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]
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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
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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations
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)
Bureau of Consumer Financial
Protection.
ACTION: Final rule; official
interpretations.
AGENCY:
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:
SUMMARY:
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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 homeequity 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
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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
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 DoddFrank 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 homeequity 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 DoddFrank 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
1 Mortgages covered by the HOEPA amendments
have been referred to as ‘‘HOEPA loans,’’ ‘‘Section
32 loans,’’ or ‘‘high-cost mortgages.’’ The DoddFrank 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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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 highcost mortgage.
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• 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 firsttime 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.
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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 purchasemoney 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.
For high-cost mortgages meeting
either of those thresholds, HOEPA
required lenders to provide special preclosing disclosures, restricted
3 HOEPA amended TILA by adding new sections
103(aa) and 129, 15 U.S.C. 1602(aa) and 1639.
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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
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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 DoddFrank 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.
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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.
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 DoddFrank 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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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
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 DoddFrank 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.
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
§ 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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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 homeimprovement loans secured by a one- to
four-family home.
Similarly, the number of HMDAreporting creditors that originate highcost 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 HMDAreporters 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.
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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 DoddFrank 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
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communications with the Bureau,
consistent with the Bureau’s policy.7
Materials submitted were filed in the
record and are publicly available at
http://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.
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.
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C. Other Rulemakings
In addition to this final rule, the
Bureau is adopting several other final
rules and issuing one proposal, all
relating to mortgage credit to implement
requirements of title XIV of the DoddFrank Act. The Bureau is also issuing a
final rule jointly with other Federal
agencies to implement requirements for
mortgage appraisals in title XIV. Each of
the final rules follows a proposal issued
in 2011 by the Board or in 2012 by the
Bureau alone or jointly with other
Federal agencies. Collectively, these
proposed and final rules are referred to
as the Title XIV Rulemakings.
• Ability-to-Repay: 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 DoddFrank Act (1) requiring creditors to
7 The Bureau’s policy regarding ex parte
communications can be found at http://files.
consumerfinance.gov/f/2011/08/Bulletin_
20110819_ExPartePresentationsRulemaking
Proceedings.pdf.
8 76 FR 27390 (May 11, 2011).
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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 DoddFrank Act sections 1411, 1412, and
1414. 15 U.S.C. 1639c. The Bureau’s
final rule is referred to as the 2013 ATR
Final Rule. Simultaneously with the
2013 ATR Final Rule, the Bureau is
issuing a proposal to amend the final
rule implementing the ability-to-repay
requirements, including by the addition
of exemptions for certain nonprofit
creditors and certain homeownership
stabilization programs and a definition
of a ‘‘qualified mortgage’’ for certain
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.
• 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.
• 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 DoddFrank Act requirements regarding forceplaced insurance, error resolution,
information requests, and payment
crediting, as well as requirements for
mortgage loan periodic statements and
adjustable-rate mortgage reset
disclosures, pursuant to section 6 of
RESPA and sections 128, 128A, 129F,
and 129G of TILA, as amended or
established by Dodd-Frank Act sections
1418, 1420, 1463, and 1464. 12 U.S.C.
2605; 15 U.S.C. 1638, 1638a, 1639f, and
1639g. The Bureau also is finalizing
rules on early intervention for troubled
and delinquent borrowers, and loss
9 76
FR 11598 (Mar. 2, 2011).
FR 57200 (Sept. 17, 2012) (RESPA); 77 FR
57318 (Sept. 17, 2012) (TILA).
10 77
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mitigation procedures, pursuant to the
Bureau’s authority under section 6 of
RESPA, as amended by Dodd-Frank Act
section 1463, to establish obligations for
mortgage servicers that it finds to be
appropriate to carry out the consumer
protection purposes of RESPA, and its
authority under section 19(a) of RESPA
to prescribe rules necessary to achieve
the purposes of RESPA. The Bureau’s
final rule under RESPA with respect to
mortgage servicing also establishes
requirements for general servicing
standards policies and procedures and
continuity of contact pursuant to its
authority under section 19(a) of RESPA.
The Bureau’s final rules are referred to
as the 2013 RESPA Servicing Final Rule
and the 2013 TILA Servicing Final Rule,
respectively.
• Loan Originator Compensation:
Following its August 2012 proposal (the
2012 Loan Originator Proposal),11 the
Bureau is issuing a final rule to
implement provisions of the DoddFrank Act requiring certain creditors
and loan originators to meet certain
duties of care, including qualification
requirements; requiring the
establishment of certain compliance
procedures by depository institutions;
prohibiting loan originators, creditors,
and the affiliates of both from receiving
compensation in various forms
(including based on the terms of the
transaction) and from sources other than
the consumer, with specified
exceptions; and establishing restrictions
on mandatory arbitration and financing
of single premium credit insurance,
pursuant to TILA sections 129B and
129C as established by Dodd-Frank Act
sections 1402, 1403, and 1414(a). 15
U.S.C. 1639b, 1639c. The Bureau’s final
rule is referred to as the 2013 Loan
Originator Final Rule.
• 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
11 77
FR 55272 (Sept. 7, 2012).
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).
12 Specifically,
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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.
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 DoddFrank 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.
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
14 77
FR 50390 (Aug. 21, 2012).
FR 51116 (Aug. 23, 2012).
16 77 FR 70105 (Nov. 23, 2012).
15 77
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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.
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
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 crossreferences to each other’s provisions or by adopting
parallel provisions. Thus, adopting some of those
amendments without also adopting certain other,
closely related provisions would create significant
technical issues, e.g., new provisions containing
cross-references to other provisions that do not yet
exist, which could undermine the ability of
creditors and other parties subject to the rules to
understand their obligations and implement
appropriate systems changes in an integrated and
efficient manner.
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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
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limit for purposes of determining
whether a transaction is a ‘‘qualified
mortgage’’ under the 2013 ATR Final
Rule. Meanwhile, the APR serves as a
coverage threshold for HOEPA
protections as well as for certain
protections afforded ‘‘higher-priced
mortgage loans’’ under § 1026.35,
including the mandatory escrow
account requirements being amended by
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
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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.
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 DoddFrank 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.
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.
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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6861
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
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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 highcost mortgages and to expand the
protections that apply to high-cost
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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.
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
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
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).
23 H. Conf. Rept. 103–652, at 162 (1994).
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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 DoddFrank 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.
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V. Section-by-Section Analysis
A. Regulation X
Section 1024.20 List of
Homeownership Counseling
Organizations
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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
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.
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 § 1024.20 generally
would have required a lender to provide
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.
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 DoddFrank 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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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 § 1024.20 also would have set
forth additional requirements related to
the content and delivery of the list. The
Bureau is finalizing proposed § 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 § 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 § 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
§ 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.
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 purchasemoney 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
26 12
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6863
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 § 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 purchasemoney 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-
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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
§ 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 § 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 § 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
§ 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
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counselors or counseling organizations
made available by the Bureau for use by
lenders in complying with § 1024.20, or
the most current list maintained by
HUD of homeownership counselors or
counseling organizations certified or
otherwise approved by HUD. Proposed
§ 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
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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 upto-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
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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.
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., prepurchase, 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
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).
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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 § 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 § 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 § 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
§ 1024.20(a)(1)(i) and (ii) and proposed
§ 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
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
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6865
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.
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 § 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
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.
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
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the Web site portal will automatically
create lists that include the relevant
homeownership counseling
organizations, the Bureau is not
finalizing proposed § 1024.20(a)(2).
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 § 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.
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.
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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 § 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 § 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
§ 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
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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
§ 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
§ 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
§ 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 § 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 § 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
§ 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 § 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 § 1024.20(a)(5). As a
result, the provision would have
required that a loan applicant receive
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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
§ 1024.20(a)(5) substantially as
proposed, except that it is renumbering
the provision as § 1024.20(a)(3).
srobinson on DSK4SPTVN1PROD with
20(a)(4)
RESPA section 5(c) does not specify
how the required list must be delivered.
Proposed § 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 ESign 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 § 1024.23 of Regulation X,
which provides for the applicability of
the E-Sign Act to RESPA. For these
reasons, the Bureau is finalizing
§ 1024.20(a)(6) substantially as
proposed, but is renumbering it as
§ 1024.20(a)(4) for organizational
purposes.
20(a)(5)
Proposed § 1024.20(a)(7) would have
provided that the lender is not required
30 15
U.S.C. 7001(c).
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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 § 1024.20(a)(7) substantially
as proposed, but is renumbering it as
§ 1024.20(a)(5).
20(a)(6)
Proposed § 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
§ 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
§ 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 § 1024.20(a)(8) is
consistent with Regulation Z
§ 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 § 1024.20(a)(8) as proposed,
except for making minor edits for clarity
and consistency and renumbering the
provision as § 1024.20(a)(6).
20(b) Open-End Lines of Credit (HomeEquity 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 § 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
§ 1024.20(c) below). Proposed
§ 1024.20(b) would have permitted a
lender or broker, for an open-end credit
plan subject to the requirements of
§ 1024.20, to comply with the timing
and delivery requirement of either
§ 1024.20(a), or with the timing and
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delivery requirements set out in
Regulation Z § 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 § 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
§ 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
§ 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 § 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
§ 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, § 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 FHAapproved HECM mortgagees to provide
HECM applicants with a list of HUDapproved 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 § 1024.20.
31 12
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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 § 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 § 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 § 1024.20 is
largely duplicative of HECM
requirements and may not provide
additional, useful information for
32 Consumer Financial Protection Bureau, Reverse
Mortgage Report, at 10–11 (June 2012), available at
http://files.consumerfinance.gov/a/assets/
documents/
201206_cfpb_Reverse_Mortgage_Report.pdf.
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borrowers of other types of reverse
mortgages, final § 1024.20(c)(1) provides
an exemption for reverse mortgages
pursuant to the Bureau’s authority
under RESPA section 19(a).
20(c)(2) Timeshare Plans
The Bureau generally proposed in
§ 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.
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 § 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
33 Commenters stated that typically if a consumer
defaults, the only consequence is that the consumer
loses the timeshare interest.
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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 § 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 highcost mortgages. The Bureau would have
revised § 1026.1(d)(5) for consistency
with the Bureau’s proposed
amendments to §§ 1026.32 and 1026.34
for high-cost mortgages. Specifically, the
Bureau proposed to revise § 1026.1(d)(5)
to include the term ‘‘open-end credit
plan’’ and to remove the term ‘‘closedend’’ 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
§ 1026.1(d)(5) and is finalizing the
provision as proposed, with one nonsubstantive change to reflect the DoddFrank Act’s adoption of the term ‘‘highcost mortgage’’ to refer to a transaction
that meets any of the coverage tests set
forth in § 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 highcost 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
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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 § 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 § 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
§ 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
§ 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 § 1026.31(c)(1).
The commenter, a consumer advocacy
organization, urged the Bureau to
eliminate the language in
§ 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, § 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
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under TILA section 105(a) to remove
this provision. Given that the DoddFrank 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
§ 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
§ 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
§ 1026.31(c)(1)(iii). The Board
prescribed § 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 § 1026.31(c)(1) generally
as proposed (i.e., to reflect the
provision’s expanded application to
HELOCs), with only minor revisions for
clarity.
In addition, the Bureau is revising
comment 31(c)(1)(i)–2 for clarification
purposes and consistency with final
§ 1026.34(a)(10). Upon further
consideration of these provisions, the
Bureau recognizes that the prohibition
of financing points and fees in
§ 1026.34(a)(10) prohibits the financing
of any points and fees, as defined in
§ 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, § 1026.34(a)(10) permits the
financing of bona fide third-party
charges, such as fees charged by a third34 See
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6869
party counselor in connection with the
consumer’s receipt of pre-loan
counseling for a high-cost mortgage
under § 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.
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
35 15
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U.S.C. 1639(v).
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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
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
36 See
15 U.S.C. 1635 and 1639(n).
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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 60day 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 § 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
§ 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
PO 00000
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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
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, § 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.’’).
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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.
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
§ 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, § 1026.31(h) and its
accompanying commentary use the
terms ‘‘consummation or account
opening’’ and ‘‘loan or credit plan’’ to
clarify that § 1026.31(h) applies to both
closed-end and open-end credit.
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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 homeequity mortgage loans with APRs or
points and fees that exceeded the
thresholds prescribed by TILA section
103(aa), as implemented by existing
§ 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
§ 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
§ 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 § 1026.32(a)(1) to mean
any consumer credit transaction, other
than a reverse mortgage transaction as
defined in § 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 § 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
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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
§ 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 selfeffectuating in the absence of
regulations.
The Bureau received no comments
concerning other aspects of proposed
§ 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 § 1026.32(a)(1), including its
cross-reference to § 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 DoddFrank 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
§ 1026.32(a)(1)(i).
TILA section 103(bb)(1)(A)(i), as
added by section 1431 of the DoddFrank Act, essentially codifies the twotiered APR test for HOEPA coverage
adopted by the Board in 2001, with
certain changes. Specifically, TILA
section 103(bb)(1)(A)(i):
38 66
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• 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 smallerdollar-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
§ 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 § 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 closedend transactions if Alternative 2 were
adopted.
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
39 See 77 FR 49091, 49100–03 (Aug. 15, 2012)
(discussing the transaction coverage rate).
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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 § 1026.32(a)(1)(i).
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
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 openend 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
40 See 77 FR 54843 (Sept. 6, 2012) (discussing the
TILA–RESPA Integration Proposal); 77 FR 54844
(Sept. 6, 2012) (discussing the HOEPA Proposal).
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).
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include only interest.42 One consumer
group commenter urged the Bureau to
make the APR coverage test more
consistent between closed- and openend 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 closedend transactions will unduly encourage
creditors to steer consumers toward
HELOCs, and particularly to HELOCs
with excessively high closing costs.
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 noninterest charges will be reflected in the
APR for closed-end, but not for openend, 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
§ 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
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 § 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 §§ 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
§ 1026.40.
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);
§ 1026.14(b).
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analyzed. Thus, the Bureau believes that
comments concerning the disparity
between the APR for closed- and openend 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
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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 § 1026.35.45
Section 1026.35 prohibits certain acts
or practices in connection with higherpriced 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
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 lowrisk 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
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
§ 1026.40 (§ 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.
45 See 73 FR 44522, 44534–36 (July 30, 2008).
46 Existing § 1026.35 contains repayment ability
requirements and other restrictions for higherpriced mortgage loans. The Bureau’s 2013 ATR
Final Rule is removing those requirements in
connection with its implementation in § 1026.43 of
the Dodd-Frank Act’s ability-to-repay and qualified
mortgage provisions. However, § 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.
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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:
• Comment 35(a)(2)–1 states that data
reported in the Freddie Mac Primary
Mortgage Market Survey® (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.
• 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 § 1026.35.49
• Comment 35(a)(2)–3 provides that,
for purposes of determining higherpriced mortgage loan coverage under
§ 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
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 § 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 § 1026.35 concerning the average
prime offer rate for other reasons. The crossreferences in commentary to § 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.
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.
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).
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6873
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 § 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
§ 1026.32(a)(1)(i) pursuant to the same
guidance set forth in § 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 § 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 § 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.
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
50 As already noted, the methodology for deriving
the average prime offer rate is based on Freddie
Mac’s Primary Mortgage Market Survey®, 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); http://
www.ffiec.gov/ratespread/default.aspx.
51 Section 1026.32(a)(3) as adopted in the final
rule was proposed as § 1026.32(a)(2).
