Amendments to the 2013 Mortgage Rules Under the Truth in Lending Act (Regulation Z), 25730-25753 [2014-10207]
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TABLE 4—DOCUMENTS RELEVANT TO THE ESBWR DESIGN CERTIFICATION RULE, FOR WHICH AN OPPORTUNITY FOR
PUBLIC COMMENT WAS PROVIDED IN THE ESBWR PROPOSED RULE—Continued
Document No.
Document title
Publicly
available
ADAMS
accession No.
Non-publicly
available
ADAMS
accession No.
Final Safety Evaluation Report .....................................
ESBWR Final Safety Evaluation Report, dated March
9, 2011.
ML103070392
(package)
N/A
List of Subjects in 10 CFR Part 52
Administrative practice and
procedure, Antitrust, Backfitting,
Combined license, Early site permit,
Emergency planning, Fees, Inspection,
Limited work authorization, Nuclear
power plants and reactors, Probabilistic
risk assessment, Prototype, Reactor
siting criteria, Redress of site, Reporting
and recordkeeping requirements,
Standard design, Standard design
certification, Incorporation by reference.
For the reasons set out in the
preamble and under the authority of the
Atomic Energy Act of 1954, as amended;
the Energy Reorganization Act of 1974,
as amended; and 5 U.S.C. 552 and 553,
the NRC is proposing to adopt the
following amendments to 10 CFR Part
52.
PART 52—LICENSES,
CERTIFICATIONS, AND APPROVALS
FOR NUCLEAR POWER PLANTS
1. The authority citation for 10 CFR
part 52 continues to read as follows:
■
Authority: Atomic Energy Act secs. 103,
104, 147, 149, 161, 181, 182, 183, 185, 186,
189, 223, 234 (42 U.S.C. 2133, 2201, 2167,
2169, 2232, 2233, 2235, 2236, 2239, 2282);
Energy Reorganization Act secs. 201, 202,
206, 211 (42 U.S.C. 5841, 5842, 5846, 5851);
Government Paperwork Elimination Act sec.
1704 (44 U.S.C. 3504 note); Energy Policy Act
of 2005, Pub. L. 109–58, 119 Stat. 594 (2005).
of the generic DCD from Jerald G. Head,
Senior Vice President, Regulatory Affairs,
GE-Hitachi Nuclear Energy, 3901 Castle
Hayne Road, MC A–18, Wilmington, NC
28401, telephone: 1–910–819–5692. You can
view the generic DCD online in the NRC
Library at https://www.nrc.gov/reading-rm/
adams.html. In ADAMS, search under
ADAMS Accession No. ML14104A929. If you
do not have access to ADAMS or if you have
problems accessing documents located in
ADAMS, contact the NRC’s Public Document
Room (PDR) reference staff at 1–800–397–
4209, 1–301–415–3747, or by email at
PDR.Resource@nrc.gov. The generic DCD can
also be viewed at the Federal rulemaking
Web site, https://www.regulations.gov, by
searching for documents filed under Docket
ID NRC–2010–0135. A copy of the DCD is
available for examination and copying at the
NRC’s PDR located at Room O–1F21, One
White Flint North, 11555 Rockville Pike,
Rockville, Maryland 20852. A copy also is
available for examination at the NRC Library
located at Two White Flint North, 11545
Rockville Pike, Rockville, Maryland 20852,
telephone: 301–415–5610, email:
Library.Resource@nrc.gov. All approved
material is available for inspection at the
National Archives and Records
Administration (NARA). For information on
the availability of this material at NARA, call
1–202–741–6030 or go to https://
www.archives.gov/federal-register/cfr/
ibrlocations.html.
*
*
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2. In appendix E to 10 CFR part 52,
as proposed to be added March 24, 2011
(76 FR 16549):
■ A. Revise paragraph III.A.
■ B. Add new paragraph VIII.B.6.b.(8).
The revision and addition read as
follows:
VIII. * * *
B. * * *
6. * * *
b. * * *
(8) Steam dryer pressure load analysis
methodology.
Appendix E to Part 52—Design
Certification Rule for the ESBWR
Design.
Dated at Rockville, Maryland, this 23rd day
of April, 2014.
For the Nuclear Regulatory Commission.
Mark A. Satorius,
Executive Director for Operations.
■
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III. Scope and Contents
A. Incorporation by reference approval. All
Tier 1, Tier 2 (including the availability
controls in Appendix 19ACM), and the
generic TS in the ESBWR DCD, Revision 10,
dated April 2014, ‘‘ESBWR Design Control
Document,’’ are approved for incorporation
by reference by the Director of the Office of
the Federal Register under 5 U.S.C. 552(a)
and 1 CFR part 51. You may obtain copies
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[FR Doc. 2014–10246 Filed 5–5–14; 8:45 am]
BILLING CODE 7590–01–P
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BUREAU OF CONSUMER FINANCIAL
PROTECTION
12 CFR Part 1026
[Docket No. CFPB–2014–0009]
RIN 3170–AA43
Amendments to the 2013 Mortgage
Rules Under the Truth in Lending Act
(Regulation Z)
Bureau of Consumer Financial
Protection.
ACTION: Proposed rule with request for
public comment.
AGENCY:
The Bureau of Consumer
Financial Protection (Bureau) proposes
amendments to certain mortgage rules
issued in 2013. The proposed rule
would provide an alternative small
servicer definition for nonprofit entities
that meet certain requirements, amend
the existing exemption from the abilityto-repay rule for nonprofit entities that
meet certain requirements, and provide
a limited cure mechanism for the points
and fees limit that applies to qualified
mortgages.
DATES: Comments regarding the
proposed amendments to 12 CFR
1026.41(e)(4), 1026.43(a)(3), and
1026.43(e)(3) must be received on or
before June 5, 2014. For the requests for
comment regarding correction or cure of
debt-to-income ratio overages and the
credit extension limit for the small
creditor definition, comments must be
received on or before July 7, 2014.
ADDRESSES: You may submit comments,
identified by Docket No. CFPB–2014–
0009 or RIN 3170–AA43, by any of the
following methods:
• Electronic: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Mail/Hand Delivery/Courier:
Monica Jackson, Office of the Executive
Secretary, Consumer Financial
Protection Bureau, 1700 G Street NW.,
Washington, DC 20552.
Instructions: All submissions should
include the agency name and docket
number or Regulatory Information
Number (RIN) for this rulemaking.
Because paper mail in the Washington,
SUMMARY:
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Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Proposed Rules
DC area and at the Bureau is subject to
delay, commenters are encouraged to
submit comments electronically. In
general, all comments received will be
posted without change to https://
www.regulations.gov. In addition,
comments will be available for public
inspection and copying at 1700 G Street
NW., Washington, DC 20552, on official
business days between the hours of 10
a.m. and 5 p.m. Eastern Time. You can
make an appointment to inspect the
documents by telephoning (202) 435–
7275.
All comments, including attachments
and other supporting materials, will
become part of the public record and
subject to public disclosure. Sensitive
personal information, such as account
numbers or social security numbers,
should not be included. Comments
generally will not be edited to remove
any identifying or contact information.
FOR FURTHER INFORMATION CONTACT:
Pedro De Oliveira, Counsel; William R.
Corbett, Nicholas Hluchyj, and Priscilla
Walton-Fein, Senior Counsels, Office of
Regulations, at (202) 435–7700.
SUPPLEMENTARY INFORMATION:
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I. Summary of Proposed Rule
In January 2013, the Bureau issued
several final rules concerning mortgage
markets in the United States (2013 Title
XIV Final Rules), pursuant to the DoddFrank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), Public
Law 111–203, 124 Stat. 1376 (2010).1
1 Specifically, on January 10, 2013, the Bureau
issued Escrow Requirements Under the Truth in
Lending Act (Regulation Z), 78 FR 4725 (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 6855 (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) (January 2013 ATR Final Rule). The
Bureau concurrently issued a proposal to amend the
January 2013 ATR Final Rule, which was finalized
on May 29, 2013. See 78 FR 6621 (Jan. 30, 2013)
(January 2013 ATR Proposal) and 78 FR 35429 (June
12, 2013) (May 2013 ATR Final Rule). 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 (Feb. 14, 2013)
(Regulation Z) and 78 FR 10695 (Feb. 14, 2013)
(Regulation X) (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 Valuations Final
Rule) and, jointly with other agencies, issued
Appraisals for Higher-Priced Mortgage Loans
(Regulation Z), 78 FR 10367 (Feb. 13, 2013) (2013
Interagency Appraisals Final Rule). On January 20,
2013, the Bureau issued the Loan Originator
Compensation Requirements under the Truth in
Lending Act (Regulation Z), 78 FR 11279 (Feb. 15,
2013) (2013 Loan Originator Final Rule).
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The Bureau clarified and revised those
rules through notice and comment
rulemaking during the summer and fall
of 2013. The purpose of those updates
was to address important questions
raised by industry, consumer groups, or
other stakeholders. The Bureau is now
proposing several additional
amendments to the 2013 Title XIV Final
Rules to revise regulatory provisions
and official interpretations primarily
relating to the Regulation Z ability-torepay/qualified mortgage requirements
and servicing rules, as well as seeking
comment on additional issues. The
Bureau expects to issue additional
proposals to address other topics
relating to the 2013 Title XIV Final
Rules, such as the definition of ‘‘rural
and underserved’’ for purposes of
certain mortgage provisions affecting
small creditors as discussed further
below.
Specifically, the Bureau is proposing
three amendments to the 2013 Title XIV
Final Rules:
• To provide an alternative definition
of the term ‘‘small servicer,’’ that would
apply to certain nonprofit entities that
service for a fee loans on behalf of other
nonprofit chapters of the same
organization. Although the Bureau is
proposing this change in Regulation Z,
the change will also affect several
provisions of Regulation X, which crossreference the Regulation Z small
servicer exemption.
• To amend the Regulation Z abilityto-repay requirements to provide that
certain interest-free, contingent
subordinate liens originated by
nonprofit creditors will not be counted
towards the credit extension limit that
applies to the nonprofit exemption from
the ability-to-repay requirements.
• To provide a limited, postconsummation cure mechanism for
loans that are originated with the good
faith expectation of qualified mortgage
status but that actually exceed the
points and fees limit for qualified
mortgages.
In addition to providing specific
proposals on these issues, the Bureau is
seeking comment on two additional
topics:
• Whether and how to provide a
limited, post-consummation cure or
correction provision for loans that are
originated with the good faith
expectation of qualified mortgage status
but that actually exceed the 43-percent
debt-to-income ratio limit that applies to
certain qualified mortgages.
• Feedback and data from smaller
creditors regarding implementation of
certain provisions in the 2013 Title XIV
Final Rules that are tailored to account
for small creditor operations and how
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their origination activities have changed
in light of the new rules.
II. Background
A. Title XIV Rulemakings Under the
Dodd-Frank Act
In response to an unprecedented cycle
of expansion and contraction in the
mortgage market that sparked the most
severe U.S. recession since the Great
Depression, Congress passed the DoddFrank Act, which was signed into law
on July 21, 2010. In the Dodd-Frank Act,
Congress established the Bureau and
generally consolidated the rulemaking
authority for Federal consumer financial
laws, including the Truth in Lending
Act (TILA) and the Real Estate
Settlement Procedures Act (RESPA), in
the Bureau.2 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.3 Under the
statute, most of these new requirements
would have taken effect automatically
on January 21, 2013, if the Bureau had
not issued implementing regulations by
that date.4 To avoid uncertainty and
potential disruption in the national
mortgage market at a time of economic
vulnerability, the Bureau issued several
final rules in a span of less than two
weeks in January 2013 to implement
these new statutory provisions and
provide for an orderly transition.
On January 10, 2013, the Bureau
issued the 2013 Escrows Final Rule, the
January 2013 ATR Final Rule, and the
2013 HOEPA Final Rule. 78 FR 4725
(Jan. 22, 2013); 78 FR 6407 (Jan. 30,
2013); 78 FR 6855 (Jan. 31, 2013). On
January 17, 2013, the Bureau issued the
2013 Mortgage Servicing Final Rules. 78
FR 10695 (Feb. 14, 2013); 78 FR 10901
(Feb. 14, 2013). On January 18, 2013, the
Bureau issued the 2013 ECOA
Valuations Final Rule and, jointly with
2 See, e.g., sections 1011 and 1021 of the DoddFrank Act, 12 U.S.C. 5491 and 5511 (establishing
and setting forth the purpose, objectives, and
functions of the Bureau); section 1061 of the DoddFrank Act, 12 U.S.C. 5581 (consolidating certain
rulemaking authority for Federal consumer
financial laws in the Bureau); section 1100A of the
Dodd-Frank Act (codified in scattered sections of 15
U.S.C.) (similarly consolidating certain rulemaking
authority in the Bureau). But see Section 1029 of
the Dodd-Frank Act, 12 U.S.C. 5519 (subject to
certain exceptions, excluding from the Bureau’s
authority 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).
3 See title XIV of the Dodd-Frank Act, Public Law
111–203, 124 Stat. 1376 (2010) (codified in
scattered sections of 12 U.S.C., 15 U.S.C., and 42
U.S.C.).
4 See section 1400(c) of the Dodd-Frank Act, 15
U.S.C. 1601 note.
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other agencies, the 2013 Interagency
Appraisals Final Rule. 78 FR 7215 (Jan.
31, 2013); 78 FR 10367 (Feb. 13, 2013).
On January 20, 2013, the Bureau issued
the 2013 Loan Originator Final Rule. 78
FR 11279 (Feb. 15, 2013).5 Pursuant to
the Dodd-Frank Act, which permitted a
maximum of one year for
implementation, most of these rules
became effective on January 10, 2014.
Concurrent with the January 2013
ATR Final Rule, on January 10, 2013,
the Bureau issued proposed
amendments to the rule (i.e., the January
2013 ATR Proposal), which the Bureau
finalized on May 29, 2013 (i.e., the May
2013 ATR Final Rule). 78 FR 6621 (Jan.
30, 2013); 78 FR 35429 (June 12, 2013).
The Bureau issued additional
corrections and clarifications to the
2013 Mortgage Servicing Final Rules
and the May 2013 ATR Final Rule in the
summer and fall of 2013.6
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B. Implementation Plan for New
Mortgage Rules
On February 13, 2013, the Bureau
announced an initiative to support
implementation of its new mortgage
rules (the Implementation Plan),7 under
which the Bureau would work with the
mortgage industry and other
stakeholders to ensure that the new
rules could be implemented accurately
and expeditiously. The Implementation
Plan included: (1) Coordination with
other agencies, including the
development of 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.
This proposal concerns additional
revisions to the new rules. The purpose
of these updates is to address important
questions raised by industry, consumer
5 Each of these rules was published in the Federal
Register shortly after issuance.
6 78 FR 44685 (July 24, 2013) (clarifying which
mortgages to consider in determining small servicer
status and the application of the small servicer
exemption with regard to servicer/affiliate and
master servicer/subservicer relationships); 78 FR
45842 (July 30, 2013); 78 FR 60381 (Oct. 1, 2013)
(revising exceptions available to small creditors
operating predominantly in ‘‘rural’’ or
‘‘underserved’’ areas); 78 FR 62993 (Oct. 23, 2013)
(clarifying proper compliance regarding servicing
requirements when a consumer is in bankruptcy or
sends a cease communication request under the
Fair Debt Collection Practice Act).
7 Press Release, Consumer Financial Protection
Bureau, Consumer Financial Protection Bureau
Lays Out Implementation Plan for New Mortgage
Rules (Feb. 13, 2013), available at https://
www.consumerfinance.gov/newsroom/consumerfinancial-protection-bureau-lays-outimplementation-plan-for-new-mortgage-rules/.
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groups, or other stakeholders. As
discussed below, the Bureau
contemplates issuing additional updates
on additional topics.
III. Legal Authority
The Bureau is issuing this proposed
rule pursuant to its authority under
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 (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. Section 1061 of the DoddFrank Act also transferred to the Bureau
all of the Department of Housing and
Urban Development’s (HUD) consumer
protection functions relating to RESPA.
Title X of the Dodd-Frank Act,
including section 1061 of the DoddFrank Act, along with TILA, RESPA,
and certain subtitles and provisions of
title XIV of the Dodd-Frank Act, are
Federal consumer financial laws.8
A. TILA
Section 105(a) of TILA authorizes the
Bureau to prescribe regulations to carry
out the purposes of TILA. 15 U.S.C.
1604(a). 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
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
8 Dodd-Frank Act section 1002(14), 12 U.S.C.
5481(14) (defining ‘‘Federal consumer financial
law’’ to include the ‘‘enumerated consumer laws,’’
the provisions of title X of the Dodd-Frank Act, and
the laws for which authorities are transferred under
title X subtitles F and H 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), 12
U.S.C. 5481(12) note (defining ‘‘enumerated
consumer laws’’ to include certain subtitles and
provisions of Dodd-Frank Act title XIV); DoddFrank Act section 1061(b)(7), 12 U.S.C. 5581(b)(7)
(transferring to the Bureau all of HUD’s consumer
protection functions relating to RESPA).
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section 102(a), 15 U.S.C. 1601(a). In
particular, it is a purpose of TILA
section 129C, as added by the DoddFrank Act, to assure that consumers are
offered and receive residential mortgage
loans on terms that reasonably reflect
their ability to repay the loans and that
are understandable and not unfair,
deceptive, and abusive. 15 U.S.C.
1639b(a)(2).
Section 105(f) of TILA authorizes the
Bureau to exempt from all or part of
TILA a 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. 15 U.S.C.
1604(f)(1). That determination must
consider:
• The loan amount and whether
TILA’s provisions ‘‘provide a benefit to
the consumers who are parties to such
transactions’’;
• The extent to which TILA
requirements ‘‘complicate, hinder, or
make more expensive the credit
process’’;
• The borrowers’ ‘‘status,’’ including
their ‘‘related financial arrangements,’’
their financial sophistication relative to
the type of transaction, and the
importance to the borrowers of the
credit, related supporting property, and
TILA coverage;
• Whether the loan is secured by the
consumer’s principal residence; and
• Whether consumer protection
would be undermined by such an
exemption. 15 U.S.C. 1604(f)(2).
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; necessary
and appropriate to effectuate the
purposes of the ability-to-repay and
residential mortgage loan origination
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 such purposes.
15 U.S.C. 1639c(b)(3)(A).
B. RESPA
Section 19(a) of RESPA 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
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achieve the purposes of RESPA, which
include RESPA’s consumer protection
purposes. 12 U.S.C. 2617(a). In addition,
section 6(j)(3) of RESPA authorizes the
Bureau to establish any requirements
necessary to carry out section 6 of
RESPA, and section 6(k)(1)(E) of RESPA
authorizes the Bureau to prescribe
regulations that are appropriate to carry
out RESPA’s consumer protection
purposes. 12 U.S.C. 2605(j)(3) and
(k)(1)(E). The consumer protection
purposes of RESPA include responding
to borrower requests and complaints in
a timely manner, maintaining and
providing accurate information, helping
borrowers avoid unwarranted or
unnecessary costs and fees, and
facilitating review for foreclosure
avoidance options.
C. The Dodd-Frank Act
Section 1405(b) of the Dodd-Frank
Act provides that, ‘‘in order to improve
consumer awareness and understanding
of transactions involving residential
mortgage loans through the use of
disclosures,’’ the Bureau may exempt
from disclosure requirements, ‘‘in whole
or in part . . . any class of residential
mortgage loans’’ if the Bureau
determines that such exemption ‘‘is in
the interest of consumers and in the
public interest.’’ 15 U.S.C. 1601 note.9
Notably, the authority granted by
section 1405(b) applies to ‘‘disclosure
requirements’’ generally, and is not
limited to a specific statute or statutes.
Accordingly, Dodd-Frank Act section
1405(b) is a broad source of authority for
exemptions from the disclosure
requirements of TILA and RESPA.
Moreover, 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).
Accordingly, the Bureau is exercising its
authority under Dodd-Frank Act section
1022(b) to propose rules that carry out
the purposes and objectives of TILA,
RESPA, title X of the Dodd-Frank Act,
and certain enumerated subtitles and
provisions of title XIV of the DoddFrank Act, and to prevent evasion of
those laws.
The Bureau is proposing to amend
rules that implement certain DoddFrank Act provisions. In particular, the
9 ‘‘Residential mortgage loan’’ is generally defined
as any consumer credit transaction (other than
open-end credit plans) that is secured by a mortgage
(or equivalent security interest) on ‘‘a dwelling or
on residential real property that includes a
dwelling’’ (except, in certain instances, timeshare
plans). 15 U.S.C. 1602(cc)(5).
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Bureau is proposing to amend
provisions of Regulation Z (and, by
reference, Regulation X) adopted by the
2013 Mortgage Servicing Final Rules
(including July 2013 amendments
thereto), the January 2013 ATR Final
Rule, and the May 2013 ATR Final Rule.
IV. Proposed Effective Date
The Bureau proposes that all of the
changes proposed herein take effect
thirty days after publication of a final
rule in the Federal Register. The
proposed changes would expand
exemptions and provide relief from
regulatory requirements; therefore the
Bureau believes an effective date of 30
days after publication may be
appropriate. The Bureau seeks comment
on whether the proposed effective date
is appropriate, or whether the Bureau
should adopt an alternative effective
date.
V. Section-by-Section Analysis
Section 1026.41 Periodic Statements
for Residential Mortgage Loans
41(e)
Exemptions
41(e)(4) Small Servicers
The Bureau is proposing to revise the
scope of the exemption for small
servicers that is set forth in § 1026.41 of
Regulation Z and incorporated by crossreference in certain provisions of
Regulation X. The proposal would add
an alternative definition of small
servicer which would apply to certain
nonprofit entities that service for a fee
only loans for which the servicer or an
associated nonprofit entity is the
creditor.
The Bureau’s 2013 Mortgage Servicing
Final Rules exempt small servicers from
certain mortgage servicing requirements.
Specifically, Regulation Z exempts
small servicers, defined in
§ 1026.41(e)(4)(ii), from the requirement
to provide periodic statements for
residential mortgage loans.10 Regulation
X incorporates this same definition by
reference to § 1026.41(e)(4) and thereby
exempts small servicers from: (1)
Certain requirements relating to
obtaining force-placed insurance,11 (2)
the general servicing policies,
procedures, and requirements,12 and (3)
10 12 CFR 1026.41(e) (requiring delivery each
billing cycle of a periodic statement, with specific
content and form). For loans serviced by a small
servicer, a creditor or assignee is also exempt from
the Regulation Z periodic statement requirements.
12 CFR 1026.41(e)(4)(i).
11 12 CFR 1024.17(k)(5) (prohibiting purchase of
force-placed insurance in certain circumstances).
12 12 CFR 1024.30(b)(1) (exempting small
servicers from §§ 1024.38 through 41, except as
otherwise provided under 41(j), as discussed in
note 13, infra). Sections 1024.38 through 40
respectively impose general servicing policies,
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certain requirements and restrictions
relating to communicating with
borrowers about, and evaluation of
applications for, loss mitigation
options.13
Current § 1026.41(e)(4)(ii) defines the
term ‘‘small servicer’’ as a servicer that
either: (A) Services, together with any
affiliates, 5,000 or fewer mortgage loans,
for all of which the servicer (or an
affiliate) is the creditor or assignee; or
(B) is a Housing Finance Agency, as
defined in 24 CFR 266.5. ‘‘Affiliate’’ is
defined in § 1026.32(b)(5) as any
company that controls, is controlled by,
or is under common control with
another company, as set forth in the
Bank Holding Company Act of 1956, 12
U.S.C. 1841 et seq. (BHCA).14
Generally, under
§ 1026.41(e)(4)(ii)(A), a servicer cannot
be a small servicer if it services any loan
for which the servicer or its affiliate is
not the creditor or assignee. However,
current § 1026.41(e)(4)(iii) excludes
from consideration certain types of
mortgage loans for purposes of
determining whether a servicer qualifies
as a small servicer: (A) Mortgage loans
voluntarily serviced by the servicer for
a creditor or assignee that is not an
affiliate of the servicer and for which
the servicer does not receive any
compensation or fees; (B) reverse
mortgage transactions; and (C) mortgage
loans secured by consumers’ interests in
timeshare plans. In the 2013 Mortgage
Servicing Final Rules, the Bureau
concluded that a separate exemption for
nonprofits was not necessary because
the Bureau believed that nonprofits
would likely fall within the small
servicer exemption. See 78 FR 10695,
10720 (Feb. 14, 2013).
As part of the Bureau’s
Implementation Plan, the Bureau has
learned that certain nonprofit entities
may, for a fee, service loans for another
nonprofit entity that is the creditor on
procedures, and requirements; early intervention
requirements for delinquent borrowers; and policies
and procedures to maintain continuity of contact
with delinquent borrowers).
13 See 12 CFR 1024.41 (loss mitigation
procedures). Though exempt from most of the rule,
small servicers are subject to the prohibition of
foreclosure referral before the loan obligation is
more than 120 days delinquent and may not make
the first notice or filing for foreclosure if a borrower
is performing pursuant to the terms of an agreement
on a loss mitigation option. 12 CFR 1024.41(j).
14 Under the BHCA, a company has ‘‘control’’
over another company if it (i) ‘‘directly or indirectly
. . . owns, controls, or has power to vote 25 per
centum or more of any class of voting securities’’
of the other company; (ii) ‘‘controls . . . the election
of a majority of the directors or trustees’’ of the
other company; or (iii) ‘‘directly or indirectly
exercises a controlling influence over the
management or policies’’ of the other company
(based on a determination by the Board). 12 U.S.C.
1841(a)(2).
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the loan. The Bureau understands that,
in some cases, these nonprofit entities
are part of a larger association of
nonprofits that are separately
incorporated but operate under mutual
contractual obligations to serve the same
charitable mission, and that use a
common name, trademark, or
servicemark. These entities likely do not
meet the definition of ‘‘affiliate’’ under
the BHCA due to the limits imposed on
nonprofits with respect to ownership
and control. Accordingly, these
nonprofits likely do not qualify for the
small servicer exemption because they
service, for a fee, loans on behalf of an
entity that is not an affiliate as defined
under the BHCA (and because the
servicer is neither the creditor for, nor
an assignee of, those loans).
The Bureau understands that groups
of nonprofit entities that are associated
with one another may consolidate
servicing activities to achieve
economies of scale necessary to service
loans cost-effectively, and that such
costs savings may reduce the cost of
credit or enable the nonprofit to extend
a greater number of loans overall.
However, because of their corporate
structures, such groups of nonprofit
entities have a more difficult time than
related for-profit servicers qualifying for
the small servicer exemption. For the
reasons discussed below, the Bureau
believes that the ability of such
nonprofit entities to consolidate
servicing activities may be beneficial to
consumers—e.g., to the extent servicing
cost savings are passed on to consumers
and/or lead to increased credit
availability—and may outweigh the
consumer protections provided by the
servicing rules to those consumers
affected by this proposal.
Accordingly, the Bureau is proposing
an alternative definition of small
servicer that would apply to nonprofit
entities that service loans on behalf of
other nonprofits within a common
network or group of nonprofit entities.
Specifically, proposed
§ 1026.41(e)(4)(ii)(C) provides that a
small servicer is a nonprofit entity that
services 5,000 or fewer mortgage loans,
including any mortgage loans serviced
on behalf of associated nonprofit
entities, for all of which the servicer or
an associated nonprofit entity is the
creditor. Proposed
§ 1026.41(e)(4)(ii)(C)(1) provides that,
for purposes of proposed
§ 1026.41(e)(4)(ii)(C), the term
‘‘nonprofit entity’’ means an entity
having a tax exemption ruling or
determination letter from the Internal
Revenue Service under section 501(c)(3)
of the Internal Revenue Code of 1986.
See 26 U.S.C. 501(c)(3); 26 CFR
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1.501(c)(3)–1. Proposed
§ 1026.41(e)(4)(ii)(C)(2) defines
‘‘associated nonprofit entities’’ to mean
nonprofit entities that by agreement
operate using a common name,
trademark, or servicemark to further and
support a common charitable mission or
purpose.
The Bureau is also proposing
technical changes to § 1026.41(e)(4)(iii),
which addresses the timing of the small
servicer determination and also
excludes certain loans from the 5,000loan limitation. The proposed changes
would add language to the existing
timing requirement to limit its
application to the small servicer
determination for purposes of
§ 1026.41(e)(4)(ii)(A) and insert a
separate timing requirement for
purposes of determining whether a
nonprofit servicer is a small servicer
pursuant to § 1026.41(e)(4)(ii)(C).
Specifically, that requirement would
provide that the servicer is evaluated
based on the mortgage loans serviced by
the servicer as of January 1 and for the
remainder of the calendar year.
The Bureau is proposing technical
changes to comment 41(e)(4)(ii)–2 in
light of proposed § 1026.41(e)(4)(ii)(C).
In addition, the Bureau is proposing to
add a comment to parallel existing
comment 41(e)(4)(ii)–2 (that addresses
the requirements to be a small servicer
under the existing definition in
§ 1026.41(e)(4)(ii)(A)). Specifically, new
comment 41(e)(4)(ii)–4 would clarify
that there are two elements to satisfying
the nonprofit small creditor definition
in proposed § 1026.41(e)(4)(ii)(C). First,
the comment would clarify that a
nonprofit entity must service 5,000 or
fewer mortgage loans, including any
mortgage loans serviced on behalf of
associated nonprofit entities. For each
associated nonprofit entity, the small
servicer determination is made
separately without consideration of the
number of loans serviced by another
associated nonprofit entity. Second, the
comment would further explain that the
nonprofit entity must service only
mortgage loans for which the servicer
(or an associated nonprofit entity) is the
creditor. To be the creditor, the servicer
(or an associated nonprofit entity) must
have been the entity to which the
mortgage loan obligation was initially
payable (that is, the originator of the
mortgage loan). The comment would
explain that a nonprofit entity is not a
small servicer under
§ 1026.41(e)(4)(ii)(C) if it services any
mortgage loans for which the servicer or
an associated nonprofit entity is not the
creditor (that is, for which the servicer
or an associated nonprofit entity was
not the originator). The comment would
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provide two examples to demonstrate
the application of the small servicer
definition under § 1026.41(e)(4)(ii)(C).
The Bureau is also proposing to revise
existing comment 41(e)(4)(iii)–3 to
specify that it explains the application
of § 1026.41(e)(4)(iii) to the small
servicer determination under
§ 1026.41(e)(4)(ii)(A) specifically. As
revised, comment 41(e)(4)(iii)–3 would
explain that mortgage loans that are not
considered pursuant to
§ 1026.41(e)(4)(iii) for purposes of the
small servicer determination under
§ 1026.41(e)(4)(ii)(A) are not considered
either for determining whether a
servicer (together with any affiliates)
services 5,000 or fewer mortgage loans
or whether a servicer is servicing only
mortgage loans that it (or an affiliate)
owns or originated. The proposal would
also make clarifying changes to the
example provided in comment
41(e)(4)(iii)–3 and would move language
in existing comment 41(e)(4)(iii)–3
regarding the limited role of voluntarily
serviced mortgage loans to new
proposed comment 41(e)(4)(iii)–5. The
Bureau is also proposing technical
changes to comment 41(e)(4)(iii)–2 in
light of proposed § 1026.41(e)(4)(ii)(C).
In addition, the Bureau is proposing
a new comment 41(e)(4)(iii)–4 to
explain the application of
§ 1026.41(e)(4)(iii) to the nonprofit small
servicer determination under proposed
§ 1026.41(e)(4)(ii)(C) specifically. The
proposed comment would explain that
mortgage loans that are not considered
pursuant to § 1026.41(e)(4)(iii) for
purposes of the small servicer
determination under
§ 1026.41(e)(4)(ii)(C) are not considered
either for determining whether a
nonprofit entity services 5,000 or fewer
mortgage loans, including any mortgage
loans serviced on behalf of associated
nonprofit entities, or whether a
nonprofit entity is servicing only
mortgage loans that it or an associated
nonprofit entity originated. The
comment would provide an example of
a nonprofit entity that services 5,400
mortgage loans. Of these mortgage loans,
it originated 2,800 mortgage loans and
associated nonprofit entities originated
2,000 mortgage loans. The nonprofit
entity receives compensation for
servicing the loans originated by
associated nonprofits. The nonprofit
entity also voluntarily services 600
mortgage loans that were originated by
an entity that is not an associated
nonprofit entity, and receives no
compensation or fees for servicing these
loans. The voluntarily serviced
mortgage loans are not considered in
determining whether the servicer
qualifies as a small servicer. Thus,
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because only the 4,800 mortgage loans
originated by the nonprofit entity or
associated nonprofit entities are
considered in determining whether the
servicer qualifies as a small servicer, the
servicer qualifies for the small servicer
exemption pursuant to
§ 1026.41(e)(4)(ii)(C) with regard to all
5,400 mortgage loans it services.
The Bureau believes that nonprofit
entities are an important source of
credit, particularly for low- and
moderate-income consumers. The
Bureau understands that nonprofit
entities, while they may operate under
a common name, trademark, or
servicemark, are not typically structured
to meet the definition of affiliate under
the BHCA. However, nonprofit entities
derive less revenue than other creditors
or servicers from their lending activities,
and therefore the Bureau believes
associated nonprofit entities may seek to
coordinate activities—including loan
servicing—as a means of achieving
economies of scale.
Under the existing rule, a servicer
qualifies for the small servicer
exemption if it services for a fee a loan
for which another entity is the creditor
or assignee, so long as both entities are
affiliates under the BHCA and the
servicer and its affiliates together
service 5,000 or fewer mortgage loans.
Since nonprofit entities are not typically
structured to meet the definition of
affiliate under the BHCA, a nonprofit
entity that services, for a fee, even a
single loan of an associated nonprofit
entity likely would not qualify as a
small servicer under the current rule.
The Bureau is proposing an alternative
small servicer definition for nonprofits
to permit associated nonprofit entities to
enter into the type of servicing
arrangements, such as consolidation of
servicing activities, that are available to
affiliates under the current rule.
The limitation in the current rule to
BHCA affiliates may discourage
consolidation of servicing among
associated nonprofits, even though such
consolidation may benefit consumers by
increasing access to credit and reducing
the cost of credit for low- and moderateincome consumers for whom nonprofits
are an important source of credit. In
addition, consolidating servicing in one
entity within the associated nonprofit
structure may enhance the nonprofit’s
ability to promptly credit payments,
administer escrow account obligations,
or handle error requests or other
requirements under Regulations X and
Z, which are applicable regardless of
small servicer status. In addition,
though small servicers are exempt from
the requirements of §§ 1024.38 through
1024.40, as well as most of the loss
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mitigation provisions under § 1024.41,
the Bureau believes that delinquent
borrowers may nonetheless benefit from
consolidated nonprofit servicers’
enhanced ability to devote trained staff
to their situation.
The Bureau is concerned that if
nonprofit servicers are subject to all of
the servicing rules, low- and moderateincome consumers may face increased
costs or reduced access to credit.
Although the Bureau believes the
servicing rules provide important
protections for consumers, the Bureau is
concerned that these protections may
not outweigh the risk of reduction in
credit access for low- and moderateincome consumers served by nonprofit
entities that qualify for the proposed
§ 1026.41(e)(4)(ii)(C) exemption.
Furthermore, the Bureau believes these
nonprofit entities, because of their scale
and community-focused lending
programs, already have incentives to
provide high levels of customer contact
and information—incentives that
warrant exempting those servicers from
complying with the periodic statement
requirements under Regulation Z and
certain requirements of Regulation X
discussed above.
The Bureau has narrowly tailored the
proposed small servicer definition for
nonprofits to prevent evasion of the
servicing rules. For example, the
proposed definition contains
restrictions on nonprofits and requires
that a substantial relationship exist
among the associated nonprofits to
qualify for the exemption. As noted
above, the definition would be limited
to groups of nonprofits that share a
common name, trademark, or
servicemark to further and support a
common charitable mission or purpose.
The Bureau believes that requiring such
commonality reduces the risk that the
small servicer definition will be used to
circumvent the servicing rules.
However, the Bureau seeks comment on
whether the proposed definition of
‘‘associated nonprofit entities’’ is
appropriate.
The Bureau has further limited the
scope of the proposed nonprofit small
servicer definition to entities designated
with an exemption under 501(c)(3) of
the Internal Revenue Code. As the
Bureau noted in the January 2013 ATR
Proposal, the Bureau believes that
501(c)(3)-designated entities face
particular constraints on resources that
other tax-exempt organizations may not.
See 78 FR 6621, 6644–45 (Jan. 30, 2013).
