Amendments to the 2013 Mortgage Rules Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z), 44685-44728 [2013-16962]
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Vol. 78
Wednesday,
No. 142
July 24, 2013
Part III
Bureau of Consumer Financial Protection
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12 CFR Parts 1024 and 1026
Amendments to the 2013 Mortgage Rules Under the Real Estate
Settlement Procedures Act (Regulation X) and the Truth in Lending Act
(Regulation Z); Final Rule
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Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations
BUREAU OF CONSUMER FINANCIAL
PROTECTION
12 CFR Parts 1024 and 1026
[Docket No. CFPB–2013–0010]
RIN 3170–AA37
Amendments to the 2013 Mortgage
Rules Under the Real Estate
Settlement Procedures Act (Regulation
X) and the Truth in Lending Act
(Regulation Z)
Bureau of Consumer Financial
Protection.
ACTION: Final rule; official
interpretations.
AGENCY:
This rule amends some of the
final mortgage rules issued by the
Bureau of Consumer Financial
Protection (Bureau) in January of 2013.
These amendments clarify, correct, or
amend provisions on the relation to
State law of Regulation X’s servicing
provisions; implementation dates for
adjustable-rate mortgage servicing;
exclusions from requirements on higherpriced mortgage loans; the small
servicer exemption from certain
servicing rules; the use of governmentsponsored enterprise and Federal
agency purchase, guarantee or insurance
eligibility for determining qualified
mortgage status; and the determination
of debt and income for purposes of
originating qualified mortgages.
DATES: This rule is effective January 10,
2014, except for the amendment to
§ 1026.35(e), which is effective July 24,
2013. See part V, Effective Date, in
SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT:
Marta Tanenhaus, Senior Counsel, Paul
Ceja, Senior Counsel and Special
Advisor; Joseph Devlin, Counsel; Office
of Regulations, at (202) 435–7700.
SUPPLEMENTARY INFORMATION:
SUMMARY:
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I. Summary of Final Rule
In January 2013, the Bureau issued
several final rules concerning mortgage
markets in the United States (2013 Title
XIV Final Rules), pursuant to the DoddFrank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act). Public
Law 111–203, 124 Stat. 1376 (2010). On
January 10, 2013, the Bureau issued the
2013 ATR Final Rule; 1 on January 17,
2013, the Bureau issued the 2013
Mortgage Servicing Final Rules; 2 and on
1 Ability-to-Repay and Qualified Mortgage
Standards Under the Truth in Lending Act
(Regulation Z) (2013 ATR Final Rule), 78 FR 6407
(Jan. 30, 2013).
2 Mortgage Servicing Rules Under the Real Estate
Settlement Procedures Act (Regulation X) (2013
RESPA Servicing Final Rule) and Mortgage
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May 16, 2013, the Bureau issued
Amendments to the 2013 Escrows Final
Rule.3 This final rule makes several
amendments to those rules. These
amendments clarify, correct, or amend
provisions on (1) the relation to State
law of Regulation X’s servicing
provisions; (2) implementation dates for
adjustable-rate mortgage disclosures; (3)
exclusions from the repayment ability
and prepayment penalty requirements
for higher-priced mortgage loans
(HPMLs); (4) the small servicer
exemption from certain of the new
servicing rules; (5) the use of
government-sponsored enterprise (GSE)
and Federal agency purchase, guarantee
or insurance eligibility for determining
qualified mortgage (QM) status; and (6)
the determination of debt and income
for purposes of originating QMs. In
addition to these six revisions and
clarifications, which are discussed more
fully below, the Bureau is making
certain technical corrections to the
regulations with no substantive change
intended.
First, the Bureau is amending the
commentary to the preemption
provision of Regulation X to clarify that
the regulation does not occupy the field
of regulation of the practices covered by
the Real Estate Settlement Procedures
Act (RESPA) or Regulation X, including
with respect to mortgage servicers or
mortgage servicing. The rule also
redesignates the Regulation X
preemption provision, § 1024.13, as
§ 1024.5(c).
Second, in response to industry
requests, the Bureau is providing
clarification of the implementation
dates for adjustable-rate mortgage
provisions § 1026.20(c) and (d) of the
2013 TILA Servicing Final Rule. This
clarification is provided in the sectionby-section analysis and does not revise
the 2013 TILA Servicing Final Rule or
its official commentary.
Third, the Bureau is revising
§ 1026.35(e) of Regulation Z, as
amended by the Amendments to the
2013 Escrows Final Rule,4 to clarify that
construction and bridge loans and
reverse mortgages are not subject to its
requirements regarding repayment
abilities and prepayment penalties for
HPMLs.
Servicing Rules Under the Truth in Lending Act
(Regulation Z) (2013 TILA Servicing Final Rule)
(together, 2013 Mortgage Servicing Final Rules), 78
FR 10695 (Feb. 14, 2013) (Regulation X), 78 FR
10901 (Feb. 14, 2013) (Regulation Z).
3 Amendments to the 2013 Escrows Final Rule
under the Truth in Lending Act (Regulation Z), 78
FR 30739 (May 23, 2013). Those amendments
revised 78 FR 4726 (Jan. 22, 2013) (2013 Escrows
Final Rule).
4 78 FR 30739 (May 23, 2013).
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Fourth, the Bureau is clarifying the
scope and application of the exemption
for small servicers that is set forth in
Regulation Z’s periodic statement
provision, § 1026.41, and incorporated
by cross-reference in certain provisions
of Regulation X. The rule clarifies which
mortgage loans to consider in
determining small servicer status and
the application of the small servicer
exemption with regard to servicer/
affiliate and master servicer/subservicer
relationships. Further, the rule provides
that three types of mortgage loans will
not be considered in determining small
servicer status: mortgage loans
voluntarily serviced for an unaffiliated
entity without remuneration, reverse
mortgages, and mortgage loans secured
by a consumer’s interest in timeshare
plans.
Fifth, the Bureau is revising
regulatory text and an official
interpretation adopted in the 2013 ATR
Final Rule and adding a new official
interpretation to describe qualified
mortgages that are entitled to a
presumption of compliance with the
ability-to-repay requirements under the
Dodd-Frank Act. Specifically, the
Bureau is providing clarifications with
regard to § 1026.43(e)(4), which allows
qualified mortgage status to certain
loans that are eligible for purchase,
guarantee, or insurance by the GSEs or
federal agencies. Section
1026.43(e)(4)(ii)(A)–(E) is amended to
make clear that matters wholly
unrelated to ability to repay will not be
relevant to determination of QM status
under this provision. Comment
43(e)(4)–4 explains that matters wholly
unrelated to ability to repay are those
matters that are wholly unrelated to
credit risk or the underwriting of the
loan. Comment 43(e)(4)–4 also clarifies
the standards a creditor must meet
when relying on a written guide or an
automated underwriting system to
determine qualified mortgage status
under § 1026.43(e)(4). In addition, the
revised comment specifies that a
creditor relying on approval through an
automated underwriting system to
establish qualified mortgage status must
also meet the conditions on approval
that are generated by that same system.
The Bureau is also revising comment
43(e)(4)–4 to clarify that a loan meeting
eligibility requirements provided in a
written agreement with one of the GSEs,
HUD, VA, USDA, or RHS is also eligible
for purchase or guarantee by the GSEs
or insured or guaranteed by the agencies
for the purposes of § 1026.43(e)(4). In
addition, the comment has been
clarified to provide that loans receiving
individual waivers from GSEs or
agencies will be considered eligible as
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Act (TILA) and RESPA, in the Bureau.5
At the same time, Congress significantly
amended the statutory requirements
governing mortgage practices with the
intent to restrict the practices that
contributed to and exacerbated the
crisis. Under the statute, most of these
new requirements would have taken
effect automatically on January 21,
2013, if the Bureau had not issued
implementing regulations by that date.6
To avoid uncertainty and potential
disruption in the national mortgage
market at a time of economic
vulnerability, the Bureau issued several
final rules in a span of less than two
weeks in January 2013 to implement
these new statutory provisions and
provide for an orderly transition.
On January 10, 2013, the Bureau
issued the 2013 ATR Final Rule, Escrow
Requirements Under the Truth in
Lending Act (Regulation Z) (2013
Escrows Final Rule),7 and High-Cost
Mortgages and Homeownership
Counseling Amendments to the Truth in
Lending Act (Regulation Z) and
Homeownership Counseling
Amendments to the Real Estate
Settlement Procedures Act (Regulation
X) (2013 HOEPA Final Rule).8 On
January 17, 2013, the Bureau issued the
2013 Mortgage Servicing Final Rules.
On January 18, 2013, the Bureau issued
Appraisals for Higher-Priced Mortgage
Loans (Regulation Z) 9 (issued jointly
with other agencies) and Disclosure and
Delivery Requirements for Copies of
Appraisals and Other Written
Valuations Under the Equal Credit
Opportunity Act (Regulation B) (2013
Appraisals Final Rule).10 On January 20,
2013, the Bureau issued Loan Originator
Compensation Requirements Under the
Truth in Lending Act (Regulation Z)
(2013 Loan Originator Final Rule).11
Most of these rules will become
effective on January 10, 2014.
Concurrent with the 2013 ATR Final
Rule, on January 10, 2013, the Bureau
issued Proposed Amendments to the
Ability-to-Repay Standards Under the
II. Background
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well. Thus, such loans could be
qualified mortgages.
The Bureau is also issuing new
comment 43(e)(4)–5, which provides
that a repurchase or indemnification
demand by the GSEs, HUD, VA, USDA,
or RHS is not dispositive for
ascertaining qualified mortgage status.
The comment provides two examples to
illustrate the application of this
guidance.
Sixth, the Bureau is amending
appendix Q of Regulation Z to facilitate
compliance and ensure access to credit
by assisting creditors in determining a
consumer’s debt-to-income ratio (DTI)
for the purposes of § 1026.43(e)(2), the
primary qualified mortgage provision.
The Bureau is making changes to
address compliance challenges raised by
stakeholders, as well as technical and
wording changes for clarification
purposes. The Bureau’s revisions
include clarifications to appendix Q on:
(1) Stability of income, and the creditor
requirement to evaluate the probability
of the consumer’s continued
employment; (2) with regard to salary,
wage, and other forms of consumer
income, the creditor requirement to
determine whether the consumer’s
income level can reasonably be
expected to continue; (3) creditor
analysis of consumer overtime and
bonus income; (4) creditor analysis of
consumer Social Security income; (5)
requirements related to the analysis of
self-employed consumer income; (6)
requirements related to nonemployment related consumer income,
including creditor analysis of consumer
trust income; and (7) creditor analysis of
rental income. The Bureau is also
revising the introduction to appendix Q
to make clear that creditors may refer to
other federal agency and GSE guidance
that is in accordance with appendix Q
as a resource, and to provide default
rules and an optional safe harbor when
appendix Q’s standards do not
otherwise resolve how to treat a
particular type of debt or income.
5 Sections 1011 and 1021 of the Dodd-Frank Act,
in title X, the ‘‘Consumer Financial Protection Act,’’
Public Law 111–203, sections 1001–1100H, codified
at 12 U.S.C. 5491, 5511. The Consumer Financial
Protection Act is substantially codified at 12 U.S.C.
5481–5603. Section 1029 of the Dodd-Frank Act
excludes from this transfer of authority, subject to
certain exceptions, any rulemaking authority over a
motor vehicle dealer that is predominantly engaged
in the sale and servicing of motor vehicles, the
leasing and servicing of motor vehicles, or both. 12
U.S.C. 5519.
6 Dodd-Frank Act section 1400(c), 15 U.S.C. 1601
note.
7 78 FR 4726 (Jan. 22, 2013).
8 78 FR 6855 (Jan. 31, 2013).
9 78 FR 10367 (Feb. 13, 2013).
10 78 FR 7215 (Jan. 31, 2013).
11 78 FR 11279 (Feb. 15, 2013).
A. Title XIV Rulemakings Under the
Dodd-Frank Act
In response to an unprecedented cycle
of expansion and contraction in the
mortgage market that sparked the most
severe U.S. recession since the Great
Depression, Congress passed the DoddFrank Act, which was signed into law
on July 21, 2010. In the Dodd-Frank Act,
Congress established the Bureau and,
under sections 1061 and 1100A,
generally consolidated the rulemaking
authority for Federal consumer financial
laws, including the Truth in Lending
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Truth in Lending Act (Regulation Z)
(2013 ATR Concurrent Proposal).12 This
proposal has now been made final (May
2013 ATR Final Rule).13 The May 2013
ATR Final Rule provides exemptions 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 May 2013 ATR Final Rule
modifies the requirements regarding the
inclusion of loan originator
compensation in the points and fees
calculation.
B. Implementation Initiative for New
Mortgage Rules
On February 13, 2013, the Bureau
announced an initiative to support
implementation of its new mortgage
rules (Implementation Plan),14 under
which the Bureau would work with the
mortgage industry and other
stakeholders to ensure that the new
rules can be implemented accurately
and expeditiously. The Implementation
Plan included (1) coordination with
other agencies; (2) publication of plainlanguage guides to the new rules; (3)
publication of additional corrections
and clarifications of the new rules, as
needed; (4) publication of readiness
guides for the new rules; and (5)
education of consumers on the new
rules.
This final rule is the third final rule
providing additional revisions and
clarifications of and amendments to the
2013 Title XIV Final Rules. In addition,
the Bureau issued a proposed rule with
further revisions and clarifications of
and amendments to several of the 2013
Title XIV Final Rules on June 24, 2013.
The purpose of these updates is to
address important questions raised by
industry, consumer groups, or other
agencies. Priority for these updates is
given to issues that are important to a
large number of stakeholders and that
critically affect mortgage companies’
implementation decisions. Previously,
the Bureau issued a final rule 15
providing corrections and clarifications
of its 2013 Escrows Final Rule, and a
final rule delaying the effective date for
a provision related to credit insurance
12 78
FR 6622 (Jan. 30, 2013).
FR 35429 (Jun. 12, 2013).
14 Consumer Financial Protection Bureau Lays
Out Implementation Plan for New Mortgage Rules.
Press Release. Feb. 13, 2013.
15 78 FR 30739 (May 23, 2013).
13 78
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financing in the 2013 Loan Originator
Final Rule. On June 24, 2013, the
Bureau issued additional proposed
clarifications 16 to several of the new
mortgage rules, including the servicing
rules touched on here and the 2013
Loan Originator Final Rule. The Bureau
expects to review the comments
received and finalize that proposal later
this summer. Going forward, the Bureau
will continue to assess whether
additional clarifications or revisions are
warranted.
Comments on the Proposed Rule
The Bureau received 73 comments on
the proposed rule 17 on which this final
rule is based. Many of these comments
discussed issues that the proposed rule
did not touch upon such as disparate
impact in regard to fair lending
enforcement, calculation methods for
residual income, and whether or not the
special QM provision at § 1026.43(e)(4)
should be eliminated before the rule
goes into effect. The Bureau notes that
it would be inconsistent with the
Administrative Procedure Act (APA) to
make changes outside the scope of the
proposal because the other commenters
and the public would not have notice
and opportunity to comment. In
addition, these regulatory updates are
intended to focus on specific narrow
implementation issues, and broader
policy changes would not be
appropriate as part of this process.
The Bureau has examined all
comments submitted and will discuss
those that were responsive to the
proposal in the section-by-section
analysis below.
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III. Legal Authority
The Bureau is issuing this final rule
pursuant to its authority under RESPA,
TILA, and the Dodd-Frank Act. Section
1061 of the Dodd-Frank Act transferred
to the Bureau the ‘‘consumer financial
protection functions’’ previously vested
in certain other Federal agencies,
including the Federal Reserve Board
(Board). The term ‘‘consumer financial
protection function’’ is defined to
include ‘‘all authority to prescribe rules
or issue orders or guidelines pursuant to
any Federal consumer financial law,
including performing appropriate
functions to promulgate and review
such rules, orders, and guidelines.’’ 18
Section 1061 of the Dodd-Frank Act also
transferred to the Bureau all of HUD’s
consumer protection functions relating
16 78
FR 39902 (July 2, 2013).
FR 25638 (May 2, 2013).
18 12 U.S.C. 5581(a)(1).
17 78
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to RESPA.19 Title X of the Dodd-Frank
Act, including section 1061, along with
RESPA, TILA, and certain subtitles and
provisions of title XIV of the DoddFrank Act are Federal consumer
financial laws.20
A. RESPA
Section 19(a) of RESPA, 12 U.S.C.
2617(a), authorizes the Bureau to
prescribe such rules and regulations, to
make such interpretations, and to grant
such reasonable exemptions for classes
of transactions, as may be necessary to
achieve the purposes of RESPA, which
include its consumer protection
purposes. In addition, section 6(j)(3) of
RESPA, 12 U.S.C. 2605(j)(3), authorizes
the Bureau to establish any
requirements necessary to carry out
section 6 of RESPA, and section
6(k)(1)(E) of RESPA, 12 U.S.C.
2605(k)(1)(E), authorizes the Bureau to
prescribe regulations that are
appropriate to carry out RESPA’s
consumer protection purposes. As
identified in the 2013 RESPA Servicing
Final Rule, the consumer protection
purposes of RESPA include responding
to borrower requests and complaints in
a timely manner, maintaining and
providing accurate information, helping
borrowers avoid unwarranted or
unnecessary costs and fees, and
facilitating review for foreclosure
avoidance options.
B. TILA
Section 105(a) of TILA, 15 U.S.C.
1604(a), authorizes the Bureau to
prescribe regulations to carry out the
purposes of TILA. Under 105(a) such
regulations may contain such additional
requirements, classifications,
differentiations, or other provisions, and
may provide for such adjustments and
exceptions for all or any class of
transactions, as in the judgment of the
Bureau 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
19 Public Law 111–203, 124 Stat. 1376, section
1061(b)(7); 12 U.S.C. 5581(b)(7).
20 Dodd-Frank Act section 1002(14), 12 U.S.C.
5481(14) (defining ‘‘Federal consumer financial
law’’ to include the ‘‘enumerated consumer laws’’
and the provisions of title X of the Dodd-Frank Act);
Dodd-Frank Act section 1002(12), 12 U.S.C.
5481(12) (defining ‘‘enumerated consumer laws’’ to
include TILA), Dodd-Frank section 1400(b), 15
U.S.C. 1601 note (defining ‘‘enumerated consumer
laws’’ to include certain subtitles and provisions of
Title XIV).
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section 102(a), 15 U.S.C. 1601(a). In
particular, it is a 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. Section 105(f) of
TILA, 15 U.S.C. 1604(f), authorizes the
Bureau to exempt from all or part of
TILA any class of transactions if the
Bureau determines that TILA coverage
does not provide a meaningful benefit to
consumers in the form of useful
information or protection. Accordingly,
the Bureau has authority to issue
regulations pursuant to title X as well as
RESPA and TILA, as amended by title
XIV.
In addition, to constitute a qualified
mortgage a loan must meet ‘‘any
guidelines or regulations established by
the Bureau relating to ratios of total
monthly debt to monthly income or
alternative measures of ability to pay
regular expenses after payment of total
monthly debt, taking into account the
income levels of the borrower and such
other factors as the Bureau may
determine are relevant and consistent
with the purposes described in [TILA
section 129C(b)(3)(B)(i)].’’ The Dodd
Frank Act also provides the Bureau with
authority to prescribe regulations that
revise, add to, or subtract from the
criteria that define a qualified mortgage
upon a finding that such regulations are
necessary or proper to ensure that
responsible, affordable mortgage credit
remains available to consumers in a
manner consistent with the purposes of
the ability-to-repay requirements; or are
necessary and appropriate to effectuate
the purposes of the ability-to-repay
requirements, to prevent circumvention
or evasion thereof, or to facilitate
compliance with TILA sections 129B
and 129C. TILA section 129C(b)(3)(B)(i),
15 U.S.C. 1639c(b)(3)(B)(i). In addition,
TILA section 129C(b)(3)(A) provides the
Bureau with authority to prescribe
regulations to carry out the purposes of
the qualified mortgage provisions, such
as to ensure that responsible and
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. 1639c(b)(3)(A).
C. The Dodd-Frank Act
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
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thereof.’’ 12 U.S.C. 5512(b)(1). Title X of
the Dodd-Frank Act is a Federal
consumer financial law. Accordingly,
the Bureau is exercising its authority
under the Dodd-Frank Act section
1022(b) to prescribe rules that carry out
the purposes and objectives of title X, as
well as of RESPA, TILA, and the
enumerated subtitles and provisions of
title XIV of the Dodd-Frank Act, and to
prevent evasion of those laws.
The Bureau is amending certain rules
finalized in January, 2013, that
implement a number of Dodd-Frank Act
provisions. In particular, the Bureau is
clarifying or amending regulatory
provisions and associated commentary
adopted by the 2013 ATR Final Rule,21
the 2013 TILA Servicing Final Rule,22
the 2013 RESPA Servicing Final Rule,23
and the 2013 Escrows Final Rule 24 as
amended by the 2013 Amendments to
the 2013 Escrows Final Rule.25
IV. Section-by-Section Analysis
A. Regulation X
Subpart A—General Provisions
The Bureau proposed a technical
amendment to the heading for Subpart
A of Regulation X from ‘‘Subpart A—
General’’ to ‘‘Subpart A—General
Provisions’’ to conform the heading in
the text of the regulation to the heading
set forth in the corresponding
commentary. No comments were
received on this change, and it is
adopted as proposed.
Section 1024.5
Coverage of RESPA
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The Proposal
The Bureau proposed to redesignate
§ 1024.13 as § 1024.5(c). Section
1024.13, ‘‘Relation to State laws,’’ sets
forth rules regarding the relationship of
the requirements in RESPA and
Regulation X to requirements
established pursuant to State law. In the
2013 RESPA Servicing Final Rule, the
Bureau divided Regulation X into
subparts and § 1024.13 was located in
new ‘‘Subpart B—Mortgage Settlement
and Escrow Accounts.’’ However, the
provisions of § 1024.13(a) are intended
to apply with respect to all of
Regulation X. Because § 1024.13 applies
for all sections of Regulation X, the
Bureau proposed to redesignate
§ 1024.13 as § 1024.5(c), located within
‘‘Subpart A—General Provisions.’’
Further, the Bureau proposed to remove
and reserve § 1024.13.
FR 6408 (Jan. 30, 2013).
FR 10902 (Feb. 14, 2013).
23 78 FR 10696 (Feb. 14, 2013).
24 78 FR 4726 (Jan. 22, 2013).
25 78 FR 30739 (May 23, 2013).
The Bureau further proposed to add
commentary for proposed § 1024.5(c) to
make clear that Regulation X does not
create field preemption. Since issuing
the 2013 RESPA Servicing Final Rule,
the Bureau had received inquiries as to
whether Regulation X’s mortgage
servicing rules result in preemption of
the field of mortgage servicing
regulation. The Bureau had addressed
this question in the preamble to the
final rule, stating that ‘‘the Final
Servicing Rules generally do not have
the effect of prohibiting State law from
affording borrowers broader consumer
protection relating to mortgage servicing
than those conferred under the Final
Servicing Rules.’’ 26 The preamble
further stated that, although ‘‘in certain
circumstances, the effect of specific
requirements of the Final Servicing
Rules is to preempt certain limited
aspects of state law’’ in general, ‘‘the
Bureau explicitly took into account
existing standards (both State and
Federal) and either built in flexibility or
designed its rules to coexist with those
standards.’’ 27
Because the Bureau continued to
receive questions on this issue, the
Bureau believed it was appropriate to
propose commentary to clarify the scope
of proposed § 1024.5(c) and expressly
address concerns about field
preemption. Consistent with the
preamble to the 2013 RESPA Servicing
Final Rule, proposed comment 5(c)(1)–
1 stated that State laws that are in
conflict with the requirements of RESPA
or Regulation X may be preempted by
RESPA and Regulation X. Proposed
comment 5(c)(1)–1 stated further that
nothing in RESPA or Regulation X,
including the provisions in subpart C
with respect to mortgage servicers or
mortgage servicing, should be construed
to preempt the entire field of regulation
of the covered practices. This proposed
addition to the commentary was meant
to clarify that RESPA and Regulation X
do not effectuate field preemption of
States’ regulation of mortgage servicers
or mortgage servicing. The comment
also made clear that RESPA and
Regulation X do not preempt State laws
that give greater protection to
consumers than do these federal laws.
The Bureau requested comment
regarding the addition of the proposed
commentary, including whether further
clarification regarding the preemption
effects of RESPA and Regulation X was
necessary or appropriate.
21 78
22 78
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26 78
FR 10706 (Feb. 14, 2013).
(specifically identifying the National
Mortgage Settlement and the California Homeowner
Bill of Rights).
27 Id.
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44689
Comments
Numerous consumer and community
groups provided similar comments
supporting the proposed changes to the
Regulation X preemption provision.
These commenters supported the
relocation of the preemption provision
to § 1024.5(c) in the General Provisions
subpart and the addition of comment
5(c)(1)–1. Many of these consumer and
community groups further suggested
that the regulatory text itself be changed
to replace the phrase ‘‘settlement
practices’’ with language more clearly
inclusive of servicing activities. Several
also requested that an example be
included with comment 5(c)(1)–1
showing that a state law more protective
of consumers will not be preempted by
Regulation X.
Two industry commenters supported
the proposed changes to the Regulation
X preemption provision. One trade
association suggested that the Bureau
should promote uniform servicing
standards to help create certainty in the
market. Another industry commenter
stated that the current regulation
covered the situation sufficiently and
the proposed guidance was
unnecessary.
Two trade associations stated that the
Bureau was narrowing the existing
preemption provision to reduce the
likelihood of preemption. One opposed
the idea that state laws more protective
of consumers are not preempted, and so
opposed the inclusion of the comment.
The other stated that the preemption
provision for mortgage servicing
transfers functions statutorily as a
general preemption of mortgage
servicing.
Several industry commenters pointed
out that the statute and regulation use
the word ‘‘inconsistent’’ when
explaining which state laws may be
preempted, while the proposed
comment uses the more common term
‘‘conflict’’ to describe the situation.
They suggested that the comment also
use the term ‘‘inconsistent’’ to avoid
confusion.
Final Rule
The relocation of the preemption
provision and the guidance in proposed
comment 5(c)(1)–1 were not intended to
change the current preemption regime
under Regulation X and the Bureau does
not believe that they do so. The
sentence in the regulation that
consumer and community groups urged
the Bureau to change simply replicates
text in RESPA section 18. Therefore the
Bureau does not believe that a change to
that sentence would be appropriate.
Comment 5(c)(1)–1 provides the
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Bureau’s official interpretation of that
regulatory language. As stated in the
proposal, the Bureau believes that the
relocation of the preemption provision
and the addition of the comment are
necessary and appropriate to eliminate
any confusion as to how the preemption
provision operates. In addition, the
Bureau believes that the comment is
sufficiently clear and does not consider
an example to be necessary.
The final rule adopts the amendments
as proposed, but changes the word
‘‘conflict’’ in the comment to
‘‘inconsistent’’ to avoid confusion.
B. Regulation Z
Section 1026.20 Disclosure
Requirements Regarding PostConsummation Events
20(c) Rate Adjustments With a
Corresponding Change in Payment
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20(d)
Initial Rate Adjustment
Implementation Date. In its proposal,
the Bureau did not seek to revise or
clarify § 1026.20(c) and (d), the
adjustable-rate mortgage (ARM)
servicing regulations issued by the
Bureau in the 2013 TILA Servicing Final
Rule. Nevertheless, the Bureau received
unsolicited queries regarding the
implementation dates for these rules.
Despite the unsolicited nature of these
comments, the Bureau believes it would
be helpful to clarify the ARM
implementation dates.
ARM regulations § 1026.20(c) and (d)
generally apply to ARMs originated both
prior to and after the January 10, 2014,
effective date. However, no servicer is
required to comply with the rule until
the effective date.
Implementation Date for § 1026.20(d).
Because the notice required by
§ 1026.20(d) must be provided to the
consumer between 210 and 240 days
before the first payment is due after the
initial interest rate adjustment, servicers
will not be required to provide the
§ 1026.20(d) notice when such payment
is due 209 or fewer days from the
effective date. However, payments due
210 or more days from the effective date
are subject to the rule.
Implementation Date for § 1026.20(c).
Because the notice required by
§ 1026.20(c) must be provided to the
consumer between 60 and 120 days
before the first payment is due after an
interest rate adjustment causing a
corresponding change in payment,
servicers will not be required to provide
the § 1026.20(c) notice when such
payment is due 25 to 59 days from the
effective date. Note that, under the time
frame of current § 1026.20(c), notices are
required 25 to 120 days before the first
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payment is due after the interest rate
adjustment. Thus, servicers already will
have provided the § 1026.20(c) notices
required by the current rule when such
payment is due 24 or fewer days from
the January 10, 2014, effective date.
Section 1026.35 Requirements for
Higher-Priced Mortgage Loans
35(e) Repayment Ability, Prepayment
Penalties
The Bureau is concerned that its
recently published Amendments to the
2013 Escrows Final Rule 28 requiring
industry to comply with certain
provisions regarding repayment ability
and prepayment penalties for HPMLs
could be interpreted as requiring that
certain transactions excluded from such
requirements are now subject to those
requirements. The Bureau believes that
the amendments, properly understood,
continue the exclusion for such
transactions from the requirements. To
provide certainty, the Bureau is revising
§ 1026.35(e) 29 to explicitly exclude
from coverage construction and bridge
loans and reverse mortgages—loans that
were previously explicitly excluded
from such requirements, as discussed
below.
In January 2013, the Bureau issued
the 2013 Escrows Final Rule,30 which
implements certain provisions of the
Dodd-Frank Act relating to escrow
accounts. That final rule revised the
definition of ‘‘higher-priced mortgage
loan’’ in 12 CFR 1026.35(a) by removing
certain exclusions from the scope of
consumer credit transactions that may
be HPMLs. The loans no longer
excluded from the definition of HPML
are: Transactions to finance the initial
construction of a dwelling (construction
loans); temporary or ‘‘bridge loans’’ with
a terms of twelve months or less, such
as a loan to purchase a new dwelling
where the consumer plans to sell a
current dwelling within twelve months
(bridge loans); and reverse mortgages
subject to § 1026.33 (reverse mortgages).
The Bureau removed these exclusions
from the general definition of HPML
and located them directly into the
individual provisions regarding
appraisal, escrow, ability to repay, and
prepayment penalty requirements for
HPMLs.31
28 78
FR 30739 (May 23, 2013).
29 Id.
FR 4726 (Jan. 22, 2013).
§ 1026.35(c)(2) of the 2013 TILA Appraisals
Rule, 78 FR 10368 (Feb. 13, 2013) (which was
adopted by the Bureau, together with several other
Federal agencies, as an inter-agency rulemaking);
§ 1026.35(b)(2) of the 2013 Escrows Final Rule, 78
FR 4727 (Jan. 22, 2013); § 1026.43(a) of the 2013
ATR Final Rule, 78 FR 6408 (Jan. 30, 2013); and
PO 00000
30 78
31 See
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Since adopting the above-referenced
rules, the Bureau adopted Amendments
to the 2013 Escrows Final Rule 32 to
prevent the inadvertent and temporary
elimination of certain consumer
protections for HPMLs concerning
ability to repay and prepayment
penalties that were codified in 12 CFR
1026.35(b) prior to June 1, 2013. The
2013 Escrows Final Rule took effect
June 1, 2013, while the 2013 ATR and
HOEPA Final Rules 33 do not take effect
until January 10, 2014. Consequently,
the existing ability-to-repay and
prepayment penalty protections for
HPMLs would have been removed,
pursuant to the 2013 Escrows Final
Rule, over seven months before parallel
provisions would take effect. The
Amendments to the 2013 Escrows Final
Rule restored those protections
temporarily in, and re-codified them as
part of, newly created 12 CFR
1026.35(e), which took effect June 1,
2013, and will be effective through
January 9, 2014.
The Bureau’s renumbering of the
ability-to-repay and prepayment penalty
provisions in § 1026.35(e) of Regulation
Z, without excluding reverse mortgages
and construction and bridge loans from
coverage under that section, could be
seen as removing these exclusions from
the requirements of that temporary
provision. To clarify that the
Amendments to the 2013 Escrows Final
Rule did not have that effect, the Bureau
is revising temporary § 1026.35(e) to
explicitly exclude construction loans,
bridge loans, and reverse mortgages
from its requirements. The Bureau is
replacing current § 1026.35(e)(3) with
new § 1026.35(e)(3), which states that
the requirements of § 1026.35(e) do not
apply to construction loans, bridge
loans, and reverse mortgages. The
Bureau is renumbering current
§ 1026.35(e)(3), ‘‘Sunset of requirements
on repayment ability and prepayment
penalties,’’ as new § 1026.35(e)(4). The
general language in § 1026.35(e) is also
revised to reflect the addition of these
exclusions. As noted below, the
amendment to § 1026.35(e) will apply to
any transaction consummated on or
after June 1, 2013, for which the creditor
receives an application on or before
January 9, 2014. Then, at the time
§ 1026.35(e) expires, the exclusions for
construction loans, bridge loans, and
reverse mortgages in the 2013 ATR and
HOEPA Final Rules will take effect.
Thus, the revision of § 1026.35(e) in this
§ 1026.32(a) of the 2013 HOEPA Final Rule, 78 FR
6856 (Jan. 31, 2013).
32 78 FR 30739 (May 23, 2013).
33 78 FR 6408 (Jan. 30, 2013); 78 FR 6856 (Jan.
31, 2013), respectively.
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final rule will make clear that
construction loans, bridge loans, and
reverse mortgages have continued and
will continue to be excluded from
certain HPML requirements regarding
prepayment penalties and a consumer’s
ability to repay the loan.
Legal authority. Construction loans,
bridge loans, and reverse mortgages
have always been excluded from the
requirements of Regulation Z regarding
repayment ability and prepayment
penalties. The mortgage rules referenced
above that implement the Dodd-Frank
Act continue to exclude such loans from
their requirements, including those
governing repayment ability and
prepayment penalties. Thus, the
revisions to § 1026.35(e) in this final
rule are merely technical changes to
clarify the temporary provision’s
consistency with the historical and
current treatment of such loans under
Regulation Z.
For these reasons, the Bureau is
revising temporary amendment
§ 1026.35(e) to explicitly exclude
construction loans, bridge loans, and
reverse mortgages from its requirements
regarding ability to repay and
prepayment penalties for HPMLs,
pursuant to its authority to provide for
adjustments and exceptions under TILA
section 105(a) and (f), and with reliance
on the authority used by the Board in
amending Regulation Z to include these
requirements,34 including TILA section
129(p). As the Board concluded before
it, the Bureau does not believe
subjecting these loans to the repayment
ability and prepayment penalty
requirements would effectuate the
purposes of, or facilitate compliance
with TILA and Regulation Z. Many of
the characteristics of these loans make
it inappropriate or unnecessary to apply
the repayment ability and prepayment
penalty requirements of § 1026.35(e).
For example, because the structure of
reverse mortgages does not provide for
repayment, the requirements related to
repayment are not appropriate for such
loans. The Bureau also notes that it
anticipates undertaking a rulemaking to
address how the Dodd-Frank Act title
XIV requirements apply to reverse
mortgages, and consumer protection
issues in the reverse mortgage market
may be addressed through such a
rulemaking. Thus, the Bureau both
interprets § 1026.35(e) not to subject the
affected loans to its requirements and
also, pursuant to 105(a) and 105(f) of
TILA, continues to exclude those loans
from the requirements of § 1026.35(e).
Notice and comment are not
necessary for this revision of
34 73
FR 44522 (July 30, 2008).
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§ 1026.35(e), which merely makes
explicit in the regulation the Bureau’s
continuing interpretation that certain
loans have been excluded from certain
legal requirements throughout the
renumbering process. Moreover, the
Bureau finds good cause to proceed
without notice and comment. 5 U.S.C.
553(b)(B). This revision merely clarifies
the operation of the rule that should
already have been apparent to many
market participants. Notice and
comment are therefore unnecessary. In
addition, the length of the notice and
comment period make it impracticable
to correct erroneous interpretations of a
rule that is already in effect and that
expires within months. For these
reasons and under the authority cited
above, the Bureau is expressly
excluding construction and bridge loans
and reverse mortgages from the abilityto-repay and prepayment penalty
requirements for HPMLs under interim
§ 1026.35(e).
Section 1026.41 Periodic Statements
for Residential Mortgage Loans
41(a)
In General
41(a)(1)
Section 1026.41(a)(1) of the 2013
TILA Servicing Final Rule addresses the
scope of the mortgage loans subject to
the periodic statement requirements,
stating that the rule applies to closedend consumer credit transactions
secured by a dwelling, subject to certain
exemptions set forth in § 1026.41(e). It
goes on to say that, for purposes of
§ 1026.41, ‘‘such transactions are
referred to as mortgage loans.’’
To eliminate any confusion as to
which loans ‘‘such transactions’’ refers,
and thus to which loans the periodic
statement rule applies, the Bureau
proposed to clarify § 1026.41(a)(1). The
proposed revision would have replaced
the indefinite reference ‘‘such
transactions’’ in § 1026.41(a)(1) with a
reiteration of the loans to which the rule
applies, that is, closed-end consumer
credit transactions secured by a
dwelling. This revision would have
clarified which transactions are
considered ‘‘mortgage loans’’ for
purposes of § 1026.41.
The proposal stated that the Bureau
believed this change also would reduce
uncertainty about which loans to
consider in determining a servicer’s
eligibility for one of the exemptions
under § 1026.41(e), the small servicer
exemption. Section 1026.41(e)(4)(ii)
defines a small servicer as a servicer
that services 5,000 or fewer mortgage
loans, for all of which the servicer (or
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an affiliate) is the creditor or assignee.35
The Bureau reasoned that the proposed
text would have clarified that, in
general, a servicer determines whether it
is a small servicer by considering the
closed-end consumer credit transactions
secured by a dwelling that it services—
including coupon book loans, which are
exempt from some of the requirements
of the periodic statement rule. The
proposal noted that, pursuant to
proposed § 1026.41(e)(4)(iii), reverse
mortgages and transactions secured by
consumers’ interests in timeshares,
which are exempt from all of the
requirements of § 1026.41, would be
excluded from consideration for
purposes of determining small servicer
status.
The Bureau received no comments on
its proposed change to the regulatory
text of § 1026.41(a)(1) and therefore is
adopting it as proposed. The Bureau
did, however, receive comments
regarding the mortgage loans covered by
the small servicer exemption, and those
comments are discussed below in the
sections specifically addressing the
small servicer exemption.
41(e)
Scope
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44691
Exemptions
41(e)(4)
Small Servicers
41(e)(4)(ii)
Small Servicer Defined
The Proposal
The proposed rule explained that, for
the reasons set forth in the 2013
Servicing Final Rules,36 the Bureau
determined that it was appropriate to
exempt small servicers from certain
mortgage servicing requirements. The
proposal set forth the rules from which
small servicers, as defined by
§ 1026.41(e)(4), are exempt: the
Regulation Z requirement to provide
periodic statements for residential
mortgage loans 37 and, in Regulation X,
(1) certain requirements relating to
obtaining force-placed insurance,38 (2)
the general servicing policies,
procedures, and requirements,39 and (3)
certain requirements and restrictions
relating to communicating with
borrowers about, and evaluation of
applications for, loss mitigation
options.40
Scope and application of the small
servicer exemption. The Bureau’s
proposal would have clarified the scope
and application of the small servicer
35 The proposal stated that Housing Finance
Agencies are deemed small servicers under
§ 1026.41(e)(4)(ii)(B) regardless of loan count and
loan ownership status.
36 See, e.g., 78 FR 10718–10720 (Feb. 14, 2013).
37 12 CFR 1026.41(e).
38 12 CFR 1024.17(k)(5).
39 12 CFR 1024.30(b)(1).
40 Id.
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exemption. The proposal stated that
determination of a servicer’s status as a
small servicer, and thus its eligibility for
the small servicer exemption, is set forth
in § 1026.41(e)(4) and that, as set forth
above, this standard is applicable by
cross-reference to certain provisions of
Regulation X. The proposal pointed out
that Regulation X applies to ‘‘federally
related mortgage loans,’’ which excludes
certain loans that are ‘‘mortgage loans’’
as defined by Regulation Z
§ 1026.41(a)(1). The proposed revision
would have clarified that, to qualify for
the small servicer exemption applicable
to either rule, the servicer must qualify
as a small servicer under
§ 1026.41(a)(1)—a determination based
on closed-end consumer credit
transactions secured by a dwelling. The
proposal would have clarified that this
Regulation Z standard applies regardless
of whether or not the loans considered
are subject to the requirements of
Regulation X. The Bureau noted in the
proposal that, although some mortgage
loans not subject to coverage under
Regulation X are considered for
purposes of determining eligibility as a
small servicer, servicing such loans
under Regulation X rules would not be
required. Thus, the Bureau posited, a
servicer that services 5,000 federally
related mortgage loans, as defined by
Regulation X, may service more than
5,000 mortgage loans, as defined by
Regulation Z § 1026.41(a)(1). The
Bureau went on to explain that, in such
a case, because the servicer’s loans
exceed the 5,000 mortgage loan limit,
the servicer is not a small servicer and,
thus, would not qualify for the small
servicer exemption with regard to
Regulation Z and Regulation X. The
proposal reiterated that the servicer
would not have to comply with
Regulation X requirements for those
mortgage loans counted for purposes of
determining small servicer eligibility
but which are not federally related
mortgage loans. The proposal stated that
by clarifying how a servicer determines
whether it qualifies as a small servicer
with regard to Regulation Z, the
proposal also would have clarified how
a servicer determines whether it
qualifies for the small servicer
exemptions from the applicable
mortgage servicing requirements in
Regulation X.
To ensure understanding of the small
servicer exemption, the Bureau
proposed to amend the commentary to
§ 1026.41(e)(4)(ii) to specifically identify
which mortgage loans are considered for
purposes of determining eligibility for
the small servicer exemption. To this
end, the Bureau proposed to add
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comment 41(e)(4)(ii)–1, which would
have clarified that, in general and
pursuant to § 1026.41(a)(1), the
mortgage loans considered in
determining qualification for the small
servicer exemption are closed-end
consumer credit transactions secured by
a dwelling. Proposed comment
41(e)(4)(ii)–1 also would have
highlighted that, pursuant to
§ 1026.41(e)(4)(iii), certain closed-end
consumer credit transactions secured by
a dwelling are not considered in
determining status as a small servicer,
as discussed further below in
connection with proposed
§ 1026.41(e)(4)(iii).
The Bureau requested comments and
data regarding whether proposed
comment 41(e)(4)(ii)–1 would
appropriately clarify the scope of
mortgage loans that must be considered
for determining if a servicer qualifies as
a small servicer. The Bureau specifically
requested comment and data regarding
whether any servicers service a
significant number of closed-end
consumer credit transactions secured by
a dwelling, which are subject to
Regulation Z, but service significantly
fewer ‘‘federally related mortgage
loans,’’ which are subject to Regulation
X. By way of example, the Bureau
requested comment and data regarding
whether any servicers would not be
considered a small servicer if the small
servicer exemption were based on
whether a servicer services 5,000 or
fewer closed end consumer credit
transactions secured by a dwelling, but
would be a small servicer if the small
servicer exemption were based on
whether a servicer services 5,000 or
fewer ‘‘federally related mortgage
loan[s],’’ as that term is defined in 12
CFR 1024.2. The proposal provided a
specific example in a footnote of a
servicer that services 10,000
construction loans, which are not
considered ‘‘federally related mortgage
loans’’ pursuant to 12 CFR 1024.2, and
100 mortgage loans that are considered
‘‘federally related mortgage loans’’
pursuant to 12 CFR 1024.2.41 Such a
servicer, the Bureau stated, would be
considered to service 10,100 closed-end
consumer credit transactions secured by
a dwelling and would not qualify for the
small servicer exemption. The proposal,
however, underscored the fact that, in
any case, only the 100 federally related
mortgage loans serviced by the servicer
would be subject to the mortgage
servicing requirements set forth in
Regulation X pursuant to 12 CFR
1024.31.
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41 78
FR 25638, 25642 n.27 (May 2, 2013).
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Comments
In response to its request for
comment, the Bureau received several
comments expressing general support
for its proposed clarification of the
scope of loans to consider in
determining whether a servicer is a
small servicer, and received no
comments opposing the proposed
clarification. Nor did the Bureau receive
any data or comment with regard to
servicers servicing a disproportionate
number of federally related mortgage
loans, as defined by Regulation X,
compared to the number of ‘‘mortgage
loans’’ they service, as defined by
Regulation Z.
The Bureau also received a number of
comments that were beyond the scope
of the proposal. Three national trade
associations urged the Bureau to revise
the rule itself so that more servicers
could qualify for the small servicer
exemption, but provided no data or
reasoning in support of this position.
Similarly, a credit union trade
association recommended that the
Bureau revise the rule to consider only
‘‘federally related mortgage loans’’
instead of the more inclusive ‘‘mortgage
loans,’’ as defined by the rule, but
likewise provided no supporting data or
reasoning. A trade association
representing community banks
generally urged the Bureau to reduce the
loan pool used to determine small
servicer status by limiting it to
‘‘federally related mortgage loans’’ and,
in the alternative, specifically
recommended carving out construction
loans—one of the categories of loans not
included in the definition of ‘‘federally
related mortgage loans’’—from the
category of ‘‘mortgage loans.’’ The trade
association set forth reasons why
construction loans require less oversight
than other mortgage loans. Finally, a
trade association representing home
builders voiced concern that the
proposal’s reference to construction
loans in the footnote example might
cause ‘‘confusion’’ which could result in
community banks reducing their
construction loan portfolio to preserve
their small servicer status. To avoid this
possibility, the trade association
recommended excluding construction
loans from the loans considered in
determining small servicer status.
Final Rule
As stated above in section I, this final
rule generally does not address
comments not directly related to the
clarifications and revisions proposed by
the rule. Absent opposition or
responsive comments and in view of the
support the Bureau received for its
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proposed clarification that the scope of
loans considered in determining small
servicer status are mortgage loans, as
defined by § 1026.41, the Bureau is
adopting comment 41(e)(4)(ii)–1 as
proposed and declines to revise
§ 1026.41 with regard to the scope of
loans considered in determining small
servicer status.
The Proposal
Affiliate and master/subservicer
relationships. The Bureau also proposed
to amend § 1026.41(e)(4)(ii)(A), which
states that a small servicer is a servicer
that ‘‘services 5,000 or fewer mortgage
loans, for all of which the servicer (or
an affiliate) is the creditor or assignee.’’
Proposed § 1026.41(e)(4)(ii)(A) would
have provided clarification that, for
purposes of determining small servicer
status, a servicer considers the mortgage
loans it services together with any
mortgage loans serviced by any
affiliates. This change, the Bureau
explained, would conform that section
with § 1026.41(e)(4)(iii), which states
that small servicer status is determined
by counting ‘‘the number of mortgage
loans serviced by the servicer and any
affiliates as of January 1 for the
remainder of the calendar year.’’ To
avoid any risk of inconsistency, the
Bureau believed it would have been
appropriate to amend
§ 1026.41(e)(4)(ii)(A) to conform the
language to § 1026.41(e)(4)(iii) by
adding the clause ‘‘together with any
affiliates’’ such that a small servicer is
a servicer that ‘‘services, together with
any affiliates, 5,000 or fewer mortgage
loans, for all of which the servicer (or
an affiliate) is the creditor or assignee.’’
As stated in the proposal, this change
would more fully conform the language
of § 1026.41(e)(4)(ii)(A) with the
language of § 1026.41(e)(4)(iii) but
would not change the meaning of the
small servicer exemption.
The Bureau also proposed to amend
the comments to § 1026.41(e)(4)(ii)(A).
Specifically, comment 41(e)(4)(ii)–1
would have been redesignated as
comment 41(e)(4)(ii)–2 and would have
been amended to clarify several
elements set forth in the 2013 TILA
Servicing Final Rule. First, it would
have clarified that there are two
concurrent requirements for
determining whether a servicer is a
small servicer, as discussed further
below. Second, it would have explained
that the mortgage loans considered in
making this determination are those
serviced by the servicer as well as by its
affiliates. Finally, it would have
clarified that the second requirement of
the small servicer test, that a servicer
must be either the ‘‘creditor or assignee’’
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of the mortgage loans it services, means
that the servicer must either currently
own or have originated all of the
mortgage loans it services. The comment
also would have provided examples to
illustrate these points.
Proposed comment 41(e)(4)(ii)–2
would have set forth the two
requirements for determining if a
servicer is a small servicer and would
have clarified that both requirements
apply to the mortgage loans serviced by
the servicer as well as by its affiliates.
The comment would have set forth both
requirements: (1) A servicer, together
with its affiliates, must service 5,000 or
fewer mortgage loans, and (2) the
servicer must only service mortgage
loans for which the servicer (or an
affiliate) is the creditor or assignee.
Proposed comment 41(e)(4)(ii)–2 further
would have clarified that to be the
‘‘creditor or assignee’’ of a mortgage
loan, the servicer (or an affiliate) must
either currently own the mortgage loan
or must have been the entity to which
the mortgage loan was initially payable.
It also would have clarified that a
servicer that only services such
mortgage loans may qualify as a small
servicer so long as the servicer also only
services 5,000 or fewer mortgage loans.
The Bureau stated that it believed that
this clarification would provide a
helpful alternative way of expressing
the requirement stated in the rule that
the servicer or affiliate must also be the
creditor or assignee of a mortgage loan.
Proposed comment 41(e)(4)(ii)–2 also
would have provided examples of
specific circumstances demonstrating
these requirements. The first example
would have illustrated the effect
affiliation has on the loan count
requirement of the small servicer test.
Proposed comment 41(e)(4)(ii)–2.i stated
that if a servicer services 3,000 mortgage
loans, but is affiliated (as defined at
§ 1026.32(b)(2)) 42 with another servicer
that services 4,000 other mortgage loans,
both servicers are considered to service
7,000 mortgage loans and neither
servicer is considered a small servicer.
The second example would have
illustrated the ownership requirement of
the small servicer test. Proposed
comment 41(e)(4)(ii)–2.ii stated that if a
servicer services 3,100 mortgage loans,
including 100 mortgage loans it neither
owns nor originated but for which it
42 The definition of ‘‘affiliate’’ for purposes of
subpart E of Regulation Z, which includes
§ 1026.41, is set forth in § 1026.32(b)(2) and applies
to all of subpart E, including the small servicer
exemption. Affiliate, as defined in § 1026.32(b)(2),
‘‘means any company that controls, is controlled by,
or is under common control with another company,
as set forth in the Bank Holding Company Act of
1956 (12 U.S.C 1841 et seq.).’’
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owns the mortgage servicing rights, the
servicer is not a small servicer. The
proposal explained that this is because
the servicer services some mortgage
loans for which the servicer (or an
affiliate) is not the creditor or assignee,
notwithstanding that the total number of
mortgage loans serviced is fewer than
5,000.
Finally, the Bureau proposed to
redesignate comment 41(e)(4)(ii)–2 as
41(e)(4)(ii)–3 and to revise the comment
so that it would provide further
clarification regarding the application of
the small servicer exemption in certain
master servicer/subservicer
relationships. Under the 2013 TILA
Servicing Final Rule, the Bureau
explained, comment 41(e)(4)(ii)–2
references Regulation X, 12 CFR
1024.31, for the definitions of ‘‘master
servicer’’ and ‘‘subservicer’’ that apply
to the rule. It also provided an example
demonstrating that even though a
master servicer meets the definition of
a small servicer, a subservicer retained
by that master servicer that does not
meet the definition does not qualify for
the small servicer exemption.
Proposed comment 41(e)(4)(ii)–3
would have clarified that a small
servicer does not lose its small servicer
status because it retains a subservicer, as
that term is defined in 12 CFR 1024.31,
to service any of its mortgage loans. The
comment also would have clarified that,
for a subservicer, as that term is defined
in 12 CFR 1024.31, to gain the benefit
of the small servicer exemption, both
the master servicer and the subservicer
must be small servicers. The comment
also would have pointed out that,
generally, a subservicer will not qualify
as a small servicer because it does not
own or did not originate the mortgage
loans it subservices. However, the
comment went on to state, a subservicer
would qualify as a small servicer if it is
an affiliate of a master servicer that
qualifies as a small servicer.
Proposed comment 41(e)(4)(ii)–3 also
would have removed the example in
2013 TILA Servicing Rule comment
41(e)(4)(ii)–2 described above in favor of
three other examples that would have
demonstrated the implication of a
master servicer/subservicer relationship
for purposes of qualifying for the small
servicer exemption. In the first proposed
example, a credit union services 4,000
mortgage loans—all of which it
originated or owns. The credit union
retains a credit union service
organization to subservice 1,000 of the
mortgage loans and the credit union
services the remaining 3,000 mortgage
loans itself. The credit union has no
affiliation relationship with the credit
union service organization. The credit
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union is a small servicer and, thus, the
small servicer exemption applies to the
3,000 mortgage loans the credit union
services itself. The credit union service
organization is not a small servicer
because it services mortgage loans it
does not own or did not originate.
Accordingly, the credit union service
organization does not gain the benefit of
the small servicer exemption and, thus,
must comply with any applicable
mortgage servicing requirements for the
1,000 mortgage loans it subservices.
Proposed comment 41(e)(4)(ii)–3.ii
would have posited the example of a
bank holding company that, through a
lender subsidiary, owns or originated
4,000 mortgage loans. In the example,
all mortgage servicing rights for the
4,000 mortgage loans are owned by a
wholly owned master servicer
subsidiary. Servicing for the 4,000
mortgage loans is conducted by a
wholly owned subservicer subsidiary.
The bank holding company controls all
of these subsidiaries and, thus, they are
affiliates of the bank holding company
pursuant § 1026.32(b)(2). Because the
master servicer and subservicer service
5,000 or fewer mortgage loans and
because the mortgage loans are owned
or originated by an affiliate of each, the
master servicer and the subservicer are
each considered a small servicer and
qualify for the small servicer exemption
for all 4,000 mortgage loans.
Proposed comment 41(e)(4)(ii)–3.iii
would have posited the example of a
nonbank servicer that services 4,000
mortgage loans, all of which it
originated or owns. The servicer retains
a ‘‘component servicer’’ to assist it with
servicing functions. The component
servicer is not engaged in ‘‘servicing’’ as
defined in 12 CFR 1024.2; that is, the
component servicer does not receive
any scheduled periodic payments from
a borrower pursuant to the terms of any
mortgage loan, including amounts for
escrow accounts, and does not make the
payments to the owner of the loan or
other third parties of principal and
interest and such other payments with
respect to the amounts received from
the borrower as may be required
pursuant to the terms of the mortgage
servicing loan documents or servicing
contract. In this proposed example, the
component servicer is not a subservicer
pursuant to 12 CFR 1024.31 because it
is not engaged in servicing, as that term
is defined in 12 CFR 1024.2. The
nonbank servicer is a small servicer and
the small servicer exemption applies to
all 4,000 mortgage loans it services.
Comments
Many commenters expressed their
appreciation for the Bureau’s
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clarification of the affiliate and master/
subservicer relationships. Among them,
a trade association representing the
banking industry noted that the
proposed clarification of the affiliate
relationship was consistent with the
regulation as issued by the Bureau.
Several commenters submitted
comments outside the scope of this
rulemaking recommending that the
Bureau reconsider altogether the
inclusion of affiliate loans in
determining eligibility for the small
servicer exemption. A trade association
representing credit union service
organizations (CUSOs), a national and
state trade association representing
credit unions, and two individual credit
unions raised concerns that the affiliate
relationships some CUSOs have with
one or more credit unions would
prevent those CUSOs (and their credit
union affiliates) from qualifying for the
small servicer exemption. (The
proposed example clarifying the master/
subservicer relationship included a
CUSO that was not an affiliate.) These
commenters recommended that the
Bureau either revise the rule to remove
affiliates and their mortgage loans from
consideration in determining small
servicer status or that the Bureau
provide clarification regarding how to
take into account the loans of CUSO
affiliates that are not wholly-owned by
credit unions or of CUSOs with multiple
owners. Two of the commenters
explained that many credit unions have
an affiliate relationship with a CUSO to
facilitate mortgage lending and
borrowing. The trade associations noted
the many cases of multiple credit
unions affiliating with a single CUSO in
order to achieve economies of scale and
to maintain competitiveness in the
marketplace. They indicated that these
arrangements are particularly important
for small credit unions with limited
capacity. The trade association
representing CUSOs voiced concern that
the affiliate requirement in § 1026.41
could have a chilling effect on the
mortgage CUSO industry by
encouraging credit unions to divest their
interests in CUSOs to maintain their
small servicer exemption or by
discouraging credit unions that qualify
as small servicers from investing in an
affiliate relationship with a CUSO.
Final Rule
In view of the comments supporting
the proposed clarification of affiliate
and master/subservicer relationships
with regard to small servicer
qualification and in the absence of
responsive comments to the contrary,
the Bureau is adopting the clarifications
as proposed. With respect to the
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comments outside the scope of this
rulemaking recommending that the
Bureau exclude the mortgage loans of
affiliates from consideration in
determining small servicer status, the
Bureau declines to revise the rule. In
addition to the fact that reopening
consideration of a major policy decision
would require notice and comment
relatively late in the implementation
process, the Bureau continues to believe
that the reasons underlying the rule as
set forth in the 2013 Servicing Final
Rules are persuasive on the merits.
For clarification with regard to CUSOs
and their relationships with one or more
credit unions, the Bureau directs both
the CUSOs and the credit unions to the
Bank Holding Company Act of 1956 (12
U.S.C. 1841 et seq.) to determine
whether their particular business
relationships constitute affiliate
relationships.43 For further clarification,
the Bureau notes that, pursuant to the
affiliate requirement in § 1026.41, in any
affiliate relationship with a CUSO, the
total number of the mortgage loans of
the affiliated entities must be
considered in determining small
servicer status. For example, for a credit
union and its CUSO affiliate, the total
number of mortgage loans serviced by
both entities must be considered to
determine the small servicer status for
both the credit union and the CUSO.44
The same is true for credit unions that
are deemed affiliates under the Bank
Holding Company Act of 1956.
41(e)(4)(iii) Small Servicer
Determination
Section 1026.41(e)(4)(iii) of the 2013
TILA Servicing Final Rule sets forth
certain criteria regarding how to
determine if a servicer qualifies as a
small servicer. In addition, that section
explains that small servicer
determination is based on the number of
mortgage loans serviced by the servicer
and any affiliates as of January 1 for the
remainder of the calendar year. It also
specifies that a servicer that ‘‘crosses the
threshold,’’ and thus loses its small
43 Pursuant to § 1026.32(b)(2), § 1026.41 is subject
to the definition of ‘‘affiliate’’ as set forth in the
Bank Holding Company Act of 1956 (the Act). See
proposed comment 41(e)(4)(ii)–3.ii. Under the Act,
‘‘affiliate’’ is defined as any company that controls,
is controlled by, or is under common control with
another company. The percentage of control is a
determining factor in whether an affiliate
relationship exists. The Bureau notes that, absent
other determining factors, if a credit union’s
percentage of control over a CUSO falls below the
statutory minimum, there would be no affiliate
relationship.
44 For the small servicer status of a credit union/
master servicer and the small servicer status of its
unaffiliated CUSO/subservicer, see proposed
comment 41(e)(4)(ii)–3.i, which the Bureau is
adopting as proposed in this final rule.
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servicer status and its small servicer
exemption, has six months after
crossing the threshold or until the next
January 1, whichever is later, to comply
with any requirements from which the
servicer is no longer exempt.
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The Proposal
To provide clarification regarding the
date for determining small service status
and when a servicer that loses small
servicer status must begin to comply
with regulations from which it had been
exempt, and that those dates apply to
both elements of the small servicer
exemption (loan count and ownership
status), proposed § 1026.41(e)(4)(iii)
included a number of revisions to the
2013 TILA Servicing Final Rule
§ 1026.41(e)(4)(iii). First, proposed
§ 1026.41(e)(4)(iii) would have replaced
the reference to a servicer that ‘‘crosses
the threshold’’ for determining if the
servicer qualifies as a small servicer
with broader language indicating that a
servicer that ‘‘ceases to qualify’’ as a
small servicer will have six months or
until the next January 1, whichever is
later, to comply with any requirements
for which a servicer is no longer exempt
as a small servicer. The Bureau stated it
believed that the broader phrase ‘‘ceases
to qualify’’ would more accurately
reflect the fact that there are two
elements to determining if a servicer
qualifies as a small servicer and pointed
to the discussion above to underscore
that either one of these elements could
cause a servicer to lose exempt status.
