactions, as defined in
Sec. 1026.43(b)(1), secured by a first lien five or more times in the
county. A creditor may rely as a safe harbor on the list of counties
published by the Bureau to determine whether a county qualifies as
``underserved'' for a particular calendar year.
(v) Notwithstanding paragraph (b)(2)(iii) of this section, an
escrow account must be established pursuant to paragraph (b)(1) of this
section for any first-lien higher-priced mortgage loan that, at
consummation, is subject to a commitment to be acquired by a person
that does not satisfy the conditions in paragraph (b)(2)(iii) of this
section, unless otherwise exempted by this paragraph (b)(2).
(3) Cancellation--(i) General. Except as provided in paragraph
(b)(3)(ii) of this section, a creditor or servicer may cancel an escrow
account required in paragraph (b)(1) of this section only upon the
earlier of:
(A) Termination of the underlying debt obligation; or
(B) Receipt no earlier than five years after consummation of a
consumer's request to cancel the escrow account.
(ii) Delayed cancellation. Notwithstanding paragraph (b)(3)(i) of
this section, a creditor or servicer shall not cancel an escrow account
pursuant to a consumer's request described in paragraph (b)(3)(i)(B) of
this section unless the following conditions are satisfied:
(A) The unpaid principal balance is less than 80 percent of the
original value of the property securing the underlying debt obligation;
and
(B) The consumer currently is not delinquent or in default on the
underlying debt obligation.
(c) [Reserved]
(d) Evasion; open-end credit. In connection with credit secured by
a consumer's principal dwelling that does not meet the definition of
open-end credit in Sec. 1026.2(a)(20), a creditor shall not structure
a home-secured loan as an open-end plan to evade the requirements of
this section.
3. In Supplement I to Part 1026--Official Interpretations:
A. The heading for Section 1026.35--Prohibited Acts or Practices in
Connection with Higher-Priced Mortgage Loans is revised.
B. Under newly designated Section 1026.35--Requirements for Higher-
Priced Mortgage Loans:
i. Under 35(a) Higher-Priced Mortgage Loans:
a. Paragraph 35(a)(1) and paragraphs 1, 2, and 3 are added.
b. Under Paragraph 35(a)(2), paragraphs 2 and 3 are revised, and
paragraph 4 is removed.
ii. The heading for 35(b) Rules for higher-priced mortgage loans is
revised.
iii. Under newly designated 35(b) Escrow accounts:
a. Paragraph 1 is revised.
b. 35(b)(1) Requirement to escrow for property taxes and insurance
and paragraphs 1, 2, and 3 are added.
c. 35(b)(2) Exemptions is added.
d. Paragraph 35(b)(2)(i) and paragraph 1 are added.
e. Paragraph 35(b)(2)(ii) and paragraphs 1, 2, and 3 are added.
f. Paragraph 35(b)(2)(ii)(C) and paragraphs 1 and 2 are removed.
g. Paragraph 35(b)(2)(iii) and paragraph 1 are added.
h. Paragraph 35(b)(2)(iii)(D)(1) and paragraph 1 are added.
i. Paragraph 35(b)(2)(iii)(D)(2) and paragraph 1 are added.
j. Paragraph 35(b)(2)(iv) and paragraph 1 are added.
k. Paragraph 35(b)(2)(v) and paragraph 1 are added.
iv. The heading for 35(b)(3) Escrows is revised.
v. Under newly designated 35(b)(3) Cancellation:
a. Paragraphs 1, 2, and 3 are added.
b. 35(b)(3)(i) Failure to escrow for property taxes and insurance
and paragraphs 1, 2, and 3 are removed.
c. Paragraph 35(b)(3)(ii)(B) and paragraph 1 are removed.
d. 35(b)(3)(v) ``Jumbo'' loans and paragraphs 1 and 2 are removed.
The revisions and additions read as follows:
Supplement I to Part 1026--Official Interpretations
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
* * * * *
[[Page 4755]]
Sec. 1026.35--Requirements for Higher-Priced Mortgage Loans
35(a) Definitions.
Paragraph 35(a)(1).
1. Comparable transaction. A higher-priced mortgage loan is a
consumer credit transaction secured by the consumer's principal
dwelling with an annual percentage rate that exceeds the average prime
offer rate for a comparable transaction as of the date the interest
rate is set by the specified margin. The table of average prime offer
rates published by the Bureau indicates how to identify the comparable
transaction.
2. Rate set. A transaction's annual percentage rate is compared to
the average prime offer rate as of the date the transaction's interest
rate is set (or ``locked'') before consummation. Sometimes a creditor
sets the interest rate initially and then re-sets it at a different
level before consummation. The creditor should use the last date the
interest rate is set before consummation.