As a result, these entities may have
fewer resources to comply with
additional rules. In addition, tax-exempt
status under section 501(c)(3) requires a
formal determination by the
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25735
government, in contrast to other types of
tax-exempt status. Accordingly, limiting
the proposed nonprofit small servicer
provision to those entities with IRS tax
exempt determinations for wholly
charitable organizations may help to
ensure that the nonprofit small servicer
status is not used to evade the servicing
rules. However, the Bureau solicits
comment on whether limitation of the
definition of ‘‘nonprofit entity’’ for
purposes of § 1026.41(e)(4)(ii)(C) to
entities with a tax exemption ruling or
determination letter from the Internal
Revenue Service under section 501(c)(3)
of the Internal Revenue Code is
appropriate. The Bureau also seeks
comment on whether it is appropriate to
include additional criteria regarding the
nonprofit entity’s activities or the loans’
features or purposes, such as those in
the nonprofit exemption from the ability
to repay requirements in
§ 1026.43(a)(3)(v)(D) or in other
statutory or regulatory schemes.
As noted above, the proposed
alternative small servicer definition in
§ 1026.41(e)(4)(ii)(C) would apply to
nonprofit entities that service 5,000 or
fewer mortgage loans. The Bureau
believes that it is necessary, in general,
to limit the number of loans serviced by
small servicers to prevent evasion of the
servicing rules and because the Bureau
believes that entities servicing more
than 5,000 mortgage loans are of a
sufficient size to comply with the full
set of servicing rules. However, the
proposed rule would apply that loan
limitation to associated nonprofit
entities differently than to affiliates.
Specifically, the definition of small
servicer in § 1026.41(e)(4)(ii)(A) counts
towards the 5,000-loan limitation all
loans serviced by the servicer together
with all loans serviced by any affiliates.
In contrast, the proposed rule for
nonprofit entities would count towards
the 5,000-loan limitation only the loans
serviced by a given nonprofit entity
(including loans it services on behalf of
associated nonprofit entities), and
would not consider loans serviced by
associated nonprofit entities. As noted
above, the Bureau is concerned that
small servicers generally lack the ability
to cost-effectively comply with the full
set of servicing rules, a concern that is
heightened in the context of nonprofit
small servicers which derive less
revenue than other creditors or servicers
from their lending activities. Some
nonprofits may consolidate servicing
activities to achieve economies of scale
across associated nonprofits. However,
the Bureau is also concerned that other
nonprofits may be structured differently
and that for these nonprofit entities
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maintaining servicing at the individual
nonprofit level may be more
appropriate. For this reason, the Bureau
does not believe it is appropriate to
consider all loans serviced across the
associated nonprofit enterprise towards
the 5,000-loan limitation. The Bureau
seeks comment on whether it is
appropriate to count only loans serviced
by a single nonprofit or whether the
small servicer determination should be
made based upon all loans serviced
among a group of associated nonprofits.
The proposed exemption would also
apply only to a nonprofit entity that
services loans for which it or an
associated nonprofit entity is the
creditor. In contrast with the exemption
under § 1026.41(e)(4)(ii)(A), the
proposed exemption would not apply to
a nonprofit entity that services loans for
which it or an associated nonprofit
entity is the assignee of the loans being
serviced. The Bureau believes that
nonprofit entities typically do not
service loans for which an entity other
than that nonprofit entity or an
associated nonprofit is the creditor, nor
does the Bureau believe that nonprofit
entities typically take an assignment of
a loan originated by an entity other than
an associated nonprofit entity. Further,
the Bureau is concerned that a rule that
permits a nonprofit servicer to service
for a fee loans that were originated by
someone other than itself or an
associated nonprofit entity while
retaining the benefit of the exemption
could be used to evade the servicing
rules, particularly since the proposed
rule would not consider loans serviced
by associated nonprofit entities as
counting towards the 5,000-loan limit.
The Bureau seeks comment on whether
limiting the exemption to loans for
which the servicer or an associated
nonprofit entity is the creditor is
appropriate.
Legal Authority
The Bureau is proposing to exempt
nonprofit small servicers from the
periodic statement requirement under
TILA section 128(f) pursuant to its
authority under TILA section 105(a) and
(f), and Dodd-Frank Act section 1405(b).
For the reasons discussed above, the
Bureau believes the proposed
exemption is necessary and proper
under TILA section 105(a) to facilitate
TILA compliance. The purpose of the
periodic statement requirement is to
ensure that consumers receive ongoing
customer contact and account
information. As discussed above, the
Bureau believes that nonprofit entities
that qualify for the exemption have
incentives to provide ongoing consumer
contact and account information that
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would exist absent a regulatory
requirement to do so. The Bureau also
believes that such nonprofits may
consolidate servicing functions in an
associated nonprofit entity to costeffectively provide this high level of
customer contact and otherwise comply
with applicable regulatory
requirements. As described above, the
Bureau is concerned that the current
rule may discourage consolidation of
servicing functions. As a result, the
current rule may result in nonprofits
being unable to provide high-contact
servicing or to comply with other
applicable regulatory requirements due
to the costs that would be imposed on
each individual servicer. Accordingly,
the Bureau believes the proposed
nonprofit small servicer definition
facilitates compliance with TILA by
allowing nonprofit small servicers to
consolidate servicing functions, without
losing status as a small servicer, in order
to cost-effectively service loans in
compliance with applicable regulatory
requirements.
In addition, consistent with TILA
section 105(f) and in light of the factors
in that provision, for a nonprofit entity
servicing 5,000 or fewer loans,
including those serviced on behalf of
associated nonprofits, all of which that
servicer or an associated nonprofit
originated, the Bureau believes that
requiring them to comply with the
periodic statement requirement in TILA
section 128(f) would not provide a
meaningful benefit to consumers in the
form of useful information or protection.
The Bureau believes, as noted above,
that these nonprofit servicers have
incentives to provide consumers with
necessary information, and that
requiring provision of periodic
statements would impose significant
costs and burden. Specifically, the
Bureau believes that the proposal will
not complicate, hinder, or make more
expensive the credit process—and is
proper without regard to the amount of
the loan, to the status of the consumer
(including related financial
arrangements, financial sophistication,
and the importance to the consumer of
the loan or related supporting property),
or to whether the loan is secured by the
principal residence of the consumer. In
addition, consistent with Dodd-Frank
Act section 1405(b), for the reasons
discussed above, the Bureau believes
that exempting nonprofit small servicers
from the requirements of TILA section
128(f) would be in the interest of
consumers and in the public interest.
As noted above, current Regulation X
cross-references the definition of small
servicer in § 1026.41(e)(4) for the
purpose of exempting small servicers
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from several mortgage servicing
requirements. Accordingly, in proposing
to amend that definition, the Bureau is
also proposing to amend the current
Regulation X exemptions for small
servicers. For this purpose, the Bureau
is relying on the same authorities on
which it relied in promulgating the
current Regulation X small servicer
exemptions. Specifically, the Bureau is
proposing to exempt nonprofit small
servicers from the requirements of
Regulation X §§ 1024.38 through 41,
except as otherwise provided in
§ 1024.41(j), see § 1024.30(b)(1), as well
as certain requirements of
§ 1024.17(k)(5), pursuant to its authority
under section 19(a) of RESPA to grant
such reasonable exemptions for classes
of transactions as may be necessary to
achieve the consumer protection
purposes of RESPA. The consumer
protection purposes of RESPA include
helping borrowers avoid unwarranted or
unnecessary costs and fees. The Bureau
believes that the proposed rule would
ensure consumers avoid unwarranted
and unnecessary costs and fees by
encouraging nonprofit small servicers to
consolidate servicing functions.
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 purposes and objectives of
Title X of the Dodd-Frank Act.
Specifically, the Bureau believes that
the proposed rule is necessary and
appropriate to carry out the purpose
under section 1021(a) of the Dodd-Frank
Act of ensuring that all consumers have
access to markets for consumer financial
products and services that are fair,
transparent, and competitive, and the
objective under section 1021(b) of the
Dodd-Frank Act of ensuring that
markets for consumer financial products
and services operate transparently and
efficiently to facilitate access and
innovation.
With respect to §§ 1024.17(k)(5), 39,
and 41 (except as otherwise provided in
§ 1024.41(j)), the Bureau is also
proposing the nonprofit small servicer
definition pursuant to its authority in
section 6(j)(3) of RESPA to set forth
requirements necessary to carry out
section 6 of RESPA and in section
6(k)(1)(E) of RESPA to set forth
obligations appropriate to carry out the
consumer protection purposes of
RESPA.
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Section 1026.43 Minimum Standards
for Transactions Secured by a Dwelling
43(a)
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43(a)(3)
The Bureau is proposing to amend the
nonprofit small creditor exemption from
the ability-to-repay rule that is set forth
in § 1026.43(a)(3)(v)(D) of Regulation Z.
To qualify for this exemption, a creditor
must have extended credit secured by a
dwelling no more than 200 times during
the calendar year preceding receipt of
the consumer’s application. The
proposal would exclude certain
subordinate-lien transactions from this
credit extension limit.
Section 129C(a)(1) of TILA states that
no creditor may make a residential
mortgage loan unless the creditor makes
a reasonable and good faith
determination (based on verified and
documented information) that, at the
time the loan is consummated, the
consumer has a reasonable ability to
repay the loan, according to its terms,
and all applicable taxes, insurance
(including mortgage guarantee
insurance), and assessments. 15 U.S.C.
1639c(a)(1). Section 1026.43 of
Regulation Z implements the ability-torepay provisions of section 129C of
TILA.
The January 2013 ATR Final Rule
implemented statutory exemptions from
the ability-to-repay provisions for home
equity lines of credit subject to 12 CFR
1026.40, and for mortgage transactions
secured by a consumer’s interest in a
timeshare plan, as defined in 11 U.S.C.
101(53D). See 12 CFR 1026.43(a). The
rule also exempted from the ability-torepay requirements (1) a transaction that
is a reverse mortgage subject to 12 CFR
1026.33, (2) temporary or ‘‘bridge’’ loans
with a term of 12 months or less, and
(3) a construction phase of 12 months or
less of a construction-to-permanent
loan.
The January 2013 ATR Final Rule did
not provide additional exemptions
sought by certain commenters in
response to an earlier proposal
published by the Board in 2011. See 76
FR 27389 (May 11, 2011) (2011 ATR
Proposal). However, the January 2013
ATR Proposal sought additional input
on some of those exemptions, and
contained a specific proposal to exempt
certain nonprofit creditors from the
ability-to-repay requirements. The
Bureau believed that limiting the
proposed exemption to creditors
designated as nonprofits was
appropriate because of the difference in
lending practices between nonprofit and
other creditors. The proposed
exemption was premised on the belief
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that the additional costs imposed by the
ability-to-repay requirements might
prompt some nonprofit creditors to
cease extending credit, or substantially
limit their credit activities, thereby
possibly harming low- to moderateincome consumers. The Bureau further
stated that for-profit creditors derive
more revenue from mortgage lending
activity than nonprofit creditors, and
therefore presumably are more likely to
have the resources to comply with the
ability-to-repay requirements.
The Bureau was concerned that an
exemption for all nonprofit creditors
could allow irresponsible creditors to
intentionally circumvent the ability-torepay requirements and harm
consumers. Thus, under the January
2013 ATR Proposal, the exemption
would have been available only if the
creditor and the loan met certain
criteria. First, the creditor would have
been required to have a tax exemption
ruling or determination letter from the
Internal Revenue Service under section
501(c)(3) of the Internal Revenue Code
of 1986 to be eligible for the proposed
exemption. Second, the creditor could
not have extended credit secured by a
dwelling more than 100 times in the
calendar year preceding receipt of the
consumer’s application. Third, the
creditor, in the calendar year preceding
receipt of the consumer’s application,
must have extended credit only to
consumers whose income did not
exceed the low- and moderate-income
household limit established by HUD.
Fourth, the extension of credit must
have been to a consumer with income
that does not exceed HUD’s low- and
moderate-income household limit. Fifth,
the creditor must have determined, in
accordance with written procedures,
that the consumer has a reasonable
ability to repay the extension of credit.
The Bureau believed that, in contrast
to for-profit creditors and other
nonprofit creditors, the nonprofit
creditors identified in
§ 1026.43(a)(3)(v)(D) appeared to elevate
long-term community stability over the
creditor’s economic considerations and
to have stronger incentives to determine
whether a consumer has the ability to
repay a mortgage loan. The Bureau
solicited comment regarding whether
the proposed exemption was
appropriate. The Bureau also
specifically requested feedback on
whether the proposed credit extension
limit of 100 transactions was
appropriate or should be increased or
decreased. The Bureau also requested
comment on the costs that would be
incurred by nonprofit creditors that
exceed that limit; the extent to which
these additional costs would affect the
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25737
ability of nonprofit creditors to extend
responsible, affordable credit to lowand moderate-income consumers; and
whether consumers could be harmed by
the proposed exemption.
Comments Concerning the 100-Credit
Extension Limit
The Bureau received many comments
regarding the proposed nonprofit
exemption. See 78 FR 35429, 35466–67
(June 12, 2013). Most commenters who
supported the proposed exemption
urged the Bureau to adopt conditions to
prevent creditors from using the
exemption to circumvent the rule.
While many industry representatives,
consumer advocates, and nonprofits
believed that a 100-credit extension
limit would discourage sham nonprofit
creditors from exploiting the exemption,
several of these commenters asked the
Bureau to raise the limit. The
commenters were primarily concerned
that, in response to the proposed limit,
nonprofit creditors would limit certain
types of lending. Specifically, a few
commenters stated that nonprofit
creditors that offer both home-purchase
mortgage loans and small-dollar
mortgage loans, such as for home energy
improvement, would limit small-dollar
lending to remain under the 100-credit
extension limitation.
The Nonprofit Exemption as Adopted
The May 2013 ATR Final Rule
finalized the nonprofit exemption
substantially as proposed, but raised the
credit extension limit from 100 to 200
credit extensions in the calendar year
preceding receipt of the consumer’s
application. See 78 FR 35429, 35467–69
(June 12, 2013). In finalizing the
exemption, the Bureau noted that most
commenters believed a credit extension
limitation was necessary to prevent
unscrupulous creditors from exploiting
the exemption. The Bureau concluded
that the risks of evasion warranted
adopting the limit. The Bureau was
concerned, however, that the proposed
100-credit extension limit would
effectively restrict nonprofits to 50
home-purchase transactions per year,
because nonprofits frequently provide
simultaneous primary- and subordinatelien financing for such transactions.
Also, the Bureau was concerned that the
proposed limit would reduce certain
types of small-dollar lending by
nonprofits, including financing home
energy improvements.
Accordingly, the Bureau included a
200-credit extension limit in the final
rule to address the concerns raised by
commenters regarding access to credit.
Some commenters had suggested limits
as high as 500 credit extensions per
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year; however, the Bureau believed that
creditors originating more than 200
dwelling-secured credit extensions per
year generally have the resources to bear
the implementation and compliance
burden associated with the ability-torepay requirements, such that they can
continue to lend without negative
impacts on consumers. The final rule
did not distinguish between first- and
subordinate-liens for purposes of the
exemption, as some commenters
suggested. The Bureau believed that
such a distinction would be needlessly
restrictive and it would be more
efficient to allow nonprofit creditors to
determine the most efficient allocation
of funds between primary- and
subordinate-lien financing.
Response to the May 2013 ATR Final
Rule and Further Proposal
Since the adoption of the May 2013
ATR Final Rule, the Bureau has heard
concerns from some nonprofit creditors
about the treatment of certain
subordinate-lien programs under the
nonprofit exemption from the ability-torepay requirements. These creditors are
concerned that they may be forced to
curtail these subordinate-lien programs
or more generally limit their lending
activities to avoid exceeding the 200credit extension limit. In particular,
these entities have indicated concern
with the treatment of subordinate-lien
transactions that charge no interest and
for which repayment is generally either
forgivable or of a contingent nature. The
Bureau understands that, absent an
amended nonprofit exemption from the
May 2013 ATR Final Rule, these
nonprofit creditors may not have the
resources to comply with the rule and
therefore are likely to curtail their
lending to stay within the 200-credit
extension limit.
In light of these concerns, the Bureau
is proposing to exclude certain deferred
or contingent, interest-free subordinate
liens from the 200-credit extension limit
for purposes of the nonprofit exemption
in § 1026.43(a)(3)(v)(D). Specifically,
proposed § 1026.43(a)(3)(vii) would
provide that consumer credit
transactions that meet the following
criteria are not considered in
determining whether a creditor meets
the requirements of
§ 1026.43(a)(3)(v)(D)(1): (A) The
transaction is secured by a subordinate
lien; (B) the transaction is for the
purpose of downpayment, closing costs,
or other similar home buyer assistance,
such as principal or interest subsidies,
property rehabilitation assistance,
energy efficiency assistance, or
foreclosure avoidance or prevention; (C)
the credit contract does not require
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payment of interest; (D) the credit
contract provides that the repayment of
the amount of credit extended is (1)
forgiven incrementally or in whole, at a
date certain, and subject only to
specified ownership and occupancy
conditions, such as a requirement that
the consumer maintain the property as
the consumer’s principal dwelling for
five years, (2) deferred for a minimum
of 20 years after consummation of the
transaction, (3) deferred until sale of the
property securing the transaction, or (4)
deferred until the property securing the
transaction is no longer the principal
dwelling of the consumer; (E) the total
of costs payable by the consumer in
connection with the transaction at
consummation is less than 1 percent of
the amount of credit extended and
includes no charges other than fees for
recordation of security instruments,
deeds, and similar documents; a bona
fide and reasonable application fee; and
a bona fide and reasonable fee for
housing counseling services; and (F) in
connection with the transaction, the
creditor complies with all other
applicable requirements of Regulation
Z.
Proposed comment 43(a)(3)(vii)–1
would provide that the terms of the
credit contract must satisfy the
conditions that the transaction not
require the payment of interest under
§ 1026.43(a)(3)(vii)(C) and that
repayment of the amount of credit
extended be forgiven or deferred in
accordance with § 1026.43(a)(3)(vii)(D).
The comment would further provide
that the other requirements of
§ 1026.43(a)(3)(vii) need not be reflected
in the credit contract, but the creditor
must retain evidence of compliance
with those provisions, as required by
the record retention provisions of
§ 1026.25(a). In particular, the creditor
must have information reflecting that
the total of closing costs imposed in
connection with the transaction are less
than 1 percent of the amount of credit
extended—and include no charges other
than recordation, application, and
housing counseling fees, in accordance
with § 1026.43(a)(3)(vii)(E). Unless an
itemization of the amount financed
sufficiently details this requirement, the
creditor must establish compliance with
§ 1026.43(a)(3)(vii)(E) by some other
written document and retain it in
accordance with § 1026.25(a).
Proposed § 1026.43(a)(3)(vii) and the
accompanying comment largely mirror a
provision that was finalized as part of
the Bureau’s December 2013 TILA–
RESPA Final Rule. See 78 FR 79729
(Dec. 31, 2013). That provision, which
was finalized in both Regulation X, at
§ 1024.5(d), and Regulation Z, at
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§ 1026.3(h)—and which will take effect
on August 1, 2015, provides a partial
exemption from the integrated
disclosure requirements for loans that
meet the above-described criteria. The
Bureau finalized this partial exemption
in the December 2013 TILA–RESPA
Final Rule to preserve an existing
exemption from Regulation X issued by
HUD and to facilitate compliance with
TILA and RESPA. See 78 FR 79729,
79758 and 79772 (Dec. 31, 2013). In
proposing that exemption, the Bureau
explained that the exemption was
intended to describe criteria associated
with certain housing assistance loan
programs for low- and moderate-income
persons. See 77 FR 51115, 51138 (Aug.
23, 2012). The Bureau believes the same
criteria describe the class of transactions
that may appropriately be excluded
from the 200-credit extension limit in
the ability-to-repay exemption for
nonprofits. The Bureau also believes
that defining a single class of
transactions for purposes of § 1024.5(d),
§ 1026.3(h), and § 1026.43(a)(3)(vii) may
facilitate compliance for creditors.
The Bureau believes the
§ 1026.43(a)(3)(v)(D) exemption as
amended by the proposal would be
limited to creditors with characteristics
that ensure consumers are offered
responsible, affordable credit on
reasonably repayable terms. The Bureau
also believes that subordinate-lien
transactions meeting the proposed
exclusion’s criteria pose low risk to
consumers, and that excluding these
transactions from the credit extension
limit is consistent with TILA’s
purposes. For example, in transactions
that would be covered by proposed
§ 1026.43(a)(3)(vii), consumers often
benefit from a reduction in their
repayment obligations on an
accompanying first-lien mortgage and
often control the triggering of any
subordinate-lien repayment requirement
for at least a twenty-year period.
Therefore, the subordinate-lien
transactions may enhance the
consumer’s ability to repay their
monthly mortgage obligations. Further,
the prohibition against charging interest
and strict limitation on fees reduces the
likelihood that borrowers will be misled
about the extent of their financial
obligations, as the amounts of their
obligations (if at all repayable) remain
essentially fixed. The Bureau believes
that limiting the exclusion to loans with
these characteristics may also reduce
the likelihood that the provision would
be used to evade the ability-to-repay
requirements.
The Bureau also believes the
proposed exclusion would facilitate
access to credit for low- and moderate-
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income consumers. As noted above, the
proposed exclusion would apply to
subordinate-lien financing extended
only for specified purposes, including
home buyer assistance, property
rehabilitation, or foreclosure avoidance.
The Bureau believes that such financing
plays a critical role in nonprofit lending
to low- and moderate-income
consumers, and in particular
homeownership programs designed for
such consumers. In purchase-money
transactions, subordinate-lien financing
may reduce the amortizing payment on
first-lien mortgages, improving low- and
moderate-income consumers’ ability to
repay, especially in jurisdictions where
housing costs are high. Similarly, the
Bureau believes such financing may
play a critical role in nonprofit
creditors’ efforts to provide propertyrehabilitation, energy-efficiency, and
foreclosure-avoidance assistance.
The Bureau believes that, without the
proposed exclusion for these
transactions, nonprofit creditors may
limit such extensions of credit, or may
limit their overall credit activity. As a
result, low- and moderate-income
consumers who would otherwise
qualify for a nonprofit creditor’s
program may be denied credit. As noted
in the January 2013 ATR Proposal, the
current exemption for nonprofit
creditors was premised on the belief
that the additional costs imposed by the
ability-to-repay requirements might
prompt certain nonprofit creditors to
cease extending credit, or substantially
limit their credit activities, thereby
possibly harming low- and moderateincome consumers. See 78 FR 6621,
6645 (Jan. 30, 2013). Because of their
limited resources to bear the compliance
burden of the ability-to-repay rule, the
Bureau believes at least some nonprofit
creditors may limit lending activity to
maintain their exemption. The proposed
amendment to the § 1026.43(a)(3)(v)(D)
exemption is intended to minimize this
effect by allowing nonprofit creditors to
originate subordinate-lien transactions
meeting the proposed
§ 1026.43(a)(3)(vii) criteria without the
risk of losing that exemption.
In addition, the Bureau believes that
excluding these subordinate-lien
transactions from the transaction-count
limitation may be appropriate because
the origination of these loans is not
necessarily indicative of a creditor’s
capacity to comply with the ability-torepay requirements. As noted above, the
Bureau believes that creditors extending
credit in more than 200 dwellingsecured transactions per year are likely
to have the resources and capacity to
comply with the ability-to-repay
requirements. However, subordinate-
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lien transactions typically involve small
loan amounts and, as limited by the
proposed exclusion’s criteria, would
generate little revenue to support a
creditor’s capacity to comply. Absent
the exclusion, those creditors might
curtail lending—with potential negative
impacts for consumer’s access to credit.
Particularly when such a subordinatelien transaction is originated in
connection with a first-lien transaction,
counting both transactions towards the
200-credit extension limit may not
provide the appropriate indication of a
creditor’s capacity to comply.
As noted above, in adopting the
current nonprofit exemption in
§ 1026.43(a)(3)(v)(D), the Bureau did not
distinguish between first- and
subordinate-lien transactions for
purposes of the credit extension limit
out of concerns that doing so would
affect creditors’ allocations of loans.
However, the Bureau does not believe
the proposed exclusion is likely to
significantly affect such allocations. As
noted above, the proposed exclusion
permits nonprofit creditors to allocate
resources to subordinate-lien
transactions without risking their
exemption from the ability-to-repay
rule. To the extent the proposed
exclusion encourages origination of
these subordinate-lien transactions, the
Bureau believes that the limitations on
the borrower’s repayment obligations as
well as on the creditor’s ability to charge
interest and fees may minimize the risk
that, as a result of the exclusion,
creditors would allocate greater
amounts of their lending to these
transactions. In fact, to the extent many
affordable homeownership programs
use such subordinate-lien transactions
in tandem with first-lien mortgages,
excluding these subordinate-lien
transactions from the credit extension
limit count may reduce the current
§ 1026.43(a)(3)(v)(D) exemption’s impact
on nonprofit creditors’ allocation of
financing between first- and
subordinate-lien transactions.
To address nonprofit creditor
concerns, the Bureau also considered
whether it would be appropriate to
remove the credit extension limitation
from the § 1026.43(a)(3)(v)(D) nonprofit
exemption altogether. The Bureau
believes that nonprofit creditors who
originate 200 or more dwelling-secured
transactions in a year generally have the
resources necessary to comply with
TILA ability-to-repay requirements. The
Bureau believes that the exemption
properly balances relevant
considerations, including the nature of
credit extended, safeguards and other
factors that may protect consumers from
harm, and the extent to which
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25739
application of the regulatory
requirements would affect access to
responsible, affordable credit.
Accordingly, the Bureau continues to
believe that the credit extension limit is
necessary to prevent evasion, but is
proposing to exclude from the 200credit extension limit a narrow class of
subordinate-lien transactions to address
concerns expressed by nonprofit
creditors and avoid potential negative
impacts on access to credit, particularly
for low- and moderate-income
consumers.
Legal Authority
The current § 1026.43(a)(3)(v)(D)
exemption from the ability-to-repay
requirements was adopted pursuant to
the Bureau’s authority under section
105(a) and (f) of TILA. Pursuant to
section 105(a) of TILA, the Bureau
generally may prescribe regulations that
provide for such adjustments and
exceptions for all or any class of
transactions that the Bureau judges are
necessary or proper to effectuate, among
other things, the purposes of TILA. For
the reasons discussed in more detail
above, the Bureau believes that the
proposed amendment of the current
§ 1026.43(a)(3)(v)(D) exemption from the
TILA ability-to-repay requirements is
necessary and proper to effectuate the
purposes of TILA, which include the
purposes of TILA section 129C. The
Bureau believes that the proposed
amendment of the exemption ensures
that consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay
by helping to ensure the viability of the
mortgage market for low- and moderateincome consumers. The Bureau believes
that the mortgage loans originated by
nonprofit creditors identified in
§ 1026.43(e)(4)(v)(D) generally account
for a consumer’s ability to repay.
Without the proposed amendment to the
exemption, the Bureau believes that
low- and moderate-income consumers
might be at risk of being denied access
to the responsible and affordable credit
offered by these creditors, which is
contrary to the purposes of TILA. The
proposed amendment to the exemption
is consistent with the purposes of TILA
by ensuring that consumers are able to
obtain responsible, affordable credit
from the nonprofit creditors discussed
above.
The Bureau has considered the factors
in TILA section 105(f) and believes that,
for the reasons discussed above, the
proposed amendment of the exemption
is appropriate under that provision. For
the reasons discussed above, the Bureau
believes that the proposed amendment
to § 1026.43(a)(3)(v)(D) would exempt
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extensions of credit for which coverage
under the ability-to-repay requirements
does not provide a meaningful benefit to
consumers (in the form of useful
information or protection) in light of the
protection that the Bureau believes the
credit extended by these creditors
already provides to consumers. The
Bureau believes that the proposed
amendment to the § 1026.43(a)(3)(v)(D)
exemption is appropriate for all affected
consumers, regardless of their other
financial arrangements and financial
sophistication and the importance of the
loan and supporting property to them.
Similarly, the Bureau believes that the
proposed amendment to the
§ 1026.43(a)(3)(v)(D) 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
proposed amendment to the
§ 1026.43(a)(3)(v)(D) exemption will
simplify the credit process without
undermining the goal of consumer
protection, denying important benefits
to consumers, or increasing the expense
of (or otherwise hindering) the credit
process.
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43(e)
Qualified Mortgages
43(e)(3) Limits on Points and Fees for
Qualified Mortgages
The Dodd-Frank Act provides that
‘‘qualified mortgages’’ are entitled to a
presumption that the creditor making
the loan satisfied the ability-to-repay
requirements. The qualified mortgage
provisions are implemented in
§ 1026.43(e). Current § 1026.43(e)(3)(i)
provides that a covered transaction is
not a qualified mortgage if the
transaction’s total points and fees
exceed certain limits set forth in
§ 1026.43(e)(3)(i)(A) through (E). For the
reasons set forth below, the Bureau is
proposing to permit a creditor or
assignee to cure an inadvertent excess
over the qualified mortgage points and
fees limits by refunding to the consumer
the amount of excess, under certain
conditions. As discussed in part VI.A.
below, the Bureau is also requesting
comment on issues related to
inadvertent debt-to-income ratio
overages, but at this time is not
proposing a specific change to the
regulation. For purposes of these
discussions, ‘‘cure’’ means a procedure
to reduce points and fees or debt-toincome ratios after consummation when
the qualified mortgage limits have been
inadvertently exceeded, while
‘‘correction’’ means post-consummation
revisions to documentation or
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calculations, or both, to reflect
conditions as they actually existed at
consummation.
43(e)(3)(i)
As discussed below, the Bureau is
proposing a new § 1026.43(e)(3)(iii) to
establish a cure procedure where a
creditor inadvertently exceeds the
qualified mortgage points and fees
limits, under certain conditions. As a
conforming change, the Bureau is also
proposing to amend § 1026.43(e)(3)(i), to
add the introductory phrase ‘‘Except as
provided in paragraph (e)(3)(iii) of this
section’’ to § 1026.43(e)(3)(i), to specify
that the cure provision in proposed
§ 1026.43(e)(3)(iii) is an exception to the
general rule that a covered transaction is
not a qualified mortgage if the
transaction’s total points and fees
exceed the applicable limit set forth in
§ 1026.43(e)(3)(i)(A) through (E).
43(e)(3)(iii)
Section 1411 of the Dodd-Frank Act
added new TILA section 129C to require
a creditor making a residential mortgage
loan to make a reasonable and good
faith determination (based on verified
and documented information) that, at
the time the loan is consummated, the
consumer has a reasonable ability to
repay the loan. 15 U.S.C. 1639c. TILA
section 129C(b) further provides that the
ability-to-repay requirements are
presumed to be met if the loan is a
qualified mortgage. TILA section
129C(b)(2) sets certain product-feature
and underwriting requirements for
qualified mortgages, including a 3percent limit on points and fees, but
gives the Bureau authority to revise, add
to, or subtract from these
requirements.15 Those requirements are
implemented by the January 2013 ATR
Final Rule, as amended by the May 2013
ATR Final Rule.
The current ability-to-repay rule
provides for four categories of qualified
mortgages: a ‘‘general’’ qualified
mortgage definition that is available to
any creditor; 16 a temporary qualified
mortgage definition for loans eligible for
sale to or guarantee by a government
sponsored enterprise (GSE) or eligible
for guarantee by or insurance under
certain Federal agency programs; 17 and
15 See TILA section 129C(b)(3)(B)(i). TILA section
129C(b)(2)(D) requires the Bureau to prescribe rules
adjusting the 3-percent points and fees limit to
‘‘permit lenders that extend smaller loans to meet
the requirements of the presumption of
compliance.’’
16 12 CFR 1026.43(e)(2). Under the general
qualified mortgage definition, the loan must meet
certain restrictions on loan features, points and fees,
and underwriting.
17 Section 1026.43(e)(4). The temporary GSE/
agency qualified mortgage definition will sunset on
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two qualified mortgage definitions
available to small creditors.18 The
current rule provides that for all types
of qualified mortgages, the up-front
points and fees charged in connection
with the mortgage must not exceed 3
percent of the total loan amount, with
higher thresholds specified for various
categories of loans below $100,000.19
Pursuant to § 1026.32(b)(1), points and
fees are the ‘‘fees or charges that are
known at or before consummation.’’
The calculation of points and fees is
complex and can involve the exercise of
judgment that may lead to inadvertent
errors with respect to charges imposed
at or before consummation. For
example, discount points may be
mistakenly excluded from, or included
in, the points and fees calculation as
bona fide third-party charges, or bona
fide discount points, under
§ 1026.32(b)(1)(i)(D) or (E). Mortgage
insurance premiums under
§ 1026.32(b)(1)(i)(C) or loan originator
compensation under § 1026.32(b)(1)(ii)
may also mistakenly be excluded from,
or included in, the points and fees
calculation. A rigorous postconsummation review by the creditor or
assignee of loans originated with the
good faith expectation of qualified
mortgage status may uncover such
inadvertent errors. However, the current
rule does not provide a mechanism for
curing such inadvertent points and fees
overages that are discovered after
consummation.
Based on information received in the
course of outreach in connection with
the Bureau’s Implementation Plan, the
Bureau understands that some creditors
the earlier of January 10, 2021, or, with respect to
GSE-eligible loans, when the GSEs exit government
conservatorship, or, with respect to agency-eligible
loans, when those agencies’ qualified mortgage
definitions take effect.
18 Section 1026.43(e)(5) contains a special
qualified mortgage definition for small creditors
that hold loans in portfolio, while § 1026.43(f)
permits small creditors that operate predominantly
in rural or underserved areas to originate qualified
mortgages with balloon-payment features, despite
the general prohibition on qualified mortgages
containing balloon payments. For a two-year
transitional period, § 1026.43(e)(6) permits all small
creditors, regardless of their areas of operation, to
originate qualified mortgages with balloon-payment
features. ‘‘Small creditor’’ is defined in
§ 1026.35(b)(2)(iii)(B) and (C), and generally
includes creditors that, in the preceding calendar
year, originated 500 or fewer covered transactions,
including transactions originated by affiliates, and
had less than $2 billion in assets.
19 See § 1026.43(e)(2) and (3). For loans of
$60,000 up to $100,000, § 1026.43(e)(3)(i) allows
points and fees of no more than $3,000. For loans
of $20,000 up to $60,000, § 1026.43(e)(3)(i) allows
points and fees of no more than 5 percent of the
total loan amount. For loans of $12,500 up to
$20,000, § 1026.43(e)(3)(i) allows points and fees of
no more than $1,000. For loan amounts less than
$12,500, § 1026.43(e)(3)(i) allows points and fees of
no more than 8 percent of the total loan amount.
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may not originate, and some secondary
market participants may not purchase,
mortgage loans that are near the
qualified mortgage limits on points and
fees because of concern that the limits
may be inadvertently exceeded at the
time of consummation. Specifically, the
Bureau understands that some creditors
seeking to originate qualified mortgages
may establish buffers, set at a level
below the points and fees limits in
§ 1026.43(e)(3)(i), to avoid exceeding
those limits. Those creditors may
simply refuse to extend mortgage credit
to consumers whose loans would
exceed the buffer threshold, either due
to the creditors’ concerns about the
potential liability attending loans
originated under the general ability-torepay standard or the risk of repurchase
demands from the secondary market if
the qualified mortgage points and fees
limit is later found to have been
exceeded. Where such buffers are
established, the Bureau is concerned
that access to credit for consumers
seeking loans at the margins of the
limits might be negatively affected. The
Bureau is also concerned that creditors
may increase the cost of credit for
consumers seeking loans at the margins
of the limits due to compliance or
secondary market repurchase risk.
In light of these concerns, the Bureau
is proposing to permit a creditor or
assignee to cure an inadvertent excess
over the qualified mortgage points and
fees limit under certain defined
conditions, including the requirement
that the loan was originated in good
faith as a qualified mortgage and that
the cure be provided in the form of a
refund to the consumer within 120 days
after consummation. The Bureau notes
that, where the loan was originated in
good faith as a qualified mortgage,
consumers likely received the benefit of
qualified mortgage treatment by
receiving lower overall loan pricing. For
this reason, the Bureau believes that a
cure provision, if appropriately limited,
would reflect the expectations of both
consumers and creditors at the time of
consummation, would not result in
significant consumer harm, and may
increase access to credit by encouraging
creditors to extend credit to consumers
seeking loans at the margins of the
points and fees limits. In addition, the
Bureau believes that a limited cure
provision may promote consistent
pricing within the qualified mortgage
range by decreasing the market’s
perceived need for higher pricing (due
to compliance or secondary market
repurchase risk) at the margins of the
points and fees limits. The Bureau also
believes this would promote stability in
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the market by limiting the need for
repurchase demands that may otherwise
be triggered without the proposed cure
option.
