High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X), 6855-6975 [2013-00740]

Agencies

• BUREAU OF CONSUMER FINANCIAL PROTECTION

[Federal Register Volume 78, Number 21 (Thursday, January 31, 2013)]
[Rules and Regulations]
[Pages 6855-6975]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00740]



[[Page 6855]]

Vol. 78

Thursday,

No. 21

January 31, 2013

Part II





Bureau of Consumer Financial Protection





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12 CFR Parts 1024 and 1026





High-Cost Mortgage and Homeownership Counseling Amendments to the Truth 
in Lending Act (Regulation Z) and Homeownership Counseling Amendments 
to the Real Estate Settlement Procedures Act (Regulation X); Final Rule

Federal Register / Vol. 78 , No. 21 / Thursday, January 31, 2013 / 
Rules and Regulations

[[Page 6856]]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Parts 1024 and 1026

[Docket No. CFPB-2012-0029]
RIN 3170-AA12


High-Cost Mortgage and Homeownership Counseling Amendments to the 
Truth in Lending Act (Regulation Z) and Homeownership Counseling 
Amendments to the Real Estate Settlement Procedures Act (Regulation X)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule; official interpretations.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) issues 
this final rule to implement the Dodd-Frank Wall Street Reform and 
Consumer Protection Act's amendments to the Truth in Lending Act and 
the Real Estate Settlement Procedures Act. The final rule amends 
Regulation Z (Truth in Lending) by expanding the types of mortgage 
loans that are subject to the protections of the Home Ownership and 
Equity Protections Act of 1994 (HOEPA), revising and expanding the 
tests for coverage under HOEPA, and imposing additional restrictions on 
mortgages that are covered by HOEPA, including a pre-loan counseling 
requirement. The final rule also amends Regulation Z and Regulation X 
(Real Estate Settlement Procedures Act) by imposing certain other 
requirements related to homeownership counseling, including a 
requirement that consumers receive information about homeownership 
counseling providers.

DATES: The rule is effective January 10, 2014.

FOR FURTHER INFORMATION CONTACT: Richard Arculin and Courtney Jean, 
Counsels; and Pavneet Singh, Senior Counsel, Office of Regulations, at 
(202) 435-7700.

SUPPLEMENTARY INFORMATION: 

I. Summary of Final Rule

    The Home Ownership and Equity Protection Act (HOEPA) was enacted in 
1994 as an amendment to the Truth in Lending Act (TILA) to address 
abusive practices in refinancing and home-equity mortgage loans with 
high interest rates or high fees. Loans that meet HOEPA's high-cost 
coverage tests are subject to special disclosure requirements and 
restrictions on loan terms, and borrowers in high-cost mortgages \1\ 
have enhanced remedies for violations of the law. The provisions of 
TILA, including HOEPA, are implemented in the Bureau's Regulation Z.\2\
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    \1\ 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(bb). For simplicity and consistency, this final rule uses the 
term ``high-cost mortgages'' to refer to mortgages covered by the 
HOEPA amendments.
    \2\ 12 CFR part 1026.
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    In response to the recent mortgage crisis, Congress amended HOEPA 
through the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) in order to expand the coverage of HOEPA and add 
protections for high-cost mortgages, including a requirement that 
borrowers receive homeownership counseling before obtaining a high-cost 
mortgage. In addition, several provisions of the Dodd-Frank Act also 
require or encourage consumers to obtain homeownership counseling for 
other types of loans. The Bureau is finalizing this rule to implement 
the HOEPA and homeownership counseling-related requirements.

Scope of HOEPA Coverage

    The final rule implements the Dodd-Frank Act's amendments that 
expanded the universe of loans potentially covered by HOEPA. Under the 
final rule, most types of mortgage loans secured by a consumer's 
principal dwelling, including purchase-money mortgages, refinances, 
closed-end home-equity loans, and open-end credit plans (i.e., home 
equity lines of credit or HELOCs) are potentially subject to HOEPA 
coverage. The final rule retains the exemption from HOEPA coverage for 
reverse mortgages. In addition, the final rule adds exemptions from 
HOEPA coverage for three types of loans that the Bureau believes do not 
present the same risk of abuse as other mortgage loans: loans to 
finance the initial construction of a dwelling, loans originated and 
financed by Housing Finance Agencies, and loans originated through the 
United States Department of Agriculture's (USDA) Rural Housing Service 
section 502 Direct Loan Program.

Revised HOEPA Coverage Tests

    The final rule implements the Dodd-Frank Act's revisions to HOEPA's 
coverage tests by providing that a transaction is a high-cost mortgage 
if any of the following tests is met:
     The transaction's annual percentage rate (APR) exceeds the 
applicable average prime offer rate by more than 6.5 percentage points 
for most first-lien mortgages, or by more than 8.5 percentage points 
for a first mortgage if the dwelling is personal property and the 
transaction is for less than $50,000;
     The transaction's APR exceeds the applicable average prime 
offer rate by more than 8.5 percentage points for subordinate or junior 
mortgages;
     The transaction's points and fees exceed 5 percent of the 
total transaction amount or, for loans below $20,000, the lesser of 8 
percent of the total transaction amount or $1,000 (with the dollar 
figures also adjusted annually for inflation); or
     The credit transaction documents permit the creditor to 
charge or collect a prepayment penalty more than 36 months after 
transaction closing or permit such fees or penalties to exceed, in the 
aggregate, more than 2 percent of the amount prepaid.
    The final rule also provides guidance on how to apply the various 
coverage tests, such as how to determine the applicable average prime 
offer rate and how to calculate points and fees.

Restrictions on Loan Terms

    The final rule also implements new Dodd-Frank Act restrictions and 
requirements concerning loan terms and origination practices for 
mortgages that fall within HOEPA's coverage test. For example:
     Balloon payments are generally banned, unless they are to 
account for the seasonal or irregular income of the borrower, they are 
part of a short-term bridge loan, or they are made by creditors meeting 
specified criteria, including operating predominantly in rural or 
underserved areas.
     Creditors are prohibited from charging prepayment 
penalties and financing points and fees.
     Late fees are restricted to four percent of the payment 
that is past due, fees for providing payoff statements are restricted, 
and fees for loan modification or payment deferral are banned.
     Creditors originating HELOCs are required to assess 
consumers' ability to repay. (Creditors originating high-cost, closed-
end credit transactions already are required to assess consumers' 
ability to repay under the Bureau's 2013 Ability-to-repay (ATR) Final 
Rule addressing a Dodd-Frank Act requirement that creditors determine 
that a consumer is able to repay a mortgage loan.)
     Creditors and mortgage brokers are prohibited from 
recommending or encouraging a consumer to default on a loan or debt to 
be refinanced by a high-cost mortgage.

[[Page 6857]]

     Before making a high-cost mortgage, creditors are required 
to obtain confirmation from a federally certified or approved 
homeownership counselor that the consumer has received counseling on 
the advisability of the mortgage.

Other Counseling-Related Requirements

    The final rule implements two additional Dodd-Frank Act 
homeownership counseling-related provisions that are not amendments to 
HOEPA.
     The final rule requires lenders to provide a list of 
homeownership counseling organizations to consumers within three 
business days after they apply for a mortgage loan, with the exclusion 
of reverse mortgages and mortgage loans secured by a timeshare. The 
final rule requires the lender to obtain the list from either a Web 
site that will be developed by the Bureau or data that will made 
available by the Bureau or the Department of Housing and Urban 
Development (HUD) for compliance with this requirement.
     The final rule implements a new requirement under TILA 
that creditors must obtain confirmation that a first-time borrower has 
received homeownership counseling from a federally certified or 
approved homeownership counselor or counseling organization before 
making a loan that provides for or permits negative amortization to the 
borrower.

Effective Date

    The rule is effective January 10, 2014.

II. Background

A. HOEPA

    HOEPA was enacted as part of the Riegle Community Development and 
Regulatory Improvement Act of 1994, Public Law 103-325, 108 Stat. 2160, 
in response to evidence concerning abusive practices in mortgage loan 
refinancing and home-equity lending.\3\ The statute did not apply to 
purchase-money mortgages or reverse mortgages but covered other closed-
end mortgage credit, e.g., refinances and closed-end home equity loans. 
Coverage was triggered where a loan's APR exceeded comparable Treasury 
securities by specified thresholds for particular loan types, or where 
points and fees exceeded 8 percent of the total loan amount or a dollar 
threshold.
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    \3\ HOEPA amended TILA by adding new sections 103(aa) and 129, 
15 U.S.C. 1602(aa) and 1639.
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    For high-cost mortgages meeting either of those thresholds, HOEPA 
required lenders to provide special pre-closing disclosures, restricted 
prepayment penalties and certain other loan terms, and regulated 
various lender 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, including finance charges and fees paid by the 
consumer. Finally, HOEPA amended TILA section 131, 15 U.S.C. 1641, to 
provide for increased liability to purchasers of high cost mortgages. 
Purchasers and assignees of loans not covered by HOEPA generally are 
liable only for violations of TILA which are apparent on the face of 
the disclosure statements, whereas purchasers of high cost mortgages 
generally are subject to all claims and defenses against the original 
creditor with respect to the mortgage.
    The Board of Governors of the Federal Reserve System (Board) first 
issued regulations implementing HOEPA in 1995. See 60 FR 15463 (March 
24, 1995). The Board published additional significant changes in 2001 
that lowered HOEPA's APR trigger 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 mortgages. See 66 FR 65604 
(Dec. 20, 2001). In 2008, the Board exercised its authority under HOEPA 
to require certain consumer protections concerning a consumer's ability 
to repay, prepayment penalties, and escrow accounts for taxes and 
insurance for a new category of ``higher-priced mortgage loans'' with 
APRs that are lower than those prescribed for high cost mortgages but 
that nevertheless exceed the average prime offer rate by prescribed 
amounts. 73 FR 44522 (July 30, 2008) (the 2008 HOEPA Final Rule).
    Historically, the Board's Regulation Z, 12 CFR part 226, has 
implemented TILA, including HOEPA. Pursuant to the Dodd-Frank Act, 
general rulemaking authority for TILA, including HOEPA, transferred 
from the Board to the Bureau on July 21, 2011. See sections 1061, 1096, 
and 1100A(2) of the Dodd-Frank Act. Accordingly, 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, conforming, and 
stylistic 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. Sections 1026.31, 1026.32, and 
1026.34 of the Bureau's Regulation Z implement the HOEPA provisions of 
TILA.

B. RESPA

    Congress enacted the Real Estate Settlement Procedures Act (RESPA), 
12 U.S.C. 2601 et seq., in 1974 to provide consumers with greater and 
timelier information on the nature and costs of the residential real 
estate settlement process and to protect consumers from unnecessarily 
high settlement charges, including through the use of disclosures and 
the prohibition of kickbacks and referral fees. RESPA's disclosure 
requirements generally apply to ``settlement services'' for ``federally 
related mortgage loans,'' a term that includes virtually any purchase-
money or refinance loan secured by a first or subordinate lien on one-
to-four family residential real property. 12 U.S.C. 2602(1). Section 5 
of RESPA generally requires that lenders provide applicants for 
federally related mortgage loans a home-buying information booklet 
containing information about the nature and costs of real estate 
settlement services and a good faith estimate of charges the borrower 
is likely to incur during the settlement process. Id. at 2604. The 
booklet and good faith estimate must be provided not later than three 
business days after the lender receives an application, unless the 
lender denies the application for credit before the end of the three-
day period. Id. at 2604(d).
    Historically, Regulation X of the Department of Housing and Urban 
Development (HUD), 24 CFR part 3500, has implemented RESPA. The Dodd-
Frank Act transferred rulemaking authority for RESPA to the Bureau, 
effective July 21, 2011. See sections 1061 and 1098 of the Dodd-Frank 
Act. Pursuant to the Dodd-Frank Act and RESPA, as amended, the Bureau 
published for public comment an interim final rule establishing a new 
Regulation X, 12 CFR part 1024, implementing RESPA. 76 FR 78978 (Dec. 
20, 2011). This rule did not impose any new substantive obligations but 
did make certain technical, conforming, and stylistic changes to 
reflect the transfer of authority and certain other changes made by the 
Dodd-Frank Act. The Bureau's Regulation X took effect on December 30, 
2011.

[[Page 6858]]

C. The Dodd-Frank Act

    Congress enacted the Dodd-Frank Act after a cycle of unprecedented 
expansion and contraction in the mortgage market sparked the most 
severe U.S. recession since the Great Depression.\4\ The Dodd-Frank Act 
created the Bureau and consolidated various rulemaking and supervisory 
authorities in the new agency, including the authority to implement 
TILA (including HOEPA) and RESPA.\5\ 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.
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    \4\ For more discussion of the mortgage market, the financial 
crisis, and mortgage origination generally, see the Bureau's 2013 
ATR Final Rule.
    \5\ Sections 1011 and 1021 of title X of the Dodd-Frank Act, the 
``Consumer Financial Protection Act,'' Public Law 111-203, sec. 
1001-1100H, 124 Stat. 1375 (2010) (codified at 12 U.S.C. 5491, 
5511). The Consumer Financial Protection Act is substantially 
codified at 12 U.S.C. 5481-5603.
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    As part of these changes, sections 1431 through 1433 of the Dodd-
Frank Act significantly amended HOEPA to expand the types of loans 
potentially subject to HOEPA coverage, to revise the triggers for HOEPA 
coverage, and to strengthen and expand the restrictions that HOEPA 
imposes on those mortgages.\6\ Several provisions of the Dodd-Frank Act 
also require and encourage consumers to obtain homeownership 
counseling. Sections 1433(e) and 1414 require creditors to obtain 
confirmation that a borrower has obtained counseling from a federally 
approved counselor prior to extending a high-cost mortgage under HOEPA 
or (in the case of first-time borrowers) a negative amortization loan. 
The Dodd-Frank Act also amended RESPA to require distribution of a 
housing counselor list as part of the general mortgage application 
process. The Bureau is finalizing this rule to implement the HOEPA and 
homeownership counseling-related requirements.
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    \6\ As amended, the HOEPA provisions of TILA will be codified at 
15 U.S.C. 1602(bb) and 1639. The Bureau notes that the Dodd-Frank 
Act amended existing TILA section 103(aa) and renumbered it as 
section 103(bb), 15 U.S.C. 1602(bb). See Sec.  1100A(1)(A) of the 
Dodd-Frank Act. This proposal generally references TILA section 
103(aa) to refer to the pre-Dodd-Frank Act provision, which is in 
effect until the Dodd-Frank Act's amendments take effect, and TILA 
section 103(bb) to refer to the amended and renumbered provision.
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D. The Market for High-Cost Mortgages

    Since the enactment of HOEPA, originations of mortgages covered by 
HOEPA have accounted for an extremely small percentage of the market. 
This may be due to a variety of factors, including the fact that 
HOEPA's coverage thresholds were set relatively high, HOEPA's assignee 
liability provisions make the loans relatively unattractive to 
secondary market investors, and general compliance burden and perceived 
stigma. Data collected under the Home Mortgage Disclosure Act (HMDA), 
12 U.S.C. 2801 et seq., further indicate that the percentage share of 
high-cost mortgages has generally been declining since 2004, the first 
year that HMDA reporters were required to identify high-cost mortgages. 
Between 2004 and 2011, high-cost mortgages typically comprised about 
0.2 percent of HMDA-reporters' originations of refinance or home-
improvement loans secured by a one-to-four family home (the class of 
mortgages generally covered by HOEPA). This percentage peaked at 0.45 
percent in 2005 when, of about 8.0 million originations of such loans, 
there were approximately 36,000 high-cost mortgages reported in HMDA. 
The percentage fell to 0.05 percent by 2011 when nearly 2,400 high-cost 
mortgages were reported compared with roughly 4.5 million refinance or 
home-improvement loans secured by a one- to four-family home.
    Similarly, the number of HMDA-reporting creditors that originate 
high-cost mortgages is relatively small. From 2004 through 2009, 
between 1,000 to 2,000 creditors that report under HMDA (between 12 to 
22 percent of HMDA-reporters in a given year) reported extending high-
cost mortgages. In each year between 2004 and 2011, the vast majority 
of creditors--roughly 80-90 percent of those that made any high-cost 
mortgages and 96 percent or more of all HMDA reporters--made fewer than 
10 high-cost mortgages. In 2010, only about 650 creditors reported any 
high-cost mortgages. In 2011 fewer than 600 creditors, or roughly 8 
percent of HMDA filers, reported originating any high-cost mortgages, 
and about 50 creditors accounted for over half of 2011 HOEPA 
originations. As discussed above, the Dodd-Frank Act expanded the types 
of loans potentially covered by HOEPA by including purchase-money 
mortgages and HELOCs and also lowering the coverage thresholds. 
Notwithstanding this expansion, the Bureau believes that HOEPA lending 
will continue to constitute a small percentage of the mortgage lending 
market. See part VII below for a detailed discussion of the likely 
impact of the Bureau's implementation of the Dodd-Frank Act amendments 
on HOEPA lending.

III. Summary of the Rulemaking Process

A. The Bureau's Proposal

    The Bureau issued for public comment its proposal to amend 
Regulation Z to implement the Dodd-Frank Act amendments to HOEPA on 
July 9, 2012. This proposal was published in the Federal Register on 
August 15, 2012. See 77 FR 49090 (August 15, 2012) (2012 HOEPA Proposal 
or the proposal). The proposal also would have implemented certain 
homeownership counseling-related requirements that Congress adopted in 
the Dodd-Frank Act, that are not amendments to HOEPA.
    The proposal would have implemented the Dodd-Frank Act's amendments 
that expanded the universe of loans potentially covered by HOEPA to 
include most types of mortgage loans secured by a consumer's principal 
dwelling. Reverse mortgages continued to be excluded. The proposal also 
would have implemented the Dodd-Frank Act's amendments to HOEPA's 
coverage tests, including adding a new threshold for prepayment 
penalties, and would have provided guidance on how to apply the 
coverage tests. In addition, the proposed rule also would have 
implemented new Dodd-Frank Act restrictions and requirements concerning 
loan terms and origination practices for high-cost mortgages.
    With respect to homeownership counseling-related requirements that 
are not amendments to HOEPA, under the proposal, lenders generally 
would have been required to distribute a list of five homeownership 
counselors or counseling organizations to a consumer applying for a 
federally related mortgage loan within three business days after 
receiving the consumer's application. The proposal also would have 
implemented a new requirement that first-time borrowers receive 
homeownership counseling before taking out a negative amortization 
loan.

B. Comments and Outreach

    The Bureau received over 150 comments on its proposal from, among 
others, consumer groups, industry trade associations, banks, community 
banks, credit unions, financial companies, State housing finance 
authorities, counseling associations and intermediaries, a State 
Attorney General's office, and individual consumers and academics. In 
addition, after the close of the original comment period, various 
interested parties including industry and consumer group commenters 
were required to submit written summaries of ex parte

[[Page 6859]]

communications with the Bureau, consistent with the Bureau's policy.\7\ 
Materials submitted were filed in the record and are publicly available 
at https://www.regulations.gov. With the exception of comments 
addressing proposed mitigating measures to account for a more inclusive 
finance charge, these comments and ex parte communications are 
discussed below in the section-by-section analysis of the final rule.
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    \7\ The Bureau's policy regarding ex parte communications can be 
found at https://files.consumerfinance.gov/f/2011/08/Bulletin_20110819_ExPartePresentationsRulemakingProceedings.pdf.
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    As discussed in further detail below, the Bureau sought comment in 
its HOEPA proposal on whether to adopt certain adjustments or 
mitigating measures in its HOEPA implementing regulations if it were to 
adopt a broader definition of ``finance charge'' under Regulation Z. 
The Bureau has since published a notice in the Federal Register making 
clear that it will defer its decision whether to adopt the more 
inclusive finance charge proposal, and therefore any implementation 
thereof, until it finalizes the its proposal to TILA-RESPA Proposal, 
which is planned for later in 2013. 77 FR 54843 (Sept. 6, 2012). 
Accordingly, this final rule is deferring discussion of any comments 
addressing proposed mitigating measures to account for a more inclusive 
finance charge under HOEPA.
    The Bureau has carefully considered the comments and ex parte 
communications and has decided to modify the proposal in certain 
respects and adopt the final rules as described below in the section-
by-section analysis.

C. Other Rulemakings

    In addition to this final rule, the Bureau is adopting several 
other final rules and issuing one proposal, all relating to mortgage 
credit to implement requirements of title XIV of the Dodd-Frank Act. 
The Bureau is also issuing a final rule jointly with other Federal 
agencies to implement requirements for mortgage appraisals in title 
XIV. Each of the final rules follows a proposal issued in 2011 by the 
Board or in 2012 by the Bureau alone or jointly with other Federal 
agencies. Collectively, these proposed and final rules are referred to 
as the Title XIV Rulemakings.
     Ability-to-Repay: The Bureau is finalizing a rule, 
following a May 2011 proposal issued by the Board (the Board's 2011 ATR 
Proposal),\8\ to implement provisions of the Dodd-Frank Act (1) 
requiring creditors to determine that a consumer has a reasonable 
ability to repay covered mortgage loans and establishing standards for 
compliance, such as by making a ``qualified mortgage,'' and (2) 
establishing certain limitations on prepayment penalties, pursuant to 
TILA section 129C as established by Dodd-Frank Act sections 1411, 1412, 
and 1414. 15 U.S.C. 1639c. The Bureau's final rule is referred to as 
the 2013 ATR Final Rule. Simultaneously with the 2013 ATR Final Rule, 
the Bureau is issuing a proposal to amend the final rule implementing 
the ability-to-repay requirements, including by the addition of 
exemptions for certain nonprofit creditors and certain homeownership 
stabilization programs and a definition of a ``qualified mortgage'' for 
certain 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 to the 2013 ATR Final Rule can take effect simultaneously 
with that rule.
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    \8\ 76 FR 27390 (May 11, 2011).
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     Escrows: The Bureau is finalizing a rule, following a 
March 2011 proposal issued by the Board (the Board's 2011 Escrows 
Proposal),\9\ 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.
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    \9\ 76 FR 11598 (Mar. 2, 2011).
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     Servicing: Following its August 2012 proposals (the 2012 
RESPA Servicing Proposal and 2012 TILA Servicing Proposal),\10\ the 
Bureau is adopting final rules to implement Dodd-Frank Act requirements 
regarding force-placed insurance, error resolution, information 
requests, and payment crediting, as well as requirements for mortgage 
loan periodic statements and adjustable-rate mortgage reset 
disclosures, pursuant to section 6 of RESPA and sections 128, 128A, 
129F, and 129G of TILA, as amended or established by Dodd-Frank Act 
sections 1418, 1420, 1463, and 1464. 12 U.S.C. 2605; 15 U.S.C. 1638, 
1638a, 1639f, and 1639g. The Bureau also is finalizing rules on early 
intervention for troubled and delinquent borrowers, and loss mitigation 
procedures, pursuant to the Bureau's authority under section 6 of 
RESPA, as amended by Dodd-Frank Act section 1463, to establish 
obligations for mortgage servicers that it finds to be appropriate to 
carry out the consumer protection purposes of RESPA, and its authority 
under section 19(a) of RESPA to prescribe rules necessary to achieve 
the purposes of RESPA. The Bureau's final rule under RESPA with respect 
to mortgage servicing also establishes requirements for general 
servicing standards policies and procedures and continuity of contact 
pursuant to its authority under section 19(a) of RESPA. The Bureau's 
final rules are referred to as the 2013 RESPA Servicing Final Rule and 
the 2013 TILA Servicing Final Rule, respectively.
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    \10\ 77 FR 57200 (Sept. 17, 2012) (RESPA); 77 FR 57318 (Sept. 
17, 2012) (TILA).
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     Loan Originator Compensation: Following its August 2012 
proposal (the 2012 Loan Originator Proposal),\11\ the Bureau is issuing 
a final rule to implement provisions of the Dodd-Frank Act requiring 
certain creditors and loan originators to meet certain duties of care, 
including qualification requirements; requiring the establishment of 
certain compliance procedures by depository institutions; prohibiting 
loan originators, creditors, and the affiliates of both from receiving 
compensation in various forms (including based on the terms of the 
transaction) and from sources other than the consumer, with specified 
exceptions; and establishing restrictions on mandatory arbitration and 
financing of single premium credit insurance, pursuant to TILA sections 
129B and 129C as established by Dodd-Frank Act sections 1402, 1403, and 
1414(a). 15 U.S.C. 1639b, 1639c. The Bureau's final rule is referred to 
as the 2013 Loan Originator Final Rule.
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    \11\ 77 FR 55272 (Sept. 7, 2012).
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     Appraisals: The Bureau, jointly with other Federal 
agencies,\12\ 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).\13\ 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

[[Page 6860]]

Appraisals Proposal),\14\ 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.
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    \12\ 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.
    \13\ 77 FR 54722 (Sept. 5, 2012).
    \14\ 77 FR 50390 (Aug. 21, 2012).
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    The Bureau is not at this time finalizing proposals concerning 
various disclosure requirements that were added by title XIV of the 
Dodd-Frank Act, integration of mortgage disclosures under TILA and 
RESPA, or a simpler, more inclusive definition of the finance charge 
for purposes of disclosures for closed-end credit transactions under 
Regulation Z. The Bureau expects to finalize these proposals and to 
consider whether to adjust regulatory thresholds under the Title XIV 
Rulemakings in connection with any change in the calculation of the 
finance charge later in 2013, after it has completed quantitative 
testing, and any additional qualitative testing deemed appropriate, of 
the forms that it proposed in July 2012 to combine TILA mortgage 
disclosures with the good faith estimate (RESPA GFE) and settlement 
statement (RESPA settlement statement) required under the Real Estate 
Settlement Procedures Act, pursuant to Dodd-Frank Act section 1032(f) 
and sections 4(a) of RESPA and 105(b) of TILA, as amended by Dodd-Frank 
Act sections 1098 and 1100A, respectively (the 2012 TILA-RESPA 
Proposal).\15\ Accordingly, the Bureau already has issued a final rule 
delaying implementation of various affected title XIV disclosure 
provisions.\16\ The Bureau's approaches to coordinating the 
implementation of the Title XIV Rulemakings and to the finance charge 
proposal are discussed in turn below.
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    \15\ 77 FR 51116 (Aug. 23, 2012).
    \16\ 77 FR 70105 (Nov. 23, 2012).
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Coordinated Implementation of Title XIV Rulemakings
    As noted in all of its foregoing proposals, the Bureau regards each 
of the Title XIV Rulemakings as 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 implementation date for this final 
rule are discussed in detail below in part VI of this notice. In 
general, however, consumer advocates requested that the Bureau put the 
protections in the Title XIV Rulemakings into effect as soon as 
practicable. In contrast, the Bureau received some industry comments 
indicating that implementing so many new requirements at the same time 
would create a significant cumulative burden for creditors. In 
addition, many commenters also acknowledged the advantages of 
implementing multiple revisions to the regulations in a coordinated 
fashion.\17\ Thus, a tension exists between coordinating the adoption 
of the Title XIV Rulemakings and facilitating industry's implementation 
of such a large set of new requirements. Some have suggested that the 
Bureau resolve this tension by adopting a sequenced implementation, 
while others have requested that the Bureau simply provide a longer 
implementation period for all of the final rules.
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    \17\ Of the several final rules being adopted under the Title 
XIV Rulemakings, six entail amendments to Regulation Z, with the 
only exceptions being the 2013 RESPA Servicing Final Rule 
(Regulation X) and the 2013 ECOA Appraisals Final Rule (Regulation 
B); the 2013 HOEPA Final Rule also amends Regulation X, in addition 
to Regulation Z. The six Regulation Z final rules involve numerous 
instances of intersecting provisions, either by cross-references to 
each other's provisions or by adopting parallel provisions. Thus, 
adopting some of those amendments without also adopting certain 
other, closely related provisions would create significant technical 
issues, e.g., new provisions containing cross-references to other 
provisions that do not yet exist, which could undermine the ability 
of creditors and other parties subject to the rules to understand 
their obligations and implement appropriate systems changes in an 
integrated and efficient manner.
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    The Bureau recognizes that many of the new provisions will require 
creditors to make changes to automated systems and, further, that most 
administrators of large systems are reluctant to make too many changes 
to their systems at once. At the same time, however, the Bureau notes 
that the Dodd-Frank Act established virtually all of these changes to 
institutions' compliance responsibilities, and contemplated that they 
be implemented in a relatively short period of time. And, as already 
noted, the extent of interaction among many of the Title XIV 
Rulemakings necessitates that many of their provisions take effect 
together. Finally, notwithstanding commenters' expressed concerns for 
cumulative burden, the Bureau expects that creditors actually may 
realize some efficiencies from adapting their systems for compliance 
with multiple new, closely related requirements at once, especially if 
given sufficient overall time to do so.
    Accordingly, the Bureau is requiring that, as a general matter, 
creditors and other affected persons begin complying with the final 
rules on January 10, 2014. As noted above, section 1400(c) of the Dodd-
Frank Act requires that some provisions of the Title XIV Rulemakings 
take effect no later than one year after the Bureau issues them. 
Accordingly, the Bureau is establishing January 10, 2014, one year 
after issuance of the Bureau's 2013 ATR, Escrows, and HOEPA Final Rules 
(i.e., the earliest of the title XIV final rules), as the baseline 
effective date for most of the Title XIV Rulemakings. The Bureau 
believes that, on balance, this approach will facilitate the 
implementation of the rules' 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 earlier 
effective dates for those final rules or certain aspects thereof, as 
applicable. Those effective dates are set forth and explained in the 
Federal Register notices for those final rules.
More Inclusive Finance Charge Proposal
    As noted above, the Bureau proposed in the 2012 TILA-RESPA Proposal 
to make the definition of finance charge more inclusive, thus rendering 
the finance charge and annual percentage rate a more useful tool for 
consumers to compare the cost of credit across different alternatives. 
77 FR 51116, 51143 (Aug. 23, 2012). Because the new definition would 
include additional costs that are not currently counted, it would cause 
the finance charges and APRs on many affected transactions to increase. 
This in turn could cause more such transactions to become subject to 
various compliance regimes under Regulation Z. Specifically, the 
finance charge is central to the calculation of a transaction's 
``points and fees,'' which in turn has been (and remains) a coverage 
threshold for the special protections afforded ``high-cost mortgages'' 
under HOEPA. Points and fees also will be subject to a 3-percent

[[Page 6861]]

limit for purposes of determining whether a transaction is a 
``qualified mortgage'' under the 2013 ATR Final Rule. Meanwhile, the 
APR serves as a coverage threshold for HOEPA protections as well as for 
certain protections afforded ``higher-priced mortgage loans'' under 
Sec.  1026.35, including the mandatory escrow account requirements 
being amended by 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 credit 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 2011 Escrows Proposal, the 2012 HOEPA 
Proposal, the Board's 2011 ATR Proposal, and the Interagency Appraisals 
Proposal, the Board and subsequently the Bureau (and other agencies) 
sought comment on certain adjustments to the affected regulatory 
thresholds to counteract this 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).\18\ Accordingly, the 2013 Escrows, HOEPA, ATR, and Interagency 
Appraisals Final Rules all are deferring any action on their respective 
proposed adjustments to regulatory thresholds.
---------------------------------------------------------------------------

    \18\ 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.
---------------------------------------------------------------------------

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, RESPA, and the Dodd-Frank Act. On July 21, 2011, 
section 1061 of the Dodd-Frank Act transferred to the Bureau the 
``consumer financial protection functions'' previously vested in 
certain other Federal agencies, including the Board.\19\ 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.'' \20\ TILA, HOEPA (which is codified as part of TILA), and 
RESPA are Federal consumer financial laws.\21\ Accordingly, the Bureau 
has authority to issue regulations pursuant to TILA and RESPA, 
including the disclosure requirements added to those statutes by title 
XIV of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \19\ Dodd-Frank Act section 1061(b), 12 U.S.C. 5581(b).
    \20\ 12 U.S.C. 5581(a)(1).
    \21\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) 
(defining ``Federal consumer financial law'' to include the 
``enumerated consumer laws'' and the provisions of title X of the 
Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12) 
(defining ``enumerated consumer laws'' to include TILA, HOEPA, and 
RESPA).
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A. RESPA

    As amended by the Dodd-Frank Act, section 19(a) of RESPA, 12 U.S.C. 
2617(a), authorizes the Bureau to prescribe such rules and regulations 
and to make such interpretations and grant such reasonable exemptions 
for classes of transactions as may be necessary to achieve the purposes 
of RESPA. One purpose of RESPA is to effect certain changes in the 
settlement process for residential real estate that will result in more 
effective advance disclosure to home buyers and sellers of settlement 
costs. RESPA section 2(b), 12 U.S.C. 2601(b). In addition, in enacting 
RESPA, Congress found that consumers are entitled to be ``provided with 
greater and more timely information on the nature and costs of the 
settlement process and [to be] protected from unnecessarily high 
settlement charges caused by certain abusive practices * * *.'' RESPA 
section 2(a), 12 U.S.C. 2601(a). In the past, section 19(a) has served 
as a broad source of authority to prescribe disclosures and substantive 
requirements to carry out the purposes of RESPA.

B. TILA

    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 the 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. 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 tied to 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

[[Page 6862]]

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. This amendment clarified the Bureau's authority under TILA 
section 105(a) to prescribe requirements beyond those specifically 
listed in the statute that meet the standards outlined in section 
105(a). The Dodd-Frank Act also clarified the Bureau's rulemaking 
authority over high-cost mortgages pursuant to section 105(a). As 
amended by the Dodd-Frank Act, TILA section 105(a) grants the Bureau 
authority to make adjustments and exceptions to the requirements of 
TILA for all transactions subject to TILA, except with respect to the 
substantive provisions of TILA section 129 that apply to high-cost 
mortgages, as noted above. For the reasons discussed in this notice, 
the Bureau is proposing regulations to carry out TILA's purposes and is 
proposing 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.
    Pursuant to TILA section 103(bb)(2), 15 U.S.C. 1602(bb)(2), the 
Bureau may prescribe regulations to adjust the statutory percentage 
points for the APR threshold to determine whether a transaction is 
covered as a high-cost mortgage, if the Bureau determines that such an 
increase or decrease is consistent with the statutory consumer 
protections for high-cost mortgages and is warranted by the need for 
credit. Under TILA section 103(bb)(4), the Bureau may adjust the 
definition of points and fees for purposes of that threshold to include 
such charges that the Bureau determines to be appropriate.
    With respect to the high-cost mortgage provisions of TILA section 
129, TILA section 129(p), 15 U.S.C. 1639(p), as amended by the Dodd-
Frank Act, grants the Bureau authority to create exemptions to the 
restrictions on high-cost mortgages and to expand the protections that 
apply to high-cost mortgages. Under TILA section 129(p)(1), the Bureau 
may exempt specific mortgage products or categories from any or all of 
the prohibitions specified in TILA section 129(c) through (i),\22\ if 
the Bureau finds that the exemption is in the interest of the borrowing 
public and will apply only to products that maintain and strengthen 
homeownership and equity protections.
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    \22\ The referenced provisions of TILA section 129 are: (c) (No 
prepayment penalty); (d) (Limitations after default); (e) (No 
balloon payments); (f) (No negative amortization); (g) (No prepaid 
payments); (h) (Prohibition on extending credit without regard to 
payment ability of consumer); and (i) (Requirements for payments 
under home improvement contracts).
---------------------------------------------------------------------------

    TILA section 129(p)(2) grants the Bureau authority to prohibit acts 
or practices in connection with:
     Mortgage loans that the Bureau finds to be unfair, 
deceptive, or designed to evade the provisions of HOEPA; and
     Refinancing of mortgage loans the Bureau finds to be 
associated with abusive lending practices or that are otherwise not in 
the interest of the borrower.
    The authority granted to the Bureau under TILA section 129(p)(2) is 
broad. The provision is not limited to acts or practices by creditors. 
TILA section 129(p)(2) authorizes protections against unfair or 
deceptive practices ``in connection with mortgage loans,'' and it 
authorizes protections against abusive practices ``in connection with * 
* * refinancing of mortgage loans.'' Thus, the Bureau's authority is 
not limited to regulating specific contractual terms of mortgage loan 
agreements; it extends to regulating mortgage loan-related practices 
generally, within the standards set forth in the statute. The Bureau 
notes that TILA does not set forth a standard for what is unfair or 
deceptive, but those terms have settled meanings under other Federal 
and State consumer protection laws. The Conference Report for HOEPA 
indicates that, in determining whether a practice in connection with 
mortgage loans is unfair or deceptive, the Bureau should look to the 
standards employed for interpreting State unfair and deceptive trade 
practices statutes and section 5(a) of the Federal Trade Commission 
Act, 15 U.S.C. 45(a).\23\
---------------------------------------------------------------------------

    \23\ H. Conf. Rept. 103-652, at 162 (1994).
---------------------------------------------------------------------------

    In addition, section 1433(e) of the Dodd-Frank Act created a new 
TILA section 129(u)(3), which authorizes the Bureau to implement pre-
loan counseling requirements mandated by the Dodd-Frank Act for high-
cost mortgages. Specifically, under TILA section 129(u)(3), the Bureau 
may prescribe regulations as the Bureau determines to be appropriate to 
implement TILA section 129(u)(1), which establishes the Dodd-Frank 
Act's pre-loan counseling requirement for high-cost mortgages.

C. The Dodd-Frank Act

    Section 1405(b) of the Dodd-Frank Act provides that, 
``[n]otwithstanding any other provision of [title XIV of the Dodd-Frank 
Act], in order to improve consumer awareness and understanding of 
transactions involving residential mortgage loans through the use of 
disclosures, the [Bureau] may, by rule, exempt from or modify 
disclosure requirements, in whole or in part, for any class of 
residential mortgage loans if the [Bureau] determines that such 
exemption or modification is in the interest of consumers and in the 
public interest.'' 15 U.S.C. 1601 note. Section 1401 of the Dodd-Frank 
Act, which added TILA section 103(cc), 15 U.S.C. 1602(cc), generally 
defines residential mortgage loan as any consumer credit transaction 
that is secured by a mortgage on a dwelling or on residential real 
property that includes a dwelling other than an open-end credit plan or 
an extension of credit secured by a consumer's interest in a timeshare 
plan. Notably, the authority granted by section 1405(b) applies to 
``disclosure requirements'' generally, and is not limited to a specific 
statute or statutes. Accordingly, Dodd-Frank Act section 1405(b) is a 
broad source of authority to modify the disclosure requirements of both 
TILA and RESPA.
    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, RESPA, 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)(1) to prescribe 
rules that carry out the purposes and objectives of TILA and title X 
and prevent evasion of those laws.
    For the reasons discussed below in the section-by-section analysis, 
the Bureau is finalizing regulations pursuant to its authority under 
TILA, RESPA, and titles X and XIV of the Dodd-Frank Act.

[[Page 6863]]

V. Section-by-Section Analysis

A. Regulation X

Section 1024.20 List of Homeownership Counseling Organizations
    The Dodd-Frank Act amended RESPA to create a new requirement that 
lenders provide a list of homeownership counselors to applicants for 
federally related mortgage loans. Specifically, section 1450 the Dodd-
Frank Act amended RESPA section 5(c) to require lenders to provide 
applicants with a ``reasonably complete or updated list of 
homeownership counselors who are certified pursuant to section 106(e) 
of the Housing and Urban Development Act of 1968 (12 U.S.C. 1701x(e)) 
and located in the area of the lender.'' \24\
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    \24\ Section 106(e) of the Housing and Urban Development Act of 
1968, 12 U.S.C. 1701x(e), requires that homeownership counseling 
provided under programs administered by HUD can only be provided by 
organizations or individuals certified by HUD as competent to 
provide homeownership counseling. Section 106(e) also requires HUD 
to establish standards and procedures for testing and certifying 
counselors.
---------------------------------------------------------------------------

    The list of homeownership counselors is to be included with a 
``home buying information booklet'' that the Bureau is directed to 
prepare ``to help consumers applying for federally related mortgage 
loans to understand the nature and costs of real estate settlement 
services.'' \25\ Prior to the Dodd-Frank Act, HUD was charged with 
distributing the RESPA ``special information booklet'' to lenders to 
help purchase-money mortgage borrowers understand the nature and costs 
of real estate settlement services. The Dodd-Frank Act amended RESPA 
section 5(a) to direct the Bureau to distribute the ``home buying 
information booklet'' to all lenders that make federally related 
mortgage loans. The Dodd-Frank Act also amended section 5(a) to require 
the Bureau to distribute lists of homeownership counselors to such 
lenders.
---------------------------------------------------------------------------

    \25\ The Dodd-Frank Act also amends RESPA section 5(b), 12 
U.S.C. 2604(b), to require that the ``home buying information 
booklet'' (the RESPA ``special information booklet,'' prior to the 
Dodd-Frank Act), include ``[i]nformation about homeownership 
counseling services made available pursuant to section 106(a)(4) of 
the Housing and Urban Development Act of 1968 (12 U.S.C. 
1701x(a)(4)), a recommendation that the consumer use such services, 
and notification that a list of certified providers of homeownership 
counseling in the area, and their contact information, is 
available.''
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    The proposal would have implemented the Dodd-Frank Act's 
requirement that a lender provide lists of homeownership counselors to 
applicants for federally related mortgage loans. Proposed Sec.  1024.20 
generally would have required a lender to provide an applicant for a 
federally related mortgage loan with a list of five homeownership 
counselors or counseling organizations in the location of the 
applicant, not later than three days after receiving an application. 
Proposed Sec.  1024.20 also would have set forth additional 
requirements related to the content and delivery of the list. The 
Bureau is finalizing proposed Sec.  1024.20 with certain changes, as 
discussed in further detail below.
20(a) Provision of List
20(a)(1)
Scope of Requirement
    As noted above, new RESPA section 5(c) requires lenders to include 
a list of homeownership counselors located in the area of the lender 
with the home buying information booklet that is to be distributed to 
applicants. To implement RESPA section 5(c), the Bureau proposed in 
Sec.  1024.20(a)(1) that the list of homeownership counselors or 
counseling agencies be provided to applicants for all federally related 
mortgage loans, except for Home Equity Conversion Mortgages (HECMs), as 
discussed in the section-by-section analysis of Sec.  1024.20(c) below. 
Under RESPA and its implementing regulations, a federally related 
mortgage loan includes purchase-money mortgage loans, subordinate-lien 
mortgages, refinancings, closed-end home-equity mortgage loans, HELOCs, 
and reverse mortgages.\26\ Thus, proposed Sec.  1024.20(a)(1) would 
have required that lenders provide the list of homeownership counselors 
to applicants for numerous types of federally related mortgage loans 
beyond purchase-money mortgages.
---------------------------------------------------------------------------

    \26\ 12 U.S.C. 2602(1); 12 CFR 1024.2.
---------------------------------------------------------------------------

    As the Bureau noted in the preamble of the proposal, based on its 
reading of section 5 of RESPA as amended, and its understanding of the 
purposes of that section, the Bureau believes that the amendments to 
RESPA indicate that Congress intended the booklet and list of 
counselors to be provided to applicants for all federally related 
mortgage loans and not just purchase-money mortgage loans. The Bureau 
acknowledged that section 5(d) of RESPA, in language that was not 
amended by the Dodd-Frank Act, requires lenders to provide the home 
buying information booklet ``to each person from whom [the lender] 
receives or for whom it prepares a written application to borrow money 
to finance the purchase of residential real estate.'' However, the 
Bureau also noted that RESPA sections 5(a) and (b), as amended, 
indicate that the booklet and list of counselors are to be provided to 
applicants for all federally related mortgage loans. Section 5(a) as 
amended (1) specifically references helping consumers applying for 
federally related mortgage loans understand the nature and costs of 
real estate settlement services; and (2) directs the Bureau to 
distribute the booklet and the lists of housing counselors to lenders 
that make federally related mortgage loans. Moreover, the prescribed 
content of the booklet is not limited to information on purchase-money 
mortgages. Under RESPA section 5(b), as amended by the Dodd-Frank Act, 
the booklet must include information specific to refinancings and 
HELOCs, as well as ``the costs incident to a real estate settlement or 
a federally related mortgage loan.''
    Additionally, the Bureau noted in the preamble of the proposal its 
view that a trained counselor can be useful to any consumer considering 
any type of mortgage loan. Mortgage transactions beyond purchase-money 
transactions, such as refinancings and open-end home-secured credit 
transactions, can entail significant risks and costs for consumers--
risks and costs that a trained homeownership counselor can assist 
consumers in fully understanding.
    Thus, for the reasons noted above, the Bureau proposed in Sec.  
1024.20(a)(1) to interpret the scope of the homeownership counselor 
list requirement to apply to all federally related mortgage loans 
pursuant to section 19(a) of RESPA, which provides the Bureau with the 
authority to ``prescribe such rules and regulations, to make such 
interpretations, and to grant such reasonable exemptions for classes of 
transactions, as may be necessary to achieve the purposes of the 
[RESPA].''
    The Bureau sought comment from the public on the costs and benefits 
of the provision of the list of homeownership counselors to applicants 
for refinancings and HELOCs. The Bureau also sought comment on the 
potential effect of the Bureau's proposal on access to homeownership 
counseling generally by consumers, and the effect of increased consumer 
demand on existing counseling resources. In particular, the Bureau 
solicited comment on the effect on counseling resources of providing 
the list beyond applicants for purchase-money mortgages.
    A number of industry commenters stated that lenders should not be 
required to provide counselor lists to applicants for refinancings or 
HELOCs. One large bank commenter, for example, asserted that the 
congressional intent to limit the requirement to purchase-

[[Page 6864]]

money mortgages is clear. Some other commenters were concerned that 
applicants for refinancings or HELOCs would either ignore the list or 
be offended by the suggestion that they would benefit from counseling, 
because such applicants already understand how mortgages work. Comments 
from consumer groups and a State Attorney General's office, however, 
supported the requirement to provide the counselor list to applicants 
for refinancings and HELOCs. Such commenters noted, for example, that 
consumers may find themselves in financial distress only after tapping 
into their home equity through a refinancing or a HELOC, in some cases 
repeatedly.
    The Bureau is generally finalizing in Sec.  1024.20(a)(1) the 
requirement to provide a list of counseling providers to applicants of 
federally related mortgage loans as proposed, for the reasons noted 
above. The Bureau continues to believe that the statutory language as a 
whole indicates Congress's intent to require lenders to provide the 
counselor list to applicants of refinancings and HELOCs, as well as 
purchase-money mortgages. Moreover, the Bureau agrees with commenters 
that suggest applicants for refinancings or HELOCs may benefit from 
information about counseling, even though such applicants have 
previously obtained a mortgage. The Bureau is, however, also adopting 
certain exemptions from the requirement, as described in the discussion 
of Sec.  1024.20(c) below.
Content of List
    As discussed above, RESPA section 5(c) requires that the list of 
homeownership counselors be comprised of homeownership counselors 
certified pursuant to section 106(e) of the Housing and Urban 
Development Act of 1968 and located in the area of the lender. RESPA 
section 5(c) does not specify any particular information about 
homeownership counselors that must be provided on the required list. 
Proposed Sec.  1024.20(a)(1) would have provided that the list include 
five homeownership counselors or homeownership counseling organizations 
located in the zip code of the applicant's current address or, if there 
were not the requisite five counselors or counseling organizations in 
that zip code, counselors or organizations within the zip code or zip 
codes closest to the loan applicant's current address. Proposed Sec.  
1024.20(a)(2) would have required lenders to include in the list only 
homeownership counselors or counseling organizations from either the 
most current list of homeownership counselors or counseling 
organizations made available by the Bureau for use by lenders in 
complying with Sec.  1024.20, or the most current list maintained by 
HUD of homeownership counselors or counseling organizations certified 
or otherwise approved by HUD. Proposed Sec.  1024.20(a)(3) would have 
required that the list include: (1) Each counselor's or counseling 
organization's name, business address, telephone number and, if 
available from the Bureau or HUD, other contact information; and (2) 
contact information for the Bureau and HUD.
    The Bureau stated in the preamble of the proposal that it expected 
to develop a Web site portal to facilitate compliance with the 
counselor list requirement. As the Bureau explained, such a Web site 
portal would allow lenders to type in the loan applicant's zip code to 
generate the requisite list, which could then be printed for 
distribution to the loan applicant. The Bureau also stated its belief 
that such an approach: (1) Could significantly mitigate any paperwork 
burden associated with requiring that the list be distributed to 
applicants for federally related mortgage loans; and (2) is consistent 
with the Dodd-Frank Act's amendment to section 5(a) of RESPA requiring 
the Bureau to distribute to lenders ``lists, organized by location, of 
homeownership counselors certified under section 106(e) of the Housing 
and Urban Development Act of 1968 (12 U.S.C. 1701x(e)) for use in 
complying with the requirement under [section 5(c)].''
    The Bureau solicited comment on the appropriate number of 
counselors or organizations to be included on the list and on whether 
there should be a limitation on the number of counselors from the same 
counseling agency. The Bureau also solicited comment on whether its 
planned Web site portal would be useful and whether there are other 
mechanisms through which the Bureau can help facilitate compliance and 
provide lists to lenders and consumers.
    A significant number of industry commenters objected to the 
proposed requirement to create individualized lists for borrowers as 
overly burdensome. Some commenters raised concerns that having to 
create these individualized lists would expose them to risk in the 
event of an error in compiling the list. Many industry commenters 
suggested that lenders should instead be permitted to comply with the 
requirement by providing Bureau and HUD contact information for the 
consumer to obtain information about counselors. Other commenters 
suggested it would be more beneficial to refer consumers to web 
databases containing all counselors in a state, or to provide a list 
based on an applicant's state rather than zip code. Commenters argued 
that changing the provision to allow compliance through a static list 
would minimize costs, create greater efficiency, and be more accurate. 
Some commenters argued that locating the nearest zip code to a 
consumer's home zip code would be overly burdensome. Several commenters 
objected to the requirement that the list be obtained from ``the most 
current'' lists of counselors or counseling organizations maintained by 
the Bureau or HUD, or suggested that ``most current'' should mean 
``monthly.'' A number of consumer group commenters, however, supported 
the requirement for an individualized list because such a list would be 
most beneficial to consumers. One such commenter also noted that 
requiring lenders to retrieve a fresh list for each applicant will 
ensure the lists received by consumers are the most up-to-date.
    Industry commenters were generally very supportive of the Bureau's 
intention to create a Web site portal to facilitate compliance, 
particularly if the individualized list requirement were retained. Some 
industry commenters noted that the list requirement would not be 
difficult to comply with as proposed, if a Web site portal were 
available. A few commenters, while primarily supportive of a 
requirement to provide a static rather than an individualized list, 
alternatively favored the idea of the Web site portal to generate the 
list (including automatically selecting adjacent zip codes to an 
applicant's zip code, if necessary). Some commenters requested a safe 
harbor for lenders providing a list generated through the Web site 
portal. Commenters proposed a number of additions or variations to the 
Web site portal. A number of industry commenters stated the Bureau 
should provide lenders with the option to import the data from the Web 
site portal directly into their systems, to ease compliance burden. 
Several industry commenters noted it would be essential that the Web 
site portal generate a list for lenders based on a simple zip code 
query. A few commenters suggested that the Web site portal should 
provide a randomized list in response to a zip code query, to avoid 
favoritism. Some commenters suggested the Web site portal should be 
made available to the public and publicized by the Bureau (e.g., though 
a public campaign in coordination with homeownership

[[Page 6865]]

counseling organizations, counseling trade groups, and HUD), and that 
lenders should be required to make lists available through their Web 
sites, branch offices, and mortgage advertising. Several commenters 
stated that the Bureau should coordinate the development of its Web 
site portal with HUD, so lenders are not required to search two 
separate databases.
    A number of industry commenters raised concerns about the 
requirement to provide a list of five counselors or counseling 
agencies, asserting that five is an arbitrary number and that it would 
be a difficult requirement to meet in certain geographic locations. 
Some commenters noted, for example, that Alaska has only three 
counseling agencies statewide, and that Wyoming has only four. One 
commenter suggested that lenders should not have to disclose counselors 
from different states, if there are not five counselors in the 
consumer's state. A few commenters suggested that the requirement be 
more flexible and require, for example, a list of ``no fewer than 
three'' counseling agencies.
    Several consumer advocacy and housing counselor advocacy groups 
commented that only homeownership counseling agencies, rather than 
individual homeownership counselors, should be permitted to appear on 
the list. These commenters noted that providing a list of individual 
counselors to consumers is neither practical nor efficient, as an 
individual counselor may not be available. A few commenters suggested 
that the list include agencies offering remote counseling services. For 
example, an alliance of counseling organizations suggested the list be 
required to include a minimum number of national counseling agencies or 
intermediaries \27\ outside of a consumer's zip code that can provide 
phone counseling.
---------------------------------------------------------------------------

    \27\ National intermediary organizations generally provide 
funding, training, and oversight of affiliated local counseling 
agencies, but may also provide counseling services directly to 
consumers. Christopher E. Herbert et al., Abt Assoc. Inc., The State 
of the Housing Counseling Industry, at xi, 2 (U.S. Dep't of Hous. & 
Urban Dev. 2008).
---------------------------------------------------------------------------

    Several consumer advocacy and housing counselor advocacy commenters 
requested that additional information be required to be provided on the 
list. For example, they asked that the lists be required to include a 
counseling agency's specialty (e.g., pre-purchase, refinance, home 
equity, rental, reverse mortgage, etc.) and any foreign language 
capacity. Another commenter requested that the list include a 
description of the services that the counselor would provide and fees 
typically charged for such services.
    Based on the comments received concerning compliance burden and the 
potential operational difficulties associated with developing lists as 
envisioned in the proposal, the Bureau is revising Sec.  1024.20(a)(1) 
to require lenders to fulfill the list obligation through use of either 
a Bureau Web site or data made available by the Bureau or HUD. 
Specifically, final Sec.  1024.20(a)(1) allows lenders to distribute 
lists of counseling organizations providing relevant counseling 
services in the applicant's location that are obtained up to 30 days in 
advance from either a Web site maintained by the Bureau or data made 
available by the Bureau or HUD for lenders to use in complying with the 
requirements of Sec.  1024.20, provided that the data are used in 
accordance with instructions provided with the data. Because lenders 
will thus generate the required lists through either a Web site that 
will automatically provide the required content of the list based on 
certain inputs, or through data that is accompanied by instructions to 
generate lists consistent with the Web site, the final rule also 
eliminates proposed Sec.  1024.20(a)(1)(i) and (ii) and proposed Sec.  
1024.20(a)(2) and (3) as unnecessary.
    The Bureau intends to create a Web site portal, in close 
coordination with HUD, that will require lenders to input certain 
required information (such as, for example, the applicant's zip code 
and the type of mortgage product) in order to generate a list of 
homeownership counseling organizations that provide relevant counseling 
services in the loan applicant's location. While the Bureau understands 
the concerns raised by commenters about the burden of generating zip-
code based lists for potential borrowers, the Bureau notes that the 
statutory requirement indicates that the list should be comprised of 
counselors ``located in the area of the lender.'' The Bureau is 
interpreting this requirement to mean the location of the applicant who 
is being served by the lender. The Bureau continues to believe that a 
list of counseling resources available near the applicant's location 
will be most useful to the applicant.\28\ The Bureau also believes that 
permitting lists to be generated based on larger geographic areas, such 
as an applicant's state, would frequently result in an applicant 
receiving a list that is overwhelmingly lengthy. The Bureau notes, for 
example, that HUD's Web site indicates that there are a significant 
number of states that are served by well over 20 homeownership 
counseling organizations. The Bureau notes, moreover, that the Web site 
portal will obviate the need for a lender to determine the closest zip 
codes to an applicant.
---------------------------------------------------------------------------

    \28\ The Bureau also relies on its exemption and modification 
authority under RESPA section 19(a) and the Dodd-Frank Act section 
1405(b). The Bureau believes that interpreting ``located in the area 
of the lender'' to mean the location of the applicant who is being 
served by the lender will help facilitate the effective functioning 
of this new RESPA disclosure. It will also, therefore, help carry 
out the purposes of RESPA for more effective advance cost 
disclosures for consumers, by providing information to loan 
applicants regarding counseling resources available for assisting 
them in understanding their prospective mortgage loans and 
settlement costs. In addition, because the Bureau believes that 
lists organized by the location of the applicant will be most useful 
to the applicants, the Bureau believes this interpretation is in the 
interest of consumers and in the public interest.
---------------------------------------------------------------------------

    The Bureau recognizes the concerns of industry commenters that 
requiring greater data inputs from lenders to generate a list will 
increase the burden on the lender. The Bureau intends to require as few 
data inputs as practicable to generate a relevant list for the 
applicant, in order to minimize compliance burden. The Bureau agrees 
with commenters that the Web site portal it develops should be made 
directly available to consumers, and the Bureau does intend to 
publicize the Web site portal to make consumers better aware of the 
counseling resources available.
    The Bureau also agrees with commenters who suggested the list 
should include only homeownership counseling organizations rather than 
individual counselors. The Bureau explained in the preamble of the 
proposal that it was proposing to allow the list to include counselors 
or counseling organizations certified or otherwise approved by HUD, 
pursuant to its exemption authority under section 19(a) of RESPA and 
its modification authority under section 1405(b) of the Dodd-Frank Act. 
The Bureau is finalizing Sec.  1024.20(a)(1) to require that the list 
contain only counseling organizations, pursuant to the same exemption 
authority, and anticipates that the Web site portal it develops may 
generate lists that include counseling organizations that are either 
certified or otherwise approved by HUD.\29\ Because

[[Page 6866]]

the Web site portal will automatically create lists that include the 
relevant homeownership counseling organizations, the Bureau is not 
finalizing proposed Sec.  1024.20(a)(2).
---------------------------------------------------------------------------

    \29\ As the Bureau noted in the preamble of the proposal, the 
Bureau understands that HUD, other than for its counseling program 
for HECMs, currently only approves homeownership counseling 
agencies, rather than certifying these agencies or individual 
counselors, as it has not yet implemented section 1445 of the Dodd-
Frank Act regarding certification of counseling providers. The 
Bureau also notes that permitting the list to include individual 
counselors could cause confusion for consumers, as an individual 
counselor may be unavailable. The Bureau is therefore exercising its 
exemption and modification authority under RESPA section 19(a) and 
the Dodd-Frank Act section 1405(b) to provide flexibility in order 
to facilitate the availability of competent counseling organizations 
for placement on the lists, so that counseling organizations that 
are either approved or certified by HUD may appear on the lists. 
Permitting the list to include HUD-approved or HUD-certified 
counseling organizations will help facilitate the effective 
functioning of this new RESPA disclosure. It will also, therefore, 
help carry out the purposes of RESPA for more effective advance cost 
disclosures for consumers, by providing information to loan 
applicants regarding counseling resources available for assisting 
them in understanding their prospective mortgage loans and 
settlement costs. The Bureau intends to work closely with HUD to 
facilitate operational coordination and consistency between the 
counseling and certification requirements HUD puts into place and 
the lists generated by the Bureau's Web site portal.
---------------------------------------------------------------------------

    The Bureau believes that allowing lenders to obtain the list up to 
30 days prior to providing it to the loan applicant strikes an 
appropriate balance between ensuring the information received by 
consumers is useful, and avoiding unnecessary burdens on lenders. The 
Bureau notes a lender may be able to keep counselor lists generated 
based on certain data inputs on file, and provide those stored lists to 
applicants as appropriate for up to 30 days, in order to avoid 
generating a new list for each applicant.
    With respect to the information that will appear on the lists of 
counseling organizations, the Bureau notes that rather than specify 
particular information, such as the counseling organization's telephone 
number, that must appear on the list through regulation, the Bureau 
will design its Web site portal so that the appropriate information 
will automatically appear on the lists that are generated. The Bureau 
will also work to ensure that any data provided for compliance with the 
requirement is accompanied by instructions that will result in the 
creation of a list that is consistent with what would have been 
generated if the Web site portal had been used. Accordingly, the Bureau 
is not finalizing proposed Sec.  1024.20(a)(3). The Bureau believes 
this will help ease compliance burden. The Bureau anticipates that the 
lists generated through its Web site portal or in accordance with its 
instructions will include contact information for the counseling 
organizations and may include additional information about the 
counseling organizations such as language capacity and areas of 
expertise. The Bureau also anticipates that the lists generated through 
its Web site portal will also include information enabling the consumer 
to access either the Bureau or the HUD list of homeownership counseling 
organizations, so that an applicant who receives the list can obtain 
information about additional counseling organizations if desired.
Timing of the List
    As discussed above, RESPA section 5(c) requires that the list be 
included with the home buying information booklet that is to be 
distributed to applicants no later than three business days after the 
lender receives a loan application. Proposed Sec.  1024.20(a)(1) would 
have required a lender to provide the list no later than three business 
days after the lender, mortgage broker, or dealer receives an 
application (or information sufficient to complete an application). The 
definition of ``application'' that would have applied appears in Sec.  
1024.2(b). The Bureau noted in the proposal that its 2012 TILA-RESPA 
Proposal proposed to adopt a new definition of ``application'' under 
Regulation Z, and it sought comment on whether to tie the provision of 
the list to this proposed definition instead of the definition in Sec.  
1024.2(b). Some industry commenters asked for greater flexibility with 
respect to the timing of the list requirement, so that a list could be 
provided later than three business days after the lender receives a 
loan application. A few consumer groups and a counseling association 
commenter objected to the timing of the list requirement on the basis 
that counseling should occur earlier in the shopping process, not at 
application. The Bureau received one comment in support of linking the 
timing requirement for the list with the good faith estimate required 
by RESPA. A few commenters noted that regardless of whether the list 
had to be provided at the same time as the RESPA good faith estimate, 
it should only have to be provided once per loan, even if a loan 
estimate had to be revised.
    The Bureau believes that the counselor list should be provided no 
later than the same time period as other applicable disclosures, in 
order to be most beneficial to consumers. The Bureau agrees with 
consumer group commenters that obtaining information about counseling 
at a point earlier than application could be beneficial to consumers. 
The Bureau notes, however, that the statutory requirement provides that 
the list of homeownership counselors be provided with the home buying 
booklet. The Bureau agrees with commenters that stated a lender should 
only be required to provide a single list in conjunction with an 
application, and notes that the final rule does not require that more 
than one list be provided. In addition, because the Bureau has not yet 
finalized the 2012 TILA-RESPA Proposal, the Bureau declines to provide 
a different definition of application in the final rule. The Bureau is 
therefore finalizing the timing requirement in Sec.  1024.20(a)(1) as 
proposed, consistent with the timing requirement of the booklet.
20(a)(2)
    RESPA section 5(c) does not specify whether the required list of 
homeownership counselors can be combined with other disclosures. To 
afford lenders flexibility and ease compliance burden, proposed Sec.  
1024.20(a)(4) would have allowed the list to be combined with other 
mortgage loan disclosures, unless otherwise prohibited. The Bureau did 
not receive any comments addressing this provision, and is finalizing 
it substantially as proposed, except that it is renumbering the 
provision as Sec.  1024.20(a)(2).
20(a)(3)
    Under RESPA section 5(c), a lender must provide a list of 
homeownership counselors to an applicant. To afford flexibility and 
help ease compliance burden, proposed Sec.  1024.20(a)(5) would have 
allowed a mortgage broker or dealer to provide the list to those 
applicants from whom it receives or for whom it prepares applications. 
Under proposed Sec.  1024.20(a)(5), where a mortgage broker or dealer 
provides the list, the lender is not required to provide an additional 
list but remains responsible for ensuring that the list has been 
provided to the loan applicant and satisfies the requirements of 
proposed Sec.  1024.20.
    The Bureau received one comment objecting to the language that a 
mortgage broker or dealer ``may'' provide the list to a loan applicant 
from whom it receives for whom it prepares an application. This 
commenter suggested that this language be changed to ``must,'' to 
reflect that mortgage brokers and dealers are required to provide the 
list to their loan applicants.
    As discussed above however, under the language of proposed Sec.  
1024.20(a)(5) the lender would have been responsible for ensuring that 
the list of counseling organizations is provided to the loan applicant 
in accordance with the requirements of Sec.  1024.20(a)(5). As a 
result, the provision would have required that a loan applicant receive

[[Page 6867]]

the list, with the lender maintaining ultimate responsibility for 
ensuring that it is provided, regardless of who provides the list. 
Accordingly, the Bureau is finalizing proposed Sec.  1024.20(a)(5) 
substantially as proposed, except that it is renumbering the provision 
as Sec.  1024.20(a)(3).
20(a)(4)
    RESPA section 5(c) does not specify how the required list must be 
delivered. Proposed Sec.  1024.20(a)(6) would have set out the 
requirements for providing the list to the loan applicant, i.e., in 
person, by mail, or by other means of delivery. As proposed, the list 
could have been provided to the loan applicant in electronic form, 
subject to the consumer consent and other applicable provisions of the 
Electronic Signatures in Global and National Commerce Act (E-Sign Act), 
15 U.S.C. 7001 et seq.
    A few industry commenters asserted that because the list 
requirement permits electronic delivery under the E-Sign Act, the list 
should not be referred to as ``written.'' One consumer group commenter 
encouraged the Bureau to remove language permitting the electronic 
delivery of disclosures, arguing that this could lead to a greater 
chance the disclosure would not be received (e.g., if the lender used 
the incorrect email address).
    The Bureau does not believe that the requirement that the list be 
``written'' conflicts with the provisions relating to delivery in 
electronic form pursuant to the E-Sign Act. In fact, the E-Sign Act 
itself specifically provides that the use of an electronic record to 
provide information can satisfy a requirement that certain information 
required to be made available to a consumer be provided in writing, 
subject to consumer consent provisions.\30\ Moreover, the Bureau 
believes it is important to retain the requirement that the list be in 
writing to provide for a retainable copy of the counseling organization 
names and contact information. In addition, the Bureau notes that 
permitting the electronic delivery of the disclosure is consistent with 
existing Sec.  1024.23 of Regulation X, which provides for the 
applicability of the E-Sign Act to RESPA. For these reasons, the Bureau 
is finalizing Sec.  1024.20(a)(6) substantially as proposed, but is 
renumbering it as Sec.  1024.20(a)(4) for organizational purposes.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 7001(c).
---------------------------------------------------------------------------

20(a)(5)
    Proposed Sec.  1024.20(a)(7) would have provided that the lender is 
not required to provide the list if, before the end of the three 
business day period, the lender denies the loan application or the loan 
applicant withdraws the application. The Bureau did not receive any 
comments addressing this provision. The Bureau is therefore finalizing 
Sec.  1024.20(a)(7) substantially as proposed, but is renumbering it as 
Sec.  1024.20(a)(5).
20(a)(6)
    Proposed Sec.  1024.20(a)(8) would have provided flexibility 
related to the requirements for providing the list when there are 
multiple lenders and multiple applicants in a mortgage loan 
transaction. Under proposed Sec.  1024.20(a)(8), if a mortgage loan 
transaction involved more than one lender, only one list was to be 
given to the loan applicant, and the lenders were to agree among 
themselves which lender would provide the list. Proposed Sec.  
1024.20(a)(8) also would have provided that if there were more than one 
loan applicant, the required list could be provided to any loan 
applicant that would have primary liability on the loan obligation.
    Industry commenters stated that it should be permissible for 
multiple lenders to provide the list for operational convenience. The 
Bureau notes that proposed Sec.  1024.20(a)(8) is consistent with 
Regulation Z Sec.  1026.31(e), which also addresses disclosure 
requirements in the case of multiple creditors. The Bureau believes 
this consistency is appropriate, and that it could be confusing for 
consumers to receive multiple copies of a counselor list disclosure. 
Accordingly, the Bureau is finalizing Sec.  1024.20(a)(8) as proposed, 
except for making minor edits for clarity and consistency and 
renumbering the provision as Sec.  1024.20(a)(6).
20(b) Open-End Lines of Credit (Home-Equity Plans) Under Regulation Z
    As noted above, RESPA section 5(c) requires that the list be 
included with the home buying information booklet that is to be 
distributed to applicants no later than three business days after the 
lender receives a loan application, and the Bureau proposed in Sec.  
1024.20(a)(1) to interpret the scope of the homeownership counselor 
list requirement to apply to all federally related loans, including 
HELOCs (except as described in the discussion of Sec.  1024.20(c) 
below). Proposed Sec.  1024.20(b) would have permitted a lender or 
broker, for an open-end credit plan subject to the requirements of 
Sec.  1024.20, to comply with the timing and delivery requirement of 
either Sec.  1024.20(a), or with the timing and delivery requirements 
set out in Regulation Z Sec.  1026.40(b) for open-end disclosures. 
Several commenters noted that they appreciated this flexibility and 
asked the Bureau to retain this approach in the final rule. The Bureau 
agrees with commenters that the flexibility to provide the list under 
the timing requirements of Sec.  1026.40(b) should be retained. The 
Bureau believes allowing this flexibility in timing will meet the 
purposes of the list requirement as well as help ease compliance 
burden. The Bureau is therefore adopting Sec.  1024.20(b) as proposed, 
with minor edits for clarity and consistency.
20(c) Exemptions
20(c)(1) Reverse Mortgage Transactions
    RESPA section 5(c) requires lenders to include a list of 
homeownership counselors with the home buying information booklet that 
is to be distributed to applicants. As noted above, the Bureau 
generally proposed in Sec.  1024.20(a)(1) to interpret the scope of the 
homeownership counselor list requirement to apply to applicants of all 
federally related mortgage loans pursuant to section 19(a) of RESPA. 
Proposed Sec.  1024.20(c) would have exempted a lender from providing 
an applicant for a HECM, as that type of reverse mortgage is defined in 
12 U.S.C. 1715z-20(b)(3), with the list required by Sec.  1024.20 if 
the lender is otherwise required by HUD to provide a list, and does 
provide a list, of HECM counselors or counseling agencies to the loan 
applicant. As discussed further below in the section-by-section 
analysis of Regulation Z, Sec.  1026.34(a)(5), the Bureau's final pre-
loan counseling requirement for high-cost mortgages, Federal law 
currently requires homeowners to receive counseling before obtaining a 
HECM reverse mortgage insured by the Federal Housing Administration 
(FHA),\31\ which is a part of HUD. HUD imposes various requirements 
related to HECM counseling, including requiring FHA-approved HECM 
mortgagees to provide HECM applicants with a list of HUD-approved HECM 
counseling agencies. The Bureau noted in the preamble of the proposal 
its concern that a duplicative list requirement could cause confusion 
for consumers and unnecessary burden for lenders. Accordingly, the 
Bureau proposed to exercise its exemption authority under RESPA section 
19(a) to allow lenders that provide a list under HUD's HECM program to 
satisfy the requirements of Sec.  1024.20.
---------------------------------------------------------------------------

    \31\ 12 U.S.C. 1715z-20(d)(2)(B).

---------------------------------------------------------------------------

[[Page 6868]]

    A trade association for the reverse mortgage industry argued that 
lenders should not be obligated to provide a counselor list to 
applicants for HECM mortgages through Sec.  1024.20. This commenter 
stated that HECM lenders are already required to provide a lengthier 
list of counselors specializing in reverse mortgage counseling. The 
commenter pointed out that in most instances a HECM lender cannot even 
complete a HECM application until they receive a HECM counseling 
certificate, except in limited circumstances under which HECM 
applicants can waive counseling requirements (e.g., for some types of 
refinancings from a HECM to another HECM). The commenter also argued 
that lenders should not have to provide applicants for non-HECM reverse 
mortgages the counseling list if the lender meets the HECM counseling 
disclosure requirements.
    The Bureau agrees that lenders should not have to provide a list of 
counselors to HECM applicants because the list is of limited value for 
such applicants, given that the majority of such applicants would 
already have been required to receive counseling prior to submitting an 
application for a HECM. In addition, upon further consideration, the 
Bureau believes that lenders should not have to provide applicants for 
any reverse mortgages subject to Regulation Z Sec.  1026.33(a) with a 
list of housing counselors. Given that counseling for HECMs and other 
reverse mortgages is typically provided by specially trained 
counselors, the Bureau believes that any additional counseling 
requirements related to these products would be better addressed 
separately. As noted above, HECM mortgagees are already required to 
provide HECM applicants with a list of HUD-approved HECM counseling 
agencies. The Bureau notes that it anticipates undertaking a rulemaking 
in the future to address how title XIV requirements apply to reverse 
mortgages and to consider other consumer protection issues in the 
reverse mortgage market.\32\ That rulemaking will provide an 
opportunity to consider further issues related to counseling or 
counseling information on reverse mortgages. Because the Bureau 
concludes that requiring lenders to provide a list of counselors to 
reverse mortgage borrowers under Sec.  1024.20 is largely duplicative 
of HECM requirements and may not provide additional, useful information 
for borrowers of other types of reverse mortgages, final Sec.  
1024.20(c)(1) provides an exemption for reverse mortgages pursuant to 
the Bureau's authority under RESPA section 19(a).
---------------------------------------------------------------------------

    \32\ Consumer Financial Protection Bureau, Reverse Mortgage 
Report, at 10-11 (June 2012), available at https://files.consumerfinance.gov/a/assets/documents/201206_cfpb_Reverse_Mortgage_Report.pdf.
---------------------------------------------------------------------------

20(c)(2) Timeshare Plans
    The Bureau generally proposed in Sec.  1024.20(a)(1) to interpret 
the scope of the homeownership counselor list requirement to apply to 
applicants of all federally related loans pursuant to section 19(a) of 
RESPA, which would include applicants for a mortgage secured by a 
consumer's interest in a timeshare. The Bureau did not propose any type 
of exemption from the list requirement for this category of applicants. 
Timeshare industry commenters argued that the requirement for a list of 
counselors should not apply to lenders receiving an application for a 
mortgage secured by a consumer's interest in a timeshare. They asserted 
an exception is warranted for mortgages secured by timeshares because 
of their belief that there was no Congressional intent to require 
counseling for timeshare buyers due to unique characteristics of the 
timeshare industry, the lack of predatory lending in this market, the 
lower risk to consumers associated with default of a mortgage secured 
by a timeshare,\33\ the protections provided by State law, and the 
timeshare business model that relies upon purchase and financing 
documents being executed simultaneously.
---------------------------------------------------------------------------

    \33\ Commenters stated that typically if a consumer defaults, 
the only consequence is that the consumer loses the timeshare 
interest.
---------------------------------------------------------------------------

    The Bureau agrees that lenders should not be obligated to provide a 
list of homeownership counselors to applicants for mortgages secured by 
a timeshare, and is therefore exercising its authority under section 
19(a) of RESPA to provide an exemption for these transactions in final 
Sec.  1024.20(c)(2). Although the Bureau believes that some form of 
counseling may be beneficial to such consumers, the Bureau is concerned 
that counselors at counseling agencies approved by HUD to counsel 
consumers on standard mortgage financing may not be trained to provide 
useful counseling addressing timeshare purchases. For that reason, the 
Bureau is concerned that the benefit of the list of counselors to a 
consumer purchasing a timeshare could be quite low. The Bureau has 
therefore determined that exempting timeshare purchases from the list 
requirement is reasonable, because it is unclear whether the list would 
provide helpful information to consumers. Accordingly, the final rule 
does not require a lender to provide an applicant for a mortgage loan 
secured by a timeshare, as described under 11 U.S.C. 101(53D), with the 
list of homeownership counseling organizations required under Sec.  
1024.20.

B. Regulation Z

Section 1026.1 Authority, Purpose, Coverage, Organization, Enforcement, 
and Liability
1(d) Organization
1(d)(5)
    Section 1026.1(d)(5) describes the organization of subpart E of 
Regulation Z, which contains special rules for mortgage transactions, 
including high-cost mortgages. The Bureau would have revised Sec.  
1026.1(d)(5) for consistency with the Bureau's proposed amendments to 
Sec. Sec.  1026.32 and 1026.34 for high-cost mortgages. Specifically, 
the Bureau proposed to revise Sec.  1026.1(d)(5) to include the term 
``open-end credit plan'' and to remove the term ``closed-end'' where 
appropriate. In addition, the Bureau proposed to include a reference to 
the new prepayment penalty coverage test for high-cost mortgages added 
by the Dodd-Frank Act. The Bureau did not receive any comments on 
proposed Sec.  1026.1(d)(5) and is finalizing the provision as 
proposed, with one non-substantive change to reflect the Dodd-Frank 
Act's adoption of the term ``high-cost mortgage'' to refer to a 
transaction that meets any of the coverage tests set forth in Sec.  
1026.32(a).
Section 1026.31 General Rules
31(c) Timing of Disclosure
31(c)(1) Disclosures for High-Cost Mortgages
    Since the enactment of the original HOEPA legislation in 1994, TILA 
section 129(a) has set forth the information that creditors must 
provide in the additional disclosure for high-cost mortgages, and TILA 
section 129(b) has described the timing requirements for this 
disclosure. Specifically, under TILA section 129(b)(1), the disclosure 
must be provided not less than three business days prior to 
consummation of the transaction. Pursuant to TILA section 129(b)(2)(A), 
if the terms of the transaction change after the disclosures have been 
provided in a way that makes the disclosure inaccurate, then a new 
disclosure must be given. TILA section 129(b)(2)(B) provides that such 
new disclosures may be given by telephone if the consumer initiated the 
change and if, at consummation, the new disclosure is provided in 
writing and the consumer and creditor certify that the telephone 
disclosure was given at least three days

[[Page 6869]]

before consummation. TILA section 129(b)(2)(C) permitted the Board (now 
the Bureau) to prescribe regulations authorizing the modification or 
waiver of rights under TILA section 129(b) if such modification was 
necessary to permit consumers to meet a bona fide financial emergency.
    TILA section 129(b) is implemented in existing Sec.  1026.31(c)(1). 
Section 1026.31(c)(1) provides that the high-cost mortgage disclosure 
shall be provided at least three business days prior to consummation, 
and Sec.  1026.31(c)(1)(i) sets forth the general rule for providing a 
new disclosure in the case of a change in terms. Section 
1026.31(c)(1)(ii) permits the new disclosure for a change in terms to 
be provided by telephone in certain circumstances, and Sec.  
1026.31(c)(1)(iii) sets forth the conditions pursuant to which a 
consumer is permitted to modify or waive the three-day waiting period 
for a disclosure for a bona fide personal financial emergency.
    The Dodd-Frank Act did not amend TILA section 129(b)(2) concerning 
the timing requirements for high-cost mortgage disclosures, except to 
clarify that authority under TILA section 129(b)(2)(C) to permit a 
modification or waiver of rights for bona fide personal financial 
emergencies transferred from the Board to the Bureau. The Bureau thus 
proposed only limited revisions to Sec.  1026.31(c)(1) and related 
commentary that would have reflected the expanded types of loans 
potentially subject to HOEPA coverage as a result of the Dodd-Frank 
Act. For example, the proposal would have included the term ``account 
opening'' in addition to ``consummation'' to reflect the fact that the 
Dodd-Frank Act expanded the requirements for high-cost mortgages to 
HELOCs.
    The Bureau received one comment concerning proposed Sec.  
1026.31(c)(1). The commenter, a consumer advocacy organization, urged 
the Bureau to eliminate the language in Sec.  1026.31(c)(1)(ii) 
permitting telephone disclosures when a consumer initiates a change in 
the transaction after the creditor has provided the high-cost mortgage 
disclosure, and that change results in different terms. The commenter 
argued that permitting telephone disclosures would encourage sloppiness 
and inconsistency in the delivery of information and argued that the 
consumer would not be able to remember the information conveyed. As 
noted above, Sec.  1026.31(c)(1)(ii) permitting telephone disclosures 
in the case of a change in terms implements a long-existing provision 
of TILA. The Bureau would need to use its authority under TILA section 
105(a) to remove this provision. Given that the Dodd-Frank Act neither 
removed nor revised this provision, the Bureau declines to make such a 
change at this time. With respect to the commenter's specific concerns, 
the Bureau notes that Sec.  1026.31(c)(1)(ii) requires a written 
disclosure at consummation or account opening that reflects any changed 
terms, along with a certification by the consumer and creditor that 
telephone disclosures reflecting those terms were made at the 
appropriate time prior to consummation or account opening.
    The commenter similarly urged the Bureau to eliminate the language 
in Sec.  1026.31(c)(1)(iii) permitting the consumer to modify the 
three-day waiting period for a bona fide personal financial emergency. 
The commenter stated that the urgency for financing for some consumers 
should not supplant protections for other consumers. The Bureau 
declines to remove or amend Sec.  1026.31(c)(1)(iii). The Board 
prescribed Sec.  1026.31(c)(1)(iii) pursuant to its authority under 
TILA section 129(b)(2)(C) when it first implemented HOEPA by final rule 
in 1995.\34\ The Bureau understands that there may be concerns about 
creditors abusing the waiver provision in certain circumstances, 
however the Bureau believes that the provision may benefit consumers 
who, for example, are facing imminent foreclosure. Absent specific 
information indicating that a change is warranted, the Bureau declines 
to modify this long-standing provision. The Bureau thus finalizes its 
amendments to Sec.  1026.31(c)(1) generally as proposed (i.e., to 
reflect the provision's expanded application to HELOCs), with only 
minor revisions for clarity.
---------------------------------------------------------------------------

    \34\ See 60 FR 15463, 15464-65 (Mar. 24, 1995).
---------------------------------------------------------------------------

    In addition, the Bureau is revising comment 31(c)(1)(i)-2 for 
clarification purposes and consistency with final Sec.  1026.34(a)(10). 
Upon further consideration of these provisions, the Bureau recognizes 
that the prohibition of financing points and fees in Sec.  
1026.34(a)(10) prohibits the financing of any points and fees, as 
defined in Sec.  1026.32(b)(1) and (2), for all high-cost mortgages. 
This prohibition includes the financing of premiums or other charges 
for the optional products such as credit insurance described in 
proposed comment 31(c)(1)(i)-2. Section 1026.34(a)(10) permits, 
however, the financing of charges not included in the definition of 
points and fees. For example, Sec.  1026.34(a)(10) permits the 
financing of bona fide third-party charges, such as fees charged by a 
third-party counselor in connection with the consumer's receipt of pre-
loan counseling for a high-cost mortgage under Sec.  1025.34(a)(5). 
Accordingly, proposed comment 31(c)(1)(i)-2 is revised for 
clarification purposes and consistency with these other provisions.
31(h) Corrections and Unintentional Violations.
    Section 1433(f) of the Dodd-Frank Act added new section 129(v) to 
TILA, 15 U.S.C. 1639(v), which prescribes certain conditions under 
which a creditor or assignee of a high-cost mortgage that has failed to 
comply with a HOEPA requirement, despite acting in good faith, will not 
be deemed to have violated the requirement. Section 129(v) permits the 
creditor or assignee to use this provision when either of the two 
following sets of conditions is satisfied: (1) ``Within 30 days of the 
loan closing and prior to the institution of any action, the consumer 
is notified of or discovers the violation, appropriate restitution is 
made, and whatever adjustments are necessary are made to the loan to 
either, at the choice of the consumer--(A) make the loan satisfy the 
requirements of this chapter; or (B) in the case of a high-cost 
mortgage, change the terms of the loan in a manner beneficial to the 
consumer so that the loan will no longer be a high-cost mortgage''; or 
(2) ``within 60 days of the creditor's discovery or receipt of 
notification of an unintentional violation or bona fide error and prior 
to the institution of any action, the consumer is notified of the 
compliance failure, appropriate restitution is made, and whatever 
adjustments are necessary are made to the loan to either, at the choice 
of the consumer--(A) make the loan satisfy the requirements of this 
chapter; or (B) in the case of a high-cost mortgage, change the terms 
of the loan in a manner beneficial so that the loan will no longer be a 
high-cost mortgage.'' \35\ The Bureau did not propose to issue 
regulatory guidance concerning this provision. The Bureau solicited 
comment on the extent to which creditors or assignees are likely to 
invoke this provision; whether regulatory guidance would be useful; and 
if so, what issues would be most important to address.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 1639(v).
---------------------------------------------------------------------------

    The Bureau did not receive comments from industry suggesting that 
creditors or assignees would be likely to invoke the provision. 
However, the Bureau received a number of comments from industry and 
consumer groups that suggested the Bureau provide guidance on certain 
statutory terms. Both industry

[[Page 6870]]

and consumer groups asked for a definition of the statutory term ``good 
faith'' and also sought guidance on whether the statutory requirement 
that notice of an unintentional error be given ``prior to the 
institution of any action'' applies only to lawsuits initiated by the 
consumer, or should be construed more broadly to include enforcement 
actions and various types of informal disputes between the borrower and 
creditor. Consumer groups also sought guidance and clarification as to 
how a creditor's use of the statute to correct an unintentional 
violation will interplay with TILA rescission rights.\36\
---------------------------------------------------------------------------

    \36\ See 15 U.S.C. 1635 and 1639(n).
---------------------------------------------------------------------------

    In addition, both industry and consumer groups sought guidance on 
the operation of the 30- and 60-day periods set forth in sections 
129(v)(1) and (2), respectively. These commenters expressed concern 
that the statute, as drafted, could be interpreted to require a 
creditor or assignee seeking the benefit of section 129(v) to provide 
notice to the consumer, receive the election of the consumer's 
preferred adjustment, and implement the consumer's election within the 
30- or 60-day period. Industry and consumer groups stated that such a 
timeframe would be unworkable, and industry commenters suggested this 
would result in creditors and assignees not using the provision.
    Both industry and consumer groups offered suggestions for a more 
workable operational framework. Specifically, industry commenters 
suggested that the 30- and 60-day time limits should refer only to the 
time in which the creditor or assignee must notify the consumer about 
the violation, but additional time should be afforded for the creditor 
to offer a choice of adjustments to the consumer, for the consumer to 
elect an adjustment, and the creditor to implement the consumer's 
elected adjustment. Consumer groups also noted that a consumer may need 
substantial time to consider a creditor's proposed adjustment in order 
to make an informed choice, and generally suggested that an additional 
30 to 60 days from the time of notice be given to consumers to make an 
election of adjustment. Similarly, industry commenters suggested an 
additional time period of 30 to 60 days be afforded to the creditor or 
assignee to implement the consumer's elected adjustment and pay any 
restitution that may be appropriate.
    The Bureau recognizes that section 129(v) is a complex provision, 
and agrees with public commenters that several of the features and 
terms of the provision are ambiguous. However, it is not yet clear what 
role section 129(v) will play in HOEPA's scheme of regulation, 
particularly in light of the Dodd-Frank Act's comprehensive amendments 
to HOEPA, and the lack of comments from industry suggesting that 
creditors or assignees will be likely to invoke this provision. The 
Bureau therefore declines at this point to issue detailed interpretive 
guidance regarding section 129(v).
    However, the Bureau agrees with industry and consumer groups that 
it is important to clarify how the 30- and 60-day periods operate. 
Comments suggested that implementing the consumer's choice of 
adjustment--which may require the creditor or assignee to make changes 
to the documentation, disclosure, or terms of a transaction--may itself 
take more than 30 days. It is thus not feasible to require creditors 
and assignees invoking the provision to also provide notice of the 
violation to the consumer and allow the consumer appropriate time to 
consider and elect an adjustment and to provide notice of that election 
to the creditor within that same 30 or 60 day period.
    The Bureau is adopting a new provision at Sec.  1026.31(h) and 
accompanying comment 31(h)-1 interpreting section 129(v) to address 
these issues. Section 1026.31(h) states that a creditor or assignee in 
a high-cost mortgage who, when acting in good faith, failed to comply 
with a requirement under section 129 of the Act will not be deemed to 
have violated such requirement if the creditor or assignee satisfies 
specified conditions. Those conditions include providing notice to the 
consumer within 30 or 60 days (as appropriate) of the prescribed 
triggering conditions and implementing the consumer's chosen 
adjustments and providing appropriate restitution within a reasonable 
time.
    In adopting new provision Sec.  1026.31(h), the Bureau is 
interpreting the language of section 129(v) to provide greater clarity 
with respect to these timeframes, which will assist creditors, 
assignees, and consumers seeking to use section 129(v). In the Bureau's 
view, section 129(v) is ambiguous regarding whether the ``within 30 [or 
60] days'' timing requirement encompasses all the events that must 
occur for a creditor or assignee to claim the provision's benefit--
including the implementation of the consumer's choice of adjustment--or 
only the first step, the consumer's notification or discovery of the 
violation. The Bureau believes Congress's intent was to make it 
possible, under appropriate circumstances, for creditors and assignees 
to satisfy the conditions of section 129(v). If securing the protection 
of section 129(v) required a creditor or assignee to complete within 30 
or 60 days tasks that cannot reasonably be done in that time, creditors 
or assignees might never seek to use the provision. The Bureau thus 
believes that, to effectuate Congress's intent, section 129(v) should 
be interpreted, if possible, so that creditors and assignees can 
feasibly meet its conditions. The Bureau agrees with industry and 
consumer groups that it would be unworkable for a creditor to complete 
within 30 or 60 days all the steps to qualify for section 129(v) 
relief. Accordingly, the Bureau interprets the language of section 
129(v) to mean that the 30- and 60-day statutory periods set forth the 
timeframe for providing notice of the violation to the consumer, but 
does not also require that the consumer elect an adjustment and that 
the creditor or assignee implement that adjustment, along with 
appropriate restitution, within the same timeframe.
    With respect to the remaining statutory conditions--the consumer's 
election of an adjustment, the creditor or assignee's implementation of 
that adjustment, and the creditor or assignee's paying of any 
appropriate restitution--the Bureau believes that Congress intended 
this provision to encourage creditors and assignees who have acted in 
good faith to remediate their violations of HOEPA, and that additional 
time is necessary for them to do so.
    However, the Bureau stresses that, for a creditor or assignee to 
enjoy the benefit of section 129(v), the required adjustment must still 
be completed in a reasonable time. While the Bureau interprets the 
specified 30- or 60-day period to cover only notice of a violation to 
the consumer, the Bureau does not believe Congress intended to allow 
the remaining steps in section 129(v) to take an arbitrarily long time. 
The Bureau believes Congress intended a creditor or assignee to make 
the appropriate restitution and complete the required section 129(v) 
modification within a reasonable time period.\37\ In the Bureau's view, 
allowing a reasonable time for a creditor or assignee to carry out the 
steps necessary to benefit from section 129(v) would effectuate 
Congress's purpose of encouraging creditors and assignees who have 
acted

[[Page 6871]]

in good faith to remediate their violations of HOEPA. If a creditor 
could take any amount of time to fulfill the section 129(v) conditions, 
the creditor might wait without completing the required modification 
unless and until it faced liability for its violation.
---------------------------------------------------------------------------

    \37\ When a statute is silent about how long a given action may 
take, Congress may be understood to have implicitly required the 
action to be completed in a reasonable time. See Norman J. Singer & 
J.D. Shambie Singer, 2B Sutherland Statutes and Statutory 
Construction, Sec.  55.3 (7th ed.) (``If a statute imposes a duty 
but is silent as to when it is to be performed, a reasonable time is 
implied.'').
---------------------------------------------------------------------------

    Section 1026.31(h) reflects this interpretation by requiring both 
appropriate restitution and the required adjustments to a loan to be 
completed within a reasonable time. What length of time is reasonable 
may depend on the circumstances, including the nature of the violation 
at stake. The Bureau therefore declines to provide detailed guidance on 
what periods would be reasonable. However, as the accompanying new 
comment 31(h)-1 notes, the Bureau generally regards 30 days after the 
consumer sends notice of the chosen adjustment as reasonable.
    Comment 31(h)-1 also provides a clarifying interpretation of the 
notice and election procedures. Section 129(v) is also ambiguous as to 
how consumers are to be notified that they have a choice of remedy and 
how they are to inform creditors of their choice. The Bureau believes 
that Congress intended for consumers to have a reasonable opportunity 
to make a choice under section 129(v). In the Bureau's view, this 
purpose is effectuated by interpreting section 129(v) to require a 
creditor or assignee to provide adequate notice of the choices 
available to the consumer. Specifically, comment 31(h)-1 notes that the 
initial notice sent to the consumer should be in writing, should offer 
the consumer the proposed adjustments, and should state the time within 
which the consumer must choose an adjustment. Comment 31(h)-1 further 
explains that the Bureau regards 60 days as generally sufficient to 
provide adequate notice of the consumer's right to make an election.
    Finally, the Bureau is clarifying in Sec.  1026.31(h) and its 
accompanying commentary certain statutory terminology for consistency 
with existing Regulation Z terminology, and to reflect the Dodd-Frank 
Act's expansion of loans potentially subject to HOEPA coverage to 
include open-end credit plans. Thus, Sec.  1026.31(h) and its 
accompanying commentary use the terms ``consummation or account 
opening'' and ``loan or credit plan'' to clarify that Sec.  1026.31(h) 
applies to both closed-end and open-end credit.
Section 1026.32 Requirements for High-Cost Mortgages
32(a) Coverage
32(a)(1)
    Prior to the Dodd-Frank Act, the statutory protections for high 
cost mortgages generally were limited to closed-end refinancings and 
home-equity mortgage loans with APRs or points and fees that exceeded 
the thresholds prescribed by TILA section 103(aa), as implemented by 
existing Sec.  1026.32(a)(1). The Dodd-Frank Act expanded HOEPA's 
coverage by providing in TILA section 103(bb)(1) that the term ``high-
cost mortgage'' means any consumer credit transaction that is secured 
by the consumer's principal dwelling, other than a reverse mortgage 
transaction, if any of the prescribed high-cost mortgage thresholds are 
met. As discussed in the section-by-section analysis of Sec.  
1026.32(a)(1)(i) through (iii), below, the Dodd-Frank Act adjusted 
HOEPA's existing APR and points and fees thresholds and added a third 
HOEPA coverage test based on a transaction's prepayment penalties.
    The proposal would have revised Sec.  1026.32(a)(1) to implement 
TILA's amended definition of ``high-cost mortgage'' by removing the 
coverage exclusions for residential mortgage transactions (i.e., 
purchase-money mortgage loans) and HELOCs while retaining the exclusion 
of reverse mortgage transactions. Specifically, the proposal would have 
defined ``high-cost mortgage'' in Sec.  1026.32(a)(1) to mean any 
consumer credit transaction, other than a reverse mortgage transaction 
as defined in Sec.  1026.33(a), that is secured by the consumer's 
principal dwelling and in which any one of the high-cost APR, points 
and fees, or prepayment penalty coverage tests is met. Proposed comment 
32(a)(1)-1 would have clarified that a high-cost mortgage includes both 
a closed- and open-end credit transaction secured by the consumer's 
principal dwelling. The comment also would have clarified that, for 
purposes of determining coverage under Sec.  1026.32, an open-end 
credit transaction is limited to account opening; an individual advance 
of funds or a draw on the credit line subsequent to account opening 
does not constitute a ``transaction'' for this purpose. As noted in the 
proposal, the Bureau believes that such a clarification is needed to 
permit creditors to determine whether a HELOC is a high-cost mortgage 
once (i.e., at account opening), rather than having to evaluate the 
HELOC for high-cost mortgage coverage each time the consumer draws on 
the credit line.
    The Bureau received numerous comments concerning the proposed 
expanded scope of loan types covered by HOEPA. The Bureau addresses 
those coverage-related comments in the section-by-section analysis of 
Sec.  1026.32(a)(2) below. One commenter expressed an overall concern 
that the Bureau is not coordinating its 2013 HOEPA Final Rule with the 
implementation of other title XIV provisions, and suggested that 
HOEPA's protections were not necessary given these other provisions. As 
discussed in Part III of this preamble, the Bureau is carefully 
coordinating its rules. The Bureau notes that the Dodd-Frank Act's 
amendments to HOEPA are self-effectuating in the absence of 
regulations.
    The Bureau received no comments concerning other aspects of 
proposed Sec.  1026.32(a)(1) or comment 32(a)(1)-1 and adopts them 
generally as proposed, except that the Bureau retains for 
organizational purposes the existing structure of Sec.  1026.32(a)(1), 
including its cross-reference to Sec.  1026.32(a)(2) for exemptions 
from HOEPA coverage.
32(a)(1)(i)
    Prior to the Dodd-Frank Act, TILA section 103(aa)(1)(A) provided 
that a transaction was covered by HOEPA if the APR at consummation of 
the transaction would exceed by more than 10 percentage points the 
yield on Treasury securities having comparable periods of maturity 
(measured as of the fifteenth day of the month immediately preceding 
the month in which the application for the extension of credit was 
received by the creditor). Pursuant to its authority under TILA section 
103(aa)(2) (re-designated by the Dodd-Frank Act as section 103(bb)(2)), 
the Board in 2001 lowered the APR threshold for first-lien transactions 
to 8 percentage points above the yield on comparable Treasury 
securities and retained the higher APR threshold of 10 percentage 
points above the yield on comparable Treasury securities for 
subordinate-lien transactions, thus creating a two-tiered APR test for 
HOEPA coverage.\38\ The APR thresholds are implemented in existing 
Sec.  1026.32(a)(1)(i).
---------------------------------------------------------------------------

    \38\ 66 FR 65604, 65617 (Dec. 20, 2001).
---------------------------------------------------------------------------

    TILA section 103(bb)(1)(A)(i), as added by section 1431 of the 
Dodd-Frank Act, essentially codifies the two-tiered APR test for HOEPA 
coverage adopted by the Board in 2001, with certain changes. 
Specifically, TILA section 103(bb)(1)(A)(i):

[[Page 6872]]

     Changes the APR benchmark from the yield on comparable 
Treasury securities to the ``average prime offer rate,'' as defined in 
TILA section 129C(b)(2)(B);
     Revises the percentage-point thresholds for first- and 
subordinate-lien transactions; and
     Creates a separate, higher percentage-point threshold for 
smaller-dollar-amount, first-lien transactions secured by personal 
property.