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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 annuallyadjusting, 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 closedend 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 ratespread 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 closedand 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.
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 § 1026.32(a)(1)(i)
(i.e., eight percentage points over the
yield on comparable Treasuries).
52 Pursuant to § 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.
53 As noted below, however, several industry
commenters objected to using the same average
prime offer rate for closed- and open-end credit
transactions.
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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 § 1026.32(a)(1)(i) would be 9.70
percent.
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
§ 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 § 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
§ 1026.32(a)(3) based on the higher of
the initial interest rate or the fullyindexed 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
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(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
§ 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 crossreference 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.
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 § 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 § 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 higherpriced mortgage loan coverage
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 § 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.
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determinations under § 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
§ 1026.32(a)(1)(i).
The Bureau acknowledges, as noted
by a commenter, that the APR
calculation required by § 1026.32(a)(3)
for determining HOEPA coverage for a
variable-rate transaction generally
requires a creditor to use the fullyindexed 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.
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
56 The higher-priced mortgage loan thresholds in
§ 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.
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.
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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 fixedrate, 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
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 highcost 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 percentagepoint threshold for HOEPA coverage for
most first-lien transactions (i.e., all firstlien, real property-secured transactions,
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.
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6875
as well as first-lien, personal propertysecured transactions for $50,000 or
more) is 6.5 percentage points over the
average prime offer rate.
Proposed § 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 § 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 highcost 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
§ 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
§ 1026.32(a)(1)(i)(A) would inhibit
access to credit and suggested various
adjustments.60 For example, several
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.
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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.
The Bureau adopts the 6.5 percentagepoint APR threshold for most first-lien
transactions in § 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,
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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 percentagepoint spread to a 6.5 percentage-point
spread will result in unwarranted
HOEPA coverage. Indeed, as noted in
the section-by-section analysis of
§ 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
§ 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.
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
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).
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 § 1026.32(a)(2).
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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.
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
63 See Selected Characteristics of New
Manufactured Homes Placed by Region, 2011, at
http://www.census.gov/construction/mhs/pdf/
char11.pdf.
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provide an option for titling the
manufactured home either as personal
or real property.
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
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
64 See, e.g., Ronald A. Wirtz, Home, sweet
(manufactured?) home, Fedgazette (July 2005),
available at http://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).
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
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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 highcost mortgage APR threshold. Some
industry commenters argued that they
would not originate high-cost mortgages
because complying with the restrictions
and requirements (particularly the preloan 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 preloan 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
§ 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
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).
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6877
8.5 percentage points. As discussed in
the section-by-section analysis of
§ 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 § 1026.32(a)(1)(i)(B) would
have implemented the APR threshold
for smaller first-lien loans secured by
personal property. Proposed
§ 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 § 1026.32(a)(1)(i)(B)
would have referred to a ‘‘first-lien
transaction’’ instead of a ‘‘first
mortgage.’’ In addition, proposed
§ 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
§ 1026.32(a)(1)(i)(B) should be
interpreted consistently with the
guidance for ‘‘total loan amount’’ set
forth in proposed § 1026.32(b)(6) and
comment 32(b)(6)–1.66
The HOEPA proposal noted that firstlien 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
§ 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
§ 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 sectionby-section analysis of
§ 1026.32(a)(1)(i)(A) above. However, at
least one industry commenter requested
66 Proposed § 1026.32(b)(6) and comment
32(b)(6)–1 are re-numbered as § 1026.32(b)(4) and
comment 32(b)(4)–1 in the Bureau’s 2013 ATR and
HOEPA Final Rules.
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that the Bureau adjust the $50,000 cutoff 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
§ 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.
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.
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.
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.
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As provided by TILA section
103(bb)(1)(i)(A)(I), the final rule adopts
in § 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 smallerdollar, 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 propertysecured loans generally have had costs
roughly 2 to 5 percent higher than
mortgages (as noted in the section-bysection analysis of § 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
69 See National Conference of Commissioners on
Uniform State Laws, Uniform Manufactured
Housing Act (July 2012), at http://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.’’
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appropriate to effectuate the higher APR
threshold for smaller-dollar, personalproperty 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.
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 renumbers 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 § 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 § 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
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mortgage’’) for consistency with
Regulation Z.
Industry and consumer group
commenters generally made the same
comments concerning proposed
§ 1026.32(a)(1)(i)(C) that they did for
§ 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 percentagepoint 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
§ 1026.32(a)(1)(i)(C) as proposed, for all
of the reasons articulated in the sectionby-section analysis of
§ 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)
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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
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from $611, where it had been set for
2012.70
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 § 1026.32(a)(1)(ii)(A) and (B).
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 DoddFrank 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
70 See 77 FR 69738 (Nov. 6, 2012) (adding
comment 32(a)(1)(ii)–2.xviii).
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 § 1026.32(b)(1)(D) (closed-end
credit transactions) and (b)(2)(D) (open-end credit
plans).
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6879
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 DoddFrank Act’s amendments to the
definition of points and fees. (As
discussed in the section-by-section
analysis of § 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
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
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 § 1026.32(b)(1) below.
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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
§ 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 § 1026.32(b)(1) and (2)
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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
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.
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fees thresholds as set forth in the
statute.
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
§ 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
§ 1026.43(b)(5)). See the section-bysection analysis of § 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
The Bureau also clarifies in
§ 1026.32(a)(1)(ii) and new comment
32(a)(1)(ii)–3 that the $20,000 amount in
§ 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
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
§ 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
§ 1026.43(e)(3)(i) and comment 43(e)(3)(i)–2, as
adopted in the 2013 ATR Final Rule.
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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
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 DoddFrank 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 § 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 sectionby-section analysis of § 1026.32(b)(4)
below for a discussion of the definition
of ‘‘total loan amount.’’
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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
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 § 1026.43(e)(3)(i) and (ii), as adopted in
the 2013 ATR Final Rule.
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).
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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 § 1026.32(a)(1)(ii). First,
proposed comment 32(a)(1)(ii)–1 would
have replaced references to the preDodd-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
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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 § 1026.32(a)(1)(iii) would
have implemented TILA section
103(bb)(1)(A)(iii) with several minor
clarifications. First, proposed
§ 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
§ 1026.32(a)(1)(iii) to both closed- and
open-end transactions, and for
consistency with Regulation Z.
Proposed § 1026.32(a)(1)(iii) also would
have cross-referenced the definition of
prepayment penalty in proposed
§ 1026.32(b)(8).77 Finally, proposed
§ 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.
Proposed comment 32(a)(1)(iii)–1
would have explained how the coverage
tests for high-cost mortgages in
§ 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
§ 1026.32(d)(6). Specifically, proposed
comment 32(a)(1)(iii)–1 would have
explained that § 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 § 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
§ 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
77 The Bureau is finalizing proposed
§ 1026.32(b)(8) as § 1026.32(b)(6).
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penalties that exceed two percent of any
amount prepaid. Taken together,
§ 1026.32(a)(1)(iii) and § 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
§ 1026.32(a)(2).
Proposed comment 32(a)(1)(iii)–1 also
cross-referenced proposed § 226.43(g) in
the Board’s 2011 ATR Proposal. Under
that proposal, § 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 statutorilyprescribed 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
The Bureau’s HOEPA proposal noted
that the cumulative effect of the DoddFrank 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 DoddFrank 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
Proposed comment 32(a)(1)(iii)–2
would have provided guidance
concerning the calculation of
prepayment penalties for HELOCs for
purposes of proposed
§ 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
78 See
76 FR 27390, 27472–78 (May 11, 2011).
These provisions are being finalized in the Bureau’s
2013 ATR Final Rule.
79 See the section-by-section analysis of
§ 1026.32(b)(1) and (2) below.
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§ 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
§ 1026.32(a)(1)(iii) and comments
32(a)(1)(iii)–1 and –2. A few industry
commenters either stated that the 36month 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 sectionby-section analysis of § 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
The Bureau is adopting
§ 1026.32(a)(1)(iii) and its commentary
substantially as proposed, with minor
adjustments to reflect both the high-cost
mortgage coverage exemptions in
§ 1026.32(a)(2) and certain other renumbering 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
§ 1026.32(a)(1)(iii) substantially as
proposed, the Bureau adopts in
§ 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
§ 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 § 1026.32(b)(6) below.
32(a)(2)
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
§ 1026.32(b)(6)(i) and (ii) below.
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Exemptions
As noted in the section-by-section
analysis of § 1026.32(a)(1) above, the
Dodd-Frank Act expanded HOEPA
coverage by providing in TILA section
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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., purchasemoney mortgage loans) and HELOCs,
while retaining the exemption of reverse
mortgage transactions.81
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.
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General
Several commenters requested an
exemption for HELOCs. They argued
that exempting HELOCs would not
interfere with the purpose of the highcost 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.
81 The HOEPA Proposal proposed to implement
the Dodd-Frank Act’s amendments to HOEPA
coverage exclusively in § 1026.32(a)(1) and to
implement in § 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,
§ 1026.32(a)(2) is used for certain coverage
exemptions and § 1026.32(a)(3) is used to
implement the APR calculation for HOEPA
coverage. Accordingly, the Bureau addresses
comments received concerning proposed
§ 1026.32(a)(2) in the section-by-section analysis of
§ 1026.32(a)(3) 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 highcost 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.
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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 §§ 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
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discussed in the section-by-section
analysis of § 1026.32(a)(1)(i)(A) and (B)
above, Congress understood that
expanding HOEPA to cover purchasemoney 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
§ 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
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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) purchasemoney 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 § 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
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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 § 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 propertysecured 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
§ 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.
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
83 See Selected Characteristics of New
Manufactured Homes Placed by Region, 2011, at
http://www.census.gov/construction/mhs/pdf/
char11.pdf.
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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
§ 1026.32(a)(1) (i.e., moving it from
existing § 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 § 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 § 1026.32(a)(2)(i).
32(a)(2)(ii)
Construction Loans
As previously noted, TILA section
103(bb)(1), as amended by the DoddFrank Act, expanded HOEPA coverage
to include purchase-money transactions.
Proposed § 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
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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-topermanent’’ 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 § 1026.32 for
construction-only loans and the
construction phase of construction-topermanent 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-topermanent 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 § 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
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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 § 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
§ 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 higherpriced 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
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from HOEPA is warranted for
construction loans.
The Bureau is adopting
§ 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-topermanent 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
§§ 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
§ 1026.32(a)(2)(ii) exemption applies to
both a construction-only loan and to the
construction phase of a construction-topermanent 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
§ 1026.17(c)(6)(ii), a creditor has the
option to treat a construction-topermanent 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
§ 1026.32, the Bureau recognizes that
the rule could present an incentive to
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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-topermanent financing.
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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
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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.
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
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
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.’’
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.
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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 § 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
§ 1026.32(a)(2)(iii) concerning loans
originated by HFAs where the HFA is
the creditor, the Bureau adopts in
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§ 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 § 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 fixedrate 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
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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
§ 1026.32(a)(2) and related commentary.
Specifically, proposed § 1026.32(a)(2)(i)
would have implemented TILA section
103(bb)(1)(B)(i) concerning fixed-rate
transactions; proposed
§ 1026.32(a)(2)(ii) would have
implemented TILA section
103(bb)(1)(B)(ii) concerning transactions
that vary with an index; and proposed
§ 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 § 1026.32(a)(2) above, the
Bureau retains existing § 1026.32(a)(2)
in the final rule to provide certain
categorical coverage exemptions. Thus,
the Bureau adopts proposed
§ 1026.32(a)(2) and comments 32(a)(2)–
1 and –2 as § 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 § 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 § 1026.32(a)(2)
referenced both phrases because, as
noted in the section-by-section analysis
of proposed § 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 § 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 § 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
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opening’’ and therefore incorporates
that phrase into final § 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 § 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 § 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
§ 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
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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 § 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 § 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 § 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
§ 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 § 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
§ 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 renumbers 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
§ 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
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Bureau received no comments
specifically addressing proposed
§ 1026.32(a)(2)(i). The Bureau thus
finalizes § 1026.32(a)(3)(i) substantially
as proposed, but with the clarification
noted in the section-by-section analysis
of § 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 § 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 § 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
§ 1026.32(a)(3)(iii) below. Specifically,
because interest rates for variable-rate
HELOCs are prohibited under TILA
section 137(a) (as implemented by
§ 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 § 1026.32(a)(2)(ii)
would have clarified that APRs for
variable-rate HELOCs should be
determined according to
§ 1026.32(a)(2)(ii) rather than
§ 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
§ 1026.32(a)(2)(ii) and thereby avoid
classification as a high-cost mortgage.
However, subsequent to consummation,
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the creditor could set a higher index
rate, at any time, which would have
triggered coverage as a high-cost
mortgage under § 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
§ 1026.32(a)(2)(iii), not
§ 1026.32(a)(2)(ii).
Proposed comment 32(a)(2)–3 would
have provided additional guidance on
the application of § 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
§ 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 § 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
§ 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 variablerate 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 § 1026.17(c)(1)–10.i.
The commenter stated that performing
an extra calculation would be extremely
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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 § 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
§ 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
§ 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
§ 1026.32(a)(2)(iii) to look to the
maximum rate for certain variable-rate
transactions and general uncertainty
about the application of proposed
§ 1026.32(a)(2) to HELOCs.
The Bureau is renumbering proposed
§ 1026.32(a)(2)(ii) as § 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
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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 § 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
§ 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
§ 1026.40(f) already prohibit variablerate HELOCs from employing an index
that varies outside the creditor’s control.
Use of internal indices is also restricted
or prohibited for closed-end, variablerate 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). Singlefamily 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
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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 internallydefined indices. Adopting a requirement
in this rule that effectively would
require all creditors originating variablerate 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
Comment 32(a)(3)–3 provides
guidance concerning the application of
§ 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
§ 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 § 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.
87 See
76 FR 44226 (July 22, 2011).
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 closedend 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.
88 In
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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,
§ 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 § 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 § 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 homesecured open-end credit in § 1026.40(f).
32(a)(3)(iii)
Proposed § 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 § 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 § 1026.32(a)(2)(iii)
applies when the interest rates
applicable to a transaction may vary,
except as described in proposed
§ 1026.32(a)(2)(ii). Proposed comment
32(a)(2)–3.ii thus would have specified
that proposed § 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.
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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
§ 1026.40(f) and its commentary
generally prohibit creditors from
changing the APR on a HELOC unless
the change is based on a publiclyavailable 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
§ 1026.32(a)(2)(iii) primarily to certain
types of closed-end credit transactions.
The Bureau observed that applying
proposed § 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
§ 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 § 1026.32(a)(2)(iii) apart from
those addressed above in connection
with § 1026.32(a)(3)(ii) and thus
finalizes § 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
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 highcost 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
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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
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 § 226.32(b)(1) and (2) 91 and
to revise and add corresponding
commentary.92
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).
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
§ 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 highcost 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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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, § 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 § 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 § 1026.32(b)(1) and (2) to the
high-cost mortgage context.
