Amendments to the 2013 Mortgage Rules Under the Equal Credit Opportunity Act (Regulation B), Real Estate Settlement Procedures Act (Regulation X), and the Truth in Lending Act (Regulation Z), 60381-60451 [2013-22752]

Agencies

• BUREAU OF CONSUMER FINANCIAL PROTECTION

[Federal Register Volume 78, Number 190 (Tuesday, October 1, 2013)]
[Rules and Regulations]
[Pages 60381-60451]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-22752]



[[Page 60381]]

Vol. 78

Tuesday,

No. 190

October 1, 2013

Part II





Bureau of Consumer Financial Protection





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12 CFR Parts 1002, 1024, and 1026





Amendments to the 2013 Mortgage Rules Under the Equal Credit 
Opportunity Act (Regulation B), Real Estate Settlement Procedures Act 
(Regulation X), and the Truth in Lending Act (Regulation Z); Final Rule

Federal Register / Vol. 78, No. 190 / Tuesday, October 1, 2013 / 
Rules and Regulations

[[Page 60382]]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Parts 1002, 1024, and 1026

[Docket No. CFPB-2013-0018]
RIN 3170-AA37


Amendments to the 2013 Mortgage Rules Under the Equal Credit 
Opportunity Act (Regulation B), Real Estate Settlement Procedures Act 
(Regulation X), and the Truth in Lending Act (Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule.

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SUMMARY: This final rule amends some of the final mortgage rules issued 
by the Bureau of Consumer Financial Protection (Bureau) in January 
2013. These amendments focus primarily on loss mitigation procedures 
under Regulation X's servicing provisions, amounts counted as loan 
originator compensation to retailers of manufactured homes and their 
employees for purposes of applying points and fees thresholds under the 
Home Ownership and Equity Protection Act and the Ability-to-Repay rules 
in Regulation Z, exemptions available to creditors that operate 
predominantly in ``rural or underserved'' areas for various purposes 
under the mortgage regulations, application of the loan originator 
compensation rules to bank tellers and similar staff, and the 
prohibition on creditor-financed credit insurance. The Bureau also is 
adjusting the effective dates for certain provisions of the loan 
originator compensation rules. In addition, the Bureau is adopting 
technical and wording changes for clarification purposes to Regulations 
B, X, and Z.

DATES: This final rule is effective January 10, 2014, except for the 
amendments to Sec. Sec.  1026.35(b)(2)(iii), 1026.36(a), (b), and (j), 
and commentary to Sec. Sec.  1026.25(c)(2), 1026.35, and 1026.36(a), 
(b), (d), and (f) in Supp. I to part 1026, which are effective January 
1, 2014, and the amendments to commentary to Sec.  1002.14(b)(3) in 
Supplement I to part 1002, which are effective January 18, 2014.
    In addition this rule changes the effective date from January 10, 
2014, to January 1, 2014, for the amendments to Sec. Sec.  
1026.25(c)(2), 1026.36(a), (b), (d), (e), (f), and (j) and commentary 
to Sec. Sec.  1026.25(c)(2) and 1026.36(a), (b), (d), (e), (f), and (j) 
in Supp. I to part 1026, published February 15, 2013, at 78 FR 11280.

FOR FURTHER INFORMATION CONTACT: Whitney Patross, Attorney; Richard 
Arculin, William Corbett, Michael Silver, and Daniel Brown, Counsels; 
Mark Morelli and Nicholas Hluchyj, Senior Counsels, and Paul Ceja, 
Senior Counsel and Special Advisor, 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).\1\ In 
June 2013, the Bureau proposed several amendments to those final rules 
(``June 2013 Proposal'').\2\ This final rule adopts with some revisions 
and additional clarifications the June 2013 Proposal. It makes several 
amendments to the provisions adopted by the 2013 Title XIV Final Rules 
to clarify or revise regulatory provisions and official interpretations 
primarily relating to the 2013 Mortgage Servicing Final Rules and the 
2013 Loan Originator Compensation Final Rule, as described further 
below. This final rule also makes modifications to the effective dates 
for provisions adopted by the 2013 Loan Originator Compensation Final 
Rule, and certain technical corrections and minor refinements to 
Regulations B, X, and Z. The specifics of these amendments and 
modifications are discussed in the following paragraphs.
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    \1\ Specifically, on January 10, 2013, the Bureau issued Escrow 
Requirements Under the Truth in Lending Act (Regulation Z), 78 FR 
4726 (Jan. 22, 2013) (2013 Escrows Final Rule), High-Cost Mortgage 
and Homeownership Counseling Amendments to the Truth in Lending Act 
(Regulation Z) and Homeownership Counseling Amendments to the Real 
Estate Settlement Procedures Act (Regulation X), 78 FR 6856 (Jan. 
31, 2013) (2013 HOEPA Final Rule), and Ability-to-Repay and 
Qualified Mortgage Standards Under the Truth in Lending Act 
(Regulation Z), 78 FR 6407 (Jan. 30, 2013) (2013 ATR Final Rule). 
The Bureau concurrently issued a proposal to amend the 2013 ATR 
Final Rule, which was finalized on May 29, 2013. See 78 FR 6621 
(Jan. 30, 2013) and 78 FR 35430 (June 12, 2013). On January 17, 
2013, the Bureau issued the Real Estate Settlement Procedures Act 
(Regulation X) and Truth in Lending Act (Regulation Z) Mortgage 
Servicing Final Rules, 78 FR 10901 (Regulation Z) (Feb. 14, 2013) 
and 78 FR 10695 (Regulation X) (Feb. 14, 2013) (2013 Mortgage 
Servicing Final Rules). On January 18, 2013, the Bureau issued the 
Disclosure and Delivery Requirements for Copies of Appraisals and 
Other Written Valuations Under the Equal Credit Opportunity Act 
(Regulation B), 78 FR 7215 (Jan. 31, 2013) (2013 ECOA Final Rule) 
and, jointly with other agencies, issued Appraisals for Higher-
Priced Mortgage Loans, 78 FR 10367 (Feb. 13, 2013). On January 20, 
2013, the Bureau issued the Loan Originator Compensation 
Requirements under the Truth in Lending Act (Regulation Z), 78 FR 
11280 (Feb. 15, 2013) (2013 Loan Originator Compensation Final 
Rule).
    \2\ Amendments to the 2013 Mortgage Rules Under the Equal Credit 
Opportunity Act (Regulation B), Real Estate Settlement Procedures 
Act (Regulation X), and the Truth in Lending Act (Regulation Z), 78 
FR 39902 (July 2, 2013).
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    First, the Bureau is adopting several modifications to provisions 
of Regulation X adopted by the 2013 Mortgage Servicing Final Rules, 
including those related to error resolution procedures and information 
requests (Sec. Sec.  1024.35 and 1024.36), and loss mitigation (Sec.  
1024.41). With respect to loss mitigation, two of the revisions concern 
the requirement in Sec.  1024.41(b)(2)(i) that a servicer review a 
borrower's loss mitigation application within five days and provide a 
notice to the borrower acknowledging receipt and informing the borrower 
whether the application is complete or incomplete. If the servicer does 
not deem the application complete, the servicer's notice must also list 
the missing items and suggest the borrower provide the information by 
the earliest remaining of four dates specified in the regulation. The 
changes replace the four specified dates with a requirement that a 
servicer give a borrower a reasonable date by which the borrower should 
in which to provide the missing information. New commentary explains 
the four dates previously specified in the regulation are now treated 
as milestones that the servicer should consider in selecting a 
reasonable date, however the final rule allows servicers more 
flexibility than the existing rule. The changes also set forth 
requirements and procedures for a servicer to follow in the event that 
a facially complete application is later found by the servicer to 
require additional information or corrections to a previously submitted 
document in order to be evaluated for loss mitigation options available 
to the borrower. Another modification provides servicers more 
flexibility in providing short-term payment forbearance plans based on 
an evaluation of an incomplete loss mitigation application. Other 
clarifications and revisions address the content of notices required 
under Sec.  1024.41(c)(1)(ii) and (h)(4), which inform borrowers of the 
outcomes of their evaluation for loss mitigation and any appeals filed 
by the borrowers. In addition, the amendments address how protections 
are determined to apply where a foreclosure sale has not been scheduled 
at the time the borrower submits a loss mitigation application or when 
a foreclosure sale is rescheduled. Finally, the amendments explain what 
actions constitute the ``first notice or filing'' for purposes of the 
general ban on proceeding to foreclosure before a

[[Page 60383]]

borrower is 120 days delinquent, and provide exemptions from the 120-
day prohibition for foreclosures for certain reasons other than 
nonpayment.
    Second, the Bureau is clarifying and revising the definition of 
points and fees for purposes of the qualified mortgage points and fees 
cap and the high-cost mortgage points and fees threshold, as adopted in 
the 2013 ATR Final Rule and the 2013 HOEPA Final Rule, respectively. In 
particular, the Bureau is adding commentary to Sec.  1026.32(b)(1)(ii) 
to clarify for retailers of manufactured homes and their employees what 
compensation must be counted as loan originator compensation and thus 
included in the points and fees thresholds. The Bureau also is adding 
commentary to clarify the treatment of charges paid by parties other 
than the consumer, including third parties, for purposes of the points 
and fees thresholds.
    Third, the Bureau is revising two exceptions available under the 
2013 Title XIV Final Rules to small creditors operating predominantly 
in ``rural'' or ``underserved'' areas pending the Bureau's re-
examination of the underlying definitions of ``rural'' or 
``underserved'' over the next two years, as it recently announced it 
would do in Ability-to-Repay and Qualified Mortgage Standards Under the 
Truth in Lending Act (Regulation Z) (May 2013 ATR Final Rule).\3\ The 
Bureau is extending an exception to the general prohibition on balloon 
features for high-cost mortgages under Sec.  1026.32(d)(1)(ii)(C) to 
allow all small creditors, regardless of whether they operate 
predominantly in ``rural'' or ``underserved'' areas, to continue 
originating balloon high-cost mortgages if the loans meet the 
requirements for qualified mortgages under Sec. Sec.  1026.43(e)(6) or 
1026.43(f). In addition, the Bureau is amending an exemption from the 
requirement to establish escrow accounts for higher-priced mortgage 
loans under Sec.  1026.35(b)(2)(iii)(A) for small creditors that extend 
more than 50 percent of their total covered transactions secured by a 
first lien in ``rural'' or ``underserved'' counties during the 
preceding calendar year. To prevent creditors that qualified for the 
exemption in 2013 from losing eligibility in 2014 or 2015 because of 
changes in which counties are considered rural while the Bureau is re-
evaluating the underlying definition of ``rural,'' the Bureau is 
amending this provision to allow creditors to qualify for the exemption 
if they extended more than 50 percent of their total covered 
transactions in rural or underserved counties in any of the previous 
three calendar years (assuming the other criteria for eligibility are 
also met).
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    \3\ 78 FR 35430 (June 12, 2013).
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    Fourth, the Bureau is adopting revisions, as well as general 
technical and wording changes, to various provisions of the 2013 Loan 
Originator Compensation Final Rule in Sec.  1026.36. These include 
revising the definition of ``loan originator'' in the regulatory text 
and commentary, such as provisions addressing when employees of a 
creditor or loan originator in certain administrative or clerical roles 
(e.g., tellers or greeters) may become ``loan originators'' and thus 
subject to the rule, upon providing contact information or credit 
applications for loan originators or creditors to consumers; further 
clarification on the meaning of ``credit terms,'' which is used 
throughout Sec.  1026.36(a); and additional clarifications regarding 
when employees of manufactured housing retailers may be classified as 
loan originators. The Bureau also is adopting a number of 
clarifications to the commentary on prohibited payments to loan 
originators.
    Fifth, the Bureau is clarifying and revising three aspects of the 
rules implementing the Dodd-Frank Act prohibition on creditors 
financing credit insurance premiums in connection with certain consumer 
credit transactions secured by a dwelling. The Bureau is adding new 
Sec.  1026.36(i)(2)(ii) to clarify what constitutes financing of such 
premiums by a creditor. The Bureau also is adding new Sec.  
1026.36(i)(2)(iii) to clarify when credit insurance premiums are 
considered to be calculated and paid on a monthly basis, for purposes 
of the statutory exclusion from the prohibition for certain credit 
insurance premium calculation and payment arrangements. And, finally, 
the Bureau is adding new comment 36(i)-1 to clarify when including the 
credit insurance premium or fee in the amount owed violates the rule.
    Sixth, the Bureau is changing the effective date for certain 
provisions under the 2013 Loan Originator Compensation Final Rule, so 
they take effect on January 1, 2014, rather than January 10, 2014, as 
originally provided. The affected provisions are the amendments to or 
additions of (as applicable) Sec.  1026.25(c)(2) (record retention), 
Sec.  1026.36(a) (definitions), Sec.  1026.36(b) (scope), Sec.  
1026.36(d) (compensation), Sec.  1026.36(e) (anti-steering), Sec.  
1026.36(f) (qualifications), and Sec.  1026.36(j) (compliance policies 
and procedures for depository institutions) and the associated 
commentary. The Bureau believes that this change will facilitate 
compliance because these provisions largely focus on compensation plan 
structures, registration and licensing, and hiring and training 
requirements that are often structured on an annual basis and typically 
do not vary from transaction to transaction. After reviewing comments, 
the Bureau has decided to keep the date for implementation of the ban 
on financing credit insurance under Sec.  1026.36(i) as January 10, 
2014, consistent with the date previously adopted in the Loan 
Originator Compensation Requirements under the Truth in Lending Act 
(Regulation Z); Prohibition on Financing Credit Insurance Premiums; 
Delay of Effective Date (2013 Effective Date Final Rule).\4\
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    \4\ 78 FR 32547 (May 31, 2013).
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    In addition to the clarifications and amendments to Regulations X 
and Z discussed above, the Bureau is adopting technical corrections and 
minor clarifications to wording throughout Regulations B, X, and Z that 
are generally not substantive in nature.

II. Background

A. Title XIV Rules 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. Public Law 111-203, 124 Stat. 
1376 (2010). In the Dodd-Frank Act, Congress established the Bureau 
and, under sections 1061 and 1100A, generally consolidated the 
rulemaking authority for Federal consumer financial laws, including the 
Equal Credit Opportunity Act (ECOA), Truth in Lending Act (TILA), and 
Real Estate Settlement Procedures Act (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

[[Page 60384]]

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.
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    \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.
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    On January 10, 2013, the Bureau issued the 2013 ATR Final Rule, the 
2013 Escrows Final Rule, and the 2013 HOEPA Final Rule. 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 \7\ (issued jointly with other agencies) and the 2013 
ECOA Final Rule. On January 20, 2013, the Bureau issued the 2013 Loan 
Originator Compensation Final Rule. Most of these rules will become 
effective on January 10, 2014.
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    \7\ 78 FR 10367 (Feb. 13, 2013).
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    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), which the Bureau finalized on May 29, 2013 (May 2013 ATR 
Final Rule).\8\
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    \8\ 78 FR 6622 (Jan. 30, 2013); 78 FR 35430 (June 12, 2013).
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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),\9\ 
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 includes: (1) Coordination 
with other agencies, including to develop consistent, updated 
examination procedures; (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.
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    \9\ Consumer Financial Protection Bureau Lays Out Implementation 
Plan for New Mortgage Rules. Press Release. Feb. 13, 2013.
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    In the June 2013 proposal, the Bureau proposed amendments to its 
new mortgage rules. This final rule adopts those proposed amendments 
with some additional clarifications and revisions. The purpose of these 
updates is to address important questions raised by industry, consumer 
groups, or other agencies.

C. Comments on the Proposed Rule

    The Bureau received 280 comments on the proposed rule on which the 
final rule is based. Many of these comments discussed issues on which 
the proposed rule did not seek comment or address. A number of comments 
addressed, for example, the small servicer exemption, the general 
effective dates for the 2013 Title XIV Rules finalized in January 2013, 
whether the Bureau should reconsider replacing the Sec.  1026.36(a) 
definition of ``loan originator'' with the definition provided under 
the SAFE Act, or whether the Bureau should amend the provision of the 
mortgage servicing rules that deals with second or successive loss 
mitigation applications. This final rule does not make any changes 
outside the scope of the proposal. As proposed, it focuses on specific, 
narrow implementation and interpretive issues, rather than broader 
policy changes.
    The Bureau has examined all comments submitted and discusses 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 ECOA, TILA, RESPA, 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 Board of Governors of the Federal Reserve 
System (Federal Reserve 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.'' \10\ 
Section 1061 of the Dodd-Frank Act also transferred to the Bureau all 
of the Department of Housing and Urban Development's (HUD) consumer 
protection functions relating to RESPA.\11\ Title X of the Dodd-Frank 
Act, including section 1061 of the Dodd-Frank Act, along with ECOA, 
TILA, RESPA, and certain subtitles and provisions of title XIV of the 
Dodd-Frank Act, are Federal consumer financial laws.\12\
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    \10\ 12 U.S.C. 5581(a)(1).
    \11\ Public Law 111-203, 124 Stat. 1376, section 1061(b)(7); 12 
U.S.C. 5581(b)(7).
    \12\ 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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A. ECOA

    Section 703(a) of ECOA authorizes the Bureau to prescribe 
regulations to carry out the purposes of ECOA. Section 703(a) further 
states that such regulations may contain--but are not limited to--such 
classifications, differentiation, or other provision, and may provide 
for such adjustments and exceptions for any class of transactions as, 
in the judgment of the Bureau, are necessary or proper to effectuate 
the purposes of ECOA, to prevent circumvention or evasion thereof, or 
to facilitate or substantiate compliance. 15 U.S.C. 1691b(a).

B. 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 ensuring that 
servicers respond to borrower requests and complaints in a timely 
manner and maintain and provide accurate information, helping borrowers 
avoid unwarranted or unnecessary costs and fees, and facilitating 
review for foreclosure avoidance options.

C. 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 section 
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

[[Page 60385]]

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, and 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. Under TILA section 
103(bb)(4), the Bureau may adjust the definition of points and fees for 
purposes of that threshold to include such charges that the Bureau 
determines to be appropriate.
    TILA section 129C(b)(3)(B)(i) 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. 
15 U.S.C. 1639c(b)(3)(B)(i). In addition, TILA section 129C(b)(3)(A) 
requires the Bureau 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. 15 U.S.C. 1639c(b)(3)(A).

D. 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 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 ECOA, RESPA, TILA, title X, and the 
enumerated subtitles and provisions of title XIV of the Dodd-Frank Act, 
and prevent evasion of those laws.
    Section 1032(a) of the Dodd-Frank Act provides that the Bureau 
``may prescribe rules to ensure that the features of any consumer 
financial product or service, both initially and over the term of the 
product or service, are fully, accurately, and effectively disclosed to 
consumers in a manner that permits consumers to understand the costs, 
benefits, and risks associated with the product or service, in light of 
the facts and circumstances.'' 12 U.S.C. 5532(a). The authority granted 
to the Bureau in Dodd-Frank Act section 1032(a) is broad, and empowers 
the Bureau to prescribe rules regarding the disclosure of the 
``features'' of consumer financial products and services generally. 
Accordingly, the Bureau may prescribe rules containing disclosure 
requirements even if other Federal consumer financial laws do not 
specifically require disclosure of such features.
    Dodd-Frank Act section 1032(c) provides that, in prescribing rules 
pursuant to Dodd-Frank Act section 1032, the Bureau ``shall consider 
available evidence about consumer awareness, understanding of, and 
responses to disclosures or communications about the risks, costs, and 
benefits of consumer financial products or services.'' 12 U.S.C. 
5532(c). Accordingly, in amending provisions authorized under Dodd-
Frank Act section 1032(a), the Bureau has considered available studies, 
reports, and other evidence about consumer awareness, understanding of, 
and responses to disclosures or communications about the risks, costs, 
and benefits of consumer financial products or services.
    The Bureau is amending rules finalized in January 2013 that 
implement certain Dodd-Frank Act provisions. In particular, the Bureau 
is amending regulatory provisions adopted by the 2013 ECOA Final Rule, 
the 2013 Mortgage Servicing Final Rules, the 2013 HOEPA Final Rule, the 
2013 Escrows Final Rule, the 2013 Loan Originator Compensation Final 
Rule, and the 2013 ATR Final Rule.

IV. Effective Dates

A. Provisions Other Than Those Related to the 2013 Loan Originator 
Compensation Final Rule or the 2013 Escrows Final Rule

    In enacting the Dodd-Frank Act, Congress significantly amended the 
statutory requirements governing a number of mortgage practices. Under 
the Dodd-Frank Act, 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.\13\ Where the Bureau was 
required to prescribe implementing regulations, the Dodd-Frank Act 
further provided that those regulations must take effect not later than 
12 months after the date of the regulations' issuance in final 
form.\14\ The Bureau issued the 2013 Title XIV Final Rules in January 
2013 to implement these new statutory provisions and provide for an 
orderly transition. To allow the mortgage industry sufficient time to 
comply with the new rules, the Bureau established January 10, 2014--one 
year after issuance of the earliest of the 2013 Title XIV Final Rules--
as the baseline effective date for nearly all of the new requirements. 
In the preamble to certain of the various 2013 Title XIV Final Rules, 
the Bureau further specified that the new regulations would apply to 
transactions for which applications were received on or after January 
10, 2014.
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    \13\ Dodd-Frank Act section 1400(c)(3), 15 U.S.C. 1601 note.
    \14\ Dodd-Frank Act section 1400(c)(1)(B), 15 U.S.C. 1601 note.
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    Except for the amendments regarding the 2013 Loan Originator 
Compensation Final Rule and the 2013 Escrows Final Rule discussed 
below, the Bureau proposed an effective date of January 10, 2014. The 
Bureau proposed this effective date because it is consistent with the 
effective dates for the 2013 Title XIV Final Rules, which this final 
rule clarifies, revises, or amends. Most of the proposed amendments 
were intended to clarify application of certain aspects of these rules 
in advance of the January 10, 2014 effective date, or amend them in 
manners that facilitate compliance. As discussed in the various 2013 
Title XIV Final Rules, the Bureau believes that having a consistent 
effective date across most of the 2013 Title XIV Final Rules will 
facilitate compliance. This includes any clarifications, revisions, or 
other amendments made during the implementation period--particularly 
those amendments designed to facilitate compliance with the overarching 
2013 Title XIV Final Rules. Thus, because the clarifications, 
revisions, and amendments to the 2013 Title XIV Final Rules adopted in 
this final rule interrelate with or depend on other aspects of the 
underlying 2013 Title XIV Final Rules and are intended largely to 
facilitate compliance with those rules,

[[Page 60386]]

the Bureau does not believe that the amendments adopted by this final 
rule should become effective on a different date than the underlying 
regulations. The Bureau thus proposed an effective date of January 10, 
2014 for any amendments adopted by this final rule.
    The Bureau received some comments from industry and trade 
associations that addressed the effective dates, but most of these 
comments generally requested a delayed effective date across all the 
rules, which the Bureau did not propose. The Bureau received a handful 
of comments that asked for staggered effective dates for the amended 
rules, but none of these comments provided a reasonable means of 
implementing the proposed amendments at a date later than the 
underlying regulations the proposal would have amended. Despite these 
comments, the Bureau remains persuaded that it would be impracticable 
for these amendments to take effect later than the underlying 
regulations they amend. Moreover, the Bureau believes that these 
amendments should help industry participants comply with the other 
components of the 2013 Title XIV Final Rules, which in most cases also 
will take effect January 10, 2014. The Bureau thus is adopting the 
effective date of January 10, 2014, for the amendments in this document 
other than as discussed in parts IV.B and IV.C below.

B. For Provisions Related to the 2013 Escrows Final Rule

    The Bureau proposed an effective date of January 1, 2014 for the 
amendments to the new provisions in Sec.  1026.35 that govern higher-
priced mortgage loan escrow requirements, which took effect on June 1, 
2013. While the Bureau established January 10, 2014 as the baseline 
effective date for most of the 2013 Title XIV Final Rules, it 
identified certain provisions that it believed did not present 
significant implementation burdens for industry, including amendments 
to Sec.  1026.35 adopted by the 2013 Escrows Final Rule. For these 
provisions, the Bureau set an earlier effective date of June 1, 2013. 
The proposal would have amended one such provision, Sec.  
1026.35(b)(2)(iii)(A), which provides an exemption from the higher-
priced mortgage loan escrow requirement to creditors that extend more 
than 50 percent of their total covered transactions secured by a first 
lien in ``rural'' or ``underserved'' counties during the preceding 
calendar year and also meet other small creditor criteria, and do not 
otherwise maintain escrow accounts for loans serviced by themselves or 
an affiliate. In light of recent changes to which counties meet the 
definition of ``rural,'' the Bureau proposed to amend this provision to 
prevent creditors that qualified for the exemption in 2013 from losing 
eligibility in 2014 or 2015 because of these changes. The proposal 
would have allowed creditors to qualify for the exemption if they 
qualified in any of the previous three calendar years (assuming the 
other criteria for eligibility are also met). In addition, the proposal 
would have amended Sec.  1026.35(b)(2)(iii)(D)(1) to prevent creditors 
that were previously ineligible for the exemption, but may now qualify 
in light of the proposed changes, from losing eligibility because they 
had established escrow accounts for first-lien higher-priced mortgage 
loans (for which applications were received after June 1, 2013), as 
required when the final rule took effect and prior to the proposed 
amendments taking effect. The Bureau proposed to make this amendment 
effective for applications received on or after January 1, 2014, 
because the Sec.  1026.35(b)(2)(iii) exemption applies based on a 
calendar year and relates to a regulation that is already in effect. 
The Bureau received no comments addressing the proposed effective date 
of this provision, other than comments that generally supported the 
proposal.
    As discussed in the section-by-section analysis below, the Bureau 
is adopting amendments to Sec.  1026.35(b)(2)(iii) as proposed. In 
addition, the Bureau is adopting amendments to the commentary to this 
section substantially as proposed with one additional clarification. 
The Bureau believes it is appropriate to set a January 1, 2014 
effective date for these provisions. The Bureau notes that a January 1, 
2014 effective date is more beneficial to industry, because the 
amendment would only expand eligibility for the exemption--thus an 
effective date of January 1, 2014, as opposed to January 10, 2014, 
would mean that creditors are able to take advantage of this expanded 
exemption earlier. Accordingly, the amendments to Sec.  
1026.35(b)(2)(iii) and its commentary will apply to applications 
received on or after January 1, 2014.

C. Provisions Related to the 2013 Loan Originator Compensation Final 
Rule

    The effective date for certain provisions in this final rule 
related to the 2013 Loan Originator Compensation Final Rule, along with 
the related provisions of the 2013 Loan Originator Compensation Final 
Rule, is January 1, 2014, for the reasons discussed below.

V. Effective Date of the 2013 Loan Originator Compensation Rule

A. General

The Proposal
    As described in the proposal, the Bureau established January 10, 
2014, as the baseline effective date for nearly all of the provisions 
in the 2013 Title XIV Final Rules, including most provisions of the 
2013 Loan Originator Compensation Final Rule. In the proposal, the 
Bureau stated that it believed that having a consistent effective date 
across nearly all of the 2013 Title XIV Final Rules would facilitate 
compliance. However, as explained in the proposal, the Bureau 
identified a few provisions that it believed did not present 
significant implementation burdens for industry, including Sec.  
1026.36(h) on mandatory arbitration clauses and waivers of certain 
consumer rights and Sec.  1026.36(i) on financing credit insurance, as 
adopted by the 2013 Loan Originator Compensation Final Rule. As 
explained in the proposal, for these provisions (and associated 
commentary), the Bureau set an earlier effective date of June 1, 
2013.\15\
---------------------------------------------------------------------------

    \15\ After interpretive issues were raised concerning the credit 
insurance provision as discussed in the 2013 Loan Originator 
Compensation Final Rule, the Bureau temporarily delayed and extended 
the effective date for Sec.  1026.36(i) in the 2013 Effective Date 
Final Rule until January 10, 2014. 78 FR 32547 (May 31, 2013). In 
the proposal, the Bureau requested comment on whether the effective 
date for Sec.  1026.36(i) may be set earlier than January 10, 2014.
---------------------------------------------------------------------------

    As described in the proposal, since issuing the 2013 Loan 
Originator Compensation Final Rule in January 2013, the Bureau has 
received a number of questions about transition issues, particularly 
with regard to application of provisions under Sec.  1026.36(d) that 
generally prohibit basing loan originator compensation on transaction 
terms but permit creditors to award non-deferred profits-based 
compensation subject to certain limits. For instance, as discussed in 
the proposal, the Bureau has received inquiries about when creditors 
and loan originator organizations may begin taking into account 
transactions for purposes of paying compensation under a non-deferred 
profits-based compensation plan pursuant to Sec.  
1026.36(d)(1)(iv)(B)(1) (i.e., the 10-percent total compensation limit, 
or the 10-percent limit). As the Bureau stated in the proposal, while 
the profits-based compensation provisions present relatively 
complicated transition issues, the Bureau is also conscious of the fact 
that most other provisions in the 2013 Loan Originator Compensation 
Final

[[Page 60387]]

Rule are simpler to implement because they largely recodify and clarify 
existing requirements that were previously adopted by the Federal 
Reserve Board in 2010 with regard to loan originator compensation, and 
by various agencies under the Secure and Fair Enforcement for Mortgage 
Licensing Act of 2008, 12 U.S.C. 5106-5116 (SAFE Act), with regard to 
loan originator qualification requirements. The Bureau also stated in 
the proposal that these provisions are focused on compensation plan 
structures, registration and licensing, and hiring and training 
requirements that are often structured on an annual basis and typically 
do not vary from transaction to transaction.
    For all of these reasons, the Bureau proposed moving the general 
effective date for most provisions adopted by the 2013 Loan Originator 
Compensation Final Rule to January 1, 2014. The Bureau stated in the 
proposal that, although this change would shorten the implementation 
period by nine days, the Bureau believes that the change would actually 
facilitate compliance and reduce implementation burden by providing a 
cleaner transition period that more closely aligns with changes to 
employers' annual compensation structures and registration, licensing, 
and training requirements. In addition, the Bureau also stated that, 
because elements of the 2013 Loan Originator Compensation Final Rule 
concerning retention of records, definitions, scope, and implementing 
procedures affect multiple provisions, the Bureau was proposing to make 
the change with regard to the bulk of the 2013 Loan Originator 
Compensation Final Rule as described further below, rather than 
attempting to treat individual provisions in isolation. Finally, the 
Bureau also proposed changes to the effective date for provisions on 
financing of credit insurance under Sec.  1026.36(i), in connection 
with proposing further clarifications and guidance on the Dodd-Frank 
Act requirements related to that provision.
    The Bureau stated in the proposal that it believed these changes 
would facilitate compliance and help ensure that the 2013 Loan 
Originator Compensation Final Rule does not have adverse unintended 
consequences. The Bureau requested public comment on these proposed 
effective dates, including on any suggested alternatives.
Comments
    The Bureau received approximately 30 comments addressing the 
proposed changes to the effective date for the 2013 Loan Originator 
Compensation Final Rule other than Sec.  1026.36(i).\16\ The comments 
generally were supportive of these proposed changes. A national 
association of credit unions and several state credit union 
associations supported moving up the effective date from January 10, 
2014, to January 1, 2014, stating that a January 1 date would result in 
a cleaner transition period that more closely aligns with changes to 
employers' annual compensation structures and registration, licensing, 
and training requirements. A national trade association of banking 
institutions stated its appreciation for the Bureau's efforts to 
facilitate compliance and establish effective dates that are better 
aligned with banker systems. This association wrote that it did not 
believe a January 1 effective date would constitute a major burden. The 
association urged the Bureau, however, to enact effective dates that 
apply to transactions that are either consummated on or after January 
1, 2014 or for which the creditor paid compensation on or after that 
date. According to the association, allowing for an alternative option 
would best accommodate the various payment systems and methods that 
exist across various institutions and would not, in its opinion, give 
rise to significant difficulties in terms of examinations.\17\
---------------------------------------------------------------------------

    \16\ The comments regarding the effective date for Sec.  
1026.36(i) are discussed separately below.
    \17\ The association stated further that, under this approach, 
an institution would have to abide by whatever effective date 
methodology it selects.
---------------------------------------------------------------------------

    One community bank commented that it would pose unnecessary and 
wasteful burdens on financial institutions of all sizes to necessitate 
a separate accounting and reporting for a nine-day period, because 
accounting periods for compensation generally commence annually each 
January 1st. A large mortgage company stated that it supported the 
change because moving the effective date to January 1, 2014, would help 
lenders update their systems on a consistent basis and avoid any 
potential lapses in accounting or confusion that could emerge between 
January 1 and January 10. One community bank stated that it is 
``operationally efficient'' to apply rule changes at the beginning of a 
month and that there would be no real difference in compliance burden 
because ``most lenders would naturally'' comply as of the earlier date 
anyway. A state association representing banking institutions wrote 
that moving up the effective date by nine days aligns more closely with 
payroll records and tax reporting and may actually be easier to 
implement from an operational basis than a January 10 effective date. 
This association did report that its members have indicated that they 
will not be able to meet either a January 1 or a January 10, 2014, 
effective date due to the 2013 Loan Originator Compensation Final 
Rule's complexity and pending amendments.
Final Rule
    As discussed in more detail below, the Bureau is finalizing the 
effective dates for Sec.  1026.36 (and interrelated provisions in Sec.  
1026.25(c)(2)) adopted by the 2013 Loan Originator Compensation Final 
Rule (and associated commentary), and the amendments to and additions 
to those sections contained in today's final rule, as proposed. The 
Bureau discusses in turn below the effective dates for different 
provisions of Sec.  1026.36 (and interrelated provisions in Sec.  
1026.25(c)(2)). These clarifications and amendments to the effective 
date require only minimal revisions to the rule text and commentary and 
primarily are reflected in the Dates caption and discussion of 
effective dates in this Supplementary Information. As amended by the 
Dodd-Frank Act, TILA section 105(a), 15 U.S.C. 1604(a), directs the 
Bureau to prescribe regulations to carry out the purposes of TILA, and 
provides that such regulations may contain additional requirements, 
classifications, differentiations, or other provisions, and may provide 
for such adjustments and exceptions for all or any class of 
transactions, that the Bureau judges are necessary or proper to 
effectuate the purposes of TILA, to prevent circumvention or evasion 
thereof, or to facilitate compliance. Under Dodd-Frank Act section 
1022(b)(1), 15 U.S.C. 5512(b)(1), the Bureau has general authority to 
prescribe rules as may be necessary or appropriate to enable the Bureau 
to administer and carry out the purposes and objectives of the Federal 
consumer financial laws, and to prevent evasions thereof. The Bureau is 
changing the effective date of the 2013 Loan Originator Compensation 
Final Rule with respect to those provisions described above pursuant to 
its TILA section 105(a) and Dodd-Frank Act section 1022(b)(1) 
authority.

B. Effective Date for Amendments to Sec.  1026.36(d)

The Proposal
    The Bureau proposed three specific changes to the effective date 
for the amendments to Sec.  1026.36(d) (and associated commentary) 
contained in

[[Page 60388]]

the 2013 Loan Originator Compensation Final Rule. First, the Bureau 
proposed that the provisions of the 2013 Loan Originator Compensation 
Final Rule revising Sec.  1026.36(d) would be effective January 1, 
2014, not January 10, 2014. The Bureau discussed its concern that an 
effective date of January 10, 2014, for the revisions to Sec.  
1026.36(d) may result in creditors and loan originator organizations 
believing that they have to account separately for the period from 
January 1 through January 9, 2014, when applying the new compensation 
restrictions under Sec.  1026.36(d). While recognizing that this 
proposal would mean that creditors and loan originator organizations 
would have a slightly shorter implementation period, the Bureau stated 
that on balance it believed the proposed change would have eased 
compliance burdens for creditors and loan originator organizations by 
eliminating any concern about a need for separate accountings as 
described above. As noted above, the Bureau also proposed to change the 
effective date for the addition of Sec.  1026.25(c)(2) (records 
retention) (and associated commentary) from January 10, 2014, to 
January 1, 2014, to dovetail with the proposal to change the effective 
date of Sec.  1026.36(d) to January 1, 2014, to ensure that records on 
compensation paid between January 1 and January 10, 2014, are properly 
maintained.
    Second, the Bureau proposed that the revisions to Sec.  1026.36(d) 
(other than the addition of Sec.  1026.36(d)(1)(iii), as discussed 
below) would have applied to transactions that are consummated and for 
which the creditor or loan originator organization paid compensation on 
or after January 1, 2014. The Bureau stated its belief that applying 
the effective date for the revisions to Sec.  1026.36(d) based on 
application receipt, rather than based on transaction consummation and 
compensation payment, could present compliance challenges. This 
proposed change, as the Bureau discussed in the proposal, would have 
permitted transactions to be taken into account for purposes of 
compensating individual loan originators under the exceptions set forth 
in Sec.  1026.36(d)(1)(iv) if the transactions were consummated and 
compensation was paid to the individual loan originator on or after 
January 1, 2014, even if the applications for those transactions were 
received prior to January 1, 2014. The Bureau stated that it believes 
this clarification, in conjunction with the proposed change to the 
effective date for the revisions to Sec.  1026.36(d) described above, 
would have reduced compliance burdens on creditors and loan originator 
organizations by allowing them to take into account all transactions 
consummated in 2014 (and for which compensation is paid to individual 
loan originators in 2014) for purposes of paying compensation under 
Sec.  1026.36(d)(1)(iv) that is earned in 2014. This proposed revision 
also would have allowed the consumer-paid compensation restrictions and 
exceptions thereto in the revisions to Sec.  1026.36(d)(2) to be 
effective upon the consummation of any transaction where such 
compensation is paid in 2014 even if the application for that 
transaction was received in 2013.
    Third, the Bureau proposed that the provisions of Sec.  
1026.36(d)(1)(iii), which pertain to contributions to or benefits under 
designated tax-advantaged plans for individual loan originators, would 
apply to transactions for which the creditor or loan originator 
organization paid compensation on or after January 1, 2014, regardless 
of when the transactions were consummated or the applications were 
received. The Bureau explained in the proposal that these changes 
regarding the effective date for the revisions to Sec.  
1026.36(d)(1)(iii) would have more clearly reflected the Bureau's 
intent to permit payment of compensation related to designated tax-
advantaged plans during both 2013 (as explained in CFPB Bulletin 2012-2 
clarifying current Sec.  1026.36(d)(1)) \18\ and thereafter (under the 
2013 Loan Originator Compensation Final Rule).
---------------------------------------------------------------------------

    \18\ The Bureau explained in the Supplementary Information to 
the 2013 Loan Originator Compensation Final Rule that it issued CFPB 
Bulletin 2012-2 (the Bulletin) to address questions regarding the 
application of Sec.  1026.36(d)(1) to ``Qualified Plans'' (as 
defined in the Bulletin). The Bureau noted in that Supplementary 
Information that until the final rule takes effect, the 
clarifications in CFPB Bulletin 2012-2 remain in effect. Moreover, 
as the Bureau stated in the proposal, the Bureau interprets 
``Qualified Plan'' as used in the Bulletin to include the designated 
tax-advantaged plans described in the final rule.
---------------------------------------------------------------------------

    In addition to the three specific changes to the effective date 
described above, the Bureau solicited comment generally on whether the 
proposed changes to the effective date for the amendments to Sec.  
1026.36(d) are appropriate or whether other approaches should be 
considered. In particular, the Bureau solicited comment on whether the 
amendments to Sec.  1026.36(d) should take effect on January 1, 2014, 
and apply to all payments of compensation made on or after that date, 
regardless of the date of consummation of the transactions on whose 
terms the compensation was based.
Comments
    Industry commenters generally supported the proposed changes to the 
effective date for the amendments to Sec.  1026.36(d) that were added 
by the 2013 Loan Originator Compensation Final Rule. There were no 
objections to the Bureau's proposal to delete application receipt as 
the triggering event for the effective date provisions of Sec.  1026.36 
(other than for Sec.  1026.36(g)). One state trade association of 
banking institutions wrote that applying the effective date for 
revisions to Sec.  1026.36(d) based on receipt of applications would 
create ``serious compliance and recordkeeping challenges.'' Moreover, 
industry commenters generally supported the shift of the effective date 
for the amendments of Sec.  1026.36(d) from January 10 to January 1, 
2014 (see discussion above with regard to the general comments the 
Bureau received on the changes to the effective dates for the 2013 Loan 
Originator Compensation Final Rule). Industry commenters also did not 
raise any objections to the proposed revisions to the effective date 
for Sec.  1026.36(d)(1)(iii), which would have applied to transactions 
for which compensation is paid on or after January 1, 2014, without 
regard to when the transactions were consummated. Nor did industry 
commenters specifically object to the proposal to change the effective 
date for the addition of Sec.  1026.25(c)(2) (records retention) from 
January 10, 2014, to January 1, 2014.
    Several commenters expressly supported the Bureau's proposal to 
apply the effective date for the amendments to Sec.  1026.36(d) (other 
than the addition of Sec.  1026.36(d)(1)(iii)) to transactions 
consummated on or after January 1, 2014, and where compensation was 
paid on or after January 1, 2014. A large depository institution wrote 
that this approach to the effective date would be a ``welcome 
clarification.'' One industry commenter that specializes in the 
financing of manufactured housing, in expressing support for proposed 
changes to the effective date, objected to the alternative on which the 
Bureau solicited comment (i.e., that the effective date would apply to 
compensation paid on or after January 1, 2014, regardless of the date 
of consummation of the transaction).\19\
---------------------------------------------------------------------------

    \19\ This commenter noted its agreement with the Bureau's 
statement in the proposal that such an approach could raise 
complexity about how the new rule would apply to payments under non-
deferred profits-based compensation plans made on or after January 
1, 2014, where the compensation payments were based on the terms of 
transactions consummated in 2013. This commenter wrote that such an 
approach would adversely affect, without fair warning, those 
creditors and their employees for whom 2013 compensation plans were 
made in mid-2012.

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

[[Page 60389]]

    A small number of industry commenters asked that the Bureau provide 
more flexibility as to the effective date for the amendments to Sec.  
1026.36(d). As noted above, one national trade association asked that 
the effective dates for the various provisions of the 2013 Loan 
Originator Compensation Final Rule be triggered either by the 
consummation of transactions on or after January 1, 2014, or by the 
payment of compensation on or after January 1, 2014, with the complying 
parties having the option of selecting the applicable triggering event. 
A state association representing banking institutions similarly asked 
for an ``either/or'' approach with regard to the proposed trigger for 
the effective date. A state association representing banking 
institutions stated that the proposed formula for the effective date 
(i.e., considering both the consummation date and the payment date) was 
unnecessarily complex, and instead recommended that the effective date 
be tied solely to the payment date. A national trade association of 
mortgage banking institutions and a mortgage company recommended that 
the Bureau adopt January 1, 2014, as an optional effective date, with 
mandatory implementation as of January 10, 2014. The association 
reasoned that while the earlier effective date may benefit many 
lenders, there may be some lenders that have already arranged 
compliance for the later date and would be forced to incur additional 
expense if compliance were required earlier. The mortgage company 
stated this change might assist in a small way in regards to payroll 
systems.
Final Rule
    The Bureau is finalizing the effective date and applicability for 
the amendments to Sec. Sec.  1026.36(d) and 1026.25(c)(2) (and 
associated commentary) adopted by the 2013 Loan Originator Compensation 
Final Rule and the proposed amendments and additions thereto in the 
June 2013 proposal, as proposed. That is: (1) The amendments to Sec.  
1026.36(d) (other than the addition of Sec.  1026.36(d)(1)(iii)) and 
the provisions of Sec.  1026.25(c)(2) will apply to transactions that 
are consummated and for which the creditor or loan originator 
organization paid compensation on or after January 1, 2014; and (2) the 
provisions of Sec.  1026.36(d)(1)(iii) will apply to transactions for 
which the creditor or loan originator organization paid compensation on 
or after January 1, 2014, regardless of when the transactions were 
consummated or their applications were received. For the reasons stated 
in the proposal and supported by many of the commenters, the Bureau 
believes that a January 1, 2014, effective date will ease compliance 
burden by aligning the effective date for the amendments to Sec.  
1026.36(d) with the date on which annual changes to compensation 
policies are implemented. Moreover, the Bureau believes that tying the 
application of the effective date for the amendments to Sec.  
1026.36(d) (other than the addition of Sec. Sec.  1026.36(d)(1)(iii) 
and 1026.25(c)(2)) to conjunctive triggering events on or after January 
1, 2014 (i.e., the consummation of transactions and the payment of 
compensation based on the terms of those transactions) best facilitates 
a smooth transition from one set of compensation rules to another. The 
Bureau thus disagrees with the commenters that asked for an ``either/
or'' approach (i.e., tied to either the consummation date or the 
payment date) or for the effective date to be tied only to payment of 
compensation. A rule where the complying party has the option of 
choosing among two possible triggering events potentially would create 
confusion for complying parties and examiners about whether 
compensation earned in 2013 but paid in 2014 is subject to the current 
compensation rules under Sec.  1026.36(d) or the amendments to Sec.  
1026.36(d) added by the 2013 Loan Originator Compensation Final Rule, 
and as to whether the amended recordkeeping requirements in Sec.  
1026.25(c)(2) would apply. Moreover, as one commenter suggested, 
permitting creditors and loan originator organizations to pay, in 2014, 
compensation earned in 2013--at which time the current compensation 
rules were still in effect--might disadvantage creditors or loan 
originator organizations that relied on the current rules in setting up 
their 2013 compensation programs in 2012.
    The Bureau also believes that providing for an optional compliance 
date of January 1, 2014--as suggested by a small number of industry 
commenters--would add complexity which would likely outweigh the 
benefits of the flexibility that some complying parties might gain from 
this approach. The Bureau is concerned that this approach to the 
effective date would lead to unnecessary dispersion of compliance dates 
over a ten-day period in early 2014, which in turn would be difficult 
to track by examiners and enforcing parties, and potentially raise 
other legal and operational questions. It could potentially lead to 
gaps in recordkeeping as well. Even further confusion could result due 
to the continued effect of the current compensation rules for an 
additional nine-day period. The Bureau also notes that the weight of 
comments it received on the proposed effective date changes supported a 
mandatory compliance date of January 1, 2014.

C. Effective Dates for Amendments to or Additions of Sec.  1026.36(a), 
(b), (e), (f), (g), and (j)

The Proposal
    Rather than implementing the proposed change in effective dates for 
Sec.  1026.36(d) in isolation, the Bureau also proposed to make the 
amendments to or additions of (as applicable) Sec.  1026.36(a) 
(definitions), Sec.  1026.36(b) (scope), Sec.  1026.36(e) (anti-
steering), Sec.  1026.36(f) (qualifications) and Sec.  1026.36(j) 
(compliance policies and procedures for depository institutions) (and 
associated commentary) contained in the 2013 Loan Originator 
Compensation Final Rule take effect on January 1, 2014. The Bureau 
proposed not to tie the effective date to the receipt of a particular 
loan application, but rather to a date certain. Because these 
provisions rely on a common set of definitions and in some cases cross-
reference each other,\20\ the Bureau proposed to make them effective on 
January 1, 2014, and without reference to receipt of applications to 
avoid a potential incongruity among the effective dates of the 
substantive provisions and the effective dates of the regulatory 
definitions and scope provisions supporting those substantive 
provisions. In the proposal, the Bureau stated that it believes this 
proposed approach would facilitate compliance.
---------------------------------------------------------------------------

    \20\ For example, Sec.  1026.36(j) requires that depository 
institutions establish written policies and procedures reasonably 
designed to ensure and monitor compliance with Sec.  1026.36(d), 
(e), (f), and (g).
---------------------------------------------------------------------------

    The Bureau did not, however, propose to adjust the effective date 
for Sec.  1026.36(g) (and associated commentary), which requires that 
loan originators' names and identifier numbers be provided on certain 
loan documentation, except to clarify and confirm that the provision 
takes effect with regard to any application received on or after 
January 10, 2014, by a creditor or a loan originator organization. 
Because this provision requires modifications to documentation for 
individual loans and the systems that generate such documentation, the 
Bureau stated in the

[[Page 60390]]

proposal that it believes it is appropriate to have this provision take 
effect with the other 2013 Title XIV Final Rules that affect individual 
loan processing.
Comments
    As noted above, the commenters that addressed the proposed changes 
to the effective dates for the provisions of the 2013 Loan Originator 
Compensation Final Rule generally expressed support for the proposed 
changes. In nearly all cases, these comments did not discuss the 
application of the effective date to specific provisions within Sec.  
1026.36, other than the amendments to Sec.  1026.36(d). One national 
trade association that requested an optional compliance date of January 
1, 2014, for the amendments to Sec.  1026.36(d) noted that, if the 
Bureau were to adopt a mandatory compliance date of January 1, 2014, it 
nonetheless agreed with the proposal to keep the effective date for the 
provisions of Sec.  1026.36(g) as January 10, 2014. The association 
stated that systems changes to revise loan documents scheduled to take 
effect on January 10 should not be made costlier or less convenient as 
a result of the Bureau's changes to the effective date provisions.
Final Rule
    The Bureau is finalizing the effective date for the amendments to 
or additions of Sec.  1026.36(a), (b), (e), (f), (g), and (j) (and 
associated commentary) contained in the 2013 Loan Originator 
Compensation Final Rule and the proposed amendments and additions 
thereto in the June 2013 proposal, as proposed. Therefore: (1) The 
effective date for the amendments to or additions of Sec.  1026.36(a), 
(b), (e), (f), and (j) as finalized in this rule will be January 1, 
2014 (i.e., a date certain that is not tied to a triggering event, such 
as receipt of an application on or after that date); and (2) the 
effective date for the addition of Sec.  1026.36(g) will be January 10, 
2014, and that section therefore will apply to all transactions for 
which the creditor or loan originator organization received an 
application on or after that date.\21\
---------------------------------------------------------------------------

    \21\ While a depository institution must have its policies and 
procedures under Sec.  1026.36(j) in place by January 1, 2014, 
including policies and procedures covering Sec.  1026.36(g), the 
depository institution is, of course, not required to ensure and 
monitor compliance with Sec.  1026.36(g) until January 10, 2014, the 
effective date of Sec.  1026.36(g).
---------------------------------------------------------------------------

    While the Bureau is not changing the effective date for Sec.  
1026.36(g), it has become aware that some uncertainty exists with 
respect to the application of this provision where more than one loan 
originator organization is involved in originating the same transaction 
(e.g., a mortgage broker and a creditor performing origination services 
with respect to the same transaction). The Bureau understands that some 
loan originator organizations are planning to comply by including the 
name and Nationwide Mortgage Licensing System and Registry (NMLSR) ID 
(where the NMLSR has provided one) for multiple loan originator 
organizations involved in originating the transaction on the loan 
documents, while others are planning to comply by including the name 
and NMLSR ID (where the NMLSR has provided one) for just one of the 
loan originator organizations involved in originating the transaction 
on the loan documents. The Bureau believes that either approach 
complies with the rule in its current form. However, the Bureau is 
considering proposing to clarify at some point in the future that the 
name and NMLSR ID (where the NMLSR has provided one) for multiple loan 
originator organizations involved in originating the transaction must 
be included on the loan documents. If the Bureau ultimately adopts such 
a clarification, it will provide adequate time for compliance.

D. Effective Date for Sec.  1026.36(i)

    As discussed in the 2013 Effective Date Final Rule and below, the 
Bureau initially adopted a June 1, 2013 effective date for Sec.  
1026.36(i), but later delayed the provision's effective date to January 
10, 2014, while the Bureau considered addressing interpretive questions 
concerning the provision's applicability to transactions other than 
those in which a lump-sum premium is added to the loan amount at 
consummation. The Bureau sought comment on whether the January 10, 2014 
effective date would be appropriate in light of the proposed changes, 
or whether an earlier effective date could be set that permits 
sufficient time for creditors to adjust their insurance premium 
practices as necessary. The Bureau received comments from trade 
associations, the credit insurance industry, credit unions and other 
financial institutions, as well as consumer groups, which addressed the 
proposed effective date. Industry commenters and trade associations 
strongly preferred the January 10th date to an earlier date, and stated 
that system adjustments will be required to implement the final rule. 
However, these commenters generally supported the January 10, 2014 
effective date as reasonable, so long as the final rule does not 
materially differ from the proposal. Consumer groups suggested that the 
Bureau set the effective date at January 1, 2014, noting that the 
consumer benefit derived from the provision has already been delayed 
from its original effective date of June 1, 2013.
    As discussed in the section-by-section analysis below, the Bureau 
is adopting amendments to Sec.  1026.36(i) substantially as proposed, 
with some additional clarifications. The Bureau believes that creditors 
will need time to adjust certain credit insurance premium billing 
practices to account for the final rule, but believes that the January 
10, 2014 effective date adopted in the 2013 Effective Date Final Rule 
will allow sufficient time for compliance. This approach is consistent 
with comments from industry and trade associations, as well as the 
generally applicable effective date for the 2013 Title XIV Final Rules, 
including for several provisions the Bureau is amending through this 
notice.

VI. Section-by-Section Analysis

A. Regulation B

Section 1002.14 Rules on Providing Appraisals and Other Valuations
14(b) Definitions
14(b)(3) Valuation
The Proposal
    The Bureau proposed to amend commentary to Sec.  1002.14 to clarify 
the definition of ``valuation'' as adopted by the 2013 ECOA Final Rule. 
As the Bureau stated in the proposal, the Dodd-Frank Act section 1474 
amended ECOA by, among other things, defining ``valuation'' to include 
any estimate of the value of the dwelling developed in connection with 
a creditor's decisions to provide credit. See ECOA section 701(e)(6). 
Similarly, the 2013 ECOA Final Rule adopted Sec.  1002.14(b)(3), which 
defines ``valuation'' as any estimate of the value of a dwelling 
developed in connection with an application for credit. Consistent with 
these provisions, the Bureau intended the term ``valuation'' to refer 
only to an estimate for purposes of the 2013 ECOA Final Rule's newly 
adopted provisions. However, the 2013 ECOA Final Rule added two 
comments that refer to a valuation as an appraiser's estimate or 
opinion of the value of the property: comment 14(b)(3)-1.i, which gives 
examples of ``valuations,'' as defined by Sec.  1002.14(b)(3); and 
comment 14(b)(3)-3.v, which provides examples of documents that discuss 
or restate a valuation of an applicant's property but nevertheless do 
not constitute ``valuations'' under Sec.  1002.14(b)(3).
    Because the Bureau did not intend by these two comments to alter 
the meaning of ``valuation'' to become inconsistent with ECOA section 
701(e)(6) and Sec.  1002.14(b)(3), the Bureau

[[Page 60391]]

proposed to clarify comments 14(b)(3)-1.i and 14(b)(3)-3.v by removing 
the words ``or opinion'' from their texts, and sought comment on the 
clarification.
Comments
    The Bureau received a few comments from trade associations and 
credit unions that generally supported the clarification. The Bureau 
also received one comment from a trade association that suggested the 
proposed change could cause additional confusion, because the term 
``opinion of value'' is commonly used to describe appraisals. This 
commenter also pointed out that appraisals are generally not considered 
to be ``estimates,'' and thus the application of the rule to appraisals 
could be confusing in light of the proposed change. The commenter 
suggested that, rather than deleting the word ``opinion'' altogether, 
the Bureau instead clarify that a valuation includes any ``estimate or 
opinion of value.''
Final Rule
    The Bureau is adopting comment 14(b)(3)-1.i as proposed with some 
additional modifications, and also is adding new comment 14(b)(3)-3.vi 
based on the trade association comment. In proposing these amendments, 
the Bureau intended to clarify that the comments referred to appraisals 
or other valuation models by removing the word ``opinion,'' which could 
be read broadly to include even speculative opinions not based on an 
appraisal or other valuation model. However, in light of the trade 
association's comments the Bureau believes that simply deleting the 
word ``opinion'' could also cause confusion regarding whether and how 
the rule applies to appraisals that are commonly described as 
``opinions of value.'' Thus, the Bureau is substituting ``opinion of 
value'' for ``opinion'' rather than deleting the word entirely. The 
Bureau is adopting revised comment 14(b)(3)-1.i with this change. The 
Bureau is adopting comment 14(b)(3)-3.v as proposed, and does not 
believe any additional revisions are necessary in light of this 
clarification, because the comment deals exclusively with reports 
reflecting property inspections and not appraisals. However, the Bureau 
is adding new comment 14(b)(3)-3.vi to clarify that appraisal reviews 
that do not provide an estimate of value or ``opinion of value'' are 
included in the list of examples of items that are not considered 
``valuations'' for purposes of Sec.  1002.14(b)(3).