Proposed § 1026.41(e)(4)(iii) therefore
would have applied the transition
period set out in the rule to situations
in which a servicer no longer meets the
loan count requirement as well as to
situations in which the servicer no
longer meets the requirement that the
servicer is the creditor or assignee of all
mortgage loans it services. Thus, the
proposal stated, if a servicer exceeds the
5,000 mortgage loan limit or begins to
service mortgage loans it does not own
or did not originate, it must comply
with any requirements from which it is
no longer exempt by either the
following January 1 or six months after
the change in operations that
disqualifies it as a small servicer,
whichever is later. The proposal would
have provided the example that, if on
September 1 a servicer that previously
qualified as a small servicer begins to
service a mortgage loan that it does not
own and did not originate, the servicer
has until March 1 of the following year
to comply with the requirements from
which it was previously exempt as a
small servicer.
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Comments and Final Rule
The Bureau did not receive any
responsive comments regarding the
proposed clarifications discussed above,
outside of general support for providing
clarification regarding this issue. In
order to clarify the timing provision, the
Bureau is adopting the changes as
proposed.
In this final rule, the Bureau also is
revising a comment to
§ 1026.41(e)(4)(iii) that provides three
examples of the timing for when a small
servicer is no longer considered a small
servicer and when that former small
servicer must start complying with any
requirements from which it previously
was exempt as a small servicer. The
Bureau is revising comment
41(e)(4)(iii)–2 to maintain consistency
with and further clarify the changes to
the regulatory text the Bureau is
adopting in § 1026.41(e)(4)(iii), as
discussed above.
To this end, the Bureau is revising the
heading of comment 41(e)(4)(iii)–2. The
Bureau is removing the reference to
‘‘threshold’’ and is amending the
heading to read: ‘‘Timing for small
servicer exemption’’ for the same
reasons discussed above and to
maintain consistency with the adopted
regulatory changes to
§ 1026.41(e)(4)(iii). In addition, the
Bureau is amending the examples in the
comment to conform to and further
clarify the changes the Bureau is
adopting in the regulatory text. The first
of the current examples states that a
servicer that begins servicing more than
5,000 loans on October 1 and is
servicing more than 5,000 loans as of
January 1 of the following year would
no longer be considered a small servicer
on April 1 of that following year. The
second current example states that a
servicer that begins servicing more than
5,000 mortgage loans on February 1, and
services more than 5,000 loans as of
January 1 of the following year, would
no longer be considered a small servicer
on January 1 of that following year. The
third example states that a servicer that
begins servicing more than 5,000
mortgage loans on February 1, but
services less than 5,000 loans as of
January 1 of the following year, is
considered a small servicer for that
following year.
The revised examples clarify two
points. The first point is that the
application of the calendar dates apply
to both elements of the small servicer
test, i.e., exceeding the allowable
maximum number of loans serviced and
servicing mortgage loans a servicer
either does not own or did not originate.
The second point of clarification is that
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44695
January 1 is the date used to determine
whether or not a servicer is considered
a small servicer and the other dates (the
latter of six months from the time the
servicer ceases to be a small servicer or
until the next January 1) are used to
determine when a small servicer that
has lost its small servicer status must
begin complying with the regulations
for which it had been exempt.
The first revised example explains
that a small servicer that begins
servicing more than 5,000 mortgage
loans (or begins servicing one or more
mortgage loans it does not own or did
not originate) on October 1 and is
servicing 5,000 mortgage loans (or
services one or more mortgage loans it
does not own or did not originate) as of
January 1 of the following year, would
no longer be considered a small servicer
on January 1 of that following year and
would have to comply with any
requirements from which it is no longer
exempt as a small servicer on April 1 of
that following year. The second revised
example states that a small servicer that
begins servicing more than 5,000
mortgage loans (or begins servicing one
or more mortgage loans it does not own
or did not originate) on February 1, and
services more than 5,000 mortgage loans
(or begins servicing one or more
mortgage loans it does not own or did
not originate) as of January 1 of the
following year, would no longer be
considered a small servicer on January
1 of that following year and would have
to comply with any requirements from
which it is no longer exempt as a small
servicer on that same January 1. The
third revised example states that a
servicer that begins servicing more than
5,000 mortgage loans (or begins
servicing one or more mortgage loans it
does not own or did not originate) on
February 1, but services less than 5,000
mortgage loans (or no longer services
mortgage loans it does not own or did
not originate) as of January 1 of the
following year, is considered a small
servicer for that following year. In sum,
the amended heading and examples
conform to and provide further
clarification of the proposed changes to
the regulatory text discussed above that
the Bureau is adopting in this final rule.
The Proposal
Consideration of loans serviced. The
proposed rule also would have added
language to § 1026.41(e)(4)(iii) to specify
which mortgage loans should not be
considered in determining small
servicer status. Proposed
§ 1026.41(e)(4)(iii) would have clarified
that certain closed-end consumer credit
transactions secured by a dwelling
would not be considered for purposes of
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determining whether a servicer qualifies
as a small servicer. Specifically, the
proposal went on to explain, because
reverse mortgage transactions and
mortgage loans secured by a consumer’s
interest in timeshare plans are exempt
from § 1026.41, such loans are not
considered when determining if a
servicer is a small servicer. The
proposed rule also would have clarified
that, because coupon book loans are
exempt only from some requirements of
§ 1026.41, such loans must be
considered in determining whether a
servicer is a small servicer.
The proposal also would have
excluded from consideration in
connection with the small servicer
exemption, any mortgage loan
voluntarily serviced by a servicer for a
creditor or assignee that is not an
affiliate of the servicer and for which
the servicer does not receive any
compensation or fees (‘‘charitably
serviced’’ mortgage loans). The Bureau
explained that it had received feedback
that certain servicers that otherwise
would be considered small servicers
voluntarily service mortgage loans for
unaffiliated nonprofit entities for
charitable purposes and do not receive
compensation or fees from engaging in
that servicing. The Bureau further
explained that, if such charitably
serviced mortgage loans were
considered in connection with
determining whether a servicer qualifies
as a small servicer, a servicer engaging
in this practice would not qualify for the
small servicer exemption because the
servicer would be servicing a mortgage
loan it does not own or did not
originate, notwithstanding that such
servicer undertook to service those
mortgage loans for charitable purposes.
The Bureau expressed concern that
including charitably serviced mortgage
loans in determining small servicer
status would cause servicers to refrain
from charitable servicing rather than
lose the benefits of a small servicer
exemption. The Bureau stated its belief
that such a result would not further the
goal of consumer protection for the
affected consumers and might instead
negatively affect the availability and
costs of credit for consumers whose
mortgage loans would otherwise be
serviced pursuant to such charitable
arrangements. Further, the Bureau
believed that consumers would be more
likely to receive superior service from
an entity in the business of servicing
that is willing to donate its services than
they would if nonprofit entities that are
not experienced in the business of
servicing were forced to take on those
duties themselves. Finally, the Bureau
stated that it believed that the benefits
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of excluding charitably serviced
mortgage loans from small servicer
determination would outweigh the
potential risks to consumers that
exclusion may pose.
The Bureau proposed that, for the
reasons set forth above and pursuant to
the Bureau’s exemption authority and
authority to provide for adjustments and
exceptions for any class of transactions
as may be necessary or proper to
effectuate the purposes of TILA, under
TILA sections 105(a) and (f), mortgage
loans voluntarily serviced by a servicer
for a creditor or assignee that is not an
affiliate of the servicer and for which
the servicer does not receive any
compensation or fees would not be
considered in determining a servicer’s
qualification as a small servicer. The
Bureau stated that it believed that
considering such loans in determining if
a servicer is a small servicer would
defeat the purposes of TILA by
penalizing charitable servicers, thereby
dissuading them from engaging in
charitable servicing to the detriment of
the consumers that otherwise would
benefit from this activity. The Bureau
requested comment regarding whether it
would be appropriate not to consider
such mortgage loans when determining
if a servicer qualifies for the small
servicer exemption. The Bureau further
requested comment on whether other
mortgage loans serviced through similar
limited arrangements should not be
considered in determining whether a
servicer is a small servicer. The Bureau
emphasized in its proposed rule that it
was neither reexamining nor seeking
comment on the issue of exempting
nonprofit entities engaged in mortgage
servicing from the requirements of the
periodic statement or any other
mortgage servicing rule.
Finally, the Bureau proposed to add
comment 41(e)(4)(iii)–3. Proposed
comment 41(e)(4)(iii)–3 would have
clarified that mortgage loans that are not
considered for purposes of determining
small servicer qualification pursuant to
§ 1026.41(e)(4)(iii), are not considered
for determining either whether a
servicer services, together with any
affiliates, 5,000 or fewer mortgage loans
or whether a servicer is servicing
mortgage loans that it does not own or
did not originate. Proposed comment
41(e)(4)(iii)–3 further would have
posited the example of a servicer that
services a total of 5,400 mortgage loans,
of which the servicer owns or originated
4,800 mortgage loans, services 300
reverse mortgage transactions that it
does not own or did not originate, and
voluntarily services 300 mortgage loans
that it does not own or did not originate
for an unaffiliated nonprofit
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organization for which the servicer does
not receive any compensation or fees.
The example stated that neither the
reverse mortgage transactions nor the
mortgage loans voluntarily serviced by
the servicer are considered for purposes
of determining if the servicer is a small
servicer. The example concluded that,
because the only mortgage loans
considered are the 4,800 other mortgage
loans serviced by the servicer, and the
servicer owns or originated each of
those mortgage loans, the servicer is
considered a small servicer and
qualifies for the small servicer
exemption with regard to all 5,400
mortgage loans it services. The comment
also would have noted that reverse
mortgages and transactions secured by a
consumer’s interest in timeshare plans,
in addition to not being considered in
determining small servicer qualification,
also are exempt from the requirements
of § 1026.41. In contrast, the proposed
comment noted, although charitably
serviced mortgage loans, as defined by
§ 1026.41(e)(4)(iii), are likewise not
considered in determining small
servicer qualification, they are not
exempt from the requirements of
§ 1026.41. The comment thus would
have clarified that a servicer that does
not qualify as a small servicer would not
be required to provide periodic
statements for reverse mortgages and
timeshare plans because they are
exempt from the rule, but would be
required to provide periodic statements
for the mortgage loans it charitably
services.
Legal authority. The Bureau proposed
to exclude charitably serviced mortgage
loans and reverse mortgage transactions
from consideration in determining a
servicer’s status as a small servicer for
purposes of the small servicer
exemption in § 1024.41(e)(4) pursuant to
its authority to provide for adjustments
and exceptions under TILA section
105(a) and (f).45 The proposal went on
to say that, with respect to charitably
serviced mortgage loans, the Bureau
believed, for the reasons described
above, that declining to consider such
mortgage loans for purposes of
determining eligibility as a small
servicer would effectuate the purposes
of, and would facilitate compliance with
TILA and Regulation Z. The proposal
further stated that, consistent with TILA
45 The proposal stated that TILA section 128(f)
requires periodic statements for ‘‘residential
mortgage loans,’’ which, pursuant to TILA section
103(cc)(5), excludes transactions secured by
consumers’ interests in timeshare plans. For this
reason, the proposed rule said, exception authority
is not required to exclude such loans from
consideration in determining if a servicer is a small
servicer.
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section 105(f) and in light of the factors
in that provision, the Bureau believed
that requiring servicers to consider
mortgage loans they charitably service
for purposes of determining eligibility
as a small servicer would cause
mortgage servicers to withdraw from
such charitable relationships and not
provide a meaningful benefit to
consumers in the form of useful
information or protection. In addition,
the Bureau expressed its concern
regarding the extent to which any
requirement to consider such loans
would complicate, hinder, or make
more expensive the credit process for
such mortgage loan transactions,
especially considering the status of the
borrowers that typically secure mortgage
loans that are charitably serviced. The
Bureau said that ultimately it believed
the goal of consumer protection would
be undermined if it were to consider, for
purposes of small servicer qualification,
mortgage loans voluntarily serviced by a
servicer for a creditor or assignee that is
not an affiliate of the servicer and for
which the servicer does not receive any
compensation or fees.
In the proposed rule, the Bureau said
it similarly believed that not
considering reverse mortgages in
determining whether a servicer is a
small servicer would effectuate the
purposes of, and would facilitate
compliance with, TILA and Regulation
Z. The Bureau said it believed this for
the same reasons set forth in the 2013
TILA Servicing Final Rule 46 exempting
reverse mortgages from the requirements
of § 1026.41. The Bureau pointed to the
discussion in that final rule that the
periodic statement requirements were
designed for a traditional mortgage
product and that information relevant
and useful for consumers with reverse
mortgages differs substantially from the
information required on the periodic
statement and, thus, would not provide
a meaningful benefit to consumers of
reverse mortgages. Finally, the proposal
put forth the Bureau’s belief that not
considering reverse mortgages in
determining whether a servicer is a
small servicer is proper irrespective of
the amount of the loan, the status of the
consumer (including related financial
arrangements, financial sophistication,
and the importance to the consumer of
the loan), or whether the loan is secured
by the principal residence of the
consumer.
Comments and Final Rule
The Bureau received only positive
comments regarding its proposed
clarification that reverse mortgage
46 See
78 FR 10901, 10973 (Feb. 14, 2013).
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transactions and mortgage loans secured
by a consumer’s interest in timeshare
plans, which are exempt from all
provisions of § 1026.41, are excluded
from the loan pool used to determine
eligibility for the small servicer
exemption. However, one national trade
association representing credit unions
contested the Bureau’s clarification that
fixed-rate loans with coupon books
must be considered for purposes of
determining eligibility for the small
servicer exemption. The commenter
said that including fixed-rate loans with
coupon books in the loan pool used to
determine small servicer status but
excluding them from the requirement to
provide periodic statements would
create confusion without providing
adequate benefits. The Bureau disagrees
and notes, as discussed above, that
fixed-rate loans with coupon books are
exempt only from some of the
requirements of § 1026.41—as opposed
to reverse mortgage transactions and
mortgage loans secured by a consumer’s
interest in timeshare plans which are
not subject to any of the requirements of
§ 1026.41. Servicers servicing fixed-rate
loans with coupon books are exempt
from the requirement to provide
periodic statements for these loans
under § 1026.41, but servicers
nevertheless have to provide to
consumers with such loans the
information contained in the periodic
statement, either in the coupon book or
in some other form. Because servicers
servicing fixed-rate loans with coupon
books must comply with the
requirements of § 1026.41 regarding
those mortgage loans, it is appropriate
that such loans would be considered in
determining whether such servicers are
small servicers and therefore exempt
from complying with the requirements
of § 1026.41 with regard to those loans.
Conversely, it is appropriate to exclude
reverse mortgage transactions and
mortgage loans secured by a consumer’s
interest in timeshare plans from the loan
pool used to determine small servicer
status because, regardless of that
servicer’s small servicer status, there is
no requirement for the servicer to
comply with any of the requirements of
§ 1026.41 with regard to those loans.
The Bureau received strong support
for its proposed revision of § 1026.41 to
exclude charitably serviced loans from
consideration in determining whether a
servicer qualifies as a small servicer,
that is, mortgage loans voluntarily
serviced for a non-affiliate creditor or
assignee and for which the servicer does
not receive any compensation or fees.
Commenters agreed that, absent the
Bureau’s proposal, small servicers likely
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would relinquish their volunteer efforts
in order to preserve their small servicer
status. In response to one commenter’s
request for clarification, the Bureau
notes that its proposed revision of the
rule with regard to volunteer servicing
is not limited to the servicing of
mortgage loans owned or originated by
nonprofit organizations, although the
Bureau suspects that most charitable
servicing is done on behalf of such
organizations. Due to the support
received by the Bureau for its proposed
revision of § 1026.41(e)(4)(iii)(A)
excluding charitably serviced mortgage
loans from the loan pool used to
determine small servicer eligibility, and
for the reasons stated above, the Bureau
is adopting the revision as proposed.
In addition to requesting comment
regarding the appropriateness of
excluding charitably serviced mortgage
loans when determining small servicer
status, the proposal solicited comment
on whether other mortgage loans
serviced through similar limited
arrangements should not be considered
in determining whether a servicer is a
small servicer. The Bureau did not
receive comments recommending that
any other servicing arrangements be
excluded from consideration for
purposes of determining small servicer
status. The Bureau did receive a
comment outside of the scope of the
proposal from a national trade
association requesting guidance
regarding the trade association’s
conclusion that certain depository
services some of its members provide
for depositors who self-finance the sale
of residential real estate do not qualify
as ‘‘servicing,’’ as defined in 12 CFR
1024.2(b). The trade association
explained that, for a minimal fee, some
banks—usually small banks—receive
mortgage payments from a borrower and
deposit the funds into that customer’s
account. According to the trade
association, the agreement between the
bank and the depositor/creditor
typically excludes any other services,
such as providing servicing in the case
of delinquency. The trade association
expressed concern that small
institutions will discontinue this service
for their depository customers who
owner-finance the sale of real property
for fear of losing their small servicer
status if the depository service could be
construed as servicing mortgage loans
that the bank does not own or did not
originate.
Because the comment was outside the
scope of the proposal, the Bureau
declines to provide the requested
guidance. Moreover, even if the
comment were within the scope of the
proposal, the Bureau is not able to
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provide guidance at this juncture
because the trade association did not
provide sufficient information about the
banking service described.
Section 1026.43 Minimum Standards
for Transactions Secured by a Dwelling
43(e)
Qualified Mortgages
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43(e)(4) Qualified Mortgage Defined—
Special Rules
The 2013 ATR Final Rule generally
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 requirement for
‘‘qualified mortgages.’’ These
provisions, in § 1026.43(c), (e)(2), (e)(4),
(e)(5), (e)(6) 47 and (f), implement the
requirements of TILA section 129C(a)(1)
and the qualified mortgage provisions of
TILA section 129C(b).
To determine the qualified mortgage
status of a loan, creditors must analyze
whether the loan meets one of the
definitions of ‘‘qualified mortgage’’ in
§ 1026.43(e)(2), (e)(4), (e)(5), (e)(6) or (f).
Section 1026.43(e)(4) provides a
definition of qualified mortgage for
loans that (1) meet the prohibitions on
certain risky loan features (e.g., negative
amortization and interest only features);
(2) do not exceed certain limitations on
points and fees under § 1026.43(e)(2);
and (3) either are eligible for purchase
or guarantee by one of the GSEs, while
under the conservatorship of the Federal
Housing Finance Agency, or are eligible
to be insured or guaranteed by HUD
under the National Housing Act (12
U.S.C. 1707 et seq.), the VA, the USDA,
or RHS.48 HUD, VA, USDA, and RHS
have authority under the Dodd-Frank
Act to define qualified mortgage
standards for the types of loans they
insure, guarantee, or administer. See
TILA section 129C(b)(3)(B)(ii). Coverage
under § 1026.43(e)(4) for such loans will
47 The May 2013 ATR Final Rule amended the
2013 ATR Final Rule in part by adding two new
types of qualified mortgages, at § 1026.43(e)(5) and
(6). See 78 FR 35430 (June 12, 2013).
48 Eligibility standards for the GSEs and Federal
agencies are available at: Fannie Mae, Single Family
Selling Guide, https://www.fanniemae.com/
content/guide/sel111312.pdf; Freddie Mac, SingleFamily Seller/Servicer Guide, https://
www.freddiemac.com/sell/guide/; HUD Handbook
4155.1, https://www.hud.gov/offices/adm/hudclips/
handbooks/hsgh/4155.1/41551HSGH.pdf; Lenders
Handbook—VA Pamphlet 26–7, Web Automated
Reference Material System (WARMS), https://
www.benefits.va.gov/warms/pam26_7.asp;
Underwriting Guidelines: USDA Rural Development
Guaranteed Rural Housing Loan Program, https://
www.rurdev.usda.gov/SupportDocuments/CA-SFHGRHUnderwritingGuide.pdf.
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sunset once each agency promulgates its
own qualified mortgage standards and
such rules take effect. Coverage of GSEeligible loans will sunset when
conservatorship ends.
Even if the Federal agencies do not
issue additional rules or
conservatorship does not end, the
temporary qualified mortgage definition
in § 1026.43(e)(4) will expire seven
years after the effective date of the
rule.49 Covered transactions that satisfy
the requirements of § 1026.43(e)(4) that
are consummated before the sunset of
§ 1026.43(e)(4) will retain their qualified
mortgage status after the temporary
definition expires. However, a loan
consummated after the sunset of
§ 1026.43(e)(4) may be a qualified
mortgage only if it satisfies the
requirements of another qualified
mortgage provision in effect at that time.
Eligibility Under GSE/Agency Guides
and Automated Underwriting Systems
The Proposal
As adopted by the 2013 ATR Final
Rule, comment 43(e)(4)–4 clarifies that,
to satisfy § 1026.43(e)(4)(ii), a loan need
not be actually purchased or guaranteed
by a GSE or insured or guaranteed by
HUD, VA, USDA, or RHS. Rather,
§ 1026.43(e)(4)(ii) requires only that the
loan be eligible for such purchase,
guarantee, or insurance. For example,
the comment provides that, for purposes
of § 1026.43(e)(4), a creditor is not
required to sell a loan to a GSE for that
loan to be a qualified mortgage. Rather,
the loan must be eligible for purchase or
guarantee by a GSE. The Commentary
clarifies that, with respect to GSEs, to
determine eligibility, a creditor may rely
on an underwriting recommendation
provided by one of the GSEs’ automated
underwriting systems (AUSs) or their
written guides. Accordingly, with regard
to the GSEs, the comment states that a
covered transaction is eligible for
purchase or guarantee by Fannie Mae or
Freddie Mac (and therefore a qualified
mortgage under § 1026.43(e)(4)) if: (i)
the loan conforms to the standards set
forth in the Fannie Mae Single-Family
Selling Guide or the Freddie Mac
Single-Family Seller/Servicer Guide; or
(ii) the loan receives an ‘‘Approve/
Eligible’’ recommendation from Desktop
Underwriter (DU); or an ‘‘Accept and
Eligible to Purchase’’ recommendation
from Loan Prospector (LP).
The Bureau proposed to revise
comment 43(e)(4)–4 in a number of
ways. First, the proposal would have
49 The rule’s effective date is January 10, 2014,
thus the § 1026.43(e)(4) qualified mortgage
definition expires at the latest after January 10,
2021.
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clarified that a creditor is not required
to comply with all GSE or agency
requirements to show qualified
mortgage status. Specifically, the
proposed revision made clear that the
creditor need not comply with certain
requirements that are wholly unrelated
to a consumer’s ability to repay,
including activities related to selling,
securitizing, or delivering consummated
loans and any requirement the creditor
is required to perform after the
consummated loan is sold, guaranteed,
or endorsed for insurance (in the case of
agency loans) such as document
custody, quality control, and servicing.
These requirements are spelled out in
the most depth in the GSE and agency
written guides, but may also be
referenced in automated underwriting
system conditions and in written
agreements with individual creditors, as
discussed further below.
The Bureau believed that the
proposed comment would clarify the
intended scope of the temporary
category of qualified mortgage created in
§ 1026.43(e)(4) and facilitate compliance
with the provisions of Regulation Z
adopted in the 2013 ATR Final Rule. As
explained in the preamble to the final
rule, the Bureau established
§ 1026.43(e)(4) as a temporary transition
measure designed to ensure access to
responsible, affordable credit for
consumers with debt-to-income ratios
that exceed the 43 percent threshold
that the Bureau adopted as a bright-line
standard in the permanent general
definition of qualified mortgage under
§ 1026.43(e)(2) while creditors adapted
to the new ATR rules and other changes
in economic and regulatory conditions.
The Bureau believed that using widely
recognized underwriting standards of
Federal agencies and entities under
Federal conservatorship to define
qualified mortgages during this interim
period would both facilitate compliance
and ensure responsible lending
practices. The temporary provision
therefore bases qualified mortgage status
on eligibility for purchase, insurance, or
guarantee, which requires use of the
federally related underwriting
standards, but does not require actual
sale, guarantee, or insurance
endorsement. Furthermore, the
temporary provision requires that a
qualified mortgage must be eligible at
consummation.
However, the Bureau recognized in
the proposed rule that the GSEs and
agencies impose a wide variety of
requirements relating not only to
underwriting of potentially eligible
loans, but also to the mechanics of sale,
guarantee, or insurance and postconsummation activities. Because
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underwriting is a complex process that
involves assessment of the consumer’s
ability to repay the loan as well as other
credit risk factors, the Bureau believed
that it was appropriate to base qualified
mortgage status under § 1026.43(e)(4) on
the GSEs’ and agencies’ general
standards concerning borrower,
product, and mortgage eligibility and
underwriting. While some of these
underwriting requirements may be more
closely or directly related to assessing a
consumer’s ability to repay than others,
the Bureau believed that attempting to
disaggregate them would be an
extraordinarily complex task that would
defeat the purposes of the temporary
definition in adopting widely
recognized standards to facilitate
compliance and access to responsible
credit. Where groups of requirements
are wholly unrelated to underwriting
(i.e., wholly unrelated to assessing
ability to repay and other risk-related
factors), however, the Bureau believed
that it was appropriate to specify that
such requirements do not affect
qualified mortgage status.
The Bureau believed that the items
described in the comment would meet
this test and provide greater clarity to
the temporary definition of qualified
mortgage. Because TILA requires
assessment of a consumer’s ability to
repay a loan as of the time of
consummation, the Bureau believed that
GSE and agency requirements relating to
post-consummation activity should not
be relevant to qualified mortgage status.
And because the temporary definition
does not require actual purchase,
guarantee, or insurance, the Bureau
believed that it would not be
appropriate to base qualified mortgage
status on elements of the guides relating
to the mechanics of actual delivery,
purchase, guarantee, and endorsement.
The Bureau recognized that most
requirements wholly unrelated to
underwriting involve postconsummation activity; however, preconsummation GSE and agency
requirements could also be wholly
unrelated to underwriting. For example,
the status of a creditor’s approval or
eligibility to do business with a GSE is
not relevant for ascertaining qualified
mortgage status using an AUS. The
Bureau invited comment on this
proposed clarification generally and on
whether other GSE or agency
requirements should be excluded.
Comments
Only one consumer group commented
on the Bureau’s inclusion of guidance
stating that issues wholly unrelated to
ability to repay would not affect a loan’s
QM status. This consumer group is also
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a nonprofit lender. Its comment
suggested that the Bureau should state
clearly those issues that are ‘‘related’’ to
ability to repay, such as income or
obligations that materially impact
ability to repay, and violations of
specific QM product restrictions, and
rule out such things as credit score and
appraisal requirements. This commenter
also stated that failure to make this
guidance clearer could reduce credit
availability.
Industry commenters overwhelmingly
supported the interpretation that issues
wholly unrelated to ability to repay
should not be considered in assessing
the QM status of a loan under
§ 1026.43(e)(4). Most, however, also
suggested that the guidance on what
would be considered wholly unrelated
to ability to repay should be clarified
and the excluded items or categories
expanded. Commenters agreed that
failure to comply with postconsummation requirements should be
excluded. As did the consumer group in
the comment referenced above, some
industry commenters requested that the
Bureau make clear that items deemed
related to ability to repay be limited to
narrow issues of a borrower’s ability to
make the loan’s payments, and that
other risk-related factors be excluded.
Specifically, commenters asked that
factors related to willingness to repay
(as opposed to ability to repay) and
issues involving the attributes or defects
of the collateral be excluded. Some
commenters raised the issue of
excluding jumbo loans.50 Two
commenters requested that a time limit
be imposed so that repurchase or
indemnification claims on seasoned
loans would be disregarded. One
commenter stated that income
determinations are variable and
subjective, so errors made in good faith
should not invalidate QM status.
Another commenter asked for guidance
on some of the issues above, rather than
specifically requesting exclusion.
In addition, commenters generally
suggested that various other topics
50 Although one commenter asked that jumbo
size, which renders a loan too large to be eligible
for GSE purchase or guarantee, be deemed wholly
unrelated to ability to repay, another commenter
merely asked for guidance on whether or not
jumbos would be excluded. The Bureau stated in
the January 2013 final rule that the temporary
qualified mortgage definition does not include
‘‘jumbo’’ loans in 1026.43(e)(4), given, in part, that
the Bureau views the jumbo market as already
robust and stable. Excluding jumbo loan size
eligibility conditions for GSEs would effectively
reverse the Bureau’s conclusion on this matter. The
Bureau continues to believe that the jumbo loan
market does not need the benefit of temporary
qualified mortgage definition and notes that jumbo
loans can be qualified mortgages to the extent that
they meet the other qualified mortgage definitions.
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44699
should be specifically listed as wholly
unrelated to ability to repay, including:
(1) Failure to comply with laws and
regulations, including consumer
protection laws and regulations; (2)
purchase of a state-issued title guarantee
for loans held in portfolio; (3) delayed
note certification; (4) Ginnie Mae
modification; (5) early buy-out
programs; (6) non-material technical
defects triggering repurchase or
indemnification; and (7) ‘‘additional
repurchase requirements.’’
The two GSEs both commented on the
proposed rule, and both discussed the
‘‘wholly unrelated to ability to repay’’
guidance. One specifically stated
support for the guidance, and both
urged the Bureau to state that collateralrelated issues were wholly unrelated to
ability to repay.
Final Rule
The Bureau adopts the guidance on
issues of what is wholly unrelated to
ability to repay substantially as
proposed, but has adopted the standard
in the regulatory text to harmonize the
eligibility requirements that must be
met for the temporary qualified
mortgage definition under the rule with
those permitted under the Commentary.
In addition, comment 43(e)(4)–4 has
been revised to state that matters wholly
unrelated to ability to repay are those
matters that are wholly unrelated to
credit risk or the underwriting of the
loan, and to provide more detailed
guidance on applying the standard.
As stated in the proposed rule,
underwriting is a complex process that
involves assessment of the consumer’s
ability to repay the loan as well as a
variety of other credit risk factors. The
Bureau made a deliberate decision in
the 2013 ATR Final Rule to base
qualified mortgage status under
§ 1026.43(e)(4) on the GSEs’ and
agencies’ general underwriting and
credit risk analysis standards. While
some of these factors may be more
closely and directly focused on
consumers’ ability to repay than others,
the Bureau continues to believe that
attempting to disaggregate GSE and
agency underwriting requirements
based on degree of relationship to
ability to repay would be an
extraordinarily complex task that would
defeat the purposes of the temporary
definition in adopting widely
recognized standards to facilitate
compliance and access to responsible
credit. Indeed, the statute itself requires
consideration of a borrower’s credit
history, which could relate to
willingness as well as ability to repay.
Exclusion of requirements regarding
collateral and other risk-related factors
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would require line-drawing exercises
that could potentially interfere with the
regulatory purpose. Moreover, allowing
disaggregation would not be consistent
with the use of AUS determinations to
demonstrate compliance, as they
involve interdependent risk factors and
do not focus solely on a borrower’s
capacity to make payments.
The Bureau has revised the final
comment to add an express general
statement that matters wholly unrelated
to ability to repay are those matters
wholly unrelated to credit risk or the
underwriting of the loan. The Bureau
believes that this language, in
conjunction with the reference to
specific sets of requirements that are
wholly unrelated to assessing ability to
repay at the time of consummation
(such as those related to selling,
securitizing, or delivering consummated
loans), provides useful guidance to
stakeholders.
As stated in the proposed rule, and
consistent with the final rule, QM status
depends on eligibility for sale,
insurance, or guarantee at
consummation, not on an actual
executed sale, insuring, or guarantee of
the individual loan. Accordingly, the
Bureau considers events occurring after
consummation and GSE and agency
requirements concerning execution of
an actual sale, insuring, or guarantee of
the loan to be wholly unrelated to
ability to repay.51 In addition, the
Bureau believes that in regard to very
limited matters, such as the status of a
creditor’s approval or eligibility to do
business with a GSE, additional preconsummation occurrences may also be
wholly unrelated to ability to repay.
Accordingly, the Bureau has revised the
language in the final comment to
identify specifically that these sets of
requirements are considered wholly
unrelated to ability to repay for
purposes of the rule.
Although the Bureau has reviewed
many of the requests for determinations
as to particular requirements in the
comments received, the Bureau notes
that with respect to certain of these
inquiries, there was not sufficient detail
or background information to discern
the precise nature of the request or
question. For instance, commenters’
bare suggestion that ‘‘additional
purchase requirements’’ be deemed
wholly unrelated to ability to repay was
simply too vague to analyze, and would
require further specification in order to
apply the standard.
51 Because
the determination is based on the
situation at consummation, the later repayment
history or ‘‘seasoning’’ of the loan would not be an
appropriate metric for this standard.
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Use of Automated Underwriting
Systems
The Proposal
The Bureau also proposed to revise
comment 43(e)(4)–4 to clarify eligibility
as determined by an automated
underwriting system of a GSE or one of
the agencies. As explained in comment
43(e)(4)–4 as adopted in the 2013 ATR
Final Rule, the AUSs and the written
guides of the GSEs as well as the
agencies can be used for eligibility
purposes under § 1026.43(e)(4). The
proposed revision of the comment
explained that to rely upon an AUS
recommendation to demonstrate
qualified mortgage status a creditor
must have (1) accurately inputted the
loan information into the automated
system, and (2) satisfied any
accompanying requirements or
conditions to the AUS approval that
would otherwise invalidate the
recommendation, unless, as discussed
above, the conditions are wholly
unrelated to the consumer’s ability to
repay. The comment as adopted in the
2013 ATR Final Rule assumed that any
recommendation used for compliance
would be valid, and these clarifications
merely listed two criteria that should be
monitored to ensure that validity. In
particular, because the AUSs generate a
list of conditions that must be met in
support of the approval designation, the
Bureau believed that those conditions
must be satisfied to show eligibility for
purchase, guarantee, or insurance. The
Bureau sought comment on these
revisions as well and also proposed
technical edits to comment 43(e)(4)–4
for clarity and accuracy.
Comments
The consumer and community group
commenters did not discuss the
guidance in comment 43(e)(4)–4
requiring that an AUS determination be
based on accurate inputs, and that the
creditor comply with any requirements
and conditions specified by the AUS.
About half of the industry commenters
that specifically discussed this guidance
supported its inclusion. Industry
commenters asked that the Bureau make
clear that QM status will not be
invalidated by minor inaccuracies and
by inaccuracies that would not change
the outcome of the AUS determination.
One commenter stated that it will not be
possible to determine whether or not a
loan would have been approved with
accurate inputs.
Final Rule
The Bureau adopts the comment as
proposed, with minor edits for clarity.
As stated in the regulation, a loan is a
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QM if it is eligible for purchase,
insurance or guarantee by a GSE or
agency other than with regard to issues
wholly unrelated to ability to repay, and
meets the other relevant requirements.
For this reason, minor inaccuracies in
input data that do not affect eligibility
will not affect QM status. The Bureau
believes the convenience and ease of
compliance made possible by this
provision are more important than
avoiding those few situations in which
it is difficult to determine which
inaccuracies will affect the AUS
outcome.
Although the reference to issues
wholly unrelated to ability to repay in
the main paragraph of the proposed
comment applied to the requirements
and conditions accompanying an AUS
determination, and unquestionably do
now that the standard is in the
regulatory language, the Bureau believes
that repeating such language in
paragraph ii will enhance the clarity of
the comment, and is doing so.
Effect of Written Contract Variances
The Proposal
The Bureau also proposed to revise
comment 43(e)(4)–4 in a third way to
clarify further that a loan meeting
eligibility requirements provided in a
written agreement between the creditor
and a GSE or agency that permits
variation from the standards of the
written guides and/or AUSs in effect at
the time of consummation is also
eligible for purchase or guarantee by the
GSEs or insurance or guarantee by the
agencies for the purposes of
§ 1026.43(e)(4). Thus, such loans would
be qualified mortgages. The Bureau
recognized that these agreements
between creditors and the GSEs or
agencies effectively constitute
modification of, or substitutes for, the
general manuals or AUSs with regard to
these creditors. In many cases, the
agreements allow the creditors to use
other automated underwriting systems
rather than the GSE or agency systems,
subject to certain conditions or
limitations on which loans the GSE or
agency will accept as eligible for
purchase, guarantee, or insurance. The
Bureau believed that it was therefore
appropriate for the purposes of
§ 1026.43(e)(4) to consider the
agreements to be equivalent to the
standard written guides for purposes of
the specific creditor to which the
agreement applies. Many of these
agreements are necessary to
accommodate local and regional market
variations and other considerations that
do not substantially relate to ATRrelated underwriting criteria and
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therefore are generally consistent with
the consumer protection and other
purposes of the rule. However, the
Bureau did not believe that it would be
appropriate to allow one creditor to rely
on the terms specified in another
creditor’s written agreement with a GSE
or agency to establish qualified
mortgage status, as the written
agreements are individually negotiated
and monitored. The Bureau sought
comment on this proposed clarification
generally and on whether other
variations on standard guides and
eligibility criteria should be considered.
Comments
Two consumer and community group
commenters discussed the use of
variances with § 1026.43(e)(4). One
comment, from a group of organizations,
stated that allowing use of variances
was a mistake because the agreements
are private and this would make them
very difficult for consumers to enforce
when they are violated. This comment
also suggested that if the variance
provision is adopted the Bureau should
make clear that a borrower would have
access to such variance agreements by
sending a qualified written request
under RESPA. The other consumer
group commenter, which operates a
nonprofit lender, supported the use of
variances as provided in the comment.
Industry commenters were very
supportive of allowing the use of
variances. However, one association
representing credit unions opposed
allowing the use of variances, stating
that it would disadvantage smaller
market participants. A real estate
association commented that variances
should be allowed but should be
required to be made public so that any
creditor could request use of their terms.
Other industry commenters requested
that the Bureau make clear that later
assignees could rely on the QM status of
loans originated pursuant to a variance.
Another commenter asked that the
Bureau specify that, in order to be relied
on, a variance must be in effect at the
time of consummation of the loan.
Several industry commenters pointed
out that these variances are often used
with correspondent lenders, and the
creditor who has negotiated the variance
agreement acts as an aggregator or
sponsor, pooling loans originated by
others. They stated that the comment as
proposed would present a problem
because it states that the variance can
only be used by a creditor who is a party
to the agreement with the GSE. They
further stated that this problem could
interfere with the origination of a large
number of loans that meet the GSEs’
standards, and argued that
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correspondent lenders should be
allowed to rely on the variances of their
sponsors or aggregators. One large bank,
however, opposed the idea of allowing
one creditor to rely on another’s
variance, stating that this might allow
loans to become QMs after
consummation.
One of the GSEs provided comment
on the variance provision, strongly
supporting it, and pointing out in
addition that both GSEs sometimes
grant individual loan waivers of their
standards. The GSE stated that these
waivers do not proceed from an increase
in its appetite for risk, and are only
granted ‘‘on an exceptional basis,’’ and
that they should be treated the same as
the negotiated variances. One industry
association also asked that such
individual waivers be treated this way.
Final Rule
The language regarding variances is
adopted substantially as proposed, with
two important changes. The Bureau
agrees that disallowing correspondent
use of variances would interfere unduly
with the market, and is adding language
to clarify use in such circumstances
without allowing wholly unrelated
entities to rely on some other creditor’s
agreement. Also, the Bureau believes
that individual waivers granted by the
GSEs should benefit from the same
treatment as creditor-specific variances
negotiated with the GSEs.
As with all the QM provisions, the
status of a loan is determined at the time
of consummation. The variance applied
to a transaction must be in effect at the
time a loan is consummated, and the
loan must meet all relevant
requirements at that time. For this
reason, a loan cannot be retroactively
made into a QM by a creditor or
assignee. In addition, because the status
is determined at consummation, later
assignees can rely on that status if it is
valid. Allowing correspondents to rely
on the variances of their sponsors or
aggregators in effect at the time of
consummation will not change this
situation, and it will help to alleviate
concerns that only larger market
participants may take advantage of
negotiated variances. The language of
comment 43(e)(4)–4 has been crafted to
ensure that the correspondent is
involved in a direct relationship with
the variance holder and originating the
QM pursuant to that relationship.
In addition, the Bureau does not
believe that allowing use of variances
will disadvantage smaller market
participants, since it is intended only to
maintain the current market situation.
Although variances are private
agreements, with the potential for
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attendant disadvantages described by
commenters above such as difficulty of
enforcement, the Bureau does not
believe it is appropriate to regulate
transparency for these agreements
through this narrowly focused
amendatory rulemaking, without further
review. As always, the Bureau will
monitor the effects of its rules on the
marketplace going forward.
The Bureau has decided to allow
loans benefitting from individual
waivers granted by the GSEs to be
treated the same as loans originated
following negotiated variances. The
Bureau has no reason to believe that
these loans present undue risk to
consumers, and notes that the GSEs are
under government conservatorship.
The provision regarding variances is
adopted as proposed, with the two
changes discussed above.
Repurchase and Indemnification
Demands
The Proposal
The Bureau also proposed new
comment 43(e)(4)–5 to provide
additional clarification on how
repurchase and indemnification
demands by the GSEs and agencies may
affect the qualified mortgage status of a
loan. The proposed comment did not
amend the meaning of the current rule
but clarified how a determination of the
qualified mortgage status of a loan
should be understood in relation to
claims that the loan was not eligible for
purchase, insurance, or guarantee and
therefore not a qualified mortgage. In
making the proposal, the Bureau
understood that facts upon which
eligibility status was determined at or
before consummation could later be
found to be incorrect. Often, a
repurchase or indemnification demand
by a GSE or an agency involves such
issues. However, the mere occurrence of
a GSE or agency demand that a creditor
repurchase a loan or indemnify the
agency for an insurance claim does not
necessarily mean that the loan is not a
qualified mortgage.
Proposed comment 43(e)(4)–5 would
have provided that a repurchase or
indemnification demand by the GSEs,
HUD, VA, USDA, or RHS is not
dispositive in ascertaining qualified
mortgage status. Much as qualified
mortgage status under the general
definition in § 1026.43(e)(2) may
typically turn on whether the
consumer’s debt-to-income ratio at the
time of consummation was equal to or
less than 43 percent, qualified mortgage
status under § 1026.43(e)(4) may
typically turn on whether the loan was
eligible for purchase, guarantee, or
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insurance at the time of consummation.
Thus, for example, a demand for
repurchase or indemnification based on
post-consummation GSE or agency
requirements would therefore not be
relevant to qualified mortgage status. As
indicated above, such factors meet the
wholly unrelated to ability to repay
standard that the Bureau is finalizing in
§ 1026.43(e)(4). Only reasons for a
repurchase or indemnification demand
that specifically apply to the qualified
mortgage status of the loan under
§ 1026.43(e)(4) would be relevant, as
discussed above in connection with
comment 43(e)(4)–4. Moreover, the mere
fact that a demand has been made, or
even resolved, between a creditor and
GSE or agency is not dispositive with
regard to eligibility for purposes of
§ 1026.43(e)(4), as those parties are
involved in an ongoing business
relationship rather than an adjudicatory
process. However, evidence of whether
a particular loan satisfied the
§ 1026.43(e)(4) eligibility criteria at
consummation may be brought to light
in the course of dealings over a
particular demand, depending on the
facts and circumstances. Such
evidence—like any evidence discovered
after consummation that relates to the
facts as of the time of consummation—
may be relevant in assessing whether a
particular loan is a qualified mortgage.
To clarify this point further, proposed
comment 43(e)(4)–5 included two
examples of relevant evidence
discovered after consummation. In the
first example, one would assume that a
loan’s eligibility for purchase was based
in part on the consumer’s employment
income of $50,000 per year. The creditor
uses the income figure in obtaining an
approve/eligible recommendation from
DU. A quality control review, however,
later determines that the documentation
provided and verified by the creditor to
comply with Fannie Mae requirements
did not support the reported income of
$50,000 per year. As a result, Fannie
Mae demands that the creditor
repurchase the loan. Assume that the
quality control review is accurate, and
that DU would not have issued an
approve/eligible recommendation if it
had been provided the accurate income
figure. The Bureau believed that, given
the facts and circumstances of this
example, the DU determination at the
time of consummation was invalid
because it was based on inaccurate
information provided by the creditor;
therefore, the loan was never a qualified
mortgage.
For the second example, one would
assume that a creditor delivered a loan,
which the creditor determined was a
qualified mortgage at the time of
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consummation, to Fannie Mae for
inclusion in a particular To-BeAnnounced Mortgage Backed Security
(MBS) pool of loans. The data submitted
by the creditor at the time of loan
delivery indicated that the various loan
terms met the product type, weightedaverage coupon, weighted-average
maturity, and other MBS pooling
criteria, and MBS issuance disclosures
to investors reflected this loan data.
However, after delivery and MBS
issuance, a quality control review
determines that the loan violates the
pooling criteria. The loan still meets
eligibility requirements for other Fannie
Mae products and loan terms. Fannie
Mae, however, requires the creditor to
repurchase the loan due to the violation
of MBS pooling requirements. Assume
that the quality control review
determination is accurate. The reason
the creditor repurchases this loan would
not be relevant to the loan’s qualified
mortgage status. The loan still meets
other Fannie Mae eligibility
requirements and therefore remains a
qualified mortgage based on these facts
and circumstances.
The Bureau invited comment on
proposed comment 43(e)(4)–5 in
general. The Bureau also solicited
comment on whether additional
examples or other particular situations
should be provided or whether
alternatives for eligibility other than
relationship to ability-to-repay
standards should be adopted that would
determine the qualified mortgage status
of a loan.
Comments
One consumer group and nonprofit
lender commented on the explanation of
how repurchase and indemnification
demands should be understood in
relation to QM status, stating support for
the Bureau’s rule but requesting more
fully developed guidance on the issue.
Industry commenters overwhelmingly
supported the addition of comment
43(e)(4)–5, but also had various
suggestions for changes. One industry
commenter, along with one of the GSEs,
stated that the first example given, in
which an accurate determination that
the creditor-reported income did not
support QM status meant that QM status
was invalid, appeared to suggest that the
repurchase demand was indeed
dispositive. A trade association asked
that the Bureau not include as ‘‘loans for
which repurchase or indemnification
demand has been made’’ those loans
that are not eventually repurchased or
indemnified.
Both GSEs commented on this
guidance, and both supported the
addition of comment 43(e)(4)–5. One
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GSE also suggested that the Bureau
should delete the examples given
because they would cause confusion.
One also requested that the Bureau
make clear that even if QM status under
§ 1026.43(e)(4) is invalidated, the loan
may still have qualified for QM status
under another provision.
Final Rule
Comment 43(e)(4)–5 is adopted as
proposed, with two small edits to make
clear that only QM status under
§ 1026.43(e)(4) is being discussed in the
examples and that in the second
example the critical fact is that the loan
still meets Fannie Mae’s eligibility
requirements.
Regarding the first example in the
comment, it is not the repurchase
demand nor the quality control review
that is dispositive as to QM status, but
the fact that the finding that the income
figure is unsupported by the
documentation is stated to be
‘‘accurate.’’ The example is a
hypothetical, and assuming the
accuracy of an issue that would
normally have to be established through
an investigation of the facts and
circumstances of the transaction allows
for better explanation of how the rule
works. As for the issue of what should
be considered a repurchase or
indemnification demand, the question is
irrelevant to QM status. Repurchase or
indemnification demands are
potentially relevant to QM status only
because they may indicate or lead to
evidence that a loan did not qualify as
a QM at the time of consummation. In
addition, the Bureau believes that the
examples will increase clarity for
stakeholders, and not cause confusion.
Accordingly, the Bureau considers the
two examples presented as providing
clear and appropriate guidance on the
issue, with the edits mentioned above.
Appendix Q to Part 1026—Standards for
Determining Monthly Debt and Income
Overview
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 (DTI) that is
less than or equal to 43 percent. To
determine whether the consumer meets
the specific DTI requirement, the
creditor must calculate the consumer’s
monthly DTI in accordance with
appendix Q. The Bureau adopted the 43
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percent DTI requirement and other
modifications to the statutory criteria
pursuant to its authorities under TILA
section 129C and 105(a).52
Appendix Q, as adopted, contains
detailed requirements for determining
‘‘debt’’ and ‘‘income’’ for the purposes
of the DTI calculation based on the
definitions of those terms set forth in
HUD Handbook 4155.1, Mortgage Credit
Analysis for Mortgage Insurance on
One-to-Four-Unit Mortgage Loans. The
standards in the Handbook are used by
creditors originating residential
mortgages insured by the Federal
Housing Administration (FHA) to
determine and verify a consumer’s total
monthly debt and monthly income. For
the purposes of appendix Q, the Bureau
largely codified the Handbook, but
modified various portions of it to
remove standards and references unique
to the FHA underwriting process.
In adopting appendix Q in the 2013
ATR Final Rule, the Bureau believed
that using, to the extent possible,
existing HUD/FHA underwriting
guidelines as the foundation for
determining ‘‘debt’’ and ‘‘income’’ for
DTI purposes would provide creditors
with well-established standards for
determining whether a loan is a
qualified mortgage under
§ 1026.43(e)(2).
Following publication of the 2013
ATR Final Rule, the Bureau received a
number of inquiries from industry
stakeholders regarding provisions
codified in the appendix that they
believed had been intended to function
as flexible standards used by the FHA
for insurance underwriting purposes,
rather than codified as bright-line
requirements for determining debt and
income. Concerns were raised that these
provisions may be properly suited for
the purposes of a holistic and
qualitative underwriting analysis but are
not well-suited to function as regulatory
requirements that are not subject to
discretionary variance or waiver on an
individual basis. Stakeholders also
expressed concern that many of these
provisions provided little clarity or
guidance for creditors for compliance
purposes. Similarly, stakeholders
expressed concerns that the broad
nature of these provisions could
undermine the presumption of
compliance available to creditors who
52 The Bureau notes that the specific 43 percent
debt-to-income requirement applies only to
qualified mortgages under § 1026.43(e)(2). The
specific DTI requirement does not apply to loans
that meet the qualified mortgage definitions in
§ 1026.43(e)(4), (5), (6), or (f), or that are not
qualified mortgages and instead comply with the
general ability-to-repay standard.
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make qualified mortgages and expose
them to significant litigation risk.
In response to these concerns, the
Bureau included certain proposed
revisions to appendix Q in its proposed
rule to facilitate compliance when
determining DTI and to further the
purposes of the ATR Final Rule. The
Bureau agreed that certain provisions of
appendix Q as adopted were not
properly suited to function as
regulations. The Bureau intended
appendix Q to serve as a reliable
mechanism for creditors to evaluate
income and debts for the purpose of
determining DTI and not as a general
and flexible underwriting policy for
assessing risk (as it is used by FHA in
the context of insurance). The Bureau
also recognized that it would not have
the same level of discretion regarding
the application of appendix Q.53
The Bureau therefore proposed
revisions to appendix Q on: (1) Stability
of income, and the creditor requirement
to evaluate the probability of the
consumer’s continued employment; (2)
with regard to salary, wage, and other
forms of consumer income, the creditor
requirement to determine whether the
consumer’s income level can reasonably
be expected to continue; (3) creditor
analysis of consumer overtime and
bonus income; (4) creditor analysis of
consumer Social Security income; (5)
requirements related to the analysis of
self-employed consumer income; (6)
requirements related to nonemployment related consumer income,
including creditor analysis of consumer
trust income; and (7) creditor analysis of
rental income.
The Bureau also proposed other
revisions to clarify the application of
appendix Q, as well as general technical
and wording changes throughout
appendix Q for consistency and
clarification, including technical
changes to conform to the specific
purpose that appendix Q serves in the
2013 ATR Final Rule, as opposed to the
function that the HUD Handbook serves
for FHA underwriting.
Overview of Comments on Bureau’s
Appendix Q Proposals
Commenters, including both industry
and consumer commenters, generally
supported the Bureau’s proposed
changes to appendix Q. A bank for
example stated that it appreciated the
Bureau’s efforts to establish clear and
reliable standards within appendix Q,
and that it generally believed the
proposed amendments would allow
creditors to underwrite loans with
improved confidence that appendix Q
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44703
standards have been met. A bank trade
association stated that it appreciated the
Bureau’s efforts to clarify the ability-torepay regulations and stated that it
believed the Bureau’s proposals would
go a long way in improving the final
rules. A state credit union association
stated that it strongly supported the
Bureau’s proposed changes to appendix
Q as certain provisions adopted in
appendix Q are not suitable to function
as regulations. A consumer organization
stated its support for the Bureau’s
clarifications of appendix Q but also
suggested the need for further
clarifications. Most commenters
suggested additional clarifications to
appendix Q, some specific to the
Bureau’s proposals, and some beyond
the Bureau’s specific proposals—
including general revisions.
Response to General Comments on
Appendix Q
The Bureau appreciates the comments
received on its appendix Q proposals.
The Bureau believes that the proposals
as adopted in this final rule will further
the purpose and intent of appendix Q by
establishing clearer requirements for
assessing the debt and income of
consumers, while at the same time
facilitating creditor compliance and
access to credit for consumers. The
comments received generally support
the Bureau’s view.
I. CONSUMER ELIGIBILITY
A. Section I.A. Stability of Income
The Proposal
The Bureau proposed revising the
criteria in appendix Q for determining
whether a consumer’s income is
‘‘stable’’ for the purposes of DTI.
Appendix Q as adopted required in
section I.A.3.a that creditors evaluate
the ‘‘probability of continued
employment’’ by analyzing, among
other things, (1) the consumer’s past
employment record; (2) the consumer’s
qualification for the position; (3) the
consumer’s previous training and
education; and (4) the employer’s
confirmation of continued employment.
Stakeholders had raised concerns that,
beyond analysis of a consumer’s past
employment record and current
employment status, each of these
requirements was incompatible with
appendix Q’s purpose of providing clear
rules for determining debt and income,
and was likely to result in compliance
difficulty and significant exposure to
litigation risk for creditors attempting to
avoid such risk by originating qualified
mortgages and thereby taking advantage
of the presumption of compliance.
Stakeholders, for example, indicated
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that many employers were likely to be
unwilling for various reasons (including
but not limited to economic uncertainty)
to confirm that a consumer’s
employment will continue into the
future, and similarly creditors may be
unqualified to evaluate a consumer’s
education, training, and job
qualifications.
In response to these concerns, the
Bureau proposed to amend appendix Q
in section I.A.3.a to eliminate the
requirements that creditors determine
the ‘‘probability of continued
employment’’ by considering a
consumer’s ‘‘qualifications for the
position’’ and ‘‘previous training and
education.’’ The Bureau proposed
instead to amend the section to require
creditors to examine a consumer’s past
and current employment. The Bureau
also proposed to remove the
requirement that creditors obtain the
‘‘employer’s confirmation of continued
employment’’ and instead require only
that the creditor examine the
‘‘employer’s confirmation of current,
ongoing employment status.’’ The
Bureau believed that requirements for a
creditor to evaluate a consumer’s
training, education, and qualifications
for his or her position are not wellsuited to function as regulations
designed to enable creditors to
determine debts and income and in turn
calculate DTI, and may increase
exposure to litigation risk. Specifically,
the Bureau indicated that it was not
entirely clear what creditors would need
to do in order to comply with these
requirements, or how those
determinations would affect a
consumer’s income for the purpose of
calculating DTI.
The Bureau also stated its belief that
requiring creditors to obtain an
employer’s confirmation of the
consumer’s continued employment
would not function properly as a
regulatory requirement because
employers likely would be unwilling to
provide any confirmation of
employment continuing beyond current,
ongoing employment. The Bureau
pointed out that without the benefit of
waiver or variance, such a requirement
could serve to disqualify any such
consumer’s employment income from
being included in the DTI calculation—
which would frustrate access to credit.
The Bureau stated further that a
confirmation of current, ongoing
employment status is adequate to verify
employment for purposes of
determining income. To that end, the
Bureau also proposed for clarification
purposes a proposed note to section
I.A.3 that states creditors may assume
that employment is ongoing if a
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consumer’s employer verifies current
employment and does not indicate that
employment has been, or is set to be
terminated. The proposed note made
clear, however, that creditors should not
rely upon a verification of current
employment that includes an
affirmative statement that the
employment is likely to cease, such as
a statement that indicates the employee
has given (or been given) notice of
employment suspension or termination.
Finally, the Bureau also proposed
several other technical, non-substantive
changes to section I.A for clarification
purposes.
Comments
Commenters, primarily from industry,
who submitted comments concerning
the Bureau’s proposed changes to
section I.A.3 were generally supportive
of those changes although some
clarification or additional guidance was
suggested by several.
Several bank trade associations and a
bank, in expressing support for the
changes, noted that: (1) While it is
reasonable to require an examination of
current employment, provisions which
require a creditor to speculate or predict
future employment are problematic; (2)
creditors should not be asked to second
guess employer hiring decisions or be
expert in establishing qualifications for
positions; (3) the eliminated criteria
could have a negative impact on
consumers with ‘‘on the job’’ education;
and (4) employers will not discuss
certainty of continued employment for
fear that it could create a new
employment contract for at-will
employees. These commenters also
suggested that the Bureau provide
guidance that verbal confirmation
would satisfy the requirement that the
creditor examine the employer’s
confirmation of the consumer’s
‘‘current, ongoing employment status’’
as provided in I.A.3.a as proposed by
the Bureau.
A state banking association
commenter, in expressing support for
the Bureau’s proposal to replace the
section I.A.3.a requirement that the
creditor obtain an employer’s
‘‘confirmation of continued
employment’’ for an applicant with a
requirement to ‘‘confirm current,
ongoing employment,’’ requested that
the Bureau provide additional
clarification for instances in which
employment is inherently dependent on
contingencies outside the employee’s or
employer’s control—such as applicants
whose salaries are funded through
ongoing grants, agency funded positions
at a nonprofit organization or federal
work programs, or applicants who are
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political appointees. A national banking
association commenter requested
similar clarification noting that
flexibility is required to ensure that all
populations are adequately served.
One commenter, a manufactured
housing lender, with regard to the
Bureau’s proposed note amending
section I.A.3.a, stated that the Bureau
should make clear that the creditor has
no obligation to inquire—either in
writing or verbally—as to the
employee’s job performance and/or
whether any suspension or termination
is imminent.
A credit union commenter that
indicated that it serves the education
community stated, in referring to the
Bureau’s proposed note amending
I.A.3.a, that the employment of many of
its members who are teachers,
professors and other educators is
established by year-to-year contracts
that generally include a termination
date. The commenter noted that these
contracts are generally renewable and
negotiated through the teacher’s
association or other union
representation. The commenter stated
that the Bureau’s proposed note would
likely preclude it from relying upon a
copy of a member’s contract as evidence
of stability of income since if the
contract included a termination date the
commenter would be unable to assume
that the member’s employment is
‘‘ongoing.’’ The commenter suggested
the proposed note be expanded to
consider fields of employment that may
be viewed as ‘‘seasonal’’ or industries
where employment is established by
contract, such as the education
community, so that a creditor could also
examine past and current employment
as part of its analysis of the stability of
income.
The manufactured housing lender
commenter also suggested that if the
Bureau adopted its proposal to amend
section I.A.3.a to eliminate the
obligation of creditors to predict a
consumer’s likelihood of continued
employment, that it remove existing
section I.A.3.b. Section I.A.3.b provides
that ‘‘creditors may favorably consider
the stability of a consumer’s income if
he/she changes jobs frequently within
the same line of work, but continues to
advance in income or benefits. In this
analysis, income stability takes
precedence over job stability.’’ The
commenter stated that this section
existed as a caveat to the obligation of
creditors to predict a consumer’s future
employment or advancement, and with
the elimination of that requirement it is
no longer necessary.
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Final Rule
The Bureau is adopting the revisions
to section I.A.3 as proposed. The Bureau
agrees with commenters that
elimination of the requirements that the
creditor: (1) examine the consumer’s
qualifications for the position, previous
training and education; and (2) examine
the employer’s confirmation of the
consumer’s continued employment—
will provide clearer and more
appropriate standards for creditors
under appendix Q, and facilitate
compliance with the Bureau’s ATR
Final Rule.
With regard to the comment
suggesting that the Bureau amend its
proposed note in section I.A.3.a to
expand it to consider industries where
employment is established by contract,
including the education community, the
Bureau appreciates the comment and
recognizes the special circumstances
confronted by contract employees. The
Bureau believes, however, that
additional revisions to section I.A.3.a
are not necessary given the existing
provisions of appendix Q with regard to
the treatment of seasonal employment
and income. That language, at sections
I.A.2.b and I.B.5, provides the means for
creditor assessment of the employment
and stability of income of contract
employees for purposes of appendix
Q.54
With regard to the comment
requesting that the Bureau clarify that
the creditor has no obligation to inquire
about a consumer’s job performance
and/or whether any suspension or
termination is imminent, the Bureau’s
revisions to I.A.3.a do not require
creditors to affirmatively make such
inquiries. That section, as revised, only
provides that a creditor cannot rely on
a verification of current employment if
it includes an affirmative statement that
employment is likely to cease.
