Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z), 35429-35506 [2013-13173]
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Vol. 78
Wednesday,
No. 113
June 12, 2013
Part III
Bureau of Consumer Financial Protection
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12 CFR Part 1026
Ability-to-Repay and Qualified Mortgage Standards Under the Truth in
Lending Act (Regulation Z); Final Rule
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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations
BUREAU OF CONSUMER FINANCIAL
PROTECTION
12 CFR Part 1026
[Docket No. CFPB–2013–0002]
RIN 3170–AA34
Ability-to-Repay and Qualified
Mortgage Standards Under the Truth in
Lending Act (Regulation Z)
Bureau of Consumer Financial
Protection.
ACTION: Final rule; official
interpretations.
AGENCY:
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SUMMARY: The Bureau of Consumer
Financial Protection (Bureau) is
amending Regulation Z, which
implements the Truth in Lending Act
(TILA). Regulation Z generally prohibits
a creditor from making a mortgage loan
unless the creditor determines that the
consumer will have the ability to repay
the loan. The final rule provides an
exemption to these requirements for
creditors with certain designations,
loans pursuant to certain programs,
certain nonprofit creditors, and
mortgage loans made in connection with
certain Federal emergency economic
stabilization programs. The final rule
also provides an additional definition of
a qualified mortgage for certain loans
made and held in portfolio by small
creditors and a temporary definition of
a qualified mortgage for balloon loans.
Finally, the final rule modifies the
requirements regarding the inclusion of
loan originator compensation in the
points and fees calculation.
DATES: This rule is effective January 10,
2014.
FOR FURTHER INFORMATION CONTACT:
Jennifer B. Kozma or Eamonn K. Moran,
Counsels; Thomas J. Kearney or Mark
Morelli, Senior Counsels; or Stephen
Shin, Managing Counsel, Office of
Regulations, at (202) 435–7700.
SUPPLEMENTARY INFORMATION:
I. Summary of the Final Rule
The Bureau is issuing this final rule
to adopt certain exemptions,
modifications, and clarifications to
TILA’s ability-to-repay requirements.
TILA section 129C, as added by sections
1411, 1412, and 1414 of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act),
generally requires creditors to make a
reasonable, good faith determination of
a consumer’s ability to repay a mortgage
loan and creates a presumption of
compliance with these ability-to-repay
requirements for certain loans
designated as ‘‘qualified mortgages.’’ On
January 10, 2013, the Bureau issued a
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final rule (the 2013 ATR Final Rule) to
implement these ability-to-repay
requirements and qualified mortgage
provisions. See 78 FR 6407 (Jan. 30,
2013). At the same time, the Bureau
issued a proposed rule (the 2013 ATR
Proposed Rule or Bureau’s proposal)
related to certain proposed exemptions,
modifications, and clarifications to the
ability-to-repay requirements. See 78 FR
6621 (Jan. 30, 2013). This final rule
addresses the issues put forth for public
comment in the 2013 ATR Proposed
Rule. See part II.B below and part II.B–
F of the 2013 ATR Final Rule for a
complete discussion of the statutory and
regulatory background to the ability-torepay requirements.
Loan Originator Compensation and the
Points and Fees Calculation
The Dodd-Frank Act generally
provides that points and fees on a
qualified mortgage may not exceed 3
percent of the loan balance and that
points and fees in excess of 5 percent
will trigger the protections for high-cost
mortgages under the Home Ownership
and Equity Protection Act (HOEPA).1
The Dodd-Frank Act also included a
provision requiring that loan originator
compensation be counted toward these
thresholds, even if it is not paid up-front
by the consumer directly to the loan
originator.
The Bureau had solicited comment on
how to apply the statutory requirements
in situations in which payments pass
from one party to another over the
course of a mortgage transaction. The
Bureau was particularly concerned
about situations in which the creditor
pays compensation to a mortgage broker
or its own loan originator employees
because there is no simple way to
determine whether the compensation is
paid from money the creditor collected
from up-front charges to the consumer
(which would already be counted
against the points and fees thresholds)
or from the interest rate on the loan
(which would not be counted toward
the thresholds).
The final rule excludes from points
and fees loan originator compensation
paid by a consumer to a mortgage broker
when that payment has already been
counted toward the points and fees
thresholds as part of the finance charge
under § 1026.32(b)(1)(i). The final rule
also excludes from points and fees
compensation paid by a mortgage broker
to an employee of the mortgage broker
because that compensation is already
1 See title I subtitle B of the Riegle Community
Development and Regulatory Improvement Act of
1994, Public Law 103–325, 108 Stat. 2160 (Jan. 25,
1994).
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included in points and fees as loan
originator compensation paid by the
consumer or the creditor to the mortgage
broker.
The final rule excludes from points
and fees compensation paid by a
creditor to its loan officers. The Bureau
concluded that there were significant
operational challenges to calculating
individual employee compensation
accurately early in the loan origination
process, and that those challenges
would lead to anomalous results for
consumers. In addition, the Bureau
concluded that structural differences
between the retail and wholesale
channels lessened risks to consumers.
The Bureau will continue to monitor the
market to determine if additional
protections are necessary and evaluate
whether there are different approaches
for calculating retail loan officer
compensation consistent with the
purposes of the statute.
The final rule retains an ‘‘additive’’
approach for calculating loan originator
compensation paid by a creditor to a
loan originator other than an employee
of creditor. Under the additive
approach, § 1026.32(b)(1)(ii) requires
that a creditor include in points and fees
compensation paid by the creditor to a
mortgage broker, in addition to up-front
charges paid by the consumer to the
creditor that are included in points and
fees under § 1026.32(b)(1)(i).
Exemptions for Certain Creditors and
Lending Programs
Certain creditors and nonprofits. The
final rule provides an exemption from
the ability-to-repay requirements for
extensions of credit made by certain
types of creditors. Creditors designated
by the U.S. Department of the Treasury
as Community Development Financial
Institutions and creditors designated by
the U.S. Department of Housing and
Urban Development as either a
Community Housing Development
Organization or a Downpayment
Assistance Provider of Secondary
Financing are exempt from the abilityto-repay requirements, under certain
conditions. The final rule also generally
exempts creditors designated as
nonprofit organizations under section
501(c)(3) of the Internal Revenue Code
of 1986 (26 U.S.C. 501(c)(3)) that extend
credit no more than 200 times annually,
provide credit only to low-to-moderate
income consumers, and follow their
own written procedures to determine
that consumers have a reasonable ability
to repay their loans.
Credit extended pursuant to certain
lending programs. The final rule
provides an exemption from the abilityto-repay requirements for extensions of
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credit made pursuant to programs
administered by a housing finance
agency and for an extension of credit
made pursuant to an Emergency
Economic Stabilization Act program,
such as extensions of credit made
pursuant to a State Hardest Hit Fund
program.
Small Creditor Portfolio and BalloonPayment Qualified Mortgages
The final rule contains several
provisions that are designed to facilitate
compliance and preserve access to
credit from small creditors, which are
defined as creditors with no more than
$2 billion in assets that (along with
affiliates) originate no more than 500
first-lien mortgages covered under the
ability-to-repay rules per year. The
Bureau had previously exercised
authority under the Dodd-Frank Act to
allow certain balloon-payment
mortgages to be designated as qualified
mortgages if they were originated and
held in portfolio by small creditors
operating predominantly in rural or
underserved areas. In this final rule, the
Bureau is:
• Adopting a new, fourth category of
qualified mortgages for certain loans
originated and held in portfolio for at
least three years (subject to certain
limited exceptions) by small creditors,
even if they do not operate
predominantly in rural or underserved
areas. The loans must meet the general
restrictions on qualified mortgages with
regard to loan features and points and
fees, and creditors must evaluate
consumers’ debt-to-income ratio or
residual income. However, the loans are
not subject to a specific debt-to-income
ratio as they would be under the general
qualified mortgage definition.
• Raising the threshold defining
which qualified mortgages receive a safe
harbor under the ability-to-repay rules
for loans that are made by small
creditors under the balloon-loan or
small creditor portfolio categories of
qualified mortgages. Because small
creditors often have higher cost of
funds, the final rule shifts the threshold
separating qualified mortgages that
receive a safe harbor from those that
receive a rebuttable presumption of
compliance with the ability-to-repay
rules from 1.5 percentage points above
the average prime offer rate (APOR) on
first-lien loans to 3.5 percentage points
above APOR.
• Providing a two-year transition
period during which small creditors that
do not operate predominantly in rural or
underserved areas can offer balloonpayment qualified mortgages if they
hold the loans in portfolio. During the
two-period transition period, the Bureau
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intends to study whether the definitions
of ‘‘rural’’ or ‘‘underserved’’ should be
adjusted and to work with small
creditors to transition to other types of
products, such as adjustable-rate
mortgages, that satisfy other qualified
mortgage definitions.
The ability-to-repay rules as revised
by this final rule will take effect on
January 10, 2014, along with various
other rules implementing new mortgage
protections under the Dodd-Frank Act.
II. Background
A. Mortgage Market Background
The mortgage market is the single
largest market for consumer financial
products and services in the United
States. In 2007 and 2008 this market
collapsed, greatly diminishing the
wealth of millions of American
consumers and sending the economy
into a severe recession. A primary cause
of the collapse was the steady
deterioration of credit standards in
mortgage lending. Evidence
demonstrates that many mortgage loans
were made solely against collateral and
without consideration of ability to
repay, particularly in the markets for
‘‘subprime’’ and ‘‘Alt-A’’ products,
which more than doubled from $400
billion in originations in 2003 to $830
billion in originations in 2006.2
Subprime products were sold primarily
to consumers with poor or no credit
history, while Alt-A loans were sold
primarily to consumers who provided
little or no documentation of income or
other evidence of repayment ability.3
Because subprime and Alt-A loans
involved additional risk, they were
typically more expensive to consumers
than ‘‘prime’’ mortgage loans, although
many of them had very low introductory
interest rates. While housing prices
continued to increase, it was relatively
easy for consumers to refinance their
existing loans into more affordable
products to avoid interest rate resets and
other adjustments. When housing prices
2 Inside Mortg. Fin., The 2011 Mortgage Market
Statistical Annual (2011).
3 There is evidence that some consumers who
would have qualified for ‘‘prime’’ loans were
steered into subprime loans as well. The Federal
Reserve Board on July 18, 2011 issued a consent
cease and desist order and assessed an $85 million
civil money penalty against Wells Fargo & Company
of San Francisco, a registered bank holding
company, and Wells Fargo Financial, Inc., of Des
Moines. The order addresses allegations that Wells
Fargo Financial employees steered potential primeeligible consumers into more costly subprime loans
and separately falsified income information in
mortgage applications. In addition to the civil
money penalty, the order requires that Wells Fargo
compensate affected consumers. See Press Release,
Federal Reserve Board (July 20, 2011), available at:
http://www.federalreserve.gov/newsevents/press/
enforcement/20110720a.htm.
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began to decline in 2005, however,
refinancing became more difficult and
delinquency rates on subprime and AltA products increased dramatically.4 By
the summer of 2006, 1.5 percent of loans
less than a year old were in default, and
this figure peaked at 2.5 percent in late
2007.5 As the economy worsened, the
rates of serious delinquency (90 or more
days past due or in foreclosure) for the
subprime and Alt-A products began a
steep increase from approximately 10
percent in 2006, to 20 percent in 2007,
to over 40 percent in 2010.6 Although
the mortgage market is recovering,
consumers today continue to feel the
effects of the financial crisis.
Community-Focused Lending Programs
While governmental and nonprofit
programs have always been an
important source of assistance for lowto moderate-income (LMI) consumers,
these programs have taken on even
greater significance in light of current
tight mortgage credit standards and
Federal initiatives to stabilize the
housing market. There are a variety of
programs designed to assist LMI
consumers with access to
homeownership. These programs are
generally offered through a nonprofit
entity, local government, or a housing
finance agency (HFA). These programs
play an important role in the housing
sector of the economy.
Types of financial assistance
available. Community-focused lending
programs typically provide LMI
consumers with assistance ranging from
housing counseling services to full
mortgage loan financing. Some
programs offer financial assistance
through land trust programs, in which
the consumer leases the real property
and takes ownership of only the
improvements. Many organizations
provide ‘‘downpayment assistance’’ in
connection with mortgage loan
financing. This can be a gift, grant, or
loan to the consumer to assist with the
consumer’s down payment, or to pay for
some of the closing costs. These
programs often rely on subsidies from
Federal government funds, local
government funds, foundations, or
4 U.S. Fin. Crisis Inquiry Comm’n, The Financial
Crisis Inquiry Report: Final Report of the National
Commission on the Causes of the Financial and
Economic Crisis in the United States at 215–217
(Official Gov’t ed. 2011) (FCIC Report), available at:
http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPOFCIC.pdf.
5 FCIC Report at 215. CoreLogic Chief Economist
Mark Fleming told the FCIC that the early payment
default rate ‘‘certainly correlates with the increase
in the Alt-A and subprime shares and the turn of
the housing market and the sensitivity of those loan
products.’’ Id.
6 FCIC Report at 217.
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employer funding.7 For example, many
of these programs rely on funds
provided through the HUD Home
Investment Partnerships Program
(HOME Program).8
Some programs offer first-lien
mortgage loans designed to meet the
needs of LMI consumers. These firstlien mortgage loans may have a
discounted interest rate or limited
origination fees or may permit high
loan-to-value ratios. Many programs
offer subordinate financing.
Subordinate-financing options may be
simple, such as a relatively inexpensive
subordinate-lien loan to pay for closing
costs. Other methods of subordinate
financing may be complex. For example,
one HFA program offers a 30-year,
fixed-rate, subordinate-lien mortgage
loan through partner creditors, with
interest-only payments for the first 11
years of the loan’s term, and with an
interest subsidy for the LMI consumer,
resulting in a graduated monthly
payment between the fifth and eleventh
year of the loan; an additional 30-year
deferred, 0 percent subordinate-lien
mortgage loan is extended by the HFA
equal to the amount of the subsidy.9
Some of the loans offered by these
programs, whether first-lien or
subordinate-financing, are structured as
hybrid grant products that are
commonly forgiven.
Housing finance agencies. For over 50
years, HFAs have provided LMI
consumers with opportunities for
affordable homeownership.10 HFAs are
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.11 Many of the State
7 Abigail Pound, Challenges and Changes in
Community-Based Lending for Homeownership,
NeighborWorks America, Joint Center for Housing
Studies of Harvard University (Feb. 2011), available
at: http://www.jchs.harvard.edu/sites/
jchs.harvard.edu/files/w11-2_pound.pdf.
8 The HOME Investment Partnerships Program is
authorized under title II of the Cranston-Gonzalez
National Affordable Housing Act of 1990, Public
Law 101–625, 104 Stat. 4079 (1990). See 24 CFR
92.1 through 92.618.
9 See http://www.mhp.net/homeownership/home
buyer/soft_second_works.php, describing the
SoftSecond program offered by the Massachusetts
Housing Partnership.
10 The first State housing finance agency was
established in New York in 1960. See New York
State Housing Finance Agency Act, 1960 Laws of
New York, 183rd Session, Chap. 671.
11 For example, the Louisiana Housing
Corporation administers affordable housing
programs across all of Louisiana, while The Finance
Authority of New Orleans administers programs
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and Federal programs HFAs administer
do not provide administrative funds;
others provide limited administrative
funds. Most HFAs operate
independently and do not receive State
operating funds. These agencies are
generally funded through tax-exempt
bonds but may receive funding from
Federal, State, or other sources.12 HFAs
issue these tax-exempt bonds, also
known as mortgage revenue bonds, and
use the proceeds of the bond sale to
finance affordable mortgage loans to
LMI consumers. As of June 2012, the 51
State HFAs (including the District of
Columbia) had $107 billion in
outstanding tax-free municipal debt
available. These mortgage revenue
bonds funded approximately 100,000
first-time homeowners per year. HFAs
may also receive funding through
Federal programs, such as the HOME
Program, which is the largest Federal
block grant for affordable housing.13
HFAs employ several methods of
promoting affordable homeownership.
These agencies may partner with local
governments to develop and implement
long-term community-development
strategies. For example, HFAs may
provide tax credits to companies that
build or rehabilitate affordable
housing.14 These agencies may also
administer affordable housing trust
funds or other State programs to
facilitate the affordable housing
development.15 Many HFAs also
provide education, counseling, or
training courses to first-time or LMI
consumers.
HFAs also provide financial
assistance directly to consumers.
Typically, HFAs offer the first-lien
mortgage loan, subordinate financing,
and downpayment assistance programs
described above. HFAs may also
establish pooled loss reserves to selfonly in Orleans Parish. See www.lhfa.state.la.us and
www.financeauthority.org.
12 Bonds issued by HFAs are tax-exempt if the
proceeds are used to provide assistance to first-time
or LMI-homebuyers. See 26 U.S.C. 143.
13 See www.hud.gov/homeprogram.
14 The Tax Reform Act of 1986, Public Law 99–
514, 100 Stat. 2085 (1986), included the LowIncome Housing Tax Credit Program. Under this
program, the IRS provides tax credits to HFAs.
HFAs may transfer these tax credits to developers
of affordable housing. Developers then sell these
credits to fund the development program. See
http://portal.hud.gov/hudportal/HUD?src=/program
_offices/comm_planning/affordablehousing/
training/web/lihtc/basics.
15 The Massachusetts Affordable Housing Trust
Fund provides funds to governmental subdivisions,
nonprofit organizations, and other entities seeking
to provide for the development of affordable
housing. See www.masshousing.com. New York
State’s Mitchell-Lama program provides subsidies
such as property tax exemptions to affordable
housing developers. See http://www.nyshcr.org/
Programs/mitchell-lama/.
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insure mortgage loans originated
pursuant to the program, thereby
permitting LMI consumers to avoid
private mortgage insurance. HFAs may
also provide other assistance to LMI
consumers, such as mortgage loan
payment subsidies or assistance with
the up-front costs of a mortgage loan. In
2010, HFAs provided about $10 billion
in affordable financing.16 In 2010, 89
percent of HFAs provided down
payment assistance loan or grant
assistance and 57 percent of HFAs
provided assistance in conjunction with
programs offered by the Federal
Housing Administration (FHA) or the
U.S. Department of Agriculture
(USDA).17 However, HFAs generally do
not provide direct financing to LMI
consumers. Many HFAs are prohibited
by law from directly extending credit in
an effort by State governments to avoid
competing with the private sector. HFAs
generally partner with creditors, such as
local banks, that extend credit pursuant
to the HFA’s program guidelines. Most
HFA programs are ‘‘mortgage purchase’’
programs in which the HFA establishes
program requirements (e.g., income
limits, purchase price limits, interest
rates, points and term limits,
underwriting standards, etc.), and agrees
to purchase loans made by private
creditors that meet these requirements.
Many HFAs expand on the
underwriting standards of GSEs or
Federal government agencies by
applying even stricter underwriting
standards than these guidelines or the
ability-to-repay requirements, such as
requiring mandatory counseling for all
first-time homebuyers and strong loan
servicing. For example, the State of New
York Mortgage Agency (SONYMA)’s
underwriting requirements generally
include a two-year, stable history of
earned income, a monthly payment-toincome ratio not to exceed 40 percent,
a monthly debt-to-income ratio not to
exceed 45 percent, and review of the
consumer’s entire credit profile to
determine acceptable credit.18
HFAs extend credit only after
conducting a lengthy and thorough
analysis of a consumer’s ability to repay.
HFAs generally employ underwriting
requirements that are uniquely tailored
to meet the needs of LMI consumers,
and which often account for
nontraditional underwriting criteria,
extenuating circumstances, and other
elements that are indicative of
16 National Council of State Housing Agencies,
State HFA Factbook (2010), p. 33.
17 Id. at 21–22, 35–36.
18 See State of New York Mortgage Agency
(SONYMA) Credit and Property Underwriting
Notes, available at: http://www.nyshcr.org/assets/
documents/1006.pdf.
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creditworthiness, ability to repay, and
responsible homeownership. In certain
circumstances, some HFAs require the
consideration of compensating factors
and other elements that are different
from the factors required to be
considered and verified under the
ability-to-repay requirements. For
example, the Connecticut Housing
Finance Agency (CHFA)’s underwriting
requirements require the consideration
of certain compensating factors (e.g.,
ability to make a large down payment,
demonstrated ability to accumulate
savings, substantial documented cash
reserves, etc.) for consumers with debt
ratios that exceed the maximum CHFA
monthly payment-to-income and debtto-income ratio limits.19 In addition, to
be eligible for Virginia Housing
Development Authority (VHDA)
conventional financing, a consumer
must demonstrate the willingness and
ability to repay the mortgage debt and
creditors must consider: Employment
and income; credit history; sufficient
funds to close; monthly housing
expenses; and monthly payment-toincome and debt-to-income ratios.20
VHDA underwriting guidelines allow
delegated underwriters to approve
exceptions to the above debt-to-income
ratios, provided that the ratios do not
exceed 2 percent above the guidelines.
The exceptions must be justified with
strong compensating factors, which
must indicate that the consumer can
afford the repayment of the increased
debt.21 Through careful and regular
oversight, however, HFAs help ensure
that their lenders follow the HFAs’ strict
underwriting standards.
Private organizations. While entities
such as HFAs develop and finance
affordable housing programs, these
mortgage loans are generally extended
by private organizations. These
organizations often are structured as
nonprofit 501(c)(3) organizations. Under
Internal Revenue Code section 501(c)(3),
the designation is for nonprofit, taxexempt, charitable organizations not
operated for the benefit of private
interests.22 Under Federal tax law,
19 See Connecticut Housing Finance Agency
Operating Manual, Section 5—Underwriting,
available at: http://www.chfa.org/content/
CHFA%20Documents/Operating%20Manual%20%20Section%2005%20Underwriting.pdf.
20 See Virginia Housing Development Authority
Origination Guide, Section 2.3 Underwriting
Requirements (Aug. 2011), available at: http://
www.vhda.com/BusinessPartners/Lenders/
LoanInfoGuides/
Loan%20Information%20and%20Guidelines/
OriginationGuide.pdf.
21 See id.
22 See http://www.irs.gov/Charities-&-Non-Profits/
Charitable-Organizations/Exemption-RequirementsSection-501(c)(3)-Organizations.
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501(c)(3) organizations are restricted
from lobbying activities, while 501(c)(4)
organizations, which must exist to
promote social welfare, may engage in
political campaigning and lobbying.23
Most organizations that provide support
to LMI consumers are structured as
501(c)(3) organizations. However, some
organizations are structured as nonprofit
501(c)(4) organizations.
Various Federal programs establish
eligibility requirements and provide
ongoing monitoring of specific types of
creditors that receive Federal grants and
other support. For example, Community
Development Financial Institutions
(CDFIs) are approved by the U.S.
Department of the Treasury (Treasury
Department) to receive monetary awards
from the Treasury Department’s CDFI
Fund, which was established to promote
capital development and growth in
underserved communities. Promoting
homeownership and providing safe
lending alternatives are among the
Fund’s main goals. The Treasury
Department created the CDFI
designation to identify and support
small-scale creditors that are committed
to community-focused lending but have
difficulty raising the capital needed to
provide affordable housing services.24
CDFIs may operate on a for-profit or
nonprofit basis, provided the CDFI has
a primary mission of promoting
community development.25 These
programs are also subject to other
eligibility requirements.26 As of July
2012, there were 999 such organizations
in the U.S., 62 percent of which were
classified as Community Development
(CD) Loan Funds and 22 percent as CD
Credit Unions, while the rest were CD
Banks, Thrifts, or CD Venture Capital
Funds.27
The U.S. Department of Housing and
Urban Development (HUD) may
designate nonprofits engaging in
affordable housing activities as
Downpayment Assistance through
Secondary Financing Providers
(DAPs).28 HUD established this
designation as part of an effort to
23 See http://www.irs.gov/Charities-&-Non-Profits/
Other-Non-Profits/Social-Welfare-Organizations.
24 See 68 FR 5704 (Feb. 4, 2003).
25 See 12 CFR 1805.201(b).
26 Id. Treasury Department eligibility
requirements for CDFIs stipulate that an approved
organization must: Be a legal entity at the time of
certification application; have a primary mission of
promoting community development; be a financing
entity; primarily serve one or more target markets;
provide development services in conjunction with
its financing activities; maintain accountability to
its defined target market; and be a non-government
entity and not be under control of any government
entity (Tribal governments excluded).
27 See http://www.cdfifund.gov/docs/
certification/cdfi/CDFI List-07-31-12.xls.
28 See 24 CFR 200.194.
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promote nonprofit involvement in
affordable housing programs.29 HUDapproved nonprofits may participate in
FHA single-family programs that allow
them to purchase homes at a discount,
finance FHA-insured mortgages with the
same terms and conditions as owneroccupants, or be able to finance
secondary loans for consumers
obtaining FHA-insured mortgages.30 A
DAP must be approved by HUD if it is
a nonprofit or nonprofit instrumentality
of government that provides
downpayment assistance as a lien in
conjunction with an FHA first mortgage;
government entity DAPs and gift
programs do not require approval.31 As
of May 2013 HUD listed 228 nonprofit
agencies and nonprofit instrumentalities
of government in the U.S. that are
authorized to provide secondary
financing.32 HUD performs field reviews
and requires annual reports of
participating nonprofit agencies.
Additionally, HUD’s quality control
plan requires periodic review for
deficient policies and procedures and
corrective actions. These approval and
subsequent review procedures are
intended to ensure that DAPs operate in
compliance with HUD requirements and
remain financially viable.33 However,
HUD recognizes that these nonprofits
have limited resources and gives
consideration to DAP viability when
crafting regulations.34
Creditors may also be certified by
HUD as Community Housing
29 ‘‘Nonprofit organizations are important
participants in HUD’s efforts to further affordable
housing opportunities for low- and moderateincome persons through the FHA single family
programs. FHA’s single family regulations recognize
a special role for nonprofit organizations in
conjunction with the . . . provision of secondary
financing.’’ See 67 FR 39238 (June 6, 2002).
30 DAPs generally rely on FHA program
guidelines for underwriting purposes, but have
additional requirements for determining eligibility
for assistance. For example, the Hawaii
Homeownership Center is a HUD-approved DAP
with separate eligibility criteria, available at: http://
www.hihomeownership.org/pdf/
DPAL5_FAQ_JAN2013.pdf.
31 See http://portal.hud.gov/hudportal/HUD?src=/
program_offices/housing/sfh/np/sfhdap01.
32 See https://entp.hud.gov/idapp/html/
f17npdata.cfm.
33 ‘‘It is vital that the Department periodically and
uniformly assess the management and financial
ability of participating nonprofit agencies to ensure
they are not overextending their capabilities and
increasing HUD’s risk of loss as a mortgage
insurance provider.’’ 65 FR 9285, 9286 (Feb. 24,
2000).
34 ‘‘HUD continues to strongly encourage the
participation of nonprofit organizations, including
community and faith-based organizations, in its
programs. This proposed rule is not designed to
place particular burdens on participation by
nonprofit organizations. Rather, the proposed rule
is designed to ensure that nonprofit organizations
have the capacity, experience, and interest to
participate in HUD’s housing programs.’’ 69 FR
7324, 7325 (Feb. 13, 2004).
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Development Organizations (CHDOs) in
connection with HUD’s HOME Program,
which provides grants to fund a wide
range of activities that promote
affordable homeownership.35 HUD
Participating Jurisdictions confer CHDO
certification only on communityfocused nonprofits that are both
dedicated to furthering a community’s
affordable housing goals and capable of
complying with the requirements of the
HOME Program.36 Creditors designated
as CHDOs are eligible to receive special
CHDO set-aside funds from the HOME
Program to fund local homebuyer
assistance programs.37 Applicants
seeking CHDO status must meet
rigorous requirements. For example, a
CHDO must be designated as a nonprofit
under section 501(c)(3) or (c)(4) of the
Internal Revenue Code, adhere to strict
standards of financial accountability,
have among its purposes the provision
of decent and affordable housing for
LMI consumers, maintain accountability
to the community, and have a proven
record of capably and effectively serving
low-income communities.38 After the
CHDO designation is obtained, CHDO
creditors must operate under the
supervision of a Participating
Jurisdiction and in accordance with the
requirements of the HOME Program.39
HUD conducts annual performance
reviews to determine whether funds
have been used in accordance with
program requirements.40 While HUD
continues to support affordable housing
programs involving CHDOs, current
market conditions have affected CHDO
viability.41
35 See http://portal.hud.gov/hudportal/HUD?src=/
program_offices/comm_planning/
affordablehousing/programs/home.
36 ‘‘The Department believes that there was
specific statutory intent to create an entitlement for
community-based nonprofit organizations that
would own, sponsor or develop HOME assisted
housing. While partnerships with State and local
government are critical to the development of
affordable housing, these organizations are viewed
as private, independent organizations separate and
apart from State or local governments. One of the
major objectives of the Department’s technical
assistance program is to increase the number of
capable, successful CHDOs able and willing to use
the CHDO set-aside [fund].’’ 61 FR 48736, 48737
(Sept. 16, 1996).
37 See 24 CFR 92.300 through 92.303.
38 See 24 CFR 92.2.
39 For example, no more than 5 percent of a
Participating Jurisdiction’s fiscal year HOME
allocation may be used for CHDO operating
expenses. 24 CFR 92.208(a).
40 See 24 CFR 92.550 through 92.552.
41 ‘‘[Participating jurisdictions] have encountered
new challenges in administering their programs and
in managing their growing portfolios of older
HOME projects. These challenges include reduced
availability of states or local funding sources,
reduced private lending, changes in housing
property standards, and energy codes and
reductions in states and local government
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CDFIs and CHDOs that provide
mortgage loans generally employ
underwriting guidelines tailored to the
needs of LMI consumers. Unlike
creditors that rely on industry-wide
underwriting guidelines, which
generally do not account for the unique
credit characteristics of LMI consumers,
CDFI and CHDO underwriting
requirements include a variety of
compensating factors. For example,
these creditors often consider personal
narratives explaining prior financial
difficulties, such as gaps in employment
or negative credit history.42 Others
consider the amount of time a consumer
spends working on the construction or
rehabilitation of affordable homes.43
Some creditors also consider a
consumer’s general reputation, relying
on references from a landlord or persons
with whom the consumer does
business.44 In these transactions, a CDFI
or CHDO may determine that the
strength of these compensating
characteristics outweigh weaknesses in
other underwriting factors, such as
negative credit history or irregular
income. Including these compensating
factors in the underwriting process
enables CDFIs and CHDOs to more
appropriately underwrite LMI
consumers.
Nonprofit creditors may engage in
community-focused lending without
obtaining one of the designations
described above. Such nonprofits often
rely on HFA or Federal programs for
funding, lending guidelines, and other
support. However, some nonprofits offer
credit to LMI consumers independent of
these State or Federal programs. For
example, nonprofits may make mortgage
loans in connection with a GSE
affordable housing program. The
Federal Home Loan Bank (FHLB)
workforces throughout the Nation. These challenges
have been magnified by current housing and credit
market conditions.’’ 76 FR 78343, 78345 (Dec. 16,
2011).
42 Neighborworks Anchorage, which is designated
as both a CDFI and CHDO, requires letters of
explanation regarding gaps in employment or
derogatory credit history. See http://
www.nwanchorage.org/home-ownership/buyinghome/getting-loan-affordable-loans-lendingprograms.
43 The Community Development Corporation of
Brownsville, which is designated as a CHDO,
requires consumers to contribute 11 months of
labor, or ‘‘sweat equity,’’ as part of the approval
process. See http://www.cdcb.org/h-hprograms.html#programs2. St. Lucie Habitat for
Humanity, which is designated as a CHDO, requires
300 hours of labor as part of the approval process.
See http://stluciehabitat.org/#.
44 Habitat for Humanity affiliates, many of which
are designated as a CHDO or CDFI, consider
references from current and former landlords,
creditors, and others. See Habitat for Humanity
Affiliate Operations Manual, available at: http://
www.medinahabitat.org/files/
AffilOpFamilySelect.pdf.
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System, Federal National Mortgage
Association (Fannie Mae), and Federal
Home Loan Mortgage Corporation
(Freddie Mac) offer several programs to
support affordable housing by
facilitating mortgage financing for LMI
consumers. For example, the FHLB
Affordable Housing Program provides
grants to member banks to fund
programs that assist with closing costs
or down payments, buy down principal
amounts or interest rates, refinance an
existing loan, or assist with
rehabilitation or construction costs.45
Fannie Mae and Freddie Mac also offer
two programs focused on communityfocused lending.46
Other options exist for nonprofits
seeking to develop and fund
community-focused lending programs.
For example, a nonprofit may originate
mortgage loans to LMI consumers and
subsequently sell the loans to a bank,
credit union, or other investor as part of
a Community Reinvestment Act
partnership program.47 Other nonprofits
may operate a limited affordable
housing assistance fund, funded entirely
by private donations, under which LMI
consumers may obtain subordinate
financing. Nonprofits such as these
often rely on the underwriting
performed by the creditor for the firstlien mortgage loan, which is often a
bank or credit union, to process,
underwrite, and approve the LMI
consumer’s application. In addition,
some nonprofits are self-supporting and
offer full financing to LMI consumers.
These nonprofits often establish lending
programs with unique guidelines, such
as requirements that LMI consumers
devote a minimum number of hours
towards the construction of affordable
housing.
Homeownership Stabilization and
Foreclosure Prevention Programs
During the early stages of the financial
crisis the mortgage market significantly
45 The Federal Home Loan Bank of Des Moines
provides funds for member bank programs related
to rural homeownership, urban first-time
homebuyers, and Native American homeownership.
See http://www.fhlbdm.com/communityinvestment/down-payment-assistance-programs/.
The Federal Home Loan Bank of Chicago provides
funds for member bank programs related to down
payment and closing cost assistance or eligible
rehabilitation costs for the purchase of a home. See
http://ci.fhlbc.com/Grant_Pgms/DPP.shtml.
46 Fannie Mae offers first-lien mortgage loans
through the My Community Mortgage program and
subordinate-lien loans through the Community
Seconds program. Freddie Mac offers both first- and
subordinate-lien mortgage loans through the Home
Possible program.
47 Under the Community Reinvestment Act (12
U.S.C. 2901), depository institutions may meet
community reinvestment goals by directly
originating or purchasing mortgage loans provided
to LMI consumers. See 12 CFR 228.22.
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tightened mortgage loan underwriting
requirements in response to uncertainty
over the magnitude of potential losses
due to delinquencies, defaults, and
foreclosures.48 This restriction in credit
availability coincided with increasing
unemployment, falling home values,
and the onset of subprime ARM resets.
As a result, many subprime ARM
consumers could not afford their
mortgage payments and were not able to
obtain refinancings. This led to
increases in delinquencies and
foreclosures, which prompted further
tightening of underwriting standards.
Other subprime ARM consumers were
able to remain current, but were not able
to refinance because of a decrease in
their loan-to-value ratio or an increase
in their debt-to-income ratio.49
However, these consumers devoted
most of their disposable income to
mortgage payments, thereby lowering
overall consumer demand and further
weakening the national economy.50
Policymakers became concerned that
the losses incurred from foreclosures on
subprime mortgage loans would
destabilize the entire mortgage market.51
There was a particular concern that the
uncertainty surrounding exposure to
these losses would lead to a fearinduced downward economic spiral.52
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48 A
2011 OCC survey shows that 56 percent of
supervised banks participating in the survey
tightened residential real estate underwriting
requirements between 2007 and 2008, and 73
percent tightened underwriting requirements
between 2008 and 2009. See Office of the
Comptroller of the Currency, Survey of Credit
Underwriting Practices 2011, p. 11.
49 ‘‘[W]ith house prices becoming flat or declining
in many parts of the country during 2007, it has
become increasingly difficult for many subprime
ARM borrowers to refinance. While many such
borrowers remain current on their loans or are still
able to refinance at market rates or into FHA
products, an increasing number have either fallen
behind on their existing payments or face the
prospect of falling behind when rates reset and they
are unable to refinance.’’ Accelerating Loan
Modifications, Improving Foreclosure Prevention
and Enhancing Enforcement, 110th Cong. (Dec. 6,
2007) (testimony of John C. Dugan, Comptroller,
Office of the Comptroller of the Currency).
50 By the third quarter of 2007, the ratio of
mortgage-related financial obligations (which is
comprised of mortgage debt, homeowners’
insurance, and property tax) to disposable personal
income reached an all-time high of 11.3 percent.
See http://www.federalreserve.gov/releases/
housedebt/.
51 ‘‘[A]nalysts are concerned that mortgage
foreclosures will climb significantly higher and,
along with falling housing prices, overwhelm the
ability of mortgage markets to restructure or
refinance loans for creditworthy borrowers.’’
Congressional Budget Office, Options for
Responding to Short-Term Economic Weakness, p.
21 (Jan. 2008).
52 ‘‘[A] breakdown of mortgage markets could put
the economy on a self-reinforcing downward spiral
of less lending, weaker economic activity, lower
house prices, more foreclosures, even less lending,
and so on, either causing or significantly worsening
a recession.’’ Id. pp. 21–22.
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As the crisis worsened, industry
stakeholders attempted to stop this selfreinforcing cycle through a series of
measures intended to stabilize
homeownership and prevent
foreclosure. Beginning in late 2008, the
Federal government, Federal agencies,
and GSEs implemented programs
designed to facilitate refinancings and
loan modifications.
The Troubled Asset Relief Program.
The U.S. government enacted and
implemented several programs intended
to promote economic recovery by
stabilizing homeownership and
preventing foreclosure. The Emergency
Economic Stabilization Act of 2008,53 as
amended by the American Recovery and
Reinvestment Act of 2009,54 authorizes
the Treasury Department to ‘‘use loan
guarantees and credit enhancements to
facilitate loan modifications to prevent
avoidable foreclosures.’’ 55 Pursuant to
this authority, the Treasury Department
established the Troubled Asset Relief
Program (TARP), under which two
programs were created to provide
financial assistance directly to
homeowners in danger of losing their
homes: the Making Home Affordable
(MHA) program and the Hardest Hit
Fund (HHF) program. The MHA
program is operated by the Treasury
Department and seeks to provide
Federally-directed assistance to
consumers who are at risk of default,
foreclosure, or were otherwise harmed
by the financial crisis.56 The HHF
program provides funds to certain HFAs
in States where the Treasury
Department has determined that locallydirected stabilization programs are
required.57
MHA began with the introduction of
the Home Affordable Modification
Program (HAMP) in March 2009.58
HAMP is intended to assist employed
homeowners by replacing the
consumer’s current mortgage loan with
a more affordable mortgage loan.59
53 12 U.S.C. 5201 et. seq.; Public Law 110–343
(Oct. 3, 2008).
54 See Sec. 7002 of Public Law 111–5 (Jan. 6,
2009).
55 12 U.S.C. 5219(a)(1).
56 See www.makinghomeaffordable.gov.
57 See http://www.treasury.gov/initiatives/
financial-stability/TARP-Programs/housing/hhf/
Pages/default.aspx.
58 See Press Release, Treasury Department, Relief
for Responsible Homeowners (Mar. 4, 2009),
available at: http://www.treasury.gov/press-center/
press-releases/Pages/200934145912322.aspx.
59 Generally speaking, a loan can be modified
under HAMP only if it yields a positive net present
value using series of tests involving ‘‘waterfalls.’’
Under the waterfall method, servicers must
repeatedly project amortizations based on
sequential decreases in the interest rate and, if
necessary, principal forgiveness, until arriving at a
potential loan modification with a target front-end
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35435
HAMP produced nearly 500,000 trial
modifications during the first six
months of the program.60 MHA offerings
expanded with the creation of the
Second Lien Modification Program in
August 2009 and the Home Affordable
Foreclosure Alternatives Program in
November 2009.61 The Treasury
Department subsequently modified
these programs several times in
response to the changing needs of
distressed consumers and the mortgage
market.62
MHA programs are currently
scheduled to expire on December 31,
2013, although there is continuing
debate about whether to extend them.63
As of December 2012, ten programs
have been established under MHA. The
Treasury Department operates five MHA
programs.64 The remaining five MHA
programs are operated in conjunction
with U.S. Department of Veterans
Affairs (VA), FHA, or USDA programs.65
Many consumers facing default or
foreclosure have received assistance
under these programs. For example,
from the beginning of the HAMP
program to March 2013, over 1.1 million
permanent HAMP modifications have
been completed, saving distressed
consumers an estimated $19.1 billion.66
DTI ratio of 31 percent. See United States
Department of the Treasury, ‘‘Home Affordable
Modification Program, Base Net Present Value
(NPV) Model v5.02, Model Documentation’’ (April
1, 2012), available at: https://www.hmpadmin.com/
portal/programs/docs/hamp_servicer/
npvmodeldocumentationv502.pdf. See also
Consumer Compliance Outlook, Federal Reserve
Bank of Philadelphia (Third Quarter 2009),
available at: http://www.philadelphiafed.org/bankresources/publications/consumer-complianceoutlook/2009/third-quarter/q3_02.cfm.
60 See Troubled Asset Relief Program (TARP)
Monthly Report to Congress—September 2009.
61 See United States Department of the Treasury
Office of Financial Stability, ‘‘Troubled Asset Relief
Program: Two Year Retrospective’’ (Oct. 2010).
62 See e.g., Supplemental Directive 10–02 (Mar.
24, 2010), modifying HAMP, Supplemental
Directive 11–07 (July 25, 2011), expanding
eligibility for the Home Affordable Unemployment
Program, and Supplemental Directive 12–02 (Mar.
9, 2012), expanding HAMP eligibility.
63 Press Release, Treasury Department, Expanding
our Efforts to Help More Homeowners and
Strengthen Hard-hit Communities (Jan. 27, 2012),
available at: http://www.treasury.gov/connect/blog/
Pages/Expanding-our-efforts-to-help-morehomeowners-and-strengthen-hard-hitcommunities.aspx.
64 In addition to HAMP, the Second Lien
Modification Program, and the Home Affordable
Foreclosure Alternatives Program, the Treasury
Department also operates the Principal Reduction
Alternative Program and the Home Affordable
Unemployment Program.
65 These programs are the FHA Home Affordable
Modification Program, USDA Special Loan
Servicing, Veterans Affairs Home Affordable
Modification, FHA Second Lien Modification
Program, and the FHA Short Refinance Program.
66 See March 2013 Making Home Affordable
Program Performance Report.
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In March 2010 the Treasury
Department established the HHF
program to enable the States most
affected by the financial crisis to
develop innovative assistance
programs.67 Nineteen programs have
been established under the HHF fund,
which is currently scheduled to expire
on December 31, 2017. These programs
provide assistance to homeowners in
the District of Columbia and the 18
States most affected by the economic
crisis.68 The HHF provides funds
directly to HFAs in these States, which
are used to create foreclosure-avoidance
programs. As of April 2013,
approximately $2.2 billion has been
allocated to support the 63 programs
established to assist distressed
consumers in these localities.69 In
California alone, nearly 17,000
consumers have received over $166
million in assistance since the
beginning of the program.70
As with the MHA programs discussed
above, these HHF programs have
evolved over time. The Treasury
Department originally encouraged HFAs
to establish programs for mortgage
modifications, principal forbearance,
short sales, principal reduction for
consumers with high loan-to-value
ratios, unemployment assistance, and
second-lien mortgage loan reduction or
modification.71 No HFAs were able to
establish all of these programs in the
early stages of the HHF. However,
through 2011 and 2012 State HHF
programs were significantly modified
and expanded.72 The 19 HFAs continue
to modify these programs to develop
more effective and efficient methods of
providing assistance to at-risk
consumers. For example, in September
67 See Hardest Hit Fund Program Guidelines
Round 1, available at: http://www.treasury.gov/
initiatives/financial-stability/TARP-Programs/
housing/Documents/HFA_Proposal_Guidelines_-_
1st_Rd.pdf.
68 The HHF provides funds to HFAs located in
Alabama, Arizona, California, Florida, Georgia,
Illinois, Indiana, Kentucky, Michigan, Mississippi,
Nevada, New Jersey, North Carolina, Ohio, Oregon,
Rhode Island, South Carolina, Tennessee, and
Washington, DC
69 See Troubled Asset Relief Program (TARP)
Monthly Report to Congress—April 2013.
70 See Keep Your Home California 2012 Fourth
Quarterly Report.
71 See Hardest Hit Fund Program Guidelines
Round 1, available at: http://www.treasury.gov/
initiatives/financial-stability/TARP-Programs/
housing/Documents/HFA_Proposal_Guidelines_-_
1st_Rd.pdf.
72 From 2011–2012, the program agreements
between the 19 HFAs and the Treasury Department
were modified 55 times. See http://
www.treasury.gov/initiatives/financial-stability/
TARP-Programs/housing/hhf/Pages/Archivalinformation.aspx.
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2012 the Nevada HHF program was
amended for the tenth time.73
Federal agency programs. In response
to the financial crisis, the FHA, the VA,
and the USDA expanded existing
programs and implemented new
programs intended to facilitate
refinancings for consumers at risk of
delinquency or default. Some of these
programs operate in conjunction with
the Treasury Department’s MHA
program, while others are run solely by
the particular Federal agency. In 2008
Congress expanded access to
refinancings under the VA’s Interest
Rate Reduction Refinancing Loan
program by raising the maximum loanto-value ratio to 100 percent and
increasing the maximum loan amount of
loans eligible to be guaranteed under the
program.74 In February 2009 HUD
increased the maximum loan amount for
FHA-insured mortgages.75 This change
expanded access to refinancings
available under the FHA’s Streamline
Refinance Program.76 Several months
later, the FHA created the Short
Refinance Option program to assist
consumers with non-FHA mortgage
loans.77 This program, which operates
in conjunction with TARP, permits
underwater consumers to refinance if
the current creditor agrees to write
down 10 percent of the outstanding
principal balance. Similarly, in August
2010 the Rural Housing Service of the
USDA (RHS) adopted rules intended to
facilitate loan modifications for
consumers struggling to make payments
on USDA Guaranteed Loans.78 The
USDA subsequently created the Single
Family Housing Guaranteed Rural
Refinance Pilot Program, which was
intended to refinance USDA borrowers
into more stable and affordable
mortgage loans.79
73 See Tenth Amendment to Commitment to
Purchase Financial Instrument and HFA
Participation Agreement, available at: http://
www.treasury.gov/initiatives/financial-stability/
TARP-Programs/housing/Pages/ProgramDocuments.aspx.
74 See Sec. 504 of the Veterans’ Benefits
Improvement Act of 2008, Public Law 110–389
(Oct. 10, 2008).
75 See HUD Mortgagee Letter 2009–07. Section
1202(b) of the American Recovery and
Reinvestment Act of 2009, Public Law 111–5 (Jan.
6, 2009), authorized the Secretary of Housing and
Urban Development to increase the loan limit.
76 The FHA Streamline Refinance Program
contains reduced underwriting requirements for
consumers with FHA mortgage loans seeking to
refinance into a new FHA mortgage loan with a
reduced interest rate. The FHA has offered
streamline refinances for over thirty years. See HUD
Mortgagee Letter 1982–23.
77 See HUD Mortgagee Letter 2010–23.
78 See 75 FR 52429 (Aug. 26, 2010).
79 See Rural Dev. Admin. Notice No. 4615 (1980–
D) (Feb. 1, 2012).
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These efforts have enabled many
consumers to receive refinancings under
these programs. In 2011, the FHA
accounted for 5.6 percent of the
mortgage refinance market, with
originations totaling $59 billion.80
However, the number of consumers
receiving assistance under these
programs varies. For example, between
April 2009 and December 2011, the
FHA started 5.6 million mortgage loan
modifications.81 During a similar time
period, nearly 997,000 FHA Streamline
Refinances were consummated.82 In
contrast, between February 2010 and
September 2012, only 1,772 mortgage
loans were refinanced under the Short
Refinance Option program.83 Efforts
continue to develop and enhance these
programs to assist distressed
homeowners while improving the
performance of existing mortgage loans
owned, insured, or guaranteed by these
agencies.
HARP and other GSE refinancing
programs. After the GSEs were placed
into conservatorship in late 2008, the
Federal Housing Finance Agency
(FHFA) took immediate steps to reduce
GSE losses by mitigating foreclosures.84
In November 2008 FHFA and the GSEs,
in coordination with the Treasury
Department and other stakeholders,
announced the Streamlined
Modification Program, which was
intended to help delinquent consumers
avoid foreclosure by affordably
restructuring mortgage payments.85 This
program was the precursor to the Home
Affordable Refinance Program (HARP)
80 This number represents FHA’s market share by
dollar volume. By number of originations, the FHA
controlled 6.5 percent of the refinance market, with
312,385 refinances originated. See FHA-Insured
Single-Family Mortgage Originations and Market
Share Report 2012—Q2, available at: http://
portal.hud.gov/hudportal/documents/huddoc?id=
fhamktq2_2012.pdf.
81 See Hearing on FY13 Federal Housing
Administration’s Budget Request, 112th Cong. (Mar.
8, 2012) (testimony of Carol Galante, Acting
Assistant Secretary for Housing/Federal Housing
Administration Commissioner for the U.S.
Department of Housing and Urban Development).
82 A total of 996,871 mortgage loans were
endorsed under the FHA Streamline Refinance
program from Fiscal Year 2009 through 2012. See
FHA Outlook Reports for Fiscal Years 2009, 2010,
2011, and 2012, available at: http://portal.hud.gov/
hudportal/HUD?src=/program_offices/housing/
rmra/oe/rpts/ooe/olmenu.
83 See Office of the Special Inspector General for
the Troubled Asset Relief Program, Quarterly
Report to Congress, p. 64 (Oct. 25, 2012).
84 See Press Release, FHFA, Statement of FHFA
Director James B. Lockhart (Sept. 7, 2008), available
at: http://www.fhfa.gov/webfiles/23/
FHFAStatement9708final.pdf.
85 See Press Release, FHFA, FHFA Announces
Implementation Plans for Streamlined Loan
Modification Program, (Dec. 18, 2008), available at:
http://www.fhfa.gov/webfiles/267/SMP
implementation121808.pdf.
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that was announced in March 2009.86
The HARP program was originally set to
expire in June 2010 and limited to
consumers with a loan-to-value ratio
that did not exceed 105 percent.
However, HARP was modified over time
to account for the deteriorating mortgage
market. In July 2010 the maximum loanto-value ratio was increased from 105
percent to 125 percent.87 Nine months
later FHFA extended the HARP
expiration date by one year, to June 30,
2011.88
Many of the nearly five million
eligible consumers were expected to
receive refinancings under HARP.89
However, by mid-2011 fewer than one
million consumers had received HARP
refinances. Fannie Mae, Freddie Mac,
and FHFA responded by significantly
altering the HARP program.90 Perhaps
most significantly, the maximum loanto-value ratio was removed, facilitating
refinances for all underwater consumers
who otherwise fit HARP’s criteria. More
HARP refinances were completed
during the first six months of 2012 than
in all of 2011.91 These changes were
especially effective in assisting
consumers with high loan-to-value
ratios. In September 2012, consumers
with loan-to-value ratios in excess of
125 percent received 26 percent of all
HARP refinances.92
The GSEs have implemented other
streamline refinance programs intended
to facilitate the refinancing of existing
GSE consumers into more affordable
mortgage loans. These programs are
available for consumers who are not
eligible for a refinancing under HARP.
For example, a consumer with a loan-tovalue ratio of less than 80 percent is
eligible for a streamline refinancing
through Fannie Mae’s Refi Plus program
or Freddie Mac’s Relief Refinance
program. These programs comprise a
86 See Press Release, Treasury Department, Relief
for Responsible Homeowners (Mar. 4, 2009),
available at: http://www.treasury.gov/press-center/
press-releases/Pages/200934145912322.aspx.
87 See Press Release, FHFA, FHFA Authorized
Fannie Mae and Freddie Mac to Expand Home
Affordable Refinance Program to 125 Percent Loanto-Value (July 1, 2009), available at: http://
www.fhfa.gov/webfiles/13495/125_LTV_release_
and_fact_sheet_7_01_09%5B1%5D.pdf.
88 See Press Release, FHFA, FHFA Extends
Refinance Program By One Year (Mar. 1, 2010),
available at: http://www.fhfa.gov/webfiles/15466/
HARPEXTENDED3110%5B1%5D.pdf.
89 See Treasury Department Press Release supra
note 94.
90 See Press Release, FHFA, FHFA, Fannie Mae
and Freddie Mac Announce HARP Changes to
Reach More Borrowers (Oct. 24, 2011), available at:
http://www.fhfa.gov/webfiles/22721/
HARP_release_102411_Final.pdf.
91 See Federal Housing Finance Agency Refinance
Report (June 2012).
92 See Federal Housing Finance Agency Refinance
Report (Sept. 2012).
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35437
the interest revenue derived from the
loan itself.
Small community creditor access to
the secondary mortgage market was
limited. Many small creditors originated
‘‘non-conforming’’ loans which could
not be purchased by the GSEs. Also,
many community creditors chose to
retain the relationship model of
underwriting, rather than fully adopting
standardized data models popular with
larger banks. Retaining these traditional
business methods had important
The Mortgage Loan Market for Small
consequences during the subprime
Portfolio Creditors
crisis. While large lending institutions
Traditionally, underwriting standards generally depended on the secondary
were determined at the branch or local
market for funding, small community
bank level. These practices heavily
banks and credit unions generally
emphasized the relationship between
remained reliant on deposits to fund
the bank and the consumer.96 Starting in mortgage loans held in portfolio. As a
result, community creditors were less
the mid-1990s, much of the mortgage
affected by the contraction in the
market began to move toward
secondary mortgage market during the
standardized underwriting practices
based on quantifiable and verifiable data financial crisis.99 For example, the
percentage of mortgage-backed
points, such as a consumer’s credit
securities in relation to the total assets
97 The shift toward standardized,
score.
of credit unions actually declined by
electronic underwriting lowered costs
more than 1.5 percent as subprime
for creditors and consumers, thereby
lending expanded.100
increasing access to mortgage credit.
Furthermore, by retaining mortgage
Standardized loan-level data made it
loans in portfolio community creditors
easier to analyze individual loans for
also retain the risk of delinquency or
compliance with underwriting
default on those loans. The presence of
requirements, which facilitated the
portfolio lending within this market
expansion of private mortgage
remains an important influence on the
securitizations. This shift from
underwriting practices of community
portfolio-focused to securitizationbanks and credit unions. These
focused mortgage lending also altered
institutions generally rely on long-term
the traditional risk calculations
relationships with a small group of
undertaken by creditors, as creditors no consumers. Therefore, the reputation of
longer retained the risks associated with these community banks and credit
poorly underwritten loans.98
unions is largely dependent on serving
Additionally, in another departure from their community in ways that cause no
the traditional mortgage lending model, harm. Thus, community creditors have
these creditors increasingly relied on
an added incentive to engage in
the fees earned by originating and
thorough underwriting to protect their
selling mortgage loans, as opposed to
balance sheet as well as their reputation.
To minimize portfolio performance risk,
93 Id.
small community creditors have
94 ‘‘Today, we continue to meet with lenders to
developed underwriting standards that
ensure HARP is helping underwater borrowers
are different than those employed by
refinance at today’s historical low interest rates. As
larger institutions. Small creditors
we continue to gain insight from the program we
generally engage in ‘‘relationship
will make additional operational adjustments as
banking,’’ in which underwriting
needed to enhance access to this program.’’ Edward
J. DeMarco, Acting Director Federal Housing
decisions rely on qualitative
significant share of GSE refinancing
activity. From January through
September 2012, 45 percent of GSE
streamline refinances were non-HARP
refinances.93 FHFA and the GSEs
remain committed to continue
modifying these programs to enhance
access to refinancing credit for
distressed consumers.94 In April 2013,
FHFA extended the HARP expiration
date to December 31, 2015.95
Finance Agency, Remarks at the American Mortgage
Conference (Sept. 10, 2012), available at: http://
www.fhfa.gov/webfiles/24365/
2012DeMarcoNCSpeechFinal.pdf.
95 See Press Release, FHFA, FHFA Extends HARP
to 2015 (Apr. 11, 2013), available at: http://
www.fhfa.gov/webfiles/22721/
HARP_release_102411_Final.pdf.
96 ‘‘[C]ommunity banks tend to base credit
decisions on local knowledge and nonstandard data
obtained through long-term relationships and are
less likely to rely on the models-based underwriting
used by larger banks.’’ Federal Deposit Insurance
Corporation, FDIC Community Banking Study, p. 1–
1 (Dec. 2012) (FDIC Community Banking Study).
97 See FCIC Report at 72.
98 See FCIC Report at 89.
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99 Between 2005 and 2008, while loan
originations at banks with assets in excess of $10
billion fell by 51 percent, loan originations at banks
with assets between $1 and $10 billion declined by
31 percent, and loan originations at banks with less
than $1 billion in assets declined by only 10
percent. See Federal Reserve Bank of Kansas City,
Financial Industry Perspectives (Dec. 2009).
100 In December 2003, the ratio of mortgagebacked securities to total assets at credit unions was
4.67 percent. By December 2006, this ratio had
decreased to 3.21 percent. See Accelerating Loan
Modifications, Improving Foreclosure Prevention
and Enhancing Enforcement, 110th Cong. (Dec. 6,
2007) (testimony of Gigi Hyland, Board Member of
the National Credit Union Administration).
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information gained from personal
relationships between creditors and
consumers.101 This qualitative
information, often referred to as ‘‘soft’’
information, focuses on subjective
factors such as consumer character and
reliability, which ‘‘may be difficult to
quantify, verify, and communicate
through the normal transmission
channels of a banking organisation.’’ 102
Evidence suggests that underwriting
based on such ‘‘soft’’ information yields
loan portfolios that perform better than
those underwritten according to ‘‘hard’’
information, such as credit score and
consumer income levels.103 For
example, one recent study found that
delinquency and default rates were
significantly lower for consumers
receiving mortgage loans from
institutions relying on soft information
for underwriting decisions.104 This is
consistent with market-wide data
demonstrating that mortgage loan
delinquency and charge-off rates are
significantly lower at smaller banks than
larger ones.105 Current data also
101 ‘‘Many customers . . . value the intimate
knowledge their banker has of their business and/
or total relationship and prefer dealing consistently
with the same individuals whom they do not have
to frequently reeducate about their own unique
financial and business situations. Such customers
are consequently willing to pay relatively more for
such service. Relationship lending thus provides a
niche for community institutions that many large
banks find less attractive or are less capable of
providing.’’ See Federal Reserve Bank of Atlanta,
On the Uniqueness of Community Banks (Oct.
2005).
102 See Allen N. Berger and Gregory F. Udell,
Small Business Credit Availability and Relationship
Lending: The Importance of Bank Organisational
Structure, Economic Journal (2002).
103 ‘‘Moreover, a comparison of loss rates on
individual loan categories suggests that community
banks may also do a better job of underwriting loans
than noncommunity institutions (see Table 4.4).’’
FDIC Community Banking Study, p. 4–6. See also
Sumit Agarwal, Brent W. Ambrose, Souphala
Chomsisengphet, and Chunlin Liu, The Role of Soft
Information in a Dynamic Contract Setting:
Evidence from the Home Equity Market, 43 Journal
of Money, Credit and Banking 633, 649 (Oct. 2011)
(analyzing home equity lending, the authors ‘‘find
that the lender’s use of soft information can
successfully reduce the risks associated with ex
post credit losses.’’).
104 ‘‘In particular, we find evidence that selection
and soft information prior to purchase are
significantly associated with reduced delinquency
and default. And, in line with relationship lending,
we find that this effect is most pronounced for
borrowers with compromised credit (credit scores
below 660), who likely benefit the most from soft
information in the lending relationship. This
suggests that for higher risk borrowers, relationship
with a bank may be about more than the mortgage
transaction.’’ O. Emre Ergungor and Stephanie
Moulton, Beyond the Transaction: Depository
Institutions and Reduced Mortgage Default for LowIncome Homebuyers, Federal Reserve Bank of
Cleveland Working Paper 11–15 (Aug. 2011).
105 Federal Reserve Board, Charge-Off and
Delinquency Rates on Loans and Leases at
Commercial Banks (Nov. 2012), available at: http://
www.federalreserve.gov/releases/chargeoff/
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suggests that that these relationshipbased lending practices lead to more
accurate underwriting decisions during
cycles of both lending expansion and
contraction.106
Although the number of community
banks has declined in recent years,
these institutions remain an important
source of nonconforming credit and of
mortgage credit generally in areas
commonly considered ‘‘rural’’ or
‘‘underserved.’’ The Bureau’s estimates
based on Home Mortgage Disclosure Act
(HMDA) and the Consolidated Report of
Condition and Income (Call Report) data
suggest that approximately one half of
all nonconforming loans are originated
by creditors with assets less than $2
billion and approximately one quarter
are originated by creditors with total
assets less than $2 billion that originate
fewer than 500 first-lien mortgages
annually. In 2011, community banks
held over 50 percent of all deposits in
micropolitan areas and over 70 percent
of all deposits held in rural areas.107
Similarly, in 2011, there were more than
600 counties where community banks
operated offices but where no
noncommunity bank offices were
present, and more than 600 additional
counties where community banks
operated offices but where fewer than
three noncommunity bank offices were
present.108 These counties have a
combined population of more than 16
million people and include both rural
and metropolitan areas.109 It is
important to note that the cost of credit
offered by these community institutions
is generally higher than the cost of
similar products offered by larger
institutions. One reason for this
increased expense stems from the nature
of relationship-based underwriting
decisions. Such qualitative evaluations
of creditworthiness tend to take more
time, and therefore are more expensive,
than underwriting decisions based on
standardized points of data.110 Also, the
cost of funds for community banks
default.htm. These data show that residential real
estate charge-offs were higher at large banks than
small ones for 12 of the previous 87 quarters, dating
to the start of the small bank survey in 1991. For
example, in the fourth quarter of 2009 large banks
had a 3.16 percent charge-off rate, while the rate at
small banks was 1.2 percent. Delinquency rates
demonstrate a similar effect.
106 ‘‘In two retail loan categories—residential real
estate loans and loans to individuals—community
banks consistently reported lower average loss rates
from 1991 through 2011, the period for which these
data are available.’’ FDIC Community Banking
Study, p. 4–6.
107 FDIC Community Banking Study, p. 3–6.
108 FDIC Community Banking Study, p. 3–5.
109 Id.
110 FCIC Report at 72.
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tends to be higher than the cost for
larger institutions.111
B. Statutory and Regulatory Background
For over 20 years, consumer
advocates, legislators, and regulators
have raised concerns about creditors
originating mortgage loans without
regard to the consumer’s ability to repay
the loan. Beginning in about 2006, these
concerns were heightened as mortgage
delinquencies and foreclosure rates
increased dramatically, caused in part
by the gradual deterioration in
underwriting standards. See 73 FR
44524 (Jul. 30, 2008). For detailed
background information, including a
summary of the legislative and
regulatory responses to this issue, which
culminated in the enactment of the
Dodd-Frank Act on July 21, 2010, the
Board of Governors of the Federal
Reserve System’s (the Board) issuance of
a proposed rule on May 11, 2011 to
implement certain amendments to TILA
made by the Dodd-Frank Act, and the
Bureau’s issuance of the 2013 ATR Final
Rule, see the discussion in the 2013
ATR Final Rule. See 78 FR 6410–6420
(Jan. 30, 2013).
The Bureau’s ATR Final Rule
The Bureau’s 2013 ATR Final Rule
implemented the ability-to-repay
requirements under TILA section 129C.
Consistent with the statute, the Bureau’s
2013 ATR Final Rule adopted
§ 1026.43(a), which applies the abilityto-repay requirements to any consumer
credit transaction secured by a dwelling,
except an open-end credit plan,
timeshare plan, reverse mortgage, or
temporary loan.
As adopted, § 1026.43(c) provides that
a creditor is prohibited from making a
covered mortgage loan unless the
creditor makes a reasonable and good
faith determination, based on verified
and documented information, that the
consumer will have a reasonable ability
to repay the loan, including any
mortgage-related obligations (such as
property taxes and mortgage insurance).
Section 1026.43(c) describes certain
requirements for making ability-to-repay
determinations, but does not provide
comprehensive underwriting standards
to which creditors must adhere. At a
minimum, however, the creditor must
consider and verify eight underwriting
factors: (1) Current or reasonably
expected income or assets; (2) current
employment status; (3) the monthly
111 FDIC Community Banking Study, p. 4–5;
Government Accountability Office, Community
Banks and Credit Unions: Impact of the DoddFrank Act Depends Largely on Future Rulemakings,
p. 10 (Sept. 2012) (GAO Community Banks and
Credit Unions Report).
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payment on the covered transaction; (4)
the monthly payment on any
simultaneous loan; (5) the monthly
payment for mortgage-related
obligations; (6) current debt obligations;
(7) the monthly debt-to-income ratio or
residual income; and (8) credit history.
Section 1026.43(c)(3) generally
requires the creditor to verify the
information relied on in determining a
consumer’s repayment ability using
reasonably reliable third-party records,
with special rules for verifying a
consumer’s income or assets. Section
1026.43(c)(5)(i) requires the creditor to
calculate the monthly mortgage
payment based on the greater of the
fully indexed rate or any introductory
rate, assuming monthly, fully
amortizing payments that are
substantially equal. Section
1026.43(c)(5)(ii) provides special
payment calculation rules for loans with
balloon payments, interest-only loans,
and negative amortization loans.
Section 1026.43(d) provides special
rules for complying with the ability-torepay requirements for a creditor
refinancing a ‘‘non-standard mortgage’’
into a ‘‘standard mortgage.’’ This
provision is based on TILA section
129C(a)(6)(E), which contains special
rules for the refinancing of a ‘‘hybrid
loan’’ into a ‘‘standard loan.’’ The
purpose of this provision is to provide
flexibility for creditors to refinance a
consumer out of a risky mortgage into a
more stable one without undertaking a
full underwriting process. Under
§ 1026.43(d), a non-standard mortgage is
defined as an adjustable-rate mortgage
with an introductory fixed interest rate
for a period of one year or longer, an
interest-only loan, or a negative
amortization loan. Under this option, a
creditor refinancing a non-standard
mortgage into a standard mortgage does
not have to consider the eight specific
underwriting criteria listed under
§ 1026.43(c), if certain conditions are
met.
Section 1026.43(e) specifies
requirements for originating ‘‘qualified
mortgages,’’ as well as standards for
when the presumption of compliance
with ability-to-repay requirements can
be rebutted. Section 1026.43(e)(1)(i)
provides a safe harbor under the abilityto-repay requirements for loans that
satisfy the definition of a qualified
mortgage and are not higher-priced
covered transactions (i.e., the APR does
not exceed APOR 112 plus 1.5 percentage
points for first-lien loans or 3.5
112 TILA section 129C(b)(2)(B) defines the average
prime offer rate as ‘‘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.’’ 15 U.S.C. 1639c(b)(2)B).
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percentage points for subordinate-lien
loans). Section 1026.43(e)(1)(ii) provides
a rebuttable presumption for qualified
mortgage loans that are higher-priced
covered transactions (i.e., the APR
exceeds APOR plus 1.5 percent for first
lien or 3.5 percent for subordinate lien).
Under the 2013 ATR Final Rule,
§ 1026.43 also provides three options for
creditors to originate a qualified
mortgage:
Qualified mortgage—general. Under
the general definition for qualified
mortgages in § 1026.43(e)(2), a creditor
must satisfy the statutory criteria
restricting certain product features and
points and fees on the loan, consider
and verify certain underwriting
requirements that are part of the general
ability-to-repay standard, and confirm
that the consumer has a total (or ‘‘backend’’) debt-to-income ratio that is less
than or equal to 43 percent. To
determine whether the consumer meets
the specific debt-to-income ratio
requirement, the creditor must calculate
the consumer’s monthly debt-to-income
ratio in accordance with appendix Q. A
loan that satisfies these criteria and is
not a higher-priced covered transaction
receives a legal safe harbor from the
ability-to-repay requirements. A loan
that satisfies these criteria and is a
higher-priced covered transaction
receives a rebuttable presumption of
compliance with the ability-to-repay
requirements.
Qualified mortgage—special rules.
The second option for originating a
qualified mortgage provides a temporary
alternative to the general definition in
§ 1026.43(e)(2). This option is intended
to avoid unnecessarily disrupting the
mortgage market at a time when it is
especially fragile, as a result of the
recent mortgage crisis. Section
1026.43(e)(4) provides that a loan is a
qualified mortgage if it meets the
statutory limitations on product features
and points and fees, satisfies certain
other requirements, and is eligible for
purchase, guarantee, or insurance by
one of the following entities:
• Fannie Mae or Freddie Mac, while
operating under the conservatorship or
receivership of the Federal Housing
Finance Agency pursuant to section
1367 of the Federal Housing Enterprises
Financial Safety and Soundness Act of
1992;
• Any limited-life regulatory entity
succeeding the charter of either Fannie
Mae or Freddie Mac pursuant to section
1367(i) of the Federal Housing
Enterprises Financial Safety and
Soundness Act of 1992;
• The U.S. Department of Housing
and Urban Development under the
National Housing Act (FHA);
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35439
• The U.S. Department of Veterans
Affairs (VA);
• The U.S. Department of Agriculture
(USDA); or
• The U.S. Department of Agriculture
Rural Housing Service (RHS).
With respect to GSE-eligible loans,
this temporary provision expires when
conservatorship of the GSEs ends. With
respect to each other category of loan,
this provision expires on the effective
date of a rule issued by each respective
Federal agency pursuant to its authority
under TILA section 129C(b)(3)(ii) to
define a qualified mortgage. In any
event, this temporary provision expires
no later than January 10, 2021.
Qualified mortgage—balloon-payment
loans by certain creditors. The third
option for originating qualified
mortgages is included under
§ 1026.43(f), which provides that a small
creditor operating predominantly in
rural or underserved areas can originate
a balloon-payment qualified mortgage.
The Dodd-Frank Act generally prohibits
balloon-payment mortgages from being
qualified mortgages. However, the
statute creates a limited exception, with
special underwriting rules, for loans
made by a creditor that: (1) Operates
predominantly in rural or underserved
areas; (2) together with affiliates, has
total annual residential mortgage loan
originations that do not exceed a limit
set by the Bureau; and (3) retains the
balloon loans in portfolio. The purpose
of this definition is to preserve credit
availability in rural or underserved
areas by assuring that small creditors
offering loans that cannot be sold on the
secondary market, and therefore must be
placed on the creditor’s balance sheet,
are able to use a balloon-payment
structure as a means of controlling
interest rate risk.
Section 1026.43(f)(1)(vi) limits
eligibility to creditors that originated
500 or fewer covered transactions
secured by a first-lien in the preceding
calendar year and that have assets of no
more than $2 billion (to be adjusted
annually). In addition, to originate a
balloon-payment qualified mortgage
more than 50 percent of a creditor’s total
first-lien covered transactions must have
been secured by properties in counties
that are ‘‘rural’’ or ‘‘underserved,’’ as
designated by the Bureau. A county is
‘‘rural’’ if, during a calendar year, it is
located in neither a metropolitan
statistical area nor a micropolitan
statistical area adjacent to a
metropolitan statistical area, as those
terms are defined by the U.S. Office of
Management and Budget. A county is
‘‘underserved’’ if no more than two
creditors extend covered transactions
five or more times in that county during
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a calendar year. Also, except as
provided, the balloon-payment qualified
mortgage must generally be held in
portfolio for at least three years. Balloon
loans by such creditors are eligible for
qualified mortgage status if they meet
the statutory limitations on product
features and points and fees, and if the
creditor follows certain other
requirements that are part of the general
ability-to-repay standard.
The Bureau’s 2013 ATR Final Rule
added two additional requirements to
§ 1026.43. Section 1026.43(g)
implements the Dodd-Frank Act limits
on prepayment penalties. Section
1026.43(h) prohibits a creditor from
structuring a closed-end extension of
credit as an open-end plan to evade the
ability-to-repay requirements.
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III. Summary of the Rulemaking
Process
A. The Bureau’s Proposal
As discussed above, TILA section
129C, as added by sections 1411, 1412,
and 1414 of the Dodd-Frank Act,
generally requires creditors to make a
reasonable, good faith determination of
a consumer’s ability to repay the loan.
On January 10, 2013, the Bureau issued
the 2013 ATR Final Rule to implement
these ability-to-repay requirements. See
78 FR 6407 (Jan. 30, 2013). At the same
time, the Bureau issued the 2013 ATR
Proposed Rule related to certain
proposed exemptions, modifications,
and clarifications to the ability-to-repay
requirements and qualified mortgage
provisions. See 78 FR 6621 (Jan. 30,
2013). The 2013 ATR Proposed Rule
contained three major elements.
First, the Bureau proposed certain
exemptions from the ability-to-repay
requirements for housing finance
agencies, certain nonprofit creditors,
certain homeownership stabilization
and foreclosure prevention programs,
and certain Federal agency and GSE
refinancing programs. The Bureau was
concerned that the ability-to-repay
requirements were substantially
different from the underwriting
requirements employed by these
creditors or required under these
programs, which would discourage
participation in and frustrate the
purposes of these programs and
significantly impair access to
responsible, affordable credit for certain
consumers.
Second, the Bureau proposed
modifications related to certain small
creditors. Specifically, the Bureau
proposed an additional definition of a
qualified mortgage for certain loans
made and held in portfolio by small
creditors. The proposed new category
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would include certain loans originated
by small creditors 113 that: (1) Have total
assets of $2 billion or less at the end of
the previous calendar year; and (2)
together with all affiliates, originated
500 or fewer first-lien covered
transactions during the previous
calendar year. The proposed new
category would include only loans held
in portfolio by these creditors. The loans
also would have to conform to all of the
requirements under the general
definition of a qualified mortgage except
the 43 percent limit on monthly debt-toincome ratio. The Bureau also proposed
to allow small creditors and small
creditors operating predominantly in
rural and underserved areas to charge a
higher annual percentage rate for firstlien qualified mortgages in the proposed
new category and still benefit from a
conclusive presumption of compliance
or ‘‘safe harbor.’’ A qualified mortgage
in the proposed new category would be
conclusively presumed to comply if the
annual percentage rate is equal to or less
than APOR plus 3.5 percentage points
for both first-lien and subordinate-lien
loans. The Bureau also posed and
solicited comment on a specific
question regarding whether there is a
need for transition mechanisms for
existing balloon loans that may end
soon after the new rule takes effect.
Finally, the Bureau proposed several
additional interpretive comments
concerning the inclusion of loan
originator compensation in the points
and fees calculation under the qualified
mortgage provisions and the high-cost
mortgage provisions under HOEPA. The
proposed comments addressed
situations in which payments flow from
one party to another over the course of
a mortgage transaction and whether to
count compensation separately where it
may already have been counted toward
points and fees under another element
of the regulatory definition. In addition,
the Bureau sought feedback on whether
additional clarification was warranted
in light of the Bureau’s separate
rulemaking to implement provisions of
the Dodd-Frank Act restricting certain
loan originator compensation practices.
B. Comments and Post-Proposal
Outreach
In response to the proposed rule, the
Bureau received approximately 1,150
letters from commenters, including
113 The $2 billion threshold reflects the purposes
of the proposed category and the structure of the
mortgage lending industry. The Bureau’s choice of
$2 billion in assets as a threshold for purposes of
TILA section 129C does not imply that a threshold
of that type or of that magnitude would be an
appropriate way to distinguish small firms for other
purposes or in other industries.
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members of Congress, creditors,
consumer groups, trade associations,
mortgage and real estate market
participants, and individual consumers.
The comments focused on all aspects of
the proposal, including:
• the calculation of loan originator
compensation for inclusion in points
and fees for the qualified mortgage and
high-cost mortgage points and fees
limits;
• the proposed exemptions from the
ability-to-repay requirements for
housing finance agencies, certain
nonprofit creditors, certain
homeownership stabilization and
foreclosure prevention programs, and
certain Federal agency and GSE
refinancing programs;
• the proposed definition of a fourth
category of qualified mortgages
including loans originated and held in
portfolio by certain small creditors; and
• the proposed amendments to the
definition of higher-priced covered
transaction with respect to qualified
mortgages that are originated and held
in portfolio by small creditors and with
respect to balloon-payment qualified
mortgages originated and held in
portfolio by small creditors operating
predominantly in rural or underserved
areas.
Materials submitted were filed in the
record and are publicly available at
http://www.regulations.gov. The Bureau
also elected to consider the comments
received after the expiration of the
comment period. As discussed in more
detail below, the Bureau has considered
these comments in adopting this final
rule.
IV. Legal Authority
The Bureau is issuing this final rule
pursuant to its authority under TILA
and the Dodd-Frank Act. See 15 U.S.C.
1604(a), 12 U.S.C. 5512(b)(1).
A. TILA Ability-to-Repay and Qualified
Mortgage Provisions
As discussed above, the Dodd-Frank
Act amended TILA to provide that, in
accordance with regulations prescribed
by the Bureau, no creditor may make a
residential mortgage loan unless the
creditor makes a reasonable and good
faith determination based on verified
and documented information that, at the
time the loan is consummated, the
consumer has a reasonable ability to
repay the loan, according to its terms,
and all applicable taxes, insurance
(including mortgage guarantee
insurance), and assessments. TILA
section 129C(a)(1); 15 U.S.C.
1639c(a)(1). As described below in part
IV.B, the Bureau has authority to
prescribe regulations to carry out the
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purposes of TILA pursuant to TILA
section 105(a). 15 U.S.C. 1604(a). In
particular, it is the purpose of TILA
section 129C, as amended by the DoddFrank Act, to assure that consumers are
offered and receive residential mortgage
loans on terms that reasonably reflect
their ability to repay the loans and that
are understandable and not unfair,
deceptive, or abusive. TILA section
129B(a)(2); 15 U.S.C. 1639b(a)(2).
TILA, as amended by the Dodd-Frank
Act, also provides creditors originating
‘‘qualified mortgages’’ special protection
from liability under the ability-to-repay
requirements. TILA section 129C(b), 15
U.S.C. 1639c(b). TILA generally defines
a ‘‘qualified mortgage’’ as a residential
mortgage loan for which: the loan does
not contain negative amortization,
interest-only payments, or balloon
payments; the term does not exceed 30
years; the points and fees generally do
not exceed 3 percent of the loan
amount; the income or assets are
considered and verified; and the
underwriting is based on the maximum
rate during the first five years, uses a
payment schedule that fully amortizes
the loan over the loan term, and takes
into account all mortgage-related
obligations. TILA section 129C(b)(2), 15
U.S.C. 1639c(b)(2). In addition, to
constitute a qualified mortgage a loan
must meet ‘‘any guidelines or
regulations established by the Bureau
relating to ratios of total monthly debt
to monthly income or alternative
measures of ability to pay regular
expenses after payment of total monthly
debt, taking into account the income
levels of the borrower and such other
factors as the Bureau may determine are
relevant and consistent with the
purposes described in [TILA section
129C(b)(3)(B)(i)].’’
TILA, as amended by the Dodd-Frank
Act, also provides the Bureau with
authority to prescribe regulations that
revise, add to, or subtract from the
criteria that define a qualified mortgage
upon a finding that such regulations are
necessary or proper to ensure that
responsible, affordable mortgage credit
remains available to consumers in a
manner consistent with the purposes of
the ability-to-repay requirements; or are
necessary and appropriate to effectuate
the purposes of the ability-to-repay
requirements, to prevent circumvention
or evasion thereof, or to facilitate
compliance with TILA sections 129B
and 129C. TILA section 129C(b)(3)(B)(i),
15 U.S.C. 1639c(b)(3)(B)(i). In addition,
TILA section 129C(b)(3)(A) provides the
Bureau with authority to prescribe
regulations to carry out the purposes of
the qualified mortgage provisions—to
ensure that responsible, affordable
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mortgage credit remains available to
consumers in a manner consistent with
the purposes of TILA section 129C.
TILA section 129C(b)(3)(A), 15 U.S.C.
1939c(b)(3)(A). As discussed in the
section-by-section analysis below, the
Bureau is issuing certain provisions of
this rule pursuant to its authority under
TILA section 129C(b)(3)(B)(i).
In addition, for purposes of defining
‘‘qualified mortgage,’’ TILA section
129C(b)(2)(A)(vi) provides the Bureau
with authority to establish guidelines or
regulations relating to monthly debt-toincome ratios or alternative measures of
ability to repay. As discussed in the
section-by-section analysis below, the
Bureau is issuing certain provisions of
this rule pursuant to its authority under
TILA sections 129C(b)(2)(A)(vi).
B. Other Rulemaking and Exception
Authorities
This final rule also relies on the
rulemaking and exception authorities
specifically granted to the Bureau by
TILA and the Dodd-Frank Act,
including the authorities discussed
below.
TILA
TILA section 105(a). As amended by
the Dodd-Frank Act, TILA section
105(a), 15 U.S.C. 1604(a), directs the
Bureau to prescribe regulations to carry
out the purposes of TILA, and provides
that such regulations may contain
additional requirements, classifications,
differentiations, or other provisions, and
may provide for such adjustments and
exceptions for all or any class of
transactions, that the Bureau judges are
necessary or proper to effectuate the
purposes of TILA, to prevent
circumvention or evasion thereof, or to
facilitate compliance therewith. A
purpose of TILA is ‘‘to assure a
meaningful disclosure of credit terms so
that the consumer will be able to
compare more readily the various credit
terms available to him and avoid the
uninformed use of credit.’’ TILA section
102(a), 15 U.S.C. 1601(a). This stated
purpose is informed by Congress’s
finding that ‘‘economic stabilization
would be enhanced and the competition
among the various financial institutions
and other firms engaged in the
extension of consumer credit would be
strengthened by the informed use of
credit[.]’’ TILA section 102(a). Thus,
strengthened competition among
financial institutions is a goal of TILA,
achieved through the effectuation of
TILA’s purposes.
As amended by section 1402 of the
Dodd-Frank Act, section 129B(a)(2) of
TILA provides that a purpose of section
129C of TILA is ‘‘to assure that
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consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay
the loans.’’ This stated purpose is
informed by Congress’s finding that
‘‘economic stabilization would be
enhanced by the protection, limitation,
and regulation of the terms of
residential mortgage credit and the
practices related to such credit, while
ensuring that responsible, affordable
mortgage credit remains available to
consumers.’’ Thus, ensuring that
responsible, affordable mortgage credit
remains available to consumers is a goal
of TILA, achieved through the
effectuation of TILA’s purposes.
Historically, TILA section 105(a) has
served as a broad source of authority for
rules that promote the informed use of
credit through required disclosures and
substantive regulation of certain
practices. However, Dodd-Frank Act
section 1100A clarified the Bureau’s
section 105(a) authority by amending
that section to provide express authority
to prescribe regulations that contain
‘‘additional requirements’’ that the
Bureau finds are necessary or proper to
effectuate the purposes of TILA, to
prevent circumvention or evasion
thereof, or to facilitate compliance. This
amendment clarified the authority to
exercise TILA section 105(a) to
prescribe requirements beyond those
specifically listed in the statute that
meet the standards outlined in section
105(a). The Dodd-Frank Act also
clarified the Bureau’s rulemaking
authority over certain high-cost
mortgages pursuant to section 105(a). As
amended by the Dodd-Frank Act, TILA
section 105(a) authority to make
adjustments and exceptions to the
requirements of TILA applies to all
transactions subject to TILA, except
with respect to the provisions of TILA
section 129, 15 U.S.C. 1639, that apply
to the high-cost mortgages defined in
TILA section 103(bb), 15 U.S.C.
1602(bb).
As discussed in the section-by-section
analysis below, the Bureau is issuing
regulations to carry out TILA’s
purposes, including such additional
requirements, adjustments, and
exceptions as, in the Bureau’s judgment,
are necessary and proper to carry out
the purposes of TILA, prevent
circumvention or evasion thereof, or to
facilitate compliance. In developing
these aspects of the final rule pursuant
to its authority under TILA section
105(a), the Bureau has considered the
purposes of TILA, including ensuring
that consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay
the loans, ensuring meaningful
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disclosures, facilitating consumers’
ability to compare credit terms, and
helping consumers avoid the
uninformed use of credit, and the
findings of TILA, including regulating
the terms of residential mortgage credit
and the practices related to such credit
to ensure that responsible, affordable
mortgage credit remains available to
consumers, strengthening competition
among financial institutions, and
promoting economic stabilization.
TILA section 105(f). Section 105(f) of
TILA, 15 U.S.C. 1604(f), authorizes the
Bureau to exempt from all or part of
TILA all or any class of transactions
(other than transactions involving any
mortgage described in TILA section
103(aa), which are high-cost mortgages)
if the Bureau determines that TILA
coverage does not provide a meaningful
benefit to consumers in the form of
useful information or protection. In
exercising this authority, the Bureau
must consider the factors identified in
section 105(f) of TILA and publish its
rationale at the time it proposes an
exemption for public comment.
Specifically, the Bureau must consider:
(a) The amount of the loan and
whether the disclosures, right of
rescission, and other provisions provide
a benefit to the consumers who are
parties to such transactions, as
determined by the Bureau;
(b) The extent to which the
requirements of TILA complicate,
hinder, or make more expensive the
credit process for the class of
transactions;
(c) The status of the borrower,
including—
(1) Any related financial arrangements
of the borrower, as determined by the
Bureau;
(2) The financial sophistication of the
borrower relative to the type of
transaction; and
(3) The importance to the borrower of
the credit, related supporting property,
and coverage under TILA, as
determined by the Bureau;
(d) Whether the loan is secured by the
principal residence of the consumer;
and
(e) Whether the goal of consumer
protection would be undermined by
such an exemption.
As discussed in the section-by-section
analysis below, the Bureau is adopting
exemptions for certain classes of
transactions from the requirements of
TILA pursuant to its authority under
TILA section 105(f). In determining
which classes of transactions to exempt
under TILA section 105(f), the Bureau
has considered the relevant factors and
determined that the exemptions are
appropriate.
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The Dodd-Frank Act
Dodd-Frank Act section 1022(b).
Section 1022(b)(1) of the Dodd-Frank
Act authorizes the Bureau to prescribe
rules ‘‘as may be necessary or
appropriate to enable the Bureau to
administer and carry out the purposes
and objectives of the Federal consumer
financial laws, and to prevent evasions
thereof.’’ 12 U.S.C. 5512(b)(1). TILA and
title X of the Dodd-Frank Act are
Federal consumer financial laws.
Accordingly, the Bureau is exercising its
authority under Dodd-Frank Act section
1022(b) to prescribe rules that carry out
the purposes and objectives of TILA and
title X and prevent evasion of those
laws.
V. Section-by-Section Analysis
Section 1026.32 Requirements for
High-Cost Mortgages
32(b) Definitions
32(b)(1)
32(b)(1)(ii)
Background
TILA section 129C(b)(2)(A)(vii), as
added by section 1412 of the DoddFrank Act, defines a ‘‘qualified
mortgage’’ as a loan for which, among
other things, the total ‘‘points and fees’’
payable in connection with the
transaction generally do not exceed 3
percent of the total loan amount.
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 5 percent of the total
transaction amount (for transactions of
$20,000 or more), or the lesser of 8
percent of the total transaction amount
or $1,000 (for transactions of less than
$20,000) or other prescribed amount.
The Bureau finalized the Dodd-Frank
Act’s amendments to TILA concerning
the points and fees limit for qualified
mortgages and the points and fees
coverage threshold for high-cost
mortgages in the 2013 ATR Final Rule
and in the final rule implementing the
Dodd-Frank Act’s amendments to
HOEPA,114 respectively.
Those rulemakings also adopted the
Dodd-Frank Act’s amendments to TILA
concerning the exclusion of certain bona
fide third-party charges and up to two
bona fide discount points from the
points and fees calculation for both
qualified mortgages and high-cost
mortgages. With respect to bona fide
114 78 FR 6856 (Jan. 31, 2013) (2013 HOEPA Final
Rule).
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discount points in particular, TILA
sections 129C(b)(2)(C)(ii)(I) and
103(dd)(1) provide for the exclusion of
up to and including two bona fide
discount points from points and fees for
qualified mortgages and high-cost
mortgages, respectively, 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, as defined in
§ 1026.35(a)(2). Similarly, TILA sections
129C(b)(2)(C)(ii)(II) and 103(dd)(2)
provide for the exclusion of up to and
including one bona fide discount point
from points and fees, 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.115 The Bureau’s
2013 ATR and HOEPA Final Rules
implemented the bona fide discount
point exclusions from points and fees in
§ 1026.32(b)(1)(i)(E) and (F) (closed-end
credit) and (b)(2)(i)(E) and (F) (open-end
credit), respectively.
TILA section 129C(b)(2)(C) defines
‘‘points and fees’’ for qualified
mortgages and high-cost mortgages to
have the same meaning as set forth in
TILA section 103(aa)(4) (renumbered as
section 103(bb)(4)).116 Points and fees
for the high-cost mortgage threshold are
defined in § 1026.32(b)(1) (closed-end
credit) and (2) (open-end credit), and
§ 1026.43(b)(9) provides that, for a
qualified mortgage, ‘‘points and fees’’
has the same meaning as in
§ 1026.32(b)(1).
Section 1431 of the Dodd-Frank Act
amended TILA to require that ‘‘all
compensation paid directly or indirectly
by a consumer or creditor to a mortgage
originator from any source, including a
mortgage originator that is also the
creditor in a table-funded transaction,’’
be included in points and fees. TILA
section 103(bb)(4)(B) (emphases added).
Prior to the amendment, TILA had
provided that only compensation paid
by a consumer to a mortgage broker at
115 The 2013 ATR and HOEPA Final Rules also
adopted the special calculation, prescribed under
TILA for high-cost mortgages, for completing the
bona fide discount point calculation for loans
secured by personal property.
116 The Dodd-Frank Act renumbered existing
TILA section 103(aa), which contains the definition
of ‘‘points and fees,’’ for the high-cost mortgage
points and fees threshold, as section 103(bb). See
section 1100A(1)(A) of the Dodd-Frank Act.
However, in defining points and fees for the
qualified mortgage points and fees limits, TILA
section 129C(b)(2)(C) refers to TILA section
103(aa)(4) rather than TILA section 103(bb)(4). To
give meaning to this provision, the Bureau
concluded that the reference to TILA section
103(aa)(4) in TILA section 129C(b)(2)(C) is mistaken
and therefore interpreted TILA section
129C(b)(2)(C) as referring to the points and fees
definition in renumbered TILA section 103(bb)(4).
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or before closing should count toward
the points and fees threshold for highcost mortgages. Under amended TILA
section 103(bb)(4)(B), however,
compensation paid to anyone that
qualifies as a ‘‘mortgage originator’’ is to
be included in points and fees for the
points and fees thresholds for both
qualified mortgages and high-cost
mortgages.117 Thus, in addition to
mortgage brokerage firms, other
mortgage originators, including
employees of a creditor (i.e., loan
officers) or of a brokerage firm (i.e.,
individual brokers) are included in
‘‘mortgage originator.’’ In addition, 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) and (C).
The 2013 ATR Final Rule. The
Bureau’s 2013 ATR Final Rule amended
§ 1026.32(b)(1) to implement revisions
to the definition of ‘‘points and fees’’
under section 1431 of the Dodd-Frank
Act, for the purposes of both HOEPA
and qualified mortgages. Among other
things, the Dodd-Frank Act added loan
originator compensation to the
definition of ‘‘points and fees’’ that had
previously applied to high-cost
mortgages under HOEPA. Section 1431
of the Dodd-Frank Act also amended
TILA to provide that open-end credit
plans (i.e., home equity lines of credit or
HELOCs) are covered by HOEPA. The
Bureau’s 2013 HOEPA Final Rule thus
separately amended § 1026.32(b)(2) to
provide for the inclusion of loan
originator compensation in points and
fees for HELOCs, to the same extent as
such compensation is required to be
counted for closed-end credit
transactions. Under § 1026.32(b)(1)(ii)
(for closed-end credit) and
§ 1026.32(b)(2)(ii) (for open-end credit),
all compensation paid directly or
indirectly by a consumer or creditor to
a loan originator, as defined in
117 ‘‘Mortgage originator’’ is generally defined to
include ‘‘any person who, for direct or indirect
compensation or gain, or in the expectation of
direct or indirect compensation or gain—(i) takes a
residential mortgage loan application; (ii) assists a
consumer in obtaining or applying to obtain a
residential mortgage loan; or (iii) offers or negotiates
terms of a residential mortgage loan.’’ TILA section
103(cc)(2)(A). 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(cc)(2)(C) through (F).
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§ 1026.36(a)(1), that can be attributed to
that transaction at the time the interest
rate is set, is required to be included in
points and fees. The commentary to
§ 1026.32(b)(1)(ii) as adopted in the
2013 ATR Final Rule provides details
for applying this requirement for closedend credit transactions (e.g., by
clarifying when compensation must be
known to be counted). The commentary
to § 1026.32(b)(2)(ii) as adopted in the
2013 HOEPA Final Rule crossreferences the commentary adopted in
§ 1026.32(b)(1)(ii) for interpretive
guidance.
In the 2013 ATR Final Rule, the
Bureau noted that, in response to the
Board’s 2011 proposal (Board’s 2011
ATR Proposal or Board’s proposal) 118
and the Bureau’s 2012 proposal to
implement the Dodd-Frank Act’s
amendments to HOEPA,119 the Bureau
received extensive feedback regarding
the inclusion of loan originator
compensation in the qualified mortgage
and high-cost mortgage points and fees
calculation. In the context of both
rulemakings, several industry
commenters argued that including loan
originator compensation in points and
fees would result in ‘‘double-counting’’
because creditors often compensate loan
originators with funds collected from
consumers at consummation. The
commenters argued that money
collected in up-front charges to
consumers should not be counted a
second time toward the points and fees
thresholds if it is passed on to a loan
originator. Consumer advocates urged
the Bureau not to assume that loan
originator compensation is funded
through up-front consumer payments to
creditors rather than through the
interest rate. They noted that, in the
wholesale channel, if the parties to a
transaction would like to fund loan
originator compensation through upfront payments, a consumer can pay the
mortgage broker directly instead of
paying origination charges to the
creditor and having the creditor pass
through payments to the mortgage
broker.
The literal language of TILA section
103(bb)(4) as amended by the DoddFrank Act defines points and fees to
include all items included in the
finance charge (except interest or the
time-price differential), all
compensation paid directly or indirectly
by a consumer or creditor to a loan
originator, ‘‘and’’ various other
enumerated items. The 2013 ATR Final
Rule noted that both the use of ‘‘and’’
118 76
FR 27390 (May 11, 2011).
FR 49090 (Aug. 15, 2012) (2012 HOEPA
Proposal).
119 77
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and the reference to ‘‘all’’ compensation
paid ‘‘directly or indirectly’’ and ‘‘from
any source’’ supports counting
compensation as it flows downstream
from one party to another so that it is
counted each time that it reaches a loan
originator, whatever the previous
source.
The Bureau stated that it believes the
statute would be read to require that
loan originator compensation be treated
as additive to the other elements of
points and fees and should be counted
as it flows downstream from one party
to another so that it is included in
points and fees each time it reaches a
loan originator, whatever the previous
source. The Bureau indicated that it did
not believe that an automatic literal
reading of the statute in all cases would
be in the best interest of either
consumers or industry, but it did not
believe that it yet had 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 all
circumstances, given the multiple
practical and complex policy
considerations involved. Accordingly,
the Bureau finalized the rule without a
qualifying interpretation on this issue
and included in the 2013 ATR Proposed
Rule several comments to explain how
to calculate loan originator
compensation in connection with
particular payment streams between
particular parties. However, the 2013
ATR Final Rule itself implemented the
additive approach of the statute.
The 2013 Loan Originator Final Rule.
Earlier this year, the Bureau issued a
final rule to implement various
provisions of the Dodd-Frank Act that
addressed compensation paid to loan
originators. 78 FR 11280 (Feb. 15, 2013)
(2013 Loan Originator Final Rule). As
the Bureau noted, the Board had
proposed rules in 2009, that, among
other things, would have prohibited
payments to a loan originator based on
the transaction’s terms or conditions;
prohibited a loan originator from
receiving dual compensation (i.e.,
compensation from both a consumer
and another person in the same
transaction); and prohibited a loan
originator from steering consumers to
transactions not in their interest to
increase the loan originator’s
compensation. In section 1403 of the
Dodd-Frank Act, Congress amended
TILA section 129B to codify significant
elements of the Board’s 2009 proposal.
In a final rule issued in 2010, the Board
finalized its proposed rules, while
acknowledging that further rulemaking
would be required to address certain
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issues and adjustments made by the
Dodd-Frank Act. 75 FR 58509 (Sept. 24,
2010) (2010 Loan Originator Final Rule).
As discussed below, the Bureau’s 2013
Loan Originator Final Rule
implemented certain provisions of TILA
section 129B, including rules expanding
and clarifying some of the prohibitions
adopted by the Board in the 2010 Loan
Originator Final Rule.
The Bureau’s 2013 Loan Originator
Final Rule clarified the scope of
§ 1026.36(d)(1), which prohibits basing
a loan originator’s compensation on any
of the transaction’s terms. This
provision was intended to eliminate
incentives for the loan originator to, for
example, persuade the consumer to
accept a higher interest rate or a
prepayment penalty, in exchange for the
loan originator receiving higher
compensation. The Bureau retained the
core prohibition in § 1026.36(d)(1), but
it clarified the meaning of a ‘‘term’’ of
the transaction and clarified the
standard for determining when
compensation is impermissibly based
on a proxy for a term of the transaction.
It also permitted certain bonuses and
retirement profit-sharing plans to be
based on the terms of multiple loan
originators’ transactions and permitted a
loan originator to participate in a
defined benefit plan without restrictions
on whether the benefits may be based
on the terms of a loan originator’s
transactions. See § 1026.36(d)(1)(iii) and
(iv). Consistent with the statute, the
Bureau also revised § 1026.36(d)(1) so
that it also applies in transactions in
which the consumer pays a mortgage
broker directly.
The 2013 Loan Originator Final Rule
also clarified the scope of
§ 1026.36(d)(2), which prohibits a loan
originator from receiving compensation
from both the consumer and other
persons in the same transaction. This
provision was designed to address
consumer confusion over mortgage
broker loyalties when brokers received
payments both from the consumer and
the creditor. The 2013 Loan Originator
Final Rule retained this prohibition but
provided an exception to permit
mortgage brokers to pay their employees
or contractors commissions (although
the commissions cannot be based on the
terms of the loans they originate).
In addition, the Bureau used its
exception authority to adopt a complete
exemption to the statutory ban on upfront fees set forth in TILA section
129B(c)(2)(B)(ii). See § 1026.36(d)(2)(ii).
That statutory ban would have
permitted a loan originator to receive an
origination fee or charge from someone
other than the consumer only if: (1) The
loan originator did not receive any
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compensation directly from the
consumer; and (2) the consumer did not
make an up-front payment of discount
points, origination points, or fees (other
than bona fide third-party charges not
retained by the loan originator, creditor,
or an affiliate of either). Thus, the
Bureau’s exemption permits the
consumer to pay origination charges or
fees to the creditor in transactions in
which the creditor is paying
compensation to the mortgage broker.
The Bureau also clarified the safe
harbor for loan originators to comply
with existing § 1026.36(e)(1), which
prohibits a loan originator from steering
a consumer to consummate a particular
transaction so that the loan originator
will receive greater compensation. The
Bureau clarified how to determine
which loans a creditor must offer to
consumers to take advantage of the safe
harbor. See § 1026.36(e)(3)(i)(C) and
comment 36(e)(3)–3. The Bureau did
not, however, implement the portion of
section 1403 of the Dodd-Frank Act that
requires the Bureau to prescribe
additional regulations to prohibit
certain types of steering, abusive or
unfair lending practices,
mischaracterization of credit histories or
appraisals, and discouraging consumers
from shopping with other mortgage
originators. The Bureau noted that it
intends to prescribe those regulations in
a future rulemaking. See 78 FR 11292
n.55.
The 2013 ATR Proposed Rule
In the 2013 ATR Proposed Rule, the
Bureau proposed commentary to
address situations in which loan
originator compensation passes from
one party to another. The Bureau
indicated that it believed that Congress
included loan originator compensation
in points and fees because of concern
that loans with high loan originator
compensation may be more costly and
riskier to consumers. Despite the
statutory language, the Bureau
questioned whether it would serve the
statutory purpose to apply a strict
additive rule that would automatically
require that loan originator
compensation be counted against the
points and fees thresholds even if it has
already been included in points and
fees. The Bureau indicated that it did
not believe that it is necessary or
appropriate to count the same payment
between a consumer and a mortgage
broker firm twice, simply because it is
both part of the finance charge and loan
originator compensation. Similarly, the
Bureau indicated that, where a payment
from either a consumer or a creditor to
a mortgage broker is counted toward
points and fees, it would not be
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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 stated that it did not believe the
purposes of the statute would be served
by counting some or all of the funds a
second time, and was concerned that
doing so could have negative impacts on
the price and availability of credit.
Proposed comment 32(b)(1)(ii)–5.i
thus would have provided that a
payment from a consumer to a mortgage
broker need not be counted toward
points and fees twice because it is both
part of the finance charge under
§ 1026.32(b)(1)(i) and loan originator
compensation under § 1026.32(b)(1)(ii).