3. Threshold for ``jumbo'' loans. Section 1026.35(a)(1)(ii)
provides a separate threshold for determining whether a transaction is
a higher-priced mortgage loan subject to Sec. 1026.35 when the
principal balance exceeds the limit in effect as of the date the
transaction's rate is set for the maximum principal obligation eligible
for purchase by Freddie Mac (a ``jumbo'' loan). The Federal Housing
Finance Agency (FHFA) establishes and adjusts the maximum principal
obligation pursuant to rules under 12 U.S.C. 1454(a)(2) and other
provisions of federal law. Adjustments to the maximum principal
obligation made by FHFA apply in determining whether a mortgage loan is
a ``jumbo'' loan to which the separate coverage threshold in Sec.
1026.35(a)(1)(ii) applies.
Paragraph 35(a)(2).
* * * * *
2. Bureau table. The Bureau publishes on the Internet, in table
form, average prime offer rates for a wide variety of transaction
types. The Bureau calculates an annual percentage rate, consistent with
Regulation Z (see Sec. 1026.22 and appendix J), for each transaction
type for which pricing terms are available from a survey. The Bureau
estimates annual percentage rates for other types of transactions for
which direct survey data are not available based on the loan pricing
terms available in the survey and other information. The Bureau
publishes on the Internet the methodology it uses to arrive at these
estimates.
3. Additional guidance on determination of average prime offer
rates. The average prime offer rate has the same meaning in Sec.
1026.35 as in Regulation C, 12 CFR part 1003. See 12 CFR
1003.4(a)(12)(ii). Guidance on the average prime offer rate under Sec.
1026.35(a)(2), such as when a transaction's rate is set and
determination of the comparable transaction, is provided in the
official commentary under Regulation C, the publication entitled ``A
Guide to HMDA Reporting: Getting it Right!'', and the relevant
``Frequently Asked Questions'' on Home Mortgage Disclosure Act (HMDA)
compliance posted on the FFIEC's Web site at http://www.ffiec.gov/hmda.
35(b) Escrow Accounts.
1. Principal dwelling. Section 1026.35(b)(1) applies to principal
dwellings, including structures that are classified as personal
property under State law. For example, an escrow account must be
established on a higher-priced mortgage loan secured by a first lien on
a manufactured home, boat, or trailer used as the consumer's principal
dwelling. See the commentary under Sec. Sec. 1026.2(a)(19) and(24),
1026.15, and 1026.23. Section 1026.35(b)(1) also applies to a higher-
priced mortgage loan secured by a first lien on a condominium if it is
in fact used as the consumer's principal dwelling. But see Sec.
1026.35(b)(2) for exemptions from the escrow requirement that may apply
to such transactions.
35(b)(1) Requirement to escrow for property taxes and insurance.
1. Administration of escrow accounts. Section 1026.35(b)(1)
requires creditors to establish an escrow account for payment of
property taxes and premiums for mortgage-related insurance required by
the creditor before the consummation of a higher-priced mortgage loan
secured by a first lien on a principal dwelling. Section 6 of RESPA, 12
U.S.C. 2605, and Regulation X, 12 CFR 1024.17, address how escrow
accounts must be administered.
2. Optional insurance items. Section 1026.35(b)(1) does not require
that an escrow account be established for premiums for mortgage-related
insurance that the creditor does not require in connection with the
credit transaction, such as earthquake insurance or credit life
insurance, even if the consumer voluntarily obtains such insurance.
3. Transactions not subject to Sec. 1026.35(b)(1). Section
1026.35(b)(1) requires a creditor to establish an escrow account before
consummation of a first-lien higher-priced mortgage loan. This
requirement does not affect a creditor's ability, right, or obligation,
pursuant to the terms of the legal obligation or applicable law, to
offer or require an escrow account for a transaction that is not
subject to Sec. 1026.35(b)(1).
35(b)(2) Exemptions.
Paragraph 35(b)(2)(i).
1. Construction-permanent loans. Under Sec. 1026.35(b)(2)(ii)(B),
Sec. 1026.35 does not apply to a transaction to finance the initial
construction of a dwelling. Section 1026.35 may apply, however, to
permanent financing that replaces a construction loan, whether the
permanent financing is extended by the same or a different creditor.