The Bureau expects that, over time,
creditors will develop greater familiarity
with, and capabilities for, originating
loans that are not qualified mortgages
under the general ability-to-repay
requirements, as well as greater
confidence in general compliance
systems. As they do so, creditors may
relax internal buffers regarding points
and fees that are predicated on the
qualified mortgage threshold. However,
the Bureau believes the impacts on
access to credit may make a points and
fees cure provision appropriate at this
time. In addition, the Bureau believes
that the cure provision will encourage
post-consummation quality control
review of loans, which will improve the
origination process over time.
Accordingly, proposed
§ 1026.43(e)(3)(iii) would provide that if
the creditor or assignee determines after
consummation that the total points and
fees payable in connection with a loan
exceed the applicable limit under
§ 1026.43(e)(3)(i), the loan is not
precluded from being a qualified
mortgage if certain conditions,
discussed below, are met.
43(e)(3)(iii)(A)
First, new § 1026.43(e)(3)(iii)(A)
would require that the creditor
originated the loan in good faith as a
qualified mortgage and the loan
otherwise meets the requirements of
§ 1026.43(e)(2), (e)(4), (e)(5), (e)(6), or (f),
as applicable. Comment 43(e)(3)(iii)–1
would provide examples of
circumstances that may be evidence that
a loan was or was not originated in good
faith as a qualified mortgage. First, the
comment would provide that
maintaining and following policies and
procedures designed to ensure that
points and fees are correctly calculated
and do not exceed the applicable limit
under § 1026.43(e)(3)(i) may be evidence
that the creditor originated the loan in
good faith as a qualified mortgage. In
addition, the comment would provide
that if the pricing on the loan is
consistent with pricing on qualified
mortgages originated
contemporaneously by the same
creditor, that may be evidence that the
loan was originated in good faith as a
qualified mortgage. The comment would
also provide examples of circumstances
that may be evidence that the loan was
not originated in good faith as a
qualified mortgage. Specifically, the
comment would provide that, if a
creditor does not maintain—or has but
does not follow—policies and
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procedures designed to ensure that
points and fees are correctly calculated
and do not exceed the applicable limit
described in § 1026.43(e)(3)(i), that may
be evidence that the creditor did not
originate the loan in good faith as a
qualified mortgage. If the pricing on the
loan is not consistent with pricing on
qualified mortgages originated
contemporaneously by the same
creditor, that may also be evidence that
a loan was not originated in good faith
as a qualified mortgage.
The Bureau is proposing to allow for
a post-consummation cure of points and
fees overages only where the loan was
originated in good faith as a qualified
mortgage to ensure that the cure
provision is available only to creditors
who make inadvertent errors in the
origination process and to prevent
creditors from exploiting the cure
provision by intentionally exceeding the
points and fees limits. However, the
Bureau seeks comment on whether the
good faith element of
§ 1026.43(e)(3)(iii)(A) is necessary in
light of the other proposed limitations
on the cure provision. The Bureau also
seeks comment on the proposed
examples in comment 43(e)(3)(iii)–1,
specifically including whether
additional guidance regarding the term
‘‘contemporaneously’’ in comments
43(e)(3)–1.i.B and 43(e)(3)–1.ii.B is
necessary, and whether additional
examples would be useful.
43(e)(3)(iii)(B)
Second, to cure a points and fees
overage, proposed § 1026.43(e)(3)(iii)(B)
would require that within 120 days after
consummation, the creditor or assignee
refunds to the consumer the dollar
amount by which the transaction’s
points and fees exceeded the applicable
limit under § 1026.43(e)(3)(i) at
consummation.
The Bureau believes that requiring a
refund to occur within a short period
after consummation is consistent with
the requirement that the loan be
originated in good faith as a qualified
mortgage. The Bureau understands that
many creditors and secondary market
purchasers conduct audits or quality
control reviews of loan files in the
period immediately following
consummation to ensure, among other
things, compliance with regulatory
requirements. During this review phase,
a creditor that originated a loan in good
faith as a qualified mortgage (or the
creditor’s assignee) may discover an
inadvertent points and fees overage.
Indeed, providing a reasonable but
limited time period for cure may
actually promote strong postconsummation quality control efforts,
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which may, in turn, improve a creditor’s
origination procedures and compliance,
thereby reducing the use of the cure
mechanism over time. Strong postconsummation quality control and
improved origination procedures may
also reduce costs over time and decrease
the incidence of repurchase demands
after a loan is sold into the secondary
market.
The Bureau believes that the proposed
120-day period would result in
reasonably prompt refunds to affected
consumers and provide sufficient time
to accommodate communication with
the consumer. A 120-day period should
also allow sufficient time for creditors
and secondary market participants to
conduct post-consummation reviews
that may uncover inadvertent points
and fees overages. In contrast, a longer
period would not result in prompt
refunds and would provide less
incentive for rigorous review
immediately after consummation. In
outreach to industry stakeholders prior
to this proposal, the Bureau learned that
120 days is a time period within which
post-consummation quality control
reviews generally are completed. The
Bureau specifically requests comment
more broadly, however, on whether 120
days is an appropriate time period for
post-consummation cure of a points and
fees overage, or whether a longer or
shorter period should be provided; what
factors would support any
recommended time period; and, if the
cure were available for a longer period,
whether additional conditions should
be applied beyond those in this
proposal.
The Bureau considered whether the
cure provision should run from the date
of discovery of the points and fees
overage or within a limited number of
days after transfer of the loan, rather
than the time of consummation, but the
Bureau believes that such alternative
provisions would be inappropriate. The
Bureau is concerned that allowing an
extended period of time for cure would
create incentives for bad faith actors to
intentionally violate the points and fees
limit and selectively wait for discovery
to cure the violation only when it would
be to their advantage to do so. Such
actions would not be consistent with the
statutory requirement of making a good
faith determination of a consumer’s
ability-to-repay. Similarly, the Bureau is
concerned that, particularly later in the
life of the loan, giving the creditor a
unilateral option to change the status of
the loan to a qualified mortgage, thereby
providing the creditor with enhanced
protection from liability, would
facilitate evasion of regulatory
requirements by the creditor.
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The Bureau also considered whether
it would be appropriate to limit a
creditor’s or assignee’s ability to cure
points and fees overages for qualified
mortgage purposes to the time prior to
the receipt of written notice of the error
from or the institution of any action by
the consumer. The Bureau believes that
such a requirement may not be
necessary because the points and fees
cure must occur within 120 days after
consummation such that it is unlikely
that the consumer would provide such
notice or institute such action during
that period. Further, the Bureau believes
that such a requirement might undercut
the purposes of the cure provision—to
encourage both lending up to the points
and fees limits and post-consummation
quality control review of loans—since
creditors and assignees could not be
certain of their ability to review the loan
post-consummation and provide a
refund, if appropriate. However, the
Bureau solicits comment on whether
cure should be permitted only prior to
receipt of written notice of the error
from or the institution of any action by
the consumer.
The Bureau recognizes that, where
points and fees have been financed as
part of the loan amount and an overage
is refunded to the consumer after
consummation, the consumer will
continue to pay interest on a loan
amount that includes the overage. As a
result, the consumer may pay more
interest over the life of the loan than
would have been paid absent the
inadvertent points and fees overage.
Although the Bureau believes such
circumstances will be limited, the
Bureau acknowledges that a postconsummation refund of the amount of
points and fees overage alone would not
make the consumer whole in most such
cases.20 For this reason, the Bureau
considered whether the cure provision
should require other means of
restitution to the consumer, such as
restructuring the loan to provide a lower
loan amount commensurate with
deducting the points and fees overage,
or requiring any refund to the consumer
to include the present value of excess
interest that the consumer would pay
over the life of the loan. However, the
Bureau believes there are complications
to these approaches. For example, the
Bureau expects that creditors would
have difficulty systematically
restructuring loans within a short time
20 There may be circumstances where the
consumer pays discount points to obtain a lower
interest rate and the post-consummation review
determines the payments do not qualify as bona
fide discount points. In such cases, a refund of the
discount points, without additional changes to the
loan, may result in a net benefit to the consumer.
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after consummation, especially where
the loan has already been, or shortly
will be, securitized. The Bureau also
notes potential difficulties in
determining the period over which
excess interest should be calculated,
since few consumers hold their loans for
the entire loan term. In light of these
considerations, the Bureau is not
proposing that the cure provision
require any means of restitution other
than a refund of the actual overage
amount to the consumer. However, the
Bureau solicits comment on other
appropriate means of restitution and in
what circumstances they may be
appropriate.
43(e)(3)(iii)(C)
The third criteria for a cure is set forth
in proposed § 1026.43(e)(3)(iii)(C),
which would provide that the creditor
or assignee must maintain and follow
policies and procedures for postconsummation review of loans and for
refunding to consumers amounts that
exceed the applicable limit under
§ 1026.43(e)(3)(i). Comment 43(e)(3)(iii)2 would provide that a creditor or
assignee satisfies § 1026.43(e)(3)(iii) if it
maintains and follows policies and
procedures for post-consummation
quality control loan review and for
curing (by providing a refund) errors in
points and fees calculations that occur
at or before consummation.
The Bureau believes this requirement
will provide an incentive for creditors to
maintain rigorous quality control
measures on a consistent and
continuing basis. The Bureau believes
that conditioning a cure on a
consistently applied policy promotes
and incentivizes good faith efforts to
identify and minimize errors that may
occur at or before consummation, with
resulting benefits to consumers, as well
as creditors and assignees.
The Bureau requests comment on all
aspects of the proposal to permit
creditors to cure inadvertent excesses
over the points and fees limit, including
whether a post-consummation cure
should be permitted, and whether
different, additional, or fewer
conditions should be imposed upon its
availability, such as whether the
consumer must be current on loan
payments at the time of the cure.
Legal Authority
The Bureau proposes
§ 1026.43(e)(3)(iii) pursuant to its
authority under TILA section
129C(b)(3)(B)(i) to promulgate
regulations that revise, add to, or
subtract from the criteria that define a
qualified mortgage. For the reasons
discussed above, the Bureau believes
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that the proposed provision is
warranted under TILA section
129C(b)(3)(B)(i) because the proposal is
necessary and proper to ensure that
responsible, affordable mortgage credit
remains available to consumers in a
manner consistent with purposes of
section 129C of TILA, and also
necessary and appropriate to facilitate
compliance with section 129C of TILA.
For example, the Bureau believes the
proposed limited post-consummation
cure provision will facilitate compliance
with TILA section 129C by encouraging
strict, post-consummation quality
control loan reviews that will, over
time, improve the origination process.
In addition, because proposed
§ 1026.43(e)(3)(iii) permits creditors to
cure inadvertent non-compliance with
the general qualified mortgage points
and fees limitation up to 120 days after
consummation, the Bureau also
proposes § 1026.43(e)(3)(iii) pursuant to
its authority under section 105(a) and (f)
of TILA. Pursuant to section 105(a) of
TILA, the Bureau generally may
prescribe regulations that provide for
such adjustments and exceptions for all
or any class of transactions that the
Bureau judges are necessary or proper
to, among other things, effectuate the
purposes of TILA. For the reasons
discussed above, the Bureau believes
that exempting the class of qualified
mortgages that involve a postconsummation points and fees cure
from the statutory requirement that the
creditor make a good faith
determination that the consumer has the
ability to repay ‘‘at the time the loan is
consummated’’ is necessary and proper
to effectuate the purposes of TILA. The
Bureau believes that limited postconsummation cure of points and fees
overages will preserve access to credit to
the extent it encourages creditors to
extend credit to consumers seeking
loans with points and fees up to the 3percent limit. Without a points and fees
cure provision, the Bureau believes that
some consumers might be at risk of
being denied access to responsible,
affordable credit, which is contrary to
the purposes of TILA. The Bureau also
believes a limited post-consummation
cure provision will facilitate compliance
with TILA section 129C by encouraging
strict, post-consummation quality
control loan reviews that will, over
time, improve the origination process.
The Bureau has considered the factors
in TILA section 105(f) and believes that
a limited points and fees cure provision
is appropriate under that provision. The
Bureau believes that the exemption,
with the specific conditions required by
the proposal, is appropriate for all
affected consumers; specifically, those
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seeking loans at the margins of the
points and fees limit whose access to
credit may be affected adversely without
the exemption. Similarly, the Bureau
believes that the exemption is
appropriate for all affected loans
covered under the exemption, i.e. those
made in good faith as qualified
mortgages, 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
would not undermine the goal of
consumer protection or increase the
complexity or expense of (or otherwise
hinder) the credit process, because costs
may actually decrease, as noted above.
While the exemption may result in
consumers in affected transactions
losing some of TILA’s benefits,
potentially including some aspects of a
foreclosure legal defense, the Bureau
believes such potential losses are
outweighed by the potentially increased
access to responsible, affordable credit,
an important benefit to consumers. The
Bureau believes that is the case for all
affected consumers, regardless of their
other financial arrangements, their
financial sophistication, and the
importance of the loan and supporting
property to them.
VI. Other Requests for Comment
A. Request for Comment on Cure or
Correction of Debt-to-Income Overages
To satisfy the general qualified
mortgage definition in § 1026.43(e)(2),
the consumer’s total monthly debt-toincome ratio—verified, documented,
and calculated in accordance with
§ 1026.43(e)(2)(vi)(B) and appendix Q—
cannot exceed 43 percent at the time of
consummation.21 Similar to an error
made in calculating points and fees,
errors made in calculating debt-toincome ratios could jeopardize a loan’s
qualified mortgage status under
§ 1026.43(e)(2). Some industry
stakeholders have suggested that
creditors seeking to originate
§ 1026.43(e)(2) qualified mortgages may
establish buffers that relate to debt-toincome ratios—i.e., buffers set at a level
below the rule’s 43-percent debt-toincome ratio limit. Some creditors may,
in turn, refuse to extend mortgage credit
to consumers whose loans would
exceed the buffer threshold, either due
to concerns about potential liability
21 In contrast to the 3-percent cap on points and
fees, which applies to all qualified mortgages, the
43-percent debt-to-income ratio limit applies only
to the ‘‘general’’ qualified mortgage category
(§ 1026.43(e)(2)), and not to the temporary GSE/
agency category (§ 1026.43(e)(4)) or the small
creditor categories (§ 1026.43(e)(5), (e)(6), and (f)).
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associated with loans originated under
the general ability-to-repay standard or
the risk of repurchase demands from the
secondary market, if the debt-to-income
ratio limit is exceeded. Such practices
may reduce access to credit to
consumers at the margins of the debt-toincome ratio limit.
As explained above, the Bureau is
proposing § 1026.43(e)(3)(iii) to permit
cure of inadvertent points and fees
overages by refunding to the consumer
the dollar amount that exceeds the
applicable points and fees limit, under
certain defined conditions. The Bureau
is also considering whether a similar
cure provision may be appropriate in
the context of debt-to-income overages.
As discussed above, the proposed points
and fees cure procedure may benefit
consumers and the market in various
ways. A debt-to-income cure provision
has the potential to benefit consumers
and the market in a similar manner.
However, as discussed below, the
Bureau believes that miscalculations of
debt-to-income ratios are fundamentally
different in nature than errors in
calculating points and fees, and may be
less suitable to a cure provision similar
to proposed § 1026.43(e)(3)(iii).
The Bureau is also considering
whether it may be appropriate to
address the more limited scenario where
debt-to-income overages result from
errors in calculation or documentation,
or both, of debt or income. Specifically,
the Bureau is considering whether, in
such situations, it would be feasible to
permit post-consummation corrections
to the documentation, which would
result in a corresponding recalculation
of the debt-to income ratio. While such
a correction mechanism has the
potential to benefit consumers and the
market, there are a number of reasons,
discussed below, why it may be
inappropriate and impracticable.
In light of these difficulties and
concerns, the Bureau is not proposing a
specific debt-to-income ratio cure or
correction provision at this time.
However, to aid its ongoing
consideration of these options, the
Bureau is requesting comment on any
and all aspects of potential cure and
correction provisions for debt-to-income
overages described below.
Debt-to-Income Cure
As noted, the Bureau recognizes that
a debt-to-income cure mechanism has
the potential to benefit consumers and
the market. However, the Bureau is
concerned that such a procedure may be
inappropriate because a miscalculation
of debt-to-income ratios cannot be
remedied in a manner similar to, or as
equally practicable as, remedying a
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miscalculation of points and fees. The
Bureau believes that debt-to-income
overages commonly would result from
creditors incorrectly, but inadvertently,
including income or failing to consider
debts in accordance with the rule—i.e.,
understating the numerator or
overstating the denominator in the
mathematical equation that derives the
debt-to-income ratio. In these situations,
a creditor or secondary market
purchaser would need to alter the
consumer’s debts and/or income to
bring the debt-to-income ratio within
the 43-percent limit or the ratio would
exceed qualified mortgage limits.
It is unclear how creditors could raise
consumers’ incomes or lower their debts
systematically to bring the ratio within
the 43-percent limit. Of course, creditors
cannot increase a consumer’s income. It
may be possible in some situations for
creditors to modify the underlying
mortgage and lower the consumer’s
monthly payment on the loan so that the
‘‘debt’’ is low enough to bring the ratio
back within the 43-percent limit—or to
pay down other debts of the consumer
to achieve the same result. However, the
Bureau believes this approach would
require a complex restructuring of the
loan, which may itself trigger a
repurchase demand from the secondary
market, and possibly require a refund of
excess payments collected from the time
of consummation.
For any such cure provision to be
considered, creditors would need to
maintain and follow policies and
procedures of post-consummation
review of loans to restructure them and
refund amounts as necessary to bring
the debt-to-income ratio within the 43percent limit. However, based on the
Bureau’s current information, the
Bureau does not believe creditors could
realistically meet such a requirement,
and expects that creditors would have
difficulty systematically restructuring
loans, or systematically paying down
debts on the consumer’s behalf, within
a short time after consummation.
Moreover, in some cases the consumer’s
other debts (when properly considered)
could be too substantial, or the
corrected income too low, for any viable
modification of the mortgage to reduce
the debt-to-income ratio below the
prescribed limit.
Debt-to-Income Correction
The Bureau is also considering
whether it may be appropriate to
address the more limited scenario where
debt-to-income overages result solely
from errors in documentation of debt or
income. For example, a creditor may
have considered but failed to properly
document certain income in accordance
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with the rule. Such an error may
feasibly be remedied by submission of
corrected documentation (and a
corresponding recalculation of the debtto-income ratio) without the need for a
monetary cure or loan restructuring. A
correction also could be effective in
situations in which the creditor erred in
calculating the consumer’s debts and as
a result verified and documented only
certain income if that income alone
appeared sufficient to satisfy the 43percent limit.
Certain sources of income (e.g., salary)
are generally considered easier to
document than others (e.g., rental or
self-employment income), and
satisfaction of the general qualified
mortgage definition does not require
creditors to document and consider
every potential source of income, so
long as the debt-to-income ratio based
on the income considered (and
calculated in accordance with the rule)
does not exceed 43 percent. Creditors
may, for the sake of expediency, only
consider easy-to-document income
when that income alone satisfies the
debt-to-income ratio—a practice
permitted under the regulation.22 Where
a creditor or secondary market
purchaser later discovers that income
relied upon was overstated or additional
debts existed that were not considered,
it may be feasible for a creditor to
correct a resulting debt-to-income ratio
overage by collecting documentation
and considering the additional income
it knew about at the time of
consummation but chose not to consider
for the sake of expediency.
While these means of correcting debtto-income ratio overages may be
feasible, the Bureau is concerned that a
provision tailored toward these
situations may be inappropriate and
believes any such provision could result
in unintended consequences. The
Bureau is concerned about the risk of
creating any disincentives for creditors
to exercise due diligence in carrying out
their statutory obligations. In addition,
the Bureau is concerned that allowing
creditors to supplement required
documentation after consummation
could raise factual questions of what
income and documentation the creditor
was aware of at the time of
consummation, and what income and
documentation were discovered only
after an intensive investigation
following discovery of a debt-to-income
overage. The Bureau is also concerned
that, in some instances a correction
22 See comment 43(c)(2)(i)–5; see also Appendix
Q (noting that a creditor may always ‘‘exclude the
income or include the debt’’ when unsure if the
debt or the income should be considered).
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provision could allow loans to be
deemed qualified mortgages based on
post hoc documentation,
notwithstanding that the creditor, in
fact, would not have made the loan had
it correctly calculated the consumer’s
debt-to-income ratio.
Although the Bureau has received
requests from industry noting that it
would be useful to permit corrections in
situations where a creditor did not
document all known income at the time
of consummation, it is not clear how
often this will happen in practice.
Furthermore, the Bureau believes that
amending the rule to allow for
correction in those instances may be
unnecessary because creditors could
avoid such debt-to-income ratio
overages by verifying additional sources
of income prior to consummation, at
least in loans where the debt-to-income
ratio would otherwise be near the 43percent limit.
As discussed above with respect to
points and fees, the Bureau expects that,
over time, creditors will develop greater
familiarity with, and capabilities for,
originating loans that are not qualified
mortgages under the ability-to-repay
requirements, as well as greater
confidence in general compliance
systems. As they do so, the Bureau
believes creditors may relax internal
debt-to-income ratio buffers that are
predicated on the qualified mortgage
threshold. Although the Bureau is
considering whether the impacts on
access to credit during the interim
period (when such capabilities are being
developed) may make a debt-to-income
cure provision appropriate, the 43percent debt-to-income ratio limit
applies only to one category of qualified
mortgages, unlike the points and fees
limit, which applies to all qualified
mortgages. Small creditors making
qualified mortgages under
§ 1026.43(e)(5), (e)(6), and (f) are not
subject to the 43-percent debt-to-income
limit. Further, creditors of any size
currently have the option of originating
GSE/agency-eligible loans under the
temporary qualified mortgage definition
without regard to the 43-percent debt-toincome limit.23 For this reason, the
Bureau believes that a relatively small
number of loans are currently affected
by the debt-to-income limit.
23 Pursuant to § 1026.43(e)(4)(ii) and (iii), the
temporary GSE/agency qualified mortgage
definition will sunset on the earlier of January 10,
2021 or, with respect to GSE-eligible loans, when
the GSEs (or any limited-life regulatory entity
succeeding the charters of the GSEs) exit
government conservatorship, or, with respect to
agency-eligible loans, when those agencies’
qualified mortgage definitions take effect.
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For these reasons, the Bureau is not
proposing a specific cure or correction
provision related to the 43-percent debtto-income limit for qualified mortgages
under § 1026.43(e)(2) at this time.
However, to aid its ongoing
consideration of such provisions, the
Bureau requests comment on all aspects
of the debt-to-income cure or correction
approaches discussed above and, in
particular, requests commenters to
provide specific and practical examples
of where such approaches may be
applied and how they may be
implemented. The Bureau also requests
comment on what conditions should
appropriately apply to cure or
correction of the qualified mortgage
debt-to-income limits, including the
time periods (such as the 120-day
period included in the proposed points
and fees cure provision) when such
provisions may be available. The Bureau
also requests comment on whether or
how a debt-to-income cure or correction
provision might be exploited by
unscrupulous creditors to undermine
consumer protections and undercut
incentives for strict compliance efforts
by creditors or assignees.
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B. Request for Comment on the Credit
Extension Limit for the Small Creditor
Definition
Under the Bureau’s 2013 Title XIV
Final Rules, there are four types of
exceptions and special provisions
available only to small creditors:
• A qualified mortgage definition for
certain loans made and held in
portfolio, which are not subject to a
bright-line debt-to-income ratio limit
and are subject to a higher annual
percentage rate (APR) threshold for
defining which first-lien qualified
mortgages receive a safe harbor under
the ability-to-repay rule
(§ 1026.43(e)(5)); 24
• Two qualified mortgage definitions
(i.e., a temporary and an ongoing
definition) for certain loans made and
held in portfolio that have balloonpayment features, which are also subject
to the higher APR threshold for defining
which first-lien qualified mortgages
receive a safe harbor under the abilityto-repay rule (§ 1026.43(e)(6) and (f));
• An exception from the requirement
to establish escrow accounts for certain
higher-priced mortgage loans (HPMLs)
24 For purposes of determining whether a loan has
a safe harbor with TILA’s ability-to-repay
requirements (or instead is categorized as ‘‘higherpriced’’ with only a rebuttable presumption of
compliance with those requirements), for first-lien
covered transactions, the special qualified mortgage
definitions in § 1026.43(e)(5), (e)(6) and (f) receive
an APR threshold of the average prime offer rate
plus 3.5 percentage points, rather than plus 1.5
percentage points.
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for small creditors that operate
predominantly in rural or underserved
areas (§ 1026.35(b)(2)(iii)); 25 and
• An exception from the prohibition
on balloon-payment features for certain
high-cost mortgages
(§ 1026.32(d)(1)(ii)(C)).26
These special rules and exceptions
recognize that small creditors are an
important source of non-conforming
mortgage credit. Small creditors’ size
and relationship lending model often
provide them with better ability than
large institutions to assess ability-torepay. At the same time, small creditors
lack economies of scale necessary to
offset the cost of certain regulatory
burdens. To be a small creditor for
purposes of these exceptions and
special provisions, the creditor must
have (1) together with its affiliates,
originated 500 or fewer covered
transactions 27 secured by a first lien in
the preceding calendar year; and (2) had
total assets of less than $2 billion at the
end of the preceding calendar year. As
discussed in more detail below, the
Bureau is requesting comment on
certain aspects of the annual first-lien
origination limit under the small
creditor test.
These special rules for small creditors
are largely based on TILA sections
129D(c) and 129C(b)(2)(E), respectively.
TILA section 129D(c) authorizes the
Bureau to exempt a creditor from the
higher-priced mortgage loan escrow
requirement if the creditor operates
predominantly in rural or underserved
areas, retains its mortgage loans in
portfolio, and meets certain asset size
and annual mortgage loan origination
thresholds set by the Bureau. TILA
section 129C(b)(2)(E) permits certain
balloon-payment mortgages originated
by small creditors to receive qualified
mortgage status, even though qualified
mortgages are otherwise prohibited from
having balloon-payment features. The
creditor qualifications under TILA
section 129C(b)(2)(E) generally mirror
25 To meet the ‘‘rural’’ or ‘‘underserved’’
requirement, during any of the preceding three
calendar years, the creditor must have extended
more than 50 percent of its total covered
transactions, as defined by § 1026.43(b)(1) and
secured by a first lien, on properties that are located
in counties that are either ‘‘rural’’ or ‘‘underserved,’’
as defined by § 1026.35(b)(2)(iv). See
§ 1026.35(b)(2)(iii)(A).
26 For loans made on or before January 10, 2016,
small creditors may originate high-cost mortgages
with balloon-payment features even if the creditor
does not operate predominantly in rural or
underserved areas, under certain conditions. See
§§ 1026.32(d)(1)(ii)(C) and 1026.43(e)(6).
27 ‘‘Covered transaction’’ is defined in
§ 1026.43(b)(1) to mean a consumer credit
transaction that is secured by a dwelling, as defined
in § 1026.2(a)(19), including any real property
attached to a dwelling, other than a transaction
exempt from coverage under § 1026.43(a).
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the criteria for the higher-priced
mortgage loan escrow exemption,
including meeting certain asset size and
annual mortgage loan origination
thresholds set by the Bureau.
The Board proposed to implement
TILA sections 129D(c) and 129C(b)(2)(E)
before TILA rulemaking authority
transferred to the Bureau. Although the
creditor qualification criteria under
these provisions are similar, the Board
proposed to implement the provisions
in slightly different ways.
To implement TILA section 129D(c),
the exemption from the higher-priced
mortgage loan escrow requirements, the
Board proposed to limit the exemption
to creditors that (1) during either of the
preceding two calendar years, together
with affiliates, originated and retained
servicing rights to 100 or fewer loans
secured by a first lien on real property
or a dwelling; and (2) together with
affiliates, do not maintain escrow
accounts for loans secured by real
property or a dwelling that the creditor
or its affiliates currently service.28 The
Board interpreted the escrow provision
as intending to exempt creditors that do
not possess economies of scale to
escrow cost-effectively. In proposing the
transaction count limit, the Board
estimated that a minimum servicing
portfolio size of 500 is necessary to
escrow cost-effectively, and assumed
that the average life expectancy of a
mortgage loan is about five years. Based
on this reasoning, the Board believed
that creditors would no longer need the
benefit of the exemption if they
originated and serviced more than 100
first-lien transactions per year. The
Board proposed a two-year coverage test
to afford an institution sufficient time
after first exceeding the threshold to
acquire an escrowing capacity. The
Board did not propose an asset-size
threshold to qualify for the escrow
exemption, but sought comment on
whether such a threshold should be
established and, if so, what it should be.
For the balloon-payment qualified
mortgage definition to implement TILA
section 129C(b)(2)(E), the Board
proposed an asset-size limit of $2 billion
and two alternative annual originations
thresholds. The Board interpreted the
qualified mortgage provision as being
designed to ensure access to credit in
areas where consumers may be able to
obtain credit only from community
banks offering balloon-payment
28 76 FR 11597 (Mar. 2, 2011) (2011 Escrows
Proposal). The proposed exemption also would
have required that, during the preceding calendar
year, the creditor extended more than 50 percent of
its total first-lien higher-priced mortgage loans in
counties designated as rural or underserved, among
other requirements.
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mortgages. Accordingly, the Board
proposed two alternatives for the total
annual originations portion of the test:
Under alternative 1, the creditor,
together with all affiliates, extended
covered transactions of some dollar
amount or less during the preceding
calendar year, whereas under alternative
2, the creditor, together with all
affiliates, extended some number of
covered transactions or fewer during the
preceding calendar year. The Board did
not propose a specific annual
originations threshold in connection
with TILA section 129C(b)(2)(E), but the
Board sought comment on the issue.
Rulemaking authority for TILA passed
to the Bureau in July 2011, before the
Board finalized the above-described
proposals. The Bureau considered the
Board’s proposals and responsive public
comments before finalizing those rules
in January 2013. The Bureau also
conducted further analysis to try to
determine the appropriate thresholds,
although such effort was significantly
constrained by data limitations. The
Bureau ultimately adopted an annual
originations limit of 500 or fewer firstlien covered transactions in the
preceding calendar year and an assetsize limit of less than $2 billion,
adjusted annually for inflation.29 The
Bureau believed that it would be
preferable to use the same annual
originations and asset-size thresholds
for the qualified mortgage and escrow
provisions to reflect the consistent
statutory language, to facilitate
compliance by not requiring institutions
to track multiple metrics, and to
promote consistent application of the
two exemptions. The Bureau also
applied these limits to the exception
from the balloon-payment prohibition
for high-cost loans, to the qualified
mortgage definition for small portfolio
creditors, and to the qualified mortgage
definition for loans with balloonpayment features.
The Bureau adopted a threshold of
500 or fewer annual originations of firstlien transactions to provide flexibility
and reduce concerns that the threshold
in the Board’s 2011 Escrows Proposal
would reduce access to credit by
excluding creditors that need special
accommodations in light of their
29 The higher-priced mortgage loan escrows
exemption also requires that the creditor operate
predominantly in rural or underserved areas. See
§ 1026.35(b)(2)(iii)(A). For loans made on or before
January 10, 2016, small creditors may originate
qualified mortgages, and high-cost mortgages, with
balloon-payment features even if the creditor does
not operate predominantly in rural or underserved
areas, under certain conditions. See
§§ 1026.32(d)(1)(ii)(C) and 1026.43(e)(6).
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capacity constraints.30 The Bureau
believed that an originations limit is the
most accurate means of limiting the
special provisions to the class of small
creditors with a business model the
Bureau believes will best facilitate
access to responsible, affordable credit.
The Bureau also believed that an asset
limit is important to preclude a very
large creditor with relatively modest
mortgage operations from taking
advantage of a provision designed for
much smaller creditors with much
different characteristics and incentives,
and that lack the scale to make
compliance less burdensome.
Based on estimates from publicly
available Home Mortgage Disclosure Act
(HMDA) and call report data, the Bureau
understood that the small creditor
provisions as finalized would include
approximately 95 percent of creditors
with less than $500 million in assets,
approximately 74 percent of creditors
with assets between $500 million and
$1 billion, and approximately 50
percent of creditors with assets between
$1 billion and $2 billion. The Bureau
believed these percentages were
consistent with the rationale for
providing special accommodation for
small creditors and would be
appropriate to ensure that consumers
have access to responsible, affordable
mortgage credit.
Consistent with the Bureau’s ongoing
Implementation Plan, the Bureau is
seeking comment on the 500 total firstlien originations limit—and the
requirement that the limit be
determined for any given calendar year
based upon results during the
immediately prior calendar year.
Specifically, the Bureau solicits
feedback and data from (1) creditors
30 The preamble to the January 2013 Escrows
Final Rule noted that the increased threshold was
likely not very dramatic because the Bureau’s
analysis of HMDA data suggested that even small
creditors are likely to sell a significant number of
their originations in the secondary market and,
assuming that most mortgage transactions that are
retained in portfolio are also serviced in-house, the
Bureau estimated that a creditor originating no
more than 500 first-lien transactions per year would
maintain and service a portfolio of about 670
mortgage obligations over time (assuming an
average obligation life expectancy of five years).
Thus, the Bureau believed the higher threshold in
the January 2013 Escrows Final Rule would help to
ensure that creditors that are subject to the escrow
requirement would in fact maintain portfolios of
sufficient size to maintain the escrow accounts on
a cost-efficient basis over time, in the event that the
Board’s 500-loan estimate of a minimum costeffective servicing portfolio size was too low. At the
same time, however, the Bureau believed that the
500 annual originations threshold in combination
with the other requirements would still ensure that
the balloon-payment qualified mortgage and escrow
exemptions are available only to small creditors
that focus primarily on a relationship lending
model and face significant systems constraints.
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designated as small creditors under the
Bureau’s 2013 Title XIV Final Rules;
and (2) creditors with assets that are not
at or above the $2 billion limitation but
that do not qualify for small creditor
treatment under the Bureau’s 2013 Title
XIV Final Rules because of their total
annual first-lien mortgage originations.
For such creditors, the Bureau requests
data on the number and type of
mortgage products offered and
originated to be held in portfolio during
the years prior to the effective date of
the 2013 Title XIV Final Rules and
subsequent to that date. In particular,
the Bureau is interested in how such
creditors’ origination mix changed in
light of the Bureau’s 2013 Title XIV
Final Rules (including, but not limited
to, the percentage of loans that are fixedrate, are adjustable-rate, or have a
balloon-payment feature) and, similarly,
how such creditors’ origination mix
changed when only considering loans
originated for the purposes of keeping
them in portfolio. The Bureau also
solicits feedback on such small
creditors’ implementation efforts with
respect to the Bureau’s 2013 Title XIV
Final Rules. The Bureau is interested in
detailed descriptions of the challenges
that creditors might face when
transitioning from originating balloonpayment loans to originating adjustablerate loans. Finally, the Bureau solicits
comment on whether the 500 total firstlien originations limit is sufficient to
serve the above-described purposes of
the provision and, to the extent it may
be insufficient, the reasons why it is
insufficient and the range of appropriate
limits.
As noted above, certain of the special
provisions applicable to small creditors
are limited to small creditors in ‘‘rural’’
or ‘‘underserved’’ areas. The Bureau
finalized a definition of ‘‘rural’’ or
‘‘underserved’’ in the 2013 Escrows
Final Rule. 78 FR 4725 (Jan. 22, 2013).
The Bureau recognizes that concerns
have been raised by some stakeholders
that the Bureau’s definition is underinclusive and fails to cover certain
counties or portions of counties that are
typically thought of as rural or
underserved in nature. The Bureau is
considering whether to propose
modifications to the definition of
‘‘rural’’ or ‘‘underserved’’ at a later date
and is not requesting comment at this
time on this issue.
VII. Dodd-Frank Act Section 1022(b)(2)
Analysis
A. Overview
In developing the proposed rule, the
Bureau has considered potential
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benefits, costs, and impacts.31 The
Bureau requests comment on the
preliminary analysis presented below as
well as submissions of additional data
that could inform the Bureau’s analysis
of the benefits, costs, and impacts. The
Bureau has consulted, or offered to
consult with, the prudential regulators,
the Securities and Exchange
Commission, the Department of Housing
and Urban Development, the Federal
Housing Finance Agency, the Federal
Trade Commission, the U.S. Department
of Veterans Affairs, the U.S. Department
of Agriculture, and the Department of
the Treasury, including regarding
consistency with any prudential,
market, or systemic objectives
administered by such agencies.