Similarly, proposed comment
32(b)(1)(ii)–5.ii would have clarified
that § 1026.32(b)(1)(ii) does not require
a creditor to include payments by a
mortgage broker to its individual loan
originator employee in the calculation
of points and fees. For example, assume
a consumer pays a $3,000 fee to a
mortgage broker, and the mortgage
broker pays a $1,500 commission to its
individual loan originator employee for
that transaction. The $3,000 mortgage
broker fee is included in points and
fees, but the $1,500 commission is not
included in points and fees because it
has already been included in points and
fees as part of the $3,000 mortgage
broker fee. The Bureau stated that it
believed that any costs to the consumer
from loan originator compensation are
adequately captured by counting the
funds a single time against the points
and fees cap. The Bureau sought
comment regarding these proposed
comments.
The Bureau noted that determining
the appropriate accounting method is
significantly more complicated when 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. As described in the 2013 ATR
Final Rule, a creditor can fund
compensation to its own loan officer or
to a mortgage broker in two different
ways. First, the payment could be
funded by origination charges paid by
the consumer to the creditor. Second,
the payment could be funded through
the interest rate, in which case the
creditor forwards funds to the loan
originator at consummation which the
creditor recovers through profit realized
on the subsequent sale of the mortgage
or, for portfolio loans, through payments
by the consumer over time. Because
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money is fungible, tracking how a
creditor spends money it collects in upfront charges versus amounts collected
through the rate to cover both loan
originator compensation and its other
overhead expenses would be
extraordinarily complex and
cumbersome. The Bureau stated that, to
facilitate compliance, it believed it
would be appropriate and necessary to
adopt generalized rules regarding the
accounting of various payments, but did
not have sufficient information to make
those choices in the 2013 ATR Final
Rule. However, the 2013 ATR Final
Rule itself implemented the additive
approach of the statute.
The Bureau noted in the 2013 ATR
Proposed Rule that the potential
downstream effects of different
accounting methods may be significant.
Under the ‘‘additive’’ approach where
no netting of up-front consumer
payments against creditor-paid loan
originator compensation is allowed,
some loans might be precluded from
being qualified mortgages or may exceed
the high-cost mortgage threshold
because of the combination of loan
originator compensation with other
charges that are included in points and
fees, such as fees paid to affiliates for
settlement services. In other cases,
creditors whose combined loan
originator compensation and up-front
charges would otherwise exceed the
points and fees limits would have strong
incentives to cap their up-front charges
for other overhead expenses under the
threshold and instead recover those
expenses by increasing interest rates to
generate higher gains on sale. This
would adversely affect consumers who
prefer to pay a lower interest rate over
time in return for 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 an ‘‘additive’’
rule by increasing interest rates, this
could increase the number of qualified
mortgages that receive a rebuttable
presumption of compliance, rather than
a safe harbor from liability, under the
ability-to-repay provisions adopted by
the 2013 ATR Final Rule.
The Bureau noted that one alternative
would be to allow all consumer
payments of up-front points and fees to
be netted against creditor-paid loan
originator compensation. However, this
‘‘netting’’ 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. For example, a consumer could
pay three percentage points in
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origination charges and be charged an
interest rate sufficient to generate a 3
percent loan originator commission, and
the loan could still fall within the 3
percent cap for qualified mortgages. The
consumer could be charged five
percentage points in origination charges
and an interest rate sufficient to
generate a 5 percent loan originator
commission and still stay under the
HOEPA points and fees trigger, thereby
denying consumers the special
protections afforded to loans with high
up-front costs. In markets that are less
competitive, this would create an
opportunity for creditors or brokerage
firms to take advantage of their market
power to harm consumers.
The Bureau sought comment on two
alternative versions of proposed
comment 32(b)(1)(ii)–5.iii. The first—
the additive approach—would have
explicitly precluded netting, consistent
with the literal language of the statute,
by specifying that § 1026.32(b)(1)(ii)
requires a creditor to include
compensation paid by a consumer or
creditor to a loan originator in the
calculation of points and fees in
addition to any fees or charges paid by
the consumer to the creditor. This
proposed comment contained an
example to illustrate this principle:
Assume that a consumer pays to the
creditor a $3,000 origination fee and
that the creditor pays to its loan officer
employee $1,500 in compensation
attributed to the transaction. Assume
further that the consumer pays no other
charges to the creditor that are included
in points and fees under
§ 1026.32(b)(1)(i) and the loan officer
receives no other compensation that is
included in points and fees under
§ 1026.32(b)(1)(ii). For purposes of
calculating points and fees, the $3,000
origination fee would be included in
points and fees under § 1026.32(b)(1)(i)
and the $1,500 in loan officer
compensation would be included in
points and fees under § 1026.32(b)(1)(ii),
equaling $4,500 in total points and fees,
provided that no other points and fees
are paid or compensation received.
The second alternative—the netting
approach—would have provided that, in
calculating the amount of loan
originator compensation to include in
points and fees, creditors would be
permitted to net consumer payments of
up-front fees and points against creditor
payments to the loan originator.
Specifically, it would have provided
that § 1026.32(b)(1)(ii) permits a creditor
to reduce the amount of loan originator
compensation included in the points
and fees calculation under
§ 1026.32(b)(1)(ii) by any amount paid
by the consumer to the creditor and
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35445
included in the points and fees
calculation under § 1026.32(b)(1)(i).
This proposed comment contained an
example to illustrate this principle:
Assume that a consumer pays to the
creditor a $3,000 origination fee and
that the creditor pays to the loan
originator $1,500 in compensation
attributed to the transaction. Assume
further that the consumer pays no other
charges to the creditor that are included
in points and fees under
§ 1026.32(b)(1)(i) and the loan originator
receives no other compensation that is
included in points and fees under
§ 1026.32(b)(1)(ii). For purposes of
calculating points and fees, the $3,000
origination fee would be included in
points and fees under § 1026.32(b)(1)(i),
but the $1,500 in loan originator
compensation need not be included in
points and fees. If, however, the
consumer pays to the creditor a $1,000
origination fee and the creditor pays to
the loan originator $1,500 in
compensation, then the $1,000
origination fee would be included in
points and fees under § 1026.32(b)(1)(i),
and $500 of the loan originator
compensation would be included in
points and fees under § 1026.32(b)(1)(ii),
equaling $1,500 in total points and fees,
provided that no other points and fees
are paid or compensation received.
The Bureau solicited feedback
regarding all aspects of both
alternatives. In addition, the Bureau
specifically requested feedback
regarding whether there are differences
in various types of loans, consumers,
loan origination channels, or market
segments which would justify applying
different netting or additive rules to
such categories. The Bureau also sought
feedback as to whether, if netting were
permitted, the creditor should be
allowed to reduce the loan originator
compensation by the full amount of
points and fees included in the finance
charge or whether the reduction should
be limited to that portion of points and
fees denominated as general origination
charges.
The Bureau also sought comment on
the implications of each alternative on
protecting consumers pursuant to the
ability-to-repay requirements, qualified
mortgage provisions, and the high-cost
mortgage provisions of HOEPA. The
Bureau also sought comment on the
likely market reactions and impacts on
the pricing of and access to credit of
each alternative, particularly as to how
such reactions might affect interest rate
levels, the safe harbor and rebuttable
presumption afforded to particular
qualified mortgages, and application of
the separate rate threshold for high-cost
mortgages under HOEPA and whether
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adjustment to the final rule would be
appropriate. The Bureau further sought
comment on the implications of both of
the above proposed alternatives in light
of the fact that both the qualified
mortgage and HOEPA provisions allow
certain bona fide discount points and
bona fide third party charges to be
excluded from the calculation of points
and fees, but do not do so for affiliate
charges.
The Bureau adopted in the 2013
HOEPA Final Rule a requirement that
creditors include compensation paid to
originators of open-end credit plans in
points and fees, to the same extent that
such compensation is required to be
included for closed-end credit
transactions. The Bureau did not receive
comments in response to the 2012
HOEPA Proposal indicating that
additional or different guidance would
be needed to calculate loan originator
compensation in the open-end credit
context. The Bureau noted in the 2013
ATR Proposed Rule that it would be
useful to provide the public with an
additional opportunity to comment.
Thus, the Bureau solicited input on
what guidance, if any, beyond that
provided for closed-end credit
transactions, would be helpful for
creditors in calculating loan originator
compensation in the open-end credit
context.
Finally, the Bureau sought comment
generally on whether additional
guidance or regulatory approaches
regarding the inclusion of loan
originator compensation in points and
fees would be useful to protect
consumers and facilitate compliance. In
particular, the Bureau sought 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 the ability-to-repay and HOEPA
rulemakings and the provisions that the
Bureau was separately finalizing in
connection with the Bureau’s 2012 Loan
Originator Proposal (since adopted in
the 2013 Loan Originator Final Rule).
For example, the Bureau sought
comment on whether additional
guidance would be useful with regard to
treatment of compensation by persons
who are ‘‘loan originators’’ but are not
employed by a creditor or mortgage
broker, given that the 2013 Loan
Originator Final Rule implemented
provisions of the Dodd-Frank Act that
specify when employees of retailers of
manufactured homes, servicers, and
other parties are loan originators for
Dodd-Frank Act purposes.
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Comments Received
The Bureau received numerous
comments regarding the calculation of
loan originator compensation for
inclusion in points and fees for the
qualified mortgage and high-cost
mortgage points and fees limits. Many of
the comments were substantially similar
letters submitted by mortgage brokers.
Many of the comments responded to the
Bureau’s proposed commentary
regarding potential double counting of
loan originator compensation. As
described below, however, some
comments also raised other issues
regarding loan originator compensation.
Few commenters addressed the
Bureau’s proposed comments
32(b)(1)(ii)–5.i and 32(b)(1)(ii)–5.ii,
which would have provided that
payments by consumers to mortgage
brokers (where those payments already
have been included in points and fees
under § 1026.32(b)(1)(i)) and payments
by mortgage brokers to their individual
loan originator employees need not be
counted as loan originator
compensation and included in points
and fees. Nearly all commenters that
addressed these proposed comments
supported them. One industry
commenter, however, argued that the
Bureau should not adopt the proposed
comments unless the Bureau also
excludes from points and fees
compensation paid by creditors to their
own loan officers. That commenter
claimed that it would be inequitable to
exclude from points and fees
compensation paid to individual loan
originators employed by a mortgage
broker firm but not to exclude
compensation paid to individual loan
originators employed by the creditor.
Many more commenters addressed
the Bureau’s two alternatives for
proposed comment 32(b)(1)(ii)–5.iii.
Consumer advocates urged the Bureau
to adopt an additive approach for
transactions in the wholesale channel,
i.e., transactions originated through a
mortgage broker. They argued that the
statutory provision was intended to
limit the total up-front charges and loan
originator compensation in loans
designated as qualified mortgages (and
to ensure that loans with charges and
compensation above the threshold are
subject to the special protection as highcost mortgages). They maintained that a
netting rule would in essence double
the points and fees thresholds for
qualified mortgages and high-cost
mortgages. As a result, loans of $100,000
or more could have up-front charges of
3 percent of the total loan amount and
loan originator compensation paid by
the creditor equal to another 3 percent,
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yet the loan could still be a qualified
mortgage.120 Similarly, loans of $20,000
or more could have up-front charges of
5 percent of the total loan amount and
creditor-paid compensation equal to
another 5 percent, yet the loan would
still not qualify as a high-cost
mortgage.121
Some consumer advocates also argued
that consumers have difficulty
understanding and evaluating the cost
of creditor-paid compensation to
mortgage brokers. They contend that, as
a result, creditor-paid compensation
historically has resulted in more costly
loans for consumers, with a higher risk
of default, particularly when consumers
also have made up-front payments.
They argued that an additive rule
provides important protection because
the Bureau elected in the 2013 Loan
Originator Final Rule to permit creditors
to continue charging up-front fees to
consumers when creditors compensate
loan originators. They maintained that a
netting rule would encourage creditors
and mortgage brokers to combine
creditor-paid compensation with upfront charges paid by consumers to
creditors because such compensation
then would not be included in points
and fees. They argued that this
combination is less transparent and
more confusing to consumers than a
model in which the consumer pays a
mortgage broker directly or pays all
charges through the rate.
Some consumer advocates also argued
that the additive approach was
necessary to complement the
protections contained in § 1026.36(d)
and (e) prohibiting or restricting certain
loan originator compensation practices.
They contended that mortgage brokers
could develop problematic business
models that would not violate the
prohibition in § 1026.36(d)(1) against
basing compensation on loan terms and
the prohibition in § 1026.36(e) against
steering consumers to consummate
particular transactions to maximize loan
originator compensation. For example,
some consumer advocates noted that,
without violating these prohibitions,
mortgage brokers could specialize in
subprime transactions with high upfront charges and high interest rates and
could induce creditors to compete for
such transactions and offer high loan
originator compensation, so long as the
compensation did not vary with the
120 For loans less than $100,000, the qualified
mortgage points and fees limits are more than 3
percent of the total loan amount. See
§ 1026.43(e)(3).
121 For loans less than $20,000, the points and
fees thresholds for high-cost mortgages are more
than 5 percent of the loan amount. See
§ 1026.32(a)(1)(ii).
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terms of individual loans. Alternatively,
they suggested that mortgage brokers
could do business with a mix of highcost creditors that pay high
compensation and creditors offering
more competitive loans that pay lower
compensation to brokers. For consumers
that mortgage brokers believe would be
more likely to agree to more costly
loans, mortgage brokers could take
advantage of the safe harbor in the antisteering rules by providing three quotes
from high-cost creditors but could
continue providing other customers
with more competitive loans through
other creditors. Consumer advocates
argued that an additive approach would
deter such practices because creditors
charging high up-front fees and paying
high compensation to mortgage brokers
would find it more difficult to remain
below the qualified mortgage points and
fees limits and the high-cost mortgage
points and fees threshold.
Some consumer advocates also argued
that the Bureau lacks the authority to
adopt a netting approach for high-cost
mortgages under HOEPA. They claimed
that the Bureau would need to use its
exception authority to adopt the netting
approach and that TILA section 105(a)
does not permit the Bureau to use its
exception authority to modify the items
included in points and fees for high-cost
mortgages. Thus, they argued that the
Bureau can adopt a netting approach
only for calculating loan originator
compensation for the qualified mortgage
points and fees limits. They maintained
that creating different measures for loan
originator compensation for qualified
mortgages and high-cost mortgages
would be confusing and create
compliance difficulties.
Some consumer advocates also argued
that double-counting concerns could be
addressed simply by having the
consumer pay the mortgage broker
directly. They noted that this approach
to structuring mortgage pricing would
permit a consumer to pay up-front
charges to reduce the amount of the
interest rate. The consumer payment to
the broker would be counted in points
and fees only one time. Some consumer
advocates maintained that there is little
justification for combining creditor-paid
compensation to mortgage brokers with
up-front charges paid by consumers.
They claimed that, historically, the
rationale for creditor-paid compensation
for mortgage brokers was that it
provided an option for consumers that
did not have sufficient funds or did not
want to pay a mortgage broker directly
and instead preferred to pay such
compensation through a higher interest
rate. They noted that such a rationale
does not make sense in a transaction in
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which creditor-paid compensation is
combined with up-front charges paid by
the consumer. Some consumer
advocates also suggested that doublecounting concerns could be addressed
by permitting creditors to net
origination payments from consumers
against loan originator compensation, so
long as the creditors provided more
detailed disclosures to consumers when
such payments would be passed
through as compensation to loan
originators.
Some consumer advocates argued that
the Bureau should treat all loan
originators the same and should
therefore also adopt an additive rule for
transactions in the retail channel. They
maintained that, while problematic loan
originator compensation practices
historically may have been more
prevalent in the wholesale channel,
there were also similar problems in the
retail channel. They also argued that,
despite the prohibitions on steering and
term-based compensation, creditors will
find ways to encourage retail loan
officers to steer consumers to highercost loans. For example, they suggested
that creditors may use deferred
compensation plans to provide some
incentives for retail loan officers to steer
consumers toward higher cost loans.
They therefore argued that the same
protections provided by an additive
approach are necessary in the retail
channel.
Some consumer advocates, however,
argued that the Bureau should adopt a
different rule for transactions in the
retail channel. They argued that
Congress was particularly concerned
with transactions with creditor-paid
compensation to mortgage brokers and
that such transactions historically
tended to be more costly and to have
higher rates of default. They claimed
that the risks of consumer injury from
loan originator compensation practices
are significantly lower in the retail
channel. They contended that, in the
retail channel, creditors and their loan
officers would have far greater
difficulties in structuring their
businesses to evade the prohibitions
against steering and term-based
compensation in § 1026.36(d)(1) and
§ 1026.36(e). They noted that retail loan
officers cannot pick and choose
different loans from different creditors
offering different levels of loan
originator compensation. They also
argued that mortgage brokers may be
more successful in convincing
consumers to accept more costly loans
because consumers perceive that their
mortgage broker is a trusted advisor and
mistakenly believe that the broker is
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35447
obligated to provide them with the
lowest cost loan.
Some consumer advocates also argued
that the double-counting concerns are
more pronounced in the retail channel
because consumers do not have the
option to pay retail loan officers
directly. Under an additive approach,
any loan originator compensation paid
by the creditor to its loan officers would
be included in points and fees in
addition to any up-front charges paid by
the consumer to the creditor. Because
the consumer cannot pay up-front
charges directly to the retail loan officer,
the consumer would have less flexibility
to pay up-front charges to receive a
lower interest rate and still remain
under the points and fees limits.
In developing the final rule, the
Bureau consulted with several Federal
agencies, as required by section
1022(b)(2)(B) of the Dodd-Frank Act.
Three agencies, the Federal Deposit
Insurance Corporation (FDIC), HUD, and
the Office of the Comptroller of the
Currency (OCC) submitted formal
comment letters. The FDIC and HUD
submitted a joint comment stating their
view that compensation paid to
mortgage brokers should be included in
points and fees whether the consumer
pays such compensation directly
through up-front charges or indirectly
through the creditor and funded through
the interest rate. The FDIC and HUD
stated that yield spread premiums
(YSPs), i.e., compensation paid by a
creditor and funded out of the interest
rate, have been offered as a payment
option for consumers that prefer lower
up-front costs and a higher interest rate
but that a consumer’s choice to use a
YSP to compensate a broker should not
affect the calculation of loan originator
compensation for points and fees. The
FDIC and HUD maintained that the
netting approach would undercount
points and fees. They also stated that a
netting approach would create
incentives for transactions to include
both up-front origination charges and
YSPs because the up-front charges could
be netted against the YSPs to reduce or
eliminate the loan originator
compensation that would be included in
points and fees. The FDIC and HUD
argued that evidence shows that
transactions with both up-front charges
and ‘‘back-end’’ payments tend to be the
most costly for consumers and are the
most difficult for them to evaluate when
shopping for a mortgage.
The FDIC and HUD supported the
proposal to exclude compensation paid
by a mortgage broker to its employees
but argued that the Bureau should also
exclude compensation paid by a
creditor to its employees. The FDIC and
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HUD argued that including in points
and fees compensation paid by a
creditor to its employee would increase
compliance costs and make it difficult
for them to create compliant systems by
the January 2014 effective date. They
also stated that including such
compensation in points and fees could
result in variations in points and fees for
loans with identical costs to the
consumer, merely because, for example,
one transaction involved a highperforming loan officer. They argued
that excluding from points and fees
compensation paid by a creditor to its
employees would not compromise the
consumer protection goals of the points
and fees provision because of the loan
originator compensation restrictions in
§ 1026.36(d). They noted that employees
of creditors have no ability to choose
among creditors, further reducing the
risk that consumers would be steered
toward more costly loans.
The OCC also submitted a comment
stating its support for excluding from
points and fees loan originator
compensation paid by a consumer to a
mortgage broker when that payment
already is included in points and fees as
part of the finance charge; excluding
from points and fees compensation paid
by a mortgage broker to its employees;
excluding from points and fees
compensation paid by a creditor to its
employees; and using an additive
approach to include in points and fees
both origination charges paid by a
consumer to a creditor and loan
originator compensation paid by a
creditor to a mortgage broker. The OCC
stated that a netting approach would
permit YSPs and origination fees to be
charged in the same transaction without
including both in points and fees and
argued that this would not serve the
interest of consumers or of a
transparent, competitive mortgage
market. The OCC noted that a netting
approach would permit a qualified
mortgage to have up-front charges equal
to 3 percent of the loan amount and an
interest rate sufficient to generate a 3
percent loan origination commission;
similarly, a netting approach would
permit a mortgage loan to have up-front
charges equal to 5 percent of the loan
amount and an interest rate sufficient to
generate a 5 percent loan origination
commission. The OCC also maintained
that including both origination charges
and YSPs increases the complexity of
mortgage transactions and confuses
consumers, particularly those who are
most vulnerable and have the fewest
credit choices.
As noted above, the OCC supported
excluding from points and fees
compensation paid by a creditor to its
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loan officers. The OCC noted that the
banking industry expressed concerns
about the operational burden of
attempting to track compensation and
about the potential uncertainty of
whether, because of changes in loan
originator compensation, a transaction
would be a qualified mortgage. The OCC
argued that excluding from points and
fees compensation paid by a creditor to
its loan officers would not adversely
affect consumer protection. The OCC
noted that individual employees in both
the retail and wholesale channels are
prohibited from steering a consumer to
a more costly loan to increase their
compensation but that there is an added
layer of protection because a creditor’s
loan officers generally do not have the
ability to select from different creditors
when presenting loan options to
consumers.
Repeating arguments they made in
response to the Board’s 2011 ATR
Proposal, many industry commenters,
including creditors and their
representatives and mortgage brokers
and their representatives, again urged
the Bureau to exclude loan originator
compensation from points and fees
altogether. They argued that loan
originator compensation has little or no
bearing on a consumer’s ability to repay
a mortgage and that it therefore is
unnecessary to include such
compensation in points and fees. They
also maintained that other regulatory
protections, including the prohibition in
§ 1026.36(d)(1) on compensating loan
originators based on the terms of the
transaction and the prohibition in
§ 1026.36(e) on steering consumers to
consummate particular transactions to
increase loan originator compensation,
are sufficient to protect consumers
against problematic loan originator
compensation practices. They claimed
that including loan originator
compensation in points and fees would
impose a significant compliance burden
and make it far more difficult to offer
qualified mortgages, leading to higher
costs for credit and reduced access to
credit.
A trade group representing mortgage
brokers and many individual mortgage
brokers submitted substantially similar
comments recommending that the
Bureau exclude all compensation paid
by creditors to loan originators. They
argued that the Board’s 2010 Loan
Originator Final Rule already restricted
loan originator compensation to prevent
steering of consumers to more costly
mortgages.
One industry commenter
recommended that, if the Bureau
declines to exclude all loan originator
compensation from points and fees, the
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Bureau should consider whether
compensation paid by a creditor to a
mortgage broker should be included in
points and fees only for higher-priced
mortgage loans because competition
may not be as robust for such loans. The
commenter suggested that the Bureau
consider excluding such compensation
entirely from points and fees for
mortgage loans in the prime market and
excluding only a certain amount for
higher-priced mortgage loans.
Many industry commenters advocated
that, if the Bureau declines to exclude
loan originator compensation altogether,
the Bureau should exclude from points
and fees any compensation paid to loan
originator employees. Many creditors
and their representatives argued that
compensation paid to loan originators
employed by creditors, as well as loan
originators employed by mortgage
brokers, should be excluded from points
and fees. They raised a number of
different arguments to support
excluding compensation paid to
individual loan originators, including
retail loan officers.
First, they asserted that calculating
loan originator compensation for
individual loan originators would
impose a substantial burden,
particularly for employees of creditors.
They noted that retail loan officers often
receive a substantial part of their
compensation after a mortgage loan is
consummated, making it difficult to
track and attribute compensation to a
transaction before that transaction is
consummated. They argued that, for
retail loan officers, it would create
significant compliance burdens to track
compensation paid to each loan officer
and attribute that compensation to each
transaction. They noted that their
existing systems are unable to track and
attribute compensation for each loan
officer for each transaction, and stated
that they would have to develop new
systems that could track compensation
in real time and communicate with loan
origination systems to calculate points
and fees. They also asserted that it
would impose substantial compliance
risk because of the difficulty in
accurately calculating such
compensation.
Second, they argued that calculating
loan originator compensation at the time
the interest rate is set would result in an
inaccurate measure of compensation
and would result in significant
anomalies. They noted that various
types of compensation, including salary
and bonuses based on factors such as
loan quality and customer satisfaction,
would not be included in loan
originator compensation because they
cannot be attributed to a particular
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transaction. However, they asserted that
the amount of compensation that is
included in points and fees may have
little bearing on how much the
consumer actually pays for a given
transaction. For example, they noted
that two transactions with identical
interest rates and up-front charges may
nevertheless have different loan
originator compensation merely because
one transaction involved an
experienced, more highly compensated
loan officer or because the interest rate
in a transaction was set at the end of the
month when a loan officer had qualified
for a higher commission.
Finally, they argued that employee
compensation is merely another
overhead cost that already is captured in
the interest rate or in origination charges
and has little, if any, bearing on a
consumer’s ability to repay a mortgage.
They argued that compensation
typically is already captured in points
and fees as origination charges and that
including employee loan originator
compensation would constitute double
counting.
One industry commenter
recommended that, if the Bureau
declines to exclude compensation paid
to individual loan originators from
points and fees, the Bureau should
consider other methods to simplify the
calculation of loan originator
compensation. That commenter
suggested that the Bureau permit a
creditor to include as loan originator
compensation a fixed amount based on
average costs for loan originator
compensation over a prior period of
time. The commenter noted that such an
approach would ease the burden and
complexity of tracking compensation for
each loan.
A trade group representing mortgage
brokers and many individual mortgage
brokers submitted substantially similar
comments urging the Bureau to include
in points and fees only compensation
received by the originating entity for
loan origination activities. They argued
that fees associated with creditors or
wholesale lenders should not be
included in points and fees. They also
maintained that originators should be
permitted to charge various percentages
for their loan origination activities,
provided they do not exceed the
qualified mortgage 3 percent cap and
that non-bank originators should be
permitted to receive compensation from
the consumer, creditor, or a
combination of both, as long as total
compensation does not exceed 3 percent
of the loan amount.
Many industry commenters argued
that, if the Bureau elects not to exclude
loan originator compensation from
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points and fees altogether, or to exclude
compensation paid to loan originator
employees, the Bureau should adopt the
netting rule in proposed alternative 2 of
comment 32(b)(1)(ii)–5.iii. They argued
that the additive rule in proposed
alternative 1 of comment 32(b)(1)(ii)–
5.iii would result in significant double
counting and could cause many loans to
exceed the qualified mortgage points
and fees limits and could cause some
loans to exceed the high-cost mortgage
threshold.
One commenter asserted that the
inclusion of loan originator
compensation in points and fees, along
with limitations on the number of
discount points that may be excluded
from points and fees, would limit the
ability of nonprofit organizations to
assist consumers in obtaining affordable
mortgages. The commenter argued that
the Bureau should adopt a rule
permitting creditors to exclude
payments to loan originators if the costs
of such payments are absorbed by
creditors and not passed along to
consumers. As an alternative, the
commenter supported comments
32(b)(1)(ii)–5.i and 32(b)(1)(ii)–5.ii, and
the second alternative of comment
32(b)(1)(ii)–5.iii, arguing that these
comments minimize double-counting.
The commenter also urged the Bureau to
permit consumers to exclude from
points and fees more than two bona fide
discount points, recommending that the
Bureau exclude from points and fees
any amounts used to buy down an
interest rate that starts at or below the
average 30-year fixed prime offer rate.
Commenters also raised other issues
related to loan originator compensation.
Several industry and nonprofit
commenters requested additional
guidance regarding the calculation of
loan originator compensation for
transactions involving manufactured
homes. They noted that, under
§ 1026.36(a), as amended by the
Bureau’s 2013 Loan Originator Final
Rule, manufactured home retailers and
their employees could qualify as loan
originators. Industry commenters
requested additional guidance on what
activities would cause a manufactured
home retailer and its employees to
qualify as loan originators. They stated
that it remains unclear what activities a
retailer and its employees could engage
in without qualifying as loan originators
and causing their compensation to be
included in points and fees. Industry
commenters also noted that, because the
creditor had limited knowledge of and
control over the activities of the
retailer’s employees, it would be
difficult for the creditor to know
whether the retailer and its employees
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35449
had engaged in activities that would
require their compensation to be
included in points and fees. They
therefore urged the Bureau to adopt a
bright-line rule under which
compensation would be included in
points and fees only if paid to an
employee of a creditor or a mortgage
broker.
Industry commenters also requested
that the Bureau clarify what
compensation must be included in
points and fees when a manufactured
home retailer and its employees qualify
as loan originators. They argued that it
is not clear whether the sales price or
the sales commission in a transaction
should be considered, at least in part,
loan originator compensation. They
urged the Bureau to clarify that
compensation paid to a retailer and its
employees in connection with the sale
of a manufactured home should not be
counted as loan originator
compensation.
Finally, a number of industry
commenters again advocated excluding
certain other items from points and fees.
In particular, several industry
commenters urged the Bureau to
exclude from points and fees real-estate
related charges paid to affiliates of the
creditor and up-front charges to recover
the costs of loan-level price adjustments
(LLPAs) imposed by the GSEs.
The Final Rule
The Bureau addresses below various
issues regarding the inclusion of loan
originator compensation in points and
fees. Specifically, the final rule provides
that payments by consumers to
mortgage brokers need not be counted as
loan originator compensation where
such payments already have been
included in points and fees as part of
the finance charge. In addition,
compensation paid by a mortgage broker
to its employees need not be included
in points and fees. The Bureau also
concludes that compensation paid by a
creditor to its own loan officers need not
be included in points and fees. The
Bureau determines, however, that it
should not use its exception authority to
alter the requirement that compensation
paid by a creditor to a mortgage broker
is included in points and fees in
addition to any origination charges paid
by a consumer to the creditor. Finally,
the Bureau provides further guidance on
how to calculate the amount of loan
originator compensation for transactions
involving manufactured homes.
Compensation paid by consumers to
mortgage brokers. In the 2013 ATR
Proposed Rule, the Bureau stated that
the broad statutory language requiring
inclusion of ‘‘all’’ compensation paid
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‘‘directly or indirectly’’ and ‘‘from any
source’’ supports counting
compensation in points and fees each
time it is paid to a loan originator. Thus,
the Bureau reads the express language of
the statute as providing for the inclusion
of loan originator compensation in
points and fees, even if some or all of
that compensation may already have
been included in points and fees under
other elements of the definition, and the
2013 ATR Final Rule adopted this
statutory approach.
However, as noted in the 2013 ATR
Proposed Rule, the Bureau does not
believe it would be in the interest of
consumers or industry to adhere to this
‘‘additive’’ approach when it is clear
that the compensation already has been
captured in points and fees. Thus, as
explained below, the Bureau is using its
adjustment and exception authority and
its authority to revise the criteria that
define a qualified mortgage to eliminate
double counting in such situations.
As noted above, the Bureau proposed
in the 2013 ATR Proposed Rule three
different examples (one of which had
two alternatives) for calculating loan
originator compensation when such
compensation may already have been
included in points and fees. The first
example, proposed comment
32(b)(1)(ii)–5.i, would have provided
that a consumer payment to a mortgage
broker that is included in points and
fees under § 1026.32(b)(1)(i) (because it
is included in the finance charge) does
not have to be counted in points and
fees again under § 1026.32(b)(1)(ii) (as
loan originator compensation). The
Bureau noted in the 2013 ATR Proposed
Rule that it did not believe that counting
a single payment to a mortgage broker
twice would advance the purpose of the
points and fees limits. Few comments
addressed this proposed example, and,
with one exception, which is discussed
below in connection with proposed
comment 32(b)(1)(ii)–5.ii, those
comments supported the Bureau’s
proposal that such payments should not
be included in points and fees under
§ 1026.32(b)(1)(ii) if they already are
included in points and fees under
§ 1026.32(b)(1)(i).
The Bureau is therefore adopting
comment 32(b)(1)(ii)–5.i as proposed
and renumbered as 32(b)(1)(ii)–4.i. The
Bureau also is adopting new
§ 1026.32(b)(1)(ii)(A) to provide that
loan originator compensation paid by a
consumer to a mortgage broker, as
defined in § 1026.36(a)(2), is not
included in points and fees if it already
has been included in points and fees
because it is included in the finance
charge under § 1026.32(b)(1)(i). The
term ‘‘mortgage broker’’ is defined in
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§ 1026.36(a)(2) to mean any loan
originator other than an employee of a
creditor. Under this definition, persons
whose primary business is not
originating mortgage loans may
nevertheless be mortgage brokers if they
qualify as a ‘‘loan originator’’ under
§ 1026.36(a)(1) and are not employees of
a creditor. The use of the term
‘‘mortgage broker’’ in
§ 1026.32(b)(1)(ii)(A) is appropriate
because compensation is excluded from
points and fees under
§ 1026.32(b)(1)(ii)(A) only if such
compensation already has been
included in points and fees under
§ 1026.32(b)(1)(i).
The Bureau is adopting new
§ 1026.32(b)(1)(ii)(A) pursuant to its
authority under TILA section 105(a) to
make such adjustments and exceptions
for any class of transactions as the
Bureau finds necessary or proper to
facilitate compliance with TILA and to
effectuate the purposes of TILA,
including the purposes of TILA section
129C of ensuring that consumers are
offered and receive residential mortgage
loans that reasonably reflect their ability
to repay the loans. The Bureau’s
understanding of this purpose is
informed by the findings related to the
purposes of section 129C of ensuring
that responsible, affordable mortgage
credit remains available to consumers.
The Bureau believes that using its
exception authorities to ensure that a
single payment to a mortgage broker
will not be counted twice in points and
fees will facilitate compliance with the
points and fees regulatory regime by
allowing creditors to count the payment
to a broker once without requiring
further investigation into the mortgage
broker’s employee compensation
practices, and by making sure that all
creditors apply the provision
consistently. It will also effectuate the
purposes of TILA by preventing the
points and fees calculation from being
artificially inflated, thereby helping to
keep mortgage loans available and
affordable by ensuring that they are
subject to the appropriate regulatory
framework with respect to qualified
mortgages and the high-cost mortgage
threshold. The Bureau is also invoking
its authority under TILA section
129C(b)(3)(B) to revise, add to, or
subtract from the criteria that define a
qualified mortgage consistent with
applicable standards. For the reasons
explained above, the Bureau has
determined that it is necessary and
proper to ensure that responsible,
affordable mortgage credit remains
available to consumers in a manner
consistent with the purposes of TILA
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section 129C and necessary and
appropriate to effectuate the purposes of
this section and to facilitate compliance
with section 129C. With respect to its
use of TILA section 129C(b)(3)(B) here
and elsewhere in this section, the
Bureau believes this authority includes
adjustments and exceptions to the
definitions of the criteria for qualified
mortgages and that it is consistent with
the purpose of facilitating compliance to
extend use of this authority to the points
and fees definitions for high-cost
mortgage in order to preserve the
consistency of the qualified mortgage
and high-cost mortgage definitions. As
noted above, by helping to ensure that
the points and fees calculation is not
artificially inflated by counting a single
payment to a mortgage broker twice, the
Bureau is helping to ensure that
responsible, affordable mortgage credit
remains available to consumers.
Some consumer advocates argued that
the Bureau lacks exception authority to
exclude loan originator compensation
from the points and fees calculation for
the high-cost mortgage threshold under
HOEPA.122 However, while the Bureau’s
authority under TILA section 105(a)
does not extend to the substantive
protections for high-cost mortgages in
TILA section 129, the provision that
defines high-cost mortgages, including
the points and fees definitions, is part
of TILA section 103. Thus, although the
Bureau cannot use its authority under
TILA section 105(a) to alter the
substantive protections accorded to
high-cost mortgages under TILA section
129, it can use that authority to adjust
the criteria used to define a high-cost
mortgage, including the method for
calculating points and fees, as specified
elsewhere in TILA.
Compensation paid by mortgage
brokers to their loan originator
employees. The second example,
proposed comment 32(b)(1)(ii)–5.ii,
would have provided that compensation
paid by a mortgage broker to its
individual loan originator employees is
not included in points and fees under
§ 1026.32(b)(1)(ii). The Bureau stated in
the 2013 ATR Proposed Rule that the
exclusion from points and fees was
warranted because a payment from
122 The consumer advocate commenters made this
argument to oppose the Bureau’s using exception
authority to exclude from points and fees (or use
a netting approach for) compensation paid by
creditors to loan originators. However, because this
argument would also apply to the Bureau’s use of
exception authority to exclude from points and fees
compensation paid by a consumer to a mortgage
broker or by a mortgage broker to its employees, the
Bureau addresses this argument here with respect
to this and other uses of its exception authority in
this rulemaking to exclude certain loan originator
compensation from points and fees.
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either a consumer or creditor to a
mortgage broker firm already is counted
in points and fees, and that it would not
be necessary or appropriate to also
include in points and fees any funds
that the mortgage broker firm passes on
to its individual loan originator
employees. Again, few commenters
addressed this example, and, with one
exception, they supported the Bureau’s
proposed comment.
As noted above, one creditor argued
that it would be unfair to adopt
proposed comments 32(b)(1)(ii)–5.i and
32(b)(1)(ii)–5.ii without adopting a
similar exclusion for compensation paid
by a creditor to its employee loan
originators (i.e., its own loan officers).
For the reasons set forth below, the
Bureau is using its exception authority
to permit creditors to exclude from
points and fees compensation paid to
their own loan officers.
Accordingly, the Bureau is adopting
comment 32(b)(1)(ii)–5.ii substantially
as proposed and renumbered as
32(b)(1)(ii)–4.ii, and is adopting new
§ 1026.32(b)(1)(ii)(B) to provide that a
payment from a mortgage broker, as
defined in § 1026.36(a)(2), to a loan
originator who is an employee of the
mortgage broker is not included in
points and fees. As noted above, the
term ‘‘mortgage broker’’ is defined in
§ 1026.36(a)(2) to mean any loan
originator other than an employee of a
creditor. Under this definition, persons
whose primary business is not
originating mortgage loans may
nevertheless be mortgage brokers if they
qualify as a ‘‘loan originator’’ under
§ 1026.36(a)(1) and are not employees of
a creditor. To qualify as a loan
originator under § 1026.36(a)(1), a
person must engage in loan origination
activities in expectation of
compensation. The use of the term
‘‘mortgage broker’’ in
§ 1026.32(b)(1)(ii)(B) is appropriate
because, as discussed above,
compensation that a mortgage broker
receives from a consumer or creditor is
included in points and fees, and this
compensation provides the funds for
any compensation that is paid by the
mortgage broker to its employee.
TILA section 103(bb)(4)(B) provides
that compensation paid by a ‘‘consumer
or creditor’’ to a loan originator is
included in points and fees. The Bureau
notes that a mortgage broker firm is
neither a consumer nor a creditor, so the
statute could plausibly be read so that
points and fees would not include
payments from a mortgage broker firm
to loan originators who work for the
firm. However, TILA section
103(bb)(4)(B) provides that
compensation must be included in
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points and fees if it is paid ‘‘directly or
indirectly’’ by a consumer or creditor
‘‘from any source.’’ Because
compensation by a mortgage broker firm
to its employees is funded from
consumer or creditor payments, such
compensation could be interpreted as
being paid indirectly by a consumer or
creditor.
Given the ambiguity, the Bureau is
also invoking its authority under TILA
section 105(a) to make such adjustments
and exceptions for a class of
transactions as the Bureau finds
necessary or proper to facilitate
compliance with TILA and to effectuate
the purposes of TILA, including the
purposes of TILA section 129C of
ensuring that consumers are offered and
receive residential mortgage loans that
reasonably reflect their ability to repay
the loans. The Bureau’s understanding
of this purpose is informed by the
findings related to the purposes of
section 129C of ensuring that
responsible, affordable mortgage credit
remains available to consumers.
Because payments by mortgage brokers
to their employees already have been
captured in the points and fees
calculation, excluding such payments
will facilitate compliance with the
points and fees regulatory regime by
eliminating the need for further
investigation into the mortgage brokers’
employee compensation practices, and
by making sure that all creditors apply
the provision consistently. It will also
effectuate the purposes of TILA by
preventing the points and fees
calculation from being artificially
inflated, thereby helping to keep
mortgage loans available and affordable
by ensuring that they are subject to the
appropriate regulatory framework with
respect to qualified mortgages and the
high-cost mortgage threshold. The
Bureau is also invoking its authority
under TILA section 129C(b)(3)(B) to
revise, add to, or subtract from the
criteria that define a qualified mortgage
consistent with applicable standards.
For the reasons explained above, the
Bureau has determined that it is
necessary and proper to ensure that
responsible, affordable mortgage credit
remains available to consumers in a
manner consistent with the purposes of
TILA section 129C and necessary and
appropriate to effectuate the purposes of
this section and to facilitate compliance
with section 129C.
Compensation paid by creditors. As
noted in the 2013 ATR Proposed Rule,
it is significantly more complicated to
devise a rule for calculating loan
originator compensation when the
consumer pays some up-front charges to
the creditor and the creditor pays loan
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35451
originator compensation to either its
own loan officer or to a mortgage broker.
That is because the creditor can fund
the compensation in two different ways:
either through origination charges paid
by the consumer (which would be
included in points and fees) or through
the interest rate (which would not be
included in points and fees). There is no
practicable method for the Bureau to
determine by rule the extent to which
compensation paid by the creditor was
funded through origination charges and,
thereby, already captured in the points
and fees calculation. The Bureau
therefore indicated that it believed that
bright-line rules would be necessary to
facilitate compliance.
As discussed below, the Bureau
concludes that it is appropriate to apply
different requirements to loan originator
compensation paid by the creditor to its
own loan officers and to compensation
paid by the creditor to other loan
originators. Specifically, the Bureau is
using its exception authority to exclude
from points and fees compensation paid
by the creditor to its own loan officers.
Compensation paid by the creditor to
other loan originators is included in
points and fees, and such compensation
must be counted in addition to any upfront charges that are included in points
and fees.
Compensation paid by creditors to
their own loan officers. In response to
the Board’s 2011 ATR Proposal, many
creditors and organizations representing
creditors urged the Bureau to exclude
all compensation paid to individual
loan originators. Among other things,
these commenters had argued that
compensation paid to loan originators
already is included in the cost of loan,
either in the interest rate or in
origination charges; that having to track
individual loan originators’
compensation and attribute it to specific
transactions would impose a significant
compliance burden; and that including
compensation paid to individual loan
originators would cause anomalous
results, with otherwise identical loans
having different amounts of loan
originator compensation included in
points and fees because of the timing of
the loan or the identity of the loan
originator. See 78 FR 6433–34 (Jan. 30,
2013).
In the 2013 ATR Final Rule, the
Bureau acknowledged the concerns
about including in points and fees
compensation paid to individual loan
originators. Nevertheless, the Bureau
declined to exclude such compensation,
noting that the statutory language
provided that points and fees include
compensation paid to ‘‘mortgage
originators,’’ which is defined to
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include individual loan officers. Id. at
6436. The Bureau also noted that
excluding from points and fees
compensation paid by creditors to their
loan officers would exacerbate the
differential treatment between the retail
and wholesale channels, as creditors in
retail transactions would not be
required to include any loan originator
compensation in points and fees, while
creditors in wholesale transactions
would be required to include in points
and fees compensation paid by either
consumers or creditors to mortgage
brokers. Id.
The Bureau notes that, in responding
to the Board’s 2011 ATR Proposal,
commenters did not have the benefit of
considering how including loan
originator compensation in points and
fees would interact with the rules
regarding loan originator compensation
that were proposed by the Bureau in the
2012 Loan Originator Proposal and
finalized in the 2013 Loan Originator
Final Rule. In response to the 2013 ATR
Proposed Rule, the Bureau received
detailed comments analyzing whether,
in light of the protections in the 2013
Loan Originator Final Rule, it would be
appropriate to include various types of
loan originator compensation in points
and fees. The Bureau also received more
extensive explanations from creditors
and organizations representing creditors
about the difficulties of calculating
compensation paid by creditors to their
own loan officers.
After carefully considering the
comments received in response to the
2013 ATR Proposed Rule, the Bureau
believes it is appropriate to reconsider
whether compensation paid to
individual loan originators should be
excluded from points and fees. As noted
above, the Bureau already has
determined that compensation paid by a
mortgage broker to its loan originator
employees need not be included in
points and fees. The Bureau concludes
that it should use its exception authority
to exclude the compensation that
creditors pay to their loan officers from
points and fees as well. As discussed in
more detail below, the Bureau
determines that including compensation
paid by creditors to their loan officers in
points and fees at this time not only
would impose a severe compliance
burden on the industry, but also would
lead to distortions in the market for
mortgage loans and produce anomalous
results for consumers. The Bureau also
believes that there are structural and
operational reasons why not including
in points and fees compensation paid to
retail loan officers poses a limited risk
of harm to consumers. As a result, the
Bureau believes that including such
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compensation in points and fees would
not effectuate the purposes of the statute
and in fact would frustrate efforts to
implement and comply with the points
and fees limits and with the broader
statutory and regulatory regime for
qualified mortgages and high-cost
mortgages that must be implemented by
January 2014. The Bureau has decided
at this time to exclude compensation
paid by creditors to their own loan
officers. The Bureau will continue to
gather data to determine the need for
and the best method for counting
compensation paid by creditors to their
loan officers consistent with the
purpose of the statute. The Bureau will
closely monitor the market as it
considers this issue to determine if
further action is warranted.
As indicated above, several factors
support this conclusion.123 Attributing
overall individual loan officer
compensation to specific transactions is
an extraordinarily difficult task. The
Bureau considered these difficulties in
the 2013 ATR Final Rule, when it
revised § 1026.32(b)(1)(ii) to provide
that creditors must include in points
and fees loan originator compensation
that can be attributed to that transaction
at the time the interest rate is set. The
requirement that the compensation is
included only if it can be attributed to
the transaction at the time the interest
rate is set was intended to permit
creditors to calculate compensation
sufficiently early in the process so that
they could know well before
consummation whether a loan would be
a qualified mortgage or a high-cost
mortgage. See 78 FR 6437 (Jan. 30,
2013). This calculation is
straightforward for compensation paid
by creditors to mortgage brokers: For
each transaction, creditors typically pay
a commission to mortgage brokers
pursuant to a pre-existing contract
between the creditor and the broker, and
that commission is known at the time
the interest rate is set. Furthermore,
because the commission structure is
known in advance it can be built into
the price of the loan, either through upfront charges or through the interest
rate.
The calculation of loan originator
compensation is significantly more
complicated for retail loan officers.124
As noted by industry commenters,
compensation for retail loan officers
often is not determined until after the
end of the month or some other, longer
time period (such as a quarter) and in
many cases is based upon the number
or dollar volume of the transactions that
have been consummated during the
preceding month or other time period.
However, for purposes of determining
whether a particular transaction is a
qualified mortgage (or a high-cost
mortgage), the calculation of points and
fees (and thus loan originator
compensation) must be performed prior
to consummation. Thus, to calculate
loan originator compensation for retail
loan officers for purposes of applying
the qualified mortgage and high-cost
mortgage thresholds, creditors would
have to determine, at the time the
interest rate is set, what compensation
a retail loan officer would be entitled to
receive if a particular transaction were
consummated. As noted above, this
calculation often would be based on the
number or dollar amount of transactions
already consummated during the time
period in which compensation is set
(e.g., the month or quarter or other time
period). This calculation may produce
an artificial measure of compensation
because, for the transaction for which
compensation is being calculated, the
date the interest rate is set may fall in
a different time period than the date the
transaction is consummated and actual
compensation is set.125 If the interest
rate were to be reset (if, for example, a
rate lock expires or underwriting
identifies risk factors which leads to an
increase in the interest rate), the
compensation would have to be
recalculated.
123 Some creditors and organizations representing
creditors had argued that it would be appropriate
to exclude from points and fees compensation paid
by creditors to their loan officers because
compensation paid to loan originator employees of
a mortgage brokerage firm would also be excluded.
As noted above, compensation paid to employees
of mortgage brokerage firms is excluded from points
and fees because such compensation already is
captured in points and fees in the payments by
consumers or creditors to the mortgage brokerage
firms. By contrast, as noted above, compensation
paid to a retail loan officer may be funded either
through origination charges or through the interest
rate, so there is no guarantee that such
compensation already has been included in points
and fees. As discussed below, however, the Bureau
concludes that additional factors justify excluding
from points and fees compensation paid by
creditors to their own loan officers.
124 The calculation of compensation paid by
mortgage brokerage firms to their individual loan
originator employees could be similarly
complicated. However, as discussed above, the
Bureau is excluding such compensation from points
and fees because such compensation already has
been captured in the points and fees calculation.
125 The Bureau recognizes that a more accurate
measure of compensation could be calculated at the
time of consummation. However, as noted in the
2013 ATR Final Rule, creditors need to know in
advance of consummation whether a transaction
will be a qualified mortgage or a high-cost mortgage
and therefore need to be able to calculate loan
originator compensation, and points and fees
generally, prior to consummation. Thus, the Bureau
does not believe that is appropriate to require that
loan originator compensation be calculated at
consummation.
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The Bureau understands from
industry comments that creditors’
existing systems generally do not track
compensation for each loan officer for
each specific transaction. Thus,
creditors would have to develop new
systems or reprogram existing systems
to track and attribute compensation for
each transaction. Depending on the
compensation structure, these systems
would have to be dynamic so that they
could track at the time the interest rate
is set what compensation a loan officer
would be entitled to receive if a given
transaction were consummated.126
Further, the systems would have to feed
into the creditors’ origination systems so
that the points-and-fee calculation could
be made. The Bureau is also concerned
that creditors may have difficulty in
implementing these systems by January
2014, when the ATR Final Rule
becomes effective.
In addition, the Bureau is concerned
that requiring creditors to calculate loan
originator compensation for their loan
officers may create uncertainty about
the points and fees calculations and
thus about whether loans satisfy the
standards for qualified mortgages and
remain below the threshold for highcost mortgages. As noted above, if
compensation paid to creditors’ loan
officers were included in points and
fees, creditors would have to calculate
at the time the interest rate is set what
compensation a loan officer would be
entitled to receive in the future. This
compensation often would depend on
the timing of other loans (i.e., how many
loans have been consummated or the
dollar value of loans consummated by
the loan officer at the time the interest
rate is set), introducing complexity and
potential for errors into the calculation.
Moreover, counting retail compensation
in points and fees would introduce
significant uncertainty into transactions
in which the interest rate is not locked
well in advance of consummation. For
instance, if the consumer elected at the
time of application to allow the interest
rate to float, the interest rate may not be
set until several days before
consummation. In such cases, the
creditor might be uncertain as to
whether the transaction was a qualified
mortgage or a high-cost mortgage until
that time. Similarly, even if the interest
rate is locked in early in the process, it
may subsequently be re-set, either
because the rate lock expires or because
126 Moreover, the Bureau understands that some
consumers prefer to float the interest rate and other
consumers lock their interest rate but have the right
to relock one time at a lower rate. Thus, in these
circumstances, creditors would have to calculate (or
recalculate) loan originator compensation later in
the process.
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the terms of the transaction are
renegotiated after underwriting. In those
cases, a transaction that was expected to
be a qualified mortgage may lose that
status because the loan originator
compensation is recalculated at the time
the interest rate is finally set. The
uncertainty of calculating compensation
highlights the difficulty creditors would
face in complying with a rule that
includes compensation to the creditors’
employees in points and fees, and the
Bureau is concerned that this
uncertainty could be disruptive to the
market.
The burden and uncertainty of
requiring creditors to calculate loan
originator compensation for their loan
officers with respect to each individual
transaction as of the time the interest
rate is set are of particular concern
because it does not appear that this
calculation would further the purposes
of the statute. The Bureau believes that
Congress expanded the scope of loan
originator compensation to be included
in points and fees because of concerns
that a loan with high loan originator
compensation is likely to be more costly
and may pose greater risk for
consumers. However, for the reasons
discussed below, the Bureau does not
believe that calculating at the time the
interest rate is set the compensation to
be paid by creditors to their own loan
officers is likely to be an accurate
measure of the actual compensation the
loan officer will receive if the loan is
consummated or of the costs passed
along to consumers.
First, the compensation as calculated
may be inaccurate and incomplete. As
noted above, compensation would be
calculated at the time the interest rate is
set, so the actual compensation that a
loan officer would receive may be
different from the amount that would be
included in points and fees. Moreover,
various types of compensation, such as
salary and bonuses for factors such as
loan performance and customer
satisfaction, cannot be attributed to
specific transactions and therefore
would not be included in loan
originator compensation for calculating
points and fees. As a result, the
calculation would produce an
incomplete measure of compensation,
and creditors would have substantial
flexibility to restructure their
compensation systems to reduce the
amount of loan originator compensation
that they would have to include in
points and fees. To the extent that
increasing numbers of creditors were to
restructure compensation to avoid the
impact of the rules, the inclusion of loan
originator compensation in points and
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fees would become even less
meaningful or consistent over time.
Second, because of the limitations on
calculating compensation, counting
retail loan originator compensation in
points and fees would produce arbitrary
outcomes because the amount of
compensation that would be attributed
to a particular transaction often will be
unrelated to the costs or risks borne by
the consumer. For example, two retail
transactions with identical interest rates
and up-front charges could have
different loan originator compensation,
and therefore different points and fees,
simply because a senior, more highly
compensated loan officer was involved
in one of the transactions. Similarly,
two transactions involving the same
loan officer could have different loan
originator compensation amounts
depending on whether the interest rates
are set at the end of the month, when
the loan officer might qualify for a
higher commission for meeting a
monthly quota for loans closed, rather
than at the beginning of the month,
when such a quota is unlikely to have
been met.127 By contrast, the costs to the
consumer, as reflected in origination
charges and the interest rate, are not
likely to vary based on the seniority of
the loan originator handling the
transaction or the loan officer’s
satisfaction of the creditor’s monthly
quota for obtaining a higher
commission.
The Bureau is also concerned that
including in points and fees
compensation paid by a creditor to its
own loan officer would place additional
limits on consumers’ ability to structure
their preferred combination of up-front
charges and interest rate. The points and
fees limits themselves restrict
consumers’ ability to pay up-front
charges and still obtain a qualified
mortgage (or avoid a high-cost
mortgage). However, these limits would
permit even less flexibility in the retail
channel because consumers cannot pay
retail loan officers directly. For
example, assume a consumer is seeking
a $100,000 loan and wants to pay $2,500
in up-front charges at closing rather
than paying those costs through a higher
127 Another arbitrary result could occur when a
consumer relocks at a lower interest rate. At the
time of the initial rate set, the creditor could
calculate loan originator compensation and
determine that points and fees do not exceed the
qualified mortgage points and fees limit or the highcost mortgage threshold. However, after the rate is
reset, the creditor would have to recalculate loan
originator compensation, and, if the loan originator
has satisfied a creditor’s monthly quota for
obtaining a higher commission, it is possible that
the higher loan originator compensation could
cause the points and fees to exceed the qualified
mortgage limits (or the high-cost mortgage
threshold).
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interest rate. Assume that the up-front
charges would all be included in points
and fees and that the transaction is
being originated through a creditor’s
loan officer, whose compensation is
$1,500. Under an additive approach, if
the consumer pays $2,500 in origination
charges to the creditor and the creditor
pays $1,500 to its loan officer, the points
and fees would be $4,000 and the loan
could not be a qualified mortgage. In
contrast with a transaction originated
through a mortgage broker, the
consumer would not have the option of
paying $1,500 directly to the loan
officer. The $1,500 in loan originator
compensation would count toward the
points and fees limits, so the consumer
therefore would not be able to pay all
of the $2,500 up-front without
exceeding the points and fees limit for
a qualified mortgage.128 The consumer
would have to pay other costs through
a higher interest rate and the resulting
higher monthly payments. Thus, under
an additive rule, consumers in the retail
channel would have less flexibility to
pay up-front charges to achieve a lower
interest rate and have the transaction
remain below the points and fees limits
for qualified mortgages and below the
threshold for high-cost mortgages. For
certain consumers, such as those who
do not qualify for a higher interest rate,
the impact could affect their access to
credit. Excluding from points and fees
loan originator compensation paid by a
creditor to its loan officers would
address this concern.
The Bureau recognizes that creditors
may earn greater profits when
consumers receive more costly loans
and that, in the absence of regulatory
protections, creditors could adopt
compensation arrangements that create
incentives for their loan officers to
originate loans that are more costly for
consumers. Including loan officer
compensation in points and fees would
have imposed some limits on the ability
of creditors to offer higher
compensation to its loan officers. The
Bureau believes, however, that the
prohibition on terms-based
compensation in § 1026.36(d)(1) will
provide substantial protection against
problematic loan originator
compensation practices in the retail
channel. The Bureau concludes that
these protections will significantly
diminish the risk of consumer injury
from excluding from points and fees
compensation paid by creditors to their
retail loan officers. The prohibition in
128 If the consumer’s payments satisfy the
standards of § 1026.32(b)(1)(i)(E) or (F), the up-front
fees could be excluded from points and fees as bona
fide discount points.
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§ 1026.36(d)(1) prevents a creditor from
paying higher compensation to its loan
officer for a transaction that, for
example, has a higher interest rate or
higher up-front charges. Moreover, the
Bureau agrees with consumer advocate
commenters and comments by the FDIC
and HUD and by the OCC that argue that
retail loan officers would have greater
difficulty than mortgage brokers in
trying to maneuver around the margins
of § 1026.36(d)(1). Unlike a mortgage
broker, a retail loan officer works with
only one creditor and therefore cannot
choose among different creditors paying
different compensation in deciding
which loans to offer a consumer.
As noted above, some consumer
advocates argued that creditors would
still be able to structure loan originator
compensation to create incentives for
their loan officers to direct consumers
toward higher-cost loans. For example,
they noted that the 2013 Loan
Originator Final Rule adopted
§ 1026.36(d)(1)(iii) and (iv), which
permit creditors to offer, under certain
conditions, deferred compensation
plans and non-deferred profits-based
compensation to their loan officers that
otherwise would violate the prohibition
on term-based compensation. They
suggested that such arrangements could
be structured to encourage loan officers
to induce consumers to accept more
costly loans. The Bureau is sensitive to
the risk that unscrupulous creditors may
look for gaps and loopholes in
regulations; however, the Bureau notes
that the referenced provisions of
§ 1026.36(d)(1) were carefully crafted to
attenuate any incentives for directing
consumers to higher-cost loans to
increase compensation. The Bureau
recognizes that creditors have
significant incentives to work around
the margins of the rules and, as noted
above, is committed to monitoring
compensation practices closely for
problematic developments that may
require further action.
In light of these concerns about the
significant compliance burden and the
questionable accuracy of the calculation
for retail loan officer compensation, the
Bureau believes it is appropriate at this
time to exclude such compensation
from points and fees. The Bureau will
continue to monitor and gather
information about loan originator
compensation practices to determine if
there are methods that are practicable
and consistent with the purposes of the
statute for including in points and fees
loan originator compensation paid by
creditors to their loan officers. As part
of the Bureau’s ongoing monitoring of
the mortgage market and for the
purposes of the Dodd-Frank Act section
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1022(d) five-year review, the Bureau
will assess how the exclusion from
points and fees of compensation paid by
creditors to their loan officers is
affecting consumers. If the Bureau were
to find that the exclusion for retail loan
officer compensation was harming
consumers, the Bureau could issue a
new proposal to narrow or eliminate the
exclusion. The Bureau is aware that
problematic loan originator
compensation practices occurred in the
past in the retail channel and that
questionable practices may occur again.
The Bureau will carefully monitor the
marketplace to respond to any such
abusive practices, including through the
use of its supervisory and enforcement
authority.
The Bureau stated in the 2013 ATR
Final Rule that it was reluctant to
exclude from points and fees
compensation paid to individual loan
originators because it would treat the
retail and wholesale channels
differently. As discussed above,
however, after considering the
information received in response to the
2013 ATR Proposed Rule, the Bureau
believes there are significant difficulties
in calculating loan originator
compensation in the retail channel. By
contrast, in transactions involving
mortgage brokers, there is little
compliance burden in calculating loan
originator compensation, and
compensation typically can be
calculated with relative ease and
accuracy. Moreover, the Bureau believes
that there is less risk of consumer injury
from excluding loan originator
compensation from points and fees in
the retail channel. The Bureau is
concerned that that mortgage brokers
may have the flexibility to structure
their business model to evade the
prohibitions of § 1026.36(d)(1) and
§ 1026.36(e) and that the risk of
consumer injury from problematic loan
originator compensation practices is
therefore higher in the wholesale
channel than in the retail channel. The
Bureau is also concerned that
unscrupulous creditors seeking to
originate more costly loans could use
the wholesale channel to expand their
operations more rapidly and with
limited investment. Historical evidence
also suggests that the risks of consumer
injury may be greater in the wholesale
channel. As noted above, some
consumer advocates cited evidence that,
particularly in the subprime market,
loans originated with mortgage brokers
were on average more expensive and
more likely to default than loans
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originated in the retail channel.129 Thus,
for the reasons discussed above, the
Bureau believes that it is necessary and
proper to use its exception authority to
exclude from points and fees
compensation paid by creditors to their
loan officers.
The Bureau considered options other
than excluding from points and fees
compensation paid by a creditor to its
loan officers. The Bureau considered
adopting a netting rule for
compensation paid by a creditor to its
loan officers. This approach would have
addressed the concern that an additive
methodology would unduly restrict a
consumers’ ability to structure their
preferred combination of up-front
charges and interest rate. However, a
netting rule would not alleviate the
compliance burden or address the other
implementation concerns associated
with including in points and fees
compensation paid by creditors to their
loan officers. One industry commenter
recommended that, if the Bureau
declines to exclude compensation paid
to retail loan officers from points and
fees, it should consider permitting
creditors to include in points and fees
an average measure of loan originator
compensation over a prior period of
time as an alternative to calculating
compensation on a transaction-bytransaction basis. The Bureau
129 See, e.g., Keith Ernst, Debbie Bocian, Wei Li,
Ctr. for Responsible Lending, Steered Wrong:
Brokers, Borrowers, and Subprime Loans (2008);
Antje Berndt, Burton Hollifield, and Patrik Sandas,
What Broker Charges Reveal About Mortgage Credit
Risk, (2012); Susan E. Woodward, A Study of
Closing Costs for FHA Mortgages available at http://
www.huduser.org/Publications/pdf/
FHA_closing_cost.pdf. The Bureau’s review of
studies generally supports this view, though the
evidence is not unequivocal. Wei Jiang, Ashlyn
Aiko Nelson, and Edward Vytacil, Liar’s Loan?
Effects of Origination Channel and Information
Falsification on Mortgage Delinquency, SSRN
working paper 142162 (2009) use a dataset from one
bank with approximately 700,000 loans originated
between 2004 and 2008. They report that ‘‘the
Broker subsamples have delinquency probabilities
that are 10–14 percentage points (or more than
50%) higher than the Bank subsamples, a
manifestation of the misalignment of incentives for
brokers who issue loans on the bank’s behalf for
commissions but do not bear the long-term
consequences of low-quality loans.’’ They also
show that loan pricing does not compensate for the
loan performance differences. Michael LaCourLittle, The Pricing of Mortgages by Brokers: An
Agency Problem?, J. of Real Estate Research, 31(2),
235–263 (2009) showcases the agency problems in
the brokerage channel, and provides a deep
literature review. This paper’s results ‘‘suggest
loans originated by brokers cost borrowers about 20
basis points more, on average, than retail loans and
that this premium is higher for lower-income and
lower credit score borrowers.’’ In contrast, Amany
El-Anshany, Gregory Elliehausen, and Yoshiaki
Shimazaki, Mortgage Brokers and the Subprime
Mortgage Market, Proceedings, Federal Reserve
Bank of Chicago (2005), find that consumers buying
through brokers paid less for their loans, by a
similar magnitude as in the LaCour-Little paper.
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considered such an approach as an
alternative for alleviating the
compliance burden and eliminating
some of the anomalies between
transactions. However, the Bureau has
concerns about whether this approach is
consistent with the statutory purpose of
identifying transactions that, because of
high up-front charges and high loan
originator compensation, should not be
eligible for the presumption of
compliance of a qualified mortgage or
that should receive the protections for
high-cost mortgages. Moreover,
permitting creditors to employ an
average measure of loan originator
compensation would raise significant
issues. For example, the Bureau would
have to determine what compensation
would be included in the measure of
average compensation, the period for
which the average would be calculated,
and whether the average would be for
an entire firm, for a business unit, for a
limited geographic area, or even for
individual loan originators. In light of
the limited time remaining before the
effective date of the rules, the Bureau
does not believe it would be practicable
to attempt to implement this alternative.
To implement the exclusion from
points and fees of compensation paid by
a creditor to its loan officers, the Bureau
is adding new § 1026.32(b)(1)(ii)(C),
which excludes compensation paid by a
creditor to a loan originator that is an
employee of the creditor. The Bureau
also is adding language to comment
32(b)(1)(ii)-1 to clarify that
compensation paid by a creditor to a
loan originator that is an employee of
the creditor is not included in points
and fees.
As the Bureau noted in the 2013 ATR
Final Rule, the Dodd-Frank Act
provides that points and fees include all
compensation paid by a consumer or
creditor to a ‘‘mortgage originator.’’ In
addition, as noted above, the Bureau
reads the statutory language as requiring
that loan originator compensation be
included in points and fees in addition
to any other items that are included in
points and fees, even if the loan
originator compensation may have been
funded through charges that already are
included in points and fees. Moreover
the Bureau reads the statutory provision
on compensation as meaning that
compensation is added as it flows
downstream from one party to another
so that it is counted each time that it
reached a loan originator, whatever its
previous source. Given this statutory
language, the Bureau believes that, to
exclude from points and fees
compensation paid by a creditor to its
loan officers, the Bureau must use its
exception authority. As provided in new
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§ 1026.32(b)(1)(ii)(C), the Bureau is
excluding compensation paid by
creditors to their loan officers pursuant
to its authority under TILA section
105(a) to make such adjustments and
exceptions for a class of transactions as
the Bureau finds necessary or proper to
facilitate compliance with TILA and its
purposes and to effectuate the purposes
of TILA, including the purposes of TILA
section 129C of ensuring that consumers
are offered and receive residential
mortgage loans that reasonably reflect
their ability to repay the loans. The
Bureau’s understanding of this purpose
is informed by the findings related to
the purposes of section 129C of ensuring
that responsible, affordable mortgage
credit remains available to consumers.
The Bureau has determined that
excluding compensation paid to retail
loan officers will facilitate compliance
with TILA and these purposes by
helping to reduce the burden and
uncertainty of calculating points and
fees in the retail context and by helping
to assure that, as of the effective date of
the rule, creditors will have systems in
place that are capable of making this
calculation. At the same time, the
Bureau has determined that excluding
compensation paid to retail loan officers
will effectuate the purposes of TILA by
helping to ensure that loans are not
arbitrarily precluded from satisfying the
criteria for a qualified mortgage or
arbitrarily designated as high-cost
mortgages because of potential
anomalies in how loan originator
compensation would be calculated for
the points and fees limits. Thus, the
exclusion will help ensure the
availability of reasonably repayable
credit, given that the points and fees
threshold will continue to provide
limits, apart from compensation not
included in finance charge, on costs
related to loans.
The Bureau is also relying upon its
authority under TILA section
129C(b)(3)(B) to revise, add to, or
subtract from the criteria that define a
qualified mortgage consistent with
applicable standards. For the reasons
explained above, the Bureau has
determined that it is necessary and
proper to ensure that responsible,
affordable mortgage credit remains
available to consumers in a manner
consistent with the purposes of TILA
section 129C and necessary and
appropriate to effectuate the purposes of
this section and to facilitate compliance
with section 129C.
Certain commentary adopted in the
2013 ATR Final Rule is no longer
necessary in light of the Bureau’s
decisions discussed above. Comment
32(b)(1)(ii)–2 describes certain types of
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compensation that would and would
not be included in points and fees for
individual loan originators. Portions of
comment 32(b)(1)(ii)–3 discuss how the
timing affects what compensation paid
to individual loan originators must be
included in points and fees. Comment
32(b)(1)(ii)–4 provides examples for
calculating compensation for individual
loan originators. Because compensation
paid by mortgage brokers to their
individual loan originator employees
and compensation paid by creditors to
their loan officers is no longer included
in points and fees, the guidance for
calculating compensation for individual
loan originators is no longer necessary.
Accordingly, the Bureau is deleting
portions of comments 32(b)(1)(ii)–2.ii
and –3, and, the entirety of comment
32(b)(1)(ii)–4.
Compensation paid by creditors to
mortgage brokers. In response to the
Board’s 2011 ATR Proposal, many
industry commenters urged the Bureau
to exclude loan originator compensation
from points and fees altogether. See 78
FR 6433 (Jan. 30, 2013). Among other
things, industry commenters had argued
that compensation paid to loan
originators already is included in the
cost of the loan and has little, if any
bearing on a consumer’s ability to repay
a mortgage loan. They also argued that
other statutory provisions and rules
already provide adequate protection
from abusive loan originator
compensation practices and that it
therefore is unnecessary to include loan
originator compensation in points and
fees. Finally, they argued that including
loan originator compensation in points
and fees would cause many loans to
exceed the qualified mortgage points
and fees limits, which would result in
an increase in the cost of credit and
diminished access to credit.
In the 2013 ATR Final Rule, the
Bureau acknowledged the concerns
about including loan originator
compensation in points and fees.
However, the Bureau noted that, in light
of the express statutory language and
Congress’s evident concern with
increasing consumer protections in
connection with loan originator
compensation practices, the Bureau did
not believe it appropriate to use its
exception authority to exclude loan
originator compensation entirely from
points and fees. In response to the 2013
ATR Proposed Rule, many industry
commenters, including mortgage
brokers and their representatives and
some creditors and their representatives,
again urged the Bureau to exclude loan
originator compensation from points
and fees altogether (or to at least
exclude from points and fees all
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compensation paid by creditors to loan
originators). Repeating many of the
same arguments made in response to the
Board’s 2011 ATR Proposal, these
commenters argued that loan originator
compensation already is included in the
cost of the loan and has little or no
effect on consumers’ ability to repay the
loan. They claimed that other
protections adopted by the Bureau and
the Board adequately protect consumers
against harmful loan originator
compensation practices and that it
therefore is unnecessary to include loan
originator compensation in points and
fees. Finally, they argued that including
loan originator compensation in points
and fees would cause many loans to
exceed the qualified mortgage points
and fees cap or the high-cost mortgage
threshold and that, as a result, many
loans would not be made, including in
particular smaller loans.
The Bureau does not believe that it is
consistent with the standards for its use
of exception and adjustment authority
to exclude from points and fees
compensation paid by creditors to loan
originators that are not employees of
creditors. As noted above, in excluding
from points and fees compensation paid
by creditors to their loan originator
employees, the Bureau invoked its
exception and adjustment authority to
facilitate compliance and, generally
speaking, to meet purposes of ensuring
that credit is available to consumers on
reasonably repayable terms. These
factors do not support excluding
compensation paid by creditors to loan
originators not employed by creditors.
The compliance burden of calculating
compensation paid by creditors to loan
originators other than their own
employees is minimal and does not
provide a basis for exclusion based on
a rationale related to facilitating
compliance. As noted above, this
calculation is straightforward for
compensation paid by creditors to
mortgage brokers: For each transaction,
creditors typically pay a commission to
mortgage brokers pursuant to a preexisting contract between the creditor
and the broker, and that commission is
known at the time the interest rate is
set.130 Moreover, as discussed below,
the Bureau believes that there remain
some risks of consumer injury from
business models in which mortgage
brokers attempt to steer consumers to
more costly transactions. Including in
points and fees compensation paid by
130 As discussed above, the compliance burden of
calculating compensation paid by creditors to their
own loan officers is substantial and offsets the
limited potential consumer protection benefits of
including such compensation in points and fees.
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creditors to mortgage brokers should
help reduce those risks. Accordingly,
the Bureau declines to use its exception
authority to exclude such compensation
from points and fees.
The Bureau also does not believe it is
appropriate to use its exception
authority to exclude loan originator
compensation payments from creditors
to mortgage brokers in certain types of
transactions. As noted above, one
industry commenter urged the Bureau to
consider whether compensation paid by
creditors to mortgage brokers should be
included in points and fees only in
subprime transactions. The commenter
did not provide data or other evidence
to support this approach. In addition,
subprime transactions already have less
flexibility than prime transactions under
the points and fees limits because bona
fide discount points may not excluded
from points and fees for transactions
with interest rates greater than 2
percentage points above APOR, see
§ 1026.32(b)(1)(i)(E) and (F), and the
Bureau is concerned about widening the
disparity in treatment under the points
and fees limits. Accordingly, the Bureau
does not believe it is appropriate to use
its exception authority to create
different requirements for loan
originator compensation in the prime
and subprime markets. Another
commenter requested that, to avoid
impairing affordable lending programs
offered by nonprofit organizations, the
Bureau exclude such payments when
the creditor absorbs the costs of the
payments and does not pass along the
costs to consumers.131 The Bureau
believes it would be difficult, if not
impossible, to determine when a
creditor was in fact not passing along
loan origination costs to consumers and
that any exemption, even if wellintentioned, could be susceptible to
abuse.
In the 2013 ATR Proposed Rule, the
Bureau proposed two alternatives—an
‘‘additive’’ approach and a ‘‘netting’’
approach— for calculating
compensation. As discussed above,
proposed alternative 1 of comment
32(b)(1)(ii)–5.iii would have adopted an
additive approach in which loan
originator compensation would have
been included in points and fees in
addition to any charges paid by the
consumer to the creditor. Proposed
alternative 2 of comment 32(b)(1)(ii)–
5.iii would have permitted creditors to
net origination charges against loan
originator compensation to calculate the
131 As discussed below, the Bureau is adopting
§ 1026.43(a)(3)(v), which exempts certain creditors,
including certain nonprofit creditors, from the
ability-to-repay requirements.
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amount of loan originator compensation
that is included in points and fees. As
discussed above, a creditor’s payments
to a loan originator may be funded by
up-front charges to the consumer,
through the interest rate, or through
some combination. The up-front charges
to the consumer would be captured in
points and fees, but compensation
funded through the interest rate would
not be captured. Thus, when a
consumer pays up-front charges, it is
not clear whether a creditor’s payments
to a loan originator are captured in such
points and fees.132
As noted above, the Bureau reads the
statutory language as requiring that loan
originator compensation be included in
points and fees in addition to any other
items that are included in points and
fees, even if the loan originator
compensation may have been funded
through charges that already are
included in points and fees. Moreover
the Bureau reads the statutory provision
on compensation as meaning that
compensation is added as it flows
downstream from one party to another
so that it is counted each time that it
reached a loan originator, whatever its
previous source. After carefully
considering the comments, the Bureau
has determined that, for calculating
compensation paid by creditors to
mortgage brokers, it is not necessary or
proper to revise the additive approach
prescribed by the statute and adopted in
the 2013 ATR Final Rule.
For creditor payments to loan
originators not employed by creditors,
calculating loan originator
compensation under an additive
approach does not impose a significant
compliance burden. As noted above,
this calculation is straightforward for
compensation paid by creditors to
mortgage brokers: For each transaction,
creditors typically pay a commission to
mortgage brokers pursuant to a preexisting contract between the creditor
and the broker, and that commission is
known at the time the interest rate is set.
For transactions in the wholesale
channel, brokers and creditors can
obviate double counting concerns by
having consumers pay brokers
directly.133 Under new comment
132 It is doubtful that Congress contemplated this
issue because, as noted above, absent the Bureau’s
use of exception authority, TILA section
129B(c)(2)(B)(ii) would have prohibited a creditor
from imposing origination fees or charges if the
creditor were compensating a loan originator.
133 The Bureau does not believe that the potential
double counting of loan originator compensation
and origination charges could be adequately
addressed by permitting a netting approach in
combination with more detailed disclosures to
consumers. The Bureau notes that, because money
is fungible, creditors could adjust their accounting
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32(b)(1)(ii)–5.i, the consumer’s payment
to the mortgage broker would be
included in points and fees only one
time. For example, assume a consumer
is seeking a $100,000 loan and wants to
pay $2,500 in up-front charges at closing
rather than paying those costs through
a higher interest rate. The transaction is
being originated through a mortgage
broker firm, which charges $1,500.
Under an additive approach, if the
consumer pays $2,500 in origination
charges to the creditor and the creditor
pays $1,500 to the mortgage broker firm,
the points and fees would be $4,000 and
the loan could not be a qualified
mortgage. However, if the consumer
pays $1,500 directly to the mortgage
broker firm and then pays $1,000 in
origination charges to the creditor, then
the points and fees would be $2,500 and
would not prevent the loan from being
a qualified mortgage. Moreover, if the
consumer pays the mortgage broker
directly, then the creditor would no
longer be responsible for the cost of
compensating the mortgage broker; as a
result, the interest rate should be the
same whether the consumer pays $1,500
to the mortgage broker and $1,000 to the
creditor or the consumer pays $2,500 to
the creditor and the creditor pays $1,500
to the mortgage broker. In light of the
options that direct consumer payments
provide in the wholesale channel, the
Bureau believes that affordable credit
will continue to be available in
connection with wholesale loans and
that use of adjustment authorities to
achieve statutory purposes is not
necessary.
The Bureau is concerned that, as
noted by the FDIC and HUD, by the
OCC, and by some consumer advocate
commenters, a netting rule in the
wholesale channel could create
incentives for mortgage brokers and
creditors to structure transactions so
that loan originator compensation is
paid by the creditor to the mortgage
broker, rather than by the consumer to
the mortgage broker. Under a netting
rule, creditors could impose origination
charges on the consumer and net those
charges against the compensation the
creditor pays the mortgage broker when
calculating points and fees. By contrast,
in a transaction in which the consumer
pays the mortgage broker directly, the
consumer’s payment to the mortgage
broker would be included in points and
fees in addition to any origination
charges imposed by the creditor. Thus,
a netting rule likely would provide
creditors with a greater ability to charge
up-front fees and still remain under the
points and fees limits.134 The Bureau
believes it would be anomalous to treat
wholesale transactions differently for
purposes of the qualified mortgage and
high-cost mortgage points and fees
limits simply because in one transaction
the consumer paid compensation
directly to the mortgage broker and in
another transaction the consumer paid
the compensation indirectly. Such an
anomaly would actually disserve the
broad purposes of TILA to inform
consumers because in the transaction
that would be favored (i.e., the
transaction in which the broker’s
commission is bundled in the fees paid
to the creditor or in the interest rate) the
costs would be less transparent than in
the disfavored transaction (i.e., the
transaction in which the consumer paid
the compensation directly to the
broker).
Finally, an additive approach would
place some additional limits on the
ability of mortgage brokers to obtain
high compensation for loans that are
more costly to consumers. As noted
above, consumer advocates have
identified two ways in which mortgage
brokers potentially could extract high
compensation for delivering loans that
are more costly to consumers (and
possibly more profitable for creditors)
would not appear to violate the
prohibitions on steering and
compensating loan originators based on
loan terms. First, mortgage brokers
could specialize in providing creditors
with loans that are more costly to
consumers in exchange for high
compensation, so long as that
compensation does not vary based on
the terms of individual loans.
Second, mortgage brokers could do
business with a mix of creditors, some
offering more costly loans (and paying
high compensation to mortgage brokers)
and some offering loans with more
favorable terms (and paying lower
compensation to brokers). Mortgage
so that they could disclose that they are recovering
loan originator compensation through up-front
charges and other origination costs through the
interest rate. Thus, this disclosure-based approach
would permit creditors to reduce the amount of
loan originator compensation they include in points
and fees without changing the amount of up-front
fees or the interest rate they charge. Moreover, given
the complex interaction between loan originator
compensation, up-front charges, and the interest
rate, the Bureau has concerns that consumers would
not understand the disclosures.
134 As consumer advocates noted in their
comments, mortgage brokers historically have
defended arrangements in which creditors pay
compensation to mortgage brokers by arguing that
this approach permits consumers to obtain
mortgage loans when they do not have sufficient
funds to compensate mortgage brokers directly. See
Nat’l Assoc. of Mortgage Brokers v. Fed. Reserve
Bd., 773 F.Supp. 2d 151, 158 (D.D.C 2011). This
rationale for creditors’ paying compensation to
mortgage brokers has little if any force if the
consumer is paying up-front charges to the creditor.
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brokers could attempt to steer borrowers
that are less sophisticated and less
likely to shop for better terms to the
creditors with more costly loans, and
they potentially could evade the antisteering prohibition by offering quotes
from at least three such creditors.135 An
additive approach likely would reduce
the potential consumer injury by
limiting the ability of creditors to
impose high up-front charges and pay
high loan originator compensation,
unless creditors are willing to exceed
the qualified mortgage points and fees
limits and, potentially, to bear the
burden of originating high-cost
mortgages under HOEPA.136
The Bureau recognizes that an
additive approach makes it more
difficult for creditors to impose up-front
charges and still remain under the
qualified mortgage points and fees
limits and the high-cost mortgage
threshold. Commenters provided
limited data regarding the magnitude of
the effects of an additive approach.
Nevertheless, even in transactions in
which a mortgage broker’s
compensation is two percentage points
of the loan amount—which the Bureau
understands to be at the high end of
mortgage broker commissions—the
creditor would still be able to charge up
to one point in up-front charges that
would count toward the qualified
mortgage points and fees limits. As
noted above, the creditor may reduce
the costs it needs to recover from
origination charges or through the
interest rate by having the consumer pay
the mortgage broker directly. In
addition, creditors in the wholesale
channel that prefer to originate only
qualified mortgages in many cases will
have the flexibility to recover more of
their origination costs through the
interest rate to ensure that their
transactions remain below the points
and fees limits.137
135 Competitive market pressures and the
difficulties of specializing in (or at least identifying
and steering) vulnerable consumers may constrain
mortgage brokers’ ability to exploit gaps in the
regulatory structure. Nevertheless, the Bureau is
concerned about the potential for consumer injury,
particularly for consumers who are less
sophisticated or less likely to shop for competitive
terms.
136 The Bureau recognizes that an additive
approach would not preclude creditors from paying
mortgage brokers above-market compensation (up to
the points and fees limits) and recovering the costs
of compensating the mortgage brokers and other
costs through an above-market interest rate.
However, as consumer advocates noted in their
comments, consumers may shop more effectively
when comparing a single variable, such as the
interest rate.
137 Moreover, to the extent that consumers prefer
to pay up-front charges to reduce the interest rate,
creditors may be able to exclude as many as two
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For the reasons discussed above, the
Bureau believes that it is neither
necessary nor appropriate to deviate
from the additive approach prescribed
by the statute and adopted in the 2013
ATR Final Rule to calculate
compensation paid by creditors to
mortgage brokers. The Bureau believes
that affordable credit will continue to be
available in connection with loans in
the wholesale channel and that use of
adjustment authorities to achieve
statutory purposes is not necessary and
proper. As noted above, the Bureau
believes that, to the extent that the
additive approach limits the ability of
mortgage brokers to steer consumers
toward more costly loans, the additive
approach is consistent with the
statutory purposes. Accordingly, the
Bureau concludes that it should not
exercise its exception authority to alter
the additive approach prescribed by the
statute. Accordingly, as adopted by this
final rule, comment 32(b)(1)(ii)–4.iii
clarifies that, for loan originators that
are not employees of the creditor, (i.e.,
mortgage brokers, as defined in
§ 1026.36(a)(2)) loan originator
compensation is included in points and
fees in addition to any origination
charges that are paid by the consumer
to the creditor.
As noted above, the term ‘‘mortgage
broker’’ is defined in § 1026.36(a)(2) to
mean any loan originator other than an
employee of a creditor. The Bureau
believes that the additive approach is
appropriate for all mortgage brokers,
including persons whose primary
business is not originating mortgage
loans but who nevertheless qualify as a
‘‘mortgage broker’’ under
§ 1026.36(a)(2). In general, calculating
compensation paid by a consumer or
creditor to such persons for loan
origination activities should be
straightforward and would impose little
compliance burden. However, as
discussed below, the Bureau intends to
provide additional guidance for
calculating loan originator
compensation for manufactured home
transactions.
Loan originator compensation for
open-end credit plans. For the high-cost
mortgage points and fees threshold, the
2013 HOEPA Final Rule applied the
same requirements for including loan
originator compensation in points and
fees in open-end credit plans as for
closed-end credit transactions. In the
2013 ATR Proposed Rule, the Bureau
solicited comment about whether
different or additional guidance is
appropriate for calculating loan
bona fide discount points under
§ 1026.32(b)(1)(i)(E) or (F).
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originator compensation for open-end
credit plans. The Bureau received few
comments that addressed open-end
credit plans, and they did not advocate
for different or additional guidance.
Accordingly, the Bureau believes that it
is appropriate to continue to apply the
same requirements for calculating loan
originator compensation for points and
fees in closed-end credit transactions
and open-end credit plans. The Bureau
is therefore revising § 1026.32(b)(2)(ii),
which addresses loan originator
compensation for open-end credit plans,
to incorporate the same exclusions from
points and fees as those discussed above
for closed-end credit transactions in
§ 1026.32(b)(1)(ii). The Bureau is not
adopting additional guidance for openend credit plans.
Calculation of loan originator
compensation for manufactured home
transactions. As noted above, several
industry and nonprofit commenters
requested clarification of what
compensation must be included in
points and fees in connection with
transactions involving manufactured
homes. They requested additional
guidance on what activities would cause
a manufactured home retailer and its
employees to qualify as loan originators.
The 2013 Loan Originator Final Rule
had provided additional guidance on
what activities would cause such a
retailer and its employees to qualify as
loan originators in light of language in
the Dodd-Frank Act creating an
exception from the definition of loan
originator for employees of
manufactured home retailers performing
certain limited activities. See
§ 1026.36(a)(1)(i)(B) and comments
36(a)-1.i.A and 36(a)-4. The commenters
nevertheless argued that it remains
unclear what activities a retailer and its
employees could engage in without
qualifying as loan originators and
causing their compensation to be
included in points and fees. Industry
commenters also noted that, because a
creditor has limited knowledge of and
control over the activities of a retailer
and its employees, it would be difficult
for a creditor to know whether a retailer
and its employees had engaged in
activities that would require their
compensation to be included in points
and fees. Industry commenters therefore
urged the Bureau to adopt a bright-line
rule that would exclude from points and
fees compensation paid to manufactured
home retailers and their employees.
They also requested that the Bureau
clarify that, in any event, compensation
received by the manufactured home
retailer or its employee for the sale of
the home should not be counted as loan
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originator compensation and included
in points and fees.
The Bureau does not believe it is
appropriate to exclude compensation
that is paid to a manufactured home
retailer for loan origination activities. In
such circumstances, the retailer is
functioning as a mortgage broker and
compensation for the retailer’s loan
origination activities should be captured
in points and fees. The Bureau
recognizes, however, that it may be
difficult for a creditor to ascertain
whether a retailer engages in loan
origination activities and, if so, what
compensation that retailer receives for
those activities, at least when such
compensation was not paid directly by
the creditor itself. Accordingly, the
Bureau intends to propose additional
guidance on these issues prior to the
effective date of the 2013 ATR Final
Rule to facilitate compliance.
With respect to employees of
manufactured home retailers, the
Bureau believes that, in most
circumstances, new
§ 1026.32(b)(1)(ii)(B) will make it
unnecessary for creditors to determine
whether employees of retailers have
engaged in loan origination activities
that would cause them to qualify as loan
originators. As discussed above,
§ 1026.32(b)(1)(ii)(B) excludes
compensation paid by mortgage brokers
to their loan originator employees. In
the usual case, when an employee of a
retailer would qualify as a loan
originator, the retailer would qualify as
a mortgage broker. If the retailer is a
mortgage broker, any compensation paid
by the retailer to the employee would be
excluded from points and fees under
§ 1026.32(b)(1)(ii)(B). Nevertheless, as
part of its proposal to provide additional
guidance as noted above, the Bureau
intends to request comment on whether
additional guidance is necessary for
calculating loan originator
compensation for employees of
manufactured home retailers.
Other issues related to points and
fees. As noted above, many commenters
requested that the Bureau reconsider
whether certain items should be
included in points and fees. In
particular, many commenters urged that
real-estate related charges paid to
affiliates and up-front charges imposed
by creditors on consumers to recover the
costs of LLPAs should not be included
in points and fees. Commenters also
asked the Bureau to permit the creditor
to exclude more than two bona fide
discount points from points and fees.
The Bureau is not reconsidering its
decision that, as provided in the statute,
real-estate related charges paid to
affiliates of the creditor are included in
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points and fees. The Bureau also
declines to reconsider its decision that,
where a creditor recovers the costs of
LLPAs through up-front charges to the
consumer, those charges are included in
points and fees. Finally, the Bureau is
not reconsidering its decision that, as
provided in the statute, creditors may
exclude no more than two bona fide
discount points from points and fees.
Many individual mortgage brokers
and a trade group representing mortgage
brokers urged the Bureau to reconsider
certain restrictions on loan originator
compensation in § 1026.36(d)(1) and (2),
arguing that these restrictions are
unnecessary because the points and fees
limits for qualified mortgages effectively
cap loan origination compensation at 3
percent of the loan amount.138 The 2013
Loan Originator Final Rule clarified and
expanded § 1026.36(d)(1) and (2), and
the Bureau declines to revisit those
provisions in this rulemaking.
Section 1026.35 Prohibited Acts or
Practices in Connection With HigherPriced Mortgage Loans
35(b) Escrow Accounts
35(b)(2) Exemptions
35(b)(2)(iii)
As discussed further below, the
Bureau proposed § 1026.43(e)(5) to
create a new type of qualified mortgage
for certain portfolio loans originated and
held by small creditors. The Bureau
proposed to adopt the same parameters
defining small creditor for purposes of
the new category of qualified mortgage
as it had used in implementing
provisions of the Dodd-Frank Act that
allow certain balloon loans to receive
qualified mortgage status and an
exemption from the requirement to
maintain an escrow accounts for certain
higher priced mortgage loans where
such loans are made by small creditors
operating predominantly in rural or
underserved areas. The size thresholds
for purposes of the rural balloon and
escrow provisions are set forth in
§ 1026.35(b)(2)(iii), as adopted by the
2013 Escrows Final Rule, which
provides that an escrow account need
not be established in connection with a
mortgage if the creditor, within
applicable time periods, annually
extends more than 50 percent of its
covered first-lien transactions on
properties that are located in rural or
underserved counties, originates (with
its affiliates) 500 or fewer first-lien
138 The Bureau notes that the general 3 percent
points and fees limit applies only to qualified
mortgages and would not restrict the loan originator
compensation paid to mortgage brokers in mortgage
transactions that are not qualified mortgages.
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covered transactions per year, and has
total assets of less than $2 billion
(adjusted annually for inflation), in
addition to other escrow account
limitations.
The Bureau did not propose to make
any specific amendments to the escrows
provision in § 1026.35(b)(2), but
indicated that if the provisions creating
a new type of small creditor portfolio
qualified mortgage in proposed
§ 1026.43(e)(5) were adopted with
changes inconsistent with
§ 1026.35(b)(2), the Bureau would
consider and might adopt parallel
amendments to § 1026.35(b)(2) to keep
these sections of the regulation
consistent.
The Bureau solicited comment on the
advantages and disadvantages of
maintaining consistency between
§ 1026.35(b)(2) and § 1026.43(e)(5).
Commenters did not specifically
address the importance of consistency.
However, several small creditors and a
small creditor trade group raised
concerns regarding the cost and burden
associated with the escrow requirements
and urged the Bureau to expand or
adopt exceptions to those requirements.
For example, commenters suggested
broadening the § 1026.35(b)(2)(iii)
exemption and exempting home
improvement loans and loans secured
by mobile homes.
As discussed below in the section-bysection analysis of § 1026.43(e)(5), the
Bureau is adopting § 1026.43(e)(5)
consistent with existing § 1026.35(b)(2)
with regard to the asset size and annual
loan origination thresholds defining a
small creditor. The Bureau did not
propose and did not solicit comment
regarding other amendments to the
escrow provisions in § 1026.35(b)(2).
The Bureau therefore is not
reconsidering the issues raised by
commenters at this time and is not
adopting any changes to § 1026.35(b)(2)
in this rulemaking.
Section 1026.43 Minimum Standards
for Transactions Secured by a Dwelling
43(a) Scope
43(a)(3)
Background
Section 129C(a)(1) of TILA, as added
by section 1411 of the Dodd-Frank Act,
states that, in accordance with
regulations prescribed by the Bureau, no
creditor may make a residential
mortgage loan unless the creditor makes
a reasonable and good faith
determination based on verified and
documented information that, at the
time the loan is consummated, the
consumer has a reasonable ability to
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repay the loan, according to its terms,
and all applicable taxes, insurance
(including mortgage guarantee
insurance), and assessments. Section
1401 of the Dodd-Frank Act adds new
TILA section 103(cc)(5), which defines
‘‘residential mortgage loan’’ to mean,
with some exceptions, any consumer
credit transaction secured by a
mortgage, deed of trust, or other
equivalent consensual security interest
on ‘‘a dwelling or on residential real
property that includes a dwelling.’’
TILA section 103(v) defines ‘‘dwelling’’
to mean a residential structure or mobile
home which contains one- to fourfamily housing units, or individual
units of condominiums or cooperatives.
Thus, a ‘‘residential mortgage loan’’
generally includes all mortgage loans,
except mortgage loans secured by a
structure with more than four
residential units. However, TILA section
103(cc)(5) specifically excludes from the
term ‘‘residential mortgage loan’’ an
open-end credit plan and an extension
of credit secured by an interest in a
timeshare plan, for purposes of the
ability-to-repay requirements under
TILA section 129C as well as provisions
concerning prepayment penalties and
other restrictions. In addition, TILA
section 129C(a)(8) exempts reverse
mortgages and temporary or ‘‘bridge’’
loans with a term of 12 months or less
from the ability-to-repay requirements.
Thus, taken together, the ability-torepay requirements of TILA section
129C(a) apply to all closed-end
mortgage loans secured by a one- to
four-unit dwelling, except loans secured
by a consumer’s interest in a timeshare
plan, reverse mortgages, or temporary or
‘‘bridge’’ loans with a term of 12 months
or less.
The Bureau’s 2013 ATR Final Rule
adopted provisions on scope that are
substantially similar to the statute,
which included modifications to
conform to the terminology of
Regulation Z. However, feedback
provided to the Bureau suggested that
the ability-to-repay requirements would
impose an unsustainable burden on
certain creditors, such as housing
finance agencies (HFAs) and certain
nonprofit organizations, offering
mortgage loan programs for low- to
moderate-income (LMI) consumers. The
Bureau was concerned that the abilityto-repay requirements adopted in the
2013 ATR Final Rule would undermine
or frustrate application of the uniquely
tailored underwriting requirements
employed by these creditors and
programs, and would require a
significant diversion of resources to
compliance, thereby significantly
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reducing access to credit. The Bureau
was also concerned that some of these
creditors would not have the resources
to implement and comply with the
ability-to-repay requirements, and may
have ceased or severely limited
extending credit to low- to moderateincome consumers, which would result
in the denial of responsible, affordable
mortgage credit. In addition, the Bureau
was concerned that the ability-to-repay
requirements may have frustrated the
purposes of certain homeownership
stabilization and foreclosure prevention
programs, such as Hardest-Hit-Fund
(HHF) programs and the Home
Affordable Refinance Program (HARP).
Accordingly, the Bureau proposed
several exemptions intended to ensure
that responsible, affordable mortgage
credit remained available for LMI and
financially distressed consumers.
43(a)(3)(iv)
The Bureau’s Proposal
As discussed above, neither TILA nor
Regulation Z provide an exemption to
the ability-to-repay requirements for
extensions of credit made pursuant to a
program administered by a Housing
Finance Agency (HFA), as defined
under 24 CFR 266.5. However, the
Bureau was concerned that the abilityto-repay requirements may
unnecessarily impose additional
requirements onto the underwriting
requirements of HFA programs and
impede access to credit available under
these programs. The Bureau was
especially concerned that the costs of
implementing and complying with the
requirements of § 1026.43(c) through (f)
would endanger the viability and
effectiveness of these programs. The
Bureau was concerned that the burden
could prompt some HFAs to severely
curtail their programs and some private
creditors that partner with HFAs to
cease participation in such programs,
both of which could reduce mortgage
credit available to LMI consumers. The
Bureau was also concerned that the
ability-to-repay requirements may affect
the ability of HFAs to apply customized
underwriting criteria or offer
customized credit products that are
designed to meet the needs of LMI
consumers while promoting long-term
housing stability.
Based on these concerns and to obtain
additional information regarding these
potential effects, the Bureau proposed
an exemption and solicited feedback on
several issues. Proposed
§ 1026.43(a)(3)(iv) would have provided
an exemption to the ability-to-repay
requirements for credit extended
pursuant to a program administered by
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an HFA. The Bureau solicited comment
on every aspect of this approach. In
particular, the Bureau sought comment
on the premise that the ability-to-repay
requirements could impose significant
implementation and compliance
burdens on HFA programs even if credit
extended under the HFA programs were
granted a presumption of compliance as
qualified mortgages. The Bureau also
sought comment on whether HFAs have
sufficiently rigorous underwriting
standards and monitoring processes to
protect the interests of consumers in the
absence of TILA’s ability-to-repay
requirements. The Bureau also
requested data related to the
delinquency, default, and foreclosure
rates of consumers participating in these
programs. In addition, the Bureau
solicited feedback regarding whether
such an exemption could harm
consumers, such as by denying
consumers the ability to pursue claims
arising under violations of § 1026.43(c)
through (f) against creditors extending
credit in connection with these
programs. Finally, the Bureau also
requested feedback on any alternative
approaches that would preserve the
availability of credit under HFA
programs while ensuring that
consumers receive mortgage loans that
reasonably reflect consumers’ ability to
repay.
Comments Received
In response to the proposed rule,
some commenters completely opposed
the proposed exemption from the
ability-to-repay requirements for
extensions of credit made pursuant to
programs administered by HFAs. These
commenters generally argued that the
rules should apply equally to all
creditors. These commenters contended
that granting exemptions to certain
creditors would create market
distortions and steer consumers towards
certain creditors, thereby reducing
consumer choice and ability to shop.
Other commenters suggested alternative
modifications to address HFA programs.
One industry commenter favored
creating special ability-to-repay
requirements tailored to the unique
underwriting characteristics of LMI
consumers. Another industry
commenter supported some type of
exemption from the ability-to-repay
requirements but advocated for
conditions or the provision of authority
to HFAs to impose their own ability-torepay standards, as various Federal
agencies (the Department of Housing
and Urban Development, the
Department of Veterans Affairs, and the
Department of Agriculture), are
authorized to do. The majority of
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industry and consumer group
commenters, however, asserted that the
proposed exemption to the ability-torepay requirements for credit extended
pursuant to a program administered by
an HFA is necessary because these
programs meet the customized needs of
LMI consumers who are creditworthy
but may not otherwise qualify for
mortgage credit under the Bureau’s
ability-to-repay requirements.
The latter group of commenters
generally supported the Bureau’s goal of
preserving access to affordable credit for
LMI consumers and favored the
Bureau’s proposal to exempt
community-focused lending programs
from the ATR requirements altogether.
These commenters contended that HFA
loan products balance access to
residential mortgage credit for LMI
consumers with a focus on the
consumer’s ability to repay. Consumer
group commenters argued that HFA
lending programs typically offer lowcost mortgage products, require full
documentation of income and
demonstrated ability to repay, and often
include extensive financial counseling
with the consumer. Commenters argued
that HFA homeowner assistance
programs are tailored to the credit
characteristics of LMI consumers that
HFAs serve and noted that these
organizations only extend credit after
conducting their own lengthy and
thorough analysis of an applicant’s
ability to repay, which often account for
nontraditional underwriting criteria,
income sources that do not fall within
typical mortgage underwriting criteria,
extenuating circumstances, and other
subjective factors that are indicative of
responsible homeownership and ability
to repay. An industry commenter noted
that, for first-time homebuyer lending,
HFAs use a combination of low-cost
financing and traditional fixed-rate,
long-term products; flexible, but
prudent, underwriting with careful
credit evaluation; diligent loan
documentation and income verification;
down payment and closing cost
assistance; homeownership counseling;
and proactive counseling and servicing.
This commenter stated that many HFAs
elaborate beyond the underwriting
standards of Federal government
agencies, such as FHA, USDA, or RHS
loans, and that HFAs also oversee
creditors involved in these programs
carefully by ensuring the HFA’s strict
underwriting standards and lending
requirements are followed. Comments
provided to the Bureau state that a New
York State HFA considers the
consumer’s entire credit history rather
than consider only a consumer’s credit
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score, which allows it to help those
consumers who may have a lower credit
score due to a prior financial hardship.
Whereas creditors do not need to engage
in separate verification where a
consumer’s application lists a debt that
is not apparent from the consumer’s
credit report pursuant to § 1026.43(c),
comments provided to the Bureau also
state that the Pennsylvania Housing
Finance Agency’s underwriting
standards require that the creditor
provide a separate verification of that
obligation, indicating the current
balance, the monthly payment, and the
payment history of the account.
Commenters also provided data
related to the relative performance of
HFA loans as further justification to
support the proposed exemption from
the ability-to-repay requirements for
extensions of credit made pursuant to a
program administered by a HFA.