B. Regulation X

General--Technical Corrections
    In addition to the clarifications and amendments to Regulation X 
discussed below, the Bureau proposed technical corrections and minor 
wording adjustments for the purpose of clarity throughout Regulation X 
that were not substantive in nature. No comments were received on these 
changes, and the Bureau is finalizing such technical and wording 
clarifications to regulatory text in Sec. Sec.  1024.30, 1024.39, and 
1024.41; and to commentary to Sec. Sec.  1024.17, 1024.33 and 1024.41.
Sections 1024.35 and .36 Error Resolution Procedures and Requests for 
Information
    The Bureau proposed minor amendments to the error resolution and 
request for information provisions of Regulation X, adopted by the 2013 
Mortgage Servicing Final Rules. In the areas in which amendments were 
proposed, the error resolution procedures largely parallel the 
information request procedures; thus the two sections are discussed 
together below. Section 1024.35 implements section 6(k)(1)(C) of RESPA, 
as amended by the Dodd-Frank Act, and Sec.  1024.36 implements section 
6(k)(1)(D) of RESPA, as amended by the Dodd-Frank Act. To the extent 
the requirements under Sec. Sec.  1024.35 and 1024.36 are applicable to 
qualified written requests, these provisions also implement sections 
6(e) and 6(k)(1)(B) of RESPA. As discussed in part III (Legal 
Authority), the Bureau is finalizing these amendments pursuant to its 
authority under RESPA sections 6(j), 6(k)(1)(E) and 19(a). As explained 
in more detail below, the Bureau believes these provisions are 
necessary and appropriate to achieve the consumer protection purposes 
of RESPA, including ensuring responsiveness to consumer requests and 
complaints and the provision and maintenance of accurate and relevant 
information.
35(c) and 36(b) Contact Information for Borrowers To Assert Errors and 
Information Requests
The Proposal
    The Bureau proposed to amend the commentary to Sec.  1024.35(c) and 
Sec.  1024.36(b) with respect to disclosure of the exclusive address (a 
servicer may designate an exclusive address for the receipt of 
notifications of errors and requests for information) when a servicer 
discloses contact information to the borrower for the purpose of 
assistance from the servicer. Section 1024.35(c), as adopted by the 
2013 Mortgage Servicing Final Rules, state that a servicer may, by 
written notice provided to a borrower, establish an address that a 
borrower must use to submit a notice of error to a servicer in 
accordance with the procedures set forth in Sec.  1024.35. Comment 
35(c)-2 clarifies that, if a servicer establishes any such exclusive 
address, the servicer must provide that address to the borrower in any 
communication in which the servicer provides the borrower with contact 
information for assistance from the servicer. Similarly, Sec.  
1024.36(b) states that a servicer may, by written notice provided to a 
borrower, establish an address that a borrower must use to submit 
information requests to a servicer in accordance with the procedures 
set forth in Sec.  1024.36. Comment 36(b)-2 clarifies that, if a 
servicer establishes any such exclusive address, the servicer must 
provide that address to the borrower in any communication in which the 
servicer provides the borrower with contact information for assistance 
from the servicer.
    In the proposal, the Bureau expressed concern that comments 35(c)-2 
and 36(b)-2 could be interpreted more broadly than the Bureau had 
intended. Section 1024.35(c) and comment 35(c)-2, as well as Sec.  
1024.36(b) and comment 36(b)-2, are intended to ensure that servicers 
inform borrowers of the correct address for the borrower to use for 
purposes of submitting notices of error or information requests, so 
that borrowers do not inadvertently send these communications to other 
non-designated servicer addresses (which would not provide the 
protections afforded by Sec. Sec.  1024.35 and 1024.36, respectively). 
If interpreted literally, the existing comments would require the 
servicer to include the designated address for notices of error and 
requests for information when any contact information, even just a 
phone number or web address, for the servicer is given to the borrower. 
The Bureau did not intend that the servicer be required to inform the 
borrower of the designated address in all communications with borrowers 
where any contact information whatsoever for the servicer is provided.
    Accordingly, the Bureau proposed to amend comment 35(c)-2 to 
provide that, if a servicer establishes a designated error resolution 
address, the servicer must provide that address to a borrower in any 
communication in which the servicer provides the borrower with an 
address for assistance from the servicer. Similarly, the Bureau 
proposed to amend comment 36(b)-2 to provide that, if a servicer 
establishes a

[[Page 60392]]

designated information request address, the servicer must provide that 
address to a borrower in any communication in which the servicer 
provides the borrower with an address for assistance from the servicer.
Comments
    The Bureau received comments from industry as well as consumer 
groups addressing these proposed clarifications. Industry commenters 
supported limiting the locations where the designated address is 
required, but asserted that the requirement was still overbroad and 
unclear as to when the designated address must be provided. These 
commenters expressed concern that they would have to provide the 
designated address on every letter that included a return address or an 
address in the letterhead. The commenters also stated this would be 
unduly burdensome as it would require significant programming costs. 
Commenters further stated this would create problems for borrowers by 
causing cluttered, confusing documents leading borrowers to incorrectly 
send other things to the designated address (e.g., a borrower may send 
a payment to the designated address, leading to a delay in payment 
processing). Finally, commenters stated the proposed clarification 
could create conflicts with other regulations, such as the force-placed 
insurance letters, which include an address but do not allow additional 
information to be included. Industry commenters generally suggested the 
designated address be required only in a specific subset of contexts: 
the initial designation letter, the periodic statements and coupon 
book, the servicer's Web site, and loss mitigation documents.
    Consumer group commenters expressed concern that borrowers will not 
be informed of their rights. Such commenters objected to a decision the 
Bureau made, in the 2013 Mortgage Servicing Final Rules, to eliminate 
the requirement that a servicer receiving a transferred loan include 
information on the error resolution procedures in its notice to the 
borrower about the transfer. Such commenters suggested that information 
on the error resolution and information request rights should be 
included on each periodic statement.
Final Rule
    The Bureau is adopting revised versions of proposed comments 35(c)-
2 and 36(b)-2. The Bureau notes that the proposal only addressed when 
the designated address must be provided, and that comments about 
providing borrowers information about the general procedures to submit 
error notifications or information requests are beyond the scope of the 
proposed changes to the rule.
    The Bureau is persuaded that the proposed language of ``an address 
for assistance'' might not have fully addressed the concerns of the 
provision being overbroad, as the proposed language could have been 
interpreted to require the designated address on every document from 
the servicer that contains a return address. The Bureau is further 
persuaded by the concern that borrowers could have been confused and 
incorrectly sent items that did not concern error resolution to the 
designated address. To require the designated address on every piece of 
written communication that includes a return address would be unduly 
burdensome and not in the best interests of the borrower. Thus, under 
the final rule, the designated address need be included in only a 
specific subset of contexts, specifically (1) the written notice, 
required by Sec.  1024.35(c) and Sec.  1024.36(b) if a servicer 
designates an exclusive address; (2) any periodic statement or coupon 
book required pursuant to 12 CFR 1026.41; (3) any Web site maintained 
by the servicer in connection with the servicing of the loan; and (4) 
any notice required pursuant to Sec. Sec.  1024.39 or 1026.41 that 
includes contact information for assistance.
    While servicers will not specifically be required to provide the 
designated address in contexts other than those described in the 
amended comments, the Bureau notes that a servicer remains subject to 
the requirement in Sec.  1026.38(b)(5) to have policies and procedures 
reasonably designed to ensure that the servicer informs the borrower of 
the procedures for submitting written notices of error and information 
requests. Further, as discussed below in the section-by-section 
analysis of section 38(b)(5), the Bureau is adopting new comment 
38(b)(5)-3 clarifying a servicer's obligation to ensure borrowers are 
informed of the designated address. The Bureau believes this the final 
rule will best balance practical considerations with the need to notify 
borrowers of the designated address.
35(g) and 36(f) Requirements Not Applicable
35(g)(1)(iii)(B) and 36(f)(1)(v)(B)
The Proposal
    The Bureau proposed amendments to Sec.  1024.35(g)(1)(iii)(B) 
(untimely notices of error) and Sec.  1024.36(f)(1)(v)(B) (untimely 
requests for information). Section 1024.35(g)(1)(iii)(B) provides that 
a notice of error is untimely if it is delivered to the servicer more 
than one year after a mortgage loan balance was paid in full. 
Similarly, current Sec.  1024.36(f)(1)(v)(B) provides that an 
information request is untimely if it is delivered to the servicer more 
than one year after a mortgage loan balance was paid in full.
    The Bureau proposed to replace the references to ``the date a 
mortgage loan balance is paid in full'' with ``the date the mortgage 
loan is discharged.'' The proposal noted that this change would address 
circumstances in which a loan is terminated without being paid in full, 
such as a loan that was discharged through foreclosure or deed in lieu 
of foreclosure without full satisfaction of the underlying contractual 
obligation. Further, the proposal stated that this change also would 
align more closely with Sec.  1024.38(c)(1), which requires a servicer 
to retain records that document actions taken with respect to a 
borrower's mortgage loan account only until one year after the date a 
mortgage loan is ``discharged.''
Comments
    The Bureau received comments from industry as well as consumer 
groups addressing the proposed modifications. Commenters were generally 
supportive of changing the rule to address situations when the loan is 
not paid in full, but expressed concerns about the use of the word 
``discharged,'' stating that this word has a specific meaning in 
bankruptcy and that there may be some ambiguity as to when a loan is 
discharged in certain situations. In particular, commenters discussed 
the foreclosure process, as well as situations in which there is a 
deficiency balance after a foreclosure sale, and situations in which 
bankruptcy proceedings may eliminate the debt but leave a lien on the 
property.
Final Rule
    The Bureau is adopting Sec.  1024.35(g)(1)(iii)(B) and Sec.  
1024.36(f)(1)(v)(B) as proposed. The Bureau believes the requirement to 
resolve errors and respond to information requests should last over the 
same timeframe as the obligation to retain records. The Bureau believes 
it would be impractical to require a servicer to resolve errors and 
provide information at a time when Regulation X no longer requires the 
servicer to retain the relevant records. Conversely, the Bureau 
believes the servicer should be responsible to correct those records 
during the period when Regulation X does require a servicer to retain 
records,

[[Page 60393]]

if necessary, and provide borrowers information from the records. 
Further, the Bureau believes the use of the term ``discharged'' is 
appropriate, especially given that the term is already used in the 
timing of the record-retention requirement. For purposes of the 
Bureau's mortgage servicing rules, as opposed to bankruptcy purposes, a 
mortgage loan is discharged when both the debt and all corresponding 
liens have been extinguished or released, as applicable. The Bureau 
believes a borrower should have the benefit of the error resolution, 
information request, and record retention provisions so long as a debt 
or lien remains because only after both have been eliminated will there 
be no further possibility of a borrower needing to seek servicing 
information or to assert a servicing error. Thus, the Bureau is 
finalizing this provision as proposed.
Section 1024.38 General Servicing Policies, Procedures and Requirements
38(b) Objectives
38(b)(5) Informing Borrowers of the Written Error Resolution and 
Information Request
Procedures
    As discussed above in the section-by-section discussion of 
Sec. Sec.  1024.35(c) and 1024.36(b), the Bureau is amending comments 
35(c)-2 and 36(b)-2 to clarify in what contexts the designated address 
for notices of error or requests for information must be provided. The 
finalized comments clarify that, if a servicer designates such an 
address, that address must be provided in any notice required pursuant 
to Sec. Sec.  1024.39 or 1024.41 that includes contact information for 
assistance. The Bureau notes that servicers may provide borrowers in 
delinquency with different addresses for different purposes. For 
example, a servicer may provide a borrower with the designated address 
for asserting errors, and a separate address for submission of loss 
mitigation applications. To mitigate the risk of a borrower sending a 
notification of error to the wrong address (and thus not triggering the 
associated protections), the Bureau is adopting new comment 38(b)(5)-3.
    Section 1024.35 sets out certain procedures a servicer must follow 
when a borrower submits a written notice of error. These procedures 
provide important protections to borrowers who in are in delinquency 
(as well as at other times). Specifically, the procedures in Sec.  
1024.35(e)(3)(i)(B) require a servicer to take certain actions before a 
scheduled foreclosure sale if a borrower asserts certain errors.\22\ 
These protections are only triggered if a borrower submits a written 
notice of error to the designated address (assuming the servicer has 
designated such an address). Thus, the Bureau believes it is important 
that borrowers asserting errors send the notice of error to the proper 
address.
---------------------------------------------------------------------------

    \22\ Section 1024.35(e)(3)(i)(B) requires that, if a borrower 
asserts an error related to a servicer making the first notice or 
filing required by applicable law for any judicial or non-judicial 
foreclosure process in violation of Sec.  1024.41(f) or (j), or 
related to a servicer moving for foreclosure judgment or order of 
sale or conducting a foreclosure sale in violation of Sec.  
1024.41(g) or (j), the servicer must comply with the requirements of 
the error resolution procedures prior to the date of a foreclosure 
sale, or within 30 days (excluding legal public holidays, Saturdays, 
and Sundays) after the servicer receives the notice of error, 
whichever is earlier.
---------------------------------------------------------------------------

    The Bureau notes that existing provisions do address ensuring the 
borrower is aware of the procedures required to trigger the error 
resolution protections. Section 1024.38(b)(5) requires a servicer to 
have policies and procedures reasonably designed to achieve the 
objective of informing borrowers of the written error resolution and 
information request procedures. The Bureau acknowledges that a borrower 
in delinquency who is working with a continuity of contact 
representative and submitting documents related to loss mitigation may 
be confused about where to submit notices asserting errors. If such a 
borrower were to orally report the assertion of the error to the 
continuity of contact representative, comment 38(b)(5)-2 explains that 
Sec.  1024.38(b)(s) would require servicers to have policies and 
procedures reasonably designed to notify a borrower who is not 
satisfied with the resolution of the complaint of the procedures for 
submitting a written notice of error. However, the Bureau is concerned 
that, if borrowers were to submit written assertions of an error to the 
addresses where they were submitting loss mitigation documents, such 
borrowers may believe they have properly followed the procedures, but 
in fact would not have triggered the protections under Sec.  1024.35.
    To address this concern, in connection with the clarification above 
on the contexts in which the designated address must be provided, the 
Bureau is adopting new comment 38(b)(5)-3. The new comment clarifies a 
servicer's obligation pursuant to Sec.  1024.38(b)(5) by stating that a 
servicer's policies and procedures must be reasonably designed to 
ensure that if a borrower submits a notice of error to an incorrect 
address that was given to the borrower in connection with submission of 
a loss mitigation application or the continuity of contact pursuant to 
Sec.  1024.40, the servicer will ensure the borrower is informed of the 
procedures for submitting written notices of error set forth in Sec.  
1024.35, including the correct address. Alternatively, the servicer 
could redirect notices of error that were sent to an incorrect address 
to the designated address established pursuant to Sec.  1024.35(c).
Section 1024.41 Loss Mitigation Procedures
    As discussed above in part III (Legal Authority), the Bureau is 
finalizing amendments to Sec.  1024.41 pursuant to its authority under 
sections 6(j)(3), 6(k)(1)(E), and 19(a) of RESPA. The Bureau believes 
that these amendments are necessary and appropriate to achieve the 
consumer protection purposes of RESPA and in particular of section 6 of 
RESPA, including to facilitate the evaluation of borrowers for 
foreclosure avoidance options. Further, the amendments implement, in 
part, section 6(k)(1)(C) of RESPA, which obligates a servicer to take 
timely action to correct errors relating to avoiding foreclosure, by 
establishing servicer duties and procedures that must be followed where 
appropriate to avoid such errors. In addition, the Bureau relies on its 
authority pursuant to section 1022(b) of the Dodd-Frank Act to 
prescribe regulations necessary or appropriate to carry out the 
purposes and objectives of Federal consumer financial law, including 
the purpose and objectives under sections 1021(a) and (b) of the Dodd-
Frank Act. The Bureau additionally relies on its authority under 
section 1032(a) of the Dodd-Frank Act, which authorizes the Bureau to 
prescribe rules to ensure that the features of any consumer financial 
product or service, both initially and over the terms of the product or 
service, are fully, accurately, and effectively disclosed to consumers 
in a manner that permits consumers to understand the costs, benefits, 
and risks associated with the product or service, in light of the facts 
and circumstances.
41(b) Receipt of a Loss Mitigation Application
41(b)(1) Complete Loss Mitigation Application
    In connection with the provisions addressing payment forbearance 
discussed below in the section-by-section analysis of 
1024.41(c)(2)(iii), the Bureau is amending comment 41(b)(1)-4 to 
clarify the obligation of a servicer to use reasonable diligence to

[[Page 60394]]

complete a loss mitigation application. See the discussion below.
41(b)(2) Review of Loss Mitigation Application Submission
41(b)(2)(i) Requirements
The Proposal
    The Bureau proposed to amend the commentary to Sec.  
1024.41(b)(2)(i) to clarify servicers' obligations with respect to 
providing notices to borrowers regarding the review of loss mitigation 
applications. Section 1024.41(b)(2)(i) requires a servicer that 
receives a loss mitigation application 45 days or more before a 
foreclosure sale to review and evaluate the application promptly and 
determine, based on that review, whether the application is complete or 
incomplete.\23\ The servicer then must notify the borrower within five 
days (excluding legal public holidays, Saturdays and Sundays) that the 
servicer acknowledges receipt of the application, and that the servicer 
has determined that the loss mitigation application is either complete 
or incomplete. If an application is incomplete, the notice must state 
the additional documents and information that the borrower must submit 
to make the loss mitigation application complete. In addition, 
servicers are obligated under Sec.  1024.41(b)(1) to exercise 
reasonable diligence in obtaining documents and information necessary 
to complete an incomplete application, which may require, when 
appropriate, the servicer to contact the borrower and request such 
information as illustrated in comment 41(b)(1)-4.i.
---------------------------------------------------------------------------

    \23\ A ``complete loss mitigation application'' is defined in 
Sec.  1024.41(b)(1) as ``an application in connection with which a 
servicer has received all the information the servicer requires from 
a borrower in evaluating applications for the loss mitigation 
options available to the borrower.''
---------------------------------------------------------------------------

    Following publication of the 2013 Mortgage Servicing Final Rules, 
the Bureau received numerous inquiries from industry stakeholders 
requesting guidance or clarification regarding how this provision may 
apply in instances where a servicer determines that additional 
information from the borrower is needed to complete an evaluation of a 
loss mitigation application after either (1) the servicer has provided 
notice to the borrower informing the borrower that the loss mitigation 
application is complete, or (2) the servicer has provided notice to the 
borrower identifying other specific information or documentation 
necessary to complete the application and the borrower has furnished 
that documentation or information. As these stakeholders noted, 
servicers sometimes must collect additional information from borrowers, 
the need for which may not have been apparent at the point of initial 
application, in order to process the application and satisfy the 
applicable investor requirements. In these situations, a borrower may 
have submitted the documents and information identified in the initial 
notice, resulting in an application that is facially complete based on 
the servicer's initial review, but the servicer, upon further 
evaluation, determines that additional information is required to 
evaluate the borrower for a loss mitigation option pursuant to 
requirements imposed by an investor or guarantor of a mortgage.
    The Bureau proposed additional commentary to address these 
concerns. As the Bureau explained in the June 2013 Proposal, the notice 
required by Sec.  1024.41(b)(2)(i)(B) is intended to provide the 
borrower with timely notification that a loss mitigation application 
was received and either is considered complete by the servicer or is 
considered incomplete and that the borrower is required to take further 
action for the servicer to evaluate the loss mitigation application. 
The Bureau was conscious of concerns that servicers have unnecessarily 
prolonged loss mitigation processes by incomplete and inadequate 
document reviews that lead to repeated requests for supplemental 
information that reasonably could have been requested initially, and so 
the Bureau designed the rule to ensure an adequate up-front review. At 
the same time, the Bureau did not believe it would be in the best 
interest of borrowers or servicers to create a system that leads to 
borrower applications being denied solely because they contain 
inadequate information and the servicer believes it may not request the 
additional information needed.
    The Bureau therefore proposed three provisions to address these 
concerns. First, the Bureau proposed new comment 41(b)(2)(i)(B)-1, 
which would have clarified that, notwithstanding that a servicer has 
informed a borrower that an application is complete (or notified the 
borrower of specific information necessary to complete an incomplete 
application), a servicer must request additional information from a 
borrower if the servicer determines, in the course of evaluating the 
loss mitigation application submitted by the borrower, that additional 
information is required.
    Second, the Bureau proposed new comment 41(b)(2)(i)(B)-2, which 
would have clarified that, except as provided in Sec.  
1024.41(c)(2)(iv) (the Bureau's third proposed new provision, discussed 
below), the protections triggered by a complete loss mitigation 
application in Sec.  1024.41 would not be triggered by an incomplete 
application. An application would have been considered complete only 
when a servicer has received all the information the servicer requires 
from a borrower in evaluating applications for the loss mitigation 
options available to the borrower, even if an inaccurate Sec.  
1024.41(b)(2)(i)(B) notice had been sent to the borrower. The Bureau 
noted that the proposed clarifications would not have allowed servicers 
deliberately to inform borrowers that incomplete applications are 
complete or to describe the information necessary to complete an 
application as something less than all of the necessary information. 
Servicers are required under Sec.  1024.41(b)(2)(i)(A) to review a loss 
mitigation application to determine whether it is complete or 
incomplete. In addition, servicers are subject to the Sec.  
1024.38(b)(2)(iv) requirement to have policies and procedures 
reasonably designed to achieve the objectives of identifying documents 
and information that a borrower is required to submit to complete an 
otherwise incomplete loss mitigation application, and servicers are 
obligated under Sec.  1024.41(b)(1) to exercise reasonable diligence in 
obtaining documents and information necessary to complete an incomplete 
application. Thus, the proposed clarifications were intended to address 
situations where servicers make bona fide mistakes in initially 
evaluating loss mitigation applications.
    Third, as described more fully below, the Bureau proposed new Sec.  
1024.41(c)(2)(iv) to require that, if a servicer creates a reasonable 
expectation that a loss mitigation application is complete, but later 
discovers information is missing, the servicer must treat the 
application as complete for certain purposes until the borrower has 
been given a reasonable opportunity to complete the loss mitigation 
application. The Bureau believed the proposed rule would mitigate 
potential risks to consumers that could arise through a loss mitigation 
process prolonged by incomplete and inadequate document reviews and 
repeated requests for supplemental information. The Bureau believed 
these new provisions would provide a mechanism for servicers to correct 
bona fide mistakes in conducting up-front reviews of loss mitigation 
applications for completeness, while ensuring that borrowers do not 
lose the protections under the rule due to such mistakes and that 
servicers have incentives to

[[Page 60395]]

conduct rigorous up-front review of loss mitigation applications.
Comments
    The Bureau received comments from industry as well as consumer 
groups addressing the proposed provisions addressing a facially 
complete application. Commenters were generally supportive of the 
Bureau addressing situations where a servicer later discovers 
additional information is required to evaluate an application that is 
complete according to the terms of the notice the servicer sent the 
borrower. Commenters generally agreed that a strict rule that prevents 
servicers from seeking additional information when needed would result 
in unnecessary denials of loss mitigation to the borrower and that 
encouraging communication from the servicer to the borrower will 
improve loss mitigation procedures for the borrower. However, some 
commenters expressed the view that the 2013 Mortgage Servicing Final 
Rules were sufficient in this regard and that revisions at a date so 
close to implementation are counterproductive to institutions trying to 
implement the rule.
Final Rule
    As discussed further below in connection with Sec.  
1024.41(c)(2)(iv), the Bureau is adopting amendments that achieve 
largely the same effect as the proposal in addressing situations where 
a servicer requires additional information to review a facially 
complete loss mitigation application. The Bureau believes, as it 
suggested in the proposal, that there is little value in requiring a 
servicer to evaluate a loss mitigation application when the servicer 
has determined certain items of information are missing. The Bureau is 
therefore adopting comment 41(b)(2)(i)(B)-1, which clarifies that if, a 
servicer determines, in the course of evaluating the loss mitigation 
application submitted by the borrower, that additional information is 
required, the servicer must promptly request the additional information 
from the borrower. The comment also references Sec.  1024.41(c)(2)(iv), 
a new provision that sets forth requirements and procedures for a 
servicer to follow in the event that a facially complete application is 
later found by the servicer to require additional information or 
documentation to be evaluated. See the discussion of Sec.  
1024.41(c)(2)(iv) in the section-by-section analysis below.
    The Bureau is not adopting proposed comment 41(b)(2)(i)(B)-2, which 
would have provided that protections triggered by a ``complete'' loss 
mitigation application would not be triggered by a facially complete 
application--i.e., where the servicer informs the borrower that the 
application is complete, or the borrower provides all the documents and 
information specified by the servicer in the Sec.  1024.41(b)(2)(i)(B) 
notice as needed to render the application complete. The Bureau 
continues to believe that certain protections must be provided to 
borrowers who have submitted all the missing documents and information 
requested in the 1026.41(b)(2)(i)(B) notice, even if a servicer later 
determines additional information is necessary. However, the Bureau has 
been persuaded by commenters that argued a borrower who submits all the 
documents requested in the Sec.  1024.41(b)(2)(i)(B) notice (if any) 
should receive the protection the rule affords to borrowers at the time 
the borrower submits those documents. In accordance with this approach, 
proposed comment 41(b)(2)(i)(B)-2 has not been finalized.
41(b)(2)(ii) Time Period Disclosure
The Proposal
    The Bureau proposed to amend the Sec.  1024.41(b)(2)(ii) time 
period disclosure requirement, which requires a servicer to provide a 
date by which a borrower should submit any missing documents and 
information necessary to make a loss mitigation application complete. 
Section 1024.41(b)(2)(ii) requires a servicer to provide in the notice 
required pursuant to Sec.  1024.41(b)(2)(i)(B) the earliest remaining 
of four specific dates set forth in Sec.  1024.41(b)(2)(ii). The four 
dates set forth in Sec.  1024.41(b)(2)(ii) are: (1) The date by which 
any document or information submitted by a borrower will be considered 
stale or invalid pursuant to any requirements applicable to any loss 
mitigation option available to the borrower; (2) the date that is the 
120th day of the borrower's delinquency; (3) the date that is 90 days 
before a foreclosure sale; and (4) the date that is 38 days before a 
foreclosure sale.
    In general, many of the protections afforded to a borrower by Sec.  
1024.41 are dependent on a borrower submitting a complete loss 
mitigation application a certain amount of time before a foreclosure 
sale. The later a borrower submits a complete application, and the 
closer in time to a foreclosure sale, the fewer protections the 
borrower receives under Sec.  1024.41. It is therefore in the interest 
of borrowers to complete loss mitigation applications as early in the 
delinquency and foreclosure process as possible. However, even if a 
borrower does not complete a loss mitigation application sufficiently 
early in the process to secure all the protections possibly available 
under Sec.  1024.41, that borrower may still benefit from some of the 
protections afforded. Borrowers should not be discouraged from 
completing loss mitigation applications merely because they cannot 
complete a loss mitigation application by the date that would be most 
advantageous in terms of securing the protections available under Sec.  
1024.41. Accordingly, the goal of Sec.  1024.41(b)(2)(ii) is to inform 
borrowers of the time by which they should complete their loss 
mitigation applications to receive the greatest set of protections 
available, without discouraging later efforts if the borrower does not 
complete the loss mitigation application by the suggested date. The 
Bureau notes Sec.  1024.41(b)(2)(ii) requires servicers to inform 
borrowers of the date by which the borrower should make the loss 
mitigation application complete, as opposed to the date by which the 
borrower must make the loss mitigation application complete.
    The Bureau believed, based on communications with consumer 
advocates, servicers, and trade associations, that the requirement in 
Sec.  1024.41(b)(2)(ii) may be overly prescriptive and may prevent a 
servicer from having the flexibility to suggest an appropriate date by 
which a borrower should complete a loss mitigation application. For 
example, if a borrower submits a loss mitigation application on the 
114th day of delinquency, the servicer would have to inform him or her 
by the 119th day that the borrower should complete the loss mitigation 
application by the 120th day under the current provision. A borrower is 
unlikely to be able to assemble the missing information within one day, 
and would be better served by being advised to complete the loss 
mitigation application by a reasonable later date that would afford the 
borrower most of the benefits of the rule as well as enough time to 
gather the information.
    In response to these concerns, and in accordance with the goals of 
the provision, the Bureau proposed to amend the requirement in Sec.  
1024.41(b)(2)(ii). Specifically, the Bureau proposed to replace the 
requirement that a servicer disclose the earliest remaining date of the 
four specific dates set forth in Sec.  1024.41(b)(2)(ii) with a more 
flexible requirement that a servicer determine and disclose a 
reasonable date by which the borrower should submit the documents and 
information necessary to

[[Page 60396]]

make the loss mitigation application complete. The Bureau proposed to 
clarify this amendment in proposed comment 41(b)(2)(ii)-1, which would 
have explained that, in determining a reasonable date, a servicer 
should select the deadline that preserves the maximum borrower rights 
under Sec.  1024.41, except when doing so would be impracticable. 
Proposed comment 41(b)(2)(ii)-1 would have clarified further that a 
servicer should consider the four deadlines previously set forth in 
Sec.  1024.41(b)(2)(ii) as factors in selecting a reasonable date. 
Proposed comment 41(b)(2)(ii)-1 also would have clarified that if a 
foreclosure sale is not scheduled, for the purposes of determining a 
reasonable date, a servicer may make a reasonable estimate of when a 
foreclosure sale may be scheduled. This proposal was intended to 
provide appropriate flexibility while also requiring that servicers 
consider the impact of the various times, and the associated 
protections, set forth in Sec.  1024.41.
Comments
    The Bureau received comments from industry as well as consumer 
groups addressing these proposed provisions. Industry commenters 
appreciated the extra flexibility offered by the proposal, but 
expressed concern about the complexity of selecting a date. Such 
commenters noted that different servicers might have different 
estimates of what should be a reasonable time for otherwise similarly 
situated borrowers, and differences in state law might also cause two 
apparently similar borrowers to receive different notices. 
Additionally, these commenters expressed concern that ambiguity in what 
is ``practical'' increases the risk of litigation. These commenters 
suggested either a simpler rule, under which the application should be 
complete by the earlier of 30 days after the borrower submitted the 
incomplete application or the 38th day before a scheduled foreclosure 
sale (an approach taken by HAMP), or that the Bureau provide additional 
guidance for determining what is impractical. Finally, commenters 
expressed concern about borrower confusion, stating that borrowers will 
not understand the significance of the various dates.
    Consumer groups expressed concern that if servicers have discretion 
about how to inform borrowers when they should complete their 
applications, servicers will misguide borrowers and cause them to 
complete applications too late to receive all the protections that 
could have been available under the rule. Additionally, some consumer 
groups expressed the view that this whole issue would be avoided if the 
loss mitigation protections were triggered by an initial application 
package, defined as a specific subset of documents required for loss 
mitigation, rather than a complete loss mitigation application.
Final Rule
    The Bureau is amending the text of Sec.  1024.41(b)(2)(ii) to 
require that the related notice must include a reasonable date by which 
the borrower should submit the missing information. Additionally, the 
Bureau is adopting an revised version of proposed comment 41(b)(2)(ii)-
1 to clarify what is a reasonable date to include in a notice sent 
pursuant to Sec.  1024.41(b)(2)(i)(B). Similar to the proposal, final 
comment 41(b)(2)(ii)-1 states that, in determining a reasonable date, a 
servicer should select the date that preserves the maximum borrower 
rights possible under Sec.  1024.41 (and provides the four milestones 
originally in the regulation text), except when doing so would be 
impracticable to permit the borrower sufficient time to obtain and 
submit the type of documentation needed. The final comment has been 
amended to state further that, generally, it would be impracticable for 
a borrower to obtain and submit documents in less than seven days.
    As discussed in the proposed rule, the Bureau has structured this 
provision so that borrowers receive information that encourages them to 
submit a complete application in time to receive the most protections 
possible under the rule, while not discouraging borrowers who miss this 
time from later submitting an application to receive a subset of the 
protections. Because some of the protections are triggered by the 
submission of a complete loss mitigation application when a certain 
amount of time remains before a scheduled foreclosure sale, the 
protections decrease the later a borrower submits an application. Thus, 
the Bureau declines to adopt a rule that simply suggests the borrower 
complete the application within 30 days because such a rule will not 
meet the intended purposes of the provision.
    The Bureau also understands that a borrower may not understand the 
significance of certain milestones, and may be confused if presented by 
a list of different dates. This is the very reason the rule requires 
the servicer to provide a single date by which the borrower should 
complete the application--it removes the burden from the borrower of 
calculating the different timelines and attempting to determine by when 
they should complete their application.
    The Bureau does appreciate the challenges of determining what would 
be impracticable, thus the Bureau has added language to the commentary 
explaining that generally it would be impracticable for a borrower to 
obtain and submit documents in less than seven days. The Bureau notes 
this is a minimum number of days, and that a servicer may extend this 
timeline if it believes the borrower would need more time to gather the 
information. The Bureau believes this approach gives servicers guidance 
as to what is impracticable, while allowing some flexibility for 
servicers to address situations where additional time would be required 
for the borrower to submit particular types of missing information.
    Finally, while the final rule does not permit servicers to estimate 
foreclosure sale dates in other contexts, such as for purposes of 
determining whether a borrower will be granted an appeal right when no 
foreclosure sale has actually been scheduled, the Bureau believes it 
appropriate to allow servicers to estimate a foreclosure sale date for 
the narrow purpose of this provision. The Bureau notes that servicers 
may have information about when a foreclosure sale is likely to be 
scheduled and that allowing a servicer to use this information in 
determining the time by which a borrower should complete the 
application would provide the most useful date for borrowers. Thus, the 
Bureau includes this provision in the comment adopted by this final 
rule.
    The Bureau notes that some consumer groups suggested loss 
mitigation protections should be triggered by an initial application 
package, defined as a specific subset of documents required for loss 
mitigation, rather than a complete loss mitigation application. The 
Bureau notes that while such an approach has been used in other loss 
mitigation programs, such a modification to the loss mitigation 
provisions of Sec.  1024.41 is beyond the scope of the proposed changes 
to the rule.
41(b)(3) Determining Protections
The Proposal
    The Bureau proposed to add new Sec.  1024.41(b)(3) addressing the 
borrowers' rights in situations in which no foreclosure sale has been 
scheduled as of the date a complete loss mitigation application is 
received, or a previously scheduled foreclosure sale is rescheduled 
after receipt of a complete application. As discussed in the proposal, 
Sec.  1024.41 is structured to

[[Page 60397]]

provide different procedural rights to borrowers and impose different 
requirements on servicers depending on the number of days remaining 
until a foreclosure sale is scheduled to occur, as of the time that a 
complete loss mitigation application is received. However, the 
provisions of Sec.  1024.41 do not expressly address situations in 
which a foreclosure sale has not yet been scheduled at the time a 
complete loss mitigation application is received, or is rescheduled 
after the application is received. Since issuance of the final rule, 
the Bureau has received questions about the applicability of the timing 
provisions in such situations. Specifically, industry stakeholders have 
asked whether it is appropriate to use estimated dates of foreclosure 
where a foreclosure sale has not been scheduled at the time a complete 
loss mitigation application is received. Further, industry stakeholders 
have requested guidance on how to apply the timelines if no foreclosure 
is scheduled as of the date a complete loss mitigation application is 
received, but a foreclosure sale is subsequently scheduled less than 90 
days after receipt of such application, or if a foreclosure sale has 
been scheduled for less than 90 days after a complete application is 
received, but is then postponed to a date that is 90 days or more after 
the receipt date.
    The Bureau proposed new Sec.  1024.41(b)(3), which stated that, for 
purposes of Sec.  1024.41, timelines based on the proximity of a 
foreclosure sale to the receipt of a complete loss mitigation 
application will be determined as of the date a complete loss 
mitigation application is received. Proposed comment 41(b)(3)-1 would 
have clarified that if a foreclosure sale has not yet been scheduled as 
of the date that a complete loss mitigation application is received, 
the application shall be treated as if it were received at least 90 
days before a foreclosure sale. Proposed comment 41(b)(3)-2 would have 
clarified that such timelines would remain in effect even if at a later 
date a foreclosure sale was rescheduled.
    The Bureau believed this approach would provide certainty to both 
servicers and borrowers as well as ensure that borrowers receive the 
broadest protections available under the rule in situations in which a 
foreclosure sale has not been scheduled at the time a borrower submits 
a complete loss mitigation application. In the proposal, the Bureau 
also discussed alternative modifications to the rule, which the Bureau 
declined to propose, including having the applicable timelines vary 
depending on the newly scheduled (or re-scheduled) sale date, or 
allowing servicers to estimate when a foreclosure sale might be 
scheduled. On balance, the Bureau believed that a straightforward rule 
under which the protections that attach are determined as of the date 
of receipt of a complete loss mitigation application, and a complete 
loss mitigation application is treated as having been received 90 days 
or more before a foreclosure sale if no sale is scheduled as of the 
date the application is received, is preferable because it would 
provide industry and borrowers with clarity regarding its application, 
without the unnecessary complexity that other approaches might produce. 
The Bureau recognized that the proposed rule might in some cases 
require a servicer to delay a foreclosure sale to allow the specified 
time for the borrower to respond to a loss mitigation offer and to 
appeal the servicer's denial of a loan modification option, where 
applicable, and sought comment and supporting data regarding 
circumstances in which this may occur.
Comments
    The Bureau received comments from industry as well as consumer 
groups addressing these proposed provisions. Overall, commenters 
appreciated the clarity and simplicity of the proposed rule. They 
supported the idea that borrower protection should be clear and 
certain. One consumer advocate expressed concern that the rule limits, 
but does not eliminate, dual tracking. This commenter was concerned 
that a sale may be scheduled with less than 37 days' notice. Another 
consumer advocate suggested the rule should always adopt the most 
consumer-friendly timeline. That is, if a sale is postponed, a borrower 
should receive the benefit of any extra protections that might arise 
given a longer time between the sale and the submission of a complete 
application; but if a sale is scheduled to occur on a short timeline, 
the borrower should not lose the original protections that had attached 
on the basis of the longer timeline.
    Industry commenters expressed concern about the feasibility of the 
proposed rule. Such commenters were concerned this may inappropriately 
extend the timeline of a foreclosure sale. These commenters urged the 
Bureau to limit the appeal right to when a complete application is 
submitted within 30 days of the first notice or filing required for a 
foreclosure sale. Alternatively, some commenters urged the Bureau to 
allow servicers to estimate when a foreclosure sale may occur. For 
example, one commenter suggested such estimates could be based on 
estimates provided by nationally recognized sources. Finally, industry 
commenters expressed concern the proposed provision may not be feasible 
because a servicer may be unable to move a scheduled foreclosure sale. 
One commenter recommended the Bureau offer an exemption from liability 
when an investor or court requires a servicer to continue with a 
foreclosure sale in violation of the applicable timelines.
Final Rule
    The Bureau is finalizing Sec.  1024.41(b)(3) and its related 
commentary substantially as proposed, but with minor wording changes. 
For the reasons discussed in the proposal, the Bureau believes the 
final rule appropriately balances consumer protection and servicer 
needs. This approach provides certainty to both servicers and 
borrowers, as well as ensures that borrowers receive the broadest 
protections available under the rule in situations where a foreclosure 
sale has not been scheduled at the time a complete loss mitigation 
application is received.
    The Bureau declines to adopt other approaches suggested in 
comments. The Bureau notes that structuring the rule such that a 
borrower's rights may be added or removed because a foreclosure sale 
was moved or rescheduled would not provide the certainty or simplicity 
created by the proposed rule. Further, the Bureau is concerned that if 
moving a foreclosure sale to a later date could trigger new 
protections, such a policy may provide a disincentive for a servicer to 
reschedule a foreclosure sale for a later date. Finally, the Bureau 
does not believe it is appropriate to limit the appeal rights to when a 
complete application is submitted within 30 days of the first notice or 
filing, because, regardless of when a first notice or filing is made, a 
servicer should be able to provide a borrower an appeal when there is 
sufficient time before the scheduled foreclosure sale.
    The Bureau does not believe that the rule being finalized, which 
grants the borrower certain rights if a borrower submits a complete 
loss mitigation application before a sale has been scheduled, will 
cause inappropriate delays in the foreclosure process. First, while 
some States may schedule foreclosure sales to occur in less than 90 
days of the scheduling of the sale, completing the process of reviewing 
a loss mitigation application may not necessitate a delay in the 
scheduled sale. For example, if the scheduling of a sale occurs 30 days 
after a complete loss mitigation application is submitted, and the sale 
is scheduled for 60 days after the scheduling occurs, the servicer

[[Page 60398]]

will have sufficient time to follow the complete loss mitigation 
procedures without having to move the foreclosure sale. Second, 
servicers control many of the timelines in the process, including the 
30-day evaluation window, and the time to process an appeal. If a 
foreclosure sale is rescheduled to occur in less than 90 days after a 
borrower submitted a complete application, a servicer does have the 
option to review the application quickly and, in doing so, the servicer 
may avoid the need to postpone the foreclosure sale.
    In situations where there is a conflict (a later scheduled 
foreclosure sale that does not allow a servicer or borrower sufficient 
time to complete the procedures required by the loss mitigation rules), 
the Bureau expects a servicer to take the necessary steps to avoid 
having the foreclosure sale occur before the loss mitigation review 
procedures run their course, including asking a court to move a 
scheduled foreclosure sale, if necessary. An important objective of the 
2013 Mortgage Servicing Final Rules is to ensure that loss mitigation 
applications receive careful review, so that a servicer does not 
foreclose on a borrower who would have qualified for a loss mitigation 
option and who timely submitted a complete application for loss 
mitigation. Consistent with that objective, once a borrower has 
submitted an application, a servicer should carry out the procedures 
prescribed by the rule in light of the timing and content of the 
application. To permit a later scheduled (or rescheduled) foreclosure 
sale to cut short those procedures would be inconsistent with the 
objective just described. For these reasons, the Bureau finalizes the 
rule substantially as proposed, with minor wording changes.
41(c) Evaluation of Loss Mitigation Applications
41(c)(1) Complete Loss Mitigation Application
41(c)(1)(ii)
    The Bureau proposed to amend Sec.  1024.41(c)(1)(ii) to state 
explicitly that the notice this provision requires must state the 
deadline for accepting or rejecting a servicer's offer of a loss 
mitigation option, in addition to the requirements currently in Sec.  
1024.41(d)(2) to specify, where applicable, that the borrower may 
appeal the servicer's denial of a loan modification option, the 
deadline for doing so, and any requirements for making an appeal. As 
described in the proposal, the Bureau intended that the Sec.  
1024.41(c)(1)(ii) notice would specify the time and procedures for the 
borrower to accept or to reject the servicer's offer, in accordance 
with requirements specified in Sec.  1024.41(e). Indeed, Sec.  
1024.41(e)(2)(i) provides that the servicer may deem the borrower to 
have rejected the offer if the borrower does not respond within the 
timelines specified under Sec.  1024.41(e)(1). Further, under Sec.  
1024.41(e)(2)(ii) and that the servicer must give the borrower a 
reasonable opportunity to complete documentation necessary to accept an 
offer of a trial loan modification plan if the borrower does not follow 
the specified procedures but begins making payments in accordance with 
the offer by the deadline specified in Sec.  1024.41(e)(1). Commenters 
did not have any objections to the proposed provision, and the Bureau 
is adopting this provision as proposed.
41(c)(2) Incomplete Loss Mitigation Application Evaluation
41(c)(2)(iii) Payment Forbearance
The Proposal
    The Bureau proposed to modify Sec.  1024.41(c)(2) to allow 
servicers to offer short-term forbearance to borrowers based on a 
review of an incomplete loss mitigation application, notwithstanding 
that provision's restriction on servicers offering a loss mitigation 
option to a borrower based on the review of an incomplete loss 
mitigation application. In adopting the 2013 Mortgage Servicing Final 
Rules, the Bureau crafted broad definitions of ``loss mitigation 
option'' and ``loss mitigation application'' for purposes of Sec.  
1024.41, to provide a streamlined process in which a borrower will be 
evaluated for all available loss mitigation options at the same time, 
rather than having to apply multiple times to be evaluated for 
different options one at a time. Since publication of the final rule, 
however, both industry and consumer advocates have raised questions and 
concerns about how the rule applies in situations in which a borrower 
needs and requests only short-term forbearance. For instance, a number 
of servicers have inquired about whether the rule would prevent them 
from granting a borrower's request for waiver of late fees or other 
short-term relief after a natural disaster until the borrower submits 
all information necessary for evaluation of the borrower for long-term 
loss mitigation options. Additionally, both consumer advocates and 
servicers have raised questions about whether a borrower's request for 
short-term relief would later preclude a borrower from invoking the 
protections afforded by the rule if the borrower encounters a 
significant change in circumstances that warrants long-term loss 
mitigation alternatives.
    The Bureau was conscious of the difficulties involved in 
distinguishing short-term forbearance programs from other types of loss 
mitigation and of the concern that some servicers may have 
significantly exacerbated borrowers' financial difficulties by using 
short-term forbearance programs inappropriately instead of reviewing 
the borrowers for long-term options. Nevertheless, the Bureau believed 
that it was possible to revise the rule to facilitate appropriate use 
of short-term payment forbearance programs without creating undue risk 
for borrowers who need to be evaluated for a full range of loss 
mitigation alternatives.
    At the outset, the Bureau noted that it does not construe the 
existing rule to require that servicers obtain a complete loss 
mitigation application prior to exercising their discretion to waive 
late fees. Additionally the Bureau noted that, under the rule as 
adopted, a servicer may offer any borrower any loss mitigation option 
if the borrower has not submitted a loss mitigation application or if 
the offer is not based on an evaluation of an incomplete loss 
mitigation application, as clarified in existing comment 41(c)(2)(i)-1.
    With regard to short-term forbearance programs that involve more 
than simply waiving late fees, such as where a servicer allows a 
borrower to forgo making a certain number of payments and then to catch 
up by spreading the unpaid amounts over some subsequent period of time, 
the Bureau believed that the issues raised by various stakeholders 
could most appropriately be addressed by providing more flexibility to 
servicers to provide such relief even if it is based on review of an 
incomplete loss mitigation application. Thus, the Bureau did not 
propose to change the current definition of loss mitigation option, 
which includes all forbearance programs. Rather, the Bureau proposed to 
relax the anti-evasion restriction in Sec.  1024.41(c)(2)(i), which 
prohibits a servicer from offering a loss mitigation option based upon 
an evaluation of an incomplete loss mitigation application.
    The Bureau thus proposed Sec.  1024.41(c)(2)(iii), which would have 
allowed short-term payment forbearance programs to be offered based on 
a review of an incomplete loss mitigation application. The proposed 
exemption would have applied only to short-term payment forbearance 
programs. Proposed comment 41(c)(2)(iii)-1 stated that a payment 
forbearance program is a loss mitigation option for which a servicer 
allows a borrower to forgo

[[Page 60399]]

making certain payments for a period of time. Short-term payment 
forbearance programs may be offered when a borrower is having a short-
term difficulty brought on, for example, by a natural disaster. In such 
cases, the servicer offers a short-term payment forbearance arrangement 
to assist the borrower in managing the hardship. The Bureau explained 
that, in its view, it is appropriate for servicers to have the 
flexibility to offer short-term payment forbearance programs prior to 
receiving a complete loss mitigation application for all available loss 
mitigation options. Proposed comment 41(c)(2)(iii)-1 also would have 
explained that a short-term program is one that allows the forbearance 
of payments due over periods of up to two months.
    The Bureau noted that, under the proposed approach, servicers that 
receive a request for short-term payment forbearance and grant such 
requests would remain subject to the requirements triggered by the 
receipt of a loss mitigation application in Sec.  1024.41. Thus, as 
explained in proposed comment 41(c)(2)(iii)-2, if a servicer offers a 
payment forbearance program based on an incomplete loss mitigation 
application, the servicer still would be required to review the 
application for completeness, to send the Sec.  1024.41(b)(2)(i)(B) 
notice to inform the borrower whether the application is complete or 
incomplete, and if incomplete what documents or additional information 
are required, and to use reasonable diligence to complete the loss 
mitigation application. If a borrower in this situation submits a 
complete application, the servicer must evaluate it for all available 
loss mitigation options. The Bureau believed that maintaining these 
requirements is important to ensure that borrowers are not 
inappropriately diverted into short-term forbearance programs without 
access to the full protections of the regulation. At the same time, if 
a borrower in fact does not want an evaluation for long-term options, 
the borrower may simply refrain from providing the additional 
information necessary to submit a complete application and the servicer 
will therefore not be required to conduct a full assessment for all 
options.
    To ensure that a borrower who is receiving an offer of short-term 
payment forbearance understands the options available, proposed Sec.  
1024.41(c)(2)(iii) would have required a servicer offering a short-term 
payment forbearance program to a borrower based on an incomplete loss 
mitigation application to include in the Sec.  1024.41(b)(2)(i)(B) 
notice additional information, specifically that: (1) The servicer has 
received an incomplete loss mitigation application and on the basis of 
that application the servicer is offering a short-term payment 
forbearance program; (2) absent further action by the borrower, the 
servicer will not be reviewing the incomplete application for other 
loss mitigation options; and (3) if the borrower would like to be 
considered for other loss mitigation options, he or she must submit the 
missing documents and information required to complete the loss 
mitigation application. The Bureau believed that providing borrowers 
this more specific information is important to ensure that borrowers do 
not face unwarranted delays and paperwork and that servicers do not 
misuse short-term forbearance to avoid addressing long-term problems.
    Finally, the Bureau proposed comment 41(c)(2)(iii)-3 to clarify 
servicers' obligations on receipt of a complete loss mitigation 
application. The proposed comment would have stated that, 
notwithstanding that a servicer may have offered a borrower a payment 
forbearance program after an evaluation of an incomplete loss 
mitigation application, and even if the borrower accepted the payment 
forbearance offer, a servicer must still comply with all requirements 
in Sec.  1024.41 on receipt of a borrower's submission of a complete 
loss mitigation application. This proposed comment was intended to 
clarify that, even though payment forbearance may be offered as short-
term assistance to a borrower, a borrower is still entitled to submit a 
complete loss mitigation application and receive an evaluation of such 
application for all available loss mitigation options. Although payment 
forbearance may assist a borrower with a short-term hardship, a 
borrower should not be precluded from demonstrating a long-term 
inability to afford the original mortgage, and being considered for 
long-term solutions, such as a loan modification, when that may be 
appropriate.
Comments
    The Bureau received comments from both industry and consumer group 
commenters on this provision. Commenters were generally very supportive 
of allowing an exclusion from the full loss mitigation procedures for 
short-term problems, that is, problems that can be quickly resolved 
(e.g., a borrower needed new tires for his or her car and thus falls a 
month behind on mortgage payments). They asserted that short-term 
problems are better resolved quickly and that the full loss mitigation 
procedures should apply only to consumers with long-term problems. One 
industry commenter stated that the paperwork of the full procedures 
would be seen as burdensome when a borrower had a short-term problem, 
and this would be perceived as poor customer service. Additionally, 
commenters pointed out that, under Sec.  1024.41(i), a borrower is 
entitled to the full procedures for only a single complete loss 
mitigation application, and it would not be in the borrower's best 
interest to ``waste'' that single evaluation under the full procedures 
on a simple, short-term problem. Consumer advocate commenters suggested 
that borrowers should be warned before they use their single 
evaluation.
    Both consumer advocate and industry commenters expressed concern 
that the two-month forbearance contemplated by the proposed rule was 
too brief. Such commenters urged the Bureau to permit payment 
forbearances of as long as six months or a year, to allow borrowers the 
opportunity to resolve their problems (for example, attempting to find 
a new job) before using up their opportunities to be evaluated for 
long-term options, such as a loan modification. Further, commenters 
expressed that the industry standard for payment forbearance programs 
was longer than two months--often six months or even a year. Finally, 
commenters expressed that short-term forbearances were particularly 
important for addressing two situations, unemployment and natural 
disasters.
Final Rule
    The Bureau is adopting Sec.  1024.41(c)(2)(iii) generally as 
proposed. However, in light of comments received, the Bureau has made 
some adjustments to the proposed provisions. As discussed below, the 
Bureau is clarifying the servicer's reasonable diligence obligation 
when a borrower has been offered a payment forbearance based on 
evaluation of an incomplete loss mitigation application, and the Bureau 
has adjusted the limit on the length of payment forbearances that would 
be allowed under this provision.
    Payment forbearance based on an incomplete application. The Bureau 
is adopting, with some adjustments, the general exclusion for short-
term forbearance from the prohibition on offering loss mitigation based 
on an incomplete application. The Bureau continues to believe this 
exclusion is appropriate, because it should provide servicers greater 
flexibility to address short-term problems quickly and efficiently. 
Further, because the exclusion applies to decisions based on review of 
incomplete loss mitigation