The Bureau received numerous
comments concerning proposed
§ 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
§ 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
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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
§ 1026.32(b)(1). Regulation text and
commentary for § 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 § 1026.32(b)(1) defines
‘‘points and fees’’ by listing included
charges in § 1026.32(b)(1)(i) through
(iv).93 As discussed below, the Board’s
2011 ATR Proposal would have revised
§ 226.32(b)(1)(i) through (iv) to reflect
amendments to TILA by the Dodd-Frank
Act, and would have added new
§ 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 § 1026.32(b)(1), as
that provision was proposed in the 2011
ATR Proposal, to clarify that the charges
listed in proposed § 1026.32(b)(1) are
the charges that must be included in the
points and fees calculation for closedend credit transactions. (The Bureau’s
2012 HOEPA Proposal would have set
forth a separate definition of points and
fees for HELOCs in proposed
§ 1026.32(b)(3)).94 As discussed below,
the Bureau is adopting proposed
§ 1026.32(b)(1) in the 2013 ATR Final
Rule with certain changes to respond to
concerns raised by commenters. Final
§ 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
Payable at or before consummation.
Section 1431(a) of the Dodd-Frank Act
amended the HOEPA points and fees
coverage test in TILA section
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 (§ 1026.32(b)(1)(i)), all compensation paid to
mortgage brokers (§ 1026.32(b)(1)(i)), real estaterelated charges paid to an affiliate of the creditor
(§ 1026.32(b)(1)(iii)), and certain credit insurance
and debt suspension and cancellation premiums
(§ 1026.32(b)(1)(iv)).
94 The Bureau adopts proposed § 1026.32(b)(3) as
§ 1026.32(b)(2) in this final rule.
95 Proposed § 1026.32(b)(3) defining points and
fees for HELOCs is finalized as § 1026.32(b)(2) in
the 2013 HOEPA Final Rule. See the section-bysection analysis of § 1026.32(b)(2) below.
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6891
103(bb)(1)(A)(ii) by providing for the
inclusion in points and fees for highcost 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
§ 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
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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
§ 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.’’
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
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 § 1026.32(b)(1) therein.
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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
§ 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 § 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.
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 § 1026.32(b)(1)(i). The DoddFrank 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 § 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
§ 1026.4(a) and 1026.4(b).’’ 12 CFR
1032(b)(1)(i). Because § 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
§ [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
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.
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§ 1026.32(b)(1)(i), proposed
§ 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 § 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 § 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, § 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 § 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
§ 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 § 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
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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
§ 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 § 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 § 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 § 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 § 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.
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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
§ 1026.32(b)(1)(i). For organizational
purposes, the Board in its 2011 ATR
Proposal set forth new
§ 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 § 226.32(b)(1)(i)(A)
without change as § 1026.32(b)(1)(i)(A).
The Bureau adopts proposed
§ 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 noninterest 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
§ 226.32(b)(1)(i)(B), as an exclusion from
the finance charge prong of points and
fees.100
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
99 These
other items are discussed in the sectionby-section analysis of § 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
§ 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 § 1026.32(b)(1)(i)(C) below.
101 Id. at 27400–01.
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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.
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 § 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
§ 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.
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
102 As discussed in the section-by-section analysis
of § 1026.(b)(1)(i)(C), however, the Bureau received
comments concerning the different treatment for
points and fees of government and PMI premiums.
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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 § 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
The 2012 HOEPA Proposal’s proposed
§ 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
103 See
76 FR 27390, 27401–02 (May 11, 2011).
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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 upfront 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
§ 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 sectionby-section analysis of
§ 1026.32(b)(1)(i)(C) in the 2013 ATR
Final Rule. As discussed in greater
detail therein, the Bureau is finalizing
proposed § 1026.32(b)(1)(i)(B)
concerning PMI premiums in the 2013
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ATR Final Rule substantially as
proposed in the 2011 ATR and 2012
HOEPA Proposals. However, the Bureau
finalizes the provision in
§ 1026.32(b)(1)(i)(C) and divides it into
two parts. The first part,
§ 1026.32(b)(1)(i)(C)(1), addresses PMI
premiums payable at or before
consummation. The second part,
§ 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.
32(b)(1)(i)(D)
TILA section 103(bb)(1)(A)(ii)
excludes from points and fees for
104 See Department of Housing and Urban
Development, Mortgagee Letter 12–4 (Mar. 6, 2012),
available at http://portal.hud.gov/hudportal/
documents/huddoc?id=12-04ml.pdf.
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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 thirdparty 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
§ 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
§ 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 § 1026.32(b)(5)(i) in a
manner that mirrored in all significant
respects the Board’s proposed
§ 226.43(e)(3)(ii)(A) concerning such
charges.107
Specifically, proposed
§ 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 § 1026.32(b)(1)(i)(B). As just
discussed in the section-by-section
analysis of § 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 § 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
105 See
76 FR 27390, 27465 (May 11, 2011).
was noted in § 1026.34(a)(5)(v) and
comment 34(a)(5)(v)-1 of the 2012 HOEPA Proposal.
107 Proposed § 1026.32(b)(5)(i) in the 2012
HOEPA Proposal would have differed from the
proposed § 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 § 1026.32(b)(2)(i)(D)
below.
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§ 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.
Proposed comment 32(b)(5)(i)–1
would have clarified that § 1026.36(a)(1)
and comment 36(a)–1 provide
additional guidance concerning the
meaning of the term ‘‘loan originator’’
for purposes of § 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 § 1026.32(b)(5)(i). First,
several industry commenters stated that
Congress intended the ‘‘bona fide thirdparty 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-bysection analysis of § 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
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 highcost 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
108 See id. (proposing the same caveat to the bona
fide third-party charge exclusion for qualified
mortgages).
109 This issue is also addressed in the section-bysection analysis of § 1026.32(b)(1)(iii) in the 2013
ATR Final Rule.
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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 § 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.
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To ensure a streamlined definition of
points and fees in the high-cost
mortgage and qualified mortgage
contexts, the Bureau is adopting
proposed § 226.43(e)(3)(ii)(A) (from the
2011 ATR Proposal) and proposed
§ 1026.32(b)(5)(i) as applied to closedend credit transactions (from the 2012
HOEPA Proposal) in
§ 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 thirdparty charge exclusion would be
counted in points and fees, if at all, as
a finance charge.
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
§ 1026.32(b)(1)(i)(C). In addition, the
2013 ATR Final Rule adopts
§ 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 § 1026.32(b)(1)(iii)
and (iv). As adopted in the 2013 ATR
Final Rule, § 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 § 1026.32(b)(1)(i)(C) (PMI
premiums), (iii) (certain real estaterelated 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
110 The exclusion of bona fide third-party charges
from points and fees for HELOCs, which also was
proposed in § 1026.32(b)(5)(i) in the 2012 HOEPA
Proposal, is finalized in § 1026.32(b)(2)(1)(D), as
discussed below.
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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 thirdparty 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
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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
§ 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 § 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 highcost 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
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).
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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.
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
§ 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
§ 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
§ 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 openend credit transaction without such
discount points would not exceed by
more than one percentage point the
average prime offer rate as defined in
§ 1026.35(a)(2). Proposed
§ 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 highcost mortgage points and fees
calculation for transactions secured by
personal property. Thus, under
proposed § 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.).
Proposed comment 32(b)(5)(ii)–1
would have clarified how to determine,
for purposes of the bona fide discount
point exclusion in proposed
§ 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,
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
§ 1026.32(b)(5)(ii)(B)(1) and (2). See the section-bysection analysis of § 1026.32(b)(1)(i)(F) below.
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respectively. Specifically, proposed
comment 32(b)(5)(ii)–1 would have
provided that the average prime offer
rate for proposed
§ 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 crossreferenced 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 statutorilyprescribed 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.
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
114 The Bureau also received comment on its
proposed definition of the phrase ‘‘bona fide.’’
Those comments are addressed in the section-bysection analysis of § 1026.32(b)(3) below.
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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
§ 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 § 226.43(e)(3)(ii)(B)
(from the 2011 ATR Proposal) and
proposed § 1026.32(b)(5)(ii)(A)(1) and
(2) as applied to closed-end credit
transactions (from the 2012 HOEPA
Proposal) in § 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 § 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 nonsubstantive changes. The 2013 ATR
Final Rule also adopts as comment
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32(b)(1)(i)(E)–1 a cross-reference to
§ 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
§ 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
§ 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.
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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 highcost 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.
In the 2012 HOEPA Proposal, the
Bureau proposed to implement the
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).
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exclusion of up to one bona fide
discount point from points and fees for
high-cost mortgages in
§ 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
§ 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
§ 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 openend credit transaction without such
discount point would not exceed by
more than two percentage points the
average prime offer rate, as defined in
§ 1026.35(a)(2). Proposed
§ 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.
The Bureau did not receive any
comments on proposed
§ 1026.32(b)(5)(ii)(B)(1) and (2) other
than those addressed in the section-bysection analysis of § 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
§ 226.43(e)(3)(ii)(C) (from the 2011 ATR
Proposal) and proposed
§ 1026.32(b)(5)(ii)(B) as applied to
closed-end credit transactions (from the
2012 HOEPA Proposal) in
§ 1026.32(b)(1)(i)(F). Section
1026.32(b)(1)(i)(F)(1) sets forth the
general rule, and § 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 crossreference 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
117 See
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of § 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
§ 1026.32(b)(1)(ii), which requires that
all compensation paid by consumers
directly to mortgage brokers be included
in points and fees, but does not address
compensation paid by creditors to
mortgage brokers or compensation paid
by any company to individual
employees (such as loan officers who
are employed by a creditor or mortgage
broker).
The Dodd-Frank Act substantially
expanded the scope of compensation
included in points and fees for both the
high-cost mortgage threshold in HOEPA
and the qualified mortgage points and
fees limits. Section 1431 of the DoddFrank Act amended TILA to require that
‘‘all compensation paid directly or
indirectly by a consumer or creditor to
a mortgage originator from any source,
including a mortgage originator that is
also the creditor in a table-funded
transaction,’’ be included in points and
fees. TILA section 103(bb)(4)(B)
(emphasis added). Under amended
TILA section 103(bb)(4)(B),
compensation paid to anyone that
qualifies as a ‘‘mortgage originator’’ is to
be included in points and fees.119 Thus,
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.
119 ‘‘Mortgage originator’’ is generally defined to
include ‘‘any person who, for direct or indirect
compensation or gain, or in the expectation of
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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.
This change is one of several
provisions in the Dodd-Frank Act that
focus on loan originator compensation
and regulation, in apparent response to
concerns that industry compensation
practices contributed to the mortgage
market crisis by creating strong
incentives for brokers and retail loan
officers to steer consumers into higherpriced loans. Specifically, loan
originators were often paid a
commission by creditors that increased
with the interest rate on a transaction.
These commissions were funded by
creditors through the increased revenue
received by the creditor as a result of the
higher rate paid by the consumer and
were closely tied to the price the
creditor expected to receive for the loan
on the secondary market as a result of
that higher rate.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.
The Dodd-Frank Act took a number of
steps to address loan originator
compensation issues, including: (1)
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).
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).
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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 § 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
§ 226.32(b)(1)(ii) did not include the
phrase ‘‘from any source.’’ The Board
noted that the statute covers
compensation paid ‘‘directly or
indirectly’’ to the loan originator, and
concluded that it would be redundant to
cover compensation ‘‘from any source.’’
Second, for consistency with Regulation
Z, the proposal used the term ‘‘loan
originator’’ as defined in § 226.36(a)(1),
rather than the term ‘‘mortgage
originator’’ that appears in section 1401
of the Dodd-Frank Act. See TILA section
103(cc)(2). The Board explained that it
interpreted the definitions of mortgage
originator under the statute and loan
originator under existing Regulation Z
to be generally consistent, with one
exception that the Board concluded was
not relevant for purposes of the points
and fees thresholds. Specifically, the
statutory definition refers to ‘‘any
person who represents to the public,
through advertising or other means of
communicating or providing
information (including the use of
business cards, stationery, brochures,
signs, rate lists, or other promotional
items), that such person can or will
provide’’ the services listed in the
definition (such as offering or
negotiating loan terms), while the
existing Regulation Z definition does
not include persons solely on this basis.
The Board concluded that it was not
necessary to add this element of the
definition to implement the points and
fees calculations anyway, reasoning that
the calculation of points and fees is
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concerned only with loan originators
that receive compensation for
performing defined origination
functions in connection with a
consummated loan. The Board noted
that a person who merely represents to
the public that such person can offer or
negotiate mortgage terms for a consumer
has not yet received compensation for
that function, so there is no
compensation to include in the
calculation of points and fees for a
particular transaction.
In the proposed commentary, the
Board explained what compensation
would and would not have been
included in points and fees under
proposed § 226.32(b)(1)(ii). The Board
proposed to revise existing comment
32(b)(1)(ii)–1 to clarify that
compensation paid by either a consumer
or a creditor to a loan originator, as
defined in § 1026.36(a)(1), would be
included in points and fees. Proposed
comment 32(b)(1)(ii)–1 also stated that
loan originator compensation already
included in points and fees because it
is included in the finance charge under
§ 226.32(b)(1)(i) would not be counted
again under § 226.32(b)(1)(ii).
Proposed comment 32(b)(1)(ii)–2.i
stated that, in determining points and
fees, loan originator compensation
includes the dollar value of
compensation paid to a loan originator
for a specific transaction, such as a
bonus, commission, yield spread
premium, award of merchandise,
services, trips, or similar prizes, or
hourly pay for the actual number of
hours worked on a particular
transaction. Proposed comment
32(b)(1)(ii)–2.ii clarified that loan
originator compensation excludes
compensation that cannot be attributed
to a transaction at the time of
origination, including, for example, the
base salary of a loan originator that is
also the employee of the creditor, or
compensation based on the performance
of the loan originator’s loans or on the
overall quality of a loan originator’s loan
files. Proposed comment 32(b)(1)(ii)–2.i
also explained that compensation paid
to a loan originator for a covered
transaction must be included in the
points and fees calculation for that
transaction whenever paid, whether at
or before closing or any time after
closing, as long as the compensation
amount can be determined at the time
of closing. In addition, proposed
comment 32(b)(1)(ii)–2.i provided three
examples of compensation paid to a
loan originator that would have been
included in the points and fees
calculation.
Proposed comment 32(b)(1)(ii)–3
stated that loan originator compensation
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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
§ 1026.32(b)(1)(ii) and related
commentary in contained in the Board’s
2011 ATR Proposal, with only nonsubstantive edits that, for example,
clarified that the provisions would have
applied to any closed-end credit
transactions subject to § 1026.32.
The Bureau received a large number
of comments on proposed
§ 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.
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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
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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 highcost 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
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volume increases. In such plans,
commenters stated, the compensation
tier cannot be determined until monthor 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 highcost 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
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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 brightline exclusion from loan originator
compensation for any manufactured
home retailer or its employees. Other
commenters argued for replacing the
activities-based exclusion with a brightline 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 DoddFrank Act sought to put such abuses to
rest.121
Some consumer group commenters
strongly opposed the Bureau’s proposal
to apply, in the points and fees context,
TILA’s activities-based test for
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-bysection analysis of § 1026.32(b)(2)(ii) below.
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6901
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 activitiesbased 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.
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Accordingly, the 2013 ATR Final Rule
in adopting § 1026.32(b)(1)(ii) has
generally tracked the statutory language
and the Board’s proposal in the
regulation text, but has expanded the
commentary to provide more detailed
guidance to clarify what compensation
must be included in points and fees.
The Dodd-Frank Act requires inclusion
in points and fees of ‘‘all compensation
paid directly or indirectly by a
consumer or creditor to a mortgage
originator from any source, including a
mortgage originator that is also the
creditor in a table-funded transaction.’’
See TILA section 103(bb)(4)(B).