Although comprehensive data for HFA
loan performance are not available,
commenters reported that the
delinquency, default, and foreclosure
statistics for consumers who receive
mortgage loans from HFA programs are
generally lower than for those of the
general populace, which demonstrates
that HFA programs ensure that
consumers are extended credit on
reasonably repayable terms.139
Commenters reported that a limited
review of HFA loan data conducted by
Fannie Mae in 2011 found that HFAfinanced loans performed significantly
better than other Fannie Mae affordable
housing loans. Also, comments cited a
2011 National Council of State Housing
139 For example, as of September 30, 2012, just
3.7 percent of SONYMA’s single-family borrowers
were 60 or more days delinquent, compared with
10.9 percent of all borrowers. Data from the
Pennsylvania Housing Finance Agency show that
for the third quarter of 2012, its conventional loans
had 90-plus day delinquency and foreclosure rates
of 2.98 percent and .99 percent, respectively, which
are well below the equivalent rates for all
conventional loans in the State of Pennsylvania.
Data from the Massachusetts Housing Partnership’s
SoftSecond Program show that the foreclosure rate
for program loans is substantially lower than the
rate for prime loans in the State of Massachusetts
(0.87 percent for SoftSecond loans as compared to
1.72 percent for prime loans). FHA-insured loans
purchased by the Connecticut Housing Finance
Agency have lower foreclosure rates than
comparable FHA loans in the northeast, and loans
financed by the Delaware State Housing Authority
and serviced by U.S. Bank have a 60 days or more
delinquency rate of just over 2 percent, compared
with a national 60 days or more rate of 8.3 percent.
Finally, Virginia Housing Development Authority
loan foreclosure rates on FHA and conventional
loans both fall under 1 percent. This is 3.2
percentage points under the national FHA
foreclosure rate and 2.5 percentage points lower
than the national foreclosure rate for conventional
loans in New York State, according to the Mortgage
Bankers Association. Prior to the recent mortgage
crisis, SONYMA’s 60-plus day default rate had
never exceeded 2 percent.
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Agencies (NCSHA) study of HFAfinanced and non-HFA-financed loans
insured by FHA that found that, in a
large majority of States, HFA-financed
loans had lower long-term delinquency
and foreclosure rates than non-HFA
loans.
A number of commenters argued that,
in the absence of an exemption, HFA
homeowner assistance programs would
not be able to continue to meet the
needs of LMI consumers or distressed
borrowers as intended. Commenters
generally stated that requiring HFAs to
comply with the ability-to-repay
requirements would be unduly
burdensome and would have a negative
impact on their ability to offer
consumers loan products that fit their
unique needs, thereby endangering the
viability and effectiveness of these
programs. Commenters also argued that
HFAs, which are governmental entities
chartered by either a State or a
municipality and are taxpayersupported, may not have sufficient
resources to implement and comply
with the ability-to-repay requirements.
According to commenters, some HFAs
may respond to the burden by severely
curtailing the credit offered under these
programs and others may divert
resources from lending to compliance,
which may also reduce access to credit
for LMI consumers.
Commenters noted that, because most
HFAs operate in partnership with
private creditors who participate
voluntarily in HFA programs, the
Bureau’s proposed HFA exemption
would help encourage eligible creditors
to continue making loans that might not
otherwise be originated due to
constraints under, or concerns about,
the Bureau’s ability-to-repay
requirements. Commenters argued that
the ability-to-repay requirements would
impose significant implementation and
compliance burdens on participating
private creditors, and this would likely
discourage creditors from participating
in HFA programs and would result in
the denial of mortgage credit to LMI
consumers.
A number of industry commenters
argued that the proposed exemption
from the ability-to-repay requirements is
in the best interests of consumers and
the nation as a whole, as the exemption
will allow homeowners to remain in
their homes and help stabilize
communities that were harmed by the
mortgage crisis and limit the degree to
which future LMI consumers have
difficulty obtaining access to credit.
Creditors also generally supported
clarifying that the exemption applies
regardless of whether the credit is
extended directly by an HFA to the
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consumer or through an intermediary
that is operating pursuant to a program
administered by an HFA, and to include
all HFA programs regardless of structure
(e.g., mortgage revenue bonds or
mortgage credit certificates).
The Final Rule
Based on these comments and
considerations, the Bureau believes that
it is appropriate to exempt credit
extended pursuant to an HFA program
from the ability-to-repay requirements.
The comments received confirm that
HFA programs generally employ
underwriting requirements that are
uniquely tailored to meet the needs of
LMI consumers, such that applying the
more generalized statutory ability-torepay requirements would provide little
or no net benefit to consumers and
instead could be unnecessarily
burdensome by diverting the focus of
HFAs and their private creditor partners
from mission activities to managing
compliance and legal risk from two
overlapping sets of underwriting
requirements. The Bureau is concerned
that absent an exemption, this diversion
of resources would significantly reduce
access to responsible mortgage credit for
many LMI borrowers.
As discussed above in part II.A, many
HFAs expand on the underwriting
standards of GSEs or Federal
government agencies by applying even
stricter underwriting standards than
these guidelines, such as requiring
mandatory counseling for all first-time
homebuyers and strong loan servicing.
As HFAs extend credit to promote longterm housing stability, rather than for
profit, HFAs generally extend credit
after performing a complex and lengthy
analysis of a consumer’s ability to repay.
As also discussed above in part II.A, the
Bureau finds that, as compared to
traditional underwriting criteria, under
which LMI borrowers may be less likely
to qualify for credit, the underwriting
standards of some HFAs allow greater
weight for (and sometimes require) the
consideration of nontraditional
underwriting elements, extenuating
circumstances, and other subjective
compensating factors that are indicative
of responsible homeownership. The
Bureau notes, however, that HFAs do
conduct regular and careful oversight of
their lenders, helping ensure that they
follow the HFAs’ strict underwriting
standards.
The Bureau is concerned that HFAs,
which are governmental entities and
taxpayer-supported, may not have
sufficient resources to implement and
comply with the ability-to-repay
requirements, or that the additional
compliance burdens would at least
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significantly reduce the resources
available to HFAs for the purpose of
providing homeowner assistance. As
discussed above in part II.A, many of
the State and Federal programs that
HFAs administer do not provide
administrative funds; others provide
limited administrative funds. Most
HFAs operate independently and do not
receive State operating funds.
Consequently, HFAs may not have
enough resources to increase
compliance efforts without negatively
impacting their missions. In the absence
of an exemption from the ability-torepay requirements, HFAs would have
to dedicate substantially more time and
resources to ensure their programs and
lending partners are in compliance.
Moreover, because many HFAs must
conduct their programs through
partnerships with private creditors, the
Bureau is concerned that absent an
exemption private creditor volunteers
would determine that complying with
both the ability-to-repay requirements
and the specialized HFA program
requirements is too burdensome or the
liability risks too great. For example,
needing to comply with both the HFA
underwriting requirements that often
account for (and sometimes require the
consideration of) nontraditional
underwriting criteria, extenuating
circumstances, and compensating
factors, as discussed above in part II.A,
and the ability-to-repay requirements
may cause some private creditors to
cease participation in such programs.
This too would reduce access to
mortgage credit to LMI consumers.
With respect to the comment
suggesting that a better approach would
be to allow HFAs to establish their own
ability-to-repay and qualified mortgage
guidelines, the Bureau notes that
Congress has the authority to determine
which agencies and programs have the
authority under TILA to prescribe rules
related to the ability-to-repay
requirements or the definition of
qualified mortgage. The Bureau is
mindful that Congress has not
authorized HFAs to prescribe rules
related to the ability-to-repay
requirements or the definition of
qualified mortgage.
Regarding the comment favoring the
creation of special ability-to-repay
requirements tailored to the unique
underwriting characteristics of LMI
consumers, the Bureau does not believe
it is appropriate to establish alternative
conditions. HFA programs have strong
but flexible ability-to-repay
requirements tailored to the unique
needs and credit characteristics of the
LMI consumers they serve. The Bureau
is concerned that imposing uniform
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alternative requirements by regulation
would curtail this flexibility and
ultimately reduce access to responsible
and affordable credit for this
population.
No commenters addressed whether
credit extended pursuant to a program
administered by an HFA should be
granted a presumption of compliance as
qualified mortgages, and, if so, under
what conditions. However, the Bureau
does not believe that extending
qualified mortgage status to these loans
would be as effective in addressing the
concerns raised above as an exemption.
Even if credit extended under the HFA
programs were granted a presumption of
compliance as qualified mortgages, HFA
programs could be impacted by
significant implementation and
compliance burdens. Furthermore, as
discussed above, many loans extended
under these programs would not appear
to satisfy the qualified mortgage
standards under § 1026.43(e)(2). Thus, a
creditor extending such a mortgage loan
would still be required to comply with
the ability-to-repay requirements of
§ 1026.43(c) and the potential liability of
noncompliance would cease or severely
curtail mortgage lending.
The Bureau received a number of
comments completely opposed to the
proposed exemptions from the abilityto-repay requirements on the grounds
that the rules should apply equally to all
creditors. However, pursuant to section
105(a) of TILA, the Bureau generally
may prescribe regulations that 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, among
other things. In addition, pursuant to
TILA section 105(f) the Bureau may
exempt by regulation from all or part of
this title all or any class of transactions
for which in the determination of the
Bureau coverage does not provide a
meaningful benefit to consumers in the
form of useful information or protection,
if certain conditions specified in that
section are met. For the reasons
discussed in each relevant section, the
Bureau believes that the exemptions
adopted in this final rule are necessary
and proper to effectuate the purposes of
TILA, which include purposes of
section 129C, by ensuring that
consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay.
Furthermore, without the exemptions
the Bureau believes that consumers in
these demographics are at risk of being
denied access to the responsible,
affordable credit offered under these
programs, which is contrary to the
purposes of TILA.
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Accordingly, the Bureau believes that
the proposed exemption for credit made
pursuant to programs administered by
an HFA is appropriate under the
circumstances. The Bureau believes that
consumers who receive extensions of
credit made pursuant to a program
administered by an HFA do so after a
determination of ability to repay using
specially tailored criteria. The
exemption adopted by the Bureau is
limited to creditors or transactions with
certain characteristics and qualifications
that ensure consumers are offered
responsible, affordable credit on
reasonably repayable terms. The Bureau
thus finds that coverage under the
ability-to-repay requirements provides
little if any meaningful benefit to
consumers in the form of useful
protection, given the nature of the credit
extended through HFAs. At the same
time, the Bureau is concerned that the
narrow class of creditors subject to the
exemption may either cease or severely
curtail mortgage lending if the ability-torepay requirements are applied to their
transactions, resulting in a denial of
access to credit. Accordingly, the
Bureau is adopting § 1026.43(a)(3)(iv) as
proposed, which provides that an
extension of credit made pursuant to a
program administered by an HFA, as
defined under 24 CFR 266.5, is exempt
from § 1026.43(c) through (f).
The Bureau is adopting new comment
43(a)(3)(iv)–1 to provide additional
clarification which will facilitate
compliance. As discussed above, the
Bureau understands that most HFA
programs are ‘‘mortgage purchase’’
programs in which the HFA establishes
program requirements (e.g., income
limits, purchase price limits, interest
rates, points and term limits,
underwriting standards, etc.), and agrees
to purchase loans made by private
creditors that meet these requirements.
As a result, the success of these
programs in large part depends upon the
participation of private creditors. The
Bureau intended the exemption to apply
to both extensions of credit by HFAs
and extensions of credit by private
creditors under a mortgage purchase or
similar HFA program. The comment
clarifies that both extensions of credit
made by HFAs directly to consumers as
well as extensions of credit made by
other creditors pursuant to a program
administered by an HFA are exempt
from the requirements of § 1026.43(c)
through (f). In addition, as discussed
above in part II.A, the Bureau
understands that HFAs are generally
funded through tax-exempt bonds (also
known as mortgage revenue bonds), but
may receive other types of funding,
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including funding through Federal
programs such as the HOME Program,
which is the largest Federal block grant
for affordable housing. The Bureau
intended the exemption to apply to
extensions of credit made pursuant to a
program administered by an HFA,
regardless of the funding source. The
comment clarifies that the creditor is
exempt from the requirements of
§ 1026.43(c) through (f) regardless of
whether the program administered by
an HFA receives funding from Federal,
State, or other sources.
Section 1026.43(a)(3)(iv) is adopted
pursuant to the Bureau’s authority
under section 105(a) and (f) of TILA.
Pursuant to section 105(a) of TILA, the
Bureau generally may prescribe
regulations that 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, among
other things. For the reasons discussed
in more detail above, the Bureau
believes that this exemption is
necessary and proper to effectuate the
purposes of TILA, which include
purposes of section 129C, by ensuring
that consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay.
The Bureau believes that mortgage loans
originated pursuant to programs
administered by HFAs sufficiently
account for a consumer’s ability to
repay, and the exemption ensures that
consumers are able to receive assistance
under these programs. Furthermore,
without the exemption the Bureau
believes that consumers in this
demographic are at risk of being denied
access to the responsible, affordable
credit offered under these programs,
which is contrary to the purposes of
TILA. This exemption is consistent with
the findings of TILA section 129C by
ensuring that consumers are able to
obtain responsible, affordable credit
from the creditors discussed above.
The Bureau has considered the factors
in TILA section 105(f) and believes that,
for the reasons discussed above, an
exemption is appropriate under that
provision. Pursuant to TILA section
105(f) the Bureau may exempt by
regulation from all or part of this title all
or any class of transactions for which in
the determination of the Bureau
coverage does not provide a meaningful
benefit to consumers in the form of
useful information or protection. In
determining which classes of
transactions to exempt the Bureau must
consider certain statutory factors. For
the reasons discussed above, the Bureau
exempts an extension of credit made
pursuant to a program administered by
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an HFA because coverage under the
ability-to-repay regulations does not
provide a meaningful benefit to
consumers in the form of useful
protection in light of the nature of the
credit extended through HFAs.
Consistent with its rationale in the
proposed rule, the Bureau believes that
the exemption is appropriate for all
affected consumers to which the
exemption would apply, regardless of
their other financial arrangements,
financial sophistication, or the
importance of the loan to them.
Similarly, the Bureau believes that the
exemption is appropriate for all affected
loans covered under the exemption,
regardless of the amount of the loan and
whether the loan is secured by the
principal residence of the consumer.
Furthermore, the Bureau believes that,
on balance, the exemption will simplify
the credit process without undermining
the goal of consumer protection,
denying important benefits to
consumers, or increasing the expense of
the credit process. Based on these
considerations and the analysis
discussed elsewhere in this final rule,
the Bureau believes that the exemptions
are appropriate. Therefore all credit
extended through the Housing Finance
Agencies is subject to the exemption.
43(a)(3)(v)
Background
As discussed above, neither TILA nor
Regulation Z provides an exemption to
the ability-to-repay requirements for
creditors, such as nonprofits, that
primarily engage in community
development lending. However,
feedback provided to the Bureau
suggested that the ability-to-repay
requirements might impose an
unsustainable burden on certain
creditors offering mortgage loan
programs for LMI consumers. The
Bureau was concerned that these
creditors would not have the resources
to implement and comply with the
ability-to-repay requirements, and
would have ceased or severely limited
extending credit to LMI consumers,
which would result in the unavailability
of responsible, affordable mortgage
credit. Accordingly, the Bureau
proposed several exemptions intended
to ensure that responsible, affordable
mortgage credit remained available for
LMI consumers.
Credit Extended by CDFIs, CHDOs, and
DAPs
The Bureau’s proposal. The Bureau
proposed to exempt from the ability-torepay requirements several types of
creditors that focus on extending credit
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to LMI consumers. Proposed
§ 1026.43(a)(3)(v)(A) would have
exempted an extension of credit made
by a creditor designated as a
Community Development Financial
Institution (CDFI), as defined under 12
CFR 1805.104(h). Proposed
§ 1026.43(a)(3)(v)(B) would have
exempted an extension of credit made
by a creditor designated as a
Downpayment Assistance Provider of
Secondary Financing (DAP) operating in
accordance with regulations prescribed
by the U.S. Department of Housing and
Urban Development applicable to such
persons. Proposed § 1026.43(a)(3)(v)(C)
would have exempted an extension of
credit made by a creditor designated as
a Community Housing Development
Organization (CHDO), as defined under
24 CFR 92.2, operating in accordance
with regulations prescribed by the U.S.
Department of Housing and Urban
Development applicable to such
persons. The Bureau requested feedback
regarding whether the requirements
imposed in connection with obtaining
and maintaining these designations
were sufficient to ensure that such
creditors provide consumers with
responsible and affordable credit, and
regarding whether unscrupulous or
irresponsible creditors would be able to
use these designations to evade the
requirements of TILA, extend credit
without regard to the consumer’s ability
to repay, or otherwise harm consumers.
Comments received. The Bureau
received many comments addressing the
proposed exemptions for creditors
designated as a CDFI, CHDO, or DAP. A
large number of industry commenters
completely opposed the proposed
exemptions. These commenters
generally argued that the rules should
apply equally to all creditors. However,
many industry and consumer advocate
commenters supported the proposed
exemptions. Twenty-five commenters
supported the proposed exemption for
creditors designated as CDFIs. Also, in
response to the Bureau’s request for
feedback, several commenters provided
data related to CDFI underwriting
requirements and loan performance.
Some commenters specifically
discussed and supported the proposed
exemption for CHDOs. While several
commenters supported the proposed
exemption for DAPs, the Bureau
received no specific feedback related to
these creditors. A few commenters
asked the Bureau to consider
exemptions for other types of
designations or lending programs. For
example, a few commenters requested
that the Bureau provide a similar
exemption for creditors that are
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chartered members of the
NeighborWorks Network, while other
commenters requested an exemption for
creditors approved as Counseling
Intermediaries by HUD.
The Bureau received feedback from
several industry commenters requesting
that the Bureau provide an exemption
for credit unions designated as lowincome credit unions (LICUs) by the
National Credit Union Administration
(NCUA). These commenters explained
that the NCUA’s LICU designation is
similar to the Treasury Department’s
CDFI designation. However, these
commenters stated that most credit
unions choose to obtain the LICU
designation instead of the CDFI
designation. Some commenters
suggested that many credit unions are
not eligible for CDFI status.
The final rule. The Bureau is adopting
the exemptions in a form that is
substantially similar to the version
proposed. For the reasons discussed
below, the Bureau has concluded that a
creditor designated as a CDFI or DAP
should be exempt from the ability-torepay requirements, provided these
creditors meet certain other applicable
requirements. As comments confirmed,
creditors seeking these designations
must undergo a screening process
related to the ability of applicants to
provide affordable, responsible credit to
obtain the designation and must operate
in accordance with the requirements of
these programs, including periodic
recertification.140 Comments provided
to the Bureau also confirmed that the
ability-to-repay requirements generally
differ from the unique underwriting
criteria which are related to the
characteristics of the consumers served
by these creditors. The ability-to-repay
requirements primarily consist of
quantitative underwriting
considerations, such as an analysis of
the consumer’s debt-to-income ratio. In
contrast, as discussed in part II.A above,
the Bureau understands that creditors
with these designations typically engage
in a lengthy underwriting process that is
specifically tailored to the needs of
these consumers by incorporating a
variety of compensating factors. Also,
although market-wide data is not
available for the delinquency rates of
credit extended by CHDOs, comments
provided to the Bureau related to CDFI
140 24 CFR 200.194(d) provides that HUD
certification as an approved nonprofit expires after
two years, and nonprofits must reapply for approval
prior to the expiration of the two year period. Also,
on February 4, 2013 the CDFI Fund required
recertification of most CDFIs. See http://
www.cdfifund.gov/news_events/CDFI-2013-06CDFI_Fund_Releases_Mandatory_
Recertification_Guidelines_for_CDFIs.asp.
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loan performance reflect the low default
levels associated with these creditors’
programs, which strongly suggest that
consumers are extended credit on
reasonably repayable terms. Finally,
commenters confirmed that these
creditors serve consumers that have
difficulty obtaining responsible and
affordable credit, and that the burdens
imposed by the ability-to-repay
requirements would significantly impair
the ability of these creditors to continue
serving this market. Taken together, this
feedback demonstrates that creditors
with these designations provide
residential mortgage loans on
reasonably repayable terms, that these
exemptions are necessary and proper to
ensure that responsible, affordable
mortgage credit remains available to
consumers served by these creditors,
and that the government approval and
oversight associated with these
designations ensures that there is little
risk that consumers would be subject to
abusive lending practices. Thus, the
Bureau has determined that it is
appropriate to adopt
§ 1026.43(a)(3)(v)(A) and (B) as
proposed.
The Bureau has also concluded that a
creditor designated as a CHDO should
be exempt from the ability-to-repay
requirements. Comments illustrated
that, like CDFIs and DAPs, CHDOs
generally extend credit on reasonably
repayable terms and ensure that LMI
consumers have access to responsible,
affordable mortgage credit. However,
HUD provided comments to the Bureau
suggesting that the exemption be
narrowed. A person may obtain a CHDO
designation for reasons unrelated to
residential mortgage lending, such as to
acquire tax credits to assist in the
development of affordable rental
properties. The Bureau believes that it is
appropriate to narrow the exemption to
only those persons that obtain the
CHDO designation for purposes of
residential mortgage lending. A person
seeking CHDO status to engage in
residential mortgage lending must enter
into a commitment with the
participating jurisdiction developing the
project under the HOME Program. The
Bureau also believes that providing
specific citations to the relevant
regulations prescribed by HUD would
facilitate compliance. Thus, the Bureau
is adopting § 1026.43(a)(3)(v)(C) with
language similar to that proposed, but
with the additional condition that the
creditor designated as a CHDO has
entered into a commitment with a
participating jurisdiction and is
undertaking a project under the HOME
Program, pursuant to the provisions of
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24 CFR 92.300(a), and as the terms
community housing development
organization, commitment, participating
jurisdiction, and project are defined
under 24 CFR 92.2.
The Bureau acknowledges that
creditors with other types of
designations also provide valuable
homeownership assistance to certain
types of consumers or communities.
However, the Bureau does not believe
that it would be appropriate to provide
exemptions for the designations
suggested by commenters. For example,
while Counseling Intermediaries must
be approved by HUD, this approval is
not related to the ability of an applicant
to provide consumers with responsible
and affordable mortgage credit.
Furthermore, the Bureau is unaware of
evidence suggesting that approval as a
Counseling Intermediary is sufficient to
ensure that consumers are offered and
receive residential mortgage loans on
reasonably repayable terms. With
respect to the feedback suggesting that
the Bureau consider providing an
exemption for creditors that are
chartered members of the
NeighborWorks Network, the Bureau
acknowledges that these creditors are
also subject to government oversight
and seem to provide responsible and
affordable mortgage credit. However, the
Bureau does not believe that providing
an exemption to these creditors would
be necessary to ensure access to
responsible and affordable credit, as
many of these creditors would qualify
for one of the exemptions adopted in
§ 1026.43(a)(3)(v)(A) through (D).
Therefore, the Bureau declines to adopt
exemptions for the other designations or
lending programs suggested by
commenters.
In response to feedback provided
regarding creditors designated as lowincome credit unions, the Bureau
conducted additional research and
analysis to determine whether an
exemption for these creditors would be
appropriate. LICUs, like CDFIs, provide
credit to low-income consumers.
However, NCUA regulations require
LICUs to serve only ‘‘predominantly’’
low-income consumers, thereby
permitting LICUs to extend credit to
many consumers with higher
incomes.141 Thus, such an exemption
would be too broad and would affect
consumers for whom access to credit is
not a concern. In addition, the Bureau
believes that the small creditor portfolio
qualified mortgage loan provisions
adopted in § 1026.43(e)(5) will address
the concerns raised by commenters and
141 ‘‘The term predominantly is defined as a
simple majority.’’ 12 CFR 701.34(a)(3).
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accommodate the needs of small
creditors, such as LICUs, while
providing consumers with valuable
protections. Therefore, the Bureau does
not believe that it would be appropriate
to provide an exemption for creditors
with an LICU designation.
Credit Extended by Certain Nonprofits
The Bureau’s proposal. Proposed
§ 1026.43(a)(3)(v)(D) would have
exempted an extension of credit made
by a creditor with a tax exemption
ruling or determination letter from the
Internal Revenue Service under section
501(c)(3) of the Internal Revenue Code
of 1986 (26 CFR 1.501(c)(3)–1), provided
that certain other conditions were
satisfied. Under proposed
§ 1026.43(a)(3)(iv)(D)(1), the exemption
would have been available only if the
creditor extended credit secured by a
dwelling no more than 100 times in the
calendar year preceding receipt of the
consumer’s application. Proposed
§ 1026.43(a)(3)(v)(D)(2) would have
further conditioned the exemption on
the creditor, in the calendar year
preceding receipt of the consumer’s
application, extending credit secured by
a dwelling only to consumers with
income that did not exceed the
qualifying limit for moderate-income
families, as established pursuant to
section 8 of the United States Housing
Act of 1937 and amended from time to
time by the U.S. Department of Housing
and Urban Development. Proposed
§ 1026.43(a)(3)(v)(D)(3) would have
made the proposed exemption available
only if the extension of credit was to a
consumer with income that did not
exceed this qualifying limit. Finally,
proposed § 1026.43(a)(3)(v)(D)(4) would
have made the proposed exemption
contingent upon the creditor
determining, in accordance with written
procedures, that the consumer had a
reasonable ability to repay the extension
of credit.
Proposed comment 43(a)(3)(v)(D)–1
would have clarified that an extension
of credit is exempt from the
requirements of § 1026.43(c) through (f)
if the credit is extended by a creditor
described in § 1026.43(a)(3)(v)(D),
provided the conditions specified in
that section are satisfied. The conditions
specified in § 1026.43(a)(3)(v)(D)(1) and
(2) are determined according to activity
that occurred in the calendar year
preceding the calendar year in which
the consumer’s application was
received. Section 1026.43(a)(3)(v)(D)(2)
provides that, during the preceding
calendar year, the creditor must have
extended credit only to consumers with
income that did not exceed the
qualifying limit then in effect for
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35465
moderate-income families, as specified
in regulations prescribed by HUD
pursuant to section 8 of the United
States Housing Act of 1937. For
example, a creditor has satisfied the
requirements of § 1026.43(a)(3)(v)(D)(2)
if the creditor demonstrates that the
creditor extended credit only to
consumers with income that did not
exceed the qualifying limit in effect on
the dates the creditor received each
consumer’s individual application. The
condition specified in
§ 1026.43(a)(3)(v)(D)(3), which relates to
the current extension of credit, provides
that the extension of credit must be to
a consumer with income that does not
exceed the qualifying limit specified in
§ 1026.43(a)(3)(v)(D)(2) in effect on the
date the creditor received the
consumer’s application. For example,
assume that a creditor with a tax
exemption ruling under section
501(c)(3) of the Internal Revenue Code
of 1986 has satisfied the conditions
identified in § 1026.43(a)(3)(v)(D)(1) and
(2). If, on May 21, 2014, the creditor in
this example extends credit secured by
a dwelling to a consumer whose
application reflected income in excess
of the qualifying limit identified in
§ 1026.43(a)(3)(v)(D)(2), the creditor has
not satisfied the condition in
§ 1026.43(a)(3)(v)(D)(3) and this
extension of credit is not exempt from
the requirements of § 1026.43(c) through
(f).
The Bureau solicited comment
regarding whether the proposed
exemption was appropriate. The Bureau
also specifically requested feedback on
whether the proposed 100 transaction
limitation was appropriate, on the costs
of implementing and complying with
the ability-to-repay requirements that
would be incurred by creditors that
extend credit secured by a dwelling
more than 100 times a year, the extent
to which this proposed condition would
affect access to responsible, affordable
credit, and whether the limit of 100
transactions per year should be
increased or decreased. The Bureau also
requested comment regarding the costs
that nonprofit creditors would incur in
connection with the ability-to-repay
requirements, the extent to which these
additional costs would affect the ability
of nonprofit creditors to extend credit to
LMI consumers, and whether consumers
could be harmed by the proposed
exemption. The Bureau solicited
comment regarding whether the
proposed exemption should be
extended to creditors designated as
nonprofits under section 501(c)(4) of the
Internal Revenue Code of 1986. The
Bureau also requested financial reports
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and mortgage lending activity data
supporting the argument that the
marginal cost of implementing and
complying with the ability-to-repay
requirements would cause 501(c)(4)
nonprofit creditors to cease, or severely
limit, extending credit to LMI
consumers.
Comments received. The Bureau
received many comments addressing
this proposed exemption. Many
commenters completely opposed the
proposed exemption for communityfocused creditors. These commenters
generally argued that the rules should
apply equally to all creditors. One
industry commenter argued that a better
approach would be to create special
ability-to-repay requirements tailored to
the unique underwriting characteristics
of LMI consumers. Many other
commenters approved of the proposed
exemption, including the Bureau’s
proposed conditions. Several
commenters stated that an exemption
for certain nonprofits was necessary, but
requested various modifications. Most
of the commenters that approved of the
proposed exemption were concerned
that the exemption could be used as a
loophole to harm consumers and agreed
that conditions were needed to address
this potential risk.
Many commenters, including
industry, consumer advocate, and
nonprofit commenters, explicitly
supported the proposed limitation of
100 extensions of credit. These
commenters generally explained that
the 100-extension limitation was an
appropriate limit that would make it
difficult for sham nonprofit creditors to
harm consumers. However, several
commenters asked the Bureau to raise
the transaction limitation. The
commenters were primarily concerned
that the limitation would force
nonprofits to limit certain types lending.
For example, a few commenters stated
that nonprofits that offer both homepurchase mortgage loans and smalldollar mortgage loans, such as for home
energy improvement, would limit smalldollar lending to remain under the 100extension limitation. One nonprofit
commenter argued that, for creditors
that provide first- and subordinate-lien
financing to LMI consumers on the same
transaction, the 100-extension limit is
effectively a 50-transaction limit.
Another nonprofit commenter suggested
that the Bureau either apply the 100extension limit to first-lien mortgage
loans, or raise the limit to 500 for total
transactions. One consumer advocate
commenter suggested raising the limit to
250 transactions per calendar year to
address these concerns. A few
commenters asked that the Bureau
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remove the limitation completely. For
example, one commenter argued that
the Bureau’s proposed limit of 100
extensions of credit would harm LMI
consumers by raising the cost of credit
obtained from larger-scale nonprofit
organizations.
One commenter argued that the
proposed exemption was too narrow
and urged the Bureau to expand the
exemption in several ways. First, this
commenter argued that the exemption
should not be limited to extensions of
credit by creditors, but rather should be
extended to all transactions in which a
nonprofit organization dedicated to
providing opportunities for affordable,
long-term homeownership is involved,
but is not the creditor. This commenter
also asked the Bureau to provide noaction letters that would provide a safe
harbor for certain mortgage lending
programs. In addition, this commenter
argued that the proposed references to
the low- to moderate-income threshold
under section 8 of the National Housing
Act was inappropriate because use of
the threshold would result in the denial
of credit to consumers with income
slightly above the threshold.
Furthermore, this commenter asserted
that it would be arbitrary and
unjustified for the Bureau to extend an
exemption to State HFAs but not
provide an exemption to organizations
that rely on underwriting criteria similar
to those used by State HFAs, such as the
consideration of a consumer’s life
circumstances. Finally, this commenter
disputed the Bureau’s justification for
the proposed exemptions—that access
to credit for LMI consumers would be
impaired if certain creditors did not
have the resources to implement and
comply with the ability-to-repay
requirements and ceased or severely
limited extending credit—by arguing
that LMI consumers are harmed when
any creditor, regardless of size, spends
money on regulatory compliance that
would otherwise have been lent to LMI
consumers.
One consumer advocate group
opposed providing an exemption for
nonprofit creditors and instead
suggested several modifications to the
ability-to-repay requirements intended
to address the Bureau’s concerns
regarding nonprofits. This commenter
argued that, rather than providing an
exemption for the proposed categories
of nonprofit creditor, the Bureau should
provide a rebuttable presumption of
compliance for these nonprofit
creditors, without requiring the
nonprofits to satisfy the requirements of
§ 1026.43(c) through (f). Also, this
commenter argued, these provisions
should apply to only bona fide
PO 00000
Frm 00038
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nonprofits, so that consumers would be
provided legal recourse against
unscrupulous creditors operating sham
nonprofits. Further, this commenter
suggested that the Bureau should
expand the anti-evasion provisions of
§ 1026.43(h) to include the adoption of
nonprofit status for purposes of
avoiding the ability-to-repay
requirements. This commenter argued
that such modifications would provide
genuine nonprofits with relief from the
regulatory and compliance burdens
associated with the ability-to-repay
requirements, while enabling consumers
to seek recourse against abusive, sham
nonprofits.
The Bureau did not receive feedback
regarding whether the proposed
exemption should be extended to
creditors designated as nonprofits under
section 501(c)(4) of the Internal Revenue
Code of 1986. However, several credit
unions and State credit union
associations requested that the Bureau
expand the nonprofit exemption to all
credit unions, as credit unions are
designated as nonprofits under sections
501(c)(1) and 501(c)(14) of the Internal
Revenue Code of 1986. These
commenters generally explained that
credit unions, like the nonprofit
creditors addressed in the Bureau’s
proposal, are often small businesses that
have difficulty complying with
regulatory burdens. Industry
commenters also requested an
exemption for certain creditors that
extend credit to LMI consumers, or for
certain programs intended to facilitate
access to credit for LMI consumers. For
example, some commenters argued that
the Bureau should provide an
exemption for credit unions operating in
certain areas, such as areas defined as
‘‘underserved’’ under the Federal Credit
Union Act, while others argued that the
Bureau should provide an exemption for
loans that meet the regulatory
requirements of the Community
Reinvestment Act or similar programs.
These commenters generally argued that
such an exemption would facilitate
access to credit for LMI consumers by
minimizing the regulatory burdens
imposed by the ability-to-repay
requirements.
A few industry and consumer
advocate commenters asked the Bureau
to establish a publicly accessible
database of all nonprofits that qualified
for the exemption. These commenters
argued that such a database would
facilitate compliance and allow
consumers to determine if nonprofit
creditors were actually exempt from the
requirements. A State attorney general
expressed concern about potential abuse
and asked the Bureau to consider
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vigorous oversight of nonprofits eligible
for the exemption.
The final rule. The Bureau is adopting
§ 1026.43(a)(3)(v)(D) in a form that is
substantially similar to the version
proposed, except that the Bureau is
increasing the annual originations limit
from 100 to 200 extensions of credit. For
the reasons discussed below, the Bureau
has concluded that the exemption
should apply provided that, in
additional to the annual originations
limit: (1) The creditor is designated as
a nonprofit organization under section
501(c)(3) of the Internal Revenue Code;
(2) the extension of credit is to a
consumer with income that does not
exceed the limit for low- and moderateincome households as established
pursuant regulations prescribed by the
U.S. Department of Housing and Urban
Development; (3) during the calendar
year preceding receipt of the consumer’s
application the creditor extended credit
only to consumers with income that did
not exceed the above limit; and (4) the
creditor determines, in accordance with
written procedures, that the consumer
has a reasonable ability to repay the
extension of credit. Comments provided
to the Bureau generally confirmed that
these conditions were reasonable and
appropriate measures to ensure that the
exemption would not be used as a
loophole to avoid the ability-to-repay
requirements. Thus, the Bureau has
determined that it is appropriate to
adopt § 1026.43(a)(3)(v)(D)(2), (3), and
(4) generally as proposed, but with
technical modifications to paragraphs
(a)(3)(v)(D)(2) and (3), as discussed
below.
However, upon further consideration
of the comments received, the Bureau
has determined that it is appropriate to
raise the threshold in proposed
§ 1026.43(a)(3)(v)(D)(1) from 100 to 200
extensions of credit. Most commenters
agreed with the rationale advanced in
the 2013 ATR Proposed Rule that a
limitation is necessary to prevent the
exemption from being exploited by
unscrupulous creditors seeking to harm
consumers. The Bureau strongly
believes that this risk outweighs the
costs that a limitation may impose on
some nonprofit creditors. While many
commenters approved of the proposed
100-extension limitation, the Bureau is
concerned that this limitation could
lead to unintended consequences. The
Bureau is particularly concerned that
nonprofit creditors providing primary
and subordinate financing on the same
transaction effectively would be limited
to 50 transactions per year. The Bureau
did not intend to propose such a strict
limitation. The Bureau has concluded
that a 200-extension limitation,
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doubling the 100-extension limit to
capture creditors making first- and
subordinate-lien loans on the same
transaction, would address the concerns
raised by commenters while achieving
the original intent of the proposed
condition. The Bureau does not agree
with the suggestions proposed by some
commenters that separate limits for firstand subordinate-lien loans should be
implemented. The Bureau believes that
such a restriction would be needlessly
restrictive, and it would be more
efficient to allow nonprofit creditors to
determine the most efficient allocation
of funds between primary and
subordinate financing. Furthermore, the
Bureau does not agree with the
arguments raised by commenters that
the threshold should be raised above
200, such as to 500 transactions. As
explained in the 2013 ATR Proposed
Rule, the Bureau intended to narrowly
tailor the exemption to small nonprofits
that did not have the resources to bear
the burdens associated with the abilityto-repay requirements, and solicited
feedback regarding whether a 100
extension of credit limit was indicative
of such a resource limitation.142 While
feedback indicated that a 200-extension
limitation would more appropriately
address the Bureau’s intentions, the
Bureau received no feedback indicating
that nonprofit creditors making more
than 200 extensions of credit lacked the
resources to implement and comply
with the ability-to-repay requirements.
The Bureau believes that creditors
originating such a number of mortgage
loans likely have the resources to bear
the implementation and compliance
burden associated with the ability-torepay requirements, unlike smaller
nonprofit creditors that make fewer
loans. Therefore, as adopted,
§ 1026.43(a)(3)(v)(D)(1) conditions the
exemption from the ability-to-repay
requirements on the creditor extending
credit secured by a dwelling no more
than 200 times during the calendar year
preceding receipt of the consumer’s
application.
As discussed above, one commenter
argued that the Bureau should limit the
exemption to bona fide nonprofit
creditors. Adding a bona fide nonprofit
condition would provide another
avenue for consumers to seek redress
against harmful lending practices,
which may deter persons from using the
exemption as a loophole. However, the
Bureau believes that the requirements of
§ 1026.43(a)(3)(v)(D) are narrowly
tailored to protect consumers and limit
the risk that an unscrupulous creditor
could create a nonprofit for the purpose
142 See
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35467
of extending credit in a harmful,
reckless, or abusive manner. Therefore,
the Bureau declines to adopt an
additional bona fide nonprofit
requirement at this time. As with the
other exemptions to the ability-to-repay
requirements, the Bureau will monitor
the mortgage market and may reevaluate
this issue if circumstances warrant
reconsideration.
As discussed above, one commenter
suggested that the Bureau adopt a
qualified mortgage definition with a
rebuttable presumption of compliance
instead of an exemption to the abilityto-repay requirements. The Bureau does
not believe it is necessary to adopt a
qualified mortgage definition for
nonprofit creditors meeting the
conditions of § 1026.43(a)(3)(v)(D). The
Bureau believes that an exemption is a
more effective method of addressing the
concerns discussed above. The Bureau
believes that a rebuttable presumption
would re-introduce the compliance
burdens on certain nonprofits that the
Bureau seeks to alleviate. Furthermore,
the line between a safe harbor and a
rebuttable presumption was determined
based on pricing thresholds and
providing a rebuttable presumption
based on other criteria is inconsistent
with the approach taken in the 2013
ATR Final Rule. Nor does the Bureau
believe that modifying the anti-evasion
provisions of § 1026.43(h) is necessary.
Either approach would increase
regulatory complexity for these
creditors, and may frustrate the goals
the Bureau seeks to achieve in
accommodating nonprofit creditors. The
Bureau also has decided that it is
inappropriate to provide no-action
letters for certain creditors, as suggested
by one commenter. For the reasons
discussed in this section, the Bureau
believes that the exemptions adopted in
this final rule are the optimal approach
for providing access to responsible,
affordable credit while ensuring that
consumers are offered and receive
mortgage credit on reasonably repayable
terms.
The Bureau has also determined that
it is appropriate to limit the exemption
to creditors designated as nonprofits
under section 501(c)(3), but not
501(c)(4), of the Internal Revenue Code
of 1986. The Bureau recognizes that
these creditors also may be affected by
the ability-to-repay requirements.
However, the Bureau believes that this
distinction is appropriate. As discussed
in the 2013 ATR Proposed Rule, this
exemption is premised on the belief that
the additional costs imposed by the
ability-to-repay requirements will force
certain nonprofit creditors to cease
extending credit, or substantially limit
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credit activities, thereby harming lowto moderate-income consumers.143 The
Bureau solicited comment regarding
whether the exemption should be
extended to creditors designated as
nonprofits under section 501(c)(4) of the
Internal Revenue Code of 1986. The
Bureau also requested financial reports
and mortgage lending activity data
supporting the argument that the
marginal cost of implementing and
complying with the ability-to-repay
requirements would cause 501(c)(4)
nonprofit creditors to cease, or severely
limit, extending credit to low- to
moderate-income consumers. The
Bureau received no comment in
response to this request. Thus, the
Bureau concludes that it is appropriate
to limit the exemption to creditors
designated as nonprofits under section
501(c)(3) of the Internal Revenue Code
of 1986, and adopts § 1026.43(a)(3)(v)(D)
as proposed.
As noted above, the Bureau received
a comment suggesting that the
exemption should not be limited to
extensions of credit by a creditor but,
rather, should be extended to other
transactions in which a nonprofit
organization that is dedicated to
providing opportunities for affordable,
long-term homeownership is involved,
but is not the creditor. While the Bureau
believes that such organizations provide
valuable assistance to LMI consumers,
the Bureau has determined that it would
be inappropriate to extend the
exemption in this manner. The
exemptions adopted by the Bureau are
limited to creditors or transactions
where the Bureau believes that
consumers are offered and receive
residential mortgage loans on
reasonably repayable terms. The
proposed exemption involves creditors
with certain characteristics that ensure
consumers are offered responsible,
affordable credit on reasonably
repayable terms. In these narrow
circumstances the Bureau has
determined that there is little risk of
harm to consumers. However, adopting
the approach suggested in this comment
effectively would expand the exemption
to all creditors, as any creditor could
involve such a nonprofit organization in
some capacity during the origination
process. Such a broad expansion would
not be necessary or proper to effectuate
the purposes of TILA; to the contrary, it
would instead exempt a potentially
large number of creditors from the
ability-to-repay requirements. The
Bureau would not be able to determine
if each potential creditor extended
credit only on reasonably repayable
terms and does not believe it would be
appropriate to assume that any
involvement by a nonprofit organization
is sufficient to ensure that consumers
were not harmed by the exemption.
Therefore, the Bureau declines to extend
the exemption to transactions involving
nonprofit organizations that are
dedicated to providing opportunities for
affordable homeownership.
With respect to the comment
disputing the Bureau’s justification for
the proposed exemptions, the Bureau
believes that this criticism results from
a misunderstanding of the Bureau’s
rationale for the proposed exemptions.
As explained in the 2013 ATR Proposed
Rule, the Bureau may provide an
exemption to the ability-to-repay
requirements if the statutory conditions
for the use of such an exemption are
met.144 Providing an exemption for a
particular class of creditors requires a
careful balancing of considerations,
including the nature of credit extended,
safeguards or other factors that may
protect consumers from harm, and the
extent to which application of the
regulatory requirements would affect
access to responsible, affordable credit.
As discussed in the Bureau’s proposal,
the Bureau was concerned about
creditors that would be forced to cease
or severely limit lending to LMI
consumers.145 Based on feedback
provided in response to this question,
the Bureau has adopted an exemption
narrowly tailored to the situations
where an exemption is necessary and
proper.
The Bureau also disagrees with the
arguments advanced that limiting the
exemption to creditors extending credit
to consumers with income below the
qualifying limit for moderate income
families as established pursuant to
section 8 of the United States Housing
Act of 1937 is arbitrary. The Bureau
acknowledges that there may be cases
where a consumer with income slightly
above the LMI threshold is unable to
secure credit. However, most
commenters agreed that these
conditions helped ensure that the
proposed exemption would not become
a regulatory loophole by which
consumers could be harmed. Thus, the
Bureau believes that it is necessary to
draw a line, and the section 8 income
limitations are clear and well-known.
Such an approach will facilitate
compliance while ensuring that the
exemption is narrowly tailored to
address the consumers for whom access
to credit is a concern. Therefore, the
Bureau has concluded that it is
144 See
143 See
78 FR 6645 (Jan. 30, 2013).
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145 Id.
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78 FR 6635–36 (Jan. 30, 2013).
at 6643.
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appropriate to refer to these qualifying
income limits. Furthermore, the Bureau
intends to monitor these qualifying
income limits in the future to ensure
that the exemption remains narrowly
tailored. The Bureau has determined
that it is necessary to make a technical
change to the proposed language.
Although HUD’s qualifying income
limits are colloquially referred to as
‘‘section 8 limits,’’ the thresholds were
established by section 102 of the
Housing and Community Development
Act of 1974, which amended the
National Housing Act of 1937. The
Bureau believes that it is appropriate to
identify the thresholds by the exact
statutory and regulatory reference.
Accordingly, the Bureau is adopting
§ 1026.43(a)(3)(v)(D)(2) and (3) generally
as proposed, but with a technical
modification that refers to the low- and
moderate-income household limit as
established pursuant to section 102 of
the Housing and Community
Development Act of 1974.
As discussed above, several
commenters asked the Bureau to remain
engaged with the nonprofit community
to ensure that the exemption is not used
as a loophole to harm consumers. For
example, some commenters asked the
Bureau to establish a database of
creditors that qualify for the
§ 1026.43(a)(3)(v)(D) exemption. The
Bureau intends to keep abreast of
developments in the mortgage market,
including lending programs offered by
nonprofit creditors pursuant to this
exemption. However, the Bureau does
not believe that it is necessary to
develop a formal oversight mechanism,
such as a database of creditors eligible
for this exemption, at this time. Instead,
the Bureau will continue to collect
information related to the effectiveness
of the ability-to-repay requirements,
including the § 1026.43(a)(3)(v)(D)
exemption, and will pursue additional
rulemakings or data collections if the
Bureau determines in the future that
such action is necessary.
The Bureau has also carefully
considered the comments requesting a
full or limited exemption from the
ability-to-repay requirements for certain
creditors or for certain programs
intended to facilitate access to credit for
LMI consumers. For example, as
discussed above, several industry
commenters argued that the Bureau
should provide an exemption for all
credit unions, which are designated as
nonprofit organizations under sections
501(c)(1) and 501(c)(14) of the Internal
Revenue Code of 1986. Other industry
commenters argued that the Bureau
should provide an exemption for credit
unions operating in certain areas, such
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as areas defined as ‘‘underserved’’ under
the Federal Credit Union Act. The
Bureau agrees with the arguments
advanced by commenters that credit
unions were not the source of the
financial crisis, have historically
employed responsible underwriting
requirements, and are often an
important source of credit for LMI
consumers. However, the Bureau does
not believe that any of the requested
exemptions for credit unions are
necessary. The Bureau understands that
many credit unions will qualify for the
additional qualified mortgage
definitions discussed below in the
section-by-section analyses of
§ 1026.43(e)(5) and (e)(6). Also, given
the thoroughness of the traditional
underwriting methods employed by
credit unions, the Bureau does not
believe that larger credit unions will
have difficulty complying with the
general ability-to-repay requirements or
qualified mortgage provisions. Further,
absent evidence suggesting that the
ability-to-repay requirements would
force these credit unions to cease or
severely curtail extending credit to LMI
consumers, the Bureau does not believe
that an exemption would be
appropriate. For similar reasons, the
Bureau declines to expand the
exemption to loans that meet the
regulatory requirements of the
Community Reinvestment Act or similar
programs. The Bureau is not persuaded
that such an expansive exemption is
necessary to ensure that LMI consumers
have access to responsible, affordable
credit.
To summarize, the Bureau has
determined that an exemption to the
ability-to-repay requirements is
appropriate for certain nonprofit
creditors. The Bureau has modified the
proposed exemption in a manner that
addressed the concerns raised by
various commenters. As adopted,
§ 1026.43(a)(3)(v)(D) exempts an
extension of credit made by a creditor
with a tax exemption ruling or
determination letter from the Internal
Revenue Service under section 501(c)(3)
of the Internal Revenue Code of 1986
(26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)–
1), provided that all of the conditions in
§ 1026.43(a)(3)(v)(D)(1) through (4) are
satisfied. Section 1026.43(a)(3)(v)(D)(1)
conditions the exemption on the
requirement that, during the calendar
year preceding receipt of the consumer’s
application, the creditor extended credit
secured by a dwelling no more than 200
times. Section 1026.43(a)(3)(v)(D)(2)
conditions the exemption on the
requirement that, during the calendar
year preceding receipt of the consumer’s
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application, the creditor extended credit
secured by a dwelling only to
consumers with income that did not
exceed the low- and moderate-income
household limit as established pursuant
to section 102 of the Housing and
Community Development Act of 1974
(42 U.S.C. 5302(a)(20)) and amended
from time to time by the U.S.
Department of Housing and Urban
Development, pursuant to 24 CFR 570.3.
Section 1026.43(a)(3)(v)(D)(3)
conditions the exemption on the
requirement that the extension of credit
is to a consumer with income that does
not exceed the above limit. Section
1026.43(a)(3)(v)(D)(4) conditions the
exemption on the requirement that the
creditor determines, in accordance with
written procedures, that the consumer
has a reasonable ability to repay the
extension of credit. The Bureau is also
adopting comment 43(a)(3)(v)(D)–1
generally as proposed, but with
technical modifications that reflect the
appropriate references to HUD’s lowand moderate-income household limit,
as described above.
Legal Authority
Section 1026.43(a)(3)(v) is adopted
pursuant to the Bureau’s authority
under section 105(a) and (f) of TILA.
Pursuant to section 105(a) of TILA, the
Bureau generally may prescribe
regulations that provide for such
adjustments and exceptions for all or
any class of transactions that the Bureau
judges are necessary and proper to
effectuate the purposes of TILA, among
other things. For the reasons discussed
in more detail above, the Bureau has
concluded that this exemption is
necessary and proper to effectuate the
purposes of TILA, which include the
purposes of TILA section 129C. By
ensuring the viability of the low- to
moderate-income mortgage market, this
exemption would ensure that
consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay.
The Bureau also believes that mortgage
loans originated by these creditors
generally account for a consumer’s
ability to repay. Without the exemption
the Bureau believes that low- to
moderate-income consumers are at risk
of being denied access to the
responsible and affordable credit offered
by these creditors, which is contrary to
the purposes of TILA. This exemption is
consistent with the finding of TILA
section 129C by ensuring that
consumers are able to obtain
responsible, affordable credit from the
nonprofit creditors discussed above
which inform the Bureau’s
understanding of its purposes.
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35469
The Bureau has considered the factors
in TILA section 105(f) and has
concluded that, for the reasons
discussed above, an exemption is
appropriate under that provision.
Pursuant to TILA section 105(f) the
Bureau may exempt by regulation from
all or part of this title all or any class
of transactions for which in the
determination of the Bureau coverage
does not provide a meaningful benefit to
consumers in the form of useful
information or protection. In
determining which classes of
transactions to exempt, the Bureau must
consider certain statutory factors. For
the reasons discussed above, the Bureau
exempts an extension of credit made by
the creditors and under conditions
provided in § 1026.43(a)(3)(v) because
coverage under the ability-to-repay
requirements does not provide a
meaningful benefit to consumers in the
form of useful protection in light of the
protection the Bureau believes that the
credit extended by these creditors
already provides to consumers.
Consistent with its rationale in the 2013
ATR Proposed Rule, the Bureau believes
that the exemptions are appropriate for
all affected consumers to which the
exemption applies, regardless of their
other financial arrangements and
financial sophistication and the
importance of the loan to them.
Similarly, the Bureau believes that the
exemptions are appropriate for all
affected loans covered under the
exemption, regardless of the amount of
the loan and whether the loan is secured
by the principal residence of the
consumer. Furthermore, the Bureau
believes that, on balance, the
exemptions will simplify the credit
process without undermining the goal of
consumer protection, denying important
benefits to consumers, or increasing the
expense of the credit process. The
Bureau recognizes that its exemption
and exception authorities apply to a
class of transactions, and has decided to
apply these authorities to the loans
covered under the final rule of the
entities subject to the adopted
exemptions.
43(a)(3)(vi)
The Bureau’s Proposal
As discussed above, neither TILA nor
Regulation Z provides an exemption to
the ability-to-repay requirements for
Federal programs designed to stabilize
homeownership or mitigate the risks of
foreclosure. However, the Bureau was
concerned that the ability-to-repay
requirements would inhibit the
effectiveness of these Federal programs.
As a result, the Bureau proposed
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§ 1026.43(a)(3)(vi), which would have
provided that an extension of credit
made pursuant to a program authorized
by sections 101 and 109 of the
Emergency Economic Stabilization Act
of 2008 (12 U.S.C. 5211; 5219) (EESA)
is exempt from § 1026.43(c) through (f).
Proposed comment 43(a)(3)(vi)–1
would have explained that the
requirements of § 1026.43(c) through (f)
did not apply to a mortgage loan
modification made in connection with a
program authorized by sections 101 and
109 of EESA. If a creditor is
underwriting an extension of credit that
is a refinancing, as defined by
§ 1026.20(a), that will be made pursuant
to a program authorized by sections 101
and 109 of the Emergency Economic
Stabilization Act of 2008, the creditor
also need not comply with § 1026.43(c)
through (f). Thus, a creditor need not
determine whether the mortgage loan
modification is considered a refinancing
under § 1026.20(a) for purposes of
determining applicability of § 1026.43;
if the transaction is made in connection
with these programs, the requirements
of § 1026.43(c) through (f) do not apply.
The Bureau solicited general feedback
regarding whether this proposed
exemption was appropriate. In
particular, the Bureau sought comment
regarding whether applicability of the
ability-to-repay requirements would
constrict the availability of credit
offered under these programs and
whether consumers have suffered
financial loss or other harm by creditors
participating in these programs. The
Bureau also requested information on
the extent to which the requirements of
these Federal programs account for a
consumer’s ability to repay. The Bureau
also sought comment regarding whether,
if the Bureau determined that a full
exemption is not warranted, what
modifications to the general ability-torepay standards would be warranted
and whether qualified mortgage status
should be granted instead, and, if so,
under what conditions.
Comments Received
The Bureau received several
comments addressing this proposed
exemption. One consumer advocate
commenter opposed the exemption and
stated that these programs lack
meaningful underwriting guidance.
Many industry and consumer advocate
commenters supported the exemption.
These commenters generally argued that
the ability-to-repay requirements would
make these programs unworkable,
which would frustrate the public policy
purposes of EESA and harm consumers
in need of assistance. A few industry
commenters requested that the Bureau
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provide an exemption for
homeownership stabilization and
foreclosure prevention programs, other
than those authorized by sections 101
and 109 of EESA, such as a creditor’s
proprietary program intended to provide
assistance to consumers who have
experienced a loss of employment or
other financial difficulty.
The Final Rule
The Bureau is adopting
§ 1026.43(a)(3)(vi) and comment
43(a)(3)(vi)–1 as proposed. For the
reasons discussed below, the Bureau has
determined that an exemption from the
ability-to-repay requirements is
necessary and appropriate for
extensions of credit made pursuant to a
program authorized by sections 101 and
109 of EESA. Commenters agreed with
the Bureau that the ability-to-repay
requirements would interfere with, or
are inapplicable to, these programs,
which are intended to address the
unique underwriting requirements of
certain consumers at risk of default or
foreclosure. By significantly impairing
the effectiveness of these programs, the
Bureau believes that there is a
considerable risk that the ability-torepay requirements would actually
prevent at-risk consumers from
receiving mortgage credit provided in an
affordable and responsible manner.
With respect to the feedback provided
opposing this exemption, the Bureau
believes that, based on the existence of
Federal oversight and the EESA
requirements, the risk of consumer harm
is low. Additionally, as discussed in
part II.A above, the Bureau understands
that these EESA programs have highly
detailed requirements, created and
maintained by the Treasury Department,
to determine whether EESA assistance
will benefit distressed consumers.146 In
addition to satisfying these Treasury
Department requirements, consumers
receiving assistance under an EESA
program must meet EESA eligibility
requirements and creditor program
requirements.147 Thus, the Bureau
believes that credit available under
these programs is extended on
reasonably repayable terms and
conditions.
Several industry commenters asked
the Bureau to consider an exemption for
proprietary foreclosure mitigation and
146 See United States Department of the Treasury,
‘‘Home Affordable Modification Program, Base Net
Present Value (NPV) Model v5.02, Model
Documentation’’ (April 1, 2012).
147 See http://www.makinghomeaffordable.gov/
programs/Pages/default.aspx. For example, the
EESA PRA program contains several eligibility
requirements in addition to program requirements.
See http://www.makinghomeaffordable.gov/
programs/lower-payments/Pages/pra.aspx.
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homeownership stabilization programs.
While the Bureau believes that these
programs likely benefit many
consumers, the Bureau has determined
that an exemption from the ability-torepay requirements is inappropriate.
Proprietary programs are not under the
jurisdiction of the U.S. Department of
the Treasury, as EESA programs are.
This lack of accountability increases the
risk that an unscrupulous creditor could
harm consumers. Furthermore, EESA
programs will expire by 2017 and are
intended to provide assistance to a
narrow set of distressed consumers. In
contrast, the exemption suggested by
commenters is potentially indefinite
and indeterminate. Also, the Bureau
believes that creditors seeking to
provide assistance to consumers in
distress without incurring the
obligations associated with the abilityto-repay requirements may do so by
providing a consumer with a workout or
similar modification that does not
constitute a refinancing under
§ 1026.20(a). Thus, the Bureau declines
to provide an exemption for these
proprietary programs.
No commenters addressed whether
credit extended pursuant to an EESA
program should be granted a
presumption of compliance as qualified
mortgages, and, if so, under what
conditions. However, the Bureau does
not believe that extending qualified
mortgage status to these loans would be
as effective in addressing the concerns
raised above as an exemption. Even if
credit extended under EESA programs
were granted a presumption of
compliance as qualified mortgages,
creditors extending credit pursuant to
these programs could be impacted by
significant implementation and
compliance burdens. Furthermore, as
discussed above, many loans extended
under these programs would not appear
to satisfy the qualified mortgage
standards under § 1026.43(e)(2). For
example, consumers receiving
assistance under EESA programs may
have DTI ratios in excess of the
§ 1026.43(e)(2)(vi) threshold.148 Thus, a
creditor extending such a mortgage
loan—assuming the loan does not
qualify for another qualified mortgage
definitions—would be required to
comply with the ability-to-repay
requirements of § 1026.43(c) and, in
response to the potential liability for
148 Consumers receiving assistance under EESA
programs may have back-end DTI ratios in excess
of 50 percent. See United States Department of the
Treasury, Making Home Affordable Program
Performance Report (March 2013), page 9, available
at: http://www.treasury.gov/initiatives/financialstability/reports/Documents/
March%202013%20MHA%20Report%20Final.pdf.
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noncompliance, would cease or severely
curtail lending under the voluntary
EESA programs.
Accordingly, the Bureau believes that
the proposed exemption for credit made
pursuant to an EESA program is
appropriate under the circumstances.
The Bureau believes that consumers
who receive extensions of credit made
pursuant to an EESA program do so
after a determination of ability to repay
using criteria unique to the distressed
consumers seeking assistance under the
program. The exemption adopted by the
Bureau is limited to creditors or
transactions with certain characteristics
and qualifications that ensure
consumers are offered responsible,
affordable credit on reasonably
repayable terms. The Bureau thus finds
that coverage under the ability-to-repay
requirements provides little if any
meaningful benefit to consumers in the
form of useful protection, given the
nature of the credit offered under EESA
programs. At the same time, the Bureau
is concerned that the narrow class of
creditors subject to the exemption may
either cease or severely curtail mortgage
lending if the ability-to-repay
requirements are applied to their
transactions, resulting in a denial of
access to credit. Accordingly, the
Bureau is adopting § 1026.43(a)(3)(vi) as
proposed.
Section 1026.43(a)(3)(vi) is adopted
pursuant to the Bureau’s authority
under section 105(a) and (f) of TILA.
Pursuant to section 105(a) of TILA, the
Bureau generally may prescribe
regulations that provide for such
adjustments and exceptions for all or
any class of transactions that the Bureau
judges are necessary and proper to
effectuate the purposes of TILA, among
other things. As discussed in more
detail above, the Bureau has concluded
that this exemption is necessary and
proper to effectuate the purposes of
TILA, which include the purposes of
TILA section 129C. This exemption
would ensure that consumers are
offered and receive residential mortgage
loans on terms that reasonably reflect
their ability to repay. In the Bureau’s
judgment extensions of credit made
pursuant to a program authorized by
sections 101 and 109 of the Emergency
Economic Stabilization Act of 2008
sufficiently account for a consumer’s
ability to repay, and the exemption
ensures that consumers are able to
receive assistance under these programs.
Furthermore, without the exemption the
Bureau believes that consumers at risk
of default or foreclosure would be
denied access to the responsible,
affordable credit offered under these
programs, which is contrary to the
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purposes of TILA. This exemption is
consistent with the finding of TILA
section 129C by ensuring that
consumers are able to obtain
responsible, affordable credit from the
nonprofit creditors discussed above
which inform the Bureau’s
understanding of its purposes.
The Bureau has considered the factors
in TILA section 105(f) and has
concluded that, for the reasons
discussed above, an exemption is
appropriate under that provision.
Pursuant to TILA section 105(f) the
Bureau may exempt by regulation from
all or part of this title all or any class
of transactions for which in the
determination of the Bureau coverage
does not provide a meaningful benefit to
consumers in the form of useful
information or protection. In
determining which classes of
transactions to exempt, the Bureau must
consider certain statutory factors. The
Bureau exempts an extension of credit
pursuant to a program authorized by
sections 101 and 109 of the Emergency
Economic Stabilization Act of 2008
because coverage under the ability-torepay requirements does not provide a
meaningful benefit to consumers in the
form of useful protection in light of the
protection the Bureau believes that the
credit extended through these programs
already provides to consumers.
Consistent with its rationale in the 2013
ATR Proposed Rule, the Bureau believes
that the exemptions are appropriate for
all affected consumers to which the
exemption applies, regardless of their
other financial arrangements and
financial sophistication and the
importance of the loan to them.
Similarly, the Bureau believes that the
exemptions are appropriate for all
affected loans covered under the
exemption, regardless of the amount of
the loan and whether the loan is secured
by the principal residence of the
consumer. Furthermore, the Bureau
believes that, on balance, the
exemptions will simplify the credit
process without undermining the goal of
consumer protection, denying important
benefits to consumers, or increasing the
expense of the credit process. The
Bureau recognizes that its exemption
and exception authorities apply to a
class of transactions, and has decided to
apply these authorities to the loans
covered under the final rule of the
entities subject to the adopted
exemptions.
43(a)(3)(vii)
The Bureau’s Proposal
As discussed above, neither TILA nor
Regulation Z provide an exemption to
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35471
the ability-to-repay requirements for
refinancing programs offered by the
Department of Housing and Urban
Development (HUD), the Department of
Veterans Affairs (VA), or the U.S.
Department of Agriculture (USDA).
However, comments provided to the
Bureau during the development of the
2013 ATR Final Rule suggested that the
ability-to-repay requirements would
restrict access to credit for consumers
seeking to obtain a refinancing under
certain Federal agency refinancing
programs, that the ability-to-repay
requirements adopted by the Bureau
should account for the requirements of
Federal agency refinancing programs,
and that Federal agency refinancing
programs should be exempt from several
of the ability-to-repay requirements.
TILA section 129C(b)(3)(B)(ii), as
amended by section 1411 of the DoddFrank Act, requires these Federal
agencies to prescribe rules related to the
definition of qualified mortgage. These
Federal agencies have not yet prescribed
rules related to the definition of
qualified mortgage. Section 1411 of the
Dodd-Frank Act addresses refinancing
of existing mortgage loans under the
ability-to-repay requirements. As
amended by the Dodd-Frank Act, TILA
section 129C(a)(5) provides that Federal
agencies may create an exemption from
the income and verification
requirements for certain streamlined
refinancings of loans made, guaranteed,
or insured by various Federal agencies.
15 U.S.C. 1639(a)(5). These Federal
agencies also have not yet prescribed
rules related to the ability-to-repay
requirements for refinancing programs.
Section 1026.43(e)(4), as adopted in the
2013 ATR Final Rule, provides
temporary qualified mortgage status for
mortgage loans eligible to be insured,
guaranteed, or made pursuant to a
program administered by one of these
Federal agencies, until the effective date
of the agencies’ qualified mortgage rules
prescribed pursuant to TILA section
129C(b)(3)(B)(ii). However, the Bureau
was concerned that the ability-to-repay
requirements would impede access to
credit available under these programs.
Based on these concerns and to gather
more information about the potential
effect of the ability-to-repay
requirements on Federal agency
refinancing programs, the Bureau
proposed an exemption for certain
refinancings under specified Federal
programs and solicited feedback on
several issues.
Specifically, proposed
§ 1026.43(a)(3)(vii) would have
provided that an extension of credit that
is a refinancing, as defined under
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§ 1026.20(a) but without regard for
whether the creditor is the creditor,
holder, or servicer of the original
obligation, that is eligible to be insured,
guaranteed, or made pursuant to a
program administered by the FHA, VA,
or USDA, is exempt from § 1026.43(c)
through (f), provided that the agency
administering the program under which
the extension of credit is eligible to be
insured, guaranteed, or made has not
prescribed rules pursuant to section
129C(a)(5) or 129C(b)(3)(B)(ii) of TILA.
The Bureau solicited comment
regarding whether this exemption is
appropriate, whether there are any
additional conditions that should be
required, whether the ability-to-repay
requirements would negatively affect
the availability of credit offered under
Federal agency programs, and whether
consumers could be harmed by
exempting these extensions of credit
from the ability-to-repay requirements.
Comments Received
In response to the proposed rule, most
commenters supported the proposed
exemption. Industry commenters stated
that the Federal agency refinancing
programs have successfully provided
significant benefits to many individual
consumers and have helped stabilize the
housing and real estate markets.
Industry commenters and an association
of State bankers noted that Federal
agency refinancing programs are subject
to comprehensive requirements and
limitations that account for a
consumer’s ability to repay (e.g.,
demonstrated payment history), and
participating creditors must document
and certify program compliance. These
commenters also noted that these
refinancing programs are in the interest
of consumers because they specifically
require a demonstrated consumer
benefit such as a lower interest rate,
lower payment amount, shorter loan
term, or more stable mortgage product.
Industry commenters and an association
of State bankers argued that subjecting
these Federal agency refinancing
programs to the ability-to-repay
requirements would conflict with the
objectives of the programs, limit
participation and access to these
programs, and raise the cost for
consumers. Without an exemption from
the ability-to-repay requirements, they
feared that most Federal agency
refinancing programs would not be
used, causing communities and
homeowners to suffer. Industry
commenters noted that the exemption
from the ability-to-repay requirements
for Federal agency refinancing programs
would encourage broad participation in
such programs, which are a critical
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component of the housing market
recovery, and in light of the improving,
but continued fragile state, of the
housing market and broader economy,
help support market stability. Industry
commenters argued that the exemption
would provide more certainty for
creditors, which would lead to more of
these types of loans being originated.
Several commenters asked the Bureau
to clarify which Federal agency
refinancing programs would qualify, as
programs change, may be replaced, and
new programs may develop in the
future. In addition, an industry
commenter suggested clarifying that
events occurring after closing of a loan
would not remove the exemption from
the ability-to-repay requirements, in
order to provide greater certainty for
creditors. An industry trade group
commenter also argued that the Bureau
should exempt not only loans that are
eligible for a Federal agency refinancing
program, but also loans that are or
would be accepted into such program
except for a good faith mistake, because
otherwise creditors will underwrite to
the ability-to-repay requirements in all
cases and the benefits of exemption will
be severely diminished, if not lost
completely.
No commenters addressed whether
Federal agency refinancings should or
should not be exempt from the abilityto-repay requirements given that FHA,
VA, and USDA loans, including
refinances, are afforded qualified
mortgage status under the Bureau’s 2013
ATR Final Rule. Specifically, no
commenters addressed the premise that
the ability-to-repay requirements could
impose significant implementation and
compliance burdens on the designated
creditors and programs even if credit
extended by the designated creditors or
under the designated programs were
granted a presumption of compliance as
qualified mortgages.
Some consumer advocate commenters
were strongly opposed to the
exemption, asserting that assessment of
a consumer’s ability to repay is of
paramount importance under the
statutory scheme. These commenters
contended that consumers could be
harmed by exempting these extensions
of credit from the ability-to-repay
requirements. The primary arguments
were that serial refinancings (and the
resulting equity-stripping) were a root
cause of the financial crisis, and that the
proposed exemption would leave
consumers with no recourse. These
commenters argued that such serial
refinancings were often not voluntarily
chosen by the consumer, but, instead,
were temporary measures that delayed
foreclosure or were driven by a loan
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originator seeking more business.
Consumer group commenters argued
that Federal agency refinance guidelines
do not contain adequate assurances of
ability to repay, and asserted that FHA
streamlined refinances are available
with no requirement to underwrite for
affordability and VA streamlined
refinances are also available without
any proof of income or appraisal. One
consumer group commenter stressed
that the ability-to-repay requirements
were intended to protect consumers
from equity-stripping or other forms of
predatory refinancing practices that
harmed so many consumers, and that
refinancing an unaffordable loan with
other loans that are not responsible or
affordable does not help consumers.
This commenter argued that consumers
do not benefit when they receive loans
they cannot afford, nor do they benefit
when a refinance that costs money and
strips the consumer of equity simply
delays the inevitable reality that the
consumer cannot afford his or her home.
This commenter also stated that the
proposed exemption would immunize
creditors from TILA liability with
respect to refinancings offered to some
of the most vulnerable consumers,
enabling unscrupulous creditors to
engage in serial refinancings that harm
consumers. This commenter also
disputed the contention raised by others
that the ability-to-repay requirements
are costly and burdensome by asserting
that the Bureau’s provisions comprise
basic underwriting requirements that all
creditors should consider before
extending refinancing credit. This
commenter argued that it is not difficult
to determine a consumer’s ability to
repay a loan, and that the Bureau’s
ability-to-repay requirements are
straightforward, streamlined, and
should become the industry standard for
all loans, whether purchase money or
refinancings. A State attorney general
also argued that the proposed
exemption would affect a large segment
of the mortgage market, thereby
potentially placing a large number of
consumers at risk while undermining
the Bureau’s goal of providing uniform
standards for the entire mortgage loan
industry.
Consumer group commenters and a
State attorney general also observed that
these Federal agencies have not yet
prescribed rules related to the ability-torepay requirements for refinances,
pursuant to TILA section 129C(a)(5), or
the definition of qualified mortgage,
pursuant to TILA section
129C(b)(3)(B)(ii), but that they have
nearly a year before the 2013 Final Rule
goes into effect, which is ample time for
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them to issue their own rules under the
Dodd-Frank Act. Accordingly, the State
attorney general argued that consumers’
access to credit will not be seriously
prejudiced by a temporary application
of the ability-to-repay requirements
because these Federal agency rules are
likely forthcoming. Consumer group
commenters and the State attorney
general argued that Federal agencies
should be bound by the ability-to-repay
requirements between now and the time
they issue their own new rules. These
commenters argued that exempting
Federal agency refinancing programs
from the ability-to-repay requirements
before they have promulgated their own
rules removes an incentive for the
agencies to promulgate their own rules
in a timely manner while opening up
the possibility that creditors acting
pursuant to Federal agency refinancing
programs could originate loans that are
not responsible or affordable in the
interim, thereby endangering the most
vulnerable consumers who receive these
loans.
The Final Rule
The Bureau is withdrawing the
proposed exemption for the reasons
below. Upon further review and
consideration of the comments received,
the Bureau has determined that the
proposed exemption would be
inappropriate. As discussed in the
Bureau’s proposal, the Bureau was
concerned that the ability-to-repay
requirements and qualified mortgage
provisions would restrict access to
credit for certain consumers seeking to
obtain a refinancing. After performing
additional analysis prompted by the
comments received, the Bureau believes
that the qualified mortgage provision
under § 1026.43(e)(4), which generally
provides qualified mortgage status to
loans that are eligible for purchase,
insurance, or guarantee by the specified
Federal agencies, including
refinancings, strikes the appropriate
balance between preserving consumers’
rights to seek redress for violations of
TILA and ensuring access to
responsible, affordable credit during the
current transition period.
The Bureau agrees with the arguments
raised by commenters that Federal
agency refinancing programs have
helped stabilize the housing and real
estate markets. The Bureau also
acknowledges that these programs are
subject to comprehensive underwriting
requirements that account for a
consumer’s ability to repay, which helps
ensure that consumers receive access to
credit. Although many commenters
approved of the proposed exemption for
the above reasons, these commenters
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did not address the costs and benefits of
the proposed exemption in light of the
qualified mortgage status granted to
loans that are eligible for purchase,
insurance, or guarantee by the specified
Federal agencies under the Bureau’s
2013 ATR Final Rule. Specifically, even
absent an exemption from the ability-torepay requirements, FHA, VA, and
USDA loans, including refinancings, are
given qualified mortgage status under
the Bureau’s 2013 ATR Final Rule,
which provides for a temporary category
of qualified mortgages for loans that
satisfy the underwriting requirements
of, and are therefore eligible to be
purchased, guaranteed, or insured by
HUD, VA, USDA, or RHS. This
temporary provision will expire when
qualified mortgage regulations issued by
the various Federal agencies become
effective, and in any event after seven
years.
Section 1026.43(e)(4) addresses any
inconsistencies that may occur between
the general ability-to-repay and
qualified mortgage provisions of the
2013 ATR Final Rule and Federal
agency requirements, which should
maintain the status quo in the Federal
agency refinancing market and ensure
that consumers are able to obtain
responsible, affordable refinancing
credit under these programs. Under the
temporary qualified mortgage provisions
in § 1026.43(e)(4), for instance, creditors
need only comply with the
documentation and underwriting
requirements established by the
respective Federal agencies, and need
not apply the 43 percent debt-to-income
ratio or follow the documentation and
underwriting procedures applicable to
the general category of qualified
mortgages under § 1026.43(e)(3) and
appendix Q. Since the Federal agency
eligibility generally satisfies the
requirements of § 1026.43(e)(4), the
Bureau does not believe that the
qualified mortgage provisions are
inconsistent with the requirements of
Federal agency refinancing programs.
Under the qualified mortgage
provision in § 1026.43(e)(4), a loan that
is eligible to be purchased, guaranteed,
or insured by the specified Federal
agencies would still need to meet
certain minimum requirements imposed
by the Dodd-Frank Act. To receive
qualified mortgage status, in addition to
Federal agency-eligibility,
§ 1026.43(e)(4)(i)(A) provides that a
mortgage loan may not include the
higher-risk loan terms identified in
§ 1026.43(e)(2)(i) (e.g., negative
amortization and interest-only
payments), may not have a loan term
that exceeds 30 years, and may not
impose points and fees in excess of the
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35473
thresholds in § 1026.43(e)(3). However,
while some Federal agency refinancings
may not be eligible for qualified
mortgage status, the Bureau does not
believe that many Federal agency
refinancings would fail to meet these
minimum requirements. Although some
Federal agency refinancings may
contain the risky features identified in
§ 1026.43(e)(2)(i) and provide for loan
terms in excess of 30 years, the Bureau
does not believe that many consumers
receive such loans. Further, while
market-wide data regarding points and
fees on Federal agency refinancings is
not available, the Bureau does not
believe that many Federal agency
refinancings would provide for points
and fees in excess of the § 1026.43(e)(3)
thresholds. Refinancings are usually less
complicated than purchase transactions.
Therefore, refinancings generally
require fewer costs, which makes it
unlikely that a Federal agency
refinancing would exceed the points
and fees thresholds and loans under
these programs. In addition, the Bureau
did not receive comment suggesting that
points and fees on Federal agency
refinancings exceed the § 1026.43(e)(3)
thresholds. In any event, to the extent
that eligibility for qualified mortgage
status based upon these minimum
requirements becomes an issue, the
Bureau notes that the various Federal
agencies can address any eligibility
concerns when they prescribe their own
detailed regulations concerning
qualified mortgages and refinancings.
Importantly, as discussed in the 2013
ATR Final Rule, the Bureau believes
that Congress intended for loans with
these risky features, long loan terms, or
high points and fees to be excluded
from the scope of the qualified mortgage
definition. As the Bureau believes that
few Federal agency refinancings would
fail to meet these minimum statutory
requirements, the Bureau does not
believe that a modification is necessary
to ensure access to responsible,
affordable credit.
The Bureau believes that the
temporary qualified mortgage provisions
will help ensure that Federal agency
refinancing programs will continue to
be used and provide more certainty for
creditors, which will lead to more of
these types of loans being originated,
and encourage broad participation in
such programs, which will help support
market stability. Thus, the Bureau
disagrees with the concerns raised by
some commenters that the withdrawal
of the exemption would conflict with
the objectives of the programs, limit
participation and access to these
programs, impair the effectiveness of
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such programs, or raise the cost for
consumers. The Bureau believes that it
has provided a sufficient transition
mechanism until the various Federal
agencies can prescribe their own
regulations concerning qualified
mortgages and refinancings.
In addition, the Bureau believes that
the temporary qualified mortgage
definition more appropriately balances
risks to consumers than a full
exemption until such time as the
Federal agencies can address the
concerns raised by commenters in their
own detailed rulemakings. The Bureau
agrees that the ability-to-repay
requirements were intended, in part, to
prevent harmful practices such as equity
stripping and other forms of predatory
refinancings. The Bureau’s temporary
qualified mortgage provision provides
additional protection to consumers and
preserves potential claims in the event
of abuse. For higher-priced qualified
mortgages, consumers will still have the
ability to assert a claim under TILA
section 130(a) and (k) and prove that,
despite the presumption of compliance
attached to the qualified mortgage, the
creditor nonetheless failed to comply
with the ability-to-repay requirements.
A consumer who prevails on such a
claim may be able to recover special
statutory damages equal to the sum of
all finance charges and fees paid within
the first three years after consummation,
among other damages and costs, and
may be able to assert the creditor’s
failure to comply to obtain recoupment
or setoff in a foreclosure action even
after the statute of limitations for
affirmative claims has passed. The
Bureau received no persuasive evidence
that the qualified mortgage provisions of
§ 1026.43(e)(4) fail to strike the
appropriate balance between consumer
protection and the needs of the
mortgage lending market during the
current transition period.
Based on these considerations, the
Bureau has determined that the
withdrawal of this proposed exemption
would ensure that consumers are
offered and receive residential mortgage
loans on terms that reasonably reflect
their ability to repay. Based on the
qualified mortgage status, the Bureau
does not believe that the ability-to-repay
requirements would significantly
interfere with requirements of these
Federal agency refinancing programs,
make it more difficult for many
consumers to qualify for these programs,
or increase the cost of credit for those
who do. The Bureau believes that the
temporary qualified mortgage definition
for loans that are eligible for purchase,
insurance, or guarantee by the specified
Federal agencies adequately addresses
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concerns about overlapping
underwriting requirements while also
preserving consumers’ rights to seek
redress if an abuse occurs. Accordingly,
the Bureau concludes that this
temporary exemption is not necessary to
preserve access to affordable and
responsible credit, and, therefore, is
withdrawing the proposed exemption.
As discussed above, several industry
commenters requested various
modifications to the proposed language.
For example, some commenters asked
the Bureau to clarify which Federal
agency refinancing programs would
qualify for the exemption from the
ability-to-repay requirements, as
programs change, may be replaced, and
new programs may develop in the
future. An industry commenter
suggested clarifying that events
occurring after closing of a loan would
not remove the exemption from the
ability-to-repay requirements, in order
to provide greater certainty for creditors.
In addition, an industry trade group
commenter argued that the Bureau
should exempt not only loans that are
eligible for a Federal agency refinance
program, but also loans that are or
would be accepted into such program
except for a good faith mistake. As the
Bureau has decided to withdraw
proposed § 1026.43(a)(3)(vii), the issues
addressed in these and similar
comments are moot. As discussed
above, mortgage loans that are eligible
for purchase, insurance, or guarantee by
the specified Federal agencies receive
the temporary qualified mortgage status
under § 1026.43(e)(4), provided the
requirements of that paragraph are met.
43(a)(3)(viii)
The Bureau’s Proposal
As discussed above, neither TILA nor
Regulation Z provides an exemption to
the ability-to-repay requirements for
particular lending programs. However,
comments provided to the Bureau
during the development of the 2013
ATR Final Rule suggested that the
ability-to-repay requirements would
restrict access to credit for consumers
seeking to obtain a refinancing under
certain GSE programs for mortgage loans
with high loan-to-value ratios or for
consumers harmed by the financial
crisis. These programs include HARP,
which was defined as an ‘‘eligible
targeted refinancing program’’ in
regulations promulgated by FHFA, to
replace high loan-to-value mortgage
loans with affordable refinancings.149
To gather more information about the
potential effect of the ability-to-repay
149 See, e.g., 12 CFR 1291.1; 74 FR 38514, 38516
(Aug. 4, 2009).
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requirements on programs such as
HARP and explore a potential
exemption, the Bureau proposed
§ 1026.43(a)(3)(viii), which would have
provided that an extension of credit that
is a refinancing, as defined under
§ 1026.20(a) but without regard for
whether the creditor is the creditor,
holder, or servicer of the original
obligation, that is eligible for purchase
or guarantee by Fannie Mae or Freddie
Mac is exempt from § 1026.43(c)
through (f). This proposed exemption
would have applied provided that: (1)
The refinancing is made pursuant to an
eligible targeted refinancing program, as
defined under 12 CFR 1291.1; (2) such
entities are operating under the
conservatorship or receivership of the
FHFA pursuant to section 1367 of the
Federal Housing Enterprises Financial
Safety and Soundness Act of 1992 (12
U.S.C. 4617(i)) on the date the
refinancing is consummated; (3) the
existing obligation satisfied and
replaced by the refinancing is owned by
Fannie Mae or Freddie Mac; (4) the
existing obligation satisfied and
replaced by the refinancing was not
consummated on or after January 10,
2014; and (5) the refinancing was not
consummated on or after January 10,
2021.
Proposed comment 43(a)(3)(viii)-1
would have explained that
§ 1026.43(a)(3)(viii) provides an
exemption from the requirements of
§ 1026.43(c) through (f) for certain
extensions of credit that are considered
refinancings, as defined in § 1026.20(a)
but without regard for whether the
creditor is the creditor, holder, or
servicer of the original obligation, that
are eligible for purchase or guarantee by
Fannie Mae or Freddie Mac. The
comment would also have explained
that the exemption provided by
§ 1026.43(a)(3)(viii) would be available
only while these entities remain in
conservatorship. The proposed
comment also contained illustrative
examples of this provision.
The Bureau expressed concern that
unscrupulous creditors would be able to
use the exemption to engage in loanflipping or other harmful practices.
Thus, the Bureau requested feedback on
whether this exemption was generally
appropriate. In particular, the Bureau
requested feedback regarding whether
consumers could be harmed by the
proposed exemption and whether this
exemption would ensure access to
responsible and affordable refinancing
credit. The Bureau also requested
feedback regarding the reference to
eligible targeted refinancing programs
under proposed § 1026.43(a)(3)(viii)(A).
Specifically, the Bureau requested
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comment regarding whether it would be
more appropriate to refer to another
public method of identifying
refinancing programs similar to HARP,
and, if so, what method of public
identification would be appropriate.
The Bureau also solicited feedback
regarding whether reference to a notice
published by FHFA pursuant to 12 CFR
1253.3 or 1253.4 would facilitate
compliance more effectively than the
proposed reference in
§ 1026.43(a)(3)(viii)(A).
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Comments Received
Many commenters supported the
proposed exemption. Several industry
commenters argued that the exemption
was necessary to prevent the imposition
of unnecessary costs on consumers.
These commenters generally believed
that the ability-to-repay requirements
were too burdensome and that creditors
would be forced to raise costs to comply
with the regulations. One governmentsponsored enterprise commenter argued
that the exemption was necessary to
preserve access to credit for consumers
eligible for a refinancing under HARP.
This commenter argued that many
HARP loans would be subject to the
rebuttable presumption of compliance,
and that industry would refuse to make
any loans that fell outside of the safe
harbor for qualified mortgages. Several
industry commenters and a Federal
agency commenter argued that the
Bureau’s proposed reference to FHFA
regulations was unnecessary. These
commenters asserted that FHFA
oversight was sufficient to ensure that
consumers would not be harmed by
creditors offering mortgage loans
eligible for purchase or guarantee by the
GSEs. For similar reasons, these
commenters argued that the Bureau’s
proposed date on which the exemption
would expire was unnecessary, as
consumers would always benefit from a
GSE-eligible refinancing, regardless of
when the consumer’s original loan was
consummated or when the consumer
obtained the refinancing. Finally,
several industry commenters and a
Federal agency commenter argued that
limiting the refinancing exemption to
HARP-eligible consumers was
unnecessary, as all consumers could
benefit from a GSE refinancing program
and limiting the exemption to HARPeligible consumers would impose
needless costs on all other consumers.
Some of these commenters also asked
the Bureau to define eligible
refinancings by reference to the Fannie
Mae or Freddie Mac selling or servicing
guides, and some asked the Bureau to
expand the exemption to include
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refinancings eligible for non-GSE
streamlined refinancing programs.
One consumer advocate commenter
strongly opposed the proposed
exemption. This commenter stressed
that predatory refinancings were one of
the primary causes of the financial crisis
and that the ability-to-repay
requirements were intended to protect
consumers from the abusive equitystripping practices that harmed so many
consumers. This commenter stated that
the proposed exemption would
immunize creditors from TILA liability
with respect to refinancings offered to
some of the most vulnerable consumers,
enabling unscrupulous creditors to
engage in serial refinancings that harm
consumers. This commenter also
disputed the contention raised by others
that the ability-to-repay requirements
are costly and burdensome by asserting
that the Bureau’s provisions comprise
basic underwriting requirements that all
creditors should consider before
extending refinancing credit. A State
attorney general also opposed the
proposed exemption for similar reasons.
This commenter also argued that the
proposed exemption would affect a
large segment of the mortgage market,
thereby potentially placing a large
number of consumers at risk while
undermining the Bureau’s goal of
providing uniform standards for the
entire mortgage loan industry.
The Final Rule
The Bureau is withdrawing the
proposed exemption for the reasons
discussed below. Upon further review
and consideration of the comments
received, the Bureau has determined
that the proposed exemption would be
inappropriate. As discussed in the
Bureau’s proposal, the Bureau was
concerned that the ability-to-repay
requirements and qualified mortgage
provisions would restrict access to
credit for certain consumers seeking to
obtain a refinancing. After performing
additional analysis prompted by the
comments received, the Bureau believes
that the special qualified mortgage
provision under § 1026.43(e)(4), which
generally provides qualified mortgage
status to GSE-eligible mortgage loans,
including refinancings, strikes the
appropriate balance between preserving
consumers’ rights to seek redress for
violations of TILA and ensuring access
to responsible, affordable credit during
the current transition period.
The Bureau acknowledges that, under
the qualified mortgage provision in
§ 1026.43(e)(4), a HARP loan would still
need to meet certain minimum
requirements imposed by the DoddFrank Act. To receive qualified
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mortgage status, in addition to GSEeligibility, § 1026.43(e)(4)(i)(A) provides
that a mortgage loan may not include
the higher-risk loan terms identified in
§ 1026.43(e)(2)(i) (e.g., negative
amortization and interest-only
payments), may not have a loan term
that exceeds 30 years, and may not
impose points and fees in excess of the
thresholds in § 1026.43(e)(3). However,
while some HARP refinancings may not
be eligible for this qualified mortgage
status, the Bureau does not believe that
many HARP loans would fail to meet
these minimum requirements.
Currently, HARP refinancings generally
may not contain the risky features
identified in § 1026.43(e)(2)(i).150 While,
HARP programs permit refinancings
that provide for loan terms in excess of
30 years, the Bureau does not believe
that many consumers receive such
loans.151 Furthermore, while marketwide data regarding points and fees on
HARP loans is not available, the Bureau
does not believe that many HARP loans
would provide for points and fees in
excess of the § 1026.43(e)(3) thresholds.
Refinancings are usually less
complicated than purchase transactions.
Therefore, refinancings generally
require fewer costs, which makes it
unlikely that a HARP loan would
exceed the points and fees thresholds,
and loans under this program would not
likely be subject to some types of
pricing abuses related to refinancings
generally. In addition, the Bureau did
not receive comment suggesting that
points and fees on HARP loans exceed
the § 1026.43(e)(3) thresholds.
Importantly, as discussed in the 2013
ATR Final Rule, the Bureau believes
that Congress intended for loans with
these risky features, long loan terms, or
high points and fees to be excluded
from the scope of the qualified mortgage
definition.152 As the Bureau believes
that few HARP loans would fail to meet
these minimum statutory requirements,
the Bureau does not believe that a
150 As of April, 2013, HARP refinancings offered
by Fannie Mae may not include negative
amortization or interest-only features. See Fannie
Mae, Single-Family Selling Guide, Chapter 5 (April
9, 2013), available at https://www.fanniemae.com/
content/guide/sel040913.pdf. Freddie Mac does not
offer mortgage loans with interest-only features and
prohibits negative amortization on refinancings
made under its HARP program. See Freddie Mac,
Single-Family Seller/Servicer Guide, Vol. I,
Chapters 22.4 and A24.3, available at: http://
www.freddiemac.com/sell/guide/.
151 Data on HARP loans with 40-year loan terms
is not publicly available. See Federal Housing
Finance Agency Refinance Report (June 2012),
available at: http://www.fhfa.gov/webfiles/25164/
Feb13RefiReportFinal.pdf.
152 See 78 FR 6516–20 (Jan. 30, 2013).
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modification is necessary to ensure
access to responsible, affordable credit.
Although many commenters approved
of the proposed exemption, these
commenters generally did not address
the costs and benefits of the proposed
exemption in light of the special
qualified mortgage status granted to
GSE-eligible loans under the Bureau’s
January 2013 ATR Final Rule. For
example, several commenters asserted
that the ability-to-repay requirements
were incompatible with HARP program
requirements. However, given that GSE
eligibility generally satisfies the
requirements of § 1026.43(e)(4), the
Bureau does not believe that the special
qualified mortgage provisions are
inconsistent with the requirements of
HARP or similar programs. For the same
reasons, the Bureau does not agree with
the arguments advanced by several
commenters that the ability-to-repay
requirements would add costs that
would make these programs
unsustainable. These comments did not
explain what additional costs would be
imposed by the regulation beyond the
costs creditors would incur in
determining GSE eligibility, which
would be required even in the absence
of the Bureau’s requirements. Based on
the comments provided, the Bureau
does not believe that the requirements
of § 1026.43(e)(4) impose any additional
meaningful costs on creditors. Thus, it
does not appear that the ability-to-repay
requirements would impair the
effectiveness of programs such as HARP.
While one GSE commenter addressed
the potential difference between the
proposed exemption and the qualified
mortgage provisions, the Bureau is not
persuaded by the arguments that
creditors would rather cease extending
credit than make a qualified mortgage
loan subject to the rebuttable
presumption. As discussed above, as
GSE eligibility generally satisfies the
requirements of § 1026.43(e)(4), the
Bureau does not believe that creditors
making qualified mortgages would incur
any meaningful additional risk by
making mortgage loans pursuant to the
eligibility requirements prescribed by
GSEs. The Bureau believes that the
ability-to-repay requirements and
qualified mortgage provisions reflect
standard industry underwriting
practices, and that creditors that make a
reasonable effort to determine a
consumer’s ability to repay would not
be concerned with potential litigation
risk that may result from the rebuttable
presumption. Thus, based on the
feedback provided, the Bureau does not
believe that a creditor would incur
much, if any, additional cost by
extending refinancing credit under the
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qualified mortgage provisions of
§ 1026.43(e)(4) as opposed to the
exemption under proposed
§ 1026.43(a)(3)(viii). Absent evidence
that the special qualified mortgage
provisions for GSE-eligible loans impose
significant costs on creditors, the
Bureau does not believe that consumers
are at risk of being denied responsible,
affordable mortgage credit.
On the other hand, there is a risk that
consumers could be harmed by the
proposed exemption. The Bureau is
persuaded by the arguments that the
proposed exemption could potentially
enable unscrupulous creditors to harm
consumers. The Bureau agrees that the
ability-to-repay requirements were
intended, in part, to prevent harmful
practices such as equity-stripping.
While the abuses of the past are
seemingly absent from today’s mortgage
market, the Bureau does not believe it
would be appropriate to deny
consumers the means to seek redress for
TILA violations. As discussed above,
the § 1026.43(e)(4) qualified mortgage
provision provides additional protection
to consumers and preserves potential
claims in the event of abuse. For higherpriced qualified mortgages, consumers
will still have the ability to assert a
claim under TILA section 130(a) and (k)
and prove that, despite the presumption
of compliance attached to the qualified
mortgage, the creditor nonetheless failed
to comply with the ability-to-repay
requirements. Thus the cost to
consumers of an exemption could be
significant, as opposed to the relatively
insignificant costs associated with
complying with the special qualified
mortgage provisions. Furthermore, given
the detailed GSE eligibility
requirements, the Bureau does not
believe it is likely that a creditor
operating a legitimate mortgage lending
operation would face meaningful
litigation risk by originating qualified
mortgages, even those subject to the
rebuttable presumption. The Bureau
received no persuasive comments
contradicting the Bureau’s belief that
the special qualified mortgage
provisions of § 1026.43(e)(4) strikes the
appropriate balance between consumer
protection and the needs of the
mortgage lending market during the
current transition period. Absent
persuasive evidence that the qualified
mortgage provisions would endanger
access to credit for the consumers
addressed by the proposal, the Bureau
does not believe that permitting this risk
of consumer abuse is appropriate. Thus,
the Bureau concludes that the proposed
exemption is neither necessary nor
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proper, and proposed
§ 1026.43(a)(3)(viii) is withdrawn.
As discussed above, several industry
commenters and a Federal agency
commenter requested various
modifications to the proposed language.
For example, some commenters argued
that the exemption should refer to the
Fannie Mae or Freddie Mac selling
guide, some commenters requested that
the Bureau provide an exemption for all
streamlined refinancing programs, and
some commenters asked the Bureau to
adopt the proposed exemption without
the time limitations in proposed
§ 1026.43(a)(3)(viii)(D) and (E). As the
Bureau has decided to withdraw
proposed § 1026.43(a)(3)(viii), the issues
addressed in these and similar
comments are moot. As discussed
above, mortgage loans made under a
streamlined refinancing program are
eligible for the temporary qualified
mortgage status under § 1026.43(e)(4),
provided the requirements of that
paragraph are met.
43(b) Definitions
43(b)(4)
Background
TILA section 129C(a)(1) through (4)
and the Bureau’s rules thereunder,
§ 1026.43(c), prohibit a creditor from
making a residential mortgage loan
unless the creditor makes a reasonable,
good faith determination, based on
verified and documented information,
that the consumer has a reasonable
ability to repay the loan. TILA section
129C(b) provides a presumption of
compliance with regard to these abilityto-repay requirements if a loan is a
qualified mortgage. Creditors may view
qualified mortgage status as important at
least in part because TILA section 130(a)
and (k) provide that, if a creditor fails
to comply with the ability-to repay
requirements, a consumer may be able
to recover special statutory damages
equal to the sum of all finance charges
and fees paid within the first three years
after consummation, among other
damages and costs, and may be able to
assert the creditor’s failure to comply to
obtain recoupment or setoff in a
foreclosure action even after the statute
of limitations for affirmative claims has
passed. TILA section 129C(b)(3)(B)(i)
authorizes the Bureau to prescribe
regulations that revise, add to, or
subtract from the criteria that define a
qualified mortgage upon a finding that
such regulations are, among other
things, necessary or proper to ensure
that responsible, affordable credit
remains available to consumers in a
manner consistent with the purposes of
TILA section 129C.
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Section 1026.43(e)(1) specifies the
strength of presumption of compliance
regardless of which regulatory
definition of qualified mortgage applies.
Under § 1026.43(e)(1)(i), a qualified
mortgage that is not a higher-priced
covered transaction as defined in
§ 1026.43(b)(4) is subject to a conclusive
presumption of compliance, or safe
harbor. In contrast, under
§ 1026.43(e)(1)(ii) a qualified mortgage
that is a higher-priced covered
transaction is subject to a rebuttable
presumption of compliance.
Section 1026.43(b)(4) defines a
higher-priced covered transaction to
mean a transaction within the scope of
§ 1026.43 with an annual percentage
rate that exceeds the average prime offer
rate for a comparable transaction as of
the date the interest rate is set by 1.5 or
more percentage points for a first-lien
covered transaction or by 3.5 or more
percentage points for a subordinate-lien
covered transaction. The average prime
offer rates are published weekly by the
Federal Financial Institutions
Examination Council based on a
national survey of creditors, the Freddie
Mac Primary Mortgage Market Survey®.
The average prime offer rates estimate
the national average APR for first-lien
mortgages offered to consumers with
good credit histories and low-risk
transaction features (e.g., loan-to-value
ratios of 80 percent or less). The higherpriced covered transaction thresholds
generally conform to the thresholds for
‘‘higher-priced mortgage loans’’ under
§ 1026.35, which contains escrow
requirements and other special
protections adopted after the financial
crisis for loans that have traditionally
been considered subprime.
Section 1026.43(e) and (f) defines
three categories of qualified mortgages.
First, § 1026.43(e)(2) provides a general
definition of a qualified mortgage.
Second, § 1026.43(e)(4) provides that
loans that are eligible to be purchased,
guaranteed, or insured by certain
government agencies or Fannie Mae or
Freddie Mac are qualified mortgages,
subject to certain restrictions including
restrictions on product features and
points and fees. Section 1026.43(e)(4)
expires after seven years and may expire
sooner with respect to some loans if
other government agencies exercise
their rulemaking authority under TILA
section 129C or if Fannie Mae or
Freddie Mac exit conservatorship.
Third, § 1026.43(f) provides that
certain balloon-payment loans are
qualified mortgages if they are made by
a small creditor that:
• Had total assets less than $2 billion
(adjusted annually for inflation) as of
the end of the preceding calendar year;
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• Together with all affiliates,
extended 500 or fewer first-lien
mortgages during the preceding
calendar year; and
• Extended more than 50 percent of
its total mortgages secured by properties
that are in rural or underserved areas
during the preceding calendar year.
Section 1026.43(f) includes only
balloon-payment loans held in portfolio
for at least three years by these small
creditors, subject to certain exceptions.
Further, it includes only loans that were
not subject, at consummation, to a
commitment to be acquired by any
person other than another qualified
small creditor.
As discussed in the section-by-section
analysis of § 1026.43(e)(5) below, the
Bureau proposed and is adopting an
additional fourth category of qualified
mortgages that includes certain loans
originated and held in portfolio by small
creditors. Like § 1026.43(f),
§ 1026.43(e)(5) includes loans originated
and held in portfolio by creditors that
had total assets less than $2 billion
(adjusted annually for inflation) as of
the end of the preceding calendar year
and, together with all affiliates,
extended 500 or fewer first-lien
mortgages during the preceding
calendar year. Unlike § 1026.43(f), new
§ 1026.43(e)(5) is not limited to creditors
that operate predominantly in rural or
underserved areas and does not include
loans with a balloon payment.
Proposal Regarding Higher-Priced
Covered Transactions
The Bureau proposed to amend the
definition of higher-priced covered
transaction in § 1026.43(b)(4) with
respect to qualified mortgages that are
originated and held in portfolio by small
creditors as described in § 1026.43(e)(5)
and with respect to balloon-payment
qualified mortgages originated and held
in portfolio by small creditors operating
predominantly in rural or underserved
areas as described in § 1026.43(f). The
Bureau proposed to amend
§ 1026.43(b)(4) to provide that a firstlien loan that is a qualified mortgage
under § 1026.43(e)(5) or (f) is a higherpriced covered transaction if the annual
percentage rate exceeds APOR for a
comparable transaction by 3.5 or more
percentage points. This would have the
effect of extending the qualified
mortgage safe harbor described in
§ 1026.43(e)(1)(i) to first-lien loans that
are qualified mortgages under
§ 1026.43(e)(5) or (f) that have an annual
percentage rate between 1.5 and 3.5
percentage points above APOR. As
discussed in more detail below, the
Bureau understands that small creditors
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35477
often charge higher rates and fees than
larger creditors for reasons including
their higher cost of funds. The Bureau
proposed this amendment to
§ 1026.43(b)(4) because it believes that
many loans made by small creditors will
exceed the existing qualified mortgage
safe harbor threshold. Without the
proposed amendment to § 1026.43(b)(4),
these loans would be considered higherpriced covered transactions and would
fall under the rebuttable presumption of
compliance described in
§ 1026.43(e)(1)(ii). The Bureau was
concerned that small creditors would be
less likely to make such loans due to
concerns about liability risk, thereby
reducing access to responsible credit.