There are three main provisions in
this rulemaking proposal. The first
provision extends the small servicer
exemption from certain provisions of
the 2013 Mortgage Servicing Final Rules
to nonprofit servicers that service 5,000
or fewer loans on behalf of themselves
and associated nonprofits, all of which
were originated by the nonprofit or an
associated nonprofit. The second
provision excludes certain non-interest
bearing, contingent subordinate liens
that meet the requirements of proposed
§ 1026.43(a)(3)(v)(D) (‘‘contingent
subordinate liens’’) from the 200-loan
limit calculation for purposes of
qualifying for the nonprofit exemption
from the ability-to-repay requirements.
The third provision affords creditors an
option, in limited circumstances, to cure
certain mistakes in cases where a
creditor originated a loan with an
expectation of qualified mortgage status,
but the loan actually exceeded the
points and fees limit for qualified
mortgages at consummation (‘‘points
and fees cure’’).
The Bureau has chosen to evaluate the
benefits, costs, and impacts of these
proposed provisions against the current
state of the world. That is, the Bureau’s
analysis below considers the benefits,
costs, and impacts of the three proposed
provisions relative to the current
regulatory regime, as set forth primarily
in the January 2013 ATR Final Rule, the
May 2013 ATR Final Rule, and the 2013
Mortgage Servicing Final Rules.32 The
31 Specifically, section 1022(b)(2)(A) of the DoddFrank Act calls for the Bureau to consider the
potential benefits and costs of a regulation to
consumers and covered persons, including the
potential reduction of access by consumers to
consumer financial products or services; the impact
on depository institutions and credit unions with
$10 billion or less in total assets as described in
section 1026 of the Dodd-Frank Act; and the impact
on consumers in rural areas.
32 The Bureau has discretion in future
rulemakings to choose the relevant provisions to
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baseline considers economic attributes
of the relevant market and the existing
regulatory structure.
The main benefit of each of these
proposed provisions to consumers is a
potential increase in access to credit and
a potential decrease in the cost of credit.
It is possible that, but for these
provisions, (1) financial institutions
would stop or curtail originating or
servicing in particular market segments
or would increase the cost of credit or
servicing in those market segments in
numbers sufficient to adversely impact
those market segments, (2) the financial
institutions that would remain in those
market segments would not provide a
sufficient quantum of mortgage loan
origination or servicing at the nonincreased price, and (3) there would not
be significant new entry into the market
segments left by the departing
institutions. If, but for these proposed
provisions, all three of these scenarios
would be realized, then the three
proposed provisions will increase
access to credit. The Bureau does not
possess any data, aside from anecdotal
comments, to refute or confirm any of
these scenarios for any of the proposed
exemptions. However, the Bureau notes
that, at least in some market segments,
these three scenarios could be realized
by just one creditor or servicer stopping
or curtailing originating or servicing or
increasing the cost of credit. This would
occur, for example, if that creditor or
servicer is the only one willing to
extend credit or provide servicing to
this market segment (for example, to
low- and moderate-income consumers),
no other creditor or servicer would enter
the market even if the incumbent exits,
and the incumbent faces higher costs
that would lead it to either increase the
cost of credit or curtail access to credit.
The main cost to consumers of the
proposed small nonprofit servicer and
small nonprofit originator provisions is
that, for some transactions, creditors or
servicers will not have to provide
consumers some of the protections
provided by the ability-to-repay and
mortgage servicing rules. The main cost
of the points and fees cure provision to
consumers is that a creditor could
reimburse a consumer for a points and
fees overage after consummation—with
the creditor thereby obtaining the safe
harbor or rebuttable presumption of
TILA ability-to-repay compliance
afforded by a qualified mortgage, and
the consumer having less ability to
challenge the mortgage on ability-torepay grounds. As noted above, the
Bureau does not possess data to provide
discuss and to choose the most appropriate baseline
for that particular rulemaking.
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a precise estimate of the number of
transactions affected. However, the
Bureau believes that the number will be
relatively small.
The main benefit of each of these
proposed provisions to covered persons
is that the affected covered persons do
not have to incur certain expenses
associated with the ability-to-repay and
mortgage servicing rules, or will not be
forced either to exit the market or to
curtail origination or servicing activities
to maintain certain regulatory
exemptions. Given the currently
available data, it is impossible for the
Bureau to estimate the number of
transactions affected with any useful
degree of precision; that is also the case
for estimating the amount of monetary
benefits for such covered persons.
There is no major cost of these
proposed provisions to covered
persons—each of the provisions is an
option that a financial institution is free
to undertake or not to undertake. The
only potential costs for covered persons
is that other financial institutions that
would have complied with the abilityto-repay and mortgage servicing rules
with or without the proposed provisions
may lose profits to the institutions that
are able to continue operating in a
market segment by virtue of one of the
proposed provisions. However, these
losses are likely to be small and are
difficult to estimate.
B. Potential Benefits and Costs to
Consumers and Covered Persons
Small Servicer Exemption Extension for
Servicing Associated Nonprofits’ Loans
The Bureau’s 2013 Mortgage Servicing
Final Rules were designed to address
the market failure of consumers not
choosing their servicers and of servicers
not having sufficient incentives to
invest in quality control and consumer
satisfaction. The demand for larger loan
servicers’ services comes from
originators, not from consumers.
Smaller servicers, however, have an
additional incentive to provide ‘‘hightouch’’ servicing that focuses on
ensuring consumer satisfaction. 78 FR
10695, 10845–46 (Feb. 14, 2013); 78 FR
10901, 10980–82 (Feb. 14, 2013).
The Bureau’s 2013 Mortgage Servicing
Final Rules provide many benefits to
consumers: for example, detailed
periodic statements. These benefits tend
to present potential costs to servicers:
for example, changing their software
systems to include additional
information on the periodic statements
to consumers. These benefits and costs
are further described in the ‘‘DoddFrank Act Section 1022(b)(2) Analysis’’
sections of the 2013 Mortgage Servicing
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Final Rules. 78 FR 10695, 10842–61
(Feb. 14, 2013); 78 FR 10901, 10978–94
(published concurrently).
Smaller servicers are generally
community banks and credit unions that
have a built-in incentive to manage their
reputation with consumers carefully
because they are servicing loans in
communities in which they also
originate loans. This incentive is
reinforced if they are servicing only
loans that they originate. Under current
§ 1026.41(e)(4)(ii), a small servicer is a
servicer that either (A) services, together
with any affiliates, 5,000 or fewer
mortgage loans for all of which the
servicer (or an affiliate) is the creditor or
assignee; or (B) is a Housing Finance
Agency, as defined in 24 CFR 266.5. The
definition of the term ‘‘affiliate’’ is the
definition provided in the Bank Holding
Company Act (BHCA). The rationale for
the small servicer exemption is
provided in the Bureau’s 2013 Mortgage
Servicing Final Rules. 78 FR 10695,
10845–46 (Feb. 14, 2013); 78 FR 10901,
10980–82 (published concurrently).
The proposed revision of the
exemption allows a nonprofit servicer to
service loans on behalf of ‘‘associated
nonprofit entities’’ that do not meet the
BHCA ‘‘affiliate’’ definition and still
qualify as a ‘‘small servicer,’’ as long as
certain other conditions are met (for
example, it has no more than 5,000
loans in its servicing portfolio). The
Bureau believes nonprofit servicers
typically follow the same ‘‘high-touch’’
servicing model followed by the small
servicers described in the Dodd-Frank
Act Section 1022(b)(2) Analysis in the
2013 Mortgage Servicing Final Rules.
While these nonprofit servicers are not
motivated by the profit incentive that
motivates community banks and small
credit unions, they nonetheless have a
reputation incentive and a mission
incentive to provide ‘‘high-touch’’
servicing, neither of which is
diminished when they service
associated nonprofits’ loans. Because it
is limited to entities sharing a common
name, trademark, or servicemark,
proposed § 1026.41(e)(4)(ii)(C) further
ensures that the reputation incentive
remains intact. In addition, the 5,000loan servicing portfolio limit ensures
that nonprofit servicers are still
sufficiently small to provide ‘‘hightouch’’ servicing. Another rationale for
the proposed revision of the exemption
is that it would create a more level
playing field for nonprofits. Currently,
for-profit affiliates can take advantage of
economies of scale to service their loans
together, but related nonprofits cannot
because they typically are not
‘‘affiliates’’ as defined by the BHCA.
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Overall, the primary benefit to
consumers of the proposed amendment
to the small servicer definition is a
potential increase in access to credit and
a potential decrease in the cost of credit.
The primary cost to consumers is losing
some of the protections of the Bureau’s
2013 Mortgage Servicing Final Rules.
The primary benefit to covered persons
is exemption from certain provisions of
those rules, and the attendant cost
savings of not having to comply with
those provisions while still being able to
achieve a certain degree of scale by
taking on servicing for associated
nonprofits. See also 78 FR 10695,
10842–61 (Feb. 14, 2013); 78 FR 10901,
10978–94 (published concurrently).
There are no significant costs to covered
persons.
Finally, the Bureau does not possess
any data that would enable it to report
the number of transactions affected, but
from anecdotal evidence and taking into
account the size of the nonprofit
servicers that are the most likely to take
advantage of this exemption, it is
unlikely that there will be a significant
number of loans affected each year.
Several nonprofit servicers might be
affected as well.
Ability-to-Repay Exemption for
Contingent Subordinate Liens
The Bureau’s ability-to-repay rule was
designed to address the market failure of
mortgage loan originators not
internalizing the effects of consumers
not being able to repay their loans:
effects both on the consumers
themselves and on the consumers’
neighbors, whose houses drop in value
due to foreclosures nearby.
The May 2013 ATR Final Rule added
a nonprofit exemption from the abilityto-repay requirements. The rationale of
that exemption is preserving low- and
moderate-income consumers’ access to
credit available from nonprofit
organizations, which might have
stopped or curtailed originating loans
but for this exemption. The main benefit
of the exemption for consumers is in
potential expansion of access to credit
and a potential decrease in the cost of
credit; the main cost for consumers is
not receiving protections provided by
the ability-to-pay rule. The May 2013
ATR Final Rule exempted only
nonprofit creditors that originated 200
or fewer loans a year, based on the
Bureau’s belief that these institutions do
internalize the effects of consumers not
being able to repay their loans and that
the loan limitation is necessary to
prevent the exemption from being
exploited by unscrupulous creditors
seeking to harm consumers.
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Proposed § 1026.43(a)(3)(vii) excludes
contingent subordinate liens from the
200-credit extension limit for purposes
of the May 2013 ATR Final Rule’s
nonprofit exemption. Given the
numerous limitations on contingent
subordinate liens, including but not
limited to the 1-percent cap on upfront
costs payable by the consumer—and
given the 200-loan limit for other loans,
the Bureau believes that the potential
for creditors to improperly exploit the
amended rule is low. The Bureau also
believes that this exemption will allow
a greater number of nonprofit creditors
to originate more loans than under the
current rule, or to remain in the lowand moderate-income consumer market
without passing through cost increases
to consumers.
Overall, the primary benefit to
consumers of the proposed exclusion is
a potential increase in access to credit
and a potential decrease in the cost of
credit. The primary cost to consumers is
losing some of the protections provided
by the Bureau’s ability-to-repay rule.
The primary benefit to covered persons
is exemption from that same rule. See
78 FR 6407, 6555–75 (Jan. 30, 2013);
(‘‘Dodd-Frank Act Section 1022(b)(2)
Analysis’’ part in the January 2013 ATR
Final Rule); 78 FR 35429, 35492–97
(June 12, 2013) (similar part in the May
2013 ATR Final Rule). There are no
significant costs to covered persons.
Finally, the Bureau does not possess
any data that would enable it to report
the number of transactions affected, but
from anecdotal evidence and taking into
account the size of the nonprofit
creditors that are most likely to take
advantage of this exemption, it is
unlikely that there will be a significant
number of loans affected each year, and
it is possible that virtually no loans will
be affected in the near future. Several
nonprofit creditors might be affected as
well, but it is possible that no nonprofit
creditors will be affected in the near
future.
Cure for Points and Fees Over the
Qualified Mortgage Threshold
To originate a qualified mortgage, a
creditor must satisfy various conditions,
including the condition of charging at
most 3 percent of the total loan amount
in points and fees, not including up to
two bona-fide discount points, and with
higher thresholds for lower loan
amounts. However, origination
processes are not perfect and creditors
might be concerned about any potential
unintended errors that result in a loan
that the creditor believed to be a
qualified mortgage at origination but
that actually was over the 3-percent
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points and fees threshold upon further,
post-consummation review.
The three most likely responses by a
creditor concerned about such
inadvertent errors would be either to
originate loans with points and fees well
below TILA’s 3-percent limit, to insert
additional quality control in its
origination process, or to charge a
premium for the risk of a loan being
deemed not to be a qualified mortgage,
especially on loans with points and fees
not well below TILA’s 3-percent limit.
The first solution is not what the
Bureau, or presumably Congress,
intended; otherwise the statutory limit
would have been set lower than 3
percent. The second solution could
result in more than the socially optimal
amount of effort expended on quality
control, especially since most loans will
be securitized and thus re-examined
shortly after origination. The savings
from forgoing additional quality control
might be passed through to consumers,
to the extent that costs saved are
marginal (as opposed to fixed) and the
markets are sufficiently competitive.
The third solution is, effectively, a less
stark version of the first solution, with
loans close to TILA’s 3-percent limit
still being originated, albeit at higher
prices simply due to being close to the
limit. Like the first potential solution,
this would be an unintended
consequence of the limit.
The primary potential drawback of
the proposal to allow creditors to cure
inadvertent points and fees errors is the
risk of inappropriate exploitation by
creditors. However, the conditions the
Bureau has placed on the proposed cure
mechanism help to ensure that creditors
will not abuse this mechanism and thus
that consumers are unlikely to
experience negative side-effects.
One such potential gaming scenario
involves a creditor originating risky
loans with high points and fees while
hoping to avoid a massive wave of
foreclosures. In this case, the possibility
of cure could be thought of as an option
that the creditor could exercise to
strengthen its position for foreclosure
litigation, but only if the creditor
foresees the wave of foreclosures. The
elements of proposed § 1026.43(e)(3)(iii)
requiring that the loan be originated in
good faith as a qualified mortgage and
that the overage be cured within 120
days after consummation should
discourage this type of gaming. Another
gaming scenario is a creditor that only
cures overages on loans that go into
foreclosure. This possibility is limited
by the proposed 120-day cure window,
as well as by the proposed requirement
that the creditor or assignee, as
applicable, maintains and follows
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policies and procedures for postconsummation review and refunding
overages.
The primary benefit to consumers of
the proposed cure provision is a
potential increase in access to credit and
a potential decrease of the cost of credit.
Another potential benefit is that, when
a creditor discovers the inadvertent
points and fees overage, the creditor
may reimburse the consumer for the
overage. However, this is a benefit only
for consumers who place greater value
on being reimbursed than on the
additional legal protections that a nonqualified mortgage would afford them.
The primary cost to consumers is that,
without the consumer’s consent, a
creditor could reimburse the consumer
for a points and fees overage after
consummation—with the creditor
thereby obtaining the safe harbor (or
rebuttable presumption) of TILA abilityto-repay compliance. However, the
Bureau believes that the safeguards
included in the proposed rule will
mitigate this potential concern as
creditors are unlikely to be able to game
the system and thereby deprive
consumers of the protections provided
by the ability-to-pay rule.
The primary benefit to covered
persons is being able to originate
qualified mortgages without engaging in
inefficient additional quality control
processes, with the attendant reduction
in legal risk. Some larger creditors might
have sufficiently robust compliance
procedures that largely prevent
inadvertent points and fees overages.
These creditors might lose some market
share to creditors for whom this
provision will be more useful. The
Bureau cannot meaningfully estimate
the magnitude of this effect.
Finally, the Bureau does not possess
any data that would enable it to report
the number of transactions affected. For
some creditors, the proposed provision
might save additional verification and
quality control in the loan origination
process for every qualified mortgage
transaction that they originate 33 and/or
allow them to originate loans with
points and fees close to the 3-percent
threshold at lower prices that do not
reflect the risk of the loan inadvertently
turning out not to be a qualified
mortgage. The Bureau seeks comment
on this issue and, in particular, any
detailed descriptions regarding the
33 While
a result of the proposed points and fees
cure is that creditors have less of an incentive to
perform rigorous quality control before
consummation, there is also an alleviating effect.
Any errors uncovered in the post-consummation
review might help creditors improve their preconsummation review by immediately pointing out
areas to focus on.
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processes that might be simplified due
to the proposed cure provision and
monetary and time savings involved.
C. Impact on Covered Persons With No
More Than $10 Billion in Assets
Covered persons with no more than
$10 billion in assets likely will be the
only covered persons affected by the
two proposed exemptions regarding
associated nonprofits and contingent
subordinate liens: The respective loan
limits of each provision virtually ensure
that any creditor or servicer with over
$10 billion in assets would not qualify
for these two exemptions. For the third
proposed provision, regarding points
and fees, smaller creditors might benefit
more than larger creditors. Larger
creditors are more likely to have
sufficiently robust compliance
procedures that largely prevent
inadvertent points and fees overages.
Thus, this proposed provision might not
benefit them as much. The third
proposed provision may lead smaller
creditors to extend a greater number of
qualified mortgages near the 3-percent
points and fees limit, to extend them for
a lower price, and/or to forgo inefficient
pre-consummation quality control. To
the extent that possibility is realized,
smaller creditors would benefit from the
liability protection afforded by qualified
mortgages.
D. Impact on Access to Credit
The Bureau does not believe that
there will be an adverse impact on
access to credit resulting from any of the
three provisions. Moreover, it is
possible that there will be an expansion
of access to credit.
E. Impact on Rural Areas
The Bureau believes that rural areas
might benefit from these three
provisions more than urban areas, to the
extent that there are fewer active
creditors or servicers operating in rural
areas than in urban areas. Thus, any
creditors or servicers exiting the market
or curtailing lending or servicing in
rural areas—or restricting originating
loans with points and fees close to the
TILA 3-percent limit—might negatively
affect access to credit more than similar
behavior by creditors or servicers
operating in more urban areas. A similar
argument applies to any increases in the
cost of credit.
VIII. Regulatory Flexibility Act
Analysis
The Regulatory Flexibility Act (the
RFA), as amended by the Small
Business Regulatory Enforcement
Fairness Act of 1996, requires each
agency to consider the potential impact
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of its regulations on small entities,
including small businesses, small
governmental units, and small nonprofit
organizations. The RFA defines a ‘‘small
business’’ as a business that meets the
size standard developed by the Small
Business Administration pursuant to the
Small Business Act.
The RFA generally requires an agency
to conduct an initial regulatory
flexibility analysis (IRFA) and a final
regulatory flexibility analysis (FRFA) of
any rule subject to notice-and-comment
rulemaking requirements, unless the
agency certifies that the rule will not
have a significant economic impact on
a substantial number of small entities.
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.
An IRFA is not required for this
proposal because the proposal, if
adopted, would not have a significant
economic impact on any small entities.
The Bureau does not expect the
proposal to impose costs on covered
persons. All methods of compliance
under current law will remain available
to small entities if the proposal is
adopted. Thus, a small entity that is in
compliance with current law need not
take any additional action if the
proposal is adopted. Accordingly, the
undersigned certifies that this proposal,
if adopted, would not have a significant
economic impact on a substantial
number of small entities.
IX. Paperwork Reduction Act
Under the Paperwork Reduction Act
of 1995 (PRA) (44 U.S.C. 3501 et seq.),
Federal agencies are generally required
to seek the Office of Management and
Budget (OMB) approval for information
collection requirements prior to
implementation. The collections of
information related to Regulations Z and
X have been previously reviewed and
approved by OMB in accordance with
the PRA and assigned OMB Control
Number 3170–0015 (Regulation Z) and
3170–0016 (Regulation X). Under the
PRA, the Bureau may not conduct or
sponsor, and, notwithstanding any other
provision of law, a person is not
required to respond to an information
collection unless the information
collection displays a valid control
number assigned by OMB.
The Bureau has determined that this
Proposed Rule would not impose any
new or revised information collection
requirements (recordkeeping, reporting,
or disclosure requirements) on covered
entities or members of the public that
would constitute collections of
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information requiring OMB approval
under the PRA. The Bureau welcomes
comments on this determination or any
other aspect of this proposal for
purposes of the PRA. Comments should
be submitted as outlined in the
ADDRESSES section above. All comments
will become a matter of public record.
List of Subjects in 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 proposes to
amend 12 CFR part 1026 as set forth
below:
PART 1026—TRUTH IN LENDING
(REGULATION Z)
1. The authority citation for part 1026
continues to read as follows:
■
Authority: 12 U.S.C. 2601, 2603–2605,
2607, 2609, 2617, 5511, 5512, 5532, 5581; 15
U.S.C. 1601 et seq.
Subpart E—Special Rules for Certain
Home Mortgage Transactions
2. Section 1026.41 is amended by
revising paragraphs (e)(4)(ii) and (iii) to
read as follows:
■
§ 1026.41 Periodic statements for
residential mortgage loans.
*
*
*
*
*
(e) * * *
(4) * * *
(ii) Small servicer defined. A small
servicer is a servicer that:
(A) Services, together with any
affiliates, 5,000 or fewer mortgage loans,
for all of which the servicer (or an
affiliate) is the creditor or assignee;
(B) Is a Housing Finance Agency, as
defined in 24 CFR 266.5; or
(C) Is a nonprofit entity that services
5,000 or fewer mortgage loans,
including any mortgage loans serviced
on behalf of associated nonprofit
entities, for all of which the servicer or
an associated nonprofit entity is the
creditor. For purposes of this paragraph
(e)(4)(ii)(C), the following definitions
apply:
(1) The term ‘‘nonprofit entity’’ means
an entity having a tax exemption ruling
or determination letter from the Internal
Revenue Service under section 501(c)(3)
of the Internal Revenue Code of 1986
(26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)–
1), and;
(2) The term ‘‘associated nonprofit
entities’’ means nonprofit entities that
by agreement operate using a common
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name, trademark, or servicemark to
further and support a common
charitable mission or purpose.
(iii) Small servicer determination. In
determining whether a servicer is a
small servicer pursuant to paragraph
(e)(4)(ii)(A) of this section, the servicer
is evaluated based on the mortgage
loans serviced by the servicer and any
affiliates as of January 1 and for the
remainder of the calendar year. In
determining whether a servicer is a
small servicer pursuant to paragraph
(e)(4)(ii)(C) of this section, the servicer
is evaluated based on the mortgage
loans serviced by the servicer as of
January 1 and for the remainder of the
calendar year. A servicer that ceases to
qualify as a small servicer will have six
months from the time it ceases to
qualify or until the next January 1,
whichever is later, to comply with any
requirements from which the servicer is
no longer exempt as a small servicer.
The following mortgage loans are not
considered in determining whether a
servicer qualifies as a small servicer:
*
*
*
*
*
■ 3. Section 1026.43 is amended by
revising paragraph (a)(3)(v)(D)(1) and
the introductory text of paragraph
(e)(3)(i) and adding new paragraphs
(a)(3)(vii) and (e)(3)(iii) to read as
follows:
§ 1026.43 Minimum standards for
transactions secured by a dwelling.
(a) * * *
(3) * * *
(v) * * *
(D) * * *
(1) During the calendar year preceding
receipt of the consumer’s application,
the creditor extended credit secured by
a dwelling no more than 200 times,
except as provided in paragraph
(a)(3)(vii) of this section;
*
*
*
*
*
(vii) Consumer credit transactions that
meet the following criteria are not
considered in determining whether a
creditor exceeds the credit extension
limitation in paragraph (a)(3)(v)(D)(1) of
this section:
(A) The transaction is secured by a
subordinate lien;
(B) The transaction is for the purpose
of:
(1) Downpayment, closing costs, or
other similar home buyer assistance,
such as principal or interest subsidies;
(2) Property rehabilitation assistance;
(3) Energy efficiency assistance; or
(4) Foreclosure avoidance or
prevention;
(C) The credit contract does not
require payment of interest;
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(D) The credit contract provides that
repayment of the amount of the credit
extended is:
(1) Forgiven either incrementally or in
whole, at a date certain, and subject
only to specified ownership and
occupancy conditions, such as a
requirement that the consumer maintain
the property as the consumer’s principal
dwelling for five years;
(2) Deferred for a minimum of 20
years after consummation of the
transaction;
(3) Deferred until sale of the property
securing the transaction; or
(4) Deferred until the property
securing the transaction is no longer the
principal dwelling of the consumer;
(E) The total of costs payable by the
consumer in connection with the
transaction at consummation is less
than 1 percent of the amount of credit
extended and includes no charges other
than:
(1) Fees for recordation of security
instruments, deeds, and similar
documents;
(2) A bona fide and reasonable
application fee; and
(3) A bona fide and reasonable fee for
housing counseling services; and
(F) The creditor complies with all
other applicable requirements of this
part in connection with the transaction.
*
*
*
*
*
(e) * * *
(3) * * *. (i) Except as provided in
paragraph (e)(3)(iii) of this section, a
covered transaction is not a qualified
mortgage unless the transaction’s total
points and fees, as defined in
§ 1026.32(b)(1), do not exceed:
*
*
*
*
*
(iii) If the creditor or assignee
determines after consummation that the
total points and fees payable in
connection with a loan exceed the
applicable limit under paragraph
(e)(3)(i) of this section, the loan is not
precluded from being a qualified
mortgage, provided:
(A) The creditor originated the loan in
good faith as a qualified mortgage and
the loan otherwise meets the
requirements of paragraphs (e)(2), (e)(4),
(e)(5), (e)(6), or (f) of this section, as
applicable;
(B) Within 120 days after
consummation, the creditor or assignee
refunds to the consumer the dollar
amount by which the transaction’s
points and fees exceeded the applicable
limit under paragraph (e)(3)(i) of this
section at consummation; and
(C) The creditor or assignee, as
applicable, maintains and follows
policies and procedures for postconsummation review of loans and
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refunding to consumers amounts that
exceed the applicable limit under
paragraph (e)(3)(i) of this section.
*
*
*
*
*
■ 4. In Supplement I to part 1026:
■ a. Under Section 1026.41—Periodic
Statements for Residential Mortgage
Loans:
■ i. Under Paragraph 41(e)(4)(ii) Small
servicer defined, paragraph 2 is revised
and paragraph 4 is added.
■ ii. Under Paragraph 41(e)(4)(iii) Small
servicer determination, paragraphs 2
and 3 are revised and paragraphs 4 and
5 are added.
■ b. Under Section 1026.43—Minimum
Standards for Transactions Secured by
a Dwelling:
■ i. New subheading Paragraph
43(a)(3)(vii) and paragraph 1 under that
subheading are added.
■ ii. New subheading Paragraph
43(e)(3)(iii) and paragraphs 1 and 2
under that subheading are added.
The revisions read as follows:
Supplement I to Part 1026—Official
Interpretations
*
*
*
*
*
Subpart E—Special Rules for Certain
Home Mortgage Transactions
*
*
*
*
*
Section 1026.41—Periodic Statements
for Residential Mortgage Loans
*
*
*
*
*
41(e)(4)(ii) Small servicer defined.
*
*
*
*
*
2. Services, together with affiliates,
5,000 or fewer mortgage loans. To
qualify as a small servicer under
§ 1026.41(e)(4)(ii)(A), a servicer must
service, together with any affiliates,
5,000 or fewer mortgage loans, for all of
which the servicer (or an affiliate) is the
creditor or assignee. There are two
elements to satisfying
§ 1026.41(e)(4)(ii)(A). First, a servicer,
together with any affiliates, must service
5,000 or fewer mortgage loans. Second,
a servicer must service only mortgage
loans for which the servicer (or an
affiliate) is the creditor or assignee. To
be the creditor or assignee of a mortgage
loan, the servicer (or an affiliate) must
either currently own the mortgage loan
or must have been the entity to which
the mortgage loan obligation was
initially payable (that is, the originator
of the mortgage loan). A servicer is not
a small servicer under
§ 1026.41(e)(4)(ii)(A) if it services any
mortgage loans for which the servicer or
an affiliate is not the creditor or assignee
(that is, for which the servicer or an
affiliate is not the owner or was not the
originator). The following two examples
demonstrate circumstances in which a
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25751
servicer would not qualify as a small
servicer under § 1026.41(e)(4)(ii)(A)
because it did not meet both
requirements under
§ 1026.41(e)(4)(ii)(A) for determining a
servicer’s status as a small servicer:
*
*
*
*
*
4. Nonprofit entity that services 5,000
or fewer mortgage loans. To qualify as
a small servicer under
§ 1026.41(e)(4)(ii)(C), a servicer must be
a nonprofit entity that services 5,000 or
fewer mortgage loans, including any
mortgage loans serviced on behalf of
associated nonprofit entities, for all of
which the servicer or an associated
nonprofit entity is the creditor. There
are two elements to satisfying
§ 1026.41(e)(4)(ii)(C). First, a nonprofit
entity must service 5,000 or fewer
mortgage loans, including any mortgage
loans serviced on behalf of associated
nonprofit entities. For each associated
nonprofit entity, the small servicer
determination is made separately,
without consideration of the number of
loans serviced by another associated
nonprofit entity. Second, a nonprofit
entity must service only mortgage loans
for which the servicer (or an associated
nonprofit entity) is the creditor. To be
the creditor, the servicer (or an
associated nonprofit entity) must have
been the entity to which the mortgage
loan obligation was initially payable
(that is, the originator of the mortgage
loan). A nonprofit entity is not a small
servicer under § 1026.41(e)(4)(ii)(C) if it
services any mortgage loans for which
the servicer (or an associated nonprofit
entity) is not the creditor (that is, for
which the servicer or an associated
nonprofit entity was not the originator).
The first of the following two examples
demonstrates circumstances in which a
nonprofit entity would qualify as a
small servicer under
§ 1026.41(e)(4)(ii)(C) because it meets
both requirements for determining a
nonprofit entity’s status as a small
servicer under § 1026.41(e)(4)(ii)(C). The
second example demonstrates
circumstances in which a nonprofit
entity would not qualify as a small
servicer under § 1026.41(e)(4)(ii)(C)
because it does not meet both
requirements under
§ 1026.41(e)(4)(ii)(C).
i. Nonprofit entity A services 3,000 of
its own mortgage loans, and 1,500
mortgage loans on behalf of associated
nonprofit entity B. All 4,500 mortgage
loans were originated by A or B.
Associated nonprofit entity C services
2,500 mortgage loans, all of which it
originated. Because the number of
mortgage loans serviced by a nonprofit
entity is determined by counting the
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number of mortgage loans serviced by
the nonprofit entity (including mortgage
loans serviced on behalf of associated
nonprofit entities) but not counting any
mortgage loans serviced by an
associated nonprofit entity, A and C are
both small servicers.
ii. A nonprofit entity services 4,500
mortgage loans—3,000 mortgage loans it
originated, 1,000 mortgage loans
originated by associated nonprofit
entities, and 500 mortgage loans neither
it nor an associated nonprofit entity
originated. The nonprofit entity is not a
small servicer because it services
mortgage loans for which neither it nor
an associated nonprofit entity is the
creditor, notwithstanding that it services
fewer than 5,000 mortgage loans.
41(e)(4)(iii) Small servicer
determination.
*
*
*
*
*
2. Timing for small servicer
exemption. The following examples
demonstrate when a servicer either is
considered or is no longer considered a
small servicer for purposes of
§ 1026.41(e)(4)(ii)(A) and (C):
i. Assume a servicer (that as of
January 1 of the current year qualifies as
a small servicer) begins servicing more
than 5,000 mortgage loans on October 1,
and services more than 5,000 mortgage
loans as of January 1 of the following
year. The servicer would no longer be
considered a small servicer on January
1 of that following year and would have
to comply with any requirements from
which it is no longer exempt as a small
servicer on April 1 of that following
year.
ii. Assume a servicer (that as of
January 1 of the current year qualifies as
a small servicer) begins servicing more
than 5,000 mortgage loans on February
1, and services more than 5,000
mortgage loans as of January 1 of the
following year. The servicer would no
longer be considered a small servicer on
January 1 of that following year and
would have to comply with any
requirements from which it is no longer
exempt as a small servicer on that same
January 1.
iii. Assume a servicer (that as of
January 1 of the current year qualifies as
a small servicer) begins servicing more
than 5,000 mortgage loans on February
1, but services fewer than 5,000
mortgage loans as of January 1 of the
following year. The servicer is
considered a small servicer for that
following year.
3. Mortgage loans not considered in
determining whether a servicer is a
small servicer. Mortgage loans that are
not considered pursuant to
§ 1026.41(e)(4)(iii) for purposes of the
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small servicer determination under
§ 1026.41(e)(4)(ii)(A) are not considered
either for determining whether a
servicer (together with any affiliates)
services 5,000 or fewer mortgage loans
or whether a servicer is servicing only
mortgage loans that it (or an affiliate)
owns or originated. For example,
assume a servicer services 5,400
mortgage loans. Of these mortgage loans,
the servicer owns or originated 4,800
mortgage loans, voluntarily services 300
mortgage loans that neither it (nor an
affiliate) owns or originated and for
which the servicer does not receive any
compensation or fees, and services 300
reverse mortgage transactions. The
voluntarily serviced mortgage loans and
reverse mortgage loans are not
considered in determining whether the
servicer qualifies as a small servicer.
Thus, because only the 4,800 mortgage
loans owned or originated by the
servicer are considered in determining
whether the servicer qualifies as a small
servicer, the servicer qualifies for the
small servicer exemption pursuant to
§ 1026.41(e)(4)(ii)(A) with regard to all
5,400 mortgage loans it services.
4. Mortgage loans not considered in
determining whether a nonprofit entity
is a small servicer. Mortgage loans that
are not considered pursuant to
§ 1026.41(e)(4)(iii) for purposes of the
small servicer determination under
§ 1026.41(e)(4)(ii)(C) are not considered
either for determining whether a
nonprofit entity services 5,000 or fewer
mortgage loans, including any mortgage
loans serviced on behalf of associated
nonprofit entities, or whether a
nonprofit entity is servicing only
mortgage loans that it or an associated
nonprofit entity originated. For
example, assume a servicer that is a
nonprofit entity services 5,400 mortgage
loans. Of these mortgage loans, the
nonprofit entity originated 2,800
mortgage loans and associated nonprofit
entities originated 2,000 mortgage loans.
The nonprofit entity receives
compensation for servicing the loans
originated by associated nonprofits. The
nonprofit entity also voluntarily
services 600 mortgage loans that were
originated by an entity that is not an
associated nonprofit entity, and receives
no compensation or fees for servicing
these loans. The voluntarily serviced
mortgage loans are not considered in
determining whether the servicer
qualifies as a small servicer. Thus,
because only the 4,800 mortgage loans
originated by the nonprofit entity or
associated nonprofit entities are
considered in determining whether the
servicer qualifies as a small servicer, the
servicer qualifies for the small servicer
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exemption pursuant to
§ 1026.41(e)(4)(ii)(C) with regard to all
5,400 mortgage loans it services.
5. Limited role of voluntarily serviced
mortgage loans. Reverse mortgages and
mortgage loans secured by consumers’
interests in timeshare plans, in addition
to not being considered in determining
small servicer qualification, are also
exempt from the requirements of
§ 1026.41. In contrast, although
voluntarily serviced mortgage loans, as
defined by § 1026.41(e)(4)(iii)(A), are
likewise not considered in determining
small servicer status, they are not
exempt from the requirements of
§ 1026.41. Thus, a servicer that does not
qualify as a small servicer would not
have to provide periodic statements for
reverse mortgages and timeshare plans
because they are exempt from the rule,
but would have to provide periodic
statements for mortgage loans it
voluntarily services.
*
*
*
*
*
Section 1026.43—Minimum Standards
for Transactions Secured by a Dwelling
*
*
*
*
*
Paragraph 43(a)(3)(vii).