[[Page 60400]]

applications, it will allow the borrower's short-term problems to be 
addressed while preserving a borrower's single use of the full Sec.  
1024.41 loss mitigation procedures.
    The Bureau declines to exclude payment forbearance from the 
definition of loss mitigation. The final rule provides the same 
benefits in flexibility that would be achieved by revising the 
definition of loss mitigation while preserving important consumer 
protections. If a borrower requests payment forbearance, he or she 
should be regarded as having requested loss mitigation under the terms 
of Sec.  1024.41, and the procedures generally required by the rule 
should take place. Further, the Bureau notes that a borrower always has 
the option of completing his or her loss mitigation application and 
receiving a full evaluation for all options. This is reflected in 
comment 41(c)(2)(iii)-3, which states that even if a servicer offers a 
borrower a payment forbearance program after an evaluation of an 
incomplete loss mitigation application, the servicer must still comply 
with all other requirements in Sec.  1024.41 if the borrower completes 
his or her loss mitigation application.
    The Bureau notes that the new provision addresses only payment 
forbearance that is offered based on an evaluation of an incomplete 
application. The Bureau is aware, as some commenters noted, that 
situations may arise where a borrower completes a loss mitigation 
application and goes through a full loss mitigation evaluation, and the 
end result is the borrower being offered a payment forbearance--which 
would exhaust his or her single use of the Sec.  1024.41 loss 
mitigation procedures. The Bureau notes that some consumer advocates 
asked the Bureau to exempt any such loss mitigation evaluation from the 
successive request provision in Sec.  1024.41(i), or require that such 
borrowers be warned so they know not to complete their application if 
they are seeking only payment forbearance.
    While the Bureau acknowledges these concerns, the Bureau notes that 
the proposal was limited to discussing payment forbearance based on 
incomplete applications, and comments addressing payment forbearance 
based on complete applications are beyond the scope of the proposed 
rule. Further, the Bureau notes that the loss mitigation rules are 
intended to address only procedures, and leave the substantive 
decisions on different loss mitigation programs to the discretion of 
the owner or assignee. Finally, the Bureau notes that any issues 
related to the second or successive request provision in Sec.  
1024.41(i) would more appropriately be addressed in a rulemaking 
focusing on that provision.
    Payment forbearance and reasonable diligence. The proposed 
provision on payment forbearance included a modification to the Sec.  
1024.41(b)(2)(i)(B) notice, which would have required the notice to 
include additional information when a servicer was offering a borrower 
payment forbearance based on an incomplete application. While the 
Bureau believes it is important for borrowers to be informed that they 
are being offered payment forbearance based on an incomplete loss 
mitigation application and they may receive a full review for all other 
options by completing their applications, the Bureau believes that 
servicers should have flexibility to provide this message at the 
appropriate time. A servicer may, in some circumstances, need to 
communicate additional information regarding payment forbearance. For 
example, a servicer may require additional information--short of a 
complete loss mitigation application--to offer a borrower a payment 
forbearance program. Further, the Bureau acknowledges that a servicer 
may decide to offer a borrower payment forbearance at various stages of 
the loss mitigation process, and the message should be provided at the 
appropriate time. For example, if a servicer needs additional 
information before offering payment forbearance, the servicer might not 
decide to offer a borrower payment forbearance until after the Sec.  
1024.41(b)(2)(i)(B) notice has been sent out. In light of these 
considerations, the Bureau declines to finalize the provision regarding 
modification of the Sec.  1024.41(b)(2)(i)(B) notice in the context of 
payment forbearance. Instead, the Bureau has amended comment 41(b)(1)-
4, added paragraph 4.iii, which addresses a servicer's reasonable 
diligence obligations. The comment explains that, when a servicer 
offers a borrower payment forbearance based on an incomplete 
application, the servicer should notify the borrower that the borrower 
may complete the application to receive a full evaluation of all loss 
mitigation options available to the borrower.
    The Bureau believes a servicer's diligence obligations may vary 
depending on the facts and circumstances. In some instances, it may be 
appropriate for servicers to include this additional information in the 
Sec.  1024.41(b)(2)(i)(B) notice. For example, if a servicer decides to 
offer a borrower payment forbearance based on the initial submission 
that establishes the loss mitigation application (e.g., the borrower 
calls the servicer and, on the basis of that call, the servicer decides 
to offer the borrower payment forbearance), the servicer might include 
the message (that the borrower is being offered payment forbearance but 
may complete the application to receive a full evaluation) in the Sec.  
1024.41(b)(2)(i)(B) notice, along with the full list of information and 
documents necessary to complete the loss mitigation application. 
Alternatively, if the servicer wanted to offer the borrower a payment 
forbearance program, but needed a few additional documents to do so, 
the servicer might send a Sec.  1024.41(b)(2)(i)(B) notice explaining 
that the borrower has the option of submitting a few items and 
receiving payment forbearance, or submitting all the missing 
information and receiving a full evaluation. If the borrower submitted 
only the items for the payment forbearance and the servicer offered the 
borrower a payment forbearance program, at that time the servicer could 
to notify the borrower that he or she has the option of completing the 
application.
    Conversely, if the servicer does not decide to offer a payment 
forbearance program based on an evaluation of an incomplete loss 
mitigation application until after the Sec.  1024.41(b)(2)(i)(B) notice 
has been sent, the servicer would still have the option of offering the 
borrower payment forbearance at that later time. The servicer would 
notify the borrower that he or she has the option of completing the 
application at the time the servicer offered the payment forbearance 
program.
    In addition, the Bureau is adding a new subpart to comment 
41(b)(1)-4 to further elaborate on the servicer's reasonable diligence 
obligation when a borrower is considered for short-term forbearance 
under this provision. Once a borrower has begun a payment forbearance 
program, the Bureau believes the servicer need not continue to request 
missing items from the borrower during the course of the payment 
forbearance program, unless the borrower fails to comply with the 
payment forbearance program or the borrower indicates he or she would 
like to continue completing the application. Thus, comment 41(b)(1)-
4.iii states that, once a servicer provides this notification, the 
servicer could suspend reasonable diligence efforts until near the end 
of the payment forbearance program, so long as the borrower remains in 
compliance with the payment forbearance program and does not request 
any further assistance.
    Finally, the Bureau believes that, unless the borrower has brought 
his or

[[Page 60401]]

her loan current, it may be necessary for the servicer to contact the 
borrower prior to the end of the forbearance period to determine if the 
borrower wishes to complete the application and proceed with a full 
loss mitigation evaluation. Thus, comment 41(b)(1)-4.iii states that 
near the end of the program, and prior to the end of the forbearance 
period, it may be necessary for the servicer to contact the borrower to 
determine if the borrower wishes to complete the application and 
proceed with a full loss mitigation evaluation.
    Length of payment forbearance. The Bureau is amending the proposed 
interpretation of ``short-term'' forbearance, in light of public 
comments that supported the general exception, but suggested that an 
exception permitting only two-month forbearances would be of limited 
benefit to borrowers and servicers. The Bureau is persuaded that a two-
month payment forbearance window may not allow the borrower sufficient 
time to remedy even some short-term problems. As adopted, comment 
41(b)(2)(iii)-1 explains that ``short-term'' forbearance means a 
program that allows the forbearance of payments due over periods of no 
more than six months, as opposed to two months. The Bureau notes that 
this six-month period may cover time both before and after the payment 
forbearance was granted (for example, if a borrower is one month 
delinquent when a servicer offers a payment forbearance program, the 
program may only extend 5 months into the future). The Bureau believes 
the extended timeline allows the servicer sufficient flexibility to 
address most short-term situations.
    As discussed in the proposal, the Bureau was concerned that, if a 
servicer offered a borrower a payment forbearance of more than two 
months, the borrower may lose the benefit of the 120-day foreclosure 
referral prohibition in Sec.  1024.41(f)(1), because the 120 days may 
run out during the course of the forbearance plan. The Bureau believes 
that, as part of a payment forbearance program as contemplated by this 
rule, a servicer should not foreclose on a borrower who is complying 
with the payment forbearance program. To make explicit that this 
restriction is an aspect of the payment forbearance programs 
permissible under the new provision, the Bureau has added a foreclosure 
protection clause to the payment forbearance provision in Sec.  
1024.41(c)(2)(iii).
    The Bureau received comments requesting longer payment forbearance 
programs and noting that existing programs that may be offered through 
HUD or HAMP, or by the Federal National Mortgage Association and 
Federal Home Loan Mortgage Corporation (collectively ``GSEs''), may 
offer payment forbearance for periods extending beyond six months to a 
year, particularly in situations such as natural disaster or 
unemployment. The Bureau remains convinced that, if a borrower has a 
long-term problem, such a borrower should, if the borrower chooses, 
receive a full evaluation for all loss mitigation options. Because 
forbearance programs under Sec.  1024.41(c)(2)(iii) should only be used 
for temporary problems, the Bureau believes it is important to reassess 
a borrower's situation after no more than six months.
    However, the new rule does not preclude a servicer from offering 
multiple successive short-term payment forbearance programs. As 
discussed below in the Section 1022(b)(2) of the Dodd-Frank Act 
analysis, the Bureau has sought to ensure that borrowers would receive 
significant benefits from the additional option without losing 
protections provided by Sec.  1024.41. Commenters strongly felt that a 
short forbearance period would not provide much additional benefit to 
borrowers, and further explained that a payment forbearance of less 
than a year may interfere with existing programs under HUD, HAMP, and 
the GSEs. The Bureau acknowledges that a borrower will generate a 
significant unpaid debt over the course of a long forbearance period. 
However, the Bureau notes that a borrower who believes the 
circumstances warrant cutting a long forbearance short can receive a 
full review for all loss available mitigation options by submitting a 
complete loss mitigation application. In addition, the Bureau believes 
that the risk servicers would attempt to evade the full loss mitigation 
procedures by offering sequential six-month forbearances to delinquent 
borrowers is low. Thus, the Bureau believes that borrowers benefit more 
from renewable forbearance agreements than they would benefit from any 
limit the Bureau might impose at this time on the maximum number of 
forbearances. The Bureau notes, however, that while the final rule does 
not prohibit a servicer from offering multiple short-term forbearances 
under this provision, the Bureau intends to monitor how temporary 
forbearances are used after this final rule becomes effective and, if 
it determines servicers are inappropriately offering sequential payment 
forbearances, may address the issue in a later rulemaking or by other 
means at a later date.
41(c)(2)(iv) Facially Complete Application
The Proposal
    As discussed above, the Bureau proposed new Sec.  
1024.41(c)(2)(iv), which stated that if a servicer creates a reasonable 
expectation that a loss mitigation application is complete but later 
discovers additional documents or information is needed to evaluate the 
application, the servicer shall treat the application as complete as of 
the date the borrower had reason to believe the application was 
complete, for purposes of applying Sec.  1024.41(f)(2) and (g), until 
the borrower has been given a reasonable opportunity to complete the 
loss mitigation application. This provision was designed to work 
together with proposed new comments 41(b)(2)(i)-1 and -2, as discussed 
above, to address situations when a servicer determines that an 
application the servicer previously determined to be complete (or to be 
missing particular information) is in fact is lacking additional 
information needed for evaluation.
    The Bureau has received questions about the impact of an error in 
the notice required by Sec.  1024.41(b)(2)(i)(B), particularly in light 
of the short time the servicer has to review the information submitted 
by the borrower. As discussed above, the Bureau recognizes that, in 
certain circumstances, an application may appear to be complete (or to 
be missing only specific information), but the servicer, upon further 
evaluation, may determine that additional information is needed before 
the servicer can evaluate the borrower for all available loss 
mitigation options. The proposed commentary to Sec.  1024.41(b)(2)(i) 
was intended to clarify that servicers are required to obtain the 
missing information in such situations. Proposed Sec.  
1024.41(c)(2)(iv) was intended to protect borrowers while a servicer 
requests the missing information.
    Proposed comment 41(c)(2)(iv)-1 would have clarified that a 
reasonable expectation is created when the borrower submits all the 
missing items (if any) identified in the Sec.  1024.41(b)(2)(i)(B) 
notice. When a reasonable expectation that a loss mitigation 
application is complete is created but the servicer later discovers 
that the application is incomplete, proposed Sec.  1024.41(c)(2)(iv) 
would have provided that the servicer shall treat the application as 
complete for certain purposes until the borrower has been given a 
reasonable opportunity to supply the missing information necessary to 
complete the loss

[[Page 60402]]

mitigation application. Specifically, under this provision, the 
servicer would need to treat the application as complete for purposes 
of the foreclosure referral prohibition in Sec.  1024.41(f)(2) and the 
foreclosure sale limitations in Sec.  1024.41(g). Proposed Sec.  
1024.41(c)(2)(iv) would have ensured that servicers that made bona fide 
mistakes in making initial determinations of completeness need not be 
considered in violation of the rule, and that borrowers do not lose 
protections under the rule due to such mistakes. The Bureau believed 
that, once a borrower is given reason to believe he or she has the 
benefit of certain protections (which are triggered by submission of a 
complete loss mitigation application), if the servicer discovers that 
an application is incomplete, the borrower should have a reasonable 
opportunity to complete the application before losing the benefit of 
such protections.
    Proposed comment 41(c)(2)(iv)-2 would have provided guidance on 
what would be a reasonable opportunity for the borrower to complete a 
loss mitigation application. The comment states that a reasonable 
opportunity requires that the borrower be notified of what information 
is missing and be given sufficient time to gather the information and 
submit it to the servicer. The amount of time that is sufficient for 
this purpose would depend on the facts and circumstances.
    The Bureau believed that proposed Sec.  1024.41(c)(2)(iv) would 
preserve servicers' obligation to conduct rigorous up-front reviews, 
while providing servicers the ability to correct a good-faith mistake 
or clerical error. Further, servicers seeking relief under the 
provision need only give borrowers a reasonable opportunity to provide 
the missing information, thus allowing a servicer to continue the 
foreclosure process if a borrower does not provide such information.
Comments
    As discussed above in the section-by-section analysis of Sec.  
1024.41(b)(2)(i), the Bureau received comments from industry as well a 
consumer groups addressing these proposed provisions. Commenters were 
generally supportive of the Bureau addressing situations where a 
servicer later discovers additional documents or information are 
required to complete a loss mitigation application. However, commenters 
sought additional clarification on several aspects of the proposed 
amendment. First, commenters sought clarification on when a borrower's 
rights or protections are triggered. Commenters also expressed concern 
that it was unclear when a reasonable expectation had been created. For 
example, one commenter stated that a servicer may argue a homeowner had 
no reasonable expectation even if a complete application was submitted. 
Second, commenters sought clarification as to what would be considered 
a reasonable amount of time for a borrower to complete an application. 
Commenters suggested a set number of days should be given. Finally, 
commenters asked what happens after the missing information is provided 
or a reasonable time passes and the borrower fails to provide the 
information. Some commenters stated that the application should be 
considered complete only as of the date the missing information was 
provided and the application was actually completed. Other commenters 
stated the application should be treated as if it were complete when 
the reasonable expectation was created. One commenter pointed out that 
the expectation should be created based on the borrower's action 
(submitting the items requested in the Sec.  1024.41(b)(2)(i)(B) 
notice), rather than on an action (or inaction) of the servicer. As 
this commenter noted, if a borrower initially submits a complete 
application, the related protections of the rule should be triggered 
when the borrower submits the application, not when the servicer sends 
the Sec.  1024.41(b)(2)(i)(B) notice. Therefore, this commenter 
asserted, if a borrower is asked to provide certain items, the 
protections should be triggered when those items are provided, not when 
the servicer deems the application to be complete. Finally, some 
commenters suggested the proposed revisions should go further and 
require a confirmation notice, as well as provide additional guidance 
on the timing and content of that notice. For example, one commenter 
suggested that servicers should be required to explain the reason a 
particular document does not meet underwriting guidelines, rather than 
simply requesting the document again.
Final Rule
    The Bureau is adopting a final version of Sec.  1024.41(c)(2)(iv) 
that is similar to the proposed version, but with some modifications. 
First, the Bureau is not including the ``reasonable expectation'' 
standard set forth in the proposal. Instead, the provision as adopted 
states that, if a borrower submits all the missing information listed 
in the notice required pursuant to Sec.  1026.41(b)(2)(i)(B), or if no 
additional information is requested in such notice, the application 
shall be considered ``facially complete'' and will trigger certain 
borrower protections. Upon further consideration, the Bureau believes 
the subjective nature of the term ``reasonable expectation'' could have 
resulted in unnecessary compliance challenges and confusion as to when 
a reasonable expectation had been established. The Bureau believes the 
concept of facial completeness, on the other hand, provides greater 
clarity to servicers and borrowers.
    Second, the Bureau is modifying proposed Sec.  1024.41(c)(2)(iv) to 
enhance borrower protections by providing that servicers are required 
to treat a ``facially complete'' application as complete for purposes 
of the Sec.  1026.41(h) appeal right and the borrower response 
timelines in Sec.  1024.41(e). As discussed above, proposed Sec.  
1026.41(c)(2)(iv) would have required servicers to treat the 
application as complete for purposes of the foreclosure referral ban in 
Sec.  1024.41(f)(2) and the foreclosure sale limitations in Sec.  
1024.41(g) until the borrower had been given a reasonable opportunity 
to supply the missing information necessary to complete the loss 
mitigation application. However, for purposes of the appeal right under 
Sec.  1024.41(h) and the borrower response timelines under Sec.  
1024.41(e), the proposal would have treated the application as complete 
only once the borrower submitted the additional information or 
documents needed to evaluate the application. Thus, under the proposal, 
if a servicer gave a borrower a reasonable expectation that he or she 
had submitted a complete application more than 90 days before a 
scheduled foreclosure sale but later requested more information 
pursuant to new Sec.  1024.41(c)(2)(iv), the borrower might not have 
received the right to an appeal or to a 14-day response time depending 
on the timing of the supplemental information request and the 
borrower's response. The Bureau has been persuaded that such a borrower 
should enjoy the benefit of the appeal right and the 14-day response 
timeline. Furthermore, the Bureau is persuaded by the comment that 
suggested that the protections of Sec.  1024.41 should be triggered 
based on the date when a borrower submits all the documents and 
information as stated in the Sec.  1024.41(b)(2)(i)(B) notice, rather 
than when the servicer deems the application to be complete.
    Thus, under Sec.  1026.41(c)(2)(iv) as adopted by the final rule, 
if a borrower submits a facially complete application that is later 
found by the servicer to require additional information or corrected 
documents to be evaluated,

[[Page 60403]]

and the borrower subsequently provides the corrected documents or 
information necessary to complete the application, the application is 
treated as complete, for the purposes of Sec.  1024.41(d), (e), (f)(2), 
(g), and (h), as of the date it was facially complete. However, the 30-
day window during which the servicer must evaluate the borrower for all 
available loss mitigation options (as required pursuant to Sec.  
1026.41(c)) will begin only when the servicer receives the missing 
information. The Bureau continues to believe there is little value in 
requiring a servicer to evaluate a loss mitigation application when a 
servicer has determined certain items of information are missing.
    Finally, Bureau has adopted new comment 41(c)(2)(iv)-2 to address 
situations in which a borrower fails to provide the missing information 
within a reasonable timeframe as prescribed by the servicer. This 
comment states that, if the borrower fails to complete the application 
within the reasonable timeframe, the servicer may treat the application 
as incomplete.
    The Bureau is not addressing in this final rule comments that 
suggested further protections for borrowers are needed, including 
additional notice requirements. The Bureau believes these concerns are 
adequately addressed. Several protections already established by the 
rule, including the requirement to have polices and procedures 
reasonable designed to achieve the objective of facilitating compliance 
with the requirement to send an accurate Sec.  1024.41(b)(2)(i)(B) 
notice (in Sec.  1024.38(b)(2)(iv); the continuity of contact 
requirements in Sec.  1024.40, and the obligation on the servicer to 
use reasonable diligence in completing an application already require 
that servicers work with borrowers to complete a loss mitigation 
application. For example, the reasonable diligence obligation requires 
servicers to promptly seek documents or information necessary to 
complete a loss mitigation application, which the Bureau believes 
includes an obligation to work proactively with borrowers when they 
discover any additional documents or information are needed to complete 
the application, as well as notify a borrower when a submitted document 
is insufficient to complete an application--for example, because a 
signature is missing. Servicers cannot be dilatory in seeking such 
materials or corrected documents. Given these and other protections and 
obligations, the Bureau believes borrowers will be adequately 
protected, because the rules should ensure they receive the benefits of 
foreclosure protections at the time their applications are facially 
complete, and will continue to receive those protections once they have 
submitted the additional materials. The Bureau notes that a servicer 
that complies with Sec.  1024.41(c)(2)(iv) will be deemed to have 
satisfied the requirement to provide an accurate Sec.  
1024.41(b)(2)(i)(B) notice. The Bureau believes this approach 
appropriately balances the servicer's need to collect additional pieces 
of information while still providing protection for the borrower.
41(d) Denial of Loan Modification Options
The Proposal
    The Bureau proposed to move the substance of Sec.  1024.41(d)(2), a 
provision addressing disclosure of information on the borrower's right 
to appeal, to Sec.  1024.41(c)(1)(ii). As a conforming amendment, the 
Bureau proposed to re-codify Sec.  1024.41(d)(1) as Sec.  1024.41(d) 
and to re-designate the corresponding commentary accordingly. The 
Bureau is finalizing these provisions as proposed.
    The Bureau also proposed to clarify the requirement in Sec.  
1024.41(d)(1), re-codified as Sec.  1024.41(d), that a servicer must 
disclose the reasons for the denial of any trial or permanent loan 
modification option available to the borrower. The Bureau believed it 
was appropriate to clarify that the requirement to disclose the reasons 
for denial focuses on only those determinations actually made by the 
servicer and does not require a servicer to continue evaluating 
additional factors after the servicer has already decided to deny a 
borrower for a particular loss mitigation option. Thus, when a 
servicer's automated system uses a program that considers a borrower 
for a loan modification by proceeding through a series of questions and 
ends the process if the consumer is denied, the servicer need not 
modify the system to continue evaluating the borrower under additional 
criteria. For example, suppose a borrower must meet qualifications A, 
B, and C to receive a loan modification, but the borrower does not meet 
any of these qualifications. A servicer's system may start by asking if 
the borrower meets qualification A, and on the failure of that 
qualification end the analysis for that specific loan modification 
option. If a servicer were required to disclose all potential reasons 
why the borrower may have been denied for that loan modification option 
(i.e., A, B, and C), it would need to consider a lengthy series of 
hypothetical scenarios: for example, if the borrower had met 
qualification A, would the borrower also have met qualification B? The 
Bureau did not intend such a requirement, which it believes would be 
unnecessarily burdensome.
    The Bureau instead intended to require only the disclosure of the 
actual reason or reasons on which the borrower was evaluated and 
denied. Accordingly, the Bureau proposed to amend Sec.  1024.41(d) to 
require that a denial notice provided by the servicer must state the 
``specific reason or reasons'' for the denial and also, where 
applicable, disclose that the borrower was not evaluated based on other 
criteria. The notice would not be required to list such criteria. The 
Bureau believed that this additional information will help borrowers 
understand the status of their application and the fact that they were 
not fully evaluated under all factors (where applicable). The Bureau 
also proposed new comment 41(d)-4 stating that, if a servicer's system 
reaches the first issue that causes a denial but does not evaluate 
borrowers for additional factors, a servicer need only provide the 
reason or reasons actually considered. The Bureau believed this 
proposed amendment would appropriately balance potential concerns about 
compliance challenges with concerns about informing borrowers about the 
status of their applications and about information that is relevant to 
potential appeals.
Comments
    The Bureau received comments from both industry and consumer groups 
addressing the proposed modifications. Commenters were generally in 
favor of this revision to the rule, and agreed it would be unduly 
burdensome for servicers to construct systems to consider hypothetical 
scenarios solely for the purpose of compiling a complete list of all 
potential denial reasons. One industry commenter suggested that the 
denial reasons disclosed be limited to ``primary'' or ``initial'' 
reasons. One consumer group expressed concern that the proposed 
revision would allow servicers to avoid disclosing the factors used in 
the net present value analysis.
Final Rule
    For the reasons discussed in the proposal, the Bureau is finalizing 
the rule as proposed. The Bureau declines to modify the rule to require 
only the ``initial'' or ``primary'' reasons as suggested by some 
commenters because the Bureau believes these terms are unclear. The 
Bureau also disagrees with commenters that suggested that the 
modification to the rule allows a servicer to evade disclosure of a 
factor used in an NPV analysis. The rule

[[Page 60404]]

requires servicers to disclose the basis for the denial, so if a 
servicer denies a borrower for a loan modification option based on an 
NPV analysis, that servicer must disclose the factors used in the 
analysis. However, if a servicer denies a borrower a loan modification 
option on other grounds, it would be unduly burdensome for the servicer 
to disclose factors that would have been used, had the servicer done a 
NPV analysis.
41(f) Prohibition on Foreclosure Referral
First Notice or Filing
The Proposal
    Section 1024.41(f) prohibits a servicer from making the first 
notice or filing required by applicable law for any judicial or non-
judicial foreclosure process unless a borrower's mortgage loan is more 
than 120 days delinquent. A servicer also is prohibited from making 
such a notice or filing while a borrower's complete loss mitigation 
application is being evaluated. In response to numerous questions 
received by the Bureau about the meaning of the phrase ``first notice 
or filing,'' the Bureau proposed to redesignate comment 41(f)(1)-1 as 
comment 41(f)-1, and then revise it to clarify what actions Sec.  
1024.41(f) would prohibit.
    Specifically, the proposed comment would have stated that whether a 
document is considered the first notice or filing is determined under 
applicable State law. Under the proposal, a document that would be used 
as evidence of compliance with foreclosure practices required pursuant 
to State law would have been considered the first notice or filing. 
Thus, a servicer would have been prohibited from sending such a notice 
or filing such a document during the pre-foreclosure review period or 
during the review period for a complete loss mitigation application. 
Documents that would not be used in this fashion would not have been 
considered the first notice or filing. The proposed comment would have 
stated expressly that this prohibition does not extend to activity such 
as attempting to collect the debt, sending periodic statements, sending 
breach letters, or any other activity during the pre-foreclosure review 
period, so long as such documents would not be used as evidence of 
complying with requirements applicable pursuant to State law in 
connection with a foreclosure process.
    The Bureau acknowledged that, under the proposed interpretation, if 
a State law mandates a notice to a borrower of the availability of 
mediation as a prerequisite to commence foreclosure, such notices would 
be considered the ``first notice or filing'' for purposes of Sec.  
1024.41. The Bureau also recognized that existing State foreclosure 
processes often can be lengthy. The proposed comment sought to balance 
protecting consumers and encouraging communication between borrowers 
and servicers by providing borrowers sufficient time to submit a 
complete loss mitigation application without the stress and costs of 
foreclosure, but also permitting servicers to communicate with 
borrowers to respond promptly to requests. However, recognizing 
potential practical difficulties for servicers as well as borrower 
protection concerns that could arise from chilling early communications 
provided for borrowers under State law, the Bureau sought comment on 
the best way to establish a workable rule that clearly identifies what 
is prohibited, while balancing these goals.
Comments
    The Bureau received substantial comments from trade associations, 
individual servicers including credit unions, the GSEs, some State 
governments, and two consumer advocacy groups, which generally 
disagreed with the proposed ``evidence of compliance with State law'' 
standard and asked the Bureau to reconsider the scope of the 
prohibition. Numerous commenters, including trade organizations, the 
GSEs, individual servicers and credit unions, asserted that the 
proposed comment would cause significant delays in the foreclosure 
process, especially where the first notice or filing would be followed 
by lengthy periods mandated by State law before actual initiation of 
court proceedings or establishing a foreclosure sale date. These 
commenters asserted that the proposal would have prohibited often 
lengthy processes from starting until after 120 days of delinquency 
have passed. For example, commenters noted that Massachusetts requires 
its own notice and opportunity to cure process that may take up to 150 
additional days before foreclosure is filed. Thus, if the notice 
beginning that cure process is deemed the ``first notice'' for purposes 
of the prohibition on foreclosure referral (as it would have been under 
the proposal), foreclosure proceedings may be delayed until the 270th 
day of delinquency. One industry commenter raised concerns that such 
delays would impact compliance with regulatory capital requirements.
    Industry commenters expressed substantial concerns with the 
proposal's use of the phrase ``evidence of compliance with State law.'' 
These commenters asserted that the phrase is vague, and that State law 
may often require proof of compliance with the mortgage contract's 
terms, which may include the sending of general default notices not 
expressly required by statute. The commenters indicated servicers would 
have difficulty understanding what documents were prohibited and likely 
would be discouraged from sending any early communications to borrowers 
if they later must use such document to show compliance with applicable 
State law.
    Industry commenters, State governments, and some consumer advocates 
indicated that the proposal likely would delay notices required under 
State-mandated pre-foreclosure programs. As these commenters noted, 
under the proposal such notices likely would constitute ``evidence of 
compliance with State law'' and thus would be prohibited until after 
the 120th day of delinquency. These commenters also asserted that such 
programs complement the Bureau's early intervention rule and that there 
is substantial benefit to borrowers in receiving these notices early in 
their delinquencies. For example, many statutory notices require that 
counseling, legal aid, or other resources be identified to borrowers, 
and consumer groups agreed that borrowers are more likely to respond 
and seek loss mitigation when they receive notices clearly informing 
them that foreclosure is imminent if they do not act. Several 
commenters pointed to data or experience that indicated many borrowers 
do not reach out to servicers for loss mitigation assistance until 
foreclosure notices or notices of default are sent. These commenters 
believed that borrowers would receive little benefit if these notices 
were delayed until after the 120th day of delinquency because the 
likelihood of a successful resolution would be reduced. On the whole, 
these commenters indicated that delaying State-mandated notices 
relating to loss mitigation programs or statutory rights to cure 
delinquencies would frustrate State efforts at avoiding foreclosure by 
making resolutions more difficult or cure more costly to consumers.
    As an alternative to the proposed interpretation of ``first notice 
or filing,'' many industry commenters recommended that the Bureau adopt 
an interpretation based on the Federal Housing Administration's (FHA) 
definition of ``first legal,'' citing familiarity with this concept. In 
the alternative, some industry commenters suggested a more uniform and 
objective definition or a State-by-State

[[Page 60405]]

determination. These commenters generally stated that a prohibition 
that extends to documents defined in a manner that closely tracks 
``first legal'' would better facilitate compliance for industry, while 
at the same time would permit and encourage the early notices to 
borrowers, including those that provide counseling, legal aid, or other 
resources. A number of commenters suggested that specific notices be 
expressly permitted, including State-mandated outreach to delinquent 
borrowers and breach letters required by the GSEs.
Final Rule
    The Bureau is adopting a revised version of proposed comment 41(f)-
1 that states a document is considered the ``first notice or filing'' 
on the basis of foreclosure procedure under applicable State law, but 
adjusts the Bureau's interpretation of what constitutes a ``first 
notice or filing.'' Rather than relying on the general notion that any 
evidence of compliance with State foreclosure law constitutes a first 
notice or filing, the Bureau is revising comment 41(f)-1 and adopting 
four new subparts that are more specifically addressed to different 
types of foreclosure procedures. New comment 41(f)-1.i explains that, 
when the foreclosure procedure under applicable State law requires 
commencement of a court action or proceeding, a document is considered 
the first notice or filing if it is the earliest document required to 
be filed with a court or other judicial body to commence the action or 
proceeding (e.g., a complaint, petition, order to docket, notice of 
hearing). The Bureau also is adopting new comment 41(f)-1.ii, which 
explains that, when the foreclosure procedure under applicable State 
law does not require a court action or proceeding, a document is 
considered the first notice or filing if it is the earliest document 
required to be recorded or published to initiate the foreclosure 
process. To address situations not already covered by comments (i) and 
(ii), new comment 41(f)-1.iii provides that, where a foreclosure 
procedure does not require initiating a court action or proceeding or 
recording or publishing of any document, a document is considered a 
``first notice or filing'' if it is the first document which 
establishes, sets or schedules the foreclosure sale date.
    As noted above, the proposal sought to balance protecting consumers 
and encouraging communication between servicers and borrowers. The 
Bureau believed that, under the proposed interpretation of ``first 
notice or filing,'' borrowers would be ensured sufficient time to 
submit a complete loss mitigation application, but servicers would 
still be able to send many of the typical early-default communications, 
so long as they were not being used as evidence of compliance with 
State law. The Bureau requested comment on whether the proposal 
established a workable rule that was clear, in light of varied 
foreclosure procedures in different states, and the multiple purposes 
for notices. As noted above, many commenters, including consumer 
advocate groups and State governments, indicated concerns with the 
proposed interpretation's impact on communication and its impact on 
State-mandated loss mitigation programs. Many commenters asserted that 
the proposal would result in either less or ineffective early default 
communication and lessen the likelihood that borrowers would 
successfully access loss mitigation resolutions or otherwise avoid 
foreclosure.
    The Bureau is persuaded by these comments that revising the 
interpretation is necessary to provide greater clarity and also provide 
for more effective pre-foreclosure outreach. As commenters noted, the 
proposed interpretation would have prohibited the use of many State-
mandated notices that do not initiate foreclosure proceedings and are 
intended to provide borrowers with information about counseling and 
other loss mitigation resources as a means of avoiding foreclosure. In 
addition, the Bureau is persuaded by comments that the proposed 
interpretation would have chilled other servicer communications, such 
as cure notices or breach letters, based on confusion over whether such 
communications were ``evidence of compliance'' and thus prohibited by 
Sec.  1024.41.
    The Bureau believes the interpretation of first notice or filing 
adopted by this final rule provides an objective basis for determining 
compliance with the prohibition on foreclosure referral. In addition, 
it addresses the concerns raised in comments that the proposal would 
restrict communications informing borrowers of assistance and statutory 
rights to cure. The Bureau agrees with commenters that permitting 
communication about cure rights or pre-foreclosure loss mitigation 
assistance or procedures available under State law, even within the 
first 120 days of a borrower's delinquency, furthers the objective of 
Sec.  1024.41's loss mitigation procedures. The Bureau believes early 
communication to borrowers about resources such as housing counseling, 
emergency loan programs, and pre-foreclosure mediation will increase 
the likelihood that borrowers will submit complete applications in time 
to benefit from the full loss mitigation procedures under Sec.  
1024.41. The Bureau appreciates that, under this modified 
interpretation, some borrowers who have not yet submitted loss 
mitigation applications may face shorter foreclosure timeframes after 
the 120th day of delinquency than under the proposed interpretation. 
However, the Bureau believes the adopted interpretation provides 
sufficient opportunity for borrowers to seek loss mitigation assistance 
without the pressure of pending litigation or foreclosure proceedings. 
The Bureau also believes a borrower's ability to exercise a statutory 
or contractual right to cure a default likely will be greater where 
notice of the cure rights is provided before several months of 
arrearages have accumulated. While the proposed interpretation was not 
intended to prohibit sending any such notice, only one that would be 
used as evidence of compliance with applicable law, the modified 
interpretation provides greater clarity.
    The Bureau acknowledges that its interpretation of ``first notice 
or filing'' may prohibit, during the 120-day period, initiation of 
State-mandated loss mitigation efforts or opportunities to cure in 
those jurisdictions where the applicable foreclosure procedure requires 
such information to appear first in a court filing, or a document that 
is recorded or published. However, were the Bureau to adopt an 
interpretation that excluded such notices from the definition of first 
filing, based on their inclusion of information related to cure rights 
or loss mitigation assistance, this likely would create significant 
confusion and frustrate the purposes of the rule, by permitting certain 
foreclosure actions within the 120-day period.
    Finally, the Bureau is adding new comment 41(f)-1.iv to clarify 
that a document provided to a borrower that initially is not required 
to be filed, recorded or published is not considered the first notice 
or filing solely on the basis that the foreclosure procedure requires a 
copy of the document to be included as an attachment to a subsequent 
document required to be filed or recorded to carry out the foreclosure 
process. The Bureau is aware through comments that, in many states, 
letters or notices (including breach letters, notices of rights to 
cure) that are required to be sent to the borrower, but do not initiate 
formal foreclosure proceedings, nonetheless are required to be included 
in later filings, i.e., as part of a complaint or subsequent

[[Page 60406]]

pleading. Such letters or notices may be sent during the pre-
foreclosure review period without violating the foreclosure referral 
ban.
    The interpretation of ``first notice or filing'' adopted by this 
final rule closely tracks, but may not be identical in all 
jurisdictions, to the FHA's ``first legal action necessary to initiate 
foreclosure'' or ``first legal'' or ``first public'' action, as some 
commenters requested.\24\ However, the Bureau believes to the extent 
there are jurisdictions where ``first notice or filing'' of Sec.  
1024.41(f) is inconsistent with the FHA standard, it will not hinder 
servicers' compliance with obligations under the FHA or investor 
requirements based upon the FHA's standard. The Bureau notes that the 
``first legal'' standard primarily serves to inform mortgagees of their 
contractual obligations as servicers of FHA-insured mortgages. In light 
of the fact that Sec.  1024.41(f) is enforceable by private right of 
action, the Bureau is adopting this interpretation of ``first notice or 
filing'' in order to provide sufficient clarity to borrowers, 
servicers, and courts. The Bureau also believes this interpretation 
provides States with clarity of the application of Sec.  1024.41(f), 
not just as to present State foreclosure procedure but with respect to 
future modifications of State law.
---------------------------------------------------------------------------

    \24\ See Department of Housing and Urban Development, Mortgagee 
Letter 2005-30, July 12, 2005.
---------------------------------------------------------------------------

Exceptions to the Prohibition of Early Foreclosure Referrals
The Proposal
    The Bureau also proposed to amend Sec.  1024.41(f)(1) so that the 
prohibition on referral to foreclosure until after the 120th day of 
delinquency would not apply in two situations: (1) When the foreclosure 
is based on a borrower's violation of a due-on-sale clause, and (2) 
when the servicer is joining the foreclosure action of a subordinate 
lienholder. As discussed in the proposal, the Bureau is aware that 
there may be some circumstances when a foreclosure is not based upon a 
borrower's delinquency, and thus protections designed to provide 
delinquent borrowers time to bring their mortgages current or apply for 
loss mitigation (such as the 120-day ban on foreclosure referral) may 
not be appropriate or necessary. The Bureau proposed amending Sec.  
1024.41(f)(1) to provide the two exemptions for foreclosures based upon 
due-on-sale clauses and for joining a subordinate lienholder's 
foreclosure, but also recognized that other situations may exist that 
also warrant exclusion. Thus, in addition to the two situations 
described above, the Bureau sought comment on what other situations may 
be appropriate to exempt, or whether the proposed exemptions were 
appropriate in situations in which a borrower has submitted a complete 
loss mitigation application.
Comments
    The Bureau received substantial comments from trade associations, 
individual servicers including credit unions, and the GSEs, which 
generally supported the added exemptions to Sec.  1024.41(f)(1). 
Industry commenters generally supported the proposed exemptions, citing 
a need to provide relief from the foreclosure referral ban where 
default is based upon a non-monetary provision of a mortgage. With 
respect to the Bureau's request for comment on other situations that 
may warrant exclusion, numerous commenters suggested the Bureau provide 
guidance or add exemptions for foreclosure based upon a determination 
that the property was abandoned or vacant. Some commenters advocated an 
exemption for abandoned properties and suggested the Bureau provide a 
list of factors to be considered in determining whether the property 
was abandoned. Consumer groups, however, expressed concerns that, 
because abandonment or vacancy status is necessarily a fact-specific 
determination, an exemption may facilitate evasion.
    In addition, some commenters suggested the Bureau exempt situations 
where the borrower is deceased without heirs or in other cases. Some 
industry commenters requested that the rule permit foreclosure within 
the 120-day period where borrowers have failed to maintain insurance or 
property tax payments or where the borrower had failed to pay late 
fees. Finally, some commenters requested an exemption for other 
situations including where borrowers commit waste, are non-responsive 
to the servicer's attempts to maintain live contact, or state a desire 
to surrender the property.
    Consumer groups acknowledged that situations may exist that warrant 
exclusion from the 120-day prohibition, such as the proposed 
exemptions, but raised concerns about their breadth. Specifically, 
these commenters expressed concerns that an exemption for all 
foreclosures based on violation of a due-on-sale clause may be overly 
broad, and could be construed to allow foreclosure where the transfer 
is to a deceased borrowers' family member or where a transfer occurs as 
a result of State divorce decree or probate order, or other transfer to 
a borrower's family member. Many of these commenters suggested that the 
exemption expressly exclude such transfers to the extent they were 
protected under the Garn-St. Germain Act.\25\ Consumer advocate 
commenters also suggested that the exemption for joining a foreclosure 
action of a subordinate lienholder should be limited to situations 
where all of the servicers and lienholders with respect to the property 
are separate entities.
---------------------------------------------------------------------------

    \25\ Garn-St. Germain Depository Institutions Act, Public Law 
97-320 (1982) (codified in various sections). The Act generally 
prohibits the exercise of due-on-sale clauses with respect to 
certain protected transfers. See 12 U.S.C. 1701j-3.
---------------------------------------------------------------------------

Final Rule
    The Bureau is adopting the amendments to Sec.  1024.41(f)(1) as 
proposed, without adopting additional exemptions. The Bureau 
appreciates comments that suggested the 120-day prohibition was 
designed to protect delinquent borrowers, but should not extend to non-
monetary defaults or breaches of the underlying mortgage agreement. 
However, the Bureau remains mindful of consumer protection concerns 
that could arise from a broader set of exemptions. For example, 
industry commenters suggested that foreclosure based on a borrower's 
failure to maintain insurance or pay property taxes should be excluded, 
but, as some of these commenters acknowledged, those and other examples 
provided are likely to coincide with borrower delinquency. The Bureau 
does not believe that servicers should be allowed to sidestep the 
borrower protections set forth in Sec.  1024.41 for delinquent 
borrowers simply because borrowers may have breached other components 
of the underlying mortgage, such as requirements to pay property taxes, 
maintain insurance, or pay late fees. The Bureau believes that 
additional exemptions would create uncertainty and could potentially be 
construed in a manner that permits evasion of the requirements of Sec.  
1024.41(f). Moreover, the Bureau does not believe exemption from the 
pre-foreclosure review period is appropriate merely because foreclosure 
is based upon an obligation other than the borrower's monthly payment. 
In many instances, these borrowers are likely experiencing financial 
distress and thus may benefit from time to seek loss mitigation.
    For similar reasons, the Bureau does not believe it is appropriate 
to adopt an exemption from the 120-day prohibition for situations where 
a borrower may be deemed to commit ``waste'' in violation of an 
underlying mortgage agreement.

[[Page 60407]]

As noted above, the Bureau is concerned that such an exemption could be 
used to circumvent the 120-day prohibition for borrowers who are also 
delinquent. However, the Bureau also notes that what constitutes waste 
is very fact-specific and the few commenters who suggested an exemption 
provided no precise definition of the term. Furthermore, while 
mortgages typically permit foreclosure in the event of waste, they also 
frequently provide other non-foreclosure remedies. In light of the 
absence of evidence suggesting waste that would necessitate rapid 
foreclosure is a significant problem, the Bureau is convinced that no 
such exemption is necessary.
    In addition, the Bureau does not believe any further narrowing or 
clarifying revisions to the due-on-sale clause exemption in Sec.  
1024.41(f)(1)(i), to protect transfers to family members or transfers 
ordered by divorce decree or probate proceedings, are necessary. The 
Bureau notes that, to the extent the Garn-St. Germain Act prohibits the 
exercise of due-on-sale clauses, the exemption from the 120-day period 
would not apply. The exemption does not alter limitations or 
obligations imposed on a servicer by another Federal or State law with 
respect to whether a due-on-sale clause validly may be exercised. 
Rather it merely provides an exception to the 120-day pre-foreclosure 
review period where the basis for foreclosure is a due-on-sale clause. 
The Bureau notes that servicers may not avail themselves of the due-on-
sale clause exemption and make the first notice or filing before the 
120th day of delinquency unless such a clause is validly enforceable.
    The Bureau is also not adopting any limitation on the exemption for 
joining a foreclosure initiated by a subordinate lienholder. The Bureau 
does not believe it is appropriate to limit the exemption application 
to only those situations where the senior and junior liens are held or 
serviced by separate entities, as was requested. In the case where an 
entity services both a first and a second lien, the servicer will be 
required to complete the pre-foreclosure review for the second lien, 
and will be required to respond to a borrower's loss mitigation 
application with respect to the first mortgage as well. Furthermore, 
the comments did not provide an adequate explanation to persuade the 
Bureau that servicers are more likely to pursue foreclosure in a manner 
that evades the 120-day pre-foreclosure review period when the senior 
and junior lien are held and serviced by the same entity.
    Finally, the Bureau notes that several commenters requested that 
the Bureau exempt vacant or abandoned properties from the 120-day 
prohibition. However, while many commenters asserted that there is a 
limited benefit to prohibiting foreclosure referral where a property is 
``vacant'' or ``abandoned'', they also generally agreed that such a 
determination depends on the individual facts and circumstances, and 
may vary according applicable State law. While some commenters 
suggested the Bureau adopt a multiple-factor test to determine whether 
a property was ``abandoned,'' the Bureau believes any such test would 
inherently rely on a holistic determination based on individual facts 
and circumstances, and would not provide the clear guideline that the 
Bureau believes is appropriate with respect to the prohibition on 
foreclosure referral. Moreover, as noted by consumer groups, a number 
of borrower protection concerns could arise from affording servicers 
too much discretion in determining whether a property is abandoned or 
vacant. In addition, some industry commenters conceded that it would be 
rare for a property to be determined abandoned or vacant earlier than 
the 120th day of delinquency.
    For these reasons, the Bureau is not adopting an exclusion from the 
120-day prohibition for vacant or abandoned properties. However, the 
Bureau notes that the provisions of Sec. Sec.  1024.39 through 1024.41 
apply only to a mortgage loan secured by property that is a borrower's 
principal residence. See 12 CFR 1024.30(c)(2). Thus, depending on the 
facts and circumstances, it is possible that some foreclosures against 
vacant or abandoned properties will not be subject to Sec.  1024.41(f).
41(h) Appeal Process
41(h)(4) Appeal Determination
    The Bureau proposed to amend Sec.  1024.41(h)(4) to provide 
expressly that the notice informing a borrower of the determination of 
his or her appeal must also state the amount of time the borrower has 
to accept or reject an offer of a loss mitigation option after the 
notice is provided to the borrower. The Bureau did not receive any 
comments on this provision and is finalizing it as proposed.
41(j) Prohibition on Foreclosure Referral
    As discussed above, the Bureau is adopting, as proposed, amendments 
to Sec.  1024.41(f)(1) that exempt two situations from the prohibition 
on referral to foreclosure until after the 120th day of delinquency: 
When the foreclosure is based on a borrower's violation of a due-on-
sale clause and when the servicer is joining the foreclosure action of 
a subordinate lienholder. The Bureau also proposed corresponding 
amendments to the provision in Sec.  1024.41(j), which provides the 
same prohibition with respect to small servicers. While the Bureau 
received a number of comments regarding the proposed amendments to 
Sec.  1024.41(f)(1) as discussed above, the Bureau received no comments 
addressing the corresponding amendments to Sec.  1024.41(j). 
Accordingly, the Bureau is adopting, as proposed, the amendments to 
Sec.  1024.41(j) to allow foreclosure before the 120th day of 
delinquency when the foreclosure is based on a borrower's violation of 
a due-on-sale clause and when the servicer is joining the foreclosure 
action of a subordinate lienholder, by incorporating a cross-reference 
to Sec.  10124.41(f)(1).

