Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z), 6407-6620 [2013-00736]
Download as PDF
Vol. 78
Wednesday,
No. 20
January 30, 2013
Part II
Bureau of Consumer Financial Protection
sroberts on DSK5SPTVN1PROD with
12 CFR Part 1026
Ability-to-Repay and Qualified Mortgage Standards under the Truth in
Lending Act (Regulation Z); Final Rule
VerDate Mar<15>2010
21:02 Jan 29, 2013
Jkt 229001
PO 00000
Frm 00001
Fmt 4717
Sfmt 4717
E:\FR\FM\30JAR2.SGM
30JAR2
6408
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
BUREAU OF CONSUMER FINANCIAL
PROTECTION
12 CFR Part 1026
[CFPB–2011–0008; CFPB–2012–0022]
RIN 3170–AA17
Ability-to-Repay and Qualified
Mortgage Standards 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
amending Regulation Z, which
implements the Truth in Lending Act
(TILA). Regulation Z currently prohibits
a creditor from making a higher-priced
mortgage loan without regard to the
consumer’s ability to repay the loan.
The final rule implements sections 1411
and 1412 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(Dodd-Frank Act), which generally
require creditors to make a reasonable,
good faith determination of a
consumer’s ability to repay any
consumer credit transaction secured by
a dwelling (excluding an open-end
credit plan, timeshare plan, reverse
mortgage, or temporary loan) and
establishes certain protections from
liability under this requirement for
‘‘qualified mortgages.’’ The final rule
also implements section 1414 of the
Dodd-Frank Act, which limits
prepayment penalties. Finally, the final
rule requires creditors to retain evidence
of compliance with the rule for three
years after a covered loan is
consummated.
DATES: The rule is effective January 10,
2014.
FOR FURTHER INFORMATION CONTACT:
Joseph Devlin, Gregory Evans, David
Friend, Jennifer Kozma, Eamonn K.
Moran, or Priscilla Walton-Fein,
Counsels; Thomas J. Kearney or Mark
Morelli, Senior Counsels; or Stephen
Shin, Managing Counsel, Office of
Regulations, at (202) 435–7700.
SUPPLEMENTARY INFORMATION:
sroberts on DSK5SPTVN1PROD with
SUMMARY:
I. Summary of the Final Rule
The Consumer Financial Protection
Bureau (Bureau) is issuing a final rule
to implement laws requiring mortgage
lenders to consider consumers’ ability to
repay home loans before extending them
credit. The rule will take effect on
January 10, 2014.
The Bureau is also releasing a
proposal to seek comment on whether to
adjust the final rule for certain
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
community-based lenders, housing
stabilization programs, certain
refinancing programs of the Federal
National Mortgage Association (Fannie
Mae) or the Federal Home Loan
Mortgage Corporation (Freddie Mac)
(collectively, the GSEs) and Federal
agencies, and small portfolio creditors.
The Bureau expects to finalize the
concurrent proposal this spring so that
affected creditors can prepare for the
January 2014 effective date.
Background
During the years preceding the
mortgage crisis, too many mortgages
were made to consumers without regard
to the consumer’s ability to repay the
loans. Loose underwriting practices by
some creditors—including failure to
verify the consumer’s income or debts
and qualifying consumers for mortgages
based on ‘‘teaser’’ interest rates that
would cause monthly payments to jump
to unaffordable levels after the first few
years—contributed to a mortgage crisis
that led to the nation’s most serious
recession since the Great Depression.
In response to this crisis, in 2008 the
Federal Reserve Board (Board) adopted
a rule under the Truth in Lending Act
which prohibits creditors from making
‘‘higher-price mortgage loans’’ without
assessing consumers’ ability to repay the
loans. Under the Board’s rule, a creditor
is presumed to have complied with the
ability-to-repay requirements if the
creditor follows certain specified
underwriting practices. This rule has
been in effect since October 2009.
In the 2010 Dodd-Frank Wall Street
Reform and Consumer Protection Act,
Congress required that for residential
mortgages, creditors must make a
reasonable and good faith determination
based on verified and documented
information that the consumer has a
reasonable ability to repay the loan
according to its terms. Congress also
established a presumption of
compliance for a certain category of
mortgages, called ‘‘qualified mortgages.’’
These provisions are similar, but not
identical to, the Board’s 2008 rule and
cover the entire mortgage market rather
than simply higher-priced mortgages.
The Board proposed a rule to implement
the new statutory requirements before
authority passed to the Bureau to
finalize the rule.
Summary of Final Rule
The final rule contains the following
key elements:
Ability-to-Repay Determinations. The
final rule describes certain minimum
requirements for creditors making
ability-to-repay determinations, but
does not dictate that they follow
PO 00000
Frm 00002
Fmt 4701
Sfmt 4700
particular underwriting models. At a
minimum, creditors generally must
consider eight underwriting factors: (1)
Current or reasonably expected income
or assets; (2) current employment status;
(3) the monthly payment on the covered
transaction; (4) the monthly payment on
any simultaneous loan; (5) the monthly
payment for mortgage-related
obligations; (6) current debt obligations,
alimony, and child support; (7) the
monthly debt-to-income ratio or
residual income; and (8) credit history.
Creditors must generally use reasonably
reliable third-party records to verify the
information they use to evaluate the
factors.
The rule provides guidance as to the
application of these factors under the
statute. For example, monthly payments
must generally be calculated by
assuming that the loan is repaid in
substantially equal monthly payments
during its term. For adjustable-rate
mortgages, the monthly payment must
be calculated using the fully indexed
rate or an introductory rate, whichever
is higher. Special payment calculation
rules apply for loans with balloon
payments, interest-only payments, or
negative amortization.
The final rule also provides special
rules to encourage creditors to refinance
‘‘non-standard mortgages’’—which
include various types of mortgages
which can lead to payment shock that
can result in default—into ‘‘standard
mortgages’’ with fixed rates for at least
five years that reduce consumers’
monthly payments.
Presumption for Qualified Mortgages.
The Dodd-Frank Act provides that
‘‘qualified mortgages’’ are entitled to a
presumption that the creditor making
the loan satisfied the ability-to-repay
requirements. However, the Act did not
specify whether the presumption of
compliance is conclusive (i.e., creates a
safe harbor) or is rebuttable. The final
rule provides a safe harbor for loans that
satisfy the definition of a qualified
mortgage and are not ‘‘higher-priced,’’
as generally defined by the Board’s 2008
rule. The final rule provides a rebuttable
presumption for higher-priced mortgage
loans, as described further below.
The line the Bureau is drawing is one
that has long been recognized as a rule
of thumb to separate prime loans from
subprime loans. Indeed, under the
existing regulations that were adopted
by the Board in 2008, only higher-priced
mortgage loans are subject to an abilityto-repay requirement and a rebuttable
presumption of compliance if creditors
follow certain requirements. The new
rule strengthens the requirements
needed to qualify for a rebuttable
presumption for subprime loans and
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
defines with more particularity the
grounds for rebutting the presumption.
Specifically, the final rule provides that
consumers may show a violation with
regard to a subprime qualified mortgage
by showing that, at the time the loan
was originated, the consumer’s income
and debt obligations left insufficient
residual income or assets to meet living
expenses. The analysis would consider
the consumer’s monthly payments on
the loan, loan-related obligations, and
any simultaneous loans of which the
creditor was aware, as well as any
recurring, material living expenses of
which the creditor was aware. Guidance
accompanying the rule notes that the
longer the period of time that the
consumer has demonstrated actual
ability to repay the loan by making
timely payments, without modification
or accommodation, after consummation
or, for an adjustable-rate mortgage, after
recast, the less likely the consumer will
be able to rebut the presumption based
on insufficient residual income.
With respect to prime loans—which
are not currently covered by the Board’s
ability-to-repay rule—the final rule
applies the new ability-to-repay
requirements but creates a strong
presumption for those prime loans that
constitute qualified mortgages. Thus, if
a prime loan satisfies the qualified
mortgage criteria described below, it
will be conclusively presumed that the
creditor made a good faith and
reasonable determination of the
consumer’s ability to repay.
General Requirements for Qualified
Mortgages. The Dodd-Frank Act sets
certain product-feature prerequisites
and affordability underwriting
requirements for qualified mortgages
and vests discretion in the Bureau to
decide whether additional underwriting
or other requirements should apply. The
final rule implements the statutory
criteria, which generally prohibit loans
with negative amortization, interestonly payments, balloon payments, or
terms exceeding 30 years from being
qualified mortgages. So-called ‘‘no-doc’’
loans where the creditor does not verify
income or assets also cannot be
qualified mortgages. Finally, a loan
generally cannot be a qualified mortgage
if the points and fees paid by the
consumer exceed three percent of the
total loan amount, although certain
‘‘bona fide discount points’’ are
excluded for prime loans. The rule
provides guidance on the calculation of
points and fees and thresholds for
smaller loans.
The final rule also establishes general
underwriting criteria for qualified
mortgages. Most importantly, the
general rule requires that monthly
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
payments be calculated based on the
highest payment that will apply in the
first five years of the loan and that the
consumer have a total (or ‘‘back-end’’)
debt-to-income ratio that is less than or
equal to 43 percent. The appendix to the
rule details the calculation of debt-toincome for these purposes, drawing
upon Federal Housing Administration
guidelines for such calculations. The
Bureau believes that these criteria will
protect consumers by ensuring that
creditors use a set of underwriting
requirements that generally safeguard
affordability. At the same time, these
criteria provide bright lines for creditors
who want to make qualified mortgages.
The Bureau also believes that there
are many instances in which individual
consumers can afford a debt-to-income
ratio above 43 percent based on their
particular circumstances, but that such
loans are better evaluated on an
individual basis under the ability-torepay criteria rather than with a blanket
presumption. In light of the fragile state
of the mortgage market as a result of the
recent mortgage crisis, however, the
Bureau is concerned that creditors may
initially be reluctant to make loans that
are not qualified mortgages, even though
they are responsibly underwritten. The
final rule therefore provides for a
second, temporary category of qualified
mortgages that have more flexible
underwriting requirements so long as
they satisfy the general product feature
prerequisites for a qualified mortgage
and also satisfy the underwriting
requirements of, and are therefore
eligible to be purchased, guaranteed or
insured by either (1) the GSEs while
they operate under Federal
conservatorship or receivership; or (2)
the U.S. Department of Housing and
Urban Development, Department of
Veterans Affairs, or Department of
Agriculture or Rural Housing Service.
This temporary provision will phase out
over time as the various Federal
agencies issue their own qualified
mortgage rules and if GSE
conservatorship ends, and in any event
after seven years.
Rural Balloon-Payment Qualified
Mortgages. The final rule also
implements a special provision in the
Dodd-Frank Act that would treat certain
balloon-payment mortgages as qualified
mortgages if they are originated and
held in portfolio by small creditors
operating predominantly in rural or
underserved areas. This provision is
designed to assure credit availability in
rural areas, where some creditors may
only offer balloon-payment mortgages.
Loans are only eligible if they have a
term of at least five years, a fixedinterest rate, and meet certain basic
PO 00000
Frm 00003
Fmt 4701
Sfmt 4700
6409
underwriting standards; debt-to-income
ratios must be considered but are not
subject to the 43 percent general
requirement.
Creditors are only eligible to make
rural balloon-payment qualified
mortgages if they originate at least 50
percent of their first-lien mortgages in
counties that are rural or underserved,
have less than $2 billion in assets, and
(along with their affiliates) originate no
more than 500 first-lien mortgages per
year. The Bureau will designate a list of
‘‘rural’’ and ‘‘underserved’’ counties
each year, and has defined coverage
more broadly than originally had been
proposed. Creditors must generally hold
the loans on their portfolios for three
years in order to maintain their
‘‘qualified mortgage’’ status.
Other Final Rule Provisions. The final
rule also implements Dodd-Frank Act
provisions that generally prohibit
prepayment penalties except for certain
fixed-rate, qualified mortgages where
the penalties satisfy certain restrictions
and the creditor has offered the
consumer an alternative loan without
such penalties. To match with certain
statutory changes, the final rule also
lengthens to three years the time
creditors must retain records that
evidence compliance with the ability-torepay and prepayment penalty
provisions and prohibits evasion of the
rule by structuring a closed-end
extension of credit that does not meet
the definition of open-end credit as an
open-end plan.
Summary of Concurrent Proposal
The concurrent proposal seeks
comment on whether the general abilityto-repay and qualified mortgage rule
should be modified to address potential
adverse consequences on certain
narrowly-defined categories of lending
programs. Because those measures were
not proposed by the Board originally,
the Bureau believes additional public
input would be helpful. Specifically, the
proposal seeks comment on whether it
would be appropriate to exempt
designated non-profit lenders,
homeownership stabilization programs,
and certain Federal agency and GSE
refinancing programs from the abilityto-repay requirements because they are
subject to their own specialized
underwriting criteria.
The proposal also seeks comment on
whether to create a new category of
qualified mortgages, similar to the one
for rural balloon-payment mortgages, for
loans without balloon-payment features
that are originated and held on portfolio
by small creditors. The new category
would not be limited to lenders that
operate predominantly in rural or
E:\FR\FM\30JAR2.SGM
30JAR2
6410
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
underserved areas, but would use the
same general size thresholds and other
criteria as the rural balloon-payment
rules. The proposal also seeks comment
on whether to increase the threshold
separating safe harbor and rebuttable
presumption qualified mortgages for
both rural balloon-payment qualified
mortgages and the new small portfolio
qualified mortgages, in light of the fact
that small creditors often have higher
costs of funds than larger creditors.
Specifically, the Bureau is proposing a
threshold of 3.5 percentage points above
APOR for first-lien loans.
II. Background
For over 20 years, consumer
advocates, legislators, and regulators
have raised concerns about creditors
originating mortgage loans without
regard to the consumer’s ability to repay
the loan. Beginning in about 2006, these
concerns were heightened as mortgage
delinquencies and foreclosure rates
increased dramatically, caused in part
by the loosening of underwriting
standards. See 73 FR 44524 (July 30,
2008). The following discussion
provides background information,
including a brief summary of the
legislative and regulatory responses to
the foregoing concerns, which
culminated in the enactment of the
Dodd-Frank Act on July 21, 2010, the
Board’s May 11, 2011, proposed rule to
implement certain amendments to TILA
made by the Dodd-Frank Act, and now
the Bureau’s issuance of this final rule
to implement sections 1411, 1412, and
1414 of that act.
A. The Mortgage Market
sroberts on DSK5SPTVN1PROD with
Overview of the Market and the
Mortgage Crisis
The mortgage market is the single
largest market for consumer financial
products and services in the United
States, with approximately $9.9 trillion
in mortgage loans outstanding.1 During
the last decade, the market went
through an unprecedented cycle of
expansion and contraction that was
fueled in part by the securitization of
mortgages and creation of increasingly
sophisticated derivative products. So
many other parts of the American
financial system were drawn into
mortgage-related activities that, when
the housing market collapsed in 2008, it
sparked the most severe recession in the
1 Fed. Reserve Sys., Flow of Funds Accounts of
the United States, at 67 tbl.L.10 (2012), available at
http://www.federalreserve.gov/releases/z1/Current/
z1.pdf (as of the end of the third quarter of 2012).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
United States since the Great
Depression.2
The expansion in this market is
commonly attributed to both particular
economic conditions (including an era
of low interest rates and rising housing
prices) and to changes within the
industry. Interest rates dropped
significantly—by more than 20
percent—from 2000 through 2003.3
Housing prices increased dramatically—
about 152 percent—between 1997 and
2006.4 Driven by the decrease in interest
rates and the increase in housing prices,
the volume of refinancings increased
rapidly, from about 2.5 million loans in
2000 to more than 15 million in 2003.5
In the mid-2000s, the market
experienced a steady deterioration of
credit standards in mortgage lending,
with evidence that loans were made
solely against collateral, or even against
expected increases in the value of
collateral, and without consideration of
ability to repay. This deterioration of
credit standards was particularly
evidenced by the growth of ‘‘subprime’’
and ‘‘Alt-A’’ products, which consumers
were often unable to repay.6 Subprime
products were sold primarily to
consumers with poor or no credit
history, although there is evidence that
2 See Thomas F. Siems, Branding the Great
Recession, Fin. Insights (Fed. Reserve Bank of Dall.)
May 13, 2012, at 3, available at http://
www.dallasfed.org/assets/documents/banking/firm/
fi/fi1201.pdf (stating that the [great recession] ‘‘was
the longest and deepest economic contraction, as
measured by the drop in real GDP, since the Great
Depression.’’).
3 See U.S. Dep’t of Hous. & Urban Dev., An
Analysis of Mortgage Refinancing, 2001–2003, at 2
(2004) (‘‘An Analysis of Mortgage Refinancing,
2001–2003’’), available at www.huduser.org/
Publications/pdf/MortgageRefinance03.pdf;
Souphala Chomsisengphet & Anthony PenningtonCross, The Evolution of the Subprime Mortgage
Market, 88 Fed. Res. Bank of St. Louis Rev. 31, 48
(2006), available at http://research.stlouisfed.org/
publications/review/article/5019.
4 U.S. Fin. Crisis Inquiry Comm’n, The Financial
Crisis Inquiry Report: Final Report of the National
Commission on the Causes of the Financial and
Economic Crisis in the United States 156 (Official
Gov’t ed. 2011) (‘‘FCIC Report’’), available at
http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPOFCIC.pdf.
5 An Analysis of Mortgage Refinancing, 2001–
2003, at 1.
6 FCIC Report at 88. These products included
most notably 2/28 and 3/27 hybrid adjustable rate
mortgages (ARMs) and option ARM products. Id. at
106. A hybrid ARM is an adjustable rate mortgage
loan that has a low fixed introductory rate for a
certain period of time. An option ARM is an
adjustable rate mortgage loan that has a scheduled
loan payment that may result in negative
amortization for a certain period of time, but that
expressly permits specified larger payments in the
contract or servicing documents, such as an
interest-only payment or a fully amortizing
payment. For these loans, the scheduled negatively
amortizing payment was typically described in
marketing and servicing materials as the ‘‘optional
payment.’’ These products were often marketed to
subprime customers.
PO 00000
Frm 00004
Fmt 4701
Sfmt 4700
some consumers who would have
qualified for ‘‘prime’’ loans were steered
into subprime loans as well.7 The AltA category of loans permitted
consumers to take out mortgage loans
while providing little or no
documentation of income or other
evidence of repayment ability. Because
these loans involved additional risk,
they were typically more expensive to
consumers than ‘‘prime’’ mortgages,
although many of them had very low
introductory interest rates. In 2003,
subprime and Alt-A origination volume
was about $400 billion; in 2006, it had
reached $830 billion.8
So long as housing prices were
continuing to increase, it was relatively
easy for consumers to refinance their
existing loans into more affordable
products to avoid interest rate resets and
other adjustments. When housing prices
began to decline in 2005, however,
refinancing became more difficult and
delinquency rates on subprime and AltA products increased dramatically.9
More and more consumers, especially
those with subprime and Alt-A loans,
were unable or unwilling to make their
mortgage payments. An early sign of the
mortgage crisis was an upswing in early
payment defaults—generally defined as
borrowers being 60 or more days
delinquent within the first year. Prior to
2006, 1.1 percent of mortgages would
end up 60 or more days delinquent
within the first two years.10 Taking a
more expansive definition of early
payment default to include 60 days
delinquent within the first two years,
this figure was double the historic
average during 2006, 2007 and 2008.11
In 2006, 2007, and 2008, 2.3 percent, 2.1
percent, and 2.3 percent of mortgages
ended up 60 or more days delinquent
within the first two years, respectively.
By the summer of 2006, 1.5 percent of
loans less than a year old were in
7 For example, the Federal Reserve Board on July
18, 2011, issued a consent cease and desist order
and assessed an $85 million civil money penalty
against Wells Fargo & Company of San Francisco,
a registered bank holding company, and Wells
Fargo Financial, Inc., of Des Moines. The order
addresses allegations that Wells Fargo Financial
employees steered potential prime-eligible
consumers into more costly subprime loans and
separately falsified income information in mortgage
applications. In addition to the civil money penalty,
the order requires that Wells Fargo compensate
affected consumers. See Press Release, Fed. Reserve
Bd. (July 20, 2011), available at http://
www.federalreserve.gov/newsevents/press/
enforcement/20110720a.htm.
8 Inside Mortg. Fin., Mortgage Originations by
Product, in 1. The 2011 Mortgage Market Statistical
Annual 20 (2011).
9 FCIC Report at 215–217.
10 CoreLogic’s TrueStandings Servicing (reflects
first-lien mortgage loans) (data service accessible
only through paid subscription).
11 Id.
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
default, and this figure peaked at 2.5
percent in late 2007, well above the 1.0
percent peak in the 2000 recession.12
First payment defaults—mortgages
taken out by consumers who never
made a single payment—exceeded 1.5
percent of loans in early 2007.13 In
addition, as the economy worsened, the
rates of serious delinquency (90 or more
days past due or in foreclosure) for the
subprime and Alt-A products began a
steep increase from approximately 10
percent in 2006, to 20 percent in 2007,
to more than 40 percent in 2010.14
The impact of this level of
delinquencies was severe on creditors
who held loans on their books and on
private investors who purchased loans
directly or through securitized vehicles.
Prior to and during the bubble, the
evolution of the securitization of
mortgages attracted increasing
involvement from financial institutions
that were not directly involved in the
extension of credit to consumers and
from investors worldwide.
Securitization of mortgages allows
originating creditors to sell off their
loans (and reinvest the funds earned in
making new ones) to investors who
want an income stream over time.
Securitization had been pioneered by
what are now called governmentsponsored enterprises (GSEs), including
the Federal National Mortgage
Association (Fannie Mae) and the
Federal Home Loan Mortgage
Corporation (Freddie Mac). But by the
early 2000s, large numbers of private
financial institutions were deeply
involved in creating increasingly
complex mortgage-related investment
vehicles through securities and
derivative products. The private
securitization-backed subprime and AltA mortgage market ground to a halt in
2007 in the face of the rising
delinquencies on subprime and Alt-A
products.15
Six years later, the United States
continues to grapple with the fallout.
The fall in housing prices is estimated
to have resulted in about $7 trillion in
household wealth losses.16 In addition,
distressed homeownership and
12 Id. at 215. (CoreLogic Chief Economist Mark
Fleming told the FCIC that the early payment
default rate ‘‘certainly correlates with the increase
in the Alt-A and subprime shares and the turn of
the housing market and the sensitivity of those loan
products.’’).
13 Id.
14 Id. at 217.
15 Id. at 124.
16 The U.S. Housing Market: Current Conditions
and Policy Considerations, at 3 (Fed. Reserve Bd.,
White Paper, 2012), available at http://
www.federalreserve.gov/publications/other-reports/
files/housing-white-paper-20120104.pdf.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
foreclosure rates remain at
unprecedented levels.17
Response and Government Programs
In light of these conditions, the
Federal government began providing
support to the mortgage markets in 2008
and continues to do so at extraordinary
levels today. The Housing and
Economic Recovery Act of 2008, which
became effective on October 1, 2008,
provided both new safeguards and
increased regulation for Fannie Mae and
Freddie Mac, as well as provisions to
assist troubled borrowers and to the
hardest hit communities. Fannie Mae
and Freddie Mac, which supported the
mainstream mortgage market,
experienced heavy losses and were
placed in conservatorship by the
Federal government in 2008 to support
the collapsing mortgage market.18
Because private investors have
withdrawn from the mortgage
securitization market and there are no
other effective secondary market
mechanisms in place, the GSEs’
continued operations help ensure that
the secondary mortgage market
continues to function and to assist
consumers in obtaining new mortgages
or refinancing existing mortgages. The
Troubled Asset Relief Program (TARP),
created to implement programs to
stabilize the financial system during the
financial crisis, was authorized through
the Emergency Economic Stabilization
Act of 2008 (EESA), as amended by the
American Recovery and Reinvestment
Act of 2009, and includes programs to
help struggling homeowners avoid
17 Lender Processing Servs., PowerPoint
Presentation, LPS Mortgage Monitor: May 2012
Mortgage Performance Observations, Data as of
April 2012 Month End, 3, 11 (May 2012), available
at http://www.lpsvcs.com/
LPSCorporateInformation/CommunicationCenter/
DataReports/Pages/Mortgage-Monitor.aspx.
18 The Housing and Economic Recovery Act of
2008 (HERA), which created the Federal Housing
Finance Agency (FHFA), granted the Director of
FHFA discretionary authority to appoint FHFA
conservator or receiver of the Enterprises ‘‘for the
purpose of reorganizing, rehabilitating, or winding
up the affairs of a regulated entity.’’ Housing and
Economic Recovery Act of 2008, section 1367 (a)(2),
amending the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992, 12
U.S.C. 4617(a)(2). On September 6, 2008, FHFA
exercised that authority, placing the Federal
National Mortgage Association (Fannie Mae) and
the Federal Home Loan Mortgage Corporation
(Freddie Mac) into conservatorships. The two GSEs
have since received more than $180 billion in
support from the Treasury Department. Through the
second quarter of 2012, Fannie Mae has drawn
$116.1 billion and Freddie Mac has drawn $71.3
billion, for an aggregate draw of $187.5 billion from
the Treasury Department. Fed. Hous. Fin. Agency,
Conservator’s Report on the Enterprises’ Financial
Performance, at 17 (Second Quarter 2012), available
at http://www.fhfa.gov/webfiles/24549/
ConservatorsReport2Q2012.pdf.
PO 00000
Frm 00005
Fmt 4701
Sfmt 4700
6411
foreclosure.19 Since 2008, several other
Federal government efforts have
endeavored to keep the country’s
housing finance system functioning,
including the Treasury Department’s
and the Federal Reserve System’s
mortgage-backed securities (MBS)
purchase programs to help keep interest
rates low and the Federal Housing
Administration’s (FHA’s) increased
market presence. As a result, mortgage
credit has remained available, albeit
with more restrictive underwriting
terms that limit or preclude some
consumers’ access to credit. These same
government agencies together with the
GSEs and other market participants
have also undertaken a series of efforts
to help families avoid foreclosure
through loan-modification programs,
loan-refinance programs and foreclosure
alternatives.20
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 2011.21 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 mortgage
loans to finance at least some of the
19 The Making Home Affordable Program (MHA)
is the umbrella program for Treasury’s homeowner
assistance and foreclosure mitigation efforts. The
main MHA components are the Home Affordable
Modification Program (HAMP), a Treasury program
that uses TARP funds to provide incentives for
mortgage servicers to modify eligible first-lien
mortgages, and two initiatives at the GSEs that use
non-TARP funds. Incentive payments for
modifications to loans owned or guaranteed by the
GSEs are paid by the GSEs, not TARP. Treasury
over time expanded MHA to include sub-programs
designed to overcome obstacles to sustainable
HAMP modifications. Treasury also allocated TARP
funds to support two additional housing support
efforts: An FHA refinancing program and TARP
funding for 19 state housing finance agencies,
called the Housing Finance Agency Hardest Hit
Fund. In the first half of 2012, Treasury extended
the application period for HAMP by a year to
December 31, 2013, and opened HAMP to nonowner-occupied rental properties and to consumers
with a wider range of debt-to-income ratios under
‘‘HAMP Tier 2.’’
20 The Home Affordable Refinance Program
(HARP) is designed to help eligible homeowners
refinance their mortgage. HARP is designed for
those homeowners who are current on their
mortgage payments but have been unable to get
traditional refinancing because the value of their
homes has declined. For a mortgage to be
considered for a HARP refinance, it must be owned
or guaranteed by the GSEs. HARP ends on
December 31, 2013.
21 Moody’s Analytics, Credit Forecast 2012 (2012)
(‘‘Credit Forecast 2012’’), available at http://
www.economy.com/default.asp (reflects first-lien
mortgage loans) (data service accessibly only
through paid subscription).
E:\FR\FM\30JAR2.SGM
30JAR2
6412
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
purchase price of their property. In
2011, 93 percent of all home purchases
were financed with a mortgage credit
transaction.22
Consumers may obtain mortgage
credit to purchase a home, to refinance
an existing mortgage, to access home
equity, or to finance home
improvement. Purchase loans and
refinancings together produced 6.3
million new first-lien mortgage loan
originations in 2011.23 The proportion
of loans that are for purchases as
opposed to refinances 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 loans, by
volume.24 Historically the distribution
has been more even. In 2000, refinances
accounted for 44 percent of the market
while purchase loans comprised 56
percent; in 2005, the two products were
split evenly.25
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 loan originations in
2011.26
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
(quarter of the transactions are below,
quarter of the transactions are above)
was $47,000 to $142,000.
GSE-eligible loans, together with the
other federally insured or guaranteed
loans, cover the majority of the current
mortgage market. Since entering
conservatorship in September 2008, the
22 Inside Mortg. Fin., New Homes Sold by
Financing, in 1 The 2012 Mortgage Market
Statistical Annual 12 (2012).
23 Credit Forecast 2012.
24 Inside Mortg. Fin., Mortgage Originations by
Product, in The 2012 Mortgage Market Statistical
Annual 17 (2012).
25 Id. These percentages are based on the dollar
amount of the loans.
26 Credit Forecast (2012) (reflects open-end and
closed-end home equity loans).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
GSEs have bought or guaranteed roughly
three of every four mortgages originated
in the country. Mortgages guaranteed by
FHA make up most of the rest.27
Outside of the securitization available
through the Government National
Mortgage Association (Ginnie Mae) for
loans primarily backed by FHA, there
are very few alternatives in place today
to assume the secondary market
functions served by the GSEs.28
Continued Fragility of the Mortgage
Market
The current mortgage market is
especially fragile as a result of the recent
mortgage crisis. Tight credit remains an
important factor in the contraction in
mortgage lending seen over the past few
years. Mortgage loan terms and credit
standards have tightened most for
consumers with lower credit scores and
with less money available for a down
payment. According to CoreLogic’s
TrueStandings Servicing, a proprietary
data service that covers about two-thirds
of the mortgage market, average
underwriting standards have tightened
considerably since 2007. Through the
first nine months of 2012, for consumers
that have received closed-end first-lien
mortgages, the weighted average FICO 29
score was 750, the loan-to-value (LTV)
ratio was 78 percent, and the debt-toincome (DTI) ratio was 34.5 percent.30
In comparison, in the peak of the
housing bubble in 2007, the weighted
average FICO score was 706, the LTV
was 80 percent, and the DTI was 39.8
percent.31
In this tight credit environment, the
data suggest that creditors are not
willing to take significant risks. In terms
of the distribution of origination
characteristics, for 90 percent of all the
Fannie Mae and Freddie Mac mortgage
27 Fed. Hous. Fin. Agency, A Strategic Plan for
Enterprise Conservatorships: The Next Chapter in a
Story that Needs an Ending, at 14 (2012) (‘‘FHFA
Report’’), available at http://www.fhfa.gov/webfiles/
23344/StrategicPlanConservatorshipsFINAL.pdf.
28 FHFA Report at 8–9. Secondary market
issuance remains heavily reliant upon the explicitly
government guaranteed securities of FNMA,
FHLMC, and GNMA. Through the first three
quarters of 2012, approximately $1.2 trillion of the
$1.33 trillion in mortgage originations have been
securitized, less than $10 billion of the $1.2 trillion
were non-agency mortgage backed securities. Inside
Mortgage Finance (Nov. 2, 2012), at 4.
29 FICO is a type of credit score that makes up a
substantial portion of the credit report that lenders
use to assess an applicant’s credit risk and whether
to extend a loan
30 CoreLogic, TrueStandings Servicing Database,
available at http://www.truestandings.com (data
reflects first-lien mortgage loans) (data service
accessible only through paid subscription).
According to CoreLogic’s TrueStandings Servicing,
FICO reports that in 2011, approximately 38 percent
of consumers receiving first-lien mortgage credit
had a FICO score of 750 or greater.
31 Id.
PO 00000
Frm 00006
Fmt 4701
Sfmt 4700
loans originated in 2011, consumers had
a FICO score over 700 and a DTI less
than 44 percent.32 According to the
Federal Reserve’s Senior Loan Officer
Opinion Survey on Bank Lending
Practices, in April 2012 nearly 60
percent of creditors reported that they
would be much less likely, relative to
2006, to originate a conforming homepurchase mortgage 33 to a consumer
with a 10 percent down payment and a
credit score of 620—a traditional marker
for those consumers with weaker credit
histories.34 The Federal Reserve Board
calculates that the share of mortgage
borrowers with credit scores below 620
has fallen from about 17 percent of
consumers at the end of 2006 to about
5 percent more recently.35 Creditors also
appear to have pulled back on offering
these consumers loans insured by the
FHA, which provides mortgage
insurance on loans made by FHAapproved creditors throughout the
United States and its territories and is
especially structured to help promote
affordability.36
The Bureau is acutely aware of the
high levels of anxiety in the mortgage
market today. These concerns include
the continued slow pace of recovery, the
confluence of multiple major regulatory
and capital initiatives, and the
compliance burdens of the various
Dodd-Frank Act rulemakings (including
uncertainty on what constitutes a
qualified residential mortgage (QRM),
which, as discussed below, relates to the
Dodd-Frank Act’s credit risk retention
requirements and mortgage
securitizations). These concerns are
causing discussion about whether
creditors will consider exiting the
business. The Bureau acknowledges that
it will likely take some time for the
mortgage market to stabilize and that
creditors will need to adjust their
operations to account for several major
regulatory and capital regimes.
B. TILA and Regulation Z
In 1968, Congress enacted the Truth
in Lending Act (TILA), 15 U.S.C. 1601
32 Id.
33 A conforming mortgage is one that is eligible
for purchase or credit guarantee by Fannie Mae or
Freddie Mac.
34 Fed. Reserve Bd., Senior Loan Officer Opinion
Survey on Bank Lending Practices, available at
http://www.federalreserve.gov/boarddocs/
SnLoanSurvey/default.htm.
35 Federal Reserve Board staff calculations based
on the Federal Reserve Bank of New York
Consumer Credit Panel. The 10th percentile of
credit scores on mortgage originations rose from 585
in 2006 to 635 at the end of 2011.
36 FHA insures mortgages on single family and
multifamily homes including manufactured homes
and hospitals. It is the largest insurer of mortgages
in the world, insuring over 34 million properties
since its inception in 1934.
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
et seq., based on findings that the
informed use of credit resulting from
consumers’ awareness of the cost of
credit would enhance economic
stability and competition among
consumer credit providers. One of the
purposes of TILA is to promote the
informed use of consumer credit by
requiring disclosures about its costs and
terms. See 15 U.S.C. 1601. TILA
requires additional disclosures for loans
secured by consumers’ homes and
permits consumers to rescind certain
transactions secured by their principal
dwellings when the required disclosures
are not provided. 15 U.S.C. 1635, 1637a.
Section 105(a) of TILA directs the
Bureau (formerly directed the Board of
Governors of the Federal Reserve
System) to prescribe regulations to carry
out TILA’s purposes and specifically
authorizes the Bureau, among other
things, to issue regulations that contain
such additional requirements,
classifications, differentiations, or other
provisions, or that provide for such
adjustments and exceptions for all or
any class of transactions, that in the
Bureau’s judgment are necessary or
proper to effectuate the purposes of
TILA, facilitate compliance thereof, or
prevent circumvention or evasion
therewith. See 15 U.S.C. 1604(a).
General rulemaking authority for
TILA transferred to the Bureau in July
2011, other than for certain motor
vehicle dealers in accordance with the
Dodd-Frank Act section 1029, 12 U.S.C.
5519. 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 the Bureau’s
rulemaking authority by section 1029 of
the Dodd-Frank Act). 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. The Official Staff
Interpretations interpret the
requirements of the regulation and
provides guidance to creditors in
applying the rules to specific
transactions. See 12 CFR part 1026,
Supp. I.
C. The Home Ownership and Equity
Protection Act (HOEPA) and HOEPA
Rules
In response to evidence of abusive
practices in the home-equity lending
market, in 1994 Congress amended
TILA by enacting the Home Ownership
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
and Equity Protection Act (HOEPA) as
part of the Riegle Community
Development and Regulatory
Improvement Act of 1994. Public Law
103–325, 108 Stat. 2160. HOEPA was
enacted as an amendment to TILA to
address abusive practices in refinancing
and home-equity mortgage loans with
high interest rates or high fees.37 Loans
that meet HOEPA’s high-cost triggers are
subject to special disclosure
requirements and restrictions on loan
terms, and consumers with high-cost
mortgages have enhanced remedies for
violations of the law.38
The statute applied generally to
closed-end mortgage credit, but
excluded purchase money mortgage
loans and reverse mortgages. Coverage
was triggered where a loan’s annual
percentage rate (APR) exceeded
comparable Treasury securities by
specified thresholds for particular loan
types, or where points and fees
exceeded eight percent of the total loan
amount or a dollar threshold.39
For high-cost loans meeting either of
those thresholds, HOEPA required
creditors to provide special pre-closing
disclosures, restricted prepayment
penalties and certain other loan terms,
and regulated various creditor practices,
such as extending credit without regard
to a consumer’s ability to repay the loan.
HOEPA also provided a mechanism for
consumers to rescind covered loans that
included certain prohibited terms and to
obtain higher damages than are allowed
for other types of TILA violations.
Finally, HOEPA amended TILA section
131, 15
U.S.C. 1641, to provide that
purchasers of high-cost loans generally
are subject to all claims and defenses
against the original creditor with respect
to the mortgage, including a creditor’s
failure to make an ability-to-repay
determination before making the loan.
HOEPA created special substantive
protections for high-cost mortgages,
such as prohibiting a creditor from
engaging in a pattern or practice of
extending a high-cost mortgage to a
37 HOEPA amended TILA by adding new sections
103(aa) and 129, 15 U.S.C. 1602(aa) and 1639.
38 HOEPA defines a class of ‘‘high-cost
mortgages,’’ which are generally closed-end homeequity loans (excluding home-purchase loans) with
annual percentage rates (APRs) or total points and
fees exceeding prescribed thresholds. Mortgages
covered by the HOEPA amendments have been
referred to as ‘‘HOEPA loans,’’ ‘‘Section 32 loans,’’
or ‘‘high-cost mortgages.’’ The Dodd-Frank Act now
refers to these loans as ‘‘high-cost mortgages.’’ See
Dodd-Frank Act section 1431; TILA section 103(aa).
For simplicity and consistency, this final rule uses
the term ‘‘high-cost mortgages’’ to refer to mortgages
covered by the HOEPA amendments.
39 The Dodd-Frank Act adjusted the baseline for
the APR comparison, lowered the points and fees
threshold, and added a prepayment trigger.
PO 00000
Frm 00007
Fmt 4701
Sfmt 4700
6413
consumer based on the consumer’s
collateral without regard to the
consumer’s repayment ability, including
the consumer’s current and expected
income, current obligations, and
employment. TILA section 129(h); 15
U.S.C. 1639(h).
In addition to the disclosures and
limitations specified in the statute,
HOEPA expanded the Board’s
rulemaking authority, among other
things, to prohibit acts or practices the
Board found to be unfair and deceptive
in connection with mortgage loans.40
In 1995, the Board implemented the
HOEPA amendments at §§ 226.31,
226.32, and 226.33 41 of Regulation Z.
See 60 FR 15463 (Mar. 24, 1995). In
particular, § 226.32(e)(1) 42 implemented
TILA section 129(h)’s ability-to-repay
requirements to prohibit a creditor from
engaging in a pattern or practice of
extending a high-cost mortgage based on
the consumer’s collateral without regard
to the consumer’s repayment ability,
including the consumer’s current
income, current obligations, and
employment status.
In 2001, the Board published
additional significant changes to expand
both HOEPA’s protections to more loans
by revising the annual percentage rate
(APR) threshold for first-lien mortgage
loans, expanded the definition of points
and fees to include the cost of optional
credit insurance and debt cancellation
premiums, and enhanced the
restrictions associated with high-cost
loans. See 66 FR 65604 (Dec. 20, 2001).
In addition, the ability-to-repay
provisions in the regulation were
revised to provide for a presumption of
a violation of the rule if the creditor
engages in a pattern or practice of
making high-cost mortgages without
verifying and documenting the
consumer’s repayment ability.
40 As discussed above, with the enactment of the
Dodd-Frank Act, general rulemaking authority for
TILA, including HOEPA, transferred from the Board
to the Bureau on July 21, 2011.
41 Subsequently renumbered as sections 1026.31,
1026.32, and 1026.33 of Regulation Z. As discussed
above, 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
the Bureau’s rulemaking authority by section 1029
of the Dodd-Frank Act). 76 FR 79768 (Dec. 22,
2011). The Bureau’s Regulation Z took effect on
December 30, 2011.
42 Subsequently renumbered as section
1026.32(e)(1) of Regulation Z.
43 Along with the Board, the other Federal
banking agencies included the Office of the
Comptroller of the Currency (OCC), the Federal
Deposit Insurance Corporation (FDIC), Office of
Thrift Supervision (OTS), and the National Credit
Union Administration (NCUA).
E:\FR\FM\30JAR2.SGM
30JAR2
6414
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
D. 2006 and 2007 Interagency
Supervisory Guidance
In December 2005, the Federal
banking agencies 43 responded to
concerns about the rapid growth of
nontraditional mortgages in the
previous two years by proposing
supervisory guidance. Nontraditional
mortgages are mortgages that allow the
consumer to defer repayment of
principal and sometimes interest. The
guidance advised institutions of the
need to reduce ‘‘risk layering’’ with
respect to these products, such as by
failing to document income or lending
nearly the full appraised value of the
home. The final guidance issued in
September 2006 specifically advised
creditors that layering risks in
nontraditional mortgage loans to
consumers receiving subprime credit
may significantly increase risks to
consumers as well as institutions. See
Interagency Guidance on Nontraditional
Mortgage Product Risks, 71 FR 58609
(Oct. 4, 2006) (2006 Nontraditional
Mortgage Guidance).
The Federal banking agencies
addressed concerns about the subprime
market in March 2007 with proposed
supervisory guidance addressing the
heightened risks to consumers and
institutions of adjustable-rate mortgages
with two- or three-year ‘‘teaser’’ interest
rates followed by substantial increases
in the rate and payment. The guidance,
finalized in June of 2007, set out the
standards institutions should follow to
ensure consumers in the subprime
market obtain loans they can afford to
repay. Among other steps, the guidance
advised creditors: (1) To use the fully
indexed rate and fully-amortizing
payment when qualifying consumers for
loans with adjustable rates and
potentially non-amortizing payments;
(2) to limit stated income and reduced
documentation loans to cases where
mitigating factors clearly minimize the
need for full documentation of income;
and (3) to provide that prepayment
penalty clauses expire a reasonable
period before reset, typically at least 60
days. See Statement on Subprime
Mortgage Lending, 72 FR 37569 (July 10,
2007) (2007 Subprime Mortgage
Statement).44 The Conference of State
Bank Supervisors (CSBS) and the
American Association of Residential
Mortgage Regulators (AARMR) issued
parallel statements for state supervisors
to use with state-supervised entities,
and many states adopted the statements.
44 The 2006 Nontraditional Mortgage Guidance
and the 2007 Subprime Mortgage Statement will
hereinafter be referred to collectively as the
‘‘Interagency Supervisory Guidance.’’
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
E. 2008 HOEPA Final Rule
After the Board finalized the 2001
HOEPA rules, new consumer protection
issues arose in the mortgage market. In
2006 and 2007, the Board held a series
of national hearings on consumer
protection issues in the mortgage
market. During those hearings,
consumer advocates and government
officials expressed a number of
concerns, and urged the Board to
prohibit or restrict certain underwriting
practices, such as ‘‘stated income’’ or
‘‘low documentation’’ loans, and certain
product features, such as prepayment
penalties. See 73 FR 44527 (July 30,
2008). The Board was also urged to
adopt additional regulations under
HOEPA, because, unlike the Interagency
Supervisory Guidance, the regulations
would apply to all creditors and would
be enforceable by consumers through
civil actions. As discussed above, in
1995 the Board implemented TILA
section 129(h)’s ability-to-repay
requirements for high-cost mortgage
loans. In 2008, the Board exercised its
authority under HOEPA to extend
certain consumer protections
concerning a consumer’s ability to repay
and prepayment penalties to a new
category of ‘‘higher-priced mortgage
loans’’ (HPMLs) 45 with APRs that are
lower than those prescribed for highcost loans but that nevertheless exceed
the average prime offer rate by
prescribed amounts. This new category
of loans was designed to include
subprime credit. Specifically, the Board
exercised its authority to revise
HOEPA’s restrictions on high-cost loans
based on a conclusion that the revisions
were necessary to prevent unfair and
deceptive acts or practices in
connection with mortgage loans. 73 FR
44522 (July 30, 2008) (2008 HOEPA
Final Rule). The Board determined that
imposing the burden to prove ‘‘pattern
or practice’’ on an individual consumer
would leave many consumers with a
lesser remedy, such as those provided
under some State laws, or without any
remedy for loans made without regard
to repayment ability. In particular, the
45 Under the Board’s 2008 HOEPA Final Rule, a
higher-priced mortgage loan is a consumer credit
transaction secured by the consumer’s principal
dwelling with an APR that exceeds the average
prime offer rate (APOR) for a comparable
transaction, as of the date the interest rate is set, by
1.5 or more percentage points for loans secured by
a first lien on the dwelling, or by 3.5 or more
percentage points for loans secured by a
subordinate lien on the dwelling. The definition of
a ‘‘higher-priced mortgage loan’’ includes
practically all ‘‘high-cost mortgages’’ because the
latter transactions are determined by higher loan
pricing threshold tests. See 12 CFR 226.35(a)(1),
since codified in parallel by the Bureau at 12 CFR
1026.35(a)(1).
PO 00000
Frm 00008
Fmt 4701
Sfmt 4700
Board concluded that a prohibition on
making individual loans without regard
for repayment ability was necessary to
ensure a remedy for consumers who are
given unaffordable loans and to deter
irresponsible lending, which injures
individual consumers. The 2008
HOEPA Final Rule provides a
presumption of compliance with the
higher-priced mortgage ability-to-repay
requirements if the creditor follows
certain procedures regarding
underwriting the loan payment,
assessing the debt-to-income ratio or
residual income, and limiting the
features of the loan, in addition to
following certain procedures mandated
for all creditors. See § 1026.34(a)(4)(iii)
and (iv). However, the 2008 HOEPA
Final Rule makes clear that even if the
creditor follows the required and
optional criteria, the creditor has merely
obtained a presumption of compliance
with the repayment ability requirement.
The consumer can still rebut or
overcome that presumption by showing
that, despite following the required and
optional procedures, the creditor
nonetheless disregarded the consumer’s
ability the loan.
F. The Dodd-Frank Act
In 2007, Congress held numerous
hearings focused on rising subprime
foreclosure rates and the extent to
which lending practices contributed to
them.46 Consumer advocates testified
46 E.g., Progress in Administration and Other
Efforts to Coordinate and Enhance Mortgage
Foreclosure Prevention: Hearing before the H.
Comm. on Fin. Servs., 110th Cong. (2007);
Legislative Proposals on Reforming Mortgage
Practices: Hearing before the H. Comm. on Fin.
Servs., 110th Cong. (2007); Legislative and
Regulatory Options for Minimizing and Mitigating
Mortgage Foreclosures: Hearing before the H.
Comm. on Fin. Servs., 110th Cong. (2007); Ending
Mortgage Abuse: Safeguarding Homebuyers:
Hearing before the S. Subcomm. on Hous., Transp.,
and Cmty. Dev. of the S. Comm. on Banking, Hous.,
and Urban Affairs, 110th Cong. (2007); Improving
Federal Consumer Protection in Financial Services:
Hearing before the H. Comm. on Fin. Servs., 110th
Cong. (2007); The Role of the Secondary Market in
Subprime Mortgage Lending: Hearing before the
Subcomm. on Fin. Insts. and Consumer Credit of
the H. Comm. on Fin. Servs., 110th Cong. (2007);
Possible Responses to Rising Mortgage Foreclosures:
Hearing before the H. Comm. on Fin. Servs., 110th
Cong. (2007); Subprime Mortgage Market Turmoil:
Examining the Role of Securitization: Hearing
before the Subcomm. on Secs., Ins., and Inv. of the
S. Comm. on Banking, Hous., and Urban Affairs,
110th Cong. (2007); Subprime and Predatory
Lending: New Regulatory Guidance, Current Market
Conditions, and Effects on Regulated Financial
Institutions: Hearing before the Subcomm. on Fin.
Insts. and Consumer Credit of the H. Comm. on Fin.
Servs., 110th Cong. (2007); Mortgage Market
Turmoil: Causes and Consequences, Hearing before
the S. Comm. on Banking, Hous., and Urban
Affairs, 110th Cong. (2007); Preserving the
American Dream: Predatory Lending Practices and
Home Foreclosures, Hearing before the S. Comm. on
Banking, Hous., and Urban Affairs, 110th Cong.
(2007).
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
that certain lending terms or practices
contributed to the foreclosures,
including a failure to consider the
consumer’s ability to repay, low- or nodocumentation loans, hybrid adjustablerate mortgages, and prepayment
penalties. Industry representatives, on
the other hand, testified that adopting
substantive restrictions on subprime
loan terms would risk reducing access
to credit for some consumers. In
response to these hearings, the House of
Representatives passed the Mortgage
Reform and Anti-Predatory Lending Act,
both in 2007 and again in 2009. H.R.
3915, 110th Cong. (2007); H.R. 1728,
111th Cong. (2009). Both bills would
have amended TILA to provide
consumer protections for mortgages,
including ability-to-repay requirements,
but neither bill was passed by the
Senate. Instead, both houses shifted
their focus to enacting comprehensive
financial reform legislation.
In December 2009, the House passed
the Wall Street Reform and Consumer
Protection Act of 2009, its version of
comprehensive financial reform
legislation, which included an abilityto-repay and qualified mortgage
provision. H.R. 4173, 111th Cong.
(2009). In May 2010, the Senate passed
its own version of ability-to-repay
requirements in its own version of
comprehensive financial reform
legislation, called the Restoring
American Financial Stability Act of
2010. S. 3217, 111th Cong. (2010). After
conference committee negotiations, the
Dodd-Frank Act was passed by both
houses of Congress and was signed into
law on July 21, 2010. Public Law 111–
203, 124 Stat. 1376 (2010).
In the Dodd-Frank Act, Congress
established the Bureau and, under
sections 1061 and 1100A, generally
consolidated the rulemaking authority
for Federal consumer financial laws,
including TILA and RESPA, in the
Bureau.47 Congress also provided the
Bureau, among other things, with
supervision authority for Federal
consumer financial laws over certain
entities, including insured depository
institutions and credit unions with total
assets over $10 billion and their
affiliates, and mortgage-related nondepository financial services
47 Sections 1011 and 1021 of the Dodd-Frank Act,
in title X, the ‘‘Consumer Financial Protection Act,’’
Public Law 111–203, secs. 1001–1100H, codified at
12 U.S.C. 5491, 5511. The Consumer Financial
Protection Act is substantially codified at 12 U.S.C.
5481–5603. Section 1029 of the Dodd-Frank Act
excludes from this transfer of authority, subject to
certain exceptions, any rulemaking authority over a
motor vehicle dealer that is predominantly engaged
in the sale and servicing of motor vehicles, the
leasing and servicing of motor vehicles, or both. 12
U.S.C. 5519.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
providers.48 In addition, Congress
provided the Bureau with authority,
subject to certain limitations, to enforce
the Federal consumer financial laws,
including the 18 enumerated consumer
laws. Title X of the Dodd-Frank Act, and
rules thereunder. The Bureau can bring
civil actions in court and administrative
enforcement proceedings to obtain
remedies such as civil penalties and
cease-and-desist orders.
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.
Title XIV of the Dodd-Frank Act
contains a modified version of the
Mortgage Reform and Anti-Predatory
Lending Act.49 The Dodd-Frank Act
requires the Bureau to propose
consolidation of the major federal
mortgage disclosures, imposes new
requirements and limitations to address
a wide range of consumer mortgage
issues, and imposes credit risk retention
requirements in connection with
mortgage securitization.
Through the Dodd-Frank Act,
Congress expanded HOEPA to apply to
more types of mortgage transactions,
including purchase money mortgage
loans and home-equity lines of credit.
Congress also amended HOEPA’s
existing high-cost triggers, added a
prepayment penalty trigger, and
expanded the protections associated
with high-cost mortgages.50
In addition, sections 1411, 1412, and
1414 of the Dodd-Frank Act created new
TILA section 129C, which establishes,
among other things, new ability-to-repay
requirements and new limits on
prepayment penalties. Section 1402 of
the Dodd-Frank Act states that Congress
created new TILA section 129C upon a
finding that ‘‘economic stabilization
would be enhanced by the protection,
limitation, and regulation of the terms of
48 Sections 1024 through 1026 of the Dodd-Frank
Act, codified at 12 U.S.C. 5514 through 5516.
49 Although S. Rept. No. 111–176 contains
general legislative history concerning the DoddFrank Act and the Senate ability-to-repay
provisions, it does not address the House Mortgage
Reform and Anti-Predatory Lending Act. Separate
legislative history for the predecessor House bills is
available in H. Rept. No. 110–441 for H.R. 3915
(2007), and H. Rept. No. 111–194 for H.R. 1728
(2009).
50 Under the Dodd-Frank Act, HOEPA protections
would be triggered where: (1) A loan’s annual
percentage rate (APR) exceeds the average prime
offer rate by 6.5 percentage points for most first-lien
mortgages and 8.5 percentage points for subordinate
lien mortgages; (2) a loan’s points and fees exceed
5 percent of the total transaction amount, or a
higher threshold for loans below $20,000; or (3) the
creditor may charge a prepayment penalty more
than 36 months after loan consummation or account
opening, or penalties that exceed more than 2
percent of the amount prepaid.
PO 00000
Frm 00009
Fmt 4701
Sfmt 4700
6415
residential mortgage credit and the
practices related to such credit, while
ensuring that responsible, affordable
mortgage credit remains available to
consumers.’’ TILA section 129B(a)(1), 15
U.S.C. 1639b(a)(1). Section 1402 of the
Dodd-Frank Act further states that the
purpose of TILA section 129C is to
‘‘assure that consumers are offered and
receive residential mortgage loans on
terms that reasonably reflect their ability
to repay the loans.’’ TILA section
129B(a)(2), 15 U.S.C. 1639b(a)(2).
Specifically, TILA section 129C:
• Expands coverage of the ability-torepay requirements to any consumer
credit transaction secured by a dwelling,
except an open-end credit plan, credit
secured by an interest in a timeshare
plan, reverse mortgage, or temporary
loan.
• Prohibits a creditor from making a
mortgage loan unless the creditor makes
a reasonable and good faith
determination, based on verified and
documented information, that the
consumer has a reasonable ability to
repay the loan according to its terms,
and all applicable taxes, insurance, and
assessments.
• Provides a presumption of
compliance with the ability-to-repay
requirements if the mortgage loan is a
‘‘qualified mortgage,’’ which does not
contain certain risky features and does
not exceed certain thresholds for points
and fees on the loan and which meets
such other criteria as the Bureau may
prescribe.
• Prohibits prepayment penalties
unless the mortgage is a fixed-rate
qualified mortgage that is not a higherpriced mortgage loan, and the amount
and duration of the prepayment penalty
are limited.
The statutory ability-to-repay
standards reflect Congress’s belief that
certain lending practices (such as lowor no-documentation loans or
underwriting loans without regard to
principal repayment) led to consumers
having mortgages they could not afford,
resulting in high default and foreclosure
rates. Accordingly, new TILA section
129C generally prohibits a creditor from
making a residential mortgage loan
unless the creditor makes a reasonable
and good faith determination, based on
verified and documented information,
that the consumer has a reasonable
ability to repay the loan according to its
terms.
To provide more certainty to creditors
while protecting consumers from
unaffordable loans, the Dodd-Frank Act
provides a presumption of compliance
with the ability-to-repay requirements
for certain ‘‘qualified mortgages.’’ TILA
section 129C(b)(1) states that a creditor
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6416
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
or assignee may presume that a loan has
met the repayment ability requirement if
the loan is a qualified mortgage.
Qualified mortgages are prohibited from
containing certain features that Congress
considered to increase risks to
consumers and must comply with
certain limits on points and fees.
The Dodd-Frank Act creates special
remedies for violations of TILA section
129C. As amended by section 1416 of
the Dodd-Frank Act, TILA provides that
a consumer who brings a timely action
against a creditor for a violation of TILA
section 129C(a) (the ability-to-repay
requirements) may be able to recover
special statutory damages equal to the
sum of all finance charges and fees paid
by the consumer, unless the creditor
demonstrates that the failure to comply
is not material. TILA section 130(a).
This recovery is in addition to: (1)
Actual damages; (2) statutory damages
in an individual action or class action,
up to a prescribed threshold; and (3)
court costs and attorney fees that would
be available for violations of other TILA
provisions. In addition, the statute of
limitations for a violation of TILA
section 129C is three years from the date
of the occurrence of the violation (as
compared to one year for most other
TILA violations, except for actions
brought under section 129 or 129B, or
actions brought by a State attorney
general to enforce a violation of section
129, 129B, 129C, 129D, 129E, 129F,
129G, or 129H, which may be brought
not later than 3 years after the date on
which the violation occurs, and private
education loans under 15 U.S.C.
1650(a), which may be brought not later
than one year from the due date of first
regular payment of principal). TILA
section 130(e). Moreover, as amended
by section 1413 of the Dodd-Frank Act,
TILA provides that when a creditor, or
an assignee, other holder or their agent
initiates a foreclosure action, a
consumer may assert a violation of TILA
section 129C(a) ‘‘as a matter of defense
by recoupment or setoff.’’ TILA section
130(k). There is no time limit on the use
of this defense and the amount of
recoupment or setoff is limited, with
respect to the special statutory damages,
to no more than three years of finance
charges and fees. For high-cost loans an
assignee generally continues to be
subject to all claims and defenses, not
only in foreclosure, with respect to that
mortgage that the consumer could assert
against the creditor of the mortgage,
unless the assignee demonstrates, by a
preponderance of evidence, that a
reasonable person exercising ordinary
due diligence, could not determine that
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
the mortgage was a high-cost mortgage.
TILA section 131(d).
In addition to the foregoing ability-torepay provisions, the Dodd-Frank Act
established other new standards
concerning a wide range of mortgage
lending practices, including
compensation of mortgage originators,51
Federal mortgage disclosures,52 and
mortgage servicing.53 Those and other
Dodd-Frank Act provisions are the
subjects of other rulemakings by the
Bureau. For additional information on
those other rulemakings, see the
discussion below in part III.C.
G. Qualified Residential Mortgage
Rulemaking
Section 15G of the Securities
Exchange Act of 1934, added by section
941(b) of the Dodd-Frank Act, generally
requires the securitizer of asset-backed
securities (ABS) to retain not less than
five percent of the credit risk of the
assets collateralizing the ABS. 15 U.S.C.
78o–11. The Dodd-Frank Act’s credit
risk retention requirements are aimed at
addressing weaknesses and failures in
the securitization process and the
securitization markets.54 By requiring
that the securitizer retain a portion of
the credit risk of the assets being
securitized, the Dodd-Frank Act
provides securitizers an incentive to
monitor and ensure the quality of the
assets underlying a securitization
transaction. Six Federal agencies (not
including the Bureau) are tasked with
implementing this requirement. Those
agencies are the Board, Office of the
Comptroller of the Currency (OCC),
Federal Deposit Insurance Corporation
(FDIC), Securities and Exchange
Commission (SEC), Federal Housing
Finance Agency (FHFA), and
Department of Housing and Urban
Development (HUD) (collectively, the
QRM agencies).
Section 15G of the Securities
Exchange Act of 1934 provides that the
credit risk retention requirements shall
not apply to an issuance of ABS if all
of the assets that collateralize the ABS
are ‘‘qualified residential mortgages’’
(QRMs). See 15 U.S.C. 78o–
11(c)(1)(C)(iii), (4)(A) and (B). Section
51 Sections 1402 through 1405 of the Dodd-Frank
Act, codified at 15 U.S.C. 1639b.
52 Section 1032(f) of the Dodd-Frank Act, codified
at 12 U.S.C. 5532(f).
53 Sections 1418, 1420, 1463, and 1464 of the
Dodd-Frank Act, codified at 12 U.S.C. 2605; 15
U.S.C. 1638, 1638a, 1639f, and 1639g.
54 As noted in the legislative history of section
15G of the Securities Exchange Act of 1934,
‘‘[w]hen securitizers retain a material amount of
risk, they have ‘skin in the game,’ aligning their
economic interest with those of investors in assetbacked securities.’’ See S. Rept. 176, 111th Cong.,
at 129 (2010).
PO 00000
Frm 00010
Fmt 4701
Sfmt 4700
15G requires the QRM agencies to
jointly define what constitutes a QRM,
taking into consideration underwriting
and product features that historical loan
performance data indicate result in a
lower risk of default. See 15 U.S.C. 78o–
11(e)(4). Notably, section 15G also
provides that the definition of a QRM
shall be ‘‘no broader than’’ the
definition of a ‘‘qualified mortgage,’’ as
the term is defined under TILA section
129C(b)(2), as amended by the DoddFrank Act, and regulations adopted
thereunder. 15 U.S.C. 78o–11(e)(4)(C).
On April 29, 2011, the QRM agencies
issued joint proposed risk retention
rules, including a proposed QRM
definition (2011 QRM Proposed Rule).
See 76 FR 24090 (Apr. 29, 2011). The
proposed rule has not been finalized.
Among other requirements, the 2011
QRM Proposed Rule incorporates the
qualified mortgage restrictions on
negative amortization, interest-only, and
balloon payments, limits points and fees
to three percent of the loan amount, and
prohibits prepayment penalties. The
proposed rule also establishes
underwriting standards designed to
ensure that QRMs have high credit
quality, including:
• A maximum ‘‘front-end’’ monthly
debt-to-income ratio (which looks at
only the consumer’s mortgage payment
relative to income, but not at other
debts) of 28 percent;
• A maximum ‘‘back-end’’ monthly
debt-to-income ratio (which includes all
of the consumer’s debt, not just the
mortgage payment) of 36 percent;
• A maximum loan-to-value (LTV)
ratio of 80 percent in the case of a
purchase transaction (with a lesser
combined LTV permitted for refinance
transactions);
• A 20 percent down payment
requirement in the case of a purchase
transaction; and
• Credit history verification and
documentation requirements.
The proposed rule also includes
appraisal requirements, restrictions on
the assumability of the mortgage, and
requires the creditor to commit to
certain servicing policies and
procedures regarding loss mitigation.
See 76 FR at 24166–67.
To provide clarity on the definitions,
calculations, and verification
requirements for the QRM standards,
the 2011 QRM Proposed Rule
incorporates certain definitions and key
terms established by HUD and required
to be used by creditors originating FHAinsured residential mortgages. See 76 FR
at 24119. Specifically, the 2011 QRM
Proposed Rule incorporates the
definitions and standards set out in the
HUD Handbook 4155.1 (New Version),
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
Mortgage Credit Analysis for Mortgage
Insurance, as in effect on December 31,
2010, for determining and verifying the
consumer’s funds and the consumer’s
monthly housing debt, total monthly
debt, and monthly gross income.55
The qualified mortgage and QRM
definitions are distinct and relate to
different parts of the Dodd-Frank Act
with different purposes, but both are
designed to address problems that had
arisen in the mortgage origination
process. The qualified mortgage
standard provides creditors with a
presumption of compliance with the
requirement in TILA section 129C(a) to
assess a consumer’s ability to repay a
residential mortgage loan. The purpose
of these provisions is to ensure that
consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay
the loans. See TILA section 129B(a)(2).
The Dodd-Frank Act’s credit risk
retention requirements are intended to
address problems in the securitization
markets and in mortgage markets by
requiring that securitizers, as a general
matter, retain an economic interest in
the credit risk of the assets they
securitize. The QRM credit risk
retention requirement was meant to
incentivize creditors to make more
responsible loans because they will
need to keep some skin in the game.56
Nevertheless, as discussed above, the
Dodd-Frank Act requires that the QRM
definition be ‘‘no broader than’’ the
qualified mortgage definition. Therefore,
in issuing the 2011 QRM Proposed Rule,
the QRM agencies sought to incorporate
the statutory qualified mortgage
standards, in addition to other
requirements, into the QRM definition.
76 FR at 24118. This approach was
designed to minimize the potential for
conflicts between the QRM standards in
the proposed rule and the qualified
mortgage definition that the Bureau
would ultimately adopt in a final rule.
In the 2011 QRM Proposed Rule, the
QRM agencies stated their expectation
to monitor the rules adopted by the
Bureau under TILA to define a qualified
mortgage and to review those rules to
ensure that the definition of QRM in the
final rule is ‘‘no broader’’ than the
definition of a qualified mortgage and to
appropriately implement the DoddFrank Act’s credit risk retention
requirement. See 76 FR at 24118. In
55 See U.S. Dep’t of Hous. & Urban Dev., Housing
Handbook 4155.1, Mortgage Credit Analysis for
Mortgage Insurance (rev. Mar. 2011) (‘‘HUD
Handbook 4155.1’’), available at http://
portal.hud.gov/hudportal/HUD?src=/
program_offices/administration/hudclips/
handbooks/hsgh/4155.1.
56 See S. Rept. 176, 111th Cong., at 129 (2010).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
preparing this final rule, the Bureau has
consulted regularly with the QRM
agencies to coordinate the qualified
mortgage and qualified residential
mortgage definitions. However, while
the Bureau’s qualified mortgage
definition will set the outer boundary of
a QRM, the QRM agencies have
discretion under the Dodd-Frank Act to
define QRMs in a way that is stricter
than the qualified mortgage definition.
III. Summary of the Rulemaking
Process
A. The Board’s Proposal
In 2011, the Board published for
public comment a proposed rule
amending Regulation Z to implement
the foregoing ability-to-repay
amendments to TILA made by the
Dodd-Frank Act. See 76 FR 27390 (May
11, 2011) (2011 ATR Proposal, the
Board’s proposal or the proposal).
Consistent with the Dodd-Frank Act, the
Board’s proposal applied the ability-torepay requirements to any consumer
credit transaction secured by a dwelling
(including vacation home loans and
home equity loans), except an open-end
credit plan, extension of credit secured
by a consumer’s interest in a timeshare
plan, reverse mortgage, or temporary
loan with a term of 12 months or less.
The Board’s proposal provided four
options for complying with the abilityto-repay requirement, including by
making a ‘‘qualified mortgage.’’ First,
the proposal would have allowed a
creditor to meet the general ability-torepay standard by originating a covered
mortgage loan for which the creditor
considered and verified eight
underwriting factors in determining
repayment ability, and, for adjustable
rate loans, the mortgage payment
calculation is based on the fully indexed
rate.57 Second, the proposal would have
allowed a creditor to refinance a ‘‘nonstandard mortgage’’ into a ‘‘standard
mortgage.’’ 58 Under this option, the
57 The eight factors are: (1) Current or reasonably
expected income or assets; (2) current employment
status; (3) the monthly payment on the mortgage;
(4) the monthly payment on any simultaneous loan;
(5) the monthly payment for mortgage-related
obligations; (6) current debt obligations; (7) the
monthly debt-to-income ratio, or residual income;
and (8) credit history.
58 This alternative is based on a Dodd-Frank Act
provision that is meant to provide flexibility for
certain streamlined refinancings, which are no- or
low-documentation transactions designed to
refinance a consumer quickly under certain
circumstances, when such refinancings would
move consumers out of risky mortgages and into
more stable mortgage products—what the proposal
defined as mortgage loans that, among other things,
do not contain negative amortization, interest-only
payments, or balloon payments, and have limited
points and fees. TILA section 129C(a)(6)(E); 15
U.S.C. 1639c(a)(6)(E).
PO 00000
Frm 00011
Fmt 4701
Sfmt 4700
6417
proposal would not have required the
creditor to verify the consumer’s income
or assets. Third, the proposal would
have allowed a creditor to originate a
qualified mortgage, which provides
special protection from liability for
creditors. Because the Board determined
that it was unclear whether that
protection is intended to be a safe
harbor or a rebuttable presumption of
compliance with the repayment ability
requirement, the Board proposed two
alternative definitions of a qualified
mortgage.59 Finally, the proposal would
have allowed a small creditor operating
predominantly in rural or underserved
areas to originate a balloon-payment
qualified mortgage if the loan term is
five years or more, and the payment
calculation is based on the scheduled
periodic payments, excluding the
balloon payment.60 The Board’s
proposal also would have implemented
the Dodd-Frank Act’s limits on
prepayment penalties, lengthened the
time creditors must retain evidence of
compliance with the ability-to-repay
and prepayment penalty provisions, and
prohibited evasion of the rule by
structuring a closed-end extension of
credit that does not meet the definition
of an open-end plan. As discussed
above, rulemaking authority under TILA
generally transferred from the Board to
the Bureau in July 2011, including the
authority under Dodd-Frank Act section
1412 to prescribe regulations to carry
out the purposes of the qualified
mortgage rules. 12 U.S.C. 5512; 12
U.S.C. 5581; 15 U.S.C. 1639c. As
discussed above, TILA section 105(a)
directs the Bureau to prescribe
regulations to carry out the purposes of
59 The Board’s proposed first alternative would
have operated as a legal safe harbor and define a
‘‘qualified mortgage’’ as a mortgage for which: (a)
The loan does not contain negative amortization,
interest-only payments, or balloon payments, or a
loan term exceeding 30 years; (b) the total points
and fees do not exceed 3 percent of the total loan
amount; (c) the consumer’s income or assets are
verified and documented; and (d) the underwriting
of the mortgage is based on the maximum interest
rate in the first five years, uses a payment schedule
that fully amortizes the loan over the loan term, and
takes into account any mortgage-related obligations.
The Board’s proposed second alternative would
have provided a rebuttable presumption of
compliance and defined a ‘‘qualified mortgage’’ as
including the criteria listed above in the first
alternative as well as considering and verifying the
following additional underwriting requirements
from the ability-to-repay standard: The consumer’s
employment status, the monthly payment for any
simultaneous loan, the consumer’s current debt
obligations, the total debt-to-income ratio or
residual income, and the consumer’s credit history.
60 This alternative is based on statutory provision.
TILA section 129C(b)(2)(E); 15 U.S.C. 1639c. As the
Board’s proposal noted, this standard is evidently
meant to accommodate community banks that
originate balloon-payment mortgages in lieu of
adjustable-rate mortgages to hedge against interest
rate risk.
E:\FR\FM\30JAR2.SGM
30JAR2
6418
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
TILA. Except with respect to the
substantive restrictions on high-cost
mortgages provided in TILA section
129, TILA section 105(a) authorizes the
Bureau to prescribe regulations that 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
determines are necessary or proper to
effectuate the purposes of TILA, to
prevent circumvention or evasion
thereof, or to facilitate compliance
therewith.
B. Comments and Post-Proposal
Outreach
The Board received numerous
comments on the proposal, including
comments regarding the criteria for a
‘‘qualified mortgage’’ and whether a
qualified mortgage provides a safe
harbor or a presumption of compliance
with the repayment ability
requirements. As noted above, in
response to the proposed rule, the Board
received approximately 1,800 letters
from commenters, including members of
Congress, creditors, consumer groups,
trade associations, mortgage and real
estate market participants, and
individual consumers. As of July 21,
2011, the Dodd-Frank Act generally
transferred the Board’s rulemaking
authority for TILA, among other Federal
consumer financial laws, to the Bureau.
Accordingly, all comment letters on the
proposed rule were also transferred to
the Bureau. Materials submitted were
filed in the record and are publicly
available at http://www.regulations.gov.
Through various comment letters and
the Bureau’s own collection of data, the
Bureau received additional information
and new data pertaining to the proposed
rule. Accordingly, in May 2012, the
Bureau reopened the comment period in
order to solicit further comment on data
and new information, including data
that may assist the Bureau in defining
loans with characteristics that make it
appropriate to presume that the creditor
complied with the ability-to-repay
requirements or assist the Bureau in
assessing the benefits and costs to
consumers, including access to credit,
and covered persons, as well as the
market share covered by, alternative
definitions of a ‘‘qualified mortgage.’’
The Bureau received approximately 160
comments in response to the reopened
comment period from a variety of
commenters, including creditors,
consumer groups, trade associations,
mortgage and real estate market
participants, individuals, small entities,
the SBA’s Office of Advocacy, and FHA.
As discussed in more detail below, the
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
Bureau has considered these comments
in adopting this final rule.
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
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: Simultaneously
with this final rule (the 2013 ATR Final
Rule), the Bureau is issuing a proposal
to amend certain provisions of the final
rule, including by the addition of
exemptions for certain nonprofit
creditors and certain homeownership
stabilization programs and a definition
of a ‘‘qualified mortgage’’ for certain
loans 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 can take effect
simultaneously with this final rule.
• Escrows: The Bureau is finalizing a
rule, following a March 2011 proposal
issued by the Board (the Board’s 2011
Escrows Proposal),61 to implement
certain provisions of the Dodd-Frank
Act expanding on existing rules that
require escrow accounts to be
established for higher-priced mortgage
loans and creating an exemption for
certain loans held by creditors operating
predominantly in rural or underserved
areas, pursuant to TILA section 129D as
established by Dodd-Frank Act sections
1461. 15 U.S.C. 1639d. The Bureau’s
final rule is referred to as the 2013
Escrows Final Rule.
• HOEPA: Following its July 2012
proposal (the 2012 HOEPA Proposal),62
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
61 76
FR 11598 (Mar. 2, 2011).
62 77 FR 49090 (Aug. 15,2012).
PO 00000
Frm 00012
Fmt 4701
Sfmt 4700
homeownership counseling, including a
requirement that creditors 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
Servicing Proposal),63 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 consumers, 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),64 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
63 77 FR 57200 (Sept. 17, 2012) (RESPA); 77 FR
57318 (Sept. 17, 2012) (TILA).
64 77 FR 55272 (Sept. 7, 2012).
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
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.
• Appraisals: The Bureau, jointly
with other Federal agencies,65 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).66 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),67 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 loans
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
65 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.
66 77 FR 54722 (Sept. 5, 2012).
67 77 FR 50390 (Aug. 21, 2012).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
Estate Settlement Procedures Act,
pursuant to Dodd-Frank Act section
1032(f) and sections 4(a) of RESPA and
105(b) of TILA, as amended by DoddFrank Act sections 1098 and 1100A,
respectively (the 2012 TILA–RESPA
Proposal).68 Accordingly, the Bureau
already has issued a final rule delaying
implementation of various affected title
XIV disclosure provisions.69 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 affecting
aspects of the mortgage industry and its
regulations. Accordingly, as noted in its
proposals, the Bureau is coordinating
carefully the Title XIV Rulemakings,
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
effective 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.70 Thus, a tension
68 77
FR 51116 (Aug. 23, 2012).
FR 70105 (Nov. 23, 2012).
70 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 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
69 77
PO 00000
Frm 00013
Fmt 4701
Sfmt 4700
6419
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 this
final rule and the Bureau’s 2013
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’ overlapping 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
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.
E:\FR\FM\30JAR2.SGM
30JAR2
6420
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
earlier effective dates for those final
rules or certain aspects thereof, as
applicable. Those effective dates are set
forth and explained in the Federal
Registers 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 this 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
the 2013 Escrows 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
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
adjustments to the affected regulatory
thresholds to counteract this
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. 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. 77 FR 54843
(Sept. 6, 2012); 77 FR 54844 (Sept. 6,
2012).71 Accordingly, this final rule and
the 2013 Escrows, HOEPA, and
Interagency Appraisals Final Rules all
are deferring any action on their
respective proposed adjustments to
regulatory thresholds.
IV. Legal Authority
The final rule was issued on January
10, 2013, in accordance with 12 CFR
1074.1. The Bureau issued this final rule
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 DoddFrank 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.’’ 72
TILA is defined as a Federal consumer
financial law.73 Accordingly, the Bureau
has authority to issue regulations
pursuant to TILA.
A. TILA Ability-to-Repay and Qualified
Mortgage Provisions
As discussed above, the Dodd-Frank
Act amended TILA to generally prohibit
a creditor from making a residential
mortgage loan without a reasonable and
good faith determination that, at the
time the loan is consummated, the
consumer has a reasonable ability to
repay the loan, along with taxes,
insurance, and assessments. TILA
section 129C(a), 15 U.S.C. 1639c(a). As
described below in part IV.B, the Bureau
has authority to prescribe regulations to
carry out the purposes of TILA pursuant
to TILA section 105(a). 15 U.S.C.
1604(a). In particular, it is the purpose
of TILA section 129C, as amended by
the Dodd-Frank Act, to assure that
consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay
the loans and that are understandable
and not unfair, deceptive, and abusive.
TILA section 129B(a)(2); 15 U.S.C.
1639b(a)(2).
The Dodd-Frank Act also provides
creditors originating ‘‘qualified
mortgages’’ special protection from
liability under the ability-to-repay
requirements. TILA section 129C(b), 15
U.S.C. 1639c(b). TILA generally defines
a ‘‘qualified mortgage’’ as a residential
mortgage loan for which: the loan does
not contain negative amortization,
interest-only payments, or balloon
payments; the term does not exceed 30
years; the points and fees generally do
not exceed three percent of the loan
amount; the income or assets are
considered and verified; and the
underwriting is based on the maximum
rate during the first five years, uses a
72 12
U.S.C. 5581(a)(1).
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).
73 Dodd-Frank
71 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.
PO 00000
Frm 00014
Fmt 4701
Sfmt 4700
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
payment schedule that fully amortizes
the loan over the loan term, and takes
into account all mortgage-related
obligations. TILA section 129C(b)(2), 15
U.S.C. 1639c(b)(2). In addition, to
constitute a qualified mortgage a loan
must meet ‘‘any guidelines or
regulations established by the Bureau
relating to ratios of total monthly debt
to monthly income or alternative
measures of ability to pay regular
expenses after payment of total monthly
debt, taking into account the income
levels of the borrower and such other
factors as the Bureau may determine are
relevant and consistent with the
purposes described in [TILA section
129C(b)(3)(B)(i)].’’
The Dodd-Frank Act also provides the
Bureau with authority to prescribe
regulations that revise, add to, or
subtract from the criteria that define a
qualified mortgage upon a finding that
such regulations are necessary or proper
to ensure that responsible, affordable
mortgage credit remains available to
consumers in a manner consistent with
the purposes of the ability-to-repay
requirements; or are necessary and
appropriate to effectuate the purposes of
the ability-to-repay requirements, to
prevent circumvention or evasion
thereof, or to facilitate compliance with
TILA sections 129B and 129C. TILA
section 129C(b)(3)(B)(i), 15 U.S.C.
1639c(b)(3)(B)(i). In addition, TILA
section 129C(b)(3)(A) provides the
Bureau with authority to prescribe
regulations to carry out the purposes of
the qualified mortgage provisions, such
as to ensure that responsible, affordable
mortgage credit remains available to
consumers in a manner consistent with
the purposes of TILA section 129C.
TILA section 129C(b)(3)(A), 15 U.S.C.
1939c(b)(3)(A). As discussed in the
section-by-section analysis below, the
Bureau is issuing certain provisions of
this rule pursuant to its authority under
TILA section 129C(b)(3)(B)(i).
The Dodd-Frank Act provides the
Bureau with other specific grants of
rulewriting authority with respect to the
ability-to-repay and qualified mortgage
provisions. With respect to the abilityto-repay provisions, TILA section
129C(a)(6)(D)(i) through (iii) provides
that when calculating the payment
obligation that will be used to determine
whether the consumer can repay a
covered transaction, the creditor must
use a fully amortizing payment schedule
and assume that: (1) The loan proceeds
are fully disbursed on the date the loan
is consummated; (2) the loan is repaid
in substantially equal, monthly
amortizing payments for principal and
interest over the entire term of the loan
with no balloon payment; and (3) the
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
interest rate over the entire term of the
loan is a fixed rate equal to the fully
indexed rate at the time of the loan
closing, without considering the
introductory rate. 15 U.S.C.
1639c(a)(6)(D)(i) through (iii). However,
TILA section 129C(a)(6)(D) authorizes
the Bureau to prescribe regulations for
calculating the payment obligation for
loans that require more rapid repayment
(including balloon payments), and
which have an annual percentage rate
that does not exceed a certain rate
threshold. 15 U.S.C. 1639c(a)(6)(D).
With respect to the qualified mortgage
provisions, the Dodd-Frank Act contains
several specific grants of rulewriting
authority. First, as described above, for
purposes of defining ‘‘qualified
mortgage,’’ TILA section
129C(b)(2)(A)(vi) provides the Bureau
with authority to establish guidelines or
regulations relating to monthly debt-toincome ratios or alternative measures of
ability to pay. Second, TILA section
129C(b)(2)(D) provides that the Bureau
shall prescribe rules adjusting the
qualified mortgage points and fees
limits described above to permit
creditors that extend smaller loans to
meet the requirements of the qualified
mortgage provisions. 15 U.S.C.
1639c(b)(2)(D)(ii). In prescribing such
rules, the Bureau must consider their
potential impact on rural areas and
other areas where home values are
lower. Id. Third, TILA section
129C(b)(2)(E) provides the Bureau with
authority to include in the definition of
‘‘qualified mortgage’’ loans with balloon
payment features, if those loans meet
certain underwriting criteria and are
originated by creditors that operate
predominantly in rural or underserved
areas, have total annual residential
mortgage originations that do not exceed
a limit set by the Bureau, and meet any
asset size threshold and any other
criteria as the Bureau may establish,
consistent with the purposes of TILA.
15 U.S.C. 1639c(b)(2)(E). As discussed
in the section-by-section analysis below,
the Bureau is issuing certain provisions
of this rule pursuant to its authority
under TILA sections 129C(a)(6)(D),
(b)(2)(A)(vi), (b)(2)(D), and (b)(2)(E).
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
TILA section 105(a). As amended by
the Dodd-Frank Act, TILA section
PO 00000
Frm 00015
Fmt 4701
Sfmt 4700
6421
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[.]’’ TILA section 102(a). 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
authority to exercise TILA section
105(a) to prescribe requirements beyond
those specifically listed in the statute
that meet the standards outlined in
section 105(a). The Dodd-Frank Act also
clarified the Bureau’s rulemaking
authority over high-cost mortgages
under HOEPA pursuant to section
105(a). As amended by the Dodd-Frank
Act, TILA section 105(a) authority to
make adjustments and exceptions to the
requirements of TILA applies to all
transactions subject to TILA, except
with respect to the substantive
provisions of TILA section 129, 15
U.S.C. 1639, that apply to the high-cost
mortgages defined in TILA section
103(bb), 15 U.S.C. 1602(bb).
TILA, as amended by the Dodd-Frank
Act, states that it is the purpose of the
ability-to-repay requirements of TILA
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6422
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
section 129C to assure that consumers
are offered and receive residential
mortgage loans on terms that reasonably
reflect their ability to repay the loans
and that are understandable and not
unfair, deceptive, or abusive. TILA
section 129B(a)(2). The Bureau
interprets this addition as a new
purpose of TILA. Therefore, the Bureau
believes that its authority under TILA
section 105(a) to make exceptions,
adjustments, and additional provisions,
among other things, 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 applies with respect to the
purpose of section 129C as well as the
purpose described in section TILA
section 129B(a)(2).
The purpose of TILA section 129C is
informed by the findings articulated in
section 129B(a) 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 and
affordable mortgage credit remains
available to consumers.
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
129C, 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. The Bureau believes that
ensuring that mortgage credit is offered
and received on terms consumers can
afford ensures the availability of
responsible, affordable mortgage credit.
TILA section 129B(e). Dodd-Frank Act
section 1405(a) amended TILA to add
new section 129B(e), 15 U.S.C.
1639B(e). That section authorizes the
Bureau to prohibit or condition terms,
acts, or practices relating to residential
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
mortgage loans that the Bureau finds to
be abusive, unfair, deceptive, predatory,
necessary or proper to ensure that
responsible, affordable mortgage credit
remains available to consumers in a
manner consistent with the purposes of
TILA section 129C, necessary or proper
to effectuate the purposes of sections
129B and 129C, to prevent
circumvention or evasion thereof, or to
facilitate compliance with such
sections, or are not in the interest of the
consumer. In developing rules under
TILA section 129B(e), the Bureau has
considered whether the rules are in the
interest of the consumer, as required by
the statute. As discussed in the sectionby-section analysis below, the Bureau is
issuing portions of this rule pursuant to
its authority under TILA section
129B(e).
The Dodd-Frank Act
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.
Accordingly, 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 and prevent evasion of those
laws.
V. Section-by-Section Analysis
Section 1026.25
Record Retention
25(a) General Rule
Section 1416 of the Dodd-Frank Act
revised TILA section 130(e) to extend
the statute of limitations for civil
liability for a violation of TILA section
129C, as well as sections 129 and 129B,
to three years after the date a violation
occurs. Existing § 1026.25(a) requires
that creditors retain evidence of
compliance with Regulation Z for two
years after disclosures must be made or
action must be taken. Accordingly, the
Board proposed to revise § 226.25(a) 74
to require that creditors retain records
that show compliance with proposed
§ 226.43, which would implement TILA
section 129C, for at least three years
after consummation. The Board did not
propose to alter the regulation’s existing
74 This section-by-section analysis discusses the
Board’s proposal by reference to the Board’s
Regulation Z, 12 CFR part 226, which the Board
proposed to amend, and discusses the Bureau’s
final rule by reference to the Bureau’s Regulation
Z, 12 CFR part 1026, which this final rule amends.
PO 00000
Frm 00016
Fmt 4701
Sfmt 4700
clarification that administrative
agencies responsible for enforcing
Regulation Z may require creditors
under the agency’s jurisdiction to retain
records for a longer period, if necessary
to carry out the agency’s enforcement
responsibilities under TILA section 108,
15 U.S.C. 1607. Under TILA section
130(e), as amended by Dodd-Frank, the
statute of limitations for civil liability
for a violation of other sections of TILA
remains one year after the date a
violation occurs, except for private
education loans under 15 U.S.C.
1650(a), actions brought under section
129 or 129B, or actions brought by a
State attorney general to enforce a
violation of section 129, 129B, 129C,
129D, 129E, 129F, 129G, or 129H. 15
U.S.C. 1640(e). Moreover, as amended
by section 1413 of the Dodd-Frank Act,
TILA provides that when a creditor, an
assignee, other holder or their agent
initiates a foreclosure action, a
consumer may assert a violation of TILA
section 129C(a) ‘‘as a matter of defense
by recoupment or setoff.’’ TILA section
130(k). There is no time limit on the use
of this defense.
As discussed below, the Bureau is
adopting minor modifications to
§ 1026.25(a) and adding in new
§ 1026.25(c) to reflect section 1416 of
the Dodd-Frank Act, in § 1026.25(c)(3)
as well as other exceptional record
retention requirements related to
mortgage loans.
25(c) Records Related to Certain
Requirements for Mortgage Loans
The Bureau is adopting the revision
proposed in § 226.25(a) to require a
creditor to retain records demonstrating
compliance with § 1026.43 consistent
with the extended statute of limitations
for violations of that section, though the
Bureau is adopting this requirement in
§ 1026.25(c)(3) to provide additional
clarity. As the 2012 TILA–RESPA
Proposal proposed new § 1026.25(c)(1)
and the 2012 Loan Originator Proposal
proposed new § 1026.25(c)(2), the
Bureau concludes that adding new
§ 1026.25(c)(3) eases compliance burden
by placing all record retention
requirements that are related to
mortgage loans and which differ from
the general record retention in one
section, § 1026.25(c). Likewise, the
Bureau is amending § 1026.25(a) to
reflect that certain record retention
requirements, such as records related to
minimum standards for transactions
secured by a dwelling, are governed by
§ 1026.43(c).
Commenters did not provide the
Bureau with significant, specific
feedback with respect to proposed
§ 226.25(a), although industry
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
commenters generally expressed
concern with respect to the compliance
burden of the 2011 ATR Proposal.
Increasing the period a creditor must
retain records from two to three years
may impose some marginal increase in
the creditor’s compliance burden in the
form of incremental cost of storage.
However, the Bureau believes that even
absent the rule, responsible creditors
will likely elect to retain records of
compliance with § 1026.43 for a period
of time well beyond three years, given
that the statute allows consumers to
bring a defensive claim for recoupment
or setoff in the event that a creditor or
assignee initiates foreclosure
proceedings. Indeed, at least one
commenter noted this tension and
requested that the Bureau provide
further regulatory instruction, although
the Bureau does not deem it necessary
to mandate recordkeeping burdens
beyond what is required by section 1416
of the Dodd-Frank Act. Furthermore, the
record-keeping burden imposed by the
rule is tailored only to show compliance
with § 1026.43, and the Bureau believes
is justified to protect the interests of
both creditors and consumers in the
event that an affirmative claim is
brought during the first three years after
consummation.
The Bureau believes that calculating
the record retention period under
§ 1026.43 from loan consummation
facilitates compliance by establishing a
single, clear start to the period, even
though a creditor will take action (e.g.,
underwriting the covered transaction
and offering a consumer the option of a
covered transaction without a
prepayment penalty) over several days
or weeks prior to consummation. The
Bureau is thus adopting the timeframe
as proposed to reduce compliance
burden.
Existing comment 25(a)–2 clarifies
that, in general, a creditor need retain
only enough information to reconstruct
the required disclosures or other
records. The Board proposed, and the
Bureau is adopting, amendments to
comment 25(a)–2 and a new comment
25(c)(3)–1 to clarify that, if a creditor
must verify and document information
used in underwriting a transaction
subject to § 1026.43, the creditor must
retain evidence sufficient to
demonstrate having done so, in
compliance with § 1026.25(a) and
§ 1026.25(c)(3). In an effort to reduce
compliance burden, comment 25(c)(3)–
1 also clarifies that creditors need not
retain actual paper copies of the
documentation used to underwrite a
transaction but that creditors must be
able to reproduce those records
accurately.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
The Board proposed comment 25(a)–
7 to provide guidance on retaining
records evidencing compliance with the
requirement to offer a consumer an
alternative covered transaction without
a prepayment penalty, as discussed
below in the section-by-section analysis
of § 1026.43(g)(3) through (5). The
Bureau believes the requirement to offer
a transaction without a prepayment
penalty under TILA section 129C(c)(4)
is intended to ensure that consumers
who choose an alternative covered
transaction with a prepayment penalty
do so voluntarily. The Bureau further
believes it is unnecessary, and contrary
to the Bureau’s efforts to streamline its
regulations, facilitate regulatory
compliance, and minimize compliance
burden, for a creditor to document
compliance with the requirement to
offer an alternative covered transaction
without a prepayment penalty when a
consumer does not choose a transaction
with a prepayment penalty or if the
covered transaction is not
consummated. Accordingly, the Bureau
is adopting as proposed comment 25(a)–
7 as comment 25(c)(3)–2, to clarify that
a creditor must retain records that
document compliance with that
requirement if a transaction subject to
§ 1026.43 is consummated with a
prepayment penalty, but need not retain
such records if a covered transaction is
consummated without a prepayment
penalty or a covered transaction is not
consummated. See § 1026.43(g)(6).
The Board proposed comment 25(a)–
7 also to provide specific guidance on
retaining records evidencing
compliance with the requirement to
offer a consumer an alternative covered
transaction without a prepayment
penalty when a creditor offers a
transaction through a mortgage broker.
As discussed in detail below in the
section-by-section analysis of
§ 1026.43(g)(4), the Board proposed that
if the creditor offers a covered
transaction with a prepayment penalty
through a mortgage broker, the creditor
must present the mortgage broker an
alternative covered transaction without
a prepayment penalty. Also, the creditor
must provide, by agreement, for the
mortgage broker to present to the
consumer that transaction or an
alternative covered transaction without
a prepayment penalty offered by another
creditor that has a lower interest rate or
a lower total dollar amount of
origination points or fees and discount
points than the creditor’s presented
alternative covered transaction. The
Bureau did not receive significant
comment on this clarification, and is
adopting the comment largely as
PO 00000
Frm 00017
Fmt 4701
Sfmt 4700
6423
proposed, renumbered as comment
25(c)(3)–2. Comment 25(c)(3)–2 also
clarifies that, to demonstrate
compliance with § 1026.43(g)(4), the
creditor must retain a record of (1) the
alternative covered transaction without
a prepayment penalty presented to the
mortgage broker pursuant to
§ 1026.43(g)(4)(i), such as a rate sheet,
and (2) the agreement with the mortgage
broker required by § 1026.34(g)(4)(ii).
Section 1026.32 Requirements for
High-Cost Mortgages
32(b) Definitions
32(b)(1)
Points and Fees—General
Section 1412 of the Dodd-Frank Act
added TILA section 129C(b)(2)(A)(vii),
which defines a ‘‘qualified mortgage’’ as
a loan for which, among other things,
the total ‘‘points and fees’’ do not
exceed 3 percent of the total loan
amount. The limits on points and fees
for qualified mortgages are implemented
in new § 1026.43(e)(3).
TILA section 129C(b)(2)(C) generally
defines ‘‘points and fees’’ for qualified
mortgages to have the same meaning as
in TILA section 103(aa)(4) (renumbered
as section 103(bb)(4)), which defines
‘‘points and fees’’ for the purpose of
determining whether a transaction
qualifies as a high-cost mortgage under
HOEPA.75 TILA section 103(aa)(4) is
implemented in current § 1026.32(b)(1).
Accordingly, the Board proposed in
§ 226.43(b)(9) that, for a qualified
mortgage, ‘‘points and fees’’ has the
same meaning as in § 226.32(b)(1).
The Board also proposed in the 2011
ATR Proposal to amend § 226.32(b)(1) to
implement revisions to the definition of
‘‘points and fees’’ under section 1431 of
the Dodd-Frank Act. Among other
things, the Dodd-Frank Act excluded
certain private mortgage insurance
premiums from, and added loan
originator compensation and
prepayment penalties to, the definition
of ‘‘points and fees’’ that had previously
75 The Dodd-Frank Act renumbered existing TILA
section 103(aa), which contains the definition of
‘‘points and fees,’’ for the high-cost mortgage points
and fees threshold, as section 103(bb). See
§ 1100A(1)(A) of the Dodd-Frank Act. However, in
defining points and fees for the qualified mortgage
points and fees limits, TILA section 129C(b)(2)(C)
refers to TILA section 103(aa)(4) rather than TILA
section 103(bb)(4). To give meaning to this
provision, the Bureau concludes that the reference
to TILA section in 103(aa)(4) in TILA section
129C(b)(2)(C) is mistaken and therefore interprets
TILA section 129C(b)(2)(C) as referring to the points
and fees definition in renumbered TILA section
103(bb)(4). This proposal generally references TILA
section 103(aa) to refer to the pre-Dodd-Frank
provision, which is in effect until the Dodd-Frank
Act’s amendments take effect, and TILA section
103(bb) to refer to the provision as amended.
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6424
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
applied to high-cost mortgage loans
under HOEPA. In the Bureau’s 2012
HOEPA Proposal, the Bureau
republished the Board’s proposed
revisions to § 226.32(b)(1), with only
minor changes, in renumbered
§ 1026.32(b)(1).
The Bureau noted in its 2012 HOEPA
Proposal that it was particularly
interested in receiving comments
concerning any newly-proposed
language and the application of the
definition in the high-cost mortgage
context. The Bureau received numerous
comments from both industry and
consumer advocacy groups, the majority
of which were neither specific to newlyproposed language nor to the
application of the definition to high-cost
mortgages. These comments largely
reiterated comments that the Board and
the Bureau had received in the ATR
rulemaking docket. The Bureau is
addressing comments received in
response to 2012 HOEPA Proposal in
the 2013 HOEPA Final Rule. Similarly,
comments received in response to the
Board’s 2011 ATR Proposal are
discussed in this final rule. The Bureau
is carefully coordinating the 2013
HOEPA and ATR Final Rules to ensure
a consistent and cohesive regulatory
framework. The Bureau is now
finalizing § 1026.32(b)(1), (b)(3),
(b)(4)(i), (b)(5), and (b)(6)(i) in this rule
in response to the comments received
on both proposals. The Bureau is
finalizing § 1026.32(b)(2), (b)(4)(ii), and
(b)(6)(ii) in the 2013 HOEPA Final Rule.
Existing § 1026.32(b)(1) defines
‘‘points and fees’’ by listing included
charges in § 1026.32(b)(1)(i) through
(iv). As discussed below, the Board
proposed revisions to § 226.32(b)(1)(i)
through (iv) and proposed to add new
§ 226.32(b)(1)(v) and (vi). In the 2012
HOEPA Proposal, the Bureau proposed
to add the phrase ‘‘in connection with
a closed-end mortgage loan’’ to
§ 1026.32(b)(1) to clarify that its
definition of ‘‘points and fees’’ would
have applied only for closed-end
mortgages. The Bureau also proposed to
define ‘‘points and fees’’ in
§ 1026.32(b)(3) for purposes of defining
which open-end credit plans qualify as
‘‘high-cost mortgages’’ under HOEPA.
However, that section is not relevant to
this rulemaking because the ability-torepay requirement in TILA section 129C
does not apply to open-end credit.
Accordingly, the Bureau is adopting
§ 1026.32(b)(1) with the clarification
that its definition of ‘‘points and fees’’
is ‘‘in connection with a closed-end
mortgage loan.’’
Payable at or before consummation.
In the 2011 ATR Proposal, the Board
noted that the Dodd-Frank Act removed
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
the phrase ‘‘payable at or before
closing’’ from the high-cost mortgage
points and fees test in TILA section
103(aa)(1)(B). See TILA section
103(bb)(1)(A)(ii). Prior to the DoddFrank Act, fees and charges were
included in points and fees for the highcost mortgage points and fees test only
if they were payable at or before closing.
The phrase ‘‘payable at or before
closing’’ is also not in TILA’s provisions
on the points and fees cap for qualified
mortgages. See TILA section
129C(b)(2)(A)(vii), (b)(2)(C). Thus, the
Board stated that, with a few exceptions,
the statute provides that any charge that
falls within the ‘‘points and fees’’
definition must be counted toward the
limits on points and fees for both highcost mortgages and qualified mortgages,
even if it is payable after loan closing.
The Board noted that the exceptions are
mortgage insurance premiums and
charges for credit insurance and debt
cancellation and suspension coverage.
The statute expressly states that these
premiums and charges are included in
points and fees only if payable at or
before closing. See TILA section
103(bb)(1)(C) (for mortgage insurance)
and TILA section 103(bb)(4)(D) (for
credit insurance and debt cancellation
and suspension coverage).
The Board expressed concern that
some fees that occur after closing, such
as fees to modify a loan, might be
deemed to be points and fees. If so, the
Board cautioned that calculating the
points and fees to determine whether a
transaction is a qualified mortgage may
be difficult because the amount of future
fees (e.g., loan modification fees) cannot
be known prior to closing. The Board
noted that creditors might be exposed to
excessive litigation risk if consumers
were able at any point during the life of
a mortgage to argue that the points and
fees for the loan exceed the qualified
mortgage limits due to fees imposed
after loan closing. The Board expressed
concern that creditors therefore might
be discouraged from making qualified
mortgages, which would undermine
Congress’s goal of increasing incentives
for creditors to make more stable,
affordable loans. The Board requested
comment on whether any other types of
fees should be included in points and
fees only if they are ‘‘payable at or
before closing.’’
Several industry commenters stated
that charges paid after closing should
not be included in points and fees and
requested that the Bureau clarify
whether such charges are included. For
example, some industry commenters
sought confirmation that charges for a
subsequent loan modification would not
be included in points and fees. More
PO 00000
Frm 00018
Fmt 4701
Sfmt 4700
generally, industry commenters argued
that they would have difficulty
calculating charges that would be paid
after closing and that including such
charges in points and fees would create
uncertainty and litigation risk. In
response to the Bureau’s 2012 HOEPA
Proposal, one consumer advocate noted
that there are inconsistent and
confusing standards for when charges
must be payable to be included in
points and fees. This commenter
recommended that the Bureau adopt a
‘‘known at or before closing’’ standard,
arguing that this standard would clarify
that financed points are included,
would prevent creditors from evading
the points and fees test by requiring
consumers to pay charges after
consummation, and would provide
certainty to creditors that must know
the amount of points and fees at or
before closing.
The Bureau appreciates that creditors
need certainty in calculating points and
fees so they can ensure that they are
originating qualified mortgages (or are
not exceeding the points and fees
thresholds for high-cost mortgages). The
Dodd-Frank Act provides that for the
points and fees tests for both qualified
mortgages and high-cost mortgages, only
charges ‘‘payable in connection with’’
the transaction are included in points
and fees. See TILA sections
103(bb)(1)(A)(ii) (high-cost mortgages)
and 129C(b)(2)(A)(vii) (qualified
mortgages). The Bureau interprets this
‘‘in connection with’’ requirement as
limiting the universe of charges that
need to be included in points and fees.
To clarify when charges or fees are ‘‘in
connection with’’ a transaction, the
Bureau is specifying in § 1026.32(b)(1)
that fees or charges are included in
points and fees only if they are ‘‘known
at or before consummation.’’
The Bureau is also adding new
comment 32(b)(1)–1, which provides
examples of fees and charges that are
and are not known at or before
consummation. The comment explains
that charges for a subsequent loan
modification generally would not be
included in points and fees because, at
consummation, the creditor would not
know whether a consumer would seek
to modify the loan and therefore would
not know whether charges in
connection with a modification would
ever be imposed. Indeed, loan
modification fees likely would not be
included in the finance charge under
§ 1026.4, as they would not be charges
imposed by creditor as an incident to or
a condition of the extension of credit.
Thus, this clarification is consistent
with the definition of the finance
charge. Comment 32(b)(1)–1 also
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
clarifies that the maximum prepayment
penalties that may be charged or
collected under the terms of a mortgage
loan are included in points and fees
under § 1026.32(b)(1)(v). In addition,
comment 32(b)(1)–1 notes that, under
§ 1026.32(b)(1)(i)(C)(1) and (iv),
premiums or other charges for private
mortgage insurance and credit insurance
payable after consummation are not
included in points and fees. This means
that such charges may be included in
points and fees only if they are payable
at or before consummation. Thus, even
if the amounts of such premiums or
other charges are known at or before
consummation, they are included in
points and fees only if they are payable
at or before consummation.
32(b)(1)(i)
sroberts on DSK5SPTVN1PROD with
Points and Fees—Included in the
Finance Charge
TILA section 103(aa)(4)(A) specifies
that ‘‘points and fees’’ includes all items
included in the finance charge, except
interest or the time-price differential.
This provision is implemented in
current § 1026.32(b)(1)(i). Section 1431
of the Dodd-Frank Act added TILA
section 103(bb)(1)(C), which excludes
from points and fees certain types and
amounts of mortgage insurance
premiums.
The Board proposed to revise
§ 226.32(b)(1)(i) to implement these
provisions. The Board proposed to move
the exclusion of interest or the timeprice differential to new
§ 226.32(b)(1)(i)(A). The Board also
proposed to add § 226.32(b)(1)(i)(B) to
implement the new exclusion for certain
mortgage insurance. In § 226.32(b)(1)(i),
the Board proposed to revise the phrase
‘‘all items required to be disclosed
under § 226.4(a) and 226.4(b)’’ to read
‘‘all items considered to be a finance
charge under § 226.4(a) and 226.4(b)’’
because § 226.4 does not itself require
disclosure of the finance charge.
One industry commenter argued that
the definition of points and fees was
overbroad because it included all items
considered to be a finance charge. The
commenter asserted that several items
that are included in the finance charge
under § 1026.4(b) are vague or
inapplicable in the context of mortgage
transactions or duplicate items
specifically addressed in other
provisions. Several industry
commenters also requested clarification
about whether certain types of fees and
charges are included in points and fees.
At least two commenters asked that the
Bureau clarify that closing agent costs
are not included in points and fees.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
The Bureau is adopting renumbered
§ 1026.32(b)(1)(i) and (i)(A) substantially
as proposed, with certain clarifications
in the commentary and in other parts of
the rule as discussed below to address
commenters’ requests for clarification.
For consistency with the language in
§ 1026.4, the Bureau is revising
§ 1026.32(b)(1)(i) to refer to ‘‘items
included in the finance charge’’ rather
than ‘‘items considered to be a finance
charge.’’
As noted above, several commenters
requested clarification regarding
whether certain types of charges would
be included in points and fees. With
respect to closing agent charges,
§ 1026.4(a)(2) provides a specific rule
for when such charges must be included
in the finance charge. If they are not
included in the finance charge, they
would not be included in points and
fees. Moreover, as discussed below and
in new comment 32(b)(1)(i)(D)–1,
certain closing agent charges may also
be excluded from points and fees as
bona fide third-party charges that are
not retained by the creditor, loan
originator, or an affiliate of either.