1. Requirements of exclusion. Section
1026.43(a)(3)(vii) excludes certain
transactions from the credit extension
limit set forth in § 1026.43(a)(3)(v)(D)(1),
provided a transaction meets several
conditions. The terms of the credit
contract must satisfy the conditions that
the transaction not require the payment
of interest under § 1026.43(a)(3)(vii)(C)
and that repayment of the amount of
credit extended be forgiven or deferred
in accordance with
§ 1026.43(a)(3)(vii)(D). The other
requirements of § 1026.43(a)(3)(vii) need
not be reflected in the credit contract,
but the creditor must retain evidence of
compliance with those provisions, as
required by § 1026.25(a). In particular,
the creditor must have information
reflecting that the total of closing costs
imposed in connection with the
transaction is less than 1 percent of the
amount of credit extended and include
no charges other than recordation,
application, and housing counseling
fees, in accordance with
§ 1026.43(a)(3)(vii)(E). Unless an
itemization of the amount financed
sufficiently details this requirement, the
creditor must establish compliance with
§ 1026.43(a)(3)(vii)(E) by some other
written document and retain it in
accordance with § 1026.25(a).
*
*
*
*
*
Paragraph 43(e)(3)(iii)
1. Originated in good faith as a
qualified mortgage. i. The following
E:\FR\FM\06MYP1.SGM
06MYP1
Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Proposed Rules
may be evidence that a creditor
originated a loan in good faith as a
qualified mortgage:
A. A creditor maintains and follows
policies and procedures designed to
ensure that points and fees are correctly
calculated and do not exceed the
applicable limit under § 1026.43(e)(3)(i);
or
B. The pricing for the loan is
consistent with pricing on qualified
mortgages originated
contemporaneously by the same
creditor.
ii. In contrast, the following may be
evidence that a loan was not originated
in good faith as a qualified mortgage:
A. A creditor does not maintain, or
the creditor has, but does not follow,
policies and procedures designed to
ensure that points and fees are correctly
calculated and do not exceed the
applicable limit under § 1026.43(e)(3)(i);
or
B. The pricing for the loan is not
consistent with pricing on qualified
mortgages originated
contemporaneously by the same
creditor.
2. Policies and procedures for postconsummation review and refunding. A
creditor or assignee satisfies
§ 1026.43(e)(3)(iii)(C) if it maintains and
follows policies and procedures for
post-consummation quality control loan
review and for curing (by providing a
refund) errors in points and fees
calculations that occur at or before
consummation.
*
*
*
*
*
Dated: April 30, 2014.
Richard Cordray,
Director, Bureau of Consumer Financial
Protection.
[FR Doc. 2014–10207 Filed 5–5–14; 8:45 am]
BILLING CODE 4810–AM–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2014–0292; Directorate
Identifier 2014–CE–011–AD]
sroberts on DSK5SPTVN1PROD with PROPOSALS
RIN 2120–AA64
Examining the AD Docket
Airworthiness Directives; GROBWERKE GMBH & CO KG and
BURKHART GROB LUFT- UND
RAUMFAHRT GmbH & CO KG Gliders
Federal Aviation
Administration (FAA), Department of
Transportation (DOT).
ACTION: Notice of proposed rulemaking
(NPRM).
AGENCY:
VerDate Mar<15>2010
18:56 May 05, 2014
We propose to adopt a new
airworthiness directive (AD) for GROBWERKE GMBH & CO KG Models G102
STANDARD ASTIR III, G102 CLUB
ASTIR III, and G102 CLUB ASTIR IIIb
gliders and BURKHART GROB LUFTUND RAUMFAHRT GmbH & CO KG
Models G103 TWIN II, G103A TWIN II
ACRO, G103C TWIN III ACRO, and G
103 C Twin III SL gliders. This proposed
AD results from mandatory continuing
airworthiness information (MCAI)
originated by an aviation authority of
another country to identify and correct
an unsafe condition on an aviation
product. The MCAI describes the unsafe
condition as plastic control cable
pulleys developing cracks due to aging.
We are issuing this proposed AD to
require actions to address the unsafe
condition on these products.
DATES: We must receive comments on
this proposed AD by June 20, 2014.
ADDRESSES: You may send comments by
any of the following methods:
• Federal eRulemaking Portal: Go to
https://www.regulations.gov. Follow the
instructions for submitting comments.
• Fax: (202) 493–2251.
• Mail: U.S. Department of
Transportation, Docket Operations, M–
30, West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue SE.,
Washington, DC 20590.
• Hand Delivery: U.S. Department of
Transportation, Docket Operations, M–
30, West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue SE.,
Washington, DC 20590, between 9 a.m.
and 5 p.m., Monday through Friday,
except Federal holidays.
For service information identified in
this proposed AD, contact FiberglasTechnik Rudolf Lindner GmbH & Co.
KG, Steige 3, D–88487 Walpertshofen,
Germany; telephone: +49 (0) 7353/22
43; fax: +49 (0) 7353/30 96; email:
info@LTB-Lindner.com; Web site:
https://www.ltb-lindner.com/
home.104.html. You may review this
referenced service information at the
FAA, Small Airplane Directorate, 901
Locust, Kansas City, Missouri 64106.
For information on the availability of
this material at the FAA, call (816) 329–
4148.
SUMMARY:
Jkt 232001
You may examine the AD docket on
the Internet at https://
www.regulations.gov by searching for
and locating Docket No. FAA–2014–
0292; or in person at the Docket
Management Facility between 9 a.m.
and 5 p.m., Monday through Friday,
except Federal holidays. The AD docket
contains this proposed AD, the
regulatory evaluation, any comments
PO 00000
Frm 00044
Fmt 4702
Sfmt 4702
25753
received, and other information. The
street address for the Docket Office
(telephone (800) 647–5527) is in the
ADDRESSES section. Comments will be
available in the AD docket shortly after
receipt.
FOR FURTHER INFORMATION CONTACT: Jim
Rutherford, Aerospace Engineer, FAA,
Small Airplane Directorate, 901 Locust,
Room 301, Kansas City, Missouri 64106;
telephone: (816) 329–4165; fax: (816)
329–4090; email:
jim.rutherford@faa.gov.
SUPPLEMENTARY INFORMATION:
Comments Invited
We invite you to send any written
relevant data, views, or arguments about
this proposed AD. Send your comments
to an address listed under the
ADDRESSES section. Include ‘‘Docket No.
FAA–2014–0292; Directorate Identifier
2014–CE–011–AD’’ at the beginning of
your comments. We specifically invite
comments on the overall regulatory,
economic, environmental, and energy
aspects of this proposed AD. We will
consider all comments received by the
closing date and may amend this
proposed AD because of those
comments.
We will post all comments we
receive, without change, to https://
regulations.gov, including any personal
information you provide. We will also
post a report summarizing each
substantive verbal contact we receive
about this proposed AD.
Discussion
The European Aviation Safety Agency
(EASA), which is the Technical Agent
for the Member States of the European
Community, has issued AD No.: 2014–
0067, dated March 18, 2014 (referred to
after this as ‘‘the MCAI’’), to correct an
unsafe condition for the specified
products. The MCAI states:
Control cable pulleys made from plastic
(white or brown material) in the rudder
control unit were reported to develop cracks
due to aging. In one case, jamming of the
rudder control unit was reported.
This condition, if not detected and
corrected, could cause cable pulleys to break,
potentially jamming the rudder control unit
and resulting in loss of control of the
sailplane.
To address this potential unsafe condition,
Fiberglas-Technik issued Technische
Mitteilung/Service Bulletin TM–G05/SB–G05
and Anweisung/Instructions A/I–G05 (one
document) to provide instructions for the
replacement of plastic cable pulleys with
pulleys made from aluminium.
For the reason described above, this AD
requires identification and replacement of
plastic cable pulleys in the rudder control
unit.
E:\FR\FM\06MYP1.SGM
06MYP1
Agencies
[Federal Register Volume 79, Number 87 (Tuesday, May 6, 2014)]
[Proposed Rules]
[Pages 25730-25753]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-10207]
=======================================================================
-----------------------------------------------------------------------
BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1026
[Docket No. CFPB-2014-0009]
RIN 3170-AA43
Amendments to the 2013 Mortgage Rules Under the Truth in Lending
Act (Regulation Z)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Proposed rule with request for public comment.
-----------------------------------------------------------------------
SUMMARY: The Bureau of Consumer Financial Protection (Bureau) proposes
amendments to certain mortgage rules issued in 2013. The proposed rule
would provide an alternative small servicer definition for nonprofit
entities that meet certain requirements, amend the existing exemption
from the ability-to-repay rule for nonprofit entities that meet certain
requirements, and provide a limited cure mechanism for the points and
fees limit that applies to qualified mortgages.
DATES: Comments regarding the proposed amendments to 12 CFR
1026.41(e)(4), 1026.43(a)(3), and 1026.43(e)(3) must be received on or
before June 5, 2014. For the requests for comment regarding correction
or cure of debt-to-income ratio overages and the credit extension limit
for the small creditor definition, comments must be received on or
before July 7, 2014.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2014-
0009 or RIN 3170-AA43, by any of the following methods:
Electronic: https://www.regulations.gov. Follow the
instructions for submitting comments.
Mail/Hand Delivery/Courier: Monica Jackson, Office of the
Executive Secretary, Consumer Financial Protection Bureau, 1700 G
Street NW., Washington, DC 20552.
Instructions: All submissions should include the agency name and
docket number or Regulatory Information Number (RIN) for this
rulemaking. Because paper mail in the Washington,
[[Page 25731]]
DC area and at the Bureau is subject to delay, commenters are
encouraged to submit comments electronically. In general, all comments
received will be posted without change to https://www.regulations.gov.
In addition, comments will be available for public inspection and
copying at 1700 G Street NW., Washington, DC 20552, on official
business days between the hours of 10 a.m. and 5 p.m. Eastern Time. You
can make an appointment to inspect the documents by telephoning (202)
435-7275.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Sensitive personal information, such as account numbers or social
security numbers, should not be included. Comments generally will not
be edited to remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Pedro De Oliveira, Counsel; William R.
Corbett, Nicholas Hluchyj, and Priscilla Walton-Fein, Senior Counsels,
Office of Regulations, at (202) 435-7700.
SUPPLEMENTARY INFORMATION:
I. Summary of Proposed 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\ The
Bureau clarified and revised those rules through notice and comment
rulemaking during the summer and fall of 2013. The purpose of those
updates was to address important questions raised by industry, consumer
groups, or other stakeholders. The Bureau is now proposing several
additional amendments to the 2013 Title XIV Final Rules to revise
regulatory provisions and official interpretations primarily relating
to the Regulation Z ability-to-repay/qualified mortgage requirements
and servicing rules, as well as seeking comment on additional issues.
The Bureau expects to issue additional proposals to address other
topics relating to the 2013 Title XIV Final Rules, such as the
definition of ``rural and underserved'' for purposes of certain
mortgage provisions affecting small creditors as discussed further
below.
---------------------------------------------------------------------------
\1\ Specifically, on January 10, 2013, the Bureau issued Escrow
Requirements Under the Truth in Lending Act (Regulation Z), 78 FR
4725 (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 6855 (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) (January 2013 ATR Final
Rule). The Bureau concurrently issued a proposal to amend the
January 2013 ATR Final Rule, which was finalized on May 29, 2013.
See 78 FR 6621 (Jan. 30, 2013) (January 2013 ATR Proposal) and 78 FR
35429 (June 12, 2013) (May 2013 ATR Final Rule). 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 (Feb. 14, 2013) (Regulation Z)
and 78 FR 10695 (Feb. 14, 2013) (Regulation X) (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 Valuations
Final Rule) and, jointly with other agencies, issued Appraisals for
Higher-Priced Mortgage Loans (Regulation Z), 78 FR 10367 (Feb. 13,
2013) (2013 Interagency Appraisals Final Rule). On January 20, 2013,
the Bureau issued the Loan Originator Compensation Requirements
under the Truth in Lending Act (Regulation Z), 78 FR 11279 (Feb. 15,
2013) (2013 Loan Originator Final Rule).
---------------------------------------------------------------------------
Specifically, the Bureau is proposing three amendments to the 2013
Title XIV Final Rules:
To provide an alternative definition of the term ``small
servicer,'' that would apply to certain nonprofit entities that service
for a fee loans on behalf of other nonprofit chapters of the same
organization. Although the Bureau is proposing this change in
Regulation Z, the change will also affect several provisions of
Regulation X, which cross-reference the Regulation Z small servicer
exemption.
To amend the Regulation Z ability-to-repay requirements to
provide that certain interest-free, contingent subordinate liens
originated by nonprofit creditors will not be counted towards the
credit extension limit that applies to the nonprofit exemption from the
ability-to-repay requirements.
To provide a limited, post-consummation cure mechanism for
loans that are originated with the good faith expectation of qualified
mortgage status but that actually exceed the points and fees limit for
qualified mortgages.
In addition to providing specific proposals on these issues, the
Bureau is seeking comment on two additional topics:
Whether and how to provide a limited, post-consummation
cure or correction provision for loans that are originated with the
good faith expectation of qualified mortgage status but that actually
exceed the 43-percent debt-to-income ratio limit that applies to
certain qualified mortgages.
Feedback and data from smaller creditors regarding
implementation of certain provisions in the 2013 Title XIV Final Rules
that are tailored to account for small creditor operations and how
their origination activities have changed in light of the new rules.
II. Background
A. Title XIV Rulemakings Under the Dodd-Frank Act
In response to an unprecedented cycle of expansion and contraction
in the mortgage market that sparked the most severe U.S. recession
since the Great Depression, Congress passed the Dodd-Frank Act, which
was signed into law on July 21, 2010. In the Dodd-Frank Act, Congress
established the Bureau and generally consolidated the rulemaking
authority for Federal consumer financial laws, including the Truth in
Lending Act (TILA) and the Real Estate Settlement Procedures Act
(RESPA), in the Bureau.\2\ 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.\3\ Under the statute, most of these new
requirements would have taken effect automatically on January 21, 2013,
if the Bureau had not issued implementing regulations by that date.\4\
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.
---------------------------------------------------------------------------
\2\ See, e.g., sections 1011 and 1021 of the Dodd-Frank Act, 12
U.S.C. 5491 and 5511 (establishing and setting forth the purpose,
objectives, and functions of the Bureau); section 1061 of the Dodd-
Frank Act, 12 U.S.C. 5581 (consolidating certain rulemaking
authority for Federal consumer financial laws in the Bureau);
section 1100A of the Dodd-Frank Act (codified in scattered sections
of 15 U.S.C.) (similarly consolidating certain rulemaking authority
in the Bureau). But see Section 1029 of the Dodd-Frank Act, 12
U.S.C. 5519 (subject to certain exceptions, excluding from the
Bureau's authority 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).
\3\ See title XIV of the Dodd-Frank Act, Public Law 111-203, 124
Stat. 1376 (2010) (codified in scattered sections of 12 U.S.C., 15
U.S.C., and 42 U.S.C.).
\4\ See section 1400(c) of the Dodd-Frank Act, 15 U.S.C. 1601
note.
---------------------------------------------------------------------------
On January 10, 2013, the Bureau issued the 2013 Escrows Final Rule,
the January 2013 ATR Final Rule, and the 2013 HOEPA Final Rule. 78 FR
4725 (Jan. 22, 2013); 78 FR 6407 (Jan. 30, 2013); 78 FR 6855 (Jan. 31,
2013). On January 17, 2013, the Bureau issued the 2013 Mortgage
Servicing Final Rules. 78 FR 10695 (Feb. 14, 2013); 78 FR 10901 (Feb.
14, 2013). On January 18, 2013, the Bureau issued the 2013 ECOA
Valuations Final Rule and, jointly with
[[Page 25732]]
other agencies, the 2013 Interagency Appraisals Final Rule. 78 FR 7215
(Jan. 31, 2013); 78 FR 10367 (Feb. 13, 2013). On January 20, 2013, the
Bureau issued the 2013 Loan Originator Final Rule. 78 FR 11279 (Feb.
15, 2013).\5\ Pursuant to the Dodd-Frank Act, which permitted a maximum
of one year for implementation, most of these rules became effective on
January 10, 2014.
---------------------------------------------------------------------------
\5\ Each of these rules was published in the Federal Register
shortly after issuance.
---------------------------------------------------------------------------
Concurrent with the January 2013 ATR Final Rule, on January 10,
2013, the Bureau issued proposed amendments to the rule (i.e., the
January 2013 ATR Proposal), which the Bureau finalized on May 29, 2013
(i.e., the May 2013 ATR Final Rule). 78 FR 6621 (Jan. 30, 2013); 78 FR
35429 (June 12, 2013). The Bureau issued additional corrections and
clarifications to the 2013 Mortgage Servicing Final Rules and the May
2013 ATR Final Rule in the summer and fall of 2013.\6\
---------------------------------------------------------------------------
\6\ 78 FR 44685 (July 24, 2013) (clarifying which mortgages to
consider in determining small servicer status and the application of
the small servicer exemption with regard to servicer/affiliate and
master servicer/subservicer relationships); 78 FR 45842 (July 30,
2013); 78 FR 60381 (Oct. 1, 2013) (revising exceptions available to
small creditors operating predominantly in ``rural'' or
``underserved'' areas); 78 FR 62993 (Oct. 23, 2013) (clarifying
proper compliance regarding servicing requirements when a consumer
is in bankruptcy or sends a cease communication request under the
Fair Debt Collection Practice Act).
---------------------------------------------------------------------------
B. Implementation Plan for New Mortgage Rules
On February 13, 2013, the Bureau announced an initiative to support
implementation of its new mortgage rules (the Implementation Plan),\7\
under which the Bureau would work with the mortgage industry and other
stakeholders to ensure that the new rules could be implemented
accurately and expeditiously. The Implementation Plan included: (1)
Coordination with other agencies, including the development of
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.
---------------------------------------------------------------------------
\7\ Press Release, Consumer Financial Protection Bureau,
Consumer Financial Protection Bureau Lays Out Implementation Plan
for New Mortgage Rules (Feb. 13, 2013), available at https://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-lays-out-implementation-plan-for-new-mortgage-rules/.
---------------------------------------------------------------------------
This proposal concerns additional revisions to the new rules. The
purpose of these updates is to address important questions raised by
industry, consumer groups, or other stakeholders. As discussed below,
the Bureau contemplates issuing additional updates on additional
topics.
III. Legal Authority
The Bureau is issuing this proposed rule pursuant to its authority
under 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 (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. 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.
Title X of the Dodd-Frank Act, including section 1061 of the Dodd-Frank
Act, along with TILA, RESPA, and certain subtitles and provisions of
title XIV of the Dodd-Frank Act, are Federal consumer financial
laws.\8\
---------------------------------------------------------------------------
\8\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14)
(defining ``Federal consumer financial law'' to include the
``enumerated consumer laws,'' the provisions of title X of the Dodd-
Frank Act, and the laws for which authorities are transferred under
title X subtitles F and H 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), 12 U.S.C.
5481(12) note (defining ``enumerated consumer laws'' to include
certain subtitles and provisions of Dodd-Frank Act title XIV); Dodd-
Frank Act section 1061(b)(7), 12 U.S.C. 5581(b)(7) (transferring to
the Bureau all of HUD's consumer protection functions relating to
RESPA).
---------------------------------------------------------------------------
A. TILA
Section 105(a) of TILA authorizes the Bureau to prescribe
regulations to carry out the purposes of TILA. 15 U.S.C. 1604(a). 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 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 added 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. 15 U.S.C.
1639b(a)(2).
Section 105(f) of TILA authorizes the Bureau to exempt from all or
part of TILA a 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. 15 U.S.C. 1604(f)(1). That
determination must consider:
The loan amount and whether TILA's provisions ``provide a
benefit to the consumers who are parties to such transactions'';
The extent to which TILA requirements ``complicate,
hinder, or make more expensive the credit process'';
The borrowers' ``status,'' including their ``related
financial arrangements,'' their financial sophistication relative to
the type of transaction, and the importance to the borrowers of the
credit, related supporting property, and TILA coverage;
Whether the loan is secured by the consumer's principal
residence; and
Whether consumer protection would be undermined by such an
exemption. 15 U.S.C. 1604(f)(2).
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;
necessary and appropriate to effectuate the purposes of the ability-to-
repay and residential mortgage loan origination 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 such purposes. 15 U.S.C. 1639c(b)(3)(A).
B. RESPA
Section 19(a) of RESPA 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
[[Page 25733]]
achieve the purposes of RESPA, which include RESPA's consumer
protection purposes. 12 U.S.C. 2617(a). In addition, section 6(j)(3) of
RESPA authorizes the Bureau to establish any requirements necessary to
carry out section 6 of RESPA, and section 6(k)(1)(E) of RESPA
authorizes the Bureau to prescribe regulations that are appropriate to
carry out RESPA's consumer protection purposes. 12 U.S.C. 2605(j)(3)
and (k)(1)(E). The consumer protection purposes of RESPA include
responding to borrower requests and complaints in a timely manner,
maintaining and providing accurate information, helping borrowers avoid
unwarranted or unnecessary costs and fees, and facilitating review for
foreclosure avoidance options.
C. The Dodd-Frank Act
Section 1405(b) of the Dodd-Frank Act provides that, ``in order to
improve consumer awareness and understanding of transactions involving
residential mortgage loans through the use of disclosures,'' the Bureau
may exempt from disclosure requirements, ``in whole or in part . . .
any class of residential mortgage loans'' if the Bureau determines that
such exemption ``is in the interest of consumers and in the public
interest.'' 15 U.S.C. 1601 note.\9\ Notably, the authority granted by
section 1405(b) applies to ``disclosure requirements'' generally, and
is not limited to a specific statute or statutes. Accordingly, Dodd-
Frank Act section 1405(b) is a broad source of authority for exemptions
from the disclosure requirements of TILA and RESPA.
---------------------------------------------------------------------------
\9\ ``Residential mortgage loan'' is generally defined as any
consumer credit transaction (other than open-end credit plans) that
is secured by a mortgage (or equivalent security interest) on ``a
dwelling or on residential real property that includes a dwelling''
(except, in certain instances, timeshare plans). 15 U.S.C.
1602(cc)(5).
---------------------------------------------------------------------------
Moreover, 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). Accordingly, the Bureau is
exercising its authority under Dodd-Frank Act section 1022(b) to
propose rules that carry out the purposes and objectives of TILA,
RESPA, title X of the Dodd-Frank Act, and certain enumerated subtitles
and provisions of title XIV of the Dodd-Frank Act, and to prevent
evasion of those laws.
The Bureau is proposing to amend rules that implement certain Dodd-
Frank Act provisions. In particular, the Bureau is proposing to amend
provisions of Regulation Z (and, by reference, Regulation X) adopted by
the 2013 Mortgage Servicing Final Rules (including July 2013 amendments
thereto), the January 2013 ATR Final Rule, and the May 2013 ATR Final
Rule.
IV. Proposed Effective Date
The Bureau proposes that all of the changes proposed herein take
effect thirty days after publication of a final rule in the Federal
Register. The proposed changes would expand exemptions and provide
relief from regulatory requirements; therefore the Bureau believes an
effective date of 30 days after publication may be appropriate. The
Bureau seeks comment on whether the proposed effective date is
appropriate, or whether the Bureau should adopt an alternative
effective date.
V. Section-by-Section Analysis
Section 1026.41 Periodic Statements for Residential Mortgage Loans
41(e) Exemptions
41(e)(4) Small Servicers
The Bureau is proposing to revise the scope of the exemption for
small servicers that is set forth in Sec. 1026.41 of Regulation Z and
incorporated by cross-reference in certain provisions of Regulation X.
The proposal would add an alternative definition of small servicer
which would apply to certain nonprofit entities that service for a fee
only loans for which the servicer or an associated nonprofit entity is
the creditor.
The Bureau's 2013 Mortgage Servicing Final Rules exempt small
servicers from certain mortgage servicing requirements. Specifically,
Regulation Z exempts small servicers, defined in Sec.
1026.41(e)(4)(ii), from the requirement to provide periodic statements
for residential mortgage loans.\10\ Regulation X incorporates this same
definition by reference to Sec. 1026.41(e)(4) and thereby exempts
small servicers from: (1) Certain requirements relating to obtaining
force-placed insurance,\11\ (2) the general servicing policies,
procedures, and requirements,\12\ and (3) certain requirements and
restrictions relating to communicating with borrowers about, and
evaluation of applications for, loss mitigation options.\13\
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\10\ 12 CFR 1026.41(e) (requiring delivery each billing cycle of
a periodic statement, with specific content and form). For loans
serviced by a small servicer, a creditor or assignee is also exempt
from the Regulation Z periodic statement requirements. 12 CFR
1026.41(e)(4)(i).
\11\ 12 CFR 1024.17(k)(5) (prohibiting purchase of force-placed
insurance in certain circumstances).
\12\ 12 CFR 1024.30(b)(1) (exempting small servicers from
Sec. Sec. 1024.38 through 41, except as otherwise provided under
41(j), as discussed in note 13, infra). Sections 1024.38 through 40
respectively impose general servicing policies, procedures, and
requirements; early intervention requirements for delinquent
borrowers; and policies and procedures to maintain continuity of
contact with delinquent borrowers).
\13\ See 12 CFR 1024.41 (loss mitigation procedures). Though
exempt from most of the rule, small servicers are subject to the
prohibition of foreclosure referral before the loan obligation is
more than 120 days delinquent and may not make the first notice or
filing for foreclosure if a borrower is performing pursuant to the
terms of an agreement on a loss mitigation option. 12 CFR
1024.41(j).
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Current Sec. 1026.41(e)(4)(ii) defines the term ``small servicer''
as a servicer that either: (A) Services, together with any affiliates,
5,000 or fewer mortgage loans, for all of which the servicer (or an
affiliate) is the creditor or assignee; or (B) is a Housing Finance
Agency, as defined in 24 CFR 266.5. ``Affiliate'' is defined in Sec.
1026.32(b)(5) as any company that controls, is controlled by, or is
under common control with another company, as set forth in the Bank
Holding Company Act of 1956, 12 U.S.C. 1841 et seq. (BHCA).\14\
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\14\ Under the BHCA, a company has ``control'' over another
company if it (i) ``directly or indirectly . . . owns, controls, or
has power to vote 25 per centum or more of any class of voting
securities'' of the other company; (ii) ``controls . . . the
election of a majority of the directors or trustees'' of the other
company; or (iii) ``directly or indirectly exercises a controlling
influence over the management or policies'' of the other company
(based on a determination by the Board). 12 U.S.C. 1841(a)(2).
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Generally, under Sec. 1026.41(e)(4)(ii)(A), a servicer cannot be a
small servicer if it services any loan for which the servicer or its
affiliate is not the creditor or assignee. However, current Sec.
1026.41(e)(4)(iii) excludes from consideration certain types of
mortgage loans for purposes of determining whether a servicer qualifies
as a small servicer: (A) Mortgage loans voluntarily serviced by the
servicer for a creditor or assignee that is not an affiliate of the
servicer and for which the servicer does not receive any compensation
or fees; (B) reverse mortgage transactions; and (C) mortgage loans
secured by consumers' interests in timeshare plans. In the 2013
Mortgage Servicing Final Rules, the Bureau concluded that a separate
exemption for nonprofits was not necessary because the Bureau believed
that nonprofits would likely fall within the small servicer exemption.
See 78 FR 10695, 10720 (Feb. 14, 2013).
As part of the Bureau's Implementation Plan, the Bureau has learned
that certain nonprofit entities may, for a fee, service loans for
another nonprofit entity that is the creditor on
[[Page 25734]]
the loan. The Bureau understands that, in some cases, these nonprofit
entities are part of a larger association of nonprofits that are
separately incorporated but operate under mutual contractual
obligations to serve the same charitable mission, and that use a common
name, trademark, or servicemark. These entities likely do not meet the
definition of ``affiliate'' under the BHCA due to the limits imposed on
nonprofits with respect to ownership and control. Accordingly, these
nonprofits likely do not qualify for the small servicer exemption
because they service, for a fee, loans on behalf of an entity that is
not an affiliate as defined under the BHCA (and because the servicer is
neither the creditor for, nor an assignee of, those loans).
The Bureau understands that groups of nonprofit entities that are
associated with one another may consolidate servicing activities to
achieve economies of scale necessary to service loans cost-effectively,
and that such costs savings may reduce the cost of credit or enable the
nonprofit to extend a greater number of loans overall. However, because
of their corporate structures, such groups of nonprofit entities have a
more difficult time than related for-profit servicers qualifying for
the small servicer exemption. For the reasons discussed below, the
Bureau believes that the ability of such nonprofit entities to
consolidate servicing activities may be beneficial to consumers--e.g.,
to the extent servicing cost savings are passed on to consumers and/or
lead to increased credit availability--and may outweigh the consumer
protections provided by the servicing rules to those consumers affected
by this proposal.
Accordingly, the Bureau is proposing an alternative definition of
small servicer that would apply to nonprofit entities that service
loans on behalf of other nonprofits within a common network or group of
nonprofit entities. Specifically, proposed Sec. 1026.41(e)(4)(ii)(C)
provides that a small servicer is a nonprofit entity that services
5,000 or fewer mortgage loans, including any mortgage loans serviced on
behalf of associated nonprofit entities, for all of which the servicer
or an associated nonprofit entity is the creditor. Proposed Sec.
1026.41(e)(4)(ii)(C)(1) provides that, for purposes of proposed Sec.
1026.41(e)(4)(ii)(C), the term ``nonprofit entity'' means an entity
having a tax exemption ruling or determination letter from the Internal
Revenue Service under section 501(c)(3) of the Internal Revenue Code of
1986. See 26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)-1. Proposed Sec.
1026.41(e)(4)(ii)(C)(2) defines ``associated nonprofit entities'' to
mean nonprofit entities that by agreement operate using a common name,
trademark, or servicemark to further and support a common charitable
mission or purpose.
The Bureau is also proposing technical changes to Sec.
1026.41(e)(4)(iii), which addresses the timing of the small servicer
determination and also excludes certain loans from the 5,000-loan
limitation. The proposed changes would add language to the existing
timing requirement to limit its application to the small servicer
determination for purposes of Sec. 1026.41(e)(4)(ii)(A) and insert a
separate timing requirement for purposes of determining whether a
nonprofit servicer is a small servicer pursuant to Sec.
1026.41(e)(4)(ii)(C). Specifically, that requirement would provide that
the servicer is evaluated based on the mortgage loans serviced by the
servicer as of January 1 and for the remainder of the calendar year.
The Bureau is proposing technical changes to comment 41(e)(4)(ii)-2
in light of proposed Sec. 1026.41(e)(4)(ii)(C). In addition, the
Bureau is proposing to add a comment to parallel existing comment
41(e)(4)(ii)-2 (that addresses the requirements to be a small servicer
under the existing definition in Sec. 1026.41(e)(4)(ii)(A)).
Specifically, new comment 41(e)(4)(ii)-4 would clarify that there are
two elements to satisfying the nonprofit small creditor definition in
proposed Sec. 1026.41(e)(4)(ii)(C). First, the comment would clarify
that a nonprofit entity must service 5,000 or fewer mortgage loans,
including any mortgage loans serviced on behalf of associated nonprofit
entities. For each associated nonprofit entity, the small servicer
determination is made separately without consideration of the number of
loans serviced by another associated nonprofit entity. Second, the
comment would further explain that the nonprofit entity must service
only mortgage loans for which the servicer (or an associated nonprofit
entity) is the creditor. To be the creditor, the servicer (or an
associated nonprofit entity) must have been the entity to which the
mortgage loan obligation was initially payable (that is, the originator
of the mortgage loan). The comment would explain that a nonprofit
entity is not a small servicer under Sec. 1026.41(e)(4)(ii)(C) if it
services any mortgage loans for which the servicer or an associated
nonprofit entity is not the creditor (that is, for which the servicer
or an associated nonprofit entity was not the originator). The comment
would provide two examples to demonstrate the application of the small
servicer definition under Sec. 1026.41(e)(4)(ii)(C).
The Bureau is also proposing to revise existing comment
41(e)(4)(iii)-3 to specify that it explains the application of Sec.
1026.41(e)(4)(iii) to the small servicer determination under Sec.
1026.41(e)(4)(ii)(A) specifically. As revised, comment 41(e)(4)(iii)-3
would explain that mortgage loans that are not considered pursuant to
Sec. 1026.41(e)(4)(iii) for purposes of the small servicer
determination under Sec. 1026.41(e)(4)(ii)(A) are not considered
either for determining whether a servicer (together with any
affiliates) services 5,000 or fewer mortgage loans or whether a
servicer is servicing only mortgage loans that it (or an affiliate)
owns or originated. The proposal would also make clarifying changes to
the example provided in comment 41(e)(4)(iii)-3 and would move language
in existing comment 41(e)(4)(iii)-3 regarding the limited role of
voluntarily serviced mortgage loans to new proposed comment
41(e)(4)(iii)-5. The Bureau is also proposing technical changes to
comment 41(e)(4)(iii)-2 in light of proposed Sec.
1026.41(e)(4)(ii)(C).
In addition, the Bureau is proposing a new comment 41(e)(4)(iii)-4
to explain the application of Sec. 1026.41(e)(4)(iii) to the nonprofit
small servicer determination under proposed Sec. 1026.41(e)(4)(ii)(C)
specifically. The proposed comment would explain that mortgage loans
that are not considered pursuant to Sec. 1026.41(e)(4)(iii) for
purposes of the small servicer determination under Sec.
1026.41(e)(4)(ii)(C) are not considered either for determining whether
a nonprofit entity services 5,000 or fewer mortgage loans, including
any mortgage loans serviced on behalf of associated nonprofit entities,
or whether a nonprofit entity is servicing only mortgage loans that it
or an associated nonprofit entity originated. The comment would provide
an example of a nonprofit entity that services 5,400 mortgage loans. Of
these mortgage loans, it originated 2,800 mortgage loans and associated
nonprofit entities originated 2,000 mortgage loans. The nonprofit
entity receives compensation for servicing the loans originated by
associated nonprofits. The nonprofit entity also voluntarily services
600 mortgage loans that were originated by an entity that is not an
associated nonprofit entity, and receives no compensation or fees for
servicing these loans. The voluntarily serviced mortgage loans are not
considered in determining whether the servicer qualifies as a small
servicer. Thus,
[[Page 25735]]
because only the 4,800 mortgage loans originated by the nonprofit
entity or associated nonprofit entities are considered in determining
whether the servicer qualifies as a small servicer, the servicer
qualifies for the small servicer exemption pursuant to Sec.
1026.41(e)(4)(ii)(C) with regard to all 5,400 mortgage loans it
services.
The Bureau believes that nonprofit entities are an important source
of credit, particularly for low- and moderate-income consumers. The
Bureau understands that nonprofit entities, while they may operate
under a common name, trademark, or servicemark, are not typically
structured to meet the definition of affiliate under the BHCA. However,
nonprofit entities derive less revenue than other creditors or
servicers from their lending activities, and therefore the Bureau
believes associated nonprofit entities may seek to coordinate
activities--including loan servicing--as a means of achieving economies
of scale.
Under the existing rule, a servicer qualifies for the small
servicer exemption if it services for a fee a loan for which another
entity is the creditor or assignee, so long as both entities are
affiliates under the BHCA and the servicer and its affiliates together
service 5,000 or fewer mortgage loans. Since nonprofit entities are not
typically structured to meet the definition of affiliate under the
BHCA, a nonprofit entity that services, for a fee, even a single loan
of an associated nonprofit entity likely would not qualify as a small
servicer under the current rule. The Bureau is proposing an alternative
small servicer definition for nonprofits to permit associated nonprofit
entities to enter into the type of servicing arrangements, such as
consolidation of servicing activities, that are available to affiliates
under the current rule.
The limitation in the current rule to BHCA affiliates may
discourage consolidation of servicing among associated nonprofits, even
though such consolidation may benefit consumers by increasing access to
credit and reducing the cost of credit for low- and moderate-income
consumers for whom nonprofits are an important source of credit. In
addition, consolidating servicing in one entity within the associated
nonprofit structure may enhance the nonprofit's ability to promptly
credit payments, administer escrow account obligations, or handle error
requests or other requirements under Regulations X and Z, which are
applicable regardless of small servicer status. In addition, though
small servicers are exempt from the requirements of Sec. Sec. 1024.38
through 1024.40, as well as most of the loss mitigation provisions
under Sec. 1024.41, the Bureau believes that delinquent borrowers may
nonetheless benefit from consolidated nonprofit servicers' enhanced
ability to devote trained staff to their situation.
The Bureau is concerned that if nonprofit servicers are subject to
all of the servicing rules, low- and moderate-income consumers may face
increased costs or reduced access to credit. Although the Bureau
believes the servicing rules provide important protections for
consumers, the Bureau is concerned that these protections may not
outweigh the risk of reduction in credit access for low- and moderate-
income consumers served by nonprofit entities that qualify for the
proposed Sec. 1026.41(e)(4)(ii)(C) exemption. Furthermore, the Bureau
believes these nonprofit entities, because of their scale and
community-focused lending programs, already have incentives to provide
high levels of customer contact and information--incentives that
warrant exempting those servicers from complying with the periodic
statement requirements under Regulation Z and certain requirements of
Regulation X discussed above.