C. Regulation Z

General--Technical Corrections
    In addition to the clarifications and amendments to Regulation Z 
discussed below, the Bureau proposed technical corrections and minor 
clarifications to wording throughout Regulation Z that are not 
substantive in nature. The Bureau is adopting such technical and 
wording clarifications as proposed to regulatory text in Sec. Sec.  
1026.23, 1026.31, 1026.32, 1026.35, and 1026.36 and to commentary to 
Sec. Sec.  1026.25, 1026.32, 1026.34, 1026.36, and 1026.41. In 
addition, the Bureau is adding additional technical corrections to 
regulation text in Sec.  1026.43 and commentary to Sec. Sec.  1026.25, 
1026.32, and 1026.43. The Bureau also is making one correction to an 
amendatory instruction that relates to FR Doc. 2013-16962, published on 
Wednesday July 24, 2013.
Section 1026.23 Right of Rescission
23(a) Consumer's Right To Rescind
23(a)(3)(ii)
    The Bureau proposed to amend Sec.  1026.23(a)(3)(ii) to update a 
cross-reference within that section from Sec.  1026.35(e)(2), as 
adopted by the Bureau's Amendments to the 2013 Escrows Final Rule under 
the Truth in Lending Act (Regulation Z) (May 2013 Escrows Final 
Rule),\26\ to Sec.  1026.43(g). The cross-reference in the May 2013 
Escrows Final Rule is the correct cross-reference during the time 
period that rule will be in effect for transactions where applications 
are received on or after June 1, 2013, but prior to January

[[Page 60408]]

10, 2014. For transactions where applications are received on or after 
January 10, 2014, the correct cross-reference will be to Sec.  
1026.43(g). For this reason, the Bureau proposed to remove the cross-
reference to Sec.  1026.35(e)(2) and replace it with a cross-reference 
to Sec.  1026.43(g). The Bureau received no comments addressing this 
change and is finalizing this amendment as proposed.
---------------------------------------------------------------------------

    \26\ 78 FR 30739 (May 23, 2013).
---------------------------------------------------------------------------

Section 1026.32 Requirements for High-Cost Mortgages
32(b) Definitions
    The Bureau's 2013 ATR Final Rule and 2013 HOEPA Final Rule contain 
provisions that relate to a transaction's ``points and fees.'' \27\ As 
adopted by the 2013 ATR Final Rule, Sec.  1026.43(e)(2)(iii) sets forth 
a cap on points and fees for a closed-end credit transaction to acquire 
qualified mortgage status. As adopted by the 2013 HOEPA Final Rule, 
Sec.  1026.32(a)(1)(ii), sets forth a points and fees coverage 
threshold for both closed- and open-end credit transactions. 
Definitions of points and fees for closed- and open-end credit 
transactions were also provided by these two final rules.
---------------------------------------------------------------------------

    \27\ See 78 FR 6407 (Jan. 30, 2013); 78 FR 6856 (Jan. 31, 2013). 
The Bureau also addressed points and fees in the May 2013 ATR Final 
Rule. See 78 FR 35430 (June 12, 2013).
---------------------------------------------------------------------------

    For purposes of both the qualified mortgage points and fees cap and 
the high-cost mortgage coverage threshold, Sec.  1026.32(b)(1) defines 
``points and fees'' for closed-end credit transactions.\28\ Section 
1026.32(b)(1)(i) defines points and fees for closed-end credit 
transactions to include all items included in the finance charge as 
specified under Sec.  1026.4(a) and (b), with the exception of certain 
items specifically excluded under Sec.  1026.32(b)(1)(i)(A) through 
(F). These excluded items include interest or time-price differential; 
certain types and amounts of mortgage insurance premiums; certain bona 
fide third-party charges not retained by the creditor, loan originator, 
or an affiliate of either; and certain bona fide discount points paid 
by the consumer. Section 1026.32(b)(1)(ii) through (vi) lists (as 
clarified by this final rule) certain other items that are specifically 
included in points and fees, including compensation paid directly or 
indirectly by a consumer or creditor to a loan originator; certain 
real-estate related items listed in Sec.  1026.4(c)(7) unless certain 
conditions are met; premiums for various forms of credit insurance, 
including credit life, credit disability, credit unemployment and 
credit property insurance; the maximum prepayment penalty, as defined 
in Sec.  1026.32(b)(6)(i), that may be charged or collected under the 
terms of the mortgage loan; and the total prepayment penalty as defined 
in Sec.  1026.32(b)(6)(i) or (ii) incurred by the consumer if the 
consumer refinances an existing mortgage loan or terminates an existing 
open-end credit plan in connection with obtaining a new mortgage loan 
with the current holder of the existing loan or plan (or a servicer 
acting on behalf of the current holder, or an affiliate of either).
---------------------------------------------------------------------------

    \28\ Section 1026.43(b)(9) provides that, for the qualified 
mortgage points and fees cap, ``points and fees'' has the same 
meaning as in Sec.  1026.32(b)(1).
---------------------------------------------------------------------------

    Points and fees for open-end credit plans for purposes of the high-
cost mortgage thresholds is defined in section 1026.32(b)(2), which 
essentially follows the inclusions and exclusions set out in Sec.  
1026.32(b)(1) for closed-end transactions, with several modifications 
and additional inclusions related to fees charged for open-end credit 
plans.
32(b)(1)
The Proposal
    Prior to the Dodd-Frank Act, TILA section 103(aa)(1)(B) provided 
that a mortgage is subject to the restrictions and requirements of 
HOEPA if the total points and fees ``payable by the consumer at or 
before closing'' (emphasis added) exceed the threshold amount. However, 
section 1431(a) of the Dodd-Frank Act amended the points and fees 
coverage test to provide in TILA section 103(bb)(1)(A)(ii) that a 
mortgage is a high-cost mortgage if the total points and fees ``payable 
in connection with the transaction'' (emphasis added) exceed newly 
established thresholds. Similarly, TILA section 129C(b)(2)(A)(vii) 
provides that points and fees ``payable in connection with the loan'' 
(emphasis added) are included in the points and fees calculation for 
qualified mortgages. As adopted by the 2013 ATR and HOEPA Final Rules, 
which implemented these changes, the definition of points and fees 
includes certain charges not paid by the consumer.
    Following publication of the Bureau's ATR and HOEPA Final Rules, 
the Bureau received numerous questions from industry seeking guidance 
regarding the treatment of third party-paid charges and creditor-paid 
charges for purposes of the points and fees calculation. Based on these 
questions, the Bureau determined that additional clarification 
concerning the treatment of charges paid by parties other than the 
consumer, including third parties, for purposes of inclusion in or 
exclusion from points and fees would be beneficial to consumers and 
creditors and facilitate compliance with the final rules. The Bureau 
therefore proposed to add new commentary to Sec.  1026.32(b)(1) to 
clarify when charges paid by parties other than the consumer, including 
third parties, are included in points and fees. Specifically, the 
Bureau proposed to add new comment 32(b)(1)-2 to clarify the treatment 
of charges imposed in connection with a closed-end credit transaction 
that are paid by a party to the transaction other than the consumer, 
for purposes of determining whether that charge is included in points 
and fees as defined in Sec.  1026.32(b)(1). The proposed comment would 
have stated that charges paid by third parties that fall within the 
definition of points and fees set forth in Sec.  1026.32(b)(1)(i) 
through (vi) are included in points and fees, and would have provided 
examples of third-party payments that are included and excluded. In 
discussing included charges, the proposed comment noted that a third-
party payment of an item excluded from the finance charge under a 
provision of Sec.  1026.4, while not included in points and fees under 
Sec.  1026.32(b)(1)(i), may be included under Sec.  1026.32(b)(1)(ii) 
through (vi). In discussing excluded charges, the proposed comment 
stated that a charge paid by a third party is not included in points 
and fees under Sec.  1026.32(b)(1)(i) as a component of the finance 
charge if any of the exclusions from points and fees in Sec.  
1026.32(b)(1)(i)(A) through (F) applies.
    The proposed comment also discussed the treatment of ``seller's 
points,'' as described in Sec.  1026.4(c)(5) and commentary. The 
proposed comment would have stated that seller's points are excluded 
from the finance charge and thus are not included in points and fees 
under Sec.  1026.32(b)(1)(i), but also would have noted that charges 
paid by the seller may be included in points and fees if the charges 
are for items in Sec.  1026.32(b)(1)(ii) through (vi).
    Finally the proposed comment would have restated for clarification 
purposes that, pursuant to Sec.  1026.32(b)(1)(i)(A) and (ii), charges 
that are paid by the creditor, other than loan originator compensation 
paid by the creditor that is required to be included in points and fees 
under Sec.  1026.32(b)(1)(ii), are excluded from points and fees. In 
proposing this clarification, the Bureau noted that, to the extent that 
the creditor recovers the cost of such charges from the consumer, the 
cost is recovered through the interest rate, which is excluded from 
points and fees under Sec.  1026.32(b)(1)(i)(A). Specifically, the 
Bureau noted, Sec.  1026.32(b)(1)(i) and

[[Page 60409]]

(b)(1)(i)(A) implements section 103(bb)(4)(A) of TILA to include in 
points and fees ``[a]ll items included in the finance charge under 
Sec.  1026.4(a) and (b)'' but specifically excludes ``interest and 
time-price differential.'' However, the Bureau noted further, under 
Sec.  1026.32(b)(1)(ii) compensation paid by the creditor to loan 
originators, other than employees of the creditor, is included in 
points and fees.
    In proposing this comment, the Bureau stated its belief that the 
proposed comment's clarification of the treatment of charges paid by 
parties other than the consumer for points and fees purposes was 
consistent with the amendment to TILA made by section 1431(a) of the 
Dodd-Frank Act, discussed above.
Comments
    The Bureau received comments on this aspect of the proposal from 
industry trade associations, banks, mortgage companies, and a 
manufactured housing lender. Many of these comments expressed general 
concerns or disagreements with the points and fees thresholds or other 
aspects of points and fees that were not at issue in the proposal, or 
expressed general support or disagreement with the treatment of charges 
paid by parties other than the consumer for purposes of the points and 
fees determination, particularly with respect to charges paid to 
creditor affiliates. The Bureau notes that it proposed commentary 
clarifying only the application of Sec.  1026.32(b)(1) and (2) to 
charges paid by parties other than the consumer, and does not consider 
these comments responsive to the proposal.
    Other commenters suggested further revisions to the Bureau's 
comment with regard to its discussion of third-party-paid charges, and 
seller's points. Some industry commenters expressed particular concern 
about the impact of the proposed comment on certain employer payments 
of employee relocation expenses, for example employer payment of 
discount points on behalf of their employees to encourage them to 
relocate. These commenters generally raised concerns that inclusion in 
points and fees could discourage relocation incentives, and requested 
that the Bureau exclude employer-paid charges from points and fees.
    Most industry commenters expressed support for the clarifications 
that seller's points are generally excluded from points and fees (as 
they are not included as a finance charge under Sec.  1026.4(c)(5)), 
but some commenters expressed concern about the possible inclusion of 
some seller-paid charges in points and fees. For example, some industry 
commenters also expressed concern that the possible inclusion of some 
seller-paid charges would create difficulties for creditors in 
determining which seller payments are included in points and fees and 
which are not. Specifically, some commenters noted that creditors may 
have difficulty in determining how seller assistance is allocated in 
the transaction, because a seller-paid amount is often provided as a 
flat dollar amount or a percentage of the purchase price that allows 
the borrower to determine how it should be applied, or the allocation 
changes at the closing table. As a proposed solution, one financial 
institution recommended that the Bureau's final comment allow creditors 
to rely on any written statement provided by the borrower, third party, 
or seller regarding the purpose of the payment.
    Industry commenters were generally supportive of the Bureau's 
proposed comment with regard to creditor-paid charges. Commenters 
generally stated that the Bureau's proposed comment provided helpful 
language that clarified that creditor-paid amounts are excluded from 
points and fees (other than loan originator compensation). Some 
suggested, however, that it would be additionally helpful if further 
comments were added to state explicitly that such charges are excluded 
from the finance charge, and that it is not material to this 
calculation that a creditor either absorbs the charges or provides a 
credit to pay them in return for a higher rate.
Final Rule
    The Bureau is adopting comment 32(b)(1)-2 as proposed, with several 
modifications. The Bureau believes that the comment as proposed, with 
several modifications, provides needed clarification to creditors to 
assist them in determining what is included in points and fees. The 
comment specifically describes when third-party-paid charges, including 
seller's points, are to be included in points and fees and when they 
are to be excluded, and provides examples. In addition, the comment 
treats third-party-paid charges consistently with the treatment of 
consumer-paid charges under Sec.  1026.32(b)(1) and current commentary 
(i.e., comment 32(b)(1)(i)-1)). Specifically, it provides that a third-
party payment of a charge is included in points and fees if it falls 
within the definition of points and fees set forth in Sec.  
1026.32(b)(1)(i) through (vi)--which includes items included in the 
finance charge under Sec.  1026.4(a) and (b). It also provides that, 
while a third-party paid charge may be excluded from the finance charge 
under Sec.  1026.4, it may be included in the points and fees 
calculation under Sec.  1026.32(b)(1)(ii) through (vi) such as, for 
example, if the third-party payment is for items such as compensation 
to a loan originator, certain real estate related items listed in Sec.  
1026.4(c)(7), premiums for certain credit insurance, and a prepayment 
penalty incurred by the consumer in some circumstances. The comment 
also specifically describes the treatment of seller's points, which, 
like other items excluded from the finance charge, are not included in 
points and fees under Sec.  1026.32(b)(1)(i) but nevertheless may be 
included in points and fees if listed in Sec.  1026.32(b)(1)(ii) 
through (vi). In addition, the comment specifically addresses the 
treatment of creditor-paid charges and excludes them from points and 
fees with the exception of a payment for loan originator compensation.
    The Bureau further notes that the comment treats seller's points 
consistently with the definition of points and fees in Regulation Z by 
excluding them from the points and fees calculation (as they are 
excluded from the finance charge), except in certain instances 
specified in Regulation Z. Section 1026.32(b)(1) defines points and 
fees to include all items included in the finance charge under Sec.  
1026.4(a) and (b), except for certain specified exclusions. This 
includes the Sec.  1026.4(c)(5) exclusion of seller's points from the 
finance charge.
    The Bureau notes that some commenters expressed concern about the 
ability of creditors to determine what third-party paid charges, 
including seller's payments, should be included in points and fees--
specifically that creditors may be aware that a lump-sum amount was 
advanced by the seller, but not aware of the breakdown of what exactly 
was paid for by the advance. The Bureau appreciates this concern and 
does believe creditors could be confronted with situations where they 
are unsure how they should account for the seller or third-party amount 
in points and fees, particularly as relates to the specific fee 
breakdown. For example, the Bureau agrees that, if a seller paid $1000 
in excluded seller's points, $500 in fees that would be included in 
points and fees, and another $500 in fees that would be excluded, all 
the creditor may be aware of is that $2,000 was advanced. Absent 
additional information, the creditor may have difficulty in determining 
what, if any, portion of the seller-paid amount needs to be included in 
points and fees (in the example above, $500). To facilitate compliance, 
the Bureau is modifying the final comment to clarify that creditors

[[Page 60410]]

may rely on written statements from the borrower or third party, 
including the seller, as to the source of the funds and the purpose of 
the payment in calculating the points and fees involving third-party 
payments.
    As discussed, some commenters expressed concern that the Bureau's 
treatment of third-party paid charges as provided in its proposed 
comment would adversely affect employer relocation assistance 
arrangements for employees that include assistance to the employee in 
financing the purchase of a home. The Bureau does not believe that the 
issues raised by these commenters provide sufficient justification to 
warrant the exercise of the Bureau's exception authority under TILA 
section 105(a) to provide a blanket exclusion of such payments from the 
calculation of points and fees. In addition, employers continue to have 
flexibility with regard to such arrangements. For example, commenters 
who raised this issue focused, in particular, on the impact of the 
Bureau's proposed comment on arrangements where the employer pays an 
employee's discount points in a transaction. However Sec.  
1026.32(b)(1)(i)(E) provides for an exclusion from points and fees of 
certain bona fide discount points, which would extend to any such 
discount points paid by a third-party employer.
    With regard to creditor-paid charges, the Bureau is finalizing 
comment 32(b)(1)-2, which makes clear that ``[c]harges that are paid by 
the creditor, other than loan originator compensation paid by the 
creditor that is required to be included in points and fees under Sec.  
1026.32(b)(1)(ii), are excluded from points and fees.'' This exclusion 
of creditor-paid charges therefore covers charges under Sec.  
1026.32(b)(1)(iii)-(vi). The Bureau also believes that existing Sec.  
1026.4 and supporting commentary already address the treatment of 
creditor-paid charges for purposes of the finance charge under Sec.  
1026.32(b)(1)(i). For example, comment 4(a)-2 states that ``[c]harges 
absorbed by the creditor as a cost of doing business are not finance 
charges, even though the creditor may take such costs into 
consideration in determining the interest rate to be charged.'' The 
Bureau disagrees with commenters that suggested additional guidance is 
needed regarding creditor-paid charges beyond what already exists in 
Regulation Z and new comment 32(b)(1)-2, but for convenience is adding 
an express reference to comment 4(a)-2 to the Bureau's final 32(b)(1)-2 
comment.
32(b)(1)(ii) and 32(b)(2)(ii)

A. Background

    Section 1431(c)(1)(A) of the Dodd-Frank Act requires that points 
and fees include ``all compensation paid directly or indirectly by a 
consumer or creditor to a mortgage originator from any source . . .'' 
TILA section 103(bb)(4). The 2013 ATR Final Rule implemented this 
statutory provision in amended Sec.  1026.32(b)(1)(ii), which provides 
that, for both the qualified mortgage points and fees limits and the 
high-cost mortgage points and fees threshold, points and fees include 
all compensation paid directly or indirectly by a consumer or creditor 
to a loan originator, as defined in Sec.  1026.36(a)(1), that can be 
attributed to the transaction at the time the interest rate is set. The 
2013 HOEPA Final Rule implemented Sec.  1026.32(b)(2)(ii), which 
provides the same standard for including loan originator compensation 
in points and fees for open-end credit plans (i.e., a home equity line 
of credit, or HELOC). Concurrent with the 2013 ATR Final Rule, the 
Bureau also issued the 2013 ATR Concurrent Proposal, which, among other 
things, proposed certain clarifications for calculating loan originator 
compensation for points and fees. The Bureau finalized the 2013 ATR 
Concurrent Proposal in the May 2013 ATR Final Rule, which further 
amended Sec.  1026.32(b)(1)(ii) to exclude certain types of loan 
originator compensation from points and fees. In particular, the May 
2013 ATR Final Rule excludes from points and fees loan originator 
compensation paid by a consumer to a mortgage broker when that payment 
has already been counted toward the points and fees thresholds as part 
of the finance charge under Sec.  1026.32(b)(1)(i). See Sec.  
1026.32(b)(1)(ii)(A). It also excludes from points and fees 
compensation paid by a mortgage broker to an employee of the mortgage 
broker because that compensation is already included in points and fees 
as loan originator compensation paid by the consumer or the creditor to 
the mortgage broker. See Sec.  1026.32(b)(1)(ii)(B). In addition, the 
May 2013 ATR Final Rule excludes from points and fees compensation paid 
by a creditor to its loan officers. See Sec.  1026.32(b)(1)(ii)(C).
    The 2013 ATR Concurrent Proposal had requested comment on whether 
additional adjustment of the rules or additional commentary is 
necessary to clarify any overlapping definitions between the points and 
fees provisions in the 2013 ATR Final Rule and the 2013 HOEPA Final 
Rule and the provisions adopted by the 2013 Loan Originator 
Compensation Final Rule. In particular, the Bureau sought comment on 
whether additional guidance would be useful regarding persons who are 
``loan originators'' under Sec.  1026.36(a)(1) but are not employed by 
a creditor or mortgage broker, such as employees of a retailer of 
manufactured homes.
    In response to the 2013 ATR Concurrent Proposal, several industry 
and nonprofit commenters requested clarification of what compensation 
must be included in points and fees in connection with transactions 
involving manufactured homes. First, they requested additional guidance 
on what activities would cause a manufactured home retailer and its 
employees to qualify as loan originators. This issue is addressed below 
in the section-by-section analysis of Sec.  1026.36(a)(1).\29\ Second, 
they requested additional guidance on what compensation paid to 
manufactured home retailers and their employees would be counted as 
loan originator compensation and included in points and fees. Industry 
commenters responding to the 2013 ATR Concurrent Proposal argued that 
it is not clear whether the sales price received by the retailer or the 
sales commission received by the retailer's employee should be 
considered, at least in part, loan originator compensation. They urged 
the Bureau to clarify that compensation paid to a retailer and its 
employees in connection with the sale of a manufactured home should not 
be counted as loan originator compensation. Rather than provide 
additional guidance in the May 2013 ATR Final Rule, the Bureau instead 
decided to propose and seek comment on additional guidance.
---------------------------------------------------------------------------

    \29\ As discussed below, the Bureau is clarifying what 
compensation must be included in points and fees. As discussed in 
the Supplementary Information describing revisions and 
clarifications to the rule text and commentary defining ``loan 
originator,'' the Bureau is also clarifying the circumstances in 
which employees of manufactured home retailers are loan originators. 
In addition, the Bureau will continue to conduct outreach with the 
manufactured home industry and other interested parties to address 
concerns about what activities are permissible for a retailer and 
its employees without causing them to qualify as loan originators.
---------------------------------------------------------------------------

B. Sections 32(b)(1)(ii)(D) and 32(b)(2)(ii)(D)

The Proposal
    The Bureau proposed new Sec.  1026.32(b)(1)(ii)(D), which would 
have excluded from points and fees all compensation paid by 
manufactured home retailers to their employees. The Bureau also 
proposed new Sec.  1026.32(b)(2)(ii)(D), which would have provided 
that, for open-end credit plans, compensation paid by manufactured home 
retailers to their employees is

[[Page 60411]]

excluded from points and fees for purposes of the high-cost mortgage 
points and fees threshold.
    The Bureau noted that the May 2013 ATR Final Rule added Sec.  
1026.32(b)(1)(ii)(B), which excludes from points and fees compensation 
paid by mortgage brokers to their loan originator employees. The Bureau 
noted that it appeared that when an employee of a retailer would 
qualify as a loan originator, the retailer also would qualify as a loan 
originator and therefore would qualify as a mortgage broker. If the 
retailer qualifies as a mortgage broker, any compensation paid by the 
retailer to the employee would be excluded from points and fees under 
Sec.  1026.32(b)(1)(ii)(B). The Bureau noted, however, that if there 
were instances in which an employee of a manufactured home retailer 
would qualify as a loan originator but the retailer would not, the 
exclusion from points and fees in Sec.  1026.32(b)(1)(ii)(B) for 
compensation paid to an employee of a mortgage broker would not apply 
because the retailer would not be a mortgage broker. The Bureau 
suggested that it may still be appropriate to exclude such compensation 
paid to an employee of a manufactured home retailer because it may be 
difficult for creditors to determine whether employees of a 
manufactured home retailer have engaged in loan origination activities 
and, if so, what compensation they received for doing so. The Bureau 
noted that a retailer typically pays a sales commission to its 
employees, so it may be difficult for a creditor to know whether a 
retailer has paid any compensation to its employees for loan 
origination activities, as distinct from compensation for sales 
activities. To prevent any such uncertainty, the Bureau proposed new 
Sec.  1026.32(b)(1)(ii)(D), to exclude from points and fees all 
compensation paid by manufactured home retailers to their employees. 
The Bureau requested comment on this proposed exclusion and on whether 
there are instances in which an employee of a manufactured home 
retailer would qualify as a loan originator but the retailer would not 
qualify as a loan originator.
    In addition, to provide additional guidance on what compensation 
would be included in loan originator compensation that must be counted 
in points and fees for manufactured home transactions, the Bureau also 
proposed new comment 32(b)(1)(ii)-5. Proposed comment 32(b)(1)(ii)-5.i 
would have provided that, if a manufactured home retailer receives 
compensation for loan origination activities and such compensation can 
be attributed to the transaction at the time the interest rate is set, 
then such compensation is loan originator compensation that is included 
in points and fees. As noted in the May 2013 ATR Final Rule, the Bureau 
does not believe it is appropriate to use its exception authority to 
exclude from points and fees all compensation that may be paid to a 
manufactured home retailer. As a general matter, to the extent that the 
consumer or creditor is paying the retailer for loan origination 
activities, the retailer is functioning as a mortgage broker and 
compensation for the retailer's loan origination activities should be 
captured in points and fees. Commenters did not address this proposed 
guidance, and the Bureau is therefore adopting it as proposed.\30\
---------------------------------------------------------------------------

    \30\ As addressed below in the discussion of Sec.  1026.36(a), 
several industry commenters argued that the Bureau should clarify 
and narrow the scope of activities that would cause a manufactured 
home retailer and its employees to qualify as loan originators.
---------------------------------------------------------------------------

    Proposed comment 32(b)(1)(ii)-5.ii would have specified that the 
sales price of a manufactured home does not include loan originator 
compensation that can be attributed to the transaction at the time the 
interest rate is set and therefore is not included in points and 
fees.\31\
---------------------------------------------------------------------------

    \31\ As noted above, the Bureau is adopting as proposed comment 
32(b)(1)(ii)-5.iii, which specifies that, consistent with new Sec.  
1026.32(b)(1)(ii)(D), compensation paid by a manufactured home 
retailer to its employees is not included in points and fees.
---------------------------------------------------------------------------

    In proposing in comment 32(b)(1)(ii)-5.ii that the sales price of a 
manufactured home would not include compensation that must be included 
in points and fees, the Bureau indicated that it did not believe that 
the sales price would include compensation that is paid for loan 
origination activities and that can be attributed to a specific 
transaction. The Bureau noted that if a retailer does not increase the 
price to obtain compensation for loan origination activities, then it 
does not appear that the sales price would include loan originator 
compensation that could be attributed to that particular transaction.
    The Bureau acknowledged that it is possible that the sales price 
could include loan originator compensation that could be attributed to 
a particular transaction at the time the interest rate is set and that 
therefore should be included in points and fees. The Bureau noted that 
one approach for calculating loan originator compensation for 
manufactured home transactions would be to compare the sales price in a 
transaction in which the retailer engaged in loan origination 
activities and the sales prices in transactions in which the retailer 
did not do so (such as in cash transactions or in transactions in which 
the consumer arranged credit through another party). To the extent that 
there is a higher sales price in the transaction in which the retailer 
engaged in loan origination activities, then the difference in sales 
prices could be counted as loan originator compensation that can be 
attributed to that transaction and that therefore should be included in 
points and fees.
    However, the Bureau stated that it did not believe that it would be 
workable to use this comparative sales price approach to determine 
whether the sales price includes loan originator compensation that must 
be included in points and fees. The creditor is responsible for 
calculating loan originator compensation to be included in points and 
fees for the qualified mortgage and high-cost mortgage points and fees 
thresholds. The Bureau noted that, under the comparative sales price 
approach, the creditor would have to analyze a manufactured home 
retailer's prices to determine if there were differences in the prices 
that would have to be included in points and fees as loan originator 
compensation. This would appear to be an extremely difficult analysis 
for the creditor to perform. Not only would the creditor have to 
compare the sales prices from numerous transactions, it would have to 
determine whether any differences between the sales prices could be 
attributed to the loan origination activities of the retailer and not 
to other factors.
    The Bureau requested comment on the proposed guidance specifying 
that the sales price does not include loan originator compensation that 
can be attributed to the transaction at the time the interest rate is 
set. In addition, the Bureau requested comment on whether the sales 
price of a manufactured home does in fact include loan originator 
compensation that can be attributed to the transaction at the time the 
interest rate is set, and, if so, whether there are practicable ways 
for a creditor to measure that compensation so that it could be 
included in points and fees.
Comments
    The Bureau received few comments that addressed proposed Sec.  
1026.32(b)(1)(ii)(D). Two industry commenters generally supported the 
proposal. Consumer advocates did not comment on this issue.
    With respect to new comment 32(b)(1)(ii)-5, industry commenters 
supported the Bureau's proposed guidance. They maintained that the 
sales price of a manufactured home does

[[Page 60412]]

not include loan originator compensation and that, in any event, it 
would not be possible for the creditor to determine if the sales price 
did include any such compensation.
    Consumer advocates, however, opposed the proposed comment. They 
argued that retailers could easily conceal loan originator compensation 
in the sales price by inflating the price above what a cash customer 
would pay. They contended that it is difficult to determine the 
equivalent cash price for manufactured homes because most sales are on 
credit and, because of the variety of options, there are not standard 
cash prices for particular models. They stated that the Manufacturer's 
Suggested Retail Price (MSRP) is not a reliable measure because it 
often does not include many options that are included with the sale and 
because the close relationships between many lenders, dealers, and 
manufacturers create an incentive to inflate MSRPs. They recommended 
that the commentary should instead provide that any originator 
compensation concealed in the sales price should be included in points 
and fees.
Final Rule
    For the reasons noted above, the Bureau is adopting new Sec.  
1026.32(b)(1)(ii)(D) and (b)(2)(ii)(D) as proposed. As discussed below, 
the Bureau is also adopting, with revisions, comment 32(b)(1)(ii)-5, 
which, among other things, explains in comment 32(b)(1)(ii)-5.iii, that 
consistent with Sec.  1026.32(b)(1)(ii)(D), compensation paid by a 
manufactured home retailer to its employees is not included in points 
and fees. The Bureau notes, however, that it does not acknowledge that 
situations exist where a manufactured housing retailer's employee is 
considered a loan originator, but the retailer itself is not.
    As discussed in the proposal, the Bureau is using its exception 
authority to adopt new Sec.  1026.32(b)(1)(ii)(D) and (b)(2)(ii)(D) 
pursuant to its authority under TILA section 105(a) to make such 
adjustments and exceptions for any class of transactions as the Bureau 
finds necessary or proper to facilitate compliance with TILA and to 
effectuate the purposes of TILA, including the purposes of TILA section 
129C of ensuring that consumers are offered and receive residential 
mortgage loans that reasonably reflect their ability to repay the 
loans. The Bureau's understanding of this purpose is informed by the 
findings related to the purposes of section 129C of ensuring that 
responsible, affordable mortgage credit remains available to consumers. 
The Bureau believes that using its TILA exception authorities will 
facilitate compliance with the points and fees regulatory regime by not 
requiring creditors to investigate the manufactured housing retailer's 
employee compensation practices, and by making sure that all creditors 
apply the provision consistently. It will also effectuate the purposes 
of TILA by helping to keep mortgage loans available and affordable by 
ensuring that they are subject to the appropriate regulatory framework 
with respect to qualified mortgages and the high-cost mortgage 
threshold. The Bureau is also invoking its authority under TILA section 
129C(b)(3)(B) to revise, add to, or subtract from the criteria that 
define a qualified mortgage consistent with applicable standards. For 
the reasons explained above, the Bureau has determined that it is 
necessary and proper to ensure that responsible, affordable mortgage 
credit remains available to consumers in a manner consistent with the 
purposes of TILA section 129C and necessary and appropriate to 
effectuate the purposes of this section and to facilitate compliance 
with section 129C. With respect to its use of TILA section 
129C(b)(3)(B), the Bureau believes this authority includes adjustments 
and exceptions to the definitions of the criteria for qualified 
mortgages and that it is consistent with the purpose of facilitating 
compliance to extend use of this authority to the points and fees 
definitions for high-cost mortgage in order to preserve the consistency 
of the qualified mortgage and high-cost mortgage definitions. As noted 
above, by helping to ensure that the points and fees calculation is not 
artificially inflated, the Bureau is helping to ensure that 
responsible, affordable mortgage credit remains available to consumers.
    The Bureau also has considered the factors in TILA section 105(f) 
and has concluded that, for the reasons discussed above, the exemption 
is appropriate under that provision. Pursuant to TILA section 105(f), 
the Bureau may exempt by regulation from all or part of this title all 
or any class of transactions for which in the determination of the 
Bureau coverage does not provide a meaningful benefit to consumers in 
the form of useful information or protection. In determining which 
classes of transactions to exempt, the Bureau must consider certain 
statutory factors. For the reasons discussed above, the Bureau is 
excluding from points and fees compensation paid by a retailer of 
manufactured homes to its employees because including such compensation 
in points and fees does not provide a meaningful benefit to consumers. 
The Bureau believes that the exemption is appropriate for all affected 
consumers to which the exemption applies, regardless of their other 
financial arrangements and financial sophistication and the importance 
of the loan to them. Similarly, the Bureau believes that the exemption 
is appropriate for all affected loans covered under the exemption, 
regardless of the amount of the loan and whether the loan is secured by 
the principal residence of the consumer. Furthermore, the Bureau 
believes that, on balance, the exemption will simplify the credit 
process without undermining the goal of consumer protection, denying 
important benefits to consumers, or increasing the expense of the 
credit process.
    The Bureau notes that it is permitting creditors to exclude from 
points and fees compensation paid to a manufactured home retailer's 
employees only where that compensation is paid by the retailer. To the 
extent that an employee of a manufactured home retailer receives from 
another source (such as the creditor) loan originator compensation that 
can be attributed to the transaction at the time the interest rate is 
set, then that compensation must be included in points and fees.
    The Bureau is adopting a modified version of comment 32(b)(1)(ii)-5 
in light of comments from consumer groups. The Bureau is concerned 
that, as noted by consumer advocates, it is possible that the sales 
price of a manufactured home could include loan originator 
compensation. In particular, the Bureau is concerned that creditors and 
manufactured home retailers could work together to conceal loan 
originator compensation in the sales price. As a result, the Bureau 
does not believe that it can determine by rule that the sales price of 
a manufactured home does not include loan originator compensation that 
must be included in points and fees.
    However, no commenters proposed a practicable method for creditors 
to determine whether the sales price of a manufactured home does in 
fact include loan originator compensation that can be attributed to the 
transaction at the time the interest rate is set. As the Bureau noted 
in the proposal, the Bureau does not believe that it is workable for 
the creditor to attempt to compare sales prices in different 
transactions to try to determine if the sales price includes loan 
originator compensation that must be included in points and fees.
    Because the Bureau's primary concern is that creditors and 
manufactured home

[[Page 60413]]

retailers could work together to conceal loan originator compensation 
in the sales price, the Bureau is adopting new guidance that focuses on 
the knowledge of the creditor. Specifically, the Bureau is revising 
proposed comment 32(b)(1)(ii)-5.ii to provide that, if the creditor has 
knowledge that the sales price of a manufactured home includes loan 
originator compensation, then that compensation must be included in 
points and fees. The creditor does not, however, have an obligation to 
investigate the retailer's sales prices to determine if the sales price 
includes such compensation.
    This approach is consistent with the current rules for calculating 
points and fees and the amount of loan originator compensation that 
must be included in points and fees. Under Sec.  1026.32(b)(1), amounts 
must be included in points and fees only if they are ``known at or 
before consummation.'' Under Sec.  1026.32(b)(1)(ii), loan originator 
compensation is included in points and fees only if it can be 
attributed to the transaction at the time the interest rate is set. In 
general, the Bureau does not believe that many creditors will know 
whether the sales price of a manufactured home includes loan originator 
compensation, and therefore would not be able to attribute any such 
compensation to the transaction at the time the interest rate is set. 
However, to the extent that, for example, a creditor and a retailer 
establish an arrangement in which the sales price of a manufactured 
home includes loan originator compensation, then the creditor would 
have knowledge that the sales price includes loan originator 
compensation and would have to include such compensation in points and 
fees. The Bureau believes that this approach will balance the goals of 
ensuring that creditors and retailers not evade the points and fees 
limits by working together to conceal loan originator compensation in 
the sales price and of avoiding a standard that would impose an 
unreasonable burden on creditors to investigate the pricing of 
manufactured home retailers.
32(b)(1)(vi) and 32(b)(2)(vi)
The Proposal
    The Bureau proposed clarifying changes to Sec.  1026.32(b)(1)(vi) 
and (b)(2)(vi) to better harmonize the definitions of ``total 
prepayment penalty'' adopted in these two sections more fully with the 
statutory requirement implemented by them. Sections 1026.32(b)(1)(vi) 
and (2)(vi) implement TILA section 103(bb)(4)(F), as added by section 
1431(c) of the Dodd-Frank Act. That provision requires that points and 
fees include ``all prepayment fees or penalties that are incurred by 
the consumer if the loan refinances a previous loan made or currently 
held by the same creditor or an affiliate of the creditor.'' Section 
1026.32(b)(1)(vi), as adopted by the 2013 ATR Final Rule, implemented 
this provision as it related to closed-end credit transactions, and 
provided that points and fees must include ``[t]he total prepayment 
penalty, as defined in paragraph (b)(6)(i) of this section, incurred by 
the consumer if the consumer refinances the existing mortgage loan with 
the current holder of the existing loan, a servicer acting on behalf of 
the current holder, or an affiliate of either.'' Section 
1026.32(b)(2)(vi), as adopted by the 2013 HOEPA Final Rule, implemented 
this provision as it related to open-end credit plans (i.e., a home 
equity line of credit, or HELOC), and provided that points and fees 
must include ``[t]he total prepayment penalty, as defined in paragraph 
(b)(6)(ii) of this section, incurred by the consumer if the consumer 
refinances an existing closed-end credit transaction with an open-end 
credit plan, or terminates an existing open-end credit plan in 
connection with obtaining a new closed- or open-end credit transaction, 
with the current holder of the existing plan, a servicer acting on 
behalf of the current holder, or an affiliate of either.''
    The Bureau proposed changes to Sec.  1026.32(b)(1)(vi) and (2)(vi) 
to clarify both provisions' application. In doing so the Bureau stated 
that it intended these provisions to work in the same manner for 
closed-end and open-end credit transactions--i.e., to include in points 
and fees any prepayment charges triggered by the refinancing of an 
existing loan or termination of a HELOC by obtaining a new credit 
transaction with the current holder of the existing closed-end mortgage 
loan or open-end credit plan. The Bureau, therefore, proposed to state 
expressly that Sec.  1026.32(b)(1)(vi) applies to instances where the 
consumer takes out a closed-end mortgage loan to pay off and terminate 
an existing open-end credit plan held by the same creditor and the plan 
imposes a prepayment penalty (as defined in Sec.  1026.32(b)(6)(ii)) on 
the consumer. The Bureau also proposed to strike from the existing 
Sec.  1026.32(b)(2)(vi) the reference to obtaining a new closed-end 
credit transaction because Sec.  1026.32(b)(2)(vi) relates to points 
and fees only for open-end credit plans and Sec.  1026.32(b)(1)(vi) 
would apply instead. The Bureau also proposed to insert in Sec.  
1026.32(b)(2)(vi) a reference to Sec.  1026.32(b)(6)(i), the definition 
of prepayment penalties for closed-end credit transactions, to clarify 
that the Sec.  1026.32(b)(6)(i) definition applies in calculating the 
prepayment penalties included where a consumer refinances a closed-end 
mortgage loan with a HELOC with the creditor holding the closed-end 
mortgage loan (i.e., the closed-end mortgage loan's prepayment 
penalties are included in calculating points and fees for the HELOC).
Comments
    The Bureau did not receive comments specific to these proposed 
changes.
Final Rule
    The Bureau is adopting the changes to Sec.  1026.32(b)(1)(vi) and 
(2)(vi) as proposed. The Bureau believes that these changes are 
consistent with the statutory provision implemented by this section and 
provide needed clarification to the Bureau's intended application of 
Sec.  1026.32(b)(1)(vi) and (2)(vi). In addition, the Bureau also is 
adopting as proposed comment 32(b)(2)-1, which directs readers for 
further guidance on the inclusion of charges paid by parties other than 
the consumer in points and fees for open-end credit plans to proposed 
comment 32(b)(1)-2 on closed-end credit transactions.
32(d) Limitations
32(d)(1)
32(d)(1)(ii) Exceptions
32(d)(1)(ii)(C)
The Proposal
    The Bureau proposed to revise the exception to the prohibition on 
balloon payments for high-cost mortgages in Sec.  1026.32(d)(1)(ii)(c) 
for transactions that satisfy the criteria set forth in Sec.  
1026.43(f), which implements TILA section 129C(b)(2)(E) as added by the 
Dodd-Frank Act provision, allows certain balloon-payment mortgages made 
by small creditors operating predominantly in ``rural or underserved 
areas'' to be accorded status as qualified mortgages under Sec.  
1026.43(f). The HOEPA balloon exception is based on the same statutory 
provision, which appears to have been designed to promote access to 
credit. TILA section 129C as added by the Dodd-Frank Act generally 
prohibits balloon-payment loans from being accorded qualified mortgage 
status, but Congress appears to have been concerned that small 
creditors in rural areas might have sufficient difficulty converting 
from balloon-payment loans to adjustable rate mortgages that they would 
curtail mortgage lending if they could not

[[Page 60414]]

obtain qualified mortgage status for their balloon-payment loans. As 
adopted in Sec.  1026.43(f) by the 2013 ATR Final Rule, the exemption 
is available to creditors that extended more than 50 percent of their 
total covered transactions secured by a first lien in ``rural'' or 
``underserved'' counties during the preceding calendar year, as those 
terms are defined in Sec.  1026.35(b)(2)(iv)(A) and (B), respectively.
    Because commenters raised similar concerns about the prohibition in 
HOEPA on high-cost mortgages having balloon-payment features, the 
Bureau decided in the 2013 HOEPA Final Rule to adopt Sec.  
1026.32(d)(1)(ii)(C) to allow balloon-payment features on loans that 
met the qualified mortgage requirements. The Bureau stated that, in its 
view, (1) allowing creditors in certain rural or underserved areas to 
extend high-cost mortgages with balloon payments will benefit consumers 
by expanding access to credit in these areas, and also will facilitate 
compliance for creditors who make these loans; and (2) allowing 
creditors that make high-cost mortgages in rural or underserved areas 
to originate loans with balloon payments if they satisfy the same 
criteria promotes consistency between the 2013 HOEPA Final Rule and the 
2013 ATR Final Rule, and thereby facilitates compliance for creditors 
that operate in these areas.
    Since publication of the 2013 HOEPA Final Rule and the 2013 ATR 
Final Rule, the Bureau received extensive comment on the definitions of 
``rural'' and ``underserved'' that it adopted for purposes of Sec.  
1026.43(f) and certain other purposes in the 2013 Title XIV Final 
Rules, including Sec.  1026.32(d)(1)(ii)(C). In light of these 
comments, the Bureau added Sec.  1026.43(e)(6) to allow small creditors 
during the period from January 10, 2014, to January 10, 2016, to make 
balloon-payment qualified mortgages even if they do not operate 
predominantly in rural or underserved areas.\32\ In addition, the 
Bureau announced that it would reexamine those definitions over the 
next two years to determine whether further adjustments are appropriate 
particularly in light of access to credit concerns.\33\
---------------------------------------------------------------------------

    \32\ Specifically, in the May 2013 ATR Final Rule, the Bureau 
adopted Sec.  1026.43(e)(6), which provided for a temporary balloon-
payment qualified mortgage that requires all of the same criteria be 
satisfied as the balloon-payment qualified mortgage definition in 
Sec.  1026.43(f) except the requirement that the creditor extend 
more than 50 percent of its total first-lien covered transactions in 
counties that are ``rural'' or ``underserved.'' This temporary 
balloon-payment qualified mortgage would sunset, however, after 
January 10, 2016. As discussed in the section-by-section analysis of 
Sec.  1026.43(e)(6) in the May 2013 ATR Final Rule, the Bureau 
adopted this two-year transition period for small creditors to roll 
over existing balloon-payment loans as qualified mortgages, even if 
they do not operate predominantly in rural or underserved areas, 
because the Bureau believes it is necessary to preserve access to 
responsible, affordable mortgage credit for some consumers. The 
Bureau also noted that, during the two-year period for which Sec.  
1026.43(e)(6) is in place, the Bureau intends to review whether the 
definitions of ``rural'' and ``underserved'' should be adjusted 
further and to explore how it can best facilitate the transition of 
small creditors that do not operate predominantly in rural or 
underserved areas from balloon-payment loans to adjustable-rate 
mortgages. 78 FR 35430 (June 12, 2013).
    \33\ See, e.g., U.S Consumer Fin Prot. Bureau, Clarification of 
the 2013 Escrows Final Rule (May 16, 2013), available at https://www.consumerfinance.gov/blog/clarification-of-the-2013-escrows-final-rule/.
---------------------------------------------------------------------------

    In light of the Bureau's decision to allow small creditors an 
additional two years to transition from balloon-payment loans to other 
products while it reevaluates the definitions of ``rural'' and 
``underserved,'' the Bureau also proposed revisions to Sec.  
1026.32(d)(1)(ii)(c) to also allow small creditors to carry over the 
flexibility provided by the revised May 2013 ATR Final Rule into the 
HOEPA balloon loan provisions. The proposal would have revised Sec.  
1026.32(d)(1)(ii)(C) to expand the exception to the prohibition on 
balloon payments for high-cost mortgages for transactions that satisfy 
the criteria in either Sec.  1026.43(f) or Sec.  1026.43(e)(6). The 
Bureau sought comment on this aspect of the proposal.
Comments
    The Bureau received substantial comments from trade associations, 
credit unions, and other industry advocates supporting the proposed 
amendments. Specifically, many of these commenters commended the Bureau 
for facilitating compliance with the balloon payment restrictions 
adopted by the 2013 HOEPA Final Rule, especially with respect to small 
creditors whose communities technically fail to meet the Bureau's 
definition of ``rural'' because they lie within the boundaries of 
micropolitan statistical areas. These commenters noted that the ability 
to originate mortgages with balloons is important to small creditors, 
who often have unique product pricing risks and also commonly do not 
have adequate staff or training to produce the additional disclosures 
required by adjustable-rate mortgages. The Bureau received one comment 
from a housing counseling organization that disagreed with the proposed 
expansion of the exemption, but the commenter raised no specific issues 
with the proposal. Rather the commenter disagreed in general with the 
original exception adopted by the 2013 HOEPA Final Rule on the premise 
that it believes balloon high-cost mortgages should never be permitted 
under any circumstances.
Final Rule
    The Bureau is adopting revised Sec.  1026.32(d)(1)(ii)(c) as 
proposed. The Bureau is expanding this exception pursuant to its 
authority under TILA section 129(p)(1), which grants it authority to 
exempt specific mortgage products or categories from any or all of the 
prohibitions specified in TILA section 129(c) through (i) if the Bureau 
finds that the exemption is in the interest of the borrowing public and 
will apply only to products that maintain and strengthen homeownership 
and equity protections.
    The Bureau believes expanding the balloon-payment exception for 
high-cost mortgages to allow certain small creditors operating in areas 
that do not qualify as ``rural'' or ``underserved'' to continue to 
originate high-cost mortgages with balloon payments is in the interest 
of the borrowing public and will strengthen homeownership and equity 
protection. The Bureau believes allowing greater access to credit in 
remote areas that nevertheless may not meet the definitions of 
``rural'' or ``underserved'' while creditors transition to adjustable-
rate mortgages (or the Bureau reconsiders those definitions) will help 
those consumers who otherwise may be able to obtain credit only from a 
limited number of creditors. Further, it will do so in a manner that 
balances consumer protections with access to credit. In the Bureau's 
view, concerns about potentially abusive practices that may accompany 
balloon payments will be curtailed by the additional requirements set 
forth in Sec.  1026.43(e)(6) and (f). Creditors that make these high-
cost mortgages will be required to verify that the loans also satisfy 
the additional criteria discussed above, including some specific 
criteria required for qualified mortgages. Further, creditors that make 
balloon-payment high-cost mortgages under this exception will be 
required to hold the high-cost mortgages in portfolio for a specified 
time, which the Bureau believes also decreases the risk of abusive 
lending practices. Accordingly, for these reasons and for the purpose 
of consistency between the two rules, the Bureau is adopting an 
exception to the Sec.  1026.32(d)(1) balloon-payment restriction for 
high-cost mortgages where the creditor satisfies the conditions set 
forth in Sec. Sec.  1026.43(f) or the conditions set forth in Sec.  
1026.43(e)(6).

[[Page 60415]]

Section 1026.35 Requirements for Higher-Priced Mortgage Loans
35(b) Escrow Accounts
35(b)(2) Exemptions
35(b)(2)(iii)
35(b)(2)(iii)(A)
The Proposal
    In addition to the HOEPA and ATR balloon provisions discussed 
above, the definitions of ``rural'' and ``underserved'' also relate to 
the Sec.  1026.35(b)(2)(iii) exemption from the requirement that 
creditors establish escrow accounts for certain higher-priced mortgage 
loans available to small creditors that operate predominantly in 
``rural'' or ``underserved'' areas. The exemption in Sec.  
1026.35(b)(2)(iii) was designed to promote access to credit by 
exempting small creditors in rural or underserved areas that might have 
sufficient difficulty maintaining escrow accounts that they would 
curtail making higher-priced mortgage loans rather than trigger the 
escrow account requirement. As adopted in the 2013 Escrows Final Rule, 
and as amended by the May 2013 Escrows Final Rule,\34\ the exemption is 
available to creditors that extended more than 50 percent of their 
total covered transactions secured by a first lien on properties that 
are located in ``rural'' or ``underserved'' counties during the 
preceding calendar year. In general, a county's status as ``rural'' is 
defined in relation to Urban Influence Codes (UICs) established by the 
United States Department of Agriculture's Economic Research Service.
---------------------------------------------------------------------------

    \34\ 78 FR 30739 (May 23, 2013).
---------------------------------------------------------------------------

    Because of updated information from the 2010 Census, however, 
numerous counties' status under the Bureau's definition will change 
between 2013 and 2014, with a small number of new counties meeting the 
definition of ``rural'' and approximately 82 counties no longer meeting 
that definition. The Bureau estimates that approximately 200-300 
otherwise eligible creditors during 2013 could lose their eligibility 
for 2014 solely because of changes in the status of the counties in 
which they operate (assuming the geographical distribution of their 
mortgage originations does not change significantly over the relevant 
period).\35\
---------------------------------------------------------------------------

    \35\ The extent of such volatility in the transition from 2012 
rural/non-rural status (for purposes of eligibility for the 
exemption during 2013) to 2013 rural/non-rural status (for purposes 
of eligibility for the exemption during 2014) is likely far greater 
than during other year-to-year transitions. This is due to the fact 
that this first year-to-year transition under the Bureau's ``rural'' 
definition happens to coincide with the redesignation by the USDA's 
Economic Research Service of U.S. counties' urban influence codes, 
on which the ``rural'' definition is generally based. This 
redesignation occurs only decennially, based on the most recent 
census data. Nevertheless, for purposes of eligibility for the 
exemption during 2013 and 2014, the volatility is significant--just 
as creditors are first attempting to apply the exemption's criteria.
---------------------------------------------------------------------------

    In light of the Bureau's intent to review whether the definitions 
of ``rural'' and ``underserved'' should be adjusted further during the 
two-year transition period for balloon-payment mortgages discussed 
above, the Bureau proposed to revise the exemption provided by Sec.  
1026.35(b)(2)(iii) to the general requirement that creditors establish 
an escrow account for first lien higher-priced mortgage loans where a 
small creditor operates predominantly in rural or underserved areas and 
meets various other criteria. The proposal would have revised Sec.  
1026.35(b) and its commentary to minimize volatility in the definitions 
while they are being re-evaluated. The proposal also would have amended 
Sec.  1026.35(b)(2)(iii)(D)(1) and its commentary to conform to the 
expansion of the exemption to creditors that may meet the Sec.  
1026.35(b)(2)(iii)(A) criteria for calendar year 2014 based on loans 
made in ``rural'' or ``underserved'' counties in calendar year 2011, 
but not 2012 or 2013.
    The Bureau sought comment on these proposed amendments and also 
proposed an effective date for the amendments that would apply to 
transactions where applications were received on or after January 1, 
2014, in light of the proposed change to the calendar year exemption 
under Sec.  1026.35(b)(2)(iii).
Comments
    The Bureau received substantial comments from trade associations, 
credit unions, and other industry advocates supporting the proposed 
amendments. Many of the comments relating to the amendments to Sec.  
1026.32(d)(1)(ii)(A) discussed above also discussed the amendments to 
Sec.  1026.35(b)(2)(iii) and offered similar or identical comments 
commending the Bureau for facilitating compliance with the requirements 
adopted by the 2013 Escrow Final Rule, particularly in light of changes 
to ``rural'' status for certain counties based on the last available 
Census data that would have caused certain creditors to lose 
eligibility for the exemption. The same housing counseling organization 
that disagreed with the balloon exception adopted by the 2013 HOEPA 
Final Rule also disagreed with the original exemption from the escrows 
requirement and thus also the proposed expansion. As before, this 
commenter did not raise any specific issues related to the proposal, 
but rather stated that all higher-priced mortgage loans should be 
escrowed, without exception. As discussed in part V above, while nearly 
all comments supported the proposal in general, no comments expressly 
addressed the January 1, 2014 effective date.
Final Rule
    The Bureau is adopting revised Sec.  1026.35(b)(2)(iii)(A) as 
proposed. The amended provision provides that, to qualify for the 
exemption, a creditor must have extended more than 50 percent of its 
total covered transactions secured by a first lien on properties 
located in ``rural'' or ``underserved'' counties during any of the 
preceding three calendar years. The provision thus prevents a creditor 
from losing eligibility for the exemption under the ``rural or 
underserved'' element of the test unless it has failed to exceed the 
50-percent threshold three years in a row.
    As discussed above in the section-by-section analysis of Sec.  
1026.32(d)(1)(ii)(C), the Bureau also is modifying the exception from 
the prohibition on balloon payments for high-cost mortgages in that 
section. Section 1026.32(d)(1)(ii)(C) provides an exception to the 
general prohibition on balloon payments for high-cost mortgages for 
balloon-payment qualified mortgages made by certain creditors operating 
predominantly in ``rural'' or ``underserved'' areas. Believing that the 
same rationale for allowing balloon-payment qualified mortgages made by 
creditors in rural or underserved areas applies to high-cost mortgages, 
the Bureau adopted the Sec.  1026.32(d)(1)(ii)(C) exception in the 2013 
HOEPA Final Rule. As explained above, the Bureau believes the same 
underlying rationale for the two-year transition period for balloon-
payment qualified mortgages described above applies equally to the 
Sec.  1026.32(d)(1)(ii)(C) exception from the high-cost mortgage 
balloon prohibition. Accordingly, the Bureau believes it is appropriate 
to extend this temporary framework to Sec.  1026.32(d)(1)(ii)(C) and 
therefore is amending Sec.  1026.32(d)(1)(ii)(C) to include loans 
meeting the criteria under Sec.  1026.43(e)(6). Thus, for both balloon-
payment qualified mortgages and for the high-cost mortgage balloon 
prohibition, the Bureau has adopted a two-year transition period during 
which the special treatment of balloon-payment loans does not depend on 
the creditor operating predominantly in rural or underserved areas.
    The Bureau considered taking the same approach with regard to the

[[Page 60416]]

escrow requirement but concluded ultimately that a smaller adjustment 
was appropriate. Because higher-priced mortgage loans are already 
subject to an escrow requirement, all creditors are currently required 
to maintain escrow accounts for such loans. Implementation of the 
amendments to the exemption will thus reduce burden for some creditors, 
but does not impose different requirements than the status quo except 
as to the length of time that an escrow account must be maintained. 
This is fundamentally different than the ability-to-repay and high-cost 
mortgage requirements, which would prohibit new balloon-payment loans 
from being accorded qualified mortgage status or from being made going 
forward absent implementation of the special exemptions. In addition, 
the Bureau may change the definitions of rural or underserved areas as 
the result of its re-examination process but does not anticipate 
lifting the requirement that creditors operate predominantly in rural 
or underserved areas to qualify for the exemption because Congress 
specifically contemplated that limitation on the escrows exemption. 
Accordingly, the Bureau believes it is appropriate to leave the 
definition in place, but to prevent volatility in the definition from 
negatively affecting creditors while the Bureau re-evaluates the 
underlying definitions. The Bureau believes that, as with the two 
balloon-payment provisions for which the Bureau believes two-year 
transition periods are appropriate, this amendment will benefit 
consumers by expanding access to credit in certain areas that met the 
definitions of ``rural'' or ``underserved'' at some time in the 
preceding three calendar years and also will facilitate compliance for 
creditors that make these loans. The Bureau also believes that the 
amendment will promote additional consistency between the regulatory 
provisions adopted by the 2013 HOEPA Final Rule, the 2013 ATR Final 
Rule, and the 2013 Escrows Final Rule, thereby facilitating compliance 
for affected creditors.
    The Bureau notes that the mechanics of Sec.  1026.35(b)(2)(iii)(A) 
differ slightly from the express transition period ending on January 
10, 2016, under Sec.  1026.43(e)(6). Thus, this amendment does not 
parallel the same transition period precisely, as does revised Sec.  
1026.32(d)(1)(ii)(C), which simply incorporates Sec.  1026.43(e)(6)'s 
conditions by cross-reference. Instead, revised Sec.  
1026.35(b)(2)(iii)(A) approximates a two-year transition period by 
extending from one to three years the time for which a creditor, once 
eligible for the exemption, cannot lose that eligibility because of 
changes in the rural (or underserved) status of the counties in which 
the creditor operates. Because the 2013 Escrows Final Rule took effect 
on June 1, 2013, the escrows provisions already have begun operating 
over seven months earlier than the provisions adopted by the 2013 HOEPA 
and ATR Final Rules (which take effect on January 10, 2014). Thus, 
whereas the two balloon-payment provisions specifically last through 
January 10, 2016, the escrows-requirement exemption will guarantee 
eligibility (for a creditor that is eligible during 2013 with respect 
to operating predominantly in rural or underserved areas, and meets the 
other applicable criteria) through 2015. Thus, the revised Sec.  
1026.35(b)(2)(iii) exemption will approximately, though not exactly, 
track the extension of the balloon exemption for qualified mortgages 
under Sec.  1026.43(e)(6), and the extension of the HOEPA balloon 
exemption under revised Sec.  1026.32(d)(1)(ii)(C).
    In addition to the changes discussed above, the Bureau also is 
amending Sec.  1026.35(b)(2)(iii)(D)(1) and its commentary to conform 
to the expansion of the exemption to creditors that may meet the 
section 35(b)(2)(iii)(A) criteria for calendar year 2014 based on loans 
made in ``rural'' or ``underserved'' counties in calendar year 2011, 
but not 2012 or 2013. Section Sec.  1026.35(b)(2)(iii)(D)(1) currently 
prohibits any creditor from availing itself of the exemption if it 
maintains escrow accounts for any extensions of consumer credit secured 
by real property or a dwelling that it or its affiliate currently 
service, unless the escrow accounts were established for first-lien 
higher-priced mortgage loans on or after April 1, 2010, and before June 
1, 2013, or were established after consummation as an accommodation for 
distressed consumers. With respect to loans where escrows were 
established on or after April 1, 2010, and before June 1, 2013, the 
Supplementary Information to the 2013 Escrows Final Rule explained that 
the Bureau believes creditors should not be penalized for compliance 
with the then current regulation, which would have required any such 
loans to be escrowed after April 1, 2010, and prior to June 1, 2013--
the date the exemption took effect. The Bureau understands that 
creditors that did not make more than 50 percent of their first-lien 
higher-priced mortgage loans in ``rural'' or ``underserved'' counties 
in calendar year 2012 would have been ineligible for the exemption for 
calendar year 2013, and thus would have been required under Sec.  
1026.35(a) to establish escrow accounts for any higher-priced mortgage 
loans those creditors made after June 1, 2013. However, it is possible 
in light of the amendments the Bureau is adopting that some of these 
same creditors may have met this criteria during calendar year 2011--
and thus, because the Bureau is finalizing the proposal and allowing 
creditors to qualify for the exemption (assuming they satisfy the other 
conditions set forth in Sec.  1026.35(b)(2)(iii)(B), (C), and (D))--
such creditors will qualify for the exemption in 2014. However, absent 
additional clarification, there would be one barrier: For applications 
received on or after June 1, 2013, but before the date the proposed 
amendment takes effect (as proposed, January 1, 2014), such a creditor 
that made a first-lien higher-priced mortgage loan would have been 
required to escrow for that loan, and thus would be deemed ineligible 
under Sec.  1026.35(b)(2)(iii)(D). The Bureau does not believe that 
such creditors should lose the exemption because they were ineligible 
prior to the proposed amendment taking effect and thus made loans with 
escrows from June 1, 2013, through December 31, 2013. As the Bureau 
discussed in the Supplementary Information to the 2013 Escrows Final 
Rule, the Bureau believes creditors should not be penalized for 
compliance with the current regulation. The Bureau thus believes it is 
appropriate to amend Sec.  1026.35(b)(2)(iii)(D)(1) and comment 
35(b)(2)(iii)(D)(1)-1.iv to exclude escrow accounts established after 
April 1, 2010 and before January 1, 2014.
    In addition, the Bureau is revising comment 35(b)(2)(iii)(D)(1)-
1.iv to clarify that the date ranges provided in Sec.  
1026.35(b)(2)(iii)(D)(1) apply to transactions for which creditors 
received applications on or after April 1, 2010, and before January 1, 
2014. As discussed above, the Bureau believes such creditors should 
still qualify for the exemption provided under Sec.  1026.35(b)(2)(iii) 
so long as they do not establish new escrow accounts for transactions 
for which they received applications on or after January 1, 2014, other 
than those described in Sec.  1026.35(b)(2)(iii)(D)(2), and they 
otherwise qualify under Sec.  1026.35(b)(2)(iii). The Bureau believes 
this clarification reflects both the manner in which the 2013 Escrows 
Rule originally applied to transactions and the applicability of this 
final rule.