The Board also proposed to revise
comment 32(b)(1)(i)–1, which states that
§ 226.32(b)(1)(i) includes in the total
‘‘points and fees’’ items defined as
finance charges under § 226.4(a) and
226.4(b). The comment explains that
items excluded from the finance charge
under other provisions of § 226.4 are not
included in the total ‘‘points and fees’’
under § 226.32(b)(1)(i), but may be
included in ‘‘points and fees’’ under
§ 226.32(b)(1)(ii) and (iii). The Board
proposed to revise this comment to state
that items excluded from the finance
charge under other provisions of § 226.4
may be included in ‘‘points and fees’’
under § 226.32(b)(1)(ii) through (vi).76
The proposed revision was intended to
reflect the additional items added to the
definition of ‘‘points and fees’’ by the
Dodd-Frank Act and corrected the
previous omission of § 226.32(b)(1)(iv).
See proposed § 226.32(b)(1)(v) and (vi).
The proposed comment also would
have added an example of how this rule
would operate. Under that example, a
fee imposed by the creditor for an
appraisal performed by an employee of
the creditor meets the general definition
of ‘‘finance charge’’ under § 226.4(a) as
76 Proposed comment 32(b)(1)(i)–1 contained a
typographical error. It stated that ‘‘[i]tems excluded
from the finance charge under other provisions of
§ 226.4 are not excluded in the total ‘‘points and
fees’’ under § 226.32(b)(1)(i), but may be included
in ‘‘points and fees’’ under § 226.32(b)(1)(ii) through
§ 226.32(b)(1)(vi).’’ (emphasis added). It should
have read that such items ‘‘are not included in the
total ‘‘points and fees’’ under § 226.32(b)(1)(i), but
may be included in ‘‘points and fees’’ under
§ 226.32(b)(1)(ii) through § 226.32(b)(1)(vi).’’
PO 00000
Frm 00019
Fmt 4701
Sfmt 4700
6425
‘‘any charge payable directly or
indirectly by the consumer and imposed
directly or indirectly by the creditor as
an incident to or a condition of the
extension of credit.’’ However,
§ 226.4(c)(7) expressly provides that
appraisal fees are not finance charges.
Therefore, under the general rule in
proposed § 226.32(b)(1)(i) providing that
finance charges must be counted as
points and fees, a fee imposed by the
creditor for an appraisal performed by
an employee of the creditor would not
have been counted in points and fees.
Proposed § 226.32(b)(1)(iii), however,
would have expressly included in
points and fees items listed in
§ 226.4(c)(7) (including appraisal fees) if
the creditor receives compensation in
connection with the charge. A creditor
would receive compensation for an
appraisal performed by its own
employee. Thus, the appraisal fee in this
example would have been included in
the calculation of points and fees.
The Bureau did not receive
substantial comment on this proposed
guidance. The Bureau is adopting
comment 32(b)(1)(i)–1, with certain
revisions for clarity. As revised,
comment 32(b)(1)(i)–1 explains that
certain items that may be included in
the finance charge under
§ 1026.32(b)(1)(i) are excluded under
§ 1026.32(b)(1)(i)(A) through (F).
Mortgage Insurance
Under existing § 1026.32(b)(1)(i),
mortgage insurance premiums are
included in the finance charge and
therefore are included in points and fees
if payable at or before closing. As noted
above, the Board proposed new
§ 226.32(b)(1)(i)(B) to implement TILA
section 103(bb)(1)(C), which provides
that points and fees shall exclude
certain charges for mortgage insurance
premiums. Specifically, the statute
excludes: (1) Any premium charged for
insurance provided by an agency of the
Federal Government or an agency of a
State; (2) any amount that is not in
excess of the amount payable under
policies in effect at the time of
origination under section 203(c)(2)(A) of
the National Housing Act, provided that
the premium, charge, or fee is required
to be refundable on a pro-rated basis
and the refund is automatically issued
upon notification of the satisfaction of
the underlying mortgage loan; and (3)
any premium paid by the consumer
after closing.
The Board noted that the exclusions
for certain premiums could plausibly be
interpreted to apply to the definition of
points and fees solely for purposes of
high-cost mortgages and not for
qualified mortgages. TILA section
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6426
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
129C(b)(2)(C)(i) cross-references TILA
section 103(aa)(4) (renumbered as
103(bb)(4)) for the definition of ‘‘points
and fees,’’ but the provision on mortgage
insurance appears in TILA section
103(bb)(1)(C) and not in section
103(bb)(4). The Board also noted that
certain provisions in the Dodd-Frank
Act’s high-cost mortgage section
regarding points and fees are repeated in
the qualified mortgage section on points
and fees. For example, both the highcost mortgage provisions and the
qualified mortgage provisions expressly
exclude from points and fees ‘‘bona fide
third party charges not retained by the
mortgage originator, creditor, or an
affiliate of the creditor or mortgage
originator.’’ TILA sections
103(bb)(1)(A)(ii) (for high-cost
mortgages), 129C(b)(2)(C)(i) (for
qualified mortgages). The mortgage
insurance provision, however, does not
separately appear in the qualified
mortgage section.
Nonetheless, the Board concluded
that the better interpretation of the
statute is that the mortgage insurance
provision in TILA section 103(bb)(1)(C)
applies to the meaning of points and
fees for both high-cost mortgages and
qualified mortgages. The Board noted
that the statute’s structure reasonably
supports this view: by its plain
language, the mortgage insurance
provision prescribes how points and
fees should be computed ‘‘for purposes
of paragraph (4),’’ i.e., for purposes of
TILA section 103(bb)(4). The mortgage
insurance provision contains no caveat
limiting its application solely to the
points and fees calculation for high-cost
mortgages. Thus, the Board determined
that the cross-reference in the qualified
mortgage provisions to TILA section
103(bb)(4) should be read to include
provisions that expressly prescribe how
points and fees should be calculated
under TILA section 103(bb)(4),
wherever located.
The Board noted that its proposal to
apply the mortgage insurance provision
to the meaning of points and fees for
both high-cost mortgages and qualified
mortgages is also supported by the
Board’s authority under TILA section
105(a) to make adjustments to facilitate
compliance with TILA. The Board also
cited its authority under TILA section
129B(e) to condition terms, acts or
practices relating to residential mortgage
loans that the Board finds necessary or
proper to effectuate the purposes of
TILA. The purposes of TILA include
‘‘assur[ing] that consumers are offered
and receive residential mortgage loan on
terms that reasonably reflect their ability
to repay the loans.’’ TILA section
129B(a)(2).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
The Board also expressed concern
about the increased risk of confusion
and compliance error if points and fees
were to have two separate meanings in
TILA—one for determining whether a
loan is a high-cost mortgage and another
for determining whether a loan is a
qualified mortgage. The Board stated
that the proposal is intended to facilitate
compliance by applying the mortgage
insurance provision to the meaning of
points and fees for both high-cost
mortgages and qualified mortgages.
In addition, the Board expressed
concern that market distortions could
result due to different treatment of
mortgage insurance in calculating points
and fees for high-cost mortgages and
qualified mortgages. ‘‘Points and fees’’
for both high-cost mortgages and
qualified mortgages generally excludes
‘‘bona fide third party charges not
retained by the mortgage originator,
creditor, or an affiliate of the creditor or
mortgage originator.’’ TILA sections
103(bb)(1)(A)(ii), 129C(b)(2)(C)(i). Under
this general provision standing alone,
premiums for up-front private mortgage
insurance would be excluded from
points and fees. However, as noted, the
statute’s specific provision on mortgage
insurance (TILA section 103(bb)(1)(C))
imposes certain limitations on the
amount and conditions under which upfront premiums for private mortgage
insurance are excluded from points and
fees. Applying the mortgage insurance
provision to the definition of points and
fees only for high-cost mortgages would
mean that any premium amount for upfront private mortgage insurance could
be charged on qualified mortgages; in
most cases, none of that amount would
be subject to the cap on points and fees
for qualified mortgages because it would
be excluded as a ‘‘bona fide third party
fee’’ that is not retained by the creditor,
loan originator, or an affiliate of either.
The Board noted that, as a result,
consumers who obtain qualified
mortgages could be vulnerable to paying
excessive up-front private mortgage
insurance costs. The Board concluded
that this outcome would undercut
Congress’s clear intent to ensure that
qualified mortgages are products with
limited fees and more safe features.
For the reasons noted by the Board,
the Bureau interprets the mortgage
insurance provision in TILA section
103(bb)(1)(C) as applying to the meaning
of points and fees for both high-cost
mortgages and qualified mortgages. The
Bureau is also adopting this approach
pursuant to its authority under TILA
sections 105(a) and 129C(b)(3)(B)(i).
Applying the mortgage insurance
provision to the meaning of points and
fees for qualified mortgages is necessary
PO 00000
Frm 00020
Fmt 4701
Sfmt 4700
and proper to effectuate the purposes of,
and facilitate compliance with the
purposes of, the ability-to-repay
requirements in TILA section 129C.
Similarly, the Bureau finds that it is
necessary and proper to use its authority
under TILA section 129C(b)(3)(B)(i) to
revise, add to, or subtract from the
criteria that define a qualified mortgage.
As noted above, construing the mortgage
insurance provision as applying to
qualified mortgages will reduce the
likelihood that consumers who obtain
qualified mortgages will pay excessive
private mortgage insurance premiums,
and therefore will help ensure that
responsible, affordable credit remains
available to consumers in a manner
consistent with the purposes of TILA
section 129C.
Proposed § 226.32(b)(1)(i)(B) tracked
the substance of the statute with one
exception. The Board interpreted the
statute as excluding from points and
fees not only up-front mortgage
insurance premiums under government
programs but also charges for mortgage
guaranties under government programs.
The Board noted that it was proposing
the exclusion from points and fees of
both mortgage insurance premiums and
guaranty fees under government
programs pursuant to its authority
under TILA section 105(a) to make
adjustments to facilitate compliance
with TILA and its purposes and to
effectuate the purposes of TILA. The
Board also found that the exclusion is
further supported by the Board’s
authority under TILA section 129B(e) to
condition terms, acts or practices
relating to residential mortgage loans
that the Board finds necessary or proper
to effectuate the purposes of TILA. The
purposes of TILA include ‘‘assur[ing]
that consumers are offered and receive
residential mortgage loan on terms that
reasonably reflect their ability to repay
the loans.’’ TILA section 129B(a)(2).
The Board noted that both the U.S.
Department of Veterans Affairs (VA) and
the U.S. Department of Agriculture
(USDA) expressed concerns that, if upfront charges for guaranties provided by
those agencies and State agencies were
included in points and fees, their loans
might exceed high-cost thresholds and
exceed the cap for qualified mortgages,
thereby disrupting these programs and
jeopardizing an important source of
credit for many consumers. The Board
requested comment on its proposal to
exclude up-front charges for any
guaranty under a Federal or State
government program, as well as any upfront mortgage insurance premiums
under government programs.
Several industry commenters argued
that premiums for private mortgage
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
insurance should be excluded
altogether, even if the premiums do not
satisfy the statutory standard for
exclusion. These commenters noted that
private mortgage insurance provides
substantial benefits, allowing consumers
who cannot afford a down payment an
alternative for obtaining credit. Another
commenter noted that the refundability
requirement of the rule would make
private mortgage insurance more
expensive.
One industry commenter asserted that
the language in proposed
§ 226.32(b)(1)(i)(B)(2) was inconsistent
with the statutory language and the
example in the commentary. The
commenter suggested that a literal
reading of proposed
§ 226.32(b)(1)(i)(B)(2) would require
exclusion of the entire premium if it
exceeded the FHA insurance premium,
rather than merely exclusion of that
portion of the premium in excess of the
FHA premium. Another industry
commenter maintained that the term
‘‘upfront’’ is vague and that the Bureau
instead should use the phrase ‘‘payable
at or before closing.’’
The Bureau is adopting proposed
§ 226.32(b)(1)(i)(B) as reunumbered
§ 1026.32(b)(1)(i)(B) with no substantive
changes but with revisions for clarity.
The Bureau is dividing proposed
§ 226.32(b)(1)(i)(B) into two parts. The
first part, § 1026.32(b)(1)(i)(B), addresses
insurance premiums and guaranty
charges under government programs.
The second part, § 1026.32(b)(1)(i)(C),
addresses premiums for private
mortgage insurance.
Consistent with the Board’s proposal,
§ 1026.32(b)(1)(i)(B) excludes from
points and fees charges for mortgage
guaranties under government programs,
as well as premiums for mortgage
insurance under government programs.
The Bureau concurs with the Board’s
interpretation that, in addition to
mortgage insurance premiums under
government programs, the statute also
excludes from points and fees charges
for mortgage guaranties under
government programs. Like the Board,
the Bureau believes that this conclusion
is further supported by TILA sections
105(a) and 129C(b)(3)(B)(i) and that it is
necessary and proper to invoke this
authority. The exclusion from points
and fees of charges for mortgage
guaranties under government programs
is necessary and proper to effectuate the
purposes of TILA. The Bureau is
concerned that including such charges
in points and fees could cause loans
offered through government programs to
exceed high-cost mortgage thresholds
and qualified mortgage points and fees
limits, potentially disrupting an
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
important source of affordable financing
for many consumers. This exclusion
helps ensure that loans do not
unnecessarily exceed the points and
fees limits for qualified mortgages,
which is consistent with the purpose,
stated in TILA section 129B(a)(2), of
assuring that consumers are offered and
receive residential mortgage loans on
terms that reasonably reflect their ability
to repay the loans and with the purpose
stated in TILA section 129C(b)(3)(B)(i)
of ensuring that responsible, affordable
mortgage credit remains available to
consumers in a manner consistent with
the purposes of TILA section 129C.
Proposed comment 32(b)(1)(i)–2
provided an example of a mortgage
insurance premium that is not counted
in points and fees because the loan was
insured by the FHA. The Bureau is
renumbering this comment as
32(b)(1)(i)(B)–1 and revising it to add an
additional example to clarify that
mortgage guaranty fees under
government programs, such as VA and
USDA funding fees, are excluded from
points and fees. The Bureau is also
deleting the reference to ‘‘up-front’’
premiums and charges. Under the
statute, premiums for mortgage
insurance or guaranty fees in connection
with a Federal or State government
program are excluded from points and
fees whenever paid. The statutory
provision excluding premiums or
charges paid after consummation
applies only to private mortgage
insurance.
The Bureau is addressing exclusions
for private mortgage insurance in
§ 1026.32(b)(1)(i)(C). For private
mortgage insurance premiums payable
after consummation,
§ 1026.32(b)(1)(i)(C)(1) provides that the
entire amount of the premium is
excluded from points and fees. For
private mortgage insurance premiums
payable at or before consummation,
§ 1026.32(b)(1)(i)(C)(1) provides that the
portion of the premium not in excess of
the amount payable under policies in
effect at the time of origination under
section 203(c)(2)(A) of the National
Housing Act is excluded from points
and fees, provided that the premium is
required to be refundable on a pro-rated
basis and the refund is automatically
issued upon notification of the
satisfaction of the underlying mortgage
loan.
As noted by one commenter, the
language in proposed § 226.32(b)(1)(i)(B)
could be read to conflict with the statute
and the commentary because it
suggested that, if a private mortgage
insurance premium payable at or before
consummation exceeded the FHA
insurance premium, then the entire
PO 00000
Frm 00021
Fmt 4701
Sfmt 4700
6427
private mortgage insurance premium
would be included in points and fees.
The Bureau is clarifying in
§ 1026.32(b)(1)(i)(C)(2) that only the
portion of the private mortgage
insurance premium that exceeds the
FHA premium must be included in
points and fees. With respect to the
comments requesting that all private
mortgage insurance premiums be
excluded from points and fees, the
Bureau notes that TILA section
103(bb)(1)(C) prescribes specific and
detailed conditions for excluding
private mortgage insurance premiums.
Under these circumstances, the Bureau
does not believe it would be appropriate
to exercise its exception authority to
reverse Congress’s decision.
Proposed comment 32(b)(1)(i)–3
explained that private mortgage
insurance premiums payable at or
before consummation need not be
included in points and fees to the extent
that the premium does not exceed the
amount payable under policies in effect
at the time of origination under section
203(c)(2)(A) of the National Housing Act
and the premiums are required to be
refunded on a pro-rated basis and the
refund is automatically issued upon
notification of satisfaction of the
underlying mortgage loan. Proposed
comment 32(b)(1)(i)–3 also provided an
example of this exclusion. Proposed
comment 32(b)(1)(i)–4 explained that
private mortgage insurance premiums
that do not qualify for an exclusion
must be included in points and fees
whether paid at or before
consummation, in cash or financed,
whether optional or required, and
whether the amount represents the
entire premium or an initial payment.
The Bureau did not receive
substantial comments on these proposed
interpretations. The Bureau is adopting
comments 32(b)(1)(i)–3, and –4 with
certain revisions for clarity and
renumbered as comments 32(b)(1)(i)(C)–
1 and –2. Comment 32(b)(1)(i)(C)–1.i is
revised to specify that private mortgage
insurance premiums paid after
consummation are excluded from points
and fees. The Bureau also adopts
clarifying changes that specify that
creditors originating conventional
loans—even such loans that are not
eligible to be FHA loans (i.e., because
their principal balance is too high)—
should look to the permissible up-front
premium amount for FHA loans, as
implemented by applicable regulations
and other written authorities issued by
the FHA (such as Mortgagee Letters).
For example, pursuant to HUD’s
Mortgagee Letter 12–4 (published March
6, 2012), the allowable up-front FHA
premium for single-family homes is 1.75
E:\FR\FM\30JAR2.SGM
30JAR2
6428
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
percent of the base loan amount.77
Finally, the Bureau clarifies that only
the portion of the single or up-front PMI
premium in excess of the allowable
FHA premium (i.e., rather than any
monthly premium or portion thereof)
must be included in points and fees.
Comments 32(b)(1)(i)(C)–1 and –2 also
have both been revised for clarity and
consistency. For example, the comments
as adopted refer to premiums ‘‘payable
at or before consummation’’ rather than
‘‘up-front’’ premiums and to
‘‘consummation’’ rather than ‘‘closing.’’
The Bureau notes that the statute refers
to ‘‘closing’’ rather than
‘‘consummation.’’ However, for
consistency with the terminology in
Regulation Z, the Bureau is using the
term ‘‘consummation.’’
sroberts on DSK5SPTVN1PROD with
Bona Fide Third-Party Charges and
Bona Fide Discount Points
The Dodd-Frank Act amended TILA
to add nearly identical provisions
excluding certain bona fide third-party
charges and bona fide discount points
from the calculation of points and fees
for both qualified mortgages and highcost mortgages.78 Specifically, section
1412 of the Dodd-Frank Act added new
TILA section 129C(b)(2)(C), which
excludes certain bona fide third-party
charges and bona fide discount points
from the calculation of points and fees
for the qualified mortgage points and
fees threshold. Similarly, section 1431
of the Dodd-Frank Act amended TILA
section 103(bb)(1)(A)(ii) and added
TILA section 103(dd) to provide for
nearly identical exclusions in
calculating points and fees for the highcost mortgage threshold.
In the 2011 ATR Proposal, the Board
proposed to implement in
§ 226.43(e)(3)(ii)(A) through (C) the
exclusion of certain bona fide thirdparty charges and bona fide discount
points only for the calculation of points
and fees for the qualified mortgage
points and fees threshold. In the 2012
HOEPA Proposal, the Bureau proposed
to implement these exclusions in
77 See Department of Housing and Urban
Development, Mortgagee Letter 12–4 (Mar. 6, 2012),
available at http://portal.hud.gov/hudportal/
documents/huddoc?id=12-04ml.pdf.
78 The exclusions differ in only one respect. To
exclude two or one bona fide discount points from
the points and fees test for determining whether a
loan is a high-cost mortgage, TILA section
103(dd)(1)(B) and (C) specified that the interest rate
for personal property loans before the discount
must be within 1 or 2 percentage points,
respectively, of the average rate on a loan in
connection with which insurance is provided under
title I of the National Housing Act. TILA section
129C(b)(2)(C), which prescribes conditions for
excluding bona fide discount points from points
and fees for qualified mortgages, does not contain
analogous provisions.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
proposed § 1026.32(b)(5) for the points
and fees threshold for high-cost
mortgages. The Bureau noted that
proposed § 1026.32(b)(5) was generally
consistent with the Board’s proposed
§ 226.43(e)(3)(ii)(A) through (C).
The Bureau believes that it is
appropriate to consolidate these
exclusions in a single provision. The
Bureau is now finalizing both rules, and
the exclusions are nearly identical for
both the qualified mortgage and highcost mortgage contexts. Moreover, under
the Board’s ATR Proposal, the points
and fees calculation for the qualified
mortgage points and fees threshold
already would have cross-referenced the
definition of points and fees for highcost mortgages in § 226.32(b)(1). Given
that the points and fees calculations for
both the qualified mortgage and highcost mortgage points and fees thresholds
will use the same points and fees
definition in § 1026.32(b)(1), the Bureau
believes it is unnecessary to implement
nearly identical exclusions from points
and fees in separate provisions for
qualified mortgages and high-cost
mortgages. Accordingly, the Bureau is
consolidating the exclusions for certain
bona fide third-party charges and bona
fide discount points for both qualified
mortgages and high-cost mortgages in
new § 1026.32(b)(1)(i)(D) through (F). In
addition, the definition of ‘‘bona fide
discount points’’ for the purposes of
§ 1026.32(b)(1)(i)(E) and (F), which the
2011 ATR Proposal would have
implemented in § 226.43(e)(3)(iv), is
instead being implemented in
§ 1026.32(b)(3).
Bona fide third-party charges. TILA
Section 129C(b)(2)(C)(i) excludes from
points and fees ‘‘bona fide third party
charges not retained by the mortgage
originator, creditor, or an affiliate of the
creditor or mortgage originator.’’
Tracking the statute, proposed
§ 226.43(e)(3)(ii)(A) would have
excluded from ‘‘points and fees’’ for
qualified mortgages any bona fide third
party charge not retained by the
creditor, loan originator, or an affiliate
of either. Proposed § 226.43(e)(3)(iii)
would have specified that the term
‘‘loan originator’’ has the same meaning
as in § 226.36(a)(1).
Proposed § 226.43(e)(3)(ii)(A) would
also have implemented TILA section
103(bb)(1)(C), which requires that
premiums for private mortgage
insurance be included in ‘‘points and
fees’’ as defined in TILA section
103(bb)(4) under certain circumstances.
Applying general rules of statutory
construction, the Board concluded that
the more specific provision on private
mortgage insurance supersedes the more
general provision permitting any bona
PO 00000
Frm 00022
Fmt 4701
Sfmt 4700
fide third party charge not retained by
the creditor, mortgage originator, or an
affiliate of either to be excluded from
‘‘points and fees.’’ Thus, proposed
§ 226.43(e)(3)(ii)(A) would have
excluded from points and fees any bona
fide third party charge not retained by
the creditor, loan originator, or an
affiliate of either unless the charges
were premiums for private mortgage
insurance that were included in points
and fees under § 226.32(b)(1)(i)(B).
The Board noted that, in setting the
purchase price for specific loans, Fannie
Mae and Freddie Mac make loan-level
price adjustments (LLPAs) to
compensate offset added risks, such as
a high LTV or low credit score, among
many other risk factors. Creditors may,
but are not required to, increase the
interest rate charged to the consumer so
as to offset the impact of the LLPAs or
increase the costs to the consumer in the
form of points to offset the lost revenue
resulting from the LLPAs. The Board
noted that, during outreach, some
creditors argued that these points
should not be counted in points and
fees for qualified mortgages under the
exclusion for ‘‘bona fide third party
charges not retained by the loan
originator, creditor, or an affiliate of
either’’ in TILA section 129C(b)(2)(C).
The Board acknowledged creditors’
concerns about exceeding the qualified
mortgage points and fees thresholds due
to LLPAs required by the GSEs.
However, the Board questioned whether
an exemption for LLPAs would be
consistent with congressional intent in
limiting points and fees for qualified
mortgages. The Board noted that points
charged to meet GSE risk-based price
adjustment requirements are arguably
no different than other points charged
on loans sold to any secondary market
purchaser to compensate that purchaser
for added loan-level risks. Congress
clearly contemplated that discount
points generally should be included in
points and fees for qualified mortgages.
The Board noted that an exclusion for
points charged by creditors in response
to secondary market LLPAs also would
raise questions about the appropriate
treatment of points charged by creditors
to offset loan-level risks on mortgage
loans that they hold in portfolio. The
Board reasoned that, under normal
circumstances, these points are retained
by the creditor, so it would not be
appropriate to exclude them from points
and fees under the ‘‘bona fide third
party charge’’ exclusion. However, the
Board cautioned that requiring that
these points be included in points and
fees, when similar charges on loans sold
into the secondary market are excluded,
may create undesirable market
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
imbalances between loans sold to the
secondary market and loans held in
portfolio.
The Board also noted that creditors
may offset risks on their portfolio loans
(or on loans sold into the secondary
market) by charging a higher rate rather
than additional points and fees;
however, the Board recognized the
limits of this approach to loan-level risk
mitigation due to concerns such as
exceeding high-cost mortgage rate
thresholds. Nonetheless, the Board
noted that in practice, an exclusion from
the qualified mortgage points and fees
calculation for all points charged to
offset loan-level risks may create
compliance and enforcement
difficulties. The Board questioned
whether meaningful distinctions
between points charged to offset loanlevel risks and other points and fees
charged on a loan could be made clearly
and consistently. In addition, the Board
observed that such an exclusion could
be overbroad and inconsistent with
Congress’s intent that points generally
be counted toward the points and fees
threshold for qualified mortgages.
The Board requested comment on
whether and on what basis the final rule
should exclude from points and fees for
qualified mortgages points charged to
meet risk-based price adjustment
requirements of secondary market
purchasers and points charged to offset
loan-level risks on mortgages held in
portfolio.
Consumer advocates did not comment
on this issue. Many industry
commenters argued that LLPAs should
be excluded from points and fees as
bona fide third party charges. The GSE
commenters agreed that LLPAs should
be excluded as bona fide third party
charges, noting that they are not
retained by the creditor. One GSE
commenter noted that LLPAs are set
fees that are transparent and accessible
via the GSEs’ Web sites. Some industry
commenters contended that including
LLPAs in points and fees would cause
many loans to exceed the points and
fees cap for qualified mortgages. Other
industry commenters argued that
requiring LLPAs to be included in
points and fees would force creditors to
recover the costs through increases in
the interest rate. One of the GSE
commenters acknowledged the concern
that creditors holding loans in portfolio
could be at a disadvantage if LLPAs
were excluded from points and fees and
suggested that the Bureau consider
allowing such creditors to exclude
published loan level risk adjustment
fees.
One industry commenter urged the
Bureau to coordinate with the agencies
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
responsible for finalizing the 2011 QRM
Proposed Rule to avoid unintended
consequences. The 2011 ARM Proposed
Rule, if adopted, would require, in
certain circumstances, that sponsors of
MBS create premium capture cash
reserve accounts to limit sponsors’
ability to monetize the excess spread
between the proceeds from the sale of
the interests and the par value of those
interests. See 76 FR 24113. The
commenter stated that this would result
in any premium in the price of a
securitization backed by residential
mortgage loans being placed in a firstloss position in the securitization. The
commenter argued that this would make
premium loans too expensive to
originate and that creditors would not
be able to recover LLPAs through
interest rate adjustments. The
commenter maintained that if the
LLPAs were included in the calculation
for the qualified mortgage points and
fees limit, creditors would also be
severely constrained in recovering
LLPAs through points. The commenter
argued that LLPAs therefore should be
excluded from the points and fees
calculation for qualified mortgages.
The Bureau is adopting
§ 226.43(e)(3)(ii)(A), with certain
revisions, as renumbered
§ 1026.32(b)(1)(i)(D). As revised,
§ 1026.32(b)(1)(i)(D) provides that a
bona fide third party charge not retained
by the creditor, loan originator, or an
affiliate of either the general is excluded
from points and fees unless the charge
is required to be included under
§ 1026.32(b)(1)(i)(C) (for mortgage
insurance premiums), (iii) (for real
estate related fees), or (iv) (for credit
insurance premiums). As noted above,
the Board proposed that the specific
provision regarding mortgage insurance,
TILA section 103(bb)(1)(C), should
govern the exclusion of private mortgage
insurance premiums of points and fees,
rather than TILA section 129C(b)(2)(C),
which provides generally for the
exclusion of certain bona fide thirdparty charges. The Bureau likewise
believes that the specific statutory
provisions regarding real estate related
fees and credit insurance premiums in
TILA section 103(bb)(4)(C) and (D)
should govern whether these charges are
included in points and fees rather than
the more general provisions regarding
exclusion of bona fide third-party
charges, TILA sections 103(bb)(1)(A)(ii)
(for high-cost mortgages) or
129C(b)(2)(C) (for qualified mortgages).
Thus, § 1026.32(b)(1)(i)(D) provides that
the general exclusion for bona fide
third-party charges applies unless the
PO 00000
Frm 00023
Fmt 4701
Sfmt 4700
6429
charges are required to be included
under § 1026.32(b)(1)(i)(C), (iii), or (iv).
The Bureau acknowledges that TILA
sections 103(bb)(1)(A)(ii) and
129C(b)(2)(C) could plausibly be read to
provide for a two-step calculation of
points and fees: first, the creditor would
calculate points and fees as defined in
TILA section 103(bb)(4); and, second,
the creditor would exclude all bona fide
third-party charges not retained by the
mortgage originator, creditor, or an
affiliate of either, as provided in TILA
sections 103(bb)(1)(A)(ii) (for high-cost
mortgages) and 129C(b)(2)(C) (for
qualified mortgages). Under this
reading, charges for, e.g., private
mortgage insurance could initially, in
step one, be included in points and fees
but then, in step two, be excluded as
bona fide third-party charges under
TILA sections 103(bb)(1)(A)(ii) or
129C(b)(2)(C).
To give meaning to the specific
statutory provisions regarding mortgage
insurance, real estate related fees, and
credit insurance, the Bureau believes
that the better reading is that these
specific provisions should govern
whether such charges are included in
points and fees, rather than the general
provisions excluding certain bona fide
third-party charges. For example,
Congress added TILA section
103(bb)(1)(C), which prescribes certain
conditions under which private
mortgage insurance premiums would be
included in points and fees. The Bureau
believes that the purpose of this
provision is to help ensure that
consumers with a qualified mortgage are
not charged excessive private mortgage
insurance premiums. If such premiums
could be excluded as bona fide thirdparty charges under TILA sections
103(bb)(1)(A)(ii) or 129C(b)(2)(C), then
the purpose of this provision would be
undermined. In further support of its
interpretation, the Bureau is invoking its
authority under TILA section 105(a) to
make such adjustments and exceptions
as are necessary and proper to effectuate
the purposes of TILA, including that
consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay
the loans. Similarly, the Bureau finds
that it is necessary, proper and
appropriate to use its authority under
TILA section 129C(b)(3)(B)(i) to revise
and subtract from the statutory
language. This use of authority ensures
that responsible, affordable mortgage
credit remains available to consumers in
a manner consistent with the purpose of
TILA section 129C, referenced above, as
well as effectuating that purpose.
As noted above, several industry
commenters argued that points charged
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6430
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
by creditors to offset LLPAs should be
excluded from points and fees under
§ 1026.32(b)(1)(i)(D). In setting the
purchase price for loans, the GSEs
impose LLPAs to offset certain credit
risks, and creditors may but are not
required to recoup the revenue lost as a
result of the LLPAs by increasing the
costs to consumers in the form of points.
The Bureau believes that the manner in
which creditors respond to LLPAs is
better viewed as a fundamental
component of how the pricing of a
mortgage loan is determined rather than
as a third party charge. As the Board
noted, allowing creditors to exclude
points charged to offset LLPAs could
create market imbalances between loans
sold on the secondary market and loans
held in portfolio. While such
imbalances could be addressed by
excluding risk adjustment fees more
broadly, including fees charged by
creditors for loans held in portfolio, the
Bureau agrees with the Board that this
could create compliance and
enforcement difficulties. Thus, the
Bureau concludes that points charged to
offset LLPAs may not be excluded from
points and fees under
§ 1026.32(b)(1)(i)(D). To the extent that
creditors offer consumers the
opportunity to pay points to lower the
interest rate that the creditor would
otherwise charge to recover the lost
revenue from the LLPAs, such points
may, if they satisfy the requirements of
§ 1026.32(b)(1)(i)(E) or (F), be excluded
from points and fees as bona fide
discount points.
As noted above, one commenter
expressed concern that if the
requirements for premium capture cash
reserve accounts proposed in the 2011
QRM Proposed Rule were adopted,
creditors would have difficulty in
recovering the costs of LLPAs through
rate and that, because of the points and
fees limits for qualified mortgages,
creditors would also have trouble
recovering the costs of LLPAs through
up-front charges to consumers. The
Bureau notes that, as proposed, the
premium capture cash reserve account
requirement would not apply to
securities sponsored by the GSEs and
would not apply to securities comprised
solely of QRMs. See 76 FR 24112,
24120. Thus, it is not clear, that even if
it were adopted, the requirement would
have as substantial an impact as
suggested by the commenter. In any
event, the requirement has merely been
proposed, not finalized. The Bureau will
continue to coordinate with the agencies
responsible for finalizing the 2011 QRM
Proposed Rule to consider the combined
effects of that rule and the instant rule.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
The Board proposed comment
43(e)(3)(ii)–1 to clarify the meaning in
proposed § 226.43(e)(3)(ii)(A) of
‘‘retained by’’ the loan originator,
creditor, or an affiliate of either.
Proposed comment 43(e)(3)(ii)–1
provided that if a creditor charges a
consumer $400 for an appraisal
conducted by a third party not affiliated
with the creditor, pays the third party
appraiser $300 for the appraisal, and
retains $100, the creditor may exclude
$300 of this fee from ‘‘points and fees’’
but must count the $100 it retains in
‘‘points and fees.’’
As noted above, several commenters
expressed confusion about the
relationship between proposed
§ 226.43(e)(3)(ii)(A), which would have
excluded bona fide third party charges
not retained by the loan originator,
creditor, or an affiliate of either, and
proposed § 226.32(b)(1)(iii), which
would have excluded certain real estate
related charges if they are reasonable, if
the creditor receives no direct or
indirect compensation in connection
with the charges, and the charges are
not paid to an affiliate of the creditor.
As explained above, the Bureau
interprets the more specific provision
governing the inclusion in points and
fees of real estate related charges
(implemented in § 1026.32(b)(1)(iii)) as
taking precedence over the more general
exclusion for bona fide third party
charges in renumbered
§ 1026.32(b)(1)(i)(D). Accordingly, the
Bureau does not believe that the
example in proposed comment
43(e)(3)(ii)–1 is appropriate for
illustrating the exclusion for bona fide
third party charges because the subject
of the example, appraisals, is
specifically addressed in
§ 1026.32(b)(1)(iii).
The Bureau therefore is revising
renumbered comment 32(b)(1)(i)(D)–1
by using a settlement agent charge to
illustrate the exclusion for bona fide
third party charges. By altering this
example to address closing agent
charges, the Bureau is also responding
to requests from commenters that the
Bureau provide more guidance on
whether closing agent charges are
included in points and fees. As noted
above, proposed § 226.43(e)(3)(iii)
would have specified that the term
‘‘loan originator,’’ as used in proposed
§ 226.43(e)(3)(ii)(A), has the same
meaning as in § 226.36(a)(1). The
Bureau is moving the cross-reference to
the definition of ‘‘loan originator’’ in
§ 226.36(a)(1) to comment 32(b)(1)(i)(D)–
1.
The Board proposed comment
43(e)(3)(ii)–2 to explain that, under
§ 226.32(b)(1)(i)(B), creditors would
PO 00000
Frm 00024
Fmt 4701
Sfmt 4700
have to include in ‘‘points and fees’’
premiums or charges payable at or
before consummation for any private
guaranty or insurance protecting the
creditor against the consumer’s default
or other credit loss to the extent that the
premium or charge exceeds the amount
payable under policies in effect at the
time of origination under section
203(c)(2)(A) of the National Housing Act
(12 U.S.C. 1709(c)(2)(A)). The proposed
comment also would have explained
that these premiums or charges would
be included if the premiums or charges
were not required to be refundable on a
pro-rated basis, or the refund is not
automatically issued upon notification
of the satisfaction of the underlying
mortgage loan. The comment would
have clarified that, under these
circumstances, even if the premiums
and charges were not retained by the
creditor, loan originator, or an affiliate
of either, they would be included in the
‘‘points and fees’’ calculation for
qualified mortgages. The comment also
would have cross-referenced proposed
comments 32(b)(1)(i)–3 and –4 for
further discussion of including private
mortgage insurance premiums in the
points and fees calculation.
The Bureau is adopting proposed
comment 43(e)(3)(ii)–2 substantially as
proposed, renumbered as comment
32(b)(i)(D)–2. In addition, the Bureau
also is adopting new comments
32(b)(i)(D)–3 and –4 to explain that the
exclusion of bona fide third party
charges under § 1026.32(b)(1)(i)(D) does
not apply to real estate-related charges
and credit insurance premiums. The
inclusion of these items in points and
fees is specifically addressed in
§ 1026.32(b)(iii) and (iv), respectively.
Bona fide discount points. TILA
section 129C(b)(2)(C)(ii) excludes up to
two bona fide discount points from
points and fees under certain
circumstances. Specifically, it excludes
up to two bona fide discount points if
the interest rate before the discount does
not exceed the average prime offer rate
by more than two percentage points.
Alternatively, it excludes up to one
discount point if the interest rate before
the discount does not exceed the
average prime offer rate by more than
one percentage point. The Board
proposed to implement this provision in
proposed § 226.43(e)(3)(ii)(B) and (C).
Proposed § 226.43(e)(3)(ii)(B) would
have permitted a creditor to exclude
from points and fees for a qualified
mortgage up to two bona fide discount
points paid by the consumer in
connection with the covered
transaction, provided that: (1) The
interest rate before the rate is
discounted does not exceed the average
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
prime offer rate, as defined in
§ 226.45(a)(2)(ii), by more than one
percent; and (2) the average prime offer
rate used for purposes of paragraph
43(e)(3)(ii)(B)(1) is the same average
prime offer rate that applies to a
comparable transaction as of the date
the discounted interest rate for the
covered transaction is set.
Proposed § 226.43(e)(3)(ii)(C) would
have permitted a creditor to exclude
from points and fees for a qualified
mortgage up to one bona fide discount
point paid by the consumer in
connection with the covered
transaction, provided that: (1) The
interest rate before the discount does
not exceed the average prime offer rate,
as defined in § 226.45(a)(2)(ii), by more
than two percent; (2) the average prime
offer rate used for purposes of
§ 226.43(e)(3)(ii)(C)(1) is the same
average prime offer rate that applies to
a comparable transaction as of the date
the discounted interest rate for the
covered transaction is set; and (3) two
bona fide discount points have not been
excluded under § 226.43(e)(3)(ii)(B).
Several industry commenters argued
that creditors should be permitted to
exclude from points and fees more than
two discount points. Some industry
commenters maintained that creditors
should be permitted to exclude as many
discount points as consumers choose to
pay. Another commenter contended that
creditors should be able to exclude as
many as three discount points.
A few industry commenters requested
eliminating the requirement that, for the
discount points to be bona fide, the
interest rate before the discount must be
within one or two percentage points of
the average prime offer rate. One
industry commenter argued that this
requirement is too inflexible. Several
commenters recommended that this
requirement be adjusted for jumbo loans
and for second homes. Another
commenter claimed that this
requirement would limit the options for
consumers paying higher interest rates
and that these are the consumers for
whom it would be most beneficial to
pay down their interest rates.
Several commenters argued that the
effect of these two limitations for
excluding discount points from points
and fees—the limit on the number of
discount points that could be excluded
and the requirement that the prediscount rate be within one or two
points of the average prime offer rate—
would have a negative impact on
consumers. They maintained that these
limitations would prevent consumers
from choosing their optimal
combination of interest rate and points
for their financial circumstances.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
One commenter noted that proposed
§ 226.43(e)(3)(ii)(B) and (C) would
require that, for the discount points or
point to be excluded from points and
fees, the interest rate before the discount
must not exceed the average prime offer
rate by more than one or two ‘‘percent,’’
respectively. The commenter
recommended that, for clarity and
consistency with the statute, the
requirement should instead require that
the interest rate before the discount be
within one or two ‘‘percentage points’’
of the average prime offer rate.
The Bureau is adopting proposed
§ 226.43(e)(3)(ii)(B) and (C), renumbered
as § 1026.32(b)(1)(i)(E) and (F), with
certain revisions. As suggested by a
commenter, the Bureau is revising both
§ 1026.32(b)(1)(i)(E)(1) and (F)(1) to
require that, to exclude the discount
points or point, the interest rate must be
within one or two ‘‘percentage points’’
(rather than ‘‘percent’’) of the average
prime offer rate. This formulation is
clearer and consistent with the statutory
language. The Bureau is also adding
§ 1026.32(b)(1)(i)(E)(2) and (F)(2) to
implement TILA section 103(dd)(1)(B)
and (C), which specify that, to exclude
discount points from points and fees for
purposes of determining whether a loan
is a high-cost mortgage, the interest rate
for personal property loans before the
discount must be within one or two
percentage points, respectively, of the
average rate on a loan in connection
with which insurance is provided under
title I of the National Housing Act. This
provision does not apply to the points
and fees limit for qualified mortgages,
regardless of whether a loan is a highcost mortgage. The provision is
included in the final rule for
completeness. Finally, in
§ 1026.32(b)(1)(i)(F), the Bureau is
clarifying that bona fide discount points
cannot be excluded under
§ 1026.32(b)(1)(i)(F) if any bona fide
discount points already have been
excluded under § 1026.32(b)(1)(i)(E).
As noted above, several commenters
urged the Bureau to alter or eliminate
the limitations on how many discount
points may be excluded and the
requirement that the pre-discount
interest rate must be within one or two
points of the average prime offer rate. A
few industry commenters also requested
that the Bureau adjust the limitation on
the pre-discount interest rate
specifically for jumbo loans and loans
for vacation homes. These commenters
noted that interest rates for such loans
otherwise would often be too high to
qualify for the exclusion for bona fide
discount points. The Bureau recognizes
that these limitations may circumscribe
the ability of consumers to purchase
PO 00000
Frm 00025
Fmt 4701
Sfmt 4700
6431
discount points to lower their interest
rates. Nevertheless, the Bureau does not
believe it would be appropriate to
exercise its exception authority.
Congress apparently concluded that
there was a greater probability of
consumer injury when consumers
purchased more than two discount
points or when the consumers were
using discount points to buy down
higher interest rates. The Bureau also
notes that, in other sections of the DoddFrank Act, Congress prescribed different
thresholds above the average prime offer
rate for jumbo loans. See TILA sections
129C(c)(1)(B) (prepayment penalties)
and 129H(f)(2) (appraisals). Congress
did not do so in the provision regarding
exclusion of bona fide discount points.
The Bureau is adding new comment
32(b)(1)(i)(E)–2 to note that the term
‘‘bona fide discount point’’ is defined in
§ 1026.32(b)(3). To streamline the rule,
the Bureau is moving into new comment
32(b)(1)(i)(E)–2 the explanation that the
average prime offer rate used for
purposes of for both § 1026.32(b)(1)(i)(E)
and (F) is the average prime offer rate
that applies to a comparable transaction
as of the date the discounted interest
rate for the covered transaction is set.
The Board proposed comment
43(e)(3)(ii)–5 to clarify that the average
prime offer rate table indicates how to
identify the comparable transaction. The
Bureau is adding the language from
proposed comment 43(e)(3)(ii)–5 to new
comment 32(b)(1)(i)(E)–2, with a
revision to the cross-reference for the
comment addressing ‘‘comparable
transaction.’’
Proposed comment 43(e)(3)(ii)–3
would have included an example to
illustrate the rule permitting exclusion
of two bona fide discount points. The
example would have assumed a covered
transaction that is a first-lien, purchase
money home mortgage with a fixed
interest rate and a 30-year term. It
would also have assumed that the
consumer locks in an interest rate of 6
percent on May 1, 2011, that was
discounted from a rate of 6.5 percent
because the consumer paid two
discount points. Finally, assume that
the average prime offer rate as of May
1, 2011 for first-lien, purchase money
home mortgages with a fixed interest
rate and a 30-year term is 5.5 percent.
In this example, the creditor would have
been able to exclude two discount
points from the ‘‘points and fees’’
calculation because the rate from which
the discounted rate was derived
exceeded the average prime offer rate for
a comparable transaction as of the date
the rate on the covered transaction was
set by only 1 percent.
E:\FR\FM\30JAR2.SGM
30JAR2
6432
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
The Bureau is adopting proposed
comment 43(e)(3)(ii)–3 substantially as
proposed but renumbered as comment
32(b)(1)(i)(E)–3. The Bureau is also
adding new comment 32(b)(1)(i)(F)–1 to
explain that comments 32(b)(1)(i)(E)–1
and –2 provide guidance concerning the
definitions of ‘‘bona fide discount
point’’ and ‘‘average prime offer rate,’’
respectively.
Proposed comment 43(e)(3)(ii)–4
would have provided an example to
illustrate the rule permitting exclusion
of one bona fide discount point. The
example assumed a covered transaction
that is a first-lien, purchase money
home mortgage with a fixed interest rate
and a 30-year term. The example also
would have assumed that the consumer
locks in an interest rate of 6 percent on
May 1, 2011, that was discounted from
a rate of 7 percent because the consumer
paid four discount points. Finally, the
example would have assumed that the
average prime offer rate as of May 1,
2011, for first-lien, purchase money
home mortgages with a fixed interest
rate and a 30-year term is 5 percent.
In this example, the creditor would
have been able to exclude one discount
point from the ‘‘points and fees’’
calculation because the rate from which
the discounted rate was derived (7
percent) exceeded the average prime
offer rate for a comparable transaction as
of the date the rate on the covered
transaction was set (5 percent) by only
2 percent. The Bureau is adopting
proposed comment 43(e)(3)(ii)–4
substantially as proposed but
renumbered as comment 32(b)(1)(i)(F)–
2.
32(b)(1)(ii)
sroberts on DSK5SPTVN1PROD with
When HOEPA was enacted in 1994, it
required that ‘‘all compensation paid to
mortgage brokers’’ be counted toward
the threshold for points and fees that
triggers special consumer protections
under the statute. Specifically, TILA
section 103(aa)(4) provided that charges
are included in points and fees only if
they are payable at or before
consummation and did not expressly
address whether ‘‘backend’’ payments
from creditors to mortgage brokers
funded out of the interest rate
(commonly referred to as yield spread
premiums) are included in points and
fees.79 This requirement is implemented
79 Some commenters use the term ‘‘yield spread
premium’’ to refer to any payment from a creditor
to a mortgage broker that is funded by increasing
the interest rate that would otherwise be charged to
the consumer in the absence of that payment. These
commenters generally assume that any payment to
the brokerage firm by the creditor is funded out of
the interest rate, reasoning that had the consumer
paid the brokerage firm directly, the creditor would
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
in existing § 1026.32(b)(1)(ii), which
requires that all compensation paid by
consumers directly to mortgage brokers
be included in points and fees, but does
not address compensation paid by
creditors to mortgage brokers or
compensation paid by any company to
individual employees (such as loan
officers who are employed by a creditor
or mortgage broker).
The Dodd-Frank Act substantially
expanded the scope of compensation
included in points and fees for both the
high-cost mortgage threshold in HOEPA
and the qualified mortgage points and
fees limits.80 Section 1431 of the DoddFrank Act amended TILA to require that
‘‘all compensation paid directly or
indirectly by a consumer or creditor to
a mortgage originator from any source,
including a mortgage originator that is
also the creditor in a table-funded
transaction,’’ be included in points and
fees. TILA section 103(bb)(4)(B)
(emphasis added). Under amended
TILA section 103(bb)(4)(B),
compensation paid to anyone that
qualifies as a ‘‘mortgage originator’’ is to
be included in points and fees.81 Thus,
in addition to compensation paid to
mortgage brokerage firms and individual
brokers, points and fees also includes
compensation paid to other mortgage
originators, including employees of a
creditor (i.e., loan officers). In addition,
as noted above, the Dodd-Frank Act
removed the phrase ‘‘payable at or
have had lower expenses and would have been able
to charge a lower rate. Other commenters use the
term ‘‘yield spread premium’’ more narrowly to
refer only to a payment from a creditor to a
mortgage broker that is based on the interest rate,
i.e., the mortgage broker receives a larger payment
if the consumer agrees to a higher interest rate. To
avoid confusion, the Bureau is limiting its use of
the term and is instead more specifically describing
the payment at issue.
80 Currently, the points and fees threshold for
determining whether a loan is a high-cost mortgage
is the greater of 8 percent of the total loan amount
or $400 (adjusted for inflation). Section 1431 of the
Dodd-Frank Act lowered the points and fees
threshold for determining whether a loan is a highcost mortgage to 5 percent of the total transaction
amount for loans of $20,000 or more and to the
lesser of 8 percent of the total transaction amount
or $1,000 for loans less than $20,000.
81 ‘‘Mortgage originator’’ is generally defined to
include ‘‘any person who, for direct or indirect
compensation or gain, or in the expectation of
direct or indirect compensation or gain—(i) takes a
residential mortgage loan application; (ii) assists a
consumer in obtaining or applying to obtain a
residential mortgage loan; or (iii) offers or negotiates
terms of a residential mortgage loan.’’ TILA section
103(dd)(2). The statute excludes certain persons
from the definition, including a person who
performs purely administrative or clerical tasks; an
employee of a retailer of manufactured homes who
does not take a residential mortgage application or
offer or negotiate terms of a residential mortgage
loan; and, subject to certain conditions, real estate
brokers, sellers who finance three or fewer
properties in a 12-month period, and servicers.
TILA section 103(dd)(2)(C) through (F).
PO 00000
Frm 00026
Fmt 4701
Sfmt 4700
before closing’’ from the high-cost
mortgage points and fees test and did
not apply the ‘‘payable at or before
closing’’ limitation to the points and
fees cap for qualified mortgages. See
TILA sections 103(bb)(1)(A)(ii) and
129C(b)(2)(A)(vii), (b)(2)(C). Thus, the
statute appears to contemplate that even
compensation paid to mortgage brokers
and other loan originators after
consummation should be counted
toward the points and fees thresholds.
This change is one of several
provisions in the Dodd-Frank Act that
focus on loan originator compensation
and regulation, in apparent response to
concerns that industry compensation
practices contributed to the mortgage
market crisis by creating strong
incentives for brokers and retail loan
officers to steer consumers into higherpriced loans. Specifically, loan
originators were often paid a
commission by creditors that increased
with the interest rate on a transaction.
These commissions were funded by
creditors through the increased revenue
received by the creditor as a result of the
higher rate paid by the consumer and
were closely tied to the price the
creditor expected to receive for the loan
on the secondary market as a result of
that higher rate.82 In addition, many
mortgage brokers charged consumers
up-front fees to cover some of their costs
at the same time that they accepted
backend payments from creditors out of
the rate. This may have contributed to
consumer confusion about where the
brokers’ loyalties lay.
The Dodd-Frank Act took a number of
steps to address loan originator
compensation issues, including: (1)
Adopting requirements that loan
originators be ‘‘qualified’’ as defined by
Bureau regulations; (2) generally
prohibiting compensation based on rate
and other terms (except for loan
amount) and prohibiting a loan
originator from receiving compensation
from both consumers and other parties
in a single transaction; (3) requiring the
promulgation of additional rules to
prohibit steering consumers to less
advantageous transactions; (4) requiring
the disclosure of loan originator
compensation; and (5) restricting loan
originator compensation under HOEPA
and the qualified mortgage provisions
by including such compensation within
the points and fees calculations. See
TILA sections 103(bb)(4)(A)(ii), (B);
82 For more detailed discussions, see the Bureau’s
2012 Loan Originator Proposal and the final rule
issued by the Board in 2010. 77 FR 55272, 55276,
55290 (Sept. 7, 2012); 75 FR 58509, 5815–16,
58519–20 (Sept. 24, 2010) (2010 Loan Originator
Final Rule).
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
128(a)(18); 129B(b), (c);
129C(b)(2)(A)(vii), (C)(i).
The Board proposed revisions to
§ 226.32(b)(1)(ii) to implement the
inclusion of more forms of loan
originator compensation into the points
and fees thresholds. Those proposed
revisions tracked the statutory language,
with two exceptions. First, proposed
§ 226.32(b)(1)(ii) did not include the
phrase ‘‘from any source.’’ The Board
noted that the statute covers
compensation paid ‘‘directly or
indirectly’’ to the loan originator, and
concluded that it would be redundant to
cover compensation ‘‘from any source.’’
Second, for consistency with Regulation
Z, the proposal used the term ‘‘loan
originator’’ as defined in § 226.36(a)(1),
rather than the term ‘‘mortgage
originator’’ that appears in section 1401
of the Dodd-Frank Act. See TILA section
103(cc)(2). The Board explained that it
interpreted the definitions of mortgage
originator under the statute and loan
originator under existing Regulation Z
to be generally consistent, with one
exception that the Board concluded was
not relevant for purposes of the points
and fees thresholds. Specifically, the
statutory definition refers to ‘‘any
person who represents to the public,
through advertising or other means of
communicating or providing
information (including the use of
business cards, stationery, brochures,
signs, rate lists, or other promotional
items), that such person can or will
provide’’ the services listed in the
definition (such as offering or
negotiating loan terms), while the
existing Regulation Z definition does
not include persons solely on this basis.
The Board concluded that it was not
necessary to add this element of the
definition to implement the points and
fees calculations anyway, reasoning that
the calculation of points and fees is
concerned only with loan originators
that receive compensation for
performing defined origination
functions in connection with a
consummated loan. The Board noted
that a person who merely represents to
the public that such person can offer or
negotiate mortgage terms for a consumer
has not yet received compensation for
that function, so there is no
compensation to include in the
calculation of points and fees for a
particular transaction.
In the proposed commentary, the
Board explained what compensation
would and would not have been
included in points and fees under
proposed § 226.32(b)(1)(ii). The Board
proposed to revise existing comment
32(b)(1)(ii)–1 to clarify that
compensation paid by either a consumer
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
or a creditor to a loan originator, as
defined in § 1026.36(a)(1), would be
included in points and fees. Proposed
comment 32(b)(1)(ii)–1 also stated that
loan originator compensation already
included in points and fees because it
is included in the finance charge under
§ 226.32(b)(1)(i) would not be counted
again under § 226.32(b)(1)(ii).
Proposed comment 32(b)(1)(ii)–2.i
stated that, in determining points and
fees, loan originator compensation
includes the dollar value of
compensation paid to a loan originator
for a specific transaction, such as a
bonus, commission, yield spread
premium, award of merchandise,
services, trips, or similar prizes, or
hourly pay for the actual number of
hours worked on a particular
transaction. Proposed comment
32(b)(1)(ii)–2.ii clarified that loan
originator compensation excludes
compensation that cannot be attributed
to a transaction at the time of
origination, including, for example, the
base salary of a loan originator that is
also the employee of the creditor, or
compensation based on the performance
of the loan originator’s loans or on the
overall quality of a loan originator’s loan
files. Proposed comment 32(b)(1)(ii)–2.i
also explained that compensation paid
to a loan originator for a covered
transaction must be included in the
points and fees calculation for that
transaction whenever paid, whether at
or before closing or any time after
closing, as long as the compensation
amount can be determined at the time
of closing. In addition, proposed
comment 32(b)(1)(ii)–2.i provided three
examples of compensation paid to a
loan originator that would have been
included in the points and fees
calculation.
Proposed comment 32(b)(1)(ii)–3
stated that loan originator compensation
includes amounts the loan originator
retains and is not dependent on the
label or name of any fee imposed in
connection with the transaction.
Proposed comment 32(b)(1)(ii)–3 offered
an example of a loan originator
imposing and retaining a ‘‘processing
fee’’ and stated that such a fee is loan
originator compensation, regardless of
whether the loan originator expends the
fee to process the consumer’s
application or uses it for other expenses,
such as overhead.
The Board requested comment on the
types of loan originator compensation
that must be included in points and
fees. The Board also sought comment on
the appropriateness of specific examples
given in the commentary.
Many industry commenters objected
to the basic concept of including loan
PO 00000
Frm 00027
Fmt 4701
Sfmt 4700
6433
originator compensation in points and
fees, urging the Bureau to use its
exception authority to exclude loan
originator compensation from points
and fees altogether. Several industry
commenters contended that other
statutory provisions and rules,
including the Secure and Fair
Enforcement for Mortgage Licensing Act
of 2008 (SAFE Act), the Board’s 2010
Loan Originator Final Rule, and certain
Dodd-Frank Act provisions (including
those proposed to be implemented in
the Bureau’s 2012 Loan Originator
Proposal), adequately regulate loan
originator compensation and prohibit or
restrict problematic loan originator
compensation practices. Accordingly,
they argued it is therefore unnecessary
to include loan originator compensation
in points and fees.
Many industry commenters also
asserted that the amount of
compensation paid to loan originators
has little or no bearing on a consumer’s
ability to repay a mortgage, and thus
that including loan originator
compensation in points and fees under
this rulemaking is unnecessary. They
further asserted that including loan
originator compensation in points and
fees would greatly increase compliance
burdens on creditors, discourage
creditors from making qualified
mortgages, and ultimately reduce access
to credit and increase the cost of credit.
Several industry commenters argued
that, if the Bureau does not exclude all
loan originator compensation from
points and fees, then the Bureau should
at least exclude compensation paid to
individual loan originators (i.e., loan
officers who are employed by creditors
or mortgage brokerage firms). They
argued that compensation paid to
individual loan originators is already
included in the cost of the loan, either
in the interest rate or in origination fees.
They maintained that including
compensation paid to individual loan
originators in points and fees would
therefore constitute double counting.
Several industry commenters also
claimed that they would face significant
challenges in determining the amount of
compensation for individual loan
originators. They noted that creditors
need clear, objective standards for
determining whether loans satisfy the
qualified mortgage standard, and that
the complexity of apportioning
compensation to individual loans at the
time of each closing to determine the
amount of loan originator compensation
to count toward the points and fees cap
would create uncertainty. They also
noted that having to track individual
loan originators’ compensation and
allocate that compensation to individual
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6434
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
loans would create additional
compliance burdens, particularly for
compensation paid after closing. Several
industry commenters also stated that
estimating loan originator compensation
in table-funded transactions would
prove difficult because the funding
assignee may not know the amount paid
by the table-funded creditor to the
individual loan originator.
Several industry commenters also
asserted that including compensation
paid to individual loan originators
would lead to anomalous results:
Otherwise identical loans could have
significant differences in points and fees
depending on the timing of the mortgage
loan or the identity of the loan officer.
They noted, for example, that a loan that
qualifies a loan officer for a substantial
bonus because it enables a loan officer
to satisfy a long-term (e.g., annual)
origination-volume target or a loan that
is originated by a high-performing loan
officer could have substantially higher
loan originator compensation, and thus
substantially higher points and fees,
than an otherwise identical loan.
Because the consumers would not be
paying higher fees or interest rates
because of such circumstances, the
commenters argued that the result
would not further the goals of the
statute.
Some industry commenters made a
separate argument that the proposed
method for including loan originator
compensation in points and fees would
create an unfair playing field for
mortgage brokers. These commenters
noted that, since a brokerage firm can be
paid by only one source under the
Board’s 2010 Loan Originator Final Rule
and related provisions of the DoddFrank Act, a payment by a creditor to a
mortgage broker must cover both the
broker’s overhead costs and the cost of
compensating the individual that
worked on the transaction. The
creditor’s entire payment to the
mortgage broker is loan originator
compensation that is included in points
and fees, so that loan originator
compensation in a wholesale
transaction includes both the
compensation received from the creditor
to cover the overhead costs of the
mortgage broker and the compensation
that the broker passes through to the
individual employee who worked on
the transaction. By contrast, in a loan
obtained directly from a creditor, the
creditor would have to include in points
and fees the compensation paid to the
loan officer, but could choose to recover
its overhead costs through the interest
rate rather than an up-front charge that
would count toward the points and fees
thresholds. One industry commenter
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
provided examples illustrating that, as a
result of this difference, loans obtained
through a mortgage broker could have
interest rates and fees identical to those
in a loan obtained directly through a
creditor but could have significantly
higher loan originator compensation
included in points and fees. Thus,
particularly for smaller loan amounts,
commenters expressed concern that it
would be difficult for loans originated
through mortgage brokers to remain
under the points and fees limits for
qualified mortgages.
A nonprofit loan originator
commenter also argued that including
loan originator compensation in points
and fees could undercut programs that
help low and moderate income
consumers obtain affordable mortgages.
This commenter noted that it relies on
payments from creditors to help it
provide services to consumers and that
counting such payments as loan
originator compensation and including
them in points and fees could
jeopardize its programs. The commenter
requested that this problem be
addressed by excluding nonprofit
organizations from the definition of loan
originator or by excluding payments by
creditors to nonprofit organizations
from points and fees.
Consumer advocates approved of
including loan originator compensation
in points and fees, regardless of when
and by whom the compensation is paid.
They asserted that including loan
originator compensation would promote
more consistent treatment by ensuring
that all payments that loan originators
receive count toward the points and fees
thresholds, regardless of whether the
payment is made by the consumer or the
creditor and whether it is paid through
the rate or through up-front fees. They
maintained that the provision was
intended to help prevent consumers
from paying excessive amounts for loan
origination services. More specifically,
some consumer advocates argued that
the Dodd-Frank Act provision requiring
inclusion of loan originator
compensation in points and fees is an
important part of a multi-pronged
approach to address widespread
steering of consumers into more
expensive mortgage transactions, and in
particular, to address the role of
commissions funded through the
interest rate in such steering. The
consumer advocates noted that separate
prohibitions on compensation based on
terms and on a loan originator’s
receiving compensation from both the
consumer and another party do not limit
the amount of compensation a loan
originator can receive or prevent a loan
originator from inducing consumers to
PO 00000
Frm 00028
Fmt 4701
Sfmt 4700
agree to above-market interest rates.
They expressed concern that,
particularly in the subprime market,
loan originators could specialize in
originating transactions with abovemarket interest rates, with the
expectation they could arrange to
receive above-market compensation for
all of their transactions. Consumer
advocates argued that counting all
methods of loan originator
compensation toward the points and
fees thresholds was intended to deter
such conduct.
Consumer advocates also pointed out
that in the wholesale context, the
consumer has the option of paying the
brokerage firm directly for its services.
Such payments have always been
included within the calculation of
points and fees for HOEPA purposes.
The advocates argued that when a
consumer elects not to make the upfront payment but instead elects to fund
the same amount of money for the
brokerage through an increased rate,
there is no justification for treating the
money received by the brokerage as a
result of the consumer’s decision any
differently.
The Bureau has carefully considered
the comments received in light of the
concerns about various issues with
regard to loan originator compensation
practices, the general concerns about the
impacts of the ability-to-repay/qualified
mortgage rule and revised HOEPA
thresholds on a market in which access
to mortgage credit is already extremely
tight, differences between the retail and
wholesale origination channels, and
practical considerations regarding both
the burdens of day-to-day
implementation and the opportunities
for evasion by parties who wish to
engage in rent-seeking. As discussed
further below, the Bureau is concerned
about implementation burdens and
anomalies created by the requirement to
include loan originator compensation in
points and fees, the impacts that it
could have on pricing and access to
credit, and the risks that rent-seekers
will continue to find ways to evade the
statutory scheme. Nevertheless, the
Bureau believes that, in light of the
historical record and of Congress’s
evident concern with loan originator
compensation practices, it would not be
appropriate to waive the statutory
requirement that loan originator
compensation be included in points and
fees. The Bureau has, however, worked
to craft the rule that implements
Congress’s judgment in a way that is
practicable and that reduces potential
negative impacts of the statutory
requirement, as discussed below. The
Bureau is also seeking comment in the
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
concurrent proposal being published
elsewhere in today’s Federal Register
on whether additional measures would
better protect consumers and reduce
implementation burdens and
unintended consequences.
Accordingly, the Bureau in adopting
§ 1026.32(b)(1)(ii) has generally tracked
the statutory language and the Board’s
proposal in the regulation text, but has
expanded the commentary to provide
more detailed guidance to clarify what
compensation must be included in
points and fees. The Dodd-Frank Act
requires inclusion in points and fees of
‘‘all compensation paid directly or
indirectly by a consumer or creditor to
a mortgage originator from any source,
including a mortgage originator that is
also the creditor in a table-funded
transaction.’’ See TILA section
103(bb)(4)(B). Consistent with the
Board’s proposal, revised
§ 1026.32(b)(ii) does not include the
phrase ‘‘from any source.’’ The Bureau
agrees that the phrase is unnecessary
because the provision expressly covers
compensation paid ‘‘directly or
indirectly’’ to the loan originator. Like
the Board’s proposal, the final rule also
uses the term ‘‘loan originator’’ as
defined in § 1026.36(a)(1), not the term
‘‘mortgage originator’’ under section
1401 of the Dodd-Frank Act. See TILA
section 103(cc)(2). The Bureau agrees
that the definitions are consistent in
relevant respects and notes that it is in
the process of amending the regulatory
definition to harmonize it even more
closely with the Dodd-Frank Act
definition of ‘‘mortgage originator.’’ 83
Accordingly, the Bureau believes use of
consistent terminology in Regulation Z
will facilitate compliance. Finally, as
revised, § 1026.32(b)(1)(ii) also does not
include the language in proposed
§ 226.32(b)(1)(ii) that specified that the
provision also applies to a loan
originator that is the creditor in a tablefunded transaction. The Bureau has
concluded that that clarification is
unnecessary because a creditor in a
table-funded transaction is already
included in the definition of loan
originator in § 1026.36(a)(1). To clarify
what compensation must be included in
points and fees, revised
§ 1026.32(b)(1)(ii) specifies that
compensation must be included if it can
be attributed to the particular
transaction at the time the interest rate
is set. These limitations are discussed in
more detail below.
In adopting the general rule, the
Bureau carefully considered arguments
by industry commenters that loan
83 See 2012 Loan Originator Proposal, 77 FR
55283–88.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
originator compensation should not be
included in points and fees because
other statutory provisions and rules
already regulate loan originator
compensation, because loan originator
compensation is already included in the
costs of mortgage loans, and because
including loan originator compensation
in points and fees would push many
loans over the 3 percent cap on points
and fees for qualified mortgages (or even
over the points and fees limits for
determining whether a loan is a highcost mortgage under HOEPA), which
would increase costs and impair access
to credit.
The Bureau views the fact that other
provisions within the Dodd-Frank Act
address other aspects of loan originator
compensation and activity as evidence
of the high priority that Congress placed
on regulating such compensation. The
other provisions pointed to by the
commenters address specific
compensation practices that created
particularly strong incentives for loan
originators to ‘‘upcharge’’ consumers on
a loan-by-loan basis and particular
confusion about loan originators’
loyalties. The Bureau believes that the
inclusion of loan originator
compensation in points and fees has
distinct purposes. In addition to
discouraging more generalized rentseeking and excessive loan originator
compensation, the Bureau believes that
Congress may have been focused on
particular risks to consumers. Thus,
with respect to qualified mortgages,
including loan originator compensation
in points and fees helps to ensure that,
in cases in which high up-front
compensation might otherwise cause
the creditor and/or loan originator to be
less concerned about long-term
sustainability, the creditor is not able to
invoke a presumption of compliance if
challenged to demonstrate that it made
a reasonable and good faith
determination of the consumer’s ability
to repay the loan. Similarly in HOEPA,
the threshold triggers additional
consumer protections, such as enhanced
disclosures and housing counseling, for
the loans with the highest up-front
pricing.
The Bureau recognizes that the
method that Congress chose to
effectuate these goals does not ensure
entirely consistent results as to whether
a loan is a qualified mortgage or a highcost transaction. For instance, loans that
are identical to consumers in terms of
up-front costs and interest rate may
nevertheless have different points and
fees based on the identity of the loan
originator who handled the transaction
for the consumer, since different
individual loan originators in a retail
PO 00000
Frm 00029
Fmt 4701
Sfmt 4700
6435
environment or different brokerage
firms in a wholesale environment may
earn different commissions from the
creditor without that translating in
differences in costs to the consumer. In
addition, there are anomalies
introduced by the fact that ‘‘loan
originator’’ is defined to include
mortgage broker firms and individual
employees hired by either brokers or
creditors, but not creditors themselves.
As a result, counting the total
compensation paid to a mortgage broker
firm will capture both the firm’s
overhead costs and the compensation
that the firm passes on to its individual
loan officer. By contrast, in a retail
transaction, the creditor would have to
include in points and fees the
compensation that it paid to its loan
officer, but would continue to have the
option of recovering its overhead costs
through the interest rate, instead of an
up-front charge, to avoid counting them
toward the points and fees thresholds.
Indeed, the Bureau expects that the new
requirement may prompt creditors to
shift certain other expenses into rate to
stay under the thresholds.
Nevertheless, to the extent there are
anomalies from including loan
originator compensation in points and
fees, these anomalies appear to be the
result of deliberate policy choices by
Congress to expand the historical
definition of points and fees to include
all methods of loan originator
compensation, whether derived from
up-front charges or from the rate,
without attempting to capture all
overhead expenses by creditors or the
gain on sale that the creditor can realize
upon closing a mortgage. The Bureau
agrees that counting loan originator
compensation that is structured through
rate toward the points and fees
thresholds could cause some loans not
to be classified as qualified mortgages
and to trigger HOEPA protections,
compared to existing treatment under
HOEPA and its implementing
regulation. However, the Bureau views
this to be exactly the result that
Congress intended.
In light of the express statutory
language and Congress’s evident
concern with increasing consumer
protections in connection with high
levels of loan originator compensation,
the Bureau does not believe that it is
appropriate to use its exception or
adjustment authority in TILA section
105(a) or in TILA section
129C(b)(3)(B)(i) to exclude loan
originator compensation entirely from
points and fees for qualified mortgages
and HOEPA. As discussed below,
however, the Bureau is attempting to
implement the points and fees
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6436
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
requirements with as much sensitivity
as practicable to potential impacts on
the pricing of and availability of credit,
anomalies and unintended
consequences, and compliance burdens.
The Bureau also carefully considered
comments urging it to exclude
compensation paid to individual loan
originators from points and fees, but
ultimately concluded that such a result
would be inconsistent with the plain
language of the statute and could
exacerbate the potential inconsistent
effects of the rule on different mortgage
origination channels. As noted above,
many industry commenters argued that,
even if loan originator compensation
were not excluded altogether, at least
compensation paid to individual loan
originators should be excluded from
points and fees. Under this approach,
only payments to mortgage brokers
would be included in points and fees.
The commenters contended that it
would be difficult to track
compensation paid to individual loan
originators, particularly when that
compensation may be paid after
consummation of the loan and that it
would create substantial compliance
problems. They also argued that
including compensation paid to
individual loan originators in points
and fees would create anomalies, in
which identical transactions from the
consumer’s perspective (i.e., the same
interest rate and up-front costs) could
nevertheless have different points and
fees because of loan originator
compensation.
As explained above, the Bureau does
not believe it is appropriate to use its
exception authority to exclude loan
originator compensation from points
and fees, and even using that exception
authority more narrowly to exclude
compensation paid to individual loan
originators could undermine Congress’s
apparent goal of providing stronger
consumer protections in cases of high
loan originator compensation. Although
earlier versions of legislation focused
specifically on compensation to
‘‘mortgage brokers,’’ which is consistent
with existing HOEPA, the Dodd-Frank
Act refers to compensation to ‘‘mortgage
originators,’’ a term that is defined in
detail elsewhere in the statute to
include individual loan officers
employed by both creditors and brokers,
in addition to the brokers themselves.
To the extent that Congress believed
that high levels of loan originator
compensation evidenced additional risk
to consumers, excluding individual loan
originators from consideration appears
inconsistent with this policy judgment.
Moreover, the Bureau notes that using
exception authority to exclude
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
compensation paid to individual loan
originators would exacerbate the
differential treatment between the retail
and wholesale channels concerning
overhead costs. As noted above,
compensation paid by the consumer or
creditor to the mortgage broker
necessarily will include amounts for
both the mortgage broker’s overhead and
profit and for the compensation the
mortgage broker passes on to its loan
officer. Excluding individual loan
officer compensation on the retail side,
however, would effectively exempt
creditors from counting any loan
originator compensation at all toward
points and fees. Thus, for transactions
that would be identical from the
consumer’s perspective in terms of
interest rate and up-front costs, the
wholesale transaction could have
significantly higher points and fees
(because the entire payment from the
creditor to the mortgage broker would
be captured in points and fees), while
the retail transaction might include no
loan origination compensation at all in
points and fees. Such a result would put
brokerage firms at a disadvantage in
their ability to originate qualified
mortgages and put them at significantly
greater risk of originating HOEPA loans.
This in turn could constrict the supply
of loan originators and the origination
channels available to consumers to their
detriment.
The Bureau recognizes that including
compensation paid to individual loan
originators, such as loan officers, with
respect to individual transactions may
impose additional burdens. For
example, creditors will have to track
employee compensation for purposes of
complying with the rule, and the
calculation of points and fees will be
more complicated. However, the Bureau
notes that creditors and brokers already
have to monitor compensation more
carefully as a result of the 2010 Loan
Originator Final Rule and the related
Dodd-Frank Act restrictions on
compensation based on terms and on
dual compensation. The Bureau also
believes that these concerns can be
reduced by providing clear guidance on
issues such as what types of
compensation are covered, when
compensation is determined, and how
to avoid ‘‘double-counting’’ payments
that are already included in points and
fees calculations. The Bureau has
therefore revised the Board’s proposed
regulation and commentary to provide
more detailed guidance, and is seeking
comment in the proposal published
elsewhere in the Federal Register today
on additional guidance and potential
PO 00000
Frm 00030
Fmt 4701
Sfmt 4700
implementation issues among other
matters.
As noted above, the Bureau is revising
§ 1026.32(b)(1)(ii) to clarify that
compensation must be counted toward
the points and fees thresholds if it can
be attributed to the particular
transaction at the time the interest rate
is set. The Bureau is also revising
comment 32(b)(1)(ii)–1 to explain in
general terms when compensation
qualifies as loan originator
compensation that must be included in
points and fees. In particular,
compensation paid by a consumer or
creditor to a loan originator is included
in the calculation of points and fees,
provided that such compensation can be
attributed to that particular transaction
at the time the interest rate is set. The
Bureau also incorporates part of
proposed comment 32(b)(1)(ii)–3 into
revised comment 32(b)(1)(ii)–1,
explaining that loan originator
compensation includes amounts the
loan originator retains, and is not
dependent on the label or name of any
fee imposed in connection with the
transaction. However, revised comment
32(b)(1)(ii)–1 does not include the
example from proposed comment
32(b)(1)(ii)–3, which stated that, if a
loan originator imposes a processing fee
and retains the fee, the fee is loan
originator compensation under
§ 1026.32(b)(1)(ii) whether the originator
expends the fee to process the
consumer’s application or uses it for
other expenses, such as overhead. That
example may be confusing in this
context because a processing fee paid to
a loan originator likely would be a
finance charge under § 1026.4 and
would therefore already be included in
points and fees under § 1026.32(b)(1)(i).
Revised comment 32(b)(1)(ii)–2.i
explains that compensation, such as a
bonus, commission, or an award of
merchandise, services, trips or similar
prizes, must be included only if it can
be attributed to a particular transaction.
The requirement that compensation is
included in points and fees only if it can
be attributed to a particular transaction
is consistent with the statutory
language. The Dodd-Frank Act provides
that, for the points and fees tests for
both qualified mortgages and high-cost
mortgages, only charges that are ‘‘in
connection with’’ the transaction are
included in points and fees. See TILA
sections 103(bb)(1)(A)(ii) (high-cost
mortgages) and 129C(b)(2)(A)(vii)
(qualified mortgages). Limiting loan
originator compensation to
compensation that is attributable to the
transaction implements the statutory
requirement that points and fees are ‘‘in
connection’’ with the transaction. This
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
limitation also makes the rule more
workable. Compensation is included in
points and fees only if it can be
attributed to a specific transaction to
facilitate compliance with the rule and
avoid over-burdening creditors with
complex calculations to determine, for
example, the portion of a loan officer’s
salary that should be counted in points
and fees.84 For clarity, the Bureau has
moved the discussion of the timing of
loan originator compensation into new
comment 32(b)(1)(ii)–3, and has added
additional examples to 32(b)(1)(ii)–4, to
illustrate the types and amount of
compensation that should be included
in points and fees.
Revised comment 32(b)(1)(ii)–2.ii
explains that loan originator
compensation excludes compensation
that cannot be attributed to a particular
transaction at the time the interest rate
is set, including, for example,
compensation based on the long-term
performance of the loan originator’s
loans or on the overall quality of the
loan originator’s loan files. The base
salary of a loan originator is also
excluded, although additional
compensation that is attributable to a
particular transaction must be included
in points and fees. The Bureau has
decided to seek further comment in the
concurrent proposal regarding treatment
of hourly wages for the actual number
of hours worked on a particular
transaction. The Board’s proposal would
have included hourly pay for the actual
number of hours worked on a particular
transaction in loan originator
compensation for purposes of the points
and fees thresholds, and the Bureau
agrees that such wages are attributable
to the particular transaction. However,
the Bureau is unclear as to whether
industry actually tracks compensation
this way in light of the administrative
burdens. Moreover, while the general
rule provides for calculation of loan
originator compensation at the time the
interest rate is set for the reasons
discussed above, the actual hours of
hours worked on a transaction would
not be known at that time. The Bureau
84 In contrast, the existing restrictions on
particular loan originator compensation structures
in § 1026.36 apply to all compensation such as
salaries, hourly wages, and contingent bonuses
because those restrictions apply only at the time
such compensation is paid, and therefore they can
be applied with certainty. Moreover, those rules
also provide for different treatment of compensation
that is not ‘‘specific to, and paid solely in
connection with, the transaction,’’ where such a
distinction is necessary for reasons of practical
application of the rule. See comment 36(d)(2)–1
(prohibition of loan originator receiving
compensation directly from consumer and also
from any other person does not prohibit consumer
payments where loan originator also receives salary
or hourly wage).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
is therefore seeking comment on issues
relating to hourly wages, including
whether to require estimates of the
hours to be worked between rate set and
consummation.
New comment 32(b)(1)(ii)–3 explains
that loan originator compensation must
be included in the points and fees
calculation for a transaction whenever
the compensation is paid, whether
before, at or after closing, as long as that
compensation amount can be attributed
to the particular transaction at the time
the interest rate is set. Some industry
commenters expressed concern that it
would be difficult to determine the
amount of compensation that would be
paid after consummation and that
creditors might have to recalculate loan
originator compensation (and thus
points and fees) after underwriting if,
for example, a loan officer became
eligible for higher compensation
because other transactions had been
consummated. The Bureau appreciates
that industry participants need certainty
at the time of underwriting as to
whether transactions will exceed the
points and fees limits for qualified
mortgages (and for high-cost mortgages).
To address this concern, the comment
32(b)(1)(ii)–3 explains that loan
originator compensation should be
calculated at the time the interest rate is
set. The Bureau believes that the date
the interest rate is set is an appropriate
standard for calculating loan originator
compensation. It would allow creditors
to be able to calculate points and fees
with sufficient certainty so that they
know early in the process whether a
transaction will be a qualified mortgage
or a high-cost mortgage.
As noted above, several industry
commenters argued that including loan
originator compensation in points and
fees would result in double counting.
They stated that creditors often will
recover loan originator compensation
costs through origination charges, and
these charges are already included in
points and fees under § 1026.32(b)(1)(i).
However, the underlying statutory
provisions as amended by the DoddFrank Act do not express any limitation
on its requirement to count loan
originator compensation toward the
points and fees test. Rather, the literal
language of TILA section 103(bb)(4) as
amended by the Dodd-Frank Act defines
points and fees to include all items
included in the finance charge (except
interest rate), all compensation paid
directly or indirectly by a consumer or
creditor to a loan originator, ‘‘and’’
various other enumerated items. The
use of ‘‘and’’ and the references to ‘‘all’’
compensation paid ‘‘directly or
indirectly’’ and ‘‘from any source’’
PO 00000
Frm 00031
Fmt 4701
Sfmt 4700
6437
suggest that compensation should be
counted as it flows downstream from
one party to another so that it is counted
each time that it reaches a loan
originator, whatever the previous
source.
The Bureau believes the statute would
be read to require that loan originator
compensation be treated as additive to
the other elements of points and fees.
The Bureau believes that an automatic
literal reading of the statute in all cases,
however, would not be in the best
interest of either consumers or industry.
For instance, the Bureau does not
believe that it is necessary or
appropriate to count the same payment
made by a consumer to a mortgage
broker firm twice, simply because it is
both part of the finance charge and loan
originator compensation. Similarly, the
Bureau does not believe that, where a
payment from either a consumer or a
creditor to a mortgage broker is counted
toward points and fees, it is necessary
or appropriate to count separately funds
that the broker then passes on to its
individual employees. In each case, any
costs and risks to the consumer from
high loan originator compensation are
adequately captured by counting the
funds a single time against the points
and fees cap; thus, the Bureau does not
believe the purposes of the statute
would be served by counting some or all
of the funds a second time, and is
concerned that doing so could have
negative impacts on the price and
availability of credit.
Determining the appropriate
accounting rule is significantly more
complicated, however, in situations in
which a consumer pays some up-front
charges to the creditor and the creditor
pays loan originator compensation to
either its own employee or to a mortgage
broker firm. Because money is fungible,
tracking how a creditor spends money it
collects in up-front charges versus
amounts collected through the rate to
cover both loan originator compensation
and its other overhead expenses would
be extraordinarily complex and
cumbersome. To facilitate compliance,
the Bureau believes it is appropriate and
necessary to adopt one or more
generalized rules regarding the
accounting of various payments.
However, the Bureau does not believe it
yet has sufficient information with
which to choose definitively between
the additive approach provided for in
the statutory language and other
potential methods of accounting for
payments in light of the multiple
practical and complex policy
considerations involved.
The potential downstream effects of
different accounting methods are
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6438
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
significant. Under the additive approach
where no offsetting consumer payments
against creditor-paid loan originator
compensation is allowed, creditors
whose combined loan originator
compensation and up-front charges
would otherwise exceed the points and
fees limits would have strong incentives
to cap their up-front charges for other
overhead expenses under the threshold
and instead recover those expenses by
increasing interest rates to generate
higher gains on sale. This would
adversely affect consumers who prefer a
lower interest rate and higher up-front
costs and, at the margins, could result
in some consumers being unable to
qualify for credit. Additionally, to the
extent creditors responded to a ‘‘no
offsetting’’ rule by increasing interest
rates, this could increase the number of
qualified mortgages that receive a
rebuttable rather than conclusive
presumption of compliance.
One alternative would be to allow all
consumer payments to offset creditorpaid loan originator compensation.
However, a ‘‘full offsetting’’ approach
would allow creditors to offset much
higher levels of up-front points and fees
against expenses paid through rate
before the heightened consumer
protections required by the Dodd-Frank
Act would apply. Particularly under
HOEPA, this may raise tensions with
Congress’s apparent intent. Other
alternatives might use a hybrid
approach depending on the type of
expense, type of loan, or other factors,
but would involve more compliance
complexity.
In light of the complex
considerations, the Bureau believes it is
necessary to seek additional notice and
comment. The Bureau therefore is
finalizing this rule without qualifying
the statutory result and is proposing two
alternative comments in the concurrent
proposal, one of which would explicitly
preclude offsetting, and the other of
which would allow full offsetting of any
consumer-paid charges against creditorpaid loan originator compensation. The
Bureau is also proposing comments to
clarify treatment of compensation paid
by consumers to mortgage brokers and
by mortgage brokers to their individual
employees. The Bureau is seeking
comment on all aspects of this issue,
including the market impacts and
whether adjustments to the final rule
would be appropriate. In addition, the
Bureau is seeking comment on whether
it would be helpful to provide for
additional adjustment of the rules or
additional commentary to clarify any
overlaps in definitions between the
points and fees provisions in this
rulemaking and the HOEPA rulemaking
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
and the provisions that the Bureau is
separately finalizing in connection with
the Bureau’s 2012 Loan Originator
Compensation Proposal.
Finally, comment 32(b)(1)(ii)–4
includes revised versions of examples in
proposed comment 32(b)(1)(ii)–2, as
well as additional examples to provide
additional guidance regarding what
compensation qualifies as loan
originator compensation that must be
included in points and fees. These
examples illustrate when compensation
can be attributed to a particular
transaction at the time the interest rate
is set. New comment 32(b)(1)(ii)–5 adds
an example explaining how salary is
treated for purposes of loan originator
compensation for calculating points and
fees.
32(b)(1)(iii)
TILA section 103(aa)(4)(C) provides
that points and fees include certain real
estate-related charges listed in TILA
section 106(e) and is implemented in
§ 1026.32(b)(1)(iii). The Dodd-Frank Act
did not amend TILA section
103(aa)(4)(C) (but did renumber it as
section 103(bb)(4)(C)). Although the
Board indicated in the Supplementary
Information that it was not proposing
any changes, proposed § 226.32(b)(1)(iii)
would have added the phrase ‘‘payable
at or before closing of the mortgage’’
loan and would have separated the
elements into three new paragraphs (A)
through (C). Thus, proposed
§ 226.32(b)(1)(iii) would have included
in points and fees ‘‘all items listed in
§ 226.4(c)(7) (other than amounts held
for future payment of taxes) payable at
or before closing of the mortgage loan,
unless: (A) The charge is reasonable; (B)
the creditor receives no direct or
indirect compensation in connection
with the charge; and (C) the charge is
not paid to an affiliate of the creditor.’’
The Board noted that the statute did not
exclude these charges if they were
payable after closing and questioned
whether such a limitation was necessary
because these charges could reasonably
be viewed as charges that by definition
are payable only at or before closing. As
noted in the section-by-section analysis
of § 1026.32(b)(1), the Board requested
comment on whether there are any other
types of fees that should be included in
points and fees only if they are payable
at or before closing.
The Board noted that during outreach
creditors had raised concerns about
including in points and fees real-estate
related fees paid to an affiliate of the
creditor, such as an affiliated title
company. Although these fees always
have been included in points and fees
for high-cost loans, creditors using
PO 00000
Frm 00032
Fmt 4701
Sfmt 4700
affiliated title companies were
concerned they would have difficulty
meeting the lower threshold for points
and fees for qualified mortgages. The
Board, however, did not propose to
exempt fees paid to creditor-affiliated
settlement service providers, noting that
Congress appeared to have rejected
excluding such fees from points and
fees.
Industry commenters criticized the
Board’s proposed treatment of fees paid
to affiliates as overbroad. Industry
commenters argued that a creditor’s
affiliation with a service provider, such
as a title insurance agency, does not
have any impact on the consumer’s
ability to repay a loan. They maintained
that studies over the past two decades
have shown that title services provided
by affiliated businesses are competitive
in cost compared to services provided
by unaffiliated businesses. They
contended that the rule should instead
focus solely on whether the fee is bona
fide.
These commenters also argued that
the largest real estate-related charge,
title insurance fees, are often either
mandated by State law or required to be
filed with the relevant state authority
and do not vary. Regardless of whether
the State sets the rate or requires that
the rate be filed, these commenters
argued that there are so few insurers
that rates tend to be nearly identical
among providers.
These commenters also argued that
including fees to affiliates would
negatively affect consumers. They
claimed that the inclusion of fees paid
to affiliates would cause loans that
would otherwise be qualified mortgages
to exceed the points and fees cap,
resulting in more expense to the
creditor, which would be passed
through to consumers in the form of
higher interest rates or fees, or in more
denials of credit. They also claimed that
the proposal would harm consumers by
reducing competition among settlement
service providers and by eliminating
operational efficiencies. One industry
trade association reported that some of
its members with affiliates would
discontinue offering mortgages, which
would reduce competition among
creditors, especially for creditors
offering smaller loans, since these loans
would be most affected by the points
and fees cap. They claimed that treating
affiliated and unaffiliated providers
differently would incentivize creditors
to use unaffiliated third-party service
providers to stay within the qualified
mortgage points and fees cap.
Several industry commenters noted
that RESPA permits affiliated business
arrangements and provides protections
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
for consumers, including a prohibition
against requiring that consumers use
affiliates, a requirement to disclose
affiliation to consumers, and a
limitation that compensation include
only return on ownership interest.
These commenters argued that charges
paid to affiliates should be excluded
from points and fees as long the RESPA
requirements are satisfied. Several
industry commenters objected to the
requirement that charges be
‘‘reasonable’’ to be excluded from points
and fees. They argued that the
requirement was vague and that it
would be difficult for a creditor to judge
whether a third-party charge met the
standard. Several commenters also
argued that the Dodd-Frank Act
provision permitting exclusion of
certain bona fide third-party charges
should apply rather than the three-part
test for items listed in § 1026.4(c)(7). See
TILA section 129C(b)(2)(C)(i).
Two consumer advocates commented
on this aspect of the proposal. They
supported including in points and fees
all fees paid to any settlement service
provider affiliated with the creditor.
The Bureau is adopting
§ 226.32(b)(1)(iii) as proposed but
renumbered as § 1026.32(b)(1)(iii). TILA
section 103(bb)(4) specifically mandates
that fees paid to and retained by
affiliates of the creditor be included in
points and fees. The Bureau
acknowledges that including fees paid
to affiliates in points and fees could
make it more difficult for creditors using
affiliated service providers to stay under
the points and fees cap for qualified
mortgages and that, as a result, creditors
could be disincented from using
affiliated service providers. This is
especially true with respect to affiliated
title insurers because of the cost of title
insurance. On the other hand, despite
RESPA’s regulation of fees charged by
affiliates, concerns have nonetheless
been raised that fees paid to an affiliate
pose greater risks to the consumer, since
affiliates of a creditor may not have to
compete in the market with other
providers of a service and thus may
charge higher prices that get passed on
to the consumer. The Bureau believes
that Congress weighed these competing
considerations and made a deliberate
decision not to exclude fees paid to
affiliates. This approach is further
reflected throughout title XIV, which
repeatedly amended TILA to treat fees
paid to affiliates as the equivalent to
fees paid to a creditor or loan originator.
See, e.g., Dodd-Frank Act sections 1403,
1411, 1412, 1414, and 1431. For
example, as noted above, TILA section
129C(b)(2)(C)(i), as added by section
1412 of the Dodd-Frank Act, provides
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
that for purposes of the qualified
mortgage points and fees test, bona fide
third-party charges are excluded other
than charges ‘‘retained by * * * an
affiliate of the creditor or mortgage
originator.’’ Similarly, TILA section
129B(c)(2)(B)(ii), added by section 1403
of the Dodd-Frank Act, restricts the
payment of points and fees but permits
the payment of bona fide third-party
charges unless those charges are
‘‘retained by * * * an affiliate of the
creditor or originator.’’ In light of these
considerations, the Bureau does not
believe there is sufficient justification to
use its exception authority in this
instance as the Bureau cannot find,
given Congress’s clear determination,
that excluding affiliate fees from the
calculation of points and fees is
necessary or proper to effectuate the
purposes of TILA, to prevent
circumvention or evasion thereof, or to
facilitate compliance therewith.
As noted above, some commenters
objected to the requirement that charges
be ‘‘reasonable.’’ The Bureau notes that
a ‘‘reasonable’’ requirement has been in
place for many years before the DoddFrank Act. TILA section 103(aa)(4)(C)
specifically provides that charges listed
in TILA section 106(e) are included in
points and fees for high-cost mortgages
unless, among other things, the charge
is reasonable. This requirement is
implemented in existing
§ 1026.32(b)(1)(iii). Similarly, a charge
may be excluded from the finance
charge under § 1026.4(c)(7) only if it is
reasonable. In the absence of any
evidence that this requirement has been
unworkable, the Bureau declines to alter
it. The fact that a transaction for such
services is conducted at arms-length
ordinarily should be sufficient to make
the charge reasonable. The
reasonableness requirement is not
intended to invite an inquiry into
whether a particular appraiser or title
insurance company is imposing
excessive charges.
Some commenters also maintained
that the provision permitting exclusion
of certain bona fide third-party charges
should apply rather than the three-part
test for items listed in § 1026.4(c)(7). See
TILA section 129C(b)(2)(C)(i). As
discussed in more detail in the sectionby-section analysis of
§ 1026.32(b)(1)(i)(D), the Bureau
concludes that § 1026.32(b)(1)(iii),
which specifically addresses exclusion
of items listed in § 1026.4(c)(7), takes
precedence over the more general
exclusion in § 1026.32(b)(1)(i)(D).
The Board’s proposed comment
32(b)(1)(iii)–1 was substantially the
same as existing comment 32(b)(1)(ii)–2.
It would have provided an example of
PO 00000
Frm 00033
Fmt 4701
Sfmt 4700
6439
the inclusion or exclusion of real-estate
related charges. The Bureau did not
receive substantial comment on the
proposed comment. The Bureau is
therefore adopting comment
32(b)(1)(ii)–1 substantially as proposed,
with revisions for clarity.
32(b)(1)(iv)
As amended by section 1431 of the
Dodd-Frank Act, TILA section
103(bb)(4)(D) includes in points and
fees premiums for various forms of
credit insurance and charges for debt
cancellation or suspension coverage.
The Board proposed § 226.32(b)(1)(iv) to
implement this provision. The Board
also proposed to revise comment
32(b)(1)(iv)–1 to reflect the revised
statutory language and to add new
comment 32(b)(1)(iv)–2 to clarify that
‘‘credit property insurance’’ includes
insurance against loss or damage to
personal property such as a houseboat
or manufactured home.
Several commenters argued that
proposed § 226.32(b)(1)(iv) did not
accurately implement the provision in
Dodd-Frank Act section 1431 that
specifies that ‘‘insurance premiums or
debt cancellation or suspension fees
calculated and paid in full on a monthly
basis shall not be considered financed
by the creditor.’’ They argued that
comment 32(b)(1)(iv)–1 should be
revised so that it expressly excludes
monthly premiums for credit insurance
from points and fees, including such
premiums payable in the first month. At
least one industry commenter also
argued that voluntary credit insurance
premiums should not be included in
points and fees. Consumer advocates
supported inclusion of credit insurance
premiums in points and fees, noting that
these services can add significant costs
to mortgages.
The Bureau is adopting
§ 226.32(b)(1)(iv) substantially as
proposed, with revisions for clarity, as
renumbered § 1026.32(b)(1)(iv). As
revised, § 1026.32(b)(1)(iv) states that
premiums or other charges for ‘‘any
other life, accident, health, or loss-ofincome insurance’’ are included in
points and fees only if the insurance is
for the benefit of the creditor. The
Bureau is also adopting proposed
comments 32(b)(1)(iv)–1 and –2
substantially as proposed, with
revisions for clarity and consistency
with terminology in Regulation Z. The
Bureau is also adopting new comment
32(b)(1)(iv)–3 to clarify that premiums
or other charges for ‘‘any other life,
accident, health, or loss-of-income
insurance’’ are included in points and
fees only if the creditor is a beneficiary
of the insurance.
E:\FR\FM\30JAR2.SGM
30JAR2
6440
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
As noted above, several commenters
argued that premiums paid monthly,
including the first such premium,
should not be included in points and
fees. The statute requires that premiums
‘‘payable at or before closing’’ be
included in points and fees; it provides
only that premiums ‘‘calculated and
paid in full on a monthly basis shall not
be considered financed by the creditor.’’
TILA section 103(bb)(4)(D). Thus, if the
first premium is payable at or before
closing, that payment is included in
points and fees even though the
subsequent monthly payments are not.
Another commenter argued that
voluntary credit insurance premiums
should be excluded from points and
fees. However, under the current rule,
voluntary credit insurance premiums
are included in points and fees. In light
of the fact that the Dodd-Frank Act
expanded the types of credit insurance
that must be included in points and
fees, the Bureau does not believe it
would be appropriate to reconsider
whether voluntary credit insurance
premiums should be included in points
and fees.
32(b)(1)(v)
As added by the Dodd-Frank Act, new
TILA section 103(bb)(4)(E) includes in
points and fees ‘‘the maximum
prepayment penalties which may be
charged or collected under the terms of
the credit transaction.’’ The Board’s
proposed § 226.32(b)(1)(v) closely
tracked the statutory language, but it
cross-referenced proposed
§ 226.43(b)(10) for the definition of
‘‘prepayment penalty.’’
Few commenters addressed this
provision. One industry commenter
argued that the maximum prepayment
penalty should not be included in
points and fees because a prepayment
that triggers the penalty may never
occur and thus the fee may never be
assessed.
The Bureau is adopting
§ 226.32(b)(1)(v) substantially as
proposed but renumbered as
§ 1026.32(b)(1)(v), with a revision to its
definitional cross-reference. As revised,
§ 1026.32(b)(1)(v) refers to the definition
of prepayment penalty in
§ 1026.32(b)(6)(i). With respect to the
comment arguing that prepayment
penalties should not be included in
points and fees, the statute requires
inclusion in points and fees of the
maximum prepayment penalties that
‘‘may be charged or collected.’’ Thus,
under the statutory language, the
imposition of the charge need not be
certain for the prepayment penalty to be
included in points and fees. In this
provision (and other provisions added
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
by the Dodd-Frank Act, such as TILA
section 129C(c)), Congress sought to
limit and deter the use of prepayment
penalties, and the Bureau does not
believe that it would be appropriate to
exercise its exception authority in a
manner that could undermine that goal.
32(b)(1)(vi)
New TILA section 103(bb)(4)(F)
requires that points and fees include
‘‘all prepayment fees or penalties that
are incurred by the consumer if the loan
refinances a previous loan made or
currently held by the same creditor or
an affiliate of the creditor.’’ The Board’s
proposed § 226.32(b)(1)(vi) would have
implemented this provision by
including in points and fees the total
prepayment penalty, as defined in
§ 226.43(b)(10), incurred by the
consumer if the mortgage loan is
refinanced by the current holder of the
existing mortgage loan, a servicer acting
on behalf of the current holder, or an
affiliate of either. The Board stated its
belief that this provision is intended in
part to curtail the practice of ‘‘loan
flipping,’’ which involves a creditor
refinancing an existing loan for financial
gain resulting from prepayment
penalties and other fees that a consumer
must pay to refinance the loan—
regardless of whether the refinancing is
beneficial to the consumer. The Board
noted that it departed from the statutory
language to use the phrases ‘‘current
holder of the existing mortgage loan’’
and ‘‘servicer acting on behalf of the
current holder’’ in proposed
§ 226.32(b)(1)(vi) because, as a practical
matter, these are the entities that would
refinance the loan and directly or
indirectly gain from associated
prepayment penalties.
Few commenters addressed this
provision. Two consumer groups
expressed support for including these
prepayment penalties in points and fees,
arguing that many consumers were
victimized by loan flipping and the
resulting fees and charges.
The Bureau is adopting
§ 226.32(b)(1)(vi) substantially as
proposed but renumbered as
§ 1026.32(b)(1)(vi). In addition to
revising for clarity, the Bureau has also
revised § 1026.32(b)(1)(vi) to refer to the
definition of prepayment penalty in
§ 1026.32(b)(6)(i). Like the Board, the
Bureau believes that it is appropriate for
§ 1026.32(b)(1)(vi) to apply to the
current holder of the existing mortgage
loan, the servicer acting on behalf of the
current holder, or an affiliate of either.
These are the entities that would
refinance the loan and gain from the
prepayment penalties on the previous
loan. Accordingly, the Bureau is
PO 00000
Frm 00034
Fmt 4701
Sfmt 4700
invoking its exception and adjustment
authority under TILA sections 105(a)
and 129C(b)(3)(B)(i). The Bureau
believes that adjusting the statutory
language to more precisely target the
entities that would benefit from
refinancing loans with prepayment
penalties will more effectively deter
loan flipping to collect prepayment
penalties and help preserve consumers’
access to safe, affordable credit. It also
will lessen the compliance burden on
other entities that lack the incentive for
loan flipping, such as a creditor that
originated the existing loan but no
longer holds the loan. For these reasons,
the Bureau believes that use of its
exception and adjustment authority is
necessary and proper under TILA
section 105(a) to effectuate the purposes
of TILA and to facilitate compliance
with TILA and its purposes, including
the purpose of assuring that consumers
are offered and receive residential
mortgage loans on terms that reasonably
reflect their ability to repay the loans.
Similarly, the Bureau finds that it is
necessary, proper, and appropriate to
use its authority under TILA section
129C(b)(3)(B)(i) to revise and subtract
from statutory language. This use of
authority ensures that responsible,
affordable mortgage credit remains
available to consumers in a manner
consistent with and effectuates the
purpose of TILA section 129C,
referenced above, and facilitates
compliance with section 129C of TILA.
32(b)(2)
Proposed Provisions Not Adopted
As noted in the section-by-section
analysis of § 1026.32(b)(1)(ii) above,
section 1431(c) of the Dodd-Frank Act
amended TILA to require that all
compensation paid directly or indirectly
by a consumer or a creditor to a
‘‘mortgage originator’’ be included in
points and fees for high-cost mortgages
and qualified mortgages. As also noted
above, the Board’s 2011 ATR Proposal
proposed to implement this statutory
change in proposed § 226.32(b)(1)(ii)
using the term ‘‘loan originator,’’ as
defined in existing § 1026.36(a)(1),
rather than the statutory term ‘‘mortgage
originator.’’ In turn, the Board proposed
new § 226.32(b)(2) to exclude from
points and fees compensation paid to
certain categories of persons specifically
excluded from the definition of
‘‘mortgage originator’’ in amended TILA
section 103, namely employees of a
retailer of manufactured homes under
certain circumstances, certain real estate
brokers, and servicers.
The Bureau is not adopting proposed
§ 226.32(b)(2). The Bureau is amending
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
the definition of ‘‘loan originator’’
§ 1026.36(a)(1) and the associated
commentary to incorporate the statutory
exclusion of these persons from the
definition. Accordingly, to the extent
these persons are excluded from the
definition of loan originator
compensation, their compensation is
not loan originator compensation that
must be counted in points and fees, and
the exclusions in proposed
§ 226.32(b)(2) are no longer necessary.
Instead, in the 2013 HOEPA Final
Rule, the Bureau is finalizing the
definition of points and fees for HELOCs
in § 1026.32(b)(2). Current
§ 1026.32(b)(2), which contains the
definition of ‘‘affiliate,’’ is being
renumbered as § 1026.32(b)(5).
32(b)(3) Bona Fide Discount Point
sroberts on DSK5SPTVN1PROD with
32(b)(3)(i) Closed-End Credit
The Dodd-Frank Act defines the term
‘‘bona fide discount points’’ as used in
§ 1026.32(b)(1)(i)(E) and (F), which, as
discussed above, permit exclusion of
‘‘bona fide discount points’’ from points
and fees for qualified mortgages. TILA
section 129C(b)(2)(C)(iii) defines the
term ‘‘bona fide discount points’’ as
‘‘loan discount points which are
knowingly paid by the consumer for the
purpose of reducing, and which in fact
result in a bona fide reduction of, the
interest rate or time-price differential
applicable to the mortgage.’’ TILA
section 129C(b)(2)(C)(iv) limits the types
of discount points that may be excluded
from ‘‘points and fees’’ to those for
which ‘‘the amount of the interest rate
reduction purchased is reasonably
consistent with established industry
norms and practices for secondary
market transactions.’’
Proposed § 226.43(e)(3)(iv) would
have implemented these provisions by
defining the term ‘‘bona fide discount
point’’ as ‘‘any percent of the loan
amount’’ paid by the consumer that
reduces the interest rate or time-price
differential applicable to the mortgage
loan by an amount based on a
calculation that: (1) Is consistent with
established industry practices for
determining the amount of reduction in
the interest rate or time-price
differential appropriate for the amount
of discount points paid by the
consumer; and (2) accounts for the
amount of compensation that the
creditor can reasonably expect to
receive from secondary market investors
in return for the mortgage loan.
The Board’s proposal would have
required that the creditor be able to
show a relationship between the amount
of interest rate reduction purchased by
a discount point and the value of the
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
transaction in the secondary market.
The Board observed that, based on
outreach with representatives of
creditors and GSEs, the value of a rate
reduction in a particular mortgage
transaction on the secondary market is
based on many complex factors, which
interact in a variety of complex ways.
The Board noted that these factors may
include, among others:
• The product type, such as whether
the loan is a fixed-rate or adjustable-rate
mortgage, or has a 30-year term or a 15year term.
• How much the MBS market is
willing to pay for a loan at that interest
rate and the liquidity of an MBS with
loans at that rate.
• How much the secondary market is
willing to pay for excess interest on the
loan that is available for capitalization
outside of the MBS market.
• The amount of the guaranty fee
required to be paid by the creditor to the
investor.
The Board indicated that it was
offering a flexible proposal because of
its concern that a more prescriptive
interpretation would be operationally
unworkable for most creditors and
would lead to excessive legal and
regulatory risk. In addition, the Board
also noted that, due to the variation in
inputs described above, a more
prescriptive rule likely would require
continual updating, creating additional
compliance burden and potential
confusion.