These changes, as implemented by the final rule, are discussed below, 
following a discussion of (1) the Bureau's proposal to use the 
``transaction coverage rate'' as an alternative to the APR for purposes 
of determining HOEPA coverage under Sec.  1026.32(a)(1)(i), and (2) 
general comments concerning the use of the APR for testing for HOEPA 
coverage.
Annual Percentage Rate versus Transaction Coverage Rate
    The Bureau proposed two alternatives in proposed Sec.  
1026.32(a)(1)(i) to implement the revised APR thresholds for HOEPA 
coverage under TILA section 103(bb)(1)(A)(i). Alternative 1 would have 
used the APR as the metric to be compared to the average prime offer 
rate for determining HOEPA coverage for both closed- and open-end 
credit transactions. Alternative 2 would have been substantially 
identical to Alternative 1, but it would have substituted a 
``transaction coverage rate'' for the APR as the metric to be compared 
to the average prime offer rate for closed-end credit transactions. The 
Bureau proposed Alternative 2 in connection with the Bureau's 2012 
TILA-RESPA Integration Proposal, which would have broadened the general 
definition of finance charge for closed-end transactions under 
Regulation Z.\39\ In its HOEPA proposal, the Bureau solicited comment 
on whether to adopt Alternative 1 or Alternative 2 for closed-end 
transactions. The Bureau also noted that it would not adopt Alternative 
2 if it did not change the definition of finance charge in connection 
with the 2012 TILA-RESPA Integration Proposal. Proposed comment 
32(a)(1)(i)-1 would have clarified how to determine the ``transaction 
coverage rate'' for closed-end transactions if Alternative 2 were 
adopted.
---------------------------------------------------------------------------

    \39\ See 77 FR 49091, 49100-03 (Aug. 15, 2012) (discussing the 
transaction coverage rate).
---------------------------------------------------------------------------

    As discussed in part II above, in August 2012, the Bureau extended 
the notice-and-comment period for comments relating to the proposed 
adoption of the more inclusive finance charge, including related 
aspects of the HOEPA proposal such as the transaction coverage rate. At 
that time, the Bureau noted that it would not be finalizing the more 
inclusive finance charge in January 2013.\40\ The Bureau therefore does 
not address in this rulemaking the numerous public comments that it 
received concerning the proposed alternatives for the APR coverage 
test. The Bureau instead will address such comments in connection with 
its finalization of the 2012 TILA-RESPA Integration Proposal, thus 
resolving that issue together with the Bureau's determination whether 
to adopt the more inclusive finance charge. The final rule thus adopts 
Alternative 1 (i.e., use of APR) in Sec.  1026.32(a)(1)(i).
---------------------------------------------------------------------------

    \40\ See 77 FR 54843 (Sept. 6, 2012) (discussing the TILA-RESPA 
Integration Proposal); 77 FR 54844 (Sept. 6, 2012) (discussing the 
HOEPA Proposal).
---------------------------------------------------------------------------

Use of the Annual Percentage Rate for HOEPA Coverage
    The Bureau received several comments generally discussing the use 
of the APR for determining HOEPA coverage. One State housing finance 
authority commenter suggested that the Bureau replace the APR-based 
coverage test for both closed- and open-end transactions with a 
simpler, interest rate-based test that would be easier to explain to 
consumers and would eliminate regional variations due to closing 
charges. Given that TILA clearly contemplates an APR-based coverage 
test for determining the applicability of HOEPA protections, as well as 
other types of special protections, the Bureau declines to adopt an 
interest rate-based test for high-cost mortgages in this 
rulemaking.\41\
---------------------------------------------------------------------------

    \41\ See TILA sections 129C(a)(6)(D)(ii) and 129C(c)(1)(B)(ii) 
(ability-to-repay and qualified mortgage requirements), 129D(b)(3) 
(escrow requirements), and 129H(f)(2) (appraisal requirements).
---------------------------------------------------------------------------

    The Bureau also declines to adopt in the final rule, as suggested 
by one consumer advocacy commenter, a requirement that non-interest 
finance charge items be included in the APR calculation for HELOCs for 
purposes of determining HOEPA coverage. As noted, the Dodd-Frank Act 
expanded HOEPA coverage to HELOCs in TILA section 103(bb)(1)(A). In 
doing so, Congress did not set forth any special standards for applying 
the APR coverage test to open-end credit. Under the HOEPA proposal, 
HELOC creditors thus would have tested HELOCs for HOEPA coverage by 
using the standard APR that creditors calculate for HELOC disclosures. 
Specifically, unlike for closed-end transactions, where the APR 
reflects costs other than interest, HELOC APRs include only 
interest.\42\ One consumer group commenter urged the Bureau to make the 
APR coverage test more consistent between closed- and open-end credit 
by adopting a more inclusive APR calculation for HELOCs. The commenter 
argued that, under the Bureau's proposal, a creditor could impose 
astronomical closing costs on a HELOC without meeting the APR coverage 
test, because such charges are not included in the APR calculation for 
HELOCs. The commenter expressed concern that the difference in the APR 
calculation for HELOCs versus closed-end transactions will unduly 
encourage creditors to steer consumers toward HELOCs, and particularly 
to HELOCs with excessively high closing costs.
---------------------------------------------------------------------------

    \42\ TILA section 128(a)(3) and (4) requires disclosure of the 
finance charge and the finance charge expressed as an ``annual 
percentage rate,'' for which the interest rate (along with other 
items in the finance charge) is a factor in the calculation. See 
Sec.  1026.18(d) and (e). TILA section 127A(a), in contrast, 
provides that HELOC creditors must disclose the annual percentage 
rate along with a statement that the rate does not include costs 
other than interest. Thus, pursuant to Sec. Sec.  1026.14(b) and 
.40, the APR to be disclosed for a HELOC--as for other types of 
open-end credit--is the periodic rate multiplied by the number of 
periods in a year under Sec.  1026.40.
---------------------------------------------------------------------------

    The Bureau acknowledges that Regulation Z requires a different 
calculation of APR for closed-end transactions (interest rate plus 
other charges) than for HELOCs (interest rate only) for disclosure 
purposes. Using these existing APRs for HOEPA coverage necessarily 
means that non-interest charges will be reflected in the APR for 
closed-end, but not for open-end, transactions. The Bureau declines at 
this time, however, to adopt a different APR for HELOCs. First, the 
Bureau notes that creditors have been required to use the (interest 
rate) APR for HELOC disclosures for more than twenty years, and this 
APR is consistent with the APR used for other open-end credit.\43\ 
Moreover, notwithstanding the commenter's concern, the Bureau believes 
that the HOEPA points and fees coverage test should constrain HELOC 
creditors from imposing excessively high closing costs. As discussed in 
the section-by-section analysis of Sec.  1026.32(b)(2) below, the final 
rule adopts a points and fees definition that is the same in all 
material respects for closed- and open-end credit. Finally, the Bureau 
believes that introducing a new APR calculation for HELOC creditors 
solely for determining HOEPA coverage could impose additional 
compliance costs that would need to be carefully

[[Page 6873]]

analyzed. Thus, the Bureau believes that comments concerning the 
disparity between the APR for closed- and open-end credit transactions 
are better considered as part of a broader reevaluation of the HELOC 
provisions of Regulation Z, rather than in the context of this 
rulemaking to implement section 1431 of the Dodd-Frank Act.\44\
---------------------------------------------------------------------------

    \43\ See, e.g., 54 FR 24670 (June 9, 1989) (adopting HELOC 
disclosure rules to implement the Home Equity Loan Consumer 
Protection Act of 1988); Sec.  1026.14(b).
    \44\ In this regard, the Bureau notes that it has inherited from 
the Board a proposal to amend the requirements for HELOC disclosures 
under current Sec.  1026.40 (Sec.  226.5b in the Board's proposal). 
See 74 FR 43428 (Aug. 26, 2009). The Bureau anticipates finalizing 
the Board's proposal in the future.
---------------------------------------------------------------------------

Average Prime Offer Rate as Benchmark
    As noted above, the Dodd-Frank Act amended HOEPA by changing the 
benchmark against which the APR must be measured to determine HOEPA 
coverage from the yield on comparable Treasury securities to the 
average prime offer rate, defined in TILA section 129C(b)(2)(B) to mean 
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) essentially 
codifies the definition of average prime offer rate adopted by the 
Board in its 2008 HOEPA Final Rule and implemented in Sec.  
1026.35.\45\
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    \45\ See 73 FR 44522, 44534-36 (July 30, 2008).
---------------------------------------------------------------------------

    Section 1026.35 prohibits certain acts or practices in connection 
with higher-priced mortgage loans. Higher-priced mortgage loans, in 
contrast to high-cost mortgages, are closed-end credit transactions 
with APRs that, in general, exceed the average prime offer rate for a 
comparable transaction as of the date the interest rate for the 
transaction is set by more than 1.5 or 3.5 percentage points for first- 
and subordinate-lien transactions, respectively.\46\
---------------------------------------------------------------------------

    \46\ Existing Sec.  1026.35 contains repayment ability 
requirements and other restrictions for higher-priced mortgage 
loans. The Bureau's 2013 ATR Final Rule is removing those 
requirements in connection with its implementation in Sec.  1026.43 
of the Dodd-Frank Act's ability-to-repay and qualified mortgage 
provisions. However, Sec.  1026.35 is being retained for escrow- and 
appraisal-related requirements for higher-priced mortgage loans, 
which are being implemented in the Bureau's 2013 Escrows Final Rule 
and the 2013 interagency appraisals rulemaking, respectively.
---------------------------------------------------------------------------

    Section 1026.35(a)(2) provides that the average prime offer rate 
means an APR that is derived from the average interest rates, points 
and ``other loan pricing terms'' currently offered to consumers by a 
representative sample of creditors for fixed- and variable-rate closed-
end credit transactions with low-risk pricing characteristics. Section 
1026.35(a)(2) also indicates that a table with the average prime offer 
rates for a broad range of types of closed-end credit transactions is 
published on the internet and updated at least weekly. Existing 
comments 35(a)(2)-1 through -4 provide further details concerning the 
calculation and use of the average prime offer rate.\47\ In relevant 
part:
---------------------------------------------------------------------------

    \47\ In proposing to cross-reference Regulation Z's existing 
guidance for average prime offer rates relating to higher-priced 
mortgage loans, the HOEPA proposal noted that Regulation Z's 
existing comments 35(a)(2)-1 through -4 likely would be renumbered 
as comments 35(a)(2)(ii)-1 through -4 for organizational purposes if 
and when the Bureau adopted the transaction coverage rate in Sec.  
1026.35 in connection with a more inclusive finance charge 
definition. As discussed, the Bureau has postponed action with 
respect to the proposed more inclusive finance charge. However, as 
described in connection with the Bureau's 2013 Escrows Final Rule, 
the Bureau is renumbering existing commentary to Sec.  1026.35 
concerning the average prime offer rate for other reasons. The 
cross-references in commentary to Sec.  1026.32(a)(2) in this final 
rule reflect the numbering that is being adopted in the 2013 Escrows 
Final Rule, rather than the numbering of existing commentary to 
section 1026.35.
---------------------------------------------------------------------------

     Comment 35(a)(2)-1 states that data reported in the 
Freddie Mac Primary Mortgage Market Survey[supreg] (PMMS) is used to 
calculate the average prime offer rates reported in the internet 
table.\48\ For variable-rate transactions, the ``other loan pricing 
terms'' (i.e., other than interest rates and points) that are used to 
calculate the average prime offer rates include commonly used indices, 
margins, and initial fixed-rate periods.
---------------------------------------------------------------------------

    \48\ The PMMS contains pricing data for four types of closed-end 
transactions: one-year ARM, \5/1\ ARM, 30-year fixed-rate, and 15-
year fixed-rate. The pricing data for those transactions is used to 
estimate average prime offer rates for the other fixed- and 
variable-rate loan products listed in the internet table.
---------------------------------------------------------------------------

     Comment 35(a)(2)-2 notes that the published average prime 
offer rate tables indicate how to identify a ``comparable transaction'' 
for purposes of calculating the APR to average prime offer rate spread 
that is required to determine higher-priced mortgage loan coverage 
under Sec.  1026.35.\49\
---------------------------------------------------------------------------

    \49\ The referenced guidance is available at http: //
www.ffiec.gov/ratespread. The first factor to consider in 
determining a ``comparable transaction'' is whether the transaction 
under consideration is fixed-rate or variable-rate. (One table 
contains average prime offer rates for fixed-rate transactions, and 
one table contains average prime offer rates for variable-rate 
transactions.) The other information necessary for determining the 
most comparable transaction is (1) the date that the interest rate 
for the transaction was set; and (2) the term of the transaction. In 
the case of a fixed-rate transaction, the term is the transaction's 
term to maturity. In the case of a variable-rate transaction, the 
term is the initial fixed-rate period, rounded to the nearest number 
of whole years (or, if the initial fixed-rate period is less than 
one year, the term is one year).
---------------------------------------------------------------------------

     Comment 35(a)(2)-3 provides that, for purposes of 
determining higher-priced mortgage loan coverage under Sec.  1026.35, a 
transaction's APR is compared to the average prime offer rate as of the 
date the transaction's interest rate is set (or ``locked'') before 
consummation. The comment specifies that if a creditor sets the 
interest rate initially and then sets it at a different level before 
consummation, the creditor should use the last date the interest rate 
is set before consummation.
     Comment 35(a)(2)-4 restates that the average prime offer 
rate tables, along with the methodology for calculating average prime 
offer rates, are published on the internet.
    Proposed Sec.  1026.32(a)(1)(i) would have implemented the change 
in the benchmark for HOEPA's APR coverage test from the yield on 
comparable Treasury securities to the average prime offer rate. 
Proposed comment 32(a)(1)(i)-2 would have clarified that creditors 
should determine the applicable average prime offer rate for closed-end 
transactions for purposes of Sec.  1026.32(a)(1)(i) pursuant to the 
same guidance set forth in Sec.  1026.35(a)(2) and commentary thereto. 
Proposed comment 32(a)(1)(i)-3 would have provided additional guidance 
for using the methodology set forth in Sec.  1026.35(a)(2) to determine 
the applicable average prime offer rate for HELOCs. The Bureau believes 
that additional guidance for HELOCs is warranted because, as discussed 
in the preamble to the proposal, the average prime offer rate currently 
is calculated only for closed-end transactions. The Bureau is not aware 
of any publicly available and authoritative surveys of pricing data for 
HELOCs from which to calculate a separate average prime offer rate for 
open-end credit.\50\ Proposed comment 32(a)(1)(i)-3 therefore would 
have instructed creditors to test HELOCs for HOEPA coverage by 
comparing the HELOC's APR (calculated in accordance with proposed Sec.  
1026.32(a)(2) \51\) to the average prime offer rate for ``the most 
closely comparable closed-end loan'' based on applicable loan 
characteristics and other loan pricing terms. Proposed comment 
32(a)(1)(i)-3 would have provided illustrative examples to facilitate 
compliance.
---------------------------------------------------------------------------

    \50\ As already noted, the methodology for deriving the average 
prime offer rate is based on Freddie Mac's Primary Mortgage Market 
Survey[supreg], which does not provide any data on HELOCs. More 
detailed discussions of the average prime offer rate is provided in 
the Board's 2008 HOEPA Final Rule and other publicly-available 
sources. See 73 FR 44522, 44533-36 (July 30, 2008); https://www.ffiec.gov/ratespread/default.aspx.
    \51\ Section 1026.32(a)(3) as adopted in the final rule was 
proposed as Sec.  1026.32(a)(2).
---------------------------------------------------------------------------

    The proposal explained why the Bureau believes that it is 
reasonable to require HELOC creditors to use the average prime offer 
rate for the most closely-comparable closed-end loan when determining 
HELOC coverage. The Bureau noted its belief that market

[[Page 6874]]

rates for HELOCs generally are based on a prime lending rate, such as 
the average prime rate as published in the Wall Street Journal.\52\ 
When the Bureau compared the prime rate published by the Board over a 
12-year period to average prime offer rates for annually-adjusting, 
closed-end credit transactions (i.e., one-year adjustable rate 
mortgages (ARMs)) for the same period, the Bureau found that the rates 
generally were comparable. Thus, the Bureau believes that using the 
average prime offer rate for the most closely-comparable closed-end 
loan is a reasonable benchmark for HOEPA's APR test for HELOCs. The 
Bureau further believes that requiring HELOC creditors to use this 
benchmark will facilitate compliance because HELOC creditors may use 
existing rate-spread calculators on the FFIEC's Web site to determine 
HOEPA coverage. Finally, the Bureau believes that requiring HELOC 
creditors to use the closed-end, average prime offer rate tables is 
appropriate under TILA section 103(bb)(1)(A)(i), which requires a 
comparison of a mortgage transaction's APR to the average prime offer 
rate without distinguishing between closed- and open-end credit. The 
Bureau nevertheless solicited data or comment on all aspects of 
determining the average prime offer rate for HELOCs. In particular, the 
Bureau solicited comment on whether a benchmark other than the average 
prime offer rate for the most closely-comparable closed-end loan would 
better meet the objectives of HOEPA's APR coverage test for HELOCs and 
facilitate compliance.
---------------------------------------------------------------------------

    \52\ Pursuant to Sec.  1026.40(f)(1), a variable-rate HELOC can 
vary only in accordance with a publicly-available index that is 
outside of the creditor's control, such as the Wall Street Journal 
prime rate.
---------------------------------------------------------------------------

    Commenters generally did not object to changing the benchmark for 
HOEPA's APR coverage test from the yield on Treasury securities to the 
average prime offer rate.\53\ Indeed, several industry commenters 
specifically supported the change, noting that the average prime offer 
rate tracks market prices better than the yield on Treasury securities. 
One such industry commenter noted that, under recent market conditions, 
the maximum APR for HOEPA coverage for a first-lien, 10-year, fixed-
rate mortgage would be higher under the HOEPA Proposal (i.e., 6.5 
percentage points over the average prime offer rate) than under 
existing Sec.  1026.32(a)(1)(i) (i.e., eight percentage points over the 
yield on comparable Treasuries). Specifically, the commenter stated 
that, under the HOEPA Proposal, the maximum APR for HOEPA coverage for 
this transaction would be 10.42 percent, whereas the maximum APR under 
existing Sec.  1026.32(a)(1)(i) would be 9.70 percent.
---------------------------------------------------------------------------

    \53\ As noted below, however, several industry commenters 
objected to using the same average prime offer rate for closed- and 
open-end credit transactions.
---------------------------------------------------------------------------

    Another industry commenter observed that using the average prime 
offer rate as the benchmark will not be difficult because the average 
prime offer rate has been used for some time as the benchmark for 
determining coverage under Regulation Z's higher-priced mortgage loan 
rules in existing Sec.  1026.35. The commenter, however, suggested that 
the Bureau work with the FFIEC to ensure that the rate-spread 
calculator currently employed for purposes of determining higher-priced 
mortgage loan coverage would be adjusted and usable for purposes of 
determining HOEPA coverage.
    Two commenters urged the Bureau to harmonize the methodologies for 
calculating the average prime offer rate and the APR for adjustable-
rate mortgages under Sec.  1026.32(a)(3). These commenters stated that, 
for example, if the APR for an adjustable-rate transaction for purposes 
of determining HOEPA coverage is determined under Sec.  1026.32(a)(3) 
based on the higher of the initial interest rate or the fully-indexed 
rate, then the applicable average prime offer rate should be calculated 
in the same way to ensure that there is a more accurate comparison for 
purposes of the HOEPA coverage calculation.
    Several industry commenters, while not objecting to the use of an 
average prime offer rate benchmark for HELOCs, urged the Bureau to 
specify in the final rule (or work to develop) a separate methodology 
for calculating the average prime offer rate for open-end credit 
transactions. The commenters stated that it is not sensible to apply 
the average prime offer rate for closed-end credit transactions to 
HELOCs, because closed- and open-end mortgage products have different 
risks, pricing, and loan characteristics. The commenters did not 
suggest an alternative benchmark or any alternatives for calculating an 
average prime offer rate for HELOCs. One commenter suggested, however, 
that if the Bureau adopted ``the most closely comparable closed-end 
loan'' standard as proposed, then the Bureau should specify how a 
creditor that originates a HELOC that could be comparable to multiple, 
different closed-end loans should determine which closed-end loan is 
the most closely comparable. Finally, one commenter requested guidance 
concerning the comparable maturity date for an ``evergreen'' HELOC 
(i.e., a HELOC with no scheduled maturity date) for which the interest 
rate may be fixed or adjustable.
    The Bureau is adopting the change in the APR benchmark from the 
yield on Treasury securities to the average prime offer rate as set 
forth in proposed Sec.  1026.32(a)(1)(i). The Bureau is finalizing 
proposed comments 32(a)(1)(i)-2 and -3 as comments 32(a)(1)(i)-1 and -
2, respectively, for organizational purposes.\54\ The Bureau makes 
certain other non-substantive changes to the proposed commentary for 
purposes of clarification. Specifically, the comments are reorganized, 
a cross-reference to comment 35(a)(2)-3 is added to comment 
32(a)(1)(i)-2,\55\ and comment 32(a)(1)(i)-3 is added to cross 
reference guidance in comment 35(a)(1)-2 on determining the date as of 
which creditors should compare a transaction's APR to the average prime 
offer rate. Finally, as discussed further below, additional guidance 
concerning how a HELOC creditor should determine the most closely 
comparable closed-end mortgage loan is added to comment 32(a)(1)(i)-2.
---------------------------------------------------------------------------

    \54\ In light of the adoption of Alternative 1 rather than 
Alternative 2, as discussed above, there is no need at present to 
finalize proposed comment 32(a)(1)(i)-1, which would have provided 
guidance concerning the transaction coverage rate. Consequently, 
proposed comments 32(a)(1)(i)-2 and -3 concerning the average prime 
offer rate are finalized (with the additional clarifying changes 
noted herein) as comments 32(a)(1)(i)-1 and -2, respectively.
    \55\ This cross-reference is to a new comment that the Bureau is 
finalizing in its 2013 Escrows Final Rule. The new comment clarifies 
that ``average prime offer rate'' as used in Sec.  1026.35 has the 
same meaning as in Regulation C, 12 CFR part 1003, and it notes that 
additional guidance concerning the average prime offer rate is 
located both in the official commentary to Regulation C as well as 
on the FFIEC's Web site.
---------------------------------------------------------------------------

    In response to commenters' suggestions that the FFIEC rate-spread 
calculator be adapted for use in determining HOEPA coverage, the Bureau 
does not anticipate difficulties in using the calculator for this 
purpose. The calculator exists on the FFIEC Web site primarily for use 
in determining the ``rate spread'' that must be reported, if any, under 
HMDA and Regulation C, 12 CFR part 1003. Specifically Regulation C 
Sec.  1003.4(a)(12) requires HMDA reporters to report the spread 
between a loan's APR and the applicable average prime offer rate 
(determined identically to the determination for higher-priced mortgage 
loans under Sec.  1026.35) if that spread exceeds 1.5 percentage points 
for a first-lien loan or 3.5 percentage points for a subordinate-lien 
loan. Those spreads match the spreads that historically have applied 
for higher-priced mortgage loan coverage

[[Page 6875]]

determinations under Sec.  1026.35(a)(2), allowing creditors to use the 
calculator to determine whether a transaction is a higher-priced 
mortgage loan.\56\ Creditors may accomplish this by noting whether the 
calculator yields a rate spread for reporting under HMDA (which means 
the transaction is a higher-priced mortgage loan) or ``N/A'' for HMDA 
reporting purposes (which means the transaction is not a higher-priced 
mortgage loan). From there, it is a simple step further to note whether 
any rate spread the calculator yields for HMDA reporting purposes 
exceeds 6.5 or 8.5 percentage points over the average prime offer rate, 
as applicable, to know whether the transaction is a high-cost mortgage 
under Sec.  1026.32(a)(1)(i).
---------------------------------------------------------------------------

    \56\ The higher-priced mortgage loan thresholds in Sec.  
1026.35(a)(1) are being revised through a separate rulemaking to 
incorporate a separate, higher threshold of 2.5 percentage points 
above the average prime offer rate for first-lien ``jumbo'' 
transactions pursuant to Dodd-Frank Act section 1471.
---------------------------------------------------------------------------

    The Bureau acknowledges, as noted by a commenter, that the APR 
calculation required by Sec.  1026.32(a)(3) for determining HOEPA 
coverage for a variable-rate transaction generally requires a creditor 
to use the fully-indexed rate, whereas blended APRs (i.e., APRs that 
take low introductory rates into consideration) are used to calculate 
average prime offer rates. The Bureau nevertheless finalizes the rule 
as proposed. The Bureau believes that APRs (and thus average prime 
offer rates) calculated pursuant to the blended method are unlikely in 
most cases to be significantly lower than APRs calculated using the 
fully-indexed rate.\57\ Moreover, the methodology for calculating the 
average prime offer rate was well-established when Congress passed the 
Dodd-Frank Act and affirmatively (1) incorporated the average prime 
offer rate as the benchmark for the APR trigger; and (2) required the 
use of the fully-indexed rate for determining the APR for variable-rate 
transactions.
---------------------------------------------------------------------------

    \57\ Specifically, such a difference would occur only if an 
introductory rate lasted for an extraordinarily long portion of a 
transaction's overall term, or if the introductory rate differed 
very substantially from the fully-indexed rate. See comment 
17(c)(1)-10.i.
---------------------------------------------------------------------------

    Finally, the Bureau does not at this time adopt a separate 
methodology for determining the average prime offer rate for HELOCs. 
Based on available data, the Bureau continues to believe that using the 
average prime offer rate for the most closely-comparable, closed-end 
credit transaction is a reasonable benchmark for HOEPA's APR test for 
HELOCs. The fact that HELOCs are tied to a prime rate which, over a 12-
year period, was generally comparable to the average prime offer rate 
for one-year ARMs informs the Bureau's conclusion. In addition, as 
discussed above, the average prime offer rate tables are published with 
a rate-spread calculator that determines the average prime offer rate 
for the most comparable closed-end credit transaction and automatically 
compares it to a transaction's APR and lien status to determine the 
transaction's APR's spread over the applicable average prime offer 
rate. This calculator can easily be used by creditors originating 
HELOCs.
    Specifically, as described in further detail in comment 
32(a)(1)(i)-2, a HELOC creditor should use the published rate-spread 
calculator to identify the average prime offer rate for the most 
closely-comparable closed-end credit transaction by inputting the same 
terms that would be required to determine the most comparable 
transaction for any closed-end origination. These terms are: (1) 
Whether the HELOC is fixed- or variable-rate; (2) if the HELOC is 
fixed-rate, the term to maturity; (3) if the HELOC is variable-rate, 
the duration of any initial, fixed-rate period; and (4) the date that 
the interest rate for the transaction is set. Finally, comment 
32(a)(1)(i)-2 clarifies that a creditor originating a fixed-rate, 
evergreen HELOC should enter a term of 30 years.\58\ The Bureau 
believes that 30 years is a reasonable proxy for the term of an 
evergreen HELOC given that 30 years is the longest term to maturity for 
conventional mortgage loans.\59\
---------------------------------------------------------------------------

    \58\ In the case of a variable-rate evergreen HELOC (as for all 
other closed- and open-end, variable-rate mortgage products) 
creditors should look to the length of any initial, fixed-rate 
period.
    \59\ The published average prime offer rate tables contain 
average rates for fixed-rate loans with terms of up to 50 years. 
Historically, however, the average rates for loans with fixed-rate 
terms of 30 years have been the same as the average rates for loans 
with fixed-rate terms of longer than 30 years.
---------------------------------------------------------------------------

32(a)(1)(i)(A)
    As added by the Dodd-Frank Act, TILA section 103(bb)(1)(A)(i)(I) 
states that a consumer credit transaction secured by a first mortgage 
on a consumer's principal dwelling is a high-cost mortgage if the APR 
at consummation of the transaction will exceed the average prime offer 
rate for a comparable transaction by more than 6.5 percentage points 
(or 8.5 percentage points, if the dwelling is personal property and the 
transaction is for less than $50,000). Thus, under TILA section 
103(bb)(1)(A)(i)(I), the APR percentage-point threshold for HOEPA 
coverage for most first-lien transactions (i.e., all first-lien, real 
property-secured transactions, as well as first-lien, personal 
property-secured transactions for $50,000 or more) is 6.5 percentage 
points over the average prime offer rate.
    Proposed Sec.  1026.32(a)(1)(i)(A) (under either proposed 
Alternative 1 or Alternative 2) would have implemented the statutory 
6.5 percentage-point APR threshold by generally mirroring the statutory 
language but also providing for certain non-substantive changes for 
clarity, organization, or consistency with existing Regulation Z and 
the Bureau's other mortgage rulemakings as mandated by the Dodd-Frank 
Act. For example, proposed Sec.  1026.32(a)(1)(i)(A) would have 
referred to a ``first-lien transaction'' instead of a ``first 
mortgage.''
    As noted in part IV above, TILA section 103(bb)(2)(A) and (B) 
provides the Bureau with authority to adjust HOEPA's APR percentage-
point thresholds if the Bureau determines that the increase or decrease 
is consistent with the statutory protections for high-cost mortgages 
and is warranted by the need for credit. The Bureau did not propose any 
adjustments to the 6.5 percentage-point APR threshold prescribed by the 
Dodd-Frank Act for either closed- or open-end transactions. However, 
the Bureau solicited comment and data on whether any such adjustment 
would better protect consumers from the risks associated with high-cost 
mortgages or would be warranted by the need for credit, particularly 
for HELOCs.
    General. Consumer groups generally did not comment on the revised 
APR percentage-point threshold in proposed Sec.  1026.32(a)(1)(i)(A). 
One consumer group commenter, however, advocated that the Bureau adopt 
a threshold of 3.5 percentage points above the average prime offer 
rate. The commenter noted that, in the current rate environment, most 
first-lien transactions would not be covered under the revised APR test 
until their APRs reached approximately 10 percent. This commenter 
stated that the threshold as proposed would allow unreasonably high 
rates to be imposed on vulnerable borrowers.
    Industry commenters and one State housing finance authority 
generally expressed concern that the revised APR percentage-point 
threshold in proposed Sec.  1026.32(a)(1)(i)(A) would inhibit access to 
credit and suggested various adjustments.\60\ For example, several

[[Page 6876]]

industry commenters urged the Bureau either to increase the threshold 
or to leave it at its existing (pre-Dodd-Frank Act) level. These 
commenters generally asserted that the existing threshold has worked 
well to date, that the Bureau has provided no empirical evidence 
demonstrating that the threshold needs to be adjusted, and that the 
enhanced HOEPA protections that the Bureau is finalizing in this 
rulemaking obviate any need to reduce the threshold. One industry 
commenter argued that increased coverage under the revised HOEPA 
coverage tests generally would interfere with the goal of the Bureau's 
2012 TILA-RESPA Proposal by eliminating a consumer's ability to shop 
for and obtain a mortgage near HOEPA's amended thresholds.
---------------------------------------------------------------------------

    \60\ Commenters generally did not distinguish between the 
revised APR percentage-point thresholds for first- and subordinate-
lien transactions. For purposes of this section-by-section analysis, 
however, the two thresholds are discussed separately.
---------------------------------------------------------------------------

    The Bureau adopts the 6.5 percentage-point APR threshold for most 
first-lien transactions in Sec.  1026.32(a)(1)(i)(A) as proposed. The 
Bureau has authority under TILA section 103(bb)(2)(A) to increase or 
decrease this APR threshold from the level set forth in the statute to 
a level between 6 and 10 percentage points above the average prime 
offer rate. However, prior to making such an adjustment, the Bureau 
must find that an increase or decrease from the statutory level is 
consistent with consumer protection and warranted by the need for 
credit. As noted, both consumer group and industry commenters suggested 
various adjustments to the threshold or suggested that the existing 
threshold should not be adjusted in light of protections. None of these 
commenters, however, provided data or other specific information to 
indicate how much of an adjustment from the level prescribed by 
Congress is warranted by a need for access to credit or to protect 
consumers from abusive lending.
    As to the consumer group comment suggesting that the Bureau 
decrease the APR threshold by several percentage points, the Bureau 
notes that, under TILA section 103(bb)(2)(B)(i), it does not have 
authority to reduce the threshold below 6 percentage points above the 
average prime offer rate. Even for adjustments that would lower the APR 
threshold within the permitted range (i.e., from the statutory 6.5 
percentage points to an adjusted 6 percentage points above the average 
prime offer rate), the Bureau does not believe that it has sufficient 
information at this time to justify such a departure based on the need 
to protect consumers from abusive lending.
    As to industry commenters' general argument that the Bureau should 
maintain the threshold at its existing (pre-Dodd-Frank) level or 
increase it, the Bureau believes that implementing the APR percentage-
point threshold at its statutorily-prescribed level, without any 
adjustment, is particularly appropriate at this time given the 
simultaneous change in the benchmark for HOEPA coverage from the yield 
on Treasury securities to the average prime offer rate. The Bureau 
believes there are several advantages of using the average prime offer 
rate rather than the yield on Treasury securities including, as one 
industry commenter noted, that the average prime offer rate more 
closely tracks movements in mortgage rates than do yields on Treasury 
securities.\61\ With this change to the benchmark, then, it is not 
clear that revising the threshold from an eight percentage-point spread 
to a 6.5 percentage-point spread will result in unwarranted HOEPA 
coverage. Indeed, as noted in the section-by-section analysis of Sec.  
1026.32(a)(1)(i) above, one industry commenter observed that the 
maximum APR for HOEPA coverage may, depending on market conditions, be 
higher in certain circumstances under the final rule than under 
existing Sec.  1026.32(a)(1)(i). Of course, if the Bureau observes an 
increase in coverage to a degree that interferes with access to credit, 
the Bureau has authority to increase the threshold as appropriate at 
that time.
---------------------------------------------------------------------------

    \61\ See also the Board's 2008 HOEPA Final Rule, 73 FR 44522, 
44534-36 (July 30, 2008) (adopting the average prime offer rate 
rather than the yield on Treasury securities for the higher-priced 
mortgage loan coverage test primarily because (1) the spread between 
Treasuries and mortgage rates can be volatile, even over a 
relatively short time frame, such that loans with the same risk 
characteristics but originated at different times may not be treated 
the same for coverage purposes and (2) matching a mortgage loan to a 
comparable Treasury security based on the length of the loan's 
contract maturity creates distortions because few loans reach their 
full maturity).
---------------------------------------------------------------------------

    Manufactured housing. Manufactured housing industry commenters in 
particular raised a number of objections to the APR thresholds.\62\ 
They noted that interest rates for manufactured home loans tend to be 
higher than for traditional mortgages for a variety of legitimate 
reasons. For example, the commenters stated that such loans tend to 
carry more credit risk and have not benefited from secondary market 
funding to the same degree as site-built housing, thus increasing 
creditors' cost of funds. According to one commenter, an APR of 14.73 
percent therefore is necessary to offer a manufactured home loan on a 
profitable basis. Industry commenters estimated that, under the HOEPA 
proposal, between 32 and 48 percent of their recent manufactured home 
loan originations would have been covered by the APR thresholds if the 
Bureau adopted the thresholds as proposed. In contrast, these 
commenters stated that, if the Bureau adopted an APR threshold of 10 
percentage points above the average prime offer rate for all home 
purchase transactions secured in whole or in part by manufactured 
housing, then only between 12 and 15 percent of manufactured home loans 
would be covered under the APR test. They also stated that, if the 
Bureau adopted an APR threshold of 12 percentage points above the 
average prime offer rate for all manufactured home loans, then only 
between 2 and 3 percent of manufactured home loans would be covered.
---------------------------------------------------------------------------

    \62\ Manufactured housing industry commenters also suggested 
various exemptions for manufactured home loans from HOEPA. Those 
comments are discussed in detail below in the section-by-section 
analysis of Sec.  1026.32(a)(2).
---------------------------------------------------------------------------

    The Bureau acknowledges the concerns raised by manufactured housing 
industry commenters concerning HOEPA coverage. In the Bureau's view, 
however, Congress weighed the interests of consumers and creditors 
concerning the costs and risks associated with manufactured housing 
loans by specifying a higher APR threshold of 8.5 percentage points 
above the average prime offer rate for personal property-secured loans 
with a loan amount of $50,000 or less. (At today's rates, for a 10- or 
15-year, fixed-rate loan, the 8.5 percentage-point threshold translates 
into an APR of approximately 12.5 or 11.25 percent, respectively.) The 
Bureau thus declines to depart from the APR thresholds prescribed by 
Congress. The Bureau's analysis was informed by the following 
considerations.
    First, the Bureau understands that manufactured homes may be titled 
either as personal property (in which case the consumer receives a 
personal property, or chattel, loan) or as real property (in which case 
the consumer receives a mortgage). Whether a manufactured home is 
titled as personal or real property does not perfectly correlate to 
whether the consumer owns the land on which the home is situated. 
Indeed, according to 2011 U.S. Census data, even though a majority (77 
percent) of new manufactured homes placed during 2011 were titled as 
personal property, only 26 percent were placed inside manufactured home 
(i.e., land-lease) communities, with the balance being placed on owned 
land.\63\ Instead, as noted by consumer group commenters, the laws in 
most States

[[Page 6877]]

provide an option for titling the manufactured home either as personal 
or real property.
---------------------------------------------------------------------------

    \63\ See Selected Characteristics of New Manufactured Homes 
Placed by Region, 2011, at https://www.census.gov/construction/mhs/pdf/char11.pdf.
---------------------------------------------------------------------------

    In seeking relief from the APR thresholds, industry commenters 
noted that the average price of a new manufactured home is 
approximately $60,600 and that the majority of their originations were 
secured by homes titled as personal property. The commenters, however, 
did not specify what portion of their loans would be subject to HOEPA 
coverage under the 6.5 percentage-point APR threshold, as opposed to 
the 8.5 percentage-point threshold for smaller-dollar, personal 
property-secured transactions. Instead, they requested that the Bureau 
adopt an across-the-board APR threshold of 10 or 12 percentage points 
above the average prime offer rate for all manufactured housing. (At 
today's rates, these thresholds translate into APRs of roughly 13 and 
15 percent for a 15-year, fixed-rate loan.)
    The Bureau understands that, as the commenters described, there 
tend to be greater costs associated with originating loans secured by 
manufactured housing, particularly when such loans secured solely by 
personal property. However, the Bureau does not have authority under 
HOEPA to increase the APR threshold for first-lien transactions to more 
than 10 percentage points above the average prime offer rate. Moreover, 
the higher threshold set forth by Congress for smaller-dollar, personal 
property loans appears to be consistent with the lower range of 
estimates of the increased rates that are associated with personal 
property loans.\64\
---------------------------------------------------------------------------

    \64\ See, e.g., Ronald A. Wirtz, Home, sweet (manufactured?) 
home, Fedgazette (July 2005), available at https://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=1479 
(interest rates for chattel loans run 2 to 5 percentage points 
higher than for real estate loans).
---------------------------------------------------------------------------

    For first-lien loans other than those eligible for the higher 
threshold, the Bureau has been unable to determine from the commenters' 
estimates what portion of the existing APRs for manufactured home loans 
is attributable to the factors cited by the commenters, such as credit 
risk and lack of a robust secondary market.\65\
---------------------------------------------------------------------------

    \65\ With respect to the lack of a secondary market in 
particular, this has not always been the case for manufactured home 
loans. From the late 1980s through the mid-2000s, the manufactured 
housing industry underwent a boom-and-bust cycle that was a 
precursor to the larger mortgage market meltdown. Securitization of 
manufactured home loans increased from $184 million in 1987 to $15 
billion in 1999, before declining to virtually zero in 2009. See Ann 
M. Burkhart, Bringing Manufactured Housing into the Real Estate 
Financing System, 37 Pepp. L. Rev. 427, 438-41 (2010). The Bureau 
understands that the Federal Housing Finance Agency (FHFA) currently 
is evaluating methods to strengthen the secondary market support for 
real property-secured manufactured home loans. See, e.g., 75 FR 
32099 (June 7, 2010) (FHFA notice of proposed rulemaking to 
implement section 1129 of the Housing and Economic Recovery Act of 
2008 (HERA), which established a duty for Fannie Mae and Freddie Mac 
to serve three specified underserved markets, including manufactured 
housing).
---------------------------------------------------------------------------

    The Bureau notes that in the current market, 10- or 15-year, fixed-
rate manufactured home loans secured by real property (or by personal 
property where the loan amount is $50,000 or more) would not fall 
within HOEPA's APR coverage threshold unless they had APRs of greater 
than approximately 10.5 or 9.25 percent, respectively. The Bureau does 
not believe that it has sufficient data to determine whether an 
adjustment to this statutory threshold is needed to compensate for 
legitimate cost factors, or how large such an adjustment should be.
    Moreover, the Bureau is not certain that manufactured home 
creditors would cease originating loans even if a portion of those 
loans exceed the high-cost mortgage APR threshold. Some industry 
commenters argued that they would not originate high-cost mortgages 
because complying with the restrictions and requirements (particularly 
the pre-loan counseling requirement) would be cost prohibitive. At the 
same time, however, industry commenters stated that manufactured home 
loans typically do not contain the types of loan terms that would be 
prohibited for high-cost mortgages. In addition, while the pre-loan 
counseling requirement will entail recordkeeping and data retention 
costs, the Bureau notes that creditors are not required to cover the 
cost of counseling.
    In sum, prior to adjusting the APR percentage point threshold for 
all manufactured home loans, the Bureau would need additional 
information showing why it is cost-prohibitive in today's market for a 
manufactured home lender to originate a first-lien, real property-
secured manufactured home (or a personal property-secured loan for 
greater than $50,000) with an APR of approximately 10.5 percent or 
less. For all of these reasons, the final rule adopts Sec.  
1026.32(a)(1)(i)(A) as proposed.
32(a)(1)(i)(B)
    As added by the Dodd-Frank Act, TILA section 103(bb)(1)(A)(i)(I) 
provides that, for first-lien transactions on a consumer's principal 
dwelling where the loan amount is less than $50,000 and is secured by 
personal property, a transaction is a high-cost mortgage if the APR at 
consummation will exceed the average prime offer rate for a comparable 
transaction by more than 8.5 percentage points. As discussed in the 
section-by-section analysis of Sec.  1026.32(a)(1)(i)(A) above, the APR 
threshold in TILA section 103(bb)(1)(A)(i)(I) for smaller first-lien 
loans secured by personal property thus establishes a higher threshold 
for such loans than the 6.5 percentage-point APR threshold for other 
first-lien transactions.
    Proposed Sec.  1026.32(a)(1)(i)(B) would have implemented the APR 
threshold for smaller first-lien loans secured by personal property. 
Proposed Sec.  1026.32(a)(1)(i)(B) generally would have mirrored the 
statutory language with certain non-substantive changes for clarity, 
organization, or consistency with existing Regulation Z and the 
Bureau's other mortgage rulemakings as mandated by the Dodd-Frank Act. 
For example, proposed Sec.  1026.32(a)(1)(i)(B) would have referred to 
a ``first-lien transaction'' instead of a ``first mortgage.'' In 
addition, proposed Sec.  1026.32(a)(1)(i)(B) would have referred to the 
transaction's ``total loan amount'' rather than its ``total transaction 
amount.'' Proposed comment 32(a)(1)(i)-4 would have stated that the 
phrase ``total loan amount'' as used in Sec.  1026.32(a)(1)(i)(B) 
should be interpreted consistently with the guidance for ``total loan 
amount'' set forth in proposed Sec.  1026.32(b)(6) and comment 
32(b)(6)-1.\66\
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    \66\ Proposed Sec.  1026.32(b)(6) and comment 32(b)(6)-1 are re-
numbered as Sec.  1026.32(b)(4) and comment 32(b)(4)-1 in the 
Bureau's 2013 ATR and HOEPA Final Rules.
---------------------------------------------------------------------------

    The HOEPA proposal noted that first-lien transactions secured by 
personal property (which may often be manufactured housing loans) may 
have higher APRs than other first-lien transactions. The Bureau thus 
specifically solicited comment and data on the higher APR percentage 
point threshold in proposed Sec.  1026.32(a)(1)(i)(B), including on 
whether any adjustment either to the percentage point threshold or to 
the dollar amount cut-off for the threshold (i.e., $50,000) would 
better protect consumers or is warranted by the need for credit.
    The Bureau received several public comments concerning the higher 
APR percentage-point threshold in proposed Sec.  1026.32(a)(1)(i)(B). 
Industry commenters generally did not distinguish between the 6.5 and 
8.5 percentage-point APR thresholds for first-lien transactions, and 
those comments are addressed in the section-by-section analysis of 
Sec.  1026.32(a)(1)(i)(A) above. However, at least one industry 
commenter requested

[[Page 6878]]

that the Bureau adjust the $50,000 cut-off for the 8.5 percentage-point 
threshold to $125,000.
    Consumer groups generally urged the Bureau not to adopt the higher, 
statutory APR threshold as proposed in Sec.  1026.32(a)(1)(i)(B) unless 
and until the Bureau finds after further research that the higher 
threshold is necessary. Several of these commenters argued that the 
higher threshold is not sensible because it applies to loans that are 
most likely to be obtained by the most vulnerable and lowest-income 
consumers. In addition, certain commenters argued that the higher 
threshold could incentivize manufactured home creditors to steer 
consumers to title their manufactured homes as personal property in the 
approximately 42 States that permit a manufactured home owner to title 
the home as either personal or real property. The commenters stated 
that steering of this type would be harmful to consumers because loans 
secured by personal property tend to be more expensive than mortgages 
secured by real property, and loans secured by personal property also 
have fewer legal protections than other mortgages.\67\ Many of the 
consumer group commenters argued that, to promote a level playing field 
for low-income consumers and to prevent steering, all first-lien 
transactions should have the same APR threshold, irrespective of the 
amount borrowed and collateral type.
---------------------------------------------------------------------------

    \67\ For example, State laws governing foreclosure procedures 
typically provide fewer protections to homes titled as personal 
property than to homes titled as real property, and RESPA only 
partially applies to personal property-secured loans.
---------------------------------------------------------------------------

    In contrast, one consumer group commenter, while agreeing with 
concerns about steering, nevertheless believed that the higher APR for 
smaller-dollar-amount, personal property-secured loans was warranted 
given market conditions and creditors' cost of funds. This commenter 
opposed any increase in the higher APR threshold beyond what is 
provided in the statute. This commenter based its recommendation on 
anecdotal evidence obtained by consulting with a sample of single-
family manufactured home loan originators,\68\ all of whom opposed 
raising the APR threshold higher than 8.5 percentage points above the 
average prime offer rate.
---------------------------------------------------------------------------

    \68\ The commenter did not state how many entities it sampled in 
its survey. Based on information that the commenter provided, 
respondents included a nonprofit lender in rural Montana, a 
nonprofit affordable housing developer in upstate New York, a 
Community Development Financial Institution in New Hampshire, and a 
credit union that makes manufactured home loans.
---------------------------------------------------------------------------

    As provided by TILA section 103(bb)(1)(i)(A)(I), the final rule 
adopts in Sec.  1026.32(a)(1)(i)(B) the higher APR threshold of 8.5 
percentage points over the average prime offer rate for first-lien 
loans secured by personal property and with a loan amount of less than 
$50,000. The Bureau understands that this separate threshold was 
designed to reflect costs associated with smaller-dollar, personal 
property loans.
    The Bureau shares commenters' concerns that a higher percentage-
point threshold for personal property-secured loans could, if set too 
high, exacerbate incentives for creditors to steer consumers into 
titling their homes as personal property. The Bureau understands that 
such steering can and does currently occur in the market. Indeed, the 
National Conference of Commissioners on Uniform State Laws approved in 
July 2012 a Uniform Manufactured Housing Act that would simplify and 
streamline State laws to convert manufactured homes titled as personal 
property to real property and would prohibit manufactured home sellers 
from steering consumers to chattel loans rather than mortgages.\69\ As 
noted, personal property-secured loans tend to offer consumers fewer 
legal protections, so a rule that permits HOEPA coverage to turn on how 
the loan is titled, and that therefore potentially incentivizes 
steering to personal property-secured loans, could be disadvantageous 
to some consumers. However, because personal property-secured loans 
generally have had costs roughly 2 to 5 percent higher than mortgages 
(as noted in the section-by-section analysis of Sec.  
1026.32(a)(1)(i)(A) above) the Bureau does not believe that 
implementing the 2 percentage-point higher threshold for such loans 
will exacerbate any steering that may already be occurring in the 
market. On balance, then, the Bureau believes that it is appropriate to 
effectuate the higher APR threshold for smaller-dollar, personal-
property secured loans in light of the higher costs occurring in the 
market for such loans. In light of the fact that Congress set forth a 
clear line for this threshold, and in the absence of specific evidence 
demonstrating another line that would better protect consumers while 
maintaining access to credit, the Bureau declines to adjust the 
statutory threshold.
---------------------------------------------------------------------------

    \69\ See National Conference of Commissioners on Uniform State 
Laws, Uniform Manufactured Housing Act (July 2012), at https://uniformlaws.org/Act.aspx?title=Manufactured Housing Act. As noted in 
a comment to the uniform law, whether a manufactured home is titled 
as real or personal property ``can affect the buyer's financing and 
legal rights in the home, such as homestead protection and marital 
property rights, and taxation of the home. * * * Under the current 
system of manufactured home financing, sellers, including retailers, 
have incentives to steer buyers to chattel loans, rather than to 
mortgage loans. However, when a mortgage loan is available, it often 
is the better option for the buyer. Though the closing costs for a 
mortgage loan can be higher than for a chattel loan, the lower 
interest rate and longer term for a mortgage loan translate to 
substantially lower monthly payments. Financing with a mortgage loan 
also provides the owner of a manufactured home with the same legal 
protections as the owner of a site-built home. Therefore, subsection 
(b) prohibits seller steering.''
---------------------------------------------------------------------------

    The Bureau adopts proposed comment 32(a)(1)(i)-4 explaining how to 
determine the ``loan amount'' for purposes of the $50,000 cut-off, but 
re-numbers it as comment 32(a)(1)(i)(B)-1 for organizational purposes. 
In the final rule, the Bureau also clarifies that the $50,000 refers to 
the face amount of the note, rather than (as proposed) the ``total loan 
amount.'' The ``total loan amount'' is a defined term used in 
connection with calculating whether a transaction meets the percentage 
point thresholds in the points and fees coverage test. As discussed in 
the section-by-section analysis of Sec.  1026.32(a)(1)(ii) below, the 
points and fees coverage test adopts the face of amount of the note as 
the relevant metric for determining whether a loan is above or below 
the $20,000 cut-off between the 5 percent and 8 percent points and fees 
tests. The face amount of the note is adopted in that context for 
consistency with the approach adopted in the points and fees provisions 
of the 2013 ATR Final Rule. The Bureau believes that a consistent 
approach to determining whether a transaction is above or below a 
particular dollar-value threshold will facilitate compliance with 
Regulation Z. Thus, upon further consideration, the Bureau specifies in 
the 2013 HOEPA Final Rule that the face amount of the note also is the 
appropriate amount for a creditor to reference in determining whether 
to apply the 6.5 or 8.5 APR percentage-point threshold for HOEPA 
coverage.
32(a)(1)(i)(C)
    TILA section 103(bb)(1)(A)(i)(II) provides that a consumer credit 
transaction secured by a subordinate or junior mortgage on the 
consumer's principal dwelling is a high-cost mortgage if the APR at 
consummation of the transaction will exceed the average prime offer 
rate for a comparable transaction by more than 8.5 percentage points. 
Proposed Sec.  1026.32(a)(1)(i)(C) would have implemented the revised 
APR percentage point threshold for subordinate-lien transactions with 
one minor terminology change (referencing a ``subordinate-lien 
transaction'' rather than a ``subordinate or junior

[[Page 6879]]

mortgage'') for consistency with Regulation Z.
    Industry and consumer group commenters generally made the same 
comments concerning proposed Sec.  1026.32(a)(1)(i)(C) that they did 
for Sec.  1026.32(a)(1)(i)(A). That is, industry commenters generally 
expressed concern about the revised APR percentage-point threshold, 
argued that the existing (pre-Dodd-Frank Act) threshold is sufficient 
for consumer protection, and stated that revising the threshold would 
result in unwarranted coverage of loans as high-cost mortgages. 
Consumer group commenters generally suggested that the Bureau lower the 
proposed APR percentage-point threshold. One consumer group commenter, 
for example, advocated that the Bureau adopt an APR threshold of 5.5 
percentage points above the average prime offer rate for subordinate-
lien transactions.
    The commenters did not provide firm data or other specific 
information to indicate what adjustment from the level prescribed by 
Congress is warranted by a need for access to credit or to protect 
consumers from abusive lending. The final rule therefore adopts Sec.  
1026.32(a)(1)(i)(C) as proposed, for all of the reasons articulated in 
the section-by-section analysis of Sec.  1026.32(a)(1)(i)(A) above. 
With respect to the comment suggesting that the Bureau lower the APR 
percentage point threshold to 5.5 percentage points above the average 
prime offer rate, the Bureau notes that, even if it possessed data to 
warrant such a reduction (and it does not), the Bureau does not have 
authority under TILA section 103(bb)(2)(B)(ii) to reduce the APR 
percentage-point threshold for subordinate-lien transactions to less 
than eight percentage points above the average prime offer rate.
32(a)(1)(ii)
Numerical Coverage Thresholds for Points and Fees
    Prior to the Dodd-Frank Act, TILA section 103(aa)(1)(B) provided 
that a mortgage is subject to the restrictions and requirements of 
HOEPA if the total points and fees payable by the consumer at or before 
loan closing exceed the greater of 8 percent of the total loan amount 
or $400. Prior to the designated transfer date under the Dodd-Frank 
Act, the Board adjusted the $400 figure annually for inflation, in 
accordance with TILA section 103(aa)(3). For 2013, the Bureau adjusted 
the figure to $625 from $611, where it had been set for 2012.\70\
---------------------------------------------------------------------------

    \70\ See 77 FR 69738 (Nov. 6, 2012) (adding comment 
32(a)(1)(ii)-2.xviii).
---------------------------------------------------------------------------

    Section 1431(a) of the Dodd-Frank Act amended HOEPA's points and 
fees coverage test to provide in TILA section 103(bb)(1)(A)(ii) that a 
mortgage is a high-cost mortgage if the total points and fees payable 
in connection with the transaction exceed either 5 percent or 8 percent 
of the total transaction amount, depending on the size of the 
transaction.\71\ Specifically, under TILA section 103(bb)(1)(A)(ii)(I), 
a transaction for $20,000 or more is a high-cost mortgage if the total 
points and fees payable in connection with the transaction exceed 5 
percent of the total transaction amount. Under TILA section 
103(bb)(1)(A)(ii)(II), a transaction for less than $20,000 is a high-
cost mortgage if the total points and fees payable in connection with 
the transaction exceed the lesser of 8 percent of the total transaction 
amount or $1,000, or such other dollar amount as the Bureau shall 
prescribe by regulation. The Bureau proposed to implement the Dodd-
Frank Act's amendments to TILA's points and fees coverage test for 
high-cost mortgages in proposed Sec.  1026.32(a)(1)(ii)(A) and (B).
---------------------------------------------------------------------------

    \71\ TILA section 103(bb)(1)(A)(ii) also excludes from points 
and fees bona fide third-party charges not retained by the mortgage 
originator, the creditor, or an affiliate of either. This exclusion 
is implemented in Sec.  1026.32(b)(1)(D) (closed-end credit 
transactions) and (b)(2)(D) (open-end credit plans).
---------------------------------------------------------------------------

    As in the case of the APR coverage test, consumer group commenters 
urged the Bureau to apply the same points and fees threshold of 5 
percent to all transactions, irrespective of the loan amount. These 
commenters argued that the higher, 8 percent points and fees threshold 
for smaller transactions (i.e., loans of less than $20,000) set forth 
in the statute disadvantages lower-income and more vulnerable 
consumers.
    The Bureau received a number of comments from industry expressing 
concern that the points and fees thresholds prescribed by the Dodd-
Frank Act, like the amended APR thresholds, would restrict access to 
credit. Some industry commenters expressed particular concern about 
smaller transactions, including loans originated by Housing Finance 
Agencies and under the USDA Rural Housing Program. One such commenter 
argued that the 5 percent points and fees threshold would be most 
problematic for loan amounts below approximately $60,000 and stated 
that the threshold would drive creditors to impose strict minimum loan 
amounts on their mortgage originations. Industry commenters generally 
acknowledged a good deal of uncertainty in estimating the potential 
impact of the revised points and fees thresholds given that the Bureau 
had not yet finalized the Dodd-Frank Act's amendments to the definition 
of points and fees. (As discussed in the section-by-section analysis of 
Sec.  1026.32(b)(1) and (2) below, the Dodd-Frank Act amended the 
definition of points and fees to remove certain items that previously 
would have been counted (e.g., certain mortgage insurance premiums and 
bona fide discount points) and to add other items (e.g., the maximum 
prepayment penalties that may be charged). Industry commenters 
nevertheless suggested that the Bureau exercise its authority to leave 
the points and fees thresholds at their existing (i.e., pre-Dodd-Frank 
Act) levels.\72\
---------------------------------------------------------------------------

    \72\ Industry and consumer groups also commented on the Bureau's 
proposed implementation of the statutory change from requiring the 
inclusion in points and fees of items payable by the consumer ``at 
or before closing'' to items ``payable in connection with the 
transaction.'' The Bureau addresses those comments in the section-
by-section analysis of Sec.  1026.32(b)(1) below.
---------------------------------------------------------------------------

    As in the case of the APR coverage test, manufactured housing 
industry commenters expressed concern about HOEPA coverage of 
manufactured home loans under the points and fees coverage test. These 
commenters estimated that anywhere from 24 to 51 percent of their 
manufactured home originations during 2010 and 2011 would have been 
covered under the proposal's points and fees threshold. (Commenters did 
not specify what percentage of their loans would have been subject to 
the 5 percent or 8 percent thresholds.) Commenters explained that 
manufactured home loans, particularly those secured by personal 
property, tend to be for smaller amounts than real property-secured 
loans. However, according to these commenters, the cost of originating 
and servicing a loan of $200,000 and a loan of $20,000 is essentially 
the same in terms of absolute dollars. They asserted that because the 
cost of origination as a percentage of loan size thus is significantly 
higher for smaller loans, transactions with small loan amounts should 
not be treated the same for purposes of the points and fees test. 
Commenters suggested that adjusting the points and fees threshold for 
purchase-money mortgages secured in whole or in part by manufactured 
housing would ensure consumer protection while maximizing credit 
availability. For example, one commenter estimated that, if the Bureau 
applied a points and fees test of the

[[Page 6880]]

greater of (1) 5 percent of the total loan amount or $3,000, or (2) 5 
percent of the total loan amount or $5,000, to all purchase-money 
mortgages secured in whole or in part by manufactured housing, then 41 
percent or 22 percent of all manufactured housing loans, respectively, 
would be covered under the points and fees test.
    The Bureau finalizes the adjusted points and fees thresholds in 
Sec.  1026.32(a)(1)(ii)(A) and (B) as proposed. The Bureau recognizes 
that points and fees comprise, in part, a means of recovering costs 
that may constitute a larger percentage of the loan amount for smaller 
loans. However, as is the case of the APR coverage test, Congress 
already adjusted the points and fees test to account for this fact by 
setting the threshold for loans of less than $20,000 higher than the 
threshold for all other loans. The Bureau would need to exercise its 
exception authority under TILA section 105(a) to adjust the thresholds 
beyond what Congress provided and, in turn, would need data or specific 
information showing that a departure from the levels set by Congress is 
warranted. Commenters presented some information indicating that, in a 
significant percentage of smaller transactions made by some lenders, 
points and fees currently are charged that exceed the threshold 
established by Congress. However, neither this information nor any 
other data available to the Bureau establishes that application of the 
statutory threshold will cause these lenders to cease making these 
loans. Moreover, commenters did not provide, and the Bureau is not 
otherwise aware of data or other information that would support, 
specific numeric thresholds different than those provided by Congress. 
The Bureau understands commenters' concerns that, if lenders choose to 
impose strict lending limits, that could have fair lending 
implications, because low- to moderate-income families and minorities 
could be more likely to suffer disproportionately. On the other hand, 
the Bureau is mindful of concerns raised by consumer groups that these 
are the very populations that need extra protections that are afforded 
by laws such as HOEPA. The Bureau believes that the points and fees 
coverage test is important in ensuring that loans with high upfront 
costs are subject to such special protections, and in the Bureau's 
view, the commenters did not present a persuasive case that 
implementing the statutory thresholds would adversely affect credit 
availability. In addition, as discussed in the section-by-section 
analysis of Sec.  1026.32(b)(1) and (2) below, the Bureau notes that it 
is adopting several limitations and clarifications to the definition of 
points and fees in response to industry commenters' concerns (e.g., by 
specifying that only such fees that are known at or before consummation 
must be included in the calculation). The Bureau believes that those 
clarifications and limitations will address some of industry's concerns 
regarding unwarranted coverage through points and fees.
    The Bureau similarly is not persuaded that a different, higher 
points and fees threshold should apply to manufactured home loans. As 
noted, manufactured housing industry commenters suggested that the 
Bureau implement a points and fees threshold for all loans secured in 
whole or in part by manufactured housing (i.e., for any real- or 
personal property-secured transaction) of (at least) the greater of 5 
percent of the total loan amount or $3,000. Under this suggested 
approach, all loans secured by manufactured housing with loan amounts 
less than $60,000 could charge points and fees of $3,000 without 
triggering HOEPA coverage. The Bureau notes that the $3,000 amount 
becomes an increasingly large percent of the loan amount as the loan 
size decreases. Thus, for the smallest loans (i.e., those that would be 
expected, for example, to be made to the most vulnerable consumers 
purchasing used manufactured homes on land that they do not own) the 
suggested points and fees could reach up to 60 percent of the loan 
amount.\73\ Manufactured housing industry commenters argued, as did 
other industry commenters, that points and fees naturally comprise a 
larger percent of the loan amount as loan amounts decrease in size. 
However, they did not provide specific evidence indicating that smaller 
manufactured home loans (let alone all manufactured home loans) have 
characteristics that merit a different points and fees threshold than 
other, smaller transactions. In short, in light of the fact that 
Congress articulated a specific points and fees threshold for smaller 
transactions, and in the absence of specific evidence indicating a more 
appropriate threshold, the Bureau adopts in the final rule the points 
and fees thresholds as set forth in the statute.
---------------------------------------------------------------------------

    \73\ For example, the Bureau understands that lenders may set 
minimum loan amounts of $5,000. Points and fees of $3,000 on a 
$5,000 loan equal 60 percent of the loan amount. One industry 
commenter, citing the American Housing Survey (AHS) noted that the 
median purchase price of a manufactured home (including new and 
existing home sales) is $27,000. Points and fees of $3,000 on a 
$27,000 loan equal 11 percent of the loan amount.
---------------------------------------------------------------------------

Determining the $20,000 Amount; Adjustment for Inflation
    As noted, a 5 percent points and fees coverage test applies to 
transactions of $20,000 or more, and an 8 percent test applies to 
transactions of less than $20,000. The Bureau's 2012 HOEPA Proposal did 
not propose a specific methodology for determining whether a 
transaction was above or below the $20,000 amount. As noted in the 
section-by-section analysis of Sec.  1026.32(a)(1)(i)(B) above, in the 
2013 ATR Final Rule, the Bureau is providing that a creditor must 
determine which points and fees tier applies to a transaction for 
purposes of the qualified mortgage points and fees test by using the 
face amount of the note (i.e., the ``loan amount'' as defined in Sec.  
1026.43(b)(5)). See the section-by-section analysis of Sec.  
1026.43(e)(3)(i) in the 2013 ATR Final Rule. For consistency with the 
approach being adopted in the 2013 ATR Final and to ease compliance, 
the Bureau is adopting the same approach for determining whether a 
transaction is above or below the $20,000 amount for the HOEPA points 
and fees coverage test. The Bureau adopts this clarification in new 
comment 32(a)(1)(ii)-3.\74\
---------------------------------------------------------------------------

    \74\ Comment 32(a)(1)(ii)-3 explains that creditors must apply 
the allowable points and fees percentage to the ``total loan 
amount'' as defined in Sec.  1026.32(b)(4), which may be different 
than the face amount of the note. This approach also is consistent 
with the approach adopted for the points and fees test for qualified 
mortgages. See Sec.  1026.43(e)(3)(i) and comment 43(e)(3)(i)-2, as 
adopted in the 2013 ATR Final Rule.
---------------------------------------------------------------------------

    The Bureau also clarifies in Sec.  1026.32(a)(1)(ii) and new 
comment 32(a)(1)(ii)-3 that the $20,000 amount in Sec.  
1026.32(a)(1)(ii)(A) and (B) will be adjusted annually for inflation on 
January 1 by the annual percentage change in the CPI that was in effect 
on the preceding June 1. To make this adjustment, the Bureau invokes 
its authority under TILA section 105(a), which grants the Bureau 
authority to exempt all or any class of transactions where necessary or 
proper to effectuate the purposes of TILA, to prevent evasion, or to 
facilitate compliance. The Bureau believes adjusting the $20,000 amount 
for inflation is necessary and proper to effectuate the purposes of, 
and to facilitate compliance with, TILA. The Bureau believes that 
failing to adjust the $20,000 amount would hinder access to credit 
without meaningfully enhancing consumer protection by failing to 
account for the effects of inflation. As noted above, the Bureau 
received a

[[Page 6881]]

significant number of comments expressing concern about the points and 
fees coverage test for smaller transactions. The Bureau believes that 
adopting this final rule without providing for the $20,000 to be 
adjusted for inflation would, over time, discourage some creditors from 
making smaller loans, to the detriment of consumers, without providing 
any meaningful corresponding consumer protection benefit. Accordingly, 
the Bureau believes that providing for the adjustment of the $20,000 
amount will strengthen competition among financial institutions and 
promote economic stabilization.\75\
---------------------------------------------------------------------------

    \75\ The Bureau also notes that adjusting the $20,000 amount for 
inflation is consistent with the approach adopted for the points and 
fees test for qualified mortgages in the Bureau's 2013 ATR Final 
Rule. The Bureau believes that adopting a uniform approach in both 
the high-cost and qualified mortgage contexts will facilitate 
compliance with TILA. See Sec.  1026.43(e)(3)(i) and (ii), as 
adopted in the 2013 ATR Final Rule.
---------------------------------------------------------------------------

Total Transaction Amount
    TILA section 103(bb)(1)(A)(ii) provides that a mortgage is a high-
cost mortgage if its total points and fees exceed (depending on 
transaction size) either 5 percent or 8 percent of the ``total 
transaction amount,'' rather than the ``total loan amount.'' The Dodd-
Frank Act did not define the term ``total transaction amount.'' 
However, the Bureau noted in its proposal that it believed the phrase 
reflected the fact that HOEPA, as amended, applies to both closed- and 
open-end credit transactions secured by a consumer's principal 
dwelling.\76\ Notwithstanding the statutory change, for consistency 
with existing Regulation Z terminology, proposed Sec.  
1026.32(a)(1)(ii) would have provided that a high-cost mortgage is one 
for which the total points and fees exceed a certain percentage of the 
``total loan amount.'' The Bureau received no comments concerning its 
adoption of the phrase ``total loan amount'' rather than ``total 
transaction amount,'' as set forth in the statute and thus adopts the 
language as proposed. See the section-by-section analysis of Sec.  
1026.32(b)(4) below for a discussion of the definition of ``total loan 
amount.''
---------------------------------------------------------------------------

    \76\ In this regard, the Bureau noted that section 1412 of the 
Dodd-Frank Act retained the phrase ``total loan amount'' for 
purposes of determining whether a closed-end credit transaction 
complied with the points and fees restrictions applicable to 
qualified mortgages. See TILA section 129C(b)(2)(A)(vii).
---------------------------------------------------------------------------

Annual Adjustment of $1,000 Amount
    As amended by the Dodd-Frank Act, HOEPA's points and fees coverage 
test appears in TILA section 103(bb)(1)(A)(ii)(I) and (II). Prior to 
being renumbered by Dodd-Frank, this test appeared in TILA section 
103(aa)(1)(B)(i) and (ii). The Dodd-Frank Act did not amend TILA 
section 103(bb)(3), which requires the points and fees dollar figure to 
be adjusted annually for inflation, to reflect this new numbering. 
Instead, TILA section 103(bb)(3) continues to cross-reference TILA 
section 103(bb)(1)(B)(ii), which now sets forth the methodology for 
determining the APR for HOEPA coverage in transactions with rates that 
vary according to an index. To give meaning to the statute as amended, 
the 2012 HOEPA Proposal interpreted the authority provided to it in 
TILA section 103(bb)(3) as authority to continue to adjust annually for 
inflation the dollar figure prescribed in TILA section 
103(bb)(1)(A)(ii)(II), as has been done prior to the Dodd-Frank Act.
    The Bureau proposed to re-number existing comment 32(a)(1)(ii)-2 
concerning the annual adjustment of the points and fees dollar figure 
as comment 32(a)(1)(ii)-1 for organizational purposes, as well as to 
revise it in several respects to reflect proposed revisions to Sec.  
1026.32(a)(1)(ii). First, proposed comment 32(a)(1)(ii)-1 would have 
replaced references to the pre-Dodd-Frank Act statutory figure of $400 
with references to the new statutory figure of $1,000. In addition, 
consistent with the Dodd-Frank Act's transfer of rulemaking authority 
for HOEPA from the Board to the Bureau, proposed comment 32(a)(1)(ii)-1 
would have stated that the Bureau will publish and incorporate into 
commentary the required annual adjustments to the $1,000 figure after 
the June Consumer Price Index figures become available each year.
    Finally, the proposal would have retained in proposed comment 
32(a)(1)(ii)-2 the paragraphs in existing comment 32(a)(1)(ii)-2 
enumerating the $400 figure as adjusted for inflation from 1996 through 
2012. The proposal noted that it would be useful to retain the list of 
historical adjustments to the $400 figure for reference, 
notwithstanding that TILA section 103(bb)(1)(A)(ii)(II) increases the 
dollar figure from $400 to $1,000.
    The Bureau received no comments on proposed comments 32(a)(1)(ii)-1 
and -2. The Bureau adopts the comments as proposed.
32(a)(1)(iii)
    Prior to the Dodd-Frank Act, a mortgage was classified as a high 
cost mortgage if either its APR or its total points and fees exceeded 
certain statutorily prescribed thresholds. Section 1431(a) of the Dodd-
Frank Act amended TILA to add new section 103(bb)(1)(A)(iii), which 
provides that a transaction is also 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.
    Proposed Sec.  1026.32(a)(1)(iii) would have implemented TILA 
section 103(bb)(1)(A)(iii) with several minor clarifications. First, 
proposed Sec.  1026.32(a)(1)(iii) would have replaced the statutory 
reference to prepayment penalties permitted by the ``credit transaction 
documents'' with a reference to such penalties permitted by the ``terms 
of the loan contract or open-end credit agreement.'' This phrasing was 
proposed to reflect the application of Sec.  1026.32(a)(1)(iii) to both 
closed- and open-end transactions, and for consistency with Regulation 
Z. Proposed Sec.  1026.32(a)(1)(iii) also would have cross-referenced 
the definition of prepayment penalty in proposed Sec.  
1026.32(b)(8).\77\ Finally, proposed Sec.  1026.32(a)(1)(iii) would 
have clarified that the creditor must include any prepayment penalty 
that is permitted to be charged more than 36 months ``after 
consummation or account opening,'' rather than after ``transaction 
closing.'' The Bureau proposed to use these terms for closed- and open-
end transactions, respectively, for consistency with Regulation Z.
---------------------------------------------------------------------------

    \77\ The Bureau is finalizing proposed Sec.  1026.32(b)(8) as 
Sec.  1026.32(b)(6).
---------------------------------------------------------------------------

    Proposed comment 32(a)(1)(iii)-1 would have explained how the 
coverage tests for high-cost mortgages in Sec.  1026.32(a)(1)(i) 
through (iii) interact with the ban on prepayment penalties for high-
cost mortgages in amended TILA section 129(c), which the HOEPA proposal 
would have implemented in Sec.  1026.32(d)(6). Specifically, proposed 
comment 32(a)(1)(iii)-1 would have explained that Sec.  1026.32 
implicates prepayment penalties in two main ways. If a transaction is a 
high-cost mortgage by operation of any of the coverage tests in 
proposed Sec.  1026.32(a)(1) (i.e., the APR, points and fees, or 
prepayment penalty tests), then the transaction must not include a 
prepayment penalty. Furthermore, under the prepayment penalty coverage 
test in Sec.  1026.32(a)(1)(iii), a transaction is a high-cost mortgage 
if, under the terms of the loan contract or credit agreement, a 
creditor can charge either (1) a prepayment penalty more than 36 months 
after consummation or account opening, or (2) total prepayment

[[Page 6882]]

penalties that exceed two percent of any amount prepaid. Taken 
together, Sec.  1026.32(a)(1)(iii) and Sec.  1026.32(d)(6) effectively 
establish a maximum period during which a prepayment penalty may be 
imposed, and a maximum prepayment penalty amount that may be imposed, 
on a transaction secured by a consumer's principal dwelling, other than 
a mortgage that is exempt from high-cost mortgage coverage under Sec.  
1026.32(a)(2).
    Proposed comment 32(a)(1)(iii)-1 also cross-referenced proposed 
Sec.  226.43(g) in the Board's 2011 ATR Proposal. Under that proposal, 
Sec.  226.43(g) would have implemented new TILA section 129C(c) by (1) 
prohibiting prepayment penalties altogether for most closed-end credit 
transactions unless the transaction is a fixed-rate, qualified mortgage 
with an APR that meets certain statutorily-prescribed thresholds; and 
(2) restricting prepayment penalties even for such qualified mortgages 
to three percent, two percent and one percent of the amount prepaid 
during the first, second, and third years following consummation, 
respectively.\78\
---------------------------------------------------------------------------

    \78\ See 76 FR 27390, 27472-78 (May 11, 2011). These provisions 
are being finalized in the Bureau's 2013 ATR Final Rule.
---------------------------------------------------------------------------

    The Bureau's HOEPA proposal noted that the cumulative effect of the 
Dodd-Frank Act's amendments to TILA concerning prepayment penalties for 
closed-end transactions would be to limit the amount of prepayment 
penalties that may be charged in connection with most such transactions 
to amounts that would not meet the high-cost mortgage prepayment 
penalty coverage test. Specifically, the Dodd-Frank Act not only 
limited the amount of prepayment penalties as just described, but it 
also provided that prepayment penalties must be included in the points 
and fees calculations for high-cost mortgages and qualified mortgages. 
See TILA sections 103(bb)(4) and 129C(b)(2)(C).\79\
---------------------------------------------------------------------------

    \79\ See the section-by-section analysis of Sec.  1026.32(b)(1) 
and (2) below.
---------------------------------------------------------------------------

    Proposed comment 32(a)(1)(iii)-2 would have provided guidance 
concerning the calculation of prepayment penalties for HELOCs for 
purposes of proposed Sec.  1026.32(b)(1)(iii). Proposed comment 
32(a)(1)(iii)-2 provided that, if the terms of a HELOC agreement allow 
for a prepayment penalty that exceeds two percent of the initial credit 
limit for the plan, the agreement would be deemed to permit a creditor 
to charge a prepayment penalty that exceeds two percent of the ``amount 
prepaid'' within the meaning of proposed Sec.  1026.32(a)(1)(iii). 
Proposed comment 32(a)(1)(iii)-2 provided three examples to illustrate 
the rule.
    The Bureau received comments addressing various aspects of proposed 
Sec.  1026.32(a)(1)(iii) and comments 32(a)(1)(iii)-1 and -2. A few 
industry commenters either stated that the 36-month prepayment penalty 
restriction seemed reasonable or stated that the prepayment penalty 
test would not have a significant impact. Several other industry 
commenters, however, either objected entirely to the addition of a 
prepayment penalty coverage test for high-cost mortgages as unnecessary 
or stated that the Bureau should narrow the scope of the test. Two 
industry commenters expressed concern that including waived closing 
costs as prepayment penalties (see the section-by-section analysis of 
Sec.  1026.32(b)(6) below) would significantly increase the likelihood 
that many smaller transactions would become high-cost mortgages under 
the two percent prepayment penalty test. The commenters noted that such 
loans tend to serve low-income consumers and have costs that are waived 
at closing on the condition that the consumer does not prepay. The 
commenters thus suggested that the Bureau establish a different 
prepayment penalty test for smaller transactions. Finally, one 
commenter suggested that the Bureau specify that the prepayment penalty 
coverage test, like the APR and points and fees tests, is based on 
information known as of consummation or account opening.\80\
---------------------------------------------------------------------------

    \80\ In addition to receiving comments concerning the prepayment 
penalty coverage test, the Bureau received various comments 
concerning its proposed definition of prepayment penalties for 
closed- and open-end transactions. Those comments are discussed in 
the section-by-section analysis of Sec.  1026.32(b)(6)(i) and (ii) 
below.
---------------------------------------------------------------------------

    The Bureau is adopting Sec.  1026.32(a)(1)(iii) and its commentary 
substantially as proposed, with minor adjustments to reflect both the 
high-cost mortgage coverage exemptions in Sec.  1026.32(a)(2) and 
certain other re-numbering in the final rule. Notwithstanding that a 
small number of commenters expressed general dissatisfaction with the 
addition of a prepayment penalty coverage test for high-cost mortgages, 
particularly for smaller-dollar-amount transactions, the Bureau 
declines to depart from the statutory requirement to add the test. 
These commenters did not provide data to support the need either for a 
wholesale departure from the statute or, in the case of smaller loans, 
to warrant the increased regulatory complexity that would come with 
adding a separate prepayment penalty test for such transactions. 
Furthermore, the Bureau notes that, even if it were to adopt a narrower 
prepayment penalty test for HOEPA coverage, prepayment penalties still 
would be restricted by the bans and limitations that the Bureau is 
adopting for most closed-end transactions in its 2013 ATR Final Rule.
    As to the suggestion that the prepayment penalty test be based on 
information known as of consummation or account opening, the Bureau 
acknowledges that a creditor may not be able to determine whether a 
flat-rate prepayment penalty would exceed two percent of an ``amount 
prepaid,'' when the ``amount prepaid'' will not be known until the 
prepayment is made. However, the Bureau notes that, for a transaction 
with a prepayment penalty, creditors can ensure that they do not exceed 
the prepayment penalty coverage test by providing that any prepayment 
penalty (including any flat penalty) will not exceed 2 percent of the 
prepaid amount.
    Although the Bureau adopts the prepayment penalty coverage test in 
Sec.  1026.32(a)(1)(iii) substantially as proposed, the Bureau adopts 
in Sec.  1026.32(b)(6) a narrower definition of prepayment penalty. The 
final definition addresses comments concerning the inclusion of 
conditionally waived closing costs in prepayment penalties, 
particularly for smaller loans. The definition provides that certain 
conditionally-waived, bona fide third-party closing costs are not 
prepayment penalties. This approach ensures that bona fide third-party 
charges that would not be counted in points and fees if they were 
charged to the consumer upfront (see, e.g., the section-by-section 
analysis of Sec.  1026.32(b)(1)(i)(D)) also will not be counted in 
points and fees if they are waived on the condition that the consumer 
does not prepay the loan in full or terminate a HELOC during the first 
36 months following consummation or account opening. This approach also 
should reduce the charges that count toward the high-cost mortgage 
prepayment penalty coverage test and at least partially address 
commenters' concerns regarding unwarranted coverage of smaller loans. 
See also the section-by-section analysis of Sec.  1026.32(b)(6) below.
32(a)(2)
Exemptions
    As noted in the section-by-section analysis of Sec.  1026.32(a)(1) 
above, the Dodd-Frank Act expanded HOEPA coverage by providing in TILA 
section

[[Page 6883]]

103(bb)(1) that the term ``high-cost mortgage'' means any consumer 
credit transaction that is secured by the consumer's principal 
dwelling, other than a reverse mortgage transaction, if any of the 
prescribed high-cost mortgage thresholds are met. The proposal would 
have implemented TILA's amended definition of ``high-cost mortgage'' by 
removing the pre-Dodd-Frank Act statutory exemptions for residential 
mortgage transactions (i.e., purchase-money mortgage loans) and HELOCs, 
while retaining the exemption of reverse mortgage transactions.\81\
---------------------------------------------------------------------------

    \81\ The HOEPA Proposal proposed to implement the Dodd-Frank 
Act's amendments to HOEPA coverage exclusively in Sec.  
1026.32(a)(1) and to implement in Sec.  1026.32(a)(2) the Dodd-Frank 
Act's amendments to TILA setting forth a new method for calculating 
APRs for determining HOEPA coverage (TILA section 103(bb)(1)(B)). In 
the final rule, Sec.  1026.32(a)(2) is used for certain coverage 
exemptions and Sec.  1026.32(a)(3) is used to implement the APR 
calculation for HOEPA coverage. Accordingly, the Bureau addresses 
comments received concerning proposed Sec.  1026.32(a)(2) in the 
section-by-section analysis of Sec.  1026.32(a)(3) below.
---------------------------------------------------------------------------

    Consumer advocate commenters generally supported the expansion of 
HOEPA to cover the new loan types. Industry commenters, on the other 
hand, expressed concern about the expansion of HOEPA and the resulting 
decrease in access to credit that they argued would follow.\82\ 
Numerous industry commenters thus requested that the Bureau use its 
authority under TILA to exempt one or more categories of transactions 
from high-cost mortgage coverage. These comments are addressed in turn 
below.
---------------------------------------------------------------------------

    \82\ Many commenters expressed similar concerns about a decrease 
in access to credit that they believe will occur as a result of the 
potentially expanded scope of HOEPA coverage under the revised high-
cost mortgage coverage tests and/or the increased costs of complying 
with the enhanced prohibitions and protections for high cost 
mortgages. Those concerns are addressed in the section-by-section 
analyses of the applicable sections of this final rule.
---------------------------------------------------------------------------

General
    Several commenters requested an exemption for HELOCs. They argued 
that exempting HELOCs would not interfere with the purpose of the high-
cost mortgage protections and that, particularly in light of current 
market conditions, the Bureau should use its authority to expand, 
rather than to constrain, credit availability. The commenters stated 
that they might stop offering HELOCs if too many are covered by the 
high-cost mortgage coverage tests. A small number of other industry 
commenters requested exemptions for purchase-money mortgage loans, 
loans held in portfolio, and loans originated by smaller lenders or 
small credit unions.
    The Bureau generally declines at this time to depart from 
Congress's clear intent to expand HOEPA to apply to most closed- and 
open-end credit transactions secured by a consumer's principal 
dwelling. In most cases, commenters expressed general concerns about 
the potential impact on access to credit of extending HOEPA to cover 
purchase-money mortgages and HELOCs. A number of commenters focused 
particularly on the potential impact on rural or underserved borrowers. 
However, they did not provide data to support any particular coverage 
exclusions. The Bureau notes that in order to make adjustments to HOEPA 
coverage, it must find that an adjustment is necessary and proper to 
effectuate the purposes of TILA, to prevent circumvention or evasion 
thereof, or to facilitate compliance therewith. Without firm data or 
other specific information to support commenters' claims regarding the 
effect of HOEPA expansion on access to credit, the Bureau does not 
believe that departures from TILA's coverage provisions are warranted. 
The Bureau recognizes, however, that the expansion of HOEPA to cover 
purchase-money mortgage loans raises unique concerns for certain 
categories of transactions (e.g., construction loans) and addresses 
those unique transactions through the narrower coverage exemptions 
discussed below. In addition, the Bureau believes that certain, 
specific concerns regarding expanded high-cost mortgage coverage (e.g., 
preserving access to balloon payment loans in rural or underserved 
areas) may be addressed through more targeted measures on a provision-
by-provision basis. Those measures are discussed below in the section-
by-section analysis of Sec. Sec.  1026.32 and 1026.34.
Manufactured Housing and Personal Property-Secured Transactions
    Prior to the Dodd-Frank Act, TILA excluded purchase-money mortgages 
from HOEPA coverage. The exclusion of purchase-money mortgages meant 
that specific types of lending were all but excluded from HOEPA 
coverage as a practical matter, if not by name. For example, 
refinancings of manufactured home loans and loans secured by other 
types of personal property (e.g., houseboats or recreational vehicles) 
historically were subject to HOEPA, but such loans are relatively rare. 
By amending TILA to remove the exclusion of purchase-money mortgages 
from HOEPA, the Dodd-Frank Act also removed the effective exclusion of 
manufactured home and personal property-secured loans from HOEPA. As 
discussed in the section-by-section analysis of Sec.  
1026.32(a)(1)(i)(A) and (B) above, Congress understood that expanding 
HOEPA to cover purchase-money transactions implicated such loans, 
because it created a specific APR coverage threshold for personal 
property-secured first-liens with a transaction amount of $50,000 or 
less.
    The HOEPA proposal did not propose specific relief from HOEPA 
coverage for manufactured home or personal property-secured loans 
beyond proposing to implement the separate, higher APR threshold set 
forth in the statute. As already discussed in the section-by-section 
analysis of Sec.  1026.32(a)(1)(i)(B) and (ii) above, the Bureau 
received public comments from both industry and consumer groups urging 
the Bureau to adjust the high-cost mortgage coverage tests as applied 
to manufactured housing. Numerous participants in the manufactured 
housing industry also requested that the Bureau exempt manufactured 
home loans from HOEPA coverage altogether. A few industry commenters 
similarly recommended that the Bureau exempt loans secured by personal 
property, such as houseboats and recreational vehicles, from HOEPA 
coverage.
    Manufactured housing. Industry commenters expressed serious 
concerns about the impact that the HOEPA proposal might have on the 
manufactured housing industry and on lower-income and rural consumers 
who rely on the manufactured home for affordable housing. Both industry 
and consumer group commenters noted that manufactured home loans 
primarily serve low- and moderate-income consumers in rural areas where 
access to other housing options and credit may be limited. 
Specifically, the Manufactured Housing Institute (MHI) estimated in its 
comment letter that there are approximately 9 million American families 
living in manufactured homes, that the average sales price of a new 
manufactured home is approximately $60,600, and that 60 percent of 
manufactured homes are located in rural areas. Moreover, according to 
2011 census data as reported by MHI, in 2011 manufactured homes 
accounted for 46 percent of all new homes sold under $150,000, and 72 
percent of all new homes sold under $125,000.
    Industry commenters estimated that, taking the HOEPA proposal's APR 
and points and fees thresholds together, between 44 and 75 percent of 
recent manufactured home loan originations would be covered by HOEPA. 
The commenters stated that they would not originate such loans. 
Commenters stated

[[Page 6884]]

that the cost of originating high cost mortgages (particularly the 
costs of making additional disclosures and the pre-loan counseling 
requirement), the ongoing costs of monitoring loans for compliance with 
HOEPA, and the legal, regulatory, and reputational risks associated 
with HOEPA would prevent them from originating high cost mortgages. At 
least one commenter stated that Congress's inclusion of manufactured 
housing in HOEPA coverage must have been an oversight.
    Commenters thus suggested several ways that the Bureau might exempt 
manufactured housing from HOEPA coverage. Specifically, various 
commenters suggested exempting (1) All manufactured home loans, (2) 
purchase-money manufactured home loans, (3) personal property-secured 
manufactured home loans, or (4) real or personal property-secured 
manufactured home loans that do not contain terms or practices 
prohibited by HOEPA (for example, negative amortization or prepayment 
penalties). Commenters stated that the last exemption would be useful 
because, as a general matter, manufactured home loans do not contain 
such loan terms. Thus, consumers taking out manufactured home loans 
already are adequately protected, and manufactured home creditors would 
be relieved of the burden of monitoring for high-cost mortgage status 
and the attendant disclosures and other requirements (e.g., counseling) 
that come with such status. In the alternative, commenters suggested 
that the Bureau provide a temporary exemption for manufactured housing 
until the Bureau obtains and analyzes data concerning the need for a 
permanent exemption.
    The Bureau is finalizing Sec.  1026.32(a) without any categorical 
exclusions for manufactured housing. Contrary to some industry 
commenters' suggestions, the plain language of HOEPA demonstrates that 
Congress specifically contemplated including manufactured home loans 
within HOEPA. The statutory definition of high-cost mortgage includes 
all consumer credit transactions secured by the consumer's principal 
dwelling (other than reverse mortgages); there is no limitation to real 
estate-secured loans. In fact, Congress specifically included an 
accommodation for a category of loans that are overwhelmingly comprised 
by manufactured housing loans by including a special, higher APR 
threshold for smaller transactions secured by personal property.
    The Bureau acknowledges that, as described by industry commenters, 
manufactured home loans may not contain certain risky features that 
HOEPA is designed to combat. However, these or other risky or abusive 
practices could arise in manufactured home lending (as with most 
lending) in the future. In addition, the Bureau believes that it would 
be imprudent to exempt manufactured home loans from HOEPA coverage when 
HOEPA offers some of the strongest consumer protections for loans 
secured by a consumer's principal dwelling, when that dwelling is 
personal property. As discussed in the section-by-section analysis of 
Sec.  1026.32(a)(1)(i)(A), approximately 77 percent of manufactured 
homes placed in the U.S. during 2011 were titled as personal 
property.\83\ State and Federal laws generally provide fewer legal 
protections for personal property-secured loans, including fewer 
required disclosures to assist consumers in understanding the terms of 
their credit transactions. For example, as discussed earlier, laws 
governing foreclosure procedures typically do not apply to loans 
secured by personal property, and RESPA only partially applies to such 
loans. The relative lack of protections for manufactured home loans 
distinguish manufactured housing from the other transaction types that 
this final rule exempts from HOEPA coverage, as discussed below. 
Moreover, consumers shopping for a manufactured home may have fewer 
financing options than those available for site-built dwellings, 
particularly when the home is titled as personal property. Lower-income 
consumers with limited financing options may be particularly 
susceptible to any abusive practices that might arise in the market. 
Finally, as discussed in the section-by-section analysis of Sec.  
1026.32(a)(1)(i) and (ii) above, the Bureau is not persuaded that 
application of the HOEPA coverage thresholds will adversely affect 
access to manufactured home loans. The Bureau however, will monitor 
access to manufactured home credit. The Bureau believes that adjusting 
the coverage thresholds, if it obtains information indicating that such 
an adjustment is warranted, is more appropriate than adopting a 
wholesale exemption.
---------------------------------------------------------------------------

    \83\ See Selected Characteristics of New Manufactured Homes 
Placed by Region, 2011, at https://www.census.gov/construction/mhs/pdf/char11.pdf.
---------------------------------------------------------------------------