[[Page 60417]]

Section 1026.36 Loan Originator Compensation
36(a) Definitions
    Section 1026.36(a) defines the term ``loan originator'' for 
purposes of Sec.  1026.36 as a person \36\ who, for or in expectation 
of direct or indirect compensation or other monetary gain, engages in a 
defined set of activities or services (unless otherwise excluded). 
Section 1026.36(a) describes these activities broadly to include any 
such person who ``takes an application, offers, arranges, assists a 
consumer in obtaining or applying to obtain, negotiates, or otherwise 
obtains or makes an extension of consumer credit for another person; or 
through advertising or other means of communication represents to the 
public that such person can or will perform any of these activities.'' 
Commentary to Sec.  1026.36(a) further describes and provides 
illustrations of these activities, including how the practice of 
``referring'' consumers to creditors or loan originators, may affect 
one's status under the section.
---------------------------------------------------------------------------

    \36\ ``Person'' is defined in Sec.  1026.2(a)(22) to mean, ``a 
natural person or an organization, including a corporation, 
partnership, proprietorship, association, cooperative, estate, 
trust, or government unit.''
---------------------------------------------------------------------------

    Following publication of the 2013 Loan Originator Compensation 
Final Rule, the Bureau received numerous inquiries from industry 
regarding the activities that, if done for compensation or gain, would 
cause a person to be classified as a ``loan originator'' under Sec.  
1026.36. As discussed below, many of these inquiries sought 
clarification regarding specific terms used throughout the section, 
such as ``credit terms,'' or guidance on how the provision may apply to 
certain loan originator or creditor employees, agents or contractors 
such as tellers and greeters, as well as other interpretive questions. 
In response, the Bureau proposed several amendments to Sec.  1026.36(a) 
and associated commentary adopted by the 2013 Loan Originator 
Compensation Final Rule to resolve inconsistencies in wording, to 
conform the comments to the intended operation of the regulation text, 
and to address issues raised during the regulatory implementation 
process. The Bureau proposed these changes pursuant to its TILA section 
105(a) and Dodd-Frank Act section 1022(b)(1) authority. As discussed 
below, the Bureau is adopting most of these amendments as proposed with 
some revisions and additional clarifying amendments.
    The Bureau also proposed to revise comments 36(a)-4.i and 36(a)-
4.ii.B to clarify those provisions' application to loan originator or 
creditor agents and contractors as well as employees. The Bureau is not 
adopting this aspect of the proposal. As discussed below, comments 
36(a)-4.i and 36(a)-4.ii.B illustrate two situations where an employee 
of a creditor or loan originator is conducting ``in house'' activity 
for his or her employer that is not considered to be ``referring'': (1) 
Handing applications from the employer to a consumer; and (2) providing 
loan originator or creditor contact information for the loan originator 
or creditor entity for which the person works, or a person that works 
for the same entity. The Bureau proposed to clarify that comments 
36(a)-4.i and 36(a)-4.ii.B may be available to certain persons who work 
for creditors or loan originators, but may not technically be 
``employed'' by the loan originator or creditor organization--i.e., 
contract employees, temporary employees, interns, or other persons who 
may be working on a voluntary basis or being paid by another entity. 
However, upon further consideration, the Bureau believes the terms 
``agent'' and ``contractor'' could be interpreted more broadly than the 
Bureau intended to include independent contractors or agents used by 
loan originators or creditors to refer customers to that loan 
originator or creditor. The Bureau did not intend these provisions to 
be applied this broadly, and also is concerned that such a reading 
could be inconsistent with other applicable laws, such as RESPA's 
prohibition on referral fees for federally related mortgages. 
Accordingly, the Bureau is limiting the scope of this comment to 
employees of loan originators or creditors.
    The Bureau notes, however, that this does not mean these provisions 
may never be available to certain persons who may possibly be 
considered agents or contractors, such as temps or contract employees. 
While these provisions are limited to employees of creditors or loan 
originators, Sec.  1026.2(b)(3) states that any terms not defined by 
Regulation Z is given the meanings given to them by State law or 
contract. The Bureau believes the term ``employee''--which is not 
defined under Regulation Z--is commonly defined under State law as well 
as employment contracts, and may extend to such persons in appropriate 
circumstances.

A. References to Credit Terms

The Proposal
    The Bureau proposed to amend Sec.  1026.36(a) and its commentary to 
clarify the meaning of ``credit terms,'' which is used in defining some 
of the exclusions to the general definition of ``loan originator,'' 
thereby further delineating the general definition. For example, as 
adopted by the 2013 Loan Originator Compensation Final Rule, Sec.  
1026.36(a)(1)(i)(A) allows persons who act as assistants to loan 
originators to perform clerical or administrative tasks on a loan 
originator's behalf without becoming loan originators themselves. To be 
eligible for the exclusion, however, the person must not, among other 
things, offer or negotiate ``credit terms available from a creditor.''
    Similarly, comment 36(a)-4.i. explains when providing a consumer 
with a credit application, an activity that would otherwise be a 
referral, does not cause a person to be classified as a loan 
originator. This comment provides an exception to certain persons who, 
among other things, do not discuss ``specific credit terms or products 
available from a creditor with the consumer.''
    In addition, comment 36(a)-4.ii.B explains when a loan originator's 
or creditor's employee, such as a teller or greeter, may engage in 
providing loan originator contact information to consumers, an activity 
that would otherwise be a referral, without being classified as a loan 
originator. This comment provides that the definition of loan 
originator does not include a creditor's or loan originator's employee 
who provides loan originator or creditor contact information to a 
consumer, provided the employee does not, among other things, ``discuss 
particular credit terms available from a creditor.'' See also Sec.  
1026.36(a)(1)(i)(B) and comments 36(a)-1.i.A.2 through-1.i.A.4 (other 
similar references to credit terms). This exclusion also assists in 
defining persons who are loan originators in the sense that it implies 
persons who do discuss specific or particular credit terms, as this 
activity is further clarified in this rule, would be included in the 
definition.
    Following publication of the 2013 Loan Originator Compensation 
Final Rule, the Bureau received numerous inquiries from loan 
originators and creditors seeking guidance on the meaning of ``credit 
terms'' in these various contexts. In light of these inquiries, the 
Bureau was concerned that the term ``credit terms'' could have been 
construed too broadly and in a manner that could render any person that 
provides such general information a loan originator, which was not the 
Bureau's intent. Rather, the Bureau generally intended the references 
to ``credit terms'' throughout Sec.  1026.36(a) to refer to particular 
credit terms that

[[Page 60418]]

are or may be made available to the consumer selected based on the 
consumer's financial characteristics. Distinct from such particular 
credit terms are general credit terms that a loan originator or 
creditor makes available and advertises to the public at large, such as 
where such person merely states: ``We offer rates as low as 3% to 
qualified consumers.''
    To address these questions, the Bureau proposed to clarify usage of 
the term ``credit terms'' throughout the section in several ways. 
First, the Bureau noted that the definition of ``credit terms,'' which 
explains the term includes rate, fees, and other costs, had been 
provided only by a parenthetical clause in Sec.  1026.36(a)(1)(i)(B) (a 
single exclusion that relates to retailers of manufactured homes) 
rather than in a separate, definitional provision. Thus, the definition 
appears to be limited to that single provision, even though the term is 
used in multiple places throughout Sec.  1026.36(a). For clarification 
purposes, the Bureau proposed to move this definition from Sec.  
1026.36(a)(1)(i)(B), to new Sec.  1026.36(a)(6), which explicitly makes 
the definition applicable to the entire section. The Bureau solicited 
comment on whether additional guidance concerning the meaning of 
particular credit terms that are or may be made available to the 
consumer in light of the consumer's financial characteristics is 
necessary, and if so, what clarifications would be helpful.
    Second, the Bureau proposed to revise Sec.  1026.36(a)(1)(i)(A) and 
(B), and comments 36(a)-1 and -4 to address inconsistencies regarding 
the meaning of ``credit terms,'' and to clarify that an activity 
involving credit terms for purposes of determining when a person is a 
loan originator must relate to ``particular credit terms that are or 
may be available from a creditor to that consumer selected based on the 
consumer's financial characteristics,'' not credit terms generally. The 
proposal would have clarified that a person who discusses with a 
consumer that, based on the consumer's financial characteristics, a 
creditor should be able to offer the consumer an interest rate of 3%, 
would be considered a loan originator. However, a person who merely 
states general information such as ``we offer rates as low as 3% to 
qualified consumers'' would not have been considered a loan originator 
because the person is not offering particular credit terms that are or 
may be available to that consumer selected based on the consumer's 
financial characteristics.
Comments
    The Bureau received comments from trade associations, industry, and 
consumer groups that addressed this clarification. Most commenters 
generally supported the proposed clarification that ``credit terms'' 
refers to ``credit terms that are or may be made available from a 
creditor to that consumer selected based on the consumer's financial 
characteristics,'' as well as the proposed explanation that ``credit 
terms'' includes rates, fees, and other costs. Some commenters 
requested additional clarification regarding the meaning and 
application of ``the consumer's financial characteristics.'' A few 
industry commenters suggested that ``financial characteristics'' be 
limited to traditional factors that influence a credit decision, such 
as income and credit score. These commenters also asked the Bureau to 
clarify that an assessment of a consumer's financial characteristics 
does not include a person simply having general knowledge of the 
consumer's account or finances, but requires an actual assessment of 
the consumer's financial characteristics that form the basis for 
selection of credit terms. Consumer groups generally supported the 
clarification, but suggested that an assessment of a consumer's 
financial characteristics should include steering based on other 
factors such as race, ethnicity, or zip code.
Final Rule
    The Bureau is adopting the clarifications to references to ``credit 
terms'' in Sec.  1026.36(a)(1)(i)(A) and comments 36(a)-1 and -4 as 
proposed, and new Sec.  1026.36(a)(6) (which states the definition of 
``credit terms'' for purposes of the section) as proposed with an 
additional clarification. In response to public comments requesting 
additional clarification, the Bureau is modifying proposed Sec.  
1026.36(a)(6) to clarify that credit terms are selected based on a 
consumer's financial characteristics when those terms are selected 
based on factors that may influence a credit decision, such as the 
consumer's debts, income, assets, or credit history. The Bureau intends 
this language to capture situations where credit terms are offered or 
discussed as available or potentially available to a consumer based on 
that consumer's ability to obtain such credit. This would include 
examining the consumer's credit history (which could include a credit 
score), income, debts, or assets and then selecting credit terms that 
are either available or potentially available to the consumer based on 
those factors. The Bureau does not intend this language to cover 
situations where, for example, an employee of a loan originator or 
creditor may be aware of a consumer's assets, income, or other factors 
but does not select credit terms based on those factors.
    The Bureau is not providing additional commentary to address 
potential referral concerns based on race, gender, ethnicity, or other 
non-financial factors. The Bureau intends this provision only to 
provide clarification on when a person may be considered a ``loan 
originator'' by discussing credit terms--i.e., when the terms have been 
selected based on the consumer's financial characteristics. To the 
extent that inappropriate non-financial characteristics such as race, 
gender, or ethnicity may factor into the selection of credit terms, the 
Bureau believes such situations would be addressed by other applicable 
laws such as ECOA and the Fair Housing Act. In any event, the Bureau 
did not intend this clarification to define the appropriate means of 
evaluating consumers for credit; rather it only intended to clarify 
when a person may be considered a loan originator by virtue of 
discussing credit terms with a consumer. The Bureau believes these 
changes better align the scope of the loan originator definition with 
the intended scope of Sec.  1026.36.
    Finally, as explained below in the section that discusses 
applicability of Sec.  1026.36(a)(1) to employees of manufactured home 
retailers, the Bureau is not adopting the proposed clarification to 
Sec.  1026.36(a)(1)(i)(B) except for removing the parenthetical 
reference defining credit terms.

B. Application-Related Administrative and Clerical Tasks

The Proposal
    Comment 36(a)-4 and its subparts explain certain activities that, 
for purposes of Sec.  1026.36(a), do not constitute ``referring'' as 
defined in comment 36(a)-1, when done (in the absence of other loan 
originator activities defined in Sec.  1026.36(a)(1)) by certain 
managers, administrative or clerical staff, or similar employees of a 
loan originator or creditor. One such comment, 36(a)-4.i, provides 
guidance regarding when such persons engage in application-related 
administrative and clerical tasks. Specifically, this comment provides 
that persons do not act as loan originators when they (1) at the 
request of the consumer, provide an application form to the consumer; 
(2) accept a completed application form from the consumer; or (3) 
without assisting the consumer in completing

[[Page 60419]]

the application, processing or analyzing the information, or discussing 
specific credit terms or products available from a creditor with the 
consumer, deliver the application to a loan originator or creditor.
    After publication of the final rule, the Bureau received inquiries 
regarding the scope of this comment, specifically if the Bureau 
intended this comment to allow such persons only to provide 
applications from the entity for which they work to consumers without 
that constituting a ``referral,'' or if the exception is broader and 
would allow any such person to influence consumers' decisions and refer 
them to a particular creditor or set of creditors without being 
considered loan originators. The Bureau proposed revisions to comment 
36(a)-4.i to clarify when providing a consumer with a credit 
application amounts to acting as a loan originator, as opposed to 
falling under the exclusion provided in comment 36(a)-4.i for 
application-related administrative and clerical tasks. Specifically, 
the Bureau proposed to revise this comment to clarify that the 
exclusion only extends to a loan originator or creditor employee (or 
agent or contractor) that provides a credit application form from the 
entity for which the person works to the consumer for the consumer to 
complete.
Comments
    The Bureau received a number of comments from industry and trade 
associations that supported these clarifications. Most of these 
comments did not identify any additional need for clarification or 
suggestions. The Bureau also received a few comments from the 
manufactured housing industry, which are addressed separately in the 
discussion of Sec.  1026.36(a)(1)(i)(B) below.
Final Rule
    For the reasons discussed above, the Bureau is adopting comment 
36(a)-4.i mostly as proposed, with some conforming changes for purposes 
of consistency with comment 36(a)-4.ii.B. While generally any person, 
including a loan originator employee would be acting as a loan 
originator for purposes of Sec.  1026.36(a)(1) if he or she refers 
consumers to a particular creditor by providing an application from 
that creditor, the Bureau does not believe that a loan originator or 
creditor employee should be considered a loan originator for simply 
providing an application from the loan originator or creditor entity 
for which he or she works. The Bureau believes that, in such a case, 
provided that the person does not assist the consumer in completing the 
application or otherwise influence his or her decision, the person is 
performing an administrative task on behalf of the entity for which he 
or she works. Thus, in the Bureau's view, there would be little 
appreciable benefit for consumers for the rule to regard such persons 
as loan originators.
    Also, as discussed below with respect to employees who provide 
creditor or loan originator contact information under comment 36(a)-
4.ii.B, the Bureau believes ambiguity regarding the meaning of ``in 
response to a consumer's request''--a factor included in both comments 
36(a)-4.i and 36(a)-4.ii.B--could cause unnecessary compliance 
challenges. Moreover, the Bureau notes that classifying such 
individuals as loan originators for providing an application without 
first waiting for an express request from the consumer would subject 
them to the requirements applicable to loan originators. Again, in the 
Bureau's view, there would be little appreciable benefit for consumers 
for the rule to regard such persons as loan originators where the 
person is simply providing a credit application from the entity for 
whom the person works. Accordingly, the Bureau is adopting comment 
36(a)-4.i as proposed, including removing the condition that the 
provision of the application must be ``at the request of the consumer'' 
and making a conforming change to the comment to only apply to 
employees of the loan originator or creditor, not all persons. However, 
the Bureau is making some wording changes for purposes of consistency 
with comment 36(a)-4.ii.B. The Bureau also is removing a reference to 
``credit products'' which also is inconsistent with comment 36(a)-
4.ii.B. The Bureau believes in both instances the rule should consider 
employees to be loan originators when such persons discuss credit terms 
that are or may be made available by a creditor or loan originator to 
that consumer selected based on the consumer's financial 
characteristics, not when they simply discuss particular categories of 
credit products generally, such as mortgages or home equity loans. Also 
as discussed above, the Bureau is not adopting proposed language that 
expressly would have extended this comment to agents or contractors of 
loan originators or creditors.

C. Responding to Consumer Inquiries and Providing General Information

1. Employees of a Creditor or Loan Originator Who Provide Loan 
Originator or Creditor Contact Information
The Proposal
    Comment 36(a)-4.ii.B provides that the definition of loan 
originator does not include persons who, as employees of a creditor or 
loan originator, provide loan originator or creditor contact 
information to a consumer in response to the consumer's request, 
provided that the employee does not discuss particular credit terms 
available from a creditor and does not direct the consumer, based on 
the employee's assessment of the consumer's financial characteristics, 
to a particular loan originator or creditor seeking to originate 
particular credit transactions to consumers with those financial 
characteristics. Prior to issuing the proposal, the Bureau received 
many inquiries on this topic from stakeholders expressing concern that, 
absent a clarifying amendment, the rule could be interpreted to require 
tellers, greeters, or other such employees to be classified as loan 
originators for merely providing contact information to a consumer who 
did not clearly or explicitly ask for it. Stakeholders further asserted 
that such persons should not be considered loan originators when their 
conduct is limited to following a script prompting them to ask whether 
the consumer is interested in a mortgage loan and the tellers are not 
able to engage in any independent assessment of the consumer. Moreover, 
stakeholders have asserted it would be very costly to implement the 
training and certification requirements under Regulation Z as amended 
by the 2013 Loan Originator Compensation Final Rule for employers with 
large numbers of administrative staff who interact with consumers on a 
day-to-day basis in the manner described.
    The proposal would have addressed these concerns by removing the 
requirement that creditor or loan originator contact information must 
be provided ``in response to the consumer's request'' for the exclusion 
to apply. In addition, and similar to the clarifications regarding 
credit terms discussed above, the Bureau also proposed to clarify that 
comment 36(a)-4.ii.B applies to loan originator or creditor agents and 
contractors as well as employees.
Comments
    The Bureau received substantial comments from trade associations 
and

[[Page 60420]]

industry, including credit unions and other small creditors, supporting 
the proposal. Consumer advocates also generally supported the proposal 
and did not raise specific objections to the revised comment. As 
discussed above, some consumer advocates and trade associations asked 
for additional clarification on what constitutes an ``assessment of a 
consumer's financial characteristics,'' but most comments did not make 
specific suggestions other than to note that they support the proposal 
and welcome the change. The Bureau also received a few comments from 
the manufactured housing industry requesting additional clarification 
regarding how the proposed comment would apply to retailers, who, 
according to these commenters, may not be employees, agents, or 
contractors of a loan originator or creditor. Specifically, these 
commenters requested that the Bureau expressly include employees, 
agents, or contractors of manufactured housing retailers as covered by 
the provision, even if such person does not work for a loan originator 
or creditor, but provides loan originator contact information to 
consumers in the same manner described in the proposal.
Final Rule
    The Bureau is adopting comment 36(a)-4.ii.B as proposed with two 
modifications. First, as discussed above with respect to comment 36(a)-
4.i, the Bureau is not adopting proposed language that would have 
extended the scope of the comment to agents or contractors of loan 
originators or creditors. Second, the Bureau is clarifying that the 
exclusion is only available to employees of a loan originator or 
creditor that provide the contact information of the loan originator or 
creditor entity for which he or she works, or of a person who works for 
that same entity. As proposed, the Bureau is removing the qualifying 
phrase ``in response to the consumer's request.'' The Bureau believes 
ambiguity regarding the meaning of ``in response to a consumer's 
request'' could have caused unnecessary compliance challenges. In such 
instances, the Bureau does not believe tellers or other such staff 
should be considered loan originators for merely providing loan 
originator or creditor contact information to the consumer (which would 
consist of such an employee directing a consumer to a loan originator 
who works for the same entity, or a creditor that is the same entity, 
as made explicit to conform the language in comments 4.i and 4.ii.B). 
The Bureau also notes that classifying such individuals as loan 
originators would subject them to the requirements applicable to loan 
originators with, in the Bureau's view, little appreciable benefit for 
consumers. However, the Bureau is retaining language, with some 
conforming changes, that would cover within the definition of ``loan 
originator'' any such employee of a creditor or loan originator 
organization who, in the course of providing loan originator or 
creditor contact information to the consumer, directs that consumer to 
a particular loan originator or particular creditor based on his or her 
assessment of the consumer's financial characteristics or discusses 
particular credit terms that are or may be available from a creditor or 
loan originator to the consumer selected based on consumer's financial 
characteristics. The Bureau believes these actions can influence the 
credit terms that the consumer ultimately obtains, and continues to 
believe these actions should result in application of the requirements 
imposed by the rule on loan originators. The Bureau believes this 
amendment should enable creditors and loan originators to implement the 
rule with respect to persons acting under the controlled circumstances 
specified by the comment while maintaining stronger protections in 
situations where significant steering could occur.
    As noted above, the Bureau is making one adjustment to the comment 
to clarify that the exclusion only is available to an employee of a 
loan originator or creditor who provides the contact information of the 
loan originator or creditor entity for which he or she works, or of a 
person who works for that same entity. The Bureau recognizes that the 
proposed amendments did not expressly limit the exclusion in this way. 
However, the Bureau intended that the exclusion be subject to this 
limitation and believes it was strongly implied, given that the 
language of the exclusion begins with the qualification that the 
definition of loan originator does not include persons who,'' as 
employees of a creditor or loan originator,'' engage in certain 
activities. The fact that the exclusion only applies to persons in 
their capacity as employees of creditors or loan originators signals 
that they are only providing loan originator or creditor contract 
information for the entity for which they work. The Bureau did not 
contemplate that such persons would provide contact information, as 
employees of a creditor or loan originator, to loan originators or 
creditors that were not their employers and no comments indicating a 
different understanding of this provision were received. However, to 
better clarify application of the provision, the Bureau is modifying 
comment 36(a)-4.ii.B to state that the exclusion only extends to 
employees providing the contact information of ``the entity for which 
he or she works or of a person who works for that same entity.'' The 
Bureau believes this will eliminate any ambiguity in the proposed 
comment that may have led such employees to believe the exclusion would 
extend to providing contact information for loan originators or 
creditors outside the entity for which they work. Accordingly, the 
Bureau is adopting this revised comment as proposed with this 
modification.
    Finally, as discussed in greater detail below in the section that 
addresses employees of manufactured housing retailers, the Bureau also 
received some comments that suggested manufactured housing retailer 
employees should be exempt from the loan originator definition 
altogether for ``referring,'' or otherwise should fall under this 
particular exclusion, regardless of whether they are employees, agents, 
or contractors of a loan originator or creditor. As discussed below in 
the discussion of Sec.  1026.36(a)(1)(i)(B), the Bureau does not 
believe that any additional amendments to this comment are necessary 
that relate to manufactured housing retailer employees.
2. Describing Other Product-Related Service.
    Comment 36(a)-4.ii.C provides that the definition of loan 
originator does not include persons who describe other product-related 
services. The Bureau proposed to amend this comment to provide examples 
of persons who describe other product-related services. The proposed 
new examples would have included persons who describe optional monthly 
payment methods via telephone or via automatic account withdrawals, the 
availability and features of online account access, the availability of 
24-hour customer support, or free mobile applications to access account 
information. In addition, the proposed amendment to comment 36(a)-
4.iii.C would have clarified that persons who perform the 
administrative task of coordinating the closing process are excluded, 
whereas persons who arrange credit transactions are not excluded. The 
Bureau received comments that generally supported the proposed 
clarifications, but did not receive comments specifically addressing 
this clarification in isolation. Accordingly, the Bureau is adopting

[[Page 60421]]

revised comments 36(a)-4.ii.C and 36(a)-4.iii.C as proposed.
3. Amounts for Charges for Services That Are Not Loan Origination 
Activities
    Comment 36(a)-5.iv.B provides that compensation includes any 
salaries, commissions, and any financial or similar incentive, 
regardless of whether it is labeled as payment for services that are 
not loan origination activities. The Bureau proposed to revise this 
comment to provide that compensation includes any salaries, 
commissions, and any financial or similar incentive ``to an individual 
loan originator,'' regardless of whether it is labeled as payment for 
services that are not loan origination activities. The proposed wording 
change conforms this provision to the other provisions in comment 
36(a)-5.iv that permit compensation paid to a loan originator 
organization under certain circumstances for services it performs that 
are not loan originator activities. The Bureau received comments that 
generally supported the proposed clarifications, but did not receive 
comments specifically addressing this clarification in isolation. 
Accordingly, the Bureau is adopting revised comment 36(a)-5 as 
proposed.

D. Clarification of Exclusion for Employees of Retailers of 
Manufactured Homes

The Proposal
    As discussed above, the Bureau proposed to revise both Sec. Sec.  
1026.36(a)(1)(i)(A) and 1026.36(a)(1)(i)(B) to address several 
inconsistencies regarding the meaning of ``credit terms'' and to 
clarify that any such activity must relate to ``particular credit terms 
that are or may be available from a creditor to that consumer selected 
based on the consumer's financial characteristics,'' not credit terms 
generally. The proposed rule preamble also provided examples of how the 
proposed revisions to comment 36(a)-4.i would affect such employees of 
manufactured home retailers. As a result of these proposed revisions, 
employees (or agents or contractors) of manufactured home retailers who 
provide a credit application form from one particular creditor or loan 
originator organization that is not the entity for which they work 
would not have qualified for the exclusions in Sec.  
1026.36(a)(1)(i)(A) or Sec.  1026.36(a)(1)(i)(B) and comment 36(a)-4.i. 
would not apply. In contrast, an employee of a manufactured home 
retailer who simply provides a credit application form from one 
particular creditor or loan originator organization that is his or her 
employer potentially would have been eligible for the exclusions in 
Sec.  1026.36(a)(1)(i)(A) and Sec.  1026.36(a)(1)(B) and comment 36(a)-
4.i potentially would have applied. An agent or contractor of a 
manufactured home retailer who simply provides a credit application 
form from one particular creditor or loan originator organization it 
works for as agent or contractor potentially would have been eligible 
for the exclusion in Sec.  1026.36(a)(1)(i)(A) and comment 36(a)-4.i. 
potentially would have applied. The proposed revisions also would have 
clarified that comment 36(a)-4.i. would apply to someone who merely 
delivers a completed credit application form from the consumer to a 
creditor or loan originator if other conditions are met, but would have 
removed language that could have been misinterpreted to suggest that 
comment 36(a)-4.i. would apply to someone who accepts an application in 
the sense of taking or helping the consumer complete an application 
could be eligible for the exclusion.
Comments
    The Bureau received comments from the manufactured housing industry 
that sought additional clarification on how the proposed amendments 
would apply to employees of manufactured housing retailers. 
Specifically, these comments relate to the illustrations of the 
proposed amendments the Bureau provided in the preamble indicating that 
comment 36(a)-4.i would only apply to manufactured housing retailer 
employees who also are employees (or agents or contractors) of the 
creditor or loan originator. Commenters expressed concern that 
manufactured housing retailer employees are typically not employees, 
agents, or contractors of a loan originator or creditor, and thus would 
only be able to take advantage of this particular exclusion in the case 
where the retailer itself provides financing or acts as the loan 
originator. These commenters suggested that retailer employees should 
be allowed to ``refer'' customers to particular loan originators or 
creditors other than the retailer itself without being considered loan 
originators, so long as the other conditions set forth in comment 
36(a)-4.i are met. In addition, these commenters also suggested that 
their employees should not be covered by the loan originator rules at 
all to the extent that they do not receive compensation from any 
creditor for such activity. No other commenters focused on application 
of the rules to manufactured home retailer employees.
Final Rule
    As discussed below, the Bureau is adopting several clarifying 
amendments and additional commentary to address comments from the 
manufactured housing industry that questioned the applicability to 
manufactured home retailer employees of commentary that describes 
``referral'' as loan originator activity and of various exclusions set 
forth in Sec.  1026.36(a)(1)(i)(A), Sec.  1026.36(a)(1)(i)(B), and 
discussed in comment 36(a)-4 and its subparts.
    Background. As an initial interpretive matter, the Bureau believes 
it is helpful to outline the statutory provision implemented by Sec.  
1026.36(a)(1)(i)(B), and how it relates to other provisions implemented 
by the 2013 Loan Originator Compensation Final Rule. TILA section 
103(cc)(2)(A) provides a three-part test for determining if a person is 
a loan originator, namely that, for or in expectation of direct or 
indirect compensation or gain, a person (1) Takes a mortgage 
application, (2) assists a consumer in obtaining or applying to obtain 
a mortgage loan, or (3) offers or negotiates terms of a mortgage loan. 
The language of TILA section 103(cc) that defines a ``mortgage 
originator'' does not specifically include the term ``refer'' or its 
variants. However, the Bureau has interpreted both ``assists a consumer 
in obtaining or applying to obtain a residential mortgage loan'' under 
section 103(cc)(2)(A)(ii) and ``offers'' under section 
103(cc)(2)(A)(iii) to include a referral of a consumer to a loan 
originator or creditor.\37\
---------------------------------------------------------------------------

    \37\ See 78 FR at 11300, including footnote 62 (Supplemental 
Information to the 2013 Loan Originator Compensation Final Rule, 
discussing ``offers'').
---------------------------------------------------------------------------

    This definition, which forms the basis for the definition of loan 
originator adopted in Sec.  1026.36(a)(1)(i), applies generally to all 
persons, unless one of a limited number of exclusions applies. One such 
exclusion exists for manufactured home retailer employees in TILA 
section 103(cc)(2)(C)(ii), and provides that the second part of the 
three-part test described above--assisting a consumer in obtaining or 
applying to obtain a mortgage loan--does not render a retailer employee 
a loan originator provided the employee does not engage in either of 
the other two steps (taking an application or offering or negotiating 
terms) and also does not advise a consumer on loan terms (including 
rates, fees, and other costs). Thus, a retailer employee who merely 
assists without offering, negotiating, taking an application, or 
advising, is not a loan originator (while one who offers or negotiates, 
takes an

[[Page 60422]]

application, or advises on loan terms would be a loan originator).
    This statutory provision was implemented by Sec.  
1026.36(a)(1)(i)(B), which is based on, and largely tracks, the 
statutory language. Consistent with this statutory structure, Sec.  
1026.36(a)(1)(i)(B) provides an exclusion for ``An employee of a 
manufactured home retailer who does not take a consumer credit 
application, offer or negotiate credit terms available from a creditor, 
or advise a consumer on credit terms (including rates, fees, and other 
costs) available from a creditor.'' The effect of this exclusion is 
that retailer employees are loan originators if they do anything in the 
general, core definition in Sec.  1026.36(a)(1)(i) other than 
``assist'' in a manner that doesn't constitute taking, advising, 
offering or negotiating, or advising on credit terms. Because both 
``assisting'' and ``offering'' include the activity of referring, a 
retailer employee who makes a referral is ``offering'' and therefore is 
a loan originator.\38\
---------------------------------------------------------------------------

    \38\ This aspect of the retailer employee exclusion was 
implemented by Sec.  1026.36(a) as adopted by the 2013 Loan 
Originator Compensation Final Rule, and explicitly addressed in the 
preamble to that rule, where the Bureau responded to similar 
comments from the manufactured housing industry. One of those 
comments asserted that, under the proposed exclusion for employees 
of a manufactured home retailer, employees could be compensated, in 
effect, for referring a consumer to a creditor without becoming a 
loan originator. The Bureau made clear that this was not a correct 
reading of the exclusion, and explained its basis for disagreeing. 
See 78 FR at 11305.
---------------------------------------------------------------------------

    The Bureau believes these provisions make clear how employees of 
manufactured housing retailers fit within the Sec.  1026.36(a)(1)(i) 
definition of loan originator, including with respect to referrals as 
described in comment 36(a)-1.i.A.1. The Bureau also provided some 
additional explanation in the Supplementary Information to the proposed 
rule, which sought to clarify further the application of comment 36(a)-
4.i to such employees. However, the Bureau continues to receive 
inquiries from industry, including comments received in connection with 
the June 2013 Proposal, that indicate there is still substantial 
confusion regarding the application of these provisions and comments to 
employees of manufactured housing retailers. For this reason, the 
Bureau is adopting additional commentary to provide further guidance 
and codify explanations previously set forth in the Supplementary 
Information to the 2013 Loan Originator Compensation Final Rule and the 
June 2013 Proposal.
    Proposed amendments to Sec.  1026.36(a)(1)(i)(B). The Bureau is not 
adopting in this final rule proposed amendments to Sec.  
1026.36(a)(1)(i)(B) other than moving the definition of ``credit 
terms'' to Sec.  1026.36(a)(6). As discussed above related to ``credit 
terms,'' the Bureau proposed to modify the reference to ``credit 
terms'' in Sec. Sec.  1026.36(a)(1)(i)(A) and 1026.36(a)(1)(i)(B), as 
well as comments 36(a)-4.i and 36(a)-4.ii.B, to be limited to ``credit 
terms available from a creditor to that consumer selected based on the 
consumer's financial characteristics.'' As discussed above, the Bureau 
believes this limitation is appropriate in the context of Sec.  
1026.36(a)(1)(i)(A) and comments 36(a)-4.i and 36(a)-4.ii.B. Each of 
these provisions addresses situations where employees of a loan 
originator or creditor may, absent exception, be considered loan 
originators for conducting activity within the entities for which they 
work. For example, Sec.  1026.36(a)(1)(i)(A) relates to persons who 
perform purely administrative or clerical tasks on behalf of a person 
who is classified as a loan originator or creditor, while comments 
36(a)-4.i and 36(a)-4.ii.B relate to determining whether an employee of 
a loan originator or creditor engages in ``referring'' by providing an 
application from the entity for which such person works, or providing 
loan originator or creditor contact information for a loan originator 
or creditor that is or works for the same entity. Each of these 
situations applies to persons who may be assisting loan originators 
within the same entity or otherwise technically ``referring'' consumers 
to loan originators or creditors that are or work for the same entity. 
However, upon further consideration the Bureau believes the limitation 
is not appropriate in the context of Sec.  1026.36(a)(1)(i)(B), which 
states that a manufactured home retailer employee would not be 
considered a loan originator if that person does not, among other 
things, ``offer or negotiate credit terms'' or ``advise a consumer on 
credit terms.'' The limitation is only intended to apply in the context 
of an employee of a loan originator or creditor assisting a loan 
originator or making a referral to the loan originator or creditor 
entity for which such person works. To the extent a retailer of 
manufactured housing is also a loan originator or creditor, the 
exclusions under Sec.  1026.36(a)(1)(i)(A) and comments 36(a)-4.i and 
36(a)-4.ii.B may be available for its employees. However, the 
limitation has no applicability outside of the loan originator or 
creditor employer/employee context and, accordingly, is not being 
included as the Bureau proposed in Sec.  1026.36(a)(1)(i)(B), which 
addresses a different employer/employee context.
    Accordingly, the Bureau is not adopting this proposed change to 
Sec.  1026.36(a)(1)(i)(B).
    Referrals. The Bureau is amending comment 36(a)-1.i.A.1 to explain 
further the underlying statutory and regulatory bases for including 
``referrals'' as loan originator activity. As adopted by the 2013 Loan 
Originator Compensation Final Rule, comment 36(a)-1.i.A.1 explains what 
actions constitute '' referring'' for purposes of Sec.  
1026.36(a)(1)(i), while comment 36(a)-4 and its subparts provide 
guidance on certain activities that do not constitute referring. The 
Bureau is amending this comment to explain that referring is an 
activity included under each of the activities of offering, arranging, 
or assisting a consumer in obtaining or applying to obtain an extension 
of credit. Accordingly, the Bureau believes this amendment makes clear 
that, while a referral may be considered ``assisting,'' it also falls 
within other statutory and regulatory categories of loan originator 
activity not excluded from the loan originator definition for 
manufactured housing retailer employees. The Bureau believes the 
discussion above and the conforming revision to comment 36(a)-1.i.A.1 
better clarify what activities, when done by an employee of a retailer 
of manufactured homes, will cause such an employee to be classified as 
a loan originator for purposes of Sec.  1026.36. The Bureau further 
notes this revision is consistent with the 2013 Loan Originator 
Compensation Final Rule, which provides an extensive discussion of the 
activities covered by TILA section 103(cc)(2)(A)(ii).\39\ As noted 
above in this preamble, the retailer employee exclusion allows such an 
employee to engage in ``assisting'' activities in a manner that doesn't 
constitute taking, advising, offering or negotiating, or advising on 
credit terms.
---------------------------------------------------------------------------

    \39\ See 78 FR at 11301 through 11303.
---------------------------------------------------------------------------

    New commentary. In addition, the Bureau is adding new commentary to 
provide further guidance on what activities may be considered 
``assisting,'' but not other loan originator activities such as 
offering, arranging, or taking an application. In the Bureau's view, 
these activities, when engaged in by employees of manufactured housing 
retailers (in the absence of other activities), do not render such 
employees loan originators for purposes of Sec.  1026.36. Accordingly, 
to provide greater clarity concerning the retailer employee exclusion 
consistent with these conclusions, a new comment

[[Page 60423]]

36(a)(1)(i)(B) is added by this final rule. The comment states that 
engaging in certain listed activities, as described below, does not 
make such an employee a loan originator.
    The Bureau is adding new comment 36(a)(1)(i)(B)-1.i to explain that 
a retailer employee may generally describe the credit application 
process to a consumer and that this activity, standing alone, would not 
cause the employee to be considered a loan originator.\40\ However, the 
retailer employee would be considered a loan originator if he or she 
advises on credit terms available from a creditor.
---------------------------------------------------------------------------

    \40\ See 78 FR at 11302.
---------------------------------------------------------------------------

    The Bureau is adding new comment 36(a)(1)(i)(B)-1.ii to explain 
that a retailer employee may prepare residential mortgage loan packages 
without being considered a loan originator.\41\ Thus, a retailer 
employee may compile and process application materials and supporting 
documentation and, further consistent with the Final Rule, provide 
general application instruction to consumers so consumers can complete 
an application, but without interacting or communicating with the 
consumer regarding specific transaction terms.
---------------------------------------------------------------------------

    \41\ See TILA section 103(cc)(4) (definition of ``assists'').
---------------------------------------------------------------------------

    The Bureau notes that this comment is consistent with the 
Supplementary Information to the 2013 Loan Originator Compensation 
Final Rule, which states:

    The Bureau agrees that persons generally engaged in loan 
processing or who compile and process application materials and 
supporting documentation and do not take an application, collect 
information on behalf of the consumer, or communicate or interact 
with consumers regarding specific transaction terms or products are 
not loan originators (see the separate discussion above on taking an 
application and collecting information on behalf of the 
consumer).\42\
---------------------------------------------------------------------------

    \42\ 78 FR at 11303

    In contrast, however, the Supplementary Information to the 2013 
Loan Originator Compensation Final Rule also noted that ``filling out a 
consumer's application, inputting the information into an online 
application or other automated system, and taking information from the 
consumer over the phone to complete the application should be 
considered `tak[ing] an application' for the purposes of the rule.'' 
\43\ Because the retailer employee exclusion does not apply if the 
employee engages in taking an application, filling out a consumer's 
application, inputting the information into an online application or 
other automated system, and taking information from the consumer over 
the phone to complete the application would make the employee a loan 
originator.
---------------------------------------------------------------------------

    \43\ 78 FR at 11299. See also comment 36(a)-1.i.A.3., 78 FR at 
11415.
---------------------------------------------------------------------------

    The Bureau is adding new comment 36(a)(1)(i)(B)-1.iii to explain 
that a retailer employee may collect information on behalf of the 
consumer with regard to a residential mortgage loan.\44\ This activity 
is not included in the activities covered by taking or offering or 
assisting that would make a retailer employee a loan originator. 
Comment 36(a)-1.i.3. and the Supplementary Information to the 2013 Loan 
Originator Compensation Final Rule describe the activity of collecting 
information on behalf of the consumer as including gathering 
information or supporting documentation from third parties on behalf of 
the consumer to provide to the consumer, for the consumer then to 
provide in the application or for the consumer to submit to the loan 
originator or creditor.\45\
---------------------------------------------------------------------------

    \44\ See TILA section 103(cc)(4) (definition of ``assists a 
consumer in obtaining or applying to obtain a residential mortgage 
loan'').
    \45\ 78 FR at 11303, 11415.
---------------------------------------------------------------------------

    The Bureau is adding new comment 36(a)(1)(i)(B)-1.iv to explain 
that a retailer employee may provide or make available general 
information about creditors that may offer financing for manufactured 
homes in the consumer's general area, when doing so does not otherwise 
amount to ``referring'' as defined in comment 36(a)-1.i.A.1. Comment 
36(a)-1.i.A.1 provides in part that referring ``includes any oral or 
written action directed to a consumer that can affirmatively influence 
the consumer to select a particular loan originator or creditor to 
obtain an extension of credit when the consumer will pay for such 
credit.'' Although this statement hardly covers the range of activities 
that may constitute referring, it does provide a basis for addressing 
the relatively unique circumstances of manufactured home retailer 
employees, who are covered by a limited statutory exclusion from the 
definition of loan originator.
    The Bureau believes that most consumers purchasing a manufactured 
home will need financing, and that a limited set of options may be 
available. As public commenters have noted, only a small number of 
creditors make loans secured by manufactured homes, and it is 
beneficial to consumers for that information to be made available to 
them by a retailer. To facilitate consumer access to credit in this 
situation, new comment 36(a)(1)(i)(B)-.1.iv allows a retailer employee 
to make general information about creditors or loan originators 
available, which includes making available, in a neutral manner, 
general brochures or information about the different creditors or loan 
originators that may offer financing to a consumer, but does not 
include recommending a particular creditor or loan originator or 
otherwise influencing the consumer's decision. The Bureau believes this 
comment falls within the purview of the quoted portion of comment 
36(a)-1.i.A.1 above, taking into consideration the unique circumstances 
and the limited statutory exclusion.
    Finally, the Bureau notes that the comment extends to providing 
general information about loan originators (i.e., mortgage brokers) as 
well as creditors. Based on public comments, the Bureau believes that 
under current market conditions only a small number of specialized 
creditors currently operate in this market, and the Bureau is not aware 
of any mortgage brokers or similar loan originators that currently 
operate in this space. Nevertheless, the Bureau recognizes that 
circumstances may change and brokers or other loan originators may 
decide to offer loans secured by manufactured homes, and if that were 
to occur the Bureau believes the same logic that applies to creditors 
described above would apply with respect to these persons or 
organizations. Accordingly, the comment includes loan originators as 
well as creditors.
36(b) Scope
The Proposal
    The Bureau proposed to revise the scope of provisions in Sec.  
1026.36(b) to reflect the applicability of the servicing provisions in 
Sec.  1026.36(c) regarding payment processing, pyramiding late fees, 
and payoff statements as modified by the 2013 TILA Servicing Final 
Rule.\46\ Current Sec.  1026.36(b) and comment 36(b)-1 (relocated from 
Sec.  1026.36(f) and comment 36-1, respectively, by the 2013 Loan 
Originator Compensation Final Rule)

[[Page 60424]]

provide that Sec.  1026.36(c) applies to closed-end consumer credit 
transactions secured by a consumer's principal dwelling. The new 
payment processing provisions in Sec.  1026.36(c)(1) and the 
restrictions on pyramiding late fees in Sec.  1026.36(c)(2) both apply 
to consumer credit transactions secured by a consumer's principal 
dwelling. The new payoff statement provisions in Sec.  1026.36(c)(3), 
however, apply more broadly to consumer credit transactions secured by 
a dwelling.
---------------------------------------------------------------------------

    \46\ Among other things, the 2013 TILA Servicing Final Rule 
implemented TILA sections 129F and 129G added by section 1464 of the 
Dodd-Frank Act. The requirements in TILA section 129F concerning 
prompt crediting of payments apply to consumer credit transactions 
secured by a consumer's principal dwelling. The requirements in TILA 
section 129G concerning payoff statements apply to creditors or 
servicers of a home loan. The 2013 TILA Servicing Final Rule, 
however, did not substantively revise the existing late fee 
pyramiding requirement in Sec.  1026.36(c) but instead redesignated 
the requirement as new paragraph 36(c)(2) to accommodate the 
regulatory provisions implementing TILA sections 129F and 129G.
---------------------------------------------------------------------------

    The proposal would have revised Sec.  1026.36(b) and comment 36(b)-
1 to state that Sec.  1026.36(c)(1) and (c)(2) apply to consumer credit 
transactions secured by a consumer's principal dwelling. The proposed 
revisions also would have provided that Sec.  1026.36(c)(3) applies to 
a consumer credit transaction secured by a dwelling (even if it is not 
the consumer's principal dwelling). The Bureau sought comment on these 
proposed revisions generally. The Bureau also invited comment on 
whether additional revisions to Sec.  1026.36(b) and comment 36(b)-1 
should be considered to clarify further the applicability of the 
provisions in Sec.  1026.36(c) as modified by the 2013 Servicing Final 
Rules.
Comments
    The Bureau received one comment that generally supported this 
clarification.
Final Rule
    The Bureau is adopting these revisions to Sec.  1026.36(b) and 
comment 36(b)-1 as proposed, to conform them to modifications made to 
Sec.  1026.36(c) by the 2013 Servicing Final Rules that changed the 
applicability of certain provisions in Sec.  1026.36(c). The Bureau 
believes the revisions are necessary to reflect the applicability of 
the provisions in Sec.  1026.36(c) as modified by the 2013 Servicing 
Final Rules.
36(d) Prohibited Payments to Loan Originators
36(d)(1) Payments Based on a Term of the Transaction
36(d)(1)(i)
    The Bureau proposed to revise comments 36(d)(1)-1.ii and 36(d)(1)-
1.iii.D, which interpret Sec.  1026.36(d)(1)(i)-(ii), to improve the 
consistency of the wording across the regulatory text and commentary, 
and provide further interpretation of the intended meaning of the 
regulatory text. The Bureau did not receive any comments pertaining to 
these particular proposed changes. As described below in the section-
by-section analysis for Sec.  1026.36(d)(1)(iv), the Bureau received a 
small number of comments expressing general support for the proposed 
clarifications to Sec.  1026.36(d) and its commentary. The Bureau is 
finalizing the revisions to comments 36(d)(1)-1.ii and -1.iii.D as 
proposed. As it stated in the proposal, the Bureau believes these 
changes facilitate compliance.
36(d)(1)(iii)
    The Bureau proposed to revise the portions of comment 36(d)(1)-3 
that interpret Sec.  1026.36(d)(1)(iii) to improve the consistency of 
the wording across the regulatory text and commentary, and provide 
further interpretation of the intended meaning of the regulatory text. 
The Bureau did not receive any comments pertaining to these particular 
proposed changes. As described below in the section-by-section analysis 
for Sec.  1026.36(d)(1)(iv), the Bureau received a small number of 
comments expressing general support for the proposed clarifications to 
Sec.  1026.36(d) and its commentary. The Bureau is finalizing the 
revisions to the portions of comment 36(d)(1)-3 that interpret Sec.  
1026.36(d)(1)(iii) as proposed. As it stated in the proposal, the 
Bureau believes these changes facilitate compliance.
36(d)(1)(iv)
    The Bureau proposed revisions to the portions of comment 36(d)(1)-3 
that interpret Sec.  1026.36(d)(1)(iv). Section 1026.36(d)(1)(iv) 
permits, under certain circumstances, the payment of compensation under 
a non-deferred profits-based compensation plan to an individual loan 
originator even if the compensation is directly or indirectly based on 
the terms of multiple transactions by multiple individual loan 
originators. Section 1026.36(d)(1)(iv)(B)(1) permits this compensation 
if it does not exceed 10 percent of the individual loan originator's 
total compensation corresponding to the time period for which the 
compensation under a non-deferred profits-based compensation plan is 
paid. Comments 36(d)(1)-3.ii through -3.v further interpret Sec.  
1026.36(d)(1)(iv)(B)(1). Section 1026.36(d)(1)(iv)(B)(2) permits this 
compensation if the individual loan originator is a loan originator for 
ten or fewer consummated transactions during the 12-month period 
preceding the compensation determination. Comment 36(d)(1)-3.vi further 
interprets Sec.  1026.36(d)(1)(iv)(B)(2). The Bureau proposed to amend 
comment 36(d)(1)-3 to improve the consistency of the wording across the 
regulatory text and commentary, provide further interpretation as to 
the intended meaning of the regulatory text in Sec.  1026.36(d)(1)(iv), 
and ensure that the examples included in the commentary accurately 
reflect the interpretations of the regulatory text contained elsewhere 
in the commentary. As the Bureau explained in the proposal, nearly all 
of the proposed revisions address the commentary sections that 
interpret the meaning of Sec.  1026.36(d)(1)(iv)(B)(1) (i.e., setting 
forth the 10-percent total compensation limit) and not Sec.  
1026.36(d)(1)(iv)(B)(2). In the proposal, the Bureau explained that it 
was proposing more extensive clarifications to two comments 
interpreting Sec.  1026.36(d)(1), comment 36(d)(1)-3.v.A, which 
clarifies the meaning of ``total compensation'' as used in Sec.  
1026.36(d)(1)(iv)(B)(1), and comment 36(d)(1)-3.v.C, to clarify the 
meaning of ``time period'' in Sec.  1026.36(d)(1)(iv)(B)(1). The Bureau 
stated in the proposal that these proposed revisions were collectively 
intended to clarify that, while the time period used to determine both 
elements of the 10-percent limit ratio is the same: (1) the non-
deferred profits-based compensation for the time period is whatever 
such compensation was earned during that time period, regardless of 
when it was actually paid; and (2) compensation that is actually paid 
during the time period, regardless of when it was earned, generally 
will be included in the amount of total compensation for that time 
period, but whether the compensation is included ultimately depends on 
the type of compensation.
    Of the institutions and individuals who submitted comments on the 
proposed changes to the 2013 Loan Originator Compensation Final Rule, 
very few specifically discussed the proposed clarifications and 
amendments to Sec.  1026.36(d) and its commentary. One large depository 
institution first highlighted some of the proposed changes to the Sec.  
1026.36(d) commentary and then stated that it generally agreed with the 
Bureau's proposed amendments and clarifications. Some consumer groups 
expressed general disagreement with elements of Sec.  1026.36(d) 
adopted by the 2013 Loan Originator Compensation Final Rule, which they 
believe the proposed revisions would amplify, but did not address any 
specific issues with the proposal itself.
    The Bureau is finalizing the changes to Sec.  1026.36(d) and the 
portions of comment 36(d)(1)-3 that interpret Sec.  1026.36(d)(1)(iv) 
as proposed. As it stated in the proposal, the Bureau

[[Page 60425]]

believes these changes would facilitate compliance.
36(i) Prohibition on Financing Credit Insurance
    The Bureau proposed to amend Sec.  1026.36(i) to clarify the scope 
of the prohibition on a creditor financing, directly or indirectly, any 
premiums for credit insurance in connection with a consumer credit 
transaction secured by a dwelling. Dodd-Frank Act section 1414 added 
TILA section 129C(d), which generally prohibits a creditor from 
financing premiums or fees for credit insurance in connection with a 
closed-end consumer credit transaction secured by a dwelling, or an 
extension of open-end consumer credit secured by the consumer's 
principal dwelling. The prohibition applies to credit life, credit 
disability, credit unemployment, credit property insurance, and other 
similar products, including debt cancellation and debt suspension 
contracts (defined collectively as ``credit insurance'' for purposes of 
this discussion). The same provision, however, excludes from the 
prohibition credit insurance premiums or fees that are ``calculated and 
paid in full on a monthly basis.'' As discussed below, the Bureau is 
adopting amended Sec.  1026.36(i) as proposed with some modifications.