The Bureau has narrowly tailored the proposed small servicer
definition for nonprofits to prevent evasion of the servicing rules.
For example, the proposed definition contains restrictions on
nonprofits and requires that a substantial relationship exist among the
associated nonprofits to qualify for the exemption. As noted above, the
definition would be limited to groups of nonprofits that share a common
name, trademark, or servicemark to further and support a common
charitable mission or purpose. The Bureau believes that requiring such
commonality reduces the risk that the small servicer definition will be
used to circumvent the servicing rules. However, the Bureau seeks
comment on whether the proposed definition of ``associated nonprofit
entities'' is appropriate.
The Bureau has further limited the scope of the proposed nonprofit
small servicer definition to entities designated with an exemption
under 501(c)(3) of the Internal Revenue Code. As the Bureau noted in
the January 2013 ATR Proposal, the Bureau believes that 501(c)(3)-
designated entities face particular constraints on resources that other
tax-exempt organizations may not. See 78 FR 6621, 6644-45 (Jan. 30,
2013). As a result, these entities may have fewer resources to comply
with additional rules. In addition, tax-exempt status under section
501(c)(3) requires a formal determination by the government, in
contrast to other types of tax-exempt status. Accordingly, limiting the
proposed nonprofit small servicer provision to those entities with IRS
tax exempt determinations for wholly charitable organizations may help
to ensure that the nonprofit small servicer status is not used to evade
the servicing rules. However, the Bureau solicits comment on whether
limitation of the definition of ``nonprofit entity'' for purposes of
Sec. 1026.41(e)(4)(ii)(C) to entities with a tax exemption ruling or
determination letter from the Internal Revenue Service under section
501(c)(3) of the Internal Revenue Code is appropriate. The Bureau also
seeks comment on whether it is appropriate to include additional
criteria regarding the nonprofit entity's activities or the loans'
features or purposes, such as those in the nonprofit exemption from the
ability to repay requirements in Sec. 1026.43(a)(3)(v)(D) or in other
statutory or regulatory schemes.
As noted above, the proposed alternative small servicer definition
in Sec. 1026.41(e)(4)(ii)(C) would apply to nonprofit entities that
service 5,000 or fewer mortgage loans. The Bureau believes that it is
necessary, in general, to limit the number of loans serviced by small
servicers to prevent evasion of the servicing rules and because the
Bureau believes that entities servicing more than 5,000 mortgage loans
are of a sufficient size to comply with the full set of servicing
rules. However, the proposed rule would apply that loan limitation to
associated nonprofit entities differently than to affiliates.
Specifically, the definition of small servicer in Sec.
1026.41(e)(4)(ii)(A) counts towards the 5,000-loan limitation all loans
serviced by the servicer together with all loans serviced by any
affiliates. In contrast, the proposed rule for nonprofit entities would
count towards the 5,000-loan limitation only the loans serviced by a
given nonprofit entity (including loans it services on behalf of
associated nonprofit entities), and would not consider loans serviced
by associated nonprofit entities. As noted above, the Bureau is
concerned that small servicers generally lack the ability to cost-
effectively comply with the full set of servicing rules, a concern that
is heightened in the context of nonprofit small servicers which derive
less revenue than other creditors or servicers from their lending
activities. Some nonprofits may consolidate servicing activities to
achieve economies of scale across associated nonprofits. However, the
Bureau is also concerned that other nonprofits may be structured
differently and that for these nonprofit entities
[[Page 25736]]
maintaining servicing at the individual nonprofit level may be more
appropriate. For this reason, the Bureau does not believe it is
appropriate to consider all loans serviced across the associated
nonprofit enterprise towards the 5,000-loan limitation. The Bureau
seeks comment on whether it is appropriate to count only loans serviced
by a single nonprofit or whether the small servicer determination
should be made based upon all loans serviced among a group of
associated nonprofits.
The proposed exemption would also apply only to a nonprofit entity
that services loans for which it or an associated nonprofit entity is
the creditor. In contrast with the exemption under Sec.
1026.41(e)(4)(ii)(A), the proposed exemption would not apply to a
nonprofit entity that services loans for which it or an associated
nonprofit entity is the assignee of the loans being serviced. The
Bureau believes that nonprofit entities typically do not service loans
for which an entity other than that nonprofit entity or an associated
nonprofit is the creditor, nor does the Bureau believe that nonprofit
entities typically take an assignment of a loan originated by an entity
other than an associated nonprofit entity. Further, the Bureau is
concerned that a rule that permits a nonprofit servicer to service for
a fee loans that were originated by someone other than itself or an
associated nonprofit entity while retaining the benefit of the
exemption could be used to evade the servicing rules, particularly
since the proposed rule would not consider loans serviced by associated
nonprofit entities as counting towards the 5,000-loan limit. The Bureau
seeks comment on whether limiting the exemption to loans for which the
servicer or an associated nonprofit entity is the creditor is
appropriate.
Legal Authority
The Bureau is proposing to exempt nonprofit small servicers from
the periodic statement requirement under TILA section 128(f) pursuant
to its authority under TILA section 105(a) and (f), and Dodd-Frank Act
section 1405(b).
For the reasons discussed above, the Bureau believes the proposed
exemption is necessary and proper under TILA section 105(a) to
facilitate TILA compliance. The purpose of the periodic statement
requirement is to ensure that consumers receive ongoing customer
contact and account information. As discussed above, the Bureau
believes that nonprofit entities that qualify for the exemption have
incentives to provide ongoing consumer contact and account information
that would exist absent a regulatory requirement to do so. The Bureau
also believes that such nonprofits may consolidate servicing functions
in an associated nonprofit entity to cost-effectively provide this high
level of customer contact and otherwise comply with applicable
regulatory requirements. As described above, the Bureau is concerned
that the current rule may discourage consolidation of servicing
functions. As a result, the current rule may result in nonprofits being
unable to provide high-contact servicing or to comply with other
applicable regulatory requirements due to the costs that would be
imposed on each individual servicer. Accordingly, the Bureau believes
the proposed nonprofit small servicer definition facilitates compliance
with TILA by allowing nonprofit small servicers to consolidate
servicing functions, without losing status as a small servicer, in
order to cost-effectively service loans in compliance with applicable
regulatory requirements.
In addition, consistent with TILA section 105(f) and in light of
the factors in that provision, for a nonprofit entity servicing 5,000
or fewer loans, including those serviced on behalf of associated
nonprofits, all of which that servicer or an associated nonprofit
originated, the Bureau believes that requiring them to comply with the
periodic statement requirement in TILA section 128(f) would not provide
a meaningful benefit to consumers in the form of useful information or
protection. The Bureau believes, as noted above, that these nonprofit
servicers have incentives to provide consumers with necessary
information, and that requiring provision of periodic statements would
impose significant costs and burden. Specifically, the Bureau believes
that the proposal will not complicate, hinder, or make more expensive
the credit process--and is proper without regard to the amount of the
loan, to the status of the consumer (including related financial
arrangements, financial sophistication, and the importance to the
consumer of the loan or related supporting property), or to whether the
loan is secured by the principal residence of the consumer. In
addition, consistent with Dodd-Frank Act section 1405(b), for the
reasons discussed above, the Bureau believes that exempting nonprofit
small servicers from the requirements of TILA section 128(f) would be
in the interest of consumers and in the public interest.
As noted above, current Regulation X cross-references the
definition of small servicer in Sec. 1026.41(e)(4) for the purpose of
exempting small servicers from several mortgage servicing requirements.
Accordingly, in proposing to amend that definition, the Bureau is also
proposing to amend the current Regulation X exemptions for small
servicers. For this purpose, the Bureau is relying on the same
authorities on which it relied in promulgating the current Regulation X
small servicer exemptions. Specifically, the Bureau is proposing to
exempt nonprofit small servicers from the requirements of Regulation X
Sec. Sec. 1024.38 through 41, except as otherwise provided in Sec.
1024.41(j), see Sec. 1024.30(b)(1), as well as certain requirements of
Sec. 1024.17(k)(5), pursuant to its authority under section 19(a) of
RESPA to grant such reasonable exemptions for classes of transactions
as may be necessary to achieve the consumer protection purposes of
RESPA. The consumer protection purposes of RESPA include helping
borrowers avoid unwarranted or unnecessary costs and fees. The Bureau
believes that the proposed rule would ensure consumers avoid
unwarranted and unnecessary costs and fees by encouraging nonprofit
small servicers to consolidate servicing functions.
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 purposes and objectives of Title
X of the Dodd-Frank Act. Specifically, the Bureau believes that the
proposed rule is necessary and appropriate to carry out the purpose
under section 1021(a) of the Dodd-Frank Act of ensuring that all
consumers have access to markets for consumer financial products and
services that are fair, transparent, and competitive, and the objective
under section 1021(b) of the Dodd-Frank Act of ensuring that markets
for consumer financial products and services operate transparently and
efficiently to facilitate access and innovation.
With respect to Sec. Sec. 1024.17(k)(5), 39, and 41 (except as
otherwise provided in Sec. 1024.41(j)), the Bureau is also proposing
the nonprofit small servicer definition pursuant to its authority in
section 6(j)(3) of RESPA to set forth requirements necessary to carry
out section 6 of RESPA and in section 6(k)(1)(E) of RESPA to set forth
obligations appropriate to carry out the consumer protection purposes
of RESPA.
[[Page 25737]]
Section 1026.43 Minimum Standards for Transactions Secured by a
Dwelling
43(a) Scope
43(a)(3)
The Bureau is proposing to amend the nonprofit small creditor
exemption from the ability-to-repay rule that is set forth in Sec.
1026.43(a)(3)(v)(D) of Regulation Z. To qualify for this exemption, a
creditor must have extended credit secured by a dwelling no more than
200 times during the calendar year preceding receipt of the consumer's
application. The proposal would exclude certain subordinate-lien
transactions from this credit extension limit.
Section 129C(a)(1) of TILA states that no creditor may make a
residential mortgage loan unless the creditor makes a reasonable and
good faith determination (based on verified and documented information)
that, at the time the loan is consummated, the consumer has a
reasonable ability to repay the loan, according to its terms, and all
applicable taxes, insurance (including mortgage guarantee insurance),
and assessments. 15 U.S.C. 1639c(a)(1). Section 1026.43 of Regulation Z
implements the ability-to-repay provisions of section 129C of TILA.
The January 2013 ATR Final Rule implemented statutory exemptions
from the ability-to-repay provisions for home equity lines of credit
subject to 12 CFR 1026.40, and for mortgage transactions secured by a
consumer's interest in a timeshare plan, as defined in 11 U.S.C.
101(53D). See 12 CFR 1026.43(a). The rule also exempted from the
ability-to-repay requirements (1) a transaction that is a reverse
mortgage subject to 12 CFR 1026.33, (2) temporary or ``bridge'' loans
with a term of 12 months or less, and (3) a construction phase of 12
months or less of a construction-to-permanent loan.
The January 2013 ATR Final Rule did not provide additional
exemptions sought by certain commenters in response to an earlier
proposal published by the Board in 2011. See 76 FR 27389 (May 11, 2011)
(2011 ATR Proposal). However, the January 2013 ATR Proposal sought
additional input on some of those exemptions, and contained a specific
proposal to exempt certain nonprofit creditors from the ability-to-
repay requirements. The Bureau believed that limiting the proposed
exemption to creditors designated as nonprofits was appropriate because
of the difference in lending practices between nonprofit and other
creditors. The proposed exemption was premised on the belief that the
additional costs imposed by the ability-to-repay requirements might
prompt some nonprofit creditors to cease extending credit, or
substantially limit their credit activities, thereby possibly harming
low- to moderate-income consumers. The Bureau further stated that for-
profit creditors derive more revenue from mortgage lending activity
than nonprofit creditors, and therefore presumably are more likely to
have the resources to comply with the ability-to-repay requirements.
The Bureau was concerned that an exemption for all nonprofit
creditors could allow irresponsible creditors to intentionally
circumvent the ability-to-repay requirements and harm consumers. Thus,
under the January 2013 ATR Proposal, the exemption would have been
available only if the creditor and the loan met certain criteria.
First, the creditor would have been required to have a tax exemption
ruling or determination letter from the Internal Revenue Service under
section 501(c)(3) of the Internal Revenue Code of 1986 to be eligible
for the proposed exemption. Second, the creditor could not have
extended credit secured by a dwelling more than 100 times in the
calendar year preceding receipt of the consumer's application. Third,
the creditor, in the calendar year preceding receipt of the consumer's
application, must have extended credit only to consumers whose income
did not exceed the low- and moderate-income household limit established
by HUD. Fourth, the extension of credit must have been to a consumer
with income that does not exceed HUD's low- and moderate-income
household limit. Fifth, the creditor must have determined, in
accordance with written procedures, that the consumer has a reasonable
ability to repay the extension of credit.
The Bureau believed that, in contrast to for-profit creditors and
other nonprofit creditors, the nonprofit creditors identified in Sec.
1026.43(a)(3)(v)(D) appeared to elevate long-term community stability
over the creditor's economic considerations and to have stronger
incentives to determine whether a consumer has the ability to repay a
mortgage loan. The Bureau solicited comment regarding whether the
proposed exemption was appropriate. The Bureau also specifically
requested feedback on whether the proposed credit extension limit of
100 transactions was appropriate or should be increased or decreased.
The Bureau also requested comment on the costs that would be incurred
by nonprofit creditors that exceed that limit; the extent to which
these additional costs would affect the ability of nonprofit creditors
to extend responsible, affordable credit to low- and moderate-income
consumers; and whether consumers could be harmed by the proposed
exemption.
Comments Concerning the 100-Credit Extension Limit
The Bureau received many comments regarding the proposed nonprofit
exemption. See 78 FR 35429, 35466-67 (June 12, 2013). Most commenters
who supported the proposed exemption urged the Bureau to adopt
conditions to prevent creditors from using the exemption to circumvent
the rule. While many industry representatives, consumer advocates, and
nonprofits believed that a 100-credit extension limit would discourage
sham nonprofit creditors from exploiting the exemption, several of
these commenters asked the Bureau to raise the limit. The commenters
were primarily concerned that, in response to the proposed limit,
nonprofit creditors would limit certain types of lending. Specifically,
a few commenters stated that nonprofit creditors that offer both home-
purchase mortgage loans and small-dollar mortgage loans, such as for
home energy improvement, would limit small-dollar lending to remain
under the 100-credit extension limitation.
The Nonprofit Exemption as Adopted
The May 2013 ATR Final Rule finalized the nonprofit exemption
substantially as proposed, but raised the credit extension limit from
100 to 200 credit extensions in the calendar year preceding receipt of
the consumer's application. See 78 FR 35429, 35467-69 (June 12, 2013).
In finalizing the exemption, the Bureau noted that most commenters
believed a credit extension limitation was necessary to prevent
unscrupulous creditors from exploiting the exemption. The Bureau
concluded that the risks of evasion warranted adopting the limit. The
Bureau was concerned, however, that the proposed 100-credit extension
limit would effectively restrict nonprofits to 50 home-purchase
transactions per year, because nonprofits frequently provide
simultaneous primary- and subordinate-lien financing for such
transactions. Also, the Bureau was concerned that the proposed limit
would reduce certain types of small-dollar lending by nonprofits,
including financing home energy improvements.
Accordingly, the Bureau included a 200-credit extension limit in
the final rule to address the concerns raised by commenters regarding
access to credit. Some commenters had suggested limits as high as 500
credit extensions per
[[Page 25738]]
year; however, the Bureau believed that creditors originating more than
200 dwelling-secured credit extensions per year generally have the
resources to bear the implementation and compliance burden associated
with the ability-to-repay requirements, such that they can continue to
lend without negative impacts on consumers. The final rule did not
distinguish between first- and subordinate-liens for purposes of the
exemption, as some commenters suggested. The Bureau believed that such
a distinction would be needlessly restrictive and it would be more
efficient to allow nonprofit creditors to determine the most efficient
allocation of funds between primary- and subordinate-lien financing.
Response to the May 2013 ATR Final Rule and Further Proposal
Since the adoption of the May 2013 ATR Final Rule, the Bureau has
heard concerns from some nonprofit creditors about the treatment of
certain subordinate-lien programs under the nonprofit exemption from
the ability-to-repay requirements. These creditors are concerned that
they may be forced to curtail these subordinate-lien programs or more
generally limit their lending activities to avoid exceeding the 200-
credit extension limit. In particular, these entities have indicated
concern with the treatment of subordinate-lien transactions that charge
no interest and for which repayment is generally either forgivable or
of a contingent nature. The Bureau understands that, absent an amended
nonprofit exemption from the May 2013 ATR Final Rule, these nonprofit
creditors may not have the resources to comply with the rule and
therefore are likely to curtail their lending to stay within the 200-
credit extension limit.
In light of these concerns, the Bureau is proposing to exclude
certain deferred or contingent, interest-free subordinate liens from
the 200-credit extension limit for purposes of the nonprofit exemption
in Sec. 1026.43(a)(3)(v)(D). Specifically, proposed Sec.
1026.43(a)(3)(vii) would provide that consumer credit transactions that
meet the following criteria are not considered in determining whether a
creditor meets the requirements of Sec. 1026.43(a)(3)(v)(D)(1): (A)
The transaction is secured by a subordinate lien; (B) the transaction
is for the purpose of downpayment, closing costs, or other similar home
buyer assistance, such as principal or interest subsidies, property
rehabilitation assistance, energy efficiency assistance, or foreclosure
avoidance or prevention; (C) the credit contract does not require
payment of interest; (D) the credit contract provides that the
repayment of the amount of credit extended is (1) forgiven
incrementally or in whole, at a date certain, and subject only to
specified ownership and occupancy conditions, such as a requirement
that the consumer maintain the property as the consumer's principal
dwelling for five years, (2) deferred for a minimum of 20 years after
consummation of the transaction, (3) deferred until sale of the
property securing the transaction, or (4) deferred until the property
securing the transaction is no longer the principal dwelling of the
consumer; (E) the total of costs payable by the consumer in connection
with the transaction at consummation is less than 1 percent of the
amount of credit extended and includes no charges other than fees for
recordation of security instruments, deeds, and similar documents; a
bona fide and reasonable application fee; and a bona fide and
reasonable fee for housing counseling services; and (F) in connection
with the transaction, the creditor complies with all other applicable
requirements of Regulation Z.
Proposed comment 43(a)(3)(vii)-1 would provide that the terms of
the credit contract must satisfy the conditions that the transaction
not require the payment of interest under Sec. 1026.43(a)(3)(vii)(C)
and that repayment of the amount of credit extended be forgiven or
deferred in accordance with Sec. 1026.43(a)(3)(vii)(D). The comment
would further provide that the other requirements of Sec.
1026.43(a)(3)(vii) need not be reflected in the credit contract, but
the creditor must retain evidence of compliance with those provisions,
as required by the record retention provisions of Sec. 1026.25(a). In
particular, the creditor must have information reflecting that the
total of closing costs imposed in connection with the transaction are
less than 1 percent of the amount of credit extended--and include no
charges other than recordation, application, and housing counseling
fees, in accordance with Sec. 1026.43(a)(3)(vii)(E). Unless an
itemization of the amount financed sufficiently details this
requirement, the creditor must establish compliance with Sec.
1026.43(a)(3)(vii)(E) by some other written document and retain it in
accordance with Sec. 1026.25(a).
Proposed Sec. 1026.43(a)(3)(vii) and the accompanying comment
largely mirror a provision that was finalized as part of the Bureau's
December 2013 TILA-RESPA Final Rule. See 78 FR 79729 (Dec. 31, 2013).
That provision, which was finalized in both Regulation X, at Sec.
1024.5(d), and Regulation Z, at Sec. 1026.3(h)--and which will take
effect on August 1, 2015, provides a partial exemption from the
integrated disclosure requirements for loans that meet the above-
described criteria. The Bureau finalized this partial exemption in the
December 2013 TILA-RESPA Final Rule to preserve an existing exemption
from Regulation X issued by HUD and to facilitate compliance with TILA
and RESPA. See 78 FR 79729, 79758 and 79772 (Dec. 31, 2013). In
proposing that exemption, the Bureau explained that the exemption was
intended to describe criteria associated with certain housing
assistance loan programs for low- and moderate-income persons. See 77
FR 51115, 51138 (Aug. 23, 2012). The Bureau believes the same criteria
describe the class of transactions that may appropriately be excluded
from the 200-credit extension limit in the ability-to-repay exemption
for nonprofits. The Bureau also believes that defining a single class
of transactions for purposes of Sec. 1024.5(d), Sec. 1026.3(h), and
Sec. 1026.43(a)(3)(vii) may facilitate compliance for creditors.
The Bureau believes the Sec. 1026.43(a)(3)(v)(D) exemption as
amended by the proposal would be limited to creditors with
characteristics that ensure consumers are offered responsible,
affordable credit on reasonably repayable terms. The Bureau also
believes that subordinate-lien transactions meeting the proposed
exclusion's criteria pose low risk to consumers, and that excluding
these transactions from the credit extension limit is consistent with
TILA's purposes. For example, in transactions that would be covered by
proposed Sec. 1026.43(a)(3)(vii), consumers often benefit from a
reduction in their repayment obligations on an accompanying first-lien
mortgage and often control the triggering of any subordinate-lien
repayment requirement for at least a twenty-year period. Therefore, the
subordinate-lien transactions may enhance the consumer's ability to
repay their monthly mortgage obligations. Further, the prohibition
against charging interest and strict limitation on fees reduces the
likelihood that borrowers will be misled about the extent of their
financial obligations, as the amounts of their obligations (if at all
repayable) remain essentially fixed. The Bureau believes that limiting
the exclusion to loans with these characteristics may also reduce the
likelihood that the provision would be used to evade the ability-to-
repay requirements.
The Bureau also believes the proposed exclusion would facilitate
access to credit for low- and moderate-
[[Page 25739]]
income consumers. As noted above, the proposed exclusion would apply to
subordinate-lien financing extended only for specified purposes,
including home buyer assistance, property rehabilitation, or
foreclosure avoidance. The Bureau believes that such financing plays a
critical role in nonprofit lending to low- and moderate-income
consumers, and in particular homeownership programs designed for such
consumers. In purchase-money transactions, subordinate-lien financing
may reduce the amortizing payment on first-lien mortgages, improving
low- and moderate-income consumers' ability to repay, especially in
jurisdictions where housing costs are high. Similarly, the Bureau
believes such financing may play a critical role in nonprofit
creditors' efforts to provide property-rehabilitation, energy-
efficiency, and foreclosure-avoidance assistance.
The Bureau believes that, without the proposed exclusion for these
transactions, nonprofit creditors may limit such extensions of credit,
or may limit their overall credit activity. As a result, low- and
moderate-income consumers who would otherwise qualify for a nonprofit
creditor's program may be denied credit. As noted in the January 2013
ATR Proposal, the current exemption for nonprofit creditors was
premised on the belief that the additional costs imposed by the
ability-to-repay requirements might prompt certain nonprofit creditors
to cease extending credit, or substantially limit their credit
activities, thereby possibly harming low- and moderate-income
consumers. See 78 FR 6621, 6645 (Jan. 30, 2013). Because of their
limited resources to bear the compliance burden of the ability-to-repay
rule, the Bureau believes at least some nonprofit creditors may limit
lending activity to maintain their exemption. The proposed amendment to
the Sec. 1026.43(a)(3)(v)(D) exemption is intended to minimize this
effect by allowing nonprofit creditors to originate subordinate-lien
transactions meeting the proposed Sec. 1026.43(a)(3)(vii) criteria
without the risk of losing that exemption.
In addition, the Bureau believes that excluding these subordinate-
lien transactions from the transaction-count limitation may be
appropriate because the origination of these loans is not necessarily
indicative of a creditor's capacity to comply with the ability-to-repay
requirements. As noted above, the Bureau believes that creditors
extending credit in more than 200 dwelling-secured transactions per
year are likely to have the resources and capacity to comply with the
ability-to-repay requirements. However, subordinate-lien transactions
typically involve small loan amounts and, as limited by the proposed
exclusion's criteria, would generate little revenue to support a
creditor's capacity to comply. Absent the exclusion, those creditors
might curtail lending--with potential negative impacts for consumer's
access to credit. Particularly when such a subordinate-lien transaction
is originated in connection with a first-lien transaction, counting
both transactions towards the 200-credit extension limit may not
provide the appropriate indication of a creditor's capacity to comply.
As noted above, in adopting the current nonprofit exemption in
Sec. 1026.43(a)(3)(v)(D), the Bureau did not distinguish between
first- and subordinate-lien transactions for purposes of the credit
extension limit out of concerns that doing so would affect creditors'
allocations of loans. However, the Bureau does not believe the proposed
exclusion is likely to significantly affect such allocations. As noted
above, the proposed exclusion permits nonprofit creditors to allocate
resources to subordinate-lien transactions without risking their
exemption from the ability-to-repay rule. To the extent the proposed
exclusion encourages origination of these subordinate-lien
transactions, the Bureau believes that the limitations on the
borrower's repayment obligations as well as on the creditor's ability
to charge interest and fees may minimize the risk that, as a result of
the exclusion, creditors would allocate greater amounts of their
lending to these transactions. In fact, to the extent many affordable
homeownership programs use such subordinate-lien transactions in tandem
with first-lien mortgages, excluding these subordinate-lien
transactions from the credit extension limit count may reduce the
current Sec. 1026.43(a)(3)(v)(D) exemption's impact on nonprofit
creditors' allocation of financing between first- and subordinate-lien
transactions.
To address nonprofit creditor concerns, the Bureau also considered
whether it would be appropriate to remove the credit extension
limitation from the Sec. 1026.43(a)(3)(v)(D) nonprofit exemption
altogether. The Bureau believes that nonprofit creditors who originate
200 or more dwelling-secured transactions in a year generally have the
resources necessary to comply with TILA ability-to-repay requirements.
The Bureau believes that the exemption properly balances relevant
considerations, including the nature of credit extended, safeguards and
other factors that may protect consumers from harm, and the extent to
which application of the regulatory requirements would affect access to
responsible, affordable credit. Accordingly, the Bureau continues to
believe that the credit extension limit is necessary to prevent
evasion, but is proposing to exclude from the 200-credit extension
limit a narrow class of subordinate-lien transactions to address
concerns expressed by nonprofit creditors and avoid potential negative
impacts on access to credit, particularly for low- and moderate-income
consumers.
Legal Authority
The current Sec. 1026.43(a)(3)(v)(D) exemption from the ability-
to-repay requirements was adopted pursuant to the Bureau's authority
under section 105(a) and (f) of TILA. Pursuant to section 105(a) of
TILA, the Bureau generally may prescribe regulations that provide for
such adjustments and exceptions for all or any class of transactions
that the Bureau judges are necessary or proper to effectuate, among
other things, the purposes of TILA. For the reasons discussed in more
detail above, the Bureau believes that the proposed amendment of the
current Sec. 1026.43(a)(3)(v)(D) exemption from the TILA ability-to-
repay requirements is necessary and proper to effectuate the purposes
of TILA, which include the purposes of TILA section 129C. The Bureau
believes that the proposed amendment of the exemption ensures that
consumers are offered and receive residential mortgage loans on terms
that reasonably reflect their ability to repay by helping to ensure the
viability of the mortgage market for low- and moderate-income
consumers. The Bureau believes that the mortgage loans originated by
nonprofit creditors identified in Sec. 1026.43(e)(4)(v)(D) generally
account for a consumer's ability to repay. Without the proposed
amendment to the exemption, the Bureau believes that low- and moderate-
income consumers might be at risk of being denied access to the
responsible and affordable credit offered by these creditors, which is
contrary to the purposes of TILA. The proposed amendment to the
exemption is consistent with the purposes of TILA by ensuring that
consumers are able to obtain responsible, affordable credit from the
nonprofit creditors discussed above.
The Bureau has considered the factors in TILA section 105(f) and
believes that, for the reasons discussed above, the proposed amendment
of the exemption is appropriate under that provision. For the reasons
discussed above, the Bureau believes that the proposed amendment to
Sec. 1026.43(a)(3)(v)(D) would exempt
[[Page 25740]]
extensions of credit for which coverage under the ability-to-repay
requirements does not provide a meaningful benefit to consumers (in the
form of useful information or protection) in light of the protection
that the Bureau believes the credit extended by these creditors already
provides to consumers. The Bureau believes that the proposed amendment
to the Sec. 1026.43(a)(3)(v)(D) exemption is appropriate for all
affected consumers, regardless of their other financial arrangements
and financial sophistication and the importance of the loan and
supporting property to them. Similarly, the Bureau believes that the
proposed amendment to the Sec. 1026.43(a)(3)(v)(D) 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 proposed amendment to the Sec.
1026.43(a)(3)(v)(D) exemption will simplify the credit process without
undermining the goal of consumer protection, denying important benefits
to consumers, or increasing the expense of (or otherwise hindering) the
credit process.
43(e) Qualified Mortgages
43(e)(3) Limits on Points and Fees for Qualified Mortgages
The Dodd-Frank Act provides that ``qualified mortgages'' are
entitled to a presumption that the creditor making the loan satisfied
the ability-to-repay requirements. The qualified mortgage provisions
are implemented in Sec. 1026.43(e). Current Sec. 1026.43(e)(3)(i)
provides that a covered transaction is not a qualified mortgage if the
transaction's total points and fees exceed certain limits set forth in
Sec. 1026.43(e)(3)(i)(A) through (E). For the reasons set forth below,
the Bureau is proposing to permit a creditor or assignee to cure an
inadvertent excess over the qualified mortgage points and fees limits
by refunding to the consumer the amount of excess, under certain
conditions. As discussed in part VI.A. below, the Bureau is also
requesting comment on issues related to inadvertent debt-to-income
ratio overages, but at this time is not proposing a specific change to
the regulation. For purposes of these discussions, ``cure'' means a
procedure to reduce points and fees or debt-to-income ratios after
consummation when the qualified mortgage limits have been inadvertently
exceeded, while ``correction'' means post-consummation revisions to
documentation or calculations, or both, to reflect conditions as they
actually existed at consummation.
43(e)(3)(i)
As discussed below, the Bureau is proposing a new Sec.
1026.43(e)(3)(iii) to establish a cure procedure where a creditor
inadvertently exceeds the qualified mortgage points and fees limits,
under certain conditions. As a conforming change, the Bureau is also
proposing to amend Sec. 1026.43(e)(3)(i), to add the introductory
phrase ``Except as provided in paragraph (e)(3)(iii) of this section''
to Sec. 1026.43(e)(3)(i), to specify that the cure provision in
proposed Sec. 1026.43(e)(3)(iii) is an exception to the general rule
that a covered transaction is not a qualified mortgage if the
transaction's total points and fees exceed the applicable limit set
forth in Sec. 1026.43(e)(3)(i)(A) through (E).
43(e)(3)(iii)
Section 1411 of the Dodd-Frank Act added new TILA section 129C to
require a creditor making a residential mortgage loan to make a
reasonable and good faith determination (based on verified and
documented information) that, at the time the loan is consummated, the
consumer has a reasonable ability to repay the loan. 15 U.S.C. 1639c.
TILA section 129C(b) further provides that the ability-to-repay
requirements are presumed to be met if the loan is a qualified
mortgage. TILA section 129C(b)(2) sets certain product-feature and
underwriting requirements for qualified mortgages, including a 3-
percent limit on points and fees, but gives the Bureau authority to
revise, add to, or subtract from these requirements.\15\ Those
requirements are implemented by the January 2013 ATR Final Rule, as
amended by the May 2013 ATR Final Rule.
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\15\ See TILA section 129C(b)(3)(B)(i). TILA section
129C(b)(2)(D) requires the Bureau to prescribe rules adjusting the
3-percent points and fees limit to ``permit lenders that extend
smaller loans to meet the requirements of the presumption of
compliance.''
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The current ability-to-repay rule provides for four categories of
qualified mortgages: a ``general'' qualified mortgage definition that
is available to any creditor; \16\ a temporary qualified mortgage
definition for loans eligible for sale to or guarantee by a government
sponsored enterprise (GSE) or eligible for guarantee by or insurance
under certain Federal agency programs; \17\ and two qualified mortgage
definitions available to small creditors.\18\ The current rule provides
that for all types of qualified mortgages, the up-front points and fees
charged in connection with the mortgage must not exceed 3 percent of
the total loan amount, with higher thresholds specified for various
categories of loans below $100,000.\19\ Pursuant to Sec.
1026.32(b)(1), points and fees are the ``fees or charges that are known
at or before consummation.''
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\16\ 12 CFR 1026.43(e)(2). Under the general qualified mortgage
definition, the loan must meet certain restrictions on loan
features, points and fees, and underwriting.
\17\ Section 1026.43(e)(4). The temporary GSE/agency qualified
mortgage definition will sunset on the earlier of January 10, 2021,
or, with respect to GSE-eligible loans, when the GSEs exit
government conservatorship, or, with respect to agency-eligible
loans, when those agencies' qualified mortgage definitions take
effect.
\18\ Section 1026.43(e)(5) contains a special qualified mortgage
definition for small creditors that hold loans in portfolio, while
Sec. 1026.43(f) permits small creditors that operate predominantly
in rural or underserved areas to originate qualified mortgages with
balloon-payment features, despite the general prohibition on
qualified mortgages containing balloon payments. For a two-year
transitional period, Sec. 1026.43(e)(6) permits all small
creditors, regardless of their areas of operation, to originate
qualified mortgages with balloon-payment features. ``Small
creditor'' is defined in Sec. 1026.35(b)(2)(iii)(B) and (C), and
generally includes creditors that, in the preceding calendar year,
originated 500 or fewer covered transactions, including transactions
originated by affiliates, and had less than $2 billion in assets.
\19\ See Sec. 1026.43(e)(2) and (3). For loans of $60,000 up to
$100,000, Sec. 1026.43(e)(3)(i) allows points and fees of no more
than $3,000. For loans of $20,000 up to $60,000, Sec.
1026.43(e)(3)(i) allows points and fees of no more than 5 percent of
the total loan amount. For loans of $12,500 up to $20,000, Sec.
1026.43(e)(3)(i) allows points and fees of no more than $1,000. For
loan amounts less than $12,500, Sec. 1026.43(e)(3)(i) allows points
and fees of no more than 8 percent of the total loan amount.
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The calculation of points and fees is complex and can involve the
exercise of judgment that may lead to inadvertent errors with respect
to charges imposed at or before consummation. For example, discount
points may be mistakenly excluded from, or included in, the points and
fees calculation as bona fide third-party charges, or bona fide
discount points, under Sec. 1026.32(b)(1)(i)(D) or (E). Mortgage
insurance premiums under Sec. 1026.32(b)(1)(i)(C) or loan originator
compensation under Sec. 1026.32(b)(1)(ii) may also mistakenly be
excluded from, or included in, the points and fees calculation. A
rigorous post-consummation review by the creditor or assignee of loans
originated with the good faith expectation of qualified mortgage status
may uncover such inadvertent errors. However, the current rule does not
provide a mechanism for curing such inadvertent points and fees
overages that are discovered after consummation.
Based on information received in the course of outreach in
connection with the Bureau's Implementation Plan, the Bureau
understands that some creditors
[[Page 25741]]
may not originate, and some secondary market participants may not
purchase, mortgage loans that are near the qualified mortgage limits on
points and fees because of concern that the limits may be inadvertently
exceeded at the time of consummation. Specifically, the Bureau
understands that some creditors seeking to originate qualified
mortgages may establish buffers, set at a level below the points and
fees limits in Sec. 1026.43(e)(3)(i), to avoid exceeding those limits.
Those creditors may simply refuse to extend mortgage credit to
consumers whose loans would exceed the buffer threshold, either due to
the creditors' concerns about the potential liability attending loans
originated under the general ability-to-repay standard or the risk of
repurchase demands from the secondary market if the qualified mortgage
points and fees limit is later found to have been exceeded. Where such
buffers are established, the Bureau is concerned that access to credit
for consumers seeking loans at the margins of the limits might be
negatively affected. The Bureau is also concerned that creditors may
increase the cost of credit for consumers seeking loans at the margins
of the limits due to compliance or secondary market repurchase risk.