The Board also noted a concern that
small creditors such as community
banks that often hold loans in portfolio
rather than sell them on the secondary
market may have difficulty complying
with this requirement. The Board
therefore requested comment on
whether it would be appropriate to
provide any exemptions from the
requirement that the interest rate
reduction purchased by a ‘‘bona fide
discount point’’ be tied to secondary
market factors.
Many industry commenters criticized
the second prong of the Board’s
proposal, which would have required
that the interest rate reduction account
for the amount of compensation that the
creditor can reasonably expect to
receive from secondary market investors
in return for the mortgage loan. Several
industry commenters argued that this
test would be complex and difficult to
apply and that, if challenged, it would
be difficult for creditors to prove that
the calculation was done properly. Two
industry commenters noted that
creditors do not always sell or plan to
sell loans in the secondary market at the
time of origination and so would not
know what compensation they would
PO 00000
Frm 00035
Fmt 4701
Sfmt 4700
6441
receive on the secondary market.
Several industry commenters
emphasized that the secondary market
test would be impracticable for creditors
holding loans in portfolio. Consumer
groups did not comment on this issue.
As noted above, the Bureau is
consolidating the exclusions for certain
bona fide third-party charges and bona
fide discount points in
§ 1026.32(b)(1)(i)(D) through (F). As a
result, the Bureau is adopting proposed
§ 226.43(e)(3)(iv), with the revision
discussed below, as renumbered
§ 1026.32(b)(3)(i). In the 2013 HOEPA
Final Rule, the Bureau is adopting a
definition of bona fide discount point
for open-end credit in
§ 1026.32(b)(3)(ii).
After carefully considering the
comments, the Bureau is modifying the
definition of ‘‘bona fide discount point.’’
Specifically, the Bureau believes it
would be difficult, if not impossible, for
many creditors to account for the
secondary market compensation in
calculating interest rate reductions. This
is particularly true for loans held in
portfolio. Therefore, the Board is
removing from § 1026.32(b)(3)(i) the
requirement that interest rate reductions
take into account secondary market
compensation. Instead, as revised,
§ 1026.32(b)(3)(i) requires only that the
calculation of the interest rate reduction
be consistent with established industry
practices for determining the amount of
reduction in the interest rate or timeprice differential appropriate for the
amount of discount points paid by the
consumer.
The Bureau finds that removing the
secondary market component of the
‘‘bona fide’’ discount point definition is
necessary and proper under TILA
section 105(a) to effectuate the purposes
of and facilitate compliance with TILA.
Similarly, the Bureau finds that it is
necessary and proper to use its authority
under TILA section 129C(b)(3)(B)(i) to
revise and subtract from the criteria that
define a qualified mortgage by removing
the secondary market component from
the bona fide discount point definition.
It will provide creditors sufficient
flexibility to demonstrate that they are
in compliance with the requirement
that, to be excluded from points and
fees, discount points must be bona fide.
In clarifying the definition, it also will
facilitate the use of bona fide discount
points by consumers to help create the
appropriate combination of points and
rate for their financial situation, thereby
helping ensure that consumers are
offered and receive residential mortgage
loan on terms that reasonably reflect
their ability to repay the loans and that
responsible, affordable mortgage credit
E:\FR\FM\30JAR2.SGM
30JAR2
6442
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
remains available to consumers in a
manner consistent with the purposes of
TILA as provided in TILA section 129C.
To provide some guidance on how
creditors may comply with this
requirement, the Bureau is adding new
comment 32(b)(3)(i)–1. This comment
explains how creditors can comply with
‘‘established industry practices’’ for
calculating interest rate reductions.
Specifically, comment 32(b)(3)(i)–1
notes that one way creditors can satisfy
this requirement is by complying with
established industry norms and
practices for secondary mortgage market
transactions. Comment 32(b)(3)(i)–1
then provides two examples. First a
creditor may rely on pricing in the tobe-announced (TBA) market for MBS to
establish that the interest rate reduction
is consistent with the compensation that
the creditor could reasonably expect to
receive in the secondary market.
Second, a creditor could comply with
established industry practices, such as
guidelines from Fannie Mae or Freddie
Mac that prescribe when an interest rate
reduction from a discount point is
considered bona fide. However, because
these examples from the secondary
market are merely illustrations of how a
creditor could comply with the
‘‘established industry practices’’
requirement for bona fide interest rate
reduction, creditors, and in particular
creditors that retain loans in portfolio,
will have flexibility to use other
approaches for complying with this
requirement.
32(b)(4) Total Loan Amount
sroberts on DSK5SPTVN1PROD with
32(b)(4)(i) Closed-End Credit
As added by section 1412 of the
Dodd-Frank Act, TILA section
129C(b)(2)(A)(vii) defines a ‘‘qualified
mortgage’’ as a mortgage for which,
among other things, ‘‘the total points
and fees * * * payable in connection
with the loan do not exceed 3 percent
of the total loan amount.’’ For purposes
of implementing the qualified mortgage
provisions, the Board proposed to retain
existing comment 32(a)(1)(ii)–1
explaining the meaning of the term
‘‘total loan amount,’’ with certain minor
revisions discussed below, while also
seeking comment on an alternative
approach.
The proposal would have revised the
‘‘total loan amount’’ calculation under
current comment 32(a)(1)(ii)–1 to
account for charges added to TILA’s
definition of points and fees by the
Dodd-Frank Act. Under Regulation Z for
purposes of applying the existing points
and fees trigger for high-cost loans, the
‘‘total loan amount’’ is calculated as the
amount of credit extended to or on
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
behalf of the consumer, minus any
financed points and fees. Specifically,
under current comment 32(a)(1)(ii)–1,
the ‘‘total loan amount’’ is calculated by
‘‘taking the amount financed, as
determined according to § 1026.18(b),
and deducting any cost listed in
§ 1026.32(b)(1)(iii) and
§ 1026.32(b)(1)(iv) that is both included
as points and fees under § 1026.32(b)(1)
and financed by the creditor.’’ Section
1026.32(b)(1)(iii) and (b)(1)(iv) pertain
to ‘‘real estate-related fees’’ listed in
§ 1026.4(c)(7) and premiums or other
charges for credit insurance or debt
cancellation coverage, respectively.
The Board proposed to revise this
comment to cross-reference additional
financed points and fees described in
proposed § 226.32(b)(1)(vi) as well. This
addition would have required a creditor
also to deduct from the amount financed
any prepayment penalties that are
incurred by the consumer if the
mortgage loan refinances a previous
loan made or currently held by the
creditor refinancing the loan or an
affiliate of the creditor—to the extent
that the prepayment penalties are
financed by the creditor. As a result, the
3 percent limit on points and fees for
qualified mortgages would have been
based on the amount of credit extended
to the consumer without taking into
account any financed points and fees.
The Board’s proposal also would have
revised one of the commentary’s
examples of the ‘‘total loan amount’’
calculation. Specifically, the Board
proposed to revise the example of a
$500 single premium for optional
‘‘credit life insurance’’ used in comment
32(b)(1)(i)–1.iv to be a $500 single
premium for optional ‘‘credit
unemployment insurance.’’ The Board
stated that this change was proposed
because, under the Dodd-Frank Act,
single-premium credit insurance—
including credit life insurance—is
prohibited in covered transactions
except for certain limited types of credit
unemployment insurance. See TILA
section 129C(d). The Board requested
comment on the proposed revisions to
the comment explaining how to
calculate the ‘‘total loan amount,’’
including whether additional guidance
is needed.
The Board also requested comment on
whether to streamline the calculation to
ensure that the ‘‘total loan amount’’
would include all credit extended other
than financed points and fees.
Specifically, the Board solicited
comment on whether to revise the
calculation of ‘‘total loan amount’’ to be
the ‘‘principal loan amount’’ (as defined
in § 226.18(b) and accompanying
commentary), minus charges that are
PO 00000
Frm 00036
Fmt 4701
Sfmt 4700
points and fees under § 226.32(b)(1) and
are financed by the creditor. The Board
explained that the purpose of using the
‘‘principal loan amount’’ instead of the
‘‘amount financed’’ would be to
streamline the calculation to facilitate
compliance and to ensure that no
charges other than financed points and
fees are excluded from the ‘‘total loan
amount.’’ 85 In general, the revised
calculation would have yielded a larger
‘‘total loan amount’’ to which the
percentage points and fees thresholds
would have to be applied than would
the proposed (and existing) ‘‘total loan
amount’’ calculation, because only
financed points and fees and no other
financed amounts would be excluded.
Thus, creditors in some cases would be
able to charge more points and fees on
the same loan under the alternative
outlined by the Board than under either
the proposed or existing rule.
In the 2012 HOEPA Proposal, the
Bureau proposed the following for
organizational purposes: (1) To move
the existing definition of ‘‘total loan
amount’’ for closed-end mortgage loans
from comment 32(a)(1)(ii)–1 to proposed
§ 1026.32(b)(6)(i); and (2) to move the
examples showing how to calculate the
total loan amount for closed-end
mortgage loans from existing comment
32(a)(1)(ii)–1 to proposed comment
32(b)(6)(i)–1. The Bureau proposed to
specify that the calculation applies to
closed-end mortgage loans because the
Bureau also proposed to define ‘‘total
loan amount’’ separately for open-end
credit plans. The Bureau also proposed
to amend the definition of ‘‘total loan
amount’’ in a manner similar to the
Board’s alternative proposal described
above. The Bureau indicated this
proposed revision would streamline the
total loan amount calculation to
facilitate compliance and would be
sensible in light of the more inclusive
definition of the finance charge
proposed in the Bureau’s 2012 TILA–
RESPA Integration Proposal.
Few commenters addressed the
Board’s proposal regarding total loan
amount. Several industry commenters
recommended that the alternative
method of calculating total loan amount
be used because it would be easier to
calculate. At least two industry
commenters recommended that, for
simplicity, the amount recited in the
note be used for calculating the
permitted points and fees.
After reviewing the comments, the
Bureau is following the 2012 HOEPA
85 Specifically, under the alternative approach,
prepaid finance charges would not be deducted
from the principal loan amount. Only financed
points and fees would be deducted.
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
Proposal and moving the definition of
total loan amount into the text of the
rule in § 1026.32(b)(4)(i). In 2013
HOEPA Final Rule, the Bureau is
adopting a definition of total loan
amount for open-end credit in
§ 1026.32(b)(4)(ii). The examples
showing how to calculate the total loan
amount are moved to comment
32(b)(4)(i)–1. However, the Bureau has
concluded that, at this point, the current
approach to calculating the total loan
amount should remain in place.
Creditors are familiar with the method
from using it for HOEPA points and fees
calculations. Moreover, as noted above,
the Bureau is deferring action on the
more inclusive definition of the finance
charge proposed in the Bureau’s 2012
TILA–RESPA Integration Proposal. If
the Bureau expands the definition of the
finance charge, the Bureau will at the
same time consider the effect on
coverage thresholds that rely on the
finance charge or the APR.
32(b)(5)
The final rule renumbers existing
§ 1026.32(b)(2) defining the term
‘‘affiliate’’ as § 1026.32(b)(5) for
organizational purposes.
32(b)(6) Prepayment Penalty
sroberts on DSK5SPTVN1PROD with
The Dodd-Frank Act’s Amendments to
TILA Relating to Prepayment Penalties
Sections 1431 and 1432 of the DoddFrank Act (relating to high-cost
mortgages) and section 1414 of the
Dodd-Frank Act (relating to qualified
mortgages) amended TILA to restrict
and, in many cases, prohibit a creditor
from imposing prepayment penalties in
dwelling-secured credit transactions.
The Dodd-Frank Act restricted
prepayment penalties in three main
ways.
First, as the Board discussed in its
2011 ATR Proposal, the Dodd-Frank Act
added new TILA section 129C(c)(1)
relating to qualified mortgages, which
generally provides that a covered
transaction (i.e., in general, a closedend, dwelling-secured credit
transaction) may include a prepayment
penalty only if it; (1) Is a qualified
mortgage, to be defined by the Board, (2)
has an APR that cannot increase after
consummation, and (3) is not a higherpriced mortgage loan. The Board
proposed to implement TILA section
129C(c)(1) in § 226.43(g)(1) and to
define the term prepayment penalty in
§ 226.43(b)(10). Under new TILA section
129C(c)(3), moreover, even loans that
meet the statutorily prescribed criteria
(i.e., fixed-rate, non-higher-priced
qualified mortgages) are capped in the
amount of prepayment penalties that
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
may be charged, starting at three percent
in the first year after consummation and
decreasing annually by increments of
one percentage point thereafter so that
no penalties may be charged after the
third year. The Board proposed to
implement TILA section 129C(c)(3) in
§ 226.43(g)(2).
Second, section 1431(a) of the DoddFrank Act amended TILA section
103(bb)(1)(A)(iii) to provide that a credit
transaction is a high-cost mortgage if the
credit transaction documents permit the
creditor to charge or collect prepayment
fees or penalties more than 36 months
after the transaction closing or if such
fees or penalties exceed, in the
aggregate, more than two percent of the
amount prepaid. Moreover, under
amended TILA section 129(c)(1), highcost mortgages are prohibited from
having a prepayment penalty.
Accordingly, any prepayment penalty in
excess of two percent of the amount
prepaid on any closed end mortgage
would both trigger and violate the rule’s
high-cost mortgage provisions. The
Bureau’s 2012 HOEPA Proposal
proposed to implement these
requirements with several minor
clarifications in § 1026.32(a)(1)(iii). See
77 FR 49090, 49150 (Aug. 15, 2012).
Third, both qualified mortgages and
most closed-end mortgage loans and
open-end credit plans secured by a
consumer’s principal dwelling are
subject to additional limitations on
prepayment penalties through the
inclusion of prepayment penalties in the
definition of points and fees for
qualified mortgages and high-cost
mortgages. See the section-by-section
analysis of proposed § 226.32(b)(1)(v)
and (vi); 77 FR 49090, 49109–10 (Aug.
15, 2012).
Taken together, the Dodd-Frank Act’s
amendments to TILA relating to
prepayment penalties mean that most
closed-end, dwelling-secured
transactions: (1) May provide for a
prepayment penalty only if the
transaction is a fixed-rate, qualified
mortgage that is neither high-cost nor
higher-priced under §§ 1026.32 and
1026.35; (2) may not, even if permitted
to provide for a prepayment penalty,
charge the penalty more than three years
following consummation or in an
amount that exceeds two percent of the
amount prepaid; and (3) may be
required to limit any penalty even
further to comply with the points and
fees limitations for qualified mortgages
or to stay below the points and fees
trigger for high-cost mortgages.
In the interest of lowering compliance
burden and to provide additional clarity
for creditors, the Bureau has elected to
define prepayment penalty in a
PO 00000
Frm 00037
Fmt 4701
Sfmt 4700
6443
consistent manner for purposes of all of
the Dodd-Frank Act’s amendments. This
definition is located in § 1026.32(b)(6).
New § 1026.43(b)(10) cross-references
this prepayment definition to provide
consistency.
TILA establishes certain disclosure
requirements for transactions for which
a penalty is imposed upon prepayment,
but TILA does not define the term
‘‘prepayment penalty.’’ The Dodd-Frank
Act also does not define the term. TILA
section 128(a)(11) requires that the
transaction-specific disclosures for
closed-end consumer credit transactions
disclose a ‘‘penalty’’ imposed upon
prepayment in full of a closed-end
transaction, without using the term
‘‘prepayment penalty.’’ 15 U.S.C.
1638(a)(11).86 Comment 18(k)(1)–1
clarifies that a ‘‘penalty’’ imposed upon
prepayment in full is a charge assessed
solely because of the prepayment of an
obligation and includes, for example,
‘‘interest’’ charges for any period after
prepayment in full is made and a
minimum finance charge.
The Board’s 2011 ATR Proposal
proposed to implement the Dodd-Frank
Act’s prepayment penalty-related
amendments to TILA for qualified
mortgages by defining ‘‘prepayment
penalty’’ for most closed-end, dwellingsecured transactions in new
§ 226.43(b)(10), and by cross-referencing
proposed § 226.43(b)(10) in the
proposed joint definition of points and
fees for qualified and high-cost
mortgages in § 226.32(b)(1)(v) and (vi).
The definition of prepayment penalty
proposed in the Board’s 2011 ATR
Proposal differed from the Board’s prior
proposals and existing guidance in the
following respects: (1) Proposed
§ 226.43(b)(10) defined prepayment
penalty with reference to a payment of
‘‘all or part of’’ the principal in a
transaction covered by the provision,
while § 1026.18(k) and associated
commentary and the Board’s 2009
Closed-End Proposal and 2010 Mortgage
Proposal referred to payment ‘‘in full;’’
(2) the examples provided omitted
reference to a minimum finance charge
and loan guarantee fees; and (3)
proposed § 226.43(b)(10) did not
incorporate, and the Board’s 2011 ATR
Proposal did not otherwise address, the
language in § 1026.18(k)(2) and
associated commentary regarding
86 Also, TILA section 128(a)(12) requires that the
transaction-specific disclosures state that the
consumer should refer to the appropriate contract
document for information regarding certain loan
terms or features, including ‘‘prepayment * * *
penalties.’’ 15 U.S.C. 1638(a)(12). In addition, TILA
section 129(c) limits the circumstances in which a
high-cost mortgage may include a ‘‘prepayment
penalty.’’ 15 U.S.C. 1639(c).
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6444
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
disclosure of a rebate of a precomputed
finance charge, or the language in
§ 1026.32(b)(6) and associated
commentary concerning prepayment
penalties for high-cost mortgages.
The Board proposal generally
received support from industry
commenters and consumer advocates
for accurately implementing section
129C(c) by using a plain language
definition of prepayment penalty. Many
commenters, particularly consumer
groups, supported a rule that eliminates
or tightly restricts the availability of
prepayment penalties. Some industry
commenters, however, cautioned the
Bureau against implementing an
overbroad definition of prepayment
penalty, citing primarily a concern over
consumers’ access to credit. At least one
commenter argued that a prepayment
penalty ban should be more narrowly
focused on the subprime loan market,
noting that the proposal affected
prepayment penalties on a wider variety
of products. Other industry commenters
expressed a concern about the Board’s
approach to the monthly interest accrual
amortization method, as discussed in
more detail below as part of the
discussion of comment 32(b)(6)–1.
The Bureau adopts the definition of
prepayment penalty under
§ 1026.32(b)(6) largely as proposed by
the Board in order to create a clear
application of the term prepayment
penalty that is consistent with the
definitions proposed in the Bureau’s
2012 TILA–RESPA Proposal (which
itself draws from the definition adopted
in the Bureau’s 2013 HOEPA Final
Rule). However, the Bureau adds to
§ 1026.32(b)(6) an explicit exclusion
from the definition of prepayment
penalty for a waived bona fide thirdparty charge that the creditor imposes if
the consumer, sooner than 36 months
after consummation, pays all of a
covered transaction’s principal before
the date on which the principal is due.
This addition is discussed in detail
below. Consistent with TILA section
129(c)(1), existing § 1026.32(d)(6), and
the Board’s proposed § 226.43(b)(10) for
qualified mortgages, § 1026.32(b)(6)(i)
provides that, for a closed-end mortgage
loan, a ‘‘prepayment penalty’’ means a
charge imposed for paying all or part of
the transaction’s principal before the
date on which the principal is due,
though the Bureau has added a carveout from this definition to accommodate
the repayment of certain conditionally
waived closing costs when the
consumer prepays in full. The Bureau
adopts this definition of prepayment
penalty under § 1026.32(b)(6), rather
than under § 1026.43(b)(10), to facilitate
compliance for creditors across
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
rulemakings. The definition of
‘‘prepayment penalty’’ under
§ 1026.32(b)(6) thus will apply to
prepayment penalty restrictions, as
applied under § 1026.43(g). Section
1026.32(b)(6) also contains requirements
and guidance related to the Bureau’s
2013 HOEPA Final Rule, such as a
definition of prepayment penalty that
applies to open-end credit.
The Board’s 2011 ATR Proposal
included as an example of a prepayment
penalty a fee that the creditor waives
unless the consumer prepays the
covered transaction. Some industry
commenters contended that such
conditional fee waivers should be
excluded from the definition of
prepayment penalties. The commenters
argued that creditors imposed
conditional fee waivers not to increase
profit, but to ensure compensation for
fixed costs associated with originating
the loan. At least one commenter
directed the Bureau to a 1996 National
Credit Union Administration opinion
letter that concluded that a conditional
waiver of closing costs by a credit union
was a benefit to the consumer. Other
comments characterized the conditional
fee waiver as a ‘‘reimbursement,’’ rather
than compensation.
The Bureau finds such comments
persuasive, particularly with respect to
a situation in which the creditor waives
a bona fide third-party charge (or
charges) on condition that the consumer
reimburse the creditor for the cost of
that charge if the consumer prepays the
loan. In such situations, the Bureau
recognizes that the creditor receives no
profit from imposing or collecting such
charges and the Bureau believes that
treating such charges as a prepayment
penalty might very well have the effect
of reducing consumer choice without
providing any commensurate consumer
benefit. In an effort to provide a sensible
way to permit a creditor to protect itself
from losing money paid at closing to
third parties on the consumer’s behalf,
prior to such time as the creditor can
otherwise recoup such costs through the
interest rate on the mortgage loan, while
balancing consumer protection interests,
the Bureau has concluded that such fees
should be permissible for a limited time
after consummation. The Bureau thus
adopts § 1032(b)(6)(i) to clarify that the
term prepayment penalty does not
include a waived bona fide third-party
charge imposed by the creditor if the
consumer pays all of a covered
transaction’s principal before the date
on which the principal is due sooner
than 36 months after consummation.
The Bureau concludes that limiting the
duration of the possible charge to 36
months after consummation is
PO 00000
Frm 00038
Fmt 4701
Sfmt 4700
consistent with TILA 129C(c)(3)(D),
which prohibits any prepayment
penalty three years after loan
consummation, while accommodating
the concerns discussed above.
Moreover, § 1032(b)(6)(i) excludes from
the definition of prepayment penalty
only those charges that a creditor
imposes to recoup waived bona-fide
third party charges in such cases where
the consumer prepays in full. Thus, for
example, if one month after loan
consummation, the consumer prepays
$100 of principal earlier than it is due,
where the total principal is $100,000,
then any fee that the creditor imposes
for such prepayment is a prepayment
penalty under § 1032(b)(6)(i) and such a
fee is restricted in accordance with
§ 1026.43(g).
The Bureau believes that
§ 1026.32(b)(6) accurately implements
TILA section 129C(c), which
significantly limits the applicability and
duration of prepayment penalties. Some
commenters argued that restrictions on
prepayment penalties should be more
narrowly focused on specific products
or consumers, because not all
consumers need protection from the
pitfalls of prepayment penalties. The
Bureau agrees that prepayment penalties
are not always harmful to consumers
and that, in some cases, allowing a
creditor to charge a prepayment penalty
may lead to increased consumer choice
and access to credit. Congress
recognized this balance by allowing a
creditor to charge a prepayment penalty
only in certain circumstances, such as
requiring the loan to be a qualified
mortgage, under TILA section
129C(c)(1)(A), and by limiting a creditor
to charging a prepayment penalty to no
more than three years following
consummation, under TILA section
129C(c)(3)(D). Section 1026.32(b)(6)
remains faithful to that balance, with
the Bureau’s minor clarification with
respect to waived bona fide third party
charges, as described above.
The Board’s 2011 ATR Proposal
included several other examples of a
prepayment penalty under proposed
§ 226.43(b)(10)(i). For clarity, the Bureau
incorporates these examples as
comment 32(b)(6)–1.i and ii, and the
Bureau is adding comment 32(b)(6)–1.iii
and iv to provide additional clarity.
Likewise, the Bureau is largely adopting
the Board’s proposed § 226.43(b)(10)(ii),
an example of what is not a prepayment
penalty, as comment 32(b)(6)–3.i, as
well as adding comment 32(b)(6)–3.ii.
Comment 32(b)(6)–1.i through iv gives
the following examples of prepayment
penalties: (1) A charge determined by
treating the loan balance as outstanding
for a period of time after prepayment in
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
full and applying the interest rate to
such ‘‘balance,’’ even if the charge
results from interest accrual
amortization used for other payments in
the transaction under the terms of the
loan contract; (2) a fee, such as an
origination or other loan closing cost,
that is waived by the creditor on the
condition that the consumer does not
prepay the loan; (3) a minimum finance
charge in a simple interest transaction;
and (4) computing a refund of unearned
interest by a method that is less
favorable to the consumer than the
actuarial method, as defined by section
933(d) of the Housing and Community
Development Act of 1992, 15 U.S.C.
1615(d).
Post-payoff interest charges. The
Board proposal included as an example
of a prepayment penalty in proposed
§ 226.43(b)(10)(i)(A) a charge
determined by the creditor or servicer
treating the loan balance as outstanding
for a period of time after prepayment in
full. Some industry commenters
expressed reservations about treating
this monthly interest accrual
amortization method as a prepayment
penalty, arguing that such a rule might
cause higher resale prices in the
secondary mortgage market to account
for cash flow uncertainty. Other
commenters noted that this calculation
method is currently used by FHA to
compute interest on its loans (including
loans currently in Ginnie Mae pools), or
that such charges were not customarily
considered a prepayment penalty. Some
commenters expressed concern that the
rule would disrupt FHA lending.
After careful consideration of the
comments received, the Bureau
concludes that going forward (e.g., for
loans a creditor originates after the
effective date), it is appropriate to
designate higher interest charges for
consumers based on accrual methods
that treat a loan balance as outstanding
for a period of time after prepayment in
full as prepayment penalties under
§ 1026.32(b)(6) and comment 32(b)(6)–
1.i. In such instances, the consumer
submits a payment before it is due, but
the creditor nonetheless charges interest
on the portion of the principal that the
creditor has already received. The
Bureau believes that charging a
consumer interest after the consumer
has repaid the principal is the
functional equivalent of a prepayment
penalty. Comment 32(b)(6)–1.i further
clarifies that ‘‘interest accrual
amortization’’ refers to the method by
which the amount of interest due for
each period (e.g., month) in a
transaction’s term is determined and
notes, for example, that ‘‘monthly
interest accrual amortization’’ treats
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
each payment as made on the
scheduled, monthly due date even if it
is actually paid early or late (until the
expiration of any grace period). The
proposed comment also provides an
example where a prepayment penalty of
$1,000 is imposed because a full
month’s interest of $3,000 is charged
even though only $2,000 in interest was
earned in the month during which the
consumer prepaid.
With respect to FHA practices relating
to monthly interest accrual
amortization, the Bureau has consulted
extensively with HUD in issuing this
final rule as well as the 2013 HOEPA
Final Rule. Based on these
consultations, the Bureau understands
that HUD must engage in rulemaking to
end its practice of imposing interest
charges on consumers for the balance of
the month in which consumers prepay
in full. The Bureau further understands
that HUD requires approximately 24
months to complete its rulemaking
process. Accordingly, in recognition of
the important role that FHA-insured
credit plays in the current mortgage
market and to facilitate FHA creditors’
ability to comply with this aspect of the
2013 ATR and HOEPA Final Rules, the
Bureau is using its authority under TILA
section 105(a) to provide for optional
compliance until January 15, 2015 with
§ 1026.32(b)(6)(i) and the official
interpretation of that provision in
comment 32(b)(6)–1.i regarding monthly
interest accrual amortization.
Specifically, § 1026.32(b)(6)(i) provides
that interest charged consistent with the
monthly interest accrual amortization
method is not a prepayment penalty for
FHA loans consummated before January
21, 2015. FHA loans consummated on
or after January 21, 2015 must comply
with all aspects of the final rule. The
Bureau is making this adjustment
pursuant to its authority under TILA
section 105(a), which provides that the
Bureau’s regulations may contain such
additional requirements, classifications,
differentiations, or other provisions, and
may provide for such adjustments and
exceptions for all or any class of
transactions as in the Bureau’s judgment
are necessary or proper to effectuate the
purposes of TILA, prevent
circumvention or evasion thereof, or
facilitate compliance therewith. 15
U.S.C. 1604(a). The purposes of TILA
include the purposes that apply to 129C,
to assure that consumers are offered and
receive residential mortgage loans on
terms that reasonably reflect their ability
to repay the loan. See 15 U.S.C.
1639b(a)(2). The Bureau believes it is
necessary and proper to make this
adjustment to ensure that consumers
PO 00000
Frm 00039
Fmt 4701
Sfmt 4700
6445
receive loans on affordable terms and to
facilitate compliance with TILA and its
purposes while mitigating the risk of
disruption to the market. For purposes
of this rulemaking, the Bureau
specifically notes that the inclusion of
interest charged consistent with the
monthly interest accrual amortization
method in the definition of prepayment
penalty for purposes of determining
whether a transaction is in compliance
with the requirements of § 1026.43(g)
applies only to transactions
consummated on or after January 10,
2014; for FHA loans, compliance with
this aspect of the definition of
prepayment penalties is optional for
transactions consummated prior to
January 21, 2015.
With regard to general concerns that
loans subject to these interest accrual
methods may be subject to higher prices
on the secondary market, the Bureau is
confident that the secondary market will
be able to price the increased risk of
prepayment, if any, that may occur as a
result of the limits that will apply to
monthly interest accrual amortizationrelated prepayment penalties. The
secondary market already does so for
various other types of prepayment risk
on investor pools, such as the risk of
refinancing or sale of the property.
Comment 32(b)(6)–1.ii further
explains the 36 month carve-out for a
waived bona fide third-party charge
imposed by the creditor if the consumer
pays all of a covered transaction’s
principal before the date on which the
principal is due sooner than 36 months
after consummation, as included in
§ 1026.32(b)(6)(i). The comment
explains that if a creditor waives $3,000
in closing costs to cover bona fide third
party charges but the terms of the loan
agreement provide that the creditor may
recoup $4,500, in part to recoup waived
charges, then only $3,000 that the
creditor may impose to cover the
waived bona fide third party charges is
considered not to be a prepayment
penalty, while any additional $1,500
charge for prepayment is a prepayment
penalty and subject to the restrictions
under § 1026.43(g). This comment also
demonstrates that the only amount
excepted from the definition of
prepayment penalty under
§ 1026.32(b)(6)(i) is the actual amount
that the creditor pays to a third party for
a waived, bona fide charge.
Minimum finance charges; unearned
interest refunds. Although longstanding
Regulation Z commentary has listed a
minimum finance charge in a simple
interest transaction as an example of a
prepayment penalty, the Board
proposed to omit that example from
proposed § 226.43(b)(10) because the
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6446
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
Board reasoned that such a charge
typically is imposed with open-end,
rather than closed-end, transactions.
The Bureau did not receive substantial
comment on this omission, but the
Bureau has elected to continue using
this example in comment 32(b)(6)–1.iii
for consistency. Likewise, the Board did
not propose to include the example of
computing a refund of unearned interest
by a method that is less favorable to the
consumer than the actuarial method, but
the Bureau is nonetheless using this
example in comment 32(b)(6)–1.iv
because similar language is found in
longstanding Regulation Z commentary.
Examples of fees that are not
prepayment penalties. The Board
included in proposed § 226.43(b)(10)(ii)
an example of a fee not considered a
prepayment penalty. For the sake of
clarity, the Bureau is moving this
example into comment 32(b)(6)–2.i,
rather than keep the example in the text
of the regulation. The Bureau also is
adding a second example in comment
32(b)(6)–2.ii.
Comment 32(b)(6)–2.i explains that
fees imposed for preparing and
providing documents when a loan is
paid in full are not prepayment
penalties when such fees are imposed
whether or not the loan is prepaid or the
consumer terminates the plan prior to
the end of its term. Commenters did not
provide substantial feedback on this
example, which the Bureau has
reworded slightly from the Board
proposal to provide conformity and
clarity.
The Board proposed omitting text
from preexisting commentary on
Regulation Z stating that a prepayment
penalty did not include loan guarantee
fees, noting that loan guarantee fees are
not charges imposed for paying all or
part of a loan’s principal before the date
on which the principal is due. The
Bureau did not receive substantial
comment on this omission. While the
Bureau agrees with the Board’s analysis,
the Bureau nonetheless elects to include
this example in comment 43(b)(6)–2.ii
to clarify that loan guarantee fees
continue to fall outside the definition of
a prepayment penalty. Moreover,
including this example of a fee that is
not a prepayment penalty is consistent
with the Bureau’s efforts to streamline
definitions and ease regulatory burden.
Construction-to-permanent financing.
Some industry commenters advocated
that, for construction-to-permanent
loans, the Bureau should exclude from
the definition of prepayment penalty
charges levied by a creditor if a
consumer does not convert the
construction loan into a permanent loan
with the same creditor within a
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
specified time period. The Bureau
believes that the concern expressed by
these commenters that the cost of credit
for these construction-to-permanent
loans would increase if such charges
were treated as prepayment penalties is
misplaced primarily because in many
cases, such charges are not, in fact, a
prepayment penalty. A prepayment
penalty is ‘‘a charge imposed for paying
all or part of a covered transaction’s
principal before the date on which the
principal is due.’’ First, the case where
the creditor charges the consumer a fee
for failing to convert a loan within a
specified period after completing the
repayment of a construction loan as
scheduled is not a prepayment penalty;
the fee is not assessed for an early
payment of principal, but rather for the
consumer’s failure to take an action
upon scheduled repayment of principal.
Second, the case where a consumer does
convert the construction loan to a
permanent loan in a timely manner, but
incurs a fee for converting the loan with
another creditor, is also likely not
prepayment penalty. While such cases
depend highly on contractual wording,
in the example above, the consumer is
charged a fee not for his early payment
of principal, but rather for his use of
another creditor. Third, the case where
the creditor charges the consumer a fee
for converting the construction loan to
a permanent loan earlier than specified
by agreement, even with the same
creditor, likely is a prepayment penalty.
While this example is not the same as
the hypothetical described by most
commenters, who expressed concern if
a consumer does not convert the
construction loan into a permanent loan
with the same creditor within a
specified time period, this is an example
of a prepayment penalty, as the creditor
has imposed a charge for paying all or
part of a covered transaction’s principal
before the date on which the principal
was due. As the above examples
demonstrate, whether a construction-topermanent loan contains a prepayment
penalty is fact-specific, and the Bureau
has decided that adding a comment
specifically addressing such loans
would not be instructive. The Bureau
sees no policy reason to generally
exclude fees specific to construction-topermanent loan from the definition of
prepayment penalty and its statutory
limits. The Bureau was not presented
with any evidence that the risks
inherent in construction-to-permanent
loans could not be priced by creditors
through alternative means, such as the
examples described above, via interest
rate, or charging closing costs. The
Bureau also notes that, because of the
PO 00000
Frm 00040
Fmt 4701
Sfmt 4700
scope of the rule, described in the
section-by-section analysis of
§ 1026.43(a), as well as the prepayment
penalty restrictions, described in the
section-by-section analysis of
§ 1026.43(g), construction-to-permanent
loans cannot be qualified mortgages,
and thus under § 1026.43(g)(1)(ii)(B)
cannot include a prepayment penalty.
Construction-to-permanent loans are
discussed in more detail in the sectionby-section analysis of § 1026.43(a).
Open-end credit. The Bureau is
concurrently adopting comments
32(b)(6)–3 and –4 to clarify its approach
to prepayment penalties with respect to
open-end credit. As the Board’s 2011
ATR Proposal did not address open-end
credit plans, the Bureau is not clarifying
prepayment penalties with respect to
open-end credit plans in this final rule.
Instead, guidance is provided in
comments 32(b)(6)–3 and –4, which the
Bureau is adopting in the concurrent
2013 HOEPA Final Rule.
Section 1026.43 Minimum Standards for
Transactions Secured by a Dwelling
43(a) Scope
Sections 1411, 1412 and 1414 of the
Dodd-Frank Act add new TILA section
129C, which requires creditors to
determine a consumer’s ability to repay
a ‘‘residential mortgage loan’’ and
establishes new rules and prohibitions
on prepayment penalties. Section 1401
of the Dodd-Frank Act adds new TILA
section 103(cc),87 which defines
‘‘residential mortgage loan’’ to mean,
with some exceptions, any consumer
credit transaction secured by a
mortgage, deed of trust, or other
equivalent consensual security interest
on ‘‘a dwelling or on residential real
property that includes a dwelling.’’
TILA section 103(v) defines ‘‘dwelling’’
to mean a residential structure or mobile
home which contains one- to fourfamily housing units, or individual
units of condominiums or cooperatives.
Thus, a ‘‘residential mortgage loan’’ is a
dwelling-secured consumer credit
transaction, regardless of whether the
consumer credit transaction involves a
home purchase, refinancing, home
equity loan, first lien or subordinate
lien, and regardless of whether the
dwelling is a principal residence,
second home, vacation home (other than
a timeshare residence), a one- to fourunit residence, condominium,
cooperative, mobile home, or
manufactured home.
87 Two TILA subsections designated 103(cc) exist
due to a discrepancy in the instructions given by
the Dodd-Frank Act. See Dodd-Frank Act sections
1100A and 1401.
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
However, the Dodd-Frank Act
specifically excludes from the term
‘‘residential mortgage loan’’ an openend credit plan or an extension of credit
secured by an interest in a timeshare
plan, for purposes of the repayment
ability and prepayment penalty
provisions under TILA section 129C,
among other provisions. See TILA
section 103(cc)(5); see also TILA section
129C(i) (providing that timeshare
transactions are not subject to TILA
section 129C). Further, the repayment
ability provisions of TILA section
129C(a) do not apply to reverse
mortgages or temporary or ‘‘bridge’’
loans with a term of 12 months or less,
including a loan to purchase a new
dwelling where the consumer plans to
sell another dwelling within 12 months.
See TILA section 129C(a)(8). The
repayment ability provisions of TILA
section 129C(a) also do not apply to
consumer credit transactions secured by
vacant land. See TILA section 103(cc)(5)
and 129C(a)(1).
TILA Section 103(cc) defines
‘‘residential mortgage loan’’ to mean a
consumer credit transaction secured by
a mortgage or equivalent consensual
security interest ‘‘on a dwelling or on
residential real property that includes a
dwelling.’’ Under TILA and Regulation
Z, the term ‘‘dwelling’’ means a
residential structure with one to four
units, whether or not the structure is
attached to real property, and includes
a condominium or cooperative unit,
mobile home, and trailer, if used as a
residence. See 15 U.S.C. 1602(v),
§ 1026.2(a)(19). To facilitate compliance
by using consistent terminology
throughout Regulation Z, the proposal
used the term ‘‘dwelling,’’ as defined in
§ 1026.2(a)(19), and not the phrase
‘‘residential real property that includes
a dwelling.’’ Proposed comment 43(a)–
2 clarified that, for purposes of
proposed § 226.43, the term ‘‘dwelling’’
would include any real property to
which the residential structure is
attached that also secures the covered
transaction.
Proposed § 226.43(a) generally
defined the scope of the ability-to-repay
provisions to include any consumer
credit transaction that is secured by a
dwelling, other than home equity lines
of credit, mortgage transactions secured
by an interest in a timeshare plan, or for
certain provisions reverse mortgages or
temporary loans with a term of 12
months or less. Proposed comment
43(a)–1 clarified that proposed § 226.43
would not apply to an extension of
credit primarily for a business,
commercial, or agricultural purpose and
cross-referenced the existing guidance
on determining the primary purpose of
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
an extension of credit in commentary on
§ 1026.3.
Numerous commenters requested
additional exemptions from coverage
beyond the statutory exemptions listed
at proposed § 226.43(a)(1) through (3).
The Bureau received requests for
exemptions from the rule for sellerfinanced transactions, loans secured by
non-primary residences, community
development loans, downpayment
assistance loans, loans eligible for
purchase by GSEs, and housing
stabilization refinances. The requested
exemptions related to community
development loans, downpayment
assistance loans, and housing
stabilization refinances are not being
included in this final rule, but are
addressed in the Bureau’s proposed rule
regarding amendments to the ability-torepay requirements, published
elsewhere in today’s Federal Register.
The requested exemptions that are not
being included in the rule and are not
being addressed in today’s concurrent
proposal are discussed immediately
below.
The Bureau received numerous letters
from individuals concerned that the rule
would cover individual home sellers
who finance the buyer’s purchase, either
through a loan or an installment sale.
However, because the definition of
‘‘creditor’’ for mortgages generally
covers only persons who extend credit
secured by a dwelling more than five
times in a calendar year, the
overwhelming majority of individual
seller-financed transactions will not be
covered by the rule. Those creditors
who self-finance six or more
transactions in a calendar year, whether
through loans or installment sales, will
need to comply with the ability-to-repay
provisions of § 1026.43, just as they
must comply with other relevant
provisions of Regulation Z.
An association of State bank
regulators suggested that the scope of
the ability-to-repay requirements be
limited to owner-occupied primary
residences, stating that ability to repay
on vacation homes and investment
properties should be left to an
institution’s business judgment. The
Bureau believes it is not appropriate or
necessary to exercise its exception
authority to change the scope of the
provision in this way for several
reasons. First, as discussed in proposed
comment 43(a)–1, loans that have a
business purpose 88 are not covered by
TILA, and so would not be covered by
the ability-to-repay provisions as
proposed and adopted. Investment
purpose loans are considered to be
88 12
PO 00000
Fmt 4701
business purpose loans. Second,
vacation home loans are consumer
credit transactions that can have marked
effects on a consumer’s finances. If a
consumer is unable to repay a mortgage
on a vacation home, the consumer will
likely suffer severe financial
consequences and the spillover effects
on property values and other consumers
in the affected area can be substantial as
well. Third, the Bureau understands
that default rates on vacation homes are
generally higher than those on primary
residences, and an exemption could
increase this disparity.
For the reasons discussed below, the
general scope provision and the
statutory exemptions in § 1026.43(a)(1)
through (3)(ii) are adopted substantially
as proposed, with minor changes as
discussed in the relevant sections
below, and the addition of
§ 1026.43(a)(3)(iii) to provide an
exemption for the construction phase of
a construction-to-permanent loan.
The general scope provision at
§ 1026.43(a) now includes language
making clear that real property attached
to a dwelling will be considered a part
of the dwelling for purposes of
compliance with § 1026.43. Although as
discussed above similar language was
included in the official commentary in
the proposed rule, the Bureau believes
this important legal requirement should
be part of the regulatory text.
Comment 43(a)–1 now includes a
reference to § 1026.20(a), which
describes different types of changes to
an existing loan that will not be treated
as refinancings, to make clear that
creditors may rely on that section in
determining whether or not § 1026.43
will apply to a particular change to an
existing loan.
43(a)(1)
The Board’s proposal included an
exemption from the scope of section
226.43 for ‘‘[a] home equity line of
credit subject to § 226.5b,’’ 89 which
implemented the exclusion of HELOCs
from coverage in the statutory definition
of ‘‘residential mortgage loan.’’ DoddFrank Act section 1401. The Bureau
received two comments asking that the
HELOC exemption be reconsidered. The
commenters stated that HELOCs had
contributed to the crisis in the mortgage
market and that failure to include them
in the ability-to-repay rule’s coverage
would likely lead to more consumer
abuse and systemic problems.
The Bureau notes that Congress
specifically exempted open-end lines of
credit from the ability-to-repay
89 The Regulation Z section on HELOCs has been
relocated and is now at 12 CFR 1026.40.
CFR 1026.3(a).
Frm 00041
6447
Sfmt 4700
E:\FR\FM\30JAR2.SGM
30JAR2
6448
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
requirements, even though the DoddFrank Act extends other consumer
protections to such loans, including the
requirements for high-cost mortgages
under HOEPA. The Bureau also notes
that home equity lines of credit have
consistently had lower delinquency
rates than other forms of consumer
credit.90 Furthermore, the requirements
contained in the Dodd-Frank Act with
respect to assessing a consumer’s ability
to repay a residential mortgage, and the
regulations the Bureau is adopting
thereunder, were crafted to apply to the
underwriting of closed-end loans and
are not necessarily transferrable to
underwriting for an open-end line of
credit secured by real estate. In light of
these considerations, the Bureau does
not believe there is sufficient
justification to find it necessary or
proper to use its adjustment and
exception authority to expand the
ability-to-repay provisions to HELOCs at
this time. However, as discussed in
detail below, the Bureau is adopting the
Board’s proposal to require creditors to
consider and verify contemporaneous
HELOCs in addition to other types of
simultaneous loans for the purpose of
complying with the ability-to-repay
provisions. See the section-by-section
analysis of § 1026.43(b)(12) below. In
addition, the final rule includes the
Board’s proposed anti-evasion
provision, which forbids the structuring
of credit that does not meet the
definition of open-end credit as an
open-end plan in order to evade the
requirements of this rule. See
§ 1026.43(h). Accordingly,
§ 1026.43(a)(1) is adopted as proposed,
with the embedded citation updated.
However, the Bureau intends to monitor
the HELOC exemption through its
supervision function and may revisit the
issue as part of its broader review of the
ability-to-repay rule under section
1022(d) of the Dodd-Frank Act, which
requires the Bureau to publish an
assessment of a significant rule or order
not later than five years after its
effective date.
43(a)(2)
sroberts on DSK5SPTVN1PROD with
The Bureau did not receive comments
on the statutory timeshare exemption
included in proposed § 226.43(a)(2).
Accordingly, the Bureau is adopting
§ 1026.43(a)(2) as proposed.
90 See Fed. Reserve Bank of N.Y., Quarterly
Report on Household Debt and Credit, at 9 (Nov.
2012), available at http://www.newyorkfed.org/
research/national_economy/householdcredit/
DistrictReport_Q32012.pdf.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
43(a)(3)
43(a)(3)(i)
Proposed § 226.43(a)(3)(i) created an
exemption from the ability-to-repay
requirements in § 226.43(c) through (f)
for reverse mortgages, as provided in the
statute. The Bureau did not receive
comments on this exemption.91
Accordingly, the Bureau is adopting
§ 1026.43(a)(3)(i) as proposed.
43(a)(3)(ii)
Proposed § 226.43(a)(3)(ii) provided
an exemption from the ability-to-repay
requirements in § 226.43(c) through (f)
for ‘‘[a] temporary or ‘bridge’ loan with
a term of 12 months or less, such as a
loan to finance the purchase of a new
dwelling where the consumer plans to
sell a current dwelling within 12
months or a loan to finance the initial
construction of a dwelling.’’
Furthermore, proposed comment 43(a)–
3 provided that, ‘‘[w]here a temporary or
bridge loan is renewable, the loan term
does not include any additional period
of time that could result from a renewal
provision.’’ The Board solicited
comment on whether a decision to treat
renewals in this manner would lead to
evasion of the rule. The statute includes
the one-year exemption implemented in
the proposed rule but does not
specifically address renewals. TILA
section 129C(a)(8), 15 U.S.C.
1639c(a)(8).
Generally, commenters did not
specifically address the proposal’s
request for comment on renewals of
short-term financing; however, one
industry commenter stated that the
statutory one-year limitation would
interfere with construction loans, which
often require more than a year to
complete. The Bureau understands that
construction loans often go beyond a
single year. Although the comment did
not specify that disregarding potential
renewals would alleviate this concern,
the Bureau believes that disregarding
renewals would facilitate compliance
and prevent unwarranted restrictions on
access to construction loans.
Commenters did not respond to the
Board’s query about whether or not
disregarding renewals of transactions
with one-year terms would lead to
evasion of the rule. Upon further
analysis, the Bureau believes that this
concern does not warrant changing the
proposed commentary. However, the
Bureau intends to monitor the issue
through its supervision function and to
91 Comments were received regarding the possible
description of a reverse mortgage qualified
mortgage, and they are discussed below. These
commenters did not discuss or question the general
exemption from the ability-to-repay rule.
PO 00000
Frm 00042
Fmt 4701
Sfmt 4700
revisit the issue as part of its broader
review of the ability-to-repay rule under
section 1022(d) of the Dodd-Frank Act,
which requires the Bureau to conduct
an assessment of significant rules five
years after they are adopted.
One industry trade association
commented on the wording of the
temporary financing exemption,
suggesting that the inclusion of the two
examples, bridge loans and construction
loans, would create uncertainty as to
whether the exemption would apply to
temporary financing of other types.
However, the Bureau believes further
clarification is not required because the
exemption applies to any temporary
loan with a term of 12 months or less,
and the examples are merely
illustrative. The Bureau is aware of and
provides clarifying examples of certain
common loan products that are
temporary or ‘‘bridge’’ loans. The
commenter did not note other common
types of temporary loan products. The
Bureau further believes that the rule
permits other types of temporary
financing as long as the loan satisfies
the requirements of the exemption.
Accordingly, § 1026.43(a)(3)(ii) and
associated commentary are adopted
substantially as proposed.
43(a)(3)(iii)
The Bureau also received comments
requesting clarification on how the
temporary financing exemption would
apply to construction-to-permanent
loans, i.e., construction financing that
will be permanently financed by the
same creditor. Typically, such loans
have a short construction period, during
which payments are made of interest
only, followed by a fully amortizing
permanent period, often an additional
30 years. Because of this hybrid form,
the loans do not appear to qualify for
the temporary financing exemption, nor
would they be qualified mortgages
because of the interest-only period and
the fact that the entire loan term will
often slightly exceed 30 years. However,
such loans may have significant
consumer benefits because they avoid
the inconvenience and expense of a
second closing, and also avoid the risk
that permanent financing will be
unavailable when the construction loan
is due.
The Bureau notes that existing
§ 1026.17(c)(6)(ii) provides that
construction-to-permanent loans may be
disclosed as either a single transaction
or as multiple transactions at the
creditor’s option. Consistent with that
provision, the Bureau is using its
adjustment and exception authority to
allow the construction phase of a
construction-to-permanent loan to be
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
exempt from the ability-to-repay
requirements as a temporary loan;
however, the permanent phase of the
loan is subject to § 1026.43. Because the
permanent phase is subject to § 1026.43,
it may be a qualified mortgage if it
satisfies the appropriate requirements.
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. The
main purpose of section 129C is
articulated in section 129B(a)(2)—‘‘to
assure that consumers are offered and
receive residential mortgage loans on
terms that reasonably reflect their ability
to repay the loans and that are not
unfair, deceptive or abusive.’’ Creditors’
ability to continue originating
construction-to-permanent loans in a
cost effective manner will help to
ensure that consumers are offered and
receive loans on terms that reasonably
reflect their ability to repay. The
construction-to-permanent product
avoids the possibility of a consumer
being unable to repay a construction
loan, because the permanent financing
is already part of the contract. Without
the ability to treat the permanent
financing as a qualified mortgage, and
the construction phase as exempt, it is
not clear how many creditors would
continue to offer such loans, especially
in the short term. In addition,
consumers will benefit from the
potentially lower costs associated with
qualified mortgages. In addition to
effectuating the purpose of ensuring
ability to repay, this exemption will
greatly facilitate compliance for
creditors providing this product.
Proposed comment 43(a)(3)–1
provided that, where a temporary or
‘‘bridge’’ loan is renewable, the loan
term does not include any additional
period of time that could result from a
renewal provision. The Bureau is
adding comment 43(a)(3)–2 to make
clear that if a construction-to-permanent
loan is treated as multiple transactions
in regard to compliance with the abilityto-repay requirements, and the initial
one-year construction phase is
renewable, the loan term of the
construction phase does not include any
additional period of time that could
result from a renewal of that
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
construction phase that is one year or
less in duration. Comment 43(a)(3)–2
also makes clear that if the construction
phase of a construction-to-permanent
loan is treated as exempt, the permanent
financing phase may be a qualified
mortgage if it meets the appropriate
requirements.
Accordingly, § 1026.43(a)(3)(iii) and
comment 43(a)(3)–2 are added to this
final rule.
43(b) Definitions
43(b)(1)
The definition of ‘‘covered
transaction’’ restates the scope of the
rule, discussed above, which
implements the statutory term
‘‘residential mortgage loan’’ defined at
TILA § 103(cc)(5). The Bureau did not
receive any comments specifically on
this provision and is adopting it as
proposed in § 1026.43(b)(1). For clarity,
the Bureau has added comment
43(b)(1)–1 explaining that the term
‘‘covered transaction’’ restates the scope
of the rule as described in § 1026.43(a).
43(b)(2)
TILA section 129C(a)(3) requires that
‘‘[a] creditor shall determine the ability
of the consumer to repay using a
payment schedule that fully amortizes
the loan over the term of the loan.’’ In
implementing this provision, the
proposed rule defined a ‘‘fully
amortizing payment’’ as ‘‘a periodic
payment of principal and interest that
will fully repay the loan amount over
the loan term.’’ The term ‘‘fully
amortizing payment’’ is used in the
general ‘‘payment calculation’’
provision in § 1026.43(c)(5)(i)(B), which
requires the use of ‘‘[m]onthly, fully
amortizing payments that are
substantially equal.’’ The Bureau has
determined that the definition of ‘‘fully
amortizing payment’’ enables accurate
implementation of the payment
calculation process envisioned by the
statute, and no comments focused on or
questioned this definition. Accordingly,
§ 1026.43(b)(2) is adopted as proposed.
43(b)(3)
TILA section 129C(a)(6)(D) provides
that, for purposes of making the
repayment ability determination
required under TILA section 129C(a),
the creditor must calculate the monthly
payment on the mortgage obligation
based on several assumptions, including
that the monthly payment be calculated
using the fully indexed rate at the time
of loan closing, without considering the
introductory rate. See TILA section
129C(a)(6)(D)(iii). TILA section
129C(a)(7) defines the term ‘‘fully
indexed rate’’ as ‘‘the index rate
PO 00000
Frm 00043
Fmt 4701
Sfmt 4700
6449
prevailing on a residential mortgage
loan at the time the loan is made plus
the margin that will apply after the
expiration of any introductory interest
rates.’’
The term ‘‘fully indexed rate’’
appeared in proposed § 226.43(c)(5),
which implemented TILA section
129C(a)(6)(D)(iii) and provided the
payment calculation rules for covered
transactions. The term also appeared in
proposed § 226.43(d)(5), which
provided special rules for creditors that
refinance a consumer from a nonstandard mortgage to a standard
mortgage.
Proposed § 226.43(b)(3) defined the
term ‘‘fully indexed rate’’ as ‘‘the
interest rate calculated using the index
or formula at the time of consummation
and the maximum margin that can
apply at any time during the loan term.’’
This proposed definition was consistent
with the statutory language of TILA
sections 129C(a)(6)(D)(iii) and
129C(a)(7), but revised certain text to
provide clarity. First, for consistency
with current Regulation Z and to
facilitate compliance, the proposal
replaced the phrases ‘‘at the time of the
loan closing’’ in TILA section
129C(a)(6)(D)(iii) and ‘‘at the time the
loan is made’’ in TILA section
129C(a)(7) with the phrase ‘‘at the time
of consummation’’ for purposes of
identifying the fully indexed rate. The
Board interpreted these statutory
phrases to have the same meaning as the
phrase ‘‘at the time of consummation.’’
See current § 1026.2(a)(7), defining the
term ‘‘consummation’’ for purposes of
Regulation Z requirements as ‘‘the time
that a consumer becomes contractually
obligated on a credit transaction.’’
In requiring that the fully indexed rate
be determined using the specified index
at consummation, the Board was
concerned that the possible existence of
loans that use more than one index
could complicate this determination.
Given the increasing relevance of
market indices, the Board solicited
comment on whether loan products
currently exist that base the interest rate
on a specific index at consummation,
but then base subsequent rate
adjustments on a different index, and
whether further guidance addressing
how to calculate the fully indexed rate
for such loan products would be
needed.
The proposed rule interpreted the
statutory reference to the margin that
will apply ‘‘after the expiration of any
introductory interest rates’’ as a
reference to the maximum margin that
can apply ‘‘at any time during the loan
term.’’ The Bureau agrees with this
interpretation, because the statutory use
E:\FR\FM\30JAR2.SGM
30JAR2
6450
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
of the plural ‘‘rates’’ modified by the allinclusive term ‘‘any’’ clearly indicates
not only that something more than the
initial introductory rate is meant, but
that ‘‘any’’ preliminary rate should be
disregarded. In addition, the statutory
term itself, ‘‘fully indexed rate,’’ appears
to require such a reading. Referencing
the entire loan term as the relevant
period of time during which the creditor
must identify the maximum margin that
can occur under the loan makes the
phrase ‘‘after the expiration of any
introductory interest rates’’ unnecessary
and allows for simplicity and
consistency with new TILA section
103(bb), the high cost mortgage
provision.
Because the proposal required that the
creditor use the ‘‘maximum’’ margin
that can apply when determining the
fully indexed rate, the creditor would be
required to take into account the largest
margin that could apply under the terms
of the legal obligation. The approach of
using the maximum margin that can
apply at any time during the loan term
is consistent with the statutory language
contained in TILA section 103(bb), as
amended by section 1431 of the DoddFrank Act, which defines a high-cost
mortgage. This statutory provision
provides that, for purposes of the
definition of a ‘‘high-cost mortgage’’
under HOEPA, for a mortgage with an
interest rate that varies solely in
accordance with an index, the annual
percentage rate must be based on ‘‘the
interest rate determined by adding the
index rate in effect on the date of
consummation of the transaction to the
maximum margin permitted at any time
during the loan agreement.’’ 92
Furthermore, although the Board was
not aware of any current loan products
that possess more than one margin that
may apply over the loan term, the Board
proposed this clarification to address
the possibility that creditors may create
products that permit different margins
to take effect at different points
throughout the loan term. The proposal
solicited comment on this approach.
The proposed definition of ‘‘fully
indexed rate’’ was also generally
consistent with the definition of ‘‘fully
indexed rate’’ as used in the MDIA
Interim Final Rule,93 and with the
Federal banking agencies’ use of the
92 Previous to the passage of the Dodd-Frank Act,
the annual percentage rate used for this
determination was calculated the same way as for
the rest of the Truth in Lending Act, pursuant to
§ 1026.14.
93 See 2010 MDIA Interim Final Rule, 75 FR
58470, 58484 (Sept. 24, 2010) (defines fully indexed
rate as ‘‘the interest rate calculated using the index
value and margin’’); see also 75 FR 81836 (Dec. 29,
2010) (revising the MDIA Interim Final Rule).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
term ‘‘fully indexed rate’’ in the 2006
Nontraditional Mortgage Guidance and
2007 Subprime Mortgage Statement.
Proposed comment 43(b)(3)–1 noted
that in some adjustable-rate
transactions, creditors may set an initial
interest rate that is not determined by
the index or formula used to make later
interest rate adjustments. This proposed
comment explained that this initial rate
charged to consumers will sometimes be
lower than the rate would be if it were
calculated using the index or formula at
consummation (i.e., a ‘‘discounted
rate’’); in some cases, this initial rate
may be higher (i.e., a ‘‘premium rate’’).
The proposed comment clarified that
when determining the fully indexed rate
where the initial interest rate is not
determined using the index or formula
for subsequent interest rate adjustments,
the creditor must use the interest rate
that would have applied had the
creditor used such index or formula
plus margin at the time of
consummation. The proposed comment
further clarified that this means, in
determining the fully indexed rate, the
creditor must not take into account any
discounted or premium rate. (In
addition, to facilitate compliance, this
comment directed creditors to
commentary that addresses payment
calculations based on the greater of the
fully indexed rate or ‘‘premium rate’’ for
purposes of the repayment ability
determination under proposed
§ 226.43(c)). See final rule
§ 1026.43(c)(5)(i)(A) and comment
43(c)(5)(i)–2.)
Proposed comment 43(b)(3)–1 differed
from guidance on disclosure
requirements in current comment
17(c)(1)–10.i, which provides that in
cases where the initial interest rate is
not calculated using the index or
formula for later rate adjustments, the
creditor should disclose a composite
annual percentage rate that reflects both
the initial rate and the fully indexed
rate. The Board believed the different
approach taken in proposed comment
43(b)(3)–1 was required by the statutory
language and was appropriate in the
present case where the purpose of the
statute is to determine whether the
consumer can repay the loan according
to its terms, including any potential
increases in required payments. TILA
section 129B(a)(2), 15 U.S.C 1639b(a)(2).
Proposed comment 43(b)(3)–2 further
clarified that if the contract provides for
a delay in the implementation of
changes in an index value or formula,
the creditor need not use the index or
formula in effect at consummation, and
provides an illustrative example. This
proposed comment was consistent with
current guidance in Regulation Z
PO 00000
Frm 00044
Fmt 4701
Sfmt 4700
regarding the use of the index value at
the time of consummation where the
contract provides for a delay. See
comments 17(c)(1)–10.i and
18(s)(2)(iii)(C)–1, which address the
fully indexed rate for purposes of
disclosure requirements.
Proposed comment 43(b)(3)–3
explained that the creditor must
determine the fully indexed rate
without taking into account any
periodic interest rate adjustment caps
that may limit how quickly the fully
indexed rate may be reached at any time
during the loan term under the terms of
the legal obligation. As the proposal
noted, the guidance contained in
proposed comment 43(b)(3)–3 differed
from guidance contained in current
comment 17(c)(1)–10.iii, which states
that, when disclosing the annual
percentage rate, creditors should give
effect to periodic interest rate
adjustment caps.
Nonetheless, the Board believed the
approach in proposed comment
43(b)(3)–3 was consistent with, and
required by, the statutory language that
states that the fully indexed rate must be
determined without considering any
introductory rate and by using the
margin that will apply after expiration
of any introductory interest rates. See
TILA section 129C(a)(6)(D)(iii) and (7).
In addition, the Board noted that the
proposed definition of fully indexed
rate, and its use in the proposed
payment calculation rules, was designed
to assess whether the consumer has the
ability to repay the loan according to its
terms. TILA section 129B(a)(2), 15 U.S.C
1639b(a)(2). This purpose differs from
the principal purpose of disclosure
requirements, which is to help ensure
that consumers avoid the uninformed
use of credit. TILA section 102(a), 15
U.S.C. 1601(a). Furthermore, the
guidance contained in proposed
comment 43(b)(3)–3 was consistent with
the Federal banking agencies’ use of the
term fully indexed rate in the 2006
Nontraditional Mortgage Guidance and
2007 Subprime Mortgage Statement.
Proposed comment 43(b)(3)–4
clarified that when determining the
fully indexed rate, a creditor may
choose, in its sole discretion, to take
into account the lifetime maximum
interest rate provided under the terms of
the legal obligation. This comment
explained, however, that where the
creditor chooses to use the lifetime
maximum interest rate, and the loan
agreement provides a range for the
maximum interest rate, the creditor
must use the highest rate in that range
as the maximum interest rate. In
allowing creditors to use the lifetime
maximum interest rate provided under
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
the terms of the obligation, the Board
was apparently interested in simplifying
compliance and benefiting consumers
by encouraging reasonable lifetime
interest rate caps. In doing so, the Board
was apparently reading its proposed
definition of fully indexed rate to allow
the maximum margin that can apply at
any time during the loan term to refer
to the maximum margin as determined
at consummation. In other words, when
the index value is determined at
consummation, the maximum margin
that can apply at any time during the
loan term will be the difference between
the lifetime interest rate cap and that
index value. Consequently, adding the
index value at consummation to that
maximum margin, as required by the
fully indexed rate definition, will yield
the lifetime interest rate cap as the fully
indexed rate.
Commenters generally did not focus
specifically on the definition of ‘‘fully
indexed rate’’ and associated
commentary proposed by the Board, or
provide examples of loans with more
than one index or more than one
margin. An organization representing
state bank regulators supported the use
of the maximum margin that can apply
at any time during the loan term,
suggesting that it would prevent
evasion. (Some commenter groups did
urge the Bureau to use its adjustment
authority to require creditors to use a
rate higher than the fully indexed rate
in assessing a consumer’s ability to
repay; these comments are discussed
below in the section-by-section analysis
of § 1026.43(c)(5)(i)). The Bureau is
adopting the rule and commentary
largely as proposed, with some
modifications for clarity. Specifically,
the Bureau decided to include language
in the definition that will make clear
that the index used in determining the
fully indexed rate is the index that will
apply after the loan is recast, so that any
index that might be used earlier in
determining an initial or intermediate
rate would not be used. This new
language is included for clarification
only, and does not change the intended
meaning of the proposed definition.
In the proposed rule, the Board noted
that the statutory construct of the
payment calculation rules, and the
requirement to calculate payments
based on the fully indexed rate, apply
to all loans that are subject to the
ability-to-repay provisions, including
loans that do not base the interest rate
on an index and therefore, do not have
a fully indexed rate. Specifically, the
statute states that ‘‘[f]or purposes of
making any determination under this
subsection, a creditor shall calculate the
monthly payment amount for principal
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
and interest on any residential mortgage
loan by assuming’’ several factors,
including the fully indexed rate, as
defined in the statute (emphasis added).
See TILA section 129C(a)(6)(D). The
statutory definition of ‘‘residential
mortgage loan’’ includes loans with
variable-rate features that are not based
on an index or formula, such as steprate mortgages. See TILA section
103(cc); see also proposed § 226.43(a),
which addressed the proposal’s scope,
and proposed § 226.43(b)(1), which
defined ‘‘covered transaction.’’
However, because step-rate mortgages
do not have a fully indexed rate, it was
unclear what interest rate the creditor
should assume when calculating
payment amounts for the purpose of
determining the consumer’s ability to
repay the covered transaction.
As discussed above, the proposal
interpreted the statutory requirement to
use the ‘‘margin that can apply at any
time after the expiration of any
introductory interest rates’’ to mean that
the creditor must use the ‘‘maximum
margin that can apply at any time
during the loan term’’ when
determining the fully indexed rate.
Accordingly, consistent with this
approach, the proposal clarified in
proposed comment 43(b)(3)–5 that
where there is no fully indexed rate
because the interest rate offered in the
loan is not based on, and does not vary
with, an index or formula, the creditor
must use the maximum interest rate that
may apply at any time during the loan
term. Proposed comment 43(b)(3)–5
provided illustrative examples of how to
determine the maximum interest rate for
a step-rate and a fixed-rate mortgage.
The Board believed this approach was
appropriate because the purpose of
TILA section 129C is to require creditors
to assess whether the consumer can
repay the loan according to its terms,
including any potential increases in
required payments. TILA section
129B(a)(2), 15 U.S.C 1639b(a)(2).
Requiring creditors to use the maximum
interest rate would help to ensure that
consumers could repay their loans.
However, the Board was also concerned
that by requiring creditors to use the
maximum interest rate in a step-rate
mortgage, the monthly payments used to
determine the consumer’s repayment
ability might be overstated and
potentially restrict credit availability.
Therefore, the Board solicited comment
on this approach, and whether authority
under TILA sections 105(a) and 129B(e)
should be used to provide an exception
for step-rate mortgages, possibly
requiring creditors to use the maximum
interest rate that occurs in only the first
PO 00000
Frm 00045
Fmt 4701
Sfmt 4700
6451
5 or 10 years, or some other appropriate
time horizon.
The Bureau received few comments
on the use of the maximum interest rate
that may apply at any time during the
loan term for step-rate mortgages. A
consumer group and a regulatory reform
group stated that this method was better
and more protective of consumers than
using a seven- or ten-year horizon. An
organization representing state bank
regulators suggested that the Bureau use
a five-year horizon, provided that the
loan has limits on later rate increases.
An industry trade association suggested
that the maximum rate only be applied
to the balance remaining when that
maximum rate is reached.
The Bureau believes that the
proposal’s method of using the
maximum interest rate that may apply at
any time during the loan term for steprate mortgages is appropriate. This
approach most closely approximates the
statutorily required fully indexed rate
because it employs the highest rate
ascertainable at consummation, as does
the fully indexed rate, and it applies
that rate to the entire original principal
of the loan, as the calculation in
§ 1026.43(c)(5)(i) does with the fully
indexed rate. In addition, this method
most effectively ensures the consumer’s
ability to repay the loan.
For the reasons stated above,
§ 1026.43(b)(3) is adopted substantially
as proposed, with the clarification
discussed above specifying that the
index used in determining the fully
indexed rate is the index that will apply
after the loan is recast. Issues regarding
the use of the fully indexed rate in the
payment calculations required by
§ 1026.43(c)(5) are discussed in the
section-by-section analysis of that
section below.
43(b)(4)
The Dodd-Frank Act added TILA
section 129C(a)(6)(D)(ii)(II), which
provides that a creditor making a
balloon-payment loan with an APR at or
above certain thresholds must
determine ability to repay ‘‘using the
contract’s repayment schedule.’’ The
thresholds required by the statute are
1.5 or more percentage points above the
average prime offer rate (APOR) for a
comparable transaction for a first lien,
and 3.5 or more percentage points above
APOR for a subordinate lien. These
thresholds are the same as those used in
the Board’s 2008 HOEPA Final Rule 94
to designate a new category of ‘‘higherpriced mortgage loans’’ (HPMLs), which
was amended by the Board’s 2011
Jumbo Loans Escrows Final Rule to
94 73
E:\FR\FM\30JAR2.SGM
FR 44522 (July 30, 2008).
30JAR2
sroberts on DSK5SPTVN1PROD with
6452
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
include a separate threshold for jumbo
loans for purposes of certain escrows
requirements.95 Implementing these
thresholds for use with the payment
underwriting determination for balloonpayment mortgages, the proposed rule
defined a ‘‘higher-priced covered
transaction’’ as one in which the annual
percentage rate (APR) ‘‘exceeds the
average prime offer rate (APOR) for a
comparable transaction as of the date
the interest rate is set by 1.5 or more
percentage points for a first-lien covered
transaction, or by 3.5 or more
percentage points for a subordinate-lien
covered transaction.’’ As explained
further below and provided for in the
statute, the designation of certain
covered transactions as higher-priced
affects the ability-to-repay
determination for balloon-payment
mortgages, and requires that those
higher-priced transactions be analyzed
using the loan contract’s full repayment
schedule, including the balloon
payment. § 1026.43(c)(5)(ii)(A)(2).
Proposed comment 43(b)(4)–1
provided guidance on the term ‘‘average
prime offer rate.’’ Proposed comment
43(b)(4)–2 stated that the table of
average prime offer rates published by
the Board would indicate how to
identify the comparable transaction for
a higher-priced covered transaction.
Proposed comment 43(b)(4)–3 clarified
that 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. This proposed comment
also explained that sometimes a creditor
sets the interest rate initially and then
resets it at a different level before
consummation, and clarified that in
these cases, the creditor should use the
last date the interest rate is set before
consummation.
The Board explained in its proposed
rule that it believed the ability-to-repay
requirements for higher-priced balloonpayment loans was meant to apply to
the subprime market, but that use of the
annual percentage rate could lead to
prime loans being exposed to this test.
For this reason, the Board was
concerned that the statutory formula for
a higher-priced covered transaction
might be over-inclusive. Accordingly,
the Board solicited comment on
whether the ‘‘transaction coverage rate’’
(TCR) should be used for this
determination, instead of the annual
percentage rate. 76 FR 27412. The TCR
had previously been proposed in
conjunction with a more inclusive
version of the APR, in order to avoid
having the more inclusive, hence
95 See
76 FR 11319 (Mar. 2, 2011).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
higher, APRs trigger certain
requirements unnecessarily. The TCR
includes fewer charges, and the Board’s
2011 Escrows Proposal proposed to use
it in the threshold test for determining
application of those requirements. 76 FR
11598, 11626–11627 (Mar. 2, 2011).
The only comment substantively
discussing the possible substitution of
the TCR for the APR was strongly
opposed to the idea, stating that it
would create unnecessary compliance
difficulty and costs. The Bureau has
determined that possible transition to a
TCR standard will implicate several
rules and is not appropriate at the
present time. However, the issue will be
considered further as part of the
Bureau’s TILA/RESPA rulemaking. See
77 FR 51116, 51126 (Aug. 23, 2012).
The Board also solicited comment on
whether or not to provide a higher
threshold for jumbo balloon-payment
mortgages or for balloon-payment
mortgages secured by a residence that is
not the consumer’s principal dwelling,
e.g., a vacation home. 76 FR 27412. The
Board requested this information due to
its belief that higher interest rates
charged for these loans might render
them unavailable without the
adjustment. The margin above APOR
suggested for first-lien jumbo balloonpayment mortgages was 2.5 percentage
points.
Two industry commenters supported
the higher threshold for jumbo loans,
arguing that the current thresholds
would interfere with credit accessibility.
One of these commenters also stated
that the higher threshold should be
available for all balloon-payment
mortgages. No commenters discussed
the non-principal-dwelling threshold.
Many other commenters objected
strongly to the statutory requirement,
implemented in the proposed rule, that
the balloon payment be considered in
applying the ability-to-repay
requirements to higher-priced covered
transaction balloon-payment mortgages.
These industry commenters felt that the
percentage point thresholds were too
low, and that many loans currently
being made would become unavailable.
They did not, however, submit
sufficient data to help the Bureau assess
these claims. Other commenters,
including several consumer protection
advocacy organizations, argued that the
higher-priced rule would be helpful in
ensuring consumers’ ability to repay
their loans.
The Bureau has evaluated the
proposed definition of ‘‘higher-priced
covered transaction’’ not only in
relation to its use in the payment
determination for balloon-payment
mortgages, but also in the light of its
PO 00000
Frm 00046
Fmt 4701
Sfmt 4700
application in other provisions of the
final rule. For example, as discussed
below, the final rule varies the strength
of the presumption of compliance for
qualified mortgages. A qualified
mortgage designated as a higher-priced
covered transaction will be presumed to
comply with the ability-to repayprovision at § 1026.43(c)(1), but will not
qualify for the safe harbor provision. See
§ 1026.43(e)(1)(ii) and (i).
Specifically, the Bureau has
considered whether to adopt a different
threshold to define high price mortgage
loans for jumbo loans than for other
loans. The Bureau notes that the Board
expressly addressed this issue in its
2008 HOEPA Final Rule and concluded
not to do so. The Board explained that
although prime jumbo loans have
always had somewhat higher rates than
prime conforming loans, the spread has
been quite volatile.96 The Board
concluded that it was sounder to err on
the side of being over-inclusive than to
set a higher threshold for jumbo loans
and potentially fail to include subprime
jumbo loans.97 The Bureau is persuaded
by the Board’s reasoning.
The Bureau recognizes that in the
Dodd-Frank Act Congress, in requiring
creditors to establish escrows accounts
for certain transactions and in requiring
appraisals for certain transactions based
upon the interest rate of the
transactions, did establish a separate
threshold for jumbo loans. The Bureau
is implementing that separate threshold
in its 2013 Escrows Final Rule which is
being issued contemporaneously with
this final rule. However, the Bureau also
notes that in the ability-to-repay
provision of the Dodd-Frank Act,
Congress mandated underwriting rules
for balloon-payment mortgages which
vary based upon the pricing of the loan,
and in doing so Congress followed the
thresholds adopted by the Board in its
2008 HOEPA Final Rule and did not
add a separate threshold for jumbo
loans. The fact that the Act uses the
Board’s criteria in the ability to repay
context lends further support to the
Bureau’s decision to use those criteria as
well in defining higher-priced loans
under the final rule.
Accordingly, the Bureau is not
providing for a higher threshold for
jumbo or non-principal dwelling
balloon-payment mortgages at this time.
In regard to the possibility of a higher
threshold for non-principal dwellings
such as vacation homes, the Bureau
understands that such products have
historically been considered to be at
higher risk of default than loans on
96 See
73 FR 44537 (July 30, 2008)
97 Id.
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
principal dwellings. Therefore, any
difference in rates is likely driven by the
repayment risk associated with the
product, and a rule meant to ensure a
consumer’s ability to repay the loan
should not provide an exemption under
these circumstances. And further, the
Bureau did not receive and is not aware
of any data supporting such an
exemption.
The Bureau does not believe that
these decisions regarding jumbo and
non-principal-dwelling balloonpayment mortgages are likely to create
any credit accessibility problems. In this
final rule at § 1026.43(f), the Bureau is
adopting a much wider area in which
institutions that provide credit in rural
or underserved areas may originate
qualified mortgages that are balloonpayment loans than did the proposed
rule. Because these are the areas in
which balloon-payment loans are
considered necessary to preserve access
to credit, and higher-priced balloonpayment mortgages in these areas can
meet the criteria for a qualified mortgage
and thus will not have to include the
balloon payment in the ability-to-repay
evaluation, access to necessary balloonpayment mortgages will not be reduced.
Accordingly, § 1026.43(b)(4) is
adopted as proposed. The associated
commentary is amended with revisions
to update information and citations.
43(b)(5)
The proposed rule defined ‘‘loan
amount’’ as ‘‘the principal amount the
consumer will borrow as reflected in the
promissory note or loan contract.’’ This
definition implemented the statutory
language requiring that the monthly
payment be calculated assuming that
‘‘the loan proceeds are fully disbursed
on the date of consummation of the
loan.’’ Dodd-Frank Act section
1411(a)(2), TILA section
129C(a)(6)(D)(i). The term ‘‘loan
amount’’ was used in the proposed
definition of ‘‘fully amortizing
payment’’ in § 226.43(b)(2), which was
then used in the general ‘‘payment
calculation’’ at § 226.43(c)(5)(i)(B). The
payment calculation required the use of
payments that pay off the loan amount
over the actual term of the loan.
The statute further requires that
creditors assume that the loan amount is
‘‘fully disbursed on the date of
consummation of the loan.’’ See TILA
Section 129C(a)(6)(D)(i). The Board
recognized that some loans do not
disburse the entire loan amount to the
consumer at consummation, but may,
for example, provide for multiple
disbursements up to an amount stated
in the loan agreement. See current
§ 1026.17(c)(6), discussing multiple-
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
advance loans and comment 17(c)(6)–2
and –3. In these cases, the loan amount,
as reflected in the promissory note or
loan contract, does not accurately reflect
the amount disbursed at consummation.
Thus, to reflect the statutory
requirement that the creditor assume the
loan amount is fully disbursed at
consummation, the Board clarified that
creditors must use the entire loan
amount as reflected in the loan contract
or promissory note, even where the loan
amount is not fully disbursed at
consummation. Proposed comment
43(b)(5)–1 provided an illustrative
example and stated that generally,
creditors should rely on § 1026.17(c)(6)
and associated commentary regarding
treatment of multiple-advance and
construction loans that would be
covered by the ability-to-repay
requirements (i.e., loans with a term
greater than 12 months). See
§ 1026.43(a)(3) discussing scope of
coverage and term length.
The Board specifically solicited
comment on whether further guidance
was needed regarding determination of
the loan amount for loans with multiple
disbursements. The Bureau did not
receive comments on the definition of
‘‘loan amount’’ or its application to
loans with multiple disbursements. The
Bureau believes that the loan amount for
multiple disbursement loans that are
covered transactions must be
determined assuming that ‘‘the loan
proceeds are fully disbursed on the date
of consummation of the loan’’ 98 as
required by the statute and the rule, and
explained in comment 43(b)(5)–1.
Accordingly, the Bureau is adopting
§ 1026.43(b)(5) and associated
commentary as proposed.
43(b)(6)
The interchangeable phrases ‘‘loan
term’’ and ‘‘term of the loan’’ appear in
the ability-to-repay and qualified
mortgage provisions of TILA, with no
definition. See TILA section 129C(c)(3),
129C(a)(6)(D)(ii), 129C(b)(2)(A)(iv) and
(v); 15 U.S.C. 1639c(c)(3),
1639c(a)(6)(D)(ii), 1639c(b)(2)(A)(iv) and
(v). The proposed rule defined ‘‘loan
term’’ as ‘‘the period of time to repay the
obligation in full.’’ Proposed comment
43(b)(6)–1 clarified that the loan term is
the period of time it takes to repay the
loan amount in full, and provided an
example. The term is used in
§ 1026.43(b)(2), the ‘‘fully amortizing
payment’’ definition, which is then used
in § 1026.43(c)(5)(i), the payment
calculation general rule. It is also used
in the qualified mortgage payment
98 Dodd-Frank Act section 1411(a)(2), TILA
section 129C(a)(6)(D)(i).
PO 00000
Frm 00047
Fmt 4701
Sfmt 4700
6453
calculation at § 1026.43(e)(2)(iv). The
Bureau did not receive any comments
on this definition, and considers it to be
an accurate and appropriate
implementation of the statutory
language. Accordingly, proposed
§ 1026.43(b)(6) is adopted as proposed.
43(b)(7)
The definition of ‘‘maximum loan
amount’’ and the calculation for which
it is used implement the requirements
regarding negative amortization loans in
new TILA section 129C(a)(6)(C) and (D).
The statute requires that a creditor ‘‘take
into consideration any balance increase
that may accrue from any negative
amortization provision.’’
The ‘‘maximum loan amount’’ is
defined in the proposed rule as
including the loan balance and any
amount that will be added to the
balance as a result of negative
amortization assuming the consumer
makes only minimum payments and the
maximum interest rate is reached at the
earliest possible time. The ‘‘maximum
loan amount’’ is used to determine a
consumer’s ability to repay for negative
amortization loans under
§ 1026.43(c)(5)(ii)(C) by taking into
account any loan balance increase that
may occur as a result of negative
amortization. The term ‘‘maximum loan
amount’’ is also used for negative
amortization loans in the ‘‘refinancing
of non-standard mortgages’’ provision,
at § 1026.43(d)(5)(i)(C)(3). The proposed
rule included commentary on how to
calculate the maximum loan amount,
with examples. See comment 43(b)(7)–
1 through –3.
The Bureau did not receive any
comments on this definition and
considers it to be an accurate and
appropriate implementation of the
statute. Accordingly, § 1026.43(b)(7) and
associated commentary are adopted as
proposed.
43(b)(8)
TILA section 129C(a)(1) and (3), as
added by section 1411 of the DoddFrank Act, requires creditors to consider
and verify mortgage-related obligations
as part of the ability-to-repay
determination ‘‘according to [the loan’s]
terms, and all applicable taxes,
insurance (including mortgage
guarantee insurance), and assessments.’’
TILA section 129C(a)(2) provides that
consumers must have ‘‘a reasonable
ability to repay the combined payments
of all loans on the same dwelling
according to the terms of those loans
and all applicable taxes, insurance
(including mortgage guarantee
insurance), and assessments.’’ Although
the Dodd-Frank Act did not establish or
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6454
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
define a single, collective term, the
foregoing requirements recite ongoing
obligations that are substantially similar
to the definition of ‘‘mortgage-related
obligation’’ used elsewhere in
Regulation Z. Section 1026.34(a)(4)(i),
which was added by the 2008 HOEPA
Final Rule, defines mortgage-related
obligations as expected property taxes,
premiums for mortgage-related
insurance required by the creditor as set
forth in the relevant escrow provisions
of Regulation Z, and similar expenses.
Comment 34(a)(4)(i)–1 clarifies that, for
purposes of § 1026.34(a)(4)(i), similar
expenses include homeowners
association dues and condominium or
cooperative fees. Section
1026.35(b)(3)(i), which addresses
escrows, states that ‘‘premiums for
mortgage-related insurance required by
the creditor, [include] 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.’’
Under the Board’s proposed
§ 226.43(b)(8), ‘‘mortgage-related
obligations’’ was defined to mean
property taxes; mortgage related
insurance premiums required by the
creditor as set forth in proposed
§ 226.45(b)(1); homeowners association,
condominium, and cooperative fees;
ground rent or leasehold payments; and
special assessments. The Board’s
proposed definition was substantially
similar to the definition under
§ 1026.34(a)(4)(i), with three
clarifications. First, the proposed
definition of mortgage-related
obligations would have included a
reference to ground rent or leasehold
payments, which are payments made to
the real property owner or leaseholder
for use of the real property. Second, the
proposed definition would have
included a reference to ‘‘special
assessments.’’ Proposed comment
43(b)(8)–1 would have clarified that
special assessments include, for
example, assessments that are imposed
on the consumer at or before
consummation, such as a one-time
homeowners association fee that will
not be paid by the consumer in full at
or before consummation. Third,
mortgage-related obligations would have
referenced proposed § 226.45(b)(1),
where the Board proposed to recodify
the existing escrow requirement for
higher-priced mortgage loans, to include
mortgage-related insurance premiums
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,
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
or insurance protecting the creditor
against the consumer’s default or other
credit loss. The Board solicited
comment on how to address any issues
that may arise in connection with
homeowners association transfer fees
and costs associated with loans for
energy efficient improvements.
Proposed comment 43(b)(8)–1 would
have clarified further that mortgagerelated obligations include mortgagerelated insurance premiums only if
required by the creditor. This comment
would have explained that the creditor
need not include premiums for
mortgage-related insurance that the
creditor does not require, such as
earthquake insurance or credit
insurance, or fees for optional debt
suspension and debt cancellation
agreements. To facilitate compliance,
this comment would have referred to
commentary associated with proposed
§ 226.43(c)(2)(v), which sets forth the
requirement to take into account any
mortgage-related obligations for
purposes of the repayment ability
determination required under proposed
§ 226.43(c).
Industry commenters and consumer
advocates generally supported the
Board’s proposed definition of
mortgage-related obligations. One
industry commenter opposed including
community transfer fees, which are
deed-based fees imposed upon the
transfer of the property. This commenter
was concerned that subjecting these fees
to Federal law might affect existing
contracts, deeds, and covenants related
to these fees, which are subject to State
and local regulation, as well as common
law regarding the transfer of real
property. The commenter also asked
that special assessments not fall under
the definition of mortgage-related
obligations. The commenter
recommended that, if special
assessments are included, creditors be
required to consider only current
special assessments, not future special
assessments. The commenter noted that,
while common assessments should be
included in the definition of mortgagerelated obligations, the Bureau should
provide guidance to creditors on the
substance of questionnaires seeking
information from third parties about
mortgage-related obligations.
Certain consumer advocates suggested
that voluntary insurance premiums be
included in the definition of mortgagerelated obligations. One consumer
advocate explained that premiums such
as these are technically voluntary, but
many consumers believe them to be
required, or have difficulty cancelling
them if they choose to cancel them.
Community advocates and several
PO 00000
Frm 00048
Fmt 4701
Sfmt 4700
industry commenters also
recommended that homeowners
association dues, and similar charges, be
included in the definition of mortgagerelated obligations. They argued that
such a requirement would further
transparency in the mortgage loan
origination process and would help
ensure that consumers receive only
credit they can reasonably expect to
repay.
For the reasons discussed below, the
Bureau concludes that property taxes,
certain insurance premiums required by
the creditor, obligations to community
governance associations, such as
cooperative, condominium, and
homeowners associations, ground rent,
and lease payments should be included
in the definition of mortgage-related
obligations. These obligations are
incurred in connection with the
mortgage loan transaction but are in
addition to the obligation to repay
principal and interest. Thus, the cost of
these obligations should be considered
with the obligation to repay principal
and interest for purposes of determining
a consumer’s ability to repay. Further,
the Bureau believes that the word
‘assessments’ in TILA section 129C is
most appropriately interpreted to refer
to all obligations imposed on consumers
in connection with ownership of the
dwelling or real property, such as
ground rent, lease payments, and, as
discussed in detail below, obligations to
community governance associations,
whether denominated as association
dues, special assessments, or otherwise.
While the provision adopted by the
Bureau is substantially similar to the
provision proposed, the Bureau was
persuaded by the comment letters that
additional clarity and guidance is
required. The Bureau is especially
sensitive to the fact that many of the
loans that will be subject to the abilityto-repay rules may be made by small
institutions, which are often unable to
devote substantial resources to analysis
of regulatory compliance.
To address the concerns and feedback
raised in the comment letters, the
Bureau has revised § 1026.43(b)(8) and
related commentary in two ways. First,
the language of § 1026.43(b)(8) is being
modified to add additional clarity. As
adopted, § 1026.43(b)(8) refers to
premiums and similar charges identified
in § 1026.4(b)(5), (7), (8), or (10), if
required by the creditor, instead of the
proposed language, which referred to
‘‘mortgage-related insurance.’’ Second,
the commentary is being significantly
expanded to provide additional
clarification and guidance.
As adopted, § 1026.43(b)(8) defines
‘‘mortgage-related obligations’’ to mean
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
property taxes; premiums and similar
charges identified in § 1026.4(b)(5), (7),
(8), or (10) that are required by the
creditor; fees and special assessments
imposed by a condominium,
cooperative, or homeowners association;
ground rent; and leasehold payments.
As proposed, comment 43(b)(8)–1
discussed all components of the
proposed definition. To provide further
clarity, the final rule splits the content
of proposed comment 43(b)(8)–1 into
four separate comments, each of which
provides additional guidance. As
adopted by the Bureau, comment
43(b)(8)–1 contains general guidance
and a cross-reference to
§ 1026.43(c)(2)(v), which contains the
requirement to take into account any
mortgage-related obligations for
purposes of determining a consumer’s
ability to repay.
The multitude of requests for
additional guidance and clarification
suggests that additional clarification of
the meaning of ‘‘property tax’’ is
needed. Comment 43(b)(8)–2 further
clarifies that § 1026.43(b)(8) includes
obligations that are functionally
equivalent to property taxes, even if
such obligations follow a different
naming convention. For example,
governments may establish independent
districts with the authority to impose
recurring levies on properties within the
district to fund a special purpose, such
as a local development bond district,
water district, or other public purpose.
These recurring levies may have a
variety of names, such as taxes,
assessments, or surcharges. Comment
43(b)(8)–2 clarifies that obligations such
as these are property taxes based on the
character of the obligation, as opposed
to the name of the obligation, and
therefore are mortgage-related
obligations.
Most comments supported the
inclusion of insurance premiums in the
ability-to-repay determination.
However, the Bureau believes that some
modifications to the proposed
‘‘mortgage-related insurance premium’’
language are appropriate. The Bureau is
persuaded that additional clarification
and guidance is important, and the
Bureau is especially sensitive to
concerns related to regulatory
complexity. The Bureau has determined
that the proposed language should be
clarified by revising the text to refer to
the current definition of finance charge
under § 1026.4. The components of the
finance charge are long-standing parts of
Regulation Z. Explicitly referring to
existing language should facilitate
compliance. Therefore, § 1026.43(b)(8)
defines mortgage-related obligations to
include all premiums or other charges
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
related to protection against a
consumer’s default, credit loss,
collateral loss, or similar loss as
identified in § 1026.4(b)(5), (7), (8), or
(10) except, as explained above, those
premiums or charges that that are not
required by the creditor. Comment
43(b)(8)–3 also contains illustrative
examples of this definition. For
example, if Federal law requires flood
insurance to be obtained in connection
with the mortgage loan, the flood
insurance premium is a mortgagerelated obligation for purposes of
§ 1026.43(b)(8).
Several commenters stated that
insurance premiums and similar charges
should be included in the determination
even if the creditor does not require
them in connection with the loan
transaction. The Bureau has carefully
considered these arguments, but has
determined that insurance premiums
and similar charges should not be
considered mortgage-related obligations
if such premiums and charges are not
required by the creditor and instead
have been voluntarily purchased by the
consumer. The Bureau acknowledges
that obligations such as these are
usually paid from a consumer’s monthly
income and, in a sense, affect a
consumer’s ability to repay. But the
consumer is free to cancel recurring
obligations such as these at any time,
provided they are truly voluntary. Thus,
they are not ‘‘obligations’’ in the sense
required by section 129C(a)(3) of TILA.
The Bureau shares the concern raised by
several commenters that unscrupulous
creditors may mislead consumers into
believing that these charges are not
optional or cannot be cancelled.
However, the Bureau does not believe
that altering the ability-to-repay
calculation for all is the appropriate
method for combatting the harmful
actions of a few. The Bureau believes
that the better course of action is to
exclude such premiums and charges
from the definition of mortgage-related
obligations only if they are truly
voluntary, and is confident that
violations of this requirement will be
apparent in specific cases from the facts.
Also, in the scenarios described by
commenters where consumers are
misled into believing that such charges
are required, the premium or charge
would not be voluntary for purposes of
the definition of finance charge under
§ 1026.4(d), and would therefore be a
mortgage-related obligation for the
purposes of § 1026.43(b)(8). Therefore,
comment 43(b)(8)–3 clarifies that
insurance premiums and similar charges
identified in § 1026.4(b)(5), (7), (8), or
(10) that are not required by the creditor
PO 00000
Frm 00049
Fmt 4701
Sfmt 4700
6455
and that the consumer purchases
voluntarily are not mortgage-related
obligations for purposes of
§ 1026.43(b)(8). For example, if a
creditor does not require earthquake
insurance to be obtained in connection
with the mortgage loan, but the
consumer voluntarily chooses to
purchase such insurance, the
earthquake insurance premium is not a
mortgage-related obligation for purposes
of § 1026.43(b)(8). Or, if a creditor
requires a minimum amount of coverage
for homeowners’ insurance and the
consumer voluntarily chooses to
purchase a more comprehensive amount
of coverage, the portion of the premium
allocated to the minimum coverage is a
mortgage-related obligation for the
purposes of § 1026.43(b)(8), while the
portion of the premium allocated to the
more comprehensive coverage
voluntarily purchased by the consumer
is not a mortgage-related obligation for
the purposes of § 1026.43(b)(8).
However, if the consumer purchases
non-required insurance or similar
coverage at consummation without
having requested the specific nonrequired insurance or similar coverage
and without having agreed to the
premium or charge for the specific nonrequired insurance or similar coverage
prior to consummation, the premium or
charge is not voluntary for purposes of
§ 1026.43(b)(8) and is a mortgage-related
obligation.
Several commenters supported the
inclusion of mortgage insurance in the
definition of mortgage-related
obligations. The Bureau also has
received several informal requests for
guidance regarding the meaning of the
term ‘‘mortgage insurance’’ in the
context of certain disclosures required
by Regulation Z. The Bureau has
decided to clarify this issue with respect
to the requirements of § 1026.43. Thus,
comment 43(b)(8)–4 clarifies that
§ 1026.43(b)(8) includes all premiums or
similar charges for coverage protecting
the creditor against the consumer’s
default or other credit loss in the
determination of mortgage-related
obligations, whether denominated as
mortgage insurance, guarantee
insurance, or otherwise, as determined
according to applicable State or Federal
law. For example, monthly ‘‘private
mortgage insurance’’ payments paid to a
non-governmental entity, annual
‘‘guarantee fee’’ payments required by a
Federal housing program, and a
quarterly ‘‘mortgage insurance’’
payment paid to a State agency
administering a housing program are all
mortgage-related obligations for
purposes of § 1026.43(b)(8). Comment
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6456
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
43(b)(8)–4 also clarifies that
§ 1026.43(b)(8) includes these charges in
the definition of mortgage-related
obligations if the creditor requires the
consumer to pay them, even if the
consumer is not legally obligated to pay
the charges under the terms of the
insurance program. Comment 43(b)(8)–4
also contains several other illustrative
examples.
Several comment letters stressed the
importance of including homeowners
association dues and similar obligations
in the determination of ability to repay.
These letters noted that, during the
subprime crisis, the failure to account
for these obligations led to many
consumers qualifying for mortgage loans
that they could not actually afford. The
Bureau agrees with these assessments.
Recurring financial obligations payable
to community governance associations,
such as homeowners association dues,
should be taken into consideration in
determining whether a consumer has
the ability to repay the obligation. While
several comment letters identified
practical problems with including
obligations such as these in the
calculation, these issues stemmed from
difficulties that may arise in calculating,
estimating, or verifying these
obligations, rather than whether the
obligations should be included in the
ability-to-repay calculation. Based on
this feedback, § 1026.43(b)(8) includes
obligations to a homeowners
association, condominium association,
or condominium association in the
determination of mortgage-related
obligations. The Bureau has addressed
the concerns related to difficulties in
calculating, estimating, or verifying
such obligations in the commentary to
§ 1026.43(c)(2)(v) and (c)(3).
One comment letter focused
extensively on community transfer fees,
which are deed-based fees imposed
upon the transfer of the property. The
Bureau recognizes that this topic is
complex and is often the subject of
special requirements imposed at the
State and local level. However, the
Bureau does not believe that the
requirements of § 1026.43 implicate
these complex issues. The narrow
question is whether such obligations
should be considered mortgage-related
obligations for purposes of determining
the consumer’s ability to repay. The
Bureau agrees with the argument,
advanced by several commenters, that
the entirety of the consumer’s ongoing
obligations should be included in the
determination. A responsible
determination of the consumer’s ability
to repay requires an accounting of such
obligations, whether the purpose of the
obligation is to satisfy the payment of a
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
community transfer fee or traditional
homeowners association dues. As with
other obligations owed to
condominium, cooperative, or
homeowners associations discussed
above, the Bureau believes that the
practical problems with these
obligations relate to when such
obligations should be included in the
determination of the consumer’s ability
to repay, rather than whether the
obligations should be considered
mortgage-related obligations. Therefore,
the Bureau has addressed the concerns
related to these obligations in the
commentary to § 1026.43(c)(2)(v) and
(c)(3).
In response to the request for feedback
in the 2011 ATR Proposal, several
commenters addressed the proposed
treatment of special assessments. Unlike
community transfer fees, which are
generally identified in the deed or
master community plan, creditors may
encounter difficulty determining
whether special assessments exist.
However, as with similar charges
discussed above, these concerns relate
to determining the consumer’s monthly
payment for mortgage-related
obligations, rather than whether these
charges should be considered mortgagerelated obligations. Special assessments
may be significant and may affect the
consumer’s ability to repay a mortgage
loan. Thus, the Bureau has concluded
that special assessments should be
included in the definition of mortgagerelated obligations under § 1026.43(b)(8)
and has addressed the concerns raised
by commenters related to calculating,
estimating, or verifying these obligations
in the commentary to § 1026.43(c)(2)(v)
and (c)(3).
New comment 43(b)(8)–5 explains
that § 1026.43(b)(8) includes in the
evaluation of mortgage-related
obligations premiums and similar
charges identified in § 1026.4(b)(5), (7),
(8), or (10) that are required by the
creditor. These premiums and similar
charges are mortgage-related obligations
regardless of whether the premium or
similar charge is excluded from the
finance charge pursuant to § 1026.4(d).
For example, a premium for insurance
against loss or damage to the property
written in connection with the credit
transaction is a premium identified in
§ 1026.4(b)(8). If this premium is
required by the creditor, the premium is
a mortgage-related obligation pursuant
to § 1026.43(b)(8), regardless of whether
the premium is excluded from the
finance charge pursuant to
§ 1026.4(d)(2). Commenters did not
request this guidance specifically, but
the Bureau believes that this comment
is needed to provide additional clarity.
PO 00000
Frm 00050
Fmt 4701
Sfmt 4700
43(b)(9)
TILA section 129C(b)(2)(C) generally
defines ‘‘points and fees’’ for a qualified
mortgage to have the same meaning as
in TILA section 103(bb)(4), which
defines points and fees for the purpose
of determining whether a transaction
exceeds the HOEPA points and fees
threshold. Proposed § 226.43(b)(9)
would have provided that ‘‘points and
fees’’ has the same meaning as in
§ 226.32(b)(1). The Bureau adopts this
provision as renumbered
§ 1026.43(b)(9).
43(b)(10)
Sections 1414, 1431, and 1432 of the
Dodd-Frank Act amended TILA to
restrict, and in many cases, prohibit a
creditor from imposing prepayment
penalties in dwelling-secured credit
transactions. TILA does not, however,
define the term ‘‘prepayment penalty.’’
In an effort to address comprehensively
prepayment penalties in a fashion that
eases compliance burden, as discussed
above, the Bureau is defining
prepayment penalty in § 1026.43(b)(10)
by cross-referencing § 1026.32(b)(6). For
a full discussion of the Bureau’s
approach to defining prepayment
penalties, see § 1026.32(b)(6), its
commentary, and the section-by-section
analysis of those provisions above.
43(b)(11)
TILA in several instances uses the
term ‘‘reset’’ to refer to the time at
which the terms of a mortgage loan are
adjusted, usually resulting in higher
required payments. For example, TILA
section 129C(a)(6)(E)(ii) states that a
creditor that refinances a loan may,
under certain conditions, ‘‘consider if
the extension of new credit would
prevent a likely default should the
original mortgage reset and give such
concerns a higher priority as an
acceptable underwriting practice.’’ 15
U.S.C. 1639c(a)(6)(E)(ii). The legislative
history further indicates that, for
adjustable-rate mortgages with low,
fixed introductory rates, Congress
understood the term ‘‘reset’’ to mean the
time at which low introductory rates
convert to indexed rates, resulting in
‘‘significantly higher monthly payments
for homeowners.’’ 99
Outreach conducted prior to issuance
of the proposed rule indicated that the
term ‘‘recast’’ is typically used in
reference to the time at which fully
amortizing payments are required for
interest-only and negative amortization
loans and that the term ‘‘reset’’ is more
99 See Comm. on Fin. Servs., Report on H.R. 1728,
Mortgage Reform and Anti-Predatory Lending Act,
H. Rept. 94, 111th Cong., at 52 (2009).
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
frequently used to indicate the time at
which adjustable-rate mortgages with an
introductory fixed rate convert to a
variable rate. For simplicity and clarity,
however, the Board proposed to use the
term ‘‘recast’’ to cover the conversion to
generally less favorable terms and
higher payments not only for interestonly loans and negative amortization
loans, but also for adjustable-rate
mortgages.
Proposed § 226.43(b)(11) defined the
term ‘‘recast,’’ which was used in two
provisions of proposed § 226.43: (1)
Proposed § 226.43(c)(5)(ii) regarding
certain required payment calculations
that creditors must consider in
determining a consumer’s ability to
repay a covered transaction; and (2)
proposed § 226.43(d) regarding payment
calculations required for refinancings
that are exempt from the ability-to-repay
requirements in § 226.43(c).
Specifically, proposed § 226.43(b)(11)
defined the term ‘‘recast’’ as follows: (1)
For an adjustable-rate mortgage, as
defined in § 1026.18(s)(7)(i),100 the
expiration of the period during which
payments based on the introductory
interest rate are permitted under the
terms of the legal obligation; (2) for an
interest-only loan, as defined in
§ 1026.18(s)(7)(iv),101 the expiration of
the period during which interest-only
payments are permitted under the terms
of the legal obligation; and (3) for a
negative amortization loan, as defined
in § 1026.18(s)(7)(v),102 the expiration of
the period during which negatively
amortizing payments are permitted
under the terms of the legal obligation.
Proposed comment 43(b)(11)–1
explained that the date on which the
‘‘recast’’ occurs is the due date of the
last monthly payment based on the
introductory fixed rate, the last interestonly payment, or the last negatively
amortizing payment, as applicable.
Proposed comment 43(b)(11)–1 also
provided an illustration showing how to
determine the date of the recast.
100 ‘‘The term ‘‘adjustable-rate mortgage’’ means a
transaction secured by real property or a dwelling
for which the annual percentage rate may increase
after consummation.’’ 12 CFR 1026.18(s)(7)(i).
101 ‘‘The term ‘‘interest-only’’ means that, under
the terms of the legal obligation, one or more of the
periodic payments may be applied solely to accrued
interest and not to loan principal; an ‘‘interest-only
loan’’ is a loan that permits interest-only
payments.’’ 12 CFR 1026.18(s)(7)(iv).
102 ‘‘[T]he term ‘‘negative amortization’’ means
payment of periodic payments that will result in an
increase in the principal balance under the terms
of the legal obligation; the term ‘‘negative
amortization loan’’ means a loan, other than a
reverse mortgage subject to section 1026.33, that
provides for a minimum periodic payment that
covers only a portion of the accrued interest,
resulting in negative amortization.’’ 12 CFR
1026.18(s)(7)(v).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
Commenters did not focus specifically
on the definition of ‘‘recast,’’ except that
an association of State bank regulators
agreed with the benefit of using a single
term for the shift to higher payments for
adjustable-rate, interest-only, and
negative amortization loans.
The Bureau considers the proposed
provision to be an accurate and
appropriate implementation of the
statute. Accordingly, the Bureau is
adopting proposed § 226.43(b)(11) as
proposed, in renumbered
§ 1026.43(b)(11).
43(b)(12)
New TILA section 129C(a)(2) provides
that ‘‘if a creditor knows, or has reason
to know, that 1 or more residential
mortgage loans secured by the same
dwelling will be made to the same
consumer,’’ that creditor must make the
ability-to-repay determination for ‘‘the
combined payments of all loans on the
same dwelling according to the terms of
those loans and all applicable taxes,
insurance (including mortgage
guarantee insurance), and assessments.’’
This section, entitled ‘‘multiple loans,’’
follows the basic ability-to-repay
requirements for a single loan, in new
TILA section 129C(a)(1).
The proposed rule implemented the
main requirement of the ‘‘multiple
loans’’ provision by mandating in
proposed § 226.43(c)(2)(iv) that a
creditor, in making its ability-to-repay
determination on the primary loan, take
into account the payments on any
‘‘simultaneous loan’’ about which the
creditor knows or has reason to know.
‘‘Simultaneous loan’’ was defined in
proposed § 226.43(b)(12) as ‘‘another
covered transaction or home equity line
of credit subject to § 226.5b 103 that will
be secured by the same dwelling and
made to the same consumer at or before
consummation of the covered
transaction.’’ Thus, although the statute
referred only to closed-end ‘‘residential
mortgage loans,’’ the Board proposed to
expand the requirement to include
consideration of simultaneous HELOCs.
The proposed definition did not include
pre-existing mortgage obligations, which
would be considered as ‘‘current debt
obligations’’ under § 1026.43(c)(2)(vi).