A. Background

1. Section 1026.36(i) as Adopted in the 2013 Loan Originator 
Compensation Final Rule
    In the 2013 Loan Originator Compensation Final Rule, the Bureau 
implemented this prohibition by adopting the statutory provision 
without substantive change, in Sec.  1026.36(i). The final rule 
provided an effective date of June 1, 2013, for Sec.  1026.36(i) and 
clarified that the provision applies to transactions for which a 
creditor received an application on or after that date.\47\
---------------------------------------------------------------------------

    \47\ 78 FR at 11390.
---------------------------------------------------------------------------

    In the preamble to the final rule, the Bureau responded to public 
comments on the regulatory text that the Bureau had included in its 
proposal. The public comments included requests from consumer groups 
for clarification on the applicability of the regulatory prohibition to 
certain factual scenarios where credit insurance premiums are charged 
periodically, rather than as a lump-sum that is added to the loan 
amount at consummation. In particular, they requested clarification on 
the meaning of the exclusion from the prohibition for credit insurance 
premiums or fees that are ``calculated and paid in full on a monthly 
basis.'' The Bureau did not receive any public comments from the credit 
insurance industry. The Bureau received a limited number of comments 
from creditors concerning the general prohibition, but these comments 
did not address specifically the applicability of the exclusion from 
the prohibition for premiums that are calculated and paid in full on a 
monthly basis.
    In their comments, the consumer groups described two practices that 
they believed should be prohibited by the regulatory provision. First, 
they described a practice in which some creditors charge credit 
insurance premiums on a monthly basis but add those premiums to the 
consumer's outstanding principal. They stated that this practice does 
not meet the requirement that, to be excluded from the prohibition, 
premiums must be ``paid in full on a monthly basis.'' They also stated 
that this practice constitutes ``financing'' of credit insurance 
premiums, which is prohibited by the provision. Second, the consumer 
groups described a practice in which credit insurance premiums are 
charged to the consumer on a ``levelized'' basis, meaning that the 
premiums remain the same each month, even as the consumer pays down the 
outstanding balance of the loan. They stated that this practice does 
not meet the condition of the exclusion that premiums must be 
``calculated . . . on a monthly basis,'' and therefore violates the 
statutory prohibition. In the preamble of the final rule, the Bureau 
stated that it agreed that these practices do not meet the condition of 
the exclusion and violate the prohibition on creditors financing credit 
insurance premiums.
2. Outreach During Implementation Period Following Publication of the 
Final Rule
    After publication of the final rule, representatives of credit 
unions and credit insurers expressed concern to the Bureau about these 
statements in the preamble of the final rule. Credit union 
representatives questioned whether adding monthly premiums to a 
consumer's loan balance should necessarily be considered prohibited 
``financing'' of the credit insurance premiums and indicated that, if 
it is considered financing and therefore is prohibited, they would not 
be able to adjust their data processing systems to comply before the 
June 1, 2013 effective date.
    Credit insurance company representatives stated that level and 
levelized credit insurance premiums are in fact ``calculated . . . on a 
monthly basis.'' (These representatives explained that industry uses 
the term ``levelized'' premiums to refer to a flat monthly payment that 
is derived from a decreasing monthly premium payment arrangement and 
use the term ``level'' premium to refer to premiums for which there is 
no decreasing monthly premium payment arrangement available, such as 
for level mortgage life insurance.) These representatives further 
asserted that levelized premiums are, in fact, ``calculated . . . on a 
monthly basis'' because an actuarially derived rate is multiplied by a 
fixed monthly principal and interest payment to derive the monthly 
insurance premium. They also asserted that level premiums are 
``calculated . . . on a monthly basis'' because an actuarially derived 
rate is multiplied by the consumer's original loan amount to derive the 
monthly insurance premium. Accordingly, they urged that level and 
levelized credit insurance premiums should be excluded from the 
prohibition on creditors financing credit insurance premiums so long as 
they are also paid in full on a monthly basis. Industry representatives 
have further stated that, even if the Bureau concludes that level or 
levelized credit insurance premiums are not ``calculated'' on a monthly 
basis within the meaning of the exclusion from the prohibition, they 
are not ``financed'' by a creditor and thus are not prohibited by the 
statutory provision.
3. Delay of Sec.  1026.36(i) Effective Date
    In light of these concerns, and the Bureau's belief that, if the 
effective date were not delayed, creditors could face uncertainty about 
whether and under what circumstances credit insurance premiums may be 
charged periodically in connection with covered consumer credit 
transactions secured by a dwelling, the Bureau issued the 2013 
Effective Date Final Rule delaying the June 1, 2013 effective date of 
Sec.  1026.36(i) to January 10, 2014.\48\ In that final rule, the 
Bureau stated its belief that this uncertainty could result in a 
substantial compliance burden to industry. However, the Bureau also 
stated that it would revisit the effective date of the provision in 
this proposal.
---------------------------------------------------------------------------

    \48\ 78 FR 32547 (May 31, 2013).
---------------------------------------------------------------------------

B. Amendments to Sec.  1026.36(i)

    The Bureau proposed, as contemplated in the 2013 Effective Date 
Final Rule, amendments to Sec.  1026.36(i) to clarify the scope of the 
prohibition on a creditor financing, directly or indirectly, any 
premiums for credit insurance in connection with a

[[Page 60426]]

consumer credit transaction secured by a dwelling. The Bureau proposed 
these amendments because it was persuaded, based on communications with 
consumer advocates, creditors, and trade associations, that its 
statement in the final rule in response to consumer group public 
comments may have been overbroad concerning when a creditor violates 
the prohibition on financing credit insurance premiums.
1. General Clarifications of Prohibition's Scope
The Proposal
    The Bureau proposed two general clarifications to the scope of the 
prohibition. First, the Bureau proposed to clarify that, although the 
heading of the statutory prohibition emphasizes the prohibition on 
financing ``single-premium'' credit insurance, which historically has 
been accomplished by adding a lump-sum premium to the consumer's loan 
balance at consummation, the provision more broadly prohibits a 
creditor from ``financing'' credit insurance premiums ``directly or 
indirectly'' in connection with a covered consumer credit transaction 
secured by a dwelling. That is, it generally prohibits a creditor from 
financing credit insurance premiums at any time. Accordingly, the 
prohibited financing of credit insurance premiums is not limited to 
addition of a single, lump-sum premium to the loan amount by the 
creditor at consummation. The Bureau proposed to clarify the scope of 
the prohibition by striking the term ``single-premium'' from the Sec.  
1026.36(i) heading.
    Second, the Bureau proposed to clarify the relationship between the 
exclusion for ``credit insurance for which premiums or fees are 
calculated and paid in full on a monthly basis'' and the general 
prohibition. The Bureau emphasized in the proposal that the mere fact 
that, under a particular premium calculation and payment arrangement, 
credit insurance premiums do not meet the conditions of the exclusion 
that they be ``calculated and paid in full on a monthly basis'' does 
not mean that a creditor is necessarily financing them in violation of 
the prohibition. For example, it is possible that credit insurance 
premiums could be calculated and paid in full by a consumer directly to 
a credit insurer on a quarterly basis with no indicia that the creditor 
is financing the premiums. (The Bureau's proposal to clarify the scope 
of the exclusion in situations in which the creditor is engaged in 
financing of credit insurance premiums is discussed below.)
Comments
    Several commenters, including credit unions, credit insurance 
companies, and trade associations, expressed general appreciation and 
support for the Bureau's willingness to provide further clarifications 
regarding the prohibition. One credit insurance company asserted that 
the statutory provision is clear and requires no clarification. A 
number of credit insurance companies and trade associations supported 
the Bureau's foundational clarification that credit insurance premiums 
that do not meet the conditions of the exclusion that they be 
``calculated and paid in full on a monthly basis'' do not necessarily 
indicate that a creditor is financing them in violation of the 
prohibition.
    Several industry commenters, including credit unions and a credit 
union trade association, objected to the proposed removal of the term 
``single-premium'' from the heading of Sec.  1026.36(i), believing that 
the proposed change would expand the applicability of the prohibition 
to practices other than a creditor's addition of a single, lump-sum 
premium to the loan amount at consummation. The commenters stated that 
inclusion of the term ``single-premium'' in the heading of the 
statutory provision indicated that Congress intended the prohibition to 
apply only to that creditor practice.
Final Rule
    The Bureau agrees that clarifications of the statutory and 
regulatory provisions are important to ensure that consumers and 
industry are able to determine which creditor practices regarding 
credit insurance are prohibited. The Bureau disagrees with the 
assertion that removal of the term ``single-premium'' from the heading 
of Sec.  1026.36(i) affects the applicability of the regulatory 
provision or expands it beyond that of the statutory provision. The 
texts of both the statutory and regulatory provisions prohibit 
creditors from financing credit insurance premiums generally, not just 
those for single-premium credit insurance, in connection with certain 
dwelling-secured loans. Although the heading of the statutory provision 
emphasizes the applicability of the prohibition to financing of single-
premium credit insurance, a basic rule of statutory interpretation is 
that the heading cannot narrow the plain meaning of the statutory 
text.\49\
---------------------------------------------------------------------------

    \49\ Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, 
256 (2004).
---------------------------------------------------------------------------

2. Definition of ``Financing'' for Purposes of Sec.  1026.36(i)
The Proposal
    In the proposal, the Bureau explained its belief that practices 
that constitute ``financing'' of credit insurance premiums or fees by a 
creditor are generally equivalent to an extension of credit to a 
consumer with respect to payment of the credit insurance premiums or 
fees. While neither TILA nor the Dodd-Frank Act expressly defines the 
term ``financing,'' section 103(f) of TILA provides that the term 
``credit'' means ``the right granted by a creditor to a debtor to defer 
payment of debt or to incur debt and defer its payment.'' \50\ Based on 
this definition of ``credit,'' Sec.  1026.4(a) of Regulation Z defines 
a ``finance charge'' to be a charge imposed by a creditor ``as an 
incident to or condition of an extension of credit.'' Thus, the Bureau 
believes the general understanding of the term ``financing'' under TILA 
and Regulation Z to be analogous to an extension of credit--i.e., a 
creditor's granting of a right to incur a debt and defer its payment. 
The Bureau stated this belief in the proposal, noting that a creditor 
finances credit insurance premiums within the meaning of the 
prohibition when it provides a consumer the right to defer payment of 
premiums or fees, including when it adds a lump-sum premium to the loan 
balance at consummation, as well as when it adds a monthly credit 
insurance premium to the consumer's principal balance.
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 1602(f). Accord 12 CFR 1026.2(a)(14).
---------------------------------------------------------------------------

    Accordingly, the Bureau proposed to add redesignated Sec.  
1026.36(i)(2)(ii), to clarify that a creditor finances credit insurance 
premiums or fees when it provides a consumer the right to defer payment 
of a credit insurance premium or fee owed by the consumer. However, the 
Bureau invited public comment on whether this clarification is 
appropriate. For example, the Bureau stated it did not believe that a 
brief delay in receipt of the consumer's premium or fee, such as might 
happen preceding a death or period of employment that the credit 
insurance is intended to cover, should cause immediate cancellation of 
the credit insurance. The Bureau also stated it did not believe that 
refraining from cancelling or causing cancellation of credit insurance 
in such circumstances means that a creditor has provided the consumer a 
right to defer payment of the premium or fee, but the Bureau invited 
public comment on consequences of defining the term ``finances'' as 
proposed. In addition, the Bureau noted that some creditors have 
suggested that

[[Page 60427]]

they may, as a purely mechanical matter, add a monthly credit insurance 
premium to the principal balance shown on a monthly statement but then 
subtract the premium from the principal balance immediately or as soon 
as the premium or fee is paid. Accordingly, the Bureau solicited 
comment on whether a creditor should instead be considered to have 
financed credit insurance premiums or fees only if it charges a 
``finance charge,'' as defined in Sec.  1026.4(a) (which implements 
section 106 of TILA, 15 U.S.C. 1605), on or in connection with the 
credit insurance premium or fee. The Bureau also requested comment on 
other situations that may arise that could cause credit insurance 
premiums to be considered ``financed'' under the proposal and may 
warrant special treatment, such as deficiencies where credit insurance 
premiums are escrowed.
Comments on the Proposed Clarification
    The Bureau received substantial comment from the credit insurance 
industry, trade associations, creditors, and consumer groups addressing 
the proposed definition of financing as well as the alternative. The 
Bureau received no comments identifying other situations such as 
escrowed premiums that could cause credit insurance premiums to be 
considered ``financed'' and may warrant special treatment. Most 
industry commenters, including credit insurance companies, credit 
unions, and their trade associations and attorneys, generally supported 
the proposed clarification that a creditor finances credit insurance 
premiums or fees when it provides a consumer the right to defer payment 
of a credit insurance premium or fee owed by the consumer. They urged 
the Bureau to clarify that the consumer does not ``owe'' the premium or 
fee until the consumer has incurred a ``debt'' for it, within the 
meaning of Sec.  1026.2(a)(14). They stated that the consumer should 
not be considered to have incurred a debt for the credit insurance 
premium or fee until the monthly period in which the premium is due 
passes without the consumer having made the payment. Only then, these 
commenters stated, might creditors advance funds on the consumer's 
behalf and provide the consumer a right to defer its payment, such that 
financing might occur. Accordingly, many of these commenters urged the 
Bureau to clarify that a creditor finances a credit insurance premium 
only if it provides a consumer the right to defer payment of the 
premiums ``beyond the month in which they are due.'' These commenters 
addressed a specific illustration provided by consumer groups in 
connection with the 2013 Loan Originator Compensation Final Rule, which 
adopted the provisions this proposal would have amended. In that 
illustration, consumer groups described a creditor that appeared to be 
adding the premium to principal on a monthly basis and then providing 
the consumer the right to defer payment long beyond the month in which 
it was due, or even indefinitely. Commenters agreed that such a 
practice would be prohibited under the clarification they urged, though 
they stated, variously, that they had never heard of a creditor 
actually engaging in such a practice, or that such practices were very 
rare. They also stated that the clarification they urged would show why 
adding a lump-sum credit insurance premium to the loan balance at 
consummation was prohibited. They stated that in such circumstances, 
the premium is due at consummation, so there is no identifiable 
``period'' in which the premium is due. One credit insurance company, 
as well as attorneys for creditors and credit insurance companies, 
stated that the credit insurance premium should be considered financed 
by the creditor only if the consumer does not pay the premium when it 
is due and the creditor incorporates it into the loan to create an 
additional obligation. The company and attorneys stated that a creditor 
should not be considered to have financed a past-due credit insurance 
premium if it does not add the premium to the loan amount, but instead 
it or the insurer provides a grace period, the insurer's obligation to 
perform under the credit insurance contract is suspended, or the 
contract is cancelled.
    Some credit unions and credit insurance companies that urged the 
Bureau to adopt the clarification discussed above suggested that it was 
important, in part, to permit the continuation of some credit unions' 
practice of ``posting'' the premium to the consumer's account, meaning 
that it is added to principal before the credit insurance premium is 
due, so it is reflected on the next periodic statement. Under the 
practice, the creditor then credits the consumer's account (meaning it 
is subtracted from principal) after the creditor receives the 
consumer's payment. Comments suggested that, for at least some credit 
unions and other small creditors, it is necessary to post the charge 
prior to its due date so the consumer's next periodic statement 
reflects the monthly charge. Some of these commenters stated that 
additional interest accrues as a result of this addition until the 
consumer's subsequent payment of credit insurance premium is credited 
to the account. Other credit union commenters stated that when they add 
the premium to principal before it is due, no additional interest 
accrues as a result. One credit insurance company explained that this 
credit union practice was necessary because credit unions' accounting 
and data processing systems recognize only principal and interest 
categories. The company stated that, as a result, there is no other way 
for them to charge the premium without extensive and cost-prohibitive 
changes in these systems. The company also stated that, for any 
creditor making a closed-end, fixed-rate mortgage, the only way to 
charge the consumer a monthly credit insurance premium that declines as 
the mortgage balance declines and also to charge a total monthly 
payment (i.e., a payment including premium, interest, and credit 
insurance premium) that remains constant from month to month, is to add 
the premium to principal. The same commenter stated that the act of 
adding the premium to principal before it is due should not be 
considered financing and that if the creditor adds the credit insurance 
premium to principal before the premium is due, the creditor should be 
considered to have financed the credit insurance premium only if the 
consumer subsequently fails to pay the credit insurance premium by the 
end of the month in which it is due. Another credit insurance company 
urged the Bureau to clarify that a creditor's addition of the credit 
insurance premium to the principal balance before it is due should not 
be considered financing of the credit insurance premium even if the 
consumer subsequently fails to make the payment when it is due, 
provided that the creditor added it to principal in the same monthly 
period in which the consumer was contractually obligated to pay the 
credit insurance premium.
    Credit insurance companies, a credit insurance trade group, and 
several credit union commenters supported the proposed clarification of 
what constitutes financing but urged the Bureau to clarify that a 
creditor does not provide a consumer a right to defer payment of the 
credit insurance premium merely because the consumer fails to pay the 
premium when it is due, the creditor provides a forbearance, or the 
creditor and consumer enter into a post-consummation work-out agreement 
to defer or suspend mortgage payments. They stated that in such cases, 
the creditor may provide the consumer a

[[Page 60428]]

contractual right to defer payment of the credit insurance premium but 
typically does not ever add the deferred premium payment to the loan 
balance.
    Consumer groups opposed the Bureau's proposed clarification that a 
creditor finances credit insurance premiums or fees when it provides a 
consumer the right to defer payment of a credit insurance premium or 
fee owed by the consumer. They reasoned that mere deferment of credit 
insurance premium payments is beneficial consumers, but, in their view, 
a creditor's act of charging consumers for the deferment is harmful to 
consumers. They expressed concern that the proposed clarification based 
on providing a consumer the right to defer payment of credit insurance 
premiums could cause creditors to stop deferring a consumer's 
obligation to pay credit insurance premiums without charge. They also 
stated that the proposed clarification could be confusing because the 
purpose of debt suspension contracts is to permit a consumer to skip a 
monthly mortgage payment. They disagreed with the comment of a credit 
insurance company that a creditor's addition of a credit insurance 
premium to principal in the same month that the consumer is 
contractually obligated to pay it should not be considered financing of 
the premium, even if doing so results in increased interest charge to 
the consumer and regardless of whether the consumer pays the credit 
insurance premium when it is due. The consumer groups countered that, 
if additional interest is charged as a result of the creditor's 
addition of the credit insurance premium to principal, then the 
creditor is clearly financing the credit insurance premium, regardless 
of when the consumer is obligated to make the credit insurance premium 
payment.
Comments on the Alternative Clarification
    Several consumer groups, legal services organizations, and fair 
housing organizations supported the alternative provision that would 
have clarified what constitutes financing of credit insurance premiums 
or fees, on which the Bureau invited public comment. The alternative 
clarification would have provided that a creditor finances credit 
insurance premiums only if it charges a finance charge on or in 
connection with the credit insurance premium or fee. These commenters, 
however, urged the Bureau to broaden the alternative proposal further, 
to clarify that a creditor charges a finance charge in connection with 
the premium and thus finances credit insurance premiums or fees if it 
charges the consumer any dollar amount in a given month that exceeds a 
rate filed with and not disapproved by the State insurance regulator.
    A number of credit unions also supported the alternative 
clarification. Generally, the credit unions that supported the 
alternative approach were the same credit unions that reported using 
the practice of adding credit insurance premiums to principal before 
they are due but stated that, under their own practices, no additional 
interest accrues as a result of the addition. These commenters stated 
that their practice should not be considered to be financing credit 
insurance premiums, but that a creditor that adds premiums to principal 
and allows additional interest to accrue until the consumer's 
subsequent payment is applied should be considered to be financing the 
credit insurance premiums.
    Most other credit insurance and credit union commenters opposed the 
alternative proposal, for several reasons. Several credit insurance 
companies, creditor trade associations, and a credit union opposed the 
alternative proposal because the definition is vague. Specifically, 
they noted that the definition of ``finance charge'' in Sec.  
1026.2(a)(14) excludes credit insurance premiums and fees under certain 
conditions, and argued that a definition of financing credit insurance 
premiums and fees that depends on whether a finance charge is imposed 
``on or in connection with'' credit insurance premiums or fees would 
create confusion and lead to unintended consequences. For example, they 
stated that a finance charge may arguably be paid ``in connection'' 
with a premium if additional interest accrues because payment of the 
premium--even in full on a monthly basis--may result in slower 
amortization of the loan than would occur if no premium were paid. 
However, such interest does not indicate the premium or fee is being 
advanced by the creditor to or on behalf of the consumer. They also 
stated that any additional interest that is accrued as a result of the 
creditor adding a monthly credit insurance premium to principal and the 
passage of time until the consumer's subsequent payment is applied 
should not be considered financing, because the addition to principal 
for accounting and monthly statement purposes does not indicate that 
the creditor is advancing any funds to or on behalf of the consumer. 
One such credit union also emphasized that the additional interest that 
accrues under its practices is very small, totaling on average 84 cents 
per year. It stated that the substantial cost of having to change 
accounting and data processing systems would be considerable, such that 
credit unions might simply choose not to offer credit insurance 
products to their customers.
    In addition, these commenters stated that the alternative proposal 
appears inconsistent with the statutory exclusion for credit insurance 
premiums and fees that are calculated and ``paid in full on a monthly 
basis,'' which would allow a finance charge in connection with a 
premium to the extent monthly outstanding balance credit insurance 
(where the premium satisfies the criteria for ``calculated'' on a 
monthly basis) is paid in the same month the charge is posted.
Final Rule
    Definition of financing. The Bureau is adopting in Sec.  
1026.36(i)(2)(ii) the proposed definition of ``financing'' as proposed, 
with one modification. Under final Sec.  1026.36(i)(2)(ii), 
``financing'' occurs when a creditor treats a credit insurance premium 
as an amount owed and provides a consumer the right to defer payment of 
that obligation. The Bureau believes this clarification best conforms 
the concept of ``financing'' in Sec.  1026.36(i) with Regulation Z's 
concept of an extension of ``credit'' in Sec.  1026.2(a)(14), which is 
defined as ``the right to defer payment of debt or to incur debt and 
defer its payment'' (emphasis added). The Bureau also is adopting an 
additional clarification that granting the consumer this right to defer 
payment only constitutes financing if it provides the consumer the 
right to defer payment of the premiums or fees ``beyond the period in 
which they are due.''
    The Bureau believes this additional clarification is appropriate in 
light of public comments, and also is consistent with the exclusion for 
credit insurance premiums that are calculated and paid in full on a 
monthly basis. As some commenters suggested, if the total amount owed 
by the consumer has not increased by the amount of the premium upon the 
close of the monthly period (after accounting for principal payments), 
then the creditor has not advanced funds or treated the premium as an 
addition to the consumer's ``debt.'' Thus, consistent with Regulation 
Z's general concept of ``credit'' in Sec.  1026.4(a)(14), the creditor 
is not treating the premium or fee as a debt obligation owed by the 
consumer and granting a right to defer payment of a debt, and is not 
``financing'' the premium. This also is consistent with Sec.  
1026.36(i)(2)(iii), which provides that any premium ``calculated'' on a 
monthly basis would not be considered financed

[[Page 60429]]

if it were also paid in full on a monthly basis--i.e., that the premium 
was not treated as a debt that the consumer was given a right to defer 
payment of beyond the month in which it was due. Accordingly, a 
creditor will not be considered to have financed a credit insurance 
premium if, upon the close of the month, the consumer has failed to 
make the premium or fee payment, but the creditor does not incorporate 
that amount into the amount owed by the consumer. However, if the 
creditor treats the premium as an addition to the consumer's debt, such 
as by communicating to the consumer that the consumer must pay it to 
satisfy the consumer's obligations under the loan or by charging 
interest on the premium, the creditor will be considered to have 
financed the premium in violation of the prohibition.
    The Bureau recognizes that there are some specific situations where 
it may be beneficial to consumers if creditors allow some period of 
time after the end of the monthly period in which a premium was due to 
decide if they would like to continue the insurance coverage. The 
Bureau believes the important distinction regarding whether or not the 
premium is considered to be financed hinges on whether the creditor 
treats the premium as a debt obligation due and then defers a right 
pay. But, as some commenters noted, as an alternative to the creditor 
adding an unpaid premium to the loan balance to create additional debt, 
a grace period could be provided during which the insurance remains in 
force unless the consumer chooses not to pay the premium (in which case 
the insurance contract is cancelled), the insurer's obligation to 
perform under the credit insurance contract could be suspended in the 
event of non-payment, or the insurance contract could be cancelled 
automatically if the premium is not paid. In these cases, the creditor 
may allow the consumer additional time to pay the premium and keep the 
insurance in force, but does not advance the amount of money necessary 
to meet the monthly credit insurance payment on the consumer's behalf 
and then require that the consumer pay the creditor--i.e., the creditor 
does not treat the premium as a debt and then provide the consumer a 
right to defer payment of the premium or fee. The Bureau believes these 
practices would, in most cases, not arise to the level of ``financing'' 
unless the creditor treats the premium as a debt and then allows 
deferral of payment beyond the month in which it was due.
    The Bureau believes similar logic would apply with respect to other 
situations, such as consumers who are offered forbearance, modification 
agreements, or are otherwise delinquent on their monthly payments. In 
these cases, a creditor that effectively pays the monthly premium on 
the consumer's behalf and then treats that amount as a debt owed to the 
creditor beyond the month in which it is due would be financing the 
premium for purposes of Sec.  1026.36(i). For example, assume that a 
consumer has credit insurance and typically pays $50.00 per month for 
that product. If the consumer is granted a six-month forbearance of 
monthly payments by the creditor (and the credit insurance itself is 
not used to cover monthly payments, but simply remains as a monthly 
charge), the creditor ``finances'' for purposes of Sec.  1026.36(i) if 
the creditor charges the consumer $50.00 each month without collecting 
payment and ultimately adds $300.00 to the consumer's debt. Similarly, 
if the same consumer were six months delinquent on his or her loan 
(meaning no payments have been received), the creditor would not be 
permitted to pay the credit insurance premiums on behalf of the 
consumer and then treat $300.00 as an additional amount owed.
    The Bureau appreciates the remaining concerns raised by consumer 
groups, but disagrees with some of their analyses. Consumer groups 
suggested providing that a creditor finances credit insurance premiums 
or fees any time the amount charged to the consumer exceeds the premium 
filed with and not disapproved by the State insurance regulator. It is 
the Bureau's understanding that under some State insurance regulation 
practices, not all types of credit insurance rates (such as those 
determined by an actuarial method) must be filed with the regulator. 
More importantly, even when applicable rates are filed with a State 
insurance regulator, the fact that a consumer is being charged more 
than the filed rate does not necessarily mean the creditor is financing 
the premium, even if the creditor receives commissions from the credit 
insurer. A difference between the filed rate and the amount charged to 
the consumer could be the result of actions by the credit insurer, 
rather than the creditor.
    The Bureau also disagrees that significant confusion about debt 
suspension products will be caused by the clarification that a creditor 
finances premiums or fees for credit insurance if it provides a 
consumer the right to defer payment of a credit insurance premium or 
fee. Debt suspension contracts permit the consumer to defer payments of 
principal and interest. The clarification the Bureau is adopting 
addresses granting a consumer a right to defer payments of credit 
insurance premiums and fees.
    Application of the provision to single-premium credit insurance. 
The Bureau is also adding comment 36(i)-1 to clarify how the 
prohibition applies to single-premium and monthly-pay products. It 
clarifies that in the case of single-premium credit insurance, a 
creditor violates Sec.  1026.36(i) by adding the credit insurance 
premium or fee to the amount owed by the consumer at closing. The 
comment states further that, in the case of monthly-pay credit 
insurance, a creditor violates Sec.  1026.36(i) if, upon the close of 
the monthly period in which the premium or fee is due, the creditor 
includes the premium or fee in the amount owed by the consumer--and 
thus treats it not as a monthly charge that could be cancelled prior to 
being due, but as a ``debt'' that is owed by the consumer to the 
creditor, which the consumer then would have a right to pay at some 
later date.
    Interest charged when the borrower is not granted a right to defer 
payment. The Bureau invited public comment on whether credit insurance 
premiums should be considered financed by a creditor only if the 
creditor imposes a finance charge on or in connection with the premium 
or fee. In doing so, the Bureau assumed that in some cases creditors 
were granting a consumer the right to defer payment and imposing a 
finance charge for that right, but in other cases creditors were not 
charging consumers for providing that right. The Bureau did not 
anticipate that creditors were charging interest on the credit 
insurance premium or fee even though no funds were being advanced on 
the consumer's behalf at the time they began charging interest, under 
the practice described by some commenters. However, the Bureau notes 
that consumer groups and several industry commenters have stated that, 
at least in some cases, creditors appear to be adding credit insurance 
premiums to a consumer's principal balance before the premium is due 
from the consumer--even though no funds are advanced on behalf of the 
consumer at that time. Interest then accrues on the increased principal 
until the consumer's subsequent payment is credited to the account. 
Commenters have pointed out that this is typically a very small amount 
of interest; one industry commenter noted that, on average, the amount 
of interest accrued due to this practice is 87 cents per consumer.
    In such cases, the Bureau believes that the accruing interest does 
not indicate that the creditor has financed the

[[Page 60430]]

premium precisely because, as several such creditors insist, they do 
not (and could not) advance any funds for the premium, and therefore 
could not add to the consumer's debt, until after the consumer's 
payment is actually due. Nevertheless (and even though the amount of 
interest charged may be very little), the Bureau believes that interest 
charged under such practices raises potential consumer protection 
concerns and may not be appropriate--although the reason it may be 
inappropriate is not because it indicates the creditor is financing the 
premium. Rather, the potential concerns arise if the creditor is 
charging the consumer additional interest on the premium even though 
the creditor is not financing the premium.
    The Bureau notes that the scope of the Sec.  1026.36(i) prohibition 
is limited to a creditor's practice of financing of premiums--which 
does not include treating the premium as an addition to the consumer's 
principal and charging interest on the addition before the premium is 
due.\51\ Indeed, even under the proposed alternative definition of 
financing--which would have relied upon the creditor's imposing a 
``finance charge'' in connection with the premium--this interest would 
not have fallen under the exclusion. The interest at issue would fail 
to meet the definition of a ``finance charge'' under Sec.  1026.4, 
which is any charge imposed as an incident to or a condition of an 
extension of ``credit.'' As discussed above, Sec.  1026.2(a)(14) 
defines ``credit'' as ``the right to defer payment of a debt or to 
incur debt and defer its payment''--and in the case of this particular 
practice there is neither a debt nor a right to defer payment prior to 
the point at which the charge is actually due. Thus, under either of 
the proposed definitions of financing, this practice would not have 
been subject to the prohibition.
---------------------------------------------------------------------------

    \51\ The same concerns do not seem to arise if a creditor adds 
the premium to a line labeled ``principal'' on a monthly statement 
due to accounting and data system limitations but does not otherwise 
treat the premium as an addition to the consumer's debt and does not 
charge interest on the addition.
---------------------------------------------------------------------------

    However, the fact that imposing interest on a premium before it is 
due does not constitute ``financing'' the premium does not mean that 
such practices comply with other Federal or State requirements. The 
Bureau intends to monitor this practice in the future and may address 
this issue at another time, whether by rulemaking or other means. 
However, based on public comments received, the Bureau believes that 
credit unions and other small creditors should be able to mitigate any 
risk that may arise from this practice by not collecting the interest 
that accrues from the consumer. For example, some credit unions that 
face these accounting and data processing system limitations appear to 
add the premium to principal before the consumer's payment is due but 
do so without additional interest being charged to the consumer. The 
Bureau believes credit unions or other creditors facing such system 
limitations may be able to credit any accrued interest back to the 
consumer timely, thereby mitigating consumer protection concerns.
3. Calculated and Paid in Full on a Monthly Basis
The Proposal
    The Bureau proposed to clarify in Sec.  1026.36(i)(2)(iii) that 
credit insurance premiums or fees are calculated on a monthly basis if 
they are determined mathematically by multiplying a rate by the monthly 
outstanding balance (e.g., the loan balance following the consumer's 
most recent monthly payment). As discussed above, Sec.  1026.36(i) 
excludes from the prohibition on a creditor financing credit insurance 
premiums or fees any ``credit insurance for which premiums or fees are 
calculated and paid in full on a monthly basis.'' Although it had 
considered the concerns raised by industry following the issuance of 
the 2013 Loan Originator Compensation Final Rule, the Bureau stated 
that it continued to believe that the more straightforward 
interpretation of the statutory language regarding a premium or fee 
that is ``calculated . . . on a monthly basis'' is a premium or fee 
that declines as the consumer pays down the outstanding principal 
balance. Credit insurance with this feature is often referred to as a 
``monthly outstanding balance,'' or M.O.B. credit insurance product. 
Level or levelized premiums or fees that are calculated by multiplying 
a rate by the initial loan amount or by a fixed monthly principal and 
interest payment are not calculated ``on a monthly basis'' in any 
meaningful way because the factors in the calculation do not change 
monthly (in contrast to the M.O.B. credit insurance product). 
Accordingly, under the proposed clarification, credit insurance could 
not have been categorically excluded from the scope of the prohibition 
on the ground that it is ``calculated and fully paid on a monthly 
basis'' if its premium or fee does not decline as the consumer pays 
down the outstanding principal balance. The Bureau noted that even if a 
particular premium calculation and payment arrangement provides for 
credit insurance premiums to be calculated on a monthly basis within 
the meaning of the proposed clarification, it must also provide for the 
premiums to be paid in full on a monthly basis (rather than added to 
principal, for example) to be categorically excluded from Sec.  
1026.36(i).
Comments
    Most of the comments discussed above addressed the statutory 
exclusion as it relates to the definition of financing, but the Bureau 
also received some comments specifically addressing the exclusion. One 
credit insurance company, three state trade associations of credit 
unions, one national trade association of credit unions, and several 
consumer groups, legal services organizations, and fair housing 
organizations supported the Bureau's proposal clarifying what credit 
insurance premiums are calculated on a monthly basis. They agreed with 
the Bureau's statement that the most straightforward interpretation of 
a premium that is ``calculated . . . on a monthly basis'' is one that 
is determined mathematically by multiplying a rate by the monthly 
outstanding balance. Consumer groups urged the Bureau to clarify that 
the exclusion should apply only to a rate filed with and not 
disapproved by a State insurance regulator. A credit insurance company 
commenter urged the Bureau to clarify that the premium or fee is ``paid 
in full on a monthly basis'' if the consumer is contractually required 
to pay it in the same month in which the creditor ``posts'' it to the 
consumer's account, even if the consumer does not in fact pay a premium 
by the end of the monthly period.
    Other credit insurance companies, a credit insurance trade 
association, several credit unions, and two state trade associations of 
credit unions stated that the Bureau's clarification was too narrow. 
They argued that any ``monthly pay'' credit insurance product should be 
excluded from the prohibition, regardless of whether the premium 
declines as the outstanding balance of the loan declines. They noted 
that model state legislation includes similar phrasing and has not been 
interpreted as being limited to products whose premiums decline as the 
loan balance declines. They stated that there was no indication that 
Congress intended a narrow meaning when it used similar language in the 
statutory prohibition.
    Finally, one creditor trade association believed that the Bureau's 
proposal meant that levelized premiums

[[Page 60431]]

necessarily amount to prohibited creditor financing of credit insurance 
and it opposed the Bureau's proposal on that basis. An actuarial firm 
noted that level premiums are an important option in credit insurance 
products and urged the Bureau not to ban them.
Final Rule
    The Bureau is adopting the provision as proposed. The Bureau does 
not believe that similarities between the statutory provision and 
language in model state legislation cited by some commenters means that 
Congress intended the phrase ``calculated . . . on a monthly basis'' to 
include a premium that stays constant every month, rather than the more 
straightforward meaning discussed above. The Bureau disagrees with the 
commenter that urged the Bureau to deem a premium to have been ``paid 
in full on a monthly basis'' by a consumer simply because it is 
contractually required to be paid monthly. Instead, if the creditor 
does not receive the consumer's payment, then the analysis under this 
final rule's clarification on what constitutes a creditor's financing 
of credit insurance premiums or fees, discussed above, applies. 
Finally, the Bureau again emphasizes that a credit insurance product 
with a level or levelized premium is not prohibited by this final rule. 
For any credit insurance product that does not meet the conditions of 
the exclusion, this final rule's clarification on what constitutes a 
creditor's financing of credit insurance premiums or fees applies.
4. Description of Creditors as at Times Acting as ``Passive Conduits'' 
for Credit Insurance Premiums and Fees
The Proposal
    The Bureau noted in the proposal that credit insurance companies, 
in their communications with the Bureau subsequent to issuance of the 
2013 Loan Originator Compensation Final Rule, described creditors as 
acting as ``passive conduits'' collecting and transmitting monthly 
premiums from the consumer to a credit insurer, rather than advancing 
funds to an insurer and collecting them subsequently from the consumer. 
Under such a scenario described by the credit insurance companies, the 
Bureau stated its belief that a creditor would not likely be providing 
a consumer the right to defer payment of a credit insurance premium or 
fee owed by the consumer within the meaning of the proposal, as 
discussed above. Similarly, the Bureau stated that, under the 
alternative interpretation that a creditor ``finances'' credit 
insurance only if it charges a ``finance charge'' on or in connection 
with the credit insurance premium or fee, as discussed above, a 
creditor that acts merely as a passive conduit for the payment of 
credit insurance premiums and fees to a credit insurer would not likely 
be charging such a finance charge. The Bureau stated that, on the other 
hand, a creditor that does not act merely as a passive conduit, but 
instead achieves a levelized premium by deferring payments, or portions 
of payments, due to a credit insurer for a monthly outstanding balance 
credit insurance product (or by imposing a finance charge incident to 
such deferment, under the alternative interpretation discussed above) 
would likely be considered to be financing the credit insurance 
premiums or fees.
    The Bureau invited public comment on the extent to which creditors 
act other than as passive conduits in a manner that would constitute 
financing of credit insurance premiums or fees. Relatedly, the Bureau 
sought public comment on whether debt cancellation or suspension 
contracts, which may be provided by the creditor itself or its 
affiliate, and not a separate insurance company, may warrant different 
or specialized treatment under the provision because a creditor would 
not, by nature, act as a ``passive conduit'' to an insurance provider. 
The Bureau specifically invited public comment on what actions by a 
creditor should or should not be considered financing of debt 
cancellation or suspension contract fees, when the creditor is a party 
to the debt cancellation or suspension contract and payments for 
principal, interest, and the debt cancellation or suspension contract 
are retained by the creditor.
Comments
    Several commenters objected to the Bureau's inclusion in preamble 
of the credit insurance industry's description of creditors as 
``passive conduits'' that merely transmit consumers' credit insurance 
premiums on to credit insurance companies. Two credit insurance 
companies conceded that they had described creditors in this way but 
expressed concern that the Bureau's use of the term in the preamble 
might be misinterpreted. They stated that the description was intended 
to refer to one example of when a creditor was not financing credit 
insurance premiums, but that it might be interpreted to mean that when 
a creditor acts other than as a ``passive conduit'' for credit 
insurance premiums, it is necessarily financing them. Further, they 
stated that the Bureau's discussion in the preamble of an example of a 
creditor acting other than as a passive conduit (i.e., when the 
creditor achieves a levelized premium by deferring payments, or 
portions of payments, due to a credit insurer) does not ever happen in 
practice. In addition, industry commenters stated that debt 
cancellation or suspension contracts should not be treated differently 
under the prohibition, but instead are charged and collected 
functionally in the same manner as traditional insurance products, 
except that they generally are not regulated by state insurance 
commissions or subject to rate-filing requirements.
    Consumer groups asserted that creditors never act as passive 
conduits because creditors receive substantial commissions from credit 
insurance companies for the policies they sell and because the 
creditors are the primary beneficiaries of the credit insurance. 
Accordingly, they stated that, whenever a consumer is charged more in 
total premiums for a levelized credit insurance product than it would 
be charged for a monthly outstanding balance product with equivalent 
coverage, the creditor should be deemed to have financed the credit 
insurance premium, even if the insurer, rather than the creditor, 
accomplished the ``levelizing'' of the premium.
Final Rule
    With respect to the Bureau's discussion of creditors as ``passive 
conduits'' of credit insurance premiums in the preamble of the proposed 
rule, the Bureau did not propose to promulgate, and is not promulgating 
in this final rule, a provision adopting that concept. Instead, as the 
Bureau explained in the proposal, the description was offered by credit 
insurance companies in their discussions with the Bureau, and the 
Bureau referred to it in the proposal as a means to elicit public 
comments and information on creditor practices that do not fit that 
description, especially with respect to debt cancellation and debt 
suspension products. The Bureau did not state a belief that creditors 
do act as passive conduits, or that any action that does not fit that 
description amounts to a violation of the provision. In addition, based 
on public comments it received, the Bureau does not believe it is 
necessary to adopt a provision that treats debt suspension or debt 
cancellation fees differently from credit insurance products.

[[Page 60432]]

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

A. Overview

    In developing the final rule, the Bureau has considered the 
potential benefits, costs, and impacts.\52\ In addition, the Bureau has 
consulted, or offered to consult with, the prudential regulators, the 
Securities and Exchange Commission, HUD, the Federal Housing Finance 
Agency, the Federal Trade Commission, and the Department of the 
Treasury, including regarding consistency with any prudential, market, 
or systemic objectives administered by such agencies.
---------------------------------------------------------------------------

    \52\ 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.\53\ These 
amendments focus primarily on clarifying or revising (1) Provisions of 
Regulation X's related to information requests and error notices; (2) 
loss mitigation procedures under Regulation X's servicing provisions; 
(3) amounts counted as loan originator compensation to retailers of 
manufactured homes and their employees for purposes of applying points 
and fees thresholds under HOEPA and the qualified mortgage rules in 
Regulation Z; (4) determination of which creditors operate 
predominantly in ``rural'' or ``underserved'' areas for various 
purposes under the mortgage regulations; (5) application of the loan 
originator compensation rules to bank tellers and similar staff; and 
(6) the prohibition on creditor-financed credit insurance. The Bureau 
also is adjusting the effective dates for certain provisions adopted by 
the 2013 Loan Originator Compensation Final Rule and making technical 
and wording changes for clarification purposes to Regulations B, X, and 
Z.
---------------------------------------------------------------------------

    \53\ 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 May 2013 Escrows Final Rule.
---------------------------------------------------------------------------

    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 as well as the 
information and analysis on which the January rules were based provide 
insight into the benefits, costs and impacts and where relevant, the 
analysis provides a qualitative discussion of the benefits, cost 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,\54\ an important benefit of 
most of the provisions of this 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. Other benefits and costs 
are considered below.
---------------------------------------------------------------------------

    \54\ 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.
---------------------------------------------------------------------------

    As described above, the Bureau is amending the commentary to Sec.  
1024.35(c) and Sec.  1024.36(b). As adopted by the 2013 Mortgage 
Servicing Rules, these provisions and accompanying commentary require a 
servicer that has established an exclusive address at which it will 
receive communications pursuant to Sec.  1024.35 and Sec.  1024.36 to 
disclose that address whenever it provides a borrower any contact 
information for assistance from the servicer. The Bureau is amending 
the commentary so that the exclusive address need be provided on the 
written notice that designates the specific address; the periodic 
statement or coupon book required pursuant to 12 CFR 1026.41; any Web 
site the servicer maintains in connection with the servicing of the 
loan; and any notice required pursuant to Sec. Sec.  1024.39 or .41 
that includes contact information for assistance.
    These amendments reduce the costs to servicers of complying with 
Sec.  1024.35(c) and Sec.  1024.36(b) of the final rule by reducing the 
number of documents and other sources of information that must be 
modified to include the designated address. The Bureau believes that 
these amendments will cause at most a minimal reduction in the benefits 
to consumers. A borrower looking for the address to which to send a 
notice of error or a request for information would likely consult the 
servicer's Web site, the borrower's statement or coupon book, any loss 
mitigation documents, or perhaps the written notice designating the 
specific address. Further, servicers have an obligation, established by 
the January rule, to maintain policies and procedures reasonably 
designed to achieve the objective of informing borrowers of the 
procedures for submitting written notices of error and written 
information requests. Thus, a servicer should provide the proper 
address to a borrower who contacts the servicer for the address to 
which to send a notice of error or a request for information. In light 
of these two parallel requirements, the Bureau believes borrowers will 
still have ready access to the exclusive address and are not likely to 
send a notice of error or a request for information to an improper 
address. Alternatives that would require the designated address on even 
fewer documents or communications would further reduce the compliance 
costs to servicers but would increase the risk that borrowers who wish 
to send a notice of error or a request for information would consult a 
document that did not include the exclusive address and would misroute 
their notice or request accordingly.
    The Bureau is amending Sec.  1024.35(g)(1)(iii)(B) (untimely 
notices of error) and Sec.  1024.36(f)(1)(v)(B) (untimely requests for 
information), which, as adopted in January, provided respectively that 
the notice or request is untimely if it is delivered to the servicer 
more than one year after a mortgage loan balance was paid in full. 
Under the amended provisions, the one-year period designated by these 
requirements will begin when a mortgage loan is discharged, such as 
through foreclosure or deed in lieu of foreclosure, even if the loan 
balance was not paid in full.
    These amendments reduce costs to servicers by increasing the number 
of situations in which a notice or request is untimely and servicers 
are therefore not required to comply with certain requirements of Sec.  
1024.35 or Sec.  1024.36. To the extent servicers no longer respond to 
notices or requests that are untimely because of these amendments, the 
lack of a response may impose some cost to consumers. The Bureau does 
not have data on the frequency with which borrowers with a mortgage 
that is terminated without being paid in full also assert an error or 
request information (within the scope of these requirements) more than 
one year after such termination, nor does the Bureau have information 
on the subsequent outcomes for such borrowers. However, the Bureau 
believes that one year after a mortgage loan is discharged generally 
provides sufficient time for borrowers to assert errors or request 
information. Consequently, an inability to obtain a response to such a 
notice or request during the longer period the rule prescribed before 
these amendments

[[Page 60433]]

would constitute at most a minimal impact on the benefits to consumers.
    The Bureau is amending the commentary to Sec.  1024.41(b)(2)(i) and 
adding new Sec.  1024.41(c)(2)(iv) to address the situation in which a 
servicer determines that additional information from the borrower is 
needed to complete an evaluation of a loss mitigation application after 
the servicer has informed the borrower, via the notice pursuant to 
Sec.  1026.41(b)(2)(i)(B), that the loss mitigation application is 
complete or the borrower provided the particular information identified 
as missing in an original notice. In summary, the servicer must request 
the additional information and provide a reasonable time for the 
borrower to respond. If the borrower provides the additional 
information, the 30-day evaluation period within which to evaluate the 
borrower for all loss mitigation options available to the borrower 
begins as of the date the borrower provides the remaining information. 
The borrower, on the other hand, receives the protections against 
foreclosure during the period provided to gather the supplemental 
information. If the borrower provides the additional information, the 
borrower will also receive the right to appeal and other rights as 
though the application were actually complete when either the borrower 
submitted the original loss mitigation application (if the notice 
informed the borrower that the application was complete) or the 
borrower provided the particular information identified in the original 
notice (if the notice informed the borrower that the application was 
incomplete). In situations in which a servicer determines that 
supplemental information from the borrower is needed after sending the 
Sec.  1024.41(b)(2)(i)(B) notice, these dates will generally be earlier 
than the date on which the borrower provides the supplemental 
information to make the application complete. Accordingly, the amended 
final rule provides greater consumer protections than the original 
final rule or the proposal.
    The costs to the servicer of these amendments are the costs of 
complying that are incremental to the baseline costs arising from the 
2013 Mortgage Servicing Final Rules. The Bureau believes that in all 
cases these costs are small given other provisions of the 2013 Mortgage 
Servicing Final Rules. As discussed above, under that final rule, 
servicers are required to review a loss mitigation application to 
determine whether it is complete or incomplete, to have policies and 
procedures reasonably designed to achieve the objectives of identifying 
documents and information that a borrower is required to submit to 
complete an otherwise incomplete loss mitigation application, and to 
exercise reasonable diligence in obtaining documents and information 
necessary to complete an incomplete application. Thus, the 2013 
Mortgage Servicing Final Rules already obligated the servicer to 
exercise reasonable diligence to bring to completion an application 
that was facially complete but in fact lacked information necessary for 
review. The servicer would therefore, even absent the new provisions, 
have the personnel and infrastructure needed to contact the borrower 
for additional information and evaluate the application since these are 
required to comply with the other obligations stated above. Thus, the 
Bureau does not believe that the costs of complying with the amendment 
are significant.
    The benefits to consumers of these amendments are the benefits of 
servicers following the procedures adopted by this final rule that are 
incremental to the baseline benefits defined by the final servicing 
rule. The amendment requires servicers to promptly request any 
additional information or documents needed to complete a facially 
complete loss mitigation application, and also provides borrowers with 
a reasonable amount of time to provide any such documents or 
information. The amendment delays the 30-day period during which a 
servicer must evaluate a complete application until after the borrower 
has provided such documents or information. This additional time 
benefits consumers by encouraging thorough review of these 
applications. Further, the rule will make clear that a servicer has 
fulfilled its obligations if it follows the new procedure. This 
encourages servicers to acknowledge and rectify their errors and 
therefore increases the likelihood that servicers will make loss 
mitigation decisions on the basis of complete information.
    As an alternative, if borrowers receive protections from the date 
on which the application is actually complete (instead of facially 
complete), it is more likely the date would be past the 120th day of 
delinquency or closer to the date of a foreclosure sale. Servicers 
might have slightly lower costs under this alternative, perhaps from a 
shorter period of providing continuity of contact and monitoring the 
property, but borrowers would receive fewer protections against 
foreclosure. Further, servicers that wanted to provide fewer 
protections could more easily manipulate the date on which an 
application is actually complete than the date on which it is facially 
complete given that facial completeness is determined by a mandated 
timeline and disclosure and by how quickly the consumer provides any 
missing information identified in the disclosure.
    The Bureau is amending the Sec.  1024.41(b)(2)(ii) time period 
disclosure requirement, which requires a servicer to provide a date by 
which a borrower should submit any missing documents and information 
necessary to make a loss mitigation application complete. As explained 
above, Sec.  1024.41(b)(2)(ii) as originally adopted requires the 
servicer to notify the borrower that the borrower should submit such 
missing documents and information by the earliest of certain dates. 
This requirement would have applied even if the nearest date would 
leave the borrower with very little time to assemble the missing 
information. The amendment requires the servicer to provide a 
reasonable date by which the borrower should submit the documents and 
information necessary to make the loss mitigation application complete. 
Commentary provides additional guidance and advises a servicer to 
select the nearest of four key dates that is at least seven days in the 
future. This change presents some tradeoff in benefits and costs for 
consumers, but on balance the Bureau believes that it will be 
beneficial to consumers. Consumers who would have been provided 
impracticable dates for responding in the initial notice generally 
benefit from this amendment by being provided with useful information. 
In particular, the Bureau believes that some consumers who might have 
failed to complete the loss mitigation application altogether when 
faced with an impracticable date for submitting materials would be more 
likely to complete the application by a reasonable date as determined 
under the amended rule, and thus to secure consideration for 
foreclosure alternatives and some of the important procedural rights 
available to them under the loss mitigation regulations. Servicers will 
incur one-time costs for changes to software to check whether the 
nearest key date is closer than the rule permits and provide the later 
date in this case. Servicers may also incur costs associated with 
receiving additional complete loss mitigation applications.
    The Bureau is adding a new provision in Sec.  1024.41(b)(3) 
addressing how borrower protections are determined when no foreclosure 
sale is scheduled as of the date a complete loss mitigation application 
is received or when a foreclosure sale is rescheduled after receipt of 
a complete application. Under the final servicing rule, a servicer 
could,

[[Page 60434]]

arguably, initiate the foreclosure process on day 121 of delinquency, 
receive a complete loss mitigation application from a borrower, 
schedule a foreclosure sale within 90 days, and then provide fewer 
protections than those afforded to loss mitigation applications 
received at least 90 days before a scheduled foreclosure sale. The new 
provisions provide that if no foreclosure sale has been scheduled as of 
the date that a complete loss mitigation application is received, the 
application shall be treated as if it were received at least 90 days 
before a scheduled foreclosure sale. In addition, the new provisions 
make clear that whether certain foreclosure protections and other 
rights in the rule apply depends on the date for which a foreclosure 
sale was scheduled at the time of a borrower's complete application. If 
the scheduled date later changes, the foreclosure protections and other 
rights that arose at the time of the complete application do not 
change.
    The Bureau recognizes that the new provisions may reduce some of 
the flexibility servicers had under the 2013 Mortgage Servicing Rule. 
This is a cost to servicers. Further, some servicers in possession of 
an incomplete loss mitigation application on day 121 of delinquency who 
would not have scheduled a foreclosure sale may now do so in order to 
avoid the risk of a longer time to foreclosure. As a result, certain 
borrowers may have less time to respond to a loss mitigation offer and 
no right to appeal a denial. On the other hand, borrowers with 
servicers that do not accelerate the scheduling of foreclosure sales 
have clearer rights and most likely more time to respond to a loss 
mitigation offer and a right to appeal a denial. The Bureau cannot 
quantify these different effects, but believes that they are most 
likely small given the wide range of other factors that determine the 
time to foreclosure.
    The Bureau is modifying Sec.  1024.41(c)(2) to allow servicers to 
offer certain short-term forbearances to borrowers, notwithstanding the 
prohibition on servicers offering a loss mitigation option to a 
borrower based on the review of an incomplete loss mitigation 
application. This provision imposes no costs on servicers because it 
does not impose any new obligations on servicers relative to the final 
rule. The provision benefits servicers by providing a relatively low-
cost way for servicers to provide borrowers with a particular loss 
mitigation option. Similarly, the provision imposes no costs on 
borrowers since the borrower can reject forbearance based on review of 
an incomplete loss mitigation option, provide a complete loss 
mitigation application, and be reviewed for all loss mitigation options 
available to the borrower (and other protections) as under the final 
rule. The provision benefits borrowers by providing borrowers with a 
particular loss mitigation option on the basis of an incomplete 
application and therefore without exhausting the option to have the 
servicer review a complete loss mitigation application.
    As discussed above, the Bureau is conscious of the fact that some 
servicers have significantly exacerbated borrowers' financial 
difficulties in the past by using short-term forbearance programs 
inappropriately instead of reviewing the borrowers for long-term 
options. Thus, in developing this provision, the Bureau has sought to 
ensure that borrowers would receive significant benefits from 
forbearance based on review of an incomplete loss mitigation option 
with minimal additional risk or loss of consumer protections. However, 
while a long forbearance period creates risks to consumers by 
generating a significant debt and increasing the chance the borrower 
might have been better off with an option that the servicer would have 
offered after evaluating a complete loss mitigation application, the 
comments received also emphasized heavily that very short forbearance 
periods do not provide much benefit to borrowers in situations in which 
forbearance is being used appropriately because they do not allow 
sufficient time for borrowers to remedy the short-term problems that 
created the need for forbearance and resume making payments on their 
loans. The Bureau does not have data with which to identify the average 
or maximum length of time of forbearance that would balance these 
factors. Further, the risks to consumers from not specifying a maximum 
length of time for forbearance are mitigated somewhat by the fact that 
a borrower who receives a forbearance agreement without having 
submitted a complete loss mitigation application can trigger a review 
for loss mitigation options by submitting a complete application more 
than 37 days before a scheduled foreclosure sale. Taking these factors 
into account, the Bureau believes that borrowers benefit more from the 
new forbearance provisions than they would from alternatives that 
imposed a maximum length of time on forbearance.
    The Bureau is also clarifying the ``first notice or filing'' 
standard in Sec.  1024.41(f). The 2013 Mortgage Servicing Final Rules 
prohibited servicers from making the ``first notice or filing'' under 
state law during the first 120 days of the borrower's delinquency, but 
interpreted ``first notice or filing'' broadly to include notices of 
default or other notices required by applicable law in order to pursue 
acceleration of a mortgage loan obligation or the sale of a property 
securing a mortgage loan obligation. The Bureau is modifying this 
interpretation and adopting a narrower construction that more closely 
tracks the Federal Housing Administration's ``first legal'' standard. 
The Bureau also is clarifying how the rule works across states with 
different foreclosure laws--such as in ``judicial'' states where 
foreclosure requires an action filed in court and in ``non-judicial'' 
states where foreclosure requires notice or publication of sale.
    The Bureau believes these amendments will benefit servicers by 
clarifying the scope of actions prohibited during a borrower's first 
120 days in accordance with a familiar standard. In addition, the 
amendments will not unduly delay foreclosures in states that provide 
statutory or other notice and cure processes in advance of a 
foreclosure action or sale by forcing servicers to wait 120 days to 
send such a notice. The Bureau believes these amendments will benefit 
borrowers because they will allow notices that do not initiate 
foreclosure, but instead are intended to provide borrowers with 
information about counseling and other loss mitigation resources as a 
means of avoiding foreclosure during the first 120 days of delinquency, 
when those notices are most likely to benefit borrowers. The Bureau 
recognizes the possibility that these amendments may, in certain 
States, allow foreclosure to be initiated more quickly than under the 
Final Rule, but the Bureau believes that the amendments are beneficial 
to borrowers overall.
    In addition, the Bureau is modifying or clarifying other Regulation 
X loss mitigation provisions. The Bureau is amending Sec.  
1024.41(c)(1)(ii) to state explicitly that the notice required by Sec.  
1024.41(c)(1)(ii) must state the deadline for accepting or rejecting a 
servicer's offer of a loss mitigation option. The Bureau is amending 
Sec.  1024.41(h)(4) to provide expressly that the notice informing a 
borrower of the determination of his or her appeal must also state the 
amount of time the borrower has to accept or reject an offer of a loss 
mitigation option after the notice is provided to the borrower. The 
Bureau is amending Sec.  1024.41(f)(1), the prohibition on referral to 
foreclosure until after the 120th day of delinquency, by exempting a 
foreclosure based on a borrower's violation of a due-on-sale clause or 
in which the servicer is joining the foreclosure action of a 
subordinate

[[Page 60435]]

lienholder. Finally, the Bureau is clarifying the requirement in Sec.  
1024.41(d)(1) (re-codified as Sec.  1024.41(d)) that a servicer must 
disclose the reasons for the denial of any trial or permanent loan 
modification option available to the borrower to make clear that this 
provision requires the servicer to disclose only determinations 
actually made by the servicer and does not require a servicer to 
continue evaluating additional factors after a decision has been 
established. The Bureau believes these modifications will only 
minimally increase costs to servicers and the clarifications will 
likely benefit both servicers and consumers, in part through reduced 
implementation costs.
    Two of the sets of modifications to the Regulation Z provisions 
involve loan originator compensation. The Bureau is clarifying for 
retailers of manufactured homes and their employees what compensation 
can be attributed to a transaction at the time the interest rate is set 
and must be included in the points and fees thresholds for qualified 
mortgages and high-cost mortgages under HOEPA. As discussed above, the 
final rule will exclude from points and fees of loan originator 
compensation paid by a retailer of manufactured homes to its employees 
and will clarify that the sales price of a manufactured home does not 
include loan originator compensation that must be included in points 
and fees. Both of these changes will reduce the burden for creditors in 
manufactured home transactions by eliminating the need for them in 
certain circumstances to attempt to determine what, if any, retailer 
employee compensation and what, if any, part of the sales price will 
count as loan originator compensation that must be included in points 
and fees. This amendment is also likely to lower slightly the amount of 
money counted toward the points and fees thresholds on the covered 
loans. As a result, keeping all other provisions of a given loan fixed, 
this will result in a greater number of loans to be eligible to be 
qualified mortgages. 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. The lower amount of points and 
fees may also lead fewer loans to be above the points and fees triggers 
for high-cost mortgages under HOEPA: This should make these loans both 
more available and offered at a lower cost to consumers, though 
consumers will not have the added consumer protections that apply to 
high-cost mortgages. 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 and the 2013 HOEPA Final Rule.
    The Bureau also is revising the commentary addressing when 
employees of a creditor or loan originator in certain administrative or 
clerical roles (e.g., tellers or greeters) may become ``loan 
originators'' under the 2013 Loan Originator Compensation Rule, and 
therefore subject to that Rule's requirements applicable to loan 
originators, such as qualification requirements and restrictions on 
certain compensation practices. As noted above, classifying such 
individuals as loan originators would subject them to the requirements 
applicable to loan originators with, in the Bureau's view, little 
appreciable benefit for consumers. Removing them from this 
classification should lower compliance costs including those related to 
SAFE Act training, certification requirements, and compensation 
restrictions.
    The final rule's provisions regarding credit insurance clarify what 
constitutes financing of such premiums by a creditor, and is therefore 
generally prohibited under the Dodd-Frank Act with regard to credit 
insurance on mortgage loans. The final rule will also clarify when 
credit insurance premiums are considered to be calculated and paid on a 
monthly basis for purposes of a statutory exclusion from the 
prohibition for certain credit insurance premium calculation and 
payment arrangements. As noted earlier, the Bureau believes that 
language in the preamble to the 2013 Loan Originator Compensation Final 
Rule led to some confusion among creditors and credit insurance 
providers regarding whether credit insurance products were prohibited 
under the rule based on how their premiums are calculated. The Bureau 
is now clarifying that the prohibition only extends to creditors 
financing credit insurance premiums, and providing additional guidance 
on what constitutes creditor financing and what is excluded from the 
prohibition. Specifically, the Bureau is finalizing a modified version 
of the clarification it proposed that provides increased clarity 
regarding the application of the rule to certain products--particularly 
to insurance with ``level'' or ``levelized'' premiums--and this should 
benefit both creditors and providers of credit insurance products. As 
discussed above, the modification will, among other things, permit 
creditors to continue providing credit insurance products, including 
those with ``level'' or ``levelized'' premiums, so long as the premium 
is not treated as an obligation owed by the consumer beyond the month 
in which it is due. The Bureau also solicited comment on an alternative 
clarification, and believes on the basis of comments that the 
alternative is less clear and no more protective of consumers than the 
provision the Bureau is finalizing.
    The final rule will also make two adjustments to provisions that 
provide certain exceptions for creditors operating predominantly in 
``rural'' or ``underserved'' areas during the next two years, while the 
Bureau reexamines the definitions of ``rural'' and ``underserved'' as 
it recently announced in the May 2013 ATR Final Rule. Specifically, the 
final rule will extend an exception to the general prohibition on 
balloon features for high-cost mortgages under the 2013 HOEPA Final 
Rule that is available to certain loans made by small creditors who 
operate predominantly in rural or underserved areas temporarily to all 
small creditors, regardless of their geographic operations. The final 
rule will also amend an exemption from the requirement to maintain 
escrows for higher-priced mortgage loans under the 2013 Escrow Final 
Rule that is available to small creditors that extended more than 50 
percent of their total covered transactions secured by a first lien in 
``rural'' or ``underserved'' counties during the preceding calendar 
year to allow small creditors to qualify for the exemption if they made 
more than 50 percent of their covered transactions in ``rural'' or 
``underserved'' counties during any of the previous three calendar 
years.
    As noted above, the Bureau believes expanding the balloon-payment 
exception for high-cost mortgages to allow certain small creditors 
operating in areas that do not qualify as ``rural'' or ``underserved'' 
to continue to originate certain high-cost mortgages with balloon 
payments during the next two years will benefit creditors who might be 
unable to convert to offering adjustable rate mortgages by the time the 
final rules take effect in January 2014. The final rule will also 
promote consistency between HOEPA requirements and the May 2013 ATR 
Final Rule, thereby facilitating compliance for creditors. The Bureau 
believes that the final rule will also benefit consumers by increasing 
access to credit relative to the

[[Page 60436]]

2013 HOEPA Final Rule. Although balloon loans can in some cases 
increase risks for consumers, the Bureau believes that those risks are 
appropriately mitigated in these circumstances because the balloon 
loans must meet the requirements for qualified mortgages in order to 
qualify for the exception. This includes certain restrictions on the 
amount of up-front points and fees and various loan features, as well 
as a requirement that the loans be held on portfolio by the small 
creditor. These requirements reduce the risk of potentially abusive 
lending practices and provide strong incentives for the creditor to 
underwrite the loan appropriately.
    The amendment to the qualifications for the exemption from the 
escrow requirements should minimize the disruptions from any changes in 
the categorization of certain counties while the Bureau is reevaluating 
the underlying definitions. This in turn should lower compliance costs 
for certain creditors during the interim period. Consumers may benefit 
from greater access to credit and lower costs, but in return will not 
receive the benefits of an escrow account. A more detailed discussion 
of these effects is contained in the discussion of benefits, costs, and 
impacts in part VII of the 2013 Escrows Final Rule.