Concerning the comment requesting
that the Bureau provide guidance to
explicitly allow verbal confirmation by
employers of the consumer’s current,
ongoing employment status, the Bureau
would like to review this request further
to ensure that such guidance would be
consistent with the purposes of
appendix Q and the ATR Final Rule.
Similarly, with regard to the comment
requesting clarification that a creditor’s
obligation to only consider a consumer’s
past and current and ongoing (and not
continual) employment as proposed by
the Bureau includes employment in
54 The
Bureau notes that Section II.E.4, Projected
Income for New Job, provides the means for creditor
assessment of projected income where such income
does not already satisfy the requirements of Section
I.
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contingent situations outside of the
employee’s or employer’s control, the
Bureau plans to review this issue further
to determine whether such clarification
to the existing appendix Q requirements
is necessary, and how any such
clarification would be framed. As
discussed above, the Bureau believes
appendix Q provides creditors with the
ability to assess the employment and
stability of income of employees
generally and contract employees in
particular.
Finally, with regard to the comment
recommending the deletion of section
I.A.3.b as unnecessary with the
adoption of the Bureau’s proposed
revisions to section I.A.3.a, the Bureau
disagrees, as it believes that section
I.A.3.b, as amended by the Bureau’s
proposed revisions, has continuing
relevance in the determination of the
stability of the consumer’s income. As
revised, section I.A.3.a requires an
examination of the consumer’s past
employment record and a verification of
current, ongoing employment status as a
method of assessing stability of income.
Section I.A.3.b provides creditors with
an additional method of assessing
stability of income, and of meeting the
ability to repay and qualified mortgage
requirements, in the situation where a
consumer changes jobs frequently.
B. Section I.B. Salary, Wage and Other
Forms of Income
Section I.B.1.a of appendix Q, the
‘‘General Policy on Consumer Income
Analysis,’’ as adopted in the ATR Final
Rule stated that creditors must analyze
the income for each consumer who will
be obligated for the mortgage debt to
determine whether his/her income level
can be reasonably expected to continue
‘‘through at least the first three years of
the mortgage loan.’’ Sections I.B.2 and
I.B.3 of appendix Q as adopted similarly
required that creditors determine
whether overtime and bonus income
‘‘will likely continue’’ and that they
‘‘establish and document an earnings
trend for overtime and bonus income.’’
The Bureau received inquiries from
industry stakeholders on these sections
of Appendix Q similar to those received
regarding section I.A.1, noting, among
other things, (1) that these provisions
codify general, forward-looking
standards that are better suited for the
purposes of a holistic and qualitative
underwriting analysis (such as the FHA
guidelines for determining insurance
eligibility) and may not function
properly as regulations; and (2) because
the Bureau may not have the flexibility
to waive or grant variances on an
individual basis regarding the
application of appendix Q, these
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44705
provisions will undermine the purpose
of appendix Q to serve as a reliable
mechanism for evaluating income and
debts for the purpose of determining the
qualified mortgage status of a loan, and
also increase the risk of litigation.
In response to these issues raised by
stakeholders, the Bureau proposed
several amendments to section I.B of
appendix Q to explain and clarify the
criteria for calculating a consumer’s
employment income and to determine
whether a consumer’s income is
continuing for the purposes of the DTI
calculation.
I.B.1. General Policy on Consumer
Income Analysis
The Proposal
The Bureau proposed to amend
section I.B.1.a to require creditors to
evaluate only whether a consumer’s
income level would not be reasonably
expected to continue based on the
documentation provided, with no threeyear requirement. In support of this
proposal, the Bureau stated its belief
that the intended purpose of appendix
Q would not be served by requiring
creditors to predict a consumer’s
employment status up to three years
after application. The Bureau stated
further that creditors should be required
to analyze recent and current
employment, along with any evidence
in the applicant’s documentation
indicating whether employment is
likely to continue. The Bureau therefore,
proposed to add a note to section 1.B.1.a
to make clear that creditors should not
assume that a consumer’s wage or salary
income can be reasonably expected to
continue if the verification of current
employment includes an affirmative
statement that the employment is likely
to cease, such as a statement that
indicates the employee has given (or
been given) notice of employment
suspension or termination. The Bureau
stated however, that if the consumer’s
application and the employment
confirmation indicate that the consumer
is currently employed and provide no
such indication that employment will
cease, the Bureau believed, as reflected
in the proposed note, that the creditor
should be able to use that consumer’s
income without an obligation to predict
whether or not that consumer will be
employed on some future date.
Comments
Various industry participants
commented on the Bureau’s proposed
amendments to section 1.B.1.a of
appendix Q, and the elimination of the
3-year requirement. These commenters
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suggested additional clarifications to
this section.
A joint bank trade association and a
bank recommended revising section
1.B.1.a to require each consumer to
disclose to the lender whether the
consumer has reason to believe that
their income level will not continue
through the first three years of the
mortgage. These commenters noted that
consumers are in the best position to
know whether they expect to retire, take
a leave of absence or otherwise not have
their income continue for the first three
years of the mortgage loan, and that
lenders have no way to reliably
determine this. They stated further that
questioning consumers about retirement
or time off to raise children raises
potential fair lending issues. They also
requested guidance on the treatment of
statements from consumers such as, ‘‘I
might retire.’’
Another bank trade association, in
commenting on the Bureau’s proposed
elimination of the requirement to
analyze whether the consumer’s income
level can reasonably be expected to
continue through the first three years of
the mortgage loan, requested
clarification of how far into the future
creditors must reasonably expect
income to continue.
One bank commenter in stating its
support for the Bureau’s proposed
changes in sections I.B.1, 2 and 3, stated
that it agreed with the Bureau that
creditors cannot be reasonably expected
to evaluate and document whether a
consumer’s income level can be
expected to continue for a three-year
period.
Various other commenters suggested
several other changes to section I.B. For
example, similar to the joint bank trade
association comment on I.B.1.a
discussed above, several commenters
raised possible fair lending issues with
regard to the section I.B.1 notes,
specifically, section i, which states that
effective income for consumers
planning to retire during the first threeyear period must include documented
retirement benefits, Social Security
payments, and other payments expected
to be received in retirement. One bank,
for example, stated that while it
supported the existing section i it
recommended that, to mitigate potential
fair lending risks based on age, the
Bureau add a clarification that creditors
should not ask consumers about future
retirement plans, but should consider
documented retirement benefits and
payments if a consumer disclosed a plan
to retire during the first three-year
period. Another bank commenter
similarly requested that the Bureau
explicitly state, for fair lending reasons,
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that creditors are not expected to ask
consumers if they plan to retire. This
commenter also noted that it would be
impracticable if not impossible to get
documented benefits and payments if
the consumer has yet to actually receive
any retirement income and may not
activate the source for up to a period of
three years. The joint bank trade
association commenter referred to above
suggested adding language to section i
of the notes indicating that effective
income requirements for consumers
planning to retire only applies to those
who disclose such plans. A bank
commenter, citing existing section ii of
the notes, which prohibits creditors
from asking consumers about possible
future maternity leave, suggested, for
fair lending reasons, that the Bureau add
a clarification that creditors should not
ask consumers about future medical
leaves, and a joint bank trade
association commenter suggested
changing the term ‘‘maternity’’ leave to
‘‘medical’’ leave in section ii of the
notes.
Final Rule
The Bureau is adopting the revisions
to section I.B.1 as proposed. The Bureau
continues to believe that the
requirement in section I.B.1.a
eliminated by the Bureau’s proposal,
i.e., that the consumer’s income must be
analyzed to determine whether the
consumer’s income level can be
reasonably expected to continue
‘‘through the first three years of the
mortgage loan,’’ does not serve the
intended purposes of appendix Q.
Instead, as proposed, the Bureau revises
section I.B.1.a to require only that the
creditor determine whether a
consumer’s income level ‘‘can be
reasonably expected to continue.’’ New
section iii of the notes to section I.B.1,
adopted by this final rule, provides that
creditors can assume that the
consumer’s salary or wage income can
be reasonably expected to continue if
the consumer’s employer verifies
current employment and income and
does not indicate that employment has
been or is set to be terminated. That
section states further, however, that this
assumption cannot be made by the
creditor if a verification of current
employment includes an affirmative
statement that the consumer’s
employment is likely to cease—such as
a statement that the consumer has given
or been given notice of employment
suspension or termination. The Bureau
believes that, as revised by this final
rule, section I.B.1 effectively sets out the
analysis required of the creditor for
assessing the continuance of consumer
salary and wage income, and is
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consistent with the purposes of
appendix Q.
With regard to the commenter that
requested clarification to appendix Q on
how far into the future creditors must
reasonably expect a consumer’s income
to continue, the Bureau believes that
section I.B.1.a, as revised by the Bureau,
effectively sets out the standard needed
to be followed by creditors. As stated in
new section iii of the notes, creditors
can ‘‘assume that salary or wage income
. . . can be reasonably expected to
continue if the consumer’s employer
verifies current employment and
income and does not indicate that
employment has been or is set to be
terminated.’’ That section, as revised by
the Bureau, does not require creditors to
make a determination that the
consumer’s income will continue
through the first three years of the
mortgage loan, or any other specified
period.
The Bureau appreciates the
recommendations from some
commenters that section I.B.1 be
amended to require consumers to
disclose whether they have reason to
believe their income level will not
continue as the consumer is in the best
position to know their future
employment and income status.
However, section I.B.1 already provides
that creditors may assume that the
consumer’s salary or wage income can
be reasonably expected to continue if
the consumer’s employer verifies
current employment and income and
does not indicate that employment has
been, or is set to be terminated. Where
no such appropriate verification is
provided, the creditor must analyze the
consumer’s income and determine
whether the consumer’s income level
can be reasonably expected to continue.
In such cases, the Bureau believes that
further analysis should be required of
creditors, and that, as revised, section
I.B provides creditors with an effective
regulatory framework for carrying out
that analysis.
With regard to the fair lending
concerns raised by some commenters
regarding questions presented to
consumers relating to future retirement
plans, the Bureau agrees that the final
rule and appendix Q do not obligate
creditors to ask consumers when they
expect to retire. If, however, a consumer
discloses a plan to retire during the first
three-year period by making an
affirmative statement of such plans,
creditors should consider documented
retirement benefits, Social Security
payments, and other payments expected
to be received in retirement. The Bureau
similarly believes that the ATR Final
Rule and appendix Q do not require
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creditors to ask whether a consumer
may, in the future, take medical leave.
The Bureau does not believe it is
necessary, however, to amend appendix
Q with specific statements in that
regard. In all cases, the Bureau expects
creditors to fully comply with all
applicable fair lending laws.
I.B.2. Overtime and Bonus Income.
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The Proposal
The Bureau also proposed changes to
section 1.B.2 regarding overtime and
bonus income.55 Specifically, the
Bureau proposed to eliminate the
requirement in section I.B.2.a that
creditors determine whether such
income ‘‘will continue.’’ Instead, the
proposal would have amended section
I.B.2.a. to provide that creditors must
focus on evaluating the consumer’s
documented overtime and bonus
income history for the past two years
and any submitted documentation
indicating whether the income likely
will cease. In proposing this change the
Bureau stated that it recognized that
overtime and bonus income may vary
from year to year and generally may be
less reliable than salary but noted that,
in certain occupations, overtime and
bonus income may be an integral and
reliable component of the consumer’s
income. The Bureau stated further that
while it believed that creditors must
confirm that overtime and bonus
income is not anomalous, the
requirement to analyze the consumer’s
two-year overtime and bonus income
history, and to verify that the submitted
documentation does not indicate
overtime or bonus income will cease,
would adequately address this concern
while satisfying the purposes of the
qualified mortgage provision.
Comments
Several industry commenters,
including several banks, a joint trade
association, several state bank
associations, and a state credit union
association provided comments specific
to the Bureau’s proposed change to
section I.B.2.a. These commenters
generally supported the Bureau’s
proposed changes. Some of these
commenters suggested additional
changes to sections I.B.2 and I.B.3.
A bank commenter, in stating support
for the Bureau’s proposed change
eliminating language requiring creditors
to determine whether overtime and
bonus income will continue, and
55 The Bureau’s proposed rule preamble at 78 FR
25650 also briefly referred to Bureau changes to
section I.B.3. However, this was a typographical
error and no Bureau changes were proposed to
section I.B.3.
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substituting language focusing on a twoyear income history, commented that
the change would facilitate better access
to credit for consumers who rely on
overtime and bonus income. Two state
bank associations similarly expressed
support for the Bureau’s proposed
change, with one stating that while most
employers are not willing to indicate
bonus income is likely to continue, they
are willing to affirm such bonus
payments were paid and if they have
ceased to exist. This second bank
association commenter stated further
that in the absence of confirmation from
the employer that a bonus program or
overtime is no longer available to an
employee, past history is an excellent
predictive tool. Another bank
commenter, in stating that the Bureau’s
analysis supporting its proposed change
to I.B.2.a on overtime and bonus income
was sound, recommended that the
formulation for assessing overtime and
bonus income in that section be applied
to other parts of appendix Q, on
different types of income.
A state credit union association
commenter stated that while the
Bureau’s proposed change to section
I.B.2.a is adequate to satisfy the
qualified mortgage provision, there are
still concerns from credit unions that
warrant further guidance. Specifically,
this commenter requested that the
Bureau provide examples of
documentation and/or further
clarification to assist in determining
whether bonus and overtime income is
anomalous.
A joint trade association commenter
suggested revisions to section I.B.2.a to
provide that overtime and bonus income
can be used if the consumer has
received the income for the past two
years and there is no evidence in the
loan file that it will not continue. In
support of this revision, the commenter
stated that the lender should not be in
a position to determine that the income
will or will not continue. The
commenter further stated that the twoyear history should satisfy this element
on its own absent evidence to the
contrary.
A credit union commenter stated that
in some lines of work such as nursing,
overtime is a standard component of the
overall compensation plan. It stated
further that the requirement in section
I.B.2.a, as revised by the Bureau’s
proposal, to document and evaluate at
least two years of overtime income,
could adversely impact certain
consumers who are new to their field or
recently hired and do not yet have two
years of overtime history. The
commenter urged the Bureau to
reconsider the impact on nurses,
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44707
firefighters and law enforcement
personnel who are just beginning their
careers, and to make appropriate
adjustments to the proposed revision.
A mortgage lender specializing in the
financing of manufactured housing
commented on section I.B.2.b, which, in
addition to requiring creditors to
develop an average of bonus and
overtime income for the past two years,
states that ‘‘periods of overtime and
bonus income less than two years may
be acceptable provided the creditor can
justify and document in writing the
reason for using the income for
qualifying purposes’’ (emphasis added).
This commenter stated that without
clear direction and guidance from the
Bureau as to what justification and
documentation would suffice in these
instances, lenders will instead choose to
exclude this income rather than face
regulatory scrutiny and a potential
lawsuit for choosing to include the
income. A joint trade association
commenter suggested several technical
edits to I.B.2.b.
Several industry commenters
provided comments on section I.B.3.
Section I.B.3.a requires a creditor to
establish and document an earnings
trend for overtime and bonus income
and, if either type of income shows a
continual decline, to document in
writing a sound rationalization for
including the income when qualifying
the consumer. Section I.B.3.b provides
that a period of more than two years
must be used in calculating the average
overtime and bonus income if the
income varies significantly from year to
year.
With regard to section I.B.3, a joint
trade association commenter suggested
removing and reformatting this section
as part of a new I.B.2.c and I.B.2.d to
provide that eligible bonus or overtime
income be calculated as the lesser of the
current year or the average of the
previous two years, as long as there is
no evidence in the loan file that the
income will not continue, and the
creditor documents in writing a sound
rationalization for including the income.
This commenter noted that income from
bonuses and overtime, commissions and
self-employment can be variable and
susceptible to significant declines from
circumstances within and outside of the
control of the consumer. The
commenter stated that the revisions it
was proposing to this section and others
in appendix Q would provide a new and
simple qualitative test for determining
the amount of income to include in the
DTI analysis. The commenter stated that
the test would require lenders to use the
lesser amount of the average of two
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year’s past income or the most recent
year’s earnings.
With specific regard to section I.B.3.b,
which states that ‘a period of more than
two years must be used in calculating
the average overtime and bonus income
if the income varies significantly from
year to year,’’ this joint trade association
commenter stated that the word
‘‘significantly’’ in that section is too
vague for a legal standard and will
invite litigation. It stated further that
lenders should only use the most recent
income, not the average, for declining
income and provide a rationale for the
inclusion of the income. A bank
similarly commented on section I.B.3.b,
that as the term ‘‘varies significantly’’ in
that section is not defined that the
requirement in that section that a period
of more than two years must be used in
calculating the average overtime and
bonus income either be eliminated or
clarified.
Final Rule
The Bureau is adopting the revisions
to section I.B.2 regarding overtime and
bonus income as proposed. The Bureau
believes that the revisions proposed to
section I.B.2.a, eliminating language
requiring creditors to determine
whether overtime and bonus income
will continue, and substituting language
that states that such income can be used
if the consumer has received it for the
past two years and documentation
submitted for the loan does not indicate
this income will likely cease, will
facilitate creditor compliance and, as
stated by a commenter, better access to
credit for consumers who are dependent
upon overtime and bonus income. At
the same time the Bureau believes that
the changes to this section otherwise
further the purpose and intent of
appendix Q and the qualified mortgage
provision through clear requirements for
a creditor assessment of the consumer’s
receipt of the overtime or bonus income
for the previous two years, and a review
of the loan documentation for
indications that the income will likely
cease. As some commenters noted,
employers may not be willing to
indicate if bonus income, for example,
is likely to continue, and in the absence
of employer confirmation, past history
can be used as a predictive tool.
With regard to other proposed
changes to section I.B.2.a raised by
commenters, such as a suggestion to
substitute language that there is no
evidence in the loan file that the
overtime or bonus income will not
continue, or possible changes to address
the potential impact of the two-year
requirement on new employees who
depend on overtime or bonus income,
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the Bureau believes that the Bureau’s
revisions strike the right balance
between facilitating compliance and
ensuring an adequate assessment of
consumer income for purposes of the
DTI and the ATR requirements. For
example, as revised by this final rule,
section I.B.2.a provides that bonus or
overtime income may be used if the
documentation in the loan file does not
indicate that the consumer’s overtime or
bonus income ‘‘will likely cease,’’
which is very similar to the language
suggested by the commenter. To the
extent that the commenter’s proposed
language would have a different effect,
the Bureau believes that the final rule’s
approach provides clear, objective
guidance to creditors that is consistent
with the analysis required by the rest of
appendix Q. As for the potential impact
of the two-year requirement on new
employees, the Bureau believes that
current section I.B.2.b, as discussed
further below, provides creditors with
the ability to assess the overtime and
bonus income of new employees.
As for comments on sections beyond
the Bureau’s specific proposed changes
to section I.B.2.a, for example with
regard to sections I.B.2.b and I.B.3, the
Bureau does not believe any changes to
those sections are warranted at this
time. With regard to section I.B.2.b for
example, the Bureau believes that
section provides flexibility for creditors
to justify and properly document the
use of a period of overtime and bonus
income of less than two years. The other
requirements of section I.B.2.a (that
documentation submitted for the loan
does not indicate the overtime or bonus
income will likely cease) and section
I.B.3.a will continue to apply to the
income analysis of the consumer. With
regard to the comments on section I.B.3,
suggesting a removal of that section and
a reformatting into a new test in section
I.B.2.c. for determining the amount of
income to include in the DTI analysis,
the Bureau appreciates the comment but
believes that sections I.B.2, as amended
by this final rule, and I.B.3, provide for
a required income analysis consistent
with the purposes and intent of
appendix Q. Regarding the comments
on section I.B.3.b, the Bureau will
continue to review this section to
determine if further clarification is
needed with regard to a creditor
determination of whether overtime or
bonus income ‘‘varies significantly,’’ but
is not making any changes at this time.
The Bureau needs additional
information in order to fully assess
whether this standard requires
additional clarification for creditors in
making the necessary appendix Q
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determinations, and whether possible
alternative standards would be
adequate.
I.B.11. Social Security Income
The Proposal
The Bureau proposed several
clarifications to the provisions in
section I.B.11 of appendix Q as adopted,
explaining how to account for Social
Security income.
Section I.B.11 as adopted by the ATR
Final Rule required that (1) Social
Security income either be verified by
the Social Security Administration
(SSA) or through Federal tax returns; (2)
the creditor obtain a complete copy of
the current awards letter; and (3) the
creditor obtain proof of continuation of
payments, given that not all Social
Security income is for retirement-aged
recipients. The Bureau proposed to
amend section I.B.11 to remove the
mention of Federal tax returns and
instead require only that creditors
obtain a benefit verification letter issued
by the SSA. In support of this change
the Bureau stated its belief that a Social
Security benefit verification letter
would provide easily accessible proof of
the receipt of Social Security benefits
and their continuance.
The Bureau also proposed to clarify in
section I.B.11 that a creditor shall
assume a benefit is ongoing and will not
expire within three years absent
evidence of expiration. The Bureau
stated, in support of this change, its
belief that this would provide a more
workable and accurate standard for
verification of Social Security income.
Comments
Several banks, national and state
banking trade associations, a state credit
union, and a consumer group submitted
comments on the Bureau’s proposal to
amend section I.B.11 to remove the
reference to Federal tax returns and to
require creditors to obtain a benefit
verification letter. Most industry
commenters saw the change as reducing
compliance flexibility, and the
consumer group requested further
changes to protect against falsification
of income.
With regard to the industry
commenters, a bank trade association
stated that it could find no justification
for what it saw as eliminating the
flexibility of allowing the use of Federal
tax returns in the current rule. It stated
that while it agreed with the Bureau’s
explanation for the change, i.e., that a
Social Security benefit verification letter
would more easily provide proof of the
receipt of Social Security benefits and
their continuance, the explanation did
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not provide a reason to eliminate the
Federal tax return option. A bank
commenter requested that I.B.11 be
revised to permit Federal tax returns or
other alternative documentation that
verifies receipt of Social Security
Income. A state banking association
commented that in many cases
applicants have lost or misplaced their
award letters but that they can easily
document and verify Social Security
income through Federal tax returns and/
or monthly bank statements. Another
state banking association stated that the
Federal tax return option would
facilitate compliance. A state credit
union commented that it was concerned
that limiting verification to a benefit
verification letter could facilitate
discrimination. Another state credit
union trade association, in stating its
concern about the supposed elimination
of the Federal tax return option, stated
that it could delay the lending process
as a result of consumers who cannot
locate their Social Security benefit
verification letter and who therefore
need to request a copy from the SSA,
resulting in a potential increased
workload for the SSA. A credit union
commenter, in recommending the
Federal tax return option, stated that
sole reliance on the Social Security
benefit verification letter could pose a
potential risk of fraud through a
modification of the letter by the
recipient before it is received by the
lending institution.
One bank commenter stated that it
supported the Bureau’s proposal to
require creditors to obtain a Social
Security benefit verification letter to
verify Social Security income, but
recommended the adoption of language
acknowledging that creditors may
obtain federal tax returns in addition to
verification letters. This commenter
noted that tax returns may be useful to
creditors to determine an applicable tax
rate used to gross up non-taxable Social
Security income, and that they may be
needed to verify income received other
than from Social Security. This
commenter also stated its support for
the Bureau’s proposed clarification
providing that Social Security income
shall be assumed not to expire within
three years, absent evidence of
expiration, stating that it would reduce
potential barriers to accessing credit for
Social Security income recipients, while
providing creditors clear guidance to
mitigate fair lending risk.
A consumer group commenter stated
that so long as the documentation
requirements for Social Security income
require that the Social Security benefit
verification letter come directly from the
SSA, this documentation is sufficient. It
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noted, however, that if the verification
letter is delivered to the lender through
a broker or originator working for the
lender, this is not sufficient
documentation as it may become a
vehicle for falsification of income. The
commenter therefore recommended that
section I.B.11 be revised to require
creditors to use either tax returns or
bank statements showing the deposit of
benefits into the bank account, in
addition to requiring a verification
letter—where the verification letter
cannot be obtained directly from the
government payor. The commenter
noted that the additional information
will provide more substantial
verification in a form that is still readily
available to applicants. It concluded on
this point that this approach will ensure
that homeowners have easy access to
needed income documentation without
providing a means for public benefit
documentation to be used to inflate
income on a loan. This commenter also
suggested, referring to section ii of the
notes to section I.B.11 (which allows
some portion of Social Security income
to be ‘‘grossed up’’ if deemed nontaxable by the IRS), that the Bureau
should specify that grossing up of Social
Security benefits should be done based
on a tax bracket that is appropriate for
the income received. It stated further on
this point that the language currently in
I.B.11 will lead to and support the
existing practice of grossing up that
allows, rather than prevents, many
unaffordable loans, as many
homeowners who receive Social
Security benefits have their income
grossed up to the top tax bracket.
Final Rule
The Bureau is adopting the revisions
to section I.B.11 as proposed. The
Bureau believes that the Social Security
benefit verification letter provides the
best method of verifying receipt of
Social Security income by the consumer
and its continuance. The Bureau
understands the concerns expressed by
various industry commenters regarding
the potential limitation on compliance
flexibility resulting from the removal of
the supposed option to verify Social
Security income through Federal tax
returns. The Bureau notes, however,
that section I.B.11 as adopted in the
2013 ATR Final Rule required, in
addition to income verification by the
SSA or Federal tax returns, a complete
copy of the current awards letter, and
documented continuation of payments.
The proposed revisions to section I.B.11
simplify these requirements by
providing that one document—the
Social Security benefit verification
letter—satisfies all needs for
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documentation. A Federal tax return is
of less value in demonstrating a
consumer’s continued receipt of Social
Security income and would not be
available for consumers who only
recently began to receive Social Security
benefits. Section I.B.11 as revised by the
final rule specifically provides that if
the Social Security benefit verification
letter does not indicate a defined
expiration date within three years of
loan origination, the creditor must
consider the income effective and likely
to continue. The consumer’s bank
statements, suggested by some
commenters as an alternative means to
verify income, also are of less value in
demonstrating continuance of receipt.
The Bureau notes moreover that
continuing to require the Social Security
benefits letter to verify that such
benefits are not likely to cease parallels
the general requirement of employer
verification of current, ongoing
employment.
As far as the concern expressed by a
commenter that the Social Security
benefit verification letter could become
a vehicle for falsification of income if
not required to be received directly from
the government payor—and in which
case it was suggested that tax returns or
bank statements be required as
additional verification—the Bureau
believes that effective due diligence by
creditors will limit such a possibility.
The Bureau expects that creditors will
exercise the same due diligence against
fraud with regard to their review of
Social Security benefit verification
letters that they apply in their review of
any mortgage loan related documents
submitted to them. With regard to the
comments received expressing concern
about consumers who are unable to
locate their Social Security Benefit
verification letters, it is the Bureau’s
understanding that benefit verification
letters may be requested on-line or over
the phone toll-free from the SSA or from
a local SSA office.
Finally, with regard to the comment
requesting that the Bureau put
limitations on the grossing up of Social
Security benefits (as permitted under
section I.B.11 in some instances), the
Bureau is not addressing that issue at
this time, as this requires further review
and consideration. Other commenters
made suggestions for changes with
regard to section II.E, Non-Taxable and
Projected Income, and the gross-up rate
allowed for non-taxable income
generally (discussed later in this
preamble) which, in addition to Social
Security income, includes Federal
government employee retirement
income, State government retirement
income, military allowances, as well as
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other types of income. The Bureau
needs additional time to fully consider
and evaluate the implications of these
comments, including those specifically
related to Social Security income, to
ensure consistency with and furtherance
of the purposes of appendix Q.
C. Section I.D. General Information on
Self-Employed Consumers and Income
Analysis
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The Proposal
Section I.D of appendix Q, as adopted,
permitted income from self-employed
consumers to be considered income for
the purposes of the DTI calculation if
certain criteria were met, including
various documentation requirements
and analysis of the financial strength of
the consumer’s business. The
documentation requirements in section
I.D.4 included the requirement to
provide a ‘‘business credit report for
corporations and ‘S’ corporations.’’ The
analysis of the financial strength of the
business in section I.D.6 required that
the creditor carefully analyze the
‘‘source of the business’s income’’ and
the ‘‘general economic outlook of
similar businesses in the area.’’
Following the publication of appendix
Q the Bureau received inquiries from
stakeholders concerning these
requirements and also noted compliance
difficulties and increased risk of
litigation that could arise from them.
Industry raised specific concerns that
business credit reports can be expensive
and difficult to obtain, and that a
requirement to assess economic
conditions for geographic areas can be
both costly and difficult, as well as
imprecise.
The Bureau proposed to make several
amendments to these income stability
requirements for self-employed
consumers. The Bureau’s first proposed
amendment eliminated the requirement
in current section I.D.4 that selfemployed consumers provide a business
credit report for corporations and ‘‘S’’
corporations. In proposing this
amendment the Bureau stated that it
recognized that business credit reports
for many smaller businesses can be
difficult or very expensive to obtain.
The Bureau also stated its belief that
while these reports may provide some
valuable information for the purposes of
an underwriting analysis, they are less
suited to function as a requirement to
determine income for self-employed
consumers.
The Bureau’s second proposed
amendment eliminated two
requirements under the requirement to
analyze a business’s financial strength
in section I.D.6. Section I.D.6, as
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adopted, required creditors (1) to
evaluate the sources of the business’s
income and (2) to evaluate the general
economic outlook for similar businesses
in the area. In proposing this
amendment the Bureau stated its belief
that both of these requirements demand
that the creditor engage in complex
analysis without providing clarity
concerning what types of evaluations
are satisfactory for the purpose of
complying with the rule. The Bureau
also stated that such a provision is
better suited to function as part of an
underwriting analysis subject to waiver,
variance, and guidance rather than a
regulatory rule.
The Bureau’s proposal also made
technical revisions to section I.D to
accommodate removal of these
requirements.
Comments
Industry commenters—several banks
and national and state trade
associations—submitted comments on
the Bureau’s proposed changes to
sections I.D.4 and I.D.6. The
commenters generally supported the
Bureau’s proposals.
A bank stated that it agreed with the
Bureau’s proposals to eliminate the
requirement for business credit reports,
citing the potential difficulty and
expense associated with obtaining such
reports. The bank stated that requiring
a business credit report could increase
the cost of credit or restrict access to
credit for self-employed consumers. The
bank also noted that appendix Q
requires creditors to obtain year-to-date
profit and loss statements and balance
sheets from self-employed consumers,
and suggested, in the alternative, that
creditors be permitted to accept
quarterly tax filings if the consumers
most recent tax return is greater than
four months old. This commenter also
stated its agreement with the Bureau’s
proposal to eliminate creditor
requirements to evaluate both the
sources of consumer’s business income
and the general economic outlook for
similar businesses in the area stating
that it agreed with the Bureau’s
conclusion that such requirements are
ill-suited to a regulatory rule designed
for consumer transactions. The
commenter added further that such
requirements are too subjective for
purposes of establishing documentation
standards for income.
Another bank commenter expressed
support for the Bureau’s proposed
elimination of the business credit report
requirement in section I.D.4, and with
regard to the Bureau’s proposed
elimination of the creditor requirements
in section I.D.6 stated that it agreed that
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requiring creditors to analyze a
business’s financial strength is beyond
the scope of the DTI standard. This
commenter suggested the removal of
section I.D.6 entirely from appendix Q,
stating that the type of determination
required by this section is highly
subjective and that such subjectivity
greatly undermines the certainty
presumed to be tied to a safe harbor test.
This commenter also suggested a change
to section I.D.4.c to make clear that
profit and loss statements will only be
required if quarterly tax returns are not
available.
A joint trade association commenter
also suggested the entire deletion of
section I.D.6, stating that subjective
criteria should be removed in favor of
documented income. This commenter
also supported the elimination of the
business credit report requirement in
section I.D.4.d. It also suggested changes
to section I.D.4.c, stating that profit and
loss statements and balance sheets
should only be required if they are
needed because quarterly taxes are not
available.
Two state banking association
commenters also supported the Bureau’s
proposal to eliminate the requirements
in section I.D.4.d, and I.D.6. One
association, with regard to section
I.D.4.d, noted that credit reports for
small businesses can be difficult to
obtain and quite expensive. The other
association stated, with regard to I.D.6,
that the creditor requirements proposed
to be eliminated by the Bureau in that
section would be inherently difficult for
creditors to make and would carry no
indication of accuracy. A state credit
union association also expressed
support for the Bureau’s changes in
these sections.
A national trade association that
represents real estate agents commented
that it supported the Bureau’s proposals
eliminating the requirements relating to
self-employed consumers in I.D.4.d and
I.D.6, stating that it agreed with the
Bureau’s assessment that these
requirements are too expensive and
complex, and without clarity. This
commenter also suggested additional
clarifications beyond the Bureau’s
proposals, to section I.D and section
I.B.7, as those sections relate to many of
its members who work as self-employed
contractors working in association with
real estate brokers, not as employees. In
particular this commenter requested
additional clarity on how creditors
should consider real estate commission
income.
Final Rule
The Bureau is adopting its revisions
to section I.D.4 and I.D.6 as proposed.
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With regard to the revisions to section
I.D.4, and the elimination from the
documentation requirements for selfemployed consumers business credit
reports for corporations and ‘‘S’’
corporations, the Bureau recognizes the
concerns expressed by commenters
regarding the expense associated with
obtaining such reports, and agrees with
commenters that this additional expense
could increase the cost of credit or
restrict access to credit for selfemployed consumers.
With regard to the Bureau’s revisions
to section I.D.6 and the elimination of
the requirements that creditors evaluate
sources of the consumer’s business
income, and the general economic
outlook for similar businesses in the
area, the Bureau agrees with
commenters who noted the subjective
nature of these requirements, and
recognizes the difficulty for creditors in
making these assessments. The Bureau
believes that these requirements are
better suited to a flexible underwriting
analysis than a regulatory rule. With
regard to those commenters who
recommended the elimination of section
I.D.6 in its entirety, the Bureau believes
that the revisions to that section
adopted by the Bureau significantly
improve this requirement as an
assessment of the business’s financial
strength, and make this an effective and
useful measure for purposes of the DTI
analysis. Furthermore, the standard as
revised is straightforward for creditors,
i.e., annual earnings that are stable or
increasing are acceptable, while income
from businesses that show a significant
decline in income over the analysis
period is not acceptable.
The Bureau notes the other changes to
these sections beyond the Bureau’s
specific proposals recommended by
some commenters, including, for
example, that creditors be permitted to
accept quarterly tax filings as an
alternative to profit and loss statements
and balance sheets under section I.D.4.c,
and additional clarification on selfemployed contractors, and real estate
commission income, under I.D. and
I.B.7. The Bureau appreciates those
recommendations, but will need to fully
evaluate them for purposes of
consistency with and furtherance of the
purposes of appendix Q, and the
implications for all stakeholders.
II. NON-EMPLOYMENT RELATED
CONSUMER INCOME
A. Section II.B. Investment and Trust
Income
The Proposal
Section II.B.2 of appendix Q as
adopted permitted trust income to be
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considered income for the purposes of
the DTI calculation ‘‘if guaranteed,
constant payments will continue for at
least the first three years of the mortgage
term.’’ Appendix Q then provided a list
of required documentation consumers
must provide but did not otherwise
specify the universe creditors must
review to make and support the threeyear determination.
The Bureau proposed an amendment
to this section to delineate more clearly
the breadth of the analysis for trust
income by specifying that the analysis is
limited to the documents appendix Q
requires. Specifically, the proposal
revised ‘‘if guaranteed, constant
payments will continue for at least the
first three years of the mortgage term’’
by adding ‘‘as evidenced by trust
income documentation.’’ Under the
requirements in section II.B.2 as
adopted, there was no specific cut-off
for the amount of diligence required or
information that must be collected to
satisfy the requirement. The Bureau
stated its belief in proposing the
amendment that it would facilitate
compliance and help ensure access to
credit by making the standard clear and
easy to apply.
Section II.B.3.a of appendix Q as
adopted required, for notes receivable
income to be considered income, that
the consumer provide a copy of the note
and documentary evidence that
payments have been consistently made
over the prior 12 months. If the
consumer is not the original payee on
the note, however, section II.B.3.b
required the creditor to establish that
the consumer is ‘‘now a holder in due
course, and able to enforce the note.’’
The Bureau proposed an amendment to
eliminate the requirement that the
consumer be a holder in due course,
which requirement the Bureau believed
may require further investigation than is
necessary to establish that the income is
effective for the purposes of the rule.
The proposal would have amended
appendix Q to require only that the
consumer is able to enforce the note.
Comments
Industry commenters who submitted
comments on the Bureau’s proposal to
revise section II.B.2 of appendix Q
either supported the changes or
requested additional clarification on
existing language in the section.
A bank commenter, for example,
stated that the change to section II.B.2.a
concerning trust income provided
clearer guidance with respect to the
required documentation, and would
help facilitate continued access to credit
for recipients of such income. This
commenter expressed concerns,
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however, with the requirement that trust
income be ‘‘guaranteed’’ and
recommended its elimination. This
commenter stated that while trust
income documentation may provide
insight into periods of likely income
continuance, it is unclear as to whether
such documentation would provide
evidence of an absolute guarantee of
payment. Other commenters similarly
objected to the word ‘‘guaranteed.’’
Another bank commenter stated that
while it agreed with the Bureau’s
proposed changes to limit the analysis
for trust income only to trust
documentation, it encouraged the
Bureau to remove ‘‘guaranteed’’ as it
seems to imply that documentation will
be available in the form of a guarantee
or that an individual can be requested
to provide such a guarantee. This
commenter stated that the creditor
should be expected to review the trust
documentation to ensure the income is
not clearly scheduled to end in the first
three years of the mortgage. A joint trade
association commenter also suggested
the deletion of the word ‘‘guaranteed’’
in this section, stating that it is unclear
who would provide the guarantee, and
that this is not in keeping with current
practice. A state banking association
stated that it supported the Bureau’s
proposed addition of the phrase ‘‘as
evidenced by the trust income
documentation’’ to section II.B.2.a so
long as the provision regarding required
trust income documentation allows for
the consumer to provide a trustee’s
statement confirming the amount of the
trust, frequency of distribution and
duration of payments. This state
banking association commenter stated
that reliance on a trustee’s statement
would allow its state’s banks to take
advantage of the protection afforded by
state law (rather than having to collect
a complete copy of the trust agreement).
With regard to the Bureau’s proposed
changes to section II.B.3, a bank
commenter agreed with the Bureau’s
proposal to eliminate the requirement
for creditors to establish that consumers
are holders in due course if the
consumer is not the original payee on
the note. This commenter noted that
creditors will be required to obtain a
copy of the note, which should
generally be sufficient to establish
enforceability. This commenter also
recommended shortening the
documentation period to evidence
consistency of payment receipts in
section II.B.3.b from 12 months to six
months. Finally, this commenter stated
that the list of acceptable
documentation in section II.B.3.b to
establish that evidence of receipt of
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notes receivable (i.e., deposit slips,
cancelled checks or tax returns) is too
restrictive, and does not take into
account other common electronic
payment methods. The commenter
recommended modifying the list of
acceptable documentation types to
include, but not be limited to, deposit
slips or receipts, cancelled checks, bank
statements or tax returns. A joint trade
association and a bank also
recommended expansion of the list of
acceptable documentation in section
II.B.3.b to include bank statements and
other deposit accounts, as electronic
payments are an increasingly common
way to transfer money regularly
between consumers.
Final Rule
The Bureau is adopting the revisions
to sections II.B.2 and II.B.3 as proposed
with two modifications. The changes
proposed by the Bureau to both sections
were generally accepted by commenters.
However, with regard to section II.B.2
the Bureau agrees with commenters that
the use of the word ‘‘guarantee’’ in that
section, i.e., that income from the trust
may be used if ‘‘guaranteed’’ constant
payments will continue, is unclear and
should be eliminated. The Bureau
believes that the requirement for
creditor evaluation of the trust
documentation, with proper due
diligence by the creditor in the review
of such documentation, is sufficient to
meet the requirement in section II.B.2
with regard to the continuance of the
trust income. With regard to the state
banking association commenter
recommending that required trust
documentation include a trustee’s
statement, the Bureau notes that section
II.B.2 specifically provides that
‘‘required trust documentation’’
includes a trustee statement confirming
the amount of the trust, the frequency of
the distribution, and the duration of
payments.
With regard to section II.B.3, the
Bureau agrees with the commenters that
suggested a modification of the list of
acceptable documentation in section
II.B.3.ii to take into account common
electronic payment methods. The
Bureau is therefore modifying this list to
include, in addition to deposit slips,
cancelled checks and tax returns, also
deposit receipts and bank or other
account statements. Finally, with regard
to the comment recommending
shortening the documentation period in
section II.B.3.b from 12 months to six
months, the Bureau appreciates the
comment but believes this requires
further evaluation to ensure consistency
with the purposes of appendix Q and
the ATR Final Rule.
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B. Section II.D. Rental Income
The Proposal
Appendix Q, as adopted, allowed
creditors to consider certain rental
income payable to the consumer taking
out the loan for the purposes of the DTI
calculation in section II.D. Section
II.D.3.a stated that it is not acceptable to
consider income from roommates in a
single-family property occupied as the
consumer’s primary residence as
‘‘income’’ for the purposes of
determining the consumer’s DTI, but
that it is acceptable to consider rental
income payable to the consumer from
boarders related by blood, marriage, or
law. The Bureau originally adopted this
provision of appendix Q for consistency
with existing FHA standards used by
industry.
Following publication of the 2013
ATR Final Rule, the Bureau became
aware of concerns regarding
requirements that boarders be related to
the homeowner in order for rental
income payable to the consumer to be
considered ‘‘income’’ for DTI purposes.
The Bureau did not believe that the
relation requirement was useful in
determining whether or not the rental
income should be used in determining
DTI. The Bureau therefore proposed to
eliminate the requirement that boarders
be related by blood, marriage, or law
from section II.D.3.a.
Comments
Commenters generally supported the
Bureau’s proposed change to section
II.D.3.a, eliminating the prohibition on
considering rental income payable to a
consumer from boarders in a singlefamily property who are not related by
blood, marriage or by law. Various
commenters recommended further
clarifications to this section.
A joint trade association commenter
in recommending the same change to
section II.D.3.a. as proposed by the
Bureau, stated that rental income
evidenced on tax returns should be
given equal treatment regardless of the
relationship status of renters. Another
national trade association commenter
stated that it generally agreed with the
Bureau’s proposed changes to this
section, but that it believed that the
guidelines need to be further modified
to be workable. Specifically this
commenter stated that the requirements
as currently written will be difficult to
administer because they depend on
distinctions and varying definitions of
the terms ‘‘roommate’’ and ‘‘boarder.’’
The commenter noted that these terms
are not defined in the regulation, and
they have no set meaning in law or
custom. The commenter stated that it
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did not believe that these regulations
should impose or dictate the types of
habitation agreements that people
choose to enter. A state bank association
commenter noted that the Bureau’s
proposal retains the prohibition on
using rental income paid by roommates,
and that neither the rule nor appendix
Q provides a definition of roommate or
boarder. Stating that the provision to
limit rental income to boarders is
unnecessarily restrictive, the commenter
requested that creditors be permitted to
consider rental income received from
roommates or boarders, provided such
income is shown on the applicant’s tax
return. A similar comment from another
state bank association stated that if the
distinction between rental income
received from roommates and boarders
is retained it requested that the Bureau
define within the regulation the terms
‘‘roommate’’ and ‘‘boarder.’’
Final Rule
The Bureau agrees with those
commenters on the Bureau’s proposed
revisions to section II.D.3 that the
requirements as proposed would be
difficult to administer and comply with
as they depend on distinctions between
‘‘roommate’’ and ‘‘boarder’’ which are
undefined terms in that section, and in
appendix Q generally. The Bureau
believes that rental income established
through tax returns is the relevant factor
for purposes of a DTI analysis, and that
the distinction between the terms
roommate and boarder is not relevant to
that determination. Therefore the
Bureau is modifying section II.D.3.a to
eliminate the prohibition on the
acceptability of income from roommates
in a single family property occupied as
the consumer’s primary residence, and
to provide that income from either
roommates or boarders is acceptable.
The Bureau retains the section II.D.3.b
requirement that rental income may be
considered effective if shown on the
consumer’s tax return, and states further
that, if not on the tax return, rental
income paid by the roommate or
boarder may not be used in qualifying.
Clarifications and other Technical
Changes
As noted above, the Bureau proposed
various other technical and wording
changes in appendix Q, for consistency
and clarification. The Bureau is
adopting those revisions as proposed.
Comments on Aspects of Appendix Q
beyond Bureau’s Specific Proposals
As noted previously, various
commenters submitted comments on
aspects of appendix Q that were not the
subject of the Bureau’s specific
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proposals, including suggestions for
significant revisions to appendix Q.
Those comments are summarized and
addressed below.
Adopt or Allow Use of GSE Guidelines
Several banks and a joint trade
association commenter recommended
that the Bureau either allow creditors to
use GSE guidelines in certain instances
not addressed by appendix Q, or to look
to and adopt certain existing GSE
guideline language. Specifically, one
bank commenter urged the Bureau to
expressly allow creditors to use GSE
guidelines for any matter not addressed
by appendix Q, as GSE guidance is
widely used by industry and is
consistent with prudent underwriting.
This commenter stated, for example,
that appendix Q does not specify how
to annuitize assets, but that GSE
guidance spells out how to annuitize a
consumer’s assets in qualifying a
borrower. It also stated that, as a general
matter, appendix Q should be revised to
allow creditors to ‘‘add back’’ amounts
deducted from a borrower’s income,
consistent with a Fannie Mae
worksheet. This commenter also noted
several other specific areas where
adoption of GSE guidance on add-backs
was requested, for example, certain addbacks permitted by the GSEs with regard
to section I.E. Income Analysis:
Individual Tax Returns (IRS Form
1040); and with regard to section II.D.5.
Rental Income, Analyzing IRS Form
1040 Schedule E. In addition this
commenter recommended with regard
to section II.E.4. Projected Income for a
New Job, adoption of the GSEs’
approach in assessing the projected
income of certain teachers. A joint trade
association commenter similarly
recommended replacing, for reasons of
clarity, appendix Q language in section
I.B.12. Automobile Allowances and
Expense Account Payments, with GSE
guidance, and replacing language in
sections I.E, F, G and H with a
requirement to follow GSE guidelines
for self-employed cash flow analysis,
including the use of several GSE forms,
and the adoption of GSE requirements
in section II.E.2. Adding Non-Taxable
Income to a Consumer’s Gross Income.
This commenter also recommended that
appendix Q follow current GSE
guidelines for an identified list of areas
where it stated appendix Q is silent and
where it was seeking additional clarity.
Another bank commenter stated that
there are instances in which the
Appendix Q guidelines fail to reflect the
level of detail needed to underwrite in
the current mortgage market, and noted
that the GSEs have adopted guidelines
which provide greater detail and in
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some instances would be clearer and
better suited to setting a regulatory
requirement. This commenter
encouraged the Bureau to review certain
specifically identified sections of the
GSE guidelines which it stated might
provide more clarity than the present
appendix Q rules. This commenter
stated, however, that it was not
recommending that the Bureau defer to
the GSE guidelines which are subject to
change without opportunity for notice
and comment. It requested the Bureau
review, for example, GSE guidelines
with regard to ‘‘income from other
sources’’ in section I.B.1.b, giving as an
example GSE guidelines on
documenting of tips and foreign income.
Like the previously discussed
commenters, it also suggested review of
sections I.E, F, G and H.
Generally Revise Appendix Q to
Eliminate Subjective Determinations
Several commenters suggested major
revisions to appendix Q to address what
the commenters viewed as standards
that require creditors to make subjective
determinations on a consumer’s debt
and income. For example, a joint trade
association commenter stated that it was
concerned that appendix Q mandates a
calculation of DTI that will require
lenders to establish essentially a manual
underwriting process due to the
numerous subjective determinations
prescribed by the rule. It stated further
that if qualified mortgages will comprise
a significant fraction of mortgage
originations, the proper calculation of
DTI under appendix Q must be able to
be incorporated into an automated
underwriting system. The commenter
therefore urged the Bureau to revise
appendix Q to minimize the
requirements for subjective
determinations by lenders and to
provide sufficient certainty to allow its
integration into automated underwriting
systems. It stated further that, for
appendix Q to be an effective bright-line
rule, the application of appendix Q
should ideally deliver the same result
regardless of the lender implementing it.
However, the commenter noted, to do
that would mean requirements for
quantitative inputs, with supporting
documentation, that eliminate any need
for subjective determinations. This
commenter concluded that appendix Q
will be relied upon to verify the
sufficiency of the lender’s determination
whether a loan is a qualified mortgage
and should be able to be conclusively
proven by written evidence, such as a
loan file, in a court of law. This
commenter supplemented its comment
with a detailed chart with suggested
revisions and comments on the Bureau’s
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proposals, and on a number of other
appendix Q provisions beyond the
Bureau’s specific proposals.
A bank commenter echoed the
comments of the joint trade association
commenter that appendix Q needs to be
revised to remove requirements for
subjective determinations. This
commenter stated, however, that it
believes the structure and form of
appendix Q can be retained while
making tailored changes to its
provisions as necessary to allow it to
serve the intended purposes of
appendix Q and the ATR Final Rule. A
lender specializing in manufactured
housing financing requested that the
Bureau examine all of appendix Q with
the goal of providing clarity and
reducing litigation, and commented
further that in order to incentivize
lenders to gravitate towards qualified
mortgages, the guidelines for making a
qualified mortgage must be as objective
as possible. To that end this commenter
stated that should the Bureau ultimately
decide not to remove the DTI
requirements and appendix Q, it should
amend certain sections of appendix Q
that the commenter believes may not
function properly as regulations.
A GSE commenter recommended that
the Bureau treat appendix Q as guidance
rather than regulation that is subject to
notice and comment rulemaking as it is
the commenter’s opinion that there are
provisions of appendix Q that are not
properly suited to be regulations. This
commenter stated that such guidance
could be revised as needed, and in
relatively short order, in response to
changing market conditions and
industry practices, and that, in contrast,
if appendix Q remains as a regulation
subject to notice and comment it loses
such flexibility. Another GSE
commenter also recommended that the
Bureau issue appendix Q in the form of
a handbook or other written guidance,
akin to the manner in which FHA
provides underwriting standards to
lenders, citing the Bureau’s loss of
flexibility and ability to respond
promptly, if appendix Q remains a
regulation subject to notice and
comment rulemaking.
A consumer group commenter stated
that while it supported the Bureau’s
proposed clarifications to appendix Q it
recommended that the Bureau go further
to clarify it in a way that is consistent
with automated underwriting. This
commenter stated further that while
manual underwriting is used by some
lenders, lenders should not be required
to underwrite in this manner simply to
comply with the definitions of debt and
income included in appendix Q.
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Other Comments on Aspects of
Appendix Q beyond the Bureau’s
Proposals
In addition to the comments
discussed above, various commenters
had comments on certain specific
sections in appendix Q, relating to
matters not included in the Bureau’s
proposals. As noted, a joint trade
association commenter supplemented
its comment letter with a detailed chart
of suggested changes to a variety of
appendix Q sections both with regard to
sections which were included in the
Bureau’s specific proposals, and
sections that were not included. Various
bank commenters stated that they
endorsed the comments made by this
commenter. Included in the joint trade
association commenter’s suggested
changes of sections outside of the
Bureau’s proposals, for example, were
changes to sections II.A. Alimony, Child
Support, and Maintenance Income
Criteria; II.C. Military Government
Agency and Assistance and Program
Income; and III.2. Debt to Income Ratio
Computation for Recurring Obligations.
As discussed above, this commenter
also identified a list of areas where it
stated appendix Q is silent and where
it was seeking additional guidance. In
its comment letter, this commenter also
suggested a new quantitative test for
determining the amount of consumer
income to include in the DTI analysis,
which it suggested not only be applied
to overtime and bonus income, but other
income analysis in appendix Q as well.
Another Bank association commenter
identified various areas with regard to
sources of income that it stated
appendix Q did not address, or did not
adequately address, and for which it
was seeking additional clarification,
including, for example, asset
amortization, stock options, capital gain
income, foreign income, relocation
earnings, and contractor and other
irregular income situations. This
commenter also requested additional
guidance on section I.C. Consumers
Employed by a Family Owned Business,
and suggested changes with regard to
section II.E. Non-Taxable and Projected
Income to allow creditors to use a 25
percent ‘‘gross-up’’ rate for all nontaxable income. Other commenters that
raised issues on sections outside of
those sections that were the subject of
the Bureau’s specific proposals included
a consumer commenter that
recommended that the 12-month
maximum for defining projected
obligations (in section V.1) should be
extended for loans with predictable
repayment requirements and inflexible
repayment terms, such as private
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student loans and student loan
repayment programs.
Response to Comments on Aspects of
Appendix Q beyond Bureau’s Specific
Proposals
The Bureau appreciates the comments
received on other aspects of appendix Q
that were not the subject of the Bureau’s
specific proposals. These comments will
assist the Bureau in its efforts to ensure
the continuing effectiveness and utility
of appendix Q as a part of the DTI
analysis.
The Bureau notes that a substantial
number of industry commenters cited
particular areas of appendix Q that they
asserted either provided no guidance, or
insufficient guidance, to enable
creditors to make the required income
and debt determinations. As described
above, many of these commenters
suggested that the Bureau adopt, allow
creditors to use, or look to GSE
guidelines with regard to certain types
of income and/or debt not specifically
addressed by appendix Q in order to, in
effect, provide a means for filling this
gap. The Bureau believes in general that
the long history and experience of other
federal agencies as well as the GSEs in
matters addressed by appendix Q can be
helpful in this context and
acknowledges that requirements
established by the other federal agencies
and the GSEs already play a significant
role in the mortgage market.
Indeed, the Bureau notes that the
temporary qualified mortgage status
established by the ATR Final Rule
provides creditors with the option to
issue qualified mortgages without
relying on the standards set forth in
Appendix Q. Under Section
1026.43(e)(4), creditors who prefer
federal agency or GSE underwriting
rules can use those rules to obtain
qualified mortgage status by ensuring
that, among other things, their loans
either are eligible for purchase or
guarantee by the GSEs or to be insured
or guaranteed by the agencies.
The Bureau notes further, however,
that while appendix Q does not
specifically refer to every possible type
of debt or income, it does set forth basic
guidelines for the treatment of debt and
income. Section I of appendix Q
addresses consumer employment
related income, and section I.B.1 sets
out standards for analysis of salary,
wage, and other consumer employment
related income. Section I.B.1.b provides
that income from sources other than
salaries or wages ‘‘can be considered as
effective’’ when it is ‘‘properly verified
and documented by the creditor.’’ This
provision sets the rule for the treatment
of types of income whose treatment is
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not otherwise more specifically
addressed by appendix Q. Likewise,
section III.2.a provides as a general rule
that recurring charges extending ten
months or more for specified recurring
obligations and ‘‘other continuing
obligations’’ must be treated as debt.
In light of these circumstances, the
Bureau has revised the introduction to
appendix Q to make two points. First,
where guidance issued by federal
agencies including the U.S. Department
of Housing and Urban Development, the
U.S. Department of Veterans Affairs, the
U.S. Department of Agriculture, or the
Rural Housing Service, or issued by the
GSEs, Fannie Mae and Freddie Mac,
while operating under the
conservatorship or receivership of the
Federal Housing Finance Agency, or
issued by a limited-life regulatory entity
succeeding the charter of either Fannie
Mae or Freddie Mac (collectively,
Agency or GSE guidance) is in
accordance with appendix Q, creditors
may look to that guidance as a helpful
resource in applying appendix Q. Thus,
where only the broad principle
contained in section I.B.1.b applies to a
particular type of income, a creditor
may look to Agency or GSE guidance
that is in accordance with appendix Q’s
standards in determining whether that
income has been properly documented
and verified. For example, appendix Q
does not specifically address additional
steps a creditor might take to document
and verify wage or salary income when
it is earned from foreign sources and
paid in foreign currency. Agency or GSE
guidance may therefore be used to
provide more specific standards with
regard to verification or calculation of
such income, as long as the guidance
used is not inconsistent with the
requirements of appendix Q. Similarly,
where the treatment of a particular
recurring obligation is not specifically
addressed in appendix Q, the creditor
may look to Agency or GSE guidance for
purposes of determining how to assess
that obligation, as long as that guidance
is in accordance with the requirements
of section III of appendix Q.
Second, in the event that there may be
consumer situations that present
questions that appendix Q simply does
not presently address at all, the Bureau
is adding language to the introduction
providing that when the standards
contained in appendix Q do not resolve
the treatment of a specific kind of debt
or income, the creditor may either (1)
exclude the income or include the debt,
or (2) treat the income or debt in
accordance with guidance issued by the
federal agencies or GSEs. The
introduction makes clear, however, that
the Bureau expects that the above-
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described default rule on excluding
income and including debts and the
optional safe harbor reliance on GSE or
Agency guidance will be used sparingly.
The introduction emphasizes that the
creditor may not rely on Agency or GSE
guidance to reach a resolution contrary
to that provided by appendix Q’s
standards, even if the Agency or GSE
guidance specifically addresses the
particular type of debt or income but the
appendix Q standards are more
generalized. For clarity, the introduction
provides a definition for when appendix
Q’s standards resolve the appropriate
treatment of a specific kind of income
or debt: where the appendix Q
standards provide a discernible answer
to the question of how to treat the debt
or income. Under this definition, the
Bureau believes that the use of the
default rule or the optional safe harbor
should only rarely be necessary. Thus,
while the Bureau’s revisions to
appendix Q reflect commenters’
concerns about the possibility of gaps in
appendix Q, the Bureau emphasizes that
as revised by this final rule, the
introduction to appendix Q only allows
creditors to use Agency or GSE guidance
whenever appendix Q does not resolve
how to treat a particular type of debt or
income (or where such guidance is used
in applying appendix Q consistent with
its standards, as discussed above). Addbacks to income permitted by Agency or
GSE guidance, for example, are not
permitted by appendix Q except in
accordance with its standards.
With regard to the request by some
commenters for a major revision to
appendix Q, including, for example, the
removal of all requirements for
subjective determinations, the Bureau
believes that the revisions made by
today’s final rule, including the default
rule and the optional safe harbor just
described, will provide creditors with
the means necessary to effectively carry
out the analysis required by appendix
Q. The Bureau will continue to review
the implementation of appendix Q to
ensure that creditors can readily comply
with its requirements, but the Bureau
believes that, with today’s final rule,
appendix Q currently meets that
standard.
As discussed, some commenters
suggested that the appendix Q
requirements be revised to allow its
integration into automated underwriting
systems. After the Bureau’s rules go into
effect in January 2014, the Bureau, in
reviewing the implementation of those
rules, including the ATR Final Rule,
will give additional consideration to the
suggestions raised by these commenters.
In the meantime, the Bureau believes
that the temporary qualified mortgage
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provisions established by the ATR Final
Rule should provide the needed
flexibility for creditors. Regarding the
comments suggesting that the Bureau
treat appendix Q as guidance rather
than as a regulation subject to notice
and comment in order to respond to
changing market conditions and
industry practices, as previously stated,
the Bureau ‘‘did not intend for appendix
Q to function as a general flexible
underwriting policy for assessing risk
(as it is used by FHA in the context of
insurance), and recognizes that the
Bureau will not have the same level of
discretion regarding the application of
appendix Q.’’ 56 Indeed, the Bureau
believes that appendix Q could not fully
serve its intended purpose of providing
clarity and certainty as to the DTI
determination were it treated as
guidance. Moreover, the Bureau believes
that appendix Q, particularly as
clarified and revised by today’s final
rule, provides creditors with sufficient
and appropriate standards for assessing
the income and debt of consumers.
V. Effective Date
The amendments in this rule are
effective January 10, 2014, except for the
change to § 1026.35(e). The amendment
to § 1026.35(e) is effective immediately
on publication of this rule in the
Federal Register. As explained above,
this amendment clarifies the Bureau’s
interpretation of § 1026.35(e); it is
therefore an interpretive rule, for which
an immediate effective date is
appropriate. In addition, the Bureau
concludes that good cause exists to
make the amendment effective
immediately. The clarification will
provide certainty to the industry and
imposes no obligations with which
mortgage lenders must comply.
Applicability date. The amendment to
§ 1026.35(e) applies to any transaction
consummated on or after June 1, 2013,
and for which the creditor receives an
application on or before January 9, 2014.