The Board chose to include HELOCs
in the definition of ‘‘simultaneous loan’’
because it believed that new TILA
section 129C(a)(2) was meant to help
ensure that creditors account for the
increased risk of consumer delinquency
or default on the covered transaction
where more than one loan secured by
the same dwelling is originated
concurrently. The Board believed that
103 The Board’s § 226.5b was recodified in the
Bureau’s Regulation Z as § 1026.40.
PO 00000
Frm 00051
Fmt 4701
Sfmt 4700
6457
this increased risk would be present
whether the other mortgage obligation
was a closed-end credit obligation or a
HELOC. For these reasons, and several
others explained in detail below, the
Board proposed to use its exception and
adjustment authority under TILA
section 105(a) to include HELOCs
within the scope of new TILA section
129C(a)(2). 76 FR 27417–27418. Because
one of the main reasons for including
HELOCs was the likelihood of a
consumer drawing on the credit line to
provide the down payment in a
purchase transaction, the Board
solicited comment on whether this
exception should be limited to purchase
transactions.
TILA section 105(a), as amended by
section 1100A of the Dodd-Frank Act,
authorized the Board, and now the
Bureau, to prescribe regulations to carry
out the purposes of TILA and
Regulation Z, to prevent circumvention
or evasion, or to facilitate compliance.
15 U.S.C. 1604(a). The inclusion of
HELOCs was further supported by the
Board’s authority under TILA section
129B(e) to condition terms, acts or
practices relating to residential mortgage
loans that the Board found necessary or
proper to effectuate the purposes of
TILA. 15 U.S.C. 1639b(e). One purpose
of the statute is set forth in TILA section
129B(a)(2), which states that ‘‘[i]t is the
purpose[] of * * * [S]ection 129C to
assure that consumers are offered and
receive residential mortgage loans on
terms that reasonably reflect their ability
to repay the loans.’’ 15 U.S.C. 1639b.
For the reasons stated below, the Board
believed that requiring creditors to
consider simultaneous loans that are
HELOCs for purposes of TILA section
129C(a)(2) would help to ensure that
consumers are offered, and receive,
loans on terms that reasonably reflect
their ability to repay.
First, the Board proposed in
§ 226.43(c)(2)(vi) that the creditor must
consider current debt obligations in
determining a consumer’s ability to
repay a covered transaction. Consistent
with current § 1026.34(a)(4), proposed
§ 226.43(c)(2)(vi) would not have
distinguished between pre-existing
closed-end and open-end mortgage
obligations. The Board believed
consistency required that it take the
same approach when determining how
to consider mortgage obligations that
come into existence concurrently with a
first-lien loan as would be taken for preexisting mortgage obligations, whether
the first-lien is a purchase or nonpurchase transaction (i.e., refinancing).
Including HELOCs in the proposed
definition of ‘‘simultaneous loan’’ for
purposes of TILA section 129C(a)(2) was
E:\FR\FM\30JAR2.SGM
30JAR2
6458
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
also considered generally consistent
with current comment 34(a)(4)–3, and
the 2006 Nontraditional Mortgage
Guidance regarding simultaneous
second-lien loans.104
Second, data indicate that where a
subordinate loan is originated
concurrently with a first-lien loan to
provide some or all of the down
payment (i.e., a ‘‘piggyback loan’’), the
default rate on the first-lien loan
increases significantly, and in direct
correlation to increasing combined loanto-value ratios.105 The data does not
distinguish between ‘‘piggyback loans’’
that are closed-end or open-end credit
transactions, or between purchase and
non-purchase transactions. However,
empirical evidence demonstrates that
approximately 60 percent of consumers
who open a HELOC concurrently with
a first-lien loan borrow against the line
of credit at the time of origination,106
suggesting that in many cases the
HELOC may be used to provide some,
or all, of the down payment on the firstlien loan.
The Board recognized that consumers
have varied reasons for originating a
HELOC concurrently with the first-lien
loan, for example, to reduce overall
closing costs or for the convenience of
having access to an available credit line
in the future. However, the Board
believed concerns relating to HELOCs
originated concurrently for savings or
convenience, and not to provide
payment towards the first-lien home
purchase loan, might be mitigated by
the Board’s proposal to require that a
creditor consider the periodic payment
on the simultaneous loan based on the
actual amount drawn from the credit
line by the consumer. See proposed
§ 226.43(c)(6)(ii), discussing payment
calculation requirements for
simultaneous loans that are HELOCs.
Still, the Board recognized that in the
case of a non-purchase transaction (e.g.,
a refinancing) a simultaneous loan that
is a HELOC might be unlikely to be
originated and drawn upon to provide
payment towards the first-lien loan,
104 See 2006 Nontraditional Mortgage Guidance,
71 FR 58609, 58614 (Oct. 4, 2006).
105 Kristopher Gerardi et al., Making Sense of the
Subprime Crisis, Brookings Papers on Econ.
Activity (Fall 2008), at 40 tbl.3.
106 The Board conducted independent analysis
using data obtained from the FRBNY Consumer
Credit Panel to determine the proportion of
piggyback HELOCs taken out in the same month as
the first-lien loan that have a draw at the time of
origination. Data used was extracted from credit
record data in years 2003 through 2010. See
Donghoon Lee and Wilbert van der Klaauw, An
Introduction to the FRBNY Consumer Credit Panel
(Fed. Reserve Bd. Of N.Y.C., Staff Rept. No. 479,
2010), available at http://data.newyorkfed.org/
research/staff_reports/sr479.pdf (providing further
description of the database).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
except perhaps towards closing costs.
Thus, the Board solicited comment on
whether it should narrow the
requirement to consider simultaneous
loans that are HELOCs to apply only to
purchase transactions.
Third, in developing this proposal
Board staff conducted outreach with a
variety of participants that consistently
expressed the view that second-lien
loans significantly impact a consumer’s
performance on the first-lien loan, and
that many second-lien loans are
HELOCs. One industry participant
explained that the vast majority of
‘‘piggyback loans’’ it originated were
HELOCs that were fully drawn at the
time of origination and used to assist in
the first-lien purchase transaction.
Another outreach participant stated that
HELOCs make up approximately 90
percent of its simultaneous loan bookof-business. Industry outreach
participants generally indicated that it is
a currently accepted underwriting
practice to include HELOCs in the
repayment ability assessment on the
first-lien loan, and generally confirmed
that the majority of simultaneous liens
considered during the underwriting
process are HELOCs. For these reasons,
the Board proposed to use its authority
under TILA sections 105(a) and 129B(e)
to broaden the scope of TILA section
129C(a)(2), and accordingly proposed to
define the term ‘‘simultaneous loan’’ to
include HELOCs.
Proposed comment 43(b)(12)–1
clarified that the definition of
‘‘simultaneous loan’’ includes any loan
that meets the definition, whether made
by the same creditor or a third-party
creditor, and provides an illustrative
example of this principle.
Proposed comment 43(b)(12)–2
further clarified the meaning of the term
‘‘same consumer,’’ and explained that
for purposes of the definition of
‘‘simultaneous loan,’’ the term ‘‘same
consumer’’ would include any
consumer, as that term is defined in
§ 1026.2(a)(11), that enters into a loan
that is a covered transaction and also
enters into another loan (e.g., a secondlien covered transaction or HELOC)
secured by the same dwelling. This
comment further explained that where
two or more consumers enter into a
legal obligation that is a covered
transaction, but only one of them enters
into another loan secured by the same
dwelling, the ‘‘same consumer’’
includes the person that has entered
into both legal obligations. The Board
believed this comment would reflect
statutory intent to include any loan that
could impact the consumer’s ability to
repay the covered transaction according
to its terms (i.e., to require the creditor
PO 00000
Frm 00052
Fmt 4701
Sfmt 4700
to consider the combined payment
obligations of the consumer(s) obligated
to repay the covered transaction). See
TILA § 129C(a)(2).
Both industry and consumer advocate
commenters overwhelmingly supported
inclusion of HELOCs as simultaneous
loans, with only one industry
commenter objecting. The objecting
commenter stated that there was no
persuasive policy argument for
deviating from the statute, but did not
provide any reason to believe that
concurrent HELOCs are less relevant to
an assessment of a consumer’s ability to
repay than concurrent closed-end
second liens. As explained in the
proposed rule, most industry
participants are already considering
HELOCs in the underwriting of seniorlien loans on the same property. 76 FR
27418.
For the reasons set forth by the Board
and discussed above, the Bureau has
determined that inclusion of HELOCs in
the definition of simultaneous loans is
an appropriate use of its TILA authority
to make adjustments and additional
requirements.
TILA section 105(a), as amended by
section 1100A of the Dodd-Frank Act,
authorizes the Bureau to prescribe
regulations that may contain such
additional requirements, classifications,
differentiations, or other provisions, and
may provide for such adjustments and
exceptions for all or any class of
transactions, as in the judgment of the
Bureau are necessary or proper to
effectuate the purposes of TILA, to
prevent circumvention or evasion of
TILA, or to facilitate compliance with
TILA. 15 U.S.C. 1604(a). The Bureau
finds that the inclusion of HELOCs is
necessary and proper to effectuate the
purposes of TILA. The inclusion of
HELOCs is further supported by the
Bureau’s authority under TILA section
129B(e) to condition terms, acts or
practices relating to residential mortgage
loans that the Bureau finds necessary or
proper to effectuate the purposes of
TILA. 15 U.S.C. 1639b(e). TILA section
129B(a)(2) states that ‘‘[i]t is the
purpose[] of * * * [S]ection 129C to
assure that consumers are offered and
receive residential mortgage loans on
terms that reasonably reflect their ability
to repay the loans.’’ 15 U.S.C. 1639b.
Inclusion of HELOCs as simultaneous
loans will help to carry out this purpose
of TILA by helping to ensure that
consumers receive loans on affordable
terms, as further explained above.
Accordingly, the Bureau is adopting
§ 1026.43(b)(12) and associated
commentary as proposed, with
clarifying edits to ensure that
simultaneous loans scheduled after
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
consummation will be considered in
determining ability to repay.
43(b)(13)
TILA section 129C(a)(1) requires that
a creditor determine a consumer’s
repayment ability using ‘‘verified and
documented information,’’ and TILA
section 129C(a)(4) specifically requires
the creditor to verify a consumer’s
income or assets relied on to determine
repayment ability using a consumer’s
tax return or ‘‘third-party documents’’
that provide reasonably reliable
evidence of the consumer’s income or
assets, as discussed in detail below in
the section-by-section analysis of
§ 1026.43(c)(3) and (4). The Board
proposed to define the term ‘‘third-party
record’’ to mean: (1) A document or
other record prepared or reviewed by a
person other than the consumer, the
creditor, any mortgage broker, as
defined in § 1026.36(a)(2), or any agent
of the creditor or mortgage broker; (2) a
copy of a tax return filed with the
Internal Revenue Service or a state
taxing authority; (3) a record the
creditor maintains for an account of the
consumer held by the creditor; or (4) if
the consumer is an employee of the
creditor or the mortgage broker, a
document or other record regarding the
consumer’s employment status or
income. The Board explained that, in
general, a creditor should refer to
reasonably reliable records prepared by
or reviewed by a third party to verify
repayment ability under TILA section
129C(a), a principle consistent with
verification requirements previously
outlined under the Board’s 2008 HOEPA
Final Rule. See § 1026.34(a)(4)(ii).
Commenters generally supported the
Board’s broad definition of a third-party
record as a reasonable definition that
allows a creditor to use a wide variety
of documents and sources, while
ensuring that the consumer does not
remain the sole source of information.
Some consumer advocates, however,
cautioned the Bureau against relying
upon tax records to provide a basis for
verifying income history, pursuant to
amended TILA section 129C(a)(4)(A), to
avoid penalizing consumers who may
not have access to accurate tax records.
The Bureau does not address comments
with respect to consumers who may not
maintain accurate tax records because
the definition provided in
1026.43(b)(13) of third-party record
merely ensures that a creditor may use
any of a wide variety of documents,
including tax records, as a method of
income verification without mandating
their use. Rather than rely solely on tax
records, for example, a creditor might
look to other third-party records for
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
verification purposes, including the
creditor’s records regarding a
consumer’s savings account held by the
creditor, which qualifies as a third-party
record under § 1026.43(b)(13)(iii), or
employment records for a consumer
employed by the creditor, which
qualifies as a third-party record under
§ 1026.43(b)(13)(iv).
The Board proposed comment
43(b)(13)–1 to clarify that third-party
records would include records
transmitted or viewed electronically, for
example, a credit report prepared by a
consumer reporting agency and
transmitted or viewed electronically.
The Bureau did not receive significant
feedback on the proposed comment and
is adopting the comment largely as
proposed. The Bureau is clarifying that
an electronic third-party record should
be transmitted electronically, such as
via email or if the creditor is able to
click on a secure hyperlink to access a
consumer’s credit report. The Bureau is
making this slight clarification to
convey that mere viewing of a record,
without the ability to capture or
maintain the record, would likely be
problematic with respect to record
retention under § 1026.25(a) and (c).
While it seems unlikely that an
electronic record could be viewed
without being transmitted as well, the
Bureau is making this alteration to avoid
any confusion.
The Bureau is adopting the remaining
comments to 43(b)(13) largely as
proposed by the Board. These comments
did not elicit significant public
feedback. Comment 43(b)(13)–1 assures
creditors that a third-party record may
be transmitted electronically. Comment
43(b)(13)–2 explains that a third-party
record includes a form a creditor
provides to a third party for providing
information, even if the creditor
completes parts of the form unrelated to
the information sought. Thus, for
example, a creditor may send a
Webform, or mail a paper form, created
by the creditor, to a consumer’s current
employer, on which the employer could
check a box that indicates that the
consumer works for the employer. The
creditor may even elect to fill in the
creditor’s name, or other portions of the
form, so long as those portions are
unrelated to the information that the
creditor seeks to verify, such as income
or employment status.
Comment 43(b)(13)(i)–1 clarifies that
a third-party record includes a
document or other record prepared by
the consumer, the creditor, the mortgage
broker, or an agent of the creditor or
mortgage broker, if the record is
reviewed by a third party. For example,
a profit-and-loss statement prepared by
PO 00000
Frm 00053
Fmt 4701
Sfmt 4700
6459
a self-employed consumer and reviewed
by a third-party accountant is a thirdparty record under § 1026.43(b)(13)(i).
The Bureau is including comment
43(b)(13)(i)–1 to explain how some firstparty records, e.g., documents originally
prepared by the consumer, may become
third-party records by virtue of an
appropriate, disinterested third-party’s
review or audit. It is the third party
review, the Bureau believes, that
provides reasonably reliable evidence of
the underlying information in the
document, just as if the document were
originally prepared by the third party.
Moreover, this clarification allows the
creditor to consult a wider variety of
documents in its determination of a
consumer’s ability to repay. Creditors
should be cautioned not to assume,
however, that merely because a
document is a third-party record as
defined by § 1026.43(b)(13), and the
creditor uses the information provided
by that document to make a
determination as to whether the
consumer will have a reasonable ability
to repay the loan according to its terms,
that the creditor has satisfied the
requirements of this rule. The creditor
also must make a reasonable and good
faith determination at or before
consummation that the consumer will
have a reasonable ability, at the time of
consummation, to repay the loan
according to its terms. For a full
discussion of the Bureau’s approach to
this determination, see § 1026.43(c)(1),
its commentary, and the section-bysection analysis of those provisions
below.
Finally, comment 43(b)(13)(iii)–1
clarifies that a third-party record
includes a record that the creditor
maintains for the consumer’s account.
Such examples might include records of
a checking account, savings account,
and retirement account that the
consumer holds, or has held, with the
creditor. Comment 43(b)(13)(iii)–1 also
provides the example of a creditor’s
records for an account related to a
consumer’s outstanding obligations to
the creditor, such as the creditor’s
records for a first-lien mortgage to a
consumer who applies for a
subordinate-lien home equity loan. This
comment helps assure industry that
such records are a legitimate basis for
determining a consumer’s ability to
repay, and/or for verifying income and
assets because it is unlikely to be in a
creditor’s interest to falsify such records
for purposes of satisfying
§ 1026.43(b)(13), as falsifying records
would violate the good faith
requirement of § 1026.43(c)(1). In
addition, this comment should help
E:\FR\FM\30JAR2.SGM
30JAR2
6460
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
assure creditors that the rule does not
inhibit a creditor’s ability to ‘‘cross-sell’’
products to consumers, by avoiding
placing the creditor at a disadvantage
with respect to verifying a consumer’s
information by virtue of the creditor’s
existing relationship with the consumer.
43(c) Repayment Ability
As enacted by the Dodd-Frank Act,
TILA section 129C(a)(1) provides that
no creditor may make a residential
mortgage loan unless the creditor makes
a reasonable and good faith
determination, based on verified and
documented information, that, at the
time the loan is consummated, the
consumer has a reasonable ability to
repay the loan according to its terms
and all applicable taxes, insurance, and
assessments. TILA section 129C(a)(2)
extends the same requirement to a
combination of multiple residential
mortgage loans secured by the same
dwelling where the creditor knows or
has reason to know that such loans will
be made to the same consumer. TILA
sections 129C(a)(3) and (a)(4) specify
factors that must be considered in
determining a consumer’s ability to
repay and verification requirements for
income and assets considered as part of
that determination. Proposed § 226.43(c)
would have implemented TILA section
129C(a)(1) through (4) in a manner
substantially similar to the statute.
Proposed § 226.43(c)(1) would have
implemented the requirement in TILA
section 129C(a)(1) that creditors make a
reasonable and good faith determination
that a consumer will have a reasonable
ability to repay the loan according to its
terms. Proposed § 226.43(c)(2) would
have required creditors to consider the
following factors in making a
determination of repayment ability, as
required by TILA section 129C(a)(1)
through (3): the consumer’s current or
reasonably expected income or assets
(other than the property that secures the
loan); the consumer’s employment
status, if the creditor relies on
employment income; the consumer’s
monthly payment on the loan; the
consumer’s monthly payment on any
simultaneous loan that the creditor
knows or has reason to know will be
made; the consumer’s monthly payment
for mortgage-related obligations; the
consumer’s current debt obligations;
and the consumer’s monthly debt-toincome ratio or residual income.
Proposed § 226.43(c)(3) would have
required that creditors verify the
information they use in making an
ability-to-repay determination using
third-party records, as required by TILA
section 129C(a)(1). Proposed
§ 226.43(c)(4) would have specified
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
methods for verifying income and assets
as required by TILA section 129C(a)(1)
and (4). Proposed § 226.43(c)(5) and (6)
would have specified how to calculate
the monthly mortgage and simultaneous
loan payments required to be
considered under proposed
§ 226.43(c)(2). Proposed § 226.43(c)(7)
would have specified how to calculate
the monthly debt-to-income ratio or
monthly residual income required to be
considered under proposed
§ 226.43(c)(2). As discussed in detail
below, the Bureau is adopting
§ 1026.43(c) substantially as proposed,
with various modifications and
clarifications.
Proposed comment 43(c)–1 would
have indicated that creditors may look
to widely accepted governmental or
nongovernmental underwriting
standards, such as the handbook on
Mortgagee Credit Analysis for Mortgage
Insurance on One- to Four-Unit
Mortgage Loans issued by FHA, to
evaluate a consumer’s ability to repay.
The proposed comment would have
stated that creditors may look to such
standards in determining, for example,
whether to classify particular inflows,
obligations, or property as ‘‘income,’’
‘‘debt,’’ or ‘‘assets’’; factors to consider
in evaluating the income of a selfemployed or seasonally employed
consumer; or factors to consider in
evaluating the credit history of a
consumer who has obtained few or no
extensions of traditional ‘‘credit’’ as
defined in § 1026.2(a)(14). In the
Supplemental Information regarding
proposed comment 43(c)–1, the Board
stated that the proposed rule and
commentary were intended to provide
flexibility in underwriting standards so
that creditors could adapt their
underwriting processes to a consumer’s
particular circumstances. The Board
stated its belief that such flexibility is
necessary because the rule covers such
a wide variety of consumers and
mortgage products.
Commenters generally supported
giving creditors significant flexibility to
develop and apply their own
underwriting standards. However,
commenters had concerns regarding the
specific approach taken in proposed
comment 43(c)–1. Commenters raised a
number of questions about what kinds
of underwriting standards might be
considered widely accepted, such as
whether a creditor’s proprietary
underwriting standards could ever be
considered widely accepted.
Commenters also were uncertain
whether the proposed comment
required creditors to adopt particular
governmental underwriting standards in
their entirety and requested clarification
PO 00000
Frm 00054
Fmt 4701
Sfmt 4700
on that point. At least one commenter,
an industry trade group, noted that
FHA-insured loans constitute a small
percentage of the mortgage market and
questioned whether FHA underwriting
standards therefore are widely accepted.
This commenter also questioned
whether it is appropriate to encourage
creditors to apply FHA underwriting
standards other than with respect to
FHA-insured loans, as FHA programs
are generally designed to make mortgage
credit available in circumstances where
private creditors are unwilling to extend
such credit without a government
guarantee. Finally, consumer group
commenters asserted that underwriting
standards do not accurately determine
ability to repay merely because they are
widely accepted and pointed to the
widespread proliferation of lax
underwriting standards that predated
the recent financial crisis.
The Bureau believes that the Board
did not intend to require creditors to use
any particular governmental
underwriting standards, including FHA
standards, in their entirety or to prohibit
creditors from using proprietary
underwriting standards. The Bureau
also does not believe that the Board
intended to endorse lax underwriting
standards on the basis that those
standards may be prevalent in the
mortgage market at a particular time.
The Bureau therefore is adopting two
new comments to provide greater clarity
regarding the role of underwriting
standards in ability-to-repay
determinations and is not adopting
proposed comment 43(c)–1.
The Bureau is concerned based on the
comments received that referring
creditors to widely accepted
governmental and nongovernmental
underwriting standards could lead to
undesirable misinterpretations and
confusion. The discussion of widely
accepted standards in proposed
comment 43(c)–1 could be
misinterpreted to suggest that the
underwriting standards of any single
market participant with a large market
share are widely accepted and therefore
to be emulated. The widely accepted
standard also could be misinterpreted to
indicate that proprietary underwriting
standards cannot yield reasonable, good
faith determinations of a consumer’s
ability to repay because they are unique
to a particular creditor and not
employed throughout the mortgage
market. Similarly, the widely accepted
standard could be misinterpreted to
encourage a creditor that lends in a
limited geographic area or in a
particular market niche to apply widely
accepted underwriting standards that
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
are inappropriate for that particular
creditor’s loans.
The Bureau also is concerned that
evaluating underwriting standards
based on whether they are widely
accepted could have other undesirable
consequences. In a market bubble or
economic crisis, many creditors may
change their underwriting standards in
similar ways, leading to widely
accepted underwriting standards
becoming unreasonably lax or
unreasonably tight. A regulatory
directive to use underwriting standards
that are widely accepted could
exacerbate those effects. Also, referring
creditors to widely accepted
governmental and nongovernmental
underwriting standards could hinder
creditors’ ability to respond to changing
market and economic conditions and
stifle market growth and positive
innovation.
Finally, the Bureau is concerned that
focusing on whether underwriting
standards are widely accepted could
distract creditors from focusing on their
obligation under TILA section 129C and
§ 1026.43(c) to make ability-to-repay
determinations that are reasonable and
in good faith. The Bureau believes that
a creditor’s underwriting standards are
an important factor in making
reasonable and good faith ability-torepay determinations. However, how
those standards are applied to the
individual facts and circumstances of a
particular extension of credit is equally
or more important.
In light of these issues, the Bureau is
not adopting proposed comment 43(c)–
1. Instead, the Bureau is adopting two
new comments, comment 43(c)(1)–1 and
comment 43(c)(2)–1. New comment
43(c)(1)–1 clarifies that creditors are
permitted to develop and apply their
own underwriting standards as long as
those standards lead to ability-to-repay
determinations that are reasonable and
in good faith. New comment 43(c)(2)–1
clarifies that creditors are permitted to
use their own definitions and other
technical underwriting criteria and
notes that underwriting guidelines
issued by governmental entities such as
the FHA are a source to which creditors
may refer for guidance on definitions
and technical underwriting criteria.
These comments are discussed below in
the section-by-section of § 1026.43(c)(1)
and (2).
43(c)(1) General Requirement
Proposed § 226.43(c)(1) would have
implemented TILA section 129C(a)(1)
by providing that a creditor shall not
make a loan that is a covered transaction
unless the creditor makes a reasonable
and good faith determination at or
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
before consummation that the consumer
will have a reasonable ability, at the
time of consummation, to repay the loan
according to its terms, including any
mortgage-related obligations.
Commenters generally agreed that
creditors should not make loans to
consumers unable to repay them and
supported the requirement to consider
ability to repay. Accordingly,
§ 1026.43(c)(1) is adopted substantially
as proposed, with two technical and
conforming changes.
As adopted, § 1026.43(c)(1) requires
creditors to make a reasonable and good
faith determination at or before
consummation that the consumer will
have a reasonable ability to repay the
loan according to its terms. Section
1026.43(c)(1) as adopted omits the
reference in the proposed rule to
determining that a consumer has a
reasonable ability ‘‘at the time of
consummation’’ to repay the loan
according to its terms. The Bureau
believes this phrase is potentially
misleading and does not accurately
reflect the intent of either the Board or
the Bureau. Mortgage loans are not
required to be repaid at the time of
consummation; instead, they are
required to be repaid over months or
years after consummation. Creditors are
required to make a predictive judgment
at the time of consummation that a
consumer is likely to have the ability to
repay a loan in the future. The Bureau
believes that the rule more clearly
reflects this requirement without the
reference to ability ‘‘at the time of
consummation’’ to repay the loan. The
creditor’s determination will necessarily
be based on the consumer’s
circumstances at or before
consummation and evidence, if any,
that those circumstances are likely to
change in the future. Section
1026.43(c)(1) as adopted also omits the
reference in the proposed rule to
mortgage-related obligations. The
Bureau believes this reference is
unnecessary because § 1026.43(c)(2)
requires creditors to consider
consumers’ monthly payments for
mortgage-related obligations and could
create confusion because § 1026.43(c)(1)
does not include references to other
factors creditors must consider under
§ 1026.43(c)(2).
As noted above, the Bureau is
adopting new comment 43(c)(1)–1,
which provides guidance regarding,
among other things, how the
requirement to make a reasonable and
good faith determination of ability to
repay relates to a creditor’s
underwriting standards. New comment
43(c)(1)–1 replaces in part and responds
PO 00000
Frm 00055
Fmt 4701
Sfmt 4700
6461
to comments regarding proposed
comment 43(c)–1, discussed above.
New comment 43(c)(1)–1 emphasizes
that creditors are to be evaluated on
whether they make a reasonable and
good faith determination that a
consumer will have a reasonable ability
to repay as required by § 1026.43(c)(1).
The comment acknowledges that
§ 1026.43(c) and the accompanying
commentary describe certain
requirements for making ability-to-repay
determinations, but do not provide
comprehensive underwriting standards
to which creditors must adhere. As an
example, new comment 43(c)(1)–1 notes
that the rule and commentary do not
specify how much income is needed to
support a particular level of debt or how
to weigh credit history against other
factors.
The Bureau believes that a variety of
underwriting standards can yield
reasonable, good faith ability-to-repay
determinations. New comment 43(c)(1)–
1 explains that, so long as creditors
consider the factors set forth in
§ 1026.43(c)(2) according to the
requirements of § 1026.43(c), creditors
are permitted to develop and apply their
own proprietary underwriting standards
and to make changes to those standards
over time in response to empirical
information and changing economic and
other conditions. The Bureau believes
this flexibility is necessary given the
wide range of creditors, consumers, and
mortgage products to which this rule
applies. The Bureau also believes that
there are no indicators in the statutory
text or legislative history of the DoddFrank Act that Congress intended to
replace proprietary underwriting
standards with underwriting standards
dictated by governmental or
government-sponsored entities as part of
the ability-to-repay requirements. The
Bureau therefore believes that
preserving this flexibility here is
consistent with Congressional intent.
The comment emphasizes that whether
a particular ability-to-repay
determination is reasonable and in good
faith will depend not only on the
underwriting standards adopted by the
creditor, but on the facts and
circumstances of an individual
extension of credit and how the
creditor’s underwriting standards were
applied to those facts and
circumstances. The comment also states
that a consumer’s statement or
attestation that the consumer has the
ability to repay the loan is not indicative
of whether the creditor’s determination
was reasonable and in good faith.
Concerns have been raised that
creditors and others will have difficulty
evaluating whether a particular ability-
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6462
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
to-repay determination is reasonable
and in good faith. Although the statute
and the rule specifies certain factors that
a creditor must consider in making such
a determination, the Bureau does not
believe that there is any litmus test that
can be prescribed to determine whether
a creditor, in considering those factors,
arrived at a belief in the consumer’s
ability to repay which was both
objectively reasonable and in subjective
good faith. Nevertheless, new comment
43(c)(1)–1 lists considerations that may
be relevant to whether a creditor who
considered and verified the required
factors in accordance with the rule
arrived at an ability-to-repay
determination that was reasonable and
in good faith. The comment states that
the following may be evidence that a
creditor’s ability-to-repay determination
was reasonable and in good faith: (1)
The consumer demonstrated actual
ability to repay the loan by making
timely payments, without modification
or accommodation, for a significant
period of time after consummation or,
for an adjustable-rate, interest-only, or
negative-amortization mortgage, for a
significant period of time after recast; (2)
the creditor used underwriting
standards that have historically resulted
in comparatively low rates of
delinquency and default during adverse
economic conditions; or (3) the creditor
used underwriting standards based on
empirically derived, demonstrably and
statistically sound models.
In contrast, new comment 43(c)(1)–1
states that the following may be
evidence that a creditor’s ability-torepay determination was not reasonable
or in good faith: (1) The consumer
defaulted on the loan a short time after
consummation or, for an adjustable-rate,
interest-only, or negative-amortization
mortgage, a short time after recast; (2)
the creditor used underwriting
standards that have historically resulted
in comparatively high levels of
delinquency and default during adverse
economic conditions; (3) the creditor
applied underwriting standards
inconsistently or used underwriting
standards different from those used for
similar loans without reasonable
justification; (4) the creditor disregarded
evidence that the underwriting
standards it used are not effective at
determining consumers’ repayment
ability; (5) the creditor consciously
disregarded evidence that the consumer
may have insufficient residual income
to cover other recurring obligations and
expenses, taking into account the
consumer’s assets other than the
property securing the covered
transaction, after paying his or her
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
monthly payments for the covered
transaction, any simultaneous loan,
mortgage-related obligations and any
current debt obligations; or (6) the
creditor disregarded evidence that the
consumer would have the ability to
repay only if the consumer subsequently
refinanced the loan or sold the property
securing the loan.
New comment 43(c)(1)–1 states the
Bureau’s belief that all of these
considerations may be relevant to
whether a creditor’s ability-to-repay
determination was reasonable and in
good faith. However, the comment also
clarifies that these considerations are
not requirements or prohibitions with
which creditors must comply, nor are
they elements of a claim that a
consumer must prove to establish a
violation of the ability-to-repay
requirements. As an example, the
comment clarifies that creditors are not
required to validate their underwriting
criteria using mathematical models.
New comment 43(c)(1)–1 also clarifies
that these considerations are not
absolute in their application; instead
they exist on a continuum and may
apply to varying degrees. As an
example, the comment states that the
longer a consumer successfully makes
timely payments after consummation or
recast the less likely it is that the
creditor’s determination of ability to
repay was unreasonable or not in good
faith.
Finally, new comment 43(c)(1)–1
clarifies that each of these
considerations must be viewed in the
context of all facts and circumstances
relevant to a particular extension of
credit. As an example, the comment
states that in some cases inconsistent
application of underwriting standards
may indicate that a creditor is
manipulating those standards to
approve a loan despite a consumer’s
inability to repay. The creditor’s abilityto-repay determination therefore may be
unreasonable or in bad faith. However,
in other cases inconsistently applied
underwriting standards may be the
result of, for example, inadequate
training and may nonetheless yield a
reasonable and good faith ability-torepay determination in a particular case.
Similarly, the comment states that
although an early payment default on a
mortgage will often be persuasive
evidence that the creditor did not have
a reasonable and good faith belief in the
consumer’s ability to repay (and such
evidence may even be sufficient to
establish a prima facie case of an abilityto-repay violation), a particular abilityto-repay determination may be
reasonable and in good faith even
though the consumer defaulted shortly
PO 00000
Frm 00056
Fmt 4701
Sfmt 4700
after consummation if, for example, the
consumer experienced a sudden and
unexpected loss of income. In contrast,
the comment states that an ability-torepay determination may be
unreasonable or not in good faith even
though the consumer made timely
payments for a significant period of time
if, for example, the consumer was able
to make those payments only by
foregoing necessities such as food and
heat.
The Board proposed comment
43(c)(1)–1 to clarify that a change in a
consumer’s circumstances after
consummation of a loan, such as a
significant reduction in income due to
a job loss or a significant obligation
arising from a major medical expense,
that cannot reasonably be anticipated
from the consumer’s application or the
records used to determine repayment
ability, is not relevant to determining a
creditor’s compliance with the rule. The
proposed comment would have further
clarified that, if the application or
records considered by the creditor at or
before consummation indicate that there
will be a change in the consumer’s
repayment ability after consummation,
such as if a consumer’s application
states that the consumer plans to retire
within 12 months without obtaining
new employment or that the consumer
will transition from full-time to parttime employment, the creditor must
consider that information. Commenters
generally supported proposed comment
43(c)(1)–1. Proposed comment 43(c)(1)–
1 is adopted substantially as proposed
and redesignated as comment 43(c)(1)–
2.
The Board also proposed comment
43(c)(1)–2 to clarify that § 226.43(c)(1)
does not require or permit the creditor
to make inquiries or verifications
prohibited by Regulation B, 12 CFR part
1002. Commenters generally supported
proposed comment 43(c)(1)–2. Proposed
comment 43(c)(1)–2 is adopted
substantially as proposed and
redesignated as comment 43(c)(1)–3.
43(c)(2) Basis for Determination
As discussed above, TILA section
129C(a)(1) generally requires a creditor
to make a reasonable and good faith
determination that a consumer has a
reasonable ability to repay a loan and all
applicable taxes, insurance, and
assessments. TILA section 129C(a)(2)
requires a creditor to include in that
determination the cost of any other
residential mortgage loans made to the
same consumer and secured by the same
dwelling. TILA section 129C(a)(3)
enumerates several factors a creditor
must consider in determining a
consumer’s ability to repay: credit
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
history; current income; expected
income; current obligations; debt-toincome ratio or residual income;
employment status; and other financial
resources other than equity in the
property securing the loan.
Proposed § 226.43(c)(2) would have
implemented the requirements under
these sections of TILA that a creditor
consider specified factors as part of a
determination of a consumer’s ability to
repay. Proposed § 226.43(c)(2) would
have required creditors to consider the
following factors in making a
determination of repayment ability, as
required by TILA section 129C(a)(1)
through (3): the consumer’s current or
reasonably expected income or assets,
other than the dwelling that secures the
loan; the consumer’s employment
status, if the creditor relies on
employment income; the consumer’s
monthly payment on the loan; the
consumer’s monthly payment on any
simultaneous loan that the creditor
knows or has reason to know will be
made; the consumer’s monthly payment
for mortgage-related obligations; the
consumer’s current debt obligations; the
consumer’s monthly debt-to-income
ratio or residual income; and the
consumer’s credit history. As discussed
in detail below, the Bureau is adopting
§ 1026.43(c)(2) substantially as
proposed, with technical and
conforming changes.
As indicated above, the Bureau also is
adopting new comment 43(c)(2)–1. New
comment 43(c)(2)–1 provides guidance
regarding definitional and other
technical underwriting issues related to
the factors enumerated in
§ 1026.43(c)(2). New comment 43(c)(2)–
1 replaces in part and responds to
comments received regarding proposed
comment 43(c)–1, as discussed above.
New comment 43(c)(2)–1 notes that
§ 1026.43(c)(2) sets forth factors
creditors must consider when making
the ability-to-repay determination
required under § 1026.43(c)(1) and the
accompanying commentary provides
guidance regarding these factors. New
comment 43(c)(2)–1 also notes that
creditors must conform to these
requirements and may rely on guidance
provided in the commentary. New
comment 43(c)(2)–1 also acknowledges
that the rule and commentary do not
provide comprehensive guidance on
definitions and other technical
underwriting criteria necessary for
evaluating these factors in practice. The
comment clarifies that, so long as a
creditor complies with the provisions of
§ 1026.43(c), the creditor is permitted to
use its own definitions and other
technical underwriting criteria.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
New comment 43(c)(2)–1 further
provides that a creditor may, but is not
required to, look to guidance issued by
entities such as the FHA, VA, USDA, or
Fannie Mae or Freddie Mac while
operating under the conservatorship of
the Federal Housing Finance
Administration. New comment 43(c)(2)–
1 gives several examples of instances
where a creditor could refer to such
guidance, such as: classifying particular
inflows, obligations, and property as
‘‘income,’’ ‘‘debt,’’ or ‘‘assets’’;
determining what information to use
when evaluating the income of a selfemployed or seasonally employed
consumer; or determining what
information to use when evaluating the
credit history of a consumer who has
few or no extensions of traditional
credit. The comment emphasizes that
these examples are illustrative, and
creditors are not required to conform to
guidance issued by these or other such
entities. The Bureau is aware that many
creditors have, for example, existing
underwriting definitions of ‘‘income’’
and ‘‘debt.’’ Creditors are not required to
modify their existing definitions and
other technical underwriting criteria to
conform to guidance issued by such
entities, and creditors’ existing
definitions and other technical
underwriting criteria are not
noncompliant merely because they
differ from those used in such guidance.
Finally, new comment 43(c)(2)–1
emphasizes that a creditor must ensure
that its underwriting criteria, as applied
to the facts and circumstances of a
particular extension of credit, result in
a reasonable, good faith determination
of a consumer’s ability to repay. As an
example, new comment 43(c)(2)–1 states
that a definition used in underwriting
that is reasonable in isolation may lead
to ability-to-repay determinations that
are unreasonable or not in good faith
when considered in the context of a
creditor’s underwriting standards or
when adopted or applied in bad faith.
Similarly, an ability-to-repay
determination is not unreasonable or in
bad faith merely because the
underwriting criteria used included a
definition that was by itself
unreasonable.
43(c)(2)(i)
TILA section 129C(a)(3) provides that,
in making the repayment ability
determination, a creditor must consider,
among other factors, a consumer’s
current income, reasonably expected
income, and ‘‘financial resources’’ other
than the consumer’s equity in the
dwelling or real property that secures
loan repayment. Furthermore, under
TILA section 129C(a)(9), a creditor may
PO 00000
Frm 00057
Fmt 4701
Sfmt 4700
6463
consider the seasonality or irregularity
of a consumer’s income in determining
repayment ability. The Board’s proposal
generally mirrored TILA section
129C(a)(3), but differed in two respects.
First, proposed § 226.43(c)(2)(i) used
the term ‘‘assets’’ rather than ‘‘financial
resources,’’ to conform with terminology
used in other provisions under TILA
section 129C(a) and Regulation Z. See,
e.g., TILA section 129C(a)(4) (requiring
that creditors consider a consumer’s
assets in determining repayment
ability); § 1026.51(a) (requiring
consideration of a consumer’s assets in
determining a consumer’s ability to pay
a credit extension under a credit card
account). The Board explained that the
terms ‘‘financial resources’’ and ‘‘assets’’
are synonymous as used in TILA section
129C(a), and elected to use the term
‘‘assets’’ throughout the proposal for
consistency. The Bureau is adopting this
interpretation as well, as part of its
effort to streamline regulations and
reduce compliance burden, and uses the
term ‘‘assets’’ throughout Regulation Z.
Second, the Board’s proposal
provided that a creditor may not look to
the value of the dwelling that secures
the covered transaction, instead of
providing that a creditor may not look
to the consumer’s equity in the
dwelling, as provided in TILA section
129C(a). The Bureau received comments
expressing concern that the Board had
proposed dispensing with the term
‘‘equity.’’ These comments protested
that the Board had assumed that
congressional concern was over the
foreclosure value of the home, rather
than protecting all homeowners,
including those who may have low
home values. The commenters’ concerns
are likely misplaced, however, as the
Board’s language provides, if anything,
broader protection for homeowners.
TILA section 129C(a)(3) is intended to
address the risk that a creditor will
consider the amount that could be
obtained through a foreclosure sale of
the dwelling, which may exceed the
amount of the consumer’s equity in the
dwelling. For example, the rule
addresses the situation in which, several
years after consummation, the value of
a consumer’s home has decreased
significantly. The rule prohibits a
creditor from considering, at or before
consummation, any value associated
with this home, even in the event that
the ‘‘underwater’’ home is sold at
foreclosure. The rule thus avoids the
situation in which the creditor might
assume that rising home values might
make up the difference should the
consumer be unable to make full
mortgage payments, and therefore the
rule is more protective of consumers
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6464
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
because the rule forbids the creditor
from considering any value associated
with the dwelling whether the
consumer’s equity stake in the dwelling
is large or small.
The Bureau is adopting the Board’s
proposal, providing that a creditor may
not look to the value of the dwelling
that secures the covered transaction,
instead of providing that a creditor may
not look to the consumer’s equity in the
dwelling, as provided in TILA section
129C(a). The Bureau is making this
adjustment pursuant to its authority
under TILA section 105(a), which
provides that the Bureau’s regulations
may contain such additional
requirements, classifications,
differentiations, or other provisions, and
may provide for such adjustments and
exceptions for all or any class of
transactions as in the Bureau’s judgment
are necessary or proper to effectuate the
purposes of TILA, prevent
circumvention or evasion thereof, or
facilitate compliance therewith. 15
U.S.C. 1604(a). The purposes of TILA
include the purposes that apply to 129C,
to assure that consumers are offered and
receive residential mortgage loans on
terms that reasonably reflect their ability
to repay the loan. See 15 U.S.C.
1639b(a)(2). As further explained above,
the Bureau believes it is necessary and
proper to make this adjustment to
ensure that consumers receive loans on
affordable terms and to facilitate
compliance with TILA and its purposes.
The Board proposed comment
43(c)(2)(i)–1 to clarify that a creditor
may base a determination of repayment
ability on current or reasonably
expected income from employment or
other sources, assets other than the
dwelling that secures the covered
transaction, or both. The Bureau did not
receive significant comment on the
proposal and has adopted the Board’s
proposed comment. In congruence with
the Bureau’s adoption of the phrase
‘‘value of the dwelling’’ in
§ 1026.43(c)(2)(i), instead of the
consumer’s equity in the dwelling, as
originally provided in TILA section
129C(a), comment 43(c)(2)(i)–1 likewise
notes that the creditor may not consider
the dwelling that secures the transaction
as an asset in any respect. This
comment is also consistent with
comment 43(a)–2, which further
clarifies that the term ‘‘dwelling’’
includes the value of the real property
to which the dwelling is attached, if the
real property also secures the covered
transaction. Comment 43(c)(2)(i)–1 also
provides examples of types of income
the creditor may consider, including
salary, wages, self-employment income,
military or reserve duty income, tips,
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
commissions, and retirement benefits;
and examples of assets the creditor may
consider, including funds in a savings
or checking account, amounts vested in
a retirement account, stocks, and bonds.
The Bureau did not receive significant
comment on the proposal and has
adopted the Board’s proposed comment.
The Bureau notes that there may be
assets other than those listed in
comment 43(c)(2)(i)–1 that a creditor
may consider; the Bureau does not
intend for the list to be exhaustive, but
merely illustrative.
The Board proposed comment
43(c)(2)(i)–2 to explain that, if a creditor
bases its determination of repayment
ability entirely or in part on a
consumer’s income, the creditor need
consider only the income necessary to
support a determination that the
consumer can repay the covered
transaction. The Bureau did not receive
significant comment and has adopted
the Board’s comment largely as
proposed. This comment clarifies that a
creditor need not document and verify
every aspect of the consumer’s income,
merely enough income to support the
creditor’s good faith determination. For
example, if a consumer earns income
from a full-time job and a part-time job
and the creditor reasonably determines
that the consumer’s income from the
full-time job is sufficient to repay the
covered transaction, the creditor need
not consider the consumer’s income
from the part-time job. Comment
43(c)(2)(i)–2 also cross-references
comment 43(c)(4)–1 for clarity.
The Board proposed comment
43(c)(2)(i)–3 to clarify that the creditor
may rely on the consumer’s reasonably
expected income either in addition to or
instead of current income. This
comment is similar to existing comment
34(a)(4)(ii)–2, which describes a similar
income test for high-cost mortgages
under § 1026.34(a)(4).107 This
consistency should serve to reduce
compliance burden for creditors. The
Bureau did not receive significant
comment on the proposal and is
adopting the Board’s comment as
proposed. Comment 43(c)(2)(i)–3 further
explains that, if a creditor relies on
expected income, the expectation that
the income will be available for
repayment must be reasonable and
verified with third-party records that
provide reasonably reliable evidence of
the consumer’s expected income.
Comment 43(c)(2)(i)–3 also gives
107 The Bureau has proposed revising comment
34(a)(4)(ii)–2, though not in a manner that would
affect the ‘‘reasonably expected income’’ aspect of
the comment. See 77 FR 49090, 49153 (Aug. 15,
2012). The Bureau is concurrently finalizing the
2012 HOEPA Proposal.
PO 00000
Frm 00058
Fmt 4701
Sfmt 4700
examples of reasonably expected
income, such as expected bonuses
verified with documents demonstrating
past bonuses or expected salary from a
job verified with a written statement
from an employer stating a specified
salary. As the Board has previously
stated, in some cases a covered
transaction may have a likely payment
increase that would not be affordable at
the consumer’s income at the time of
consummation. A creditor may be able
to verify a reasonable expectation of an
increase in the consumer’s income that
will make the higher payment affordable
to the consumer. See 73 FR 44522,
44544 (July 30, 2008).
TILA section 129C(a)(9) provides that
a creditor may consider the seasonality
or irregularity of a consumer’s income
in determining repayment ability.
Accordingly, the Board proposed
comment 43(c)(2)(i)–4 to clarify that a
creditor reasonably may determine that
a consumer can make periodic loan
payments even if the consumer’s
income, such as self-employment or
agricultural employment income, is
seasonal or irregular. The Bureau
received little comment on this
proposal, although at least one
consumer advocate expressed concern
that creditors might interpret the rule to
allow for a creditor to differentiate
among types of income. Specifically, the
commenter expressed concern that some
creditors might differentiate types of
income, for example salaried income as
opposed to disability payments, and
that these creditors might require the
consumer to produce a letter stating that
the disability income was guaranteed for
a specified period. The Bureau
understands these concerns, and
cautions creditors not to overlook the
requirements imposed by the Equal
Credit Opportunity Act, implemented
by the Bureau under Regulation B. See
15 U.S.C. 1601 et seq.; 12 CFR 1002.1
et seq. For example, 12 CFR 1002.6(b)(2)
prohibits a creditor from taking into
account whether an applicant’s income
derives from any public assistance
program. The distinction here is that
43(c)(2)(i)–4 permits the creditor to
consider the regularity of the
consumer’s income, but such
consideration must be based on the
consumer’s income history, not based
on the source of the income, as both a
consumer’s wages or a consumer’s
receipt of public assistance may or may
not be irregular. The Bureau is adopting
this comment largely as proposed, as the
concerns discussed above are largely
covered by Regulation B. Comment
43(c)(2)(i)–4 states that, for example, if
the creditor determines that the income
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
a consumer receives a few months each
year from, for example, selling crops or
from agricultural employment is
sufficient to make monthly loan
payments when divided equally across
12 months, then the creditor reasonably
may determine that the consumer can
repay the loan, even though the
consumer may not receive income
during certain months.
Finally, the Bureau is adding new
comment 43(c)(2)(i)–5 to further clarify,
in the case of joint applicants, the
consumer’s current or reasonably
expected income or assets basis of the
creditor’s ability-to-repay
determination. This comment is similar
in approach to the Board’s proposed
comment 43(c)(4)–2, discussed below,
however, proposed comment 43(c)(4)–2
discussed the verification of income in
the case of joint applicants. The Bureau
is adding comment 43(c)(2)(i)–5 to
clarify the creditor’s basis for making an
ability-to-repay determination for joint
applicants. Comment 43(c)(2)(i)–5
explains that when two or more
consumers apply for an extension of
credit as joint obligors with primary
liability on an obligation, § 1026.43(c)(i)
does not require the creditor to consider
income or assets that are not needed to
support the creditor’s repayment ability
determination. Thus, the comment
explains that if the income or assets of
one applicant are sufficient to support
the creditor’s repayment ability
determination, then the creditor is not
required to consider the income or
assets of the other applicant.
43(c)(2)(ii)
TILA section 129C(a)(3) requires that
a creditor consider a consumer’s
employment status in determining the
consumer’s repayment ability, among
other requirements. The Board proposal
implemented this requirement in
proposed § 226.43(c)(2)(ii) and clarified
that a creditor need consider a
consumer’s employment status only if
the creditor relies on income from the
consumer’s employment in determining
repayment ability. The Bureau did not
receive significant comment on the
Board’s proposal and is adopting
§ 1026.43(c)(2)(ii) as proposed. The
Bureau sees no purpose in requiring a
creditor to consider a consumer’s
employment status in the case where
the creditor need not consider the
income from that employment in the
creditor’s reasonable and good faith
determination that the consumer will
have a reasonable ability to repay the
loan according to its terms.
The Board proposed, and the Bureau
is adopting, comment 43(c)(2)(ii)–1 to
illustrate this point further. The
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
comment states, for example, that if a
creditor relies wholly on a consumer’s
investment income to determine the
consumer’s repayment ability, the
creditor need not consider or verify the
consumer’s employment status. The
proposed comment further clarifies that
employment may be full-time, part-time,
seasonal, irregular, military, or selfemployment. Comment 43(c)(2)(ii)–1 is
similar to comment 34(a)(4)–6, which
discusses income, assets, and
employment in determining repayment
ability for high-cost mortgages.
In its proposal, the Board explained
that a creditor generally must verify
information relied on to determine
repayment ability using reasonably
reliable third-party records, but may
verify employment status orally as long
as the creditor prepares a record of the
oral information. The Board proposed
comment 43(c)(2)(ii)–2 to add that a
creditor also may verify the employment
status of military personnel using the
electronic database maintained by the
Department of Defense (DoD) to
facilitate identification of consumers
covered by credit protections provided
pursuant to 10 U.S.C. 987, also known
as the ‘‘Talent Amendment.’’ 108 The
Board solicited comment on whether
creditors needed additional flexibility in
verifying the employment status of
military personnel, such as by verifying
the employment status of a member of
the military using a Leave and Earnings
Statement. As this proposed comment
was designed to provide clarification for
creditors with respect to verifying a
consumer’s employment, this proposed
comment is discussed in the section-bysection analysis of § 1026.43(c)(3)
below.
43(c)(2)(iii)
Proposed § 226.43(c)(2)(iii)
implemented the requirements under
new TILA section 129C(a)(1) and (3), in
part, by requiring that the creditor
consider the consumer’s monthly
payment on the covered transaction,
calculated in accordance with proposed
§ 226.43(c)(5), for purposes of
determining the consumer’s repayment
ability. Proposed comment 43(c)(2)(iii)–
1 clarified the regulatory language and
made clear that mortgage-related
obligations must also be considered.
The Bureau did not receive comments
on this provision. Accordingly, the
108 The Talent Amendment is contained in the
John Warner National Defense Authorization Act.
See Public Law 109–364, 120 Stat. 2083, 2266
(2006); 72 FR 50580, 5088 (Aug. 31, 2007)
(discussing the DoD database in a final rule
implementing the Talent Amendment). Currently,
the DoD database is available at https://
www.dmdc.osd.mil/appj/mla/.
PO 00000
Frm 00059
Fmt 4701
Sfmt 4700
6465
Bureau is adopting § 1026.43(c)(2)(iii) as
proposed. Comment 43(c)(2)(iii)–1 has
been edited to remove the reference to
mortgage-related obligations as
potentially confusing. The monthly
payment for mortgage-related
obligations must be considered under
§ 1026.43(c)(2)(v).
43(c)(2)(iv)
Proposed § 226.43(c)(2)(iv)
implemented the requirements under
new TILA section 129C(a)(2), in part, by
requiring that the creditor consider ‘‘the
consumer’s monthly payment on any
simultaneous loan that the creditor
knows or has reason to know will be
made, calculated in accordance with’’
proposed § 226.43(c)(6), for purposes of
determining the consumer’s repayment
ability. As explained above in the
section-by-section analysis of
§ 1026.43(b)(12), ‘‘simultaneous loan’’ is
defined, in the proposed and final rules,
to include HELOCs.
Proposed comment 43(c)(2)(iv)–1
clarified that for purposes of the
repayment ability determination, a
simultaneous loan includes any covered
transaction or HELOC that will be made
to the same consumer at or before
consummation of the covered
transaction and secured by the same
dwelling that secures the covered
transaction. This comment explained
that a HELOC that is a simultaneous
loan that the creditor knows or has
reason to know about must be
considered in determining a consumer’s
ability to repay the covered transaction,
even though the HELOC is not a covered
transaction subject to § 1026.43.
Proposed comment 43(c)(2)(iv)–3
clarified the scope of timing and the
meaning of the phrase ‘‘at or before
consummation’’ with respect to
simultaneous loans that the creditor
must consider for purposes of proposed
§ 226.43(c)(2)(iv). Proposed comment
43(c)(2)(iv)–4 provided guidance on the
verification of simultaneous loans.
The Bureau received several industry
comments on the requirement, in the
regulation and the statute, that the
creditor consider any simultaneous loan
it ‘‘knows or has reason to know’’ will
be made. The commenters felt that the
standard was vague, and that it would
be difficult for a creditor to understand
when it ‘‘has reason to know’’ a
simultaneous loan will be made.
The Board provided guidance on the
‘‘knows or has reason to know’’
standard in proposed comment
43(c)(2)(iv)–2. This comment provided
that, in regard to ‘‘piggyback’’ secondlien loans, the creditor complies with
the standard if it follows policies and
procedures that are designed to
E:\FR\FM\30JAR2.SGM
30JAR2
6466
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
determine whether at or before
consummation that the same consumer
has applied for another credit
transaction secured by the same
dwelling. The proposed comment
provided an example in which the
requested loan amount is less than the
home purchase price, indicating that
there is a down payment coming from
a different funding source. The
creditor’s policies and procedures must
require the consumer to state the source
of the down payment, which must be
verified. If the creditor determines that
the source of the down payment is
another extension of credit that will be
made to the same consumer and secured
by the same dwelling, the creditor
knows or has reason to know of the
simultaneous loan. Alternatively, if the
creditor has verified information that
the down payment source is the
consumer’s existing assets, the creditor
would be under no further obligation to
determine whether a simultaneous loan
will be extended at or before
consummation.
The Bureau believes that comment
43(c)(2)(iv)–2 provides clear guidance
on the ‘‘knows or has reason to know’’
standard, with the addition of language
clarifying that the creditor is not
obligated to investigate beyond
reasonable underwriting policies and
procedures to determine whether a
simultaneous loan will be extended at
or before consummation of the covered
transaction.
The Bureau considers the provision to
be an accurate and appropriate
implementation of the statute. Proposed
§ 226.43(c)(2)(iv) and associated
commentary are adopted substantially
as proposed, in renumbered
§ 1026.43(c)(2)(iv), with the addition of
the language discussed above to
comment 43(c)(2)(iv)–2 and other minor
clarifying changes. Comment
43(c)(2)(iv)–3 now includes language
making clear that if the consummation
of the loan transaction is extended past
the traditional closing, any
simultaneous loan originated after that
traditional closing may still be
interpreted as having occurred ‘‘at’’
consummation. In addition, as
discussed below, comment 43(c)(2)(iv)–
4, Verification of simultaneous loans,
has been grouped with other verification
comments, in comment 43(c)(3)–4.
43(c)(2)(v)
As discussed above, TILA section
129C(a)(1) and (3) requires creditors to
consider and verify mortgage-related
obligations as part of the ability-to-repay
determination ‘‘according to [the loan’s]
terms, and all applicable taxes,
insurance (including mortgage
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
guarantee insurance), and assessments.’’
Section 1026.34(a)(4), which was added
by the 2008 HOEPA Final Rule, also
requires creditors to consider mortgagerelated obligations in assessing
repayment ability. See the section-bysection analysis of § 1026.43(b)(8) for a
discussion of the Bureau’s interpretation
of ‘‘mortgage-related obligations’’ and
the definition adopted in the final rule.
The Board proposed to require
creditors to consider the consumer’s
monthly payment for mortgage-related
obligations as part of the repayment
ability determination. Proposed
comment 43(c)(2)(v)–1 explained that
mortgage-related obligations must be
included in the creditor’s determination
of repayment ability regardless of
whether the amounts are included in
the monthly payment or whether there
is an escrow account established.
Proposed comment 43(c)(2)(v)–2
clarified that, in considering mortgagerelated obligations that are not paid
monthly, the creditor may look to
widely accepted governmental or nongovernmental standards to determine
the pro rata monthly payment amount.
The Board solicited comment on
operational difficulties creditors may
encounter when complying with this
monthly requirement, and whether
additional guidance was necessary.
Proposed comment 43(c)(2)(v)–3
explained that estimates of mortgagerelated obligations should be based
upon information known to the creditor
at the time the creditor underwrites the
mortgage obligation. This comment
explained that information is known if
it is ‘‘reasonably available’’ to the
creditor at the time of underwriting the
loan, and cross-referenced current
comment 17(c)(2)(i)–1 for guidance
regarding ‘‘reasonably available.’’
Proposed comment 43(c)(2)(v)–3 further
clarified that, for purposes of
determining repayment ability under
proposed § 226.43(c), the creditor would
not need to project potential changes.
Proposed comment 43(c)(2)(v)–4
stated that creditors must make the
repayment ability determination
required under proposed § 226.43(c)
based on information verified from
reasonably reliable records. This
comment explained that guidance
regarding verification of mortgagerelated obligations could be found in
proposed comments 43(c)(3)–1 and –2,
which discuss verification using thirdparty records.
The Board solicited comment on any
special concerns regarding the
requirement to document certain
mortgage-related obligations, for
example, ground rent or leasehold
payments, or special assessments. The
PO 00000
Frm 00060
Fmt 4701
Sfmt 4700
Board also solicited comment on
whether it should provide that the
HUD–1 or –1A or a successor form
could serve as verification of mortgagerelated obligations reflected by the form,
where a legal obligation exists to
complete the form accurately.
Industry commenters and consumer
advocates generally supported including
consideration and verification of
mortgage-related obligations in the
ability-to-repay determination. Several
industry commenters asked that the
Bureau provide creditors more
flexibility in considering and verifying
mortgage-related obligations. They
suggested that a reasonable and good
faith determination be deemed
sufficient, rather than use of all
underwriting standards in any
particular government or nongovernment handbook. Community
banks asserted that flexible standards
were necessary to meet their customers’
needs. Some consumer advocates
suggested that creditors be permitted to
draw on only widely accepted standards
that have been validated by experience
or sanctioned by a government agency.
Some industry commenters asked for
more guidance on how to calculate pro
rata monthly payment amounts and
estimated property taxes. One industry
commenter asked that creditors be
permitted to use pro rata monthly
payment amounts for special
assessments, not quarterly or yearly
amounts. The commenter requested that
estimates of common assessments be
permitted. This commenter also
recommended that creditors be
permitted to verify the amount of
common assessments with information
provided by the consumer. One
commenter noted that verification using
HUD–1 forms should be permitted
because there is a legal obligation to
complete the HUD–1 accurately.
The Bureau is adopting the rule as
proposed. For the reasons discussed
below, the Bureau concludes that a
creditor should consider the consumer’s
monthly payment for mortgage-related
obligations in determining the
consumer’s ability to repay, pursuant to
§ 1026.43(c)(1). As commenters
confirmed, obligations related to the
mortgage may affect the consumer’s
ability to satisfy the obligation to make
recurring payments of principal and
interest. The Bureau also agrees with the
argument raised by many commenters
that the failure to account consistently
for these obligations during the
subprime crisis harmed many
consumers. Thus, the Bureau has
determined that it is appropriate to
adopt § 1026.43(c)(2)(v) as proposed.
However, the Bureau believes that
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
additional guidance will facilitate
compliance. As explained below, the
Bureau has expanded on the proposed
commentary language to provide
additional clarity and illustrative
examples.
The final version of comment
43(c)(2)(v)–1 is substantially similar to
the language as proposed. As discussed
under § 1026.43(b)(8) above, the Bureau
is revising the language related to
insurance premiums to provide
additional clarity. The modifications to
the language in proposed comment
43(c)(2)(v)–1 conform to the language
adopted under § 1026.43(b)(8) and the
related commentary. Furthermore, the
final version of comment 43(c)(2)(v)-1
contains additional explanation
regarding the determination of the
consumer’s monthly payment, and
provides additional illustrative
examples to clarify further the
requirements of § 1026.43(c)(2)(v). For
example, assume that a consumer will
be required to pay mortgage insurance
premiums, as defined by § 1026.43(b)(8),
on a monthly, annual, or other basis
after consummation. Section
1026.43(c)(2)(v) includes these recurring
mortgage insurance payments in the
evaluation of the consumer’s monthly
payment for mortgage-related
obligations. However, if the consumer
will incur a one-time fee or charge for
mortgage insurance or similar purposes,
such as an up-front mortgage insurance
premium imposed at consummation,
§ 1026.43(c)(2)(v) does not include this
up-front mortgage insurance premium
in the evaluation of the consumer’s
monthly payment for mortgage-related
obligations.
As discussed under § 1026.43(b)(8)
above, several commenters discussed
the importance of including
homeowners association dues and
similar obligations in the determination
of ability to repay. These commenters
argued, and the Bureau agrees, that
recurring financial obligations payable
to community governance associations,
such as homeowners association dues,
should be taken into consideration in
determining whether a consumer has
the ability to repay the obligation. The
Bureau recognizes the practical
problems that may arise with including
obligations such as these in the
evaluation of the consumer’s monthly
payment for mortgage-related
obligations. Commenters identified
issues stemming from difficulties which
may arise in calculating, estimating, and
verifying these obligations. Based on
this feedback, the Bureau has
determined that additional clarification
is necessary. As adopted, comment
43(c)(2)(v)–2 clarifies that creditors need
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
not include payments to community
governance associations if such
obligations are fully satisfied at or
before consummation by the consumer.
This comment further clarifies that
§ 1026.43(c)(2)(v) does not require the
creditor to include these payments in
the evaluation of the consumer’s
monthly payment for mortgage-related
obligations if the consumer does not pay
the fee directly at or before
consummation, and instead finances the
obligation. In these cases, the financed
obligation will be included in the loan
amount, and is therefore already
included in the determination of ability
to repay pursuant to § 1026.43(c)(2)(iii).
However, if the consumer incurs the
obligation and will satisfy the obligation
with recurring payments after
consummation, regardless of whether
the obligation is escrowed,
§ 1026.43(c)(2)(v) requires the creditor
to include the obligation in the
evaluation of the consumer’s monthly
payment for mortgage-related
obligations. The Bureau has also
addressed the concerns raised by
commenters related to calculating,
estimating, and verifying these
obligations in comments 43(c)(2)(v)–4
and –5 and 43(c)(3)–5, respectively.
As discussed under § 1026.43(b)(8)
above, one comment letter focused
extensively on community transfer fees.
The Bureau agrees with the argument,
advanced by several commenters, that
the entirety of the consumer’s ongoing
obligations should be included in the
determination. A responsible
determination of the consumer’s ability
to repay requires an accounting of such
obligations, whether the purpose of the
obligation is to satisfy the payment of a
community transfer fee or traditional
homeowners association dues. An
obligation that is not paid in full at or
before consummation must be paid after
consummation, which may affect the
consumer’s ability to repay ongoing
obligations. Thus, comment 43(c)(2)(v)–
2 clarifies that community transfer fees
are included in the determination of the
consumer’s monthly payment for
mortgage-related obligations if such fees
are paid on a recurring basis after
consummation. Additionally, the
Bureau believes that a creditor is not
required to include community transfer
fees that are imposed on the seller, as
many community transfer fees are, in
the ability-to-repay calculation.
In response to the request for feedback
in the proposed rule, several
commenters addressed the proposed
treatment of special assessments. Unlike
community transfer fees, which are
generally identified in the deed or
master community plan, creditors may
PO 00000
Frm 00061
Fmt 4701
Sfmt 4700
6467
encounter difficulty determining
whether special assessments exist.
Special assessments are often imposed
in response to some urgent or
unexpected need. Consequently, neither
the creditor nor the community
governance association may be able to
predict the frequency and magnitude of
special assessments. However, this
difficulty does not exist for special
assessments that are known at the time
of underwriting. Known special
assessments, which the buyer must pay
and which may be significant, may
affect the consumer’s ability to repay the
obligation. Thus, comment 43(c)(2)(v)–3
clarifies that the creditor must include
special assessments in the evaluation of
the consumer’s monthly payment for
mortgage-related obligations if such fees
are paid by the consumer on a recurring
basis after consummation, regardless of
whether an escrow is established for
these fees. For example, if a
homeowners association imposes a
special assessment that the consumer
will have to pay in full at or before
consummation, § 1026.43(c)(2)(v) does
not include the special assessment in
the evaluation of the consumer’s
monthly payment for mortgage-related
obligations. Section 1026.43(c)(2)(v)
does not require a creditor to include
special assessments in the evaluation of
the consumer’s monthly payment for
mortgage-related obligations if the
special assessments are imposed as a
one-time charge. For example, if a
homeowners association imposes a
special assessment that the consumer
will have to satisfy in one payment,
§ 1026.43(c)(2)(v) does not include this
one-time special assessment in the
evaluation of the consumer’s monthly
payment for mortgage-related
obligations. However, if the consumer
will pay the special assessment on a
recurring basis after consummation,
regardless of whether the consumer’s
payments for the special assessment are
escrowed, § 1026.43(c)(2)(v) requires the
creditor to include this recurring special
assessment in the evaluation of the
consumer’s monthly payment for
mortgage-related obligations. Comment
43(c)(2)(v)–3 also includes several other
examples illustrating this requirement.
The Bureau agrees that clear and
detailed guidance regarding determining
pro rata monthly payments of mortgagerelated obligations should be provided.
However, the Bureau believes that it is
important to strike a balance between
providing clear guidance and providing
creditors with the flexibility to serve the
evolving mortgage market. The
comments identified significant
concerns with the use of ‘‘widely
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6468
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
accepted governmental and nongovernmental standards’’ for purposes
of determining the pro rata monthly
payment amount for mortgage-related
obligations. While commenters
generally stated that ‘‘widely accepted
governmental standards’’ was an
appropriate standard, others commented
that ‘‘non-governmental standards’’ may
not be sufficiently clear. The Bureau
believes that ‘‘governmental standards’’
could be relied on to perform pro rata
calculations of monthly mortgage
related obligations because such
standards provide detailed and
comprehensive guidance and are
frequently revised to adapt to the needs
of the evolving residential finance
market. However, the comments noted
that ‘‘non-governmental standards’’ is
not sufficiently descriptive to illustrate
clearly how to calculate pro rata
monthly payments. Additionally, the
Bureau believes that clear guidance is
also needed to address the possibility
that a particular government program
may not specifically describe how to
calculate pro rata monthly payment
amounts for mortgage-related
obligations. Thus, the Bureau believes
that it is appropriate to revise and
further develop the concept of ‘‘widely
accepted governmental and nongovernmental standards.’’
Based on this feedback, the Bureau
has revised and expanded the comment
clarifying how to calculate pro rata
monthly mortgage obligations. As
adopted, comment 43(c)(2)(v)–4
provides that, if the mortgage loan is
originated pursuant to a governmental
program, the creditor may determine the
pro rata monthly amount of the
mortgage-related obligation in
accordance with the specific
requirements of that program. If the
mortgage loan is originated pursuant to
a government program that does not
contain specific standards for
determining the pro rata monthly
amount of the mortgage-related
obligation, or if the mortgage loan is not
originated pursuant to a government
program, the creditor complies with
§ 1026.43(c)(2)(v) by dividing the total
amount of a particular non-monthly
mortgage-related obligation by no more
than the number of months from the
month that the non-monthly mortgagerelated obligation last was due prior to
consummation until the month that the
non-monthly mortgage-related
obligation next will be due after
consummation. Comment 43(c)(2)(v)–4
also includes several examples which
illustrate the conversion of non-monthly
obligations into monthly, pro rata
payments. For example, assume that a
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
consumer applies for a mortgage loan on
February 1st. Assume further that the
subject property is located in a
jurisdiction where property taxes are
paid in arrears annually on the first day
of October. The creditor complies with
§ 1026.43(c)(2)(v) by determining the
annual property tax amount owed in the
prior October, dividing the amount by
12, and using the resulting amount as
the pro rata monthly property tax
payment amount for the determination
of the consumer’s monthly payment for
mortgage-related obligations. The
creditor complies even if the consumer
will likely owe more in the next year
than the amount owed the prior October
because the jurisdiction normally
increases the property tax rate annually,
provided that the creditor does not have
knowledge of an increase in the
property tax rate at the time of
underwriting.
The Bureau is adopting comment
43(c)(2)(v)–5 in a form that is
substantially similar to the version
proposed. One industry commenter was
especially concerned about estimating
costs for community governance
organizations, such as cooperative,
condominium, or homeowners
associations. This commenter noted
that, because of industry concerns about
TILA liability, many community
governance organizations refuse to
provide estimates of association
expenses absent agreements disclaiming
association liability. This commenter
expressed concern that the ability-torepay requirements would make
community governance organizations
less likely to provide estimates of
association expenses, which would
result in mortgage loan processing
delays. The Bureau does not believe that
the ability-to-repay requirements will
lead to difficulties in exchanging
information between creditors and
associations because the ability-to-repay
requirements generally apply only to
creditors, as defined under
§ 1026.2(a)(17). However, the Bureau
recognizes that consumers may be
harmed if mortgage loan transactions are
needlessly delayed by concerns arising
from the ability-to-repay requirements.
Thus, the Bureau has decided to address
these concerns by adding several
examples to comment 43(c)(2)(v)–5
illustrating the requirements of
§ 1026.43(c)(2)(v). For example, the
creditor complies with § 1026.43(c)(2)(v)
by relying on an estimate of mortgagerelated obligations prepared by the
homeowners association. In accordance
with the guidance provided under
comment 17(c)(2)(i)–1, the creditor need
only exercise due diligence in
PO 00000
Frm 00062
Fmt 4701
Sfmt 4700
determining mortgage-related
obligations, and complies with
§ 1026.43(c)(2)(v) by relying on the
representations of other reliable parties
in preparing estimates. Or, assume that
the homeowners association has
imposed a special assessment on the
seller, but the seller does not inform the
creditor of the special assessment, the
homeowners association does not
include the special assessment in the
estimate of expenses prepared for the
creditor, and the creditor is unaware of
the special assessment. The creditor
complies with § 1026.43(c)(2)(v) if it
does not include the special assessment
in the determination of mortgage-related
obligations. The creditor may rely on
the representations of other reliable
parties, in accordance with the guidance
provided under comment 17(c)(2)(i)–1.
43(c)(2)(vi)
TILA section 129C(a)(1) and (3)
requires creditors to consider ‘‘current
obligations’’ as part of an ability-torepay determination. Proposed
§ 226.43(c)(2)(vi) would have
implemented the requirement under
TILA section 129C(a)(1) and (3) by
requiring creditors to consider current
debt obligations. Proposed comment
43(c)(2)(vi)–1 would have specified that
current debt obligations creditors must
consider include, among other things,
alimony and child support. The Bureau
believes that it is reasonable to consider
child support and alimony as ‘‘debts’’
given that the term ‘‘debt’’ is not defined
in the statute. However, the Bureau
understands that while alimony and
child support are obligations, they may
not be considered debt obligations
unless and until they are not paid in a
timely manner. Therefore,
§ 1026.43(c)(2)(vi) specifies that
creditors must consider current debt
obligations, alimony, and child support
to clarify that alimony and child
support are included whether or not
they are paid in a timely manner.
Proposed comment 43(c)(2)(vi)–1
would have referred creditors to widely
accepted governmental and nongovernmental underwriting standards in
determining how to define ‘‘current debt
obligations.’’ The proposed comment
would have given examples of current
debt obligations, such as student loans,
automobile loans, revolving debt,
alimony, child support, and existing
mortgages. The Board solicited
comment on proposed comment
43(c)(2)(vi)–1 and on whether more
specific guidance should be provided to
creditors. Commenters generally
supported giving creditors significant
flexibility and did not encourage the
Bureau to adopt more specific guidance.
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
Because the Bureau believes that a wide
range of criteria and guidelines for
considering current debt obligations
will contribute to reasonable, good faith
ability-to-repay determinations,
comment 43(c)(2)(vi)–1 as adopted
preserves the flexible approach of the
Board’s proposed comment. The
comment gives examples of current debt
obligations but does not provide an
exhaustive list. The comment therefore
preserves substantial flexibility for
creditors to develop their own
underwriting guidelines regarding
consideration of current debt
obligations. Reference to widely
accepted governmental and nongovernmental underwriting standards
has been omitted, as discussed above in
the section-by-section analysis of
§ 1026.43(c).
The Board also solicited comment on
whether additional guidance should be
provided regarding consideration of
debt obligations that are almost paid off.
Commenters generally stated that
creditors should be required to consider
obligations that are almost paid off only
if they affect repayment ability. The
Bureau agrees that many different
standards for considering obligations
that are almost paid off could lead to
reasonable, good faith ability-to-repay
determinations. As adopted, comment
43(c)(2)(vi)–1 includes additional
language clarifying that creditors have
significant flexibility to consider current
debt obligations in light of attendant
facts and circumstances, including that
an obligation is likely to be paid off
soon after consummation. As an
example, comment 43(c)(2)(vi)–1 states
that a creditor may take into account
that an existing mortgage is likely to be
paid off soon after consummation
because there is an existing contract for
sale of the property that secures that
mortgage.
The Board also solicited comment on
whether additional guidance should be
provided regarding consideration of
debt obligations in forbearance or
deferral. Several commenters, including
both creditors and consumer advocates,
supported requiring creditors to
consider obligations in forbearance or
deferral. At least one large creditor
objected to requiring creditors to
consider such obligations in all cases.
The Bureau believes that many different
standards for considering obligations in
forbearance or deferral could lead to
reasonable, good faith determinations of
ability to repay. As adopted, comment
43(c)(2)(vi)–1 therefore includes
additional language clarifying that
creditors should consider whether debt
obligations in forbearance or deferral at
the time of underwriting are likely to
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
affect a consumer’s ability to repay
based on the payment for which the
consumer will be liable upon expiration
of the forbearance or deferral period and
other relevant facts and circumstances,
such as when the forbearance or deferral
period will expire.
Parts of proposed comment
43(c)(2)(vi)–1 and proposed comment
43(c)(2)(vi)–2 would have provided
guidance on verification of current debt
obligations. All guidance regarding
verification has been moved to the
commentary to § 1026.43(c)(3) and is
discussed below in the section-bysection analysis of that provision.
The Board solicited comment on
whether it should provide guidance on
consideration of current debt obligations
for joint applicants. Commenters
generally did not comment on
consideration of current debt obligations
for joint applicants. One trade
association commenter stated that joint
applicants should be subject to the same
standards as individual applicants.
Because the Bureau believes that the
current debt obligations of all joint
applicants must be considered to reach
a reasonable, good faith determination
of ability to repay, the Bureau is
adopting new comment 43(c)(2)(vi)–2.
New comment 43(c)(2)(vi)–2 clarifies
that when two or more consumers apply
for credit as joint obligors, a creditor
must consider the debt obligations of all
such joint applicants. The comment also
explains that creditors are not required
to consider the debt obligations of a
consumer acting merely as surety or
guarantor. Finally, the comment
clarifies that the requirements of
§ 1026.43(c)(2)(vi) do not affect various
disclosure requirements.
43(c)(2)(vii)
TILA section 129C(a)(3) requires
creditors to consider the consumer’s
monthly debt-to-income ratio or
residual income the consumer will have
after paying non-mortgage debt and
mortgage-related obligations, as part of
the ability-to-repay determination under
TILA section 129C(a)(1). This provision
is consistent with the 2008 HOEPA
Final Rule, which grants a creditor in a
high-cost or higher-priced mortgage loan
a presumption of compliance with the
requirement that the creditor assess
repayment ability if, among other
things, the creditor considers the
consumer’s debt-to-income ratio or
residual income. See
§ 1026.34(a)(4)(iii)(C), (b)(1). Existing
comment 34(a)(4)(iii)(C)–1 provides that
creditors may look to widely accepted
governmental and non-governmental
underwriting standards in defining
‘‘income’’ and ‘‘debt’’ including, for
PO 00000
Frm 00063
Fmt 4701
Sfmt 4700
6469
example, those set forth in the FHA
Handbook on Mortgage Credit Analysis
for Mortgage Insurance on One-to-Four
Unit Mortgage Loans.
Proposed § 226.43(c)(2)(vii) would
have implemented TILA section
129C(a)(3) by requiring creditors, as part
of the repayment ability determination,
to consider the consumer’s monthly
debt-to-income ratio or residual income.
Proposed comment 43(c)(2)(vii)–1
would have cross-referenced
§ 226.43(c)(7), regarding the definitions
and calculations for the monthly debtto-income and residual income.
Consistent with the 2008 HOEPA Final
Rule, the proposed rule would have
provided creditors flexibility to
determine whether to use a debt-toincome ratio or residual income metric
in assessing the consumer’s repayment
ability. As the Board noted, if one of
these metrics alone holds as much
predictive power as the two together,
then requiring creditors to use both
metrics could reduce credit access
without an offsetting increase in
consumer protection. 76 FR 27390,
27424–25 (May 11, 2011), citing 73 FR
44550 (July 30, 2008). The proposed
rule did not specifically address
creditors’ use of both metrics if such an
approach would provide incremental
predictive power of assessing a
consumer’s repayment ability. However,
as discussed above in the section-bysection analysis of § 1026.43(c), the
Board’s proposed comment 43(c)–1
would have provided that, in evaluating
the consumer’s repayment ability under
§ 226.43(c), creditors may look to widely
accepted governmental or nongovernmental underwriting standards,
such as the FHA Handbook on Mortgage
Credit Analysis for Mortgage Insurance
on One-to-Four Unit Mortgage Loans,
consistent with existing comment
34(a)(4)(iii)(C)–1.
In response to the proposed rule,
industry commenters and consumer
advocates generally supported including
consideration of the debt-to-income
ratio or residual income in the abilityto-repay determination. Several industry
commenters asked that the Bureau
provide creditors more flexibility in
considering and verifying the debt-toincome ratio or residual income. They
suggested that a reasonable and good
faith determination be deemed
sufficient, rather than use of all
underwriting standards in any
particular government or nongovernment handbook. Community
banks asserted that flexible standards
are necessary to meet their customers’
needs. Some consumer advocates
suggested that creditors be permitted
only to draw on widely accepted
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6470
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
standards that have been validated by
experience or sanctioned by a
government agency. They argued that
more specific standards would help
ensure safe and sound underwriting
criteria, higher compliance rates, and a
larger number of performing loans.
Section 1026.43(c)(2)(vii) adopts the
Board’s proposal by requiring a creditor
making the repayment determination
under § 1026.43(c)(1) to consider the
consumer’s monthly debt-to-income
ratio or residual income, in accordance
with § 1026.43(c)(7). The Bureau
believes that a flexible approach to
evaluating a consumer’s debt-to-income
ratio or residual income is appropriate
because stricter guidelines may limit
access to credit and create fair lending
problems. Broad guidelines will provide
creditors necessary flexibility to serve
the whole of the mortgage market
effectively and responsibly.
Accordingly, the final rule sets
minimum underwriting standards while
providing creditors with flexibility to
use their own reasonable guidelines in
making the repayment ability
determination required by
§ 1026.43(c)(1). Moreover, and as in the
2008 HOEPA Final Rule, the approach
would provide creditors flexibility to
determine whether to use a debt-toincome ratio or residual income, or
both, in assessing a consumer’s
repayment ability.
As discussed above in the section-bysection analysis of § 1026.43(c), the
Bureau is not finalizing the Board’s
proposed comment 43(c)–1 regarding
the use of widely accepted
governmental or non-governmental
underwriting standards in evaluating
the consumer’s repayment ability.
Instead, for the reasons discussed above,
comment 43(c)(2)–1 provides that the
rule and commentary permit creditors to
adopt reasonable standards for
evaluating factors in underwriting a
loan, such as whether to classify
particular inflows or obligations as
‘‘income’’ or ‘‘debt,’’ and that, in
evaluating a consumer’s repayment
ability, a creditor may look to
governmental underwriting standards.
See section-by-section analysis of
§ 1026.43(c)(2).
The Bureau believes a flexible
approach to evaluating debt and income
is appropriate in making the repayment
ability determination under
§ 1026.43(c). However, for the reasons
discussed below, the Bureau believes a
quantitative standard for evaluating a
consumer’s debt-to-income ratio should
apply to loans that are ‘‘qualified
mortgages’’ that receive a safe harbor or
presumption of compliance with the
repayment ability determination under
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
§ 1026.43(c). For a discussion of the
quantitative debt-to-income standard
that applies to qualified mortgages
pursuant to § 1026.43(e)(2) and the
rationale for applying a quantitative
standard in the qualified mortgage
space, see the section-by-section
analysis of § 1026.43(e)(2).
43(c)(2)(viii)
TILA section 129C(a)(1) and (3)
requires creditors to consider credit
history as part of the ability-to-repay
determination. Proposed
§ 226.43(c)(2)(viii) would have
implemented the requirement under
TILA section 129C(a)(1) and (3) by
adopting the statutory requirement that
creditors consider credit history as part
of an ability-to-repay determination.
Proposed comment 43(c)(2)(viii)–1
would have referred creditors to widely
accepted governmental and nongovernmental underwriting standards to
define credit history. The proposed
comment would have given examples of
factors creditors could consider, such as
the number and age of credit lines,
payment history, and any judgments,
collections, or bankruptcies. The
proposed comment also would have
referred creditors to credit bureau
reports or to nontraditional credit
references such as rental payment
history or public utility payments.
Commenters generally did not object
to the proposed adoption of the
statutory requirement to consider credit
history as part of ability-to-repay
determinations. Commenters generally
supported giving creditors significant
flexibility in how to consider credit
history. Creditors also generally
supported clarifying that creditors may
look to nontraditional credit references
such as rental payment history or public
utility payments.
Section 1026.43(c)(2)(viii) is adopted
as proposed. Comment 43(c)(2)(viii)–1
as adopted substantially maintains the
proposed comment’s flexible approach
to consideration of credit history.
Comment 43(c)(2)(viii)–1 notes that
‘‘credit history’’ may include factors
such as the number and age of credit
lines, payment history, and any
judgments, collections, or bankruptcies.
The comment clarifies that the rule does
not require creditors to obtain or
consider a consolidated credit score or
prescribe a minimum credit score that
creditors must apply. The comment
further clarifies that the rule does not
specify which aspects of credit history
a creditor must consider or how various
aspects of credit history could be
weighed against each other or against
other underwriting factors. The
comment explains that some aspects of
PO 00000
Frm 00064
Fmt 4701
Sfmt 4700
a consumer’s credit history, whether
positive or negative, may not be directly
indicative of the consumer’s ability to
repay and that a creditor therefore may
give various aspects of a consumer’s
credit history as much or as little weight
as is appropriate to reach a reasonable,
good faith determination of ability to
repay. The Bureau believes that this
flexible approach is appropriate because
of the wide range of creditors,
consumers, and loans to which the rule
will apply. The Bureau believes that a
wide range of approaches to considering
credit history will contribute to
reasonable, good faith ability-to-repay
determinations. As in the proposal, the
comment, as adopted, clarifies that
creditors may look to non-traditional
credit references such as rental payment
history or public utility payments, but
are not required to do so. Reference to
widely accepted governmental and nongovernmental underwriting standards
has been omitted, as discussed in the
section-by-section analysis of
§ 1026.43(c), above.
Portions of proposed comment
43(c)(2)(viii)–1 discussed verification of
credit history. All guidance regarding
verification has been moved to the
commentary to § 1026.43(c)(3) and is
discussed below in the section-bysection analysis of that provision.
Because the Bureau believes that the
credit history of all joint applicants
must be considered to reach a
reasonable, good faith determination of
joint applicants’ ability to repay, and for
conformity with the commentary to
§ 1026.43(c)(2)(vi) regarding
consideration of current debt obligations
for multiple applicants, the Bureau is
adopting new comment 43(c)(2)(viii)–2
regarding multiple applicants. The
comment clarifies that, when two or
more consumers apply jointly for credit,
the creditor is required by
§ 1026.43(c)(2)(viii) to consider the
credit history of all joint applicants.
New comment 43(c)(2)(viii)–2 also
clarifies that creditors are not required
to consider the credit history of a
consumer who acts merely as a surety
or guarantor. Finally, the comment
clarifies that the requirements of
§ 1026.43(c)(2)(viii) do not affect various
disclosure requirements.
43(c)(3) Verification Using Third-Party
Records
TILA section 129C(a)(1) requires that
a creditor make a reasonable and good
faith determination, based on ‘‘verified
and documented information,’’ that a
consumer has a reasonable ability to
repay the covered transaction. The
Board’s 2008 HOEPA Final Rule
required that a creditor verify the
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
consumer’s income or assets relied on to
determine repayment ability and the
consumer’s current obligations under
§ 1026.34(a)(4)(ii)(A) and (C). Thus,
TILA section 129C(a)(1) differs from
existing repayment ability rules by
requiring a creditor to verify
information relied on in considering the
consumer’s ability to repay according to
the considerations required under TILA
section 129C(a)(3), which are discussed
above in the section-by-section analysis
of § 1026.43(c)(2).
The Board’s proposal would have
implemented TILA section 129C(a)(1)’s
general requirement to verify a
consumer’s repayment ability in
proposed § 226.43(c)(3), which required
that a creditor verify a consumer’s
repayment ability using reasonably
reliable third-party records, with two
exceptions. Under the first exception,
proposed § 226.43(c)(3)(i) provided that
a creditor may orally verify a
consumer’s employment status, if the
creditor subsequently prepares a record
of the oral employment status
verification. Under the second
exception, proposed § 226.43(c)(3)(ii)
provided that, in cases where a creditor
relies on a consumer’s credit report to
verify a consumer’s current debt
obligations and the consumer’s
application states a current debt
obligation not shown in the consumer’s
credit report, the creditor need not
independently verify the additional debt
obligation, as reported. Proposed
comment 43(c)(3)–1 clarified that
records a creditor uses to verify a
consumer’s repayment ability under
proposed § 226.43(c)(3) must be specific
to the individual consumer. Records
regarding, for example, average incomes
in the consumer’s geographic location or
average incomes paid by the consumer’s
employer would not be specific to the
individual consumer and are not
sufficient.
Proposed comment 43(c)(3)–2
provided that a creditor may obtain
third-party records from a third-party
service provider, as long as the records
are reasonably reliable and specific to
the individual consumer. As stated in
§ 1026.43(c)(3), the standard for
verification is that the creditor must use
‘‘reasonably reliable third-party
records,’’ which is fulfilled for
reasonably reliable documents, specific
to the consumer, provided by a thirdparty service provider. Also, proposed
comment 43(c)(3)–2 clarified that a
creditor may obtain third-party records,
for example, payroll statements, directly
from the consumer, again as long as the
records are reasonably reliable.
The Board also solicited comment on
whether any documents or records
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
prepared by the consumer and not
reviewed by a third party appropriately
could be considered in determining
repayment ability, for example, because
a particular record provides information
not obtainable using third-party records.
In particular, the Board solicited
comment on methods currently used to
ensure that documents prepared by selfemployed consumers (such as a year-todate profit and loss statement for the
period after the period covered by the
consumer’s latest income tax return, or
an operating income statement prepared
by a consumer whose income includes
rental income) are reasonably reliable
for use in determining repayment
ability.
Commenters generally supported the
Board’s proposal to implement the
Dodd-Frank Act’s verification
requirements. Consumer groups
generally found the proposal to be an
accurate implementation of the statute
and posited that the proposal would
provide much-needed protection for
consumers. Industry commenters
generally also supported the proposal,
noting that most underwriters already
engaged in similarly sound
underwriting practices. Some industry
commenters noted that verifying a
consumer’s employment status imposes
a burden upon the consumer’s employer
as well, however the Bureau has
concluded that the oral verification
provision provided by
§ 1026.43(c)(3)(ii), discussed below,
alleviates such concerns.
The Bureau is adopting
§ 1026.43(c)(3) substantially as
proposed, with certain clarifying
changes which are described below. The
final rule also adds new comment
43(c)(3)–3. In addition, for
organizational purposes, the final rule
generally adopts proposed comments
43(c)(2)(iv)–4, 43(c)(2)(v)–4,
43(c)(2)(vi)–1, 43(c)(2)(viii)–1, and
43(c)(2)(ii)–2 in renumbered comments
43(c)(3)–4 through –8 with revisions as
discussed below. These changes and
additions to § 1026.43(c)(3) and its
commentary are discussed below.
First, the final rule adds a new
§ 1026.43(c)(3)(i), which provides that,
for purposes of § 1026.43(c)(2)(i), a
creditor must verify a consumer’s
income or assets in accordance with
§ 1026.43(c)(4). This is an exception to
the general rule in § 1026.43(c)(3) that a
creditor must verify the information that
the creditor relies on in determining a
consumer’s repayment ability under
§ 1026.43(c)(2) using reasonably reliable
third-party records. Because of this new
provision, proposed § 226.43(c)(3)(i) and
(ii) are adopted as proposed in
§ 1026.43(c)(3)(ii) and (iii), with minor
PO 00000
Frm 00065
Fmt 4701
Sfmt 4700
6471
technical revisions. In addition, the
Bureau is adopting proposed comments
43(c)(3)–1 and –2 substantially as
proposed with revisions to clarify that
the guidance applies to both
§ 1026.43(c)(3) and (c)(4).
The Bureau is adding new comment
43(c)(3)–3 to clarify that a credit report
generally is considered a reasonably
reliable third-party record. The Board’s
proposed comment 43(c)(2)(vi)–2 stated,
among other things, that a credit report
is deemed a reasonably reliable thirdparty record under proposed
§ 226.43(c)(3). Commenters did not
address that aspect of proposed
comment 43(c)(2)(vi)–2. The Bureau
believes credit reports are generally
reasonably reliable third-party records
for verification purposes. Comment
43(c)(3)–3 also explains that a creditor
is not generally required to obtain
additional reasonably reliable thirdparty records to verify information
contained in a credit report, as the
report itself is the means of verification.
Likewise, comment 43(c)(3)–3 explains
that if information is not included in the
credit report, then the credit report
cannot serve as a means of verifying that
information. The comment further
explains, however, that if the creditor
may know or have reason to know that
a credit report is not reasonably reliable,
in whole or in part, then the creditor
complies with § 1026.43(c)(3) by
disregarding such inaccurate or
disputed items or reports. The creditor
may also, but is not required, to obtain
other reasonably reliable third-party
records to verify information with
respect to which the credit report, or
item therein, may be inaccurate. The
Bureau believes that this guidance
strikes the appropriate balance between
acknowledging that in many cases, a
credit report is a reasonably reliable
third-party record for verification and
documentation for many creditors, but
also that a credit report may be subject
to a fraud alert, extended alert, active
duty alert, or similar alert identified in
15 U.S.C. 1681c–1, or may contain debt
obligations listed on a credit report is
subject to a statement of dispute
pursuant to 15 U.S.C. 1681i(b).
Accordingly, for the reasons discussed
above, the Bureau is adopting new
comment 43(c)(3)–3.
As noted above, the Bureau is
adopting proposed comment
43(c)(2)(iv)–4 as comment 43(c)(3)–4 for
organizational purposes. The Board
proposed comment 43(c)(2)(iv)–4 to
explain that although a creditor could
use a credit report to verify current
obligations, the report would not reflect
a simultaneous loan that has not yet
been consummated or has just recently
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6472
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
been consummated. Proposed comment
43(c)(2)(iv)–2 clarified that if the
creditor knows or has reason to know
that there will be a simultaneous loan
extended at or before consummation,
then the creditor may verify the
simultaneous loan by obtaining thirdparty verification from the third-party
creditor of the simultaneous loan. The
proposed comment provided, as an
example, that the creditor may obtain a
copy of the promissory note or other
written verification from the third-party
creditor in accordance with widely
accepted governmental or nongovernmental standards. In addition,
proposed comment 43(c)(2)(iv)–2 crossreferenced comments 43(c)(3)–1 and –2,
which discuss verification using thirdparty records. The Bureau generally did
not receive comment with respect to
this proposed comment; however, at
least one commenter supported the
example that a promissory note would
serve as appropriate documentation for
verifying a simultaneous loan. The
Bureau is adopting proposed comment
43(c)(2)(iv)–4 as comment 43(c)(3)–4
with the following amendment. For
consistency with other aspects of the
rule, comment 43(c)(3)–4 does not
include the Board’s proposed reference
to widely accepted governmental or
non-governmental standards.
The Board proposed comment
43(c)(2)(v)–4, which stated that creditors
must make the repayment ability
determination required under proposed
§ 226.43(c) based on information
verified from reasonably reliable
records. The Board solicited comment
on any special concerns regarding the
requirement to document certain
mortgage-related obligations, for
example, ground rent or leasehold
payments, or special assessments. The
Board also solicited comment on
whether it should provide that the
HUD–1 or –1A or a successor form
could serve as verification of mortgagerelated obligations reflected by the form,
where a legal obligation exists to
complete the HUD–1 or –1A accurately.
To provide additional clarity, the
Bureau is moving guidance that
discusses verification, including
proposed comment 43(c)(2)(v)–4, as part
of the section-by-section analysis of, and
commentary to, § 1026.43(c)(3).
Additional comments from the Board’s
proposal with respect to mortgagerelated obligations are in the section-bysection analysis of § 1026.43(c)(2)(v),
above.
Industry commenters and consumer
advocates generally supported including
consideration and verification of
mortgage-related obligations in the
ability-to-repay determination. Several
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
industry commenters asked that the
Bureau provide creditors more
flexibility in considering and verifying
mortgage-related obligations. Several
consumer advocate commenters
discussed the importance of verifying
mortgage-related obligations based on
reliable records, noting that inadequate,
or non-existent, verification measures
played a significant part in the subprime
crisis. Industry commenters agreed that
verification was appropriate, but these
commenters also stressed the
importance of clear and detailed
guidance. Several commenters were
concerned about the meaning of
‘‘reasonably reliable records’’ in the
context of mortgage-related obligations.
Some commenters asked the Bureau to
designate certain items as reasonably
reliable, such as taxes referenced in a
title report, statements of common
expenses provided by community
associations, or items identified in the
HUD–1 or HUD–1A.
The Bureau is adopting proposed
comment 43(c)(2)(v)–4 as comment
43(c)(3)–5 with revision to provide
further explanation of its approach to
verifying mortgage-related obligations.
While the reasonably reliable standard
contains an element of subjectivity, the
Bureau concludes that this flexibility is
necessary. The Bureau believes that it is
important to craft a regulation with the
flexibility to accommodate an evolving
mortgage market. The Bureau
determines that the reasonably reliable
standard is appropriate in this context
given the nature of the items that are
defined as mortgage-related obligations.
Thus, comment 43(c)(3)–5 incorporates
by reference comments 43(c)(3)–1 and
–2. Mortgage-related obligations refer to
a limited set of charges, such as
property taxes and lease payments,
which a creditor can generally verify
from an independent or objective
source. Thus, in the context of
mortgage-related obligations this
standard provides certainty while being
sufficiently flexible to adapt as
underwriting practices develop over
time.
To address the concerns raised by
several commenters, the Bureau is
providing further clarification in
43(c)(3)–5 to provide detailed guidance
and several examples illustrating these
requirements. For example, comment
43(c)(3)–5 clarifies that records are
reasonably reliable for purposes
§ 1026.43(c)(2)(v) if the information in
the record was provided by a
governmental organization, such as a
taxing authority or local government.
Comment 43(c)(3)–5 also explains that a
creditor complies with § 1026.43(c)(2)(v)
if it relies on, for example, homeowners
PO 00000
Frm 00066
Fmt 4701
Sfmt 4700
association billing statements provided
by the seller to verify other information
in a record provided by an entity
assessing charges, such as a
homeowners association. Comment
43(c)(3)–5 further illustrates that records
are reasonably reliable if the
information in the record was obtained
from a valid and legally executed
contract, such as a ground rent
agreement. Comment 43(c)(3)–5 also
clarifies that other records may be
reasonably reliable if the creditor can
demonstrate that the source provided
the information objectively.
The Board’s proposal solicited
comment regarding whether the HUD–1,
or similar successor document, should
be considered a reasonably reliable
record. The Board noted, and
commenters confirmed, that the HUD–1,
HUD–1A, or successor form might be a
reasonably reliable record because a
legal obligation exists to complete the
form accurately. Although the Bureau
agrees with these considerations, the
Bureau does not believe that a
document provided in final form at
consummation, such as the HUD–1,
should be used for the purposes of
determining ability to repay pursuant to
§ 1026.43(c)(2)(v). The Bureau expects
the ability-to-repay determination to be
conducted in advance of consummation.
It therefore may be impractical for a
creditor to rely on a document that is
produced in final form at, or shortly
before, consummation for verification
purposes. The Bureau is also concerned
that real estate transactions may be
needlessly disrupted or delayed if
creditors delay determining the
consumer’s ability to repay until the
HUD–1, or similar successor document,
is prepared. Given these concerns, and
strictly as a matter of policy, the Bureau
does not wish to encourage the use of
the HUD–1, or similar successor
document, for the purposes of
determining a consumer’s ability to
repay, and the Bureau is not specifically
designating the HUD–1 as a reasonably
reliable record in either
§ 1026.43(c)(2)(v) or related
commentary, such as comment 43(c)(3)–
5. However, the Bureau acknowledges
that the HUD–1, HUD–1A, or similar
successor document may comply with
§ 1026.43(c)(3).
The Board proposed comment
43(c)(2)(vi)–1, which discussed both
consideration and verification of current
debt obligations. The Bureau discusses
portions of proposed comment
43(c)(2)(vi)–1, regarding consideration
of current debt obligations, in the
section-by-section analysis of
§ 1026.43(c)(2)(vi). As noted above, for
organizational purposes and to provide
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
additional clarity, however, the Bureau
is moving guidance that discusses
verification, including portions of
proposed comment 43(c)(2)(vi)–1, as
part of the commentary to
§ 1026.43(c)(3). With respect to
verification, proposed comment
43(c)(2)(vi)–1 stated that: (1) In
determining how to verify current debt
obligations, a creditor may look to
widely accepted governmental and
nongovernmental underwriting
standards; and (2) a creditor may, for
example, look to credit reports, student
loan statements, automobile loan
statements, credit card statements,
alimony or child support court orders
and existing mortgage statements.
Commenters did not provide the Bureau
with significant comment with respect
to this proposal, although at least one
large bank commenter specifically urged
the Bureau to allow creditors to verify
current debt obligations using a credit
report. For the reasons discussed below,
the Bureau is adopting, in relevant part,
proposed comment 43(c)(2)(vi)–1 as
comment 43(c)(3)–6. The Bureau
believes that the proposed guidance
regarding verification using statements
and orders related to individual
obligations could be misinterpreted as
implying that credit reports are not
sufficient verification of current debt
obligations and that creditors must
obtain statements and other
documentation pertaining to each
individual obligation. Comment
43(c)(3)–6 therefore explains that a
creditor is not required to further verify
the existence or amount of the
obligation listed in a credit report,
absent circumstances described in
comment 43(c)(3)–3. The Bureau
believes that a credit report is a
reasonably reliable third-party record
and is sufficient verification of current
debt obligations in most cases. The
Bureau also believes that this approach
is reflected in the Board’s proposal. For
example, proposed comment
43(c)(2)(vi)–2 stated that a credit report
is a reasonably reliable third-party
record; and proposed § 1026.43(c)(3)(ii)
indicated that a creditor could rely on
a consumer’s credit report to verify a
consumer’s current debt obligations.
Unlike proposed comment 43(c)(2)(vi)–
1, comment 43(c)(3)–6 does not include
reference to widely accepted
governmental and nongovernmental
underwriting standards for consistency
with the amendments in other parts of
the rule. To understand the Bureau’s
approach to verification standards, see
the section-by-section analysis,
commentary, and regulation text of
§ 1026.43(c) and § 1026.43(c)(1) above.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
The Board proposed comment
43(c)(2)(viii)–1, which discussed both
the consideration and verification of
credit history. The Bureau discusses
portions of proposed comment
43(c)(2)(viii)–1, those regarding
consideration of credit history, in the
section-by-section analysis of
§ 1026.43(c)(2)(viii). However, the
Bureau is moving guidance on
verification, including portions of
proposed comment 43(c)(2)(viii)–1, to
§ 1026.43(c)(3) and its commentary.
Regarding verification, proposed
comment 43(c)(2)(viii)–1 stated that: (1)
Creditors may look to widely accepted
governmental and nongovernmental
underwriting standards to determine
how to verify credit history; and (2) a
creditor may, for example, look to credit
reports from credit bureaus, or other
nontraditional credit references
contained in third-party documents,
such as rental payment history or public
utility payments to verify credit history.
Commenters did not object to the
Board’s proposed approach to
verification of credit history. The
Bureau is adopting this approach under
comment 43(c)(3)–7 with the following
exception. References to widely
accepted governmental and
nongovernmental underwriting
standards have been removed, as
discussed above in the section-bysection analysis of § 1026.43(c). Portions
of proposed comment 43(c)(2)(viii)–1
regarding verification are otherwise
adopted substantially as proposed in
new comment 43(c)(3)–7.
The Board proposed comment
43(c)(2)(ii)–2 to clarify that a creditor
also may verify the employment status
of military personnel using the
electronic database maintained by the
DoD to facilitate identification of
consumers covered by credit protections
provided pursuant to 10 U.S.C. 987, also
known as the ‘‘Talent Amendment.’’ 109
The Board also sought additional
comment as to whether creditors needed
additional flexibility in verifying the
employment status of military
personnel, such as by verifying the
employment status of a member of the
military using a Leave and Earnings
Statement.
Industry commenters requested that
the Bureau provide additional flexibility
for creditors to verify military
employment. For example, some
industry commenters noted that a Leave
and Earnings Statement was concrete
evidence of employment status and
income for military personnel and other
industry commenters stated that
institutions that frequently work with
109 See
PO 00000
supra note 105.
Frm 00067
Fmt 4701
Sfmt 4700
6473
military personnel have built their own
expertise in determining the reliability
of using the Leave and Earnings
Statement. These commenters argued
that using a Leave and Earnings
Statement is as reliable a means of
verifying the employment status of
military personnel as using a payroll
statement to verify that employment
status of a civilian.
Accordingly, the Bureau is adopting
proposed comment 43(c)(2)(ii)–2 as
comment 43(c)(3)–8, for organizational
purposes, with the following additional
clarification. Comment 43(c)(3)–8
clarifies that a creditor may verify
military employment by means of a
military Leave and Earnings Statement.
Therefore, comment 43(c)(3)–8 provides
that a creditor may verify the
employment status of military personnel
by using either a military Leave and
Earnings Statement or by using the
electronic database maintained by the
DoD.
The Board solicited comment on
whether a creditor might appropriately
verify a consumer’s repayment ability
using any documents or records
prepared by the consumer and not
reviewed by a third party, perhaps
because a particular record might
provide information not obtainable
using third-party records. The Bureau
did not receive sufficient indication that
such records would qualify as
reasonably reliable and has thus not
added additional regulatory text or
commentary to allow for the use of such
records. However, a creditor using
reasonable judgment nevertheless may
determine that such information is
useful in verifying a consumer’s ability
to repay. For example, the creditor may
consider and verify a self-employed
consumer’s income from the consumer’s
2013 income tax return, and the
consumer then may offer an unaudited
year-to-date profit and loss statement
that reflects significantly lower expected
income in 2014. The creditor might
reasonably use the lower 2014 income
figure as a more conservative method of
underwriting. However, should the
unverified 2014 income reflect
significantly greater income than the
income tax return showed for 2013, a
creditor instead would verify this
information in accordance with
§ 1026.43(c)(4).