In light of these concerns, the Bureau is proposing to permit a
creditor or assignee to cure an inadvertent excess over the qualified
mortgage points and fees limit under certain defined conditions,
including the requirement that the loan was originated in good faith as
a qualified mortgage and that the cure be provided in the form of a
refund to the consumer within 120 days after consummation. The Bureau
notes that, where the loan was originated in good faith as a qualified
mortgage, consumers likely received the benefit of qualified mortgage
treatment by receiving lower overall loan pricing. For this reason, the
Bureau believes that a cure provision, if appropriately limited, would
reflect the expectations of both consumers and creditors at the time of
consummation, would not result in significant consumer harm, and may
increase access to credit by encouraging creditors to extend credit to
consumers seeking loans at the margins of the points and fees limits.
In addition, the Bureau believes that a limited cure provision may
promote consistent pricing within the qualified mortgage range by
decreasing the market's perceived need for higher pricing (due to
compliance or secondary market repurchase risk) at the margins of the
points and fees limits. The Bureau also believes this would promote
stability in the market by limiting the need for repurchase demands
that may otherwise be triggered without the proposed cure option.
The Bureau expects that, over time, creditors will develop greater
familiarity with, and capabilities for, originating loans that are not
qualified mortgages under the general ability-to-repay requirements, as
well as greater confidence in general compliance systems. As they do
so, creditors may relax internal buffers regarding points and fees that
are predicated on the qualified mortgage threshold. However, the Bureau
believes the impacts on access to credit may make a points and fees
cure provision appropriate at this time. In addition, the Bureau
believes that the cure provision will encourage post-consummation
quality control review of loans, which will improve the origination
process over time.
Accordingly, proposed Sec. 1026.43(e)(3)(iii) would provide that
if the creditor or assignee determines after consummation that the
total points and fees payable in connection with a loan exceed the
applicable limit under Sec. 1026.43(e)(3)(i), the loan is not
precluded from being a qualified mortgage if certain conditions,
discussed below, are met.
43(e)(3)(iii)(A)
First, new Sec. 1026.43(e)(3)(iii)(A) would require that the
creditor originated the loan in good faith as a qualified mortgage and
the loan otherwise meets the requirements of Sec. 1026.43(e)(2),
(e)(4), (e)(5), (e)(6), or (f), as applicable. Comment 43(e)(3)(iii)-1
would provide examples of circumstances that may be evidence that a
loan was or was not originated in good faith as a qualified mortgage.
First, the comment would provide that maintaining and following
policies and procedures designed to ensure that points and fees are
correctly calculated and do not exceed the applicable limit under Sec.
1026.43(e)(3)(i) may be evidence that the creditor originated the loan
in good faith as a qualified mortgage. In addition, the comment would
provide that if the pricing on the loan is consistent with pricing on
qualified mortgages originated contemporaneously by the same creditor,
that may be evidence that the loan was originated in good faith as a
qualified mortgage. The comment would also provide examples of
circumstances that may be evidence that the loan was not originated in
good faith as a qualified mortgage. Specifically, the comment would
provide that, if a creditor does not maintain--or has but does not
follow--policies and procedures designed to ensure that points and fees
are correctly calculated and do not exceed the applicable limit
described in Sec. 1026.43(e)(3)(i), that may be evidence that the
creditor did not originate the loan in good faith as a qualified
mortgage. If the pricing on the loan is not consistent with pricing on
qualified mortgages originated contemporaneously by the same creditor,
that may also be evidence that a loan was not originated in good faith
as a qualified mortgage.
The Bureau is proposing to allow for a post-consummation cure of
points and fees overages only where the loan was originated in good
faith as a qualified mortgage to ensure that the cure provision is
available only to creditors who make inadvertent errors in the
origination process and to prevent creditors from exploiting the cure
provision by intentionally exceeding the points and fees limits.
However, the Bureau seeks comment on whether the good faith element of
Sec. 1026.43(e)(3)(iii)(A) is necessary in light of the other proposed
limitations on the cure provision. The Bureau also seeks comment on the
proposed examples in comment 43(e)(3)(iii)-1, specifically including
whether additional guidance regarding the term ``contemporaneously'' in
comments 43(e)(3)-1.i.B and 43(e)(3)-1.ii.B is necessary, and whether
additional examples would be useful.
43(e)(3)(iii)(B)
Second, to cure a points and fees overage, proposed Sec.
1026.43(e)(3)(iii)(B) would require that within 120 days after
consummation, the creditor or assignee refunds to the consumer the
dollar amount by which the transaction's points and fees exceeded the
applicable limit under Sec. 1026.43(e)(3)(i) at consummation.
The Bureau believes that requiring a refund to occur within a short
period after consummation is consistent with the requirement that the
loan be originated in good faith as a qualified mortgage. The Bureau
understands that many creditors and secondary market purchasers conduct
audits or quality control reviews of loan files in the period
immediately following consummation to ensure, among other things,
compliance with regulatory requirements. During this review phase, a
creditor that originated a loan in good faith as a qualified mortgage
(or the creditor's assignee) may discover an inadvertent points and
fees overage. Indeed, providing a reasonable but limited time period
for cure may actually promote strong post-consummation quality control
efforts,
[[Page 25742]]
which may, in turn, improve a creditor's origination procedures and
compliance, thereby reducing the use of the cure mechanism over time.
Strong post-consummation quality control and improved origination
procedures may also reduce costs over time and decrease the incidence
of repurchase demands after a loan is sold into the secondary market.
The Bureau believes that the proposed 120-day period would result
in reasonably prompt refunds to affected consumers and provide
sufficient time to accommodate communication with the consumer. A 120-
day period should also allow sufficient time for creditors and
secondary market participants to conduct post-consummation reviews that
may uncover inadvertent points and fees overages. In contrast, a longer
period would not result in prompt refunds and would provide less
incentive for rigorous review immediately after consummation. In
outreach to industry stakeholders prior to this proposal, the Bureau
learned that 120 days is a time period within which post-consummation
quality control reviews generally are completed. The Bureau
specifically requests comment more broadly, however, on whether 120
days is an appropriate time period for post-consummation cure of a
points and fees overage, or whether a longer or shorter period should
be provided; what factors would support any recommended time period;
and, if the cure were available for a longer period, whether additional
conditions should be applied beyond those in this proposal.
The Bureau considered whether the cure provision should run from
the date of discovery of the points and fees overage or within a
limited number of days after transfer of the loan, rather than the time
of consummation, but the Bureau believes that such alternative
provisions would be inappropriate. The Bureau is concerned that
allowing an extended period of time for cure would create incentives
for bad faith actors to intentionally violate the points and fees limit
and selectively wait for discovery to cure the violation only when it
would be to their advantage to do so. Such actions would not be
consistent with the statutory requirement of making a good faith
determination of a consumer's ability-to-repay. Similarly, the Bureau
is concerned that, particularly later in the life of the loan, giving
the creditor a unilateral option to change the status of the loan to a
qualified mortgage, thereby providing the creditor with enhanced
protection from liability, would facilitate evasion of regulatory
requirements by the creditor.
The Bureau also considered whether it would be appropriate to limit
a creditor's or assignee's ability to cure points and fees overages for
qualified mortgage purposes to the time prior to the receipt of written
notice of the error from or the institution of any action by the
consumer. The Bureau believes that such a requirement may not be
necessary because the points and fees cure must occur within 120 days
after consummation such that it is unlikely that the consumer would
provide such notice or institute such action during that period.
Further, the Bureau believes that such a requirement might undercut the
purposes of the cure provision--to encourage both lending up to the
points and fees limits and post-consummation quality control review of
loans--since creditors and assignees could not be certain of their
ability to review the loan post-consummation and provide a refund, if
appropriate. However, the Bureau solicits comment on whether cure
should be permitted only prior to receipt of written notice of the
error from or the institution of any action by the consumer.
The Bureau recognizes that, where points and fees have been
financed as part of the loan amount and an overage is refunded to the
consumer after consummation, the consumer will continue to pay interest
on a loan amount that includes the overage. As a result, the consumer
may pay more interest over the life of the loan than would have been
paid absent the inadvertent points and fees overage. Although the
Bureau believes such circumstances will be limited, the Bureau
acknowledges that a post-consummation refund of the amount of points
and fees overage alone would not make the consumer whole in most such
cases.\20\ For this reason, the Bureau considered whether the cure
provision should require other means of restitution to the consumer,
such as restructuring the loan to provide a lower loan amount
commensurate with deducting the points and fees overage, or requiring
any refund to the consumer to include the present value of excess
interest that the consumer would pay over the life of the loan.
However, the Bureau believes there are complications to these
approaches. For example, the Bureau expects that creditors would have
difficulty systematically restructuring loans within a short time after
consummation, especially where the loan has already been, or shortly
will be, securitized. The Bureau also notes potential difficulties in
determining the period over which excess interest should be calculated,
since few consumers hold their loans for the entire loan term. In light
of these considerations, the Bureau is not proposing that the cure
provision require any means of restitution other than a refund of the
actual overage amount to the consumer. However, the Bureau solicits
comment on other appropriate means of restitution and in what
circumstances they may be appropriate.
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\20\ There may be circumstances where the consumer pays discount
points to obtain a lower interest rate and the post-consummation
review determines the payments do not qualify as bona fide discount
points. In such cases, a refund of the discount points, without
additional changes to the loan, may result in a net benefit to the
consumer.
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43(e)(3)(iii)(C)
The third criteria for a cure is set forth in proposed Sec.
1026.43(e)(3)(iii)(C), which would provide that the creditor or
assignee must maintain and follow policies and procedures for post-
consummation review of loans and for refunding to consumers amounts
that exceed the applicable limit under Sec. 1026.43(e)(3)(i). Comment
43(e)(3)(iii)-2 would provide that a creditor or assignee satisfies
Sec. 1026.43(e)(3)(iii) if it maintains and follows policies and
procedures for post-consummation quality control loan review and for
curing (by providing a refund) errors in points and fees calculations
that occur at or before consummation.
The Bureau believes this requirement will provide an incentive for
creditors to maintain rigorous quality control measures on a consistent
and continuing basis. The Bureau believes that conditioning a cure on a
consistently applied policy promotes and incentivizes good faith
efforts to identify and minimize errors that may occur at or before
consummation, with resulting benefits to consumers, as well as
creditors and assignees.
The Bureau requests comment on all aspects of the proposal to
permit creditors to cure inadvertent excesses over the points and fees
limit, including whether a post-consummation cure should be permitted,
and whether different, additional, or fewer conditions should be
imposed upon its availability, such as whether the consumer must be
current on loan payments at the time of the cure.
Legal Authority
The Bureau proposes Sec. 1026.43(e)(3)(iii) pursuant to its
authority under TILA section 129C(b)(3)(B)(i) to promulgate regulations
that revise, add to, or subtract from the criteria that define a
qualified mortgage. For the reasons discussed above, the Bureau
believes
[[Page 25743]]
that the proposed provision is warranted under TILA section
129C(b)(3)(B)(i) because the proposal is necessary and proper to ensure
that responsible, affordable mortgage credit remains available to
consumers in a manner consistent with purposes of section 129C of TILA,
and also necessary and appropriate to facilitate compliance with
section 129C of TILA. For example, the Bureau believes the proposed
limited post-consummation cure provision will facilitate compliance
with TILA section 129C by encouraging strict, post-consummation quality
control loan reviews that will, over time, improve the origination
process.
In addition, because proposed Sec. 1026.43(e)(3)(iii) permits
creditors to cure inadvertent non-compliance with the general qualified
mortgage points and fees limitation up to 120 days after consummation,
the Bureau also proposes Sec. 1026.43(e)(3)(iii) pursuant to its
authority under section 105(a) and (f) of TILA. Pursuant to section
105(a) of TILA, the Bureau generally may prescribe regulations that
provide for such adjustments and exceptions for all or any class of
transactions that the Bureau judges are necessary or proper to, among
other things, effectuate the purposes of TILA. For the reasons
discussed above, the Bureau believes that exempting the class of
qualified mortgages that involve a post-consummation points and fees
cure from the statutory requirement that the creditor make a good faith
determination that the consumer has the ability to repay ``at the time
the loan is consummated'' is necessary and proper to effectuate the
purposes of TILA. The Bureau believes that limited post-consummation
cure of points and fees overages will preserve access to credit to the
extent it encourages creditors to extend credit to consumers seeking
loans with points and fees up to the 3-percent limit. Without a points
and fees cure provision, the Bureau believes that some consumers might
be at risk of being denied access to responsible, affordable credit,
which is contrary to the purposes of TILA. The Bureau also believes a
limited post-consummation cure provision will facilitate compliance
with TILA section 129C by encouraging strict, post-consummation quality
control loan reviews that will, over time, improve the origination
process.
The Bureau has considered the factors in TILA section 105(f) and
believes that a limited points and fees cure provision is appropriate
under that provision. The Bureau believes that the exemption, with the
specific conditions required by the proposal, is appropriate for all
affected consumers; specifically, those seeking loans at the margins of
the points and fees limit whose access to credit may be affected
adversely without the exemption. Similarly, the Bureau believes that
the exemption is appropriate for all affected loans covered under the
exemption, i.e. those made in good faith as qualified mortgages,
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 would not undermine the goal
of consumer protection or increase the complexity or expense of (or
otherwise hinder) the credit process, because costs may actually
decrease, as noted above. While the exemption may result in consumers
in affected transactions losing some of TILA's benefits, potentially
including some aspects of a foreclosure legal defense, the Bureau
believes such potential losses are outweighed by the potentially
increased access to responsible, affordable credit, an important
benefit to consumers. The Bureau believes that is the case for all
affected consumers, regardless of their other financial arrangements,
their financial sophistication, and the importance of the loan and
supporting property to them.
VI. Other Requests for Comment
A. Request for Comment on Cure or Correction of Debt-to-Income Overages
To satisfy the general qualified mortgage definition in Sec.
1026.43(e)(2), the consumer's total monthly debt-to-income ratio--
verified, documented, and calculated in accordance with Sec.
1026.43(e)(2)(vi)(B) and appendix Q--cannot exceed 43 percent at the
time of consummation.\21\ Similar to an error made in calculating
points and fees, errors made in calculating debt-to-income ratios could
jeopardize a loan's qualified mortgage status under Sec.
1026.43(e)(2). Some industry stakeholders have suggested that creditors
seeking to originate Sec. 1026.43(e)(2) qualified mortgages may
establish buffers that relate to debt-to-income ratios--i.e., buffers
set at a level below the rule's 43-percent debt-to-income ratio limit.
Some creditors may, in turn, refuse to extend mortgage credit to
consumers whose loans would exceed the buffer threshold, either due to
concerns about potential liability associated with loans originated
under the general ability-to-repay standard or the risk of repurchase
demands from the secondary market, if the debt-to-income ratio limit is
exceeded. Such practices may reduce access to credit to consumers at
the margins of the debt-to-income ratio limit.
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\21\ In contrast to the 3-percent cap on points and fees, which
applies to all qualified mortgages, the 43-percent debt-to-income
ratio limit applies only to the ``general'' qualified mortgage
category (Sec. 1026.43(e)(2)), and not to the temporary GSE/agency
category (Sec. 1026.43(e)(4)) or the small creditor categories
(Sec. 1026.43(e)(5), (e)(6), and (f)).
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As explained above, the Bureau is proposing Sec.
1026.43(e)(3)(iii) to permit cure of inadvertent points and fees
overages by refunding to the consumer the dollar amount that exceeds
the applicable points and fees limit, under certain defined conditions.
The Bureau is also considering whether a similar cure provision may be
appropriate in the context of debt-to-income overages. As discussed
above, the proposed points and fees cure procedure may benefit
consumers and the market in various ways. A debt-to-income cure
provision has the potential to benefit consumers and the market in a
similar manner. However, as discussed below, the Bureau believes that
miscalculations of debt-to-income ratios are fundamentally different in
nature than errors in calculating points and fees, and may be less
suitable to a cure provision similar to proposed Sec.
1026.43(e)(3)(iii).
The Bureau is also considering whether it may be appropriate to
address the more limited scenario where debt-to-income overages result
from errors in calculation or documentation, or both, of debt or
income. Specifically, the Bureau is considering whether, in such
situations, it would be feasible to permit post-consummation
corrections to the documentation, which would result in a corresponding
recalculation of the debt-to income ratio. While such a correction
mechanism has the potential to benefit consumers and the market, there
are a number of reasons, discussed below, why it may be inappropriate
and impracticable.
In light of these difficulties and concerns, the Bureau is not
proposing a specific debt-to-income ratio cure or correction provision
at this time. However, to aid its ongoing consideration of these
options, the Bureau is requesting comment on any and all aspects of
potential cure and correction provisions for debt-to-income overages
described below.
Debt-to-Income Cure
As noted, the Bureau recognizes that a debt-to-income cure
mechanism has the potential to benefit consumers and the market.
However, the Bureau is concerned that such a procedure may be
inappropriate because a miscalculation of debt-to-income ratios cannot
be remedied in a manner similar to, or as equally practicable as,
remedying a
[[Page 25744]]
miscalculation of points and fees. The Bureau believes that debt-to-
income overages commonly would result from creditors incorrectly, but
inadvertently, including income or failing to consider debts in
accordance with the rule--i.e., understating the numerator or
overstating the denominator in the mathematical equation that derives
the debt-to-income ratio. In these situations, a creditor or secondary
market purchaser would need to alter the consumer's debts and/or income
to bring the debt-to-income ratio within the 43-percent limit or the
ratio would exceed qualified mortgage limits.
It is unclear how creditors could raise consumers' incomes or lower
their debts systematically to bring the ratio within the 43-percent
limit. Of course, creditors cannot increase a consumer's income. It may
be possible in some situations for creditors to modify the underlying
mortgage and lower the consumer's monthly payment on the loan so that
the ``debt'' is low enough to bring the ratio back within the 43-
percent limit--or to pay down other debts of the consumer to achieve
the same result. However, the Bureau believes this approach would
require a complex restructuring of the loan, which may itself trigger a
repurchase demand from the secondary market, and possibly require a
refund of excess payments collected from the time of consummation.
For any such cure provision to be considered, creditors would need
to maintain and follow policies and procedures of post-consummation
review of loans to restructure them and refund amounts as necessary to
bring the debt-to-income ratio within the 43-percent limit. However,
based on the Bureau's current information, the Bureau does not believe
creditors could realistically meet such a requirement, and expects that
creditors would have difficulty systematically restructuring loans, or
systematically paying down debts on the consumer's behalf, within a
short time after consummation. Moreover, in some cases the consumer's
other debts (when properly considered) could be too substantial, or the
corrected income too low, for any viable modification of the mortgage
to reduce the debt-to-income ratio below the prescribed limit.
Debt-to-Income Correction
The Bureau is also considering whether it may be appropriate to
address the more limited scenario where debt-to-income overages result
solely from errors in documentation of debt or income. For example, a
creditor may have considered but failed to properly document certain
income in accordance with the rule. Such an error may feasibly be
remedied by submission of corrected documentation (and a corresponding
recalculation of the debt-to-income ratio) without the need for a
monetary cure or loan restructuring. A correction also could be
effective in situations in which the creditor erred in calculating the
consumer's debts and as a result verified and documented only certain
income if that income alone appeared sufficient to satisfy the 43-
percent limit.
Certain sources of income (e.g., salary) are generally considered
easier to document than others (e.g., rental or self-employment
income), and satisfaction of the general qualified mortgage definition
does not require creditors to document and consider every potential
source of income, so long as the debt-to-income ratio based on the
income considered (and calculated in accordance with the rule) does not
exceed 43 percent. Creditors may, for the sake of expediency, only
consider easy-to-document income when that income alone satisfies the
debt-to-income ratio--a practice permitted under the regulation.\22\
Where a creditor or secondary market purchaser later discovers that
income relied upon was overstated or additional debts existed that were
not considered, it may be feasible for a creditor to correct a
resulting debt-to-income ratio overage by collecting documentation and
considering the additional income it knew about at the time of
consummation but chose not to consider for the sake of expediency.
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\22\ See comment 43(c)(2)(i)-5; see also Appendix Q (noting that
a creditor may always ``exclude the income or include the debt''
when unsure if the debt or the income should be considered).
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While these means of correcting debt-to-income ratio overages may
be feasible, the Bureau is concerned that a provision tailored toward
these situations may be inappropriate and believes any such provision
could result in unintended consequences. The Bureau is concerned about
the risk of creating any disincentives for creditors to exercise due
diligence in carrying out their statutory obligations. In addition, the
Bureau is concerned that allowing creditors to supplement required
documentation after consummation could raise factual questions of what
income and documentation the creditor was aware of at the time of
consummation, and what income and documentation were discovered only
after an intensive investigation following discovery of a debt-to-
income overage. The Bureau is also concerned that, in some instances a
correction provision could allow loans to be deemed qualified mortgages
based on post hoc documentation, notwithstanding that the creditor, in
fact, would not have made the loan had it correctly calculated the
consumer's debt-to-income ratio.
Although the Bureau has received requests from industry noting that
it would be useful to permit corrections in situations where a creditor
did not document all known income at the time of consummation, it is
not clear how often this will happen in practice. Furthermore, the
Bureau believes that amending the rule to allow for correction in those
instances may be unnecessary because creditors could avoid such debt-
to-income ratio overages by verifying additional sources of income
prior to consummation, at least in loans where the debt-to-income ratio
would otherwise be near the 43-percent limit.
As discussed above with respect to points and fees, the Bureau
expects that, over time, creditors will develop greater familiarity
with, and capabilities for, originating loans that are not qualified
mortgages under the ability-to-repay requirements, as well as greater
confidence in general compliance systems. As they do so, the Bureau
believes creditors may relax internal debt-to-income ratio buffers that
are predicated on the qualified mortgage threshold. Although the Bureau
is considering whether the impacts on access to credit during the
interim period (when such capabilities are being developed) may make a
debt-to-income cure provision appropriate, the 43-percent debt-to-
income ratio limit applies only to one category of qualified mortgages,
unlike the points and fees limit, which applies to all qualified
mortgages. Small creditors making qualified mortgages under Sec.
1026.43(e)(5), (e)(6), and (f) are not subject to the 43-percent debt-
to-income limit. Further, creditors of any size currently have the
option of originating GSE/agency-eligible loans under the temporary
qualified mortgage definition without regard to the 43-percent debt-to-
income limit.\23\ For this reason, the Bureau believes that a
relatively small number of loans are currently affected by the debt-to-
income limit.
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\23\ Pursuant to Sec. 1026.43(e)(4)(ii) and (iii), the
temporary GSE/agency qualified mortgage definition will sunset on
the earlier of January 10, 2021 or, with respect to GSE-eligible
loans, when the GSEs (or any limited-life regulatory entity
succeeding the charters of the GSEs) exit government
conservatorship, or, with respect to agency-eligible loans, when
those agencies' qualified mortgage definitions take effect.
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[[Page 25745]]
For these reasons, the Bureau is not proposing a specific cure or
correction provision related to the 43-percent debt-to-income limit for
qualified mortgages under Sec. 1026.43(e)(2) at this time. However, to
aid its ongoing consideration of such provisions, the Bureau requests
comment on all aspects of the debt-to-income cure or correction
approaches discussed above and, in particular, requests commenters to
provide specific and practical examples of where such approaches may be
applied and how they may be implemented. The Bureau also requests
comment on what conditions should appropriately apply to cure or
correction of the qualified mortgage debt-to-income limits, including
the time periods (such as the 120-day period included in the proposed
points and fees cure provision) when such provisions may be available.
The Bureau also requests comment on whether or how a debt-to-income
cure or correction provision might be exploited by unscrupulous
creditors to undermine consumer protections and undercut incentives for
strict compliance efforts by creditors or assignees.
B. Request for Comment on the Credit Extension Limit for the Small
Creditor Definition
Under the Bureau's 2013 Title XIV Final Rules, there are four types
of exceptions and special provisions available only to small creditors:
A qualified mortgage definition for certain loans made and
held in portfolio, which are not subject to a bright-line debt-to-
income ratio limit and are subject to a higher annual percentage rate
(APR) threshold for defining which first-lien qualified mortgages
receive a safe harbor under the ability-to-repay rule (Sec.
1026.43(e)(5)); \24\
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\24\ For purposes of determining whether a loan has a safe
harbor with TILA's ability-to-repay requirements (or instead is
categorized as ``higher-priced'' with only a rebuttable presumption
of compliance with those requirements), for first-lien covered
transactions, the special qualified mortgage definitions in Sec.
1026.43(e)(5), (e)(6) and (f) receive an APR threshold of the
average prime offer rate plus 3.5 percentage points, rather than
plus 1.5 percentage points.
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Two qualified mortgage definitions (i.e., a temporary and
an ongoing definition) for certain loans made and held in portfolio
that have balloon-payment features, which are also subject to the
higher APR threshold for defining which first-lien qualified mortgages
receive a safe harbor under the ability-to-repay rule (Sec.
1026.43(e)(6) and (f));
An exception from the requirement to establish escrow
accounts for certain higher-priced mortgage loans (HPMLs) for small
creditors that operate predominantly in rural or underserved areas
(Sec. 1026.35(b)(2)(iii)); \25\ and
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\25\ To meet the ``rural'' or ``underserved'' requirement,
during any of the preceding three calendar years, the creditor must
have extended more than 50 percent of its total covered
transactions, as defined by Sec. 1026.43(b)(1) and secured by a
first lien, on properties that are located in counties that are
either ``rural'' or ``underserved,'' as defined by Sec.
1026.35(b)(2)(iv). See Sec. 1026.35(b)(2)(iii)(A).
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An exception from the prohibition on balloon-payment
features for certain high-cost mortgages (Sec.
1026.32(d)(1)(ii)(C)).\26\
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\26\ For loans made on or before January 10, 2016, small
creditors may originate high-cost mortgages with balloon-payment
features even if the creditor does not operate predominantly in
rural or underserved areas, under certain conditions. See Sec. Sec.
1026.32(d)(1)(ii)(C) and 1026.43(e)(6).
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These special rules and exceptions recognize that small creditors
are an important source of non-conforming mortgage credit. Small
creditors' size and relationship lending model often provide them with
better ability than large institutions to assess ability-to-repay. At
the same time, small creditors lack economies of scale necessary to
offset the cost of certain regulatory burdens. To be a small creditor
for purposes of these exceptions and special provisions, the creditor
must have (1) together with its affiliates, originated 500 or fewer
covered transactions \27\ secured by a first lien in the preceding
calendar year; and (2) had total assets of less than $2 billion at the
end of the preceding calendar year. As discussed in more detail below,
the Bureau is requesting comment on certain aspects of the annual
first-lien origination limit under the small creditor test.
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\27\ ``Covered transaction'' is defined in Sec. 1026.43(b)(1)
to mean a consumer credit transaction that is secured by a dwelling,
as defined in Sec. 1026.2(a)(19), including any real property
attached to a dwelling, other than a transaction exempt from
coverage under Sec. 1026.43(a).
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These special rules for small creditors are largely based on TILA
sections 129D(c) and 129C(b)(2)(E), respectively. TILA section 129D(c)
authorizes the Bureau to exempt a creditor from the higher-priced
mortgage loan escrow requirement if the creditor operates predominantly
in rural or underserved areas, retains its mortgage loans in portfolio,
and meets certain asset size and annual mortgage loan origination
thresholds set by the Bureau. TILA section 129C(b)(2)(E) permits
certain balloon-payment mortgages originated by small creditors to
receive qualified mortgage status, even though qualified mortgages are
otherwise prohibited from having balloon-payment features. The creditor
qualifications under TILA section 129C(b)(2)(E) generally mirror the
criteria for the higher-priced mortgage loan escrow exemption,
including meeting certain asset size and annual mortgage loan
origination thresholds set by the Bureau.
The Board proposed to implement TILA sections 129D(c) and
129C(b)(2)(E) before TILA rulemaking authority transferred to the
Bureau. Although the creditor qualification criteria under these
provisions are similar, the Board proposed to implement the provisions
in slightly different ways.
To implement TILA section 129D(c), the exemption from the higher-
priced mortgage loan escrow requirements, the Board proposed to limit
the exemption to creditors that (1) during either of the preceding two
calendar years, together with affiliates, originated and retained
servicing rights to 100 or fewer loans secured by a first lien on real
property or a dwelling; and (2) together with affiliates, do not
maintain escrow accounts for loans secured by real property or a
dwelling that the creditor or its affiliates currently service.\28\ The
Board interpreted the escrow provision as intending to exempt creditors
that do not possess economies of scale to escrow cost-effectively. In
proposing the transaction count limit, the Board estimated that a
minimum servicing portfolio size of 500 is necessary to escrow cost-
effectively, and assumed that the average life expectancy of a mortgage
loan is about five years. Based on this reasoning, the Board believed
that creditors would no longer need the benefit of the exemption if
they originated and serviced more than 100 first-lien transactions per
year. The Board proposed a two-year coverage test to afford an
institution sufficient time after first exceeding the threshold to
acquire an escrowing capacity. The Board did not propose an asset-size
threshold to qualify for the escrow exemption, but sought comment on
whether such a threshold should be established and, if so, what it
should be.
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\28\ 76 FR 11597 (Mar. 2, 2011) (2011 Escrows Proposal). The
proposed exemption also would have required that, during the
preceding calendar year, the creditor extended more than 50 percent
of its total first-lien higher-priced mortgage loans in counties
designated as rural or underserved, among other requirements.
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For the balloon-payment qualified mortgage definition to implement
TILA section 129C(b)(2)(E), the Board proposed an asset-size limit of
$2 billion and two alternative annual originations thresholds. The
Board interpreted the qualified mortgage provision as being designed to
ensure access to credit in areas where consumers may be able to obtain
credit only from community banks offering balloon-payment
[[Page 25746]]
mortgages. Accordingly, the Board proposed two alternatives for the
total annual originations portion of the test: Under alternative 1, the
creditor, together with all affiliates, extended covered transactions
of some dollar amount or less during the preceding calendar year,
whereas under alternative 2, the creditor, together with all
affiliates, extended some number of covered transactions or fewer
during the preceding calendar year. The Board did not propose a
specific annual originations threshold in connection with TILA section
129C(b)(2)(E), but the Board sought comment on the issue.
Rulemaking authority for TILA passed to the Bureau in July 2011,
before the Board finalized the above-described proposals. The Bureau
considered the Board's proposals and responsive public comments before
finalizing those rules in January 2013. The Bureau also conducted
further analysis to try to determine the appropriate thresholds,
although such effort was significantly constrained by data limitations.
The Bureau ultimately adopted an annual originations limit of 500 or
fewer first-lien covered transactions in the preceding calendar year
and an asset-size limit of less than $2 billion, adjusted annually for
inflation.\29\ The Bureau believed that it would be preferable to use
the same annual originations and asset-size thresholds for the
qualified mortgage and escrow provisions to reflect the consistent
statutory language, to facilitate compliance by not requiring
institutions to track multiple metrics, and to promote consistent
application of the two exemptions. The Bureau also applied these limits
to the exception from the balloon-payment prohibition for high-cost
loans, to the qualified mortgage definition for small portfolio
creditors, and to the qualified mortgage definition for loans with
balloon-payment features.
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\29\ The higher-priced mortgage loan escrows exemption also
requires that the creditor operate predominantly in rural or
underserved areas. See Sec. 1026.35(b)(2)(iii)(A). For loans made
on or before January 10, 2016, small creditors may originate
qualified mortgages, and high-cost mortgages, with balloon-payment
features even if the creditor does not operate predominantly in
rural or underserved areas, under certain conditions. See Sec. Sec.
1026.32(d)(1)(ii)(C) and 1026.43(e)(6).
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The Bureau adopted a threshold of 500 or fewer annual originations
of first-lien transactions to provide flexibility and reduce concerns
that the threshold in the Board's 2011 Escrows Proposal would reduce
access to credit by excluding creditors that need special
accommodations in light of their capacity constraints.\30\ The Bureau
believed that an originations limit is the most accurate means of
limiting the special provisions to the class of small creditors with a
business model the Bureau believes will best facilitate access to
responsible, affordable credit. The Bureau also believed that an asset
limit is important to preclude a very large creditor with relatively
modest mortgage operations from taking advantage of a provision
designed for much smaller creditors with much different characteristics
and incentives, and that lack the scale to make compliance less
burdensome.
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\30\ The preamble to the January 2013 Escrows Final Rule noted
that the increased threshold was likely not very dramatic because
the Bureau's analysis of HMDA data suggested that even small
creditors are likely to sell a significant number of their
originations in the secondary market and, assuming that most
mortgage transactions that are retained in portfolio are also
serviced in-house, the Bureau estimated that a creditor originating
no more than 500 first-lien transactions per year would maintain and
service a portfolio of about 670 mortgage obligations over time
(assuming an average obligation life expectancy of five years).
Thus, the Bureau believed the higher threshold in the January 2013
Escrows Final Rule would help to ensure that creditors that are
subject to the escrow requirement would in fact maintain portfolios
of sufficient size to maintain the escrow accounts on a cost-
efficient basis over time, in the event that the Board's 500-loan
estimate of a minimum cost-effective servicing portfolio size was
too low. At the same time, however, the Bureau believed that the 500
annual originations threshold in combination with the other
requirements would still ensure that the balloon-payment qualified
mortgage and escrow exemptions are available only to small creditors
that focus primarily on a relationship lending model and face
significant systems constraints.
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Based on estimates from publicly available Home Mortgage Disclosure
Act (HMDA) and call report data, the Bureau understood that the small
creditor provisions as finalized would include approximately 95 percent
of creditors with less than $500 million in assets, approximately 74
percent of creditors with assets between $500 million and $1 billion,
and approximately 50 percent of creditors with assets between $1
billion and $2 billion. The Bureau believed these percentages were
consistent with the rationale for providing special accommodation for
small creditors and would be appropriate to ensure that consumers have
access to responsible, affordable mortgage credit.
Consistent with the Bureau's ongoing Implementation Plan, the
Bureau is seeking comment on the 500 total first-lien originations
limit--and the requirement that the limit be determined for any given
calendar year based upon results during the immediately prior calendar
year. Specifically, the Bureau solicits feedback and data from (1)
creditors designated as small creditors under the Bureau's 2013 Title
XIV Final Rules; and (2) creditors with assets that are not at or above
the $2 billion limitation but that do not qualify for small creditor
treatment under the Bureau's 2013 Title XIV Final Rules because of
their total annual first-lien mortgage originations. For such
creditors, the Bureau requests data on the number and type of mortgage
products offered and originated to be held in portfolio during the
years prior to the effective date of the 2013 Title XIV Final Rules and
subsequent to that date. In particular, the Bureau is interested in how
such creditors' origination mix changed in light of the Bureau's 2013
Title XIV Final Rules (including, but not limited to, the percentage of
loans that are fixed-rate, are adjustable-rate, or have a balloon-
payment feature) and, similarly, how such creditors' origination mix
changed when only considering loans originated for the purposes of
keeping them in portfolio. The Bureau also solicits feedback on such
small creditors' implementation efforts with respect to the Bureau's
2013 Title XIV Final Rules. The Bureau is interested in detailed
descriptions of the challenges that creditors might face when
transitioning from originating balloon-payment loans to originating
adjustable-rate loans. Finally, the Bureau solicits comment on whether
the 500 total first-lien originations limit is sufficient to serve the
above-described purposes of the provision and, to the extent it may be
insufficient, the reasons why it is insufficient and the range of
appropriate limits.
As noted above, certain of the special provisions applicable to
small creditors are limited to small creditors in ``rural'' or
``underserved'' areas. The Bureau finalized a definition of ``rural''
or ``underserved'' in the 2013 Escrows Final Rule. 78 FR 4725 (Jan. 22,
2013). The Bureau recognizes that concerns have been raised by some
stakeholders that the Bureau's definition is under-inclusive and fails
to cover certain counties or portions of counties that are typically
thought of as rural or underserved in nature. The Bureau is considering
whether to propose modifications to the definition of ``rural'' or
``underserved'' at a later date and is not requesting comment at this
time on this issue.
VII. Dodd-Frank Act Section 1022(b)(2) Analysis
A. Overview
In developing the proposed rule, the Bureau has considered
potential
[[Page 25747]]
benefits, costs, and impacts.\31\ The Bureau requests comment on the
preliminary analysis presented below as well as submissions of
additional data that could inform the Bureau's analysis of the
benefits, costs, and impacts. The Bureau has consulted, or offered to
consult with, the prudential regulators, the Securities and Exchange
Commission, the Department of Housing and Urban Development, the
Federal Housing Finance Agency, the Federal Trade Commission, the U.S.