    Personal property loans. As noted, a few industry commenters urged 
the Bureau to exempt loans secured by personal property such as 
houseboats or recreational vehicles from coverage under the final high-
cost mortgage rule, even if such property is the consumer's principal 
dwelling. The commenters stated that financing personal property is a 
separate line of business from mortgage lending, with different risks 
and pricing, and that vendors that finance such property may not have 
the capacity to comply with HOEPA. For the reasons just discussed with 
respect to manufactured housing, the Bureau does not believe that it is 
appropriate to exempt loans secured by personal property from the high-
cost mortgage rules. The Bureau believes that Congress has already 
balanced the competing considerations regarding coverage of this type 
of lending, and that this balance is reflected in the special APR 
threshold for smaller dollar, personal property-secured loans.
32(a)(2)(i)
Reverse Mortgages
    Prior to the Dodd-Frank Act, TILA section 103(aa)(1) exempted 
reverse mortgages from coverage under HOEPA. The Dodd-Frank Act 
retained this exemption in re-designated TILA section 103(bb)(1)(A), 
and the HOEPA proposal would have implemented it in Sec.  1026.32(a)(1) 
(i.e., moving it from existing Sec.  1026.32(a)(2)(ii) but making no 
substantive changes). One consumer group commenter requested that the 
Bureau revisit the reverse mortgage exemption either in this rulemaking 
or in the near future, citing particular concerns about increased fees 
in reverse mortgages. The Bureau declines to depart in this rulemaking 
from Congress's clear intent to retain the exemption of reverse 
mortgages from high-cost mortgage coverage. The Bureau notes that 
reverse mortgages currently are subject to additional disclosure rules 
under Sec.  1026.33. The Bureau also notes that it anticipates 
undertaking a rulemaking to address how the Dodd-Frank Act Title XIV 
requirements apply to reverse mortgages, and any consumer protection 
issues in the reverse mortgage market may be addressed through such a 
rulemaking. Accordingly, the final rule adopts the proposed exemption 
for reverse mortgages as Sec.  1026.32(a)(2)(i).
32(a)(2)(ii)
Construction Loans
    As previously noted, TILA section 103(bb)(1), as amended by the 
Dodd-Frank Act, expanded HOEPA coverage to include purchase-money 
transactions. Proposed Sec.  1026.32(a)(1) therefore would have 
expanded HOEPA coverage to all purchase-money transactions, including 
transactions to finance the initial construction of a consumer's 
principal dwelling. These ``construction

[[Page 6885]]

loans'' can take different forms. In some cases, creditors may provide 
``construction-only'' loans, where only the construction of the 
dwelling is financed by the creditor. These loans commonly contain 
balloon structures and are often refinanced into permanent loans after 
completion of the construction. In other cases, creditors may provide 
``construction-to-permanent'' loans, where both the construction and 
the permanent financing are extended by the same creditor. For these 
loans--which may be disclosed as two separate transactions or as a 
single transaction at the option of the creditor--the construction 
financing typically rolls into a permanent financing at the end of the 
construction phase. The Bureau did not propose different treatment of 
construction loans in the HOEPA proposal.
    The Bureau received numerous comments from industry groups and 
banks, including a number of community banks, expressing concern that 
the expansion of HOEPA to include construction loans would unduly 
restrict access to home construction financing for consumers, with 
little to no corresponding consumer benefit. These commenters urged the 
Bureau to create an exemption to Sec.  1026.32 for construction-only 
loans and the construction phase of construction-to-permanent loans, 
providing several bases for doing so.
    First, industry groups and community banks argued that the short 
term nature of construction financing as well as typically higher 
interest and administrative fees associated with construction-only 
loans or the construction phase of a construction-to-permanent loan 
would result in large numbers of these loans falling under the new 
HOEPA APR threshold. These commenters generally asserted that access to 
credit for these loans would be reduced because most creditors, as a 
matter of policy, do not make high-cost mortgages. They also noted that 
an additional barrier exists to making a construction-only loan as a 
high-cost mortgage, because construction-only loans are typically 
structured as balloons with terms of 1-2 years, and proposed Sec.  
1026.32(d)(1) would have prohibited any such balloon payments on high-
cost mortgages. Thus, independent of the various reasons creditors 
typically refrain from making high-cost mortgages, creditors would be 
barred from making any such construction-only loan as a high-cost 
mortgage in its usual form. One large bank indicated that 20 percent of 
its 2009-2012 construction-only loans would have been classified as 
high-cost mortgages under the new HOEPA APR criteria, and that it would 
not have made those loans had HOEPA applied.
    Industry groups and community banks also asserted that construction 
loans should not be covered by HOEPA, largely because the predatory 
lending and abusive practices that compelled the passage of HOEPA do 
not exist for construction loans. Industry groups emphasized that 
construction loans typically involve more sophisticated consumers than 
ordinary residential mortgage loans and require more extensive 
coordination between the creditor, the home builder, and the home 
buyer, which they believe reduces the risk of abusive credit practices. 
As support for this position, these commenters noted that construction 
loans do not have the same history of abusive credit practices as other 
mortgage loans. In addition, industry groups argued that many of the 
protections afforded to borrowers under HOEPA--such as restrictions on 
acceleration, charging of fees for loan modifications or payoff 
statements, and negative amortization features--are generally 
inapplicable to construction loans.
    The Bureau notes that these comments are consistent with the 
discussion in the Board's 2008 HOEPA Final Rule, 73 FR 44522, 44539 
(July 30, 2008), which exempted construction loans from the higher-
priced mortgage loan rules (see Sec.  1026.35(a)(3)) for substantially 
the same reasons urged by industry. In that rule, the Board determined 
that construction loans typically have higher points, fees, and 
interest associated with them than other loan products, as well as 
shorter terms, which often results in construction loans having 
substantially higher APRs than other mortgage loan products. Thus, in 
the Board's view, applying Sec.  1026.35 to construction loans would 
have resulted in an excessive number of construction loans being 
classified as higher-priced mortgage loans, which could discourage some 
creditors from extending such financing. In addition, the Board also 
found that construction loans do not present the same risk of abuse as 
other mortgage loans, and concluded that applying the higher-priced 
mortgage loan rules to construction loans could hinder some borrowers' 
access to construction financing without meaningfully enhancing 
consumer protection. 73 FR at 44539. Upon careful consideration of the 
Board's rulemaking and the public comments received on the Bureau's 
2012 HOEPA Proposal, the Bureau similarly concludes that an exemption 
from HOEPA is warranted for construction loans.
    The Bureau is adopting Sec.  1026.32(a)(2)(ii) to exempt from HOEPA 
coverage loans to finance the initial construction of a consumer's 
principal residence, which includes both construction-only loans and 
the construction phase of construction-to-permanent loans. The Bureau 
is exempting such loans from coverage pursuant to its authority under 
TILA section 105(a), which grants the Bureau authority to exempt all or 
any class of transactions where necessary or proper to effectuate the 
purposes of TILA, to prevent evasion, or to facilitate compliance. The 
Bureau believes that exempting construction loans from the HOEPA 
restrictions set forth in Sec. Sec.  1026.32 and 1026.34 is necessary 
and proper to effectuate the purposes of, and to facilitate compliance 
with, TILA, in accordance with TILA section 105(a). The Bureau believes 
that concerns discussed in the 2008 HOEPA Rule, such as hindering 
access to credit without meaningfully enhancing consumer protection, 
are equally applicable to construction financing transactions that 
otherwise would be high-cost mortgages. The Bureau further believes 
that adopting this final rule without an exemption for construction 
loans would discourage some creditors from participation in the 
construction financing business, thereby reducing competition to the 
detriment of consumers, without providing any meaningful corresponding 
consumer protection benefit. Accordingly, the Bureau believes that an 
exemption for construction loans will strengthen competition among 
financial institutions and promote economic stabilization.
    The Bureau also is adopting comment 32(a)(2)(ii)-1 to provide 
further guidance on how the exemption applies to construction-to-
permanent loans. Comment 32(a)(2)(ii)-1 explains that the Sec.  
1026.32(a)(2)(ii) exemption applies to both a construction-only loan 
and to the construction phase of a construction-to-permanent loan. 
However, the permanent financing that replaces a construction loan, 
whether extended by the same or a different creditor, is not exempt 
from HOEPA coverage. Under Sec.  1026.17(c)(6)(ii), a creditor has the 
option to treat a construction-to-permanent loan as a single 
transaction or as multiple transactions for disclosure purposes, even 
when the same creditor extends both loans and a single closing occurs. 
Because only the construction phase is exempt from Sec.  1026.32, the 
Bureau recognizes that the rule could present an incentive to

[[Page 6886]]

creditors to shift all or most upfront charges to the construction 
phase. However, the Bureau remains persuaded that construction loans do 
not present the same risk of abuse as do other loans. The Bureau also 
believes that market competition should minimize creditors' ability to 
engage in such evasion because those creditors should be unable to 
capture much of the construction market where other creditors offering 
construction-only financing will tend to have superior pricing. 
Nevertheless, the Bureau intends to monitor the construction financing 
market going forward for signs that circumvention may be occurring and, 
if so, may take future action regarding the exclusion for the 
construction phase of construction-to-permanent financing.
32(a)(2)(iii)
Housing Finance Agency Loans
    As noted above, Congress amended TILA to expand the types of loans 
subject to HOEPA coverage and to revise HOEPA's coverage tests. In 
doing so, Congress did not provide any exemptions from HOEPA coverage 
for any State or other government agencies, either in TILA section 
103(bb) or 129. However, until Congress changed the scope of HOEPA's 
coverage, few if any of their activities were covered.
    Certain commenters, including an association of State housing 
finance authorities, urged the Bureau to exempt loans financed by 
Housing Finance Agencies (HFAs). These commenters observed that HFAs 
operate as public entities in every State and that, as agencies and 
instrumentalities of government, they have a unique mission to provide 
safe and affordable financing. In addition, the commenters stated, 
loans financed by HFAs tend to perform better than other loans. The 
commenters stated that many loans financed by HFAs would be unlikely to 
meet any of HOEPA's coverage tests. On the other hand, according to the 
commenters, many HFAs offer smaller-loan-amount products that, for 
example, finance the purchase of manufactured homes in rural areas or 
support critical repairs and renovations. Because the principal amounts 
of such loans are so low, the commenters expressed concern that even 
reasonable fees to offset origination and administrative costs might 
make many of the loans high-cost mortgages, which in turn could prevent 
the HFAs from originating the loans. In turn, consumers might turn to 
financing through costlier forms of credit. The commenters stated that 
the risk of exempting loans originated under such programs from HOEPA 
coverage is low because sufficient protections are provided by HFAs' 
normal lending practices.
    The Bureau adopts in the final rule an exemption from HOEPA for 
transactions that are directly financed by an HFA, as that term is 
defined in 24 CFR 266.5.\84\ The Bureau adopts this exemption pursuant 
to its authority under TILA section 105(a) to exempt all or any class 
of transactions where necessary or proper to effectuate the purposes of 
TILA, to prevent evasion, or to facilitate compliance. The Bureau 
believes that this exemption is necessary and proper to effectuate the 
purposes of TILA to avoid the uninformed use of credit by ensuring that 
borrowers seeking to obtain fair and affordable loans originated and 
financed directly by HFAs are not driven to other, costlier and riskier 
forms of credit.
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    \84\ Pursuant to 24 CFR 266.5, an HFA is defined as ``any public 
body, agency, or instrumentality created by a specific act of a 
State legislature or local municipality empowered to finance 
activities designed to provide housing and related facilities, 
through land acquisition, construction or rehabilitation.''
---------------------------------------------------------------------------

    HFAs are quasi-governmental entities, chartered by either a State 
or a municipality, that engage in diverse housing financing activities 
for the promotion of affordable housing. Some HFAs are chartered to 
promote affordable housing goals across an entire State, while others' 
jurisdiction extends to only particular cities or counties.\85\ Among 
other activities designed to promote affordable homeownership, HFAs 
provide financial assistance to consumers through first-lien mortgage 
loans, subordinate-loan financing, and down payment assistance programs 
(e.g., a loan to the consumer to assist with the consumer's down 
payment, or to pay for some of the closing costs). The Bureau 
understands that HFA lending is characterized by low-cost financing, 
evaluation of a consumer's repayment ability, and homeownership 
counseling.\86\
---------------------------------------------------------------------------

    \85\ For example, the Louisiana Housing Corporation administers 
affordable housing programs across all of Louisiana, while The 
Finance Authority of New Orleans administers programs only in 
Orleans Parish. See www.lhfa.state.la.us and 
www.financeauthority.org.
    \86\ The vast majority of HFA loans are fixed-rate, fully-
amortizing, fully-documented conforming loans.
---------------------------------------------------------------------------

    The Bureau understands that, in most cases, HFAs partner with 
creditors, such as local banks, that extend credit pursuant to the HFA 
program guidelines. HFAs generally do not provide direct financing to 
consumers. Nonetheless, the Bureau's exemption of HFAs from HOEPA 
coverage extends only to those transactions where the HFA itself 
provides direct financing. Transactions made pursuant to a program 
administered by an HFA but that are financed by private creditors are 
still subject to HOEPA coverage. Although the details of HFA programs 
may differ from State to State, the Bureau believes that consumers in 
loans where a government-chartered agency is the creditor are 
sufficiently protected from the types of abuse that HOEPA was designed 
to address. The Bureau acknowledges that loans financed by private 
entities in partnership with HFAs may also have significant consumer 
protections, however the Bureau believes that it is important to retain 
HOEPA protections for such loans because the HFA does not directly 
control the transaction.
32(a)(2)(iv)
USDA Rural Loans
    As noted in the section-by-section analysis of Sec.  
1026.32(a)(2)(iii) above, Congress amended TILA to expand the types of 
loans subject to high-cost mortgage coverage and to revise the high-
cost mortgage coverage tests. In doing so, Congress did not provide any 
exemptions from HOEPA coverage for loans originated by the Federal 
government, such as through the USDA Rural Housing Service, either in 
TILA section 103(bb) or 129. However, until Congress changed the scope 
of high-cost mortgage coverage, few if any of their activities were 
covered.
    The Bureau received one comment concerning USDA Rural Housing 
Service loans. Specifically, the industry commenter suggested that the 
Bureau exempt (or adjust the APR and points and fees thresholds for) 
loans issued under the USDA Guaranteed Rural Housing Program. This 
commenter noted that such loans carry enhanced consumer protections, 
such as maximum interest rates that must track closely to prime, and 
that they tend to be for small dollar amounts. The commenter expressed 
concern about the points and fees threshold because loans originated 
through the USDA Rural Housing Service program tend to be for smaller 
dollar amounts and thus a relatively higher percentage of their loan 
amount may be counted toward the points and fees threshold.
    The Bureau declines to exempt loans issued under the USDA 
Guaranteed Rural Housing Program. However, upon further consideration 
and for reasons similar to those discussed in the section-by-section 
analysis of Sec.  1026.32(a)(2)(iii) concerning loans originated by 
HFAs where the HFA is the creditor, the Bureau adopts in

[[Page 6887]]

Sec.  1026.32(a)(2)(iv) in the final rule an exemption for loans 
originated through the USDA's Rural Housing Service section 502 Direct 
Loan Program. The Bureau adopts this exemption pursuant to its 
authority under TILA section 105(a) to exempt all or any class of 
transactions where necessary or proper to effectuate the purposes of 
TILA, to prevent evasion, or to facilitate compliance. The Bureau 
believes that this exemption is necessary and proper to effectuate the 
purposes of TILA to avoid the uninformed use of credit by ensuring that 
borrowers seeking to obtain fair and affordable loans through 
government programs are not driven to other, costlier forms of credit. 
The Bureau believes that the protections afforded consumers in the 
section 502 Direct Loan Program, where the Federal government is the 
creditor, are sufficiently protected from the types of abuse that HOEPA 
was designed to address. As noted, however, the Bureau does not at this 
time adopt an exemption in Sec.  1026.32(a)(2)(iv) to loans issued 
under the USDA Guaranteed Rural Housing Program.
32(a)(3) Determination of Annual Percentage Rate
    Prior to the Dodd-Frank Act, TILA did not specify how to calculate 
the APR for purposes of HOEPA's APR coverage test. The Dodd-Frank Act 
changed this by adding section 103(bb)(1)(B) to TILA. Section 
103(bb)(1)(B) instructs creditors to use one of three methods to 
determine the interest rate for purposes of calculating the APR for 
high-cost mortgage coverage. The method that the creditor must use 
depends on whether the transaction is fixed- or variable-rate and, if 
the transaction is variable-rate, the manner in which the transaction's 
rate may vary (i.e., in accordance with an index or otherwise). Under 
TILA section 103(bb)(1)(B)(i) through (iii), the APR for the high-cost 
mortgage APR coverage test shall be determined based on the following 
interest rates, respectively: (1) In the case of a fixed-rate 
transaction in which the APR will not vary during the term of the loan, 
the interest rate in effect on the date of consummation of the 
transaction; (2) in the case of a transaction in which the rate of 
interest varies solely in accordance with an index, 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; and (3) in the case of any other 
transaction in which the rate may vary at any time during the term of 
the loan for any reason, the interest charged on the transaction at the 
maximum rate that may be charged during the term of the loan.
    The Bureau proposed to implement TILA section 103(bb)(1)(B) in 
Sec.  1026.32(a)(2) and related commentary. Specifically, proposed 
Sec.  1026.32(a)(2)(i) would have implemented TILA section 
103(bb)(1)(B)(i) concerning fixed-rate transactions; proposed Sec.  
1026.32(a)(2)(ii) would have implemented TILA section 103(bb)(1)(B)(ii) 
concerning transactions that vary with an index; and proposed Sec.  
1026.32(a)(2)(iii) would have implemented TILA section 103(bb)(1)(B)(i) 
concerning other transactions with rates that vary. As discussed in the 
section-by-section analysis of Sec.  1026.32(a)(2) above, the Bureau 
retains existing Sec.  1026.32(a)(2) in the final rule to provide 
certain categorical coverage exemptions. Thus, the Bureau adopts 
proposed Sec.  1026.32(a)(2) and comments 32(a)(2)-1 and -2 as Sec.  
1026.32(a)(3) and comments 32(a)(3)-1 and -2 in the final rule, with 
several revisions as discussed below.
    First, as noted above, TILA section 103(bb)(1)(B) describes how to 
calculate the APR for the high-cost mortgage APR coverage test. Thus, 
the statute references the ``annual percentage rate of interest.'' 
Proposed Sec.  1026.32(a)(2) would have implemented TILA section 
103(bb)(1)(B) by referencing both the ``annual percentage rate'' and 
the ``transaction coverage rate,'' as applicable. Proposed Sec.  
1026.32(a)(2) referenced both phrases because, as noted in the section-
by-section analysis of proposed Sec.  1026.32(a)(1)(i) above, the 
proposed APR coverage test contained two alternatives that would have 
required creditors to compare a transaction's APR or transaction 
coverage rate, respectively, to the average prime offer rate. Because 
the Bureau is not finalizing the expanded finance charge in connection 
with its January 2013 rulemakings, the Bureau finalizes Sec.  
1026.32(a)(3) with references only to the APR, rather than to both the 
APR and the transaction coverage rate.
    Second, as noted above, TILA section 103(bb)(1)(B) instructs 
creditors to calculate a transaction's APR based on the interest rate 
(for a fixed-rate transaction) or index rate (for a transaction that 
varies with an index) in effect on the date of consummation of the 
transaction. Proposed Sec.  1026.32(a)(2) would have referred not only 
to ``consummation,'' but also to ``account opening'' to reflect the 
fact that the requirement also applies to HELOCs. The Bureau received 
no comments on its inclusion of the phrase ``account opening'' and 
therefore incorporates that phrase into final Sec.  1026.32(a)(3) as 
proposed.
    The Bureau did, however, receive a number of comments stating that 
the proposal's requirement to use the interest rate or (for variable-
rate transactions) the index rate in effect as of consummation or 
account opening for purposes of calculating the APR for HOEPA coverage 
would be unworkable as a practical matter. These commenters noted that 
a creditor may not know until the last minute what index rate to use 
for purposes of determining HOEPA coverage, and if the index rate 
changed at the last minute such that the loan became a high-cost 
mortgage, closing would need to be delayed to comply with the 
requirement to provide the high-cost mortgage disclosures. The 
commenters further noted that a different standard--the index rate in 
effect as of the date the rate for the transaction is set--is used 
elsewhere in Regulation Z for similar APR determinations, including for 
determining coverage as a higher-priced mortgage loan under Sec.  
1026.35.
    Under TILA section 105(a), the Bureau's 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. Pursuant to its authority 
to make adjustments to facilitate compliance with the TILA, the Bureau 
adopts in Sec.  1026.32(a)(3)(i) and (ii), respectively, a requirement 
that creditors use the interest rate or index rate in effect as of the 
date the interest rate for the transaction is set (i.e., the rate-set 
date), rather than as of consummation as provided in TILA section 
103(bb)(1)(B). The Bureau recognizes that, as commenters pointed out, 
it likely would not be practicable for creditors to wait until 
consummation or account opening to determine with certainty the 
applicable interest or index rate to be used for the high-cost mortgage 
coverage test. Creditors must be able to determine with certainty prior 
to this time whether a transaction is a high-cost mortgage. The Bureau 
further acknowledges that other coverage tests under Regulation Z, such 
as the test for higher-priced mortgage loans under Sec.  1026.35, 
require creditors to use the rate-set date and believes that it is 
useful to harmonize the HOEPA APR coverage test with those rules. Thus, 
providing that the interest or index rate be the rate in effect on the 
date that the

[[Page 6888]]

rate for the transaction is set will facilitate compliance, consistent 
with TILA section 105(a).
    Proposed comment 32(a)(2)-1 would have made clear that creditors 
are required to use Sec.  1026.32(a)(2), rather than existing guidance 
in comment 17(c)(1)-10.i, to calculate the APR for discounted and 
premium variable-rate loans. Proposed comment 32(a)(2)-2 would have 
clarified that the APR for a HELOC must be determined in accordance 
with Sec.  1026.32(a)(2), regardless of whether there is an advance of 
funds at account opening. Proposed comment 32(a)(2)-2 further would 
have clarified that Sec.  1026.32(a)(2) does not require HELOC 
creditors to calculate the APR for any extensions of credit subsequent 
to account opening. In other words, any draw on the credit line 
subsequent to account opening is not considered to be a separate open-
end ``transaction'' for purposes of determining whether the transaction 
is a high-cost mortgage under the APR coverage test.
    Proposed comment 32(a)(2)-4 would have clarified the application of 
Sec.  1026.32(a)(2) for home-equity plans that offer fixed-rate and -
term repayment options. As noted in the proposal, some variable-rate 
HELOC plans may permit borrowers to repay a portion or all of their 
outstanding balance at a fixed-rate and over a specified period of 
time. Proposed comment 32(a)(2)-4 would have clarified that, if a HELOC 
has only a fixed rate during the draw period, the creditor must use 
that fixed rate to determine the plan's APR, as required by proposed 
Sec.  1026.32(a)(2)(i). If during the draw period, however, a HELOC has 
a variable rate but also offers a fixed-rate and -term payment option, 
a creditor must use the terms applicable to the variable-rate feature 
to determine the plan's APR, as described in proposed Sec.  
1026.32(a)(2)(ii). The Bureau received no comments on proposed comments 
32(a)(2)-1, -2, or -4 and finalizes them as proposed, except that the 
Bureau re-numbers the comments as 32(a)(3)-1, -2, and -5 in the final 
rule.
32(a)(3)(i)
    TILA section 103(bb)(1)(B) requires that, in connection with a 
fixed-rate transaction in which the APR will not vary during the term 
of the loan, the APR must be based on the interest rate in effect on 
the date of consummation. As discussed above, proposed Sec.  
1026.32(a)(2)(i) would have required that the calculation of the APR 
for a fixed-rate transaction be based on the interest rate in effect on 
the date of consummation or account opening. The Bureau received no 
comments specifically addressing proposed Sec.  1026.32(a)(2)(i). The 
Bureau thus finalizes Sec.  1026.32(a)(3)(i) substantially as proposed, 
but with the clarification noted in the section-by-section analysis of 
Sec.  1026.32(a)(3) above (i.e., that the interest rate is measured as 
of the date the interest rate for the transaction is set).
32(a)(3)(ii)
    Proposed Sec.  1026.32(a)(2)(ii) would have implemented TILA 
section 103(bb)(1)(B)(ii)'s requirements for calculating APRs for 
transactions in which the interest rate varies solely in accordance 
with an index. As noted above, pursuant to TILA section 
103(bb)(1)(B)(ii), the APR for such transactions must be based on the 
interest rate that is determined by adding the maximum margin permitted 
at any time during the loan agreement to the index rate in effect on 
the date of consummation (i.e., the fully-indexed rate). Proposed Sec.  
1026.32(a)(2)(ii) would have implemented this provision with the 
additional qualification that it applies only in the case of a 
transaction in which the interest rate can vary during the term of the 
loan or plan in accordance with an index outside the creditor's 
control.
    The Bureau believed that the proposed qualification would have 
helped to differentiate TILA section 103(bb)(1)(B)(ii) concerning rates 
that vary with an index from TILA section 103(bb)(1)(B)(iii) concerning 
rates that ``may vary at any time during the term of the loan for any 
reason.'' See the section-by-section analysis of Sec.  
1026.32(a)(3)(iii) below. Specifically, because interest rates for 
variable-rate HELOCs are prohibited under TILA section 137(a) (as 
implemented by Sec.  1026.40(f)) from varying pursuant to an index that 
is within the creditor's control, the Bureau believed that adding the 
language ``outside the creditor's control'' to proposed Sec.  
1026.32(a)(2)(ii) would have clarified that APRs for variable-rate 
HELOCs should be determined according to Sec.  1026.32(a)(2)(ii) rather 
than Sec.  1026(a)(2)(iii).
    Additionally, the Bureau proposed to adopt the clarification 
pursuant to its authority under TILA 105(a) to prevent circumvention of 
coverage under HOEPA. The Bureau noted that if the index were in the 
creditor's control, such as the creditor's own prime lending rate, a 
creditor might set a low index rate for purposes of Sec.  
1026.32(a)(2)(ii) and thereby avoid classification as a high-cost 
mortgage. However, subsequent to consummation, the creditor could set a 
higher index rate, at any time, which would have triggered coverage as 
a high-cost mortgage under Sec.  1026.32(a)(2)(ii) if it were in effect 
at consummation. Accordingly, the proposal would have provided that, if 
the interest rate varies in accordance with an index that is under the 
creditor's control, the creditor would determine the APR under Sec.  
1026.32(a)(2)(iii), not Sec.  1026.32(a)(2)(ii).
    Proposed comment 32(a)(2)-3 would have provided additional guidance 
on the application of Sec.  1026.32(a)(2)(ii) and (iii) to mortgage 
transactions with interest rates that vary. Specifically, proposed 
comment 32(a)(2)-3.i would have provided that proposed Sec.  
1026.32(a)(2)(ii) applies when the interest rate is determined by an 
index that is outside the creditor's control. In addition, proposed 
comment 32(a)(2)-3.i would have clarified that even if the transaction 
has a fixed, discounted introductory or initial interest rate, proposed 
Sec.  1026.32(a)(2)(ii) requires adding the contractual maximum margin 
to the index, without reflecting the introductory rate. Proposed 
comment 32(a)(2)-3.i also would have provided that the maximum margin 
means the highest margin that might apply under the terms of the credit 
transaction. For example, if the terms of the credit transaction 
provide that a borrower's margin may increase by 2 percentage points if 
the borrower's employment with the creditor ends, then the creditor 
must add that higher margin to the index to determine HOEPA coverage.
    The Bureau received a number of comments on proposed Sec.  
1026.32(a)(2)(ii) and (iii). Consumer groups generally advocated that 
the Bureau depart from the statute by requiring creditors to use the 
maximum rate permitted under the terms of the mortgage loan or HELOC 
for all variable-rate transactions. The consumer groups observed that 
creditors have better information than consumers to predict when 
interest rates will increase and that, if a consumer could at any time 
during the term of the loan or credit plan be required to make payments 
based on an APR within the high-cost mortgage range, the consumer 
should receive the protections associated with such mortgages.
    One industry commenter objected to the requirement to recalculate a 
distinct variable-rate APR solely for purposes of high-cost mortgage 
coverage, rather than using the composite rate calculation set forth in 
existing Sec.  1026.17(c)(1)-10.i. The commenter stated that performing 
an extra calculation would be extremely

[[Page 6889]]

burdensome and would introduce additional opportunities for error into 
the loan origination process.
    Two industry commenters objected to the requirement that the index 
be ``outside the creditor's control'' for purposes of proposed Sec.  
1026.32(a)(2)(ii), noting that internal indices are used by certain 
closed-end creditors to price loans to reflect local economic 
conditions and by, for example, members of the Farm Credit System.
    Several industry commenters requested clarification about whether 
rate floors or caps would cause the index to vary in a manner within 
the creditor's control, such that a creditor originating a loan or 
credit plan with such features would need to calculate the APR for 
HOEPA coverage using the maximum rate that could be imposed over the 
life of the loan under proposed Sec.  1026.32(a)(2)(iii). These 
commenters expressed particular concern about floor rates in HELOCs, 
noting that most variable-rate HELOCs provide for such a floor rate, 
even when the rate otherwise varies solely with an index outside the 
creditor's control. Commenters stated that it would be inappropriate to 
require HELOC creditors to use the maximum rate applicable over the 
life of the HELOC under proposed Sec.  1026.32(a)(2)(iii) (which often 
may be the State usury cap) and thereby classify large numbers of 
HELOCs as high-cost mortgages merely because the credit plan provides 
for a rate floor.
    Other industry commenters requested that the Bureau specify that, 
if a transaction has an introductory rate that is higher than the 
fully-indexed rate, creditors must use the introductory rate for the 
APR calculation. Finally, some industry commenters expressed general 
concern about undue coverage of loans under HOEPA as a result of the 
requirement in proposed Sec.  1026.32(a)(2)(iii) to look to the maximum 
rate for certain variable-rate transactions and general uncertainty 
about the application of proposed Sec.  1026.32(a)(2) to HELOCs.
    The Bureau is renumbering proposed Sec.  1026.32(a)(2)(ii) as Sec.  
1026.32(a)(3)(ii), and finalizing follows. First, notwithstanding 
consumer groups' comments, the Bureau declines to adopt a final rule 
that would require creditors generally to use the maximum rate 
applicable during the life of the loan (i.e., as opposed to the fully-
indexed rate) for determining high-cost mortgage coverage. The Bureau 
understands that creditors originating variable-rate transactions are 
required to disclose the maximum rate possible during the loan term and 
that industry practice typically is to disclose the highest rate 
permissible under State law. The Bureau does not believe that Congress 
intended all such variable-rate transactions to be classified as high-
cost mortgages and believes that the final rule strikes the appropriate 
balance between the concerns of industry and those of consumer groups.
    Second, notwithstanding industry's complaints about the burdens of 
performing an additional calculation, the Bureau implements in the 
final rule the statutory requirement to calculate APRs for high-cost 
mortgage coverage pursuant to the requirements set forth in TILA 
section 103(bb)(1)(B)(ii) and (iii), rather than in accordance with the 
rules for composite APRs for disclosure purposes under Sec.  1026.17. 
The Bureau acknowledges that the final rule may require creditors to 
conduct an additional calculation to determine high-cost mortgage 
coverage for variable-rate transactions. However, the Bureau believes 
that Congress made a deliberate decision to depart from the general APR 
calculation, to ensure that introductory rates not be given undue 
weight in determining whether a transaction is a high-cost mortgage. 
Despite the additional burden associated with a different calculation, 
the Bureau does not believe that avoidance of an additional calculation 
is a sufficient basis to use its exception authority to depart from the 
clear intent of the statute.
    Third, the Bureau does not adopt in the final rule the proposed 
requirement that variations in an index must be ``outside the 
creditor's control'' for Sec.  1026.32(a)(3)(ii) to apply. The Bureau 
is not certain, at present, that the risk of evasion requires adding 
this limitation. As noted, TILA section 137 and Sec.  1026.40(f) 
already prohibit variable-rate HELOCs from employing an index that 
varies outside the creditor's control. Use of internal indices is also 
restricted or prohibited for closed-end, variable-rate transactions in 
many circumstances. Federal regulations significantly restrict the 
circumstances under which federally-chartered banks and thrifts may use 
an index within the creditor's control. For example, Office of the 
Comptroller of the Currency regulations generally require national 
banks to use an index for ARMs that is ``readily available to, and 
verifiable by, the borrower and beyond the control of the bank.'' 12 
CFR 34.22(a). Single-family seller/servicer guides published by the 
Government Sponsored Enterprises (GSEs) also indicate that ARMs must be 
tied to publicly-available indices. Finally, the Alternative Mortgage 
Transactions Parity Act (AMTPA) provides restrictions on the use of 
internal indices. AMTPA authorizes state-licensed or -chartered housing 
creditors to make alternative mortgage transactions such as ARMs in 
compliance with Federal rather than State law, in order to establish 
parity and competitive equality between State and Federal lenders. 
However, AMTPA provides that an ARM cannot benefit from the preemptive 
effect of Federal law over more restrictive State law unless the 
transaction uses an index outside the creditor's control or a formula 
or schedule identifying the amount by which the rate or finance charge 
can increase and when a change can occur.\87\ Finally, based on the 
public comments received, there appear to be legitimate, if infrequent, 
circumstances under which creditors use internally-defined indices. 
Adopting a requirement in this rule that effectively would require all 
creditors originating variable-rate transactions to use an index 
outside the creditor's control would cause disruption, for example, to 
Farm Credit System programs. The Bureau notes, however, that it will 
continue to monitor whether such a restriction would be sensible as a 
general matter for closed-end transactions and may revisit the issue in 
future rulemakings.\88\
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    \87\ See 76 FR 44226 (July 22, 2011).
    \88\ In this regard, the Bureau notes that the Board solicited 
comment on whether to prohibit the use of an index under a 
creditor's control for a closed-end ARM in connection with its 2010 
Mortgage Proposal, 75 FR 58539 (Sept. 24, 2010). The Bureau has 
inherited the Board's proposal as part of the transfer of authority 
for TILA under the Dodd-Frank Act.
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    Comment 32(a)(3)-3 provides guidance concerning the application of 
Sec.  1026.32(a)(3)(ii). Comment 32(a)(3)-3 clarifies that the interest 
rate for a transaction varies solely in accordance with an index even 
if the transaction has an introductory rate that is higher or lower 
than the fully-indexed rate provided that, following the first rate 
adjustment, the interest rate for the transaction varies solely in 
accordance with an index. The comment specifies that, for transactions 
subject to Sec.  1026.32(a)(3)(ii), the interest rate generally is 
determined by adding the index rate in effect on the date that the 
interest rate for the transaction is set to the maximum margin for the 
transaction, as set forth in the agreement for the loan or plan. 
However, if a transaction subject to Sec.  1026.32(a)(3)(ii) has an 
introductory rate that is higher than the index rate plus the maximum 
margin for the transaction as of the date the interest rate for the 
transaction is set, then the interest rate for the APR determination is 
the higher, initial (or ``premium'') interest rate.

[[Page 6890]]

    The Bureau agrees with comments received that use of the 
introductory rate is the appropriate measure under this circumstance 
and notes that this approach aligns with the definition of ``fully-
indexed rate'' as adopted in the Bureau's 2013 ATR Final Rule. Section 
1026.43(c)(5) of that rule implements the payment calculation 
requirements of TILA section 129C(a), which contains the general 
requirement that a creditor determine a consumer's ability to repay a 
mortgage loan. Specifically, Sec.  1026.43(c)(5) and comment 
43(c)(5)(i)-2 of the 2013 ATR Final Rule explain that a creditor must 
determine a consumer's repayment ability with respect to substantially 
equal, monthly, fully amortizing payments that are based on the greater 
of the fully indexed rate or any introductory interest rate.
    Comment 32(a)(3)-3.iii provides several examples to illustrate the 
rule. As described in the examples, creditors should use Sec.  
1026.32(a)(3)(ii) notwithstanding the existence of a rate floor or a 
rate cap on a variable-rate transaction that otherwise varies in 
accordance with an index. The Bureau believes that the clarification 
concerning rate floors and rate caps is useful and will promote clarity 
in applying the rule, notwithstanding the removal of the requirement 
that the index must be outside the creditor's control for Sec.  
1026.32(a)(3)(ii) to apply. Comment 32(a)(3)-3.iii also notes by way of 
example that an open-end credit plan may not have a rate that varies 
other than in accordance with an index, pursuant to existing rules for 
home-secured open-end credit in Sec.  1026.40(f).
32(a)(3)(iii)
    Proposed Sec.  1026.32(a)(2)(iii) would have required that, for a 
loan in which the interest rate may vary during the term of the loan, 
other than a loan as described in proposed Sec.  1026.32(a)(2)(ii) (for 
credit where the rate may vary solely in accordance with an index), the 
annual percentage rate must be based on the maximum interest rate that 
may be imposed during the term of the loan. Proposed comment 32(a)(2)-
3.ii would have clarified that Sec.  1026.32(a)(2)(iii) applies when 
the interest rates applicable to a transaction may vary, except as 
described in proposed Sec.  1026.32(a)(2)(ii). Proposed comment 
32(a)(2)-3.ii thus would have specified that proposed Sec.  
1026.32(a)(2)(iii) would apply, for example, to a closed-end credit 
transaction when interest rate changes are at the creditor's discretion 
or where multiple fixed rates apply to a transaction, such as a step-
rate mortgage, in which specified fixed rates are imposed for specified 
periods.
    The Bureau sought comment on its proposals for determining the APR 
for HOEPA coverage, including on whether any aspect of the proposal 
could result in unwarranted, over-inclusive HOEPA coverage of HELOCs. 
In particular, the Bureau noted (as discussed above) that Sec.  
1026.40(f) and its commentary generally prohibit creditors from 
changing the APR on a HELOC unless the change is based on a publicly-
available index outside the creditor's control or unless the rate 
change is specifically set forth in the agreement, such as step-rate 
plans. The proposal noted that Regulation Z's HELOC restrictions would 
effectively limit the application of proposed Sec.  1026.32(a)(2)(iii) 
primarily to certain types of closed-end credit transactions. The 
Bureau observed that applying proposed Sec.  1026.32(a)(2)(iii) to 
determine the APR for a variable-rate HELOC could result in over-
inclusive coverage of HELOCs under HOEPA because the maximum possible 
interest rate for many variable-rate HELOCs is pegged to the maximum 
interest rate permissible under State law. That interest rate, in turn, 
likely would cause the plan's APR to exceed HOEPA's APR threshold. 
Therefore, the Bureau solicited comment on whether there were any 
circumstances in which the terms of a variable-rate HELOC might warrant 
application of proposed Sec.  1026.32(a)(2)(iii) and, if so, whether 
additional clarification would be necessary to avoid unwarranted 
coverage of HELOCs under HOEPA.
    The Bureau received no comments on proposed Sec.  
1026.32(a)(2)(iii) apart from those addressed above in connection with 
Sec.  1026.32(a)(3)(ii) and thus finalizes Sec.  1026.32(a)(3)(iii) as 
proposed with minor revisions for clarity.
32(b) Definitions
32(b)(1) and (2)
Points and Fees--General
    Section 1431(c)(1) of the Dodd-Frank Act revised and added certain 
items to the definition of points and fees for purposes of determining 
whether a transaction exceeds the HOEPA points and fees threshold. See 
TILA section 103(bb)(4).\89\ As discussed in detail in the Bureau's 
2013 ATR Final Rule, section 1412 of the Dodd-Frank Act also amended 
TILA to add new provisions that require creditors to consider 
consumers' ability to repay and that create a new type of closed-end 
credit transaction, a ``qualified mortgage.'' Among other requirements, 
under new TILA section 129C(b)(2)(A)(vii), to be a qualified mortgage, 
a transaction must have points and fees payable in connection with the 
loan that generally do not exceed three percent of the total loan 
amount. In turn, ``points and fees'' for purposes of qualified 
mortgages means ``points and fees'' as defined by HOEPA.\90\
---------------------------------------------------------------------------

    \89\ As noted in the preamble to the proposal, the Dodd-Frank 
Act renumbered TILA section 103(aa)(1)(B) concerning points and fees 
for high-cost mortgages as 103(bb)(1)(A)(ii). However, the Dodd-
Frank Act did not amend existing TILA section 103(aa)(4) (the 
provision that defines points and fees) to reflect this new 
numbering. Thus, TILA section 103(bb)(4) provides that ``[f]or 
purposes of paragraph [103(bb)](1)(B), points and fees shall include 
. * * *'' TILA section 103(bb)(1)(B), however, concerns the 
calculation of the APR for HOEPA coverage. To give meaning to the 
statute as amended, the Bureau interprets TILA section 103(bb)(4) as 
cross-referencing the points and fees coverage test in TILA section 
103(bb)(1)(A)(ii), rather than the APR calculation in TILA section 
103(bb)(1)(B).
    \90\ See TILA section 129C(b)(2)(A)(vii) and (C)(i) (setting 
forth points and fees requirements for qualified mortgages). TILA 
section 129C(b)(2)(C)(i) cross-references the definition of points 
and fees in TILA section 103(aa)(4), which the Dodd-Frank Act re-
designated as TILA section 103(bb)(4).
---------------------------------------------------------------------------

    As noted in the 2012 HOEPA Proposal, the Board proposed to 
implement the Dodd-Frank Act's amendments to the definition of points 
and fees for both qualified mortgages and high-cost mortgages as part 
of its 2011 ATR Proposal. Thus, for example, the 2011 ATR Proposal 
would have implemented the Dodd-Frank Act's exclusion of certain 
private mortgage insurance (PMI) premiums from points and fees, as well 
as added loan originator compensation and prepayment penalties to that 
definition. The Board proposed to implement those changes in Sec.  
226.32(b)(1) and (2) \91\ and to revise and add corresponding 
commentary.\92\
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    \91\ Whereas the Bureau's Regulation Z is codified at 12 CFR 
part 1026, the Board's Regulation Z was codified at 12 CFR part 226.
    \92\ See 76 FR 27390, 27398-406, 27481-82, 27487-89 (May 11, 
2011). In its 2011 ATR Proposal, the Board noted that its proposed 
amendments to Sec.  226.32(b)(1) and (2) were limited to the 
definition of points and fees and that the 2011 ATR Proposal was not 
proposing to implement any of the other high-cost mortgage 
amendments in TILA. See id. at 27398. Thus, the Board noted that, if 
its ATR Proposal were finalized prior to the rule on high-cost 
mortgages, the calculation of the points and fees threshold for 
qualified mortgages and high-cost mortgages would be different, but 
the baseline definition of points and fees would be the same. See 
id. at 27399. For example, the Board's 2011 ATR Proposal did not 
propose to implement the statutory changes to the points and fees 
threshold for high-cost mortgages that exclude from the threshold 
calculation ``bona fide third-party charges not retained by the 
mortgage originator, creditor, or an affiliate of the creditor or 
mortgage originator'' and that permit creditors to exclude certain 
``bona fide discount points,'' even though the Board proposed to 
implement identical provisions of the Dodd-Frank Act defining the 
points and fees threshold for qualified mortgages. See id. at 27398-
99.

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[[Page 6891]]

    When the Bureau issued its 2012 HOEPA Proposal, the Bureau was in 
the process of finalizing the Board's 2011 ATR Proposal, including 
evaluating comments received concerning the Board's proposed amendments 
to the definition in Regulation Z of points and fees, Sec.  
226.32(b)(1) and (2). The Bureau believed that issuing separate, 
different proposals to implement the Dodd-Frank Act's amendments to the 
definition of points and fees, one for high-cost mortgages and one for 
qualified mortgages, had the potential to cause compliance burden and 
uncertainty. The Bureau nevertheless needed to address in the 2012 
HOEPA Proposal certain aspects of the points and fees definition, most 
significantly the interaction of points and fees with the Bureau's 
proposed more inclusive definition of the finance charge, the 
application of points and fees to HELOCs, and the correction of certain 
internal cross-references.
    To address those issues while also attempting to minimize 
uncertainty, the Bureau republished in the 2012 HOEPA Proposal the 
Board's proposed amendments to Sec.  226.32(b)(1) and (2) substantially 
as set forth in the Board's 2011 ATR Proposal, with revisions only to 
address the issues noted above and to conform terminology to existing 
Regulation Z provisions. 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 definitions in 
proposed Sec.  1026.32(b)(1) and (2) to the high-cost mortgage context.
    The Bureau received numerous comments concerning proposed Sec.  
1026.32(b)(1) and (2) from both industry and consumer groups, the 
majority of which did not specifically address newly-proposed language 
or to the application of the definition to the high-cost mortgage 
context. The comments largely reiterated comments that the Board and 
the Bureau had received in response to the 2011 ATR Proposal. For 
example, commenters generally requested greater clarity with respect to 
whether certain charges (e.g., charges not known at consummation) must 
be counted in points and fees. Industry commenters also requested that 
the Bureau either exclude or limit the amount of certain types of 
charges that must be included (e.g., affiliate charges and loan 
originator compensation). The Bureau addresses below the comments 
received in response to proposed Sec.  1026.32(b)(1) and (2) in the 
2012 HOEPA Proposal. Similarly, comments received concerning these same 
provisions as they relate to the Board's 2011 ATR Proposal are 
addressed in the Bureau's 2013 ATR Final Rule. The Bureau is 
coordinating the 2013 HOEPA and 2013 ATR Final Rules to ensure a 
consistent and cohesive regulatory framework for points and fees. Thus, 
the 2013 ATR Final Rule is publishing regulation text and commentary 
concerning the definition of points and fees for closed-end credit 
transactions, as adopted by that rulemaking in Sec.  1026.32(b)(1). 
Regulation text and commentary for Sec.  1026.32(b)(1), though 
discussed in the section-by-section analysis below, is not republished 
in this Federal Register notice but instead is indicated with 
asterisks.
32(b)(1)
Closed-End Points and Fees
    Existing Sec.  1026.32(b)(1) defines ``points and fees'' by listing 
included charges in Sec.  1026.32(b)(1)(i) through (iv).\93\ As 
discussed below, the Board's 2011 ATR Proposal would have revised Sec.  
226.32(b)(1)(i) through (iv) to reflect amendments to TILA by the Dodd-
Frank Act, and would have added new Sec.  226.32(b)(1)(v) and (vi) 
concerning the inclusion in points and fees of certain prepayment 
penalties. The Bureau's 2012 HOEPA Proposal would have amended existing 
Sec.  1026.32(b)(1), as that provision was proposed in the 2011 ATR 
Proposal, to clarify that the charges listed in proposed Sec.  
1026.32(b)(1) are the charges that must be included in the points and 
fees calculation for closed-end credit transactions. (The Bureau's 2012 
HOEPA Proposal would have set forth a separate definition of points and 
fees for HELOCs in proposed Sec.  1026.32(b)(3)).\94\ As discussed 
below, the Bureau is adopting proposed Sec.  1026.32(b)(1) in the 2013 
ATR Final Rule with certain changes to respond to concerns raised by 
commenters. Final Sec.  1026.32(b)(1) as adopted in the 2013 ATR Final 
Rule clarifies, as proposed, that the provision applies to closed-end 
credit transactions.\95\
---------------------------------------------------------------------------

    \93\ In brief, these existing provisions require the inclusion 
in points and fees for high-cost mortgages of all non-interest items 
included in the finance charge (Sec.  1026.32(b)(1)(i)), all 
compensation paid to mortgage brokers (Sec.  1026.32(b)(1)(i)), real 
estate-related charges paid to an affiliate of the creditor (Sec.  
1026.32(b)(1)(iii)), and certain credit insurance and debt 
suspension and cancellation premiums (Sec.  1026.32(b)(1)(iv)).
    \94\ The Bureau adopts proposed Sec.  1026.32(b)(3) as Sec.  
1026.32(b)(2) in this final rule.
    \95\ Proposed Sec.  1026.32(b)(3) defining points and fees for 
HELOCs is finalized as Sec.  1026.32(b)(2) in the 2013 HOEPA Final 
Rule. See the section-by-section analysis of Sec.  1026.32(b)(2) 
below.
---------------------------------------------------------------------------

    Payable at or before consummation. Section 1431(a) of the Dodd-
Frank Act amended the HOEPA points and fees coverage test in TILA 
section 103(bb)(1)(A)(ii) by providing for the inclusion in points and 
fees for high-cost mortgages of ``the total points and fees payable in 
connection with the transaction,'' as opposed to ``the total points and 
fees payable by the consumer at or before closing'' (emphases added). 
The 2012 HOEPA Proposal would have implemented this change in proposed 
Sec.  1026.32(a)(1)(ii). The Bureau noted in its 2012 HOEPA proposal 
that the practical result of this change would have been that--unless 
otherwise specified--any item listed in the points and fees definitions 
for closed- and open-end credit transactions would have been counted 
toward the points and fees threshold for high-cost mortgages even if 
the item were payable after consummation or account opening. The 
exceptions would have been certain mortgage insurance premiums and 
charges for credit insurance and debt cancellation and suspension 
coverage. TILA expressly states that those premiums and charges are 
included in points and fees only if payable at or before closing. See 
TILA section 103(bb)(1)(C) (mortgage insurance) and TILA section 
103(bb)(4)(D) (credit insurance and debt cancellation and suspension 
coverage).
    The Bureau's proposed inclusion in points and fees for high-cost 
mortgages of ``the total points and fees payable in connection with the 
transaction'' was consistent with the proposed inclusion in points and 
fees for qualified mortgages of ``the total points and fees * * * 
payable in connection with the loan'' in the Board's 2011 ATR Proposal. 
As discussed in the Bureau's 2013 ATR Final Rule, the Board expressed 
concern in the 2011 ATR Proposal that some fees that occur after 
closing, such as fees to modify a loan, might be deemed to be points 
and fees under the new framework. The Board thus requested comment in 
the 2011 ATR Proposal on whether other fees (i.e., in addition to 
certain mortgage insurance premiums and charges for credit insurance 
and debt cancellation and suspension coverage) should be included in 
points and fees only if they are ``payable at or before closing.''
    As discussed in greater detail in the Bureau's 2013 ATR Final Rule, 
both industry and consumer group commenters expressed concern (either 
in response to the 2011 ATR Proposal, the 2012 HOEPA Proposal, or both) 
that the general requirement to include in points and fees charges 
``payable in connection with the transaction'' introduced uncertainty 
into the points and fees calculation by, for example, making it unclear 
whether certain charges that might not be known (or

[[Page 6892]]

knowable) as of consummation would need to be included. One industry 
commenter thus recommended that the Bureau clarify that items included 
in the finance charge but paid after consummation are carved out of 
points and fees. One consumer group commenter suggested that the Bureau 
replace the ``payable in connection with the transaction'' phrasing 
with the general requirement to include in points and fees charges 
``known at or before'' consummation or account opening. The commenter 
noted that the ``known at or before'' standard would (1) Clarify that 
charges financed through the loan amount are included in points and 
fees, (2) prevent creditors from evading the points and fees test by 
requiring consumers to pay charges after consummation, and (3) enable 
creditors to calculate the amount of points and fees with certainty at 
or before consummation.
    As discussed in the 2013 ATR Final Rule, the Dodd-Frank Act 
provides that for the points and fees tests for both high-cost 
mortgages and qualified mortgages, the 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 appreciates, however, that creditors 
need certainty in calculating points and fees so they can ensure that 
they are not exceeding the points and fees thresholds for high-cost 
mortgages (or that they are not exceeding the points and fees cap for 
qualified mortgages). The Bureau thus interprets the ``in connection 
with'' requirement in TILA section 103(bb)(1)(A)(ii) for high-cost 
mortgages as limiting the universe of charges that need to be included 
in points and fees.\96\ Specifically, to clarify when charges or fees 
are ``in connection with'' a transaction, the Bureau is specifying in 
Sec.  1026.32(b)(1) in the 2013 ATR Final Rule that fees or charges are 
included in points and fees only if they are ``known at or before 
consummation.''
---------------------------------------------------------------------------

    \96\ The Bureau is adopting the same interpretation for points 
and fees for qualified mortgages in the 2013 ATR Final Rule. See the 
section-by-section analysis of Sec.  1026.32(b)(1) therein.
---------------------------------------------------------------------------

    As discussed in detail in the 2013 ATR Final Rule, the Bureau also 
is adding new comment 32(b)(1)-1 to explain when fees or charges are 
known at or before consummation. The comment explains that charges for 
a subsequent loan modification generally are not 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.\97\ Comment 32(b)(1)-1 also clarifies that the maximum 
prepayment penalties that may be charged or collected under the terms 
of a mortgage loan are known at or before consummation and are included 
in points and fees under Sec.  1026.32(b)(1)(iv), even though the 
consumer will pay them, if ever, sometime after consummation.\98\ In 
addition, comment 32(b)(1)-1 notes that, under Sec.  
1026.32(b)(1)(i)(C)(1) and (iii), certain premiums or other charges for 
PMI or credit insurance must 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.
---------------------------------------------------------------------------

    \97\ A few industry commenters requested that the Bureau clarify 
that servicing charges are excluded from points and fees. The Bureau 
notes that the guidance in comment 32(b)(1)-1 as adopted in the 2013 
ATR Final Rule applies equally to these types of charges; thus, they 
must be included in points and fees only if known at or before 
consummation.
    \98\ The Bureau notes that the inclusion of prepayment penalties 
in points and fees is an exception to the general rule that a 
creditor must count only those charges that the creditor knows will 
be imposed. This is a result of the fact that TILA expressly 
requires the maximum prepayment penalties that may be charged in 
connection with a transaction to be counted in points and fees.
---------------------------------------------------------------------------

32(b)(1)(i)
    Prior to the Dodd-Frank Act, TILA section 103(aa)(4)(A) provided 
that points and fees includes all items included in the finance charge, 
except interest or the time-price differential. This provision (the 
finance charge prong of points and fees) is implemented in existing 
Sec.  1026.32(b)(1)(i). The Dodd-Frank Act did not specifically amend 
TILA section 103(aa)(4)(A). Nevertheless, both the Board's 2011 ATR 
Proposal and the Bureau's 2012 HOEPA Proposal proposed several 
revisions to Sec.  1026.32(b)(1)(i) and comment 32(b)(1)(i)-1.
    First, in its 2011 ATR Proposal, the Board proposed to revise 
existing language in Regulation Z that requires the inclusion in points 
and fees of ``all items required to be disclosed under Sec.  1026.4(a) 
and 1026.4(b).'' 12 CFR 1032(b)(1)(i). Because Sec.  1026.4 does not 
itself require disclosure of the finance charge, the Board proposed to 
revise this language to read: ``all items considered to be a finance 
charge under Sec.  [1026.4(a)] and [1026.4(b)].'' The Board also 
proposed certain clarifying changes to comment 32(b)(1)(i)-1.
    In addition to re-publishing the Board's proposed change to Sec.  
1026.32(b)(1)(i), proposed Sec.  1026.32(b)(1)(i) in the Bureau's 2012 
HOEPA Proposal would have amended the finance charge prong of the 
points and fees definition to ensure that additional charges were not 
included in points and fees as a result of the more inclusive 
definition of the finance charge proposed in the Bureau's 2012 TILA-
RESPA Integration Proposal. The Bureau believed that the proposed 
amendment to Sec.  1026.32(b)(1)(i) was necessary to avoid a 
potentially unwarranted expansion in HOEPA coverage through an increase 
in the finance charge.
    In response both to the Board's 2011 ATR Proposal and to Bureau's 
2012 HOEPA Proposal, several industry commenters expressed concern that 
the proposed definition of points and fees was overbroad because it 
included all items considered to be a finance charge. The commenters 
asserted that several items that are included in the finance charge 
under Sec.  1026.4(b) are vague or inapplicable in the context of 
mortgage transactions, or that they duplicate items specifically 
addressed in other provisions of the points and fees test, thus making 
the points and fees calculation internally inconsistent. Several 
industry commenters also requested clarification about whether specific 
fees and charges are included in points and fees. For example, at least 
two commenters asked that the Bureau clarify whether (and if so, to 
what extent) interest, real estate agents' fees, settlement agent 
costs, hazard insurance premiums, property taxes, Sec.  1026.4(c)(7) 
charges, appraisal fees, servicing fees, mortgage insurance premiums, 
discounts for payment other than by credit, and various optional 
charges, are included in points and fees. The Bureau responds to these 
comments below, but generally notes that the finance charge as defined 
in Sec.  1026.4 continues to be the starting point for points and fees. 
Once a creditor has determined whether a charge would be included in 
points and fees as a finance charge that is known at or before 
consummation, then a creditor should apply the more specific points and 
fees provisions in Sec.  1026.32(b)(1)(i)(A) through (F) to determine 
whether the charge is excluded. Likewise, even if a creditor has 
determined that a charge is excluded from points and fees because it is 
not a finance charge, the creditor must apply the more specific points 
and fees provisions in Sec.  1026.32(b)(1)(ii) through (vi) to 
determine whether the charge nonetheless must be included in points and 
fees.
    In response to the 2012 HOEPA Proposal, some industry commenters

[[Page 6893]]

also generally urged the Bureau to clarify that additional charges 
would not be brought into points and fees merely by operation of the 
Bureau's proposed more inclusive definition of the finance charge. 
Other commenters, particularly consumer groups, expressed 
dissatisfaction with the Bureau's proposed method for addressing the 
more inclusive finance charge in Sec.  1026.32(b)(1)(i), generally 
stating that the Bureau's approach was needlessly complicated and that 
the Dodd-Frank Act's exclusion of bona fide third-party charges in TILA 
section 103(bb)(1)(A)(ii) adequately addressed any concerns about 
unwarranted fees being brought into the points and fees definition 
through the expanded finance charge.
    As discussed in part III above, the Bureau will be determining 
whether to adopt its proposed more inclusive finance charge definition 
when it finalizes the 2012 TILA-RESPA Integration Proposal, rather than 
in January 2013. Accordingly, the Bureau neither addresses comments 
relating to, nor finalizes in this rulemaking, the 2012 HOEPA 
Proposal's amendment to the definition of points and fees for closed-
end credit transactions to address the more Bureau's proposed more 
inclusive finance charge.
    The Bureau otherwise is adopting proposed Sec.  1026.32(b)(1)(i) in 
the 2013 ATR Final Rule substantially as proposed in the 2011 ATR 
Proposal and the 2012 HOEPA Proposal, but with certain additions and 
clarifications in the commentary to Sec.  1026.32(b)(1)(i) (as well as 
in other parts of the points and fees calculation) to address 
commenters' requests for clarification about whether certain fees are 
included in or excluded from the calculation. These additions and 
clarifications also are discussed in detail in the section-by-section 
analysis of Sec.  1026.32(b)(1)(i) in the Bureau's 2013 ATR Final Rule.
    With respect to certain of the commenters' specific concerns about 
whether particular items (e.g., discounts offered to induce payment for 
a purchase by cash and settlement agent charges), the Bureau notes that 
creditors should follow Sec.  1026.4 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 settlement 
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.
32(b)(1)(i)(A)
    TILA section 103(aa)(4)(A) historically has provided that points 
and fees includes all items included in the finance charge, except 
interest or the time-price differential. This provision (the finance 
charge prong of points and fees) is implemented in existing Sec.  
1026.32(b)(1)(i). For organizational purposes, the Board in its 2011 
ATR Proposal set forth new Sec.  226.32(b)(1)(i)(A) to implement the 
pre-existing exclusion of interest from points and fees. In its 2012 
HOEPA Proposal, the Bureau republished the Board's proposed Sec.  
226.32(b)(1)(i)(A) without change as Sec.  1026.32(b)(1)(i)(A). The 
Bureau adopts proposed Sec.  1026.32(b)(1)(i)(A) in the 2013 ATR Final 
Rule, as proposed.
32(b)(1)(i)(B)
    The Dodd-Frank Act did not amend TILA section 103(aa)(4)(A) 
concerning the inclusion in points and fees of non-interest items in 
the finance charge. However, the Dodd-Frank Act added several 
provisions to TILA that provide for the exclusion from points and fees 
of certain items that otherwise would be included in points and fees 
under the finance charge prong. One such item is premiums for 
government mortgage insurance.\99\ Specifically, section 1431 of the 
Dodd-Frank Act added new TILA section 103(bb)(1)(C), which excludes all 
government mortgage insurance premiums from the calculation of points 
and fees. Because such premiums otherwise would be included in points 
and fees as an item included in the finance charge, the Board in its 
2011 ATR Proposal proposed to implement new TILA section 103(bb)(1)(C) 
in new Sec.  226.32(b)(1)(i)(B), as an exclusion from the finance 
charge prong of points and fees.\100\
---------------------------------------------------------------------------

    \99\ These other items are discussed in the section-by-section 
analysis of Sec.  1026.32(b)(1)(i)(C) through (F) below.
    \100\ See 76 FR 27390, 27400-02, 27481, 27487-88 (May 11, 2011). 
The Board's proposed Sec.  226.32(b)(1)(i)(B) also would have 
excluded certain PMI premiums from points and fees. Those exclusions 
are addressed in the section-by-section analysis of Sec.  
1026.32(b)(1)(i)(C) below.
---------------------------------------------------------------------------

    In implementing the government mortgage insurance premium exclusion 
provided by new TILA section 103(bb)(1)(C), the Board proposed to 
exclude from points and fees not only mortgage insurance premiums under 
government programs, but also charges for mortgage guaranties under 
government programs.\101\ The Board stated that it interpreted the 
statute to exclude such guaranties, and that its proposal was supported 
by its authority under TILA section 105(a) to make adjustments to 
facilitate compliance with and effectuate the purposes of TILA. Both 
the U.S. Department of Veterans Affairs (VA) and the USDA expressed 
concerns to the Board that, if charges for guaranties provided by those 
agencies and State agencies were included in points and fees, their 
loans might exceed high-cost mortgage thresholds and the cap for 
qualified mortgages, thereby disrupting these programs and jeopardizing 
an important source of credit for many consumers.
---------------------------------------------------------------------------

    \101\ Id. at 27400-01.
---------------------------------------------------------------------------

    The Bureau's 2012 HOEPA Proposal would have implemented the 
exclusion from points and fees of government mortgage insurance 
premiums and guaranty fees as proposed by the Board in Sec.  
226.32(b)(1)(i)(B) and comment 32(b)(1)(i)-2, with only minor wording 
changes for consistency with Regulation Z. In excluding guaranty fees, 
the Bureau, like the Board in its 2011 ATR Proposal, would have 
exercised its authority under TILA section 105(a) to make adjustments 
to facilitate compliance with and effectuate the purposes of TILA. For 
the same reasons stated by the Board in its 2011 ATR Proposal, and as 
further explained in the Bureau's 2013 ATR Final Rule, the Bureau 
believes that exercising its authority under TILA section 105(a) to 
exclude government guaranty fees from points and fees is appropriate to 
ensure access to credit through Federal and State government programs.
    The Bureau did not receive any comments in response to its 2012 
HOEPA Proposal objecting to the exclusion from points and fees of 
government mortgage insurance premiums or guaranty fees.\102\ The 
Bureau is adopting these exclusions in the Bureau's 2013 ATR Final Rule 
substantially as proposed in the 2011 ATR and 2012 HOEPA Proposals, but 
with clarifying revisions that are discussed in greater detail in the 
section-by-section analysis of Sec.  1026.(b)(1)(i)(B) in the 2013 ATR 
Final Rule. For instance, the Bureau is adding an example to comment 
32(b)(1)(i)(B)-1 to clarify that mortgage guaranty fees under 
government programs, such as VA and USDA funding fees, are excluded 
from points and fees.
---------------------------------------------------------------------------

    \102\ As discussed in the section-by-section analysis of Sec.  
1026.(b)(1)(i)(C), however, the Bureau received comments concerning 
the different treatment for points and fees of government and PMI 
premiums.
---------------------------------------------------------------------------

32(b)(1)(i)(C)
    As added by the Dodd-Frank Act, TILA section 103(bb)(1)(C) excludes 
certain PMI premiums from points and fees for high-cost mortgages and

[[Page 6894]]

qualified mortgages. Specifically, TILA section 103(bb)(1)(C)(ii) 
provides that points and fees shall exclude any amount of PMI premiums 
payable at or before consummation 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. TILA section 
103(bb)(1)(C)(iii) provides for the exclusion from points and fees of 
any mortgage insurance premium paid by the consumer after consummation. 
As with government mortgage insurance premiums and guarantees, because 
such PMI premiums otherwise would be included in points and fees as an 
item included in the finance charge, the Board proposed to implement 
the new exclusion in Sec.  226.32(b)(1)(i)(B) and comments 32(b)(1)(i)-
3 and -4, as an exclusion from the finance charge prong of points and 
fees.\103\
---------------------------------------------------------------------------

    \103\ See 76 FR 27390, 27401-02 (May 11, 2011).
---------------------------------------------------------------------------

    The 2012 HOEPA Proposal's proposed Sec.  1026.32(b)(1)(i)(B) and 
comments 32(b)(1)(i)-3 and -4 republished the Board's proposed 
provisions concerning PMI premiums with only minor changes for 
consistency with Regulation Z. The Bureau's 2012 HOEPA Proposal thus 
would have excluded from points and fees, as required by amended TILA 
section 103(bb)(1)(C): (1) All up-front PMI premiums, but only to the 
extent that such premiums did not exceed government-sponsored premiums 
and were refundable to the consumer on a pro rata basis, and (2) all 
PMI premiums payable after consummation.
    Several industry commenters objected to the 2012 HOEPA Proposal's 
treatment of PMI premiums for closed-end points and fees. Industry 
commenters generally voiced the same objections to this provision that 
they voiced in response to the Board's 2011 ATR Proposal. Specifically, 
some industry commenters criticized what they viewed as different 
treatment of PMI and government insurance premiums and argued that PMI 
premiums should be excluded from points and fees altogether, even if 
the premiums do not satisfy the statutory standard for exclusion. These 
commenters stated that PMI provides substantial benefits to consumers 
and noted that the 2012 HOEPA Proposal was likely to incentivize 
creditors to originate FHA loans rather than loans requiring PMI if FHA 
premiums are given more favorable treatment in points and fees. One 
such commenter stated that driving consumers to FHA loans would be 
problematic because FHA's insurance book has already grown too large 
and is at risk of becoming actuarially unsound. Another commenter noted 
that comparing up-front mortgage insurance premiums for conventional 
loans to such premiums for FHA loans is problematic for consumers 
because FHA premiums are structured to have an up-front payment 
followed by monthly payments, whereas with PMI a consumer can elect to 
pay a single, up-front premium, to pay on a monthly basis, or to pay 
through rate. Under the proposal, the commenter argued, consumers would 
be less likely to be able to choose a single, up-front premium. One 
commenter argued that tying PMI premiums to up-front government 
premiums would require conventional lenders to become experts in FHA 
loans. Some such commenters suggested that all mortgage insurance 
premiums payable at or before consummation, whether government or 
private and regardless of amount, should be excluded from points and 
fees.
    Other industry commenters objected to the Bureau's proposed 
implementation of the statutory distinction that would favor refundable 
PMI premiums over nonrefundable premiums. These commenters noted that 
nonrefundable premiums tend to be less expensive for consumers than 
refundable premiums.
    Finally, some commenters expressed uncertainty as to the precise 
rule for inclusion of PMI premiums payable at or before consummation in 
points and fees. It was noted that proposed Sec.  
1026.32(b)(1)(i)(B)(2), as written, could have been interpreted to 
require inclusion of the entire PMI premium if it exceeded the FHA 
insurance premium, rather than merely the inclusion of the portion of 
the premium in excess of the FHA premium. A few commenters also 
expressed uncertainty about how to complete the FHA premium comparison 
when originating conventional loans, particularly loans that would not 
qualify for FHA insurance (e.g., because their principal balance is too 
high).
    These comments on the Bureau's 2012 HOEPA Proposal generally were 
consistent with concerns raised in response to the Board's 2011 ATR 
Proposal. Thus, commenters' concerns primarily are addressed in the 
section-by-section analysis of Sec.  1026.32(b)(1)(i)(C) in the 2013 
ATR Final Rule. As discussed in greater detail therein, the Bureau is 
finalizing proposed Sec.  1026.32(b)(1)(i)(B) concerning PMI premiums 
in the 2013 ATR Final Rule substantially as proposed in the 2011 ATR 
and 2012 HOEPA Proposals. However, the Bureau finalizes the provision 
in Sec.  1026.32(b)(1)(i)(C) and divides it into two parts. The first 
part, Sec.  1026.32(b)(1)(i)(C)(1), addresses PMI premiums payable at 
or before consummation. The second part, Sec.  1026.32(b)(1)(i)(C)(2), 
addresses PMI premiums payable after consummation.
    As noted in the 2013 ATR Final Rule, with respect to the comments 
requesting that all PMI premiums be excluded from points and fees, the 
Bureau notes that Congress enacted TILA section 103(bb)(1)(C), which 
created different treatment of government and PMI premiums and 
prescribed specific and detailed conditions for excluding PMI premiums 
(i.e., based on the amount of the premium and whether it is 
refundable). The Bureau does not believe it would be appropriate to 
exercise its exception authority to reverse Congress's decision.
    The Bureau acknowledges, however, that there is a need for 
clarification as to what portion of any PMI premium payable at or 
before consummation must be included in points and fees. Thus, as 
discussed more fully in the 2013 ATR Final Rule, the Bureau adopts in 
that rulemaking clarifying changes that, among other things, specify 
that only the portion of a PMI premium payable at or before 
consummation that exceeds the government premium is included in 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 percent 
of the base loan amount.\104\ 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.
---------------------------------------------------------------------------

    \104\ See Department of Housing and Urban Development, Mortgagee 
Letter 12-4 (Mar. 6, 2012), available at https://portal.hud.gov/hudportal/documents/huddoc?id=12-04ml.pdf.
---------------------------------------------------------------------------

32(b)(1)(i)(D)
    TILA section 103(bb)(1)(A)(ii) excludes from points and fees for

[[Page 6895]]

purposes of determining whether a transaction is a high-cost mortgage 
bona fide third-party charges not retained by the creditor, loan 
originator, or an affiliate of either. This bona fide third-party 
charge exclusion from points and fees for high-cost mortgages is 
identical to the exclusion of such charges from points and fees for 
qualified mortgages under TILA section 129C(b)(2)(C), which the Board 
proposed to implement in its 2011 ATR Proposal in Sec.  
226.43(e)(3)(ii)(A).\105\ Such a bona fide third-party charge would 
include, for example, a counseling fee paid by the consumer to a HUD-
certified homeownership counseling organization to receive the 
counseling required for high-cost mortgages under Sec.  
1026.34(a)(5).\106\ For consistency and to ease compliance, the Bureau 
proposed in its 2012 HOEPA Proposal to implement the bona fide third-
party charge exclusion for high-cost mortgages in proposed Sec.  
1026.32(b)(5)(i) in a manner that mirrored in all significant respects 
the Board's proposed Sec.  226.43(e)(3)(ii)(A) concerning such 
charges.\107\
---------------------------------------------------------------------------

    \105\ See 76 FR 27390, 27465 (May 11, 2011).
    \106\ This was noted in Sec.  1026.34(a)(5)(v) and comment 
34(a)(5)(v)-1 of the 2012 HOEPA Proposal.
    \107\ Proposed Sec.  1026.32(b)(5)(i) in the 2012 HOEPA Proposal 
would have differed from the proposed Sec.  226.43(e)(3)(ii)(A) in 
the Board's 2011 ATR Proposal in one minor respect to address the 
application of HOEPA and, in turn, the bona fide third-party charge 
exclusion, to HELOCs. See the section-by-section analysis of Sec.  
1026.32(b)(2)(i)(D) below.
---------------------------------------------------------------------------

    Specifically, proposed Sec.  1026.32(b)(5)(i) in the 2012 HOEPA 
Proposal would have excluded from the points and fees calculation for 
high-cost mortgages any bona fide third-party charge not retained by 
the creditor, loan originator, or an affiliate of either, unless the 
charge was a PMI premium that was required to be included in closed-end 
points and fees under proposed Sec.  1026.32(b)(1)(i)(B). As just 
discussed in the section-by-section analysis of Sec.  
1026.32(b)(1)(i)(C), the Dodd-Frank Act amended TILA to add section 
103(bb)(1)(C)(ii), which excludes only certain PMI premiums from the 
points and fees calculation for high-cost mortgages. Thus, the Bureau 
would have implemented TILA's general exclusion of bona fide third-
party charges from the points and fees calculation for high-cost 
mortgages in proposed Sec.  1026.32(b)(5)(i) with the caveat that 
certain PMI premiums must be included in points and fees for closed-end 
credit transactions as set forth in proposed Sec.  
1026.32(b)(1)(i)(B).\108\ In other words, where one portion of the 
statutory points and fees provision would exclude the charge (the 
general provision) and another would include it (the specific 
provision), the Bureau interpreted TILA to require the charge to be 
included in the calculation.
---------------------------------------------------------------------------

    \108\ See id. (proposing the same caveat to the bona fide third-
party charge exclusion for qualified mortgages).
---------------------------------------------------------------------------

    Proposed comment 32(b)(5)(i)-1 would have clarified that Sec.  
1026.36(a)(1) and comment 36(a)-1 provide additional guidance 
concerning the meaning of the term ``loan originator'' for purposes of 
Sec.  1026.32(b)(5)(i). Proposed comment 32(b)(5)(i)-2 would have 
provided an example for purposes of determining whether a charge may be 
excluded from points and fees as a bona fide third-party charge. 
Proposed comment 32(b)(5)(i)-3 addressing PMI premiums mirrored 
proposed comment 43(e)(3)(ii)-2 in the Board's 2011 ATR Proposal, 
except that proposed comment 32(b)(5)(i)-3 would have provided that it 
applies for purposes of determining whether a mortgage is a high-cost 
mortgage, rather than a qualified mortgage. Proposed comment 
32(b)(5)(i)-3 also would have specified that the comment applies to 
closed-end transactions.
    The Bureau received two main categories of comments concerning 
proposed Sec.  1026.32(b)(5)(i). First, several industry commenters 
stated that Congress intended the ``bona fide third-party charge'' 
exclusion to establish a ``bona fide'' standard, rather than a 
``reasonable'' standard, for the exclusion of all third-party charges 
from points and fees for high-cost mortgages (and qualified mortgages). 
These comments are addressed below in the section-by-section analysis 
of Sec.  1026.32(b)(1)(iii), which deals with the inclusion in points 
and fees of certain real estate-related charges paid to the creditor or 
an affiliate of the creditor.\109\
---------------------------------------------------------------------------

    \109\ This issue is also addressed in the section-by-section 
analysis of Sec.  1026.32(b)(1)(iii) in the 2013 ATR Final Rule.
---------------------------------------------------------------------------

    Second, GSE commenters argued, as they did in comments submitted in 
response to the Board's 2011 ATR Proposal, that loan-level price 
adjustments (LLPAs) should be excluded from points and fees for high-
cost mortgages as bona fide third-party charges. LLPAs are made by 
Fannie Mae and Freddie Mac when purchasing loans to offset perceived 
risks, such as a high loan-to-value ratio (LTV) or low credit score, 
among many other risk factors. The Board's 2011 ATR Proposal solicited 
comment on whether such charges, including charges in connection with 
similar risk-based price adjustments for mortgages held in portfolio, 
should be excluded from points and fees for qualified mortgages. As 
discussed in detail in the 2013 ATR Final Rule, 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. GSE commenters thus argued that these points should not 
be counted in points and fees for high-cost mortgages (or 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 103(bb)(1)(A)(ii) (or TILA section 129C(b)(2)(C)(i) for 
qualified mortgages). The GSE commenters noted that LLPAs did not exist 
when Sec.  1026.32 was originally adopted, so there has been no 
guidance on whether such charges should be included in, or excluded 
from, points and fees. The commenters stated that the lack of guidance 
is now an issue because of the revised points and fees definition and 
lower threshold for points and fees for high-cost mortgages following 
the Dodd-Frank Act.
    The GSE commenters, as well as certain industry commenters, worried 
that, without an exclusion for LLPAs, points and fees would quickly be 
consumed by these fees and loan originator compensation, such that 
loans could have trouble staying under the general 5 percent high-cost 
mortgage points and fees threshold. The GSE commenters stated that 
LLPAs meet the definition of a bona fide third-party charge as that 
term was proposed in the 2011 ATR and 2012 HOEPA Proposals, because the 
creditor does not retain the charge. In addition, LLPAs are set fees 
that are transparent and accessible via the GSEs' Web sites, so there 
is little risk of abuse. The commenters acknowledged that some 
creditors charge similar risk-based price adjustments to consumers even 
when holding loans in portfolio, but they argued that such risk-based 
price adjustments also could be excluded from points and fees if they 
were made publicly available, as the GSE's charges are, or disclosed to 
consumers as a third-party fee on the Bureau's proposed TILA-RESPA 
integrated disclosure form. Certain industry comments suggested that 
the Bureau clarify that LLPAs may be excluded from points and fees as 
bona fide discount points. Consumer groups did not comment on this 
issue.

[[Page 6896]]

    To ensure a streamlined definition of points and fees in the high-
cost mortgage and qualified mortgage contexts, the Bureau is adopting 
proposed Sec.  226.43(e)(3)(ii)(A) (from the 2011 ATR Proposal) and 
proposed Sec.  1026.32(b)(5)(i) as applied to closed-end credit 
transactions (from the 2012 HOEPA Proposal) in Sec.  
1026.32(b)(1)(i)(D) in the 2013 ATR Final Rule.\110\ The Bureau 
believes that this placement is sensible in the context of both 
rulemakings given that the items excluded through the bona fide third-
party charge exclusion would be counted in points and fees, if at all, 
as a finance charge.
---------------------------------------------------------------------------

    \110\ The exclusion of bona fide third-party charges from points 
and fees for HELOCs, which also was proposed in Sec.  
1026.32(b)(5)(i) in the 2012 HOEPA Proposal, is finalized in Sec.  
1026.32(b)(2)(1)(D), as discussed below.
---------------------------------------------------------------------------

    Section 1026.32(b)(1)(i)(D) as adopted in the 2013 ATR Final Rule 
retains the proposed caveat that the exclusion of bona fide third-party 
charges from points and fees is subject to the limitation that certain 
amounts of PMI premiums must sometimes be included in the calculation 
pursuant to Sec.  1026.32(b)(1)(i)(C). In addition, the 2013 ATR Final 
Rule adopts Sec.  1026.32(b)(1)(i)(D) with two new comments reflecting 
that the exclusion for bona fide third-party charges also is subject to 
the more specific points and fees provisions in Sec.  
1026.32(b)(1)(iii) and (iv). As adopted in the 2013 ATR Final Rule, 
Sec.  1026.32(b)(1)(i)(D) thus provides that a bona fide third-party 
charge not retained by the creditor, loan originator, or an affiliate 
of either is excluded from points and fees unless the charge is 
required to be included under Sec.  1026.32(b)(1)(i)(C) (PMI premiums), 
(iii) (certain real estate-related fees), or (iv) (credit insurance 
premiums). The final rule thus adheres to the approach that the 
specific statutory provisions regarding PMI (TILA section 
103(bb)(1)(C)), certain real estate-related fees (TILA section 
103(bb)(4)(C)), and credit insurance premiums (TILA section 
103(bb)(4)(D)) should govern whether these charges are included in 
points and fees, rather than the more general provisions regarding the 
exclusion of bona fide third-party charges in TILA sections 
103(bb)(1)(A)(ii) and 129C(b)(2)(C) for high-cost mortgages and 
qualified mortgages, respectively.
    As discussed in detail in the 2013 ATR Final Rule, the Bureau 
acknowledges that TILA sections 103(bb)(1)(A)(ii) and 129C(b)(2)(C) 
concerning bona fide third-party charges could 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). 
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) and 
129C(b)(2)(C). Under this reading, certain charges--such as for private 
mortgage insurance premiums--could initially, in step one, be included 
in points and fees. In step two, these charges would be excluded if 
they were bona fide third-party charges.
    However, 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. In support of this approach, the Bureau 
also invokes its authority under TILA section 105(a) to make such 
adjustments and exceptions as are necessary and proper to effectuate 
the purposes of TILA. The Bureau believes that Congress included 
specific provisions regarding these types of fees in part to deter the 
imposition of excessive fees. Allowing exclusion of these fees and 
charges if they are ``bona fide''--without meeting any of the other 
conditions specified by Congress--would undermine this purpose. 
Additionally, it would in effect nullify the specific conditions 
Congress set forth for exclusion from the points and fees calculation.
    As noted above, GSE commenters argued that points charged by 
creditors to offset LLPAs should be excluded from points and fees as 
bona fide third-party charges. 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. 
As noted in the 2013 ATR Final Rule, 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 in 
its 2011 ATR Proposal, 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 such 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, if points 
are charged to offset LLPAs, those points may not be excluded from 
points and fees as bona fide third-party charges. However, 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 be excluded 
from points and fees as bona fide discount points if they satisfy the 
requirements of Sec.  1026.32(b)(1)(i)(E) or (F).
    In light of the foregoing considerations, the Bureau is finalizing 
the exclusion of bona fide third-party charges from closed-end points 
and fees in Sec.  1026.32(b)(1)(i)(D) in the 2013 ATR Final Rule, with 
comments 32(b)(1)(i)(D)-1 through -4 providing further guidance 
concerning the interaction of the bona fide third-party charge 
exclusion with other points and fees provisions. See comments 
32(b)(1)(i)(D)-1 (third-party settlement agent charges), -2 (PMI 
premiums), -3 (real estate-related charges), and -4 (credit insurance 
premiums).
32(b)(1)(i)(E)
Exclusion of Up to Two Bona Fide Discount Points
    Section 1431(d) of the Dodd-Frank Act added new section 103(dd)(1) 
to TILA, which permits a creditor to exclude from points and fees for 
high-cost mortgages up to and including two bona fide discount points 
payable by the consumer in connection with the mortgage, but only if 
the interest rate from which the mortgage's interest rate will be 
discounted does not exceed by more than one percentage point (1) the 
average prime offer rate or (2) for loans secured by personal property, 
the average rate on a loan for which insurance is provided under Title 
I of the National Housing Act.\111\ New TILA section 103(dd)(1) for 
high-cost mortgages is substantially similar to new TILA section 
129C(b)(2)(C)(ii)(I). TILA section 129C(b)(2)(C)(ii)(I) provides for 
the exclusion of up to and including two bona fide discount points from 
points and fees for qualified mortgages, but only if the interest rate 
for the transaction before the discount does not exceed by more than 
one percentage point the average prime offer rate.\112\ The only 
difference between

[[Page 6897]]

new TILA section 103(dd)(1) (high-cost mortgages) and new TILA section 
129C(b)(2)(C)(ii)(I) (qualified mortgages) is that the high-cost 
mortgage provision provides for a special calculation to determine 
whether discount points may be excluded from points and fees for loans 
secured by personal property.
---------------------------------------------------------------------------

    \111\ See TILA section 103(dd)(1)(A) (average prime offer rate) 
and (B) (average rate on loans insured under Title I).
    \112\ See 76 FR 27390, 27465-67, 27485, 27504 (May 11, 2011).
---------------------------------------------------------------------------

    In the 2012 HOEPA Proposal, the Bureau proposed to implement the 
exclusion of up to two bona fide discount points from points and fees 
for high-cost mortgages in proposed Sec.  1026.32(b)(5)(ii)(A)(1) 
(loans secured by real property) and (2) (loans secured by personal 
property).\113\ The proposed provision generally would have been 
consistent with proposed Sec.  226.43(e)(3)(ii)(B) in the Board's 2011 
ATR Proposal, which would have implemented new TILA section 
129C(b)(2)(C)(ii)(I) for qualified mortgages. Specifically, proposed 
Sec.  1026.32(b)(5)(ii)(A)(1) would have permitted a creditor to 
exclude from points and fees for high-cost mortgages up to two bona 
fide discount points payable by the consumer, provided that the 
interest rate for the closed- or open-end credit transaction without 
such discount points would not exceed by more than one percentage point 
the average prime offer rate as defined in Sec.  1026.35(a)(2). 
Proposed Sec.  1026.32(b)(5)(ii)(A)(2) would have implemented the 
special calculation for determining whether up to two discount points 
could be excluded from the high-cost mortgage points and fees 
calculation for transactions secured by personal property. Thus, under 
proposed Sec.  1026.32(b)(5)(ii)(A)(2) a creditor extending credit 
secured by personal property could exclude from points and fees up to 
two bona fide discount points payable by the consumer, provided that 
the interest rate for the closed- or open-end credit transaction 
without such discount points would not exceed by more than one 
percentage point the average rate on loans insured under Title I of the 
National Housing Act (12 U.S.C. 1702 et seq.).
---------------------------------------------------------------------------

    \113\ In its 2012 HOEPA Proposal, the Bureau proposed to 
implement the exclusion of up to one bona fide discount point from 
the points and fees calculation for high-cost mortgages in Sec.  
1026.32(b)(5)(ii)(B)(1) and (2). See the section-by-section analysis 
of Sec.  1026.32(b)(1)(i)(F) below.
---------------------------------------------------------------------------

    Proposed comment 32(b)(5)(ii)-1 would have clarified how to 
determine, for purposes of the bona fide discount point exclusion in 
proposed Sec.  1026.32(b)(5)(ii)(A)(1) and (B)(1), whether a 
transaction's interest rate met the requirement not to exceed the 
average prime offer rate by more than one or two percentage points, 
respectively. Specifically, proposed comment 32(b)(5)(ii)-1 would have 
provided that the average prime offer rate for proposed Sec.  
1026.32(b)(5)(ii)(A)(1) and (B)(1) is the average prime offer rate that 
applies to a comparable transaction as of the date the interest rate 
for the transaction is set. Proposed comment 32(b)(5)(ii)-1 would have 
cross-referenced proposed comments 32(a)(1)(i)-1 and -2 for closed- and 
open-end credit transactions, respectively, for guidance as to 
determining the applicable average prime offer rate. Proposed comment 
32(b)(5)(ii)-1 also would have cross-referenced proposed comments 
43(e)(3)(ii)-3 and -4 for examples of how to calculate bona fide 
discount points for closed-end credit transactions secured by real 
property.
    The Bureau received several comments concerning the exclusion of 
discount points from points and fees for high-cost mortgages. The 
comments, which were from industry, generally requested that the Bureau 
use its authority to eliminate or loosen the requirement that the 
interest rate prior to the discount not exceed the average prime offer 
rate by the statutorily-prescribed amount. The commenters stated that 
the starting interest rate requirement is too restrictive and will mean 
that, in many cases, creditors will not be able to deduct any discount 
points from points and fees. Thus, for example, one commenter suggested 
that one percentage point be added to the margin above the average 
prime offer rate for jumbo loans and loans on second homes, which tend 
to have higher interest rates. A few industry commenters also requested 
that the Bureau clarify that discount points that meet the criteria are 
excluded from points and fees regardless of who pays them (i.e., the 
consumer, the seller, or another person, such as the consumer's 
employer).\114\ The Bureau did not receive any comments specifically on 
proposed comment 32(b)(5)(ii)-1; however, one industry commenter 
requested that the Bureau clarify whether the examples in proposed 
comments 43(e)(3)(ii)-3 and -4 in the 2011 ATR Proposal for performing 
the discount point calculation apply in the high-cost mortgage context.
---------------------------------------------------------------------------

    \114\ The Bureau also received comment on its proposed 
definition of the phrase ``bona fide.'' Those comments are addressed 
in the section-by-section analysis of Sec.  1026.32(b)(3) below.
---------------------------------------------------------------------------

    As noted in the 2013 ATR Final Rule, which received similar 
comments concerning the exclusion of bona fide discount points from the 
points and fees calculation for qualified mortgages, the starting 
interest rate limitations are prescribed in the statute. The Bureau 
recognizes that these limitations may circumscribe the ability of 
consumers to purchase more discount points to lower their interest 
rates. Nevertheless, Congress apparently concluded that there was a 
greater probability of consumer injury when consumers purchased more 
than two discount points or when consumers use discount points to buy 
down interest rates that exceed the average prime offer rate by more 
than two percentage points. In the absence of data or specific 
information suggesting a contrary conclusion, the Bureau declines to 
use its authority to adjust the statutory requirement.
    As to comments seeking guidance that discount points may be 
excluded if not directly paid by the consumer, the Bureau notes that 
creditors should continue to apply the basic rules of Regulation Z 
concerning whether points are included in the finance charge and, in 
turn, whether they are included in points and fees. For example, 
because seller's points are excluded from the finance charge under 
existing Sec.  1026.4(c)(5), they are not included in points and fees, 
regardless of whether they meet the bona fide discount point test for 
exclusion.
    In light of the foregoing considerations, the Bureau adopts in the 
2013 ATR Final Rule the exclusion from points and fees of up to two 
bona fide discount points substantially as proposed in the 2011 ATR and 
2012 HOEPA Proposals (for qualified mortgages and high-cost mortgages, 
respectively). However, to ensure a streamlined definition of points 
and fees in the high-cost mortgage and qualified mortgage contexts, the 
Bureau is finalizing proposed Sec.  226.43(e)(3)(ii)(B) (from the 2011 
ATR Proposal) and proposed Sec.  1026.32(b)(5)(ii)(A)(1) and (2) as 
applied to closed-end credit transactions (from the 2012 HOEPA 
Proposal) in Sec.  1026.32(b)(1)(i)(E) in the 2013 ATR Final Rule. 
Section 1026.32(b)(1)(i)(E)(1) sets forth the general rule, and Sec.  
1026.32(b)(1)(i)(E)(2) sets forth the special rule under HOEPA for 
personal property-secured loans. The Bureau believes that this 
placement is sensible in the context of both rulemakings given that the 
points excluded through the bona fide discount point exclusion would be 
counted in points and fees, if at all, through the finance charge 
prong.
    The 2013 ATR Final Rule finalizes proposed comment 32(b)(5)(ii)-1 
from the 2012 HOEPA Proposal as comment 32(b)(1)(i)(E)-2, with certain 
non-substantive changes. The 2013 ATR Final Rule also adopts as comment

[[Page 6898]]

32(b)(1)(i)(E)-1 a cross-reference to Sec.  1026.32(b)(3) for the 
definition of ``bona fide discount point,'' and as comment 
32(b)(1)(i)(E)-3 examples of how to calculate the exclusion of up to 
two bona fide discount points from points and fees. These comments are 
discussed in further detail in the section-by-section analysis of Sec.  
1026.32(b)(1)(i)(E) in the 2013 ATR Final Rule. The Bureau notes that 
finalizing the bona fide discount point exclusion for both qualified 
mortgages and high-cost mortgages in Sec.  1026.32(b)(1) should 
streamline compliance and alleviate any concern that the rules would be 
applied differently in the high-cost and qualified mortgage contexts.
32(b)(1)(i)(F)
Exclusion of Up to One Bona Fide Discount Point
    Section 1431(d) of the Dodd-Frank Act added new section 103(dd)(2) 
to TILA, which permits a creditor to exclude from points and fees for 
high-cost mortgages up to and including one bona fide discount point 
payable by the consumer in connection with the mortgage, but only if 
the interest rate from which the mortgage's interest rate will be 
discounted does not exceed by more than two percentage points (1) the 
average prime offer rate or (2) for loans secured by personal property, 
the average rate on a loan for which insurance is provided under Title 
I of the National Housing Act.\115\ New TILA section 103(dd)(2) for 
high-cost mortgages is substantially similar to new TILA section 
129C(b)(2)(C)(ii)(II) for qualified mortgages. TILA section 
129C(b)(2)(C)(ii)(II) provides for the exclusion of up to and including 
one bona fide discount point from points and fees for qualified 
mortgages, but only if the interest rate for the transaction before the 
discount does not exceed the average prime offer rate by more than two 
percentage points.\116\ The only difference between new TILA section 
103(dd)(2) for high-cost mortgages and new TILA section 
129C(b)(2)(C)(ii)(II) for qualified mortgages is that the high-cost 
mortgage provision provides for a special calculation to determine 
whether discount points may be excluded from points and fees for loans 
secured by personal property.
---------------------------------------------------------------------------

    \115\ See TILA section 103(dd)(2)(A) (average prime offer rate) 
and (B) (average rate on loans insured under Title I).
    \116\ See 76 FR 27390, 27465-67, 27485, 27504 (May 11, 2011).
---------------------------------------------------------------------------

    In the 2012 HOEPA Proposal, the Bureau proposed to implement the 
exclusion of up to one bona fide discount point from points and fees 
for high-cost mortgages in Sec.  1026.32(b)(5)(ii)(B)(1) (loans secured 
by real property) and (2) (loans secured by personal property). The 
proposed provision generally would have been consistent with proposed 
Sec.  226.43(e)(3)(ii)(C) in the Board's 2011 ATR Proposal, which would 
have implemented new TILA section 129C(b)(2)(C)(ii)(II) for qualified 
mortgages.\117\ Specifically, proposed Sec.  1026.32(b)(5)(ii)(B)(1) 
would have permitted a creditor to exclude from points and fees for 
high-cost mortgages up to one bona fide discount point payable by the 
consumer, provided that the interest rate for the closed- or open-end 
credit transaction without such discount point would not exceed by more 
than two percentage points the average prime offer rate, as defined in 
Sec.  1026.35(a)(2). Proposed Sec.  1026.32(b)(5)(ii)(B)(2) would have 
implemented the special calculation for determining whether up to one 
discount point could be excluded from points and fees for high-cost 
mortgages for transactions secured by personal property.
---------------------------------------------------------------------------

    \117\ See id.
---------------------------------------------------------------------------

    The Bureau did not receive any comments on proposed Sec.  
1026.32(b)(5)(ii)(B)(1) and (2) other than those addressed in the 
section-by-section analysis of Sec.  1026.32(b)(1)(i)(E) above, 
concerning the exclusion of up to two bona fide discount points from 
points and fees. As with that exclusion, and to ensure a streamlined 
definition of points and fees in the high-cost mortgage and qualified 
mortgage contexts, the Bureau is finalizing in the 2013 ATR Final Rule 
proposed Sec.  226.43(e)(3)(ii)(C) (from the 2011 ATR Proposal) and 
proposed Sec.  1026.32(b)(5)(ii)(B) as applied to closed-end credit 
transactions (from the 2012 HOEPA Proposal) in Sec.  
1026.32(b)(1)(i)(F). Section 1026.32(b)(1)(i)(F)(1) sets forth the 
general rule, and Sec.  1026.32(b)(1)(i)(F)(2) sets forth the special 
rule under HOEPA for personal property-secured loans.
    The 2013 ATR Final Rule also adopts in comment 32(b)(1)(i)(F)-1 a 
cross-reference to comments 32(b)(1)(i)(E)-1 and -2 for the definition 
of ``bona fide discount point'' and ``average prime offer rate,'' 
respectively, and in comment 32(b)(1)(i)(F)-3 an example of how to 
calculate the exclusion of up to one bona fide discount point from 
closed-end points and fees. These comments are discussed in further 
detail in the section-by-section analysis of Sec.  1026.32(b)(1)(i)(F) 
in the 2013 ATR Final Rule.
32(b)(1)(ii)
    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.\118\ This requirement is implemented in existing Sec.  
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).
---------------------------------------------------------------------------

    \118\ 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 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.
---------------------------------------------------------------------------

    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. Section 
1431 of the Dodd-Frank 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.\119\ Thus,

[[Page 6899]]

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 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.
---------------------------------------------------------------------------

    \119\ ``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).
---------------------------------------------------------------------------

    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 higher-priced 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.\120\ 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.
---------------------------------------------------------------------------

    \120\ 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).
---------------------------------------------------------------------------

    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); 
128(a)(18); 129B(b), (c); 129C(b)(2)(A)(vii), (C)(i).
    The Board's 2011 ATR Proposal proposed revisions to Sec.  
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, the Board's proposed Sec.  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 Sec.  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 Sec.  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 or a creditor to a loan originator, as defined in Sec.  
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 Sec.  226.32(b)(1)(i) would not be counted again under 
Sec.  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

[[Page 6900]]

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 Bureau's 2012 HOEPA Proposal largely republished the proposed 
revisions and additions to proposed Sec.  1026.32(b)(1)(ii) and related 
commentary in contained in the Board's 2011 ATR Proposal, with only 
non-substantive edits that, for example, clarified that the provisions 
would have applied to any closed-end credit transactions subject to 
Sec.  1026.32.
    The Bureau received a large number of comments on proposed Sec.  
1026.32(b)(1)(ii) and its related commentary in response to the 2012 
HOEPA Proposal. Most of the comments came from industry groups or 
individual institutions. As with other aspects of the definition of 
points and fees, industry commenters' concerns regarding this provision 
were similar to those that were raised in response to the Board's 2011 
ATR Proposal, which are addressed in detail in the preamble of the 
Bureau's 2013 ATR Final Rule. Industry commenters objected to the 
proposed inclusion of loan originator compensation in the points and 
fees calculation for high-cost mortgages for the following main 
reasons.
    Many industry commenters objected to the general requirement to 
include loan originator compensation in points and fees. Some of these 
commenters suggested that the Bureau should use its exception authority 
to exclude loan originator compensation from the calculation. Several 
commenters argued that consumers are already protected from harmful 
compensation practices by other Dodd-Frank Act rules, such as those 
proposed to be implemented in the Bureau's 2012 Loan Originator 
Proposal. Some such commenters asserted that the HOEPA proposal, by 
requiring permissible compensation to be counted toward HOEPA points 
and fees coverage, would undercut the value derived from the payments 
deemed proper under the Bureau's other rules. In addition, the 
commenters argued, including loan originator compensation in points and 
fees would constrain credit and harm consumers by, for example, 
increasing the number of loans that might exceed the HOEPA points and 
fees threshold.
    A number of industry commenters asserted, in particular, that loan 
originator compensation paid to individual employees should not be 
counted in points and fees. Some commenters stated that the proposed 
inclusion of loan originator compensation to employees is contrary to 
the intent of the statute, which the commenters argued was merely 
intended to cover business entities and not individuals. Other 
commenters stated, for example, that employee compensation is not a 
direct cost to the consumer and that it is indistinguishable from 
aspects of a company's overall cost and expenditure structure, such 
expenses for rent, marketing, or office supplies, which are not counted 
in points and fees.
    A number of commenters noted that including compensation to 
individual loan originators in points and fees would constitute double-
counting of costs, because loan originator compensation already is 
included in the cost of the loan, as an overhead charge. The commenters 
requested that the Bureau clarify, for example, that compensation paid 
by a lender to its own loan originator, which is not paid directly by 
the borrower but rather from the lender's profits or post-closing sale 
of the loan, should not be counted in points and fees. Similarly, at 
least one commenter requested that the Bureau clarify that lenders can 
assume that a fee paid to a broker includes any compensation paid to 
the broker's employees, and that the lender should have no 
responsibility to separately account for such payments. One commenter 
argued that, if compensation to mortgage broker employees is excluded, 
then compensation to retail loan officer employees should be excluded 
as well.
    Some industry commenters asserted that including loan originator 
compensation in points and fees is not only unnecessary in light of 
other Bureau rulemakings, but also that including it would lead to 
anomalous results, because otherwise identical loans may have different 
points and fees depending on which loan officer originates a loan 
(i.e., because better or more experienced loan originators tend to earn 
more compensation) or on when in the year a loan is originated (i.e., 
because compensation tends to increase throughout the year as periodic, 
volume-based bonus thresholds are met). Neither of these factors is 
indicative of the terms of the loan itself, but consumers' access to 
credit could depends on such factors, because creditors likely would 
choose not to originate a loan if its associated loan originator 
compensation would cause its points and fees to exceed the HOEPA 
threshold. Commenters stated that the effects of such anomalous results 
could be felt within one company (i.e., as between an experienced and a 
more junior loan officer), or between companies (i.e., with one company 
that compensates its loan officers more than another company).
    Industry commenters also asserted that developing company-wide 
systems to track employee compensation on a loan-by-loan basis would be 
highly burdensome, with little consumer benefit. The system changes 
that would be required would be complex, because there are so many 
variations in how compensation may be paid. Creditors would continue to 
face practical challenges even after such systems were established. 
Many compensation plans pay bonuses at the end of the month, period, or 
year, so determining compensation to be included at origination would 
be difficult. One result, commenters asserted, would be that the amount 
of compensation included in points and fees could be easily second-
guessed after the fact, which could be highly problematic (particularly 
for assignees) considering the risk of liability attendant to 
originating or purchasing a high-cost mortgage. For example, commenters 
asserted that such second-guessing could increase the risk that a loan 
might be determined to be a high-cost mortgage, even if it was not 
clear to the creditor at origination that it was a high-cost mortgage. 
Finally, some commenters noted that a rule requiring accurate 
determination of compensation at origination would require wholesale 
changes in compensation practices, which is more appropriately 
addressed in other rulemakings.
    Not only would tracking compensation be burdensome, but commenters 
requested additional guidance concerning when particular types of 
compensation would be required to be included in the calculation. For 
example, several commenters stated that compensation often is tied to 
conditions, such as continued employment, that are not known as of 
consummation. Other conditions to which compensation might be tied 
include, for example, the customer service rating of the loan 
originator, or overall company performance for a particular period of 
time. Some commenters similarly noted that it was unclear how to count 
compensation awarded in tiered compensation plans where, for example, 
the amount of compensation increases as the loan originator's total 
aggregate

[[Page 6901]]

volume increases. In such plans, commenters stated, the compensation 
tier cannot be determined until month- or quarter-end, and the rule as 
proposed is not clear about whether such compensation would need to be 
counted.
    Several commenters suggested that, if the Bureau were to adopt a 
rule including individual loan originator compensation in points and 
fees, then the Bureau should clearly exclude certain types of 
compensation, such as salary and hourly wages, from the calculation. 
The commenters asserted that these types of compensation generally are 
not tied to any specific loan transaction. The commenters stated that 
it would be difficult to determine how much of such compensation to 
count in the points and fees calculation before or at consummation, 
that establishing systems to make such a determination would be costly, 
and that including hourly wages would create an incentive for loan 
originators to spend less time on loans, to the detriment of consumers 
and in contrast to the overall goal of ensuring, for example, careful 
loan underwriting.
    A number of commenters requested additional guidance concerning the 
timing of the loan originator compensation calculation. The commenters 
stated that it would be impracticable to require compensation to be 
counted as of consummation. In this regard, several commenters asked 
whether compensation should be determined based on facts known at some 
earlier time, such as the rate-lock date.
    Some commenters also emphasized the importance of having clear 
guidance concerning the amount of loan originator compensation to be 
included in points and fees. The commenters stated that ambiguous rules 
would make it difficult to know how much compensation to count for a 
particular transaction and, in turn, difficult to discern whether a 
transaction exceeds the HOEPA points and fees threshold. A few 
commenters noted that this is of particular concern for entities 
looking to purchase loans, or for entities conducting due diligence 
reviews prior to purchase, since it is necessary to determine if points 
and fees are accurate, to avoid purchasing a high-cost mortgage.
    Finally, a number of industry commenters urged the Bureau to 
provide additional guidance concerning who would be considered a loan 
originator for purposes of the points and fees test. Several commenters 
objected to the fact that the Bureau seemingly had not coordinated its 
proposed definitions of ``loan originator'' across its various title 
XIV rulemakings, or with the definition of that term as set forth in 
the Secure and Fair Enforcement for Mortgage Licensing Act of 2008. The 
commenters noted that the Bureau's 2012 Loan Originator Proposal would 
have adopted a broad definition of loan originator. According to these 
commenters, a broad definition will be difficult to apply in the points 
and fees context, as it will require tracking compensation of anyone 
who, for compensation, takes an application, arranges, offers, 
negotiates, or otherwise obtains an extension of consumer credit for 
another person.
    Manufactured housing industry commenters expressed a related 
concern about the definition of loan originator as applied to employees 
of manufactured home retailers. Under TILA's definition of loan 
originator, an ``activities-based'' test would apply in determining 
whether such a person was a loan originator. Thus, creditors would need 
to track the activities of manufactured home retailer employees to 
determine whether to count their compensation in points and fees. 
Commenters asserted that a manufactured home retailer has no way of 
knowing, or controlling, such activities for a given transaction. At 
least one commenter argued for a bright-line exclusion from loan 
originator compensation for any manufactured home retailer or its 
employees. Other commenters argued for replacing the activities-based 
exclusion with a bright-line test, such as an exclusion for retailer 
(or retailer employee) compensation that does not exceed what the 
retailer or its employee would have received in a comparable cash 
transaction.
    Consumer group commenters strongly supported the inclusion of loan 
originator compensation in points and fees. The commenters noted that 
outsized mortgage broker compensation was one of the primary drivers of 
the passage of HOEPA in the mid-1990's. The commenters also noted that 
compensation schemes involving yield spread premiums later became 
another vehicle through which consumers were assessed costs they were 
wholly unaware existed, and that the Dodd-Frank Act sought to put such 
abuses to rest.\121\
---------------------------------------------------------------------------

    \121\ Commenters raised these objections in response to the 
Bureau's proposal to exclude loan originator compensation from the 
definition of points and fees for HELOCs. See the section-by-section 
analysis of Sec.  1026.32(b)(2)(ii) below.
---------------------------------------------------------------------------

    Some consumer group commenters strongly opposed the Bureau's 
proposal to apply, in the points and fees context, TILA's activities-
based test for determining whether an employee of a manufactured home 
retailer is a loan originator whose compensation must be counted. These 
commenters asserted that a test that attempts to distinguish between 
employees who, for example, take an application or advise on loan terms 
(i.e., loan originators), from employees who merely assist a consumer 
in obtaining or applying for a loan (i.e., not loan originators) would 
be unworkable. Commenters either argued that the activities listed in 
the activities-based test (i.e., taking an application, advising on 
loan terms, or offering loan terms) should be broadly defined, or that 
any compensation paid to an employee of a manufactured home retailer to 
arrange financing should be included.
    The Bureau has carefully considered the comments received in 
response to its 2012 HOEPA Proposal, as well as in response to the 
Board's 2011 ATR Proposal, 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' 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 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.