43(c)(4) Verification of Income or Assets
TILA section 129C(a)(4) requires that
a creditor verify amounts of income or
assets that a creditor relied upon to
determine repayment ability by
reviewing the consumer’s Internal
Revenue Service (IRS) Form W–2, tax
returns, payroll statements, financial
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6474
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
institution records, or other third-party
documents that provide reasonably
reliable evidence of the consumer’s
income or assets. TILA section
129C(a)(4) further provides that, in
order to safeguard against fraudulent
reporting, any consideration of a
consumer’s income history must
include the verification of income using
either (1) IRS transcripts of tax returns;
or (2) an alternative method that quickly
and effectively verifies income
documentation by a third-party, subject
to rules prescribed by the Board, and
now the Bureau. TILA section
129C(a)(4) is similar to existing
§ 1026.34(a)(4)(ii)(A), adopted by the
Board’s 2008 HOEPA Final Rule,
although TILA section 129C(a)(4)(B)
provides for the alternative methods of
third-party income documentation
(other than use of an IRS tax-return
transcript) to be both ‘‘reasonably
reliable’’ and to ‘‘quickly and
effectively’’ verify a consumer’s income.
The Board proposed to implement TILA
section 129C(a)(4)(B), adjusting the
requirement to (1) require the creditor to
use reasonably reliable third-party
records, consistent with TILA section
129C(a)(4), rather than the ‘‘quickly and
effectively’’ standard of TILA section
129C(a)(4)(B); and (2) provide examples
of reasonably reliable records that a
creditor can use to efficiently verify
income, as well as assets. As discussed
in the Board’s proposal, the Board
proposed these adjustments pursuant to
its authority under TILA sections 105(a)
and 129B(e). The Board believed that
considering reasonably reliable records
effectuates the purposes of TILA section
129C(a)(4), is an effective means of
verifying a consumer’s income, and
helps ensure that consumers are offered
and receive loans on terms that
reasonably reflect their repayment
ability.
Industry and consumer group
commenters generally supported
proposed § 226.43(c)(4) because the
proposal would permit a creditor to use
a wide variety of documented income
and/or asset verification methods, while
maintaining the appropriate goal of
ensuring accurate verification
procedures. Some commenters
requested that the Bureau allow a
creditor to underwrite a mortgage based
on records maintained by a financial
institution that show an ability to repay.
Specifically, commenters raised
concerns with respect to customers who
may not have certain documents, such
as IRS Form W–2, because of their
employment or immigration status. The
Bureau expects that § 1026.43(c)(4)
provides that the answer to such
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
concerns is self-explanatory; a creditor
need not, by virtue of the requirements
of § 1026.43(c)(4), require a consumer to
produce an IRS Form W–2 in order to
verify income. Some industry
commenters argued that the Bureau
should also permit creditors to verify
information for certain applicants, such
as the self-employed, by using non-third
party reviewed documents, arguing it
would reduce costs for consumers. The
Bureau does not find such justification
to be persuasive, as other widely
available documents, such as financial
institution records or tax records, could
easily serve as means of verification
without imposing significant cost to the
consumer or creditor. See also the
discussion of comment 43(b)(13)(i)–1,
addressing third-party records.
Some industry commenters
advocated, in addition, that creditors be
allowed to employ broader, faster
sources of income verification, such as
internet-based tools that employ
aggregate employer data, or be allowed
to rely on statistically qualified models
to estimate income or assets. The
Bureau, however, believes that
permitting creditors to use statistical
models or aggregate data to verify
income or assets would be contrary to
the purposes of TILA section 129C(a)(4).
Although the statute uses the words
‘‘quickly and effectively,’’ these words
cannot be read in isolation, but should
instead be read in context of the entirety
of TILA section 129C(a)(4). As noted
above, the Bureau believes that TILA
section 129C(a)(4) is primarily intended
to safeguard against fraudulent reporting
and inaccurate underwriting, rather
than accelerate the process of verifying
a consumer’s income, as the statute
specifically notes that a creditor must
verify a consumer’s income history ‘‘[i]n
order to safeguard against fraudulent
reporting.’’ The Bureau further believes
that permitting the use of aggregate data
or non-individualized estimates would
undermine the requirements to verify a
consumer’s income and to determine a
consumer’s ability to repay. Rather, the
Bureau believes that the statute requires
verification of the amount of income or
assets relied upon using evidence of an
individual’s income or assets.
For substantially the same reasons
stated in the Board’s proposal, the
Bureau is adopting proposed
§ 226.43(c)(4) and its accompanying
commentary substantially as proposed
in renumbered § 1026.43(c)(4), with
revisions for clarity. Accordingly, the
Bureau is implementing TILA section
129C(a)(4) in § 1026.43(c)(4), which
provides that a creditor must verify the
amounts of income or assets it relies on
to determine a consumer’s ability to
PO 00000
Frm 00068
Fmt 4701
Sfmt 4700
repay a covered transaction using thirdparty records that provide reasonably
reliable evidence of the consumer’s
income or assets. Section 1026.43(c)(4)
further provides a list of illustrative
examples of methods of verifying a
consumer’s income or asserts using
reasonably reliable third-party records.
Such examples include: (1) Copies of
tax returns the consumer filed with the
IRS or a State taxing authority; (2) IRS
Form W–2s or similar IRS forms for
reporting wages or tax withholding; (3)
payroll statements, including military
Leave and Earnings Statements; (4)
financial institution records; (5) records
from the consumer’s employer or a third
party that obtained consumer-specific
income information from the
consumer’s employer; (6) records from a
government agency stating the
consumer’s income from benefits or
entitlements, such as a ‘‘proof of
income’’ letter issued by the Social
Security Administration; (7) check
cashing receipts; and (8) receipts from a
consumer’s use of funds transfer
services. The Bureau also believes that
by providing such examples of
acceptable records, the Bureau enables
creditors to quickly and effectively
verify a consumer’s income, as provided
in TILA section 129C(a)(4)(B).
Comment 43(c)(4)–1 clarifies that
under § 1026.43(c)(4), a creditor need
verify only the income or assets relied
upon to determine the consumer’s
repayment ability. Comment 43(c)(4)–1
also provides an example where the
creditor need not verify a consumer’s
annual bonus because the creditor relies
on only the consumer’s salary to
determine the consumer’s repayment
ability. This comment also clarifies that
comments 43(c)(3)–1 and –2, discussed
above, are instructive with respect to
income and asset verification.
Comment 43(c)(4)–2 clarifies that, if
consumers jointly apply for a loan and
each consumer lists his or her income
or assets on the application, the creditor
need verify only the income or assets
the creditor relies on to determine
repayment ability. Comment 43(c)(2)(i)–
5, discussed above, may also be
instructive in cases of multiple
applicants.
Comment 43(c)(4)–3 provides that a
creditor may verify a consumer’s
income using an IRS tax-return
transcript that summarizes the
information in the consumer’s filed tax
return, another record that provides
reasonably reliable evidence of the
consumer’s income, or both. Comment
43(c)(4)–3 also clarifies that a creditor
may obtain a copy of an IRS tax-return
transcript or filed tax return from a
service provider or from the consumer,
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
and the creditor need not obtain the
copy directly from the IRS or other
taxing authority. For additional
guidance, Comment 43(c)(4)–3 crossreferences guidance on obtaining
records in comment 43(c)(3)–2.
Finally, comment 43(c)(4)(vi)–1 states
that an example of a record from a
Federal, State, or local government
agency stating the consumer’s income
from benefits or entitlements is a ‘‘proof
of income letter’’ (also known as a
‘‘budget letter,’’ ‘‘benefits letter,’’ or
‘‘proof of award letter’’) from the Social
Security Administration.
As discussed above, the Bureau is
adopting § 1026.43(c)(4) as enabling
creditors to quickly and effectively
verify a consumer’s income, as provided
in TILA section 129C(a)(4)(B). In
addition, for substantially the same
rationale as discussed in the Board’s
proposal, the Bureau is adopting
§ 1026.43(c)(4) using its authority under
TILA section 105(a) to prescribe
regulations to carry out the purposes of
TILA. One of the purposes of TILA
section 129C is to assure that consumers
are offered and receive covered
transactions on terms that reasonably
reflect their ability to repay the loan.
See TILA section 129B(a)(2). The
Bureau believes that a creditor
consulting reasonably reliable records is
an effective means of verifying a
consumer’s income and helps ensure
that consumers are offered and receive
loans on terms that reasonably reflect
their repayment ability. The Bureau
further believes that TILA section
129C(a)(4) is intended to safeguard
against fraudulent or inaccurate
reporting, rather than to accelerate the
creditor’s ability to verify a consumer’s
income. Indeed, the Bureau believes
that there is a risk that requiring a
creditor to use quick methods to verify
the consumer’s income would
undermine the effectiveness of the
ability-to-repay requirements by
sacrificing thoroughness for speed. The
Bureau believes instead that requiring
the use of reasonably reliable records
effectuates the purposes of TILA section
129C(a)(4) without suggesting that
creditors must obtain records or
complete income verification within a
specific period of time. The Bureau is
adopting the examples of reasonably
reliable records, proposed by the Board,
that a creditor may use to efficiently
verify income or assets, because the
Bureau believes that it will facilitate
compliance by providing clear guidance
to creditors.
The Bureau notes that the Board
proposal solicited comment on whether
it should provide an affirmative defense
for a creditor that can show that the
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
amounts of the consumer’s income or
assets that the creditor relied upon in
determining the consumer’s repayment
ability were not materially greater than
the amounts the creditor could have
verified using third-party records at or
before consummation. Such an
affirmative defense, while not specified
under TILA, would be consistent with
the Board’s 2008 HOEPA Final Rule.
See § 1026.34(a)(4)(ii)(B).110 Consumer
group commenters generally opposed an
affirmative defense, arguing that such an
allowance would essentially gut the
income and asset verification
requirement provided by the rule. Other
commenters noted that providing an
affirmative defense might result in
confusion, and possible litigation, over
what the term ‘‘material’’ may mean,
and that a rule permitting an affirmative
defense would need to define
materiality specifically, including from
whose perspective materiality should be
measured (i.e., the creditor’s or the
consumer’s). Based on the comments
received, the Bureau believes that an
affirmative defense is not warranted.
The Bureau believes that permitting an
affirmative defense could result in
circumvention of the § 1026.43(c)(4)
verification requirement. For the
reasons stated, the Bureau is not
adopting an affirmative defense for a
creditor that can show that the amounts
of the consumer’s income or assets that
the creditor relied upon in determining
the consumer’s repayment ability were
not materially greater than the amounts
the creditor could have verified using
third-party records at or before
consummation.
43(c)(5) Payment Calculation
The Board proposed § 226.43(c)(5) to
implement the payment calculation
requirements of TILA section 129C(a),
as enacted by section 1411 of the DoddFrank Act. TILA section 129C(a)
contains the general requirement that a
creditor determine the consumer’s
‘‘ability to repay the loan, according to
its terms, and all applicable taxes,
insurance (including mortgage
guarantee insurance), and assessments,’’
based on several considerations,
including ‘‘a payment schedule that
fully amortizes the loan over the term of
the loan.’’ TILA section 129C(a)(1) and
(3). The statutory requirement to
consider mortgage-related obligations,
as defined in § 1026.43(b)(8), is
discussed above in the section-bysection analysis of § 1026.43(c)(2)(v).
110 The Bureau’s 2012 HOEPA Proposal proposed
to amend this subsection, though not in a manner
that affected the overall effect of an affirmative
defense. See 77 FR 49090, 49153 (Aug. 15, 2012).
PO 00000
Frm 00069
Fmt 4701
Sfmt 4700
6475
TILA section 129C(a) requires, among
other things, that a creditor make a
determination that a consumer ‘‘has a
reasonable ability to repay’’ a residential
mortgage loan. TILA section
129C(a)(6)(D) provides the process for
calculating the monthly payment
amount ‘‘[f]or purposes of making any
determination under this subsection,’’
i.e., subsection (a), for ‘‘any residential
mortgage loan.’’ TILA section
129C(a)(6)(A) through (D) requires
creditors to make uniform assumptions
when calculating the payment
obligation for purposes of determining
the consumer’s repayment ability for the
covered transaction. Specifically, TILA
section 129C(a)(6)(D)(i) through (iii)
provides that, when calculating the
payment obligation that will be used to
determine whether the consumer can
repay the covered transaction, the
creditor must use a fully amortizing
payment schedule and assume that: (1)
The loan proceeds are fully disbursed
on the date the loan is consummated; (2)
the loan is repaid in substantially equal,
monthly amortizing payments for
principal and interest over the entire
term of the loan with no balloon
payment; and (3) the interest rate over
the entire term of the loan is a fixed rate
equal to the fully indexed rate at the
time of the loan closing, without
considering the introductory rate. The
term ‘‘fully indexed rate’’ is defined in
TILA section 129C(a)(7).
TILA section 129C(a)(6)(D)(ii)(I) and
(II), however, provides two exceptions
to the second assumption regarding
‘‘substantially equal, monthly payments
over the entire term of the loan with no
balloon payment’’ for loans that require
‘‘more rapid repayment (including
balloon payment).’’ First, this statutory
provision authorizes the Bureau to
prescribe regulations for calculating the
payment obligation for loans that
require more rapid repayment
(including balloon payment), and which
have an annual percentage rate that does
not exceed the threshold for higherpriced mortgage loans. TILA section
129C(a)(6)(D)(ii)(I). Second, for loans
that ‘‘require more rapid repayment
(including balloon payment),’’ and
which exceed the higher-priced
mortgage loan threshold, the statute
requires that the creditor use the loan
contract’s repayment schedule. TILA
section 129C(a)(6)(D)(ii)(II). The statute
does not define the term ‘‘rapid
repayment.’’
The statute also provides three
additional clarifications to the
assumptions stated above for loans that
contain certain features. First, for
variable-rate loans that defer repayment
of any principal or interest, TILA
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6476
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
section 129C(a)(6)(A) states that for
purposes of the repayment ability
determination a creditor must use ‘‘a
fully amortizing repayment schedule.’’
This provision generally reiterates the
requirement provided under TILA
section 129C(a)(3) to use a payment
schedule that fully amortizes the loan.
Second, for covered transactions that
permit or require interest-only
payments, the statute requires that the
creditor determine the consumers’
repayment ability using ‘‘the payment
amount required to amortize the loan by
its final maturity.’’ TILA section
129C(a)(6)(B). Third, for covered
transactions with negative amortization,
the statute requires the creditor to also
take into account ‘‘any balance increase
that may accrue from any negative
amortization provision’’ when making
the repayment ability determination.
TILA section 129C(a)(6)(C). The statute
does not define the terms ‘‘variablerate,’’ ‘‘fully amortizing,’’ ‘‘interestonly,’’ or ‘‘negative amortization.’’
Proposed § 226.43(c)(5)(i) and (ii)
implemented these statutory provisions,
as discussed in further detail below.
TILA section 129C(a), as enacted by
section 1411 of the Dodd-Frank Act,
largely codifies many aspects of the
repayment ability rule under
§ 1026.34(a)(4) from the Board’s 2008
HOEPA Final Rule and extends such
requirements to the entire mortgage
market regardless of the loan’s interest
rate. Similarly to § 1026.34(a)(4), the
statutory framework of TILA section
129C(a) focuses on prescribing the
requirements that govern the
underwriting process and extension of
credit to consumers, rather than
dictating which credit terms may or may
not be permissible. However, there are
differences between TILA section
129C(a) and the 2008 HOEPA Final Rule
with respect to payment calculation
requirements.
Current § 1026.34(a)(4) does not
address how a creditor must calculate
the payment obligation for a loan that
cannot meet the presumption of
compliance under § 1026.34(a)(4)(iii)(B).
For example, § 1026.34(a)(4) does not
specify how to calculate the periodic
payment required for a negative
amortization loan or balloon-payment
mortgage with a term of less than seven
years. In contrast, the Dodd-Frank Act
lays out a specific framework for
underwriting any loan subject to TILA
section 129C(a). In taking this approach,
the statutory requirements in TILA
section 129C(a)(6)(D) addressing
payment calculation requirements differ
from § 1026.34(a)(4)(iii) in the following
manner: (1) The statute generally
premises repayment ability on monthly
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
payment obligations calculated using
the fully indexed rate, with no limit on
the term of the loan that should be
considered for such purpose; (2) the
statute permits underwriting loans with
balloon payments to differ depending
on whether the loan’s annual percentage
rate exceeds the applicable loan pricing
benchmark, or meets or falls below the
applicable loan pricing benchmark; and
(3) the statute expressly addresses
underwriting requirements for loans
with interest-only payments or negative
amortization.
In 2006 and 2007 the Board and other
Federal banking agencies addressed
concerns regarding the increased risk to
creditors and consumers presented by
loans that permit consumers to defer
repayment of principal and sometimes
interest, and by adjustable-rate
mortgages in the subprime market. The
Interagency Supervisory Guidance
stated that creditors should determine a
consumer’s repayment ability using a
payment amount based on the fully
indexed rate, assuming a fully
amortizing schedule. In addition, the
2006 Nontraditional Mortgage Guidance
addressed specific considerations for
negative amortization and interest-only
loans. State supervisors issued parallel
statements to this guidance, which most
states have adopted. TILA section
129C(a)(3) and (6) is generally
consistent with this longstanding
Interagency Supervisory Guidance and
largely extends the guidance regarding
payment calculation assumptions to all
loan types covered under TILA section
129C(a), regardless of a loan’s interest
rate. The Board proposed § 226.43(c)(5)
to implement the payment calculation
requirements of TILA section
129C(a)(1), (3) and (6) for purposes of
the repayment ability determination
required under proposed § 226.43(c).
Consistent with these statutory
provisions, proposed § 226.43(c)(5) did
not prohibit the creditor from offering
certain credit terms or loan features, but
rather focused on the calculation
process the creditor would be required
to use to determine whether the
consumer could repay the loan
according to its terms. Under the
proposal, creditors generally would
have been required to determine a
consumer’s ability to repay a covered
transaction using the fully indexed rate
or the introductory rate, whichever is
greater, to calculate monthly, fully
amortizing payments that are
substantially equal, unless a special rule
applies. See proposed § 226.43(c)(5)(i).
For clarity and simplicity, proposed
§ 226.43(c)(5)(i) used the terms ‘‘fully
amortizing payment’’ and ‘‘fully
PO 00000
Frm 00070
Fmt 4701
Sfmt 4700
indexed rate,’’ which were defined
separately under proposed
§ 226.43(b)(2) and (3), respectively, as
discussed above. Proposed comment
43(c)(5)(i)–1 clarified that the general
rule would apply whether the covered
transaction is an adjustable-, step-, or
fixed-rate mortgage, as those terms are
defined in § 1026.18(s)(7)(i), (ii), and
(iii), respectively.
Proposed § 226.43(c)(5)(ii)(A) through
(C) created exceptions to the general
rule and provided special rules for
calculating the payment obligation for
balloon-payment mortgages, interestonly loans or negative amortization
loans, as follows:
Balloon-payment mortgages.
Consistent with TILA section
129C(a)(6)(D)(ii)(I) and (II), for covered
transactions with a balloon payment,
proposed § 226.43(c)(5)(ii)(A) provided
special rules that differed depending on
the loan’s rate. Proposed
§ 226.43(c)(5)(ii)(A)(1) stated that for
covered transactions with a balloon
payment that are not higher-priced
covered transactions, the creditor must
determine a consumer’s ability to repay
the loan using the maximum payment
scheduled in the first five years after
consummation. Proposed
§ 226.43(c)(5)(ii)(A)(2) further stated that
for covered transactions with balloon
payments that are higher priced covered
transactions, the creditor must
determine the consumer’s ability to
repay according to the loan’s payment
schedule, including any balloon
payment. For clarity, proposed
§ 226.43(c)(5)(ii)(A) used the term
‘‘higher-priced covered transaction’’ to
refer to a covered transaction that
exceeds the applicable higher-priced
mortgage loan coverage threshold.
‘‘Higher-priced covered transaction’’ is
defined in § 1026.43(b)(4), discussed
above. The term ‘‘balloon payment’’ has
the same meaning as in current
§ 1026.18(s)(5)(i).
Interest-only loans. Consistent with
TILA section 129C(a)(6)(B) and (D),
proposed § 226.43(c)(5)(ii)(B) provided
special rules for interest-only loans.
Proposed § 226.43(c)(5)(ii)(B) required
that the creditor determine the
consumer’s ability to repay the interestonly loan using (1) the fully indexed
rate or the introductory rate, whichever
is greater; and (2) substantially equal,
monthly payments of principal and
interest that will repay the loan amount
over the term of the loan remaining as
of the date the loan is recast. For clarity,
proposed § 226.43(c)(5)(ii)(B) used the
terms ‘‘loan amount’’ and ‘‘recast,’’
which are defined and discussed under
§ 1026.43(b)(5) and (11), respectively.
The term ‘‘interest-only loan’’ has the
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
same meaning as in current
§ 1026.18(s)(7)(iv).
Negative amortization loans.
Consistent with TILA section
129C(a)(6)(C) and (D), proposed
§ 226.43(c)(5)(ii)(C) provided special
rules for negative amortization loans.
Proposed § 226.43(c)(5)(ii)(C) required
that the creditor determine the
consumer’s ability to repay the negative
amortization loan using (1) the fully
indexed rate or the introductory rate,
whichever is greater; and (2)
substantially equal, monthly payments
of principal and interest that will repay
the maximum loan amount over the
term of the loan remaining as of the date
the loan is recast. Proposed comment
43(c)(5)(ii)(C)–1 clarified that for
purposes of the rule, the creditor would
first have to determine the maximum
loan amount and the period of time that
remains in the loan term after the loan
is recast. For clarity, proposed
§ 226.43(c)(5)(ii)(C) used the terms
‘‘maximum loan amount’’ and ‘‘recast,’’
which are defined and discussed under
§ 1026.43(b)(7) and (11), respectively.
The term ‘‘negative amortization loan’’
has the same meaning as in current
§ 1026.18(s)(7)(v) and comment
18(s)(7)–1.
43(c)(5)(i) General Rule
Proposed § 226.43(c)(5)(i)
implemented the payment calculation
requirements in TILA section
129C(a)(3), 129C(6)(D)(i) through (iii),
and stated the general rule for
calculating the payment obligation on a
covered transaction for purposes of the
ability-to-repay provisions. Consistent
with the statute, proposed
§ 226.43(c)(5)(i) provided that unless an
exception applies under proposed
§ 226.43(c)(5)(ii), a creditor must make
the repayment ability determination
required under proposed
§ 226.43(c)(2)(iii) by using the greater of
the fully indexed rate or any
introductory interest rate, and monthly,
fully amortizing payments that are
substantially equal. That is, under the
proposed general rule the creditor
would calculate the consumer’s
monthly payment amount based on the
loan amount, and amortize that loan
amount in substantially equal payments
over the loan term, using the fully
indexed rate.
Proposed comment 43(c)(5)(i)–1
explained that the payment calculation
method set forth in proposed
§ 226.43(c)(5)(i) applied to any covered
transaction that does not have a balloon
payment or that is not an interest-only
loan or negative amortization loan,
whether it is a fixed-rate, adjustable-rate
or step-rate mortgage. This comment
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
further explained that the payment
calculation method set forth in
proposed § 226.43(c)(5)(ii) applied to
any covered transaction that is a loan
with a balloon payment, interest-only
loan, or negative amortization loan. To
facilitate compliance, this comment
listed the defined terms used in
proposed § 226.43(c)(5) and provided
cross-references to their definitions.
The fully indexed rate or introductory
rate, whichever is greater. Proposed
§ 226.43(c)(5)(i)(A) implemented the
requirement in TILA section
129C(a)(6)(D)(iii) to use the fully
indexed rate when calculating the
monthly, fully amortizing payment for
purposes of the repayment ability
determination. Proposed
§ 226.43(c)(5)(i)(A) also provided that
when creditors calculate the monthly,
fully amortizing payment for adjustablerate mortgages, they would have to use
the introductory interest rate if it were
greater than the fully indexed rate (i.e.,
a premium rate). In some adjustable-rate
transactions, creditors may set an initial
interest rate that is not determined by
the index or formula used to make later
interest rate adjustments. Sometimes
this initial rate charged to consumers is
lower than the rate would be if it were
determined by using the index plus
margin, or formula (i.e., the fully
indexed rate). However, an initial rate
that is a premium rate is higher than the
rate based on the index or formula.
Thus, requiring creditors to use only the
fully indexed rate would result in
creditors underwriting loans that have a
‘‘premium’’ introductory rate at a rate
lower than the rate on which the
consumer’s initial payments would be
based. The Board believed that requiring
creditors to assess the consumer’s
ability to repay on the initial higher
payments would better effectuate the
statutory intent and purpose. Proposed
comment 43(c)(5)(i)–2 provided
guidance on using the greater of the
premium or fully indexed rate.
Monthly, fully amortizing payments.
For simplicity, proposed
§ 226.43(c)(5)(i) used the term ‘‘fully
amortizing payment’’ to refer to the
statutory requirements that a creditor
use a payment schedule that repays the
loan assuming that (1) the loan proceeds
are fully disbursed on the date of
consummation of the loan; and (2) the
loan is repaid in amortizing payments
for principal and interest over the entire
term of the loan. See TILA sections
129C(a)(3) and (6)(D)(i) and (ii). As
discussed above, § 1026.43(b)(2) defines
‘‘fully amortizing payment’’ to mean a
periodic payment of principal and
interest that will fully repay the loan
amount over the loan term. The terms
PO 00000
Frm 00071
Fmt 4701
Sfmt 4700
6477
‘‘loan amount’’ and ‘‘loan term’’ are
defined in § 1026.43(b)(5) and (b)(6),
respectively, and discussed above.
The statute also expressly requires
that a creditor use ‘‘monthly amortizing
payments’’ for purposes of the
repayment ability determination. TILA
section 129C(6)(D)(ii). The Board
recognized that some loan agreements
require consumers to make periodic
payments with less frequency, for
example quarterly or semi-annually.
Proposed § 226.43(c)(5)(i)(B) did not
dictate the frequency of payment under
the terms of the loan agreement, but did
require creditors to convert the payment
schedule to monthly payments to
determine the consumer’s repayment
ability. Proposed comment 43(c)(5)(i)–3
clarified that the general payment
calculation rules do not prescribe the
terms or loan features that a creditor
may choose to offer or extend to a
consumer, but establish the calculation
method a creditor must use to determine
the consumer’s repayment ability for a
covered transaction. This comment
explained, by way of example, that the
terms of the loan agreement may require
that the consumer repay the loan in
quarterly or bi-weekly scheduled
payments, but for purposes of the
repayment ability determination, the
creditor must convert these scheduled
payments to monthly payments in
accordance with proposed
§ 226.43(c)(5)(i)(B). This comment also
explained that the loan agreement may
not require the consumer to make fully
amortizing payments, but for purposes
of the repayment ability determination
the creditor must convert any nonamortizing payments to fully amortizing
payments.
Substantially equal. Proposed
comment 43(c)(5)(i)–4 provided
additional guidance to creditors for
determining whether monthly, fully
amortizing payments are ‘‘substantially
equal.’’ See TILA section
129C(a)(6)(D)(ii). This comment stated
that creditors should disregard minor
variations due to payment-schedule
irregularities and odd periods, such as
a long or short first or last payment
period. The comment explained that
monthly payments of principal and
interest that repay the loan amount over
the loan term need not be equal, but that
the monthly payments should be
substantially the same without
significant variation in the monthly
combined payments of both principal
and interest. Proposed comment
43(c)(5)(i)–4 further explained that
where, for example, no two monthly
payments vary from each other by more
than 1 percent (excluding odd periods,
such as a long or short first or last
E:\FR\FM\30JAR2.SGM
30JAR2
6478
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
payment period), such monthly
payments would be considered
substantially equal for purposes of the
rule. The comment further provided
that, in general, creditors should
determine whether the monthly, fully
amortizing payments are substantially
equal based on guidance provided in
current § 1026.17(c)(3) (discussing
minor variations), and § 1026.17(c)(4)(i)
through (iii) (discussing paymentschedule irregularities and measuring
odd periods due to a long or short first
period) and associated commentary. The
proposal solicited comment on
operational difficulties that arise by
ensuring payment amounts meet the
‘‘substantially equal’’ condition. The
proposal also solicited comment on
whether a 1 percent variance is an
appropriate tolerance threshold.
Examples of payment calculations.
Proposed comment § 226.43(c)(5)(i)–5
provided illustrative examples of how to
determine the consumer’s repayment
ability based on substantially equal,
monthly, fully amortizing payments as
required under proposed
§ 226.43(c)(5)(i) for a fixed-rate,
adjustable-rate and step-rate mortgage.
The Board recognized that, although
consistent with the statute, the proposed
framework would require creditors to
underwrite certain loans, such as hybrid
ARMs with a discounted rate period of
five or more years (e.g., 5/1, 7/1, and 10/
1 ARMs) to a more stringent standard as
compared to the underwriting standard
set forth in proposed § 226.43(e)(2)(v)
for qualified mortgages.111 The Board
believed this approach was consistent
with the statute’s intent to ensure
consumers can reasonably repay their
loans, and that in both cases consumers’
interests are properly protected. See
TILA section 129B(a)(2), 15 U.S.C.
1639b(a)(2). To meet the definition of a
qualified mortgage, a loan cannot have
certain risky terms or features, such as
provisions that permit deferral of
principal or a term that exceeds 30
years; no similar restrictions apply to
loans subject to the ability-to-repay
standard. See proposed § 226.43(e)(2)(i)
and (ii). As a result, the risk of potential
payment shock is diminished
significantly for qualified mortgages. For
this reason, the Board believed that
maintaining the potentially more lenient
statutory underwriting standard for
loans that satisfy the qualified mortgage
criteria would help to ensure that
responsible and affordable credit
111 The Bureau has also determined that in many
instances the fully indexed rate would result in a
more lenient underwriting standard than the
qualified mortgage calculation. See the discussion
of non-qualified mortgage ARM underwriting
below.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
remains available to consumers. See
TILA section 129B(a)(2), 15 U.S.C.
1639b(a)(2).
Loan amount or outstanding principal
balance. As noted above, proposed
§ 226.43(c)(5)(i) was consistent with the
statutory requirements regarding
payment calculations for purposes of
the repayment ability determination.
The Board believed that the intent of
these statutory requirements was to
prevent creditors from assessing the
consumer’s repayment ability based on
understated payment obligations,
especially when risky features can be
present on the loan. However, the Board
was concerned that the statute, as
implemented in proposed
§ 226.43(c)(5)(i), would require creditors
to determine, in some cases, a
consumer’s repayment ability using
overstated payment amounts because
the creditor would have to assume that
the consumer repays the loan amount in
substantially equal payments based on
the fully indexed rate, regardless of
when the fully indexed rate could take
effect under the terms of the loan. The
Board was concerned that this approach
might restrict credit availability, even
where consumers were able to
demonstrate that they can repay the
payment obligation once the fully
indexed rate takes effect.
For this reason, the proposal solicited
comment on whether authority should
be exercised under TILA sections 105(a)
and 129B(e) to provide that the creditor
may calculate the monthly payment
using the fully indexed rate based on
the outstanding principal balance as of
the date the fully indexed rate takes
effect under the loan’s terms, instead of
the loan amount at consummation.
Step-rate and adjustable-rate
calculations. Due to concerns regarding
credit availability, the proposal also
solicited comment on alternative means
to calculate monthly payments for steprate and adjustable-rate mortgages. The
proposal asked for comment on whether
or not the rule should require that
creditors underwrite a step-rate or an
adjustable-rate mortgage using the
maximum interest rate in the first seven
or ten years or some other appropriate
time horizon that would reflect a
significant introductory rate period. The
section-by-section analysis of the ‘‘fully
indexed rate’’ definition, at
§ 1026.43(b)(3) above, discusses this
issue in regard to step-rate mortgages.
For discussion of payment calculation
methods for adjustable-rate mortgages,
see below.
Safe harbor to facilitate compliance.
The Board recognized that under its
proposal, creditors would have to
comply with multiple assumptions
PO 00000
Frm 00072
Fmt 4701
Sfmt 4700
when calculating the particular payment
for purposes of the repayment ability
determination. The Board was
concerned that the complexity of the
proposed payment calculation
requirements might increase the
potential for unintentional errors to
occur, making compliance difficult,
especially for small creditors that might
be unable to invest in advanced
technology or software needed to ensure
payment calculations are compliant. At
the same time, the Board noted that the
intent of the statutory framework and
the proposal was to ensure consumers
are offered and receive loans on terms
that they can reasonably repay. Thus,
the Board solicited comment on
whether authority under TILA sections
105(a) and 129B(e) should be exercised
to provide a safe harbor for creditors
that use the largest scheduled payment
that can occur during the loan term to
determine the consumer’s ability to
repay, to facilitate compliance with the
requirements under proposed
§ 226.43(c)(5)(i) and (ii).
Final Rule
The final rule requires creditors to
underwrite the loan at the premium rate
if greater than the fully indexed rate for
purposes of the repayment ability
determination using the authority under
TILA section 105(a). 15 U.S.C. 1604(a).
TILA section 105(a), as amended by
section 1100A of the Dodd-Frank Act,
provides that the Bureau’s regulations
may contain such additional
requirements, classifications,
differentiations, or other provisions, and
may provide for such adjustments and
exceptions for all or any class of
transactions as in the Bureau’s judgment
are necessary or proper to effectuate the
purposes of TILA, prevent
circumvention or evasion thereof, or
facilitate compliance therewith. 15
U.S.C. 1604(a). This approach is further
supported by the authority under TILA
section 129B(e) to condition terms, acts
or practices relating to residential
mortgage loans that the Bureau finds
necessary and proper to ensure that
responsible, affordable mortgage credit
remains available to consumers in a
manner consistent with and which
effectuates the purposes of sections
129B and 129C, and which are in the
interest of the consumer. 15 U.S.C.
1639b(e). The purposes of TILA include
the purpose of TILA sections 129B and
129C, to assure that consumers are
offered and receive residential mortgage
loans on terms that reasonably reflect
their ability to repay the loan, among
other things. TILA section 129B(b), 15
U.S.C. 1639b. For the reasons discussed
above, the Bureau believes that
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
requiring creditors to underwrite the
loan to the premium rate for purposes
of the repayment ability determination
is necessary and proper to ensure that
consumers are offered, and receive,
loans on terms that reasonably reflect
their ability to repay, and to prevent
circumvention or evasion. Without a
requirement to consider payments based
on a premium rate, a creditor could
originate loans with introductory-period
payments that consumers do not have
the ability to repay. Therefore, this
provision is also in the interest of
consumers.
As discussed above, the Board
solicited comment on whether
payments for non-qualified mortgage
ARMs should be calculated similarly to
qualified mortgage ARMs, by using the
maximum rate that will apply during a
certain period, such as the first seven
years or some other appropriate time
horizon. Consumer and community
groups were divided on this issue. Some
supported use of the fully indexed rate,
but one stated that underwriting ARMs
based on the initial period of at least
five years may be appropriate. Another
suggested that for non-qualified
mortgage ARMs the rule should require
use of the maximum interest rate or
interest rate cap, whichever is greater, to
better protect against payment shock. A
civil rights organization also advocated
that ARMs that are not qualified
mortgages should be underwritten to
several points above the fully indexed
rate. A combined comment from
consumer advocacy organizations also
supported non-qualified mortgage
ARMs being underwritten more strictly,
suggesting that because this is the
market segment that will have the
fewest controls, the predatory practices
will migrate here, and there is
significant danger of payment shock
when using the fully indexed rate in a
low-rate environment such as today’s
market. They suggested that the rule
follow Fannie Mae’s method, which
requires underwriting that uses the fully
indexed rate or the note rate plus 2
percent, whichever is greater, for ARMs
with initial fixed periods of up to five
years. In addition, one joint industry
and consumer advocacy comment
suggested adding 2 percent to the fully
indexed rate in order to calculate the
monthly payment amount.
Industry groups were strongly in favor
of using a specific time period for
underwriting, generally suggesting five
years. One credit union association
stated that use of the fully indexed rate
is excessive and unnecessary, and will
increase the cost of credit. Industry
commenters stated that creditors
generally consider only the fixed-rate
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
period, and ARMs with fixed periods of
at least five years are considered safe.
One large bank stated that the
calculation for ARMs, whether or not
they are qualified mortgages, should be
uniform to ease compliance.
The Bureau has determined that it
will not use its exception and
adjustment authority to change the
statutory underwriting scheme for nonqualified mortgage ARMs. The statutory
scheme clearly differentiates between
the qualified mortgage and nonqualified mortgage underwriting
strategies. The qualified mortgage
underwriting rules ignore any
adjustment in interest rate that may
occur after the first five years; thus, for
example, for an ARM with an initial
adjustment period of seven years, the
interest rate used for the qualified
mortgage calculation will be the initial
interest rate. In addition, the qualified
mortgage rules, by using the ‘‘maximum
interest rate,’’ take into account any
adjustment in interest rate that can
occur during the first five years,
including adjustments attributable to
changes in the index rate. In contrast,
the non-qualified mortgage rules have
an unlimited time horizon but do not
take into account adjustments
attributable to changes in the index rate.
Based on the its research and analysis,
the Bureau notes that the data indicate
that neither the fully indexed rate nor
the maximum rate during a defined
underwriting period produces
consistent results with regard to abilityto-repay calculations. The Bureau finds
that the underwriting outcomes under
the two methods vary depending on a
number of complex variables, such as
the terms of the loan (e.g., the length of
the initial adjustment period and
interest rate caps) and the interest rate
environment. In other words, for a
particular loan, whether the monthly
payment may be higher under a
calculation that uses the fully indexed
rate, as opposed to the maximum rate in
the first five years, depends on a
number of factors. Given the factspecific nature of the payment
calculation outcomes, the Bureau
believes that overriding the statutory
scheme would be inappropriate.
The Bureau also believes that
adjusting the interest rate to be used for
non-qualified mortgage ability-to-repay
calculations to somewhere between the
fully indexed rate specified in the
statute and the maximum interest rate
mandated for qualified mortgage
underwriting; for example through an
adjustment to the fully indexed rate of
an additional 2 percent, would be
inappropriate. The fully indexed rate
had been in use since it was adopted by
PO 00000
Frm 00073
Fmt 4701
Sfmt 4700
6479
the Interagency Supervisory Guidance
in 2006, and Congress was likely relying
on that experience in crafting the
statutory scheme. Adding to the fully
indexed rate would potentially reduce
the availability of credit. Such an
adjustment also could result in a
calculated interest rate and monthly
payment that are higher than the
interest rate and payment calculated for
qualified mortgage underwriting, given
that the qualified mortgage rules look
only to potential adjustments during the
first five years.
The Bureau recognizes that
underwriting practices today often take
into account potential adjustments in an
ARM that can result from increases in
the index rate. For example, Fannie Mae
requires underwriting that uses the fully
indexed rate or the note rate plus 2
percent, whichever is greater, for ARMs
with initial fixed periods of up to five
years. The Bureau notes that
underwriters have the flexibility to
adjust their practices in response to
changing interest rate environments
whereas the process an administrative
agency like the Bureau must follow to
amend a rule is more time consuming.
The Bureau also notes that the creditor
must make a reasonable determination
that the consumer has the ability to
repay the loan according to its terms.
Therefore, in situations where there is a
significant likelihood that the consumer
will face an adjustment that will take
the interest rate above the fully indexed
rate, a creditor whose debt-to-income or
residual income calculation indicates
that a consumer cannot afford to absorb
any such increase may not have a
reasonable belief in the consumer’s
ability to repay the loan according to its
terms. See comment 43(c)(1)–1.
Although the Bureau has determined
to implement the statutory scheme as
written and require use of the fully
indexed rate for non-qualified mortgage
ARMs, it will monitor this issue through
its mandatory five-year review, and may
make adjustments as necessary.
As discussed above, the Board also
solicited comment on whether or not to
allow the fully indexed rate to be
applied to the balance projected to be
remaining when the fully indexed rate
goes into effect, instead of the full loan
amount, and thus give a potentially
more accurate figure for the maximum
payment that would be required for
purposes of determining ability to
repay. A consumer group and a group
advocating for financial reform
supported this possibility, saying that
allowing lenders to apply the fully
indexed rate to the balance remaining
when the rate changes, rather than the
full loan amount, will encourage longer
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6480
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
fixed-rate periods and safer lending, as
well as preserve access to credit. An
association representing credit unions
also agreed with the possible
amendment, stating that the new
method would yield a more accurate
measure of the maximum payment that
could be owed.
The Bureau believes it is appropriate
for the final rule to remain consistent
with the statutory scheme. The Bureau
believes that changing the calculation
method, required by the statute,112
would not be an appropriate use of its
exception and adjustment authority.
The Bureau believes the potentially
stricter underwriting method of
calculating the monthly payment by
applying the imputed (i.e., fully
indexed) interest rate to the full loan
amount for non-qualified mortgage
ARMs, provides greater assurance of the
ability to repay. In addition, payment
calculation using the fully indexed rate
can only approximate the consumer’s
payments after recast, since the index
may have increased significantly by
then. Accordingly, the Bureau believes
that requiring the use of the full loan
amount will reduce the potential
inaccuracy of the ability-to-repay
determination in such a situation.
In addition, the Board solicited
comment on whether to provide a safe
harbor for any creditor that underwrites
using the ‘‘largest scheduled payment
that can occur during the loan term.’’ To
provide such a safe harbor the Bureau
would have to employ its exception and
adjustment authority because the use of
the fully indexed rate calculation is
required by TILA section
129C(a)(6)(D)(iii). Two industry
commenters and an association of state
bank regulators supported this
exemption, but none of them provided
a developed rationale for their support
or included information useful in
assessing the possible exemption. The
Bureau does not believe that it would be
appropriate at this time to alter the
statutory scheme in this manner.
As discussed above, the Board also
solicited comment on how to lessen any
operational difficulties of ensuring that
payment amounts meet the
‘‘substantially equal’’ condition, and
whether or not allowing a one percent
variance between payments provided an
appropriate threshold. Only two
commenters mentioned this issue. One
industry commenter stated that the 1
percent threshold was appropriate, but
an association of state bank regulators
112 ‘‘A creditor shall determine the ability of the
consumer to repay using a payment schedule that
fully amortizes the loan over the loan term.’’ TILA
§ 129C(a)(3).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
believed that a 5 percent threshold
would work better. Because the 1
percent threshold appears to be
sufficient to allow for payment variance
and industry commenters did not
express a need for a higher threshold,
the Bureau does not believe that the
provision should be amended.
For the reasons stated above, the
Bureau is adopting § 1026.43(c)(5)(i) and
associated commentary substantially as
proposed, with minor clarifying
revisions.
43(c)(5)(ii) Special Rules for Loans With
a Balloon Payment, Interest-Only Loans,
and Negative Amortization Loans
Proposed § 226.43(c)(5)(ii) created
exceptions to the general rule under
proposed § 226.43(c)(5)(i), and provided
special rules in proposed
§ 226.43(c)(5)(ii)(A) through (C) for
loans with a balloon payment, interestonly loans, and negative amortization
loans, respectively, for purposes of the
repayment ability determination
required under proposed
§ 226.43(c)(2)(iii). In addition to TILA
section 129C(a)(6)(D)(i) through (iii),
proposed § 226.43(c)(5)(ii)(A) through
(C) implemented TILA sections
129C(a)(6)(B) and (C), and TILA section
129C(a)(6)(D)(ii)(I) and (II). Each of these
proposed special rules is discussed
below.
43(c)(5)(ii)(A)
Implementing the different payment
calculation methods in TILA section
129C(a)(6)(D)(ii), the Board proposed
different rules for balloon-payment
mortgages that are higher-priced
covered transactions and those that are
not, in § 1026.43(c)(5)(ii)(A)(1) and (2).
Proposed comment 43(c)(5)(ii)(A)–1
provided guidance on applying these
two methods. This guidance is adopted
as proposed with minor changes for
clarity and to update a citation. The
language describing the calculation
method for balloon-payment mortgages
that are not higher-priced covered
transactions has been changed to reflect
the use of the first regular payment due
date as the start of the relevant five-year
period. Pursuant to the Bureau’s
rulewriting authority under TILA
section 129C(a)(6)(D)(ii)(I), this change
has been made to facilitate compliance
through consistency with the amended
underwriting method for qualified
mortgages. See the section-by-section
analysis of § 1026.43(e)(2)(iv)(A). As
with the recast on five-year adjustablerate qualified mortgages, the Bureau
believes that consumers will benefit
from having a balloon payment moved
to at least five years after the first
PO 00000
Frm 00074
Fmt 4701
Sfmt 4700
regular payment due date, rather than
five years after consummation.
43(c)(5)(ii)(A)(1)
The statute provides an exception
from the general payment calculation
discussed above for loans that require
‘‘more rapid repayment (including
balloon payment).’’ See TILA section
129C(a)(6)(D)(ii)(I) and (II). For balloonpayment loans that are not higherpriced covered transactions (as
determined by using the margins above
APOR in TILA section
129C(a)(6)(D)(ii)(I) and implemented at
§ 1026.43(b)(4)), the statute provides
that the payment calculation will be
determined by regulation. The Board
proposed that a creditor be required to
make the repayment determination
under proposed § 226.43(c)(2)(iii) for
‘‘[t]he maximum payment scheduled
during the first five years after
consummation * * *’’
The Board chose a five-year period in
order to preserve access to affordable
short-term credit, and because five years
was considered an adequate period for
a consumer’s finances to improve
sufficiently to afford a fully amortizing
loan. The Board believed that balloonpayment loans of less than five years
presented more risk of inability to
repay. The Board also believed that the
five-year period would facilitate
compliance and create a level playing
field because of its uniformity with the
general qualified mortgage provision
(see § 1026.43(e)), and balloon-payment
qualified mortgage provision (see
§ 1026.43(f)). The Board solicited
comment on whether the five-year
horizon was appropriate. Proposed
comment § 226.43(c)(5)(ii)(A)–2
provided further guidance to creditors
on determining whether a balloon
payment occurs in the first five years
after consummation. Proposed comment
43(c)(5)(ii)(A)–3 addressed renewable
balloon-payment loans. This comment
discussed balloon-payment loans that
are not higher-priced covered
transactions which provide an
unconditional obligation to renew a
balloon-payment loan at the consumer’s
option or obligation to renew subject to
conditions within the consumer’s
control. This comment clarified that for
purposes of the repayment ability
determination, the loan term does not
include the period of time that could
result from a renewal provision.
The Board recognized that proposed
comment 43(c)(5)(ii)(A)–3 did not take
the same approach as guidance
contained in comment 17(c)(1)–11
regarding treatment of renewable
balloon-payment loans for disclosure
purposes, or with guidance contained in
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
current comment 34(a)(4)(iv)–2 of the
Board’s 2008 HOEPA Final Rule.
Although the proposal differed from
current guidance in Regulation Z, the
Board believed this approach was
appropriate for several reasons. First,
the ability-to-repay provisions in the
Dodd-Frank Act do not address
extending the term of a balloon-payment
loan with an unconditional obligation to
renew provision. Second, permitting
short-term ‘‘prime’’ balloon-payment
loans to benefit from the special
payment calculation rule when a
creditor includes an unconditional
obligation to renew, but retains the right
to increase the interest rate at the time
of renewal, would create a significant
loophole in the balloon payment rules.
Such an approach could frustrate the
objective to ensure consumers obtain
mortgages on affordable terms for a
reasonable period of time because the
interest rate could escalate within a
short period of time, increasing the
potential risk of payment shock to the
consumer. This is particularly the case
where no limits exist on the interest rate
that the creditor can choose to offer to
the consumer at the time of renewal. See
TILA Section 129B(a)(2), 15 U.S.C.
1639b(a)(2), and TILA Section
129C(b)(2)(A)(v). Moreover, the Board
believed it would be speculative to posit
the interest rate at the time of renewal
for purposes of the repayment ability
determination. Third, the guidance
contained in comment 17(c)(1)–11
regarding treatment of renewable
balloon-payment loans is meant to help
ensure consumers are aware of their
loan terms and avoid the uninformed
use of credit, which differs from the
stated purpose of this proposed
provision, which was to help ensure
that consumers receive loans on terms
that reasonably reflect their repayment
ability. TILA section 102(a), 15 U.S.C.
1601(a)(2), and TILA section 129B(a)(2),
15 U.S.C. 1639b(a)(2).
Proposed comment 43(c)(5)(ii)(A)–4
provided several illustrative examples
of how to determine the maximum
payment scheduled during the first five
years after consummation for loans with
a balloon payment that are not higherpriced covered transactions.
In regard to the proposed five-year
underwriting period, some commenters
suggested that the payment period
considered should be increased to ten
years, stating that balloon-payment
loans were repeatedly used in an
abusive manner during the years of
heavy subprime lending. The combined
consumer advocacy organizations’
comment stated that the five-year
underwriting might lead to an increase
in five-year balloon-payment loans,
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
which would be bad for sustainable
lending. On the other hand, a trade
association representing credit unions
supported the five-year rule. One
industry commenter objected to the
whole balloon underwriting scheme,
including the five-year rule, apparently
preferring something less.
For the reasons discussed by the
Board in the proposal, and described
above, the Bureau has determined that
five years is an appropriate time frame
for determining the ability to repay on
balloon-payment mortgages that are not
higher-priced covered transactions.
However, for the sake of uniformity and
ease of compliance with the qualified
mortgage calculation and ability-torepay calculation for non-qualified
mortgage adjustable-rate mortgages, the
proposed provision has been changed to
state that the five years will be
measured from the date of the first
regularly scheduled payment, rather
than the date of consummation. The
Bureau has made this determination
pursuant to the authority granted by
TILA section 129C(a)(6)(D)(ii)(I) to
prescribe regulations for calculating
payments to determine consumers’
ability to repay balloon-payment
mortgages that are not higher-cost
covered transactions.
TILA section 129C(a)(6)(D)(ii)) refers
to loans requiring ‘‘more rapid
repayment (including balloon
payment).’’ The Board solicited
comment about whether this statutory
language should be read as referring to
loan types other than balloon-payment
loans. The Bureau did not receive
comments on this matter, and has
determined that the rule language does
not need to be amended to include other
types of ‘‘rapid repayment’’ loans at this
time.
The Board also solicited comment
about balloon-payment loans that have
an unconditional obligation to renew.
The Board asked whether or not such
loans should be allowed to comply with
the ability-to-repay requirements using
the total of the mandatory renewal
terms, instead of just the first term. As
discussed above, proposed comment
43(c)(5)(ii)(A)–3 made clear that this
would not be allowed under the rule as
proposed. The Board also solicited
comment on any required conditions
that the renewal obligation should have,
if such an amendment were made.
However, the Bureau did not receive
comments on this matter, and the
provision and staff comment are
adopted as proposed. A creditor making
any non-higher-priced balloon-payment
mortgage of less than five years with a
clear obligation to renew can avoid
having the ability-to-repay
PO 00000
Frm 00075
Fmt 4701
Sfmt 4700
6481
determination applied to the balloon
payment by including the renewal
period in the loan term so that the
balloon payment occurs after five years.
Accordingly, the Bureau is adopting
§ 1026.43(c)(5)(ii)(A)(1) and associated
commentary substantially as proposed,
with minor changes for clarification, as
well as new language to reflect that the
five-year underwriting period begins
with the due date of the first payment,
as discussed above. In addition, the
Bureau has added a second example to
comment 43(c)(5)(ii)(A)–2 to
demonstrate the effect of the change to
the beginning of the underwriting
period.
43(c)(5)(ii)(A)(2)
Proposed § 226.43(c)(5)(ii)(A)(2)
implemented TILA section
129C(a)(6)(D)(ii)(II) and provided that
for a higher-priced covered transaction,
the creditor must determine the
consumer’s ability to repay a loan with
a balloon payment using the scheduled
payments required under the terms of
the loan, including any balloon
payment. TILA section
129C(a)(6)(D)(ii)(II) states that for loans
that require ‘‘more rapid repayment 113
(including balloon payment),’’ and
which exceed the loan pricing threshold
set forth, the creditor must underwrite
the loan using the ‘‘[loan] contract’s
repayment schedule.’’ For purposes of
proposed § 226.43(c)(5)(i)(A), ‘‘higherpriced covered transaction’’ means a
covered transaction 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 1.5 or more percentage
points for a first-lien covered
transaction, or by 3.5 or more
percentage points for a subordinate-lien
covered transaction. See § 1026.43(b)(4).
The proposed rule interpreted the
statutory requirement that the creditor
use the loan contract’s payment
schedule to mean that the creditor must
use all scheduled payments under the
terms of the loan needed to fully
amortize the loan, consistent with the
requirement under TILA section
129C(a)(3). Payment of the balloon,
either at maturity or during any
intermittent period, is necessary to fully
amortize the loan, and so a consumer’s
ability to pay the balloon payment
would need to be considered. Proposed
comment 43(c)(5)(ii)(A)–5 provided an
illustrative example of how to
determine the consumer’s repayment
ability based on the loan contract’s
payment schedule, including any
113 See the previous section, .43(c)(5)(ii)(A)(1), for
discussion of this statutory language.
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6482
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
balloon payment. The proposed rule
applied to ‘‘non-prime’’ loans with a
balloon payment regardless of the length
of the term or any contract provision
that provides for an unconditional
guarantee to renew.
In making this proposal, the Board
expressed concern that this approach
could lessen credit choice for non-prime
consumers and solicited comment, with
supporting data, on the impact of this
approach for low-to-moderate income
consumers. In addition, the Board asked
for comment on whether or not a
consumer’s ability to refinance out of a
balloon-payment loan should be
considered in determining ability to
repay.
Industry commenters who focused on
this provision opposed applying the
ability-to-repay determination to the
entire payment schedule. Two trade
associations representing small and
mid-size banks strongly objected to
including the balloon payment in the
underwriting, and one stated that many
of the loans its members currently make
would fall into the higher-priced
category, making these loans
unavailable. However, the statutory
scheme for including the balloon
payment was supported by a state
housing agency and the combined
consumer protection advocacy
organizations submitting joint
comments.
None of the commenters submitted
data supporting the importance of
higher-priced balloon-payment
mortgages for credit availability, or
whether consideration of a consumer’s
ability to obtain refinancing would
make the ability-to-repay determination
less significant in this context. The
Bureau notes that under § 1026.43(f) a
balloon-payment mortgage that is a
higher-priced covered transaction made
by certain creditors in rural or
underserved areas may also be a
qualified mortgage and thus the creditor
would not have to consider the
consumer’s ability to repay the balloon
payment. Because this final rule adopts
a wider definition of ‘‘rural or
underserved area’’ than the Board
proposed, potential credit accessibility
concerns have been lessened. See the
section-by-section analysis of
§ 1026.43(f), below.
The statute requires the consideration
of the balloon payment for higher-priced
covered transactions, and the Bureau
does not believe that using its exception
and adjustment authority would be
appropriate for this issue. Accordingly,
§ 1026.43(c)(5)(ii)(A)(2) and associated
commentary are adopted substantially
as proposed, with minor changes for
clarification.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
43(c)(5)(ii)(B)
The Board’s proposed
§ 226.43(c)(5)(ii)(B) implemented TILA
section 129C(a)(6)(B), which requires
that the creditor determine the
consumer’s repayment ability using ‘‘the
payment amount required to amortize
the loan by its final maturity.’’ For
clarity, the proposed rule used the term
‘‘recast,’’ which is defined for interestonly loans as the expiration of the
period during which interest-only
payments are permitted under the terms
of the legal obligation. See
§ 1026.43(b)(11). The statute does not
define the term ‘‘interest-only.’’ For
purposes of this rule, the terms
‘‘interest-only loan’’ and ‘‘interest-only’’
have the same meaning as in
§ 1026.18(s)(7)(iv).
For interest-only loans (i.e., loans that
permit interest only payments for any
part of the loan term), proposed
§ 226.43(c)(5)(ii)(B) provided that the
creditor must determine the consumer’s
ability to repay the interest-only loan
using (1) the fully indexed rate or any
introductory rate, whichever is greater;
and (2) substantially equal, monthly
payments of principal and interest that
will repay the loan amount over the
term of the loan remaining as of the date
the loan is recast. The proposed
payment calculation rule for interestonly loans paralleled the general rule
proposed in § 226.43(c)(5)(i), except that
proposed § 226.43(c)(5)(ii)(B)(2)
required a creditor to determine the
consumer’s ability to repay the loan
amount over the term that remains after
the loan is recast, rather than requiring
the creditor to use fully amortizing
payments, as defined under proposed
§ 226.43(b)(2).
The Board interpreted the statutory
text in TILA section 129C(a)(6)(B) as
requiring the creditor to determine the
consumer’s ability to repay an interestonly loan using the monthly principal
and interest payment amount needed to
repay the loan amount once the interestonly payment period expires, rather
than using, for example, an understated
monthly principal and interest payment
that would amortize the loan over its
entire term, similar to a 30-year fixed
mortgage. The proposed rule would
apply to all interest-only loans,
regardless of the length of the interestonly period. The Board believed this
approach most accurately assessed the
consumer’s ability to repay the loan
once it begins to amortize; this is
consistent with the approach taken for
interest-only loans in the 2006
Nontraditional Mortgage Guidance.
Proposed comment 43(c)(5)(ii)(B)–1
provided guidance on the monthly
PO 00000
Frm 00076
Fmt 4701
Sfmt 4700
payment calculation for interest-only
loans, and clarified that the relevant
term of the loan for calculating these
payments is the period of time that
remains after the loan is recast. This
comment also explained that for a loan
on which only interest and no principal
has been paid, the loan amount will be
the outstanding principal balance at the
time of the recast.
Proposed comment 43(c)(5)(ii)(B)–2
provided illustrative examples for how
to determine the consumer’s repayment
ability based on substantially equal
monthly payments of principal and
interest for interest-only loans.
Commenters did not focus on the
calculation for interest-only loans. The
Bureau considers the Board’s
interpretation and implementation of
the statute to be accurate and
appropriate. Accordingly,
§ 1026.43(c)(5)(ii)(B) and associated
commentary are adopted as proposed.
43(c)(5)(ii)(C)
Proposed § 226.43(c)(5)(ii)(C)
implemented the statutory requirement
in TILA section 129C(a)(6)(C) that the
creditor consider ‘‘any balance increase
that may accrue from any negative
amortization provision when making
the repayment ability determination.’’
The statute does not define the term
‘‘negative amortization.’’
For such loans, proposed
§ 226.43(c)(5)(ii)(C) provided that a
creditor must determine the consumer’s
repayment ability using (1) the fully
indexed rate or any introductory interest
rate, whichever is greater; and (2)
substantially equal, monthly payments
of principal and interest that will repay
the maximum loan amount over the
term of the loan remaining as of the date
the loan is recast. The proposed
payment calculation rule for negative
amortization loans paralleled the
general rule in proposed
§ 226.43(c)(5)(i), except that proposed
§ 226.43(c)(5)(ii)(C)(2) required the
creditor to use the monthly payment
amount that repays the maximum loan
amount over the term of the loan that
remains after the loan is recast, rather
than requiring the creditor to use fully
amortizing payments, as defined under
§ 1026.43(b)(2). The proposed rule used
the terms ‘‘maximum loan amount’’ and
‘‘recast,’’ which are defined and
discussed at § 1026.43(b)(7) and (b)(11),
respectively.
The Board proposed that the term
‘‘negative amortization loan’’ have the
same meaning as set forth in
§ 226.18(s)(7)(v), which provided that
the term ‘‘negative amortization loan’’
means a loan, other than a reverse
mortgage subject to § 226.33, that
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
provides for a minimum periodic
payment that covers only a portion of
the accrued interest, resulting in
negative amortization. As defined, the
term ‘‘negative amortization loan’’ does
not cover other loan types that may have
a negative amortization feature, but
which do not permit the consumer
multiple payment options, such as
seasonal income loans. Accordingly,
proposed § 226.43(c)(5)(ii)(C) covered
only loan products that permit or
require minimum periodic payments,
such as payment-option loans and
graduated payment mortgages with
negative amortization.114 The Board
believed that covering these types of
loans in proposed § 226.43(c)(5)(ii)(C)
was consistent with statutory intent to
account for the negative equity that can
occur when a consumer makes
payments that defer some or all
principal or interest for a period of time,
and to address the impact that any
potential payment shock might have on
the consumer’s ability to repay the loan.
See TILA section 129C(a)(6)(C).
In contrast, in a transaction such as a
seasonal loan that has a negative
amortization feature, but which does not
provide for minimum periodic
payments that permit deferral of some
or all principal, the consumer repays the
loan with fully amortizing payments in
accordance with the payment schedule.
Accordingly, the same potential for
payment shock due to accumulating
negative amortization does not exist.
These loans with a negative
amortization feature are therefore not
covered by the proposed term ‘‘negative
amortization loan,’’ and would not be
subject to the special payment
calculation requirements for negative
amortization loans at proposed
§ 226.43(c)(5)(ii)(C).
For purposes of determining the
consumer’s ability to repay a negative
amortization loan under proposed
§ 226.43(c)(5)(ii)(C), creditors would be
required to make a two-step payment
calculation.
Step one: maximum loan amount.
Proposed § 226.43(c)(5)(ii)(C) would
have required that the creditor first
determine the maximum loan amount
and period of time that remains in the
loan term after the loan is recast before
determining the consumer’s repayment
ability on the loan. See comment
43(c)(5)(ii)(C)–1; see also proposed
§ 226.43(b)(11), which defined the term
‘‘recast’’ to mean the expiration of the
114 Graduated payment mortgages that have
negative amortization and fall within the definition
of ‘‘negative amortization loans’’ provide for step
payments that may be less than the interest accrued
for a fixed period of time. The unpaid interest is
added to the principal balance of the loan.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
period during which negatively
amortizing payments are permitted
under the terms of the legal obligation.
Proposed comment 43(c)(5)(ii)(C)–2
further clarified that recast for a
negative amortization loan occurs after
the maximum loan amount is reached
(i.e., the negative amortization cap) or
the introductory minimum periodic
payment period expires.
As discussed above, § 1026.43(b)(7)
defines ‘‘maximum loan amount’’ as the
loan amount plus any increase in
principal balance that results from
negative amortization, as defined in
§ 1026.18(s)(7)(v), based on the terms of
the legal obligation. Under the proposal,
creditors would make the following two
assumptions when determining the
maximum loan amount: (1) The
consumer makes only the minimum
periodic payments for the maximum
possible time, until the consumer must
begin making fully amortizing
payments; and (2) the maximum interest
rate is reached at the earliest possible
time.
As discussed above under the
proposed definition of ‘‘maximum loan
amount,’’ the Board interpreted the
statutory language in TILA section
129C(a)(6)(C) as requiring creditors to
fully account for any potential increase
in the loan amount that might result
under the loan’s terms where the
consumer makes only the minimum
periodic payments required. The Board
believed the intent of this statutory
provision was to help ensure that the
creditor consider the consumer’s
capacity to absorb the increased
payment amounts that would be needed
to amortize the larger loan amount once
the loan is recast. The Board recognized
that the approach taken towards
calculating the maximum loan amount
requires creditors to assume a ‘‘worstcase scenario,’’ but believed this
approach was consistent with statutory
intent to take into account the greatest
potential increase in the principal
balance.
Moreover, the Board noted that
calculating the maximum loan amount
based on these assumptions is
consistent with the approach in the
2010 MDIA Interim Final Rule,115
which addresses disclosure
requirements for negative amortization
loans, and also the 2006 Nontraditional
Mortgage Guidance, which provides
guidance to creditors regarding
underwriting negative amortization
loans.116
115 See
12 CFR 1026.18(s)(2)(ii) and comment
18(s)(2)(ii)–2.
116 See 2006 Nontraditional Mortgage Guidance,
at 58614, n.7.
PO 00000
Frm 00077
Fmt 4701
Sfmt 4700
6483
Step two: payment calculation. Once
the creditor knows the maximum loan
amount and period of time that remains
after the loan is recast, the proposed
payment calculation rule for negative
amortization loans would require the
creditor to use the fully indexed rate or
introductory rate, whichever is greater,
to calculate the substantially equal,
monthly payment amount that will
repay the maximum loan amount over
the term of the loan that remains as of
the date the loan is recast. See proposed
§ 226.43(c)(5)(ii)(C)(1) and (2).
Proposed comment 43(c)(5)(ii)(C)–1
clarified that creditors must follow this
two-step approach when determining
the consumer’s repayment ability on a
negative amortization loan, and also
provided cross-references to aid
compliance. Proposed comment
43(c)(5)(ii)(C)–2 provided further
guidance to creditors regarding the
relevant term of the loan that must be
used for purposes of the repayment
ability determination. Proposed
comment 43(c)(5)(ii)(C)–3 provided
illustrative examples of how to
determine the consumer’s repayment
ability based on substantially equal
monthly payments of principal and
interest as required under proposed
§ 226.43(c)(5)(ii)(C) for a negative
amortization loan.
In discussing the ability-to-repay
requirements for negative amortization
loans, the Board noted the anomaly that
a graduated payment mortgage may
have a largest scheduled payment that is
larger than the payment calculated
under proposed § 226.43(c)(5)(ii)(C).
The Board solicited comment on
whether or not the largest scheduled
payment should be used in determining
ability to repay. The Bureau received
one comment on this issue, from an
association of State bank regulators,
arguing that the rule should use the
largest payment scheduled. However,
the Bureau does not believe that a
special rule for graduated payment
mortgages, which would require an
exception from the statute, is necessary
to ensure ability to repay these loans. It
is unlikely that the calculated payment
will be very different from the largest
scheduled payment, and introducing
this added complexity to the rule is
unnecessary. Also, the one comment
favoring such a choice did not include
sufficient data to support use of the
exception and adjustment authority
under TILA, and the Bureau is not
aware any such data.
Final Rule
The Bureau did not receive comments
on the proposed method for calculating
payments for negative amortization
E:\FR\FM\30JAR2.SGM
30JAR2
6484
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
loans. The Bureau believes that the
method proposed by the Board
implements the statutory provision
accurately and appropriately.
Accordingly, § 1026.43(c)(5)(ii)(C) and
associated commentary are adopted
substantially as proposed, with minor
changes for clarification.
43(c)(6) Payment Calculation for
Simultaneous Loans
43(c)(6)(i)
The Board’s proposed rule provided
that for purposes of determining a
consumer’s ability to repay a loan, ‘‘a
creditor must consider a consumer’s
payment on a simultaneous loan that
is—(i) a covered transaction, by
following paragraphs (c)(5)(i) and (ii) of
this section’’ (i.e., the payment
calculation rules for the covered
transaction itself).
Proposed comment 43(c)(6)–1 stated
that in determining the consumer’s
repayment ability for a covered
transaction, the creditor must include
consideration of any simultaneous loan
which it knows or has reason to know
will be made at or before consummation
of the covered transaction. Proposed
comment 43(c)(6)–2 explained that for a
simultaneous loan that is a covered
transaction, as that term was defined in
proposed § 226.43(b)(1), the creditor
must determine a consumer’s ability to
repay the monthly payment obligation
for a simultaneous loan as set forth in
proposed § 226.43(c)(5), taking into
account any mortgage-related
obligations.
The Bureau did not receive comments
on this specific language or the use of
the covered transaction payment
calculation for simultaneous loans. For
discussion of other issues regarding
simultaneous loans, see the section-bysection analysis of § 1026.43(b)(12),
.43(c)(2)(iv) and .43(c)(6)(ii).
The Bureau considers the language of
proposed§ 226.43(c)(6)(i) to be an
accurate and appropriate
implementation of the statute.
Accordingly, the Bureau is adopting
§ 1026.43(c)(6)(i) and associated
commentary substantially as proposed,
with minor changes for clarity. The
requirement to consider any mortgagerelated obligations, presented in
comment 43(c)(6)–2, is now also part of
the regulatory text, at § 1026.43(c)(6).
sroberts on DSK5SPTVN1PROD with
43(c)(6)(ii)
For a simultaneous loan that is a
HELOC, the consumer is generally not
committed to using the entire credit line
at consummation. The amount of funds
drawn on a simultaneous HELOC may
differ greatly depending, for example,
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
on whether the HELOC is used as a
‘‘piggyback loan’’ to help towards
payment on a home purchase
transaction or if the HELOC is opened
for convenience to be drawn down at a
future time. In the proposed rule, the
Board was concerned that requiring the
creditor to underwrite a simultaneous
HELOC assuming a full draw on the
credit line might unduly restrict credit
access, especially in connection with
non-purchase transactions, because it
would require creditors to assess the
consumer’s repayment ability using
potentially overstated payment
amounts. For this reason, the Board
proposed under § 226.43(c)(6)(ii) that
the creditor calculate the payment for
the simultaneous HELOC based on the
amount of funds to be drawn by the
consumer at consummation of the
covered transaction. The Board solicited
comment on whether this approach was
appropriate.
Proposed comment 43(c)(6)–3
clarified that for a simultaneous loan
that is a HELOC, the creditor must
consider the periodic payment required
under the terms of the plan when
assessing the consumer’s ability to repay
the covered transaction secured by the
same dwelling as the simultaneous loan.
This comment explained that under
proposed § 226.43(c)(6)(ii), the creditor
must determine the periodic payment
required under the terms of the plan by
considering the actual amount of credit
to be drawn by the consumer at or
before consummation of the covered
transaction. This comment clarified that
the amount to be drawn is the amount
requested by the consumer; when the
amount requested will be disbursed, or
actual receipt of funds, is not
determinative.
Several industry commenters objected
that it is difficult to know the actual
amount drawn on a HELOC if it is held
by another lender. One commenter
suggested finding another way to do this
calculation, such as by adding 1 percent
of the full HELOC line to the overall
monthly payment. Two banking trade
associations said that the full line of
credit should be considered, and if the
consumer does not qualify, the line of
credit can be reduced in order to qualify
safely. One bank stated that creditors
regulated by Federal banking agencies
are bound by the interagency ‘‘Credit
Risk Guidance for Home Equity
Lending’’ (2005) to consider the full line
of credit, and this will create an uneven
playing field.
Other industry commenters supported
use of the actual amount drawn at
consummation. Both Freddie Mac and
Fannie Mae stated that the Board’s
proposal for considering the actual
PO 00000
Frm 00078
Fmt 4701
Sfmt 4700
amount drawn at closing was consistent
with their underwriting standards. In
addition, an association representing
one state’s credit unions stated that
requiring consideration of a 100 percent
draw would be onerous and inaccurate.
It also asked that we make clear that the
creditor does not have to recalculate a
consumer’s ability to repay if the
amount drawn changes at
consummation.
The Bureau believes that requiring
consideration of 100 percent of a home
equity line of credit would
unnecessarily restrict credit availability
for consumers. Available but
unaccessed credit is not considered in
determining ability to repay a mortgage
when the consumer has other types of
credit lines, such as credit cards.
Although HELOCs are secured by the
consumer’s dwelling, and thus differ
from other types of available but
unaccessed credit, this difference does
not seem determinative. Any potential
dwelling-secured home equity line of
credit that a creditor might grant to a
consumer could simply be requested by
the consumer immediately following
consummation of the covered
transaction. The fact that the potential
credit line has been identified and
enumerated prior to the transaction,
rather than after, does not seem
significant compared to the fact that the
consumer has chosen not to access that
credit, and will not be making payments
on it. As with the rest of the ability-torepay requirements, creditors should
apply appropriate underwriting
procedures, and are not restricted to the
legally mandated minimum required by
this rule, as long as they satisfy that
minimum.
The requirements of the 2005 ‘‘Credit
Risk Guidance for Home Equity
Lending’’ do not change the Bureau’s
view of this issue. The Guidance covers
home equity lending itself, not
consideration of HELOCs as
simultaneous loans when determining
ability to repay for senior non-HELOCs.
The requirement to consider the entire
home equity line of credit controls only
a bank’s granting of that line of credit.
For this reason, the Bureau does not
believe that banks following this
guidance will be disadvantaged. In
addition, the Bureau will not be
implementing the suggested alternative
of adding 1 percent to the calculated
monthly payment on the covered
transaction. The Bureau is not aware of
any data supporting the accuracy of
such an approach.
In regard to the comments concerning
difficulty in determining the amount of
the draw and the monthly HELOC
payment, the Bureau as discussed above
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
in the section-by-section analysis of
§ 1026.43(c)(2)(iv) has added language
to comment 43(c)(2)(iv)–4 providing
more specific guidance in applying the
knows or has reason to know standard.
In addition, language has been added to
comment 43(c)(6)–3, regarding payment
calculations for simultaneous HELOCs,
making clear that a creditor does not
need to reconsider ability to repay if the
consumer unexpectedly draws more
money than planned at closing from a
HELOC issued by a different creditor. In
addition, the regulation language has
been clarified to state that the creditor
must use the amount of credit ‘‘to be’’
drawn at consummation, making clear
that a violation does not occur if the
creditor did not know or have reason to
know that a different amount would be
drawn.
The Board also solicited comment on
whether or not a safe harbor should be
given to those creditors who consider
the full HELOC credit line. However,
commenters did not focus on this
possibility. The Bureau believes that
although a creditor may choose to
underwrite using the full credit line as
a means of considering ability to repay
in relation to the actual draw, a safe
harbor is not warranted. Because the full
credit line should always be equal to or
greater than the actual draw,
appropriate use of the full credit line in
underwriting will constitute appropriate
compliance without a safe harbor.
In addition to the amount of a HELOC
that needs to be considered in
determining ability to repay, the Board
also solicited comment on whether the
treatment of HELOCs as simultaneous
loans should be limited to purchase
transactions. The Board suggested that
concerns regarding ‘‘piggyback loans’’
were not as acute with non-purchase
transactions.
Consumer and public interest groups
opposed limiting the consideration of
HELOCs to purchase transactions.
Several consumer advocacy groups
suggested that if only purchase
transactions were covered, the abuses
would migrate to the unregulated space.
Some commenters said they did not see
a reason to exclude the cost of a
simultaneous loan when it is extended
as part of a refinance. Industry
commenters did not focus much on this
issue, but an association representing
credit unions supported limiting
consideration to purchase transactions
in order to reduce regulatory burden on
credit unions and streamline the
refinancing process.
The Bureau believes that requiring
consideration of HELOCs as
simultaneous loans is appropriate in
both purchase and non-purchase
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
transactions. In both situations the
HELOC is a lien on the consumer’s
dwelling with a cost that affects the
viability of the covered transaction loan.
The Bureau recognizes that a
simultaneous HELOC in connection
with a refinancing is more likely to be
a convenience than one issued
simultaneously with a purchase
transaction, which will often cover
down payment, transaction costs or
other major expenses. However, the
final rule accommodates this difference
by allowing the creditor to base its
ability-to-repay determination on the
actual draw. The Bureau did not receive
and is not aware of any information or
data that justifies excluding actual
draws on simultaneous HELOCs in
connection with refinances from this
rule.
For the reasons stated above, the
Bureau considers the language of
proposed§ 226.43(c)(6)(ii) to be an
accurate and appropriate
implementation of the statute.
Accordingly, the Bureau is adopting
§ 1026.43(c)(6)(ii) and associated
commentary as proposed, with minor
changes for clarity.
43(c)(7) Monthly Debt-to-Income Ratio
or Residual Income
As discussed above, TILA section
129C(a)(3) requires creditors to consider
the debt-to-income ratio or residual
income the consumer will have after
paying non-mortgage debt and
mortgage-related obligations, as part of
the ability-to-repay determination under
TILA section 129C(a)(1). The Board’s
proposal would have implemented this
requirement in § 226.43(c)(2)(vii). The
Board proposed definitions and
calculations for the monthly debt-toincome ratio and residual income in
§ 226.43(c)(7).
With respect to the definitions,
proposed § 226.43(c)(7)(i)(A) would
have defined the total monthly debt
obligations as the sum of: the payment
on the covered transaction, as required
to be calculated by proposed
§ 226.43(c)(2)(iii) and (c)(5); the monthly
payment on any simultaneous loans, as
required to be calculated by proposed
§ 226.43(c)(2)(iv) and (c)(6); the monthly
payment amount of any mortgagerelated obligations, as required to be
considered by proposed
§ 226.43(c)(2)(v); and the monthly
payment amount of any current debt
obligations, as required to be considered
by proposed § 226.43(c)(2)(vi). Proposed
§ 1026.43(c)(7)(i)(B) would have defined
the total monthly income as the sum of
the consumer’s current or reasonably
expected income, including any income
PO 00000
Frm 00079
Fmt 4701
Sfmt 4700
6485
from assets, as required to be considered
by proposed § 226.43(c)(2)(i) and (c)(4).
With respect to the calculations,
proposed § 226.43(c)(7)(ii)(A) would
have required the creditor to consider
the consumer’s monthly debt-to-income
ratio by taking the ratio of the
consumer’s total monthly debt
obligations to total monthly income.
Proposed § 226.43(c)(7)(ii)(B) would
have required the creditor to consider
the consumer’s residual income by
subtracting the consumer’s total
monthly debt obligations from the total
monthly income. The Board solicited
comment on whether consideration of
residual income should account for loan
amount, region of the country, and
family size, and on whether creditors
should be required to include Federal
and State taxes in the consumer’s
obligations to calculate the residual
income.
Proposed comment 43(c)(7)–1 would
have stated that a creditor must
calculate the consumer’s total monthly
debt obligations and total monthly
income in accordance with the
requirements in proposed § 226.43(c)(7).
The proposed comment would have
explained that creditors may look to
widely accepted governmental and nongovernmental underwriting standards to
determine the appropriate thresholds for
the debt-to-income ratio or residual
income.
Proposed comment 43(c)(7)–2 would
have clarified that if a creditor considers
both the consumer’s debt-to-income
ratio and residual income, the creditor
may base its determination of ability to
repay on either the consumer’s debt-toincome ratio or residual income, even if
the determination would differ with the
basis used. In the section-by-section
analysis of proposed § 226.43(c)(7), the
Board explained that it did not wish to
create an incentive for creditors to
consider and verify as few factors as
possible in the repayment ability
determination.
Proposed comment 43(c)(7)–3 would
have provided that creditors may
consider compensating factors to
mitigate a higher debt-to-income ratio or
lower residual income. The proposed
comment would have provided that the
creditor may, for example, consider the
consumer’s assets other than the
dwelling securing the covered
transaction or the consumer’s residual
income as a compensating factor for a
higher debt-to-income ratio. The
proposed comment also would have
provided that, in determining whether
and in what manner to consider
compensating factors, creditors may
look to widely accepted governmental
and non-governmental underwriting
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6486
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
standards. The Board solicited comment
on whether it should provide more
guidance on what factors creditors may
consider, and on how creditors may
include compensating factors in the
repayment ability determination.
In addition, the Board solicited
comment on two issues related to the
use of automated underwriting systems.
The Board solicited comment on
providing a safe harbor for creditors
relying on automated underwriting
systems that use monthly debt-toincome ratios, if the system developer
certifies that the system’s use of
monthly debt-to-income ratios in
determining repayment ability is
empirically derived and statistically
sound. The Board also solicited
comment on other methods to facilitate
creditor reliance on automated
underwriting systems, while ensuring
that creditors can demonstrate
compliance with the rule.
As discussed above in the section-bysection analysis of § 1026.43(c)(2)(vii),
industry commenters and consumer
advocates largely supported including
consideration of the monthly debt-toincome ratio or residual income in the
ability-to-repay determination and
generally favored a flexible approach to
consideration of those factors. In
response to the Board’s proposal, some
consumer advocates asked that the
Bureau conduct research on the debt-toincome ratio and residual income. They
requested a standard that reflects the
relationship between the debt-to-income
ratio and residual income. One industry
commenter recommended that the
Bureau adopt the VA calculation of
residual income. Another industry
commenter suggested that the Bureau
adopt the same definitions of the debtto-income ratio and residual income as
for qualified residential mortgages, to
reduce compliance burdens and the
possibility of errors. One industry
commenter asked that consideration of
residual income be permitted to vary
with family size and geographic
location. The commenter suggested that
the residual income calculation account
for Federal and State taxes. Several
consumer advocates suggested that the
Bureau review the VA residual income
guidelines and update the cost of living
tiers. They affirmed that all regularly
scheduled debt payments should be
included in the residual income
calculation. They noted that residual
income should be sufficient to cover
basic living necessities, including food,
utilities, clothing, transportation, and
known health care expenses.
One industry commenter asked that
the Bureau provide guidance on and
additional examples of compensating
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
factors, for example, situations where a
consumer has many assets but a low
income or high debt-to-income ratio.
The commenter suggested that the
Bureau clarify that the list of examples
was not exclusive. Consumer advocates
recommended that the Bureau not
permit extensions of credit based on a
good credit history or involving a high
loan-to-value ratio if the debt-to-income
ratio or residual income does not reflect
an ability to repay. These commenters
argued that credit scores and down
payments reflect past behavior and
incentives to make down payments, not
ability to repay.
The Bureau is largely adopting
§ 1026.43(c)(7) as proposed, with certain
clarifying changes to the commentary.
Specifically, comment 43(c)(7)–1
clarifies that § 1026.43(c) does not
prescribe a specific debt-to-income ratio
with which creditors must comply. For
the reasons discussed above in the
section-by-section analysis of
§ 1026.43(c), the Bureau is not finalizing
the portion of proposed comment
43(c)(7)–1 which would have provided
that the creditor may look to widely
accepted governmental and nongovernmental underwriting standards to
determine the appropriate threshold for
the monthly debt-to-income ratio or the
monthly residual income. Instead,
comment 43(c)(7)–1 provides that an
appropriate threshold for a consumer’s
monthly debt-to-income ratio or
monthly residual income is for the
creditor to determine in making a
reasonable and good faith determination
of a consumer’s repayment ability.
Comment 43(c)(7)–2 clarifies
guidance regarding use of both monthly
debt-to-income and monthly residual
income by providing that if a creditor
considers the consumer’s monthly debtto-income ratio, the creditor may also
consider the consumer’s residual
income as further validation of the
assessment made using the consumer’s
monthly debt-to-income ratio. The
Bureau is not finalizing proposed
comment 43(c)(7)–2, which would have
provided that if a creditor considers
both the consumer’s monthly debt-toincome ratio and residual income, the
creditor may base the ability-to-repay
determination on either metric, even if
the ability-to-repay determination
would differ with the basis used. The
Bureau believes the final guidance
better reflects how the two standards
work together in practice, but the
change is not intended to alter the rule.
Comment 43(c)(7)–3 also clarifies
guidance regarding the use of
compensating factors in assessing a
consumer’s ability to repay by providing
that, for example, the creditor may
PO 00000
Frm 00080
Fmt 4701
Sfmt 4700
reasonably and in good faith determine
that an individual consumer has the
ability to repay despite a higher
monthly debt-to-income ratio or lower
residual income in light of the
consumer’s assets other than the
dwelling securing the covered
transaction, such as a savings account.
The creditor may also reasonably and in
good faith determine that a consumer
has the ability to repay despite a higher
debt-to-income ratio in light of the
consumer’s residual income. The
Bureau believes that not permitting use
of compensating factors may reduce
access to credit in some cases, even if
the consumer could afford the mortgage.
The Bureau does not believe, however,
that the rule should provide an
extensive list of compensating factors
that the creditor may consider in
assessing repayment ability. Instead,
creditors should make reasonable and
good faith determinations of the
consumer’s repayment ability in light of
the facts and circumstances. This
approach to compensating factors is
consistent with the final rule’s flexible
approach to the requirement that
creditors make a reasonable and good
faith of a consumer’s repayment ability
throughout § 1026.43(c).
The Bureau will consider conducting
a future study on the debt-to-income
ratio and residual income. Except for
one small creditor and the VA, the
Bureau is not aware of any creditors that
routinely use residual income in
underwriting, other than as a
compensating factor.117 The VA
underwrites its loans to veterans based
on a residual income table developed in
1997. The Bureau understands that the
table shows the residual income desired
for the consumer based on the loan
amount, region of the country, and
family size, but does not account for
differences in housing or living costs
within regions (for instance rural
Vermont versus New York City). The
Bureau also understands that the
residual income is calculated by
deducting obligations, including Federal
and State taxes, from effective income.
However, at this time, the Bureau is
unable to conduct a detailed review of
the VA residual income guidelines,
which would include an analysis of
whether those guidelines are predictive
of repayment ability, to determine if
those standards should be incorporated,
in whole or in part, into the ability-to117 See also Michael E. Stone, What is Housing
Affordability? The Case for the Residual Income
Approach, 17 Housing Pol’y Debate 179 (2006)
(advocating use of a residual income approach but
acknowledging that it ‘‘is neither well known,
particularly in this country, nor widely understood,
let alone accepted’’).
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
repay analysis that applies to the entire
residential mortgage market. Further,
the Bureau believes that providing
broad standards for the definition and
calculation of residual income will help
preserve flexibility if creditors wish to
develop and refine more nuanced
residual income standards in the future.
The Bureau accordingly does not find it
necessary or appropriate to specify a
detailed methodology in the final rule
for consideration of residual income.
The final rule also does not provide
a safe harbor for creditors relying on
automated underwriting systems that
use monthly debt-to-income ratios. The
Bureau understands that creditors
routinely rely on automated
underwriting systems, many of which
are proprietary and thus lack
transparency to the individual creditors
using the systems. Such systems may
decide, for example, whether the debtto-income ratio and compensating
factors are appropriate, but may not
disclose to the individual creditors
using such systems which compensating
factors were used for loan approval.
However, the Bureau does not believe a
safe harbor is necessary in light of the
flexibility the final rule provides to
creditors in assessing a consumer’s
repayment ability, including
consideration of monthly debt-toincome ratios. See comments 43(c)(1)–1
and 43(c)(2)–1.
Finally, the Bureau notes the contrast
between the flexible approach to
considering and calculating debt-toincome in § 1026.43(c)(2)(vii) and (7)
and the specific standards for evaluating
debt-to-income for purposes of
determining whether a covered
transaction is a qualified mortgage
under § 1026.43(e)(2). For the reasons
discussed below in the section-bysection analysis of § 1026.43(e)(2), the
Bureau believes a specific, quantitative
standard for evaluating a consumer’s
debt-to-income ratio is appropriate in
determining whether a loan receives
either a safe harbor or presumption of
compliance with the repayment ability
requirements of § 1026.43(c)(1) pursuant
to § 1026.43(e)(2). However, the abilityto-repay requirements in § 1026.43(c)
will apply to the whole of the mortgage
market and therefore require flexibility
to permit creditors to assess repayment
ability while ensuring continued access
to responsible, affordable mortgage
credit. Accordingly, the final rule sets
minimum underwriting standards while
providing creditors with flexibility to
use their own quantitative standards in
making the repayment ability
determination required by
§ 1026.43(c)(1).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
43(d) Refinancing of Non-Standard
Mortgages
Two provisions of section 1411 of the
Dodd-Frank Act address the refinancing
of existing mortgage loans under the
ability-to-repay requirements. As
provided in the Dodd-Frank Act, TILA
section 129C(a)(5) provides that certain
Federal agencies may create an
exemption from the income verification
requirements in TILA section 129C(a)(4)
if certain conditions are met. 15 U.S.C.
1639c(a)(5). In addition, TILA section
129C(a)(6)(E) provides certain special
ability-to-repay requirements to
encourage applications to refinance
existing ‘‘hybrid loans’’ into a ‘‘standard
loans’’ with the same creditor, where
the consumer has not been delinquent
on any payments on the existing loan
and the monthly payments would be
reduced under the refinanced loan. The
statute allows creditors to give special
weight to the consumer’s good standing
and to consider whether the refinancing
would prevent a likely default, as well
as other potentially favorable treatment
to the consumer. However, it does not
expressly exempt applications for such
‘‘payment shock refinancings’’ from
TILA’s general ability-to-repay
requirements or define ‘‘hybrid’’ or
‘‘standard loans.’’ 118 15 U.S.C.
1639c(a)(6)(E).
The Board noted in its proposal that
it reviewed the Dodd-Frank Act’s
legislative history, consulted with
consumer advocates and representatives
of both industry and the GSEs, and
examined underwriting rules and
guidelines for the refinance programs of
private creditors, GSEs and Federal
agencies, as well as for the Home
Affordable Modification Program
(HAMP). The Board noted that it also
considered TILA section 129C(a)(5),
which permits Federal agencies to adopt
rules exempting refinancings from
certain of the ability-to-repay
requirements in TILA section 129C(a).
In proposing § 226.43(d) to implement
TILA section 129C(a)(6)(E), the Board
interpreted the statute as being intended
to afford greater flexibility to creditors
of certain home mortgage refinancings
when complying with the general
ability-to-repay provisions in TILA
section 129C(a). Consistent with this
reading of the statute, the proposal
would have provided an exemption
from certain criteria required to be
considered as part of the general
118 Section 128A of TILA, as added by Section
1418 of the Dodd-Frank Act, includes a definition
of ‘‘hybrid adjustable rate mortgage.’’ However, that
definition applies to the adjustable rate mortgage
disclosure requirements under TILA section 128A,
not the ability-to-repay requirements under TILA
section 129C.
PO 00000
Frm 00081
Fmt 4701
Sfmt 4700
6487
repayment ability determination under
TILA section 129C(a). Specifically, the
Board’s proposal would have permitted
creditors to evaluate qualifying
applications without having to verify
the consumer’s income and assets as
prescribed in the general ability-torepay requirements, provided that a
number of additional conditions were
met. In addition, the proposal would
have permitted a creditor to calculate
the monthly payment used for
determining the consumer’s ability to
repay the new loan based on
assumptions that would typically result
in a lower monthly payment than those
required to be used under the general
ability-to-repay requirements. The
proposal also clarified the conditions
that must be met in a home mortgage
refinancing in order for this greater
flexibility to apply.
The Board noted that TILA section
129C(a)(6)(E)(ii) permits creditors to
give prevention of a ‘‘likely default
should the original mortgage reset a
higher priority as an acceptable
underwriting practice.’’ 15 U.S.C.
1639c(a)(6)(E)(ii). The Board interpreted
this provision to mean that certain
ability-to-repay criteria under TILA
section 129C(a) should not apply to
refinances that meet the requisite
conditions. TILA section 129C(a)
specifically prescribes the requirements
that creditors must meet to satisfy the
obligation to determine a consumer’s
ability to repay a mortgage loan. The
Board concluded that the term
‘‘underwriting practice’’ could
reasonably be interpreted to refer to the
underwriting rules prescribed in earlier
portions of TILA section 129C(a);
namely, those concerning the general
ability-to-repay underwriting
requirements.
The Board also structured its proposal
to provide for flexibility in underwriting
that is characteristic of so-called
‘‘streamlined refinances,’’ which are
offered by creditors to existing
customers without having to go through
a full underwriting process appropriate
for a new origination. The Board noted
that section 1411 of the Dodd-Frank Act
specifically authorizes streamlined
refinancings of loans made, guaranteed,
or insured by Federal agencies, and
concluded that TILA section
129C(a)(6)(E) is most reasonably
interpreted as being designed to address
the remaining market for streamlined
refinancings; namely, those offered
under programs of private creditors and
the GSEs. The Board stated that in its
understanding typical streamlined
refinance programs do not require
documentation of income and assets,
although a verbal verification of
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6488
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
employment may be required. The
Board further noted that TILA section
129C(a)(6)(E) includes three central
elements of typical streamlined
refinance programs, in that it requires
that the creditor be the same for the
existing and new mortgage loan
obligation, that the consumer have a
positive payment history on the existing
mortgage loan obligation, and that the
payment on the new refinancing be
lower than on the existing mortgage
loan obligation.
One difference the Board noted
between the statute and typical
streamlined refinance programs is that
the statute targets consumers facing
‘‘likely default’’ if the existing mortgage
‘‘reset[s].’’ The Board indicated that, by
contrast, streamlined refinance
programs may not be limited to
consumers at risk in this way. For
example, streamlined refinancing
programs may assist consumers who are
not facing potential default but who
simply wish to take advantage of lower
rates despite a drop in their home value
or wish to switch from a less stable
variable-rate product to a fixed-rate
product. The Board noted parallels
between TILA’s new refinancing
provisions and the focus of HAMP, a
government program specifically aimed
at providing modifications for
consumers at risk of ‘‘imminent
default,’’ or in default or foreclosure.119
However, the Board noted that
underwriting criteria for a HAMP
modification are considerably more
stringent than for a typical streamlined
refinance.
On balance, the Board interpreted the
statutory language as being modeled on
the underwriting standards of typical
streamlined refinance programs rather
than the tighter standards of HAMP. The
Board concluded that Congress intended
to facilitate opportunities to refinance
loans on which payments could become
significantly higher and thus
unaffordable. The Board cautioned that
applying underwriting standards that
are too stringent could impede
refinances that Congress intended to
encourage. In particular, the statutory
language permitting creditors to give
‘‘likely default’’ a ‘‘higher priority as an
acceptable underwriting practice’’
indicates that flexibility in these special
refinances should be permitted. In
addition, underwriting standards that go
significantly beyond those used in
existing streamlined refinance programs
could create a risk that these programs
would be unable to meet the TILA
ability-to-repay requirements; thus, an
119 See, e.g., Fannie Mae, FM 0509, Home
Affordable Modification Program, at 1 (2009).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
important refinancing resource for atrisk consumers would be compromised
and the overall mortgage market
potentially disrupted at a vulnerable
time.
The Board noted, however, that
consumers at risk of default when
higher payments are required might
present greater credit risks to the
institutions holding their loans when
those loans are refinanced without
verifying the consumer’s income and
assets. Accordingly, the Board’s
proposal would have imposed some
requirements that are more stringent
than those of typical streamlined
refinance programs as a prerequisite to
the refinancing provision under
proposed § 226.43(d). For example, the
proposal would have permitted a
consumer to have had only one
delinquency of more than 30 days in the
24 months immediately preceding the
consumer’s application for a refinance.
By contrast, the Board indicated that
streamlined refinance programs of
which it is aware tend to consider the
consumer’s payment history for only the
last 12 months.120 In addition, the
proposal would have defined the type of
loan into which a consumer may
refinance under TILA’s new refinancing
provisions to include several
characteristics designed to ensure that
those loans are stable and affordable.
These include a requirement that the
interest rate be fixed for the first five
years after consummation and that the
points and fees be capped at three
percent of the total loan amount, subject
to a limited exemption for smaller loans.
43(d)(1) Definitions
In the Board’s proposal, § 226.43(d)(1)
established the scope of paragraph (d)
and set forth the conditions under
which the special refinancing
provisions applied, while proposed
§ 226.43(d)(2) addressed the definitions
for ‘‘non-standard mortgage,’’ ‘‘standard
mortgage,’’ and ‘‘refinancing.’’ The
Bureau believes that paragraph (d)
should begin with the relevant
definitions, before proceeding to the
scope and conditions of the special
refinancing provisions. The rule
finalized by the Bureau is accordingly
reordered. The following discussion
details the definitions adopted in
§ 1026.43(d)(1), which were proposed
by the Board under § 226.43(d)(2).
Proposed § 226.43(d)(2) defined the
terms ‘‘non-standard mortgage’’ and
‘‘standard mortgage.’’ As noted earlier,
120 See, e.g., Fannie Mae, Home Affordable
Refinance Refi Plus Options, at 2 (Mar. 29, 2010);
Freddie Mac, Pub. No. 387, Freddie Mac-owned
Streamlined Refinance Mortgage, at 2 (2010).
PO 00000
Frm 00082
Fmt 4701
Sfmt 4700
the statute does not define the terms
‘‘hybrid loan’’ and ‘‘standard loan’’ used
in the special refinancing provisions of
TILA section 129C(a)(6)(E). Therefore,
the Board proposed definitions it
believed to be consistent with the policy
objective underlying these special
provisions: Facilitating the refinancing
of home mortgages on which consumers
risk a likely default due to impending
payment shock into more stable and
affordable products.
43(d)(1)(i) Non-Standard Mortgage
As noted above, the statute does not
define the terms ‘‘hybrid loan’’ and
‘‘standard loan’’ used in TILA section
129C(a)(6)(E). The Board proposed
definitions it believed to be consistent
with Congress’s objectives. Proposed
§ 226.43(d)(2)(i) substituted the term
‘‘non-standard mortgage’’ for the
statutory term ‘‘hybrid loan’’ and would
have defined non-standard mortgage as
any ‘‘covered transaction,’’ as defined in
proposed § 226.43(b)(1), that is:
• An adjustable-rate mortgage, as
defined in § 226.18(s)(7)(i), with an
introductory fixed interest rate for a
period of one year or longer; 121
• An interest-only loan, as defined in
§ 226.18(s)(7)(iv); 122 or
• A negative amortization loan, as
defined in § 226.18(s)(7)(v).123
Proposed comment 43(d)(2)(i)(A)–1
explained the application of the
definition of non-standard mortgage to
an adjustable-rate mortgage with an
introductory fixed interest rate for one
or more years. This proposed comment
clarified that, for example, a covered
transaction with a fixed introductory
rate for the first two, three or five years
that then converts to a variable rate for
the remaining 28, 27 or 25 years,
respectively, is a non-standard
mortgage. By contrast, a covered
transaction with an introductory rate for
six months that then converts to a
variable rate for the remaining 29 and 1⁄2
years is not a non-standard mortgage.
The Board articulated several
rationales for its proposed definition of
121 ‘‘The term ‘adjustable-rate mortgage’ means a
transaction secured by real property or a dwelling
for which the annual percentage rate may increase
after consummation.’’ 12 CFR 1026.18(s)(7)(i).
122 ‘‘The term ‘interest-only’ means that, under
the terms of the legal obligation, one or more of the
periodic payments may be applied solely to accrued
interest and not to loan principal; an ‘interest-only
loan’ is a loan that permits interest-only payments.’’
12 CFR 1026.18(s)(7)(iv).
123 ‘‘[T]he term ‘negative amortization’ means
payment of periodic payments that will result in an
increase in the principal balance under the terms
of the legal obligation; the term ‘negative
amortization loan’ means a loan that permits
payments resulting in negative amortization, other
than a reverse mortgage subject to section 226.33.’’
12 CFR 1026.18(s)(7)(v).
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
a non-standard mortgage. First, the
Board noted that the legislative history
of the Dodd-Frank Act describes
‘‘hybrid’’ mortgages as mortgages with a
‘‘blend’’ of fixed-rate and adjustable-rate
characteristics—generally loans with an
initial fixed period and adjustment
periods, such as ‘‘2/23s and 3/27s.’’ 124
The Board also stated that the legislative
history indicates that Congress was
concerned about consumers being
trapped in mortgages likely to result in
payments that would suddenly become
significantly higher—often referred to as
‘‘payment shock’’—because their home
values had dropped, thereby ‘‘making
refinancing difficult.’’ 125
The Board interpreted Congress’
concern about consumers being at risk
due to payment shock as supporting an
interpretation of the term ‘‘hybrid loan’’
to encompass both loans that are
‘‘hybrid’’ in that they start with a fixed
interest rate and convert to a variable
rate, but also loans that are ‘‘hybrid’’ in
that consumers can make payments that
do not pay down principal for a period
of time that then convert to higher
payments covering all or a portion of
principal. By defining ‘‘non-standard
mortgage’’ in this way, the proposal was
intended to increase refinancing options
for a wide range of at-risk consumers
while conforming to the statutory
language and legislative intent.
The proposed definition of ‘‘nonstandard mortgage’’ would not have
included adjustable-rate mortgages
whose rate is fixed for an initial period
of less than one year. In those instances,
the Board posited that a consumer may
not face ‘‘payment shock’’ because the
consumer has paid the fixed rate for
such a short period of time. The Board
also expressed concern that allowing
streamlined refinancings under this
provision where the interest rate is fixed
for less than one year could result in
‘‘loan flipping.’’ A creditor, for example,
could make a covered transaction and
then only a few months later refinance
that loan under proposed § 226.43(d) to
take advantage of the exemption from
certain ability-to-repay requirements
while still profiting from the refinancing
fees.
The Board expressed concern that
under its proposed definition, a
consumer could refinance out of a
relatively stable product, such as an
adjustable-rate mortgage with a fixed
interest rate for a period of 10 years,
which then adjusts to a variable rate for
the remaining loan term, and that it was
124 See Comm. on Fin. Servs., Report on H.R.
1728, Mortgage Reform and Anti-Predatory Lending
Act, H. Rept. 94, 110th Cong., at 5 (2009).
125 Id. at 51–52.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
unclear whether TILA section
129C(a)(6)(E) was intended to cover this
type of product. The Board solicited
comment on whether adjustable-rate
mortgages with an initial fixed rate
should be considered non-standard
mortgages regardless of how long the
initial fixed rate applies, or if the
proposed initial fixed-rate period of at
least one year should otherwise be
revised.
The proposed definition of nonstandard mortgage also did not include
balloon-payment mortgages. The Board
noted that balloon-payment mortgages
are not clearly ‘‘hybrid’’ products, given
that the monthly payments on a balloonpayment mortgage do not necessarily
increase or change from the time of
consummation; rather, the entire
outstanding principal balance becomes
due on a particular, predetermined date.
The Board stated that consumers of
balloon-payment mortgages typically
expect that the entire loan balance will
be due at once at a certain point in time
and are generally aware well in advance
that they will need to repay the loan or
refinance.
The Board solicited comment on
whether to use its legal authority to
include balloon-payment mortgages in
the definition of non-standard mortgage
for purposes of the special refinancing
provisions of TILA section
129C(a)(6)(E). The Board also requested
comment generally on the
appropriateness of the proposed
definition of non-standard mortgage.
Commenters on this aspect of the
proposal generally urged the Bureau to
expand in various ways the proposed
definition of non-standard mortgage and
either supported or did not address the
proposed definition’s inclusion of
adjustable-rate mortgages, interest-only
loans, or negative amortization loans.
One consumer group commented that it
supported the Board’s proposed
definition of non-standard mortgage.
Other consumer group commenters
stated that the Bureau should use its
exemption and adjustment authority
under TILA to include balloon-payment
loans within the scope of proposed
§ 226.43(d). In addition, one industry
commenter stated that creditors should
have flexibility to refinance a
performing balloon-payment loan
within the six months preceding, or
three months following, a balloon
payment date without regard to the
ability-to-pay requirements. In contrast,
one industry commenter stated that
balloon-payment loans should not be
included in the definition of nonstandard mortgage, because consumers
are generally well aware of the balloon
payment feature in a loan, which is
PO 00000
Frm 00083
Fmt 4701
Sfmt 4700
6489
clearly explained to customers. This
industry commenter further stated that
during the life of a balloon-payment
loan, its customers often make regular
payments that reduce the principal
balance and that balloon-payment loans
do not make it more likely that a
consumer will default.
While the Bureau agrees that many
consumers may need to seek a
refinancing when a balloon loan
payment comes due, given the approach
that the Bureau has taken to
implementing the payment shock
refinancing provision in § 1026.43(d),
the Bureau is declining to expand the
definition of non-standard mortgage to
include balloon-payment mortgages. As
discussed in more detail in the
supplementary information to
§ 1026.43(d)(3), as adopted § 1026.43(d)
provides a broad exemption to all of the
general ability-to-repay requirements set
forth in § 1026.43(c) when a nonstandard mortgage is refinanced into a
standard mortgage provided that certain
conditions are met. The point of this
exemption is to enable creditors,
without going through full
underwriting, to offer consumers who
are facing increased monthly payments
due to the recast of a loan a new loan
with lower monthly payments. Thus, a
key element of the exemption is that the
monthly payment on the standard
mortgage be materially lower than the
monthly payment for the non-standard
mortgage. As discussed in the sectionby-section analysis of § 1026.43(d)(1)
below, the Bureau is adopting a safe
harbor for reductions of 10 percent.
Balloon payments pose a different kind
of risk to consumers, one that arises not
from the monthly payments (which
often tend to be low) but from the
balloon payment due when the entire
remaining balance becomes due. The
provisions of § 1026.43(d)(1) are not
meant to address this type of risk.
Accordingly, the Bureau declines to
expand the definition of non-standard
mortgage to include balloon-payment
loans. The Bureau believes, however,
that where a consumer is performing
under a balloon-payment mortgage and
is offered a new loan of a type that
would qualify as a standard loan with
monthly payments at or below the
payments of the balloon-payment
mortgage, creditors will have little
difficulty in satisfying the ability-torepay requirements.
Consumer group commenters and one
GSE commenter argued that the
definition of non-standard mortgage
should accommodate GSE-held loans.
These commenters stated that these
loans should receive the same income
verification exemption as Federal
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6490
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
agency streamlined refinancing
programs. These commenters noted that
while the GSEs are held in
conservatorship by the Federal
government, GSE-held loans should be
treated the same as FHA for purposes of
streamlined refinance programs, which
are ultimately about reducing the risk to
the taxpayer by avoiding default by
consumers who could receive lowercost mortgage loans. Consumer group
commenters further urged that GSE
streamlined refinance programs should
be subject to standards at least as
stringent as those for the FHA
streamlined refinance program.
In addition, one of the GSEs
questioned the policy justification for
the differences between sections
129C(a)(5) and 129C(a)(6)(E) of TILA.
TILA section 129C(a)(5), which applies
to certain government loans, permits
Federal agencies to exempt certain
refinancings from the income and asset
verification requirement without regard
to the original mortgage product, in
contrast to TILA section 129C(a)(6)(E),
which as discussed above applies only
when the original loan is a ‘‘hybrid’’
loan. This commenter noted that
consumers with certain types of
mortgage loans, such as fixed-rate and
balloon-payment loans, may have to go
through a more costly and cumbersome
process to refinance their mortgages
than consumers with government loans.