When a construction loan may be permanently financed by the same
creditor, Sec. 1026.17(c)(6)(ii) permits the creditor to give either
one combined disclosure for both the construction financing and the
permanent financing, or a separate set of disclosures for each of the
two phases as though they were two separate transactions. See also
comment 17(c)(6)-2. Section 1026.17(c)(6)(ii) addresses only how a
creditor may elect to disclose a construction-permanent transaction.
Which disclosure option a creditor elects under Sec. 1026.17(c)(6)(ii)
does not affect the determination of whether the permanent phase of the
transaction is subject to Sec. 1026.35. When the creditor discloses
the two phases as separate transactions, the annual percentage rate for
the permanent phase must be compared to the average prime offer rate
for a transaction that is comparable to the permanent financing to
determine whether the transaction is a higher-priced mortgage loan
under Sec. 1026.35(a). When the creditor discloses the two phases as a
single transaction, a single annual percentage rate, reflecting the
appropriate charges from both phases, must be calculated for the
transaction in accordance with Sec. 1026.22(a)(1) and appendix D to
part 1026. This annual percentage rate must be compared to the average
prime offer rate for a transaction that is comparable to the permanent
financing to determine the transaction is a higher-priced mortgage loan
under Sec. 1026.35(a). If the transaction is determined to be a
higher-priced mortgage loan, only the permanent phase is subject to the
requirement of Sec. 1026.35(b)(1) to establish and maintain an escrow
account, and the period for which the escrow account must remain in
place under Sec. 1026.35(b)(3) is measured from the time the
conversion to the permanent phase financing occurs.
Paragraph 35(b)(2)(ii).
1. Limited exemption. A creditor is required to escrow for payment
of property taxes for all first-lien higher-
[[Page 4756]]
priced mortgage loans secured by condominium, planned unit development,
or similar dwellings or units regardless of whether the creditor
escrows for insurance premiums for such dwellings or units.
2. Planned unit developments. Planned unit developments (PUDs) are
a form of property ownership often used in retirement communities, golf
communities, and similar communities made up of homes located within a
defined geographical area. PUDs usually have a homeowners' association
or some other governing association, analogous to a condominium
association and with similar authority and obligations. Thus, as with
condominiums, PUDs often have master insurance policies that cover all
units in the PUD. Under Sec. 1026.35(b)(2)(ii), if a PUD's governing
association is obligated to maintain such a master insurance policy, an
escrow account required by Sec. 1026.35(b)(1) for a transaction
secured by a unit in the PUD need not include escrows for insurance.
This exemption applies not only to condominiums and PUDs but also to
any other type of property ownership arrangement that has a governing
association with an obligation to maintain a master insurance policy.
3. More than one governing association associated with a dwelling.
The limited exemption provided pursuant to Sec. 1026.35(b)(2)(ii)
applies to each master insurance policy for properties with multiple
governing associations, to the extent each governing association has an
obligation to maintain a master insurance policy.
Paragraph 35(b)(2)(iii).
1. Requirements for exemption. Under Sec. 1026.35(b)(2)(iii),
except as provided in Sec. 1026.35(b)(2)(v), a creditor need not
establish an escrow account for taxes and insurance for a higher-priced
mortgage loan, provided the following four conditions are satisfied
when the higher-priced mortgage loan is consummated:
i. During the preceding calendar year, more than 50 percent of the
creditor's total first-lien covered transactions, as defined in Sec.
1026.43(b)(1), on properties located in counties that are either
``rural'' or ``underserved,'' as set forth in Sec. 1026.35(b)(2)(iv).
Pursuant to that section, the Bureau determines annually which counties
in the United States are rural or underserved and publishes a list of
those counties to enable creditors to determine whether they meet this
condition for the exemption. Thus, for example, if a creditor
originated 90 first-lien covered transactions, as defined by Sec.
1026.43(b)(1), during 2013, the creditor meets this condition for an
exemption in 2014 if at least 46 of those transactions are secured by
first liens on properties that are located in counties that are on the
Bureau's lists of rural or underserved counties for 2013.
ii. The creditor and its affiliates together originated 500 or
fewer first-lien covered transactions, as defined in Sec.