[[Page 6902]]

    Accordingly, the 2013 ATR Final Rule in adopting Sec.  
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 Sec.  
1026.32(b)(ii) as adopted in the 2013 ATR Final Rule 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 Sec.  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.'' \122\ Accordingly, the Bureau 
believes use of consistent terminology in Regulation Z will facilitate 
compliance. Finally, as revised, Sec.  1026.32(b)(1)(ii) also does not 
include the language in proposed Sec.  226.32(b)(1)(ii) that specified 
that the provision also applies to a loan originator that is the 
creditor in a table-funded 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 
Sec.  1026.36(a)(1). To clarify what compensation must be included in 
points and fees, revised Sec.  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.
---------------------------------------------------------------------------

    \122\ See 2012 Loan Originator Proposal, 77 FR 55283-88.
---------------------------------------------------------------------------

    In adopting the general rule, the Bureau carefully considered 
arguments by industry commenters that loan 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 high-cost 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 rent-seeking 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 high-cost 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 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) 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 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.

[[Page 6903]]

    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 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 
implementation issues among other matters.
    As noted above, the Bureau is revising Sec.  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 Sec.  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 Sec.  1026.4 and 
would therefore already be included in points and fees under Sec.  
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 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

[[Page 6904]]

complex calculations to determine, for example, the portion of a loan 
officer's salary that should be counted in points and fees.\123\ 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.
---------------------------------------------------------------------------

    \123\ In contrast, the existing restrictions on particular loan 
originator compensation structures in Sec.  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).
---------------------------------------------------------------------------

    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 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 Sec.  1026.32(b)(1)(i). 
However, the underlying statutory provisions as amended by the Dodd-
Frank 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'' 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 significant. Under the additive approach where no offsetting 
consumer payments against creditor-paid loan originator compensation is 
allowed, creditors

[[Page 6905]]

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 
creditor-paid 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 
creditor-paid 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 2013 ATR Final Rule 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)
Real Estate-Related Charges
    Since the enactment of HOEPA in 1994, TILA section 103(aa)(4)(C) 
has provided that points and fees for HOEPA coverage include each 
charge listed in TILA section 106(e) (except escrow for the future 
payment of taxes), unless the charge is reasonable, the creditor 
receives no direct or indirect compensation in connection with the 
charge, and the charge is paid to a third party unaffiliated with the 
creditor.\124\ If any of the conditions are not met, then the charge 
must be included. Thus, such charges--i.e., TILA section 106(a) charges 
paid to affiliates of the creditor, except such charges that are 
escrowed for the future payment of taxes--have always been included in 
the calculation of points and fees for high-cost mortgages, even if 
they were not included in the finance charge. The long-standing 
statutory requirement to include such charges in points and fees is 
implemented in existing Sec.  1026.32(b)(1)(iii).
---------------------------------------------------------------------------

    \124\ See TILA section 106(e)(1) (fees or premiums for title 
examination, title insurance, or similar purposes), (2) (fees for 
preparation of loan-related documents), (3) (escrows for future 
payment of taxes and insurance), (4) (fees for notarizing deeds and 
other documents), (5) (appraisal fees, including fees related to any 
pest infestation or flood hazard inspection conducted prior to 
closing), and (6) (credit reports).
---------------------------------------------------------------------------

    As noted in the preamble of the Bureau's 2012 HOEPA Proposal, the 
Dodd-Frank Act did not amend TILA section 103(aa)(4)(C). However, as 
also noted in the 2012 HOEPA Proposal, the Board nevertheless proposed 
certain clarifying revisions to Sec.  226.32(b)(1)(iii) in its 2011 ATR 
Proposal. In brief, the Board's proposed revisions would have added the 
phrase ``payable at or before closing of the mortgage'' loan. The 
Board's proposal would have added this limiting language to clarify 
that, notwithstanding the Dodd-Frank Act's amendments to TILA requiring 
the inclusion in points and fees of all charges payable ``in connection 
with the transaction'' (see the section-by-section analysis of Sec.  
1026.32(b)(1) above), the charges listed in Sec.  1026.4(c)(7) would 
only need to be included if they were payable at or before 
consummation. For consistency with the Dodd-Frank Act, the Board's 
proposal also would have enumerated separately as Sec.  
1026.32(b)(1)(iii)(A) through (C) the three long-standing pre-
conditions for excluding from points and fees the charges referred to 
in Sec.  226.32(b)(1)(iii).\125\
---------------------------------------------------------------------------

    \125\ See 76 FR 27390, 27404, 27481, 27489 (May 11, 2011).
---------------------------------------------------------------------------

    Proposed Sec.  1026.32(b)(1)(iii) and comment 32(b)(1)(iii)-1 in 
the Bureau's 2012 HOEPA Proposal republished the revisions proposed in 
the 2011 ATR Proposal and only minor, non-substantive changes. Proposed 
Sec.  1026.32(b)(1)(iii) in the Bureau's 2012 HOEPA Proposal thus would 
have provided for the inclusion in points and fees for closed-end 
credit transactions ``all items listed in Sec.  1026.4(c)(7) (other 
than amounts held for future payment of taxes) payable at or before 
consummation 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.''
    Proposed comment 32(b)(1)(iii)-1 in the Bureau's 2012 HOEPA 
Proposal would have republished this comment as set forth in the 2011 
ATR Proposal, with one minor change. Specifically, the Bureau's 
proposed comment 32(b)(1)(iii)-1 would have provided that a fee paid by 
the consumer for an appraisal performed by the creditor must be 
included in points and fees under Sec.  1026.32(b)(1)(iii), but the 
comment would have removed the phrase ``even though the fee may be 
excludable from the finance charge if it is bona fide and reasonable in 
amount.'' The Bureau would have made this proposed revision to comment 
32(b)(1)(iii)-1 for consistency with the Bureau's proposed more 
inclusive definition of the finance charge, which would have included 
such appraisal fees in the finance charge in all cases (i.e., whether 
or not such fees were bona fide and reasonable in amount).
    In sum, neither the Board's 2011 ATR Proposal, nor the Bureau's 
2012 HOEPA Proposal, would have expanded the scope of items to be 
included in points and fees under Sec.  1026.32(b)(1)(iii), but only 
would have made certain clarifying changes. The Bureau nevertheless 
received a number of comments from industry in response to proposed

[[Page 6906]]

Sec.  1026.32(b)(1)(iii) as set forth in the 2012 HOEPA Proposal.
    Uncertainty Concerning the Definition of Points and Fees. First, 
the Bureau received several comments suggesting that commenters were 
uncertain as to the interaction of proposed Sec.  1026.32(b)(1)(i) 
(finance charge prong of points and fees) and (iii) (real estate-
related charges). Commenters noted that the Bureau's proposed Sec.  
1026.32(b)(1)(iii) would have required the inclusion in points and fees 
in certain circumstances of items that the Bureau's proposed Sec.  
1026.32(b)(1)(i) otherwise would have excluded from points and fees 
through that provision's reliance on the finance charge as the starting 
point for the points and fees calculation. Commenters stated that, for 
example, proposed Sec.  1026.32(b)(1)(i) would not require the 
inclusion in points and fees of charges payable in a comparable cash 
transaction (because such charges are excluded from the definition of 
the finance charge), but that proposed Sec.  1026.32(b)(1)(iii) 
nevertheless would require such charges to be included if they were 
among the items listed in Sec.  1026.4(c)(7) and met any of the other 
conditions specified in Sec.  1026.32(b)(1)(iii) (e.g., the amount of 
the charge is unreasonable, the creditor receives direct or indirect 
compensation in connection with the charge, or the charge is paid to an 
affiliate of the creditor).\126\ Commenters similarly noted that Sec.  
1026.32(b)(1)(iii) would include in points and fees charges set forth 
in Sec.  1026.4(c)(7) unless they are reasonable and paid to a third 
party, but that Sec.  1026.4(c)(7) itself specifies a list of real 
estate-related fees that are excluded from the definition of the 
finance charge (and therefore arguably excluded from points and fees 
under Sec.  1026.32(b)(1)(i)). These commenters advocated either that 
the Bureau clarify whether the categories of charges discussed above 
are included in, or excluded from, points and fees, or that the Bureau 
clarify the points and fees definition by adopting a ``plain English'' 
approach. Finally, one commenter requested that the Bureau clarify 
whether property taxes are excluded from points and fees in all cases, 
regardless of whether they are reasonable in amount.
---------------------------------------------------------------------------

    \126\ The commenters suggested that such fees payable in a 
comparable cash transaction be excluded from points and fees.
---------------------------------------------------------------------------

    As noted above, neither proposed 1026.32(b)(1)(i) nor proposed 
Sec.  1026.32(b)(1)(iii) in the Bureau's 2012 HOEPA Proposal were 
intended to change the types of charges included in points and fees 
through these provisions, or the way that these provisions work 
together to define points and fees. The Bureau notes that much of the 
complexity that exists in the existing points and fees definition and 
about which industry commenters complained arises from the requirement 
in TILA to use the finance charge as the starting point for points and 
fees.
    To address any uncertainty, however, the Bureau notes that 
commentary to Sec.  1026.32(b)(1)(i) as adopted in the 2013 ATR Final 
Rule provides an example of how Sec.  1026.32(b)(1)(i) and (iii) work 
together. Specifically, comment 32(b)(1)(i)-1, as adopted in that 
rulemaking, provides that, if an item meets the conditions for 
inclusion in points and fees specified in Sec.  1026.32(b)(1)(iii), 
then it must be included in points and fees irrespective of whether it 
constitutes a finance charge and, in turn, irrespective of whether it 
would have been included in points and fees under Sec.  
1026.32(b)(1)(i) (i.e., even if payable in a comparable cash 
transaction). In other words, the finance charge merely constitutes the 
starting point for points and fees.\127\
---------------------------------------------------------------------------

    \127\ In response to commenters' questions concerning property 
taxes, the Bureau notes that escrowed taxes are excluded from the 
real estate-related charges that must be included in points and fees 
under certain circumstances.
---------------------------------------------------------------------------

    ``Reasonable'' or ``Bona Fide'' Charges. As noted in the section-
by-section analysis of Sec.  1026.32(b)(1)(i)(D) above, several 
industry commenters argued that the Dodd-Frank Act adopted a ``bona 
fide,'' rather than a ``reasonable'' standard for the exclusion from 
points and fees of third-party charges when it amended TILA section 
103(bb)(1)(A)(ii) (i.e., HOEPA's points and fees coverage test) to 
exclude from points and fees bona fide third-party charges not retained 
by a creditor or its affiliate. These commenters objected to the 
requirement under proposed Sec.  1026.32(b)(1)(iii) that the third-
party charges covered by that provision be ``reasonable'' (as opposed 
to ``bona fide'') to be excluded from points and fees.
    The Bureau disagrees that Congress intended that a ``bona fide'' 
test apply in determining whether all third-party charges may be 
excluded from points and fees. As noted in the Bureau's 2013 ATR Final 
Rule, which interprets similar provisions of TILA for qualified 
mortgages,\128\ at the same time that Congress added the bona fide 
third-party charge language to TILA in section 103(bb)(1)(A)(ii), it 
retained long-standing TILA section 103(aa)(4)(C), requiring that, as a 
pre-condition for excluding the third-party charges listed in Sec.  
1026.4(c)(7) from points and fees, that such charges be ``reasonable.'' 
The Bureau does not believe that the new ``bona fide'' third-party 
charge exclusion renders the pre-existing ``reasonable'' third-party 
charge exclusion meaningless and, in the absence of any evidence that 
the ``reasonable'' provision has been unworkable, the Bureau declines 
to alter it. Instead, as discussed in the section-by-section analysis 
of Sec.  1026.32(b)(1)(i)(D) above, the Bureau concludes, consistent 
with its determination in the 2013 ATR Final Rule, that Sec.  
1026.32(b)(1)(iii), which specifically addresses the exclusion of items 
listed in Sec.  1026.4(c)(7), takes precedence over the more general 
exclusion for bona fide third-party charges. In response to commenters' 
concerns that the ``reasonableness'' of third-party charges may be 
second-guessed, the Bureau notes its belief that the fact that a 
transaction for such services is conducted at arms-length ordinarily 
should be sufficient to ensure that the charge is reasonable.\129\
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    \128\ For qualified mortgages, the statutory counterpart to TILA 
section 103(bb)(1)(A)(ii) for high-cost mortgages is TILA section 
129C(b)(2)(C)(i), which excludes bona fide third-party charges not 
retained by a creditor or its affiliate from the calculation of 
points and fees for qualified mortgages.
    \129\ The Bureau declines, however, to adopt a rule, as 
suggested by one industry commenter, that any fee permitted under 
the customary and reasonable appraisal fee rule in Sec.  1026.42(f), 
is per se reasonable under Sec.  1026.32(b)(1)(iii) and bona fide 
under Sec.  1026.32(b)(1)(i)(D). Again, in the absence of evidence 
that the pre-existing reasonableness test in Sec.  
1026.32(b)(1)(iii) has been unworkable, the Bureau declines to 
change it.
---------------------------------------------------------------------------

    Charges of Affiliated Settlement Service Providers. Many industry 
commenters argued that the points and fees definition for high-cost 
mortgages should not distinguish between fees paid to affiliate and 
non-affiliate service providers. Commenters thus suggested that the 
Bureau use its exception authority to level the playing field either by 
excluding bona fide and reasonable affiliate fees from points and fees, 
or by requiring that all non-affiliated service provider fees be 
included. Commenters alternatively suggested that the Bureau require 
affiliate charges to be included in points and fees only to the extent 
that such charges are unreasonable or exceed the market price charged 
by unaffiliated service providers. Commenters advanced a number of 
arguments in support of these positions.
    Commenters argued that there is no basis for a distinction between 
affiliate and non-affiliate charges, notwithstanding that TILA 
contemplates just such a distinction for points and fees. These 
commenters stated that affiliate business arrangements are

[[Page 6907]]

expressly permitted and regulated by RESPA, that the Bureau has not 
articulated any policy purpose or consumer benefit to including 
affiliate fees in points and fees, and that the Bureau's 2012 HOEPA 
Proposal would discourage the use of affiliates, which undercuts a goal 
of the Bureau's 2012 TILA-RESPA Integration Proposal to increase 
certainty around the cost of affiliate providers by providing for a 
zero tolerance for settlement charges of affiliated entities. The 
commenters further stated that affiliate charges, just like charges for 
services by unaffiliated service providers, are set largely by factors 
outside the creditor's control, such as market price.
    Commenters similarly argued that the HOEPA proposal's inclusion of 
affiliated third-party charges in points and fees would harm consumers 
while providing no countervailing benefit. The commenters asserted that 
roughly 26 percent of the market uses affiliate service providers, and 
that these providers offer value, convenience, efficiency, and 
reliability to consumers by providing ``one-stop shopping,'' speeding 
up loan closings, and allowing creditors to control the quality of 
ancillary settlement services. Commenters pointed to studies 
demonstrating that affiliate settlement service providers are 
competitive in cost with unaffiliated service providers and argued that 
consumers would be harmed by reduced choice and by having to pay higher 
prices as a result of reduced competition as lenders avoided using 
affiliated service providers rather than risk high-cost mortgage 
coverage through the points and fees threshold.
    Certain commenters expressed particular concern about the inclusion 
in points and fees of affiliated title charges. These commenters stated 
that there is no rational basis for requiring affiliated title charges 
to be included in points and fees, because, for example, title 
insurance fees are regulated at the State level either through 
statutorily-prescribed rates, or through a requirement that title 
insurance premiums be publicly filed. Commenters noted that, as a 
result of State regulation, there is little variation in title 
insurance charges from provider to provider and such charges are not 
subject to manipulation. In a variation of the argument that the Bureau 
generally should exclude affiliate settlement charges from points and 
fees, some commenters suggested that the Bureau should adopt a specific 
carve-out for affiliate title fees to the extent such fees are 
otherwise regulated at the State level, or to the extent that such 
charges are reasonable and do not exceed the cost for unaffiliated 
title insurance.
    The Bureau is adopting Sec.  1026.32(b)(1)(iii) and related 
commentary in the 2013 ATR Final Rule substantially as proposed in the 
2011 ATR and 2012 HOEPA Proposals.\130\ The rationale set forth in the 
section-by-section analysis of Sec.  1026.32(b)(1)(iii) in the 2013 ATR 
Final Rule applies equally to this rulemaking. TILA section 103(bb)(4) 
specifically mandates that fees paid to and retained by affiliates of 
the creditor be included in calculating points and fees for high-cost 
mortgages. To exclude such fees from points and fees for purposes of 
determining high-cost mortgage coverage, the Bureau would have to use 
its exception authority under TILA section 105(a). The Bureau is aware 
of concerns 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 threshold for high-cost 
mortgages. On the other hand, 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 
elected not to exclude fees paid to affiliates. Indeed, title XIV 
repeatedly differentiates between affiliates and independent, third-
party service providers. See, e.g., Dodd-Frank Act sections 1403, 1411, 
1412, 1414, and 1431. The Bureau is not aware of any empirical evidence 
suggesting that Congress's election, if implemented, would affect the 
availability of responsible credit, or otherwise harm consumers, and 
therefore does not believe that it would be appropriate to use its 
exception authority in this instance.
---------------------------------------------------------------------------

    \130\ Comment 32(b)(1)(iii)-1 is adopted in the 2013 ATR Final 
Rule without the change proposed in the 2012 HOEPA Proposal that 
would have accounted for the Bureau's proposed more inclusive 
definition of the finance charge. As discussed, the Bureau plans to 
determine whether to finalize the more inclusive finance charge 
proposed in its 2012 TILA-RESPA Integration Proposal at a later 
time, in conjunction with the finalization of that proposal.
---------------------------------------------------------------------------

32(b)(1)(iv)
    As noted in the Bureau's 2013 ATR Final Rule, section 1431(c) of 
the Dodd-Frank Act amended TILA to add new TILA section 103(bb)(4)(D), 
which codifies, with a few adjustments, existing Sec.  
1026.32(b)(1)(iv). Section 1026.32(b)(1)(iv) requires the inclusion in 
points and fees for high-cost mortgages of certain credit insurance and 
debt cancellation premiums.
    The Board's 2011 ATR Proposal would have implemented TILA section 
103(bb)(4)(D) by amending existing Sec.  226.32(b)(1)(iv) to track the 
language set forth in the Dodd-Frank Act.\131\ Specifically, the 2011 
ATR Proposal would have provided that points and fees include premiums 
payable at or before closing for any credit life, disability, 
unemployment, or credit property insurance, or any other accident, 
loss-of-income, life or health insurance, or any payments directly or 
indirectly for any debt cancellation or suspension agreement or 
contract. The 2011 ATR Proposal also would have added 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.
---------------------------------------------------------------------------

    \131\ See 76 FR 27390, 27404-05, 27481, 27489 (May 11, 2011).
---------------------------------------------------------------------------

    Proposed Sec.  1026.32(b)(1)(iv) in the Bureau's 2012 HOEPA 
Proposal republished the Board's proposed revisions and additions to 
Sec.  226.32(b)(1)(iv) and comment 32(b)(1)(iv)-1, as well as the 
Board's proposed new comment 32(b)(1)(iv)-2, substantially as proposed 
in the Board's 2011 ATR Proposal.\132\ In addition, proposed comment 
32(b)(1)(iv)-1 would have clarified that credit insurance premiums must 
be included in points and fees if they are paid at consummation, 
whether they are paid in cash or, if permitted by applicable law, 
financed. The Bureau stated that the clarifying phrase ``if permitted 
by applicable law'' was necessary because section 1414 of the Dodd-
Frank Act added to TILA new section 129C(d) prohibiting the financing 
of most types of credit insurance.\133\
---------------------------------------------------------------------------

    \132\ In its 2011 ATR Proposal, the Board did not propose to 
implement in the definition of points and fees the provision in 
section 1431(c) of the Dodd-Frank Act 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.'' In its 2012 HOEPA Proposal, 
the Bureau proposed to implement that provision in proposed Sec.  
1026.34(a)(10) prohibiting the financing of points and fees for 
high-cost mortgages. See the section-by-section analysis of Sec.  
1026.34(a)(10) below.
    \133\ In general, TILA section 129C(d) provides that no creditor 
may finance, directly or indirectly, in connection with any 
residential mortgage loan or with any extension of credit under an 
open-end consumer credit plan secured by the principal dwelling of 
the consumer, any credit life, credit disability, credit 
unemployment, or credit property insurance, or any other accident, 
loss-of-income, life, or health insurance, or any payments directly 
or indirectly for any debt cancellation or suspension agreement or 
contract. TILA section 129C(d)(1) 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, 
and (d)(2) provides that the prohibition does not apply to 
reasonable credit unemployment insurance that it not paid to the 
creditor or an affiliate of the creditor.

---------------------------------------------------------------------------

[[Page 6908]]

    The Bureau did not receive many comments on proposed Sec.  
1026.32(b)(1)(iv) as set forth in the 2012 HOEPA Proposal. A few 
industry commenters requested that the Bureau clarify whether insurance 
premiums that are solely for the consumer's benefit, such as 
homeowner's insurance, must be included in points and fees. One such 
commenter specifically noted that certain types of voluntary insurance 
and service contract products for manufactured homes, like homeowner's 
insurance, protect the consumer as beneficiary and not the creditor. 
This commenter requested that the Bureau clarify in commentary that 
such products are clearly excluded from the definition of credit 
property insurance. At least one industry commenter also stated that 
the statutory (and thus Regulation Z's) definition of points and fees 
contradicts itself on whether hazard insurance premiums are included. 
The commenter stated that hazard insurance premiums are payable in 
comparable cash transactions, and therefore excluded under Sec.  
1026.32(b)(1)(i) (the finance charge prong of points and fees). The 
commenter argued that the regulation should be clear that hazard 
insurance premiums are excluded from points and fees in all cases 
because they are payable in a cash transaction.
    The Bureau is adopting Sec.  1026.32(b)(1)(iv) and comments 
32(b)(1)(iv)-1 and -2 in the 2013 ATR Final Rule substantially as 
proposed in the 2011 ATR and 2012 HOEPA Proposals. However, as noted in 
the 2013 ATR Final Rule, Sec.  1026.32(b)(1)(iii) is adopted in that 
rulemaking with the clarification in comment 32(b)(1)(iii)-3 that 
premiums or other charges for ``any other life, accident, health, or 
loss-of-income insurance'' need not be included in points and fees if 
the consumer is the sole beneficiary of the insurance. As with other 
charges that are specifically required to be included in points and 
fees, hazard insurance premiums (unless solely for the benefit of the 
consumer) are included even if they are not payable in a comparable 
cash transaction and thus not part of the finance charge.
32(b)(1)(v)
    As noted in the Bureau's 2013 ATR Final Rule, section 1431(c) of 
the Dodd-Frank Act amended TILA to add new TILA section 103(bb)(4)(E), 
which requires the inclusion in points and fees of the maximum 
prepayment fees and penalties which may be charged or collected under 
the terms of the credit transaction. The Board's 2011 ATR Proposal 
proposed to implement this statutory change in new Sec.  
226.32(b)(1)(v).\134\ Proposed Sec.  1026.32(b)(1)(v) in the Bureau's 
2012 HOEPA Proposal republished the Board's proposed Sec.  
226.32(b)(1)(v), except that it would have replaced a cross-reference 
to the Board's proposed definition of prepayment penalty for qualified 
mortgages (i.e., the Board's proposed Sec.  226.43(b)(10)) with a 
cross-reference to the definition of prepayment penalty for closed-end 
credit transactions set forth in the HOEPA Proposal's Sec.  
1026.32(b)(8)(i).\135\
---------------------------------------------------------------------------

    \134\ See 76 FR 27390, 27405, 27481 (May 11, 2011).
    \135\ The Bureau is finalizing proposed Sec.  1026.32(b)(8)(i) 
as Sec.  1026.32(b)(6)(i) in the 2013 ATR Final Rule. See the 
section-by-section analysis of Sec.  1026.32(b)(6)(i) below.
---------------------------------------------------------------------------

    The Bureau received few comments on proposed Sec.  
1026.32(b)(1)(v). Several commenters observed that proposed Sec.  
1026.32(b)(1)(v), when read together with the Bureau's definition of 
prepayment penalty for closed-end credit transactions in proposed Sec.  
1026.32(b)(8)(i), would have required the inclusion in points and fees 
of bona fide third-party charges waived by the creditor on the 
condition that the consumer did not prepay the loan, even though the 
Bureau's proposal would have permitted certain such charges to be 
excluded from the definition of prepayment penalty (and, in turn, from 
points and fees) for HELOCs. Those comments are addressed in the 
section-by-section analysis of Sec.  1026.32(b)(6)(i) below.
    Proposed Sec.  1026.32(b)(1)(v) requiring the inclusion in points 
and fees of the maximum prepayment fees and penalties which may be 
charged or collected under the terms of the credit otherwise is being 
adopted in the 2013 ATR Final Rule substantially as proposed.
32(b)(1)(vi)
    Section 1431(c) of the Dodd-Frank Act amended TILA to add new TILA 
section 103(bb)(4)(F), which requires the inclusion in points and fees 
of 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 2011 ATR 
Proposal proposed to implement this statutory change in new Sec.  
226.32(b)(1)(vi) by providing for the inclusion in points and fees of 
the total prepayment penalty incurred by the consumer if the consumer 
refinances an existing mortgage loan with the current holder of the 
existing loan, a servicer acting on behalf of the current holder, or an 
affiliate of either.\136\ Proposed Sec.  1026.32(b)(1)(vi) in the 
Bureau's 2012 HOEPA Proposal republished the Board's proposed Sec.  
226.32(b)(1)(vi), except that it would have replaced a cross-reference 
to the Board's proposed definition of prepayment penalty for qualified 
mortgages (i.e., the Board's proposed Sec.  226.43(b)(10)) with a 
cross-reference to the definition of prepayment penalty for closed-end 
credit transactions in proposed Sec.  1026.32(b)(8)(i).\137\ The Bureau 
did not receive any comments specifically in response to proposed Sec.  
1026.32(b)(1)(vi).
---------------------------------------------------------------------------

    \136\ See 76 FR 27390, 27405, 27481 (May 11, 2011).
    \137\ As already noted, the Bureau is finalizing proposed Sec.  
1026.32(b)(8)(i) as Sec.  1026.32(b)(6)(i) in the 2013 ATR Final 
Rule. See the section-by-section analysis for proposed Sec.  
1026.32(b)(6)(i), below.
---------------------------------------------------------------------------

    Proposed Sec.  1026.32(b)(1)(vi) is being adopted, substantially as 
proposed in the 2011 ATR and 2012 HOEPA Proposals, in Sec.  
1026.32(b)(1)(vi) in the 2013 ATR Final Rule, with only minor changes 
for clarity. As noted in the preamble to the 2013 ATR Final Rule, the 
Bureau believes that it is appropriate for Sec.  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 
(i.e., and not to the creditor that originally made the loan, if that 
creditor no longer holds the loan). The entities that are listed in 
Sec.  1026.32(b)(1)(vi) are the entities that would refinance the 
transaction and, as a practical matter, gain from the prepayment 
penalties on the previous transaction. Accordingly, the Bureau is 
invoking its exception and adjustment authority under TILA section 
105(a) with respect to the provision. The Bureau believes that 
adjusting the statutory language will more precisely target the 
entities in the current market environment that would benefit from 
refinancing loans with prepayment penalties, 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 an 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 and facilitate 
compliance with TILA.

[[Page 6909]]

32(b)(2)
Proposed Provisions Not Adopted
    As noted in the section-by-section analysis of Sec.  
1026.32(b)(1)(ii) above, section 1431(c) of the Dodd-Frank Act amended 
TILA to require the inclusion in points and fees for high-cost 
mortgages (and qualified mortgages) of all compensation paid directly 
or indirectly by a consumer or a creditor to a ``mortgage originator.'' 
As also noted above, the Board's 2011 ATR Proposal proposed to 
implement this statutory change in proposed Sec.  226.32(b)(1)(ii) 
utilizing the term ``loan originator,'' as defined in existing Sec.  
1026.36(a)(1), rather than the statutory term ``mortgage originator.'' 
\138\ In turn, the Board proposed new Sec.  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.\139\ The Bureau's proposed Sec.  1026.32(b)(2) 
republished the Board's proposed Sec.  226.32(b)(2), with certain 
terminology changes to reflect the scope of transactions covered by 
Sec.  1026.32, rather than only Sec.  1026.43, as in the Board's 
proposal. The Bureau received numerous comments concerning proposed 
Sec.  1026.32(b)(2). These comments are discussed in the section-by-
section analysis of Sec.  1026.32(b)(1)(ii) above. Instead, the Bureau 
finalizes the definition of points and fees for HELOCs in Sec.  
1026.32(b)(2).
---------------------------------------------------------------------------

    \138\ See 76 FR 27390, 27402-04, 27481, 27488-89 (May 11, 2011).
    \139\ See id. at 27405-06, 27481.
---------------------------------------------------------------------------

Points and Fees for HELOCs
    As discussed in the section-by-section analysis of Sec.  1026.32(a) 
above, TILA section 103(bb)(1)(A) as amended by the Dodd-Frank Act 
provides that a ``high-cost mortgage'' may include an open-end credit 
plan secured by a consumer's principal dwelling. Section 1431(c) of the 
Dodd-Frank Act, in turn, amended TILA by adding new section 103(bb)(5), 
which specifies how to calculate points and fees for HELOCs. Unlike 
TILA's pre-existing points and fees definition for closed-end credit 
transactions, which enumerates six specific categories of items that 
creditors must include in points and fees, the points and fees 
provision for HELOCs simply provides that points and fees for open-end 
credit plans are calculated by adding ``the total points and fees known 
at or before closing, including the maximum prepayment penalties that 
may be charged or collected under the terms of the credit transaction, 
plus the minimum additional fees the consumer would be required to pay 
to draw down an amount equal to the total credit line.'' Thus, apart 
from identifying (1) maximum prepayment penalties and (2) fees to draw 
down an amount equal to the total credit line, the Dodd-Frank Act did 
not enumerate the specific items that should be included in ``total 
points and fees'' for HELOCs.
    For clarity and to facilitate compliance, the 2012 HOEPA Proposal 
would have implemented TILA section 103(bb)(5) in Sec.  1026.32(b)(3) 
(i.e., separately from closed-end points and fees) and would have 
defined points and fees for HELOCs to include the following categories 
of charges: (1) Each item required to be included in points and fees 
for closed-end credit transactions under Sec.  1026.32(b)(1), to the 
extent applicable in the open-end credit context; (2) certain 
participation fees that the creditor may impose on a consumer in 
connection with an open-end credit plan; and (3) the minimum fee the 
creditor would require the consumer to pay to draw down an amount equal 
to the total credit line. Each of these items, along with certain 
modifications adopted in the final rule in response to comments 
received, is discussed below.
32(b)(2)(i)
    Proposed Sec.  1026.32(b)(3)(i) would have provided that all items 
included in the finance charge under Sec.  1026.4(a) and (b), except 
interest or the time-price differential, must be included in points and 
fees for open-end credit plans, to the extent such items are payable at 
or before account opening. This provision generally would have mirrored 
proposed Sec.  1026.32(b)(1)(i) for closed-end credit transactions, 
with the following differences.
    First, proposed Sec.  1026.32(b)(3)(i) would have specified that 
the items included in the finance charge under Sec.  1026.4(a) and (b) 
must be included in points and fees only if they are payable at or 
before account opening. Proposed comment 32(b)(3)(i)-1 would have 
clarified that this provision was intended to address the potential 
uncertainty that could arise from the fact that certain charges 
included in the finance charge under Sec.  1026.4(a) and (b) are 
transaction costs unique to HELOCs that often may not be known at 
account opening. Proposed comment 32(b)(3)(i)-1 thus would have 
explained that charges payable after the opening of a HELOC, for 
example minimum monthly finance charges and service charges based 
either on account activity or inactivity, need not be included in 
points and fees for HELOCs, even if they are included in the finance 
charge under Sec.  1026.4(a) and (b). Transaction fees generally are 
also not included in points and fees for HELOCs, except as provided in 
proposed Sec.  1026.32(b)(3)(vi).
    Second, in contrast to proposed Sec.  1026.32(b)(1)(i) for closed-
end credit transactions, proposed Sec.  1026.32(b)(3)(i) for HELOCs 
would not have addressed the more inclusive definition of the finance 
charge proposed in the Bureau's 2012 TILA-RESPA Integration Proposal. 
Such language was unnecessary in the open-end credit context, because 
the Bureau's 2012 TILA-RESPA Proposal proposed to adopt the more 
inclusive finance charge only for closed-end credit transactions.
    Third, the Bureau would have omitted from proposed Sec.  
1026.32(b)(3)(i) as unnecessary the exclusion from points and fees set 
forth in amended TILA section 103(bb)(1)(C) for premiums or guaranties 
for government-provided or certain PMI premiums. The Bureau understands 
that such insurance products, which are designed to protect creditors 
originating loans with high loan-to-value ratios, are normally 
inapplicable in the context of HELOCs.
    The Bureau received several comments concerning proposed Sec.  
1026.32(b)(3)(i). One industry commenter expressed concern that the 
different formulation of proposed Sec.  1026.32(b)(1)(i) for closed-end 
credit transactions and proposed Sec.  1026.32(b)(3)(i) for HELOCs 
reflected a substantive difference in the approach to points and fees 
in the closed- and open-end credit contexts. A consumer group commenter 
urged the Bureau to coordinate the closed- and open-end points and fees 
definitions to establish a clear and consistent rule in both contexts 
for when charges must be included in the calculation (i.e., whether 
points and fees includes any charges in connection with the 
transaction, charges ``payable'' at or before consummation or account 
opening, or charges ``known'' at or before consummation or account 
opening). Finally, the Bureau received one comment suggesting that it 
incorporate TILA section 103(bb)(1)(C) concerning mortgage insurance 
premiums into the points and fees definition for HELOCs as a 
prophylactic measure, even though such products typically are not 
associated with open-end credit plans.
    The Bureau finalizes Sec.  1026.32(b)(3)(i) substantially as 
proposed, in Sec.  1026.32(b)(2)(i). However, the Bureau

[[Page 6910]]

omits the proposed reference to charges ``payable'' at or before 
account opening. As discussed in the section-by-section analysis of 
Sec.  1026.32(b)(1) above, the final rule instead clarifies that each 
of the charges in the points and fees calculation for HELOCs must be 
included (as under final Sec.  1026.32(b)(1) for closed-end credit 
transactions) only if it is ``known'' at or before account opening. The 
result of this change is consistency between the final rules for points 
and fees in Sec.  1026.32(b)(1) for closed-end credit and Sec.  
1026.32(b)(2) for HELOCs. In addition, as suggested by one commenter, 
the Bureau is incorporating TILA's provisions concerning mortgage 
insurance premiums into the definition of points and fees for HELOCs in 
Sec.  1026.32(b)(2)(i)(B) and (C).
32(b)(2)(i)(B)
    The Bureau adopts Sec.  1026.32(b)(2)(i)(B) in the final rule to 
clarify that government mortgage insurance premiums and guarantees are 
excluded from points and fees for HELOCs, just as they are from points 
and fees for closed-end credit transactions. Thus, Sec.  
1026.32(b)(2)(i)(B) for HELOCs mirrors Sec.  1026.32(b)(1)(i)(B) as 
adopted in the 2013 ATR Final Rule for closed-end credit transactions, 
and comment 32(b)(2)(i)(B) cross-references comment 32(b)(1)(i)(B) for 
further guidance. The Bureau's 2012 HOEPA Proposal would not have 
incorporated this provision of TILA into the definition of points and 
fees for HELOCs. However, upon further consideration, the Bureau 
believes that even if such mortgage insurance is not common for HELOCs, 
it is useful to exclude these types of premiums and guarantees from the 
points and fees definition to accommodate the possibility of this 
product developing for HELOCs. Additionally, to ease compliance, the 
Bureau believes it is desirable for the definition of points and fees 
for closed-end credit transactions and HELOCs to be parallel to the 
greatest extent practicable. Accordingly, the Bureau interprets TILA 
section 103(bb)(5) as containing an exclusion for government premiums 
and guarantees that is parallel to that for closed-end transactions, 
and is exercising its authority under TILA section 103(bb)(4)(G) to 
ensure consistent treatment.
32(b)(2)(i)(C)
    The Bureau adopts Sec.  1026.32(b)(2)(i)(C) in the final rule to 
clarify that PMI premiums are excluded from points and fees for HELOCs 
to the same extent that they are excluded from points and fees for 
closed-end credit transactions. Thus, Sec.  1026.32(b)(2)(i)(C) for 
HELOCs mirrors Sec.  1026.32(b)(1)(i)(C) as adopted in the 2013 ATR 
Final Rule for closed-end credit transactions, and comment 
32(b)(2)(i)(C) cross-references comments 32(b)(1)(i)(C)-1 and -2 for 
further guidance. The Bureau's 2012 HOEPA Proposal would not have 
incorporated this provision of TILA into the definition of points and 
fees for HELOCs. However, upon further consideration, the Bureau 
believes that even if such mortgage insurance is not common for HELOCs, 
it is useful to include it in the points and fees definition, as noted 
above. For the same reasons discussed above in connection with 
government premiums, the Bureau interprets TILA section 103(bb)(5) as 
containing an exclusion for PMI premiums that is parallel to that for 
closed-end transactions, and is exercising its authority under TILA 
section 103(bb)(4)(G) to ensure consistent treatment.
32(b)(2)(i)(D)
    As discussed in the section-by-section analysis of Sec.  
1026.32(b)(1)(i)(D) above, amended TILA section 103(bb)(1)(A)(ii) 
excludes from points and fees for high-cost mortgages bona fide third-
party charges not retained by the creditor, mortgage originator or an 
affiliate of either. The proposal would have implemented this provision 
for both closed- and open-end credit transactions in proposed Sec.  
1026.32(b)(5)(i), with a cross-reference to Sec.  1026.36(a)(1) for the 
definition of loan originator.\140\ Proposed Sec.  1026.32(b)(5)(i) 
would have specified, however, that ``loan originator'' as used in that 
provision meant a loan originator as that term is defined in Sec.  
1026.36(a)(1), notwithstanding Sec.  1026.36(f). The Bureau believed 
that such a clarification was necessary for HELOCs because originators 
of open-end credit plans are not, strictly speaking, ``mortgage 
originators'' as that term is defined in amended TILA section 103. TILA 
section 103(cc)(2)(A) defines a mortgage originator as a person that 
performs specific activities with respect to a ``residential mortgage 
loan,'' and TILA section 103(cc)(5) excludes consumer credit 
transactions under an open-end credit plan from the definition of 
residential mortgage loan. Thus, on its face, TILA section 
103(bb)(1)(A)(ii) could be read not to exclude from points and fees 
bona fide third-party charges not retained by an originator of an 
HELOC. As stated in the proposal, the Bureau believes bona fide third-
party charges not retained by a loan originator should be excluded from 
points and fees whether the originator is originating a closed- or 
open-end credit transaction. Accordingly, proposed Sec.  
1026.32(b)(5)(i) stated that, for purposes of Sec.  1026.32(b)(5)(i), 
the term ``loan originator'' means a loan originator as that term is 
defined in Sec.  1026.36(a)(1) (i.e., in general, an originator of any 
consumer mortgage credit transaction) notwithstanding Sec.  1026.36(f), 
which otherwise limits the term ``loan originator'' to persons 
originating closed-end credit transactions.
---------------------------------------------------------------------------

    \140\ Like the Board's proposed Sec.  226.43(e)(3)(ii), 76 FR 
27390, 27465, 27485 (May 11, 2011), the Bureau's proposed Sec.  
1026.32(b)(5)(i) would have used the term ``loan originator'' rather 
than ``mortgage originator'' for consistency within Regulation Z.
---------------------------------------------------------------------------

    The Bureau did not receive any comments concerning its proposal to 
treat originators of HELOCs and originators of closed-end credit 
transactions equally for purposes of the bona fide third-party charge 
exclusion from points and fees. Thus, the Bureau finalizes the 
provision substantially as proposed. However, in light of the fact that 
the Bureau is adopting the bona fide third-party charge exclusion for 
closed-end credit transactions in Sec.  1026.32(b)(1)(i)(D) in the 2013 
ATR Final Rule (i.e., rather than in Sec.  1026.32(b)(5)(i) for both 
closed- and open-end credit transactions, as proposed), the Bureau 
adopts a separate exclusion for HELOCs in Sec.  1026.32(b)(2)(i)(D) of 
the 2013 HOEPA Final Rule, which mirrors the provision for closed-end 
credit transactions. Thus, the final rule for HELOCs reflects the fact 
that mortgage insurance premiums, certain real estate-related charges, 
and certain credit insurance premiums may sometimes be included in 
points and fees for HELOCs according to the specific requirements in 
Sec.  1026.32(b)(2)(i)(C), (ii), and (iii), even if those charges might 
otherwise have been excluded from points and fees as bona fide third-
party charges.
32(b)(2)(i)(E) and (F)
    As discussed in the section-by-section analysis of Sec.  
1026.32(b)(1)(i)(E) and (F) above, section 1431(d) of the Dodd-Frank 
Act added new section 103(dd) to TILA, which permits a creditor to 
exclude from the points and fees calculation for high-cost mortgages, 
if certain conditions are met, either: (1) Up to two bona fide discount 
points (TILA section 103(dd)(1)), or (2) up to one bona fide discount 
point (TILA section 103(dd)(2)). The 2012 HOEPA Proposal would have 
implemented these bona fide discount point provisions for both closed- 
and open-end credit transactions in Sec.  1026.32(b)(5)(ii)(A) 
(exclusion of up

[[Page 6911]]

to two discount points) and (B) (exclusion of up to one discount 
point).
    Proposed Sec.  1026.32(b)(5)(ii)(A) and (B) are being adopted in 
the 2013 ATR Final rule as Sec.  1026.32(b)(1)(i)(E) and (F), 
respectively, as carve-outs in the finance charge prong of closed-end 
points and fees for closed-end credit transactions. Thus, the Bureau 
adopts Sec.  1026.32(b)(2)(i)(E) and (F) to provide for the exclusion 
of up to two bona fide discount points from the points and fees 
calculation for HELOCs. The Bureau notes that it did not receive any 
comments specifically concerning the application of the bona fide 
discount point exclusion to HELOCs. Thus, as adopted, the bona fide 
discount point exclusions for HELOCs mirror Sec.  1026.32(b)(1)(i)(E) 
and (F) for closed-end credit transactions, and comments 
32(b)(2)(i)(E)-1 and 32(b)(2)(i)(F)-1 cross-reference the commentary to 
those provisions for additional guidance.
32(b)(2)(ii)
    The Bureau's proposal did not include in the calculation of points 
and fees for HELOCs compensation paid to originators of open-end plans. 
As discussed above in the section-by-section analysis of Sec.  
1026.32(b)(1)(ii), section 1431(c) of the Dodd-Frank Act amended TILA 
section 103(aa)(4)(B) to require mortgage originator compensation to be 
included in the existing calculation of points and fees. At the same 
time, however, section 1401 of the Dodd-Frank Act amended TILA section 
103 to define a ``mortgage originator'' as a person who undertakes 
specified actions with respect to a ``residential mortgage loan 
application'' or in connection with a ``residential mortgage loan.'' 
Section 1401 further defined the term ``residential mortgage loan'' to 
exclude a consumer credit transaction under an open-end credit plan. 
Given that the Dodd-Frank Act did not specify in amended TILA section 
103(bb)(5) concerning HELOCs that compensation paid to originators of 
open-end credit plans must be included in the calculation of points and 
fees, the Bureau believed that it was reasonable to conclude that 
Congress did not intend for such compensation to be included. The 
Bureau believed that any incentive to evade the closed-end, high-cost 
mortgage points and fees threshold by structuring a transaction as a 
HELOC could be addressed through the prohibition in TILA against 
structuring a transaction as an open-end credit plan to evade HOEPA. 
See TILA section 129(r); Sec.  1026.34(b), below.
    The Bureau did not propose to include loan originator compensation 
in points and fees for HELOCs, but the Bureau noted that amended TILA 
section 103(bb)(4)(G) grants the Bureau authority to include in points 
and fees such other charges that it determines to be appropriate. The 
Bureau thus requested comment on the proposed definition of points and 
fees for HELOCs, including on whether any additional fees should be 
included in the definition. In particular, the Bureau requested comment 
on whether compensation paid to originators should be included in the 
calculation of points and fees for HELOCs. The Bureau recognized that 
neither TILA nor Regulation Z currently addresses compensation paid to 
originators of HELOCs and accordingly requested comment on the 
operational issues that would be entailed in tracking such compensation 
for inclusion in the points and fees calculation. The Bureau also 
requested comment on whether the guidance and examples set forth in 
proposed Sec.  1026.32(b)(1)(ii) and comments 32(b)(1)(ii)-1 and -2 
concerning closed-end loan originator compensation would provide 
sufficient guidance to creditors calculating such compensation for 
HELOCs, or whether additional or different guidance would be of 
assistance in the open-end context.
    The Bureau received comments from both industry and consumer groups 
concerning its proposal to omit loan originator compensation from 
points and fees for HELOCs. Industry commenters supported the 
exclusion, with some arguing (as discussed in the section-by-section 
analysis above) that the exclusion should be extended to closed-end 
credit transactions. Consumer groups strongly objected to the Bureau's 
proposed exclusion of compensation to originators of HELOCs on the 
grounds that it would perpetuate an unwarranted distinction between 
closed- and open-end credit for purposes of HOEPA coverage, when 
Congress clearly intended that HELOCs be covered by HOEPA and subject 
to the same protections as closed-end credit transactions, including 
the provisions that the Dodd-Frank added to address perceived abuses in 
loan originator compensation. Consumer groups similarly argued that the 
Bureau's proposal to rely on the anti-structuring provision in Sec.  
1026.34(b) was ``dangerously na[iuml]ve.'' No commenters provided 
information concerning the operational burdens that HELOC creditors 
might face in tracking loan originator compensation, or on whether 
closed-end guidance for calculating loan originator compensation would 
be sufficient to provide guidance to HELOC creditors.
    As discussed in the section-by-section analysis of Sec.  
1026.32(b)(1)(ii), the Bureau is adopting in the 2013 ATR Final Rule a 
requirement to include in points and fees compensation paid to loan 
originators, and is providing guidance for determining what types of 
compensation, and how much compensation, needs to be included. The 
Bureau is persuaded that requiring loan originator compensation to be 
included in points and fees for closed-end credit, while exempting it 
for open-end credit, could lead to undesirable results, such as 
creditors steering consumers to open-end credit where a closed-end 
product would be more appropriate. Accordingly, the Bureau is adopting 
in the final rule a requirement that creditors include compensation 
paid to originators of open-end credit plans, to the same extent that 
such compensation is required to be included for closed-end credit 
transactions.
    To provide the public with an additional opportunity to give 
feedback concerning what further guidance may be needed to calculate 
and include loan originator compensation for open-end credit in points 
and fees, the Bureau is soliciting comment on this issue in the 
concurrent proposal that is being published today.
32(b)(2)(iii)
    Proposed Sec.  1026.32(b)(3)(ii) would have provided for the 
inclusion in points and fees for HELOCs of the real estate-related 
charges listed in Sec.  1026.4(c)(7) (other than amounts held for 
future payment of taxes) payable at or before account opening. However, 
any such charge would have been excluded from points and fees if it is 
reasonable, the creditor receives no direct or indirect compensation in 
connection with the charge, and the charge is not paid to an affiliate 
of the creditor. Proposed Sec.  1026.32(b)(3)(ii) thus would have 
mirrored proposed Sec.  1026.32(b)(1)(iii) concerning the inclusion of 
such charges in points and fees for closed-end credit transactions. 
Proposed comment 32(b)(3)(ii)-1 would have cross-referenced proposed 
comment 32(b)(1)(iii)-1 for guidance concerning the inclusion in points 
and fees of items listed in Sec.  1026.4(c)(7). The Bureau did not 
receive any comments specifically addressing proposed Sec.  
1026.32(b)(3)(ii) or its related commentary. The Bureau thus finalizes 
these provisions as proposed in Sec.  1026.32(b)(2)(iii).
32(b)(2)(iv)
    Proposed Sec.  1026.32(b)(3)(iii) would have provided for the 
inclusion in points and fees for HELOCs of

[[Page 6912]]

premiums or other charges payable at or before account opening for any 
credit life, credit disability, credit unemployment, or credit property 
insurance, or any other life, accident, health, or loss-of-income 
insurance, or any payments directly or indirectly for any debt 
cancellation or suspension agreement or contract. Proposed Sec.  
1026.32(b)(3)(iii) thus would have mirrored proposed Sec.  
1026.32(b)(1)(iv) concerning the inclusion of such charges for closed-
end credit transactions. Proposed comment 32(b)(3)(iii)-1 would have 
cross-referenced proposed comments 32(b)(1)(iv)-1 and -2 for guidance 
concerning the inclusion in points and fees of premiums for credit 
insurance and debt cancellation or suspension coverage.
    The Bureau received few comments specifically addressing proposed 
Sec.  1026.32(b)(3)(iii) or its related commentary. The comments argued 
that the Bureau should specify, as for closed-end points and fees, that 
hazard insurance premiums are excluded in all cases for HELOCs because 
they are payable in a comparable cash transaction. For the reasons 
discussed in the section-by-section analysis of closed-end points and 
fees, the Bureau disagrees and notes that the final rule includes 
hazard insurance premiums unless they are solely for the benefit of the 
consumer. The Bureau thus finalizes proposed Sec.  1026.32(b)(3)(iii) 
and its related commentary generally as proposed, as Sec.  
1026.32(b)(2)(iv). The Bureau adds a new cross-reference to comment 
32(b)(1)(iv)-3, which is being adopted in the 2013 ATR Final Rule. 
Comment 32(b)(1)(iv)-3 provides clarification concerning treatment of 
premiums solely for the benefit of the consumer.
32(b)(2)(v)
    Proposed Sec.  1026.32(b)(3)(iv) would have provided for the 
inclusion in points and fees for HELOCs the maximum prepayment penalty 
that may be charged or collected under the terms of the plan. This 
provision would have mirrored proposed Sec.  1026.32(b)(1)(v) 
concerning the inclusion of maximum prepayment penalties for closed-end 
credit transactions, except that proposed Sec.  1026.32(b)(3)(iv) would 
have cross-referenced the definition of prepayment penalty provided for 
HELOCs in proposed Sec.  1026.32(b)(8)(ii).
    The Bureau did not receive any comments specifically addressing 
proposed Sec.  1026.32(b)(3)(iv). The Bureau thus finalizes this 
provision generally as proposed, as Sec.  1026.32(b)(2)(v). The Bureau 
replaces the proposed cross-reference to Sec.  1026.32(b)(8)(ii) with a 
cross-reference to Sec.  1026.32(b)(6)(ii), where the definition of 
prepayment penalty for HELOCs is being finalized.
32(b)(2)(vi)
    As discussed in the section-by-section analysis of Sec.  
1026.32(b)(1)(vi) above, section 1431(c) of the Dodd-Frank Act amended 
TILA to add new TILA section 103(bb)(4)(F) to the general definition of 
points and fees. TILA section 103(bb)(4)(F) requires the inclusion in 
points and fees of 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 HOEPA Proposal would not have included this item in its enumerated 
list of points and fees for HELOCs. However, proposed comment 32(b)(8)-
2 would have aligned the treatment of closed-end and open-end credit 
transactions by clarifying that for HELOCs, the term ``prepayment 
penalty'' includes a charge imposed if the consumer terminates the plan 
in connection with obtaining a new loan or plan with the current holder 
of the existing plan, a servicer acting on behalf of the current 
holder, or an affiliate of either.
    Upon further reflection, the Bureau believes that it is preferable 
to align the list of items in Sec.  1026.32(b)(2) that should be 
included in points and fees for HELOCs with that for closed-end credit 
transactions in Sec.  1026.32(b)(1). As a result, the Bureau is 
including the guidance contained in proposed comment 32(b)(8)-2 in 
Sec.  1026.32(b)(2)(vi). Section 1026.32(b)(2)(vi) includes a 
requirement that the creditor include in points and fees for HELOCs the 
total prepayment penalty, as defined in Sec.  1026.32(b)(6)(ii), 
incurred by the consumer if the consumer refinances an existing closed-
end credit transaction with an open-end credit plan, or terminates an 
existing open-end credit plan in connection with obtaining a new open-
end credit transaction, with the current holder of the existing plan, a 
servicer acting on behalf of the current holder, or an affiliate of 
either.
32(b)(2)(vii)
    Proposed Sec.  1026.32(b)(3)(v) would have provided for the 
inclusion in points and fees for HELOCs of ``any fees charged for 
participation in an open-end credit plan, as described in Sec.  
1026.4(c)(4), whether assessed on an annual or other periodic basis.'' 
In the proposal, the Bureau noted that the fees described in Sec.  
1026.4(c)(4) (i.e., fees charged for participation in a credit plan) 
are excluded from the finance charge, and thus would not otherwise have 
been included in points and fees for HELOCs under proposed Sec.  
1026.32(b)(3)(i). The Bureau believed, however, that such fees should 
be included in points and fees for HELOCs because creditors extending 
HELOCs may commonly impose such fees on consumers as a pre-condition to 
maintaining access to the plans, and because the Bureau believed that 
creditors generally could calculate at account opening the amount of 
participation charges that the consumer would be required to pay to 
maintain access for the life of the plan.
    Proposed comment 32(b)(3)(v)-1 thus would have clarified that Sec.  
1026.32(b)(3)(v) requires the inclusion in points and fees of annual 
fees or other periodic maintenance fees that the consumer must pay to 
retain access to the open-end credit plan, as described in Sec.  
1026.4(c)(4). The comment would have clarified that, for purposes of 
the points and fees test, a creditor should assume that any annual fee 
is charged each year for the original term of the plan. Thus, for 
example, if the terms of a home-equity line of credit with a ten-year 
term require the consumer to pay an annual fee of $50, the creditor 
would be required to include $500 in participation fees in its 
calculation of points and fees.
    The Bureau requested comment on the inclusion of fees described in 
Sec.  1026.4(c)(4) in points and fees for HELOCs, including on whether 
additional guidance was needed concerning how to calculate such fees 
for plans that do not have a definite plan length.
    The Bureau received several comments from industry concerning the 
proposed inclusion of participation fees in points and fees for HELOCs. 
Several commenters expressed concern that the definition would 
disproportionately impact HELOCs with lower commitment amounts and 
therefore adversely affect the availability of such products. 
Commenters also stated that TILA's statutory language did not support 
the inclusion of participation fees in points and fees if the creditor 
waives the fees dependent on the consumer's use of the credit plan, 
such as if the consumer carries an outstanding balance or if the line 
has been used during the year. Commenters observed that these 
conditions cannot be known at account opening, thus the amount of 
participation charge to be included in points and fees over the term of 
the HELOC cannot be known at account opening. Commenters suggested

[[Page 6913]]

various alternatives for including participation fees in points and 
fees for HELOCs, such as requiring the fees to be included only if they 
are payable at or before account opening, or requiring them to be 
included only for the first three years of the account (after which the 
consumer could close the account without facing a prepayment penalty if 
the consumer objected to paying the fee). No commenters provided any 
suggestions for calculating the amount of participation fees to be 
included in points and fees for a HELOC without a specified account 
termination date.
    The Bureau adopts this provision as Sec.  1026.32(b)(2)(vii) with 
the limitation that creditors must include only those participation 
charges that are payable before or at account opening. The Bureau 
expects that this approach will provide a workable rule for creditors 
opening HELOCs with participation charges that may be waived depending 
on a consumer's use of the account, as well as for HELOCs without a 
specified account termination date.
32(b)(2)(viii)
    As noted above, new TILA section 103(bb)(5) specifies, in part, 
that the calculation of points and fees for HELOCs must include ``the 
minimum additional fees the consumer would be required to pay to draw 
down an amount equal to the total credit line.'' The Bureau proposed to 
implement this requirement in Sec.  1026.32(b)(3)(vi). Specifically, 
proposed Sec.  1026.32(b)(3)(vi) would have provided for inclusion in 
the calculation of points and fees for HELOCs any transaction fee, 
including any minimum fee or per-transaction fee, that would be charged 
for a draw on the credit line. Proposed Sec.  1026.32(b)(3)(vi) would 
have clarified that a transaction fee that is assessed when a consumer 
draws on the credit line must be included in points and fees whether or 
not the consumer draws the entire credit line. In the proposal, the 
Bureau noted its belief that any transaction fee that would be charged 
for a draw on the credit line would include any transaction fee that 
would be charged to draw down an amount equal to the total credit line.
    The Bureau interprets the requirement in amended TILA section 
103(bb)(5) to include the ``minimum additional fees'' that will be 
imposed on the consumer to draw an amount of credit equal to the total 
credit line as requiring creditors to assume that a consumer will make 
at least one such draw during the term of the credit plan. The Bureau 
recognizes that creditors will not know at account opening how many 
times (if ever) a consumer will draw the entire amount of the credit 
line. For clarity and ease of compliance, the Bureau interprets the 
statute to require the creditor to assume one such draw. Proposed 
comment 32(b)(3)(vi)-1 would have clarified this requirement with an 
example. Proposed comment 32(b)(3)(vi)-2 would have clarified that, if 
the terms of the HELOC permit a consumer to draw on the credit line 
using either a variable- or fixed-rate feature, proposed Sec.  
1026.32(b)(3)(vi) requires the creditor to use the terms applicable to 
the variable-rate feature for determining the transaction fee that must 
be included in the points and fees calculation.
    The Bureau solicited comment on the requirement to include in 
points and fees for HELOCs the charge assessed for one draw of the 
total credit line, and on whether additional guidance was needed for 
HELOCs with a maximum amount per draw. The Bureau did not receive any 
comments specifically addressing proposed Sec.  1026.32(b)(3)(vi) or 
its related commentary. The Bureau thus finalizes these provisions as 
proposed, but renumbers them in the final rule as Sec.  
1026.32(b)(2)(viii) and comments 32(b)(2)(viii)-1 and -2.
32(b)(3)
Definition of Bona Fide Discount Point
    As discussed in the section-by-section analysis of Sec.  
1026.32(b)(2) above, the Bureau proposed to implement the calculation 
of points and fees for HELOCs in Sec.  1026.32(b)(3). The Bureau is 
finalizing the calculation of points and fees for HELOCs in Sec.  
1026.32(b)(2). Thus, the Bureau is adopting in Sec.  1026.32(b)(3) the 
definition of bona fide discount point. The Bureau proposed to 
implement this definition in Sec.  1026.32(b)(5)(ii) in the 2012 HOEPA 
Proposal.
    The Dodd-Frank Act added TILA sections 103(dd)(3) and (4) and 
129C(b)(2)(C)(iii) and (iv) to provide the same methodology for high-
cost mortgages and qualified mortgages, respectively, for determining 
whether a discount point is ``bona fide'' and thus excludable from 
points and fees. Specifically, these sections provide that a discount 
point is ``bona fide'' if (1) the consumer knowingly pays it for the 
purpose of reducing, and the point in fact results in a bona fide 
reduction of, the interest rate or time-price differential applicable 
to the mortgage, and (2) the amount of the interest rate reduction 
purchased is reasonably consistent with established industry norms and 
practices for secondary mortgage market transactions.
    Under both the Board's proposed Sec.  226.43(e)(3)(iv) for 
qualified mortgages and the Bureau's proposed Sec.  1026.32(b)(5)(ii) 
for high-cost mortgages, a discount point would have been ``bona fide'' 
if it both (1) reduced the interest rate or time-price differential 
applicable to transaction based on a calculation that was 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) 
accounted for the amount of compensation that the creditor could 
reasonably expect to receive from secondary market investors in return 
for the transaction. Specifically, proposed Sec.  1026.32(b)(5)(ii)(C) 
in the 2012 HOEPA Proposal simply would have cross-referenced proposed 
Sec.  226.43(e)(3)(iv) as set forth in the Board's 2011 ATR Proposal 
for purposes of determining whether a discount point was ``bona fide'' 
and excludable from the high-cost mortgage points and fees 
calculation.\141\ The Bureau noted in the 2012 HOEPA Proposal that it 
expected to provide further clarification concerning the exclusion of 
bona fide discount points from points and fees for qualified mortgages 
when it finalized the Board's 2011 ATR Proposal. In the 2012 HOEPA 
Proposal, the Bureau thus stated that it would coordinate any such 
clarification across the ATR and HOEPA Final Rules.
---------------------------------------------------------------------------

    \141\ See 76 FR 27390, 27485 (May 11, 2011).
---------------------------------------------------------------------------

    The Bureau received several comments concerning its proposed 
definition of ``bona fide discount point,'' all from industry 
commenters. The comments generally repeated what commenters had stated 
in response to the Board's 2011 ATR Proposal. Specifically, commenters 
stated that the proposed definition was both vague and overly 
restrictive, and that the secondary market does not create a meaningful 
benchmark for whether the amount of a given interest rate reduction is 
``bona fide.'' Some commenters objected that they were not aware of 
``established industry practices'' related to loan pricing and that 
pricing strategies vary significantly from creditor to creditor. For 
example, one creditor's ``par rate'' may be higher or lower than 
another's based on whether the creditor absorbs secondary market costs 
such as LLPAs and processing fees or passes them on to the consumer. 
Such factors could impact the creditor's discount point pricing. 
Certain other commenters requested guidance for how creditors making 
portfolio loans with discount points could establish that the discount 
point is ``bona fide,'' given that

[[Page 6914]]

the proposed test would have been tied to the secondary market.
    As discussed at length in the Bureau's 2013 ATR Final Rule, the 
Bureau is adopting in that rulemaking a definition of ``bona fide 
discount point'' with certain modifications from what was proposed in 
the 2011 ATR and 2012 HOEPA Final Rules. In brief, the Bureau is 
removing the proposed requirement that interest rate reductions take 
into account secondary market considerations. Instead, as revised, 
Sec.  1026.32(b)(3) 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 time-price 
differential appropriate for the amount of discount points paid by the 
consumer. As noted in the 2013 ATR Final Rule, 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. In 
particular, the exception is necessary and proper to permit creditors 
sufficient flexibility to demonstrate that they are in compliance with 
the requirement that discount points are bona fide. These same 
considerations regarding facilitating compliance apply equally in the 
high-cost mortgage context.
    To further assist creditors in the bona fide discount point 
calculation for high-cost mortgages and qualified mortgages, the Bureau 
is adopting in the 2013 ATR Final Rule new comment 32(b)(3)-1, which 
provides examples of methods that a creditor can use to determine 
whether a discount point is ``bona fide.'' The examples are discussed 
in further detail in the section-by-section analysis of Sec.  
1026.32(b)(4) in the ATR Final Rule.
32(b)(4)
Proposed Provision Not Adopted
    Proposed Sec.  1026.32(b)(4) in the 2012 HOEPA Proposal would have 
excluded from points and fees for HELOCs any charge the creditor waived 
at or before account opening, unless the creditor could assess the 
charge after account opening. Proposed comment 32(b)(4)-1 would have 
provided an example to illustrate the rule. The Bureau received several 
comments relating to whether and when conditionally-waived closing 
costs should be required to be included in points and fees through the 
prepayment penalty prong of the calculation. The Bureau is addressing 
issues concerning the treatment of conditionally-waived, third-party 
charges in the definition of prepayment penalty, and therefore is not 
finalizing proposed Sec.  1026.32(b)(4). Public comments regarding 
these charges are addressed in the section-by-section analysis of Sec.  
1026.32(b)(6) below.
Total Loan Amount for Points and Fees
    As noted in the section-by-section analysis of Sec.  
1026.32(a)(1)(ii) above, the Bureau's 2012 HOEPA Proposal proposed for 
organizational purposes to move (1) the existing definition of ``total 
loan amount'' for closed-end credit transactions from comment 
32(a)(1)(ii)-1 to proposed Sec.  1026.32(b)(6)(i), and (2) the examples 
showing how to calculate the total loan amount for closed-end credit 
transactions from existing comment 32(a)(1)(ii)-1 to proposed comment 
32(b)(6)(i)-1. The Bureau also proposed certain changes to the total 
loan amount definition and commentary for closed-end credit 
transactions, as discussed below. Finally, the Bureau proposed to 
define ``total loan amount'' for HELOCs in proposed Sec.  
1026.32(b)(6)(ii). The definition of ``total loan amount'' is being 
finalized in the 2013 ATR Final Rule. As adopted in that rulemaking, 
the definitions and accompanying guidance will appear in Sec.  
1026.32(b)(4) and comment 32(b)(4)(i)-1. Changes from what the Bureau 
proposed in its 2012 HOEPA Proposal are discussed below.
32(b)(4)(i)
    As noted, the Bureau proposed to move existing comment 
32(a)(1)(ii)-1 concerning calculation of the ``total loan amount'' for 
points and fees to proposed Sec.  1026.32(b)(6)(i) and comment 
32(b)(6)(i)-1 and to specify that the calculation applies to closed-end 
credit transactions. The Bureau also proposed to amend the definition 
of ``total loan amount'' so that the ``amount financed,'' as calculated 
pursuant to Sec.  1026.18(b), would no longer be the starting point for 
the total loan amount calculation. The Bureau proposed this amendment 
both because the Bureau believed that it would streamline the total 
loan amount calculation and because the Bureau believed the revisions 
were sensible in light of the more inclusive definition of the finance 
charge proposed in the Bureau's 2012 TILA-RESPA Proposal. In the 
preamble of the HOEPA proposal, the Bureau noted that one effect of the 
proposed more inclusive finance charge generally could have been to 
reduce the ``amount financed'' for many transactions. The Bureau thus 
proposed not to rely on the ``amount financed'' calculation as the 
starting point for the ``total loan amount'' in HOEPA. The Bureau 
instead proposed to define ``total loan amount'' as the amount of 
credit extended at consummation that the consumer is legally obligated 
to repay, as reflected in the loan contract, less any cost that is both 
included in points and fees under Sec.  1026.32(b)(1) and financed by 
the creditor. Proposed comment 32(b)(6)(i)-1 would have provided an 
example of the Bureau's proposed ``total loan amount'' calculation for 
closed-end credit transactions.
    The Bureau requested comment on the appropriateness of its revised 
definition of ``total loan amount,'' and particularly on whether 
additional guidance was needed in light of the prohibition against 
financing of points and fees for high-cost mortgages. Specifically, the 
Bureau noted that, under the 2012 HOEPA Proposal, financed points are 
relevant for two purposes. First, financed points and fees must be 
excluded from the total loan amount for purposes of determining whether 
a closed-end credit transaction is covered by HOEPA under the points 
and fees threshold. Second, if a transaction is a high-cost mortgage 
through operation of any of the HOEPA triggers, the creditor is 
prohibited from financing points and fees by, for example, including 
points and fees in the note amount or financing them through a separate 
note. See the section-by-section analysis of Sec.  1026.34(a)(10) 
below.
    The 2012 HOEPA Proposal noted that, notwithstanding HOEPA's ban on 
the financing of points and fees for high-cost mortgages, for purposes 
of determining HOEPA coverage (and thus whether the ban applies) 
creditors should be required to deduct from the amount of credit 
extended to the consumer any points and fees that the creditor would 
finance if the transaction were not subject to HOEPA.\142\ In this way, 
the percentage limit on points and fees for determining HOEPA coverage 
would be based on the amount of credit extended to the borrower without 
taking into account any points and fees that would (if permitted) be 
financed. The preamble to the 2012 HOEPA Proposal provided an example 
to illustrate how the provisions concerning financed points and fees in 
proposed Sec. Sec.  1026.32(b)(6)(i) and 1026.34(a)(10) would have 
worked together.
---------------------------------------------------------------------------

    \142\ Calculating the total loan amount by deducting financed 
points and fees from the amount of credit extended to the consumer 
is consistent with the existing total loan amount calculation in 
current comment 32(a)(1)(ii)-1.
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    The Bureau received numerous comments concerning its proposed 
amendment to the total loan amount calculation for closed-end credit 
transactions. The comments, from both industry and consumer groups,

[[Page 6915]]

generally requested that the calculation be clarified prior to its 
finalization. The Bureau received no comments seeking further guidance 
or clarification concerning the interaction of the total loan amount 
calculation and the prohibition against financing of points and fees 
for high-cost mortgages.
    After further consideration, the Bureau has determined not to adopt 
at this time the proposed revisions to the total loan amount 
calculation for closed-end credit transactions. The Bureau notes that 
it likely will revisit this subject when it issues a final rule 
concerning the proposed more inclusive finance charge. Thus, the Bureau 
adopts the total loan amount definition for closed-end credit 
transactions as separately finalized in connection with the 2013 ATR 
Final Rule. As finalized therein, the total loan amount for a closed-
end credit transaction is calculated consistently with existing comment 
32(a)(1)(ii)-1, except that the Bureau is adopting certain 
clarifications to reflect the operation of other, new provisions under 
TILA. For example, the total loan amount calculation examples, which 
discuss whether and when to subtract financed points and fees from the 
amount financed, are revised so that they no longer refer to the 
financing of credit life insurance, because the financing of most such 
insurance is prohibited under TILA section 129C(d).
32(b)(4)(ii)
    Proposed Sec.  1026.32(b)(6)(ii) in the 2012 HOEPA Proposal would 
have provided that the ``total loan amount'' for a HELOC is the credit 
limit for the plan when the account is opened. The Bureau requested 
comment as to whether additional guidance was needed concerning the 
``total loan amount'' for HELOCs. The Bureau received no comments 
concerning proposed Sec.  1026.32(b)(6)(ii) and finalizes it in this 
rulemaking, as Sec.  1026.32(b)(4)(ii).
32(b)(5)
    The 2012 HOEPA Proposal would have re-numbered existing Sec.  
1026.32(b)(2) defining the term ``affiliate'' as Sec.  1026.32(b)(7) 
for organizational purposes. The Bureau received no comments on this 
provision. The Bureau finalizes this organizational change in the 2013 
ATR Final Rule, by re-numbering existing Sec.  1026.32(b)(2) as Sec.  
1026.32(b)(5).
32(b)(6)
HOEPA's Current Approach to Prepayment Penalties
    Existing Sec.  1026.32 addresses prepayment penalties in Sec.  
1026.32(d)(6) and (7). Existing Sec.  1026.32(d)(6) has implemented 
TILA section 129(c)(1) by defining the term ``prepayment penalty'' for 
high-cost mortgages as a penalty for paying all or part of the 
principal before the date on which the principal is due, including by 
computing a refund of unearned scheduled interest in a manner less 
favorable than the actuarial method, as defined by section 933(d) of 
the Housing and Community Development Act of 1992. Existing Sec.  
1026.32(d)(7) has implemented TILA section 129(c)(2) by specifying when 
a creditor historically has been permitted to impose a prepayment 
penalty in connection with a high-cost mortgage. Prior to the Dodd-
Frank Act, the substantive limitations on prepayment penalties in TILA 
section 129(c)(1) and (2) were the only statutorily-prescribed 
limitations on prepayment penalties in TILA, other than certain 
disclosure requirements set forth in TILA section 128(a)(11) and 
(12).\143\
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    \143\ Existing Sec.  1026.35(b)(2) restricts prepayment 
penalties for higher-priced mortgage loans in much the same way that 
existing Sec.  1026.32(d)(6) and (7) restricts such penalties for 
high-cost mortgages, but Sec.  1026.35(b)(2) was adopted before the 
specific prohibitions contained in the Dodd-Frank Act were enacted. 
The Bureau's Escrows Final Rule is removing the restriction in Sec.  
1026.35(b)(2), in any event, in light of the broader prepayment 
penalty regulations being adopted both in this rulemaking and the 
2013 ATR Final Rule.
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The Dodd-Frank Act's Amendments to TILA Relating to Prepayment 
Penalties
    As discussed in the 2012 HOEPA Proposal, sections 1431 and 1432 of 
the Dodd-Frank Act (high-cost mortgages) and section 1414 of the Dodd-
Frank Act (qualified mortgages) amended TILA to further restrict (and 
often prohibit) prepayment penalties in dwelling-secured credit 
transactions. The Dodd-Frank Act restricted prepayment penalties in 
three main ways.
    Qualified Mortgages. First, as discussed in the 2013 ATR Final 
Rule, the Dodd-Frank Act added to TILA new section 129C(c)(1) relating 
to qualified mortgages, which generally provides that a residential 
mortgage loan (i.e., in general, a closed-end, dwelling-secured credit 
transaction) may include a prepayment penalty only if it: (1) Is a 
qualified mortgage (as the Bureau is defining that term in Sec.  
1026.43(e)(2), (e)(4), and (f)), (2) has an APR that cannot increase 
after consummation, and (3) is not a higher-priced mortgage loan as 
defined in Sec.  1026.35(a).\144\ Under amended TILA section 
129C(c)(3), moreover, even loans that meet the statutorily-prescribed 
criteria just described (i.e., fixed-rate, non-higher-priced qualified 
mortgages) may not include prepayment penalties that exceed three 
percent, two percent, and one percent of the amount prepaid during the 
first, second, and third years following consummation, respectively (or 
any prepayment penalty after the third year following 
consummation).\145\
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    \144\ The Bureau's 2013 ATR Final Rule is finalizing the Board's 
proposed implementation of TILA section 129C(c)(1) in new Sec.  
1026.43(g)(1).
    \145\ The Bureau's 2013 ATR Final Rule is finalizing the Board's 
proposed implementation of TILA section 129C(c)(3) in new Sec.  
1026.43(g)(2), which provides that a prepayment penalty must not 
apply after the three-year period following consummation, and must 
not exceed 2 percent of the outstanding loan balance prepaid (during 
the first two years following consummation) or 1 percent of the 
outstanding loan balance prepaid (during the third year following 
consummation).
---------------------------------------------------------------------------

    High-Cost Mortgages. Second, as discussed above in the section-by-
section analysis of Sec.  1026.32(a)(1)(iii), amended TILA section 
103(bb)(1)(A)(iii) provides that any closed- or open-end consumer 
credit transaction secured by a consumer's principal dwelling (other 
than a reverse mortgage transaction) with a prepayment penalty in 
excess of 2 percent of the amount prepaid or payable more than 36 
months after consummation or account opening is a high-cost mortgage 
subject to Sec. Sec.  1026.32 and 1026.34. Under amended TILA section 
129(c)(1), in turn, high-cost mortgages are prohibited from having a 
prepayment penalty.
    Prepayment Penalty Inclusion in Points and Fees. Third, both 
qualified mortgages and most closed-end credit transactions and HELOCs 
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 both qualified 
mortgages and high-cost mortgages. See the section-by-section analysis 
of Sec.  1026.32(b)(1)(v)-(vi) and (b)(2)(v)-(vi) above. See also the 
section-by-section analysis of Sec. Sec.  1026.32(b)(1)(v)-(vi) and 
.43(e)(3) in the Bureau's 2013 ATR Final Rule (discussing the inclusion 
of prepayment penalties in the points and fees calculation for 
qualified mortgages pursuant to TILA section 129C(b)(2)(A)(vii) and 
noting that most qualified mortgage transactions may not have total 
points and fees that exceed three percent of the total loan amount).
    Taken together, the Dodd-Frank Act's amendments to TILA relating to 
prepayment penalties mean that most

[[Page 6916]]

closed-end, dwelling-secured transactions (1) may provide for a 
prepayment penalty only if they are fixed-rate, qualified mortgages 
that are neither high-cost nor higher-priced under Sec. Sec.  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;\146\ 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 threshold for high-cost mortgages. 
In addition, in the open-end credit context, no HELOC secured by a 
consumer's principal dwelling may provide for a prepayment penalty more 
than 3 years following account opening or in an amount that exceeds two 
percent of the initial credit limit under the plan.
---------------------------------------------------------------------------

    \146\ New TILA section 129C(c)(3) limits prepayment penalties 
for fixed-rate, non-higher-priced qualified mortgages to three 
percent, two percent, and one percent of the amount prepaid during 
the first, second, and third years following consummation, 
respectively. However, amended TILA sections 103(bb)(1)(A)(iii) and 
129(c)(1) for high-cost mortgages effectively prohibit prepayment 
penalties in excess of two percent of the amount prepaid at any time 
following consummation for most credit transactions secured by a 
consumer's principal dwelling by providing that HOEPA protections 
(including a ban on prepayment penalties) apply to credit 
transactions with prepayment penalties that exceed two percent of 
the amount prepaid. To comply with both the high-cost mortgage 
provisions and the qualified mortgage provisions, creditors 
originating most closed-end transactions secured by a consumer's 
principal dwelling would need to limit the prepayment penalty on the 
transaction to (1) no more than two percent of the amount prepaid 
during the first and second years following consummation, (2) no 
more than one percent of the amount prepaid during the third year 
following consummation, and (3) zero thereafter.
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The Board's and the Bureau's Proposals Relating to Prepayment Penalties
    In its 2009 Closed-End Proposal, the Board proposed to establish a 
new Sec.  226.38(a)(5) for disclosure of prepayment penalties for 
closed-end credit transactions. See 74 FR 43232, 43334, 43413 (Aug. 26, 
2009). In proposed comment 38(a)(5)-2, the Board stated that examples 
of prepayment penalties include charges determined by treating the loan 
balance as outstanding for a period after prepayment in full and 
applying the interest rate to such ``balance,'' a minimum finance 
charge in a simple-interest transaction, and charges that a creditor 
waives unless the consumer prepays the obligation. In addition, the 
Board's proposed comment 38(a)(5)-3 listed loan guarantee fees and fees 
imposed for preparing a payoff statement or other documents in 
connection with the prepayment as examples of charges that are not 
prepayment penalties. The Board's 2010 Mortgage Proposal included 
amendments to existing comment 18(k)(1)-1 and proposed comment 
38(a)(5)-2 stating that prepayment penalties include ``interest'' 
charges after prepayment in full even if the charge results from 
interest accrual amortization used for other payments in the 
transaction.\147\
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    \147\ See 75 FR 58539, 58756, 58781 (Sept. 24, 2010). The 
preamble to the Board's 2010 Mortgage Proposal explained that the 
proposed revisions to current Regulation Z commentary and proposed 
comment 38(a)(5)-2 from the Board's 2009 Closed-End Proposal 
regarding interest accrual amortization were in response to concerns 
about the application of prepayment penalties to certain Federal 
Housing Administration (FHA) and other loans (i.e., when a consumer 
prepays an FHA loan in full, the consumer must pay interest through 
the end of the month in which prepayment is made).
---------------------------------------------------------------------------

    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, 
dwelling-secured transactions in new Sec.  226.43(b)(10), and by cross-
referencing proposed Sec.  226.43(b)(10) in the proposed joint 
definition of points and fees for qualified and high-cost mortgages in 
Sec.  226.32(b)(1)(v) and (vi).\148\ The definition of prepayment 
penalty proposed in the Board's 2011 ATR Proposal differed from the 
Board's prior proposals and current guidance in the following respects: 
(1) Proposed Sec.  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 Sec.  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,\149\ and (3) proposed Sec.  226.43(b)(10) did not 
incorporate, and the Board's 2011 ATR Proposal did not otherwise 
address, the language in Sec.  1026.18(k)(2) and associated commentary 
regarding disclosure of a rebate of a precomputed finance charge, or 
the language in Sec.  1026.32(b)(6) and associated commentary 
concerning prepayment penalties for high-cost mortgages.
---------------------------------------------------------------------------

    \148\ See 76 FR 27390, 27481-82 (May 11, 2011).
    \149\ The preamble to the Board's 2011 ATR Proposal addressed 
why the Board chose to omit these two items. The Board reasoned that 
a minimum finance charge need not be included as an example of a 
prepayment penalty because such a charge typically is imposed with 
open-end, rather than closed-end, transactions. The Board stated 
that loan guarantee fees are not prepayment penalties because they 
are not charges imposed for paying all or part of a loan's principal 
before the date on which the principal is due. See 76 FR 27390, 
27416 (May 11, 2011).
---------------------------------------------------------------------------

    The Bureau's 2012 TILA-RESPA Proposal drew from the Board's pre-
existing proposals concerning the definition of prepayment penalty for 
closed-end credit transactions, and reconciled their definitions in 
proposing a definition for closed-end credit disclosures.
The Bureau's 2012 HOEPA Proposal
    To provide guidance as to the meaning of ``prepayment penalty'' for 
closed-end credit transactions subject to Sec.  1026.32 that was 
consistent with the definition proposed in the Bureau's 2012 TILA-RESPA 
Proposal, as well as to provide guidance concerning prepayment 
penalties in the context of HELOCs, the Bureau's 2012 HOEPA Proposal 
would have established a new Sec.  1026.32(b)(8) to define the term 
``prepayment penalty'' for purposes of closed- and open-end credit 
transactions subject to Sec.  1026.32. Proposed Sec.  1026.32(b)(8)(i) 
defining ``prepayment penalty'' for closed-end credit transactions is 
finalized as Sec.  1026.32(b)(6)(i) in the 2013 ATR Final Rule, and 
proposed Sec.  1026.32(b)(8)(ii) defining the term for HELOCs is 
finalized as Sec.  1026.32(b)(6)(ii) in this final rule, with certain 
adjustments from the proposal discussed below.
32(b)(6)(i)
Prepayment Penalty; Closed-End Credit Transactions
    Consistent with TILA section 129(c)(1), existing Sec.  
1026.32(d)(6), and the Board's proposed Sec.  226.43(b)(10) for 
qualified mortgages, proposed Sec.  1026.32(b)(8)(i) would have 
provided that, for a closed-end credit transaction, 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. 
Proposed comment 32(b)(8)-1.i through -1.iv would have given examples 
of prepayment penalties for closed-end credit transactions, including 
(among others) (1) a charge determined by treating the loan balance as 
outstanding for a period of time after prepayment in 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; and (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. 
Proposed comment

[[Page 6917]]