Department of Veterans Affairs, the U.S. Department of Agriculture, and
the Department of the Treasury, including regarding consistency with
any prudential, market, or systemic objectives administered by such
agencies.
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\31\ 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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There are three main provisions in this rulemaking proposal. The
first provision extends the small servicer exemption from certain
provisions of the 2013 Mortgage Servicing Final Rules to nonprofit
servicers that service 5,000 or fewer loans on behalf of themselves and
associated nonprofits, all of which were originated by the nonprofit or
an associated nonprofit. The second provision excludes certain non-
interest bearing, contingent subordinate liens that meet the
requirements of proposed Sec. 1026.43(a)(3)(v)(D) (``contingent
subordinate liens'') from the 200-loan limit calculation for purposes
of qualifying for the nonprofit exemption from the ability-to-repay
requirements. The third provision affords creditors an option, in
limited circumstances, to cure certain mistakes in cases where a
creditor originated a loan with an expectation of qualified mortgage
status, but the loan actually exceeded the points and fees limit for
qualified mortgages at consummation (``points and fees cure'').
The Bureau has chosen to evaluate the benefits, costs, and impacts
of these proposed provisions against the current state of the world.
That is, the Bureau's analysis below considers the benefits, costs, and
impacts of the three proposed provisions relative to the current
regulatory regime, as set forth primarily in the January 2013 ATR Final
Rule, the May 2013 ATR Final Rule, and the 2013 Mortgage Servicing
Final Rules.\32\ The baseline considers economic attributes of the
relevant market and the existing regulatory structure.
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\32\ The Bureau has discretion in future rulemakings to choose
the relevant provisions to discuss and to choose the most
appropriate baseline for that particular rulemaking.
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The main benefit of each of these proposed provisions to consumers
is a potential increase in access to credit and a potential decrease in
the cost of credit. It is possible that, but for these provisions, (1)
financial institutions would stop or curtail originating or servicing
in particular market segments or would increase the cost of credit or
servicing in those market segments in numbers sufficient to adversely
impact those market segments, (2) the financial institutions that would
remain in those market segments would not provide a sufficient quantum
of mortgage loan origination or servicing at the non-increased price,
and (3) there would not be significant new entry into the market
segments left by the departing institutions. If, but for these proposed
provisions, all three of these scenarios would be realized, then the
three proposed provisions will increase access to credit. The Bureau
does not possess any data, aside from anecdotal comments, to refute or
confirm any of these scenarios for any of the proposed exemptions.
However, the Bureau notes that, at least in some market segments, these
three scenarios could be realized by just one creditor or servicer
stopping or curtailing originating or servicing or increasing the cost
of credit. This would occur, for example, if that creditor or servicer
is the only one willing to extend credit or provide servicing to this
market segment (for example, to low- and moderate-income consumers), no
other creditor or servicer would enter the market even if the incumbent
exits, and the incumbent faces higher costs that would lead it to
either increase the cost of credit or curtail access to credit.
The main cost to consumers of the proposed small nonprofit servicer
and small nonprofit originator provisions is that, for some
transactions, creditors or servicers will not have to provide consumers
some of the protections provided by the ability-to-repay and mortgage
servicing rules. The main cost of the points and fees cure provision to
consumers is that a creditor could reimburse a consumer for a points
and fees overage after consummation--with the creditor thereby
obtaining the safe harbor or rebuttable presumption of TILA ability-to-
repay compliance afforded by a qualified mortgage, and the consumer
having less ability to challenge the mortgage on ability-to-repay
grounds. As noted above, the Bureau does not possess data to provide a
precise estimate of the number of transactions affected. However, the
Bureau believes that the number will be relatively small.
The main benefit of each of these proposed provisions to covered
persons is that the affected covered persons do not have to incur
certain expenses associated with the ability-to-repay and mortgage
servicing rules, or will not be forced either to exit the market or to
curtail origination or servicing activities to maintain certain
regulatory exemptions. Given the currently available data, it is
impossible for the Bureau to estimate the number of transactions
affected with any useful degree of precision; that is also the case for
estimating the amount of monetary benefits for such covered persons.
There is no major cost of these proposed provisions to covered
persons--each of the provisions is an option that a financial
institution is free to undertake or not to undertake. The only
potential costs for covered persons is that other financial
institutions that would have complied with the ability-to-repay and
mortgage servicing rules with or without the proposed provisions may
lose profits to the institutions that are able to continue operating in
a market segment by virtue of one of the proposed provisions. However,
these losses are likely to be small and are difficult to estimate.
B. Potential Benefits and Costs to Consumers and Covered Persons
Small Servicer Exemption Extension for Servicing Associated Nonprofits'
Loans
The Bureau's 2013 Mortgage Servicing Final Rules were designed to
address the market failure of consumers not choosing their servicers
and of servicers not having sufficient incentives to invest in quality
control and consumer satisfaction. The demand for larger loan
servicers' services comes from originators, not from consumers. Smaller
servicers, however, have an additional incentive to provide ``high-
touch'' servicing that focuses on ensuring consumer satisfaction. 78 FR
10695, 10845-46 (Feb. 14, 2013); 78 FR 10901, 10980-82 (Feb. 14, 2013).
The Bureau's 2013 Mortgage Servicing Final Rules provide many
benefits to consumers: for example, detailed periodic statements. These
benefits tend to present potential costs to servicers: for example,
changing their software systems to include additional information on
the periodic statements to consumers. These benefits and costs are
further described in the ``Dodd-Frank Act Section 1022(b)(2) Analysis''
sections of the 2013 Mortgage Servicing
[[Page 25748]]
Final Rules. 78 FR 10695, 10842-61 (Feb. 14, 2013); 78 FR 10901, 10978-
94 (published concurrently).
Smaller servicers are generally community banks and credit unions
that have a built-in incentive to manage their reputation with
consumers carefully because they are servicing loans in communities in
which they also originate loans. This incentive is reinforced if they
are servicing only loans that they originate. Under current Sec.
1026.41(e)(4)(ii), a small servicer is a servicer that either (A)
services, together with any affiliates, 5,000 or fewer mortgage loans
for all of which the servicer (or an affiliate) is the creditor or
assignee; or (B) is a Housing Finance Agency, as defined in 24 CFR
266.5. The definition of the term ``affiliate'' is the definition
provided in the Bank Holding Company Act (BHCA). The rationale for the
small servicer exemption is provided in the Bureau's 2013 Mortgage
Servicing Final Rules. 78 FR 10695, 10845-46 (Feb. 14, 2013); 78 FR
10901, 10980-82 (published concurrently).
The proposed revision of the exemption allows a nonprofit servicer
to service loans on behalf of ``associated nonprofit entities'' that do
not meet the BHCA ``affiliate'' definition and still qualify as a
``small servicer,'' as long as certain other conditions are met (for
example, it has no more than 5,000 loans in its servicing portfolio).
The Bureau believes nonprofit servicers typically follow the same
``high-touch'' servicing model followed by the small servicers
described in the Dodd-Frank Act Section 1022(b)(2) Analysis in the 2013
Mortgage Servicing Final Rules. While these nonprofit servicers are not
motivated by the profit incentive that motivates community banks and
small credit unions, they nonetheless have a reputation incentive and a
mission incentive to provide ``high-touch'' servicing, neither of which
is diminished when they service associated nonprofits' loans. Because
it is limited to entities sharing a common name, trademark, or
servicemark, proposed Sec. 1026.41(e)(4)(ii)(C) further ensures that
the reputation incentive remains intact. In addition, the 5,000-loan
servicing portfolio limit ensures that nonprofit servicers are still
sufficiently small to provide ``high-touch'' servicing. Another
rationale for the proposed revision of the exemption is that it would
create a more level playing field for nonprofits. Currently, for-profit
affiliates can take advantage of economies of scale to service their
loans together, but related nonprofits cannot because they typically
are not ``affiliates'' as defined by the BHCA.
Overall, the primary benefit to consumers of the proposed amendment
to the small servicer definition is a potential increase in access to
credit and a potential decrease in the cost of credit. The primary cost
to consumers is losing some of the protections of the Bureau's 2013
Mortgage Servicing Final Rules. The primary benefit to covered persons
is exemption from certain provisions of those rules, and the attendant
cost savings of not having to comply with those provisions while still
being able to achieve a certain degree of scale by taking on servicing
for associated nonprofits. See also 78 FR 10695, 10842-61 (Feb. 14,
2013); 78 FR 10901, 10978-94 (published concurrently). There are no
significant costs to covered persons.
Finally, the Bureau does not possess any data that would enable it
to report the number of transactions affected, but from anecdotal
evidence and taking into account the size of the nonprofit servicers
that are the most likely to take advantage of this exemption, it is
unlikely that there will be a significant number of loans affected each
year. Several nonprofit servicers might be affected as well.
Ability-to-Repay Exemption for Contingent Subordinate Liens
The Bureau's ability-to-repay rule was designed to address the
market failure of mortgage loan originators not internalizing the
effects of consumers not being able to repay their loans: effects both
on the consumers themselves and on the consumers' neighbors, whose
houses drop in value due to foreclosures nearby.
The May 2013 ATR Final Rule added a nonprofit exemption from the
ability-to-repay requirements. The rationale of that exemption is
preserving low- and moderate-income consumers' access to credit
available from nonprofit organizations, which might have stopped or
curtailed originating loans but for this exemption. The main benefit of
the exemption for consumers is in potential expansion of access to
credit and a potential decrease in the cost of credit; the main cost
for consumers is not receiving protections provided by the ability-to-
pay rule. The May 2013 ATR Final Rule exempted only nonprofit creditors
that originated 200 or fewer loans a year, based on the Bureau's belief
that these institutions do internalize the effects of consumers not
being able to repay their loans and that the loan limitation is
necessary to prevent the exemption from being exploited by unscrupulous
creditors seeking to harm consumers.
Proposed Sec. 1026.43(a)(3)(vii) excludes contingent subordinate
liens from the 200-credit extension limit for purposes of the May 2013
ATR Final Rule's nonprofit exemption. Given the numerous limitations on
contingent subordinate liens, including but not limited to the 1-
percent cap on upfront costs payable by the consumer--and given the
200-loan limit for other loans, the Bureau believes that the potential
for creditors to improperly exploit the amended rule is low. The Bureau
also believes that this exemption will allow a greater number of
nonprofit creditors to originate more loans than under the current
rule, or to remain in the low- and moderate-income consumer market
without passing through cost increases to consumers.
Overall, the primary benefit to consumers of the proposed exclusion
is a potential increase in access to credit and a potential decrease in
the cost of credit. The primary cost to consumers is losing some of the
protections provided by the Bureau's ability-to-repay rule. The primary
benefit to covered persons is exemption from that same rule. See 78 FR
6407, 6555-75 (Jan. 30, 2013); (``Dodd-Frank Act Section 1022(b)(2)
Analysis'' part in the January 2013 ATR Final Rule); 78 FR 35429,
35492-97 (June 12, 2013) (similar part in the May 2013 ATR Final Rule).
There are no significant costs to covered persons.
Finally, the Bureau does not possess any data that would enable it
to report the number of transactions affected, but from anecdotal
evidence and taking into account the size of the nonprofit creditors
that are most likely to take advantage of this exemption, it is
unlikely that there will be a significant number of loans affected each
year, and it is possible that virtually no loans will be affected in
the near future. Several nonprofit creditors might be affected as well,
but it is possible that no nonprofit creditors will be affected in the
near future.
Cure for Points and Fees Over the Qualified Mortgage Threshold
To originate a qualified mortgage, a creditor must satisfy various
conditions, including the condition of charging at most 3 percent of
the total loan amount in points and fees, not including up to two bona-
fide discount points, and with higher thresholds for lower loan
amounts. However, origination processes are not perfect and creditors
might be concerned about any potential unintended errors that result in
a loan that the creditor believed to be a qualified mortgage at
origination but that actually was over the 3-percent
[[Page 25749]]
points and fees threshold upon further, post-consummation review.
The three most likely responses by a creditor concerned about such
inadvertent errors would be either to originate loans with points and
fees well below TILA's 3-percent limit, to insert additional quality
control in its origination process, or to charge a premium for the risk
of a loan being deemed not to be a qualified mortgage, especially on
loans with points and fees not well below TILA's 3-percent limit. The
first solution is not what the Bureau, or presumably Congress,
intended; otherwise the statutory limit would have been set lower than
3 percent. The second solution could result in more than the socially
optimal amount of effort expended on quality control, especially since
most loans will be securitized and thus re-examined shortly after
origination. The savings from forgoing additional quality control might
be passed through to consumers, to the extent that costs saved are
marginal (as opposed to fixed) and the markets are sufficiently
competitive. The third solution is, effectively, a less stark version
of the first solution, with loans close to TILA's 3-percent limit still
being originated, albeit at higher prices simply due to being close to
the limit. Like the first potential solution, this would be an
unintended consequence of the limit.
The primary potential drawback of the proposal to allow creditors
to cure inadvertent points and fees errors is the risk of inappropriate
exploitation by creditors. However, the conditions the Bureau has
placed on the proposed cure mechanism help to ensure that creditors
will not abuse this mechanism and thus that consumers are unlikely to
experience negative side-effects.
One such potential gaming scenario involves a creditor originating
risky loans with high points and fees while hoping to avoid a massive
wave of foreclosures. In this case, the possibility of cure could be
thought of as an option that the creditor could exercise to strengthen
its position for foreclosure litigation, but only if the creditor
foresees the wave of foreclosures. The elements of proposed Sec.
1026.43(e)(3)(iii) requiring that the loan be originated in good faith
as a qualified mortgage and that the overage be cured within 120 days
after consummation should discourage this type of gaming. Another
gaming scenario is a creditor that only cures overages on loans that go
into foreclosure. This possibility is limited by the proposed 120-day
cure window, as well as by the proposed requirement that the creditor
or assignee, as applicable, maintains and follows policies and
procedures for post-consummation review and refunding overages.
The primary benefit to consumers of the proposed cure provision is
a potential increase in access to credit and a potential decrease of
the cost of credit. Another potential benefit is that, when a creditor
discovers the inadvertent points and fees overage, the creditor may
reimburse the consumer for the overage. However, this is a benefit only
for consumers who place greater value on being reimbursed than on the
additional legal protections that a non-qualified mortgage would afford
them. The primary cost to consumers is that, without the consumer's
consent, a creditor could reimburse the consumer for a points and fees
overage after consummation--with the creditor thereby obtaining the
safe harbor (or rebuttable presumption) of TILA ability-to-repay
compliance. However, the Bureau believes that the safeguards included
in the proposed rule will mitigate this potential concern as creditors
are unlikely to be able to game the system and thereby deprive
consumers of the protections provided by the ability-to-pay rule.
The primary benefit to covered persons is being able to originate
qualified mortgages without engaging in inefficient additional quality
control processes, with the attendant reduction in legal risk. Some
larger creditors might have sufficiently robust compliance procedures
that largely prevent inadvertent points and fees overages. These
creditors might lose some market share to creditors for whom this
provision will be more useful. The Bureau cannot meaningfully estimate
the magnitude of this effect.
Finally, the Bureau does not possess any data that would enable it
to report the number of transactions affected. For some creditors, the
proposed provision might save additional verification and quality
control in the loan origination process for every qualified mortgage
transaction that they originate \33\ and/or allow them to originate
loans with points and fees close to the 3-percent threshold at lower
prices that do not reflect the risk of the loan inadvertently turning
out not to be a qualified mortgage. The Bureau seeks comment on this
issue and, in particular, any detailed descriptions regarding the
processes that might be simplified due to the proposed cure provision
and monetary and time savings involved.
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\33\ While a result of the proposed points and fees cure is that
creditors have less of an incentive to perform rigorous quality
control before consummation, there is also an alleviating effect.
Any errors uncovered in the post-consummation review might help
creditors improve their pre-consummation review by immediately
pointing out areas to focus on.
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C. Impact on Covered Persons With No More Than $10 Billion in Assets
Covered persons with no more than $10 billion in assets likely will
be the only covered persons affected by the two proposed exemptions
regarding associated nonprofits and contingent subordinate liens: The
respective loan limits of each provision virtually ensure that any
creditor or servicer with over $10 billion in assets would not qualify
for these two exemptions. For the third proposed provision, regarding
points and fees, smaller creditors might benefit more than larger
creditors. Larger creditors are more likely to have sufficiently robust
compliance procedures that largely prevent inadvertent points and fees
overages. Thus, this proposed provision might not benefit them as much.
The third proposed provision may lead smaller creditors to extend a
greater number of qualified mortgages near the 3-percent points and
fees limit, to extend them for a lower price, and/or to forgo
inefficient pre-consummation quality control. To the extent that
possibility is realized, smaller creditors would benefit from the
liability protection afforded by qualified mortgages.
D. Impact on Access to Credit
The Bureau does not believe that there will be an adverse impact on
access to credit resulting from any of the three provisions. Moreover,
it is possible that there will be an expansion of access to credit.
E. Impact on Rural Areas
The Bureau believes that rural areas might benefit from these three
provisions more than urban areas, to the extent that there are fewer
active creditors or servicers operating in rural areas than in urban
areas. Thus, any creditors or servicers exiting the market or
curtailing lending or servicing in rural areas--or restricting
originating loans with points and fees close to the TILA 3-percent
limit--might negatively affect access to credit more than similar
behavior by creditors or servicers operating in more urban areas. A
similar argument applies to any increases in the cost of credit.
VIII. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (the RFA), as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996, requires each
agency to consider the potential impact
[[Page 25750]]
of its regulations on small entities, including small businesses, small
governmental units, and small nonprofit organizations. The RFA defines
a ``small business'' as a business that meets the size standard
developed by the Small Business Administration pursuant to the Small
Business Act.
The RFA generally requires an agency to conduct an initial
regulatory flexibility analysis (IRFA) and a final regulatory
flexibility analysis (FRFA) of any rule subject to notice-and-comment
rulemaking requirements, unless the agency certifies that the rule will
not have a significant economic impact on a substantial number of small
entities. 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.
An IRFA is not required for this proposal because the proposal, if
adopted, would not have a significant economic impact on any small
entities. The Bureau does not expect the proposal to impose costs on
covered persons. All methods of compliance under current law will
remain available to small entities if the proposal is adopted. Thus, a
small entity that is in compliance with current law need not take any
additional action if the proposal is adopted. Accordingly, the
undersigned certifies that this proposal, if adopted, would not have a
significant economic impact on a substantial number of small entities.
IX. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et
seq.), Federal agencies are generally required to seek the Office of
Management and Budget (OMB) approval for information collection
requirements prior to implementation. The collections of information
related to Regulations Z and X have been previously reviewed and
approved by OMB in accordance with the PRA and assigned OMB Control
Number 3170-0015 (Regulation Z) and 3170-0016 (Regulation X). Under the
PRA, the Bureau may not conduct or sponsor, and, notwithstanding any
other provision of law, a person is not required to respond to an
information collection unless the information collection displays a
valid control number assigned by OMB.
The Bureau has determined that this Proposed Rule would not impose
any new or revised information collection requirements (recordkeeping,
reporting, or disclosure requirements) on covered entities or members
of the public that would constitute collections of information
requiring OMB approval under the PRA. The Bureau welcomes comments on
this determination or any other aspect of this proposal for purposes of
the PRA. Comments should be submitted as outlined in the ADDRESSES
section above. All comments will become a matter of public record.
List of Subjects in 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 proposes to
amend 12 CFR part 1026 as set forth below:
PART 1026--TRUTH IN LENDING (REGULATION Z)
0
1. The authority citation for part 1026 continues to read as follows:
Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 5511,
5512, 5532, 5581; 15 U.S.C. 1601 et seq.
Subpart E--Special Rules for Certain Home Mortgage Transactions
0
2. Section 1026.41 is amended by revising paragraphs (e)(4)(ii) and
(iii) to read as follows:
Sec. 1026.41 Periodic statements for residential mortgage loans.
* * * * *
(e) * * *
(4) * * *
(ii) Small servicer defined. A small servicer is a servicer that:
(A) Services, together with any affiliates, 5,000 or fewer mortgage
loans, for all of which the servicer (or an affiliate) is the creditor
or assignee;
(B) Is a Housing Finance Agency, as defined in 24 CFR 266.5; or
(C) Is a nonprofit entity that services 5,000 or fewer mortgage
loans, including any mortgage loans serviced on behalf of associated
nonprofit entities, for all of which the servicer or an associated
nonprofit entity is the creditor. For purposes of this paragraph
(e)(4)(ii)(C), the following definitions apply:
(1) The term ``nonprofit entity'' means an entity having a tax
exemption ruling or determination letter from the Internal Revenue
Service under section 501(c)(3) of the Internal Revenue Code of 1986
(26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)-1), and;
(2) The term ``associated nonprofit entities'' means nonprofit
entities that by agreement operate using a common name, trademark, or
servicemark to further and support a common charitable mission or
purpose.
(iii) Small servicer determination. In determining whether a
servicer is a small servicer pursuant to paragraph (e)(4)(ii)(A) of
this section, the servicer is evaluated based on the mortgage loans
serviced by the servicer and any affiliates as of January 1 and for the
remainder of the calendar year. In determining whether a servicer is a
small servicer pursuant to paragraph (e)(4)(ii)(C) of this section, the
servicer is evaluated based on the mortgage loans serviced by the
servicer as of January 1 and for the remainder of the calendar year. A
servicer that ceases to qualify as a small servicer will have six
months from the time it ceases to qualify or until the next January 1,
whichever is later, to comply with any requirements from which the
servicer is no longer exempt as a small servicer. The following
mortgage loans are not considered in determining whether a servicer
qualifies as a small servicer:
* * * * *
0
3. Section 1026.43 is amended by revising paragraph (a)(3)(v)(D)(1) and
the introductory text of paragraph (e)(3)(i) and adding new paragraphs
(a)(3)(vii) and (e)(3)(iii) to read as follows:
Sec. 1026.43 Minimum standards for transactions secured by a
dwelling.
(a) * * *
(3) * * *
(v) * * *
(D) * * *
(1) During the calendar year preceding receipt of the consumer's
application, the creditor extended credit secured by a dwelling no more
than 200 times, except as provided in paragraph (a)(3)(vii) of this
section;
* * * * *
(vii) Consumer credit transactions that meet the following criteria
are not considered in determining whether a creditor exceeds the credit
extension limitation in paragraph (a)(3)(v)(D)(1) of this section:
(A) The transaction is secured by a subordinate lien;
(B) The transaction is for the purpose of:
(1) Downpayment, closing costs, or other similar home buyer
assistance, such as principal or interest subsidies;
(2) Property rehabilitation assistance;
(3) Energy efficiency assistance; or
(4) Foreclosure avoidance or prevention;
(C) The credit contract does not require payment of interest;
[[Page 25751]]
(D) The credit contract provides that repayment of the amount of
the credit extended is:
(1) Forgiven either incrementally or in whole, at a date certain,
and subject only to specified ownership and occupancy conditions, such
as a requirement that the consumer maintain the property as the
consumer's principal dwelling for five years;
(2) Deferred for a minimum of 20 years after consummation of the
transaction;
(3) Deferred until sale of the property securing the transaction;
or
(4) Deferred until the property securing the transaction is no
longer the principal dwelling of the consumer;
(E) The total of costs payable by the consumer in connection with
the transaction at consummation is less than 1 percent of the amount of
credit extended and includes no charges other than:
(1) Fees for recordation of security instruments, deeds, and
similar documents;
(2) A bona fide and reasonable application fee; and
(3) A bona fide and reasonable fee for housing counseling services;
and
(F) The creditor complies with all other applicable requirements of
this part in connection with the transaction.
* * * * *
(e) * * *
(3) * * *. (i) Except as provided in paragraph (e)(3)(iii) of this
section, a covered transaction is not a qualified mortgage unless the
transaction's total points and fees, as defined in Sec. 1026.32(b)(1),
do not exceed:
* * * * *
(iii) If the creditor or assignee determines after consummation
that the total points and fees payable in connection with a loan exceed
the applicable limit under paragraph (e)(3)(i) of this section, the
loan is not precluded from being a qualified mortgage, provided:
(A) The creditor originated the loan in good faith as a qualified
mortgage and the loan otherwise meets the requirements of paragraphs
(e)(2), (e)(4), (e)(5), (e)(6), or (f) of this section, as applicable;
(B) Within 120 days after consummation, the creditor or assignee
refunds to the consumer the dollar amount by which the transaction's
points and fees exceeded the applicable limit under paragraph (e)(3)(i)
of this section at consummation; and
(C) The creditor or assignee, as applicable, maintains and follows
policies and procedures for post-consummation review of loans and
refunding to consumers amounts that exceed the applicable limit under
paragraph (e)(3)(i) of this section.
* * * * *
0
4. In Supplement I to part 1026:
0
a. Under Section 1026.41--Periodic Statements for Residential Mortgage
Loans:
0
i. Under Paragraph 41(e)(4)(ii) Small servicer defined, paragraph 2 is
revised and paragraph 4 is added.
0
ii. Under Paragraph 41(e)(4)(iii) Small servicer determination,
paragraphs 2 and 3 are revised and paragraphs 4 and 5 are added.
0
b. Under Section 1026.43--Minimum Standards for Transactions Secured by
a Dwelling:
0
i. New subheading Paragraph 43(a)(3)(vii) and paragraph 1 under that
subheading are added.
0
ii. New subheading Paragraph 43(e)(3)(iii) and paragraphs 1 and 2 under
that subheading are added.
The revisions read as follows:
Supplement I to Part 1026--Official Interpretations
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
* * * * *
Section 1026.41--Periodic Statements for Residential Mortgage Loans
* * * * *
41(e)(4)(ii) Small servicer defined.
* * * * *
2. Services, together with affiliates, 5,000 or fewer mortgage
loans. To qualify as a small servicer under Sec. 1026.41(e)(4)(ii)(A),
a servicer must service, together with any affiliates, 5,000 or fewer
mortgage loans, for all of which the servicer (or an affiliate) is the
creditor or assignee. There are two elements to satisfying Sec.
1026.41(e)(4)(ii)(A). First, a servicer, together with any affiliates,
must service 5,000 or fewer mortgage loans. Second, a servicer must
service only mortgage loans for which the servicer (or an affiliate) is
the creditor or assignee. To be the creditor or assignee of a mortgage
loan, the servicer (or an affiliate) must either currently own the
mortgage loan or must have been the entity to which the mortgage loan
obligation was initially payable (that is, the originator of the
mortgage loan). A servicer is not a small servicer under Sec.
1026.41(e)(4)(ii)(A) if it services any mortgage loans for which the
servicer or an affiliate is not the creditor or assignee (that is, for
which the servicer or an affiliate is not the owner or was not the
originator). The following two examples demonstrate circumstances in
which a servicer would not qualify as a small servicer under Sec.
1026.41(e)(4)(ii)(A) because it did not meet both requirements under
Sec. 1026.41(e)(4)(ii)(A) for determining a servicer's status as a
small servicer:
* * * * *
4. Nonprofit entity that services 5,000 or fewer mortgage loans. To
qualify as a small servicer under Sec. 1026.41(e)(4)(ii)(C), a
servicer must be a nonprofit entity that services 5,000 or fewer
mortgage loans, including any mortgage loans serviced on behalf of
associated nonprofit entities, for all of which the servicer or an
associated nonprofit entity is the creditor. There are two elements to
satisfying Sec. 1026.41(e)(4)(ii)(C). First, a nonprofit entity must
service 5,000 or fewer mortgage loans, including any mortgage loans
serviced on behalf of associated nonprofit entities. For each
associated nonprofit entity, the small servicer determination is made
separately, without consideration of the number of loans serviced by
another associated nonprofit entity. Second, a nonprofit entity must
service only mortgage loans for which the servicer (or an associated
nonprofit entity) is the creditor. To be the creditor, the servicer (or
an associated nonprofit entity) must have been the entity to which the
mortgage loan obligation was initially payable (that is, the originator
of the mortgage loan). A nonprofit entity is not a small servicer under
Sec. 1026.41(e)(4)(ii)(C) if it services any mortgage loans for which
the servicer (or an associated nonprofit entity) is not the creditor
(that is, for which the servicer or an associated nonprofit entity was
not the originator). The first of the following two examples
demonstrates circumstances in which a nonprofit entity would qualify as
a small servicer under Sec. 1026.41(e)(4)(ii)(C) because it meets both
requirements for determining a nonprofit entity's status as a small
servicer under Sec. 1026.41(e)(4)(ii)(C). The second example
demonstrates circumstances in which a nonprofit entity would not
qualify as a small servicer under Sec. 1026.41(e)(4)(ii)(C) because it
does not meet both requirements under Sec. 1026.41(e)(4)(ii)(C).
i. Nonprofit entity A services 3,000 of its own mortgage loans, and
1,500 mortgage loans on behalf of associated nonprofit entity B. All
4,500 mortgage loans were originated by A or B. Associated nonprofit
entity C services 2,500 mortgage loans, all of which it originated.
Because the number of mortgage loans serviced by a nonprofit entity is
determined by counting the
[[Page 25752]]
number of mortgage loans serviced by the nonprofit entity (including
mortgage loans serviced on behalf of associated nonprofit entities) but
not counting any mortgage loans serviced by an associated nonprofit
entity, A and C are both small servicers.
ii. A nonprofit entity services 4,500 mortgage loans--3,000
mortgage loans it originated, 1,000 mortgage loans originated by
associated nonprofit entities, and 500 mortgage loans neither it nor an
associated nonprofit entity originated. The nonprofit entity is not a
small servicer because it services mortgage loans for which neither it
nor an associated nonprofit entity is the creditor, notwithstanding
that it services fewer than 5,000 mortgage loans.
41(e)(4)(iii) Small servicer determination.
* * * * *
2. Timing for small servicer exemption. The following examples
demonstrate when a servicer either is considered or is no longer
considered a small servicer for purposes of Sec. 1026.41(e)(4)(ii)(A)
and (C):
i. Assume a servicer (that as of January 1 of the current year
qualifies as a small servicer) begins servicing more than 5,000
mortgage loans on October 1, and services more than 5,000 mortgage
loans as of January 1 of the following year. The servicer would no
longer be considered a small servicer on January 1 of that following
year and would have to comply with any requirements from which it is no
longer exempt as a small servicer on April 1 of that following year.
ii. Assume a servicer (that as of January 1 of the current year
qualifies as a small servicer) begins servicing more than 5,000
mortgage loans on February 1, and services more than 5,000 mortgage
loans as of January 1 of the following year. The servicer would no
longer be considered a small servicer on January 1 of that following
year and would have to comply with any requirements from which it is no
longer exempt as a small servicer on that same January 1.
iii. Assume a servicer (that as of January 1 of the current year
qualifies as a small servicer) begins servicing more than 5,000
mortgage loans on February 1, but services fewer than 5,000 mortgage
loans as of January 1 of the following year. The servicer is considered
a small servicer for that following year.
3. Mortgage loans not considered in determining whether a servicer
is a small servicer. Mortgage loans that are not considered pursuant to
Sec. 1026.41(e)(4)(iii) for purposes of the small servicer
determination under Sec. 1026.41(e)(4)(ii)(A) are not considered
either for determining whether a servicer (together with any
affiliates) services 5,000 or fewer mortgage loans or whether a
servicer is servicing only mortgage loans that it (or an affiliate)
owns or originated. For example, assume a servicer services 5,400
mortgage loans. Of these mortgage loans, the servicer owns or
originated 4,800 mortgage loans, voluntarily services 300 mortgage
loans that neither it (nor an affiliate) owns or originated and for
which the servicer does not receive any compensation or fees, and
services 300 reverse mortgage transactions. The voluntarily serviced
mortgage loans and reverse mortgage loans are not considered in
determining whether the servicer qualifies as a small servicer. Thus,
because only the 4,800 mortgage loans owned or originated by the
servicer are considered in determining whether the servicer qualifies
as a small servicer, the servicer qualifies for the small servicer
exemption pursuant to Sec. 1026.41(e)(4)(ii)(A) with regard to all
5,400 mortgage loans it services.
4. Mortgage loans not considered in determining whether a nonprofit
entity is a small servicer. Mortgage loans that are not considered
pursuant to Sec. 1026.41(e)(4)(iii) for purposes of the small servicer
determination under Sec. 1026.41(e)(4)(ii)(C) are not considered
either for determining whether a nonprofit entity services 5,000 or
fewer mortgage loans, including any mortgage loans serviced on behalf
of associated nonprofit entities, or whether a nonprofit entity is
servicing only mortgage loans that it or an associated nonprofit entity
originated. For example, assume a servicer that is a nonprofit entity
services 5,400 mortgage loans. Of these mortgage loans, the nonprofit
entity originated 2,800 mortgage loans and associated nonprofit
entities originated 2,000 mortgage loans. The nonprofit entity receives
compensation for servicing the loans originated by associated
nonprofits. The nonprofit entity also voluntarily services 600 mortgage
loans that were originated by an entity that is not an associated
nonprofit entity, and receives no compensation or fees for servicing
these loans. The voluntarily serviced mortgage loans are not considered
in determining whether the servicer qualifies as a small servicer.
Thus, because only the 4,800 mortgage loans originated by the nonprofit
entity or associated nonprofit entities are considered in determining
whether the servicer qualifies as a small servicer, the servicer
qualifies for the small servicer exemption pursuant to Sec.
1026.41(e)(4)(ii)(C) with regard to all 5,400 mortgage loans it
services.
5. Limited role of voluntarily serviced mortgage loans. Reverse
mortgages and mortgage loans secured by consumers' interests in
timeshare plans, in addition to not being considered in determining
small servicer qualification, are also exempt from the requirements of
Sec. 1026.41. In contrast, although voluntarily serviced mortgage
loans, as defined by Sec. 1026.41(e)(4)(iii)(A), are likewise not
considered in determining small servicer status, they are not exempt
from the requirements of Sec. 1026.41. Thus, a servicer that does not
qualify as a small servicer would not have to provide periodic
statements for reverse mortgages and timeshare plans because they are
exempt from the rule, but would have to provide periodic statements for
mortgage loans it voluntarily services.
* * * * *
Section 1026.43--Minimum Standards for Transactions Secured by a
Dwelling
* * * * *
Paragraph 43(a)(3)(vii).
1. Requirements of exclusion. Section 1026.43(a)(3)(vii) excludes
certain transactions from the credit extension limit set forth in Sec.
1026.43(a)(3)(v)(D)(1), provided a transaction meets several
conditions. The terms of the credit contract must satisfy the
conditions that the transaction not require the payment of interest
under Sec. 1026.43(a)(3)(vii)(C) and that repayment of the amount of
credit extended be forgiven or deferred in accordance with Sec.
1026.43(a)(3)(vii)(D). The other requirements of Sec.
1026.43(a)(3)(vii) need not be reflected in the credit contract, but
the creditor must retain evidence of compliance with those provisions,
as required by Sec. 1026.25(a). In particular, the creditor must have
information reflecting that the total of closing costs imposed in
connection with the transaction is less than 1 percent of the amount of
credit extended and include no charges other than recordation,
application, and housing counseling fees, in accordance with Sec.
1026.43(a)(3)(vii)(E). Unless an itemization of the amount financed
sufficiently details this requirement, the creditor must establish
compliance with Sec. 1026.43(a)(3)(vii)(E) by some other written
document and retain it in accordance with Sec. 1026.25(a).
* * * * *
Paragraph 43(e)(3)(iii)
1. Originated in good faith as a qualified mortgage. i. The
following
[[Page 25753]]
may be evidence that a creditor originated a loan in good faith as a
qualified mortgage:
A. A creditor maintains and follows policies and procedures
designed to ensure that points and fees are correctly calculated and do
not exceed the applicable limit under Sec. 1026.43(e)(3)(i); or
B. The pricing for the loan is consistent with pricing on qualified
mortgages originated contemporaneously by the same creditor.
ii. In contrast, the following may be evidence that a loan was not
originated in good faith as a qualified mortgage:
A. A creditor does not maintain, or the creditor has, but does not
follow, policies and procedures designed to ensure that points and fees
are correctly calculated and do not exceed the applicable limit under
Sec. 1026.43(e)(3)(i); or
B. The pricing for the loan is not consistent with pricing on
qualified mortgages originated contemporaneously by the same creditor.
2. Policies and procedures for post-consummation review and
refunding. A creditor or assignee satisfies Sec. 1026.43(e)(3)(iii)(C)
if it maintains and follows policies and procedures for post-
consummation quality control loan review and for curing (by providing a
refund) errors in points and fees calculations that occur at or before
consummation.
* * * * *
Dated: April 30, 2014.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2014-10207 Filed 5-5-14; 8:45 am]
BILLING CODE 4810-AM-P