1026.43(b)(1), during the preceding calendar year.
iii. As of the end of the preceding calendar year, the creditor had
total assets that are less than the asset threshold for the relevant
calendar year. For calendar year 2013, the asset threshold is
$2,000,000,000. Creditors that had total assets of less than
$2,000,000,000 on December 31, 2012, satisfy this criterion for
purposes of the exemption during 2013. This asset threshold shall
adjust automatically each year based on the year-to-year change in the
average of the Consumer Price Index for Urban Wage Earners and Clerical
Workers, not seasonally adjusted, for each 12-month period ending in
November, with rounding to the nearest million dollars. The Bureau will
publish notice of the asset threshold each year by amending this
comment.
iv. The creditor and its affiliates do not maintain an escrow
account for any mortgage transaction being serviced by the creditor or
its affiliate at the time the transaction is consummated, except as
provided in Sec. 1026.35(b)(2)(iii)(D)(1) and (2). Thus, the exemption
applies, provided the other conditions of Sec. 1026.35(b)(2)(iii) are
satisfied, even if the creditor previously maintained escrow accounts
for mortgage loans, provided it no longer maintains any such accounts
except as provided in Sec. 1026.35(b)(2)(iii)(D)(1) and (2). Once a
creditor or its affiliate begins escrowing for loans currently serviced
other than those addressed in Sec. 1026.35(b)(2)(iii)(D)(1) and (2),
however, the creditor and its affiliate become ineligible for the
exemption in Sec. 1026.35(b)(2)(iii) on higher-priced mortgage loans
they make while such escrowing continues. Thus, as long as a creditor
(or its affiliate) services and maintains escrow accounts for any
mortgage loans, other than as provided in Sec.
1026.35(b)(2)(iii)(D)(1) and (2), the creditor will not be eligible for
the exemption for any higher-priced mortgage loan it may make. For
purposes of Sec. 1026.35(b)(2)(iii), a creditor or its affiliate
``maintains'' an escrow account only if it services a mortgage loan for
which an escrow account has been established at least through the due
date of the second periodic payment under the terms of the legal
obligation.
Paragraph 35(b)(2)(iii)(D)(1).
1. Exception for certain accounts. Escrow accounts established for
first-lien higher-priced mortgage loans on or after April 1, 2010, and
before June 1, 2013, are not counted for purposes of Sec.
1026.35(b)(2)(iii)(D). On and after June 1, 2013, creditors, together
with their affiliates, that establish new escrow accounts, other than
those described in Sec. 1026.35(b)(2)(iii)(D)(2), do not qualify for
the exemption provided under Sec. 1026.35(b)(2)(iii). Creditors,
together with their affiliates, that continue to maintain escrow
accounts established between April 1, 2010, and June 1, 2013, still
qualify for the exemption provided under Sec. 1026.35(b)(2)(iii) so
long as they do not establish new escrow accounts for transactions
consummated on or after June 1, 2013, other than those described in
Sec. 1026.35(b)(2)(iii)(D)(2), and they otherwise qualify under Sec.
1026.35(b)(2)(iii).
Paragraph 35(b)(2)(iii)(D)(2).
1. Exception for post-consummation escrow accounts for distressed
consumers. An escrow account established after consummation for a
distressed consumer does not count for purposes of Sec.
1026.35(b)(2)(iii)(D). Distressed consumers are consumers who are
working with the creditor or servicer to attempt to bring the loan into
a current status through a modification, deferral, or other
accommodation to the consumer. A creditor, together with its
affiliates, that establishes escrow accounts after consummation as a
regular business practice, regardless of whether consumers are in
distress, does not qualify for the exception described in Sec.
1026.35(b)(2)(iii)(D)(2).
Paragraph 35(b)(2)(iv).
1. Requirements for ``rural'' or ``underserved'' status. A county
is considered to be ``rural'' or ``underserved'' for purposes of Sec.
1026.35(b)(2)(iii)(A) if it satisfies either of the two tests in Sec.
1026.35(b)(2)(iv). The Bureau applies both tests to each county in the
United States and, if a county satisfies either test, the Bureau will
include the county on a published list of ``rural'' or ``underserved''
counties for a particular calendar year. To facilitate compliance with
Sec. 1026.35(c), the Bureau also creates a list of only those counties
that are ``rural'' but not also ``underserved.'' The Bureau will post
on its public Web site the applicable lists for each calendar year by
the end of that year. A creditor may rely as a safe harbor, pursuant to
section 130(f) of the Truth in Lending Act, on the lists of counties
published by the Bureau to determine whether a county qualifies as
``rural'' or ``underserved'' for a particular calendar year. A
creditor's originations of
[[Page 4757]]
covered transactions, as defined by Sec. 1026.43(b)(1), in such
counties during that year are considered in determining whether the
creditor satisfies the condition in Sec. 1026.35(b)(2)(iii)(A) and
therefore will be eligible for the exemption during the following
calendar year.