32(b)(8)-1.i would have provided additional clarification concerning 
the treatment as prepayment penalties of charges imposed as a result of 
the interest accrual amortization method used in the transaction.
    Proposed comment 32(b)(8)-3.i through -3.ii would have applied to 
both closed- and open-end credit transactions and would have clarified 
that a prepayment penalty does not include: (1) Fees imposed for 
preparing and providing documents when a loan is paid in full, or when 
a HELOC is terminated, if the fees apply whether or not the loan is 
prepaid or the plan is terminated prior to the expiration of its term, 
such as a loan payoff statement, a reconveyance document, or another 
document releasing the creditor's security interest in the dwelling 
that secures the loan; or (2) loan guarantee fees.
    The Bureau noted that its proposed definition of prepayment penalty 
in Sec.  1026.32(b)(8)(i) and comments 32(b)(8)-1 and 32(b)(8)-3.i and 
.ii would have substantially incorporated the definitions of and 
guidance on prepayment penalties from the Board's 2009 Closed-End 
Proposal, 2010 Mortgage Proposal, and 2011 ATR Proposal and, as 
necessary, reconciled their differences. For example, the definitions 
would have incorporated the language from the Board's 2009 Closed-End 
Proposal and 2010 Mortgage Proposal (but that was omitted in the 
Board's 2011 ATR Proposal) listing a minimum finance charge as an 
example of a prepayment penalty and stating that loan guarantee fees 
are not prepayment penalties, because similar language is found in 
longstanding Regulation Z commentary. Based on the differing approaches 
taken by the Board in its recent mortgage proposals, however, the 
Bureau's HOEPA proposal sought comment on whether a minimum finance 
charge should be listed as an example of a prepayment penalty and 
whether loan guarantee fees should be excluded from the definition of 
prepayment penalty.
    The Bureau's HOEPA proposal noted that it expected to coordinate 
the definition of prepayment penalty in proposed Sec.  1026.32(b)(8)(i) 
with the definitions in the Bureau's other pending rulemakings mandated 
by the Dodd-Frank Act concerning ability-to-repay, TILA-RESPA mortgage 
disclosure integration, and mortgage servicing. To the extent 
consistent with consumer protection objectives, the Bureau believed 
that adopting a consistent definition of ``prepayment penalty'' across 
its various pending rulemakings affecting closed-end credit would 
facilitate compliance.
    The Bureau received several comments concerning its proposed 
definition for prepayment penalties in closed-end credit transactions. 
The comments related to two main aspects of the proposal: (1) The 
treatment as a prepayment penalty of the assessment of interest for 
periods after the borrower has paid in full; and (2) the inclusion of 
all conditionally-waived closing costs in the definition of prepayment 
penalty for closed-end credit transactions. The Bureau is adopting 
proposed Sec.  1026.32(b)(8)(i) as Sec.  1026.32(b)(6)(i) in the 2013 
ATR Final Rule, with certain changes from the 2012 HOEPA Proposal to 
address comments received, as discussed below. As adopted in the 2013 
ATR Final Rule and as discussed further therein, comments 32(b)(6)-1 
and -2 provide examples of payments that are (and are not) prepayment 
penalties in the case of closed-end credit transactions.
    Post-payoff interest charges. Several commenters expressed serious 
concern about the Bureau's proposal to include in the definition of 
prepayment penalty for closed-end credit transactions the assessment of 
interest for periods after the borrower pays in full. Commenters voiced 
concern about the potential impact of this provision on FHA lending. 
FHA loans, based on a monthly interest accrual amortization method, are 
subject to a policy under which interest may accrue and be charged to 
the consumer for a partial month after a full payoff. Given that FHA 
loans can be paid off well beyond 36 months (the maximum time period 
during which a prepayment penalty may be imposed without triggering 
HOEPA), defining prepayment penalty to include such interest would 
effectively cause FHA loans to trigger HOEPA unless the FHA changes its 
policy going forward.\150\ Commenters stated that the Bureau should 
either define prepayment penalties to exclude interest payments that 
are imposed for the balance of a month in which a consumer repays a 
mortgage loan in full, or the Bureau should work with FHA prior to the 
change taking effect to avoid disruption to industry and, in turn, to 
borrowers.
---------------------------------------------------------------------------

    \150\ As noted in the Bureau's 2013 ATR Final Rule, it would 
similarly mean that no future FHA loan could be a qualified mortgage 
absent a change in the accrual method, due to prepayment penalty 
limitations on qualified mortgages. In addition, the accrual method 
would be prohibited for non-qualified mortgages, which are not 
permitted to have any prepayment penalties.
---------------------------------------------------------------------------

    As discussed in the 2013 ATR Final Rule, the Bureau is not removing 
or substantively amending comment 32(b)(6)-1.i, which specifies that 
the practice of charging a consumer interest after the consumer prepays 
the loan in full is a prepayment penalty. As noted in that rulemaking, 
the Bureau includes the interest calculation as an example of a 
prepayment penalty in comment 32(b)(6)-1.i chiefly because such 
methodology penalizes the consumer by requiring the consumer to pay 
interest for a period after the loan has been paid in full. The 
inclusion of this example is also consistent with long-standing 
Regulation Z commentary accompanying Sec.  1026.18 that requires such 
charges to be disclosed as prepayment penalties, as well as with Board 
Regulation Z proposals from 2009 and 2010.\151\
---------------------------------------------------------------------------

    \151\ 74 FR 43232, 43257, 43295, 43390, 43413 (Aug. 26, 2009); 
75 FR 58539, 58586 (Sept. 24, 2010).
---------------------------------------------------------------------------

    However, 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 ATR 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 HOEPA and ATR Final Rules, the Bureau is using 
its authority under TILA section 105(a) to provide for optional 
compliance until January 21, 2015 with Sec.  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, Sec.  
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

[[Page 6918]]

circumvention or evasion thereof, or facilitate compliance therewith. 
15 U.S.C. 1604(a). The Bureau believes it is necessary and proper to 
make this adjustment 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 has exceeded the high-
cost mortgage prepayment penalty or points and fees coverage tests 
(and, in turn, whether the transaction has violated the prohibition 
against prepayment penalties for high-cost mortgages) applies only to 
transactions consummated on or after January 10, 2014; for FHA loans, 
compliance with this aspect of the definition or prepayment penalties 
is optional for transactions consummated prior to January 21, 2015.
    Conditionally-waived closing costs. Several commenters expressed 
dissatisfaction with the proposed inclusion of conditionally-waived 
closing costs as prepayment penalties for closed-end credit 
transactions. The commenters noted that the 2012 HOEPA Proposal would 
have excluded such waived closing costs from the definition of 
prepayment penalty for HELOCs, provided that the costs represented bona 
fide third-party charges and were recouped only in the case of 
prepayments occurring within the first 36 months after account opening. 
As with other aspects of the Proposal that applied different treatment 
to open- versus closed-end credit, consumer groups argued that waived 
closing costs should be considered prepayment penalties in all cases. 
Some industry commenters, on the other hand, argued that all waived 
closing charges (i.e., not only bona fide third-party charges, and not 
only such charges that the creditor might recoup during the first three 
years) should be excluded from the definition of prepayment penalty for 
both closed- and open-end credit. Other industry commenters requested 
that the exemption from prepayment penalties for waived third-party 
charges proposed for HELOCs apply equally to closed-end subordinate-
lien loans, because creditors commonly waive third-party fees on those 
loans as they do for HELOCs. One commenter suggested that the rule be 
clarified so that a charge, such as taxes, which would not be included 
in points and fees if the consumer paid it at closing would not be 
included in points and fees through the prepayment penalty prong if the 
creditor waived that charge but required it to be repaid if the 
consumer prepaid the loan or terminated the plan early. Another 
commenter noted that there is a practice of waiving closing costs on 
smaller transactions on the condition that the consumer does not prepay 
within three years of consummation or account opening. This commenter 
expressed concern that treatment of those costs as prepayment penalties 
would exceed the two percent HOEPA prepayment penalty trigger, thus 
unfairly burdening small-dollar-value lending.
    The Bureau is also adopting language and adding an example in the 
2013 ATR Final Rule to comment 32(b)(6)-1.ii to clarify that, for 
closed-end credit transactions (as for HELOCs), the term ``prepayment 
penalty'' does not include conditionally-waived, bona fide third-party 
closing charges that the creditor may impose on the consumer if the 
consumer prepays the loan in full within 36 months of consummation.
    The Bureau believes that excluding such charges from the definition 
of prepayment penalty for both closed- and open-end credit is the only 
practicable way to make the various provisions of HOEPA relating to 
prepayment penalties and points and fees work sensibly together. In 
this regard, the Bureau notes that bona fide third-party charges that 
the consumer pays upfront and that are not paid to or retained by the 
creditor or its affiliate are excluded from the definition of points 
and fees for closed-end credit transactions under Sec.  
1026.32(b)(1)(i)(D). By contrast, if the same bona fide third-party 
charges, waived on the condition that the consumer does not prepay the 
loan in full, are defined as prepayment penalties, then such charges 
would be required to be included in points and fees (through the 
prepayment penalty prong) even though the consumer may never actually 
pay those fees. The Bureau believes that treating a conditionally-
waived charge that would not otherwise be included in points and fee as 
a prepayment penalty would penalize the creditor for the conditional 
waiver and deter creditors from making these offers to the detriment of 
consumers. As noted in the 2013 ATR Final Rule, the Bureau recognizes 
that the creditor receives no profit from imposing or collecting such 
bona fide third-party 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 
for closed-end credit transactions.
32(b)(6)(ii)
Prepayment Penalties; HELOCs
    Proposed Sec.  1026.32(b)(8)(ii) would have defined the term 
``prepayment penalty'' for HELOCs. Specifically, proposed Sec.  
1026.32(b)(8)(ii) would have provided that, in connection with an open-
end credit plan, the term ``prepayment penalty'' means any fee that may 
be imposed by the creditor if the consumer terminates the plan prior to 
the expiration of its term.
    Proposed comment 32(b)(8)-2 would have clarified that, for an open-
end credit plan, the term ``prepayment penalty'' includes any charge 
imposed if the consumer terminates the plan prior to the expiration of 
its term, including, for example, if the consumer terminates the plan 
in connection with obtaining a new loan or plan with the current holder 
of the existing plan, a servicer acting on behalf of the current 
holder, or an affiliate of either. Proposed comment 32(b)(8)-2 would 
have further clarified that the term ``prepayment penalty'' includes a 
waived closing cost that must be repaid if the consumer terminates the 
plan prior to the end of its term, except that the repayment of waived 
bona fide third-party charges if the consumer terminates the credit 
plan within 36 months after account opening is not considered a 
prepayment penalty. The Bureau's proposal provided for a threshold of 
36 months to clarify that, if the terms of an open-end credit plan 
permit a creditor to charge a consumer for waived third-part closing 
costs when, for example, the consumer terminates the plan in year nine 
of a ten-year plan, such charges would be considered prepayment 
penalties and would cause the open-end credit plan to be classified as 
a high-cost mortgage.\152\
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    \152\ The proposal noted that exclusion of certain 
conditionally-waived closing costs from the definition of prepayment 
penalty for HELOCs would have been different from the proposal's 
definition of prepayment penalty for closed-end credit transactions. 
As discussed in the section-by-section analysis of Sec.  
1026.32(b)(6)(i), the Bureau adopts a consistent treatment of 
conditionally-waived closing costs for closed-end credit 
transactions.
---------------------------------------------------------------------------

    Proposed comment 32(b)(8)-3.iii would have specified that, in the 
case of

[[Page 6919]]

an open-end transaction, the term ``prepayment penalty'' does not 
include fees that the creditor may impose on the consumer to maintain 
the open-end credit plan, when an event has occurred that otherwise 
would permit the creditor to terminate and accelerate the plan.\153\
---------------------------------------------------------------------------

    \153\ The proposal noted that the exclusion from prepayment 
penalties of fees that a creditor may charge in a HELOC may impose 
in lieu of terminating and accelerating a plan is consistent with 
the exclusion of such fees as prepayment penalties required to be 
disclosed to the consumer as proposed in the Board's 2009 Open-End 
Proposal. See 74 FR 43428, 43481 (Aug. 26, 2009).
---------------------------------------------------------------------------

    The Bureau received several comments from consumer groups 
concerning its proposed definition of prepayment penalties for HELOCs. 
These comments generally urged the Bureau to eliminate distinctions 
between the treatment of prepayment penalties in the closed- and open-
end credit contexts because consumers do not distinguish between 
closed- and open-end products and thus they should not be treated 
differently.
    The Bureau finalizes Sec.  1026.32(b)(8)(ii) as Sec.  
1026.32(b)(6)(ii). For the reasons discussed in the section-by-section 
analysis of Sec.  1026.32(b)(6)(i) above, the Bureau has determined to 
exclude conditionally-waived, bona fide third-party closing costs from 
the definition of prepayment penalty for closed-end credit transactions 
where the terms of the transaction provide that the creditor may recoup 
those costs from the consumer if the consumer prepays the transaction 
in full sooner than 36 months after consummation. With this change, the 
Bureau believes there is parity between closed- and open-end credit 
transactions for prepayment penalties.
32(c) Disclosures
    TILA section 129(a) requires additional disclosures for high-cost 
mortgages, and these requirements are implemented in Sec.  1026.32(c). 
The Bureau proposed to amend Sec.  1026.32(c) to provide clarification 
and further guidance on the application of these disclosure 
requirements to open-end credit plans.
    The Bureau proposed comment 32(c)(2)-1 to clarify how to disclose 
the annual percentage rate for an open-end high-cost mortgage. 
Specifically, proposed comment 32(c)(2)-1 would have clarified that 
creditors must comply with Sec.  1026.6(a)(1), which sets forth the 
general requirements for determination and disclosure of finance 
charges associated with open-end credit plans. In addition, the 
proposed comment would have stated that if the transaction offers a 
fixed-rate for a period of time, such as a discounted initial interest 
rate, Sec.  1026.32(c)(2) requires a creditor to disclose the annual 
percentage rate of the fixed-rate discounted initial interest rate, and 
the rate that would apply when the feature expires.
    The proposed rule would have made clarifications to Sec.  
1026.32(c)(3), which requires disclosure of the regular payment and the 
amount of any balloon payment. Balloon payments generally are no longer 
permitted for high-cost mortgages, except in certain narrow 
circumstances, as discussed below. Proposed Sec.  1026.32(c)(3)(i) 
would have incorporated the requirement in current Sec.  1026.32(c)(3) 
for closed-end credit transactions and clarified that the balloon 
payment disclosure is required to the extent a balloon payment is 
specifically permitted under Sec.  1026.32(d)(1).
    For open-end credit plans, a creditor may not be able to provide a 
disclosure on the ``regular'' payment applicable to the plan because 
the regular monthly (or other periodic) payment will depend on factors 
that will not be known at the time the disclosure is required, such as 
the amount of the extension(s) of credit on the line and the rate 
applicable at the time of the draw or the time of the payment. To 
facilitate compliance and to provide consumers with meaningful 
disclosures, the Bureau proposed Sec.  1026.32(c)(3)(ii) to require 
creditors to disclose an example of a minimum periodic payment for 
open-end high-cost mortgages. Accordingly, proposed Sec.  
1026.32(c)(3)(ii)(A) would have provided that, for open-end credit 
plans, a creditor must disclose payment examples showing the first 
minimum periodic payment for the draw period and, if applicable, any 
repayment period and the balance outstanding at the beginning of any 
repayment period. Furthermore, the proposal would have required this 
example to be based on the following assumptions: (1) The consumer 
borrows the full credit line, as disclosed pursuant to Sec.  
1026.32(c)(5)(ii) at account opening and does not obtain any additional 
extensions of credit; (2) the consumer makes only minimum periodic 
payments during the draw period and any repayment period; and (3) the 
annual percentage rate used to calculate the sample payments will 
remain the same during the draw period and any repayment period. 
Proposed Sec.  1026.32(c)(3)(ii)(A)(3) further would have required that 
the creditor provide the minimum periodic payment example based on the 
annual percentage rate for the plan, as described in Sec.  
1026.32(c)(2), except that if an introductory annual percentage rate 
applies, the creditor must use the rate that would otherwise apply to 
the plan after the introductory rate expires.
    As discussed in detail below, the Bureau proposed Sec.  
1026.32(d)(1)(iii) to provide an exemption to the prohibition on 
balloon payments for certain open-end credit plans. Accordingly, to the 
extent permitted under Sec.  1026.32(d)(1), proposed Sec.  
1026.32(c)(3)(ii)(B) would have required disclosure of that fact and 
the amount of the balloon payment based on the assumptions described in 
Sec.  1026.32(c)(3)(ii)(A).
    To reduce potential consumer confusion, proposed Sec.  
1026.32(c)(3)(ii)(C) would have required that a creditor provide a 
statement explaining the assumptions upon which the Sec.  
1026.32(c)(3)(ii)(A) payment examples are based. Furthermore, for the 
same reason, proposed Sec.  1026.32(c)(3)(ii)(D) would have required a 
statement that the examples are not the consumer's actual payments and 
that the consumer's actual periodic payments will depend on the amount 
the consumer has borrowed and interest rate applicable to that period. 
The Bureau believes that without such statements, consumers could 
misunderstand the minimum payment examples.
    The Bureau solicited comment on these proposed statements and 
whether other language would be appropriate and beneficial to consumer. 
The Bureau did not receive any comments addressing these issues. 
Accordingly, the Bureau is adopting Sec.  1026.32(c)(3) as proposed.
    The Bureau also proposed to revise comment 32(c)(3)-1 to reflect 
the expanded statutory restriction on balloon payments and to clarify 
that to the extent a balloon payment is permitted under Sec.  
1026.32(d)(1), the balloon payment must be disclosed under Sec.  
1026.32(c)(3)(i). In addition, the Bureau proposed to renumber current 
comment 32(c)(3)-1 as proposed comment 32(c)(3)(i)-1 for organizational 
purposes. The Bureau did not receive any comments addressing revised 
comment 32(c)(3)-1, and accordingly is adopting comment 32(c)(3)(i)-1 
as proposed, with a minor revision for consistency with Regulation Z 
terminology.
    In order to provide additional guidance on the application of Sec.  
1026.32(c)(4) to open-end credit plans, the Bureau proposed to revise 
comment 32(c)(4)-1. For an open-end credit plan, comment 32(c)(4)-1 
would have provided that the disclosure of the maximum monthly payment, 
as required under Sec.  1026.32(c)(4), must be

[[Page 6920]]

based on the following assumptions: (1) The consumer borrows the full 
credit line at account opening with no additional extensions of credit; 
(2) the consumer makes only minimum periodic payments during the draw 
period and any repayment period; and (3) the maximum annual percentage 
rate that may apply under the payment plan, as required by Sec.  
1026.30, applies to the plan at account opening. Although actual 
payments on the plan may depend on various factors, such as the amount 
of the draw and the rate applicable at that time, the Bureau believes 
this approach is consistent with existing guidance to calculate the 
``worst-case'' payment example. The Bureau received no comments on this 
aspect of the proposal, and accordingly is adopting comment 32(c)(4)-1 
as proposed.
    The Bureau proposed to amend Sec.  1026.32(c)(5) to clarify the 
disclosure requirements for open-end credit plans. In the proposal, the 
Bureau noted that the amount borrowed can be ascertained in a closed-
end credit transaction but typically is not known at account opening 
for an open-end credit plan. Specifically, proposed Sec.  
1026.32(c)(5)(ii) would have provided that for open-end transactions, a 
creditor must disclose the credit limit applicable to the plan. Because 
HELOCs are open-end (revolving) lines of credit, the amount borrowed 
depends on the amount drawn on the plan at any time. Thus, the Bureau 
believes that disclosing the credit limit is a more appropriate and 
meaningful disclosure to the consumer than the total amount borrowed.
    The Bureau also proposed technical revisions to the existing 
requirements for closed-end credit transactions under Sec.  
1026.32(c)(5) and to the guidance under comment 32(c)(5)-1. Upon 
further consideration of these provisions, the Bureau recognizes that 
the prohibition of financing points and fees in final Sec.  
1026.34(a)(10) will prohibit the financing of any points and fees, as 
defined in Sec.  1026.32(b)(1) and (2) for all high-cost mortgages. 
This prohibition thus includes the financing of optional credit 
insurance or debt cancellation coverage described in existing Sec.  
1026.32(c)(5), as well as ``premiums or other charges for any credit 
life, credit disability, credit unemployment, or credit property 
insurance, or any other life, accident, health, or loss-of-income 
insurance for which the creditor is the beneficiary, as well as any 
payments directly or indirectly for any debt cancellation or suspension 
agreement or contract'' as described in existing comment 32(c)(5)-1. 
Accordingly, the disclosure for high-cost mortgages required by Sec.  
1026.32(c)(5) should not include premiums or other charges for debt 
cancellation coverage or other charges that are included in the 
calculation of points and fees, and thereby prohibited from being 
financed under Sec.  1026.34(a)(10). Section 34(a)(10) does not 
prohibit, however, the financing of certain bona fide third-party 
charges that are not considered ``points and fees,'' such as fees 
charged by a third-party counselor in connection with the consumer's 
receipt of pre-loan counseling under Sec.  1025.34(a)(5). Accordingly, 
the Bureau is adopting Sec.  1026.32(c)(5) with revisions for 
clarification and consistency with final Sec. Sec.  1026.32(b)(2) and 
1026.34(a)(10), and eliminating comment 32(c)(5)-1.
32(d) Limitations
32(d)(1)
    The Dodd-Frank Act amended the restrictions on balloon payments 
under TILA section 129(e). Specifically, amended TILA section 129(e) 
provides that no high-cost mortgage may contain a scheduled payment 
that is more than twice as large as the average of earlier scheduled 
payments, except when the payment schedule is adjusted to the seasonal 
or irregular income of the consumer.
Definition of Balloon Payment
    The Bureau proposed two alternatives in proposed Sec.  
1026.32(d)(1)(i) to define balloon payments for purposes of 
implementing HOEPA's new restrictions on these payments. Under 
Alternative 1, proposed Sec.  1026.32(d)(1)(i) would have incorporated 
the statutory language and defined ``balloon payment'' as a scheduled 
payment that is more than twice as large as the average of regular 
periodic payments. Under Alternative 2, the rule would have mirrored 
Regulation Z's existing definition of ``balloon payment'' in Sec.  
1026.18(s)(5)(i). Accordingly, proposed Sec.  1026.32(d)(1)(i) would 
have provided that a balloon payment is ``a payment schedule with a 
payment that is more than two times a regular periodic payment.'' This 
definition is similar to the statutory definition under the Dodd-Frank 
Act, except that it uses as its benchmark any regular periodic payment, 
rather than the average of earlier scheduled payments.
    The Bureau noted in the proposal that, in its view, Alternative 2 
would better protect consumers and their interests, but solicited 
comment on both alternatives. As stated in the proposal, because the 
existing regulatory definition is narrower than the statutory 
definition, the Bureau believes that a payment that is twice any one 
regular periodic payment would be equal to or less than a payment that 
is twice the average of earlier scheduled payments. The Bureau noted 
that the range of scheduled payment amounts under Alternative 2 is more 
limited and defined. For example, if the regular periodic payment on a 
high-cost mortgage is $200, a payment of greater than $400 would 
constitute a balloon payment. Under Alternative 1, however, the balloon 
payment amount could be greater than $400 if, for example, the regular 
periodic payments were increased by $100 each year. Under Alternative 
1, the amount constituting a balloon payment could increase with the 
incremental increase of the average of earlier scheduled payments. 
Under either alternative, a high-cost mortgage generally must provide 
for fully amortizing payments.
    The Bureau solicited comment on whether the difference in wording 
between the statutory definition and the existing regulatory 
definition, as a practical matter, would yield a significant difference 
in what constitutes a ``balloon payment'' in the high-cost mortgage 
context. The Bureau did not receive any comments that persuasively 
suggested Alternative 1 was preferable to Alternative 2.
    The Bureau is adopting Alternative 2 as proposed, pursuant to its 
authority under TILA section 129(p)(1). TILA section 129(p)(1) allows 
the Bureau to exempt specific mortgage products or categories of 
mortgages from certain prohibitions under TILA section 129 if the 
Bureau finds that the exemption is in the interest of the borrowing 
public and will apply only to products that maintain and strengthen 
homeownership and equity protection. The Bureau believes that under 
Alternative 2, consumers would have a better understanding of the 
highest possible regular periodic payment in a repayment schedule and 
may experience less ``payment shock'' as a result. Therefore, the 
Bureau believes that Alternative 2 would better protect consumers and 
be in their interest. In addition, the Bureau believes that the 
definition of balloon payment under Alternative 2 would facilitate and 
simplify compliance by providing creditors with a single definition 
within Regulation Z and alleviating the need to average earlier 
scheduled payments. The Bureau notes that a similar adjustment is being 
adopted in the 2013 ATR Final Rule and was proposed in the 2012 TILA-
RESPA Proposal.
    The Bureau also adopts proposed comment 32(d)(1)(i)-1, which 
provides

[[Page 6921]]

further guidance on the application of Sec.  1026.32(d)(1)(i) under 
Alternative 2. Specifically, the comment clarifies that for purposes of 
open-end transactions, the term ``regular periodic payment'' or 
``periodic payment'' means the required minimum periodic payment.
    In addition, the Bureau is finalizing proposed Sec.  
1026.32(d)(1)(iii) with some changes for clarification purposes. 
Proposed Sec.  1026.32(d)(1)(i) would have been applicable to open-end 
credit plans. However, for an open-end credit plan that has both a draw 
period and a repayment period during which no further draws may be 
taken--a structure the Bureau believes is common for open-end plans--
proposed Sec.  1026.32(d)(1)(iii) would have made the limitations 
ofSec.  1026.32(d)(1)(i) applicable only to the repayment period. Given 
that Sec.  1026.32(d)(1)(i) defines a balloon payment as any payment 
that is more than twice the regular periodic payment, any open-end 
credit plan that converts from smaller interest-only payments to larger 
fully amortizing payments could be considered a balloon payment if the 
post-conversion payment is more than twice the interest-only payment 
during the draw period. As stated in the 2012 HOEPA Proposal, the 
purpose of the proposed exclusion of the draw period from the balloon 
limitation for this type of open-end plan was to provide creditors with 
flexibility to offer products with beneficial payment features.
    The Bureau is adopting proposed Sec.  1026.32(d)(1)(iii) with 
revisions to clarify that the exception to Sec.  1026.32(d)(1)(i) 
applies to any adjustment in the regular periodic payment that results 
solely from the credit plan's transition from the draw period to the 
repayment period. The Bureau believes this revision alleviates any 
concern that proposed Sec.  1026.32(d)(1)(iii) would have allowed 
balloon payments during the draw period in other situations. The Bureau 
is also adding new comment 32(d)(1)-2 to provide further guidance on 
how the balloon payment restriction applies to open-end credit plans 
with both a draw and repayment period, including a clarification that 
the limitation in Sec.  1026.32(d)(1)(i) does not apply to any 
increases in regular periodic payments that result from the initial 
draw or additional draws on the credit line during the draw period. 
Finally, the Bureau is renumbering proposed comment 32(d)(1)-2 to 
comment 32(d)(1)-3.
``Bridge'' Loans
    As previously noted, the Bureau proposed to revise Sec.  
1026.32(d)(1)(ii) consistent with amended TILA section 129(e). 
Accordingly, proposed Sec.  1026.32(d)(1)(ii) would have provided an 
exemption to the balloon payment restrictions under Sec.  
1026.32(d)(1)(i) only if the payment schedule is adjusted to the 
seasonal or irregular income of the consumer. The proposal would have 
removed an exemption from current Sec.  1026.32(d)(1)(ii) to the 
restrictions on balloon payments for loans with maturity of less than 
one year, if the purpose of the loan is a ``bridge'' loan connected 
with the acquisition or construction of a dwelling intended to become 
the consumer's principal dwelling.
    The Bureau received several comments from industry groups and banks 
that supported retaining the exemption for bridge loans in the final 
rule, and no comments that voiced opposition. Industry groups and some 
community banks pointed out that bridge loans are currently covered by 
HOEPA, and an exemption to the pre-Dodd Frank Act restrictions on 
balloon payments was in place to prevent unnecessarily restricting 
access to short-term bridge loans for consumers. In particular, 
commenters stated that, because all short-term bridge loans are 
structured with balloon payments, the effect of this removal would be 
to prohibit any bridge loan that is classified as a high-cost mortgage. 
Some commenters suggested that the Bureau retain the existing exemption 
for temporary or bridge loans of less than 12 months as exists in 
current Sec.  1026.32(d)(1)(ii), while one commenter suggested that the 
Bureau provide an exemption for temporary bridge loans of 12 months or 
less.
    The Bureau agrees with these commenters that the proposed rule 
would have unnecessarily banned any short term bridge loans covered by 
HOEPA. Accordingly, final Sec.  1026.32(d)(1)(ii) retains an exemption 
to the restriction on balloon payments for short-term bridge loans made 
in connection with the acquisition of a new dwelling. In addition, 
because it is the Bureau's understanding that temporary or short-term 
``bridge'' loans are commonly structured as 12-month balloons, the 
Bureau is adopting the commenter's suggestion of bridge loans of terms 
of 12 months or less.
    The Bureau is retaining this exemption as modified pursuant to its 
authority under TILA section 129(p), which grants the Bureau authority 
to exempt specific mortgage products or categories from any or all of 
the prohibitions specified in TILA section 129(c) through (i) if the 
Bureau finds that the exemption is in the interest of the borrowing 
public and will apply only to products that maintain and strengthen 
homeownership and equity protections. The Bureau believes this approach 
is in the interest of the borrowing public and will strengthen 
homeownership and equity protection, because it is consistent with the 
historical and current treatment of bridge loans under HOEPA and will 
not unduly restrict access to temporary bridge financing for consumers. 
The Bureau further believes that improving access to short-term bridge 
financing will strengthen homeownership and equity protection by better 
allowing homeowners who need to sell a current residence in order to 
purchase a new one access to short-term financing to do so. Finally, 
the Bureau believes that adopting an exemption for short-term bridge 
loans of 12 months or less, as opposed to the current exemption for 
short-term bridge loans of less than 12 months, is also in the interest 
of the borrowing public because it will remove an unnecessary barrier 
to short-term financing in its usual 12-month form, at negligible if 
any cost to consumer protection. The Bureau does not believe that 
permitting a term of 12 months or less, as opposed to 11 months and 30 
days or less, presents an increased risk of abuse to consumers. In 
addition, permitting balloons for bridge loans with a term of 12 months 
or less is consistent with the 2013 ATR Final Rule and 2013 Escrows 
Final Rule.
Balloon Payment Restrictions for Creditors in Rural or Underserved 
Areas
    As previously noted, proposed Sec.  1026.32(d)(1)(ii) would have 
provided an exemption to the balloon payment restrictions under Sec.  
1026.32(d)(1)(i) only if the payment schedule is adjusted to the 
seasonal or irregular income of the consumer. The Bureau did not 
propose different treatment for loans made by creditors in rural or 
underserved areas.
    A significant number of industry commenters, especially community 
banks, objected generally to the balloon payment restriction. These 
commenters expressed concerns that the 2012 HOEPA Proposal would have 
prohibited them from making balloon loans that fall within the new 
HOEPA thresholds, which may have a significant adverse effect on their 
businesses given that the thresholds for high-cost mortgages are being 
expanded by the statute. These commenters argued that balloon loans are 
important to serve the needs of their customers, especially in rural 
areas, and

[[Page 6922]]

banks in these areas use balloon loans to manage their risks and safety 
and soundness concerns. Commenters asked for various types of relief, 
including that the prohibition be lifted entirely; that community banks 
be exempt from the prohibition if the balloon loan is held in 
portfolio; or that balloon payments be permitted so long as they are 
only for a final payment.
    The Bureau notes that it is including an exemption to the balloon 
payment restrictions on qualified mortgages for certain loans made by 
creditors in ``rural'' or ``underserved'' areas in the 2013 ATR Final 
Rule. As more fully explained in that rule, the Bureau is allowing for 
certain qualified mortgages to contain balloon payments provided that 
(1) The loan meets all of the criteria for a qualified mortgage, with 
certain exceptions; (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 mortgage-related obligations; (4) the loan is not 
originated in conjunction with a forward commitment and is held in 
portfolio for at least three years; and (5) the creditor meets 
prescribed qualifications. See Sec. Sec.  1026.43(f)(1)(i)-(vi) and 
1026.43(f)(2). Those qualifications are that the creditor: (1) Operates 
predominantly in rural or underserved areas; (2) together with all 
affiliates, has total annual residential mortgage loan originations 
that do not exceed 500 first-lien covered transactions per year; (3) 
retains the balloon payment loans in portfolio; and (4) has less than 
$2 billion in assets. See Sec. Sec.  1026.43(f)(1)(vi) and 
1026.35(b)(2)(iii)(A), (B), (C).\154\
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    \154\ The 2013 Escrows Final Rule defines the terms ``rural'' 
and ``underserved'' for purposes of Sec.  1026.32(d)(1). See Sec.  
1026.35(b)(iv).
---------------------------------------------------------------------------

    The Bureau agrees with commenters that allowing creditors in 
certain rural or underserved areas to extend high-cost mortgages with 
balloon payments could benefit consumers by expanding access to credit 
in these areas, and also would facilitate compliance for creditors who 
make these loans. The Bureau thus believes that balloon payments should 
not be prohibited for high-cost mortgages in rural or underserved 
areas, provided the creditor meets certain criteria that balance the 
need for access to credit with appropriate consumer protections. In the 
Bureau's view, the 2013 ATR Final Rule provides an appropriate 
framework for determining when a high-cost mortgage may be permitted to 
contain a balloon payment. Further, allowing creditors who make high-
cost mortgages in rural or underserved areas to originate loans with 
balloon payments if they satisfy the same criteria promotes consistency 
between the 2013 HOEPA Final Rule and the 2013 ATR Final Rule, and 
thereby facilitates compliance for creditors who operate in these 
areas. Thus, as adopted, Sec.  1026.32(d)(1) grants a limited exemption 
from the balloon payment prohibition for creditors that make high-cost 
mortgages with balloon payments, but that also meet the conditions set 
forth in Sec. Sec.  1026.43(f)(1)(i) through (vi) and 1026.43(f)(2), as 
adopted by the 2013 ATR Final Rule.
    The Bureau is providing this exemption pursuant to its authority 
under TILA section 129(p)(1), which grants it authority to exempt 
specific mortgage products or categories from any or all of the 
prohibitions specified in TILA section 129(c) through (i) if the Bureau 
finds that the exemption is in the interest of the borrowing public and 
will apply only to products that maintain and strengthen homeownership 
and equity protections. The Bureau believes the balloon payment 
exemption for high-cost mortgages is in the interest of the borrowing 
public and will strengthen homeownership and equity protection. 
Allowing greater access to credit in rural or underserved areas will 
help those consumers who may be able to obtain credit only from a 
limited number of creditors obtain mortgages. Further, it will do so in 
a manner that balances consumer protections with access to credit. In 
the Bureau's view, concerns about potentially abusive practices that 
may accompany balloon payments will be curtailed by the additional 
requirements set forth in Sec. Sec.  1026.43(f)(1)(i) through (vi). 
Creditors who make these high-cost mortgages will be required to verify 
that the loans also satisfy a number of additional criteria, including 
some specific criteria required for qualified mortgages. Further, as 
fully discussed in the 2013 ATR Final Rule, creditors that make balloon 
high-cost mortgages under this exception will be required to hold the 
high-cost mortgages in portfolio for a specified time, which the Bureau 
believes also decreases the risk of abusive lending practices. 
Accordingly, for these reasons and for the purpose of consistency 
between the two rulemakings, the Bureau is amending the final rule to 
include an exemption to the Sec.  1026.32(d)(1) balloon restriction for 
high-cost mortgages where the creditor satisfies the conditions set 
forth in Sec. Sec.  1026.43(f)(1)(i) through (vi) and 1026.43(f)(2).
32(d)(6) and (7) Prepayment Penalties
    As discussed in the section-by-section analysis of Sec.  
1026.32(b)(6) above, prior to the Dodd-Frank Act, TILA permitted 
prepayment penalties for high-cost mortgages in certain circumstances. 
In particular, under TILA section 129(c)(2), which historically has 
been implemented in Sec.  1026.32(d)(7), prior to the Dodd-Frank Act a 
high-cost mortgage could provide for a prepayment penalty so long as 
the penalty was otherwise permitted by law and, under the terms of the 
loan, the penalty would not apply: (1) To a prepayment made more than 
24 months after consummation, (2) if the source of the prepayment was a 
refinancing of the current mortgage by the creditor or an affiliate of 
the creditor, (3) if the consumer's debt-to-income ratio exceeded fifty 
percent, or (4) if the amount of the periodic payment of principal or 
interest (or both) could change during the first four years after 
consummation of the loan.
    Section 1432(a) of the Dodd-Frank Act repealed TILA section 
129(c)(2). Thus, prepayment penalties are no longer permitted for high-
cost mortgages. The proposal would have implemented this change 
consistent with the statute by removing and reserving existing Sec.  
1026.32(d)(7) and comments 32(d)(7)(iii)-1 through -3 and 32(d)(7)(iv)-
1 and -2. The proposal also would have amended existing Sec.  
1026.32(d)(6) to clarify that prepayment penalties are a prohibited 
term for high-cost mortgages. As discussed in the section-by-section 
analysis of Sec.  1026.32(b)(6)(i) above, the proposal would have 
retained in proposed Sec.  1026.32(b)(8)(i) and proposed comment 
32(b)(8)-1.iv the definition of prepayment penalty contained in 
existing Sec.  1026.32(d)(6) and comment 32(d)(6)-1.
    The Bureau received few comments concerning its proposal to 
implement the Dodd-Frank Act provisions banning prepayment penalties 
for high-cost mortgages. One commenter objected as a general matter to 
the Dodd-Frank Act's treatment of prepayment penalties for purposes of 
both qualified mortgages and high-cost mortgages. The Bureau does not 
find these comments persuasive, for the reasons discussed above in 
connection with Sec.  1026.32(a)(1)(iii), and the Bureau finalizes 
Sec.  1026.32(d)(6) and (7) as proposed.

[[Page 6923]]

32(d)(8) Acceleration of Debt
    The Bureau proposed a new Sec.  1026.32(d)(8) to implement the 
prohibition in new section 129(l) of TILA added by section 1433(a) of 
the Dodd-Frank Act. New section 129(l) of TILA prohibits a high-cost 
mortgage from containing a provision which permits the creditor to 
accelerate the loan debt, except when repayment has been accelerated: 
(1) In response to a default in payment; (2) pursuant to a due-on-sale 
provision; or (3) pursuant to a material violation of some other 
provision of the loan document unrelated to payment schedule.
    Proposed Sec.  1026.32(d)(8) would have replaced current Sec.  
1026.32(d)(8), which similarly prohibits due-on-demand clauses for 
high-cost mortgage except (1) In cases of fraud or material 
misrepresentation in connection with the loan; (2) a consumer's failure 
to meet the repayment terms of the loan agreement for any outstanding 
balance; or (3) a consumer's action or inaction that adversely affects 
the creditor's security for the loan or any right of the creditor in 
such security.
    Proposed Sec.  1026.32(d)(8) would have prohibited an acceleration 
feature in the loan or open-end credit agreement for a high-cost 
mortgage unless there is a default in payment under the agreement, the 
acceleration is pursuant to a due-on-sale clause, or there is a 
material violation of a provision of the agreement unrelated to the 
payment schedule. The Bureau also proposed comments to provide 
additional clarification and examples of when acceleration under 
proposed Sec.  1026.32(d)(8) would be permitted. The Bureau sought 
comment from the public on these aspects of the proposal, and in 
particular sought possible additional examples where a consumer's 
material violation of the loan or open-end credit agreement may or may 
not warrant acceleration of the debt.
    The Bureau received two public comments from industry in response 
to this request, which generally requested additional guidance on the 
term ``material violation of the loan agreement,'' and questioned 
whether the proposed rule would permit acceleration in circumstances 
other than failure to pay property taxes that may materially impair the 
creditor's security interest, such as the examples that exist in the 
commentary to current Sec.  1026.32(d)(8). These commenters also 
suggested some additional examples of actions undertaken by the 
consumer that they believe could result in prior lien to a first 
mortgage being filed against the property in ``material violation'' of 
a loan term. These examples included failure to pay property taxes; 
failure to pay condominium fees, homeowner association dues or 
assessments, or utilities; and default on another lien on the subject 
property. The commenters also objected to the proposal's removal of 
several of the existing comments to current Sec.  1026.32(d)(8)(iii), 
on the ground that acceleration is justified in those situations, and 
is currently permitted. Specifically, the commenters objected to the 
removal of language in comment 32(d)(8)(iii)-2.i.E providing that a 
creditor may terminate and accelerate a high-cost mortgage in some 
instances if the consumer obligated on the credit dies. The commenters 
also objected to the proposal's removal of an example in comment 
32(d)(8)(iii)-2.i F providing that a creditor may terminate and 
accelerate a high-cost mortgage if the property is taken by eminent 
domain.
    In the Bureau's view, section 129(l) essentially codified the 
substance of current Sec.  1026.32(d)(8). The changes the Bureau 
proposed to Sec.  1026.32(d)(8) and its commentary were primarily for 
clarity and organizational purposes. Upon further consideration and in 
light of the comments regarding the potential impact of removing 
certain examples, the Bureau has decided to implement a final rule and 
commentary that closely follow the current Sec.  1026.32(d)(8) and 
commentary. The Bureau agrees that acceleration should not be deemed 
impermissible under Regulation Z in situations where it is currently 
permitted, and is including the examples set forth in current comments 
32(d)(8)(iii)-2.i.E and F the commentary to the final rule. The Bureau 
believes these revisions adequately and appropriately address 
industry's comments by clarifying that acceleration may be permitted in 
certain circumstances where the creditor's security interest is 
materially and adversely affected, such as when an action or inaction 
by the consumer results in a prior lien being filed against the 
property, or the property is taken by eminent domain.
    The Bureau declines to include the various other examples provided 
by industry commenters in the commentary. The Bureau notes that the 
examples set forth in comment 32(d)(8)(iii)-2.i.A through G serve only 
as illustrations of instances where acceleration may be deemed 
permissible when the action or inaction by the consumer impairs the 
creditor's security interest. These circumstances may, but do not 
always, adversely affect the creditor's security interest, and the list 
of examples is not all-inclusive. While the Bureau agrees with industry 
commenters that other actions or inactions that may result in a prior 
lien being filed against the property could materially impair the 
creditor's security interest, the Bureau does not believe the examples 
provided, such as failure to pay homeowner association dues or 
utilities, are likely to result in such an impairment in most 
circumstances. The Bureau thus declines to include these specific 
examples in the commentary to Sec.  1026.32(d)(8).
    In addition, the Bureau is adding comment 32(d)(8)(i)-1 to provide 
further guidance regarding acceleration of a loan for fraud or material 
misrepresentation, consistent with comment 40(f)(2)(i)-1 (concerning 
requirements for home equity plans). The Bureau believes that this 
guidance will be equally helpful to creditors seeking to accelerate a 
high-cost mortgage. Finally, the Bureau has made minor changes for 
clarification and in light of the expansion of the coverage of HOEPA to 
include open-end credit.
Section 1026.34 Prohibited Acts or Practices in Connection With High-
Cost Mortgages 34(a) Prohibited Acts or Practices for High-Cost 
Mortgages
    The Bureau is finalizing proposed Sec.  1026.34(a)(1) through (3) 
and comment 34(a)(3)-2 with revisions for consistency and clarity. 
Proposed section 1026.34(a)(1) and comment 34(a)(3)-2 are revised to 
replace the terms ``loan subject to section 226.32'' with ``high-cost 
mortgage.'' Sections 1026.34(a)(2) and (3) are revised to remove 
capitalization from ``assignee'' and ``within one year period,'' for 
consistency purposes.
34(a)(4) Repayment Ability for High-Cost Mortgages
    TILA section 129(h) generally prohibits a creditor from engaging in 
a pattern or practice of extending credit to consumers under high-cost 
mortgages based on the consumers' collateral without regard to the 
consumers' repayment ability, including the consumers' current and 
expected income, current obligations, and employment.
    TILA section 129(h) is implemented in current Sec.  1026.34(a)(4). 
In 2008, the Board by regulation 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. The 
2008 HOEPA Rule set forth the specific requirements for verification of 
repayment ability in Sec.  1026.34(a)(4)(ii). In addition,

[[Page 6924]]

Sec.  1026.34(a)(4)(iii) provides for a presumption of compliance with 
the ability-to-repay requirements if the creditor follows certain 
procedures. See Sec.  1026.34(a)(4)(iii)-(iv) and comment 
34(a)(4)(iii)-1. However, the 2008 HOEPA Final Rule makes clear that 
the presumption of compliance is rebuttable. See comment 34(a)(4)(iii)-
1. The consumer can still rebut or overcome that presumption by showing 
that, despite following the procedures specified in Sec.  
1026.34(a)(4)(iii), 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 did not amend TILA section 129(h); however, 
sections 1411, 1412, and 1414 of Dodd-Frank, among other things, 
established new ability-to-repay requirements for all residential 
mortgage loans under new TILA section 129C. Specifically, the Bureau's 
2013 ATR Final Rule (which implements TILA section 129C) extends these 
new ability-to-repay requirements to any consumer credit transaction 
secured by a dwelling, except an open-end credit plan, a transaction 
secured by a consumer's interest in a timeshare plan, a reverse 
mortgage, or temporary loans such as construction loans and bridge 
loans with terms of 12 months or less. Closed-end credit transactions 
that are high-cost mortgages, as defined in TILA section 103(bb), will 
be subject to the ability-to-repay requirements pursuant to TILA 
section 129C and the Bureau's implementing regulations at Sec.  
1026.43. Open-end credit plans secured by the consumer's principal 
dwelling that are high-cost mortgages will not be subject to the 
ability-to-pay requirements of Bureau's 2013 ATR Final Rule, but will 
instead be subject to the existing ability-to-repay requirements of 
TILA section 129(h) and the Bureau's implementing regulations at Sec.  
1026.34(a)(4). As discussed below, the Bureau is revising Sec.  
1026.34(a)(4) to account for these significant changes to the 
regulatory landscape with respect to repayment ability for closed-end 
credit transactions, and amending the existing repayment ability 
requirements in current Sec.  1026.34(a)(4) to apply specifically to 
high-cost open-end credit plans.
Closed-End High-Cost Mortgages
    For consistency with TILA section 129C, proposed Sec.  
1026.34(a)(4) would have provided that, in connection with a closed-end 
high-cost mortgage, a creditor must comply with the repayment ability 
requirements in Sec.  1026.43 (to be established separately under the 
Bureau's 2013 ATR Final Rule). Therefore, the existing requirements and 
the presumption of compliance under Sec.  1026.34(a)(4)(i)-(iv) would 
no longer have applied to closed-end credit transactions. Rather, as 
set forth in the Bureau's 2013 ATR Final Rule, a creditor would have 
been required to consider specific criteria and records set forth in 
Sec.  1026.43(c)(2) and (3) and, based on that criteria, make a 
``reasonable and good faith determination at or before consummation 
that the consumer will have a reasonable ability to repay'' the high-
cost mortgage. See Sec.  1026.43(c)(1) and comments 43(c)(1)-1 and 
43(c)(2)-1.
    Thus, as set forth more fully in the 2013 ATR Final Rule, for any 
closed-end high-cost mortgage that does not meet the qualified mortgage 
criteria set forth in Sec.  1026.43(e), there would have been no 
presumption of compliance available to creditors for the ability to 
repay requirement. The 2012 HOEPA Proposal stated that only open-end 
credit transactions are subject to the Sec.  1026.34(a)(4) ability-to-
repay requirements, and thus would have removed the presumption of 
compliance currently available for any such high-cost mortgage under 
Sec.  1026.34(a)(4)(iii). See proposed comment 34(a)(4)-1.\155\ 
However, as also set forth in the 2013 ATR Final Rule, the Sec.  
1026.43(e) rebuttable presumption of compliance with the ability-to-
repay requirement would have been available for certain high-cost 
mortgages that meet the specific qualified mortgage criteria set forth 
in Sec.  1026.43(e).\156\
---------------------------------------------------------------------------

    \155\ In the final rule, the Bureau is adding additional 
clarifying language to make clear that the Sec.  1026.34(a)(4)(iii) 
presumption only applies to open-end credit plans.
    \156\ The safe harbor available for certain qualified mortgage 
transactions under Sec.  1026.43(e)(1) will not be available for 
HOEPA transactions that otherwise meet the qualified mortgage 
criteria. As set forth in the 2013 ATR Final Rule, the safe harbor 
is only available for loans that are not higher-priced covered 
transactions, as defined in Sec.  1026.43(b)(4). This will preclude 
any high-cost mortgage covered by HOEPA's APR threshold from being 
eligible for a safe harbor. Similarly, any loan that triggers the 
HOEPA thresholds for limitations on points and fees and prepayment 
penalties will fail to satisfy the criteria for qualified mortgages, 
and thus will be ineligible for either the safe harbor or the 
rebuttable presumption of compliance available to qualified 
mortgages. See Sec.  1026.43(e)(3) and (g).
---------------------------------------------------------------------------

    The Bureau solicited comment on this aspect of the proposal, and 
received a few public comments from consumer groups that generally 
supported it. In particular, consumer groups agreed that requiring 
creditors to comply with the ability-to-repay requirements set forth in 
Sec.  1026.43 for all closed-end credit transactions, including high-
cost mortgages, should benefit consumers by simplifying compliance and 
enforcement of the rules, provided that the final rule does not reduce 
the remedies available for high-cost mortgages. No commenters raised 
objections to this aspect of the proposal. However, as more fully 
discussed in the 2013 ATR Final Rule, several consumer groups submitted 
comments in connection with the Board's 2011 ATR Proposal requesting 
that high-cost mortgages be prohibited from receiving qualified 
mortgage status through the 2013 ATR Final Rule. 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, and argued that it would seem incongruous for any 
high-cost mortgage to be given a presumption of compliance with the 
ability-to-repay rule.
    The Bureau is adopting this aspect of Sec.  1026.34(a)(4) as 
proposed, which is consistent with the statutory language of TILA 
section 129C. The Bureau notes that the 2013 ATR Final Rule does not 
prohibit a high-cost mortgage from being a qualified mortgage, but is 
mindful that allowing a high-cost mortgage to meet the qualified 
mortgage criteria set forth in Sec.  1026.43 potentially raises 
concerns for consumer groups regarding HOEPA protections and remedies. 
However, the Bureau disagrees with consumer groups that suggest 
allowing certain high-cost mortgages to be ``qualified mortgages''--and 
thereby permitting a rebuttable presumption of compliance with the 
Sec.  1026.43(a) repayment ability requirements for these 
transactions--is incongruous with the underlying consumer protection 
purpose of HOEPA. Rather, the Bureau believes that the net effect of 
requiring creditors to comply with Sec.  1026.43 for all closed-end 
transactions, including those rules that pertain to the presumption of 
compliance available for qualified mortgages, should be enhanced 
consumer protection and facilitation of compliance.
    There are several considerations informing the Bureau's treatment 
of repayment ability requirements. First, as discussed above, the Dodd-
Frank Act does not prohibit high-cost mortgages

[[Page 6925]]

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 APR limit on qualified mortgages. Therefore, nothing 
in the statute prohibits a creditor from making a loan with an APR that 
triggers HOEPA coverage, while still meeting the criteria for a 
qualified mortgage.
    Second, although they are similar, the Bureau generally considers 
the ability-to-repay requirements set forth in Sec.  1026.43 to be more 
protective of consumers than the current ability-to-repay criteria for 
high-cost mortgages set forth in current Sec.  1026.34(a)(4)(i)-(iv). 
For example, Sec.  1026.43 would require creditors to consider 
additional factors not currently included in Sec.  1026.34(a)(4), such 
as a consumer's monthly debt-to-income ratio or residual income. The 
Bureau generally believes these criteria to be more rigorous than the 
current ability-to-repay provisions.
    Third, the Bureau believes that, for high-cost mortgages that meet 
the qualified mortgage definition, there is reason to provide a 
presumption, 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-to-income test for a qualified 
mortgage. 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.
    The Bureau also disagrees with the concerns raised by consumer 
groups that allowing a rebuttable presumption of compliance for these 
high-cost mortgages will undermine consumer protection. Rather, the 
Bureau believes the final rule will provide greater consumer protection 
than the current ability-to-repay rules, which allow for a presumption 
of compliance for any high-cost mortgages. See current Sec.  
1026.34(a)(4)(iii). As more fully set forth in the Bureau's 2013 ATR 
Final Rule, for any high-cost mortgages that do not meet the qualified 
mortgage criteria set forth in Sec.  1026.43(e), there will be no 
presumption of compliance available to creditors for the Sec.  
1026.34(a)(4) ability-to-repay requirement. The Bureau believes this 
will provide greater consumer protection and facilitate, rather than 
hinder, challenges to creditors' repayment ability determinations for 
these transactions.
    The Bureau also believes that allowing high-cost mortgages to be 
qualified mortgages could provide an incentive to creditors that make 
high-cost mortgages to satisfy the qualified mortgage requirements, 
which would provide additional consumer protections. For example, 
creditors who make high-cost mortgages as qualified mortgages will need 
to have verified the consumer's assets, liabilities, income and other 
criteria, and determined that the consumer's debt-to-income ratio meets 
certain specified criteria. See Sec.  1026.43(e). Further protections 
and restrictions, such as restricting interest-only payments and 
limiting loan terms to 30 years, are not requirements under HOEPA, but 
are required to achieve qualified mortgage status.
    The Bureau believes that allowing high-cost, qualified mortgages 
may be particularly beneficial to consumers in certain small loan 
markets, where some creditors may need to exceed high-cost mortgage 
thresholds due to the unique structure of their business. The Bureau 
believes that these creditors are likely to make high-cost mortgages 
regardless of the various disincentives to high-cost lending, and 
allowing for a presumption of compliance for these high-cost mortgages 
could provide an incentive to these creditors to make these mortgages 
as qualified mortgages. As discussed above, the Bureau believes this 
would be in the interest of consumers by providing additional consumer 
protections.
    The Bureau also does not believe that allowing high-cost mortgages 
to be ``qualified mortgages'' will deprive consumers of the substantive 
protections or remedies afforded by HOEPA or encourage creditors to 
engage in high-cost lending. Other than allowing for a presumption of 
compliance with the Sec.  1026.43 repayment ability requirements for 
those transactions that meet the criteria for qualified mortgages, the 
enhanced disclosure and counseling requirements, and the enhanced 
liability for HOEPA violations, are unaffected by the final rule.
    Finally, in addition to the various benefits to consumers described 
above, the Bureau believes that requiring the same standards for 
determining repayment ability and obtaining a rebuttable presumption of 
compliance for other closed-end credit transactions not covered by 
HOEPA and high-cost mortgages that are subject to the repayment ability 
requirements of Sec.  1026.43 will facilitate compliance by providing 
clarity and consistency between the 2013 ATR Final Rule and the 2013 
HOEPA Final Rule.
``Bridge'' Loans
    Because temporary or ``bridge'' loans, such as loans with maturity 
of 12 months or less made in connection with the acquisition or 
construction of a dwelling intended to become the consumer's principal 
dwelling are closed-end credit transactions, any such loan that is a 
high-cost mortgage will be subject to the ability-to-repay requirements 
pursuant to TILA section 129C and the Bureau's implementing regulations 
at Sec.  1026.43. As discussed in the Bureau's 2013 ATR Final Rule, 
temporary loans such as bridge loans with terms of 12 months or less 
(including high-cost mortgages) are exempt from the Sec.  1026.43 
ability-to-repay requirements. The proposal nonetheless would have 
retained an exemption from the Sec.  1026.34(a)(4) HOEPA ability-to-
repay requirement that exists in current Sec.  1026.34(a)(4)(v).
    The Bureau received no comments on this aspect of the proposal, and 
is retaining the exemption from the Sec.  1026.34(a)(4) ability-to-
repay requirements for ``bridge'' loans as proposed. For clarity and 
organizational purposes, however, the Bureau is moving the exemption 
from proposed Sec.  1026.34(a)(4)(v) to Sec.  1026.34(a)(4), which 
discusses ability-to-repay for closed-end credit transactions.
    The Bureau is retaining this exemption as consistent with TILA 
section 129C(a)(8), and pursuant to its authority under TILA section 
129(p), which grants the Bureau authority to exempt specific mortgage 
products or categories from any or all of the prohibitions specified in 
TILA section 129(c) through (i) if the Bureau finds that the exemption 
is in the interest of the borrowing public and will apply only to 
products that maintain and strengthen home ownership and equity 
protections. Retaining this exemption is consistent with the historical 
and current treatment of bridge loans under HOEPA's ability-to-repay 
standards, and also is consistent with the TILA section 129C(a)(8) 
exemption for bridge loans that apply to the general ability-to-repay 
requirements set forth in the 2013 ATR Final Rule. The Bureau believes 
this approach is in the interest of the borrowing public and will 
strengthen home ownership and equity protection because it will not 
unduly restrict

[[Page 6926]]

access to temporary bridge financing for consumers.
Open-End High-Cost Mortgages
    As previously noted, the existing ability-to-repay requirements of 
TILA section 129(h) will now apply to open-end credit plans that are 
high-cost mortgages. To facilitate compliance, the Bureau proposed to 
implement TILA section 129(h) as it applies to open-end credit plans in 
proposed Sec.  1026.34(a)(4) by amending the existing mortgage 
repayment ability requirements in current Sec.  1026.34(a)(4) to apply 
specifically to high-cost open-end credit plans. The Bureau solicited 
public comment on this issue, but did not receive any comments that 
addressed it.
    The Bureau is revising Sec.  1026.34(a)(4) to provide, as proposed, 
that in connection with an open-end credit plan subject to Sec.  
1026.32, a creditor shall not open a plan for a consumer where credit 
is or will be extended without regard to the consumer's repayment 
ability as of account opening, including the consumer's current and 
reasonably expected income, employment, assets other than the 
collateral, and current obligations, including any mortgage-related 
obligations. As discussed above, the Bureau notes that in the 2008 
HOEPA Final Rule, the Board adopted a rule prohibiting individual high-
cost mortgages or higher-priced mortgage loans from being extended 
based on the collateral without regard to repayment ability, in place 
of a prior rule prohibiting a pattern or practice of making extensions 
based on the collateral without regard to consumers' ability to repay. 
The existing requirements further create a presumption of compliance 
under certain conditions to provide creditors with more certainty and 
to mitigate potential increased litigation risk.
    The Board concluded that this regulatory structure was warranted 
based on the comments the Board received and additional information. 
Specifically, the Board exercised its authority under TILA section 
129(l)(2) (renumbered as TILA section 129(p)(2) by the Dodd-Frank Act) 
to revise the liability standard for high-cost mortgages based on a 
conclusion that the revisions were necessary to prevent unfair or 
deceptive acts or practices in connection with mortgage loans. See 73 
FR 44545, at 44539 (July 30, 2008). In particular, the 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. The 
Board determined that imposing the burden to prove ``pattern or 
practice'' on an individual consumer would leave many borrowers with a 
lesser remedy, such as those provided under some State laws, or without 
any remedy, for loans made without regard to repayment ability. The 
Board further determined that removing this burden would not only 
improve remedies for individual borrowers, it would also increase 
deterrence of irresponsible lending. The Board concluded that the 
structure of its rule would also have advantages for creditors over a 
``pattern or practice'' standard, which can create substantial 
uncertainty and litigation risk. While the Board's rule removed the 
``pattern or practice'' language from its rule, it provided certainty 
to creditors by including specific procedures for establishing a 
rebuttable presumption of compliance.
    For substantially the same reasons detailed by the Board in the 
2008 HOEPA Final Rule, the Bureau believes that it is necessary and 
proper to use its authority under TILA section 129(p)(2) to retain the 
existing Sec.  1026.34(a)(4) repayment ability requirements with 
respect to individual open-end credit plans that are high-cost 
mortgages, with a presumption of compliance as specified in the 
regulation, rather than merely prohibiting a ``pattern or practice'' of 
engaging in such transactions without regard for consumers' ability to 
repay the loans. The Bureau believes that the concerns discussed in the 
2008 HOEPA Final Rule, such as preventing unfair practices, providing 
remedies for individual borrowers, and providing more certainty to 
creditors, are equally applicable to open-end transactions that are 
high-cost mortgages. Furthermore, also for these same reasons, the 
Bureau believes it would not be in creditors' and borrowers' interest 
to reinsert the ``pattern or practice'' language and remove the 
presumption of compliance in existing Sec.  1026.34(a)(4). Therefore, 
the Bureau believes that applying the existing repayment ability 
requirement in current Sec.  1026.34(a)(4) to open-end high-cost 
mortgages is necessary to prevent unfair or deceptive acts or practices 
in connection with mortgage loans. See TILA section 129(p)(2).
    The Bureau is also revising several aspects of Sec.  1026.34(a)(4) 
for consistency with the 2013 ATR Final Rule and for clarification 
purposes. The Bureau is removing Sec.  1026.34(a)(4)(ii)(B) and 
accompanying comments 34(a)(4)(ii)(B)-1 and -2, which the Bureau 
proposed to retain. This provision would have provided 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. The Bureau notes that the Board's 2011 ATR 
Proposal solicited comment on whether it should have provided this 
provision in the Sec.  1026.43 repayment ability requirements which, 
while not specified under TILA, would have been consistent with the 
Board's 2008 HOEPA Final Rule. See 2011 ATR Proposal, 76 FR 27390, 
27426 (May 11, 2011); see also Sec.  1026.34(a)(4)(ii)(B).
    As more fully discussed in the 2013 ATR Final Rule, the Bureau 
received several responses from consumer groups in response to the 
Board's 2011 ATR Proposal that generally opposed the affirmative 
defense. These commenters argued that the provision would undermine the 
income and asset verification requirement provided in proposed Sec.  
1026.43(c)(4). 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).
    As discussed in the 2013 ATR Final Rule, the Bureau is not adopting 
an affirmative defense as part of final Sec.  1026.43 because, in the 
Bureau's view, such a defense could result in circumvention of the 
Sec.  1026.43(c)(4) verification requirement.
    Upon further consideration of proposed Sec.  1026.34(a)(4)(ii)(B), 
and in light of the 2013 ATR Final Rule, the Bureau believes that the 
same reasoning applies to the repayment ability requirements for open-
end credit transactions. In the Bureau's view, adopting the affirmative 
defense set forth in proposed Sec.  1026.34(a)(4)(ii)(B) would create 
an unnecessary inconsistency between the repayment ability criteria in 
Sec.  1026.43(c) and Sec.  1026.34(a)(4). Further, the Bureau believes 
the title XIV amendments to TILA provide a strong indication that 
creditors should be required to verify income, assets, and other 
relevant information as part of the repayment ability determination. 
This principle is reflected in the Bureau's decision not to adopt this 
affirmative defense for the repayment ability requirements set forth in 
the 2013 ATR Final Rule. The Bureau believes that proposed Sec.  
1026.34(a)(4)(ii)(B) could have

[[Page 6927]]

encouraged some creditors to determine repayment ability for open-end 
credit plans without verifying a consumer's income, assets, and other 
relevant information. Removing proposed Sec.  1026.34(a)(4)(ii)(B), on 
the other hand, will better protect consumers, facilitate compliance, 
and better harmonize the 2013 HOEPA and ATR Final Rules. Accordingly, 
the Bureau is removing proposed Sec.  1026.34(a)(4)(ii)(B) and 
renumbering the remainder of Sec.  1026.34(a)(4)(ii).
    The Bureau is also revising the definition of ``mortgage-related 
obligations'' to reflect the definition set forth in the 2013 ATR Final 
Rule, and clarifying that, with respect to open-end credit plans, 
``mortgage-related obligations'' are obligations that are required by 
another credit obligation undertaken prior to or at account opening, 
and are secured by the same dwelling. See Sec.  1026.43(b)(8). For 
clarity and consistency with this revised definition, the Bureau is 
also removing existing comment 34(a)(4)(i)-1, which had further defined 
the term using the previous definition.
    In addition, the Bureau is adopting clarifying revisions as 
proposed in Sec.  1026.32(a)(4) and its associated commentary, with 
several additional minor edits for consistency, clarity, or 
organizational purposes. The Bureau is removing proposed Sec.  
1026.34(a)(4)(iv)(A), which would have excluded negatively amortizing 
transactions from the Sec.  1026.34(a)(4) presumption of compliance. 
Given that negative amortization features are prohibited altogether for 
high-cost mortgages, and Sec.  1026.34(a)(4)(iv) only applies only to 
open-end, high-cost mortgages, it is unnecessary to exclude such 
transactions from the Sec.  1026.34(a)(4)(iii) presumption of 
compliance. The Bureau is also revising comment 34(a)(4)-4 to reflect 
this change.
    The proposal generally incorporated guidance in current comments 
34(a)(4)-1 through -5, with revisions for clarity and consistency. 
Proposed comment 34(a)(4)-1 would have clarified that the repayment 
ability requirement under Sec.  1026.34(a)(4) applies to open-end 
credit plans subject to Sec.  1026.32; however, the repayment ability 
provisions of Sec.  1026.43 apply to closed-end credit transactions 
subject to Sec.  1026.32. Proposed comment 34(a)(4)-3 also would have 
clarified the current commentary to conform with proposed revisions and 
removed the current example. Finally, proposed comment 
34(a)(4)(iii)(B)-1 would have removed the examples in current comment 
34(a)(4)(iii)(B) as unnecessary or inapplicable. The Bureau did not 
receive any comments addressing these aspects of the proposal.
    The Bureau is adopting these comments as proposed, with several 
changes for clarity and consistency. Comment 34(a)(4)-3 is amended to 
clarify that ``other dwelling-secured obligations'' includes any 
mortgage-related obligations that are required by another credit 
obligation undertaken prior to or at account opening, and are secured 
by the same dwelling that secures the high-cost mortgage transaction.
34(a)(4)(iii)(B)
    As noted above, because open-end credit plans are excluded from 
coverage of TILA section 129C, the existing ability-to-repay 
requirements of TILA section 129(h) and the Bureau's implementing 
regulations at Sec.  1026.34(a)(4) would still apply to open-end credit 
plans that are high-cost mortgages. Moreover, because the presumption 
of compliance set forth in Sec.  1026.43(e) may only apply to qualified 
mortgages (which cannot include open-end credit plans), the presumption 
of compliance set forth in Sec.  1026.34(a)(4)(iii) will still apply to 
open-end credit plans that are high-cost mortgages.
    The Bureau proposed to revise current Sec.  1026.34(a)(4)(iii) to 
clarify the criteria that a creditor must satisfy to obtain a 
presumption of compliance with the repayment ability requirements for 
high-cost mortgages that are open-end credit plans. In particular, 
current Sec.  1026.34(a)(4)(iii)(B) requires that a creditor determine 
the consumer's repayment ability using the largest payment of principal 
and interest scheduled in the first seven years following consummation 
and taking into account current obligations and mortgage-related 
obligations. The Bureau believes that it is appropriate to determine 
the consumer's repayment ability based on the largest periodic payment 
amount a consumer would be required to pay under the payment schedule. 
However, applying this requirement to open-end credit plans requires 
additional assumptions because a creditor may not know certain factors 
required to determine the largest required minimum periodic payment, 
such as the amount a consumer will borrow and the applicable annual 
percentage rate. Accordingly, the Bureau proposed revised Sec.  
1026.34(a)(4)(iii)(B) to require a creditor to determine the consumer's 
repayment ability taking into account current obligations and mortgage-
related obligations as defined in Sec.  1026.34(a)(4)(i), and using the 
largest required minimum periodic payment. Furthermore, proposed Sec.  
1026.34(a)(4)(iii)(B) would have required a creditor to determine the 
largest required minimum periodic payment based on the following 
assumptions: (1) The consumer borrows the full credit line at account 
opening with no additional extensions of credit; (2) the consumer makes 
only required minimum periodic payments during the draw period and any 
repayment period; and (3) the maximum APR that may apply under the 
payment plan (as required to be included in the consumer credit 
contract under Sec.  1026.30) applies to the plan at account opening 
and will apply during the draw period and any repayment period. The 
Bureau received no comments on these aspects of the proposal, and 
accordingly is adopting them as proposed.
34(a)(5) Pre-Loan Counseling
Summary of Dodd-Frank Act Amendments
    Section 1433(e) of the Dodd-Frank Act added new TILA section 
129(u), which creates a counseling requirement for high-cost mortgages. 
Prior to extending a high-cost mortgage, TILA section 129(u)(1) 
requires that a creditor receive certification that a consumer has 
obtained counseling on the advisability of the mortgage from a HUD-
approved counselor, or at the discretion of HUD's Secretary, a State 
housing finance authority. TILA section 129(u)(1) also prohibits such a 
counselor from being employed by or affiliated with the creditor. TILA 
section 129(u)(3) specifically authorizes the Bureau to prescribe 
regulations that it determines are appropriate to implement the 
counseling requirement. In addition to the counseling requirement, TILA 
section 129(u)(2) requires that a counselor verify, prior to certifying 
that a consumer has received counseling on the advisability of the 
high-cost mortgage, that the consumer has received each statement 
required by TILA section 129 (implemented in Sec.  1026.32(c)) or each 
statement required by RESPA with respect to the transaction.\157\ The 
Bureau is exercising

[[Page 6928]]

its authority under TILA section 129(u)(3) to implement the counseling 
requirement in a way that ensures that borrowers will receive 
meaningful counseling, and at the same time that the required 
counseling can be provided in a manner that minimizes operational 
challenges.
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    \157\ In addition to the housing counseling requirement for 
high-cost mortgages, the Dodd-Frank Act now requires housing 
counseling for first-time borrowers of negative amortization loans. 
Section 1414(a) of the Dodd-Frank Act requires creditors to receive 
documentation from a first-time borrower demonstrating that the 
borrower has received homeownership counseling prior to extending a 
mortgage to the borrower that may result in negative amortization. 
This requirement is further discussed in the section-by-section 
analysis for Sec.  1026.36(k) below.
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Background Concerning HUD's Housing Counseling Program
    HUD's housing counseling program is authorized by section 106 of 
the Housing and Urban Development Act of 1968 (12 U.S.C. 1701w and 
1701x), which is implemented in 24 CFR part 214. As described in the 
preamble of the proposal, this program provides counseling to consumers 
on a broad array of topics, including seeking, financing, maintaining, 
renting, and owning a home. According to HUD, the purpose of the 
program is to provide a broad range of housing counseling services to 
homeowners and tenants to assist them in improving their housing 
conditions and in meeting the responsibilities of tenancy or 
homeownership. Counselors can also help borrowers evaluate whether 
interest rates may be unreasonably high or repayment terms 
unaffordable, and thus may help reduce the risk of defaults and 
foreclosures.
    HUD historically has implemented its housing counseling program by 
issuing approvals of nonprofit agencies that meet its requirements for 
participation, monitoring these agencies, and awarding competitive 
grants to these agencies. HUD also provides counseling funds through 
State housing finance authorities and national and regional 
intermediaries, which provide oversight, support, and funding for 
affiliated local counseling agencies. HUD has required counseling 
agencies to meet various program requirements and comply with program 
policies and regulations to participate in HUD's housing counseling 
program.\158\ While HUD's regulations establish training and experience 
requirements for the individual counselors employed by the counseling 
agencies, to date, HUD generally has not approved individual 
counselors. Pursuant to amendments made to the housing counseling 
statute by section 1445 of the Dodd-Frank Act, HUD must provide for the 
certification of individual housing counselors going forward. Section 
106(e) of the Housing and Urban Development Act (12 U.S.C. 1701x(e)) 
provides that the standards and procedures for testing and certifying 
counselors must be established by regulation. The Bureau understands 
that HUD is undertaking a rulemaking to put these standards and 
procedures in place for individual counselors.
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    \158\ In addition to the regulations in 24 CFR part 214, HUD's 
Housing Counseling Program is governed by the provisions of the HUD 
Housing Counseling Program Handbook 7610.1 and applicable Mortgagee 
letters.
---------------------------------------------------------------------------

    Pre-loan housing counseling is available generally to prospective 
borrowers planning to purchase or refinance a home, but Federal and 
State laws specifically require that counseling be provided prior to 
origination of certain types of loans. For example, as previously 
discussed in connection with the Bureau's amendment to Regulation X, 
Federal law requires homeowners to receive counseling before obtaining 
a reverse mortgage insured by the FHA (i.e., a HECM).\159\ HUD imposes 
various requirements related to HECM counseling, including, for 
example: Requiring FHA-approved HECM lenders to provide applicants with 
contact information for HUD-approved counseling agencies; delineating 
particular topics that need to be addressed through HECM counseling; 
and prohibiting HECM lenders from steering a prospective borrower to a 
particular counseling agency.\160\ As discussed and implemented in this 
final rule, the Dodd-Frank Act added counseling requirements for high-
cost mortgages and certain loans involving negative amortization.
---------------------------------------------------------------------------

    \159\ 12 U.S.C. 1715z-20(d)(2)(B).
    \160\ See HUD Housing Counseling Handbook 7610.1 (05/2010), 
Chapter 4, available at https://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/7610.1/76101HSGH.pdf (visited June 16, 20012) (HUD 
Handbook).
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Proposal
    The proposal would have implemented the Dodd-Frank Act's 
requirement that a creditor receive written certification that a 
consumer has obtained counseling on the advisability of the mortgage 
prior to extending a high-cost mortgage to a consumer in proposed Sec.  
1026.34(a)(5) and accompanying commentary. As discussed in further 
detail below, the Bureau is adopting the pre-loan counseling 
requirement for high-cost mortgages in Sec.  1026.34(a)(5), with 
several revisions.
34(a)(5)(i) Certification of Counseling Required
    Consistent with the statute, proposed Sec.  1026.34(a)(5)(i) would 
have prohibited a creditor from extending a high-cost mortgage unless 
the creditor receives written certification that the consumer has 
obtained counseling on the advisability of the mortgage from a HUD-
approved counselor, or a State housing finance authority, if permitted 
by HUD.
    While a significant number of both consumer group and industry 
commenters expressed support for the counseling requirement for high-
cost mortgages, a few commenters objected to the counseling requirement 
generally. Some industry commenters were concerned that consumers would 
view counseling as an unnecessary burden due to its cost and 
inconvenience, or that the requirement for counseling could cause 
closings to be delayed. In addition, a nonprofit network that provides 
training to housing counselors objected to the counseling requirement 
out of concern that because counseling is only being required for 
consumers seeking the riskiest loans, counselors will be unable to 
influence the performance of the loans, which could cause others to 
question the value of counseling unfairly. This commenter instead 
recommended that counseling be required for all first-time borrowers 
seeking anything other than a 30 year, fixed-rate mortgage with fixed 
payments. One commenter urged that high-cost mortgages that finance 
manufactured housing be exempt from the counseling requirement, because 
the counseling fee would constitute a disproportionately large cost for 
these relatively small mortgages.
    The Bureau does not believe any of these concerns warrant departing 
from the statutory requirement for high-cost mortgage counseling. The 
Bureau does not agree with commenters that the counseling for high-cost 
mortgages is an unnecessary burden. Congress made the determination 
that mandatory counseling would be beneficial to consumers prior to 
obtaining certain types of riskier loans, and the Bureau is not 
persuaded that it should use its authority to depart from that 
determination. Although the Bureau understands concerns that counseling 
could be valuable for some first-time borrowers of loans other than 
those that are fixed-rate and with fixed payments, the Bureau proposed 
to require and solicited comment on counseling consistent with the 
statute, and does not believe that it has a basis to determine whether 
the benefits of mandatory counseling outweigh the costs for a broader 
group of consumers. With respect to concerns about the perceived 
efficacy of counseling due to the limited nature of the counseling 
requirements, the Bureau does not agree that a counselor will be unable 
to influence the outcome of the mortgage. The Bureau believes that a 
consumer may decide not to move forward with a high-cost mortgage even 
after application, or

[[Page 6929]]

may be able to shop or negotiate for different mortgage terms, based on 
counseling received on the advisability of the mortgage. Moreover, the 
Bureau believes that the requirement to provide a list of housing 
counselors under RESPA, discussed above, will encourage applicants for 
other types of mortgages to obtain homeownership counseling even if 
they are not required to do so. As to the requested exclusion from 
counseling for high-cost mortgages that finance manufactured housing, 
the Bureau believes that counseling would be equally beneficial to a 
consumer financing a manufactured home through a high-cost mortgage as 
it would be for a consumer financing another type of dwelling. Finally, 
the Bureau notes that the counseling provisions would permit the cost 
of counseling to be financed or to be paid by the creditor, provided 
that the creditor does not condition payment on the closing of the 
loan. For all of these reasons, the Bureau is finalizing the 
requirement for certification of counseling in Sec.  1026.34(a)(5)(i) 
as proposed.
    The Bureau also proposed commentary addressing a number of issues 
related to proposed Sec.  1026.34(a)(5)(i), to provide creditors 
additional compliance guidance. As discussed in detail below, the 
Bureau is also adopting this guidance as proposed, with certain 
revisions.
    TILA section 129(u) does not define the term ``State housing 
finance authority.'' Proposed comment 34(a)(5)-1 would have clarified 
that for the purposes of Sec.  1026.34(a)(5), a State housing finance 
authority has the same meaning as a ``State housing finance agency'' 
provided in 24 CFR 214.3 of HUD's regulations implementing the housing 
counseling program. The Bureau proposed to use the definition contained 
in 24 CFR 214.3 because it specifically addresses the ability of State 
housing finance authorities to provide or fund counseling, either 
directly or through an affiliate. The Bureau did not receive any 
comment regarding this definition and is finalizing it as proposed, 
except that the Bureau is renumbering it as 34(a)(5)(i)-2 for 
organizational purposes.
    The Bureau proposed comment 34(a)(5)(i)-1 to clarify that 
counselors approved by the Secretary of HUD are homeownership 
counselors that are certified pursuant to section 106(e) of the Housing 
and Urban Development Act of 1968 (12 U.S.C. 1701x(e)), or as otherwise 
determined by the Secretary of HUD. The Bureau proposed this 
clarification because of its understanding that other than for its HECM 
counseling program, HUD currently approves housing counseling agencies 
and not individual counselors, but will be certifying housing 
counselors in the future to implement section 1445 of the Dodd-Frank 
Act. The proposed comment was intended to ensure that the Bureau's 
regulations do not impede HUD from determining which counselors qualify 
as HUD-approved and to account for future decisions of HUD with respect 
to the approval of counselors.\161\ The Bureau did not receive any 
comments objecting to this guidance, and is adopting it as proposed.
---------------------------------------------------------------------------

    \161\ HUD has stated that it ``may require specialized training 
or certifications prior to approving certain housing counseling 
services, such as HECM counseling.'' HUD Handbook at 3-2.
---------------------------------------------------------------------------

    Proposed comment 34(a)(5)(i)-2 would have provided that prior to 
receiving certification of counseling, a creditor may not extend a 
high-cost mortgage, but may engage in other activities, such as 
processing an application that will result in the extension of a high-
cost mortgage (by, for example, ordering an appraisal or title search). 
As the Bureau discussed in the preamble of the proposal, nothing in the 
statutory requirement restricts a creditor from processing an 
application that will result in the extension of a high-cost mortgage 
prior to obtaining certification of counseling, and permitting the 
processing of the application is consistent with the high-cost mortgage 
counseling requirements as a whole.\162\ Moreover, the Bureau believes 
that proposed comment 34(a)(5)(i)-2 is necessary to address both the 
ability of a creditor to provide the required disclosures to the 
consumer to permit certification of counseling, and to address the 
likelihood that a creditor may receive the required certification of 
counseling only days before the consummation of the loan, at the 
earliest. As discussed in the preamble of the proposal, new TILA 
section 129(u)(2) requires a counselor to verify the consumer's receipt 
of each statement required by either TILA section 129 (which sets forth 
the requirement for additional disclosures for high-cost mortgages and 
is implemented in Sec.  1026.32(c)) or by RESPA prior to issuing 
certification of counseling. The additional disclosures for high-cost 
mortgages required under Sec.  1026.32(c) may be provided by the 
creditor up to three business days prior to consummation of the 
mortgage. RESPA requires lenders to provide borrowers several 
disclosures over the course of the mortgage transaction, such as the 
good faith estimate and the settlement statement. Currently, the HUD-1 
may be provided by the creditor at settlement.\163\ Commenters 
generally did not raise any objections to comment 34(a)(5)(i)-2, and 
the Bureau is finalizing it as proposed, except that it is renumbering 
it as 34(a)(5)(i)-3 for organizational purposes.
---------------------------------------------------------------------------

    \162\ The HECM program requires counseling to occur before a 
HECM lender may ``process'' an application, meaning that the 
creditor may accept an application, but ``may not order an 
appraisal, title search, or an FHA case number or in any other way 
begin the process of originating a HECM loan'' before the consumer 
has received counseling. HUD Mortgagee Letter 2004-25 (June 23, 
2004). However, the Bureau notes that HECM counselors are not 
required to verify the receipt of transaction-specific disclosures 
prior to issuing a certification of counseling.
    \163\ The Bureau notes that as part of its 2012 TILA-RESPA 
Proposal, the Bureau proposed requiring that a closing disclosure 
combining the RESPA settlement statement and the final TILA 
disclosure be provided to a consumer prior to settlement. However, 
the Bureau does not anticipate that any such requirement will take 
effect until after the effective date for the requirements for high-
cost mortgages.
---------------------------------------------------------------------------

    Proposed comment 34(a)(5)(i)-3 would have set forth the methods 
whereby a certification form may be received by the creditor. The 
proposed comment clarifies that the written certification of counseling 
may be received by any method, such as mail, email, or facsimile, so 
long as the certification is in a retainable form. The Bureau did not 
receive any comments on this guidance, and except for renumbering it as 
34(a)(5)(i)-4, is finalizing it as proposed.
    One counseling association requested clarification that the 
required certification of counseling is not an indication that a 
counselor has made a judgment about the appropriateness of a high-cost 
mortgage for a consumer. This commenter expressed its support for 
proposed comment 34(a)(5)(iv)-1, which similarly would have provided 
that a statement that a consumer has received counseling on the 
advisability of a high-cost mortgage does not require the counselor to 
have made a judgment as to the appropriateness of the high-cost 
mortgage, as discussed below. The Bureau agrees that it would be useful 
to clarify that certification of counseling is not evidence of a 
counselor's opinion of the loan for the consumer, but only that the 
consumer has received counseling. Accordingly, the Bureau has added new 
comment 34(a)(5)(i)-5 to address the purpose of certification in the 
final rule.
    A few commenters raised operational issues related to the 
certification process, including generally asking for more guidance and 
asking the Bureau to allow creditors to move forward with the 
consummation of a high-cost mortgage without a certification form if 
the counselor does not provide the form

[[Page 6930]]

to the creditor within a certain time period. The Bureau has not 
proposed additional guidance related to the certification process, in 
part because the Bureau believes that it is important to allow 
flexibility so that counselors and creditors can develop processes that 
work best. The Bureau also declines to permit a creditor to consummate 
a high-cost mortgage without receiving certification of counseling, 
which is required by the statute. Such a result would be inconsistent 
with the basic statutory scheme, since absent certification, a creditor 
could not be certain that counseling occurred, that the counseling 
addressed the required elements, or that the counselor was able to 
verify receipt of the required disclosures.
34(a)(5)(ii) Timing of Counseling
    As noted above, TILA section 129(u)(1) requires that a creditor 
receive certification of counseling prior to extending a high-cost 
mortgage to a consumer, but otherwise does not address when counseling 
should occur. Proposed Sec.  1026.34(a)(5)(ii) would have required 
counseling to occur after the consumer receives either the good faith 
estimate required under RESPA or the disclosures required under Sec.  
1026.40 for open-end credit. The Bureau noted in the preamble to the 
proposal that permitting counseling to occur as early as possible 
allows consumers more time to consider whether to proceed with a high-
cost mortgage and to shop or negotiate for different mortgage terms. 
However, the Bureau believes that it is also important that counseling 
on a high-cost mortgage address the specific loan terms being offered 
to a consumer. The Bureau therefore concluded that requiring the 
receipt of either of these transaction-specific documents prior to the 
consumer's receipt of counseling on the advisability of the high-cost 
mortgage would best ensure that the counseling session can address the 
specific features of the high-cost mortgage and that consumers will 
have an opportunity to ask questions about the loan terms offered. At 
the same time, given that these documents are provided to the consumer 
within a few days following application, the Bureau believes that the 
proposal permits counseling to occur early enough to give consumers 
sufficient time after counseling to consider whether to proceed with 
the high-cost mortgage transaction and to consider alternative 
options.\164\
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    \164\ The Bureau notes that as part of its 2012 TILA-RESPA 
Proposal, the Bureau proposed that the good faith estimate required 
by RESPA be combined with the early TILA disclosure. Proposed Sec.  
1026.34(a)(5)(ii) was intended to permit both the current good faith 
estimate or a future combined disclosure to satisfy the requirement 
in order to trigger counseling.
---------------------------------------------------------------------------

    Despite the verification requirement, the Bureau does not believe 
that it would make sense to wait until receipt of all disclosures 
referenced in the statute to permit counseling to occur. Accordingly, 
nothing in proposed Sec.  1026.34(a)(5)(ii) would require a counselor 
to wait for the receipt of either the Sec.  1026.32(c) disclosure or 
the full set of RESPA disclosures that must be verified prior to 
certification to provide counseling. As noted above, the Sec.  
1026.32(c) high-cost mortgage disclosure is generally required to be 
provided to the consumer no later than three business days prior to 
consummation of the loan, and one of the disclosures required under 
RESPA, the HUD-1, currently may be provided to the consumer at 
settlement. As a practical matter, this means that certification would 
not happen until right before closing. The Bureau does not believe that 
delaying counseling pending receipt of all disclosures would benefit 
consumers, because consumers may not be able to walk away from the 
transaction or seek better loan terms so late in the process. 
Accordingly, the Bureau concluded that the best approach would be a 
two-stage process in which counseling would occur prior to and 
separately from the receipt of the high-cost mortgage disclosures, 
after which the counselor would confirm receipt of the disclosures, 
answer any additional questions from the consumer, and issue the 
certification. Under these circumstances, a consumer obtaining a high-
cost mortgage would have at least two separate contacts with his 
housing counselor, the first to receive counseling on the advisability 
of the high-cost mortgage, and the second to verify with the counselor 
that the consumer has received the applicable disclosures. The Bureau 
noted its belief that a second contact may be beneficial to consumers 
because it gives consumers an opportunity to request that the counselor 
explain the disclosure and to raise any additional questions or 
concerns they have, just prior to consummation.
    Proposed comment 34(a)(5)(ii)-1 clarified that for open-end credit 
plans subject to Sec.  1026.32, proposed Sec.  1026.34(a)(5)(ii) 
permits receipt of either the good faith estimate required by RESPA or 
the disclosures required under Sec.  1026.40 to allow counseling to 
occur, because 12 CFR 1024.7(h) permits the disclosures required by 
Sec.  1026.40 to be provided in lieu of a good faith estimate, in the 
case of an open-end credit plan.
    Proposed comment 34(a)(5)(ii)-2 clarified that counseling may occur 
after the consumer receives either an initial good faith estimate or a 
disclosure under Sec.  1026.40, regardless of whether a revised 
disclosure is subsequently provided to the consumer.
    The Bureau solicited comment on the proposed timing requirements 
for counseling, including whether a second contact would help 
facilitate compliance with the requirement for certification of 
counseling. Most commenters were generally supportive of the timing 
proposed by the Bureau, and the accompanying guidance. Commenters noted 
that the Bureau's proposal would allow counseling to occur early in the 
process, but also provide counselors with the ability to view specific 
disclosures. A few commenters, however, expressed a view that the 
counseling should occur earlier in the process, e.g., before a consumer 
shops for a property or a loan.
    The Bureau agrees that counseling earlier in the process may be 
beneficial to some consumers. However, the Bureau believes that for 
high-cost mortgage borrowers, it is also important that the consumer 
receive counseling on the terms of the mortgage the consumer is 
offered. The ability to view the mortgage specific disclosures will 
allow counselors to provide counseling that addresses the affordability 
of the specific loan the consumer is considering. Moreover, the Bureau 
notes that practically speaking, a creditor is not likely to know 
whether or not the consumer will be offered a high-cost mortgage prior 
to receiving the consumer's application. For these reasons, the Bureau 
is finalizing Sec.  1026.34(a)(5)(ii) as proposed, with minor edits for 
clarity and consistency.
34(a)(5)(iii) Affiliation Prohibited
    Proposed Sec.  1026.34(a)(5)(iii)(A) would have implemented the 
general prohibition in new TILA section 129(u)(1) that the counseling 
required for a high-cost mortgage shall not be provided by a counselor 
who is employed by or affiliated \165\ with the creditor extending the 
high-cost mortgage. Pursuant to the Bureau's authority under TILA 
129(u)(3), proposed Sec.  1026.34(a)(5)(iii)(B) also would have created 
an exemption from this general prohibition for a State

[[Page 6931]]

housing finance authority that both extends a high-cost mortgage and 
provides counseling to a consumer, either itself or through an 
affiliate, for the same high-cost mortgage transaction.
---------------------------------------------------------------------------

    \165\ ``Affiliate'' is defined in Sec.  1026.32(b)(2) to mean 
``any company that controls, is controlled by, or is under common 
control with another company, as set forth in the Bank Holding 
Company Act of 1956 (12 U.S.C. 1841 et seq.).''
---------------------------------------------------------------------------

    The Bureau requested comment on the proposed general affiliation 
prohibition, the exemption provided for State housing finance 
authorities, and whether the Bureau should consider excepting any other 
entities from the general affiliation prohibition, including nonprofit 
counseling agencies. A number of commenters supported the general 
affiliation prohibition, and several commenters also supported the 
exemption to the affiliation prohibition for State housing finance 
authorities. A few commenters, including a consumer group and an 
association for nonprofit counseling organizations, urged the Bureau to 
also exempt nonprofit organizations with 501(c)(3) status from the 
affiliation prohibition because such entities also provide small loans 
for purposes such as emergency repair or foreclosure rescue that may be 
classified as high-cost. These commenters noted that organizations with 
501(c)(3) status have a higher level of accountability than other 
entities.
    The Bureau is adopting Sec.  1026.34(a)(5)(iii)(A) substantially as 
proposed. However, because a transaction made by a Housing Finance 
Agency acting as the creditor is now exempt from HOEPA coverage, as 
discussed in the section-by-section analysis to Sec.  1026.32(a)(1), 
the Bureau is not finalizing Sec.  1026.34(a)(5)(iii)(B). The Bureau 
does not believe that an exemption from the affiliation prohibition is 
necessary for State housing finance authorities, given the general 
exemption from HOEPA for the transactions they make. With respect to 
the request for an exemption for loans originated by organizations with 
501(c)(3) status, the Bureau agrees that as with loans made by State 
housing finance authorities, such loans may be beneficial to consumers. 
However, the Bureau is concerned that an entity's 501(c)(3) status may 
not be sufficient to prevent potential abuses and that an entity could 
be motivated to obtain nonprofit status in order to avoid the 
affiliation prohibition, if it were to exempt such entities. The Bureau 
is aware, for example, of concerns that credit counseling organizations 
engaging in questionable activities have sought nonprofit status to 
circumvent consumer protection laws.\166\ Accordingly, the Bureau 
declines to create an exception to the affiliation prohibition for 
nonprofit organizations.
---------------------------------------------------------------------------

    \166\ See https://www.irs.gov/uac/IRS,-FTC-and-State-Regulators-Urge-Care-When-Seeking-Help-from-Credit-Counseling-Organizations.
---------------------------------------------------------------------------

34(a)(5)(iv) Content of Certification
    As described above, TILA section 129(u)(1) requires a creditor to 
receive certification that the consumer has received counseling on the 
advisability of the mortgage prior to extending the high-cost mortgage, 
and TILA section 129(u)(2) requires a counselor to verify a consumer's 
receipt of each statement required by TILA section 129 or RESPA in 
connection with the transaction prior to certifying the consumer has 
received counseling. Proposed Sec.  1026.34(a)(5)(iv) would have set 
forth requirements for the certification form that is provided to the 
creditor. Specifically, proposed Sec.  1026.34(a)(5)(iv) would have 
provided that the certification form must include the name(s) of the 
consumer(s) who obtained counseling; the date(s) of counseling; the 
name and address of the counselor; a statement that the consumer(s) 
received counseling on the advisability of the high-cost mortgage based 
on the terms provided in either the good faith estimate or the 
disclosures required by Sec.  1026.40; and a statement that the 
counselor has verified that the consumer(s) received the Sec.  
1026.32(c) disclosures or the disclosures required by RESPA with 
respect to the transaction.
    TILA section 129(u) did not define the term ``advisability.'' The 
Bureau proposed guidance in comment 34(a)(5)(iv)-1 that would have 
addressed the meaning of the statement that a consumer has received 
counseling on the advisability of the high-cost mortgage. Specifically, 
the Bureau proposed that a statement that a consumer has received 
counseling on the advisability of a high-cost mortgage means that the 
consumer has received counseling about key terms of the mortgage 
transaction, as set out in the disclosures provided to the consumer 
pursuant to RESPA or Sec.  1026.40; the consumer's budget, including 
the consumer's income, assets, financial obligations, and expenses; and 
the affordability of the loan for the consumer. The Bureau further 
provided some examples of such key terms of the mortgage transaction 
that are included in the good faith estimate or the disclosures 
required under Sec.  1026.40 that are provided to the consumer. The 
Bureau noted in the preamble of the proposal that requiring counseling 
on the high-cost mortgage to address terms of the specific high-cost 
mortgage transaction is consistent with both the language and purpose 
of the statute, and that a requirement that counseling address the 
consumer's budget and the affordability of the loan is appropriate, 
since these are factors that are relevant to the advisability of a 
mortgage transaction for the consumer. HUD already requires counselors 
to analyze the financial situation of their clients and establish a 
household budget for their clients when providing housing 
counseling.\167\
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    \167\ HUD Handbook at 3-5.
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    Proposed comment 34(a)(5)(iv)-1 would have further explained, 
however, that a statement that a consumer has received counseling on 
the advisability of the high-cost mortgage does not require the 
counselor to have made a judgment or determination as to the 
appropriateness of the loan for the consumer. The proposal would have 
provided that such a statement means the counseling has addressed the 
affordability of the high-cost mortgage for the consumer, not that the 
counselor is required to have determined whether a specific loan is 
appropriate for a consumer or whether a consumer is able to repay the 
loan.\168\
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    \168\ This is consistent with HUD's guidance related to the 
certification of counseling provided for the HECM program, which 
indicates that the issuance of a HECM counseling certificate 
``attests ONLY to the fact that the client attended and participated 
in the required counseling and that the statutorily required 
counseling for a HECM was provided'' and ``does NOT indicate whether 
the counseling agency recommends or does not recommend the client 
for a reverse mortgage.'' HUD Handbook at 4-18 (emphases in 
original).
---------------------------------------------------------------------------