Comments Received
The Bureau solicited comment on
several issues related to the proposed
amendments to § 1026.43(b)(4). First,
the Bureau solicited comment regarding
whether the proposed amendments to
§ 1026.43(b)(4) are necessary to preserve
access to responsible, affordable
mortgage credit and regarding any
adverse effects the proposed
amendments would have on consumers.
Most commenters agreed that small
creditors may charge more than larger
creditors for legitimate business reasons;
that amending the definition of higherpriced covered transaction for these
types of qualified mortgages is necessary
to preserve access to responsible,
affordable mortgage credit; and that the
rule would provide appropriate
protection for consumers even with a
higher interest rate threshold.
Commenters expressing this view
included some consumer advocacy
organizations, coalitions of State
regulators, national and State trade
groups representing creditors, national
and State mortgage bankers associations,
a national association representing
home builders, one very large creditor,
and many small creditors.
A much smaller number of
commenters opposed the proposed
amendments. These included other
consumer advocacy organizations, a
trade group representing very large
creditors, a national organization
representing mortgage brokers, a letter
submitted in substantially similar form
by several individual mortgage brokers,
and one very large creditor. These
commenters generally argued that a
consumer’s ability to repay does not
depend on the creditor’s size and that
the same standards therefore should
apply to all creditors. One of these
commenters argued that small creditors
do not need to charge higher rates and
fees because their higher costs are offset
by lower default rates.
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The Bureau also solicited comment on
the proposed 3.5 percentage point
threshold and whether another
threshold would be more appropriate.
While many commenters supported the
proposed 3.5 percentage point
threshold, several commenters argued
that the proposed 3.5 percentage point
threshold was not sufficient and should
be raised. Commenters expressing this
view included a national trade group
representing creditors, State bankers
associations, and several small
creditors. These commenters generally
suggested thresholds between 4.0 and
5.5 percentage points above APOR.
Several of these commenters, including
the national trade group, cited the
traditional principle that small creditors
generally must charge consumers 4.0
percentage points above the creditor’s
cost of funds in order to operate safely
and soundly.
Finally, the Bureau solicited comment
on whether, to preserve access to
mortgage credit, the Bureau also should
raise the threshold for subordinate-lien
covered transactions that are qualified
mortgages under § 1026.43(e)(5) and (f),
and, if so, what threshold would be
appropriate for those loans. A small
number of commenters, including a
State bankers association and several
small creditors, urged the Bureau to
adopt a higher threshold for
subordinate-lien covered transactions.
These commenters generally argued that
subordinate-lien loans entail inherently
greater credit risk and that a higher
threshold was needed to account for this
additional risk. Most commenters did
not address the threshold for
subordinate-lien loans.
The Final Rule
The amendments to § 1026.43(b)(4)
are adopted as proposed. The Bureau
believes the amendments are warranted
to preserve access to responsible,
affordable mortgage credit for some
consumers, including consumers who
do not qualify for conforming mortgage
credit and consumers in rural and
underserved areas, as described below.
As discussed above in part II.A, the
Bureau understands that small creditors
are a significant source of loans that do
not conform to the requirements for
government guarantee and insurance
programs or purchase by entities such as
Fannie Mae and Freddie Mac. The
Bureau also understands that larger
creditors may be unwilling to make at
least some of these loans because the
consumers or properties involved
cannot be accurately assessed using the
standardized underwriting criteria
employed by larger creditors or are
illiquid because they are non-
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conforming and therefore entail greater
risk. For similar reasons, the Bureau
understands that larger creditors may be
unwilling to purchase such loans. Small
creditors often are willing to evaluate
the merits of unique consumers and
properties using flexible underwriting
criteria and make highly individualized
underwriting decisions. Small creditors
often hold these loans on their balance
sheets, retaining the associated credit,
liquidity, and other risks.
The Bureau also understands that
small creditors are a significant source
of credit in rural and underserved areas.
As discussed above in part II.A, small
creditors are significantly more likely
than larger creditors to operate offices in
rural areas, and there are hundreds of
counties nationwide where the only
creditors are small creditors and
hundreds more where larger creditors
have only a limited presence.
The Bureau also understands that
small creditors, including those
operating in rural and underserved
areas, may charge consumers higher
interest rates and fees than larger
creditors for several legitimate business
reasons. As discussed above in part II.A,
small creditors may pay more for funds
than larger creditors. Small creditors
generally rely heavily on deposits to
fund lending activities and therefore
pay more in expenses per dollar of
revenue as interest rates fall and the
spread between loan yields and deposit
costs narrows. Small creditors also may
rely more on interest income than larger
creditors, as larger creditors obtain
higher percentages of their income from
noninterest sources such as trading,
investment banking, and fiduciary
services.
In addition, small creditors may find
it more difficult to limit their exposure
to interest rate risk than larger creditors
and therefore may charge higher rates to
compensate for that exposure. Similarly,
any individual loan poses a
proportionally more significant credit
risk to a smaller creditor than to a larger
creditor, and small creditors may charge
higher rates or fees to compensate for
that risk. Consumers obtaining loans
that cannot readily be sold into the
securitization markets also may pay
higher interest rates and fees to
compensate for the risk associated with
the illiquidity of such loans.
Small creditors, including those
operating in rural and underserved
areas, have repeatedly asserted to the
Bureau and to other regulators that they
are unable or unwilling to assume the
risk of litigation associated with lending
outside the qualified mortgage safe
harbor. The Bureau does not believe that
the regulatory requirement to make a
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reasonable and good faith determination
based on verified and documented
evidence that a consumer has a
reasonable ability to repay would entail
significant litigation risk for small
creditors, especially where their loan
meets a qualified mortgage definition
and qualifies for a rebuttable
presumption of compliance. As
discussed in part II.A above, small
creditors as a group have consistently
experienced lower credit losses for
residential mortgage loans than larger
creditors. The Bureau believes this is
strong evidence that small creditors
have historically engaged in responsible
mortgage underwriting that includes
considered determinations of
consumers’ ability to repay, at least in
part because they bear the risk of default
associated with loans held in their
portfolios. The Bureau also believes that
because many small creditors use a
lending model based on maintaining
ongoing relationships with their
customers and have specialized
knowledge of the community in which
they operate, they therefore may have a
more comprehensive understanding of
their customers’ financial circumstances
and may be better able to assess ability
to repay than larger creditors. In
addition, the Bureau believes that small
creditors operating in limited
geographical areas may face significant
risk of harm to their reputation within
their community if they make loans that
consumers cannot repay. At the same
time, because of the relationship small
creditors have with their customers, the
Bureau believes that the likelihood of
litigation between a customer and his or
her community bank or credit union is
low.
However, the Bureau acknowledges
that due to their size small creditors
may find even a remote prospect of
litigation risk to be so daunting that they
may change their business models to
avoid it. The Bureau also believes that
the exit of small creditors from the
residential mortgage market could create
substantial short-term access to credit
issues.
The Bureau continues to believe that
raising the interest rate threshold as
proposed is necessary and appropriate
to preserve access to responsible,
affordable credit for consumers that are
unable to obtain loans from other
creditors because they do not qualify for
conforming loans or because they live in
rural or underserved areas. The existing
qualified mortgage safe harbor applies to
first-lien loans only if the annual
percentage rate is less than 1.5
percentage points above APOR for
comparable transactions. The Bureau
believes that many loans made by small
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creditors, including those operating in
rural and underserved areas, will exceed
that threshold but will not pose risks to
consumers. These small creditors have
repeatedly asserted to the Bureau and
other regulators that they will not
continue to extend mortgage credit
unless they can make loans that are
covered by the qualified mortgage safe
harbor. The Bureau therefore believes
that, unless § 1026.43(b)(4) is amended
as proposed, small creditors operating
in rural and underserved areas may
reduce the number of mortgage loans
they make or stop making mortgage
loans altogether, limiting the availability
of nonconforming mortgage credit and
of mortgage credit in rural and
underserved areas.
The Bureau is sensitive to concerns
about the consistency of protections for
all consumers and about maintaining a
level playing field for market
participants, but believes that a
differentiated approach is justified here.
The commenters who suggested that
consumers’ interests are best served by
subjecting all creditors to the same
standards provided nothing substantive
that refutes the points raised in the
Bureau’s proposal regarding the lending
track records and business models of
small creditors, their concerns about
litigation risk and compliance burden,
and the potential access to credit
problems the Bureau believes will arise
if § 1026.43(b)(4) is not amended. For
example, these commenters have not
indicated that large creditors would be
able and willing to fulfill the role
currently played by small creditors in
providing access to responsible,
affordable nonconforming credit or
credit in rural and underserved areas,
nor have they provided evidence that
the Bureau’s concerns about limitations
on access to credit if the interest rate
threshold is not raised are unfounded.
One commenter asserted that small
creditors’ lower credit losses are
sufficient to offset their higher costs,
making it unnecessary to raise the
interest rate threshold. While the
Bureau understands that small creditors
have historically had lower credit
losses, this commenter provided no
evidence that these lower losses are
sufficient to offset small creditors’
higher cost of funds and greater reliance
on interest income and the greater risks
associated with holding loans in a
comparatively small portfolio, and the
Bureau is not aware of any such
evidence.153 In addition, these
153 The FDIC Community Banking Study, to
which the Bureau has referred as authority for the
point that small creditors have historically incurred
lower credit losses than larger creditors, indicates
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commenters have provided no evidence
to challenge the Bureau’s view, as
described in the proposal, above, and in
the section-by-section analysis of
§ 1026.43(e)(5) below, that the
combination of the small creditors’
relationship lending model, local
knowledge, and other characteristics
and the inherent incentives of portfolio
lending are sufficient to protect
consumers.
The Bureau does not believe,
however, that it is necessary to raise the
threshold for first-lien covered
transactions above APOR plus 3.5
percentage points for either first-lien or
subordinate-lien loans as suggested by
some commenters. The Bureau
estimated the average cost of funds for
small creditors from publicly available
call reports filed by small creditors
between 2000 and 2012. These estimates
suggest that the majority of first-lien
mortgage loans priced by a small
creditor at the creditor’s cost of funds
plus 4.0 percentage points, the
traditional principle of small creditor
safe and sound lending noted by several
commenters, would fall below even the
original threshold of APOR plus 1.5
percentage points. However, the Bureau
acknowledges that its estimates are
averages that do not reflect individual or
regional differences in cost of funds and
do not reflect the additional credit risk
associated with subordinate-lien loans.
The Bureau believes that the additional
2.0 percentage points afforded by the
APOR plus 3.5 percentage point
standard are sufficient to address these
differences. The Bureau therefore
believes that amending § 1026.43(b)(4)
as proposed will allow small creditors
to lend at a sustainable rate and still fall
within the qualified mortgage safe
harbor, thereby preserving access to
affordable, responsible credit.
As discussed below in the section-bysection analysis of § 1026.43(e)(6), the
Bureau is providing a two-year
transition period during which small
creditors may make balloon-payment
qualified mortgages regardless of
whether they operate predominantly in
rural or underserved areas. The Bureau
therefore is amending § 1026.43(b)(4) to
include references to § 1026.43(e)(6) and
that despite their lower credit losses and lower noninterest expenses, community banks on average
have lower (worse) pre-tax return on assets and a
higher and increasing (worse and deteriorating)
ratio of noninterest expense to net operating
revenue than noncommunity banks. The study
attributes these in large part to community banks’
reliance on interest income and the narrowing of
the spread between asset yields and funding costs
due to a prolonged period of historically low
interest rates. FDIC Community Banking Study, p.
IV–V, 4–1–4–11. See also GAO Community Banks
and Credit Unions Report, p. 10–11.
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35479
to provide that a first-lien loan that is a
qualified mortgage under § 1026.43(e)(6)
is a higher priced covered transaction if
the annual percentage rate exceeds
APOR for a comparable transaction by
3.5 or more percentage points. This
provision would apply to the same
creditors and loans as § 1026.43(e)(5)
and (f). The Bureau therefore believes
that the rationales regarding raising the
interest rate threshold for qualified
mortgages under § 1026.43(e)(5) and (f)
described above apply with equal force
to qualified mortgages under this new
provision.
Accordingly, the Bureau is exercising
its authority under TILA sections 105(a)
to amend § 1026.43(b)(4) substantially
as proposed, with conforming
amendments as described above.
Pursuant to TILA section 105(a) the
Bureau generally may prescribe
regulations that 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, among
other things. In the 2013 ATR Final Rule
the Bureau stated that it interpreted
TILA section 129C(b)(1) to create a
rebuttable presumption for qualified
mortgages generally and exercised its
adjustment authority under TILA 105(a)
with respect to prime loans (loans with
an APR that do not exceed APOR by 1.5
percentage points for first liens and 3.5
percentage points for second liens), to
provide a conclusive presumption (e.g.,
safe harbor).154 In this final rule the
Bureau uses its TILA section 105(a)
adjustment authority to further expand
the safe harbor to include certain
covered transactions (those subject to
the qualified mortgage definition under
paragraph (e)(5), (e)(6) or (f)) that have
an APR that exceeds the prime offer rate
for a comparable transaction as of the
date the interest rate is set by 3.5
percentage points for a first-lien covered
transaction.
The Bureau believes that this
adjustment to also provide a safe harbor
for these loans is necessary and proper
to facilitate compliance with and to
effectuate the purposes of TILA,
including to assure that consumers are
offered and receive residential mortgage
loans on terms that reasonably reflect
their ability to repay the loans.155 As
154 See
78 FR 6514.
adjustments are also consistent with the
Bureau’s authority under TILA section
129C(b)(3)(B)(i) to prescribe regulations that revise,
add to, or subtract from the criteria that define a
qualified mortgage upon a finding that such
regulations are necessary or proper to ensure that
responsible, affordable mortgage credit remains
available to consumers in a manner consistent with
155 These
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described above, the Bureau believes
that, unless § 1026.43(b)(4) is amended,
small creditors will be less likely to
make residential mortgage loans.
Because small creditors are a significant
source of nonconforming mortgage
credit and mortgage credit generally in
rural or underserved areas, this would
significantly limit access to mortgage
credit for some consumers. The Bureau
also believes that the relationship
lending model, qualitative local
knowledge, and size of small creditors,
combined with the intrinsic incentives
of portfolio lending, provide strong
assurances that these creditors will
make reasonable and good faith
determinations of consumers’ ability to
repay. Providing a safe harbor for these
loans facilitates compliance with the
ability-to-repay standards in a manner
consistent with the purposes of TILA.
43(e) Qualified Mortgages
43(e)(1) Safe Harbor and Presumption of
Compliance
The Bureau is adopting two
additional provisions regarding
qualified mortgages, as discussed in the
section-by-section analyses of
§ 1026.43(e)(5) and (6) below. The
Bureau therefore is adopting conforming
changes to § 1026.43(e)(1) to include
references to these new provisions. Like
other qualified mortgages, qualified
mortgages under § 1026.43(e)(5) and (6)
are covered by the safe harbor described
in § 1026.43(e)(1)(i) if they are not
higher-priced covered transactions and
are subject to the rebuttable
presumption of compliance described in
§ 1026.43(e)(1)(ii) if they are higherpriced covered transactions. However,
the Bureau is adopting a different
definition of higher-priced covered
transaction to first-lien qualified
mortgages under § 1026.43(e)(5) and (6).
The section-by-section analysis of
§ 1026.43(b)(4), above, describes the
alternate definition of higher-priced
covered transactions.
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43(e)(2) Qualified Mortgage Defined—
General
The Bureau is adopting conforming
amendments to § 1026.43(e)(2) to
include references to § 1026.43(e)(5) and
(6), as described in the section-bysection analyses of those sections,
below.
the purposes of this section, necessary and
appropriate to effectuate the purposes of TILA
section 129B and section 129C, to prevent
circumvention or evasion thereof, or to facilitate
compliance with such section.
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43(e)(5) Qualified Mortgage Defined—
Small Creditor Portfolio Loans
Background
TILA section 129C(a)(1) through (4)
and the Bureau’s rules thereunder,
§ 1026.43(c), prohibit a creditor from
making a residential mortgage loan
unless the creditor makes a reasonable,
good faith determination, based on
verified and documented information,
that the consumer has a reasonable
ability to repay the loan. TILA section
129C(b) provides that a creditor or
assignee may presume that a loan has
met the ability-to-repay requirements if
a loan is a qualified mortgage. Creditors
may view qualified mortgage status as
important at least in part because TILA
section 130 provides that, if a creditor
fails to comply with the ability-to-repay
requirements, a consumer may be able
to recover special statutory damages
equal to the sum of all finance charges
and fees paid within the first three years
after consummation, among other
damages and costs, and may be able to
assert the creditor’s failure to comply to
obtain recoupment or setoff in a
foreclosure action even after the statute
of limitations on affirmative claims has
expired. TILA section 129C(b)(2)(A)(vi)
authorizes, but does not require, the
Bureau to establish limits on debt-toincome ratio or other measures of a
consumer’s ability to pay regular
expenses after making payments on
mortgage and other debts. TILA section
129C(b)(3)(B)(i) authorizes the Bureau to
revise, add to, or subtract from the
criteria that define a qualified mortgage
upon a finding that such regulations are,
among other things, necessary or proper
to ensure that responsible, affordable
credit remains available to consumers in
a manner consistent with the purposes
of TILA section 129C or necessary and
appropriate to effectuate the purposes of
TILA sections 129B and 129C.
Section 1026.43(e) and (f) defines
three categories of qualified mortgages.
First, § 1026.43(e)(2) prescribes the
general definition of a qualified
mortgage. Second, § 1026.43(e)(4)
provides that certain loans that are
eligible to be purchased, guaranteed, or
insured by certain Federal government
agencies or Fannie Mae or Freddie Mac
while operating under conservatorship
are qualified mortgages. Section
1026.43(e)(4) expires seven years after
its effective date and may expire earlier
with respect to certain loans if other
Federal government agencies exercise
their rulemaking authority under TILA
section 129C or if the GSEs exit
conservatorship. Third, § 1026.43(f)
provides that certain loans with a
balloon payment made by small
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creditors operating predominantly in
rural or underserved areas are qualified
mortgages.
The Bureau’s Proposal
The Bureau proposed to define a
fourth category of qualified mortgages
including loans originated and held in
portfolio by certain small creditors in
new § 1026.43(e)(5). This additional
category of qualified mortgages would
have been similar in several respects to
§ 1026.43(f), which provides that certain
balloon loans made by small creditors
operating predominantly in rural or
underserved areas are qualified
mortgages. As under § 1026.43(f), the
additional category would have
included loans originated by small
creditors, as defined by asset-size and
transaction thresholds, and held in
portfolio by those creditors for at least
three years, subject to certain
exceptions. However, proposed
§ 1026.43(e)(5) would have included
small creditors that do not operate
predominantly in rural or underserved
areas and would not have included
loans with a balloon payment.
Specifically, the new category would
have included certain loans originated
by creditors that:
• Have total assets that do not exceed
$2 billion as of the end of the preceding
calendar year (adjusted annually for
inflation); and
• Together with all affiliates,
extended 500 or fewer first-lien
mortgages during the preceding
calendar year.
The proposed additional category
would have included only loans held in
portfolio by these creditors. Specifically,
proposed § 1026.43(e)(5) would have
provided that a loan would lose its
qualified mortgage status under
§ 1026.43(e)(5) if it is sold, assigned, or
otherwise transferred, subject to
exceptions for transfers that are made
three or more years after consummation,
to another qualifying institution, as
required by a supervisory action, or
pursuant to a merger or acquisition. In
addition, proposed § 1026.43(e)(5)
would have provided that a loan must
not be subject at consummation to a
commitment to be acquired by any
person other than a person that also
meets the above asset and origination
criteria.
The loan also would have had to
conform to all of the requirements under
the § 1026.43(e)(2) general definition of
a qualified mortgage except with regard
to debt-to-income ratio. In other words,
the loan could not have:
• Negative-amortization, interestonly, or balloon-payment features;
• A term longer than 30 years; or
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• Points and fees greater than 3
percent of the total loan amount (or, for
smaller loans, a specified amount).
When underwriting the loan the
creditor would have been required to
take into account the monthly payment
for any mortgage-related obligations,
and:
• Use the maximum interest rate that
may apply during the first five years and
periodic payments of principal and
interest that will repay the full
principal;
• Consider and verify the consumer’s
current and reasonably expected income
or assets other than the value of the
property securing the loan; and
• Consider and verify the consumer’s
current debt obligations, alimony, and
child support.
The creditor also would have been
required to consider the consumer’s
debt-to-income ratio or residual income
and to verify the underlying information
generally in accordance with
§ 1026.43(c)(7). Section 1026.43(c)(7)
describes how creditors must calculate
a consumers’ debt-to-income ratio or
residual income for purposes of
complying with the ability-to-repay
rules set forth in § 1026.43(c). Section
1026.43(c)(7) specifies that a creditor
must consider the ratio of or difference
between a consumer’s total monthly
debt obligations and total monthly
income. Section 1026.43(c)(7)(i)(A)
specifies that a consumer’s total
monthly debt obligations includes the
payment on the covered transaction as
calculated according to § 1026.43(c)(5).
However, for purposes of
§ 1026.43(e)(5), the calculation of the
payment on the covered transaction
must be determined in accordance with
§ 1026.43(e)(2)(iv) instead of
§ 1026.43(c)(5).
In contrast, the general definition of a
qualified mortgage in § 1026.43(e)(2)
requires a creditor to calculate the
consumer’s debt-to-income ratio
according to instructions in appendix
Q 156 and specifies that the consumer’s
debt-to-income ratio must be 43 percent
or less.
As with all qualified mortgages, a
qualified mortgage under § 1026.43(e)(5)
would have received either a rebuttable
presumption of compliance with, or a
safe harbor from liability for violating,
the ability-to-repay requirements in
§ 1026.43(c), depending on the annual
percentage rate. However, as described
above in the section-by-section analysis
of § 1026.43(b)(4), the Bureau also
156 The Bureau has proposed certain revisions to
Appendix Q. See 78 FR 25638–25662 (May 2, 2013).
Comments on this proposal must be received on or
before June 3, 2013.
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proposed and is adopting an alternate
definition of higher-priced covered
transaction for first-lien covered
transactions that are qualified mortgages
under proposed § 1026.43(e)(5).
Amended as proposed, § 1026.43(b)(4)
provides that a first-lien covered
transaction that is a qualified mortgage
under proposed § 1026.43(e)(5) is a
higher-priced covered transaction if the
annual percentage rate exceeds APOR
for a comparable transaction by 3.5 or
more percentage points. This extends
the qualified mortgage safe harbor
described in § 1026.43(e)(1)(i) to firstlien qualified mortgages defined under
proposed § 1026.43(e)(5) even if those
loans have annual percentage rates
between 1.5 and 3.5 percentage points
higher than APOR. Without the
amendment to § 1026.43(b)(4), such
loans would have been covered by the
rebuttable presumption of compliance
described in § 1026.43(e)(1)(ii).
The Bureau proposed ten comments
to clarify the requirements described in
proposed § 1026.43(e)(5). Proposed
comment 43(e)(5)–1 would have
provided additional guidance regarding
the requirement to comply with the
general definition of a qualified
mortgage under § 1026.43(e)(2). The
proposed comment would have restated
the regulatory requirement that a
covered transaction must satisfy the
requirements of the § 1026.43(e)(2)
general definition of qualified mortgage,
except with regard to debt-to-income
ratio, to be a qualified mortgage under
§ 1026.43(e)(5). As an example, the
proposed comment would have
explained that a qualified mortgage
under § 1026.43(e)(5) may not have a
loan term in excess of 30 years because
longer terms are prohibited for qualified
mortgages under § 1026.43(e)(2)(ii). As
another example, the proposed
comment would have explained that a
qualified mortgage under § 1026.43(e)(5)
may not result in a balloon payment
because § 1026.43(e)(2)(i)(C) provides
that qualified mortgages may not have
balloon payments except as provided
under § 1026.43(f). Finally, the
proposed comment would have clarified
that a covered transaction may be a
qualified mortgage under § 1026.43(e)(5)
even though the consumer’s monthly
debt-to-income ratio exceeds 43 percent,
§ 1026.43(e)(2)(vi) notwithstanding.
Proposed comment 43(e)(5)–2 would
have clarified that § 1026.43(e)(5) does
not prescribe a specific monthly debt-toincome ratio with which creditors must
comply. Instead, creditors must
consider a consumer’s debt-to-income
ratio or residual income calculated
generally in accordance with
§ 1026.43(c)(7) and verify the
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35481
information used to calculate the debtto-income ratio or residual income in
accordance with § 1026.43(c)(3) and (4).
The proposed comment would have
explained that § 1026.43(c)(7) refers
creditors to § 1026.43(c)(5) for
instructions on calculating the payment
on the covered transaction and that
§ 1026.43(c)(5) requires creditors to
calculate the payment differently than
§ 1026.43(e)(2)(iv). The proposed
comment would have clarified that, for
purposes of the qualified mortgage
definition in § 1026.43(e)(5), creditors
must base their calculation of the
consumer’s debt-to-income ratio or
residual income on the payment on the
covered transaction calculated
according to § 1026.43(e)(2)(iv) instead
of according to § 1026.43(c)(5). Finally,
the proposed comment would have
clarified that creditors are not required
to calculate the consumer’s monthly
debt-to-income ratio in accordance with
appendix Q as is required under the
general definition of qualified mortgages
by § 1026.43(e)(2)(vi).
Proposed comment 43(e)(5)–3 would
have noted that the term ‘‘forward
commitment’’ is sometimes used to
describe a situation where a creditor
originates a mortgage loan that will be
transferred or sold to a purchaser
pursuant to an agreement that has been
entered into at or before the time the
transaction is consummated. The
proposed comment would have clarified
that a mortgage that will be acquired by
a purchaser pursuant to a forward
commitment does not satisfy the
requirements of § 1026.43(e)(5), whether
the forward commitment provides for
the purchase and sale of the specific
transaction or for the purchase and sale
of transactions with certain prescribed
criteria that the transaction meets.
However, the proposed comment also
would have clarified that a forward
commitment to another person that also
meets the requirements of
§ 1026.43(e)(5)(i)(D) is permitted. The
proposed comment would have given
the following example: Assume a
creditor that is eligible to make qualified
mortgages under § 1026.43(e)(5) makes a
mortgage. If that mortgage meets the
purchase criteria of an investor with
which the creditor has an agreement to
sell such loans after consummation,
then the loan does not meet the
definition of a qualified mortgage under
§ 1026.43(e)(5). However, if the investor
meets the requirements of
§ 1026.43(e)(5)(i)(D), the mortgage will
be a qualified mortgage if all other
applicable criteria also are satisfied.
Proposed comment 43(e)(5)–4 would
have reiterated that, to be eligible to
make qualified mortgages under
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§ 1026.43(e)(5), a creditor must satisfy
the requirements of
§ 1026.35(b)(2)(iii)(B) and (C). For ease
of reference, the comment would have
stated that § 1026.35(b)(2)(iii)(B)
requires that, during the preceding
calendar year, the creditor and its
affiliates together originated 500 or
fewer first-lien covered transactions and
that § 1026.35(b)(2)(iii)(C) requires that,
as of the end of the preceding calendar
year, the creditor had total assets of less
than $2 billion, adjusted annually for
inflation.
Proposed comment 43(e)(5)–5 would
have clarified that creditors generally
must hold a loan in portfolio to
maintain the transaction’s status as a
qualified mortgage under
§ 1026.43(e)(5), subject to four
exceptions. The proposed comment
would have clarified that, unless one of
these exceptions applies, a loan is no
longer a qualified mortgage under
§ 1026.43(e)(5) once legal title to the
debt obligation is sold, assigned, or
otherwise transferred to another person.
Accordingly, unless one of the
exceptions applies, the transferee could
not benefit from the presumption of
compliance for qualified mortgages
under § 1026.43(e)(1) unless the loan
also met the requirements of another
qualified mortgage definition. Proposed
comment 43(e)(5)–6 would have
clarified that § 1026.43(e)(5)(ii) applies
not only to an initial sale, assignment,
or other transfer by the originating
creditor but to subsequent sales,
assignments, and other transfers as well.
The proposed comment would have
given the following example: Assume
Creditor A originates a qualified
mortgage under § 1026.43(e)(5). Six
months after consummation, Creditor A
sells the qualified mortgage to Creditor
B pursuant to § 1026.43(e)(5)(ii)(B) and
the loan retains its qualified mortgage
status because Creditor B complies with
the limits on asset size and number of
transactions. If Creditor B sells the
qualified mortgage, it will lose its
qualified mortgage status under
§ 1026.43(e)(5) unless the sale qualifies
for one of the § 1026.43(e)(5)(ii)
exceptions for sales three or more years
after consummation, to another
qualifying institution, as required by
supervisory action, or pursuant to a
merger or acquisition.
Proposed comment 43(e)(5)–7 would
have clarified that, under
§ 1026.43(e)(5)(ii)(A), if a qualified
mortgage under § 1026.43(e)(5) is sold,
assigned, or otherwise transferred three
years or more after consummation, the
loan retains its status as a qualified
mortgage under § 1026.43(e)(5)
following the transfer. The proposed
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comment would have clarified that this
is true even if the transferee is not itself
eligible to originate qualified mortgages
under § 1026.43(e)(5). The proposed
comment would have clarified that,
once three or more years after
consummation have passed, the
qualified mortgage will continue to be a
qualified mortgage throughout its life,
and a transferee, and any subsequent
transferees, may invoke the
presumption of compliance for qualified
mortgages under § 1026.43(e)(1).
Proposed comment 43(e)(5)–8 would
have clarified that, under
§ 1026.43(e)(5)(ii)(B), a qualified
mortgage under § 1026.43(e)(5) may be
sold, assigned, or otherwise transferred
at any time to another creditor that
meets the requirements of
§ 1026.43(e)(5)(v). The proposed
comment would have noted that section
§ 1026.43(e)(5)(v) requires that a
creditor, together with all affiliates
during the preceding calendar year,
originated 500 or fewer first-lien
covered transactions and had total
assets less than $2 billion (adjusted
annually for inflation) at the end of the
preceding calendar year. The proposed
comment would have clarified that a
qualified mortgage under § 1026.43(e)(5)
that is transferred to a creditor that
meets these criteria would retain its
qualified mortgage status even if it is
transferred less than three years after
consummation.
Proposed comment 43(e)(5)–9 would
have clarified that § 1026.43(e)(5)(ii)(C)
facilitates sales that are deemed
necessary by supervisory agencies to
revive troubled creditors and resolve
failed creditors. The proposed comment
would have noted that this section
provides that a qualified mortgage under
§ 1026.43(e)(5) retains its qualified
mortgage status if it is sold, assigned, or
otherwise transferred to: another person
pursuant to a capital restoration plan or
other action under 12 U.S.C. 1831o; the
actions or instructions of any person
acting as conservator, receiver or
bankruptcy trustee; an order of a State
or Federal government agency with
jurisdiction to examine the creditor
pursuant to State or Federal law; or an
agreement between the creditor and
such an agency. The proposed comment
would have clarified that a qualified
mortgage under § 1026.43(e)(5) that is
sold, assigned, or otherwise transferred
under these circumstances retains its
qualified mortgage status regardless of
how long after consummation it is sold
and regardless of the size or other
characteristics of the transferee. The
proposed comment also would have
clarified that § 1026.43(e)(5)(ii)(C) does
not apply to transfers done to comply
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with a generally applicable regulation
with future effect designed to
implement, interpret, or prescribe law
or policy in the absence of a specific
order by or a specific agreement with a
government agency described in
§ 1026.43(e)(5)(ii)(C) mandating the sale
of one or more qualified mortgages
under § 1026.43(e)(5) held by the
creditor, or one of the other
circumstances listed in
§ 1026.43(e)(5)(ii)(C). As an example,
the proposed comment would have
explained that a qualified mortgage
under § 1026.43(e)(5) that is sold
pursuant to a capital restoration plan
under 12 U.S.C. 1831o would retain its
status as a qualified mortgage following
the sale. However, if the creditor simply
chose to sell the same qualified
mortgage as one way to comply with
general regulatory capital requirements
in the absence of supervisory action or
agreement, the mortgage would lose its
status as a qualified mortgage following
the sale unless it qualifies under another
definition of qualified mortgage.
Proposed comment 43(e)(5)–10 would
have clarified that a qualified mortgage
under § 1026.43(e)(5) retains its
qualified mortgage status if a creditor
merges with or is acquired by another
person regardless of whether the
creditor or its successor is eligible to
originate new qualified mortgages under
§ 1026.43(e)(5) after the merger or
acquisition. However, the proposed
comment also would have clarified that
the creditor or its successor can
originate new qualified mortgages under
§ 1026.43(e)(5) after the merger or
acquisition only if the creditor or its
successor complies with all of the
requirements of § 1026.43(e)(5) at that
time. The proposed comment would
have provided the following example:
Assume a creditor that originates 250
covered transactions each year and
originates qualified mortgages under
§ 1026.43(e)(5) is acquired by a larger
creditor that originates 10,000 covered
transactions each year. Following the
acquisition, the small creditor would no
longer be able to originate
§ 1026.43(e)(5) qualified mortgages
because, together with its affiliates, it
would originate more than 500 covered
transactions each year. However, the
§ 1026.43(e)(5) qualified mortgages
originated by the small creditor before
the acquisition would retain their
qualified mortgage status.
Comments Received
A large number and broad range of
commenters expressed support for
proposed § 1026.43(e)(5). These
commenters included national, State,
and regional trade groups representing
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banks and credit unions, more than 90
small and mid-size creditors from more
than two dozen States, one very large
creditor, coalitions of State regulators,
consumer advocacy organizations, a
national trade group representing
mortgage bankers, national trade groups
representing homebuilders and real
estate agents, a tribally designated
housing entity, and representatives of
the manufactured housing industry.
These commenters generally agreed
with the points made by the Bureau in
its proposal.
A much smaller number of
commenters objected to proposed
§ 1026.43(e)(5). These creditors
included a consumer advocacy
organization, a national trade group
representing very large creditors, one
very large creditor, a national trade
group representing mortgage brokers,
and several individual mortgage
brokers. These commenters generally
argued that the Bureau should not adopt
special rules for small creditors because
a consumer’s ability to repay does not
depend on the size of the creditor.
These commenters also raised other
arguments, such as that proposed
§ 1026.43(e)(5) would encourage
regulatory arbitrage and charter
shopping by creditors or that the
Bureau’s proposal to provide an
additional qualified mortgage definition
is evidence that the ability-to-repay and
qualified mortgage provisions of the
Dodd-Frank Act are fundamentally
flawed and should be abandoned in
favor of further study.
The Bureau solicited comments on a
number of specific issues related to
proposed § 1026.43(e)(5). First, the
Bureau solicited comment on whether
non-conforming mortgage credit is
likely to be unavailable if the rule is not
amended and whether amending the
rule as proposed would ensure that such
credit is made available in a
responsible, affordable way.
Commenters supporting proposed
§ 1026.43(e)(5) generally agreed with the
Bureau’s assessment that, without
amendment, the ability-to-repay and
qualified mortgage rules would
significantly limit access to
nonconforming credit and access to
credit in rural and underserved areas.
Many individual small creditors
asserted that they would limit the
number of residential mortgage loans
they made or cease mortgage lending
altogether if the rule was not amended
and that this would severely limit
access to credit in their communities.
National and State trade groups
representing creditors expressed similar
views on behalf of their members. These
commenters generally agreed that small
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creditors are uniquely able and have
strong incentives to make accurate
determinations of ability to repay, that
the incentives to make these
determinations accurately and
conservatively are particularly strong
with respect to portfolio loans, and that
the combination of these factors would
provide ample protection for
consumers. Commenters opposing
proposed § 1026.43(e)(5) did not refute
the points raised by the Bureau in the
proposal. These commenters did not
offer evidence or substantive arguments
that access to credit would be preserved
without the proposed amendments, did
not suggest meaningful alternative ways
of preserving access to credit, and did
not offer substantive arguments or
evidence that credit made available
pursuant to proposed § 1026.43(e)(5)
likely would be irresponsible or
unaffordable. One commenter argued
that proposed § 1026.43(e)(5) would not
preserve access to credit because it
would not provide significant regulatory
relief to small creditors and because it
was limited to a small number of loans
per small creditor and therefore would
not benefit consumers.
Second, the Bureau solicited
comment on the following issues
relating to the criteria describing small
creditors: Whether the Bureau should
adopt criteria consistent with those used
in § 1026.35(b) and in the § 1026.43(f)
definition of qualified mortgages which
applies to certain balloon loans made by
small creditors operating predominantly
in rural or underserved areas; whether
the proposed $2 billion asset limit is
appropriate and whether the limit
should be higher or lower; and whether
to include a limitation on the number of
first-lien covered transactions extended
by the creditor and its affiliates and, if
so, whether the proposed 500transaction limit is appropriate.
Most commenters urged the Bureau to
expand the scope of proposed
§ 1026.43(e)(5) by adjusting the asset or
originations limits or both.157 Many
commenters, including national and
State trade groups representing banks
and credit unions and many individual
small creditors, asserted that 500 annual
first-lien originations is more typical of
a creditor with assets of $500 million
than a creditor with assets of $2 billion.
157 Several commenters, including representatives
of creditors that finance manufactured housing and
two creditors that provide low-documentation
mortgage loans predominantly to Asian immigrants
in California, argued that the Bureau should adopt
additional qualified mortgage definitions that
would include their mortgage loan products. The
Bureau did not propose and did not solicit
comment regarding such additional qualified
mortgage definitions and is not adopting such
definitions at this time.
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These commenters argued that the 500
annual first-lien originations limit is
significantly more restrictive than the $2
billion asset limit and should therefore
either be raised or be eliminated.
Commenters suggested alternate limits
such as 1,000 portfolio loans or between
2,000 and 5,000 total first-lien
originations. Some commenters,
including trade groups representing
creditors and individual small and midsize creditors, urged the Bureau to raise
the $2 billion asset limit to $5 billion or
$10 billion. These commenters argued
that this change is necessary to facilitate
access to nonconforming credit and
access to credit in areas that are served
only by mid-sized banks with assets
greater than $2 billion.
Third, the Bureau solicited comment
regarding the requirement that loans be
held in portfolio generally, including
whether the proposed exemptions were
appropriate and whether other criteria,
guidance, or exemptions should be
included regarding the requirement to
hold loans in portfolio, either in lieu of
or in addition to those included in the
proposal. Commenters generally did not
object to the requirement that loans be
held in portfolio as described in
proposed § 1026.43(e)(5) and the
accompanying comments. In addition,
many commenters agreed with the
Bureau that the requirement that loans
be held in portfolio provides important
protections for consumers because it
aligns consumers’ and creditors’
interests regarding ability to repay. One
commenter, a consumer advocacy
organization, argued against the
proposed provision allowing loans to be
transferred less than three years after
origination because of a creditor’s
bankruptcy or failure. This commenter
argued that bankruptcy or failure may
be indicative of poor underwriting
leading to high default rates and that
consumers therefore should retain the
right to make claims against the creditor
in bankruptcy, conservatorship, or
receivership.
Fourth, the Bureau solicited comment
on the loan feature and underwriting
requirements with which qualified
mortgages under proposed
§ 1026.43(e)(5) would have to comply.
The Bureau solicited comment on
whether qualified mortgages under
proposed § 1026.43(e)(5) should be
exempt from additional provisions of
§ 1026.43(e)(2) or should be subject to
any other loan feature or underwriting
requirements, either in lieu of or in
addition to those proposed. In
particular, the Bureau solicited
comment on whether these qualified
mortgages should be exempt from the
requirement to consider debt-to-income
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ratio calculated according to appendix
Q and the prohibition on debt-to-income
ratios in excess of 43 percent and
whether other requirements related to
debt-to-income ratio or residual income
should be provided, either in lieu of or
in addition to those proposed. Most
commenters supported relaxing
underwriting restrictions on portfolio
loans made by small creditors generally
and exempting these loans from both
the requirement to consider debt-toincome ratio calculated according to
appendix Q and the prohibition on debtto-income ratios in excess of 43 percent
specifically.158 These commenters,
including consumer advocacy
organizations, national and State trade
groups representing banks and credit
unions, and many small creditors,
agreed that small creditors are
particularly able to make accurate
determinations of ability to repay
without a specific numeric limit and
that the requirement to calculate debtto-income ratio according to appendix Q
would present a significant burden to
many small creditors with little or no
corresponding benefit to consumers. In
addition, many small creditors and
national and State trade groups
representing creditors argued that all
small creditors should be eligible to
make balloon-payment qualified
mortgages if the loan is held in
portfolio.
Fifth, and last, the Bureau solicited
comment on the following issue.
Section 1026.43(e)(5) could provide
different legal status to loans with
identical terms based solely on the
creditor’s size and intention to hold the
loan in portfolio. The Bureau stated its
belief that the size of and relationship
lending model employed by small
creditors provide significant assurances
that the mortgage credit they extend will
be responsible and affordable. However,
to the extent that consumers may have
a choice of creditors, some of whom are
not small, it was not clear that
consumers shopping for mortgage loans
would be aware that their choice of
creditor could significantly affect their
legal rights. The Bureau solicited
comment on the extent and significance
of this risk generally. Specifically, the
Bureau solicited comment on whether
consumers who obtain small creditor
portfolio loans likely could have
obtained credit from other sources and
on the extent to which a consumer who
obtains a portfolio loan from a small
creditor would be disadvantaged by the
inability to make an affirmative claim of
noncompliance with the ability-to-repay
rules or to assert noncompliance in a
foreclosure action.
Most commenters, including national
and State trade groups representing
banks and credit unions, as well as
many individual small creditors, stated
that small creditors make portfolio loans
almost exclusively to consumers who do
not qualify for secondary market
financing for reasons unrelated to ability
to repay, including: comparable sales
that are not sufficiently similar, too
distant, or too old; irregular zoning, lack
of zoning, or problems with land
records; condominiums that do not
comply with secondary market owneroccupancy requirements; loan-to-value
ratio; self-employed and seasonallyemployed consumers who cannot prove
continuance to the satisfaction of the
secondary market; consumers with a
new job; and small dollar loans that fall
below secondary market thresholds.
These commenters noted that these
issues may be particularly problematic
in rural areas but that they are common
in suburban and urban areas as well.
These commenters stated that
consumers who qualify for secondary
market financing generally obtain
secondary market loans that are not held
in portfolio and would be unaffected by
proposed § 1026.43(e)(5).
Two commenters, a national trade
group representing very large creditors
and a very large creditor, argued that
consumers would be disadvantaged by
proposed § 1026.43(e)(5) because the
rule would apply even in geographic
areas where there are other creditors
and because consumers comparing
loans from different creditors would
have to compare different legal rights
that are difficult to value.
158 One commenter, a consumer advocacy
organization, urged the Bureau to adopt a lower
debt-to-income ratio limit, such as 41 percent, for
low-income borrowers for all qualified mortgages.
In contrast, other commenters urged the Bureau to
raise or eliminate the debt-to-income ratio limit for
all qualified mortgages secured by property in
Puerto Rico and Hawaii. These commenters argued
that the 43 percent debt-to-income ratio limit would
limit access to mortgage credit in Puerto Rico and
Hawaii because debt-to-income ratios in these areas
often are more than 43 percent. The Bureau did not
propose and did not solicit comment regarding
changes to the debt-to-income ratio limit for other
categories of qualified mortgages and is not
reconsidering this issue at this time.
The Final Rule
Section 1026.43(e)(5) and the related
comments are adopted as proposed. For
the reasons stated below, the Bureau
believes that § 1026.43(e)(5) is necessary
and appropriate to preserve access to
responsible, affordable credit for some
consumers, including consumers who
do not qualify for conforming mortgage
credit.
Access to affordable, responsible
credit. The Bureau continues to believe
that § 1026.43(e)(5) is necessary to
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preserve access to credit for some
consumers, including consumers who
do not qualify for conforming mortgage
credit, and will ensure that this credit
is provided in a responsible, affordable
way.
As discussed above in part II.A and in
the section-by-section analysis of
§ 1026.43(b)(4), the Bureau understands
that small creditors are a significant
source of nonconforming mortgage
credit. The Bureau believes that many of
these loans would not be made by larger
creditors because the consumers or
properties involved are not accurately
assessed by the standardized
underwriting criteria used by larger
creditors or because larger creditors are
unwilling to make loans that cannot be
sold to the securitization markets. The
Bureau therefore believes that access to
mortgage credit for some consumers
would be restricted if small creditors
stopped making nonconforming loans or
significantly reduced the number of
nonconforming loans they make.
Such an impact could be particularly
significant in rural areas, where small
creditors are a significant source of
credit. As discussed above in part II.A,
small creditors are significantly more
likely than larger creditors to operate
offices in rural areas, and there are
hundreds of counties nationwide where
the only creditors are small creditors
and hundreds more where larger
creditors have only a limited presence.
The Bureau also continues to believe
that small creditors are particularly well
suited to originate responsible,
affordable mortgage credit. As discussed
above in part II.A, the small creditors
often are better able to assess ability to
repay because they are more likely to
base underwriting decisions on local
knowledge and qualitative data and less
likely to rely on standardized
underwriting criteria. Because many
small creditors use a lending model
based on maintaining ongoing
relationships with their customers, they
often have a more comprehensive
understanding of their customer’s
financial circumstances. Small
creditors’ lending activities often are
limited to a single community, allowing
the creditor to have an in-depth
understanding of the economic and
other circumstances of that community.
In addition, because small creditors
often consider a smaller volume of
applications for mortgage credit, small
creditors may be more willing and able
to consider the unique facts and
circumstances attendant to each
consumer and property, and senior
personnel are more likely to be able to
bring their judgment to bear regarding
individual underwriting decisions.
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Small creditors also have particularly
strong incentives to make careful
assessments of a consumer’s ability to
repay because small creditors bear the
risk of default associated with loans
held in portfolio and because each loan
represents a proportionally greater risk
to a small creditor than to a larger one.
In addition, small creditors operating in
limited geographical areas may face
significant risk of harm to their
reputations within their communities if
they make loans that consumers cannot
repay.
As many commenters reiterated, small
creditors have repeatedly asserted that
they will not lend outside the qualified
mortgage safe harbor. The Bureau does
not believe that small creditors face
significant litigation risk from the
ability-to-repay requirements. For the
reasons stated above, the Bureau
believes that small creditors as a group
generally are better positioned to assess
ability to repay than larger creditors,
have particularly strong incentives to
accurately assess ability to repay
independent of the threat of ability-torepay litigation, and historically have
been very successful at accurately
assessing ability to repay, as
demonstrated by their comparatively
low credit losses. In addition, the
Bureau believes that because many
small creditors use a lending model
based on maintaining ongoing
relationships with their customers,
those customers may be more likely to
pursue alternatives to litigation in the
event that difficulties with a loan arise.
The Bureau therefore believes that it is
unlikely that small creditors will face
significant liability for claims of
noncompliance filed by their customers
or will be significantly disadvantaged by
recoupment and setoff claims in
foreclosure actions.
However, the Bureau acknowledges
that due to their size small creditors
may find even a remote prospect of
litigation risk to be so daunting that they
may change their business models to
avoid it. The Bureau also believes that
the exit of small creditors from the
residential mortgage market could create
substantial short-term access to credit
issues.
The Bureau therefore believes that,
absent an amendment to the ability-torepay and qualified mortgage rules,
many small creditors will reduce or
cease their mortgage lending activities,
which would cause many consumers to
face constraints on their access to credit
that are entirely unrelated to their
ability to repay. The Bureau believes
that § 1026.43(e)(5) will preserve
consumers’ access to credit and, because
of the characteristics of small creditors
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and portfolio lending described above,
the credit provided generally will be
responsible and affordable.
The Bureau is sensitive to concerns
about the consistency of protections for
all consumers and about maintaining a
level playing field for market
participants, but nevertheless believes
that a differentiated approach is
justified here. The commenters that
suggested that consumers’ interests are
best served by subjecting all creditors to
the same standards provided nothing
that refutes the points raised in the
Bureau’s proposal regarding the low
credit losses and unique business
models of small creditors, their
concerns about litigation risk and
compliance burden, and the potential
access to credit problems the Bureau
believes will arise if the rule is not
amended. The Bureau also disagrees
that § 1026.43(e)(5) would not benefit
consumers because it is limited to a
small number of loans per creditor.
Because there are thousands of small
creditors as defined by § 1026.43(e)(5) in
the United States, the Bureau believes
that § 1026.43(e)(5) is likely to preserve
access to affordable, responsible
mortgage credit for hundreds of
thousands of consumers annually.
Asset and originations limits. Section
1026.43(e)(5) includes portfolio loans
made by creditors that have assets of $2
billion or less (adjusted annually for
inflation) and, together with all
affiliates, originate 500 or fewer firstlien mortgages each year. The Bureau
proposed these thresholds to maintain
consistency with the § 1026.43(f)
qualified mortgage definition, which
includes certain balloon loans made and
held in portfolio by small creditors
operating predominantly in rural or
underserved areas, and with thresholds
used in § 1026.35 as adopted by the
Bureau’s 2013 Escrows Final Rule. In
the proposal, the Bureau emphasized
the importance of maintaining
consistent criteria, particularly between
§ 1026.43(e)(5) and (f), to avoid creating
undesirable regulatory incentives (such
as an incentive to make balloon loans
where a creditor has the capability of
making other mortgages that better
protect consumers’ interests) and to
minimize compliance burdens by
minimizing the number of metrics
creditors must track to determine their
eligibility for various regulatory
provisions. The Bureau continues to
believe that it is important to maintain
consistency between these provisions.
Many commenters urged the Bureau
to raise the limit above 500 first-lien
originations for § 1026.43(e)(5), for
instance by changing the types of loans
counted or the numeric threshold. A
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national trade group representing small
creditors and several other commenters
argued that the originations limit in
§ 1026.43(e)(5) should be based on
portfolio loans originated annually
rather than all first-lien originations.
These commenters argued that
including loans sold to the secondary
market in the origination threshold was
not appropriate because the purpose of
§ 1026.43(e)(5) is to encourage portfolio
lending and thereby preserve
consumers’ access to nonconforming
credit.
On its face, the rationale advanced by
these commenters argues against any
limitation on the number of portfolio
loans, as any limit would discourage
portfolio lending in excess of that limit
and all portfolio loans appear to carry
with them a greater inherent incentive
to exercise care in determining ability to
repay than loans sold to the secondary
market. However, one of the lessons
learned in the recent financial crisis is
that in the heat of a housing bubble,
even portfolio lending standards can
become too lax and standards that
ensure responsible, affordable lending
may be threatened.
Thus, the Bureau did not propose to
provide qualified mortgage treatment to
all portfolio loans, but rather only to
portfolio loans made by small creditors
on the theory that both the
characteristics of the creditor—its small
size, community-based focus, and
commitment to relationship lending—
and the inherent incentives associated
with portfolio lending together would
justify extending qualified mortgage
status to a loan that would not meet the
ordinary qualified mortgage criteria.
Given this rationale, the Bureau does
not believe it is appropriate to adopt an
originations limit under which a
creditor would be treated as a small,
relationship-based creditor no matter
how many loans it is selling to the
secondary market.
Using publicly available HMDA data
and call report data, the Bureau
estimated the impact of adopting a limit
based on portfolio loan originations
instead of total first-lien originations.
This change would add nearly one
thousand creditors to the scope of
§ 1026.43(e)(5). These creditors appear
to hold a significantly smaller
percentage of the loans they originate in
portfolio than creditors that would fall
within § 1026.43(e)(5) as proposed,
raising questions about the extent to
which these creditors can be considered
relationship lenders. This reinforces the
point that the relationship lending
model underlying the Bureau’s rationale
for § 1026.43(e)(5) cannot be defined by
reference only to a subset of a creditor’s
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originations, but rather based on the
nature of its overall operations. The
Bureau therefore continues to believe
that an originations limit based on total
first-lien originations is the most
appropriate way to ensure that the new
category of qualified mortgages is
appropriately cabined.
In addition, many commenters
recommended increasing the
originations limit from 500 first-lien
mortgages to between 2,000 and 5,000.
The principal rationale offered by these
commenters is that banks with assets
over $500 million often originate more
than 500 first-lien mortgages per year
and that the limitation on originations is
not consistent with (i.e., is significantly
more restrictive than) the $2 billion
asset limit.
The Bureau intended and believes
that both elements of the threshold play
independent and important roles. The
Bureau believes that an originations
limit is the most accurate means of
limiting § 1026.43(e)(5) to the class of
small creditors the business model of
which the Bureau believes will best
assure that the qualified mortgage
definition facilitates access only to
responsible, affordable credit. However,
the Bureau believes that an asset limit
is nonetheless important to preclude a
very large creditor with relatively
modest mortgage operations from taking
advantage of a provision designed for
much smaller creditors with much
different characteristics and incentives.
Due to general scale, such a creditor
would not have the same type of
community focus and reputational and
balance-sheet incentives to assess ability
to repay with sufficient care as smaller,
community-based creditors, and is
generally better able from a systems
perspective to handle compliance
functions.
Based on estimates from publicly
available HMDA and call report data,
the Bureau understands that, under the
proposed criteria, the likelihood of
falling within the scope of
§ 1026.43(e)(5) decreases as a creditor’s
size increases. The proposed limits
include approximately 95 percent of
creditors with less than $500 million in
assets, approximately 74 percent of
creditors with assets between $500
million and $1 billion, and
approximately 50 percent of creditors
with assets between $1 billion and $2
billion. These percentages are entirely
consistent with the Bureau’s rationale
for § 1026.43(e)(5), as described above.
As the size of an institution increases,
it is to be expected that the scale of its
lending business will increase as well.
As the scale of a creditor’s lending
business increases, the likelihood that
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the institution is engaged in
relationship-based lending and
employing qualitative or local
knowledge in its underwriting
decreases. The Bureau therefore
continues to believe that the proposed
limit of 500 total first-lien originations
is consistent with the rationale
underlying § 1026.43(e)(5) and
appropriate to ensure that consumers
have access only to responsible,
affordable mortgage credit.
Finally, some commenters argued that
the Bureau should increase the asset
limit from $2 billion to $5 billion or $10
billion. The Bureau does not believe this
change is necessary to preserve access to
credit. The traditional definition of a
community bank has long been regarded
as an institution with less than $1
billion in assets.159 The Bureau’s
estimates show that § 1026.43(e)(5) as
proposed includes over 90 percent of
institutions with assets less than $1
billion. In its recent Community Bank
Study, the FDIC employed a more
complex definition that excluded a
small number of institutions with assets
under $1 billion based primarily on the
nature of their assets and added a
modest number of banks with assets
greater than $1 billion based on a multifactor test including criteria such as the
geographic scope of the institution’s
operations and focus on core banking
activities.160 The Bureau has concluded
that the FDIC’s definition is too complex
for regulatory purposes and no
commenters advocated that the Bureau
adopt it. However, the Bureau notes that
the larger banks added by the FDIC’s
more nuanced definition of community
bank had average assets of $1.9 billion.
In addition, the Bureau notes that a
creditor with assets between $1 billion
and $2 billion has, on average, 16
branches, 252 employees, and
operations in 5 counties. In contrast, a
creditor with between $2 billion and
$10 billion in assets has, on average, 34
branches, 532 employees, and
operations in 12 counties. As the staff
and geographic scope of an institution
increases, it becomes less and less likely
that a creditor will engage in
relationship lending or use qualitative
or local knowledge in its underwriting.
In addition, as an institution adds staff
and branches, it is more likely from a
systems perspective to handle
compliance functions. The Bureau
therefore believes that the proposed $2
billion asset limit is consistent with the
rationale underlying § 1026.43(e)(5) and
159 See,
e.g., FDIC Community Banking Study, p.
1–1.
160 FDIC
Community Banking Study, p. 1–1—1–
5.
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appropriate to ensure that consumers
have access only to affordable,
responsible credit.
Portfolio requirements. The Bureau
continues to believe that the discipline
imposed when small creditors make
loans that they will hold in their
portfolio is important to protect
consumers’ interests and to prevent
evasion. The Bureau proposed that
qualified mortgages under
§ 1026.43(e)(5) must be held in portfolio
for three years to retain their status as
qualified mortgages, thus matching the
statute of limitations for affirmative
claims for violations of the ability-torepay rules. If a small creditor holds a
qualified mortgage in portfolio for three
years, it retains all of the litigation risk
for potential violations of the ability-torepay rules except in the event of a
subsequent foreclosure.
The Bureau is extending qualified
mortgage status only to portfolio loans
made by small creditors, rather than all
portfolio loans, because, as discussed
above, the Bureau believes that small
creditors are a unique and important
source of non-conforming mortgage
credit and mortgage credit in rural areas
for which there is no readily available
replacement, that small creditors are
likely to be particularly burdened by the
litigation risk associated with the
ability-to-repay requirements and are
particularly likely to reduce or cease
mortgage lending if subjected to these
rules without accommodation, and that
small creditors have both strong
incentives and particular ability to make
these loans in a way that ensures that
consumers are able to repay that may
not be present for larger creditors.
As the Bureau acknowledged in the
proposal, limitations on the ability of a
creditor to sell loans in its portfolio may
limit the creditor’s ability to manage its
regulatory capital levels by adjusting the
value of its assets, may affect the
creditor’s ability to manage interest rate
risk by preventing sales of seasoned
loans, and may present other safety and
soundness concerns. The Bureau has
consulted with prudential regulators on
these issues and continues to believe the
proposed exceptions address these
concerns without sacrificing the
consumer protection provided by the
portfolio requirement.
One commenter, a consumer
advocacy organization, argued that the
Bureau should not adopt the proposed
exception that would allow a qualified
mortgage under § 1026.43(e)(5) to retain
its qualified mortgage status if it is
transferred less than three years after
origination because of a bank failure.
The commenter argued that the need for
supervisory action strongly suggests that
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loans should not be entitled to the
presumption of compliance associated
with qualified mortgage status. The
commenter further asserted that
agencies charged with resolving failed
creditors have sufficient authority to
protect transferees from consumers’
claims. The Bureau understands that
creditors fail for many different reasons,
many of which are entirely unrelated to
underwriting practices for residential
mortgage loans. The Bureau also
continues to believe that this exception
is necessary to ensure that resolutions
are not impeded. The Bureau therefore
declines to adopt the commenter’s
suggestion.
Underwriting requirements and debtto-income ratio. Qualified mortgages
under § 1026.43(e)(5) differ from
qualified mortgages under the
§ 1026.43(e)(2) general definition in two
key respects. First, as discussed above
in the section-by-section analysis of
§ 1026.43(b)(4), qualified mortgages
under § 1026.43(e)(5) are subject to a
higher annual percentage rate threshold
for the qualified mortgage safe harbor.
Second, creditors are required to
consider the consumer’s debt-to-income
ratio or residual income and to verify
the underlying information generally in
accordance with § 1026.43(c), but are
not required to calculate the consumer’s
debt-to-income ratio according to
appendix Q and there is no numeric
limit on the consumers’ debt-to-income
ratio.
The Bureau continues to believe that
consideration of debt-to-income ratio or
residual income is fundamental to any
determination of ability to repay. A
consumer is able to repay a loan if he
or she has sufficient funds to pay his or
her other obligations and expenses and
still make the payments required by the
terms of the loan. Arithmetically
comparing the funds to which a
consumer has recourse with the amount
of those funds the consumer has already
committed to spend or is committing to
spend in the future is necessary to
determine whether sufficient funds
exist.
However, for the same reasons that
the Bureau declined to impose a specific
43-percent threshold for balloonpayment qualified mortgages under the
balloon loan provision in § 1026.43(f),
the Bureau does not believe it is
necessary to impose a specific debt-toincome ratio or residual income
threshold for this category of qualified
mortgages. As discussed above, the
Bureau believes that small creditors
often are particularly able to make
highly individualized determinations of
ability to repay that take into
consideration the unique characteristics
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and financial circumstances of a
particular consumer. While the Bureau
believes that many creditors can make
mortgage loans with consumer debt-toincome ratios above 43 percent that
consumers are able to repay, the Bureau
also believes that portfolio loans made
by small creditors are particularly likely
to be made responsibly and to be
affordable for the consumer even if such
loans exceed the 43-percent threshold.
The Bureau therefore believes that it is
appropriate to presume compliance
even above the 43-percent threshold for
small creditors who meet the criteria set
forth in § 1026.43(e)(5). The Bureau
believes that the discipline imposed
when small creditors make loans that
they will hold in their portfolio is
sufficient to protect consumers’ interests
in this regard. Because the Bureau is not
adopting a specific limit on consumers’
debt-to-income ratio, the Bureau does
not believe it is necessary to require
creditors to calculate debt-to-income
ratio in accordance with a particular
standard such as that set forth in
appendix Q.
The Bureau does not believe it is
appropriate to permit all small creditors
to make balloon-payment qualified
mortgages under § 1026.43(e)(5) as
suggested by some commenters. The
Bureau believes that Congress clearly
indicated in the Dodd-Frank Act that
only small creditors operating
predominantly in rural or underserved
areas should be eligible to originate
balloon-payment qualified mortgages.
However, as discussed below in the
section-by-section analyses of
§ 1026.43(e)(6) and (f), the Bureau is
providing a two-year transition period
during which all small creditors may
originate balloon-payment qualified
mortgages. This transition period will
allow the Bureau to study the existing
definitions of rural and underserved to
determine whether they adequately
preserve consumers’ access to
responsible, affordable mortgage credit
and will facilitate creditors’ transition to
alternatives to balloon-payment
mortgages, such as adjustable-rate
mortgages.
Valuation of legal rights by
consumers. Finally, the Bureau is
convinced that small creditor portfolio
loans covered by § 1026.43(e)(5) are
unlikely to be provided to consumers
who qualify for secondary market
financing or who can otherwise obtain
mortgage credit. The Bureau therefore
concludes that the risk that comparison
shopping consumers will be unable to
assess the value of the right to sue in the
event of default or foreclosure is
unlikely to be significant in practice.
Also, as discussed above, the Bureau
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35487
believes that small creditors’ historically
low credit losses demonstrate that the
size and other characteristics of and
relationship lending model employed
by small creditors provide significant
assurances that the mortgage credit they
extend will be responsible and
affordable. Because consumers are
unlikely to receive loans from small
creditors that result in default or
foreclosure, it appears unlikely that
consumers will be significantly
disadvantaged by the inability to make
an affirmative claim of noncompliance
with the ability-to-repay rules or to
assert noncompliance in a foreclosure
action. The Bureau therefore believes
that this issue is not sufficient to
outweigh the significant benefit of
§ 1026.43(e)(5) in preserving access to
credit.
Legal authority. Accordingly, the
Bureau is exercising its authority under
TILA sections 105(a), 129C(b)(2)(vi), and
129C(b)(3)(B)(i) to adopt § 1026.43(e)(5)
as proposed for the reasons summarized
below and discussed in more detail
above. Under TILA section 105(a) the
Bureau generally may prescribe
regulations that provide for such
adjustments and exceptions for all or
any class of transactions that the Bureau
judges are necessary and proper to
effectuate the purposes of TILA, which
include the purposes of TILA 129C, and
facilitate compliance with these
purposes, among other things. The
Bureau believes that these amendments
are necessary and proper to ensure that
consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay
the loans. This provision is consistent
with the findings of TILA section 129C
by ensuring that consumers are able to
obtain responsible affordable credit,
which informs the Bureau’s
understanding of its purposes.
Furthermore, the Bureau revises the
qualified mortgage criteria in the statute
to adopt this new definition by finding
that this provision is necessary and
proper to ensure that responsible,
affordable mortgage credit remains
available to consumers in a manner
consistent with the purposes of TILA
section 129C, necessary and appropriate
to effectuate the purposes of TILA
section 129C and to facilitate
compliance with TILA section129C. As
described above, the Bureau believes
that, unless § 1026.43(e)(5) is adopted,
small creditors will be less likely to
make residential mortgage loans.
Because small creditors are a significant
source of nonconforming mortgage
credit nationally and mortgage credit
generally in rural or underserved areas,
this would significantly limit access to
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mortgage credit for some consumers.
The Bureau also believes that the
relationship lending model, qualitative
local knowledge, and size of small
creditors, combined with the intrinsic
incentives of portfolio lending, provide
strong assurances that these creditors
typically will make reasonable and good
faith determinations of consumers’
ability to repay when originating loans
pursuant to § 1026.43(e)(5). This
provision is also necessary and proper
to facilitate compliance with the
purposes of TILA by easing the ability
of small creditors to make qualified
mortgages. The Bureau also believes that
the provisions of § 1026.43(e)(5) relating
to debt-to-income ratio or residual
income are authorized by TILA section
129C(b)(2)(vi), which authorizes, but
does not require, the Bureau to adopt
guidelines or regulations relating to
debt-to-income ratio or alternative
measures of ability to pay regular
expenses after payment of total monthly
debt.
43(e)(6) Qualified Mortgage Defined—
Temporary Balloon-Payment Qualified
Mortgage Rules Background
As discussed above, TILA section
129C(b) and the Bureau’s rules
thereunder, § 1026.43(e), provide that a
creditor or assignee may presume that a
loan has met the ability-to-repay
requirements described in TILA section
129C(a)(1) through (4) and the Bureau’s
rules thereunder, § 1026.43(c), if a loan
is a qualified mortgage. TILA section
129C(b)(2)(A)(ii) provides that qualified
mortgages generally cannot include a
balloon payment. Accordingly,
§ 1026.43(e)(2) of the Bureau’s rules
provides a general qualified mortgage
definition that excludes loans with a
balloon payment. In addition,
§ 1026.43(e)(4) provides a temporary
qualified mortgage definition that also
excludes balloon-payment loans.
However, TILA section 129C(b)(2)(E)
permits the Bureau to provide by
regulation an alternate qualified
mortgage definition that includes
certain balloon payment mortgages
originated and held in portfolio by small
creditors operating predominantly in
rural or underserved areas. The Bureau
exercised this authority in adopting
§ 1026.43(f). Section 1026.43(f) allows
creditors with less than $2 billion in
assets that originate, together with all
affiliates, fewer than 500 first-lien
mortgages annually to originate balloonpayment qualified mortgages if the
creditor operates predominantly in rural
or underserved areas and if certain other
requirements are met. The Bureau
adopted definitions of rural and
underserved in § 1026.35(b)(2)(iv).
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As discussed above in the section-bysection analysis of § 1026.43(e)(5), the
Bureau proposed and is adopting a
fourth category of qualified mortgage
which includes loans originated and
held in portfolio by small creditors that
meet the same asset and originations
criteria regardless of whether they
operate predominantly in rural and
underserved areas. Qualified mortgages
in this category are subject to different,
more relaxed requirements regarding
debt-to-income ratio and are covered by
the regulatory safe harbor at a higher
annual percentage rate than other
qualified mortgages. However, because
TILA section 129C(b)(2)(A)(ii) specifies
that qualified mortgages generally may
not have a balloon payment,
§ 1026.43(e)(5) does not include
mortgages with a balloon payment.
The Bureau’s Proposal and Comments
Received
Prohibition on balloon payments
generally. As discussed above, in
proposing the new category of qualified
mortgage for certain small creditor
portfolio loans under § 1026.43(e)(5),
the Bureau solicited comment regarding
the loan feature and underwriting
requirements with which qualified
mortgages under proposed
§ 1026.43(e)(5) would have to comply.
Specifically, the Bureau solicited
comment on whether qualified
mortgages under proposed
§ 1026.43(e)(5) should be exempt from
provisions of § 1026.43(e)(2) in addition
to those related to debt-to-income ratio
or should be subject to any other loan
feature or underwriting requirements,
either in lieu of or in addition to those
proposed.
A large number of commenters,
including national and State trade
groups representing creditors and many
individual small creditors, argued that
§ 1026.43(e)(5) would not have the
intended effect of preserving access to
nonconforming mortgage credit and
mortgage credit in rural areas unless
§ 1026.43(e)(5) permitted small creditors
to make balloon-payment mortgages
within the qualified mortgage safe
harbor regardless of whether they
operate predominantly in rural or
underserved areas.
These commenters argued that small
creditors rely on balloon-payment
provisions to manage interest rate risk
for the overwhelming majority of their
residential mortgage portfolio loans.
One national trade group representing
small creditors estimated that 75
percent of all residential mortgages in
small creditors’ portfolios have a
balloon-payment feature. Many small
creditors who reported information
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regarding their own portfolios reported
that between 90 and 100 percent of their
portfolio mortgage loans include a
balloon-payment feature.
These commenters also stated that
small creditors that rely on balloonpayment features generally do not have
the capability at this time to originate
and service adjustable-rate mortgages,
also known as ARMs. Adjustable-rate
mortgages would serve as an alternate
way to manage interest rate risk and are
permissible under § 1026.43(e)(5) as
proposed and finalized. However,
commenters expressed concerns that
adjustable-rate mortgages are more
difficult for small creditors to originate
and service because of the systems and
disclosures required.
Finally, these commenters reiterated
that small creditors generally will be
unwilling or unable to lend outside the
qualified mortgage safe harbor because
of the associated litigation risk. As such,
argued these commenters, the
prohibition on balloon-payments under
§ 1026.43(e)(5) would cause a significant
reduction in consumers’ access to
nonconforming credit.
These commenters also asserted that
small creditors have been originating
balloon-payment loans for many years
without significant harm to consumers
and that balloon-payment loans made
by small creditors generally have very
low default rates that are a fraction of
average default rates for mortgage loans
generally. These commenters added that
portfolio mortgage loans are a
significant portion of assets and a
significant revenue stream for most
small creditors. Therefore, the
commenters argued, the inability to
make balloon-payment loans within the
qualified mortgage safe harbor will
cause serious financial harm to many
small creditors, further reducing
consumers’ access to nonconforming
and other mortgage credit.
Rollover balloons. The Bureau also
solicited comment regarding consumers
with balloon-payment loans originated
before the January 10, 2014, effective
date of the 2013 ATR Final Rule for
which the balloon payment will become
due after the effective date. The Bureau
noted that small creditors that use
balloon-payment loans to manage
interest rate risk generally refinance the
remaining principal when the balloon
payment becomes due. In other words,
the small creditors who follow this
practice generally use the balloon
payment feature as an opportunity to
adjust the loan’s interest rate, not
because they expect the consumer will
repay the loan in full before the balloon
payment becomes due.
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In the proposal, the Bureau stated its
belief that the balloon-payment
qualified mortgage provision in
§ 1026.43(f) and the small creditor
portfolio exemption in proposed
§ 1026.43(e)(5) would be adequate to
facilitate refinancing of balloonpayment loans for which the balloonpayment becomes due after January 10,
2014. However, the Bureau solicited
feedback regarding whether these
provisions were adequate for this
purpose or whether creditors would
need additional time beyond the
January 10, 2014, effective date or
would require any additional
accommodations, modifications, or
exemptions.
Several commenters, including small
creditors and creditor trade groups,
specifically acknowledged the
difficulties presented by balloonpayment loans originated before the
effective date. These commenters stated
the balloon-payment mortgages offered
by small creditors generally have
payments (other than the balloon) that
amortize the loan over 30 years. These
commenters stated that consumers most
often take these loans not because they
expect to repay the loan before the
balloon payment becomes due but based
on creditors’ assurances that they will
be able to refinance the loan, albeit at
a different rate. In other words, these
commenters confirmed that small
creditors use balloons in a way that is
functionally similar to a long-term
adjustable-rate mortgage. These
commenters asserted that small
creditors generally are committed to
refinancing these loans for their
customers. They stated, however, that
they will be unable or unwilling to do
so after the effective date unless changes
are made to permit them to originate
new balloon-payment loans within the
qualified mortgage safe harbor.
These commenters stated that, if the
small creditors who originated these
loans are unable or unwilling to
refinance them, consumers will be
forced to seek refinancing elsewhere.
According to these commenters,
consumers with balloon-payment loans
from small creditors generally do not
qualify for secondary market financing,
and many of these consumers therefore
will have difficulty finding other
refinancing or restructuring options.
The commenters asserted that in
extreme circumstances some consumers
who are unable to refinance or make the
balloon payment might face foreclosure
if they were unable to secure
refinancing.
Commenters who raised this issue
generally argued that the Bureau should
exempt loans that refinance a balloon-
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payment loan originated before the
effective date from the ability-to-repay
and qualified mortgage rules or
significantly broaden the ability of
creditors to make balloon loans within
the qualified mortgage safe harbor such
that a greater portion of these
refinancing loans would be covered.
The Final Rule
The Bureau is adopting new
§ 1026.43(e)(6), which provides a twoyear transition period during which
small creditors as defined by
§ 1026.43(e)(5) can originate balloonpayment qualified mortgages even if
they do not operate predominantly in
rural or underserved areas. The Bureau
is adopting new § 1026.43(e)(6) because
it believes that doing so is necessary to
preserve access to responsible,
affordable mortgage credit for some
consumers. As discussed further below
and in connection with § 1026.43(f),
during the two-year period in which
§ 1026.43(e)(6) is in place, the Bureau
intends to review whether the
definitions of ‘‘rural’’ or ‘‘underserved’’
should be further adjusted for purposes
of the qualified mortgage rule and to
explore how it can best facilitate the
transition of small creditors’ who do not
operate predominantly in rural or
underserved areas from balloonpayment loans to adjustable-rate
mortgages as Congress intended under
the Dodd-Frank Act. At the end of the
period, however, the Bureau expects
that the statutory framework will take
full effect such that balloon-payment
loans are treated as qualified mortgages
only where originated by small creditors
operating predominantly in rural or
underserved areas under § 1026.43(f).
New § 1026.43(e)(6) defines an
additional category of qualified
mortgages that, like § 1026.43(e)(5),
includes loans originated and held in
portfolio by creditors that:
• Have total assets that do not exceed
$2 billion as of the end of the preceding
calendar year (adjusted annually for
inflation); and
• Together with all affiliates,
extended 500 or fewer first-lien covered
transactions during the preceding
calendar year.
New § 1026.43(e)(6) is not limited to
small creditors operating predominantly
in rural or underserved areas. However,
the new provision incorporates by
reference all other requirements under
the § 1026.43(f) balloon-payment
qualified mortgage definition. The loan
therefore cannot have:
• Payments that result in an increase
of the principal balance;
• A term longer than 30 years; and
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35489
• Points and fees greater than 3
percent of the total loan amount (or, for
smaller loans, a specified amount).
The creditor must consider and verify
the consumer’s current or reasonably
expected income or assets (other than
the dwelling and attached real property
that secure the loan) and the consumer’s
current debt obligations, alimony, and
child support. The creditor also must
consider the consumer’s monthly debtto-income ratio or residual income. As
with § 1026.43(e)(5) and (f), there is no
numeric limit on a consumer’s debt-toincome ratio and creditors are not
required to calculate debt-to-income
ratio according to appendix Q. In
addition, the loan must provide for
scheduled payments that are
substantially equal and calculated using
an amortization period that does not
exceed 30 years, an interest rate that
does not increase over the term of the
loan, and a term of 5 years or longer.
A loan must not be subject at
consummation to a commitment to be
acquired by any person other than a
person that also meets the above assetsize and number of transactions criteria.
A loan loses its qualified mortgage
status under § 1026.43(e)(6) if it is sold,
assigned, or otherwise transferred,
subject to exceptions for transfers that
are made three or more years after
consummation, to another qualifying
institution, as required by a supervisory
action, or pursuant to a merger or
acquisition.
As with all qualified mortgages, a
qualified mortgage under § 1026.43(e)(6)
receives either a rebuttable or
conclusive presumption of compliance
with the ability-to repay requirements in
§ 1026.43(c), depending on the annual
percentage rate. However, as described
above in the section-by-section analysis
of § 1026.43(b)(4), the Bureau is
adopting an alternate definition of
higher-priced covered transaction for
first-lien covered transactions that are
qualified mortgages under
§ 1026.43(e)(5) and (f). As also is
discussed above in the section-bysection analysis of § 1026.43(b)(4), this
alternate definition applies to qualified
mortgages under § 1026.43(e)(6) as well.
As such, § 1026.43(b)(4) provides that a
first-lien covered transaction that is a
qualified mortgage under proposed
§ 1026.43(e)(6) is a higher-priced
covered transaction if the annual
percentage rate exceeds APOR for a
comparable transaction by 3.5 or more
percentage points. This extends the
qualified mortgage safe harbor described
in § 1026.43(e)(1)(i) to first-lien
qualified mortgages defined under
proposed § 1026.43(e)(6) even if those
loans have annual percentage rates
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between 1.5 and 3.5 percentage points
higher than APOR. Such loans
otherwise would be covered by the
rebuttable presumption of compliance
described in § 1026.43(e)(1)(ii).
As discussed below, § 1026.43(e)(6) is
intended to provide a temporary
transition period during which small
creditors that do not operate
predominantly in rural and underserved
areas can originate balloon-payment
qualified mortgages. Section
1026.43(e)(6) therefore applies only to
loans consummated on or before
January 10, 2016, two years after the
effective date of the 2013 ATR Final
Rule. Qualified mortgages originated
under § 1026.43(e)(6) on or before
January 10, 2016, will retain their
qualified mortgage status after January
10, 2016, as long as all other
requirements, such as the requirement
to retain the loan in portfolio subject to
certain exceptions, are met.
The Bureau believes § 1026.43(e)(6)
appropriately balances consumer
protection and access to credit issues.
As discussed above in the section-bysection analyses of § 1026.43(b)(4) and
(e)(5), the Bureau believes that small
creditors are an important source of
mortgage credit, including
nonconforming mortgage credit, and
that there would be a significant
reduction in consumers’ access to credit
if small creditors were to substantially
reduce the number of residential
mortgage loans they make or cease
mortgage lending altogether. The Bureau
also understands that small creditors
generally do not originate long-term
fixed-rate portfolio loans because of the
associated interest rate risk, that many
small creditors do not offer ARMs
because they do not have the
compliance and other systems in place
to originate and service them, and that
many small creditors have expressed
reluctance to offer balloon-payment
mortgages outside the qualified
mortgage safe harbor because of the
associated litigation risk. The Bureau
also understands that some consumers
may find it more inconvenient, more
costly, or more difficult to refinance
their existing balloon-payment loans if
small creditors are unable or unwilling
to refinance these loans because these
consumers would have to seek financing
from other creditors. The Bureau also is
sensitive to concerns that some
consumers may be unable to find
alternative financing and therefore
could face foreclosure.
Commenters’ preferred solution is for
the Bureau to significantly and
permanently broaden the ability of all
small creditors to make balloonpayment mortgages that are either
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exempt from the ability-to-repay rules or
within the qualified mortgage safe
harbor. As discussed further below with
regard to § 1026.43(f), the Bureau
believes it is appropriate to use the twoyear transition period to consider
whether it can develop more accurate or
precise definitions of rural and
underserved. However, the Bureau
believes that Congress made a deliberate
policy choice in the Dodd-Frank Act not
to extend qualified mortgage status to
balloon-payment products outside of
such areas. The Bureau believes that
with appropriate transition time, and
perhaps implementation support, small
creditors can develop adjustable-rate
mortgage products that will enable them
to manage interest rate risk in a manner
that poses less risk for consumers.
Accordingly, the Bureau also will focus
during the two-year transition period on
facilitating small creditors’ conversion
to adjustable-rate mortgage products.
The Bureau understands that
adjustable-rate mortgages offered today
by many creditors would fall within that
qualified mortgage safe harbor and
incorporate interest rate adjustment
features similar to those of the balloonpayment mortgages used by many small
creditors. For example, the interest rate
of a 5/5 ARM adjusts five years after
consummation and every five years
thereafter for the duration of the loan
term, paralleling the interest rate
adjustment terms of an amortizing 5year balloon-payment mortgage that is
expected to be refinanced until it is paid
off. The Bureau also understands that
there are differences between
adjustable-rate and balloon-payment
mortgages that may be significant for
some creditors. Interest rate adjustments
for adjustable-rate mortgages are tied to
changes in an index rate, and commonly
used index rates (e.g., the London
Interbank Offered Rate or ‘‘LIBOR’’) may
not track small creditors’ cost of funds.
Interest rates for adjustable-rate
mortgages generally are capped at a
certain amount above the initial rate,
and this cap makes managing interest
rate risk more complex. In addition,
creditors that do not currently originate
ARMs are likely to incur costs for
developing the capability to do so (such
as by purchasing additional modules for
existing lending platforms), and there
are additional expenses associated with
servicing adjustable-rate mortgages, as
consumers must be notified before each
interest rate adjustment and servicing
systems must be equipped to adjust the
interest rate and payment amount.
However, adjustable-rate mortgages
also pose significantly less risk to
consumers. The Bureau believes that
balloon-payment mortgages are
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particularly risky for consumers because
the consumer must rely on the creditors’
nonbinding assurances that the loan
will be refinanced before the balloon
payment becomes due. Even a creditor
with the best of intentions may find
itself unable to refinance a loan when a
balloon payment becomes due. Changes
in the consumer’s credit profile may
affect the creditor’s willingness to
refinance or the price of the loan, and
consumers may be unable to anticipate
the new rate that will be offered and
suddenly find that they are unable to
afford it. Consumers with balloonpayment mortgages therefore face the
periodic possibility of losing their
property even if they perform their
obligations under the terms of the loan.
Adjustable-rate mortgages present less
risk to consumers because they do not
require refinancing and because interest
rate adjustments are calibrated over the
life of the loan and therefore are more
predictable.
Publicly available data from reports
filed with the National Credit Union
Administration indicate that around 20
percent of small credit unions,
including some with assets below $150
million, originate adjustable-rate
mortgages and only 18 percent of small
credit unions originate balloon-payment
mortgages but not adjustable-rate
mortgages. This suggests that small
creditors can manage interest rate risk,
lend safely and soundly, and afford the
expense and compliance burden
associated with originating adjustablerate mortgages.
The Bureau believes that Congress
made a clear policy choice in the DoddFrank Act that small creditors not
operating predominantly in rural or
underserved areas must ultimately
conduct their residential mortgage
business using adjustable-rate mortgages
or other alternatives to balloon-payment
mortgages. However, as discussed below
in the section-by-section analysis of
§ 1026.43(f), the Bureau believes that
further study of the existing definitions
of rural and underserved is warranted.
In addition, the Bureau acknowledges
that many small creditors are not
equipped to offer alternatives to
balloon-payment mortgages today and
are unlikely to be so equipped by the
January 10, 2014, effective date. If small
creditors are unable or unwilling to
originate new loans as of that date, the
Bureau believes there will be
deleterious effects on access to
nonconforming credit and possible
harm to consumers with balloonpayment mortgages originated before the
effective date that expect to refinance
their loans with the same creditor when
the balloon payment becomes due.
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The Bureau therefore believes that, in
order to preserve access to affordable,
responsible credit, it is necessary and
appropriate to provide small creditors,
as defined in § 1026.43(e)(5), with a
two-year transition period after the
effective date during which they can
continue to originate balloon loans. The
Bureau believes that this two-year
period will enable the Bureau to reexamine the definitions of rural or
underserved to determine, among other
things, whether these definitions
accurately identify communities in
which there are limitations on access to
credit and whether it is possible to
develop definitions that are more
accurate or more precise. The Bureau
may consider proposing changes to the
definitions of rural or underserved
based on the results of its inquiry. The
two-year transition period also will
facilitate small creditors’ conversion to
adjustable-rate mortgage products or
other alternatives to balloon-payment
loans.
Accordingly, the Bureau is exercising
its authority under TILA sections 105(a),
129C(b)(2)(vi), and 129C(b)(3)(B)(i) to
adopt § 1026.43(e)(6) for the reasons
summarized below and discussed in
more detail above. Under TILA section
105(a) the Bureau generally may
prescribe regulations that provide for
such adjustments and exceptions for all
or any class of transactions that the
Bureau judges are necessary and proper
to effectuate the purposes of TILA,
which include the purposes of TILA
129C, and facilitate compliance with
these purposes, among other things. The
Bureau believes that these amendments
are necessary and proper to ensure that
consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay
the loans. This provision is consistent
with the findings of TILA section 129C
by ensuring that consumers are able to
obtain responsible affordable credit,
which informs the Bureau’s
understanding of its purposes.
Furthermore, the Bureau revises the
qualified mortgage criteria in the statute
to adopt this new definition by finding
that this provision is necessary and
proper to ensure that responsible,
affordable mortgage credit remains
available to consumers in a manner
consistent with the purposes of TILA
section 129C, necessary and appropriate
to effectuate the purposes of TILA
section 129C and to facilitate
compliance with TILA section129C. As
described above, the Bureau believes
that, unless § 1026.43(e)(6) is adopted,
small creditors will be less likely to
make residential mortgage loans.
Because small creditors are a significant
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source of nonconforming mortgage
credit nationally and mortgage credit
generally in rural or underserved areas,
this would significantly limit access to
mortgage credit for some consumers.
The Bureau also believes that the
relationship lending model, qualitative
local knowledge, and size of small
creditors, combined with the intrinsic
incentives of portfolio lending, provide
strong assurances that these creditors
typically will make reasonable and good
faith determinations of consumers’
ability to repay when originating loans
pursuant to § 1026.43(e)(6). This
provision is also necessary and proper
to facilitate compliance with the
purposes of TILA by easing the ability
of small creditors to make qualified
mortgages. The Bureau also believes that
the provisions of § 1026.43(e)(6) relating
to debt-to-income ratio or residual
income are authorized by TILA section
129C(b)(2)(vi), which authorizes, but
does not require, the Bureau to adopt
guidelines or regulations relating to
debt-to-income ratio or alternative
measures of ability to pay regular
expenses after payment of total monthly
debt.
43(f) Balloon-Payment Qualified
Mortgages Made by Certain Creditors
Section 1026.43(f) provides that
certain balloon loans made and held in
portfolio by certain small creditors
operating predominantly in rural or
underserved areas are qualified
mortgages. The Bureau did not propose
specific amendments to § 1026.43(f), but
explained that if proposed
§ 1026.43(e)(5) were adopted with
changes inconsistent with § 1026.43(f),
the Bureau would consider and might
adopt parallel amendments to
§ 1026.43(f) in order to keep these
sections of the regulation consistent.
The Bureau solicited comment on the
advantages and disadvantages of
maintaining consistency between
§ 1026.43(e)(5) and (f). Commenters
generally did not specifically discuss
the importance of consistency, although
most commenters advocating for
changes to § 1026.43(e)(5) stated that
conforming changes should be made to
§ 1026.43(f) as well. However, many
commenters raised concerns regarding
the scope of the Bureau’s definitions of
rural and underserved under
§ 1026.43(f). Commenters including
national and State trade groups
representing creditors and dozens of
small creditors argued that the Bureau’s
definitions of rural and underserved are
too restrictive and do not adequately
preserve consumers’ access to credit.
Commenters were particularly critical of
the Bureau’s definition of ‘‘rural,’’
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which they asserted excluded many
communities that are considered rural
under other legal or regulatory
definitions or that are commonly
viewed as rural because of their small,
isolated, agricultural or undeveloped
characteristics. Some of these
commenters proposed that the Bureau
adopt alternate definitions of ‘‘rural,’’
such as those used by the U.S.
Department of Agriculture’s Rural
Housing Loan Program or the Farm
Credit System. Others suggested that all
creditors or all small creditors should be
eligible to make balloon-payment
qualified mortgages if the loan is held in
portfolio, or that a balloon-payment
mortgage should be considered a
qualified mortgage if the consumer and
property have certain characteristics
that suggest the loan would not be
eligible for sale to the secondary market.
Other commenters raised concerns
about the requirement that balloonpayment qualified mortgages have a
loan term of five years or longer. These
commenters asserted that many small
creditors currently originate balloonpayment loans with shorter terms and
would be unable to manage interest rate
risk using balloon-payment loans with a
five-year term.
One commenter, a consumer
advocacy organization, argued that all
qualified mortgages should be longterm, fixed-rate loans and that the
§ 1026.43(f) definition of balloonpayment qualified mortgages should be
abandoned.
As discussed above in the section by
section analysis of § 1026.43(e)(5),
§ 1026.43(e)(5) as adopted is consistent
with existing § 1026.43(f). The Bureau
did not propose and did not solicit
comment regarding amendments
§ 1026.43(f) except with respect to
preserving consistency with
§ 1026.43(e)(5), and the Bureau is not
reconsidering the definitions of rural
and underserved and the § 1026.43(f)
restrictions on the terms of balloonpayment qualified mortgages at this
time. The Bureau is therefore not
adopting any changes to § 1026.43(f) in
this rulemaking.
However, the Bureau is sensitive to
concerns expressed by commenters that
the existing definitions of rural and
underserved may not include some
communities in which there are
limitations on access to credit related to
the community’s rural character or the
small number of creditors operating in
the community. For example, the
Bureau is aware that there are
drawbacks to a county-based system for
defining ‘‘rural’’ and ‘‘undeserved,’’
such as in western States where
counties may cover extremely large
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areas. As discussed above in the sectionby-section analysis of § 1026.43(e)(6),
the Bureau is providing a two-year
transition period during which small
creditors can originate balloon payment
qualified mortgages even if they do not
operate predominantly in rural or
underserved areas. In addition to
providing time for small creditors to
further develop their capacity to offer
adjustable-rate mortgages, the Bureau
expects to re-examine the definitions of
rural or underserved during this time to
determine, among other things, whether
these definitions accurately identify
communities in which there are
limitations on access to credit and
whether it is possible to develop
definitions that are more accurate or
more precise. The Bureau may consider
proposing changes to the definitions of
rural or underserved based on the
results of its inquiry.
43(g) Prepayment Penalties
The Bureau is adopting conforming
amendments to § 1026.43(g) to include
references to § 1026.43(e)(5) and (6), as
described in the section-by-section
analyses of those sections, above.
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VI. Effective Date
This final rule is effective on January
10, 2014. The rule applies to
transactions for which the creditor
received an application on or after that
date. The Bureau received several
comments requesting various delays in
the effective date. For example, one
commenter asked the Bureau to delay
the effective date for all of § 1026.43 by
six months to provide sufficient time to
implement the processes, procedures,
and systems changes needed to comply
with the ability-to-repay requirements.
The Bureau has considered these
comments, but declines to delay the
effective date. The Bureau
acknowledges the challenges identified
by commenters, but believes that an
effective date of January 10, 2014
provides sufficient time to implement
the required changes. Also, as discussed
in the 2013 ATR Final Rule, the Bureau
believes that this effective date will
ensure that consumers receive the
protections in these rules as soon as
reasonably practicable, taking into
account the timeframes established in
section 1400(c) of the Dodd-Frank Act,
the overlapping provisions of the other
title XIV final rules, the Bureau’s efforts
at facilitating regulatory
implementation, and the need to afford
creditors, other affected entities, and
other industry participants sufficient
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time to implement the more complex or
resource-intensive new requirements.161
VII. Dodd-Frank Act Section 1022(b)(2)
Analysis
In developing the final rule, the
Bureau has considered potential
benefits, costs, and impacts.162 In
addition, the Bureau has consulted, or
offered to consult with, the prudential
regulators, SEC, HUD, FHFA, the
Federal Trade Commission, and the
Department of the Treasury, including
regarding consistency with any
prudential, market, or systemic
objectives administered by such
agencies. The Bureau also held
discussions with or solicited feedback
from the United States Department of
Agriculture, Rural Housing Service, the
Federal Housing Administration, and
the Department of Veterans Affairs
regarding the potential impacts of the
final rule on those entities’ loan
programs.
The Bureau is issuing this final rule
to adopt certain exemptions,
modifications, and clarifications to
TILA’s ability-to-repay rule. On January
10, 2013, the Bureau issued the 2013
ATR Final Rule to implement the
ability-to-repay requirements of the
Dodd-Frank Act that generally require a
creditor to make a reasonable, good faith
determination of a consumer’s ability to
repay a mortgage loan and other
statutory provisions. See 78 FR 6407
(Jan. 30, 2013). At the same time, the
Bureau issued the 2013 ATR Proposed
Rule related to certain proposed
exemptions, modifications, and
clarifications to the ability-to-repay rule.
See 78 FR 6621 (Jan. 30, 2013).
The final rule provides exceptions to
the 2013 ATR Final Rule, which
implements the statute’s inclusion of
loan originator compensation in points
and fees. Specifically, in the final rule,
payments by consumers to mortgage
brokers need not be counted as loan
originator compensation where such
payments already have been included in
points and fees as part of the finance
charge. In addition, compensation paid
by a mortgage broker to its employee
loan originator need not be included in
points and fees, nor does compensation
paid by a creditor to its own loan
originator employees. However,
161 See
78 FR 6555 (Jan. 30, 2013).
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.
162 Specifically,
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consistent with the statute and 2013
ATR Final Rule, compensation paid by
a creditor to a mortgage broker
continues to be included in points and
fees in addition to any origination
charges paid by a consumer to the
creditor.
The final rule also provides certain
exemptions from the ATR requirements.
These include exemptions for
extensions of credit made by certain
types of creditors, in accordance with
applicable conditions, including
creditors designated by the U.S.
Department of the Treasury as
Community Development Financial
Institutions; creditors designated by the
U.S. Department of Housing and Urban
Development as either a Community
Housing Development Organization or a
Downpayment Assistance Provider of
Secondary Financing; and certain
creditors designated as nonprofit
organizations under section 501(c)(3) of
the Internal Revenue Code. The final
rule also exempts from the ability-torepay requirements extensions of credit
made pursuant to a program
administered by a housing finance
agency (HFA) and extensions of credit
made pursuant to an Emergency
Economic Stabilization Act program.
The final rule creates two new
definitions for loans that can be
qualified mortgages. The final rule
creates a new category of qualified
mortgages that includes, among other
conditions, certain loans originated and
held on portfolio by creditors that have
total assets of less than $2 billion at the
end of the previous calendar year and,
together with all affiliates, originated
500 or fewer first-lien covered
mortgages during the previous calendar
year. In addition, the final rule creates
a two-year transition period during
which balloon loans originated and held
on portfolio by small creditors (as
defined above) who do not operate
predominantly in rural or underserved
areas can be qualified mortgages under
defined conditions. Such loans would
not be eligible for qualified mortgage
status under section 1026.43(f) because
under the statute, that provision is
limited to creditors that operate
predominantly in rural or underserved
areas. The final rule also allows small
creditors to charge a higher annual
percentage rate of 3.5 percentage points
above the Average Prime Offer Rate for
first-lien qualified mortgages, and still
benefit from a conclusive presumption
of compliance (or safe harbor). This
higher threshold applies to the new
small creditor portfolio qualified
mortgages just described, to first-lien
balloon-payment qualified mortgages
originated by small creditors operating
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predominantly in rural or underserved
areas and, to balloon mortgages
originated by other small creditors
during the two-year transition period.
This analysis generally examines the
benefits, costs, and impacts of the final
rule against the baseline of the January
2013 ATR Rule.163 For the analyses
considered here, the Bureau believes
that the baseline of the 2013 ATR Final
Rule is the most appropriate and
informative. Because the final rule
includes amendments and clarifications
to the January 2013 ATR Rule, a
comparison to the January baseline
focuses precisely on the impacts of such
provisions. The analyses in this section
rely on data that the Bureau have
obtained, the record including
comments received in the proposed
rule, and the record established by the
Board and Bureau during the
development of the 2013 ATR Final
Rule. However, the Bureau notes that for
some analyses, there are limited data
available with which to quantify the
potential costs, benefits, and impacts of
the proposal. Still, general economic
principles together with the limited data
that are available provide insight into
the benefits, costs, and impacts and in
these cases, the analysis provides a
qualitative discussion of the benefits,
costs, and impacts of the final rule.
Commenters on the proposed rule did
not submit comments specifically
addressing the analyses under Section
1022 contained in the Supplemental
Information accompanying the proposal.
However, several did address the overall
benefits, costs and impacts of the
proposal.164 The comments are
discussed throughout the section-bysection analyses above.
A. Potential Benefits and Costs to
Consumers and Covered Persons
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1. Points and Fees Calculation
In the final rule, payments by
consumers to mortgage brokers need not
be counted as loan originator
compensation where such payments
already have been included in points
and fees as part of the finance charge.
In addition, compensation paid by a
163 The Bureau has discretion in future
rulemakings to choose the relevant provisions to
discuss and to choose the most appropriate baseline
for that particular rulemaking.
164 In conducting the interagency consultation
process under section 1022(b)(2)(B), the Bureau
received communications for the public record
regarding the proposed rule. The FDIC, HUD, and
OCC wrote the Bureau regarding the proposed
provisions on loan originator compensation and
FHFA and HUD wrote the Bureau regarding the
proposed exemptions from the ability-to-repay
requirements. These comments are discussed in
more detail in the section-by-section analyses
above.
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mortgage broker to its employee loan
originator need not be included in
points and fees, nor does compensation
paid by a creditor to its own loan
originator employees. However,
compensation paid by a creditor to a
mortgage broker is included in points
and fees in addition to any origination
charges paid by a consumer to the
creditor.
As noted above, the Bureau believes
that the most appropriate baseline
against which to consider these changes
is the 2013 ATR Final Rule. Consistent
with the literal language of the statute,
the 2013 ATR Final Rule provided that
loan originator compensation be treated
as additive to other elements of points
and fees and that compensation is
added as it flows downstream to the
loan originator. As discussed in the
section-by-section analyses above, the
Bureau is now invoking its exception
and revision authorities to alter the
statutory additive approach to exclude
certain compensation.
At a general level, the exclusion
(inclusion) of additional sources of
compensation in the points and fees
calculation decreases (increases) the
total amount of points and fees. As
explained in the 2013 ATR Final Rule,
keeping all other provisions of a given
loan fixed, calculations that exclude
additional amounts of compensation
will result in a greater number of loans
being eligible as qualified mortgages.
Conversely, calculations that include
additional amounts of compensation are
less likely to achieve qualified mortgage
status. For loans that are not eligible to
be qualified mortgages, the costs of
origination may be slightly higher as a
result of the slightly increased liability
for the lender and any assignees and of
possibly increased compliance costs
related to the origination and
documentation of the loan. If these costs
are passed along, consumers’ costs for
these loans may also increase. However,
these consumers will also have the
added consumer protections that
accompany loans made under the
general ability-to-repay provisions. In
some instances, such up-front points
and fees could be folded into the
interest rate in order to maintain loans’
status as qualified mortgages, which in
turn could move loans out of the safe
harbor and into the rebuttable
presumption. The 2013 ATR Final Rule
discussed the impacts of the ability-torepay/qualified mortgage regime on
consumers in depth including the
nature of the liability regime. To the
extent that the impact of various
provisions of this rule on consumers is
essentially to expand or contract
coverage of the ability-to-repay/
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35493
qualified mortgage regime, the general
discussion of the impacts from the
January 2013 rule is informative for
each of the various provisions.
The exclusion (inclusion) of
additional loan originator compensation
amounts in points and fees may
similarly lead fewer (more) loans to
exceed the points and fees triggers and
rate triggers for high-cost mortgages
under HOEPA. Based on the history of
high-cost mortgage loans, the Bureau
believes that loans exceeding the highcost thresholds are less likely to be
offered unless they can be restructured
with lower up front points and fees.
Consumers who are offered and accept
loans above the high-cost mortgage
threshold will have the added consumer
protections that accompany high-cost
mortgage loans; other consumers may
still able to take out their loan by paying
a higher interest rate and less upfront.165 The January 2013 HOEPA rule
discussed the impacts of the high-cost
mortgage regime on consumers in depth
including the nature of the liability
regime. To the extent that the impact of
various provisions of this rule on
consumers is essentially to expand or
contract coverage of the high cost
mortgage regime, the general discussion
of the impacts from the January 2013
HOEPA rule is informative for each of
the various provisions.
Measured against the 2013 ATR Final
Rule baseline, the final rule excludes
certain compensation from the points
and fees calculation in both the
wholesale and retail channels. In the
wholesale channel, two types of
compensation are excluded: Payments
by consumers to mortgage brokers
where such payments are already
included in points and fees as part of
the finance charge and compensation
paid by a mortgage broker to its
employee loan originator. In the retail
channel, compensation paid by a
creditor to its own loan originator
employees is also excluded. Because of
these exclusions, more loans will satisfy
the points and fees threshold for
qualified mortgages and fewer loans will
exceed the points and fees threshold for
high-cost mortgages. As described
above, for covered persons, the costs of
supplying such loans should be slightly
reduced; consumers with such loans
should therefore benefit from greater
access to credit and lower costs, but
would have a more restricted ability to
challenge violations of the ability-torepay rules and would not benefit from
165 The ability to cover up-front costs in the
interest rate depends on the characteristics of the
borrower and the loan. The interest rate threshold
for high-cost mortgages under HOEPA could also
potentially limit this option.
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the protections afforded to high-cost
mortgages.
The magnitude of both of these
effects—changes in the status of loans as
qualified mortgages or high cost
mortgages and the extent to which
lenders may adjust pricing and
compensation practices in response to
such provisions—will determine the
costs, benefits, and impacts on covered
persons and consumers. As noted
earlier, comprehensive and
representative data that include points
and fees as well as loan originator
compensation is not readily available.
The Bureau did receive some data,
however, in response to its requests
included in the proposed rule. In a
communication that has been made part
of the record, one industry trade group
submitted data to the Bureau that
contained loan-level information for
three anonymous retail lenders. These
data included information on points and
fees and estimates of loan originator
compensation. Based on the limited
data in this submission, excluding
compensation paid by retail lenders to
their loan officers has a minor impact on
the number of loans below the qualified
mortgage points and fees or high-cost
mortgage thresholds.166 The Bureau is
not able to determine precisely how
representative these data are of the
overall retail mortgage market, however.