VI. Section 1022(b)(2) of the DoddFrank Act
A. Overview
In developing the final rule, the
Bureau has considered potential
benefits, costs, and impacts.57 In
FR 25648.
section 1022(b)(2)(A) of the DoddFrank Act calls for the Bureau to consider the
potential benefits and costs of a regulation to
consumers and covered persons, including the
potential reduction of access by consumers to
consumer financial products or services; the impact
on depository institutions and credit unions with
$10 billion or less in total assets as described in
section 1026 of the Dodd-Frank Act; and the impact
on consumers in rural areas.
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44715
addition, the Bureau has consulted, or
offered to consult with, the prudential
regulators, SEC, HUD, VA, USDA,
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.
As noted above, this rule makes
amendments to some of the final
mortgage rules issued by the Bureau in
January of 2013.58 These amendments
clarify, correct, or amend provisions on
(1) the relation to State law of
Regulation X’s servicing provisions; (2)
implementation transition requirements
for adjustable-rate mortgage disclosures;
(3) the small servicer exemption from
certain of the new servicing rules; (4)
exclusions from the repayment ability
and prepayment penalty requirements
for higher-priced mortgage loans
(HPMLs); (5) the use of governmentsponsored enterprise (GSE) and Federal
agency purchase, guarantee or insurance
eligibility for determining qualified
mortgage (QM) status; and (6) the
determination of debt and income for
purposes of originating QMs. In
addition to these revisions, which are
discussed more fully below, the Bureau
is also making certain technical
corrections to the regulations with no
substantive change intended.
The analysis in this section relies on
data that the Bureau has obtained and
the record established by the Board and
Bureau during the development of the
2013 Title XIV Final Rules. However,
the Bureau notes that for some analyses,
there are limited data available with
which to quantify the potential costs,
benefits, and impacts of this final rule.
In particular, the Bureau did not receive
comments specifically addressing the
Section 1022 analysis in the proposed
rule. Still, general economic principles
together with the limited data that are
available provide insight into the
benefits, costs, and impacts and where
relevant, the analysis provides a
qualitative discussion of the benefits,
costs, and impacts of the final rule.
B. Potential Benefits and Costs to
Consumers and Covered Persons
The Bureau believes that, compared to
the baseline established by the final
rules issued in January 2013,59 the
57 Specifically,
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58 For convenience, the reference to these January
2013 rules is also meant to encompass the rules
issued in May 2013 that amended the January rules,
including the final rule amending the 2013 Escrows
Final Rule, issued on May 16, 2013.
59 The Bureau has discretion in any rulemaking
to choose an appropriate scope of analysis with
respect to potential benefits and costs and an
appropriate baseline.
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primary benefit of most of the
provisions of the final rule to both
consumers and covered persons is an
increase in clarity and precision of the
regulations and an accompanying
reduction in compliance costs.
More specifically, the provisions that
clarify: (1) That the preemption
provisions in Regulation X do not
preempt the field of regulation of the
practices covered by RESPA and
Regulation X; (2) the timing of required
disclosures for adjustable-rate
mortgages; and, (3) the exclusion of
construction loans, bridge loans, and
reverse mortgages from the requirements
of the ability-to-repay and prepayment
penalty provisions in § 1026.35(e)
generally conform the rules to the
policies articulated by the final rules
already issued. The discussion of
benefits, costs, or impacts discussed in
part VII of each of the January rules
included consideration of each of these
provisions.
The final rule also modifies the text
of the Regulation Z servicing rule to
clarify the scope and application of the
small servicer exemption. Specifically,
it clarifies the application of the small
servicer exemption with regard to
servicer/affiliate and master servicer/
subservicer relationships and excludes
mortgage loans voluntarily serviced for
an unaffiliated entity without
remuneration, reverse mortgage
transactions, mortgage loans secured by
consumers’ interest in timeshare plans,
from being considered when
determining whether a servicer qualifies
as a small servicer. In total, these
changes are expected to grant the small
servicer exemption to a larger number of
firms. These entities should benefit from
lower costs while their customers may
lose some of the protections embedded
in the relevant rules. The nature and
magnitude of these protections and their
potential costs are described in part VII
of both of the 2013 Mortgage Servicing
Final Rules.
The provisions that clarify and amend
the definition of qualified mortgage
should also add clarity to the rules and
thus lower costs of compliance. These
include the clarification of the test that
they be eligible for purchase or
guarantee by the GSEs or insured or
guaranteed by the agencies, the
clarification that a repurchase or
indemnification demand by the GSEs,
FHA, VA, USDA, or RHS is not
determinative of qualified mortgage
status, and the revisions clarifying that
a loan meeting eligibility requirements
provided in a written agreement with
one of the GSEs, HUD, VA, USDA, or
RHS is also eligible as are loans
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receiving individual waivers from GSEs
or agencies.
These provisions make explicit that
matters wholly unrelated to ability to
repay will not be relevant to
determination of QM status and that a
creditor is not required to satisfy certain
mandates concerning loan delivery and
other requirements that are wholly
unrelated to assessing a consumer’s
ability to repay the loan. They also
clarify that loans meeting GSE or agency
eligibility requirements set forth in an
applicable written contract variance or
individual waiver at the time of
consummation are eligible for GSE or
agency purchase, guarantee, or
insurance under § 1026.43(e)(4). As
such, these provisions should lower the
burden for these loans to be qualified
mortgages. The Bureau believes that
these changes provide useful guidance
to industry and generally conform the
rules to the policies intended by the
final rules issued in January.
Accordingly, the discussion of benefits,
costs, or impacts discussed in part VII
of each of the January rules included
consideration of the effects of each of
these provisions.
The amendments to appendix Q in
this final rule reduce the creditor’s
requirements to obtain affirmative
confirmation that several types of
income will continue in the future.
Under these amendments, creditors may
assume in the absence of contrary
evidence, that certain past, current, and/
or ongoing conditions can be reasonably
expected to continue. Other provisions
clarify the types of evidence that
creditors may rely on to verify income,
while another expands the types of
rental income that may be used in the
DTI calculation. The Bureau is also
revising the introduction to appendix Q
to clarify that creditors may look to
guidance from certain federal agencies
and the GSEs in applying appendix Q so
long as that guidance is in accordance
with the standards in appendix Q and
to provide a default rule of excluding
income and including debts and an
optional safe harbor for reliance on GSE
or Agency guidance when appendix Q’s
standards do not otherwise resolve how
to treat a particular type of debt or
income. As noted earlier, the Bureau
believes that these provisions will
establish clearer requirements for
assessing the debt and income of
consumers while at the same time
facilitating creditor compliance. More
specifically, these provisions should
increase the probability that certain
loans are originated as qualified
mortgages and receive a presumption of
compliance with the ability-to-repay
standards. For such loans, the costs of
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origination may be slightly lower as a
result of the slightly decreased liability
for the lender and any assignees and for
possibly decreased compliance costs.
Consumers may benefit from slightly
increased access to credit and lower
costs on the affected loans; however,
these consumers will also not have the
added consumer protections that
accompany loans made under the
general ability-to-repay provisions. A
more detailed discussion of these effects
is contained in the discussion of
benefits, costs, and impacts in part VII
of the 2013 ATR Final Rule.
The final rule is generally not
expected to have a differential impact
on depository institutions and credit
unions with $10 billion or less in total
assets as described in section 1026 or on
consumers in rural areas. The main
exception is for those depository
institutions and credit unions, which by
virtue of their size, are more likely to
qualify for the small servicer exemption
and to benefit from the reduction in
compliance burden.
Given the nature of the changes made
by the final rule, the Bureau does not
believe that the final rule will materially
reduce consumers’ access to consumer
products and services. Rather, the
reduced burden in many of the changes
in this rule should generally help to
improve access to credit.
VII. Regulatory Flexibility Act Analysis
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.60 These analyses must
‘‘describe the impact of the proposed
rule on small entities.’’ 61 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,62
or if the agency considers a series of
closely related rules as one rule for
60 5
U.S.C. 601 et seq.
U.S.C. 603(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 nonprofit 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).
62 5 U.S.C. 605(b).
61 5
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purposes of complying with the IRFA or
FRFA requirements.63 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.64
This rulemaking is part of a series of
rules that have revised and expanded
the regulatory requirements for entities
that originate or service mortgage loans.
In January 2013, the Bureau adopted the
2013 ATR Final Rule and the 2013
Mortgage Servicing Final Rules, along
with other related rules mentioned
above. Part VIII of the supplementary
information to each of these rules set
forth the Bureau’s analyses and
determinations under the RFA with
respect to those rules. See 78 FR 10861
(Regulation X), 78 FR 10994 (Regulation
Z—servicing), 78 FR 6575 (Regulation
Z—ATR). Because this final rule
generally makes clarifying changes to
conform the January rules to their
intended purposes, the RFA analyses
associated with those rules generally
take into account the impact of the
changes made by this final rule.
Because these rules qualify as ‘‘a
series of closely related rules,’’ for
purposes of the RFA, the Bureau relies
on those analyses and determines that it
has met or exceeded the IRFA and FRFA
requirements.
In the alternative, the Bureau also
concludes that the final rule will not
have a significant impact on a
substantial number of small entities. As
noted, this final rule generally clarifies
the existing rules. These changes will
not have a material impact on small
entities. In the instance of the small
servicer exemption, the rule likely
reduces burden for the affected firms. In
addition, the changes to appendix Q
will likely reduce compliance costs by
increasing clarity and providing more
objective standards for evaluating
certain kinds of income. The changes to
appendix Q should also increase the
probability that certain loans are
originated as qualified mortgages and
receive a presumption of compliance
with the ability-to-repay standards.
Therefore, the undersigned certifies that
the rule will not have a significant
impact on a substantial number of small
entities.
VIII. Paperwork Reduction Act
This final rule amends 12 CFR 1026
(Regulation Z), which implements the
Truth in Lending Act (TILA), and 12
CFR 1024 (Regulation X), which
63 5
64 5
U.S.C. 605(c).
U.S.C. 609.
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implements the Real Estate Settlement
Procedures Act (RESPA). Regulations Z
and X currently contain collections of
information approved by OMB. The
Bureau’s OMB control number for
Regulation Z is 3170–0015 and for
Regulation X is 3170–0016. However,
the Bureau has determined that this
final rule will not materially alter these
collections of information or impose any
new recordkeeping, reporting, or
disclosure requirements on the public
that would constitute collections of
information requiring approval under
the Paperwork Reduction Act, 44 U.S.C.
3501 et seq.
List of Subjects
12 CFR Part 1024
Condominiums, Consumer protection,
Housing, Mortgage servicing, Mortgages,
Recordkeeping requirements, Reporting.
12 CFR Part 1026
Advertising, Consumer protection,
Credit, Credit unions, Mortgages,
National banks, Reporting and
recordkeeping requirements, Savings
associations, Truth in lending.
Authority and Issuance
For the reasons set forth in the
preamble, the Bureau amends
Regulation X, 12 CFR part 1024, as
amended by the final rule published on
February 14, 2013, 78 FR 10695, and
Regulation Z, 12 CFR part 1026, as
amended by the final rules published on
January 30, 2013, 78 FR 6407 and
February 14, 2013, 78 FR 10901 as set
forth below:
PART 1024—REAL ESTATE
SETTLEMENT PROCEDURES ACT
(REGULATION X)
1. The authority citation for part 1024
continues to read as follows:
■
Authority: 12 U.S.C. 2603–2605, 2607,
2609, 2617, 5512, 5532, 5581.
Subpart A—General Provisions
2. The subpart A heading is revised to
read as set forth above.
■
3. Section 1024.5 is amended by
adding paragraph (c) to read as follows:
■
§ 1024.5
Coverage of RESPA.
*
*
*
*
*
(c) Relation to State laws. (1) State
laws that are inconsistent with RESPA
or this part are preempted to the extent
of the inconsistency. However, RESPA
and these regulations do not annul,
alter, affect, or exempt any person
subject to their provisions from
complying with the laws of any State
with respect to settlement practices,
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except to the extent of the
inconsistency.
(2) Upon request by any person, the
Bureau is authorized to determine if
inconsistencies with State law exist; in
doing so, the Bureau shall consult with
appropriate Federal agencies.
(i) The Bureau may not determine that
a State law or regulation is inconsistent
with any provision of RESPA or this
part, if the Bureau determines that such
law or regulation gives greater
protection to the consumer.
(ii) In determining whether provisions
of State law or regulations concerning
affiliated business arrangements are
inconsistent with RESPA or this part,
the Bureau may not construe those
provisions that impose more stringent
limitations on affiliated business
arrangements as inconsistent with
RESPA so long as they give more
protection to consumers and/or
competition.
(3) Any person may request the
Bureau to determine whether an
inconsistency exists by submitting to
the address established by the Bureau to
request an official interpretation, a copy
of the State law in question, any other
law or judicial or administrative
opinion that implements, interprets or
applies the relevant provision, and an
explanation of the possible
inconsistency. A determination by the
Bureau that an inconsistency with State
law exists will be made by publication
of a notice in the Federal Register.
‘‘Law’’ as used in this section includes
regulations and any enactment which
has the force and effect of law and is
issued by a State or any political
subdivision of a State.
(4) A specific preemption of
conflicting State laws regarding notices
and disclosures of mortgage servicing
transfers is set forth in § 1024.33(d).
Subpart B—Mortgage Settlement and
Escrow Accounts
§ 1024.13
[Removed and Reserved]
4. Section 1024.13 is removed and
reserved.
■
5. In Supplement I to Part 1024,
Subpart A is added to read as follows:
■
Supplement I to Part 1024—Official
Bureau Interpretations
*
*
*
*
*
Subpart A—General Provisions
§ 1024.5
Coverage of RESPA
5(c) Relation to State laws.
Paragraph 5(c)(1).
1. State laws that are inconsistent
with the requirements of RESPA or
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Regulation X may be preempted by
RESPA or Regulation X. State laws that
give greater protection to consumers are
not inconsistent with and are not
preempted by RESPA or Regulation X.
In addition, nothing in RESPA or
Regulation X should be construed to
preempt the entire field of regulation of
the practices covered by RESPA or
Regulation X, including the regulations
in Subpart C with respect to mortgage
servicers or mortgage servicing.
*
*
*
*
*
PART 1026—TRUTH IN LENDING
(REGULATION Z)
6. The authority citation for part 1026
is revised 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
7. Section 1026.35 is amended by
revising paragraph (e) introductory text,
redesignating paragraph (e)(3) as
paragraph (e)(4), and adding new
paragraph (e)(3) to read as follows:
■
§ 1026.35 Requirements for higher-priced
mortgage loans.
*
*
*
*
*
(e) Repayment ability, prepayment
penalties. Except as provided in
paragraph (e)(3) of this section, higherpriced mortgage loans are subject to the
following restrictions:
*
*
*
*
*
(3) Exclusions. This paragraph (e)
does not apply to a transaction to
finance the initial construction of a
dwelling; a temporary or ‘‘bridge’’ loan
with a term of twelve months or less,
such as a loan to purchase a new
dwelling where the consumer plans to
sell a current dwelling within twelve
months; or a reverse mortgage
transaction subject to § 1026.33.
*
*
*
*
*
8. Section 1026.41 is amended by
revising paragraphs (a)(1) and (e)(4)(ii)
and (iii) to read as follows:
■
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§ 1026.41 Periodic statements for
residential mortgage loans.
(a) In general. (1) Scope. This section
applies to a closed-end consumer credit
transaction secured by a dwelling,
unless an exemption in paragraph (e) of
this section applies. A closed-end
consumer credit transaction secured by
a dwelling is referred to as a mortgage
loan for purposes of this section.
*
*
*
*
*
(e) * * *
(4) * * *
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(ii) Small servicer defined. A small
servicer is a servicer that either:
(A) Services, together with any
affiliates, 5,000 or fewer mortgage loans,
for all of which the servicer (or an
affiliate) is the creditor or assignee; or
(B) Is a Housing Finance Agency, as
defined in 24 CFR 266.5.
(iii) Small servicer determination. In
determining whether a servicer is a
small servicer, the servicer is evaluated
based on the mortgage loans serviced by
the servicer and any affiliates as of
January 1 for the remainder of the
calendar year. A servicer that ceases to
qualify as a small servicer will have six
months from the time it ceases to
qualify or until the next January 1,
whichever is later, to comply with any
requirements from which the servicer is
no longer exempt as a small servicer.
The following mortgage loans are not
considered in determining whether a
servicer qualifies as a small servicer:
(A) Mortgage loans voluntarily
serviced by the servicer for a creditor or
assignee that is not an affiliate of the
servicer and for which the servicer does
not receive any compensation or fees.
(B) Reverse mortgage transactions.
(C) Mortgage loans secured by
consumers’ interests in timeshare plans.
9. Section 1026.43 is amended by
revising paragraphs (e)(4)(ii)(A)
introductory text through (E) to read as
follows:
■
§ 1026.43 Minimum standards for
transactions secured by a dwelling.
*
*
*
*
*
(e) * * *
(4) * * *
(ii) * * *
(A) A loan that is eligible, except with
regard to matters wholly unrelated to
ability to repay:
*
*
*
*
*
(B) A loan that is eligible to be
insured, except with regard to matters
wholly unrelated to ability to repay, by
the U.S. Department of Housing and
Urban Development under the National
Housing Act (12 U.S.C. 1707 et seq.);
(C) A loan that is eligible to be
guaranteed, except with regard to
matters wholly unrelated to ability to
repay, by the U.S. Department of
Veterans Affairs;
(D) A loan that is eligible to be
guaranteed, except with regard to
matters wholly unrelated to ability to
repay, by the U.S. Department of
Agriculture pursuant to 42 U.S.C.
1472(h); or
(E) A loan that is eligible to be
insured, except with regard to matters
wholly unrelated to ability to repay, by
the Rural Housing Service.
*
*
*
*
*
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10. Appendix Q to Part 1026 is revised
to read as follows:
■
Appendix Q to Part 1026—Standards
for Determining Monthly Debt and
Income
Section 1026.43(e)(2)(vi) provides that, to
satisfy the requirements for a qualified
mortgage under § 1026.43(e)(2), the ratio of
the consumer’s total monthly debt payments
to total monthly income at the time of
consummation cannot exceed 43 percent.
Section 1026.43(e)(2)(vi)(A) requires the
creditor to calculate the ratio of the
consumer’s total monthly debt payments to
total monthly income using the following
standards, with additional requirements for
calculating debt and income appearing in
§ 1026.43(e)(2)(vi)(B). Where guidance issued
by the U.S. Department of Housing and
Urban Development, the U.S. Department of
Veterans Affairs, the U.S. Department of
Agriculture, or the Rural Housing Service, or
issued by the Federal National Mortgage
Association (Fannie Mae) or the Federal
Home Loan Mortgage Corporation (Freddie
Mac) while operating under the
conservatorship or receivership of the
Federal Housing Finance Agency, or issued
by a limited-life regulatory entity succeeding
the charter of either Fannie Mae or Freddie
Mac (collectively, Agency or GSE guidance)
is in accordance with appendix Q, creditors
may look to that guidance as a helpful
resource in applying appendix Q. Moreover,
when the following standards do not resolve
how a specific kind of debt or income should
be treated, the creditor may either (1) exclude
the income or include the debt, or (2) rely on
Agency or GSE guidance to resolve the issue.
The following standards resolve the
appropriate treatment of a specific kind of
debt or income where the standards provide
a discernible answer to the question of how
to treat the debt or income. However, a
creditor may not rely on Agency or GSE
guidance to reach a resolution contrary to
that provided by the following standards,
even if such Agency or GSE guidance
specifically addresses the particular type of
debt or income but the following standards
provide more generalized guidance.
I. Consumer Employment Related Income
A. Stability of Income
1. Effective Income. Income may not be
used in calculating the consumer’s debt-toincome ratio if it comes from any source that
cannot be verified, is not stable, or will not
continue.
2. Verifying Employment History.
a. The creditor must verify the consumer’s
employment for the most recent two full
years, and the creditor must require the
consumer to:
i. Explain any gaps in employment that
span one or more months, and
ii. Indicate if he/she was in school or the
military for the recent two full years,
providing evidence supporting this claim,
such as college transcripts, or discharge
papers.
b. Allowances can be made for seasonal
employment, typical for the building trades
and agriculture, if documented by the
creditor.
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Note: A consumer with a 25 percent or
greater ownership interest in a business is
considered self-employed and will be
evaluated as a self-employed consumer.
3. Analyzing a Consumer’s Employment
Record.
a. When analyzing a consumer’s
employment, creditors must examine:
i. The consumer’s past employment record;
and
ii. The employer’s confirmation of current,
ongoing employment status.
Note: Creditors may assume that
employment is ongoing if a consumer’s
employer verifies current employment and
does not indicate that employment has been,
or is set to be terminated. Creditors should
not rely upon a verification of current
employment that includes an affirmative
statement that the employment is likely to
cease, such as a statement that indicates the
employee has given (or been given) notice of
employment suspension or termination.
b. Creditors may favorably consider the
stability of a consumer’s income if he/she
changes jobs frequently within the same line
of work, but continues to advance in income
or benefits. In this analysis, income stability
takes precedence over job stability.
4. Consumers Returning to Work After an
Extended Absence. A consumer’s income
may be considered effective and stable when
recently returning to work after an extended
absence if he/she:
a. Is employed in the current job for six
months or longer; and
b. Can document a two year work history
prior to an absence from employment using:
i. Traditional employment verifications;
and/or
ii. Copies of IRS Form W–2s or pay stubs.
Note: An acceptable employment situation
includes individuals who took several years
off from employment to raise children, then
returned to the workforce.
c. Important: Situations not meeting the
criteria listed above may not be used in
qualifying. Extended absence is defined as
six months.
B. Salary, Wage and Other Forms of Income
1. General Policy on Consumer Income
Analysis.
a. The income of each consumer who will
be obligated for the mortgage debt and whose
income is being relied upon in determining
ability to repay must be analyzed to
determine whether his/her income level can
be reasonably expected to continue.
b. In most cases, a consumer’s income is
limited to salaries or wages. Income from
other sources can be considered as effective,
when properly verified and documented by
the creditor.
Notes: i. Effective income for consumers
planning to retire during the first three-year
period must include the amount of:
a. Documented retirement benefits;
b. Social Security payments; or
c. Other payments expected to be received
in retirement.
ii. Creditors must not ask the consumer
about possible, future maternity leave.
iii. Creditors may assume that salary or
wage income from employment verified in
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accordance with section I.A.3 above can be
reasonably expected to continue if a
consumer’s employer verifies current
employment and income and does not
indicate that employment has been, or is set
to be terminated. Creditors should not
assume that income can be reasonably
expected to continue if a verification of
current employment includes an affirmative
statement that the employment is likely to
cease, such as a statement that indicates the
employee has given (or been given) notice of
employment suspension or termination.
2. Overtime and Bonus Income.
a. Overtime and bonus income can be used
to qualify the consumer if he/she has
received this income for the past two years,
and documentation submitted for the loan
does not indicate this income will likely
cease. If, for example, the employment
verification states that the overtime and
bonus income is unlikely to continue, it may
not be used in qualifying.
b. The creditor must develop an average of
bonus or overtime income for the past two
years. Periods of overtime and bonus income
less than two years may be acceptable,
provided the creditor can justify and
document in writing the reason for using the
income for qualifying purposes.
3. Establishing an Overtime and Bonus
Income Earning Trend.
a. The creditor must establish and
document an earnings trend for overtime and
bonus income. If either type of income shows
a continual decline, the creditor must
document in writing a sound rationalization
for including the income when qualifying the
consumer.
b. A period of more than two years must
be used in calculating the average overtime
and bonus income if the income varies
significantly from year to year.
4. Qualifying Part-Time Income.
a. Part-time and seasonal income can be
used to qualify the consumer if the creditor
documents that the consumer has worked the
part-time job uninterrupted for the past two
years, and plans to continue. Many low and
moderate income families rely on part-time
and seasonal income for day to day needs,
and creditors should not restrict
consideration of such income when
qualifying the income of these consumers.
b. Part-time income received for less than
two years may be included as effective
income, provided that the creditor justifies
and documents that the income is likely to
continue.
c. Part-time income not meeting the
qualifying requirements may not be used in
qualifying.
Note: For qualifying purposes, ‘‘part-time’’
income refers to employment taken to
supplement the consumer’s income from
regular employment; part-time employment
is not a primary job and it is worked less than
40 hours.
5. Income from Seasonal Employment.
a. Seasonal income is considered
uninterrupted, and may be used to qualify
the consumer, if the creditor documents that
the consumer:
i. Has worked the same job for the past two
years, and
ii. Expects to be rehired the next season.
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b. Seasonal employment includes, but is
not limited to:
i. Umpiring baseball games in the summer;
or
ii. Working at a department store during
the holiday shopping season.
6. Primary Employment Less Than 40 Hour
Work Week.
a. When a consumer’s primary
employment is less than a typical 40-hour
work week, the creditor should evaluate the
stability of that income as regular, on-going
primary employment.
b. Example: A registered nurse may have
worked 24 hours per week for the last year.
Although this job is less than the 40-hour
work week, it is the consumer’s primary
employment, and should be considered
effective income.
7. Commission Income.
a. Commission income must be averaged
over the previous two years. To qualify
commission income, the consumer must
provide:
i. Copies of signed tax returns for the last
two years; and
ii. The most recent pay stub.
b. Consumers whose commission income
was received for more than one year, but less
than two years may be considered favorably
if the underwriter can:
i. Document the likelihood that the income
will continue, and
ii. Soundly rationalize accepting the
commission income.
Notes: i. Unreimbursed business expenses
must be subtracted from gross income.
ii. A commissioned consumer is one who
receives more than 25 percent of his/her
annual income from commissions.
iii. A tax transcript obtained directly from
the IRS may be used in lieu of signed tax
returns.
8. Qualifying Commission Income Earned
for Less Than One Year.
a. Commission income earned for less than
one year is not considered effective income.
Exceptions may be made for situations in
which the consumer’s compensation was
changed from salary to commission within a
similar position with the same employer.
b. A consumer’s income may also qualify
when the portion of earnings not attributed
to commissions would be sufficient to qualify
the consumer for the mortgage.
9. Employer Differential Payments.
If the employer subsidizes a consumer’s
mortgage payment through direct payments,
the amount of the payments:
a. Is considered gross income, and
b. Cannot be used to offset the mortgage
payment directly, even if the employer pays
the servicing creditor directly.
10. Retirement Income.
Retirement income must be verified from
the former employer, or from Federal tax
returns. If any retirement income, such as
employer pensions or 401(k)’s, will cease
within the first full three years of the
mortgage loan, such income may not be used
in qualifying.
11. Social Security Income.
Social Security income must be verified by
a Social Security Administration benefit
verification letter (sometimes called a ‘‘proof
of income letter,’’ ‘‘budget letter,’’ ‘‘benefits
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letter,’’ or ‘‘proof of award letter’’). If any
benefits expire within the first full three
years of the loan, the income source may not
be used in qualifying.
Notes: i. If the Social Security
Administration benefit verification letter
does not indicate a defined expiration date
within three years of loan origination, the
creditor shall consider the income effective
and likely to continue. Pending or current reevaluation of medical eligibility for benefit
payments is not considered an indication
that the benefit payments are not likely to
continue.
ii. Some portion of Social Security income
may be ‘‘grossed up’’ if deemed nontaxable
by the IRS.
12. Automobile Allowances and Expense
Account Payments.
a. Only the amount by which the
consumer’s automobile allowance or expense
account payments exceed actual
expenditures may be considered income.
b. To establish the amount to add to gross
income, the consumer must provide the
following:
i. IRS Form 2106, Employee Business
Expenses, for the previous two years; and
ii. Employer verification that the payments
will continue.
c. If the consumer uses the standard permile rate in calculating automobile expenses,
as opposed to the actual cost method, the
portion that the IRS considers depreciation
may be added back to income.
d. Expenses that must be treated as
recurring debt include:
i. The consumer’s monthly car payment;
and
ii. Any loss resulting from the calculation
of the difference between the actual
expenditures and the expense account
allowance.
4. General Documentation Requirements
for Self-Employed Consumers.
Self-employed consumers must provide the
following documentation:
a. Signed, dated individual tax returns,
with all applicable tax schedules for the most
recent two years;
b. For a corporation, ‘‘S’’ corporation, or
partnership, signed copies of Federal
business income tax returns for the last two
years, with all applicable tax schedules; and
c. Year to date profit and loss (P&L)
statement and balance sheet.
5. Establishing a Self-Employed
Consumer’s Earnings Trend.
a. When qualifying income, the creditor
must establish the consumer’s earnings trend
from the previous two years using the
consumer’s tax returns.
b. If a consumer:
i. Provides quarterly tax returns, the
income analysis may include income through
the period covered by the tax filings, or
ii. Is not subject to quarterly tax returns, or
does not file them, then the income shown
on the P&L statement may be included in the
analysis, provided the income stream based
on the P&L is consistent with the previous
years’ earnings.
c. If the P&L statements submitted for the
current year show an income stream
considerably greater than what is supported
by the previous year’s tax returns, the
creditor must base the income analysis solely
on the income verified through the tax
returns.
d. If the consumer’s earnings trend for the
previous two years is downward and the
most recent tax return or P&L is less than the
prior year’s tax return, the consumer’s most
recent year’s tax return or P&L must be used
to calculate his/her income.
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C. Consumers Employed by a Family Owned
Business.
1. Income Documentation Requirement.
In addition to normal employment
verification, a consumer employed by a
family owned business is required to provide
evidence that he/she is not an owner of the
business, which may include:
a. Copies of signed personal tax returns, or
b. A signed copy of the corporate tax return
showing ownership percentage.
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Note: A tax transcript obtained directly
from the IRS may be used in lieu of signed
tax returns.
D. General Information on Self-Employed
Consumers and Income Analysis.
1. Definition: Self-Employed Consumer.
A consumer with a 25 percent or greater
ownership interest in a business is
considered self-employed.
2. Types of Business Structures.
There are four basic types of business
structures. They include:
a. Sole proprietorships;
b. Corporations;
c. Limited liability or ‘‘S’’ corporations;
and
d. Partnerships.
3. Minimum Length of Self Employment.
a. Income from self-employment is
considered stable, and effective, if the
consumer has been self-employed for two or
more years.
b. Due to the high probability of failure
during the first few years of a business, the
requirements described in the table below are
necessary for consumers who have been selfemployed for less than two years.
6. Analyzing the Business’s Financial
Strength.
The creditor must consider the business’s
financial strength by examining annual
earnings. Annual earnings that are stable or
increasing are acceptable, while businesses
that show a significant decline in income
over the analysis period are not acceptable.
E. Income Analysis: Individual Tax Returns
(IRS Form 1040).
1. General Policy on Adjusting Income
Based on a Review of IRS Form 1040.
The amount shown on a consumer’s IRS
Form 1040 as adjusted gross income must
either be increased or decreased based on the
creditor’s analysis of the individual tax
return and any related tax schedules.
2. Guidelines for Analyzing IRS Form 1040.
The table below contains guidelines for
analyzing IRS Form 1040:
BILLING CODE 4810–AM–P
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F. Income Analysis: Corporate Tax Returns
(IRS Form 1120).
1. Description: Corporation.
A corporation is a State-chartered business
owned by its stockholders.
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2. Need To Obtain Consumer Percentage of
Ownership Information.
a. Corporate compensation to the officers,
generally in proportion to the percentage of
ownership, is shown on the:
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i. Corporate tax return IRS Form 1120; and
ii. Individual tax returns.
b. When a consumer’s percentage of
ownership does not appear on the tax
returns, the creditor must obtain the
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b. The table below describes the items
found on IRS Form 1120 for which an
adjustment must be made in order to
determine adjusted business income.
back to the income in proportion to the
consumer’s share of income.
c. Income must also be reduced
proportionately by the total obligations
payable by the partnership in less than one
year.
d. Important: Cash withdrawals from the
partnership may have a severe negative
impact on the partnership’s ability to
continue operating, and must be considered
in the income analysis.
statements support a two-year receipt history.
This income must be averaged over the two
years.
b. Subtract any funds that are derived from
these sources, and are required for the cash
investment, before calculating the projected
interest or dividend income.
2. Trust Income.
a. Income from trusts may be used if
constant payments will continue for at least
the first three years of the mortgage term as
evidenced by trust income documentation.
b. Required trust income documentation
includes a copy of the Trust Agreement or
other trustee statement, confirming the:
i. Amount of the trust;
ii. Frequency of distribution; and
iii. Duration of payments.
c. Trust account funds may be used for the
required cash investment if the consumer
provides adequate documentation that the
withdrawal of funds will not negatively affect
income. The consumer may use funds from
the trust account for the required cash
investment, but the trust income used to
determine repayment ability cannot be
affected negatively by its use.
3. Notes Receivable Income.
a. In order to include notes receivable
income, the consumer must provide:
i. A copy of the note to establish the
amount and length of payment, and
ii. Evidence that these payments have been
consistently received for the last 12 months
through deposit slips, deposit receipts,
cancelled checks, bank or other account
statements, or tax returns.
b. If the consumer is not the original payee
on the note, the creditor must establish that
the consumer is able to enforce the note.
4. Eligible Investment Properties.
Follow the steps in the table below to
calculate an investment property’s income or
loss if the property to be subject to a
mortgage is an eligible investment property.
H. Income Analysis: Partnership Tax Returns
(IRS Form 1065).
1. Description: Partnership.
a. A partnership is formed when two or
more individuals form a business, and share
in profits, losses, and responsibility for
running the company.
b. Each partner pays taxes on his/her
proportionate share of the partnership’s net
income.
2. Analyzing Partnership Tax Returns.
a. Both general and limited partnerships
report income on IRS Form 1065, and the
partners’ share of income is carried over to
Schedule E of IRS Form 1040.
b. The creditor must review IRS Form 1065
to assess the viability of the business. Both
depreciation and depletion may be added
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II. Non-Employment Related Consumer
Income
A. Alimony, Child Support, and Maintenance
Income Criteria.
Alimony, child support, or maintenance
income may be considered effective, if:
1. Payments are likely to be received
consistently for the first three years of the
mortgage;
2. The consumer provides the required
documentation, which includes a copy of
the:
i. Final divorce decree;
ii. Legal separation agreement;
iii. Court order; or
iv. Voluntary payment agreement; and
3. The consumer can provide acceptable
evidence that payments have been received
during the last 12 months, such as:
i. Cancelled checks;
ii. Deposit slips;
iii. Tax returns; or
iv. Court records.
Notes: i. Periods less than 12 months may
be acceptable, provided the creditor can
adequately document the payer’s ability and
willingness to make timely payments.
ii. Child support may be ‘‘grossed up’’
under the same provisions as non-taxable
income sources.
B. Investment and Trust Income.
1. Analyzing Interest and Dividends.
a. Interest and dividend income may be
used as long as tax returns or account
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a. In order to determine a consumer’s selfemployed income from a corporation the
adjusted business income must:
i. Be determined; and
ii. Multiplied by the consumer’s percentage
of ownership in the business.
G. Income Analysis: ‘‘S’’ Corporation Tax
Returns (IRS Form 1120S).
1. Description: ‘‘S’’ Corporation.
a. An ‘‘S’’ corporation is generally a small,
start-up business, with gains and losses
passed to stockholders in proportion to each
stockholder’s percentage of business
ownership.
b. Income for owners of ‘‘S’’ corporations
comes from IRS Form W–2 wages, and is
taxed at the individual rate. The IRS Form
1120S, Compensation of Officers line item is
transferred to the consumer’s individual IRS
Form 1040.
2. Analyzing ‘‘S’’ Corporation Tax Returns.
a. ‘‘S’’ corporation depreciation and
depletion may be added back to income in
proportion to the consumer’s share of the
corporation’s income.
b. In addition, the income must also be
reduced proportionately by the total
obligations payable by the corporation in less
than one year.
c. Important: The consumer’s withdrawal
of cash from the corporation may have a
severe negative impact on the corporation’s
ability to continue operating, and must be
considered in the income analysis.
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information from the corporation’s
accountant, along with evidence that the
consumer has the right to any compensation.
3. Analyzing Corporate Tax Returns.
C. Military, Government Agency, and
Assistance Program Income.
1. Military Income.
a. Military personnel not only receive base
pay, but often times are entitled to additional
forms of pay, such as:
i. Income from variable housing
allowances;
ii. Clothing allowances;
iii. Flight or hazard pay;
iv. Rations; and
v. Proficiency pay.
b. These types of additional pay are
acceptable when analyzing a consumer’s
income as long as the probability of such pay
to continue is verified in writing.
Note: The tax-exempt nature of some of the
above payments should also be considered.
2. VA Benefits.
a. Direct compensation for service-related
disabilities from the Department of Veterans
Affairs (VA) is acceptable, provided the
creditor receives documentation from the
VA.
b. Education benefits used to offset
education expenses are not acceptable.
3. Government Assistance Programs.
a. Income received from government
assistance programs is acceptable as long as
the paying agency provides documentation
indicating that the income is expected to
continue for at least three years.
b. If the income from government
assistance programs will not be received for
at least three years, it may not be used in
qualifying.
c. Unemployment income must be
documented for two years, and there must be
reasonable assurance that this income will
continue. This requirement may apply to
seasonal employment.
Note: Social Security income is acceptable
as provided in section I.B.11.
4. Mortgage Credit Certificates.
a. If a government entity subsidizes the
mortgage payments either through direct
payments or tax rebates, these payments may
be considered as acceptable income.
b. Either type of subsidy may be added to
gross income, or used directly to offset the
mortgage payment, before calculating the
qualifying ratios.
5. Homeownership Subsidies.
a. A monthly subsidy may be treated as
income, if a consumer is receiving subsidies
under the housing choice voucher home
ownership option from a public housing
agency (PHA). Although continuation of the
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homeownership voucher subsidy beyond the
first year is subject to Congressional
appropriation, for the purposes of
underwriting, the subsidy will be assumed to
continue for at least three years.
b. If the consumer is receiving the subsidy
directly, the amount received is treated as
income. The amount received may also be
treated as nontaxable income and be ‘‘grossed
up’’ by 25 percent, which means that the
amount of the subsidy, plus 25 percent of
that subsidy may be added to the consumer’s
income from employment and/or other
sources.
c. Creditors may treat this subsidy as an
‘‘offset’’ to the monthly mortgage payment
(that is, reduce the monthly mortgage
payment by the amount of the home
ownership assistance payment before
dividing by the monthly income to determine
the payment-to-income and debt-to-income
ratios). The subsidy payment must not pass
through the consumer’s hands.
d. The assistance payment must be:
i. Paid directly to the servicing creditor; or
ii. Placed in an account that only the
servicing creditor may access.
Note: Assistance payments made directly
to the consumer must be treated as income.
D. Rental Income.
1. Analyzing the Stability of Rental Income.
a. Rent received for properties owned by
the consumer is acceptable as long as the
creditor can document the stability of the
rental income through:
i. A current lease;
ii. An agreement to lease; or
iii. A rental history over the previous 24
months that is free of unexplained gaps
greater than three months (such gaps could
be explained by student, seasonal, or military
renters, or property rehabilitation).
b. A separate schedule of real estate is not
required for rental properties as long as all
properties are documented on the Uniform
Residential Loan Application.
Note: The underwriting analysis may not
consider rental income from any property
being vacated by the consumer, except under
the circumstances described below.
2. Rental Income From Consumer
Occupied Property.
a. The rent for multiple unit property
where the consumer resides in one or more
units and charges rent to tenants of other
units may be used for qualifying purposes.
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b. Projected rent for the tenant-occupied
units only may:
i. Be considered gross income, only after
deducting vacancy and maintenance factors,
and
ii. Not be used as a direct offset to the
mortgage payment.
3. Income from Roommates or Boarders in
a Single Family Property.
a. Rental income from roommates or
boarders in a single family property occupied
as the consumer’s primary residence is
acceptable.
b. The rental income may be considered
effective if shown on the consumer’s tax
return. If not on the tax return, rental income
paid by the roommate or boarder may not be
used in qualifying.
4. Documentation Required To Verify
Rental Income.
Analysis of the following required
documentation is necessary to verify all
consumer rental income:
a. IRS Form 1040 Schedule E; and
b. Current leases/rental agreements.
5. Analyzing IRS Form 1040 Schedule E.
a. The IRS Form 1040 Schedule E is
required to verify all rental income.
Depreciation shown on Schedule E may be
added back to the net income or loss.
b. Positive rental income is considered
gross income for qualifying purposes, while
negative income must be treated as a
recurring liability.
c. The creditor must confirm that the
consumer still owns each property listed, by
comparing Schedule E with the real estate
owned section of the Uniform Residential
Loan Application (URLA).
6. Using Current Leases To Analyze Rental
Income.
a. The consumer can provide a current
signed lease or other rental agreement for a
property that was acquired since the last
income tax filing, and is not shown on
Schedule E.
b. In order to calculate the rental income:
i. Reduce the gross rental amount by 25
percent for vacancies and maintenance;
ii. Subtract PITI and any homeowners
association dues; and
iii. Apply the resulting amount to income,
if positive, or recurring debts, if negative.
7. Exclusion of Rental Income From
Property Being Vacated by the Consumer.
Underwriters may not consider any rental
income from a consumer’s principal
residence that is being vacated in favor of
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When a consumer vacates a principal
residence in favor of another principal
residence, the rental income, reduced by the
appropriate vacancy factor, may be
considered in the underwriting analysis
under the circumstances listed in the table
below.
ii. Should use the tax rate used to calculate
the consumer’s last year’s income tax.
Note: If the consumer is not required to file
a Federal tax return, the tax rate to use is 25
percent.
3. Analyzing Projected Income.
a. Projected or hypothetical income is not
acceptable for qualifying purposes. However,
exceptions are permitted for income from the
following sources:
i. Cost-of-living adjustments;
ii. Performance raises; and
iii. Bonuses.
b. For the above exceptions to apply, the
income must be:
i. Verified in writing by the employer; and
ii. Scheduled to begin within 60 days of
loan closing.
4. Projected Income for New Job.
a. Projected income is acceptable for
qualifying purposes for a consumer
scheduled to start a new job within 60 days
of loan closing if there is a guaranteed, nonrevocable contract for employment.
b. The creditor must verify that the
consumer will have sufficient income or cash
reserves to support the mortgage payment
and any other obligations between loan
closing and the start of employment.
Examples of this type of scenario are teachers
whose contracts begin with the new school
year, or physicians beginning a residency
after the loan closes.
c. The income does not qualify if the loan
closes more than 60 days before the
consumer starts the new job.
1. Types of Non-Taxable Income.
Certain types of regular income may not be
subject to Federal tax. Such types of nontaxable income include:
a. Some portion of Social Security, some
Federal government employee retirement
income, Railroad Retirement Benefits, and
some State government retirement income;
b. Certain types of disability and public
assistance payments;
c. Child support;
d. Military allowances; and
e. Other income that is documented as
being exempt from Federal income taxes.
2. Adding Non-Taxable Income to a
Consumer’s Gross Income.
a. The amount of continuing tax savings
attributed to regular income not subject to
Federal taxes may be added to the
consumer’s gross income.
b. The percentage of non-taxable income
that may be added cannot exceed the
appropriate tax rate for the income amount.
Additional allowances for dependents are not
acceptable.
c. The creditor:
i. Must document and support the amount
of income grossed up for any non-taxable
income source, and
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III. Consumer Liabilities: Recurring
Obligations
1. Types of Recurring Obligation. Recurring
obligations include:
a. All installment loans;
b. Revolving charge accounts;
c. Real estate loans;
d. Alimony;
e. Child support; and
f. Other continuing obligations.
2. Debt to Income Ratio Computation for
Recurring Obligations.
a. The creditor must include the following
when computing the debt to income ratios for
recurring obligations:
i. Monthly housing expense; and
ii. Additional recurring charges extending
ten months or more, such as
a. Payments on installment accounts;
b. Child support or separate maintenance
payments;
c. Revolving accounts; and
d. Alimony.
b. Debts lasting less than ten months must
be included if the amount of the debt affects
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ii. This applies solely to a principal
residence being vacated in favor of another
principal residence. It does not apply to
existing rental properties disclosed on the
loan application and confirmed by tax
returns (Schedule E of form IRS 1040).
8. Policy Exceptions Regarding the
Exclusion of Rental Income From a Principal
Residence Being Vacated by a Consumer.
E. Non-Taxable and Projected Income
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another principal residence, except under the
conditions described below:
Notes: i. This policy assures that a
consumer either has sufficient income to
make both mortgage payments without any
rental income, or has an equity position not
likely to result in defaulting on the mortgage
on the property being vacated.
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the consumer’s ability to pay the mortgage
during the months immediately after loan
closing, especially if the consumer will have
limited or no cash assets after loan closing.
Note: Monthly payments on revolving or
open-ended accounts, regardless of the
balance, are counted as a liability for
qualifying purposes even if the account
appears likely to be paid off within 10
months or less.
3. Revolving Account Monthly Payment
Calculation. If the credit report shows any
revolving accounts with an outstanding
balance but no specific minimum monthly
payment, the payment must be calculated as
the greater of:
a. 5 percent of the balance; or
b. $10.
Note: If the actual monthly payment is
documented from the creditor or the creditor
obtains a copy of the current statement
reflecting the monthly payment, that amount
may be used for qualifying purposes.
4. Reduction of Alimony Payment for
Qualifying Ratio Calculation. Since there are
tax consequences of alimony payments, the
creditor may choose to treat the monthly
alimony obligation as a reduction from the
consumer’s gross income when calculating
the ratio, rather than treating it as a monthly
obligation.
IV. Consumer Liabilities: Contingent
Liability
1. Definition: Contingent Liability. A
contingent liability exists when an individual
is held responsible for payment of a debt if
another party, jointly or severally obligated,
defaults on the payment.
2. Application of Contingent Liability
Policies. The contingent liability policies
described in this topic apply unless the
consumer can provide conclusive evidence
from the debt holder that there is no
possibility that the debt holder will pursue
debt collection against him/her should the
other party default.
3. Contingent Liability on Mortgage
Assumptions. Contingent liability must be
considered when the consumer remains
obligated on an outstanding FHA-insured,
VA-guaranteed, or conventional mortgage
secured by property that:
a. Has been sold or traded within the last
12 months without a release of liability, or
b. Is to be sold on assumption without a
release of liability being obtained.
4. Exemption From Contingent Liability
Policy on Mortgage Assumptions. When a
mortgage is assumed, contingent liabilities
need not be considered if the:
a. Originating creditor of the mortgage
being underwritten obtains, from the servicer
of the assumed loan, a payment history
showing that the mortgage has been current
during the previous 12 months, or
b. Value of the property, as established by
an appraisal or the sales price on the HUD–
1 Settlement Statement from the sale of the
property, results in a loan-to-value (LTV)
ratio of 75 percent or less.
5. Contingent Liability on Cosigned
Obligations.
a. Contingent liability applies, and the debt
must be included in the underwriting
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analysis, if an individual applying for a
mortgage is a cosigner/co-obligor on:
i. A car loan;
ii. A student loan;
iii. A mortgage; or
iv. Any other obligation.
b. If the creditor obtains documented proof
that the primary obligor has been making
regular payments during the previous 12
months, and does not have a history of
delinquent payments on the loan during that
time, the payment does not have to be
included in the consumer’s monthly
obligations.
V. Consumer Liabilities: Projected
Obligations and Obligations Not Considered
Debt
1. Projected Obligations
a. Debt payments, such as a student loan
or balloon-payment note scheduled to begin
or come due within 12 months of the
mortgage loan closing, must be included by
the creditor as anticipated monthly
obligations during the underwriting analysis.
b. Debt payments do not have to be
classified as projected obligations if the
consumer provides written evidence that the
debt will be deferred to a period outside the
12-month timeframe.
c. Balloon-payment notes that come due
within one year of loan closing must be
considered in the underwriting analysis.
2. Obligations Not Considered Debt
Obligations not considered debt, and
therefore not subtracted from gross income,
include:
a. Federal, State, and local taxes;
b. Federal Insurance Contributions Act
(FICA) or other retirement contributions,
such as 401(k) accounts (including
repayment of debt secured by these funds):
c. Commuting costs;
d. Union dues;
e. Open accounts with zero balances;
f. Automatic deductions to savings
accounts;
g. Child care; and
h. Voluntary deductions.
11. In Supplement I to Part 1026—Official
Interpretations:
A. Under Section 1026.41—Periodic
Statements for Residential Mortgage Loans:
i. Under 41(e)(4) Small servicers:
a. Under 41(e)(4)(ii) Small servicer defined,
paragraphs 1 and 2 are revised and paragraph
3 is added.
b. Under Paragraph 41(e)(4)(iii) Small
servicer determination, paragraph 3 is added.
B. Under Section 1026.43—Minimum
Standards for Transactions Secured by a
Dwelling:
i. Under 43(e)(4) Qualified mortgage
defined-special rules, paragraph 4 is revised
and paragraph 5 is added.
The revisions and additions read as
follows:
Supplement I to Part 1026—Official
Interpretations
*
*
*
*
*
Subpart E—Special Rules for Certain
Home Mortgage Transactions
*
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44725
§ 1026.41 Periodic Statements for
Residential Mortgage Loans
*
*
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*
41(e)(4)(ii) Small servicer defined.
1. Mortgage loans considered.
Pursuant to § 1026.41(a)(1), the
mortgage loans considered in
determining status as a small servicer
are closed-end consumer credit
transactions secured by a dwelling,
subject to the exclusions in
§ 1026.41(e)(4)(iii).
2. Requirements to be a small servicer.
Pursuant to § 1026.41(e)(4)(ii)(A), to
qualify as a small servicer, a servicer
must service, together with any
affiliates, 5,000 or fewer mortgage loans,
for all of which the servicer (or an
affiliate) is the creditor or assignee.
There are two elements to this
requirement. First, a servicer, together
with any affiliates, must service 5,000 or
fewer mortgage loans. Second, a servicer
must service only mortgage loans for
which the servicer (or an affiliate) is the
creditor or assignee. To be the creditor
or assignee of a mortgage loan, the
servicer (or an affiliate) must either
currently own the mortgage loan or
must have been the entity to which the
mortgage loan obligation was initially
payable (that is, the originator of the
mortgage loan). A servicer is not a small
servicer if it services any mortgage loans
for which the servicer or an affiliate is
not the creditor or assignee (that is, for
which the servicer or an affiliate is not
the owner or was not the originator).
The following two examples
demonstrate circumstances in which a
servicer would not qualify as a small
servicer because it did not meet both
requirements for determining a
servicer’s status as a small servicer:
i. A servicer services 3,000 mortgage
loans, all of which it or an affiliate owns
or originated. An affiliate of the servicer
services 4,000 other mortgage loans, all
of which it or an affiliate owns or
originated. Because the number of
mortgage loans serviced by a servicer is
determined by counting the mortgage
loans serviced by a servicer together
with any affiliates, both of these
servicers are considered to be servicing
7,000 mortgage loans and neither
servicer is a small servicer.
ii. A service services 3,100 mortgage
loans—3,000 mortgage loans it owns or
originated and 100 mortgage loans it
neither owns nor originated, but for
which it owns the mortgage servicing
rights. The servicer is not a small
servicer because it services mortgage
loans for which the servicer (or an
affiliate) is not the creditor or assignee,
notwithstanding that the servicer
services fewer than 5,000 mortgage
loans.
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3. Master servicing and subservicing.
A servicer that qualifies as a small
servicer does not lose its small servicer
status if it retains a subservicer, as that
term is defined in 12 CFR 1024.31, to
service any of its mortgage loans. A
subservicer can gain the benefit of the
small servicer exemption only if (1) the
master servicer, as that term is defined
in 12 CFR 1024.31, is a small servicer
and (2) the subservicer is a small
servicer. A subservicer generally will
not qualify as a small servicer because
it does not own or did not originate the
mortgage loans it subservices—unless it
is an affiliate of a master servicer that
qualifies as a small servicer. The
following examples demonstrate the
application of the small servicer
exemption for different forms of
servicing relationships:
i. A credit union services 4,000
mortgage loans, all of which it
originated or owns. The credit union
retains a credit union service
organization, that is not an affiliate, to
subservice 1,000 of the mortgage loans.
The credit union is a small servicer and,
thus, can gain the benefit of the small
servicer exemption for the 3,000
mortgage loans the credit union services
itself. The credit union service
organization is not a small servicer
because it services mortgage loans it
does not own or did not originate.
Accordingly, the credit union service
organization does not gain the benefit of
the small servicer exemption and, thus,
must comply with any applicable
mortgage servicing requirements for the
1,000 mortgage loans it subservices.
ii. A bank holding company, through
a lender subsidiary, owns or originated
4,000 mortgage loans. All mortgage
servicing rights for the 4,000 mortgage
loans are owned by a wholly owned
master servicer subsidiary. Servicing for
the 4,000 mortgage loans is conducted
by a wholly owned subservicer
subsidiary. The bank holding company
controls all of these subsidiaries and,
thus, they are affiliates of the bank
holding company pursuant 12 CFR
1026.32(b)(2). Because the master
servicer and subservicer service 5,000 or
fewer mortgage loans, and because all
the mortgage loans are owned or
originated by an affiliate, the master
servicer and the subservicer both qualify
for the small servicer exemption for all
4,000 mortgage loans.
iii. A nonbank servicer services 4,000
mortgage loans, all of which it
originated or owns. The servicer retains
a ‘‘component servicer’’ to assist it with
servicing functions. The component
servicer is not engaged in ‘‘servicing’’ as
defined in 12 CFR 1024.2; that is, the
component servicer does not receive
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any scheduled periodic payments from
a borrower pursuant to the terms of any
mortgage loan, including amounts for
escrow accounts, and does not make the
payments to the owner of the loan or
other third parties of principal and
interest and such other payments with
respect to the amounts received from
the borrower as may be required
pursuant to the terms of the mortgage
servicing loan documents or servicing
contract. The component servicer is not
a subservicer pursuant to 12 CFR
1024.31 because it is not engaged in
servicing, as that term is defined in 12
CFR 1024.2. The nonbank servicer is a
small servicer and, thus, can gain the
benefit of the small servicer exemption
with regard to all 4,000 mortgage loans
it services.
41(e)(4)(iii) Small servicer
determination.
*
*
*
*
*
2. Timing for small servicer
exemption. The following examples
demonstrate when a servicer either is
considered or is no longer considered a
small servicer:
i. A servicer that begins servicing
more than 5,000 mortgage loans (or
begins servicing one or more mortgage
loans it does not own or did not
originate) on October 1, and services
more than 5,000 mortgage loans (or
services one or more mortgage loans it
does not own or did not originate) as of
January 1 of the following year, would
no longer be considered a small servicer
on January 1 of that following year and
would have to comply with any
requirements from which it is no longer
exempt as a small servicer on April 1 of
that following year.
ii. A servicer that begins servicing
more than 5,000 mortgage loans (or
begins servicing one or more mortgage
loans it does not own or did not
originate) on February 1, and services
more than 5,000 mortgage loans (or
services one or more mortgage loans it
does not own or did not originate) as of
January 1 of the following year, would
no longer be considered a small servicer
on January 1 of that following year and
would have to comply with any
requirements from which it is no longer
exempt as a small servicer on that same
January 1.
iii. A servicer that begins servicing
more than 5,000 mortgage loans (or
begins servicing one or more mortgage
loans it does not own or did not
originate) on February 1, but services
less than 5,000 mortgage loans (or no
longer services mortgage loans it does
not own or did not originate) as of
January 1 of the following year, is
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considered a small servicer for that
following year.
*
*
*
*
*
3. Mortgage loans not considered in
determining whether a servicer is a
small servicer. Mortgage loans that are
not considered for purposes of
determining whether a servicer is a
small servicer pursuant to
§ 1026.41(e)(4)(iii) are not considered
either for determining whether a
servicer, together with any affiliates,
services 5,000 or fewer mortgage loans
or whether a servicer is servicing only
mortgage loans that it owns or
originated. For example, assume a
servicer services 5,400 mortgage loans.
Of these mortgage loans, the servicer
owns or originated 4,800 mortgage
loans, voluntarily services 300 mortgage
loans that it does not own or did not
originate for an unaffiliated nonprofit
organization for which the servicer does
not receive any compensation or fees,
and services 300 reverse mortgage
transactions that it does not own and
did not originate. Because the only
mortgage loans considered are the 4,800
mortgage loans owned or originated by
the servicer, the servicer is considered
a small servicer and qualifies for the
small servicer exemption with regard to
all 5,400 mortgage loans it services.
Note that reverse mortgages and
mortgage loans secured by consumers’
interests in timeshare plans, in addition
to not being considered in determining
small servicer qualification, are also
exempt from the requirements of
§ 1026.41. In contrast, although
charitably serviced mortgage loans, as
defined by § 1026.41(e)(4)(iii), are
likewise not considered in determining
small servicer qualification, they are not
exempt from the requirements of
§ 1026.41. Thus, a servicer that does not
qualify as a small servicer would not
have to provide periodic statements for
reverse mortgages and timeshare plans
because they are exempt from the rule,
but would have to provide periodic
statements for mortgage loans it
charitably services.
*
*
*
*
*
§ 1026.43 Minimum Standards for
Transactions Secured by a Dwelling
*
*
*
*
*
43(e)(4) Qualified mortgage defined—
special rules.
*
*
*
*
*
4. Eligible for purchase, guarantee, or
insurance except with regard to matters
wholly unrelated to ability to repay. To
satisfy § 1026.43(e)(4)(ii), a loan need
not be actually purchased or guaranteed
by Fannie Mae or Freddie Mac or
insured or guaranteed by one of the
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Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations
Agencies (the U.S. Department of
Housing and Urban Development
(HUD), U.S. Department of Veterans
Affairs (VA), U.S. Department of
Agriculture (USDA), or Rural Housing
Service (RHS)). Rather,
§ 1026.43(e)(4)(ii) requires only that the
creditor determine that the loan is
eligible (i.e., meets the criteria) for such
purchase, guarantee, or insurance at
consummation. For example, for
purposes of § 1026.43(e)(4), a creditor is
not required to sell a loan to Fannie Mae
or Freddie Mac (or any limited-life
regulatory entity succeeding the charter
of either) for that loan to be a qualified
mortgage; however, the loan must be
eligible for purchase or guarantee by
Fannie Mae or Freddie Mac (or any
limited-life regulatory entity succeeding
the charter of either), including
satisfying any requirements regarding
consideration and verification of a
consumer’s income or assets, credit
history, debt-to-income ratio or residual
income, and other credit risk factors, but
not any requirements regarding matters
wholly unrelated to ability to repay. To
determine eligibility for purchase,
guarantee or insurance, a creditor may
rely on a valid underwriting
recommendation provided by a GSE
automated underwriting system (AUS)
or an AUS that relies on an Agency
underwriting tool; compliance with the
standards in the GSE or Agency written
guide in effect at the time; a written
agreement between the creditor or a
direct sponsor or aggregator of the
creditor and a GSE or Agency that
permits variation from the standards of
the written guides and/or variation from
the AUSs, in effect at the time of
consummation; or an individual loan
waiver granted by the GSE or Agency to
the creditor. For creditors relying on the
variances of a sponsor or aggregator, a
loan that is transferred directly to or
through the sponsor or aggregator at or
after consummation complies with
§ 1026.43(e)(4). In using any of the four
methods listed above, the creditor need
not satisfy standards that are wholly
unrelated to assessing a consumer’s
ability to repay that the creditor is
required to perform. Matters wholly
unrelated to ability to repay are those
matters that are wholly unrelated to
credit risk or the underwriting of the
loan. Such matters include requirements
related to the status of the creditor
rather than the loan, requirements
related to selling, securitizing, or
delivering the loan, and any
requirement that the creditor must
perform after the consummated loan is
sold, guaranteed, or endorsed for
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insurance such as document custody,
quality control, or servicing.
Accordingly, a covered transaction is
eligible for purchase or guarantee by
Fannie Mae or Freddie Mac, for
example, if:
i. The loan conforms to the relevant
standards set forth in the Fannie Mae
Single-Family Selling Guide or the
Freddie Mac Single-Family Seller/
Servicer Guide in effect at the time, or
to standards set forth in a written
agreement between the creditor or a
sponsor or aggregator of the creditor and
Fannie Mae or Freddie Mac in effect at
that time that permits variation from the
standards of those guides;
ii. The loan has been granted an
individual waiver by a GSE, which will
allow purchase or guarantee in spite of
variations from the applicable
standards; or
iii. The creditor inputs accurate
information into the Fannie Mae or
Freddie Mac AUS or another AUS
pursuant to a written agreement
between the creditor and Fannie Mae or
Freddie Mac that permits variation from
the GSE AUS; the loan receives one of
the recommendations specified below in
paragraphs A or B from the
corresponding GSE AUS or an
equivalent recommendation pursuant to
another AUS as authorized in the
written agreement; and the creditor
satisfies any requirements and
conditions specified by the relevant
AUS that are not wholly unrelated to
ability to repay, the non-satisfaction of
which would invalidate that
recommendation:
A. An ‘‘Approve/Eligible’’
recommendation from Desktop
Underwriter (DU); or
B. A risk class of ‘‘Accept’’ and
purchase eligibility of ‘‘Freddie Mac
Eligible’’ from Loan Prospector (LP).