C. Impact on Depository Institutions and Credit Unions With $10 Billion 
or Less in Total Assets, as Described in Section 1026; the Impact of 
the Provisions on Consumers in Rural Areas; Impact on Access to 
Consumer Financial Products and Services

    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. The exceptions are 
those provisions related to the definitions of ``rural'' and 
``underserved'' which directly impact entities with under $2 billion in 
total assets. The final rule may have some differential impacts on 
consumers in rural areas. To the extent that manufactured housing 
loans, higher-priced mortgage loans, high-cost loans or balloon loans 
are more prevalent in these areas, the relevant provisions may have 
slightly greater impacts. As discussed above, costs for creditors in 
these areas should be reduced; consumers should benefit from increased 
access to credit and lower costs, though they will not have access to 
the heightened protections afforded by various provisions. Given the 
nature and limited scope of the changes in the final rule, the Bureau 
does not believe that the final rule will reduce consumers' access to 
consumer financial products and services.

VIII. 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.\55\ These analyses must 
``describe the impact of the proposed rule on small entities.'' \56\ 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,\57\ or if the agency considers a series of closely related 
rules as one rule for purposes of complying with the IRFA or FRFA 
requirements.\58\ 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.\59\
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    \55\ 5 U.S.C. 601 et seq.
    \56\ 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 not-for-profit 
organizations, and small government jurisdictions. 5 U.S.C. 601(6). 
A ``small business'' is determined by application of Small Business 
Administration regulations and reference to the North American 
Industry Classification System (NAICS) classifications and size 
standards. 5 U.S.C. 601(3). A ``small organization'' is any ``not-
for-profit enterprise which is independently owned and operated and 
is not dominant in its field.'' 5 U.S.C. 601(4). A ``small 
governmental jurisdiction'' is the government of a city, county, 
town, township, village, school district, or special district with a 
population of less than 50,000. 5 U.S.C. 601(5).
    \57\ 5 U.S.C. 605(b).
    \58\ 5 U.S.C. 605(c).
    \59\ 5 U.S.C. 609.
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    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. As noted above, in January, 2013, the Bureau 
issued the 2013 ATR Final Rule, 2013 Escrows Final Rule, 2013 HOEPA 
Final Rule, 2013 Mortgage Servicing Final Rules, and the 2013 Loan 
Originator Compensation Final Rule. Since January 2013, the Bureau also 
has issued the May 2013 ATR Final Rule, May 2013 Escrows Final Rule, 
and the 2013 Effective Date Final Rule, along with Amendments to the 
2013 Mortgage Rules under the Real Estate Settlement Procedures Act 
(Regulation X) and Truth in Lending Act (Regulation Z).\60\ The 
Supplementary Information to each of these rules set forth the Bureau's 
analyses and determinations under the RFA with respect to those rules. 
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.
---------------------------------------------------------------------------

    \60\ 78 FR 44686 (July 24, 2013).
---------------------------------------------------------------------------

    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 
rule and to the extent any changes are substantive, these changes will 
not have a material impact on small entities. The provisions related to 
servicing do not apply to many small entities under the small servicer 
exemption (and to the extent that they do, small entities will benefit 
from the same increased flexibility under the proposed provisions as 
other servicers), while the provisions related to loan originator 
compensation and the ``rural'' and ``underserved'' definitions lower 
the regulatory burden and possible compliance costs for affected 
entities. Therefore, the undersigned certifies that the rule will not 
have a significant impact on a substantial number of small entities.

IX. Paperwork Reduction Act

    This final rule amends 12 CFR Part 1002 (Regulation B) which 
implements the Equal Credit Opportunity Act, 12 CFR Part 1026 
(Regulation Z), which implements the Truth in Lending Act (TILA), and 
12 CFR Part 1024 (Regulation X), which implements the Real Estate 
Settlement Procedures Act (RESPA). Regulations B, Z and X currently 
contain collections of information approved by OMB. The Bureau's OMB 
control number for Regulation B is 3170-0013, for Regulation Z is 3170-
0015 and for Regulation X is 3170-0016. However, the Bureau has 
determined that this proposed rule would 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 1002

    Aged, Banks, Banking, Civil rights, Consumer protection, Credit, 
Credit unions, Discrimination, Fair lending, Marital status 
discrimination, National banks, National origin discrimination, 
Penalties, Race discrimination, Religious discrimination, Reporting and

[[Page 60437]]

recordkeeping requirements, Savings associations, Sex discrimination.

12 CFR Part 1024

    Condominiums, Consumer protection, Housing, Mortgage servicing, 
Mortgages, Reporting and recordkeeping.

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 12 CFR 
parts 1002, 1024, and 1026 as set forth below:

PART 1002--EQUAL CREDIT OPPORTUNITY ACT (REGULATION B)

0
1. The authority citation for part 1002 continues to read as follows:

    Authority: 12 U.S.C. 5512, 5581; 15 U.S.C. 1691b.

0
2. Appendix A to part 1002 is amended by revising paragraph 2.d to read 
as follows:

Appendix A to Part 1002--Federal Agencies To Be Listed in Adverse 
Action Notices

* * * * *
    2. * * *
    d. Federal Credit Unions: National Credit Union Administration, 
Office of Consumer Protection, 1775 Duke Street, Alexandria, VA 
22314.
* * * * *


0
3. In Supplement I to Part 1002, under Section 1002.14, under Paragraph 
14(b)(3) Valuation, as amended January 31, 2013, at 78 FR 7250, 
effective January 18, 2014, paragraphs 1.i and 3.v are revised and 
paragraph 3.vi is added to read as follows:

Supplement I to Part 1002--Official Interpretations

* * * * *

Section 1002.14--Rules on Providing Appraisals and Valuations

* * * * *
    14(b)(3) Valuation.
    1. * * *
    i. A report prepared by an appraiser (whether or not licensed or 
certified) including the appraiser's estimate of the property's 
value or opinion of value.
* * * * *
    3. * * *
    v. Reports reflecting property inspections that do not provide 
an estimate of the value of the property and are not used to develop 
an estimate of the value of the property.
    vi. Appraisal reviews that do not include the appraiser's 
estimate of the property's value or opinion of value.
* * * * *

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

0
4. 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

0
5. Section 1024.30, as added February 14, 2013, at 78 FR 10695 is 
amended by revising paragraph (a) to read as follows:


Sec.  1024.30  Scope.

    (a) In general. Except as provided in paragraphs (b) and (c) of 
this section, this subpart applies to any mortgage loan, as that term 
is defined in Sec.  1024.31.
* * * * *

0
6. Section 1024.35, as added February 14, 2013, at 78 FR 10695 is 
amended by revising paragraph (g)(1)(iii)(B) to read as follows:


Sec.  1024.35  Error resolution procedures.

* * * * *
    (g) * * *
    (1) * * *
    (iii) * * *
    (B) The mortgage loan is discharged.
* * * * *

0
7. Section 1024.36, as added February 14, 2013, at 78 FR 10695, is 
amended by revising paragraph (f)(1)(v)(B) to read as follows:


Sec.  1024.36  Requests for information.

* * * * *
    (f) * * *
    (1) * * *
    (v) * * *
    (B) The mortgage loan is discharged.
* * * * *

0
8. Section 1024.39, as added February 14, 2013, at 78 FR 10695, is 
amended by revising paragraphs (b)(1) and (3) to read as follows:


Sec.  1024.39  Early intervention requirements for certain borrowers.

* * * * *
    (b) Written notice. (1) Notice required. Except as otherwise 
provided in this section, a servicer shall provide to a delinquent 
borrower a written notice with the information set forth in paragraph 
(b)(2) of this section not later than the 45th day of the borrower's 
delinquency. A servicer is not required to provide the written notice 
more than once during any 180-day period.
* * * * *
    (3) Model clauses. Model clauses MS-4(A), MS-4(B), and MS-4(C), in 
appendix MS-4 to this part may be used to comply with the requirements 
of this paragraph (b).
* * * * *

0
9. Section 1024.41, as added February 14, 2013, at 78 FR 10695, is 
amended by revising paragraph (b)(2)(ii), adding paragraph (b)(3), 
revising paragraphs (c)(1)(ii) and (c)(2)(i), adding paragraphs 
(c)(2)(iii) and (iv), and revising paragraphs (d), (f)(1), (h)(4), and 
(j) to read as follows:


Sec.  1024.41  Loss mitigation procedures.

* * * * *
    (b) * * *
    (2) * * *
    (ii) Time period disclosure. The notice required pursuant to 
paragraph (b)(2)(i)(B) of this section must include a reasonable date 
by which the borrower should submit the documents and information 
necessary to make the loss mitigation application complete.
    (3) Determining Protections. To the extent a determination of 
whether protections under this section apply to a borrower is made on 
the basis of the number of days between when a complete loss mitigation 
application is received and when a foreclosure sale occurs, such 
determination shall be made as of the date a complete loss mitigation 
application is received.
    (c) * * *
    (1) * * *
    (ii) Provide the borrower with a notice in writing stating the 
servicer's determination of which loss mitigation options, if any, it 
will offer to the borrower on behalf of the owner or assignee of the 
mortgage. The servicer shall include in this notice the amount of time 
the borrower has to accept or reject an offer of a loss mitigation 
program as provided for in paragraph (e) of this section, if 
applicable, and a notification, if applicable, that the borrower has 
the right to appeal the denial of any loan modification option as well 
as the amount of time the borrower has to file such an appeal and any 
requirements for making an appeal, as provided for in paragraph (h) of 
this section.
    (2) * * *
    (i) In general. Except as set forth in paragraphs (c)(2)(ii) and 
(iii) of this section, a servicer shall not evade the requirement to 
evaluate a complete loss mitigation application for all loss mitigation 
options available to the borrower by offering a loss mitigation option 
based upon an evaluation of any information provided by a borrower in

[[Page 60438]]

connection with an incomplete loss mitigation application.
* * * * *
    (iii) Payment forbearance. Notwithstanding paragraph (c)(2)(i) of 
this section, a servicer may offer a short-term payment forbearance 
program to a borrower based upon an evaluation of an incomplete loss 
mitigation application. A servicer shall not make the first notice or 
filing required by applicable law for any judicial or non-judicial 
foreclosure process, and shall not move for foreclosure judgment or 
order of sale, or conduct a foreclosure sale, if a borrower is 
performing pursuant to the terms of a payment forbearance program 
offered pursuant to this section.
    (iv) Facially complete application. If a borrower submits all the 
missing documents and information as stated in the notice required 
pursuant to Sec.  1026.41(b)(2)(i)(B), or no additional information is 
requested in such notice, the application shall be considered facially 
complete. If the servicer later discovers additional information or 
corrections to a previously submitted document are required to complete 
the application, the servicer must promptly request the missing 
information or corrected documents and treat the application as 
complete for the purposes of paragraphs (f)(2) and (g) of this section 
until the borrower is given a reasonable opportunity to complete the 
application. If the borrower completes the application within this 
period, the application shall be considered complete as of the date it 
was facially complete, for the purposes of paragraphs (d), (e), (f)(2), 
(g), and (h) of this section, and as of the date the application was 
actually complete for the purposes of paragraph (c). A servicer that 
complies with this paragraph will be deemed to have fulfilled its 
obligation to provide an accurate notice under paragraph (b)(2)(i)(B).
    (d) Denial of loan modification options. If a borrower's complete 
loss mitigation application is denied for any trial or permanent loan 
modification option available to the borrower pursuant to paragraph (c) 
of this section, a servicer shall state in the notice sent to the 
borrower pursuant to paragraph (c)(1)(ii) of this section the specific 
reason or reasons for the servicer's determination for each such trial 
or permanent loan modification option and, if applicable, that the 
borrower was not evaluated on other criteria.
* * * * *
    (f) * * *
    (1) Pre-foreclosure review period. A servicer shall not make the 
first notice or filing required by applicable law for any judicial or 
non-judicial foreclosure process unless:
    (i) A borrower's mortgage loan obligation is more than 120 days 
delinquent;
    (ii) The foreclosure is based on a borrower's violation of a due-
on-sale clause; or
    (iii) The servicer is joining the foreclosure action of a 
subordinate lienholder.
* * * * *
    (h) * * *
    (4) Appeal determination. Within 30 days of a borrower making an 
appeal, the servicer shall provide a notice to the borrower stating the 
servicer's determination of whether the servicer will offer the 
borrower a loss mitigation option based upon the appeal and, if 
applicable, how long the borrower has to accept or reject such an offer 
or a prior offer of a loss mitigation option. A servicer may require 
that a borrower accept or reject an offer of a loss mitigation option 
after an appeal no earlier than 14 days after the servicer provides the 
notice to a borrower. A servicer's determination under this paragraph 
is not subject to any further appeal.
* * * * *
    (j) Small servicer requirements. A small servicer shall be subject 
to the prohibition on foreclosure referral in paragraph (f)(1) of this 
section. A small servicer shall not make the first notice or filing 
required by applicable law for any judicial or non-judicial foreclosure 
process and shall not move for foreclosure judgment or order of sale, 
or conduct a foreclosure sale, if a borrower is performing pursuant to 
the terms of an agreement on a loss mitigation option.

0
10. Appendix MS-3 to Part 1024, as added February 14, 2013, at 78 FR 
10695, is amended by revising the entry for MS-3(D) in the table of 
contents at the beginning of the appendix, and revising the heading of 
MS-3(D) to read as follows:

Appendix MS-3 to Part 1024

* * * * *

MS-3(D)--Model Form for Renewal or Replacement of Force-Placed 
Insurance Notice Containing Information Required by Sec.  1024.37(e)(2)

* * * * *

0
11. In Supplement I to Part 1024, as added February 14, 2013, at 78 FR 
10695:
0
a. Under Section 1024.17--Escrow Accounts, the heading for 17(k)(5)(ii) 
is revised.
0
b. Under Section 1024.33--Mortgage Servicing Transfers:
0
i. Under Paragraph 33(a) Servicing Disclosure Statement, paragraph 1 is 
revised.
0
ii. Under Paragraph 33(c)(1) Payments not considered late, paragraph 2 
is revised.
0
c. Under Section 1024.35--Error Resolution Procedures, Paragraph 35(c), 
paragraph 2 is revised.
0
d. Under Section 1024.36--Request for Information, Paragraph 36(b), 
paragraph 2 is revised.
0
e. Under Section 1024.38--General Servicing Policies, Procedures and 
Requirements, Paragraph 38(b)(5),paragraph 3 is added.
0
f. The heading for Section 1024.41 is revised.
0
g. Under Section 1024.41--Loss Mitigation Procedures:
0
i. Paragraphs 41(b)(2), 41(b)(3), 41(c)(2)(iii), and 41(c)(2)(iv) are 
added.
0
ii. The heading for paragraphs 41(c) is revised.
0
iii. Under newly designated 41(c), paragraph (c)(2)(iii) is added.
0
iv. The heading Paragraph 41(d)(1) is removed.
0
v. Under paragraph 41(d), paragraph 3 is redesignated as 
Paragraph(c)(1), paragraph 4, and paragraph 4 is redesignated as 
paragraph 3.
0
vii. Under paragraph 41(d), paragraph 4 is added.
0
viii. Under paragraph 41(f), new paragraph 1 is added.
    The revisions and additions read as follows:

Supplement I to Part 1024--Official Bureau Interpretations

* * * * *

Subpart B--Mortgage Settlement and Escrow Accounts

* * * * *

Section 1024.17--Escrow Accounts

* * * * *
    17(k)(5)(ii) Inability to disburse funds.
* * * * *

Subpart C--Mortgage Servicing

* * * * *

Section 1024.33--Mortgage Servicing Transfers

* * * * *
    33(a) Servicing disclosure statement.
    1. Terminology. Although the servicing disclosure statement must 
be clear and conspicuous pursuant to Sec.  1024.32(a), Sec.  
1024.33(a) does not set forth any specific rules for the format of 
the statement, and the specific language of the servicing disclosure 
statement in appendix MS-1 is not required to be used. The model 
format may be supplemented with additional information that 
clarifies or enhances the model language.
* * * * *

[[Page 60439]]

    33(c) Borrower payments during transfer of servicing.
    33(c)(1) Payments not considered late.
    1. * * *
    2. Compliance with Sec.  1024.39. A transferee servicer's 
compliance with Sec.  1024.39 during the 60-day period beginning on 
the effective date of a servicing transfer does not constitute 
treating a payment as late for purposes of Sec.  1024.33(c)(1).

Section 1024.35--Error Resolution Procedures

* * * * *
    35(c) Contact information for borrowers to assert errors.
* * * * *
    2. Notice of an exclusive address. A notice establishing an 
address that a borrower must use to assert an error may be included 
with a different disclosure, such as a notice of transfer. The 
notice is subject to the clear and conspicuous requirement in Sec.  
1024.32(a)(1). If a servicer establishes an address that a borrower 
must use to assert an error, a servicer must provide that address to 
the borrower in the following contexts:
    i. The written notice designating the specific address, required 
pursuant to Sec.  1024.35(c) and Sec.  1024.36(b).
    ii. Any periodic statement or coupon book required pursuant to 
12 CFR 1026.41.
    iii. Any Web site the servicer maintains in connection with the 
servicing of the loan.
    iv. Any notice required pursuant to Sec. Sec.  1024.39 or .41 
that includes contact information for assistance.
* * * * *

Section 1024.36--Requests for Information

* * * * *
    36(b) Contact information for borrowers to request information.
    1. * * *
    2. Notice of an exclusive address. A notice establishing an 
address that a borrower must use to request information may be 
included with a different disclosure, such as a notice of transfer. 
The notice is subject to the clear and conspicuous requirement in 
Sec.  1024.32(a)(1). If a servicer establishes an address that a 
borrower must use to request information, a servicer must provide 
that address to the borrower in the following contexts:
    i. The written notice designating the specific address, required 
pursuant to Sec.  1024.35(c) and Sec.  1024.36(b).
    ii. Any periodic statement or coupon book required pursuant to 
12 CFR 1026.41.
    iii. Any Web site the servicer maintains in connection with the 
servicing of the loan.
    iv. Any notice required pursuant to Sec. Sec.  1024.39 or .41 
that includes contact information for assistance.
* * * * *

Section 1024.38--General Servicing Policies, Procedures and 
Requirements

    38(b) Objectives.
    38(b)(5) Informing Borrowers of the Written Error Resolution and 
Information Request Procedures.
* * * * *
    3. Notices of error incorrectly sent to addresses associated 
with submission of loss mitigation applications or the continuity of 
contact. A servicer's policies and procedures must be reasonably 
designed to ensure that if a borrower incorrectly submits an 
assertion of an error to any address given to the borrower in 
connection with submission of a loss mitigation application or the 
continuity of contact pursuant to Sec.  1024.40, the servicer will 
inform the borrower of the procedures for submitting written notices 
of error set forth in Sec.  1024.35, including the correct address. 
Alternatively, the servicer could redirect such notices to the 
correct address.
* * * * *

Section 1024.41--Loss Mitigation Procedures

    41(b) Receipt of loss mitigation application.
    41(b)(1) Complete loss mitigation application.
* * * * *
    4. Diligence requirements. Although a servicer has flexibility 
to establish its own requirements regarding the documents and 
information necessary for a loss mitigation application, the 
servicer must act with reasonable diligence to collect information 
needed to complete the application. Further, a servicer must request 
information necessary to make a loss mitigation application complete 
promptly after receiving the loss mitigation application. Reasonable 
diligence includes, without limitation, the following actions:
    i. A servicer requires additional information from the 
applicant, such as an address or a telephone number to verify 
employment; the servicer contacts the applicant promptly to obtain 
such information after receiving a loss mitigation application;
    ii. Servicing for a mortgage loan is transferred to a servicer 
and the borrower makes an incomplete loss mitigation application to 
the transferee servicer after the transfer; the transferee servicer 
reviews documents provided by the transferor servicer to determine 
if information required to make the loss mitigation application 
complete is contained within documents transferred by the transferor 
servicer to the servicer; and
    iii. A servicer offers a borrower a payment forbearance program 
based on an incomplete loss mitigation application; the servicer 
notifies the borrower that he or she is being offered a payment 
forbearance program based on an evaluation of an incomplete 
application, and that the borrower has the option of completing the 
application to receive a full evaluation of all loss mitigation 
options available to the borrower. If a servicer provides such a 
notification, the borrower remains in compliance with the payment 
forbearance program, and the borrower does not request further 
assistance, the servicer could suspend reasonable diligence efforts 
until near the end of the payment forbearance program. Near the end 
of the program, and prior to the end of the forbearance period, it 
may be necessary for the servicer to contact the borrower to 
determine if the borrower wishes to complete the application and 
proceed with a full loss mitigation evaluation.
* * * * *
    41(b)(2)Review of loss mitigation application submission.
    41(b)(2)(i) Requirements.
    Paragraph 41(b)(2)(i)(B).
    1. Later discovery of additional information required to 
evaluate application. Even if a servicer has informed a borrower 
that an application is complete (or notified the borrower of 
specific information necessary to complete an incomplete 
application), if the servicer determines, in the course of 
evaluating the loss mitigation application submitted by the 
borrower, that additional information or a corrected version of a 
previously submitted document is required, the servicer must 
promptly request the additional information or corrected document 
from the borrower pursuant to the reasonable diligence obligation in 
Sec.  1024.41(b)(1). See Sec.  1024.41(c)(2)(iv) addressing facially 
complete applications.
    41(b)(2)(ii) Time period disclosure.
    1. Reasonable date. Section 1024.41(b)(2)(ii) requires that a 
notice informing a borrower that a loss mitigation application is 
incomplete must include a reasonable date by which the borrower 
should submit the documents and information necessary to make the 
loss mitigation application complete. In determining a reasonable 
date, a servicer should select the deadline that preserves the 
maximum borrower rights under Sec.  1024.41 based on the milestones 
listed below, except when doing so would be impracticable to permit 
the borrower sufficient time to obtain and submit the type of 
documentation needed. Generally, it would be impracticable for a 
borrower to obtain and submit documents in less than seven days. In 
setting a date, the following milestones should be considered (if 
the date of a foreclosure sale is not known, a servicer may use a 
reasonable estimate of the date for which a foreclosure sale may be 
scheduled):
    i. The date by which any document or information submitted by a 
borrower will be considered stale or invalid pursuant to any 
requirements applicable to any loss mitigation option available to 
the borrower;
    ii. The date that is the 120th day of the borrower's 
delinquency;
    iii. The date that is 90 days before a foreclosure sale;
    iv. The date that is 38 days before a foreclosure sale.
    41(b)(3) Determining Protections.
    1. Foreclosure sale not scheduled. If no foreclosure sale has 
been scheduled as of the date that a complete loss mitigation 
application is received, the application is considered to have been 
received more than 90 days before any foreclosure sale.
    2. Foreclosure sale re-scheduled. The protections under Sec.  
1024.41 that have been determined to apply to a borrower pursuant to 
Sec.  1024.41(b)(3) remain in effect thereafter, even if a 
foreclosure sale is later scheduled or rescheduled.
    41(c) Evaluation of loss mitigation applications.
* * * * *
    41(c)(2) Incomplete loss mitigation application evaluation.
* * * * *
    41(c)(2)(iii) Payment forbearance.

[[Page 60440]]

    1. Short-term payment forbearance program. The exemption in 
Sec.  1024.41(c)(2)(iii) applies to short-term payment forbearance 
programs. A payment forbearance program is a loss mitigation option 
for which a servicer allows a borrower to forgo making certain 
payments or portions of payments for a period of time. A short-term 
payment forbearance program allows the forbearance of payments due 
over periods of no more than six months. Such a program would be 
short-term regardless of the amount of time a servicer allows the 
borrower to make up the missing payments.
    2. Payment forbearance and incomplete applications. Section 
1024.41(c)(2)(iii) allows a servicer to offer a borrower a short-
term payment forbearance program based on an evaluation of an 
incomplete loss mitigation application. Such an incomplete loss 
mitigation application is still subject to the other obligations in 
Sec.  1024.41, including the obligation in Sec.  1024.41(b)(2) to 
review the application to determine if it is complete, the 
obligation in Sec.  1024.41(b)(1) to exercise reasonable diligence 
in obtaining documents and information to complete a loss mitigation 
application (see comment 41(b)(1)-4.iii), and the obligation to 
provide the borrower with the Sec.  1024.41(b)(2)(i)(B) notice that 
the servicer acknowledges the receipt of the application and has 
determined the application is incomplete.
    3. Payment forbearance and complete applications. Even if a 
servicer offers a borrower a payment forbearance program based on an 
evaluation of an incomplete loss mitigation application, the 
servicer must still comply with all the requirements in Sec.  
1024.41 if the borrower completes his or her loss mitigation 
application.
    41(c)(2)(iv) Facially complete application.
    1. Reasonable opportunity. Section 1024.41(c)(2)(iv) requires a 
servicer to treat a facially complete application as complete for 
the purposes of paragraphs (f)(2) and (g) until the borrower has 
been given a reasonable opportunity to complete the application. A 
reasonable opportunity requires the servicer to notify the borrower 
of what additional information or corrected documents are required, 
and to afford the borrower sufficient time to gather the information 
and documentation necessary to complete the application and submit 
it to the servicer. The amount of time that is sufficient for this 
purpose will depend on the facts and circumstances.
    2. Borrower fails to complete the application. If the borrower 
fails to complete the application within the timeframe provided 
under Sec.  1024.41(c)(2)(iv), the application shall be considered 
incomplete.
    41(d) Denial of loan modification options.
* * * * *
    4. Reasons listed. A servicer is required to disclose the actual 
reason or reasons for the denial. If a servicer's systems establish 
a hierarchy of eligibility criteria and reach the first criterion 
that causes a denial but do not evaluate the borrower based on 
additional criteria, a servicer complies with the rule by providing 
only the reason or reasons with respect to which the borrower was 
actually evaluated and rejected as well as notification that the 
borrower was not evaluated on other criteria. A servicer is not 
required to determine or disclose whether a borrower would have been 
denied on the basis of additional criteria if such criteria were not 
actually considered.
    41(f) Prohibition on foreclosure referral.
    1. Prohibited activities. Section 1024.41(f) prohibits a 
servicer from making the first notice or filing required by 
applicable law for any judicial or non-judicial foreclosure process 
under certain circumstances. Whether a document is considered the 
first notice or filing is determined on the basis of foreclosure 
procedure under the applicable State law.
    i. Where foreclosure procedure requires a court action or 
proceeding, a document is considered the first notice or filing if 
it is the earliest document required to be filed with a court or 
other judicial body to commence the action or proceeding (e.g., a 
complaint, petition, order to docket, or notice of hearing).
    ii. Where foreclosure procedure does not require an action or 
court proceeding, such as under a power of sale, a document is 
considered the first notice or filing if it is the earliest document 
required to be recorded or published to initiate the foreclosure 
process.
    iii. Where foreclosure procedure does not require any court 
filing or proceeding, and also does not require any document to be 
recorded or published, a document is considered the first notice or 
filing if it is the earliest document that establishes, sets, or 
schedules a date for the foreclosure sale.
    iv. A document provided to the borrower but not initially 
required to be filed, recorded, or published is not considered the 
first notice or filing on the sole basis that the document must 
later be included as an attachment accompanying another document 
that is required to be filed, recorded, or published to carry out a 
foreclosure.
* * * * *

PART 1026--TRUTH IN LENDING (REGULATION Z)

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

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

Subpart C--Closed-End Credit

0
13. Section 1026.23 is amended by revising paragraph (a)(3)(ii) to read 
as follows:


Sec.  1026.23  Right of rescission.

    (a) * * *
    (3) * * *
    (ii) For purposes of this paragraph (a)(3), the term ``material 
disclosures'' means the required disclosures of the annual percentage 
rate, the finance charge, the amount financed, the total of payments, 
the payment schedule, and the disclosures and limitations referred to 
in Sec. Sec.  1026.32(c) and (d) and 1026.43(g).
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
14. Section 1026.31, as amended January 31, 2013, at 78 FR 6856 is 
amended by revising paragraphs (g), (h)(1)(iii)(A), and (h)(2)(iii)(A) 
to read as follows:


Sec.  1026.31  General rules.

* * * * *
    (g) Accuracy of annual percentage rate. For purposes of section 
1026.32, the annual percentage rate shall be considered accurate, and 
may be used in determining whether a transaction is covered by section 
1026.32, if it is accurate according to the requirements and within the 
tolerances under section 1026.22 for closed-end credit transactions or 
1026.6(a) for open-end credit plans. The finance charge tolerances for 
rescission under section 1026.23(g) or (h) shall not apply for this 
purpose.
    (h) * * *
    (1) * * *
    (iii) * * *
    (A) Make the loan or credit plan satisfy the requirements of 15 
U.S.C. 1631-1651; or
* * * * *
    (2) * * *
    (iii) * * *
    (A) Make the loan or credit plan satisfy the requirements of 15 
U.S.C. 1631-1651; or
* * * * *
0
15. Section 1026.32 is amended by:
0
a. Revising paragraph (a)(2)(iii), as amended January 31, 2013, at 78 
FR 6856;
0
b. Revising paragraph (b)(1)(ii), as amended June 12, 2013, at 78 FR 
35430;
0
c. Revising paragraph (b)(1)(vi), as amended January 30, 2013, at 78 FR 
6408;
0
d. Revising paragraph (b)(2)(ii), as amended June 12, 2013, at 78 FR 
35430; and
0
e. Revising paragraphs (b)(2)(vi), (b)(6)(ii), and (d)(1)(ii)(C), as 
amended January 31, 2013, at 78 FR 6856.
    The revisions read as follows:


Sec.  1026.32  Requirements for high-cost mortgages.

    (a) * * *
    (2) * * *
    (iii) A transaction originated by a Housing Finance Agency, where 
the Housing Finance Agency is the creditor for the transaction; or
* * * * *
    (b) * * *

[[Page 60441]]

    (1) * * *
    (ii) All compensation paid directly or indirectly by a consumer or 
creditor to a loan originator, as defined in Sec.  1026.36(a)(1), that 
can be attributed to that transaction at the time the interest rate is 
set unless:
    (A) That compensation is paid by a consumer to a mortgage broker, 
as defined in Sec.  1026.36(a)(2), and already has been included in 
points and fees under paragraph (b)(1)(i) of this section;
    (B) That compensation is paid by a mortgage broker, as defined in 
Sec.  1026.36(a)(2), to a loan originator that is an employee of the 
mortgage broker;
    (C) That compensation is paid by a creditor to a loan originator 
that is an employee of the creditor; or
    (D) That compensation is paid by a retailer of manufactured homes 
to its employee.
* * * * *
    (vi) The total prepayment penalty, as defined in paragraph 
(b)(6)(i) or (ii) of this section, as applicable, incurred by the 
consumer if the consumer refinances the existing mortgage loan, or 
terminates an existing open-end credit plan in connection with 
obtaining a new mortgage loan, with the current holder of the existing 
loan or plan, a servicer acting on behalf of the current holder, or an 
affiliate of either.
    (2) * * *
    (ii) All compensation paid directly or indirectly by a consumer or 
creditor to a loan originator, as defined in Sec.  1026.36(a)(1), that 
can be attributed to that transaction at the time the interest rate is 
set unless:
    (A) That compensation is paid by a consumer to a mortgage broker, 
as defined in Sec.  1026.36(a)(2), and already has been included in 
points and fees under paragraph (b)(2)(i) of this section;
    (B) That compensation is paid by a mortgage broker, as defined in 
Sec.  1026.36(a)(2), to a loan originator that is an employee of the 
mortgage broker;
    (C) That compensation is paid by a creditor to a loan originator 
that is an employee of the creditor; or
    (D) That compensation is paid by a retailer of manufactured homes 
to its employee.
* * * * *
    (vi) The total prepayment penalty, as defined in paragraph 
(b)(6)(i) or (ii) of this section, as applicable, incurred by the 
consumer if the consumer refinances an existing closed-end credit 
transaction with an open-end credit plan, or terminates an existing 
open-end credit plan in connection with obtaining a new open-end credit 
plan, with the current holder of the existing transaction or plan, a 
servicer acting on behalf of the current holder, or an affiliate of 
either;
* * * * *
    (6) * * *
    (ii) Open-end credit. For an open-end credit plan, prepayment 
penalty means a charge imposed by the creditor if the consumer 
terminates the open-end credit plan prior to the end of its term, other 
than a waived, bona fide third-party charge that the creditor imposes 
if the consumer terminates the open-end credit plan sooner than 36 
months after account opening.
* * * * *
    (d) * * *
    (1) * * *
    (ii) * * *
    (C) A loan that meets the criteria set forth in Sec. Sec.  
1026.43(f)(1)(i) through (vi) and 1026.43(f)(2), or the conditions set 
forth in Sec.  1026.43(e)(6).
* * * * *

0
16. Section 1026.35 is amended by revising paragraphs (b)(2)(i)(D), 
(b)(2)(iii)(A), and (b)(2)(iii)(D)(1) to read as follows:


Sec.  1026.35  Requirements for higher-priced mortgage loans.

* * * * *
    (b) * * *
    (2) * * *
    (i) * * *
    (D) A reverse mortgage transaction subject to Sec.  1026.33.
* * * * *
    (iii) * * *
    (A) During any of the three preceding calendar years, the creditor 
extended more than 50 percent of its total covered transactions, as 
defined by Sec.  1026.43(b)(1), secured by a first lien, on properties 
that are located in counties that are either ``rural'' or 
``underserved,'' as set forth in paragraph (b)(2)(iv) of this section;
* * * * *
    (D) * * *
    (1) Escrow accounts established for first-lien higher-priced 
mortgage loans on or after April 1, 2010, and before January 1, 2014; 
or
* * * * *

0
17. Section 1026.36, as amended February 15, 2013, at 78 FR 11280, is 
amended by revising paragraphs (a)(1)(i)(A) and (B), adding paragraphs 
(a)(6), and (b), and revising paragraphs (f)(3)(i) introductory text, 
(f)(3)(ii), (i), and (j)(2) to read as follows:


Sec.  1026.36  Prohibited acts or practices and certain requirements 
for credit secured by a dwelling.

    (a) * * *
    (1) * * *
    (i) * * *
    (A) A person who does not take a consumer credit application or 
offer or negotiate credit terms available from a creditor to that 
consumer selected based on the consumer's financial characteristics, 
but who performs purely administrative or clerical tasks on behalf of a 
person who does engage in such activities.
    (B) An employee of a manufactured home retailer who does not take a 
consumer credit application, offer or negotiate credit terms, or advise 
a consumer on credit terms.
* * * * *
    (6) Credit terms. For purposes of this section, the term ``credit 
terms'' includes rates, fees, and other costs. Credit terms are 
selected based on the consumer's financial characteristics when those 
terms are selected based on any factors that may influence a credit 
decision, such as debts, income, assets, or credit history.
* * * * *
    (b) Scope. Paragraphs (c)(1) and (2) of this section apply to 
closed-end consumer credit transactions secured by a consumer's 
principal dwelling. Paragraph (c)(3) of this section applies to a 
consumer credit transaction secured by a dwelling. Paragraphs (d) 
through (i) of this section apply to closed-end consumer credit 
transactions secured by a dwelling. This section does not apply to a 
home equity line of credit subject to Sec.  1026.40, except that 
paragraphs (h) and (i) of this section apply to such credit when 
secured by the consumer's principal dwelling and paragraph (c)(3) 
applies to such credit when secured by a dwelling. Paragraphs (d) 
through (i) of this section do not apply to a loan that is secured by a 
consumer's interest in a timeshare plan described in 11 U.S.C. 
101(53D).
* * * * *
    (f) * * *
    (3) * * *
    (i) Obtain for any individual whom the loan originator organization 
hired on or after January 1, 2014 (or whom the loan originator 
organization hired before this date but for whom there were no 
applicable statutory or regulatory background standards in effect at 
the time of hire or before January 1, 2014, used to screen the 
individual) and for any individual regardless of when hired who, based 
on reliable information known to the loan originator organization, 
likely does not meet the standards under Sec.  1026.36(f)(3)(ii), 
before the individual acts as a loan originator in a consumer credit 
transaction secured by a dwelling:
* * * * *

[[Page 60442]]

    (ii) Determine on the basis of the information obtained pursuant to 
paragraph (f)(3)(i) of this section and any other information 
reasonably available to the loan originator organization, for any 
individual whom the loan originator organization hired on or after 
January 1, 2014 (or whom the loan originator organization hired before 
this date but for whom there were no applicable statutory or regulatory 
background standards in effect at the time of hire or before January 1, 
2014, used to screen the individual) and for any individual regardless 
of when hired who, based on reliable information known to the loan 
originator organization, likely does not meet the standards under this 
paragraph (f)(3)(ii), before the individual acts as a loan originator 
in a consumer credit transaction secured by a dwelling, that the 
individual loan originator:
* * * * *
    (i) Prohibition on financing credit insurance. (1) A creditor may 
not finance, directly or indirectly, any premiums or fees for credit 
insurance in connection with a consumer credit transaction secured by a 
dwelling (including a home equity line of credit secured by the 
consumer's principal dwelling). This prohibition does not apply to 
credit insurance for which premiums or fees are calculated and paid in 
full on a monthly basis.
    (2) For purposes of this paragraph (i):
    (i) ``Credit insurance'':
    (A) Means credit life, credit disability, credit unemployment, or 
credit property insurance, or any other accident, loss-of-income, life, 
or health insurance, or any payments directly or indirectly for any 
debt cancellation or suspension agreement or contract, but
    (B) Excludes credit unemployment insurance for which the 
unemployment insurance premiums are reasonable, the creditor receives 
no direct or indirect compensation in connection with the unemployment 
insurance premiums, and the unemployment insurance premiums are paid 
pursuant to a separate insurance contract and are not paid to an 
affiliate of the creditor;
    (ii) A creditor finances premiums or fees for credit insurance if 
it provides a consumer the right to defer payment of a credit insurance 
premium or fee owed by the consumer beyond the monthly period in which 
the premium or fee is due; and
    (iii) Credit insurance premiums or fees are calculated on a monthly 
basis if they are determined mathematically by multiplying a rate by 
the actual monthly outstanding balance.
    (j) * * *
    (2) For purposes of this paragraph (j), ``depository institution'' 
has the meaning in section 1503(3) of the SAFE Act, 12 U.S.C. 5102(3). 
For purposes of this paragraph (j), ``subsidiary'' has the meaning in 
section 3 of the Federal Deposit Insurance Act, 12 U.S.C. 1813.
* * * * *

0
18. Section 1026.43, as added January 30, 2013, at 78 FR 6408, is 
amended by revising paragraphs (a)(2) and (e)(4)(ii) introductory text 
and (e)(4)(ii)(C) to read as follows:


Sec.  1026.43  Minimum standards for transactions secured by a 
dwelling.

    (a) * * *
    (2) A mortgage transaction secured by a consumer's interest in a 
timeshare plan, as defined in 11 U.S.C. 101(53(D); or
* * * * *
    (e) * * *
    (4) * * *
    (ii) Eligible loans. A qualified mortgage under this paragraph 
(e)(4) must be one of the following at consummation:
* * * * *
    (C) A loan that is eligible to be guaranteed by the U.S. Department 
of Veterans Affairs;
* * * * *

0
19. Appendix H to Part 1026, as amended February 14, 2013, at 78 FR 
10901, is amended by revising the entry for H-30(C) in the table of 
contents at the beginning of the appendix, and revising the heading of 
H-30(C) to read as follows:

Appendix H to Part 1026--Closed-End Model Forms and Clauses

* * * * *

H-30(C) Sample Form of Periodic Statement for a Payment-Option Loan

* * * * *

0
20. In Supplement I to Part 1026:
0
a. Under Section 1026.25--Record Retention
0
i. Under Paragraph 25(c)(2) Records related to requirements for loan 
originator compensation, as amended February 15, 2013, at 78 FR 11280, 
paragraph 1 is revised.
0
ii. Under Paragraph 25(c)(3) Records related to minimum standards for 
transactions secured by a dwelling, as added January 30, 2013, at 78 FR 
6408, paragraph 1 is revised.
0
b. Under Section 1026.32--Requirements for High-Cost Mortgages:
0
i. Under Paragraph 32(b)(1), as amended January 30, 2013, at 78 FR 
6408, paragraph 2 is added.
0
ii. Under Paragraph 32(b)(1)(ii), as amended June 12, 2013, at 78 FR 
35430, paragraph 5 is added.
0
iii. Paragraph 32(b)(2) and paragraph 1 are added.
0
iv. Under Paragraph 32(b)(2)(i), as amended January 30, 2013, at 78 FR 
6408, paragraph 1 is revised.
0
v. Under Paragraph 32(b)(2)(i)(D), as amended January 30, 2013, at 78 
FR 6408, paragraph 1 is revised.
0
vi. Under Paragraph 32(d)(8)(ii), as amended January 30, 2013, at 78 FR 
6408, paragraph 1 is revised.
0
c. Under Section 1026.34--Prohibited Acts or Practices in Connection 
with High-Cost Mortgages, under Paragraph 34(a)(5)(v), as amended 
January 30, 2013, at 78 FR 6408, paragraph 1 is revised.
0
d. Under Section 1026.35--Requirements for Higher-Priced Mortgage Loans
0
i. Under Paragraph 35(b)(2)(iii), paragraph 1 is revised.
0
ii. Under Paragraph 35(b)(2)(iii)(D(1), paragraph 1 is revised.
0
e. Under Section 1026.36--Prohibited Acts or Practices in Connection 
With Credit Secured by a Dwelling
0
i. Under Paragraph 36(a), as amended February 15, 2013, at 78 FR 11280, 
paragraphs 1, 4, and 5 are revised.
0
ii. Paragraph 36(a)(1)(i)(B) and paragraph 1 are added.
0
iii. Under Paragraph 36(b), as amended February 15, 2013, at 78 FR 
11280, paragraph 1 is revised.
0
iv. Under Paragraph 36(d)(1), as amended February 15, 2013, at 78 FR 
11280, paragraphs 1, 3, and 6 are revised.
0
v. Under Paragraph 36(f)(3)(i), as amended February 15, 2013, at 78 FR 
11280, paragraphs 1 and 2 are revised.
0
vi. Under Paragraph 36(f)(3)(ii), as amended February 15, 2013, at 78 
FR 11280, paragraphs 1 and 2 are revised.
0
f. Under Section 1026.41--Periodic Statements for Residential Mortgage 
Loans
0
i. Under Paragraph 41(b), as amended February 14, 2013, at 78 FR 10901, 
paragraph 1 is revised.
0
ii. Under Paragraph 41(d), as amended February 14, 2013, at 78 FR 
10901, paragraph 3 is revised.
0
iii. Under Paragraph 41(d)(4), as amended February 14, 2013, at 78 FR 
10901, paragraph 1 is revised.
0
iv. Under Paragraph 41(e)(3), as amended February 14, 2013, at 78 FR 
10901, paragraph 1 is revised.
0
v. Under Paragraph 41(e)(4)(iii), as amended February 14, 2013, at 78 
FR 10901, paragraph 1 is revised.
0
g. Under Section 1026.43--Minimum Standards for Transactions Secured by 
a Dwelling:
0
i. Under Paragraph 43(b)(8), as added January 30, 2013, at 78 FR 6408, 
paragraph 4 is revised.