Consistent with the Board’s proposal,
revised § 1026.32(b)(ii) 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 § 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,
§ 1026.32(b)(1)(ii) also does not include
the language in proposed
§ 226.32(b)(1)(ii) that specified that the
provision also applies to a loan
originator that is the creditor in a tablefunded transaction. The Bureau has
concluded that that clarification is
unnecessary because a creditor in a
table-funded transaction is already
included in the definition of loan
originator in § 1026.36(a)(1). To clarify
what compensation must be included in
points and fees, revised
§ 1026.32(b)(1)(ii) specifies that
compensation must be included if it can
be attributed to the particular
transaction at the time the interest rate
is set. These limitations are discussed in
more detail below.
In adopting the general rule, the
Bureau carefully considered arguments
by industry commenters that loan
originator compensation should not be
included in points and fees because
other statutory provisions and rules
already regulate loan originator
122 See 2012 Loan Originator Proposal, 77 FR
55283–88.
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compensation, because loan originator
compensation is already included in the
costs of mortgage loans, and because
including loan originator compensation
in points and fees would push many
loans over the 3 percent cap on points
and fees for qualified mortgages (or even
over the points and fees limits for
determining whether a loan is a highcost mortgage under HOEPA), which
would increase costs and impair access
to credit.
The Bureau views the fact that other
provisions within the Dodd-Frank Act
address other aspects of loan originator
compensation and activity as evidence
of the high priority that Congress placed
on regulating such compensation. The
other provisions pointed to by the
commenters address specific
compensation practices that created
particularly strong incentives for loan
originators to ‘‘upcharge’’ consumers on
a loan-by-loan basis and particular
confusion about loan originators’
loyalties. The Bureau believes that the
inclusion of loan originator
compensation in points and fees has
distinct purposes. In addition to
discouraging more generalized rentseeking and excessive loan originator
compensation, the Bureau believes that
Congress may have been focused on
particular risks to consumers. Thus,
with respect to qualified mortgages,
including loan originator compensation
in points and fees helps to ensure that,
in cases in which high up-front
compensation might otherwise cause
the creditor and/or loan originator to be
less concerned about long-term
sustainability, the creditor is not able to
invoke a presumption of compliance if
challenged to demonstrate that it made
a reasonable and good faith
determination of the consumer’s ability
to repay the loan. Similarly in HOEPA,
the threshold triggers additional
consumer protections, such as enhanced
disclosures and housing counseling, for
the loans with the highest up-front
pricing.
The Bureau recognizes that the
method that Congress chose to
effectuate these goals does not ensure
entirely consistent results as to whether
a loan is a qualified mortgage or a highcost transaction. For instance, loans that
are identical to consumers in terms of
up-front costs and interest rate may
nevertheless have different points and
fees based on the identity of the loan
originator who handled the transaction
for the consumer, since different
individual loan originators in a retail
environment or different brokerage
firms in a wholesale environment may
earn different commissions from the
creditor without that translating in
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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.
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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,
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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
§ 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
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6903
transaction at the time the interest rate
is set. The Bureau is also revising
comment 32(b)(1)(ii)–1 to explain in
general terms when compensation
qualifies as loan originator
compensation that must be included in
points and fees. In particular,
compensation paid by a consumer or
creditor to a loan originator is included
in the calculation of points and fees,
provided that such compensation can be
attributed to that particular transaction
at the time the interest rate is set. The
Bureau also incorporates part of
proposed comment 32(b)(1)(ii)–3 into
revised comment 32(b)(1)(ii)–1,
explaining that loan originator
compensation includes amounts the
loan originator retains, and is not
dependent on the label or name of any
fee imposed in connection with the
transaction. However, revised comment
32(b)(1)(ii)–1 does not include the
example from proposed comment
32(b)(1)(ii)–3, which stated that, if a
loan originator imposes a processing fee
and retains the fee, the fee is loan
originator compensation under
§ 1026.32(b)(1)(ii) whether the originator
expends the fee to process the
consumer’s application or uses it for
other expenses, such as overhead. That
example may be confusing in this
context because a processing fee paid to
a loan originator likely would be a
finance charge under § 1026.4 and
would therefore already be included in
points and fees under § 1026.32(b)(1)(i).
Revised comment 32(b)(1)(ii)–2.i
explains that compensation, such as a
bonus, commission, or an award of
merchandise, services, trips or similar
prizes, must be included only if it can
be attributed to a particular transaction.
The requirement that compensation is
included in points and fees only if it can
be attributed to a particular transaction
is consistent with the statutory
language. The Dodd-Frank Act provides
that, for the points and fees tests for
both qualified mortgages and high-cost
mortgages, only charges that are ‘‘in
connection with’’ the transaction are
included in points and fees. See TILA
sections 103(bb)(1)(A)(ii) (high-cost
mortgages) and 129C(b)(2)(A)(vii)
(qualified mortgages). Limiting loan
originator compensation to
compensation that is attributable to the
transaction implements the statutory
requirement that points and fees are ‘‘in
connection’’ with the transaction. This
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
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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.
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.
123 In contrast, the existing restrictions on
particular loan originator compensation structures
in § 1026.36 apply to all compensation such as
salaries, hourly wages, and contingent bonuses
because those restrictions apply only at the time
such compensation is paid, and therefore they can
be applied with certainty. Moreover, those rules
also provide for different treatment of compensation
that is not ‘‘specific to, and paid solely in
connection with, the transaction,’’ where such a
distinction is necessary for reasons of practical
application of the rule. See comment 36(d)(2)–1
(prohibition of loan originator receiving
compensation directly from consumer and also
from any other person does not prohibit consumer
payments where loan originator also receives salary
or hourly wage).
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New comment 32(b)(1)(ii)–3 explains
that loan originator compensation must
be included in the points and fees
calculation for a transaction whenever
the compensation is paid, whether
before, at or after closing, as long as that
compensation amount can be attributed
to the particular transaction at the time
the interest rate is set. Some industry
commenters expressed concern that it
would be difficult to determine the
amount of compensation that would be
paid after consummation and that
creditors might have to recalculate loan
originator compensation (and thus
points and fees) after underwriting if,
for example, a loan officer became
eligible for higher compensation
because other transactions had been
consummated. The Bureau appreciates
that industry participants need certainty
at the time of underwriting as to
whether transactions will exceed the
points and fees limits for qualified
mortgages (and for high-cost mortgages).
To address this concern, the comment
32(b)(1)(ii)–3 explains that loan
originator compensation should be
calculated at the time the interest rate is
set. The Bureau believes that the date
the interest rate is set is an appropriate
standard for calculating loan originator
compensation. It would allow creditors
to be able to calculate points and fees
with sufficient certainty so that they
know early in the process whether a
transaction will be a qualified mortgage
or a high-cost mortgage.
As noted above, several industry
commenters argued that including loan
originator compensation in points and
fees would result in double counting.
They stated that creditors often will
recover loan originator compensation
costs through origination charges, and
these charges are already included in
points and fees under § 1026.32(b)(1)(i).
However, the underlying statutory
provisions as amended by the DoddFrank Act do not express any limitation
on its requirement to count loan
originator compensation toward the
points and fees test. Rather, the literal
language of TILA section 103(bb)(4) as
amended by the Dodd-Frank Act defines
points and fees to include all items
included in the finance charge (except
interest rate), all compensation paid
directly or indirectly by a consumer or
creditor to a loan originator, ‘‘and’’
various other enumerated items. The
use of ‘‘and’’ and the references to ‘‘all’’
compensation paid ‘‘directly or
indirectly’’ and ‘‘from any source’’
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
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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
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whose combined loan originator
compensation and up-front charges
would otherwise exceed the points and
fees limits would have strong incentives
to cap their up-front charges for other
overhead expenses under the threshold
and instead recover those expenses by
increasing interest rates to generate
higher gains on sale. This would
adversely affect consumers who prefer a
lower interest rate and higher up-front
costs and, at the margins, could result
in some consumers being unable to
qualify for credit. Additionally, to the
extent creditors responded to a ‘‘no
offsetting’’ rule by increasing interest
rates, this could increase the number of
qualified mortgages that receive a
rebuttable rather than conclusive
presumption of compliance.
One alternative would be to allow all
consumer payments to offset creditorpaid loan originator compensation.
However, a ‘‘full offsetting’’ approach
would allow creditors to offset much
higher levels of up-front points and fees
against expenses paid through rate
before the heightened consumer
protections required by the Dodd-Frank
Act would apply. Particularly under
HOEPA, this may raise tensions with
Congress’s apparent intent. Other
alternatives might use a hybrid
approach depending on the type of
expense, type of loan, or other factors,
but would involve more compliance
complexity.
In light of the complex
considerations, the Bureau believes it is
necessary to seek additional notice and
comment. The Bureau therefore is
finalizing this rule without qualifying
the statutory result and is proposing two
alternative comments in the concurrent
proposal, one of which would explicitly
preclude offsetting, and the other of
which would allow full offsetting of any
consumer-paid charges against creditorpaid loan originator compensation. The
Bureau is also proposing comments to
clarify treatment of compensation paid
by consumers to mortgage brokers and
by mortgage brokers to their individual
employees. The Bureau is seeking
comment on all aspects of this issue,
including the market impacts and
whether adjustments to the final rule
would be appropriate. In addition, the
Bureau is seeking comment on whether
it would be helpful to provide for
additional adjustment of the rules or
additional commentary to clarify any
overlaps in definitions between the
points and fees provisions in this
rulemaking and the 2013 ATR Final
Rule and the provisions that the Bureau
is separately finalizing in connection
with the Bureau’s 2012 Loan Originator
Compensation Proposal.
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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
§ 1026.32(b)(1)(iii).
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 § 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
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).
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6905
charges payable ‘‘in connection with the
transaction’’ (see the section-by-section
analysis of § 1026.32(b)(1) above), the
charges listed in § 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
§ 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
§ 226.32(b)(1)(iii).125
Proposed § 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, nonsubstantive changes. Proposed
§ 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 § 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 § 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 § 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
125 See 76 FR 27390, 27404, 27481, 27489 (May
11, 2011).
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§ 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
§ 1026.32(b)(1)(i) (finance charge prong
of points and fees) and (iii) (real estaterelated charges). Commenters noted that
the Bureau’s proposed
§ 1026.32(b)(1)(iii) would have required
the inclusion in points and fees in
certain circumstances of items that the
Bureau’s proposed § 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 § 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 § 1026.32(b)(1)(iii)
nevertheless would require such charges
to be included if they were among the
items listed in § 1026.4(c)(7) and met
any of the other conditions specified in
§ 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 § 1026.32(b)(1)(iii) would
include in points and fees charges set
forth in § 1026.4(c)(7) unless they are
reasonable and paid to a third party, but
that § 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
§ 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.
As noted above, neither proposed
1026.32(b)(1)(i) nor proposed
§ 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
126 The commenters suggested that such fees
payable in a comparable cash transaction be
excluded from points and fees.
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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
§ 1026.32(b)(1)(i) as adopted in the 2013
ATR Final Rule provides an example of
how § 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
§ 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 § 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
‘‘Reasonable’’ or ‘‘Bona Fide’’
Charges. As noted in the section-bysection analysis of § 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
§ 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 third127 In response to commenters’ questions
concerning property taxes, the Bureau notes that
escrowed taxes are excluded from the real estaterelated charges that must be included in points and
fees under certain circumstances.
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 thirdparty charges not retained by a creditor or its
affiliate from the calculation of points and fees for
qualified mortgages.
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party charge language to TILA in section
103(bb)(1)(A)(ii), it retained longstanding TILA section 103(aa)(4)(C),
requiring that, as a pre-condition for
excluding the third-party charges listed
in § 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 § 1026.32(b)(1)(i)(D) above,
the Bureau concludes, consistent with
its determination in the 2013 ATR Final
Rule, that § 1026.32(b)(1)(iii), which
specifically addresses the exclusion of
items listed in § 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 secondguessed, 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
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
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 § 1026.42(f), is per se
reasonable under § 1026.32(b)(1)(iii) and bona fide
under § 1026.32(b)(1)(i)(D). Again, in the absence of
evidence that the pre-existing reasonableness test in
§ 1026.32(b)(1)(iii) has been unworkable, the Bureau
declines to change it.
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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 statutorilyprescribed 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 carveout for affiliate title fees to the extent
such fees are otherwise regulated at the
State level, or to the extent that such
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charges are reasonable and do not
exceed the cost for unaffiliated title
insurance.
The Bureau is adopting
§ 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-bysection analysis of § 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 highcost 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.
32(b)(1)(iv)
As noted in the Bureau’s 2013 ATR
Final Rule, section 1431(c) of the DoddFrank Act amended TILA to add new
TILA section 103(bb)(4)(D), which
codifies, with a few adjustments,
existing § 1026.32(b)(1)(iv). Section
1026.32(b)(1)(iv) requires the inclusion
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.
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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
§ 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.
Proposed § 1026.32(b)(1)(iv) in the
Bureau’s 2012 HOEPA Proposal
republished the Board’s proposed
revisions and additions to
§ 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
131 See 76 FR 27390, 27404–05, 27481, 27489
(May 11, 2011).
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
§ 1026.34(a)(10) prohibiting the financing of points
and fees for high-cost mortgages. See the section-bysection analysis of § 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
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The Bureau did not receive many
comments on proposed
§ 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 § 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
§ 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, § 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-ofincome 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.
srobinson on DSK4SPTVN1PROD with
32(b)(1)(v)
As noted in the Bureau’s 2013 ATR
Final Rule, section 1431(c) of the DoddFrank Act amended TILA to add new
TILA section 103(bb)(4)(E), which
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.
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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
§ 226.32(b)(1)(v).134 Proposed
§ 1026.32(b)(1)(v) in the Bureau’s 2012
HOEPA Proposal republished the
Board’s proposed § 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 § 226.43(b)(10)) with a crossreference to the definition of
prepayment penalty for closed-end
credit transactions set forth in the
HOEPA Proposal’s § 1026.32(b)(8)(i).135
The Bureau received few comments
on proposed § 1026.32(b)(1)(v). Several
commenters observed that proposed
§ 1026.32(b)(1)(v), when read together
with the Bureau’s definition of
prepayment penalty for closed-end
credit transactions in proposed
§ 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 sectionby-section analysis of § 1026.32(b)(6)(i)
below.
Proposed § 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
§ 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
§ 1026.32(b)(1)(vi) in the Bureau’s 2012
HOEPA Proposal republished the
Board’s proposed § 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 § 226.43(b)(10)) with a crossreference to the definition of
prepayment penalty for closed-end
credit transactions in proposed
§ 1026.32(b)(8)(i).137 The Bureau did not
receive any comments specifically in
response to proposed § 1026.32(b)(1)(vi).
Proposed § 1026.32(b)(1)(vi) is being
adopted, substantially as proposed in
the 2011 ATR and 2012 HOEPA
Proposals, in § 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 § 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 § 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.
134 See 76 FR 27390, 27405, 27481 (May 11,
2011).
135 The Bureau is finalizing proposed
§ 1026.32(b)(8)(i) as § 1026.32(b)(6)(i) in the 2013
ATR Final Rule. See the section-by-section analysis
of § 1026.32(b)(6)(i) below.
136 See 76 FR 27390, 27405, 27481 (May 11,
2011).
137 As already noted, the Bureau is finalizing
proposed § 1026.32(b)(8)(i) as § 1026.32(b)(6)(i) in
the 2013 ATR Final Rule. See the section-by-section
analysis for proposed § 1026.32(b)(6)(i), below.