5. Repurchase and indemnification
demands. A repurchase or
indemnification demand by Fannie
Mae, Freddie Mac, HUD, VA, USDA, or
RHS is not dispositive of qualified
mortgage status. Qualified mortgage
status under § 1026.43(e)(4) depends on
whether a loan is eligible to be
purchased, guaranteed, or insured at the
time of consummation, provided that
other requirements under
§ 1026.43(e)(4) are satisfied. Some
repurchase or indemnification demands
are not related to eligibility criteria at
consummation. See comment 43(e)(4)-4.
Further, even where a repurchase or
indemnification demand relates to
whether the loan satisfied relevant
eligibility requirements as of the time of
consummation, the mere fact that a
demand has been made, or even
resolved, between a creditor and GSE or
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44727
agency is not dispositive for purposes of
§ 1026.43(e)(4). However, evidence of
whether a particular loan satisfied the
§ 1026.43(e)(4) eligibility criteria at
consummation may be brought to light
in the course of dealing over a particular
demand, depending on the facts and
circumstances. Accordingly, each loan
should be evaluated by the creditor
based on the facts and circumstances
relating to the eligibility of that loan at
the time of consummation. For example:
i. Assume eligibility to purchase a
loan was based in part on the
consumer’s employment income of
$50,000 per year. The creditor uses the
income figure in obtaining an approve/
eligible recommendation from DU. A
quality control review, however, later
determines that the documentation
provided and verified by the creditor to
comply with Fannie Mae requirements
did not support the reported income of
$50,000 per year. As a result, Fannie
Mae demands that the creditor
repurchase the loan. Assume that the
quality control review is accurate, and
that DU would not have issued an
approve/eligible recommendation if it
had been provided the accurate income
figure. The DU determination at the
time of consummation was invalid
because it was based on inaccurate
information provided by the creditor;
therefore, the loan was never a qualified
mortgage under § 1026.43(e)(4).
ii. Assume that a creditor delivered a
loan, which the creditor determined was
a qualified mortgage at the time of
consummation under § 1026.43(e)(4), to
Fannie Mae for inclusion in a particular
To-Be-Announced Mortgage Backed
Security (MBS) pool of loans. The data
submitted by the creditor at the time of
loan delivery indicated that the various
loan terms met the product type,
weighted-average coupon, weightedaverage maturity, and other MBS
pooling criteria, and MBS issuance
disclosures to investors reflected this
loan data. However, after delivery and
MBS issuance, a quality control review
determines that the loan violates the
pooling criteria.
eligibility requirements for Fannie Mae
products and loan terms. Fannie Mae,
however, requires the creditor to
repurchase the loan due to the violation
of MBS pooling requirements. Assume
that the quality control review
determination is accurate. Because the
loan still meets Fannie Mae’s eligibility
requirements, it remains a qualified
mortgage based on these facts and
circumstances.
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*
*
Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations
*
*
Dated: July 10, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial
Protection.
*
[FR Doc. 2013–16962 Filed 7–23–13; 8:45 am]
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]]>Agencies
[Federal Register Volume 78, Number 142 (Wednesday, July 24, 2013)]
[Rules and Regulations]
[Pages 44685-44728]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-16962]
[[Page 44685]]
Vol. 78
Wednesday,
No. 142
July 24, 2013
Part III
Bureau of Consumer Financial Protection
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12 CFR Parts 1024 and 1026
Amendments to the 2013 Mortgage Rules Under the Real Estate Settlement
Procedures Act (Regulation X) and the Truth in Lending Act (Regulation
Z); Final Rule
Federal Register / Vol. 78 , No. 142 / Wednesday, July 24, 2013 /
Rules and Regulations
[[Page 44686]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Parts 1024 and 1026
[Docket No. CFPB-2013-0010]
RIN 3170-AA37
Amendments to the 2013 Mortgage Rules Under the Real Estate
Settlement Procedures Act (Regulation X) and the Truth in Lending Act
(Regulation Z)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Final rule; official interpretations.
-----------------------------------------------------------------------
SUMMARY: This rule amends some of the final mortgage rules issued by
the Bureau of Consumer Financial Protection (Bureau) in January of
2013. These amendments clarify, correct, or amend provisions on the
relation to State law of Regulation X's servicing provisions;
implementation dates for adjustable-rate mortgage servicing; exclusions
from requirements on higher-priced mortgage loans; the small servicer
exemption from certain servicing rules; the use of government-sponsored
enterprise and Federal agency purchase, guarantee or insurance
eligibility for determining qualified mortgage status; and the
determination of debt and income for purposes of originating qualified
mortgages.
DATES: This rule is effective January 10, 2014, except for the
amendment to Sec. 1026.35(e), which is effective July 24, 2013. See
part V, Effective Date, in SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT: Marta Tanenhaus, Senior Counsel, Paul
Ceja, Senior Counsel and Special Advisor; Joseph Devlin, Counsel;
Office of Regulations, at (202) 435-7700.
SUPPLEMENTARY INFORMATION:
I. Summary of Final Rule
In January 2013, the Bureau issued several final rules concerning
mortgage markets in the United States (2013 Title XIV Final Rules),
pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act). Public Law 111-203, 124 Stat. 1376 (2010). On
January 10, 2013, the Bureau issued the 2013 ATR Final Rule; \1\ on
January 17, 2013, the Bureau issued the 2013 Mortgage Servicing Final
Rules; \2\ and on May 16, 2013, the Bureau issued Amendments to the
2013 Escrows Final Rule.\3\ This final rule makes several amendments to
those rules. These amendments clarify, correct, or amend provisions on
(1) the relation to State law of Regulation X's servicing provisions;
(2) implementation dates for adjustable-rate mortgage disclosures; (3)
exclusions from the repayment ability and prepayment penalty
requirements for higher-priced mortgage loans (HPMLs); (4) the small
servicer exemption from certain of the new servicing rules; (5) the use
of government-sponsored enterprise (GSE) and Federal agency purchase,
guarantee or insurance eligibility for determining qualified mortgage
(QM) status; and (6) the determination of debt and income for purposes
of originating QMs. In addition to these six revisions and
clarifications, which are discussed more fully below, the Bureau is
making certain technical corrections to the regulations with no
substantive change intended.
---------------------------------------------------------------------------
\1\ Ability-to-Repay and Qualified Mortgage Standards Under the
Truth in Lending Act (Regulation Z) (2013 ATR Final Rule), 78 FR
6407 (Jan. 30, 2013).
\2\ Mortgage Servicing Rules Under the Real Estate Settlement
Procedures Act (Regulation X) (2013 RESPA Servicing Final Rule) and
Mortgage Servicing Rules Under the Truth in Lending Act (Regulation
Z) (2013 TILA Servicing Final Rule) (together, 2013 Mortgage
Servicing Final Rules), 78 FR 10695 (Feb. 14, 2013) (Regulation X),
78 FR 10901 (Feb. 14, 2013) (Regulation Z).
\3\ Amendments to the 2013 Escrows Final Rule under the Truth in
Lending Act (Regulation Z), 78 FR 30739 (May 23, 2013). Those
amendments revised 78 FR 4726 (Jan. 22, 2013) (2013 Escrows Final
Rule).
---------------------------------------------------------------------------
First, the Bureau is amending the commentary to the preemption
provision of Regulation X to clarify that the regulation does not
occupy the field of regulation of the practices covered by the Real
Estate Settlement Procedures Act (RESPA) or Regulation X, including
with respect to mortgage servicers or mortgage servicing. The rule also
redesignates the Regulation X preemption provision, Sec. 1024.13, as
Sec. 1024.5(c).
Second, in response to industry requests, the Bureau is providing
clarification of the implementation dates for adjustable-rate mortgage
provisions Sec. 1026.20(c) and (d) of the 2013 TILA Servicing Final
Rule. This clarification is provided in the section-by-section analysis
and does not revise the 2013 TILA Servicing Final Rule or its official
commentary.
Third, the Bureau is revising Sec. 1026.35(e) of Regulation Z, as
amended by the Amendments to the 2013 Escrows Final Rule,\4\ to clarify
that construction and bridge loans and reverse mortgages are not
subject to its requirements regarding repayment abilities and
prepayment penalties for HPMLs.
---------------------------------------------------------------------------
\4\ 78 FR 30739 (May 23, 2013).
---------------------------------------------------------------------------
Fourth, the Bureau is clarifying the scope and application of the
exemption for small servicers that is set forth in Regulation Z's
periodic statement provision, Sec. 1026.41, and incorporated by cross-
reference in certain provisions of Regulation X. The rule clarifies
which mortgage loans to consider in determining small servicer status
and the application of the small servicer exemption with regard to
servicer/affiliate and master servicer/subservicer relationships.
Further, the rule provides that three types of mortgage loans will not
be considered in determining small servicer status: mortgage loans
voluntarily serviced for an unaffiliated entity without remuneration,
reverse mortgages, and mortgage loans secured by a consumer's interest
in timeshare plans.
Fifth, the Bureau is revising regulatory text and an official
interpretation adopted in the 2013 ATR Final Rule and adding a new
official interpretation to describe qualified mortgages that are
entitled to a presumption of compliance with the ability-to-repay
requirements under the Dodd-Frank Act. Specifically, the Bureau is
providing clarifications with regard to Sec. 1026.43(e)(4), which
allows qualified mortgage status to certain loans that are eligible for
purchase, guarantee, or insurance by the GSEs or federal agencies.
Section 1026.43(e)(4)(ii)(A)-(E) is amended to make clear that matters
wholly unrelated to ability to repay will not be relevant to
determination of QM status under this provision. Comment 43(e)(4)-4
explains that matters wholly unrelated to ability to repay are those
matters that are wholly unrelated to credit risk or the underwriting of
the loan. Comment 43(e)(4)-4 also clarifies the standards a creditor
must meet when relying on a written guide or an automated underwriting
system to determine qualified mortgage status under Sec.
1026.43(e)(4). In addition, the revised comment specifies that a
creditor relying on approval through an automated underwriting system
to establish qualified mortgage status must also meet the conditions on
approval that are generated by that same system.
The Bureau is also revising comment 43(e)(4)-4 to clarify that a
loan meeting eligibility requirements provided in a written agreement
with one of the GSEs, HUD, VA, USDA, or RHS is also eligible for
purchase or guarantee by the GSEs or insured or guaranteed by the
agencies for the purposes of Sec. 1026.43(e)(4). In addition, the
comment has been clarified to provide that loans receiving individual
waivers from GSEs or agencies will be considered eligible as
[[Page 44687]]
well. Thus, such loans could be qualified mortgages.
The Bureau is also issuing new comment 43(e)(4)-5, which provides
that a repurchase or indemnification demand by the GSEs, HUD, VA, USDA,
or RHS is not dispositive for ascertaining qualified mortgage status.
The comment provides two examples to illustrate the application of this
guidance.
Sixth, the Bureau is amending appendix Q of Regulation Z to
facilitate compliance and ensure access to credit by assisting
creditors in determining a consumer's debt-to-income ratio (DTI) for
the purposes of Sec. 1026.43(e)(2), the primary qualified mortgage
provision. The Bureau is making changes to address compliance
challenges raised by stakeholders, as well as technical and wording
changes for clarification purposes. The Bureau's revisions include
clarifications to appendix Q on: (1) Stability of income, and the
creditor requirement to evaluate the probability of the consumer's
continued employment; (2) with regard to salary, wage, and other forms
of consumer income, the creditor requirement to determine whether the
consumer's income level can reasonably be expected to continue; (3)
creditor analysis of consumer overtime and bonus income; (4) creditor
analysis of consumer Social Security income; (5) requirements related
to the analysis of self-employed consumer income; (6) requirements
related to non-employment related consumer income, including creditor
analysis of consumer trust income; and (7) creditor analysis of rental
income. The Bureau is also revising the introduction to appendix Q to
make clear that creditors may refer to other federal agency and GSE
guidance that is in accordance with appendix Q as a resource, and to
provide default rules and an optional safe harbor when appendix Q's
standards do not otherwise resolve how to treat a particular type of
debt or income.
II. Background
A. Title XIV Rulemakings Under the Dodd-Frank Act
In response to an unprecedented cycle of expansion and contraction
in the mortgage market that sparked the most severe U.S. recession
since the Great Depression, Congress passed the Dodd-Frank Act, which
was signed into law on July 21, 2010. In the Dodd-Frank Act, Congress
established the Bureau and, under sections 1061 and 1100A, generally
consolidated the rulemaking authority for Federal consumer financial
laws, including the Truth in Lending Act (TILA) and RESPA, in the
Bureau.\5\ At the same time, Congress significantly amended the
statutory requirements governing mortgage practices with the intent to
restrict the practices that contributed to and exacerbated the crisis.
Under the statute, most of these new requirements would have taken
effect automatically on January 21, 2013, if the Bureau had not issued
implementing regulations by that date.\6\ To avoid uncertainty and
potential disruption in the national mortgage market at a time of
economic vulnerability, the Bureau issued several final rules in a span
of less than two weeks in January 2013 to implement these new statutory
provisions and provide for an orderly transition.
---------------------------------------------------------------------------
\5\ Sections 1011 and 1021 of the Dodd-Frank Act, in title X,
the ``Consumer Financial Protection Act,'' Public Law 111-203,
sections 1001-1100H, codified at 12 U.S.C. 5491, 5511. The Consumer
Financial Protection Act is substantially codified at 12 U.S.C.
5481-5603. Section 1029 of the Dodd-Frank Act excludes from this
transfer of authority, subject to certain exceptions, any rulemaking
authority over a motor vehicle dealer that is predominantly engaged
in the sale and servicing of motor vehicles, the leasing and
servicing of motor vehicles, or both. 12 U.S.C. 5519.
\6\ Dodd-Frank Act section 1400(c), 15 U.S.C. 1601 note.
---------------------------------------------------------------------------
On January 10, 2013, the Bureau issued the 2013 ATR Final Rule,
Escrow Requirements Under the Truth in Lending Act (Regulation Z) (2013
Escrows Final Rule),\7\ and High-Cost Mortgages and Homeownership
Counseling Amendments to the Truth in Lending Act (Regulation Z) and
Homeownership Counseling Amendments to the Real Estate Settlement
Procedures Act (Regulation X) (2013 HOEPA Final Rule).\8\ On January
17, 2013, the Bureau issued the 2013 Mortgage Servicing Final Rules. On
January 18, 2013, the Bureau issued Appraisals for Higher-Priced
Mortgage Loans (Regulation Z) \9\ (issued jointly with other agencies)
and Disclosure and Delivery Requirements for Copies of Appraisals and
Other Written Valuations Under the Equal Credit Opportunity Act
(Regulation B) (2013 Appraisals Final Rule).\10\ On January 20, 2013,
the Bureau issued Loan Originator Compensation Requirements Under the
Truth in Lending Act (Regulation Z) (2013 Loan Originator Final
Rule).\11\ Most of these rules will become effective on January 10,
2014.
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\7\ 78 FR 4726 (Jan. 22, 2013).
\8\ 78 FR 6855 (Jan. 31, 2013).
\9\ 78 FR 10367 (Feb. 13, 2013).
\10\ 78 FR 7215 (Jan. 31, 2013).
\11\ 78 FR 11279 (Feb. 15, 2013).
---------------------------------------------------------------------------
Concurrent with the 2013 ATR Final Rule, on January 10, 2013, the
Bureau issued Proposed Amendments to the Ability-to-Repay Standards
Under the Truth in Lending Act (Regulation Z) (2013 ATR Concurrent
Proposal).\12\ This proposal has now been made final (May 2013 ATR
Final Rule).\13\ The May 2013 ATR Final Rule provides exemptions 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 May 2013 ATR Final Rule modifies the
requirements regarding the inclusion of loan originator compensation in
the points and fees calculation.
---------------------------------------------------------------------------
\12\ 78 FR 6622 (Jan. 30, 2013).
\13\ 78 FR 35429 (Jun. 12, 2013).
---------------------------------------------------------------------------
B. Implementation Initiative for New Mortgage Rules
On February 13, 2013, the Bureau announced an initiative to support
implementation of its new mortgage rules (Implementation Plan),\14\
under which the Bureau would work with the mortgage industry and other
stakeholders to ensure that the new rules can be implemented accurately
and expeditiously. The Implementation Plan included (1) coordination
with other agencies; (2) publication of plain-language guides to the
new rules; (3) publication of additional corrections and clarifications
of the new rules, as needed; (4) publication of readiness guides for
the new rules; and (5) education of consumers on the new rules.
---------------------------------------------------------------------------
\14\ Consumer Financial Protection Bureau Lays Out
Implementation Plan for New Mortgage Rules. Press Release. Feb. 13,
2013.
---------------------------------------------------------------------------
This final rule is the third final rule providing additional
revisions and clarifications of and amendments to the 2013 Title XIV
Final Rules. In addition, the Bureau issued a proposed rule with
further revisions and clarifications of and amendments to several of
the 2013 Title XIV Final Rules on June 24, 2013. The purpose of these
updates is to address important questions raised by industry, consumer
groups, or other agencies. Priority for these updates is given to
issues that are important to a large number of stakeholders and that
critically affect mortgage companies' implementation decisions.
Previously, the Bureau issued a final rule \15\ providing corrections
and clarifications of its 2013 Escrows Final Rule, and a final rule
delaying the effective date for a provision related to credit insurance
[[Page 44688]]
financing in the 2013 Loan Originator Final Rule. On June 24, 2013, the
Bureau issued additional proposed clarifications \16\ to several of the
new mortgage rules, including the servicing rules touched on here and
the 2013 Loan Originator Final Rule. The Bureau expects to review the
comments received and finalize that proposal later this summer. Going
forward, the Bureau will continue to assess whether additional
clarifications or revisions are warranted.
---------------------------------------------------------------------------
\15\ 78 FR 30739 (May 23, 2013).
\16\ 78 FR 39902 (July 2, 2013).
---------------------------------------------------------------------------
Comments on the Proposed Rule
The Bureau received 73 comments on the proposed rule \17\ on which
this final rule is based. Many of these comments discussed issues that
the proposed rule did not touch upon such as disparate impact in regard
to fair lending enforcement, calculation methods for residual income,
and whether or not the special QM provision at Sec. 1026.43(e)(4)
should be eliminated before the rule goes into effect. The Bureau notes
that it would be inconsistent with the Administrative Procedure Act
(APA) to make changes outside the scope of the proposal because the
other commenters and the public would not have notice and opportunity
to comment. In addition, these regulatory updates are intended to focus
on specific narrow implementation issues, and broader policy changes
would not be appropriate as part of this process.
---------------------------------------------------------------------------
\17\ 78 FR 25638 (May 2, 2013).
---------------------------------------------------------------------------
The Bureau has examined all comments submitted and will discuss
those that were responsive to the proposal in the section-by-section
analysis below.
III. Legal Authority
The Bureau is issuing this final rule pursuant to its authority
under RESPA, TILA, and the Dodd-Frank Act. Section 1061 of the Dodd-
Frank Act transferred to the Bureau the ``consumer financial protection
functions'' previously vested in certain other Federal agencies,
including the Federal Reserve Board (Board). The term ``consumer
financial protection function'' is defined to include ``all authority
to prescribe rules or issue orders or guidelines pursuant to any
Federal consumer financial law, including performing appropriate
functions to promulgate and review such rules, orders, and
guidelines.'' \18\ Section 1061 of the Dodd-Frank Act also transferred
to the Bureau all of HUD's consumer protection functions relating to
RESPA.\19\ Title X of the Dodd-Frank Act, including section 1061, along
with RESPA, TILA, and certain subtitles and provisions of title XIV of
the Dodd-Frank Act are Federal consumer financial laws.\20\
---------------------------------------------------------------------------
\18\ 12 U.S.C. 5581(a)(1).
\19\ Public Law 111-203, 124 Stat. 1376, section 1061(b)(7); 12
U.S.C. 5581(b)(7).
\20\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14)
(defining ``Federal consumer financial law'' to include the
``enumerated consumer laws'' and the provisions of title X of the
Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12)
(defining ``enumerated consumer laws'' to include TILA), Dodd-Frank
section 1400(b), 15 U.S.C. 1601 note (defining ``enumerated consumer
laws'' to include certain subtitles and provisions of Title XIV).
---------------------------------------------------------------------------
A. RESPA
Section 19(a) of RESPA, 12 U.S.C. 2617(a), authorizes the Bureau to
prescribe such rules and regulations, to make such interpretations, and
to grant such reasonable exemptions for classes of transactions, as may
be necessary to achieve the purposes of RESPA, which include its
consumer protection purposes. In addition, section 6(j)(3) of RESPA, 12
U.S.C. 2605(j)(3), authorizes the Bureau to establish any requirements
necessary to carry out section 6 of RESPA, and section 6(k)(1)(E) of
RESPA, 12 U.S.C. 2605(k)(1)(E), authorizes the Bureau to prescribe
regulations that are appropriate to carry out RESPA's consumer
protection purposes. As identified in the 2013 RESPA Servicing Final
Rule, the consumer protection purposes of RESPA include responding to
borrower requests and complaints in a timely manner, maintaining and
providing accurate information, helping borrowers avoid unwarranted or
unnecessary costs and fees, and facilitating review for foreclosure
avoidance options.
B. TILA
Section 105(a) of TILA, 15 U.S.C. 1604(a), authorizes the Bureau to
prescribe regulations to carry out the purposes of TILA. Under 105(a)
such regulations may contain such additional requirements,
classifications, differentiations, or other provisions, and may provide
for such adjustments and exceptions for all or any class of
transactions, as in the judgment of the Bureau 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). In particular, it is a 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. Section 105(f) of
TILA, 15 U.S.C. 1604(f), authorizes the Bureau to exempt from all or
part of TILA any class of transactions if the Bureau determines that
TILA coverage does not provide a meaningful benefit to consumers in the
form of useful information or protection. Accordingly, the Bureau has
authority to issue regulations pursuant to title X as well as RESPA and
TILA, as amended by title XIV.
In addition, to constitute a qualified mortgage a loan must meet
``any guidelines or regulations established by the Bureau relating to
ratios of total monthly debt to monthly income or alternative measures
of ability to pay regular expenses after payment of total monthly debt,
taking into account the income levels of the borrower and such other
factors as the Bureau may determine are relevant and consistent with
the purposes described in [TILA section 129C(b)(3)(B)(i)].'' The Dodd
Frank Act also provides the Bureau with authority to prescribe
regulations that revise, add to, or subtract from the criteria that
define a qualified mortgage upon a finding that such regulations are
necessary or proper to ensure that responsible, affordable mortgage
credit remains available to consumers in a manner consistent with the
purposes of the ability-to-repay requirements; or are necessary and
appropriate to effectuate the purposes of the ability-to-repay
requirements, to prevent circumvention or evasion thereof, or to
facilitate compliance with TILA sections 129B and 129C. TILA section
129C(b)(3)(B)(i), 15 U.S.C. 1639c(b)(3)(B)(i). In addition, TILA
section 129C(b)(3)(A) provides the Bureau with authority to prescribe
regulations to carry out the purposes of the qualified mortgage
provisions, such as to ensure that responsible and 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.
1639c(b)(3)(A).
C. The Dodd-Frank Act
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
[[Page 44689]]
thereof.'' 12 U.S.C. 5512(b)(1). Title X of the Dodd-Frank Act is a
Federal consumer financial law. Accordingly, the Bureau is exercising
its authority under the Dodd-Frank Act section 1022(b) to prescribe
rules that carry out the purposes and objectives of title X, as well as
of RESPA, TILA, and the enumerated subtitles and provisions of title
XIV of the Dodd-Frank Act, and to prevent evasion of those laws.
The Bureau is amending certain rules finalized in January, 2013,
that implement a number of Dodd-Frank Act provisions. In particular,
the Bureau is clarifying or amending regulatory provisions and
associated commentary adopted by the 2013 ATR Final Rule,\21\ the 2013
TILA Servicing Final Rule,\22\ the 2013 RESPA Servicing Final Rule,\23\
and the 2013 Escrows Final Rule \24\ as amended by the 2013 Amendments
to the 2013 Escrows Final Rule.\25\
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\21\ 78 FR 6408 (Jan. 30, 2013).
\22\ 78 FR 10902 (Feb. 14, 2013).
\23\ 78 FR 10696 (Feb. 14, 2013).
\24\ 78 FR 4726 (Jan. 22, 2013).
\25\ 78 FR 30739 (May 23, 2013).
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IV. Section-by-Section Analysis
A. Regulation X
Subpart A--General Provisions
The Bureau proposed a technical amendment to the heading for
Subpart A of Regulation X from ``Subpart A--General'' to ``Subpart A--
General Provisions'' to conform the heading in the text of the
regulation to the heading set forth in the corresponding commentary. No
comments were received on this change, and it is adopted as proposed.
Section 1024.5 Coverage of RESPA
The Proposal
The Bureau proposed to redesignate Sec. 1024.13 as Sec.
1024.5(c). Section 1024.13, ``Relation to State laws,'' sets forth
rules regarding the relationship of the requirements in RESPA and
Regulation X to requirements established pursuant to State law. In the
2013 RESPA Servicing Final Rule, the Bureau divided Regulation X into
subparts and Sec. 1024.13 was located in new ``Subpart B--Mortgage
Settlement and Escrow Accounts.'' However, the provisions of Sec.
1024.13(a) are intended to apply with respect to all of Regulation X.
Because Sec. 1024.13 applies for all sections of Regulation X, the
Bureau proposed to redesignate Sec. 1024.13 as Sec. 1024.5(c),
located within ``Subpart A--General Provisions.'' Further, the Bureau
proposed to remove and reserve Sec. 1024.13.
The Bureau further proposed to add commentary for proposed Sec.
1024.5(c) to make clear that Regulation X does not create field
preemption. Since issuing the 2013 RESPA Servicing Final Rule, the
Bureau had received inquiries as to whether Regulation X's mortgage
servicing rules result in preemption of the field of mortgage servicing
regulation. The Bureau had addressed this question in the preamble to
the final rule, stating that ``the Final Servicing Rules generally do
not have the effect of prohibiting State law from affording borrowers
broader consumer protection relating to mortgage servicing than those
conferred under the Final Servicing Rules.'' \26\ The preamble further
stated that, although ``in certain circumstances, the effect of
specific requirements of the Final Servicing Rules is to preempt
certain limited aspects of state law'' in general, ``the Bureau
explicitly took into account existing standards (both State and
Federal) and either built in flexibility or designed its rules to
coexist with those standards.'' \27\
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\26\ 78 FR 10706 (Feb. 14, 2013).
\27\ Id. (specifically identifying the National Mortgage
Settlement and the California Homeowner Bill of Rights).
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Because the Bureau continued to receive questions on this issue,
the Bureau believed it was appropriate to propose commentary to clarify
the scope of proposed Sec. 1024.5(c) and expressly address concerns
about field preemption. Consistent with the preamble to the 2013 RESPA
Servicing Final Rule, proposed comment 5(c)(1)-1 stated that State laws
that are in conflict with the requirements of RESPA or Regulation X may
be preempted by RESPA and Regulation X. Proposed comment 5(c)(1)-1
stated further that nothing in RESPA or Regulation X, including the
provisions in subpart C with respect to mortgage servicers or mortgage
servicing, should be construed to preempt the entire field of
regulation of the covered practices. This proposed addition to the
commentary was meant to clarify that RESPA and Regulation X do not
effectuate field preemption of States' regulation of mortgage servicers
or mortgage servicing. The comment also made clear that RESPA and
Regulation X do not preempt State laws that give greater protection to
consumers than do these federal laws.
The Bureau requested comment regarding the addition of the proposed
commentary, including whether further clarification regarding the
preemption effects of RESPA and Regulation X was necessary or
appropriate.
Comments
Numerous consumer and community groups provided similar comments
supporting the proposed changes to the Regulation X preemption
provision. These commenters supported the relocation of the preemption
provision to Sec. 1024.5(c) in the General Provisions subpart and the
addition of comment 5(c)(1)-1. Many of these consumer and community
groups further suggested that the regulatory text itself be changed to
replace the phrase ``settlement practices'' with language more clearly
inclusive of servicing activities. Several also requested that an
example be included with comment 5(c)(1)-1 showing that a state law
more protective of consumers will not be preempted by Regulation X.
Two industry commenters supported the proposed changes to the
Regulation X preemption provision. One trade association suggested that
the Bureau should promote uniform servicing standards to help create
certainty in the market. Another industry commenter stated that the
current regulation covered the situation sufficiently and the proposed
guidance was unnecessary.
Two trade associations stated that the Bureau was narrowing the
existing preemption provision to reduce the likelihood of preemption.
One opposed the idea that state laws more protective of consumers are
not preempted, and so opposed the inclusion of the comment. The other
stated that the preemption provision for mortgage servicing transfers
functions statutorily as a general preemption of mortgage servicing.
Several industry commenters pointed out that the statute and
regulation use the word ``inconsistent'' when explaining which state
laws may be preempted, while the proposed comment uses the more common
term ``conflict'' to describe the situation. They suggested that the
comment also use the term ``inconsistent'' to avoid confusion.
Final Rule
The relocation of the preemption provision and the guidance in
proposed comment 5(c)(1)-1 were not intended to change the current
preemption regime under Regulation X and the Bureau does not believe
that they do so. The sentence in the regulation that consumer and
community groups urged the Bureau to change simply replicates text in
RESPA section 18. Therefore the Bureau does not believe that a change
to that sentence would be appropriate. Comment 5(c)(1)-1 provides the
[[Page 44690]]
Bureau's official interpretation of that regulatory language. As stated
in the proposal, the Bureau believes that the relocation of the
preemption provision and the addition of the comment are necessary and
appropriate to eliminate any confusion as to how the preemption
provision operates. In addition, the Bureau believes that the comment
is sufficiently clear and does not consider an example to be necessary.
The final rule adopts the amendments as proposed, but changes the
word ``conflict'' in the comment to ``inconsistent'' to avoid
confusion.
B. Regulation Z
Section 1026.20 Disclosure Requirements Regarding Post-Consummation
Events
20(c) Rate Adjustments With a Corresponding Change in Payment
20(d) Initial Rate Adjustment
Implementation Date. In its proposal, the Bureau did not seek to
revise or clarify Sec. 1026.20(c) and (d), the adjustable-rate
mortgage (ARM) servicing regulations issued by the Bureau in the 2013
TILA Servicing Final Rule. Nevertheless, the Bureau received
unsolicited queries regarding the implementation dates for these rules.
Despite the unsolicited nature of these comments, the Bureau believes
it would be helpful to clarify the ARM implementation dates.
ARM regulations Sec. 1026.20(c) and (d) generally apply to ARMs
originated both prior to and after the January 10, 2014, effective
date. However, no servicer is required to comply with the rule until
the effective date.
Implementation Date for Sec. 1026.20(d). Because the notice
required by Sec. 1026.20(d) must be provided to the consumer between
210 and 240 days before the first payment is due after the initial
interest rate adjustment, servicers will not be required to provide the
Sec. 1026.20(d) notice when such payment is due 209 or fewer days from
the effective date. However, payments due 210 or more days from the
effective date are subject to the rule.
Implementation Date for Sec. 1026.20(c). Because the notice
required by Sec. 1026.20(c) must be provided to the consumer between
60 and 120 days before the first payment is due after an interest rate
adjustment causing a corresponding change in payment, servicers will
not be required to provide the Sec. 1026.20(c) notice when such
payment is due 25 to 59 days from the effective date. Note that, under
the time frame of current Sec. 1026.20(c), notices are required 25 to
120 days before the first payment is due after the interest rate
adjustment. Thus, servicers already will have provided the Sec.
1026.20(c) notices required by the current rule when such payment is
due 24 or fewer days from the January 10, 2014, effective date.
Section 1026.35 Requirements for Higher-Priced Mortgage Loans
35(e) Repayment Ability, Prepayment Penalties
The Bureau is concerned that its recently published Amendments to
the 2013 Escrows Final Rule \28\ requiring industry to comply with
certain provisions regarding repayment ability and prepayment penalties
for HPMLs could be interpreted as requiring that certain transactions
excluded from such requirements are now subject to those requirements.
The Bureau believes that the amendments, properly understood, continue
the exclusion for such transactions from the requirements. To provide
certainty, the Bureau is revising Sec. 1026.35(e) \29\ to explicitly
exclude from coverage construction and bridge loans and reverse
mortgages--loans that were previously explicitly excluded from such
requirements, as discussed below.
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\28\ 78 FR 30739 (May 23, 2013).
\29\ Id.
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In January 2013, the Bureau issued the 2013 Escrows Final Rule,\30\
which implements certain provisions of the Dodd-Frank Act relating to
escrow accounts. That final rule revised the definition of ``higher-
priced mortgage loan'' in 12 CFR 1026.35(a) by removing certain
exclusions from the scope of consumer credit transactions that may be
HPMLs. The loans no longer excluded from the definition of HPML are:
Transactions to finance the initial construction of a dwelling
(construction loans); temporary or ``bridge loans'' with a terms of
twelve months or less, such as a loan to purchase a new dwelling where
the consumer plans to sell a current dwelling within twelve months
(bridge loans); and reverse mortgages subject to Sec. 1026.33 (reverse
mortgages). The Bureau removed these exclusions from the general
definition of HPML and located them directly into the individual
provisions regarding appraisal, escrow, ability to repay, and
prepayment penalty requirements for HPMLs.\31\
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\30\ 78 FR 4726 (Jan. 22, 2013).
\31\ See Sec. 1026.35(c)(2) of the 2013 TILA Appraisals Rule,
78 FR 10368 (Feb. 13, 2013) (which was adopted by the Bureau,
together with several other Federal agencies, as an inter-agency
rulemaking); Sec. 1026.35(b)(2) of the 2013 Escrows Final Rule, 78
FR 4727 (Jan. 22, 2013); Sec. 1026.43(a) of the 2013 ATR Final
Rule, 78 FR 6408 (Jan. 30, 2013); and Sec. 1026.32(a) of the 2013
HOEPA Final Rule, 78 FR 6856 (Jan. 31, 2013).
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Since adopting the above-referenced rules, the Bureau adopted
Amendments to the 2013 Escrows Final Rule \32\ to prevent the
inadvertent and temporary elimination of certain consumer protections
for HPMLs concerning ability to repay and prepayment penalties that
were codified in 12 CFR 1026.35(b) prior to June 1, 2013. The 2013
Escrows Final Rule took effect June 1, 2013, while the 2013 ATR and
HOEPA Final Rules \33\ do not take effect until January 10, 2014.
Consequently, the existing ability-to-repay and prepayment penalty
protections for HPMLs would have been removed, pursuant to the 2013
Escrows Final Rule, over seven months before parallel provisions would
take effect. The Amendments to the 2013 Escrows Final Rule restored
those protections temporarily in, and re-codified them as part of,
newly created 12 CFR 1026.35(e), which took effect June 1, 2013, and
will be effective through January 9, 2014.
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\32\ 78 FR 30739 (May 23, 2013).
\33\ 78 FR 6408 (Jan. 30, 2013); 78 FR 6856 (Jan. 31, 2013),
respectively.
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The Bureau's renumbering of the ability-to-repay and prepayment
penalty provisions in Sec. 1026.35(e) of Regulation Z, without
excluding reverse mortgages and construction and bridge loans from
coverage under that section, could be seen as removing these exclusions
from the requirements of that temporary provision. To clarify that the
Amendments to the 2013 Escrows Final Rule did not have that effect, the
Bureau is revising temporary Sec. 1026.35(e) to explicitly exclude
construction loans, bridge loans, and reverse mortgages from its
requirements. The Bureau is replacing current Sec. 1026.35(e)(3) with
new Sec. 1026.35(e)(3), which states that the requirements of Sec.
1026.35(e) do not apply to construction loans, bridge loans, and
reverse mortgages. The Bureau is renumbering current Sec.
1026.35(e)(3), ``Sunset of requirements on repayment ability and
prepayment penalties,'' as new Sec. 1026.35(e)(4). The general
language in Sec. 1026.35(e) is also revised to reflect the addition of
these exclusions. As noted below, the amendment to Sec. 1026.35(e)
will apply to any transaction consummated on or after June 1, 2013, for
which the creditor receives an application on or before January 9,
2014. Then, at the time Sec. 1026.35(e) expires, the exclusions for
construction loans, bridge loans, and reverse mortgages in the 2013 ATR
and HOEPA Final Rules will take effect. Thus, the revision of Sec.
1026.35(e) in this
[[Page 44691]]
final rule will make clear that construction loans, bridge loans, and
reverse mortgages have continued and will continue to be excluded from
certain HPML requirements regarding prepayment penalties and a
consumer's ability to repay the loan.
Legal authority. Construction loans, bridge loans, and reverse
mortgages have always been excluded from the requirements of Regulation
Z regarding repayment ability and prepayment penalties. The mortgage
rules referenced above that implement the Dodd-Frank Act continue to
exclude such loans from their requirements, including those governing
repayment ability and prepayment penalties. Thus, the revisions to
Sec. 1026.35(e) in this final rule are merely technical changes to
clarify the temporary provision's consistency with the historical and
current treatment of such loans under Regulation Z.
For these reasons, the Bureau is revising temporary amendment Sec.
1026.35(e) to explicitly exclude construction loans, bridge loans, and
reverse mortgages from its requirements regarding ability to repay and
prepayment penalties for HPMLs, pursuant to its authority to provide
for adjustments and exceptions under TILA section 105(a) and (f), and
with reliance on the authority used by the Board in amending Regulation
Z to include these requirements,\34\ including TILA section 129(p). As
the Board concluded before it, the Bureau does not believe subjecting
these loans to the repayment ability and prepayment penalty
requirements would effectuate the purposes of, or facilitate compliance
with TILA and Regulation Z. Many of the characteristics of these loans
make it inappropriate or unnecessary to apply the repayment ability and
prepayment penalty requirements of Sec. 1026.35(e). For example,
because the structure of reverse mortgages does not provide for
repayment, the requirements related to repayment are not appropriate
for such loans. The Bureau also notes that it anticipates undertaking a
rulemaking to address how the Dodd-Frank Act title XIV requirements
apply to reverse mortgages, and consumer protection issues in the
reverse mortgage market may be addressed through such a rulemaking.
Thus, the Bureau both interprets Sec. 1026.35(e) not to subject the
affected loans to its requirements and also, pursuant to 105(a) and
105(f) of TILA, continues to exclude those loans from the requirements
of Sec. 1026.35(e).
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\34\ 73 FR 44522 (July 30, 2008).
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Notice and comment are not necessary for this revision of Sec.
1026.35(e), which merely makes explicit in the regulation the Bureau's
continuing interpretation that certain loans have been excluded from
certain legal requirements throughout the renumbering process.
Moreover, the Bureau finds good cause to proceed without notice and
comment. 5 U.S.C. 553(b)(B). This revision merely clarifies the
operation of the rule that should already have been apparent to many
market participants. Notice and comment are therefore unnecessary. In
addition, the length of the notice and comment period make it
impracticable to correct erroneous interpretations of a rule that is
already in effect and that expires within months. For these reasons and
under the authority cited above, the Bureau is expressly excluding
construction and bridge loans and reverse mortgages from the ability-
to-repay and prepayment penalty requirements for HPMLs under interim
Sec. 1026.35(e).
Section 1026.41 Periodic Statements for Residential Mortgage Loans
41(a) In General
41(a)(1) Scope
Section 1026.41(a)(1) of the 2013 TILA Servicing Final Rule
addresses the scope of the mortgage loans subject to the periodic
statement requirements, stating that the rule applies to closed-end
consumer credit transactions secured by a dwelling, subject to certain
exemptions set forth in Sec. 1026.41(e). It goes on to say that, for
purposes of Sec. 1026.41, ``such transactions are referred to as
mortgage loans.''
To eliminate any confusion as to which loans ``such transactions''
refers, and thus to which loans the periodic statement rule applies,
the Bureau proposed to clarify Sec. 1026.41(a)(1). The proposed
revision would have replaced the indefinite reference ``such
transactions'' in Sec. 1026.41(a)(1) with a reiteration of the loans
to which the rule applies, that is, closed-end consumer credit
transactions secured by a dwelling. This revision would have clarified
which transactions are considered ``mortgage loans'' for purposes of
Sec. 1026.41.
The proposal stated that the Bureau believed this change also would
reduce uncertainty about which loans to consider in determining a
servicer's eligibility for one of the exemptions under Sec.
1026.41(e), the small servicer exemption. Section 1026.41(e)(4)(ii)
defines a small servicer as a servicer that services 5,000 or fewer
mortgage loans, for all of which the servicer (or an affiliate) is the
creditor or assignee.\35\ The Bureau reasoned that the proposed text
would have clarified that, in general, a servicer determines whether it
is a small servicer by considering the closed-end consumer credit
transactions secured by a dwelling that it services--including coupon
book loans, which are exempt from some of the requirements of the
periodic statement rule. The proposal noted that, pursuant to proposed
Sec. 1026.41(e)(4)(iii), reverse mortgages and transactions secured by
consumers' interests in timeshares, which are exempt from all of the
requirements of Sec. 1026.41, would be excluded from consideration for
purposes of determining small servicer status.
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\35\ The proposal stated that Housing Finance Agencies are
deemed small servicers under Sec. 1026.41(e)(4)(ii)(B) regardless
of loan count and loan ownership status.
---------------------------------------------------------------------------
The Bureau received no comments on its proposed change to the
regulatory text of Sec. 1026.41(a)(1) and therefore is adopting it as
proposed. The Bureau did, however, receive comments regarding the
mortgage loans covered by the small servicer exemption, and those
comments are discussed below in the sections specifically addressing
the small servicer exemption.
41(e) Exemptions
41(e)(4) Small Servicers
41(e)(4)(ii) Small Servicer Defined
The Proposal
The proposed rule explained that, for the reasons set forth in the
2013 Servicing Final Rules,\36\ the Bureau determined that it was
appropriate to exempt small servicers from certain mortgage servicing
requirements. The proposal set forth the rules from which small
servicers, as defined by Sec. 1026.41(e)(4), are exempt: the
Regulation Z requirement to provide periodic statements for residential
mortgage loans \37\ and, in Regulation X, (1) certain requirements
relating to obtaining force-placed insurance,\38\ (2) the general
servicing policies, procedures, and requirements,\39\ and (3) certain
requirements and restrictions relating to communicating with borrowers
about, and evaluation of applications for, loss mitigation options.\40\
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\36\ See, e.g., 78 FR 10718-10720 (Feb. 14, 2013).
\37\ 12 CFR 1026.41(e).
\38\ 12 CFR 1024.17(k)(5).
\39\ 12 CFR 1024.30(b)(1).
\40\ Id.
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Scope and application of the small servicer exemption. The Bureau's
proposal would have clarified the scope and application of the small
servicer
[[Page 44692]]
exemption. The proposal stated that determination of a servicer's
status as a small servicer, and thus its eligibility for the small
servicer exemption, is set forth in Sec. 1026.41(e)(4) and that, as
set forth above, this standard is applicable by cross-reference to
certain provisions of Regulation X. The proposal pointed out that
Regulation X applies to ``federally related mortgage loans,'' which
excludes certain loans that are ``mortgage loans'' as defined by
Regulation Z Sec. 1026.41(a)(1). The proposed revision would have
clarified that, to qualify for the small servicer exemption applicable
to either rule, the servicer must qualify as a small servicer under
Sec. 1026.41(a)(1)--a determination based on closed-end consumer
credit transactions secured by a dwelling. The proposal would have
clarified that this Regulation Z standard applies regardless of whether
or not the loans considered are subject to the requirements of
Regulation X. The Bureau noted in the proposal that, although some
mortgage loans not subject to coverage under Regulation X are
considered for purposes of determining eligibility as a small servicer,
servicing such loans under Regulation X rules would not be required.
Thus, the Bureau posited, a servicer that services 5,000 federally
related mortgage loans, as defined by Regulation X, may service more
than 5,000 mortgage loans, as defined by Regulation Z Sec.
1026.41(a)(1). The Bureau went on to explain that, in such a case,
because the servicer's loans exceed the 5,000 mortgage loan limit, the
servicer is not a small servicer and, thus, would not qualify for the
small servicer exemption with regard to Regulation Z and Regulation X.
The proposal reiterated that the servicer would not have to comply with
Regulation X requirements for those mortgage loans counted for purposes
of determining small servicer eligibility but which are not federally
related mortgage loans. The proposal stated that by clarifying how a
servicer determines whether it qualifies as a small servicer with
regard to Regulation Z, the proposal also would have clarified how a
servicer determines whether it qualifies for the small servicer
exemptions from the applicable mortgage servicing requirements in
Regulation X.
To ensure understanding of the small servicer exemption, the Bureau
proposed to amend the commentary to Sec. 1026.41(e)(4)(ii) to
specifically identify which mortgage loans are considered for purposes
of determining eligibility for the small servicer exemption. To this
end, the Bureau proposed to add comment 41(e)(4)(ii)-1, which would
have clarified that, in general and pursuant to Sec. 1026.41(a)(1),
the mortgage loans considered in determining qualification for the
small servicer exemption are closed-end consumer credit transactions
secured by a dwelling. Proposed comment 41(e)(4)(ii)-1 also would have
highlighted that, pursuant to Sec. 1026.41(e)(4)(iii), certain closed-
end consumer credit transactions secured by a dwelling are not
considered in determining status as a small servicer, as discussed
further below in connection with proposed Sec. 1026.41(e)(4)(iii).
The Bureau requested comments and data regarding whether proposed
comment 41(e)(4)(ii)-1 would appropriately clarify the scope of
mortgage loans that must be considered for determining if a servicer
qualifies as a small servicer. The Bureau specifically requested
comment and data regarding whether any servicers service a significant
number of closed-end consumer credit transactions secured by a
dwelling, which are subject to Regulation Z, but service significantly
fewer ``federally related mortgage loans,'' which are subject to
Regulation X. By way of example, the Bureau requested comment and data
regarding whether any servicers would not be considered a small
servicer if the small servicer exemption were based on whether a
servicer services 5,000 or fewer closed end consumer credit
transactions secured by a dwelling, but would be a small servicer if
the small servicer exemption were based on whether a servicer services
5,000 or fewer ``federally related mortgage loan[s],'' as that term is
defined in 12 CFR 1024.2. The proposal provided a specific example in a
footnote of a servicer that services 10,000 construction loans, which
are not considered ``federally related mortgage loans'' pursuant to 12
CFR 1024.2, and 100 mortgage loans that are considered ``federally
related mortgage loans'' pursuant to 12 CFR 1024.2.\41\ Such a
servicer, the Bureau stated, would be considered to service 10,100
closed-end consumer credit transactions secured by a dwelling and would
not qualify for the small servicer exemption. The proposal, however,
underscored the fact that, in any case, only the 100 federally related
mortgage loans serviced by the servicer would be subject to the
mortgage servicing requirements set forth in Regulation X pursuant to
12 CFR 1024.31.
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\41\ 78 FR 25638, 25642 n.27 (May 2, 2013).
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Comments
In response to its request for comment, the Bureau received several
comments expressing general support for its proposed clarification of
the scope of loans to consider in determining whether a servicer is a
small servicer, and received no comments opposing the proposed
clarification. Nor did the Bureau receive any data or comment with
regard to servicers servicing a disproportionate number of federally
related mortgage loans, as defined by Regulation X, compared to the
number of ``mortgage loans'' they service, as defined by Regulation Z.
The Bureau also received a number of comments that were beyond the
scope of the proposal. Three national trade associations urged the
Bureau to revise the rule itself so that more servicers could qualify
for the small servicer exemption, but provided no data or reasoning in
support of this position. Similarly, a credit union trade association
recommended that the Bureau revise the rule to consider only
``federally related mortgage loans'' instead of the more inclusive
``mortgage loans,'' as defined by the rule, but likewise provided no
supporting data or reasoning. A trade association representing
community banks generally urged the Bureau to reduce the loan pool used
to determine small servicer status by limiting it to ``federally
related mortgage loans'' and, in the alternative, specifically
recommended carving out construction loans--one of the categories of
loans not included in the definition of ``federally related mortgage
loans''--from the category of ``mortgage loans.'' The trade association
set forth reasons why construction loans require less oversight than
other mortgage loans. Finally, a trade association representing home
builders voiced concern that the proposal's reference to construction
loans in the footnote example might cause ``confusion'' which could
result in community banks reducing their construction loan portfolio to
preserve their small servicer status. To avoid this possibility, the
trade association recommended excluding construction loans from the
loans considered in determining small servicer status.
Final Rule
As stated above in section I, this final rule generally does not
address comments not directly related to the clarifications and
revisions proposed by the rule. Absent opposition or responsive
comments and in view of the support the Bureau received for its
[[Page 44693]]
proposed clarification that the scope of loans considered in
determining small servicer status are mortgage loans, as defined by
Sec. 1026.41, the Bureau is adopting comment 41(e)(4)(ii)-1 as
proposed and declines to revise Sec. 1026.41 with regard to the scope
of loans considered in determining small servicer status.
The Proposal
Affiliate and master/subservicer relationships. The Bureau also
proposed to amend Sec. 1026.41(e)(4)(ii)(A), which states that a small
servicer is a servicer that ``services 5,000 or fewer mortgage loans,
for all of which the servicer (or an affiliate) is the creditor or
assignee.'' Proposed Sec. 1026.41(e)(4)(ii)(A) would have provided
clarification that, for purposes of determining small servicer status,
a servicer considers the mortgage loans it services together with any
mortgage loans serviced by any affiliates. This change, the Bureau
explained, would conform that section with Sec. 1026.41(e)(4)(iii),
which states that small servicer status is determined by counting ``the
number of mortgage loans serviced by the servicer and any affiliates as
of January 1 for the remainder of the calendar year.'' To avoid any
risk of inconsistency, the Bureau believed it would have been
appropriate to amend Sec. 1026.41(e)(4)(ii)(A) to conform the language
to Sec. 1026.41(e)(4)(iii) by adding the clause ``together with any
affiliates'' such that a small servicer is a servicer that ``services,
together with any affiliates, 5,000 or fewer mortgage loans, for all of
which the servicer (or an affiliate) is the creditor or assignee.'' As
stated in the proposal, this change would more fully conform the
language of Sec. 1026.41(e)(4)(ii)(A) with the language of Sec.
1026.41(e)(4)(iii) but would not change the meaning of the small
servicer exemption.
The Bureau also proposed to amend the comments to Sec.
1026.41(e)(4)(ii)(A). Specifically, comment 41(e)(4)(ii)-1 would have
been redesignated as comment 41(e)(4)(ii)-2 and would have been amended
to clarify several elements set forth in the 2013 TILA Servicing Final
Rule. First, it would have clarified that there are two concurrent
requirements for determining whether a servicer is a small servicer, as
discussed further below. Second, it would have explained that the
mortgage loans considered in making this determination are those
serviced by the servicer as well as by its affiliates. Finally, it
would have clarified that the second requirement of the small servicer
test, that a servicer must be either the ``creditor or assignee'' of
the mortgage loans it services, means that the servicer must either
currently own or have originated all of the mortgage loans it services.
The comment also would have provided examples to illustrate these
points.
Proposed comment 41(e)(4)(ii)-2 would have set forth the two
requirements for determining if a servicer is a small servicer and
would have clarified that both requirements apply to the mortgage loans
serviced by the servicer as well as by its affiliates. The comment
would have set forth both requirements: (1) A servicer, together with
its affiliates, must service 5,000 or fewer mortgage loans, and (2) the
servicer must only service mortgage loans for which the servicer (or an
affiliate) is the creditor or assignee. Proposed comment 41(e)(4)(ii)-2
further would have clarified that to be the ``creditor or assignee'' of
a mortgage loan, the servicer (or an affiliate) must either currently
own the mortgage loan or must have been the entity to which the
mortgage loan was initially payable. It also would have clarified that
a servicer that only services such mortgage loans may qualify as a
small servicer so long as the servicer also only services 5,000 or
fewer mortgage loans. The Bureau stated that it believed that this
clarification would provide a helpful alternative way of expressing the
requirement stated in the rule that the servicer or affiliate must also
be the creditor or assignee of a mortgage loan.
Proposed comment 41(e)(4)(ii)-2 also would have provided examples
of specific circumstances demonstrating these requirements. The first
example would have illustrated the effect affiliation has on the loan
count requirement of the small servicer test. Proposed comment
41(e)(4)(ii)-2.i stated that if a servicer services 3,000 mortgage
loans, but is affiliated (as defined at Sec. 1026.32(b)(2)) \42\ with
another servicer that services 4,000 other mortgage loans, both
servicers are considered to service 7,000 mortgage loans and neither
servicer is considered a small servicer. The second example would have
illustrated the ownership requirement of the small servicer test.
Proposed comment 41(e)(4)(ii)-2.ii stated that if a servicer services
3,100 mortgage loans, including 100 mortgage loans it neither owns nor
originated but for which it owns the mortgage servicing rights, the
servicer is not a small servicer. The proposal explained that this is
because the servicer services some mortgage loans for which the
servicer (or an affiliate) is not the creditor or assignee,
notwithstanding that the total number of mortgage loans serviced is
fewer than 5,000.
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\42\ The definition of ``affiliate'' for purposes of subpart E
of Regulation Z, which includes Sec. 1026.41, is set forth in Sec.
1026.32(b)(2) and applies to all of subpart E, including the small
servicer exemption. Affiliate, as defined in Sec. 1026.32(b)(2),
``means any company that controls, is controlled by, or is under
common control with another company, as set forth in the Bank
Holding Company Act of 1956 (12 U.S.C 1841 et seq.).''
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Finally, the Bureau proposed to redesignate comment 41(e)(4)(ii)-2
as 41(e)(4)(ii)-3 and to revise the comment so that it would provide
further clarification regarding the application of the small servicer
exemption in certain master servicer/subservicer relationships. Under
the 2013 TILA Servicing Final Rule, the Bureau explained, comment
41(e)(4)(ii)-2 references Regulation X, 12 CFR 1024.31, for the
definitions of ``master servicer'' and ``subservicer'' that apply to
the rule. It also provided an example demonstrating that even though a
master servicer meets the definition of a small servicer, a subservicer
retained by that master servicer that does not meet the definition does
not qualify for the small servicer exemption.
Proposed comment 41(e)(4)(ii)-3 would have clarified that a small
servicer does not lose its small servicer status because it retains a
subservicer, as that term is defined in 12 CFR 1024.31, to service any
of its mortgage loans. The comment also would have clarified that, for
a subservicer, as that term is defined in 12 CFR 1024.31, to gain the
benefit of the small servicer exemption, both the master servicer and
the subservicer must be small servicers. The comment also would have
pointed out that, generally, a subservicer will not qualify as a small
servicer because it does not own or did not originate the mortgage
loans it subservices. However, the comment went on to state, a
subservicer would qualify as a small servicer if it is an affiliate of
a master servicer that qualifies as a small servicer.
Proposed comment 41(e)(4)(ii)-3 also would have removed the example
in 2013 TILA Servicing Rule comment 41(e)(4)(ii)-2 described above in
favor of three other examples that would have demonstrated the
implication of a master servicer/subservicer relationship for purposes
of qualifying for the small servicer exemption. In the first proposed
example, a credit union services 4,000 mortgage loans--all of which it
originated or owns. The credit union retains a credit union service
organization to subservice 1,000 of the mortgage loans and the credit
union services the remaining 3,000 mortgage loans itself. The credit
union has no affiliation relationship with the credit union service
organization. The credit
[[Page 44694]]
union is a small servicer and, thus, the small servicer exemption
applies to the 3,000 mortgage loans the credit union services itself.
The credit union service organization is not a small servicer because
it services mortgage loans it does not own or did not originate.
Accordingly, the credit union service organization does not gain the
benefit of the small servicer exemption and, thus, must comply with any
applicable mortgage servicing requirements for the 1,000 mortgage loans
it subservices.
Proposed comment 41(e)(4)(ii)-3.ii would have posited the example
of a bank holding company that, through a lender subsidiary, owns or
originated 4,000 mortgage loans. In the example, all mortgage servicing
rights for the 4,000 mortgage loans are owned by a wholly owned master
servicer subsidiary. Servicing for the 4,000 mortgage loans is
conducted by a wholly owned subservicer subsidiary. The bank holding
company controls all of these subsidiaries and, thus, they are
affiliates of the bank holding company pursuant Sec. 1026.32(b)(2).
Because the master servicer and subservicer service 5,000 or fewer
mortgage loans and because the mortgage loans are owned or originated
by an affiliate of each, the master servicer and the subservicer are
each considered a small servicer and qualify for the small servicer
exemption for all 4,000 mortgage loans.
Proposed comment 41(e)(4)(ii)-3.iii would have posited the example
of a nonbank servicer that services 4,000 mortgage loans, all of which
it originated or owns. The servicer retains a ``component servicer'' to
assist it with servicing functions. The component servicer is not
engaged in ``servicing'' as defined in 12 CFR 1024.2; that is, the
component servicer does not receive any scheduled periodic payments
from a borrower pursuant to the terms of any mortgage loan, including
amounts for escrow accounts, and does not make the payments to the
owner of the loan or other third parties of principal and interest and
such other payments with respect to the amounts received from the
borrower as may be required pursuant to the terms of the mortgage
servicing loan documents or servicing contract. In this proposed
example, the component servicer is not a subservicer pursuant to 12 CFR
1024.31 because it is not engaged in servicing, as that term is defined
in 12 CFR 1024.2. The nonbank servicer is a small servicer and the
small servicer exemption applies to all 4,000 mortgage loans it
services.
Comments
Many commenters expressed their appreciation for the Bureau's
clarification of the affiliate and master/subservicer relationships.
Among them, a trade association representing the banking industry noted
that the proposed clarification of the affiliate relationship was
consistent with the regulation as issued by the Bureau. Several
commenters submitted comments outside the scope of this rulemaking
recommending that the Bureau reconsider altogether the inclusion of
affiliate loans in determining eligibility for the small servicer
exemption. A trade association representing credit union service
organizations (CUSOs), a national and state trade association
representing credit unions, and two individual credit unions raised
concerns that the affiliate relationships some CUSOs have with one or
more credit unions would prevent those CUSOs (and their credit union
affiliates) from qualifying for the small servicer exemption. (The
proposed example clarifying the master/subservicer relationship
included a CUSO that was not an affiliate.) These commenters
recommended that the Bureau either revise the rule to remove affiliates
and their mortgage loans from consideration in determining small
servicer status or that the Bureau provide clarification regarding how
to take into account the loans of CUSO affiliates that are not wholly-
owned by credit unions or of CUSOs with multiple owners. Two of the
commenters explained that many credit unions have an affiliate
relationship with a CUSO to facilitate mortgage lending and borrowing.
The trade associations noted the many cases of multiple credit unions
affiliating with a single CUSO in order to achieve economies of scale
and to maintain competitiveness in the marketplace. They indicated that
these arrangements are particularly important for small credit unions
with limited capacity. The trade association representing CUSOs voiced
concern that the affiliate requirement in Sec. 1026.41 could have a
chilling effect on the mortgage CUSO industry by encouraging credit
unions to divest their interests in CUSOs to maintain their small
servicer exemption or by discouraging credit unions that qualify as
small servicers from investing in an affiliate relationship with a
CUSO.
Final Rule
In view of the comments supporting the proposed clarification of
affiliate and master/subservicer relationships with regard to small
servicer qualification and in the absence of responsive comments to the
contrary, the Bureau is adopting the clarifications as proposed. With
respect to the comments outside the scope of this rulemaking
recommending that the Bureau exclude the mortgage loans of affiliates
from consideration in determining small servicer status, the Bureau
declines to revise the rule. In addition to the fact that reopening
consideration of a major policy decision would require notice and
comment relatively late in the implementation process, the Bureau
continues to believe that the reasons underlying the rule as set forth
in the 2013 Servicing Final Rules are persuasive on the merits.
For clarification with regard to CUSOs and their relationships with
one or more credit unions, the Bureau directs both the CUSOs and the
credit unions to the Bank Holding Company Act of 1956 (12 U.S.C. 1841
et seq.) to determine whether their particular business relationships
constitute affiliate relationships.\43\ For further clarification, the
Bureau notes that, pursuant to the affiliate requirement in Sec.