    Proposed comment 34(a)(5)(iv)-2 would have clarified that a 
counselor's verification of either the Sec.  1026.32(c) disclosures or 
the disclosures required by RESPA means that a counselor has confirmed, 
orally, in writing, or by some other means, receipt of such disclosures 
with the consumer. The Bureau noted that a counselor's verification of 
receipt of the applicable disclosures would not indicate that the 
applicable disclosures provided to the consumer with respect to the 
transaction were complete, accurate, or properly provided by the 
creditor.
    Commenters raised two main points concerning proposed Sec.  
1026.34(a)(5)(iv). First, a significant number of commenters raised 
concerns about the form of counseling and requested that the Bureau 
permit counseling to occur through means other than in person, such as 
by telephone, group classes, or self-study, particularly in rural areas 
where counseling resources may be more limited. A few commenters also 
raised concerns about proposed comment 34(a)(5)(iv)-1 and the guidance 
that a statement that a consumer has received counseling on the 
advisability of the high-cost mortgage does not require the counselor

[[Page 6932]]

to have determined whether a loan is appropriate for the consumer. 
These commenters believe that counselors should advise consumers on 
whether or not they should accept the high-cost mortgage and that 
advising consumers in this manner would be beneficial.
    The Bureau is finalizing proposed Sec.  1026.34(a)(5)(iv) and its 
associated commentary as proposed, with minor edits for clarity and 
consistency. The Bureau agrees that counseling for a high-cost mortgage 
should not be required to be received in person, and the Bureau notes 
that nothing in the proposed or final regulation or commentary would 
prohibit or prescribe any particular format for the required 
counseling. The Bureau also notes, however, that the requirement for a 
certification form completed by a counselor will necessitate that the 
counseling be provided by a counselor. As such, certain forms of 
counseling, such as self-study, cannot be used to satisfy the 
counseling requirement.
    The Bureau also agrees with commenters that consumers may benefit 
from a counselor's judgment about whether a mortgage is appropriate for 
the consumer. However, the Bureau notes that nothing in the regulation 
or commentary would prohibit or restrict a counselor from advising a 
consumer whether or not to enter into the high-cost mortgage. Under the 
proposal, a counselor would be permitted to advise the consumer in the 
manner the counselor deemed most helpful, in accordance with the 
requirements set forth by HUD, but a counselor would not be required to 
make a determination as to the appropriateness of the mortgage.
34(a)(5)(v) Counseling Fees
    TILA section 129(u) does not address the payment of fees for high-
cost mortgage counseling. As the Bureau discussed in the preamble of 
the proposal, HUD generally permits housing counselors to charge 
reasonable fees to consumers for counseling services, if the fees do 
not create a financial hardship for the consumer.\169\ For most of its 
counseling programs, HUD also permits creditors to pay for counseling 
services, either through a lump sum or on a per case basis, but imposes 
certain requirements on this funding to minimize potential conflicts of 
interest. For example, HUD requires that the payment be commensurate 
with the services provided and be reasonable and customary for the 
area, the payment not violate the requirements of RESPA, and the 
payment and the funding relationship be disclosed to the consumer.\170\ 
In the HECM program, however, creditor funding of counseling is 
prohibited. Due to concerns that counselors may not be independent of 
creditors and may present biased information to consumers, section 
255(d)(2)(B) of the National Housing Act, as amended by section 2122 of 
the Housing and Economic Recovery Act of 2008, prohibits mortgagees 
from paying for HECM counseling on behalf of mortgagors.
---------------------------------------------------------------------------

    \169\ 24 CFR 214.313(a), (b).
    \170\ 24 CFR 214.313(e); 214.303.
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    As noted in the preamble, the Bureau believes that counselor 
impartiality is essential to ensuring that counseling affords 
meaningful consumer protection. Without counselor impartiality, the 
counseling a consumer receives on the advisability of a high-cost 
mortgage could be of limited value. However, the Bureau is also aware 
of concerns that housing counseling resources are limited and that 
funding for counseling may not be adequate.\171\ Prohibiting creditor 
funding of counseling may make it more difficult for counseling 
agencies to maintain their programs and provide services so that 
consumers may meet the legal requirement to receive counseling prior to 
obtaining a high-cost mortgage. It may also create financial hardships 
for borrowers of high-cost mortgages who would otherwise be obligated 
to pay the counseling fee upfront or finance the counseling fee.
---------------------------------------------------------------------------

    \171\ See U.S. Department of Housing and Urban Development 
Office of Policy Development & Research, The State of the Housing 
Counseling Industry (Sept. 2008), at 22, 59, 156-57.
---------------------------------------------------------------------------

    Proposed Sec.  1026.34(a)(5)(v) would have addressed the funding of 
counseling fees by permitting a creditor to pay the fees of a counselor 
or counseling organization for high-cost mortgage counseling. However, 
to address potential conflicts of interest, the Bureau also proposed 
that a creditor may not condition the payment of these fees on the 
consummation of the high-cost mortgage. Moreover, the Bureau proposed 
that if the consumer withdraws the application that would result in the 
extension of a high-cost mortgage after receiving counseling, a 
creditor may not condition payment of counseling fees on the receipt of 
certification from the counselor required by proposed Sec.  
1026.34(a)(5)(i). If a counseling agency's collection of fees were 
contingent upon the consummation of the mortgage, or receipt of a 
certification, a counselor might have an incentive to counsel a 
consumer to accept a loan that is not in the consumer's best interest. 
The Bureau recognized, however, that a creditor may wish to confirm 
that a counselor has provided services to a consumer, prior to paying a 
counseling fee. Accordingly, proposed Sec.  1026.34(a)(5)(v) also would 
have provided that a creditor may otherwise confirm that a counselor 
has provided counseling to a consumer prior to paying counseling fees. 
The Bureau believed proposed Sec.  1026.34(a)(5)(v) would help preserve 
the availability of counseling for high-cost mortgages, and at the same 
time help ensure counselor independence and prevent conflicts of 
interest that may otherwise arise from creditor funding of counseling.
    The Bureau also proposed comment 34(a)(5)(v)-1 to address the 
financing of counseling fees to likewise preserve the availability of 
counseling for high-cost mortgages. The proposed comment would have 
clarified that proposed Sec.  1026.34(a)(5)(v) does not prohibit a 
creditor from financing the counseling fee as part of the mortgage 
transaction, provided that the fee is a bona fide third party charge as 
defined by proposed Sec.  1026.32(b)(5)(i). The proposal was intended 
to ensure that several options are available for the payment of any 
counseling fees, such as a consumer paying the fee directly to the 
counseling agency, the creditor paying the fee to the counseling 
agency, or the creditor financing the counseling fee for the consumer.
    Several commenters were supportive of the proposal to allow lender 
funding of counseling with the restriction that the funding cannot be 
contingent upon consummation of the high-cost mortgage. Other 
commenters raised general concerns about the lack of funding for 
counseling and the lack of counseling resources, particularly in rural 
areas. One commenter suggested that the Bureau address the lack of 
funding by amending the HUD-1 settlement form to provide a line item 
for ``counseling/education'' fees, to legitimize the payment of 
counseling fees from closing costs. As noted in the preamble of the 
proposal, the Bureau is aware of concerns about the adequacy of funding 
for counseling. The Bureau is not persuaded, however, that it should 
take additional measures to address this concern beyond its proposal to 
ensure that several options are available for the payment of counseling 
fees in the context of this rulemaking. The Bureau is therefore 
adopting Sec.  1026.34(a)(5)(v) and its associated commentary as 
proposed.
34(a)(5)(vi) Steering Prohibited
    TILA section 129(u) does not address potential steering of 
consumers by

[[Page 6933]]

creditors to particular counselors. Pursuant to its authority under 
TILA section 129(u)(3), proposed Sec.  1026.34(a)(5)(vi) would have 
provided that a creditor that extends a high-cost mortgage shall not 
steer or otherwise direct a consumer to choose a particular counselor 
or counseling organization for the required counseling. The Bureau 
proposed this restriction to help preserve counselor independence and 
prevent conflicts of interest that may arise when creditors refer 
consumers to particular counselors or counseling organizations. Under 
the HECM program, lenders providing HECMs are prohibited from steering 
consumers to any particular counselor or counseling agency.\172\ As the 
Bureau noted in the preamble to the proposal, absent a steering 
prohibition, a creditor could direct the consumer to a counselor with 
whom the creditor has a tacit or express agreement to refer customers 
in exchange for favorable advice on the creditor's products in the 
counseling session.
---------------------------------------------------------------------------

    \172\ HUD Handbook at 4-11.
---------------------------------------------------------------------------

    The Bureau also proposed comments 34(a)(5)(vi)-1 and 2, to provide 
an example of an action that constitutes steering and an example of an 
action that does not constitute steering.
    The Bureau solicited comment on its proposed approach to prevent 
steering of consumers to particular counselors or counseling 
organizations and the examples proposed in comments 34(a)(5)(vi)-1 and 
2. The Bureau did not receive any comments addressing the steering 
prohibition or examples, and adopts them as proposed.
34(a)(5)(vii) List of Counselors
Proposed Provisions Not Adopted
    Proposed Sec.  1026.34(a)(5)(vii) would have added a requirement 
that a creditor provide to a consumer for whom counseling is required a 
notice containing a list of five counselors or counseling organizations 
approved by HUD to provide high-cost mortgage counseling. Proposed 
Sec.  1026.34(a)(5)(vii) would have further stated that a creditor will 
be deemed to have complied with the obligation to provide a counselor 
list if the creditor complied with the broader obligation proposed 
under Regulation X, Sec.  1024.20, discussed above, to provide a 
counselor list to any applicant for a federally related mortgage loan.
    The Bureau sought comment on the content and form of the required 
counselor list. Comments addressing these aspects of the list are 
addressed above, in the discussion of Sec.  1024.20. The Bureau also 
sought comment on whether some creditors would likely comply with the 
counselor list requirement in Sec.  1026.34(a)(5)(vii) independent of 
their obligations under RESPA. The Bureau did not receive any comments 
indicating that creditors would likely comply with the high-cost 
mortgage counseling list requirement other than through the general 
obligation to provide a counseling list in Sec.  1024.20.
    As noted above, the Bureau is finalizing the counseling list 
requirement under Sec.  1024.20 to apply broadly to all federally 
related mortgage loans, including open-end credit plans. Given the 
scope of this requirement, a creditor extending a high-cost mortgage to 
a consumer will always be obliged to provide a consumer with a notice 
about counseling resources under Sec.  1024.20. As a result, because it 
would duplicate the requirement in Sec.  1024.20, the Bureau is not 
adopting proposed Sec.  1026.34(a)(5)(vii) in the final rule.
34(a)(6) Recommended Default
    Proposed Sec.  1026.34(a)(6) would have implemented the prohibition 
on a creditor recommending that a consumer default on an existing 
obligation in connection with a high-cost mortgage, in new section 
129(j) of TILA, which was added by section 1433(a) of the Dodd-Frank 
Act. Specifically, section 129(j) of TILA prohibits creditors from 
recommending or encouraging a consumer to default on an ``existing loan 
or other debt prior to and in connection with the closing or planned 
closing of a high-cost mortgage that refinances all or any portion of 
such existing loan.'' The Bureau proposed to use its authority under 
section 129(p)(2) of TILA to extend this prohibition in proposed Sec.  
1026.34(a)(6) to mortgage brokers, in addition to creditors. Section 
129(p)(2) provides that the ``Bureau by regulation * * * shall prohibit 
acts or practices in connection with * * * refinancing of mortgage 
loans the Bureau finds to be associated with abusive lending practices, 
or that are otherwise not in the interest of the borrower.''
    The proposal noted that section 129(j) prohibits a practice--in 
connection with a refinancing--that is abusive or ``otherwise not in 
the interest of the borrower'' whereby a creditor advises a consumer to 
stop making payments on an existing loan knowing that if the consumer 
takes that advice, the consumer will default on the existing loan. 
Following the creditor's advice could therefore leave the consumer with 
no choice but to accept a high-cost mortgage originated by that 
creditor, with terms that are likely less favorable to the consumer, to 
refinance and eliminate the default on the existing loan. As noted in 
the preamble of the proposed rule, the Bureau believes that it is 
appropriate to extend the same prohibition against such creditor 
actions to mortgage brokers, who often have significant interaction 
with consumers with regard to the refinancing of mortgage loans and 
could have similar incentives to encourage defaults that are not in the 
interest of the consumer. As stated by the Board in 2008 HOEPA Final 
Rule, 73 FR 44522, 44529 (July 30, 2008), the exception authority under 
TILA section 129(p)(2) is broad, and is not limited to practices of 
creditors. Proposed Sec.  1026.34(a)(6) therefore prohibits this 
practice for both creditors and mortgage brokers.\173\ The Bureau 
received comments from a few consumer groups that supported this 
extension and no comments that opposed it. Therefore, the Bureau is 
adopting Sec.  1026.34(a)(6) as proposed.
---------------------------------------------------------------------------

    \173\ An additional statutory basis for extending this 
prohibition to mortgage brokers is the authority provided under 
Section 129(p)(2)(A) of TILA, which requires the Bureau to ``by 
regulation * * * prohibit acts or practices in connection with--(A) 
mortgage loans that the Bureau finds to be unfair, deceptive, or 
designed to evade the provisions of this section.'' Under the 
practice prohibited by Section 129(j), the borrower may be deceived 
into stopping payment on their existing loan due to a 
misrepresentation made by a mortgage broker that to do so will be of 
no consequence to the borrower--even though the nonpayment will 
result in a default by that borrower, in effect forcing the borrower 
to take the high cost mortgage offered by the mortgage broker to 
eliminate that default. This scenario would likely meet the basic 
elements of a deceptive act or practice: (1) A representation, 
omission or practice that is likely to mislead the consumer; (2) the 
consumer acted reasonably in the circumstances; and (3) the 
representation, omission, or practice is ``material,'' i.e., is 
likely to affect the consumer's conduct or decision with regard to a 
product or service (i.e., the accepting of a high-cost mortgage). 
See Board's final rule on higher-priced mortgage loans, 73 FR 44522, 
44528-29 (July 30, 2008), citing to a letter from James C. Miller 
III, Chairman, Federal Trade Commission to Hon. John D. Dingell, 
Chairman, H. Comm. on Energy and Commerce (Oct. 14, 1983), in 
explaining the Board's authority to prohibit unfair and deceptive 
practices under then Section 129(l)(2) of TILA.
---------------------------------------------------------------------------

    In addition, the Bureau proposed comments to Sec.  1026.34(a)(6), 
which would have clarified that whether a creditor or mortgage broker 
``recommends or encourages'' a consumer to default on an existing loan 
depends on the relevant facts and circumstances, and provided examples. 
Specifically, the Bureau proposed comment 34(a)(6)-2, which explained 
that a creditor or mortgage broker ``recommends or encourages'' default 
when the creditor or mortgage broker advises the consumer to stop 
making payments on an existing loan ``knowing that the consumer's 
cessation of

[[Page 6934]]

payments will cause the consumer to default on the existing loan.'' 
Proposed comment 34(a)(6)-2 also explained that a creditor or mortgage 
broker does not recommend or encourage default by ``advis[ing] a 
consumer, in good faith, to stop payment on an existing loan that is 
intended to be paid prior to the loan entering into default by the 
proceeds of a high-cost mortgage upon the consummation of that high-
cost mortgage, if the consummation is delayed for reasons outside the 
control of the creditor or mortgage broker.''
    The Bureau solicited comment on the proposed examples and on 
additional possible examples where a creditor or mortgage broker may or 
may not be recommending or encouraging a consumer's default. The Bureau 
received a few public comments addressing proposed comment 34(a)(6)-2. 
For example, one consumer group suggested that the proposed discussions 
of ``knowledge'' and ``good faith'' were vague and could undermine what 
it believed Congress intended to be a ``bright line'' prohibition on 
any communication that may be viewed as a recommended default. 
Commenters did not suggest alternative language for the Bureau to use 
in place of this comment, but instead urged the Bureau to strike 
proposed comment 34(a)(6)-2 altogether, or replace it with a general 
statement that any recommendation or encouragement of nonpayment 
violates the ban.
    The Bureau agrees with these commenters that the discussion of 
``knowledge'' and ``good faith'' in proposed comment 34(a)(6)-2 could 
be confusing to creditors or to consumers. However, the Bureau believes 
that a flat prohibition of communication between a creditor or broker 
and a consumer concerning the relationship between timing of the next 
payment due on the existing loan and the anticipated date of 
consummation of the new high-cost mortgage would be unnecessary and 
contrary to the interests of consumers. In particular, the Bureau 
believes that such a prohibition could result in consumers 
unnecessarily making payments on loans that will be paid off prior to 
the due date, and then needing to seek refunds after payoff. Such a 
result would be inefficient and contrary to the interests of 
consumers--particularly those with limited financial resources. On the 
other hand, the Bureau believes permitting limited communication from 
the creditor or broker to inform the borrower that the anticipated 
consummation date of the new high-cost mortgage will occur prior to the 
next payment due date on an existing loan to be refinanced by the high-
cost mortgage will help prevent this inefficiency and benefit 
consumers.
    For these reasons, the Bureau believes that operational guidance 
would be helpful regarding certain situations where a consumer is 
scheduled to refinance an existing loan through a new high-cost 
mortgage, and that loan is scheduled to be consummated prior to the due 
date for the next payment due on the consumer's existing loan. The 
Bureau is adopting a revised comment 34(a)(6)-2, which addresses these 
concerns. Revised comment 34(a)(6)-2 removes the references to 
``knowledge'' and ``good faith'' and instead provides that a creditor 
or mortgage broker ``recommends or encourages'' default when the 
creditor or mortgage broker advises the consumer to stop making 
payments on an existing loan in a manner that is likely to cause the 
consumer to default on the existing loan. The Bureau believes that this 
language will alleviate the consumer protection concerns raised by 
commenters without unnecessarily restricting communication between a 
borrower and a creditor or broker.
    Revised comment 34(a)(6)-2 further provides operational guidance on 
certain instances where delay of consummation of a high-cost mortgage 
occurs for reasons outside the control of a creditor or mortgage 
broker. In those circumstances, revised comment 34(a)(6)-2 provides 
that a creditor or mortgage broker does not ``recommend or encourage'' 
default because the creditor or mortgage broker informs a consumer that 
the new high-cost mortgage is scheduled to be consummated prior to the 
due date for the next payment due on the consumer's existing loan 
(which is intended to be paid by the proceeds of the new high-cost 
mortgage) so long as the creditor or broker also informs the consumer 
that any delay of consummation of the new high-cost mortgage beyond the 
payment due date of the existing loan will not relieve the consumer of 
the obligation to make timely payment on that loan. For the reasons set 
forth above, the Bureau believes these revisions also address the 
consumer protection concerns raised by commenters without unnecessarily 
restricting communication between a borrower and a creditor or broker.
34(a)(7) Modification and Deferral Fees
    The Bureau proposed a new Sec.  1026.34(a)(7) to implement the 
prohibition on modification and deferral fees for high-cost mortgages 
in new section 129(s) of TILA, as added by section 1433(b) of the Dodd-
Frank Act. Specifically, section 129(s) of TILA prohibits a ``creditor, 
successor in interest, assignee, or any agent'' of these parties from 
charging a consumer ``any fee to modify, renew, extend, or amend a 
high-cost mortgage, or to defer any payment due under the terms of such 
mortgage.'' As proposed, Sec.  1026.34(a)(7) would have closely 
followed the statutory language in its implementation of section 
129(s).
    The Bureau sought comment on the applicability of the prohibition 
to a refinancing of a high-cost mortgage, including where the 
refinancing would place the consumer in a non-high-cost mortgage. The 
Bureau also sought comment on the specific circumstances, including 
examples, under which the prohibition on modification and deferral fees 
is particularly needed to protect consumers. The Bureau further sought 
information on the implications of the Bureau's proposal on practices 
for open-end credit, and specifically on the extent to which fees are 
charged for a consumer's renewal or extension of the draw period under 
such open-end credit plans.
    The Bureau received no public comments regarding the application of 
this proposal to open-end credit and fees for renewal or extension of 
draw periods. The Bureau received comments from several consumer groups 
expressing support for the prohibition. Consumer advocates also urged 
the Bureau to clarify that the prohibition covers certain practices, 
including forbearances and conditioning a modification on a consumer 
paying a portion of the amount in arrears. Industry commenters, 
including community banks, voiced general opposition to the prohibition 
on the basis that loan modifications and deferrals involve 
administrative costs for the lender and the prohibition on charging 
consumers for them will lead to increased costs for all consumers. One 
commenter suggested that the prohibition may discourage lenders from 
offering modifications or deferrals, and several suggested that it 
would discourage lenders from making high-cost mortgages at all. Other 
industry commenters sought clarification on the specific types of fees 
and charges covered by the rule.
    The Bureau is adopting Sec.  1026.34(a)(7) as proposed. In the 
Bureau's view, the language of section 129(s) of TILA suggests that 
Congress intended the prohibition on loan modification and deferral 
fees to be broad. The statute specifically prohibits ``any fee to 
modify, renew, extend, or amend a high-cost mortgage'' or ``to defer 
any payment due under the terms of such mortgage.'' The Bureau thus 
believes that the language of section

[[Page 6935]]

129(s) is sufficiently broad to include forbearances and that further 
clarifying commentary is unnecessary. In addition, the Bureau 
recognizes that industry commenters argued that proposed Sec.  
1026.34(a)(7) may lead to increased costs. However, industry's general 
concerns do not provide an adequate basis to alter the unequivocal 
prohibition on modification and deferral fees set forth in the statute. 
Accordingly, the Bureau will adopt proposed Sec.  1026.34(a)(7) as 
proposed.
34(a)(8) Late Fees
    Section 1433(a) of the Dodd-Frank Act added to TILA a new section 
129(k) establishing limitations on late fees on high-cost mortgages. 
Proposed Sec.  1026.34(a)(8) would have implemented these limitations 
with minor modifications for clarity.
    New TILA section 129(k)(1) generally provides that any late payment 
charge in connection with a high-cost mortgage must be specifically 
permitted by the terms of the loan contract or open-end credit 
agreement and must not exceed four percent of the ``amount of the 
payment past due.'' No such late payment charge may be imposed more 
than once with respect to a single late payment, or prior to the 
expiration of certain statutorily prescribed grace periods (i.e., for 
transactions in which interest is paid in advance, no fee may be 
imposed until 30 days after the date the payment is due; for all other 
transactions, no fee may be imposed until 15 days after the date the 
payment is due). Proposed Sec. Sec.  1026.34(a)(8)(i) and (ii) would 
have implemented new TILA section 129(k)(1) consistent with the 
statute.
    The Bureau sought comment on whether additional guidance is needed 
concerning the meaning of the phrase ``amount of the payment past due'' 
or the application of Sec.  1026.34(a)(8) to open-end credit plans. As 
discussed in detail below, the Bureau did not receive any comments 
addressing these issues. The Bureau received a small number of comments 
from industry objecting to the proposal's implementation of the 
limitation on late fees. The commenters expressed concern that the 
limitation is inconsistent with current industry practices, which 
typically allow for a 5 percent late charge. They also argued that a 4 
percent limit is too low to cover lenders' collection cost or 
adequately incentive timely payments. The Bureau acknowledges these 
concerns, but does not believe that they provide a principled basis to 
depart from the specific limits set forth by the statute.
    The Bureau is aware that some consumer groups believe that the new 
prohibition of late fees should be placed within section 32(d) as a 
limitation rather than within section 34 as a prohibited act or 
practice. For purposes of organization, the Bureau believes that the 
late fee prohibition is most appropriately contained within section 34, 
and thus declines to depart from the proposal in this respect.
Amount Past Due
    New TILA section 129(k)(1) does not define the phrase ``amount of 
the payment past due.'' Proposed comment 34(a)(8)(i)-1 would have 
explained that, for purposes of proposed Sec.  1026.34(a)(8)(i), the 
``payment past due'' in an open-end credit plan is the required minimum 
periodic payment, as provided under the terms of the plan. This comment 
was intended to clarify that, for open-end credit plans, where monthly 
payment amounts can vary depending on the consumer's use of the credit 
line, the ``payment past due'' is the required minimum periodic payment 
that was due immediately prior to the assessment of the late payment 
fee. The Bureau sought comment on the appropriateness of this 
definition. The Bureau also sought comment on whether additional 
guidance was needed concerning the meaning of the phrase ``amount of 
the payment past due'' in the context either of closed-end credit 
transactions or in the case of partial mortgage payments. The Bureau 
did not receive any comments addressing these aspects of the proposal. 
Accordingly, the Bureau is adopting Sec. Sec.  1026.34(a)(8)(i) and 
(ii) as proposed.
34(a)(8)(iii) Multiple Late Charges Assessed on Payment Subsequently 
Paid
    New TILA section 129(k)(2) prohibits the imposition of a late 
charge in connection with a high-cost mortgage payment, when the only 
delinquency is attributable to late charges assessed on an earlier 
payment, and the payment is otherwise a full payment for the applicable 
period and is paid by its due date or within any applicable grace 
period. The Bureau proposed to implement this prohibition on such late-
fee ``pyramiding,'' consistent with the statutory language, in Sec.  
1026.34(a)(8)(iii). The Bureau noted that proposed Sec.  
1026.34(a)(8)(iii) is consistent with Sec.  1026.36(c)(1)(ii), which 
similarly prohibits late-fee pyramiding by servicers in connection with 
a consumer credit transaction secured by a consumer's principal 
dwelling.
    Proposed comment 34(a)(8)(iii)-1 would have provided an 
illustration of the rule. The Bureau requested comment as to whether 
additional guidance was needed concerning the application of proposed 
Sec.  1026.34(a)(8)(iii) to open-end credit plans. The Bureau did not 
receive any comments addressing these aspects of the proposal. 
Accordingly, the Bureau is adopting Sec.  1026.34(a)(8)(iii) and 
comment 34(a)(8)(iii)-1 as proposed.
34(a)(8)(iv) Failure To Make Required Payment
    New TILA section 129(k)(3) provides that, if a past due principal 
balance exists on a high-cost mortgage as a result of a consumer's 
failure to make one or more required payments, and if permitted by the 
terms of the loan contract or open-end credit agreement permit, 
subsequent payments may be applied first to the past due principal 
balance (without deduction due to late fees or related fees) until the 
default is cured. The Bureau generally proposed to implement new TILA 
section 129(k)(3), consistent with the statutory language, in Sec.  
1026.34(a)(8)(iv), to clarify the application of the provision to open-
end credit plans.
    Proposed comment 34(a)(8)(iv)-1 would have provided an illustration 
of the rule. The Bureau requested comment on this example, including on 
whether additional guidance was needed concerning the application of 
proposed Sec.  1026.34(a)(8)(iv) to open-end credit plans. The Bureau 
did not receive comment specifically regarding proposed Sec.  
1026.34(a)(8)(iv), or proposed comment 34(a)(8)(iv)-1, and will adopt 
Sec.  1026.34(a)(8)(iv) and comment 34(a)(8)(iv)-1 as proposed.
34(a)(9) Payoff Statements
    The Bureau proposed a new Sec.  1026.34(a)(9) to implement new 
section 129(t) of TILA, added by section 1433(d) of the Dodd-Frank Act, 
which (1) specifically prohibits, with certain exceptions, a creditor 
or servicer from charging a fee for ``informing or transmitting to any 
person the balance due to pay off the outstanding balance on a high-
cost mortgage;'' and (2) requires payoff balances for high-cost 
mortgages to be provided within five business days of a request by a 
consumer or a person authorized by the consumer to obtain such 
information.
    Proposed Sec.  1026.34(a)(9), in implementing section 129(t), would 
have prohibited a creditor or servicer from charging a fee to a 
consumer (or a person authorized by the consumer to receive such 
information) for providing a statement of an outstanding pay off 
balance due on a high-cost mortgage. It would have allowed, however, as

[[Page 6936]]

provided by section 129(t), the charging of a processing fee to cover 
the cost of providing a payoff statement by fax or courier, so long as 
such fees do not exceed an amount that is comparable to fees imposed 
for similar services provided in connection with a non-high-cost 
mortgage. The creditor or servicer would have been required to make the 
payoff statement available to a consumer by a method other than by fax 
or courier and without charge. Prior to charging a fax or courier 
processing fee, the creditor or servicer would have been required to 
disclose to the consumer (or a person authorized by the consumer to 
receive the consumer's payoff information) that payoff statements are 
otherwise available for free. Under the proposal, a creditor or 
servicer who has provided payoff statements on a high-cost mortgage to 
a consumer without charge (other than a processing fee for faxes or 
courier services) for four times during a calendar year would have been 
permitted to charge a reasonable fee for providing payoff statements 
during the remainder of the calendar year. Finally, the proposal would 
have required payoff statements to be provided by a creditor or 
servicer within five business days after receiving a request by a 
consumer for such a statement (or a person authorized by the consumer 
to obtain such information).\174\
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    \174\ See current Sec.  1026.36(c)(1)(iii), which prohibits a 
servicer ``[i]n connection with a consumer credit transaction 
secured by a consumer's principal dwelling'' from failing ``to 
provide within a reasonable period of time after receiving a request 
from the consumer * * * an accurate statement of the total 
outstanding balance * * *.'' The commentary related to this section 
states that ``it would be reasonable under most circumstances to 
provide the statement within five business days of receipt of a 
consumer's request, and that ``[t]his time frame might be longer, 
for example, when the servicer is experiencing an unusually high 
volume of refinancing requests.'' See also new Section 129G of TILA 
added by section 1464 of the Dodd-Frank Act, which sets new timing 
requirements for the delivery of payoff statements for ``home 
loans'' but does not specifically address high-cost mortgages. It 
requires a ``creditor or servicer of a home loan'' to ``send an 
accurate payoff balance within a reasonable time, but in no case 
more than 7 business days, after the receipt of a written request 
for such balance from or on behalf of the borrower.'' The Bureau is 
implementing this provision in its rulemaking on mortgage servicing.
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    The Bureau sought public comment on what additional guidance would 
be needed with regard to the fee and timing requirements for the 
provision of payoff statements for high-cost mortgages under proposed 
Sec.  1026.34(a)(9). The Bureau received a handful of comments from 
industry groups generally objecting to the prohibition against charging 
a fee to a consumer. Specifically, commenters pointed out that 
producing payoff statements involves an administrative cost for 
creditors and suggested that prohibiting such fees may lead to higher 
borrowing costs generally if creditors spread those costs to all 
borrowers. On the other hand, one consumer group suggested an 
additional requirement that the amount specified in the payoff 
statement must remain accurate for 15 days after the statement is 
mailed.
    The Bureau is adopting Sec.  1026.34(a)(9) as proposed. In the 
Bureau's view, these public comments provided no principled basis for 
substantive changes to the prohibition and exceptions set forth in the 
statute.
34(a)(10) Financing of Points and Fees
    Section 1433 of the Dodd-Frank Act added to TILA a new section 
129(m) prohibiting the direct or indirect financing of (1) any points 
and fees; and (2) any prepayment penalty payable by the consumer in a 
refinancing transaction if the creditor or an affiliate of the creditor 
is the holder of the note being refinanced. Proposed Sec.  
1026.34(a)(10) would have implemented new TILA section 129(m).
    Proposed Sec.  1026.34(a)(10) would have implemented all aspects of 
the statute, except that the Bureau omitted the statutory language 
concerning the financing of prepayment penalties payable by the 
consumer in a refinancing transaction. The Bureau noted that such 
penalties are subsumed in the definition of points and fees for Sec.  
1026.32 in proposed Sec. Sec.  1026.32(b)(1)(vi) and (3)(iv). Thus, the 
prohibition against financing of ``points and fees'' necessarily 
captures the prohibition against financing of prepayment penalties 
payable in a refinancing transaction if the creditor or an affiliate of 
the creditor is the holder of the note being refinanced. Consistent 
with amended TILA section 103(bb)(4)(D) concerning the financing of 
credit insurance premiums (which new TILA section 129C(d) generally 
bans), proposed Sec.  1026.34(a)(10) would have specified that credit 
insurance premiums are not considered financed when they are calculated 
and paid in full on a monthly basis.
    Proposed comment 34(a)(10)-1 would have clarified that ``points and 
fees'' for proposed Sec.  1026.34(a)(10) means those items that are 
required to be included in the calculation of points and fees under 
Sec. Sec.  1026.32(b)(1) through (5). Proposed comment 34(a)(10)-1 
specified that, for example, in connection with the extension of credit 
under a high-cost mortgage, a creditor may finance a fee charged in 
connection with the consumer's receipt of pre-loan counseling under 
Sec.  1026.34(a)(5) because such a fee would be excluded from points 
and fees as a bona fide third-party charge.
    Proposed comment 34(a)(10)-2 would have provided examples of 
prohibited financing of points and fees. The proposed comment explained 
that a creditor directly or indirectly finances points and fees in 
connection with a high-cost mortgage if, for example, such points or 
fees are added to the loan balance or financed through a separate note, 
if the note is payable to the creditor or to an affiliate of the 
creditor. In the case of an open-end credit plan, a creditor also 
finances points and fees if the creditor advances funds from the credit 
line to cover the fees.
    The Bureau requested comment on its proposed implementation of new 
TILA section 129(m). In particular, the Bureau requested comment on 
whether Sec.  1026.34(a)(10) should prohibit the financing of charges 
that are not included in the calculation of points and fees, such as 
bona-fide third party charges (including certain amounts of private 
mortgage insurance premiums).
    One commenter responded to the request for comments regarding 
whether to include bona-fide third party charges in the financing 
prohibition; the comment advised against it on the basis that it risked 
restricting access to credit. The Bureau also received comments from 
industry generally objecting to the prohibition on financing of points 
and fees. In particular, these commenters argued that the prohibition 
would restrict access to credit for low-income consumers without 
sufficient cash to pay up-front points and fees.
    Though the Bureau acknowledges industry's concern regarding low-
income borrowers' ability to pay up-front points and fees, it does not 
believe this provides a sufficient basis to alter the prohibition set 
forth in the statute. Moreover, the Bureau believes that the 
prohibition provides enhanced consumer protection because it will 
prohibit creditors from imposing excessive points and fees in 
connection with high-cost mortgages by rolling them into the loan 
balance. Accordingly, the Bureau is adopting Sec.  1026.34(a)(10) and 
comments 34(a)(10)-1 and 34(a)(10)-2 as proposed.
34(b) Prohibited Acts or Practices for Dwelling-Secured Loans; 
Structuring Loans To Evade High-Cost Mortgage Requirements
    The Bureau proposed revisions to Sec.  1026.34(b) to implement the 
prohibition on structuring a loan transaction ``for the purpose and 
with the intent'' to evade the requirements for high-cost mortgages in 
new section

[[Page 6937]]

129(r) of TILA, which was added by section 1433(b) of the Dodd-Frank 
Act. Section 129(r) of TILA specifically prohibits a creditor from 
taking ``any action in connection with a high-cost mortgage'' to: (1) 
``Structure a loan as an open-end credit plan or another form of loan 
for the purpose and with the intent of evading the provisions of this 
title,'' which include the high-cost mortgage requirements; or (2) 
divide a loan into separate parts ``for the purpose and with the 
intent'' to evade the same provisions.
    Prior to the Dodd-Frank Act, open-end credit plans were not within 
the scope of HOEPA's coverage. Current Sec.  1026.34(b) prohibits 
structuring a home-secured loan as an open-end plan to evade the 
requirements of HOEPA. The Dodd-Frank Act amended TILA, however, to 
include open-end credit plans within the scope of coverage of HOEPA. 
Nevertheless, as noted, new section 129(r) prohibits the structuring of 
what would otherwise be a high-cost mortgage in the form of an open-end 
credit plan, or another form of loan, including dividing the loan into 
separate parts. Proposed Sec.  1026.34(b) would have implemented this 
new section by prohibiting the structuring of a transaction that is 
otherwise a high-cost mortgage as another form of loan, including 
dividing any loan transaction into separate parts, for the purpose and 
intent to evade the requirements of HOEPA.
    Proposed comment 34(b)-1 would have provided examples of violations 
of proposed Sec.  1026.34(b): (1) A loan that has been divided into two 
separate loans, thereby dividing the points and fees for each loan so 
that the HOEPA thresholds are not met, with the specific intent to 
evade the requirements of HOEPA; and (2) the structuring of a high-cost 
mortgage as an open-end home-equity line of credit that is in fact a 
closed-end home-equity loan to evade the requirement to include loan 
originator compensation in points and fees for closed-end credit 
transactions under proposed Sec.  1026.32(b)(1).
    The proposal renumbered existing comment 34(b)-1 as comment 34(b)-2 
for organizational purposes. Notwithstanding the Dodd-Frank Act's 
expansion of coverage under HOEPA to include open-end credit plans, the 
Bureau believed that the guidance set forth in proposed comment 34(b)-2 
would be useful for situations where it appears that a closed-end 
credit transaction has been structured as an open-end credit plan to 
evade the closed-end HOEPA coverage thresholds. The Bureau proposed 
certain conforming amendments to proposed comment 34(b)-2, however, for 
consistency with the Bureau's proposed amendment to the definition of 
``total loan amount'' for closed-end mortgage loans. See the section-
by-section analysis to proposed Sec.  1026.32(b)(6)(i), above.
    The Bureau received several comments from consumer groups 
encouraging an expansive interpretation of the new section 129(r). One 
specifically suggested additional requirements that all loans that have 
been divided into two or more loans should be evaluated to determine if 
they should be considered covered by HOEPA and that all open-end loans 
should be evaluated in the same manner as closed-end loans if they meet 
certain criteria. Several commenters also expressed concern over loan 
terms, such as rate increase after default and ``performance based'' 
rates that would allow a creditor to disclose an unrealistically low 
APR and avoid the high-cost mortgage requirements. Consumer advocates 
also described a practice in which a creditor extends to a consumer an 
initial, unsecured loan, the proceeds of which are used to pay points 
and fees associated with a subsequent mortgage loan. The Bureau 
considered these suggestions. With respect to the comments regarding 
the scope of the prohibition, the Bureau believes that the proposed 
language is sufficiently broad to cover loans structured to evade high-
cost mortgage requirements. Other provisions in Regulation Z address 
APR determination and disclosure, and increased interest rates after 
default are impermissible under Sec.  1026.32(d)(4). In response to the 
comment describing the practice of making an initial, unsecured loan, 
the proceeds of which are used to pay points and fees associated with a 
subsequent mortgage loan, the Bureau has slightly revised comment 
34(b)-1.i to reflect that if a creditor structures a loan as two or 
more loans to evade HOEPA, those loans may constitute an evasion 
whether made consecutively or at the same time.
    The Bureau also received comments from GSEs expressing concern 
regarding the ability of secondary market purchasers to determine 
whether a loan has been divided into one or more parts to evade high-
cost mortgage requirements. Specifically, these commenters argued that, 
if an entity purchases only first-lien loans, it does not routinely 
receive documentation regarding subordinate loans and may have 
difficulty in uncovering evasion. Particular concern was noted that 
GSEs are unable to discern a creditor's ``intent'' in making a given 
loan. The GSE commenters thus requested a rule limiting liability for 
assignees when they purchase only one obligation.
    The Bureau notes the GSEs' concern, but is adopting Sec.  
1026.34(b) as proposed. The Bureau recognizes that the expansion of 
HOEPA coverage to include purchase-money transactions may increase the 
risk of assignee liability for GSEs and other secondary market 
purchasers. However, the Bureau does not believe this concern warrants 
departure from the statute. Since HOEPA's inception, TILA has provided 
for assignee liability with respect to all claims and defenses the 
consumer could assert against the creditor unless the assignee could 
demonstrate, by a preponderance of the evidence, that ``a reasonable 
person exercising due diligence'' could not determine the loan at issue 
was a high-cost mortgage. See 15 U.S.C. 1641(c). The Dodd-Frank Act did 
not alter this long-standing provision, but did, however, add the 
prohibition against dividing a transaction into separate parts for the 
purpose and with the intent of evading HOEPA. The Bureau thus believes 
that interpreting TILA section 129(r) to limit liability for GSE 
purchasers would be inconsistent with Congress's intent to impose a 
special assignee liability rule for high-cost mortgage.
    In addition, the Bureau is not convinced that the GSEs will be 
unable to adequately control for risk of purchasing mortgages 
structured to evade HOEPA. While the GSEs raised concerns regarding 
increased risk of assignee liability, they also noted that creditors 
are currently required to identify loans with subordinate financing at 
the time of sale, and must represent and warrant that the subordinate 
lien loans comply with GSE requirements. In addition, they stated that 
GSEs are able to request additional documentation for subordinate 
liens. The Bureau believes these comments indicate that GSEs possess at 
least some capability to control for risk of purchasing loans that may 
have been structured to evade HOEPA through their own due diligence.
    With respect to the GSEs' claim that there is no way for them to 
determine whether the creditor's ``intent'' was to evade HOEPA, the 
Bureau is providing comment 34(b)-1i. to provide guidance on when loans 
may be deemed structured with the intent to evade HOEPA. Comment 34(b)-
1i. provides that a creditor structures a transaction to evade HOEPA 
if, for example, the creditor structures a loan that would otherwise be 
a high-cost mortgage as two or more loans, whether made consecutively 
or at the same time, to

[[Page 6938]]

divide the loan fees to avoid the points and fees threshold for high-
cost mortgages.
    Finally, the final rule incorporates several additional changes. 
Because of changes to requirements regarding points and fees 
calculations for open- and closed-end transactions, the final rule 
removes proposed comment 34(b)-1.ii as unnecessary. In light of the 
Bureau's decision to create an exemption from HOEPA coverage for 
transactions to finance the initial construction of a dwelling, the 
Bureau is substituting a different comment 34(b)-1.ii to clarify that a 
creditor does not structure a transaction in violation of Sec.  
1026.34(b) when a loan to finance the initial construction of a 
dwelling may be permanently financed by the same creditor, such as a 
``construction-to-permanent'' loan, and the construction phase and the 
permanent phase are treated as separate transactions. The final rule 
adopts the other parts of Sec.  1026.34(b) and related commentary as 
proposed.
Section 1026.36 Prohibited Acts or Practices in Connection With Credit 
Secured by a Dwelling
36(k) Negative Amortization Counseling
    The Dodd-Frank Act added two general requirements that creditors 
must fulfill prior to extending credit to a consumer secured by a 
dwelling or residential real property that includes a dwelling, other 
than a reverse mortgage, that may result in negative amortization. The 
first, found in new TILA 129C(f)(1), requires creditors to provide 
consumers with a disclosure that, among other things, describes 
negative amortization and states that negative amortization increases 
the outstanding principal balance of the account and reduces a 
consumer's equity in the property. The Bureau is not implementing this 
requirement in the current rule, but is planning to implement it as 
part of its 2012 TILA-RESPA proposal. The second provision, found in 
new TILA 129C(f)(2), requires creditors to obtain sufficient 
documentation demonstrating that a first-time borrower has received 
homeownership counseling from a HUD-certified organization or 
counselor, prior to extending credit in connection with a residential 
mortgage loan that may result in negative amortization. As noted in the 
preamble of the proposed HOEPA rule, because of the similarity of TILA 
129C(f)(2) to the counseling requirement for high-cost mortgages, the 
Bureau is including the implementation of this counseling provision as 
part of this rule.
    The Bureau proposed Sec.  1026.36(k) to implement the general 
counseling requirement for first-time borrowers of mortgages that may 
result in negative amortization consistent with the statutory language. 
In addition to the general counseling requirement in proposed Sec.  
1026.36(k)(1), pursuant to its authority under TILA section 105(a), the 
Bureau proposed to include two additional provisions in Sec. Sec.  
1026.36(k)(3) and (4), consistent with the requirements for high-cost 
mortgage counseling. Proposed Sec.  1026.36(k)(3) would have addressed 
steering by creditors to particular counselors or counseling 
organizations and proposed Sec.  1026.36(k)(4) would have required the 
provision of a list of counselors to consumers. In addition to 
requesting comments on specific aspects of the counseling requirement 
for negative amortization loans, the Bureau requested comment on 
whether it would minimize compliance burdens if the Bureau conformed 
the counseling requirements for mortgages that may result in negative 
amortization with the counseling requirements for high-cost mortgages, 
despite differences in statutory language. The Bureau did not receive 
any comments suggesting that conforming the counseling requirements 
would be beneficial. As a result, the Bureau is finalizing Sec.  
1026.36(k) substantially as proposed, but with certain revisions, as 
discussed in greater detail below.
36(k)(1) Counseling Required
    Proposed Sec.  1026.36(k)(1) would have implemented the statutory 
requirement that a creditor shall not extend credit to a first-time 
borrower in connection with a residential transaction secured by a 
dwelling (with exceptions for reverse mortgages and mortgages secured 
by timeshare plans) that may result in negative amortization, unless 
the creditor receives documentation that the consumer has obtained 
counseling from a HUD-certified or approved counselor or counseling 
organization.\175\ The Bureau omitted from the proposal the statutory 
language limiting the requirement for counseling to a residential 
mortgage loan that may result in negative amortization ``that is not a 
qualified mortgage'' because a qualified mortgage by definition does 
not permit a payment schedule that results in an increase of the 
principal balance under new TILA 129C(b)(2)(A).
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    \175\ As noted in the preamble to the proposal, the Bureau is 
exercising its authority under section 105(a) of TILA Act to allow 
counseling to be provided by HUD-approved counselors or 
organizations, in addition to HUD-certified counselors or 
organizations, as is specifically required by TILA section 
129C(f)(2). The Bureau is proposing to exercise its authority to 
provide flexibility and to facilitate compliance by ensuring greater 
availability of competent housing counselors for the required 
counseling.
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    Proposed comment 36(k)(1)-1 would have provided that counseling 
organizations or counselors certified or approved by HUD to provide the 
counseling required by Sec.  1026.36(k)(1) include organizations and 
counselors that are certified or approved by HUD pursuant to section 
106(e) of the Housing and Urban Development Act of 1968 (12 U.S.C. 
1701x(e)) or 24 CFR part 214, unless HUD determines otherwise.
    The Bureau also proposed several additional comments to provide 
further clarification. Proposed comment 36(k)(1)-2 would have addressed 
the content of counseling to ensure that the counseling is useful and 
meaningful to the consumer with regard to the negative amortization 
feature of the loan. Specifically, proposed comment 36(k)(1)-2 would 
have required that homeownership counseling pursuant to Sec.  
1026.36(k)(1) include information regarding the risks and consequences 
of negative amortization. The Bureau noted in the preamble of the 
proposal that it believes that a requirement that the counseling 
address the negative amortization feature of a loan is consistent with 
the purpose of the statute.
    To help facilitate creditor compliance with proposed Sec.  
1026.36(k)(1), proposed comment 36(k)(1)-3 would have provided examples 
of documentation that demonstrate that a consumer has received the 
required counseling, such as a certificate, letter, or email from a 
HUD-certified or -approved organization or counselor indicating the 
consumer has received counseling.
    Finally, proposed comment 36(k)(1)-4 would have addressed when a 
creditor may begin to process the application for a mortgage that may 
result in negative amortization. As with high-cost mortgage counseling, 
the Bureau proposed that prior to receiving documentation of counseling 
a creditor may not extend a mortgage to a consumer that may result in 
negative amortization but may engage in other activities, such as 
processing an application for such a mortgage.
    The Bureau solicited comment on the proposed general requirement 
and accompanying comments. A significant number of consumer groups 
strongly objected to the proposed counseling requirement for first-time 
borrowers of negative amortization loans as inadequate. These 
commenters noted that negative amortization loans are very high-risk 
and difficult for consumers to understand. Commenters asked the

[[Page 6939]]

Bureau to ban negative amortization loans entirely, or at least to ban 
negative amortization loans secured by a consumer's principal dwelling. 
Alternatively, commenters asked the Bureau to require counseling for 
all borrowers of negative amortization loans, rather than just first-
time borrowers. Some commenters also requested that the Bureau set 
further standards for negative amortization counseling, such as 
requiring the counseling to include review of loan terms and household 
finances. A few commenters asked the Bureau to ban negative 
amortization specifically for high-cost mortgages.
    The Bureau is finalizing Sec.  1026.36(k)(1) as proposed. While the 
Bureau agrees that negative amortization loans are inherently more 
risky than fully amortizing loans, the Bureau also notes that Congress 
considered the risks associated with these loans, but did not ban these 
loans in connection with the comprehensive mortgage reforms contained 
in title XIV of the Dodd-Frank Act. Instead, Congress has made the 
determination to address the increased risk associated with these 
mortgages by other means, such as requiring additional disclosures and 
counseling for first-time borrowers, and preventing loans containing 
negative amortization from being qualified mortgages. The Bureau does 
not believe it is appropriate to ban negative amortization loans more 
broadly in the context of this rulemaking to implement section 1414. At 
this time, the Bureau does not believe it is necessary to set any 
further standards for negative amortization counseling, beyond those in 
the proposal. As noted above, the Bureau proposed that the required 
counseling must address the risks and consequences of negative 
amortization, and the Bureau is now adopting that additional 
requirement in this final rule. Finally, in response to comments asking 
the Bureau to ban negative amortization for high-cost mortgages, the 
Bureau notes that high-cost mortgages are already prohibited from 
negatively amortizing, pursuant to Sec.  1026.32(d)(2).
36(k)(2) Definitions
    TILA section 129C(f) does not define the terms, ``first-time 
borrower'' and ``negative amortization.'' To afford creditors guidance 
on the circumstances under which Sec.  1026.36(k)(1) applies, proposed 
Sec.  1026.36(k)(2) would have provided definitions of these two key 
terms. Specifically, proposed Sec.  1026.36(k)(2)(i) would have stated 
that a first-time borrower means a consumer who has not previously 
received a closed-end mortgage loan or open-end credit plan secured by 
a dwelling. Proposed Sec.  1026.36(k)(2)(ii) would have provided that 
negative amortization means a payment schedule with regular periodic 
payments that cause the principal balance to increase. The Bureau did 
not receive comments on either of these definitions, and is finalizing 
them as proposed.
36(k)(3) Steering Prohibited
    TILA section 129C(f)(2) does not address potential steering of 
consumers by creditors to particular counselors. Consistent with its 
proposal to prohibit steering for high-cost mortgage counseling in 
Sec.  1026.34(a)(5)(vi), the Bureau proposed in Sec.  1026.36(k)(3) to 
prohibit a creditor that extends mortgage credit that may result in 
negative amortization from steering or otherwise directing a consumer 
to choose a particular counselor or counseling organization for the 
counseling required by proposed Sec.  1026.36(k). The Bureau proposed 
this prohibition pursuant to its authority under TILA section 105(a). 
Proposed comment 36(k)(3)-1 references the proposed comments in 
34(a)(5)(vi)-1 and -2, which provide an example of an action that 
constitutes steering and an example of an action that does not 
constitute steering. The Bureau did not receive comment on this 
provision, and is therefore finalizing it as proposed.
36(k)(4) List of Counselors
Proposed Provisions Not Adopted
    Also consistent with its proposal in Sec.  1026.34(a)(5)(vii) for 
high-cost mortgage counseling, the Bureau proposed in Sec.  
1026.36(k)(4)(i) to add a requirement that a creditor provide a list of 
counselors to a consumer for whom counseling is required under proposed 
Sec.  1026.36(k) and proposed in Sec.  1026.36(k)(4)(ii) a safe harbor 
for a creditor that provides a list of counselors pursuant to the 
obligation in Regulation X Sec.  1024.20. However, as with the parallel 
requirement related to high-cost mortgages, the Bureau is not 
finalizing this requirement because it will essentially duplicate the 
counseling list requirement finalized in Sec.  1024.20, which will 
require a counseling list to be provided to all applicants of federally 
related mortgage loans, including negative amortization mortgages.

VI. Effective Date

    This final rule is effective on January 10, 2014. The rule applies 
to transactions for which the creditor or lender received an 
application on or after that date. As discussed above in part III, the 
Bureau believes that this approach is consistent with the timeframes 
established in section 1400(c) of the Dodd-Frank Act and, on balance, 
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.
    In response to the proposal, the Bureau received a number of 
comments from industry referencing the other title XIV rules and 
indicating that implementing so many new requirements at the same time 
would create a significant cumulative burden for creditors. Many of 
these commenters suggested that the Bureau provide as late an effective 
date as possible, with many commenters suggesting periods of between18 
and 24 months, in order to have time to adjust computerized systems, 
compliance procedures, and train staff. While a few commenters 
suggested sequenced implementation dates for all of the title XIV 
rulemakings, other commenters asked the Bureau to provide a longer 
implementation date but to avoid implementing the regulations in a 
piecemeal fashion. One industry association commenter suggested that 
the Bureau employ an approach similar to that taken for the 2012 TILA-
REPSA proposal, and issue a rule temporarily delaying implementation of 
the HOEPA rule.
    For the reasons already discussed above, the Bureau believes that 
an effective date of January 10, 2014 for this final rule and most 
provisions of the other title XIV final rules will ensure that 
consumers receive the protections in these rules as soon as reasonably 
practicable, taking into account the timeframes established by the 
Dodd-Frank Act, the need for a coordinated approach to facilitate 
implementation of the rules' overlapping provisions, and the need to 
afford creditors and other affected entities sufficient time to 
implement the more complex or resource-intensive new requirements.

VII. Dodd-Frank Act Section 1022(b)(2)

    In developing the final rule, the Bureau has considered the 
regulation's potential benefits, costs, and impacts.\176\ The proposal 
set forth a preliminary analysis of these effects, and the Bureau 
requested and received comments on this analysis. In addition, the 
Bureau

[[Page 6940]]

has consulted or offered to consult with the prudential regulators, the 
Federal Trade Commission, HUD, FHFA, and USDA in connection with this 
rulemaking, including regarding consistency with any prudential, 
market, or systemic objectives administered by such agencies.\177\
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    \176\ Section 1022(b)(2)(A) of the Dodd-Frank Act calls for the 
Bureau to consider the potential benefits and costs of a regulation 
to consumers and covered persons, including the potential reduction 
of access by consumers to consumer financial products or services; 
the impact on depository institutions and credit unions with $10 
billion or less in total assets as described in section 1026 of the 
Dodd-Frank Act; and the impact on consumers in rural areas.
    \177\ Section 1022(b)(2)(B) of the Dodd-Frank Act requires the 
Bureau to engage in such consultation ``prior to proposing a rule 
and during the comment process.''
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    As discussed above, HOEPA currently addresses potentially harmful 
practices in refinancing and closed-end home-equity mortgages. Loans 
that meet HOEPA's thresholds are subject to restrictions on loan terms 
as well as to special disclosure requirements intended to ensure that 
consumers in high-cost mortgages understand the features and 
implications of such loans. Borrowers with high-cost mortgages also 
have enhanced remedies for violations of the law. The Dodd-Frank Act 
expanded the types of loans potentially covered by HOEPA to include 
purchase-money mortgages and HELOCs secured by a consumer's principal 
dwelling. The Dodd-Frank Act also expanded the protections associated 
with high-cost mortgages, including by adding new restrictions on loan 
terms, extending the requirement that a creditor verify a consumer's 
ability to repay to a HELOC, and adding a requirement that consumers 
receive homeownership counseling before high-cost mortgages may be 
extended.
    In this rulemaking, the Bureau is amending Regulation Z to 
implement the changes to HOEPA set forth in the Dodd-Frank Act. In 
addition to the amendments related to high-cost mortgages, the Bureau 
is also finalizing an amendment to Regulation Z and an amendment to 
Regulation X to implement amendments made by sections 1414(a) and 1450 
of the Dodd-Frank Act to TILA and to RESPA related to homeownership 
counseling for other types of mortgages, respectively.
    In the proposal, the Bureau generally requested comment on the 
section 1022 impact analysis set forth therein. Among other things, the 
Bureau requested comment on the use of the data described in the 
proposal and sought additional data regarding the potential benefits, 
costs, and impacts of the proposal. Industry commenters raised general 
concerns that expanding the set of loans potentially subject to HOEPA, 
changing the HOEPA coverage thresholds, and imposing additional 
restrictions on high-cost mortgages could decrease access to credit. 
Several commenters stated that few creditors are willing to make high-
cost mortgages because of the reputational, regulatory, and legal risks 
so that expanding HOEPA coverage will reduce access to credit. In 
contrast, consumer groups generally did not raise similar concerns 
regarding access to credit as a result of expanding the set of loans 
potentially subject to HOEPA and changing the HOEPA coverage 
thresholds. Some consumer groups further suggested stronger protections 
for consumers with high-cost mortgages were warranted.
    Both industry and consumer groups commented that the Bureau should 
collect additional data to analyze the potential impacts of the 
proposed rule and to assess the empirical bases for implementing or 
deviating from statutory thresholds. For example, both manufactured 
housing industry commenters and consumer groups argued that the Bureau 
should collect additional data to inform its specification of APR and 
points-and-fees thresholds that differ by collateral type and loan 
size.
    In addition to soliciting comment generally on the impact analysis, 
the proposal solicited comment on and suggestions for additional data 
regarding specific aspects of the proposal. For example, the Bureau 
requested information concerning how provisions in the rule may affect 
the share of HELOCs that would meet the HOEPA thresholds and the costs 
and benefits of requiring that the list of homeownership counseling 
providers for loans covered by Regulation X to be given to applicants 
for all federally related mortgages rather than to only applicants for 
purchase-money mortgages. In addition, the Bureau requested information 
and data on the proposal's potential impact on consumers in rural areas 
specifically as well as the proposal's potential impact on depository 
institutions and credit unions with total assets of $10 billion or 
less. The Bureau generally received limited detail and data in response 
to many of these specific requests. The comments are discussed 
throughout this preamble and below in the context of the analysis of 
the benefits and costs of the respective provisions of the final 
rule.\178\
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    \178\ An exception is comments received on the proposed 
transaction coverage rate. Numerous commenters raised concerns 
regarding this provision. As discussed above, however, the Bureau is 
not implementing the proposed provisions relating to the transaction 
coverage rate in this final rule. Consequently, comments on the 
costs and benefits of the transaction coverage rate are not 
discussed below.
---------------------------------------------------------------------------

A. Provisions To Be Analyzed

    The discussion below considers the potential benefits, costs, and 
impacts to consumers and covered persons of key provisions of the final 
rule, as well as certain alternatives considered, which include:
    1. Expanding the types of transactions potentially covered by HOEPA 
to include purchase-money mortgages and HELOCs;
    2. Revising the existing HOEPA APR and points-and-fees thresholds 
to implement Dodd-Frank Act requirements, as well as modifying the APR 
and points-and-fees calculations to determine whether a transaction is 
a high-cost mortgage;
    3. Adding a prepayment penalty coverage threshold;
    4. Adding and revising several restrictions and requirements on 
loan terms and practices for high-cost mortgages; \179\ and
---------------------------------------------------------------------------

    \179\ These restrictions and requirements include requiring that 
a creditor receive certification that a HOEPA consumer has received 
pre-loan counseling from an approved homeownership counseling 
organization; prohibiting creditors and brokers from recommending 
default on a loan to be refinanced with a high-cost mortgage; 
prohibiting creditors, servicers, and assignees from charging a fee 
to modify, defer, renew, extend, or amend a high-cost mortgage; 
limiting the fees that can be charged for a payoff statement; 
banning prepayment penalties; substantially limiting balloon 
payments; and requiring that a creditor assess a consumer's ability 
to repay a HELOC.
---------------------------------------------------------------------------

    5. Implementing two separate homeownership counseling-related 
provisions mandated by the Dodd-Frank Act, namely, generally requiring 
lenders to provide a list of homeownership counseling organizations to 
applicants for federally related mortgages subject to RESPA, and 
requiring creditors to obtain documentation that a first-time borrower 
of a negatively amortizing loan has received homeownership counseling.
    The analysis considers the benefits and costs of certain provisions 
together where there are substantially similar benefits and costs. For 
example, expanding the types of loans potentially subject to HOEPA 
coverage to include purchase-money mortgages and HELOCs would likely 
expand the number of high-cost mortgages. The overall impact of this 
expansion of coverage is generally discussed in the aggregate. In other 
cases, the analysis considers the costs and benefits of each provision 
separately. When relevant, the discussion of these five categories of 
provisions incorporates the comments and data the Bureau received in 
response to its proposal and considers the costs and benefits of 
changes made between the proposal and final rule.

[[Page 6941]]

    The analysis relies on data that the Bureau has obtained, which 
include updated versions of data analyzed in the proposed rule such as 
data on 2011 mortgages collected under HMDA that were released after 
publication of the proposed rule and revised data on nondepository 
mortgage originators from the National Mortgage Licensing System.\180\ 
The analysis also draws on evidence of the impact of State anti-
predatory lending statutes that often place additional or tighter 
restrictions on mortgages than those required by HOEPA prior to the 
Dodd-Frank Act amendments. However, the Bureau notes that, in some 
instances, there are limited data that are publicly available with 
which to quantify the potential costs, benefits, and impacts of the 
final rule. For example, data on the terms and features of HELOCs are 
more limited and less available than data on closed-end mortgages. The 
Bureau is not aware of and commenters did not provide any systematic 
and representative data on the terms and features of HELOCs. Moreover, 
some potential costs and benefits, such as the value of homeownership 
counseling, or reduced likelihood of an unanticipated fee or change in 
payments, are extremely difficult to quantify and to measure. 
Therefore, the analysis generally provides a qualitative discussion of 
the benefits, costs, and impacts of the final rule.
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    \180\ The Bureau noted in its Summer 2012 mortgage proposals 
that it sought to obtain additional data to supplement its 
consideration of the rulemakings, including additional data from the 
National Mortgage Licensing System (NMLS) and the NMLS Mortgage Call 
Report, loan file extracts from various lenders, and data from the 
pilot phases of the National Mortgage Database. Each of these data 
sources was not necessarily relevant to each of the rulemakings. The 
Bureau used the additional data from NMLS and NMLS Mortgage Call 
Report data to better corroborate its estimate of the contours of 
the non-depository segment of the mortgage market. The Bureau has 
received loan file extracts from three lenders, but at this point, 
the data from one lender is not usable and the data from the other 
two is not sufficiently standardized nor representative to inform 
consideration of the final rules. Additionally, the Bureau has thus 
far not yet received data from the National Mortgage Database pilot 
phases. The Bureau also requested that commenters submit relevant 
data. All probative data submitted by commenters are discussed in 
this document.
---------------------------------------------------------------------------

B. Baseline for Analysis

    The HOEPA amendments are self-effectuating, and the Dodd-Frank Act 
does not require the Bureau to adopt a regulation to implement these 
amendments. Thus, many costs and benefits of the final rule considered 
below would arise largely or entirely from the statute, not from the 
final rule. The final rule would provide substantial benefits compared 
to allowing the HOEPA amendments to take effect alone by clarifying 
parts of the statute that call for interpretation, such as how to 
determine whether a HELOC is a high-cost mortgage and by creating 
certain exemptions. Greater clarity on parts of the statute that call 
for interpretation should reduce the compliance burdens on covered 
persons by reducing costs for attorneys and compliance officers and 
also by reducing the litigation risk and potential liability creditors 
and assignees of high-cost mortgages would face in the absence of 
regulatory guidance. In addition, the Bureau believes that exempting 
construction loans, for example, should reduce burden on not only 
covered persons that originate these types of loans but also on 
consumers because potential HOEPA coverage of these loans may have led 
to sharper reductions (relative to other types of loans) in the 
availability of construction loans. In this light, the costs that the 
regulation would impose beyond those imposed by the statute itself are 
likely to be at most minimal.
    Section 1022 of the Dodd-Frank Act permits the Bureau to consider 
the benefits and costs of the rule solely compared to the state of the 
world in which the statute takes effect without an implementing 
regulation. The Bureau has nonetheless also considered the potential 
benefits, costs, and impacts of the major provisions of the final rule 
against a pre-statutory baseline (i.e., the benefits, costs, and 
impacts of the relevant provisions of the Dodd-Frank Act and the 
regulation combined).\181\ There is one exception: The Bureau does not 
discuss below the benefits and costs of determining whether a loan is a 
high-cost mortgage, e.g., the costs of computer systems and software, 
employee training, outside legal advice, and similar costs potentially 
necessary to determine whether a loan is a high-cost mortgage.\182\ One 
trade association commenter asserted that the Bureau's analysis of the 
compliance burden due to the expansion of HOEPA to purchase-money 
mortgages and HELOCs is incomplete in part because it did not consider 
the costs of determining whether a loan is a high-cost mortgage. The 
trade association noted that these costs would now be incurred for all 
purchase-money mortgages and HELOCs, including those that are 
ultimately not originated or that are modified to avoid classification 
as a high-cost mortgage. As noted in its preliminary section 1022 
analysis, the Bureau does not consider these benefits and costs because 
these changes are required by the Dodd-Frank Act's amendments to HOEPA. 
The Bureau's discretion to exempt broad categories of loans from HOEPA 
coverage is limited, and the Bureau does not believe such exemptions 
are consistent with the mandate of the statute. The Bureau has 
discretion in future rulemakings to choose the most appropriate 
baseline for each particular rulemaking.
---------------------------------------------------------------------------

    \181\ The Bureau chose as a matter of discretion to consider 
costs and benefits of provisions that are required by the Dodd-Frank 
Act to inform the rulemaking more completely.
    \182\ Some States have anti-predatory lending statutes that 
provide additional restrictions on mortgage terms and features 
beyond those under HOEPA. See 74 FR 43232, 43244 (Aug. 26, 2009) 
(surveying State laws that are coextensive with HOEPA). In general, 
State statutes that overlap and/or extend beyond the final rule 
would be expected to reduce both its costs and its benefits.
---------------------------------------------------------------------------

    A few industry commenters argued that the analysis did not 
adequately consider the proposal's costs and benefits in the context of 
related rulemakings including the cumulative effects of these rules on 
consumers and systemic risk. The Bureau, however, interprets the 
consideration required by section 1022(b)(2)(A) to be focused on the 
potential benefits, costs, and impacts of the particular rule at issue, 
and to not include those of other pending or potential rulemakings. 
Moreover, the commenters do not suggest a reliable method for assessing 
cumulative impacts of multiple rulemakings. The Bureau believes that 
there are multiple reasonable approaches for conducting the 
consideration called for by section 1022(b)(2)(A) and that the approach 
it has taken in this analysis is reasonable and that, particularly in 
light of the difficulties of reliably estimating certain benefits and 
costs, it has discretion to decline to undertake additional or 
different forms of analysis. The Bureau notes that it has coordinated 
the development of the final rule with its other rulemakings and has, 
as appropriate, discussed some of the significant interactions of the 
rulemakings.
    One commenter stated that the Bureau did not sufficiently weigh the 
negative effects of the proposed rule against the likely benefits as 
measured by the goal of U.S. financial stability. The Bureau notes 
that, as discussed in this 1022(b)(2) analysis and other parts of the 
preamble, it has carefully taken into account the potential negative 
effects of the proposed rule and has accordingly added exceptions and 
other provisions to mitigate these potential negative effects while 
preserving the benefits of the rule within the constraints mandated by 
Congress.

[[Page 6942]]

C. Coverage of the Final Rule

    HOEPA. The provisions of the final rule that relate to high-cost 
mortgages apply to any consumer credit transaction that meets one of 
the HOEPA thresholds and that is secured by the consumer's principal 
dwelling, including both closed-end credit transactions (including 
purchase-money mortgages) and open-end credit plans (i.e., home-equity 
lines of credit, or HELOCs), but not to reverse mortgages, transactions 
to finance the initial construction of a dwelling, transactions 
originated by a Housing Finance Agency, or transactions originated 
under the United States Department of Agriculture's Rural Development 
Section 502 Direct Loan Program.
    In this part of this Supplementary Information, the term 
``creditor'' is used generally to describe depository institutions, 
credit unions, and independent mortgage companies that extend mortgage 
loans, though in places the discussion distinguishes between these 
types of creditors. When appropriate, this part discusses affected 
persons other than creditors, such as mortgage brokers and servicers. 
For example, as required by the Dodd-Frank Act, the restrictions on 
loan modification or deferral fees and fees for payoff statements would 
apply to mortgage servicers. In addition, the Bureau is extending the 
prohibition on recommended default to mortgage brokers.
    Additional Counseling Provisions. The requirement that lenders 
provide mortgage applicants a list of homeownership counseling 
organizations applies to applications for a loan covered by RESPA 
including purchase-money mortgages, subordinate mortgages, 
refinancings, closed-end home-equity mortgages, and open-end credit 
plans. The negative amortization counseling provision applies only to 
closed-end credit transactions that are made to first-time borrowers, 
are secured by a dwelling, and may result in negative amortization. 
These counseling-related provisions do not apply to reverse mortgages 
or to transactions secured by a consumer's interest in a timeshare plan 
(as described in 11 U.S.C. 101(53D)).

D. Potential Benefits and Costs to Consumers and Covered Persons

1. Expanding the Types of Loans Potentially Subject to HOEPA Coverage
    Expanding the types of loans potentially subject to HOEPA coverage 
to include purchase-money mortgages and HELOCs would increase the 
number of loans potentially subject to HOEPA coverage and as a result, 
almost certainly, the number of closed-end mortgages and HELOCs 
classified as high-cost mortgages. Data collected under HMDA offer a 
rough illustration of the scope of the expansion of loans potentially 
covered by HOEPA.\183\ Home-improvement and refinance loans accounted 
for 66 percent of closed-end mortgages secured by a principal dwelling 
reported in the 2011 HMDA data.\184\ Therefore, the data suggest that 
about 34 percent of home-secured closed-end mortgages in 2011 were not 
potentially subject to HOEPA coverage because they were purchase-money 
mortgages.\185\ If one additionally considers HELOCs, it is likely that 
closer to 42 percent of all mortgages (i.e., closed-end mortgages and 
HELOCs) in 2011 were not eligible for HOEPA coverage.\186\ The rule 
would expand the types of loans potentially subject to HOEPA coverage 
to essentially all closed-end mortgages and open-end credit plans 
secured by a principal dwelling, except reverse mortgage transactions, 
transactions to finance the initial construction of a dwelling, 
transactions originated by a Housing Finance Agency, or transactions 
originated under the United States Department of Agriculture's Rural 
Development Section 502 Direct Loan Program.\187\
---------------------------------------------------------------------------

    \183\ The Home Mortgage Disclosure Act (HMDA), enacted by 
Congress in 1975, as implemented by the Bureau's Regulation C 
requires lending institutions annually to report public loan-level 
data regarding mortgage originations. For more information, see 
https://www.ffiec.gov/hmda. The illustration is not exact because not 
all mortgage creditors report under HMDA. The HMDA data capture 
roughly 90-95 percent of lending by the Federal Housing 
Administration and 75-85 percent of other first-lien home loans. 
Robert B. Avery, Neil Bhutta, Kenneth P. Brevoort & Glenn B. Canner, 
The Mortgage Market in 2011: Highlights from the Data Reported under 
the Home Mortgage Disclosure Act, Fed. Res. Bull. (forthcoming), at 
n.2.
    \184\ As noted above, the analysis of the final rule uses 
updated data relative to the proposal. For example, the analysis of 
the proposal relied on 2010 HMDA data, since 2011 HMDA were not yet 
available.
    \185\ The share of closed-end originations reported under HMDA 
that were purchase-money mortgages was somewhat lower in 2011 than 
in most preceding years. The share ranged between 43 percent and 47 
percent of originations over the 2004-2008 period before it fell to 
31 percent in 2009. The share changed more substantially in earlier 
years, when it declined from 59 percent in 2000 to 26 percent in 
2003. Robert B. Avery, Neil Bhutta, Kenneth P. Brevoort & Glenn B. 
Canner, The Mortgage Market in 2011: Highlights from the Data 
Reported under the Home Mortgage Disclosure Act, Fed. Res. Bull. 
(forthcoming), Table 3.B.
    \186\ Experian-Oliver Wyman's analysis of credit bureau data 
indicates that there were roughly 13 percent as many HELOC 
originations in 2011 as there were originations of closed-end 
mortgage or home equity loans. Specifically, Experian-Oliver Wyman 
estimated that there were roughly 6.4 million mortgages and 418,000 
home equity loans originated in 2011 compared with about 909,000 
HELOC originations. The estimate of 42 percent assumes that the 
fraction of closed-end originations that were purchase-money 
mortgages among creditors that did not report under HMDA was 
comparable to the estimated 34 percent for HMDA reporters. More 
information about the Experian-Oliver Wyman quarterly Market 
Intelligence Report is available at https://www.marketintelligencereports.com.
    \187\ The estimates of the shares of mortgages potentially 
subject to HOEPA exclude construction loans, which are not reported 
under HMDA. Similarly, the estimates likely exclude reverse 
mortgages because these mortgages generally are not reported under 
HMDA.
---------------------------------------------------------------------------

    The Bureau expects, however, that only a small fraction of loans 
would qualify as high-cost mortgages under the final rule and that few 
creditors would make a large number of high-cost mortgages. The 
Bureau's analysis of loans reported under HMDA suggests that the share 
of all closed-end mortgages for creditors that report under HMDA might 
increase from about 0.04 percent under the current thresholds to 
between 0.1 to 0.3 percent of loans under the revised thresholds.\188\ 
Based on analysis of data from HMDA and from depositories' Reports of 
Condition and Income (Call Reports) and statistical extrapolation to 
non-reporting entities, the Bureau estimates that about 6-7 percent of 
depository institutions made any closed-end high-cost mortgages in 2011 
under the current HOEPA thresholds, and that this likely would have 
been approximately 10 percent if the revised thresholds had been in 
place.\189\ Many of these creditors are predicted to make few high-cost 
mortgages: The share of depository institutions that make ten or more 
high-cost mortgages is estimated to increase from less than 1 percent 
under the current thresholds to about 2 percent under the final 
rule.\190\ Similarly, the

[[Page 6943]]

share of non-depository creditors for which high-cost mortgages 
comprise more than 1 percent of all closed-end originations is 
estimated to rise from 5 percent to 7 percent.\191\ Finally, although 
it is difficult to estimate precisely the share of HELOCs that will 
meet the HOEPA thresholds, the effect of the final rule on creditors' 
businesses is likely limited because open-end lending generally 
comprises a small fraction of creditors' lending portfolios. Based on 
the estimated shares of high-cost mortgages for creditors, the Bureau 
considered creditors' potential revenue losses under the assumption 
that creditors made no high-cost mortgages, which is likely a 
conservative assumption if lenders are able to substitute loans that do 
not exceed the HOEPA thresholds in place of a high-cost mortgage. As 
discussed in more detail below, these estimates suggest that the effect 
of the final rule would be minor for the vast majority of creditors.
---------------------------------------------------------------------------

    \188\ These estimates may overstate the extent to which high-
cost mortgage lending may increase under the revised thresholds. In 
particular, the estimate of 0.04 percent of loans that are currently 
classified as high-cost mortgages in HMDA is based on the HOEPA flag 
in those data. This estimate of the current share of high-cost 
mortgages rises to nearly 0.06 percent if the fraction is estimated 
in an approach comparable to that for projection of the share of 
loans that exceed the revised thresholds.
    \189\ Every national bank, State member bank, and insured 
nonmember bank is required by its primary Federal regulator to file 
consolidated Reports of Condition and Income, also known as Call 
Report data, for each quarter as of the close of business on the 
last day of each calendar quarter (the report date). The specific 
reporting requirements depend upon the size of the bank and whether 
it has any foreign offices. For more information, see https://www2.fdic.gov/call_tfr_rpts/.
    \190\ These estimates of creditors that make any or more than 10 
high-cost mortgages under the final rule assume that some lenders 
avoid making high-cost mortgage loans. In particular, these 
estimates assume that lenders that are estimated to have not made 
any high-cost mortgages 2009-2011 do not originate loans that exceed 
the revised HOEPA thresholds.
    \191\ These estimates are based on the Bureau's analysis of 
mortgage lending by non-depository institutions based on HMDA data 
and data from the National Mortgage Licensing System.
---------------------------------------------------------------------------

    Some industry commenters argued that, as a result of HOEPA's 
expansion to include purchase-money transactions, HOEPA would apply to 
construction loans, a large fraction of which would be classified as 
high-cost mortgages because these loans typically have higher fees and 
APR. In addition, manufactured housing creditors expressed concerns 
that a substantial fraction of loans that they originate would exceed 
the HOEPA thresholds. Those concerns are addressed in detail below.
a. Benefits and Costs to Consumers
    The Bureau believes that the benefits and costs of expanding the 
types of loans potentially subject to HOEPA coverage, and in turn the 
likely number of high-cost mortgages, should be similar qualitatively 
to the benefits and costs of current HOEPA provisions.\192\ The Bureau 
believes that these benefits likely include improving some applicants' 
and consumers' understanding of the terms and features of a given high-
cost mortgage as a result of the enhanced disclosures required for 
high-cost mortgages and as a result of the counseling requirement.\193\ 
In addition, the rule would restrict or prohibit loan terms such as 
prepayment penalties and, in many cases, balloon payments whose risks 
may be difficult for some consumers to evaluate.\194\ Improving 
consumers' understanding of loan terms and such restrictions on loan 
terms could reduce the likelihood that a HOEPA consumer faces a 
sizable, unanticipated fee or increase in payments.
---------------------------------------------------------------------------

    \192\ As discussed below, the Bureau believes that the magnitude 
of the benefits and costs of HOEPA coverage are generally expected 
to increase under the final rule due to, for instance, new and 
revised restrictions and requirements on loan terms and origination 
practices for high-cost mortgages.
    \193\ The Bureau is not aware of in-depth empirical analyses of 
the benefits or costs to consumers of the current HOEPA provisions 
specifically. In contrast, several studies have assessed the impacts 
of State anti-predatory lending laws and, where relevant, findings 
of these studies are discussed below.
    \194\ As discussed in the preamble as well as below, balloon 
payments are generally prohibited for high-cost mortgages but would 
be permitted for short-term bridge loans made in connection with the 
acquisition of a new dwelling and for certain loans made by specific 
categories of creditors serving rural or underserved areas.
---------------------------------------------------------------------------

    Improving consumers' understanding of a given loan would likely 
increase some consumers' ability--and potentially their propensity--to 
shop for a mortgage. A greater ability to shop could have additional 
benefits to consumers if, as a consequence, consumers shop more 
extensively and select a more favorable mortgage (which may be a loan 
that does not meet the HOEPA thresholds) or if consumers forgo taking 
out any mortgage, if none would likely be affordable. At least for some 
consumers, obtaining information in the process of choosing a mortgage 
may be costly. These costs could include the time and effort of 
obtaining additional mortgage offers, trying to understand a large 
number of loan terms, and--particularly for an adjustable-rate loan--
assessing the likelihood of various future contingencies.
    A consumer who finds shopping for and understanding loan terms 
difficult or who needs to make a decision in a short timeframe, for 
example, may select a mortgage with less favorable loan terms than he 
or she could qualify for because the costs of shopping exceed what the 
consumer perceives to be the expected savings, reduced risk, or other 
benefits that could be realized if shopping resulted in the choice of 
another mortgage. The Bureau expects that the final rule would reduce 
the costs of understanding the loan terms for some high-cost loan 
applicants through enhanced disclosures and counseling. In doing so, 
the final rule could benefit applicants who opt, based on better 
information, not to take out a high-cost mortgage.
    It appears that many consumers do not shop extensively when 
selecting a mortgage. A 2012 survey by Fannie Mae found that nearly 40 
percent of mortgage consumers received offers from only one creditor 
when selecting their current mortgage.\195\ Given the estimated 
benefits to a consumer from shopping, this suggests that consumers find 
the time and effort of additional shopping costly; they underestimate 
the potential value from shopping; or both.\196\
---------------------------------------------------------------------------

    \195\ Fannie Mae, ``Mortgage Shopping: Are Borrowers Leaving 
Money on the Table?,'' November 27, 2012 available at https://www.fanniemae.com/resources/file/research/housingsurvey/pdf/nhsq22012presentation.pdf. This finding is broadly consistent with 
information obtained from creditors through outreach and with 
earlier studies that suggest roughly 20-30 percent of consumers 
contacted only one creditor in shopping for a mortgage and that a 
similar fraction considered only two lenders. See, e.g., Jinkook Lee 
& Jeanne M. Hogarth, Consumer Information Search for Home Mortgages: 
Who, What, How Much, and What Else?, 9 Fin. Serv. Rev. 277 (2000); 
James M. Lacko & Janis K. Pappalardo, The Effect of Mortgage Broker 
Compensation Disclosures on Consumers and Competition: A Controlled 
Experiment (Federal Trade Commission Bureau of Economics Staff 
report, February 2004), https://www.ftc.gov/be/workshops/mortgage/articles/lackopappalardo2004.pdf.
    \196\ Susan E. Woodward & Robert E. Hall, Diagnosing Consumer 
Confusion and Sub-Optimal Shopping Effort: Theory and Mortgage-
Market Evidence (Nat'l Bureau of Econ. Research, Working Paper No. 
16007, 2010), available at www.nber.org/papers/w16007.
---------------------------------------------------------------------------

    Some mortgage consumers appear to have difficulty understanding or 
at least recalling details of their mortgage, particularly the terms 
and features of adjustable-rate mortgages.\197\ Improved information 
about loan terms may be especially beneficial in the case of high-cost 
mortgages. At least along some dimensions, the types of consumers who 
may be less certain about their mortgage terms are also the types of 
consumers who are more likely to have taken out a subprime loan.\198\ 
In addition, focus groups suggest that many subprime consumers perceive 
their choice set as limited or experience a sense of desperation.\199\ 
Consumers

[[Page 6944]]

who wish to obtain a mortgage and believe that they have few options 
may be more likely to accept loan terms offered to them and, in turn, 
less likely to consider terms of the mortgage in depth. Similarly, 
consumers seeking a mortgage to alleviate short-term financial 
pressures may focus on near-term features of the mortgage, rather than 
on the risk of, for example, a large payment increase at some later 
point due to a teaser rate expiring or to fluctuations in interest 
rates.
---------------------------------------------------------------------------

    \197\ See Brian Bucks & Karen Pence, Do Borrowers Know Their 
Mortgage Terms?, 64 J. Urb. Econ. 218 (2008); James M. Lacko & Janis 
K. Pappalardo, Improving Consumer Mortgage Disclosures: An Empirical 
Assessment of Current and Prototype Disclosure Forms (Federal Trade 
Commission Bureau of Economics Staff Report, June 2007), https://www.ftc.gov/os/2007/06/P025505MortgageDisclosureReport.pdf and 
Fannie Mae, ``Mortgage Shopping: Are Borrowers Leaving Money on the 
Table?,'' November 27, 2012 available at https://www.fanniemae.com/resources/file/research/housingsurvey/pdf/nhsq22012presentation.pdf.
    \198\ See Brian Bucks & Karen Pence, Do Borrowers Know Their 
Mortgage Terms?, 64 J. Urb. Econ. 218 (2008).
    \199\ See James M. Lacko & Janis K. Pappalardo, Improving 
Consumer Mortgage Disclosures: An Empirical Assessment of Current 
and Prototype Disclosure Forms (Federal Trade Commission Bureau of 
Economics Staff Report, June 2007), https://www.ftc.gov/os/2007/06/P025505MortgageDisclosureReport.pdf and Danna Moore, Survey of 
Financial Literacy in Washington State: Knowledge, Behavior, 
Attitudes, and Experiences (Washington State University, Social and 
Economic Sciences Research Center, Technical Report 03-39, 2003), 
https://www.sesrc.wsu.edu/sesrcsite/Papers/files/dfi-techreport-FINAL2-16-04.pdf.
---------------------------------------------------------------------------

    Clearer or more readily accessible information about loan terms may 
also be particularly beneficial for consumers that take out a purchase-
money mortgage. A recent survey of mortgage borrowers suggests that 
purchase-money mortgage consumers are less likely to be familiar with 
the mortgage process and with mortgage terms such as interest rates and 
fees, down payments, and money for closing.\200\ The final rule would 
expand HOEPA coverage to purchase-money mortgages so that the potential 
benefits of improved information may now accrue for the first time to 
this set of high-cost mortgage consumers.
---------------------------------------------------------------------------

    \200\ Freddie Mac, ``National Mortgage Database, Phase 2 
National Survey of Mortgage Borrowers,'' (May 2011).
---------------------------------------------------------------------------

    These benefits to consumers arise from making information less 
costly, but the potential benefits to consumers may be even greater if 
at least some consumers make systematic errors in processing 
information. For example, some studies find that some consumers may not 
accurately gauge the probability of uncertain events.\201\ Thus, it is 
possible that, in assessing the expected costs of a mortgage offer, 
some consumers underestimate the likelihood of circumstances that lead, 
for example, to incurring a late-payment fee or the likelihood of 
moving or refinancing and thus of incurring a prepayment penalty.
---------------------------------------------------------------------------

    \201\ See, e.g., Colin Camerer, Samuel Issacharoff, George 
Loewenstein, Ted O'Donoghue, & Matthew Rabin, Regulation for 
Conservatives: Behavioral Economics and the Case for ``Asymmetric 
Paternalism,'' 151 U. Pa. L. Rev. 1211 (2003).
---------------------------------------------------------------------------

    The final rule could increase the cost of credit or curtail access 
to credit for a small share of HELOC consumers and purchase-money 
consumers because, as detailed below, creditors may be reluctant to 
make high-cost mortgages and may no longer offer loans that they 
currently make but that would meet the new HOEPA thresholds. Studies of 
State anti-predatory mortgage lending laws, however, indicate these 
impacts of extending HOEPA coverage may be limited, as the State laws 
typically have only modest effects on the volume of subprime lending 
overall and on interest rates for loans that meet the State-law 
thresholds.\202\
---------------------------------------------------------------------------

    \202\ These studies have generally found that State laws 
typically have only small effects on the volume of subprime lending 
overall. Similarly, more restrictive State laws are associated with 
higher interest rates, but the evidence suggests this is the case 
only for fixed-rate loans and that the effect is modest. 
Nevertheless, the stronger laws were associated with a clearer 
reduction on the amount of subprime lending, and prohibitions of 
specific loan features such as prepayment penalties appear to reduce 
the prevalence of the prohibited feature. See Raphael W. Bostic, 
Souphala Chomsisengphet, Kathleen C. Engel, Patricia A. McCoy, 
Anthony Pennington-Cross, & Susan M. Wachter, Mortgage Product 
Substitution and State Anti-Predatory Lending Laws: Better Loans and 
Better Borrowers? (U. Pa. Inst. L. Econ., Research Paper No. 09-27, 
2009), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1460871; Lei Ding, Roberto G. Quercia, 
Carolina K. Reid, and Alan M. White (2011), ``State Anti-Predatory 
Lending Laws and Neighborhood Foreclosure Rates,'' Journal of Urban 
Affairs, Volume 33, Number 4, pages 451-467.
---------------------------------------------------------------------------

    The arguably muted response of origination volume to passage of 
State anti-predatory lending laws appears to reflect, in part, the fact 
that the market substituted other products that did not trigger 
restrictions or requirements of the statute, for example, loans with 
lower initial promotional interest rates and longer promotional-rate 
periods.\203\ It is possible that some consumers would receive a more-
favorable loan if creditors respond to the expansion of the types of 
loans potentially subject to HOEPA coverage by substituting mortgage 
terms that would not trigger HOEPA coverage. It is also possible, 
however, that some consumers would receive a less-favorable loan or no 
loan at all.\204\
---------------------------------------------------------------------------

    \203\ See Raphael W. Bostic, Souphala Chomsisengphet, Kathleen 
C. Engel, Patricia A. McCoy, Anthony Pennington-Cross, & Susan M. 
Wachter, Mortgage Product Substitution and State Anti-Predatory 
Lending Laws: Better Loans and Better Borrowers? (U. Pa. Inst. L. 
Econ., Research Paper No. 09-27, 2009), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1460871.
    \204\ It is possible that some borrowers would receive a less 
favorable mortgage if, for example, lenders avoid making high-cost 
mortgages and, consequently, competition in lending to some 
consumers is reduced.
---------------------------------------------------------------------------

    The Bureau is unaware of data that would allow for strong 
inferences regarding the extent to which such substitution in 
creditors' mortgage product offerings leads to consumers taking out 
more favorable loans. Studies of State anti-predatory mortgage lending 
statutes, however, suggest that stronger State statutes are associated 
with lower neighborhood-level mortgage default rates.\205\ On the one 
hand, this finding might be seen as consistent with the possibility 
that at least some consumers receive more beneficial loans. On the 
other hand, it might reflect the possibility that access to credit is 
more limited in States with comparatively strong anti-predatory 
statutes, i.e., that consumers that are more likely to default may be 
less likely to receive a mortgage in these states. This latter 
interpretation, however, is arguably more difficult to reconcile with 
the finding that strong State statutes are estimated to have only a 
limited effect on the volume of subprime lending.
---------------------------------------------------------------------------

    \205\ Ding, Roberto G. Quercia, Carolina K. Reid, and Alan M. 
White (2011), ``State Anti-Predatory Lending Laws and Neighborhood 
Foreclosure Rates,'' Journal of Urban Affairs, Volume 33, Number 4, 
pages 451-467.
---------------------------------------------------------------------------

b. Benefits and Costs to Covered Persons
    Expanding the types of loans potentially subject to HOEPA coverage 
to include purchase-money mortgages and HELOCs would likely require 
creditors to generate and to provide HOEPA disclosures to a greater 
number of consumers than today. It is difficult to predict the extent 
to which creditors may avoid making newly eligible loans under the 
final rule. The Bureau's estimation methodology in analyzing the 
paperwork burden associated with the final rule implies that on the 
order of 25,000-30,000 loans might qualify as high-cost mortgages or 
high-cost HELOCs. Regardless, the Bureau expects that the share of 
consumers that receive a high-cost mortgage would remain a small 
fraction of all mortgage consumers (by the Bureau's estimates, likely 
about 0.3 percent of all closed-end and open-end originations). 
Creditors would likely also incur costs (e.g., the costs of time 
involved in receiving the certification and data retention costs) to 
comply with the final rule's requirement that a creditor obtain 
certification that a consumer has received homeownership counseling 
prior to extending a high-cost mortgage.
    A small number of creditors may also lose a small fraction of 
revenue as a greater number of loans are subject to HOEPA. Based on 
outreach, the Bureau understands that some creditors believe they will 
be negatively perceived if they make high-cost mortgages. This belief 
coupled with the restrictions and liability provisions associated with 
high-cost mortgages and limited secondary market demand for high-cost 
mortgages may reduce creditors' ability or willingness to make high-
cost purchase-money mortgages and HELOCs. Creditors may also be 
reluctant to make high-cost purchase-money mortgages that they 
previously would have extended because of the

[[Page 6945]]

general inability to sell high-cost mortgages in the current market, 
primarily because of assignee liability.
    If creditors were indeed unwilling to make the likely small 
fraction of loans that newly meet the revised HOEPA thresholds and did 
not substitute other loan terms, they would lose the full revenue from 
any loans that they choose not to originate. A second possibility is 
that creditors restrict high-cost mortgage lending in part by 
substituting alternative terms that do not meet the HOEPA thresholds. 
Even if all potential high-cost mortgages were modified in this way so 
that the number of originations was unaffected, the alternative loans 
would presumably be less profitable (or at most equally profitable), 
since a creditor could have offered the same loan contract prior to the 
expansion of HOEPA. Thus, even when creditors substitute alternative 
loan products, creditors likely would incur some revenue loss.
c. Scale of Affected Consumers and Covered Persons
    Despite expanding the types of loans potentially subject to HOEPA 
coverage, which likely would result in an increase in the number and 
share of loans that are classified as high-cost mortgages, high-cost 
mortgages are expected to continue to account for a small fraction of 
both closed-end mortgages and HELOCs. Thus, the final rule would be 
expected to have no direct impact on the vast majority of creditors, 
because, as noted above, at most about 10 percent of creditors are 
predicted to make loans that would be classified under the final rule, 
and few creditors are expected to make significant numbers of high-cost 
mortgages. Similarly, the final rule would not be expected to affect 
directly the vast majority of consumers--those who do not apply for or 
obtain a high-cost mortgage. As noted above, the Bureau estimates that 
the share of all closed-end mortgages for creditors that report under 
HMDA might increase from about 0.04 percent under the current 
thresholds to about 0.1 to 0.3 percent of loans under the revised 
thresholds. The estimated proportion of purchase-money mortgages that 
would qualify as high-cost mortgages is slightly greater, 0.5 percent, 
but is still a small fraction of all such loans.
    One trade association argued that the Bureau's analysis of the 
compliance burden was incomplete because it did not properly consider 
the costs of determining whether a purchase-money mortgage or a HELOC 
is a high-cost mortgage. In particular, the trade association asserted 
that, in general, most creditors as a matter of course seek to avoid 
high-cost mortgages, due to the reputational stigma and liability risks 
associated with making these loans. According to this commenter, 
creditors thus incur costs to identify potential high-cost mortgage s 
in order to avoid making such loans. But, the commenter asserted, now 
that HOEPA has been expanded to include both purchase-money 
transactions and open-end credit transactions, creditors will incur new 
costs to identify (and avoid making) these types of loans that may 
potentially fall under the HOEPA thresholds as well. The Bureau 
believes that these costs include, for example, the costs of changing 
or upgrading software or computer systems, costs of legal and 
compliance review of how HOEPA applies to HELOCs, and the costs of 
training staff that may have previously originated only purchase-money 
mortgages or HELOCs so that they did not previously need to be familiar 
with HOEPA. In the trade association's view, the Bureau did not 
properly account for these new costs in its analysis. However, the 
Bureau's Section 1022 analysis does not consider the benefits and costs 
of determining whether purchase-money mortgages and HELOCs exceed the 
HOEPA thresholds because, as noted in the discussion of the baseline, 
these benefits and costs arise directly from the statute.
    The final rule addresses commenters' concerns, discussed above, 
that expanding HOEPA coverage to purchase-money mortgages would apply 
to transactions to finance the initial construction of a dwelling 
(construction loans)--which typically have higher fees and interest 
rates than other home-secured loans--and, consequently would unduly 
reduce access to such credit with little benefit to consumers. One 
industry commenter estimated that about one-fifth of its construction-
only loans originated in recent years would have exceeded the HOEPA 
thresholds. The benefits to consumers of extending HOEPA coverage to 
construction loans may be smaller than for other types of loans because 
many restrictions on high-cost mortgages are generally inapplicable to 
construction loans including restrictions on acceleration, fees for 
loan modifications or payoff statements, and negative amortization 
features.\206\ The Bureau is exempting transactions to finance the 
initial construction of a dwelling from the final rule. Thus, the final 
rule should have no direct costs or benefits to consumers that seek 
such financing or to covered persons insofar as they originate these 
transactions. As compared with the proposed rule, the final rule will 
result in lower costs for construction loan creditors.
---------------------------------------------------------------------------