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32(b)(2)
srobinson on DSK4SPTVN1PROD with
Proposed Provisions Not Adopted
As noted in the section-by-section
analysis of § 1026.32(b)(1)(ii) above,
section 1431(c) of the Dodd-Frank Act
amended TILA to require 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 § 226.32(b)(1)(ii)
utilizing the term ‘‘loan originator,’’ as
defined in existing § 1026.36(a)(1),
rather than the statutory term ‘‘mortgage
originator.’’ 138 In turn, the Board
proposed new § 226.32(b)(2) to exclude
from points and fees compensation paid
to certain categories of persons
specifically excluded from the
definition of ‘‘mortgage originator’’ in
amended TILA section 103, namely
employees of a retailer of manufactured
homes under certain circumstances,
certain real estate brokers, and
servicers.139 The Bureau’s proposed
§ 1026.32(b)(2) republished the Board’s
proposed § 226.32(b)(2), with certain
terminology changes to reflect the scope
of transactions covered by § 1026.32,
rather than only § 1026.43, as in the
Board’s proposal. The Bureau received
numerous comments concerning
proposed § 1026.32(b)(2). These
comments are discussed in the sectionby-section analysis of § 1026.32(b)(1)(ii)
above. Instead, the Bureau finalizes the
definition of points and fees for HELOCs
in § 1026.32(b)(2).
Points and Fees for HELOCs
As discussed in the section-by-section
analysis of § 1026.32(a) above, TILA
section 103(bb)(1)(A) as amended by the
Dodd-Frank Act provides that a ‘‘highcost mortgage’’ may include an openend 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 preexisting 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
138 See 76 FR 27390, 27402–04, 27481, 27488–89
(May 11, 2011).
139 See id. at 27405–06, 27481.
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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 § 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 § 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 openend 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 § 1026.32(b)(3)(i) would
have provided that all items included in
the finance charge under § 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 § 1026.32(b)(1)(i) for closedend credit transactions, with the
following differences.
First, proposed § 1026.32(b)(3)(i)
would have specified that the items
included in the finance charge under
§ 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 § 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
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6909
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
§ 1026.4(a) and (b). Transaction fees
generally are also not included in points
and fees for HELOCs, except as
provided in proposed
§ 1026.32(b)(3)(vi).
Second, in contrast to proposed
§ 1026.32(b)(1)(i) for closed-end credit
transactions, proposed § 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 § 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
§ 1026.32(b)(3)(i). One industry
commenter expressed concern that the
different formulation of proposed
§ 1026.32(b)(1)(i) for closed-end credit
transactions and proposed
§ 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 openend credit plans.
The Bureau finalizes § 1026.32(b)(3)(i)
substantially as proposed, in
§ 1026.32(b)(2)(i). However, the Bureau
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omits the proposed reference to charges
‘‘payable’’ at or before account opening.
As discussed in the section-by-section
analysis of § 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 § 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 § 1026.32(b)(1) for
closed-end credit and § 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
§ 1026.32(b)(2)(i)(B) and (C).
srobinson on DSK4SPTVN1PROD with
32(b)(2)(i)(B)
The Bureau adopts
§ 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, § 1026.32(b)(2)(i)(B)
for HELOCs mirrors § 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
§ 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
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points and fees for closed-end credit
transactions. Thus, § 1026.32(b)(2)(i)(C)
for HELOCs mirrors § 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 § 1026.32(b)(1)(i)(D) above,
amended TILA section 103(bb)(1)(A)(ii)
excludes from points and fees for highcost 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 § 1026.32(b)(5)(i), with a
cross-reference to § 1026.36(a)(1) for the
definition of loan originator.140
Proposed § 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 § 1026.36(a)(1),
notwithstanding § 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
140 Like the Board’s proposed § 226.43(e)(3)(ii), 76
FR 27390, 27465, 27485 (May 11, 2011), the
Bureau’s proposed § 1026.32(b)(5)(i) would have
used the term ‘‘loan originator’’ rather than
‘‘mortgage originator’’ for consistency within
Regulation Z.
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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 § 1026.32(b)(5)(i)
stated that, for purposes of
§ 1026.32(b)(5)(i), the term ‘‘loan
originator’’ means a loan originator as
that term is defined in § 1026.36(a)(1)
(i.e., in general, an originator of any
consumer mortgage credit transaction)
notwithstanding § 1026.36(f), which
otherwise limits the term ‘‘loan
originator’’ to persons originating
closed-end credit transactions.
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
§ 1026.32(b)(1)(i)(D) in the 2013 ATR
Final Rule (i.e., rather than in
§ 1026.32(b)(5)(i) for both closed- and
open-end credit transactions, as
proposed), the Bureau adopts a separate
exclusion for HELOCs in
§ 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
§ 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 § 1026.32(b)(1)(i)(E) and (F)
above, section 1431(d) of the DoddFrank 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 § 1026.32(b)(5)(ii)(A) (exclusion of up
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srobinson on DSK4SPTVN1PROD with
to two discount points) and (B)
(exclusion of up to one discount point).
Proposed § 1026.32(b)(5)(ii)(A) and
(B) are being adopted in the 2013 ATR
Final rule as § 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
§ 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
§ 1026.32(b)(1)(i)(E) and (F) for closedend 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-bysection analysis of § 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, highcost 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); § 1026.34(b), below.
The Bureau did not propose to
include loan originator compensation in
points and fees for HELOCs, but the
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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 § 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 § 1026.34(b) was
¨
‘‘dangerously naıve.’’ 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.
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6911
As discussed in the section-by-section
analysis of § 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 closedend credit, while exempting it for openend 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 § 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
§ 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 § 1026.32(b)(3)(ii)
thus would have mirrored proposed
§ 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 § 1026.4(c)(7). The
Bureau did not receive any comments
specifically addressing proposed
§ 1026.32(b)(3)(ii) or its related
commentary. The Bureau thus finalizes
these provisions as proposed in
§ 1026.32(b)(2)(iii).
32(b)(2)(iv)
Proposed § 1026.32(b)(3)(iii) would
have provided for the inclusion in
points and fees for HELOCs of
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srobinson on DSK4SPTVN1PROD with
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
§ 1026.32(b)(3)(iii) thus would have
mirrored proposed § 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 crossreferenced 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
§ 1026.32(b)(3)(iii) or its related
commentary. The comments argued that
the Bureau should specify, as for closedend 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 § 1026.32(b)(3)(iii) and its
related commentary generally as
proposed, as § 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 § 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 § 1026.32(b)(1)(v)
concerning the inclusion of maximum
prepayment penalties for closed-end
credit transactions, except that proposed
§ 1026.32(b)(3)(iv) would have crossreferenced the definition of prepayment
penalty provided for HELOCs in
proposed § 1026.32(b)(8)(ii).
The Bureau did not receive any
comments specifically addressing
proposed § 1026.32(b)(3)(iv). The
Bureau thus finalizes this provision
generally as proposed, as
§ 1026.32(b)(2)(v). The Bureau replaces
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the proposed cross-reference to
§ 1026.32(b)(8)(ii) with a cross-reference
to § 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 § 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 § 1026.32(b)(2) that
should be included in points and fees
for HELOCs with that for closed-end
credit transactions in § 1026.32(b)(1). As
a result, the Bureau is including the
guidance contained in proposed
comment 32(b)(8)–2 in
§ 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 § 1026.32(b)(6)(ii),
incurred by the consumer if the
consumer refinances an existing closedend 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 § 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
§ 1026.4(c)(4), whether assessed on an
annual or other periodic basis.’’ In the
proposal, the Bureau noted that the fees
described in § 1026.4(c)(4) (i.e., fees
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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
§ 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
§ 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 § 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 tenyear 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
§ 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
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srobinson on DSK4SPTVN1PROD with
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
§ 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 § 1026.32(b)(3)(vi).
Specifically, proposed
§ 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 pertransaction fee, that would be charged
for a draw on the credit line. Proposed
§ 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
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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 § 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 § 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 § 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 § 1026.32(b)(2) above, the
Bureau proposed to implement the
calculation of points and fees for
HELOCs in § 1026.32(b)(3). The Bureau
is finalizing the calculation of points
and fees for HELOCs in § 1026.32(b)(2).
Thus, the Bureau is adopting in
§ 1026.32(b)(3) the definition of bona
fide discount point. The Bureau
proposed to implement this definition
in § 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
§ 226.43(e)(3)(iv) for qualified mortgages
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6913
and the Bureau’s proposed
§ 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 timeprice 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
§ 1026.32(b)(5)(ii)(C) in the 2012
HOEPA Proposal simply would have
cross-referenced proposed
§ 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.
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
141 See
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76 FR 27390, 27485 (May 11, 2011).
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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,
§ 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 timeprice 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 highcost mortgage context.
To further assist creditors in the bona
fide discount point calculation for highcost 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 § 1026.32(b)(4) in the ATR Final Rule.
32(b)(4)
srobinson on DSK4SPTVN1PROD with
Proposed Provision Not Adopted
Proposed § 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
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penalty, and therefore is not finalizing
proposed § 1026.32(b)(4). Public
comments regarding these charges are
addressed in the section-by-section
analysis of § 1026.32(b)(6) below.
Total Loan Amount for Points and Fees
As noted in the section-by-section
analysis of § 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 § 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
§ 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
§ 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
§ 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 § 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
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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 § 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 sectionby-section analysis of § 1026.34(a)(10)
below.
The 2012 HOEPA Proposal noted that,
notwithstanding HOEPA’s ban on the
financing of points and fees for highcost 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
§§ 1026.32(b)(6)(i) and 1026.34(a)(10)
would have worked together.
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,
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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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 closedend 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 § 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 § 1026.32(b)(6)(ii) and
finalizes it in this rulemaking, as
§ 1026.32(b)(4)(ii).
srobinson on DSK4SPTVN1PROD with
32(b)(5)
The 2012 HOEPA Proposal would
have re-numbered existing
§ 1026.32(b)(2) defining the term
‘‘affiliate’’ as § 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
§ 1026.32(b)(2) as § 1026.32(b)(5).
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32(b)(6)
HOEPA’s Current Approach to
Prepayment Penalties
Existing § 1026.32 addresses
prepayment penalties in § 1026.32(d)(6)
and (7). Existing § 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
§ 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
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 dwellingsecured credit transactions. The DoddFrank 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 § 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
143 Existing § 1026.35(b)(2) restricts prepayment
penalties for higher-priced mortgage loans in much
the same way that existing § 1026.32(d)(6) and (7)
restricts such penalties for high-cost mortgages, but
§ 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 § 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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loan as defined in § 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, nonhigher-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
High-Cost Mortgages. Second, as
discussed above in the section-bysection analysis of § 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 §§ 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 § 1026.32(b)(1)(v)–(vi) and
(b)(2)(v)–(vi) above. See also the sectionby-section analysis of
§§ 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
144 The Bureau’s 2013 ATR Final Rule is
finalizing the Board’s proposed implementation of
TILA section 129C(c)(1) in new § 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 § 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).
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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 §§ 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.
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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
§ 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 simpleinterest 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
146 New TILA section 129C(c)(3) limits
prepayment penalties for fixed-rate, non-higherpriced 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 highcost 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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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
The Board’s 2011 ATR Proposal
proposed to implement the Dodd-Frank
Act’s prepayment penalty-related
amendments to TILA for qualified
mortgages by defining ‘‘prepayment
penalty’’ for most closed-end, dwellingsecured transactions in new
§ 226.43(b)(10), and by cross-referencing
proposed § 226.43(b)(10) in the
proposed joint definition of points and
fees for qualified and high-cost
mortgages in § 226.32(b)(1)(v) and
(vi).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
§ 226.43(b)(10) defined prepayment
penalty with reference to a payment of
‘‘all or part of’’ the principal in a
transaction covered by the provision,
while § 1026.18(k) and associated
commentary and the Board’s 2009
Closed-End Proposal and 2010 Mortgage
Proposal referred to payment ‘‘in full,’’
(2) the examples provided omitted
reference to a minimum finance charge
and loan guarantee fees,149 and (3)
proposed § 226.43(b)(10) did not
incorporate, and the Board’s 2011 ATR
Proposal did not otherwise address, the
language in § 1026.18(k)(2) and
associated commentary regarding
disclosure of a rebate of a precomputed
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 ClosedEnd 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).
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).
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finance charge, or the language in
§ 1026.32(b)(6) and associated
commentary concerning prepayment
penalties for high-cost mortgages.
The Bureau’s 2012 TILA–RESPA
Proposal drew from the Board’s preexisting 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
§ 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
§ 1026.32(b)(8) to define the term
‘‘prepayment penalty’’ for purposes of
closed- and open-end credit transactions
subject to § 1026.32. Proposed
§ 1026.32(b)(8)(i) defining ‘‘prepayment
penalty’’ for closed-end credit
transactions is finalized as
§ 1026.32(b)(6)(i) in the 2013 ATR Final
Rule, and proposed § 1026.32(b)(8)(ii)
defining the term for HELOCs is
finalized as § 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 § 1026.32(d)(6), and
the Board’s proposed § 226.43(b)(10) for
qualified mortgages, proposed
§ 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
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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
§ 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 ClosedEnd 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 § 1026.32(b)(8)(i) with the
definitions in the Bureau’s other
pending rulemakings mandated by the
Dodd-Frank Act concerning ability-torepay, 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
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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
§ 1026.32(b)(8)(i) as § 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.
As discussed in the 2013 ATR Final
Rule, the Bureau is not removing or
substantively amending comment
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 nonqualified mortgages, which are not permitted to
have any prepayment penalties.
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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 § 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
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
§ 1026.32(b)(6)(i) and the official
interpretation of that provision in
comment 32(b)(6)–1.i regarding monthly
interest accrual amortization.
Specifically, § 1026.32(b)(6)(i) provides
that interest charged consistent with the
monthly interest accrual amortization
method is not a prepayment penalty for
FHA loans consummated before January
21, 2015. FHA loans consummated on
or after January 21, 2015 must comply
with all aspects of the final rule. The
Bureau is making this adjustment
pursuant to its authority under TILA
section 105(a), which provides that the
Bureau’s regulations may contain such
additional requirements, classifications,
differentiations, or other provisions, and
may provide for such adjustments and
exceptions for all or any class of
transactions as in the Bureau’s judgment
are necessary or proper to effectuate the
purposes of TILA, prevent
151 74 FR 43232, 43257, 43295, 43390, 43413
(Aug. 26, 2009); 75 FR 58539, 58586 (Sept. 24,
2010).
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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 openversus 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
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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 thirdparty 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
§ 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
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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 § 1026.32(b)(8)(ii) would
have defined the term ‘‘prepayment
penalty’’ for HELOCs. Specifically,
proposed § 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 tenyear 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
Proposed comment 32(b)(8)–3.iii
would have specified that, in the case of
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-bysection analysis of § 1026.32(b)(6)(i), the Bureau
adopts a consistent treatment of conditionallywaived closing costs for closed-end credit
transactions.
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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
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
§ 1026.32(b)(8)(ii) as § 1026.32(b)(6)(ii).
For the reasons discussed in the sectionby-section analysis of § 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.
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32(c) Disclosures
TILA section 129(a) requires
additional disclosures for high-cost
mortgages, and these requirements are
implemented in § 1026.32(c). The
Bureau proposed to amend § 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 § 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
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).