1026.41, in any affiliate relationship with a CUSO, the total number of
the mortgage loans of the affiliated entities must be considered in
determining small servicer status. For example, for a credit union and
its CUSO affiliate, the total number of mortgage loans serviced by both
entities must be considered to determine the small servicer status for
both the credit union and the CUSO.\44\ The same is true for credit
unions that are deemed affiliates under the Bank Holding Company Act of
1956.
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\43\ Pursuant to Sec. 1026.32(b)(2), Sec. 1026.41 is subject
to the definition of ``affiliate'' as set forth in the Bank Holding
Company Act of 1956 (the Act). See proposed comment 41(e)(4)(ii)-
3.ii. Under the Act, ``affiliate'' is defined as any company that
controls, is controlled by, or is under common control with another
company. The percentage of control is a determining factor in
whether an affiliate relationship exists. The Bureau notes that,
absent other determining factors, if a credit union's percentage of
control over a CUSO falls below the statutory minimum, there would
be no affiliate relationship.
\44\ For the small servicer status of a credit union/master
servicer and the small servicer status of its unaffiliated CUSO/
subservicer, see proposed comment 41(e)(4)(ii)-3.i, which the Bureau
is adopting as proposed in this final rule.
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41(e)(4)(iii) Small Servicer Determination
Section 1026.41(e)(4)(iii) of the 2013 TILA Servicing Final Rule
sets forth certain criteria regarding how to determine if a servicer
qualifies as a small servicer. In addition, that section explains that
small servicer determination is based on the number of mortgage loans
serviced by the servicer and any affiliates as of January 1 for the
remainder of the calendar year. It also specifies that a servicer that
``crosses the threshold,'' and thus loses its small
[[Page 44695]]
servicer status and its small servicer exemption, has six months after
crossing the threshold or until the next January 1, whichever is later,
to comply with any requirements from which the servicer is no longer
exempt.
The Proposal
To provide clarification regarding the date for determining small
service status and when a servicer that loses small servicer status
must begin to comply with regulations from which it had been exempt,
and that those dates apply to both elements of the small servicer
exemption (loan count and ownership status), proposed Sec.
1026.41(e)(4)(iii) included a number of revisions to the 2013 TILA
Servicing Final Rule Sec. 1026.41(e)(4)(iii). First, proposed Sec.
1026.41(e)(4)(iii) would have replaced the reference to a servicer that
``crosses the threshold'' for determining if the servicer qualifies as
a small servicer with broader language indicating that a servicer that
``ceases to qualify'' as a small servicer will have six months or until
the next January 1, whichever is later, to comply with any requirements
for which a servicer is no longer exempt as a small servicer. The
Bureau stated it believed that the broader phrase ``ceases to qualify''
would more accurately reflect the fact that there are two elements to
determining if a servicer qualifies as a small servicer and pointed to
the discussion above to underscore that either one of these elements
could cause a servicer to lose exempt status.
Proposed Sec. 1026.41(e)(4)(iii) therefore would have applied the
transition period set out in the rule to situations in which a servicer
no longer meets the loan count requirement as well as to situations in
which the servicer no longer meets the requirement that the servicer is
the creditor or assignee of all mortgage loans it services. Thus, the
proposal stated, if a servicer exceeds the 5,000 mortgage loan limit or
begins to service mortgage loans it does not own or did not originate,
it must comply with any requirements from which it is no longer exempt
by either the following January 1 or six months after the change in
operations that disqualifies it as a small servicer, whichever is
later. The proposal would have provided the example that, if on
September 1 a servicer that previously qualified as a small servicer
begins to service a mortgage loan that it does not own and did not
originate, the servicer has until March 1 of the following year to
comply with the requirements from which it was previously exempt as a
small servicer.
Comments and Final Rule
The Bureau did not receive any responsive comments regarding the
proposed clarifications discussed above, outside of general support for
providing clarification regarding this issue. In order to clarify the
timing provision, the Bureau is adopting the changes as proposed.
In this final rule, the Bureau also is revising a comment to Sec.
1026.41(e)(4)(iii) that provides three examples of the timing for when
a small servicer is no longer considered a small servicer and when that
former small servicer must start complying with any requirements from
which it previously was exempt as a small servicer. The Bureau is
revising comment 41(e)(4)(iii)-2 to maintain consistency with and
further clarify the changes to the regulatory text the Bureau is
adopting in Sec. 1026.41(e)(4)(iii), as discussed above.
To this end, the Bureau is revising the heading of comment
41(e)(4)(iii)-2. The Bureau is removing the reference to ``threshold''
and is amending the heading to read: ``Timing for small servicer
exemption'' for the same reasons discussed above and to maintain
consistency with the adopted regulatory changes to Sec.
1026.41(e)(4)(iii). In addition, the Bureau is amending the examples in
the comment to conform to and further clarify the changes the Bureau is
adopting in the regulatory text. The first of the current examples
states that a servicer that begins servicing more than 5,000 loans on
October 1 and is servicing more than 5,000 loans as of January 1 of the
following year would no longer be considered a small servicer on April
1 of that following year. The second current example states that a
servicer that begins servicing more than 5,000 mortgage loans on
February 1, and services more than 5,000 loans as of January 1 of the
following year, would no longer be considered a small servicer on
January 1 of that following year. The third example states that a
servicer that begins servicing more than 5,000 mortgage loans on
February 1, but services less than 5,000 loans as of January 1 of the
following year, is considered a small servicer for that following year.
The revised examples clarify two points. The first point is that
the application of the calendar dates apply to both elements of the
small servicer test, i.e., exceeding the allowable maximum number of
loans serviced and servicing mortgage loans a servicer either does not
own or did not originate. The second point of clarification is that
January 1 is the date used to determine whether or not a servicer is
considered a small servicer and the other dates (the latter of six
months from the time the servicer ceases to be a small servicer or
until the next January 1) are used to determine when a small servicer
that has lost its small servicer status must begin complying with the
regulations for which it had been exempt.
The first revised example explains that a small servicer that
begins servicing more than 5,000 mortgage loans (or begins servicing
one or more mortgage loans it does not own or did not originate) on
October 1 and is servicing 5,000 mortgage loans (or services one or
more mortgage loans it does not own or did not originate) as of January
1 of the following year, would no longer be considered a small servicer
on January 1 of that following year and would have to comply with any
requirements from which it is no longer exempt as a small servicer on
April 1 of that following year. The second revised example states that
a small servicer that begins servicing more than 5,000 mortgage loans
(or begins servicing one or more mortgage loans it does not own or did
not originate) on February 1, and services more than 5,000 mortgage
loans (or begins servicing one or more mortgage loans it does not own
or did not originate) as of January 1 of the following year, would no
longer be considered a small servicer on January 1 of that following
year and would have to comply with any requirements from which it is no
longer exempt as a small servicer on that same January 1. The third
revised example states that a servicer that begins servicing more than
5,000 mortgage loans (or begins servicing one or more mortgage loans it
does not own or did not originate) on February 1, but services less
than 5,000 mortgage loans (or no longer services mortgage loans it does
not own or did not originate) as of January 1 of the following year, is
considered a small servicer for that following year. In sum, the
amended heading and examples conform to and provide further
clarification of the proposed changes to the regulatory text discussed
above that the Bureau is adopting in this final rule.
The Proposal
Consideration of loans serviced. The proposed rule also would have
added language to Sec. 1026.41(e)(4)(iii) to specify which mortgage
loans should not be considered in determining small servicer status.
Proposed Sec. 1026.41(e)(4)(iii) would have clarified that certain
closed-end consumer credit transactions secured by a dwelling would not
be considered for purposes of
[[Page 44696]]
determining whether a servicer qualifies as a small servicer.
Specifically, the proposal went on to explain, because reverse mortgage
transactions and mortgage loans secured by a consumer's interest in
timeshare plans are exempt from Sec. 1026.41, such loans are not
considered when determining if a servicer is a small servicer. The
proposed rule also would have clarified that, because coupon book loans
are exempt only from some requirements of Sec. 1026.41, such loans
must be considered in determining whether a servicer is a small
servicer.
The proposal also would have excluded from consideration in
connection with the small servicer exemption, any mortgage loan
voluntarily serviced by a servicer for a creditor or assignee that is
not an affiliate of the servicer and for which the servicer does not
receive any compensation or fees (``charitably serviced'' mortgage
loans). The Bureau explained that it had received feedback that certain
servicers that otherwise would be considered small servicers
voluntarily service mortgage loans for unaffiliated nonprofit entities
for charitable purposes and do not receive compensation or fees from
engaging in that servicing. The Bureau further explained that, if such
charitably serviced mortgage loans were considered in connection with
determining whether a servicer qualifies as a small servicer, a
servicer engaging in this practice would not qualify for the small
servicer exemption because the servicer would be servicing a mortgage
loan it does not own or did not originate, notwithstanding that such
servicer undertook to service those mortgage loans for charitable
purposes.
The Bureau expressed concern that including charitably serviced
mortgage loans in determining small servicer status would cause
servicers to refrain from charitable servicing rather than lose the
benefits of a small servicer exemption. The Bureau stated its belief
that such a result would not further the goal of consumer protection
for the affected consumers and might instead negatively affect the
availability and costs of credit for consumers whose mortgage loans
would otherwise be serviced pursuant to such charitable arrangements.
Further, the Bureau believed that consumers would be more likely to
receive superior service from an entity in the business of servicing
that is willing to donate its services than they would if nonprofit
entities that are not experienced in the business of servicing were
forced to take on those duties themselves. Finally, the Bureau stated
that it believed that the benefits of excluding charitably serviced
mortgage loans from small servicer determination would outweigh the
potential risks to consumers that exclusion may pose.
The Bureau proposed that, for the reasons set forth above and
pursuant to the Bureau's exemption authority and authority to provide
for adjustments and exceptions for any class of transactions as may be
necessary or proper to effectuate the purposes of TILA, under TILA
sections 105(a) and (f), mortgage loans voluntarily serviced by a
servicer for a creditor or assignee that is not an affiliate of the
servicer and for which the servicer does not receive any compensation
or fees would not be considered in determining a servicer's
qualification as a small servicer. The Bureau stated that it believed
that considering such loans in determining if a servicer is a small
servicer would defeat the purposes of TILA by penalizing charitable
servicers, thereby dissuading them from engaging in charitable
servicing to the detriment of the consumers that otherwise would
benefit from this activity. The Bureau requested comment regarding
whether it would be appropriate not to consider such mortgage loans
when determining if a servicer qualifies for the small servicer
exemption. The Bureau further requested comment on whether other
mortgage loans serviced through similar limited arrangements should not
be considered in determining whether a servicer is a small servicer.
The Bureau emphasized in its proposed rule that it was neither
reexamining nor seeking comment on the issue of exempting nonprofit
entities engaged in mortgage servicing from the requirements of the
periodic statement or any other mortgage servicing rule.
Finally, the Bureau proposed to add comment 41(e)(4)(iii)-3.
Proposed comment 41(e)(4)(iii)-3 would have clarified that mortgage
loans that are not considered for purposes of determining small
servicer qualification pursuant to Sec. 1026.41(e)(4)(iii), are not
considered for determining either whether a servicer services, together
with any affiliates, 5,000 or fewer mortgage loans or whether a
servicer is servicing mortgage loans that it does not own or did not
originate. Proposed comment 41(e)(4)(iii)-3 further would have posited
the example of a servicer that services a total of 5,400 mortgage
loans, of which the servicer owns or originated 4,800 mortgage loans,
services 300 reverse mortgage transactions that it does not own or did
not originate, and voluntarily services 300 mortgage loans that it does
not own or did not originate for an unaffiliated nonprofit organization
for which the servicer does not receive any compensation or fees. The
example stated that neither the reverse mortgage transactions nor the
mortgage loans voluntarily serviced by the servicer are considered for
purposes of determining if the servicer is a small servicer. The
example concluded that, because the only mortgage loans considered are
the 4,800 other mortgage loans serviced by the servicer, and the
servicer owns or originated each of those mortgage loans, the servicer
is considered a small servicer and qualifies for the small servicer
exemption with regard to all 5,400 mortgage loans it services. The
comment also would have noted that reverse mortgages and transactions
secured by a consumer's interest in timeshare plans, in addition to not
being considered in determining small servicer qualification, also are
exempt from the requirements of Sec. 1026.41. In contrast, the
proposed comment noted, although charitably serviced mortgage loans, as
defined by Sec. 1026.41(e)(4)(iii), are likewise not considered in
determining small servicer qualification, they are not exempt from the
requirements of Sec. 1026.41. The comment thus would have clarified
that a servicer that does not qualify as a small servicer would not be
required to provide periodic statements for reverse mortgages and
timeshare plans because they are exempt from the rule, but would be
required to provide periodic statements for the mortgage loans it
charitably services.
Legal authority. The Bureau proposed to exclude charitably serviced
mortgage loans and reverse mortgage transactions from consideration in
determining a servicer's status as a small servicer for purposes of the
small servicer exemption in Sec. 1024.41(e)(4) pursuant to its
authority to provide for adjustments and exceptions under TILA section
105(a) and (f).\45\ The proposal went on to say that, with respect to
charitably serviced mortgage loans, the Bureau believed, for the
reasons described above, that declining to consider such mortgage loans
for purposes of determining eligibility as a small servicer would
effectuate the purposes of, and would facilitate compliance with TILA
and Regulation Z. The proposal further stated that, consistent with
TILA
[[Page 44697]]
section 105(f) and in light of the factors in that provision, the
Bureau believed that requiring servicers to consider mortgage loans
they charitably service for purposes of determining eligibility as a
small servicer would cause mortgage servicers to withdraw from such
charitable relationships and not provide a meaningful benefit to
consumers in the form of useful information or protection. In addition,
the Bureau expressed its concern regarding the extent to which any
requirement to consider such loans would complicate, hinder, or make
more expensive the credit process for such mortgage loan transactions,
especially considering the status of the borrowers that typically
secure mortgage loans that are charitably serviced. The Bureau said
that ultimately it believed the goal of consumer protection would be
undermined if it were to consider, for purposes of small servicer
qualification, mortgage loans voluntarily serviced by a servicer for a
creditor or assignee that is not an affiliate of the servicer and for
which the servicer does not receive any compensation or fees.
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\45\ The proposal stated that TILA section 128(f) requires
periodic statements for ``residential mortgage loans,'' which,
pursuant to TILA section 103(cc)(5), excludes transactions secured
by consumers' interests in timeshare plans. For this reason, the
proposed rule said, exception authority is not required to exclude
such loans from consideration in determining if a servicer is a
small servicer.
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In the proposed rule, the Bureau said it similarly believed that
not considering reverse mortgages in determining whether a servicer is
a small servicer would effectuate the purposes of, and would facilitate
compliance with, TILA and Regulation Z. The Bureau said it believed
this for the same reasons set forth in the 2013 TILA Servicing Final
Rule \46\ exempting reverse mortgages from the requirements of Sec.
1026.41. The Bureau pointed to the discussion in that final rule that
the periodic statement requirements were designed for a traditional
mortgage product and that information relevant and useful for consumers
with reverse mortgages differs substantially from the information
required on the periodic statement and, thus, would not provide a
meaningful benefit to consumers of reverse mortgages. Finally, the
proposal put forth the Bureau's belief that not considering reverse
mortgages in determining whether a servicer is a small servicer is
proper irrespective of the amount of the loan, the status of the
consumer (including related financial arrangements, financial
sophistication, and the importance to the consumer of the loan), or
whether the loan is secured by the principal residence of the consumer.
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\46\ See 78 FR 10901, 10973 (Feb. 14, 2013).
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Comments and Final Rule
The Bureau received only positive comments regarding its proposed
clarification that reverse mortgage transactions and mortgage loans
secured by a consumer's interest in timeshare plans, which are exempt
from all provisions of Sec. 1026.41, are excluded from the loan pool
used to determine eligibility for the small servicer exemption.
However, one national trade association representing credit unions
contested the Bureau's clarification that fixed-rate loans with coupon
books must be considered for purposes of determining eligibility for
the small servicer exemption. The commenter said that including fixed-
rate loans with coupon books in the loan pool used to determine small
servicer status but excluding them from the requirement to provide
periodic statements would create confusion without providing adequate
benefits. The Bureau disagrees and notes, as discussed above, that
fixed-rate loans with coupon books are exempt only from some of the
requirements of Sec. 1026.41--as opposed to reverse mortgage
transactions and mortgage loans secured by a consumer's interest in
timeshare plans which are not subject to any of the requirements of
Sec. 1026.41. Servicers servicing fixed-rate loans with coupon books
are exempt from the requirement to provide periodic statements for
these loans under Sec. 1026.41, but servicers nevertheless have to
provide to consumers with such loans the information contained in the
periodic statement, either in the coupon book or in some other form.
Because servicers servicing fixed-rate loans with coupon books must
comply with the requirements of Sec. 1026.41 regarding those mortgage
loans, it is appropriate that such loans would be considered in
determining whether such servicers are small servicers and therefore
exempt from complying with the requirements of Sec. 1026.41 with
regard to those loans. Conversely, it is appropriate to exclude reverse
mortgage transactions and mortgage loans secured by a consumer's
interest in timeshare plans from the loan pool used to determine small
servicer status because, regardless of that servicer's small servicer
status, there is no requirement for the servicer to comply with any of
the requirements of Sec. 1026.41 with regard to those loans.
The Bureau received strong support for its proposed revision of
Sec. 1026.41 to exclude charitably serviced loans from consideration
in determining whether a servicer qualifies as a small servicer, that
is, mortgage loans voluntarily serviced for a non-affiliate creditor or
assignee and for which the servicer does not receive any compensation
or fees. Commenters agreed that, absent the Bureau's proposal, small
servicers likely would relinquish their volunteer efforts in order to
preserve their small servicer status. In response to one commenter's
request for clarification, the Bureau notes that its proposed revision
of the rule with regard to volunteer servicing is not limited to the
servicing of mortgage loans owned or originated by nonprofit
organizations, although the Bureau suspects that most charitable
servicing is done on behalf of such organizations. Due to the support
received by the Bureau for its proposed revision of Sec.
1026.41(e)(4)(iii)(A) excluding charitably serviced mortgage loans from
the loan pool used to determine small servicer eligibility, and for the
reasons stated above, the Bureau is adopting the revision as proposed.
In addition to requesting comment regarding the appropriateness of
excluding charitably serviced mortgage loans when determining small
servicer status, the proposal solicited comment on whether other
mortgage loans serviced through similar limited arrangements should not
be considered in determining whether a servicer is a small servicer.
The Bureau did not receive comments recommending that any other
servicing arrangements be excluded from consideration for purposes of
determining small servicer status. The Bureau did receive a comment
outside of the scope of the proposal from a national trade association
requesting guidance regarding the trade association's conclusion that
certain depository services some of its members provide for depositors
who self-finance the sale of residential real estate do not qualify as
``servicing,'' as defined in 12 CFR 1024.2(b). The trade association
explained that, for a minimal fee, some banks--usually small banks--
receive mortgage payments from a borrower and deposit the funds into
that customer's account. According to the trade association, the
agreement between the bank and the depositor/creditor typically
excludes any other services, such as providing servicing in the case of
delinquency. The trade association expressed concern that small
institutions will discontinue this service for their depository
customers who owner-finance the sale of real property for fear of
losing their small servicer status if the depository service could be
construed as servicing mortgage loans that the bank does not own or did
not originate.
Because the comment was outside the scope of the proposal, the
Bureau declines to provide the requested guidance. Moreover, even if
the comment were within the scope of the proposal, the Bureau is not
able to
[[Page 44698]]
provide guidance at this juncture because the trade association did not
provide sufficient information about the banking service described.
Section 1026.43 Minimum Standards for Transactions Secured by a
Dwelling
43(e) Qualified Mortgages
43(e)(4) Qualified Mortgage Defined--Special Rules
The 2013 ATR Final Rule generally 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
requirement for ``qualified mortgages.'' These provisions, in Sec.
1026.43(c), (e)(2), (e)(4), (e)(5), (e)(6) \47\ and (f), implement the
requirements of TILA section 129C(a)(1) and the qualified mortgage
provisions of TILA section 129C(b).
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\47\ The May 2013 ATR Final Rule amended the 2013 ATR Final Rule
in part by adding two new types of qualified mortgages, at Sec.
1026.43(e)(5) and (6). See 78 FR 35430 (June 12, 2013).
---------------------------------------------------------------------------
To determine the qualified mortgage status of a loan, creditors
must analyze whether the loan meets one of the definitions of
``qualified mortgage'' in Sec. 1026.43(e)(2), (e)(4), (e)(5), (e)(6)
or (f). Section 1026.43(e)(4) provides a definition of qualified
mortgage for loans that (1) meet the prohibitions on certain risky loan
features (e.g., negative amortization and interest only features); (2)
do not exceed certain limitations on points and fees under Sec.
1026.43(e)(2); and (3) either are eligible for purchase or guarantee by
one of the GSEs, while under the conservatorship of the Federal Housing
Finance Agency, or are eligible to be insured or guaranteed by HUD
under the National Housing Act (12 U.S.C. 1707 et seq.), the VA, the
USDA, or RHS.\48\ HUD, VA, USDA, and RHS have authority under the Dodd-
Frank Act to define qualified mortgage standards for the types of loans
they insure, guarantee, or administer. See TILA section
129C(b)(3)(B)(ii). Coverage under Sec. 1026.43(e)(4) for such loans
will sunset once each agency promulgates its own qualified mortgage
standards and such rules take effect. Coverage of GSE-eligible loans
will sunset when conservatorship ends.
---------------------------------------------------------------------------
\48\ Eligibility standards for the GSEs and Federal agencies are
available at: Fannie Mae, Single Family Selling Guide, https://www.fanniemae.com/content/guide/sel111312.pdf; Freddie Mac, Single-
Family Seller/Servicer Guide, https://www.freddiemac.com/sell/guide/;
HUD Handbook 4155.1, https://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4155.1/41551HSGH.pdf; Lenders Handbook--VA Pamphlet
26-7, Web Automated Reference Material System (WARMS), https://www.benefits.va.gov/warms/pam26_7.asp; Underwriting Guidelines:
USDA Rural Development Guaranteed Rural Housing Loan Program, https://www.rurdev.usda.gov/SupportDocuments/CA-SFH-GRHUnderwritingGuide.pdf.
---------------------------------------------------------------------------
Even if the Federal agencies do not issue additional rules or
conservatorship does not end, the temporary qualified mortgage
definition in Sec. 1026.43(e)(4) will expire seven years after the
effective date of the rule.\49\ Covered transactions that satisfy the
requirements of Sec. 1026.43(e)(4) that are consummated before the
sunset of Sec. 1026.43(e)(4) will retain their qualified mortgage
status after the temporary definition expires. However, a loan
consummated after the sunset of Sec. 1026.43(e)(4) may be a qualified
mortgage only if it satisfies the requirements of another qualified
mortgage provision in effect at that time.
---------------------------------------------------------------------------
\49\ The rule's effective date is January 10, 2014, thus the
Sec. 1026.43(e)(4) qualified mortgage definition expires at the
latest after January 10, 2021.
---------------------------------------------------------------------------
Eligibility Under GSE/Agency Guides and Automated Underwriting Systems
The Proposal
As adopted by the 2013 ATR Final Rule, comment 43(e)(4)-4 clarifies
that, to satisfy Sec. 1026.43(e)(4)(ii), a loan need not be actually
purchased or guaranteed by a GSE or insured or guaranteed by HUD, VA,
USDA, or RHS. Rather, Sec. 1026.43(e)(4)(ii) requires only that the
loan be eligible for such purchase, guarantee, or insurance. For
example, the comment provides that, for purposes of Sec.
1026.43(e)(4), a creditor is not required to sell a loan to a GSE for
that loan to be a qualified mortgage. Rather, the loan must be eligible
for purchase or guarantee by a GSE. The Commentary clarifies that, with
respect to GSEs, to determine eligibility, a creditor may rely on an
underwriting recommendation provided by one of the GSEs' automated
underwriting systems (AUSs) or their written guides. Accordingly, with
regard to the GSEs, the comment states that a covered transaction is
eligible for purchase or guarantee by Fannie Mae or Freddie Mac (and
therefore a qualified mortgage under Sec. 1026.43(e)(4)) if: (i) the
loan conforms to the standards set forth in the Fannie Mae Single-
Family Selling Guide or the Freddie Mac Single-Family Seller/Servicer
Guide; or (ii) the loan receives an ``Approve/Eligible'' recommendation
from Desktop Underwriter (DU); or an ``Accept and Eligible to
Purchase'' recommendation from Loan Prospector (LP).
The Bureau proposed to revise comment 43(e)(4)-4 in a number of
ways. First, the proposal would have clarified that a creditor is not
required to comply with all GSE or agency requirements to show
qualified mortgage status. Specifically, the proposed revision made
clear that the creditor need not comply with certain requirements that
are wholly unrelated to a consumer's ability to repay, including
activities related to selling, securitizing, or delivering consummated
loans and any requirement the creditor is required to perform after the
consummated loan is sold, guaranteed, or endorsed for insurance (in the
case of agency loans) such as document custody, quality control, and
servicing. These requirements are spelled out in the most depth in the
GSE and agency written guides, but may also be referenced in automated
underwriting system conditions and in written agreements with
individual creditors, as discussed further below.
The Bureau believed that the proposed comment would clarify the
intended scope of the temporary category of qualified mortgage created
in Sec. 1026.43(e)(4) and facilitate compliance with the provisions of
Regulation Z adopted in the 2013 ATR Final Rule. As explained in the
preamble to the final rule, the Bureau established Sec. 1026.43(e)(4)
as a temporary transition measure designed to ensure access to
responsible, affordable credit for consumers with debt-to-income ratios
that exceed the 43 percent threshold that the Bureau adopted as a
bright-line standard in the permanent general definition of qualified
mortgage under Sec. 1026.43(e)(2) while creditors adapted to the new
ATR rules and other changes in economic and regulatory conditions. The
Bureau believed that using widely recognized underwriting standards of
Federal agencies and entities under Federal conservatorship to define
qualified mortgages during this interim period would both facilitate
compliance and ensure responsible lending practices. The temporary
provision therefore bases qualified mortgage status on eligibility for
purchase, insurance, or guarantee, which requires use of the federally
related underwriting standards, but does not require actual sale,
guarantee, or insurance endorsement. Furthermore, the temporary
provision requires that a qualified mortgage must be eligible at
consummation.
However, the Bureau recognized in the proposed rule that the GSEs
and agencies impose a wide variety of requirements relating not only to
underwriting of potentially eligible loans, but also to the mechanics
of sale, guarantee, or insurance and post-consummation activities.
Because
[[Page 44699]]
underwriting is a complex process that involves assessment of the
consumer's ability to repay the loan as well as other credit risk
factors, the Bureau believed that it was appropriate to base qualified
mortgage status under Sec. 1026.43(e)(4) on the GSEs' and agencies'
general standards concerning borrower, product, and mortgage
eligibility and underwriting. While some of these underwriting
requirements may be more closely or directly related to assessing a
consumer's ability to repay than others, the Bureau believed that
attempting to disaggregate them would be an extraordinarily complex
task that would defeat the purposes of the temporary definition in
adopting widely recognized standards to facilitate compliance and
access to responsible credit. Where groups of requirements are wholly
unrelated to underwriting (i.e., wholly unrelated to assessing ability
to repay and other risk-related factors), however, the Bureau believed
that it was appropriate to specify that such requirements do not affect
qualified mortgage status.
The Bureau believed that the items described in the comment would
meet this test and provide greater clarity to the temporary definition
of qualified mortgage. Because TILA requires assessment of a consumer's
ability to repay a loan as of the time of consummation, the Bureau
believed that GSE and agency requirements relating to post-consummation
activity should not be relevant to qualified mortgage status. And
because the temporary definition does not require actual purchase,
guarantee, or insurance, the Bureau believed that it would not be
appropriate to base qualified mortgage status on elements of the guides
relating to the mechanics of actual delivery, purchase, guarantee, and
endorsement. The Bureau recognized that most requirements wholly
unrelated to underwriting involve post-consummation activity; however,
pre-consummation GSE and agency requirements could also be wholly
unrelated to underwriting. For example, the status of a creditor's
approval or eligibility to do business with a GSE is not relevant for
ascertaining qualified mortgage status using an AUS. The Bureau invited
comment on this proposed clarification generally and on whether other
GSE or agency requirements should be excluded.
Comments
Only one consumer group commented on the Bureau's inclusion of
guidance stating that issues wholly unrelated to ability to repay would
not affect a loan's QM status. This consumer group is also a nonprofit
lender. Its comment suggested that the Bureau should state clearly
those issues that are ``related'' to ability to repay, such as income
or obligations that materially impact ability to repay, and violations
of specific QM product restrictions, and rule out such things as credit
score and appraisal requirements. This commenter also stated that
failure to make this guidance clearer could reduce credit availability.
Industry commenters overwhelmingly supported the interpretation
that issues wholly unrelated to ability to repay should not be
considered in assessing the QM status of a loan under Sec.
1026.43(e)(4). Most, however, also suggested that the guidance on what
would be considered wholly unrelated to ability to repay should be
clarified and the excluded items or categories expanded. Commenters
agreed that failure to comply with post-consummation requirements
should be excluded. As did the consumer group in the comment referenced
above, some industry commenters requested that the Bureau make clear
that items deemed related to ability to repay be limited to narrow
issues of a borrower's ability to make the loan's payments, and that
other risk-related factors be excluded. Specifically, commenters asked
that factors related to willingness to repay (as opposed to ability to
repay) and issues involving the attributes or defects of the collateral
be excluded. Some commenters raised the issue of excluding jumbo
loans.\50\ Two commenters requested that a time limit be imposed so
that repurchase or indemnification claims on seasoned loans would be
disregarded. One commenter stated that income determinations are
variable and subjective, so errors made in good faith should not
invalidate QM status. Another commenter asked for guidance on some of
the issues above, rather than specifically requesting exclusion.
---------------------------------------------------------------------------
\50\ Although one commenter asked that jumbo size, which renders
a loan too large to be eligible for GSE purchase or guarantee, be
deemed wholly unrelated to ability to repay, another commenter
merely asked for guidance on whether or not jumbos would be
excluded. The Bureau stated in the January 2013 final rule that the
temporary qualified mortgage definition does not include ``jumbo''
loans in 1026.43(e)(4), given, in part, that the Bureau views the
jumbo market as already robust and stable. Excluding jumbo loan size
eligibility conditions for GSEs would effectively reverse the
Bureau's conclusion on this matter. The Bureau continues to believe
that the jumbo loan market does not need the benefit of temporary
qualified mortgage definition and notes that jumbo loans can be
qualified mortgages to the extent that they meet the other qualified
mortgage definitions.
---------------------------------------------------------------------------
In addition, commenters generally suggested that various other
topics should be specifically listed as wholly unrelated to ability to
repay, including: (1) Failure to comply with laws and regulations,
including consumer protection laws and regulations; (2) purchase of a
state-issued title guarantee for loans held in portfolio; (3) delayed
note certification; (4) Ginnie Mae modification; (5) early buy-out
programs; (6) non-material technical defects triggering repurchase or
indemnification; and (7) ``additional repurchase requirements.''
The two GSEs both commented on the proposed rule, and both
discussed the ``wholly unrelated to ability to repay'' guidance. One
specifically stated support for the guidance, and both urged the Bureau
to state that collateral-related issues were wholly unrelated to
ability to repay.
Final Rule
The Bureau adopts the guidance on issues of what is wholly
unrelated to ability to repay substantially as proposed, but has
adopted the standard in the regulatory text to harmonize the
eligibility requirements that must be met for the temporary qualified
mortgage definition under the rule with those permitted under the
Commentary. In addition, comment 43(e)(4)-4 has been revised to state
that matters wholly unrelated to ability to repay are those matters
that are wholly unrelated to credit risk or the underwriting of the
loan, and to provide more detailed guidance on applying the standard.
As stated in the proposed rule, underwriting is a complex process
that involves assessment of the consumer's ability to repay the loan as
well as a variety of other credit risk factors. The Bureau made a
deliberate decision in the 2013 ATR Final Rule to base qualified
mortgage status under Sec. 1026.43(e)(4) on the GSEs' and agencies'
general underwriting and credit risk analysis standards. While some of
these factors may be more closely and directly focused on consumers'
ability to repay than others, the Bureau continues to believe that
attempting to disaggregate GSE and agency underwriting requirements
based on degree of relationship to ability to repay would be an
extraordinarily complex task that would defeat the purposes of the
temporary definition in adopting widely recognized standards to
facilitate compliance and access to responsible credit. Indeed, the
statute itself requires consideration of a borrower's credit history,
which could relate to willingness as well as ability to repay.
Exclusion of requirements regarding collateral and other risk-related
factors
[[Page 44700]]
would require line-drawing exercises that could potentially interfere
with the regulatory purpose. Moreover, allowing disaggregation would
not be consistent with the use of AUS determinations to demonstrate
compliance, as they involve interdependent risk factors and do not
focus solely on a borrower's capacity to make payments.
The Bureau has revised the final comment to add an express general
statement that matters wholly unrelated to ability to repay are those
matters wholly unrelated to credit risk or the underwriting of the
loan. The Bureau believes that this language, in conjunction with the
reference to specific sets of requirements that are wholly unrelated to
assessing ability to repay at the time of consummation (such as those
related to selling, securitizing, or delivering consummated loans),
provides useful guidance to stakeholders.
As stated in the proposed rule, and consistent with the final rule,
QM status depends on eligibility for sale, insurance, or guarantee at
consummation, not on an actual executed sale, insuring, or guarantee of
the individual loan. Accordingly, the Bureau considers events occurring
after consummation and GSE and agency requirements concerning execution
of an actual sale, insuring, or guarantee of the loan to be wholly
unrelated to ability to repay.\51\ In addition, the Bureau believes
that in regard to very limited matters, such as the status of a
creditor's approval or eligibility to do business with a GSE,
additional pre-consummation occurrences may also be wholly unrelated to
ability to repay. Accordingly, the Bureau has revised the language in
the final comment to identify specifically that these sets of
requirements are considered wholly unrelated to ability to repay for
purposes of the rule.
---------------------------------------------------------------------------
\51\ Because the determination is based on the situation at
consummation, the later repayment history or ``seasoning'' of the
loan would not be an appropriate metric for this standard.
---------------------------------------------------------------------------
Although the Bureau has reviewed many of the requests for
determinations as to particular requirements in the comments received,
the Bureau notes that with respect to certain of these inquiries, there
was not sufficient detail or background information to discern the
precise nature of the request or question. For instance, commenters'
bare suggestion that ``additional purchase requirements'' be deemed
wholly unrelated to ability to repay was simply too vague to analyze,
and would require further specification in order to apply the standard.
Use of Automated Underwriting Systems
The Proposal
The Bureau also proposed to revise comment 43(e)(4)-4 to clarify
eligibility as determined by an automated underwriting system of a GSE
or one of the agencies. As explained in comment 43(e)(4)-4 as adopted
in the 2013 ATR Final Rule, the AUSs and the written guides of the GSEs
as well as the agencies can be used for eligibility purposes under
Sec. 1026.43(e)(4). The proposed revision of the comment explained
that to rely upon an AUS recommendation to demonstrate qualified
mortgage status a creditor must have (1) accurately inputted the loan
information into the automated system, and (2) satisfied any
accompanying requirements or conditions to the AUS approval that would
otherwise invalidate the recommendation, unless, as discussed above,
the conditions are wholly unrelated to the consumer's ability to repay.
The comment as adopted in the 2013 ATR Final Rule assumed that any
recommendation used for compliance would be valid, and these
clarifications merely listed two criteria that should be monitored to
ensure that validity. In particular, because the AUSs generate a list
of conditions that must be met in support of the approval designation,
the Bureau believed that those conditions must be satisfied to show
eligibility for purchase, guarantee, or insurance. The Bureau sought
comment on these revisions as well and also proposed technical edits to
comment 43(e)(4)-4 for clarity and accuracy.
Comments
The consumer and community group commenters did not discuss the
guidance in comment 43(e)(4)-4 requiring that an AUS determination be
based on accurate inputs, and that the creditor comply with any
requirements and conditions specified by the AUS. About half of the
industry commenters that specifically discussed this guidance supported
its inclusion. Industry commenters asked that the Bureau make clear
that QM status will not be invalidated by minor inaccuracies and by
inaccuracies that would not change the outcome of the AUS
determination. One commenter stated that it will not be possible to
determine whether or not a loan would have been approved with accurate
inputs.
Final Rule
The Bureau adopts the comment as proposed, with minor edits for
clarity. As stated in the regulation, a loan is a QM if it is eligible
for purchase, insurance or guarantee by a GSE or agency other than with
regard to issues wholly unrelated to ability to repay, and meets the
other relevant requirements. For this reason, minor inaccuracies in
input data that do not affect eligibility will not affect QM status.
The Bureau believes the convenience and ease of compliance made
possible by this provision are more important than avoiding those few
situations in which it is difficult to determine which inaccuracies
will affect the AUS outcome.
Although the reference to issues wholly unrelated to ability to
repay in the main paragraph of the proposed comment applied to the
requirements and conditions accompanying an AUS determination, and
unquestionably do now that the standard is in the regulatory language,
the Bureau believes that repeating such language in paragraph ii will
enhance the clarity of the comment, and is doing so.
Effect of Written Contract Variances
The Proposal
The Bureau also proposed to revise comment 43(e)(4)-4 in a third
way to clarify further that a loan meeting eligibility requirements
provided in a written agreement between the creditor and a GSE or
agency that permits variation from the standards of the written guides
and/or AUSs in effect at the time of consummation is also eligible for
purchase or guarantee by the GSEs or insurance or guarantee by the
agencies for the purposes of Sec. 1026.43(e)(4). Thus, such loans
would be qualified mortgages. The Bureau recognized that these
agreements between creditors and the GSEs or agencies effectively
constitute modification of, or substitutes for, the general manuals or
AUSs with regard to these creditors. In many cases, the agreements
allow the creditors to use other automated underwriting systems rather
than the GSE or agency systems, subject to certain conditions or
limitations on which loans the GSE or agency will accept as eligible
for purchase, guarantee, or insurance. The Bureau believed that it was
therefore appropriate for the purposes of Sec. 1026.43(e)(4) to
consider the agreements to be equivalent to the standard written guides
for purposes of the specific creditor to which the agreement applies.
Many of these agreements are necessary to accommodate local and
regional market variations and other considerations that do not
substantially relate to ATR-related underwriting criteria and
[[Page 44701]]
therefore are generally consistent with the consumer protection and
other purposes of the rule. However, the Bureau did not believe that it
would be appropriate to allow one creditor to rely on the terms
specified in another creditor's written agreement with a GSE or agency
to establish qualified mortgage status, as the written agreements are
individually negotiated and monitored. The Bureau sought comment on
this proposed clarification generally and on whether other variations
on standard guides and eligibility criteria should be considered.
Comments
Two consumer and community group commenters discussed the use of
variances with Sec. 1026.43(e)(4). One comment, from a group of
organizations, stated that allowing use of variances was a mistake
because the agreements are private and this would make them very
difficult for consumers to enforce when they are violated. This comment
also suggested that if the variance provision is adopted the Bureau
should make clear that a borrower would have access to such variance
agreements by sending a qualified written request under RESPA. The
other consumer group commenter, which operates a nonprofit lender,
supported the use of variances as provided in the comment.
Industry commenters were very supportive of allowing the use of
variances. However, one association representing credit unions opposed
allowing the use of variances, stating that it would disadvantage
smaller market participants. A real estate association commented that
variances should be allowed but should be required to be made public so
that any creditor could request use of their terms. Other industry
commenters requested that the Bureau make clear that later assignees
could rely on the QM status of loans originated pursuant to a variance.
Another commenter asked that the Bureau specify that, in order to be
relied on, a variance must be in effect at the time of consummation of
the loan.
Several industry commenters pointed out that these variances are
often used with correspondent lenders, and the creditor who has
negotiated the variance agreement acts as an aggregator or sponsor,
pooling loans originated by others. They stated that the comment as
proposed would present a problem because it states that the variance
can only be used by a creditor who is a party to the agreement with the
GSE. They further stated that this problem could interfere with the
origination of a large number of loans that meet the GSEs' standards,
and argued that correspondent lenders should be allowed to rely on the
variances of their sponsors or aggregators. One large bank, however,
opposed the idea of allowing one creditor to rely on another's
variance, stating that this might allow loans to become QMs after
consummation.
One of the GSEs provided comment on the variance provision,
strongly supporting it, and pointing out in addition that both GSEs
sometimes grant individual loan waivers of their standards. The GSE
stated that these waivers do not proceed from an increase in its
appetite for risk, and are only granted ``on an exceptional basis,''
and that they should be treated the same as the negotiated variances.
One industry association also asked that such individual waivers be
treated this way.
Final Rule
The language regarding variances is adopted substantially as
proposed, with two important changes. The Bureau agrees that
disallowing correspondent use of variances would interfere unduly with
the market, and is adding language to clarify use in such circumstances
without allowing wholly unrelated entities to rely on some other
creditor's agreement. Also, the Bureau believes that individual waivers
granted by the GSEs should benefit from the same treatment as creditor-
specific variances negotiated with the GSEs.
As with all the QM provisions, the status of a loan is determined
at the time of consummation. The variance applied to a transaction must
be in effect at the time a loan is consummated, and the loan must meet
all relevant requirements at that time. For this reason, a loan cannot
be retroactively made into a QM by a creditor or assignee. In addition,
because the status is determined at consummation, later assignees can
rely on that status if it is valid. Allowing correspondents to rely on
the variances of their sponsors or aggregators in effect at the time of
consummation will not change this situation, and it will help to
alleviate concerns that only larger market participants may take
advantage of negotiated variances. The language of comment 43(e)(4)-4
has been crafted to ensure that the correspondent is involved in a
direct relationship with the variance holder and originating the QM
pursuant to that relationship.
In addition, the Bureau does not believe that allowing use of
variances will disadvantage smaller market participants, since it is
intended only to maintain the current market situation. Although
variances are private agreements, with the potential for attendant
disadvantages described by commenters above such as difficulty of
enforcement, the Bureau does not believe it is appropriate to regulate
transparency for these agreements through this narrowly focused
amendatory rulemaking, without further review. As always, the Bureau
will monitor the effects of its rules on the marketplace going forward.
The Bureau has decided to allow loans benefitting from individual
waivers granted by the GSEs to be treated the same as loans originated
following negotiated variances. The Bureau has no reason to believe
that these loans present undue risk to consumers, and notes that the
GSEs are under government conservatorship.
The provision regarding variances is adopted as proposed, with the
two changes discussed above.
Repurchase and Indemnification Demands
The Proposal
The Bureau also proposed new comment 43(e)(4)-5 to provide
additional clarification on how repurchase and indemnification demands
by the GSEs and agencies may affect the qualified mortgage status of a
loan. The proposed comment did not amend the meaning of the current
rule but clarified how a determination of the qualified mortgage status
of a loan should be understood in relation to claims that the loan was
not eligible for purchase, insurance, or guarantee and therefore not a
qualified mortgage. In making the proposal, the Bureau understood that
facts upon which eligibility status was determined at or before
consummation could later be found to be incorrect. Often, a repurchase
or indemnification demand by a GSE or an agency involves such issues.
However, the mere occurrence of a GSE or agency demand that a creditor
repurchase a loan or indemnify the agency for an insurance claim does
not necessarily mean that the loan is not a qualified mortgage.
Proposed comment 43(e)(4)-5 would have provided that a repurchase
or indemnification demand by the GSEs, HUD, VA, USDA, or RHS is not
dispositive in ascertaining qualified mortgage status. Much as
qualified mortgage status under the general definition in Sec.
1026.43(e)(2) may typically turn on whether the consumer's debt-to-
income ratio at the time of consummation was equal to or less than 43
percent, qualified mortgage status under Sec. 1026.43(e)(4) may
typically turn on whether the loan was eligible for purchase,
guarantee, or
[[Page 44702]]
insurance at the time of consummation. Thus, for example, a demand for
repurchase or indemnification based on post-consummation GSE or agency
requirements would therefore not be relevant to qualified mortgage
status. As indicated above, such factors meet the wholly unrelated to
ability to repay standard that the Bureau is finalizing in Sec.
1026.43(e)(4). Only reasons for a repurchase or indemnification demand
that specifically apply to the qualified mortgage status of the loan
under Sec. 1026.43(e)(4) would be relevant, as discussed above in
connection with comment 43(e)(4)-4. Moreover, the mere fact that a
demand has been made, or even resolved, between a creditor and GSE or
agency is not dispositive with regard to eligibility for purposes of
Sec. 1026.43(e)(4), as those parties are involved in an ongoing
business relationship rather than an adjudicatory process. However,
evidence of whether a particular loan satisfied the Sec. 1026.43(e)(4)
eligibility criteria at consummation may be brought to light in the
course of dealings over a particular demand, depending on the facts and
circumstances. Such evidence--like any evidence discovered after
consummation that relates to the facts as of the time of consummation--
may be relevant in assessing whether a particular loan is a qualified
mortgage.
To clarify this point further, proposed comment 43(e)(4)-5 included
two examples of relevant evidence discovered after consummation. In the
first example, one would assume that a loan's eligibility for purchase
was based in part on the consumer's employment income of $50,000 per
year. The creditor uses the income figure in obtaining an approve/
eligible recommendation from DU. A quality control review, however,
later determines that the documentation provided and verified by the
creditor to comply with Fannie Mae requirements did not support the
reported income of $50,000 per year. As a result, Fannie Mae demands
that the creditor repurchase the loan. Assume that the quality control
review is accurate, and that DU would not have issued an approve/
eligible recommendation if it had been provided the accurate income
figure. The Bureau believed that, given the facts and circumstances of
this example, the DU determination at the time of consummation was
invalid because it was based on inaccurate information provided by the
creditor; therefore, the loan was never a qualified mortgage.
For the second example, one would assume that a creditor delivered
a loan, which the creditor determined was a qualified mortgage at the
time of consummation, to Fannie Mae for inclusion in a particular To-
Be-Announced Mortgage Backed Security (MBS) pool of loans. The data
submitted by the creditor at the time of loan delivery indicated that
the various loan terms met the product type, weighted-average coupon,
weighted-average maturity, and other MBS pooling criteria, and MBS
issuance disclosures to investors reflected this loan data. However,
after delivery and MBS issuance, a quality control review determines
that the loan violates the pooling criteria. The loan still meets
eligibility requirements for other Fannie Mae products and loan terms.
Fannie Mae, however, requires the creditor to repurchase the loan due
to the violation of MBS pooling requirements. Assume that the quality
control review determination is accurate. The reason the creditor
repurchases this loan would not be relevant to the loan's qualified
mortgage status. The loan still meets other Fannie Mae eligibility
requirements and therefore remains a qualified mortgage based on these
facts and circumstances.
The Bureau invited comment on proposed comment 43(e)(4)-5 in
general. The Bureau also solicited comment on whether additional
examples or other particular situations should be provided or whether
alternatives for eligibility other than relationship to ability-to-
repay standards should be adopted that would determine the qualified
mortgage status of a loan.
Comments
One consumer group and nonprofit lender commented on the
explanation of how repurchase and indemnification demands should be
understood in relation to QM status, stating support for the Bureau's
rule but requesting more fully developed guidance on the issue.
Industry commenters overwhelmingly supported the addition of
comment 43(e)(4)-5, but also had various suggestions for changes. One
industry commenter, along with one of the GSEs, stated that the first
example given, in which an accurate determination that the creditor-
reported income did not support QM status meant that QM status was
invalid, appeared to suggest that the repurchase demand was indeed
dispositive. A trade association asked that the Bureau not include as
``loans for which repurchase or indemnification demand has been made''
those loans that are not eventually repurchased or indemnified.
Both GSEs commented on this guidance, and both supported the
addition of comment 43(e)(4)-5. One GSE also suggested that the Bureau
should delete the examples given because they would cause confusion.
One also requested that the Bureau make clear that even if QM status
under Sec. 1026.43(e)(4) is invalidated, the loan may still have
qualified for QM status under another provision.
Final Rule
Comment 43(e)(4)-5 is adopted as proposed, with two small edits to
make clear that only QM status under Sec. 1026.43(e)(4) is being
discussed in the examples and that in the second example the critical
fact is that the loan still meets Fannie Mae's eligibility
requirements.
Regarding the first example in the comment, it is not the
repurchase demand nor the quality control review that is dispositive as
to QM status, but the fact that the finding that the income figure is
unsupported by the documentation is stated to be ``accurate.'' The
example is a hypothetical, and assuming the accuracy of an issue that
would normally have to be established through an investigation of the
facts and circumstances of the transaction allows for better
explanation of how the rule works. As for the issue of what should be
considered a repurchase or indemnification demand, the question is
irrelevant to QM status. Repurchase or indemnification demands are
potentially relevant to QM status only because they may indicate or
lead to evidence that a loan did not qualify as a QM at the time of
consummation. In addition, the Bureau believes that the examples will
increase clarity for stakeholders, and not cause confusion.
Accordingly, the Bureau considers the two examples presented as
providing clear and appropriate guidance on the issue, with the edits
mentioned above.
Appendix Q to Part 1026--Standards for Determining Monthly Debt and
Income
Overview
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 (DTI) that is less
than or equal to 43 percent. To determine whether the consumer meets
the specific DTI requirement, the creditor must calculate the
consumer's monthly DTI in accordance with appendix Q. The Bureau
adopted the 43
[[Page 44703]]
percent DTI requirement and other modifications to the statutory
criteria pursuant to its authorities under TILA section 129C and
105(a).\52\
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\52\ The Bureau notes that the specific 43 percent debt-to-
income requirement applies only to qualified mortgages under Sec.
1026.43(e)(2). The specific DTI requirement does not apply to loans
that meet the qualified mortgage definitions in Sec. 1026.43(e)(4),
(5), (6), or (f), or that are not qualified mortgages and instead
comply with the general ability-to-repay standard.
---------------------------------------------------------------------------
Appendix Q, as adopted, contains detailed requirements for
determining ``debt'' and ``income'' for the purposes of the DTI
calculation based on the definitions of those terms set forth in HUD
Handbook 4155.1, Mortgage Credit Analysis for Mortgage Insurance on
One-to-Four-Unit Mortgage Loans. The standards in the Handbook are used
by creditors originating residential mortgages insured by the Federal
Housing Administration (FHA) to determine and verify a consumer's total
monthly debt and monthly income. For the purposes of appendix Q, the
Bureau largely codified the Handbook, but modified various portions of
it to remove standards and references unique to the FHA underwriting
process.
In adopting appendix Q in the 2013 ATR Final Rule, the Bureau
believed that using, to the extent possible, existing HUD/FHA
underwriting guidelines as the foundation for determining ``debt'' and
``income'' for DTI purposes would provide creditors with well-
established standards for determining whether a loan is a qualified
mortgage under Sec. 1026.43(e)(2).
Following publication of the 2013 ATR Final Rule, the Bureau
received a number of inquiries from industry stakeholders regarding
provisions codified in the appendix that they believed had been
intended to function as flexible standards used by the FHA for
insurance underwriting purposes, rather than codified as bright-line
requirements for determining debt and income. Concerns were raised that
these provisions may be properly suited for the purposes of a holistic
and qualitative underwriting analysis but are not well-suited to
function as regulatory requirements that are not subject to
discretionary variance or waiver on an individual basis. Stakeholders
also expressed concern that many of these provisions provided little
clarity or guidance for creditors for compliance purposes. Similarly,
stakeholders expressed concerns that the broad nature of these
provisions could undermine the presumption of compliance available to
creditors who make qualified mortgages and expose them to significant
litigation risk.
In response to these concerns, the Bureau included certain proposed
revisions to appendix Q in its proposed rule to facilitate compliance
when determining DTI and to further the purposes of the ATR Final Rule.
The Bureau agreed that certain provisions of appendix Q as adopted were
not properly suited to function as regulations. The Bureau intended
appendix Q to serve as a reliable mechanism for creditors to evaluate
income and debts for the purpose of determining DTI and not as a
general and flexible underwriting policy for assessing risk (as it is
used by FHA in the context of insurance). The Bureau also recognized
that it would not have the same level of discretion regarding the
application of appendix Q.\53\
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\53\ 78 FR 25648.
---------------------------------------------------------------------------
The Bureau therefore proposed revisions to appendix Q on: (1)
Stability of income, and the creditor requirement to evaluate the
probability of the consumer's continued employment; (2) with regard to
salary, wage, and other forms of consumer income, the creditor
requirement to determine whether the consumer's income level can
reasonably be expected to continue; (3) creditor analysis of consumer
overtime and bonus income; (4) creditor analysis of consumer Social
Security income; (5) requirements related to the analysis of self-
employed consumer income; (6) requirements related to non-employment
related consumer income, including creditor analysis of consumer trust
income; and (7) creditor analysis of rental income.
The Bureau also proposed other revisions to clarify the application
of appendix Q, as well as general technical and wording changes
throughout appendix Q for consistency and clarification, including
technical changes to conform to the specific purpose that appendix Q
serves in the 2013 ATR Final Rule, as opposed to the function that the
HUD Handbook serves for FHA underwriting.
Overview of Comments on Bureau's Appendix Q Proposals
Commenters, including both industry and consumer commenters,
generally supported the Bureau's proposed changes to appendix Q. A bank
for example stated that it appreciated the Bureau's efforts to
establish clear and reliable standards within appendix Q, and that it
generally believed the proposed amendments would allow creditors to
underwrite loans with improved confidence that appendix Q standards
have been met. A bank trade association stated that it appreciated the
Bureau's efforts to clarify the ability-to-repay regulations and stated
that it believed the Bureau's proposals would go a long way in
improving the final rules. A state credit union association stated that
it strongly supported the Bureau's proposed changes to appendix Q as
certain provisions adopted in appendix Q are not suitable to function
as regulations. A consumer organization stated its support for the
Bureau's clarifications of appendix Q but also suggested the need for
further clarifications. Most commenters suggested additional
clarifications to appendix Q, some specific to the Bureau's proposals,
and some beyond the Bureau's specific proposals--including general
revisions.
Response to General Comments on Appendix Q
The Bureau appreciates the comments received on its appendix Q
proposals. The Bureau believes that the proposals as adopted in this
final rule will further the purpose and intent of appendix Q by
establishing clearer requirements for assessing the debt and income of
consumers, while at the same time facilitating creditor compliance and
access to credit for consumers. The comments received generally support
the Bureau's view.
I. CONSUMER ELIGIBILITY
A. Section I.A. Stability of Income
The Proposal
The Bureau proposed revising the criteria in appendix Q for
determining whether a consumer's income is ``stable'' for the purposes
of DTI.
Appendix Q as adopted required in section I.A.3.a that creditors
evaluate the ``probability of continued employment'' by analyzing,
among other things, (1) the consumer's past employment record; (2) the
consumer's qualification for the position; (3) the consumer's previous
training and education; and (4) the employer's confirmation of
continued employment. Stakeholders had raised concerns that, beyond
analysis of a consumer's past employment record and current employment
status, each of these requirements was incompatible with appendix Q's
purpose of providing clear rules for determining debt and income, and
was likely to result in compliance difficulty and significant exposure
to litigation risk for creditors attempting to avoid such risk by
originating qualified mortgages and thereby taking advantage of the
presumption of compliance. Stakeholders, for example, indicated
[[Page 44704]]
that many employers were likely to be unwilling for various reasons
(including but not limited to economic uncertainty) to confirm that a
consumer's employment will continue into the future, and similarly
creditors may be unqualified to evaluate a consumer's education,
training, and job qualifications.
In response to these concerns, the Bureau proposed to amend
appendix Q in section I.A.3.a to eliminate the requirements that
creditors determine the ``probability of continued employment'' by
considering a consumer's ``qualifications for the position'' and
``previous training and education.'' The Bureau proposed instead to
amend the section to require creditors to examine a consumer's past and
current employment. The Bureau also proposed to remove the requirement
that creditors obtain the ``employer's confirmation of continued
employment'' and instead require only that the creditor examine the
``employer's confirmation of current, ongoing employment status.'' The
Bureau believed that requirements for a creditor to evaluate a
consumer's training, education, and qualifications for his or her
position are not well-suited to function as regulations designed to
enable creditors to determine debts and income and in turn calculate
DTI, and may increase exposure to litigation risk. Specifically, the
Bureau indicated that it was not entirely clear what creditors would
need to do in order to comply with these requirements, or how those
determinations would affect a consumer's income for the purpose of
calculating DTI.
The Bureau also stated its belief that requiring creditors to
obtain an employer's confirmation of the consumer's continued
employment would not function properly as a regulatory requirement
because employers likely would be unwilling to provide any confirmation
of employment continuing beyond current, ongoing employment. The Bureau
pointed out that without the benefit of waiver or variance, such a
requirement could serve to disqualify any such consumer's employment
income from being included in the DTI calculation--which would
frustrate access to credit.
The Bureau stated further that a confirmation of current, ongoing
employment status is adequate to verify employment for purposes of
determining income. To that end, the Bureau also proposed for
clarification purposes a proposed note to section I.A.3 that states
creditors may assume that employment is ongoing if a consumer's
employer verifies current employment and does not indicate that
employment has been, or is set to be terminated. The proposed note made
clear, however, that creditors should not rely upon a verification of
current employment that includes an affirmative statement that the
employment is likely to cease, such as a statement that indicates the
employee has given (or been given) notice of employment suspension or
termination.
Finally, the Bureau also proposed several other technical, non-
substantive changes to section I.A for clarification purposes.
Comments
Commenters, primarily from industry, who submitted comments
concerning the Bureau's proposed changes to section I.A.3 were
generally supportive of those changes although some clarification or
additional guidance was suggested by several.
Several bank trade associations and a bank, in expressing support
for the changes, noted that: (1) While it is reasonable to require an
examination of current employment, provisions which require a creditor
to speculate or predict future employment are problematic; (2)
creditors should not be asked to second guess employer hiring decisions
or be expert in establishing qualifications for positions; (3) the
eliminated criteria could have a negative impact on consumers with ``on
the job'' education; and (4) employers will not discuss certainty of
continued employment for fear that it could create a new employment
contract for at-will employees. These commenters also suggested that
the Bureau provide guidance that verbal confirmation would satisfy the
requirement that the creditor examine the employer's confirmation of
the consumer's ``current, ongoing employment status'' as provided in
I.A.3.a as proposed by the Bureau.
A state banking association commenter, in expressing support for
the Bureau's proposal to replace the section I.A.3.a requirement that
the creditor obtain an employer's ``confirmation of continued
employment'' for an applicant with a requirement to ``confirm current,
ongoing employment,'' requested that the Bureau provide additional
clarification for instances in which employment is inherently dependent
on contingencies outside the employee's or employer's control--such as
applicants whose salaries are funded through ongoing grants, agency
funded positions at a nonprofit organization or federal work programs,
or applicants who are political appointees. A national banking
association commenter requested similar clarification noting that
flexibility is required to ensure that all populations are adequately
served.
One commenter, a manufactured housing lender, with regard to the
Bureau's proposed note amending section I.A.3.a, stated that the Bureau
should make clear that the creditor has no obligation to inquire--
either in writing or verbally--as to the employee's job performance
and/or whether any suspension or termination is imminent.
A credit union commenter that indicated that it serves the
education community stated, in referring to the Bureau's proposed note
amending I.A.3.a, that the employment of many of its members who are
teachers, professors and other educators is established by year-to-year
contracts that generally include a termination date. The commenter
noted that these contracts are generally renewable and negotiated
through the teacher's association or other union representation. The
commenter stated that the Bureau's proposed note would likely preclude
it from relying upon a copy of a member's contract as evidence of
stability of income since if the contract included a termination date
the commenter would be unable to assume that the member's employment is
``ongoing.'' The commenter suggested the proposed note be expanded to
consider fields of employment that may be viewed as ``seasonal'' or
industries where employment is established by contract, such as the
education community, so that a creditor could also examine past and
current employment as part of its analysis of the stability of income.
The manufactured housing lender commenter also suggested that if
the Bureau adopted its proposal to amend section I.A.3.a to eliminate
the obligation of creditors to predict a consumer's likelihood of
continued employment, that it remove existing section I.A.3.b. Section
I.A.3.b provides that ``creditors may favorably consider the stability
of a consumer's income if he/she changes jobs frequently within the
same line of work, but continues to advance in income or benefits. In
this analysis, income stability takes precedence over job stability.''
The commenter stated that this section existed as a caveat to the
obligation of creditors to predict a consumer's future employment or
advancement, and with the elimination of that requirement it is no
longer necessary.
[[Page 44705]]
Final Rule
The Bureau is adopting the revisions to section I.A.3 as proposed.