The Bureau declines to adopt
regulations implementing TILA section
129C(a)(5). The Bureau notes that TILA
section 129C(a)(5) expressly confers
authority on certain Federal agencies
(i.e., HUD, VA, USDA, and RHS) to
exempt from the income verification
requirement refinancings of certain
loans made, guaranteed, or insured by
such Federal agencies. The scope of
TILA section 129C(a)(5) is limited to
such Federal agencies or governmentguaranteed or -insured loans. The
Bureau also declines to expand the
scope of § 1026.43(d) to include GSE
refinancings that do not otherwise fall
within the scope of § 1026.43(d). While
accommodation for GSE-held mortgage
loans that are not non-standard
mortgages under § 1026.43(d) may be
appropriate, the Bureau wishes to obtain
additional information in connection
with GSE refinancings and has
requested feedback in a proposed rule
published elsewhere in today’s Federal
Register. However, the Bureau notes
that to the extent a loan held by the
GSEs (or a loan made, guaranteed or
insured by the Federal agencies above)
qualifies as a non-standard mortgage
under § 1026.43(d)(1)(i) and the other
conditions in § 1026.43(d) are met, the
refinancing provisions of general
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
applicability in § 1026.43(d) would be
available for refinancing a GSE-held
loan.
Industry commenters and one
industry trade association commented
that special ability-to-repay
requirements should be available for all
rate-and-term refinancings, regardless of
whether the refinancings are insured or
guaranteed by the Federal government
or involve a non-standard mortgage.
One industry trade association stated
that such special ability-to-repay
requirements should incorporate similar
standards to those established for
certain government loans in TILA
section 129C(a)(5), including a
requirement that the consumer not be 30
or more days delinquent. For such
loans, this trade association stated that
other requirements under TILA section
129C(a)(6)(E) regarding payment history
should not be imposed, because the
consumer is already obligated to pay the
debt and the note holder in many cases
will already bear the credit risk. Other
commenters stated that because a rateand-term refinancing would offer the
consumer a better rate (except in the
case of adjustable rate mortgages), there
is no reason to deny the creditor the
ability to improve its credit risk and to
offer the consumer better financing.
Several industry commenters and one
GSE noted that streamlined refinancing
programs are an important resource for
consumers seeking to refinance into a
lower monthly payment mortgage even
when the underlying mortgage loan is
not a non-standard mortgage, and urged
the Bureau to considering modifying
proposed § 226.43(d) to include
conventional loans where the party
making or purchasing the new loan
already owns the credit risk.
The Bureau declines to expand the
scope of § 1026.43(d) to include rateand-term refinancings when the
underlying mortgage is not a nonstandard mortgage, as defined in
§ 1026.43(d)(1)(i). The Bureau believes
that the statute clearly limits the
refinancing provision in TILA section
129(C)(6)(E) to circumstances where the
loan being refinanced is a ‘‘hybrid loan’’
and where the refinancing could
‘‘prevent a likely default.’’ The Bureau
agrees with the Board that TILA section
129C(a)(6)(E) is intended to address
concerns about loans involving possible
payment shock. Where a consumer has
proven capable of making payments, is
about to experience payment shock, is at
risk of default, and is refinancing to a
mortgage with a lower monthly payment
and with product terms that do not pose
any increased risk, the Bureau believes
that the benefits of the refinancing
outweigh the consumer protections
PO 00000
Frm 00084
Fmt 4701
Sfmt 4700
afforded by the ability-to-repay
requirements. Absent these exigent
circumstances, the Bureau believes that
creditors should determine that the
consumer has the ability to repay the
mortgage loan. The Bureau does not
believe that a consumer who receives an
initial lower monthly payment from a
rate-and-term refinancing actually
receives a benefit if the consumer
cannot reasonably be expected to repay
the loan. Also, the Bureau notes that
some of the scenarios identified by
commenters, such as offering a
consumer a better rate with a rate-andterm refinancing where the creditor
bears the credit risk, would be exempt
from the ability-to-repay requirements.
A refinancing that results in a reduction
in the APR with a corresponding change
in the payment schedule and meets the
other conditions in § 1026.20(a) is not a
‘‘refinancing’’ for purposes of § 1026.43,
and therefore is not subject to the
ability-to-repay requirements. As with
other terms used in TILA section 129C,
the Bureau believes that this
interpretation is necessary to achieve
Congress’s intent.
Several other industry commenters
urged the Bureau to broaden the
definition of non-standard mortgage to
include refinancings extended pursuant
to the Home Affordable Refinance
Program (HARP) and similar programs.
One such commenter indicated that
under HARP, a loan can only be
refinanced if the consumer is not in
default, the new payment is fully
amortizing, and both the original and
new loans comply with agency
requirements. This commenter stated
that HARP permits consumers who
would not otherwise be able to
refinance due to a high loan-to-value
ratio or other reasons to refinance into
another loan, providing a consumer
benefit. The commenter indicated that
HARP loans do not meet all of the
proposed ability-to-repay requirements
and that the Bureau should use its
authority to provide that HARP and
other similar programs are exempt from
the ability-to-repay requirements, as
they promote credit availability and
increasing stability in the housing
market. The Bureau acknowledges that
HARP refinancings and the payment
shock refinancings addressed under
TILA section 129C(a)(6)(E) are both
intended to assist consumers harmed by
the financial crisis. Although both types
of refinancings are motivated by similar
goals, the Bureau does not believe that
expanding § 1026.43(d) to include all
HARP refinancings is consistent with
TILA section 129C(a)(6)(E) because
HARP refinancings are not predicated
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
on the occurrence of payment shock and
a consumer’s likely default. For
example, a consumer with a mortgage
loan that will not recast and who is not
at risk of default may qualify for a HARP
refinancing if the consumer’s loan-tovalue ratio exceeds 80 percent. The
Bureau strongly believes that
§ 1026.43(d) should be limited to
instances where a consumer is facing
payment shock and likely default.
While not limited to the prevention of
payment shock and default, the Bureau
acknowledges that extensions of credit
made pursuant to programs such as
HARP are intended to assist consumers
harmed by the financial crisis.
Furthermore, these programs employ
complex underwriting requirements to
determine a consumer’s ability to repay.
Thus, it may be appropriate to modify
the ability-to-repay requirements to
accommodate such programs. However,
an appropriate balance between helping
affected consumers and ensuring that
these consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect consumers’ ability to
repay must be found. To determine how
to strike this balance, the Bureau wishes
to obtain additional information in
connection with these programs and has
requested feedback in a proposed rule
published elsewhere in today’s Federal
Register.
Accordingly, the definition of ‘‘nonstandard mortgage’’ is adopted as
proposed, renumbered as
§ 1026.43(d)(1)(i). In addition, comment
43(d)(2)(i)(A)–1 also is adopted as
proposed, renumbered as
43(d)(1)(i)(A)–1.
43(d)(1)(ii) Standard Mortgage
Proposed § 226.43(d)(2)(ii) would
have substituted the term ‘‘standard
mortgage’’ for the statutory term
‘‘standard loan’’ and defined this term
to mean a covered transaction that has
the following five characteristics:
• First, the regular periodic payments
may not: (1) Cause the principal balance
to increase; (2) allow the consumer to
defer repayment of principal; or (3)
result in a balloon payment.
• Second, the total points and fees
payable in connection with the
transaction may not exceed three
percent of the total loan amount, with
exceptions for smaller loans specified in
proposed § 226.43(e)(3).
• Third, the loan term may not
exceed 40 years.
• Fourth, the interest rate must be
fixed for the first five years after
consummation.
• Fifth, the proceeds from the loan
may be used solely to pay—(1) the
outstanding principal balance on the
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
non-standard mortgage; and (2) closing
or settlement charges required to be
disclosed under RESPA.
Proposed limitations on regular
periodic payments. Proposed
§ 226.43(d)(2)(ii)(A) would have
required that a standard mortgage
provide for regular periodic payments
that do not result in negative
amortization, deferral of principal
repayment, or a balloon payment.
Proposed comment 43(d)(2)(ii)(A)–1
clarified that ‘‘regular periodic
payments’’ are payments that do not
result in an increase of the principal
balance (negative amortization) or allow
the consumer to defer repayment of
principal. The proposed comment
explained that the requirement for
‘‘regular periodic payments’’ means that
the contractual terms of the standard
mortgage must obligate the consumer to
make payments of principal and interest
on a monthly or other periodic basis
that will repay the loan amount over the
loan term. Proposed comment
43(d)(2)(ii)(A)–1 further explained that,
with the exception of payments
resulting from any interest rate changes
after consummation in an adjustablerate or step-rate mortgage, the periodic
payments must be substantially equal,
with a cross-reference to proposed
comment 43(c)(5)(i)–3 regarding the
meaning of ‘‘substantially equal.’’ In
addition, the comment clarified that
‘‘regular periodic payments’’ do not
include a single-payment transaction
and cross-referenced similar
commentary on the meaning of ‘‘regular
periodic payments’’ under proposed
comment 43(e)(2)(i)–1. Proposed
comment 43(d)(2)(ii)(A)–1 also crossreferenced proposed comment
43(e)(2)(i)–2 to explain the prohibition
on payments that ‘‘allow the consumer
to defer repayment of principal.’’
One consumer group commenter
stated that it supported the exclusion of
negative amortization, interest-only
payments, and balloon payments from
the definition of standard mortgage. In
addition, several other consumer groups
commented in support of the Board’s
proposal to exclude balloon-payment
loans from the definition of standard
mortgage. These commenters stated that
balloon-payment products, even with
self-executing renewal, should not be
permitted to take advantage of an
exemption from the general
underwriting standards in § 1026.43(c).
Consumer groups expressed concern
that, in cases where the consumer does
not have assets sufficient to make the
balloon payment, balloon-payment
loans will necessarily require another
refinance or will lead to a default. The
Bureau agrees with the concerns
PO 00000
Frm 00085
Fmt 4701
Sfmt 4700
6491
expressed by such commenters and
believes that it is appropriate to require
that balloon-payment loans be
underwritten in accordance with the
general ability-to-repay standard, rather
than under the payment shock
refinancing provision in § 1026.43(d).
Accordingly, the Bureau is not
expanding the definition of standard
mortgage to include balloon-payment
mortgages.
The Bureau received no other
comment on this proposed definition.
Accordingly, the Bureau is adopting the
definition of standard mortgage as
proposed, renumbered as
§ 1026.43(d)(1)(ii)(A). Similarly, the
Bureau received no comment on
proposed comment 43(d)(2)(ii)(A)–1,
which is adopted as proposed and
renumbered as 43(d)(1)(ii)(A)–1.
Proposed three percent cap on points
and fees. Proposed § 226.43(d)(2)(ii)(B)
would have prohibited creditors from
charging points and fees on the
mortgage loan of more than three
percent of the total loan amount, with
certain exceptions for small loans.
Specifically, proposed
§ 226.43(d)(2)(ii)(B) cross-referenced the
points and fees provisions under
proposed § 226.43(e)(3), thereby
applying the points and fees limitations
for a ‘‘qualified mortgage’’ to a standard
mortgage. The points and fees limitation
for a ‘‘qualified mortgage’’ and the
relevant exception for small loans are
discussed in detail in the section-bysection analysis of § 1026.43(e)(3)
below.
The Board noted several reasons for
the proposed limitation on the points
and fees that may be charged on a
standard mortgage. First, the limitation
was intended to prevent creditors from
undermining the provision’s purpose—
placing at-risk consumers into more
affordable loans—by charging excessive
points and fees for the refinance.
Second, the points and fees limitation
was intended to ensure that consumers
attain a net benefit in refinancing their
non-standard mortgage. The higher a
consumer’s up-front costs to refinance a
home mortgage, the longer it will take
for the consumer to recoup those costs
through lower payments on the new
mortgage. By limiting the amount of
points and fees that can be charged in
a refinance covered by proposed
§ 226.43(d), the provision increases the
likelihood that the consumer will hold
the loan long enough to recoup those
costs. Third, the proposed limitation
was intended to be consistent with the
provisions set forth in TILA section
129C(a)(5) regarding certain
refinancings under Federal agency
programs.
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6492
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
The Board requested comment on the
proposal to apply the same limit on the
points and fees that may be charged for
a ‘‘qualified mortgage’’ under § 226.43(e)
to the points and fees that may be
charged on a ‘‘standard mortgage’’ under
§ 226.43(d). The Bureau received no
comments on this proposed points and
fees threshold, which is adopted as
proposed, renumbered as
§ 1026.43(d)(1)(ii)(B). See the sectionby-section analysis of § 1026.43(e)(3)
below for more specific information
regarding the limitations applicable to
‘‘points and fees’’ for qualified
mortgages and refinancings under
§ 1026.43(d).
Proposed loan term of no more than
40 years. Proposed § 226.43(d)(2)(ii)(C)
would have provided that, to qualify as
a standard mortgage under proposed
§ 226.43(d), a covered transaction may
not have a loan term of more than 40
years. The Board stated that this
condition was intended to ensure that
creditors and consumers have sufficient
options to refinance a 30-year loan, for
example, which is unaffordable for the
consumer in the near term, into a loan
with lower, more affordable payments
over a longer term. This flexibility may
be especially important in higher cost
areas where loan amounts on average
exceed loan amounts in other areas.
The Board noted that loans with
longer terms may cost more over time,
but indicated that it was reluctant to
foreclose options for consumers for
whom the lower payment of a 40-year
loan might make the difference between
defaulting and not defaulting. The
Board also noted that prevalent
streamlined refinance programs permit
loan terms of up to 40 years and
expressed concern about disrupting the
current mortgage market at a vulnerable
time. The Board specifically requested
comment on the proposed condition to
allow a standard mortgage to have a
loan term of up to 40 years. The Bureau
received no comment on this proposed
condition, which is adopted as
proposed, renumbered as
§ 1026.43(d)(1)(ii)(C).
Proposed requirement that the interest
rate be fixed for the first five years.
Proposed § 226.43(d)(2)(ii)(D) would
have required that a standard mortgage
have a fixed interest rate for the first five
years after consummation. Proposed
comment 43(d)(2)(ii)(D)–1 provided an
illustrative example. The proposed
comment also cross-referenced
proposed comment 43(e)(2)(iv)–3.iii for
guidance regarding step-rate mortgages.
The Board articulated several reasons
for requiring a minimum five-year fixedrate period for standard mortgages. First,
the Board noted that a fixed rate for five
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
years is consistent with TILA section
129C(b)(2)(A)(v), which requires the
creditor to underwrite a qualified
mortgage based on the maximum
interest rate that may apply during the
first five years. The Board indicated that
Congress intended both qualified
mortgages and standard mortgages to be
stable loan products, and therefore that
the required five-year fixed-rate period
for qualified mortgages would also be an
appropriate benchmark for standard
mortgages. The Board further stated that
the safeguard of a fixed rate for five
years after consummation would help to
ensure that consumers refinance into
products that are stable for a substantial
period of time. In particular, a fixed
payment for five years after
consummation would constitute a
significant improvement in the
circumstances of a consumer who may
have defaulted absent the refinance. The
Board specifically noted that the
proposal would permit so-called ‘‘5/1
ARMs,’’ where the interest rate is fixed
for the first five years, after which time
the rate becomes variable, to be standard
mortgages.
The Board requested comment on the
proposal defining a standard mortgage
as a mortgage loan with an interest rate
that is fixed for at least the first five
years after consummation, including on
whether the rate should be required to
be fixed for a shorter or longer period
and data to support any alternative time
period. One consumer group commenter
stated that the use of adjustable-rate
mortgages should be limited in the
definition of standard mortgage. This
commenter stated that adjustable-rate
mortgage loans contributed to the
subprime lending expansion and the
financial crisis that followed. In
particular, this commenter expressed
concern that adjustable-rate mortgage
loans were utilized in loan-flipping
schemes that trapped consumers in
unaffordable loans, forcing such
consumers to refinance into less
affordable mortgage loans. This
commenter indicated that standard
mortgages should be limited to fixed
and step-rate loans and, in low or
moderate interest rate environments,
adjustable-rate mortgages with a 5-year
or longer-term fixed period. However,
this commenter urged the Bureau to
consider permitting shorter-term
adjustable-rate mortgages to be standard
mortgages in high interest rate
environments because in such
circumstance, an adjustable-rate
mortgage could potentially reduce the
consumer’s monthly payments at recast,
which may outweigh the risks of
PO 00000
Frm 00086
Fmt 4701
Sfmt 4700
increased payments for some
consumers.
The Bureau is adopting the
requirement that a standard mortgage
have a fixed interest rate for the first five
years after consummation as proposed,
renumbered as § 1026.43(d)(1)(ii)(D).
The Bureau agrees with the Board that
the intent of TILA section 129C(a)(6)(E)
appears to be to facilitate refinances of
riskier mortgages into more stable loan
products, and accordingly, believes that
a standard mortgage should provide for
a significant period of time during
which payments will be predictable,
based on a fixed rate or step rates that
are set at the time of consummation.
The Bureau believes that five years is an
appropriate standard in part because it
is consistent with the statutory
requirement for a qualified mortgage
under section 129C(b)(2)(A)(v). The
Bureau believes that predictability for
consumers is best effectuated by a single
rule that applies in all interest rate
environments, rather than a rule that
depends on the interest rate
environment in effect at the time of the
refinancing. Further, given that
§ 1026.43(d) provides an exemption
from the general ability-to-repay
requirements in § 1026.43(c), the Bureau
believes that it is important that a
refinancing conducted in accordance
with § 1026.43(d) result in a stable loan
product and predictable payments for a
significant period of time.
In addition, the Board solicited
comment on whether a balloon-payment
mortgage of at least five years should be
considered a standard mortgage under
the refinancing provisions of proposed
§ 226.43(d). The Board noted that in
some circumstances, a balloon-payment
mortgage with a fixed, monthly payment
for five years might benefit a consumer
who otherwise would have defaulted.
The Board further noted that a five-year
balloon-payment mortgage may not be
appreciably less risky for the consumer
than a ‘‘5/1 ARM,’’ which is permitted
under the proposal, depending on the
terms of the rate adjustment scheduled
to occur in year five.
As discussed above, several consumer
groups stated that balloon products,
even with self-executing renewal,
should not be permitted to take
advantage of an exemption from the
general underwriting standards in
§ 1026.43(c). Consumer groups
expressed concern that, in cases where
the consumer does not have assets
sufficient to make the balloon payment,
balloon-payment mortgages will
necessarily require another refinance or
will lead to a default. For the reasons
discussed in the supplementary
information to § 1026.43(d)(1)(ii)(A)
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
above, the Bureau is not expanding the
definition of ‘‘standard mortgage’’ to
include balloon-payment mortgages.
Proposed requirement that loan
proceeds be used for limited purposes.
Proposed § 226.43(d)(2)(ii)(E) would
have restricted the use of the proceeds
of a standard mortgage to two purposes:
• To pay off the outstanding principal
balance on the non-standard mortgage;
and
• To pay closing or settlement
charges required to be disclosed under
the Real Estate Settlement Procedures
Act, 12 U.S.C. 2601 et seq., which
includes amounts required to be
deposited in an escrow account at or
before consummation.
Proposed comment 43(d)(2)(ii)(E)–1
clarified that if the proceeds of a
covered transaction are used for other
purposes, such as to pay off other liens
or to provide additional cash to the
consumer for discretionary spending,
the transaction does not meet the
definition of a ‘‘standard mortgage.’’
The Board expressed concern that
permitting the consumers to lose
additional equity in their homes under
the proposed refinancing provisions
could undermine the financial stability
of those consumers, thus contravening
the purposes of TILA section
129C(a)(6)(E). The Board requested
comment, however, on whether some de
minimis amount of cash to the
consumer should be permitted, either
because this allowance would be
operationally necessary to cover
transaction costs or for other reasons,
such as to reimburse a consumer for
closing costs that were over-estimated
but financed.
The Bureau received only one
comment on this aspect of the proposal.
An association of State bank regulators
agreed that the rule should generally
restrict the use of the proceeds of the
standard mortgage to paying off the
outstanding balance on the nonstandard mortgage or to pay closing or
settlement costs. However, they urged
the Bureau to provide an exemption that
would permit loan proceeds to be used
to pay for known home repair needs and
suggested that any such exemption
require the consumer to provide verified
estimates in advance in order to ensure
that loan proceeds are used only for
required home repairs.
The Bureau is adopting the limitation
on the use of loan proceeds as proposed,
renumbered as § 1026.43(d)(1)(ii)(E).
The Bureau declines to permit the
proceeds of a refinancing conducted in
accordance with § 1026.43(d) to be used
for home repair purposes, for several
reasons. First, the Bureau believes that
such an exemption would be
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
inconsistent with the statutory purposes
of TILA section 129C(a)(6)(E), which is
intended to permit refinancings on the
basis of less stringent underwriting in
the narrow circumstances where a
consumer’s non-standard mortgage is
about to recast and lead to a likely
default by the consumer. The Bureau
believes that permitting a consumer to
utilize home equity for home repairs in
connection with a refinancing
conducted pursuant to § 1026.43(d)
could further compromise the financial
position of consumers who are already
in a risky financial position. The Bureau
believes that it would be more
appropriate, where home repairs are
needed, for a creditor to perform the
underwriting required to advance any
credit required in connection with those
repairs. In addition, the Bureau believes
that such an exemption could be subject
to manipulation by fraudulent home
contractors, by the creditor, and even by
a consumer. It would be difficult, even
with a requirement that the consumer
provide verified estimates, to ensure
that amounts being disbursed for home
repairs actually are needed, and in fact
used, for that purpose.
43(d)(1)(iii)
Proposed § 226.43(d)(2)(iii) would
have defined the term ‘‘refinancing’’ to
have the same meaning as in
§ 1026.20(a).126 Section 1026.20(a)
defines the term ‘‘refinancing’’ generally
to mean a transaction in which an
existing obligation is ‘‘satisfied and
replaced by a new obligation
undertaken by the same consumer.’’
Official commentary explains that
‘‘[w]hether a refinancing has occurred is
determined by reference to whether the
original obligation has been satisfied or
extinguished and replaced by a new
obligation, based on the parties’ contract
and applicable law.’’ See comment
20(a)–1. However, the following are not
considered ‘‘refinancings’’ for purposes
of § 1026.20(a): (1) A renewal of a
payment obligation with no change in
the original terms; and (2) a reduction
in the annual percentage rate with a
corresponding change in the payment
schedule. See § 1026.20(a)(1) and (a)(2),
and comment 20(a)–2.
The Board requested comment on
whether the proposed meaning of
‘‘refinancing’’ should be expanded to
include a broader range of transactions
or otherwise should be defined
differently or explained more fully than
proposed. The Bureau received no
comments on this proposed definition.
126 The Board’s proposal originally referred to
226.20(a), which was subsequently renumbered as
12 CFR 1026.20(a).
PO 00000
Frm 00087
Fmt 4701
Sfmt 4700
6493
Accordingly, the Bureau is adopting the
definition of refinancing as proposed,
renumbered as § 1026.43(d)(1)(iii).
43(d)(2) Scope
In the Board’s proposal, § 226.43(d)(2)
addressed the definitions for ‘‘nonstandard mortgage,’’ ‘‘standard
mortgage,’’ and ‘‘refinancing,’’ while
proposed § 226.43(d)(1) established the
scope of paragraph (d) and set forth the
conditions under which the special
refinancing provisions applied. The
Bureau believes that paragraph (d)
should begin with the relevant
definitions, before proceeding to the
scope and conditions of the special
refinancing provisions. The rule
finalized by the Bureau is accordingly
reordered. The following discussion
details the provisions adopted in
§ 1026.43(d)(2), which were proposed
by the Board under § 226.43(d)(1).
Proposed § 226.43(d)(1) would have
defined the scope of the refinancing
provisions under proposed § 226.43(d).
Specifically, proposed § 226.43(d)
applied when a non-standard mortgage
is refinanced into a standard mortgage
and the following conditions are met—
• The creditor of the standard
mortgage is the current holder of the
existing non-standard mortgage or the
servicer acting on behalf of the current
holder.
• The monthly payment for the
standard mortgage is significantly lower
than the monthly payment for the nonstandard mortgage, as calculated under
proposed § 226.43(d)(5).
• The creditor receives the
consumer’s written application for the
standard mortgage before the nonstandard mortgage is ‘‘recast.’’
• The consumer has made no more
than one payment more than 30 days
late on the non-standard mortgage
during the 24 months immediately
preceding the creditor’s receipt of the
consumer’s written application for the
standard mortgage.
• The consumer has made no
payments more than 30 days late during
the six months immediately preceding
the creditor’s receipt of the consumer’s
written application for the standard
mortgage.
Proposed comment 43(d)(1)–1
clarified that the requirements for a
‘‘written application,’’ a term that
appears in § 226.43(d)(1)(iii), (d)(1)(iv)
and (d)(1)(v), discussed in detail below,
are found in comment 19(a)(1)(i)–3.
Comment 19(a)(1)(i)–3 states that
creditors may rely on the Real Estate
Settlement Procedures Act (RESPA) and
Regulation X (including any
interpretations issued by HUD) in
E:\FR\FM\30JAR2.SGM
30JAR2
6494
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
deciding whether a ‘‘written
application’’ has been received. This
comment further states that, in general,
Regulation X defines ‘‘application’’ to
mean the submission of a borrower’s
financial information in anticipation of
a credit decision relating to a federally
related mortgage loan. See 12 CFR
1024.2(b). Comment 19(a)(1)(i)–3
clarifies that an application is received
when it reaches the creditor in any of
the ways applications are normally
transmitted, such as by mail, hand
delivery, or through an intermediary
agent or broker. The comment further
clarifies that, if an application reaches
the creditor through an intermediary
agent or broker, the application is
received when it reaches the creditor,
rather than when it reaches the agent or
broker. Comment 19(a)(1)(i)–3 also
cross-references comment 19(b)–3 for
guidance in determining whether or not
the transaction involves an intermediary
agent or broker. The Bureau received no
comments on this proposed comment,
which is adopted as proposed,
renumbered as 43(d)(2)–1.
43(d)(2)(i)
Proposed § 226.43(d)(1)(i) would have
required that the creditor for the new
mortgage loan also be either the current
holder of the existing non-standard
mortgage or the servicer acting on behalf
of the current holder. This provision
was intended to implement the
requirement in TILA section
129C(a)(6)(E) that the existing loan must
be refinanced by ‘‘the creditor into a
standard loan to be made by the same
creditor.’’
The Board interpreted the statutory
phrase ‘‘same creditor’’ to mean that the
creditor refinancing the loan must have
an existing relationship with the
consumer. The Board explained that the
existing relationship is important
because the creditor must be able to
easily access the consumer’s payment
history and potentially other
information about the consumer in lieu
of documenting the consumer’s income
and assets. The Board also noted that
this statutory provision is intended to
ensure that the creditor of the
refinancing has an interest in placing
the consumer into a new loan that is
affordable and beneficial. The proposal
would have permitted the creditor of the
refinanced loan to be the holder, or
servicer acting on behalf of the holder,
of the existing mortgage. The Board
further explained that the existing
servicer may be the entity conducting
the refinance, particularly for refinances
held by GSEs. By also permitting the
creditor on the refinanced loan to be the
servicer acting on behalf of the holder
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
of the existing mortgage, the proposal
was intended to apply to a loan that has
been sold to a GSE, refinanced by the
existing servicer, and continues to be
held by the same GSE. The Board
solicited comment on whether the
proposed rule could be structured
differently to better ensure that the
creditor retains an interest in the
performance of the new loan and
whether additional guidance is needed.
Several commenters urged the Bureau
to impose a specific period following a
refinancing under § 226.43(d) during
which the creditor must remain the
current holder of the loan. Consumer
group commenters suggested that to be
eligible for the non-standard mortgage
refinancing the creditor should be
required to maintain full interest in the
refinanced loan for a minimum of 12
months. These commenters expressed
concern that the lack of such a retention
requirement would permit creditors to
refinance loans that are likely to fail
without performing the robust
underwriting that would otherwise be
required for a new loan. If such loans
were to be immediately sold to a third
party, consumer groups indicated that it
could invite abuse by creditors with an
incentive to sell riskier loans without
providing full value to the consumer.
An association of State bank regulators
urged the Bureau to adopt a two-year
holding period during which the
creditor must remain the current holder
of the loan.
One industry commenter indicated
that the Bureau should broaden the
scope to permit a subservicer of the loan
to be the creditor with respect to the
standard loan. Another industry
commenter stated that the scope should
be expanded to allow a creditor to
refinance a non-standard mortgage that
it did not originate or is not servicing.
This commenter indicated that due to
the volume of requests for refinancing
received by some creditors, consumers
may benefit from more timely
refinancing if a third-party creditor is
eligible to use non-standard refinancing
provisions.
The Bureau is adopting this
requirement as proposed, renumbered
as § 1026.43(d)(2)(i). As discussed in
more detail below, as adopted
§ 1026.43(d) provides a broad
exemption to all of the ability-to-repay
requirements set forth in § 1026.43(c)
when a non-standard mortgage is
refinanced into a standard mortgage
provided that certain conditions are
met. Section 1026.43(d)(2)(i) is adopted
pursuant to the Bureau’s authority
under section 105(a) of TILA. The
Bureau finds that this adjustment is
necessary to effectuate the purposes of
PO 00000
Frm 00088
Fmt 4701
Sfmt 4700
TILA by ensuring that consumers are
offered and receive residential mortgage
loans on terms that reasonably reflect
their ability to repay, while ensuring
that consumers at risk of default due to
payment shock are able to obtain
responsible, affordable refinancing
credit from the current holder of the
consumer’s mortgage loan, or the
servicer acting on behalf of the current
holder. To prevent unscrupulous
creditors from using § 1026.43(d) to
engage in loan-flipping, and to ensure
that this exemption is available only in
those cases where consumer benefit is
the most likely, the Bureau believes that
it is important that the creditor of the
standard loan be the holder of, or the
servicer acting on behalf of the holder
of, the non-standard loan. In such cases,
the Bureau agrees with the Board that
the creditor has a better incentive to
refinance the consumer into a more
stable and affordable loan. Therefore,
the Bureau declines to extend the scope
of § 1026.43(d) to cover cases in which
the creditor of the non-standard loan is
not the current holder of the
nonstandard loan or servicer acting on
behalf of that holder.
The Bureau believes that the
combination of this restriction and the
other protections contained in
§ 1026.43(d) is sufficient to prevent
unscrupulous creditors from engaging in
loan-flipping. Therefore, the Bureau
does not believe that it is necessary to
impose a specified period during which
the creditor of the standard mortgage
must remain the holder of the loan. As
discussed in the section-by-section
analysis of § 1026.43(d)(2)(vi) below, the
Bureau has conditioned use of
§ 1026.43(d), for non-standard loans
consummated after the effective date of
this final rule, on the non-standard loan
having been made in accordance with
the ability-to-repay requirements in
§ 1026.43(c), including consideration of
the eight factors listed in § 1026.43(c)(2).
The Bureau believes that this will help
to ensure that creditors cannot use the
refinancing provisions of § 1026.43(d) to
systematically make and divest riskier
mortgages, or to cure substandard
underwriting on a non-standard
mortgage by refinancing the consumer
into a loan with a lower, but still
unaffordable, payment. TILA section
130(k)(1) provides that consumers may
assert as a defense to foreclosure by way
of recoupment or setoff violations of
TILA section 129C(a) (of which TILA
section 129C(a)(6)(E) comprises a
subpart). 15 U.S.C. 1640(k)(1). This
defense to foreclosure applies against
assignees of the loan in addition to the
original creditor. Therefore, given that
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
the non-standard loan having been
originated in accordance with
§ 1026.43(c) is a condition for using the
refinancing provision in § 1026.43(d), a
consumer may assert violations of
§ 1026.43(c) on the original nonstandard loan as a defense to foreclosure
for the standard loan made under
§ 1026.43(d), even if that standard loan
is subsequently sold by the creditor.
In addition to believing that
imposition of a holding period is
unnecessary, the Bureau has concerns
that imposition of a holding period also
could create adverse consequences for
the safety and soundness of financial
institutions. In some circumstances, a
creditor may need for safety and
soundness reasons to sell a portion of its
portfolio, which may include a
residential mortgage loan that was made
in accordance with § 1026.43(d).
However, such a creditor may not know
at the time of the refinancing that it
ultimately will need to sell the loan, and
may even intend to remain the holder
the loan for a longer period of time at
the time of consummation. The Bureau
has concerns about the burden imposed
on issuers by a holding period in such
circumstances where the creditor does
not or cannot know at the time of the
refinance under § 1026.43(d) that the
loan will need to be sold within the next
12 months.
43(d)(2)(ii)
Proposed § 226.43(d)(1)(ii) would
have required that the monthly payment
on the new mortgage loan be ‘‘materially
lower’’ than the monthly payment for
the existing mortgage loan. This
proposed provision would have
implemented the requirement in TILA
section 129C(a)(6)(E) that there be ‘‘a
reduction in monthly payment on the
existing hybrid loan’’ in order for the
special provisions to apply to a
refinancing. Proposed comment
43(d)(1)(ii)–1 provided that the monthly
payment for the new loan must be
‘‘materially lower’’ than the monthly
payment for an existing non-standard
mortgage and clarifies that the payments
that must be compared must be
calculated according to proposed
§ 226.43(d)(5). The proposed comment
also clarified that whether the new loan
payment is ‘‘materially lower’’ than the
non-standard mortgage payment
depends on the facts and circumstances,
but that, in all cases, a payment
reduction of 10 percent or greater would
meet the ‘‘materially lower’’ standard.
Consumer groups and an association
of State bank regulators supported the
adoption of a 10 percent safe harbor for
the ‘‘materially lower’’ standard. In
contrast, industry commenters opposed
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
the requirement that payment on the
standard mortgage be ‘‘materially
lower’’ than the payment on the nonstandard mortgage. These commenters
urged the Bureau not to adopt the 10
percent safe harbor proposed by the
Board and stated that the 10 percent safe
harbor would become the de facto rule
if adopted. These commenters expressed
concerns that the ‘‘materially lower’’
standard would unduly restrict access to
credit for many consumers and
suggested that the Bureau instead adopt
a standard that would permit more
consumers to qualify for the nonstandard refinancing provisions. Several
commenters indicated that the Bureau
should adopt a five percent safe harbor
rather than the proposed ten percent.
One industry commenter recommended
that the Bureau permit reductions of a
minimum dollar amount to satisfy the
rule, particularly in cases where the
monthly payment is already low.
Finally, one industry commenter asked
the Bureau to provide guidance
regarding the meaning of ‘‘materially
lower’’ when the reduction in payment
is less than 10 percent.
The Bureau is adopting as proposed
the requirement that the payment on the
standard mortgage be ‘‘materially
lower’’ than the non-standard mortgage
and the safe harbor for a 10 percent or
greater reduction, renumbered as
§ 1026.43(d)(2)(ii) and comment
43(d)(2)(ii)–1. The Bureau agrees with
the Board that it would be inconsistent
with the statutory purpose to permit the
required reduction to be merely de
minimis. In such cases, the consumer
likely would not obtain a meaningful
benefit that would help to prevent
default. As discussed in the section-bysection analysis below, § 1026.43(d)(3)
exempts refinancings from the abilityto-repay requirements in § 1026.43(c),
provided that certain conditions are
met. Given that § 1026.43(d) provides a
broad exemption to the ability-to-repay
requirements, the Bureau believes that it
is important that the reduction in
payment provide significant value to the
consumer and increase the likelihood
that the refinancing will improve the
consumer’s ability to repay the loan.
Accordingly, the Bureau is adopting the
10 percent safe harbor as proposed. The
Bureau declines to adopt a dollar
amount safe harbor because the
appropriate dollar amount would
depend on a number of factors,
including the amount of the loan and
monthly payment, but notes that
reductions of less than 10 percent could
nonetheless meet the ‘‘materially lower’’
standard depending on the relevant
facts and circumstances.
PO 00000
Frm 00089
Fmt 4701
Sfmt 4700
6495
43(d)(2)(iii)
Proposed § 226.43(d)(1)(iii) would
have required that the creditor for the
refinancing receive the consumer’s
written application for the refinancing
before the existing non-standard
mortgage is ‘‘recast.’’ As discussed in
the section-by-section analysis of
§ 1026.43(b)(11) above, the proposal
defined the term ‘‘recast’’ to mean, for
an adjustable-rate mortgage, the
expiration of the period during which
payments based on the introductory
fixed rate are permitted; for an interestonly loan, the expiration of the period
during which the interest-only
payments are permitted; and, for a
negative amortization loan, the
expiration of the period during which
negatively amortizing payments are
permitted.
The Board explained that the proposal
was intended to implement TILA
section 129C(a)(6)(E)(ii), which permits
creditors of certain refinances to
‘‘consider if the extension of new credit
would prevent a likely default should
the original mortgage reset.’’ This
statutory language implies that the
special refinancing provisions apply
only where the original mortgage has
not yet ‘‘reset.’’ Accordingly, the Board
concluded that Congress’s concern
likely was prevention of default in the
event of a ‘‘reset,’’ not loss mitigation on
a mortgage for which a default on the
‘‘reset’’ payment has already occurred.
However, in recognition of the fact
that a consumer may not realize that a
loan will be recast until the recast
occurs and that the consumer could not
refinance the loan under proposed
§ 226.43(d), the Board also requested
comment on whether it would be
appropriate to use legal authority to
make adjustments to TILA to permit
refinancings after a loan is recast.
Consumer groups urged the Bureau to
expand the scope of the non-standard
refinancing provisions to apply to
applications filed after the initial recast
of a non-standard loan has occurred.
These commenters stated that the intent
of the proposal is to avoid ‘‘likely
default’’ and indicated that for some
consumers, notification that the
consumer’s interest rate has adjusted
and their payment has increased may be
their first notice that their payment has
gone up and increased their likelihood
of default. One consumer group
commenter stated that these consumers
may be better credit risks than those
consumers whose loans have not yet
recast and they would clearly benefit
from a materially lower monthly
payment.
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6496
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
Several industry commenters
similarly urged the Bureau to modify
the provisions to apply to applications
for refinancings received after recast of
the non-standard loan. One of these
commenters stated that the timing of the
application is irrelevant to the
consumer’s ability to repay or the
consumer’s need to refinance. One
industry commenter stated that
processing an application and assessing
a consumer’s ability to repay a new loan
may require additional time well before
the recast date. This commenter urged
the Bureau to expand the scope of the
non-standard refinancing provisions to
include refinancings after a loan is
recast that are in the best interests of
consumers.
For the reasons discussed below, the
Bureau is adopting § 1026.43(d)(2)(iii),
which provides that § 1026.43(d)
applies to the refinancing of a nonstandard mortgage into a standard
mortgage when the creditor receives the
consumer’s written application for the
standard mortgage no later than two
months after the non-standard mortgage
has recast, provided certain other
conditions are met. The Bureau believes
that the best reading of TILA section
129C(a)(6)(E) is that it is intended to
facilitate refinancings for consumers at
risk of default due to the ‘‘payment
shock’’ that may occur upon the recast
of the consumer’s loan to a higher rate
or fully amortizing payments. The
Bureau acknowledges that the statutory
language contemplates that such recast
has not yet occurred. However, the
Bureau does not believe that Congress
intended to provide relief for consumers
facing imminent ‘‘payment shock’’
based on how promptly the consumer
filed, or how quickly the creditor
processed, an application for a
refinancing. For example, the periodic
rate on a mortgage loan may recast on
July 1st, but the higher payment
reflecting the recast interest rate would
not be due until August 1st. In this
example, a consumer may not
experience payment shock until a
month after the consumer’s rate recasts.
Additionally, it may take a significant
amount of time for a consumer to
provide the creditor with all of the
information required by the creditor,
thereby triggering the receipt of an
application for purposes of the abilityto-repay requirements. The Bureau does
not believe that Congress intended the
special treatment afforded by TILA
section 129C(a)(6)(E) to hinge on
paperwork delays such as these. The
Bureau agrees with the arguments raised
by commenters and believes that the
purposes of TILA are best effectuated by
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
permitting consumers to submit
applications for refinancings for a short
period of time after recast occurs. The
Bureau has determined that permitting
a consumer to apply for a refinancing
within two months of the date of recast
strikes the appropriate balance between
the language of the statute and the
practical considerations involved with
submitting an application for a
refinancing in response to payment
shock. Pursuant to its authority under
TILA section 105(a), the Bureau finds
that modifying § 1026.43(d) to apply to
extensions of credit where the creditor
receives the consumer’s written
application for the standard mortgage no
later than two months after the nonstandard mortgage has recast ensures
that consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay
while ensuring that responsible,
affordable mortgage credit remains
available to consumers at risk of default
due to higher payments resulting from
the recast.
43(d)(2)(iv)
Proposed § 226.43(d)(1)(iv) would
have required that, during the 24
months immediately preceding the
creditor’s receipt of the consumer’s
written application for the standard
mortgage, the consumer has made no
more than one payment on the nonstandard mortgage more than 30 days
late. Proposed comment 43(d)(1)(iv)–1
provided an illustrative example.
Together with proposed
§ 226.43(d)(1)(v), proposed
§ 226.43(d)(1)(iv) would have
implemented the portion of TILA
section 129C(a)(6)(E) that requires that
the consumer not have been
‘‘delinquent on any payment on the
existing hybrid loan.’’
Although TILA section 129C(a)(6)(E)
contains a statutory prohibition on
‘‘any’’ delinquencies on the existing
non-standard (‘‘hybrid’’) mortgage, the
Board interpreted its proposal as
consistent with the statute in addition to
being consistent with the consumer
protection purpose of TILA and current
industry practices. In addition, the
Board noted its authority under TILA
sections 105(a) and 129B(e)—which has
since transferred to the Bureau—to
adjust provisions of TILA and condition
practices ‘‘to assure that consumers are
offered and receive residential mortgage
loan on terms that reasonably reflect
their ability to repay the loans and that
are understandable and not unfair,
deceptive, or abusive.’’ 15 U.S.C.
1604(a); 15 U.S.C. 1639b(e); TILA
section 129B(a)(2), 15 U.S.C.
1639b(a)(2).
PO 00000
Frm 00090
Fmt 4701
Sfmt 4700
The Board provided several reasons
for proposing to require a look-back
period for payment history of 24
months, rather than a 12-month period.
First, the Board noted that consumers at
risk of default when higher payments
are required might present greater credit
risks to the institutions holding their
loans, even if the institutions refinance
those loans. Second, the Board noted
views expressed during outreach by
GSE and creditor representatives that
consumers with positive payment
histories tend to be less likely than other
consumers to become obligated on a
new loan for which they cannot afford
the monthly payments. The Board
solicited comment on the proposal to
require that the consumer have only one
delinquency during the 24 months prior
to applying for a refinancing,
particularly on whether a longer or
shorter look-back period should be
required.
In addition, under the proposal, late
payments of 30 days or fewer on the
existing, non-standard mortgage would
not disqualify a consumer from
refinancing the non-standard mortgage
under the streamlined refinance
provisions of proposed § 226.43(d). The
Board stated that allowing
delinquencies of 30 or fewer days is
consistent with the statutory prohibition
on ‘‘any’’ delinquency for several
reasons. First, the Board noted that
delinquencies of this length may occur
for many reasons outside of the
consumer’s control, such as mailing
delays, miscommunication about where
the payment should be sent, or payment
crediting errors. Second, many creditors
incorporate a late fee ‘‘grace period’’
into their payment arrangements, which
permits consumers to make their
monthly payments for a certain number
of days after the contractual due date
without incurring a late fee.
Accordingly, the Board noted that the
statute should not be read to prohibit
consumers from obtaining needed
refinances due to payments that are late
but within a late fee grace period.
Finally, the Board indicated that the
predominant streamlined refinance
programs of which it is aware uniformly
measure whether a consumer has a
positive payment history based on
whether the consumer has made any
payments late by 30 days (or, as in the
proposal, more than 30 days).
Proposed comment 43(d)(1)(iv)–2
would have clarified that whether a
payment is more than 30 days late
depends on the contractual due date not
accounting for any grace period and
provided an illustrative example. The
Board indicated that using the
contractual due date for determining
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
whether a payment has been made more
than 30 days after the due date would
facilitate compliance and enforcement
by providing clarity. Whereas late fee
‘‘grace periods’’ are often not stated in
writing, the contractual due date is
unambiguous. Finally, the Board stated
that using the contractual due date for
determining whether a loan payment is
made on time is consistent with
standard home mortgage loan contracts.
The Board requested comment on
whether the delinquencies that creditors
are required to consider under
§ 226.43(d)(1) should be late payments
of more than 30 days as proposed, 30
days or more, or some other time period.
Consumer groups supported the
Board’s proposal to identify late
payments as late payments of more than
30 days. However, they stated that the
requirement that consumers not have
more than one delinquency in the past
24 months to qualify for a refinance
under § 1026.43(d) was overly stringent
and that the appropriate standard would
be no delinquencies in the past 12
months.
Several industry commenters
similarly urged the Bureau to adopt a
12-month period rather than the
proposed 24-month period in which a
consumer may have one late payment.
These commenters stated that
permitting only one 30-day late
payment in the past 24 months is too
restrictive and would require a creditor
to overlook a recent history of timely
payments. In addition, one industry
commenter stated that the standard for
defining a late payment should be late
payments of more than 60 days.
The Bureau is adopting this provision
generally as proposed, renumbered as
§ 1026.43(d)(2)(iv), with one substantive
change. The Bureau is adopting a 12month look-back period rather than the
24-month period proposed by the Board.
The Bureau believes that reviewing a
consumer’s payment history over the
last 12 months would be more
appropriate than a 24-month period,
and agrees that a 24-month period may
unduly restrict consumer access to the
§ 1026.43(d) refinancing provisions. The
Bureau believes that the requirement
that a consumer’s account have no more
than one 30-day late payment in the
past 12 months will best effectuate the
purposes of TILA by ensuring that only
those consumers with positive payment
histories are eligible for the nonstandard refinancing provisions under
§ 1026.43(d). Section 1026.43(d)(2)(iv) is
adopted pursuant to the Bureau’s
authority under section 105(a) of TILA.
The Bureau finds that this adjustment is
necessary and proper to effectuate the
purposes of TILA by ensuring that
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay,
while ensuring that consumers at risk of
default due to payment shock are able
to obtain responsible, affordable
refinancing credit.
The Bureau also is adopting
comments 43(d)(1)(iv)–1 and
43(d)(1)(iv)–2 generally as proposed,
with conforming amendments to reflect
the 12-month look-back period in
§ 1026.43(d)(2)(iv), and renumbered as
43(d)(2)(iv)–1 and 43(d)(2)(iv)–2. The
Bureau has made several technical
amendments to the example in
comment 43(d)(2)(iv)–1 for clarity. As
proposed, the examples in the comment
referred to dates prior to the effective
date of this rule; the Bureau has updated
the dates in the examples so that they
will occur after this rule becomes
effective.
43(d)(2)(v)
Proposed § 226.43(d)(1)(v) would
have required that the consumer have
made no payments on the non-standard
mortgage more than 30 days late during
the six months immediately preceding
the creditor’s receipt of the consumer’s
written application for the standard
mortgage. This provision complemented
proposed § 226.43(d)(1)(iv), discussed
above, in implementing the portion of
TILA section 129C(a)(6)(E) that requires
that the consumer not have been
‘‘delinquent on any payment on the
existing hybrid loan.’’ Taken together
with proposed § 226.43(d)(1)(iv), the
Board believed that this is a reasonable
interpretation of the prohibition on
‘‘any’’ delinquencies on the nonstandard mortgage and is supported by
the Board’s authority under TILA
sections 105(a) and 129B(e)—which has
transferred to the Bureau—to adjust
provisions of TILA and condition
practices ‘‘to assure that consumers are
offered and receive residential mortgage
loans on terms that reasonably reflect
their ability to repay the loans and that
are understandable and not unfair,
deceptive, or abusive.’’ 15 U.S.C.
1604(a); TILA section 129B(a)(2), 15
U.S.C. 1639b(a)(2).
The Board stated that a six-month
‘‘clean’’ payment record indicates a
reasonable level of financial stability on
the part of the consumer applying for a
refinancing. In addition, the Board
noted that participants in its outreach
indicated that a prohibition on
delinquencies of more than 30 days for
the six months prior to application for
the refinancing was generally consistent
with common industry practice and
would not be unduly disruptive to
PO 00000
Frm 00091
Fmt 4701
Sfmt 4700
6497
existing streamlined refinance programs
with well-performing loans.
Proposed comment 43(d)(1)(v)–1
provided an illustrative example of the
proposed rule and clarified that if the
number of months between
consummation of the non-standard
mortgage and the consumer’s
application for the standard mortgage is
six or fewer, the consumer may not have
made any payment more than 30 days
late on the non-standard mortgage. The
comment cross-referenced proposed
comments 43(d)(1)–2 and 43(d)(1)(iv)–2
for an explanation of ‘‘written
application’’ and how to determine the
payment due date, respectively.
One industry commenter stated that
the prohibition on late payments in the
past six months should be amended to
provide flexibility when the late
payment was due to extenuating
circumstances. The Bureau declines to
adopt a rule providing an adjustment for
extenuating circumstances, for several
reasons. First, the existence or absence
of extenuating circumstances is a factspecific question and it would be
difficult to distinguish by regulation
between extenuating circumstances that
reflect an ongoing risk with regard to the
consumer’s ability to repay the loan
versus extenuating circumstances that
present less risk. In addition, an
adjustment for extenuating
circumstances appears to be
inconsistent with the purposes of TILA
section 129C(a)(6)(E), which
contemplates that the consumer ‘‘has
not been delinquent on any payment on
the existing hybrid loan,’’ without
distinguishing between payments that
are delinquent due to extenuating
circumstances or otherwise.
Furthermore, by defining a late payment
as more than 30 days late, the Bureau
believes that many extenuating
circumstances, for example a payment
made three weeks late due to mail
delivery issues, will not preclude use of
§ 1026.43(d).
Accordingly, the Bureau is adopting
this provision as proposed, renumbered
as § 1026.43(d)(2)(v). Similarly, the
Bureau is adopting comment
43(d)(1)(v)–1 generally as proposed,
with several technical amendments for
clarity and renumbered as 43(d)(2)(v)–1.
As proposed, the examples in the
comment referred to dates prior to the
effective date of this rule; the Bureau
has updated the dates in the examples
so that they will occur after this rule
becomes effective. Pursuant to its
authority under TILA section 105(a), the
Bureau finds that requiring that the
consumer have made no payments on
the non-standard mortgage more than 30
days late during the six months
E:\FR\FM\30JAR2.SGM
30JAR2
6498
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
immediately preceding the creditor’s
receipt of the consumer’s written
application for the standard mortgage
ensures that consumers are offered and
receive residential mortgage loans on
terms that reasonably reflect their ability
to repay while ensuring that
responsible, affordable mortgage credit
remains available to consumers at risk
of default due to higher payments
resulting from the recast.
43(d)(2)(vi)
For the reasons discussed in the
section-by-section analysis of
§ 1026.43(d)(3), the Bureau is adopting a
new § 1026.43(d)(2)(vi) that generally
conditions use of § 1026.43(d) on the
existing non-standard mortgage having
been made in accordance with
§ 1026.43(c), provided that the existing
non-standard mortgage loan was
consummated on or after January 10,
2014. For the reasons discussed in the
section-by-section analysis of
§ 1026.43(d)(3), the Bureau believes that
this provision is necessary and proper to
prevent use of § 1026.43(d)’s
streamlined refinance provision to
circumvent or ‘‘cure’’ violations of the
ability-to-repay requirements in
§ 1026.43(c). Section 1026.43(d)(2)(vi) is
adopted pursuant to the Bureau’s
authority under TILA section 105(a).
The Bureau finds that this adjustment is
necessary to effectuate the purposes of
TILA by ensuring that consumers are
offered and receive residential mortgage
loans on terms that reasonably reflect
their ability to repay, while ensuring
that consumers at risk of default due to
payment shock are able to obtain
responsible and affordable refinancing
credit. Furthermore, the Bureau believes
that this adjustment is necessary to
prevent unscrupulous creditors from
using § 1026.43(d) to engage in loanflipping or other practices that are
harmful to consumers, thereby
circumventing the requirements of
TILA.
sroberts on DSK5SPTVN1PROD with
43(d)(3) Exemption From Repayment
Ability Requirements
Under specific conditions, proposed
§ 226.43(d)(3) would have exempted a
creditor in a refinancing from two of the
ability-to-repay requirements under
proposed § 226.43(c). First, the proposal
provided that a creditor is not required
to comply with the income and asset
verification requirements of proposed
§ 226.43(c)(2)(i) and (c)(4). Second, the
proposal provided that the creditor is
not required to comply with the
payment calculation requirements of
proposed § 226.43(c)(2)(iii) and (c)(5);
the creditor may instead use payment
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
calculations prescribed in proposed
§ 226.43(d)(5)(ii).
For these exemptions to apply,
proposed § 226.43(d)(3)(i)(A) would
have required that all of the conditions
in proposed § 226.43(d)(1)(i) through (v)
be met. In addition, proposed
§ 226.43(d)(3)(i)(B) would have required
that the creditor consider whether the
standard mortgage will prevent a likely
default by the consumer on the nonstandard mortgage when the nonstandard mortgage is recast. This
proposed provision implemented TILA
section 129C(a)(6)(E)(ii), which permits
a creditor to ‘‘consider if the extension
of new credit would prevent a likely
default should the original mortgage
reset and give such concerns a higher
priority as an acceptable underwriting
practice.’’ As clarified in proposed
comment 43(d)(3)(i)–1, the Board
interpreted TILA section 129(a)(6)(E)(ii)
to require a creditor to consider
whether: (1) The consumer is likely to
default on the existing mortgage once
new, higher payments are required; and
(2) the new mortgage will prevent the
consumer’s default. The Board solicited
comment regarding whether these
proposed provisions were appropriate,
and also specifically solicited comment
on whether exemptions from the abilityto-repay requirements, other than those
proposed, were appropriate.
Several commenters expressly
supported this proposed provision. An
association of State bank supervisors
stated that refinancing designed to put
a consumer in a higher-quality standard
mortgage before the existing lowerquality mortgage recasts should be given
greater deference and further stated that
it is sound policy to encourage
refinancing where it protects both the
economic interest of the creditor and the
financial health of the consumer.
Consumer groups commented that
limited and careful exemption from
income verification, provided that
protections are in place, can help
consumers and communities, while
preventing reckless and abusive lending
on the basis of little or no
documentation. Civil rights
organizations also stated that the
streamlined refinance option would
provide much-needed relief for
consumers with loans that are not
sustainable in the long term but who are
not yet in default. These commenters
also stated that minority consumers
have been targeted in the past for
unsustainable loans and that this
provision could help to prevent further
foreclosures and economic loss in
minority communities, as well as for
homeowners in general.
PO 00000
Frm 00092
Fmt 4701
Sfmt 4700
Other consumer group commenters
stated that an exemption to the income
verification requirement for refinancing
into standard mortgages is problematic.
One commenter stated that, because the
refinance would be executed by the
same creditor that made the original
hybrid loan, income verification would
not be difficult. This commenter urged
the Bureau to encourage income
documentation when implementing the
Dodd-Frank Act.
Several industry commenters urged
the Bureau to provide additional relief
for refinancings made in accordance
with proposed § 226.43(d), either by
permitting the standard loan to be
classified as a qualified mortgage or by
providing exemptions from other of the
proposed ability-to-repay requirements.
One industry commenter stated that in
addition to the proposed exemption for
the verification of income and assets,
refinancings conducted in accordance
with § 226.43(d) also should be exempt
from the requirements to consider the
consumer’s debt-to-income ratio or
residual income, if the consumer is still
employed and has not incurred
significant additional debt obligations
prior to the refinance. This commenter
stated that overly rigid standards could
significantly reduce the number of
consumers who qualify for this
exemption. Similarly, one industry
trade association urged the Bureau to
exempt refinancings from the
requirement to consider the consumer’s
debt obligations, debt-to-income ratio,
and employment. This commenter
stated that the proposed requirement to
consider these additional underwriting
factors was seemingly in conflict with
the purpose of proposed § 226.43(d) and
would preclude consumers from taking
advantage of beneficial and less costly
refinancing opportunities. In addition,
several industry commenters and one
industry trade association commented
that standard mortgages made in
accordance with § 226.43(d) should be
treated as qualified mortgages.
The Bureau agrees with the concerns
raised by commenters that the proposed
exemptions were drawn too narrowly.
The Bureau believes that TILA section
129C(a)(6)(E) is intended to create
incentives for creditors to refinance
loans in circumstances where
consumers have non-standard loans on
which they are currently able to make
payments but on which they are likely
to be unable to make the payments after
recast and therefore default on the loan.
Accordingly, the Bureau believes that in
order to create incentives for creditors to
use the non-standard refinancing
provision, TILA section 129C(a)(6)(E)
must be intended to provide at least a
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
limited exemption from the general
ability-to-repay determination as
adopted in § 1026.43(c). Otherwise,
creditors may have little incentive to
provide consumers at risk of default
with refinancings that result in
‘‘materially lower’’ payments. The
Bureau believes, however, that in
implementing TILA section
129C(a)(6)(E) it is important to balance
the creation of additional flexibility and
incentives for creditors to refinance
non-standard mortgages into standard
mortgages against the likelihood of
benefit to the consumer.
The Bureau notes that under the final
rule as adopted, the availability of the
non-standard refinancing provision
contains several conditions that are
intended to benefit the consumer. First,
the special ability-to-repay requirements
in § 1026.43(d) are available only if the
conditions in § 1026.43(d)(2) are met.
These conditions include limiting the
scope of § 1026.43(d) to refinancings of
non-standard mortgages into standard
mortgages, which generally are more
stable products with reduced risk of
payment shock. The definition of
standard mortgage in § 1026.43(d)(1)(ii)
includes a number of limitations that
are intended to ensure that creditors
may only use the provisions in
§ 1026.43(d) to offer a consumer a
product with safer features. For
example, as discussed in the section-bysection analysis of § 1026.43(d)(1)(ii) a
standard mortgage may not include
negative amortization, an interest-only
feature, or a balloon payment; in
addition, the term of the standard
mortgage may not exceed 40 years, the
interest rate must be fixed for at least
the first five years, the loan is subject to
a limitation on the points and fees that
may be charged, and there are
limitations on the use of proceeds from
the refinancing. Furthermore,
§ 1026.43(d)(2)(ii) requires that the
monthly payment on the standard
mortgage be materially lower than the
monthly payment for the non-standard
mortgage and, as discussed above, the
Bureau is adopting a 10 percent safe
harbor for what constitutes a ‘‘material’’
reduction.
The Bureau has concerns that, as
proposed by the Board, an exemption
only from the requirement to consider
and verify the consumer’s income or
assets may create insufficient incentives
for creditors to make refinancings to
assist consumers at risk of default. For
example, the proposal would have
required creditors to comply with the
requirement in § 1026.43(c)(2)(vii) to
consider the consumer’s debt-to-income
ratio or residual income. Accordingly,
notwithstanding an exemption from
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
income or asset verification, the
proposal would have required
consideration of income, as well as
consideration of all of the other
underwriting criteria set forth in
§ 1026.43(c)(2).
The Bureau believes that in light of
the safeguards imposed by other
portions of § 1026.43(d), as discussed
above, it is appropriate to provide an
exemption to all of the ability-to-repay
requirements under § 1026.43(c) for a
refinance conducted in accordance with
§ 1026.43(d). The Bureau believes that a
broad exemption from the general
ability-to-repay determination is
appropriate in order to create incentives
for creditors to quickly and efficiently
refinance consumers whose nonstandard mortgages are about to recast,
thus rendering them likely to default,
into more affordable, more stable
mortgage loans. The Bureau is aware
that some consumers may nonetheless
default on a standard mortgage made in
accordance with § 1026.43(d), but those
consumers likely would have defaulted
had the non-standard mortgage
remained in place. For others, the
material reduction in payment required
under § 1026.43(d)(2) and the more
stable product type following
refinancing may be sufficient to enable
consumers to avoid default. The Bureau
believes that a refinancing conducted in
accordance with § 1026.43(d) will
generally improve a consumer’s chances
of avoiding default. Section
1026.43(d)(3) is adopted pursuant to the
Bureau’s authority under TILA section
105(a). The Bureau finds that this
adjustment is necessary to effectuate the
purposes of TILA by ensuring that
consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay,
while ensuring that consumers at risk of
default due to payment shock are able
to obtain responsible and affordable
refinancing credit.
However, to prevent evasion or
circumvention of the ability-to-repay
requirements in § 1026.43(c), the Bureau
is imposing one additional condition on
the use of § 1026.43(d). Specifically,
new § 1026.43(d)(2)(vi) conditions the
use of § 1026.43(d), for non-standard
mortgages consummated on or after the
effective date of this rule, on the nonstandard mortgage having been made in
accordance with § 1026.43(c). The
Bureau has concerns that absent
§ 1026.43(d)(2)(vi), a creditor might
attempt to use a refinancing conducted
in accordance with § 1026.43(d) to
‘‘cure’’ substandard underwriting of the
prior non-standard mortgage. For
example, without § 1026.43(d)(2)(vi), if
a creditor discovered that it had made
PO 00000
Frm 00093
Fmt 4701
Sfmt 4700
6499
an error in consideration of the
underwriting factors under
§ 1026.43(c)(2) for a non-standard
mortgage, the creditor might consider
conducting a refinancing under
§ 1026.43(d), in order to argue that the
consumer may no longer raise as a
defense to foreclosure the underwriting
of the original non-standard mortgage.
The Bureau believes that conditioning
the use of § 1026.43(d) on the earlier
loan having been made in accordance
with § 1026.43(c) will better effectuate
the purposes of TILA by ensuring that
consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay
while preventing unscrupulous
creditors from evading the ability-torepay requirements.
New § 1026.43(d)(2)(vi) applies only
to non-standard mortgages
consummated on or after the effective
date of this rule. For non-standard loans
consummated before the effective date
of this final rule, a refinancing under
§ 1026.43(d) would not be subject to this
condition. The Bureau believes that
non-standard mortgages made prior to
the effective date, to which the abilityto-repay requirements in § 1026.43(c)
did not apply, may present an increased
risk of default when they are about to
recast, so that facilitating refinancing
into more stable mortgages may be
particularly important even if the
consumer could not qualify for a new
loan under traditional ability-to-repay
requirements. The Bureau believes that,
on balance, given the conditions that
apply to refinances under § 1026.43(d),
refinances of these loans are more likely
to benefit consumers than to harm
consumers, notwithstanding the
inapplicability of § 1026.43(d)(2)(vi). In
addition, the concern about a creditor
using § 1026.43(d) to ‘‘cure’’ prior
violations of § 1026.43(c) does not apply
to loans made before the effective date
of this rule, as such loans were not
required to be made in accordance with
§ 1026.43.
Proposed condition that the consumer
will likely default. Proposed comment
43(d)(3)(i)–2 would have clarified that,
in considering whether the consumer’s
default on the non-standard mortgage is
‘‘likely,’’ the creditor may look to
widely accepted governmental and nongovernmental standards for analyzing a
consumer’s likelihood of default. The
proposal was not intended, however, to
constrain servicers and other relevant
parties from using other methods to
determine a consumer’s likelihood of
default, including those tailored
specifically to that servicer. As
discussed in the supplementary
information to the proposal, the Board
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6500
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
considered certain government
refinancing programs as well as
feedback from outreach participants,
each of which suggested that there may
be legitimate differences in servicer
assessments of a consumer’s likelihood
of default. The Board noted that it
considered an ‘‘imminent default’’
standard but heard from consumer
advocates that ‘‘imminent default’’ may
be a standard that is too high for the
refinancing provisions in TILA section
129C(a)(6)(E) and could prevent many
consumers from obtaining a refinancing
to avoid payment shock. Accordingly,
the Board’s proposal used the exact
statutory wording—‘‘likely default’’—in
implementing the provision permitting
a creditor to prioritize prevention of
default in underwriting a refinancing.
The Board solicited comment on the
proposal to use the term ‘‘likely default’’
in implementing TILA section
129C(a)(6)(E)(ii) and on whether
additional guidance is needed on how
to meet the requirement that a creditor
must reasonably and in good faith
determine that a standard mortgage will
prevent a likely default should the nonstandard mortgage be recast.
Two industry trade associations urged
the Bureau to remove proposed
§ 226.43(d)(3)(i)(B) as a condition to the
availability of the non-standard
refinancing provisions. One of these
commenters noted that a creditor would
have to underwrite a consumer’s income
and assets to determine whether the
consumer would likely default, which
would defeat the purpose of the
proposed provision. Several industry
commenters also indicated that the
‘‘likelihood of default’’ standard is
vague and accordingly subjects creditors
to potential liability for waiving certain
ability-to-repay requirements, and
questioned the extent to which creditors
would utilize the streamline refinance
option in light of this potential liability.
One such commenter urged the Bureau
to eliminate this requirement or, in the
alternative, to provide additional
guidance regarding when a consumer is
‘‘likely to go into default.’’
An association of State bank
supervisors stated that there can be no
quantifiable standard for the definition
of ‘‘likely default.’’ These commenters
further stated that institutions must use
sound judgment and regulators must
provide responsible oversight to ensure
that abuses are not occurring through
the refinancing exemption set forth in
§ 1026.43(d).
The Bureau is adopting the provision
as proposed, renumbered as
§ 1026.43(d)(3)(i)(B), and is also
adopting comments 43(d)(3)(i)–1 and
43(d)(3)(i)–2 as proposed. The Bureau
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
believes that eliminating the
requirement that a creditor consider
whether the extension of new credit
would prevent a likely default would be
inconsistent with TILA section
129C(a)(6)(E), which expressly includes
language regarding consideration by the
creditor of ‘‘[whether] the extension of
new credit would prevent a likely
default should the original mortgage
reset.’’ At the same time, the Bureau
agrees with the association of State bank
supervisors that it would be difficult to
impose by regulation a single standard
for what constitutes a likely default.
Accordingly, the Bureau is adopting the
flexible approach proposed by the
Board, which would permit but not
require creditors to look to widelyaccepted standards for analyzing a
consumer’s likelihood of default. The
Bureau does not believe that this
flexible approach requires a creditor to
consider the consumer’s income and
assets if, for example, statistical
evidence indicates that consumers who
experience a payment shock of the type
that the consumer is about to experience
have a high incidence of defaulting
following the payment shock.
Proposed payment calculation for
repayment ability determination.
Proposed comment 43(d)(3)(ii)–1 would
have explained that, if the conditions in
proposed § 226.43(d)(1) are met, the
creditor may satisfy the payment
calculation requirements for
determining a consumer’s ability to
repay the new loan by applying the
calculation prescribed under proposed
§ 226.43(d)(5)(ii), rather than the
calculation prescribed under proposed
§ 226.43(c)(2)(iii) and (c)(5). As
discussed in the section-by-section
analysis above, as adopted
§ 1026.43(d)(3) provides an exemption
from the requirements of § 1026.43(c) if
certain conditions are met. Accordingly,
while the creditor is required to
determine whether there is a material
reduction in payment consistent with
§ 1026.43(d)(2)(ii) by using the payment
calculations prescribed in
§ 1026.43(d)(5), the creditor is not
required to use these same payment
calculations for purposes of
§ 1026.43(c). Accordingly, the Bureau is
withdrawing proposed comment
43(d)(3)(ii)–1 as unnecessary.
43(d)(4) Offer of Rate Discounts and
Other Favorable Terms
Proposed § 226.43(d)(4) would have
provided that a creditor making a loan
under the special refinancing provisions
of § 226.43(d) may offer to the consumer
the same or better rate discounts and
other terms that the creditor offers to
any new consumer, consistent with the
PO 00000
Frm 00094
Fmt 4701
Sfmt 4700
creditor’s documented underwriting
practices and to the extent not
prohibited by applicable State or
Federal law. This aspect of the proposal
was intended to implement TILA
section 129C(a)(6)(E)(iii), which permits
creditors of refinancings subject to
special ability-to-repay requirements in
TILA section 129C(a)(6)(E) to ‘‘offer rate
discounts and other favorable terms’’ to
the consumer ‘‘that would be available
to new customers with high credit
ratings based on such underwriting
practice.’’
The Bureau received no comments on
this provision, which is adopted as
proposed and renumbered as
§ 1026.43(d)(4). The Bureau is
concerned that the phrase ‘‘consistent
with the creditor’s underwriting
practice’’ could be misinterpreted to
refer to the underwriting requirements
in § 1026.43(c). As this final rule
provides an exemption under
§ 1026.43(d) for all of the requirements
in § 1026.43(c), subject to the other
conditions discussed above, the Bureau
believes that additional clarification is
needed to address this potential
misinterpretation. Thus, the Bureau is
adopting comment 43(d)(4)–1, which
clarifies that in connection with a
refinancing made pursuant to
§ 1026.43(d), § 1026.43(d)(4) requires a
creditor offering a consumer rate
discounts and terms that are the same
as, or better than, the rate discounts and
terms offered to new consumers to make
such an offer consistent with the
creditor’s documented underwriting
practices. Section 1026.43(d)(4) does not
require a creditor making a refinancing
pursuant to § 1026.43(d) to comply with
the underwriting requirements of
§ 1026.43(c). Rather, § 1026.43(d)(4)
requires creditors providing such
discounts to do so consistent with
documented policies related to loan
pricing, loan term qualifications, or
other similar underwriting practices.
For example, assume that a creditor is
providing a consumer with a
refinancing made pursuant to
§ 1026.43(d) and that this creditor has a
documented practice of offering rate
discounts to consumers with credit
scores above a certain threshold.
Assume further that the consumer
receiving the refinancing has a credit
score below this threshold, and
therefore would not normally qualify for
the rate discount available to consumers
with high credit scores. This creditor
complies with § 1026.43(d)(4) by
offering the consumer the discounted
rate in connection with the refinancing
made pursuant to § 1026.43(d), even if
the consumer would not normally
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
qualify for that discounted rate,
provided that the offer of the discounted
rate is not prohibited by applicable State
or Federal law. However, § 1026.43(d)(4)
does not require a creditor to offer a
consumer such a discounted rate.
sroberts on DSK5SPTVN1PROD with
43(d)(5) Payment Calculations
Proposed § 226.43(d)(5) would have
prescribed the payment calculations for
determining whether the consumer’s
monthly payment for a standard
mortgage will be ‘‘materially lower’’
than the monthly payment for the nonstandard mortgage. Proposed
§ 226.43(d)(5) thus was intended to
complement proposed § 226.43(d)(1)(ii)
in implementing TILA section
129C(a)(6)(E), which requires a
‘‘reduction’’ in the monthly payment for
the existing non-standard (‘‘hybrid’’)
mortgage when refinanced into a
standard mortgage.
43(d)(5)(i) Non-Standard mortgage
Proposed § 226.43(d)(5)(i) would have
required that the monthly payment for
a non-standard mortgage be based on
substantially equal, monthly, fully
amortizing payments of principal and
interest that would result once the
mortgage is recast. The Board stated that
comparing the payment on the standard
mortgage to the payment amount on
which the consumer likely would have
defaulted (i.e., the payment resulting on
the existing non-standard mortgage once
the introductory terms cease and a
higher payment results) would promote
needed refinances consistent with
Congress’s intent.
The Board noted that the payment
that the consumer is currently making
on the existing non-standard mortgage
may be an inappropriately low payment
to compare to the standard mortgage
payment. The existing payments may be
interest-only or negatively amortizing;
these temporarily lower payment
amounts would be difficult for creditors
to ‘‘reduce’’ with a refinanced loan that
has a comparable term length and
principal amount. Indeed, the payment
on a new loan with a fixed-rate rate and
fully-amortizing payment, as is required
for the payment calculation of a
standard mortgage under the proposal,
for example, is likely to be higher than
the interest-only or negative
amortization payment. As a result, few
refinancings would yield a lower
monthly payment, so many consumers
could not receive the benefits of
refinancing into a more stable loan
product.
Accordingly, the proposal would have
required a creditor to calculate the
monthly payment for a non-standard
mortgage using—
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
• The fully indexed rate as of a
reasonable period of time before or after
the date on which the creditor receives
the consumer’s written application for
the standard mortgage;
• The term of the loan remaining as
of the date of the recast, assuming all
scheduled payments have been made up
to the recast date and the payment due
on the recast date is made and credited
as of that date; and
• A remaining loan amount that is—
Æ For an adjustable-rate mortgage, the
outstanding principal balance as of the
date the mortgage is recast, assuming all
scheduled payments have been made up
to the recast date and the payment due
on the recast date is made and credited
as of that date;
Æ For an interest-only loan, the loan
amount, assuming all scheduled
payments have been made up to the
recast date and the payment due on the
recast date is made and credited as of
that date;
Æ For a negative amortization loan,
the maximum loan amount.
Proposed comment 43(d)(5)(i)–1
would have explained that, to determine
whether the monthly periodic payment
for a standard mortgage is materially
lower than the monthly periodic
payment for the non-standard mortgage
under proposed § 226.43(d)(1)(ii), the
creditor must consider the monthly
payment for the non-standard mortgage
that will result after the loan is recast,
assuming substantially equal payments
of principal and interest that amortize
the remaining loan amount over the
remaining term as of the date the
mortgage is recast. The proposed
comment noted that guidance regarding
the meaning of ‘‘substantially equal’’
and ‘‘recast’’ is provided in comment
43(c)(5)(i)–4 and § 226.43(b)(11),
respectively.
Proposed comment 43(d)(5)(i)–2
would have explained that the term
‘‘fully indexed rate’’ used for calculating
the payment for a non-standard
mortgage is generally defined in
proposed § 226.43(b)(3) and associated
commentary. The proposed comment
explained an important difference
between the ‘‘fully indexed rate’’ as
defined in proposed § 226.43(b)(3),
however, and the meaning of ‘‘fully
indexed rate’’ in § 226.43(d)(5)(i).
Specifically, under proposed
§ 226.43(b)(3), the fully indexed rate is
calculated at the time of consummation.
Under proposed § 226.43(d)(5)(i), the
fully indexed rate would be calculated
within a reasonable period of time
before or after the date on which the
creditor receives the consumer’s written
application for the standard mortgage.
Comment 43(d)(5)(i)–2 clarified that 30
PO 00000
Frm 00095
Fmt 4701
Sfmt 4700
6501
days would generally be considered a
‘‘reasonable period of time.’’
Proposed comment 43(d)(5)(i)–3
would have clarified that the term
‘‘written application’’ is explained in
comment 19(a)(1)(i)–3. Comment
19(a)(1)(i)–3 states that creditors may
rely on RESPA and Regulation X
(including any interpretations issued by
HUD) in deciding whether a ‘‘written
application’’ has been received. In
general, Regulation X defines
‘‘application’’ to mean the submission of
a borrower’s financial information in
anticipation of a credit decision relating
to a federally related mortgage loan. See
12 CFR 1024.2(b). As explained in
comment 19(a)(1)(i)–3, an application is
received when it reaches the creditor in
any of the ways applications are
normally transmitted, such as by mail,
hand delivery, or through an
intermediary agent or broker. If an
application reaches the creditor through
an intermediary agent or broker, the
application is received when it reaches
the creditor, rather than when it reaches
the agent or broker. This proposed
comment also cross-referenced
comment 19(b)–3 for guidance in
determining whether the transaction
involves an intermediary agent or
broker.
Proposed payment calculation for an
adjustable-rate mortgage with an
introductory fixed rate. Proposed
comments 43(d)(5)(i)–4 and –5 would
have clarified the payment calculation
for an adjustable-rate mortgage with an
introductory fixed rate under proposed
§ 226.43(d)(5)(i). Proposed comment
43(d)(5)(i)–4 clarified that the monthly
periodic payment for an adjustable-rate
mortgage with an introductory fixed
interest rate for a period of one or more
years must be calculated based on
several assumptions. First, the payment
must be based on the outstanding
principal balance as of the date on
which the mortgage is recast, assuming
all scheduled payments have been made
up to that date and the last payment due
under those terms is made and credited
on that date. Second, the payment
calculation must be based on
substantially equal monthly payments
of principal and interest that will fully
repay the outstanding principal balance
over the term of the loan remaining as
of the date the loan is recast. Third, the
payment must be based on the fully
indexed rate, as defined in
§ 226.43(b)(3), as of the date of the
written application for the standard
mortgage. The proposed comment set
forth an illustrative example. Proposed
comment 43(d)(5)(i)–5 would have
provided a second illustrative example
of the payment calculation for an
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6502
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
adjustable-rate mortgage with an
introductory fixed rate.
Proposed payment calculation for an
interest-only loan. Proposed comments
43(d)(5)(i)–6 and –7 would have
explained the payment calculation for
an interest-only loan under proposed
§ 226.43(d)(5)(i). Proposed comment
43(d)(5)(i)–6 would have clarified that
the monthly periodic payment for an
interest-only loan must be calculated
based on several assumptions. First, the
payment must be based on the loan
amount, as defined in § 226.43(b)(5),
assuming all scheduled payments are
made under the terms of the legal
obligation in effect before the mortgage
is recast. The comment provides an
example of a mortgage with a 30-year
loan term for which the first 24 months
of payments are interest-only. The
comment then explains that, if the 24th
payment is due on September 1, 2013,
the creditor must calculate the
outstanding principal balance as of
September 1, 2013, assuming that all 24
payments under the interest-only
payment terms have been made and
credited.
Second, the payment calculation must
be based on substantially equal monthly
payments of principal and interest that
will fully repay the loan amount over
the term of the loan remaining as of the
date the loan is recast. Thus, in the
example above, the creditor must
assume a loan term of 28 years (336
payments). Third, the payment must be
based on the fully indexed rate as of the
date of the written application for the
standard mortgage.
Proposed comment 43(d)(5)(i)–7
would have provided an illustration of
the payment calculation for an interestonly loan. The example assumes a loan
in an amount of $200,000 that has a 30year loan term. The loan agreement
provides for a fixed interest rate of 7
percent, and permits interest-only
payments for the first two years, after
which time amortizing payments of
principal and interest are required.
Second, the example states that the nonstandard mortgage is consummated on
February 15, 2011, and the first monthly
payment is due on April 1, 2011. The
loan is recast on the due date of the 24th
monthly payment, which is March 1,
2013. Finally, the example assumes that
on March 15, 2012, the creditor receives
the consumer’s written application for a
refinancing, after the consumer has
made 12 monthly on-time payments.
Proposed comment 43(d)(5)(i)–7
would have further explained that, to
calculate the non-standard mortgage
payment that must be compared to the
standard mortgage payment, the creditor
must use—
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
• The loan amount, which is the
outstanding principal balance as of
March 1, 2013, assuming all scheduled
interest-only payments have been made
and credited up to that date. In this
example, the loan amount is $200,000.
• An interest rate of 7 percent, which
is the interest rate in effect at the time
of consummation of this fixed-rate nonstandard mortgage.
• The remaining loan term as of
March 1, 2013, the date of the recast,
which is 28 years.
The comment concluded by stating
that, based on the assumptions above,
the monthly payment for the nonstandard mortgage for purposes of
determining whether the standard
mortgage monthly payment is lower
than the non-standard mortgage
monthly payment is $1,359. This is the
substantially equal, monthly payment of
principal and interest required to repay
the loan amount at the fully indexed
rate over the remaining term.
Proposed payment calculation for a
negative amortization loan. Proposed
comments 43(d)(5)(i)–8 and –9 would
have explained the payment calculation
for a negative amortization loan under
proposed § 226.43(d)(5)(i)(C). Proposed
comment 43(d)(5)(i)–8 would have
clarified that the monthly periodic
payment for a negative amortization
loan must be calculated based on
several assumptions. First, the
calculation must be based on the
maximum loan amount. The comment
further stated that examples of how to
calculate the maximum loan amount are
provided in proposed comment
43(b)(7)–3.
Second, the payment calculation must
be based on substantially equal monthly
payments of principal and interest that
will fully repay the maximum loan
amount over the term of the loan
remaining as of the date the loan is
recast. For example, the comment states,
if the loan term is 30 years and the loan
is recast on the due date of the 60th
monthly payment, the creditor must
assume a loan term of 25 years. Third,
the payment must be based on the fully
indexed rate as of the date of the written
application for the standard mortgage.
Proposed comment 43(d)(5)(i)–9
would have provided an illustration of
the payment calculation for a negative
amortization loan. The example
assumes a loan in an amount of
$200,000 that has a 30-year loan term.
The loan agreement provides that the
consumer can make minimum monthly
payments that cover only part of the
interest accrued each month until the
date on which the principal balance
increases to the negative amortization
cap of 115 percent of the loan amount,
PO 00000
Frm 00096
Fmt 4701
Sfmt 4700
or for the first five years of monthly
payments, whichever occurs first. The
loan is an adjustable-rate mortgage that
adjusts monthly according to a specified
index plus a margin of 3.5 percent.
The example also assumed that the
non-standard mortgage is consummated
on February 15, 2011, and the first
monthly payment is due on April 1,
2011. Further, the example assumes
that, based on the calculation of the
maximum loan amount required under
§ 226.43(b)(7) and associated
commentary, the negative amortization
cap of 115 percent is reached on July 1,
2013, the due date of the 28th monthly
payment. Finally, the example assumes
that on March 15, 2012, the creditor
receives the consumer’s written
application for a refinancing, after the
consumer has made 12 monthly on-time
payments. On this date, the index value
is 4.5 percent.
Proposed comment 43(d)(5)(i)–9 then
stated that, to calculate the nonstandard mortgage payment that must be
compared to the standard mortgage
payment under proposed
§ 226.43(d)(1)(ii), the creditor must
use—
• The maximum loan amount of
$229,243 as of July 1, 2013.
• The fully indexed rate of 8 percent,
which is the index value of 4.5 percent
as of March 15, 2012 (the date on which
the creditor receives the application for
a refinancing) plus the margin of 3.5
percent.
• The remaining loan term as of July
1, 2013, the date of the recast, which is
27 years and 8 months (332 monthly
payments).
The comment concluded by stating
that, based on the assumptions above,
the monthly payment for the nonstandard mortgage for purposes of
determining whether the standard
mortgage monthly payment is lower
than the non-standard mortgage
monthly payment is $1,717. This is the
substantially equal, monthly payment of
principal and interest required to repay
the maximum loan amount at the fully
indexed rate over the remaining term.
The Board requested comment on the
proposed payment calculation for a nonstandard mortgage and on the
appropriateness and usefulness of the
proposed payment calculation
examples.
The Bureau received no specific
comment on the payment calculations
for non-standard mortgages set forth in
proposed § 226.43(d)(5)(i) and its
associated commentary. Accordingly,
the provision that is being adopted is
substantially similar to the version
proposed, renumbered as
§ 1026.43(d)(5)(i). The Bureau also is
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
adopting the associated commentary
generally as proposed. The Bureau has
made several technical amendments to
the examples in comments 43(d)(5)(i)–4,
–5, –6, –7, and –9 for clarity. As
proposed, the examples in the comment
referred to dates prior to the effective
date of this rule; the Bureau has updated
the dates in the examples so that they
will occur after this rule becomes
effective.
The Bureau believes that it is
necessary to clarify the provisions
related to payment calculations for
interest-only loans and negative
amortization loans. The provisions
adopted clarify that the payment
calculation required by
§ 1026.43(d)(5)(i) must be based on the
outstanding principal balance, rather
than the original amount of credit
extended. Accordingly, as adopted
§ 1026.43(d)(5)(i)(C)(2) requires the
remaining loan amount for an interestonly loan to be based on the outstanding
principal balance as of the date of the
recast, assuming all scheduled
payments have been made up to the
recast date and the payment due on the
recast date is made and credited as of
that date. Similarly,
§ 1026.43(d)(5)(i)(C)(3) requires the
remaining loan amount for a negative
amortization loan to be based on the
maximum loan amount, determined
after adjusting for the outstanding
principal balance. The Bureau has made
technical amendments to the example in
comments 43(d)(5)(i)–6, –7, –8, and –9
to conform to this clarification.
Additionally, the Bureau has added
new comment 43(d)(5)(i)–10 to add an
additional illustration of the payment
calculation for a negative amortization
loan. As adopted, comment 43(d)(5)(i)–
10 provides an illustrative example,
clarifying that, pursuant to the example
and assumptions included in the
example, to calculate the non-standard
mortgage payment on a negative
amortization loan for which the
consumer has made more than the
minimum required payment that must
be compared to the standard mortgage
payment under § 1026.43(d)(1)(i), the
creditor must use the maximum loan
amount of $229,219 as of March 1, 2019,
the fully indexed rate of 8 percent,
which is the index value of 4.5 percent
as of March 15, 2012 (the date on which
the creditor receives the application for
a refinancing) plus the margin of 3.5
percent, and the remaining loan term as
of March 1, 2019, the date of the recast,
which is 25 years (300 monthly
payments). The comment further
explains that, based on these
assumptions, the monthly payment for
the non-standard mortgage for purposes
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
of determining whether the standard
mortgage monthly payment is lower
than the non-standard mortgage
monthly payment is $1,769. This is the
substantially equal, monthly payment of
principal and interest required to repay
the maximum loan amount at the fully
indexed rate over the remaining term.
The Bureau finds that comment
43(d)(5)(i)–10, which is adopted
pursuant to the Bureau’s authority
under section 105(a) of TILA, is
necessary to facilitate compliance with
TILA.
43(d)(5)(ii) Standard Mortgage
Proposed § 226.43(d)(5)(ii) would
have prescribed the required calculation
for the monthly payment on a standard
mortgage that must be compared to the
monthly payment on a non-standard
mortgage under proposed
§ 226.43(d)(1)(ii). The same payment
calculation must also be used by
creditors of refinances under proposed
§ 226.43(d) in determining whether the
consumer has a reasonable ability to
repay the standard mortgage, as would
have been required under proposed
§ 226.43(c)(2)(ii).
Specifically, the monthly payment for
a standard mortgage must be based on
substantially equal, monthly, fully
amortizing payments using the
maximum interest rate that may apply
to the standard mortgage within the first
five years after consummation. Proposed
comment 43(d)(5)(ii)–1 would have
clarified that the meaning of ‘‘fully
amortizing payment’’ is defined in
§ 226.43(b)(2), and that guidance
regarding the meaning of ‘‘substantially
equal’’ may be found in proposed
comment 43(c)(5)(i)–4. Proposed
comment 43(d)(5)(ii)–1 also explained
that, for a mortgage with a single, fixed
rate for the first five years, the
maximum rate that will apply during
the first five years after consummation
will be the rate at consummation. For a
step-rate mortgage, however, which is a
type of fixed-rate mortgage, the rate that
must be used is the highest rate that will
apply during the first five years after
consummation. For example, if the rate
for the first two years is 4 percent, the
rate for the second two years is 5
percent, and the rate for the next two
years is 6 percent, the rate that must be
used is 6 percent.
Proposed comment 43(d)(5)(ii)–2
would have provided an illustration of
the payment calculation for a standard
mortgage. The example assumes a loan
in an amount of $200,000 with a 30-year
loan term. The loan agreement provides
for an interest rate of 6 percent that is
fixed for an initial period of five years,
after which time the interest rate will
PO 00000
Frm 00097
Fmt 4701
Sfmt 4700
6503
adjust annually based on a specified
index plus a margin of 3 percent, subject
to a 2 percent annual interest rate
adjustment cap. The comment states
that, based on the above assumptions,
the creditor must determine whether the
standard mortgage payment is
materially lower than the non-standard
mortgage payment based on a standard
mortgage payment of $1,199. This is the
substantially equal, monthly payment of
principal and interest required to repay
$200,000 over 30 years at an interest
rate of 6 percent.
The Bureau received no specific
comment on the payment calculations
for standard mortgages set forth in
proposed § 226.43(d)(5)(ii) and its
associated commentary. Accordingly,
this provisions is adopted as proposed,
renumbered as § 1026.43(d)(5)(ii). The
Bureau also is adopting the associated
commentary generally as proposed, with
several technical amendments for
clarity.
43(e) Qualified Mortgages
Background
As discussed above, TILA section
129C(a)(1) prohibits a creditor from
making a residential mortgage loan
unless the creditor makes a reasonable
and good faith determination, at or
before consummation, based on verified
and documented information, that at the
time of consummation the consumer has
a reasonable ability to repay the loan.
TILA section 129C(a)(1) through (4) and
(6) through (9) requires creditors
specifically to consider and verify
various factors relating to the
consumer’s income and other assets,
debts and other obligations, and credit
history. However, the ability-to-repay
provisions do not directly restrict
features, term, or costs of the loan.
TILA section 129C(b), in contrast,
provides that loans that meet certain
requirements shall be deemed
‘‘qualified mortgages,’’ which are
entitled to a presumption of compliance
with the ability-to-repay requirements.
The section sets forth a number of
qualified mortgage requirements which
focus mainly on prohibiting certain
risky features and practices (such as
negative amortization and interest-only
periods or underwriting a loan without
verifying the consumer’s income) and
on generally limiting points and fees in
excess of 3 percent of the total loan
amount. The only underwriting
provisions in the statutory definition of
qualified mortgage are a requirement
that ‘‘income and financial resources
relied upon to qualify the [borrowers] be
verified and documented’’ and a further
requirement that underwriting be based
E:\FR\FM\30JAR2.SGM
30JAR2
6504
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
upon a fully amortizing schedule using
the maximum rate permitted during the
first five years of the loan. TILA section
129C(b)(2)(A)(iii) through (v). However,
TILA section 129C(b)(2)(A)(vi)
authorizes the Bureau to adopt
‘‘guidelines or regulations * * *
relating to ratios of total monthly debt
to monthly income or alternative
measures of ability to pay * * * .’’ And
TILA section 129C(b)(3)(B)(i) further
authorizes the Bureau to revise, add to,
or subtract from the criteria that define
a qualified mortgage upon a finding that
the changes are necessary or proper to
ensure that responsible, affordable
mortgage credit remains available to
consumers in a manner consistent with
the purposes of TILA section 129C,
necessary and appropriate to effectuate
the purposes of TILA sections 129C and
129B, to prevent circumvention or
evasion thereof, or to facilitate
compliance with TILA sections 129C
and 129B.127
The qualified mortgage requirements
are critical to implementation of various
parts of the Dodd-Frank Act. For
example, several consumer protection
requirements in title XIV of the DoddFrank Act treat qualified mortgages
differently than non-qualified mortgages
or key off elements of the qualified
mortgage definition.128 In addition, the
requirements concerning retention of
risk by parties involved in the
securitization process under title IX of
the Dodd-Frank Act provide special
treatment for ‘‘qualified residential
mortgages,’’ which under section 15G of
the Securities Exchange Act of 1934, as
amended by section 941(b) of the DoddFrank Act, ‘‘shall be no broader than the
127 TILA section 129B contains requirements and
restrictions relating to mortgage originators. TILA
section 129B(b) requires a loan originator to be
qualified and, when required, registered and
licensed as a mortgage originator under the Secure
and Fair Enforcement of Mortgage Licensing Act of
2008 (SAFE Act), and to include on all loan
documents any unique identifier of the mortgage
originator provided by the Nationwide Mortgage
Licensing System and Registry. That section also
requires the Bureau to prescribe regulations
requiring depository institutions to establish and
maintain procedures designed to ensure and
monitor compliance of such institutions, including
their subsidiaries and employees, with the SAFE
Act. TILA section 129B(c) contains certain
prohibitions on loan originator steering, including
restrictions on various compensation practices, and
requires the Bureau to prescribe regulations to
prohibit certain specific steering activities.
128 For example, as described in the section-bysection analysis of § 1026.43(g), TILA section
129C(c), added by section 1414(a) of the DoddFrank Act, provides that a residential mortgage loan
that is not a ‘‘qualified mortgage’’ may not contain
a prepayment penalty. In addition, section 1471 of
the Dodd-Frank Act establishes a new TILA section
129H, which sets forth appraisal requirements
applicable to higher-risk mortgages. The definition
of ‘‘higher-risk mortgage’’ expressly excludes
qualified mortgages.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
term ‘qualified mortgage,’’’ as defined
by TILA section 129C(b) and the
Bureau’s implementing regulations. 15
U.S.C. 780–11(e)(4).129
For present purposes, however, the
definition of a qualified mortgage is
perhaps most significant because of its
implications for ability-to-repay claims.
TILA section 129C(b)(1) provides that
‘‘[a]ny creditor with respect to any
residential mortgage loan, and any
assignee of such loan subject to liability
under this title, may presume that the
loan has met the [ability-to-repay]
requirements of subsection (a), if the
loan is a qualified mortgage.’’ But the
statute does not describe the strength of
the presumption or what if anything
could be used to rebut it. As discussed
further below, there are legal and policy
arguments that support interpreting the
presumption as either rebuttable or
conclusive.
Determining the definition and scope
of protection afforded to qualified
mortgages is the area of this rulemaking
which has engendered perhaps the
greatest interest and comment. Although
TILA section 129C(a)(1) requires only
that a creditor make a ‘‘reasonable and
good faith determination’’ of the
consumer’s ‘‘reasonable ability to
repay’’ a residential mortgage,
considerable concern has arisen about
the actual and perceived litigation and
liability risk to creditors and assignees
under the statute. Commenters tended
to focus heavily on the choice between
a presumption that is rebuttable and one
that is conclusive as a means of
mitigating that risk, although the criteria
that define a qualified mortgage are also
important because a creditor would
have to prove status as a qualified
mortgage in order to invoke any
(rebuttable or conclusive) presumption
of compliance.
In assessing the potential impacts of
the statute, it is important to note that
regulations issued after the mortgage
crisis but prior to the enactment of the
Dodd-Frank Act have already imposed
ability-to-repay requirements for highcost and higher-priced mortgages and
created a presumption of compliance for
such mortgages if the creditor satisfied
certain underwriting and verification
requirements. Specifically, under
provisions of the Board’s 2008 HOEPA
Final Rule that took effect in October
2009, creditors are prohibited from
extending high-cost or higher-priced
mortgage loans without regard to the
consumer’s ability to repay. See
§ 1026.34(a)(4). The rules provide a
presumption of compliance with those
129 See part II.G for a discussion of the 2011 QRM
Proposed Rule.
PO 00000
Frm 00098
Fmt 4701
Sfmt 4700
ability-to-repay requirements if the
creditor follows certain optional
procedures regarding underwriting the
loan payment, assessing the debt-toincome (DTI) ratio or residual income,
and limiting the features of the loan, in
addition to following certain procedures
mandated for all creditors. See
§ 1026.34(a)(4)(iii) and (iv) and
comment 34(a)(4)(iii)–1. However, the
2008 HOEPA Final Rule makes clear
that even if the creditor follows these
criteria, the presumption of compliance
is rebuttable. See comment 34(a)(4)(iii)–
1. The consumer can still overcome that
presumption by showing that, despite
following the required and optional
procedures, the creditor nonetheless
disregarded the consumer’s ability to
repay the loan. For example, the
consumer could present evidence that
although the creditor assessed the
consumer’s debt-to-income ratio or
residual income, the debt-to-income
ratio was very high or the residual
income was very low. This evidence
may be sufficient to overcome the
presumption of compliance and
demonstrate that the creditor extended
credit without regard to the consumer’s
ability to repay the loan.
The Dodd-Frank Act extends a
requirement to assess consumers’ ability
to repay to the full mortgage market, and
establishes a presumption using a
different set of criteria that focus more
on product features than underwriting
practices. Further, the statute
establishes similar but slightly different
remedies than are available under the
existing requirements. Section 1416 of
the Dodd-Frank Act amended TILA
section 130(a) to provide that a
consumer who brings a timely action
against a creditor for a violation the
ability-to-repay requirements may be
able to recover special statutory
damages equal to the sum of all finance
charges and fees paid by the consumer.
The statute of limitations is three years
from the date of the occurrence of the
violation. Moreover, as amended by
section 1413 of the Dodd-Frank Act,
TILA section 130(k) provides that when
a creditor, assignee, or other holder
initiates a foreclosure action, a
consumer may assert a violation of the
ability-to-repay requirements as a matter
of defense by recoupment or setoff.
There is no time limit on the use of this
defense, but the amount of recoupment
or setoff is limited with respect to the
special statutory damages to no more
than three years of finance charges and
fees. This limit on setoff is more
restrictive than under the existing
regulations, but also expressly applies to
assignees.
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
In light of the statutory ambiguities,
complex policy considerations, and
concerns about litigation risk, the
Board’s proposal mapped out two
alternatives at the opposite ends of a
spectrum for defining a qualified
mortgage and the protection afforded to
such mortgages. At one end, the Board’s
Alternative 1 would have defined
qualified mortgage only to include the
mandated statutory elements listed in
TILA section 129C(b)(2), most of which,
as noted above, relate to product
features and not to the underwriting
decision or process itself. This
alternative would have provided
creditors with a safe harbor to establish
compliance with the general repayment
ability requirement in proposed
§ 226.43(c)(1). As the Board recognized,
this would provide strong incentives for
creditors to make qualified mortgages in
order to minimize litigation risk and
compliance burden under general
ability-to-repay requirements, but might
prevent consumers from seeking redress
for failure to assess their ability to
repay. In Alternative 2, the Board
proposed a definition of qualified
mortgage which incorporated both the
statutory product feature restrictions
and additional underwriting elements
drawn from the general ability-to-repay
requirements, as well as seeking
comment on whether to establish a
specific debt-to-income requirement.
Alternative 2 also specified that
consumers could rebut the presumption
of compliance by demonstrating that a
creditor did not adequately determine
the consumers’ ability to repay the loan.
As the Board recognized, this would
better ensure that creditors fully
evaluate consumers’ ability to repay
qualified mortgages and preserve
consumers’ rights to seek redress.
However, the Board expressed concern
that Alternative 2 would provide little
incentive to make qualified mortgages in
the first place, given that the
requirements may be challenging to
satisfy and the strength of protection
afforded would be minimal.
Overview of Final Rule
As noted above and discussed in
greater detail in the section-by-section
analysis below, the Dodd-Frank Act
accords the Bureau significant
discretion in defining the scope of, and
legal protections afforded to, a qualified
mortgage. In developing the rules for
qualified mortgages, the Bureau has
carefully considered numerous factors,
including the Board’s proposal to
implement TILA section 129C(b),
comments and ex parte
communications, current regulations
and the current state of the mortgage
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
market, and the implications of the
qualified mortgage rule on other parts of
the Dodd-Frank Act. The Bureau is
acutely aware of the problematic
practices that gave rise to the financial
crisis and sees the ability-to-pay
requirement as an important bulwark to
prevent a recurrence of those practices
by establishing a floor for safe
underwriting. At the same time, the
Bureau is equally aware of the anxiety
in the mortgage market today
concerning the continued slow pace of
recovery and the confluence of multiple
major regulatory and capital initiatives.
Although every industry representative
that has communicated with the Bureau
acknowledges the importance of
assessing a consumer’s ability to repay
before extending a mortgage to the
consumer—and no creditor claims to do
otherwise—there is nonetheless a
widespread fear about the litigation
risks associated with the Dodd-Frank
Act ability-to-repay requirements. Even
community banks, deeply ingrained
within their local communities and
committed to a relationship lending
model, have expressed to the Bureau
their fear of litigation. In crafting the
rules to implement the qualified
mortgage provision, the Bureau has
sought to balance creating new
protections for consumers and new
responsibilities for creditors with
preserving consumers’ access to credit
and allowing for appropriate lending
and innovation.
The Bureau recognizes both the need
for certainty in the short term and the
risk that actions taken by the Bureau in
order to provide such certainty could,
over time, defeat the prophylactic aims
of the statute or impede recovery in
various parts of the market. For
instance, in defining the criteria for a
qualified mortgage, the Bureau is called
upon to identify a class of mortgages
which can be presumed to be affordable.
The boundaries must be clearly drawn
so that consumers, creditors, and
secondary market investors can all
proceed with reasonable assurance as to
whether a particular loan constitutes a
qualified mortgage. Yet the Bureau
believes that it is not possible by rule to
define every instance in which a
mortgage is affordable, and the Bureau
fears that an overly broad definition of
qualified mortgage could stigmatize
non-qualified mortgages or leave
insufficient liquidity for such loans. If
the definition of qualified mortgage is so
broad as to deter creditors from making
non-qualified mortgages altogether, the
regulation would curtail access to
responsible credit for consumers and
turn the Bureau’s definition of a
PO 00000
Frm 00099
Fmt 4701
Sfmt 4700
6505
qualified mortgage into a straitjacket
setting the outer boundary of credit
availability. The Bureau does not
believe such a result would be
consistent with congressional intent or
in the best interests of consumers or the
market.
The Bureau is thus attuned to the
problems of the past, the pressures that
exist today, and the ways in which the
market might return in the future. As a
result, the Bureau has worked to
establish guideposts in the final rule to
make sure that the market’s return is
healthy and sustainable for the longterm. Within that framework, the
Bureau is defining qualified mortgages
to strike a clear and calibrated balance
as follows:
First, the final rule provides
meaningful protections for consumers
while providing clarity to creditors
about what they must do if they seek to
invoke the qualified mortgage
presumption of compliance.
Accordingly, the qualified mortgage
criteria include not only the minimum
elements required by the statute—
including prohibitions on risky loan
features, a cap on points and fees, and
special underwriting rules for
adjustable-rate mortgages—but
additional underwriting features to
ensure that creditors do in fact evaluate
individual consumers’ ability to repay
the qualified mortgages. The qualified
mortgage criteria thus incorporate key
elements of the verification
requirements under the ability-to-repay
standard and strengthen the consumer
protections established by the ability-torepay requirements.
In particular, the final rule provides a
bright-line threshold for the consumer’s
total debt-to-income ratio, so that under
a qualified mortgage, the consumer’s
total monthly debt payments cannot
exceed 43 percent of the consumer’s
total monthly income. The bright-line
threshold for debt-to-income serves
multiple purposes. First, it protects
consumer interests because debt-toincome ratios are a common and
important tool for evaluating
consumers’ ability to repay their loans
over time, and the 43 percent threshold
has been utilized by the Federal
Housing Administration (FHA) for many
years as its general boundary for
defining affordability. Relative to other
benchmarks that are used in the market
(such as GSE guidelines) that have a
benchmark of 36 percent, before
consideration of compensating factors,
this threshold is a relatively liberal one
which allows ample room for
consumers to qualify for an affordable
mortgage. Second, it provides a wellestablished and well-understood rule
E:\FR\FM\30JAR2.SGM
30JAR2
6506
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
that will provide certainty for creditors
and help to minimize the potential for
disputes and costly litigation over
whether a mortgage is a qualified
mortgage. Third, it allows room for a
vibrant market for non-qualified
mortgages over time. The Bureau
recognizes that there will be many
instances in which individual
consumers can afford an even higher
debt-to-income ratio based on their
particular circumstances, although the
Bureau believes that such loans are
better evaluated on an individual basis
under the ability-to-repay criteria rather
than with a blanket presumption. The
Bureau also believes that there are a
sufficient number of potential borrowers
who can afford a mortgage that would
bring their debt-to-income ratio above
43 percent that responsible creditors
will continue to make such loans as
they become more comfortable with the
new regulatory framework. To preserve
access to credit during the transition
period, the Bureau has also adopted
temporary measures as discussed
further below.
The second major feature of the final
rule is the provision of carefully
calibrated presumptions of compliance
afforded to different types of qualified
mortgages. Following the approach
developed by the Board in the existing
ability-to-repay rules to distinguish
between prime and subprime loans, the
final rule distinguishes between two
types of qualified mortgages based on
the mortgage’s Annual Percentage Rate
(APR) relative to the Average Prime
Offer Rate (APOR).130 For loans that
exceed APOR by a specified amount—
loans denominated as ‘‘higher-priced
mortgage loans’’—the final rule provides
a rebuttable presumption. In other
words, the creditor is presumed to have
satisfied the ability-to-repay
requirements, but a consumer may rebut
that presumption under carefully
defined circumstances.131 For all other
loans, i.e., loans that are not ‘‘higherpriced,’’ the final rule provides a
conclusive presumption that the
creditor has satisfied the ability-to-repay
requirements once the creditor proves
that it has in fact made a qualified
mortgage. In other words, the final rule
provides a safe harbor from ability-torepay challenges for the least risky type
of qualified mortgages, while providing
room to rebut the presumption for
qualified mortgages whose pricing is
indicative of a higher level of risk.132
The Bureau believes that this calibration
will further encourage creditors to
extend credit responsibly and provide
certainty that promotes access to credit.
The Bureau believes that loans that
fall within the rebuttable presumption
category will be loans made to
consumers who are more likely to be
vulnerable 133 so that, even if the loans
satisfy the criteria for a qualified
mortgage, those consumers should be
provided the opportunity to prove that,
in an individual case, the creditor did
not have a reasonable belief that the
loan would be affordable for that
consumer. Under a qualified mortgage
with a safe harbor, most of the loans
within this category will be the loans
made to prime borrowers who pose
fewer risks. Furthermore, considering
the difference in historical performance
levels between prime and subprime
loans, the Bureau believes that it is
reasonable to presume conclusively that
a creditor who has verified a consumer’s
debt and income, determined in
accordance with specified standards
that the consumer has a debt-to-income
ratio that does not exceed 43 percent,
and made a prime mortgage with the
product features required for a qualified
mortgage has satisfied its obligation to
assess the consumer’s ability to repay.