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transaction offers a fixed-rate for a
period of time, such as a discounted
initial interest rate, § 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 § 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 § 1026.32(c)(3)(i) would have
incorporated the requirement in current
§ 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
§ 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
§ 1026.32(c)(3)(ii) to require creditors to
disclose an example of a minimum
periodic payment for open-end highcost mortgages. Accordingly, proposed
§ 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 § 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
§ 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
§ 1026.32(c)(2), except that if an
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6919
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 § 1026.32(d)(1)(iii) to
provide an exemption to the prohibition
on balloon payments for certain openend credit plans. Accordingly, to the
extent permitted under § 1026.32(d)(1),
proposed § 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
§ 1026.32(c)(3)(ii)(A).
To reduce potential consumer
confusion, proposed
§ 1026.32(c)(3)(ii)(C) would have
required that a creditor provide a
statement explaining the assumptions
upon which the § 1026.32(c)(3)(ii)(A)
payment examples are based.
Furthermore, for the same reason,
proposed § 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 § 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 § 1026.32(d)(1), the
balloon payment must be disclosed
under § 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
§ 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 § 1026.32(c)(4), must be
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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 § 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
§ 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 § 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
§ 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 § 1026.34(a)(10) will
prohibit the financing of any points and
fees, as defined in § 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 § 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-
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cost mortgages required by
§ 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
§ 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 thirdparty counselor in connection with the
consumer’s receipt of pre-loan
counseling under § 1025.34(a)(5).
Accordingly, the Bureau is adopting
§ 1026.32(c)(5) with revisions for
clarification and consistency with final
§§ 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 § 1026.32(d)(1)(i) to define
balloon payments for purposes of
implementing HOEPA’s new restrictions
on these payments. Under Alternative 1,
proposed § 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 § 1026.18(s)(5)(i).
Accordingly, proposed § 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
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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
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further guidance on the application of
§ 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 § 1026.32(d)(1)(iii) with some
changes for clarification purposes.
Proposed § 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
§ 1026.32(d)(1)(iii) would have made the
limitations of§ 1026.32(d)(1)(i)
applicable only to the repayment
period. Given that § 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
§ 1026.32(d)(1)(iii) with revisions to
clarify that the exception to
§ 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
§ 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
§ 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.
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‘‘Bridge’’ Loans
As previously noted, the Bureau
proposed to revise § 1026.32(d)(1)(ii)
consistent with amended TILA section
129(e). Accordingly, proposed
§ 1026.32(d)(1)(ii) would have provided
an exemption to the balloon payment
restrictions under § 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
§ 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 preDodd Frank Act restrictions on balloon
payments was in place to prevent
unnecessarily restricting access to shortterm 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
§ 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
§ 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
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6921
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
§ 1026.32(d)(1)(ii) would have provided
an exemption to the balloon payment
restrictions under § 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
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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
§§ 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
§§ 1026.43(f)(1)(vi) and
1026.35(b)(2)(iii)(A), (B), (C).154
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
154 The 2013 Escrows Final Rule defines the terms
‘‘rural’’ and ‘‘underserved’’ for purposes of
§ 1026.32(d)(1). See § 1026.35(b)(iv).
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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, § 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 §§ 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
§§ 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 § 1026.32(d)(1) balloon restriction
for high-cost mortgages where the
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creditor satisfies the conditions set forth
in §§ 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 § 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 § 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
§ 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
§ 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 § 1026.32(b)(6)(i) above, the
proposal would have retained in
proposed § 1026.32(b)(8)(i) and
proposed comment 32(b)(8)–1.iv the
definition of prepayment penalty
contained in existing § 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
§ 1026.32(a)(1)(iii), and the Bureau
finalizes § 1026.32(d)(6) and (7) as
proposed.
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32(d)(8) Acceleration of Debt
The Bureau proposed a new
§ 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 § 1026.32(d)(8) would have
replaced current § 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 § 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
§ 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
§ 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
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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 § 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 § 1026.32(d)(8). The changes the
Bureau proposed to § 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 § 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
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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
§ 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
§ 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 ‘‘highcost 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 HighCost 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 § 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
§ 1026.34(a)(4)(ii). In addition,
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§ 1026.34(a)(4)(iii) provides for a
presumption of compliance with the
ability-to-repay requirements if the
creditor follows certain procedures. See
§ 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 § 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-toincome 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 openend 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
§ 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 § 1026.34(a)(4). As discussed below,
the Bureau is revising § 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 § 1026.34(a)(4) to apply
specifically to high-cost open-end credit
plans.
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Closed-End High-Cost Mortgages
For consistency with TILA section
129C, proposed § 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
§ 1026.43 (to be established separately
under the Bureau’s 2013 ATR Final
Rule). Therefore, the existing
requirements and the presumption of
compliance under § 1026.34(a)(4)(i)–(iv)
would no longer have applied to closedend 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 § 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 § 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 closedend high-cost mortgage that does not
meet the qualified mortgage criteria set
forth in § 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
§ 1026.34(a)(4) ability-to-repay
requirements, and thus would have
removed the presumption of compliance
currently available for any such highcost mortgage under § 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 § 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 § 1026.43(e).156
155 In the final rule, the Bureau is adding
additional clarifying language to make clear that the
§ 1026.34(a)(4)(iii) presumption only applies to
open-end credit plans.
156 The safe harbor available for certain qualified
mortgage transactions under § 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 § 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 § 1026.43(e)(3) and (g).
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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
§ 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
§ 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 § 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
§ 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 § 1026.43 for all closedend 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
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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 abilityto-repay requirements set forth in
§ 1026.43 to be more protective of
consumers than the current ability-torepay criteria for high-cost mortgages set
forth in current § 1026.34(a)(4)(i)–(iv).
For example, § 1026.43 would require
creditors to consider additional factors
not currently included in
§ 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-torepay 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
§ 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 § 1026.43(e), there
will be no presumption of compliance
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available to creditors for the
§ 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 highcost 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
§ 1026.43(e). Further protections and
restrictions, such as restricting interestonly 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 § 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
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for other closed-end credit transactions
not covered by HOEPA and high-cost
mortgages that are subject to the
repayment ability requirements of
§ 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 § 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 § 1026.43 ability-torepay requirements. The proposal
nonetheless would have retained an
exemption from the § 1026.34(a)(4)
HOEPA ability-to-repay requirement
that exists in current § 1026.34(a)(4)(v).
The Bureau received no comments on
this aspect of the proposal, and is
retaining the exemption from the
§ 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
§ 1026.34(a)(4)(v) to § 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
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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 openend 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 § 1026.34(a)(4)
by amending the existing mortgage
repayment ability requirements in
current § 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 § 1026.34(a)(4)
to provide, as proposed, that in
connection with an open-end credit
plan subject to § 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.
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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 § 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 § 1026.34(a)(4). Therefore,
the Bureau believes that applying the
existing repayment ability requirement
in current § 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 § 1026.34(a)(4) for
consistency with the 2013 ATR Final
Rule and for clarification purposes. The
Bureau is removing § 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
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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 thirdparty 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 § 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 § 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 § 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
§ 1026.43 because, in the Bureau’s view,
such a defense could result in
circumvention of the § 1026.43(c)(4)
verification requirement.
Upon further consideration of
proposed § 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 § 1026.34(a)(4)(ii)(B)
would create an unnecessary
inconsistency between the repayment
ability criteria in § 1026.43(c) and
§ 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
§ 1026.34(a)(4)(ii)(B) could have
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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
§ 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 § 1026.34(a)(4)(ii)(B) and
renumbering the remainder of
§ 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 § 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
§ 1026.32(a)(4) and its associated
commentary, with several additional
minor edits for consistency, clarity, or
organizational purposes. The Bureau is
removing proposed
§ 1026.34(a)(4)(iv)(A), which would
have excluded negatively amortizing
transactions from the § 1026.34(a)(4)
presumption of compliance. Given that
negative amortization features are
prohibited altogether for high-cost
mortgages, and § 1026.34(a)(4)(iv) only
applies only to open-end, high-cost
mortgages, it is unnecessary to exclude
such transactions from the
§ 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
§ 1026.34(a)(4) applies to open-end
credit plans subject to § 1026.32;
however, the repayment ability
provisions of § 1026.43 apply to closedend credit transactions subject to
§ 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
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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 mortgagerelated 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
§ 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
§ 1026.43(e) may only apply to qualified
mortgages (which cannot include openend credit plans), the presumption of
compliance set forth in
§ 1026.34(a)(4)(iii) will still apply to
open-end credit plans that are high-cost
mortgages.
The Bureau proposed to revise current
§ 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 highcost mortgages that are open-end credit
plans. In particular, current
§ 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
§ 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
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6927
§ 1026.34(a)(4)(i), and using the largest
required minimum periodic payment.
Furthermore, proposed
§ 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 § 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
§ 1026.32(c)) or each statement required
by RESPA with respect to the
transaction.157 The Bureau is exercising
157 In addition to the housing counseling
requirement for high-cost mortgages, the DoddFrank 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 § 1026.36(k) below.
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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.
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.
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.
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 § 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 § 1026.34(a)(5), with
several revisions.
34(a)(5)(i) Certification of Counseling
Required
Consistent with the statute, proposed
§ 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
159 12
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.
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U.S.C. 1715z–20(d)(2)(B).
HUD Housing Counseling Handbook
7610.1 (05/2010), Chapter 4, available at http://
www.hud.gov/offices/adm/hudclips/handbooks/
hsgh/7610.1/76101HSGH.pdf (visited June 16,
20012) (HUD Handbook).
160 See
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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 highcost mortgage even after application, or
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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 § 1026.34(a)(5)(i) as
proposed.
The Bureau also proposed
commentary addressing a number of
issues related to proposed
§ 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 § 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
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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 HUDapproved 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.
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 highcost 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 § 1026.32(c)) or by
RESPA prior to issuing certification of
counseling. The additional disclosures
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.
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.
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6929
for high-cost mortgages required under
§ 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.
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 highcost 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
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.
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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 highcost 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 § 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 § 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
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
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§ 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 § 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
§ 1026.34(a)(5)(ii) as proposed, with
minor edits for clarity and consistency.
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
§ 1026.34(a)(5)(ii) would require a
counselor to wait for the receipt of
either the § 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
§ 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 § 1026.32, proposed
§ 1026.34(a)(5)(ii) permits receipt of
either the good faith estimate required
by RESPA or the disclosures required
under § 1026.40 to allow counseling to
occur, because 12 CFR 1024.7(h)
permits the disclosures required by
34(a)(5)(iii) Affiliation Prohibited
Proposed § 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 § 1026.34(a)(5)(iii)(B) also
would have created an exemption from
this general prohibition for a State
combined with the early TILA disclosure. Proposed
§ 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.
165 ‘‘Affiliate’’ is defined in § 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.).’’
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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.
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
§ 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 § 1026.32(a)(1), the Bureau is
not finalizing § 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
166 See http://www.irs.gov/uac/IRS,-FTC-andState-Regulators-Urge-Care-When-Seeking-Helpfrom-Credit-Counseling-Organizations.
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create an exception to the affiliation
prohibition for nonprofit 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 § 1026.34(a)(5)(iv)
would have set forth requirements for
the certification form that is provided to
the creditor. Specifically, proposed
§ 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 § 1026.40; and a
statement that the counselor has verified
that the consumer(s) received the
§ 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 § 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 § 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
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6931
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
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
Proposed comment 34(a)(5)(iv)–2
would have clarified that a counselor’s
verification of either the § 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 § 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
167 HUD
Handbook at 3–5.
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).
168 This
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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
§ 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 highcost 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
169 24
CFR 214.313(a), (b).
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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.
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 highcost 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.
Proposed § 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 highcost 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 § 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
170 24
CFR 214.313(e); 214.303.
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.
171 See
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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
§ 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 § 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
§ 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
§ 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 § 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
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creditors to particular counselors.
Pursuant to its authority under TILA
section 129(u)(3), proposed
§ 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.
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
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Proposed Provisions Not Adopted
Proposed § 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
§ 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, § 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 § 1024.20.
172 HUD
Handbook at 4–11.
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The Bureau also sought comment on
whether some creditors would likely
comply with the counselor list
requirement in § 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
§ 1024.20.
As noted above, the Bureau is
finalizing the counseling list
requirement under § 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 § 1024.20.
As a result, because it would duplicate
the requirement in § 1024.20, the
Bureau is not adopting proposed
§ 1026.34(a)(5)(vii) in the final rule.
34(a)(6) Recommended Default
Proposed § 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 § 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,
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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 § 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 § 1026.34(a)(6) as proposed.
In addition, the Bureau proposed
comments to § 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
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.
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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
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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 highcost 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
§ 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
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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, § 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 openend 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 highcost mortgages at all. Other industry
commenters sought clarification on the
specific types of fees and charges
covered by the rule.
The Bureau is adopting
§ 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
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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
§ 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
§ 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
§ 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 §§ 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 § 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
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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
§ 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 §§ 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 latefee ‘‘pyramiding,’’ consistent with the
statutory language, in
§ 1026.34(a)(8)(iii). The Bureau noted
that proposed § 1026.34(a)(8)(iii) is
consistent with § 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
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6935
the rule. The Bureau requested
comment as to whether additional
guidance was needed concerning the
application of proposed
§ 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 § 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 § 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 § 1026.34(a)(8)(iv) to open-end
credit plans. The Bureau did not receive
comment specifically regarding
proposed § 1026.34(a)(8)(iv), or
proposed comment 34(a)(8)(iv)–1, and
will adopt § 1026.34(a)(8)(iv) and
comment 34(a)(8)(iv)–1 as proposed.
34(a)(9) Payoff Statements
The Bureau proposed a new
§ 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 § 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
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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 nonhigh-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
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 § 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
174 See current § 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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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
§ 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
§ 1026.34(a)(10) would have
implemented new TILA section 129(m).
Proposed § 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
§ 1026.32 in proposed
§§ 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 § 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 § 1026.34(a)(10) means those
items that are required to be included in
the calculation of points and fees under
§§ 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 § 1026.34(a)(5)
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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
§ 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 lowincome borrowers’ ability to pay upfront 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
§ 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
§ 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
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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, openend credit plans were not within the
scope of HOEPA’s coverage. Current
§ 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 § 1026.34(b)
would have implemented this new
section by prohibiting the structuring of
a transaction that is otherwise a highcost 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 § 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 § 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
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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 § 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 § 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
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6937
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 § 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
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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 openand 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 § 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 ‘‘constructionto-permanent’’ loan, and the
construction phase and the permanent
phase are treated as separate
transactions. The final rule adopts the
other parts of § 1026.34(b) and related
commentary as proposed.
Section 1026.36 Prohibited Acts or
Practices in Connection With Credit
Secured by a Dwelling
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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.
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The Bureau proposed § 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 § 1026.36(k)(1), pursuant to its
authority under TILA section 105(a), the
Bureau proposed to include two
additional provisions in §§ 1026.36(k)(3)
and (4), consistent with the
requirements for high-cost mortgage
counseling. Proposed § 1026.36(k)(3)
would have addressed steering by
creditors to particular counselors or
counseling organizations and proposed
§ 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 § 1026.36(k)
substantially as proposed, but with
certain revisions, as discussed in greater
detail below.
36(k)(1) Counseling Required
Proposed § 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
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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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).