The Bureau therefore did not rely on
these data, although the overall patterns
in these data and the general
magnitudes of any effects align with the
Bureau’s general understanding of the
level of loan originator compensation
and the level of up-front charges in the
market. This general understanding
informs the Bureau’s analysis and leads
the Bureau to believe that the economic
impact of these outcomes should be
small. On the whole, the final rule will
slightly reduce costs related to
supplying these loans as well as
compliance costs for covered persons as
compared to the 2013 ATR Final Rule.
The Bureau believes that consumers
will benefit from slightly increased
access to credit and lower costs on the
affected loans, but in return will not
receive the protections afforded to loans
166 The precise magnitudes of the effects depend
critically on whether third-party charges are
provided by an affiliate of the loan originator.
Assuming that affiliates are not involved in the
transaction, the rule has almost no effect, with
fewer than 0.5% of loans in this sample dropping
below the relevant thresholds. Under the
assumption that affiliates provided all settlement
services, roughly 6% of loans that would exceed the
limits are projected to no longer do so once loan
originator compensation is excluded. However, this
figure is very likely an overestimate: Even for those
creditors that use affiliates, it is rare that all
settlement charges would be provided by affiliated
third parties.
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originated under the general ability-torepay standards or to high-cost
mortgages.
This provision of the rule may also
alter the competitive dynamics between
the wholesale channel and the retail
channel. As noted above, the Bureau
recognizes that an additive approach
makes it more difficult for creditors to
impose up-front charges and still remain
under the qualified mortgage points and
fees limits and the high-cost mortgage
threshold. For certain loans originated
through the brokerage channel, the
inclusion of compensation paid by the
creditor to the brokerage firm in the
points and fees calculation may have
the effect of denying the loan qualified
mortgage status while a loan ostensibly
similar in terms of interest rate and upfront charges but that has no broker
commission because it is offered
through the retail channel might be a
qualified mortgage. However, for loans
in the brokerage channel, this impact
could be mitigated by having the
consumer pay the broker directly, by
shifting other origination charges into
the rate, and/or by shifting from a
settlement services provider affiliated
with the creditor to a non-affiliated
provider.
The major alternative that the Bureau
considered to address the competitive
impact of the final rule was including in
points and fees compensation from
creditors to their loan originator
employees in retail transactions (either
under an additive or netting approach).
This alternative, however, also could
have altered the nature of competition
between retail and the wholesale
channels. On the one hand, if this
alternative had been implemented,
fewer loans made through the retail
channel would have fallen within the
regulatory points and fees thresholds.167
On the other hand, the compliance
burden on creditors originating retail
transactions would have been
significant, which could have given the
wholesale channel a competitive
advantage over the retail channel due to
the cost of complying with this
alternative. As noted above, the
Bureau’s general understanding of the
market suggests that this alternative
would not materially change which
loans are qualified mortgages in the
retail channel. However, the Bureau
received numerous industry comments
asserting that counting loan officer
compensation in retail transactions
would impose a significant burden on
167 The extent that payments from creditors to
brokerage firms must cover overhead, which is not
included in payments from creditor to their own
employees, limits the degree to which this
alternative could achieve a fully equal impact.
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the retail channel.168 Each creditor
originating loans through the retail
channel would have to devise internal
policies and systems regarding which
components of loan officers’
compensation (and that of any other
employees occasionally performing
some of the loan officers’ functions) to
include under the rule and a method of
tracking such compensation in real time
for the purpose of determining whether
a particular loan is eligible for the
qualified mortgage status or is a highcost mortgage. The Bureau believes that
the labor and investments to develop
such systems would be substantial. As
described above, the Bureau was also
concerned that this alternative would
have provided little benefit to
consumers, in part due to the anomalies
in counting individual loan originator
compensation that is specific to the
retail transaction as of the time that the
interest rate is set.
The other major alternative discussed
in the proposed rule would have
permitted creditors to net origination
charges against loan originator
compensation paid to brokers (and
creditors’ own loan originator
employees) to calculate the amount of
loan originator compensation that is
included in points and fees. As noted,
under such an approach (as compared to
the final rule), fewer loans originated
through the wholesale channel would
exceed the qualified mortgage and highcost points and fees thresholds. In the
wholesale context, comprehensive data
that includes points and fees as well as
loan originator compensation is also not
readily available. However, as discussed
above, the Bureau was concerned that
such an approach would reduce the
benefits to consumers of the qualified
mortgage status and high-cost mortgage
protections by allowing higher
combined loan originator compensation
and up-front points and fees.
Particularly in markets that are not fully
competitive or in transactions involving
less sophisticated consumers or
consumers who are less likely to shop
for competitive pricing, the Bureau was
concerned that the netting approach
would provide greater flexibility to
structure loan originator compensation
to provide incentives for mortgage
brokers to deliver more costly loans. In
addition, the Bureau was concerned that
such an approach would have created
strong incentives for creditors and
mortgage brokers to structure loan
originator compensation to be paid
168 The wholesale channel does not experience
nearly the same burden due to this rule. Both the
creditor to broker and the consumer to creditor fees
are already routinely calculated by the industry.
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through the creditor to take advantage of
the netting approach, which is not
available where the consumer pays the
mortgage broker directly.
Other combinations of the additive
approach, the netting approach, and the
approach of excluding all compensation
in either channel are also possible; the
impacts are derived as combinations of
the ones discussed here.
2. Exemptions From Ability-to-Repay
Requirements
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As described in the Section 1022
Analysis of the 2013 ATR Final Rule,
there are a number of situations where
creditors may engage in lending with
too little regard for the consumer’s
ability to repay. The 2013 Final ATR
Rule is designed to minimize such
activity by ensuring proper
documentation and verification related
to extensions of credit and by requiring
consideration of a number of factors
including the consumer’s debt-toincome ratio and credit history.
Creditors who fail to follow any of these
requirements, or who extend credit
without a ‘‘reasonable and good faith
determination’’ of the consumer’s ability
to repay, are subject to liability.169
However, as described above, the
Bureau was concerned that the abilityto-repay requirements adopted in the
2013 ATR Final Rule would undermine
or frustrate application of the uniquely
tailored underwriting requirements
employed by certain creditors and
programs, and would require a
significant diversion of resources to
compliance, thereby significantly
reducing access to credit. The Bureau
was also concerned that some of these
creditors would not have the resources
to implement and comply with the
ability-to-repay requirements, and may
have ceased or severely limited
extending credit to low- to moderateincome consumers, which would result
in the denial of responsible, affordable
mortgage credit. The exemptions from
the ability-to-repay requirements are
designed to eliminate these
requirements and thereby to limit
creditors’ costs and protect credit
availability in carefully defined
169 The liability regime extends beyond creditors.
As amended by section 1413 of the Dodd-Frank Act,
TILA provides that when a creditor, an assignee,
other holder or their agent initiates a foreclosure
action, a consumer may assert a violation of TILA
section 129C(a) ‘‘as a matter of defense by
recoupment or setoff.’’ TILA section 130(k). There
is no time limit on the use of this defense and the
amount of recoupment or setoff is limited, with
respect to the special statutory damages, to no more
than three years of finance charges and fees. The
impacts of the liability regime applicable to covered
mortgages are discussed in more detail in the 1022
analysis for the 2013 ATR Final Rule.
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circumstances, namely loans or loan
programs that serve certain consumers
or communities and that typically assess
repayment ability in ways that do not
necessarily comport with the
requirements of the Act and the 2013
ATR Final Rule.
As described earlier, mortgage lending
by community-focused creditors,
programs operated by housing finance
agencies, nonprofit organizations, and
housing stabilization programs, varies
widely in the form of financing, the
products offered, and the precise nature
of underwriting. In particular, the
Bureau understands that many of these
creditors do not use documentation and
verification procedures closely aligned
with the requirements of the 2013 ATR
Final Rule or consider all of the
underwriting factors specified in the
rule. The benefits of the final rule derive
from eliminating the costs of imposing
these requirements on these particular
extensions of credits and assuring that
credit remains available through these
programs without regard to the rule’s
underwriting factors. Access to credit is
a specific concern for the populations
generally served by these lenders and
programs.
As explained in the 2013 ATR Final
Rule, in general, consumers and others
could be harmed by this action as it
removes particular consumer
protections and could allow some
deleterious lending to occur. However,
in all of the cases discussed above, the
Bureau believes that the communityfocused mission of the creditor
organizations and/or programs through
which credit is extended, the close
interaction between creditors and
consumers in these instances, and other
safeguards (including government
monitoring of certain categories and the
origination thresholds for the general
nonprofit category) should mitigate any
potential harms to consumers and costs
from the rule.
Data regarding the exact scope of
lending through these channels are
limited, as are data regarding the
performance of these loans. There are 51
HFAs and approximately 1,000 CDFIs,
62 percent of which are classified as
Community Development (CD) Loan
Funds, 22 percent as CD Credit Unions,
while the rest are CD Banks, Thrifts, or
CD Venture Capital Funds.170 There are
233 501(c)(3) nonprofit agencies and
nonprofit instrumentalities of
government in the U.S. that are
authorized to provide secondary
170 See U.S. Dep’t of the Treas., Community
Development Financial Institutions Fund, http://
www.cdfifund.gov/docs/certification/cdfi/CDFI List
-07-31-12.xls.
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35495
financing,171 267 creditors certified by
HUD as Community Housing
Development Organizations (CHDOs) in
connection with HUD’s HOME
Investment Partnership Program,172 and
231 organizations certified as
Downpayment Assistance through
Secondary Financing Providers.173 The
Bureau is not aware and commenters
did not provide a comprehensive list of
these institutions. However, the Bureau
believes that there may be substantial
overlap among these institutions. A
large number of creditors participate in
the housing stabilization programs
covered by the final rule.
Data regarding the number or volume
of loans made by housing finance
agencies and community-focused
lending programs is limited. There is
some data suggesting that HFA bonds
funded approximately 67,000 loans in
2010 with a value of just over $8
billion.174 Data regarding CDFIs indicate
that these institutions funded just under
$4 billion in loans; however, data on the
type of housing supported is
unavailable.175 Lending at CHDOs
totaled $64 million in 2011 with just
under 500 loans.176
The Bureau had proposed an
exemption to the ability-to-repay
requirements for refinancing programs
offered by the Department of Housing
and Urban Development (HUD), the
Department of Veterans Affairs (VA), or
the U.S. Department of Agriculture
(USDA). Similarly, the Bureau had
proposed an exemption to the ability-torepay requirements for certain GSE
refinancing programs. However, as
noted above, the Bureau has concluded
after further deliberation that the
proposed exemptions from the abilityto-repay requirements are unnecessary
because, even absent an exemption from
the ability-to-repay requirements, FHA,
171 See U.S. Dep’t of Hous. and Urban
Development: Nonprofits, https://entp.hud.gov/
idapp/html/f17npdata.cfm.
172 Includes 2011 data for institutions with CHDO
reservations and CHDO loans without a rental
tenure type. See U.S. Dep’t of Hous. and Urban
Development: HOME Participating Jurisdiction’s
Open Activities Reports, http://www.hud.gov/
offices/cpd/affordablehousing/reports/open/.
173 Includes data for institutions shown to offer
secondary financing. See U.S. Dep’t of Hous. and
Urban Development: Nonprofits, https://
entp.hud.gov/idapp/html/f17npdata.cfm.
174 See National Council of State Housing
Agencies, State HFA Factbook (2010), http://
www.ncsha.org/story/ncsha-releasescomprehensive-survey-hfa-program-activity.
175 See U.S. Dep’t of the Treas., Community
Development Financial Institutions Fund:
Awardees/Allocatees, http://www.cdfifund.gov/
awardees/db/basicSearchResults.asp.
176 See U.S. Dep’t of Hous. and Urban
Development: HOME Participating Jurisdiction’s
Open Activities Reports, http://www.hud.gov/
offices/cpd/affordablehousing/reports/open.
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VA, and USDA loans, including
refinancings, as well as GSE
refinancings, are given qualified
mortgage status under the Bureau’s 2013
ATR Final Rule. Under the temporary
category of qualified mortgages in
§ 1026.43(e)(4), the final rule already
incorporates the refinancing programs’
specific underwriting criteria and
affords these loans a presumption (in
some cases, conclusive) of compliance
with the ability-to-repay requirements,
so long as they meet certain product
feature requirements and limitations on
points and fees. The small difference
between the proposed exemption and
the 2013 ATR Final Rule temporary
category for QMs involves loan features
(e.g., negative amortization and interest
only features) and the cap on points and
fees under § 1026.43(e)(2). Under the
2013 ATR Final Rule, loans with those
features or above the points and fees
threshold (that otherwise meet the
conditions of the QM definition) cannot
be originated as qualified mortgages and
therefore must meet the ability-to-repay
requirements, while under the proposed
exemption they would have been
exempted from those requirements as
well. The Bureau believes that very few
refinancings would be excluded on
these grounds and therefore that these
restrictions should not impose any
additional meaningful costs on creditors
or impede consumers’ access to
responsible, affordable mortgage credit.
Qualified mortgage refinancings that
trigger the threshold for higher-priced
mortgage loans are also another small
area of difference: under the 2013 ATR
Final Rule, these loans have a rebuttable
presumption of compliance with the
ability-to-repay requirements while
under the exemption there would have
been no such requirements. As
described, costs for covered persons
offering these loans could be slightly
higher. However, as discussed above, in
light of the history of refinancings, the
Bureau believes that it is a meaningful
benefit to consumers to preserve their
ability to seek redress in the event of
abuse.
3. Extension of Qualified Mortgage
Status
The benefits to covered persons from
extending qualified mortgage status to
certain loans made by smaller creditors
and held on portfolio also derive from
maintaining access to credit and
limiting potential increases in the costs
of these loans. By granting creditors that
qualify under the new qualified
mortgage definition a conclusive or
rebuttable presumption of compliance
with the ability-to-repay provisions, the
final rule limits the legal liability of
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these creditors and most expected
litigation costs. The final rule may also
provide greater flexibility with regard to
certain documentation, verification, and
underwriting practices in certain
circumstances.177 These cost reductions
in turn could enhance the willingness of
such creditors to make these loans or
reduce the amount the creditors would
otherwise charge for these loans.178
Consumers, too, will benefit to the
extent that the expanded qualified
mortgage status makes creditors more
willing to continue extending such
credit and to do so at a lower price than
they might charge for non-qualified
mortgages under the new regulations. In
return, however, consumers will have
narrower grounds on which to challenge
any violations of the ability-to-repay
rules as discussed in more detail in the
Section 1022 analysis of the 2013 Final
ATR Rule.
Given the lower default and
delinquency rates at these smaller
community-focused institutions, the
avoided costs related to liability and
litigation are likely small. However, the
lower default and delinquency rates at
these institutions, the relationship
lending that they engage in, and
restrictions on reselling the loans on the
secondary market for at least three
years, together also suggest that the risk
of consumer harm (and therefore the
costs of this provisions) are also very
small.179 While the mathematical
impacts of litigation costs/risks may be
limited, the Bureau believes that the
broader impacts on access to credit
could be significant particularly in
individual communities.
Based on data from 2011, roughly
9,200 institutions with approximately
450,000 loans on portfolio are likely to
be affected by the extension of qualified
mortgages for certain small creditors.180
177 For example, the final rule requires that small
creditors assess either the debt-to-income ratio or
the residual income of the borrower, but does not
require that the consumer’s DTI not exceed 43
percent as determined pursuant to appendix Q nor
that the loan be eligible for purchase, guarantee, or
insurance by the GSEs or by specified federal
agencies.
178 To the extent that the cost advantage is
material, this provision could give some smaller
institutions a slight advantage over lenders not
eligible to make qualified mortgages using this
definition.
179 The possibility that small creditors qualifying
for this exemption can make certain mortgages as
qualified mortgages, while their larger competitors
can only make these loans subject to the ability-torepay provisions, may allow them to offer these
loans at lower rates. However, as discussed in the
2013 ATR Final Rule, any effects on pricing are
likely to be small.
180 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
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Based on the Bureau’s estimates, on
average, 16.7 percent of portfolio loans
at these institutions are estimated to
have a DTI ratio above 43 percent. For
the subset of these loans that also do not
contain any of the prohibited features
for the general definition for qualified
mortgages (assuming other conditions
are met), the final rule grants the
creditor a conclusive or rebuttable
presumption of compliance with the
ability-to-repay requirements. The
Bureau is unable to estimate the
percentage of these loans that would not
qualify for the temporary expansion of
the qualified mortgage definition in the
final rule under § 1026.43(e)(4).
Similarly, the Bureau is unable to
estimate the number of balloon
mortgages originated by lenders not
operating in rural areas that are eligible
for qualified mortgage status under the
final rule’s temporary provision.
Similar tradeoffs are involved in the
increase in the qualified mortgage
threshold from 1.5 percentage points
above the average prime offer rate
(APOR) to 3.5 percentage points above
APOR for first lien mortgages originated
and held by small creditors and for the
qualified balloon mortgages originated
and held by small creditors
predominantly operating in rural or
underserved areas. For loans in this
APR range, whether they meet the
definition of qualified mortgage under
the 2013 Final ATR Rule or under the
new definitions provided in this final
rule, the presumption of compliance
with the ability-to-repay requirements
would be strengthened. The Bureau
estimates that roughly 8–10 percent of
portfolio loans at these institutions are
likely to be affected by this change.
Strengthening the presumption of
compliance for these loans will benefit
consumers and/or covered persons to
the extent doing so improves credit
access or reduces costs. Strengthening
the presumption will have a cost to
consumers to the extent consumers who
find themselves unable to afford their
HMDA, the Bureau has matched HMDA data to Call
Report data and MCR data 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.
The Bureau has projected originations of higherpriced mortgage loans for depositories that do not
report HMDA in a similar fashion. These
projections use Poisson regressions that estimate
loan volumes as a function of an institution’s total
assets, employment, mortgage holdings, and
geographic presence. Neither HMDA nor the Call
Report data have loan level estimates of the DTI. To
estimate these figures, the Bureau has matched the
HMDA data to data on the HLP dataset provided by
the FHFA. This allows estimation of coefficients in
a probit model to predict DTI using loan amount,
income, and other variables. This model is then
used to estimate DTI for loans in HMDA.
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mortgage, and would otherwise be able
to make out a claim and recover their
losses, would be unable to do so under
the expanded safe harbor.
B. Potential Specific Impacts of the
Final Rule
1. Potential Impact on Consumer Access
to Consumer Financial Products or
Services
The Bureau does not anticipate that
the final rule would reduce consumers’
access to consumer financial products
and services. Rather, as discussed
above, the Bureau believes that the final
rule would in fact enhance certain
consumers’ access to mortgage credit as
compared to the 2013 ATR Final Rule.
The Bureau believes that the exclusion
of certain compensation from the
calculation of points and fees allows
more mortgages under the qualified
mortgage and high-cost mortgage
thresholds; the exemption from the
ability-to-repay requirements should
facilitate lending under various
programs and by various creditors; and,
the new and expanded qualified
mortgage definitions should also expand
responsible lending.
2. Depository Institutions and Credit
Unions With $10 Billion or Less in Total
Assets, as Described in Section 1026
The Bureau believes the final rule will
have differential impacts on some
depository institutions and credit
unions with $10 billion or less in total
assets as described in Section 1026. The
depository institutions and credit
unions that are CDFIs, and are therefore
covered under the exemption from the
ability-to-repay requirements, and the
institutions covered by new definition
of qualified mortgages and the higherrate threshold for small creditor
portfolio loans are all in this group and
are therefore uniquely impacted by the
rule as discussed above.
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3. Impact of the Provisions on
Consumers in Rural Areas
The final rule will have some
differential impacts on consumers in
rural areas. In these areas, a greater
fraction of loans are made by smaller
institutions and carried on portfolio and
therefore the small creditor portfolio
exemption would be likely to have
greater impacts. The Bureau
understands that mortgage loans in
these areas and by these institutions are
less standardized and often cannot be
sold into the secondary market. These
differences may result in slightly higher
interest rates on average for loans to
rural consumers and more higher priced
mortgage loans. By making it easier for
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loans held in portfolio by certain
institutions to receive qualified
mortgage status and by raising the
rebuttable presumption threshold for
those loans, the final rule will likely
have a greater relative effect on rural
consumers than on their non-rural
counterparts: more loans will meet the
definitions for qualified mortgages and
within that group, more loans will have
the safe harbor presumption of
compliance with the ability-to-repay
requirements. To the extent that these
changes expand access to credit, rural
consumers will benefit. While the
relationship model of lending prevalent
in this area makes both delinquency and
litigation less likely overall, these
changes will also limit some of the
protections for these consumers as
well.181
VIII. Regulatory Flexibility Act
Analysis
A. Overview
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.182 These analyses must
‘‘describe the impact of the proposed
rule on small entities.’’ 183 An IRFA or
FRFA is not required if the agency
certifies that the rule will not have a
significant economic impact on a
substantial number of small entities.184
The Bureau also is subject to certain
additional procedures under the RFA
involving the convening of a panel to
consult with small business
representatives prior to proposing a rule
for which an IRFA is required.185
The final rule amends Regulation Z,
which implements the Truth in Lending
Act (TILA) and is related to a final rule
181 Relationship lending refers to underwriting
decisions predicated on more tacit information and
personal relationships, in particular, relative to
more automated and formula-based forms of
underwriting.
182 5 U.S.C. 601 et. seq.
183 5 U.S.C. 603(a); 5 U.S.C. 604(a). For purposes
of assessing the impacts of the proposed rule on
small entities, ‘‘small entities’’ is defined in the
RFA to include small businesses, small not-forprofit organizations, and small government
jurisdictions. 5 U.S.C. 601(6). A ‘‘small business’’ is
determined by application of Small Business
Administration regulations and reference to the
North American Industry Classification System
(NAICS) classifications and size standards. 5 U.S.C.
601(3). A ‘‘small organization’’ is any ‘‘not-for-profit
enterprise which is independently owned and
operated and is not dominant in its field.’’ 5 U.S.C.
601(4). A ‘‘small governmental jurisdiction’’ is the
government of a city, county, town, township,
village, school district, or special district with a
population of less than 50,000. 5 U.S.C. 601(5).
184 5 U.S.C. 605(b).
185 5 U.S.C. 609.
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35497
published in the Federal Register in
January 2013 (78 FR 6408) (2013 ATR
Final Rule). That final rule implements
certain amendments to TILA that were
added by sections 1411, 1412, and 1414
of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (DoddFrank Act), which created new TILA
section 129C. These changes were made
in response to the recent foreclosure
crisis to address certain lending
practices (such as low- or nodocumentation loans or underwriting
mortgages without including any
principal repayments in the
underwriting determination) that led to
consumers having mortgages they could
not afford, thereby contributing to high
default and foreclosure rates. Among
other things, the Dodd-Frank Act
requires creditors to make a reasonable,
good faith determination of a
consumer’s ability to repay any
consumer credit transaction secured by
a dwelling (excluding an open-end
credit plan, timeshare plan, reverse
mortgage, or temporary loan) and
establishes certain protections from
liability under this provision for
‘‘qualified mortgages.’’
As discussed above, the Bureau
believes that the 2013 ATR Final Rule
should be modified to address potential
adverse consequences on certain
narrowly-defined categories of lending
programs. Specifically, the final rule
adopts certain amendments to the 2013
ATR Final Rule implementing these
requirements, including exemptions for
certain nonprofit and communityfocused lending creditors and certain
homeownership stabilization and
foreclosure prevention programs. The
final rule also creates a new category of
qualified mortgages, similar to the one
for rural balloon-payment loans, for
loans without balloon-payment features
that are originated and held on portfolio
by small creditors. The new category
will not be limited to creditors that
operate predominantly in rural or
underserved areas, but will use the same
general size thresholds and other
criteria as the rural or underserved
balloon-payment rules. In light of the
fact that small creditors often have
higher costs of funds than larger
creditors, the final rule also increases
the threshold separating safe harbor and
rebuttable presumption qualified
mortgages for balloon-payment qualified
mortgages, the new small portfolio
qualified mortgages, and balloonpayment qualified mortgages originated
under the new temporary two-year
balloon mortgage provision. Finally, the
final rule provides additional
clarifications and exclusions regarding
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the inclusion of loan originator
compensation in the points and fees
calculation for all categories of qualified
mortgage.
In the proposal, the Bureau certified
that the rule would not have a
significant economic impact on a
substantial number of small entities and
therefore did not prepare an IRFA.
Approximately 100 commenters argued
that the Bureau should conduct a
SBREFA panel to learn more about how
the rule will impact the thousands of
small business entities that originate
mortgage loans. These commenters
noted that while the Bureau stated that
an initial regulatory flexibility analysis
(IRFA) was not necessary under the
Regulatory Flexibility Act (RFA)
because the proposal would not have a
significant economic impact on a
substantial number of small entities, the
Bureau’s own methodology showed that
the rule would apply to 9,373 small
entities out of 14,194 total entities that
originate mortgage loans. These
commenters contended that the Bureau
use its authority under the Dodd-Frank
Act to delay the effective date of the
2013 ATR Final Rule and conduct
further analysis of the mortgage loan
origination market and how loan
originators are currently assessing and
determining consumers’ ability to
repay.186
While the Bureau acknowledges that
the exemption applies to many small
entities, this does not imply that it has
a significant impact on a substantial
number of small entities. Further, the
commenters provided little reasoning
and no data to support the claim that
the rule would have such an effect. The
Bureau believes that the final rule will
not have a significant impact on a
substantial number of small entities and
therefore neither a SBREFA panel nor a
FRFA is required.
The analysis below evaluates the
potential economic impact of the final
rule on small entities as defined by the
RFA. The analysis generally examines
the regulatory impact of the provisions
of the final rule against the baseline of
the 2013 ATR Final Rule published in
January 2013, however some of the
discussion includes consideration of
alternative baselines. As a result of this
analysis, the Bureau certifies that the
final rule would not have a significant
economic impact on a substantial
number of small entities.
B. Number and Classes of Affected
Entities
The final rule will apply to all
creditors that extend closed-end credit
secured by a dwelling, including real
property attached to a dwelling, subject
to certain exemptions. All small entities
that extend these loans are potentially
subject to at least some aspects of the
final rule. This rule may impact small
businesses, small nonprofit
organizations, and small government
jurisdictions. A ‘‘small business’’ is
NAICS
Code
Category
determined by application of SBA
regulations and reference to the North
American Industry Classification
System (NAICS) classifications and size
standards.187 Under such standards,
depository institutions with $175
million or less in assets are considered
small; other financial businesses are
considered small if such entities have
average annual receipts (i.e., annual
revenues) that do not exceed $7 million.
Thus, commercial banks, savings
institutions, and credit unions with
$175 million or less in assets are small
businesses, while other creditors
extending credit secured by real
property or a dwelling are small
businesses if average annual receipts do
not exceed $7 million.
The Bureau can identify through data
under the Home Mortgage Disclosure
Act, Reports of Condition and Income
(Call Reports), and data from the
National Mortgage Licensing System
(NMLS) the approximate numbers of
small depository institutions that will
be subject to the final rule. Origination
data is available for entities that report
in HMDA, NMLS or the credit union
call reports; for other entities, the
Bureau has estimated their origination
activities using statistical projection
methods.
The following table provides the
Bureau’s estimate of the number and
types of entities to which the rule will
apply:
Total
entities
Small entities
Entities that
originate
any mortgage loans b
Small
entities that
originate
any mortgage loans
a 3,466
Commercial Banking ................................................................................
Savings Institutions ..................................................................................
Credit Unions c .........................................................................................
Real Estate Credit d e ...............................................................................
522110
522120
522130
522292
6,505
930
7,240
2,787
3,601
377
6,296
2,294
a 6,307
Total ..................................................................................................
....................
17,462
12,568
a 922
a 373
a 4,178
a 3,240
2,787
a 2,294
14,194
9,373
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Source: 2011 HMDA, Dec 31, 2011 Bank and Thrift Call Reports, Dec 31, 2011 NCUA Call Reports, Dec 31, 2011 NMLSR Mortgage Call Reports.
a For HMDA reporters, loan counts from HMDA 2011. For institutions that are not HMDA reporters, loan counts projected based on Call Report
data fields and counts for HMDA reporters.
b Entities are characterized as originating loans if they make one or more loans.
c Does not include cooperativas operating in Puerto Rico. The Bureau has limited data about these institutions or their mortgage activity.
d NMLSR Mortgage Call Report (MCR) for 2011. All MCR reporters that originate at least one loan or that have positive loan amounts are considered to be engaged in real estate credit (instead of purely mortgage brokers). For institutions with missing revenue values, the probability that
institution was a small entity is estimated based on the count and amount of originations and the count and amount of brokered loans.
e Data do not distinguish nonprofit from for-profit organizations, but Real Estate Credit presumptively includes nonprofit organizations.
It is difficult to determine the number
of small nonprofits that would be
subject to the regulation. Nonprofits do
not generally file Call Reports or HMDA
reports. As explained in part II above, as
186 78
FR 6663–6666.
U.S.C. 601(3). The current SBA size
standards are located on the SBA’s Web site at
187 5
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of November 2012 there are 233
nonprofit agencies and nonprofit
instrumentalities of government in the
U.S. that are authorized by HUD to
provide secondary financing,188 267
institutions designated as Community
Housing Development Organizations
that provided credit in 2011, and 231
institutions designated as
Downpayment Assistance through
http://www.sba.gov/content/table-small-businesssize-standards.
188 See U.S. Dep’t of Hous. and Urban
Development: Nonprofits, https://entp.hud.gov/
idapp/html/f17npdata.cfm.
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purposes of HOEPA. The Bureau’s
exercise of its exception and adjustment
authority in the final rule, however, will
reduce burden on small entities and
facilitate compliance. Compared to the
January 2013 baseline, where such
compensation is included in the points
and fees calculation, the final rule
reduces burden on certain small
entities: for retail originators, fewer
loans will exceed the points and fees
limits for qualified mortgages and high
cost mortgages, and firms will face
lowered compliance costs.190
C. Clarification Regarding Loan
Originator Compensation in the Points
and Fees Calculation
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Secondary Financing Providers. A
comprehensive list of these institutions
is not available; however the Bureau
believes that there may be substantial
overlap among these institutions and
that most of these institutions would
qualify as small entities.
Also, as of July 2012 there were 999
organizations designated by the
Treasury Department as CDFIs, 356 of
which are depository institutions or
credit unions counted above. Among the
remaining, some are nonprofits and
most likely small.189
D. Exemptions from the Ability-to-Repay
Requirements
The provisions related to communityfocused lending programs discussed
above all provide exemptions from the
ability-to-repay requirements. Measured
against the baseline of the Bureau’s 2013
ATR Final Rule, these provisions
impose either no or insignificant
additional burdens on small entities.
More specifically, these provisions will
reduce the burdens associated with
implementation costs, additional
underwriting costs, and compliance
costs stemming from the ability-to-repay
requirements.
Section 1026.43(a)(3)(iv) provides that
an extension of credit made pursuant to
a program administered by a housing
finance agency, as defined by 24 CFR
266.5, is exempt from the requirements
of § 1026.43(c) through (f). For any
housing finance agencies and their
partner creditors that meet the
definition of ‘‘small entity,’’ this
provision will remove the burden of
having to modify the underwriting
practices associated with these
programs to implement the ability-torepay requirements. This provision will
also remove the burden to small entities
of having to develop and maintain
policies and procedures to monitor
compliance with the ability-to-repay
requirements.
The final rule also exempts from the
ability-to-repay requirements an
extension of credit made by a creditor
designated as a Community
Development Financial Institution, a
Downpayment Assistance through
Secondary Financing Provider, or a
Community Housing Development
Organization (CHDO) if the CHDO meets
certain additional criteria. This
provision will remove the burden to
small entities of having to implement
the ability-to-repay requirements. This
provision will also remove the burden
As discussed in detail above, the
Dodd-Frank Act requires creditors to
include 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, in the calculation of points
and fees. The statute does not express
any limitation on this requirement, and
thus, the Bureau adopted in the 2013
ATR Final Rule that loan originator
compensation be treated as additive to
up-front charges paid by the consumer
and the other elements of points and
fees and that compensation is added as
it flows downstream to the loan
originator.
The final rule provides that payments
by consumers to mortgage brokers need
not be counted as loan originator
compensation where such payments
already have been included in points
and fees as part of the finance charge.
The final rule also provides that
compensation paid by a mortgage broker
to its employee loan originator need not
be included in points and fees. In the
final rule, compensation paid by a
creditor to a mortgage broker is included
in points and fees in addition to any
origination charges paid by a consumer
to the creditor. Compensation paid by a
creditor to its own loan originator
employees need not be included in
points and fees.
The statute requires loan originator
compensation to be treated as additive
to the other elements of points and fees
and the 2013 ATR Final Rule adopted
this approach. This places a burden on
small creditors, since it makes it more
likely that mortgage loans will not be
eligible as qualified mortgages under the
ability-to-repay rules or will be
classified as high-cost mortgages for
189 See
U.S. Dep’t of the Treas., Community
Development Financial Institutions Fund, http://
www.cdfifund.gov/docs/certification/cdfi/CDFIList07–31–12.xls.
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190 The Bureau notes that the ability-to-repay
requirements as well as the rules applying to highcost mortgages generally apply to creditors and not
to other classes of small entities including mortgage
brokers.
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35499
to small entities of having to develop
and maintain policies and procedures to
monitor compliance with the ability-torepay requirements. Regulatory burdens
may be associated with obtaining and
maintaining one of the designations
required to qualify for the exemption.
However, this decision is voluntary and
the Bureau presumes that a small entity
would not do so unless the burden
reduction resulting from the exemption
outweighed the additional burden
imposed by obtaining and maintaining
the designation. Thus, additional
burdens would still be part of an overall
burden reduction.
The final rule also exempts from the
ability-to-repay requirements extensions
of credit made by a creditor with a tax
exemption ruling or determination letter
from the Internal Revenue Service under
section 501(c)(3) of the Internal Revenue
Code of 1986 (26 U.S.C. 501(c)(3)
provided that: during the calendar year
preceding receipt of the consumer’s
application, the creditor extended credit
secured by a dwelling no more than 200
times; during the calendar year
preceding receipt of the consumer’s
application, the creditor extended credit
secured by a dwelling only to
consumers with income that did not
exceed the low- and moderate-income
household limits; the extension of credit
is to a consumer with income that does
not exceed the above limit; and, the
creditor determines, in accordance with
written procedures, that the consumer
has a reasonable ability to repay the
extension of credit.
For eligible entities, this provision
will remove the burden of complying
with the ability-to-repay requirements.
This provision will also remove the
burden to small entities of having to
develop and maintain policies and
procedures to monitor compliance with
the ability-to-repay requirements in the
2013 ATR Final Rule. While eligible
nonprofit creditors will need to
maintain documentation of their own
procedures regarding the determination
of a consumer’s ability to repay, the
Bureau believes that such small
nonprofits already have written policies
and procedures. In any case, the
decision to use the exemption is
voluntary and entities are expected to
use it only if reduces overall burden.
Regulatory burdens may be associated
with obtaining and maintaining the
501(c)(3) designation required to qualify
for the exemption. However, this
decision is voluntary and the Bureau
presumes that a small entity would not
do so unless the burden reduction
resulting from the exemption
outweighed the additional burden
imposed by obtaining and maintaining
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the designation. Thus, additional
burdens would still be part of an overall
burden reduction.
The final rule provides that an
extension of credit made pursuant to a
program authorized by sections 101 and
109 of the Emergency Economic
Stabilization Act of 2008 is exempt from
the ability-to-repay requirements. This
provision will remove the burden to
participating small entities of having to
modify the underwriting practices
associated with these programs to
implement the ability-to-repay
requirements. This provision will also
remove the burden to small entities of
having to develop and maintain policies
and procedures to monitor compliance
with these ability-to-repay
requirements.
E. Portfolio Loans Made by Small
Creditors and Balloon-Payment
Qualified Mortgages
As discussed above, the Bureau is
finalizing certain amendments to the
2013 ATR Final Rule, including an
additional definition of a qualified
mortgage for certain loans made and
held in portfolio by small creditors. The
new category includes certain loans
originated by small creditors that: (1)
Have total assets less than $2 billion at
the end of the previous calendar year;
and (2) together with all affiliates,
originated 500 or fewer covered
transactions, secured by first-liens
during the previous calendar year. The
$2 billion asset threshold in the
definition will be adjusted annually
based on the year-to-year change in the
average of the Consumer Price Index for
Urban Wage Earners and Clerical
Workers, not seasonally adjusted. These
loans must generally conform to the
requirements under the general
definition of a qualified mortgage in
§ 1026.43(e)(2), except that a loan with
a consumer debt-to-income ratio higher
than 43 percent could be a qualified
mortgage if all other criteria are met.
Small creditors are required to consider
the consumer’s debt-to-income ratio or
residual income in underwriting the
loans, but are not required to follow
appendix Q or subject to any specific
threshold.
This provision would reduce burden
on small creditors by removing the 43
percent debt-to-income limitation for
qualified mortgages, as well as
providing more flexibility in the
assessment of debt-to-income ratios. At
the small creditors identified, 16.7
percent of mortgage loans on portfolio
are estimated to have a debt to income
ratios above 43 percent. For these loans,
the final rule grants creditors a
presumption of compliance with the
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ability-to-repay requirements; rough
estimates indicate that three quarters of
these loans will gain a conclusive
presumption and the remaining loans
will gain the rebuttable presumption.
The final rule also temporarily allows
small creditors that do not operate
predominantly in rural or underserved
areas to offer balloon-payment qualified
mortgages, with the same presumptions
of compliance, if they hold the loans in
portfolio.
The Bureau also is allowing small
creditors to charge a higher annual
percentage rate for first-lien qualified
mortgages in the new category and still
benefit from a conclusive presumption
of compliance or ‘‘safe harbor.’’ In
addition, the Bureau also is allowing
small creditors operating predominantly
in rural or underserved areas to offer
first-lien balloon loans with a higher
annual percentage rate and still benefit
from a conclusive presumption of
compliance with the ability-to-repay
rules or ‘‘safe harbor.’’ The increase in
the threshold from the average prime
offer rate (APOR) plus 1.5 percentage
points to APOR plus 3.5 percentage
points will reduce burden for the loans
at these institutions between these rates,
as these loans will now qualify for a
conclusive, rather than a rebuttable
presumption.
The regulatory requirement to make a
reasonable and good faith determination
based on verified and documented
evidence that a consumer has a
reasonable ability to repay may entail
litigation risk for small creditors. It is
difficult to estimate the reduction in
potential future liability costs associated
with the changes. However, the Bureau
notes that lending practices at smaller
institutions are often based on a more
personal relationship based model and
that historically, delinquency rates on
mortgages at smaller institutions are
lower than the average in the industry.
The Bureau believes that small creditors
have historically engaged in responsible
mortgage underwriting that includes
thorough and thoughtful determinations
of consumers’ ability to repay, at least
in part because they bear the risk of
default associated with loans held in
their portfolios. The Bureau also
believes that because small creditors’
lending model is based on maintaining
ongoing, mutually beneficial
relationships with their customers, they
therefore have a more comprehensive
understanding of their customers’
financial circumstances and are better
able to assess ability to repay than larger
creditors. As such, the expected
litigation costs from the ability-to-repay
provisions of the 2013 ATR Final Rule,
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and therefore the reduced burden from
this final rule, should be small.
The Bureau acknowledges the
possibility that this final rule may
increase small creditor burden to the
extent that creditors need to maintain
records relating to eligibility for the
exemption, but the Bureau believes that
these costs are negligible, as creditor
asset size and origination activity are
data that all depository institutions and
credit unions are likely to maintain for
routine business or supervisory
purposes. Thus, the Bureau believes that
the burden reduction stemming from a
reduction in liability costs would
outweigh any potential recordkeeping
costs, resulting in overall burden
reduction. Small entities for which such
cost reductions are outweighed by
additional record keeping costs may
choose not to utilize the exemption.
F. Conclusion
Each element of this final rule results
in an economic burden reduction for
these small entities. The exemptions for
nonprofit creditors would lessen any
economic impact resulting from the
ability-to-repay requirements. The
exemptions for homeownership
stabilization and foreclosure prevention
programs would also soften any
economic impact on small entities
extending credit pursuant to those
programs. The new categories of
qualified mortgage would make it easier
for small entities to originate qualified
mortgages. The Bureau’s clarifications
ensuring consumer-paid compensation
to brokers is counted only once and the
exclusion of retail loan officer and
broker employee compensation will
reduce burden on small entities and
make it more likely that mortgage loans
will be eligible for a presumption of
compliance as qualified mortgages
under the ability-to-repay rules and not
be classified as high-cost mortgages for
purposes of HOEPA. While all of these
provisions may entail some additional
recordkeeping costs, the Bureau believes
that these costs are minimal and
outweighed by the cost reductions
resulting from the final rule. Small
entities for which such cost reductions
are outweighed by additional record
keeping costs may choose not to utilize
the exemptions.
Certification
Accordingly, the undersigned certifies
that this proposal will not have a
significant economic impact on a
substantial number of small entities.
IX. Paperwork Reduction Act Analysis
Certain provisions of this final rule
contain ‘‘collection of information’’
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requirements within the meaning of the
Paperwork Reduction Act of 1995 (44
U.S.C. 3501 et seq.) (Paperwork
Reduction Act or PRA). On January 30,
2013, the Bureau published notice of the
proposed rule in the Federal Register
(78 FR 6622). The Bureau received no
PRA-related comments on the
information collections in § 1026.43(c).
This final rule amends 12 CFR part
1026 (Regulation Z), which implements
the Truth in Lending Act (TILA).
Regulation Z currently contains
collections of information approved by
the Office of Management and Budget
(OMB). The Bureau’s OMB control
number for Regulation Z is 3170–0015.
The PRA (44 U.S.C. 3507(a), (a)(2) and
(a)(3)) requires that a Federal agency
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 provisions of law, no person is
required to comply with, or is subject to
any penalty for failure to comply with,
a collection of information that does not
display a currently valid OMB control
number (44 U.S.C. 3512). The collection
of information contained in this rule,
and identified as such, has been
submitted to OMB for review under
section 3507(d) of the PRA.
A. Overview
As described below, the final rule
amends the collections of information
currently in Regulation Z to implement
amendments to TILA made by the
Dodd-Frank Act. This final rule is
related to the Ability-to-Repay/Qualified
Mortgage final rule (2013 ATR Final
Rule) published in the Federal Register
in January 2013 (78 FR 6408). The 2013
ATR Final Rule implements sections
1411, 1412, and 1414 of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act),
which creates new TILA section 129C.
Among other things, the Dodd-Frank
Act requires creditors to make a
reasonable, good faith determination,
based on verified and documented
information, that the consumer will
have a reasonable ability to repay any
consumer credit transaction secured by
a dwelling (excluding an open-end
credit plan, timeshare plan, reverse
mortgage, or temporary loan), including
any mortgage-related obligations (such
as property taxes), and establishes
certain protections from liability under
this requirement for ‘‘qualified
mortgages.’’ TILA section 129C(a); 15
U.S.C. 1639c(a). The stated purpose of
the Dodd-Frank Act ability-to-repay
requirement is to assure that consumers
are offered and receive residential
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mortgage loans on terms that reasonably
reflect their ability to repay the loans
and that are not understandable and not
unfair, deceptive or abusive. TILA
section 129B(a)(2); 15 U.S.C.
1639b(a)(2). Prior to the Dodd-Frank
Act, existing Regulation Z provided
ability-to-repay requirements for highcost and higher-priced mortgage loans.
The Dodd-Frank Act expanded the
scope of the ability-to-repay
requirement to cover all residential
mortgage loans with its scope.
The 2013 ATR Final Rule establishes
standards for complying with the
ability-to-repay requirement, including
defining ‘‘qualified mortgage.’’ In
addition to the ability-to-repay and
qualified mortgage provisions, the 2013
ATR Final Rule implements the DoddFrank Act limits on prepayment
penalties and lengthens the time
creditors must retain records that
evidence compliance with the ability-torepay and prepayment penalty
provisions.
This final rule adopts certain
amendments to the 2013 ATR Final
Rule implementing these ability-torepay requirements, including
exemptions for certain communityfocused creditors, housing finance
agencies, nonprofit organizations and
housing stabilization programs; an
additional definition of a qualified
mortgage for certain loans made and
held in portfolio by small creditors that
have total assets less than $2 billion at
the end of the previous calendar year
and, together with all affiliates,
originated 500 or fewer first-lien
covered transactions during the
previous calendar year. The final rule
also temporarily allows small creditors
that do not operate predominantly in
rural or underserved areas to offer
balloon-payment qualified mortgages if
they hold the loans in portfolio. The
Bureau also is allowing small creditors
to charge a higher annual percentage
rate for first-lien qualified mortgages in
the new category and still benefit from
a conclusive presumption of compliance
or ‘‘safe harbor,’’ and to allow small
creditors operating predominantly in
rural or underserved areas to offer firstlien balloon loans with a higher annual
percentage rate and still benefit from a
conclusive presumption of compliance
with the ability-to-repay rules or ‘‘safe
harbor.’’
The final rule also provides
exceptions to the 2013 ATR Final Rule,
which implements the statute’s
inclusion of loan originator
compensation in points and fees.
Specifically, in the final rule, payments
by consumers to mortgage brokers need
not be counted as loan originator
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35501
compensation where such payments
already have been included in points
and fees as part of the finance charge.
In addition, compensation paid by a
mortgage broker to its employee loan
originator need not be included in
points and fees, nor does compensation
paid by a creditor to its own loan
originator employees. However,
consistent with the statute and 2013
ATR Final Rule, compensation paid by
a creditor to a mortgage broker
continues to be included in points and
fees in addition to any origination
charges paid by a consumer to the
creditor.
The information collection in the final
rule is required to provide benefits for
consumers and would be 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 nonbank creditors) subject to Regulation
Z.191
Under the final rule, the Bureau
generally 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 and their depository
institution affiliates; privately insured
credit unions; and certain
nondepository creditors. 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. 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 are not required to, use
the Bureau’s burden estimation
methodology.
Using the Bureau’s burden estimation
methodology, there is no change to the
total estimated burden under Regulation
Z as a result of the final rule.
191 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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B. Information Collection Requirements
Ability-to-Repay Verification and
Documentation Requirements
As discussed above, the 2013 ATR
Final Rule published in January 2013
contains specific criteria that a creditor
must consider in assessing a consumer’s
repayment ability while different
verification requirements apply to
qualified mortgages. As described in the
relevant sections of the final rule, the
Bureau does not believe that the
verification and documentation
requirements of the final rule result in
additional ongoing costs for most
covered persons. However, for some
creditors, notably the communityfocused lending programs, housing
finance agencies, and not-for profit
organizations exempted in the final rule,
lending can vary widely, in the form of
financing, the products offered and the
precise nature of underwriting. These
processes may not involve the more
traditional products covered by the
qualified mortgage definition nor do
these creditors use documentation and
verification procedures closely aligned
with the requirements of the 2013 ATR
Final Rule.
For these creditors, the final rule
should eliminate any costs from
imposing these requirements on these
particular extensions of credits. The
Bureau estimates one-time and ongoing
costs to respondents of complying with
the final rule as follows.
One-time costs. The Bureau estimates
that covered persons will incur one-time
costs associated with reviewing the
relevant sections of the Federal Register
and training relevant employees. In
general, the Bureau estimates these costs
to include, for each covered person, the
costs for one attorney and one
compliance officer to read and review
the sections of the final rule that
describe the verification and
documentation requirements for loans,
the exemptions from the ability-to-repay
requirements, and the costs for each
loan officer or other loan originator to
receive training concerning the
requirements. However, the Bureau
believes that respondents will review
the relevant sections of this final rule
along with the 2013 ATR Final Rule to
best understand any new regulatory
requirements and their coverage. As
such, there is no additional one-time
burden attributed to the final rule.
Ongoing costs. The exemptions for the
covered institutions should reduce any
burden related to these provisions.
However, in the 2013 ATR Final Rule,
the Bureau did not attribute any
paperwork burden to these provisions
on the assumption that the verification
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and documentation requirements of the
2013 ATR Final Rule will not result in
additional ongoing costs for most
covered persons. As such, it would be
inappropriate to credit any reduction in
burden to the final rule.
For the reasons set forth in the
preamble, the Bureau amends
Regulation Z, 12 CFR part 1026, as
amended by the final rules published on
January 30, 2013 (78 FR 6408), and
January 31, 2013 (78 FR 6962), as set
forth below:
(A) That compensation is paid by a
consumer to a mortgage broker, as
defined in § 1026.36(a)(2), and already
has been included in points and fees
under paragraph (b)(1)(i) of this section;
(B) That compensation is paid by a
mortgage broker, as defined in
§ 1026.36(a)(2), to a loan originator that
is an employee of the mortgage broker;
or
(C) That compensation is paid by a
creditor to a loan originator that is an
employee of the creditor.
*
*
*
*
*
(2) * * *
(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
that transaction at the time the interest
rate is set unless:
(A) That compensation is paid by a
consumer to a mortgage broker, as
defined in § 1026.36(a)(2), and already
has been included in points and fees
under paragraph (b)(2)(i) of this section;
(B) That compensation is paid by a
mortgage broker, as defined in
§ 1026.36(a)(2), to a loan originator that
is an employee of the mortgage broker;
or
(C) That compensation is paid by a
creditor to a loan originator that is an
employee of the creditor.
*
*
*
*
*
■ 3. Section 1026.43 is amended by
revising paragraphs (a)(3)(ii) and (iii),
(b)(4), (e)(1), (e)(2), and (g)(1)(ii)(B), and
adding new paragraphs (a)(3)(iv)
through (vi), (e)(5) and (e)(6), to read as
follows:
PART 1026—TRUTH IN LENDING
(REGULATION Z)
§ 1026.43 Minimum standards for
transactions secured by a dwelling.
C. Summary of Burden Hours
As noted, the Bureau does not believe
the final rule results in any changes in
the burdens under Regulation Z
associated with information collections
for Bureau respondents under the PRA.
D. Comments
The Consumer Financial Protection
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 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 in 12 CFR Part 1026
Advertising, Consumer protection,
Mortgages, Reporting and recordkeeping
requirements, Truth in Lending.
Authority and Issuance
1. The authority citation for part 1026
continues to read as follows:
■
Authority: 12 U.S.C. 2601, 2603–2605,
2607, 2609, 2617, 5511, 5512, 5532, 5581; 15
U.S.C. 1601 et seq.
Subpart E—Special Rules for Certain
Home Mortgage Transactions
2. Section 1026.32 is amended by
revising paragraphs (b)(1)(ii) and
(b)(2)(ii) to read as follows:
■
§ 1026.32 Requirements for high-cost
mortgages.
*
*
*
*
*
(b) * * *
(1) * * *
(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
that transaction at the time the interest
rate is set unless:
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(a) * * *
(3) * * *
(ii) A temporary or ‘‘bridge’’ loan with
a term of 12 months or less, such as a
loan to finance the purchase of a new
dwelling where the consumer plans to
sell a current dwelling within 12
months or a loan to finance the initial
construction of a dwelling;
(iii) A construction phase of 12
months or less of a construction-topermanent loan;
(iv) An extension of credit made
pursuant to a program administered by
a Housing Finance Agency, as defined
under 24 CFR 266.5;
(v) An extension of credit made by:
(A) A creditor designated as a
Community Development Financial
Institution, as defined under 12 CFR
1805.104(h);
(B) A creditor designated as a
Downpayment Assistance through
Secondary Financing Provider, pursuant
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to 24 CFR 200.194(a), operating in
accordance with regulations prescribed
by the U.S. Department of Housing and
Urban Development applicable to such
persons;
(C) A creditor designated as a
Community Housing Development
Organization provided that the creditor
has entered into a commitment with a
participating jurisdiction and is
undertaking a project under the HOME
program, pursuant to the provisions of
24 CFR 92.300(a), and as the terms
community housing development
organization, commitment, participating
jurisdiction, and project are defined
under 24 CFR 92.2; or
(D) A creditor with a tax exemption
ruling or determination letter from the
Internal Revenue Service under section
501(c)(3) of the Internal Revenue Code
of 1986 (26 U.S.C. 501(c)(3); 26 CFR
1.501(c)(3)–1), provided that:
(1) During the calendar year preceding
receipt of the consumer’s application,
the creditor extended credit secured by
a dwelling no more than 200 times;
(2) During the calendar year preceding
receipt of the consumer’s application,
the creditor extended credit secured by
a dwelling only to consumers with
income that did not exceed the low- and
moderate-income household limit as
established pursuant to section 102 of
the Housing and Community
Development Act of 1974 (42 U.S.C.
5302(a)(20)) and amended from time to
time by the U.S. Department of Housing
and Urban Development, pursuant to 24
CFR 570.3;
(3) The extension of credit is to a
consumer with income that does not
exceed the household limit specified in
paragraph (a)(3)(v)(D)(2) of this section;
and
(4) The creditor determines, in
accordance with written procedures,
that the consumer has a reasonable
ability to repay the extension of credit.
(vi) An extension of credit made
pursuant to a program authorized by
sections 101 and 109 of the Emergency
Economic Stabilization Act of 2008 (12
U.S.C. 5211; 5219);
(b) * * *
(4) Higher-priced covered transaction
means a covered transaction with an
annual percentage rate that exceeds the
average prime offer rate for a
comparable transaction as of the date
the interest rate is set by 1.5 or more
percentage points for a first-lien covered
transaction, other than a qualified
mortgage under paragraph (e)(5), (e)(6),
or (f) of this section; by 3.5 or more
percentage points for a first-lien covered
transaction that is a qualified mortgage
under paragraph (e)(5), (e)(6), or (f) of
this section; or by 3.5 or more
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percentage points for a subordinate-lien
covered transaction.
*
*
*
*
*
(e) Qualified mortgages. (1) Safe
harbor and presumption of compliance.
(i) Safe harbor for loans that are not
higher-priced covered transactions. A
creditor or assignee of a qualified
mortgage, as defined in paragraphs
(e)(2), (e)(4), (e)(5), (e)(6), or (f) of this
section, that is not a higher-priced
covered transaction, as defined in
paragraph (b)(4) of this section,
complies with the repayment ability
requirements of paragraph (c) of this
section.
(ii) Presumption of compliance for
higher-priced covered transactions. (A)
A creditor or assignee of a qualified
mortgage, as defined in paragraph (e)(2),
(e)(4), (e)(5), (e)(6), or (f) of this section,
that is a higher-priced covered
transaction, as defined in paragraph
(b)(4) of this section, is presumed to
comply with the repayment ability
requirements of paragraph (c) of this
section.
(B) To rebut the presumption of
compliance described in paragraph
(e)(1)(ii)(A) of this section, it must be
proven that, despite meeting the
prerequisites of paragraph (e)(2), (e)(4),
(e)(5), (e)(6), or (f) of this section, the
creditor did not make a reasonable and
good faith determination of the
consumer’s repayment ability at the
time of consummation, by showing that
the consumer’s income, debt
obligations, alimony, child support, and
the consumer’s monthly payment
(including mortgage-related obligations)
on the covered transaction and on any
simultaneous loans of which the
creditor was aware at consummation
would leave the consumer with
insufficient residual income or assets
other than the value of the dwelling
(including any real property attached to
the dwelling) that secures the loan with
which to meet living expenses,
including any recurring and material
non-debt obligations of which the
creditor was aware at the time of
consummation.
(2) Qualified mortgage defined—
general. Except as provided in
paragraph (e)(4), (e)(5), (e)(6), or (f) of
this section, a qualified mortgage is a
covered transaction:
*
*
*
*
*
(5) Qualified mortgage defined—small
creditor portfolio loans. (i)
Notwithstanding paragraph (e)(2) of this
section, a qualified mortgage is a
covered transaction:
(A) That satisfies the requirements of
paragraph (e)(2) of this section other
than the requirements of paragraph
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35503
(e)(2)(vi) and without regard to the
standards in appendix Q to this part;
(B) For which the creditor considers
at or before consummation the
consumer’s monthly debt-to-income
ratio or residual income and verifies the
debt obligations and income used to
determine that ratio in accordance with
paragraph (c)(7) of this section, except
that the calculation of the payment on
the covered transaction for purposes of
determining the consumer’s total
monthly debt obligations in paragraph
(c)(7)(i)(A) shall be determined in
accordance with paragraph (e)(2)(iv) of
this section instead of paragraph (c)(5)
of this section;
(C) That is not subject, at
consummation, to a commitment to be
acquired by another person, other than
a person that satisfies the requirements
of paragraph (e)(5)(i)(D) of this section;
and
(D) For which the creditor satisfies the
requirements stated in
§ 1026.35(b)(2)(iii)(B) and (C).
(ii) A qualified mortgage extended
pursuant to paragraph (e)(5)(i) of this
section immediately loses its status as a
qualified mortgage under paragraph
(e)(5)(i) if legal title to the qualified
mortgage is sold, assigned, or otherwise
transferred to another person except
when:
(A) The qualified mortgage is sold,
assigned, or otherwise transferred to
another person three years or more after
consummation of the qualified
mortgage;
(B) The qualified mortgage is sold,
assigned, or otherwise transferred to a
creditor that satisfies the requirements
of paragraph (e)(5)(i)(D) of this section;
(C) The qualified mortgage is sold,
assigned, or otherwise transferred to
another person pursuant to a capital
restoration plan or other action under 12
U.S.C. 1831o, actions or instructions of
any person acting as conservator,
receiver, or bankruptcy trustee, an order
of a State or Federal government agency
with jurisdiction to examine the creditor
pursuant to State or Federal law, or an
agreement between the creditor and
such an agency; or
(D) The qualified mortgage is sold,
assigned, or otherwise transferred
pursuant to a merger of the creditor with
another person or acquisition of the
creditor by another person or of another
person by the creditor.
(6) Qualified mortgage defined—
temporary balloon-payment qualified
mortgage rules. (i) Notwithstanding
paragraph (e)(2) of this section, a
qualified mortgage is a covered
transaction:
(A) That satisfies the requirements of
paragraph (f) of this section other than
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the requirements of paragraph (f)(1)(vi);
and
(B) For which the creditor satisfies the
requirements stated in
§ 1026.35(b)(2)(iii)(B) and (C).
(ii) The provisions of this paragraph
(e)(6) apply only to covered transactions
consummated on or before January 10,
2016.
*
*
*
*
*
(g) * * *
(1) * * *
(ii) * * *
(B) Is a qualified mortgage under
paragraph (e)(2), (e)(4), (e)(5), (e)(6), or
(f) of this section; and
*
*
*
*
*
■ 4. In Supplement I to Part 1026—
Official Interpretations:
■ A. Under Section 1026.32—
Requirements for High-Cost Mortgages:
■ i. Under 32(b) Definitions:
■ a. Under Paragraph 32(b)(1)(ii),
paragraphs 1, 2, 3, and 4 are revised.
■ B. Under Section 1026.43—Minimum
Standards for Transactions Secured by
a Dwelling:
■ i. Under 43(a) Scope:
■ a. Paragraph 43(a)(3)(iv) and
paragraph 1 are added.
■ b. Paragraph 43(a)(3)(v)(D) and
paragraph 1 are added.
■ c. Paragraph 43(a)(3)(vi) and
paragraph 1 are added.
■ ii. Under 43(e) Qualified Mortgages:
■ a. Paragraph 43(e)(5) and paragraphs
1 through 10 are added.
The revisions and additions read as
follows:
Supplement I to Part 1026—Official
Interpretations
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Subpart E—Special Rules for Certain Home
Mortgage Transactions
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Section 1026.32—Requirements for High-Cost
Mortgages
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*
*
32(b) Definitions.
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Paragraph 32(b)(1)(ii).
1. Loan originator compensation—general.
Compensation paid by a consumer or creditor
to a loan originator, other than an employee
of the creditor, is included in the calculation
of points and fees for a transaction, provided
that such compensation can be attributed to
that particular transaction at the time the
interest rate is set. Compensation paid to an
employee of a creditor is not included in
points and fees. 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.
2. Loan originator compensation—
attributable to a particular transaction. Loan
originator compensation is compensation
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that is paid by a consumer or creditor to a
loan originator that can be attributed to that
particular transaction. The amount of
compensation that can be attributed to a
particular transaction is the dollar value of
compensation that the loan originator will
receive if the transaction is consummated. As
explained in comment 32(b)(1)(ii)–3, the
amount of compensation that a loan
originator will receive is calculated as of the
date the interest rate is set and includes
compensation that is paid before, at, or after
consummation.
3. Loan originator compensation—timing.
Compensation paid to a loan originator that
can be attributed to a transaction must be
included in the points and fees calculation
for that loan regardless of whether the
compensation is paid before, at, or after
consummation. The amount of loan
originator compensation that can be
attributed to a transaction is determined as of
the date the interest rate is set. Thus, loan
originator compensation for a transaction
includes compensation that can be attributed
to that transaction at the time the creditor
sets the interest rate for the transaction, even
if that compensation is not paid until after
consummation.
4. Loan originator compensation—
calculating loan originator compensation in
connection with other charges or payments
included in the finance charge or made to
loan originators. i. Consumer payments to
mortgage brokers. As provided in
§ 1026.32(b)(1)(ii)(A), consumer payments to
a mortgage broker already included in the
points and fees calculation under
§ 1026.32(b)(1)(i) need not be counted again
under § 1026.32(b)(1)(ii). For example,
assume a consumer pays a mortgage broker
a $3,000 fee for a transaction. The $3,000
mortgage broker fee is included in the
finance charge under § 1026.4(a)(3). Because
the $3,000 mortgage broker fee is already
included in points and fees under
§ 1026.32(b)(1)(i), it is not counted again
under § 1026.32(b)(1)(ii).
ii. Payments by a mortgage broker to its
individual loan originator employee. As
provided in § 1026.32(b)(1)(ii)(B),
compensation paid by a mortgage broker to
its individual loan originator employee is not
included in points and fees under
§ 1026.32(b)(1)(ii). For example, assume a
consumer pays a $3,000 fee to a mortgage
broker, and the mortgage broker pays a
$1,500 commission to its individual loan
originator employee for that transaction. The
$3,000 mortgage broker fee is included in
points and fees, but the $1,500 commission
is not included in points and fees because it
has already been included in points and fees
as part of the $3,000 mortgage broker fee.
iii. Creditor’s origination fees—loan
originator not employed by creditor.
Compensation paid by a consumer or creditor
to a loan originator who is not employed by
the creditor is included in the calculation of
points and fees under § 1026.32(b)(1)(ii).
Such compensation is included in points and
fees in addition to any origination fees or
charges paid by the consumer to the creditor
that are included in points and fees under
§ 1026.32(b)(1)(i). For example, assume that a
consumer pays to the creditor a $3,000
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origination fee and that the creditor pays a
mortgage broker $1,500 in compensation
attributed to the transaction. Assume further
that the consumer pays no other charges to
the creditor that are included in points and
fees under § 1026.32(b)(1)(i) and that the
mortgage broker receives no other
compensation that is included in points and
fees under § 1026.32(b)(1)(ii). For purposes of
calculating points and fees, the $3,000
origination fee is included in points and fees
under § 1026.32(b)(1)(i) and the $1,500 in
loan originator compensation is included in
points and fees under § 1026.32(b)(1)(ii),
equaling $4,500 in total points and fees,
provided that no other points and fees are
paid or compensation received.
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Section 1026.43—Minimum Standards for
Transactions Secured by a Dwelling
43(a) Scope.
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Paragraph 43(a)(3)(iv).
1. General. The requirements of
§ 1026.43(c) through (f) do not apply to an
extension of credit made pursuant to a
program administered by a Housing Finance
Agency, as defined under 24 CFR 266.5.
Under the exemption, the requirements of
§ 1026.43(c) through (f) do not apply to
extensions of credit made by housing finance
agencies and extensions of credit made by
intermediaries (e.g., private creditors)
pursuant to a program administered by a
housing finance agency. For example, if a
creditor is extending credit, including a
subordinate-lien covered transaction, that
will be made pursuant to a program
administered by a housing finance agency,
the creditor is exempt from the requirements
of § 1026.43(c) through (f). Similarly, the
creditor is exempt from the requirements of
§ 1026.43(c) through (f) regardless of whether
the program administered by a housing
finance agency is funded by Federal, State, or
other sources.
Paragraph 43(a)(3)(v)(D).
1. General. An extension of credit is
exempt from the requirements of § 1026.43(c)
through (f) if the credit is extended by a
creditor described in § 1026.43(a)(3)(v)(D),
provided the conditions specified in that
section are satisfied. The conditions specified
in § 1026.43(a)(3)(v)(D)(1) and (2) are
determined according to activity that
occurred in the calendar year preceding the
calendar year in which the consumer’s
application was received. Section
1026.43(a)(3)(v)(D)(2) provides that, during
the preceding calendar year, the creditor
must have extended credit only to consumers
with income that did not exceed the limit
then in effect for low- and moderate-income
households, as specified in regulations
prescribed by the U.S. Department of
Housing and Urban Development pursuant to
24 CFR 570.3. For example, a creditor has
satisfied the requirement in
§ 1026.43(a)(3)(v)(D)(2) if the creditor
extended credit only to consumers with
incomes that did not exceed the limit in
effect on the dates the creditor received each
consumer’s individual application. The
condition specified in
§ 1026.43(a)(3)(v)(D)(3), which relates to the
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current extension of credit, provides that the
extension of credit must be to a consumer
with income that does not exceed the limit
specified in § 1026.43(a)(3)(v)(D)(2) in effect
on the date the creditor received the
consumer’s application. For example, assume
that a creditor with a tax exemption ruling
under section 501(c)(3) of the Internal
Revenue Code of 1986 has satisfied the
conditions identified in
§ 1026.43(a)(3)(v)(D)(1) and (2). If, on May 21,
2014, the creditor in this example extends
credit secured by a dwelling to a consumer
whose application reflected income in excess
of the limit identified in
§ 1026.43(a)(3)(v)(D)(2) in effect on the date
the creditor received that consumer’s
application, the creditor has not satisfied the
condition in § 1026.43(a)(3)(v)(D)(3) and this
extension of credit is not exempt from the
requirements of § 1026.43(c) through (f).
Paragraph 43(a)(3)(vi).
1. General. The requirements of
§ 1026.43(c) through (f) do not apply to a
mortgage loan modification made in
connection with a program authorized by
sections 101 and 109 of the Emergency
Economic Stabilization Act of 2008. If a
creditor is underwriting an extension of
credit that is a refinancing, as defined by
§ 1026.20(a), that will be made pursuant to a
program authorized by sections 101 and 109
of the Emergency Economic Stabilization Act
of 2008, the creditor also need not comply
with § 1026.43(c) through (f). A creditor need
not determine whether the mortgage loan
modification is considered a refinancing
under § 1026.20(a) for purposes of
determining applicability of § 1026.43; if the
transaction is made in connection with these
programs, the requirements of § 1026.43(c)
through (f) do not apply. In addition, if a
creditor underwrites a new extension of
credit, such as a subordinate-lien mortgage
loan, that will be made pursuant to a program
authorized by sections 101 and 109 of the
Emergency Economic Stabilization Act of
2008, the creditor need not comply with the
requirements of § 1026.43(c) through (f).
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43(e) Qualified mortgages.
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Paragraph 43(e)(5).
1. Satisfaction of qualified mortgage
requirements. For a covered transaction to be
a qualified mortgage under § 1026.43(e)(5),
the mortgage must satisfy the requirements
for a qualified mortgage under
§ 1026.43(e)(2), other than the requirements
regarding debt-to-income ratio. For example,
a qualified mortgage under § 1026.43(e)(5)
may not have a loan term in excess of 30
years because longer terms are prohibited for
qualified mortgages under § 1026.43(e)(2)(ii).
Similarly, a qualified mortgage under
§ 1026.43(e)(5) may not result in a balloon
payment because § 1026.43(e)(2)(i)(C)
provides that qualified mortgages may not
have balloon payments except as provided
under § 1026.43(f). However, a covered
transaction need not comply with
§ 1026.43(e)(2)(vi), which prohibits consumer
monthly debt-to-income ratios in excess of 43
percent. A covered transaction therefore can
be a qualified mortgage under § 1026.43(e)(5)
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even though the consumer’s monthly debt-toincome ratio is greater than 43 percent.
2. Debt-to-income ratio or residual income.
Section 1026.43(e)(5) does not prescribe a
specific monthly debt-to-income ratio with
which creditors must comply. Instead,
creditors must consider a consumer’s debt-toincome ratio or residual income calculated
generally in accordance with § 1026.43(c)(7)
and verify the information used to calculate
the debt-to-income ratio or residual income
in accordance with § 1026.43(c)(3) and (4).
However, § 1026.43(c)(7) refers creditors to
§ 1026.43(c)(5) for instructions on calculating
the payment on the covered transaction.
Section 1026.43(c)(5) requires creditors to
calculate the payment differently than
§ 1026.43(e)(2)(iv). For purposes of the
qualified mortgage definition in
§ 1026.43(e)(5), creditors must base their
calculation of the consumer’s debt-to-income
ratio or residual income on the payment on
the covered transaction calculated according
to § 1026.43(e)(2)(iv) instead of according to
§ 1026.43(c)(5). Creditors are not required to
calculate the consumer’s monthly debt-toincome ratio in accordance with appendix Q
to this part as is required under the general
definition of qualified mortgages by
§ 1026.43(e)(2)(vi).
3. Forward commitments. A creditor may
make a mortgage loan that will be transferred
or sold to a purchaser pursuant to an
agreement that has been entered into at or
before the time the transaction is
consummated. Such an agreement is
sometimes known as a ‘‘forward
commitment.’’ A mortgage that will be
acquired by a purchaser pursuant to a
forward commitment does not satisfy the
requirements of § 1026.43(e)(5), whether the
forward commitment provides for the
purchase and sale of the specific transaction
or for the purchase and sale of transactions
with certain prescribed criteria that the
transaction meets. However, a forward
commitment to another person that also
meets the requirements of
§ 1026.43(e)(5)(i)(D) is permitted. For
example, assume a creditor that is eligible to
make qualified mortgages under
§ 1026.43(e)(5) makes a mortgage. If that
mortgage meets the purchase criteria of an
investor with which the creditor has an
agreement to sell loans after consummation,
then the loan does not meet the definition of
a qualified mortgage under § 1026.43(e)(5).
However, if the investor meets the
requirements of § 1026.43(e)(5)(i)(D), the
mortgage will be a qualified mortgage if all
other applicable criteria also are satisfied.
4. Creditor qualifications. To be eligible to
make qualified mortgages under
§ 1026.43(e)(5), a creditor must satisfy the
requirements stated in § 1026.35(b)(2)(iii)(B)
and (C). Section 1026.35(b)(2)(iii)(B) requires
that, during the preceding calendar year, the
creditor and its affiliates together originated
500 or fewer first-lien covered transactions.
Section 1026.35(b)(2)(iii)(C) requires that, as
of the end of the preceding calendar year, the
creditor had total assets of less than $2
billion, adjusted annually by the Bureau for
inflation.
5. Requirement to hold in portfolio.
Creditors generally must hold a loan in
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35505
portfolio to maintain the transaction’s status
as a qualified mortgage under § 1026.43(e)(5),
subject to four exceptions. Unless one of
these exceptions applies, a loan is no longer
a qualified mortgage under § 1026.43(e)(5)
once legal title to the debt obligation is sold,
assigned, or otherwise transferred to another
person. Accordingly, unless one of the
exceptions applies, the transferee could not
benefit from the presumption of compliance
for qualified mortgages under § 1026.43(e)(1)
unless the loan also met the requirements of
another qualified mortgage definition.
6. Application to subsequent transferees.
The exceptions contained in
§ 1026.43(e)(5)(ii) apply not only to an initial
sale, assignment, or other transfer by the
originating creditor but to subsequent sales,
assignments, and other transfers as well. For
example, assume Creditor A originates a
qualified mortgage under § 1026.43(e)(5). Six
months after consummation, Creditor A sells
the qualified mortgage to Creditor B pursuant
to § 1026.43(e)(5)(ii)(B) and the loan retains
its qualified mortgage status because Creditor
B complies with the limits on asset size and
number of transactions. If Creditor B sells the
qualified mortgage, it will lose its qualified
mortgage status under § 1026.43(e)(5) unless
the sale qualifies for one of the
§ 1026.43(e)(5)(ii) exceptions for sales three
or more years after consummation, to another
qualifying institution, as required by
supervisory action, or pursuant to a merger
or acquisition.
7. Transfer three years after
consummation. Under § 1026.43(e)(5)(ii)(A),
if a qualified mortgage under § 1026.43(e)(5)
is sold, assigned, or otherwise transferred
three years or more after consummation, the
loan retains its status as a qualified mortgage
under § 1026.43(e)(5) following the transfer.
The transferee need not be eligible to
originate qualified mortgages under
§ 1026.43(e)(5). The loan will continue to be
a qualified mortgage throughout its life, and
the transferee, and any subsequent
transferees, may invoke the presumption of
compliance for qualified mortgages under
§ 1026.43(e)(1).
8. Transfer to another qualifying creditor.
Under § 1026.43(e)(5)(ii)(B), a qualified
mortgage under § 1026.43(e)(5) may be sold,
assigned, or otherwise transferred at any time
to another creditor that meets the
requirements of § 1026.43(e)(5)(v). That
section requires that a creditor, during the
preceding calendar year, together with all
affiliates, 500 or fewer first-lien covered
transactions and had total assets less than $2
billion (as adjusted for inflation) at the end
of the preceding calendar year. A qualified
mortgage under § 1026.43(e)(5) transferred to
a creditor that meets these criteria would
retain its qualified mortgage status even if it
is transferred less than three years after
consummation.
9. Supervisory sales. Section
1026.43(e)(5)(ii)(C) facilitates sales that are
deemed necessary by supervisory agencies to
revive troubled creditors and resolve failed
creditors. A qualified mortgage under
§ 1026.43(e)(5) retains its qualified mortgage
status if it is sold, assigned, or otherwise
transferred to another person pursuant to: A
capital restoration plan or other action under
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12 U.S.C. 1831o; the actions or instructions
of any person acting as conservator, receiver
or bankruptcy trustee; an order of a State or
Federal government agency with jurisdiction
to examine the creditor pursuant to State or
Federal law; or an agreement between the
creditor and such an agency. A qualified
mortgage under § 1026.43(e)(5) that is sold,
assigned, or otherwise transferred under
these circumstances retains its qualified
mortgage status regardless of how long after
consummation it is sold and regardless of the
size or other characteristics of the transferee.
Section 1026.43(e)(5)(ii)(C) does not apply to
transfers done to comply with a generally
applicable regulation with future effect
designed to implement, interpret, or
prescribe law or policy in the absence of a
specific order by or a specific agreement with
a governmental agency described in
§ 1026.43(e)(5)(ii)(C) directing the sale of one
or more qualified mortgages under
§ 1026.43(e)(5) held by the creditor or one of
the other circumstances listed in
§ 1026.43(e)(5)(ii)(C). For example, a
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qualified mortgage under § 1026.43(e)(5) that
is sold pursuant to a capital restoration plan
under 12 U.S.C. 1831o would retain its status
as a qualified mortgage following the sale.
However, if the creditor simply chose to sell
the same qualified mortgage as one way to
comply with general regulatory capital
requirements in the absence of supervisory
action or agreement it would lose its status
as a qualified mortgage following the sale
unless it qualifies under another definition of
qualified mortgage.
10. Mergers and acquisitions. A qualified
mortgage under § 1026.43(e)(5) retains its
qualified mortgage status if a creditor merges
with, is acquired by, or acquires another
person regardless of whether the creditor or
its successor is eligible to originate new
qualified mortgages under § 1026.43(e)(5)
after the merger or acquisition. However, the
creditor or its successor can originate new
qualified mortgages under § 1026.43(e)(5)
only if it complies with all of the
requirements of § 1026.43(e)(5) after the
merger or acquisition. For example, assume
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a creditor that originates 250 covered
transactions each year and originates
qualified mortgages under § 1026.43(e)(5) is
acquired by a larger creditor that originates
10,000 covered transactions each year.
Following the acquisition, the small creditor
would no longer be able to originate
§ 1026.43(e)(5) qualified mortgages because,
together with its affiliates, it would originate
more than 500 covered transactions each
year. However, the § 1026.43(e)(5) qualified
mortgages originated by the small creditor
before the acquisition would retain their
qualified mortgage status.
*
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*
Dated: May 29, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial
Protection.
[FR Doc. 2013–13173 Filed 6–11–13; 8:45 am]
BILLING CODE 4810–AM–P
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Agencies
[Federal Register Volume 78, Number 113 (Wednesday, June 12, 2013)]
[Rules and Regulations]
[Pages 35429-35506]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-13173]
[[Page 35429]]
Vol. 78
Wednesday,
No. 113
June 12, 2013
Part III
Bureau of Consumer Financial Protection
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12 CFR Part 1026
Ability-to-Repay and Qualified Mortgage Standards Under the Truth in
Lending Act (Regulation Z); Final Rule
Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 /
Rules and Regulations
[[Page 35430]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1026
[Docket No. CFPB-2013-0002]
RIN 3170-AA34
Ability-to-Repay and Qualified Mortgage Standards Under the Truth
in Lending Act (Regulation Z)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Final rule; official interpretations.
-----------------------------------------------------------------------
SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is
amending Regulation Z, which implements the Truth in Lending Act
(TILA). Regulation Z generally prohibits a creditor from making a
mortgage loan unless the creditor determines that the consumer will
have the ability to repay the loan. The final rule provides an
exemption to these requirements for creditors with certain
designations, loans pursuant to certain programs, certain nonprofit
creditors, and mortgage loans made in connection with certain Federal
emergency economic stabilization programs. The final rule also provides
an additional definition of a qualified mortgage for certain loans made
and held in portfolio by small creditors and a temporary definition of
a qualified mortgage for balloon loans. Finally, the final rule
modifies the requirements regarding the inclusion of loan originator
compensation in the points and fees calculation.
DATES: This rule is effective January 10, 2014.
FOR FURTHER INFORMATION CONTACT: Jennifer B. Kozma or Eamonn K. Moran,
Counsels; Thomas J. Kearney or Mark Morelli, Senior Counsels; or
Stephen Shin, Managing Counsel, Office of Regulations, at (202) 435-
7700.
SUPPLEMENTARY INFORMATION:
I. Summary of the Final Rule
The Bureau is issuing this final rule to adopt certain exemptions,
modifications, and clarifications to TILA's ability-to-repay
requirements. TILA section 129C, as added by sections 1411, 1412, and
1414 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act), generally requires creditors to make a reasonable,
good faith determination of a consumer's ability to repay a mortgage
loan and creates a presumption of compliance with these ability-to-
repay requirements for certain loans designated as ``qualified
mortgages.'' On January 10, 2013, the Bureau issued a final rule (the
2013 ATR Final Rule) to implement these ability-to-repay requirements
and qualified mortgage provisions. See 78 FR 6407 (Jan. 30, 2013). At
the same time, the Bureau issued a proposed rule (the 2013 ATR Proposed
Rule or Bureau's proposal) related to certain proposed exemptions,
modifications, and clarifications to the ability-to-repay requirements.
See 78 FR 6621 (Jan. 30, 2013). This final rule addresses the issues
put forth for public comment in the 2013 ATR Proposed Rule. See part
II.B below and part II.B-F of the 2013 ATR Final Rule for a complete
discussion of the statutory and regulatory background to the ability-
to-repay requirements.
Loan Originator Compensation and the Points and Fees Calculation
The Dodd-Frank Act generally provides that points and fees on a
qualified mortgage may not exceed 3 percent of the loan balance and
that points and fees in excess of 5 percent will trigger the
protections for high-cost mortgages under the Home Ownership and Equity
Protection Act (HOEPA).\1\ The Dodd-Frank Act also included a provision
requiring that loan originator compensation be counted toward these
thresholds, even if it is not paid up-front by the consumer directly to
the loan originator.
---------------------------------------------------------------------------
\1\ See title I subtitle B of the Riegle Community Development
and Regulatory Improvement Act of 1994, Public Law 103-325, 108
Stat. 2160 (Jan. 25, 1994).
---------------------------------------------------------------------------
The Bureau had solicited comment on how to apply the statutory
requirements in situations in which payments pass from one party to
another over the course of a mortgage transaction. The Bureau was
particularly concerned about situations in which the creditor pays
compensation to a mortgage broker or its own loan originator employees
because there is no simple way to determine whether the compensation is
paid from money the creditor collected from up-front charges to the
consumer (which would already be counted against the points and fees
thresholds) or from the interest rate on the loan (which would not be
counted toward the thresholds).
The final rule excludes from points and fees loan originator
compensation paid by a consumer to a mortgage broker when that payment
has already been counted toward the points and fees thresholds as part
of the finance charge under Sec. 1026.32(b)(1)(i). The final rule also
excludes from points and fees compensation paid by a mortgage broker to
an employee of the mortgage broker because that compensation is already
included in points and fees as loan originator compensation paid by the
consumer or the creditor to the mortgage broker.
The final rule excludes from points and fees compensation paid by a
creditor to its loan officers. The Bureau concluded that there were
significant operational challenges to calculating individual employee
compensation accurately early in the loan origination process, and that
those challenges would lead to anomalous results for consumers. In
addition, the Bureau concluded that structural differences between the
retail and wholesale channels lessened risks to consumers. The Bureau
will continue to monitor the market to determine if additional
protections are necessary and evaluate whether there are different
approaches for calculating retail loan officer compensation consistent
with the purposes of the statute.
The final rule retains an ``additive'' approach for calculating
loan originator compensation paid by a creditor to a loan originator
other than an employee of creditor. Under the additive approach, Sec.
1026.32(b)(1)(ii) requires that a creditor include in points and fees
compensation paid by the creditor to a mortgage broker, in addition to
up-front charges paid by the consumer to the creditor that are included
in points and fees under Sec. 1026.32(b)(1)(i).
Exemptions for Certain Creditors and Lending Programs
Certain creditors and nonprofits. The final rule provides an
exemption from the ability-to-repay requirements for extensions of
credit made by certain types of creditors. Creditors designated by the
U.S. Department of the Treasury as Community Development Financial
Institutions and creditors designated by the U.S. Department of Housing
and Urban Development as either a Community Housing Development
Organization or a Downpayment Assistance Provider of Secondary
Financing are exempt from the ability-to-repay requirements, under
certain conditions. The final rule also generally exempts creditors
designated as nonprofit organizations under section 501(c)(3) of the
Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3)) that extend credit
no more than 200 times annually, provide credit only to low-to-moderate
income consumers, and follow their own written procedures to determine
that consumers have a reasonable ability to repay their loans.
Credit extended pursuant to certain lending programs. The final
rule provides an exemption from the ability-to-repay requirements for
extensions of
[[Page 35431]]
credit made pursuant to programs administered by a housing finance
agency and for an extension of credit made pursuant to an Emergency
Economic Stabilization Act program, such as extensions of credit made
pursuant to a State Hardest Hit Fund program.
Small Creditor Portfolio and Balloon-Payment Qualified Mortgages
The final rule contains several provisions that are designed to
facilitate compliance and preserve access to credit from small
creditors, which are defined as creditors with no more than $2 billion
in assets that (along with affiliates) originate no more than 500
first-lien mortgages covered under the ability-to-repay rules per year.
The Bureau had previously exercised authority under the Dodd-Frank Act
to allow certain balloon-payment mortgages to be designated as
qualified mortgages if they were originated and held in portfolio by
small creditors operating predominantly in rural or underserved areas.
In this final rule, the Bureau is:
Adopting a new, fourth category of qualified mortgages for
certain loans originated and held in portfolio for at least three years
(subject to certain limited exceptions) by small creditors, even if
they do not operate predominantly in rural or underserved areas. The
loans must meet the general restrictions on qualified mortgages with
regard to loan features and points and fees, and creditors must
evaluate consumers' debt-to-income ratio or residual income. However,
the loans are not subject to a specific debt-to-income ratio as they
would be under the general qualified mortgage definition.
Raising the threshold defining which qualified mortgages
receive a safe harbor under the ability-to-repay rules for loans that
are made by small creditors under the balloon-loan or small creditor
portfolio categories of qualified mortgages. Because small creditors
often have higher cost of funds, the final rule shifts the threshold
separating qualified mortgages that receive a safe harbor from those
that receive a rebuttable presumption of compliance with the ability-
to-repay rules from 1.5 percentage points above the average prime offer
rate (APOR) on first-lien loans to 3.5 percentage points above APOR.
Providing a two-year transition period during which small
creditors that do not operate predominantly in rural or underserved
areas can offer balloon-payment qualified mortgages if they hold the
loans in portfolio. During the two-period transition period, the Bureau
intends to study whether the definitions of ``rural'' or
``underserved'' should be adjusted and to work with small creditors to
transition to other types of products, such as adjustable-rate
mortgages, that satisfy other qualified mortgage definitions.
The ability-to-repay rules as revised by this final rule will take
effect on January 10, 2014, along with various other rules implementing
new mortgage protections under the Dodd-Frank Act.
II. Background
A. Mortgage Market Background
The mortgage market is the single largest market for consumer
financial products and services in the United States. In 2007 and 2008
this market collapsed, greatly diminishing the wealth of millions of
American consumers and sending the economy into a severe recession. A
primary cause of the collapse was the steady deterioration of credit
standards in mortgage lending. Evidence demonstrates that many mortgage
loans were made solely against collateral and without consideration of
ability to repay, particularly in the markets for ``subprime'' and
``Alt-A'' products, which more than doubled from $400 billion in
originations in 2003 to $830 billion in originations in 2006.\2\
Subprime products were sold primarily to consumers with poor or no
credit history, while Alt-A loans were sold primarily to consumers who
provided little or no documentation of income or other evidence of
repayment ability.\3\
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\2\ Inside Mortg. Fin., The 2011 Mortgage Market Statistical
Annual (2011).
\3\ There is evidence that some consumers who would have
qualified for ``prime'' loans were steered into subprime loans as
well. The Federal Reserve Board on July 18, 2011 issued a consent
cease and desist order and assessed an $85 million civil money
penalty against Wells Fargo & Company of San Francisco, a registered
bank holding company, and Wells Fargo Financial, Inc., of Des
Moines. The order addresses allegations that Wells Fargo Financial
employees steered potential prime-eligible consumers into more
costly subprime loans and separately falsified income information in
mortgage applications. In addition to the civil money penalty, the
order requires that Wells Fargo compensate affected consumers. See
Press Release, Federal Reserve Board (July 20, 2011), available at:
http://www.federalreserve.gov/newsevents/press/enforcement/20110720a.htm.
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Because subprime and Alt-A loans involved additional risk, they
were typically more expensive to consumers than ``prime'' mortgage
loans, although many of them had very low introductory interest rates.
While housing prices continued to increase, it was relatively easy for
consumers to refinance their existing loans into more affordable
products to avoid interest rate resets and other adjustments. When
housing prices began to decline in 2005, however, refinancing became
more difficult and delinquency rates on subprime and Alt-A products
increased dramatically.\4\ By the summer of 2006, 1.5 percent of loans
less than a year old were in default, and this figure peaked at 2.5
percent in late 2007.\5\ As the economy worsened, the rates of serious
delinquency (90 or more days past due or in foreclosure) for the
subprime and Alt-A products began a steep increase from approximately
10 percent in 2006, to 20 percent in 2007, to over 40 percent in
2010.\6\ Although the mortgage market is recovering, consumers today
continue to feel the effects of the financial crisis.
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\4\ U.S. Fin. Crisis Inquiry Comm'n, The Financial Crisis
Inquiry Report: Final Report of the National Commission on the
Causes of the Financial and Economic Crisis in the United States at
215-217 (Official Gov't ed. 2011) (FCIC Report), available at:
http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
\5\ FCIC Report at 215. CoreLogic Chief Economist Mark Fleming
told the FCIC that the early payment default rate ``certainly
correlates with the increase in the Alt-A and subprime shares and
the turn of the housing market and the sensitivity of those loan
products.'' Id.
\6\ FCIC Report at 217.
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Community-Focused Lending Programs
While governmental and nonprofit programs have always been an
important source of assistance for low- to moderate-income (LMI)
consumers, these programs have taken on even greater significance in
light of current tight mortgage credit standards and Federal
initiatives to stabilize the housing market. There are a variety of
programs designed to assist LMI consumers with access to homeownership.
These programs are generally offered through a nonprofit entity, local
government, or a housing finance agency (HFA). These programs play an
important role in the housing sector of the economy.
Types of financial assistance available. Community-focused lending
programs typically provide LMI consumers with assistance ranging from
housing counseling services to full mortgage loan financing. Some
programs offer financial assistance through land trust programs, in
which the consumer leases the real property and takes ownership of only
the improvements. Many organizations provide ``downpayment assistance''
in connection with mortgage loan financing. This can be a gift, grant,
or loan to the consumer to assist with the consumer's down payment, or
to pay for some of the closing costs. These programs often rely on
subsidies from Federal government funds, local government funds,
foundations, or
[[Page 35432]]
employer funding.\7\ For example, many of these programs rely on funds
provided through the HUD Home Investment Partnerships Program (HOME
Program).\8\
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\7\ Abigail Pound, Challenges and Changes in Community-Based
Lending for Homeownership, NeighborWorks America, Joint Center for
Housing Studies of Harvard University (Feb. 2011), available at:
http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/w11-2_pound.pdf.
\8\ The HOME Investment Partnerships Program is authorized under
title II of the Cranston-Gonzalez National Affordable Housing Act of
1990, Public Law 101-625, 104 Stat. 4079 (1990). See 24 CFR 92.1
through 92.618.
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Some programs offer first-lien mortgage loans designed to meet the
needs of LMI consumers. These first-lien mortgage loans may have a
discounted interest rate or limited origination fees or may permit high
loan-to-value ratios. Many programs offer subordinate financing.
Subordinate-financing options may be simple, such as a relatively
inexpensive subordinate-lien loan to pay for closing costs. Other
methods of subordinate financing may be complex. For example, one HFA
program offers a 30-year, fixed-rate, subordinate-lien mortgage loan
through partner creditors, with interest-only payments for the first 11
years of the loan's term, and with an interest subsidy for the LMI
consumer, resulting in a graduated monthly payment between the fifth
and eleventh year of the loan; an additional 30-year deferred, 0
percent subordinate-lien mortgage loan is extended by the HFA equal to
the amount of the subsidy.\9\ Some of the loans offered by these
programs, whether first-lien or subordinate-financing, are structured
as hybrid grant products that are commonly forgiven.
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\9\ See http://www.mhp.net/homeownership/homebuyer/soft_second_works.php, describing the SoftSecond program offered by the
Massachusetts Housing Partnership.
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Housing finance agencies. For over 50 years, HFAs have provided LMI
consumers with opportunities for affordable homeownership.\10\ HFAs are
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.\11\ Many of the State
and Federal programs HFAs administer do not provide administrative
funds; others provide limited administrative funds. Most HFAs operate
independently and do not receive State operating funds. These agencies
are generally funded through tax-exempt bonds but may receive funding
from Federal, State, or other sources.\12\ HFAs issue these tax-exempt
bonds, also known as mortgage revenue bonds, and use the proceeds of
the bond sale to finance affordable mortgage loans to LMI consumers. As
of June 2012, the 51 State HFAs (including the District of Columbia)
had $107 billion in outstanding tax-free municipal debt available.
These mortgage revenue bonds funded approximately 100,000 first-time
homeowners per year. HFAs may also receive funding through Federal
programs, such as the HOME Program, which is the largest Federal block
grant for affordable housing.\13\
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\10\ The first State housing finance agency was established in
New York in 1960. See New York State Housing Finance Agency Act,
1960 Laws of New York, 183rd Session, Chap. 671.
\11\ 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.
\12\ Bonds issued by HFAs are tax-exempt if the proceeds are
used to provide assistance to first-time or LMI-homebuyers. See 26
U.S.C. 143.
\13\ See www.hud.gov/homeprogram.
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HFAs employ several methods of promoting affordable homeownership.
These agencies may partner with local governments to develop and
implement long-term community-development strategies. For example, HFAs
may provide tax credits to companies that build or rehabilitate
affordable housing.\14\ These agencies may also administer affordable
housing trust funds or other State programs to facilitate the
affordable housing development.\15\ Many HFAs also provide education,
counseling, or training courses to first-time or LMI consumers.
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\14\ The Tax Reform Act of 1986, Public Law 99-514, 100 Stat.
2085 (1986), included the Low-Income Housing Tax Credit Program.
Under this program, the IRS provides tax credits to HFAs. HFAs may
transfer these tax credits to developers of affordable housing.
Developers then sell these credits to fund the development program.
See http://portal.hud.gov/hudportal/HUD?src=/program_offices/comm_planning/affordablehousing/training/web/lihtc/basics.
\15\ The Massachusetts Affordable Housing Trust Fund provides
funds to governmental subdivisions, nonprofit organizations, and
other entities seeking to provide for the development of affordable
housing. See www.masshousing.com. New York State's Mitchell-Lama
program provides subsidies such as property tax exemptions to
affordable housing developers. See http://www.nyshcr.org/Programs/mitchell-lama/.
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HFAs also provide financial assistance directly to consumers.
Typically, HFAs offer the first-lien mortgage loan, subordinate
financing, and downpayment assistance programs described above. HFAs
may also establish pooled loss reserves to self-insure mortgage loans
originated pursuant to the program, thereby permitting LMI consumers to
avoid private mortgage insurance. HFAs may also provide other
assistance to LMI consumers, such as mortgage loan payment subsidies or
assistance with the up-front costs of a mortgage loan. In 2010, HFAs
provided about $10 billion in affordable financing.\16\ In 2010, 89
percent of HFAs provided down payment assistance loan or grant
assistance and 57 percent of HFAs provided assistance in conjunction
with programs offered by the Federal Housing Administration (FHA) or
the U.S. Department of Agriculture (USDA).\17\ However, HFAs generally
do not provide direct financing to LMI consumers. Many HFAs are
prohibited by law from directly extending credit in an effort by State
governments to avoid competing with the private sector. HFAs generally
partner with creditors, such as local banks, that extend credit
pursuant to the HFA's program guidelines. Most HFA programs are
``mortgage purchase'' programs in which the HFA establishes program
requirements (e.g., income limits, purchase price limits, interest
rates, points and term limits, underwriting standards, etc.), and
agrees to purchase loans made by private creditors that meet these
requirements.
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\16\ National Council of State Housing Agencies, State HFA
Factbook (2010), p. 33.
\17\ Id. at 21-22, 35-36.
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Many HFAs expand on the underwriting standards of GSEs or Federal
government agencies by applying even stricter underwriting standards
than these guidelines or the ability-to-repay requirements, such as
requiring mandatory counseling for all first-time homebuyers and strong
loan servicing. For example, the State of New York Mortgage Agency
(SONYMA)'s underwriting requirements generally include a two-year,
stable history of earned income, a monthly payment-to-income ratio not
to exceed 40 percent, a monthly debt-to-income ratio not to exceed 45
percent, and review of the consumer's entire credit profile to
determine acceptable credit.\18\
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\18\ See State of New York Mortgage Agency (SONYMA) Credit and
Property Underwriting Notes, available at: http://www.nyshcr.org/assets/documents/1006.pdf.
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HFAs extend credit only after conducting a lengthy and thorough
analysis of a consumer's ability to repay. HFAs generally employ
underwriting requirements that are uniquely tailored to meet the needs
of LMI consumers, and which often account for nontraditional
underwriting criteria, extenuating circumstances, and other elements
that are indicative of
[[Page 35433]]
creditworthiness, ability to repay, and responsible homeownership. In
certain circumstances, some HFAs require the consideration of
compensating factors and other elements that are different from the
factors required to be considered and verified under the ability-to-
repay requirements. For example, the Connecticut Housing Finance Agency
(CHFA)'s underwriting requirements require the consideration of certain
compensating factors (e.g., ability to make a large down payment,
demonstrated ability to accumulate savings, substantial documented cash
reserves, etc.) for consumers with debt ratios that exceed the maximum
CHFA monthly payment-to-income and debt-to-income ratio limits.\19\ In
addition, to be eligible for Virginia Housing Development Authority
(VHDA) conventional financing, a consumer must demonstrate the
willingness and ability to repay the mortgage debt and creditors must
consider: Employment and income; credit history; sufficient funds to
close; monthly housing expenses; and monthly payment-to-income and
debt-to-income ratios.\20\ VHDA underwriting guidelines allow delegated
underwriters to approve exceptions to the above debt-to-income ratios,
provided that the ratios do not exceed 2 percent above the guidelines.
The exceptions must be justified with strong compensating factors,
which must indicate that the consumer can afford the repayment of the
increased debt.\21\ Through careful and regular oversight, however,
HFAs help ensure that their lenders follow the HFAs' strict
underwriting standards.
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\19\ See Connecticut Housing Finance Agency Operating Manual,
Section 5--Underwriting, available at: http://www.chfa.org/content/CHFA%20Documents/Operating%20Manual%20-%20Section%2005%20Underwriting.pdf.
\20\ See Virginia Housing Development Authority Origination
Guide, Section 2.3 Underwriting Requirements (Aug. 2011), available
at: http://www.vhda.com/BusinessPartners/Lenders/LoanInfoGuides/Loan%20Information%20and%20Guidelines/OriginationGuide.pdf.
\21\ See id.
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Private organizations. While entities such as HFAs develop and
finance affordable housing programs, these mortgage loans are generally
extended by private organizations. These organizations often are
structured as nonprofit 501(c)(3) organizations. Under Internal Revenue
Code section 501(c)(3), the designation is for nonprofit, tax-exempt,
charitable organizations not operated for the benefit of private
interests.\22\ Under Federal tax law, 501(c)(3) organizations are
restricted from lobbying activities, while 501(c)(4) organizations,
which must exist to promote social welfare, may engage in political
campaigning and lobbying.\23\ Most organizations that provide support
to LMI consumers are structured as 501(c)(3) organizations. However,
some organizations are structured as nonprofit 501(c)(4) organizations.
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\22\ See http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Exemption-Requirements-Section-501(c)(3)-
Organizations.
\23\ See http://www.irs.gov/Charities-&-Non-Profits/Other-Non-Profits/Social-Welfare-Organizations.
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Various Federal programs establish eligibility requirements and
provide ongoing monitoring of specific types of creditors that receive
Federal grants and other support. For example, Community Development
Financial Institutions (CDFIs) are approved by the U.S. Department of
the Treasury (Treasury Department) to receive monetary awards from the
Treasury Department's CDFI Fund, which was established to promote
capital development and growth in underserved communities. Promoting
homeownership and providing safe lending alternatives are among the
Fund's main goals. The Treasury Department created the CDFI designation
to identify and support small-scale creditors that are committed to
community-focused lending but have difficulty raising the capital
needed to provide affordable housing services.\24\ CDFIs may operate on
a for-profit or nonprofit basis, provided the CDFI has a primary
mission of promoting community development.\25\ These programs are also
subject to other eligibility requirements.\26\ As of July 2012, there
were 999 such organizations in the U.S., 62 percent of which were
classified as Community Development (CD) Loan Funds and 22 percent as
CD Credit Unions, while the rest were CD Banks, Thrifts, or CD Venture
Capital Funds.\27\
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\24\ See 68 FR 5704 (Feb. 4, 2003).
\25\ See 12 CFR 1805.201(b).
\26\ Id. Treasury Department eligibility requirements for CDFIs
stipulate that an approved organization must: Be a legal entity at
the time of certification application; have a primary mission of
promoting community development; be a financing entity; primarily
serve one or more target markets; provide development services in
conjunction with its financing activities; maintain accountability
to its defined target market; and be a non-government entity and not
be under control of any government entity (Tribal governments
excluded).
\27\ See http://www.cdfifund.gov/docs/certification/cdfi/CDFI
List-07-31-12.xls.
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The U.S. Department of Housing and Urban Development (HUD) may
designate nonprofits engaging in affordable housing activities as
Downpayment Assistance through Secondary Financing Providers
(DAPs).\28\ HUD established this designation as part of an effort to
promote nonprofit involvement in affordable housing programs.\29\ HUD-
approved nonprofits may participate in FHA single-family programs that
allow them to purchase homes at a discount, finance FHA-insured
mortgages with the same terms and conditions as owner-occupants, or be
able to finance secondary loans for consumers obtaining FHA-insured
mortgages.\30\ A DAP must be approved by HUD if it is a nonprofit or
nonprofit instrumentality of government that provides downpayment
assistance as a lien in conjunction with an FHA first mortgage;
government entity DAPs and gift programs do not require approval.\31\
As of May 2013 HUD listed 228 nonprofit agencies and nonprofit
instrumentalities of government in the U.S. that are authorized to
provide secondary financing.\32\ HUD performs field reviews and
requires annual reports of participating nonprofit agencies.
Additionally, HUD's quality control plan requires periodic review for
deficient policies and procedures and corrective actions. These
approval and subsequent review procedures are intended to ensure that
DAPs operate in compliance with HUD requirements and remain financially
viable.\33\ However, HUD recognizes that these nonprofits have limited
resources and gives consideration to DAP viability when crafting
regulations.\34\
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\28\ See 24 CFR 200.194.