The Bureau agrees with commenters that elimination of the requirements
that the creditor: (1) examine the consumer's qualifications for the
position, previous training and education; and (2) examine the
employer's confirmation of the consumer's continued employment--will
provide clearer and more appropriate standards for creditors under
appendix Q, and facilitate compliance with the Bureau's ATR Final Rule.
With regard to the comment suggesting that the Bureau amend its
proposed note in section I.A.3.a to expand it to consider industries
where employment is established by contract, including the education
community, the Bureau appreciates the comment and recognizes the
special circumstances confronted by contract employees. The Bureau
believes, however, that additional revisions to section I.A.3.a are not
necessary given the existing provisions of appendix Q with regard to
the treatment of seasonal employment and income. That language, at
sections I.A.2.b and I.B.5, provides the means for creditor assessment
of the employment and stability of income of contract employees for
purposes of appendix Q.\54\
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\54\ The Bureau notes that Section II.E.4, Projected Income for
New Job, provides the means for creditor assessment of projected
income where such income does not already satisfy the requirements
of Section I.
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With regard to the comment requesting that the Bureau clarify that
the creditor has no obligation to inquire about a consumer's job
performance and/or whether any suspension or termination is imminent,
the Bureau's revisions to I.A.3.a do not require creditors to
affirmatively make such inquiries. That section, as revised, only
provides that a creditor cannot rely on a verification of current
employment if it includes an affirmative statement that employment is
likely to cease.
Concerning the comment requesting that the Bureau provide guidance
to explicitly allow verbal confirmation by employers of the consumer's
current, ongoing employment status, the Bureau would like to review
this request further to ensure that such guidance would be consistent
with the purposes of appendix Q and the ATR Final Rule. Similarly, with
regard to the comment requesting clarification that a creditor's
obligation to only consider a consumer's past and current and ongoing
(and not continual) employment as proposed by the Bureau includes
employment in contingent situations outside of the employee's or
employer's control, the Bureau plans to review this issue further to
determine whether such clarification to the existing appendix Q
requirements is necessary, and how any such clarification would be
framed. As discussed above, the Bureau believes appendix Q provides
creditors with the ability to assess the employment and stability of
income of employees generally and contract employees in particular.
Finally, with regard to the comment recommending the deletion of
section I.A.3.b as unnecessary with the adoption of the Bureau's
proposed revisions to section I.A.3.a, the Bureau disagrees, as it
believes that section I.A.3.b, as amended by the Bureau's proposed
revisions, has continuing relevance in the determination of the
stability of the consumer's income. As revised, section I.A.3.a
requires an examination of the consumer's past employment record and a
verification of current, ongoing employment status as a method of
assessing stability of income. Section I.A.3.b provides creditors with
an additional method of assessing stability of income, and of meeting
the ability to repay and qualified mortgage requirements, in the
situation where a consumer changes jobs frequently.
B. Section I.B. Salary, Wage and Other Forms of Income
Section I.B.1.a of appendix Q, the ``General Policy on Consumer
Income Analysis,'' as adopted in the ATR Final Rule stated that
creditors must analyze the income for each consumer who will be
obligated for the mortgage debt to determine whether his/her income
level can be reasonably expected to continue ``through at least the
first three years of the mortgage loan.'' Sections I.B.2 and I.B.3 of
appendix Q as adopted similarly required that creditors determine
whether overtime and bonus income ``will likely continue'' and that
they ``establish and document an earnings trend for overtime and bonus
income.'' The Bureau received inquiries from industry stakeholders on
these sections of Appendix Q similar to those received regarding
section I.A.1, noting, among other things, (1) that these provisions
codify general, forward-looking standards that are better suited for
the purposes of a holistic and qualitative underwriting analysis (such
as the FHA guidelines for determining insurance eligibility) and may
not function properly as regulations; and (2) because the Bureau may
not have the flexibility to waive or grant variances on an individual
basis regarding the application of appendix Q, these provisions will
undermine the purpose of appendix Q to serve as a reliable mechanism
for evaluating income and debts for the purpose of determining the
qualified mortgage status of a loan, and also increase the risk of
litigation.
In response to these issues raised by stakeholders, the Bureau
proposed several amendments to section I.B of appendix Q to explain and
clarify the criteria for calculating a consumer's employment income and
to determine whether a consumer's income is continuing for the purposes
of the DTI calculation.
I.B.1. General Policy on Consumer Income Analysis
The Proposal
The Bureau proposed to amend section I.B.1.a to require creditors
to evaluate only whether a consumer's income level would not be
reasonably expected to continue based on the documentation provided,
with no three-year requirement. In support of this proposal, the Bureau
stated its belief that the intended purpose of appendix Q would not be
served by requiring creditors to predict a consumer's employment status
up to three years after application. The Bureau stated further that
creditors should be required to analyze recent and current employment,
along with any evidence in the applicant's documentation indicating
whether employment is likely to continue. The Bureau therefore,
proposed to add a note to section 1.B.1.a to make clear that creditors
should not assume that a consumer's wage or salary income can be
reasonably expected to continue if the verification of current
employment includes an affirmative statement that the employment is
likely to cease, such as a statement that indicates the employee has
given (or been given) notice of employment suspension or termination.
The Bureau stated however, that if the consumer's application and the
employment confirmation indicate that the consumer is currently
employed and provide no such indication that employment will cease, the
Bureau believed, as reflected in the proposed note, that the creditor
should be able to use that consumer's income without an obligation to
predict whether or not that consumer will be employed on some future
date.
Comments
Various industry participants commented on the Bureau's proposed
amendments to section 1.B.1.a of appendix Q, and the elimination of the
3-year requirement. These commenters
[[Page 44706]]
suggested additional clarifications to this section.
A joint bank trade association and a bank recommended revising
section 1.B.1.a to require each consumer to disclose to the lender
whether the consumer has reason to believe that their income level will
not continue through the first three years of the mortgage. These
commenters noted that consumers are in the best position to know
whether they expect to retire, take a leave of absence or otherwise not
have their income continue for the first three years of the mortgage
loan, and that lenders have no way to reliably determine this. They
stated further that questioning consumers about retirement or time off
to raise children raises potential fair lending issues. They also
requested guidance on the treatment of statements from consumers such
as, ``I might retire.''
Another bank trade association, in commenting on the Bureau's
proposed elimination of the requirement to analyze whether the
consumer's income level can reasonably be expected to continue through
the first three years of the mortgage loan, requested clarification of
how far into the future creditors must reasonably expect income to
continue.
One bank commenter in stating its support for the Bureau's proposed
changes in sections I.B.1, 2 and 3, stated that it agreed with the
Bureau that creditors cannot be reasonably expected to evaluate and
document whether a consumer's income level can be expected to continue
for a three-year period.
Various other commenters suggested several other changes to section
I.B. For example, similar to the joint bank trade association comment
on I.B.1.a discussed above, several commenters raised possible fair
lending issues with regard to the section I.B.1 notes, specifically,
section i, which states that effective income for consumers planning to
retire during the first three-year period must include documented
retirement benefits, Social Security payments, and other payments
expected to be received in retirement. One bank, for example, stated
that while it supported the existing section i it recommended that, to
mitigate potential fair lending risks based on age, the Bureau add a
clarification that creditors should not ask consumers about future
retirement plans, but should consider documented retirement benefits
and payments if a consumer disclosed a plan to retire during the first
three-year period. Another bank commenter similarly requested that the
Bureau explicitly state, for fair lending reasons, that creditors are
not expected to ask consumers if they plan to retire. This commenter
also noted that it would be impracticable if not impossible to get
documented benefits and payments if the consumer has yet to actually
receive any retirement income and may not activate the source for up to
a period of three years. The joint bank trade association commenter
referred to above suggested adding language to section i of the notes
indicating that effective income requirements for consumers planning to
retire only applies to those who disclose such plans. A bank commenter,
citing existing section ii of the notes, which prohibits creditors from
asking consumers about possible future maternity leave, suggested, for
fair lending reasons, that the Bureau add a clarification that
creditors should not ask consumers about future medical leaves, and a
joint bank trade association commenter suggested changing the term
``maternity'' leave to ``medical'' leave in section ii of the notes.
Final Rule
The Bureau is adopting the revisions to section I.B.1 as proposed.
The Bureau continues to believe that the requirement in section I.B.1.a
eliminated by the Bureau's proposal, i.e., that the consumer's income
must be analyzed to determine whether the consumer's income level can
be reasonably expected to continue ``through the first three years of
the mortgage loan,'' does not serve the intended purposes of appendix
Q. Instead, as proposed, the Bureau revises section I.B.1.a to require
only that the creditor determine whether a consumer's income level
``can be reasonably expected to continue.'' New section iii of the
notes to section I.B.1, adopted by this final rule, provides that
creditors can assume that the consumer's salary or wage income can be
reasonably expected to continue if the consumer's employer verifies
current employment and income and does not indicate that employment has
been or is set to be terminated. That section states further, however,
that this assumption cannot be made by the creditor if a verification
of current employment includes an affirmative statement that the
consumer's employment is likely to cease--such as a statement that the
consumer has given or been given notice of employment suspension or
termination. The Bureau believes that, as revised by this final rule,
section I.B.1 effectively sets out the analysis required of the
creditor for assessing the continuance of consumer salary and wage
income, and is consistent with the purposes of appendix Q.
With regard to the commenter that requested clarification to
appendix Q on how far into the future creditors must reasonably expect
a consumer's income to continue, the Bureau believes that section
I.B.1.a, as revised by the Bureau, effectively sets out the standard
needed to be followed by creditors. As stated in new section iii of the
notes, creditors can ``assume that salary or wage income . . . can be
reasonably expected to continue if the consumer's employer verifies
current employment and income and does not indicate that employment has
been or is set to be terminated.'' That section, as revised by the
Bureau, does not require creditors to make a determination that the
consumer's income will continue through the first three years of the
mortgage loan, or any other specified period.
The Bureau appreciates the recommendations from some commenters
that section I.B.1 be amended to require consumers to disclose whether
they have reason to believe their income level will not continue as the
consumer is in the best position to know their future employment and
income status. However, section I.B.1 already provides that creditors
may assume that the consumer's salary or wage income can be reasonably
expected to continue if the consumer's employer verifies current
employment and income and does not indicate that employment has been,
or is set to be terminated. Where no such appropriate verification is
provided, the creditor must analyze the consumer's income and determine
whether the consumer's income level can be reasonably expected to
continue. In such cases, the Bureau believes that further analysis
should be required of creditors, and that, as revised, section I.B
provides creditors with an effective regulatory framework for carrying
out that analysis.
With regard to the fair lending concerns raised by some commenters
regarding questions presented to consumers relating to future
retirement plans, the Bureau agrees that the final rule and appendix Q
do not obligate creditors to ask consumers when they expect to retire.
If, however, a consumer discloses a plan to retire during the first
three-year period by making an affirmative statement of such plans,
creditors should consider documented retirement benefits, Social
Security payments, and other payments expected to be received in
retirement. The Bureau similarly believes that the ATR Final Rule and
appendix Q do not require
[[Page 44707]]
creditors to ask whether a consumer may, in the future, take medical
leave. The Bureau does not believe it is necessary, however, to amend
appendix Q with specific statements in that regard. In all cases, the
Bureau expects creditors to fully comply with all applicable fair
lending laws.
I.B.2. Overtime and Bonus Income.
The Proposal
The Bureau also proposed changes to section 1.B.2 regarding
overtime and bonus income.\55\ Specifically, the Bureau proposed to
eliminate the requirement in section I.B.2.a that creditors determine
whether such income ``will continue.'' Instead, the proposal would have
amended section I.B.2.a. to provide that creditors must focus on
evaluating the consumer's documented overtime and bonus income history
for the past two years and any submitted documentation indicating
whether the income likely will cease. In proposing this change the
Bureau stated that it recognized that overtime and bonus income may
vary from year to year and generally may be less reliable than salary
but noted that, in certain occupations, overtime and bonus income may
be an integral and reliable component of the consumer's income. The
Bureau stated further that while it believed that creditors must
confirm that overtime and bonus income is not anomalous, the
requirement to analyze the consumer's two-year overtime and bonus
income history, and to verify that the submitted documentation does not
indicate overtime or bonus income will cease, would adequately address
this concern while satisfying the purposes of the qualified mortgage
provision.
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\55\ The Bureau's proposed rule preamble at 78 FR 25650 also
briefly referred to Bureau changes to section I.B.3. However, this
was a typographical error and no Bureau changes were proposed to
section I.B.3.
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Comments
Several industry commenters, including several banks, a joint trade
association, several state bank associations, and a state credit union
association provided comments specific to the Bureau's proposed change
to section I.B.2.a. These commenters generally supported the Bureau's
proposed changes. Some of these commenters suggested additional changes
to sections I.B.2 and I.B.3.
A bank commenter, in stating support for the Bureau's proposed
change eliminating language requiring creditors to determine whether
overtime and bonus income will continue, and substituting language
focusing on a two-year income history, commented that the change would
facilitate better access to credit for consumers who rely on overtime
and bonus income. Two state bank associations similarly expressed
support for the Bureau's proposed change, with one stating that while
most employers are not willing to indicate bonus income is likely to
continue, they are willing to affirm such bonus payments were paid and
if they have ceased to exist. This second bank association commenter
stated further that in the absence of confirmation from the employer
that a bonus program or overtime is no longer available to an employee,
past history is an excellent predictive tool. Another bank commenter,
in stating that the Bureau's analysis supporting its proposed change to
I.B.2.a on overtime and bonus income was sound, recommended that the
formulation for assessing overtime and bonus income in that section be
applied to other parts of appendix Q, on different types of income.
A state credit union association commenter stated that while the
Bureau's proposed change to section I.B.2.a is adequate to satisfy the
qualified mortgage provision, there are still concerns from credit
unions that warrant further guidance. Specifically, this commenter
requested that the Bureau provide examples of documentation and/or
further clarification to assist in determining whether bonus and
overtime income is anomalous.
A joint trade association commenter suggested revisions to section
I.B.2.a to provide that overtime and bonus income can be used if the
consumer has received the income for the past two years and there is no
evidence in the loan file that it will not continue. In support of this
revision, the commenter stated that the lender should not be in a
position to determine that the income will or will not continue. The
commenter further stated that the two-year history should satisfy this
element on its own absent evidence to the contrary.
A credit union commenter stated that in some lines of work such as
nursing, overtime is a standard component of the overall compensation
plan. It stated further that the requirement in section I.B.2.a, as
revised by the Bureau's proposal, to document and evaluate at least two
years of overtime income, could adversely impact certain consumers who
are new to their field or recently hired and do not yet have two years
of overtime history. The commenter urged the Bureau to reconsider the
impact on nurses, firefighters and law enforcement personnel who are
just beginning their careers, and to make appropriate adjustments to
the proposed revision.
A mortgage lender specializing in the financing of manufactured
housing commented on section I.B.2.b, which, in addition to requiring
creditors to develop an average of bonus and overtime income for the
past two years, states that ``periods of overtime and bonus income less
than two years may be acceptable provided the creditor can justify and
document in writing the reason for using the income for qualifying
purposes'' (emphasis added). This commenter stated that without clear
direction and guidance from the Bureau as to what justification and
documentation would suffice in these instances, lenders will instead
choose to exclude this income rather than face regulatory scrutiny and
a potential lawsuit for choosing to include the income. A joint trade
association commenter suggested several technical edits to I.B.2.b.
Several industry commenters provided comments on section I.B.3.
Section I.B.3.a requires a creditor to establish and document an
earnings trend for overtime and bonus income and, if either type of
income shows a continual decline, to document in writing a sound
rationalization for including the income when qualifying the consumer.
Section I.B.3.b provides that a period of more than two years must be
used in calculating the average overtime and bonus income if the income
varies significantly from year to year.
With regard to section I.B.3, a joint trade association commenter
suggested removing and reformatting this section as part of a new
I.B.2.c and I.B.2.d to provide that eligible bonus or overtime income
be calculated as the lesser of the current year or the average of the
previous two years, as long as there is no evidence in the loan file
that the income will not continue, and the creditor documents in
writing a sound rationalization for including the income. This
commenter noted that income from bonuses and overtime, commissions and
self-employment can be variable and susceptible to significant declines
from circumstances within and outside of the control of the consumer.
The commenter stated that the revisions it was proposing to this
section and others in appendix Q would provide a new and simple
qualitative test for determining the amount of income to include in the
DTI analysis. The commenter stated that the test would require lenders
to use the lesser amount of the average of two
[[Page 44708]]
year's past income or the most recent year's earnings.
With specific regard to section I.B.3.b, which states that `a
period of more than two years must be used in calculating the average
overtime and bonus income if the income varies significantly from year
to year,'' this joint trade association commenter stated that the word
``significantly'' in that section is too vague for a legal standard and
will invite litigation. It stated further that lenders should only use
the most recent income, not the average, for declining income and
provide a rationale for the inclusion of the income. A bank similarly
commented on section I.B.3.b, that as the term ``varies significantly''
in that section is not defined that the requirement in that section
that a period of more than two years must be used in calculating the
average overtime and bonus income either be eliminated or clarified.
Final Rule
The Bureau is adopting the revisions to section I.B.2 regarding
overtime and bonus income as proposed. The Bureau believes that the
revisions proposed to section I.B.2.a, eliminating language requiring
creditors to determine whether overtime and bonus income will continue,
and substituting language that states that such income can be used if
the consumer has received it for the past two years and documentation
submitted for the loan does not indicate this income will likely cease,
will facilitate creditor compliance and, as stated by a commenter,
better access to credit for consumers who are dependent upon overtime
and bonus income. At the same time the Bureau believes that the changes
to this section otherwise further the purpose and intent of appendix Q
and the qualified mortgage provision through clear requirements for a
creditor assessment of the consumer's receipt of the overtime or bonus
income for the previous two years, and a review of the loan
documentation for indications that the income will likely cease. As
some commenters noted, employers may not be willing to indicate if
bonus income, for example, is likely to continue, and in the absence of
employer confirmation, past history can be used as a predictive tool.
With regard to other proposed changes to section I.B.2.a raised by
commenters, such as a suggestion to substitute language that there is
no evidence in the loan file that the overtime or bonus income will not
continue, or possible changes to address the potential impact of the
two-year requirement on new employees who depend on overtime or bonus
income, the Bureau believes that the Bureau's revisions strike the
right balance between facilitating compliance and ensuring an adequate
assessment of consumer income for purposes of the DTI and the ATR
requirements. For example, as revised by this final rule, section
I.B.2.a provides that bonus or overtime income may be used if the
documentation in the loan file does not indicate that the consumer's
overtime or bonus income ``will likely cease,'' which is very similar
to the language suggested by the commenter. To the extent that the
commenter's proposed language would have a different effect, the Bureau
believes that the final rule's approach provides clear, objective
guidance to creditors that is consistent with the analysis required by
the rest of appendix Q. As for the potential impact of the two-year
requirement on new employees, the Bureau believes that current section
I.B.2.b, as discussed further below, provides creditors with the
ability to assess the overtime and bonus income of new employees.
As for comments on sections beyond the Bureau's specific proposed
changes to section I.B.2.a, for example with regard to sections I.B.2.b
and I.B.3, the Bureau does not believe any changes to those sections
are warranted at this time. With regard to section I.B.2.b for example,
the Bureau believes that section provides flexibility for creditors to
justify and properly document the use of a period of overtime and bonus
income of less than two years. The other requirements of section
I.B.2.a (that documentation submitted for the loan does not indicate
the overtime or bonus income will likely cease) and section I.B.3.a
will continue to apply to the income analysis of the consumer. With
regard to the comments on section I.B.3, suggesting a removal of that
section and a reformatting into a new test in section I.B.2.c. for
determining the amount of income to include in the DTI analysis, the
Bureau appreciates the comment but believes that sections I.B.2, as
amended by this final rule, and I.B.3, provide for a required income
analysis consistent with the purposes and intent of appendix Q.
Regarding the comments on section I.B.3.b, the Bureau will continue to
review this section to determine if further clarification is needed
with regard to a creditor determination of whether overtime or bonus
income ``varies significantly,'' but is not making any changes at this
time. The Bureau needs additional information in order to fully assess
whether this standard requires additional clarification for creditors
in making the necessary appendix Q determinations, and whether possible
alternative standards would be adequate.
I.B.11. Social Security Income
The Proposal
The Bureau proposed several clarifications to the provisions in
section I.B.11 of appendix Q as adopted, explaining how to account for
Social Security income.
Section I.B.11 as adopted by the ATR Final Rule required that (1)
Social Security income either be verified by the Social Security
Administration (SSA) or through Federal tax returns; (2) the creditor
obtain a complete copy of the current awards letter; and (3) the
creditor obtain proof of continuation of payments, given that not all
Social Security income is for retirement-aged recipients. The Bureau
proposed to amend section I.B.11 to remove the mention of Federal tax
returns and instead require only that creditors obtain a benefit
verification letter issued by the SSA. In support of this change the
Bureau stated its belief that a Social Security benefit verification
letter would provide easily accessible proof of the receipt of Social
Security benefits and their continuance.
The Bureau also proposed to clarify in section I.B.11 that a
creditor shall assume a benefit is ongoing and will not expire within
three years absent evidence of expiration. The Bureau stated, in
support of this change, its belief that this would provide a more
workable and accurate standard for verification of Social Security
income.
Comments
Several banks, national and state banking trade associations, a
state credit union, and a consumer group submitted comments on the
Bureau's proposal to amend section I.B.11 to remove the reference to
Federal tax returns and to require creditors to obtain a benefit
verification letter. Most industry commenters saw the change as
reducing compliance flexibility, and the consumer group requested
further changes to protect against falsification of income.
With regard to the industry commenters, a bank trade association
stated that it could find no justification for what it saw as
eliminating the flexibility of allowing the use of Federal tax returns
in the current rule. It stated that while it agreed with the Bureau's
explanation for the change, i.e., that a Social Security benefit
verification letter would more easily provide proof of the receipt of
Social Security benefits and their continuance, the explanation did
[[Page 44709]]
not provide a reason to eliminate the Federal tax return option. A bank
commenter requested that I.B.11 be revised to permit Federal tax
returns or other alternative documentation that verifies receipt of
Social Security Income. A state banking association commented that in
many cases applicants have lost or misplaced their award letters but
that they can easily document and verify Social Security income through
Federal tax returns and/or monthly bank statements. Another state
banking association stated that the Federal tax return option would
facilitate compliance. A state credit union commented that it was
concerned that limiting verification to a benefit verification letter
could facilitate discrimination. Another state credit union trade
association, in stating its concern about the supposed elimination of
the Federal tax return option, stated that it could delay the lending
process as a result of consumers who cannot locate their Social
Security benefit verification letter and who therefore need to request
a copy from the SSA, resulting in a potential increased workload for
the SSA. A credit union commenter, in recommending the Federal tax
return option, stated that sole reliance on the Social Security benefit
verification letter could pose a potential risk of fraud through a
modification of the letter by the recipient before it is received by
the lending institution.
One bank commenter stated that it supported the Bureau's proposal
to require creditors to obtain a Social Security benefit verification
letter to verify Social Security income, but recommended the adoption
of language acknowledging that creditors may obtain federal tax returns
in addition to verification letters. This commenter noted that tax
returns may be useful to creditors to determine an applicable tax rate
used to gross up non-taxable Social Security income, and that they may
be needed to verify income received other than from Social Security.
This commenter also stated its support for the Bureau's proposed
clarification providing that Social Security income shall be assumed
not to expire within three years, absent evidence of expiration,
stating that it would reduce potential barriers to accessing credit for
Social Security income recipients, while providing creditors clear
guidance to mitigate fair lending risk.
A consumer group commenter stated that so long as the documentation
requirements for Social Security income require that the Social
Security benefit verification letter come directly from the SSA, this
documentation is sufficient. It noted, however, that if the
verification letter is delivered to the lender through a broker or
originator working for the lender, this is not sufficient documentation
as it may become a vehicle for falsification of income. The commenter
therefore recommended that section I.B.11 be revised to require
creditors to use either tax returns or bank statements showing the
deposit of benefits into the bank account, in addition to requiring a
verification letter--where the verification letter cannot be obtained
directly from the government payor. The commenter noted that the
additional information will provide more substantial verification in a
form that is still readily available to applicants. It concluded on
this point that this approach will ensure that homeowners have easy
access to needed income documentation without providing a means for
public benefit documentation to be used to inflate income on a loan.
This commenter also suggested, referring to section ii of the notes to
section I.B.11 (which allows some portion of Social Security income to
be ``grossed up'' if deemed non-taxable by the IRS), that the Bureau
should specify that grossing up of Social Security benefits should be
done based on a tax bracket that is appropriate for the income
received. It stated further on this point that the language currently
in I.B.11 will lead to and support the existing practice of grossing up
that allows, rather than prevents, many unaffordable loans, as many
homeowners who receive Social Security benefits have their income
grossed up to the top tax bracket.
Final Rule
The Bureau is adopting the revisions to section I.B.11 as proposed.
The Bureau believes that the Social Security benefit verification
letter provides the best method of verifying receipt of Social Security
income by the consumer and its continuance. The Bureau understands the
concerns expressed by various industry commenters regarding the
potential limitation on compliance flexibility resulting from the
removal of the supposed option to verify Social Security income through
Federal tax returns. The Bureau notes, however, that section I.B.11 as
adopted in the 2013 ATR Final Rule required, in addition to income
verification by the SSA or Federal tax returns, a complete copy of the
current awards letter, and documented continuation of payments. The
proposed revisions to section I.B.11 simplify these requirements by
providing that one document--the Social Security benefit verification
letter--satisfies all needs for documentation. A Federal tax return is
of less value in demonstrating a consumer's continued receipt of Social
Security income and would not be available for consumers who only
recently began to receive Social Security benefits. Section I.B.11 as
revised by the final rule specifically provides that if the Social
Security benefit verification letter does not indicate a defined
expiration date within three years of loan origination, the creditor
must consider the income effective and likely to continue. The
consumer's bank statements, suggested by some commenters as an
alternative means to verify income, also are of less value in
demonstrating continuance of receipt. The Bureau notes moreover that
continuing to require the Social Security benefits letter to verify
that such benefits are not likely to cease parallels the general
requirement of employer verification of current, ongoing employment.
As far as the concern expressed by a commenter that the Social
Security benefit verification letter could become a vehicle for
falsification of income if not required to be received directly from
the government payor--and in which case it was suggested that tax
returns or bank statements be required as additional verification--the
Bureau believes that effective due diligence by creditors will limit
such a possibility. The Bureau expects that creditors will exercise the
same due diligence against fraud with regard to their review of Social
Security benefit verification letters that they apply in their review
of any mortgage loan related documents submitted to them. With regard
to the comments received expressing concern about consumers who are
unable to locate their Social Security Benefit verification letters, it
is the Bureau's understanding that benefit verification letters may be
requested on-line or over the phone toll-free from the SSA or from a
local SSA office.
Finally, with regard to the comment requesting that the Bureau put
limitations on the grossing up of Social Security benefits (as
permitted under section I.B.11 in some instances), the Bureau is not
addressing that issue at this time, as this requires further review and
consideration. Other commenters made suggestions for changes with
regard to section II.E, Non-Taxable and Projected Income, and the
gross-up rate allowed for non-taxable income generally (discussed later
in this preamble) which, in addition to Social Security income,
includes Federal government employee retirement income, State
government retirement income, military allowances, as well as
[[Page 44710]]
other types of income. The Bureau needs additional time to fully
consider and evaluate the implications of these comments, including
those specifically related to Social Security income, to ensure
consistency with and furtherance of the purposes of appendix Q.
C. Section I.D. General Information on Self-Employed Consumers and
Income Analysis
The Proposal
Section I.D of appendix Q, as adopted, permitted income from self-
employed consumers to be considered income for the purposes of the DTI
calculation if certain criteria were met, including various
documentation requirements and analysis of the financial strength of
the consumer's business. The documentation requirements in section
I.D.4 included the requirement to provide a ``business credit report
for corporations and `S' corporations.'' The analysis of the financial
strength of the business in section I.D.6 required that the creditor
carefully analyze the ``source of the business's income'' and the
``general economic outlook of similar businesses in the area.''
Following the publication of appendix Q the Bureau received inquiries
from stakeholders concerning these requirements and also noted
compliance difficulties and increased risk of litigation that could
arise from them. Industry raised specific concerns that business credit
reports can be expensive and difficult to obtain, and that a
requirement to assess economic conditions for geographic areas can be
both costly and difficult, as well as imprecise.
The Bureau proposed to make several amendments to these income
stability requirements for self-employed consumers. The Bureau's first
proposed amendment eliminated the requirement in current section I.D.4
that self-employed consumers provide a business credit report for
corporations and ``S'' corporations. In proposing this amendment the
Bureau stated that it recognized that business credit reports for many
smaller businesses can be difficult or very expensive to obtain. The
Bureau also stated its belief that while these reports may provide some
valuable information for the purposes of an underwriting analysis, they
are less suited to function as a requirement to determine income for
self-employed consumers.
The Bureau's second proposed amendment eliminated two requirements
under the requirement to analyze a business's financial strength in
section I.D.6. Section I.D.6, as adopted, required creditors (1) to
evaluate the sources of the business's income and (2) to evaluate the
general economic outlook for similar businesses in the area. In
proposing this amendment the Bureau stated its belief that both of
these requirements demand that the creditor engage in complex analysis
without providing clarity concerning what types of evaluations are
satisfactory for the purpose of complying with the rule. The Bureau
also stated that such a provision is better suited to function as part
of an underwriting analysis subject to waiver, variance, and guidance
rather than a regulatory rule.
The Bureau's proposal also made technical revisions to section I.D
to accommodate removal of these requirements.
Comments
Industry commenters--several banks and national and state trade
associations--submitted comments on the Bureau's proposed changes to
sections I.D.4 and I.D.6. The commenters generally supported the
Bureau's proposals.
A bank stated that it agreed with the Bureau's proposals to
eliminate the requirement for business credit reports, citing the
potential difficulty and expense associated with obtaining such
reports. The bank stated that requiring a business credit report could
increase the cost of credit or restrict access to credit for self-
employed consumers. The bank also noted that appendix Q requires
creditors to obtain year-to-date profit and loss statements and balance
sheets from self-employed consumers, and suggested, in the alternative,
that creditors be permitted to accept quarterly tax filings if the
consumers most recent tax return is greater than four months old. This
commenter also stated its agreement with the Bureau's proposal to
eliminate creditor requirements to evaluate both the sources of
consumer's business income and the general economic outlook for similar
businesses in the area stating that it agreed with the Bureau's
conclusion that such requirements are ill-suited to a regulatory rule
designed for consumer transactions. The commenter added further that
such requirements are too subjective for purposes of establishing
documentation standards for income.
Another bank commenter expressed support for the Bureau's proposed
elimination of the business credit report requirement in section I.D.4,
and with regard to the Bureau's proposed elimination of the creditor
requirements in section I.D.6 stated that it agreed that requiring
creditors to analyze a business's financial strength is beyond the
scope of the DTI standard. This commenter suggested the removal of
section I.D.6 entirely from appendix Q, stating that the type of
determination required by this section is highly subjective and that
such subjectivity greatly undermines the certainty presumed to be tied
to a safe harbor test. This commenter also suggested a change to
section I.D.4.c to make clear that profit and loss statements will only
be required if quarterly tax returns are not available.
A joint trade association commenter also suggested the entire
deletion of section I.D.6, stating that subjective criteria should be
removed in favor of documented income. This commenter also supported
the elimination of the business credit report requirement in section
I.D.4.d. It also suggested changes to section I.D.4.c, stating that
profit and loss statements and balance sheets should only be required
if they are needed because quarterly taxes are not available.
Two state banking association commenters also supported the
Bureau's proposal to eliminate the requirements in section I.D.4.d, and
I.D.6. One association, with regard to section I.D.4.d, noted that
credit reports for small businesses can be difficult to obtain and
quite expensive. The other association stated, with regard to I.D.6,
that the creditor requirements proposed to be eliminated by the Bureau
in that section would be inherently difficult for creditors to make and
would carry no indication of accuracy. A state credit union association
also expressed support for the Bureau's changes in these sections.
A national trade association that represents real estate agents
commented that it supported the Bureau's proposals eliminating the
requirements relating to self-employed consumers in I.D.4.d and I.D.6,
stating that it agreed with the Bureau's assessment that these
requirements are too expensive and complex, and without clarity. This
commenter also suggested additional clarifications beyond the Bureau's
proposals, to section I.D and section I.B.7, as those sections relate
to many of its members who work as self-employed contractors working in
association with real estate brokers, not as employees. In particular
this commenter requested additional clarity on how creditors should
consider real estate commission income.
Final Rule
The Bureau is adopting its revisions to section I.D.4 and I.D.6 as
proposed.
[[Page 44711]]
With regard to the revisions to section I.D.4, and the elimination from
the documentation requirements for self-employed consumers business
credit reports for corporations and ``S'' corporations, the Bureau
recognizes the concerns expressed by commenters regarding the expense
associated with obtaining such reports, and agrees with commenters that
this additional expense could increase the cost of credit or restrict
access to credit for self-employed consumers.
With regard to the Bureau's revisions to section I.D.6 and the
elimination of the requirements that creditors evaluate sources of the
consumer's business income, and the general economic outlook for
similar businesses in the area, the Bureau agrees with commenters who
noted the subjective nature of these requirements, and recognizes the
difficulty for creditors in making these assessments. The Bureau
believes that these requirements are better suited to a flexible
underwriting analysis than a regulatory rule. With regard to those
commenters who recommended the elimination of section I.D.6 in its
entirety, the Bureau believes that the revisions to that section
adopted by the Bureau significantly improve this requirement as an
assessment of the business's financial strength, and make this an
effective and useful measure for purposes of the DTI analysis.
Furthermore, the standard as revised is straightforward for creditors,
i.e., annual earnings that are stable or increasing are acceptable,
while income from businesses that show a significant decline in income
over the analysis period is not acceptable.
The Bureau notes the other changes to these sections beyond the
Bureau's specific proposals recommended by some commenters, including,
for example, that creditors be permitted to accept quarterly tax
filings as an alternative to profit and loss statements and balance
sheets under section I.D.4.c, and additional clarification on self-
employed contractors, and real estate commission income, under I.D. and
I.B.7. The Bureau appreciates those recommendations, but will need to
fully evaluate them for purposes of consistency with and furtherance of
the purposes of appendix Q, and the implications for all stakeholders.
II. NON-EMPLOYMENT RELATED CONSUMER INCOME
A. Section II.B. Investment and Trust Income
The Proposal
Section II.B.2 of appendix Q as adopted permitted trust income to
be considered income for the purposes of the DTI calculation ``if
guaranteed, constant payments will continue for at least the first
three years of the mortgage term.'' Appendix Q then provided a list of
required documentation consumers must provide but did not otherwise
specify the universe creditors must review to make and support the
three-year determination.
The Bureau proposed an amendment to this section to delineate more
clearly the breadth of the analysis for trust income by specifying that
the analysis is limited to the documents appendix Q requires.
Specifically, the proposal revised ``if guaranteed, constant payments
will continue for at least the first three years of the mortgage term''
by adding ``as evidenced by trust income documentation.'' Under the
requirements in section II.B.2 as adopted, there was no specific cut-
off for the amount of diligence required or information that must be
collected to satisfy the requirement. The Bureau stated its belief in
proposing the amendment that it would facilitate compliance and help
ensure access to credit by making the standard clear and easy to apply.
Section II.B.3.a of appendix Q as adopted required, for notes
receivable income to be considered income, that the consumer provide a
copy of the note and documentary evidence that payments have been
consistently made over the prior 12 months. If the consumer is not the
original payee on the note, however, section II.B.3.b required the
creditor to establish that the consumer is ``now a holder in due
course, and able to enforce the note.'' The Bureau proposed an
amendment to eliminate the requirement that the consumer be a holder in
due course, which requirement the Bureau believed may require further
investigation than is necessary to establish that the income is
effective for the purposes of the rule. The proposal would have amended
appendix Q to require only that the consumer is able to enforce the
note.
Comments
Industry commenters who submitted comments on the Bureau's proposal
to revise section II.B.2 of appendix Q either supported the changes or
requested additional clarification on existing language in the section.
A bank commenter, for example, stated that the change to section
II.B.2.a concerning trust income provided clearer guidance with respect
to the required documentation, and would help facilitate continued
access to credit for recipients of such income. This commenter
expressed concerns, however, with the requirement that trust income be
``guaranteed'' and recommended its elimination. This commenter stated
that while trust income documentation may provide insight into periods
of likely income continuance, it is unclear as to whether such
documentation would provide evidence of an absolute guarantee of
payment. Other commenters similarly objected to the word
``guaranteed.'' Another bank commenter stated that while it agreed with
the Bureau's proposed changes to limit the analysis for trust income
only to trust documentation, it encouraged the Bureau to remove
``guaranteed'' as it seems to imply that documentation will be
available in the form of a guarantee or that an individual can be
requested to provide such a guarantee. This commenter stated that the
creditor should be expected to review the trust documentation to ensure
the income is not clearly scheduled to end in the first three years of
the mortgage. A joint trade association commenter also suggested the
deletion of the word ``guaranteed'' in this section, stating that it is
unclear who would provide the guarantee, and that this is not in
keeping with current practice. A state banking association stated that
it supported the Bureau's proposed addition of the phrase ``as
evidenced by the trust income documentation'' to section II.B.2.a so
long as the provision regarding required trust income documentation
allows for the consumer to provide a trustee's statement confirming the
amount of the trust, frequency of distribution and duration of
payments. This state banking association commenter stated that reliance
on a trustee's statement would allow its state's banks to take
advantage of the protection afforded by state law (rather than having
to collect a complete copy of the trust agreement).
With regard to the Bureau's proposed changes to section II.B.3, a
bank commenter agreed with the Bureau's proposal to eliminate the
requirement for creditors to establish that consumers are holders in
due course if the consumer is not the original payee on the note. This
commenter noted that creditors will be required to obtain a copy of the
note, which should generally be sufficient to establish enforceability.
This commenter also recommended shortening the documentation period to
evidence consistency of payment receipts in section II.B.3.b from 12
months to six months. Finally, this commenter stated that the list of
acceptable documentation in section II.B.3.b to establish that evidence
of receipt of
[[Page 44712]]
notes receivable (i.e., deposit slips, cancelled checks or tax returns)
is too restrictive, and does not take into account other common
electronic payment methods. The commenter recommended modifying the
list of acceptable documentation types to include, but not be limited
to, deposit slips or receipts, cancelled checks, bank statements or tax
returns. A joint trade association and a bank also recommended
expansion of the list of acceptable documentation in section II.B.3.b
to include bank statements and other deposit accounts, as electronic
payments are an increasingly common way to transfer money regularly
between consumers.
Final Rule
The Bureau is adopting the revisions to sections II.B.2 and II.B.3
as proposed with two modifications. The changes proposed by the Bureau
to both sections were generally accepted by commenters. However, with
regard to section II.B.2 the Bureau agrees with commenters that the use
of the word ``guarantee'' in that section, i.e., that income from the
trust may be used if ``guaranteed'' constant payments will continue, is
unclear and should be eliminated. The Bureau believes that the
requirement for creditor evaluation of the trust documentation, with
proper due diligence by the creditor in the review of such
documentation, is sufficient to meet the requirement in section II.B.2
with regard to the continuance of the trust income. With regard to the
state banking association commenter recommending that required trust
documentation include a trustee's statement, the Bureau notes that
section II.B.2 specifically provides that ``required trust
documentation'' includes a trustee statement confirming the amount of
the trust, the frequency of the distribution, and the duration of
payments.
With regard to section II.B.3, the Bureau agrees with the
commenters that suggested a modification of the list of acceptable
documentation in section II.B.3.ii to take into account common
electronic payment methods. The Bureau is therefore modifying this list
to include, in addition to deposit slips, cancelled checks and tax
returns, also deposit receipts and bank or other account statements.
Finally, with regard to the comment recommending shortening the
documentation period in section II.B.3.b from 12 months to six months,
the Bureau appreciates the comment but believes this requires further
evaluation to ensure consistency with the purposes of appendix Q and
the ATR Final Rule.
B. Section II.D. Rental Income
The Proposal
Appendix Q, as adopted, allowed creditors to consider certain
rental income payable to the consumer taking out the loan for the
purposes of the DTI calculation in section II.D. Section II.D.3.a
stated that it is not acceptable to consider income from roommates in a
single-family property occupied as the consumer's primary residence as
``income'' for the purposes of determining the consumer's DTI, but that
it is acceptable to consider rental income payable to the consumer from
boarders related by blood, marriage, or law. The Bureau originally
adopted this provision of appendix Q for consistency with existing FHA
standards used by industry.
Following publication of the 2013 ATR Final Rule, the Bureau became
aware of concerns regarding requirements that boarders be related to
the homeowner in order for rental income payable to the consumer to be
considered ``income'' for DTI purposes. The Bureau did not believe that
the relation requirement was useful in determining whether or not the
rental income should be used in determining DTI. The Bureau therefore
proposed to eliminate the requirement that boarders be related by
blood, marriage, or law from section II.D.3.a.
Comments
Commenters generally supported the Bureau's proposed change to
section II.D.3.a, eliminating the prohibition on considering rental
income payable to a consumer from boarders in a single-family property
who are not related by blood, marriage or by law. Various commenters
recommended further clarifications to this section.
A joint trade association commenter in recommending the same change
to section II.D.3.a. as proposed by the Bureau, stated that rental
income evidenced on tax returns should be given equal treatment
regardless of the relationship status of renters. Another national
trade association commenter stated that it generally agreed with the
Bureau's proposed changes to this section, but that it believed that
the guidelines need to be further modified to be workable. Specifically
this commenter stated that the requirements as currently written will
be difficult to administer because they depend on distinctions and
varying definitions of the terms ``roommate'' and ``boarder.'' The
commenter noted that these terms are not defined in the regulation, and
they have no set meaning in law or custom. The commenter stated that it
did not believe that these regulations should impose or dictate the
types of habitation agreements that people choose to enter. A state
bank association commenter noted that the Bureau's proposal retains the
prohibition on using rental income paid by roommates, and that neither
the rule nor appendix Q provides a definition of roommate or boarder.
Stating that the provision to limit rental income to boarders is
unnecessarily restrictive, the commenter requested that creditors be
permitted to consider rental income received from roommates or
boarders, provided such income is shown on the applicant's tax return.
A similar comment from another state bank association stated that if
the distinction between rental income received from roommates and
boarders is retained it requested that the Bureau define within the
regulation the terms ``roommate'' and ``boarder.''
Final Rule
The Bureau agrees with those commenters on the Bureau's proposed
revisions to section II.D.3 that the requirements as proposed would be
difficult to administer and comply with as they depend on distinctions
between ``roommate'' and ``boarder'' which are undefined terms in that
section, and in appendix Q generally. The Bureau believes that rental
income established through tax returns is the relevant factor for
purposes of a DTI analysis, and that the distinction between the terms
roommate and boarder is not relevant to that determination. Therefore
the Bureau is modifying section II.D.3.a to eliminate the prohibition
on the acceptability of income from roommates in a single family
property occupied as the consumer's primary residence, and to provide
that income from either roommates or boarders is acceptable. The Bureau
retains the section II.D.3.b requirement that rental income may be
considered effective if shown on the consumer's tax return, and states
further that, if not on the tax return, rental income paid by the
roommate or boarder may not be used in qualifying.
Clarifications and other Technical Changes
As noted above, the Bureau proposed various other technical and
wording changes in appendix Q, for consistency and clarification. The
Bureau is adopting those revisions as proposed.
Comments on Aspects of Appendix Q beyond Bureau's Specific Proposals
As noted previously, various commenters submitted comments on
aspects of appendix Q that were not the subject of the Bureau's
specific
[[Page 44713]]
proposals, including suggestions for significant revisions to appendix
Q. Those comments are summarized and addressed below.
Adopt or Allow Use of GSE Guidelines
Several banks and a joint trade association commenter recommended
that the Bureau either allow creditors to use GSE guidelines in certain
instances not addressed by appendix Q, or to look to and adopt certain
existing GSE guideline language. Specifically, one bank commenter urged
the Bureau to expressly allow creditors to use GSE guidelines for any
matter not addressed by appendix Q, as GSE guidance is widely used by
industry and is consistent with prudent underwriting. This commenter
stated, for example, that appendix Q does not specify how to annuitize
assets, but that GSE guidance spells out how to annuitize a consumer's
assets in qualifying a borrower. It also stated that, as a general
matter, appendix Q should be revised to allow creditors to ``add back''
amounts deducted from a borrower's income, consistent with a Fannie Mae
worksheet. This commenter also noted several other specific areas where
adoption of GSE guidance on add-backs was requested, for example,
certain add-backs permitted by the GSEs with regard to section I.E.
Income Analysis: Individual Tax Returns (IRS Form 1040); and with
regard to section II.D.5. Rental Income, Analyzing IRS Form 1040
Schedule E. In addition this commenter recommended with regard to
section II.E.4. Projected Income for a New Job, adoption of the GSEs'
approach in assessing the projected income of certain teachers. A joint
trade association commenter similarly recommended replacing, for
reasons of clarity, appendix Q language in section I.B.12. Automobile
Allowances and Expense Account Payments, with GSE guidance, and
replacing language in sections I.E, F, G and H with a requirement to
follow GSE guidelines for self-employed cash flow analysis, including
the use of several GSE forms, and the adoption of GSE requirements in
section II.E.2. Adding Non-Taxable Income to a Consumer's Gross Income.
This commenter also recommended that appendix Q follow current GSE
guidelines for an identified list of areas where it stated appendix Q
is silent and where it was seeking additional clarity.
Another bank commenter stated that there are instances in which the
Appendix Q guidelines fail to reflect the level of detail needed to
underwrite in the current mortgage market, and noted that the GSEs have
adopted guidelines which provide greater detail and in some instances
would be clearer and better suited to setting a regulatory requirement.
This commenter encouraged the Bureau to review certain specifically
identified sections of the GSE guidelines which it stated might provide
more clarity than the present appendix Q rules. This commenter stated,
however, that it was not recommending that the Bureau defer to the GSE
guidelines which are subject to change without opportunity for notice
and comment. It requested the Bureau review, for example, GSE
guidelines with regard to ``income from other sources'' in section
I.B.1.b, giving as an example GSE guidelines on documenting of tips and
foreign income. Like the previously discussed commenters, it also
suggested review of sections I.E, F, G and H.
Generally Revise Appendix Q to Eliminate Subjective Determinations
Several commenters suggested major revisions to appendix Q to
address what the commenters viewed as standards that require creditors
to make subjective determinations on a consumer's debt and income. For
example, a joint trade association commenter stated that it was
concerned that appendix Q mandates a calculation of DTI that will
require lenders to establish essentially a manual underwriting process
due to the numerous subjective determinations prescribed by the rule.
It stated further that if qualified mortgages will comprise a
significant fraction of mortgage originations, the proper calculation
of DTI under appendix Q must be able to be incorporated into an
automated underwriting system. The commenter therefore urged the Bureau
to revise appendix Q to minimize the requirements for subjective
determinations by lenders and to provide sufficient certainty to allow
its integration into automated underwriting systems. It stated further
that, for appendix Q to be an effective bright-line rule, the
application of appendix Q should ideally deliver the same result
regardless of the lender implementing it. However, the commenter noted,
to do that would mean requirements for quantitative inputs, with
supporting documentation, that eliminate any need for subjective
determinations. This commenter concluded that appendix Q will be relied
upon to verify the sufficiency of the lender's determination whether a
loan is a qualified mortgage and should be able to be conclusively
proven by written evidence, such as a loan file, in a court of law.
This commenter supplemented its comment with a detailed chart with
suggested revisions and comments on the Bureau's proposals, and on a
number of other appendix Q provisions beyond the Bureau's specific
proposals.
A bank commenter echoed the comments of the joint trade association
commenter that appendix Q needs to be revised to remove requirements
for subjective determinations. This commenter stated, however, that it
believes the structure and form of appendix Q can be retained while
making tailored changes to its provisions as necessary to allow it to
serve the intended purposes of appendix Q and the ATR Final Rule. A
lender specializing in manufactured housing financing requested that
the Bureau examine all of appendix Q with the goal of providing clarity
and reducing litigation, and commented further that in order to
incentivize lenders to gravitate towards qualified mortgages, the
guidelines for making a qualified mortgage must be as objective as
possible. To that end this commenter stated that should the Bureau
ultimately decide not to remove the DTI requirements and appendix Q, it
should amend certain sections of appendix Q that the commenter believes
may not function properly as regulations.
A GSE commenter recommended that the Bureau treat appendix Q as
guidance rather than regulation that is subject to notice and comment
rulemaking as it is the commenter's opinion that there are provisions
of appendix Q that are not properly suited to be regulations. This
commenter stated that such guidance could be revised as needed, and in
relatively short order, in response to changing market conditions and
industry practices, and that, in contrast, if appendix Q remains as a
regulation subject to notice and comment it loses such flexibility.
Another GSE commenter also recommended that the Bureau issue appendix Q
in the form of a handbook or other written guidance, akin to the manner
in which FHA provides underwriting standards to lenders, citing the
Bureau's loss of flexibility and ability to respond promptly, if
appendix Q remains a regulation subject to notice and comment
rulemaking.
A consumer group commenter stated that while it supported the
Bureau's proposed clarifications to appendix Q it recommended that the
Bureau go further to clarify it in a way that is consistent with
automated underwriting. This commenter stated further that while manual
underwriting is used by some lenders, lenders should not be required to
underwrite in this manner simply to comply with the definitions of debt
and income included in appendix Q.
[[Page 44714]]
Other Comments on Aspects of Appendix Q beyond the Bureau's Proposals
In addition to the comments discussed above, various commenters had
comments on certain specific sections in appendix Q, relating to
matters not included in the Bureau's proposals. As noted, a joint trade
association commenter supplemented its comment letter with a detailed
chart of suggested changes to a variety of appendix Q sections both
with regard to sections which were included in the Bureau's specific
proposals, and sections that were not included. Various bank commenters
stated that they endorsed the comments made by this commenter. Included
in the joint trade association commenter's suggested changes of
sections outside of the Bureau's proposals, for example, were changes
to sections II.A. Alimony, Child Support, and Maintenance Income
Criteria; II.C. Military Government Agency and Assistance and Program
Income; and III.2. Debt to Income Ratio Computation for Recurring
Obligations. As discussed above, this commenter also identified a list
of areas where it stated appendix Q is silent and where it was seeking
additional guidance. In its comment letter, this commenter also
suggested a new quantitative test for determining the amount of
consumer income to include in the DTI analysis, which it suggested not
only be applied to overtime and bonus income, but other income analysis
in appendix Q as well. Another Bank association commenter identified
various areas with regard to sources of income that it stated appendix
Q did not address, or did not adequately address, and for which it was
seeking additional clarification, including, for example, asset
amortization, stock options, capital gain income, foreign income,
relocation earnings, and contractor and other irregular income
situations. This commenter also requested additional guidance on
section I.C. Consumers Employed by a Family Owned Business, and
suggested changes with regard to section II.E. Non-Taxable and
Projected Income to allow creditors to use a 25 percent ``gross-up''
rate for all non-taxable income. Other commenters that raised issues on
sections outside of those sections that were the subject of the
Bureau's specific proposals included a consumer commenter that
recommended that the 12-month maximum for defining projected
obligations (in section V.1) should be extended for loans with
predictable repayment requirements and inflexible repayment terms, such
as private student loans and student loan repayment programs.
Response to Comments on Aspects of Appendix Q beyond Bureau's Specific
Proposals
The Bureau appreciates the comments received on other aspects of
appendix Q that were not the subject of the Bureau's specific
proposals. These comments will assist the Bureau in its efforts to
ensure the continuing effectiveness and utility of appendix Q as a part
of the DTI analysis.
The Bureau notes that a substantial number of industry commenters
cited particular areas of appendix Q that they asserted either provided
no guidance, or insufficient guidance, to enable creditors to make the
required income and debt determinations. As described above, many of
these commenters suggested that the Bureau adopt, allow creditors to
use, or look to GSE guidelines with regard to certain types of income
and/or debt not specifically addressed by appendix Q in order to, in
effect, provide a means for filling this gap. The Bureau believes in
general that the long history and experience of other federal agencies
as well as the GSEs in matters addressed by appendix Q can be helpful
in this context and acknowledges that requirements established by the
other federal agencies and the GSEs already play a significant role in
the mortgage market.
Indeed, the Bureau notes that the temporary qualified mortgage
status established by the ATR Final Rule provides creditors with the
option to issue qualified mortgages without relying on the standards
set forth in Appendix Q. Under Section 1026.43(e)(4), creditors who
prefer federal agency or GSE underwriting rules can use those rules to
obtain qualified mortgage status by ensuring that, among other things,
their loans either are eligible for purchase or guarantee by the GSEs
or to be insured or guaranteed by the agencies.
The Bureau notes further, however, that while appendix Q does not
specifically refer to every possible type of debt or income, it does
set forth basic guidelines for the treatment of debt and income.
Section I of appendix Q addresses consumer employment related income,
and section I.B.1 sets out standards for analysis of salary, wage, and
other consumer employment related income. Section I.B.1.b provides that
income from sources other than salaries or wages ``can be considered as
effective'' when it is ``properly verified and documented by the
creditor.'' This provision sets the rule for the treatment of types of
income whose treatment is not otherwise more specifically addressed by
appendix Q. Likewise, section III.2.a provides as a general rule that
recurring charges extending ten months or more for specified recurring
obligations and ``other continuing obligations'' must be treated as
debt.
In light of these circumstances, the Bureau has revised the
introduction to appendix Q to make two points. First, where guidance
issued by federal agencies including the U.S. Department of Housing and
Urban Development, the U.S. Department of Veterans Affairs, the U.S.
Department of Agriculture, or the Rural Housing Service, or issued by
the GSEs, Fannie Mae and Freddie Mac, while operating under the
conservatorship or receivership of the Federal Housing Finance Agency,
or issued by a limited-life regulatory entity succeeding the charter of
either Fannie Mae or Freddie Mac (collectively, Agency or GSE guidance)
is in accordance with appendix Q, creditors may look to that guidance
as a helpful resource in applying appendix Q. Thus, where only the
broad principle contained in section I.B.1.b applies to a particular
type of income, a creditor may look to Agency or GSE guidance that is
in accordance with appendix Q's standards in determining whether that
income has been properly documented and verified. For example, appendix
Q does not specifically address additional steps a creditor might take
to document and verify wage or salary income when it is earned from
foreign sources and paid in foreign currency. Agency or GSE guidance
may therefore be used to provide more specific standards with regard to
verification or calculation of such income, as long as the guidance
used is not inconsistent with the requirements of appendix Q.
Similarly, where the treatment of a particular recurring obligation is
not specifically addressed in appendix Q, the creditor may look to
Agency or GSE guidance for purposes of determining how to assess that
obligation, as long as that guidance is in accordance with the
requirements of section III of appendix Q.
Second, in the event that there may be consumer situations that
present questions that appendix Q simply does not presently address at
all, the Bureau is adding language to the introduction providing that
when the standards contained in appendix Q do not resolve the treatment
of a specific kind of debt or income, the creditor may either (1)
exclude the income or include the debt, or (2) treat the income or debt
in accordance with guidance issued by the federal agencies or GSEs. The
introduction makes clear, however, that the Bureau expects that the
above-
[[Page 44715]]
described default rule on excluding income and including debts and the
optional safe harbor reliance on GSE or Agency guidance will be used
sparingly. The introduction emphasizes that the creditor may not rely
on Agency or GSE guidance to reach a resolution contrary to that
provided by appendix Q's standards, even if the Agency or GSE guidance
specifically addresses the particular type of debt or income but the
appendix Q standards are more generalized. For clarity, the
introduction provides a definition for when appendix Q's standards
resolve the appropriate treatment of a specific kind of income or debt:
where the appendix Q standards provide a discernible answer to the
question of how to treat the debt or income. Under this definition, the
Bureau believes that the use of the default rule or the optional safe
harbor should only rarely be necessary. Thus, while the Bureau's
revisions to appendix Q reflect commenters' concerns about the
possibility of gaps in appendix Q, the Bureau emphasizes that as
revised by this final rule, the introduction to appendix Q only allows
creditors to use Agency or GSE guidance whenever appendix Q does not
resolve how to treat a particular type of debt or income (or where such
guidance is used in applying appendix Q consistent with its standards,
as discussed above). Add-backs to income permitted by Agency or GSE
guidance, for example, are not permitted by appendix Q except in
accordance with its standards.
With regard to the request by some commenters for a major revision
to appendix Q, including, for example, the removal of all requirements
for subjective determinations, the Bureau believes that the revisions
made by today's final rule, including the default rule and the optional
safe harbor just described, will provide creditors with the means
necessary to effectively carry out the analysis required by appendix Q.
The Bureau will continue to review the implementation of appendix Q to
ensure that creditors can readily comply with its requirements, but the
Bureau believes that, with today's final rule, appendix Q currently
meets that standard.
As discussed, some commenters suggested that the appendix Q
requirements be revised to allow its integration into automated
underwriting systems. After the Bureau's rules go into effect in
January 2014, the Bureau, in reviewing the implementation of those
rules, including the ATR Final Rule, will give additional consideration
to the suggestions raised by these commenters. In the meantime, the
Bureau believes that the temporary qualified mortgage provisions
established by the ATR Final Rule should provide the needed flexibility
for creditors. Regarding the comments suggesting that the Bureau treat
appendix Q as guidance rather than as a regulation subject to notice
and comment in order to respond to changing market conditions and
industry practices, as previously stated, the Bureau ``did not intend
for appendix Q to function as a general flexible underwriting policy
for assessing risk (as it is used by FHA in the context of insurance),
and recognizes that the Bureau will not have the same level of
discretion regarding the application of appendix Q.'' \56\ Indeed, the
Bureau believes that appendix Q could not fully serve its intended
purpose of providing clarity and certainty as to the DTI determination
were it treated as guidance. Moreover, the Bureau believes that
appendix Q, particularly as clarified and revised by today's final
rule, provides creditors with sufficient and appropriate standards for
assessing the income and debt of consumers.
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\56\ 78 FR 25648.
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V. Effective Date
The amendments in this rule are effective January 10, 2014, except
for the change to Sec. 1026.35(e). The amendment to Sec. 1026.35(e)
is effective immediately on publication of this rule in the Federal
Register. As explained above, this amendment clarifies the Bureau's
interpretation of Sec. 1026.35(e); it is therefore an interpretive
rule, for which an immediate effective date is appropriate. In
addition, the Bureau concludes that good cause exists to make the
amendment effective immediately. The clarification will provide
certainty to the industry and imposes no obligations with which
mortgage lenders must comply.
Applicability date. The amendment to Sec. 1026.35(e) applies to
any transaction consummated on or after June 1, 2013, and for which the
creditor receives an application on or before January 9, 2014.
VI. Section 1022(b)(2) of the Dodd-Frank Act
A. Overview
In developing the final rule, the Bureau has considered potential
benefits, costs, and impacts.\57\ In addition, the Bureau has
consulted, or offered to consult with, the prudential regulators, SEC,
HUD, VA, USDA, 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.
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\57\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act
calls for the Bureau to consider the potential benefits and costs of
a regulation to consumers and covered persons, including the
potential reduction of access by consumers to consumer financial
products or services; the impact on depository institutions and
credit unions with $10 billion or less in total assets as described
in section 1026 of the Dodd-Frank Act; and the impact on consumers
in rural areas.
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As noted above, this rule makes amendments to some of the final
mortgage rules issued by the Bureau in January of 2013.\58\ These
amendments clarify, correct, or amend provisions on (1) the relation to
State law of Regulation X's servicing provisions; (2) implementation
transition requirements for adjustable-rate mortgage disclosures; (3)
the small servicer exemption from certain of the new servicing rules;
(4) exclusions from the repayment ability and prepayment penalty
requirements for higher-priced mortgage loans (HPMLs); (5) the use of
government-sponsored enterprise (GSE) and Federal agency purchase,
guarantee or insurance eligibility for determining qualified mortgage
(QM) status; and (6) the determination of debt and income for purposes
of originating QMs. In addition to these revisions, which are discussed
more fully below, the Bureau is also making certain technical
corrections to the regulations with no substantive change intended.
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\58\ For convenience, the reference to these January 2013 rules
is also meant to encompass the rules issued in May 2013 that amended
the January rules, including the final rule amending the 2013
Escrows Final Rule, issued on May 16, 2013.
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The analysis in this section relies on data that the Bureau has
obtained and the record established by the Board and Bureau during the
development of the 2013 Title XIV Final Rules. However, the Bureau
notes that for some analyses, there are limited data available with
which to quantify the potential costs, benefits, and impacts of this
final rule. In particular, the Bureau did not receive comments
specifically addressing the Section 1022 analysis in the proposed rule.