This approach will provide significant
certainty to creditors operating in the
prime market. The approach will also
create lesser but still important
protection for creditors in the subprime
market who follow the qualified
mortgage rules, while preserving
consumer remedies and creating strong
incentives for more responsible lending
in the part of the market in which the
most abuses occurred prior to the
financial crisis.
Third, the final rule provides a
temporary special rule for certain
qualified mortgages to provide a
transition period to help ensure that
130 APOR means ‘‘the average prime offer rate for
a comparable transaction as of the date on which
the interest rate for the transaction is set, as
published by the Bureau.’’ TILA section
129C(b)(2)(B).
131 As described further below, under a qualified
mortgage with a rebuttable presumption, a
consumer can rebut that presumption by showing
that, in fact, at the time the loan was made the
consumer did not have sufficient income or assets
(other than the value of the dwelling that secures
the transaction), after paying his or her mortgage
and other debts, to be able to meet his or her other
living expenses of which the creditor was aware.
132 The threshold for determining which
treatment applies generally matches the threshold
for ‘‘higher-priced mortgage loans’’ under existing
Regulation Z, except that the rule does not provide
a separate, higher threshold for jumbo loans. The
Dodd-Frank Act itself codified the same thresholds
for other purposes. See Dodd-Frank Act section
1411, enacting TILA section 129C(6)(d)(ii). In
adopting the ‘‘higher-priced mortgage loans’’
threshold in 2008, the Board explained that the aim
was to ‘‘cover the subprime market and generally
exclude the prime market.’’ 73 FR 44522, 44532
(July 30, 2008).
133 See generally, id. at 44533.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
PO 00000
Frm 00100
Fmt 4701
Sfmt 4700
sustainable credit will return in all parts
of the market over time. The temporary
special rule expands the definition of a
qualified mortgage to include any loan
that is eligible to be purchased,
guaranteed, or insured by various
Federal agencies or by the GSEs while
they are operating under
conservatorship. This temporary
provision preserves access to credit in
today’s market by permitting a loan that
does not satisfy the 43 percent debt-toincome ratio threshold to nonetheless be
a qualified mortgage based upon an
underwriting determination made
pursuant to guidelines created by the
GSEs while in conservatorship or one of
the Federal agencies. This temporary
provision will sunset in a maximum of
seven years. As with loans that satisfy
the 43 percent debt-to-income ratio
threshold, qualified mortgages under
this temporary rule will receive either a
rebuttable or conclusive presumption of
compliance depending upon the pricing
of the loan relative to APOR. The
Bureau believes this provision will
provide sufficient consumer protection
while providing adequate time for
creditors to adjust to the new
requirements of the final rule as well as
to changes in other regulatory, capital,
and economic conditions.
A detailed description of the qualified
mortgage definition is set forth below.
Section 1026.43(e)(1) provides the
presumption of compliance provided to
qualified mortgages. Section
1026.43(e)(2) provides the criteria for a
qualified mortgage under the general
definition, including the restrictions on
certain product features, verification
requirements, and a specified debt-toincome ratio threshold. Section
1026.43(e)(3) provides the limits on
points and fees for qualified mortgages,
including the limits for smaller loan
amounts. Section 1026.43(e)(4) provides
the temporary special rule for qualified
mortgages. Lastly, § 1026.43(f)
implements a statutory exemption
permitting certain balloon-payment
loans by creditors operating
predominantly in rural or underserved
areas to be qualified mortgages.
43(e)(1) Safe Harbor and Presumption of
Compliance
As discussed above, the Dodd-Frank
Act provides a presumption of
compliance with the ability-to-repay
requirements for qualified mortgages,
but the statute is not clear as to whether
that presumption is intended to be
conclusive so as to create a safe harbor
that cuts off litigation or a rebuttable
presumption of compliance with the
ability-to-repay requirements. The title
of section 1412 refers to both a ‘‘safe
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
harbor and rebuttable presumption,’’
and as discussed below there are
references to both safe harbors and
presumptions in other provisions of the
statute. As the Board’s proposal
discussed, an analysis of the statutory
construction and policy implications
demonstrates that there are sound
reasons for adopting either
interpretation. See 76 FR 27390, 27452–
55 (May 11, 2011).
Several aspects of the statutory
structure favor a safe harbor
interpretation. First, TILA section
129C(b)(1) states that a creditor or
assignee may presume that a loan has
‘‘met the requirements of subsection (a),
if the loan is a qualified mortgage.’’
TILA section 129C(a) contains the
general ability-to repay requirement,
and also a set of specific underwriting
criteria that must be considered by a
creditor in assessing the consumer’s
repayment ability. Rather than stating
that the presumption of compliance
applies only to TILA section 129C(a)(1)
for the general ability-to-repay
requirements, it appears Congress
intended creditors who make qualified
mortgages to be presumed to comply
with both the ability-to-repay
requirements and all of the specific
underwriting criteria. Second, TILA
section 129C(b)(2) does not define a
qualified mortgage as requiring
compliance with all of the underwriting
criteria of the general ability-to-repay
standard. Therefore, unlike the
approach found in the 2008 HOEPA
Final Rule, it appears that meeting the
criteria for a qualified mortgage is an
alternative way of establishing
compliance with all of the ability-torepay requirements, which could
suggest that meeting the qualified
mortgage criteria conclusively satisfies
these requirements. In other words,
given that a qualified mortgage satisfies
the ability-to-repay requirements, one
could assume that meeting the qualified
mortgage definition conclusively
establishes compliance with those
requirements.
In addition, TILA section
129C(b)(3)(B), which provides the
Bureau authority to revise, add to, or
subtract from the qualified mortgage
criteria upon making certain findings, is
titled ‘‘Revision of Safe Harbor Criteria.’’
Further, in section 1421 of the DoddFrank Act, Congress instructed the
Government Accountability Office to
issue a study on the effect ‘‘on the
mortgage market for mortgages that are
not within the safe harbor provided in
the amendments made by this subtitle.’’
Certain policy considerations also
favor a safe harbor. Treating a qualified
mortgage as a safe harbor provides
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
greater legal certainty for creditors and
secondary market participants than a
rebuttable presumption of compliance.
Increased legal certainty may benefit
consumers if as a result creditors are
encouraged to make loans that satisfy
the qualified mortgage criteria, as such
loans cannot have certain risky features
and have a cap on upfront costs.
Furthermore, increased certainty may
result in loans with a lower cost than
would be charged in a world of legal
uncertainty. Thus, a safe harbor may
also allow creditors to provide
consumers additional or more affordable
access to credit by reducing their
expected total litigation costs.
On the other hand, there are also
several aspects of the statutory structure
that favor interpreting qualified
mortgage as creating a rebuttable
presumption of compliance. With
respect to statutory construction, TILA
section 129C(b)(1) states that a creditor
or assignee ‘‘may presume’’ that a loan
has met the repayment ability
requirement if the loan is a qualified
mortgage. As the Board’s proposal notes,
this could suggest that originating a
qualified mortgage provides a
presumption of compliance with the
repayment ability requirements, which
the consumer can rebut with evidence
that the creditor did not, in fact, make
a good faith and reasonable
determination of the consumer’s ability
to repay the loan. Similarly, in the
smaller loans provisions in TILA section
129C(b)(2)(D), Congress instructed the
Bureau to adjust the points and fees cap
for qualified mortgages ‘‘to permit
lenders that extend smaller loans to
meet the requirements of the
presumption of compliance’’ in TILA
section 129C(b)(1).134 As noted above,
the 2008 HOEPA Final Rule also
contains a rebuttable presumption of
compliance with respect to the abilityto-repay requirements that currently
apply to high-cost and higher-priced
mortgages.
The legislative history of the DoddFrank Act may also favor interpreting
‘‘qualified mortgage’’ as a rebuttable
presumption of compliance. As
described in a joint comment letter from
several consumer advocacy groups, a
prior version of Dodd-Frank Act title
XIV from 2007 contemplated a dual
track for liability in litigation: a
rebuttable presumption for creditors and
a safe harbor for secondary market
134 In prescribing such rules, the Bureau is to
consider the potential impact of such rules on rural
areas and other areas where home values are lower.
This provision did not appear in earlier versions of
title XIV of the Dodd-Frank Act, so there is no
legislative history to explain the use of the word
‘‘presumption’’ in this context.
PO 00000
Frm 00101
Fmt 4701
Sfmt 4700
6507
participants.135 That draft legislation
would have provided that creditors,
assignees, and securitizers could
presume compliance with the ability-torepay provision if the loan met certain
requirements.136 However, the
presumption of compliance would have
been rebuttable only against the
creditor, effectively creating a safe
harbor for assignees and securitizers.137
The caption ‘‘safe harbor and rebuttable
presumption’’ appears to have
originated from the 2007 version of the
legislation. The 2009 version of the
legislation did not contain this dual
track approach.138 Instead, the language
simply stated that creditors, assignees,
and securitizers ‘‘may presume’’ that
qualified mortgages satisfied ability-torepay requirements, without specifying
the nature of the presumption.139 The
committee report of the 2009 bill
described the provision as establishing
a ‘‘limited safe harbor’’ for qualified
mortgages, while also stating that ‘‘the
presumption can be rebutted.’’ 140 This
suggests that Congress contemplated
that qualified mortgages would receive
a rebuttable presumption of compliance
with the ability-to-repay provisions,
notwithstanding Congress’s use of the
term ‘‘safe harbor’’ in the heading of
section 129C(b) and elsewhere in the
statute and legislative history.
There are also policy reasons that
favor interpreting ‘‘qualified mortgage’’
as a rebuttable presumption of
compliance. The ultimate aim of the
statutory provisions is to assure that,
before making a mortgage loan, the
creditor makes a determination of the
consumer’s ability to repay. No matter
how many elements the Bureau might
add to the definition of qualified
mortgage, it still would not be possible
to define a class of loans which ensured
that every consumer within the class
could necessarily afford a particular
loan. In light of this, interpreting the
statute to provide a safe harbor that
precludes a consumer from challenging
the creditor’s determination of
repayment ability seems to raise
135 See Mortgage Reform and Anti-Predatory
Lending Act of 2007, H.R. 3915, 110th Cong. (2007).
136 See H.R. 3915 § 203. Specifically, that prior
version of title XIV would have created two types
of qualified mortgages: (1) a ‘‘qualified mortgage,’’
which included loans with prime interest rates or
government insured VA or FHA loans, and (2) a
‘‘qualified safe harbor mortgage,’’ which met
underwriting standards and loan term restrictions
similar to the definition of qualified mortgage
eventually codified at TILA section 129C(b)(2).
137 Id.
138 See Mortgage Reform and Anti-Predatory
Lending Act of 2009, H.R. 1728.
139 See H.R. 1728 § 203.
140 Mortgage Reform and Anti-Predatory Lending
Act of 2009, H. Rept. No. 94, 111th Cong., at 48
(2009).
E:\FR\FM\30JAR2.SGM
30JAR2
6508
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
tensions with the requirement to
determine repayment ability. In
contrast, interpreting a qualified
mortgage as providing a rebuttable
presumption of compliance would
better ensure that creditors consider
each consumer’s ability to repay the
loan rather than only satisfying the
qualified mortgage criteria.
sroberts on DSK5SPTVN1PROD with
The Board’s Proposal
As described above, in light of the
statutory ambiguity and competing
policy considerations, the Board
proposed two alternative definitions for
a qualified mortgage, which generally
represent two ends of the spectrum of
possible definitions. Alternative 1
would have applied only the specific
requirements listed for qualified
mortgages in TILA section 129C(b)(2),
and would have provided creditors with
a safe harbor to establish compliance
with the general repayment ability
requirement in proposed § 226.43(c)(1).
Alternative 2 would have required a
qualified mortgage to satisfy the specific
requirements listed in the TILA section
129C(b)(2), as well as additional
requirements taken from the general
ability-to-repay standard in proposed
§ 226.43(c)(2) through (7). Alternative 2
would have provided a rebuttable
presumption of compliance with the
ability-to-repay requirements. Although
the Board specifically proposed two
alternative qualified mortgage
definitions, it also sought comment on
other approaches by soliciting comment
on other alternative definitions. The
Board also specifically solicited
comment on what criteria should be
included in the definition of a qualified
mortgage to ensure that the definition
provides an incentive to creditors to
make qualified mortgages, while also
ensuring that consumers have the ability
to repay those loans. In particular, the
Board sought comment on whether the
qualified mortgage definition should
require consideration of a consumer’s
debt-to-income ratio or residual income,
including whether and how to include
a quantitative standard for the debt-toincome ratio or residual income for the
qualified mortgage definition.
Comments
Generally, numerous industry and
other commenters, including some
members of Congress, supported a legal
safe harbor while consumer groups and
other commenters, including an
association of State bank regulators,
supported a rebuttable presumption.
However, as described below,
commenters did not necessarily support
the two alternative proposals
specifically as drafted by the Board. For
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
instance, a significant number of
industry commenters advocated
incorporating the general ability-torepay requirements into the qualified
mortgage definition, while providing a
safe harbor for those loans that met the
enhanced standards. And a coalition of
industry and consumer advocates
presented a proposal to the Bureau that
would have provided a tiered approach
to defining a qualified mortgage. Under
the first tier, if the consumer’s back-end
debt-to-income (total debt-to-income)
ratio is 43 percent or less, the loan
would be a qualified mortgage, and no
other tests would be required. Under the
second tier, if the consumer’s total debtto-income ratio is more than 43 percent,
the creditor would apply a series of tests
related to the consumer’s front-end
debt-to-income ratio (housing debt-toincome), stability of income and past
payment history, availability of reserves,
and residual income to determine if a
loan is a qualified mortgage.
Comments in favor of safe harbor.
Industry commenters strongly
supported a legal safe harbor from
liability for qualified mortgages. These
commenters believe that a broad safe
harbor with clear, bright lines would
provide certainty and clarity for
creditors and assignees. Generally,
industry commenters argued that a safe
harbor is needed in order: (i) To ensure
creditors make loans, (ii) to ensure the
availability of and access to affordable
credit without increasing the costs of
borrowing; (iii) to promote certainty and
saleability in the secondary market, and
(iv) to contain litigation risk and costs
for creditors and assignees.
Generally, although acknowledging
ambiguities in the statutory language,
industry commenters argued that the
statute’s intent and legislative history
indicate that qualified mortgages are
meant to be a legal safe harbor, in lieu
of the ability-to-repay standards.
Industry commenters argued that a safe
harbor would best ensure safe, welldocumented, and properly underwritten
loans without limiting the availability of
credit or increasing the costs of credit to
consumers. Many industry commenters
asserted that a legal safe harbor from
liability would ensure access to
affordable credit. Other industry
commenters argued that a safe harbor
ultimately benefits consumers with
increased access to credit, reduced loan
fees and interest rates, and less-risky
loan features. In contrast, various
industry commenters contended that a
rebuttable presumption would not
provide enough certainty for creditors
and the secondary market. Commenters
argued that if creditors cannot easily
ascertain whether a loan satisfies the
PO 00000
Frm 00102
Fmt 4701
Sfmt 4700
ability-to-repay requirements, creditors
will either not make loans or will pass
the cost of uncertain legal risk to
consumers, which in turn would
increase the cost of borrowing.
Numerous industry commenters
argued for a legal safe harbor because of
the liabilities of an ability-to-repay
violation and the costs associated with
ability-to-repay litigation. Generally,
commenters argued that a rebuttable
presumption for qualified mortgages
would invite more extensive litigation
than necessary that will result in greater
costs being borne by all consumers.
Commenters emphasized the relatively
severe penalties for ability-to-repay
violations under the Dodd-Frank Act,
including enhanced damages, an
extended three-year statute of
limitations, a recoupment or set-off
provision as a defense to foreclosure,
and new enforcement authorities by
State attorneys general. In addition,
assignee liabilities are amplified
because of the recoupment and set-off
provision in TILA section 130(k).
Commenters asserted that the increased
costs associated with litigation could
make compliance too costly for smaller
creditors, which would reduce
competition and credit availability from
the market. In particular, community
bank trade association commenters
argued that the Bureau should adopt a
safe harbor for qualified mortgage loans
and include bright-line requirements to
protect community banks from litigation
and ease the compliance burden.
Ultimately, community bank trade
association commenters stated that few,
if any, banks would risk providing a
mortgage that only has a rebuttable
presumption attached.
Industry commenters generally
believed that a rebuttable presumption
would increase the incidence of
litigation because any consumer who
defaults on a loan would be likely to sue
for recoupment in foreclosure.
Commenters were also concerned about
frivolous challenges in court as well as
heightened scrutiny by regulators. In
particular, a credit union association
commenter supported a safe harbor
because of concerns that a rebuttable
presumption would cause credit unions
to be faced with significant amounts of
frivolous foreclosure defense litigation
in the future. In addition to increased
incidence of litigation, industry
commenters and other interested parties
argued that the estimated costs of
litigation under a rebuttable
presumption would be overly
burdensome for creditors and assignees.
Some commenters and interested parties
presented estimates of the litigation
costs associated with claims alleging a
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
violation of the ability-to-repay
requirements. For example, one
industry trade association commenter
estimated that the attorney’s fees for a
claim involving a qualified mortgage
under a safe harbor would cost $30,000,
compared to $50,000 for a claim under
a rebuttable presumption. That
commenter provided a separate
estimation from a law firm that the
attorneys’ fees to the creditor will be
approximately $26,000 in cases where
the matter is disposed of on a motion to
dismiss, whereas the fees for the cost of
a full trial could reach $155,000. That
commenter asserted that safe harbor
claims are more likely to be dismissed
on a motion to dismiss than the
rebuttable presumption.
An industry commenter and other
interested parties argued that the
estimated costs to creditors associated
with litigation and penalties for an
ability-to-repay violation could be
substantial and provided illustrations of
costs under the proposal, noting
potential cost estimates of the possible
statutory damages and attorney’s fees.
For example, the total estimated costs
and damages ranged between
approximately $70,000 and $110,000
depending on various assumptions,
such as the interest rate on a loan or
whether the presumption of compliance
is conclusive or rebuttable.
Industry commenters also generally
argued that a safe harbor would promote
access to credit because creditors would
be more willing to extend credit where
they receive protections under the
statutory scheme. One industry trade
association commenter cited the 2008
HOEPA Final Rule, which provided a
rebuttable presumption of compliance
with the requirement to consider a
consumer’s repayment ability upon
meeting certain criteria, as causing a
significant drop in higher-priced
mortgage loan originations, and
suggested that access to general
mortgage credit would be similarly
restricted if the final rule adopts a
rebuttable presumption for the market
as a whole. A large bank commenter
similarly noted the lack of lending in
the higher-priced mortgage space since
the 2008 HOEPA Final Rule took effect.
In addition to the liquidity constraints
for non-qualified mortgages,
commenters argued that the liability and
damages from a potential ability-torepay TILA violation would be a
disincentive for a majority of creditors
to make non-qualified mortgage loans.
Further, some commenters suggested
that creditors could face reputational
risk from making non-qualified
mortgage loans because consumers
would view them as ‘‘inferior’’ to
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
qualified mortgages. Other commenters
argued that reducing the protections
afforded to qualified mortgages could
cause creditors to act more
conservatively and restrict credit or
result in the denial of credit at a higher
rate and increase the cost of credit.
Many commenters argued that the most
serious effects and impacts on the
availability and cost of credit would be
for minority, low- to moderate-income,
and first-time borrowers. Therefore,
industry commenters believed that a
bright-line safe harbor would provide
the strongest incentive for creditors to
provide sustainable mortgage credit to
the widest array of qualified consumers.
Furthermore, one industry trade
association commenter argued that not
providing strong incentives for creditors
would diminish the possibility of
recovery of the housing market and the
nation’s economy.
Industry commenters also expressed
concerns regarding secondary market
considerations and assignee liability.
Commenters urged the Bureau to
consider commercial litigation costs
associated with the contractually
required repurchase (‘‘put-back’’) of
loans sold on the secondary market
where there is litigation over those
loans, as well as the risk of extended
foreclosure timelines because of ongoing
ability-to-repay litigation. Industry
commenters asserted that a safe harbor
is critical to promote saleability of loans
in the secondary market. In particular,
they stated that clarity and certainty
provided by a safe harbor would
promote efficiencies in the secondary
market because investors in securitized
residential mortgage loans (mortgage
backed securities, or MBS) could be
more certain that they are not
purchasing compliance risk along with
their investments. Commenters asserted
that without a safe harbor, the resulting
uncertainty would eliminate the
efficiencies provided by secondary sale
or securitization of loans. By extension,
commenters claimed that the cost of
borrowing for consumers would
ultimately increase. Large bank
commenters stated that although they
might originate non-qualified mortgage
loans, the number would be relatively
small and held in portfolio because they
believe it is unlikely that non-qualified
mortgage loans will be saleable in the
secondary market. Generally, industry
commenters asserted that creditors,
regardless of size, would be unwilling to
risk exposure outside the qualified
mortgage space. One large bank
commenter stated that the 2008 HOEPA
Final Rule did not create a defense to
foreclosure against assignees for the life
PO 00000
Frm 00103
Fmt 4701
Sfmt 4700
6509
of the loan, as does the Dodd-Frank
Act’s ability-to-repay provisions.
Accordingly, industry commenters
strongly supported broad coverage of
qualified mortgages, as noted above.
Commenters asserted that the
secondary market will demand a ‘‘safe
harbor’’ for quality assurance and risk
avoidance. If the regulatory framework
does not provide a safe harbor,
commenters asserted that investors
would require creditors to agree to
additional, strict representations and
warranties when assigning loans.
Contracts between loan originators and
secondary market purchasers often
require originators to repurchase loans
should a loan perform poorly, and these
commenters expect that future contracts
will include provisions related to the
ability-to-repay rule. Commenters assert
that the risks and costs associated with
additional potential put-backs to the
creditor would increase liability and
risk to creditors, which would
ultimately increase the cost of credit to
consumers. Furthermore, commenters
contended that if the rule is too onerous
in its application to the secondary
market, then the secondary market
participants may purchase fewer loans
or increase pricing to account for the
additional risk, such as is now the case
for high-cost mortgages.
Commenters noted that the risks
associated with assignee liability are
heightened by any vagueness in
standards in the rule. One secondary
market purchaser commenter argued
that a rebuttable presumption would
present challenges because purchasers
(or assignees) are not part of the
origination process. It is not feasible for
purchasers to evaluate all of the
considerations that went into an
underwriting decision, so they must rely
on the creditor’s representations that the
loan was originated in compliance with
applicable laws and the purchaser’s
requirements. However, assignees may
have to defend a creditor’s underwriting
decision at any time during the life of
the loan because there is no statute of
limitations on raising the failure to
make an ability-to-repay determination
as a defense to foreclosure. The
commenters argued that defending these
cases would be difficult and costly, and
that such burdens would be reduced by
safe harbor protections.
Comments in favor of rebuttable
presumption of compliance. Consumer
group commenters generally urged the
Bureau to adopt a rebuttable
presumption for qualified mortgages.
Commenters argued that Congress
intended a rebuttable presumption, not
a safe harbor. In particular, commenters
contended that the Dodd-Frank Act’s
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6510
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
legislative history and statutory text
strongly support a rebuttable
presumption. Commenters noted that
the statute is designed to strike a fair
balance between market incentives and
market discipline, as well as a balance
between consumers’ legal rights and
excessive exposure to litigation risk for
creditors. Commenters asserted that the
purpose of the qualified mortgage
designation is to foster sustainable
lending products and practices built
upon sound product design and sensible
underwriting. To that end, a rebuttable
presumption would accomplish the goal
of encouraging creditors to originate
loans that meet the qualified mortgage
definition while assuring consumers of
significantly greater protection from
abusive or ineffective underwriting than
if a safe harbor were adopted. Consumer
group commenters contended that
qualified mortgages can earn and
deserve the trust of both consumers and
investors only if they carry the
assurance that they are soundly
designed and properly underwritten.
Many consumer group commenters
asserted that a rebuttable presumption
would provide better protections for
consumers as well as improving
safeguards against widespread risky
lending while helping ensure that there
would be no shortcuts on common
sense underwriting. They argued that a
legal safe harbor could invite abusive
lending because consumers will have no
legal recourse. Several commenters also
asserted that no qualified mortgage
definition could cover all contingencies
in which such abuses could occur.
Some commenters argued that a legal
safe harbor would leave consumers
unprotected against abuses, such as
those associated with simultaneous
liens or from inadequate consideration
of employment and income. An
association of State bank regulators
favored a rebuttable presumption
because, although a rebuttable
presumption provides less legal
protection than a safe harbor, a
rebuttable presumption encourages
institutions to consider repayment
factors that are part of a sound
underwriting process. That commenter
contended that a creditor should not be
granted blanket protection from a
foreclosure defense of an ability-torepay violation if the creditor failed to
consider and verify such crucial
information as a consumer’s
employment status and credit history,
for example. On this point, the
rebuttable presumption proposed by the
Board would require creditors to make
individualized determinations that the
consumer has the ability to repay the
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
loan based on all of the underwriting
factors listed in the general ability-torepay standard.
Consumer group commenters
observed that a rebuttable presumption
would better ensure that creditors
actually consider a consumer’s ability to
repay the loan. Consumer group
commenters also asserted that the goals
of safe, sound, sustainable mortgage
lending and a balanced system of
accountability are best served by a
rebuttable presumption because
consumers should be able to put
evidence before a court that the
creditor’s consideration and verification
of the consumer’s ability to repay the
loan was unreasonable or in bad faith.
To that end, a rebuttable presumption
would allow the consumer to assert that,
despite complying with the criteria for
a qualified mortgage and the ability-torepay standard, the creditor did not
make a reasonable and good faith
determination of the consumer’s ability
to repay the loan. Without this
accountability, commenters argued that
the Dodd-Frank Act’s effectiveness
would be undermined.
Ultimately, consumer group
commenters believed that a rebuttable
presumption would not exacerbate
current issues with credit access and
availability, but would instead allow
room for honest, efficient competition
and affordable credit. Consumer group
commenters generally contended that
the fear of litigation and estimated costs
and risks associated with ability-torepay violations are overstated and
based on misunderstanding of the extent
of exposure to TILA liability. Consumer
group commenters and some ex parte
communications asserted that the
potential incidence of litigation is
relatively small, and therefore liability
cost and risk are minimal for any given
mortgage creditor. For example,
consumer group commenters asserted
that there are significant practical
limitations to consumers bringing an
ability-to-repay claim, suggesting that
few distressed homeowners would be
able to obtain legal representation often
necessary to mount a successful rebuttal
in litigation. Consumer groups provided
percentages of borrowers in foreclosure
who are represented by lawyers, noting
the difficulty of bringing a TILA
violation claim, and addressed estimates
of litigation costs, such as attorneys’
fees. Consumer groups provided
estimates of the number of cases in
foreclosure and the percentage of cases
that involve TILA claims, such as a
claim of rescission.
Furthermore, consumer group
commenters argued that the three-year
cap on enhanced damages (equal to the
PO 00000
Frm 00104
Fmt 4701
Sfmt 4700
sum if all finance charges and fees paid
by the consumer within three years of
consummation) for violation of the
ability-to-repay requirements limits
litigation risk significantly. Commenters
contended that, as a general rule, a court
is more likely to find that the ability-torepay determination at consummation
was not reasonable and in good faith the
earlier in the process a default occurs,
and at that point the amount of interest
paid by a consumer (a component of
enhanced damages) will be relatively
small. Commenters argued that the
longer it takes a consumer to default, the
harder the burden it will be for the
consumer to show that the default was
reasonably predictable at consummation
and was caused by improper
underwriting rather than a subsequent
income or expense shock; moreover,
even if the consumer can surmount that
burden, the amount of damages is still
capped at three years’ worth of paid
interest. In addition, consumer group
commenters contended that the
penalties to which creditors could be
subject on a finding of failure to meet
the ability-to-repay requirements would
not be so injurious or even so likely to
be applied in all but the most egregious
situations as to impose any meaningful
risk upon creditors.
Moreover, many consumer group
commenters observed that creditors that
comply with the rules and ensure that
their loan originators are using sound,
well documented and verified
underwriting will be adequately
protected by a rebuttable presumption.
Final Rule
As described above, the presumption
afforded to qualified mortgages in the
final rule balances consumers’ ability to
invoke the protections of the DoddFrank Act scheme with the need to
create sufficient certainty to promote
access to credit in all parts of the
market. Specifically, the final rule
provides a safe harbor with the abilityto-repay requirements for loans that
meet the qualified mortgage criteria and
pose the least risk, while providing a
rebuttable presumption for ‘‘higherpriced’’ mortgage loans, defined as
having an APR that exceeds APOR by
1.5 percentage points for first liens and
3.5 percentage points for second
liens.141 The final rule also specifically
defines the grounds on which the
presumption accorded to more
expensive qualified mortgages can be
rebutted. In issuing this final rule, the
141 For the reasons discussed above in the sectionby-section analysis of § 1026.43(b)(4), the Bureau
does not adopt a separate threshold for jumbo loans
in the higher-priced covered transaction definition
for purposes of § 1026.43(e)(1).
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
Bureau has drawn on the experiences
from the current ability-to-repay
provisions that apply to higher-priced
mortgages, described above. Based on
the difference in historical performance
levels between prime and subprime
loans, the Bureau believes that this
approach will provide significant
certainty to creditors while preserving
consumer remedies and creating strong
incentives for more responsible lending
in the part of the market in which the
most abuses occurred prior to the
financial crisis.
In issuing this final rule, the Bureau
carefully considered the comments
received and the interpretive and policy
considerations for providing qualified
mortgages either a safe harbor or
rebuttable presumption of compliance
with the repayment ability
requirements. For the reasons set forth
by the Board and discussed above, the
Bureau finds that the statutory language
is ambiguous and does not mandate a
particular approach. In adopting the
final rule, the Bureau accordingly
focused on which interpretation would
best promote the various policy goals of
the statute, taking into account the
Bureau’s authority, among other things,
to make adjustments and exceptions
necessary or proper to effectuate the
purposes of TILA, as amended by the
Dodd-Frank Act.
Discouraging unsafe underwriting. As
described in part II above, the ability-torepay provisions of the Dodd-Frank Act
were codified in response to lax lending
terms and practices in the mid-2000’s,
which led to increased foreclosures,
particularly for subprime borrowers.
The statutory underwriting
requirements for a qualified mortgage—
for example, the requirement that loans
be underwritten on a fully amortized
basis using the maximum interest rate
during the first five years and not a
teaser rate, and the requirement to
consider and verify a consumer’s
income or assets—will help prevent a
return to such lax lending. So, too, will
the requirement that a consumer’s debtto-income ratio (including mortgagerelated obligations and obligations on
simultaneous second liens) not exceed
43 percent, as discussed further below.
Notwithstanding these requirements,
however, the Bureau recognizes that it
is not possible to define by a bright-line
rule a class of mortgages as to which it
will always be the case that each
individual consumer has the ability to
repay his or her loan. That is especially
true with respect to subprime loans. In
many cases, the pricing of a subprime
loan is the result of loan level price
adjustments established by the
secondary market and calibrated to
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
default risk. Furthermore, the subprime
segment of the market is comprised of
borrowers who tend to be less
sophisticated and who have fewer
options available to them, and thus are
more susceptible to being victimized by
predatory lending practices. The
historical performance of subprime
loans bears all this out.142 The Bureau
concludes, therefore, that for subprime
loans there is reason to impose
heightened standards to protect
consumers and otherwise promote the
policies of the statute. Accordingly, the
Bureau believes that it is important to
afford consumers the opportunity to
rebut the presumption of compliance
that applies to qualified mortgages with
regard to higher-priced mortgages by
showing that, in fact, the creditor did
not have a good faith and reasonable
belief in the consumer’s reasonable
ability to repay the loan at the time the
loan was made.
These same considerations lead to the
opposite result with respect to prime
loans which satisfy the requirements for
a qualified mortgage. The fact that a
consumer receives a prime rate is itself
indicative of the absence of any indicia
that would warrant a loan level price
adjustment, and thus is suggestive of the
consumer’s ability to repay. Historically,
prime rate loans have performed
significantly better than subprime rate
loans and the prime segment of the
market has been subject to fewer
abuses.143 Moreover, requiring creditors
to prove that they have satisfied the
qualified mortgage requirements in
order to invoke the presumption of
compliance will itself ensure that the
loans in question do not contain certain
risky features and are underwritten with
careful attention to consumers’ debt-toincome ratios. Accordingly, the Bureau
believes that where a loan is not a
higher-priced covered transaction and
meets both the product and
underwriting requirements for a
qualified mortgage, there are sufficient
grounds for concluding that the creditor
had a reasonable and good faith belief
in the consumer’s ability to repay to
warrant a safe harbor.
This approach carefully balances the
likelihood of consumers needing redress
142 For example, data from the MBA delinquency
survey show that serious delinquency rates for
conventional prime mortgages averaged roughly 2
percent from 1998 through 2011 and peaked at 7
percent following the recent housing collapse. In
contrast, the serious delinquency rates averaged 13
percent over the same period. In late 2009, it
peaked at over 30 percent.’’ Mortgage Bankers
Association, National Delinquency Survey. For a
discussion of the historical performance of
subprime loans, see 2008 HOEPA Final Rule, 73 FR
44522, 44524–26 (July 30, 2008).
143 See id.
PO 00000
Frm 00105
Fmt 4701
Sfmt 4700
6511
with the potential benefits to both
consumers and industry of reducing
uncertainty concerning the new regime.
To the extent that the rule reduces
litigation risk concerns for prime
qualified mortgages, consumers in the
prime market may benefit from
enhanced competition (although, as
discussed below, the Bureau believes
litigation costs will be small and
manageable for almost all creditors). In
particular, the Bureau believes that
larger creditors may expand
correspondent lending relationships
with smaller banks with respect to
prime qualified mortgages. Larger
creditors may also relax currently
restrictive credit overlays (creditorcreated underwriting requirements that
go beyond GSE or agency guidelines),
thereby increasing access to credit.
Scope of rebuttable presumption. In
light of the heightened protections for
subprime loans, the final rule also
carefully defines the grounds on which
the presumption that applies to higherpriced qualified mortgages can be
rebutted. The Bureau believes that this
feature is critical to ensuring that
creditors have sufficient incentives to
provide higher-priced qualified
mortgages to consumers. Given the
historical record of abuses in the
subprime market, the Bureau believes it
is particularly important to ensure that
consumers are able to access qualified
mortgages in light of their product
feature restrictions and other
protections.
Specifically, the final rule defines the
standard by which a consumer may
rebut the presumption of compliance
afforded to higher-priced qualified
mortgages, and provides an example of
how a consumer may rebut the
presumption. As described below, the
final rule provides that consumers may
rebut the presumption with regard to a
higher-priced covered transaction by
showing that, at the time the loan was
originated, the consumer’s income and
debt obligations left insufficient residual
income or assets to meet living
expenses. The analysis would consider
the consumer’s monthly payments on
the loan, mortgage-related obligations,
and any simultaneous loans of which
the creditor was aware, as well as any
recurring, material living expenses of
which the creditor was aware.
The Bureau believes the rebuttal
standard in the final rule appropriately
balances the consumer protection and
access to credit considerations
described above. This standard is
consistent with the standard in the 2008
HOEPA Final Rule, and is specified as
the exclusive means of rebutting the
presumption. Commentary to the
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6512
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
existing rule provides as an example of
how its presumption may be rebutted
that the consumer could show ‘‘a very
high debt-to-income ratio and a very
limited residual income.’’ Under the
definition of qualified mortgage that the
Bureau is adopting, however, the
creditor generally is not entitled to a
presumption if the debt-to-income ratio
is ‘‘very high.’’ As a result, the Bureau
is focusing the standard for rebutting the
presumption in the final rule on
whether, despite meeting a debt-toincome test, the consumer nonetheless
had insufficient residual income to
cover the consumer’s living expenses.
The Bureau believes this standard is
sufficiently broad to provide consumers
a reasonable opportunity to demonstrate
that the creditor did not have a good
faith and reasonable belief in the
consumer’s repayment ability, despite
meeting the prerequisites of a qualified
mortgage. At the same time, the Bureau
believes the rebuttal standard in the
final rule is sufficiently clear to provide
certainty to creditors, investors, and
regulators about the standards by which
the presumption can successfully be
challenged in cases where creditors
have correctly followed the qualified
mortgage requirements.
Several commenters raised concerns
about the use of oral evidence to
impeach the information contained in
the loan file. For example, a consumer
may seek to show that a loan does not
meet the requirements of a qualified
mortgage by relying on information
provided orally to the creditor or loan
originator to establish that the debt-toincome ratio was miscalculated.
Alternatively, a consumer may seek to
show that the creditor should have
known, based upon facts disclosed
orally to the creditor or loan originator,
that the consumer had insufficient
residual income to be able to afford the
mortgage. The final rule does not
preclude the use of such oral evidence
in ability-to-repay cases. The Bureau
believes that courts will determine the
weight to be given to such evidence on
a case-by-case basis. To exclude such
evidence across the board would invite
abuses in which consumers could be
misled or coerced by an unscrupulous
loan originator into keeping certain facts
out of the written record.
Litigation risks and access to credit. In
light of the continuing and widespread
concern about litigation risk under the
Dodd-Frank Act regime, the Bureau, in
the course of developing the framework
described above, carefully analyzed the
impacts of potential litigation on nonqualified mortgages, any qualified
mortgages with a rebuttable
presumption, and any qualified
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
mortgages with a safe harbor. The
Bureau also considered secondary
market dynamics, including the
potential impacts on creditors from
loans that the secondary market ‘‘puts
back’’ on the originators because of
ability-to-repay litigation. The Bureau’s
analysis is described in detail in the
section 1022(b)(2) analysis under part
VII; the results of that analysis helped
to shape the calibrated approach that
the Bureau is adopting in the final rule
and suggest that the mortgage market
will be able to absorb litigation risks
under the rule without jeopardizing
access to credit.
Specifically, as discussed in the
section 1022(b)(2) analysis under part
VII, the Bureau believes that even
without the benefit of any presumption
of compliance, the actual increase in
costs from the litigation risk associated
with ability-to-pay requirements would
be quite modest. This is a function of
the relatively small number of potential
claims, the relatively small size of those
claims, and the relatively low likelihood
of claims being filed and successfully
prosecuted. The Bureau notes that
litigation likely would arise only when
a consumer in fact was unable to repay
the loan (i.e. was seriously delinquent or
had defaulted), and even then only if
the consumer elects to assert a claim
and is able to secure a lawyer to provide
representation; the consumer can
prevail only upon proving that the
creditor lacked a reasonable and good
faith belief in the consumer’s ability to
repay at consummation or failed to
consider the statutory factors in arriving
at that belief.
The rebuttable presumption of
compliance being afforded to qualified
mortgages that are higher-priced reduces
the litigation risk, and hence the
potential transaction costs, still further.
As described above, the Bureau has
crafted the presumption of compliance
being afforded to subprime loans so that
it is not materially different than the
presumption that exists today under the
2008 HOEPA Final Rule. Indeed, the
Bureau is defining with more
particularity the requirements for
rebutting this presumption. No evidence
has been presented to the Bureau to
suggest that the presumption under the
2008 HOEPA Final Rule has led to
significant litigation or to any
distortions in the market for higherpriced mortgages. As noted above,
commenters noted the lack of lending in
the higher-priced mortgage space since
the 2008 HOEPA Final Rule took effect,
but the Bureau is unaware of evidence
suggesting the low lending levels are the
result of the Board’s rule, as compared
to the general state of the economy,
PO 00000
Frm 00106
Fmt 4701
Sfmt 4700
uncertainty over multiple regulatory
and capital initiatives, and other factors.
Relative to the Dodd-Frank Act, the
Bureau notes that the existing regime
already provides for attorneys’ fees and
the same remedies against creditors in
affirmative cases, and actually provides
for greater remedies against creditors in
foreclosure defense situations.
Nevertheless, the incidence of claims
under the existing ability-to-repay rules
for high-cost and higher-priced loans
and analogous State laws is relatively
low. The Bureau’s analysis shows that
cost estimates remain modest for both
loans that are not qualified mortgages
and loans that are qualified mortgages
with a rebuttable presumption of
compliance, and even more so for
qualified mortgages with a safe harbor.
The Bureau recognizes, of course, that
under the Dodd-Frank Act ability-torepay provisions, a consumer can assert
a claim against an assignee as a ‘‘defense
by recoupment or set off’’ in a
foreclosure action. There is no time
limit on the use of this defense, but the
consumer cannot recover as special
statutory damages more than three years
of finance charges and fees. To the
extent this leads to increased litigation
potential with respect to qualified
mortgages as to which the presumption
of compliance is rebuttable, this may
cause creditors to take greater care when
underwriting these riskier products to
avoid potential put-back risk from
investors. The Bureau believes that this
is precisely what Congress intended—to
create incentives for creditors to engage
in sound underwriting and for
secondary market investors to monitor
the quality of the loans they buy—and
that these incentives are particularly
warranted with respect to the subprime
market.
At the same time, the Bureau does not
believe that the potential assignee
liability with respect to higher-priced
qualified mortgages will preclude such
loans from being sold on the secondary
market. Specifically, in analyzing
impacts on the secondary market the
Bureau notes that investors are
purchasing higher-priced mortgage
loans that are subject to the existing
ability-to-repay requirements and
presumption of compliance and that the
GSEs have already incorporated into
their contracts with creditors a
representation and warranty designed to
provide investor protection in the event
of an ability-to-repay violation. The
Bureau agrees with industry and
secondary market participant
commenters that investors will likely
require creditors to agree to similar
representations and warranties when
assigning or selling loans under the new
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
rule because secondary market
participants will not want to be held
accountable for ability-to-repay
compliance which investors will view
as the responsibility of the creditor. For
prime loans, this may represent an
incremental risk of put-back to
creditors, given that such loans are not
subject to the current regime, but those
loans are being provided a safe harbor
if they are qualified mortgages. For
subprime (higher risk) loans it is not
clear that there is any incremental risk
beyond that which exists today under
the Board’s rule. There are also some
administrative costs associated with
such ‘‘put-backs’’ (e.g., costs associated
with the process of putting back loans
from the issuer or insurer or servicer on
behalf of the securitization trust to the
creditor as a result of the ability-torepay claims), but those costs are
unlikely to be material for qualified
mortgages subject to the rebuttable
presumption and will not affect either
the pricing of the loans or the
availability of a secondary market for
these loans.
In sum, the Bureau has crafted the
calibrated presumptions to ensure that
these litigation and secondary market
impacts do not jeopardize access to
credit. With regard to subprime loans,
there is some possibility that creditors
who are less sophisticated or less able
to bear any litigation risk may elect to
refrain from engaging in subprime
lending, but as discussed below, the
Bureau believes that there are sufficient
creditors with the capabilities of making
responsible subprime loans so as to
avoid significant adverse impact on
credit availability in that market.
Specific provisions. For the reasons
discussed above, in § 1026.43(e)(1), the
Bureau is providing a safe harbor and
rebuttable presumption with the abilityto-repay requirements for loans that
meet the definition of a qualified
mortgage. As explained in comment
43(e)(1)–1, § 1026.43(c) requires a
creditor to make a reasonable and good
faith determination at or before
consummation that a consumer will be
able to repay a covered transaction.
Section 1026.43(e)(1)(i) and (ii) provide
a safe harbor and rebuttable
presumption of compliance,
respectively, with the repayment ability
requirements of § 1026.43(c) for
creditors and assignees of covered
transactions that satisfy the
requirements of a qualified mortgage
under § 1026.43(e)(2), (e)(4), or (f).
Section 1026.43(e)(1)(i) provides a
safe harbor for qualified mortgages that
are not higher-priced covered
transactions, by stating that a creditor or
assignee of a qualified mortgage as
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
defined in § 1026.43(e)(2), (e)(4), or (f)
that is not a higher-priced covered
transaction, as defined in
§ 1026.43(b)(4), complies with the
repayment ability requirements of
§ 1026.43(c). Comment 43(e)(1)(i)–1
clarifies that, to qualify for the safe
harbor in § 1026.43(e)(1)(i), a covered
transaction must meet the requirements
of a qualified mortgage in
§ 1026.43(e)(2), (e)(4), or (f) and must
not be a higher-priced covered
transaction, as defined in
§ 1026.43(b)(4).
For qualified mortgages that are
higher-priced covered transactions,
§ 1026.43(e)(1)(ii)(A) provides a
rebuttable presumption of compliance
with the repayment ability
requirements. That section provides that
a creditor or assignee of a qualified
mortgage as defined in § 1026.43(e)(2),
(e)(4), or (f) that is a higher-priced
covered transaction, as defined
§ 1026.43(b)(4), is presumed to comply
with the repayment ability requirements
of § 1026.43(c). Section
1026.43(e)(1)(ii)(B) provides that to
rebut the presumption of compliance, it
must be proven that, despite meeting
the requirements of § 1026.43(e)(2),
(e)(4), or (f), the creditor did not make
a reasonable and good faith
determination of the consumer’s
repayment ability at the time of
consummation, by showing that the
consumer’s income, debt obligations,
alimony, child support, and the
consumer’s monthly payment
(including mortgage-related obligations)
on the covered transaction and on any
simultaneous loans of which the
creditor was aware at consummation
would leave the consumer with
insufficient residual income or assets
other than the value of the dwelling
(including any real property attached to
the dwelling) that secures the loan with
which to meet living expenses,
including any recurring and material
non-debt obligations of which the
creditor was aware at the time of
consummation.
Comment 43(e)(1)(ii)–1 clarifies that a
creditor or assignee of a qualified
mortgage under § 1026.43(e)(2), (e)(4), or
(f) that is a higher-priced covered
transaction is presumed to comply with
the repayment ability requirements of
§ 1026.43(c). To rebut the presumption,
it must be proven that, despite meeting
the standards for a qualified mortgage
(including either the debt-to-income
standard in § 1026.43(e)(2)(vi) or the
standards of one of the entities specified
in § 1026.43(e)(4)(ii)), the creditor did
not have a reasonable and good faith
belief in the consumer’s repayment
ability. To rebut the presumption, it
PO 00000
Frm 00107
Fmt 4701
Sfmt 4700
6513
must be proven that, despite meeting
the standards for a qualified mortgage
(including either the debt-to-income
standard in § 1026.43(e)(2)(vi) or the
standards of one of the entities specified
in § 1026.43(e)(4)(ii)), the creditor did
not have a reasonable and good faith
belief in the consumer’s repayment
ability. Specifically, it must be proven
that, at the time of consummation, based
on the information available to the
creditor, the consumer’s income, debt
obligations, alimony, child support, and
the consumer’s monthly payment
(including mortgage-related obligations)
on the covered transaction and on any
simultaneous loans of which the
creditor was aware at consummation
would leave the consumer with
insufficient residual income or assets
other than the value of the dwelling
(including any real property attached to
the dwelling) that secures the loan with
which to meet living expenses,
including any recurring and material
non-debt obligations of which the
creditor was aware at the time of
consummation, and that the creditor
thereby did not make a reasonable and
good faith determination of the
consumer’s repayment ability. The
comment also provides, by way of
example, that a consumer may rebut the
presumption with evidence
demonstrating that the consumer’s
residual income was insufficient to meet
living expenses, such as food, clothing,
gasoline, and health care, including the
payment of recurring medical expenses
of which the creditor was aware at the
time of consummation, and after taking
into account the consumer’s assets other
than the value of the dwelling securing
the loan, such as a savings account. In
addition, the longer the period of time
that the consumer has demonstrated
actual ability to repay the loan by
making timely payments, without
modification or accommodation, after
consummation or, for an adjustable-rate
mortgage, after recast, the less likely the
consumer will be able to rebut the
presumption based on insufficient
residual income and prove that, at the
time the loan was made, the creditor
failed to make a reasonable and good
faith determination that the consumer
had the reasonable ability to repay the
loan.
As noted above, the Bureau believes
that the statutory language regarding
whether qualified mortgages receive
either a safe harbor or rebuttable
presumption of compliance is
ambiguous, and does not plainly
mandate one approach over the other.
Furthermore, the Bureau has the
authority to tailor the strength of the
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6514
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
presumption of compliance based on
the characteristics associated with the
different types of qualified mortgages.
Accordingly, the Bureau interprets TILA
section 129C(b)(1) to create a rebuttable
presumption, but exercises its
adjustment authority under TILA
section 105(a) to limit the ability to
rebut the presumption in two ways,
because an open-ended rebuttable
presumption would unduly restrict
access to credit without a corresponding
benefit to consumers.
First, the Bureau uses its adjustment
authority under section 105(a) to limit
the ability to rebut the presumption to
insufficient residual income or assets
other than the dwelling that secures the
transaction because the Bureau believes
exercise of this authority is necessary
and proper to facilitate compliance with
and to effectuate a purpose of section
129 and TILA. The Bureau believes this
approach, while preserving consumer
remedies, provides clear standards to
creditors and courts regarding the basis
upon which the presumption of
compliance that applies to higher-priced
covered transactions may be rebutted,
thereby enhancing creditor certainty
and encouraging lending in the higherpriced mortgage market. The Bureau
finds this approach is necessary and
proper to ensure that consumers are
offered and receive residential mortgage
loans on terms that reasonably reflect
their ability to repay the loans, a
purpose of section 129 and TILA.
Second, with respect to prime loans
(loans with an APR that does not exceed
APOR by 1.5 percentage points for first
liens and 3.5 percentage points for
second liens), the Bureau also uses its
adjustment authority under TILA
section 105(a) to provide a conclusive
presumption (e.g., a safe harbor). Under
the conclusive presumption, if a prime
loan satisfies the criteria for being a
qualified mortgage, the loan will be
deemed to satisfy section 129C’s abilityto-repay criteria and will not be subject
to rebuttal based on residual income or
otherwise. The Bureau finds that this
approach balances the competing
consumer protection and access to
credit considerations described above.
As discussed above, the Bureau will not
extend the safe harbor to higher-priced
loans because that approach would
provide insufficient protection to
consumers in loans with higher interest
rates who may require greater protection
than consumers in prime rate loans. On
the other hand, an approach that
provided a rebuttable presumption of
compliance for all qualified mortgages
(including prime loans which
historically have a low default rate)
could lead creditors to make fewer
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
mortgage loans to certain consumers,
which could restrict access to credit (or
unduly raise the cost of credit) without
a corresponding benefit to consumers.
The Bureau finds that this adjustment
providing a safe harbor for prime loans
is necessary and proper to facilitate
compliance with and to effectuate the
purposes of section 129C and TILA,
including to assure that consumers are
offered and receive residential mortgage
loans on terms that reasonably reflect
their ability to repay the loans.144
43(e)(2) Qualified Mortgage Defined—
General
As discussed above, TILA section
129C(b)(2) defines the requirements for
qualified mortgages to limit certain loan
terms and features. The statute generally
prohibits a qualified mortgage from
permitting an increase of the principal
balance on the loan (negative
amortization), interest-only payments,
balloon payments (except for certain
balloon-payment qualified mortgages
pursuant to TILA section 129C(b)(2)(E)),
a term greater than 30 years, or points
and fees that exceed a specified
threshold.
In addition, the statute incorporates
limited underwriting criteria that
overlap with some elements of the
general ability-to-repay standard.
Specifically, the statutory definition of
qualified mortgage requires the creditor
to (1) verify and document the income
and financial resources relied upon to
qualify the obligors on the loan; and (2)
underwrite the loan based on a fully
amortizing payment schedule and the
maximum interest rate during the first
five years, taking into account all
applicable taxes, insurance, and
assessments. As noted above, these
requirements appear to be focused
primarily on ensuring that certain
mortgage products—no-documentation
loans and loans underwritten based
only on a consumer’s ability to make
payments during short introductory
periods with low ‘‘teaser’’ interest
rates—are not eligible to be qualified
mortgages.
In addition to these limited
underwriting criteria, the statute also
authorizes the Bureau to establish
144 These adjustments are consistent with the
Bureau’s authority under TILA section
129C(b)(3)(B)(i) to prescribe regulations that revise,
add to, or subtract from the criteria that define a
qualified mortgage upon a finding that such
regulations are necessary or proper to ensure that
responsible, affordable mortgage credit remains
available to consumers in a manner consistent with
the purposes of this section, necessary and
appropriate to effectuate the purposes of TILA
section 129B and section 129C, to prevent
circumvention or evasion thereof, or to facilitate
compliance with such sections.
PO 00000
Frm 00108
Fmt 4701
Sfmt 4700
additional criteria relating to ratios of
total monthly debt to monthly income
or alternative measures of ability to pay
regular expenses after payment of total
monthly debt, taking into account the
income levels of the consumer and other
factors the Bureau determines relevant
and consistent with the purposes
described in TILA section
129C(b)(3)(B)(i). To the extent the
Bureau incorporates a debt-to-income or
residual income requirement into the
qualified mortgage definition, several
additional elements of the general
ability-to-repay standard would
effectively also be incorporated into the
qualified mortgage definition, since
debt-to-income and residual income
analyses by their nature require
assessment of income, debt (including
simultaneous loans), and mortgagerelated obligations. As discussed above,
the Board proposed two alternatives to
implement the qualified mortgage
elements. Both alternatives under the
Board’s proposal would have
incorporated the statutory elements of a
qualified mortgage (e.g., product feature
and loan term restrictions, limits on
points and fees, payment calculation
requirements, and the requirement to
consider and verify the consumer’s
income or assets). However, Alternative
2 also included the additional factors in
the general ability-to-repay standard.
Comments
Qualified mortgage definition. As an
initial matter, the majority of
commenters generally favored defining
qualified mortgages to reach a broad
portion of the overall market and to
provide clarity with regard to the
required elements. Commenters agreed
that clarity promotes the benefits of
creditors lending with confidence and
consumers receiving loans that comply
with the basic requirements of an
affordable loan. In addition,
commenters generally agreed that a
qualified mortgage should be broad,
encompassing the vast majority of the
existing mortgage market. Numerous
commenters indicated that creditors
believed that the difference between the
legal protections afforded (or risks
associated with) qualified mortgages
and non-qualified mortgages would
result in very little lending outside of
qualified mortgages. Commenters
asserted that a narrowly defined
qualified mortgage would leave loans
outside the legal protections of qualified
mortgages and would result in
constrained credit or increased cost of
credit.
As discussed in the section-by-section
analysis of § 1026.43(e)(1), commenters
did not necessarily support the two
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
alternatives specifically as proposed by
the Board, but suggested variations on
the definition of qualified mortgage that
contain some or all of the Board’s
proposed criteria, or additional criteria
not specifically included in either of the
Board’s proposed alternatives. For
example, as described below, a coalition
of industry and consumer advocates
suggested a tiered approach to defining
qualified mortgage, based primarily on
meeting a specific back-end debt-toincome requirement, with alternative
means of satisfying the qualified
mortgage definition (such as housing
debt-to-income, reserves, and residual
income) if the back-end debt-to-income
test is not satisfied. Similarly, one
industry commenter suggested using a
weighted approach to defining qualified
mortgage, which would weight some
underwriting factors more heavily than
others and permit a significant factor in
one area to compensate for a weak or
missing factor in another area.
Consumer group commenters and
some industry commenters generally
supported excluding from the definition
of qualified mortgage certain risky loan
features which result in ‘‘payment
shock,’’ such as negative amortization or
interest-only features. Consumer group
commenters also supported limiting
qualified mortgages to a 30-year term, as
required by statute. Consumer group
commenters and one industry trade
association strongly supported requiring
creditors to consider and verify the all
the ability-to-repay requirements. These
commenters contended that the abilityto-repay requirements represent prudent
mortgage underwriting techniques and
are essential to sustainable lending. To
that point, these commenters argued
that qualified mortgage loans should
represent the best underwritten and
most fully documented loans, which
would justify some form of protection
from future liability. In addition, several
consumer group commenters suggested
adding a further requirement that when
assessing the consumer’s income and
determining whether the consumer will
be able to meet the monthly payments,
a creditor must also take into account
other recurring but non-debt related
expenses. These commenters argued
that many consumers, and especially
low- and moderate-income consumers,
face significant monthly recurring
expenses, such as medical care or
prescriptions and child care expense
needed to enable the borrower or coborrower to work outside the home.
These commenters further argued that
even where the percentage of disposable
income in such situations seems
reasonable, the nominal amounts left to
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
low- and moderate-income consumers
may be insufficient to enable such
households to reasonably meet all their
obligations. While one consumer group
commenter specifically supported the
inclusion of a consumer’s credit history
as an appropriate factor for a creditor to
consider and verify when underwriting
a loan, several commenters argued that
the consumer’s credit history should be
not included in the ability-to-repay
requirements because, although credit
history may be relevant in prudent
underwriting, it involves a multitude of
factors that need to be taken into
consideration. In addition, one
association of State bank regulators also
favored consideration of the repayment
factors that are part of a sound
underwriting process.
As noted above, some industry
commenters also generally supported
including the underwriting
requirements as proposed in Alternative
2, with some adjustments, so long as the
resulting qualified mortgage was
entitled to a safe harbor. These
commenters stated that most creditors
today are already complying with the
full ability-to-repay underwriting
standards, and strong standards will
help them resist competitive forces to
lower underwriting standards in the
future. Other industry commenters
argued that the qualified mortgage
criteria should not exclude specific loan
products because the result will be that
such products will be unavailable in the
market.
Some commenters generally
supported aligning the definition of
qualified mortgage with the definition
proposed by several Federal agencies to
define ‘‘qualified residential mortgages’’
(QRM) for purposes of the risk retention
requirements in title IX of the DoddFrank Act. For example, one commenter
suggested that the required payment
calculation for qualified mortgages be
consistent with the QRM proposed
requirement that the payment
calculation be based on the maximum
rate in the first five years after the first
full payment required. An association of
reverse mortgage lenders requested that
a ‘‘qualified’’ reverse mortgage be
defined to ensure that the Federal
agencies finalizing the QRM rule are
able to make a proprietary reverse
mortgage a QRM, which would be
exempt from the risk retention
requirements. Lastly, numerous
consumer group commenters argued
that high-cost mortgages be excluded
from being a qualified mortgage.
Quantitative standards. Some
industry commenters supported
including quantitative standards for
such variables as debt-to-income ratios
PO 00000
Frm 00109
Fmt 4701
Sfmt 4700
6515
and credit score with compensating
factors in the qualified mortgage
definition. These commenters
contended that quantitative standards
provide certainty and would help
ensure creditworthy consumers have
access to qualified mortgage loans. One
consumer group commenter argued that,
without specific quantitative standards,
bank examiners and assignees would
have no benchmarks against which to
measure a creditor’s compliance or
safety and soundness. One industry
commenter favored quantitative
standards such as a maximum back-end
debt-to-income ratio because that would
provide sufficient certainty to creditors
and investors. One consumer group
commenter supported including
quantitative standards for the debt-toincome ratio because, without this,
every loan would be open to debate as
to whether the consumer had the ability
to repay at the time of loan
consummation.
As described further below, certain
commenters and interested parties
requested that the Bureau adopt a
specific debt-to-income ratio
requirement for qualified mortgages. For
example, some suggested that if a
consumer’s total debt-to-income ratio is
below a specified threshold, the
mortgage loan should satisfy the
qualified mortgage requirements,
assuming other relevant conditions are
met. In addition to a debt-to-income
requirement, some commenters and
interested parties suggested that the
Bureau should include within the
definition of a ‘‘qualified mortgage’’
loans with a debt-to-income ratio above
a certain threshold if the consumer has
a certain amount of assets, such as
money in a savings or similar account,
or a certain amount of residual income.
Some industry commenters advocated
against including quantitative standards
for such variables as debt-to-income
ratios and residual income. Those
commenters argued that underwriting a
loan involves weighing a variety of
factors, and creditors and investors
should be allowed to exercise discretion
and weigh risks for each individual
loan. To that point, one industry trade
group commenter argued that
community banks, for example,
generally have conservative
requirements for a consumer’s debt-toincome ratio, especially for loans that
are held in portfolio by the bank, and
consider many factors when
underwriting mortgage loans, such as
payment history, liquid reserves, and
other assets. Because several factors are
considered and evaluated in the
underwriting process, this commenter
asserted that community banks can be
E:\FR\FM\30JAR2.SGM
30JAR2
6516
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
flexible when underwriting mortgage
loans and provide arrangements for
certain consumers that fall outside of
the normal debt-to-income ratio for a
certain loan. This commenter contended
that strict quantitative standards would
inhibit community banks’ relationship
lending and ability to use their sound
judgment in the lending process. Some
commenters contended that requiring
specific quantitative standards could
restrict credit access and availability for
consumers.
Generally, industry commenters and
some consumer group commenters
believed compensating factors are
beneficial in underwriting and should
be permitted. These commenters
generally believe compensating factors
should be incorporated into the
qualified mortgage criteria, such as in
circumstances when a specified debt-toincome ratio threshold was exceeded. In
their view, lending is an individualized
decision and compensating factors can,
for example, mitigate a consumer’s high
debt-to-income ratio or low residual
income. One industry trade group
commenter argued that the inclusion of
compensating factors would allow for a
broader underwriting approach and
should include family history,
repayment history, potential income
growth, and inter-family transactions.
One association of State bank regulators
suggested that the rule provide guidance
on mitigating factors for creditors to
consider when operating outside of
standard parameters. For example,
creditors lending outside of typical
debt-to-income standards can rely upon
other assets or the fact that a consumer
has a high income. Other industry
commenters argued that the rule should
provide for enough flexibility to allow
for common-sense underwriting and
avoid rigid limits or formulas that
would exclude consumers on the basis
of one or a few underwriting factors.
Another commenter stated that the
rule should not set thresholds or limits
on repayment ability factors. Instead,
the rule should allow the creditor to
consider the required factors and be
held to a good faith standard. Such a
rule permits individualized
determinations to be made based on
each consumer, local markets, and the
risk tolerance of each creditor.
Final Rule
Section 1026.43(e)(2) of the final rule
contains the general qualified mortgage
definition. As set forth below, the final
rule defines qualified mortgages under
§ 1026.43(e)(2) as loans that satisfy all of
the qualified mortgage criteria required
by the statute (including underwriting
to the maximum interest rate during the
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
first five years of the loan and
consideration and verification of the
consumer’s income or assets), for which
the creditor considers and verifies the
consumer’s current debt obligations,
alimony, and child support, and that
have a total (‘‘back-end’’) monthly debtto-income ratio of no greater than 43
percent, following the standards for
‘‘debt’’ and ‘‘income’’ set forth in
appendix Q.
While the general definition of
qualified mortgage in § 1026.43(e)(2)
contains all of the statutory qualified
mortgage elements, it does not
separately incorporate all of the general
ability-to-repay underwriting
requirements that would have been part
of the qualified mortgage definition
under the Board’s proposed Alternative
2. In particular, the definition of
qualified mortgage in § 1026.43(e)(2)
does not specifically require
consideration of the consumer’s
employment status, monthly payment
on the covered transaction (other than
the requirement to underwrite the loan
to the maximum rate in the first five
years), monthly payment on any
simultaneous loans, or the consumer’s
credit history, which are part of the
general ability-to-repay analysis under
§ 1026.43(c)(2). Instead, most of these
requirements are incorporated into the
standards for determining ‘‘debt’’ and
‘‘income’’ pursuant to
§ 1026.43(e)(2)(vi)(A) and (B), to which
the creditor must look to determine if
the loan meets the 43 percent debt-toincome ratio threshold as required in
§ 1026.43(e)(2)(vi). In particular, that
calculation will require the creditor to
verify, among other things, the
consumer’s employment status (to
determine current or expected income)
and the monthly payment on the
covered transaction (including
mortgage-related obligations) and on
any simultaneous loans that the creditor
knows or has reason to know will be
made. In addition, although
consideration and verification of a
consumer’s credit history is not
specifically incorporated into the
qualified mortgage definition, creditors
must verify a consumer’s debt
obligations using reasonably reliable
third-party records, which may include
use of a credit report or records that
evidence nontraditional credit
references. See section-by-section
analysis of § 1026.43(e)(2)(v) and (c)(3).
The final rule adopts this approach
because the Bureau believes that the
statute is fundamentally about assuring
that the mortgage credit consumers
receive is affordable. Qualified
mortgages are intended to be mortgages
as to which it can be presumed that the
PO 00000
Frm 00110
Fmt 4701
Sfmt 4700
creditor made a reasonable
determination of the consumer’s ability
to repay. Such a presumption would not
be reasonable—indeed would be
imprudent—if a creditor made a
mortgage loan without considering and
verifying core aspects of the consumer’s
individual financial picture, such as
income or assets and debt. Incorporating
these ability-to-repay underwriting
requirements into the qualified
mortgage definition thus ensures that
creditors assess the consumer’s
repayment ability for a qualified
mortgage using robust and appropriate
underwriting procedures. The specific
requirements for a qualified mortgage
under § 1026.43(e)(2) are described
below.
The Bureau notes that the final rule
does not define a ‘‘qualified’’ reverse
mortgage. As described above, TILA
section 129C(a)(8) excludes reverse
mortgages from the repayment ability
requirements. See section-by-section
analysis of § 1026.43(a)(3)(i). However,
TILA section 129C(b)(2)(ix) provides
that the term ‘‘qualified mortgage’’ may
include a ‘‘residential mortgage loan’’
that is ‘‘a reverse mortgage which meets
the standards for a qualified mortgage,
as set by the Bureau in rules that are
consistent with the purposes of this
subsection.’’ The Board’s proposal did
not include reverse mortgages in the
definition of a ‘‘qualified mortgage.’’
Because reverse mortgages are exempt
from the ability-to-repay requirements,
the effects of defining a reverse
mortgage as a ‘‘qualified mortgage’’
would be, for example, to allow for
certain otherwise banned prepayment
penalties and permit reverse mortgages
to be QRMs under the Dodd-Frank Act’s
risk retention rules. The Bureau believes
that the first effect is contrary to the
purposes of the statute. With respect to
the QRM rulemaking, the Bureau will
continue to coordinate with the Federal
agencies finalizing the QRM rulemaking
to determine the appropriate treatment
of reverse mortgages.
43(e)(2)(i)
TILA section 129C(b)(2)(A)(i) states
that the regular periodic payments of a
qualified mortgage may not result in an
increase of the principal balance or
allow the consumer to defer repayment
of principal (except for certain balloonpayment loans made by creditors
operating predominantly in rural or
underserved areas, discussed below in
the section-by-section analysis of
§ 1026.43(f)). TILA section
129C(b)(2)(A)(ii) states that the terms of
a qualified mortgage may not include a
balloon payment (subject to an
exception for creditors operating
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
predominantly in rural or underserved
areas). The statute defines ‘‘balloon
payment’’ as ‘‘a scheduled payment that
is more than twice as large as the
average of earlier scheduled payments.’’
TILA section 129C(b)(2)(A)(ii).
The Board’s proposed § 226.43(e)(2)(i)
would have implemented TILA sections
129C(b)(2)(A)(i) and (ii). First, the
proposed provision would have
required that a qualified mortgage
provide for regular periodic payments.
Second, proposed § 226.43(e)(2)(i)
would have provided that the regular
periodic payments may not (1) result in
an increase of the principal balance; (2)
allow the consumer to defer repayment
of principal, except as provided in
proposed § 226.43(f); or (3) result in a
balloon payment, as defined in
proposed § 226.18(s)(5)(i), except as
provided in proposed § 226.43(f).
Proposed comment 43(e)(2)(i)–1
would have explained that, as a
consequence of the foregoing
requirements, a qualified mortgage must
require the consumer to make payments
of principal and interest, on a monthly
or other periodic basis, that will fully
repay the loan amount over the loan
term. These periodic payments must be
substantially equal except for the effect
that any interest rate change after
consummation has on the payment
amount in the case of an adjustable-rate
or step-rate mortgage. The proposed
comment would have also provided
that, because proposed § 226.43(e)(2)(i)
would have required that a qualified
mortgage provide for regular, periodic
payments, a single-payment transaction
may not be a qualified mortgage. This
comment would have clarified a
potential evasion of the regulation, as a
creditor otherwise could structure a
transaction with a single payment due at
maturity that technically would not be
a balloon payment as defined in
proposed § 226.18(s)(5)(i) because it is
not more than two times a regular
periodic payment.
Proposed comment 43(e)(2)(i)–2
would have provided additional
guidance on the requirement in
proposed § 226.43(e)(2)(i)(B) that a
qualified mortgage may not allow the
consumer to defer repayment of
principal. The comment would have
clarified that, in addition to interestonly terms, deferred principal
repayment also occurs if the payment is
applied to both accrued interest and
principal but the consumer makes
periodic payments that are less than the
amount that would be required under a
payment schedule that has substantially
equal payments that fully repay the loan
amount over the loan term. Graduated
payment mortgages, for example, allow
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
deferral of principal repayment in this
manner and therefore may not be
qualified mortgages.
As noted above, the Dodd-Frank Act
defines ‘‘balloon payment’’ as ‘‘a
scheduled payment that is more than
twice as large as the average of earlier
scheduled payments.’’ However,
proposed § 226.43(e)(2)(i)(C) would
have cross-referenced Regulation Z’s
existing definition of ‘‘balloon
payment’’ in § 226.18(s)(5)(i), which
provides that a balloon payment is ‘‘a
payment that is more than two times a
regular periodic payment.’’ The Board
noted that this definition is
substantially similar to the statutory
one, except that it uses as its benchmark
any regular periodic payment rather
than the average of earlier scheduled
payments. The Board explained that the
difference in wording between the
statutory definition and the existing
regulatory definition does not yield a
significant difference in what
constitutes a ‘‘balloon payment’’ in the
qualified mortgage context. Specifically,
the Board stated its belief that because
a qualified mortgage generally must
provide for substantially equal, fully
amortizing payments of principal and
interest, a payment that is greater than
twice any one of a loan’s regular
periodic payments also generally will be
greater than twice the average of its
earlier scheduled payments.
Accordingly, to facilitate compliance,
the Board proposed to cross-reference
the existing definition of ‘‘balloon
payment.’’ The Board proposed this
adjustment to the statutory definition
pursuant to its authority under TILA
section 105(a) to make such adjustments
for all or any class of transactions as in
the judgment of the Board are necessary
or proper to facilitate compliance with
TILA. The Board stated that this
approach is further supported by its
authority under TILA section 129B(e) to
condition terms, acts or practices
relating to residential mortgage loans
that the Board finds necessary or proper
to facilitate compliance.
Finally, in the preamble to the Board’s
proposal, the Board noted that some
balloon-payment loans are renewable at
maturity and that such loans might
appropriately be eligible to be qualified
mortgages, provided the terms for
renewal eliminate the risk of the
consumer facing a large, unaffordable
payment obligation, which underlies the
rationale for generally excluding
balloon-payment loans from the
definition of qualified mortgages. If the
consumer is protected by the terms of
the transaction from that risk, the Board
stated that such a transaction might
appropriately be treated as though it
PO 00000
Frm 00111
Fmt 4701
Sfmt 4700
6517
effectively is not a balloon-payment
loan even if it is technically structured
as one. The Board solicited comment on
whether it should include an exception
providing that, notwithstanding
proposed § 226.43(e)(2)(i)(C), a qualified
mortgage may provide for a balloon
payment if the creditor is
unconditionally obligated to renew the
loan at the consumer’s option (or is
obligated to renew subject to conditions
within the consumer’s control). The
Board sought comment on how such an
exception should be structured to
ensure that the large-payment risk
ordinarily accompanying a balloonpayment loan is fully eliminated by the
renewal terms and on how such an
exception might be structured to avoid
the potential for circumvention.
As discussed above, commenters
generally supported excluding from the
definition of qualified mortgage certain
risky loan features which result in
‘‘payment shock,’’ such as negative
amortization or interest-only features.
Commenters generally recognized such
features as significant contributors to
the recent housing crisis. Industry
commenters noted that such restrictions
are objective criteria which creditors
can conclusively demonstrate were met
at the time of origination. However, one
mortgage company asserted that such
limitations should not apply in loss
mitigation transactions, such as loan
modifications and extensions, or to loan
assumptions. That commenter noted
that while negative amortization is not
common in most loan modification
programs, the feature can be used at
times to help consumers work through
default situations. The commenter also
noted that deferral of payments,
including principal payments, and
balloon payment structures are
commonly used to relieve payment
default burdens. One bank commenter
argued that the rule should permit
qualified mortgages to have balloon
payment features if the creditor is
unconditionally obligated to renew the
loan at the consumer’s option, or is
obligated to renew subject to conditions
within the consumer’s control.
For the reasons discussed in the
proposed rule, the Bureau is adopting
§ 226.43(e)(2)(i) as proposed in
renumbered § 1026.43(e)(2)(i), with
certain clarifying changes. In particular,
in addition to the proposed language,
section 1026.43(e)(2)(i) specifies that a
qualified mortgage is a covered
transaction that provides for regular
periodic payments that are substantially
equal, ‘‘except for the effect that any
interest rate change after consummation
has on the payment in the case of an
adjustable-rate or step-rate mortgage.’’
E:\FR\FM\30JAR2.SGM
30JAR2
6518
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
This language appeared in the
commentary to § 226.43(e)(2)(i) in the
proposed rule, but to provide clarity, the
Bureau is adopting this language in the
text of § 1026.43(e)(2)(i) in the final rule.
Notably, the Bureau is adopting in
§ 1026.43(e)(2)(i) the proposed crossreference to the existing Regulation Z
definition of balloon payment. Like the
Board, the Bureau finds that the
statutory definition and the existing
regulatory definition do not yield a
significant difference in what
constitutes a ‘‘balloon payment’’ in the
qualified mortgage context.
Accordingly, the Bureau makes this
adjustment pursuant to its authority
under TILA section 105(a) because the
Bureau believes that affording creditors
a single definition of balloon payment
within Regulation Z is necessary and
proper to facilitate compliance with and
effectuate the purposes of TILA.
In addition, like the proposal, the
final rule does not provide exceptions
from the prohibition on qualified
mortgages providing for balloon
payments, other than the exception for
creditors operating predominantly in
rural or underserved areas, described
below in the section-by-section analysis
of § 1026.43(f). The Bureau believes that
it is appropriate to implement the rule
consistent with statutory intent, which
specifies only a narrow exception from
this general rule for creditors operating
predominantly in rural or underserved
areas rather than a broader exception to
the general prohibition on qualified
mortgages containing balloon payment
features. With respect to renewable
balloon-payment loans, the Bureau does
not believe that the risk that a consumer
will face a significant payment shock
from the balloon feature can be fully
eliminated, and that a rule that attempts
to provide such special treatment for
renewable balloon-payment loans
would be subject to abuse.
43(e)(2)(ii)
TILA section 129C(b)(2)(A)(viii)
requires that a qualified mortgage must
not provide for a loan term that exceeds
30 years, ‘‘except as such term may be
extended under paragraph (3), such as
in high-cost areas.’’ As discussed above,
TILA section 129C(b)(3)(B)(i) authorizes
the Bureau to revise, add to, or subtract
from the qualified mortgage criteria if
the Bureau makes certain findings,
including that such revision is
necessary or proper to ensure that
responsible, affordable mortgage credit
remains available to consumers in a
manner consistent with the purposes of
TILA section 129C(b) or necessary and
appropriate to effectuate the purposes of
section 129C.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
Proposed § 226.43(e)(2)(ii) would
have implemented the 30-year
maximum loan term requirement in the
statute without exception. The preamble
to the proposed rule explains that, based
on available information, the Board
believed that mortgage loans with terms
greater than 30 years are rare and, when
made, generally are for the convenience
of consumers who could qualify for a
loan with a 30-year term but prefer to
spread out their payments further.
Therefore, the Board believed such an
exception is generally unnecessary. The
Board solicited comment on whether
there are any ‘‘high-cost areas’’ in which
loan terms in excess of 30 years are
necessary to ensure that responsible,
affordable credit is available and, if so,
how they should be identified for
purposes of such an exception. The
Board also sought comment on whether
any other exceptions would be
appropriate, consistent with the Board’s
authority in TILA section
129C(b)(3)(B)(i).
As noted above, commenters
generally supported the 30-year term
limitation. One commenter suggested
the final rule should clarify that a loan
term that is slightly longer than 30 years
because of the due date of the first
regular payment nevertheless meets the
30-year term requirement. One trade
association commenter suggested that
creditors be provided flexibility to
originate 40-year loans in order to
accommodate consumers in regions of
the country where housing prices are
especially high, but did not provide any
information regarding the historic
performance of 40-year loans or discuss
how the Bureau should define high-cost
areas in a way that avoids abuse. An
association of State bank regulators also
suggested that the rule permit loan
terms beyond 30 years in high-cost areas
and suggested that those areas could be
determined based on housing price
indices. That commenter, two large
industry trade associations, and one
mortgage company commenter argued
that the 30-year term limitation should
not apply to loan modifications that
provide a consumer with a loan with a
lower monthly payment than he or she
may otherwise face. One such
commenter noted that, as a general
matter, the rule should clarify that
modifications of existing loans should
not be subject to the same ability-torepay requirements to avoid depriving
consumers of beneficial modifications.
For the reasons discussed in the
proposed rule, the Bureau is generally
adopting § 226.43(e)(2)(ii) as proposed
in renumbered § 1026.43(e)(2)(ii). In
response to commenter concern, the
final rule clarifies in comment
PO 00000
Frm 00112
Fmt 4701
Sfmt 4700
43(e)(2)(ii)–1 that the 30-year term
limitation in § 1026.43(e)(2)(ii) is
applied without regard to any interim
period between consummation and the
beginning of the first full unit period of
the repayment schedule. Consistent
with the Board’s analysis, the final rule
does not provide exceptions to the 30year loan limitation. Like the Board, the
Bureau is unaware of a basis upon
which to conclude that an exception to
the 30-year loan term limitation for
qualified mortgages in high-cost areas is
appropriate. In particular, the Bureau
believes that loans with terms greater
than 30 years are rare and that, when
made, generally are for the convenience
of consumers who could qualify for a
loan with a 30-year term.
The final rule also does not provide
additional guidance on the 30-year loan
term limitation in the context of loan
modifications. The Bureau understands
that private creditors may offer loan
modifications to consumers at risk of
default or foreclosure, and that such
modifications may extend the duration
of the loan beyond the initial term. If
such modification results in the
satisfaction and replacement of the
original obligation, the loan would be a
refinance under current § 1026.20(a),
and therefore the new transaction must
comply with the ability-to-repay
requirements of § 1026.43(c) or satisfy
the criteria for a qualified mortgage,
independent of any ability-to-repay
analysis or the qualified mortgage status
of the initial transaction. However, if the
transaction does not meet the criteria in
1026.20(a), which determines a
refinancing—generally resulting in the
satisfaction and replacement of the
original obligation—the loan would not
be a refinance under § 1026.20(a), and
would instead be an extension of the
original loan. In such a case, compliance
with the ability-to-repay provision,
including a loan’s qualified mortgage
status, would be determined as of the
date of consummation of the initial
transaction, regardless of a later
modification.
43(e)(2)(iii)
TILA section 129C(b)(2)(A)(vii)
defines a qualified mortgage as a loan
for which, among other things, the total
points and fees payable in connection
with the loan do not exceed three
percent of the total loan amount. TILA
section 129C(b)(2)(D) requires the
Bureau to prescribe rules adjusting this
threshold to ‘‘permit lenders that extend
smaller loans to meet the requirements
of the presumption of compliance.’’ The
statute further requires the Bureau, in
prescribing such rules, to ‘‘consider the
potential impact of such rules on rural
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
areas and other areas where home
values are lower.’’
Proposed § 226.43(e)(2)(iii) would
have implemented these provisions by
providing that a qualified mortgage is a
loan for which the total points and fees
payable in connection with the loan do
not exceed the amounts specified under
proposed § 226.43(e)(3). As discussed in
detail in the section-by-section analysis
of § 1026.43(e)(3), the Board proposed
two alternatives for calculating the
allowable points and fees for a qualified
mortgage: One approach would have
consisted of five ‘‘tiers’’ of loan sizes
and corresponding limits on points and
fees, while the other approach would
have consisted of three ‘‘tiers’’ of points
and fees based on a formula yielding a
greater allowable percentage of the total
loan amount to be charged in points and
fees for each dollar increase in loan size.
Additionally, proposed § 226.43(b)(9)
would have defined ‘‘points and fees’’ to
have the same meaning as in proposed
§ 226.32(b)(1).
For the reasons discussed in the
proposed rule, the Bureau is generally
adopting § 226.43(e)(2)(iii) as proposed
in renumbered § 1026.43(e)(2)(iii). For a
discussion of the final rule’s approach
to calculating allowable points and fees
for a qualified mortgage, see the sectionby-section analysis of § 1026.43(e)(3).
For a discussion of the definition of
points and fees, see the section-bysection analysis of § 1026.32(b)(1).
As noted above, several consumer
group commenters requested that highcost mortgages be prohibited from
receiving qualified mortgage status.
Those commenters noted that high-cost
mortgages have been singled out by
Congress as deserving of special
regulatory treatment because of their
potential to be abusive to consumers.
They argue that it would seem
incongruous for any high-cost mortgage
to be given a presumption of
compliance with the ability-to-repay
rule. However, the final rule does not
prohibit a high-cost mortgage from being
a qualified mortgage. Under the DoddFrank Act, a mortgage loan is a high-cost
mortgage when (1) the annual
percentage rate exceeds APOR by more
than 6.5 percentage points for first-liens
or 8.5 percentage points for subordinateliens; (2) points and fees exceed 5
percent, generally; or (3) when
prepayment penalties may be imposed
more than three years after
consummation or exceed 2 percent of
the amount prepaid. Neither the Board’s
2011 ATR–QM Proposal nor the
Bureau’s 2012 HOEPA Proposal would
have prohibited loans that are high-cost
mortgages as a result of a high interest
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
rate from receiving qualified mortgage
status.
As a general matter, the ability-torepay requirements in this final rule
apply to most closed-end mortgage
loans, including closed-end high-cost
mortgages. Notwithstanding the DoddFrank Act’s creation of a new ability-torepay regime for mortgage loans,
Congress did not modify an existing
prohibition in TILA section 129(h)
against originating a high-cost mortgage
without regard to a consumer’s
repayment ability (HOEPA ability-torepay). Thus, under TILA (as amended
by the Dodd-Frank Act), closed-end
high-cost mortgages are subject both to
the general ability-to-repay provisions
and to HOEPA’s ability-to-repay
requirement.145 As implemented in
existing § 1026.34(a)(4), the HOEPA
ability-to-repay rules contain a
rebuttable presumption of compliance if
the creditor takes certain steps that are
generally less rigorous than the DoddFrank Act’s ability-to-repay
requirements, as implemented in this
rule. For this reason, and as explained
further in that rulemaking, the Bureau’s
2013 HOEPA Final Rule provides that a
creditor complies with the high-cost
mortgage ability-to-repay requirement
by complying with the general abilityto-repay provision, as implemented by
this final rule.146
The final rule does not prohibit highcost mortgages from being qualified
mortgages for several reasons. First, the
Dodd-Frank Act does not prohibit highcost mortgages from receiving qualified
mortgage status. While the statute
imposes a points and fees limit on
qualified mortgages (3 percent,
generally) that effectively prohibits
loans that trigger the high-cost mortgage
points and fee threshold from receiving
qualified mortgage status, it does not
impose an annual percentage rate limit
145 The statutory HOEPA ability-to-repay
provisions prohibit creditors from engaging in a
pattern or practice of making loans without regard
to the consumer’s repayment ability. In the 2008
HOEPA Final Rule, the Board eliminated the
‘‘pattern or practice’’ requirement under the HOEPA
ability-to-repay provision and also applied the
repayment ability requirement to higher-priced
mortgage loans.
146 The Bureau notes that, among other
restrictions, the 2013 HOEPA Final Rule also
includes in § 1026.32(d)(1) a prohibition on balloon
payment features for most high-cost mortgages, and
retains the current restrictions on high-cost
mortgages permitting negative amortization. As
noted, high-cost mortgages will be subject to these
restrictions in addition to the requirements imposed
in this final rule. With respect to prepayment
penalty revisions, the Dodd-Frank Act deleted the
statutory restrictions applicable to high-cost
mortgages. The new Dodd-Frank Act prepayment
penalty restrictions of section 1414 are
implemented as discussed below.
PO 00000
Frm 00113
Fmt 4701
Sfmt 4700
6519
on qualified mortgages.147 Therefore,
nothing in the statute prohibits a
creditor from making a loan with a very
high interest rate such that the loan is
a high-cost mortgage while still meeting
the criteria for a qualified mortgage.
In addition, the final rule does not
prohibit high-cost mortgages from being
qualified mortgages because the Bureau
believes that, for loans that meet the
qualified mortgage definition, there is
reason to presume, subject to rebuttal,
that the creditor had a reasonable and
good faith belief in the consumer’s
ability to repay notwithstanding the
high interest rate. High-cost mortgages
will be less likely to meet qualified
mortgage criteria because the higher
interest rate will generate higher
monthly payments and thus require
higher income to satisfy the debt-toincome test for a qualified mortgage. But
where that test is satisfied—that is,
where the consumer has an acceptable
debt-to-income ratio calculated in
accordance with qualified mortgage
underwriting rules—there is no logical
reason to exclude the loan from the
definition of a qualified mortgage.
Allowing a high-cost mortgage to be a
qualified mortgage can benefit
consumers. The Bureau anticipates that,
in the small loan market, creditors may
sometimes exceed high-cost mortgage
thresholds due to the unique structure
of their business. The Bureau believes it
would be in the interest of consumers to
afford qualified mortgage status to loans
meeting the qualified mortgage criteria
so as to remove any incremental
impediment that the general ability-torepay provisions would impose on
making such loans. The Bureau also
believes this approach could provide an
incentive to creditors making high-cost
mortgages to satisfy the qualified
mortgage requirements, which would
provide additional consumer
protections, such as restricting interestonly payments and limiting loan terms
to 30 years, which are not requirements
under HOEPA.
147 The points and fees limit for qualified
mortgages set forth in the Dodd-Frank Act, as
implemented in § 1026.43(e) of this final rule
(including separate points and fees limits for
smaller loans), is lower than the high-cost mortgage
points and fees threshold. Thus, any loan that
triggers the high-cost mortgage provisions through
the points and fees criteria could not satisfy the
qualified mortgage definition. Likewise,
§ 1026.43(g) of this final rule provides that, where
qualified mortgages are permitted to have
prepayment penalties, such penalties may not be
imposed more than three years after consummation
or in an amount that exceeds 2 percent of the
amount prepaid. This limitation aligns with the
prepayment penalty trigger for the high-cost
mortgage provisions, such that a loan that satisfies
the qualified mortgage requirements would never
trigger the high-cost mortgage provisions as a result
of a prepayment penalty.
E:\FR\FM\30JAR2.SGM
30JAR2
6520
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
Furthermore, allowing high-cost
mortgage loans to be qualified mortgages
would not impact the various
impediments to making high-cost
mortgage loans, including enhanced
disclosure and counseling requirements
and the enhanced liability for HOEPA
violations. Thus, there would remain
strong disincentives to making high-cost
mortgages. The Bureau does not believe
that allowing high-cost mortgages to be
qualified mortgages would incent
creditors who would not otherwise
make high-cost mortgages to start
making them.
sroberts on DSK5SPTVN1PROD with
43(e)(2)(iv)
TILA section 129C(b)(2)(A)(iv) and (v)
provides as a condition to meeting the
definition of a qualified mortgage, in
addition to other criteria, that the
underwriting process for a fixed-rate or
adjustable-rate loan be based on ‘‘a
payment schedule that fully amortizes
the loan over the loan term and takes
into account all applicable taxes,
insurance, and assessments.’’ The
statute further states that for an
adjustable-rate loan, the underwriting
must be based on ‘‘the maximum rate
permitted under the loan during the first
5 years.’’ See TILA section
129C(b)(2)(A)(v). The statute does not
define the terms ‘‘fixed rate,’’
‘‘adjustable-rate,’’ or ‘‘loan term,’’ and
provides no additional assumptions
regarding how to calculate the payment
obligation.
These statutory requirements differ
from the payment calculation
requirements set forth in existing
§ 1026.34(a)(4)(iii), which provides a
presumption of compliance with the
repayment ability requirements for
higher-priced mortgage loans, where the
creditor underwrites the loan using the
largest payment of principal and interest
scheduled in the first seven years
following consummation. The existing
presumption of compliance under
§ 1026.34(a)(4)(iii) is available for all
high-cost and higher-priced mortgage
loans, except for loans with negative
amortization or balloon-payment
mortgages with a term less than seven
years. In contrast, TILA section
129C(b)(2)(A) requires the creditor to
underwrite the loan based on the
maximum payment during the first five
years, and does not extend the scope of
qualified mortgages to any loan that
contains certain risky features or a loan
term exceeding 30 years. Loans with a
balloon-payment feature would not
meet the definition of a qualified
mortgage regardless of term length,
unless made by a creditor that satisfies
the conditions in § 1026.43(f).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
The Board proposed to implement the
underwriting requirements of TILA
section 129C(b)(2)(A)(iv) and (v), for
purposes of determining whether a loan
meets the definition of a qualified
mortgage, in proposed § 226.43(e)(2)(iv).
Under the proposal, creditors would
have been required to underwrite a loan
that is a fixed-, adjustable-, or step-rate
mortgage using a periodic payment of
principal and interest based on the
maximum interest rate permitted during
the first five years after consummation.
The terms ‘‘adjustable-rate mortgage,’’
‘‘step-rate mortgage,’’ and ‘‘fixed-rate
mortgage’’ would have had the meaning
as in current § 1026.18(s)(7)(i) through
(iii), respectively.
Specifically, proposed
§ 226.43(e)(2)(iv) would have provided
that meeting the definition of a qualified
mortgage is contingent, in part, on
creditors meeting the following
underwriting requirements:
(1) Proposed § 226.43(e)(2)(iv) would
have required that the creditor take into
account any mortgage-related
obligations when underwriting the
consumer’s loan;
(2) Proposed § 226.43(e)(2)(iv)(A)
would have required the creditor to use
the maximum interest rate that may
apply during the first five years after
consummation; and
(3) Proposed § 226.43(e)(2)(iv)(B)
would have required that the periodic
payments of principal and interest repay
either the outstanding principal balance
over the remaining term of the loan as
of the date the interest rate adjusts to the
maximum interest rate that can occur
during the first five years after
consummation, or the loan amount over
the loan term.
These three underwriting conditions
under proposed § 226.43(e)(2)(iv), and
the approach to these criteria adopted in
the final rule, are discussed below.
Proposed § 226.43(e)(2)(iv) would
have implemented TILA section
129C(b)(2)(A)(iv) and (v), in part, and
provided that, to be a qualified mortgage
under proposed § 1026.43(e)(2), the
creditor must underwrite the loan taking
into account any mortgage-related
obligations. Proposed comment
43(e)(2)(iv)–6 would have provided
cross-references to proposed
§ 226.43(b)(8) and associated
commentary. The Board proposed to use
the term ‘‘mortgage-related obligations’’
in place of ‘‘all applicable taxes,
insurance (including mortgage
guarantee insurance), and assessments.’’
Proposed § 226.43(b)(8) would have
defined the term ‘‘mortgage-related
obligations’’ to mean property taxes;
mortgage-related insurance premiums
required by the creditor as set forth in
PO 00000
Frm 00114
Fmt 4701
Sfmt 4700
proposed § 226.45(b)(1); homeowners
association, condominium, and
cooperative fees; ground rent or
leasehold payments; and special
assessments.
Commenters generally supported the
inclusion of mortgage-related
obligations in the underwriting
requirement in proposed
§ 226.43(e)(2)(iv). Several industry trade
associations, banks, civil rights
organizations, and consumer advocacy
groups specifically supported the
requirement. Several commenters
requested clear guidance on the
amounts to be included in the monthly
payment amount, including mortgagerelated obligations. In addition, a civil
rights organization and several
consumer advocacy groups argued that
the creditor should also be required to
consider recurring, non-debt expenses,
such as medical supplies and child care.
As discussed above in the section-bysection analysis of § 1026.43(b)(8), the
Bureau is adopting the proposed
definition of mortgage-related
obligations in renumbered
§ 1026.43(b)(8), with certain clarifying
changes and additional examples.
For the reasons discussed above, the
Bureau is adopting the mortgage-related
obligations portion of § 226.43(e)(2)(vi)
as proposed in renumbered
§ 1026.43(e)(2)(vi). The final rule does
not contain a specific requirement that
the creditor consider, when
underwriting the consumer’s monthly
payment, recurring non-debt expenses,
such as medical supplies and child care.
However, such expenses, if known to
the creditor at the time of
consummation, may be relevant to a
consumer’s ability to rebut the
presumption of compliance that applies
to qualified mortgages that are higherpriced covered transactions. See
section-by-section analysis of
§ 1026.43(e)(1)(ii)(B).
43(e)(2)(iv)(A)
Proposed § 226.43(e)(2)(iv)(A) would
have implemented TILA section
129C(b)(2)(A)(iv) and (v), in part, and
provided that, to be a qualified mortgage
under proposed § 1026.43(e)(2), the
creditor must underwrite the loan using
the maximum interest rate that may
apply during the first five years after
consummation. However, the statute
does not define the term ‘‘maximum
rate,’’ nor does the statute clarify
whether the phrase ‘‘the maximum rate
permitted under the loan during the first
5 years’’ means the creditor should use
the maximum interest rate that occurs
during the first five years of the loan
beginning with the first periodic
payment due under the loan, or during
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
the first five years after consummation
of the loan. The former approach would
capture the rate recast for a 5/1 hybrid
adjustable-rate mortgage that occurs on
the due date of the 60th monthly
payment, and the latter would not.
The Board interpreted the phrase
‘‘maximum rate permitted’’ as requiring
creditors to underwrite the loan based
on the maximum interest rate that could
occur under the terms of the loan during
the first five years after consummation,
assuming a rising index value. See
proposed comment 43(e)(2)(iv)–1. The
Board noted that this interpretation is
consistent with current guidance
contained in Regulation Z regarding
disclosure of the maximum interest rate.
See MDIA Interim Rule, 75 FR 58471
(Sept. 24, 2010). The Board further
stated that this interpretation is
consistent with congressional intent to
encourage creditors to make loans to
consumers that are less risky and that
afford the consumer a reasonable period
of time to repay (i.e., 5 years) on less
risky terms. For the reasons described in
the proposed rule, the Bureau is
adopting the ‘‘maximum interest rate’’
provision in § 1026.43(e)(2)(iv) as
proposed in renumbered
§ 1026.43(e)(2)(iv).
The Board proposed to interpret the
phrase ‘‘during the first 5 years’’ as
requiring creditors to underwrite the
loan based on the maximum interest
rate that may apply during the first five
years after consummation. TILA section
129C(b)(2)(A)(v). The preamble to the
proposed rule explains several reasons
for this interpretation. First, the Board
noted that a plain reading of the
statutory language conveys that the
‘‘first five years’’ is the first five years of
the loan once it comes into existence
(i.e., once it is consummated). The
Board believed that interpreting the
phrase to mean the first five years
beginning with the first periodic
payment due under the loan would
require an expansive reading of the
statutory text.
Second, the Board noted that the
intent of this underwriting condition is
to ensure that the consumer can afford
the loan’s payments for a reasonable
amount of time and that Congress
intended for a reasonable amount of
time to be the first five years after
consummation.
Third, the Board proposed this
approach because it is consistent with
prior iterations of this statutory text and
the Board’s 2008 HOEPA Final Rule. As
noted above, the Dodd-Frank Act
codifies many aspects of the repayment
ability requirements contained in
existing § 1026.34(a)(4) of the Board’s
2008 HOEPA Final Rule.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
Fourth, the Board believed that
interpreting the phrase ‘‘during the first
five years’’ as including the rate
adjustment at the end of the fifth year
would be of limited benefit to
consumers because creditors could
easily structure their product offerings
to avoid application of the rule. For
example, a creditor could move a rate
adjustment that typically occurs on the
due date of the 60th monthly payment
to due date of the first month that falls
outside the specified time horizon,
making any proposal to extend the time
period in order to include the rate
adjustment of diminished value.
Finally, the Board believed that the
proposed timing of the five-year period
could appropriately differ from the
approach used under the 2010 MDIA
Interim Final Rule, given the different
purposes of the rules. The Board
amended the 2010 MDIA Interim Final
Rule to require that creditors base their
interest rate and payment disclosures on
the first five years after the due date of
the first regular periodic payment rather
than the first five years after
consummation. See 75 FR 81836, 81839
(Dec. 29, 2010). The revision clarified
that the disclosure requirements for 5⁄1
hybrid adjustable-rate mortgages must
include the rate adjustment that occurs
on the due date of the 60th monthly
payment, which typically occurs more
than five years after consummation. The
disclosure requirements under the 2010
MDIA Interim Final Rule, as revised, are
intended to help make consumers aware
of changes to their loan terms that may
occur if they choose to stay in the loan
beyond five years and therefore, helps to
ensure consumers avoid the uninformed
use of credit. The Board believed a
different approach is appropriate under
proposed § 226.43(e)(2)(iv) because that
requirement seeks to ensure that the
loan’s payments are affordable for a
reasonable period of time. For the
reasons stated above, the Board believed
that Congress intended the first five
years after consummation to be a
reasonable period of time to ensure that
the consumer has the ability to repay
the loan according to its terms.
For all the above-listed reasons, the
Board interpreted the statutory text as
requiring that the creditor underwrite
the loan using the maximum interest
rate during the first five years after
consummation. The Board solicited
comment on its interpretation of the
phrase ‘‘first five years’’ and the
appropriateness of this approach. The
Board also proposed clarifying
commentary and examples, which are
described below.
As described above, commenters
generally supported the payment
PO 00000
Frm 00115
Fmt 4701
Sfmt 4700
6521
calculation requirements in the
proposed rule, including the five-year
payment calculation. A comment from a
coalition of consumer advocates
suggested that the period may not be
long enough to assure a consumer’s
ability to repay given that the average
homeowner holds their mortgage for
approximately seven years, and
suggested that the five-year payment
calculation requirement be extended to
reflect the average mortgage duration of
the first ten years of the loan. Two
industry commenters suggested that the
time horizon in the required payment
calculation for qualified mortgages be
consistent with the proposed
requirement in the 2011 QRM Proposed
Rule that the payment calculation be
based on the maximum rate in the first
five years after the date on which the
first regular periodic payment will be
due. One such commenter noted that
the payment calculation approach in the
2011 QRM Proposed Rule is more
protective of consumers. Another
industry commenter suggested that the
final rule should measure the first five
years from the first regularly scheduled
payment, for consistency with the 2010
MDIA Interim Final Rule. An
association of State bank regulators
agreed with the Board’s reasoning,
noting that creditors could structure
loans to recast outside any parameter set
by the rule and that an effective way to
prevent purposeful evasion of the
payment calculation provision would
require legislation.
Notwithstanding the Board’s
proposed approach, the Bureau
interprets the phrase ‘‘during the first 5
years’’ as requiring creditors to
underwrite the loan based on the
maximum interest rate that may apply
during the first five years after the first
regular periodic payment will be due.
Like the Board, the Bureau finds the
statutory language to be ambiguous.
However, the Bureau believes that the
statutory phrase ‘‘during the first 5
years’’ could be given either meaning,
and that this approach provides greater
protections to consumers by requiring
creditors to underwrite qualified
mortgages using the rate that would
apply after the recast of a five-year
adjustable rate mortgage. Further, as
noted, this approach is consistent with
the payment calculation in the 2011
QRM Proposed Rule and in existing
Regulation Z with respect to the
disclosure requirements for interest
rates on adjustable-rate amortizing
loans.
Accordingly, § 1026.43(e)(2)(iv)(A)
provides that a qualified mortgage under
§ 1026.43(e)(2) must be underwritten,
taking into account any mortgage-
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6522
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
related obligations, using the maximum
interest rate that may apply during the
first five years after the date on which
the first regular periodic payment will
be due. Although the Bureau is
finalizing the commentary and
examples to § 226.43(e)(2)(iv) as
proposed in the commentary to
renumbered § 1026.43(e)(2)(iv), the final
rule makes conforming changes to the
proposed commentary to reflect the
adjusted time horizon. The proposed
commentary and the changes to the
proposed commentary as implemented
in the final rule are described below.
The Bureau is finalizing comment
43(e)(2)(iv)–1 as proposed, but with
conforming changes to reflect the new
time horizon. In the final rule, the
comment provides guidance to creditors
on how to determine the maximum
interest rate during the first five years
after the date on which the first regular
periodic payment will be due. This
comment explains that creditors must
use the maximum rate that could apply
at any time during the first five years
after the date on which the first regular
periodic payment will be due,
regardless of whether the maximum rate
is reached at the first or subsequent
adjustment during such five year period.
The Bureau is finalizing comment
43(e)(2)(iv)(A)–2 as proposed. That
comment clarifies that for a fixed-rate
mortgage, creditors should use the
interest rate in effect at consummation,
and provides a cross-reference to
§ 1026.18(s)(7)(iii) for the meaning of
the term ‘‘fixed-rate mortgage.’’
The Bureau is finalizing comment
43(e)(2)(iv)–3 as proposed, but with
conforming changes to reflect the new
time horizon. That comment provides
guidance to creditors regarding
treatment of periodic interest rate
adjustment caps, and explains that, for
an adjustable-rate mortgage, creditors
should assume the interest rate
increases after consummation as rapidly
as possible, taking into account the
terms of the legal obligation. The
comment further explains that creditors
should account for any periodic interest
rate adjustment cap that may limit how
quickly the interest rate can increase
under the terms of the legal obligation.
The comment states that where a range
for the maximum interest rate during
the first five years is provided, the
highest rate in that range is the
maximum interest rate for purposes of
this section. Finally, the comment
clarifies that where the terms of the
legal obligation are not based on an
index plus a margin, or formula, the
creditor must use the maximum interest
rate that occurs during the first five
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
years after the date on which the first
regular periodic payment will be due.
The Bureau is also adopting comment
43(e)(2)(iv)–3.i through .iii as proposed,
but with conforming changes to the
comment to reflect the new time
horizon. Those comments provide
examples of how to determine the
maximum interest rate. For example,
comment 43(e)(2)(iv)–3.1 illustrates how
to determine the maximum interest rate
in the first five years after the date on
which the first regular periodic payment
will be due for an adjustable-rate
mortgage with a discounted rate for
three years.
The Bureau is also finalizing
comment 43(e)(2)(iv)–4 as proposed, but
with conforming changes to reflect the
new time horizon. Comment
43(e)(2)(iv)–4 clarifies the meaning of
the phrase ‘‘first five years after the date
on which the first regular periodic
payment will be due.’’ This comment
provides that under
§ 1026.43(e)(2)(iv)(A), the creditor must
underwrite the loan using the maximum
interest rate that may apply during the
first five years after the date on which
the first regular periodic payment will
be due, and provides an illustrative
example.
43(e)(2)(iv)(B)
Proposed § 226.43(e)(2)(iv)(B) would
have implemented TILA section
129C(b)(2)(A)(iv) and (v), in part, by
providing, as part of meeting the
definition of a qualified mortgage under
proposed § 1026.43(e)(2), that the
creditor underwrite the loan using
periodic payments of principal and
interest that will repay either (1) the
outstanding principal balance over the
remaining term of the loan as of the date
the interest rate adjusts to the maximum
interest rate that occurs during the first
five years after consummation; or (2) the
loan amount over the loan term. See
proposed § 226.43(e)(2)(iv)(B)(1) and (2).
TILA section 129C(b)(2)(A)(iv) and (v)
states that underwriting should be based
‘‘on a payment schedule that fully
amortizes the loan over the loan term.’’
The Board noted that unlike the
payment calculation assumptions set
forth for purposes of the general abilityto-repay rule, under TILA section
129C(a)(6), the underwriting conditions
for purposes of meeting the definition of
a qualified mortgage do not specify the
loan amount that should be repaid, and
do not define ‘‘loan term.’’ For
consistency and to facilitate
compliance, the Board proposed to use
the terms ‘‘loan amount’’ and ‘‘loan
term’’ in proposed § 226.43(b)(5) and
(b), respectively, for purposes of this
underwriting condition.
PO 00000
Frm 00116
Fmt 4701
Sfmt 4700
However, the Board also believed that
a loan that meets the definition of a
qualified mortgage and which has the
benefit of other safeguards, such as
limits on loan features and fees, merits
flexibility in the underwriting process.
Accordingly, the Board proposed to
permit creditors to underwrite the loan
using periodic payments of principal
and interest that will repay either the
outstanding principal balance as of the
date the maximum interest rate during
the first five years after consummation
takes effect under the terms of the loan,
or the loan amount as of the date of
consummation. The Board believed the
former approach more accurately
reflects the largest payment amount that
the consumer would need to make
under the terms of the loan during the
first five years after consummation,
whereas the latter approach would
actually overstate the payment amounts
required. This approach would have set
a minimum standard for qualified
mortgages, while affording creditors
latitude to choose either approach to
facilitate compliance.