\29\ ``Nonprofit organizations are important participants in
HUD's efforts to further affordable housing opportunities for low-
and moderate-income persons through the FHA single family programs.
FHA's single family regulations recognize a special role for
nonprofit organizations in conjunction with the . . . provision of
secondary financing.'' See 67 FR 39238 (June 6, 2002).
\30\ DAPs generally rely on FHA program guidelines for
underwriting purposes, but have additional requirements for
determining eligibility for assistance. For example, the Hawaii
Homeownership Center is a HUD-approved DAP with separate eligibility
criteria, available at: http://www.hihomeownership.org/pdf/DPAL5_FAQ_JAN2013.pdf.
\31\ See http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/np/sfhdap01.
\32\ See https://entp.hud.gov/idapp/html/f17npdata.cfm.
\33\ ``It is vital that the Department periodically and
uniformly assess the management and financial ability of
participating nonprofit agencies to ensure they are not
overextending their capabilities and increasing HUD's risk of loss
as a mortgage insurance provider.'' 65 FR 9285, 9286 (Feb. 24,
2000).
\34\ ``HUD continues to strongly encourage the participation of
nonprofit organizations, including community and faith-based
organizations, in its programs. This proposed rule is not designed
to place particular burdens on participation by nonprofit
organizations. Rather, the proposed rule is designed to ensure that
nonprofit organizations have the capacity, experience, and interest
to participate in HUD's housing programs.'' 69 FR 7324, 7325 (Feb.
13, 2004).
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Creditors may also be certified by HUD as Community Housing
[[Page 35434]]
Development Organizations (CHDOs) in connection with HUD's HOME
Program, which provides grants to fund a wide range of activities that
promote affordable homeownership.\35\ HUD Participating Jurisdictions
confer CHDO certification only on community-focused nonprofits that are
both dedicated to furthering a community's affordable housing goals and
capable of complying with the requirements of the HOME Program.\36\
Creditors designated as CHDOs are eligible to receive special CHDO set-
aside funds from the HOME Program to fund local homebuyer assistance
programs.\37\ Applicants seeking CHDO status must meet rigorous
requirements. For example, a CHDO must be designated as a nonprofit
under section 501(c)(3) or (c)(4) of the Internal Revenue Code, adhere
to strict standards of financial accountability, have among its
purposes the provision of decent and affordable housing for LMI
consumers, maintain accountability to the community, and have a proven
record of capably and effectively serving low-income communities.\38\
After the CHDO designation is obtained, CHDO creditors must operate
under the supervision of a Participating Jurisdiction and in accordance
with the requirements of the HOME Program.\39\ HUD conducts annual
performance reviews to determine whether funds have been used in
accordance with program requirements.\40\ While HUD continues to
support affordable housing programs involving CHDOs, current market
conditions have affected CHDO viability.\41\
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\35\ See http://portal.hud.gov/hudportal/HUD?src=/program_offices/comm_planning/affordablehousing/programs/home.
\36\ ``The Department believes that there was specific statutory
intent to create an entitlement for community-based nonprofit
organizations that would own, sponsor or develop HOME assisted
housing. While partnerships with State and local government are
critical to the development of affordable housing, these
organizations are viewed as private, independent organizations
separate and apart from State or local governments. One of the major
objectives of the Department's technical assistance program is to
increase the number of capable, successful CHDOs able and willing to
use the CHDO set-aside [fund].'' 61 FR 48736, 48737 (Sept. 16,
1996).
\37\ See 24 CFR 92.300 through 92.303.
\38\ See 24 CFR 92.2.
\39\ For example, no more than 5 percent of a Participating
Jurisdiction's fiscal year HOME allocation may be used for CHDO
operating expenses. 24 CFR 92.208(a).
\40\ See 24 CFR 92.550 through 92.552.
\41\ ``[Participating jurisdictions] have encountered new
challenges in administering their programs and in managing their
growing portfolios of older HOME projects. These challenges include
reduced availability of states or local funding sources, reduced
private lending, changes in housing property standards, and energy
codes and reductions in states and local government workforces
throughout the Nation. These challenges have been magnified by
current housing and credit market conditions.'' 76 FR 78343, 78345
(Dec. 16, 2011).
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CDFIs and CHDOs that provide mortgage loans generally employ
underwriting guidelines tailored to the needs of LMI consumers. Unlike
creditors that rely on industry-wide underwriting guidelines, which
generally do not account for the unique credit characteristics of LMI
consumers, CDFI and CHDO underwriting requirements include a variety of
compensating factors. For example, these creditors often consider
personal narratives explaining prior financial difficulties, such as
gaps in employment or negative credit history.\42\ Others consider the
amount of time a consumer spends working on the construction or
rehabilitation of affordable homes.\43\ Some creditors also consider a
consumer's general reputation, relying on references from a landlord or
persons with whom the consumer does business.\44\ In these
transactions, a CDFI or CHDO may determine that the strength of these
compensating characteristics outweigh weaknesses in other underwriting
factors, such as negative credit history or irregular income. Including
these compensating factors in the underwriting process enables CDFIs
and CHDOs to more appropriately underwrite LMI consumers.
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\42\ Neighborworks Anchorage, which is designated as both a CDFI
and CHDO, requires letters of explanation regarding gaps in
employment or derogatory credit history. See http://www.nwanchorage.org/home-ownership/buying-home/getting-loan-affordable-loans-lending-programs.
\43\ The Community Development Corporation of Brownsville, which
is designated as a CHDO, requires consumers to contribute 11 months
of labor, or ``sweat equity,'' as part of the approval process. See
http://www.cdcb.org/h-h-programs.html#programs2. St. Lucie Habitat
for Humanity, which is designated as a CHDO, requires 300 hours of
labor as part of the approval process. See http://stluciehabitat.org/#.
\44\ Habitat for Humanity affiliates, many of which are
designated as a CHDO or CDFI, consider references from current and
former landlords, creditors, and others. See Habitat for Humanity
Affiliate Operations Manual, available at: http://www.medinahabitat.org/files/AffilOpFamilySelect.pdf.
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Nonprofit creditors may engage in community-focused lending without
obtaining one of the designations described above. Such nonprofits
often rely on HFA or Federal programs for funding, lending guidelines,
and other support. However, some nonprofits offer credit to LMI
consumers independent of these State or Federal programs. For example,
nonprofits may make mortgage loans in connection with a GSE affordable
housing program. The Federal Home Loan Bank (FHLB) System, Federal
National Mortgage Association (Fannie Mae), and Federal Home Loan
Mortgage Corporation (Freddie Mac) offer several programs to support
affordable housing by facilitating mortgage financing for LMI
consumers. For example, the FHLB Affordable Housing Program provides
grants to member banks to fund programs that assist with closing costs
or down payments, buy down principal amounts or interest rates,
refinance an existing loan, or assist with rehabilitation or
construction costs.\45\ Fannie Mae and Freddie Mac also offer two
programs focused on community-focused lending.\46\
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\45\ The Federal Home Loan Bank of Des Moines provides funds for
member bank programs related to rural homeownership, urban first-
time homebuyers, and Native American homeownership. See http://www.fhlbdm.com/community-investment/down-payment-assistance-programs/. The Federal Home Loan Bank of Chicago provides funds for
member bank programs related to down payment and closing cost
assistance or eligible rehabilitation costs for the purchase of a
home. See http://ci.fhlbc.com/Grant_Pgms/DPP.shtml.
\46\ Fannie Mae offers first-lien mortgage loans through the My
Community Mortgage program and subordinate-lien loans through the
Community Seconds program. Freddie Mac offers both first- and
subordinate-lien mortgage loans through the Home Possible program.
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Other options exist for nonprofits seeking to develop and fund
community-focused lending programs. For example, a nonprofit may
originate mortgage loans to LMI consumers and subsequently sell the
loans to a bank, credit union, or other investor as part of a Community
Reinvestment Act partnership program.\47\ Other nonprofits may operate
a limited affordable housing assistance fund, funded entirely by
private donations, under which LMI consumers may obtain subordinate
financing. Nonprofits such as these often rely on the underwriting
performed by the creditor for the first-lien mortgage loan, which is
often a bank or credit union, to process, underwrite, and approve the
LMI consumer's application. In addition, some nonprofits are self-
supporting and offer full financing to LMI consumers. These nonprofits
often establish lending programs with unique guidelines, such as
requirements that LMI consumers devote a minimum number of hours
towards the construction of affordable housing.
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\47\ Under the Community Reinvestment Act (12 U.S.C. 2901),
depository institutions may meet community reinvestment goals by
directly originating or purchasing mortgage loans provided to LMI
consumers. See 12 CFR 228.22.
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Homeownership Stabilization and Foreclosure Prevention Programs
During the early stages of the financial crisis the mortgage market
significantly
[[Page 35435]]
tightened mortgage loan underwriting requirements in response to
uncertainty over the magnitude of potential losses due to
delinquencies, defaults, and foreclosures.\48\ This restriction in
credit availability coincided with increasing unemployment, falling
home values, and the onset of subprime ARM resets. As a result, many
subprime ARM consumers could not afford their mortgage payments and
were not able to obtain refinancings. This led to increases in
delinquencies and foreclosures, which prompted further tightening of
underwriting standards. Other subprime ARM consumers were able to
remain current, but were not able to refinance because of a decrease in
their loan-to-value ratio or an increase in their debt-to-income
ratio.\49\ However, these consumers devoted most of their disposable
income to mortgage payments, thereby lowering overall consumer demand
and further weakening the national economy.\50\
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\48\ A 2011 OCC survey shows that 56 percent of supervised banks
participating in the survey tightened residential real estate
underwriting requirements between 2007 and 2008, and 73 percent
tightened underwriting requirements between 2008 and 2009. See
Office of the Comptroller of the Currency, Survey of Credit
Underwriting Practices 2011, p. 11.
\49\ ``[W]ith house prices becoming flat or declining in many
parts of the country during 2007, it has become increasingly
difficult for many subprime ARM borrowers to refinance. While many
such borrowers remain current on their loans or are still able to
refinance at market rates or into FHA products, an increasing number
have either fallen behind on their existing payments or face the
prospect of falling behind when rates reset and they are unable to
refinance.'' Accelerating Loan Modifications, Improving Foreclosure
Prevention and Enhancing Enforcement, 110th Cong. (Dec. 6, 2007)
(testimony of John C. Dugan, Comptroller, Office of the Comptroller
of the Currency).
\50\ By the third quarter of 2007, the ratio of mortgage-related
financial obligations (which is comprised of mortgage debt,
homeowners' insurance, and property tax) to disposable personal
income reached an all-time high of 11.3 percent. See http://www.federalreserve.gov/releases/housedebt/.
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Policymakers became concerned that the losses incurred from
foreclosures on subprime mortgage loans would destabilize the entire
mortgage market.\51\ There was a particular concern that the
uncertainty surrounding exposure to these losses would lead to a fear-
induced downward economic spiral.\52\ As the crisis worsened, industry
stakeholders attempted to stop this self-reinforcing cycle through a
series of measures intended to stabilize homeownership and prevent
foreclosure. Beginning in late 2008, the Federal government, Federal
agencies, and GSEs implemented programs designed to facilitate
refinancings and loan modifications.
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\51\ ``[A]nalysts are concerned that mortgage foreclosures will
climb significantly higher and, along with falling housing prices,
overwhelm the ability of mortgage markets to restructure or
refinance loans for creditworthy borrowers.'' Congressional Budget
Office, Options for Responding to Short-Term Economic Weakness, p.
21 (Jan. 2008).
\52\ ``[A] breakdown of mortgage markets could put the economy
on a self-reinforcing downward spiral of less lending, weaker
economic activity, lower house prices, more foreclosures, even less
lending, and so on, either causing or significantly worsening a
recession.'' Id. pp. 21-22.
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The Troubled Asset Relief Program. The U.S. government enacted and
implemented several programs intended to promote economic recovery by
stabilizing homeownership and preventing foreclosure. The Emergency
Economic Stabilization Act of 2008,\53\ as amended by the American
Recovery and Reinvestment Act of 2009,\54\ authorizes the Treasury
Department to ``use loan guarantees and credit enhancements to
facilitate loan modifications to prevent avoidable foreclosures.'' \55\
Pursuant to this authority, the Treasury Department established the
Troubled Asset Relief Program (TARP), under which two programs were
created to provide financial assistance directly to homeowners in
danger of losing their homes: the Making Home Affordable (MHA) program
and the Hardest Hit Fund (HHF) program. The MHA program is operated by
the Treasury Department and seeks to provide Federally-directed
assistance to consumers who are at risk of default, foreclosure, or
were otherwise harmed by the financial crisis.\56\ The HHF program
provides funds to certain HFAs in States where the Treasury Department
has determined that locally-directed stabilization programs are
required.\57\
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\53\ 12 U.S.C. 5201 et. seq.; Public Law 110-343 (Oct. 3, 2008).
\54\ See Sec. 7002 of Public Law 111-5 (Jan. 6, 2009).
\55\ 12 U.S.C. 5219(a)(1).
\56\ See www.makinghomeaffordable.gov.
\57\ See http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/hhf/Pages/default.aspx.
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MHA began with the introduction of the Home Affordable Modification
Program (HAMP) in March 2009.\58\ HAMP is intended to assist employed
homeowners by replacing the consumer's current mortgage loan with a
more affordable mortgage loan.\59\ HAMP produced nearly 500,000 trial
modifications during the first six months of the program.\60\ MHA
offerings expanded with the creation of the Second Lien Modification
Program in August 2009 and the Home Affordable Foreclosure Alternatives
Program in November 2009.\61\ The Treasury Department subsequently
modified these programs several times in response to the changing needs
of distressed consumers and the mortgage market.\62\
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\58\ See Press Release, Treasury Department, Relief for
Responsible Homeowners (Mar. 4, 2009), available at: http://www.treasury.gov/press-center/press-releases/Pages/200934145912322.aspx.
\59\ Generally speaking, a loan can be modified under HAMP only
if it yields a positive net present value using series of tests
involving ``waterfalls.'' Under the waterfall method, servicers must
repeatedly project amortizations based on sequential decreases in
the interest rate and, if necessary, principal forgiveness, until
arriving at a potential loan modification with a target front-end
DTI ratio of 31 percent. See United States Department of the
Treasury, ``Home Affordable Modification Program, Base Net Present
Value (NPV) Model v5.02, Model Documentation'' (April 1, 2012),
available at: https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/npvmodeldocumentationv502.pdf. See also Consumer Compliance
Outlook, Federal Reserve Bank of Philadelphia (Third Quarter 2009),
available at: http://www.philadelphiafed.org/bank-resources/publications/consumer-compliance-outlook/2009/third-quarter/q3_02.cfm.
\60\ See Troubled Asset Relief Program (TARP) Monthly Report to
Congress--September 2009.
\61\ See United States Department of the Treasury Office of
Financial Stability, ``Troubled Asset Relief Program: Two Year
Retrospective'' (Oct. 2010).
\62\ See e.g., Supplemental Directive 10-02 (Mar. 24, 2010),
modifying HAMP, Supplemental Directive 11-07 (July 25, 2011),
expanding eligibility for the Home Affordable Unemployment Program,
and Supplemental Directive 12-02 (Mar. 9, 2012), expanding HAMP
eligibility.
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MHA programs are currently scheduled to expire on December 31,
2013, although there is continuing debate about whether to extend
them.\63\ As of December 2012, ten programs have been established under
MHA. The Treasury Department operates five MHA programs.\64\ The
remaining five MHA programs are operated in conjunction with U.S.
Department of Veterans Affairs (VA), FHA, or USDA programs.\65\ Many
consumers facing default or foreclosure have received assistance under
these programs. For example, from the beginning of the HAMP program to
March 2013, over 1.1 million permanent HAMP modifications have been
completed, saving distressed consumers an estimated $19.1 billion.\66\
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\63\ Press Release, Treasury Department, Expanding our Efforts
to Help More Homeowners and Strengthen Hard-hit Communities (Jan.
27, 2012), available at: http://www.treasury.gov/connect/blog/Pages/Expanding-our-efforts-to-help-more-homeowners-and-strengthen-hard-hit-communities.aspx.
\64\ In addition to HAMP, the Second Lien Modification Program,
and the Home Affordable Foreclosure Alternatives Program, the
Treasury Department also operates the Principal Reduction
Alternative Program and the Home Affordable Unemployment Program.
\65\ These programs are the FHA Home Affordable Modification
Program, USDA Special Loan Servicing, Veterans Affairs Home
Affordable Modification, FHA Second Lien Modification Program, and
the FHA Short Refinance Program.
\66\ See March 2013 Making Home Affordable Program Performance
Report.
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[[Page 35436]]
In March 2010 the Treasury Department established the HHF program
to enable the States most affected by the financial crisis to develop
innovative assistance programs.\67\ Nineteen programs have been
established under the HHF fund, which is currently scheduled to expire
on December 31, 2017. These programs provide assistance to homeowners
in the District of Columbia and the 18 States most affected by the
economic crisis.\68\ The HHF provides funds directly to HFAs in these
States, which are used to create foreclosure-avoidance programs. As of
April 2013, approximately $2.2 billion has been allocated to support
the 63 programs established to assist distressed consumers in these
localities.\69\ In California alone, nearly 17,000 consumers have
received over $166 million in assistance since the beginning of the
program.\70\
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\67\ See Hardest Hit Fund Program Guidelines Round 1, available
at: http://www.treasury.gov/initiatives/financial-stability/TARP-
Programs/housing/Documents/HFA_Proposal_Guidelines__-1st_
Rd.pdf.
\68\ The HHF provides funds to HFAs located in Alabama, Arizona,
California, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan,
Mississippi, Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode
Island, South Carolina, Tennessee, and Washington, DC
\69\ See Troubled Asset Relief Program (TARP) Monthly Report to
Congress--April 2013.
\70\ See Keep Your Home California 2012 Fourth Quarterly Report.
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As with the MHA programs discussed above, these HHF programs have
evolved over time. The Treasury Department originally encouraged HFAs
to establish programs for mortgage modifications, principal
forbearance, short sales, principal reduction for consumers with high
loan-to-value ratios, unemployment assistance, and second-lien mortgage
loan reduction or modification.\71\ No HFAs were able to establish all
of these programs in the early stages of the HHF. However, through 2011
and 2012 State HHF programs were significantly modified and
expanded.\72\ The 19 HFAs continue to modify these programs to develop
more effective and efficient methods of providing assistance to at-risk
consumers. For example, in September 2012 the Nevada HHF program was
amended for the tenth time.\73\
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\71\ See Hardest Hit Fund Program Guidelines Round 1, available
at: http://www.treasury.gov/initiatives/financial-stability/TARP-
Programs/housing/Documents/HFA_Proposal_Guidelines__-1st_
Rd.pdf.
\72\ From 2011-2012, the program agreements between the 19 HFAs
and the Treasury Department were modified 55 times. See http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/hhf/Pages/Archival-information.aspx.
\73\ See Tenth Amendment to Commitment to Purchase Financial
Instrument and HFA Participation Agreement, available at: http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/Pages/Program-Documents.aspx.
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Federal agency programs. In response to the financial crisis, the
FHA, the VA, and the USDA expanded existing programs and implemented
new programs intended to facilitate refinancings for consumers at risk
of delinquency or default. Some of these programs operate in
conjunction with the Treasury Department's MHA program, while others
are run solely by the particular Federal agency. In 2008 Congress
expanded access to refinancings under the VA's Interest Rate Reduction
Refinancing Loan program by raising the maximum loan-to-value ratio to
100 percent and increasing the maximum loan amount of loans eligible to
be guaranteed under the program.\74\ In February 2009 HUD increased the
maximum loan amount for FHA-insured mortgages.\75\ This change expanded
access to refinancings available under the FHA's Streamline Refinance
Program.\76\ Several months later, the FHA created the Short Refinance
Option program to assist consumers with non-FHA mortgage loans.\77\
This program, which operates in conjunction with TARP, permits
underwater consumers to refinance if the current creditor agrees to
write down 10 percent of the outstanding principal balance. Similarly,
in August 2010 the Rural Housing Service of the USDA (RHS) adopted
rules intended to facilitate loan modifications for consumers
struggling to make payments on USDA Guaranteed Loans.\78\ The USDA
subsequently created the Single Family Housing Guaranteed Rural
Refinance Pilot Program, which was intended to refinance USDA borrowers
into more stable and affordable mortgage loans.\79\
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\74\ See Sec. 504 of the Veterans' Benefits Improvement Act of
2008, Public Law 110-389 (Oct. 10, 2008).
\75\ See HUD Mortgagee Letter 2009-07. Section 1202(b) of the
American Recovery and Reinvestment Act of 2009, Public Law 111-5
(Jan. 6, 2009), authorized the Secretary of Housing and Urban
Development to increase the loan limit.
\76\ The FHA Streamline Refinance Program contains reduced
underwriting requirements for consumers with FHA mortgage loans
seeking to refinance into a new FHA mortgage loan with a reduced
interest rate. The FHA has offered streamline refinances for over
thirty years. See HUD Mortgagee Letter 1982-23.
\77\ See HUD Mortgagee Letter 2010-23.
\78\ See 75 FR 52429 (Aug. 26, 2010).
\79\ See Rural Dev. Admin. Notice No. 4615 (1980-D) (Feb. 1,
2012).
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These efforts have enabled many consumers to receive refinancings
under these programs. In 2011, the FHA accounted for 5.6 percent of the
mortgage refinance market, with originations totaling $59 billion.\80\
However, the number of consumers receiving assistance under these
programs varies. For example, between April 2009 and December 2011, the
FHA started 5.6 million mortgage loan modifications.\81\ During a
similar time period, nearly 997,000 FHA Streamline Refinances were
consummated.\82\ In contrast, between February 2010 and September 2012,
only 1,772 mortgage loans were refinanced under the Short Refinance
Option program.\83\ Efforts continue to develop and enhance these
programs to assist distressed homeowners while improving the
performance of existing mortgage loans owned, insured, or guaranteed by
these agencies.
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\80\ This number represents FHA's market share by dollar volume.
By number of originations, the FHA controlled 6.5 percent of the
refinance market, with 312,385 refinances originated. See FHA-
Insured Single-Family Mortgage Originations and Market Share Report
2012--Q2, available at: http://portal.hud.gov/hudportal/documents/huddoc?id=fhamktq2_2012.pdf.
\81\ See Hearing on FY13 Federal Housing Administration's Budget
Request, 112th Cong. (Mar. 8, 2012) (testimony of Carol Galante,
Acting Assistant Secretary for Housing/Federal Housing
Administration Commissioner for the U.S. Department of Housing and
Urban Development).
\82\ A total of 996,871 mortgage loans were endorsed under the
FHA Streamline Refinance program from Fiscal Year 2009 through 2012.
See FHA Outlook Reports for Fiscal Years 2009, 2010, 2011, and 2012,
available at: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/ooe/olmenu.
\83\ See Office of the Special Inspector General for the
Troubled Asset Relief Program, Quarterly Report to Congress, p. 64
(Oct. 25, 2012).
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HARP and other GSE refinancing programs. After the GSEs were placed
into conservatorship in late 2008, the Federal Housing Finance Agency
(FHFA) took immediate steps to reduce GSE losses by mitigating
foreclosures.\84\ In November 2008 FHFA and the GSEs, in coordination
with the Treasury Department and other stakeholders, announced the
Streamlined Modification Program, which was intended to help delinquent
consumers avoid foreclosure by affordably restructuring mortgage
payments.\85\ This program was the precursor to the Home Affordable
Refinance Program (HARP)
[[Page 35437]]
that was announced in March 2009.\86\ The HARP program was originally
set to expire in June 2010 and limited to consumers with a loan-to-
value ratio that did not exceed 105 percent. However, HARP was modified
over time to account for the deteriorating mortgage market. In July
2010 the maximum loan-to-value ratio was increased from 105 percent to
125 percent.\87\ Nine months later FHFA extended the HARP expiration
date by one year, to June 30, 2011.\88\
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\84\ See Press Release, FHFA, Statement of FHFA Director James
B. Lockhart (Sept. 7, 2008), available at: http://www.fhfa.gov/webfiles/23/FHFAStatement9708final.pdf.
\85\ See Press Release, FHFA, FHFA Announces Implementation
Plans for Streamlined Loan Modification Program, (Dec. 18, 2008),
available at: http://www.fhfa.gov/webfiles/267/SMPimplementation121808.pdf.
\86\ See Press Release, Treasury Department, Relief for
Responsible Homeowners (Mar. 4, 2009), available at: http://www.treasury.gov/press-center/press-releases/Pages/200934145912322.aspx.
\87\ See Press Release, FHFA, FHFA Authorized Fannie Mae and
Freddie Mac to Expand Home Affordable Refinance Program to 125
Percent Loan-to-Value (July 1, 2009), available at: http://www.fhfa.gov/webfiles/13495/125_LTV_release_and_fact_sheet_7_01_09%5B1%5D.pdf.
\88\ See Press Release, FHFA, FHFA Extends Refinance Program By
One Year (Mar. 1, 2010), available at: http://www.fhfa.gov/webfiles/15466/HARPEXTENDED3110%5B1%5D.pdf.
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Many of the nearly five million eligible consumers were expected to
receive refinancings under HARP.\89\ However, by mid-2011 fewer than
one million consumers had received HARP refinances. Fannie Mae, Freddie
Mac, and FHFA responded by significantly altering the HARP program.\90\
Perhaps most significantly, the maximum loan-to-value ratio was
removed, facilitating refinances for all underwater consumers who
otherwise fit HARP's criteria. More HARP refinances were completed
during the first six months of 2012 than in all of 2011.\91\ These
changes were especially effective in assisting consumers with high
loan-to-value ratios. In September 2012, consumers with loan-to-value
ratios in excess of 125 percent received 26 percent of all HARP
refinances.\92\
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\89\ See Treasury Department Press Release supra note 94.
\90\ See Press Release, FHFA, FHFA, Fannie Mae and Freddie Mac
Announce HARP Changes to Reach More Borrowers (Oct. 24, 2011),
available at: http://www.fhfa.gov/webfiles/22721/HARP_release_102411_Final.pdf.
\91\ See Federal Housing Finance Agency Refinance Report (June
2012).
\92\ See Federal Housing Finance Agency Refinance Report (Sept.
2012).
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The GSEs have implemented other streamline refinance programs
intended to facilitate the refinancing of existing GSE consumers into
more affordable mortgage loans. These programs are available for
consumers who are not eligible for a refinancing under HARP. For
example, a consumer with a loan-to-value ratio of less than 80 percent
is eligible for a streamline refinancing through Fannie Mae's Refi Plus
program or Freddie Mac's Relief Refinance program. These programs
comprise a significant share of GSE refinancing activity. From January
through September 2012, 45 percent of GSE streamline refinances were
non-HARP refinances.\93\ FHFA and the GSEs remain committed to continue
modifying these programs to enhance access to refinancing credit for
distressed consumers.\94\ In April 2013, FHFA extended the HARP
expiration date to December 31, 2015.\95\
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\93\ Id.
\94\ ``Today, we continue to meet with lenders to ensure HARP is
helping underwater borrowers refinance at today's historical low
interest rates. As we continue to gain insight from the program we
will make additional operational adjustments as needed to enhance
access to this program.'' Edward J. DeMarco, Acting Director Federal
Housing Finance Agency, Remarks at the American Mortgage Conference
(Sept. 10, 2012), available at: http://www.fhfa.gov/webfiles/24365/2012DeMarcoNCSpeechFinal.pdf.
\95\ See Press Release, FHFA, FHFA Extends HARP to 2015 (Apr.
11, 2013), available at: http://www.fhfa.gov/webfiles/22721/HARP_release_102411_Final.pdf.
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The Mortgage Loan Market for Small Portfolio Creditors
Traditionally, underwriting standards were determined at the branch
or local bank level. These practices heavily emphasized the
relationship between the bank and the consumer.\96\ Starting in the
mid-1990s, much of the mortgage market began to move toward
standardized underwriting practices based on quantifiable and
verifiable data points, such as a consumer's credit score.\97\ The
shift toward standardized, electronic underwriting lowered costs for
creditors and consumers, thereby increasing access to mortgage credit.
Standardized loan-level data made it easier to analyze individual loans
for compliance with underwriting requirements, which facilitated the
expansion of private mortgage securitizations. This shift from
portfolio-focused to securitization-focused mortgage lending also
altered the traditional risk calculations undertaken by creditors, as
creditors no longer retained the risks associated with poorly
underwritten loans.\98\ Additionally, in another departure from the
traditional mortgage lending model, these creditors increasingly relied
on the fees earned by originating and selling mortgage loans, as
opposed to the interest revenue derived from the loan itself.
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\96\ ``[C]ommunity banks tend to base credit decisions on local
knowledge and nonstandard data obtained through long-term
relationships and are less likely to rely on the models-based
underwriting used by larger banks.'' Federal Deposit Insurance
Corporation, FDIC Community Banking Study, p. 1-1 (Dec. 2012) (FDIC
Community Banking Study).
\97\ See FCIC Report at 72.
\98\ See FCIC Report at 89.
---------------------------------------------------------------------------
Small community creditor access to the secondary mortgage market
was limited. Many small creditors originated ``non-conforming'' loans
which could not be purchased by the GSEs. Also, many community
creditors chose to retain the relationship model of underwriting,
rather than fully adopting standardized data models popular with larger
banks. Retaining these traditional business methods had important
consequences during the subprime crisis. While large lending
institutions generally depended on the secondary market for funding,
small community banks and credit unions generally remained reliant on
deposits to fund mortgage loans held in portfolio. As a result,
community creditors were less affected by the contraction in the
secondary mortgage market during the financial crisis.\99\ For example,
the percentage of mortgage-backed securities in relation to the total
assets of credit unions actually declined by more than 1.5 percent as
subprime lending expanded.\100\
---------------------------------------------------------------------------
\99\ Between 2005 and 2008, while loan originations at banks
with assets in excess of $10 billion fell by 51 percent, loan
originations at banks with assets between $1 and $10 billion
declined by 31 percent, and loan originations at banks with less
than $1 billion in assets declined by only 10 percent. See Federal
Reserve Bank of Kansas City, Financial Industry Perspectives (Dec.
2009).
\100\ In December 2003, the ratio of mortgage-backed securities
to total assets at credit unions was 4.67 percent. By December 2006,
this ratio had decreased to 3.21 percent. See Accelerating Loan
Modifications, Improving Foreclosure Prevention and Enhancing
Enforcement, 110th Cong. (Dec. 6, 2007) (testimony of Gigi Hyland,
Board Member of the National Credit Union Administration).
---------------------------------------------------------------------------
Furthermore, by retaining mortgage loans in portfolio community
creditors also retain the risk of delinquency or default on those
loans. The presence of portfolio lending within this market remains an
important influence on the underwriting practices of community banks
and credit unions. These institutions generally rely on long-term
relationships with a small group of consumers. Therefore, the
reputation of these community banks and credit unions is largely
dependent on serving their community in ways that cause no harm. Thus,
community creditors have an added incentive to engage in thorough
underwriting to protect their balance sheet as well as their
reputation. To minimize portfolio performance risk, small community
creditors have developed underwriting standards that are different than
those employed by larger institutions. Small creditors generally engage
in ``relationship banking,'' in which underwriting decisions rely on
qualitative
[[Page 35438]]
information gained from personal relationships between creditors and
consumers.\101\ This qualitative information, often referred to as
``soft'' information, focuses on subjective factors such as consumer
character and reliability, which ``may be difficult to quantify,
verify, and communicate through the normal transmission channels of a
banking organisation.'' \102\ Evidence suggests that underwriting based
on such ``soft'' information yields loan portfolios that perform better
than those underwritten according to ``hard'' information, such as
credit score and consumer income levels.\103\ For example, one recent
study found that delinquency and default rates were significantly lower
for consumers receiving mortgage loans from institutions relying on
soft information for underwriting decisions.\104\ This is consistent
with market-wide data demonstrating that mortgage loan delinquency and
charge-off rates are significantly lower at smaller banks than larger
ones.\105\ Current data also suggests that that these relationship-
based lending practices lead to more accurate underwriting decisions
during cycles of both lending expansion and contraction.\106\
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\101\ ``Many customers . . . value the intimate knowledge their
banker has of their business and/or total relationship and prefer
dealing consistently with the same individuals whom they do not have
to frequently reeducate about their own unique financial and
business situations. Such customers are consequently willing to pay
relatively more for such service. Relationship lending thus provides
a niche for community institutions that many large banks find less
attractive or are less capable of providing.'' See Federal Reserve
Bank of Atlanta, On the Uniqueness of Community Banks (Oct. 2005).
\102\ See Allen N. Berger and Gregory F. Udell, Small Business
Credit Availability and Relationship Lending: The Importance of Bank
Organisational Structure, Economic Journal (2002).
\103\ ``Moreover, a comparison of loss rates on individual loan
categories suggests that community banks may also do a better job of
underwriting loans than noncommunity institutions (see Table 4.4).''
FDIC Community Banking Study, p. 4-6. See also Sumit Agarwal, Brent
W. Ambrose, Souphala Chomsisengphet, and Chunlin Liu, The Role of
Soft Information in a Dynamic Contract Setting: Evidence from the
Home Equity Market, 43 Journal of Money, Credit and Banking 633, 649
(Oct. 2011) (analyzing home equity lending, the authors ``find that
the lender's use of soft information can successfully reduce the
risks associated with ex post credit losses.'').
\104\ ``In particular, we find evidence that selection and soft
information prior to purchase are significantly associated with
reduced delinquency and default. And, in line with relationship
lending, we find that this effect is most pronounced for borrowers
with compromised credit (credit scores below 660), who likely
benefit the most from soft information in the lending relationship.
This suggests that for higher risk borrowers, relationship with a
bank may be about more than the mortgage transaction.'' O. Emre
Ergungor and Stephanie Moulton, Beyond the Transaction: Depository
Institutions and Reduced Mortgage Default for Low-Income Homebuyers,
Federal Reserve Bank of Cleveland Working Paper 11-15 (Aug. 2011).
\105\ Federal Reserve Board, Charge-Off and Delinquency Rates on
Loans and Leases at Commercial Banks (Nov. 2012), available at:
http://www.federalreserve.gov/releases/chargeoff/default.htm. These
data show that residential real estate charge-offs were higher at
large banks than small ones for 12 of the previous 87 quarters,
dating to the start of the small bank survey in 1991. For example,
in the fourth quarter of 2009 large banks had a 3.16 percent charge-
off rate, while the rate at small banks was 1.2 percent. Delinquency
rates demonstrate a similar effect.
\106\ ``In two retail loan categories--residential real estate
loans and loans to individuals--community banks consistently
reported lower average loss rates from 1991 through 2011, the period
for which these data are available.'' FDIC Community Banking Study,
p. 4-6.
---------------------------------------------------------------------------
Although the number of community banks has declined in recent
years, these institutions remain an important source of nonconforming
credit and of mortgage credit generally in areas commonly considered
``rural'' or ``underserved.'' The Bureau's estimates based on Home
Mortgage Disclosure Act (HMDA) and the Consolidated Report of Condition
and Income (Call Report) data suggest that approximately one half of
all nonconforming loans are originated by creditors with assets less
than $2 billion and approximately one quarter are originated by
creditors with total assets less than $2 billion that originate fewer
than 500 first-lien mortgages annually. In 2011, community banks held
over 50 percent of all deposits in micropolitan areas and over 70
percent of all deposits held in rural areas.\107\ Similarly, in 2011,
there were more than 600 counties where community banks operated
offices but where no noncommunity bank offices were present, and more
than 600 additional counties where community banks operated offices but
where fewer than three noncommunity bank offices were present.\108\
These counties have a combined population of more than 16 million
people and include both rural and metropolitan areas.\109\ It is
important to note that the cost of credit offered by these community
institutions is generally higher than the cost of similar products
offered by larger institutions. One reason for this increased expense
stems from the nature of relationship-based underwriting decisions.
Such qualitative evaluations of creditworthiness tend to take more
time, and therefore are more expensive, than underwriting decisions
based on standardized points of data.\110\ Also, the cost of funds for
community banks tends to be higher than the cost for larger
institutions.\111\
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\107\ FDIC Community Banking Study, p. 3-6.
\108\ FDIC Community Banking Study, p. 3-5.
\109\ Id.
\110\ FCIC Report at 72.
\111\ FDIC Community Banking Study, p. 4-5; Government
Accountability Office, Community Banks and Credit Unions: Impact of
the Dodd-Frank Act Depends Largely on Future Rulemakings, p. 10
(Sept. 2012) (GAO Community Banks and Credit Unions Report).
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B. Statutory and Regulatory Background
For over 20 years, consumer advocates, legislators, and regulators
have raised concerns about creditors originating mortgage loans without
regard to the consumer's ability to repay the loan. Beginning in about
2006, these concerns were heightened as mortgage delinquencies and
foreclosure rates increased dramatically, caused in part by the gradual
deterioration in underwriting standards. See 73 FR 44524 (Jul. 30,
2008). For detailed background information, including a summary of the
legislative and regulatory responses to this issue, which culminated in
the enactment of the Dodd-Frank Act on July 21, 2010, the Board of
Governors of the Federal Reserve System's (the Board) issuance of a
proposed rule on May 11, 2011 to implement certain amendments to TILA
made by the Dodd-Frank Act, and the Bureau's issuance of the 2013 ATR
Final Rule, see the discussion in the 2013 ATR Final Rule. See 78 FR
6410-6420 (Jan. 30, 2013).
The Bureau's ATR Final Rule
The Bureau's 2013 ATR Final Rule implemented the ability-to-repay
requirements under TILA section 129C. Consistent with the statute, the
Bureau's 2013 ATR Final Rule adopted Sec. 1026.43(a), which applies
the ability-to-repay requirements to any consumer credit transaction
secured by a dwelling, except an open-end credit plan, timeshare plan,
reverse mortgage, or temporary loan.
As adopted, Sec. 1026.43(c) provides that a creditor is prohibited
from making a covered mortgage loan unless the creditor makes a
reasonable and good faith determination, based on verified and
documented information, that the consumer will have a reasonable
ability to repay the loan, including any mortgage-related obligations
(such as property taxes and mortgage insurance). Section 1026.43(c)
describes certain requirements for making ability-to-repay
determinations, but does not provide comprehensive underwriting
standards to which creditors must adhere. At a minimum, however, the
creditor must consider and verify eight underwriting factors: (1)
Current or reasonably expected income or assets; (2) current employment
status; (3) the monthly
[[Page 35439]]
payment on the covered transaction; (4) the monthly payment on any
simultaneous loan; (5) the monthly payment for mortgage-related
obligations; (6) current debt obligations; (7) the monthly debt-to-
income ratio or residual income; and (8) credit history.
Section 1026.43(c)(3) generally requires the creditor to verify the
information relied on in determining a consumer's repayment ability
using reasonably reliable third-party records, with special rules for
verifying a consumer's income or assets. Section 1026.43(c)(5)(i)
requires the creditor to calculate the monthly mortgage payment based
on the greater of the fully indexed rate or any introductory rate,
assuming monthly, fully amortizing payments that are substantially
equal. Section 1026.43(c)(5)(ii) provides special payment calculation
rules for loans with balloon payments, interest-only loans, and
negative amortization loans.
Section 1026.43(d) provides special rules for complying with the
ability-to-repay requirements for a creditor refinancing a ``non-
standard mortgage'' into a ``standard mortgage.'' This provision is
based on TILA section 129C(a)(6)(E), which contains special rules for
the refinancing of a ``hybrid loan'' into a ``standard loan.'' The
purpose of this provision is to provide flexibility for creditors to
refinance a consumer out of a risky mortgage into a more stable one
without undertaking a full underwriting process. Under Sec.
1026.43(d), a non-standard mortgage is defined as an adjustable-rate
mortgage with an introductory fixed interest rate for a period of one
year or longer, an interest-only loan, or a negative amortization loan.
Under this option, a creditor refinancing a non-standard mortgage into
a standard mortgage does not have to consider the eight specific
underwriting criteria listed under Sec. 1026.43(c), if certain
conditions are met.
Section 1026.43(e) specifies requirements for originating
``qualified mortgages,'' as well as standards for when the presumption
of compliance with ability-to-repay requirements can be rebutted.
Section 1026.43(e)(1)(i) provides a safe harbor under the ability-to-
repay requirements for loans that satisfy the definition of a qualified
mortgage and are not higher-priced covered transactions (i.e., the APR
does not exceed APOR \112\ plus 1.5 percentage points for first-lien
loans or 3.5 percentage points for subordinate-lien loans). Section
1026.43(e)(1)(ii) provides a rebuttable presumption for qualified
mortgage loans that are higher-priced covered transactions (i.e., the
APR exceeds APOR plus 1.5 percent for first lien or 3.5 percent for
subordinate lien). Under the 2013 ATR Final Rule, Sec. 1026.43 also
provides three options for creditors to originate a qualified mortgage:
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\112\ TILA section 129C(b)(2)(B) defines the average prime offer
rate as ``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.'' 15 U.S.C. 1639c(b)(2)B).
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Qualified mortgage--general. Under the general definition for
qualified mortgages in Sec. 1026.43(e)(2), a creditor must satisfy the
statutory criteria restricting certain product features and points and
fees on the loan, consider and verify certain underwriting requirements
that are part of the general ability-to-repay standard, and confirm
that the consumer has a total (or ``back-end'') debt-to-income ratio
that is less than or equal to 43 percent. To determine whether the
consumer meets the specific debt-to-income ratio requirement, the
creditor must calculate the consumer's monthly debt-to-income ratio in
accordance with appendix Q. A loan that satisfies these criteria and is
not a higher-priced covered transaction receives a legal safe harbor
from the ability-to-repay requirements. A loan that satisfies these
criteria and is a higher-priced covered transaction receives a
rebuttable presumption of compliance with the ability-to-repay
requirements.
Qualified mortgage--special rules. The second option for
originating a qualified mortgage provides a temporary alternative to
the general definition in Sec. 1026.43(e)(2). This option is intended
to avoid unnecessarily disrupting the mortgage market at a time when it
is especially fragile, as a result of the recent mortgage crisis.
Section 1026.43(e)(4) provides that a loan is a qualified mortgage if
it meets the statutory limitations on product features and points and
fees, satisfies certain other requirements, and is eligible for
purchase, guarantee, or insurance by one of the following entities:
Fannie Mae or Freddie Mac, while operating under the
conservatorship or receivership of the Federal Housing Finance Agency
pursuant to section 1367 of the Federal Housing Enterprises Financial
Safety and Soundness Act of 1992;
Any limited-life regulatory entity succeeding the charter
of either Fannie Mae or Freddie Mac pursuant to section 1367(i) of the
Federal Housing Enterprises Financial Safety and Soundness Act of 1992;
The U.S. Department of Housing and Urban Development under
the National Housing Act (FHA);
The U.S. Department of Veterans Affairs (VA);
The U.S. Department of Agriculture (USDA); or
The U.S. Department of Agriculture Rural Housing Service
(RHS).
With respect to GSE-eligible loans, this temporary provision
expires when conservatorship of the GSEs ends. With respect to each
other category of loan, this provision expires on the effective date of
a rule issued by each respective Federal agency pursuant to its
authority under TILA section 129C(b)(3)(ii) to define a qualified
mortgage. In any event, this temporary provision expires no later than
January 10, 2021.
Qualified mortgage--balloon-payment loans by certain creditors. The
third option for originating qualified mortgages is included under
Sec. 1026.43(f), which provides that a small creditor operating
predominantly in rural or underserved areas can originate a balloon-
payment qualified mortgage. The Dodd-Frank Act generally prohibits
balloon-payment mortgages from being qualified mortgages. However, the
statute creates a limited exception, with special underwriting rules,
for loans made by a creditor that: (1) Operates predominantly in rural
or underserved areas; (2) together with affiliates, has total annual
residential mortgage loan originations that do not exceed a limit set
by the Bureau; and (3) retains the balloon loans in portfolio. The
purpose of this definition is to preserve credit availability in rural
or underserved areas by assuring that small creditors offering loans
that cannot be sold on the secondary market, and therefore must be
placed on the creditor's balance sheet, are able to use a balloon-
payment structure as a means of controlling interest rate risk.
Section 1026.43(f)(1)(vi) limits eligibility to creditors that
originated 500 or fewer covered transactions secured by a first-lien in
the preceding calendar year and that have assets of no more than $2
billion (to be adjusted annually). In addition, to originate a balloon-
payment qualified mortgage more than 50 percent of a creditor's total
first-lien covered transactions must have been secured by properties in
counties that are ``rural'' or ``underserved,'' as designated by the
Bureau. A county is ``rural'' if, during a calendar year, it is located
in neither a metropolitan statistical area nor a micropolitan
statistical area adjacent to a metropolitan statistical area, as those
terms are defined by the U.S. Office of Management and Budget. A county
is ``underserved'' if no more than two creditors extend covered
transactions five or more times in that county during
[[Page 35440]]
a calendar year. Also, except as provided, the balloon-payment
qualified mortgage must generally be held in portfolio for at least
three years. Balloon loans by such creditors are eligible for qualified
mortgage status if they meet the statutory limitations on product
features and points and fees, and if the creditor follows certain other
requirements that are part of the general ability-to-repay standard.
The Bureau's 2013 ATR Final Rule added two additional requirements
to Sec. 1026.43. Section 1026.43(g) implements the Dodd-Frank Act
limits on prepayment penalties. Section 1026.43(h) prohibits a creditor
from structuring a closed-end extension of credit as an open-end plan
to evade the ability-to-repay requirements.
III. Summary of the Rulemaking Process
A. The Bureau's Proposal
As discussed above, TILA section 129C, as added by sections 1411,
1412, and 1414 of the Dodd-Frank Act, generally requires creditors to
make a reasonable, good faith determination of a consumer's ability to
repay the loan. On January 10, 2013, the Bureau issued the 2013 ATR
Final Rule to implement these ability-to-repay requirements. See 78 FR
6407 (Jan. 30, 2013). At the same time, the Bureau issued the 2013 ATR
Proposed Rule related to certain proposed exemptions, modifications,
and clarifications to the ability-to-repay requirements and qualified
mortgage provisions. See 78 FR 6621 (Jan. 30, 2013). The 2013 ATR
Proposed Rule contained three major elements.
First, the Bureau proposed certain exemptions from the ability-to-
repay requirements for housing finance agencies, certain nonprofit
creditors, certain homeownership stabilization and foreclosure
prevention programs, and certain Federal agency and GSE refinancing
programs. The Bureau was concerned that the ability-to-repay
requirements were substantially different from the underwriting
requirements employed by these creditors or required under these
programs, which would discourage participation in and frustrate the
purposes of these programs and significantly impair access to
responsible, affordable credit for certain consumers.
Second, the Bureau proposed modifications related to certain small
creditors. Specifically, the Bureau proposed an additional definition
of a qualified mortgage for certain loans made and held in portfolio by
small creditors. The proposed new category would include certain loans
originated by small creditors \113\ that: (1) Have total assets of $2
billion or less at the end of the previous calendar year; and (2)
together with all affiliates, originated 500 or fewer first-lien
covered transactions during the previous calendar year. The proposed
new category would include only loans held in portfolio by these
creditors. The loans also would have to conform to all of the
requirements under the general definition of a qualified mortgage
except the 43 percent limit on monthly debt-to-income ratio. The Bureau
also proposed to allow small creditors and small creditors operating
predominantly in rural and underserved areas to charge a higher annual
percentage rate for first-lien qualified mortgages in the proposed new
category and still benefit from a conclusive presumption of compliance
or ``safe harbor.'' A qualified mortgage in the proposed new category
would be conclusively presumed to comply if the annual percentage rate
is equal to or less than APOR plus 3.5 percentage points for both
first-lien and subordinate-lien loans. The Bureau also posed and
solicited comment on a specific question regarding whether there is a
need for transition mechanisms for existing balloon loans that may end
soon after the new rule takes effect.
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\113\ The $2 billion threshold reflects the purposes of the
proposed category and the structure of the mortgage lending
industry. The Bureau's choice of $2 billion in assets as a threshold
for purposes of TILA section 129C does not imply that a threshold of
that type or of that magnitude would be an appropriate way to
distinguish small firms for other purposes or in other industries.
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Finally, the Bureau proposed several additional interpretive
comments concerning the inclusion of loan originator compensation in
the points and fees calculation under the qualified mortgage provisions
and the high-cost mortgage provisions under HOEPA. The proposed
comments addressed situations in which payments flow from one party to
another over the course of a mortgage transaction and whether to count
compensation separately where it may already have been counted toward
points and fees under another element of the regulatory definition. In
addition, the Bureau sought feedback on whether additional
clarification was warranted in light of the Bureau's separate
rulemaking to implement provisions of the Dodd-Frank Act restricting
certain loan originator compensation practices.
B. Comments and Post-Proposal Outreach
In response to the proposed rule, the Bureau received approximately
1,150 letters from commenters, including members of Congress,
creditors, consumer groups, trade associations, mortgage and real
estate market participants, and individual consumers. The comments
focused on all aspects of the proposal, including:
the calculation of loan originator compensation for
inclusion in points and fees for the qualified mortgage and high-cost
mortgage points and fees limits;
the proposed exemptions from the ability-to-repay
requirements for housing finance agencies, certain nonprofit creditors,
certain homeownership stabilization and foreclosure prevention
programs, and certain Federal agency and GSE refinancing programs;
the proposed definition of a fourth category of qualified
mortgages including loans originated and held in portfolio by certain
small creditors; and
the proposed amendments to the definition of higher-priced
covered transaction with respect to qualified mortgages that are
originated and held in portfolio by small creditors and with respect to
balloon-payment qualified mortgages originated and held in portfolio by
small creditors operating predominantly in rural or underserved areas.
Materials submitted were filed in the record and are publicly
available at http://www.regulations.gov. The Bureau also elected to
consider the comments received after the expiration of the comment
period. As discussed in more detail below, the Bureau has considered
these comments in adopting this final rule.
IV. Legal Authority
The Bureau is issuing this final rule pursuant to its authority
under TILA and the Dodd-Frank Act. See 15 U.S.C. 1604(a), 12 U.S.C.
5512(b)(1).
A. TILA Ability-to-Repay and Qualified Mortgage Provisions
As discussed above, the Dodd-Frank Act amended TILA to provide
that, in accordance with regulations prescribed by the Bureau, no
creditor may make a residential mortgage loan unless the creditor makes
a reasonable and good faith determination based on verified and
documented information that, at the time the loan is consummated, the
consumer has a reasonable ability to repay the loan, according to its
terms, and all applicable taxes, insurance (including mortgage
guarantee insurance), and assessments. TILA section 129C(a)(1); 15
U.S.C. 1639c(a)(1). As described below in part IV.B, the Bureau has
authority to prescribe regulations to carry out the
[[Page 35441]]
purposes of TILA pursuant to TILA section 105(a). 15 U.S.C. 1604(a). In
particular, it is the purpose of TILA section 129C, as amended by the
Dodd-Frank Act, to assure that consumers are offered and receive
residential mortgage loans on terms that reasonably reflect their
ability to repay the loans and that are understandable and not unfair,
deceptive, or abusive. TILA section 129B(a)(2); 15 U.S.C. 1639b(a)(2).
TILA, as amended by the Dodd-Frank Act, also provides creditors
originating ``qualified mortgages'' special protection from liability
under the ability-to-repay requirements. TILA section 129C(b), 15
U.S.C. 1639c(b). TILA generally defines a ``qualified mortgage'' as a
residential mortgage loan for which: the loan does not contain negative
amortization, interest-only payments, or balloon payments; the term
does not exceed 30 years; the points and fees generally do not exceed 3
percent of the loan amount; the income or assets are considered and
verified; and the underwriting is based on the maximum rate during the
first five years, uses a payment schedule that fully amortizes the loan
over the loan term, and takes into account all mortgage-related
obligations. TILA section 129C(b)(2), 15 U.S.C. 1639c(b)(2). In
addition, to constitute a qualified mortgage a loan must meet ``any
guidelines or regulations established by the Bureau relating to ratios
of total monthly debt to monthly income or alternative measures of
ability to pay regular expenses after payment of total monthly debt,
taking into account the income levels of the borrower and such other
factors as the Bureau may determine are relevant and consistent with
the purposes described in [TILA section 129C(b)(3)(B)(i)].''
TILA, as amended by the Dodd-Frank Act, also provides the Bureau
with authority to prescribe regulations that revise, add to, or
subtract from the criteria that define a qualified mortgage upon a
finding that such regulations are necessary or proper to ensure that
responsible, affordable mortgage credit remains available to consumers
in a manner consistent with the purposes of the ability-to-repay
requirements; or are necessary and appropriate to effectuate the
purposes of the ability-to-repay requirements, to prevent circumvention
or evasion thereof, or to facilitate compliance with TILA sections 129B
and 129C. TILA section 129C(b)(3)(B)(i), 15 U.S.C. 1639c(b)(3)(B)(i).
In addition, TILA section 129C(b)(3)(A) provides the Bureau with
authority to prescribe regulations to carry out the purposes of the
qualified mortgage provisions--to ensure that responsible, affordable
mortgage credit remains available to consumers in a manner consistent
with the purposes of TILA section 129C. TILA section 129C(b)(3)(A), 15
U.S.C. 1939c(b)(3)(A). As discussed in the section-by-section analysis
below, the Bureau is issuing certain provisions of this rule pursuant
to its authority under TILA section 129C(b)(3)(B)(i).
In addition, for purposes of defining ``qualified mortgage,'' TILA
section 129C(b)(2)(A)(vi) provides the Bureau with authority to
establish guidelines or regulations relating to monthly debt-to-income
ratios or alternative measures of ability to repay. As discussed in the
section-by-section analysis below, the Bureau is issuing certain
provisions of this rule pursuant to its authority under TILA sections
129C(b)(2)(A)(vi).
B. Other Rulemaking and Exception Authorities
This final rule also relies on the rulemaking and exception
authorities specifically granted to the Bureau by TILA and the Dodd-
Frank Act, including the authorities discussed below.
TILA
TILA section 105(a). As amended by the Dodd-Frank Act, TILA section
105(a), 15 U.S.C. 1604(a), directs the Bureau to prescribe regulations
to carry out the purposes of TILA, and provides that such regulations
may contain additional requirements, classifications, differentiations,
or other provisions, and may provide for such adjustments and
exceptions for all or any class of transactions, that the Bureau judges
are necessary or proper to effectuate the purposes of TILA, to prevent
circumvention or evasion thereof, or to facilitate compliance
therewith. A purpose of TILA is ``to assure a meaningful disclosure of
credit terms so that the consumer will be able to compare more readily
the various credit terms available to him and avoid the uninformed use
of credit.'' TILA section 102(a), 15 U.S.C. 1601(a). This stated
purpose is informed by Congress's finding that ``economic stabilization
would be enhanced and the competition among the various financial
institutions and other firms engaged in the extension of consumer
credit would be strengthened by the informed use of credit[.]'' TILA
section 102(a). Thus, strengthened competition among financial
institutions is a goal of TILA, achieved through the effectuation of
TILA's purposes.
As amended by section 1402 of the Dodd-Frank Act, section
129B(a)(2) of TILA provides that a purpose of section 129C of TILA is
``to assure that consumers are offered and receive residential mortgage
loans on terms that reasonably reflect their ability to repay the
loans.'' This stated purpose is informed by Congress's finding that
``economic stabilization would be enhanced by the protection,
limitation, and regulation of the terms of residential mortgage credit
and the practices related to such credit, while ensuring that
responsible, affordable mortgage credit remains available to
consumers.'' Thus, ensuring that responsible, affordable mortgage
credit remains available to consumers is a goal of TILA, achieved
through the effectuation of TILA's purposes.
Historically, TILA section 105(a) has served as a broad source of
authority for rules that promote the informed use of credit through
required disclosures and substantive regulation of certain practices.
However, Dodd-Frank Act section 1100A clarified the Bureau's section
105(a) authority by amending that section to provide express authority
to prescribe regulations that contain ``additional requirements'' that
the Bureau finds are necessary or proper to effectuate the purposes of
TILA, to prevent circumvention or evasion thereof, or to facilitate
compliance. This amendment clarified the authority to exercise TILA
section 105(a) to prescribe requirements beyond those specifically
listed in the statute that meet the standards outlined in section
105(a). The Dodd-Frank Act also clarified the Bureau's rulemaking
authority over certain high-cost mortgages pursuant to section 105(a).
As amended by the Dodd-Frank Act, TILA section 105(a) authority to make
adjustments and exceptions to the requirements of TILA applies to all
transactions subject to TILA, except with respect to the provisions of
TILA section 129, 15 U.S.C. 1639, that apply to the high-cost mortgages
defined in TILA section 103(bb), 15 U.S.C. 1602(bb).
As discussed in the section-by-section analysis below, the Bureau
is issuing regulations to carry out TILA's purposes, including such
additional requirements, adjustments, and exceptions as, in the
Bureau's judgment, are necessary and proper to carry out the purposes
of TILA, prevent circumvention or evasion thereof, or to facilitate
compliance. In developing these aspects of the final rule pursuant to
its authority under TILA section 105(a), the Bureau has considered the
purposes of TILA, including ensuring that consumers are offered and
receive residential mortgage loans on terms that reasonably reflect
their ability to repay the loans, ensuring meaningful
[[Page 35442]]
disclosures, facilitating consumers' ability to compare credit terms,
and helping consumers avoid the uninformed use of credit, and the
findings of TILA, including regulating the terms of residential
mortgage credit and the practices related to such credit to ensure that
responsible, affordable mortgage credit remains available to consumers,
strengthening competition among financial institutions, and promoting
economic stabilization.
TILA section 105(f). Section 105(f) of TILA, 15 U.S.C. 1604(f),
authorizes the Bureau to exempt from all or part of TILA all or any
class of transactions (other than transactions involving any mortgage
described in TILA section 103(aa), which are high-cost mortgages) if
the Bureau determines that TILA coverage does not provide a meaningful
benefit to consumers in the form of useful information or protection.
In exercising this authority, the Bureau must consider the factors
identified in section 105(f) of TILA and publish its rationale at the
time it proposes an exemption for public comment. Specifically, the
Bureau must consider:
(a) The amount of the loan and whether the disclosures, right of
rescission, and other provisions provide a benefit to the consumers who
are parties to such transactions, as determined by the Bureau;
(b) The extent to which the requirements of TILA complicate,
hinder, or make more expensive the credit process for the class of
transactions;
(c) The status of the borrower, including--
(1) Any related financial arrangements of the borrower, as
determined by the Bureau;
(2) The financial sophistication of the borrower relative to the
type of transaction; and
(3) The importance to the borrower of the credit, related
supporting property, and coverage under TILA, as determined by the
Bureau;
(d) Whether the loan is secured by the principal residence of the
consumer; and
(e) Whether the goal of consumer protection would be undermined by
such an exemption.
As discussed in the section-by-section analysis below, the Bureau
is adopting exemptions for certain classes of transactions from the
requirements of TILA pursuant to its authority under TILA section
105(f). In determining which classes of transactions to exempt under
TILA section 105(f), the Bureau has considered the relevant factors and
determined that the exemptions are appropriate.
The Dodd-Frank Act
Dodd-Frank Act section 1022(b). Section 1022(b)(1) of the Dodd-
Frank Act authorizes the Bureau to prescribe rules ``as may be
necessary or appropriate to enable the Bureau to administer and carry
out the purposes and objectives of the Federal consumer financial laws,
and to prevent evasions thereof.'' 12 U.S.C. 5512(b)(1). TILA and title
X of the Dodd-Frank Act are Federal consumer financial laws.
Accordingly, the Bureau is exercising its authority under Dodd-Frank
Act section 1022(b) to prescribe rules that carry out the purposes and
objectives of TILA and title X and prevent evasion of those laws.
V. Section-by-Section Analysis
Section 1026.32 Requirements for High-Cost Mortgages
32(b) Definitions
32(b)(1)
32(b)(1)(ii)
Background
TILA section 129C(b)(2)(A)(vii), as added by section 1412 of the
Dodd-Frank Act, defines a ``qualified mortgage'' as a loan for which,
among other things, the total ``points and fees'' payable in connection
with the transaction generally do not exceed 3 percent of the total
loan amount. 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 5
percent of the total transaction amount (for transactions of $20,000 or
more), or the lesser of 8 percent of the total transaction amount or
$1,000 (for transactions of less than $20,000) or other prescribed
amount. The Bureau finalized the Dodd-Frank Act's amendments to TILA
concerning the points and fees limit for qualified mortgages and the
points and fees coverage threshold for high-cost mortgages in the 2013
ATR Final Rule and in the final rule implementing the Dodd-Frank Act's
amendments to HOEPA,\114\ respectively.
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\114\ 78 FR 6856 (Jan. 31, 2013) (2013 HOEPA Final Rule).
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Those rulemakings also adopted the Dodd-Frank Act's amendments to
TILA concerning the exclusion of certain bona fide third-party charges
and up to two bona fide discount points from the points and fees
calculation for both qualified mortgages and high-cost mortgages. With
respect to bona fide discount points in particular, TILA sections
129C(b)(2)(C)(ii)(I) and 103(dd)(1) provide for the exclusion of up to
and including two bona fide discount points from points and fees for
qualified mortgages and high-cost mortgages, respectively, 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,
as defined in Sec. 1026.35(a)(2). Similarly, TILA sections
129C(b)(2)(C)(ii)(II) and 103(dd)(2) provide for the exclusion of up to
and including one bona fide discount point from points and fees, 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.\115\ The Bureau's 2013 ATR and HOEPA Final Rules implemented
the bona fide discount point exclusions from points and fees in Sec.
1026.32(b)(1)(i)(E) and (F) (closed-end credit) and (b)(2)(i)(E) and
(F) (open-end credit), respectively.
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\115\ The 2013 ATR and HOEPA Final Rules also adopted the
special calculation, prescribed under TILA for high-cost mortgages,
for completing the bona fide discount point calculation for loans
secured by personal property.
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TILA section 129C(b)(2)(C) defines ``points and fees'' for
qualified mortgages and high-cost mortgages to have the same meaning as
set forth in TILA section 103(aa)(4) (renumbered as section
103(bb)(4)).\116\ Points and fees for the high-cost mortgage threshold
are defined in Sec. 1026.32(b)(1) (closed-end credit) and (2) (open-
end credit), and Sec. 1026.43(b)(9) provides that, for a qualified
mortgage, ``points and fees'' has the same meaning as in Sec.
1026.32(b)(1).
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\116\ The Dodd-Frank Act renumbered existing TILA section
103(aa), which contains the definition of ``points and fees,'' for
the high-cost mortgage points and fees threshold, as section
103(bb). See section 1100A(1)(A) of the Dodd-Frank Act. However, in
defining points and fees for the qualified mortgage points and fees
limits, TILA section 129C(b)(2)(C) refers to TILA section 103(aa)(4)
rather than TILA section 103(bb)(4). To give meaning to this
provision, the Bureau concluded that the reference to TILA section
103(aa)(4) in TILA section 129C(b)(2)(C) is mistaken and therefore
interpreted TILA section 129C(b)(2)(C) as referring to the points
and fees definition in renumbered TILA section 103(bb)(4).
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Section 1431 of the Dodd-Frank Act amended TILA to require that
``all compensation paid directly or indirectly by a consumer or
creditor to a mortgage originator from any source, including a mortgage
originator that is also the creditor in a table-funded transaction,''
be included in points and fees. TILA section 103(bb)(4)(B) (emphases
added). Prior to the amendment, TILA had provided that only
compensation paid by a consumer to a mortgage broker at
[[Page 35443]]
or before closing should count toward the points and fees threshold for
high-cost mortgages. Under amended TILA section 103(bb)(4)(B), however,
compensation paid to anyone that qualifies as a ``mortgage originator''
is to be included in points and fees for the points and fees thresholds
for both qualified mortgages and high-cost mortgages.\117\ Thus, in
addition to mortgage brokerage firms, other mortgage originators,
including employees of a creditor (i.e., loan officers) or of a
brokerage firm (i.e., individual brokers) are included in ``mortgage
originator.'' In addition, 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) and (C).
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\117\ ``Mortgage originator'' is generally defined to include
``any person who, for direct or indirect compensation or gain, or in
the expectation of direct or indirect compensation or gain--(i)
takes a residential mortgage loan application; (ii) assists a
consumer in obtaining or applying to obtain a residential mortgage
loan; or (iii) offers or negotiates terms of a residential mortgage
loan.'' TILA section 103(cc)(2)(A). 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(cc)(2)(C) through (F).
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The 2013 ATR Final Rule. The Bureau's 2013 ATR Final Rule amended
Sec. 1026.32(b)(1) to implement revisions to the definition of
``points and fees'' under section 1431 of the Dodd-Frank Act, for the
purposes of both HOEPA and qualified mortgages. Among other things, the
Dodd-Frank Act added loan originator compensation to the definition of
``points and fees'' that had previously applied to high-cost mortgages
under HOEPA. Section 1431 of the Dodd-Frank Act also amended TILA to
provide that open-end credit plans (i.e., home equity lines of credit
or HELOCs) are covered by HOEPA. The Bureau's 2013 HOEPA Final Rule
thus separately amended Sec. 1026.32(b)(2) to provide for the
inclusion of loan originator compensation in points and fees for
HELOCs, to the same extent as such compensation is required to be
counted for closed-end credit transactions. Under Sec.
1026.32(b)(1)(ii) (for closed-end credit) and Sec. 1026.32(b)(2)(ii)
(for open-end credit), all compensation paid directly or indirectly by
a consumer or creditor to a loan originator, as defined in Sec.
1026.36(a)(1), that can be attributed to that transaction at the time
the interest rate is set, is required to be included in points and
fees. The commentary to Sec. 1026.32(b)(1)(ii) as adopted in the 2013
ATR Final Rule provides details for applying this requirement for
closed-end credit transactions (e.g., by clarifying when compensation
must be known to be counted). The commentary to Sec. 1026.32(b)(2)(ii)
as adopted in the 2013 HOEPA Final Rule cross-references the commentary
adopted in Sec. 1026.32(b)(1)(ii) for interpretive guidance.
In the 2013 ATR Final Rule, the Bureau noted that, in response to
the Board's 2011 proposal (Board's 2011 ATR Proposal or Board's
proposal) \118\ and the Bureau's 2012 proposal to implement the Dodd-
Frank Act's amendments to HOEPA,\119\ the Bureau received extensive
feedback regarding the inclusion of loan originator compensation in the
qualified mortgage and high-cost mortgage points and fees calculation.
In the context of both rulemakings, several industry commenters argued
that including loan originator compensation in points and fees would
result in ``double-counting'' because creditors often compensate loan
originators with funds collected from consumers at consummation. The
commenters argued that money collected in up-front charges to consumers
should not be counted a second time toward the points and fees
thresholds if it is passed on to a loan originator. Consumer advocates
urged the Bureau not to assume that loan originator compensation is
funded through up-front consumer payments to creditors rather than
through the interest rate. They noted that, in the wholesale channel,
if the parties to a transaction would like to fund loan originator
compensation through up-front payments, a consumer can pay the mortgage
broker directly instead of paying origination charges to the creditor
and having the creditor pass through payments to the mortgage broker.
---------------------------------------------------------------------------
\118\ 76 FR 27390 (May 11, 2011).
\119\ 77 FR 49090 (Aug. 15, 2012) (2012 HOEPA Proposal).
---------------------------------------------------------------------------
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 or the time-price differential),
all compensation paid directly or indirectly by a consumer or creditor
to a loan originator, ``and'' various other enumerated items. The 2013
ATR Final Rule noted that both the use of ``and'' and the reference to
``all'' compensation paid ``directly or indirectly'' and ``from any
source'' supports counting compensation as it flows downstream from one
party to another so that it is counted each time that it reaches a loan
originator, whatever the previous source.
The Bureau stated that it believes the statute would be read to
require that loan originator compensation be treated as additive to the
other elements of points and fees and should be counted as it flows
downstream from one party to another so that it is included in points
and fees each time it reaches a loan originator, whatever the previous
source. The Bureau indicated that it did not believe that an automatic
literal reading of the statute in all cases would be in the best
interest of either consumers or industry, but it did not believe that
it yet had 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 all
circumstances, given the multiple practical and complex policy
considerations involved. Accordingly, the Bureau finalized the rule
without a qualifying interpretation on this issue and included in the
2013 ATR Proposed Rule several comments to explain how to calculate
loan originator compensation in connection with particular payment
streams between particular parties. However, the 2013 ATR Final Rule
itself implemented the additive approach of the statute.
The 2013 Loan Originator Final Rule. Earlier this year, the Bureau
issued a final rule to implement various provisions of the Dodd-Frank
Act that addressed compensation paid to loan originators. 78 FR 11280
(Feb. 15, 2013) (2013 Loan Originator Final Rule). As the Bureau noted,
the Board had proposed rules in 2009, that, among other things, would
have prohibited payments to a loan originator based on the
transaction's terms or conditions; prohibited a loan originator from
receiving dual compensation (i.e., compensation from both a consumer
and another person in the same transaction); and prohibited a loan
originator from steering consumers to transactions not in their
interest to increase the loan originator's compensation. In section
1403 of the Dodd-Frank Act, Congress amended TILA section 129B to
codify significant elements of the Board's 2009 proposal. In a final
rule issued in 2010, the Board finalized its proposed rules, while
acknowledging that further rulemaking would be required to address
certain
[[Page 35444]]
issues and adjustments made by the Dodd-Frank Act. 75 FR 58509 (Sept.
24, 2010) (2010 Loan Originator Final Rule). As discussed below, the
Bureau's 2013 Loan Originator Final Rule implemented certain provisions
of TILA section 129B, including rules expanding and clarifying some of
the prohibitions adopted by the Board in the 2010 Loan Originator Final
Rule.
The Bureau's 2013 Loan Originator Final Rule clarified the scope of
Sec. 1026.36(d)(1), which prohibits basing a loan originator's
compensation on any of the transaction's terms. This provision was
intended to eliminate incentives for the loan originator to, for
example, persuade the consumer to accept a higher interest rate or a
prepayment penalty, in exchange for the loan originator receiving
higher compensation. The Bureau retained the core prohibition in Sec.
1026.36(d)(1), but it clarified the meaning of a ``term'' of the
transaction and clarified the standard for determining when
compensation is impermissibly based on a proxy for a term of the
transaction. It also permitted certain bonuses and retirement profit-
sharing plans to be based on the terms of multiple loan originators'
transactions and permitted a loan originator to participate in a
defined benefit plan without restrictions on whether the benefits may
be based on the terms of a loan originator's transactions. See Sec.
1026.36(d)(1)(iii) and (iv). Consistent with the statute, the Bureau
also revised Sec. 1026.36(d)(1) so that it also applies in
transactions in which the consumer pays a mortgage broker directly.
The 2013 Loan Originator Final Rule also clarified the scope of
Sec. 1026.36(d)(2), which prohibits a loan originator from receiving
compensation from both the consumer and other persons in the same
transaction. This provision was designed to address consumer confusion
over mortgage broker loyalties when brokers received payments both from
the consumer and the creditor. The 2013 Loan Originator Final Rule
retained this prohibition but provided an exception to permit mortgage
brokers to pay their employees or contractors commissions (although the
commissions cannot be based on the terms of the loans they originate).
In addition, the Bureau used its exception authority to adopt a
complete exemption to the statutory ban on up-front fees set forth in
TILA section 129B(c)(2)(B)(ii). See Sec. 1026.36(d)(2)(ii). That
statutory ban would have permitted a loan originator to receive an
origination fee or charge from someone other than the consumer only if:
(1) The loan originator did not receive any compensation directly from
the consumer; and (2) the consumer did not make an up-front payment of
discount points, origination points, or fees (other than bona fide
third-party charges not retained by the loan originator, creditor, or
an affiliate of either). Thus, the Bureau's exemption permits the
consumer to pay origination charges or fees to the creditor in
transactions in which the creditor is paying compensation to the
mortgage broker.
The Bureau also clarified the safe harbor for loan originators to
comply with existing Sec. 1026.36(e)(1), which prohibits a loan
originator from steering a consumer to consummate a particular
transaction so that the loan originator will receive greater
compensation. The Bureau clarified how to determine which loans a
creditor must offer to consumers to take advantage of the safe harbor.
See Sec. 1026.36(e)(3)(i)(C) and comment 36(e)(3)-3. The Bureau did
not, however, implement the portion of section 1403 of the Dodd-Frank
Act that requires the Bureau to prescribe additional regulations to
prohibit certain types of steering, abusive or unfair lending
practices, mischaracterization of credit histories or appraisals, and
discouraging consumers from shopping with other mortgage originators.
The Bureau noted that it intends to prescribe those regulations in a
future rulemaking. See 78 FR 11292 n.55.
The 2013 ATR Proposed Rule
In the 2013 ATR Proposed Rule, the Bureau proposed commentary to
address situations in which loan originator compensation passes from
one party to another. The Bureau indicated that it believed that
Congress included loan originator compensation in points and fees
because of concern that loans with high loan originator compensation
may be more costly and riskier to consumers. Despite the statutory
language, the Bureau questioned whether it would serve the statutory
purpose to apply a strict additive rule that would automatically
require that loan originator compensation be counted against the points
and fees thresholds even if it has already been included in points and
fees. The Bureau indicated that it did not believe that it is necessary
or appropriate to count the same payment between a consumer and a
mortgage broker firm twice, simply because it is both part of the
finance charge and loan originator compensation. Similarly, the Bureau
indicated that, where a payment from either a consumer or a creditor to
a mortgage broker is counted toward points and fees, it would not be
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 stated that it did not believe
the purposes of the statute would be served by counting some or all of
the funds a second time, and was concerned that doing so could have
negative impacts on the price and availability of credit.
Proposed comment 32(b)(1)(ii)-5.i thus would have provided that a
payment from a consumer to a mortgage broker need not be counted toward
points and fees twice because it is both part of the finance charge
under Sec. 1026.32(b)(1)(i) and loan originator compensation under
Sec. 1026.32(b)(1)(ii). Similarly, proposed comment 32(b)(1)(ii)-5.ii
would have clarified that Sec. 1026.32(b)(1)(ii) does not require a
creditor to include payments by a mortgage broker to its individual
loan originator employee in the calculation of points and fees. For
example, assume a consumer pays a $3,000 fee to a mortgage broker, and
the mortgage broker pays a $1,500 commission to its individual loan
originator employee for that transaction. The $3,000 mortgage broker
fee is included in points and fees, but the $1,500 commission is not
included in points and fees because it has already been included in
points and fees as part of the $3,000 mortgage broker fee. The Bureau
stated that it believed that any costs to the consumer from loan
originator compensation are adequately captured by counting the funds a
single time against the points and fees cap. The Bureau sought comment
regarding these proposed comments.
The Bureau noted that determining the appropriate accounting method
is significantly more complicated when 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.
As described in the 2013 ATR Final Rule, a creditor can fund
compensation to its own loan officer or to a mortgage broker in two
different ways. First, the payment could be funded by origination
charges paid by the consumer to the creditor. Second, the payment could
be funded through the interest rate, in which case the creditor
forwards funds to the loan originator at consummation which the
creditor recovers through profit realized on the subsequent sale of the
mortgage or, for portfolio loans, through payments by the consumer over
time. Because
[[Page 35445]]
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. The Bureau stated that, to
facilitate compliance, it believed it would be appropriate and
necessary to adopt generalized rules regarding the accounting of
various payments, but did not have sufficient information to make those
choices in the 2013 ATR Final Rule. However, the 2013 ATR Final Rule
itself implemented the additive approach of the statute.
The Bureau noted in the 2013 ATR Proposed Rule that the potential
downstream effects of different accounting methods may be significant.
Under the ``additive'' approach where no netting of up-front consumer
payments against creditor-paid loan originator compensation is allowed,
some loans might be precluded from being qualified mortgages or may
exceed the high-cost mortgage threshold because of the combination of
loan originator compensation with other charges that are included in
points and fees, such as fees paid to affiliates for settlement
services. In other cases, creditors whose combined loan originator
compensation and up-front charges would otherwise exceed the points and
fees limits would have strong incentives to cap their up-front charges
for other overhead expenses under the threshold and instead recover
those expenses by increasing interest rates to generate higher gains on
sale. This would adversely affect consumers who prefer to pay a lower
interest rate over time in return for 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 an
``additive'' rule by increasing interest rates, this could increase the
number of qualified mortgages that receive a rebuttable presumption of
compliance, rather than a safe harbor from liability, under the
ability-to-repay provisions adopted by the 2013 ATR Final Rule.
The Bureau noted that one alternative would be to allow all
consumer payments of up-front points and fees to be netted against
creditor-paid loan originator compensation. However, this ``netting''
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. For example, a consumer could pay three percentage points in
origination charges and be charged an interest rate sufficient to
generate a 3 percent loan originator commission, and the loan could
still fall within the 3 percent cap for qualified mortgages. The
consumer could be charged five percentage points in origination charges
and an interest rate sufficient to generate a 5 percent loan originator
commission and still stay under the HOEPA points and fees trigger,
thereby denying consumers the special protections afforded to loans
with high up-front costs. In markets that are less competitive, this
would create an opportunity for creditors or brokerage firms to take
advantage of their market power to harm consumers.
The Bureau sought comment on two alternative versions of proposed
comment 32(b)(1)(ii)-5.iii. The first--the additive approach--would
have explicitly precluded netting, consistent with the literal language
of the statute, by specifying that Sec. 1026.32(b)(1)(ii) requires a
creditor to include compensation paid by a consumer or creditor to a
loan originator in the calculation of points and fees in addition to
any fees or charges paid by the consumer to the creditor. This proposed
comment contained an example to illustrate this principle: Assume that
a consumer pays to the creditor a $3,000 origination fee and that the
creditor pays to its loan officer employee $1,500 in compensation
attributed to the transaction. Assume further that the consumer pays no
other charges to the creditor that are included in points and fees
under Sec. 1026.32(b)(1)(i) and the loan officer receives no other
compensation that is included in points and fees under Sec.
1026.32(b)(1)(ii). For purposes of calculating points and fees, the
$3,000 origination fee would be included in points and fees under Sec.
1026.32(b)(1)(i) and the $1,500 in loan officer compensation would be
included in points and fees under Sec. 1026.32(b)(1)(ii), equaling
$4,500 in total points and fees, provided that no other points and fees
are paid or compensation received.
The second alternative--the netting approach--would have provided
that, in calculating the amount of loan originator compensation to
include in points and fees, creditors would be permitted to net
consumer payments of up-front fees and points against creditor payments
to the loan originator. Specifically, it would have provided that Sec.
1026.32(b)(1)(ii) permits a creditor to reduce the amount of loan
originator compensation included in the points and fees calculation
under Sec. 1026.32(b)(1)(ii) by any amount paid by the consumer to the
creditor and included in the points and fees calculation under Sec.
1026.32(b)(1)(i). This proposed comment contained an example to
illustrate this principle: Assume that a consumer pays to the creditor
a $3,000 origination fee and that the creditor pays to the loan
originator $1,500 in compensation attributed to the transaction. Assume
further that the consumer pays no other charges to the creditor that
are included in points and fees under Sec. 1026.32(b)(1)(i) and the
loan originator receives no other compensation that is included in
points and fees under Sec. 1026.32(b)(1)(ii). For purposes of
calculating points and fees, the $3,000 origination fee would be
included in points and fees under Sec. 1026.32(b)(1)(i), but the
$1,500 in loan originator compensation need not be included in points
and fees. If, however, the consumer pays to the creditor a $1,000
origination fee and the creditor pays to the loan originator $1,500 in
compensation, then the $1,000 origination fee would be included in
points and fees under Sec. 1026.32(b)(1)(i), and $500 of the loan
originator compensation would be included in points and fees under
Sec. 1026.32(b)(1)(ii), equaling $1,500 in total points and fees,
provided that no other points and fees are paid or compensation
received.
The Bureau solicited feedback regarding all aspects of both
alternatives. In addition, the Bureau specifically requested feedback
regarding whether there are differences in various types of loans,
consumers, loan origination channels, or market segments which would
justify applying different netting or additive rules to such
categories. The Bureau also sought feedback as to whether, if netting
were permitted, the creditor should be allowed to reduce the loan
originator compensation by the full amount of points and fees included
in the finance charge or whether the reduction should be limited to
that portion of points and fees denominated as general origination
charges.
The Bureau also sought comment on the implications of each
alternative on protecting consumers pursuant to the ability-to-repay
requirements, qualified mortgage provisions, and the high-cost mortgage
provisions of HOEPA. The Bureau also sought comment on the likely
market reactions and impacts on the pricing of and access to credit of
each alternative, particularly as to how such reactions might affect
interest rate levels, the safe harbor and rebuttable presumption
afforded to particular qualified mortgages, and application of the
separate rate threshold for high-cost mortgages under HOEPA and whether
[[Page 35446]]
adjustment to the final rule would be appropriate. The Bureau further
sought comment on the implications of both of the above proposed
alternatives in light of the fact that both the qualified mortgage and
HOEPA provisions allow certain bona fide discount points and bona fide
third party charges to be excluded from the calculation of points and
fees, but do not do so for affiliate charges.
The Bureau adopted in the 2013 HOEPA Final Rule a requirement that
creditors include compensation paid to originators of open-end credit
plans in points and fees, to the same extent that such compensation is
required to be included for closed-end credit transactions. The Bureau
did not receive comments in response to the 2012 HOEPA Proposal
indicating that additional or different guidance would be needed to
calculate loan originator compensation in the open-end credit context.
The Bureau noted in the 2013 ATR Proposed Rule that it would be useful
to provide the public with an additional opportunity to comment. Thus,
the Bureau solicited input on what guidance, if any, beyond that
provided for closed-end credit transactions, would be helpful for
creditors in calculating loan originator compensation in the open-end
credit context.
Finally, the Bureau sought comment generally on whether additional
guidance or regulatory approaches regarding the inclusion of loan
originator compensation in points and fees would be useful to protect
consumers and facilitate compliance. In particular, the Bureau sought
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 the
ability-to-repay and HOEPA rulemakings and the provisions that the
Bureau was separately finalizing in connection with the Bureau's 2012
Loan Originator Proposal (since adopted in the 2013 Loan Originator
Final Rule). For example, the Bureau sought comment on whether
additional guidance would be useful with regard to treatment of
compensation by persons who are ``loan originators'' but are not
employed by a creditor or mortgage broker, given that the 2013 Loan
Originator Final Rule implemented provisions of the Dodd-Frank Act that
specify when employees of retailers of manufactured homes, servicers,
and other parties are loan originators for Dodd-Frank Act purposes.
Comments Received
The Bureau received numerous comments regarding the calculation of
loan originator compensation for inclusion in points and fees for the
qualified mortgage and high-cost mortgage points and fees limits. Many
of the comments were substantially similar letters submitted by
mortgage brokers. Many of the comments responded to the Bureau's
proposed commentary regarding potential double counting of loan
originator compensation. As described below, however, some comments
also raised other issues regarding loan originator compensation.
Few commenters addressed the Bureau's proposed comments
32(b)(1)(ii)-5.i and 32(b)(1)(ii)-5.ii, which would have provided that
payments by consumers to mortgage brokers (where those payments already
have been included in points and fees under Sec. 1026.32(b)(1)(i)) and
payments by mortgage brokers to their individual loan originator
employees need not be counted as loan originator compensation and
included in points and fees. Nearly all commenters that addressed these
proposed comments supported them. One industry commenter, however,
argued that the Bureau should not adopt the proposed comments unless
the Bureau also excludes from points and fees compensation paid by
creditors to their own loan officers. That commenter claimed that it
would be inequitable to exclude from points and fees compensation paid
to individual loan originators employed by a mortgage broker firm but
not to exclude compensation paid to individual loan originators
employed by the creditor.
Many more commenters addressed the Bureau's two alternatives for
proposed comment 32(b)(1)(ii)-5.iii. Consumer advocates urged the
Bureau to adopt an additive approach for transactions in the wholesale
channel, i.e., transactions originated through a mortgage broker. They
argued that the statutory provision was intended to limit the total up-
front charges and loan originator compensation in loans designated as
qualified mortgages (and to ensure that loans with charges and
compensation above the threshold are subject to the special protection
as high-cost mortgages). They maintained that a netting rule would in
essence double the points and fees thresholds for qualified mortgages
and high-cost mortgages. As a result, loans of $100,000 or more could
have up-front charges of 3 percent of the total loan amount and loan
originator compensation paid by the creditor equal to another 3
percent, yet the loan could still be a qualified mortgage.\120\
Similarly, loans of $20,000 or more could have up-front charges of 5
percent of the total loan amount and creditor-paid compensation equal
to another 5 percent, yet the loan would still not qualify as a high-
cost mortgage.\121\
---------------------------------------------------------------------------
\120\ For loans less than $100,000, the qualified mortgage
points and fees limits are more than 3 percent of the total loan
amount. See Sec. 1026.43(e)(3).
\121\ For loans less than $20,000, the points and fees
thresholds for high-cost mortgages are more than 5 percent of the
loan amount. See Sec. 1026.32(a)(1)(ii).
---------------------------------------------------------------------------
Some consumer advocates also argued that consumers have difficulty
understanding and evaluating the cost of creditor-paid compensation to
mortgage brokers. They contend that, as a result, creditor-paid
compensation historically has resulted in more costly loans for
consumers, with a higher risk of default, particularly when consumers
also have made up-front payments. They argued that an additive rule
provides important protection because the Bureau elected in the 2013
Loan Originator Final Rule to permit creditors to continue charging up-
front fees to consumers when creditors compensate loan originators.
They maintained that a netting rule would encourage creditors and
mortgage brokers to combine creditor-paid compensation with up-front
charges paid by consumers to creditors because such compensation then
would not be included in points and fees. They argued that this
combination is less transparent and more confusing to consumers than a
model in which the consumer pays a mortgage broker directly or pays all
charges through the rate.
Some consumer advocates also argued that the additive approach was
necessary to complement the protections contained in Sec. 1026.36(d)
and (e) prohibiting or restricting certain loan originator compensation
practices. They contended that mortgage brokers could develop
problematic business models that would not violate the prohibition in
Sec. 1026.36(d)(1) against basing compensation on loan terms and the
prohibition in Sec. 1026.36(e) against steering consumers to
consummate particular transactions to maximize loan originator
compensation. For example, some consumer advocates noted that, without
violating these prohibitions, mortgage brokers could specialize in
subprime transactions with high up-front charges and high interest
rates and could induce creditors to compete for such transactions and
offer high loan originator compensation, so long as the compensation
did not vary with the
[[Page 35447]]
terms of individual loans. Alternatively, they suggested that mortgage
brokers could do business with a mix of high-cost creditors that pay
high compensation and creditors offering more competitive loans that
pay lower compensation to brokers. For consumers that mortgage brokers
believe would be more likely to agree to more costly loans, mortgage
brokers could take advantage of the safe harbor in the anti-steering
rules by providing three quotes from high-cost creditors but could
continue providing other customers with more competitive loans through
other creditors. Consumer advocates argued that an additive approach
would deter such practices because creditors charging high up-front
fees and paying high compensation to mortgage brokers would find it
more difficult to remain below the qualified mortgage points and fees
limits and the high-cost mortgage points and fees threshold.
Some consumer advocates also argued that the Bureau lacks the
authority to adopt a netting approach for high-cost mortgages under
HOEPA. They claimed that the Bureau would need to use its exception
authority to adopt the netting approach and that TILA section 105(a)
does not permit the Bureau to use its exception authority to modify the
items included in points and fees for high-cost mortgages. Thus, they
argued that the Bureau can adopt a netting approach only for
calculating loan originator compensation for the qualified mortgage
points and fees limits. They maintained that creating different
measures for loan originator compensation for qualified mortgages and
high-cost mortgages would be confusing and create compliance
difficulties.
Some consumer advocates also argued that double-counting concerns
could be addressed simply by having the consumer pay the mortgage
broker directly. They noted that this approach to structuring mortgage
pricing would permit a consumer to pay up-front charges to reduce the
amount of the interest rate. The consumer payment to the broker would
be counted in points and fees only one time. Some consumer advocates
maintained that there is little justification for combining creditor-
paid compensation to mortgage brokers with up-front charges paid by
consumers. They claimed that, historically, the rationale for creditor-
paid compensation for mortgage brokers was that it provided an option
for consumers that did not have sufficient funds or did not want to pay
a mortgage broker directly and instead preferred to pay such
compensation through a higher interest rate. They noted that such a
rationale does not make sense in a transaction in which creditor-paid
compensation is combined with up-front charges paid by the consumer.
Some consumer advocates also suggested that double-counting concerns
could be addressed by permitting creditors to net origination payments
from consumers against loan originator compensation, so long as the
creditors provided more detailed disclosures to consumers when such
payments would be passed through as compensation to loan originators.
Some consumer advocates argued that the Bureau should treat all
loan originators the same and should therefore also adopt an additive
rule for transactions in the retail channel. They maintained that,
while problematic loan originator compensation practices historically
may have been more prevalent in the wholesale channel, there were also
similar problems in the retail channel. They also argued that, despite
the prohibitions on steering and term-based compensation, creditors
will find ways to encourage retail loan officers to steer consumers to
higher-cost loans. For example, they suggested that creditors may use
deferred compensation plans to provide some incentives for retail loan
officers to steer consumers toward higher cost loans. They therefore
argued that the same protections provided by an additive approach are
necessary in the retail channel.
Some consumer advocates, however, argued that the Bureau should
adopt a different rule for transactions in the retail channel. They
argued that Congress was particularly concerned with transactions with
creditor-paid compensation to mortgage brokers and that such
transactions historically tended to be more costly and to have higher
rates of default. They claimed that the risks of consumer injury from
loan originator compensation practices are significantly lower in the
retail channel. They contended that, in the retail channel, creditors
and their loan officers would have far greater difficulties in
structuring their businesses to evade the prohibitions against steering
and term-based compensation in Sec. 1026.36(d)(1) and Sec.
1026.36(e). They noted that retail loan officers cannot pick and choose
different loans from different creditors offering different levels of
loan originator compensation. They also argued that mortgage brokers
may be more successful in convincing consumers to accept more costly
loans because consumers perceive that their mortgage broker is a
trusted advisor and mistakenly believe that the broker is obligated to
provide them with the lowest cost loan.
Some consumer advocates also argued that the double-counting
concerns are more pronounced in the retail channel because consumers do
not have the option to pay retail loan officers directly. Under an
additive approach, any loan originator compensation paid by the
creditor to its loan officers would be included in points and fees in
addition to any up-front charges paid by the consumer to the creditor.
Because the consumer cannot pay up-front charges directly to the retail
loan officer, the consumer would have less flexibility to pay up-front
charges to receive a lower interest rate and still remain under the
points and fees limits.
In developing the final rule, the Bureau consulted with several
Federal agencies, as required by section 1022(b)(2)(B) of the Dodd-
Frank Act. Three agencies, the Federal Deposit Insurance Corporation
(FDIC), HUD, and the Office of the Comptroller of the Currency (OCC)
submitted formal comment letters. The FDIC and HUD submitted a joint
comment stating their view that compensation paid to mortgage brokers
should be included in points and fees whether the consumer pays such
compensation directly through up-front charges or indirectly through
the creditor and funded through the interest rate. The FDIC and HUD
stated that yield spread premiums (YSPs), i.e., compensation paid by a
creditor and funded out of the interest rate, have been offered as a
payment option for consumers that prefer lower up-front costs and a
higher interest rate but that a consumer's choice to use a YSP to
compensate a broker should not affect the calculation of loan
originator compensation for points and fees. The FDIC and HUD
maintained that the netting approach would undercount points and fees.
They also stated that a netting approach would create incentives for
transactions to include both up-front origination charges and YSPs
because the up-front charges could be netted against the YSPs to reduce
or eliminate the loan originator compensation that would be included in
points and fees. The FDIC and HUD argued that evidence shows that
transactions with both up-front charges and ``back-end'' payments tend
to be the most costly for consumers and are the most difficult for them
to evaluate when shopping for a mortgage.
The FDIC and HUD supported the proposal to exclude compensation
paid by a mortgage broker to its employees but argued that the Bureau
should also exclude compensation paid by a creditor to its employees.
The FDIC and
[[Page 35448]]
HUD argued that including in points and fees compensation paid by a
creditor to its employee would increase compliance costs and make it
difficult for them to create compliant systems by the January 2014
effective date. They also stated that including such compensation in
points and fees could result in variations in points and fees for loans
with identical costs to the consumer, merely because, for example, one
transaction involved a high-performing loan officer. They argued that
excluding from points and fees compensation paid by a creditor to its
employees would not compromise the consumer protection goals of the
points and fees provision because of the loan originator compensation
restrictions in Sec. 1026.36(d). They noted that employees of
creditors have no ability to choose among creditors, further reducing
the risk that consumers would be steered toward more costly loans.
The OCC also submitted a comment stating its support for excluding
from points and fees loan originator compensation paid by a consumer to
a mortgage broker when that payment already is included in points and
fees as part of the finance charge; excluding from points and fees
compensation paid by a mortgage broker to its employees; excluding from
points and fees compensation paid by a creditor to its employees; and
using an additive approach to include in points and fees both
origination charges paid by a consumer to a creditor and loan
originator compensation paid by a creditor to a mortgage broker. The
OCC stated that a netting approach would permit YSPs and origination
fees to be charged in the same transaction without including both in
points and fees and argued that this would not serve the interest of
consumers or of a transparent, competitive mortgage market. The OCC
noted that a netting approach would permit a qualified mortgage to have
up-front charges equal to 3 percent of the loan amount and an interest
rate sufficient to generate a 3 percent loan origination commission;
similarly, a netting approach would permit a mortgage loan to have up-
front charges equal to 5 percent of the loan amount and an interest
rate sufficient to generate a 5 percent loan origination commission.
The OCC also maintained that including both origination charges and
YSPs increases the complexity of mortgage transactions and confuses
consumers, particularly those who are most vulnerable and have the
fewest credit choices.
As noted above, the OCC supported excluding from points and fees
compensation paid by a creditor to its loan officers. The OCC noted
that the banking industry expressed concerns about the operational
burden of attempting to track compensation and about the potential
uncertainty of whether, because of changes in loan originator
compensation, a transaction would be a qualified mortgage. The OCC
argued that excluding from points and fees compensation paid by a
creditor to its loan officers would not adversely affect consumer
protection. The OCC noted that individual employees in both the retail
and wholesale channels are prohibited from steering a consumer to a
more costly loan to increase their compensation but that there is an
added layer of protection because a creditor's loan officers generally
do not have the ability to select from different creditors when
presenting loan options to consumers.
Repeating arguments they made in response to the Board's 2011 ATR
Proposal, many industry commenters, including creditors and their
representatives and mortgage brokers and their representatives, again
urged the Bureau to exclude loan originator compensation from points
and fees altogether. They argued that loan originator compensation has
little or no bearing on a consumer's ability to repay a mortgage and
that it therefore is unnecessary to include such compensation in points
and fees. They also maintained that other regulatory protections,
including the prohibition in Sec. 1026.36(d)(1) on compensating loan
originators based on the terms of the transaction and the prohibition
in Sec. 1026.36(e) on steering consumers to consummate particular
transactions to increase loan originator compensation, are sufficient
to protect consumers against problematic loan originator compensation
practices. They claimed that including loan originator compensation in
points and fees would impose a significant compliance burden and make
it far more difficult to offer qualified mortgages, leading to higher
costs for credit and reduced access to credit.
A trade group representing mortgage brokers and many individual
mortgage brokers submitted substantially similar comments recommending
that the Bureau exclude all compensation paid by creditors to loan
originators. They argued that the Board's 2010 Loan Originator Final
Rule already restricted loan originator compensation to prevent
steering of consumers to more costly mortgages.
One industry commenter recommended that, if the Bureau declines to
exclude all loan originator compensation from points and fees, the
Bureau should consider whether compensation paid by a creditor to a
mortgage broker should be included in points and fees only for higher-
priced mortgage loans because competition may not be as robust for such
loans. The commenter suggested that the Bureau consider excluding such
compensation entirely from points and fees for mortgage loans in the
prime market and excluding only a certain amount for higher-priced
mortgage loans.
Many industry commenters advocated that, if the Bureau declines to
exclude loan originator compensation altogether, the Bureau should
exclude from points and fees any compensation paid to loan originator
employees. Many creditors and their representatives argued that
compensation paid to loan originators employed by creditors, as well as
loan originators employed by mortgage brokers, should be excluded from
points and fees. They raised a number of different arguments to support
excluding compensation paid to individual loan originators, including
retail loan officers.
First, they asserted that calculating loan originator compensation
for individual loan originators would impose a substantial burden,
particularly for employees of creditors. They noted that retail loan
officers often receive a substantial part of their compensation after a
mortgage loan is consummated, making it difficult to track and
attribute compensation to a transaction before that transaction is
consummated. They argued that, for retail loan officers, it would
create significant compliance burdens to track compensation paid to
each loan officer and attribute that compensation to each transaction.
They noted that their existing systems are unable to track and
attribute compensation for each loan officer for each transaction, and
stated that they would have to develop new systems that could track
compensation in real time and communicate with loan origination systems
to calculate points and fees. They also asserted that it would impose
substantial compliance risk because of the difficulty in accurately
calculating such compensation.
Second, they argued that calculating loan originator compensation
at the time the interest rate is set would result in an inaccurate
measure of compensation and would result in significant anomalies. They
noted that various types of compensation, including salary and bonuses
based on factors such as loan quality and customer satisfaction, would
not be included in loan originator compensation because they cannot be
attributed to a particular
[[Page 35449]]
transaction. However, they asserted that the amount of compensation
that is included in points and fees may have little bearing on how much
the consumer actually pays for a given transaction. For example, they
noted that two transactions with identical interest rates and up-front
charges may nevertheless have different loan originator compensation
merely because one transaction involved an experienced, more highly
compensated loan officer or because the interest rate in a transaction
was set at the end of the month when a loan officer had qualified for a
higher commission.
Finally, they argued that employee compensation is merely another
overhead cost that already is captured in the interest rate or in
origination charges and has little, if any, bearing on a consumer's
ability to repay a mortgage. They argued that compensation typically is
already captured in points and fees as origination charges and that
including employee loan originator compensation would constitute double
counting.
One industry commenter recommended that, if the Bureau declines to
exclude compensation paid to individual loan originators from points
and fees, the Bureau should consider other methods to simplify the
calculation of loan originator compensation. That commenter suggested
that the Bureau permit a creditor to include as loan originator
compensation a fixed amount based on average costs for loan originator
compensation over a prior period of time. The commenter noted that such
an approach would ease the burden and complexity of tracking
compensation for each loan.
A trade group representing mortgage brokers and many individual
mortgage brokers submitted substantially similar comments urging the
Bureau to include in points and fees only compensation received by the
originating entity for loan origination activities. They argued that
fees associated with creditors or wholesale lenders should not be
included in points and fees. They also maintained that originators
should be permitted to charge various percentages for their loan
origination activities, provided they do not exceed the qualified
mortgage 3 percent cap and that non-bank originators should be
permitted to receive compensation from the consumer, creditor, or a
combination of both, as long as total compensation does not exceed 3
percent of the loan amount.
Many industry commenters argued that, if the Bureau elects not to
exclude loan originator compensation from points and fees altogether,
or to exclude compensation paid to loan originator employees, the
Bureau should adopt the netting rule in proposed alternative 2 of
comment 32(b)(1)(ii)-5.iii. They argued that the additive rule in
proposed alternative 1 of comment 32(b)(1)(ii)-5.iii would result in
significant double counting and could cause many loans to exceed the
qualified mortgage points and fees limits and could cause some loans to
exceed the high-cost mortgage threshold.
One commenter asserted that the inclusion of loan originator
compensation in points and fees, along with limitations on the number
of discount points that may be excluded from points and fees, would
limit the ability of nonprofit organizations to assist consumers in
obtaining affordable mortgages. The commenter argued that the Bureau
should adopt a rule permitting creditors to exclude payments to loan
originators if the costs of such payments are absorbed by creditors and
not passed along to consumers. As an alternative, the commenter
supported comments 32(b)(1)(ii)-5.i and 32(b)(1)(ii)-5.ii, and the
second alternative of comment 32(b)(1)(ii)-5.iii, arguing that these
comments minimize double-counting. The commenter also urged the Bureau
to permit consumers to exclude from points and fees more than two bona
fide discount points, recommending that the Bureau exclude from points
and fees any amounts used to buy down an interest rate that starts at
or below the average 30-year fixed prime offer rate.
Commenters also raised other issues related to loan originator
compensation. Several industry and nonprofit commenters requested
additional guidance regarding the calculation of loan originator
compensation for transactions involving manufactured homes. They noted
that, under Sec. 1026.36(a), as amended by the Bureau's 2013 Loan
Originator Final Rule, manufactured home retailers and their employees
could qualify as loan originators. Industry commenters requested
additional guidance on what activities would cause a manufactured home
retailer and its employees to qualify as loan originators. They stated
that it remains unclear what activities a retailer and its employees
could engage in without qualifying as loan originators and causing
their compensation to be included in points and fees. Industry
commenters also noted that, because the creditor had limited knowledge
of and control over the activities of the retailer's employees, it
would be difficult for the creditor to know whether the retailer and
its employees had engaged in activities that would require their
compensation to be included in points and fees. They therefore urged
the Bureau to adopt a bright-line rule under which compensation would
be included in points and fees only if paid to an employee of a
creditor or a mortgage broker.