Still, general economic principles together with the limited data that
are available provide insight into the benefits, costs, and impacts and
where relevant, the analysis provides a qualitative discussion of the
benefits, costs, and impacts of the final rule.
B. Potential Benefits and Costs to Consumers and Covered Persons
The Bureau believes that, compared to the baseline established by
the final rules issued in January 2013,\59\ the
[[Page 44716]]
primary benefit of most of the provisions of the final rule to both
consumers and covered persons is an increase in clarity and precision
of the regulations and an accompanying reduction in compliance costs.
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\59\ The Bureau has discretion in any rulemaking to choose an
appropriate scope of analysis with respect to potential benefits and
costs and an appropriate baseline.
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More specifically, the provisions that clarify: (1) That the
preemption provisions in Regulation X do not preempt the field of
regulation of the practices covered by RESPA and Regulation X; (2) the
timing of required disclosures for adjustable-rate mortgages; and, (3)
the exclusion of construction loans, bridge loans, and reverse
mortgages from the requirements of the ability-to-repay and prepayment
penalty provisions in Sec. 1026.35(e) generally conform the rules to
the policies articulated by the final rules already issued. The
discussion of benefits, costs, or impacts discussed in part VII of each
of the January rules included consideration of each of these
provisions.
The final rule also modifies the text of the Regulation Z servicing
rule to clarify the scope and application of the small servicer
exemption. Specifically, it clarifies the application of the small
servicer exemption with regard to servicer/affiliate and master
servicer/subservicer relationships and excludes mortgage loans
voluntarily serviced for an unaffiliated entity without remuneration,
reverse mortgage transactions, mortgage loans secured by consumers'
interest in timeshare plans, from being considered when determining
whether a servicer qualifies as a small servicer. In total, these
changes are expected to grant the small servicer exemption to a larger
number of firms. These entities should benefit from lower costs while
their customers may lose some of the protections embedded in the
relevant rules. The nature and magnitude of these protections and their
potential costs are described in part VII of both of the 2013 Mortgage
Servicing Final Rules.
The provisions that clarify and amend the definition of qualified
mortgage should also add clarity to the rules and thus lower costs of
compliance. These include the clarification of the test that they be
eligible for purchase or guarantee by the GSEs or insured or guaranteed
by the agencies, the clarification that a repurchase or indemnification
demand by the GSEs, FHA, VA, USDA, or RHS is not determinative of
qualified mortgage status, and the revisions clarifying that a loan
meeting eligibility requirements provided in a written agreement with
one of the GSEs, HUD, VA, USDA, or RHS is also eligible as are loans
receiving individual waivers from GSEs or agencies.
These provisions make explicit that matters wholly unrelated to
ability to repay will not be relevant to determination of QM status and
that a creditor is not required to satisfy certain mandates concerning
loan delivery and other requirements that are wholly unrelated to
assessing a consumer's ability to repay the loan. They also clarify
that loans meeting GSE or agency eligibility requirements set forth in
an applicable written contract variance or individual waiver at the
time of consummation are eligible for GSE or agency purchase,
guarantee, or insurance under Sec. 1026.43(e)(4). As such, these
provisions should lower the burden for these loans to be qualified
mortgages. The Bureau believes that these changes provide useful
guidance to industry and generally conform the rules to the policies
intended by the final rules issued in January. Accordingly, the
discussion of benefits, costs, or impacts discussed in part VII of each
of the January rules included consideration of the effects of each of
these provisions.
The amendments to appendix Q in this final rule reduce the
creditor's requirements to obtain affirmative confirmation that several
types of income will continue in the future. Under these amendments,
creditors may assume in the absence of contrary evidence, that certain
past, current, and/or ongoing conditions can be reasonably expected to
continue. Other provisions clarify the types of evidence that creditors
may rely on to verify income, while another expands the types of rental
income that may be used in the DTI calculation. The Bureau is also
revising the introduction to appendix Q to clarify that creditors may
look to guidance from certain federal agencies and the GSEs in applying
appendix Q so long as that guidance is in accordance with the standards
in appendix Q and to provide a default rule of excluding income and
including debts and an optional safe harbor for reliance on GSE or
Agency guidance when appendix Q's standards do not otherwise resolve
how to treat a particular type of debt or income. As noted earlier, the
Bureau believes that these provisions will establish clearer
requirements for assessing the debt and income of consumers while at
the same time facilitating creditor compliance. More specifically,
these provisions should increase the probability that certain loans are
originated as qualified mortgages and receive a presumption of
compliance with the ability-to-repay standards. For such loans, the
costs of origination may be slightly lower as a result of the slightly
decreased liability for the lender and any assignees and for possibly
decreased compliance costs. Consumers may benefit from slightly
increased access to credit and lower costs on the affected loans;
however, these consumers will also not have the added consumer
protections that accompany loans made under the general ability-to-
repay provisions. A more detailed discussion of these effects is
contained in the discussion of benefits, costs, and impacts in part VII
of the 2013 ATR Final Rule.
The final rule is generally not expected to have a differential
impact on depository institutions and credit unions with $10 billion or
less in total assets as described in section 1026 or on consumers in
rural areas. The main exception is for those depository institutions
and credit unions, which by virtue of their size, are more likely to
qualify for the small servicer exemption and to benefit from the
reduction in compliance burden.
Given the nature of the changes made by the final rule, the Bureau
does not believe that the final rule will materially reduce consumers'
access to consumer products and services. Rather, the reduced burden in
many of the changes in this rule should generally help to improve
access to credit.
VII. Regulatory Flexibility Act Analysis
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.\60\ These analyses must
``describe the impact of the proposed rule on small entities.'' \61\ 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,\62\ or if the agency considers a series of closely related
rules as one rule for
[[Page 44717]]
purposes of complying with the IRFA or FRFA requirements.\63\ 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.\64\
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\60\ 5 U.S.C. 601 et seq.
\61\ 5 U.S.C. 603(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 nonprofit
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).
\62\ 5 U.S.C. 605(b).
\63\ 5 U.S.C. 605(c).
\64\ 5 U.S.C. 609.
---------------------------------------------------------------------------
This rulemaking is part of a series of rules that have revised and
expanded the regulatory requirements for entities that originate or
service mortgage loans. In January 2013, the Bureau adopted the 2013
ATR Final Rule and the 2013 Mortgage Servicing Final Rules, along with
other related rules mentioned above. Part VIII of the supplementary
information to each of these rules set forth the Bureau's analyses and
determinations under the RFA with respect to those rules. See 78 FR
10861 (Regulation X), 78 FR 10994 (Regulation Z--servicing), 78 FR 6575
(Regulation Z--ATR). Because this final rule generally makes clarifying
changes to conform the January rules to their intended purposes, the
RFA analyses associated with those rules generally take into account
the impact of the changes made by this final rule.
Because these rules qualify as ``a series of closely related
rules,'' for purposes of the RFA, the Bureau relies on those analyses
and determines that it has met or exceeded the IRFA and FRFA
requirements.
In the alternative, the Bureau also concludes that the final rule
will not have a significant impact on a substantial number of small
entities. As noted, this final rule generally clarifies the existing
rules. These changes will not have a material impact on small entities.
In the instance of the small servicer exemption, the rule likely
reduces burden for the affected firms. In addition, the changes to
appendix Q will likely reduce compliance costs by increasing clarity
and providing more objective standards for evaluating certain kinds of
income. The changes to appendix Q should also increase the probability
that certain loans are originated as qualified mortgages and receive a
presumption of compliance with the ability-to-repay standards.
Therefore, the undersigned certifies that the rule will not have a
significant impact on a substantial number of small entities.
VIII. Paperwork Reduction Act
This final rule amends 12 CFR 1026 (Regulation Z), which implements
the Truth in Lending Act (TILA), and 12 CFR 1024 (Regulation X), which
implements the Real Estate Settlement Procedures Act (RESPA).
Regulations Z and X currently contain collections of information
approved by OMB. The Bureau's OMB control number for Regulation Z is
3170-0015 and for Regulation X is 3170-0016. However, the Bureau has
determined that this final rule will not materially alter these
collections of information or impose any new recordkeeping, reporting,
or disclosure requirements on the public that would constitute
collections of information requiring approval under the Paperwork
Reduction Act, 44 U.S.C. 3501 et seq.
List of Subjects
12 CFR Part 1024
Condominiums, Consumer protection, Housing, Mortgage servicing,
Mortgages, Recordkeeping requirements, Reporting.
12 CFR Part 1026
Advertising, Consumer protection, Credit, Credit unions, Mortgages,
National banks, Reporting and recordkeeping requirements, Savings
associations, Truth in lending.
Authority and Issuance
For the reasons set forth in the preamble, the Bureau amends
Regulation X, 12 CFR part 1024, as amended by the final rule published
on February 14, 2013, 78 FR 10695, and Regulation Z, 12 CFR part 1026,
as amended by the final rules published on January 30, 2013, 78 FR 6407
and February 14, 2013, 78 FR 10901 as set forth below:
PART 1024--REAL ESTATE SETTLEMENT PROCEDURES ACT (REGULATION X)
0
1. The authority citation for part 1024 continues to read as follows:
Authority: 12 U.S.C. 2603-2605, 2607, 2609, 2617, 5512, 5532,
5581.
Subpart A--General Provisions
0
2. The subpart A heading is revised to read as set forth above.
0
3. Section 1024.5 is amended by adding paragraph (c) to read as
follows:
Sec. 1024.5 Coverage of RESPA.
* * * * *
(c) Relation to State laws. (1) State laws that are inconsistent
with RESPA or this part are preempted to the extent of the
inconsistency. However, RESPA and these regulations do not annul,
alter, affect, or exempt any person subject to their provisions from
complying with the laws of any State with respect to settlement
practices, except to the extent of the inconsistency.
(2) Upon request by any person, the Bureau is authorized to
determine if inconsistencies with State law exist; in doing so, the
Bureau shall consult with appropriate Federal agencies.
(i) The Bureau may not determine that a State law or regulation is
inconsistent with any provision of RESPA or this part, if the Bureau
determines that such law or regulation gives greater protection to the
consumer.
(ii) In determining whether provisions of State law or regulations
concerning affiliated business arrangements are inconsistent with RESPA
or this part, the Bureau may not construe those provisions that impose
more stringent limitations on affiliated business arrangements as
inconsistent with RESPA so long as they give more protection to
consumers and/or competition.
(3) Any person may request the Bureau to determine whether an
inconsistency exists by submitting to the address established by the
Bureau to request an official interpretation, a copy of the State law
in question, any other law or judicial or administrative opinion that
implements, interprets or applies the relevant provision, and an
explanation of the possible inconsistency. A determination by the
Bureau that an inconsistency with State law exists will be made by
publication of a notice in the Federal Register. ``Law'' as used in
this section includes regulations and any enactment which has the force
and effect of law and is issued by a State or any political subdivision
of a State.
(4) A specific preemption of conflicting State laws regarding
notices and disclosures of mortgage servicing transfers is set forth in
Sec. 1024.33(d).
Subpart B--Mortgage Settlement and Escrow Accounts
Sec. 1024.13 [Removed and Reserved]
0
4. Section 1024.13 is removed and reserved.
0
5. In Supplement I to Part 1024, Subpart A is added to read as follows:
Supplement I to Part 1024--Official Bureau Interpretations
* * * * *
Subpart A--General Provisions
Sec. 1024.5 Coverage of RESPA
5(c) Relation to State laws.
Paragraph 5(c)(1).
1. State laws that are inconsistent with the requirements of RESPA
or
[[Page 44718]]
Regulation X may be preempted by RESPA or Regulation X. State laws that
give greater protection to consumers are not inconsistent with and are
not preempted by RESPA or Regulation X. In addition, nothing in RESPA
or Regulation X should be construed to preempt the entire field of
regulation of the practices covered by RESPA or Regulation X, including
the regulations in Subpart C with respect to mortgage servicers or
mortgage servicing.
* * * * *
PART 1026--TRUTH IN LENDING (REGULATION Z)
0
6. The authority citation for part 1026 is revised 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
0
7. Section 1026.35 is amended by revising paragraph (e) introductory
text, redesignating paragraph (e)(3) as paragraph (e)(4), and adding
new paragraph (e)(3) to read as follows:
Sec. 1026.35 Requirements for higher-priced mortgage loans.
* * * * *
(e) Repayment ability, prepayment penalties. Except as provided in
paragraph (e)(3) of this section, higher-priced mortgage loans are
subject to the following restrictions:
* * * * *
(3) Exclusions. This paragraph (e) does not apply to a transaction
to finance the initial construction of a dwelling; a temporary or
``bridge'' loan with a term of twelve months or less, such as a loan to
purchase a new dwelling where the consumer plans to sell a current
dwelling within twelve months; or a reverse mortgage transaction
subject to Sec. 1026.33.
* * * * *
0
8. Section 1026.41 is amended by revising paragraphs (a)(1) and
(e)(4)(ii) and (iii) to read as follows:
Sec. 1026.41 Periodic statements for residential mortgage loans.
(a) In general. (1) Scope. This section applies to a closed-end
consumer credit transaction secured by a dwelling, unless an exemption
in paragraph (e) of this section applies. A closed-end consumer credit
transaction secured by a dwelling is referred to as a mortgage loan for
purposes of this section.
* * * * *
(e) * * *
(4) * * *
(ii) Small servicer defined. A small servicer is a servicer that
either:
(A) Services, together with any affiliates, 5,000 or fewer mortgage
loans, for all of which the servicer (or an affiliate) is the creditor
or assignee; or
(B) Is a Housing Finance Agency, as defined in 24 CFR 266.5.
(iii) Small servicer determination. In determining whether a
servicer is a small servicer, the servicer is evaluated based on the
mortgage loans serviced by the servicer and any affiliates as of
January 1 for the remainder of the calendar year. A servicer that
ceases to qualify as a small servicer will have six months from the
time it ceases to qualify or until the next January 1, whichever is
later, to comply with any requirements from which the servicer is no
longer exempt as a small servicer. The following mortgage loans are not
considered in determining whether a servicer qualifies as a small
servicer:
(A) Mortgage loans voluntarily serviced by the servicer for a
creditor or assignee that is not an affiliate of the servicer and for
which the servicer does not receive any compensation or fees.
(B) Reverse mortgage transactions.
(C) Mortgage loans secured by consumers' interests in timeshare
plans.
0
9. Section 1026.43 is amended by revising paragraphs (e)(4)(ii)(A)
introductory text through (E) to read as follows:
Sec. 1026.43 Minimum standards for transactions secured by a
dwelling.
* * * * *
(e) * * *
(4) * * *
(ii) * * *
(A) A loan that is eligible, except with regard to matters wholly
unrelated to ability to repay:
* * * * *
(B) A loan that is eligible to be insured, except with regard to
matters wholly unrelated to ability to repay, by the U.S. Department of
Housing and Urban Development under the National Housing Act (12 U.S.C.
1707 et seq.);
(C) A loan that is eligible to be guaranteed, except with regard to
matters wholly unrelated to ability to repay, by the U.S. Department of
Veterans Affairs;
(D) A loan that is eligible to be guaranteed, except with regard to
matters wholly unrelated to ability to repay, by the U.S. Department of
Agriculture pursuant to 42 U.S.C. 1472(h); or
(E) A loan that is eligible to be insured, except with regard to
matters wholly unrelated to ability to repay, by the Rural Housing
Service.
* * * * *
0
10. Appendix Q to Part 1026 is revised to read as follows:
Appendix Q to Part 1026--Standards for Determining Monthly Debt and
Income
Section 1026.43(e)(2)(vi) provides that, to satisfy the
requirements for a qualified mortgage under Sec. 1026.43(e)(2), the
ratio of the consumer's total monthly debt payments to total monthly
income at the time of consummation cannot exceed 43 percent. Section
1026.43(e)(2)(vi)(A) requires the creditor to calculate the ratio of
the consumer's total monthly debt payments to total monthly income
using the following standards, with additional requirements for
calculating debt and income appearing in Sec. 1026.43(e)(2)(vi)(B).
Where guidance issued by the U.S. Department of Housing and Urban
Development, the U.S. Department of Veterans Affairs, the U.S.
Department of Agriculture, or the Rural Housing Service, or issued
by the Federal National Mortgage Association (Fannie Mae) or the
Federal Home Loan Mortgage Corporation (Freddie Mac) while operating
under the conservatorship or receivership of the Federal Housing
Finance Agency, or issued by a limited-life regulatory entity
succeeding the charter of either Fannie Mae or Freddie Mac
(collectively, Agency or GSE guidance) is in accordance with
appendix Q, creditors may look to that guidance as a helpful
resource in applying appendix Q. Moreover, when the following
standards do not resolve how a specific kind of debt or income
should be treated, the creditor may either (1) exclude the income or
include the debt, or (2) rely on Agency or GSE guidance to resolve
the issue. The following standards resolve the appropriate treatment
of a specific kind of debt or income where the standards provide a
discernible answer to the question of how to treat the debt or
income. However, a creditor may not rely on Agency or GSE guidance
to reach a resolution contrary to that provided by the following
standards, even if such Agency or GSE guidance specifically
addresses the particular type of debt or income but the following
standards provide more generalized guidance.
I. Consumer Employment Related Income
A. Stability of Income
1. Effective Income. Income may not be used in calculating the
consumer's debt-to-income ratio if it comes from any source that
cannot be verified, is not stable, or will not continue.
2. Verifying Employment History.
a. The creditor must verify the consumer's employment for the
most recent two full years, and the creditor must require the
consumer to:
i. Explain any gaps in employment that span one or more months,
and
ii. Indicate if he/she was in school or the military for the
recent two full years, providing evidence supporting this claim,
such as college transcripts, or discharge papers.
b. Allowances can be made for seasonal employment, typical for
the building trades and agriculture, if documented by the creditor.
[[Page 44719]]
Note: A consumer with a 25 percent or greater ownership interest
in a business is considered self-employed and will be evaluated as a
self-employed consumer.
3. Analyzing a Consumer's Employment Record.
a. When analyzing a consumer's employment, creditors must
examine:
i. The consumer's past employment record; and
ii. The employer's confirmation of current, ongoing employment
status.
Note: Creditors may assume that employment is ongoing if a
consumer's employer verifies current employment and does not
indicate that employment has been, or is set to be terminated.
Creditors should not rely upon a verification of current employment
that includes an affirmative statement that the employment is likely
to cease, such as a statement that indicates the employee has given
(or been given) notice of employment suspension or termination.
b. Creditors may favorably consider the stability of a
consumer's income if he/she changes jobs frequently within the same
line of work, but continues to advance in income or benefits. In
this analysis, income stability takes precedence over job stability.
4. Consumers Returning to Work After an Extended Absence. A
consumer's income may be considered effective and stable when
recently returning to work after an extended absence if he/she:
a. Is employed in the current job for six months or longer; and
b. Can document a two year work history prior to an absence from
employment using:
i. Traditional employment verifications; and/or
ii. Copies of IRS Form W-2s or pay stubs.
Note: An acceptable employment situation includes individuals
who took several years off from employment to raise children, then
returned to the workforce.
c. Important: Situations not meeting the criteria listed above
may not be used in qualifying. Extended absence is defined as six
months.
B. Salary, Wage and Other Forms of Income
1. General Policy on Consumer Income Analysis.
a. The income of each consumer who will be obligated for the
mortgage debt and whose income is being relied upon in determining
ability to repay must be analyzed to determine whether his/her
income level can be reasonably expected to continue.
b. In most cases, a consumer's income is limited to salaries or
wages. Income from other sources can be considered as effective,
when properly verified and documented by the creditor.
Notes: i. Effective income for consumers planning to retire
during the first three-year period must include the amount of:
a. Documented retirement benefits;
b. Social Security payments; or
c. Other payments expected to be received in retirement.
ii. Creditors must not ask the consumer about possible, future
maternity leave.
iii. Creditors may assume that salary or wage income from
employment verified in accordance with section I.A.3 above can be
reasonably expected to continue if a consumer's employer verifies
current employment and income and does not indicate that employment
has been, or is set to be terminated. Creditors should not assume
that income can be reasonably expected to continue if a verification
of current employment includes an affirmative statement that the
employment is likely to cease, such as a statement that indicates
the employee has given (or been given) notice of employment
suspension or termination.
2. Overtime and Bonus Income.
a. Overtime and bonus income can be used to qualify the consumer
if he/she has received this income for the past two years, and
documentation submitted for the loan does not indicate this income
will likely cease. If, for example, the employment verification
states that the overtime and bonus income is unlikely to continue,
it may not be used in qualifying.
b. The creditor must develop an average of bonus or overtime
income for the past two years. Periods of overtime and bonus income
less than two years may be acceptable, provided the creditor can
justify and document in writing the reason for using the income for
qualifying purposes.
3. Establishing an Overtime and Bonus Income Earning Trend.
a. The creditor must establish and document an earnings trend
for overtime and bonus income. If either type of income shows a
continual decline, the creditor must document in writing a sound
rationalization for including the income when qualifying the
consumer.
b. A period of more than two years must be used in calculating
the average overtime and bonus income if the income varies
significantly from year to year.
4. Qualifying Part-Time Income.
a. Part-time and seasonal income can be used to qualify the
consumer if the creditor documents that the consumer has worked the
part-time job uninterrupted for the past two years, and plans to
continue. Many low and moderate income families rely on part-time
and seasonal income for day to day needs, and creditors should not
restrict consideration of such income when qualifying the income of
these consumers.
b. Part-time income received for less than two years may be
included as effective income, provided that the creditor justifies
and documents that the income is likely to continue.
c. Part-time income not meeting the qualifying requirements may
not be used in qualifying.
Note: For qualifying purposes, ``part-time'' income refers to
employment taken to supplement the consumer's income from regular
employment; part-time employment is not a primary job and it is
worked less than 40 hours.
5. Income from Seasonal Employment.
a. Seasonal income is considered uninterrupted, and may be used
to qualify the consumer, if the creditor documents that the
consumer:
i. Has worked the same job for the past two years, and
ii. Expects to be rehired the next season.
b. Seasonal employment includes, but is not limited to:
i. Umpiring baseball games in the summer; or
ii. Working at a department store during the holiday shopping
season.
6. Primary Employment Less Than 40 Hour Work Week.
a. When a consumer's primary employment is less than a typical
40-hour work week, the creditor should evaluate the stability of
that income as regular, on-going primary employment.
b. Example: A registered nurse may have worked 24 hours per week
for the last year. Although this job is less than the 40-hour work
week, it is the consumer's primary employment, and should be
considered effective income.
7. Commission Income.
a. Commission income must be averaged over the previous two
years. To qualify commission income, the consumer must provide:
i. Copies of signed tax returns for the last two years; and
ii. The most recent pay stub.
b. Consumers whose commission income was received for more than
one year, but less than two years may be considered favorably if the
underwriter can:
i. Document the likelihood that the income will continue, and
ii. Soundly rationalize accepting the commission income.
Notes: i. Unreimbursed business expenses must be subtracted from
gross income.
ii. A commissioned consumer is one who receives more than 25
percent of his/her annual income from commissions.
iii. A tax transcript obtained directly from the IRS may be used
in lieu of signed tax returns.
8. Qualifying Commission Income Earned for Less Than One Year.
a. Commission income earned for less than one year is not
considered effective income. Exceptions may be made for situations
in which the consumer's compensation was changed from salary to
commission within a similar position with the same employer.
b. A consumer's income may also qualify when the portion of
earnings not attributed to commissions would be sufficient to
qualify the consumer for the mortgage.
9. Employer Differential Payments.
If the employer subsidizes a consumer's mortgage payment through
direct payments, the amount of the payments:
a. Is considered gross income, and
b. Cannot be used to offset the mortgage payment directly, even
if the employer pays the servicing creditor directly.
10. Retirement Income.
Retirement income must be verified from the former employer, or
from Federal tax returns. If any retirement income, such as employer
pensions or 401(k)'s, will cease within the first full three years
of the mortgage loan, such income may not be used in qualifying.
11. Social Security Income.
Social Security income must be verified by a Social Security
Administration benefit verification letter (sometimes called a
``proof of income letter,'' ``budget letter,'' ``benefits
[[Page 44720]]
letter,'' or ``proof of award letter''). If any benefits expire
within the first full three years of the loan, the income source may
not be used in qualifying.
Notes: i. If the Social Security Administration benefit
verification letter does not indicate a defined expiration date
within three years of loan origination, the creditor shall consider
the income effective and likely to continue. Pending or current re-
evaluation of medical eligibility for benefit payments is not
considered an indication that the benefit payments are not likely to
continue.
ii. Some portion of Social Security income may be ``grossed up''
if deemed nontaxable by the IRS.
12. Automobile Allowances and Expense Account Payments.
a. Only the amount by which the consumer's automobile allowance
or expense account payments exceed actual expenditures may be
considered income.
b. To establish the amount to add to gross income, the consumer
must provide the following:
i. IRS Form 2106, Employee Business Expenses, for the previous
two years; and
ii. Employer verification that the payments will continue.
c. If the consumer uses the standard per-mile rate in
calculating automobile expenses, as opposed to the actual cost
method, the portion that the IRS considers depreciation may be added
back to income.
d. Expenses that must be treated as recurring debt include:
i. The consumer's monthly car payment; and
ii. Any loss resulting from the calculation of the difference
between the actual expenditures and the expense account allowance.
C. Consumers Employed by a Family Owned Business.
1. Income Documentation Requirement.
In addition to normal employment verification, a consumer
employed by a family owned business is required to provide evidence
that he/she is not an owner of the business, which may include:
a. Copies of signed personal tax returns, or
b. A signed copy of the corporate tax return showing ownership
percentage.
Note: A tax transcript obtained directly from the IRS may be
used in lieu of signed tax returns.
D. General Information on Self-Employed Consumers and Income
Analysis.
1. Definition: Self-Employed Consumer.
A consumer with a 25 percent or greater ownership interest in a
business is considered self-employed.
2. Types of Business Structures.
There are four basic types of business structures. They include:
a. Sole proprietorships;
b. Corporations;
c. Limited liability or ``S'' corporations; and
d. Partnerships.
3. Minimum Length of Self Employment.
a. Income from self-employment is considered stable, and
effective, if the consumer has been self-employed for two or more
years.
b. Due to the high probability of failure during the first few
years of a business, the requirements described in the table below
are necessary for consumers who have been self-employed for less
than two years.
[GRAPHIC] [TIFF OMITTED] TR24JY13.000
4. General Documentation Requirements for Self-Employed
Consumers.
Self-employed consumers must provide the following
documentation:
a. Signed, dated individual tax returns, with all applicable tax
schedules for the most recent two years;
b. For a corporation, ``S'' corporation, or partnership, signed
copies of Federal business income tax returns for the last two
years, with all applicable tax schedules; and
c. Year to date profit and loss (P&L) statement and balance
sheet.
5. Establishing a Self-Employed Consumer's Earnings Trend.
a. When qualifying income, the creditor must establish the
consumer's earnings trend from the previous two years using the
consumer's tax returns.
b. If a consumer:
i. Provides quarterly tax returns, the income analysis may
include income through the period covered by the tax filings, or
ii. Is not subject to quarterly tax returns, or does not file
them, then the income shown on the P&L statement may be included in
the analysis, provided the income stream based on the P&L is
consistent with the previous years' earnings.
c. If the P&L statements submitted for the current year show an
income stream considerably greater than what is supported by the
previous year's tax returns, the creditor must base the income
analysis solely on the income verified through the tax returns.
d. If the consumer's earnings trend for the previous two years
is downward and the most recent tax return or P&L is less than the
prior year's tax return, the consumer's most recent year's tax
return or P&L must be used to calculate his/her income.
6. Analyzing the Business's Financial Strength.
The creditor must consider the business's financial strength by
examining annual earnings. Annual earnings that are stable or
increasing are acceptable, while businesses that show a significant
decline in income over the analysis period are not acceptable.
E. Income Analysis: Individual Tax Returns (IRS Form 1040).
1. General Policy on Adjusting Income Based on a Review of IRS
Form 1040.
The amount shown on a consumer's IRS Form 1040 as adjusted gross
income must either be increased or decreased based on the creditor's
analysis of the individual tax return and any related tax schedules.
2. Guidelines for Analyzing IRS Form 1040.
The table below contains guidelines for analyzing IRS Form 1040:
BILLING CODE 4810-AM-P
[[Page 44721]]
[GRAPHIC] [TIFF OMITTED] TR24JY13.001
F. Income Analysis: Corporate Tax Returns (IRS Form 1120).
1. Description: Corporation.
A corporation is a State-chartered business owned by its
stockholders.
2. Need To Obtain Consumer Percentage of Ownership Information.
a. Corporate compensation to the officers, generally in
proportion to the percentage of ownership, is shown on the:
i. Corporate tax return IRS Form 1120; and
ii. Individual tax returns.
b. When a consumer's percentage of ownership does not appear on
the tax returns, the creditor must obtain the
[[Page 44722]]
information from the corporation's accountant, along with evidence
that the consumer has the right to any compensation.
3. Analyzing Corporate Tax Returns.
a. In order to determine a consumer's self-employed income from
a corporation the adjusted business income must:
i. Be determined; and
ii. Multiplied by the consumer's percentage of ownership in the
business.
b. The table below describes the items found on IRS Form 1120
for which an adjustment must be made in order to determine adjusted
business income.
[GRAPHIC] [TIFF OMITTED] TR24JY13.002
G. Income Analysis: ``S'' Corporation Tax Returns (IRS Form 1120S).
1. Description: ``S'' Corporation.
a. An ``S'' corporation is generally a small, start-up business,
with gains and losses passed to stockholders in proportion to each
stockholder's percentage of business ownership.
b. Income for owners of ``S'' corporations comes from IRS Form
W-2 wages, and is taxed at the individual rate. The IRS Form 1120S,
Compensation of Officers line item is transferred to the consumer's
individual IRS Form 1040.
2. Analyzing ``S'' Corporation Tax Returns.
a. ``S'' corporation depreciation and depletion may be added
back to income in proportion to the consumer's share of the
corporation's income.
b. In addition, the income must also be reduced proportionately
by the total obligations payable by the corporation in less than one
year.
c. Important: The consumer's withdrawal of cash from the
corporation may have a severe negative impact on the corporation's
ability to continue operating, and must be considered in the income
analysis.
H. Income Analysis: Partnership Tax Returns (IRS Form 1065).
1. Description: Partnership.
a. A partnership is formed when two or more individuals form a
business, and share in profits, losses, and responsibility for
running the company.
b. Each partner pays taxes on his/her proportionate share of the
partnership's net income.
2. Analyzing Partnership Tax Returns.
a. Both general and limited partnerships report income on IRS
Form 1065, and the partners' share of income is carried over to
Schedule E of IRS Form 1040.
b. The creditor must review IRS Form 1065 to assess the
viability of the business. Both depreciation and depletion may be
added back to the income in proportion to the consumer's share of
income.
c. Income must also be reduced proportionately by the total
obligations payable by the partnership in less than one year.
d. Important: Cash withdrawals from the partnership may have a
severe negative impact on the partnership's ability to continue
operating, and must be considered in the income analysis.
II. Non-Employment Related Consumer Income
A. Alimony, Child Support, and Maintenance Income Criteria.
Alimony, child support, or maintenance income may be considered
effective, if:
1. Payments are likely to be received consistently for the first
three years of the mortgage;
2. The consumer provides the required documentation, which
includes a copy of the:
i. Final divorce decree;
ii. Legal separation agreement;
iii. Court order; or
iv. Voluntary payment agreement; and
3. The consumer can provide acceptable evidence that payments
have been received during the last 12 months, such as:
i. Cancelled checks;
ii. Deposit slips;
iii. Tax returns; or
iv. Court records.
Notes: i. Periods less than 12 months may be acceptable,
provided the creditor can adequately document the payer's ability
and willingness to make timely payments.
ii. Child support may be ``grossed up'' under the same
provisions as non-taxable income sources.
B. Investment and Trust Income.
1. Analyzing Interest and Dividends.
a. Interest and dividend income may be used as long as tax
returns or account statements support a two-year receipt history.
This income must be averaged over the two years.
b. Subtract any funds that are derived from these sources, and
are required for the cash investment, before calculating the
projected interest or dividend income.
2. Trust Income.
a. Income from trusts may be used if constant payments will
continue for at least the first three years of the mortgage term as
evidenced by trust income documentation.
b. Required trust income documentation includes a copy of the
Trust Agreement or other trustee statement, confirming the:
i. Amount of the trust;
ii. Frequency of distribution; and
iii. Duration of payments.
c. Trust account funds may be used for the required cash
investment if the consumer provides adequate documentation that the
withdrawal of funds will not negatively affect income. The consumer
may use funds from the trust account for the required cash
investment, but the trust income used to determine repayment ability
cannot be affected negatively by its use.
3. Notes Receivable Income.
a. In order to include notes receivable income, the consumer
must provide:
i. A copy of the note to establish the amount and length of
payment, and
ii. Evidence that these payments have been consistently received
for the last 12 months through deposit slips, deposit receipts,
cancelled checks, bank or other account statements, or tax returns.
b. If the consumer is not the original payee on the note, the
creditor must establish that the consumer is able to enforce the
note.
4. Eligible Investment Properties.
Follow the steps in the table below to calculate an investment
property's income or loss if the property to be subject to a
mortgage is an eligible investment property.
[[Page 44723]]
[GRAPHIC] [TIFF OMITTED] TR24JY13.003
C. Military, Government Agency, and Assistance Program Income.
1. Military Income.
a. Military personnel not only receive base pay, but often times
are entitled to additional forms of pay, such as:
i. Income from variable housing allowances;
ii. Clothing allowances;
iii. Flight or hazard pay;
iv. Rations; and
v. Proficiency pay.
b. These types of additional pay are acceptable when analyzing a
consumer's income as long as the probability of such pay to continue
is verified in writing.
Note: The tax-exempt nature of some of the above payments should
also be considered.
2. VA Benefits.
a. Direct compensation for service-related disabilities from the
Department of Veterans Affairs (VA) is acceptable, provided the
creditor receives documentation from the VA.
b. Education benefits used to offset education expenses are not
acceptable.
3. Government Assistance Programs.
a. Income received from government assistance programs is
acceptable as long as the paying agency provides documentation
indicating that the income is expected to continue for at least
three years.
b. If the income from government assistance programs will not be
received for at least three years, it may not be used in qualifying.
c. Unemployment income must be documented for two years, and
there must be reasonable assurance that this income will continue.
This requirement may apply to seasonal employment.
Note: Social Security income is acceptable as provided in
section I.B.11.
4. Mortgage Credit Certificates.
a. If a government entity subsidizes the mortgage payments
either through direct payments or tax rebates, these payments may be
considered as acceptable income.
b. Either type of subsidy may be added to gross income, or used
directly to offset the mortgage payment, before calculating the
qualifying ratios.
5. Homeownership Subsidies.
a. A monthly subsidy may be treated as income, if a consumer is
receiving subsidies under the housing choice voucher home ownership
option from a public housing agency (PHA). Although continuation of
the homeownership voucher subsidy beyond the first year is subject
to Congressional appropriation, for the purposes of underwriting,
the subsidy will be assumed to continue for at least three years.
b. If the consumer is receiving the subsidy directly, the amount
received is treated as income. The amount received may also be
treated as nontaxable income and be ``grossed up'' by 25 percent,
which means that the amount of the subsidy, plus 25 percent of that
subsidy may be added to the consumer's income from employment and/or
other sources.
c. Creditors may treat this subsidy as an ``offset'' to the
monthly mortgage payment (that is, reduce the monthly mortgage
payment by the amount of the home ownership assistance payment
before dividing by the monthly income to determine the payment-to-
income and debt-to-income ratios). The subsidy payment must not pass
through the consumer's hands.
d. The assistance payment must be:
i. Paid directly to the servicing creditor; or
ii. Placed in an account that only the servicing creditor may
access.
Note: Assistance payments made directly to the consumer must be
treated as income.
D. Rental Income.
1. Analyzing the Stability of Rental Income.
a. Rent received for properties owned by the consumer is
acceptable as long as the creditor can document the stability of the
rental income through:
i. A current lease;
ii. An agreement to lease; or
iii. A rental history over the previous 24 months that is free
of unexplained gaps greater than three months (such gaps could be
explained by student, seasonal, or military renters, or property
rehabilitation).
b. A separate schedule of real estate is not required for rental
properties as long as all properties are documented on the Uniform
Residential Loan Application.
Note: The underwriting analysis may not consider rental income
from any property being vacated by the consumer, except under the
circumstances described below.
2. Rental Income From Consumer Occupied Property.
a. The rent for multiple unit property where the consumer
resides in one or more units and charges rent to tenants of other
units may be used for qualifying purposes.
b. Projected rent for the tenant-occupied units only may:
i. Be considered gross income, only after deducting vacancy and
maintenance factors, and
ii. Not be used as a direct offset to the mortgage payment.
3. Income from Roommates or Boarders in a Single Family
Property.
a. Rental income from roommates or boarders in a single family
property occupied as the consumer's primary residence is acceptable.
b. The rental income may be considered effective if shown on the
consumer's tax return. If not on the tax return, rental income paid
by the roommate or boarder may not be used in qualifying.
4. Documentation Required To Verify Rental Income.
Analysis of the following required documentation is necessary to
verify all consumer rental income:
a. IRS Form 1040 Schedule E; and
b. Current leases/rental agreements.
5. Analyzing IRS Form 1040 Schedule E.
a. The IRS Form 1040 Schedule E is required to verify all rental
income. Depreciation shown on Schedule E may be added back to the
net income or loss.
b. Positive rental income is considered gross income for
qualifying purposes, while negative income must be treated as a
recurring liability.
c. The creditor must confirm that the consumer still owns each
property listed, by comparing Schedule E with the real estate owned
section of the Uniform Residential Loan Application (URLA).
6. Using Current Leases To Analyze Rental Income.
a. The consumer can provide a current signed lease or other
rental agreement for a property that was acquired since the last
income tax filing, and is not shown on Schedule E.
b. In order to calculate the rental income:
i. Reduce the gross rental amount by 25 percent for vacancies
and maintenance;
ii. Subtract PITI and any homeowners association dues; and
iii. Apply the resulting amount to income, if positive, or
recurring debts, if negative.
7. Exclusion of Rental Income From Property Being Vacated by the
Consumer. Underwriters may not consider any rental income from a
consumer's principal residence that is being vacated in favor of
[[Page 44724]]
another principal residence, except under the conditions described
below:
Notes: i. This policy assures that a consumer either has
sufficient income to make both mortgage payments without any rental
income, or has an equity position not likely to result in defaulting
on the mortgage on the property being vacated.
ii. This applies solely to a principal residence being vacated
in favor of another principal residence. It does not apply to
existing rental properties disclosed on the loan application and
confirmed by tax returns (Schedule E of form IRS 1040).
8. Policy Exceptions Regarding the Exclusion of Rental Income
From a Principal Residence Being Vacated by a Consumer.
When a consumer vacates a principal residence in favor of
another principal residence, the rental income, reduced by the
appropriate vacancy factor, may be considered in the underwriting
analysis under the circumstances listed in the table below.
[GRAPHIC] [TIFF OMITTED] TR24JY13.004
E. Non-Taxable and Projected Income
1. Types of Non-Taxable Income.
Certain types of regular income may not be subject to Federal
tax. Such types of non-taxable income include:
a. Some portion of Social Security, some Federal government
employee retirement income, Railroad Retirement Benefits, and some
State government retirement income;
b. Certain types of disability and public assistance payments;
c. Child support;
d. Military allowances; and
e. Other income that is documented as being exempt from Federal
income taxes.
2. Adding Non-Taxable Income to a Consumer's Gross Income.
a. The amount of continuing tax savings attributed to regular
income not subject to Federal taxes may be added to the consumer's
gross income.
b. The percentage of non-taxable income that may be added cannot
exceed the appropriate tax rate for the income amount. Additional
allowances for dependents are not acceptable.
c. The creditor:
i. Must document and support the amount of income grossed up for
any non-taxable income source, and
ii. Should use the tax rate used to calculate the consumer's
last year's income tax.
Note: If the consumer is not required to file a Federal tax
return, the tax rate to use is 25 percent.
3. Analyzing Projected Income.
a. Projected or hypothetical income is not acceptable for
qualifying purposes. However, exceptions are permitted for income
from the following sources:
i. Cost-of-living adjustments;
ii. Performance raises; and
iii. Bonuses.
b. For the above exceptions to apply, the income must be:
i. Verified in writing by the employer; and
ii. Scheduled to begin within 60 days of loan closing.
4. Projected Income for New Job.
a. Projected income is acceptable for qualifying purposes for a
consumer scheduled to start a new job within 60 days of loan closing
if there is a guaranteed, non-revocable contract for employment.
b. The creditor must verify that the consumer will have
sufficient income or cash reserves to support the mortgage payment
and any other obligations between loan closing and the start of
employment. Examples of this type of scenario are teachers whose
contracts begin with the new school year, or physicians beginning a
residency after the loan closes.
c. The income does not qualify if the loan closes more than 60
days before the consumer starts the new job.
III. Consumer Liabilities: Recurring Obligations
1. Types of Recurring Obligation. Recurring obligations include:
a. All installment loans;
b. Revolving charge accounts;
c. Real estate loans;
d. Alimony;
e. Child support; and
f. Other continuing obligations.
2. Debt to Income Ratio Computation for Recurring Obligations.
a. The creditor must include the following when computing the
debt to income ratios for recurring obligations:
i. Monthly housing expense; and
ii. Additional recurring charges extending ten months or more,
such as
a. Payments on installment accounts;
b. Child support or separate maintenance payments;
c. Revolving accounts; and
d. Alimony.
b. Debts lasting less than ten months must be included if the
amount of the debt affects
[[Page 44725]]
the consumer's ability to pay the mortgage during the months
immediately after loan closing, especially if the consumer will have
limited or no cash assets after loan closing.
Note: Monthly payments on revolving or open-ended accounts,
regardless of the balance, are counted as a liability for qualifying
purposes even if the account appears likely to be paid off within 10
months or less.
3. Revolving Account Monthly Payment Calculation. If the credit
report shows any revolving accounts with an outstanding balance but
no specific minimum monthly payment, the payment must be calculated
as the greater of:
a. 5 percent of the balance; or
b. $10.
Note: If the actual monthly payment is documented from the
creditor or the creditor obtains a copy of the current statement
reflecting the monthly payment, that amount may be used for
qualifying purposes.
4. Reduction of Alimony Payment for Qualifying Ratio
Calculation. Since there are tax consequences of alimony payments,
the creditor may choose to treat the monthly alimony obligation as a
reduction from the consumer's gross income when calculating the
ratio, rather than treating it as a monthly obligation.
IV. Consumer Liabilities: Contingent Liability
1. Definition: Contingent Liability. A contingent liability
exists when an individual is held responsible for payment of a debt
if another party, jointly or severally obligated, defaults on the
payment.
2. Application of Contingent Liability Policies. The contingent
liability policies described in this topic apply unless the consumer
can provide conclusive evidence from the debt holder that there is
no possibility that the debt holder will pursue debt collection
against him/her should the other party default.
3. Contingent Liability on Mortgage Assumptions. Contingent
liability must be considered when the consumer remains obligated on
an outstanding FHA-insured, VA-guaranteed, or conventional mortgage
secured by property that:
a. Has been sold or traded within the last 12 months without a
release of liability, or
b. Is to be sold on assumption without a release of liability
being obtained.
4. Exemption From Contingent Liability Policy on Mortgage
Assumptions. When a mortgage is assumed, contingent liabilities need
not be considered if the:
a. Originating creditor of the mortgage being underwritten
obtains, from the servicer of the assumed loan, a payment history
showing that the mortgage has been current during the previous 12
months, or
b. Value of the property, as established by an appraisal or the
sales price on the HUD-1 Settlement Statement from the sale of the
property, results in a loan-to-value (LTV) ratio of 75 percent or
less.
5. Contingent Liability on Cosigned Obligations.
a. Contingent liability applies, and the debt must be included
in the underwriting analysis, if an individual applying for a
mortgage is a cosigner/co-obligor on:
i. A car loan;
ii. A student loan;
iii. A mortgage; or
iv. Any other obligation.
b. If the creditor obtains documented proof that the primary
obligor has been making regular payments during the previous 12
months, and does not have a history of delinquent payments on the
loan during that time, the payment does not have to be included in
the consumer's monthly obligations.
V. Consumer Liabilities: Projected Obligations and Obligations Not
Considered Debt
1. Projected Obligations
a. Debt payments, such as a student loan or balloon-payment note
scheduled to begin or come due within 12 months of the mortgage loan
closing, must be included by the creditor as anticipated monthly
obligations during the underwriting analysis.
b. Debt payments do not have to be classified as projected
obligations if the consumer provides written evidence that the debt
will be deferred to a period outside the 12-month timeframe.
c. Balloon-payment notes that come due within one year of loan
closing must be considered in the underwriting analysis.
2. Obligations Not Considered Debt
Obligations not considered debt, and therefore not subtracted
from gross income, include:
a. Federal, State, and local taxes;
b. Federal Insurance Contributions Act (FICA) or other
retirement contributions, such as 401(k) accounts (including
repayment of debt secured by these funds):
c. Commuting costs;
d. Union dues;
e. Open accounts with zero balances;
f. Automatic deductions to savings accounts;
g. Child care; and
h. Voluntary deductions.
11. In Supplement I to Part 1026--Official Interpretations:
A. Under Section 1026.41--Periodic Statements for Residential
Mortgage Loans:
i. Under 41(e)(4) Small servicers:
a. Under 41(e)(4)(ii) Small servicer defined, paragraphs 1 and 2
are revised and paragraph 3 is added.
b. Under Paragraph 41(e)(4)(iii) Small servicer determination,
paragraph 3 is added.
B. Under Section 1026.43--Minimum Standards for Transactions
Secured by a Dwelling:
i. Under 43(e)(4) Qualified mortgage defined-special rules,
paragraph 4 is revised and paragraph 5 is added.
The revisions and additions read as follows:
Supplement I to Part 1026--Official Interpretations
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
* * * * *
Sec. 1026.41 Periodic Statements for Residential Mortgage Loans
* * * * *
41(e)(4)(ii) Small servicer defined.
1. Mortgage loans considered. Pursuant to Sec. 1026.41(a)(1), the
mortgage loans considered in determining status as a small servicer are
closed-end consumer credit transactions secured by a dwelling, subject
to the exclusions in Sec. 1026.41(e)(4)(iii).
2. Requirements to be a small servicer. Pursuant to Sec.
1026.41(e)(4)(ii)(A), to qualify as a small servicer, a servicer must
service, together with any affiliates, 5,000 or fewer mortgage loans,
for all of which the servicer (or an affiliate) is the creditor or
assignee. There are two elements to this requirement. First, a
servicer, together with any affiliates, must service 5,000 or fewer
mortgage loans. Second, a servicer must service only mortgage loans for
which the servicer (or an affiliate) is the creditor or assignee. To be
the creditor or assignee of a mortgage loan, the servicer (or an
affiliate) must either currently own the mortgage loan or must have
been the entity to which the mortgage loan obligation was initially
payable (that is, the originator of the mortgage loan). A servicer is
not a small servicer if it services any mortgage loans for which the
servicer or an affiliate is not the creditor or assignee (that is, for
which the servicer or an affiliate is not the owner or was not the
originator). The following two examples demonstrate circumstances in
which a servicer would not qualify as a small servicer because it did
not meet both requirements for determining a servicer's status as a
small servicer:
i. A servicer services 3,000 mortgage loans, all of which it or an
affiliate owns or originated. An affiliate of the servicer services
4,000 other mortgage loans, all of which it or an affiliate owns or
originated. Because the number of mortgage loans serviced by a servicer
is determined by counting the mortgage loans serviced by a servicer
together with any affiliates, both of these servicers are considered to
be servicing 7,000 mortgage loans and neither servicer is a small
servicer.
ii. A service services 3,100 mortgage loans--3,000 mortgage loans
it owns or originated and 100 mortgage loans it neither owns nor
originated, but for which it owns the mortgage servicing rights. The
servicer is not a small servicer because it services mortgage loans for
which the servicer (or an affiliate) is not the creditor or assignee,
notwithstanding that the servicer services fewer than 5,000 mortgage
loans.
[[Page 44726]]
3. Master servicing and subservicing. A servicer that qualifies as
a small servicer does not lose its small servicer status if it retains
a subservicer, as that term is defined in 12 CFR 1024.31, to service
any of its mortgage loans. A subservicer can gain the benefit of the
small servicer exemption only if (1) the master servicer, as that term
is defined in 12 CFR 1024.31, is a small servicer and (2) the
subservicer is a small servicer. A subservicer generally will not
qualify as a small servicer because it does not own or did not
originate the mortgage loans it subservices--unless it is an affiliate
of a master servicer that qualifies as a small servicer. The following
examples demonstrate the application of the small servicer exemption
for different forms of servicing relationships:
i. A credit union services 4,000 mortgage loans, all of which it
originated or owns. The credit union retains a credit union service
organization, that is not an affiliate, to subservice 1,000 of the
mortgage loans. The credit union is a small servicer and, thus, can
gain the benefit of the small servicer exemption for the 3,000 mortgage
loans the credit union services itself. The credit union service
organization is not a small servicer because it services mortgage loans
it does not own or did not originate. Accordingly, the credit union
service organization does not gain the benefit of the small servicer
exemption and, thus, must comply with any applicable mortgage servicing
requirements for the 1,000 mortgage loans it subservices.
ii. A bank holding company, through a lender subsidiary, owns or
originated 4,000 mortgage loans. All mortgage servicing rights for the
4,000 mortgage loans are owned by a wholly owned master servicer
subsidiary. Servicing for the 4,000 mortgage loans is conducted by a
wholly owned subservicer subsidiary. The bank holding company controls
all of these subsidiaries and, thus, they are affiliates of the bank
holding company pursuant 12 CFR 1026.32(b)(2). Because the master
servicer and subservicer service 5,000 or fewer mortgage loans, and
because all the mortgage loans are owned or originated by an affiliate,
the master servicer and the subservicer both qualify for the small
servicer exemption for all 4,000 mortgage loans.
iii. A nonbank servicer services 4,000 mortgage loans, all of which
it originated or owns. The servicer retains a ``component servicer'' to
assist it with servicing functions. The component servicer is not
engaged in ``servicing'' as defined in 12 CFR 1024.2; that is, the
component servicer does not receive any scheduled periodic payments
from a borrower pursuant to the terms of any mortgage loan, including
amounts for escrow accounts, and does not make the payments to the
owner of the loan or other third parties of principal and interest and
such other payments with respect to the amounts received from the
borrower as may be required pursuant to the terms of the mortgage
servicing loan documents or servicing contract. The component servicer
is not a subservicer pursuant to 12 CFR 1024.31 because it is not
engaged in servicing, as that term is defined in 12 CFR 1024.2. The
nonbank servicer is a small servicer and, thus, can gain the benefit of
the small servicer exemption with regard to all 4,000 mortgage loans it
services.
41(e)(4)(iii) Small servicer determination.
* * * * *
2. Timing for small servicer exemption. The following examples
demonstrate when a servicer either is considered or is no longer
considered a small servicer:
i. A servicer that begins servicing more than 5,000 mortgage loans
(or begins servicing one or more mortgage loans it does not own or did
not originate) on October 1, and services more than 5,000 mortgage
loans (or services one or more mortgage loans it does not own or did
not originate) as of January 1 of the following year, would no longer
be considered a small servicer on January 1 of that following year and
would have to comply with any requirements from which it is no longer
exempt as a small servicer on April 1 of that following year.
ii. A servicer that begins servicing more than 5,000 mortgage loans
(or begins servicing one or more mortgage loans it does not own or did
not originate) on February 1, and services more than 5,000 mortgage
loans (or services one or more mortgage loans it does not own or did
not originate) as of January 1 of the following year, would no longer
be considered a small servicer on January 1 of that following year and
would have to comply with any requirements from which it is no longer
exempt as a small servicer on that same January 1.
iii. A servicer that begins servicing more than 5,000 mortgage
loans (or begins servicing one or more mortgage loans it does not own
or did not originate) on February 1, but services less than 5,000
mortgage loans (or no longer services mortgage loans it does not own or
did not originate) as of January 1 of the following year, is considered
a small servicer for that following year.
* * * * *
3. Mortgage loans not considered in determining whether a servicer
is a small servicer. Mortgage loans that are not considered for
purposes of determining whether a servicer is a small servicer pursuant
to Sec. 1026.41(e)(4)(iii) are not considered either for determining
whether a servicer, together with any affiliates, services 5,000 or
fewer mortgage loans or whether a servicer is servicing only mortgage
loans that it owns or originated. For example, assume a servicer
services 5,400 mortgage loans. Of these mortgage loans, the servicer
owns or originated 4,800 mortgage loans, voluntarily services 300
mortgage loans that it does not own or did not originate for an
unaffiliated nonprofit organization for which the servicer does not
receive any compensation or fees, and services 300 reverse mortgage
transactions that it does not own and did not originate. Because the
only mortgage loans considered are the 4,800 mortgage loans owned or
originated by the servicer, the servicer is considered a small servicer
and qualifies for the small servicer exemption with regard to all 5,400
mortgage loans it services. Note that reverse mortgages and mortgage
loans secured by consumers' interests in timeshare plans, in addition
to not being considered in determining small servicer qualification,
are also exempt from the requirements of Sec. 1026.41. In contrast,
although charitably serviced mortgage loans, as defined by Sec.
1026.41(e)(4)(iii), are likewise not considered in determining small
servicer qualification, they are not exempt from the requirements of
Sec. 1026.41. Thus, a servicer that does not qualify as a small
servicer would not have to provide periodic statements for reverse
mortgages and timeshare plans because they are exempt from the rule,
but would have to provide periodic statements for mortgage loans it
charitably services.
* * * * *
Sec. 1026.43 Minimum Standards for Transactions Secured by a Dwelling
* * * * *
43(e)(4) Qualified mortgage defined--special rules.
* * * * *
4. Eligible for purchase, guarantee, or insurance except with
regard to matters wholly unrelated to ability to repay. To satisfy
Sec. 1026.43(e)(4)(ii), a loan need not be actually purchased or
guaranteed by Fannie Mae or Freddie Mac or insured or guaranteed by one
of the
[[Page 44727]]
Agencies (the U.S. Department of Housing and Urban Development (HUD),
U.S. Department of Veterans Affairs (VA), U.S. Department of
Agriculture (USDA), or Rural Housing Service (RHS)). Rather, Sec.
1026.43(e)(4)(ii) requires only that the creditor determine that the
loan is eligible (i.e., meets the criteria) for such purchase,
guarantee, or insurance at consummation. For example, for purposes of
Sec. 1026.43(e)(4), a creditor is not required to sell a loan to
Fannie Mae or Freddie Mac (or any limited-life regulatory entity
succeeding the charter of either) for that loan to be a qualified
mortgage; however, the loan must be eligible for purchase or guarantee
by Fannie Mae or Freddie Mac (or any limited-life regulatory entity
succeeding the charter of either), including satisfying any
requirements regarding consideration and verification of a consumer's
income or assets, credit history, debt-to-income ratio or residual
income, and other credit risk factors, but not any requirements
regarding matters wholly unrelated to ability to repay. To determine
eligibility for purchase, guarantee or insurance, a creditor may rely
on a valid underwriting recommendation provided by a GSE automated
underwriting system (AUS) or an AUS that relies on an Agency
underwriting tool; compliance with the standards in the GSE or Agency
written guide in effect at the time; a written agreement between the
creditor or a direct sponsor or aggregator of the creditor and a GSE or
Agency that permits variation from the standards of the written guides
and/or variation from the AUSs, in effect at the time of consummation;
or an individual loan waiver granted by the GSE or Agency to the
creditor. For creditors relying on the variances of a sponsor or
aggregator, a loan that is transferred directly to or through the
sponsor or aggregator at or after consummation complies with Sec.
1026.43(e)(4). In using any of the four methods listed above, the
creditor need not satisfy standards that are wholly unrelated to
assessing a consumer's ability to repay that the creditor is required
to perform. Matters wholly unrelated to ability to repay are those
matters that are wholly unrelated to credit risk or the underwriting of
the loan. Such matters include requirements related to the status of
the creditor rather than the loan, requirements related to selling,
securitizing, or delivering the loan, and any requirement that the
creditor must perform after the consummated loan is sold, guaranteed,
or endorsed for insurance such as document custody, quality control, or
servicing.
Accordingly, a covered transaction is eligible for purchase or
guarantee by Fannie Mae or Freddie Mac, for example, if:
i. The loan conforms to the relevant standards set forth in the
Fannie Mae Single-Family Selling Guide or the Freddie Mac Single-Family
Seller/Servicer Guide in effect at the time, or to standards set forth
in a written agreement between the creditor or a sponsor or aggregator
of the creditor and Fannie Mae or Freddie Mac in effect at that time
that permits variation from the standards of those guides;
ii. The loan has been granted an individual waiver by a GSE, which
will allow purchase or guarantee in spite of variations from the
applicable standards; or
iii. The creditor inputs accurate information into the Fannie Mae
or Freddie Mac AUS or another AUS pursuant to a written agreement
between the creditor and Fannie Mae or Freddie Mac that permits
variation from the GSE AUS; the loan receives one of the
recommendations specified below in paragraphs A or B from the
corresponding GSE AUS or an equivalent recommendation pursuant to
another AUS as authorized in the written agreement; and the creditor
satisfies any requirements and conditions specified by the relevant AUS
that are not wholly unrelated to ability to repay, the non-satisfaction
of which would invalidate that recommendation:
A. An ``Approve/Eligible'' recommendation from Desktop Underwriter
(DU); or
B. A risk class of ``Accept'' and purchase eligibility of ``Freddie
Mac Eligible'' from Loan Prospector (LP).
5. Repurchase and indemnification demands. A repurchase or
indemnification demand by Fannie Mae, Freddie Mac, HUD, VA, USDA, or
RHS is not dispositive of qualified mortgage status. Qualified mortgage
status under Sec. 1026.43(e)(4) depends on whether a loan is eligible
to be purchased, guaranteed, or insured at the time of consummation,
provided that other requirements under Sec. 1026.43(e)(4) are
satisfied. Some repurchase or indemnification demands are not related
to eligibility criteria at consummation. See comment 43(e)(4)-4.
Further, even where a repurchase or indemnification demand relates to
whether the loan satisfied relevant eligibility requirements as of the
time of consummation, the mere fact that a demand has been made, or
even resolved, between a creditor and GSE or agency is not dispositive
for purposes of Sec. 1026.43(e)(4). However, evidence of whether a
particular loan satisfied the Sec. 1026.43(e)(4) eligibility criteria
at consummation may be brought to light in the course of dealing over a
particular demand, depending on the facts and circumstances.
Accordingly, each loan should be evaluated by the creditor based on the
facts and circumstances relating to the eligibility of that loan at the
time of consummation. For example:
i. Assume eligibility to purchase a loan was based in part on the
consumer's employment income of $50,000 per year. The creditor uses the
income figure in obtaining an approve/eligible recommendation from DU.
A quality control review, however, later determines that the
documentation provided and verified by the creditor to comply with
Fannie Mae requirements did not support the reported income of $50,000
per year. As a result, Fannie Mae demands that the creditor repurchase
the loan. Assume that the quality control review is accurate, and that
DU would not have issued an approve/eligible recommendation if it had
been provided the accurate income figure. The DU determination at the
time of consummation was invalid because it was based on inaccurate
information provided by the creditor; therefore, the loan was never a
qualified mortgage under Sec. 1026.43(e)(4).
ii. Assume that a creditor delivered a loan, which the creditor
determined was a qualified mortgage at the time of consummation under
Sec. 1026.43(e)(4), to Fannie Mae for inclusion in a particular To-Be-
Announced Mortgage Backed Security (MBS) pool of loans. The data
submitted by the creditor at the time of loan delivery indicated that
the various loan terms met the product type, weighted-average coupon,
weighted-average maturity, and other MBS pooling criteria, and MBS
issuance disclosures to investors reflected this loan data. However,
after delivery and MBS issuance, a quality control review determines
that the loan violates the pooling criteria.The loan still meets
eligibility requirements for Fannie Mae products and loan terms. Fannie
Mae, however, requires the creditor to repurchase the loan due to the
violation of MBS pooling requirements. Assume that the quality control
review determination is accurate. Because the loan still meets Fannie
Mae's eligibility requirements, it remains a qualified mortgage based
on these facts and circumstances.
[[Page 44728]]
* * * * *
Dated: July 10, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-16962 Filed 7-23-13; 8:45 am]
BILLING CODE 4810-AM-P