    \206\ In addition, the Bureau notes that the Board concluded 
that, at least historically, there have been fewer concerns 
regarding potentially abusive lending practices for construction 
loans compared with other mortgages.
---------------------------------------------------------------------------

    Some commenters argued that the Bureau incorrectly concluded that 
only a small fraction of manufactured home loans would be covered. 
However, the Bureau notes that it concluded based on available data 
that the proposed rule was expected to have little direct impact on the 
vast majority of consumers and creditors (not manufactured-home 
borrowers specifically), and that the share of high-cost mortgages 
would likely be higher for loans secured by manufactured housing than 
for loans secured by other types of homes. Under the current 
thresholds, the share of home improvement or refinance loans (those 
types of loans currently covered by HOEPA) that are identified as high-
cost mortgage s in the 2011 HMDA data is about 2 percent for loans 
secured by a manufactured home compared with about 0.04 percent of 
loans secured by other types of 1-4 family homes, for example.
    The Bureau recognized that HMDA data that form the basis of these 
estimates likely under-represent mortgages extended in rural areas, 
where manufactured housing is more common. The Bureau requested 
additional data on the share of manufactured housing mortgages that 
would qualify as high-cost mortgages and on the proposed rule's effects 
on rural areas. By and large, however, the data the Bureau received in 
response to these requests came from entities that report in HMDA. 
Thus, although the commenters' analysis and data broadly aligned with 
the Bureau's analysis of data reported by these creditors under HMDA, 
the request for data did not yield information on loans extended by 
creditors that do not report under HMDA.
    The benefits and costs to consumers who would potentially seek a 
mortgage to finance the purchase of a manufactured home and the costs 
to covered persons of extending HOEPA coverage to purchase-money 
mortgages depends critically on the source of these differences in the 
share of loans that qualify as high-cost mortgages. On the one hand, 
industry commenters argued that the differences reflect manufactured 
housing creditors' higher cost of funds (due, at least in part, to a 
lack of secondary market funding for mortgages on manufactured homes) 
as well as manufactured-home purchasers' typically lower income and 
credit scores

[[Page 6946]]

than mortgage consumers as a whole. In addition, mortgages for 
manufactured housing tend to be for smaller amounts, so these loans may 
be more likely to exceed the points-and fees thresholds, particularly 
if origination costs are fixed or do not fall in line with loan size. 
On the other hand, consumer group commenters raised concerns that 
higher interest rates and points and fees on manufactured-home 
purchase-money mortgages may reflect limited competition or harmful 
lending practices applied to disproportionately to vulnerable 
consumers.
    Available data cannot distinguish the extent to which the factors 
suggested by commenters underlie the comparatively large fraction of 
manufactured housing mortgages that meet the existing HOEPA thresholds. 
Analyzing data for the subset of creditors that report under HMDA, 
manufactured home loans are more likely than other mortgages to be 
flagged as high-cost mortgages, and this conclusion still holds after 
controlling for differences in loan size, consumer income, and other 
factors reported in HMDA that may differ systematically between owners 
of manufactured housing and other homeowners. Even so, the remaining 
gap in the probability that a mortgage has a relatively high interest 
rate could conceivably reflect differences in consumers' credit scores, 
collateral value, predicted loan performance, or other factors that are 
not measured in HMDA.
    Without comprehensive data on a range of manufactured housing 
creditors, including the credit characteristics of their consumers, 
points and fees, and loan performance, it is difficult to determine the 
extent to which each of these hypothesized factors contribute to the 
observed differences in loan terms. Such data, in turn, would allow 
stronger inferences regarding both the costs and benefits of the final 
rule to consumers and covered persons alike. If the generally less-
favorable terms on manufactured home loans reflected harmful lending 
practices, then HOEPA's disclosure and counseling requirements and 
borrower protections may have considerable benefit for consumers. In 
addition, some creditors that extend credit for the purchase of 
manufactured homes could gain market share from creditors that engage 
in harmful lending practices. If the higher interest rates and points 
and fees (as a percent of loan amount) on mortgages for manufactured 
homes instead reflect differences in, for example, default rates or 
creditors' costs, then subjecting a larger share of manufactured-home 
mortgages to HOEPA restrictions and requirements may reduce access to 
credit for potential manufactured home buyers and the revenue of 
creditors that specialize in manufactured home loans. The Bureau notes 
that, in this scenario, the benefits and costs may vary across 
consumers and more comprehensive data would be required to gauge the 
extent of this variation in costs and benefits. Some borrowers that 
previously could have obtained a manufactured home mortgage would no 
longer be able to do so and may be worse off. At the same time, other 
borrowers that cannot finance the purchase of a manufactured home could 
be better off if the only loan that would have been available to them 
was a high-cost mortgage. Finally, borrowers who are able to obtain a 
high-cost loan with substantially similar terms under the existing and 
final rules may benefit from the additional HOEPA disclosures and 
protections. If creditors are able to avoid making high-cost mortgages 
by adjusting loan terms to avoid the thresholds, as may be the case 
particularly if there is a lack of competition, some borrowers may 
receive a loan with a lower rate or points and fees than they would 
have if HOEPA did not apply to purchase-money mortgages.
2. Revised APR and Points-and-Fees Thresholds
    The statute, and therefore the final rule, revise the APR and 
points-and-fees thresholds. These revisions would likely result in an 
increase in the number of high-cost mortgages. The Bureau estimates, 
for example, that these changes in the APR thresholds along with the 
change in the benchmark interest rate from Treasuries to average prime 
offer rate would increase the fraction of refinance and home 
improvement loans that are high-cost mortgages made by creditors that 
reported in the 2011 HMDA data from about 0.06 percent of loans to 
roughly 0.2 percent of loans. The Dodd-Frank Act also expanded the 
definition of points and fees to include new charges, including some 
costs that may be payable after consummation or account opening. The 
expanded definition of points and fees is expected to reinforce the 
effect of the revised points-and-fees threshold and to result in a 
greater number of loans that exceed the new points-and-fees threshold.
    One trade association commenter drew on a survey of its members to 
argue that many mortgages for small dollar amounts would exceed the 
points-and fees-threshold. According to the trade association, its 
survey respondents indicated that all mortgages for amounts of $61,500 
or less exceeded the points-and-fees threshold and 67 percent of loans 
for $80,000 or less exceeded the threshold.\207\ The Bureau welcomed 
the additional information provided by this trade association's survey 
of its membership. Nonetheless, without additional detail about the 
survey design, for example, the Bureau believes the summary results may 
be illustrative but cannot be assumed to be representative.
---------------------------------------------------------------------------

    \207\ Roughly 15 percent of 2011 originations of mortgages 
secured by single-family, owner-occupied homes reported by lenders 
under HMDA were for amounts less than $80,000 and about 9 percent 
were for less than $61,500.
---------------------------------------------------------------------------

a. Benefits and Costs to Consumers
    The Dodd-Frank Act revisions to the thresholds may benefit 
consumers by increasing the number of credit transactions classified as 
high-cost mortgages. As a result, the benefits and costs to consumers 
discussed above in the context of expanding HOEPA coverage are likely 
similar, at least qualitatively, to the benefits and costs of revising 
the thresholds to capture a greater share of credit transactions. As a 
result of the revised thresholds, these benefits and costs would apply 
to a larger set of transactions, although as noted above, the Bureau 
believes that high-cost mortgages would likely remain a small fraction 
of all mortgages. The Bureau believes that, in some cases, these 
benefits likely include a better understanding of the risks associated 
with the transaction, which in turn may reduce the likelihood that a 
consumer takes out a mortgage he or she cannot afford; better loan 
terms due to increased shopping; and an absence of loan features whose 
associated risks may be difficult for consumers to understand.
    Nonetheless, the final rule could impose costs on a small number of 
consumers by raising the cost of credit or curtailing access to credit 
if creditors choose not to make loans that meet the revised thresholds. 
As discussed above, however, available evidence based on State anti-
predatory lending statutes suggests that tighter restrictions and more 
expansive definitions of high-cost mortgages typically have only a 
limited impact on the cost of credit and on originations.
    For closed-end loans, the definition of points and fees in the 
final rule is narrower than in the proposal in several respects. First, 
compared with the proposal, the final rule specifies that charges are 
included in points and fees only if it is known at or before 
consummation that the consumer will incur the charges. The final rule 
also provides that waived third-party charges

[[Page 6947]]

that the creditor may recoup if the consumer prepays the loan in full 
during the first three years following consummation will not be 
included in points and fees as prepayment penalties. The Bureau expects 
that, to the extent these differences result in fewer closed-end credit 
transactions that meet the points-and-fees thresholds, both the 
benefits and costs to consumers would be reduced relative to the 
proposal.
    The definition of points and fees for open-end credit plans in the 
final rule also differs from that in the proposal along two dimensions. 
First, loan originator compensation (defined identically to 
compensation for closed-end loans) will be included in points and fees 
under the final rule, whereas the proposal would have excluded these 
payments. This change is expected to increase the number of HELOCs that 
qualify as high-cost mortgages and, accordingly, the costs and benefits 
to consumers and to covered persons. By contrast, the final rule's 
inclusion of participation fees payable at or before account opening--
rather than for the life of the loan, as proposed--is expected to 
decrease the number of HELOCs that qualify as high-cost mortgages.
    In calculating the APR for variable-rate transactions, the final 
rule specifies that this rate is based on the fully-indexed rate and 
relevant margin if the rate can vary based only on an index, even if 
that index is the creditor's own index. The proposal would have 
required that the APR be calculated based on the maximum rate that 
could be charged over the life of the loan if the relevant index was 
under the creditors' control. Thus, the proposal would potentially have 
led to a greater number of loans that exceed the APR threshold. For 
this reason as well, the Bureau expects that the benefits and costs to 
consumers would be reduced relative to the proposal. As discussed 
above, however, the Bureau expects that only a small number of 
variable-rate, closed-end credit transactions would employ an index in 
the creditor's control, so this revision to the proposal should not 
result in a significant change to the benefits and costs to consumers.
    The final rule does not implement the measures contained in the 
proposed rule that were intended approximately to offset an increase in 
HOEPA coverage as a result of the more expansive finance charge 
definition contained in the Bureau's 2012 TILA-RESPA Proposal. Since 
the alternative measures would have been crafted so that the number of 
high-cost mortgages would have been approximately unchanged, the Bureau 
expects that this difference between the proposed and final rules would 
not appreciably alter the potential costs and benefits to consumers.
b. Benefits and Costs to Covered Persons
    The benefits and costs to covered persons of revising the statutory 
HOEPA thresholds would likely be expected to be similar, at least 
qualitatively, to those that would result from expanding the types of 
credit transactions potentially subject to HOEPA coverage to purchase-
money mortgages and HELOCs. For example, creditors would likely incur 
costs associated with generating and providing HOEPA disclosures for 
additional transactions that would be covered by the revised HOEPA 
thresholds, as well as costs associated with obtaining certification 
that a consumer has received homeownership counseling prior to taking 
out a high-cost mortgage. As discussed above, the Bureau estimates that 
a small number of creditors may also lose a modest fraction of revenue 
if they are reluctant to make high-cost mortgages and cannot offer 
alternatives that are as profitable as a high-cost mortgage.\208\
---------------------------------------------------------------------------

    \208\ As noted above, a trade association commenter stated, 
based on a survey of its members, that many mortgages for 
comparatively small dollar amounts would exceeded the points-and-
fees threshold. For example, the survey respondents indicated that 
about two-thirds of loans for $80,000 or less would exceed the 
threshold. The Bureau notes that loans of this size comprise about 
15 percent of home-secured, single-family, owner-occupied loans 
reported the 2011 HMDA data and, presumably, a similar small 
fraction of revenue. Further, the Bureau believes that without 
additional detail regarding, for example, the survey design and 
question wording, the summary results from the survey may be 
illustrative, but cannot be assumed to be representative.
---------------------------------------------------------------------------

    Again, the final rule differs from the proposal in its more limited 
definitions of points and fees for closed- and open-end credit 
transactions and its use of the fully indexed rate (rather than maximum 
allowable rate) in calculating the APR for certain variable-rate 
transactions. The Bureau expects that, to the extent these differences 
result in fewer loans that meet the points-and-fees or APR thresholds, 
benefits and costs to covered persons would be reduced relative to the 
proposal, just as for consumers. At the same time, the clarifying 
changes made to points and fees (e.g., changes noting when loan 
originator compensation must be included) will reduce covered persons' 
compliance burden; the definition of loan originator compensation is 
identical to the definition adopted in the Bureau's qualified-mortgage 
rulemaking.
    The final rule does not implement the alternative proposal to adopt 
a Transaction Coverage Rate (TCR) in the event that a more expansive 
definition of finance charge were finalized in connection with the 
Bureau's 2012 TILA-RESPA Proposal. The Bureau is therefore not 
addressing at this time commenters' concerns with respect to the costs 
that may be associated with calculating a TCR.
3. New Prepayment-Penalty Test
    The Dodd-Frank Act added a new HOEPA coverage test for loans with a 
prepayment penalty. Under the Dodd-Frank Act, HOEPA protections would 
be triggered where the creditor may charge a prepayment penalty more 
than 36 months after consummation, or if the penalty is greater than 2 
percent of the amount prepaid. High-cost mortgages, in turn, are 
prohibited from having prepayment penalties, so the prepayment penalty 
test effectively caps both the time period after consummation during 
which such a penalty may be charged and the amount of any such penalty.
    As discussed below, due to data limitations, the Bureau cannot 
fully quantify the benefits and costs to consumers and the costs to 
covered persons. Nevertheless, the Bureau believes that the number of 
credit transactions that might qualify as high-cost mortgages because 
of the prepayment penalty test is likely small.
    Trends and aggregate statistics suggest that mortgages originated 
in recent years are very unlikely to have prepayment penalties for two 
reasons. First, prepayment penalties were most common on subprime and 
near-prime mortgages, a market that has disappeared. Second, a roughly 
90 percent of dollar-weighted mortgage originations in recent years 
were purchased by Fannie Mae or Freddie Mac or were FHA or VA 
loans.\209\ Fannie Mae and Freddie Mac purchase very few loans with 
prepayment penalties--in a random sample of mortgages from the FHFA's 
Historical Loan Performance data, a very small percentage of mortgages 
originated between 1997 and 2011 had a prepayment penalty.\210\
---------------------------------------------------------------------------

    \209\ In dollar-weighted terms, loans purchased by Fannie Mae or 
Freddie Mac accounted for about two-thirds of 2011 mortgage 
originations, and FHA/VA loans comprised roughly 22 percent of 
originations. Figures for 2010 are similar. Inside Mortgage Finance 
``The 2012 Mortgage Market Statistical Annual, Volume 1: The Primary 
Market,'' (2012) at 17. See also Tamara Keith, ``What's Next for 
Fannie, Freddie? Hard To Say,'' February 10, 2011, available at 
https://www.npr.org/2011/02/10/133636987/whats-next-for-fannie-freddie-hard-to-say.
    \210\ The Bureau notes that a trade association noted in its 
comments that all but one of its members that it surveyed regarding 
the effects of the proposed rule would be unaffected by the new 
prepayment penalty test. The Bureau observes, however, that the 
representativeness and weight of this finding from the survey cannot 
be assessed without additional detail such as the context and 
wording of the questionnaire, the number and characteristics of the 
creditors that responded to the survey, and information on how these 
respondents differ from the population of creditors that extend 
mortgages as a whole.

---------------------------------------------------------------------------

[[Page 6948]]

    Further, the Bureau observes that the prevalence of prepayment 
penalties, in general, could be reduced over time by other Dodd-Frank 
Act provisions related to ability-to-repay requirements that separately 
restrict such penalties for closed-end credit transactions that are not 
qualified mortgages.\211\ For example, under the Dodd-Frank Act, most 
closed-end, dwelling-secured mortgages will generally be prohibited 
from having a prepayment penalty unless they are fixed-rate, non-
higher-priced, qualified mortgages. Moreover, under the Dodd-Frank Act, 
even such qualifying closed-end mortgages may not have a prepayment 
penalty that exceeds 3 percent, 2 percent, or 1 percent of the amount 
prepaid during the first, second, and third years following 
consummation, respectively (and no prepayment penalty thereafter). 
Finally, under the Dodd-Frank Act, prepayment penalties are included in 
the points and fees calculation for qualified mortgages. For qualified 
mortgages, points and fees are capped at 3 percent of the total loan 
amount, so unless a creditor originating a qualified mortgage can forgo 
some or all of the other charges that are included in the definition of 
points and fees, it necessarily will need to limit the amount of 
prepayment penalties that may be charged in connection with the 
transaction.\212\
---------------------------------------------------------------------------

    \211\ See 15 U.S.C. 1639c.
    \212\ Further, the Bureau notes that a trade association noted 
in its comments that all but one of its members that it surveyed 
regarding the effects of the proposed rule would be unaffected by 
the new prepayment penalty test. The Bureau further notes, 
nonetheless, that the representativeness and weight of this finding 
from the survey cannot be assessed without additional detail such as 
the context and wording of the questionnaire, the number and 
characteristics of the creditors that responded to the survey, and 
information on how these respondents differ from the population of 
creditors that extend mortgages as a whole.
---------------------------------------------------------------------------

a. Benefits and Costs to Consumers
    The final rule would potentially benefit a small number of 
consumers by potentially making it easier to refinance a high-cost 
mortgage. Prepayment penalties can prevent a consumer from refinancing 
in circumstances where it would be advantageous for the consumer to do 
so as would be true if, for example, interest rates fall or if the 
consumer's credit score improves. The prepayment penalty test coupled 
with the prohibition on prepayment penalties would remove this barrier 
to obtaining a more favorable loan.
    The final rule may be particularly beneficial to consumers who, in 
taking out a mortgage, underestimate the likelihood that they will move 
or that more favorable terms might be available in the future so that 
refinancing would be advantageous. Likewise, eliminating prepayment 
penalties could benefit consumers that select a loan based on terms 
that are immediately relevant or certain rather than costs and benefits 
of the loan terms that are uncertain or in the future.
    Nevertheless, the final rules regarding prepayment penalties would 
potentially result in some consumers taking out a mortgage that is less 
favorable than they would if the rule were not implemented. For 
example, this would be true for a consumer who is unlikely to move or 
refinance and may be willing to accept a prepayment penalty in exchange 
for a lower interest rate if a creditor offered mortgage products with 
such a trade-off.\213\ The final rules regarding prepayment penalties 
could, more generally, reduce access to credit for some potential 
applicants if creditors that previously used such penalties to manage 
prepayment and interest-rate risk reduce lending or increase interest 
rates or fees as a result of the final rule.
---------------------------------------------------------------------------

    \213\ At least for subprime loans, loans with a prepayment 
penalty tend to have lower interest rates. See, e.g., Oren Bar-Gill, 
The Law, Economics and Psychology of Subprime Mortgage Contracts, 94 
Cornell L. Rev. 1073-1152 (2009).
---------------------------------------------------------------------------

    At this time, the Bureau cannot quantify the extent to which 
creditors may restrict lending or increase fees or interest rates as a 
result of the final rule. To do so would require, among other 
information, comprehensive data on the terms and features--including 
details of any prepayment penalties--of mortgage contracts that 
creditors offer. Similarly, the Bureau cannot quantify the share of 
consumers or the costs to consumers who may receive a less-favorable 
mortgage than if the final rule did not restrict prepayment penalties. 
Estimating these quantities would require not only data on the 
alternative mortgage contracts that consumers might be offered but also 
information on how consumers value each of the alternative contracts.
b. Costs to Covered Persons
    The final rule could increase the risk and, in turn, the costs that 
the likely small number of creditors that would make high-cost 
mortgages would assume in making such a loan. Prepayment penalties are 
one tool that creditors can use to manage prepayment and interest rate 
risk and to increase the likelihood that creditors recoup the costs of 
making the loan. The final rule would limit creditors' ability to 
manage prepayment and interest rate risk in this way, although 
creditors might be expected to adjust the contracts that they offer to 
at least partially offset any associated revenue loss. The Bureau notes 
that the costs to creditors associated with this component of the final 
rule could be muted by the effect of the other provisions of the Dodd-
Frank Act that limit prepayment penalties, as discussed above.
4. New and Revised Restrictions and Requirements for High-Cost 
Mortgages
    The final rule also tightens existing restrictions for high-cost 
mortgages, including on balloon payments, acceleration clauses, and 
loan structuring to evade HOEPA and, as discussed above, bans 
prepayment penalties for high-cost mortgages. Further, the final rule 
adds new restrictions including limiting fees for late payments and 
fees for transmission of payoff statements; prohibiting fees for loan 
modification, payment deferral, renewal or extension; prohibiting 
financing of points and fees; and prohibiting recommended default. 
Finally, the rule provides for an expansion of the existing ability-to-
repay requirement to open-end credit plans and adds a requirement that 
a creditor receive certification that a consumer has received pre-loan 
homeownership counseling prior to extending a high-cost mortgage.
a. Benefits and Costs to Consumers
    Taken together, the final rule's requirements and restrictions 
provide a variety of potential benefits to the likely small number of 
consumers with a high-cost mortgage. These potential benefits include 
reducing the likelihood that a consumer would face unexpected payment 
increases, increasing the likelihood a consumer can refinance, and 
improving a consumer's ability to obtain a mortgage that is affordable 
and otherwise meets their needs.
    The restrictions on acceleration clauses, late fees, and fees for 
loan modification, payment deferral, renewal or similar actions each 
reduce the likelihood of unanticipated payment increases. Steady, 
predictable payments may simplify consumers' budgeting and may 
particularly benefit consumers with high-cost mortgages if, as might be 
expected, these consumers tend to have fewer resources to draw upon to 
meet unanticipated payment increases.
    Similarly, the final rule generally prohibits balloon payments for 
high-cost

[[Page 6949]]

mortgages except in certain limited circumstances. Although scheduled 
balloon payments may be more predictable than, for example, a late fee, 
balloon payments may typically be much larger. The final rule's limits 
on balloon payments may reduce the likelihood that a consumer with 
insufficient financial assets to make the balloon payment feels 
pressure to refinance the loan, potentially at a higher interest rate 
or with new fees. In contrast to the proposal, which would have 
exempted from the balloon restriction only mortgage transactions with 
payment schedules adjusted to the seasonal income of the consumer, the 
final rule also exempts certain short-term bridge loans (which 
generally are structured with balloon payments) and high-cost mortgages 
originated by specific categories of creditors serving rural or 
underserved areas that also meet other prescribed conditions set forth 
in the 2013 ATR Final Rule. Consumers with a high-cost short-term 
bridge loan or with a mortgage that meets these specific criteria would 
not benefit from avoiding the potential contingency of facing pressure 
to refinance a high-cost mortgage in order to avoid a scheduled balloon 
payment.
    Several of the requirements and restrictions may help consumers to 
select the mortgage that best suits their needs. First, the requirement 
that the creditor assess the repayment ability of an applicant for a 
high-cost HELOC may help to ensure that the HELOC is affordable for the 
consumer. Second, the provision that prohibits a creditor from 
recommending that a consumer default on an existing loan in connection 
with closing a high-cost mortgage that refinances the existing loan 
would make it less likely that, because of a pending default, a 
consumer is pressured or constrained to consummate a mortgage, 
particularly one whose terms had changed unfavorably after the initial 
application. Third, prohibiting loan modification fees and restricting 
fees for payoff statements would reduce the costs to borrowers of 
obtaining a more favorable loan through modification or refinancing. 
Fourth, by prohibiting financing of points and fees (including a 
prepayment penalty as part of a refinance), the final rule could 
improve consumers' ability to assess the costs of a given mortgage. In 
particular, the costs of points and fees or of a prepayment penalty may 
be less salient to consumers if they are financed, because the cost is 
spread out over many years. When points and fees are instead paid up 
front, the costs may be more transparent for some consumers, and 
consequently the consumer may more readily recognize a relatively high 
fee. Fifth, pre-loan counseling would potentially improve applicants' 
mortgage decision-making by improving applicants' understanding of loan 
terms. This benefit is qualitatively similar to the benefits of the 
HOEPA disclosure. Moreover, counseling may benefit a consumer by, for 
example, improving the consumer's assessment of his or her ability to 
meet the scheduled loan payments and by making the consumer aware of 
other alternatives (such as purchasing a different home or a different 
mortgage product). Finally, some applicants may find information on 
loan terms and features to be more useful or effective when delivered 
in a counseling setting rather than in paper form. Counseling could 
also complement the HOEPA disclosure by providing applicants an 
opportunity to resolve questions regarding information on the 
disclosure itself. In addition, in weighing the feasibility or merits 
of a loan, applicants may focus on the loan features that are most 
easily understood, most immediately relevant, or most certain; 
homeownership counseling could mitigate any bias in an applicant's 
decision-making by focusing either on less understood or less 
immediate, but still important, provisions.
    It is possible, however, that creditors would respond to the 
tighter restrictions on high-cost mortgages by increasing the cost of 
credit or even no longer extending loans to these consumers. As noted 
above, however, to date the evidence suggests that, in general, 
restrictions on high-cost lending may have only modest effects on the 
cost of credit and on the supply of credit, at least as measured by 
mortgage originations.
    As discussed above, however, the Bureau agreed with commenters that 
prohibiting balloon payments on a high-cost mortgage could reduce 
consumers' access to credit more substantially in some specific 
instances and therefore impose greater costs on some consumers with a 
high-cost mortgage. In light of this, the final rule exempts certain 
short-term bridge loans and mortgages extended by creditors serving 
rural or underserved communities from the general prohibition of 
balloon payments for high-cost mortgages.
    Finally, the pre-loan counseling requirement could impose costs on 
consumers. Not only might the consumer have to pay for counseling, but 
the need to obtain counseling could conceivably delay the closing 
process, and such delay may be costly for some consumers.
b. Benefits and Costs to Covered Persons
    Creditors that already assess a HELOC-consumer's ability to repay 
may benefit from the final rule's requirement by gaining market share 
as their competitors incur costs to meet this requirement. The 
requirement that a creditor receive certification that a consumer 
obtaining a high-cost mortgage has received pre-loan homeownership 
counseling may benefit creditors by reducing the time that a creditor 
would need to spend to help a consumer select a mortgage or to answer a 
consumer's questions.
    In light of the tighter restrictions and requirements on high-cost 
mortgages, creditors may be less willing to make high-cost mortgages. 
If so, then some creditors' revenues may decline by a likely small 
proportion either because they do not extend any credit to a consumer 
to whom they would have previously made a high-cost mortgage, or 
because they extend an alternative loan that does not qualify as a 
high-cost mortgage but that results in lower revenue. In addition, as 
commenters stated, restrictions such as limiting fees for payoff 
statements and prohibiting loan modification fees would result in 
higher costs to all mortgage borrowers. One community bank commented 
that current restrictions on high-cost mortgages had already driven 
creditworthy customers to seek credit from less-regulated creditors.
    In some instances the potential impacts of these restrictions may 
extend beyond creditors. The rule would extend the prohibition on 
recommended default to brokers as well as creditors, for example. This 
prohibition is expected to have little impact on covered persons 
because the Bureau believes that few, if any, creditors or brokers have 
a business model premised on recommending default on a loan to be 
refinanced as a high-cost mortgage. The limits on various fees, 
detailed above, apply to servicers as well as creditors. Both of these 
sets of covered persons could incur revenue losses or greater costs if 
such fees are important risk management tools.
    The Bureau believes creditors would incur recordkeeping and data 
retention costs due to the final requirement that a creditor receive 
certification that a consumer received pre-loan counseling. Based on 
the estimation methodology for analyzing the paperwork burden 
associated with the final rule, the Bureau estimates that the total 
ongoing costs for all creditors that make any high-cost mortgages to be 
about $43,000 annually. These costs may be small relative to the 
quantity of other

[[Page 6950]]

information that must be retained and that, under the proposed 2012 
TILA-RESPA rule, would generally be required to be retained in machine-
readable format.
5. Counseling-Related Provisions for RESPA-Covered Loans and Negative-
Amortization Loans
    The final rule, like the proposal, would include two additional 
provisions required by the Dodd-Frank Act related to homeownership 
counseling that apply to loans with negative amortization and loans 
covered by RESPA. First, the final rule would require lenders to 
provide a list of homeownership counseling organizations to applicants 
for all mortgages covered by RESPA except for reverse mortgages and 
transactions secured by a consumer's interest in a timeshare plan.
    Several industry commenters, including community banks, objected to 
the requirement that the RESPA homeownership counseling list be 
provided to refinance or HELOC applicants. Consumer groups commented 
that the counseling list requirement should apply to all federally 
related mortgages because concerns regarding potentially abusive 
lending practices and borrower confusion also exist for refinancings 
and HELOCs, not just for purchase-money mortgages. The Bureau agrees 
that the potential benefits of homeownership counseling are not limited 
to purchase-money mortgage consumers.
    Commenters suggested that compliance burden would be lower if 
creditors were not required to provide an applicant-specific counseling 
list. Alternatives that commenters suggested include State-specific 
lists and a uniform document with general information regarding 
homeownership counseling along with information on internet or 
telephone resources to identify homeownership counseling resources. The 
Bureau agrees that requiring creditors to provide a list of 
homeownership counseling resources that is not tailored to each 
applicant's location would reduce lenders' compliance burden. However, 
the Bureau also believes that a more-generic list would reduce the 
likelihood that at least some mortgage applicants obtain and 
potentially benefit from homeownership counseling. Moreover, the Bureau 
notes that the Dodd-Frank Act specifies that applicants receive a list 
of counseling resources organized by location, and the Bureau notes 
that it interprets this statutory prescription to mean the location of 
the applicant who is being served by the lender.
    The proposal would also have required that both consumers with a 
high-cost mortgage and first-time borrowers with a loan that may result 
in negative amortization receive a list of homeownership counselors or 
counseling organizations, but the final rule does not include this 
requirement. These proposed requirements that consumers with a HOEPA or 
negative-amortization mortgage receive a list of homeownership 
counseling resources would have been satisfied by complying with the 
RESPA counseling list requirement since RESPA covers both sets of 
loans. Therefore, there would have been no additional costs and 
benefits from the proposed requirements for HOEPA and negative-
amortization mortgages. Similarly, removing the requirements for these 
sets of loans in the final rule does not alter the regulation's costs 
and benefits.
    With respect to first-time borrowers with a loan that could have 
negative amortization, the final rule would require that a creditor 
receive documentation that the consumer received homeownership 
counseling. The final rule would not specify any particular elements 
that must be included in the documentation.
a. Benefits and Costs to Consumers
    The two non-HOEPA homeownership counseling provisions included in 
the final rule would generally have benefits to consumers that are 
similar in nature to those of requiring that creditors to receive 
certification that a consumer with a high-cost mortgage has received 
homeownership counseling. In particular, as discussed above, 
homeownership counseling may improve consumers' understanding of their 
mortgages, it may complement the information provided in disclosures, 
and it could counteract any tendency among consumers to consider only 
loan features that are most certain, most easily understood, most 
immediately relevant, or most clearly highlighted by creditors.
    The final rule would not mandate counseling for potential consumers 
of mortgages covered by RESPA, but requiring creditors to provide the 
list of homeownership counseling organizations may prompt some 
consumers who were unaware of these resources (or of their geographic 
proximity) to seek homeownership counseling. This may especially be the 
case for consumers who feel confused or overwhelmed by the information 
and disclosures provided by the creditor.
    In contrast, the final rule would require that a creditor receive 
documentation that a first-time borrower that has applied for a loan 
that could have negative amortization has received homeownership 
counseling. First-time borrowers may particularly benefit from 
homeownership counseling if they have greater difficulty, relative to 
other consumers, in understanding or assessing loan terms and features 
because they do not have experience with obtaining or paying on a 
mortgage.
    The Bureau believes that requiring applicants of loans covered by 
RESPA to receive a list of homeownership counseling organizations 
should not result in costs to consumers beyond those passed on by 
creditors. More specifically, the information contained on the list 
should be readily understandable, the time required of the consumer to 
receive the disclosure should be minimal, and consumers may choose not 
to follow up on this information.
    First-time borrowers with a loan that may have negative 
amortization may have to pay for the counseling, either upfront or by 
financing the fee. In addition, counseling may be costly, at least in 
terms of time, for consumers who do not find it helpful. In addition, 
the counseling requirement may impose delays on loan closing, which 
could be costly, for example, for a consumer who is contractually 
obligated to close on a home by a certain date.
b. Benefits and Costs to Covered Persons
    The Bureau believes that covered persons would incur costs from 
providing potential consumers of loans covered by RESPA with a list of 
homeownership counseling organizations. The Bureau estimates that these 
costs are likely less than one dollar per application but recognizes 
that creditors would have to provide the list with each of well over 10 
million applications each year. The Bureau expects that the list would 
be a single page and that it would be provided with other materials 
that the creditor is required to provide. In addition, the Bureau will 
create a Web site portal for lenders to use in generating the required 
lists of homeownership counseling organizations.
    The Bureau also believes that the costs of obtaining documentation 
that a first-time borrower with a negative-amortization loan has 
obtained counseling are likely small because such loans will most 
likely be very rare. Not only are loans with negative-amortization 
features uncommon, but also the provision would apply only to first-
time borrowers for such loans.\214\

[[Page 6951]]

Further, the creditor would only be required to receive the 
documentation of counseling. For these reasons, the Bureau believes 
that the burden to creditors would be minimal.
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    \214\ Data from the 2010 Survey of Consumer Finances (SCF), the 
most recent survey year available at the time this analysis was 
conducted, indicate that only 0.8 percent of first-lien mortgages in 
2010 reportedly had negative-amortization features. This estimate is 
only suggestive because it is only for first-lien mortgages and it 
is an estimate of the stock, rather than the flow, of mortgages with 
such features. The 2010 estimate is higher than the corresponding 
estimate in the 2007 SCF, but it is lower than estimates from the 
six waves of the SCF between 1989 and 2004, for which the estimate 
fraction of first-lien mortgages with negative-amortization features 
ranged from 1.3 percent to 2.3 percent.
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    In the preamble of the proposal, the Bureau noted that the proposed 
counseling requirements for high-cost mortgages differed from those for 
mortgages that may result in negative amortization. The Bureau 
solicited comment on whether conforming these requirements to one 
another would reduce compliance burdens. The Bureau notes that it 
received no data from commenters on this point.
    Creditors may benefit from these two counseling-related provisions 
by gaining market share relative to creditors that currently do not 
provide clear and complete information to consumers regarding loan 
terms. This could occur if, as a result of counseling, applicants to 
such a creditor obtained a better understanding of the loan offer and 
were less likely to accept it.

E. Potential Specific Impacts of the Final Rule

1. Depository Institutions and Credit Unions with $10 Billion or Less 
in Total Assets, As Described in Section 1026
    The Bureau does not expect the final rule to have a unique impact 
on depository institutions and credit unions with $10 billion or less 
in total assets as described in section 1026. As noted above, although 
not all creditors report under HMDA, those data suggest that the vast 
majority of creditors do not make any high-cost mortgages. The Bureau 
expects this would be the case under the final rule as well, so few 
institutions would likely be directly impacted by the final rule. As 
might be expected given the fact that the vast majority of depository 
institutions that make mortgages are estimated to have less than $10 
billion in total assets, the estimated share of these creditors in HMDA 
that currently make any closed-end high-cost mortgages, 8 percent, is 
essentially identical to the estimate for all depository institutions. 
Likewise, nearly 16 percent of all depository institutions and credit 
unions that report under HMDA and of those with $10 billion or less in 
total assets that report in HMDA are predicted to make any high-cost 
mortgages under the final rule. The impact of the final rule on 
depository institutions and credit unions may vary based on the types 
of loans that an institution makes currently including, for example, 
the share of mortgage lending comprised of purchase-money mortgages and 
HELOCs relative to closed-end refinance and home-improvement loans.
2. Impact of the Provisions on Consumers in Rural Areas
    Data on mortgage lending in rural areas are comparatively sparse. 
In particular, the HMDA data, which inform the analysis of the final 
rule, only include creditors that have a branch in a metropolitan 
statistical area, so these data are unlikely to be representative of 
rural mortgage transactions. Thus, it is difficult to quantify how the 
final rule may affect rural consumers differently from consumers and 
applicants in urban areas. Nonetheless, in qualitative terms, one might 
expect that the impact of the final rule on consumers in rural areas 
could differ from those for consumers located in urban areas for 
several reasons. First, rural consumers may have fewer creditors that 
they readily comparison shop among and fewer nearby counseling 
resources. A potential reduction in lending for newly classified high-
cost mortgages may therefore have a greater impact in rural areas, and 
a rural consumer that is offered a high-cost mortgage may be less able 
to obtain a mortgage from a different creditor that is not a high-cost 
mortgage. Similarly, consumers in rural areas may have fewer in-person 
counseling resources available in their immediate vicinity.
    Second, the Bureau understands that creditors in rural areas are 
more likely to extend balloon loans. One reason for this is that 
smaller creditors in these areas may be less likely to be able to 
securitize their mortgages, at least in the current market environment. 
These smaller creditors therefore bear the interest rate risk for these 
loans, and they may rely on balloon-payment mortgages to manage this 
risk. To mitigate potential reductions in access to credit, the final 
rule allows an exemption from the balloon payment prohibition for 
creditors that make high-cost mortgages with balloon payments, but that 
also meet the conditions set forth in Sec. Sec.  1026.43(f)(1)(i) 
through (vi) and 1026.43(f)(2), as adopted by the 2013 ATR Final Rule. 
This provision would reduce the burden of the final rule for rural 
creditors that offer high-cost loans with balloon payments.
    Third, the share of loans that qualify as high-cost mortgages may 
differ in rural areas relative to urban areas due to geographic 
differences in the housing stock and home values. The Bureau believes 
that mortgages in rural areas are more likely to be non-conforming 
because of, for example, seasonal or irregular income.\215\ In 
addition, home values tend to be lower in rural areas, a pattern that 
has potentially ambiguous implications for the likelihood that a rural 
loan would qualify as a high-cost mortgage. Specifically, some 
mortgages in these areas may be more likely to qualify as high-cost 
mortgages because they have comparatively high points and fees as a 
percentage of the loan amount. At the same time, rural mortgages are 
also more likely to be for less than $20,000 and thus subject to the 
higher points-and-fees threshold.
---------------------------------------------------------------------------

    \215\ The Bureau notes that the balloon payment restrictions 
included an exemption for seasonal or irregular income.
---------------------------------------------------------------------------

    Finally, manufactured homes are more common in rural areas; about 
15 percent of housing units in rural areas are manufactured homes 
compared to less than four percent of housing units in urban 
areas.\216\ As noted above, mortgages secured by manufactured housing 
typically have higher interest rates and smaller loan amounts so they 
are more likely to meet the APR and points-and-fees thresholds. Since 
manufactured-home residents disproportionately reside in rural areas 
and loans secured by manufactured homes are more likely to exceed the 
HOEPA thresholds, the benefits of HOEPA protections and disclosures may 
be more likely to accrue to mortgage borrowers and applicants in rural 
areas as would the potential costs to consumers such as potentially 
higher cost of credit or more limited access to credit.
---------------------------------------------------------------------------

    \216\ Estimates are three-year estimates from the 2009-2011 
American Community Surveys (https://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ACS_11_3YR_GCT2501.US26&prodType=table).
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VIII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis (FRFA) of any rule subject to 
notice-and-comment rulemaking requirements, unless the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities.\217\ The Bureau

[[Page 6952]]

also is subject to certain additional procedures under the RFA 
involving the convening of a panel to consult with small business 
representatives prior to proposing a rule for which an IRFA is 
required.\218\
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    \217\ For purposes of assessing the impacts of the final rule on 
small entities, ``small entities'' is defined in the RFA to include 
small businesses, small not-for-profit organizations, and small 
government jurisdictions. 5 U.S.C. 601(6). A ``small business'' is 
determined by application of Small Business Administration 
regulations and reference to the North American Industry 
Classification System (NAICS) classifications and size standards. 5 
U.S.C. 601(3). A ``small organization'' is any ``not-for-profit 
enterprise which is independently owned and operated and is not 
dominant in its field.'' 5 U.S.C. 601(4). A ``small governmental 
jurisdiction'' is the government of a city, county, town, township, 
village, school district, or special district with a population of 
less than 50,000. 5 U.S.C. 601(5).
    \218\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    The Bureau is certifying the final rule. Therefore, a FRFA is not 
required for this rule because it will not have a significant economic 
impact on a substantial number of small entities.

A. Overview of Analysis and Data

    The analysis below evaluates the potential economic impact of the 
final rule on small entities as defined by the RFA.\219\ It considers 
effects of the revised APR and points-and-fees coverage thresholds and 
of the extension of HOEPA coverage to purchase money mortgages and 
HELOCs. In addition, the analysis considers the impact of the two non-
HOEPA counseling-related provisions which are being implemented as part 
of the final rule. The analysis does not consider the interaction 
between State anti-predatory lending laws and HOEPA. The Bureau notes 
that State statutes that place tighter restrictions on high-cost 
mortgages than either current or amended HOEPA may reduce the economic 
impact of the final rule.\220\
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    \219\ The Bureau received comments addressing the impact of the 
final rule generally. These comments are addressed throughout this 
preamble, and in the context of its final section 1022 analysis.
    \220\ In its analysis of a proposed change to the definition of 
finance charge, the Board noted that, at least as of 2009, only 
Illinois, Maryland, and Washington, DC had APR thresholds below the 
then-existing HOEPA APR threshold for first-lien mortgage loans. 74 
FR 43232, 43244 (Aug. 26, 2009).
---------------------------------------------------------------------------

    The analysis below uses a pre-statute baseline, except for the 
extension of HOEPA coverage to purchase-money mortgages and HELOCs. As 
noted in its section 1022 analysis, the Bureau does not consider these 
benefits and costs because these changes are required by the Dodd-Frank 
Act's amendments to HOEPA.\221\ The Bureau's discretion to exempt broad 
categories of loans from HOEPA coverage is limited, and the Bureau does 
not believe such exemptions are consistent with the mandate of the 
statute. Creditors today generally have processes and often software 
systems to determine whether a transaction is a high-cost mortgage. 
Creditors will have to update these processes and systems to determine 
whether a purchase money mortgage or HELOC is a high-cost mortgage. The 
cost of determining whether a transaction is a high-cost mortgage is 
therefore unavoidable under the statute.
---------------------------------------------------------------------------

    \221\ The Bureau notes that the HOEPA amendments of the Dodd-
Frank Act are self-effectuating and that the Dodd-Frank Act does not 
require the Bureau to promulgate a regulation. Viewed from this 
perspective, the final rule reduces burdens by clarifying statutory 
ambiguities that may impose costs such as increased costs for 
attorneys and compliance officers, over-compliance, and unnecessary 
litigation.
---------------------------------------------------------------------------

    The analysis considers the impact of the final rule's revisions to 
HOEPA on closed-end lending by depository institutions (DIs), closed-
end lending by non-depositories (non-DIs), and HELOCs separately 
because these components of the analysis necessarily rely on different 
data sources. The starting point for much of the analysis of closed-end 
lending is loan-level data reported under the Home Mortgage Disclosure 
Act (HMDA).\222\ The HMDA data include information on high-cost 
mortgage lending under the current HOEPA thresholds, but some creditors 
are exempt from reporting to HMDA.\223\ For exempt DIs, the Bureau 
estimates the extent of creditors' high-cost, closed-end lending under 
the current and post-Dodd Frank Act thresholds based on Call Report 
data (which are available for all DIs). For exempt non-DIs, the Bureau 
supplements data on non-depositories that report in HMDA with data from 
the Nationwide Mortgage Licensing System and Registry Mortgage Call 
Report (``MCR'').\224\ The Bureau does not have comprehensive loan-
level data for HELOCs comparable to the HMDA data for closed-end 
mortgages, and this portion of the analysis draws on Call Report data 
as well as data from the 2010 Survey of Consumer Finances (SCF).\225\ 
Finally, in all cases the Bureau notes that it is not aware of 
representative quantitative data on prepayment penalties, but available 
evidence suggests that this new threshold would have little impact on 
HOEPA coverage.\226\
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    \222\ The Home Mortgage Disclosure Act (HMDA), enacted by 
Congress in 1975, as implemented by the Bureau's Regulation C 
requires lending institutions annually to report public loan-level 
data regarding mortgage originations. For more information, see 
https://www.ffiec.gov/hmda.
    \223\ Depository institutions with assets less than $40 million 
(in 2011), for example, and those with branches exclusively in non-
metropolitan areas and those that make no purchase money mortgage 
loans are not required to report to HMDA. Reporting requirements for 
non-depository institutions depend on several factors, including 
whether the company made fewer than 100 purchase-money or refinance 
loans, the dollar volume of mortgage lending as share of total 
lending, and whether the institution had at least five applications, 
originations, or purchased loans from metropolitan areas.
    \224\ The Nationwide Mortgage Licensing System is a national 
registry of non-depository financial institutions including mortgage 
loan originators. Portions of the registration information are 
public. The Mortgage Call Report data are reported at the 
institution level and include information on the number and dollar 
amount of loans originated, the number and dollar amount of loans 
brokered, and on HOEPA originations. The analysis in this part draws 
on HMDA and MCR data by classifying non-depository institutions with 
similar reported amounts of originations and of HOEPA lending in the 
two data sets.
    \225\ The Bureau assumes that few if any non-DIs originate 
HELOCs due to lack of funding for lines of credit and lack of access 
to the payment system.
    \226\ Trends and aggregate statistics suggest that loans 
originated in recent years are very unlikely to have prepayment 
penalties for two reasons. First, prepayment penalties were most 
common on subprime and near-prime loans, a market that has 
disappeared. Second, by one estimate, nearly 90 percent of 2010 
originations were purchased by Fannie Mae or Freddie Mac or were FHA 
or VA loans (Tamara Keith, ``What's Next for Fannie, Freddie? Hard 
to Say,'' February 10, 2011, available at https://www.npr.org/2011/02/10/133636987/whats-next-for-fannie-freddie-hard-to-say). Fannie 
Mae and Freddie Mac purchase very few loans with prepayment 
penalties--in a random sample of loans from the FHFA's Historical 
Loan Performance data, a very small percentage of loans originated 
between 1997 and 2011 had a prepayment penalty.
---------------------------------------------------------------------------

    As a measure of the potential impact of the final rule, the 
analysis considers the potential share of revenue a creditor may forgo 
if it were to make no high-cost mortgages.\227\ The Bureau believes 
that this approach very likely provides a conservative upper bound on 
the effects on creditors' revenues, since some of the new loans 
potentially subject to HOEPA coverage might still be made (either as 
high-cost mortgages or with alternative terms to avoid the HOEPA 
thresholds). The Bureau notes that at least some creditors currently 
extend high-cost mortgages. Further, creditors may still make some 
loans that might otherwise meet the new HOEPA thresholds by changing 
the loan terms to avoid being a high-cost mortgage (though perhaps with 
a partial revenue loss).\228\ Moreover, this approach is consistent 
with the possibility that some

[[Page 6953]]

creditors may be less willing to make high-cost mortgages in the future 
due to new and revised restrictions on high-cost mortgages, but the 
Bureau believes that any such effect on creditors' willingness to 
extend high-cost mortgages likely is small.
---------------------------------------------------------------------------

    \227\ Revenue has been used in other analyses of economic 
impacts under the RFA. For purposes of this analysis, the Bureau 
uses revenue as a measure of economic impact. In the future, the 
Bureau will consider whether a feasible alternative numerical 
measure would be more appropriate for financial firms.
    \228\ By the same token, the analysis also implicitly assumes 
that creditors that do not currently make high-cost mortgages will 
not rethink their policies and make high-cost mortgages in the 
future. Although it seems the less likely concern, the Bureau notes 
that creditors could change their policies if a large share of 
creditors' originations would now meet the HOEPA thresholds.
---------------------------------------------------------------------------

B. Overview of Market for High-Cost Mortgages

    High-cost mortgages comprise a small share of total mortgages. HMDA 
data indicate that less than one percent of loans meet the current 
HOEPA thresholds and that this share has generally declined over 
time.\229\ Between 2004 and 2011, high-cost mortgages typically 
comprised about 0.2 percent of originations of home-secured refinance 
or home-improvement loans made by creditors that report in HMDA. This 
fraction peaked at 0.44 percent in 2005 and fell to 0.05 percent by 
2011.\230\ Similarly, few creditors originate high-cost mortgages. The 
number of creditors extending high-cost mortgages ranged between about 
1,000 and 2,300 over the 2004 and 2009 period, or between 12 and 27 
percent of creditors. The number of creditors extending high-cost 
mortgages fell in 2010 and 2011, and only about 570 creditors (roughly 
8 percent) filing HMDA data reported any high-cost mortgages in 
2011.\231\
---------------------------------------------------------------------------

    \229\ The information on whether a loan was a high-cost mortgage 
has been collected in HMDA since 2004.
    \230\ These percentages correspond to nearly 36,000 loans in 
2005 and roughly 2,400 loans in 2011.
    \231\ The statistics for 2004-2010 are drawn from Federal 
Reserve Bulletin articles that summarize the HMDA data each year. In 
contrast, the 2011 numbers are based on the analysis of 2011 HMDA 
data and may differ slightly from those presented in the Bulletin 
article that summarizes the 2011 HMDA data due to subsequent data 
revisions and small differences in definitions (e.g., not counting a 
loan as a high-cost mortgage even if it is flagged as a high-cost 
mortgage if it appears ineligible to be a high-cost mortgage because 
the property is not owner-occupied.)
---------------------------------------------------------------------------

C. Number and Classes of Affected Entities

    Greater than half of commercial banks and about 40 percent of 
thrifts meet the Small Business Administration's definition of small 
entities, and the large majority of these institutions originate 
mortgages (Table 1). By comparison, not quite 80 percent of credit 
unions are small entities, but about 40 percent of credit unions and 
nearly half of credit unions that are small entities have no closed-end 
mortgage originations.\232\ About 90 percent of non-DI mortgage 
originators have revenues below the relevant Small Business 
Administration threshold.\233\
---------------------------------------------------------------------------

    \232\ The estimates in this analysis are based upon data and 
statistical analyses performed by the Bureau. To estimate counts and 
properties of mortgages for entities that do not report under HMDA, 
the Bureau has matched HMDA data to Call Report data and NMLS and 
has statistically projected estimated loan counts for those 
depository institutions that do not report these data either under 
HMDA or on the NCUA call report. These projections use Poisson 
regressions that estimate loan volumes as a function of an 
institution's total assets, employment, mortgage holdings and 
geographic presence.
    \233\ The Bureau expects that the economic impact of the final 
rule on mortgage brokers that are small entities (for example, the 
provision prohibiting brokers from recommending default) would not 
be significant.
[GRAPHIC] [TIFF OMITTED] TR31JA13.000

D. Impact of Revised Thresholds on Depository Institutions

1. Closed-End HOEPA Lending by Small Depository Institutions
    To assess the final rule's impacts, the analysis aims to estimate 
the counterfactual set of loans that would have met the definition of a 
high-cost mortgage if the revised thresholds had been in effect in 
2011.\234\ One can

[[Page 6954]]

identify 2011 HMDA loans that would have met the revised APR thresholds 
based on information in the HMDA data. In contrast, the Bureau is not 
aware of an approach to directly determine whether a loan in the 2011 
HMDA data would meet the revised points-and-fees threshold and, hence, 
whether the loan would have been flagged as a high-cost mortgage. To 
overcome this data limitation, the Bureau modeled the probability that 
a loan would have been flagged as a high-cost mortgage in HMDA as a 
function of: (i) the loan amount and (ii) the difference between the 
loan's APR and the APR threshold.\235\
---------------------------------------------------------------------------

    \234\ The HMDA data contain a flag which indicates whether a 
loan was classified as a high-cost mortgage as well as a variable 
that reports the spread between the loan's APR and the APOR for 
higher-priced mortgage loans. Higher-priced mortgage loans are 
first-liens for which this spread is at least 1.5 percentage points 
and subordinate liens with a spread of 3.5 percentage points or 
greater. Importantly, the ``higher-priced'' mortgage loan thresholds 
are well below the APR thresholds for HOEPA. The spread is 
calculated as of the date the loan's rate was set. Based on these 
variables, the analysis defines as a high-cost mortgage any HMDA 
loan that is either flagged as a high-cost mortgage or that has an 
estimated APR spread that exceeds the relevant HOEPA threshold. The 
current HOEPA APR threshold is relative to a comparable Treasury 
security, but the reported spread in HMDA is relative to APOR, so it 
is not possible to determine with certainty whether a HMDA loan 
meets the current APR threshold, and not all loans that are 
estimated to be above the APR threshold are flagged as high-cost 
mortgages. The Bureau also considered a narrower definition of a 
high-cost mortgage, namely, any loan that was identified as a high-
cost mortgage in the HMDA data. Conclusions based on this 
alternative definition are qualitatively similar to those under the 
primary, more conservative definition described above.
    \235\ The statistical model captures the effect of the changes 
in the APR thresholds through the fact that the gap between the 
thresholds and APR would generally narrow, which increases the 
estimated probability that a loan would have been flagged as a high-
cost mortgage. Modeling the probability as a function of loan size 
indirectly approximates the effect of the Dodd-Frank Act revisions 
to the points-and-fees thresholds. More specifically, the points-
and-fees threshold is defined, in part, based on points and fees as 
a percentage of the loan amount, so that, given two loans with 
identical points and fees, the loan with a smaller loan amount 
should be more likely to be flagged as a high-cost mortgage. Indeed, 
high-cost mortgages are more prevalent for loans with smaller loan 
amounts in HMDA. Thus, this appears to provide a reasonable approach 
to capturing variation in the likelihood that a loan is a high-cost 
mortgage. The Bureau solicited public comment seeking information or 
data (including data on points and fees or on prepayment penalties) 
from interested parties that could be used to refine or evaluate 
this approximation, but the Bureau did not receive any such 
information or data.
---------------------------------------------------------------------------

    The changes to the APR and points-and-fees thresholds are estimated 
to increase the share of loans made by HMDA-reporters and potentially 
subject to HOEPA that are classified as high-cost mortgages from 0.09 
percent of loans to 0.4 percent.\236\ Under the current HOEPA 
regulations, fewer than 5 percent of small depository institutions are 
estimated to make any high-cost mortgages, and only about 0.2 percent 
of small DIs are estimated to have made at least 10 high-cost mortgages 
in 2011 (Table 2). As expected, the estimates imply that the shares of 
lenders would have been larger if the revised thresholds had been in 
place.\237\ Nevertheless, by these estimates, high-cost mortgages would 
have remained a small fraction of closed-end originations by small DIs, 
and the majority of small DIs would have made no high-cost mortgages 
under the revised thresholds.\238\
---------------------------------------------------------------------------

    \236\ Loans potentially subject to HOEPA coverage in this 
context are loans for non-business purposes secured by a lien on an 
owner-occupied 1-4 family property, including manufactured homes. In 
addition, the estimate of the share of loans subject to HOEPA 
coverage currently excludes purchase money mortgages, which are 
included in the estimate of this share under the final rule. The 
estimated share of loans currently classified as high-cost mortgages 
is about 0.06 percent if purchase-money mortgages are included in 
the set of loans considered.
    \237\ The estimates of the share of loans that would be 
classified as high-cost mortgages if the revised thresholds had been 
in place are, more precisely, estimates of the number of loans 
potentially classified as high-cost mortgages and do not account for 
lenders' decision to originate or not originate a loan based on 
high-cost mortgage status. If some lenders avoid making high-cost 
mortgages, this estimate would be an upper bound on the number of 
high-cost mortgages that might be originated under the revised 
thresholds. The estimated number of high-cost mortgages in the 
absence of lenders' responses is the relevant estimate for gauging 
the maximum loss in revenue that could occur for a lender that chose 
to make no high-cost mortgages under the revised thresholds.
    \238\ The share of small DIs estimated to make any high-cost 
mortgages under the revised HOEPA thresholds is substantially higher 
in this analysis than in the analysis conducted at the proposal 
stage. This primarily reflects a difference in how the results are 
reported. The previous analysis only counted lenders that were 
estimated to make at least one high-cost mortgage under the revised 
thresholds as making a high-cost mortgage. This analysis counts 
lenders that are estimated to have a small, but non-zero, 
probability of making a high-cost mortgage, weighted by that 
probability. Note that this does not increase the share of small DIs 
estimated to make 10 or more high-cost mortgages. These and other 
estimates in this analysis can of course differ from estimates 
presented in the proposal due to, for example, refinements in the 
estimation methodology and the incorporation of updated data.

 Table 2--Estimated Number of Small DIs That Originate Any High-Cost Mortgages or 10 or More High-Cost Mortgages
                                 Under the Current and Revised HOEPA Thresholds
----------------------------------------------------------------------------------------------------------------
                                                                   Pre-Dodd-Frank Act      Post-Dodd-Frank Act
----------------------------------------------------------------------------------------------------------------
Estimated number that make any high-cost mortgages............                      501                     1710
    Percent of small depository institutions..................                     4.9%                    16.6%
Estimated number that make 10 or more high-cost mortgages.....                       22                       48
    Percent of small depository institutions..................                     0.2%                     0.5%
----------------------------------------------------------------------------------------------------------------

2. Costs to Small Depository Institutions From Changes in Closed-End 
Originations
    To gauge the potential effect of the Dodd-Frank Act amendments to 
HOEPA related to closed-end high-cost mortgages, the Bureau 
approximates the potential revenue loss to DIs that report in HMDA 
based on the estimated share, from HMDA, of home-secured loan 
originations that would be high-cost mortgages and the share of total 
income (for banks and thrifts) or total outstanding balances (for 
credit unions) accounted for by mortgages based on Call Report 
data.\239\
---------------------------------------------------------------------------

    \239\ Data on interest and fee income are not available in the 
credit union Call Report data. This calculation assumes that 
interest and fee income for HOEPA and non-high-cost mortgages are 
comparable at banks and thrifts and assumes that the share of 
outstanding balances accounted for by mortgages is a reasonable 
proxy for the share of mortgage revenue for a given credit union.
---------------------------------------------------------------------------

    The Bureau estimates that high-cost closed-end mortgages account 
for just a fraction of revenue for most small DIs under both the 
current and revised thresholds (Table 3). The Bureau estimates that, 
post-Dodd-Frank Act, 6.8 percent of small DIs might lose more than 1 
percent of revenue, compared with 2.2 percent of small DIs under the 
current thresholds. At most, about two percent of small DIs would have 
revenue losses greater than 3 percent if these creditors chose to make 
no closed-end high-cost mortgages.

[[Page 6955]]



 Table 3--Estimated Revenue Shares Attributable to Closed-End High-Cost Mortgage Lending for Small DIs Pre- and
                                               Post-Dodd-Frank Act
----------------------------------------------------------------------------------------------------------------
                                                                   Pre-Dodd-Frank Act      Post-Dodd-Frank Act
----------------------------------------------------------------------------------------------------------------
Number with HOEPA revenue share >1% \a\.......................                      229                      696
    Percent of small depositories.............................                     2.2%                     6.8%
Number with HOEPA revenue share >3% \a\.......................                       76                      225
    Percent of small depositories.............................                     0.7%                     2.2%
----------------------------------------------------------------------------------------------------------------
\a\ Revenue shares for commercial banks and savings institutions are based on interest and fee income from loans
  secured by 1-4 family homes (including HELOCst, which cannot be distinguished) as a share of total interest
  and non-interest income. NCUA Call Report data for credit unions do not contain direct measures of income from
  mortgages and other sources, so the mortgage revenue share is assumed to be proportional to the dollar value
  of closed- and open-end real-estate loans and lines of credit as a share of total outstanding balances on
  loans and leases.

3. Open-End HOEPA Lending by Small Depository Institutions
    Call Report data for banks and thrifts indicate that nearly all 
banks and thrifts that make home-equity lines of credit also make 
closed-end mortgages, so the estimated numbers of affected entities are 
essentially identical to those shown in the first two rows of Table 1 
when considering institutions that make either open- or closed-end 
mortgages.\240\ Based on the credit union Call Report data, the Bureau 
estimates that 248 credit unions--all but two of which were small 
entities--originated HELOCs but no closed-end mortgages in 2011. Thus, 
the Bureau estimates that 4,426 credit unions and 3,486 small credit 
unions would potentially be affected by either the changes to closed-
end thresholds or the extension of HOEPA to HELOCs. With regard to non-
DIs, the Bureau estimates that few, if any, non-DIs that are small 
entities make HELOCs because non-DIs generally are less likely to be 
able to fund lines of credit and to have access to the payment system.
---------------------------------------------------------------------------

    \240\ Seven of the 5,297 commercial banks and savings 
institutions with outstanding revolving mortgage receivables 
reported neither outstanding closed-end receivables nor originations 
in HMDA. Five of these were small depositories.
---------------------------------------------------------------------------

4. Effect of the Dodd-Frank Act on Open-End HOEPA Lending
    HELOCs account for more than ten percent of the value of 
outstanding loans and leases for about 12-13 percent of small DIs, and 
they comprise more than one-quarter of outstanding balances on loans 
and leases for only about 2-3 percent of small DIs (Table 4).

 Table 4--HELOCs Represent a Modest Portion of Most Small Depositories'
                                 Lending
------------------------------------------------------------------------
                                      Percent of DIs
                                           \a\         Number of DIs \a\
------------------------------------------------------------------------
HELOCs > 10% of all loans/leases..          11.6-13.2        1,196-1,354
HELOCs > 25% of all loans/leases..            2.3-3.0            233-304
------------------------------------------------------------------------
\a\ First-lien HELOCs cannot be distinguished from other first liens in
  the credit union Call Report data. The ranges reflect alternative
  assumptions on the value of credit union's HELOC receivables: the
  lower bound assumes that no first liens are HELOCs, and the upper
  bound assumes that all adjustable-rate first liens with an adjustment
  period of one year or less are HELOCs.

5. Direct Costs Associated With the Dodd-Frank Act for Open-End High-
Cost Mortgages
    Data from SCF indicate that an estimated 3.2 percent of outstanding 
HELOCs would potentially meet the APR thresholds. The analysis of 
closed-end mortgages for HMDA reporters imply that about 55 percent of 
loans that meet any HOEPA threshold meet the APR threshold. Thus, 
combining these estimates suggests that about 5.8 percent of HELOCs 
might meet the HOEPA thresholds.\241\
---------------------------------------------------------------------------

    \241\ The share of high-cost HELOCs that meet the APR threshold 
arguably might be greater or less than the share for closed-end 
high-cost mortgages. On the one hand, HELOCs tend to be for smaller 
amounts, so points and fees may tend to be a larger percent of loan 
size. On the other hand, the Bureau believes that points and fees 
may be less prevalent for HELOCs than for closed-end mortgages.
---------------------------------------------------------------------------

    The SCF is the only source of nationally representative data on 
interest rates on consummated HELOCs that the Bureau is aware of, but 
the Bureau acknowledges that the SCF provides a small sample of HELOCs. 
Thus, in addition to the approximation error in extrapolating from 
closed-end mortgages to HELOCs due to data limitations, the SCF-based 
estimate of 3.2 percent is likely imprecisely estimated but reflects 
the best available estimate given existing data. Given these caveats, 
the analysis considers how the conclusions would differ if one assumed 
that a greater fraction of HELOCs would meet the HOEPA thresholds. For 
context, as noted above, the Bureau estimates that roughly 0.4 percent 
of closed-end mortgages reported in HMDA would be high-cost mortgages, 
a percentage that is about one-fifteenth of the estimate for HELOCs, 
which might suggest that the HELOC estimate is conservative.
    The Bureau estimates that, if the rough estimate of 5.8 percent 
described above were accurate, about 600 small DIs (about six percent 
of small DIs) would experience a revenue loss that exceeds one percent 
(Table 5). If the actual proportion of high-cost HELOCs were a bit more 
than 50 percent higher than the Bureau estimates, i.e., at 9 percent, 
then the estimated share of small depositories that might experience a 
1 percent revenue loss increases to not quite 11 percent, and about 1.4 
percent of small DIs might experience a loss greater than 3 percent of 
revenue by these estimates. Under the even more conservative assumption 
that 12 percent of HELOCs are high-cost mortgages (i.e., more than 
double the SCF-based estimate), about 14 percent of small DIs might be 
expected to lose greater than 1 percent of revenue, and less than 3 
percent of DIs would have estimated losses that exceed 3 percent of 
revenue.

[[Page 6956]]



Table 5--Estimated Shares of Revenue From Post-Dodd-Frank Act High-Cost HELOCs for Small Depository Institutions
----------------------------------------------------------------------------------------------------------------
                                                                Assumed share of post-DFA high-cost HELOCS
                                                        --------------------------------------------------------
                                                            5.8 percent         9 percent          12 percent
----------------------------------------------------------------------------------------------------------------
Number with HOEPA revenue share >1% \a\................                606              1,110              1,473
    Percent of small depository institutions...........               5.9%              10.8%              14.3%
Number with HOEPA revenue share >3% \a\................                 31                139                300
    Percent of small depository institutions...........               0.3%               1.4%               2.9%
----------------------------------------------------------------------------------------------------------------
\a\ First-lien HELOCs cannot be distinguished from other first liens in the credit union Call Report data. The
  estimated revenue shares assume all adjustable-rate first liens with an adjustment period of one year or less
  are HELOCs (corresponding to the upper bound estimates in Table 4).

    For depository institutions, the potential loss in revenue due to 
the Dodd-Frank Act revisions to HOEPA comprises the losses from both 
closed- and open-end lending. To assess the potential revenues losses 
for DIs from both sources, the Bureau first estimates the combined loss 
based on the assumption that 12 percent of HELOCs would be high-cost 
mortgages.\242\ Under this quite conservative assumption, the Bureau 
estimates that roughly 22 percent of small DIs would lose more than one 
percent of revenue if these creditors made neither closed-end nor open-
end high-cost mortgages, and fewer than 6 percent of small DIs would 
lose 3 percent of revenue under this scenario. The Bureau believes that 
this estimate provides an extremely conservative upper bound on the 
revenue losses that a small DI might incur for at least three reasons. 
First, the estimate assumes that all of these small DIs cease making 
all loans that will be covered; in fact, lenders may continue to extend 
these loans, especially if they constitute an important source of 
revenue. Second, rather than forgo making these loans entirely, lenders 
may offer alternative loans that do not exceed the HOEPA thresholds. 
This may result in some loss of revenue, relative to loans above the 
thresholds, but not all of the revenue associated with the loan. 
Finally, the SCF-based estimate is the best available estimate of the 
current share of HELOCs that might meet the HOEPA threshold, but it is 
likely quite imprecisely estimated. The Bureau notes that the share of 
HELOCs that might exceed the APR threshold in the three prior waves of 
the SCF was below 2 percent, versus the 3.2 percent estimate from the 
2010 SCF. If the share of HELOCs that might exceed the APR threshold is 
in fact 2 percent, that would substantially reduce the estimated share 
of small DIs that would experience 1 percent or 3 percent reductions in 
revenue.
---------------------------------------------------------------------------

    \242\ This calculation is based on estimating the potential 
revenue loss on HELOCs for each depository based on information in 
the Call Report data. This estimate is combined with an estimate of 
losses on closed-end mortgages for HMDA reporters. The Bureau then 
estimates the probability that a DI that does not report in HMDA 
would have a combined revenue loss of more than one percent based on 
the institution type, assets, and the estimated potential percentage 
revenue loss on HELOCs.
---------------------------------------------------------------------------

    If instead 9 percent of HELOCs were high-cost mortgages--a 
proportion more than 50 percent greater than the estimate based on the 
SCF and therefore still conservative--the Bureau estimates 
approximately 19 percent of small DIs would have combined losses that 
exceed 1 percent of revenue, and about 4 percent of small DIs would 
lose more than 3 percent of revenue.\243\
---------------------------------------------------------------------------

    \243\ The corresponding estimates for all DIs are comparable.
---------------------------------------------------------------------------

E. Impact of Revised Thresholds on Non-Depository Institutions Closed-
End HOEPA Lending by Small Non-Depository Institutions

    The Bureau estimates based on the MCR data that 2,294 out of 2,787 
total non-depository mortgage originators are small entities (Table 1). 
According to the MCR data, many non-DI creditors originate just a few 
loans. Just less than one-third of nonbank creditors are estimated to 
have originated ten or fewer loans, for example, and over 40 percent of 
non-DIs made at most 25 loans. These fractions are even greater for 
small non-DIs as well.\244\
---------------------------------------------------------------------------

    \244\ Over half of non-DI originators also broker loans. Revenue 
from brokering or other sources may mitigate the potential revenue 
losses of the Dodd-Frank Act amendments on those creditors.
---------------------------------------------------------------------------

    The Bureau estimates that the number of high-cost mortgages 
originated by non-DIs that report in HMDA would increase from fewer 
than 200 loans under the current thresholds to over 12,000 if the post-
Dodd-Frank Act thresholds applied.\245\ The Bureau notes that this is a 
substantial increase. However, even with this large estimated increase 
in the absolute number of high-cost mortgages, the Bureau estimates 
that this number corresponds to less than 0.8 percent of all closed-end 
credit transactions potentially subject to HOEPA coverage originated by 
non-DIs that report in HMDA. Moreover, roughly 80 percent of the 
estimated increase is driven by two creditors that made no loans in 
2011 that were flagged as high-cost mortgages in HMDA but that account 
for the majority of the new high-cost mortgages. Three additional 
creditors account for another roughly 5 percent of the new high-cost 
mortgages. The majority of originations by these five creditors were 
mortgages on manufactured homes, particularly purchase-money mortgages. 
Based on the number of originations, the Bureau believes that the 
largest creditors for manufactured homes are not small entities. The 
increase in the number of loans covered therefore very likely 
overstates the impact on small entities.
---------------------------------------------------------------------------

    \245\ Unlike the Call Report data for DIs, however, the Bureau 
cannot currently match the MCR data to HMDA to project HOEPA lending 
under the post-Dodd-Frank Act thresholds by non-DIs that do not 
report in HMDA.
---------------------------------------------------------------------------

    In estimating the effects of the Dodd-Frank Act revisions to HOEPA 
on non-DIs' revenues, the Bureau assumes that the share of revenue from 
HOEPA lending is the same as the share of HOEPA originations for a 
given creditor. Thus, to examine the impact of the final rule on 
revenue for non-DIs, the Bureau estimates the probability that high-
cost mortgages comprise more than 1 percent, 3 percent, or 5 percent of 
all originations for non-DIs that report in the 2010 HMDA data and 
extrapolates these estimates for non-DIs that do not report in 
HMDA.\246\
---------------------------------------------------------------------------

    \246\ The extrapolation is done based on the number of 
originations and whether the non-DI originated any HOEPA loans in 
2011 under the current HOEPA thresholds.
---------------------------------------------------------------------------

    Under this assumption, the MCR data indicate that high-cost 
mortgages accounted for more than 1 percent of revenue for about 5 
percent of small non-DIs in 2011 (Table 6) and for more than 5 percent 
of revenue for a slightly smaller fraction.\247\ Roughly one fifth of

[[Page 6957]]

small non-DIs are estimated to have more than1 percent of revenue from 
high-cost mortgages under the new APR and points-and-fees thresholds, 
and about 11 percent and 7 percent of small non-DIs are estimated to 
have more than 3 percent of revenue or 5 percent of revenue, 
respectively, from high-cost mortgages.\248\
---------------------------------------------------------------------------

    \247\ These estimates are based in part on modeling revenue, and 
therefore the likelihood that a non-DI is a small entity, because 
data on revenue are missing for the majority of originators in the 
MCR data.
    \248\ The extrapolation from non-DIs that report in HMDA to non-
DIs that do not report in HMDA assumes that patterns of lending 
among non-reporters are similar to patterns at reporters that have 
comparable originations and that did or did not make high-cost 
mortgages. The extrapolation is subject to the caveat that, in 
classifying lenders based on origination volumes, it does not 
distinguish between originations of purchase-money mortgages 
compared with refinance or home-improvement loans. As noted, the 
post-Dodd-Frank Act revisions to HOEPA may particularly increase the 
share of high-cost mortgages among creditors that specialize in home 
purchase loans, including creditors that specialize in loans for 
purchasing manufactured homes.

 Table 6--Estimated Shares of High-Cost Mortgage Originations for Small Non-DIs Pre- and Post-Dodd-Frank Act \a\
----------------------------------------------------------------------------------------------------------------
                                                     Pre-DFA                              Post-DFA
                                     ---------------------------------------------------------------------------
                                            Number            Percent             Number            Percent
----------------------------------------------------------------------------------------------------------------
High-cost mortgages > 1% of all                     116                5.1                461               20.1
 loans..............................
High-cost mortgages > 3% of all                     116                5.1                258               11.3
 loans..............................
High-cost mortgages > 5% of all                     115                5.0                161                7.0
 loans..............................
----------------------------------------------------------------------------------------------------------------
\a\ Number and percent of post-Dodd-Frank Act HOEPA originations are projected based on estimated post-Dodd-
  Frank Act originations of high-cost mortgages by HMDA-reporting non-DIs, conditional on total originations in
  2011 and on origination of any pre-Dodd-Frank Act high-cost mortgages in 2011. In particular, in projecting
  the probability that a creditor made more than a given percent of high-cost mortgages post-Dodd-Frank Act, the
  Bureau controls for whether the creditor made any pre-Dodd-Frank Act high-cost mortgages in 2011. To estimate
  the number of small entities, revenue for entities that did not report revenue is estimated based on the
  dollar value and number of loans originated and the dollar value and number of loans brokered.

F. TILA and RESPA Counseling-Related Provisions

    The final rule also implements two Dodd-Frank Act provisions 
related to homeownership counseling. The Bureau expects that neither of 
these provisions will result in a sizable revenue loss for small 
creditors. The first requires that a creditor obtain sufficient 
documentation to demonstrate that a borrower received homeownership 
counseling before extending a negative-amortization mortgage to a 
first-time borrower. This requirement will likely apply to only a small 
fraction of mortgages: only 0.8 percent of first-liens in the 2010 SCF 
reportedly had negative-amortization features, and by definition this 
is an upper bound on the share of negative-amortization first-lien 
mortgages held by first-time borrowers.\249\ Moreover, the provision 
only requires a creditor to obtain documentation, which the Bureau 
expects to be a comparatively low burden. For these reasons, the Bureau 
believes that the burden to creditors would be minimal, as noted in 
Parts VII and IX.
---------------------------------------------------------------------------

    \249\ For context, the comparable shares of loans that allowed 
for negative amortization in the 1989-2004 SCFs varied between 1.3-
2.3 percent of loans, and the 2007 SCF estimate was 0.3 percent. 
These percentages are based on the share of mortgage borrowers who 
said their payment did not change when the interest rate on their 
adjustable-rate mortgage changed.
---------------------------------------------------------------------------

    The second provision is a new requirement that lenders provide loan 
applicants a list of homeownership counseling agencies from either a 
Web site maintained by the Bureau or data made available by the Bureau 
or HUD for lenders to use in complying with this requirement. Under the 
final rule, this requirement would apply to all applicants for a 
federally related mortgage (except for applicants for a reverse 
mortgage transaction or a mortgage secured by a timeshare) and so would 
apply to a large number of applications--under the Bureau's estimation 
methodology in analyzing the paper work burden, nearly 15 million 
applications for mortgages and HELOCs. Nevertheless, the Bureau 
believes the burden is likely to be minimal--less than $ 1 per 
application--because it should be straightforward to obtain and to 
provide the required information from the Web site or data made 
available to the lender. Further, the list will likely be provided with 
other documents that the applicant must receive from the lender.

G. Conclusion

    The Bureau estimates that, under the final rule, only a small 
fraction of depository institutions would be expected to lose more than 
three or even more than one percent of revenue even under the 
conservative assumption that creditors forgo making any high-cost 
mortgages. For example, under the assumption that 9 percent of HELOCs 
fell within the HOEPA thresholds--a proportion more than 50 percent 
higher than the estimate based on the SCF and therefore quite 
conservative--the Bureau estimates that about 19 percent of small DIs 
would have combined losses that exceed one percent of revenue, and 
about 4 percent of small DIs would lose more than three percent of 
revenue. In all cases, the TILA and RESPA counseling provisions noted 
above would have little impact on these impact estimates.
    For non-depository institutions, about 20 percent of small non-DIs 
are estimated to have more than 1 percent of revenue from high-cost 
mortgages under the new APR and points-and-fees thresholds, and about 
11 percent of small non-DIs are estimated to have more than three 
percent of revenue from high-cost mortgages.\250\ In all cases, the 
TILA and RESPA counseling provisions noted above would have little 
impact on these impact estimates.
---------------------------------------------------------------------------


---------------------------------------------------------------------------

Certification
    Accordingly, the undersigned certifies that this rule will not have 
a significant economic impact on a substantial number of small 
entities.

IX. Paperwork Reduction Act

    Certain provisions of this final rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501 et seq.) (Paperwork Reduction Act 
or PRA). Under the PRA, the Bureau may not conduct or sponsor a 
collection of information unless OMB approved the collection under the 
PRA and the OMB control number obtained is displayed. Further, 
notwithstanding any other provision of law, no person is required to 
comply with, or is subject to any penalty for failure to comply with, a 
collection of information does not display a currently valid OMB 
control number (44 U.S.C. 3512). The Bureau's OMB control number for 
Regulation X is

[[Page 6958]]

3170-0016 and for Regulation Z is 3170-0015.
    This Final Rule contains an information collection requirement that 
has not been approved by the OMB and, therefore, is not effective until 
OMB approval is obtained. The unapproved information collection 
requirement is contained in Sec.  1024.20 of the regulation. The Bureau 
will publish a separate notice in the Federal Register announcing the 
submission of this information collection requirement to OMB as well as 
OMB's action on this submission including the OMB control number and 
expiration date. The Final Rule also comprises information collections 
contained in Sec. Sec.  1026.32, 1026.34(a)(5), and 1026.36(k) of the 
regulation that have been pre-approved.
    On August 15, 2012, notice of the proposed rule was published in 
the Federal Register (FR). The Bureau invited comment on:
    (1) Whether the proposed collection of information is necessary for 
the proper performance of the Bureau's functions, including whether the 
information has practical utility;
    (2) The accuracy of the Bureau's estimate of the burden of the 
proposed information collection, including the cost of compliance;
    (3) Ways to enhance the quality, utility, and clarity of the 
information to be collected; and
    (4) Ways to minimize the burden of information collection on 
respondents, including through the use of automated collection 
techniques or other forms of information technology.
    The comment period for the final rule expired on October 15, 2012.
    In conjunction with the proposal, the Bureau received comments on 
the merits of various aspects of the final rule, including the burden 
of compliance generally. These comments relate to core issues in the 
proposal, and the Bureau's consideration of these comments is discussed 
above. Several commenters stated generally that the Bureau 
underestimated the compliance burden. However, very few comments 
specifically addressed specific estimates, assumptions or calculations 
used to derive the paperwork burden estimates for the Bureau's 
amendments to Regulation Z. One commenter did provide an alternative 
specific estimate--6400 hours for each lender--of the time cost for 
legal and compliance staff to review the rule (including both the 
Regulation X and Regulation Z components). The commenter did not detail 
the basis for this estimate, and the Bureau believes it overestimates, 
possibly to a substantial degree, the time required for legal and 
compliance staff to review the rule. The Bureau also notes that its 
methodology estimating the time cost of reviewing regulations bears 
similarities to those taken by other agencies. The Bureau is largely 
restating its burden estimates from the proposed rule for Regulation Z, 
though, to provide better public information, the analysis includes 
revised estimates that reflect, e.g., updated data.
    The Bureau also received a few comments addressing the paperwork 
burden of providing a list of homeownership counseling organizations in 
connection with each mortgage loan application, as required by the 
Bureau's amendments to Regulation X. For example, one large bank stated 
that the new counselor list requirement would require manually 
generating a separate list for each applicant. The commenter argued 
that hundreds of hours per day would be required to generate and 
provide the disclosure lists and that the proposal could result in as 
many as 42,000 versions of the disclosure. Other commenters generally 
asserted that the Bureau underestimated the paperwork burden that will 
accompany generating and providing a counselor list in connection with 
every mortgage application. As discussed in the analysis of Sec.  
1024.20 above, some commenters provided suggestions for minimizing 
their compliance burden, which also impact their paperwork burden. The 
Bureau is modifying Sec.  1024.20 in response to these comments by, for 
example, exempting some types of loans from the list requirement, 
reducing uncertainty regarding compliance with the requirement for 
lenders through the use the Web site portal that the Bureau will 
provide, and giving lenders the option to comply through the use of 
data they can import into their systems to create the list.
    This final rule amends 12 CFR part 1024 (Regulation X) and 12 CFR 
part 1026 (Regulation Z). Both Regulations X and Z currently contain 
collections of information approved by OMB. RESPA and Regulation X are 
intended to provide consumers with greater and timelier information on 
the nature and costs of the residential real estate settlement process. 
As previously discussed, the final rule amends the information 
collections currently required by Regulation X by requiring that 
lenders distribute to applicants for most federally related mortgage 
loans a list of homeownership counseling organizations located in the 
area of the applicant. See the section-by-section analysis to Sec.  
1024.20, above. TILA and Regulation Z are intended to ensure effective 
disclosure of the costs and terms of credit to consumers. As previously 
discussed, the final rule amends the information collections currently 
required by Regulation Z by expanding the categories of loans for which 
a special HOEPA disclosure is required and requiring creditors to 
receive and review confirmation that prospective borrowers of high-cost 
mortgages and, in the case of first-time borrowers, negatively 
amortizing mortgage loans have received required pre-loan counseling. 
See generally the section-by-section analysis to Sec.  1026.32(a)(1) 
and (c), Sec.  1026.34(a)(5), and Sec.  1026.36(k).
    The information collection in the final rule is required to provide 
benefits for consumers and is mandatory. See 15 U.S.C. 1601 et seq.; 12 
U.S.C. 2601 et seq. Because the Bureau does not collect any information 
under the final rule, no issue of confidentiality arises. The likely 
respondents would be depository institutions (i.e., commercial banks/
savings institutions and credit unions) and non-depository institutions 
(i.e., mortgage companies or other non-bank lenders) subject to 
Regulation X or the high-cost mortgage requirements or negative 
amortization loan counseling requirements of Regulation Z.\251\
---------------------------------------------------------------------------

    \251\ For purposes of this PRA analysis, references to 
``creditors'' or ``lenders'' shall be deemed to refer collectively 
to commercial banks, savings institutions, credit unions, and 
mortgage companies (i.e., non-depository lenders), unless otherwise 
stated. Moreover, reference to ``respondents'' shall generally mean 
all categories of entities identified in the sentence to which this 
footnote is appended, except as otherwise stated or if the context 
indicates otherwise.
---------------------------------------------------------------------------

    Under the final rule, the Bureau accounts for the entire paperwork 
burden for respondents under Regulation X. The Bureau generally also 
accounts for the paperwork burden associated with Regulation Z for the 
following respondents pursuant to its administrative enforcement 
authority: insured depository institutions with more than $10 billion 
in total assets, their depository institution affiliates, privately 
insured credit unions, and certain non-depository lenders. The Bureau 
and the FTC generally both have enforcement authority over non-
depository institutions for Regulation Z. Accordingly, the Bureau has 
allocated to itself half of the estimated burden to non-depository 
institutions, and the Bureau has also allocated to itself half of the 
estimated burden for privately insured credit unions. Other Federal 
agencies are responsible for estimating and reporting to OMB the total 
paperwork burden for the institutions for which they have 
administrative enforcement authority. They may, but

[[Page 6959]]

are not required to, use the Bureau's burden estimation methodology.
    Using the Bureau's burden estimation methodology, the total 
estimated burden under the changes to Regulation X for all of the 
nearly 15,000 institutions subject to the final rule, would be 
approximately 28,000 hours for one-time changes and nearly 250,000 
hours annually. Using the Bureau's burden estimation methodology, the 
total estimated burden under the changes to Regulation Z for the 
roughly 3,000 institutions, including Bureau respondents,\252\ that are 
estimated to make high-cost mortgages subject to the final rule would 
be approximately 23,000 hours of one-time costs and about 1,800 hours 
annually.
---------------------------------------------------------------------------

    \252\ There are 153 depository institutions (and their 
depository affiliates) that are subject to the Bureau's 
administrative enforcement authority. In addition there are 146 
privately insured credit unions that are subject to the Bureau's 
administrative enforcement authority. For purposes of this PRA 
analysis, the Bureau's respondents under Regulation Z are 136 
depository institutions that originate either open or closed-end 
mortgages; 90 privately insured credit unions that are estimated to 
originate either open- or closed-end mortgages; and an estimated 
2,787 non-depository institutions that are subject to the Bureau's 
administrative enforcement authority. Unless otherwise specified, 
all references to burden hours and costs for the Bureau respondents 
for the collection under Regulation Z are based on a calculation of 
half of the estimated 2,787 nondepository institutions and 90 
privately insured credit unions.
---------------------------------------------------------------------------

    The aggregate estimates of total burdens presented in this part 
VIII are based on estimated costs that are weighted averages across 
respondents. The Bureau expects that the amount of time required to 
implement each of the changes for a given institution may vary based on 
the size, complexity, and practices of the respondent.

A. Information Collection Requirements

    The Bureau believes the following aspects of the final rule would 
be information collection requirements under the PRA.
1. Provision of List of Homeownership Counselors
    The Bureau estimates one-time and ongoing costs to respondents of 
complying with the housing counselor disclosure requirements in Sec.  
1024.20 as follows.
    One-time costs. The Bureau estimates that covered persons would 
incur one-time costs associated with reviewing the regulation and 
training relevant employees. Specifically, the Bureau estimates that, 
for each covered person, one attorney and one compliance officer would 
each take 7.5 minutes (15 minutes in total) to read and review the 
sections of the regulation that describe the housing counseling 
disclosures, based on the length of the sections. The Bureau also 
estimates that each loan officer or other loan originator and an equal 
number of loan processors will need to receive 7.5 minutes of training 
concerning the disclosures.\253\ The Bureau estimates the total one-
time costs across all relevant providers of reviewing the relevant 
portions of the regulation and conducting training to be about 28,000 
hours and $1,200,000, or about $240,000 per year if annualized over 
five years. Table 1, below, shows the Bureau's estimate of the total 
one-time paperwork burden to all respondents to comply with the housing 
counselor disclosure requirements in Sec.  1024.20.
---------------------------------------------------------------------------

    \253\ The burden-hour estimate of training assumes that a total 
of 30 minutes is required for training on all aspects of the 
proposed rule. For simplicity, these time estimates assume that an 
equal amount of time is spent on each of the four provisions, but 
the Bureau expects the proportion of time allocated to each topic in 
the 30 minute total training time may vary. The estimation 
methodology also assumes that a trainer will spend an hour for every 
ten hours of trainee time.
---------------------------------------------------------------------------

    Ongoing costs. On an ongoing basis, the Bureau estimates that 
producing and providing the required list of housing counseling 
organizations to an applicant will take approximately one minute and 
that the cost of producing the required disclosures (e.g., paper and 
printing costs) will be $0.10 per disclosure.\254\ The estimated 
ongoing paperwork burden to all Bureau respondents taken together is 
approximately 246,000 burden hours and about $7.8 million annually, or 
less than 55 cents per loan application. Table 2, below, shows the 
Bureau's estimates of the total ongoing annual paperwork burden to all 
Bureau respondents to comply with the requirement to provide mortgage 
loan applicants with a list of homeownership counseling organizations.
---------------------------------------------------------------------------

    \254\ The estimated ongoing costs reflect the Bureau's 
expectation that producing the list of housing counseling 
organizations will require only a limited number of pieces of 
information and that the required information will be readily 
obtainable (e.g., the ZIP code of the applicant). In the proposed 
rule, the Bureau estimated the ongoing costs under the assumption 
that the housing counseling organization disclosure would be 
produced and provided by a loan officer. In contrast, the estimated 
ongoing costs of providing the disclosure in the final rule are 
based on the assumption that the disclosure is prepared by a loan 
processor. Accordingly, the estimated one-time training costs 
associated with this information collection reflects training costs 
for not only loan officers (as in the proposed rule) but also loan 
processors. The Bureau believes it is more likely that a loan 
processor will produce and provide the disclosure along with other 
documents that are typically prepared by loan processors and 
provided to mortgage applicants.
---------------------------------------------------------------------------

2. Receipt of Certification of Counseling for High-Cost Mortgages
    The Bureau estimates one-time and ongoing costs to respondents of 
complying with the requirement to receive the high-cost mortgage 
counseling certification, as required by Sec.  1026.34(a)(5)(i) and 
(iv), as follows. The Bureau estimates that 40 depository institutions 
and 436 non-depository institutions subject to the Bureau's 
administrative enforcement authority would originate high-cost 
mortgages.\255\ The Bureau estimates that this universe of relevant 
providers would each incur a one-time burden of 24 minutes for 
compliance or legal staff to read and review the relevant sections of 
the regulation (12 minutes for each of two compliance or legal staff 
members). The Bureau also estimates that this universe of relevant 
providers would incur a one-time burden of 7.5 minutes each to conduct 
initial training for each loan officer or other loan originator 
concerning the receipt of certification of counseling. The Bureau 
estimates that the total one-time burden across all relevant providers 
of complying with the high-cost mortgage housing counseling 
certification requirement would be about 1,400 hours and roughly 
$68,000.
---------------------------------------------------------------------------

    \255\ In the case of high-cost mortgages, TILA defines 
``creditor'' as a person that, in any 12 month period, originates 
two or more high-cost mortgages, or one or more high-cost mortgage 
through a broker. For purposes of determining the universe of 
relevant providers for this provision, the Bureau does not attempt 
to calculate how many of the respondents that have made HOEPA loans 
in the past made only one HOEPA loan. Thus, the number of relevant 
providers used to calculate the paperwork burden for this provision 
may be an overestimate.
---------------------------------------------------------------------------

    On an ongoing basis, the Bureau estimates that respondents would 
incur a burden of 2 minutes per origination to receive and review the 
certification form. In addition, the Bureau estimates that, on average, 
a creditor would incur a cost of $0.025 to retain the certification 
form. The Bureau estimates that the total ongoing burden across all 
relevant providers of complying with the high-cost mortgage housing 
counseling certification requirement would be about 500 hours and 
$25,000 annually. The Bureau's estimates of the total one-time and 
ongoing annual paperwork burden to all Bureau respondents to comply 
with the requirement to receive certification of high-cost mortgage 
counseling are set forth in Tables 1 and 2, below.

[[Page 6960]]

3. Receipt of Documentation of Counseling for Negative Amortization 
Loans
    The Bureau does not separately estimate the paperwork burden to 
respondents of complying with the requirement to receive documentation 
that first-time borrowers in negatively amortizing loans have received 
pre-loan homeownership counseling, as required by Sec.  1026.36(k). The 
Bureau believes that any such burden will be minimal. The universe of 
respondents for this provision is negligible. Based on data from the 
2010 Survey of Consumer Finances, the Bureau estimates that only 0.8 
percent of all outstanding mortgages in 2010 had negative amortization 
features. This estimate is an upper bound on the share of negatively 
amortizing loans held by first-time borrowers. Further, the Bureau 
believes that few if any mortgages originated currently could 
potentially negatively amortize. Moreover, the Bureau believes that the 
burden to respondents of complying with the provision would be minimal 
since the required elements of the documentation are minimal, and the 
provision would require creditors only to receive and retain this 
documentation as part of the loan file.
4. HOEPA Disclosure Form
    The Bureau believes that respondents will incur certain one-time 
and ongoing paperwork burden pursuant to Sec.  1026.32(a)(1), which 
implements Dodd-Frank's extension of HOEPA coverage to purchase money 
mortgage loans and open-end credit plans. As a result of Sec.  
1026.32(a)(1), respondents that extend purchase money mortgage loans or 
open-end credit plans that are high-cost mortgages would be required to 
provide borrowers the special HOEPA disclosure required by Sec.  
1026.32(c). The Bureau has identified the following paperwork burdens 
in connection with Sec.  1026.32(a)(1).
a. Revising the HOEPA Disclosure Form
    First, the Bureau estimates the burden to creditors originating 
high-cost purchase money mortgage loans and high-cost HELOCs of 
revising the HOEPA disclosure required by Sec.  1026.32(c). The Bureau 
believes that respondents making high-cost purchase money mortgage 
loans would incur minimal or no additional burden, because the Bureau 
expects that these respondents would provide the same HOEPA disclosures 
used for refinance and closed-end home-equity loans subject to Sec.  
1026.32.
    As discussed in the section-by-section analysis to Sec.  
1026.32(c), however, the calculation of certain of the required 
disclosures differs between the open-end and closed-end credit 
contexts. Therefore, the Bureau separately estimates the burden for 
revising the HOEPA disclosure for respondents likely to make high-cost 
HELOCs. The Bureau estimates that 37 depository institutions for which 
it has administrative enforcement authority, including 3 privately 
insured credit unions, would be likely to originate a high-cost HELOC. 
Because non-depository institutions are generally less able to fund 
lines of credit and to have access to the payment system, the Bureau 
believes that few, if any, non-depository institutions originate open-
end credit plans.
    The Bureau believes that respondents that are likely to make high-
cost HELOCs would incur a one-time burden, but no ongoing burden, in 
connection with revising the HOEPA disclosure. The one-time burden 
includes a total estimated burden of about 1,800 hours across all 
relevant providers to update their software and information technology 
systems to generate the HOEPA disclosure form appropriate for open-end 
credit plans. This estimate combines the burdens for large creditors 
and a fraction of smaller creditors whom the Bureau assumes would 
develop the necessary software and systems internally. The Bureau 
assumes that the remainder of smaller creditors would rely on third-
party vendors to obtain a revised disclosure form for high-cost HELOCs; 
these small creditors are assumed to incur the dollar costs passed on 
from a vendor that offers the product but no hours burden. In addition, 
the Bureau assumes that respondents that are likely to make high-cost 
HELOCs would spend 7.5 minutes each training a subset of loan officers 
or other loan originators that may make such loans. The Bureau 
estimates that the training burden across all relevant providers would 
total nearly 1,100 hours. The total one-time burden across all relevant 
providers to revise the HOEPA disclosure is therefore about 2,900 
hours. The Bureau estimates the corresponding dollar-cost burden is 
roughly $170,000, corresponding to about $34,000 per year for all 
respondents if this one-time cost were annualized over five years. The 
estimated total one-time burden is summarized in Table 1, below.
b. Providing the HOEPA Disclosure Form
    Respondents that make any high-cost mortgage would incur costs to 
review the provisions of the regulation related to the HOEPA 
disclosure. These costs could vary considerably across creditors. A 
creditor that currently makes high-cost mortgages might be expected to 
have lower costs to review the relevant section of the regulation than 
would a creditor that has not previously made high-cost mortgages but 
now expects to make such loans as a result of, for example, the revised 
triggers and extension of HOEPA to purchase money mortgage loans and 
HELOCs. The Bureau's estimates are averages of these costs across 
lenders.
    One-time costs. Based on the length of the section, the Bureau 
estimates the one-time burden across all relevant providers to read and 
review the HOEPA disclosure provision and to obtain any necessary legal 
guidance would be 30 minutes for each of two legal or compliance staff 
members. Across all relevant providers, the Bureau assumes an average 
one-time burden of 7.5 minutes each per loan officer or other loan 
originator for initial training concerning the disclosure. Under these 
assumptions, the total one-time burden across all relevant providers is 
estimated to be about 1,500 hours and approximately $81,000, or 
somewhat greater than $16,000 annually if the costs were divided 
equally over five years.
    Ongoing costs. On an ongoing basis, the Bureau estimates that 
producing and providing the required disclosures to an applicant will 
take approximately 2 minutes and that the cost of producing the 
required disclosures will be $0.10 per disclosure. The Bureau assumes 
that, on average, the cost of retaining a copy of the disclosure for 
recordkeeping will cost $0.025 per disclosure. The Bureau estimates 
that, taken together, the production, provision, and record-retention 
costs for across all relevant providers would total approximately 500 
hours and about $27,000 annually.