Industry commenters also requested that the Bureau clarify what
compensation must be included in points and fees when a manufactured
home retailer and its employees qualify as loan originators. They
argued that it is not clear whether the sales price or the sales
commission in a transaction should be considered, at least in part,
loan originator compensation. They urged the Bureau to clarify that
compensation paid to a retailer and its employees in connection with
the sale of a manufactured home should not be counted as loan
originator compensation.
Finally, a number of industry commenters again advocated excluding
certain other items from points and fees. In particular, several
industry commenters urged the Bureau to exclude from points and fees
real-estate related charges paid to affiliates of the creditor and up-
front charges to recover the costs of loan-level price adjustments
(LLPAs) imposed by the GSEs.
The Final Rule
The Bureau addresses below various issues regarding the inclusion
of loan originator compensation in points and fees. Specifically, the
final rule provides that payments by consumers to mortgage brokers need
not be counted as loan originator compensation where such payments
already have been included in points and fees as part of the finance
charge. In addition, compensation paid by a mortgage broker to its
employees need not be included in points and fees. The Bureau also
concludes that compensation paid by a creditor to its own loan officers
need not be included in points and fees. The Bureau determines,
however, that it should not use its exception authority to alter the
requirement that compensation paid by a creditor to a mortgage broker
is included in points and fees in addition to any origination charges
paid by a consumer to the creditor. Finally, the Bureau provides
further guidance on how to calculate the amount of loan originator
compensation for transactions involving manufactured homes.
Compensation paid by consumers to mortgage brokers. In the 2013 ATR
Proposed Rule, the Bureau stated that the broad statutory language
requiring inclusion of ``all'' compensation paid
[[Page 35450]]
``directly or indirectly'' and ``from any source'' supports counting
compensation in points and fees each time it is paid to a loan
originator. Thus, the Bureau reads the express language of the statute
as providing for the inclusion of loan originator compensation in
points and fees, even if some or all of that compensation may already
have been included in points and fees under other elements of the
definition, and the 2013 ATR Final Rule adopted this statutory
approach.
However, as noted in the 2013 ATR Proposed Rule, the Bureau does
not believe it would be in the interest of consumers or industry to
adhere to this ``additive'' approach when it is clear that the
compensation already has been captured in points and fees. Thus, as
explained below, the Bureau is using its adjustment and exception
authority and its authority to revise the criteria that define a
qualified mortgage to eliminate double counting in such situations.
As noted above, the Bureau proposed in the 2013 ATR Proposed Rule
three different examples (one of which had two alternatives) for
calculating loan originator compensation when such compensation may
already have been included in points and fees. The first example,
proposed comment 32(b)(1)(ii)-5.i, would have provided that a consumer
payment to a mortgage broker that is included in points and fees under
Sec. 1026.32(b)(1)(i) (because it is included in the finance charge)
does not have to be counted in points and fees again under Sec.
1026.32(b)(1)(ii) (as loan originator compensation). The Bureau noted
in the 2013 ATR Proposed Rule that it did not believe that counting a
single payment to a mortgage broker twice would advance the purpose of
the points and fees limits. Few comments addressed this proposed
example, and, with one exception, which is discussed below in
connection with proposed comment 32(b)(1)(ii)-5.ii, those comments
supported the Bureau's proposal that such payments should not be
included in points and fees under Sec. 1026.32(b)(1)(ii) if they
already are included in points and fees under Sec. 1026.32(b)(1)(i).
The Bureau is therefore adopting comment 32(b)(1)(ii)-5.i as
proposed and renumbered as 32(b)(1)(ii)-4.i. The Bureau also is
adopting new Sec. 1026.32(b)(1)(ii)(A) to provide that loan originator
compensation paid by a consumer to a mortgage broker, as defined in
Sec. 1026.36(a)(2), is not included in points and fees if it already
has been included in points and fees because it is included in the
finance charge under Sec. 1026.32(b)(1)(i). The term ``mortgage
broker'' is defined in Sec. 1026.36(a)(2) to mean any loan originator
other than an employee of a creditor. Under this definition, persons
whose primary business is not originating mortgage loans may
nevertheless be mortgage brokers if they qualify as a ``loan
originator'' under Sec. 1026.36(a)(1) and are not employees of a
creditor. The use of the term ``mortgage broker'' in Sec.
1026.32(b)(1)(ii)(A) is appropriate because compensation is excluded
from points and fees under Sec. 1026.32(b)(1)(ii)(A) only if such
compensation already has been included in points and fees under Sec.
1026.32(b)(1)(i).
The Bureau is adopting new Sec. 1026.32(b)(1)(ii)(A) pursuant to
its authority under TILA section 105(a) to make such adjustments and
exceptions for any class of transactions as the Bureau finds necessary
or proper to facilitate compliance with TILA and to effectuate the
purposes of TILA, including the purposes of TILA section 129C of
ensuring that consumers are offered and receive residential mortgage
loans that reasonably reflect their ability to repay the loans. The
Bureau's understanding of this purpose is informed by the findings
related to the purposes of section 129C of ensuring that responsible,
affordable mortgage credit remains available to consumers. The Bureau
believes that using its exception authorities to ensure that a single
payment to a mortgage broker will not be counted twice in points and
fees will facilitate compliance with the points and fees regulatory
regime by allowing creditors to count the payment to a broker once
without requiring further investigation into the mortgage broker's
employee compensation practices, and by making sure that all creditors
apply the provision consistently. It will also effectuate the purposes
of TILA by preventing the points and fees calculation from being
artificially inflated, thereby helping to keep mortgage loans available
and affordable by ensuring that they are subject to the appropriate
regulatory framework with respect to qualified mortgages and the high-
cost mortgage threshold. The Bureau is also invoking its authority
under TILA section 129C(b)(3)(B) to revise, add to, or subtract from
the criteria that define a qualified mortgage consistent with
applicable standards. For the reasons explained above, the Bureau has
determined that it is necessary and proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
consistent with the purposes of TILA section 129C and necessary and
appropriate to effectuate the purposes of this section and to
facilitate compliance with section 129C. With respect to its use of
TILA section 129C(b)(3)(B) here and elsewhere in this section, the
Bureau believes this authority includes adjustments and exceptions to
the definitions of the criteria for qualified mortgages and that it is
consistent with the purpose of facilitating compliance to extend use of
this authority to the points and fees definitions for high-cost
mortgage in order to preserve the consistency of the qualified mortgage
and high-cost mortgage definitions. As noted above, by helping to
ensure that the points and fees calculation is not artificially
inflated by counting a single payment to a mortgage broker twice, the
Bureau is helping to ensure that responsible, affordable mortgage
credit remains available to consumers.
Some consumer advocates argued that the Bureau lacks exception
authority to exclude loan originator compensation from the points and
fees calculation for the high-cost mortgage threshold under HOEPA.\122\
However, while the Bureau's authority under TILA section 105(a) does
not extend to the substantive protections for high-cost mortgages in
TILA section 129, the provision that defines high-cost mortgages,
including the points and fees definitions, is part of TILA section 103.
Thus, although the Bureau cannot use its authority under TILA section
105(a) to alter the substantive protections accorded to high-cost
mortgages under TILA section 129, it can use that authority to adjust
the criteria used to define a high-cost mortgage, including the method
for calculating points and fees, as specified elsewhere in TILA.
---------------------------------------------------------------------------
\122\ The consumer advocate commenters made this argument to
oppose the Bureau's using exception authority to exclude from points
and fees (or use a netting approach for) compensation paid by
creditors to loan originators. However, because this argument would
also apply to the Bureau's use of exception authority to exclude
from points and fees compensation paid by a consumer to a mortgage
broker or by a mortgage broker to its employees, the Bureau
addresses this argument here with respect to this and other uses of
its exception authority in this rulemaking to exclude certain loan
originator compensation from points and fees.
---------------------------------------------------------------------------
Compensation paid by mortgage brokers to their loan originator
employees. The second example, proposed comment 32(b)(1)(ii)-5.ii,
would have provided that compensation paid by a mortgage broker to its
individual loan originator employees is not included in points and fees
under Sec. 1026.32(b)(1)(ii). The Bureau stated in the 2013 ATR
Proposed Rule that the exclusion from points and fees was warranted
because a payment from
[[Page 35451]]
either a consumer or creditor to a mortgage broker firm already is
counted in points and fees, and that it would not be necessary or
appropriate to also include in points and fees any funds that the
mortgage broker firm passes on to its individual loan originator
employees. Again, few commenters addressed this example, and, with one
exception, they supported the Bureau's proposed comment.
As noted above, one creditor argued that it would be unfair to
adopt proposed comments 32(b)(1)(ii)-5.i and 32(b)(1)(ii)-5.ii without
adopting a similar exclusion for compensation paid by a creditor to its
employee loan originators (i.e., its own loan officers). For the
reasons set forth below, the Bureau is using its exception authority to
permit creditors to exclude from points and fees compensation paid to
their own loan officers.
Accordingly, the Bureau is adopting comment 32(b)(1)(ii)-5.ii
substantially as proposed and renumbered as 32(b)(1)(ii)-4.ii, and is
adopting new Sec. 1026.32(b)(1)(ii)(B) to provide that a payment from
a mortgage broker, as defined in Sec. 1026.36(a)(2), to a loan
originator who is an employee of the mortgage broker is not included in
points and fees. As noted above, the term ``mortgage broker'' is
defined in Sec. 1026.36(a)(2) to mean any loan originator other than
an employee of a creditor. Under this definition, persons whose primary
business is not originating mortgage loans may nevertheless be mortgage
brokers if they qualify as a ``loan originator'' under Sec.
1026.36(a)(1) and are not employees of a creditor. To qualify as a loan
originator under Sec. 1026.36(a)(1), a person must engage in loan
origination activities in expectation of compensation. The use of the
term ``mortgage broker'' in Sec. 1026.32(b)(1)(ii)(B) is appropriate
because, as discussed above, compensation that a mortgage broker
receives from a consumer or creditor is included in points and fees,
and this compensation provides the funds for any compensation that is
paid by the mortgage broker to its employee.
TILA section 103(bb)(4)(B) provides that compensation paid by a
``consumer or creditor'' to a loan originator is included in points and
fees. The Bureau notes that a mortgage broker firm is neither a
consumer nor a creditor, so the statute could plausibly be read so that
points and fees would not include payments from a mortgage broker firm
to loan originators who work for the firm. However, TILA section
103(bb)(4)(B) provides that compensation must be included in points and
fees if it is paid ``directly or indirectly'' by a consumer or creditor
``from any source.'' Because compensation by a mortgage broker firm to
its employees is funded from consumer or creditor payments, such
compensation could be interpreted as being paid indirectly by a
consumer or creditor.
Given the ambiguity, the Bureau is also invoking its authority
under TILA section 105(a) to make such adjustments and exceptions for a
class of transactions as the Bureau finds necessary or proper to
facilitate compliance with TILA and to effectuate the purposes of TILA,
including the purposes of TILA section 129C of ensuring that consumers
are offered and receive residential mortgage loans that reasonably
reflect their ability to repay the loans. The Bureau's understanding of
this purpose is informed by the findings related to the purposes of
section 129C of ensuring that responsible, affordable mortgage credit
remains available to consumers. Because payments by mortgage brokers to
their employees already have been captured in the points and fees
calculation, excluding such payments will facilitate compliance with
the points and fees regulatory regime by eliminating the need for
further investigation into the mortgage brokers' employee compensation
practices, and by making sure that all creditors apply the provision
consistently. It will also effectuate the purposes of TILA by
preventing the points and fees calculation from being artificially
inflated, thereby helping to keep mortgage loans available and
affordable by ensuring that they are subject to the appropriate
regulatory framework with respect to qualified mortgages and the high-
cost mortgage threshold. The Bureau is also invoking its authority
under TILA section 129C(b)(3)(B) to revise, add to, or subtract from
the criteria that define a qualified mortgage consistent with
applicable standards. For the reasons explained above, the Bureau has
determined that it is necessary and proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
consistent with the purposes of TILA section 129C and necessary and
appropriate to effectuate the purposes of this section and to
facilitate compliance with section 129C.
Compensation paid by creditors. As noted in the 2013 ATR Proposed
Rule, it is significantly more complicated to devise a rule for
calculating loan originator compensation when the consumer pays some
up-front charges to the creditor and the creditor pays loan originator
compensation to either its own loan officer or to a mortgage broker.
That is because the creditor can fund the compensation in two different
ways: either through origination charges paid by the consumer (which
would be included in points and fees) or through the interest rate
(which would not be included in points and fees). There is no
practicable method for the Bureau to determine by rule the extent to
which compensation paid by the creditor was funded through origination
charges and, thereby, already captured in the points and fees
calculation. The Bureau therefore indicated that it believed that
bright-line rules would be necessary to facilitate compliance.
As discussed below, the Bureau concludes that it is appropriate to
apply different requirements to loan originator compensation paid by
the creditor to its own loan officers and to compensation paid by the
creditor to other loan originators. Specifically, the Bureau is using
its exception authority to exclude from points and fees compensation
paid by the creditor to its own loan officers. Compensation paid by the
creditor to other loan originators is included in points and fees, and
such compensation must be counted in addition to any up-front charges
that are included in points and fees.
Compensation paid by creditors to their own loan officers. In
response to the Board's 2011 ATR Proposal, many creditors and
organizations representing creditors urged the Bureau to exclude all
compensation paid to individual loan originators. Among other things,
these commenters had argued that compensation paid to loan originators
already is included in the cost of loan, either in the interest rate or
in origination charges; that having to track individual loan
originators' compensation and attribute it to specific transactions
would impose a significant compliance burden; and that including
compensation paid to individual loan originators would cause anomalous
results, with otherwise identical loans having different amounts of
loan originator compensation included in points and fees because of the
timing of the loan or the identity of the loan originator. See 78 FR
6433-34 (Jan. 30, 2013).
In the 2013 ATR Final Rule, the Bureau acknowledged the concerns
about including in points and fees compensation paid to individual loan
originators. Nevertheless, the Bureau declined to exclude such
compensation, noting that the statutory language provided that points
and fees include compensation paid to ``mortgage originators,'' which
is defined to
[[Page 35452]]
include individual loan officers. Id. at 6436. The Bureau also noted
that excluding from points and fees compensation paid by creditors to
their loan officers would exacerbate the differential treatment between
the retail and wholesale channels, as creditors in retail transactions
would not be required to include any loan originator compensation in
points and fees, while creditors in wholesale transactions would be
required to include in points and fees compensation paid by either
consumers or creditors to mortgage brokers. Id.
The Bureau notes that, in responding to the Board's 2011 ATR
Proposal, commenters did not have the benefit of considering how
including loan originator compensation in points and fees would
interact with the rules regarding loan originator compensation that
were proposed by the Bureau in the 2012 Loan Originator Proposal and
finalized in the 2013 Loan Originator Final Rule. In response to the
2013 ATR Proposed Rule, the Bureau received detailed comments analyzing
whether, in light of the protections in the 2013 Loan Originator Final
Rule, it would be appropriate to include various types of loan
originator compensation in points and fees. The Bureau also received
more extensive explanations from creditors and organizations
representing creditors about the difficulties of calculating
compensation paid by creditors to their own loan officers.
After carefully considering the comments received in response to
the 2013 ATR Proposed Rule, the Bureau believes it is appropriate to
reconsider whether compensation paid to individual loan originators
should be excluded from points and fees. As noted above, the Bureau
already has determined that compensation paid by a mortgage broker to
its loan originator employees need not be included in points and fees.
The Bureau concludes that it should use its exception authority to
exclude the compensation that creditors pay to their loan officers from
points and fees as well. As discussed in more detail below, the Bureau
determines that including compensation paid by creditors to their loan
officers in points and fees at this time not only would impose a severe
compliance burden on the industry, but also would lead to distortions
in the market for mortgage loans and produce anomalous results for
consumers. The Bureau also believes that there are structural and
operational reasons why not including in points and fees compensation
paid to retail loan officers poses a limited risk of harm to consumers.
As a result, the Bureau believes that including such compensation in
points and fees would not effectuate the purposes of the statute and in
fact would frustrate efforts to implement and comply with the points
and fees limits and with the broader statutory and regulatory regime
for qualified mortgages and high-cost mortgages that must be
implemented by January 2014. The Bureau has decided at this time to
exclude compensation paid by creditors to their own loan officers. The
Bureau will continue to gather data to determine the need for and the
best method for counting compensation paid by creditors to their loan
officers consistent with the purpose of the statute. The Bureau will
closely monitor the market as it considers this issue to determine if
further action is warranted.
As indicated above, several factors support this conclusion.\123\
Attributing overall individual loan officer compensation to specific
transactions is an extraordinarily difficult task. The Bureau
considered these difficulties in the 2013 ATR Final Rule, when it
revised Sec. 1026.32(b)(1)(ii) to provide that creditors must include
in points and fees loan originator compensation that can be attributed
to that transaction at the time the interest rate is set. The
requirement that the compensation is included only if it can be
attributed to the transaction at the time the interest rate is set was
intended to permit creditors to calculate compensation sufficiently
early in the process so that they could know well before consummation
whether a loan would be a qualified mortgage or a high-cost mortgage.
See 78 FR 6437 (Jan. 30, 2013). This calculation is straightforward for
compensation paid by creditors to mortgage brokers: For each
transaction, creditors typically pay a commission to mortgage brokers
pursuant to a pre-existing contract between the creditor and the
broker, and that commission is known at the time the interest rate is
set. Furthermore, because the commission structure is known in advance
it can be built into the price of the loan, either through up-front
charges or through the interest rate.
---------------------------------------------------------------------------
\123\ Some creditors and organizations representing creditors
had argued that it would be appropriate to exclude from points and
fees compensation paid by creditors to their loan officers because
compensation paid to loan originator employees of a mortgage
brokerage firm would also be excluded. As noted above, compensation
paid to employees of mortgage brokerage firms is excluded from
points and fees because such compensation already is captured in
points and fees in the payments by consumers or creditors to the
mortgage brokerage firms. By contrast, as noted above, compensation
paid to a retail loan officer may be funded either through
origination charges or through the interest rate, so there is no
guarantee that such compensation already has been included in points
and fees. As discussed below, however, the Bureau concludes that
additional factors justify excluding from points and fees
compensation paid by creditors to their own loan officers.
---------------------------------------------------------------------------
The calculation of loan originator compensation is significantly
more complicated for retail loan officers.\124\ As noted by industry
commenters, compensation for retail loan officers often is not
determined until after the end of the month or some other, longer time
period (such as a quarter) and in many cases is based upon the number
or dollar volume of the transactions that have been consummated during
the preceding month or other time period. However, for purposes of
determining whether a particular transaction is a qualified mortgage
(or a high-cost mortgage), the calculation of points and fees (and thus
loan originator compensation) must be performed prior to consummation.
Thus, to calculate loan originator compensation for retail loan
officers for purposes of applying the qualified mortgage and high-cost
mortgage thresholds, creditors would have to determine, at the time the
interest rate is set, what compensation a retail loan officer would be
entitled to receive if a particular transaction were consummated. As
noted above, this calculation often would be based on the number or
dollar amount of transactions already consummated during the time
period in which compensation is set (e.g., the month or quarter or
other time period). This calculation may produce an artificial measure
of compensation because, for the transaction for which compensation is
being calculated, the date the interest rate is set may fall in a
different time period than the date the transaction is consummated and
actual compensation is set.\125\ If the interest rate were to be reset
(if, for example, a rate lock expires or underwriting identifies risk
factors which leads to an increase in the interest rate), the
compensation would have to be recalculated.
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\124\ The calculation of compensation paid by mortgage brokerage
firms to their individual loan originator employees could be
similarly complicated. However, as discussed above, the Bureau is
excluding such compensation from points and fees because such
compensation already has been captured in the points and fees
calculation.
\125\ The Bureau recognizes that a more accurate measure of
compensation could be calculated at the time of consummation.
However, as noted in the 2013 ATR Final Rule, creditors need to know
in advance of consummation whether a transaction will be a qualified
mortgage or a high-cost mortgage and therefore need to be able to
calculate loan originator compensation, and points and fees
generally, prior to consummation. Thus, the Bureau does not believe
that is appropriate to require that loan originator compensation be
calculated at consummation.
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[[Page 35453]]
The Bureau understands from industry comments that creditors'
existing systems generally do not track compensation for each loan
officer for each specific transaction. Thus, creditors would have to
develop new systems or reprogram existing systems to track and
attribute compensation for each transaction. Depending on the
compensation structure, these systems would have to be dynamic so that
they could track at the time the interest rate is set what compensation
a loan officer would be entitled to receive if a given transaction were
consummated.\126\ Further, the systems would have to feed into the
creditors' origination systems so that the points-and-fee calculation
could be made. The Bureau is also concerned that creditors may have
difficulty in implementing these systems by January 2014, when the ATR
Final Rule becomes effective.
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\126\ Moreover, the Bureau understands that some consumers
prefer to float the interest rate and other consumers lock their
interest rate but have the right to relock one time at a lower rate.
Thus, in these circumstances, creditors would have to calculate (or
recalculate) loan originator compensation later in the process.
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In addition, the Bureau is concerned that requiring creditors to
calculate loan originator compensation for their loan officers may
create uncertainty about the points and fees calculations and thus
about whether loans satisfy the standards for qualified mortgages and
remain below the threshold for high-cost mortgages. As noted above, if
compensation paid to creditors' loan officers were included in points
and fees, creditors would have to calculate at the time the interest
rate is set what compensation a loan officer would be entitled to
receive in the future. This compensation often would depend on the
timing of other loans (i.e., how many loans have been consummated or
the dollar value of loans consummated by the loan officer at the time
the interest rate is set), introducing complexity and potential for
errors into the calculation. Moreover, counting retail compensation in
points and fees would introduce significant uncertainty into
transactions in which the interest rate is not locked well in advance
of consummation. For instance, if the consumer elected at the time of
application to allow the interest rate to float, the interest rate may
not be set until several days before consummation. In such cases, the
creditor might be uncertain as to whether the transaction was a
qualified mortgage or a high-cost mortgage until that time. Similarly,
even if the interest rate is locked in early in the process, it may
subsequently be re-set, either because the rate lock expires or because
the terms of the transaction are renegotiated after underwriting. In
those cases, a transaction that was expected to be a qualified mortgage
may lose that status because the loan originator compensation is
recalculated at the time the interest rate is finally set. The
uncertainty of calculating compensation highlights the difficulty
creditors would face in complying with a rule that includes
compensation to the creditors' employees in points and fees, and the
Bureau is concerned that this uncertainty could be disruptive to the
market.
The burden and uncertainty of requiring creditors to calculate loan
originator compensation for their loan officers with respect to each
individual transaction as of the time the interest rate is set are of
particular concern because it does not appear that this calculation
would further the purposes of the statute. The Bureau believes that
Congress expanded the scope of loan originator compensation to be
included in points and fees because of concerns that a loan with high
loan originator compensation is likely to be more costly and may pose
greater risk for consumers. However, for the reasons discussed below,
the Bureau does not believe that calculating at the time the interest
rate is set the compensation to be paid by creditors to their own loan
officers is likely to be an accurate measure of the actual compensation
the loan officer will receive if the loan is consummated or of the
costs passed along to consumers.
First, the compensation as calculated may be inaccurate and
incomplete. As noted above, compensation would be calculated at the
time the interest rate is set, so the actual compensation that a loan
officer would receive may be different from the amount that would be
included in points and fees. Moreover, various types of compensation,
such as salary and bonuses for factors such as loan performance and
customer satisfaction, cannot be attributed to specific transactions
and therefore would not be included in loan originator compensation for
calculating points and fees. As a result, the calculation would produce
an incomplete measure of compensation, and creditors would have
substantial flexibility to restructure their compensation systems to
reduce the amount of loan originator compensation that they would have
to include in points and fees. To the extent that increasing numbers of
creditors were to restructure compensation to avoid the impact of the
rules, the inclusion of loan originator compensation in points and fees
would become even less meaningful or consistent over time.
Second, because of the limitations on calculating compensation,
counting retail loan originator compensation in points and fees would
produce arbitrary outcomes because the amount of compensation that
would be attributed to a particular transaction often will be unrelated
to the costs or risks borne by the consumer. For example, two retail
transactions with identical interest rates and up-front charges could
have different loan originator compensation, and therefore different
points and fees, simply because a senior, more highly compensated loan
officer was involved in one of the transactions. Similarly, two
transactions involving the same loan officer could have different loan
originator compensation amounts depending on whether the interest rates
are set at the end of the month, when the loan officer might qualify
for a higher commission for meeting a monthly quota for loans closed,
rather than at the beginning of the month, when such a quota is
unlikely to have been met.\127\ By contrast, the costs to the consumer,
as reflected in origination charges and the interest rate, are not
likely to vary based on the seniority of the loan originator handling
the transaction or the loan officer's satisfaction of the creditor's
monthly quota for obtaining a higher commission.
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\127\ Another arbitrary result could occur when a consumer
relocks at a lower interest rate. At the time of the initial rate
set, the creditor could calculate loan originator compensation and
determine that points and fees do not exceed the qualified mortgage
points and fees limit or the high-cost mortgage threshold. However,
after the rate is reset, the creditor would have to recalculate loan
originator compensation, and, if the loan originator has satisfied a
creditor's monthly quota for obtaining a higher commission, it is
possible that the higher loan originator compensation could cause
the points and fees to exceed the qualified mortgage limits (or the
high-cost mortgage threshold).
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The Bureau is also concerned that including in points and fees
compensation paid by a creditor to its own loan officer would place
additional limits on consumers' ability to structure their preferred
combination of up-front charges and interest rate. The points and fees
limits themselves restrict consumers' ability to pay up-front charges
and still obtain a qualified mortgage (or avoid a high-cost mortgage).
However, these limits would permit even less flexibility in the retail
channel because consumers cannot pay retail loan officers directly. For
example, assume a consumer is seeking a $100,000 loan and wants to pay
$2,500 in up-front charges at closing rather than paying those costs
through a higher
[[Page 35454]]
interest rate. Assume that the up-front charges would all be included
in points and fees and that the transaction is being originated through
a creditor's loan officer, whose compensation is $1,500. Under an
additive approach, if the consumer pays $2,500 in origination charges
to the creditor and the creditor pays $1,500 to its loan officer, the
points and fees would be $4,000 and the loan could not be a qualified
mortgage. In contrast with a transaction originated through a mortgage
broker, the consumer would not have the option of paying $1,500
directly to the loan officer. The $1,500 in loan originator
compensation would count toward the points and fees limits, so the
consumer therefore would not be able to pay all of the $2,500 up-front
without exceeding the points and fees limit for a qualified
mortgage.\128\ The consumer would have to pay other costs through a
higher interest rate and the resulting higher monthly payments. Thus,
under an additive rule, consumers in the retail channel would have less
flexibility to pay up-front charges to achieve a lower interest rate
and have the transaction remain below the points and fees limits for
qualified mortgages and below the threshold for high-cost mortgages.
For certain consumers, such as those who do not qualify for a higher
interest rate, the impact could affect their access to credit.
Excluding from points and fees loan originator compensation paid by a
creditor to its loan officers would address this concern.
---------------------------------------------------------------------------
\128\ If the consumer's payments satisfy the standards of Sec.
1026.32(b)(1)(i)(E) or (F), the up-front fees could be excluded from
points and fees as bona fide discount points.
---------------------------------------------------------------------------
The Bureau recognizes that creditors may earn greater profits when
consumers receive more costly loans and that, in the absence of
regulatory protections, creditors could adopt compensation arrangements
that create incentives for their loan officers to originate loans that
are more costly for consumers. Including loan officer compensation in
points and fees would have imposed some limits on the ability of
creditors to offer higher compensation to its loan officers. The Bureau
believes, however, that the prohibition on terms-based compensation in
Sec. 1026.36(d)(1) will provide substantial protection against
problematic loan originator compensation practices in the retail
channel. The Bureau concludes that these protections will significantly
diminish the risk of consumer injury from excluding from points and
fees compensation paid by creditors to their retail loan officers. The
prohibition in Sec. 1026.36(d)(1) prevents a creditor from paying
higher compensation to its loan officer for a transaction that, for
example, has a higher interest rate or higher up-front charges.
Moreover, the Bureau agrees with consumer advocate commenters and
comments by the FDIC and HUD and by the OCC that argue that retail loan
officers would have greater difficulty than mortgage brokers in trying
to maneuver around the margins of Sec. 1026.36(d)(1). Unlike a
mortgage broker, a retail loan officer works with only one creditor and
therefore cannot choose among different creditors paying different
compensation in deciding which loans to offer a consumer.
As noted above, some consumer advocates argued that creditors would
still be able to structure loan originator compensation to create
incentives for their loan officers to direct consumers toward higher-
cost loans. For example, they noted that the 2013 Loan Originator Final
Rule adopted Sec. 1026.36(d)(1)(iii) and (iv), which permit creditors
to offer, under certain conditions, deferred compensation plans and
non-deferred profits-based compensation to their loan officers that
otherwise would violate the prohibition on term-based compensation.
They suggested that such arrangements could be structured to encourage
loan officers to induce consumers to accept more costly loans. The
Bureau is sensitive to the risk that unscrupulous creditors may look
for gaps and loopholes in regulations; however, the Bureau notes that
the referenced provisions of Sec. 1026.36(d)(1) were carefully crafted
to attenuate any incentives for directing consumers to higher-cost
loans to increase compensation. The Bureau recognizes that creditors
have significant incentives to work around the margins of the rules
and, as noted above, is committed to monitoring compensation practices
closely for problematic developments that may require further action.
In light of these concerns about the significant compliance burden
and the questionable accuracy of the calculation for retail loan
officer compensation, the Bureau believes it is appropriate at this
time to exclude such compensation from points and fees. The Bureau will
continue to monitor and gather information about loan originator
compensation practices to determine if there are methods that are
practicable and consistent with the purposes of the statute for
including in points and fees loan originator compensation paid by
creditors to their loan officers. As part of the Bureau's ongoing
monitoring of the mortgage market and for the purposes of the Dodd-
Frank Act section 1022(d) five-year review, the Bureau will assess how
the exclusion from points and fees of compensation paid by creditors to
their loan officers is affecting consumers. If the Bureau were to find
that the exclusion for retail loan officer compensation was harming
consumers, the Bureau could issue a new proposal to narrow or eliminate
the exclusion. The Bureau is aware that problematic loan originator
compensation practices occurred in the past in the retail channel and
that questionable practices may occur again. The Bureau will carefully
monitor the marketplace to respond to any such abusive practices,
including through the use of its supervisory and enforcement authority.
The Bureau stated in the 2013 ATR Final Rule that it was reluctant
to exclude from points and fees compensation paid to individual loan
originators because it would treat the retail and wholesale channels
differently. As discussed above, however, after considering the
information received in response to the 2013 ATR Proposed Rule, the
Bureau believes there are significant difficulties in calculating loan
originator compensation in the retail channel. By contrast, in
transactions involving mortgage brokers, there is little compliance
burden in calculating loan originator compensation, and compensation
typically can be calculated with relative ease and accuracy. Moreover,
the Bureau believes that there is less risk of consumer injury from
excluding loan originator compensation from points and fees in the
retail channel. The Bureau is concerned that that mortgage brokers may
have the flexibility to structure their business model to evade the
prohibitions of Sec. 1026.36(d)(1) and Sec. 1026.36(e) and that the
risk of consumer injury from problematic loan originator compensation
practices is therefore higher in the wholesale channel than in the
retail channel. The Bureau is also concerned that unscrupulous
creditors seeking to originate more costly loans could use the
wholesale channel to expand their operations more rapidly and with
limited investment. Historical evidence also suggests that the risks of
consumer injury may be greater in the wholesale channel. As noted
above, some consumer advocates cited evidence that, particularly in the
subprime market, loans originated with mortgage brokers were on average
more expensive and more likely to default than loans
[[Page 35455]]
originated in the retail channel.\129\ Thus, for the reasons discussed
above, the Bureau believes that it is necessary and proper to use its
exception authority to exclude from points and fees compensation paid
by creditors to their loan officers.
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\129\ See, e.g., Keith Ernst, Debbie Bocian, Wei Li, Ctr. for
Responsible Lending, Steered Wrong: Brokers, Borrowers, and Subprime
Loans (2008); Antje Berndt, Burton Hollifield, and Patrik Sandas,
What Broker Charges Reveal About Mortgage Credit Risk, (2012); Susan
E. Woodward, A Study of Closing Costs for FHA Mortgages available at
http://www.huduser.org/Publications/pdf/FHA_closing_cost.pdf. The
Bureau's review of studies generally supports this view, though the
evidence is not unequivocal. Wei Jiang, Ashlyn Aiko Nelson, and
Edward Vytacil, Liar's Loan? Effects of Origination Channel and
Information Falsification on Mortgage Delinquency, SSRN working
paper 142162 (2009) use a dataset from one bank with approximately
700,000 loans originated between 2004 and 2008. They report that
``the Broker subsamples have delinquency probabilities that are 10-
14 percentage points (or more than 50%) higher than the Bank
subsamples, a manifestation of the misalignment of incentives for
brokers who issue loans on the bank's behalf for commissions but do
not bear the long-term consequences of low-quality loans.'' They
also show that loan pricing does not compensate for the loan
performance differences. Michael LaCour-Little, The Pricing of
Mortgages by Brokers: An Agency Problem?, J. of Real Estate
Research, 31(2), 235-263 (2009) showcases the agency problems in the
brokerage channel, and provides a deep literature review. This
paper's results ``suggest loans originated by brokers cost borrowers
about 20 basis points more, on average, than retail loans and that
this premium is higher for lower-income and lower credit score
borrowers.'' In contrast, Amany El-Anshany, Gregory Elliehausen, and
Yoshiaki Shimazaki, Mortgage Brokers and the Subprime Mortgage
Market, Proceedings, Federal Reserve Bank of Chicago (2005), find
that consumers buying through brokers paid less for their loans, by
a similar magnitude as in the LaCour-Little paper.
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The Bureau considered options other than excluding from points and
fees compensation paid by a creditor to its loan officers. The Bureau
considered adopting a netting rule for compensation paid by a creditor
to its loan officers. This approach would have addressed the concern
that an additive methodology would unduly restrict a consumers' ability
to structure their preferred combination of up-front charges and
interest rate. However, a netting rule would not alleviate the
compliance burden or address the other implementation concerns
associated with including in points and fees compensation paid by
creditors to their loan officers. One industry commenter recommended
that, if the Bureau declines to exclude compensation paid to retail
loan officers from points and fees, it should consider permitting
creditors to include in points and fees an average measure of loan
originator compensation over a prior period of time as an alternative
to calculating compensation on a transaction-by-transaction basis. The
Bureau considered such an approach as an alternative for alleviating
the compliance burden and eliminating some of the anomalies between
transactions. However, the Bureau has concerns about whether this
approach is consistent with the statutory purpose of identifying
transactions that, because of high up-front charges and high loan
originator compensation, should not be eligible for the presumption of
compliance of a qualified mortgage or that should receive the
protections for high-cost mortgages. Moreover, permitting creditors to
employ an average measure of loan originator compensation would raise
significant issues. For example, the Bureau would have to determine
what compensation would be included in the measure of average
compensation, the period for which the average would be calculated, and
whether the average would be for an entire firm, for a business unit,
for a limited geographic area, or even for individual loan originators.
In light of the limited time remaining before the effective date of the
rules, the Bureau does not believe it would be practicable to attempt
to implement this alternative.
To implement the exclusion from points and fees of compensation
paid by a creditor to its loan officers, the Bureau is adding new Sec.
1026.32(b)(1)(ii)(C), which excludes compensation paid by a creditor to
a loan originator that is an employee of the creditor. The Bureau also
is adding language to comment 32(b)(1)(ii)-1 to clarify that
compensation paid by a creditor to a loan originator that is an
employee of the creditor is not included in points and fees.
As the Bureau noted in the 2013 ATR Final Rule, the Dodd-Frank Act
provides that points and fees include all compensation paid by a
consumer or creditor to a ``mortgage originator.'' In addition, as
noted above, the Bureau reads the statutory language as requiring that
loan originator compensation be included in points and fees in addition
to any other items that are included in points and fees, even if the
loan originator compensation may have been funded through charges that
already are included in points and fees. Moreover the Bureau reads the
statutory provision on compensation as meaning that compensation is
added as it flows downstream from one party to another so that it is
counted each time that it reached a loan originator, whatever its
previous source. Given this statutory language, the Bureau believes
that, to exclude from points and fees compensation paid by a creditor
to its loan officers, the Bureau must use its exception authority. As
provided in new Sec. 1026.32(b)(1)(ii)(C), the Bureau is excluding
compensation paid by creditors to their loan officers pursuant to its
authority under TILA section 105(a) to make such adjustments and
exceptions for a class of transactions as the Bureau finds necessary or
proper to facilitate compliance with TILA and its purposes and to
effectuate the purposes of TILA, including the purposes of TILA section
129C of ensuring that consumers are offered and receive residential
mortgage loans that reasonably reflect their ability to repay the
loans. The Bureau's understanding of this purpose is informed by the
findings related to the purposes of section 129C of ensuring that
responsible, affordable mortgage credit remains available to consumers.
The Bureau has determined that excluding compensation paid to retail
loan officers will facilitate compliance with TILA and these purposes
by helping to reduce the burden and uncertainty of calculating points
and fees in the retail context and by helping to assure that, as of the
effective date of the rule, creditors will have systems in place that
are capable of making this calculation. At the same time, the Bureau
has determined that excluding compensation paid to retail loan officers
will effectuate the purposes of TILA by helping to ensure that loans
are not arbitrarily precluded from satisfying the criteria for a
qualified mortgage or arbitrarily designated as high-cost mortgages
because of potential anomalies in how loan originator compensation
would be calculated for the points and fees limits. Thus, the exclusion
will help ensure the availability of reasonably repayable credit, given
that the points and fees threshold will continue to provide limits,
apart from compensation not included in finance charge, on costs
related to loans.
The Bureau is also relying upon its authority under TILA section
129C(b)(3)(B) to revise, add to, or subtract from the criteria that
define a qualified mortgage consistent with applicable standards. For
the reasons explained above, the Bureau has determined that it is
necessary and proper to ensure that responsible, affordable mortgage
credit remains available to consumers in a manner consistent with the
purposes of TILA section 129C and necessary and appropriate to
effectuate the purposes of this section and to facilitate compliance
with section 129C.
Certain commentary adopted in the 2013 ATR Final Rule is no longer
necessary in light of the Bureau's decisions discussed above. Comment
32(b)(1)(ii)-2 describes certain types of
[[Page 35456]]
compensation that would and would not be included in points and fees
for individual loan originators. Portions of comment 32(b)(1)(ii)-3
discuss how the timing affects what compensation paid to individual
loan originators must be included in points and fees. Comment
32(b)(1)(ii)-4 provides examples for calculating compensation for
individual loan originators. Because compensation paid by mortgage
brokers to their individual loan originator employees and compensation
paid by creditors to their loan officers is no longer included in
points and fees, the guidance for calculating compensation for
individual loan originators is no longer necessary. Accordingly, the
Bureau is deleting portions of comments 32(b)(1)(ii)-2.ii and -3, and,
the entirety of comment 32(b)(1)(ii)-4.
Compensation paid by creditors to mortgage brokers. In response to
the Board's 2011 ATR Proposal, many industry commenters urged the
Bureau to exclude loan originator compensation from points and fees
altogether. See 78 FR 6433 (Jan. 30, 2013). Among other things,
industry commenters had argued that compensation paid to loan
originators already is included in the cost of the loan and has little,
if any bearing on a consumer's ability to repay a mortgage loan. They
also argued that other statutory provisions and rules already provide
adequate protection from abusive loan originator compensation practices
and that it therefore is unnecessary to include loan originator
compensation in points and fees. Finally, they argued that including
loan originator compensation in points and fees would cause many loans
to exceed the qualified mortgage points and fees limits, which would
result in an increase in the cost of credit and diminished access to
credit.
In the 2013 ATR Final Rule, the Bureau acknowledged the concerns
about including loan originator compensation in points and fees.
However, the Bureau noted that, in light of the express statutory
language and Congress's evident concern with increasing consumer
protections in connection with loan originator compensation practices,
the Bureau did not believe it appropriate to use its exception
authority to exclude loan originator compensation entirely from points
and fees. In response to the 2013 ATR Proposed Rule, many industry
commenters, including mortgage brokers and their representatives and
some creditors and their representatives, again urged the Bureau to
exclude loan originator compensation from points and fees altogether
(or to at least exclude from points and fees all compensation paid by
creditors to loan originators). Repeating many of the same arguments
made in response to the Board's 2011 ATR Proposal, these commenters
argued that loan originator compensation already is included in the
cost of the loan and has little or no effect on consumers' ability to
repay the loan. They claimed that other protections adopted by the
Bureau and the Board adequately protect consumers against harmful loan
originator compensation practices and that it therefore is unnecessary
to include loan originator compensation in points and fees. Finally,
they argued that including loan originator compensation in points and
fees would cause many loans to exceed the qualified mortgage points and
fees cap or the high-cost mortgage threshold and that, as a result,
many loans would not be made, including in particular smaller loans.
The Bureau does not believe that it is consistent with the
standards for its use of exception and adjustment authority to exclude
from points and fees compensation paid by creditors to loan originators
that are not employees of creditors. As noted above, in excluding from
points and fees compensation paid by creditors to their loan originator
employees, the Bureau invoked its exception and adjustment authority to
facilitate compliance and, generally speaking, to meet purposes of
ensuring that credit is available to consumers on reasonably repayable
terms. These factors do not support excluding compensation paid by
creditors to loan originators not employed by creditors. The compliance
burden of calculating compensation paid by creditors to loan
originators other than their own employees is minimal and does not
provide a basis for exclusion based on a rationale related to
facilitating compliance. As noted above, this calculation is
straightforward for compensation paid by creditors to mortgage brokers:
For each transaction, creditors typically pay a commission to mortgage
brokers pursuant to a pre-existing contract between the creditor and
the broker, and that commission is known at the time the interest rate
is set.\130\ Moreover, as discussed below, the Bureau believes that
there remain some risks of consumer injury from business models in
which mortgage brokers attempt to steer consumers to more costly
transactions. Including in points and fees compensation paid by
creditors to mortgage brokers should help reduce those risks.
Accordingly, the Bureau declines to use its exception authority to
exclude such compensation from points and fees.
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\130\ As discussed above, the compliance burden of calculating
compensation paid by creditors to their own loan officers is
substantial and offsets the limited potential consumer protection
benefits of including such compensation in points and fees.
---------------------------------------------------------------------------
The Bureau also does not believe it is appropriate to use its
exception authority to exclude loan originator compensation payments
from creditors to mortgage brokers in certain types of transactions. As
noted above, one industry commenter urged the Bureau to consider
whether compensation paid by creditors to mortgage brokers should be
included in points and fees only in subprime transactions. The
commenter did not provide data or other evidence to support this
approach. In addition, subprime transactions already have less
flexibility than prime transactions under the points and fees limits
because bona fide discount points may not excluded from points and fees
for transactions with interest rates greater than 2 percentage points
above APOR, see Sec. 1026.32(b)(1)(i)(E) and (F), and the Bureau is
concerned about widening the disparity in treatment under the points
and fees limits. Accordingly, the Bureau does not believe it is
appropriate to use its exception authority to create different
requirements for loan originator compensation in the prime and subprime
markets. Another commenter requested that, to avoid impairing
affordable lending programs offered by nonprofit organizations, the
Bureau exclude such payments when the creditor absorbs the costs of the
payments and does not pass along the costs to consumers.\131\ The
Bureau believes it would be difficult, if not impossible, to determine
when a creditor was in fact not passing along loan origination costs to
consumers and that any exemption, even if well-intentioned, could be
susceptible to abuse.
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\131\ As discussed below, the Bureau is adopting Sec.
1026.43(a)(3)(v), which exempts certain creditors, including certain
nonprofit creditors, from the ability-to-repay requirements.
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In the 2013 ATR Proposed Rule, the Bureau proposed two
alternatives--an ``additive'' approach and a ``netting'' approach-- for
calculating compensation. As discussed above, proposed alternative 1 of
comment 32(b)(1)(ii)-5.iii would have adopted an additive approach in
which loan originator compensation would have been included in points
and fees in addition to any charges paid by the consumer to the
creditor. Proposed alternative 2 of comment 32(b)(1)(ii)-5.iii would
have permitted creditors to net origination charges against loan
originator compensation to calculate the
[[Page 35457]]
amount of loan originator compensation that is included in points and
fees. As discussed above, a creditor's payments to a loan originator
may be funded by up-front charges to the consumer, through the interest
rate, or through some combination. The up-front charges to the consumer
would be captured in points and fees, but compensation funded through
the interest rate would not be captured. Thus, when a consumer pays up-
front charges, it is not clear whether a creditor's payments to a loan
originator are captured in such points and fees.\132\
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\132\ It is doubtful that Congress contemplated this issue
because, as noted above, absent the Bureau's use of exception
authority, TILA section 129B(c)(2)(B)(ii) would have prohibited a
creditor from imposing origination fees or charges if the creditor
were compensating a loan originator.
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As noted above, the Bureau reads the statutory language as
requiring that loan originator compensation be included in points and
fees in addition to any other items that are included in points and
fees, even if the loan originator compensation may have been funded
through charges that already are included in points and fees. Moreover
the Bureau reads the statutory provision on compensation as meaning
that compensation is added as it flows downstream from one party to
another so that it is counted each time that it reached a loan
originator, whatever its previous source. After carefully considering
the comments, the Bureau has determined that, for calculating
compensation paid by creditors to mortgage brokers, it is not necessary
or proper to revise the additive approach prescribed by the statute and
adopted in the 2013 ATR Final Rule.
For creditor payments to loan originators not employed by
creditors, calculating loan originator compensation under an additive
approach does not impose a significant compliance burden. As noted
above, this calculation is straightforward for compensation paid by
creditors to mortgage brokers: For each transaction, creditors
typically pay a commission to mortgage brokers pursuant to a pre-
existing contract between the creditor and the broker, and that
commission is known at the time the interest rate is set.
For transactions in the wholesale channel, brokers and creditors
can obviate double counting concerns by having consumers pay brokers
directly.\133\ Under new comment 32(b)(1)(ii)-5.i, the consumer's
payment to the mortgage broker would be included in points and fees
only one time. For example, assume a consumer is seeking a $100,000
loan and wants to pay $2,500 in up-front charges at closing rather than
paying those costs through a higher interest rate. The transaction is
being originated through a mortgage broker firm, which charges $1,500.
Under an additive approach, if the consumer pays $2,500 in origination
charges to the creditor and the creditor pays $1,500 to the mortgage
broker firm, the points and fees would be $4,000 and the loan could not
be a qualified mortgage. However, if the consumer pays $1,500 directly
to the mortgage broker firm and then pays $1,000 in origination charges
to the creditor, then the points and fees would be $2,500 and would not
prevent the loan from being a qualified mortgage. Moreover, if the
consumer pays the mortgage broker directly, then the creditor would no
longer be responsible for the cost of compensating the mortgage broker;
as a result, the interest rate should be the same whether the consumer
pays $1,500 to the mortgage broker and $1,000 to the creditor or the
consumer pays $2,500 to the creditor and the creditor pays $1,500 to
the mortgage broker. In light of the options that direct consumer
payments provide in the wholesale channel, the Bureau believes that
affordable credit will continue to be available in connection with
wholesale loans and that use of adjustment authorities to achieve
statutory purposes is not necessary.
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\133\ The Bureau does not believe that the potential double
counting of loan originator compensation and origination charges
could be adequately addressed by permitting a netting approach in
combination with more detailed disclosures to consumers. The Bureau
notes that, because money is fungible, creditors could adjust their
accounting so that they could disclose that they are recovering loan
originator compensation through up-front charges and other
origination costs through the interest rate. Thus, this disclosure-
based approach would permit creditors to reduce the amount of loan
originator compensation they include in points and fees without
changing the amount of up-front fees or the interest rate they
charge. Moreover, given the complex interaction between loan
originator compensation, up-front charges, and the interest rate,
the Bureau has concerns that consumers would not understand the
disclosures.
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The Bureau is concerned that, as noted by the FDIC and HUD, by the
OCC, and by some consumer advocate commenters, a netting rule in the
wholesale channel could create incentives for mortgage brokers and
creditors to structure transactions so that loan originator
compensation is paid by the creditor to the mortgage broker, rather
than by the consumer to the mortgage broker. Under a netting rule,
creditors could impose origination charges on the consumer and net
those charges against the compensation the creditor pays the mortgage
broker when calculating points and fees. By contrast, in a transaction
in which the consumer pays the mortgage broker directly, the consumer's
payment to the mortgage broker would be included in points and fees in
addition to any origination charges imposed by the creditor. Thus, a
netting rule likely would provide creditors with a greater ability to
charge up-front fees and still remain under the points and fees
limits.\134\ The Bureau believes it would be anomalous to treat
wholesale transactions differently for purposes of the qualified
mortgage and high-cost mortgage points and fees limits simply because
in one transaction the consumer paid compensation directly to the
mortgage broker and in another transaction the consumer paid the
compensation indirectly. Such an anomaly would actually disserve the
broad purposes of TILA to inform consumers because in the transaction
that would be favored (i.e., the transaction in which the broker's
commission is bundled in the fees paid to the creditor or in the
interest rate) the costs would be less transparent than in the
disfavored transaction (i.e., the transaction in which the consumer
paid the compensation directly to the broker).
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\134\ As consumer advocates noted in their comments, mortgage
brokers historically have defended arrangements in which creditors
pay compensation to mortgage brokers by arguing that this approach
permits consumers to obtain mortgage loans when they do not have
sufficient funds to compensate mortgage brokers directly. See Nat'l
Assoc. of Mortgage Brokers v. Fed. Reserve Bd., 773 F.Supp. 2d 151,
158 (D.D.C 2011). This rationale for creditors' paying compensation
to mortgage brokers has little if any force if the consumer is
paying up-front charges to the creditor.
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Finally, an additive approach would place some additional limits on
the ability of mortgage brokers to obtain high compensation for loans
that are more costly to consumers. As noted above, consumer advocates
have identified two ways in which mortgage brokers potentially could
extract high compensation for delivering loans that are more costly to
consumers (and possibly more profitable for creditors) would not appear
to violate the prohibitions on steering and compensating loan
originators based on loan terms. First, mortgage brokers could
specialize in providing creditors with loans that are more costly to
consumers in exchange for high compensation, so long as that
compensation does not vary based on the terms of individual loans.
Second, mortgage brokers could do business with a mix of creditors,
some offering more costly loans (and paying high compensation to
mortgage brokers) and some offering loans with more favorable terms
(and paying lower compensation to brokers). Mortgage
[[Page 35458]]
brokers could attempt to steer borrowers that are less sophisticated
and less likely to shop for better terms to the creditors with more
costly loans, and they potentially could evade the anti-steering
prohibition by offering quotes from at least three such creditors.\135\
An additive approach likely would reduce the potential consumer injury
by limiting the ability of creditors to impose high up-front charges
and pay high loan originator compensation, unless creditors are willing
to exceed the qualified mortgage points and fees limits and,
potentially, to bear the burden of originating high-cost mortgages
under HOEPA.\136\
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\135\ Competitive market pressures and the difficulties of
specializing in (or at least identifying and steering) vulnerable
consumers may constrain mortgage brokers' ability to exploit gaps in
the regulatory structure. Nevertheless, the Bureau is concerned
about the potential for consumer injury, particularly for consumers
who are less sophisticated or less likely to shop for competitive
terms.
\136\ The Bureau recognizes that an additive approach would not
preclude creditors from paying mortgage brokers above-market
compensation (up to the points and fees limits) and recovering the
costs of compensating the mortgage brokers and other costs through
an above-market interest rate. However, as consumer advocates noted
in their comments, consumers may shop more effectively when
comparing a single variable, such as the interest rate.
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The Bureau recognizes that an additive approach makes it more
difficult for creditors to impose up-front charges and still remain
under the qualified mortgage points and fees limits and the high-cost
mortgage threshold. Commenters provided limited data regarding the
magnitude of the effects of an additive approach. Nevertheless, even in
transactions in which a mortgage broker's compensation is two
percentage points of the loan amount--which the Bureau understands to
be at the high end of mortgage broker commissions--the creditor would
still be able to charge up to one point in up-front charges that would
count toward the qualified mortgage points and fees limits. As noted
above, the creditor may reduce the costs it needs to recover from
origination charges or through the interest rate by having the consumer
pay the mortgage broker directly. In addition, creditors in the
wholesale channel that prefer to originate only qualified mortgages in
many cases will have the flexibility to recover more of their
origination costs through the interest rate to ensure that their
transactions remain below the points and fees limits.\137\
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\137\ Moreover, to the extent that consumers prefer to pay up-
front charges to reduce the interest rate, creditors may be able to
exclude as many as two bona fide discount points under Sec.
1026.32(b)(1)(i)(E) or (F).
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For the reasons discussed above, the Bureau believes that it is
neither necessary nor appropriate to deviate from the additive approach
prescribed by the statute and adopted in the 2013 ATR Final Rule to
calculate compensation paid by creditors to mortgage brokers. The
Bureau believes that affordable credit will continue to be available in
connection with loans in the wholesale channel and that use of
adjustment authorities to achieve statutory purposes is not necessary
and proper. As noted above, the Bureau believes that, to the extent
that the additive approach limits the ability of mortgage brokers to
steer consumers toward more costly loans, the additive approach is
consistent with the statutory purposes. Accordingly, the Bureau
concludes that it should not exercise its exception authority to alter
the additive approach prescribed by the statute. Accordingly, as
adopted by this final rule, comment 32(b)(1)(ii)-4.iii clarifies that,
for loan originators that are not employees of the creditor, (i.e.,
mortgage brokers, as defined in Sec. 1026.36(a)(2)) loan originator
compensation is included in points and fees in addition to any
origination charges that are paid by the consumer to the creditor.
As noted above, the term ``mortgage broker'' is defined in Sec.
1026.36(a)(2) to mean any loan originator other than an employee of a
creditor. The Bureau believes that the additive approach is appropriate
for all mortgage brokers, including persons whose primary business is
not originating mortgage loans but who nevertheless qualify as a
``mortgage broker'' under Sec. 1026.36(a)(2). In general, calculating
compensation paid by a consumer or creditor to such persons for loan
origination activities should be straightforward and would impose
little compliance burden. However, as discussed below, the Bureau
intends to provide additional guidance for calculating loan originator
compensation for manufactured home transactions.
Loan originator compensation for open-end credit plans. For the
high-cost mortgage points and fees threshold, the 2013 HOEPA Final Rule
applied the same requirements for including loan originator
compensation in points and fees in open-end credit plans as for closed-
end credit transactions. In the 2013 ATR Proposed Rule, the Bureau
solicited comment about whether different or additional guidance is
appropriate for calculating loan originator compensation for open-end
credit plans. The Bureau received few comments that addressed open-end
credit plans, and they did not advocate for different or additional
guidance. Accordingly, the Bureau believes that it is appropriate to
continue to apply the same requirements for calculating loan originator
compensation for points and fees in closed-end credit transactions and
open-end credit plans. The Bureau is therefore revising Sec.
1026.32(b)(2)(ii), which addresses loan originator compensation for
open-end credit plans, to incorporate the same exclusions from points
and fees as those discussed above for closed-end credit transactions in
Sec. 1026.32(b)(1)(ii). The Bureau is not adopting additional guidance
for open-end credit plans.
Calculation of loan originator compensation for manufactured home
transactions. As noted above, several industry and nonprofit commenters
requested clarification of what compensation must be included in points
and fees in connection with transactions involving manufactured homes.
They requested additional guidance on what activities would cause a
manufactured home retailer and its employees to qualify as loan
originators. The 2013 Loan Originator Final Rule had provided
additional guidance on what activities would cause such a retailer and
its employees to qualify as loan originators in light of language in
the Dodd-Frank Act creating an exception from the definition of loan
originator for employees of manufactured home retailers performing
certain limited activities. See Sec. 1026.36(a)(1)(i)(B) and comments
36(a)-1.i.A and 36(a)-4. The commenters nevertheless argued that it
remains unclear what activities a retailer and its employees could
engage in without qualifying as loan originators and causing their
compensation to be included in points and fees. Industry commenters
also noted that, because a creditor has limited knowledge of and
control over the activities of a retailer and its employees, it would
be difficult for a creditor to know whether a retailer and its
employees had engaged in activities that would require their
compensation to be included in points and fees. Industry commenters
therefore urged the Bureau to adopt a bright-line rule that would
exclude from points and fees compensation paid to manufactured home
retailers and their employees. They also requested that the Bureau
clarify that, in any event, compensation received by the manufactured
home retailer or its employee for the sale of the home should not be
counted as loan
[[Page 35459]]
originator compensation and included in points and fees.
The Bureau does not believe it is appropriate to exclude
compensation that is paid to a manufactured home retailer for loan
origination activities. In such circumstances, the retailer is
functioning as a mortgage broker and compensation for the retailer's
loan origination activities should be captured in points and fees. The
Bureau recognizes, however, that it may be difficult for a creditor to
ascertain whether a retailer engages in loan origination activities
and, if so, what compensation that retailer receives for those
activities, at least when such compensation was not paid directly by
the creditor itself. Accordingly, the Bureau intends to propose
additional guidance on these issues prior to the effective date of the
2013 ATR Final Rule to facilitate compliance.
With respect to employees of manufactured home retailers, the
Bureau believes that, in most circumstances, new Sec.
1026.32(b)(1)(ii)(B) will make it unnecessary for creditors to
determine whether employees of retailers have engaged in loan
origination activities that would cause them to qualify as loan
originators. As discussed above, Sec. 1026.32(b)(1)(ii)(B) excludes
compensation paid by mortgage brokers to their loan originator
employees. In the usual case, when an employee of a retailer would
qualify as a loan originator, the retailer would qualify as a mortgage
broker. If the retailer is a mortgage broker, any compensation paid by
the retailer to the employee would be excluded from points and fees
under Sec. 1026.32(b)(1)(ii)(B). Nevertheless, as part of its proposal
to provide additional guidance as noted above, the Bureau intends to
request comment on whether additional guidance is necessary for
calculating loan originator compensation for employees of manufactured
home retailers.
Other issues related to points and fees. As noted above, many
commenters requested that the Bureau reconsider whether certain items
should be included in points and fees. In particular, many commenters
urged that real-estate related charges paid to affiliates and up-front
charges imposed by creditors on consumers to recover the costs of LLPAs
should not be included in points and fees. Commenters also asked the
Bureau to permit the creditor to exclude more than two bona fide
discount points from points and fees. The Bureau is not reconsidering
its decision that, as provided in the statute, real-estate related
charges paid to affiliates of the creditor are included in points and
fees. The Bureau also declines to reconsider its decision that, where a
creditor recovers the costs of LLPAs through up-front charges to the
consumer, those charges are included in points and fees. Finally, the
Bureau is not reconsidering its decision that, as provided in the
statute, creditors may exclude no more than two bona fide discount
points from points and fees.
Many individual mortgage brokers and a trade group representing
mortgage brokers urged the Bureau to reconsider certain restrictions on
loan originator compensation in Sec. 1026.36(d)(1) and (2), arguing
that these restrictions are unnecessary because the points and fees
limits for qualified mortgages effectively cap loan origination
compensation at 3 percent of the loan amount.\138\ The 2013 Loan
Originator Final Rule clarified and expanded Sec. 1026.36(d)(1) and
(2), and the Bureau declines to revisit those provisions in this
rulemaking.
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\138\ The Bureau notes that the general 3 percent points and
fees limit applies only to qualified mortgages and would not
restrict the loan originator compensation paid to mortgage brokers
in mortgage transactions that are not qualified mortgages.
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Section 1026.35 Prohibited Acts or Practices in Connection With Higher-
Priced Mortgage Loans
35(b) Escrow Accounts
35(b)(2) Exemptions
35(b)(2)(iii)
As discussed further below, the Bureau proposed Sec. 1026.43(e)(5)
to create a new type of qualified mortgage for certain portfolio loans
originated and held by small creditors. The Bureau proposed to adopt
the same parameters defining small creditor for purposes of the new
category of qualified mortgage as it had used in implementing
provisions of the Dodd-Frank Act that allow certain balloon loans to
receive qualified mortgage status and an exemption from the requirement
to maintain an escrow accounts for certain higher priced mortgage loans
where such loans are made by small creditors operating predominantly in
rural or underserved areas. The size thresholds for purposes of the
rural balloon and escrow provisions are set forth in Sec.
1026.35(b)(2)(iii), as adopted by the 2013 Escrows Final Rule, which
provides that an escrow account need not be established in connection
with a mortgage if the creditor, within applicable time periods,
annually extends more than 50 percent of its covered first-lien
transactions on properties that are located in rural or underserved
counties, originates (with its affiliates) 500 or fewer first-lien
covered transactions per year, and has total assets of less than $2
billion (adjusted annually for inflation), in addition to other escrow
account limitations.
The Bureau did not propose to make any specific amendments to the
escrows provision in Sec. 1026.35(b)(2), but indicated that if the
provisions creating a new type of small creditor portfolio qualified
mortgage in proposed Sec. 1026.43(e)(5) were adopted with changes
inconsistent with Sec. 1026.35(b)(2), the Bureau would consider and
might adopt parallel amendments to Sec. 1026.35(b)(2) to keep these
sections of the regulation consistent.
The Bureau solicited comment on the advantages and disadvantages of
maintaining consistency between Sec. 1026.35(b)(2) and Sec.
1026.43(e)(5). Commenters did not specifically address the importance
of consistency. However, several small creditors and a small creditor
trade group raised concerns regarding the cost and burden associated
with the escrow requirements and urged the Bureau to expand or adopt
exceptions to those requirements. For example, commenters suggested
broadening the Sec. 1026.35(b)(2)(iii) exemption and exempting home
improvement loans and loans secured by mobile homes.
As discussed below in the section-by-section analysis of Sec.
1026.43(e)(5), the Bureau is adopting Sec. 1026.43(e)(5) consistent
with existing Sec. 1026.35(b)(2) with regard to the asset size and
annual loan origination thresholds defining a small creditor. The
Bureau did not propose and did not solicit comment regarding other
amendments to the escrow provisions in Sec. 1026.35(b)(2). The Bureau
therefore is not reconsidering the issues raised by commenters at this
time and is not adopting any changes to Sec. 1026.35(b)(2) in this
rulemaking.
Section 1026.43 Minimum Standards for Transactions Secured by a
Dwelling
43(a) Scope
43(a)(3)
Background
Section 129C(a)(1) of TILA, as added by section 1411 of the Dodd-
Frank Act, states that, in accordance with regulations prescribed by
the Bureau, no creditor may make a residential mortgage loan unless the
creditor makes a reasonable and good faith determination based on
verified and documented information that, at the time the loan is
consummated, the consumer has a reasonable ability to
[[Page 35460]]
repay the loan, according to its terms, and all applicable taxes,
insurance (including mortgage guarantee insurance), and assessments.
Section 1401 of the Dodd-Frank Act adds new TILA section 103(cc)(5),
which defines ``residential mortgage loan'' to mean, with some
exceptions, any consumer credit transaction secured by a mortgage, deed
of trust, or other equivalent consensual security interest on ``a
dwelling or on residential real property that includes a dwelling.''
TILA section 103(v) defines ``dwelling'' to mean a residential
structure or mobile home which contains one- to four-family housing
units, or individual units of condominiums or cooperatives. Thus, a
``residential mortgage loan'' generally includes all mortgage loans,
except mortgage loans secured by a structure with more than four
residential units. However, TILA section 103(cc)(5) specifically
excludes from the term ``residential mortgage loan'' an open-end credit
plan and an extension of credit secured by an interest in a timeshare
plan, for purposes of the ability-to-repay requirements under TILA
section 129C as well as provisions concerning prepayment penalties and
other restrictions. In addition, TILA section 129C(a)(8) exempts
reverse mortgages and temporary or ``bridge'' loans with a term of 12
months or less from the ability-to-repay requirements. Thus, taken
together, the ability-to-repay requirements of TILA section 129C(a)
apply to all closed-end mortgage loans secured by a one- to four-unit
dwelling, except loans secured by a consumer's interest in a timeshare
plan, reverse mortgages, or temporary or ``bridge'' loans with a term
of 12 months or less.
The Bureau's 2013 ATR Final Rule adopted provisions on scope that
are substantially similar to the statute, which included modifications
to conform to the terminology of Regulation Z. However, feedback
provided to the Bureau suggested that the ability-to-repay requirements
would impose an unsustainable burden on certain creditors, such as
housing finance agencies (HFAs) and certain nonprofit organizations,
offering mortgage loan programs for low- to moderate-income (LMI)
consumers. The Bureau was concerned that the ability-to-repay
requirements adopted in the 2013 ATR Final Rule would undermine or
frustrate application of the uniquely tailored underwriting
requirements employed by these creditors and programs, and would
require a significant diversion of resources to compliance, thereby
significantly reducing access to credit. The Bureau was also concerned
that some of these creditors would not have the resources to implement
and comply with the ability-to-repay requirements, and may have ceased
or severely limited extending credit to low- to moderate-income
consumers, which would result in the denial of responsible, affordable
mortgage credit. In addition, the Bureau was concerned that the
ability-to-repay requirements may have frustrated the purposes of
certain homeownership stabilization and foreclosure prevention
programs, such as Hardest-Hit-Fund (HHF) programs and the Home
Affordable Refinance Program (HARP). Accordingly, the Bureau proposed
several exemptions intended to ensure that responsible, affordable
mortgage credit remained available for LMI and financially distressed
consumers.
43(a)(3)(iv)
The Bureau's Proposal
As discussed above, neither TILA nor Regulation Z provide an
exemption to the ability-to-repay requirements for extensions of credit
made pursuant to a program administered by a Housing Finance Agency
(HFA), as defined under 24 CFR 266.5. However, the Bureau was concerned
that the ability-to-repay requirements may unnecessarily impose
additional requirements onto the underwriting requirements of HFA
programs and impede access to credit available under these programs.
The Bureau was especially concerned that the costs of implementing and
complying with the requirements of Sec. 1026.43(c) through (f) would
endanger the viability and effectiveness of these programs. The Bureau
was concerned that the burden could prompt some HFAs to severely
curtail their programs and some private creditors that partner with
HFAs to cease participation in such programs, both of which could
reduce mortgage credit available to LMI consumers. The Bureau was also
concerned that the ability-to-repay requirements may affect the ability
of HFAs to apply customized underwriting criteria or offer customized
credit products that are designed to meet the needs of LMI consumers
while promoting long-term housing stability.
Based on these concerns and to obtain additional information
regarding these potential effects, the Bureau proposed an exemption and
solicited feedback on several issues. Proposed Sec. 1026.43(a)(3)(iv)
would have provided an exemption to the ability-to-repay requirements
for credit extended pursuant to a program administered by an HFA. The
Bureau solicited comment on every aspect of this approach. In
particular, the Bureau sought comment on the premise that the ability-
to-repay requirements could impose significant implementation and
compliance burdens on HFA programs even if credit extended under the
HFA programs were granted a presumption of compliance as qualified
mortgages. The Bureau also sought comment on whether HFAs have
sufficiently rigorous underwriting standards and monitoring processes
to protect the interests of consumers in the absence of TILA's ability-
to-repay requirements. The Bureau also requested data related to the
delinquency, default, and foreclosure rates of consumers participating
in these programs. In addition, the Bureau solicited feedback regarding
whether such an exemption could harm consumers, such as by denying
consumers the ability to pursue claims arising under violations of
Sec. 1026.43(c) through (f) against creditors extending credit in
connection with these programs. Finally, the Bureau also requested
feedback on any alternative approaches that would preserve the
availability of credit under HFA programs while ensuring that consumers
receive mortgage loans that reasonably reflect consumers' ability to
repay.
Comments Received
In response to the proposed rule, some commenters completely
opposed the proposed exemption from the ability-to-repay requirements
for extensions of credit made pursuant to programs administered by
HFAs. These commenters generally argued that the rules should apply
equally to all creditors. These commenters contended that granting
exemptions to certain creditors would create market distortions and
steer consumers towards certain creditors, thereby reducing consumer
choice and ability to shop. Other commenters suggested alternative
modifications to address HFA programs. One industry commenter favored
creating special ability-to-repay requirements tailored to the unique
underwriting characteristics of LMI consumers. Another industry
commenter supported some type of exemption from the ability-to-repay
requirements but advocated for conditions or the provision of authority
to HFAs to impose their own ability-to-repay standards, as various
Federal agencies (the Department of Housing and Urban Development, the
Department of Veterans Affairs, and the Department of Agriculture), are
authorized to do. The majority of
[[Page 35461]]
industry and consumer group commenters, however, asserted that the
proposed exemption to the ability-to-repay requirements for credit
extended pursuant to a program administered by an HFA is necessary
because these programs meet the customized needs of LMI consumers who
are creditworthy but may not otherwise qualify for mortgage credit
under the Bureau's ability-to-repay requirements.
The latter group of commenters generally supported the Bureau's
goal of preserving access to affordable credit for LMI consumers and
favored the Bureau's proposal to exempt community-focused lending
programs from the ATR requirements altogether. These commenters
contended that HFA loan products balance access to residential mortgage
credit for LMI consumers with a focus on the consumer's ability to
repay. Consumer group commenters argued that HFA lending programs
typically offer low-cost mortgage products, require full documentation
of income and demonstrated ability to repay, and often include
extensive financial counseling with the consumer. Commenters argued
that HFA homeowner assistance programs are tailored to the credit
characteristics of LMI consumers that HFAs serve and noted that these
organizations only extend credit after conducting their own lengthy and
thorough analysis of an applicant's ability to repay, which often
account for nontraditional underwriting criteria, income sources that
do not fall within typical mortgage underwriting criteria, extenuating
circumstances, and other subjective factors that are indicative of
responsible homeownership and ability to repay. An industry commenter
noted that, for first-time homebuyer lending, HFAs use a combination of
low-cost financing and traditional fixed-rate, long-term products;
flexible, but prudent, underwriting with careful credit evaluation;
diligent loan documentation and income verification; down payment and
closing cost assistance; homeownership counseling; and proactive
counseling and servicing. This commenter stated that many HFAs
elaborate beyond the underwriting standards of Federal government
agencies, such as FHA, USDA, or RHS loans, and that HFAs also oversee
creditors involved in these programs carefully by ensuring the HFA's
strict underwriting standards and lending requirements are followed.
Comments provided to the Bureau state that a New York State HFA
considers the consumer's entire credit history rather than consider
only a consumer's credit score, which allows it to help those consumers
who may have a lower credit score due to a prior financial hardship.
Whereas creditors do not need to engage in separate verification where
a consumer's application lists a debt that is not apparent from the
consumer's credit report pursuant to Sec. 1026.43(c), comments
provided to the Bureau also state that the Pennsylvania Housing Finance
Agency's underwriting standards require that the creditor provide a
separate verification of that obligation, indicating the current
balance, the monthly payment, and the payment history of the account.
Commenters also provided data related to the relative performance
of HFA loans as further justification to support the proposed exemption
from the ability-to-repay requirements for extensions of credit made
pursuant to a program administered by a HFA. Although comprehensive
data for HFA loan performance are not available, commenters reported
that the delinquency, default, and foreclosure statistics for consumers
who receive mortgage loans from HFA programs are generally lower than
for those of the general populace, which demonstrates that HFA programs
ensure that consumers are extended credit on reasonably repayable
terms.\139\ Commenters reported that a limited review of HFA loan data
conducted by Fannie Mae in 2011 found that HFA-financed loans performed
significantly better than other Fannie Mae affordable housing loans.
Also, comments cited a 2011 National Council of State Housing Agencies
(NCSHA) study of HFA-financed and non-HFA-financed loans insured by FHA
that found that, in a large majority of States, HFA-financed loans had
lower long-term delinquency and foreclosure rates than non-HFA loans.
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\139\ For example, as of September 30, 2012, just 3.7 percent of
SONYMA's single-family borrowers were 60 or more days delinquent,
compared with 10.9 percent of all borrowers. Data from the
Pennsylvania Housing Finance Agency show that for the third quarter
of 2012, its conventional loans had 90-plus day delinquency and
foreclosure rates of 2.98 percent and .99 percent, respectively,
which are well below the equivalent rates for all conventional loans
in the State of Pennsylvania. Data from the Massachusetts Housing
Partnership's SoftSecond Program show that the foreclosure rate for
program loans is substantially lower than the rate for prime loans
in the State of Massachusetts (0.87 percent for SoftSecond loans as
compared to 1.72 percent for prime loans). FHA-insured loans
purchased by the Connecticut Housing Finance Agency have lower
foreclosure rates than comparable FHA loans in the northeast, and
loans financed by the Delaware State Housing Authority and serviced
by U.S. Bank have a 60 days or more delinquency rate of just over 2
percent, compared with a national 60 days or more rate of 8.3
percent. Finally, Virginia Housing Development Authority loan
foreclosure rates on FHA and conventional loans both fall under 1
percent. This is 3.2 percentage points under the national FHA
foreclosure rate and 2.5 percentage points lower than the national
foreclosure rate for conventional loans in New York State, according
to the Mortgage Bankers Association. Prior to the recent mortgage
crisis, SONYMA's 60-plus day default rate had never exceeded 2
percent.
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A number of commenters argued that, in the absence of an exemption,
HFA homeowner assistance programs would not be able to continue to meet
the needs of LMI consumers or distressed borrowers as intended.
Commenters generally stated that requiring HFAs to comply with the
ability-to-repay requirements would be unduly burdensome and would have
a negative impact on their ability to offer consumers loan products
that fit their unique needs, thereby endangering the viability and
effectiveness of these programs. Commenters also argued that HFAs,
which are governmental entities chartered by either a State or a
municipality and are taxpayer-supported, may not have sufficient
resources to implement and comply with the ability-to-repay
requirements. According to commenters, some HFAs may respond to the
burden by severely curtailing the credit offered under these programs
and others may divert resources from lending to compliance, which may
also reduce access to credit for LMI consumers.
Commenters noted that, because most HFAs operate in partnership
with private creditors who participate voluntarily in HFA programs, the
Bureau's proposed HFA exemption would help encourage eligible creditors
to continue making loans that might not otherwise be originated due to
constraints under, or concerns about, the Bureau's ability-to-repay
requirements. Commenters argued that the ability-to-repay requirements
would impose significant implementation and compliance burdens on
participating private creditors, and this would likely discourage
creditors from participating in HFA programs and would result in the
denial of mortgage credit to LMI consumers.
A number of industry commenters argued that the proposed exemption
from the ability-to-repay requirements is in the best interests of
consumers and the nation as a whole, as the exemption will allow
homeowners to remain in their homes and help stabilize communities that
were harmed by the mortgage crisis and limit the degree to which future
LMI consumers have difficulty obtaining access to credit. Creditors
also generally supported clarifying that the exemption applies
regardless of whether the credit is extended directly by an HFA to the
[[Page 35462]]
consumer or through an intermediary that is operating pursuant to a
program administered by an HFA, and to include all HFA programs
regardless of structure (e.g., mortgage revenue bonds or mortgage
credit certificates).
The Final Rule
Based on these comments and considerations, the Bureau believes
that it is appropriate to exempt credit extended pursuant to an HFA
program from the ability-to-repay requirements. The comments received
confirm that HFA programs generally employ underwriting requirements
that are uniquely tailored to meet the needs of LMI consumers, such
that applying the more generalized statutory ability-to-repay
requirements would provide little or no net benefit to consumers and
instead could be unnecessarily burdensome by diverting the focus of
HFAs and their private creditor partners from mission activities to
managing compliance and legal risk from two overlapping sets of
underwriting requirements. The Bureau is concerned that absent an
exemption, this diversion of resources would significantly reduce
access to responsible mortgage credit for many LMI borrowers.
As discussed above in part II.A, many HFAs expand on the
underwriting standards of GSEs or Federal government agencies by
applying even stricter underwriting standards than these guidelines,
such as requiring mandatory counseling for all first-time homebuyers
and strong loan servicing. As HFAs extend credit to promote long-term
housing stability, rather than for profit, HFAs generally extend credit
after performing a complex and lengthy analysis of a consumer's ability
to repay. As also discussed above in part II.A, the Bureau finds that,
as compared to traditional underwriting criteria, under which LMI
borrowers may be less likely to qualify for credit, the underwriting
standards of some HFAs allow greater weight for (and sometimes require)
the consideration of nontraditional underwriting elements, extenuating
circumstances, and other subjective compensating factors that are
indicative of responsible homeownership. The Bureau notes, however,
that HFAs do conduct regular and careful oversight of their lenders,
helping ensure that they follow the HFAs' strict underwriting
standards.
The Bureau is concerned that HFAs, which are governmental entities
and taxpayer-supported, may not have sufficient resources to implement
and comply with the ability-to-repay requirements, or that the
additional compliance burdens would at least significantly reduce the
resources available to HFAs for the purpose of providing homeowner
assistance. As discussed above in part II.A, many of the State and
Federal programs that HFAs administer do not provide administrative
funds; others provide limited administrative funds. Most HFAs operate
independently and do not receive State operating funds. Consequently,
HFAs may not have enough resources to increase compliance efforts
without negatively impacting their missions. In the absence of an
exemption from the ability-to-repay requirements, HFAs would have to
dedicate substantially more time and resources to ensure their programs
and lending partners are in compliance.
Moreover, because many HFAs must conduct their programs through
partnerships with private creditors, the Bureau is concerned that
absent an exemption private creditor volunteers would determine that
complying with both the ability-to-repay requirements and the
specialized HFA program requirements is too burdensome or the liability
risks too great. For example, needing to comply with both the HFA
underwriting requirements that often account for (and sometimes require
the consideration of) nontraditional underwriting criteria, extenuating
circumstances, and compensating factors, as discussed above in part
II.A, and the ability-to-repay requirements may cause some private
creditors to cease participation in such programs. This too would
reduce access to mortgage credit to LMI consumers.
With respect to the comment suggesting that a better approach would
be to allow HFAs to establish their own ability-to-repay and qualified
mortgage guidelines, the Bureau notes that Congress has the authority
to determine which agencies and programs have the authority under TILA
to prescribe rules related to the ability-to-repay requirements or the
definition of qualified mortgage. The Bureau is mindful that Congress
has not authorized HFAs to prescribe rules related to the ability-to-
repay requirements or the definition of qualified mortgage.
Regarding the comment favoring the creation of special ability-to-
repay requirements tailored to the unique underwriting characteristics
of LMI consumers, the Bureau does not believe it is appropriate to
establish alternative conditions. HFA programs have strong but flexible
ability-to-repay requirements tailored to the unique needs and credit
characteristics of the LMI consumers they serve. The Bureau is
concerned that imposing uniform alternative requirements by regulation
would curtail this flexibility and ultimately reduce access to
responsible and affordable credit for this population.
No commenters addressed whether credit extended pursuant to a
program administered by an HFA should be granted a presumption of
compliance as qualified mortgages, and, if so, under what conditions.
However, the Bureau does not believe that extending qualified mortgage
status to these loans would be as effective in addressing the concerns
raised above as an exemption. Even if credit extended under the HFA
programs were granted a presumption of compliance as qualified
mortgages, HFA programs could be impacted by significant implementation
and compliance burdens. Furthermore, as discussed above, many loans
extended under these programs would not appear to satisfy the qualified
mortgage standards under Sec. 1026.43(e)(2). Thus, a creditor
extending such a mortgage loan would still be required to comply with
the ability-to-repay requirements of Sec. 1026.43(c) and the potential
liability of noncompliance would cease or severely curtail mortgage
lending.
The Bureau received a number of comments completely opposed to the
proposed exemptions from the ability-to-repay requirements on the
grounds that the rules should apply equally to all creditors. However,
pursuant to section 105(a) of TILA, the Bureau generally may prescribe
regulations that 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, among other things. In
addition, pursuant to TILA section 105(f) the Bureau may exempt by
regulation from all or part of this title all or any class of
transactions for which in the determination of the Bureau coverage does
not provide a meaningful benefit to consumers in the form of useful
information or protection, if certain conditions specified in that
section are met. For the reasons discussed in each relevant section,
the Bureau believes that the exemptions adopted in this final rule are
necessary and proper to effectuate the purposes of TILA, which include
purposes of section 129C, by ensuring that consumers are offered and
receive residential mortgage loans on terms that reasonably reflect
their ability to repay. Furthermore, without the exemptions the Bureau
believes that consumers in these demographics are at risk of being
denied access to the responsible, affordable credit offered under these
programs, which is contrary to the purposes of TILA.
[[Page 35463]]
Accordingly, the Bureau believes that the proposed exemption for
credit made pursuant to programs administered by an HFA is appropriate
under the circumstances. The Bureau believes that consumers who receive
extensions of credit made pursuant to a program administered by an HFA
do so after a determination of ability to repay using specially
tailored criteria. The exemption adopted by the Bureau is limited to
creditors or transactions with certain characteristics and
qualifications that ensure consumers are offered responsible,
affordable credit on reasonably repayable terms. The Bureau thus finds
that coverage under the ability-to-repay requirements provides little
if any meaningful benefit to consumers in the form of useful
protection, given the nature of the credit extended through HFAs. At
the same time, the Bureau is concerned that the narrow class of
creditors subject to the exemption may either cease or severely curtail
mortgage lending if the ability-to-repay requirements are applied to
their transactions, resulting in a denial of access to credit.
Accordingly, the Bureau is adopting Sec. 1026.43(a)(3)(iv) as
proposed, which provides that an extension of credit made pursuant to a
program administered by an HFA, as defined under 24 CFR 266.5, is
exempt from Sec. 1026.43(c) through (f).
The Bureau is adopting new comment 43(a)(3)(iv)-1 to provide
additional clarification which will facilitate compliance. As discussed
above, the Bureau understands that most HFA programs are ``mortgage
purchase'' programs in which the HFA establishes program requirements
(e.g., income limits, purchase price limits, interest rates, points and
term limits, underwriting standards, etc.), and agrees to purchase
loans made by private creditors that meet these requirements. As a
result, the success of these programs in large part depends upon the
participation of private creditors. The Bureau intended the exemption
to apply to both extensions of credit by HFAs and extensions of credit
by private creditors under a mortgage purchase or similar HFA program.
The comment clarifies that both extensions of credit made by HFAs
directly to consumers as well as extensions of credit made by other
creditors pursuant to a program administered by an HFA are exempt from
the requirements of Sec. 1026.43(c) through (f). In addition, as
discussed above in part II.A, the Bureau understands that HFAs are
generally funded through tax-exempt bonds (also known as mortgage
revenue bonds), but may receive other types of funding, including
funding through Federal programs such as the HOME Program, which is the
largest Federal block grant for affordable housing. The Bureau intended
the exemption to apply to extensions of credit made pursuant to a
program administered by an HFA, regardless of the funding source. The
comment clarifies that the creditor is exempt from the requirements of
Sec. 1026.43(c) through (f) regardless of whether the program
administered by an HFA receives funding from Federal, State, or other
sources.
Section 1026.43(a)(3)(iv) is adopted pursuant to the Bureau's
authority under section 105(a) and (f) of TILA. Pursuant to section
105(a) of TILA, the Bureau generally may prescribe regulations that
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, among other things. For the reasons
discussed in more detail above, the Bureau believes that this exemption
is necessary and proper to effectuate the purposes of TILA, which
include purposes of section 129C, by ensuring that consumers are
offered and receive residential mortgage loans on terms that reasonably
reflect their ability to repay. The Bureau believes that mortgage loans
originated pursuant to programs administered by HFAs sufficiently
account for a consumer's ability to repay, and the exemption ensures
that consumers are able to receive assistance under these programs.
Furthermore, without the exemption the Bureau believes that consumers
in this demographic are at risk of being denied access to the
responsible, affordable credit offered under these programs, which is
contrary to the purposes of TILA. This exemption is consistent with the
findings of TILA section 129C by ensuring that consumers are able to
obtain responsible, affordable credit from the creditors discussed
above.
The Bureau has considered the factors in TILA section 105(f) and
believes that, for the reasons discussed above, an exemption is
appropriate under that provision. Pursuant to TILA section 105(f) the
Bureau may exempt by regulation from all or part of this title all or
any class of transactions for which in the determination of the Bureau
coverage does not provide a meaningful benefit to consumers in the form
of useful information or protection. In determining which classes of
transactions to exempt the Bureau must consider certain statutory
factors. For the reasons discussed above, the Bureau exempts an
extension of credit made pursuant to a program administered by an HFA
because coverage under the ability-to-repay regulations does not
provide a meaningful benefit to consumers in the form of useful
protection in light of the nature of the credit extended through HFAs.
Consistent with its rationale in the proposed rule, the Bureau believes
that the exemption is appropriate for all affected consumers to which
the exemption would apply, regardless of their other financial
arrangements, financial sophistication, or the importance of the loan
to them. Similarly, the Bureau believes that the exemption is
appropriate for all affected loans covered under the exemption,
regardless of the amount of the loan and whether the loan is secured by
the principal residence of the consumer. Furthermore, the Bureau
believes that, on balance, the exemption will simplify the credit
process without undermining the goal of consumer protection, denying
important benefits to consumers, or increasing the expense of the
credit process. Based on these considerations and the analysis
discussed elsewhere in this final rule, the Bureau believes that the
exemptions are appropriate. Therefore all credit extended through the
Housing Finance Agencies is subject to the exemption.
43(a)(3)(v)
Background
As discussed above, neither TILA nor Regulation Z provides an
exemption to the ability-to-repay requirements for creditors, such as
nonprofits, that primarily engage in community development lending.
However, feedback provided to the Bureau suggested that the ability-to-
repay requirements might impose an unsustainable burden on certain
creditors offering mortgage loan programs for LMI consumers. The Bureau
was concerned that these creditors would not have the resources to
implement and comply with the ability-to-repay requirements, and would
have ceased or severely limited extending credit to LMI consumers,
which would result in the unavailability of responsible, affordable
mortgage credit. Accordingly, the Bureau proposed several exemptions
intended to ensure that responsible, affordable mortgage credit
remained available for LMI consumers.
Credit Extended by CDFIs, CHDOs, and DAPs
The Bureau's proposal. The Bureau proposed to exempt from the
ability-to-repay requirements several types of creditors that focus on
extending credit
[[Page 35464]]
to LMI consumers. Proposed Sec. 1026.43(a)(3)(v)(A) would have
exempted an extension of credit made by a creditor designated as a
Community Development Financial Institution (CDFI), as defined under 12
CFR 1805.104(h). Proposed Sec. 1026.43(a)(3)(v)(B) would have exempted
an extension of credit made by a creditor designated as a Downpayment
Assistance Provider of Secondary Financing (DAP) operating in
accordance with regulations prescribed by the U.S. Department of
Housing and Urban Development applicable to such persons. Proposed
Sec. 1026.43(a)(3)(v)(C) would have exempted an extension of credit
made by a creditor designated as a Community Housing Development
Organization (CHDO), as defined under 24 CFR 92.2, operating in
accordance with regulations prescribed by the U.S. Department of
Housing and Urban Development applicable to such persons. The Bureau
requested feedback regarding whether the requirements imposed in
connection with obtaining and maintaining these designations were
sufficient to ensure that such creditors provide consumers with
responsible and affordable credit, and regarding whether unscrupulous
or irresponsible creditors would be able to use these designations to
evade the requirements of TILA, extend credit without regard to the
consumer's ability to repay, or otherwise harm consumers.
Comments received. The Bureau received many comments addressing the
proposed exemptions for creditors designated as a CDFI, CHDO, or DAP. A
large number of industry commenters completely opposed the proposed
exemptions. These commenters generally argued that the rules should
apply equally to all creditors. However, many industry and consumer
advocate commenters supported the proposed exemptions. Twenty-five
commenters supported the proposed exemption for creditors designated as
CDFIs. Also, in response to the Bureau's request for feedback, several
commenters provided data related to CDFI underwriting requirements and
loan performance. Some commenters specifically discussed and supported
the proposed exemption for CHDOs. While several commenters supported
the proposed exemption for DAPs, the Bureau received no specific
feedback related to these creditors. A few commenters asked the Bureau
to consider exemptions for other types of designations or lending
programs. For example, a few commenters requested that the Bureau
provide a similar exemption for creditors that are chartered members of
the NeighborWorks Network, while other commenters requested an
exemption for creditors approved as Counseling Intermediaries by HUD.
The Bureau received feedback from several industry commenters
requesting that the Bureau provide an exemption for credit unions
designated as low-income credit unions (LICUs) by the National Credit
Union Administration (NCUA). These commenters explained that the NCUA's
LICU designation is similar to the Treasury Department's CDFI
designation. However, these commenters stated that most credit unions
choose to obtain the LICU designation instead of the CDFI designation.
Some commenters suggested that many credit unions are not eligible for
CDFI status.
The final rule. The Bureau is adopting the exemptions in a form
that is substantially similar to the version proposed. For the reasons
discussed below, the Bureau has concluded that a creditor designated as
a CDFI or DAP should be exempt from the ability-to-repay requirements,
provided these creditors meet certain other applicable requirements. As
comments confirmed, creditors seeking these designations must undergo a
screening process related to the ability of applicants to provide
affordable, responsible credit to obtain the designation and must
operate in accordance with the requirements of these programs,
including periodic recertification.\140\ Comments provided to the
Bureau also confirmed that the ability-to-repay requirements generally
differ from the unique underwriting criteria which are related to the
characteristics of the consumers served by these creditors. The
ability-to-repay requirements primarily consist of quantitative
underwriting considerations, such as an analysis of the consumer's
debt-to-income ratio. In contrast, as discussed in part II.A above, the
Bureau understands that creditors with these designations typically
engage in a lengthy underwriting process that is specifically tailored
to the needs of these consumers by incorporating a variety of
compensating factors. Also, although market-wide data is not available
for the delinquency rates of credit extended by CHDOs, comments
provided to the Bureau related to CDFI loan performance reflect the low
default levels associated with these creditors' programs, which
strongly suggest that consumers are extended credit on reasonably
repayable terms. Finally, commenters confirmed that these creditors
serve consumers that have difficulty obtaining responsible and
affordable credit, and that the burdens imposed by the ability-to-repay
requirements would significantly impair the ability of these creditors
to continue serving this market. Taken together, this feedback
demonstrates that creditors with these designations provide residential
mortgage loans on reasonably repayable terms, that these exemptions are
necessary and proper to ensure that responsible, affordable mortgage
credit remains available to consumers served by these creditors, and
that the government approval and oversight associated with these
designations ensures that there is little risk that consumers would be
subject to abusive lending practices. Thus, the Bureau has determined
that it is appropriate to adopt Sec. 1026.43(a)(3)(v)(A) and (B) as
proposed.
---------------------------------------------------------------------------
\140\ 24 CFR 200.194(d) provides that HUD certification as an
approved nonprofit expires after two years, and nonprofits must
reapply for approval prior to the expiration of the two year period.
Also, on February 4, 2013 the CDFI Fund required recertification of
most CDFIs. See http://www.cdfifund.gov/news_events/CDFI-2013-06-CDFI_Fund_Releases_Mandatory_Recertification_Guidelines_for_CDFIs.asp.
---------------------------------------------------------------------------
The Bureau has also concluded that a creditor designated as a CHDO
should be exempt from the ability-to-repay requirements. Comments
illustrated that, like CDFIs and DAPs, CHDOs generally extend credit on
reasonably repayable terms and ensure that LMI consumers have access to
responsible, affordable mortgage credit. However, HUD provided comments
to the Bureau suggesting that the exemption be narrowed. A person may
obtain a CHDO designation for reasons unrelated to residential mortgage
lending, such as to acquire tax credits to assist in the development of
affordable rental properties. The Bureau believes that it is
appropriate to narrow the exemption to only those persons that obtain
the CHDO designation for purposes of residential mortgage lending. A
person seeking CHDO status to engage in residential mortgage lending
must enter into a commitment with the participating jurisdiction
developing the project under the HOME Program. The Bureau also believes
that providing specific citations to the relevant regulations
prescribed by HUD would facilitate compliance. Thus, the Bureau is
adopting Sec. 1026.43(a)(3)(v)(C) with language similar to that
proposed, but with the additional condition that the creditor
designated as a CHDO has entered into a commitment with a participating
jurisdiction and is undertaking a project under the HOME Program,
pursuant to the provisions of
[[Page 35465]]
24 CFR 92.300(a), and as the terms community housing development
organization, commitment, participating jurisdiction, and project are
defined under 24 CFR 92.2.
The Bureau acknowledges that creditors with other types of
designations also provide valuable homeownership assistance to certain
types of consumers or communities. However, the Bureau does not believe
that it would be appropriate to provide exemptions for the designations
suggested by commenters. For example, while Counseling Intermediaries
must be approved by HUD, this approval is not related to the ability of
an applicant to provide consumers with responsible and affordable
mortgage credit. Furthermore, the Bureau is unaware of evidence
suggesting that approval as a Counseling Intermediary is sufficient to
ensure that consumers are offered and receive residential mortgage
loans on reasonably repayable terms. With respect to the feedback
suggesting that the Bureau consider providing an exemption for
creditors that are chartered members of the NeighborWorks Network, the
Bureau acknowledges that these creditors are also subject to government
oversight and seem to provide responsible and affordable mortgage
credit. However, the Bureau does not believe that providing an
exemption to these creditors would be necessary to ensure access to
responsible and affordable credit, as many of these creditors would
qualify for one of the exemptions adopted in Sec. 1026.43(a)(3)(v)(A)
through (D). Therefore, the Bureau declines to adopt exemptions for the
other designations or lending programs suggested by commenters.
In response to feedback provided regarding creditors designated as
low-income credit unions, the Bureau conducted additional research and
analysis to determine whether an exemption for these creditors would be
appropriate. LICUs, like CDFIs, provide credit to low-income consumers.
However, NCUA regulations require LICUs to serve only ``predominantly''
low-income consumers, thereby permitting LICUs to extend credit to many
consumers with higher incomes.\141\ Thus, such an exemption would be
too broad and would affect consumers for whom access to credit is not a
concern. In addition, the Bureau believes that the small creditor
portfolio qualified mortgage loan provisions adopted in Sec.
1026.43(e)(5) will address the concerns raised by commenters and
accommodate the needs of small creditors, such as LICUs, while
providing consumers with valuable protections. Therefore, the Bureau
does not believe that it would be appropriate to provide an exemption
for creditors with an LICU designation.
---------------------------------------------------------------------------
\141\ ``The term predominantly is defined as a simple
majority.'' 12 CFR 701.34(a)(3).
---------------------------------------------------------------------------
Credit Extended by Certain Nonprofits
The Bureau's proposal. Proposed Sec. 1026.43(a)(3)(v)(D) would
have exempted an extension of credit made by a creditor with a tax
exemption ruling or determination letter from the Internal Revenue
Service under section 501(c)(3) of the Internal Revenue Code of 1986
(26 CFR 1.501(c)(3)-1), provided that certain other conditions were
satisfied. Under proposed Sec. 1026.43(a)(3)(iv)(D)(1), the exemption
would have been available only if the creditor extended credit secured
by a dwelling no more than 100 times in the calendar year preceding
receipt of the consumer's application. Proposed Sec.
1026.43(a)(3)(v)(D)(2) would have further conditioned the exemption on
the creditor, in the calendar year preceding receipt of the consumer's
application, extending credit secured by a dwelling only to consumers
with income that did not exceed the qualifying limit for moderate-
income families, as established pursuant to section 8 of the United
States Housing Act of 1937 and amended from time to time by the U.S.
Department of Housing and Urban Development. Proposed Sec.
1026.43(a)(3)(v)(D)(3) would have made the proposed exemption available
only if the extension of credit was to a consumer with income that did
not exceed this qualifying limit. Finally, proposed Sec.
1026.43(a)(3)(v)(D)(4) would have made the proposed exemption
contingent upon the creditor determining, in accordance with written
procedures, that the consumer had a reasonable ability to repay the
extension of credit.
Proposed comment 43(a)(3)(v)(D)-1 would have clarified that an
extension of credit is exempt from the requirements of Sec. 1026.43(c)
through (f) if the credit is extended by a creditor described in Sec.
1026.43(a)(3)(v)(D), provided the conditions specified in that section
are satisfied. The conditions specified in Sec. 1026.43(a)(3)(v)(D)(1)
and (2) are determined according to activity that occurred in the
calendar year preceding the calendar year in which the consumer's
application was received. Section 1026.43(a)(3)(v)(D)(2) provides that,
during the preceding calendar year, the creditor must have extended
credit only to consumers with income that did not exceed the qualifying
limit then in effect for moderate-income families, as specified in
regulations prescribed by HUD pursuant to section 8 of the United
States Housing Act of 1937. For example, a creditor has satisfied the
requirements of Sec. 1026.43(a)(3)(v)(D)(2) if the creditor
demonstrates that the creditor extended credit only to consumers with
income that did not exceed the qualifying limit in effect on the dates
the creditor received each consumer's individual application. The
condition specified in Sec. 1026.43(a)(3)(v)(D)(3), which relates to
the current extension of credit, provides that the extension of credit
must be to a consumer with income that does not exceed the qualifying
limit specified in Sec. 1026.43(a)(3)(v)(D)(2) in effect on the date
the creditor received the consumer's application. For example, assume
that a creditor with a tax exemption ruling under section 501(c)(3) of
the Internal Revenue Code of 1986 has satisfied the conditions
identified in Sec. 1026.43(a)(3)(v)(D)(1) and (2). If, on May 21,
2014, the creditor in this example extends credit secured by a dwelling
to a consumer whose application reflected income in excess of the
qualifying limit identified in Sec. 1026.43(a)(3)(v)(D)(2), the
creditor has not satisfied the condition in Sec.
1026.43(a)(3)(v)(D)(3) and this extension of credit is not exempt from
the requirements of Sec. 1026.43(c) through (f).
The Bureau solicited comment regarding whether the proposed
exemption was appropriate. The Bureau also specifically requested
feedback on whether the proposed 100 transaction limitation was
appropriate, on the costs of implementing and complying with the
ability-to-repay requirements that would be incurred by creditors that
extend credit secured by a dwelling more than 100 times a year, the
extent to which this proposed condition would affect access to
responsible, affordable credit, and whether the limit of 100
transactions per year should be increased or decreased. The Bureau also
requested comment regarding the costs that nonprofit creditors would
incur in connection with the ability-to-repay requirements, the extent
to which these additional costs would affect the ability of nonprofit
creditors to extend credit to LMI consumers, and whether consumers
could be harmed by the proposed exemption. The Bureau solicited comment
regarding whether the proposed exemption should be extended to
creditors designated as nonprofits under section 501(c)(4) of the
Internal Revenue Code of 1986. The Bureau also requested financial
reports
[[Page 35466]]
and mortgage lending activity data supporting the argument that the
marginal cost of implementing and complying with the ability-to-repay
requirements would cause 501(c)(4) nonprofit creditors to cease, or
severely limit, extending credit to LMI consumers.
Comments received. The Bureau received many comments addressing
this proposed exemption. Many commenters completely opposed the
proposed exemption for community-focused creditors. These commenters
generally argued that the rules should apply equally to all creditors.
One industry commenter argued that a better approach would be to create
special ability-to-repay requirements tailored to the unique
underwriting characteristics of LMI consumers. Many other commenters
approved of the proposed exemption, including the Bureau's proposed
conditions. Several commenters stated that an exemption for certain
nonprofits was necessary, but requested various modifications. Most of
the commenters that approved of the proposed exemption were concerned
that the exemption could be used as a loophole to harm consumers and
agreed that conditions were needed to address this potential risk.
Many commenters, including industry, consumer advocate, and
nonprofit commenters, explicitly supported the proposed limitation of
100 extensions of credit. These commenters generally explained that the
100-extension limitation was an appropriate limit that would make it
difficult for sham nonprofit creditors to harm consumers. However,
several commenters asked the Bureau to raise the transaction
limitation. The commenters were primarily concerned that the limitation
would force nonprofits to limit certain types lending. For example, a
few commenters stated that nonprofits that offer both home-purchase
mortgage loans and small-dollar mortgage loans, such as for home energy
improvement, would limit small-dollar lending to remain under the 100-
extension limitation. One nonprofit commenter argued that, for
creditors that provide first- and subordinate-lien financing to LMI
consumers on the same transaction, the 100-extension limit is
effectively a 50-transaction limit. Another nonprofit commenter
suggested that the Bureau either apply the 100-extension limit to
first-lien mortgage loans, or raise the limit to 500 for total
transactions. One consumer advocate commenter suggested raising the
limit to 250 transactions per calendar year to address these concerns.
A few commenters asked that the Bureau remove the limitation
completely. For example, one commenter argued that the Bureau's
proposed limit of 100 extensions of credit would harm LMI consumers by
raising the cost of credit obtained from larger-scale nonprofit
organizations.