[[Page 60443]]

0
ii. Under Paragraph 43(c)(3), as added January 30, 2013, at 78 FR 6408, 
paragraph 6 is revised.
0
iii. Under Paragraph 43(e)(4), as added January 30, 2013, at 78 FR 
6408, paragraph 1 is revised.
0
iv. Under Paragraph 43(e)(5), as amended June 12, 2013, at 78 FR 35430, 
paragraph 8 is revised.
0
v. Under Paragraph 43(f)(2)(iii), as added January 30, 2013, at 78 FR 
6408, paragraph 1 is revised.
    The revisions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Subpart D--Miscellaneous

Section 1026.25--Record Retention

* * * * *
    25(c) Records related to certain requirements for mortgage 
loans.
    25(c)(2) Records related to requirements for loan originator 
compensation.
    1. * * *
    i. Records sufficient to evidence payment and receipt of 
compensation. Records are sufficient to evidence payment and receipt 
of compensation if they demonstrate the following facts: The nature 
and amount of the compensation; that the compensation was paid, and 
by whom; that the compensation was received, and by whom; and when 
the payment and receipt of compensation occurred. The compensation 
agreements themselves are to be retained in all circumstances 
consistent with Sec.  1026.25(c)(2)(i). The additional records that 
are sufficient necessarily will vary on a case-by-case basis 
depending on the facts and circumstances, particularly with regard 
to the nature of the compensation. For example, if the compensation 
is in the form of a salary, records to be retained might include 
copies of required filings under the Internal Revenue Code that 
demonstrate the amount of the salary. If the compensation is in the 
form of a contribution to or a benefit under a designated tax-
advantaged plan, records to be maintained might include copies of 
required filings under the Internal Revenue Code or other applicable 
Federal law relating to the plan, copies of the plan and amendments 
thereto in which individual loan originators participate and the 
names of any loan originators covered by the plan, or determination 
letters from the Internal Revenue Service regarding the plan. If the 
compensation is in the nature of a commission or bonus, records to 
be retained might include a settlement agent ``flow of funds'' 
worksheet or other written record or a creditor closing instructions 
letter directing disbursement of fees at consummation. Where a loan 
originator is a mortgage broker, a disclosure of compensation or 
broker agreement required by applicable State law that recites the 
broker's total compensation for a transaction is a record of the 
amount actually paid to the loan originator in connection with the 
transaction, unless actual compensation deviates from the amount in 
the disclosure or agreement. Where compensation has been decreased 
to defray the cost, in whole or part, of an unforeseen increase in 
an actual settlement cost over an estimated settlement cost 
disclosed to the consumer pursuant to section 5(c) of RESPA (or 
omitted from that disclosure), records to be maintained are those 
documenting the decrease in compensation and reasons for it.
    ii. Compensation agreement. For purposes of Sec.  1026.25(c)(2), 
a compensation agreement includes any agreement, whether oral, 
written, or based on a course of conduct that establishes a 
compensation arrangement between the parties (e.g., a brokerage 
agreement between a creditor and a mortgage broker or provisions of 
employment contracts between a creditor and an individual loan 
originator employee addressing payment of compensation). Where a 
compensation agreement is oral or based on a course of conduct and 
cannot itself be maintained, the records to be maintained are those, 
if any, evidencing the existence or terms of the oral or course of 
conduct compensation agreement. Creditors and loan originators are 
free to specify what transactions are governed by a particular 
compensation agreement as they see fit. For example, they may 
provide, by the terms of the agreement, that the agreement governs 
compensation payable on transactions consummated on or after some 
future effective date (in which case, a prior agreement governs 
transactions consummated in the meantime). For purposes of applying 
the record retention requirement to transaction-specific 
commissions, the relevant compensation agreement for a given 
transaction is the agreement pursuant to which compensation for that 
transaction is determined.
* * * * *
    25(c)(3) Records related to minimum standards for transactions 
secured by a dwelling.
    1. Evidence of compliance with repayment ability provisions. A 
creditor must retain evidence of compliance with Sec.  1026.43 for 
three years after the date of consummation of a consumer credit 
transaction covered by that section. (See comment 25(c)(3)-2 for 
guidance on the retention of evidence of compliance with the 
requirement to offer a consumer a loan without a prepayment penalty 
under Sec.  1026.43(g)(3).) If a creditor must verify and document 
information used in underwriting a transaction subject to Sec.  
1026.43, the creditor shall retain evidence sufficient to 
demonstrate compliance with the documentation requirements of the 
rule. Although a creditor need not retain actual paper copies of the 
documentation used in underwriting a transaction subject to Sec.  
1026.43, to comply with Sec.  1026.25(c)(3), the creditor must be 
able to reproduce such records accurately. For example, if the 
creditor uses a consumer's Internal Revenue Service (IRS) Form W-2 
to verify the consumer's income, the creditor must be able to 
reproduce the IRS Form W-2 itself, and not merely the income 
information that was contained in the form.
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

Section 1026.32--Requirements for High-Cost Mortgages

* * * * *
    32(b) Definitions.
* * * * *
    Paragraph 32(b)(1).
* * * * *
    2. Charges paid by parties other than the consumer. Under Sec.  
1026.32(b)(1), points and fees may include charges paid by third 
parties in addition to charges paid by the consumer. Specifically, 
charges paid by third parties that fall within the definition of 
points and fees set forth in Sec.  1026.32(b)(1)(i) through (vi) are 
included in points and fees. In calculating points and fees in 
connection with a transaction, creditors may rely on written 
statements from the consumer or third party paying for a charge, 
including the seller, to determine the source and purpose of any 
third-party payment for a charge.
    i. Examples--included in points and fees. A creditor's 
origination charge paid by a consumer's employer on the consumer's 
behalf that is included in the finance charge as defined in Sec.  
1026.4(a) or (b), must be included in points and fees under Sec.  
1026.32(b)(1)(i), unless other exclusions under Sec.  1026.4 or 
Sec.  1026.32(b)(1)(i)(A) through (F) apply. In addition, consistent 
with comment 32(b)(1)(i)-1, a third-party payment of an item 
excluded from the finance charge under a provision of Sec.  1026.4, 
while not included in the total points and fees under Sec.  
1026.32(b)(1)(i), may be included under Sec.  1026.32(b)(1)(ii) 
through (vi). For example, a payment by a third party of a creditor-
imposed fee for an appraisal performed by an employee of the 
creditor is included in points and fees under Sec.  
1026.32(b)(1)(iii). See comment 32(b)(1)(i)-1.
    ii. Examples--not included in points and fees. A charge paid by 
a third party is not included in points and fees under Sec.  
1026.32(b)(1)(i) if the exclusions to points and fees in Sec.  
1026.32(b)(1)(i)(A) through (F) apply. For example, certain bona 
fide third-party charges not retained by the creditor, loan 
originator, or an affiliate of either are excluded from points and 
fees under Sec.  1026.32(b)(1)(i)(D), regardless of whether those 
charges are paid by a third party or the consumer.
    iii. Seller's points. Seller's points, as described in Sec.  
1026.4(c)(5) and commentary, are excluded from the finance charge 
and thus are not included in points and fees under Sec.  
1026.32(b)(1)(i). However, charges paid by the seller for items 
listed in Sec.  1026.32(b)(1)(ii) through (vi) are included in 
points and fees.
    iv. Creditor-paid charges. Charges that are paid by the 
creditor, other than loan originator compensation paid by the 
creditor that is required to be included in points and fees under 
Sec.  1026.32(b)(1)(ii), are excluded from points and fees. See

[[Page 60444]]

Sec. Sec.  1026.32(b)(1)(i)(A), 1026.4(a), and comment 4(a)-(2).
* * * * *
    Paragraph 32(b)(1)(ii).
* * * * *
    4. Loan originator compensation--calculating loan originator 
compensation in connection with other charges or payments included 
in the finance charge or made to loan originators.
* * * * *
    iii. Creditor's origination fees--loan originator not employed 
by creditor. Compensation paid by a creditor to a loan originator 
who is not employed by the creditor is included in the calculation 
of points and fees under Sec.  1026.32(b)(1)(ii). Such compensation 
is included in points and fees in addition to any origination fees 
or charges paid by the consumer to the creditor that are included in 
points and fees under Sec.  1026.32(b)(1)(i). For example, assume 
that a consumer pays to the creditor a $3,000 origination fee and 
that the creditor pays a mortgage broker $1,500 in compensation 
attributed to the transaction. Assume further that the consumer pays 
no other charges to the creditor that are included in points and 
fees under Sec.  1026.32(b)(1)(i) and that the mortgage broker 
receives no other compensation that is included in points and fees 
under Sec.  1026.32(b)(1)(ii). For purposes of calculating points 
and fees, the $3,000 origination fee is included in points and fees 
under Sec.  1026.32(b)(1)(i) and the $1,500 in loan originator 
compensation is included in points and fees under Sec.  
1026.32(b)(1)(ii), equaling $4,500 in total points and fees, 
provided that no other points and fees are paid or compensation 
received.
* * * * *
    5. Loan originator compensation--calculating loan originator 
compensation in manufactured home transactions. i. If a manufactured 
home retailer qualifies as a loan originator under Sec.  
1026.36(a)(1), then compensation that is paid by a consumer or 
creditor to the retailer for loan origination activities and that 
can be attributed to the transaction at the time the interest rate 
is set must be included in points and fees. For example, assume a 
manufactured home retailer takes a residential mortgage loan 
application and is entitled to receive at consummation a $1,000 
commission from the creditor for taking the mortgage loan 
application. The $1,000 commission is loan originator compensation 
that must be included in points and fees.
    ii. If the creditor has knowledge that the sales price of a 
manufactured home includes loan originator compensation, then such 
compensation can be attributed to the transaction at the time the 
interest rate is set and therefore is included in points and fees 
under Sec.  1026.32(b)(1)(ii). However, the creditor is not required 
to investigate the sales price of a manufactured home to determine 
if the sales price includes loan originator compensation.
    iii. As provided in Sec.  1026.32(b)(1)(ii)(D), compensation 
paid by a manufactured home retailer to its employees is not 
included in points and fees under Sec.  1026.32(b)(1)(ii).
* * * * *
    Paragraph 32(b)(2).
    1. See comment 32(b)(1)-2 for guidance concerning the inclusion 
in points and fees of charges paid by parties other than the 
consumer.
* * * * *
    Paragraph 32(b)(2)(i).
    1. Finance charge. The points and fees calculation under Sec.  
1026.32(b)(2) generally does not include items that are included in 
the finance charge but that are not known until after account 
opening, such as minimum monthly finance charges or charges based on 
account activity or inactivity. Transaction fees also generally are 
not included in the points and fees calculation, except as provided 
in Sec.  1026.32(b)(2)(vi). See comments 32(b)(1)-1 and 32(b)(1)(i)-
1 for additional guidance concerning the calculation of points and 
fees.
* * * * *
    Paragraph 32(b)(2)(i)(D).
    1. For purposes of Sec.  1026.32(b)(2)(i)(D), the term loan 
originator means a loan originator as that term is defined in Sec.  
1026.36(a)(1), without regard to Sec.  1026.36(a)(2). See comments 
32(b)(1)(i)(D)-1 through -4 for further guidance concerning the 
exclusion of bona fide third-party charges from points and fees.
* * * * *
    Paragraph 32(d)(8)(ii).
    1. Failure to meet repayment terms. A creditor may terminate a 
loan or open-end credit agreement and accelerate the balance when 
the consumer fails to meet the repayment terms resulting in a 
default in payment under the agreement; a creditor may do so, 
however, only if the consumer actually fails to make payments 
resulting in a default in the agreement. For example, a creditor may 
not terminate and accelerate if the consumer, in error, sends a 
payment to the wrong location, such as a branch rather than the main 
office of the creditor. If a consumer files for or is placed in 
bankruptcy, the creditor may terminate and accelerate under Sec.  
1026.32(d)(8)(ii) if the consumer fails to meet the repayment terms 
resulting in a default of the agreement. Section 1026.32(d)(8)(ii) 
does not override any State or other law that requires a creditor to 
notify a consumer of a right to cure, or otherwise places a duty on 
the creditor before it can terminate a loan or open-end credit 
agreement and accelerate the balance.
* * * * *

Section 1026.34--Prohibited Acts or Practices in Connection With 
High-Cost Mortgages

* * * * *
    34(a)(5) Pre-loan counseling.
* * * * *
    Paragraph 34(a)(5)(v) Counseling fees.
    1. Financing. Section 1026.34(a)(5)(v) does not prohibit a 
creditor from financing the counseling fee as part of the 
transaction for a high-cost mortgage, if the fee is a bona fide 
third-party charge as provided by Sec.  1026.32(b)(1)(i)(D) and 
(b)(2)(i)(D).
* * * * *

Section 1026.35--Requirements for Higher-Priced Mortgage Loans

* * * * *
    35(b) Escrow accounts.
* * * * *
    35(b)(2) Exemptions.
* * * * *
    Paragraph 35(b)(2)(iii).
    1. Requirements for exemption. Under Sec.  1026.35(b)(2)(iii), 
except as provided in Sec.  1026.35(b)(2)(v), a creditor need not 
establish an escrow account for taxes and insurance for a higher-
priced mortgage loan, provided the following four conditions are 
satisfied when the higher-priced mortgage loan is consummated:
    i. During any of the three preceding calendar years, more than 
50 percent of the creditor's total first-lien covered transactions, 
as defined in Sec.  1026.43(b)(1), are secured by properties located 
in counties that are either ``rural'' or ``underserved,'' as set 
forth in Sec.  1026.35(b)(2)(iv). Pursuant to that section, a 
creditor may rely as a safe harbor on a list of counties published 
by the Bureau to determine whether counties in the United States are 
rural or underserved for a particular calendar year. Thus, for 
example, if a creditor originated 90 covered transactions, as 
defined by Sec.  1026.43(b)(1), secured by a first lien, during 
2011, 2012, or 2013, the creditor meets this condition for an 
exemption in 2014 if at least 46 of those transactions in one of 
those three calendar years are secured by first liens on properties 
that are located in such counties.
* * * * *
    Paragraph 35(b)(2)(iii)(D)(1).
    1. Exception for certain accounts. Escrow accounts established 
for first-lien higher-priced mortgage loans for which applications 
were received on or after April 1, 2010, and before January 1, 2014, 
are not counted for purposes of Sec.  1026.35(b)(2)(iii)(D). For 
applications received on and after January 1, 2014, creditors, 
together with their affiliates, that establish new escrow accounts, 
other than those described in Sec.  1026.35(b)(2)(iii)(D)(2), do not 
qualify for the exemption provided under Sec.  1026.35(b)(2)(iii). 
Creditors, together with their affiliates, that continue to maintain 
escrow accounts established for first-lien higher-priced mortgage 
loans for which applications were received on or after April 1, 
2010, and before January 1, 2014, still qualify for the exemption 
provided under Sec.  1026.35(b)(2)(iii) so long as they do not 
establish new escrow accounts for transactions for which they 
received applications on or after January 1, 2014, other than those 
described in Sec.  1026.35(b)(2)(iii)(D)(2), and they otherwise 
qualify under Sec.  1026.35(b)(2)(iii).
* * * * *

Section 1026.36--Prohibited Acts or Practices in Connection With 
Credit Secured by a Dwelling

    36(a) Definitions.
    1. Meaning of loan originator. i. General. A. Section 1026.36(a) 
defines the set of activities or services any one of which, if done 
for or in the expectation of compensation or gain, makes the person 
doing such activities or

[[Page 60445]]

performing such services a loan originator, unless otherwise 
excluded. The scope of activities covered by the term loan 
originator includes:
    1. Referring a consumer to any person who participates in the 
origination process as a loan originator. Referring is an activity 
included under each of the activities of offering, arranging, or 
assisting a consumer in obtaining or applying to obtain an extension 
of credit. Referring includes any oral or written action directed to 
a consumer that can affirmatively influence the consumer to select a 
particular loan originator or creditor to obtain an extension of 
credit when the consumer will pay for such credit. See comment 
36(a)-4 with respect to certain activities that do not constitute 
referring.
    2. Arranging a credit transaction, including initially 
contacting and orienting the consumer to a particular loan 
originator's or creditor's origination process or particular credit 
terms that are or may be available to that consumer selected based 
on the consumer's financial characteristics, assisting the consumer 
to apply for credit, taking an application, offering particular 
credit terms to the consumer selected based on the consumer's 
financial characteristics, negotiating credit terms, or otherwise 
obtaining or making an extension of credit.
    3. Assisting a consumer in obtaining or applying for consumer 
credit by advising on particular credit terms that are or may be 
available to that consumer based on the consumer's financial 
characteristics, filling out an application form, preparing 
application packages (such as a credit application or pre-approval 
application or supporting documentation), or collecting application 
and supporting information on behalf of the consumer to submit to a 
loan originator or creditor. A person who, acting on behalf of a 
loan originator or creditor, collects information or verifies 
information provided by the consumer, such as by asking the consumer 
for documentation to support the information the consumer provided 
or for the consumer's authorization to obtain supporting documents 
from third parties, is not collecting information on behalf of the 
consumer. See also comment 36(a)z4.i through iv with respect to 
application-related administrative and clerical tasks and comment 
36(a)-1.v with respect to third-party advisors.
    4. Presenting particular credit terms for the consumer's 
consideration that are selected based on the consumer's financial 
characteristics, or communicating with a consumer for the purpose of 
reaching a mutual understanding about prospective credit terms.
* * * * *
    4. * * *
    i. Application-related administrative and clerical tasks. The 
definition of loan originator does not include a loan originator's 
or creditor's employee who provides a credit application form from 
the entity for which the person works to the consumer for the 
consumer to complete or, without assisting the consumer in 
completing the credit application, processing or analyzing the 
information, or discussing particular credit terms that are or may 
be available from a creditor or loan originator to that consumer 
selected based on the consumer's financial characteristics, delivers 
the credit application from a consumer to a loan originator or 
creditor. A person does not assist the consumer in completing the 
application if the person explains to the consumer filling out the 
application the contents of the application or where particular 
consumer information is to be provided, or generally describes the 
credit application process to a consumer without discussing 
particular credit terms that are or may be available from a creditor 
or loan originator to that consumer selected based on the consumer's 
financial characteristics.
    ii. Responding to consumer inquiries and providing general 
information. The definition of loan originator does not include 
persons who:
    A. * * *
    B. As employees of a creditor or loan originator, provide loan 
originator or creditor contact information of the loan originator or 
creditor entity for which he or she works, or of a person who works 
for that the same entity to a consumer, provided that the person 
does not discuss particular credit terms that are or may be 
available from a creditor or loan originator to that consumer 
selected based on the consumer's financial characteristics and does 
not direct the consumer, based on his or her assessment of the 
consumer's financial characteristics, to a particular loan 
originator or particular creditor seeking to originate credit 
transactions to consumers with those financial characteristics;
    C. Describe other product-related services (for example, persons 
who describe optional monthly payment methods via telephone or via 
automatic account withdrawals, the availability and features of 
online account access, the availability of 24-hour customer support, 
or free mobile applications to access account information); or
    D. * * *
    iii. Loan processing. The definition of loan originator does not 
include persons who, acting on behalf of a loan originator or a 
creditor:
    A. * * *
    B. * * *
    C. Coordinate consummation of the credit transaction or other 
aspects of the credit transaction process, including by 
communicating with a consumer about process deadlines and documents 
needed at consummation, provided that any communication that 
includes a discussion about credit terms available from a creditor 
to that consumer selected based on the consumer's financial 
characteristics only confirms credit terms already agreed to by the 
consumer;
* * * * *
    iv. Underwriting, credit approval, and credit pricing. The 
definition of loan originator does not include persons who:
    A. * * *
    B. Approve particular credit terms or set particular credit 
terms available from a creditor to that consumer selected based on 
the consumer's financial characteristics in offer or counter-offer 
situations, provided that only a loan originator communicates to or 
with the consumer regarding these credit terms, an offer, or 
provides or engages in negotiation, a counter-offer, or approval 
conditions; or
* * * * *
    5. Compensation.
* * * * *
    iv. Amounts for charges for services that are not loan 
origination activities.
    A. * * *
    B. Compensation includes any salaries, commissions, and any 
financial or similar incentive to an individual loan originator, 
regardless of whether it is labeled as payment for services that are 
not loan origination activities.
* * * * *
    36(a)(1)(i)(B) Employee of a retailer of manufactured homes.
    1. The definition of loan originator does not include an 
employee of a manufactured home retailer that ``assists'' a consumer 
in obtaining or applying for consumer credit as defined in comment 
36(a)-1.i.A.3, provided the employee does not advise the consumer on 
specific credit terms, or otherwise engage in loan originator 
activity as defined in Sec.  1026.36(a)(1). The following examples 
describe activities that, in the absence of other activities, do not 
define a manufactured home retailer employee as a loan originator:
    i. Generally describing the credit application process to a 
consumer without advising on credit terms available from a creditor.
    ii. Preparing residential mortgage loan packages, which means 
compiling and processing loan application materials and supporting 
documentation, and providing general application instructions to 
consumers so consumers can complete an application, without 
interacting or communicating with the consumer regarding transaction 
terms, but not filling out a consumer's application, inputting the 
information into an online application or other automated system, or 
taking information from the consumer over the phone to complete the 
application.
    iii. Collecting information on behalf of the consumer with 
regard to a residential mortgage loan. Collecting information ``on 
behalf of the consumer'' would include gathering information or 
supporting documentation from third parties on behalf of the 
consumer to provide to the consumer, for the consumer then to 
provide in the application or for the consumer to submit to the loan 
originator or creditor.
    iv. Providing or making available general information about 
creditors or loan originators that may offer financing for 
manufactured homes in the consumer's general area, when doing so 
does not otherwise amount to ``referring'' as defined in comment 
36(a)-1.i.A.1. This includes making available, in a neutral manner, 
general brochures or information about the different creditors or 
loan originators that may offer financing to a consumer, but does 
not include recommending a particular creditor or loan originator or 
otherwise influencing the consumer's decision.
* * * * *
    36(b) Scope.
    1. Scope of coverage. Section 1026.36(c)(1) and (c)(2) applies 
to closed-end consumer

[[Page 60446]]

credit transactions secured by a consumer's principal dwelling. 
Section 1026.36(c)(3) applies to a consumer credit transaction, 
including home equity lines of credit under Sec.  1026.40, secured 
by a consumer's dwelling. Paragraphs (h) and (i) of Sec.  1026.36 
apply to home equity lines of credit under Sec.  1026.40 secured by 
a consumer's principal dwelling. Paragraphs (d), (e), (f), (g), (h), 
and (i) of Sec.  1026.36 apply to closed-end consumer credit 
transactions secured by a dwelling. Closed-end consumer credit 
transactions include transactions secured by first or subordinate 
liens, and reverse mortgages that are not home equity lines of 
credit under Sec.  1026.40. See Sec.  1026.36(b) for additional 
restrictions on the scope of Sec.  1026.36, and Sec. Sec.  1026.1(c) 
and 1026.3(a) and corresponding commentary for further discussion of 
extensions of credit subject to Regulation Z.
* * * * *
    36(d) Prohibited payments to loan originators.
* * * * *
    36(d)(1) Payments based on a term of a transaction.
    1. * * *
    ii. Single or multiple transactions. The prohibition on payment 
and receipt of compensation under Sec.  1026.36(d)(1)(i) encompasses 
compensation that directly or indirectly is based on the terms of a 
single transaction of a single individual loan originator, the terms 
of multiple transactions by that single individual loan originator, 
or the terms of multiple transactions by multiple individual loan 
originators. Compensation to an individual loan originator that is 
based upon profits determined with reference to a mortgage-related 
business is considered compensation that is based on the terms of 
multiple transactions by multiple individual loan originators. For 
clarification about the exceptions permitting compensation based 
upon profits determined with reference to mortgage-related business 
pursuant to either a designated tax-advantaged plan or a non-
deferred profits-based compensation plan, see comment 36(d)(1)-3. 
For clarification about ``mortgage-related business,'' see comments 
36(d)(1)-3.v.B and -3.v.E.
    A. Assume that a creditor pays a bonus to an individual loan 
originator out of a bonus pool established with reference to the 
creditor's profits and the profits are determined with reference to 
the creditor's revenue from origination of closed-end consumer 
credit transactions secured by a dwelling. In such instance, the 
bonus is considered compensation that is based on the terms of 
multiple transactions by multiple individual loan originators. 
Therefore, the bonus is prohibited under Sec.  1026.36(d)(1)(i), 
unless it is otherwise permitted under Sec.  1026.36(d)(1)(iv).
    B. Assume that an individual loan originator's employment 
contract with a creditor guarantees a quarterly bonus in a specified 
amount conditioned upon the individual loan originator meeting 
certain performance benchmarks (e.g., volume of originations 
monthly). A bonus paid following the satisfaction of those 
contractual conditions is not directly or indirectly based on the 
terms of a transaction by an individual loan originator, the terms 
of multiple transactions by that individual loan originator, or the 
terms of multiple transactions by multiple individual loan 
originators under Sec.  1026.36(d)(1)(i) as clarified by this 
comment 36(d)(1)-1.ii, because the creditor is obligated to pay the 
bonus, in the specified amount, regardless of the terms of 
transactions of the individual loan originator or multiple 
individual loan originators and the effect of those terms of 
multiple transactions on the creditor's profits. Because this type 
of bonus is not directly or indirectly based on the terms of 
multiple transactions by multiple individual loan originators, as 
described in Sec.  1026.36(d)(1)(i) (as clarified by this comment 
36(d)(1)-1.ii), it is not subject to the 10-percent total 
compensation limit described in Sec.  1026.36(d)(1)(iv)(B)(1).
    iii. * * *
* * * * *
    D. The fees and charges described above in paragraphs B and C 
can only be a term of a transaction if the fees or charges are 
required to be disclosed in the Good Faith Estimate, the HUD-1, or 
the HUD-1A (and subsequently in any integrated disclosures 
promulgated by the Bureau under TILA section 105(b) (15 U.S.C. 
1604(b)) and RESPA section 4 (12 U.S.C. 2603) as amended by sections 
1098 and 1100A of the Dodd-Frank Act).
* * * * *
    3. Interpretation of Sec.  1026.36(d)(1)(iii) and (iv). Subject 
to certain restrictions, Sec.  1026.36(d)(1)(iii) and Sec.  
1026.36(d)(1)(iv) permit contributions to or benefits under 
designated tax-advantaged plans and compensation under a non-
deferred profits-based compensation plan even if the contributions, 
benefits, or compensation, respectively, are based on the terms of 
multiple transactions by multiple individual loan originators.
    i. Designated tax-advantaged plans. Section 1026.36(d)(1)(iii) 
permits an individual loan originator to receive, and a person to 
pay, compensation in the form of contributions to a defined 
contribution plan or benefits under a defined benefit plan provided 
the plan is a designated tax-advantaged plan (as defined in Sec.  
1026.36(d)(1)(iii)), even if contributions to or benefits under such 
plans are directly or indirectly based on the terms of multiple 
transactions by multiple individual loan originators. In the case of 
a designated tax-advantaged plan that is a defined contribution 
plan, Sec.  1026.36(d)(1)(iii) does not permit the contribution to 
be directly or indirectly based on the terms of that individual loan 
originator's transactions. A defined contribution plan has the 
meaning set forth in Internal Revenue Code section 414(i), 26 U.S.C. 
414(i). A defined benefit plan has the meaning set forth in Internal 
Revenue Code section 414(j), 26 U.S.C. 414(j).
    ii. Non-deferred profits-based compensation plans. As used in 
Sec.  1026.36(d)(1)(iv), a ``non-deferred profits-based compensation 
plan'' is any compensation arrangement where an individual loan 
originator may be paid variable, additional compensation based in 
whole or in part on the mortgage-related business profits of the 
person paying the compensation, any affiliate, or a business unit 
within the organizational structure of the person or the affiliate, 
as applicable (i.e., depending on the level within the person's or 
affiliate's organization at which the non-deferred profits-based 
compensation plan is established). A non-deferred profits-based 
compensation plan does not include a designated tax-advantaged plan 
or other forms of deferred compensation that are not designated tax-
advantaged plans, such as those created pursuant to Internal Revenue 
Code section 409A, 26 U.S.C. 409A. Thus, if contributions to or 
benefits under a designated tax-advantaged plan or compensation 
under another form of deferred compensation plan are determined with 
reference to the mortgage-related business profits of the person 
making the contribution, then the contribution, benefits, or other 
compensation, as applicable, are not permitted by Sec.  
1026.36(d)(1)(iv) (although, in the case of contributions to or 
benefits under a designated tax-advantaged plan, the benefits or 
contributions may be permitted by Sec.  1026.36(d)(1)(iii)). Under a 
non-deferred profits-based compensation plan, the individual loan 
originator may, for example, be paid directly in cash, stock, or 
other non-deferred compensation, and the compensation under the non-
deferred profits-based compensation plan may be determined by a 
fixed formula or may be at the discretion of the person (e.g., the 
person may elect not to pay compensation under a non-deferred 
profits-based compensation plan in a given year), provided the 
compensation is not directly or indirectly based on the terms of the 
individual loan originator's transactions. As used in Sec.  
1026.36(d)(1)(iv) and this commentary, non-deferred profits-based 
compensation plans include, without limitation, bonus pools, profits 
pools, bonus plans, and profit-sharing plans. Compensation under a 
non-deferred profits-based compensation plan could include, without 
limitation, annual or periodic bonuses, or awards of merchandise, 
services, trips, or similar prizes or incentives where the bonuses, 
contributions, or awards are determined with reference to the 
profits of the person, business unit, or affiliate, as applicable. 
As used in Sec.  1026.36(d)(1)(iv) and this commentary, a business 
unit is a division, department, or segment within the overall 
organizational structure of the person or the person's affiliate 
that performs discrete business functions and that the person or the 
affiliate treats separately for accounting or other organizational 
purposes. For example, a creditor that pays its individual loan 
originators bonuses at the end of a calendar year based on the 
creditor's average net return on assets for the calendar year is 
operating a non-deferred profits-based compensation plan under Sec.  
1026.36(d)(1)(iv). A bonus that is paid to an individual loan 
originator from a source other than a non-deferred profits-based 
compensation plan (or a deferred compensation plan where the bonus 
is determined with reference to mortgage-related business profits), 
such as a retention bonus budgeted for in advance or a performance 
bonus paid out of a bonus pool set aside at the beginning of the

[[Page 60447]]

company's annual accounting period as part of the company's 
operating budget, does not violate the prohibition on payment of 
compensation based on the terms of multiple transactions by multiple 
individual loan originators under Sec.  1026.36(d)(1)(i), as 
clarified by comment 36(d)(1)-1.ii; therefore, Sec.  
1026.36(d)(1)(iv) does not apply to such bonuses.
    iii. Compensation that is not directly or indirectly based on 
the terms of multiple transactions by multiple individual loan 
originators. The compensation arrangements addressed in Sec.  
1026.36(d)(1)(iii) and (iv) are permitted even if they are directly 
or indirectly based on the terms of multiple transactions by 
multiple individual loan originators. See comment 36(d)(1)-1 for 
additional interpretation. If a loan originator organization's 
revenues are exclusively derived from transactions subject to Sec.  
1026.36(d) (whether paid by creditors, consumers, or both) and that 
loan originator organization pays its individual loan originators a 
bonus under a non-deferred profits-based compensation plan, the 
bonus is not directly or indirectly based on the terms of multiple 
transactions by multiple individual loan originators if Sec.  
1026.36(d)(1)(i) is otherwise complied with.
    iv. Compensation based on terms of an individual loan 
originator's transactions. Under both Sec.  1026.36(d)(1)(iii), with 
regard to contributions made to a defined contribution plan that is 
a designated tax-advantaged plan, and Sec.  1026.36(d)(1)(iv)(A), 
with regard to compensation under a non-deferred profits-based 
compensation plan, the payment of compensation to an individual loan 
originator may not be directly or indirectly based on the terms of 
that individual loan originator's transaction or transactions. 
Consequently, for example, where an individual loan originator makes 
loans that vary in their interest rate spread, the compensation 
payment may not take into account the average interest rate spread 
on the individual loan originator's transactions during the relevant 
calendar year.
    v. Compensation under non-deferred profits-based compensation 
plans. Assuming that the conditions in Sec.  1026.36(d)(1)(iv)(A) 
are met, Sec.  1026.36(d)(1)(iv)(B)(1) permits certain compensation 
to an individual loan originator under a non-deferred profits-based 
compensation plan. Specifically, if the compensation is determined 
with reference to the profits of the person from mortgage-related 
business, compensation under a non-deferred profits-based 
compensation plan is permitted provided the compensation does not, 
in the aggregate, exceed 10 percent of the individual loan 
originator's total compensation corresponding to the time period for 
which compensation under the non-deferred profits-based compensation 
plan is paid. The compensation restrictions under Sec.  
1026.36(d)(1)(iv)(B)(1) are sometimes referred to in this commentary 
as the ``10-percent total compensation limit'' or the ``10-percent 
limit.''
    A. Total compensation. For purposes of Sec.  
1026.36(d)(1)(iv)(B)(1), the individual loan originator's total 
compensation consists of the sum total of: (1) All wages and tips 
reportable for Medicare tax purposes in box 5 on IRS form W-2 (or, 
if the individual loan originator is an independent contractor, 
reportable compensation on IRS form 1099-MISC) that are actually 
paid during the relevant time period (regardless of when the wages 
and tips are earned), except for any compensation under a non-
deferred profits-based compensation plan that is earned during a 
different time period (see comment 36(d)(1)-3.v.C); (2) at the 
election of the person paying the compensation, all contributions 
that are actually made during the relevant time period by the 
creditor or loan originator organization to the individual loan 
originator's accounts in designated tax-advantaged plans that are 
defined contribution plans (regardless of when the contributions are 
earned); and (3) at the election of the person paying the 
compensation, all compensation under a non-deferred profits-based 
compensation plan that is earned during the relevant time period, 
regardless of whether the compensation is actually paid during that 
time period (see comment 36(d)(1)-3.v.C). If an individual loan 
originator has some compensation that is reportable on the W-2 and 
some that is reportable on the 1099-MISC, the total compensation is 
the sum total of what is reportable on each of the two forms.
    B. Profits of the Person. Under Sec.  1026.36(d)(1)(iv), a plan 
is a non-deferred profits-based compensation plan if compensation is 
paid, based in whole or in part, on the profits of the person paying 
the compensation. As used in Sec.  1026.36(d)(1)(iv), ``profits of 
the person'' include, as applicable depending on where the non-
deferred profits-based compensation plan is set, the profits of the 
person, the business unit to which the individual loan originators 
are assigned for accounting or other organizational purposes, or any 
affiliate of the person. Profits from mortgage-related business are 
profits determined with reference to revenue generated from 
transactions subject to Sec.  1026.36(d). Pursuant to Sec.  
1026.36(b) and comment 36(b)-1, Sec.  1026.36(d) applies to closed-
end consumer credit transactions secured by dwellings. This revenue 
includes, without limitation, and as applicable based on the 
particular sources of revenue of the person, business unit, or 
affiliate, origination fees and interest associated with dwelling-
secured transactions for which individual loan originators working 
for the person were loan originators, income from servicing of such 
transactions, and proceeds of secondary market sales of such 
transactions. If the amount of the individual loan originator's 
compensation under non-deferred profits-based compensation plans 
paid for a time period does not, in the aggregate, exceed 10 percent 
of the individual loan originator's total compensation corresponding 
to the same time period, compensation under non-deferred profits-
based compensation plans may be paid under Sec.  
1026.36(d)(1)(iv)(B)(1) regardless of whether or not it was 
determined with reference to the profits of the person from 
mortgage-related business.
    C. Time period for which the compensation under the non-deferred 
profits-based compensation plan is paid and to which the total 
compensation corresponds. Under Sec.  1026.36(d)(1)(iv)(B)(1), 
determination of whether payment of compensation under a non-
deferred profits-based compensation plan complies with the 10-
percent limit requires a calculation of the ratio of the 
compensation under the non-deferred profits-based compensation plan 
(i.e., the compensation subject to the 10-percent limit) and the 
total compensation corresponding to the relevant time period. For 
compensation subject to the 10-percent limit, the relevant time 
period is the time period for which a person makes reference to 
profits in determining the compensation (i.e., when the compensation 
was earned). It does not matter whether the compensation is actually 
paid during that particular time period. For total compensation, the 
relevant time period is the same time period, but only certain types 
of compensation may be included in the total compensation amount for 
that time period (see comment 36(d)(1)-3.v.A). For example, assume 
that during calendar year 2014 a creditor pays an individual loan 
originator compensation in the following amounts: $80,000 in 
commissions based on the individual loan originator's performance 
and volume of loans generated during the calendar year; and $10,000 
in an employer contribution to a designated tax-advantaged defined 
contribution plan on behalf of the individual loan originator. The 
creditor desires to pay the individual loan originator a year-end 
bonus of $10,000 under a non-deferred profits-based compensation 
plan. The commissions are paid and employer contributions to the 
designated tax-advantaged defined contribution plan are made during 
calendar year 2014, but the year-end bonus will be paid in January 
2015. For purposes of the 10-percent limit, the year-end bonus is 
counted toward the 10-percent limit for calendar year 2014, even 
though it is not actually paid until 2015. Therefore, for calendar 
year 2014 the individual loan originator's compensation that is 
subject to the 10-percent limit would be $10,000 (i.e., the year-end 
bonus) and the total compensation would be $100,000 (i.e., the sum 
of the commissions, the designated tax-advantaged plan contribution 
(assuming the creditor elects to include it in total compensation 
for calendar year 2014), and the bonus (assuming the creditor elects 
to include it in total compensation for calendar year 2014)); the 
bonus would be permissible under Sec.  1026.36(d)(1)(iv) because it 
does not exceed 10 percent of total compensation. The determination 
of total compensation corresponding to 2014 also would not take into 
account any compensation subject to the 10-percent limit that is 
actually paid in 2014 but is earned during a different calendar year 
(e.g., an annual bonus determined with reference to mortgage-related 
business profits for calendar year 2013 that is paid in January 
2014). If the employer contribution to the designated tax-advantaged 
plan is earned in 2014 but actually made in 2015, however, it may 
not be included in total compensation for 2014. A company, business 
unit, or affiliate, as applicable, may pay compensation subject to 
the 10-percent limit during different time periods falling within 
its annual accounting period for keeping records and reporting 
income and expenses,

[[Page 60448]]

which may be a calendar year or a fiscal year depending on the 
annual accounting period. In such instances, however, the 10-percent 
limit applies both as to each time period and cumulatively as to the 
annual accounting period. For example, assume that a creditor uses a 
calendar-year accounting period. If the creditor pays an individual 
loan originator a bonus at the end of each quarter under a non-
deferred profits-based compensation plan, the payment of each 
quarterly bonus is subject to the 10-percent limit measured with 
respect to each quarter. The creditor can also pay an annual bonus 
under the non-deferred profits-based compensation plan that does not 
exceed the difference of 10 percent of the individual loan 
originator's total compensation corresponding to the calendar year 
and the aggregate amount of the quarterly bonuses.
    D. Awards of merchandise, services, trips, or similar prizes or 
incentives. If any compensation paid to an individual loan 
originator under Sec.  1026.36(d)(1)(iv) consists of an award of 
merchandise, services, trips, or similar prize or incentive, the 
cash value of the award is factored into the calculation of the 10-
percent total compensation limit. For example, during a given 
calendar year, individual loan originator A and individual loan 
originator B are each employed by a creditor and paid $40,000 in 
salary, and $45,000 in commissions. The creditor also contributes 
$5,000 to a designated tax-advantaged defined contribution plan for 
each individual loan originator during that calendar year, which the 
creditor elects to include in the total compensation amount. Neither 
individual loan originator is paid any other form of compensation by 
the creditor. In December of the calendar year, the creditor rewards 
both individual loan originators for their performance during the 
calendar year out of a bonus pool established with reference to the 
profits of the mortgage origination business unit. Individual loan 
originator A is paid a $10,000 cash bonus, meaning that individual 
loan originator A's total compensation is $100,000 (assuming the 
creditor elects to include the bonus in the total compensation 
amount). Individual loan originator B is paid a $7,500 cash bonus 
and awarded a vacation package with a cash value of $3,000, meaning 
that individual loan originator B's total compensation is $100,500 
(assuming the creditor elects to include the reward in the total 
compensation amount). Under Sec.  1026.36(d)(1)(iv)(B)(1), 
individual loan originator A's $10,000 bonus is permissible because 
the bonus would not constitute more than 10 percent of individual 
loan originator A's total compensation for the calendar year. The 
creditor may not pay individual loan originator B the $7,500 bonus 
and award the vacation package, however, because the total value of 
the bonus and the vacation package would be $10,500, which is 
greater than 10 percent (10.45 percent) of individual loan 
originator B's total compensation for the calendar year. One way to 
comply with Sec.  1026.36(d)(1)(iv)(B)(1) would be if the amount of 
the bonus were reduced to $7,000 or less or the vacation package 
were structured such that its cash value would be $2,500 or less.
    E. Compensation determined only with reference to non-mortgage-
related business profits. Compensation under a non-deferred profits-
based compensation plan is not subject to the 10-percent total 
compensation limit under Sec.  1026.36(d)(1)(iv)(B)(1) if the non-
deferred profits-based compensation plan is determined with 
reference only to profits from business other than mortgage-related 
business, as determined in accordance with reasonable accounting 
principles. Reasonable accounting principles reflect an accurate 
allocation of revenues, expenses, profits, and losses among the 
person, any affiliate of the person, and any business units within 
the person or affiliates, and are consistent with the accounting 
principles applied by the person, the affiliate, or the business 
unit with respect to, as applicable, its internal budgeting and 
auditing functions and external reporting requirements. Examples of 
external reporting and filing requirements that may be applicable to 
creditors and loan originator organizations are Federal income tax 
filings, Federal securities law filings, or quarterly reporting of 
income, expenses, loan origination activity, and other information 
required by government-sponsored enterprises. As used in Sec.  
1026.36(d)(1)(iv)(B)(1), profits means positive profits or losses 
avoided or mitigated.
    F. Additional examples. 1. Assume that, during a given calendar 
year, a loan originator organization pays an individual loan 
originator employee $40,000 in salary and $125,000 in commissions, 
and makes a contribution of $15,000 to the individual loan 
originator's 401(k) plan. At the end of the year, the loan 
originator organization wishes to pay the individual loan originator 
a bonus based on a formula involving a number of performance 
metrics, to be paid out of a profit pool established at the level of 
the company but that is determined in part with reference to the 
profits of the company's mortgage origination unit. Assume that the 
loan originator organization derives revenues from sources other 
than transactions covered by Sec.  1026.36(d). In this example, the 
performance bonus would be directly or indirectly based on the terms 
of multiple individual loan originators' transactions as described 
in Sec.  1026.36(d)(1)(i), because it is being determined with 
reference to profits from mortgage-related business. Assume, 
furthermore, that the loan originator organization elects to include 
the bonus in the total compensation amount for the calendar year. 
Thus, the bonus is permissible under Sec.  1026.36(d)(1)(iv)(B)(1) 
if it does not exceed 10 percent of the loan originator's total 
compensation, which in this example consists of the individual loan 
originator's salary and commissions, the contribution to the 401(k) 
plan (if the loan originator organization elects to include the 
contribution in the total compensation amount), and the performance 
bonus. Therefore, if the loan originator organization elects to 
include the 401(k) contribution in total compensation for these 
purposes, the loan originator organization may pay the individual 
loan originator a performance bonus of up to $20,000 (i.e., 10 
percent of $200,000 in total compensation). If the loan originator 
organization does not include the 401(k) contribution in calculating 
total compensation, or the 401(k) contribution is actually made in 
January of the following calendar year (in which case it cannot be 
included in total compensation for the initial calendar year), the 
bonus may be up to $18,333.33. If the loan originator organization 
includes neither the 401(k) contribution nor the performance bonus 
in the total compensation amount, the bonus may not exceed $16,500.
    2. Assume that the compensation during a given calendar year of 
an individual loan originator employed by a creditor consists of 
only salary and commissions, and the individual loan originator does 
not participate in a designated tax-advantaged defined contribution 
plan. Assume further that the creditor uses a calendar-year 
accounting period. At the end of the calendar year, the creditor 
pays the individual loan originator two bonuses: A ``performance'' 
bonus based on the individual loan originator's aggregate loan 
volume for a calendar year that is paid out of a bonus pool 
determined with reference to the profits of the mortgage origination 
business unit, and a year-end ``holiday'' bonus in the same amount 
to all company employees that is paid out of a company-wide bonus 
pool. Because the performance bonus is paid out of a bonus pool that 
is determined with reference to the profits of the mortgage 
origination business unit, it is compensation that is determined 
with reference to mortgage-related business profits, and the bonus 
is therefore subject to the 10-percent total compensation limit. If 
the company-wide bonus pool from which the ``holiday'' bonus is paid 
is derived in part from profits of the creditor's mortgage 
origination business unit, then the combination of the ``holiday'' 
bonus and the performance bonus is subject to the 10-percent total 
compensation limit. The ``holiday'' bonus is not subject to the 10-
percent total compensation limit if the bonus pool is determined 
with reference only to the profits of business units other than the 
mortgage origination business unit, as determined in accordance with 
reasonable accounting principles. If the ``performance'' bonus and 
the ``holiday'' bonus in the aggregate do not exceed 10 percent of 
the individual loan originator's total compensation, the bonuses may 
be paid under Sec.  1026.36(d)(1)(iv)(B)(1) without the necessity of 
determining from which bonus pool they were paid or whether they 
were determined with reference to the profits of the creditor's 
mortgage origination business unit.
    G. Reasonable reliance by individual loan originator on 
accounting or statement by person paying compensation. An individual 
loan originator is deemed to comply with its obligations regarding 
receipt of compensation under Sec.  1026.36(d)(1)(iv)(B)(1) if the 
individual loan originator relies in good faith on an accounting or 
a statement provided by the person who determined the individual 
loan originator's compensation under a non-deferred profits-based 
compensation plan pursuant to Sec.  1026.36(d)(1)(iv)(B)(1) and 
where the statement or accounting is provided within a reasonable 
time period following the person's determination.

[[Page 60449]]

    vi. Individual loan originators who originate ten or fewer 
transactions. Assuming that the conditions in Sec.  
1026.36(d)(1)(iv)(A) are met, Sec.  1026.36(d)(1)(iv)(B)(2) permits 
compensation to an individual loan originator under a non-deferred 
profits-based compensation plan even if the payment or contribution 
is directly or indirectly based on the terms of multiple individual 
loan originators' transactions if the individual is a loan 
originator (as defined in Sec.  1026.36(a)(1)(i)) for ten or fewer 
consummated transactions during the 12-month period preceding the 
compensation determination. For example, assume a loan originator 
organization employs two individual loan originators who originate 
transactions subject to Sec.  1026.36 during a given calendar year. 
Both employees are individual loan originators as defined in Sec.  
1026.36(a)(1)(ii), but only one of them (individual loan originator 
B) acts as a loan originator in the normal course of business, while 
the other (individual loan originator A) is called upon to do so 
only occasionally and regularly performs other duties (such as 
serving as a manager). In January of the following calendar year, 
the loan originator organization formally determines the financial 
performance of its mortgage business for the prior calendar year. 
Based on that determination, the loan originator organization on 
February 1 decides to pay a bonus to the individual loan originators 
out of a company bonus pool. Assume that, between February 1 of the 
prior calendar year and January 31 of the current calendar year, 
individual loan originator A was the loan originator for eight 
consummated transactions, and individual loan originator B was the 
loan originator for 15 consummated transactions. The loan originator 
organization may award the bonus to individual loan originator A 
under Sec.  1026.36(d)(1)(iv)(B)(2). The loan originator 
organization may not award the bonus to individual loan originator B 
relying on the exception under Sec.  1026.36(d)(1)(iv)(B)(2) because 
it would not apply, although it could award a bonus pursuant to the 
10-percent total compensation limit under Sec.  
1026.36(d)(1)(iv)(B)(1) if the requirements of that provision are 
complied with.
* * * * *
    6. Periodic changes in loan originator compensation and terms of 
transactions. Section 1026.36 does not limit a creditor or other 
person from periodically revising the compensation it agrees to pay 
a loan originator. However, the revised compensation arrangement 
must not result in payments to the loan originator that are based on 
the terms of a credit transaction. A creditor or other person might 
periodically review factors such as loan performance, transaction 
volume, as well as current market conditions for loan originator 
compensation, and prospectively revise the compensation it agrees to 
pay to a loan originator. For example, assume that during the first 
six months of the year, a creditor pays $3,000 to a particular loan 
originator for each loan delivered, regardless of the terms of the 
transaction. After considering the volume of business produced by 
that loan originator, the creditor could decide that as of July 1, 
it will pay $3,250 for each loan delivered by that particular loan 
originator, regardless of the terms of the transaction. No violation 
occurs even if the loans made by the creditor after July 1 generally 
carry a higher interest rate than loans made before that date, to 
reflect the higher compensation.
* * * * *
    36(f) Loan originator qualification requirements.
* * * * *
    Paragraph 36(f)(3).
* * * * *
    Paragraph 36(f)(3)(i).
    1. Criminal and credit histories. Section 1026.36(f)(3)(i) 
requires the loan originator organization to obtain, for any of its 
individual loan originator employees who is not required to be 
licensed and is not licensed as a loan originator pursuant to the 
SAFE Act, a criminal background check, a credit report, and 
information related to any administrative, civil, or criminal 
determinations by any government jurisdiction. The requirement 
applies to individual loan originator employees who were hired on or 
after January 1, 2014 (or whom the loan originator organization 
hired before this date but for whom there were no applicable 
statutory or regulatory background standards in effect at the time 
of hire or before January 1, 2014, used to screen the individual). A 
credit report may be obtained directly from a consumer reporting 
agency or through a commercial service. A loan originator 
organization with access to the NMLSR can meet the requirement for 
the criminal background check by reviewing any criminal background 
check it receives upon compliance with the requirement in 12 CFR 
1007.103(d)(1) and can meet the requirement to obtain information 
related to any administrative, civil, or criminal determinations by 
any government jurisdiction by obtaining the information through the 
NMLSR. Loan originator organizations that do not have access to 
these items through the NMLSR may obtain them by other means. For 
example, a criminal background check may be obtained from a law 
enforcement agency or commercial service. Information on any past 
administrative, civil, or criminal findings (such as from 
disciplinary or enforcement actions) may be obtained from the 
individual loan originator.
    2. Retroactive obtaining of information not required. Section 
1026.36(f)(3)(i) does not require the loan originator organization 
to obtain the covered information for an individual whom the loan 
originator organization hired as a loan originator before January 1, 
2014, and screened under applicable statutory or regulatory 
background standards in effect at the time of hire. However, if the 
individual subsequently ceases to be employed as a loan originator 
by that loan originator organization, and later resumes employment 
as a loan originator by that loan originator organization (or any 
other loan originator organization), the loan originator 
organization is subject to the requirements of Sec.  
1026.36(f)(3)(i).
* * * * *
    Paragraph 36(f)(3)(ii).
    1. Scope of review. Section 1026.36(f)(3)(ii) requires the loan 
originator organization to review the information that it obtains 
under Sec.  1026.36(f)(3)(i) and other reasonably available 
information to determine whether the individual loan originator 
meets the standards in Sec.  1026.36(f)(3)(ii). Other reasonably 
available information includes any information the loan originator 
organization has obtained or would obtain as part of a reasonably 
prudent hiring process, including information obtained from 
application forms, candidate interviews, other reliable information 
and evidence provided by a candidate, and reference checks. The 
requirement applies to individual loan originator employees who were 
hired on or after January 1, 2014 (or whom the loan originator 
organization hired before this date but for whom there were no 
applicable statutory or regulatory background standards in effect at 
the time of hire or before January 1, 2014, used to screen the 
individual).
    2. Retroactive determinations not required. Section 
1026.36(f)(3)(ii) does not require the loan originator organization 
to review the covered information and make the required 
determinations for an individual whom the loan originator 
organization hired as a loan originator on or before January 1, 2014 
and screened under applicable statutory or regulatory background 
standards in effect at the time of hire. However, if the individual 
subsequently ceases to be employed as a loan originator by that loan 
originator organization, and later resumes employment as a loan 
originator by that loan originator organization (or any other loan 
originator organization), the loan originator organization employing 
the individual is subject to the requirements of Sec.  
1026.36(f)(3)(ii).
* * * * *
    36(i) Prohibition on financing credit insurance.
    1. Financing credit insurance premiums or fees. In the case of 
single-premium credit insurance, a creditor violates Sec.  
1026.36(i) by adding the credit insurance premium or fee to the 
amount owed by the consumer at closing. In the case of monthly-pay 
credit insurance, a creditor violates Sec.  1026.36(i) if, upon the 
close of the monthly period in which the premium or fee is due, the 
creditor includes the premium or fee in the amount owed by the 
consumer.
* * * * *

Section 1026.41--Periodic Statements for Residential Mortgage Loans

* * * * *
    41(b) Timing of the periodic statement.
    1. Reasonably prompt time. Section 1026.41(b) requires that the 
periodic statement be delivered or placed in the mail no later than 
a reasonably prompt time after the payment due date or the end of 
any courtesy period. Delivering, emailing or placing the periodic 
statement in the mail within four days of the close of the courtesy 
period of the previous billing cycle generally would be considered 
reasonably prompt.
* * * * *

[[Page 60450]]

    41(d) Content and layout of the periodic statement.
* * * * *
    3. Terminology. A servicer may use terminology other than that 
found on the sample periodic statements in appendix H-30, so long as 
the new terminology is commonly understood. For example, servicers 
may take into consideration regional differences in terminology and 
refer to the account for the collection of taxes and insurance, 
referred to in Sec.  1026.41(d) as the ``escrow account,'' as an 
``impound account.''
* * * * *
    41(d)(4) Transaction Activity.
    1. Meaning. Transaction activity includes any transaction that 
credits or debits the amount currently due. This is the same amount 
that is required to be disclosed under Sec.  1026.41(d)(1)(iii). 
Examples of such transactions include, without limitation:
* * * * *
    41(e)(3) Coupon book exemption.
    1. Fixed rate. For guidance on the meaning of ``fixed rate'' for 
purposes of Sec.  1026.41(e)(3), see Sec.  1026.18(s)(7)(iii) and 
its commentary.
* * * * *
    41(e)(4) Small servicers.
* * * * *
    41(e)(4)(iii) Small servicer determination.
    1. Loans obtained by merger or acquisition. Any mortgage loans 
obtained by a servicer or an affiliate as part of a merger or 
acquisition, or as part of the acquisition of all of the assets or 
liabilities of a branch office of a creditor, should be considered 
mortgage loans for which the servicer or an affiliate is the 
creditor to which the mortgage loan is initially payable. A branch 
office means either an office of a depository institution that is 
approved as a branch by a Federal or State supervisory agency or an 
office of a for-profit mortgage lending institution (other than a 
depository institution) that takes applications from the public for 
mortgage loans.
* * * * *
Corrections to FR Doc. 2013-16962
    In FR Doc. 2013-16962 appearing on page 44685 in the Federal 
Register on Wednesday July 24, 2013, the following correction is made:

Supplement I to Part 1026 [Corrected]

    1. On page 44725, in the second column, amendatory instruction 
11.A.i.b is corrected to read ``Under Paragraph 41(e)(4)(iii) Small 
servicer determination, paragraph 2 is amended and paragraph 3 is 
added.''

Section 1026.43--Minimum Standards for Transactions Secured by a 
Dwelling

* * * * *
    43(b) Definitions.
* * * * *
    43(b)(8) Mortgage-related obligations.
* * * * *
    4. Mortgage insurance, guarantee, or similar charges. Section 
1026.43(b)(8) includes in the evaluation of mortgage-related 
obligations premiums or charges protecting the creditor against the 
consumer's default or other credit loss. This includes all premiums 
or similar charges, whether denominated as mortgage insurance, 
guarantee, or otherwise, as determined according to applicable State 
or Federal law. For example, monthly ``private mortgage insurance'' 
payments paid to a non-governmental entity, annual ``guarantee fee'' 
payments required by a Federal housing program, and a quarterly 
``mortgage insurance'' payment paid to a State agency administering 
a housing program are all mortgage-related obligations for purposes 
of Sec.  1026.43(b)(8). Section 1026.43(b)(8) includes these charges 
in the definition of mortgage-related obligations if the creditor 
requires the consumer to pay them, even if the consumer is not 
legally obligated to pay the charges under the terms of the 
insurance program. For example, if a mortgage insurance program 
obligates the creditor to make recurring mortgage insurance 
payments, and the creditor requires the consumer to reimburse the 
creditor for such recurring payments, the consumer's payments are 
mortgage-related obligations for purposes of Sec.  1026.43(b)(8). 
However, if a mortgage insurance program obligates the creditor to 
make recurring mortgage insurance payments, and the creditor does 
not require the consumer to reimburse the creditor for the cost of 
the mortgage insurance payments, the recurring mortgage insurance 
payments are not mortgage-related obligations for purposes of Sec.  
1026.43(b)(8).
* * * * *
    43(c) Repayment ability.
* * * * *
    43(c)(3) Verification using third-party records.
* * * * *
    6. Verification of current debt obligations. Section 
1026.43(c)(3) does not require creditors to obtain additional 
records to verify the existence or amount of obligations shown on a 
consumer's credit report or listed on the consumer's application, 
absent circumstances described in comment 43(c)(3)-3. Under Sec.  
1026.43(c)(3)(iii), if a creditor relies on a consumer's credit 
report to verify a consumer's current debt obligations and the 
consumer's application lists a debt obligation not shown on the 
credit report, the creditor may consider the existence and amount of 
the obligation as it is stated on the consumer's application. The 
creditor is not required to further verify the existence or amount 
of the obligation, absent circumstances described in comment 
43(c)(3)-3.
* * * * *
    43(e) Qualified mortgages.
* * * * *
    43(e)(4) Qualified mortgage defined--special rules.
    1. Alternative definition. Subject to the sunset provided under 
Sec.  1026.43(e)(4)(iii), Sec.  1026.43(e)(4) provides an 
alternative definition of qualified mortgage to the definition 
provided in Sec.  1026.43(e)(2). To be a qualified mortgage under 
Sec.  1026.43(e)(4), the transaction must satisfy the requirements 
under Sec.  1026.43(e)(2)(i) through (iii), in addition to being one 
of the types of loans specified in Sec.  1026.43(e)(4)(ii)(A) 
through (E).
* * * * *
    Paragraph 43(e)(5).
* * * * *
    8. Transfer to another qualifying creditor. Under Sec.  
1026.43(e)(5)(ii)(B), a qualified mortgage under Sec.  1026.43(e)(5) 
may be sold, assigned, or otherwise transferred at any time to 
another creditor that meets the requirements of Sec.  
1026.43(e)(5)(i)(D). That section requires that a creditor, during 
the preceding calendar year, together with all affiliates, 
originated 500 or fewer first-lien covered transactions and had 
total assets less than $2 billion (as adjusted for inflation) at the 
end of the preceding calendar year. A qualified mortgage under Sec.  
1026.43(e)(5) transferred to a creditor that meets these criteria 
would retain its qualified mortgage status even if it is transferred 
less than three years after consummation.
* * * * *
    43(f) Balloon-Payment qualified mortgages made by certain 
creditors.
* * * * *
    Paragraph 43(f)(2)(iii).
    1. Supervisory sales. Section 1026.43(f)(2)(iii) facilitates 
sales that are deemed necessary by supervisory agencies to revive 
troubled creditors and resolve failed creditors. A balloon-payment 
qualified mortgage under Sec.  1026.43(f)(1) retains its qualified 
mortgage status if it is sold, assigned, or otherwise transferred to 
another person pursuant to: (1) A capital restoration plan or other 
action under 12 U.S.C. 1831o; (2) the actions or instructions of any 
person acting as conservator, receiver, or bankruptcy trustee; (3) 
an order of a State or Federal government agency with jurisdiction 
to examine the creditor pursuant to State or Federal law; or (4) an 
agreement between the creditor and such an agency. A balloon-payment 
qualified mortgage under Sec.  1026.43(f)(1) that is sold, assigned, 
or otherwise transferred under these circumstances retains its 
qualified mortgage status regardless of how long after consummation 
it is sold and regardless of the size or other characteristics of 
the transferee. Section 1026.43(f)(2)(iii) does not apply to 
transfers done to comply with a generally applicable regulation with 
future effect designed to implement, interpret, or prescribe law or 
policy in the absence of a specific order by or a specific agreement 
with a governmental agency described in Sec.  1026.43(f)(2)(iii) 
directing the sale of one or more qualified mortgages under Sec.  
1026.43(f)(1) held by the creditor or one of the other circumstances 
listed in Sec.  1026.43(f)(2)(iii). For example, a balloon-payment 
qualified mortgage under Sec.  1026.43(f)(1) that is sold pursuant 
to a capital restoration plan under 12 U.S.C. 1831o would retain its 
status as a qualified mortgage following the sale. However, if the 
creditor simply chose to sell the same qualified mortgage as one way 
to comply with general regulatory capital requirements in the 
absence of supervisory action or agreement the transaction would 
lose its status as a qualified mortgage following the

[[Page 60451]]

sale unless it qualifies under another definition of qualified 
mortgage.
* * * * *

    Dated: September 12, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-22752 Filed 9-19-13; 4:15 pm]
BILLING CODE 4810-AM-P