            Table 1--One-Time Costs for All CFPB Respondents
------------------------------------------------------------------------
      Information collection              Hours             Dollars
------------------------------------------------------------------------
Provision of list of housing                   28,000          1,200,000
 counselors.......................
Receipt of certification of                     1,400             68,000
 counseling for high-cost
 mortgages........................

[[Page 6961]]

 
Revision of HOEPA disclosure for                2,900            170,000
 applicability to open-end credit.
Provision of HOEPA disclosure.....              1,500             81,000
                                   -------------------------------------
    Total burden, All Respondents.             34,000          1,520,000
------------------------------------------------------------------------


             Table 2--Ongoing Costs for All CFPB Respondents
------------------------------------------------------------------------
      Information collection              Hours             Dollars
------------------------------------------------------------------------
Provision of list of housing                  246,000          7,790,000
 counselors.......................
Receipt of certification of                       500             25,000
 counseling for high-cost
 mortgages........................
Revision of HOEPA disclosure for    .................  .................
 applicability to open-end credit.
Provision of special HOEPA                        500             27,000
 disclosure.......................
                                   -------------------------------------
    Total annual burden, All                  247,000          7,840,000
     Respondents..................
------------------------------------------------------------------------

    The Bureau has a continuing interest in the public's opinions of 
our collections of information. At any time, comments regarding the 
burden estimate, or any other aspect of this collection of information, 
including suggestions for reducing the burden, may be sent to: The 
Office of Management and Budget (OMB), Attention: Desk Officer for the 
Consumer Financial Protection Bureau, Office of Information and 
Regulatory Affairs, Washington, DC 20503, or by the Internet to http://oira_submission@omb.eop.gov, with copies to the Bureau at the Consumer 
Financial Protection Bureau (Attention: PRA Office), 1700 G Street NW., 
Washington, DC 20552, or by the Internet to CFPB_Public_PRA@cfpb.gov.

List of Subjects

12 CFR Part 1024

    Condominiums, Consumer protection, Housing, Mortgagees, Mortgages, 
Mortgage servicing, Recordkeeping requirements, Reporting.

12 CFR Part 1026

    Advertising, Consumer protection, Mortgages, Reporting and 
recordkeeping requirements, Truth in lending.

Authority and Issuance

    For the reasons stated in the preamble, the Bureau amends 
Regulation X, 12 CFR part 1024, and Regulation Z, 12 CFR part 1026, as 
set forth below:

PART 1024--REAL ESTATE SETTLEMENT PROCEDURES ACT (REGULATION X)

0
1. The authority citation for part 1024 continues to read as follows:

    Authority:  12 U.S.C. 2603-2605, 2607, 2609, 2617, 5512, 5581.


0
2. Section 1024.20 is added to read as follows:


Sec.  1024.20  List of homeownership counseling organizations.

    (a) Provision of list. (1) Except as otherwise provided in this 
section, not later than three business days after a lender, mortgage 
broker, or dealer receives an application, or information sufficient to 
complete an application, the lender must provide the loan applicant 
with a clear and conspicuous written list of homeownership counseling 
organizations that provide relevant counseling services in the loan 
applicant's location. The list of homeownership counseling 
organizations distributed to each loan applicant under this section 
shall be obtained no earlier than 30 days prior to the time when the 
list is provided to the loan applicant from either:
    (i) The Web site maintained by the Bureau for lenders to use in 
complying with the requirements of this section; or
    (ii) Data made available by the Bureau or HUD for lenders to use in 
complying with the requirements of this section, provided that the data 
is used in accordance with instructions provided with the data.
    (2) The list of homeownership counseling organizations provided 
under this section may be combined and provided with other mortgage 
loan disclosures required pursuant to Regulation Z, 12 CFR part 1026, 
or this part unless prohibited by Regulation Z or this part.
    (3) A mortgage broker or dealer may provide the list of 
homeownership counseling organizations required under this section to 
any loan applicant from whom it receives or for whom it prepares an 
application. If the mortgage broker or dealer has provided the required 
list of homeownership counseling organizations, the lender is not 
required to provide an additional list. The lender is responsible for 
ensuring that the list of homeownership counseling organizations is 
provided to a loan applicant in accordance with this section.
    (4) If the lender, mortgage broker, or dealer does not provide the 
list of homeownership counseling organizations required under this 
section to the loan applicant in person, the lender must mail or 
deliver the list to the loan applicant by other means. The list may be 
provided in electronic form, subject to compliance with the consumer 
consent and other applicable provisions of the Electronic Signatures in 
Global and National Commerce Act (E-Sign Act), 15 U.S.C. 7001 et seq.
    (5) The lender is not required to provide the list of homeownership 
counseling organizations required under this section if, before the end 
of the three-business-day period provided in paragraph (a)(1) of this 
section, the lender denies the application or the loan applicant 
withdraws the application.
    (6) If a mortgage loan transaction involves more than one lender, 
only one list of homeownership counseling organizations required under 
this section shall be given to the loan applicant and the lenders shall 
agree among themselves which lender will comply with the requirements 
that this section imposes on any or all of them. If there is more than 
one loan applicant, the required list of homeownership counseling 
organizations may be provided to any loan applicant with primary 
liability on the mortgage loan obligation.
    (b) Open-end lines of credit (home-equity plans) under Regulation 
Z. For a federally related mortgage loan that is a home-equity line of 
credit subject to Regulation Z, 12 CFR 1026.40, a lender or mortgage 
broker that provides the

[[Page 6962]]

loan applicant with the list of homeownership organizations required 
under this section may comply with the timing and delivery requirements 
set out in either paragraph (a) of this section or 12 CFR 1026.40(b).
    (c) Exemptions. (1) Reverse mortgage transactions. A lender is not 
required to provide an applicant for a reverse mortgage transaction 
subject to 12 CFR 1026.33(a) the list of homeownership counseling 
organizations required under this section.
    (2) Timeshare plans. A lender is not required to provide an 
applicant for a mortgage loan secured by a timeshare, as described 
under 11 U.S.C. 101(53D), the list of homeownership counseling 
organizations required under this section.

PART 1026--TRUTH IN LENDING (REGULATION Z)

0
3. The authority citation for part 1026 continues to read as follows:

    Authority:  12 U.S.C. 2601; 2603-2605, 2607, 2609, 2617, 5511, 
5512, 5532, 5581; 15 U.S.C. 1601 et seq.

Subpart A--General

0
4. Section 1026.1 is amended by revising paragraph (d)(5) to read as 
follows:


Sec.  1026.1  Authority, purpose, coverage, organization, enforcement, 
and liability.

* * * * *
    (d) * * *
    (5) Subpart E contains special rules for mortgage transactions. 
Section 1026.32 requires certain disclosures and provides limitations 
for closed-end credit transactions and open-end credit plans that have 
rates or fees above specified amounts or certain prepayment penalties. 
Section 1026.33 requires special disclosures, including the total 
annual loan cost rate, for reverse mortgage transactions. Section 
1026.34 prohibits specific acts and practices in connection with high-
cost mortgages, as defined in Sec.  1026.32(a). Section 1026.35 
prohibits specific acts and practices in connection with closed-end 
higher-priced mortgage loans, as defined in Sec.  1026.35(a). Section 
1026.36 prohibits specific acts and practices in connection with an 
extension of credit secured by a dwelling.
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
5. Section 1026.31 is amended by revising paragraph (c)(1) and adding 
paragraph (h) to read as follows:


Sec.  1026.31  General rules.

* * * * *
    (c) Timing of disclosure. (1) Disclosures for high-cost mortgages. 
The creditor shall furnish the disclosures required by Sec.  1026.32 at 
least three business days prior to consummation or account opening of a 
high-cost mortgage as defined in Sec.  1026.32(a).
    (i) Change in terms. After complying with this paragraph (c)(1) and 
prior to consummation or account opening, if the creditor changes any 
term that makes the disclosures inaccurate, new disclosures shall be 
provided in accordance with the requirements of this subpart.
    (ii) Telephone disclosures. A creditor may provide new disclosures 
required by paragraph (c)(1)(i) of this section by telephone if the 
consumer initiates the change and if, prior to or at consummation or 
account opening:
    (A) The creditor provides new written disclosures; and
    (B) The consumer and creditor sign a statement that the new 
disclosures were provided by telephone at least three days prior to 
consummation or account opening, as applicable.
    (iii) Consumer's waiver of waiting period before consummation or 
account opening. The consumer may, after receiving the disclosures 
required by this paragraph (c)(1), modify or waive the three-day 
waiting period between delivery of those disclosures and consummation 
or account opening if the consumer determines that the extension of 
credit is needed to meet a bona fide personal financial emergency. To 
modify or waive the right, the consumer shall give the creditor a dated 
written statement that describes the emergency, specifically modifies 
or waives the waiting period, and bears the signature of all the 
consumers entitled to the waiting period. Printed forms for this 
purpose are prohibited, except when creditors are permitted to use 
printed forms pursuant to Sec.  1026.23(e)(2).
* * * * *
    (h) Corrections and unintentional violations. A creditor or 
assignee in a high-cost mortgage, as defined in Sec.  1026.32(a), who, 
when acting in good faith, failed to comply with any requirement under 
section 129 of the Act will not be deemed to have violated such 
requirement if the creditor or assignee satisfies either of the 
following sets of conditions:
    (1)(i) Within 30 days of consummation or account opening and prior 
to the institution of any action, the consumer is notified of or 
discovers the violation;
    (ii) Appropriate restitution is made within a reasonable time; and
    (iii) Within a reasonable time, whatever adjustments are necessary 
are made to the loan or credit plan to either, at the choice of the 
consumer:
    (A) Make the loan or credit plan satisfy the requirements of this 
chapter; or
    (B) Change the terms of the loan or credit plan in a manner 
beneficial to the consumer so that the loan or credit plan will no 
longer be a high-cost mortgage.
    (2)(i) Within 60 days of the creditor's discovery or receipt of 
notification of an unintentional violation or bona fide error and prior 
to the institution of any action, the consumer is notified of the 
compliance failure;
    (ii) Appropriate restitution is made within a reasonable time; and
    (iii) Within a reasonable time, whatever adjustments are necessary 
are made to the loan or credit plan to either, at the choice of the 
consumer:
    (A) Make the loan or credit plan satisfy the requirements of this 
chapter; or
    (B) Change the terms of the loan or credit plan in a manner 
beneficial to the consumer so that the loan or credit plan will no 
longer be a high-cost mortgage.

0
6. Section 1026.32 is amended by:
0
A. Revising paragraph (a);
0
B. Adding paragraphs (b)(2), (b)(3)(ii), (b)(4)(ii), and (b)(6)(ii);
0
C. Revising paragraphs (c)(3) through (5); and
0
D. Revising paragraph (d) introductory text, revising paragraphs (d)(1) 
and (6), removing and reserving paragraph (d)(7), and revising 
paragraph (d)(8).
    The additions and revisions read as follows:


Sec.  1026.32  Requirements for high-cost mortgages.

    (a) Coverage. (1) The requirements of this section apply to a high-
cost mortgage, which is any consumer credit transaction that is secured 
by the consumer's principal dwelling, other than as provided in 
paragraph (a)(2) of this section, and in which:
    (i) The annual percentage rate applicable to the transaction, as 
determined in accordance with paragraph (a)(3) of this section, will 
exceed the average prime offer rate, as defined in Sec.  1026.35(a)(2), 
for a comparable transaction by more than:
    (A) 6.5 percentage points for a first-lien transaction, other than 
as described in paragraph (a)(1)(i)(B) of this section;
    (B) 8.5 percentage points for a first-lien transaction if the 
dwelling is personal property and the loan amount is less than $50,000; 
or
    (C) 8.5 percentage points for a subordinate-lien transaction; or

[[Page 6963]]

    (ii) The transaction's total points and fees, as defined in 
paragraphs (b)(1) and (2) of this section, will exceed:
    (A) 5 percent of the total loan amount for a transaction with a 
loan amount of $20,000 or more; the $20,000 figure shall be adjusted 
annually on January 1 by the annual percentage change in the Consumer 
Price Index that was reported on the preceding June 1; or
    (B) The lesser of 8 percent of the total loan amount or $1,000 for 
a transaction with a loan amount of less than $20,000; the $1,000 and 
$20,000 figures shall be adjusted annually on January 1 by the annual 
percentage change in the Consumer Price Index that was reported on the 
preceding June 1; or
    (iii) Under the terms of the loan contract or open-end credit 
agreement, the creditor can charge a prepayment penalty, as defined in 
paragraph (b)(6) of this section, more than 36 months after 
consummation or account opening, or prepayment penalties that can 
exceed, in total, more than 2 percent of the amount prepaid.
    (2) Exemptions. This section does not apply to the following:
    (i) A reverse mortgage transaction subject to Sec.  1026.33;
    (ii) A transaction to finance the initial construction of a 
dwelling;
    (iii) A transaction originated by a Housing Finance Agency, where 
the Housing Finance Agency is the creditor for the transaction;
    (iv) A transaction originated pursuant to the United States 
Department of Agriculture's Rural Development Section 502 Direct Loan 
Program.
    (3) Determination of annual percentage rate. For purposes of 
paragraph (a)(1)(i) of this section, a creditor shall determine the 
annual percentage rate for a closed- or open-end credit transaction 
based on the following:
    (i) For a transaction in which the annual percentage rate will not 
vary during the term of the loan or credit plan, the interest rate in 
effect as of the date the interest rate for the transaction is set;
    (ii) For a transaction in which the interest rate may vary during 
the term of the loan or credit plan in accordance with an index, the 
interest rate that results from adding the maximum margin permitted at 
any time during the term of the loan or credit plan to the value of the 
index rate in effect as of the date the interest rate for the 
transaction is set, or the introductory interest rate, whichever is 
greater; and
    (iii) For a transaction in which the interest rate may or will vary 
during the term of the loan or credit plan, other than a transaction 
described in paragraph (a)(3)(ii) of this section, the maximum interest 
rate that may be imposed during the term of the loan or credit plan.
    (b) * * *
    (2) In connection with an open-end credit plan, points and fees 
means the following fees or charges that are known at or before account 
opening:
    (i) All items included in the finance charge under Sec.  1026.4(a) 
and (b), except that the following items are excluded:
    (A) Interest or the time-price differential;
    (B) Any premium or other charge imposed in connection with any 
Federal or State agency program for any guaranty or insurance that 
protects the creditor against the consumer's default or other credit 
loss;
    (C) For any guaranty or insurance that protects the creditor 
against the consumer's default or other credit loss and that is not in 
connection with any Federal or State agency program:
    (1) If the premium or other charge is payable after account 
opening, the entire amount of such premium or other charge; or
    (2) If the premium or other charge is payable at or before account 
opening, the portion of any such premium or other charge that is not in 
excess of the amount payable under policies in effect at the time of 
account opening under section 203(c)(2)(A) of the National Housing Act 
(12 U.S.C. 1709(c)(2)(A)), provided that the premium or charge is 
required to be refundable on a pro rata basis and the refund is 
automatically issued upon notification of the satisfaction of the 
underlying mortgage transaction;
    (D) Any bona fide third-party charge not retained by the creditor, 
loan originator, or an affiliate of either, unless the charge is 
required to be included in points and fees under paragraphs 
(b)(2)(i)(C), (b)(2)(iii) or (b)(2)(iv) of this section;
    (E) Up to two bona fide discount points payable by the consumer in 
connection with the transaction, provided that the conditions specified 
in paragraph (b)(1)(i)(E) of this section are met; and
    (F) Up to one bona fide discount point payable by the consumer in 
connection with the transaction, provided that no discount points have 
been excluded under paragraph (b)(2)(i)(E) of this section and the 
conditions specified in paragraph (b)(1)(i)(F) of this section are met;
    (ii) All compensation paid directly or indirectly by a consumer or 
creditor to a loan originator, as defined in Sec.  1026.36(a)(1), that 
can be attributed to that transaction at the time the interest rate is 
set;
    (iii) All items listed in Sec.  1026.4(c)(7) (other than amounts 
held for future payment of taxes) 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;
    (iv) Premiums or other charges payable at or before account opening 
for any credit life, credit disability, credit unemployment, or credit 
property insurance, or any other life, accident, health, or loss-of-
income insurance for which the creditor is a beneficiary, or any 
payments directly or indirectly for any debt cancellation or suspension 
agreement or contract;
    (v) The maximum prepayment penalty, as defined in paragraph 
(b)(6)(ii) of this section, that may be charged or collected under the 
terms of the open-end credit plan;
    (vi) The total prepayment penalty, as defined in paragraph 
(b)(6)(ii) of this section, incurred by the consumer if the consumer 
refinances an existing closed-end credit transaction with an open-end 
credit plan, or terminates an existing open-end credit plan in 
connection with obtaining a new closed- or open-end credit transaction, 
with the current holder of the existing plan, a servicer acting on 
behalf of the current holder, or an affiliate of either;
    (vii) Any fees charged for participation in an open-end credit 
plan, payable at or before account opening, as described in Sec.  
1026.4(c)(4); and
    (viii) Any transaction fee, including any minimum fee or per-
transaction fee, that will be charged for a draw on the credit line, 
where the creditor must assume that the consumer will make at least one 
draw during the term of the plan.
    (3) * * *
    (ii) Open-end credit. The term bona fide discount point means an 
amount equal to 1 percent of the credit limit for the plan when the 
account is opened, paid by the consumer, and that reduces the interest 
rate or time-price differential applicable to the transaction based on 
a calculation that 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. See comment 32(b)(3)(i)-1 for additional guidance in 
determining whether a discount point is bona fide.
    (4) * * *

[[Page 6964]]

    (ii) Open-end credit. The total loan amount for an open-end credit 
plan is the credit limit for the plan when the account is opened.
* * * * *
    (6) * * *
    (ii) Open-end credit. For an open-end credit plan, prepayment 
penalty means a charge imposed by the creditor if the consumer 
terminates the open-end credit plan prior to the end of its term, other 
than a waived bona fide third-party charge that the creditor imposes if 
the consumer terminates the open-end credit plan sooner than 36 months 
after account opening.
    (c) * * *
    (3) Regular payment; minimum periodic payment example; balloon 
payment. (i) For a closed-end credit transaction, the amount of the 
regular monthly (or other periodic) payment and the amount of any 
balloon payment provided in the credit contract, if permitted under 
paragraph (d)(1) of this section. The regular payment disclosed under 
this paragraph shall be treated as accurate if it is based on an amount 
borrowed that is deemed accurate and is disclosed under paragraph 
(c)(5) of this section.
    (ii) For an open-end credit plan:
    (A) An example showing the first minimum periodic payment for the 
draw period, the first minimum periodic payment for any repayment 
period, and the balance outstanding at the beginning of any repayment 
period. The example must be based on the following assumptions:
    (1) The consumer borrows the full credit line, as disclosed in 
paragraph (c)(5) of this section, at account opening and does not 
obtain any additional extensions of credit;
    (2) The consumer makes only minimum periodic payments during the 
draw period and any repayment period; and
    (3) The annual percentage rate used to calculate the example 
payments remains the same during the draw period and any repayment 
period. The creditor must provide the minimum periodic payment example 
based on the annual percentage rate for the plan, as described in 
paragraph (c)(2) of this section, except that if an introductory annual 
percentage rate applies, the creditor must use the rate that will apply 
to the plan after the introductory rate expires.
    (B) If the credit contract provides for a balloon payment under the 
plan as permitted under paragraph (d)(1) of this section, a disclosure 
of that fact and an example showing the amount of the balloon payment 
based on the assumptions described in paragraph (c)(3)(ii)(A) of this 
section.
    (C) A statement that the example payments show the first minimum 
periodic payments at the current annual percentage rate if the consumer 
borrows the maximum credit available when the account is opened and 
does not obtain any additional extensions of credit, or a substantially 
similar statement.
    (D) A statement that the example payments are not the consumer's 
actual payments and that the actual minimum periodic payments will 
depend on the amount the consumer borrows, the interest rate applicable 
to that period, and whether the consumer pays more than the required 
minimum periodic payment, or a substantially similar statement.
    (4) Variable-rate. For variable-rate transactions, a statement that 
the interest rate and monthly payment may increase, and the amount of 
the single maximum monthly payment, based on the maximum interest rate 
required to be included in the contract by Sec.  1026.30.
    (5) Amount borrowed; credit limit. (i) For a closed-end credit 
transaction, the total amount the consumer will borrow, as reflected by 
the face amount of the note. Where the amount borrowed includes 
financed charges that are not prohibited under Sec.  1026.34(a)(10), 
that fact shall be stated, grouped together with the disclosure of the 
amount borrowed. The disclosure of the amount borrowed shall be treated 
as accurate if it is not more than $100 above or below the amount 
required to be disclosed.
    (ii) For an open-end credit plan, the credit limit for the plan 
when the account is opened.
    (d) Limitations. A high-cost mortgage shall not include the 
following terms:
    (1)(i) Balloon payment. Except as provided by paragraphs (d)(1)(ii) 
and (iii) of this section, a payment schedule with a payment that is 
more than two times a regular periodic payment.
    (ii) Exceptions. The limitations in paragraph (d)(1)(i) of this 
section do not apply to:
    (A) A mortgage transaction with a payment schedule that is adjusted 
to the seasonal or irregular income of the consumer;
    (B) A loan with maturity of 12 months or less, if the purpose of 
the loan is a ``bridge'' loan connected with the acquisition or 
construction of a dwelling intended to become the consumer's principal 
dwelling; or
    (C) A loan that meets the criteria set forth in Sec. Sec.  
1026.43(f)(1)(i) through (vi) and 1026.43(f)(2).
    (iii) Open-end credit plans. If the terms of an open-end credit 
plan provide for a repayment period during which no further draws may 
be taken, the limitations in paragraph (d)(1)(i) of this section do not 
apply to any adjustment in the regular periodic payment that results 
solely from the credit plan's transition from the draw period to the 
repayment period. If the terms of an open-end credit plan do not 
provide for any repayment period, the limitations in paragraph 
(d)(1)(i) of this section apply to all periods of the credit plan.
* * * * *
    (6) Prepayment penalties. A prepayment penalty, as defined in 
paragraph (b)(6) of this section.
    (7) [Reserved]
    (8) Acceleration of debt. A demand feature that permits the 
creditor to accelerate the indebtedness by terminating the high-cost 
mortgage in advance of the original maturity date and to demand 
repayment of the entire outstanding balance, except in the following 
circumstances:
    (i) There is fraud or material misrepresentation by the consumer in 
connection with the loan or open-end credit agreement;
    (ii) The consumer fails to meet the repayment terms of the 
agreement for any outstanding balance that results in a default in 
payment under the loan; or
    (iii) There is any action or inaction by the consumer that 
adversely affects the creditor's security for the loan, or any right of 
the creditor in such security.
* * * * *

0
7. Section 1026.34 is revised to read as follows:


Sec.  1026.34  Prohibited acts or practices in connection with high-
cost mortgages.

    (a) Prohibited acts or practices for high-cost mortgages. (1) Home 
improvement contracts. A creditor shall not pay a contractor under a 
home improvement contract from the proceeds of a high-cost mortgage, 
other than:
    (i) By an instrument payable to the consumer or jointly to the 
consumer and the contractor; or
    (ii) At the election of the consumer, through a third-party escrow 
agent in accordance with terms established in a written agreement 
signed by the consumer, the creditor, and the contractor prior to the 
disbursement.
    (2) Notice to assignee. A creditor may not sell or otherwise assign 
a high-cost mortgage without furnishing the following statement to the 
purchaser or assignee: ``Notice: This is a mortgage subject to special 
rules under the Federal Truth in Lending Act. Purchasers or assignees 
of this mortgage could be liable for all claims and

[[Page 6965]]

defenses with respect to the mortgage that the consumer could assert 
against the creditor.''
    (3) Refinancings within one-year period. Within one year of having 
extended a high-cost mortgage, a creditor shall not refinance any high-
cost mortgage to the same consumer into another high-cost mortgage, 
unless the refinancing is in the consumer's interest. An assignee 
holding or servicing a high-cost mortgage shall not, for the remainder 
of the one-year period following the date of origination of the credit, 
refinance any high-cost mortgage to the same consumer into another 
high-cost mortgage, unless the refinancing is in the consumer's 
interest. A creditor (or assignee) is prohibited from engaging in acts 
or practices to evade this provision, including a pattern or practice 
of arranging for the refinancing of its own loans by affiliated or 
unaffiliated creditors.
    (4) Repayment ability for high-cost mortgages. In connection with 
an open-end, high-cost mortgage, a creditor shall not open a plan for a 
consumer where credit is or will be extended without regard to the 
consumer's repayment ability as of account opening, including the 
consumer's current and reasonably expected income, employment, assets 
other than the collateral, and current obligations including any 
mortgage-related obligations that are required by another credit 
obligation undertaken prior to or at account opening, and are secured 
by the same dwelling that secures the high-cost mortgage transaction. 
The requirements set forth in Sec.  1026.34(a)(4)(i) through (iv) apply 
to open-end high-cost mortgages, but do not apply to closed-end high-
cost mortgages. In connection with a closed-end, high-cost mortgage, a 
creditor must comply with the repayment ability requirements set forth 
in Sec.  1026.43. Temporary or ``bridge'' loans with terms of twelve 
months or less, such as a loan to purchase a new dwelling where the 
consumer plans to sell a current dwelling within twelve months, are 
exempt from this repayment ability requirement.
    (i) Mortgage-related obligations. For purposes of this paragraph 
(a)(4), mortgage-related obligations are property taxes; premiums and 
similar charges identified in Sec.  1026.4(b)(5), (7), (8), and (10) 
that are required by the creditor; fees and special assessments imposed 
by a condominium, cooperative, or homeowners association; ground rent; 
and leasehold payments.
    (ii) Basis for determination of repayment ability. Under this 
paragraph (a)(4) a creditor must determine the consumer's repayment 
ability in connection with an open-end, high cost mortgage as follows:
    (A) A creditor must verify amounts of income or assets that it 
relies on to determine repayment ability, including expected income or 
assets, by the consumer's Internal Revenue Service Form W-2, tax 
returns, payroll receipts, financial institution records, or other 
third-party documents that provide reasonably reliable evidence of the 
consumer's income or assets.
    (B) A creditor must verify the consumer's current obligations, 
including any mortgage-related obligations that are required by another 
credit obligation undertaken prior to or at account opening, and are 
secured by the same dwelling that secures the high-cost mortgage 
transaction.
    (iii) Presumption of compliance. For an open-end, high cost 
mortgage, a creditor is presumed to have complied with this paragraph 
(a)(4) with respect to a transaction if the creditor:
    (A) Determines the consumer's repayment ability as provided in 
paragraph (a)(4)(ii);
    (B) Determines the consumer's repayment ability taking into account 
current obligations and mortgage-related obligations as defined in 
paragraph (a)(4)(i) of this section, and using the largest required 
minimum periodic payment based on the following assumptions:
    (1) The consumer borrows the full credit line at account opening 
with no additional extensions of credit;
    (2) The consumer makes only required minimum periodic payments 
during the draw period and any repayment period;
    (3) If the annual percentage rate may increase during the plan, the 
maximum annual percentage rate that is included in the contract, as 
required by Sec.  1026.30, applies to the plan at account opening and 
will apply during the draw period and any repayment period.
    (C) Assesses the consumer's repayment ability taking into account 
at least one of the following: The ratio of total current obligations, 
including any mortgage-related obligations that are required by another 
credit obligation undertaken prior to or at account opening, and are 
secured by the same dwelling that secures the high-cost mortgage 
transaction, to income, or the income the consumer will have after 
paying current obligations.
    (iv) Exclusions from presumption of compliance. Notwithstanding the 
previous paragraph, no presumption of compliance is available for an 
open-end, high-cost mortgage transaction for which the regular periodic 
payments when aggregated do not fully amortize the outstanding 
principal balance except as otherwise provided by Sec.  
1026.32(d)(1)(ii).
    (5) Pre-loan counseling. (i) Certification of counseling required. 
A creditor shall not extend a high-cost mortgage to a consumer unless 
the creditor receives written certification that the consumer has 
obtained counseling on the advisability of the mortgage from a 
counselor that is approved to provide such counseling by the Secretary 
of the U.S. Department of Housing and Urban Development or, if 
permitted by the Secretary, by a State housing finance authority.
    (ii) Timing of counseling. The counseling required under this 
paragraph (a)(5) must occur after the consumer receives either the good 
faith estimate required by section 5(c) of the Real Estate Settlement 
Procedures Act of 1974 (12 U.S.C. 2604(c)) or the disclosures required 
by Sec.  1026.40.
    (iii) Affiliation prohibited. The counseling required under this 
paragraph (a)(5) shall not be provided by a counselor who is employed 
by or affiliated with the creditor.
    (iv) Content of certification. The certification of counseling 
required under paragraph (a)(5)(i) must include:
    (A) The name(s) of the consumer(s) who obtained counseling;
    (B) The date(s) of counseling;
    (C) The name and address of the counselor;
    (D) A statement that the consumer(s) received counseling on the 
advisability of the high-cost mortgage based on the terms provided in 
either the good faith estimate required by section 5(c) of the Real 
Estate Settlement Procedures Act of 1974 (12 U.S.C. 2604(c)) or the 
disclosures required by Sec.  1026.40; and
    (E) A statement that the counselor has verified that the 
consumer(s) received the disclosures required by either Sec.  
1026.32(c) or the Real Estate Settlement Procedures Act of 1974 (12 
U.S.C. 2601 et seq.) with respect to the transaction.
    (v) Counseling fees. A creditor may pay the fees of a counselor or 
counseling organization for providing counseling required under this 
paragraph (a)(5) but may not condition the payment of such fees on the 
consummation or account-opening of a mortgage transaction. If the 
consumer withdraws the application that would result in the extension 
of a high-cost mortgage, a creditor may not condition the payment of 
such fees on the receipt of certification from the counselor required 
by paragraph (a)(5)(i) of this section. A creditor may, however, 
confirm that a counselor has provided counseling to the consumer 
pursuant to this paragraph (a)(5) prior to paying the

[[Page 6966]]

fee of a counselor or counseling organization.
    (vi) Steering prohibited. A creditor that extends a high-cost 
mortgage shall not steer or otherwise direct a consumer to choose a 
particular counselor or counseling organization for the counseling 
required under this paragraph (a)(5).
    (6) Recommended default. A creditor or mortgage broker, as defined 
in section 1026.36(a)(2), may not recommend or encourage default on an 
existing loan or other debt prior to and in connection with the 
consummation or account opening of a high-cost mortgage that refinances 
all or any portion of such existing loan or debt.
    (7) Modification and deferral fees. A creditor, successor-in-
interest, assignee, or any agent of such parties may not charge a 
consumer any fee to modify, renew, extend or amend a high-cost 
mortgage, or to defer any payment due under the terms of such mortgage.
    (8) Late fees. (i) General. Any late payment charge imposed in 
connection with a high-cost mortgage must be specifically permitted by 
the terms of the loan contract or open-end credit agreement and may not 
exceed 4 percent of the amount of the payment past due. No such charge 
may be imposed more than once for a single late payment.
    (ii) Timing. A late payment charge may be imposed in connection 
with a high-cost mortgage only if the payment is not received by the 
end of the 15-day period beginning on the date the payment is due or, 
in the case of a high-cost mortgage on which interest on each 
installment is paid in advance, the end of the 30-day period beginning 
on the date the payment is due.
    (iii) Multiple late charges assessed on payment subsequently paid. 
A late payment charge may not be imposed in connection with a high-cost 
mortgage payment if any delinquency is attributable only to a late 
payment charge imposed on an earlier payment, and the payment otherwise 
is a full payment for the applicable period and is paid by the due date 
or within any applicable grace period.
    (iv) Failure to make required payment. The terms of a high-cost 
mortgage agreement may provide that any payment shall first be applied 
to any past due balance. If the consumer fails to make a timely payment 
by the due date and subsequently resumes making payments but has not 
paid all past due payments, the creditor may impose a separate late 
payment charge for any payment(s) outstanding (without deduction due to 
late fees or related fees) until the default is cured.
    (9) Payoff statements. (i) Fee prohibition. In general, a creditor 
or servicer (as defined in 12 CFR 1024.2(b)) may not charge a fee for 
providing to a consumer, or a person authorized by the consumer to 
obtain such information, a statement of the amount due to pay off the 
outstanding balance of a high-cost mortgage.
    (ii) Processing fee. A creditor or servicer may charge a processing 
fee to cover the cost of providing a payoff statement, as described in 
paragraph (a)(9)(i) of this section, by fax or courier, provided that 
such fee may not exceed an amount that is comparable to fees imposed 
for similar services provided in connection with consumer credit 
transactions that are secured by the consumer's principal dwelling and 
are not high-cost mortgages. A creditor or servicer shall make a payoff 
statement available to a consumer, or a person authorized by the 
consumer to obtain such information, by a method other than by fax or 
courier and without charge pursuant to paragraph (a)(9)(i) of this 
section.
    (iii) Processing fee disclosure. Prior to charging a processing fee 
for provision of a payoff statement by fax or courier, as permitted 
pursuant to paragraph (a)(9)(ii) of this section, a creditor or 
servicer shall disclose to a consumer or a person authorized by the 
consumer to obtain the consumer's payoff statement that payoff 
statements, as described in paragraph (a)(9)(i) of this section, are 
available by a method other than by fax or courier without charge.
    (iv) Fees permitted after multiple requests. A creditor or servicer 
that has provided a payoff statement, as described in paragraph 
(a)(9)(i) of this section, to a consumer, or a person authorized by the 
consumer to obtain such information, without charge, other than the 
processing fee permitted under paragraph (a)(9)(ii) of this section, 
four times during a calendar year, may thereafter charge a reasonable 
fee for providing such statements during the remainder of the calendar 
year. Fees for payoff statements provided to a consumer, or a person 
authorized by the consumer to obtain such information, in a subsequent 
calendar year are subject to the requirements of this section.
    (v) Timing of delivery of payoff statements. A payoff statement, as 
described in paragraph (a)(9)(i) of this section, for a high-cost 
mortgage shall be provided by a creditor or servicer within five 
business days after receiving a request for such statement by a 
consumer or a person authorized by the consumer to obtain such 
statement.
    (10) Financing of points and fees. A creditor that extends credit 
under a high-cost mortgage may not finance charges that are required to 
be included in the calculation of points and fees, as that term is 
defined in Sec.  1026.32(b)(1) and (2). Credit insurance premiums or 
debt cancellation or suspension fees that are required to be included 
in points and fees under Sec.  1026.32(b)(1)(iv) or (2)(iv) shall not 
be considered financed by the creditor when they are calculated and 
paid in full on a monthly basis.
    (b) Prohibited acts or practices for dwelling-secured loans; 
structuring loans to evade high-cost mortgage requirements. A creditor 
shall not structure any transaction that is otherwise a high-cost 
mortgage in a form, for the purpose, and with the intent to evade the 
requirements of a high-cost mortgage subject to this subpart, including 
by dividing any loan transaction into separate parts.

0
8. Section 1026.36 is amended by adding and reserving paragraphs (g) 
and (j) and adding paragraph (k) to read as follows:
* * * * *


Sec.  1026.36  Prohibited acts or practices in connection with credit 
secured by a dwelling.

* * * * *
    (g) [Reserved]
* * * * *
    (j) [Reserved]
    (k) Negative amortization counseling. (1) Counseling required. A 
creditor shall not extend credit to a first-time borrower in connection 
with a closed-end transaction secured by a dwelling, other than a 
reverse mortgage transaction subject to Sec.  1026.33 or a transaction 
secured by a consumer's interest in a timeshare plan described in 11 
U.S.C. 101(53D), that may result in negative amortization, unless the 
creditor receives documentation that the consumer has obtained 
homeownership counseling from a counseling organization or counselor 
certified or approved by the U.S. Department of Housing and Urban 
Development to provide such counseling.
    (2) Definitions. For the purposes of this paragraph (k), the 
following definitions apply:
    (i) A ``first-time borrower'' means a consumer who has not 
previously received a closed-end credit transaction or open-end credit 
plan secured by a dwelling.
    (ii) ``Negative amortization'' means a payment schedule with 
regular periodic payments that cause the principal balance to increase.
    (3) Steering prohibited. A creditor that extends credit to a first-
time borrower in connection with a closed-end

[[Page 6967]]

transaction secured by a dwelling, other than a reverse mortgage 
transaction subject to Sec.  1026.33 or a transaction secured by a 
consumer's interest in a timeshare plan described in 11 U.S.C. 
101(53D), that may result in negative amortization shall not steer or 
otherwise direct a consumer to choose a particular counselor or 
counseling organization for the counseling required under this 
paragraph (k).

0
9. In Supplement I to Part 1026--Official Interpretations:
0
A. Under Section 1026.31--General Rules:
0
i. Under 31(c) Timing of disclosure:
0
a. Under 31(c)(1), the heading is revised.
0
b. Under newly designated 31(c)(1), paragraph 1 is revised.
0
c. Under 31(c)(1)(i) Change in terms, paragraph 2 is revised.
0
d. Under 31(c)(1)(ii) Telephone disclosures, paragraph 1 is revised.
0
e. Under 31(c)(1)(iii), the heading is revised.
0
ii. 31(h) Corrections and unintentional violations and paragraphs 1 and 
2 are added.
0
B. Under Section 1026.32--Requirements for High-Cost Mortgages:
0
i. Under 32(a) Coverage:
0
a. Paragraph 32(a)(1) and paragraph 1 are added.
0
b. Under Paragraph 32(a)(1)(i), paragraphs 1, 2, and 3 are revised, and 
paragraph 4 is removed.
0
c. Paragraph 32(a)(1)(i)(B) and paragraph 1 are added.
0
d. Under Paragraph 32(a)(1)(ii), paragraph 1 and the introductory text 
of paragraph 2 are revised, and paragraph 3 is added.
0
e. Paragraph 32(a)(1)(iii) and paragraphs 1 and 2 are added.
0
f. Under Paragraph 32(a)(2), the heading is revised.
0
g. Paragraph 32(a)(2)(ii) and paragraph 1 are added.
0
h. Paragraph 32(a)(2)(iii) and paragraph 1 are added.
0
i. 32(a)(3) Determination of annual percentage rate and paragraphs 1, 
2, 3, 4, and 5 are added.
0
ii. Under 32(b) Definitions:
0
a. Paragraph 32(b)(2), Paragraph 32(b)(2)(i), and paragraph 1 are 
added.
0
b. Paragraph 32(b)(2)(i)(B) and paragraph 1 are added.
0
c. Paragraph 32(b)(2)(i)(C) and paragraph 1 are added.
0
d. Paragraph 32(b)(2)(i)(D) and paragraph 1 are added.
0
e. Paragraph 32(b)(2)(i)(E) and paragraph 1 are added.
0
f. Paragraph 32(b)(2)(i)(F) and paragraph 1 are added.
0
g. Paragraph 32(b)(2)(ii) and paragraph 1 are added.
0
h. Paragraph 32(b)(2)(iii) and paragraph 1 are added.
0
i. Paragraph 32(b)(2)(iv) and paragraph 1 are added.
0
j. Paragraph 32(b)(2)(vii) and paragraph 1 are added.
0
k. Paragraph 32(b)(2)(viii) and paragraphs 1 and 2 are added.
0
l. Under Paragraph 32(b)(6), as added elsewhere in this issue of the 
Federal Register, paragraphs 3 and 4 are added.
0
iii. Under 32(c) Disclosures:
0
a. 32(c)(2) Annual percentage rate and paragraph 1 are added.
0
b. Under 32(c)(3), the heading is revised.
0
c. Under newly designated 32(c)(3), paragraph 1 is revised.
0
d. Paragraph 32(c)(3)(i) and paragraph 1 are added.
0
e. Under 32(c)(4) Variable rate, paragraph 1 is revised.
0
iv. Under 32(d) Limitations:
0
a. Paragraph 1 is revised.
0
b. Under 32(d)(1)(i) Balloon payment, paragraph 1 is revised and 
paragraphs 2 and 3 are added.
0
c. Under 32(d)(2) Negative Amortization, paragraph 1 is revised.
0
d. 32(d)(6) Prepayment Penalties and paragraph 1 are removed.
0
e. 32(d)(7) Prepayment Penalty Exception, Paragraph 32(d)(7)(iii) and 
paragraphs 1, 2, and 3, and Paragraph 32(d)(7)(iv) and paragraphs 1 and 
2 are removed.
0
f. Under 32(d)(8), the heading is revised.
0
g. Under newly designated 32(d)(8), Paragraph 32(d)(8)(i) and paragraph 
1 are added.
0
h. Under Paragraph 32(d)(8)(ii), paragraph 1 is revised.
0
i. Under Paragraph 32(d)(8)(iii), paragraphs 1 and 2.ii are revised.
0
C. Under Section 1026.34--Prohibited Acts or Practices for High-Cost 
Mortgages:
0
i. Under 34(a) Prohibited Acts or Practices for High-Cost Mortgages:
0
a. Under 34(a)(4) Repayment ability, paragraphs 1 through 5 are 
revised.
0
b. Under Paragraph 34(a)(4)(ii)(B), paragraph 1 is revised and 
paragraph 2 is removed.
0
c. Paragraph 34(a)(4)(ii)(C) and paragraph 1 are removed.
0
d. Under 34(a)(4)(iii) Presumption of compliance, paragraph 1 is 
revised.
0
e. Under Paragraph 34(a)(4)(iii)(B), paragraph 1 is revised.
0
f. 34(a)(5) Pre-loan counseling, 34(a)(5)(i) Certification of 
counseling required, and paragraphs 1 through 5 are added.
0
g. 34(a)(5)(ii) Timing of counseling and paragraphs 1 and 2 are added.
0
h. 34(a)(5)(iv) Content of certification and paragraphs 1 and 2 are 
added.
0
i. 34(a)(5)(v) Counseling fees and paragraph 1 are added.
0
j. 34(a)(5)(vi) Steering prohibited and paragraphs 1 and 2 are added.
0
k. 34(a)(6) Recommended default and paragraphs 1 and 2 are added.
0
l. 34(a)(8) Late Fees, 34(a)(8)(i) General, and paragraph 1 are added.
0
m. 34(a)(8)(iii) Multiple late charges assessed on payment subsequently 
paid and paragraph 1 are added.
0
n. 34(a)(8)(iv) Failure to make required payment and paragraph 1 are 
added.
0
o. 34(a)(10) Financing of points and fees and paragraphs 1 and 2 are 
added.
0
ii. Under 34(b) Prohibited Acts or Practices for Dwelling-Secured 
Loans; Open-End Credit, the heading is revised.
0
iii. Under revised 34(b) Prohibited acts or practices for dwelling-
secured loans; structuring loans to evade high-cost mortgage 
requirements, paragraph 1 is revised and paragraph 2 is added.
0
D. Under Section 1026.36--Prohibited Acts or Practices in Connection 
with Credit Secured by a Dwelling:
0
i. 36(k) Negative amortization counseling is added.
0
a. 36(k)(1)Counseling required and paragraphs 1 through 4 are added.
0
b. 36(k)(3) Steering prohibited and paragraph 1 are added.
    The revisions and additions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions


Sec.  1026.31  General Rules

* * * * *
    31(c)(1) Disclosures for high-cost mortgages.
    1. Pre-consummation or account opening waiting period. A creditor 
must furnish Sec.  1026.32 disclosures at least three business days 
prior to consummation for a closed-end, high-cost mortgage and at least 
three business days prior to account opening for an open-end, high-cost 
mortgage. Under Sec.  1026.32, ``business day'' has the same meaning as 
the rescission rule in comment 2(a)(6)-2--all calendar days except 
Sundays and the Federal legal holidays listed in 5 U.S.C. 6103(a). 
However, while the disclosure rule under Sec. Sec.  1026.15 and 1026.23 
extends to midnight of the third business day, the rule under Sec.  
1026.32 does not. For example, under Sec.  1026.32, if disclosures were 
provided on a Friday, consummation or account opening could occur any 
time on Tuesday, the third business day following receipt of

[[Page 6968]]

the disclosures. If the timing of the rescission rule were to be used, 
consummation or account opening could not occur until after midnight on 
Tuesday.
    31(c)(1)(i) Change in terms.
* * * * *
    2. Premiums or other charges financed at consummation or account 
opening. If the consumer finances the payment of premiums or other 
charges as permitted under Sec.  1026.34(a)(10), and as a result the 
monthly payment differs from what was previously disclosed under Sec.  
1026.32, redisclosure is required and a new three-day waiting period 
applies.
    31(c)(1)(ii) Telephone disclosures.
    1. Telephone disclosures. Disclosures by telephone must be 
furnished at least three business days prior to consummation or account 
opening, as applicable, calculated in accordance with the timing rules 
under Sec.  1026.31(c)(1).
    31(c)(1)(iii) Consumer's waiver of waiting period before 
consummation or account opening.
* * * * *
    31(h) Corrections and unintentional violations.
    1. Notice requirements. Notice of a violation pursuant to Sec.  
1026.31(h)(1) or (2) should be in writing. The notice should make the 
consumer aware of the choices available under Sec.  1026.31(h)(1)(iii) 
and (2)(iii). For notice to be adequate, the consumer should have at 
least 60 days in which to consider the available options and 
communicate a choice to the creditor or assignee.
    2. Reasonable time. To claim the benefit of Sec.  1026.31(h), a 
creditor or assignee must implement appropriate restitution and the 
consumer's elected adjustment within a reasonable time after the 
consumer provides notice of that election to the creditor or assignee. 
What length of time is reasonable will depend on what changes to a loan 
or credit plan's documentation, disclosure, or terms are necessary to 
effectuate the adjustment. In general, implementing appropriate 
restitution and completing an adjustment within 30 days of the 
consumer's providing notice of the election can be considered 
reasonable.


Sec.  1026.32  Requirements for High-Cost Mortgages

    32(a) Coverage.
    Paragraph 32(a)(1).
    1. The term high-cost mortgage includes both a closed-end credit 
transaction and an open-end credit plan secured by the consumer's 
principal dwelling. For purposes of determining coverage under Sec.  
1026.32, an open-end consumer credit transaction is the account opening 
of an open-end credit plan. An advance of funds or a draw on the credit 
line under an open-end credit plan subsequent to account opening does 
not constitute an open-end ``transaction.''
    Paragraph 32(a)(1)(i).
    1. Average prime offer rate. High-cost mortgages include closed- 
and open-end consumer credit transactions secured by the consumer's 
principal dwelling with an annual percentage rate that exceeds the 
average prime offer rate for a comparable transaction as of the date 
the interest rate is set by the specified amount. The term ``average 
prime offer rate'' is defined in Sec.  1026.35(a)(2).
    2. Comparable transaction. Guidance for determining a comparable 
transaction is set forth in comments 35(a)(1)-1 and 35(a)(2)-2 and -3, 
which direct creditors to published tables of average prime offer rates 
for fixed- and variable-rate closed-end credit transactions. Creditors 
opening open-end credit plans must compare the annual percentage rate 
for the plan to the average prime offer rate for the most closely 
comparable closed-end transaction. To identify the most closely 
comparable closed-end transaction, the creditor should identify whether 
the credit plan is fixed- or variable-rate; if the plan is fixed-rate, 
the term of the plan to maturity; if the plan is variable-rate, the 
duration of any initial, fixed-rate period; and the date the interest 
rate for the plan is set. If a fixed-rate plan has no definite plan 
length, a creditor must use the average prime offer rate for a 30-year 
fixed-rate loan. If a variable-rate plan has an optional, fixed-rate 
feature, a creditor must use the rate table for variable-rate 
transactions. If a variable-rate plan has an initial, fixed-rate period 
that is not in whole years, a creditor must identify the most closely-
comparable transaction by using the number of whole years closest to 
the actual fixed-rate period. For example, if a variable-rate plan has 
an initial fixed-rate period of 20 months, a creditor must use the 
average prime offer rate for a two-year adjustable-rate loan. If a 
variable-rate plan has no initial fixed-rate period, or if it has an 
initial fixed-rate period of less than one year, a creditor must use 
the average prime offer rate for a one-year adjustable-rate loan. Thus, 
for example, if the initial fixed-rate period is six months, a creditor 
must use the average prime offer rate for a one-year adjustable-rate 
loan.
    3. Rate set. Comment 35(a)(1)-2 provides guidance for determining 
the average prime offer rate in effect on the date that the interest 
rate for the transaction is set.
    Paragraph 32(a)(1)(i)(B).
    1. Loan amount less than $50,000. The creditor must determine 
whether to apply the APR threshold in Sec.  1026.32(a)(1)(i)(B) based 
on the loan amount, which is the face amount of the note.
    Paragraph 32(a)(1)(ii).
    1. Annual adjustment of $1,000 amount. The $1,000 figure in Sec.  
1026.32(a)(1)(ii)(B) is adjusted annually on January 1 by the annual 
percentage change in the CPI that was in effect on the preceding June 
1. The Bureau will publish adjustments after the June figures become 
available each year.
    2. Historical adjustment of $400 amount. Prior to January 10, 2014, 
a mortgage loan was covered by Sec.  1026.32 if the total points and 
fees payable by the consumer at or before loan consummation exceeded 
the greater of $400 or 8 percent of the total loan amount. The $400 
figure was adjusted annually on January 1 by the annual percentage 
change in the CPI that was in effect on the preceding June 1, as 
follows:
* * * * *
    3. Applicable threshold. For purposes of Sec.  1026.32(a)(1)(ii), a 
creditor must determine the applicable points and fees threshold based 
on the face amount of the note (or, in the case of an open-end credit 
plan, the credit limit for the plan when the account is opened). 
However, the creditor must apply the allowable points and fees 
percentage to the ``total loan amount,'' as defined in Sec.  
1026.32(b)(4). For closed-end credit transactions, the total loan 
amount may be different than the face amount of the note. The $20,000 
amount in Sec.  1026.32(a)(1)(ii)(A) and (B) is adjusted annually on 
January 1 by the annual percentage change in the CPI that was in effect 
on the preceding June 1.
    Paragraph 32(a)(1)(iii).
    1. Maximum period and amount. Section 1026.32(a)(1)(iii) provides 
that a closed-end credit transaction or an open-end credit plan is a 
high-cost mortgage if, under the terms of the loan contract or open-end 
credit agreement, a creditor can charge either a prepayment penalty 
more than 36 months after consummation or account opening, or total 
prepayment penalties that exceed 2 percent of any amount prepaid. 
Section 1026.32(a)(1)(iii) applies only for purposes of determining 
whether a transaction is subject to the high-cost mortgage requirements 
and restrictions in Sec.  1026.32(c) and (d) and Sec.  1026.34. 
However, if a transaction is subject to

[[Page 6969]]

those requirements and restrictions by operation of any provision of 
Sec.  1026.32(a)(1), including by operation of Sec.  
1026.32(a)(1)(iii), then the transaction may not include a prepayment 
penalty. See Sec.  1026.32(d)(6). As a result, Sec.  1026.32(a)(1)(iii) 
effectively establishes a maximum period during which a prepayment 
penalty may be imposed, and a maximum prepayment penalty amount that 
may be imposed, on a closed-end credit transaction or open-end credit 
plan (other than such a mortgage as described in Sec.  1026.32(a)(2)) 
secured by a consumer's principal dwelling. Closed-end credit 
transactions covered by Sec.  1026.43 are subject to the additional 
prepayment penalty restrictions set forth in Sec.  1026.43(g).
    2. Examples; open-end credit. If the terms of an open-end credit 
agreement allow for a prepayment penalty that exceeds 2 percent of the 
initial credit limit for the plan, the agreement will be deemed to be a 
transaction with a prepayment penalty that exceeds 2 percent of the 
``amount prepaid'' within the meaning of Sec.  1026.32(a)(1)(iii). The 
following examples illustrate how to calculate whether the terms of an 
open-end credit agreement comply with the maximum prepayment penalty 
period and amounts described in Sec.  1026.32(a)(1)(iii).
    i. Assume that the terms of a home-equity line of credit with an 
initial credit limit of $10,000 require the consumer to pay a $500 flat 
fee if the consumer terminates the plan less than 36 months after 
account opening. The $500 fee constitutes a prepayment penalty under 
Sec.  1026.32(b)(6)(ii), and the penalty is greater than 2 percent of 
the $10,000 initial credit limit, which is $200. Under Sec.  
1026.32(a)(1)(iii), the plan is a high-cost mortgage subject to the 
requirements and restrictions set forth in Sec. Sec.  1026.32 and 
1026.34.
    ii. Assume that the terms of a home-equity line of credit with an 
initial credit limit of $10,000 and a ten-year term require the 
consumer to pay a $200 flat fee if the consumer terminates the plan 
prior to its normal expiration. The $200 prepayment penalty does not 
exceed 2 percent of the initial credit limit, but the terms of the 
agreement permit the creditor to charge the fee more than 36 months 
after account opening. Thus, under Sec.  1026.32(a)(1)(iii), the plan 
is a high-cost mortgage subject to the requirements and restrictions 
set forth in Sec. Sec.  1026.32 and 1026.34.
    iii. Assume that, under the terms of a home-equity line of credit 
with an initial credit limit of $150,000, the creditor may charge the 
consumer any closing costs waived by the creditor if the consumer 
terminates the plan less than 36 months after account opening. Assume 
also that the creditor waived closing costs of $1,000. Bona fide third-
party charges comprised $800 of the $1,000 in waived closing costs, and 
origination charges retained by the creditor or its affiliate comprised 
the remaining $200. Under Sec.  1026.32(b)(6)(ii), the $800 in bona 
fide third-party charges is not a prepayment penalty, while the $200 
for the creditor's own originations costs is a prepayment penalty. The 
total prepayment penalty of $200 is less than 2 percent of the initial 
$150,000 credit limit, and the penalty does not apply if the consumer 
terminates the plan more than 36 months after account opening. Thus, 
the plan is not a high-cost mortgage under Sec.  1026.32(a)(1)(iii).
    32(a)(2) Exemptions.
* * * * *
    Paragraph 32(a)(2)(ii).
    1. Construction-permanent loans. Section 1026.32 does not apply to 
a transaction to finance the initial construction of a dwelling. This 
exemption applies to a construction-only loan as well as to the 
construction phase of a construction-to-permanent loan. Section 1026.32 
may apply, however, to permanent financing that replaces a construction 
loan, whether the permanent financing is extended by the same or a 
different creditor. When a construction loan may be permanently 
financed by the same creditor, Sec.  1026.17(c)(6)(ii) permits the 
creditor to give either one combined disclosure for both the 
construction financing and the permanent financing, or a separate set 
of disclosures for each of the two phases as though they were two 
separate transactions. See also comment 17(c)(6)-2. Section 
1026.17(c)(6)(ii) addresses only how a creditor may elect to disclose a 
construction to permanent transaction. Which disclosure option a 
creditor elects under Sec.  1026.17(c)(6)(ii) does not affect the 
determination of whether the permanent phase of the transaction is 
subject to Sec.  1026.32. When the creditor discloses the two phases as 
separate transactions, the annual percentage rate for the permanent 
phase must be compared to the average prime offer rate for a 
transaction that is comparable to the permanent financing to determine 
coverage under Sec.  1026.32. Likewise, a single amount of points and 
fees, also reflecting the appropriate charges from the permanent phase, 
must be calculated and compared with the total loan amount to determine 
coverage under Sec.  1026.32. When the creditor discloses the two 
phases as a single transaction, a single annual percentage rate, 
reflecting the appropriate charges from both phases, must be calculated 
for the transaction in accordance with Sec.  1026.32(a)(3) and appendix 
D to part 1026. This annual percentage rate must be compared to the 
average prime offer rate for a transaction that is comparable to the 
permanent financing to determine coverage under Sec.  1026.32. 
Likewise, a single amount of points and fees, also reflecting the 
appropriate charges from both phases of the transaction, must be 
calculated and compared with the total loan amount to determine 
coverage under Sec.  1026.32. If the transaction is determined to be a 
high-cost mortgage, only the permanent phase is subject to the 
requirements of Sec. Sec.  1026.32 and 1026.34.
    Paragraph 32(a)(2)(iii).
    1. Housing Finance Agency. For purposes of Sec.  
1026.32(a)(2)(iii), a Housing Finance Agency means a housing finance 
agency as defined in 24 CFR 266.5.
    32(a)(3) Determination of annual percentage rate.
    1. In general. The guidance set forth in the commentary to Sec.  
1026.17(c)(1) and in Sec.  1026.40 addresses calculation of the annual 
percentage rate disclosures for closed-end credit transactions and 
open-end credit plans, respectively. Section 1026.32(a)(3) requires a 
different calculation of the annual percentage rate solely to determine 
coverage under Sec.  1026.32(a)(1)(i).
    2. Open-end credit. The annual percentage rate for an open-end 
credit plan must be determined in accordance with Sec.  1026.32(a)(3), 
regardless of whether there is an advance of funds at account opening. 
Section 1026.32(a)(3) does not require the calculation of the annual 
percentage rate for any extensions of credit subsequent to account 
opening. Any draw on the credit line subsequent to account opening is 
not treated as a separate transaction for purposes of determining 
annual percentage rate threshold coverage.
    3. Rates that vary; index rate plus maximum margin. i. Section 
1026.32(a)(3)(ii) applies in the case of a closed- or open-end credit 
transaction when the interest rate for the transaction varies solely in 
accordance with an index. For purposes of Sec.  1026.32(a)(3)(ii), a 
transaction's interest rate varies in accordance with an index even if 
the transaction has an initial rate that is not determined by the index 
used to make later interest rate adjustments provided that, following 
the first rate adjustment, the interest rate

[[Page 6970]]

for the transaction varies solely in accordance with an index.
    ii. In general, for transactions subject to Sec.  
1026.32(a)(3)(ii), the annual percentage rate is determined by adding 
the index rate in effect on the date that the interest rate for the 
transaction is set to the maximum margin for the transaction, as set 
forth in the agreement for the loan or plan. In some cases, a 
transaction subject to Sec.  1026.32(a)(3)(ii) may have an initial rate 
that is a premium rate and is higher than the index rate plus the 
maximum margin as of the date the interest rate for the transaction is 
set. In such cases, the annual percentage rate is determined based on 
the initial ``premium'' rate.
    iii. The following examples illustrate the rule:
    A. Assume that the terms of a closed-end, adjustable-rate mortgage 
loan provide for a fixed, initial interest rate of 2 percent for two 
years following consummation, after which the interest rate will adjust 
annually in accordance with an index plus a 2 percent margin. Also 
assume that the applicable index is 3 percent as of the date the 
interest rate for the transaction is set, and a lifetime interest rate 
cap of 15 percent applies to the transaction. Pursuant to Sec.  
1026.32(a)(3)(ii), for purposes of determining the annual percentage 
rate for Sec.  1026.32(a)(1)(i), the interest rate for the transaction 
is 5 percent (3 percent index rate plus 2 percent margin).
    B. Assume the same transaction terms set forth in paragraph 
3.iii.A, except that an initial interest rate of 6 percent applies to 
the transaction. Pursuant to Sec.  1026.32(a)(3)(ii), for purposes of 
determining the annual percentage rate for Sec.  1026.32(a)(1)(i), the 
interest rate for the transaction is 6 percent.
    C. Assume that the terms of an open-end credit agreement with a 
five-year draw period and a five-year repayment period provide for a 
fixed, initial interest rate of 2 percent for the first year of the 
repayment period, after which the interest rate will adjust annually 
pursuant to a publicly-available index outside the creditor's control, 
in accordance with the limitations applicable to open-end credit plans 
in Sec.  1026.40(f). Also assume that, pursuant to the terms of the 
open-end credit agreement, a margin of 2 percent applies because the 
consumer is employed by the creditor, but that the margin will increase 
to 4 percent if the consumer's employment with the creditor ends. 
Finally, assume that the applicable index rate is 3.5 percent as of the 
date the interest rate for the transaction is set, and a lifetime 
interest rate cap of 15 percent applies to the transaction. Pursuant to 
Sec.  1026.32(a)(3)(ii), for purposes of determining the annual 
percentage rate for Sec.  1026.32(a)(1)(i), the interest rate for the 
transaction is 7.5 percent (3.5 percent index rate plus 4 percent 
maximum margin).
    D. Assume the same transaction terms set forth in paragraph 
3.iii.C, except that an initial interest rate of 8 percent applies to 
the transaction. Pursuant to Sec.  1026.32(a)(3)(ii), for purposes of 
determining the annual percentage rate for Sec.  1026.32(a)(1)(i), the 
interest rate for the transaction is 8 percent.
    4. Rates that vary other than in accordance with an index. Section 
1026.32(a)(3)(iii) applies when the interest rate applicable to a 
closed- or open-end transaction may or will vary, except as described 
in Sec.  1026.32(a)(3)(ii). Section 1026.32(a)(3)(iii) thus applies 
where multiple fixed rates apply to a transaction, such as in a step-
rate mortgage. For example, assume the following interest rates will 
apply to a transaction: 3 percent for the first six months, 4 percent 
for the next 10 years, and 5 percent for the remaining loan term. In 
this example, Sec.  1026.32(a)(3)(iii) would be used to determine the 
interest rate, and 5 percent would be the maximum interest rate 
applicable to the transaction used to determine the annual percentage 
rate for purposes of Sec.  1026.32(a)(1)(i). Section 1026.32(a)(3)(iii) 
also applies to any other adjustable-rate loan where the interest rate 
may vary but according to a formula other than the sum of an index and 
a margin.
    5. Fixed-rate and -term payment options. If an open-end credit plan 
has only a fixed rate during the draw period, a creditor must use the 
interest rate applicable to that feature to determine the annual 
percentage rate, as required by Sec.  1026.32(a)(3)(i). However, if an 
open-end credit plan has a variable rate, but also offers a fixed-rate 
and -term payment option during the draw period, Sec.  1026.32(a)(3) 
requires a creditor to use the terms applicable to the variable-rate 
feature for determining the annual percentage rate, as described in 
Sec.  1026.32(a)(3)(ii).
    32(b) Definitions.
* * * * *
    Paragraph 32(b)(2)(i).
    1. Finance charge. The points and fees calculation under Sec.  
1026.32(b)(2) generally does not include items that are included in the 
finance charge but that are not known until after account opening, such 
as minimum monthly finance charges or charges based on account activity 
or inactivity. Transaction fees also generally are not included in the 
points and fees calculation, except as provided in Sec.  
1026.32(b)(2)(vi). See comments 32(b)(1)-1 and 32(b)(1)(i)-1 and -2 for 
additional guidance concerning the calculation of points and fees.
    Paragraph 32(b)(2)(i)(B).
    1. See comment 32(b)(1)(i)(B)-1 for further guidance concerning the 
exclusion of mortgage insurance premiums payable in connection with any 
Federal or State agency program.
    Paragraph 32(b)(2)(i)(C).
    1. See comment 32(b)(1)(i)(C)-1 and -2 for further guidance 
concerning the exclusion of mortgage insurance premiums payable for any 
guaranty or insurance that protects the creditor against the consumer's 
default or other credit loss and that is not in connection with any 
Federal or State agency program.
    Paragraph 32(b)(2)(i)(D).
    1. For purposes of Sec.  1026.32(b)(2)(i)(D), the term loan 
originator means a loan originator as that term is defined in Sec.  
1026.36(a)(1), without regard to Sec.  1026.36(a)(2). See comments 
32(b)(1)(i)(D)-1, -3, and -4 for further guidance concerning the 
exclusion of bona fide third-party charges from points and fees.
    Paragraph 32(b)(2)(i)(E).
    1. See comments 32(b)(1)(i)(E)-1 through -3 for further guidance 
concerning the exclusion of up to two bona fide discount points from 
points and fees.
    Paragraph 32(b)(2)(i)(F).
    1. See comments 32(b)(1)(i)(F)-1 and -2 for further guidance 
concerning the exclusion of up to one bona fide discount point from 
points and fees.
    Paragraph 32(b)(2)(ii).
    1. For purposes of Sec.  1026.32(b)(2)(ii), the term loan 
originator means a loan originator as that term is defined in Sec.  
1026.36(a)(1), without regard to Sec.  1026.36(a)(2). See the 
commentary to Sec.  1026.32(b)(1)(ii) for additional guidance 
concerning the inclusion of loan originator compensation in points and 
fees.
    Paragraph 32(b)(2)(iii).
    1. Other charges. See comment 32(b)(1)(iii)-1 for further guidance 
concerning the inclusion of items listed in Sec.  1026.4(c)(7) in 
points and fees.
    Paragraph 32(b)(2)(iv).
    1. Credit insurance and debt cancellation or suspension coverage. 
See comments 32(b)(1)(iv)-1 through -3 for further guidance concerning 
the inclusion of premiums for credit insurance and debt cancellation or 
suspension coverage in points and fees.
    Paragraph 32(b)(2)(vii).
    1. Participation fees. Fees charged for participation in a credit 
plan must be

[[Page 6971]]

included in the points and fees calculation for purposes of Sec.  
1026.32 if payable at or before account opening. These fees include 
annual fees or other periodic fees that must be paid as a condition of 
access to the plan itself. See commentary to Sec.  1026.4(c)(4) for a 
description of these fees.
    Paragraph 32(b)(2)(viii).
    1. Transaction fees to draw down the credit line. Section 
1026.32(b)(2)(viii) requires creditors in open-end credit plans to 
include in points and fees any transaction fee, including any per-
transaction fee, that will be charged for a draw on the credit line. 
Section 1026.32(b)(2)(viii) requires the creditor to assume that the 
consumer will make at least one draw during the term of the credit 
plan. Thus, if the terms of the open-end credit plan permit the 
creditor to charge a $10 transaction fee each time the consumer draws 
on the credit line, Sec.  1026.32(b)(2)(viii) requires the creditor to 
include one $10 charge in the points and fees calculation.
    2. Fixed-rate loan option. If the terms of an open-end credit plan 
permit a consumer to draw on the credit line using either a variable-
rate feature or a fixed-rate feature, Sec.  1026.32(b)(2)(viii) 
requires the creditor to use the terms applicable to the variable-rate 
feature for determining the transaction fee that must be included in 
the points and fees calculation.
* * * * *
    32(b)(6) Prepayment penalty.
* * * * *
    3. Examples of prepayment penalties; open-end credit. For purposes 
of Sec.  1026.32(b)(6)(ii), the term prepayment penalty includes a 
charge, including a waived closing cost, imposed by the creditor if the 
consumer terminates the open-end credit plan prior to the end of its 
term. This includes a charge imposed if the consumer terminates the 
plan outright or, for example, if the consumer terminates the plan in 
connection with obtaining a new loan or plan with the current holder of 
the existing plan, a servicer acting on behalf of the current holder, 
or an affiliate of either. However, the term prepayment penalty does 
not include a waived bona fide third-party charge imposed by the 
creditor if the consumer terminates the open-end credit plan during the 
first 36 months after account opening.
    4. Fees that are not prepayment penalties; open-end credit. For 
purposes of Sec.  1026.32(b)(6)(ii), fees that are not prepayment 
penalties include, for example:
    i. Fees imposed for preparing and providing documents when an open-
end credit plan is terminated, if such fees are imposed whether or not 
the consumer terminates the plan prior to the end of its term. Examples 
include a payoff statement, a reconveyance document, or another 
document releasing the creditor's security interest in the dwelling 
that secures the line of credit.
    ii. Loan guarantee fees.
    iii. Any fee that the creditor may impose in lieu of termination 
and acceleration under comment 40(f)(2)-2.
    32(c) Disclosures.
* * * * *
    32(c)(2) Annual percentage rate.
    1. Disclosing annual percentage rate for open-end high-cost 
mortgages. In disclosing the annual percentage rate for an open-end, 
high-cost mortgage under Sec.  1026.32(c)(2), creditors must comply 
with Sec.  1026.6(a)(1). If a fixed-rate, discounted introductory or 
initial interest rate is offered on the transaction, Sec.  
1026.32(c)(2) requires a creditor to disclose the annual percentage 
rate of the fixed-rate, discounted introductory or initial interest 
rate feature, and the rate that would apply when the feature expires.
    32(c)(3) Regular payment; minimum periodic payment example; balloon 
payment.
    1. Balloon payment. Except as provided in Sec.  1026.32(d)(1)(ii) 
and (iii), a mortgage transaction subject to this section may not 
include a payment schedule that results in a balloon payment.
    Paragraph 32(c)(3)(i).
    1. General. The regular payment is the amount due from the consumer 
at regular intervals, such as monthly, bimonthly, quarterly, or 
annually. There must be at least two payments, and the payments must be 
in an amount and at such intervals that they fully amortize the amount 
owed. In disclosing the regular payment, creditors may rely on the 
rules set forth in Sec.  1026.18(g); however, the amounts for voluntary 
items, such as credit life insurance, may be included in the regular 
payment disclosure only if the consumer has previously agreed to the 
amounts.
    i. If the loan has more than one payment level, the regular payment 
for each level must be disclosed. For example:
    A. In a 30-year graduated payment mortgage where there will be 
payments of $300 for the first 120 months, $400 for the next 120 
months, and $500 for the last 120 months, each payment amount must be 
disclosed, along with the length of time that the payment will be in 
effect.
    B. If interest and principal are paid at different times, the 
regular amount for each must be disclosed.
    C. In discounted or premium variable-rate transactions where the 
creditor sets the initial interest rate and later rate adjustments are 
determined by an index or formula, the creditor must disclose both the 
initial payment based on the discount or premium and the payment that 
will be in effect thereafter. Additional explanatory material which 
does not detract from the required disclosures may accompany the 
disclosed amounts. For example, if a monthly payment is $250 for the 
first six months and then increases based on an index and margin, the 
creditor could use language such as the following: ``Your regular 
monthly payment will be $250 for six months. After six months your 
regular monthly payment will be based on an index and margin, which 
currently would make your payment $350. Your actual payment at that 
time may be higher or lower.''
    32(c)(4) Variable-rate.
    1. Calculating ``worst-case'' payment example. For a closed-end 
credit transaction, creditors may rely on instructions in Sec.  
1026.19(b)(2)(viii)(B) for calculating the maximum possible increases 
in rates in the shortest possible timeframe, based on the face amount 
of the note (not the hypothetical loan amount of $10,000 required by 
Sec.  1026.19(b)(2)(viii)(B)). The creditor must provide a maximum 
payment for each payment level, where a payment schedule provides for 
more than one payment level and more than one maximum payment amount is 
possible. For an open-end credit plan, the maximum monthly payment must 
be based on the following assumptions:
    i. The consumer borrows the full credit line at account opening 
with no additional extensions of credit.
    ii. The consumer makes only minimum periodic payments during the 
draw period and any repayment period.
    iii. If the annual percentage rate may increase during the plan, 
the maximum annual percentage rate that is included in the contract, as 
required by Sec.  1026.30, applies to the plan at account opening.
* * * * *
    32(d) Limitations.
    1. Additional prohibitions applicable under other sections. Section 
1026.34 sets forth certain prohibitions in connection with high-cost 
mortgages, in addition to the limitations in Sec.  1026.32(d). Further, 
Sec.  1026.35(b) prohibits certain practices in connection with closed-
end transactions that meet the coverage test in Sec.  1026.35(a). 
Because the coverage test in Sec.  1026.35(a) is generally broader than 
the coverage test in Sec.  1026.32(a), most closed-end high-cost 
mortgages are also subject to

[[Page 6972]]

the prohibitions set forth in Sec.  1026.35(b) (such as escrows), in 
addition to the limitations in Sec.  1026.32(d).
* * * * *
    32(d)(1)(i) Balloon payment.
    1. Regular periodic payments. The repayment schedule for a high-
cost mortgage must fully amortize the outstanding principal balance 
through ``regular periodic payments.'' A payment is a ``regular 
periodic payment'' if it is not more than two times the amount of other 
payments. For purposes of open-end credit plans, the term ``regular 
periodic payment'' or ``periodic payment'' means the required minimum 
periodic payment.
    2. Repayment period. If the terms of an open-end credit plan 
provide for a repayment period during which no further draws may be 
taken, the limitations in Sec.  1026.32(d)(1)(i) apply to regular 
periodic payments required by the credit plan during the draw period, 
but do not apply to any adjustment in the regular periodic payment that 
results from the transition from the credit plan's draw period to its 
repayment period. Further, the limitation on balloon payments in Sec.  
1026.32(d)(1)(i) does not preclude increases in regular periodic 
payments that result solely from the initial draw or additional draws 
on the credit line during the draw period.
    3. No repayment period. If the terms of an open-end credit plan do 
not provide for a repayment period, the repayment schedule must fully 
amortize any outstanding principal balance in the draw period through 
regular periodic payments. However, the limitation on balloon payments 
in Sec.  1026.32(d)(1)(i) does not preclude increases in regular 
periodic payments that result solely from the initial draw or 
additional draws on the credit line during the draw period.
    32(d)(2) Negative amortization.
    1. Negative amortization. The prohibition against negative 
amortization in a high-cost mortgage does not preclude reasonable 
increases in the principal balance that result from events permitted by 
the legal obligation unrelated to the payment schedule. For example, 
when a consumer fails to obtain property insurance and the creditor 
purchases insurance, the creditor may add a reasonable premium to the 
consumer's principal balance, to the extent permitted by applicable law 
and the consumer's legal obligation.
* * * * *
    32(d)(8) Acceleration of debt.
    Paragraph 32(d)(8)(i).
    1. Fraud or material misrepresentation. A creditor may terminate a 
loan or open-end credit agreement and accelerate the balance if there 
has been fraud or material misrepresentation by the consumer in 
connection with the loan or open-end credit agreement. What constitutes 
fraud or misrepresentation is determined by applicable State law and 
may include acts of omission as well as overt acts, as long as any 
necessary intent on the part of the consumer exists.
    Paragraph 32(d)(8)(ii).
    1. Failure to meet repayment terms. A creditor may terminate a loan 
or open-end credit agreement and accelerate the balance when the 
consumer fails to meet the repayment terms resulting in a default in 
payment under the agreement; a creditor may do so, however, only if the 
consumer actually fails to make payments resulting in a default in the 
agreement. For example, a creditor may not terminate and accelerate if 
the consumer, in error, sends a payment to the wrong location, such as 
a branch rather than the main office of the creditor. If a consumer 
files for or is placed in bankruptcy, the creditor may terminate and 
accelerate under Sec.  1026.32(d)(8)(i) if the consumer fails to meet 
the repayment terms resulting in a default of the agreement. Section 
1026.32(d)(8)(i) does not override any State or other law that requires 
a creditor to notify a consumer of a right to cure, or otherwise places 
a duty on the creditor before it can terminate a loan or open-end 
credit agreement and accelerate the balance.
    Paragraph 32(d)(8)(iii).
    1. Impairment of security. A creditor may terminate a loan or open-
end credit agreement and accelerate the balance if the consumer's 
action or inaction adversely affects the creditor's security for the 
loan, or any right of the creditor in that security. Action or inaction 
by third parties does not, in itself, permit the creditor to terminate 
and accelerate.
    2. * * *
    ii. By contrast, the filing of a judgment against the consumer 
would be cause for termination and acceleration only if the amount of 
the judgment and collateral subject to the judgment is such that the 
creditor's security is adversely and materially affected in violation 
of the loan or open-end credit agreement. If the consumer commits waste 
or otherwise destructively uses or fails to maintain the property, 
including demolishing or removing structures from the property, such 
that the action adversely affects the security in a material way, the 
loan or open-end credit agreement may be terminated and the balance 
accelerated. Illegal use of the property by the consumer would permit 
termination and acceleration if it subjects the property to seizure. If 
one of two consumers obligated on a loan dies, the creditor may 
terminate the loan and accelerate the balance if the security is 
adversely affected. If the consumer moves out of the dwelling that 
secures the loan and that action adversely affects the security in a 
material way, the creditor may terminate a loan or open-end credit 
agreement and accelerate the balance.
* * * * *


Sec.  1026.34  Prohibited Acts or Practices in Connection with High-
Cost Mortgages

* * * * *
    34(a)(4) Repayment ability for high-cost mortgages.
    1. Application of repayment ability rule. The Sec.  1026.34(a)(4) 
prohibition against making loans without regard to consumers' repayment 
ability applies to open-end, high-cost mortgages. The Sec.  1026.43 
repayment ability provisions apply to closed-end, high-cost mortgages. 
Accordingly, in connection with a closed-end, high-cost mortgage, Sec.  
1026.34(a)(4) requires a creditor to comply with the repayment ability 
requirements set forth in Sec.  1026.43.
    2. General prohibition. Section 1026.34(a)(4) prohibits a creditor 
from extending credit under a high-cost, open-end credit plan based on 
the value of the consumer's collateral without regard to the consumer's 
repayment ability as of account opening, including the consumer's 
current and reasonably expected income, employment, assets other than 
the collateral, current obligations, and property tax and insurance 
obligations. A creditor may base its determination of repayment ability 
on current or reasonably expected income from employment or other 
sources, on assets other than the collateral, or both.
    3. Other dwelling-secured obligations. For purposes of Sec.  
1026.34(a)(4), current obligations include another credit obligation of 
which the creditor has knowledge undertaken prior to or at account 
opening and secured by the same dwelling that secures the high-cost 
mortgage transaction.
    4. Discounted introductory rates and non-amortizing payments. A 
credit agreement may determine a consumer's initial payments using a 
temporarily discounted interest rate or permit the consumer to make 
initial payments that are non-amortizing. In such cases the creditor 
may determine repayment ability using the assumptions provided in Sec.  
1026.34(a)(4)(iv).
    5. Repayment ability as of account opening. Section 1026.34(a)(4) 
prohibits a creditor from disregarding repayment ability based on the 
facts and

[[Page 6973]]

circumstances known to the creditor as of account opening. In general, 
a creditor does not violate this provision if a consumer defaults 
because of a significant reduction in income (for example, a job loss) 
or a significant obligation (for example, an obligation arising from a 
major medical expense) that occurs after account opening. However, if a 
creditor has knowledge as of account opening of reductions in income 
(for example, if a consumer's written application states that the 
consumer plans to retire within twelve months without obtaining new 
employment, or states that the consumer will transition from full-time 
to part-time employment), the creditor must consider that information.
* * * * *
    34(a)(4)(ii) Verification of Repayment Ability.
* * * * *
    Paragraph 34(a)(4)(ii)(B).
    1. In general. A credit report may be used to verify current 
obligations. A credit report, however, might not reflect an obligation 
that a consumer has listed on an application. The creditor is 
responsible for considering such an obligation, but the creditor is not 
required to independently verify the obligation. Similarly, a creditor 
is responsible for considering certain obligations undertaken just 
before or at account opening and secured by the same dwelling that 
secures the transaction (for example, a ``piggy back'' loan), of which 
the creditor knows, even if not reflected on a credit report. See 
comment 34(a)(4)-3.
    34(a)(4)(iii) Presumption of compliance.
    1. In general. A creditor is presumed to have complied with Sec.  
1026.34(a)(4) if the creditor follows the three underwriting procedures 
specified in paragraph 34(a)(4)(iii) for verifying repayment ability, 
determining the payment obligation, and measuring the relationship of 
obligations to income. The procedures for verifying repayment ability 
are required under Sec.  1026.34(a)(4)(ii); the other procedures are 
not required but, if followed along with the required procedures, 
create a presumption that the creditor has complied with Sec.  
1026.34(a)(4). The consumer may rebut the presumption with evidence 
that the creditor nonetheless disregarded repayment ability despite 
following these procedures. For example, evidence of a very high debt-
to-income ratio and a very limited residual income could be sufficient 
to rebut the presumption, depending on all of the facts and 
circumstances. If a creditor fails to follow one of the non-required 
procedures set forth in Sec.  1026.34(a)(4)(iii), then the creditor's 
compliance is determined based on all of the facts and circumstances 
without there being a presumption of either compliance or violation.
    Paragraph 34(a)(4)(iii)(B).
    1. Determination of payment schedule. To retain a presumption of 
compliance under Sec.  1026.34(a)(4)(iii), a creditor must determine 
the consumer's ability to pay the principal and interest obligation 
based on the maximum scheduled payment. In general, a creditor should 
determine a payment schedule for purposes of Sec.  
1026.34(a)(4)(iii)(B) based on the guidance in the commentary to Sec.  
1026.32(c)(3).
* * * * *
    34(a)(5) Pre-loan counseling.
    34(a)(5)(i) Certification of counseling required.
    1. HUD-approved counselor. For purposes of Sec.  1026.34(a)(5), 
counselors approved by the Secretary of the U.S. Department of Housing 
and Urban Development are homeownership counselors certified pursuant 
to section 106(e) of the Housing and Urban Development Act of 1968 (12 
U.S.C. 1701x(e)), or as otherwise determined by the Secretary.
    2. State housing finance authority. For purposes of Sec.  
1026.34(a)(5), a ``State housing finance authority'' has the same 
meaning as ``State housing finance agency'' provided in 24 CFR 214.3.
    3. Processing applications. Prior to receiving certification of 
counseling, a creditor may not extend a high-cost mortgage, but may 
engage in other activities, such as processing an application that will 
result in the extension of a high-cost mortgage (by, for example, 
ordering an appraisal or title search).
    4. Form of certification. The written certification of counseling 
required by Sec.  1026.34(a)(5)(i) may be received by mail, email, 
facsimile, or any other method, so long as the certification is in a 
retainable form.
    5. Purpose of certification. Certification of counseling indicates 
that a consumer has received counseling as required by Sec.  
1026.34(a)(5), but it does not indicate that a counselor has made a 
judgment or determination as to the appropriateness of the transaction 
for the consumer.
    34(a)(5)(ii) Timing of counseling.
    1. Disclosures for open-end credit plans. Section 1026.34(a)(5)(ii) 
permits receipt of either the good faith estimate required by section 
5(c) of RESPA or the disclosures required under Sec.  1026.40 to allow 
counseling to occur. Pursuant to 12 CFR 1024.7(h), the disclosures 
required by Sec.  1026.40 can be provided in lieu of a good faith 
estimate for open-end credit plans.
    2. Initial disclosure. Counseling may occur after receipt of either 
an initial good faith estimate required by section 5(c) of RESPA or a 
disclosure form pursuant to Sec.  1026.40, regardless of whether a 
revised good faith estimate or revised disclosure form pursuant to 
Sec.  1026.40 is subsequently provided to the consumer.
    34(a)(5)(iv) Content of certification.
    1. Statement of counseling on advisability. A statement that a 
consumer has received counseling on the advisability of the high-cost 
mortgage means that the consumer has received counseling about key 
terms of the mortgage transaction, as set out in either the good faith 
estimate required by section 5(c) of RESPA or the disclosures provided 
to the consumer pursuant to Sec.  1026.40; the consumer's budget, 
including the consumer's income, assets, financial obligations, and 
expenses; and the affordability of the mortgage transaction for the 
consumer. Examples of such terms of the mortgage transaction include 
the initial interest rate, the initial monthly payment, whether the 
payment may increase, how the minimum periodic payment will be 
determined, and fees imposed by the creditor, as may be reflected in 
the applicable disclosure. A statement that a consumer has received 
counseling on the advisability of the high-cost mortgage does not 
require the counselor to have made a judgment or determination as to 
the appropriateness of the mortgage transaction for the consumer.
    2. Statement of verification. A statement that a counselor has 
verified that the consumer has received the disclosures required by 
either Sec.  1026.32(c) or by RESPA for the high-cost mortgage means 
that a counselor has confirmed, orally, in writing, or by some other 
means, receipt of such disclosures with the consumer.
    34(a)(5)(v) Counseling fees.
    1. Financing. Section 1026.34(a)(5)(v) does not prohibit a creditor 
from financing the counseling fee as part of the transaction for a 
high-cost mortgage, if the fee is a bona fide third- party charge as 
provided by Sec.  1026.32(b)(5)(i).
    34(a)(5)(vi) Steering prohibited.
    1. An example of an action that constitutes steering would be when 
a creditor repeatedly highlights or otherwise distinguishes the same 
counselor in the notices the creditor provides to consumers pursuant to 
Sec.  1026.34(a)(5)(vii).

[[Page 6974]]

    2. Section 1026.34(a)(5)(vi) does not prohibit a creditor from 
providing a consumer with objective information related to counselors 
or counseling organizations in response to a consumer's inquiry. An 
example of an action that would not constitute steering would be when a 
consumer asks the creditor for information about the fees charged by a 
counselor, and the creditor responds by providing the consumer 
information about fees charged by the counselor to other consumers that 
previously obtained counseling pursuant to Sec.  1026.34(a)(5).
    34(a)(6) Recommended default.
    1. Facts and circumstances. Whether a creditor or mortgage broker 
``recommends or encourages'' default for purposes of Sec.  
1026.34(a)(6) depends on all of the relevant facts and circumstances.
    2. Examples. i. A creditor or mortgage broker ``recommends or 
encourages'' default when the creditor or mortgage broker advises the 
consumer to stop making payments on an existing loan in a manner that 
is likely to cause the consumer to default on the existing loan.
    ii. When delay of consummation of a high-cost mortgage occurs for 
reasons outside the control of a creditor or mortgage broker, that 
creditor or mortgage broker does not ``recommend or encourage'' default 
because the creditor or mortgage broker informed a consumer that:
    A. The consumer's high-cost mortgage is scheduled to be consummated 
prior to the due date for the next payment due on the consumer's 
existing loan, which is intended to be paid by the proceeds of the new 
high-cost mortgage; and
    B. Any delay of consummation of the new high-cost mortgage beyond 
the payment due date of the existing loan will not relieve the consumer 
of the obligation to make timely payment on that loan.
    34(a)(8) Late fees.
    34(a)(8)(i) General.
    1. For purposes of Sec.  1026.34(a)(8), in connection with an open-
end credit plan, the amount of the payment past due is the required 
minimum periodic payment as provided under the terms of the open-end 
credit agreement.
    34(a)(8)(iii) Multiple late charges assessed on payment 
subsequently paid.
    1. Section 1026.34(a)(8)(iii) prohibits the pyramiding of late fees 
or charges in connection with a high-cost mortgage payment. For 
example, assume that a consumer's regular periodic payment of $500 is 
due on the 1st of each month. On August 25, the consumer makes a $500 
payment which was due on August 1, and as a result, a $10 late charge 
is assessed. On September 1, the consumer makes another $500 payment 
for the regular periodic payment due on September 1, but does not pay 
the $10 late charge assessed on the August payment. Under Sec.  
1026.34(h)(2), it is impermissible to allocate $10 of the consumer's 
September 1 payment to cover the late charge, such that the September 
payment becomes delinquent. In short, because the $500 payment made on 
September 1 is a full payment for the applicable period and is paid by 
its due date or within any applicable grace period, no late charge may 
be imposed on the account in connection with the September payment.
    34(a)(8)(iv) Failure to make required payment.
    1. Under Sec.  1026.34(a)(8)(iv), if a consumer fails to make one 
or more required payments and then resumes making payments but fails to 
bring the account current, it is permissible, if permitted by the terms 
of the loan contract or open-end credit agreement, to apply the 
consumer's payments first to the past due payment(s) and to impose a 
late charge on each subsequent required payment until the account is 
brought current. To illustrate: Assume that a consumer's regular 
periodic payment of $500 is due on the 1st of each month, or before the 
expiration of a 15-day grace period. Also assume that the consumer 
fails to make a timely installment payment by August 1 (or within the 
applicable grace period), and a $10 late charge therefore is imposed. 
The consumer resumes making monthly payments on September 1. Under 
Sec.  1026.34(a)(8)(iv), if permitted by the terms of the loan 
contract, the creditor may apply the $500 payment made on September 1 
to satisfy the missed $500 payment that was due on August 1. If the 
consumer makes no other payment prior to the end of the grace period 
for the payment that was due on September 1, the creditor may also 
impose a $10 late fee for the payment that was due on September 1.
    34(a)(10) Financing of points and fees.
    1. Points and fees. For purposes of Sec.  1026.34(a)(10), ``points 
and fees'' means those items that are required to be included in the 
calculation of points and fees under Sec.  1026.32(b)(1) and (2). Thus, 
for example, in connection with the extension of credit under a high-
cost mortgage, a creditor may finance a fee charged by a third-party 
counselor in connection with the consumer's receipt of pre-loan 
counseling under Sec.  1026.34(a)(5), because, pursuant to Sec.  
1026.32(b)(1)(i)(D) and (b)(2)(i)(D), such a fee is excluded from the 
calculation of points and fees as a bona fide third-party charge.
    2. Examples of financing points and fees. For purposes of Sec.  
1026.34(a)(10), points and fees are financed if, for example, they are 
added to the loan balance or financed through a separate note, if the 
note is payable to the creditor or to an affiliate of the creditor. In 
the case of an open-end credit plan, a creditor also finances points 
and fees if the creditor advances funds from the credit line to cover 
the fees.
    34(b) Prohibited acts or practices for dwelling-secured loans; 
structuring loans to evade high-cost mortgage requirements.
    1. Examples. i. A creditor structures a transaction in violation of 
Sec.  1026.34(b) if, for example, the creditor structures a loan that 
would otherwise be a high-cost mortgage as two or more loans, whether 
made consecutively or at the same time, for example, to divide the loan 
fees to avoid the points and fees threshold for high-cost mortgages in 
Sec.  1026.32(a)(1)(ii).
    ii. A creditor does not structure a transaction in violation of 
Sec.  1026.34(b) when a loan to finance the initial construction of a 
dwelling may be permanently financed by the same creditor, such as a 
``construction-to-permanent'' loan, and the construction phase and the 
permanent phase are treated as separate transactions. Section 
1026.17(c)(6)(ii) permits the creditor to give either one combined 
disclosure for both the construction financing and the permanent 
financing, or a separate set of disclosures for each of the two phases 
as though they were two separate transactions. See also comment 
17(c)(6)-2.
    2. Amount of credit extended. Where a loan is documented as open-
end credit but the features and terms or other circumstances 
demonstrate that it does not meet the definition of open-end credit, 
the loan is subject to the rules for closed-end credit. Thus, in 
determining the ``total loan amount'' for purposes of applying the 
triggers under Sec.  1026.32, the amount of credit that would have been 
extended if the loan had been documented as a closed-end loan is a 
factual determination to be made in each case. Factors to be considered 
include the amount of money the consumer originally requested, the 
amount of the first advance or the highest outstanding balance, or the 
amount of the credit line. The full amount of the credit line is 
considered only to the extent that it is reasonable to expect that the 
consumer might use the full amount of credit.
* * * * *

[[Page 6975]]

Sec.  1026.36  Prohibited Acts or Practices in Connection with Credit 
Secured by a Dwelling

* * * * *
    36(k) Negative amortization counseling.
    36(k)(1) Counseling required.
    1. HUD-certified or -approved counselor or counseling organization. 
For purposes of Sec.  1026.36(k), organizations or counselors certified 
or approved by the U.S. Department of Housing and Urban Development 
(HUD) to provide the homeownership counseling required by Sec.  
1026.36(k) include counselors and counseling organizations that are 
certified or approved pursuant to section 106(e) of the Housing and 
Urban Development Act of 1968 (12 U.S.C. 1701x(e)) or 24 CFR part 214, 
unless HUD determines otherwise.
    2. Homeownership counseling. The counseling required under Sec.  
1026.36(k) must include information regarding the risks and 
consequences of negative amortization.
    3. Documentation. Examples of documentation that demonstrate a 
consumer has received the counseling required under Sec.  1026.36(k) 
include a certificate of counseling, letter, or email from a HUD-
certified or -approved counselor or counseling organization indicating 
that the consumer has received homeownership counseling.
    4. Processing applications. Prior to receiving documentation that a 
consumer has received the counseling required under Sec.  1026.36(k), a 
creditor may not extend credit to a first-time borrower in connection 
with a closed-end transaction secured by a dwelling that may result in 
negative amortization, but may engage in other activities, such as 
processing an application for such a transaction (by, for example, 
ordering an appraisal or title search).
    36(k)(3) Steering prohibited.
    1. See comments 34(a)(5)(vi)-1 and -2 for guidance concerning 
steering.
* * * * *

    Dated: January 10, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-00740 Filed 1-18-13; 11:15 am]
BILLING CODE 4810-AM-P