For the reasons described in the
proposed rule, the Bureau is finalizing
§ 226.43(e)(2)(iv)(A) as proposed in
renumbered § 1026.43(e)(2)(iv)(A).
However, the final rule makes
conforming changes to the proposed
commentary to reflect the adjusted timehorizon to the first five years after the
due date of the first regular periodic
payment. The proposed commentary
and the changes to the proposed
commentary in the final rule are
described below.
The Bureau is finalizing comment
43(e)(2)(iv)–5 as proposed, but with
conforming changes to reflect the new
time horizon. Comment 43(e)(2)(iv)–5
provides further clarification to
creditors regarding the loan amount to
be used for purposes of this second
condition in § 1026.43(e)(2)(iv). The
comment explains that for a creditor to
meet the definition of a qualified
mortgage under § 1026.43(e)(2), the
creditor must determine the periodic
payment of principal and interest using
the maximum interest rate permitted
during the first five years after the date
on which the first regular periodic
payment will be due that repays either
(1) the outstanding principal balance as
of the earliest date the maximum
interest rate can take effect under the
terms of the legal obligation, over the
remaining term of the loan, or (2) the
loan amount, as that term is defined in
§ 1026.43(b)(5), over the entire loan
term, as that term is defined in
§ 1026.43(b)(6). This comment provides
illustrative examples for both
approaches.
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
The Bureau is finalizing comment
43(c)(2)(iv)–6 as proposed. That
comment reiterates that
§ 1026.43(e)(2)(iv) requires creditors to
take mortgage-related obligations into
account when underwriting the loan
and refers to § 1026.43(b)(8) and its
associated commentary for the meaning
of mortgage-related obligations.
The Bureau is also finalizing
comment 43(e)(2)(iv)–7 as proposed, but
with conforming changes to reflect the
new time horizon. Comment
43(e)(2)(iv)–7 provides examples of how
to determine the periodic payment of
principal and interest based on the
maximum interest rate during the first
five years after the date on which the
first regular periodic payment will be
due under § 1026.43(e)(2)(iv). The final
rule provides an additional example of
how to determine the periodic payment
of principal and interest based on the
maximum interest rate during the first
five years after the date on which the
first regular periodic payment will be
due under § 1026.43(e)(2)(iv) for an
adjustable-rate mortgage with a discount
of seven years, to illustrate how the
payment calculation applies in a loan
that adjusts after the five-year time
horizon. Comment 43(e)(2)(iv)–7.iv
provides an example of a loan in an
amount of $200,000 with a 30-year loan
term, that provides for a discounted
interest rate of 6 percent that is fixed for
an initial period of seven years, after
which the interest rate will adjust
annually based on a specified index
plus a margin of 3 percent, subject to a
2 percent annual interest rate
adjustment cap. The index value in
effect at consummation is 4.5 percent.
The loan is consummated on March 15,
2014, and the first regular periodic
payment is due May 1, 2014. Under the
terms of the loan agreement, the first
rate adjustment is on April 1, 2021 (the
due date of the 84th monthly payment),
which occurs more than five years after
the date on which the first regular
periodic payment will be due. Thus, the
maximum interest rate under the terms
of the loan during the first five years
after the date on which the first regular
periodic payment will be due is 6
percent. Under this example, the
transaction will meet the definition of a
qualified mortgage if the creditor
underwrites the loan using the monthly
payment of principal and interest of
$1,199 to repay the loan amount of
$200,000 over the 30-year loan term
using the maximum interest rate during
the first five years after the date on
which the first regular periodic payment
will be due of 6 percent.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
43(e)(2)(v)
43(e)(2)(v)(A)
TILA section 129C(b)(2)(A)(iii)
provides that a condition for meeting
the requirements of a qualified mortgage
is that the income and financial
resources relied upon to qualify the
obligors on the residential mortgage
loan are verified and documented. This
requirement is consistent with
requirement under the general abilityto-repay standard to consider and verify
a consumer’s income or assets using
third-party records, pursuant to TILA
section 129C(a)(1) and (3), as discussed
above in the section-by-section analysis
of § 1026.43(c)(2)(i) and (c)(4).
Proposed § 226.43(e)(2)(v) would have
implemented TILA section
129C(b)(2)(A)(iii) by providing that for a
covered transaction to be a qualified
mortgage, the creditor must consider
and verify the consumer’s current or
reasonably expected income or assets to
determine the consumer’s repayment
ability, as required by proposed
§ 226.43(c)(2)(i) and (c)(4). The proposal
used the term ‘‘assets’’ instead of
‘‘financial resources’’ for consistency
with other provisions in Regulation Z
and, as noted above, the Bureau believes
that the terms have the same meaning.
Proposed comment 43(e)(2)(v)–1 would
have clarified that creditors may rely on
commentary to proposed
§ 226.43(c)(2)(i), (c)(3) and (c)(4) for
guidance regarding considering and
verifying the consumer’s income or
assets to satisfy the conditions for a
qualified mortgage under proposed
§ 226.43(e)(2)(v).
For the reasons discussed in the
proposal, the Bureau is finalizing
§ 226.43(e)(2)(v)(A) as proposed in
renumbered § 1026.43(e)(2)(v)(A), with
additional clarification that the value of
the dwelling includes any real property
to which the dwelling is attached.
Renumbered § 1026.43(e)(2)(v)(A) also
provides that the creditor must consider
and verify the consumer’s current or
reasonably expected income or assets
other than the value of the dwelling
(including any real property attached to
the dwelling) that secures the loan, in
accordance with appendix Q, in
addition to § 1026.43(c)(2)(i) and (c)(4).
Comment 43(e)(2)(v)–2 clarifies this
provision, by explaining that, for
purposes of this requirement, the
creditor must consider and verify, at a
minimum, any income specified in
appendix Q. A creditor may also
consider and verify any other income in
accordance with § 1026.43(c)(2)(i) and
(c)(4); however, such income would not
be included in the total monthly debtto-income ratio determination by
PO 00000
Frm 00117
Fmt 4701
Sfmt 4700
6523
§ 1026.43(e)(2)(vi). As described below,
appendix Q contains specific standards
for defining ‘‘income,’’ to provide
certainty to creditors as to whether a
loan meets the requirements for a
qualified mortgage. The final rule
includes this reference to appendix Q
and additional comment to clarify the
relationship between the requirement to
consider a consumer’s current or
reasonably expected income in
§ 1026.43(e)(2)(v)(A) and the definition
of ‘‘income’’ in appendix Q. In other
words, a creditor who considers
‘‘income’’ as defined in appendix Q
meets the income requirement in
§ 1026.43(e)(2)(v)(A), so long as that
income is verified pursuant to
§ 1026.43(c)(4). In addition, comment
43(e)(2)(v)–1 provides that for guidance
on satisfying § 1026.43(e)(2)(v), a
creditor may rely on commentary to
§ 1026.43(c)(2)(i) and (vi), (c)(3), and
(c)(4).
43(e)(2)(v)(B)
The Board’s proposed Alternative 2
would have required that creditors
consider and verify the following
additional underwriting requirements,
which are also required under the
general ability-to-repay standard: the
consumer’s employment status, the
consumer’s monthly payment on any
simultaneous loans, the consumer’s
current debt obligations, the consumer’s
monthly debt-to-income ratio or
residual income, and the consumer’s
credit history. The commentary would
have provided that creditors could look
to commentary on the general
repayment ability provisions under
proposed § 226.43(c)(2)(i), (ii), (iv), and
(vi) through (viii), and (c)(3), (c)(4),
(c)(6), and (c)(7) for guidance regarding
considering and verifying the
consumer’s repayment ability to satisfy
the conditions under § 226.43(e)(2)(v)
for a qualified mortgage. See proposed
comment 43(e)(2)(v)–1 under
Alternative 2. The Board proposed these
additions pursuant to its legal authority
under TILA section 129C(b)(3)(B)(i). The
Board believed that adding these
requirements may be necessary to better
ensure that the consumers are offered
and receive loans on terms that
reasonably reflect their ability to repay
the loan.
In the final rule, § 1026.43(e)(2)(v)(B)
provides that, to meet the requirements
for a qualified mortgage under
§ 1026.43(e)(2), the creditor must
consider and verify the consumer’s
current debt obligations, alimony, and
child support, in accordance with
appendix Q and § 1026.43(c)(2)(vi) and
(c)(3). In addition, new comment
43(e)(2)(v)–3 clarifies that, for purposes
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6524
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
of considering and verifying the
consumer’s current debt obligations,
alimony, and child support pursuant to
§ 1026.43(e)(2)(v)(B), the creditor must
consider and verify, at a minimum, any
debt or liability specified in appendix
Q. A creditor may also consider and
verify other debt in accordance with
§ 1026.43(c)(2)(vi) and (c)(3); however,
such debt would not be included in the
total monthly debt-to-income ratio
determination required by
§ 1026.43(e)(2)(vi). As described below,
appendix Q contains specific standards
for defining ‘‘debt,’’ to provide certainty
to creditors as to whether a loan meets
the requirements for a qualified
mortgage. The final rule includes this
reference to appendix Q and additional
comment to clarify the relationship
between the requirement to consider a
consumer’s current debt obligations,
alimony, and child support in
§ 1026.43(e)(2)(v)(B) and the definition
of ‘‘debt’’ in appendix Q. In other
words, a creditor who considers ‘‘debt’’
as defined in appendix Q meets the
requirement in § 1026.43(e)(2)(v)(B), so
long as that income is verified pursuant
to § 1026.43(c)(3).
The Bureau is incorporating the
requirement that the creditor consider
and verify the consumer’s current debt
obligations, alimony, and child support
into the definition of a qualified
mortgage in § 1026.43(e)(2) pursuant to
its authority under TILA section
129C(b)(3)(B)(i). The Bureau finds that
this addition to the qualified mortgage
criteria is necessary and proper to
ensure that responsible, affordable
mortgage credit remains available to
consumers in a manner that is
consistent with the purposes of TILA
section 129C and necessary and
appropriate to effectuate the purposes of
TILA section 129C, which includes
assuring that consumers are offered and
receive residential mortgage loans on
terms that reasonably reflect their ability
to repay the loan. The Bureau also
incorporates this requirement pursuant
to its authority under TILA section
105(a) to issue regulations that, among
other things, contain such additional
requirements, other provisions, or that
provide for such adjustments for all or
any class of transactions, that in the
Bureau’s judgment are necessary or
proper to effectuate the purposes of
TILA, which include the above purpose
of section 129C, among other things.
The Bureau believes that this addition
to the qualified mortgage criteria is
necessary and proper to achieve this
purpose. In particular, as discussed
above, the Bureau finds that
incorporating the requirement that a
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
creditor consider and verify a
consumer’s current debt obligations,
alimony, and child support into the
qualified mortgage criteria ensures that
creditors consider, on an individual
basis, and verify whether a consumer
has the ability to repay a qualified
mortgage. Furthermore, together with
the requirement to consider and verify
income, the Bureau believes this
requirement to consider and verify debt
obligations, alimony, and child support
strengthens consumer protection and is
fundamental to the underlying
components of the requirement in
§ 1026.43(e)(2)(vi), which provides a
specific debt-to-income ratio threshold.
Ultimately, the Bureau believes that
the statute is fundamentally about
establishing standards for determining a
consumer’s reasonable ability to repay
and therefore believes it is appropriate
to incorporate the ability-to-repay
underwriting requirements into the
qualified mortgage definition to ensure
consistent consumer protections for
repayment ability for a qualified
mortgage. However, as described above,
most of the ability-to-repay
requirements must be considered and
verified to satisfy the specific debt-toincome ratio requirement in
§ 1026.43(e)(2)(vi), which requires the
creditor to follow the standards for
‘‘debt’’ and ‘‘income’’ in appendix Q,
including the consumer’s employment
status, monthly payment on the covered
transaction, monthly payment on
simultaneous loans of which the
creditor is aware, and monthly payment
on mortgage-related obligations. For this
reason, unlike the Board’s proposed
Alternative 2, the final rule does not
separately require consideration and
verification of these factors that are part
of the general ability-to-repay analysis.
43(e)(2)(vi)
TILA section 129C(b)(2)(vi) states that
the term qualified mortgage includes
any mortgage loan ‘‘that complies with
any guidelines or regulations
established by the Bureau relating to
ratios of total monthly debt to monthly
income or alternative measure of ability
to pay regular expenses after payment of
total monthly debt, taking into account
the income levels of the consumer and
such other factors as the Bureau may
determine relevant and consistent with
the purposes described in paragraph
(3)(B)(i).’’
Board’s Proposal
Under proposed § 226.43(e)(2)(v)
under Alternative 1, creditors would not
have been required to consider the
consumer’s debt-to-income ratio or
residual income to make a qualified
PO 00000
Frm 00118
Fmt 4701
Sfmt 4700
mortgage. The Board noted several
reasons for proposing this approach.
First, the Board noted that the debt-toincome ratio and residual income are
based on widely accepted standards
which, although flexible, do not provide
certainty that a loan is a qualified
mortgage. The Board believed this
approach is contrary to Congress’
apparent intent to provide incentives to
creditors to make qualified mortgages,
since they have less risky features and
terms. Second, the Board noted that
because the definition of a qualified
mortgage under Alternative 1 would not
require consideration of current debt
obligations or simultaneous loans, it
would be impossible for a creditor to
calculate the debt-to-income ratio or
residual income without adding those
requirements as well. Third, the Board
stated that data shows that the debt-toincome ratio generally does not have a
significant predictive power of loan
performance once the effects of credit
history, loan type, and loan-to-value
ratio are considered.148 Fourth, the
Board noted that although consideration
of the mortgage debt-to-income ratio (or
‘‘front-end’’ debt-to-income) might help
consumers receive loans on terms that
reasonably reflect their ability to repay
the loans, the Board’s outreach
indicated that creditors often do not
find that ‘‘front-end’’ debt-to-income
ratio is a strong predictor of ability to
repay. Finally, the Board stated its
concern that the benefit of including the
debt-to-income ratio or residual income
in the definition of qualified mortgage
may not outweigh the cost to certain
consumers who may not meet widely
accepted debt-to-income ratio standards,
but may have other compensating
factors, such as sufficient residual
income or other resources to be able to
reasonably afford the mortgage. A
definition of qualified mortgage that
required consideration of the
consumer’s debt-to-income or residual
income could limit the availability of
credit to those consumers.
However, under proposed
§ 226.43(e)(2)(v) under Alternative 2, a
qualified mortgage would have been
defined as a loan which, among other
things, the creditor considers the
consumer’s monthly debt-to-income
ratio or residual income, pursuant to
proposed § 226.43(c)(2)(vii) and (c)(7).
The Board noted that, without
determining the consumer’s debt-toincome ratio, a creditor could originate
148 The proposal cited Yuliya Demyanyk & Otto
Van Hemert, Understanding the Subprime Mortgage
Crisis, 24 Rev. Fin. Stud. 1848 (2011); James A.
Berkovec et al., Race, Redlining, and Residential
Mortgage Loan Performance, 9 J. Real Est. Fin. &
Econs. 263 (1994).
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
a qualified mortgage without any
requirement to consider the effect of the
new loan payment on the consumer’s
overall financial picture. The consumer
could have a very high total debt-toincome ratio under reasonable
underwriting standards, and be
predicted to default soon after the first
scheduled mortgage payment.
Accordingly, the Board believed that
including the debt-to-income ratio or
residual income in the definition of
qualified mortgage might ensure that the
consumer has a reasonable ability to
repay the loan.
The Board did not propose a
quantitative standard for the debt-toincome ratio in the qualified mortgage
definition, but solicited comment on the
appropriateness of such an approach.
The Board’s proposal noted several
reasons for declining to introduce a
specific debt-to-income ratio for
qualified mortgages. First, as explained
in the 2008 HOEPA Final Rule, the
Board was concerned that setting a
specific debt-to-income ratio could limit
credit availability without providing
adequate off-setting benefits. 73 FR 4455
(July 30, 2008). The Board sought
comment on what exceptions may be
necessary for low-income consumers or
consumers living in high-cost areas, or
for other cases, if the Board were to
adopt a quantitative debt-to-income
standard.
Second, outreach conducted by the
Board revealed a range of underwriting
guidelines for debt-to-income ratios
based on product type, whether
creditors used manual or automated
underwriting, and special
considerations for high- and low-income
consumers. The Board believed that
setting a quantitative standard would
require it to address the operational
issues related to the calculation of the
debt-to-income ratio. For example, the
Board would need clearly to define
income and current debt obligations, as
well as compensating factors and the
situations in which creditors may use
compensating factors. In addition, the
debt-to-income ratio is often a floating
metric, since the percentage changes as
new information about income or
current debt obligations becomes
available. A quantitative standard
would require guidelines on the timing
of the debt-to-income ratio calculation,
and what circumstances would
necessitate a re-calculation of the debtto-income ratio. Furthermore, a
quantitative standard may also need to
provide tolerances for mistakes made in
calculating the debt-to-income ratio.
The rule would also need to address the
use of automated underwriting systems
in determining the debt-to-income.
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
For all these reasons, the Board did
not propose a quantitative standard for
the debt-to-income ratio. The Board
recognized, however, that creditors, and
ultimately consumers, may benefit from
a higher degree of certainty surrounding
the qualified mortgage definition that a
quantitative standard could provide.
Therefore, the Board solicited comment
on whether and how it should prescribe
a quantitative standard for the debt-toincome ratio or residual income for the
qualified mortgage definition.
Comments
As noted above, the Bureau received
comments in response to the Board’s
2011 ATR Proposal and in response to
the Bureau’s May 2012 notice to reopen
the comment period. The reopened
comment period solicited comment
specifically on new data and
information obtained from the Federal
Housing Finance Agency (FHFA) after
the close of the original comment
period. In the notice to reopen the
comment period, the Bureau, among
other things, solicited comment on data
and information as well as sought
comment specifically on certain
underwriting factors, such as a debt-toincome ratio, and their relationship to
measures of delinquency or their impact
on the number or percentage of
mortgage loans that would be a qualified
mortgage. In addition, the Bureau
sought comment and data on estimates
of litigation costs and liability risks
associated with claims alleging a
violation of ability-to-repay
requirements.
Comments on general debt-to-income
ratio or residual income requirement. In
response to the proposed rule, some
industry commenters argued that the
final rule should not require
consideration and verification of a
consumer’s monthly debt-to-income
ratio or residual income for a qualified
mortgage. They argued that such an
approach would create a vague,
subjective definition of qualified
mortgage. Certain industry commenters
requested that if the Bureau added
consideration and verification of the
debt-to-income ratio or residual income
to the definition of a qualified mortgage,
the Bureau establish flexible standards.
These commenters argued that imposing
low debt-to-income ratio requirements
would be devastating to many potential
creditworthy homebuyers.
Other industry commenters suggested
that if the Bureau added consideration
and verification of the debt-to-income
ratio or residual income to the
definition of a qualified mortgage, the
Bureau provide clear and objective
standards. For example, one industry
PO 00000
Frm 00119
Fmt 4701
Sfmt 4700
6525
trade group commenter noted that,
historically, the debt-to-income ratio has
been a key metric used to assess a
consumer’s ability to repay a mortgage
loan, and has been incorporated into
both manual and automated
underwriting systems used in the
industry. Some industry commenters
asked that the final rule adopt the VA
calculation of residual income. See also
the section-by-section analysis of
section 1026.43(c)(7). Another industry
commenter suggested that any mortgage
with a residual income of at least $600
be sufficient for a qualified mortgage.
Another industry commenter suggested
that, at a minimum, residual income
considerations would require a
workable standard with clear, specific,
and objective criteria and be explicitly
limited to specific expense items. An
industry trade group commenter
recommended that if the Bureau
requires the use of residual income,
creditors be allowed flexibility in
considering residual income along with
other factors in loan underwriting.
Comments that addressed a specific
debt-to-income ratio are discussed
below.
Several industry commenters
recommended that if the Bureau
required consideration and verification
of the debt-to-income ratio or residual
income for a qualified mortgage,
creditors be permitted to take
compensating factors into account. They
suggested that the Bureau provide
examples of compensating factors, such
as: (1) The property being an energyefficient home; (2) the consumer having
probability for increased earnings based
on education, job training, or length of
time in a profession; (3) the consumer
having demonstrated ability to carry a
higher total debt-load while maintaining
a good credit history for at least 12
months; (4) future expenses being lower,
such as child-support payments to cease
for child soon to reach age of majority;
or (5) the consumer having substantial
verified liquid assets.
Consumer advocates generally
supported adding consideration and
verification of the debt-to-income ratio
or residual income to the definition of
a qualified mortgage. They noted that
such inclusion would help ensure that
consumers receive mortgages they can
afford and that such factors are basic,
core features of common-sense
underwriting that are clearly related to
the risk of consumer default. To that
point, these commenters contended that
residual income is an essential
component, especially for lower-income
families. One consumer group
commenter stressed that residual
income standards should be
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6526
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
incorporated, and pointed to the FHFA
data in the Bureau’s notice to reopen the
comment period to demonstrate that
relying solely on debt-to-income ratios
is insufficient to ensure sound lending
based on a consumer’s ability to repay.
Many industry and consumer group
commenters and interested parties
supported use of a specific debt-toincome ratio threshold. For example,
some suggested that if a consumer’s
total debt-to-income ratio is below a
specified threshold, the mortgage loan
should satisfy the qualified mortgage
requirements, assuming other relevant
conditions are met. At least one
industry commenter supported allowing
the use of FHA underwriting guidelines
to define ‘‘debt’’ and ‘‘income.’’
Although many commenters
supported the use of a specific debt-toincome ratio threshold, both industry
and consumer group commenters noted
that relying on debt-to-income is only
one element of underwriting, and that
creditors have used other compensating
factors and underwriting criteria. Some
commenters acknowledged that a
consumer’s debt-to-income ratio is a
useful measure of loan performance;
however, they asserted that the year of
origination (i.e., vintage) has more
bearing on loan performance. In
addition, some commenters argued that
measures of consumer credit history and
loan-to-value are more predictive, and
that broader economic factors largely
determine loan performance. Several
industry commenters recommended a
debt-to-income ratio cutoff that is at the
upper end of today’s relatively
conservative lending standards, while
permitting creditors to consider loans
that exceed that debt-to-income ratio
threshold if the consumer satisfies other
objective criteria (such as reserves,
housing payment history, and residual
income), that help creditors assess the
consumer’s ability to repay the loan.
These commenters argued that the
FHFA data in the Bureau’s notice to
reopen the comment period demonstrate
that when loans are properly
underwritten, debt-to-income ratios can
be relatively high without significantly
affecting loan performance.
Numerous commenters argued that
the Bureau should consider the costs
and benefits of selecting a maximum
debt-to-income ratio for qualified
mortgages. Many industry and
consumer group commenters argued
that a debt-to-income threshold that is
too low would unnecessarily exclude a
large percentage of consumers from
qualified mortgages. One joint industry
and consumer group comment letter
suggested a 43 percent total debt-toincome ratio. In addition to a debt-to-
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
income requirement, some commenters
and interested parties suggested that the
Bureau should include within the
definition of a ‘‘qualified mortgage’’
loans with a debt-to-income ratio above
a certain threshold if the consumer has
a certain amount of assets, such as
money in a savings or similar account,
or a certain amount of residual income.
For example, an industry commenter
suggested a 45 percent total debt-toincome ratio, with an allowance for
higher total debt-to-income ratios of up
to 50 percent for consumers with
significant assets (e.g., at least one year’s
worth of reserves). This commenter
asked that the Bureau carve out
consumers who have shown ability to
maintain a high debt-to-income ratio or
who have a nontraditional credit
history. This commenter explained that
the higher the debt-to-income ratio, the
more likely a brief interruption in
income or unexpected large expense
could compromise repayment ability.
The commenter noted that only a
numerical standard would provide
sufficient certainty for creditors and
investors, since they may otherwise end
up litigating what is a reasonable debtto-income ratio. Another industry
commenter asked that a 50 percent
back-end debt-to-income ratio be
sufficient. This commenter noted that
without clear and objective standards,
creditors trying to make a qualified
mortgage would fall back on the
qualified residential mortgage
standards.
Another industry trade association
commenter argued that a total debt-toincome ratio threshold of 43 percent is
problematic because according to the
FHFA data in the Bureau’s notice to
reopen the comment period, there is no
appreciable difference in performance
for loans with a 43 percent debt-toincome ratio and loans with 46 percent
debt-to-income ratio. In other words,
commenters argued that the FHFA data
supports a higher debt-to-income ratio
threshold, such as 46 percent. Another
commenter noted that the FHFA data
does not include data on portfolio loans.
Some consumer group commenters
suggested that the Bureau conduct
further research into the role of debt-toincome ratios and the relationship
between a consumer’s debt-to-income
ratio and residual income. One
commenter noted that the Bureau
should consider a tiered-approach for
higher-income consumers who can
support a higher debt-to-income ratio.
Another consumer group commenter
argued that residual income should be
incorporated into the definition of
qualified mortgage. Several commenters
suggested that the Bureau use the
PO 00000
Frm 00120
Fmt 4701
Sfmt 4700
general residual income standards of the
VA as a model for a residual income
test, and one of these commenters
recommended that the Bureau
coordinate with FHFA to evaluate the
experiences of the GSEs in using
residual income in determining a
consumer’s ability to repay.
Some commenters opposed including
a specific debt-to-income ratio threshold
into the qualified mortgage criteria. For
example, one commenter argued that
though the qualified mortgage criteria
should be as objective as possible, a
specific debt-to-income threshold
should not be imposed because the
criteria should be flexible to account for
changing markets. Another commenter
argued that creditors should be able to
consider debt-to-income and residual
income ratios, but creditors should not
be restricted to using prescribed debt-toincome or residual income ratios. One
industry commenter contended that if
the Bureau were to impose a 45 percent
total debt-to-income ratio, for example,
most larger secondary market investors/
servicers would impose a total debt-toincome ratio that is much lower (such
as 43 percent or 41 percent) as a general
rule of risk management.
Final Rule
The Bureau believes, based upon its
review of the data it has obtained and
the comments received, that the use of
total debt-to-income as a qualified
mortgage criterion provides a
widespread and useful measure of a
consumer’s ability to repay, and that the
Bureau should exercise its authority to
adopt a specific debt-to-income ratio
that must be met in order for a loan to
meet the requirements of a qualified
mortgage. The Bureau believes that the
qualified mortgage criteria should
include a standard for evaluating
whether consumers have the ability to
repay their mortgage loans, in addition
to the product feature requirements
specified in the statute. At the same
time, the Bureau recognizes concerns
that creditors should readily be able to
determine whether individual mortgage
transactions will be deemed qualified
mortgages. The Bureau addresses these
concerns by adopting a bright-line debtto-income ratio threshold of 43 percent,
as well as clear and specific standards,
based on FHA guidelines, set forth in
appendix Q for calculating the debt-toincome ratio in individual cases.
The Bureau believes that a consumer’s
debt-to-income ratio is generally
predictive of the likelihood of default,
and is a useful indicator of such. At a
basic level, the lower the debt-to-income
ratio, the greater the consumer’s ability
to pay back a mortgage loan would be
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
under existing conditions as well as
changed circumstances, such as an
increase in an adjustable rate, a drop in
future income, or unanticipated
expenses or new debts. The Bureau’s
analysis of FHFA’s Historical Loan
Performance (HLP) dataset, data
provided by the FHA,149 and data
provided by commenters all bear this
out. These data indicate that debt-toincome ratio correlates with loan
performance, as measured by
delinquency rate (where delinquency is
defined as being over 60 days late), in
any credit cycle. Within a typical range
of debt-to-income ratios for prudent
underwriting (e.g., under 32 percent
debt-to-income to 46 percent debt-toincome), the Bureau notes that
generally, there is a gradual increase in
delinquency with higher debt-to-income
ratio.150 The record also shows that
debt-to-income ratios are widely used as
an important part of the underwriting
processes of both governmental
programs and private lenders.
The Bureau recognizes the Board’s
initial assessment that debt-to-income
ratios may not have significant
predictive power once the effects of
credit history, loan type, and loan-tovalue are considered. In the same vein,
the Bureau notes that some commenters
suggested that the Bureau include
compensating factors in addition to a
specific debt-to-income ratio threshold.
Even if a standard that takes into
account multiple factors produces more
accurate ability-to-pay determinations
in specific cases, incorporating a multifactor test or compensating factors into
the definition of a qualified mortgage
would undermine the goal of ensuring
that creditors and the secondary market
can readily determine whether a
particular loan is a qualified mortgage.
Further, the Bureau believes that
compensating factors would be too
complex to calibrate into a bright-line
rule and that some compensating factors
suggested by commenters as
appropriate, such as loan-to-value
ratios, do not speak to a consumer’s
repayment ability.
Therefore, as permitted by the statute,
the Bureau is adopting a specific debtto-income ratio threshold because this
approach provides a clear, bright line
criterion for a qualified mortgage that
ensures that creditors in fact evaluate
149 The FHA’s comment letter provided in
response to the 2012 notice to reopen the comment
period describes this data.
150 See, e.g., 77 F.R. 33120, 33122–23 (June 5,
2012) (Table 2: Ever 60+ Delinquency Rates,
summarizing the HLP dataset by volume of loans
and percentage that were ever 60 days or more
delinquent, tabulated by the total DTI on the loans
and year of origination).
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
consumers’ ability to repay qualified
mortgages and provides certainty for
creditors to know that a loan satisfies
the definition of a qualified mortgage. A
specific debt-to-income ratio threshold
also provides additional certainty to
assignees and investors in the secondary
market, which should help reduce
possible concerns regarding legal risk
and potentially promote credit
availability. As numerous commenters
have urged, there is significant value to
providing objective requirements that
can be determined based on loan files.
As described below, the final rule
generally requires creditors to use the
standards for defining ‘‘debt’’ and
‘‘income’’ in appendix Q, which are
adapted from current FHA guidelines, to
minimize burden and provide
consistent standards. The standards set
forth in appendix Q provide sufficient
detail and clarity to address concerns
that creditors may not have adequate
certainty about whether a particular
loan satisfies the requirements for being
a qualified mortgage, and therefore will
not deter creditors from providing
qualified mortgages to consumers. The
Bureau anticipates that the standards
will facilitate compliance with the
Dodd-Frank Act risk retention
requirements, as the 2011 QRM
Proposed Rule relied on FHA standards
for defining ‘‘debt’’ and ‘‘income.’’ The
Bureau has consulted with the Federal
agencies responsible for the QRM
rulemaking in developing this rule, and
will continue to do so going forward.
Based on analysis of available data
and comments received, the Bureau
believes that 43 percent is an
appropriate ratio for a specific debt-toincome threshold, and that this
approach advances the goals of
consumer protection and preserving
access to credit. The Bureau
acknowledges, based on its analysis of
the data, that there is no ‘‘magic
number’’ which separates affordable
from unaffordable mortgages; rather, as
noted above, there is a gradual increase
in delinquency rates as debt-to-income
ratios increase. That being said, the
Bureau understands that 43 percent is
within the range of debt-to-income
ratios used by many creditors and
generally comports with industry
standards and practices for prudent
underwriting. As noted above, 43
percent is the threshold used by the
FHA as its general boundary. Although
the Bureau notes that Fannie Mae’s and
Freddie Mac’s guidelines generally
require a 36 percent debt-to-income
ratio, without compensating factors, the
Bureau believes that a 43 percent debtto-income threshold represents an
PO 00000
Frm 00121
Fmt 4701
Sfmt 4700
6527
appropriate method to define which
loans merit treatment as qualified
mortgages. In particular, the Bureau
believes that 43 percent represents a
prudent outer boundary for a categorical
presumption of a consumer’s ability to
repay.
As discussed above, there was
significant debate among the
commenters about the precise debt-toincome ratio threshold to establish.
Although a lower debt-to-income
threshold would provide greater
assurance of a consumer’s ability to
repay a loan, many commenters argued,
and the Bureau agrees, that establishing
a debt-to-income ratio threshold
significantly below 43 percent would
curtail many consumers’ access to
qualified mortgages. One commenter
estimated that roughly half of
conventional borrowers would not be
eligible for qualified mortgage loans if
the debt-to-income ratio was set at 32
percent, while 85 percent of borrowers
would be eligible with a ratio set at 45
percent.
At the same time, the Bureau declines
to establish a debt-to-income ratio
threshold higher than 43 percent. The
Bureau recognizes that some
commenters suggested that debt-toincome ratios above 43 percent would
not significantly increase the likelihood
of default (depending to some extent on
the presence of compensating factors),
and that some consumers may face
greater difficulty obtaining qualified
mortgages absent a higher threshold.
However, as the debt-to-income ratio
increases, the presence of compensating
factors becomes more important to the
underwriting process and in ensuring
that consumers have the ability to repay
the loan. The general ability-to-repay
procedures, rather than the qualified
mortgage framework, is better suited for
consideration of all relevant factors that
go to a consumer’s ability to repay a
mortgage loan.
Thus, the Bureau emphasizes that it
does not believe that a 43 percent debtto-income ratio represents the outer
boundary of responsible lending. The
Bureau notes that even in today’s creditconstrained market, approximately 22
percent of mortgage loans are made with
a debt-to-income ratio that exceeds 43
percent and that prior to the mortgage
boom approximately 20 percent of
mortgage loans were made above that
threshold. Various governmental
agencies, GSEs, and creditors have
developed a range of compensating
factors that are applied on a case by case
basis to assess a consumer’s ability to
repay when the consumer’s debt-toincome ratio exceeds a specified ratio.
Many community banks and credit
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6528
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
unions have found that they can
prudently lend to consumers with a
higher debt-to-income ratio based upon
their firsthand knowledge of the
individual consumer. As discussed
below, many of those loans will fall
within the temporary exception that the
Bureau is recognizing for qualified
mortgages. Over the long term, as the
market recovers from the mortgage crisis
and adjusts to the ability-to-repay rules,
the Bureau expects that there will be a
robust and sizable market for prudent
loans beyond the 43 percent threshold
even without the benefit of the
presumption of compliance that applies
to qualified mortgages. In short, the
Bureau does not believe that consumers
who do not receive a qualified mortgage
because of the 43 percent debt-toincome ratio threshold should be cut off
from responsible credit, and has
structured the rule to try to ensure that
a robust and affordable ability-to-repay
market develops over time.
The Bureau also believes that there
would be significant negative
consequences to the market from setting
a higher threshold. For instance, if the
qualified mortgage debt-to-income ratio
threshold were set above 43 percent, it
might sweep in many mortgages in
which there is not a sound reason to
presume that the creditor had a
reasonable belief in the consumer’s
ability to repay. At a minimum,
adopting a higher debt-to-income
threshold to define qualified mortgages
would require a corresponding
weakening of the strength of the
presumption of compliance—which
would largely defeat the point of
adopting a higher debt-to-income
threshold. Additionally, the Bureau also
fears that if the qualified mortgage
boundary were to cover substantially all
of the mortgage market, creditors might
be unwilling to make non-qualified
mortgage loans, with the result that the
qualified mortgage rule would define
the limit of credit availability. The
Bureau believes that lending in the nonqualified mortgage market can and
should be robust and competitive over
time. The Bureau expects that, as credit
conditions ease, creditors will continue
making prudent, profitable loans in nontraditional segments, such as to
consumers who have sufficient total
assets or future earning potential to be
able to afford a loan with a higher debtto-income ratio or consumers who have
a demonstrated ability to pay housing
expenses at or above the level of a
contemplated mortgage.
Finally, the Bureau acknowledges
arguments that residual income may be
a better measure of repayment ability in
the long run. A consumer with a
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
relatively low household income may
not be able to afford a 43 percent debtto-income ratio because the remaining
income, in absolute dollar terms, is too
small to enable the consumer to cover
his or her living expenses. Conversely,
a consumer with a relatively high
household income may be able to afford
a higher debt ratio and still live
comfortably on what is left over.
Unfortunately, however, the Bureau
lacks sufficient data, among other
considerations, to mandate a bright-line
rule based on residual income at this
time. The Bureau expects to study
residual income further in preparation
for the five-year review of this rule
required by the Dodd-Frank Act. See
also section-by-section analysis of
§ 1026.43(c)(7).
The Bureau believes that it is
important that the final rule provide
clear standards by which creditors
calculate a consumer’s monthly debt-toincome ratio for purposes of the specific
debt-to-income threshold in
§ 1026.43(e)(2)(vi). For this reason, the
final rule provides specific standards for
defining ‘‘debt’’ and ‘‘income’’ in
appendix Q. These standards are based
on the definitions of debt and income
used by creditors originating residential
mortgages that are insured by the FHA.
In particular, appendix Q incorporates
the definitions and standards in the
HUD Handbook 4155.1, Mortgage Credit
Analysis for Mortgage Insurance on
One-to-Four-Unit Mortgage Loans, to
determine and verify a consumer’s total
monthly debt and monthly income, with
limited modifications to remove
portions unique to the FHA
underwriting process, such as references
to the TOTAL Scorecard Instructions.
The use of FHA guidelines for this
purpose provides clear, well-established
standards for determining whether a
loan is a qualified mortgage under
§ 1026.43(e)(2). This approach is also
consistent with the proposed approach
to defining debt and income in the 2011
QRM Proposed Rule, and therefore
could facilitate compliance for creditors.
The Bureau has consulted with the
Federal agencies responsible for the
QRM rulemaking and will continue to
do so going forward as that rulemaking
is completed, as well as to discuss
changes to FHA guidelines that may
occur over time.
Accordingly, § 1026.43(e)(2)(vi)
provides that, as a condition to being a
qualified mortgage under
§ 1026.43(e)(2), the consumer’s total
monthly debt-to-income ratio does not
exceed 43 percent. For purposes of
§ 1026.43(e)(2)(vi), the consumer’s
monthly debt-to-income ratio is
calculated in accordance with appendix
PO 00000
Frm 00122
Fmt 4701
Sfmt 4700
Q, except as provided in
§ 1026.43(e)(2)(vi)(B). Section
1026.43(e)(2)(vi)(B) contains additional
requirements regarding the calculation
of ‘‘debt,’’ for consistency with other
parts of the qualified mortgage
definition and § 1026.43. Specifically,
that section provides that the
consumer’s monthly debt-to-income
ratio must be calculated using the
consumer’s monthly payment on the
covered transaction, including
mortgage-related obligations, in
accordance with § 1026.43(e)(2)(iv), and
any simultaneous loan that the creditor
knows or has reason to know will be
made, in accordance with
§ 1026.43(c)(2)(iv) and (c)(6). Comment
43(e)(2)(vi)–1 clarifies the relationship
between the definition of ‘‘debt’’ in
appendix Q and the requirements of
§ 1026.43(e)(2)(vi)(B). Specifically, the
comment states that, as provided in
appendix Q, for purposes of
§ 1026.43(e)(2)(vi), creditors must
include in the definition of ‘‘debt’’ a
consumer’s monthly housing expense.
This includes, for example, the
consumer’s monthly payment on the
covered transaction (including
mortgage-related obligations) and
simultaneous loans. Accordingly,
§ 1026.43(e)(2)(vi)(B) provides the
method by which a creditor calculates
the consumer’s monthly payment on the
covered transaction and on any
simultaneous loan that the creditor
knows or has reason to know will be
made.
The Bureau notes that the specific 43
percent debt-to-income requirement
applies only to qualified mortgages
under § 1026.43(e)(2). For the reasons
discussed below, the specific debt-toincome ratio requirement does not
apply to loans that meet the qualified
mortgage definitions in § 1026.43(e)(4)
or (f).
43(e)(3) Limits on Points and Fees for
Qualified Mortgages
43(e)(3)(i)
TILA section 129C(b)(2)(A)(vii)
defines a ‘‘qualified mortgage’’ as a loan
for which, among other things, the total
points and fees payable in connection
with the loan do not exceed 3 percent
of the total loan amount. TILA section
129C(b)(2)(D) requires the Bureau to
prescribe rules adjusting this limit to
‘‘permit lenders that extend smaller
loans to meet the requirements of the
presumption of compliance.’’ The
statute further requires the Bureau to
‘‘consider the potential impact of such
rules on rural areas and other areas
where home values are lower.’’ The
statute does not define and the
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
legislative history does not provide
guidance on the term ‘‘smaller loan’’ or
the phrase ‘‘rural areas and other areas
where home values are lower.’’
The Board proposed two alternative
versions of § 226.43(e)(3)(i) to
implement the 3 percent points and fees
cap for qualified mortgages and the
adjustment to the cap for smaller loans.
For both alternatives, the Board
proposed a threshold of $75,000,
indexed to inflation, for smaller loans.
For loans above the $75,000 threshold,
the 3 percent points and fees cap for
qualified mortgages would have
applied. For loans below $75,000,
different limits would have applied,
depending on the amount of the loan.
The Board explained that it set the
smaller loan threshold at $75,000
because it believed that Congress
intended the exception to the 3 percent
points and fees cap to apply to more
than a minimal, but still limited,
proportion of home-secured loans. The
Board noted that HMDA data show that
8.4 percent of first-lien, home-purchase
(site-built) mortgages in 2008 and 9.7
percent of such mortgages in 2009 had
a loan amount of $74,000 or less. The
Board also stated that outreach and
research indicated that $2,250—3
percent of $75,000—is within range of
average costs to originate a first-lien
home mortgage. Thus, the Board
concluded that $75,000 appears to be an
appropriate benchmark for applying the
3 percent limit on points and fees, with
higher limits below that threshold
offering creditors a reasonable
opportunity to recover their origination
costs.
Both of the Board’s proposed
alternatives would have separated loans
into tiers based on loan size, with each
tier subject to different limits on points
and fees. The Board’s proposed
Alternative 1 would have consisted of
five tiers of loan sizes and
corresponding limits on points and fees:
• For a loan amount of $75,000 or
more, 3 percent of the total loan
amount;
• For a loan amount greater than or
equal to $60,000 but less than $75,000,
3.5 percent of the total loan amount;
• For a loan amount greater than or
equal to $40,000 but less than $60,000,
4 percent of the total loan amount;
• For a loan amount greater than or
equal to $20,000 but less than $40,000,
4.5 percent of the total loan amount; and
• For a loan amount less than
$20,000, 5 percent of the total loan
amount.
Alternative 2 would have consisted of
three tiers of loan sizes and
corresponding limits on points and fees.
The first and third tiers were consistent
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
with Alternative 1. The middle tier was
a sliding scale that reduced the points
and fees cap (as a percentage of the loan
amount) with each dollar increase in
loan size. The three tiers of Alternative
2 would have consisted of:
• For a loan amount of $75,000 or
more, 3 percent of the total loan
amount;
• For a loan amount greater than or
equal to $20,000 but less than $75,000,
a percentage of the total loan amount
yielded by the following formula:
Æ Total loan amount¥$20,000 = $Z
Æ $Z × 0.0036 basis points = Y basis
points
Æ 500 basis points¥Y basis points =
X basis points
Æ X basis points × 0.01 = Allowable
points and fees as a percentage of the
total loan amount.
• For a loan amount less than
$20,000, 5 percent of the total loan
amount.
The approach in Alternative 2 would
have smoothed the transition from one
tier to another and fixed an anomaly of
Alternative 1. Under Alternative 1, for
loans just above and below the dividing
line between tiers, a greater dollar
amount of points and fees would have
been allowed on the smaller loans than
on the larger loans. For example, the
allowable points and fees on a total loan
amount of $76,000 would have been
$2,280 (3 percent of $76,000), but the
permissible points and fees on a total
loan amount of $70,000 would have
been $2,450 (3.5 percent of $70,000).
The Board noted that its proposal was
designed to ensure that if a loan is a
qualified mortgage it would not also be
a high-cost mortgage based on the points
and fees. The Board stated its belief that
the statute is designed to reduce the
compliance burden on creditors when
they make qualified mortgages, in order
to encourage creditors to make loans
with stable, understandable loan
features. The Board expressed concern
that creating points and fees thresholds
for small loans that might result in
qualified mortgages also being high-cost
mortgages would discourage creditors
from making qualified mortgages
because the requirements and
limitations of high-cost loans are
generally more stringent than for other
loans.
The Board requested comment on the
proposed alternative loan size ranges
and corresponding points and fees
limits for qualified mortgages. The
Board also requested comment on
whether the loan size ranges should be
indexed for inflation.
The Board stated that, instead of using
a smaller loan threshold with different
tiers, it had considered adjusting the
PO 00000
Frm 00123
Fmt 4701
Sfmt 4700
6529
criteria for smaller loans by narrowing
the types of charges that would be
included in points and fees for smaller
loans. The Board indicated that
outreach participants disfavored this
approach because it would have
required different ways of calculating
points and fees, depending on loan size,
and thus likely would have increased
the burden of complying with the rules
and the risk of error. The Board also
stated that it had considered proposing
an alternative points and fees threshold
for certain geographical areas. As the
Board noted, however, property values
shift over time, and there is substantial
variation in property values and loan
amounts within geographical areas.
Thus, adjusting the limits on points and
fees based solely on geographic areas
would have been a less straightforward
and less precise method of addressing
the statute’s concern with smaller loans.
No commenters supported these
approaches.
Several industry commenters argued
that points and fees have little, if any,
relationship to consumers’ ability to
repay their mortgage loans and that
qualified mortgages should therefore not
be subject to limits on points and fees.
Although they acknowledged that the
Dodd-Frank Act generally prescribed a 3
percent limit on points and fees for
qualified mortgages, they urged the
Bureau to use its authority to eliminate
this requirement.
Several industry commenters
contended that the 3 percent limit on
points and fees for qualified mortgages
is too low. They maintained that the 3
percent cap would require creditors to
increase interest rates to recover their
costs and would limit consumers’
flexibility to arrange their optimal
combination of interest rates and points
and fees. Industry commenters also
claimed that the 3 percent limit would
have a negative impact on consumers’
access to affordable credit. Some
industry commenters noted that the
GSEs’ seller/servicer guides contain
standards that limit points and fees for
loans that the GSEs purchase or
securitize, with the current standards
limiting points and fees to the greater of
5 percent of the mortgage amount or
$1,000. The commenters argued that
Bureau should use its authority adopt
the GSEs’ standards instead of the
requirements prescribed by the DoddFrank Act. One commenter argued that,
because of the complexity of the points
and fees test, the Bureau should adopt
a tolerance of one-quarter of 1 percent
or $250 for the 3 percent limit so that
de minimis errors in calculating points
and fees would not prevent a loan from
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6530
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
retaining the legal protection of a
qualified mortgage.
With respect to the two proposed
alternative versions of section
43(e)(3)(i), industry commenters
generally preferred Alternative 1. They
explained that Alternative 2 was too
complex, would be difficult to
implement, and would increase
compliance and litigation costs. Some
consumer advocates preferred
Alternative 2, stating that it would be
more beneficial to consumers. Other
consumer advocates preferred
Alternative 1, asserting that its
simplicity would minimize
miscalculations that could harm
consumers. They stated that the
difference to the consumer between
Alternative 1 and Alternative 2 was
marginal. Some of these consumer
advocates argued that the benefit
afforded by simplicity would outweigh
the small pricing distortions.
Commenters did not object to the
Board’s general approach of setting a
threshold amount for smaller loans and
adjusting the points and fees cap for
loans below the threshold. Instead, the
comments discussed what the threshold
loan amount should be for smaller loans
and what limits should be imposed on
points and fees for loans below the
threshold.
Industry commenters contended that
the Board’s proposed limits on points
and fees for smaller loans would be too
low and would not permit creditors to
recover their costs. They stated that
many origination costs are fixed
regardless of loan size. They asserted
that if a creditor could not cover those
costs through points and fees, the
creditor would either not make the
mortgage or increase the interest rate to
cover the costs. Industry commenters
expressed concern that, for smaller
loans, a rate increase might result in the
loan becoming a high-cost mortgage or
in some consumers no longer being
eligible for the loan. They contended
that creditors would be reluctant to
make these loans and credit availability
would be compromised, in particular for
low-income, minority, and rural
consumers, and first-time home buyers.
One commenter reported that if a
consumer were offered a high interest
rate to cover costs and the rate were
increased to offset the costs of a smaller
loan, the consumer would pay
thousands of dollars more over the life
of the loan. Industry commenters
asserted that the proposed alternatives
did not capture the congressional intent
of providing creditors sufficient
incentives to make smaller loans.
Industry commenters urged the Bureau
to revise the proposal to allow creditors
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
to recover more of their costs through
points and fees, either by increasing the
threshold for smaller loans or raising the
limits for loans below the threshold or
by doing both.
Many industry commenters
recommended raising the threshold for
smaller loans from the $75,000
threshold proposed by the Board. One
industry commenter suggested setting
the threshold at $100,000, indexed to
inflation. Relying on loan balances for
median home prices, another industry
commenter asked that the Bureau raise
the threshold to $125,000. Many other
industry commenters recommended
raising the threshold to $150,000. One
commenter noted that the average loan
size in the United States at the end of
the second quarter of 2010 was $193,800
and suggested using 80 percent of the
average loan size, rounding off to the
nearest $10,000.
In addition to urging the Bureau to
raise the smaller loan threshold, many
industry commenters recommended that
the Bureau revise the proposal to permit
creditors to charge higher points and
fees for loans below the smaller loan
threshold for qualified mortgages.
Several industry commenters asked that
the Bureau set the cap between 3.5 and
5 percent, indexed to inflation, for all
loans under the smaller loans threshold.
One industry commenter noted that
Fannie Mae and Freddie Mac permit
points and fees up to 5 percent. An
industry commenter suggested a cap
equal to the greater of 3 percent or
$2,000, indexed to inflation. A
combination of industry commenters
and consumer advocates recommended
a cap equal to the greater of 3 percent
or $3,000. One industry commenter
advocated a 4 percent cap for all loans
below $125,000. Several industry
commenters recommended that the cap
be set at a fixed amount plus a
percentage to lessen the impact of
moving from one tier to the next.
In support of their arguments to raise
the smaller loan threshold and to raise
the limits on points and fees for loans
below the threshold, several industry
commenters provided data showing that
many smaller loans would have
exceeded the proposed points and fees
caps. For example, a trade association
commenter drew on data submitted by
a member bank that showed that the
majority of loans under $100,000 would
exceed the points and fees cap,
assuming fees paid to an affiliate title
company were included, and that many
loans between $100,000 and $150,000
would also exceed the cap. A trade
association industry commenter shared
data from one of its members, a
financial services provider. The member
PO 00000
Frm 00124
Fmt 4701
Sfmt 4700
reviewed over 250,000 of its recent
loans and found that none of the loans
under $75,000 would meet the proposed
cap and that 50 percent of the loans
under $125,000 would meet the cap.
Several industry commenters reported
that if the Bureau raised the smaller
loan threshold to $150,000, a
significantly smaller percentage of loans
would exceed the points and fees cap.
A trade association representing the
manufactured housing industry noted
the Board’s concern about setting the
points and fees cap so high that some
qualified mortgages would be deemed
high-cost mortgages under HOEPA. The
commenter argued, however, that the
Bureau has authority to change highcost mortgage thresholds and urged the
Bureau to exercise this authority. The
commenter cited section 1431 of the
Dodd-Frank Act for the proposition that
the Board may increase the amount of
origination costs above $1,000 for loans
less than $20,000. The commenter also
said that section 1022 of the Dodd-Frank
Act may grant the Board authority to
exempt certain smaller sized
manufactured home loans from the 5
percent points and fees caps on highcost mortgages for loans above $20,000,
based on asset class, transaction
volume, and existing consumer
protections.
Consumer advocates generally
endorsed the $75,000 threshold for
smaller loans. They questioned industry
concerns that the 3 percent threshold
would limit the availability of credit for
consumers with comparatively low loan
amounts. Instead, the commenters
emphasized the importance of ensuring
that qualified mortgages are affordable.
In their view, the 3 percent points and
fees cap is a key factor in ensuring
affordability, so the exception for
smaller loans should apply to only a
limited proportion of loans. Consumer
advocates argued that the points and
fees cap should not exceed the 5 percent
HOEPA trigger. They asserted that
points and fees should be reasonable,
reflect actual origination costs, and not
result in disparate pricing schemes
disadvantaging consumers with smaller
loans.
One consumer advocate
recommended analyzing the impact of a
3 percent points and fees cap on access
to credit for low- and moderate-income
consumers, in particular for Community
Reinvestment Act loans. The commenter
asked that the Bureau describe in
preamble the results of any analysis of
points and fees by loan amount, and for
Community Reinvestment Act and nonCommunity Reinvestment Act loans.
In light of these comments, the
Bureau is adopting revised
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
§ 1026.43(e)(3)(i) to implement the
limits on points and fees for qualified
mortgages. As noted above, several
industry commenters argued that points
and fees have little if any bearing on
consumers’ ability to repay their
mortgage loans and that the points and
fees limits would result in higher
interest rates and reduced access to
credit. They urged the Bureau to use its
authority to eliminate the limits on
points and fees for qualified mortgages.
As an alternative to eliminating the
points and fees limits entirely, some
industry commenters requested that the
Bureau adopt the GSEs’ standards
limiting points and fees for loans that
they purchase or securitize. Those
standards currently limit points and fees
to the greater of 5 percent of the loan
amount or $1,000.
The Bureau does not believe it would
be appropriate to eliminate the limits on
points and fees for qualified mortgages.
The Bureau also declines to adopt the
GSEs’ current standards and raise the
general 3 percent limit on points and
fees. The goal of TILA section 129C is
to assure that consumers are able to
repay their mortgages over the term of
the loans. Originators that make large
sums up front may be less careful in
assuring the consumers’ ability to repay
over time. Moreover, Congress may have
believed that the points and fees limits
may deter originators from imposing
unnecessary or excessive up-front
charges. In the absence of persuasive
evidence that the points and fees limits
will undermine consumers’ access to
affordable credit, the Bureau does not
believe it would be appropriate to
eliminate the points and fees limits or
to raise the general 3 percent limit. As
discussed in more detail below,
however, the Bureau is implementing
revised points and fees limits for
smaller loans. The Bureau also notes
that the Dodd-Frank Act did not adopt
a tolerance that would allow creditors to
exceed the points and fees limits by
small amounts and declines to adopt
such a tolerance.
As noted above, a consumer advocate
requested that the Bureau conduct an
analysis of the 3 percent points and fees
cap on access to credit for low- and
moderate-income consumers, in
particular for Community Reinvestment
Act loans. Given the lack of available
data, it has not been practicable for the
Bureau to perform such an analysis
while finalizing this and other title XIV
rules. The Bureau will consider whether
it is possible and valuable to conduct
such an analysis in the future.
Revised § 1026.43(e)(3)(i) employs an
approach similar to that proposed by the
Board to implement the 3 percent cap
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
on points and fees and the adjustment
to the cap for smaller loans. Like the
Board’s proposal, § 1026.43(e)(3)(i) sets
a threshold for smaller loans, establishes
tiers based on loan size, and sets limits
on points and fees within each tier.
However, § 1026.43(e)(3)(i) uses a mix of
percentage and flat dollar limits to avoid
anomalous results at tier margins and
also adjusts the definition of smaller
loan to include more transactions.
Although most commenters favored
this tiering methodology, as noted
above, some commenters suggested that
the Bureau reject the Board’s tiered
approach and instead adopt a simpler
mechanism, with all loan amounts
below the threshold subject to a single
percentage cap or dollar amount cap on
points and fees. Like the Board, the
Bureau believes the tiered approach
provides a more flexible and calibrated
mechanism for implementing the limits
on points and fees for smaller loans. A
single percentage cap that would apply
to all smaller loans may not allow
creditors a reasonable opportunity to
recover costs for very small loans. It also
may create a distortion in which loans
just below the smaller loan threshold
would be permitted to have significantly
higher points and fees than loans just
above the smaller loan threshold. A
single dollar amount cap (e.g., $3,000)
could result in points and fees that are
a very high percentage of the very
smallest loans and, as a result, could
result in qualified mortgages also
triggering the obligations of high-cost
mortgages.
Thus, as in the Board’s proposal, the
final rule sets a threshold for smaller
loans and establishes tiers, based on
loan size, with different limits on points
and fees. Specifically, § 1026.43(e)(3)(i)
provides that a transaction is not a
qualified mortgage unless the total
points and fees payable in connection
with the loan do not exceed:
• For a loan amount greater than or
equal to $100,000, 3 percent of the total
loan amount;
• For a loan amount greater than or
equal to $60,000 but less than $100,000,
$3,000;
• For a loan amount greater than or
equal to $20,000 but less than $60,000,
5 percent of the total loan amount;
• For a loan amount greater than or
equal to $12,500 but less than $20,000,
$1,000 of the total loan amount;
• For a loan amount of less than
$12,500, 8 percent of the total loan
amount.
The Bureau’s final rule departs from
the proposal in two ways. First,
§ 1026.43(e)(3)(i) raises the threshold for
smaller loans to $100,000. Second, for
loans below the $100,000 threshold,
PO 00000
Frm 00125
Fmt 4701
Sfmt 4700
6531
§ 1026.43(e)(3)(i) revises the points and
fees caps for smaller loans within the
various tiers. The general effect of these
revisions will be to increase the points
and fees that creditors can charge for
smaller loans while still permitting
those loans to meet the standard for a
qualified mortgage. These two changes
are discussed at greater length below.
$100,000 Threshold for Smaller Loans
To fulfill the stated purpose of the
adjustment for smaller loans, the
threshold should be set at a level that is
sufficient to permit creditors making
smaller loans a reasonable opportunity
to recoup their origination costs and
still offer qualified mortgages but not so
high as to cause loans to exceed the
HOEPA threshold to become high-cost
mortgages. As noted above, the Board
proposed to set the smaller loan
threshold so that three percent of that
amount would have provided creditors
with a reasonable opportunity to recover
their costs, with loans below that
threshold subject to higher caps on
points and fees. Thus, the Board’s
proposed $75,000 threshold would have
created a benchmark of $2,250. The
Board stated that its outreach and
research indicated that $2,250 would be
within the range of average costs to
originate a first-lien home mortgage.
However, as noted above, several
industry commenters reported, based on
recent loan data, that creditors’ points
and fees often exceed $2,250 for smaller
loans and that a significant number of
loans above $75,000 would exceed the
three percent cap.151
This evidence suggests that the $2,250
benchmark (and the corresponding
$75,000 smaller loan threshold) in the
proposal could have been insufficient to
permit creditors to recoup all or even
most of their origination costs. The
Bureau is aware that the commenters’
loan data reflects creditors’ points and
fees, and not the underlying costs.
Nevertheless, the evidence that
substantial proportions of smaller loans
would have exceeded the points and
fees limits raises concerns that the
creditors would not be able to recover
their costs through points and fees and
still originate qualified mortgages.
Creditors that are unable to recover their
origination costs through points and
fees would have to attempt to recover
those costs through higher rates. If the
higher rates would trigger the additional
151 As the Board noted, resources that provide
data on origination costs tend to use different
methodologies to calculate points and fees and do
not use the methodology prescribed under TILA as
amended by the Dodd-Frank Act. The same
concerns apply to commenters’ data on points and
fees.
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6532
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
regulatory requirements applicable to
high-cost loans under HOEPA or would
render some potential consumers
ineligible, then access to credit for at
least some consumers could be
compromised. Moreover, for consumers
who plan to remain in their homes (and
their loans) for a long time, a higher
interest rate would result in higher
payments over the life of the loan.
Some commenters claimed that a
substantial portion of loans up to
$125,000 or $150,000 would exceed the
3 percent points and fees cap and that
the Bureau should raise the threshold
accordingly. The Bureau disagrees for
two reasons. First, this would stretch
the meaning of ‘‘smaller loans.’’ In 2011,
slightly under 21 percent of first-lien
home mortgages were below $100,000
and another 22 percent were between
$100,000 and $150,000. Thus,
increasing the threshold to $150,000
would more than double the number of
loans entitled to an exception to the
congressionally-established points and
fees cap and would capture over 40
percent of the market. The Bureau
believes that this would be an overly
expansive construction of the term
‘‘smaller loans’’ for the purpose of the
exception to the general rule capping
points and fees for qualified mortgages
at 3 percent. Such a broad definition of
‘‘smaller loans’’ could allow the
exception to undermine the cap on
points and fees and frustrate
congressional intent that qualified
mortgages include limited points and
fees. The function of the smaller loan
exception to the points and fees cap is
to make it possible for creditors making
smaller loans to originate qualified
mortgages. The smaller loan exception
should provide creditors a reasonable
opportunity to recover most, if not all,
of their origination costs for smaller
loans and still originate qualified
mortgages. It should not be transformed
into a mechanism that ensures that
creditors can continue to charge the
same points and fees they have in the
past and still have their loans meet the
qualified mortgage standard.
The Bureau concludes that a $100,000
small loan threshold strikes an
appropriate balance between
congressional goals of allowing creditors
offering smaller loans to meet the
standard for qualified mortgages and
ensuring that qualified mortgages
include limited points and fees. The
$100,000 threshold (and, as discussed
below, the corresponding adjustments to
the points and fees limits for loans
under that threshold) should provide
creditors with a reasonable opportunity
to recover most, if not all, of their
origination costs through points and
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
fees, reducing the likelihood that any
increase in rates would trigger
obligations of high-cost loans or would
cause loans to be higher-priced covered
transactions under § 1026.43(b)(4). At
the same time, the $100,000 threshold
would not render the smaller loan
exception so broad that it undermines
the general 3 percent cap on points and
fees. It would cover a significant but
still limited proportion of mortgages.
According to the 2011 Home Mortgage
Disclosure Act 152 (HMDA) data, 20.4
percent of first-lien home purchase
mortgages and 20.9 percent of first-lien
refinances were less than $100,000.153
Limits on Points and Fees for Smaller
Loans
In addition to raising the smaller loan
threshold to $100,000, § 1026.43(e)(3)(i)
also differs from the Board’s proposal by
setting higher limits on points and fees
for smaller loans. As noted above, the
Bureau is concerned that the Board’s
proposal would not have provided
creditors with a reasonable opportunity
to recover their origination costs. Thus,
§ 1026.43(e)(3)(i) allows creditors higher
limits on points and fees for smaller
loans. Specifically, for loans of $60,000
up to $100,000, § 1026.43(e)(3)(i) allows
points and fees of no more than $3,000.
For loans of $20,000 up to $60,000,
§ 1026.43(e)(3)(i) allows points and fees
of no more than 5 percent of the total
loan amount. For loans of $12,500 up to
$20,000, § 1026.43(e)(3)(i) allows points
and fees of no more than $1,000. For
loan amounts less than $12,500,
§ 1026.43(e)(3)(i) allows points and fees
of no more than 8 percent of the total
loan amount.
In contrast with the Board’s proposed
Alternative 1, § 1026.43(e)(3)(i) creates
smooth transitions between the tiers. As
noted above, under Alternative 1, the
one-half percent changes in the points
and fees cap between tiers would have
produced the anomalous result that
some smaller loans would have been
permitted to include a higher dollar
amount of points and fees than larger
loans. While proposed Alternative 2
would have avoided this problem, it
152 12
U.S.C. 2801 et seq.
proportion of loans under the $100,000
threshold would of course be larger than under a
$75,000 threshold. As indicated in the Board’s
proposal, in 2008, 8.3 percent of first-lien home
purchase mortgages and 7.6 percent of refinances
were under $75,000 for owner-occupied, one- to
four-family, site-built properties. According to 2011
HMDA data, 10.6 percent of first-lien home
purchases and 11 percent of first-lien refinances
were under $75,000. Nevertheless, the Bureau
believes that the $100,000 threshold is sufficiently
limited that it remains faithful to the statute’s
framework, with the smaller loan exception not
undermining the general 3 percent limit on points
and fees.
153 The
PO 00000
Frm 00126
Fmt 4701
Sfmt 4700
would also have been somewhat more
complex, thereby increasing the risk of
errors. The tiers in § 1026.43(e)(3)(i) all
feature easy-to-calculate limits, making
compliance easier.
Finally, the three lower tiers are tied
to the comparable thresholds for highcost loans to ensure that the points and
fees on loans that satisfy the qualified
mortgage standard do not trigger the
additional obligations of high-cost
mortgages. Under TILA as amended, a
high-cost mortgage has points and fees
equal to 5 percent of the total
transaction amount if the transaction is
$20,000 or more, and points and fees
equal to the lesser of 8 percent of the
total transaction amount or $1,000, if
the transaction is less than $20,000. See
TILA section 103(bb)(1)(A)(ii)(I) and (II).
Setting the maximum points and fees
caps based on the HOEPA triggers will
help ensure that a qualified mortgage is
not a high-cost mortgage because of the
points and fees.
Proposed comment 43(e)(3)(i)–1
would have cross-referenced comment
32(a)(ii)–1 for an explanation of how to
calculate the ‘‘total loan amount.’’ The
Bureau adopts comment 43(e)(3)(i)–1
substantially as proposed, but it adds an
explanation for tiers in which the
prescribed points and fees limit is a
fixed dollar amount rather than a
percentage and revises the crossreference because the explanation of
calculating ‘‘total loan amount’’ is
moved to comment 32(b)(5)(i)–1.
Proposed comment 43(e)(3)(i)–2
would have explained that a creditor
must determine which category the loan
falls into based on the face amount of
the note (the ‘‘loan amount’’), but must
apply the allowable points and fees
percentage to the ‘‘total loan amount,’’
which may be an amount that is
different than the face amount of the
note. The Bureau adopts comment
43(e)(3)(i)–2 substantially as proposed,
but it revises some of the limits to
reflect the changes described above.
Proposed comment 43(e)(3)(i)–3
would have provided examples of
calculations for different loan amounts.
The Bureau adopts comment 43(e)(3)(i)–
3 with revisions to reflect the changes
to some of the limits described above.
Impact on Rural Areas and Other Areas
Where Home Values Are Lower
TILA section 129C(b)(2)(D) requires
the Bureau to consider the rules’
potential impact on ‘‘rural areas and
other areas where home values are
lower.’’ The Bureau considered the
concerns raised by industry commenters
that if the limits on points and fees for
smaller loans were set too low, access to
credit could be impaired, in particular
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
for low income, minority, and rural
consumers, and first-time home buyers.
Setting the threshold for smaller loans
too low may also negatively affect
access to credit for manufactured
housing, which disproportionately
serves lower-income consumers and
rural areas. The higher threshold and
higher limits on points and fees for
smaller loans should help to ensure that
creditors are able to offer qualified
mortgages in rural areas and other areas
where home values are lower.
The Bureau declines to adopt the
recommendation of one commenter that
it exempt smaller loans for
manufactured homes from the points
and fees triggers for high-cost mortgages.
Section 1431 of the Dodd Frank Act
provides that a loan of $20,000 or more
is deemed a high-cost mortgage if total
points and fees exceed 5 percent of the
total transaction amount and that a loan
of less than $20,000 is deemed a highcost mortgage if total points and fees
exceed the lesser of 8 percent of the
total transaction amount or $1,000, or
other such dollar amount as the Bureau
may prescribe by regulations. Such a
change is beyond the scope of this
rulemaking and is more appropriately
addressed in the parallel HOEPA
rulemaking.
43(e)(3)(ii)
Bona Fide Third-party Charges and
Bona Fide Discount Points
As discussed in the section-by-section
analysis of § 1026.32(b)(1)(i), the Bureau
is moving the provisions excluding
certain bona fide third-party charges
and bona fide discount points to
§ 1026.32(b)(1)(i)(D) through (F). The
Board had proposed to implement these
provisions in proposed § 226.43(e)(3)(ii)
through (iv).
sroberts on DSK5SPTVN1PROD with
Indexing Points and Fees Limits for
Inflation
The Board requested comment on
whether the loan size ranges for the
qualified mortgage points and fees
limits should be indexed for inflation. A
few industry commenters recommended
that the loan size ranges or the
permitted dollar amounts of points and
fees be adjusted for inflation. The
Bureau believes that it is appropriate to
adjust the points and fees limits to
reflect inflation. In addition, the Bureau
notes that, as prescribed by TILA
section 103(aa)(3), what was originally a
$400 points and fees limit for high-cost
loans has been adjusted annually for
inflation, and that the dollar amounts of
the new high-cost points and fees
thresholds in TILA section
103(bb)(1)(A)(ii)(II) will also be adjusted
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
annually for inflation. The Bureau
believes the points and fees thresholds
for high-cost loans and qualified
mortgages should be treated consistently
with respect to inflation adjustments.
Accordingly, in new § 1026.43(e)(3)(ii),
the Bureau provides that the dollar
amounts, including the loan amounts,
shall be adjusted annually to reflect
changes in the Consumer Price Index for
All Urban Consumers (CPI–U). The
adjusted amounts will be published in
new comment 43(e)(3)(ii)–1.
43(e)(4) Qualified Mortgage Defined—
Special Rules
As discussed above, the Bureau is
finalizing the general qualified mortgage
definition in § 1026.43(e)(2). Under that
definition, qualified mortgages would be
limited to loans that satisfy the qualified
mortgage product feature criteria in the
statute (including prohibitions on
certain risky loan features, limitations
on points and fees, and the requirement
to underwrite to the maximum rate in
the first five years of the loan), for
which the creditor considers and
verifies the consumer’s income and
assets and current debt obligations,
alimony, and child support, and for
which the consumer’s total (or ‘‘backend’’) debt-to-income ratio is less than
or equal to 43 percent.154
The Bureau believes this approach
establishes an appropriate benchmark
over the long term for distinguishing
which loans should be presumed to
meet the ability-to-repay requirements
under the Dodd-Frank Act, while also
leaving room for the provision of
responsible mortgage credit over time to
consumers with higher debt-to-income
ratios under the general ability-to-repay
154 As noted above, the Board proposed two
alternative definitions of qualified mortgage, but
also solicited comment on other alternative
definitions. The Board specifically requested
comment on what criteria should be included in the
definition of a qualified mortgage to ensure that the
definition provides an incentive to creditors to
make qualified mortgages, while also ensuring that
consumers have the ability to repay those loans. In
addition, as described above, the Board’s proposed
comment 43(c)-1 would have provided that
creditors may look to widely accepted
governmental or non-governmental underwriting
standards when assessing a consumer’s repayment
ability under the general ability-to-repay standard,
including assessing the eight specific underwriting
criteria under proposed §§ 226.43(c)(2) and
(e)(2)(v)-Alternative 2. Similarly, proposed
comment 43(c)(7)–1 would have provided that, to
determine the appropriate threshold for monthly
debt-to-income ratio or residual income, the
creditor may look to widely accepted governmental
and non-governmental underwriting standards. As
noted, various commenters suggested that the final
rule should look to certain Federal agency
underwriting standards for purposes of determining
whether a loan has met certain aspects of the
qualified mortgage definition (for example, debt-toincome ratios and residual income).
PO 00000
Frm 00127
Fmt 4701
Sfmt 4700
6533
requirements. However, the Bureau
acknowledges it may take some time for
the non-qualified mortgage market to
establish itself in light of the market
anxiety regarding litigation risk under
the ability-to-repay rules, the general
slow recovery of the mortgage market,
and the need for creditors to adjust their
operations to account for several other
major regulatory and capital regimes. In
light of these factors, the Bureau has
concluded that it is appropriate to
provide a temporary alternative
definition of qualified mortgage. This
will help ensure access to responsible,
affordable credit is available for
consumers with debt-to-income ratios
above 43 percent and facilitate
compliance by creditors by promoting
the use of widely recognized, federallyrelated underwriting standards.
Under this temporary provision, as a
substitute for the general qualified
mortgage definition in § 1026.43(e)(2),
which contains a 43 percent debt-toincome ratio threshold, the final rule
provides a second definition of qualified
mortgage in § 1026.43(e)(4) for loans
that meet the prohibitions on certain
risky loan features (e.g., negative
amortization and interest only features)
and the limitations on points and fees
under § 1026.43(e)(2) and are eligible for
purchase or guarantee by the GSEs,
while under the conservatorship of the
FHFA, or eligible to be insured or
guaranteed by the U.S. Department of
Housing and Urban Development under
the National Housing Act (12 U.S.C.
1707 et seq.) (FHA), the VA, the USDA,
or the Rural Housing Service (RHS).155
The FHA, VA, USDA, and RHS have
authority under the statute to define
qualified mortgage standards for their
own loans, so coverage under
§ 1026.43(e)(4), will sunset once each
agency promulgates its own qualified
mortgage standards, and such rules take
effect. See TILA section 129C(b)(3)(ii).
Coverage of GSE-eligible loans will
sunset when conservatorship ends.
Even if the Federal agencies do not
issue additional rules or
conservatorship does not end, the
temporary qualified mortgage definition
in § 1026.43(e)(4) will expire seven
155 Eligibility standards for the GSEs and Federal
agencies are available at: Fannie Mae, Single Family
Selling Guide, https://www.fanniemae.com/
content/guide/sel111312.pdf; Freddie Mac, SingleFamily Seller/Servicer Guide, http://
www.freddiemac.com/sell/guide/; HUD Handbook
4155.1, http://www.hud.gov/offices/adm/hudclips/
handbooks/hsgh/4155.1/41551HSGH.pdf; Lenders
Handbook—VA Pamphlet 26–7, Web Automated
Reference Material System (WARMS), http://
www.benefits.va.gov/warms/pam26_7.asp;
Underwriting Guidelines: USDA Rural Development
Guaranteed Rural Housing Loan Program, http://
www.rurdev.usda.gov/SupportDocuments/CA-SFHGRHUnderwritingGuide.pdf.
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
6534
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
years after the effective date of the rule.
The Bureau believes that this will
provide an adequate period for
economic, market, and regulatory
conditions to stabilize. Because the
Bureau is obligated by statute to analyze
the impact and status of the ability-torepay rule five years after its effective
date, the Bureau will have an
opportunity to confirm that it is
appropriate to allow the temporary
provision to expire prior to the sunset.
Covered transactions that satisfy the
requirements of § 1026.43(e)(4) that are
consummated before the sunset of
§ 1026.43(e)(4) will retain their qualified
mortgage status after the temporary
definition expires. However, a loan
consummated after the sunset of
§ 1026.43(e)(4) may only be a qualified
mortgage if it satisfies the requirements
of § 1026.43(e)(2) or (f).
The alternative definition of qualified
mortgage recognizes that the current
mortgage market is especially fragile as
a result of the recent mortgage crisis. It
also recognizes the government’s
extraordinary efforts to address the
crisis; GSE-eligible loans, together with
the other federally insured or
guaranteed loans, cover roughly 80
percent of the current mortgage market.
In light of this significant Federal role
and the government’s focus on
affordability in the wake of the mortgage
crisis, the Bureau believes it is
appropriate, for the time being, to
presume that loans that are eligible for
purchase, guarantee, or insurance by the
designated Federal agencies and the
GSEs while under conservatorship have
been originated with appropriate
consideration of consumers’ ability to
repay, where those loans also satisfy the
requirements of § 1026.43(e)(2)
concerning restrictions on product
features and total points and fees
limitations. The temporary definition is
carefully calibrated to provide a
reasonable transition period to the
general qualified mortgage definition,
including the 43 percent debt-to-income
ratio requirement. While this temporary
definition is in effect, the Bureau will
monitor the market to ensure it remains
appropriate to presume that the loans
falling within those programs have been
originated with appropriate
consideration of the consumer’s
repayment ability. The Bureau believes
this temporary approach will ultimately
benefit consumers by minimizing any
increases in the cost of credit as a result
of this rule while the markets adjust to
the new regulations.
The Bureau believes this temporary
alternative definition will provide an
orderly transition period, while
preserving access to credit and
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
effectuating the broader purposes of the
ability-to-repay statute during the
interim period. The Bureau believes that
responsible loans can be made above a
43 percent debt-to-income ratio
threshold, and has consciously
structured the qualified mortgage
requirements in a way that leaves room
for responsible lending on both sides of
the qualified mortgage line. The
temporary exception has been carefully
structured to cover loans that are
eligible to be purchased, guaranteed, or
insured by the GSEs (while in
conservatorship) or Federal agencies
regardless of whether the loans are
actually so purchased, guaranteed, or
insured; this will leave room for private
investors to return to the market and
secure the same legal protection as the
GSEs and Federal agencies. At the same
time, as the market recovers and the
GSEs and FHA are able to reduce their
presence in the market, the percentage
of loans that are granted qualified
mortgage status under the temporary
definition will shrink towards the longterm structure.
In addition to being a loan that is
eligible to be made, guaranteed, or
insured by the above-described Federal
agencies or the GSEs while in
conservatorship, to meet the definition
of qualified mortgage under
§ 1026.43(e)(4), the loan must satisfy the
statutory qualified mortgage criteria
regarding prohibitions on certain risky
loan features and limitations on points
and fees. Specifically, § 1026.43(e)(4)(i)
provides that, notwithstanding
§ 1026.43(e)(2), a qualified mortgage is a
covered transaction that satisfies the
requirements of § 1026.43(e)(2)(i)
through (iii). As discussed above, those
provisions require: that the loan provide
for regular periodic payments that do
not result in an increase of the principal
balance, allow the consumer to defer
repayment of principal, or result in a
balloon payments; that the loan term
does not exceed 30 years; and that the
total points and fees payable in
connection with the loan do not exceed
the threshold set forth in § 1026.43(e)(3).
As described further below, the
temporary definition does not include
requirements to (1) verify and document
the consumer’s income or assets relied
upon in qualifying the consumer; (2)
underwrite a fixed rate loan based on a
payment schedule that fully amortizes
the loan over the term and takes into
account all applicable taxes, insurance,
and assessments; or (3) underwrite an
adjustable-rate loan using the maximum
interest rate permitted in the first five
years. The Bureau highlights that a loan
need not be actually purchased or
PO 00000
Frm 00128
Fmt 4701
Sfmt 4700
guaranteed by the GSEs or insured or
guaranteed by the above-listed Federal
agencies to qualify for the temporary
definition in § 1026.43(e)(4). Rather, the
loan need only be eligible for such
purchase, guarantee, or insurance.
Notably, the temporary qualified
mortgage definition does not include
‘‘jumbo loans.’’ The Bureau does not
believe that creditors making jumbo
loans need the benefit of the temporary
exception, as the Bureau views the
jumbo market as already robust and
stable. Jumbo loans can still be qualified
mortgages if they meet the general rule
(i.e. are within the 43 percent debt-toincome ratio and underwritten in
accordance with the general qualified
mortgage requirements).
Section 1026.43(e)(4)(iii) contains the
sunset provisions for the special
qualified mortgage definition in
§ 1026.43(e)(4). Specifically,
§ 1026.43(e)(4)(iii)(A) provides that each
respective special rule in
§ 1026.43(e)(4)(ii)(B) (FHA loans),
(e)(4)(ii)(C) (VA loans), (e)(4)(ii)(D)
(USDA loans); and (e)(4)(ii)(E) (RHS
loans) shall expire on the effective date
of a rule issued by each respective
agency pursuant to its authority under
TILA section 129C(b)(3)(ii) to define a
qualified mortgage. Section
1026.43(e)(4)(iii)(B) provides that,
unless otherwise expired under
§ 1026.43(e)(4)(iii)(A), the special rules
in § 1026.43(e)(4) are available only for
covered transactions consummated on
or before a date that is seven years after
the effective date of this rule.
Comment 43(e)(4)–1 provides
additional clarification regarding the
special qualified mortgage definition.
Specifically, the comment provides that,
subject to the sunset provided under
§ 1026.43(e)(4)(iii), § 1026.43(e)(4)
provides an alternative definition of
qualified mortgage to the definition
provided in § 1026.43(e)(2). To be a
qualified mortgage under
§ 1026.43(e)(4), the creditor must satisfy
the requirements under
§§ 1026.43(e)(2)(i) through (iii), in
addition to being one of the types of
loans specified in §§ 1026.43(e)(4)(ii)(A)
through (E).
Comment 43(e)(4)–2 clarifies the
effect that a termination of
conservatorship would have on loans
that satisfy the qualified mortgage
definition under § 1026.43(e)(4) because
of their eligibility for purchase or
guarantee by Fannie Mae or Freddie
Mac. The comment provides that
§ 1026.43(e)(4)(ii)(A) requires that a
covered transaction be eligible for
purchase or guarantee by Fannie Mae or
Freddie Mac (or any limited-life
regulatory entity succeeding the charter
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
of either) operating under the
conservatorship or receivership of the
FHFA pursuant to section 1367 of the
Federal Housing Enterprises Financial
Safety and Soundness Act of 1992 (12
U.S.C. 4617), as amended by the
Housing and Economic Recovery Act of
2008). The special rule under
§ 1026.43(e)(4)(ii)(A) does not apply if
Fannie Mae or Freddie Mac (or any
limited-life regulatory entity succeeding
the charter of either) has ceased
operating under the conservatorship or
receivership of the FHFA. For example,
if either Fannie Mae or Freddie Mac (or
succeeding limited-life regulatory
entity) ceases to operate under the
conservatorship or receivership of the
FHFA, § 1026.43(e)(4)(ii)(A) would no
longer apply to loans eligible for
purchase or guarantee by that entity;
however, the special rule would be
available for a loan that is eligible for
purchase or guarantee by the other
entity still operating under
conservatorship or receivership.
Comment 43(e)(4)(iii)–3 clarifies that
the definition of qualified mortgage
under § 1026.43(e)(4) applies only to
loans consummated on or before a date
that is seven years after the effective
date of the rule, regardless of whether
Fannie Mae or Freddie Mac (or any
limited-life regulatory entity succeeding
the charter of either) continues to
operate under the conservatorship or
receivership of the FHFA. Accordingly,
§ 1026.43(e)(4) is available only for
covered transactions consummated on
or before the earlier of either: (i) The
date Fannie Mae or Freddie Mac (or any
limited-life regulatory entity succeeding
the charter of either), respectively, cease
to operate under the conservatorship or
receivership of the FHFA pursuant to
section 1367 of the Federal Housing
Enterprises Financial Safety and
Soundness Act of 1992 (12 U.S.C. 4617),
as amended by the Housing and
Economic Recovery Act of 2008; or (ii)
a date that is seven years after the
effective date of the rule, as provided by
§ 1026.43(e)(4)(iii).
Finally, comment 43(e)(4)(iii)–4
clarifies that, to satisfy
§ 1026.43(e)(4)(ii), a loan need not be
actually purchased or guaranteed by the
GSEs or insured or guaranteed by the
FHA, VA, USFA, or RHS. Rather,
§ 1026.43(e)(4)(ii) requires only that the
loan be eligible for such purchase,
guarantee, or insurance. Rather,
§ 1026.43(e)(4)(ii) requires only that the
loan be eligible for such purchase,
guarantee, or insurance. For example,
for purposes of § 1026.43(e)(4), a
creditor is not required to sell a loan to
Fannie Mae or Freddie Mac (or any
limited-life regulatory entity succeeding
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
the charter of either) to be a qualified
mortgage. Rather, the loan must be
eligible for purchase or guarantee by
Fannie Mae or Freddie Mac (or any
limited-life regulatory entity succeeding
the charter of either), including
satisfying any requirements regarding
consideration and verification of a
consumer’s income or assets, current
debt obligations, and debt-to-income
ratio or residual income. To determine
eligibility, a creditor may rely on an
underwriting recommendation provided
by Fannie Mae and Freddie Mac’s
Automated Underwriting Systems
(AUSs) or written guide. Accordingly, a
covered transaction is eligible for
purchase or guarantee by Fannie Mae or
Freddie Mac if: (i) The loan conforms to
the standards set forth in the Fannie
Mae Single-Family Selling Guide or the
Freddie Mac Single-Family Seller/
Servicer Guide; or (ii) the loan receives
an ‘‘Approve/Eligible’’ recommendation
from Desktop Underwriter (DU); or an
‘‘Accept and Eligible to Purchase’’
recommendation from Loan Prospector
(LP).
The Bureau is finalizing
§ 1026.43(e)(4) pursuant to its authority
under TILA section 129C(b)(3)(B)(i) to
prescribe regulations that revise, add to,
or subtract from the criteria that define
a qualified mortgage upon the findings
described above. The Bureau believes
the temporary qualified mortgage
definition is necessary and proper to
ensure that responsible, affordable
mortgage credit remains available to
consumers in a manner consistent with
the purposes of TILA section 129C and
necessary and appropriate to effectuate
the purposes of TILA section 129C,
which includes assuring that consumers
are offered and receive residential
mortgage loans on terms that reasonably
reflect their ability to repay the loan.
As described above, the Bureau
believes that the provision of qualified
mortgage status to loans that are eligible
for purchase, guarantee, or to be insured
by the Federal entities described above
will provide a smooth transition to a
more normal mortgage market.
Similarly, the Bureau believes that
including all loans that are eligible to be
made, guaranteed, or insured by
agencies of the Federal government and
the GSEs while under conservatorship,
will minimize the risk of disruption as
the market adjusts to the ability-to-repay
requirements of this rule. This
adjustment to the qualified mortgage
definition will also facilitate compliance
with the ability-to-repay requirements.
The Bureau is also finalizing
§ 1026.43(e)(4) pursuant to its authority
under TILA section 105(a) to issue
regulations with such requirements,
PO 00000
Frm 00129
Fmt 4701
Sfmt 4700
6535
classifications, differentiations, or other
provisions, and that provide for such
adjustments and exceptions for all or
any class of transactions, as in the
judgment of the Bureau are necessary
and proper to effectuate the purposes of
TILA, to prevent circumvention or
evasion thereof, or to facilitate
compliance therewith. For the reasons
described above, the Bureau believes the
adjustments to the definition of
qualified mortgage are necessary to
effectuate the purposes of TILA, which
include the above-described purpose of
TILA section 129C, among other things,
and to facilitate compliance therewith.
The Bureau is exercising this
authority to remove certain qualified
mortgage statutory criteria, as discussed
further below, and to add criteria related
to eligibility for Federal agency
programs and GSEs while
conservatorship, as outlined above, in
order to create this qualified mortgage
definition.
As noted above, § 1026.43(e)(4)
applies to loans that are eligible for
guarantee or insurance by the Federal
agencies listed above. The provisions of
section 1412 apply to all residential
mortgage loans, including loans that are
eligible for and are guaranteed or
insured by the Federal agencies listed
above. However, TILA section
129C(b)(3)(B)(ii) provides the Federal
agencies listed above with authority, in
consultation with the Bureau, to
prescribe rules defining the types of
loans they insure, guarantee or
administer, as the case may be, that are
qualified mortgages and such rules may
revise, add to, or subtract from the
criteria used to define a qualified
mortgage upon certain findings.
Consistent with this authority, the
Bureau leaves to these agencies, in
consultation with the Bureau, further
prescribing qualified mortgage rules
defining the types of loans they
respectively insure, guarantee or
administer, and their rules may further
revise the qualified mortgage criteria
finalized in this rule with respect to
these loans. In light of the Federal
agencies’ authority in TILA section
129C(b)(3)(B)(ii), § 1026.43(e)(4) will
sunset once each agency has exercised
its authority to promulgate their own
qualified mortgage standards.
As noted above, the final rule does
not specifically include in the
temporary definition the statutory
requirements to (1) verify and document
the consumer’s income or assets relied
upon in qualifying the consumer; (2)
underwrite a fixed rate loan based on a
payment schedule that fully amortizes
the loan over the term and takes into
account all applicable taxes, insurance,
E:\FR\FM\30JAR2.SGM
30JAR2
6536
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
and assessments; or (3) underwrite an
adjustable-rate loan using the maximum
interest rate permitted in the first five
years. As discussed above, the Bureau
believes it is appropriate, for the time
being, to presume that loans that are
eligible for purchase, guarantee, or
insurance by the designated Federal
agencies and the GSEs while under
conservatorship have been originated
with appropriate consideration of
consumers’ ability to repay where the
loans satisfy the requirements of
§ 1026.43(e)(2) concerning restrictions
on product features and total points and
fees limitations. Layering additional and
different underwriting requirements on
top of the requirements that are unique
to each loan program would undermine
the purpose of the temporary definition,
namely, to preserve access to credit
during a transition period while the
mortgage industry adjusts to this final
rule and during a time when the market
is especially fragile. Accordingly, as
noted above, the Bureau is using its
authority under TILA section
129C(b)(3)(B)(i) to remove these
statutory requirements from the
qualified mortgage definition in
§ 1026.43(e)(4). For similar reasons the
Bureau is not requiring that loans that
meet this qualified mortgage definition
meet the 43 percent debt-to-income ratio
requirement in § 1026.43(e)(2). The
eligibility requirements of the GSEs and
Federal agencies incorporate debt-toincome ratio thresholds. However, the
GSEs and Federal agencies also permit
consideration of certain compensating
factors that are unique to each loan
program. The Bureau declines to layer
an additional debt-to-income ratio
requirement to avoid undermining the
purpose of the temporary qualified
mortgage definition.
43(f) Balloon-Payment Qualified
Mortgages Made by Certain Creditors
TILA section 129C(b)(2)(E) authorizes
the Bureau to permit qualified
mortgages with balloon payments,
provided the loans meet four
conditions. Specifically, those
conditions are that: (1) The loan meets
certain of the criteria for a qualified
mortgage; (2) the creditor makes a
determination that the consumer is able
to make all scheduled payments, except
the balloon payment, out of income or
assets other than the collateral; (3) the
loan is underwritten based on a
payment schedule that fully amortizes
the loan over a period of not more than
30 years and takes into account all
applicable taxes, insurance, and
assessments; and (4) the creditor meets
four prescribed qualifications. Those
four qualifications are that the creditor:
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
(1) Operates predominantly in rural or
underserved areas; (2) together with all
affiliates, has total annual residential
mortgage loan originations that do not
exceed a limit set by the Bureau; (3)
retains the balloon-payment loans in
portfolio; and (4) meets any asset-size
threshold and any other criteria the
Bureau may establish, consistent with
the purposes of this subtitle.
The four creditor qualifications are
nearly identical to provisions in section
1461 of the Dodd-Frank Act, which
authorizes the Bureau under TILA
section 129D(c) to exempt small
creditors that operate predominantly in
rural or underserved areas from a
requirement to establish escrow
accounts for certain first-lien, higherpriced mortgage loans. Specifically, the
statute authorizes creation of an
exemption for any 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 its mortgage debt obligations
in portfolio; and (4) meets any asset-size
thresholds and any other criteria that
the Bureau may establish.
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-payment
qualified mortgage and escrow
provisions. Specifically, the Board
interpreted the qualified mortgage
provision as being designed 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, and the escrow
provision to exempt creditors that do
not possess economies of scale to costeffectively offset the burden of
establishing escrow accounts by
maintaining a certain minimum
portfolio size from being required to
establish escrow accounts on higherpriced mortgage loans. Accordingly, the
two Board proposals would have used
common definitions of ‘‘rural’’ and
‘‘underserved,’’ but did not provide
uniformity in calculating and defining
various other elements. For the balloon
balloon-payment qualified mortgage
provisions, for instance, the Board’s
proposed § 226.43(f) would have
required that the creditor (1) in the
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 each
for qualifications relating to (1) the total
PO 00000
Frm 00130
Fmt 4701
Sfmt 4700
annual originations limit; and (2) the
retention of balloon-payment mortgages
in portfolio. The proposal also would
have implemented the four conditions
for balloon-payment qualified mortgages
under TILA section 129C(b)(2)(E) and
used its adjustment and exception
authority to add a requirement that the
loan term be five years or longer.
In contrast, the Board’s proposal for
the escrows exemption under proposed
§ 226.45(b)(2)(iii) would have required
that the creditor have (1) in the
preceding calendar year, have made
more than 50 percent of its first-lien
mortgages in rural or underserved areas;
(2) together with all affiliates, originated
and retained servicing rights to no more
than 100 first-lien mortgage debt
obligations in either the current or prior
calendar year; and (3) together with all
affiliates, not maintained an escrow
account on any consumer credit secured
by real property. 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 both cases, the Board proposed to
use a narrow definition of rural based
on the Economic Research Service (ERS)
of the USDA’s ‘‘urban influence codes’’
(UICs). The UICs are based on the
definitions of ‘‘metropolitan statistical
areas’’ of at least one million residents
and ‘‘micropolitan statistical areas’’
with a town of at least 2,500 residents,
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 that are not located
in or adjacent to any metropolitan or
micropolitan area. 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 balloon-payment qualified
mortgage and escrow exemption
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
permitting qualified mortgages with
balloon payments generally, consumer
group commenters stated that the
balloon-payment qualified mortgage
exemption is a discretionary provision,
as TILA section 129C(b)(2)(E) states that
the Bureau ‘‘may’’ provide an
exemption for balloon-payment
mortgages to be qualified mortgages, and
E:\FR\FM\30JAR2.SGM
30JAR2
sroberts on DSK5SPTVN1PROD with
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
stated that such an exemption should
not be provided in the final rule because
such exemption would have a negative
effect on consumers’ access to
responsible and affordable credit. Trade
association and industry commenters
generally supported the balloonpayment qualified mortgage exemption,
with some comments related to the
specific provisions that are discussed
below. One trade association
commented that the exemption should
extend to all balloon-payment mortgages
held in portfolio by financial
institutions; as such a broader
exemption would achieve Congress’s
intent as well as reduce the difficulty
that creditors would have in complying
with the requirements in the proposal.
Three trade associations and several
industry commenters commented that
the balloon-payment qualified mortgage
exemption was needed to ensure access
to credit for consumers in rural areas
because smaller institutions in those
areas use balloon-payment mortgages to
control interest rate risk.
The Bureau believes Congress enacted
the exemption in TILA section
129C(b)(2)(E) because it was concerned
that the restrictions on balloon-payment
mortgages under the ability to repay and
general qualified mortgage provisions
might unduly constrain access to credit
in rural and underserved areas, where
consumers may be able to obtain credit
only from a limited number of creditors,
including some community banks that
may offer only balloon-payment
mortgages. Because Congress explicitly
set out detailed criteria, indicating that
it did not intend to exclude balloonpayment mortgages from treatment as
qualified mortgages that meet those
criteria, and the Bureau is implementing
the statutory exemption for balloonpayment mortgages to be qualified
mortgages provided they meet the
conditions described below. The Bureau
believes those criteria reflect a careful
judgment by Congress concerning the
circumstances in which the potential
negative impact from restricting
consumers’ access to responsible and
affordable credit would outweigh any
benefit of prohibiting qualified
mortgages from providing for balloon
payments. The Bureau therefore
believes that the scope of the exemption
provided in this final rule implements
Congress’s judgment as to the proper
balance between those two imperatives.
The Bureau believes that there are
compelling reasons underlying
Congress’s decision not to allow
balloon-payment mortgages to enjoy
qualified-mortgage status except in
carefully limited circumstances. It is the
rare consumer who can afford to make
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
a balloon payment when due. Thus,
ordinarily a consumer facing a balloon
payment must obtain new financing.
Depending on market conditions at the
time and also the consumer’s own
economic circumstances, consumers
may find it difficult to obtain affordable
credit. Some consumers may be forced
to sell their homes to pay off the
balloon-payment mortgage. Others may
find it necessary to take on a new loan
on terms that create hardships for the
consumers. Unscrupulous lenders may
seek to take advantage of consumers
faced with the necessity of making a
balloon payment by offering loans on
predatory terms.
On the other hand, in rural and other
underserved areas, it is not uncommon
for consumers to seek a mortgage loan
of a type that cannot be sold on the
secondary market, because of special
characteristics of either the property in
question or the consumer. Many
community banks make mortgages that
are held in portfolio in these
circumstances. To manage interest rate
risk and avoid complexities in
originating and servicing adjustable rate
mortgages, these banks generally make
balloon-payment mortgage loans which
the banks roll over, at then current
market interest rate, when the balloonpayment mortgage comes due. For
example, data available through the
National Credit Union Administration
indicates that among credit unions
which make mortgages in rural areas
(using the definition of rural described
below), 25 percent make only balloonpayment or hybrid mortgages.
There are also substantial data
suggesting that the small portfolio
creditors that are most likely to rely on
balloon-payment mortgages to manage
their interest rate risks (or to have
difficulty maintaining escrow accounts)
have a significantly better track record
than larger creditors with regard to loan
performance. As discussed in more
depth in the 2013 ATR Concurrent
Proposal, because small portfolio
lenders retain a higher percentage of
their loans on their own books, they
have strong incentives to engage in
thorough underwriting. To minimize
performance risk, small community
lenders have developed underwriting
standards that are different than those
employed by larger institutions. Small
lenders generally engage in
‘‘relationship banking,’’ in which
underwriting decisions rely at least in
part on qualitative information gained
from personal relationships between
lenders and consumers. This qualitative
information focuses on subjective
factors such as consumer character and
reliability which ‘‘may be difficult to
PO 00000
Frm 00131
Fmt 4701
Sfmt 4700
6537
quantify, verify, and communicate
through the normal transmission
channels of banking organization.’’ 156
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 debt
obligations, small portfolio creditors
have strong incentives to work with the
consumers to get them back on track,
both to protect the creditors’ balance
sheets and their reputations in their
local communities. Market-wide data
demonstrate that loan delinquency and
charge-off rates are significantly lower at
smaller banks than larger ones.157
The Bureau believes that these kinds
of considerations underlay Congress’s
decision to authorize the Bureau to
establish an exemption under TILA
section 129C(b)(2)(E) to ensure access to
credit in rural and underserved areas
where consumers may be able to obtain
credit only from such community banks
offering these balloon-payment
mortgages. 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 adopts
§ 1026.43(f) largely as proposed but with
certain changes described below to
implement TILA section 129C(b)(2)(E).
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.158 The Bureau believes that
this approach is justified by several
considerations, including the largely
identical statutory language, the similar
congressional intents underlying the
two provisions, and the fact that
requiring small creditors operating
predominantly in rural or underserved
156 See Allen N. Berger & Gregory F. Udell, Small
Business Credit Availability and Relationship
Lending: The Importance of Bank Organizational
Structure, 112 Econ. J. F32 (2002).
157 See 2013 ATR Concurrent Proposal; Fed.
Deposit Ins. Corp., FDIC Community Banking
Study, (Dec. 2012), available at http://fdic.gov/
regulations/resources/cbi/study.html.
158 The Bureau has similarly attempted to
maintain consistency between the asset size, annual
originations threshold, and requirements
concerning portfolio loans 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 mortgages 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 2013 ATR Concurrent Proposal.
E:\FR\FM\30JAR2.SGM
30JAR2
6538
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
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 in
order to promote consistency, the
Bureau has carefully calibrated the
changes to further the purposes of each
rulemaking and in light of the evidence
suggesting that small portfolio lenders’
relationship banking model provides
significant consumer protections in its
own right.
For the foregoing reasons, the Bureau
is adopting § 1026.43(f)(1)(vi) to
implement TILA section
129C(b)(2)(E)(iv) by providing that a
balloon loan that meets the other criteria
specified in the regulation is a qualified
mortgage if the creditor: (1) In the
preceding calendar year made more
than 50 percent of its covered
transactions secured by a first lien 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 escrow provision with regard
to the requirement that the affected
loans be held in portfolio by requiring
in both rules that the transactions not be
subject to a ‘‘forward commitment’’
agreement to sell the loan at the time of
consummation. These qualifications and
the other requirements under the final
rule are discussed in more detail below.
43(f)(1) Exemption
The Bureau believes that the
provisions of TILA section 129C(b)(2)(E)
are designed to require that balloonpayment qualified mortgages meet the
same criteria for qualified mortgages as
described in TILA section 129C(b)(2)(A),
except where the nature of the balloonpayment mortgage itself requires
adjustment to the general rules. In TILA
section 129C(b)(2)(A), a qualified
mortgage cannot allow the consumer to
defer repayment of principal. Deferred
principal repayment may occur if the
payment is applied to both accrued
interest and principal but the consumer
makes periodic payments that are less
than the amount that would be required
under a payment schedule that has
substantially equal payments that fully
repay the loan amount over the loan
term. The scheduled payments that fully
repay a balloon-payment mortgage over
the loan term include the balloon
payment itself and, therefore, are not
substantially equal. Thus, balloon-
VerDate Mar<15>2010
20:04 Jan 29, 2013
Jkt 229001
payment mortgages permit the
consumer to defer repayment of
principal. Additionally, a qualified
mortgage must explicitly fully amortize
the loan amount over the loan term and
explicitly cannot result in a balloon
payment under TILA section
129C(b)(2)(A). Since TILA section
129C(b)(2)(A) contains these provisions,
TILA section 129C(b)(2)(E) exempts
balloon-payment qualified mortgages
from meeting those requirements. TILA
section 129C(b)(2)(E) has additional
requirements that a creditor consider
the consumer’s ability to repay the
scheduled payments using a calculation
methodology appropriate for a balloonpayment mortgage.
Accordingly, the Bureau is adjusting
the ability-to-repay requirements
generally applicable to qualified
mortgages under § 1026.43(e)(2) for the
balloon-payment qualified mortgage
exemption. Requirements that are the
same in both the generally applicable
qualified mortgage requirements and the
balloon-payment qualified mortgage
exemption are specifically described in
paragraph (f)(1)(i). The requirements in
the generally applicable qualified
mortgage requirements that are
inapplicable, for the reasons described
below, to the balloon-payment qualified
mortgage exemption are replaced by
requirements in paragraph (f)(1)(ii), (iii)
and (iv) that specifically address the
provisions inherent in balloon-payment
mortgages.
and (e)(2)(v). These requirements are
similar to the requirements in the
Board’s proposal, except that they are
stated as affirmative requirements
instead of excluding qualified mortgage
requirements that are not required to be
considered for balloon-payment
qualified mortgages.
Section 1026.43(f)(1)(i), by exclusion,
exempts balloon-payment qualified
mortgages from the requirements in
§ 1026.43(e)(2)(i)(B), (e)(2)(i)(C),
(e)(2)(iv), and (e)(2)(vi), which use
calculation methodologies that would
make the origination of balloonpayment qualified mortgages difficult, if
not impossible. The requirements in
subsequent provisions of § 1026.43(f)(1)
are adopted below to require the
consideration of scheduled payments
and the debt-to-income ratio made in
conjunction with alternative calculation
methodologies that are appropriate for
balloon-payment qualified mortgages.
Comment 43(f)(1)(i)–1 clarifies that a
balloon-payment qualified mortgage
under this exemption must provide for
regular periodic payments that do not
result in an increase of the principal
balance as required by
§ 1026.43(e)(2)(i)(A), must have a loan
term that does not exceed 30 years as
required by § 1026.43(e)(2)(ii), must
have total points and fees that do not
exceed specified thresholds pursuant to
§ 1026.43(e)(2)(iii), and must satisfy the
consideration and verification
requirements in § 1026.43(e)(2)(v).
43(f)(1)(i)
TILA section 129C(b)(2)(E)(i) requires
that a balloon-payment qualified
mortgage meet all of the criteria for a
qualified mortgage, except for the
provisions that require the loan to have:
(1) Regular periodic payments that
provide for the complete repayment of
principal over the loan term, (2) terms
that do not result in a balloon payment,
and (3) a payment schedule that fully
amortizes the mortgage over the loan
term taking into account all applicable
taxes, insurance and assessments. The
Board’s proposed § 226.43(f)(1)(i) would
have implemented this provision by
requiring that balloon-payment
qualified mortgages meet the same
requirements for other qualified
mortgages, except for specific provisions
of § 226.43(e)(2) that would not have to
be considered. Commenters did not
address these requirements specifically.
The Bureau is adopting § 1026.43(f)(1)(i)
to implement TILA section
129C(b)(2)(E)(i) by providing that a
balloon-payment qualified mortgage
must meet the criteria for a qualified
mortgage as required by
§ 1026.43(e)(2)(i)(A), (e)(2)(ii), (e)(2)(iii),
43(f)(1)(ii)
TILA section 129C(b)(2)(E)(ii) requires
a creditor making a balloon-payment
qualified mortgage to determine that the
consumer is able to make all scheduled
payments, except the balloon payment,
out of income and assets other than the
collateral. TILA section
129C(b)(2)(E)(iii) requires a creditor
making a balloon-payment qualified
mortgage to determine, among other
things, that the scheduled payments
include mortgage-related obligations.
Proposed § 226.43(f)(1)(ii) would have
required that the creditor determine that
the consumer can make all of the
scheduled payments, except for the
balloon payment, from the consumer’s
current or reasonably expected income
or assets other than the dwelling that
secures the loan. Commenters did not
address this requirement specifically.
The Bureau is adopting
§ 1026.43(f)(1)(ii) to implement TILA
section 129C(b)(2)(E)(ii) and a portion of
TILA section 129C(b)(2)(E)(iii) by
requiring a creditor to determine that
the consumer can make all of the
payments under the terms of the legal
obligation, as described in
PO 00000
Frm 00132
Fmt 4701
Sfmt 4700
E:\FR\FM\30JAR2.SGM
30JAR2
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations
sroberts on DSK5SPTVN1PROD with
§ 1026.43(f)(1)(iv)(A), together with all
mortgage-related obligations and
excluding the balloon payment, from
the consumer’s income or assets other
than the dwelling that secures the loan.
Comment 43(f)(1)(ii)–1 provides an
example to illustrate the calculation of
the monthly payment on which this
determination must be based. Comment
43(f)(1)(ii)–2 provides additional
clarification on how a creditor may
make the required determination that
the consumer is able to make all
scheduled payments other than the
balloon pay