One commenter argued that the proposed exemption was too narrow and
urged the Bureau to expand the exemption in several ways. First, this
commenter argued that the exemption should not be limited to extensions
of credit by creditors, but rather should be extended to all
transactions in which a nonprofit organization dedicated to providing
opportunities for affordable, long-term homeownership is involved, but
is not the creditor. This commenter also asked the Bureau to provide
no-action letters that would provide a safe harbor for certain mortgage
lending programs. In addition, this commenter argued that the proposed
references to the low- to moderate-income threshold under section 8 of
the National Housing Act was inappropriate because use of the threshold
would result in the denial of credit to consumers with income slightly
above the threshold. Furthermore, this commenter asserted that it would
be arbitrary and unjustified for the Bureau to extend an exemption to
State HFAs but not provide an exemption to organizations that rely on
underwriting criteria similar to those used by State HFAs, such as the
consideration of a consumer's life circumstances. Finally, this
commenter disputed the Bureau's justification for the proposed
exemptions--that access to credit for LMI consumers would be impaired
if certain creditors did not have the resources to implement and comply
with the ability-to-repay requirements and ceased or severely limited
extending credit--by arguing that LMI consumers are harmed when any
creditor, regardless of size, spends money on regulatory compliance
that would otherwise have been lent to LMI consumers.
One consumer advocate group opposed providing an exemption for
nonprofit creditors and instead suggested several modifications to the
ability-to-repay requirements intended to address the Bureau's concerns
regarding nonprofits. This commenter argued that, rather than providing
an exemption for the proposed categories of nonprofit creditor, the
Bureau should provide a rebuttable presumption of compliance for these
nonprofit creditors, without requiring the nonprofits to satisfy the
requirements of Sec. 1026.43(c) through (f). Also, this commenter
argued, these provisions should apply to only bona fide nonprofits, so
that consumers would be provided legal recourse against unscrupulous
creditors operating sham nonprofits. Further, this commenter suggested
that the Bureau should expand the anti-evasion provisions of Sec.
1026.43(h) to include the adoption of nonprofit status for purposes of
avoiding the ability-to-repay requirements. This commenter argued that
such modifications would provide genuine nonprofits with relief from
the regulatory and compliance burdens associated with the ability-to-
repay requirements, while enabling consumers to seek recourse against
abusive, sham nonprofits.
The Bureau did not receive feedback regarding whether the proposed
exemption should be extended to creditors designated as nonprofits
under section 501(c)(4) of the Internal Revenue Code of 1986. However,
several credit unions and State credit union associations requested
that the Bureau expand the nonprofit exemption to all credit unions, as
credit unions are designated as nonprofits under sections 501(c)(1) and
501(c)(14) of the Internal Revenue Code of 1986. These commenters
generally explained that credit unions, like the nonprofit creditors
addressed in the Bureau's proposal, are often small businesses that
have difficulty complying with regulatory burdens. Industry commenters
also requested an exemption for certain creditors that extend credit to
LMI consumers, or for certain programs intended to facilitate access to
credit for LMI consumers. For example, some commenters argued that the
Bureau should provide an exemption for credit unions operating in
certain areas, such as areas defined as ``underserved'' under the
Federal Credit Union Act, while others argued that the Bureau should
provide an exemption for loans that meet the regulatory requirements of
the Community Reinvestment Act or similar programs. These commenters
generally argued that such an exemption would facilitate access to
credit for LMI consumers by minimizing the regulatory burdens imposed
by the ability-to-repay requirements.
A few industry and consumer advocate commenters asked the Bureau to
establish a publicly accessible database of all nonprofits that
qualified for the exemption. These commenters argued that such a
database would facilitate compliance and allow consumers to determine
if nonprofit creditors were actually exempt from the requirements. A
State attorney general expressed concern about potential abuse and
asked the Bureau to consider
[[Page 35467]]
vigorous oversight of nonprofits eligible for the exemption.
The final rule. The Bureau is adopting Sec. 1026.43(a)(3)(v)(D) in
a form that is substantially similar to the version proposed, except
that the Bureau is increasing the annual originations limit from 100 to
200 extensions of credit. For the reasons discussed below, the Bureau
has concluded that the exemption should apply provided that, in
additional to the annual originations limit: (1) The creditor is
designated as a nonprofit organization under section 501(c)(3) of the
Internal Revenue Code; (2) the extension of credit is to a consumer
with income that does not exceed the limit for low- and moderate-income
households as established pursuant regulations prescribed by the U.S.
Department of Housing and Urban Development; (3) during the calendar
year preceding receipt of the consumer's application the creditor
extended credit only to consumers with income that did not exceed the
above limit; and (4) the creditor determines, in accordance with
written procedures, that the consumer has a reasonable ability to repay
the extension of credit. Comments provided to the Bureau generally
confirmed that these conditions were reasonable and appropriate
measures to ensure that the exemption would not be used as a loophole
to avoid the ability-to-repay requirements. Thus, the Bureau has
determined that it is appropriate to adopt Sec.
1026.43(a)(3)(v)(D)(2), (3), and (4) generally as proposed, but with
technical modifications to paragraphs (a)(3)(v)(D)(2) and (3), as
discussed below.
However, upon further consideration of the comments received, the
Bureau has determined that it is appropriate to raise the threshold in
proposed Sec. 1026.43(a)(3)(v)(D)(1) from 100 to 200 extensions of
credit. Most commenters agreed with the rationale advanced in the 2013
ATR Proposed Rule that a limitation is necessary to prevent the
exemption from being exploited by unscrupulous creditors seeking to
harm consumers. The Bureau strongly believes that this risk outweighs
the costs that a limitation may impose on some nonprofit creditors.
While many commenters approved of the proposed 100-extension
limitation, the Bureau is concerned that this limitation could lead to
unintended consequences. The Bureau is particularly concerned that
nonprofit creditors providing primary and subordinate financing on the
same transaction effectively would be limited to 50 transactions per
year. The Bureau did not intend to propose such a strict limitation.
The Bureau has concluded that a 200-extension limitation, doubling the
100-extension limit to capture creditors making first- and subordinate-
lien loans on the same transaction, would address the concerns raised
by commenters while achieving the original intent of the proposed
condition. The Bureau does not agree with the suggestions proposed by
some commenters that separate limits for first- and subordinate-lien
loans should be implemented. The Bureau believes that such a
restriction would be needlessly restrictive, and it would be more
efficient to allow nonprofit creditors to determine the most efficient
allocation of funds between primary and subordinate financing.
Furthermore, the Bureau does not agree with the arguments raised by
commenters that the threshold should be raised above 200, such as to
500 transactions. As explained in the 2013 ATR Proposed Rule, the
Bureau intended to narrowly tailor the exemption to small nonprofits
that did not have the resources to bear the burdens associated with the
ability-to-repay requirements, and solicited feedback regarding whether
a 100 extension of credit limit was indicative of such a resource
limitation.\142\ While feedback indicated that a 200-extension
limitation would more appropriately address the Bureau's intentions,
the Bureau received no feedback indicating that nonprofit creditors
making more than 200 extensions of credit lacked the resources to
implement and comply with the ability-to-repay requirements. The Bureau
believes that creditors originating such a number of mortgage loans
likely have the resources to bear the implementation and compliance
burden associated with the ability-to-repay requirements, unlike
smaller nonprofit creditors that make fewer loans. Therefore, as
adopted, Sec. 1026.43(a)(3)(v)(D)(1) conditions the exemption from the
ability-to-repay requirements on the creditor extending credit secured
by a dwelling no more than 200 times during the calendar year preceding
receipt of the consumer's application.
---------------------------------------------------------------------------
\142\ See 78 FR 6644 (Jan. 30, 2013).
---------------------------------------------------------------------------
As discussed above, one commenter argued that the Bureau should
limit the exemption to bona fide nonprofit creditors. Adding a bona
fide nonprofit condition would provide another avenue for consumers to
seek redress against harmful lending practices, which may deter persons
from using the exemption as a loophole. However, the Bureau believes
that the requirements of Sec. 1026.43(a)(3)(v)(D) are narrowly
tailored to protect consumers and limit the risk that an unscrupulous
creditor could create a nonprofit for the purpose of extending credit
in a harmful, reckless, or abusive manner. Therefore, the Bureau
declines to adopt an additional bona fide nonprofit requirement at this
time. As with the other exemptions to the ability-to-repay
requirements, the Bureau will monitor the mortgage market and may
reevaluate this issue if circumstances warrant reconsideration.
As discussed above, one commenter suggested that the Bureau adopt a
qualified mortgage definition with a rebuttable presumption of
compliance instead of an exemption to the ability-to-repay
requirements. The Bureau does not believe it is necessary to adopt a
qualified mortgage definition for nonprofit creditors meeting the
conditions of Sec. 1026.43(a)(3)(v)(D). The Bureau believes that an
exemption is a more effective method of addressing the concerns
discussed above. The Bureau believes that a rebuttable presumption
would re-introduce the compliance burdens on certain nonprofits that
the Bureau seeks to alleviate. Furthermore, the line between a safe
harbor and a rebuttable presumption was determined based on pricing
thresholds and providing a rebuttable presumption based on other
criteria is inconsistent with the approach taken in the 2013 ATR Final
Rule. Nor does the Bureau believe that modifying the anti-evasion
provisions of Sec. 1026.43(h) is necessary. Either approach would
increase regulatory complexity for these creditors, and may frustrate
the goals the Bureau seeks to achieve in accommodating nonprofit
creditors. The Bureau also has decided that it is inappropriate to
provide no-action letters for certain creditors, as suggested by one
commenter. For the reasons discussed in this section, the Bureau
believes that the exemptions adopted in this final rule are the optimal
approach for providing access to responsible, affordable credit while
ensuring that consumers are offered and receive mortgage credit on
reasonably repayable terms.
The Bureau has also determined that it is appropriate to limit the
exemption to creditors designated as nonprofits under section
501(c)(3), but not 501(c)(4), of the Internal Revenue Code of 1986. The
Bureau recognizes that these creditors also may be affected by the
ability-to-repay requirements. However, the Bureau believes that this
distinction is appropriate. As discussed in the 2013 ATR Proposed Rule,
this exemption is premised on the belief that the additional costs
imposed by the ability-to-repay requirements will force certain
nonprofit creditors to cease extending credit, or substantially limit
[[Page 35468]]
credit activities, thereby harming low- to moderate-income
consumers.\143\ The Bureau solicited comment regarding whether the
exemption should be extended to creditors designated as nonprofits
under section 501(c)(4) of the Internal Revenue Code of 1986. The
Bureau also requested financial reports and mortgage lending activity
data supporting the argument that the marginal cost of implementing and
complying with the ability-to-repay requirements would cause 501(c)(4)
nonprofit creditors to cease, or severely limit, extending credit to
low- to moderate-income consumers. The Bureau received no comment in
response to this request. Thus, the Bureau concludes that it is
appropriate to limit the exemption to creditors designated as
nonprofits under section 501(c)(3) of the Internal Revenue Code of
1986, and adopts Sec. 1026.43(a)(3)(v)(D) as proposed.
---------------------------------------------------------------------------
\143\ See 78 FR 6645 (Jan. 30, 2013).
---------------------------------------------------------------------------
As noted above, the Bureau received a comment suggesting that the
exemption should not be limited to extensions of credit by a creditor
but, rather, should be extended to other transactions in which a
nonprofit organization that is dedicated to providing opportunities for
affordable, long-term homeownership is involved, but is not the
creditor. While the Bureau believes that such organizations provide
valuable assistance to LMI consumers, the Bureau has determined that it
would be inappropriate to extend the exemption in this manner. The
exemptions adopted by the Bureau are limited to creditors or
transactions where the Bureau believes that consumers are offered and
receive residential mortgage loans on reasonably repayable terms. The
proposed exemption involves creditors with certain characteristics that
ensure consumers are offered responsible, affordable credit on
reasonably repayable terms. In these narrow circumstances the Bureau
has determined that there is little risk of harm to consumers. However,
adopting the approach suggested in this comment effectively would
expand the exemption to all creditors, as any creditor could involve
such a nonprofit organization in some capacity during the origination
process. Such a broad expansion would not be necessary or proper to
effectuate the purposes of TILA; to the contrary, it would instead
exempt a potentially large number of creditors from the ability-to-
repay requirements. The Bureau would not be able to determine if each
potential creditor extended credit only on reasonably repayable terms
and does not believe it would be appropriate to assume that any
involvement by a nonprofit organization is sufficient to ensure that
consumers were not harmed by the exemption. Therefore, the Bureau
declines to extend the exemption to transactions involving nonprofit
organizations that are dedicated to providing opportunities for
affordable homeownership.
With respect to the comment disputing the Bureau's justification
for the proposed exemptions, the Bureau believes that this criticism
results from a misunderstanding of the Bureau's rationale for the
proposed exemptions. As explained in the 2013 ATR Proposed Rule, the
Bureau may provide an exemption to the ability-to-repay requirements if
the statutory conditions for the use of such an exemption are met.\144\
Providing an exemption for a particular class of creditors requires a
careful balancing of considerations, including the nature of credit
extended, safeguards or other factors that may protect consumers from
harm, and the extent to which application of the regulatory
requirements would affect access to responsible, affordable credit. As
discussed in the Bureau's proposal, the Bureau was concerned about
creditors that would be forced to cease or severely limit lending to
LMI consumers.\145\ Based on feedback provided in response to this
question, the Bureau has adopted an exemption narrowly tailored to the
situations where an exemption is necessary and proper.
---------------------------------------------------------------------------
\144\ See 78 FR 6635-36 (Jan. 30, 2013).
\145\ Id. at 6643.
---------------------------------------------------------------------------
The Bureau also disagrees with the arguments advanced that limiting
the exemption to creditors extending credit to consumers with income
below the qualifying limit for moderate income families as established
pursuant to section 8 of the United States Housing Act of 1937 is
arbitrary. The Bureau acknowledges that there may be cases where a
consumer with income slightly above the LMI threshold is unable to
secure credit. However, most commenters agreed that these conditions
helped ensure that the proposed exemption would not become a regulatory
loophole by which consumers could be harmed. Thus, the Bureau believes
that it is necessary to draw a line, and the section 8 income
limitations are clear and well-known. Such an approach will facilitate
compliance while ensuring that the exemption is narrowly tailored to
address the consumers for whom access to credit is a concern.
Therefore, the Bureau has concluded that it is appropriate to refer to
these qualifying income limits. Furthermore, the Bureau intends to
monitor these qualifying income limits in the future to ensure that the
exemption remains narrowly tailored. The Bureau has determined that it
is necessary to make a technical change to the proposed language.
Although HUD's qualifying income limits are colloquially referred to as
``section 8 limits,'' the thresholds were established by section 102 of
the Housing and Community Development Act of 1974, which amended the
National Housing Act of 1937. The Bureau believes that it is
appropriate to identify the thresholds by the exact statutory and
regulatory reference. Accordingly, the Bureau is adopting Sec.
1026.43(a)(3)(v)(D)(2) and (3) generally as proposed, but with a
technical modification that refers to the low- and moderate-income
household limit as established pursuant to section 102 of the Housing
and Community Development Act of 1974.
As discussed above, several commenters asked the Bureau to remain
engaged with the nonprofit community to ensure that the exemption is
not used as a loophole to harm consumers. For example, some commenters
asked the Bureau to establish a database of creditors that qualify for
the Sec. 1026.43(a)(3)(v)(D) exemption. The Bureau intends to keep
abreast of developments in the mortgage market, including lending
programs offered by nonprofit creditors pursuant to this exemption.
However, the Bureau does not believe that it is necessary to develop a
formal oversight mechanism, such as a database of creditors eligible
for this exemption, at this time. Instead, the Bureau will continue to
collect information related to the effectiveness of the ability-to-
repay requirements, including the Sec. 1026.43(a)(3)(v)(D) exemption,
and will pursue additional rulemakings or data collections if the
Bureau determines in the future that such action is necessary.
The Bureau has also carefully considered the comments requesting a
full or limited exemption from the ability-to-repay requirements for
certain creditors or for certain programs intended to facilitate access
to credit for LMI consumers. For example, as discussed above, several
industry commenters argued that the Bureau should provide an exemption
for all credit unions, which are designated as nonprofit organizations
under sections 501(c)(1) and 501(c)(14) of the Internal Revenue Code of
1986. Other industry commenters argued that the Bureau should provide
an exemption for credit unions operating in certain areas, such
[[Page 35469]]
as areas defined as ``underserved'' under the Federal Credit Union Act.
The Bureau agrees with the arguments advanced by commenters that credit
unions were not the source of the financial crisis, have historically
employed responsible underwriting requirements, and are often an
important source of credit for LMI consumers. However, the Bureau does
not believe that any of the requested exemptions for credit unions are
necessary. The Bureau understands that many credit unions will qualify
for the additional qualified mortgage definitions discussed below in
the section-by-section analyses of Sec. 1026.43(e)(5) and (e)(6).
Also, given the thoroughness of the traditional underwriting methods
employed by credit unions, the Bureau does not believe that larger
credit unions will have difficulty complying with the general ability-
to-repay requirements or qualified mortgage provisions. Further, absent
evidence suggesting that the ability-to-repay requirements would force
these credit unions to cease or severely curtail extending credit to
LMI consumers, the Bureau does not believe that an exemption would be
appropriate. For similar reasons, the Bureau declines to expand the
exemption to loans that meet the regulatory requirements of the
Community Reinvestment Act or similar programs. The Bureau is not
persuaded that such an expansive exemption is necessary to ensure that
LMI consumers have access to responsible, affordable credit.
To summarize, the Bureau has determined that an exemption to the
ability-to-repay requirements is appropriate for certain nonprofit
creditors. The Bureau has modified the proposed exemption in a manner
that addressed the concerns raised by various commenters. As adopted,
Sec. 1026.43(a)(3)(v)(D) exempts an extension of credit made by a
creditor with a tax exemption ruling or determination letter from the
Internal Revenue Service under section 501(c)(3) of the Internal
Revenue Code of 1986 (26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)-1),
provided that all of the conditions in Sec. 1026.43(a)(3)(v)(D)(1)
through (4) are satisfied. Section 1026.43(a)(3)(v)(D)(1) conditions
the exemption on the requirement that, during the calendar year
preceding receipt of the consumer's application, the creditor extended
credit secured by a dwelling no more than 200 times. Section
1026.43(a)(3)(v)(D)(2) conditions the exemption on the requirement
that, during the calendar year preceding receipt of the consumer's
application, the creditor extended credit secured by a dwelling only to
consumers with income that did not exceed the low- and moderate-income
household limit as established pursuant to section 102 of the Housing
and Community Development Act of 1974 (42 U.S.C. 5302(a)(20)) and
amended from time to time by the U.S. Department of Housing and Urban
Development, pursuant to 24 CFR 570.3. Section 1026.43(a)(3)(v)(D)(3)
conditions the exemption on the requirement that the extension of
credit is to a consumer with income that does not exceed the above
limit. Section 1026.43(a)(3)(v)(D)(4) conditions the exemption on the
requirement that the creditor determines, in accordance with written
procedures, that the consumer has a reasonable ability to repay the
extension of credit. The Bureau is also adopting comment
43(a)(3)(v)(D)-1 generally as proposed, but with technical
modifications that reflect the appropriate references to HUD's low- and
moderate-income household limit, as described above.
Legal Authority
Section 1026.43(a)(3)(v) is adopted pursuant to the Bureau's
authority under section 105(a) and (f) of TILA. Pursuant to section
105(a) of TILA, the Bureau generally may prescribe regulations that
provide for such adjustments and exceptions for all or any class of
transactions that the Bureau judges are necessary and proper to
effectuate the purposes of TILA, among other things. For the reasons
discussed in more detail above, the Bureau has concluded that this
exemption is necessary and proper to effectuate the purposes of TILA,
which include the purposes of TILA section 129C. By ensuring the
viability of the low- to moderate-income mortgage market, this
exemption would ensure that consumers are offered and receive
residential mortgage loans on terms that reasonably reflect their
ability to repay. The Bureau also believes that mortgage loans
originated by these creditors generally account for a consumer's
ability to repay. Without the exemption the Bureau believes that low-
to moderate-income consumers are at risk of being denied access to the
responsible and affordable credit offered by these creditors, which is
contrary to the purposes of TILA. This exemption is consistent with the
finding of TILA section 129C by ensuring that consumers are able to
obtain responsible, affordable credit from the nonprofit creditors
discussed above which inform the Bureau's understanding of its
purposes.
The Bureau has considered the factors in TILA section 105(f) and
has concluded that, for the reasons discussed above, an exemption is
appropriate under that provision. Pursuant to TILA section 105(f) the
Bureau may exempt by regulation from all or part of this title all or
any class of transactions for which in the determination of the Bureau
coverage does not provide a meaningful benefit to consumers in the form
of useful information or protection. In determining which classes of
transactions to exempt, the Bureau must consider certain statutory
factors. For the reasons discussed above, the Bureau exempts an
extension of credit made by the creditors and under conditions provided
in Sec. 1026.43(a)(3)(v) because coverage under the ability-to-repay
requirements does not provide a meaningful benefit to consumers in the
form of useful protection in light of the protection the Bureau
believes that the credit extended by these creditors already provides
to consumers. Consistent with its rationale in the 2013 ATR Proposed
Rule, the Bureau believes that the exemptions are appropriate for all
affected consumers to which the exemption applies, regardless of their
other financial arrangements and financial sophistication and the
importance of the loan to them. Similarly, the Bureau believes that the
exemptions are appropriate for all affected loans covered under the
exemption, regardless of the amount of the loan and whether the loan is
secured by the principal residence of the consumer. Furthermore, the
Bureau believes that, on balance, the exemptions will simplify the
credit process without undermining the goal of consumer protection,
denying important benefits to consumers, or increasing the expense of
the credit process. The Bureau recognizes that its exemption and
exception authorities apply to a class of transactions, and has decided
to apply these authorities to the loans covered under the final rule of
the entities subject to the adopted exemptions.
43(a)(3)(vi)
The Bureau's Proposal
As discussed above, neither TILA nor Regulation Z provides an
exemption to the ability-to-repay requirements for Federal programs
designed to stabilize homeownership or mitigate the risks of
foreclosure. However, the Bureau was concerned that the ability-to-
repay requirements would inhibit the effectiveness of these Federal
programs. As a result, the Bureau proposed
[[Page 35470]]
Sec. 1026.43(a)(3)(vi), which would have provided that an extension of
credit made pursuant to a program authorized by sections 101 and 109 of
the Emergency Economic Stabilization Act of 2008 (12 U.S.C. 5211; 5219)
(EESA) is exempt from Sec. 1026.43(c) through (f).
Proposed comment 43(a)(3)(vi)-1 would have explained that the
requirements of Sec. 1026.43(c) through (f) did not apply to a
mortgage loan modification made in connection with a program authorized
by sections 101 and 109 of EESA. If a creditor is underwriting an
extension of credit that is a refinancing, as defined by Sec.
1026.20(a), that will be made pursuant to a program authorized by
sections 101 and 109 of the Emergency Economic Stabilization Act of
2008, the creditor also need not comply with Sec. 1026.43(c) through
(f). Thus, a creditor need not determine whether the mortgage loan
modification is considered a refinancing under Sec. 1026.20(a) for
purposes of determining applicability of Sec. 1026.43; if the
transaction is made in connection with these programs, the requirements
of Sec. 1026.43(c) through (f) do not apply.
The Bureau solicited general feedback regarding whether this
proposed exemption was appropriate. In particular, the Bureau sought
comment regarding whether applicability of the ability-to-repay
requirements would constrict the availability of credit offered under
these programs and whether consumers have suffered financial loss or
other harm by creditors participating in these programs. The Bureau
also requested information on the extent to which the requirements of
these Federal programs account for a consumer's ability to repay. The
Bureau also sought comment regarding whether, if the Bureau determined
that a full exemption is not warranted, what modifications to the
general ability-to-repay standards would be warranted and whether
qualified mortgage status should be granted instead, and, if so, under
what conditions.
Comments Received
The Bureau received several comments addressing this proposed
exemption. One consumer advocate commenter opposed the exemption and
stated that these programs lack meaningful underwriting guidance. Many
industry and consumer advocate commenters supported the exemption.
These commenters generally argued that the ability-to-repay
requirements would make these programs unworkable, which would
frustrate the public policy purposes of EESA and harm consumers in need
of assistance. A few industry commenters requested that the Bureau
provide an exemption for homeownership stabilization and foreclosure
prevention programs, other than those authorized by sections 101 and
109 of EESA, such as a creditor's proprietary program intended to
provide assistance to consumers who have experienced a loss of
employment or other financial difficulty.
The Final Rule
The Bureau is adopting Sec. 1026.43(a)(3)(vi) and comment
43(a)(3)(vi)-1 as proposed. For the reasons discussed below, the Bureau
has determined that an exemption from the ability-to-repay requirements
is necessary and appropriate for extensions of credit made pursuant to
a program authorized by sections 101 and 109 of EESA. Commenters agreed
with the Bureau that the ability-to-repay requirements would interfere
with, or are inapplicable to, these programs, which are intended to
address the unique underwriting requirements of certain consumers at
risk of default or foreclosure. By significantly impairing the
effectiveness of these programs, the Bureau believes that there is a
considerable risk that the ability-to-repay requirements would actually
prevent at-risk consumers from receiving mortgage credit provided in an
affordable and responsible manner.
With respect to the feedback provided opposing this exemption, the
Bureau believes that, based on the existence of Federal oversight and
the EESA requirements, the risk of consumer harm is low. Additionally,
as discussed in part II.A above, the Bureau understands that these EESA
programs have highly detailed requirements, created and maintained by
the Treasury Department, to determine whether EESA assistance will
benefit distressed consumers.\146\ In addition to satisfying these
Treasury Department requirements, consumers receiving assistance under
an EESA program must meet EESA eligibility requirements and creditor
program requirements.\147\ Thus, the Bureau believes that credit
available under these programs is extended on reasonably repayable
terms and conditions.
---------------------------------------------------------------------------
\146\ See United States Department of the Treasury, ``Home
Affordable Modification Program, Base Net Present Value (NPV) Model
v5.02, Model Documentation'' (April 1, 2012).
\147\ See http://www.makinghomeaffordable.gov/programs/Pages/default.aspx. For example, the EESA PRA program contains several
eligibility requirements in addition to program requirements. See
http://www.makinghomeaffordable.gov/programs/lower-payments/Pages/pra.aspx.
---------------------------------------------------------------------------
Several industry commenters asked the Bureau to consider an
exemption for proprietary foreclosure mitigation and homeownership
stabilization programs. While the Bureau believes that these programs
likely benefit many consumers, the Bureau has determined that an
exemption from the ability-to-repay requirements is inappropriate.
Proprietary programs are not under the jurisdiction of the U.S.
Department of the Treasury, as EESA programs are. This lack of
accountability increases the risk that an unscrupulous creditor could
harm consumers. Furthermore, EESA programs will expire by 2017 and are
intended to provide assistance to a narrow set of distressed consumers.
In contrast, the exemption suggested by commenters is potentially
indefinite and indeterminate. Also, the Bureau believes that creditors
seeking to provide assistance to consumers in distress without
incurring the obligations associated with the ability-to-repay
requirements may do so by providing a consumer with a workout or
similar modification that does not constitute a refinancing under Sec.
1026.20(a). Thus, the Bureau declines to provide an exemption for these
proprietary programs.
No commenters addressed whether credit extended pursuant to an EESA
program should be granted a presumption of compliance as qualified
mortgages, and, if so, under what conditions. However, the Bureau does
not believe that extending qualified mortgage status to these loans
would be as effective in addressing the concerns raised above as an
exemption. Even if credit extended under EESA programs were granted a
presumption of compliance as qualified mortgages, creditors extending
credit pursuant to these programs could be impacted by significant
implementation and compliance burdens. Furthermore, as discussed above,
many loans extended under these programs would not appear to satisfy
the qualified mortgage standards under Sec. 1026.43(e)(2). For
example, consumers receiving assistance under EESA programs may have
DTI ratios in excess of the Sec. 1026.43(e)(2)(vi) threshold.\148\
Thus, a creditor extending such a mortgage loan--assuming the loan does
not qualify for another qualified mortgage definitions--would be
required to comply with the ability-to-repay requirements of Sec.
1026.43(c) and, in response to the potential liability for
[[Page 35471]]
noncompliance, would cease or severely curtail lending under the
voluntary EESA programs.
---------------------------------------------------------------------------
\148\ Consumers receiving assistance under EESA programs may
have back-end DTI ratios in excess of 50 percent. See United States
Department of the Treasury, Making Home Affordable Program
Performance Report (March 2013), page 9, available at: http://www.treasury.gov/initiatives/financial-stability/reports/Documents/March%202013%20MHA%20Report%20Final.pdf.
---------------------------------------------------------------------------
Accordingly, the Bureau believes that the proposed exemption for
credit made pursuant to an EESA program is appropriate under the
circumstances. The Bureau believes that consumers who receive
extensions of credit made pursuant to an EESA program do so after a
determination of ability to repay using criteria unique to the
distressed consumers seeking assistance under the program. The
exemption adopted by the Bureau is limited to creditors or transactions
with certain characteristics and qualifications that ensure consumers
are offered responsible, affordable credit on reasonably repayable
terms. The Bureau thus finds that coverage under the ability-to-repay
requirements provides little if any meaningful benefit to consumers in
the form of useful protection, given the nature of the credit offered
under EESA programs. At the same time, the Bureau is concerned that the
narrow class of creditors subject to the exemption may either cease or
severely curtail mortgage lending if the ability-to-repay requirements
are applied to their transactions, resulting in a denial of access to
credit. Accordingly, the Bureau is adopting Sec. 1026.43(a)(3)(vi) as
proposed.
Section 1026.43(a)(3)(vi) is adopted pursuant to the Bureau's
authority under section 105(a) and (f) of TILA. Pursuant to section
105(a) of TILA, the Bureau generally may prescribe regulations that
provide for such adjustments and exceptions for all or any class of
transactions that the Bureau judges are necessary and proper to
effectuate the purposes of TILA, among other things. As discussed in
more detail above, the Bureau has concluded that this exemption is
necessary and proper to effectuate the purposes of TILA, which include
the purposes of TILA section 129C. This exemption would ensure that
consumers are offered and receive residential mortgage loans on terms
that reasonably reflect their ability to repay. In the Bureau's
judgment extensions of credit made pursuant to a program authorized by
sections 101 and 109 of the Emergency Economic Stabilization Act of
2008 sufficiently account for a consumer's ability to repay, and the
exemption ensures that consumers are able to receive assistance under
these programs. Furthermore, without the exemption the Bureau believes
that consumers at risk of default or foreclosure would be denied access
to the responsible, affordable credit offered under these programs,
which is contrary to the purposes of TILA. This exemption is consistent
with the finding of TILA section 129C by ensuring that consumers are
able to obtain responsible, affordable credit from the nonprofit
creditors discussed above which inform the Bureau's understanding of
its purposes.
The Bureau has considered the factors in TILA section 105(f) and
has concluded that, for the reasons discussed above, an exemption is
appropriate under that provision. Pursuant to TILA section 105(f) the
Bureau may exempt by regulation from all or part of this title all or
any class of transactions for which in the determination of the Bureau
coverage does not provide a meaningful benefit to consumers in the form
of useful information or protection. In determining which classes of
transactions to exempt, the Bureau must consider certain statutory
factors. The Bureau exempts an extension of credit pursuant to a
program authorized by sections 101 and 109 of the Emergency Economic
Stabilization Act of 2008 because coverage under the ability-to-repay
requirements does not provide a meaningful benefit to consumers in the
form of useful protection in light of the protection the Bureau
believes that the credit extended through these programs already
provides to consumers. Consistent with its rationale in the 2013 ATR
Proposed Rule, the Bureau believes that the exemptions are appropriate
for all affected consumers to which the exemption applies, regardless
of their other financial arrangements and financial sophistication and
the importance of the loan to them. Similarly, the Bureau believes that
the exemptions are appropriate for all affected loans covered under the
exemption, regardless of the amount of the loan and whether the loan is
secured by the principal residence of the consumer. Furthermore, the
Bureau believes that, on balance, the exemptions will simplify the
credit process without undermining the goal of consumer protection,
denying important benefits to consumers, or increasing the expense of
the credit process. The Bureau recognizes that its exemption and
exception authorities apply to a class of transactions, and has decided
to apply these authorities to the loans covered under the final rule of
the entities subject to the adopted exemptions.
43(a)(3)(vii)
The Bureau's Proposal
As discussed above, neither TILA nor Regulation Z provide an
exemption to the ability-to-repay requirements for refinancing programs
offered by the Department of Housing and Urban Development (HUD), the
Department of Veterans Affairs (VA), or the U.S. Department of
Agriculture (USDA). However, comments provided to the Bureau during the
development of the 2013 ATR Final Rule suggested that the ability-to-
repay requirements would restrict access to credit for consumers
seeking to obtain a refinancing under certain Federal agency
refinancing programs, that the ability-to-repay requirements adopted by
the Bureau should account for the requirements of Federal agency
refinancing programs, and that Federal agency refinancing programs
should be exempt from several of the ability-to-repay requirements.
TILA section 129C(b)(3)(B)(ii), as amended by section 1411 of the Dodd-
Frank Act, requires these Federal agencies to prescribe rules related
to the definition of qualified mortgage. These Federal agencies have
not yet prescribed rules related to the definition of qualified
mortgage. Section 1411 of the Dodd-Frank Act addresses refinancing of
existing mortgage loans under the ability-to-repay requirements. As
amended by the Dodd-Frank Act, TILA section 129C(a)(5) provides that
Federal agencies may create an exemption from the income and
verification requirements for certain streamlined refinancings of loans
made, guaranteed, or insured by various Federal agencies. 15 U.S.C.
1639(a)(5). These Federal agencies also have not yet prescribed rules
related to the ability-to-repay requirements for refinancing programs.
Section 1026.43(e)(4), as adopted in the 2013 ATR Final Rule, provides
temporary qualified mortgage status for mortgage loans eligible to be
insured, guaranteed, or made pursuant to a program administered by one
of these Federal agencies, until the effective date of the agencies'
qualified mortgage rules prescribed pursuant to TILA section
129C(b)(3)(B)(ii). However, the Bureau was concerned that the ability-
to-repay requirements would impede access to credit available under
these programs. Based on these concerns and to gather more information
about the potential effect of the ability-to-repay requirements on
Federal agency refinancing programs, the Bureau proposed an exemption
for certain refinancings under specified Federal programs and solicited
feedback on several issues.
Specifically, proposed Sec. 1026.43(a)(3)(vii) would have provided
that an extension of credit that is a refinancing, as defined under
[[Page 35472]]
Sec. 1026.20(a) but without regard for whether the creditor is the
creditor, holder, or servicer of the original obligation, that is
eligible to be insured, guaranteed, or made pursuant to a program
administered by the FHA, VA, or USDA, is exempt from Sec. 1026.43(c)
through (f), provided that the agency administering the program under
which the extension of credit is eligible to be insured, guaranteed, or
made has not prescribed rules pursuant to section 129C(a)(5) or
129C(b)(3)(B)(ii) of TILA. The Bureau solicited comment regarding
whether this exemption is appropriate, whether there are any additional
conditions that should be required, whether the ability-to-repay
requirements would negatively affect the availability of credit offered
under Federal agency programs, and whether consumers could be harmed by
exempting these extensions of credit from the ability-to-repay
requirements.
Comments Received
In response to the proposed rule, most commenters supported the
proposed exemption. Industry commenters stated that the Federal agency
refinancing programs have successfully provided significant benefits to
many individual consumers and have helped stabilize the housing and
real estate markets. Industry commenters and an association of State
bankers noted that Federal agency refinancing programs are subject to
comprehensive requirements and limitations that account for a
consumer's ability to repay (e.g., demonstrated payment history), and
participating creditors must document and certify program compliance.
These commenters also noted that these refinancing programs are in the
interest of consumers because they specifically require a demonstrated
consumer benefit such as a lower interest rate, lower payment amount,
shorter loan term, or more stable mortgage product. Industry commenters
and an association of State bankers argued that subjecting these
Federal agency refinancing programs to the ability-to-repay
requirements would conflict with the objectives of the programs, limit
participation and access to these programs, and raise the cost for
consumers. Without an exemption from the ability-to-repay requirements,
they feared that most Federal agency refinancing programs would not be
used, causing communities and homeowners to suffer. Industry commenters
noted that the exemption from the ability-to-repay requirements for
Federal agency refinancing programs would encourage broad participation
in such programs, which are a critical component of the housing market
recovery, and in light of the improving, but continued fragile state,
of the housing market and broader economy, help support market
stability. Industry commenters argued that the exemption would provide
more certainty for creditors, which would lead to more of these types
of loans being originated.
Several commenters asked the Bureau to clarify which Federal agency
refinancing programs would qualify, as programs change, may be
replaced, and new programs may develop in the future. In addition, an
industry commenter suggested clarifying that events occurring after
closing of a loan would not remove the exemption from the ability-to-
repay requirements, in order to provide greater certainty for
creditors. An industry trade group commenter also argued that the
Bureau should exempt not only loans that are eligible for a Federal
agency refinancing program, but also loans that are or would be
accepted into such program except for a good faith mistake, because
otherwise creditors will underwrite to the ability-to-repay
requirements in all cases and the benefits of exemption will be
severely diminished, if not lost completely.
No commenters addressed whether Federal agency refinancings should
or should not be exempt from the ability-to-repay requirements given
that FHA, VA, and USDA loans, including refinances, are afforded
qualified mortgage status under the Bureau's 2013 ATR Final Rule.
Specifically, no commenters addressed the premise that the ability-to-
repay requirements could impose significant implementation and
compliance burdens on the designated creditors and programs even if
credit extended by the designated creditors or under the designated
programs were granted a presumption of compliance as qualified
mortgages.
Some consumer advocate commenters were strongly opposed to the
exemption, asserting that assessment of a consumer's ability to repay
is of paramount importance under the statutory scheme. These commenters
contended that consumers could be harmed by exempting these extensions
of credit from the ability-to-repay requirements. The primary arguments
were that serial refinancings (and the resulting equity-stripping) were
a root cause of the financial crisis, and that the proposed exemption
would leave consumers with no recourse. These commenters argued that
such serial refinancings were often not voluntarily chosen by the
consumer, but, instead, were temporary measures that delayed
foreclosure or were driven by a loan originator seeking more business.
Consumer group commenters argued that Federal agency refinance
guidelines do not contain adequate assurances of ability to repay, and
asserted that FHA streamlined refinances are available with no
requirement to underwrite for affordability and VA streamlined
refinances are also available without any proof of income or appraisal.
One consumer group commenter stressed that the ability-to-repay
requirements were intended to protect consumers from equity-stripping
or other forms of predatory refinancing practices that harmed so many
consumers, and that refinancing an unaffordable loan with other loans
that are not responsible or affordable does not help consumers. This
commenter argued that consumers do not benefit when they receive loans
they cannot afford, nor do they benefit when a refinance that costs
money and strips the consumer of equity simply delays the inevitable
reality that the consumer cannot afford his or her home. This commenter
also stated that the proposed exemption would immunize creditors from
TILA liability with respect to refinancings offered to some of the most
vulnerable consumers, enabling unscrupulous creditors to engage in
serial refinancings that harm consumers. This commenter also disputed
the contention raised by others that the ability-to-repay requirements
are costly and burdensome by asserting that the Bureau's provisions
comprise basic underwriting requirements that all creditors should
consider before extending refinancing credit. This commenter argued
that it is not difficult to determine a consumer's ability to repay a
loan, and that the Bureau's ability-to-repay requirements are
straightforward, streamlined, and should become the industry standard
for all loans, whether purchase money or refinancings. A State attorney
general also argued that the proposed exemption would affect a large
segment of the mortgage market, thereby potentially placing a large
number of consumers at risk while undermining the Bureau's goal of
providing uniform standards for the entire mortgage loan industry.
Consumer group commenters and a State attorney general also
observed that these Federal agencies have not yet prescribed rules
related to the ability-to-repay requirements for refinances, pursuant
to TILA section 129C(a)(5), or the definition of qualified mortgage,
pursuant to TILA section 129C(b)(3)(B)(ii), but that they have nearly a
year before the 2013 Final Rule goes into effect, which is ample time
for
[[Page 35473]]
them to issue their own rules under the Dodd-Frank Act. Accordingly,
the State attorney general argued that consumers' access to credit will
not be seriously prejudiced by a temporary application of the ability-
to-repay requirements because these Federal agency rules are likely
forthcoming. Consumer group commenters and the State attorney general
argued that Federal agencies should be bound by the ability-to-repay
requirements between now and the time they issue their own new rules.
These commenters argued that exempting Federal agency refinancing
programs from the ability-to-repay requirements before they have
promulgated their own rules removes an incentive for the agencies to
promulgate their own rules in a timely manner while opening up the
possibility that creditors acting pursuant to Federal agency
refinancing programs could originate loans that are not responsible or
affordable in the interim, thereby endangering the most vulnerable
consumers who receive these loans.
The Final Rule
The Bureau is withdrawing the proposed exemption for the reasons
below. Upon further review and consideration of the comments received,
the Bureau has determined that the proposed exemption would be
inappropriate. As discussed in the Bureau's proposal, the Bureau was
concerned that the ability-to-repay requirements and qualified mortgage
provisions would restrict access to credit for certain consumers
seeking to obtain a refinancing. After performing additional analysis
prompted by the comments received, the Bureau believes that the
qualified mortgage provision under Sec. 1026.43(e)(4), which generally
provides qualified mortgage status to loans that are eligible for
purchase, insurance, or guarantee by the specified Federal agencies,
including refinancings, strikes the appropriate balance between
preserving consumers' rights to seek redress for violations of TILA and
ensuring access to responsible, affordable credit during the current
transition period.
The Bureau agrees with the arguments raised by commenters that
Federal agency refinancing programs have helped stabilize the housing
and real estate markets. The Bureau also acknowledges that these
programs are subject to comprehensive underwriting requirements that
account for a consumer's ability to repay, which helps ensure that
consumers receive access to credit. Although many commenters approved
of the proposed exemption for the above reasons, these commenters did
not address the costs and benefits of the proposed exemption in light
of the qualified mortgage status granted to loans that are eligible for
purchase, insurance, or guarantee by the specified Federal agencies
under the Bureau's 2013 ATR Final Rule. Specifically, even absent an
exemption from the ability-to-repay requirements, FHA, VA, and USDA
loans, including refinancings, are given qualified mortgage status
under the Bureau's 2013 ATR Final Rule, which provides for a temporary
category of qualified mortgages for loans that satisfy the underwriting
requirements of, and are therefore eligible to be purchased,
guaranteed, or insured by HUD, VA, USDA, or RHS. This temporary
provision will expire when qualified mortgage regulations issued by the
various Federal agencies become effective, and in any event after seven
years.
Section 1026.43(e)(4) addresses any inconsistencies that may occur
between the general ability-to-repay and qualified mortgage provisions
of the 2013 ATR Final Rule and Federal agency requirements, which
should maintain the status quo in the Federal agency refinancing market
and ensure that consumers are able to obtain responsible, affordable
refinancing credit under these programs. Under the temporary qualified
mortgage provisions in Sec. 1026.43(e)(4), for instance, creditors
need only comply with the documentation and underwriting requirements
established by the respective Federal agencies, and need not apply the
43 percent debt-to-income ratio or follow the documentation and
underwriting procedures applicable to the general category of qualified
mortgages under Sec. 1026.43(e)(3) and appendix Q. Since the Federal
agency eligibility generally satisfies the requirements of Sec.
1026.43(e)(4), the Bureau does not believe that the qualified mortgage
provisions are inconsistent with the requirements of Federal agency
refinancing programs.
Under the qualified mortgage provision in Sec. 1026.43(e)(4), a
loan that is eligible to be purchased, guaranteed, or insured by the
specified Federal agencies would still need to meet certain minimum
requirements imposed by the Dodd-Frank Act. To receive qualified
mortgage status, in addition to Federal agency-eligibility, Sec.
1026.43(e)(4)(i)(A) provides that a mortgage loan may not include the
higher-risk loan terms identified in Sec. 1026.43(e)(2)(i) (e.g.,
negative amortization and interest-only payments), may not have a loan
term that exceeds 30 years, and may not impose points and fees in
excess of the thresholds in Sec. 1026.43(e)(3). However, while some
Federal agency refinancings may not be eligible for qualified mortgage
status, the Bureau does not believe that many Federal agency
refinancings would fail to meet these minimum requirements. Although
some Federal agency refinancings may contain the risky features
identified in Sec. 1026.43(e)(2)(i) and provide for loan terms in
excess of 30 years, the Bureau does not believe that many consumers
receive such loans. Further, while market-wide data regarding points
and fees on Federal agency refinancings is not available, the Bureau
does not believe that many Federal agency refinancings would provide
for points and fees in excess of the Sec. 1026.43(e)(3) thresholds.
Refinancings are usually less complicated than purchase transactions.
Therefore, refinancings generally require fewer costs, which makes it
unlikely that a Federal agency refinancing would exceed the points and
fees thresholds and loans under these programs. In addition, the Bureau
did not receive comment suggesting that points and fees on Federal
agency refinancings exceed the Sec. 1026.43(e)(3) thresholds. In any
event, to the extent that eligibility for qualified mortgage status
based upon these minimum requirements becomes an issue, the Bureau
notes that the various Federal agencies can address any eligibility
concerns when they prescribe their own detailed regulations concerning
qualified mortgages and refinancings. Importantly, as discussed in the
2013 ATR Final Rule, the Bureau believes that Congress intended for
loans with these risky features, long loan terms, or high points and
fees to be excluded from the scope of the qualified mortgage
definition. As the Bureau believes that few Federal agency refinancings
would fail to meet these minimum statutory requirements, the Bureau
does not believe that a modification is necessary to ensure access to
responsible, affordable credit.
The Bureau believes that the temporary qualified mortgage
provisions will help ensure that Federal agency refinancing programs
will continue to be used and provide more certainty for creditors,
which will lead to more of these types of loans being originated, and
encourage broad participation in such programs, which will help support
market stability. Thus, the Bureau disagrees with the concerns raised
by some commenters that the withdrawal of the exemption would conflict
with the objectives of the programs, limit participation and access to
these programs, impair the effectiveness of
[[Page 35474]]
such programs, or raise the cost for consumers. The Bureau believes
that it has provided a sufficient transition mechanism until the
various Federal agencies can prescribe their own regulations concerning
qualified mortgages and refinancings.
In addition, the Bureau believes that the temporary qualified
mortgage definition more appropriately balances risks to consumers than
a full exemption until such time as the Federal agencies can address
the concerns raised by commenters in their own detailed rulemakings.
The Bureau agrees that the ability-to-repay requirements were intended,
in part, to prevent harmful practices such as equity stripping and
other forms of predatory refinancings. The Bureau's temporary qualified
mortgage provision provides additional protection to consumers and
preserves potential claims in the event of abuse. For higher-priced
qualified mortgages, consumers will still have the ability to assert a
claim under TILA section 130(a) and (k) and prove that, despite the
presumption of compliance attached to the qualified mortgage, the
creditor nonetheless failed to comply with the ability-to-repay
requirements. A consumer who prevails on such a claim may be able to
recover special statutory damages equal to the sum of all finance
charges and fees paid within the first three years after consummation,
among other damages and costs, and may be able to assert the creditor's
failure to comply to obtain recoupment or setoff in a foreclosure
action even after the statute of limitations for affirmative claims has
passed. The Bureau received no persuasive evidence that the qualified
mortgage provisions of Sec. 1026.43(e)(4) fail to strike the
appropriate balance between consumer protection and the needs of the
mortgage lending market during the current transition period.
Based on these considerations, the Bureau has determined that the
withdrawal of this proposed exemption would ensure that consumers are
offered and receive residential mortgage loans on terms that reasonably
reflect their ability to repay. Based on the qualified mortgage status,
the Bureau does not believe that the ability-to-repay requirements
would significantly interfere with requirements of these Federal agency
refinancing programs, make it more difficult for many consumers to
qualify for these programs, or increase the cost of credit for those
who do. The Bureau believes that the temporary qualified mortgage
definition for loans that are eligible for purchase, insurance, or
guarantee by the specified Federal agencies adequately addresses
concerns about overlapping underwriting requirements while also
preserving consumers' rights to seek redress if an abuse occurs.
Accordingly, the Bureau concludes that this temporary exemption is not
necessary to preserve access to affordable and responsible credit, and,
therefore, is withdrawing the proposed exemption.
As discussed above, several industry commenters requested various
modifications to the proposed language. For example, some commenters
asked the Bureau to clarify which Federal agency refinancing programs
would qualify for the exemption from the ability-to-repay requirements,
as programs change, may be replaced, and new programs may develop in
the future. An industry commenter suggested clarifying that events
occurring after closing of a loan would not remove the exemption from
the ability-to-repay requirements, in order to provide greater
certainty for creditors. In addition, an industry trade group commenter
argued that the Bureau should exempt not only loans that are eligible
for a Federal agency refinance program, but also loans that are or
would be accepted into such program except for a good faith mistake. As
the Bureau has decided to withdraw proposed Sec. 1026.43(a)(3)(vii),
the issues addressed in these and similar comments are moot. As
discussed above, mortgage loans that are eligible for purchase,
insurance, or guarantee by the specified Federal agencies receive the
temporary qualified mortgage status under Sec. 1026.43(e)(4), provided
the requirements of that paragraph are met.
43(a)(3)(viii)
The Bureau's Proposal
As discussed above, neither TILA nor Regulation Z provides an
exemption to the ability-to-repay requirements for particular lending
programs. However, comments provided to the Bureau during the
development of the 2013 ATR Final Rule suggested that the ability-to-
repay requirements would restrict access to credit for consumers
seeking to obtain a refinancing under certain GSE programs for mortgage
loans with high loan-to-value ratios or for consumers harmed by the
financial crisis. These programs include HARP, which was defined as an
``eligible targeted refinancing program'' in regulations promulgated by
FHFA, to replace high loan-to-value mortgage loans with affordable
refinancings.\149\ To gather more information about the potential
effect of the ability-to-repay requirements on programs such as HARP
and explore a potential exemption, the Bureau proposed Sec.
1026.43(a)(3)(viii), which would have provided that an extension of
credit that is a refinancing, as defined under Sec. 1026.20(a) but
without regard for whether the creditor is the creditor, holder, or
servicer of the original obligation, that is eligible for purchase or
guarantee by Fannie Mae or Freddie Mac is exempt from Sec. 1026.43(c)
through (f). This proposed exemption would have applied provided that:
(1) The refinancing is made pursuant to an eligible targeted
refinancing program, as defined under 12 CFR 1291.1; (2) such entities
are operating under the conservatorship or receivership of the FHFA
pursuant to section 1367 of the Federal Housing Enterprises Financial
Safety and Soundness Act of 1992 (12 U.S.C. 4617(i)) on the date the
refinancing is consummated; (3) the existing obligation satisfied and
replaced by the refinancing is owned by Fannie Mae or Freddie Mac; (4)
the existing obligation satisfied and replaced by the refinancing was
not consummated on or after January 10, 2014; and (5) the refinancing
was not consummated on or after January 10, 2021.
---------------------------------------------------------------------------
\149\ See, e.g., 12 CFR 1291.1; 74 FR 38514, 38516 (Aug. 4,
2009).
---------------------------------------------------------------------------
Proposed comment 43(a)(3)(viii)-1 would have explained that Sec.
1026.43(a)(3)(viii) provides an exemption from the requirements of
Sec. 1026.43(c) through (f) for certain extensions of credit that are
considered refinancings, as defined in Sec. 1026.20(a) but without
regard for whether the creditor is the creditor, holder, or servicer of
the original obligation, that are eligible for purchase or guarantee by
Fannie Mae or Freddie Mac. The comment would also have explained that
the exemption provided by Sec. 1026.43(a)(3)(viii) would be available
only while these entities remain in conservatorship. The proposed
comment also contained illustrative examples of this provision.
The Bureau expressed concern that unscrupulous creditors would be
able to use the exemption to engage in loan-flipping or other harmful
practices. Thus, the Bureau requested feedback on whether this
exemption was generally appropriate. In particular, the Bureau
requested feedback regarding whether consumers could be harmed by the
proposed exemption and whether this exemption would ensure access to
responsible and affordable refinancing credit. The Bureau also
requested feedback regarding the reference to eligible targeted
refinancing programs under proposed Sec. 1026.43(a)(3)(viii)(A).
Specifically, the Bureau requested
[[Page 35475]]
comment regarding whether it would be more appropriate to refer to
another public method of identifying refinancing programs similar to
HARP, and, if so, what method of public identification would be
appropriate. The Bureau also solicited feedback regarding whether
reference to a notice published by FHFA pursuant to 12 CFR 1253.3 or
1253.4 would facilitate compliance more effectively than the proposed
reference in Sec. 1026.43(a)(3)(viii)(A).
Comments Received
Many commenters supported the proposed exemption. Several industry
commenters argued that the exemption was necessary to prevent the
imposition of unnecessary costs on consumers. These commenters
generally believed that the ability-to-repay requirements were too
burdensome and that creditors would be forced to raise costs to comply
with the regulations. One government-sponsored enterprise commenter
argued that the exemption was necessary to preserve access to credit
for consumers eligible for a refinancing under HARP. This commenter
argued that many HARP loans would be subject to the rebuttable
presumption of compliance, and that industry would refuse to make any
loans that fell outside of the safe harbor for qualified mortgages.
Several industry commenters and a Federal agency commenter argued that
the Bureau's proposed reference to FHFA regulations was unnecessary.
These commenters asserted that FHFA oversight was sufficient to ensure
that consumers would not be harmed by creditors offering mortgage loans
eligible for purchase or guarantee by the GSEs. For similar reasons,
these commenters argued that the Bureau's proposed date on which the
exemption would expire was unnecessary, as consumers would always
benefit from a GSE-eligible refinancing, regardless of when the
consumer's original loan was consummated or when the consumer obtained
the refinancing. Finally, several industry commenters and a Federal
agency commenter argued that limiting the refinancing exemption to
HARP-eligible consumers was unnecessary, as all consumers could benefit
from a GSE refinancing program and limiting the exemption to HARP-
eligible consumers would impose needless costs on all other consumers.
Some of these commenters also asked the Bureau to define eligible
refinancings by reference to the Fannie Mae or Freddie Mac selling or
servicing guides, and some asked the Bureau to expand the exemption to
include refinancings eligible for non-GSE streamlined refinancing
programs.
One consumer advocate commenter strongly opposed the proposed
exemption. This commenter stressed that predatory refinancings were one
of the primary causes of the financial crisis and that the ability-to-
repay requirements were intended to protect consumers from the abusive
equity-stripping practices that harmed so many consumers. This
commenter stated that the proposed exemption would immunize creditors
from TILA liability with respect to refinancings offered to some of the
most vulnerable consumers, enabling unscrupulous creditors to engage in
serial refinancings that harm consumers. This commenter also disputed
the contention raised by others that the ability-to-repay requirements
are costly and burdensome by asserting that the Bureau's provisions
comprise basic underwriting requirements that all creditors should
consider before extending refinancing credit. A State attorney general
also opposed the proposed exemption for similar reasons. This commenter
also argued that the proposed exemption would affect a large segment of
the mortgage market, thereby potentially placing a large number of
consumers at risk while undermining the Bureau's goal of providing
uniform standards for the entire mortgage loan industry.
The Final Rule
The Bureau is withdrawing the proposed exemption for the reasons
discussed below. Upon further review and consideration of the comments
received, the Bureau has determined that the proposed exemption would
be inappropriate. As discussed in the Bureau's proposal, the Bureau was
concerned that the ability-to-repay requirements and qualified mortgage
provisions would restrict access to credit for certain consumers
seeking to obtain a refinancing. After performing additional analysis
prompted by the comments received, the Bureau believes that the special
qualified mortgage provision under Sec. 1026.43(e)(4), which generally
provides qualified mortgage status to GSE-eligible mortgage loans,
including refinancings, strikes the appropriate balance between
preserving consumers' rights to seek redress for violations of TILA and
ensuring access to responsible, affordable credit during the current
transition period.
The Bureau acknowledges that, under the qualified mortgage
provision in Sec. 1026.43(e)(4), a HARP loan would still need to meet
certain minimum requirements imposed by the Dodd-Frank Act. To receive
qualified mortgage status, in addition to GSE-eligibility, Sec.
1026.43(e)(4)(i)(A) provides that a mortgage loan may not include the
higher-risk loan terms identified in Sec. 1026.43(e)(2)(i) (e.g.,
negative amortization and interest-only payments), may not have a loan
term that exceeds 30 years, and may not impose points and fees in
excess of the thresholds in Sec. 1026.43(e)(3). However, while some
HARP refinancings may not be eligible for this qualified mortgage
status, the Bureau does not believe that many HARP loans would fail to
meet these minimum requirements. Currently, HARP refinancings generally
may not contain the risky features identified in Sec.
1026.43(e)(2)(i).\150\ While, HARP programs permit refinancings that
provide for loan terms in excess of 30 years, the Bureau does not
believe that many consumers receive such loans.\151\ Furthermore, while
market-wide data regarding points and fees on HARP loans is not
available, the Bureau does not believe that many HARP loans would
provide for points and fees in excess of the Sec. 1026.43(e)(3)
thresholds. Refinancings are usually less complicated than purchase
transactions. Therefore, refinancings generally require fewer costs,
which makes it unlikely that a HARP loan would exceed the points and
fees thresholds, and loans under this program would not likely be
subject to some types of pricing abuses related to refinancings
generally. In addition, the Bureau did not receive comment suggesting
that points and fees on HARP loans exceed the Sec. 1026.43(e)(3)
thresholds. Importantly, as discussed in the 2013 ATR Final Rule, the
Bureau believes that Congress intended for loans with these risky
features, long loan terms, or high points and fees to be excluded from
the scope of the qualified mortgage definition.\152\ As the Bureau
believes that few HARP loans would fail to meet these minimum statutory
requirements, the Bureau does not believe that a
[[Page 35476]]
modification is necessary to ensure access to responsible, affordable
credit.
---------------------------------------------------------------------------
\150\ As of April, 2013, HARP refinancings offered by Fannie Mae
may not include negative amortization or interest-only features. See
Fannie Mae, Single-Family Selling Guide, Chapter 5 (April 9, 2013),
available at https://www.fanniemae.com/content/guide/sel040913.pdf.
Freddie Mac does not offer mortgage loans with interest-only
features and prohibits negative amortization on refinancings made
under its HARP program. See Freddie Mac, Single-Family Seller/
Servicer Guide, Vol. I, Chapters 22.4 and A24.3, available at:
http://www.freddiemac.com/sell/guide/.
\151\ Data on HARP loans with 40-year loan terms is not publicly
available. See Federal Housing Finance Agency Refinance Report (June
2012), available at: http://www.fhfa.gov/webfiles/25164/Feb13RefiReportFinal.pdf.
\152\ See 78 FR 6516-20 (Jan. 30, 2013).
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Although many commenters approved of the proposed exemption, these
commenters generally did not address the costs and benefits of the
proposed exemption in light of the special qualified mortgage status
granted to GSE-eligible loans under the Bureau's January 2013 ATR Final
Rule. For example, several commenters asserted that the ability-to-
repay requirements were incompatible with HARP program requirements.
However, given that GSE eligibility generally satisfies the
requirements of Sec. 1026.43(e)(4), the Bureau does not believe that
the special qualified mortgage provisions are inconsistent with the
requirements of HARP or similar programs. For the same reasons, the
Bureau does not agree with the arguments advanced by several commenters
that the ability-to-repay requirements would add costs that would make
these programs unsustainable. These comments did not explain what
additional costs would be imposed by the regulation beyond the costs
creditors would incur in determining GSE eligibility, which would be
required even in the absence of the Bureau's requirements. Based on the
comments provided, the Bureau does not believe that the requirements of
Sec. 1026.43(e)(4) impose any additional meaningful costs on
creditors. Thus, it does not appear that the ability-to-repay
requirements would impair the effectiveness of programs such as HARP.
While one GSE commenter addressed the potential difference between
the proposed exemption and the qualified mortgage provisions, the
Bureau is not persuaded by the arguments that creditors would rather
cease extending credit than make a qualified mortgage loan subject to
the rebuttable presumption. As discussed above, as GSE eligibility
generally satisfies the requirements of Sec. 1026.43(e)(4), the Bureau
does not believe that creditors making qualified mortgages would incur
any meaningful additional risk by making mortgage loans pursuant to the
eligibility requirements prescribed by GSEs. The Bureau believes that
the ability-to-repay requirements and qualified mortgage provisions
reflect standard industry underwriting practices, and that creditors
that make a reasonable effort to determine a consumer's ability to
repay would not be concerned with potential litigation risk that may
result from the rebuttable presumption. Thus, based on the feedback
provided, the Bureau does not believe that a creditor would incur much,
if any, additional cost by extending refinancing credit under the
qualified mortgage provisions of Sec. 1026.43(e)(4) as opposed to the
exemption under proposed Sec. 1026.43(a)(3)(viii). Absent evidence
that the special qualified mortgage provisions for GSE-eligible loans
impose significant costs on creditors, the Bureau does not believe that
consumers are at risk of being denied responsible, affordable mortgage
credit.
On the other hand, there is a risk that consumers could be harmed
by the proposed exemption. The Bureau is persuaded by the arguments
that the proposed exemption could potentially enable unscrupulous
creditors to harm consumers. The Bureau agrees that the ability-to-
repay requirements were intended, in part, to prevent harmful practices
such as equity-stripping. While the abuses of the past are seemingly
absent from today's mortgage market, the Bureau does not believe it
would be appropriate to deny consumers the means to seek redress for
TILA violations. As discussed above, the Sec. 1026.43(e)(4) qualified
mortgage provision provides additional protection to consumers and
preserves potential claims in the event of abuse. For higher-priced
qualified mortgages, consumers will still have the ability to assert a
claim under TILA section 130(a) and (k) and prove that, despite the
presumption of compliance attached to the qualified mortgage, the
creditor nonetheless failed to comply with the ability-to-repay
requirements. Thus the cost to consumers of an exemption could be
significant, as opposed to the relatively insignificant costs
associated with complying with the special qualified mortgage
provisions. Furthermore, given the detailed GSE eligibility
requirements, the Bureau does not believe it is likely that a creditor
operating a legitimate mortgage lending operation would face meaningful
litigation risk by originating qualified mortgages, even those subject
to the rebuttable presumption. The Bureau received no persuasive
comments contradicting the Bureau's belief that the special qualified
mortgage provisions of Sec. 1026.43(e)(4) strikes the appropriate
balance between consumer protection and the needs of the mortgage
lending market during the current transition period. Absent persuasive
evidence that the qualified mortgage provisions would endanger access
to credit for the consumers addressed by the proposal, the Bureau does
not believe that permitting this risk of consumer abuse is appropriate.
Thus, the Bureau concludes that the proposed exemption is neither
necessary nor proper, and proposed Sec. 1026.43(a)(3)(viii) is
withdrawn.
As discussed above, several industry commenters and a Federal
agency commenter requested various modifications to the proposed
language. For example, some commenters argued that the exemption should
refer to the Fannie Mae or Freddie Mac selling guide, some commenters
requested that the Bureau provide an exemption for all streamlined
refinancing programs, and some commenters asked the Bureau to adopt the
proposed exemption without the time limitations in proposed Sec.
1026.43(a)(3)(viii)(D) and (E). As the Bureau has decided to withdraw
proposed Sec. 1026.43(a)(3)(viii), the issues addressed in these and
similar comments are moot. As discussed above, mortgage loans made
under a streamlined refinancing program are eligible for the temporary
qualified mortgage status under Sec. 1026.43(e)(4), provided the
requirements of that paragraph are met.
43(b) Definitions
43(b)(4)
Background
TILA section 129C(a)(1) through (4) and the Bureau's rules
thereunder, Sec. 1026.43(c), prohibit a creditor from making a
residential mortgage loan unless the creditor makes a reasonable, good
faith determination, based on verified and documented information, that
the consumer has a reasonable ability to repay the loan. TILA section
129C(b) provides a presumption of compliance with regard to these
ability-to-repay requirements if a loan is a qualified mortgage.
Creditors may view qualified mortgage status as important at least in
part because TILA section 130(a) and (k) provide that, if a creditor
fails to comply with the ability-to repay requirements, a consumer may
be able to recover special statutory damages equal to the sum of all
finance charges and fees paid within the first three years after
consummation, among other damages and costs, and may be able to assert
the creditor's failure to comply to obtain recoupment or setoff in a
foreclosure action even after the statute of limitations for
affirmative claims has passed. TILA section 129C(b)(3)(B)(i) authorizes
the Bureau to prescribe regulations that revise, add to, or subtract
from the criteria that define a qualified mortgage upon a finding that
such regulations are, among other things, necessary or proper to ensure
that responsible, affordable credit remains available to consumers in a
manner consistent with the purposes of TILA section 129C.
[[Page 35477]]
Section 1026.43(e)(1) specifies the strength of presumption of
compliance regardless of which regulatory definition of qualified
mortgage applies. Under Sec. 1026.43(e)(1)(i), a qualified mortgage
that is not a higher-priced covered transaction as defined in Sec.
1026.43(b)(4) is subject to a conclusive presumption of compliance, or
safe harbor. In contrast, under Sec. 1026.43(e)(1)(ii) a qualified
mortgage that is a higher-priced covered transaction is subject to a
rebuttable presumption of compliance.
Section 1026.43(b)(4) defines a higher-priced covered transaction
to mean a transaction within the scope of Sec. 1026.43 with an annual
percentage rate that exceeds the average prime offer rate for a
comparable transaction as of the date the interest rate is set by 1.5
or more percentage points for a first-lien covered transaction or by
3.5 or more percentage points for a subordinate-lien covered
transaction. The average prime offer rates are published weekly by the
Federal Financial Institutions Examination Council based on a national
survey of creditors, the Freddie Mac Primary Mortgage Market
Survey[supreg]. The average prime offer rates estimate the national
average APR for first-lien mortgages offered to consumers with good
credit histories and low-risk transaction features (e.g., loan-to-value
ratios of 80 percent or less). The higher-priced covered transaction
thresholds generally conform to the thresholds for ``higher-priced
mortgage loans'' under Sec. 1026.35, which contains escrow
requirements and other special protections adopted after the financial
crisis for loans that have traditionally been considered subprime.
Section 1026.43(e) and (f) defines three categories of qualified
mortgages. First, Sec. 1026.43(e)(2) provides a general definition of
a qualified mortgage. Second, Sec. 1026.43(e)(4) provides that loans
that are eligible to be purchased, guaranteed, or insured by certain
government agencies or Fannie Mae or Freddie Mac are qualified
mortgages, subject to certain restrictions including restrictions on
product features and points and fees. Section 1026.43(e)(4) expires
after seven years and may expire sooner with respect to some loans if
other government agencies exercise their rulemaking authority under
TILA section 129C or if Fannie Mae or Freddie Mac exit conservatorship.
Third, Sec. 1026.43(f) provides that certain balloon-payment loans
are qualified mortgages if they are made by a small creditor that:
Had total assets less than $2 billion (adjusted annually
for inflation) as of the end of the preceding calendar year;
Together with all affiliates, extended 500 or fewer first-
lien mortgages during the preceding calendar year; and
Extended more than 50 percent of its total mortgages
secured by properties that are in rural or underserved areas during the
preceding calendar year.
Section 1026.43(f) includes only balloon-payment loans held in
portfolio for at least three years by these small creditors, subject to
certain exceptions. Further, it includes only loans that were not
subject, at consummation, to a commitment to be acquired by any person
other than another qualified small creditor.
As discussed in the section-by-section analysis of Sec.
1026.43(e)(5) below, the Bureau proposed and is adopting an additional
fourth category of qualified mortgages that includes certain loans
originated and held in portfolio by small creditors. Like Sec.
1026.43(f), Sec. 1026.43(e)(5) includes loans originated and held in
portfolio by creditors that had total assets less than $2 billion
(adjusted annually for inflation) as of the end of the preceding
calendar year and, together with all affiliates, extended 500 or fewer
first-lien mortgages during the preceding calendar year. Unlike Sec.
1026.43(f), new Sec. 1026.43(e)(5) is not limited to creditors that
operate predominantly in rural or underserved areas and does not
include loans with a balloon payment.
Proposal Regarding Higher-Priced Covered Transactions
The Bureau proposed to amend the definition of higher-priced
covered transaction in Sec. 1026.43(b)(4) with respect to qualified
mortgages that are originated and held in portfolio by small creditors
as described in Sec. 1026.43(e)(5) and with respect to balloon-payment
qualified mortgages originated and held in portfolio by small creditors
operating predominantly in rural or underserved areas as described in
Sec. 1026.43(f). The Bureau proposed to amend Sec. 1026.43(b)(4) to
provide that a first-lien loan that is a qualified mortgage under Sec.
1026.43(e)(5) or (f) is a higher-priced covered transaction if the
annual percentage rate exceeds APOR for a comparable transaction by 3.5
or more percentage points. This would have the effect of extending the
qualified mortgage safe harbor described in Sec. 1026.43(e)(1)(i) to
first-lien loans that are qualified mortgages under Sec. 1026.43(e)(5)
or (f) that have an annual percentage rate between 1.5 and 3.5
percentage points above APOR. As discussed in more detail below, the
Bureau understands that small creditors often charge higher rates and
fees than larger creditors for reasons including their higher cost of
funds. The Bureau proposed this amendment to Sec. 1026.43(b)(4)
because it believes that many loans made by small creditors will exceed
the existing qualified mortgage safe harbor threshold. Without the
proposed amendment to Sec. 1026.43(b)(4), these loans would be
considered higher-priced covered transactions and would fall under the
rebuttable presumption of compliance described in Sec.
1026.43(e)(1)(ii). The Bureau was concerned that small creditors would
be less likely to make such loans due to concerns about liability risk,
thereby reducing access to responsible credit.
Comments Received
The Bureau solicited comment on several issues related to the
proposed amendments to Sec. 1026.43(b)(4). First, the Bureau solicited
comment regarding whether the proposed amendments to Sec.
1026.43(b)(4) are necessary to preserve access to responsible,
affordable mortgage credit and regarding any adverse effects the
proposed amendments would have on consumers. Most commenters agreed
that small creditors may charge more than larger creditors for
legitimate business reasons; that amending the definition of higher-
priced covered transaction for these types of qualified mortgages is
necessary to preserve access to responsible, affordable mortgage
credit; and that the rule would provide appropriate protection for
consumers even with a higher interest rate threshold. Commenters
expressing this view included some consumer advocacy organizations,
coalitions of State regulators, national and State trade groups
representing creditors, national and State mortgage bankers
associations, a national association representing home builders, one
very large creditor, and many small creditors.
A much smaller number of commenters opposed the proposed
amendments. These included other consumer advocacy organizations, a
trade group representing very large creditors, a national organization
representing mortgage brokers, a letter submitted in substantially
similar form by several individual mortgage brokers, and one very large
creditor. These commenters generally argued that a consumer's ability
to repay does not depend on the creditor's size and that the same
standards therefore should apply to all creditors. One of these
commenters argued that small creditors do not need to charge higher
rates and fees because their higher costs are offset by lower default
rates.
[[Page 35478]]
The Bureau also solicited comment on the proposed 3.5 percentage
point threshold and whether another threshold would be more
appropriate. While many commenters supported the proposed 3.5
percentage point threshold, several commenters argued that the proposed
3.5 percentage point threshold was not sufficient and should be raised.
Commenters expressing this view included a national trade group
representing creditors, State bankers associations, and several small
creditors. These commenters generally suggested thresholds between 4.0
and 5.5 percentage points above APOR. Several of these commenters,
including the national trade group, cited the traditional principle
that small creditors generally must charge consumers 4.0 percentage
points above the creditor's cost of funds in order to operate safely
and soundly.
Finally, the Bureau solicited comment on whether, to preserve
access to mortgage credit, the Bureau also should raise the threshold
for subordinate-lien covered transactions that are qualified mortgages
under Sec. 1026.43(e)(5) and (f), and, if so, what threshold would be
appropriate for those loans. A small number of commenters, including a
State bankers association and several small creditors, urged the Bureau
to adopt a higher threshold for subordinate-lien covered transactions.
These commenters generally argued that subordinate-lien loans entail
inherently greater credit risk and that a higher threshold was needed
to account for this additional risk. Most commenters did not address
the threshold for subordinate-lien loans.
The Final Rule
The amendments to Sec. 1026.43(b)(4) are adopted as proposed. The
Bureau believes the amendments are warranted to preserve access to
responsible, affordable mortgage credit for some consumers, including
consumers who do not qualify for conforming mortgage credit and
consumers in rural and underserved areas, as described below.
As discussed above in part II.A, the Bureau understands that small
creditors are a significant source of loans that do not conform to the
requirements for government guarantee and insurance programs or
purchase by entities such as Fannie Mae and Freddie Mac. The Bureau
also understands that larger creditors may be unwilling to make at
least some of these loans because the consumers or properties involved
cannot be accurately assessed using the standardized underwriting
criteria employed by larger creditors or are illiquid because they are
non-conforming and therefore entail greater risk. For similar reasons,
the Bureau understands that larger creditors may be unwilling to
purchase such loans. Small creditors often are willing to evaluate the
merits of unique consumers and properties using flexible underwriting
criteria and make highly individualized underwriting decisions. Small
creditors often hold these loans on their balance sheets, retaining the
associated credit, liquidity, and other risks.
The Bureau also understands that small creditors are a significant
source of credit in rural and underserved areas. As discussed above in
part II.A, small creditors are significantly more likely than larger
creditors to operate offices in rural areas, and there are hundreds of
counties nationwide where the only creditors are small creditors and
hundreds more where larger creditors have only a limited presence.
The Bureau also understands that small creditors, including those
operating in rural and underserved areas, may charge consumers higher
interest rates and fees than larger creditors for several legitimate
business reasons. As discussed above in part II.A, small creditors may
pay more for funds than larger creditors. Small creditors generally
rely heavily on deposits to fund lending activities and therefore pay
more in expenses per dollar of revenue as interest rates fall and the
spread between loan yields and deposit costs narrows. Small creditors
also may rely more on interest income than larger creditors, as larger
creditors obtain higher percentages of their income from noninterest
sources such as trading, investment banking, and fiduciary services.
In addition, small creditors may find it more difficult to limit
their exposure to interest rate risk than larger creditors and
therefore may charge higher rates to compensate for that exposure.
Similarly, any individual loan poses a proportionally more significant
credit risk to a smaller creditor than to a larger creditor, and small
creditors may charge higher rates or fees to compensate for that risk.
Consumers obtaining loans that cannot readily be sold into the
securitization markets also may pay higher interest rates and fees to
compensate for the risk associated with the illiquidity of such loans.
Small creditors, including those operating in rural and underserved
areas, have repeatedly asserted to the Bureau and to other regulators
that they are unable or unwilling to assume the risk of litigation
associated with lending outside the qualified mortgage safe harbor. The
Bureau does not believe that the regulatory requirement to make a
reasonable and good faith determination based on verified and
documented evidence that a consumer has a reasonable ability to repay
would entail significant litigation risk for small creditors,
especially where their loan meets a qualified mortgage definition and
qualifies for a rebuttable presumption of compliance. As discussed in
part II.A above, small creditors as a group have consistently
experienced lower credit losses for residential mortgage loans than
larger creditors. The Bureau believes this is strong evidence that
small creditors have historically engaged in responsible mortgage
underwriting that includes considered determinations of consumers'
ability to repay, at least in part because they bear the risk of
default associated with loans held in their portfolios. The Bureau also
believes that because many small creditors use a lending model based on
maintaining ongoing relationships with their customers and have
specialized knowledge of the community in which they operate, they
therefore may have a more comprehensive understanding of their
customers' financial circumstances and may be better able to assess
ability to repay than larger creditors. In addition, the Bureau
believes that small creditors operating in limited geographical areas
may face significant risk of harm to their reputation within their
community if they make loans that consumers cannot repay. At the same
time, because of the relationship small creditors have with their
customers, the Bureau believes that the likelihood of litigation
between a customer and his or her community bank or credit union is
low.
However, the Bureau acknowledges that due to their size small
creditors may find even a remote prospect of litigation risk to be so
daunting that they may change their business models to avoid it. The
Bureau also believes that the exit of small creditors from the
residential mortgage market could create substantial short-term access
to credit issues.
The Bureau continues to believe that raising the interest rate
threshold as proposed is necessary and appropriate to preserve access
to responsible, affordable credit for consumers that are unable to
obtain loans from other creditors because they do not qualify for
conforming loans or because they live in rural or underserved areas.
The existing qualified mortgage safe harbor applies to first-lien loans
only if the annual percentage rate is less than 1.5 percentage points
above APOR for comparable transactions. The Bureau believes that many
loans made by small
[[Page 35479]]
creditors, including those operating in rural and underserved areas,
will exceed that threshold but will not pose risks to consumers. These
small creditors have repeatedly asserted to the Bureau and other
regulators that they will not continue to extend mortgage credit unless
they can make loans that are covered by the qualified mortgage safe
harbor. The Bureau therefore believes that, unless Sec. 1026.43(b)(4)
is amended as proposed, small creditors operating in rural and
underserved areas may reduce the number of mortgage loans they make or
stop making mortgage loans altogether, limiting the availability of
nonconforming mortgage credit and of mortgage credit in rural and
underserved areas.
The Bureau is sensitive to concerns about the consistency of
protections for all consumers and about maintaining a level playing
field for market participants, but believes that a differentiated
approach is justified here. The commenters who suggested that
consumers' interests are best served by subjecting all creditors to the
same standards provided nothing substantive that refutes the points
raised in the Bureau's proposal regarding the lending track records and
business models of small creditors, their concerns about litigation
risk and compliance burden, and the potential access to credit problems
the Bureau believes will arise if Sec. 1026.43(b)(4) is not amended.
For example, these commenters have not indicated that large creditors
would be able and willing to fulfill the role currently played by small
creditors in providing access to responsible, affordable nonconforming
credit or credit in rural and underserved areas, nor have they provided
evidence that the Bureau's concerns about limitations on access to
credit if the interest rate threshold is not raised are unfounded. One
commenter asserted that small creditors' lower credit losses are
sufficient to offset their higher costs, making it unnecessary to raise
the interest rate threshold. While the Bureau understands that small
creditors have historically had lower credit losses, this commenter
provided no evidence that these lower losses are sufficient to offset
small creditors' higher cost of funds and greater reliance on interest
income and the greater risks associated with holding loans in a
comparatively small portfolio, and the Bureau is not aware of any such
evidence.\153\ In addition, these commenters have provided no evidence
to challenge the Bureau's view, as described in the proposal, above,
and in the section-by-section analysis of Sec. 1026.43(e)(5) below,
that the combination of the small creditors' relationship lending
model, local knowledge, and other characteristics and the inherent
incentives of portfolio lending are sufficient to protect consumers.
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\153\ The FDIC Community Banking Study, to which the Bureau has
referred as authority for the point that small creditors have
historically incurred lower credit losses than larger creditors,
indicates that despite their lower credit losses and lower non-
interest expenses, community banks on average have lower (worse)
pre-tax return on assets and a higher and increasing (worse and
deteriorating) ratio of noninterest expense to net operating revenue
than noncommunity banks. The study attributes these in large part to
community banks' reliance on interest income and the narrowing of
the spread between asset yields and funding costs due to a prolonged
period of historically low interest rates. FDIC Community Banking
Study, p. IV-V, 4-1-4-11. See also GAO Community Banks and Credit
Unions Report, p. 10-11.
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The Bureau does not believe, however, that it is necessary to raise
the threshold for first-lien covered transactions above APOR plus 3.5
percentage points for either first-lien or subordinate-lien loans as
suggested by some commenters. The Bureau estimated the average cost of
funds for small creditors from publicly available call reports filed by
small creditors between 2000 and 2012. These estimates suggest that the
majority of first-lien mortgage loans priced by a small creditor at the
creditor's cost of funds plus 4.0 percentage points, the traditional
principle of small creditor safe and sound lending noted by several
commenters, would fall below even the original threshold of APOR plus
1.5 percentage points. However, the Bureau acknowledges that its
estimates are averages that do not reflect individual or regional
differences in cost of funds and do not reflect the additional credit
risk associated with subordinate-lien loans. The Bureau believes that
the additional 2.0 percentage points afforded by the APOR plus 3.5
percentage point standard are sufficient to address these differences.
The Bureau therefore believes that amending Sec. 1026.43(b)(4) as
proposed will allow small creditors to lend at a sustainable rate and
still fall within the qualified mortgage safe harbor, thereby
preserving access to affordable, responsible credit.
As discussed below in the section-by-section analysis of Sec.
1026.43(e)(6), the Bureau is providing a two-year transition period
during which small creditors may make balloon-payment qualified
mortgages regardless of whether they operate predominantly in rural or
underserved areas. The Bureau therefore is amending Sec. 1026.43(b)(4)
to include references to Sec. 1026.43(e)(6) and to provide that a
first-lien loan that is a qualified mortgage under Sec. 1026.43(e)(6)
is a higher priced covered transaction if the annual percentage rate
exceeds APOR for a comparable transaction by 3.5 or more percentage
points. This provision would apply to the same creditors and loans as
Sec. 1026.43(e)(5) and (f). The Bureau therefore believes that the
rationales regarding raising the interest rate threshold for qualified
mortgages under Sec. 1026.43(e)(5) and (f) described above apply with
equal force to qualified mortgages under this new provision.
Accordingly, the Bureau is exercising its authority under TILA
sections 105(a) to amend Sec. 1026.43(b)(4) substantially as proposed,
with conforming amendments as described above. Pursuant to TILA section
105(a) the Bureau generally may prescribe regulations that 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, among other things. In the 2013 ATR Final Rule the
Bureau stated that it interpreted TILA section 129C(b)(1) to create a
rebuttable presumption for qualified mortgages generally and exercised
its adjustment authority under TILA 105(a) with respect to prime loans
(loans with an APR that do not exceed APOR by 1.5 percentage points for
first liens and 3.5 percentage points for second liens), to provide a
conclusive presumption (e.g., safe harbor).\154\ In this final rule the
Bureau uses its TILA section 105(a) adjustment authority to further
expand the safe harbor to include certain covered transactions (those
subject to the qualified mortgage definition under paragraph (e)(5),
(e)(6) or (f)) that have an APR that exceeds the prime offer rate for a
comparable transaction as of the date the interest rate is set by 3.5
percentage points for a first-lien covered transaction.
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\154\ See 78 FR 6514.
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The Bureau believes that this adjustment to also provide a safe
harbor for these loans is necessary and proper to facilitate compliance
with and to effectuate the purposes of TILA, including to assure that
consumers are offered and receive residential mortgage loans on terms
that reasonably reflect their ability to repay the loans.\155\ As
[[Page 35480]]
described above, the Bureau believes that, unless Sec. 1026.43(b)(4)
is amended, small creditors will be less likely to make residential
mortgage loans. Because small creditors are a significant source of
nonconforming mortgage credit and mortgage credit generally in rural or
underserved areas, this would significantly limit access to mortgage
credit for some consumers. The Bureau also believes that the
relationship lending model, qualitative local knowledge, and size of
small creditors, combined with the intrinsic incentives of portfolio
lending, provide strong assurances that these creditors will make
reasonable and good faith determinations of consumers' ability to
repay. Providing a safe harbor for these loans facilitates compliance
with the ability-to-repay standards in a manner consistent with the
purposes of TILA.
---------------------------------------------------------------------------
\155\ These adjustments are also consistent with the Bureau's
authority under TILA section 129C(b)(3)(B)(i) to prescribe
regulations that revise, add to, or subtract from the criteria that
define a qualified mortgage upon a finding that such regulations are
necessary or proper to ensure that responsible, affordable mortgage
credit remains available to consumers in a manner consistent with
the purposes of this section, necessary and appropriate to
effectuate the purposes of TILA section 129B and section 129C, to
prevent circumvention or evasion thereof, or to facilitate
compliance with such section.
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43(e) Qualified Mortgages
43(e)(1) Safe Harbor and Presumption of Compliance
The Bureau is adopting two additional provisions regarding
qualified mortgages, as discussed in the section-by-section analyses of
Sec. 1026.43(e)(5) and (6) below. The Bureau therefore is adopting
conforming changes to Sec. 1026.43(e)(1) to include references to
these new provisions. Like other qualified mortgages, qualified
mortgages under Sec. 1026.43(e)(5) and (6) are covered by the safe
harbor described in Sec. 1026.43(e)(1)(i) if they are not higher-
priced covered transactions and are subject to the rebuttable
presumption of compliance described in Sec. 1026.43(e)(1)(ii) if they
are higher-priced covered transactions. However, the Bureau is adopting
a different definition of higher-priced covered transaction to first-
lien qualified mortgages under Sec. 1026.43(e)(5) and (6). The
section-by-section analysis of Sec. 1026.43(b)(4), above, describes
the alternate definition of higher-priced covered transactions.
43(e)(2) Qualified Mortgage Defined--General
The Bureau is adopting conforming amendments to Sec. 1026.43(e)(2)
to include references to Sec. 1026.43(e)(5) and (6), as described in
the section-by-section analyses of those sections, below.
43(e)(5) Qualified Mortgage Defined--Small Creditor Portfolio Loans
Background
TILA section 129C(a)(1) through (4) and the Bureau's rules
thereunder, Sec. 1026.43(c), prohibit a creditor from making a
residential mortgage loan unless the creditor makes a reasonable, good
faith determination, based on verified and documented information, that
the consumer has a reasonable ability to repay the loan. TILA section
129C(b) provides that a creditor or assignee may presume that a loan
has met the ability-to-repay requirements if a loan is a qualified
mortgage. Creditors may view qualified mortgage status as important at
least in part because TILA section 130 provides that, if a creditor
fails to comply with the ability-to-repay requirements, a consumer may
be able to recover special statutory damages equal to the sum of all
finance charges and fees paid within the first three years after
consummation, among other damages and costs, and may be able to assert
the creditor's failure to comply to obtain recoupment or setoff in a
foreclosure action even after the statute of limitations on affirmative
claims has expired. TILA section 129C(b)(2)(A)(vi) authorizes, but does
not require, the Bureau to establish limits on debt-to-income ratio or
other measures of a consumer's ability to pay regular expenses after
making payments on mortgage and other debts. TILA section
129C(b)(3)(B)(i) authorizes the Bureau to revise, add to, or subtract
from the criteria that define a qualified mortgage upon a finding that
such regulations are, among other things, necessary or proper to ensure
that responsible, affordable credit remains available to consumers in a
manner consistent with the purposes of TILA section 129C or necessary
and appropriate to effectuate the purposes of TILA sections 129B and
129C.
Section 1026.43(e) and (f) defines three categories of qualified
mortgages. First, Sec. 1026.43(e)(2) prescribes the general definition
of a qualified mortgage. Second, Sec. 1026.43(e)(4) provides that
certain loans that are eligible to be purchased, guaranteed, or insured
by certain Federal government agencies or Fannie Mae or Freddie Mac
while operating under conservatorship are qualified mortgages. Section
1026.43(e)(4) expires seven years after its effective date and may
expire earlier with respect to certain loans if other Federal
government agencies exercise their rulemaking authority under TILA
section 129C or if the GSEs exit conservatorship. Third, Sec.
1026.43(f) provides that certain loans with a balloon payment made by
small creditors operating predominantly in rural or underserved areas
are qualified mortgages.
The Bureau's Proposal
The Bureau proposed to define a fourth category of qualified
mortgages including loans originated and held in portfolio by certain
small creditors in new Sec. 1026.43(e)(5). This additional category of
qualified mortgages would have been similar in several respects to
Sec. 1026.43(f), which provides that certain balloon loans made by
small creditors operating predominantly in rural or underserved areas
are qualified mortgages. As under Sec. 1026.43(f), the additional
category would have included loans originated by small creditors, as
defined by asset-size and transaction thresholds, and held in portfolio
by those creditors for at least three years, subject to certain
exceptions. However, proposed Sec. 1026.43(e)(5) would have included
small creditors that do not operate predominantly in rural or
underserved areas and would not have included loans with a balloon
payment.
Specifically, the new category would have included certain loans
originated by creditors that:
Have total assets that do not exceed $2 billion as of the
end of the preceding calendar year (adjusted annually for inflation);
and
Together with all affiliates, extended 500 or fewer first-
lien mortgages during the preceding calendar year.
The proposed additional category would have included only loans
held in portfolio by these creditors. Specifically, proposed Sec.
1026.43(e)(5) would have provided that a loan would lose its qualified
mortgage status under Sec. 1026.43(e)(5) if it is sold, assigned, or
otherwise transferred, subject to exceptions for transfers that are
made three or more years after consummation, to another qualifying
institution, as required by a supervisory action, or pursuant to a
merger or acquisition. In addition, proposed Sec. 1026.43(e)(5) would
have provided that a loan must not be subject at consummation to a
commitment to be acquired by any person other than a person that also
meets the above asset and origination criteria.
The loan also would have had to conform to all of the requirements
under the Sec. 1026.43(e)(2) general definition of a qualified
mortgage except with regard to debt-to-income ratio. In other words,
the loan could not have:
Negative-amortization, interest-only, or balloon-payment
features;
A term longer than 30 years; or
[[Page 35481]]
Points and fees greater than 3 percent of the total loan
amount (or, for smaller loans, a specified amount).
When underwriting the loan the creditor would have been required to
take into account the monthly payment for any mortgage-related
obligations, and:
Use the maximum interest rate that may apply during the
first five years and periodic payments of principal and interest that
will repay the full principal;
Consider and verify the consumer's current and reasonably
expected income or assets other than the value of the property securing
the loan; and
Consider and verify the consumer's current debt
obligations, alimony, and child support.
The creditor also would have been required to consider the
consumer's debt-to-income ratio or residual income and to verify the
underlying information generally in accordance with Sec.
1026.43(c)(7). Section 1026.43(c)(7) describes how creditors must
calculate a consumers' debt-to-income ratio or residual income for
purposes of complying with the ability-to-repay rules set forth in
Sec. 1026.43(c). Section 1026.43(c)(7) specifies that a creditor must
consider the ratio of or difference between a consumer's total monthly
debt obligations and total monthly income. Section 1026.43(c)(7)(i)(A)
specifies that a consumer's total monthly debt obligations includes the
payment on the covered transaction as calculated according to Sec.
1026.43(c)(5). However, for purposes of Sec. 1026.43(e)(5), the
calculation of the payment on the covered transaction must be
determined in accordance with Sec. 1026.43(e)(2)(iv) instead of Sec.
1026.43(c)(5).
In contrast, the general definition of a qualified mortgage in
Sec. 1026.43(e)(2) requires a creditor to calculate the consumer's
debt-to-income ratio according to instructions in appendix Q \156\ and
specifies that the consumer's debt-to-income ratio must be 43 percent
or less.
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\156\ The Bureau has proposed certain revisions to Appendix Q.
See 78 FR 25638-25662 (May 2, 2013). Comments on this proposal must
be received on or before June 3, 2013.
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As with all qualified mortgages, a qualified mortgage under Sec.
1026.43(e)(5) would have received either a rebuttable presumption of
compliance with, or a safe harbor from liability for violating, the
ability-to-repay requirements in Sec. 1026.43(c), depending on the
annual percentage rate. However, as described above in the section-by-
section analysis of Sec. 1026.43(b)(4), the Bureau also proposed and
is adopting an alternate definition of higher-priced covered
transaction for first-lien covered transactions that are qualified
mortgages under proposed Sec. 1026.43(e)(5). Amended as proposed,
Sec. 1026.43(b)(4) provides that a first-lien covered transaction that
is a qualified mortgage under proposed Sec. 1026.43(e)(5) is a higher-
priced covered transaction if the annual percentage rate exceeds APOR
for a comparable transaction by 3.5 or more percentage points. This
extends the qualified mortgage safe harbor described in Sec.
1026.43(e)(1)(i) to first-lien qualified mortgages defined under
proposed Sec. 1026.43(e)(5) even if those loans have annual percentage
rates between 1.5 and 3.5 percentage points higher than APOR. Without
the amendment to Sec. 1026.43(b)(4), such loans would have been
covered by the rebuttable presumption of compliance described in Sec.
1026.43(e)(1)(ii).
The Bureau proposed ten comments to clarify the requirements
described in proposed Sec. 1026.43(e)(5). Proposed comment 43(e)(5)-1
would have provided additional guidance regarding the requirement to
comply with the general definition of a qualified mortgage under Sec.
1026.43(e)(2). The proposed comment would have restated the regulatory
requirement that a covered transaction must satisfy the requirements of
the Sec. 1026.43(e)(2) general definition of qualified mortgage,
except with regard to debt-to-income ratio, to be a qualified mortgage
under Sec. 1026.43(e)(5). As an example, the proposed comment would
have explained that a qualified mortgage under Sec. 1026.43(e)(5) may
not have a loan term in excess of 30 years because longer terms are
prohibited for qualified mortgages under Sec. 1026.43(e)(2)(ii). As
another example, the proposed comment would have explained that a
qualified mortgage under Sec. 1026.43(e)(5) may not result in a
balloon payment because Sec. 1026.43(e)(2)(i)(C) provides that
qualified mortgages may not have balloon payments except as provided
under Sec. 1026.43(f). Finally, the proposed comment would have
clarified that a covered transaction may be a qualified mortgage under
Sec. 1026.43(e)(5) even though the consumer's monthly debt-to-income
ratio exceeds 43 percent, Sec. 1026.43(e)(2)(vi) notwithstanding.
Proposed comment 43(e)(5)-2 would have clarified that Sec.
1026.43(e)(5) does not prescribe a specific monthly debt-to-income
ratio with which creditors must comply. Instead, creditors must
consider a consumer's debt-to-income ratio or residual income
calculated generally in accordance with Sec. 1026.43(c)(7) and verify
the information used to calculate the debt-to-income ratio or residual
income in accordance with Sec. 1026.43(c)(3) and (4). The proposed
comment would have explained that Sec. 1026.43(c)(7) refers creditors
to Sec. 1026.43(c)(5) for instructions on calculating the payment on
the covered transaction and that Sec. 1026.43(c)(5) requires creditors
to calculate the payment differently than Sec. 1026.43(e)(2)(iv). The
proposed comment would have clarified that, for purposes of the
qualified mortgage definition in Sec. 1026.43(e)(5), creditors must
base their calculation of the consumer's debt-to-income ratio or
residual income on the payment on the covered transaction calculated
according to Sec. 1026.43(e)(2)(iv) instead of according to Sec.
1026.43(c)(5). Finally, the proposed comment would have clarified that
creditors are not required to calculate the consumer's monthly debt-to-
income ratio in accordance with appendix Q as is required under the
general definition of qualified mortgages by Sec. 1026.43(e)(2)(vi).
Proposed comment 43(e)(5)-3 would have noted that the term
``forward commitment'' is sometimes used to describe a situation where
a creditor originates a mortgage loan that will be transferred or sold
to a purchaser pursuant to an agreement that has been entered into at
or before the time the transaction is consummated. The proposed comment
would have clarified that a mortgage that will be acquired by a
purchaser pursuant to a forward commitment does not satisfy the
requirements of Sec. 1026.43(e)(5), whether the forward commitment
provides for the purchase and sale of the specific transaction or for
the purchase and sale of transactions with certain prescribed criteria
that the transaction meets. However, the proposed comment also would
have clarified that a forward commitment to another person that also
meets the requirements of Sec. 1026.43(e)(5)(i)(D) is permitted. The
proposed comment would have given the following example: Assume a
creditor that is eligible to make qualified mortgages under Sec.
1026.43(e)(5) makes a mortgage. If that mortgage meets the purchase
criteria of an investor with which the creditor has an agreement to
sell such loans after consummation, then the loan does not meet the
definition of a qualified mortgage under Sec. 1026.43(e)(5). However,
if the investor meets the requirements of Sec. 1026.43(e)(5)(i)(D),
the mortgage will be a qualified mortgage if all other applicable
criteria also are satisfied.
Proposed comment 43(e)(5)-4 would have reiterated that, to be
eligible to make qualified mortgages under
[[Page 35482]]
Sec. 1026.43(e)(5), a creditor must satisfy the requirements of Sec.
1026.35(b)(2)(iii)(B) and (C). For ease of reference, the comment would
have stated that Sec. 1026.35(b)(2)(iii)(B) requires that, during the
preceding calendar year, the creditor and its affiliates together
originated 500 or fewer first-lien covered transactions and that Sec.
1026.35(b)(2)(iii)(C) requires that, as of the end of the preceding
calendar year, the creditor had total assets of less than $2 billion,
adjusted annually for inflation.
Proposed comment 43(e)(5)-5 would have clarified that creditors
generally must hold a loan in portfolio to maintain the transaction's
status as a qualified mortgage under Sec. 1026.43(e)(5), subject to
four exceptions. The proposed comment would have clarified that, unless
one of these exceptions applies, a loan is no longer a qualified
mortgage under Sec. 1026.43(e)(5) once legal title to the debt
obligation is sold, assigned, or otherwise transferred to another
person. Accordingly, unless one of the exceptions applies, the
transferee could not benefit from the presumption of compliance for
qualified mortgages under Sec. 1026.43(e)(1) unless the loan also met
the requirements of another qualified mortgage definition. Proposed
comment 43(e)(5)-6 would have clarified that Sec. 1026.43(e)(5)(ii)
applies not only to an initial sale, assignment, or other transfer by
the originating creditor but to subsequent sales, assignments, and
other transfers as well. The proposed comment would have given the
following example: Assume Creditor A originates a qualified mortgage
under Sec. 1026.43(e)(5). Six months after consummation, Creditor A
sells the qualified mortgage to Creditor B pursuant to Sec.
1026.43(e)(5)(ii)(B) and the loan retains its qualified mortgage status
because Creditor B complies with the limits on asset size and number of
transactions. If Creditor B sells the qualified mortgage, it will lose
its qualified mortgage status under Sec. 1026.43(e)(5) unless the sale
qualifies for one of the Sec. 1026.43(e)(5)(ii) exceptions for sales
three or more years after consummation, to another qualifying
institution, as required by supervisory action, or pursuant to a merger
or acquisition.
Proposed comment 43(e)(5)-7 would have clarified that, under Sec.
1026.43(e)(5)(ii)(A), if a qualified mortgage under Sec. 1026.43(e)(5)
is sold, assigned, or otherwise transferred three years or more after
consummation, the loan retains its status as a qualified mortgage under
Sec. 1026.43(e)(5) following the transfer. The proposed comment would
have clarified that this is true even if the transferee is not itself
eligible to originate qualified mortgages under Sec. 1026.43(e)(5).
The proposed comment would have clarified that, once three or more
years after consummation have passed, the qualified mortgage will
continue to be a qualified mortgage throughout its life, and a
transferee, and any subsequent transferees, may invoke the presumption
of compliance for qualified mortgages under Sec. 1026.43(e)(1).
Proposed comment 43(e)(5)-8 would have clarified that, under Sec.
1026.43(e)(5)(ii)(B), a qualified mortgage under Sec. 1026.43(e)(5)
may be sold, assigned, or otherwise transferred at any time to another
creditor that meets the requirements of Sec. 1026.43(e)(5)(v). The
proposed comment would have noted that section Sec. 1026.43(e)(5)(v)
requires that a creditor, together with all affiliates during the
preceding calendar year, originated 500 or fewer first-lien covered
transactions and had total assets less than $2 billion (adjusted
annually for inflation) at the end of the preceding calendar year. The
proposed comment would have clarified that a qualified mortgage under
Sec. 1026.43(e)(5) that is transferred to a creditor that meets these
criteria would retain its qualified mortgage status even if it is
transferred less than three years after consummation.
Proposed comment 43(e)(5)-9 would have clarified that Sec.
1026.43(e)(5)(ii)(C) facilitates sales that are deemed necessary by
supervisory agencies to revive troubled creditors and resolve failed
creditors. The proposed comment would have noted that this section
provides that a qualified mortgage under Sec. 1026.43(e)(5) retains
its qualified mortgage status if it is sold, assigned, or otherwise
transferred to: another person pursuant to a capital restoration plan
or other action under 12 U.S.C. 1831o; the actions or instructions of
any person acting as conservator, receiver or bankruptcy trustee; an
order of a State or Federal government agency with jurisdiction to
examine the creditor pursuant to State or Federal law; or an agreement
between the creditor and such an agency. The proposed comment would
have clarified that a qualified mortgage under Sec. 1026.43(e)(5) that
is sold, assigned, or otherwise transferred under these circumstances
retains its qualified mortgage status regardless of how long after
consummation it is sold and regardless of the size or other
characteristics of the transferee. The proposed comment also would have
clarified that Sec. 1026.43(e)(5)(ii)(C) does not apply to transfers
done to comply with a generally applicable regulation with future
effect designed to implement, interpret, or prescribe law or policy in
the absence of a specific order by or a specific agreement with a
government agency described in Sec. 1026.43(e)(5)(ii)(C) mandating the
sale of one or more qualified mortgages under Sec. 1026.43(e)(5) held
by the creditor, or one of the other circumstances listed in Sec.
1026.43(e)(5)(ii)(C). As an example, the proposed comment would have
explained that a qualified mortgage under Sec. 1026.43(e)(5) that is
sold pursuant to a capital restoration plan under 12 U.S.C. 1831o would
retain its status as a qualified mortgage following the sale. However,
if the creditor simply chose to sell the same qualified mortgage as one
way to comply with general regulatory capital requirements in the
absence of supervisory action or agreement, the mortgage would lose its
status as a qualified mortgage following the sale unless it qualifies
under another definition of qualified mortgage.
Proposed comment 43(e)(5)-10 would have clarified that a qualified
mortgage under Sec. 1026.43(e)(5) retains its qualified mortgage
status if a creditor merges with or is acquired by another person
regardless of whether the creditor or its successor is eligible