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 § 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
§ 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 § 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
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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
§ 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 § 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 § 1026.36(k)(1) applies,
proposed § 1026.36(k)(2) would have
provided definitions of these two key
terms. Specifically, proposed
§ 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
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credit plan secured by a dwelling.
Proposed § 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 § 1026.34(a)(5)(vi), the
Bureau proposed in § 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
§ 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
§ 1026.34(a)(5)(vii) for high-cost
mortgage counseling, the Bureau
proposed in § 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
§ 1026.36(k) and proposed in
§ 1026.36(k)(4)(ii) a safe harbor for a
creditor that provides a list of
counselors pursuant to the obligation in
Regulation X § 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 § 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
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6939
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 DoddFrank 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
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.
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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
As discussed above, HOEPA currently
addresses potentially harmful practices
in refinancing and closed-end homeequity 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 purchasemoney 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 DoddFrank 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
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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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-andfees 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
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.
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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
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.
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.
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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 antipredatory 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 closedend 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.
B. Baseline for Analysis
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The HOEPA amendments are selfeffectuating, 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
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.
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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 highcost 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 highcost mortgage.182 One trade association
commenter asserted that the Bureau’s
analysis of the compliance burden due
to the expansion of HOEPA to purchasemoney 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
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.
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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.
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.
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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)).
srobinson on DSK4SPTVN1PROD with
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
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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
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 http://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 ExperianOliver Wyman quarterly Market Intelligence Report
is available at http://
www.marketintelligencereports.com.
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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
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 highcost 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
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.
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 http://
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 highcost 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.
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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 highcost 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 highcost 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.
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.
srobinson on DSK4SPTVN1PROD with
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
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.
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
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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.
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
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 highcost mortgages but would be permitted for shortterm 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.
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6943
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
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 highcost 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
195 Fannie Mae, ‘‘Mortgage Shopping: Are
Borrowers Leaving Money on the Table?,’’
November 27, 2012 available at http://
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), http://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.
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),
http://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 http://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),
http://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
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srobinson on DSK4SPTVN1PROD with
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 nearterm 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.
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.
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.
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
and Economic Sciences Research Center, Technical
Report 03–39, 2003), http://www.sesrc.wsu.edu/
sesrcsite/Papers/files/dfi-techreport-FINAL2-1604.pdf.
200 Freddie Mac, ‘‘National Mortgage Database,
Phase 2 National Survey of Mortgage Borrowers,’’
(May 2011).
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).
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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
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
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
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 http://
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.
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 http://
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.
205 Ding, Roberto G. Quercia, Carolina K. Reid,
and Alan M. White (2011), ‘‘State Anti-Predatory
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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.
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 openend 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 highcost 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 purchasemoney mortgages that they previously
would have extended because of the
Lending Laws and Neighborhood Foreclosure
Rates,’’ Journal of Urban Affairs, Volume 33,
Number 4, pages 451–467.
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srobinson on DSK4SPTVN1PROD with
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 highcost 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
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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 purchasemoney 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 homesecured 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
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.
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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.
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 highcost 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
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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 lessfavorable 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
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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 highcost 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 purchasemoney 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
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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.
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
207 Roughly 15 percent of 2011 originations of
mortgages secured by single-family, owneroccupied homes reported by lenders under HMDA
were for amounts less than $80,000 and about 9
percent were for less than $61,500.
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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 closedend 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 closedend 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 variablerate transactions, the final rule specifies
that this rate is based on the fullyindexed 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, closedend 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
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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 purchasemoney 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 highcost 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
Again, the final rule differs from the
proposal in its more limited definitions
of points and fees for closed- and openend 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-andfees 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
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 homesecured, 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.
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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 DoddFrank 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 highcost 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 http://www.npr.org/2011/02/10/
133636987/whats-next-for-fannie-freddie-hard-tosay.
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
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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 closedend, 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 DoddFrank Act, even such qualifying closedend 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
srobinson on DSK4SPTVN1PROD with
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 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.
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.
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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 tradeoff.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.
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
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).
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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 DoddFrank 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-torepay 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 highcost 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
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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 shortterm 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
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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 highcost 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.
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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
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srobinson on DSK4SPTVN1PROD with
information that must be retained and
that, under the proposed 2012 TILA–
RESPA rule, would generally be
required to be retained in machinereadable format.
5. Counseling-Related Provisions for
RESPA-Covered Loans and NegativeAmortization 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 purchasemoney 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.
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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 negativeamortization 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
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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 negativeamortization loan has obtained
counseling are likely small because such
loans will most likely be very rare. Not
only are loans with negativeamortization features uncommon, but
also the provision would apply only to
first-time borrowers for such loans.214
214 Data from the 2010 Survey of Consumer
Finances (SCF), the most recent survey year
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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.
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
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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 closedend 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
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 negativeamortization features ranged from 1.3 percent to 2.3
percent.
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$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 highcost mortgages with balloon payments,
but that also meet the conditions set
forth in §§ 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
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6951
rule for rural creditors that offer highcost 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.
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.
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
215 The Bureau notes that the balloon payment
restrictions included an exemption for seasonal or
irregular income.
216 Estimates are three-year estimates from the
2009–2011 American Community Surveys (http://
factfinder2.census.gov/faces/tableservices/jsf/
pages/productview.xhtml?pid=ACS_11_3YR_
GCT2501.US26&prodType=table).
217 For purposes of assessing the impacts of the
final rule on small entities, ‘‘small entities’’ is
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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
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.
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 nonHOEPA 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
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.
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, closedend lending under the current and postDodd 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
defined in the RFA to include small businesses,
small not-for-profit organizations, and small
government jurisdictions. 5 U.S.C. 601(6). A ‘‘small
business’’ is determined by application of Small
Business Administration regulations and reference
to the North American Industry Classification
System (NAICS) classifications and size standards.
5 U.S.C. 601(3). A ‘‘small organization’’ is any ‘‘notfor-profit enterprise which is independently owned
and operated and is not dominant in its field.’’ 5
U.S.C. 601(4). A ‘‘small governmental jurisdiction’’
is the government of a city, county, town, township,
village, school district, or special district with a
population of less than 50,000. 5 U.S.C. 601(5).
218 5 U.S.C. 609.
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).
221 The Bureau notes that the HOEPA
amendments of the Dodd-Frank Act are selfeffectuating 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.
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 http://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
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A. Overview of Analysis and Data
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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
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 highcost 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
on HOEPA originations. The analysis in this part
draws on HMDA and MCR data by classifying nondepository 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 http://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.
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.
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creditors may be less willing to make
high-cost mortgages in the future due to
new and revised restrictions on highcost mortgages, but the Bureau believes
that any such effect on creditors’
willingness to extend high-cost
mortgages likely is small.
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
D. Impact of Revised Thresholds on
Depository Institutions
1. Closed-End HOEPA Lending by Small
Depository Institutions
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 highcost 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
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
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
229 The information on whether a loan was a highcost 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.)
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.
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
Continued
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To assess the final rule’s impacts, the
analysis aims to estimate the
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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 highcost 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
The changes to the APR and pointsand-fees thresholds are estimated to
increase the share of loans made by
HMDA-reporters and potentially subject
to HOEPA that are classified as highcost 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
TABLE 2—ESTIMATED NUMBER OF SMALL DIS THAT ORIGINATE ANY HIGH-COST MORTGAGES OR 10 OR MORE HIGHCOST MORTGAGES UNDER THE CURRENT AND REVISED HOEPA THRESHOLDS
Pre-Dodd-Frank Act
Estimated number that make any high-cost mortgages .........................................................
Percent of small depository institutions ............................................................................
Estimated number that make 10 or more high-cost mortgages .............................................
Percent of small depository institutions ............................................................................
501
4.9%
22
0.2%
Post-Dodd-Frank Act
1710
16.6%
48
0.5%
srobinson on DSK4SPTVN1PROD with
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
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 closedend high-cost mortgages.
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 pointsand-fees thresholds. More specifically, the pointsand-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.
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 highcost 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.
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.
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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
Number with HOEPA revenue share >1% a ............................................................................
Percent of small depositories ...........................................................................................
Number with HOEPA revenue share >3% a ............................................................................
Percent of small depositories ...........................................................................................
Post-Dodd-Frank Act
229
2.2%
76
0.7%
696
6.8%
225
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.
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
HELOCs > 10% of all loans/leases .............................................................................................................
HELOCs > 25% of all loans/leases .............................................................................................................
11.6–13.2
2.3–3.0
Number of DIs a
1,196–1,354
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.
srobinson on DSK4SPTVN1PROD with
5. Direct Costs Associated With the
Dodd-Frank Act for Open-End HighCost Mortgages
Data from SCF indicate that an
estimated 3.2 percent of outstanding
HELOCs would potentially meet the
APR thresholds. The analysis of closedend 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
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.
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.
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.
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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
Number with HOEPA revenue share >1% a
Percent of small depository institutions
Number with HOEPA revenue share >3% a
Percent of small depository institutions
..............................................................
..............................................................
..............................................................
..............................................................
9 percent
606
5.9%
31
0.3%
1,110
10.8%
139
1.4%
12 percent
1,473
14.3%
300
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).
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.
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
srobinson on DSK4SPTVN1PROD with
For depository institutions, the
potential loss in revenue due to the
Dodd-Frank Act revisions to HOEPA
comprises the losses from both closedand 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
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
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-
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.
243 The corresponding estimates for all DIs are
comparable.
244 Over half of non-DI originators also broker
loans. Revenue from brokering or other sources may
mitigate the potential revenue losses of the DoddFrank Act amendments on those creditors.
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 postDodd-Frank Act thresholds by non-DIs that do not
report in HMDA.
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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 highcost 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.
In estimating the effects of the DoddFrank Act revisions to HOEPA on nonDIs’ 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
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
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.
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.
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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
TABLE 6—ESTIMATED SHARES OF HIGH-COST MORTGAGE ORIGINATIONS FOR SMALL NON-DIS PRE- AND POST-DODDFRANK ACT a
Pre-DFA
Number
High-cost mortgages > 1% of all loans ...................................
High-cost mortgages > 3% of all loans ...................................
High-cost mortgages > 5% of all loans ...................................
Post-DFA
Percent
116
116
115
Number
5.1
5.1
5.0
Percent
461
258
161
20.1
11.3
7.0
a Number and percent of post-Dodd-Frank Act HOEPA originations are projected based on estimated post-Dodd-Frank Act originations of highcost 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-DoddFrank 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
srobinson on DSK4SPTVN1PROD with
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 negativeamortization 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.
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
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 nonreporters 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-
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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
money mortgages compared with refinance or
home-improvement loans. As noted, the post-DoddFrank 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.
249 For context, the comparable shares of loans
that allowed for negative amortization in the 1989–
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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
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.
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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 § 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 §§ 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
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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 § 1024.20 above, some
commenters provided suggestions for
minimizing their compliance burden,
which also impact their paperwork
burden. The Bureau is modifying
§ 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 § 1024.20, above. TILA and
Regulation Z are intended to ensure
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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
§ 1026.32(a)(1) and (c), § 1026.34(a)(5),
and § 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
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 nondepository 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
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.
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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 onetime 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.
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.
srobinson on DSK4SPTVN1PROD with
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 § 1024.20 as
follows.
One-time costs. The Bureau estimates
that covered persons would incur onetime 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
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.
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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 onetime paperwork burden to all
respondents to comply with the housing
counselor disclosure requirements in
§ 1024.20.
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.
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.
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.
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6959
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
§ 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 onetime 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.
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.
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.
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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 § 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
§ 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 § 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 § 1026.32(c). The
Bureau has identified the following
paperwork burdens in connection with
§ 1026.32(a)(1).
srobinson on DSK4SPTVN1PROD with
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
§ 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 § 1026.32.
As discussed in the section-by-section
analysis to § 1026.32(c), however, the
calculation of certain of the required
disclosures differs between the openend 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 nondepository 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, nondepository institutions originate openend 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 onetime 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 recordretention 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
Provision of list of housing counselors ........................................................................................................
Receipt of certification of counseling for high-cost mortgages ...................................................................
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28,000
1,400
31JAR2
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1,200,000
68,000
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations
6961
TABLE 1—ONE-TIME COSTS FOR ALL CFPB RESPONDENTS—Continued
Information collection
Hours
Dollars
Revision of HOEPA disclosure for applicability to open-end credit ............................................................
Provision of HOEPA disclosure ...................................................................................................................
2,900
1,500
170,000
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 counselors ........................................................................................................
Receipt of certification of counseling for high-cost mortgages ...................................................................
Revision of HOEPA disclosure for applicability to open-end credit ............................................................
Provision of special HOEPA disclosure ......................................................................................................
246,000
500
..............................
500
7,790,000
25,000
..............................
27,000
Total annual burden, All Respondents .................................................................................................
247,000
7,840,000
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
srobinson on DSK4SPTVN1PROD with
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)
1. The authority citation for part 1024
continues to read as follows:
■
Authority: 12 U.S.C. 2603–2605, 2607,
2609, 2617, 5512, 5581.
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2. Section 1024.20 is added to read as
follows:
■
§ 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
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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 (homeequity 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
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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)
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
4. Section 1026.1 is amended by
revising paragraph (d)(5) to read as
follows:
■
§ 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 § 1026.32(a).
Section 1026.35 prohibits specific acts
and practices in connection with closedend higher-priced mortgage loans, as
defined in § 1026.35(a). Section 1026.36
prohibits specific acts and practices in
connection with an extension of credit
secured by a dwelling.
*
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*
*
*
srobinson on DSK4SPTVN1PROD with
*
Subpart E—Special Rules for Certain
Home Mortgage Transactions
5. Section 1026.31 is amended by
revising paragraph (c)(1) and adding
paragraph (h) to read as follows:
■
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§ 1026.31
General rules.
*
*
*
*
*
(c) Timing of disclosure. (1)
Disclosures for high-cost mortgages. The
creditor shall furnish the disclosures
required by § 1026.32 at least three
business days prior to consummation or
account opening of a high-cost mortgage
as defined in § 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 § 1026.23(e)(2).
*
*
*
*
*
(h) Corrections and unintentional
violations. A creditor or assignee in a
high-cost mortgage, as defined in
§ 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
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(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.
■ 6. Section 1026.32 is amended by:
■ A. Revising paragraph (a);
■ B. Adding paragraphs (b)(2), (b)(3)(ii),
(b)(4)(ii), and (b)(6)(ii);
■ C. Revising paragraphs (c)(3) through
(5); and
■ 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:
§ 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 § 1026.35(a)(2), for a
comparable transaction by more than:
(A) 6.5 percentage points for a firstlien transaction, other than as described
in paragraph (a)(1)(i)(B) of this section;
(B) 8.5 percentage points for a firstlien 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
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(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 § 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
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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 § 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
§ 1026.36(a)(1), that can be attributed to
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6963
that transaction at the time the interest
rate is set;
(iii) All items listed in § 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 closedend 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 § 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) * * *
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(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 thirdparty 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
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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 § 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 § 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 §§ 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
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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.
*
*
*
*
*
■ 7. Section 1026.34 is revised to read
as follows:
§ 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
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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 highcost 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 highcost 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 openend, 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 mortgagerelated 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 § 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 closedend, high-cost mortgage, a creditor must
comply with the repayment ability
requirements set forth in § 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 § 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
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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 highcost 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 § 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
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6965
the outstanding principal balance
except as otherwise provided by
§ 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 § 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 § 1026.40; and
(E) A statement that the counselor has
verified that the consumer(s) received
the disclosures required by either
§ 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 accountopening 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
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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 highcost 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.