i. Under Sec. 1026.35(b)(2)(iv)(A), a county is rural during a
calendar year if it is neither in a metropolitan statistical area nor
in a micropolitan statistical area that is adjacent to a metropolitan
statistical area. These areas are defined by the Office of Management
and Budget and applied under currently applicable Urban Influence Codes
(UICs), established by the United States Department of Agriculture's
Economic Research Service (USDA-ERS). Specifically, the Bureau
classifies a county as ``rural'' if the USDA-ERS categorizes the county
under UIC 4, 6, 7, 8, 9, 10, 11, or 12. Descriptions of UICs are
available on the USDA-ERS Web site at http://www.ers.usda.gov/data-products/urban-influence-codes/documentation.aspx.
ii. Under Sec. 1026.35(b)(2)(iv)(B), a county is underserved
during a calendar year if, according to Home Mortgage Disclosure Act
(HMDA) data for that year, no more than two creditors extend first-lien
covered transactions, as defined in Sec. 1026.43(b)(1), secured by a
first lien five or more times in the county. These areas are defined by
reference to the specific calendar year's HMDA data. Specifically, a
county is ``underserved'' if, in the applicable calendar year's public
HMDA aggregate dataset, no more than two creditors have reported five
or more first-lien covered transactions with HMDA geocoding that places
the properties in that county. For purposes of this determination,
because only covered transactions are counted, all first-lien
originations (and only first-lien originations) reported in the HMDA
data are counted except those for which the owner-occupancy status is
reported as ``Not owner-occupied'' (HMDA code 2), the property type is
reported as ``Multifamily'' (HMDA code 3), the applicant's or co-
applicant's race is reported as ``Not applicable'' (HMDA code 7), or
the applicant's or co-applicant's sex is reported as ``Not applicable''
(HMDA code 4). The most recent HMDA data are available at http://www.ffiec.gov/hmda.
Paragraph 35(b)(2)(v).
1. Forward commitments. A creditor may make a mortgage loan that
will be transferred or sold to a purchaser pursuant to an agreement
that has been entered into at or before the time the loan is
consummated. Such an agreement is sometimes known as a ``forward
commitment.'' Even if a creditor is otherwise eligible for the
exemption in Sec. 1026.35(b)(2)(iii), a first-lien higher-priced
mortgage loan that will be acquired by a purchaser pursuant to a
forward commitment is subject to the requirement to establish an escrow
account under Sec. 1026.35(b)(1) unless the purchaser is also eligible
for the exemption in Sec. 1026.35(b)(2)(iii) or the transaction is
otherwise exempt under Sec. 1026.35(b)(2). The escrow requirement
applies to any such transaction, whether the forward commitment
provides for the purchase and sale of the specific transaction or for
the purchase and sale of mortgage obligations with certain prescribed
criteria that the transaction meets. For example, assume a creditor
that qualifies for the exemption in Sec. 1026.35(b)(2)(iii) makes a
higher-priced mortgage loan that meets the purchase criteria of an
investor with which the creditor has an agreement to sell such mortgage
obligations after consummation. If the investor is ineligible for the
exemption in Sec. 1026.35(b)(2)(iii), an escrow account must be
established for the transaction before consummation in accordance with
Sec. 1026.35(b)(1) unless the transaction is otherwise exempt (such as
a reverse mortgage or home equity line of credit).
35(b)(3) Cancellation.
1. Termination of underlying debt obligation. Section
1026.35(b)(3)(i) provides that, in general, an escrow account required
by Sec. 1026.35(b)(1) may not be cancelled until the underlying debt
obligation is terminated or the consumer requests cancellation at least
five years after consummation. Methods by which an underlying debt
obligation may be terminated include, among other things, repayment,
refinancing, rescission, and foreclosure.
2. Minimum durations. Section 1026.35(b)(3) establishes minimum
durations for which escrow accounts established pursuant to Sec.
1026.35(b)(1) must be maintained. This requirement does not affect a
creditor's right or obligation, pursuant to the terms of the legal
obligation or applicable law, to offer or require an escrow account
thereafter.
3. Less than eighty percent unpaid principal balance. The term
``original value'' in Sec. 1026.35(b)(3)(ii)(A) means the lesser of
the sales price reflected in the sales contract for the property, if
any, or the appraised value of the property at the time the transaction
was consummated. In determining whether the unpaid principal balance
has reached less than 80 percent of the original value of the property
securing the underlying debt, the creditor or servicer shall count any
subordinate lien of which it has reason to know. If the consumer
certifies in writing that the equity in the property securing the
underlying debt obligation is unencumbered by a subordinate lien, the
creditor or servicer may rely upon the certification in making its
determination unless it has actual knowledge to the contrary.
* * * * *
Dated: January 10, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-00734 Filed 1-16-13; 11:15 am]
BILLING CODE 4810-AM-P