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(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
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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 § 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 § 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.
■ 8. Section 1026.36 is amended by
adding and reserving paragraphs (g) and
(j) and adding paragraph (k) to read as
follows:
*
*
*
*
*
§ 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 closedend transaction secured by a dwelling,
other than a reverse mortgage
transaction subject to § 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
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transaction secured by a dwelling, other
than a reverse mortgage transaction
subject to § 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).
■ 9. In Supplement I to Part 1026—
Official Interpretations:
■ A. Under Section 1026.31—General
Rules:
■ i. Under 31(c) Timing of disclosure:
■ a. Under 31(c)(1), the heading is
revised.
■ b. Under newly designated 31(c)(1),
paragraph 1 is revised.
■ c. Under 31(c)(1)(i) Change in terms,
paragraph 2 is revised.
■ d. Under 31(c)(1)(ii) Telephone
disclosures, paragraph 1 is revised.
■ e. Under 31(c)(1)(iii), the heading is
revised.
■ ii. 31(h) Corrections and unintentional
violations and paragraphs 1 and 2 are
added.
■ B. Under Section 1026.32—
Requirements for High-Cost Mortgages:
■ i. Under 32(a) Coverage:
■ a. Paragraph 32(a)(1) and paragraph 1
are added.
■ b. Under Paragraph 32(a)(1)(i),
paragraphs 1, 2, and 3 are revised, and
paragraph 4 is removed.
■ c. Paragraph 32(a)(1)(i)(B) and
paragraph 1 are added.
■ d. Under Paragraph 32(a)(1)(ii),
paragraph 1 and the introductory text of
paragraph 2 are revised, and paragraph
3 is added.
■ e. Paragraph 32(a)(1)(iii) and
paragraphs 1 and 2 are added.
■ f. Under Paragraph 32(a)(2), the
heading is revised.
■ g. Paragraph 32(a)(2)(ii) and
paragraph 1 are added.
■ h. Paragraph 32(a)(2)(iii) and
paragraph 1 are added.
■ i. 32(a)(3) Determination of annual
percentage rate and paragraphs 1, 2, 3,
4, and 5 are added.
■ ii. Under 32(b) Definitions:
■ a. Paragraph 32(b)(2), Paragraph
32(b)(2)(i), and paragraph 1 are added.
■ b. Paragraph 32(b)(2)(i)(B) and
paragraph 1 are added.
■ c. Paragraph 32(b)(2)(i)(C) and
paragraph 1 are added.
■ d. Paragraph 32(b)(2)(i)(D) and
paragraph 1 are added.
■ e. Paragraph 32(b)(2)(i)(E) and
paragraph 1 are added.
■ f. Paragraph 32(b)(2)(i)(F) and
paragraph 1 are added.
■ g. Paragraph 32(b)(2)(ii) and
paragraph 1 are added.
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h. Paragraph 32(b)(2)(iii) and
paragraph 1 are added.
■ i. Paragraph 32(b)(2)(iv) and
paragraph 1 are added.
■ j. Paragraph 32(b)(2)(vii) and
paragraph 1 are added.
■ k. Paragraph 32(b)(2)(viii) and
paragraphs 1 and 2 are added.
■ l. Under Paragraph 32(b)(6), as added
elsewhere in this issue of the Federal
Register, paragraphs 3 and 4 are added.
■ iii. Under 32(c) Disclosures:
■ a. 32(c)(2) Annual percentage rate and
paragraph 1 are added.
■ b. Under 32(c)(3), the heading is
revised.
■ c. Under newly designated 32(c)(3),
paragraph 1 is revised.
■ d. Paragraph 32(c)(3)(i) and paragraph
1 are added.
■ e. Under 32(c)(4) Variable rate,
paragraph 1 is revised.
■ iv. Under 32(d) Limitations:
■ a. Paragraph 1 is revised.
■ b. Under 32(d)(1)(i) Balloon payment,
paragraph 1 is revised and paragraphs 2
and 3 are added.
■ c. Under 32(d)(2) Negative
Amortization, paragraph 1 is revised.
■ d. 32(d)(6) Prepayment Penalties and
paragraph 1 are removed.
■ 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.
■ f. Under 32(d)(8), the heading is
revised.
■ g. Under newly designated 32(d)(8),
Paragraph 32(d)(8)(i) and paragraph 1
are added.
■ h. Under Paragraph 32(d)(8)(ii),
paragraph 1 is revised.
■ i. Under Paragraph 32(d)(8)(iii),
paragraphs 1 and 2.ii are revised.
■ C. Under Section 1026.34—Prohibited
Acts or Practices for High-Cost
Mortgages:
■ i. Under 34(a) Prohibited Acts or
Practices for High-Cost Mortgages:
■ a. Under 34(a)(4) Repayment ability,
paragraphs 1 through 5 are revised.
■ b. Under Paragraph 34(a)(4)(ii)(B),
paragraph 1 is revised and paragraph 2
is removed.
■ c. Paragraph 34(a)(4)(ii)(C) and
paragraph 1 are removed.
■ d. Under 34(a)(4)(iii) Presumption of
compliance, paragraph 1 is revised.
■ e. Under Paragraph 34(a)(4)(iii)(B),
paragraph 1 is revised.
■ f. 34(a)(5) Pre-loan counseling,
34(a)(5)(i) Certification of counseling
required, and paragraphs 1 through 5
are added.
■ g. 34(a)(5)(ii) Timing of counseling
and paragraphs 1 and 2 are added.
■ h. 34(a)(5)(iv) Content of certification
and paragraphs 1 and 2 are added.
■
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i. 34(a)(5)(v) Counseling fees and
paragraph 1 are added.
■ j. 34(a)(5)(vi) Steering prohibited and
paragraphs 1 and 2 are added.
■ k. 34(a)(6) Recommended default and
paragraphs 1 and 2 are added.
■ l. 34(a)(8) Late Fees, 34(a)(8)(i)
General, and paragraph 1 are added.
■ m. 34(a)(8)(iii) Multiple late charges
assessed on payment subsequently paid
and paragraph 1 are added.
■ n. 34(a)(8)(iv) Failure to make
required payment and paragraph 1 are
added.
■ o. 34(a)(10) Financing of points and
fees and paragraphs 1 and 2 are added.
■ ii. Under 34(b) Prohibited Acts or
Practices for Dwelling-Secured Loans;
Open-End Credit, the heading is revised.
■ iii. Under revised 34(b) Prohibited
acts or practices for dwelling-secured
loans; structuring loans to evade highcost mortgage requirements, paragraph 1
is revised and paragraph 2 is added.
■ D. Under Section 1026.36—Prohibited
Acts or Practices in Connection with
Credit Secured by a Dwelling:
■ i. 36(k) Negative amortization
counseling is added.
■ a. 36(k)(1)Counseling required and
paragraphs 1 through 4 are added.
■ 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
§ 1026.31
General Rules
*
*
*
*
*
31(c)(1) Disclosures for high-cost
mortgages.
1. Pre-consummation or account
opening waiting period. A creditor must
furnish § 1026.32 disclosures at least
three business days prior to
consummation for a closed-end, highcost mortgage and at least three business
days prior to account opening for an
open-end, high-cost mortgage. Under
§ 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 §§ 1026.15 and 1026.23 extends
to midnight of the third business day,
the rule under § 1026.32 does not. For
example, under § 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
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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 § 1026.34(a)(10), and
as a result the monthly payment differs
from what was previously disclosed
under § 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
§ 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 § 1026.31(h)(1) or
(2) should be in writing. The notice
should make the consumer aware of the
choices available under
§ 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 § 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.
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§ 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 § 1026.32, an open-end
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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 § 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 openend 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 variablerate, the duration of any initial, fixedrate 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 variablerate 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, fixedrate period that is not in whole years, a
creditor must identify the most closelycomparable 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 fixedrate 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 fixedrate period, or if it has an initial fixedrate 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
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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
§ 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
§ 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 § 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 § 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
§ 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
§ 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 § 1026.32(c) and (d) and § 1026.34.
However, if a transaction is subject to
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those requirements and restrictions by
operation of any provision of
§ 1026.32(a)(1), including by operation
of § 1026.32(a)(1)(iii), then the
transaction may not include a
prepayment penalty. See
§ 1026.32(d)(6). As a result,
§ 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 § 1026.32(a)(2))
secured by a consumer’s principal
dwelling. Closed-end credit transactions
covered by § 1026.43 are subject to the
additional prepayment penalty
restrictions set forth in § 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 § 1026.32(a)(1)(iii). The
following examples illustrate how to
calculate whether the terms of an openend credit agreement comply with the
maximum prepayment penalty period
and amounts described in
§ 1026.32(a)(1)(iii).
i. Assume that the terms of a homeequity 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 § 1026.32(b)(6)(ii), and
the penalty is greater than 2 percent of
the $10,000 initial credit limit, which is
$200. Under § 1026.32(a)(1)(iii), the plan
is a high-cost mortgage subject to the
requirements and restrictions set forth
in §§ 1026.32 and 1026.34.
ii. Assume that the terms of a homeequity 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
§ 1026.32(a)(1)(iii), the plan is a highcost mortgage subject to the
requirements and restrictions set forth
in §§ 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
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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 thirdparty 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
§ 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 § 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 constructiononly 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,
§ 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 § 1026.17(c)(6)(ii)
does not affect the determination of
whether the permanent phase of the
transaction is subject to § 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 § 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 § 1026.32. When the creditor
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discloses the two phases as a single
transaction, a single annual percentage
rate, reflecting the appropriate charges
from both phases, must be calculated for
the transaction in accordance with
§ 1026.32(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 § 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 § 1026.32. If the transaction is
determined to be a high-cost mortgage,
only the permanent phase is subject to
the requirements of §§ 1026.32 and
1026.34.
Paragraph 32(a)(2)(iii).
1. Housing Finance Agency. For
purposes of § 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 § 1026.17(c)(1)
and in § 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
§ 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 § 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
§ 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
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for the transaction varies solely in
accordance with an index.
ii. In general, for transactions subject
to § 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 § 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 closedend, 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
§ 1026.32(a)(3)(ii), for purposes of
determining the annual percentage rate
for § 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
§ 1026.32(a)(3)(ii), for purposes of
determining the annual percentage rate
for § 1026.32(a)(1)(i), the interest rate for
the transaction is 6 percent.
C. Assume that the terms of an openend 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 publiclyavailable index outside the creditor’s
control, in accordance with the
limitations applicable to open-end
credit plans in § 1026.40(f). Also assume
that, pursuant to the terms of the openend 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
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§ 1026.32(a)(3)(ii), for purposes of
determining the annual percentage rate
for § 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
§ 1026.32(a)(3)(ii), for purposes of
determining the annual percentage rate
for § 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
§ 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,
§ 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 § 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 § 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,
§ 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
§ 1026.32(a)(3)(ii).
32(b) Definitions.
*
*
*
*
*
Paragraph 32(b)(2)(i).
1. Finance charge. The points and fees
calculation under § 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
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included in the points and fees
calculation, except as provided in
§ 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
§ 1026.32(b)(2)(i)(D), the term loan
originator means a loan originator as
that term is defined in § 1026.36(a)(1),
without regard to § 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 § 1026.32(b)(2)(ii),
the term loan originator means a loan
originator as that term is defined in
§ 1026.36(a)(1), without regard to
§ 1026.36(a)(2). See the commentary to
§ 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 § 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
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included in the points and fees
calculation for purposes of § 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 § 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 pertransaction 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,
§ 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, § 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
§ 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 § 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
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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
§ 1026.32(c)(2), creditors must comply
with § 1026.6(a)(1). If a fixed-rate,
discounted introductory or initial
interest rate is offered on the
transaction, § 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 § 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 § 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.
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C. In discounted or premium variablerate 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 § 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
§ 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 § 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
§ 1026.32(d). Further, § 1026.35(b)
prohibits certain practices in connection
with closed-end transactions that meet
the coverage test in § 1026.35(a).
Because the coverage test in § 1026.35(a)
is generally broader than the coverage
test in § 1026.32(a), most closed-end
high-cost mortgages are also subject to
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the prohibitions set forth in § 1026.35(b)
(such as escrows), in addition to the
limitations in § 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 § 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
§ 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 § 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
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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 openend 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 § 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
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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.
*
*
*
*
*
§ 1026.34 Prohibited Acts or Practices in
Connection with High-Cost Mortgages
*
*
*
*
*
34(a)(4) Repayment ability for highcost mortgages.
1. Application of repayment ability
rule. The § 1026.34(a)(4) prohibition
against making loans without regard to
consumers’ repayment ability applies to
open-end, high-cost mortgages. The
§ 1026.43 repayment ability provisions
apply to closed-end, high-cost
mortgages. Accordingly, in connection
with a closed-end, high-cost mortgage,
§ 1026.34(a)(4) requires a creditor to
comply with the repayment ability
requirements set forth in § 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 § 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 § 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
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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 parttime 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 § 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
§ 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 § 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
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follow one of the non-required
procedures set forth in
§ 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 § 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
§ 1026.34(a)(4)(iii)(B) based on the
guidance in the commentary to
§ 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 § 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 § 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
§ 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 § 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 § 1026.40 to
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6973
allow counseling to occur. Pursuant to
12 CFR 1024.7(h), the disclosures
required by § 1026.40 can be provided
in lieu of a good faith estimate for openend 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 § 1026.40, regardless of
whether a revised good faith estimate or
revised disclosure form pursuant to
§ 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 § 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
§ 1026.32(c) or by RESPA for the highcost 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 § 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
§ 1026.34(a)(5)(vii).
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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 § 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 § 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 § 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
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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 § 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 § 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
§ 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
§ 1026.34(a)(10), ‘‘points and fees’’
means those items that are required to
be included in the calculation of points
and fees under § 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
§ 1026.34(a)(5), because, pursuant to
§ 1026.32(b)(1)(i)(D) and (b)(2)(i)(D),
such a fee is excluded from the
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calculation of points and fees as a bona
fide third-party charge.
2. Examples of financing points and
fees. For purposes of § 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 § 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
§ 1026.32(a)(1)(ii).
ii. A creditor does not structure a
transaction in violation of § 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-topermanent’’ 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 § 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.
*
*
*
*
*
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§ 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 § 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 § 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
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CFR part 214, unless HUD determines
otherwise.
2. Homeownership counseling. The
counseling required under § 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 § 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 § 1026.36(k), a creditor
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6975
may not extend credit to a first-time
borrower in connection with a closedend 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
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]]>Agencies
[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
-----------------------------------------------------------------------
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]]
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\3\ HOEPA amended TILA by adding new sections 103(aa) and 129,
15 U.S.C. 1602(aa) and 1639.
---------------------------------------------------------------------------
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 http://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 http://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.
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\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.
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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.
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\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).
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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\
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\23\ H. Conf. Rept. 103-652, at 162 (1994).
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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.
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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.
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\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.
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\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.
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\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).
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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.
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\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.
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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).
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\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.
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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.
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\30\ 15 U.S.C. 7001(c).
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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.
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\31\ 12 U.S.C. 1715z-20(d)(2)(B).
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[[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).
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\32\ Consumer Financial Protection Bureau, Reverse Mortgage
Report, at 10-11 (June 2012), available at http://files.consumerfinance.gov/a/assets/documents/201206_cfpb_Reverse_Mortgage_Report.pdf.
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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
t 
