Amendments Relating to Small Creditors and Rural or Underserved Areas Under the Truth in Lending Act (Regulation Z), 59943-59973 [2015-24362]

Download as PDF Vol. 80 Friday, No. 191 October 2, 2015 Part III Bureau of Consumer Financial Protection asabaliauskas on DSK5VPTVN1PROD with RULES 12 CFR Part 1026 Amendments Relating to Small Creditors and Rural or Underserved Areas Under the Truth in Lending Act (Regulation Z); Rules VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\02OCR2.SGM 02OCR2 59944 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations BUREAU OF CONSUMER FINANCIAL PROTECTION 12 CFR Part 1026 [Docket No. CFPB–2015–0004] RIN 3170–AA43 Amendments Relating to Small Creditors and Rural or Underserved Areas Under the Truth in Lending Act (Regulation Z) Bureau of Consumer Financial Protection. ACTION: Final rule; official interpretations. AGENCY: The Bureau of Consumer Financial Protection (Bureau) is amending certain mortgage rules issued by the Bureau in 2013. This final rule revises the Bureau’s regulatory definitions of small creditor, and rural and underserved areas, for purposes of certain special provisions and exemptions from various requirements provided to certain small creditors under the Bureau’s mortgage rules. DATES: This final rule is effective on January 1, 2016. For additional discussion regarding the effective date of the rule see part VI of the SUPPLEMENTARY INFORMATION below. FOR FURTHER INFORMATION CONTACT: Jeffrey Haywood, Paralegal Specialist; Nicholas Hluchyj, Senior Counsel, or Paul Ceja, Senior Counsel and Special Advisor, Office of Regulations, at (202) 435–7700. SUPPLEMENTARY INFORMATION: SUMMARY: I. Summary of the Final Rule asabaliauskas on DSK5VPTVN1PROD with RULES 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) (January 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-toRepay 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) VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 The Bureau has clarified and revised those rules over the past two years. The purpose of those updates was to address important questions raised by industry, consumer groups, or other stakeholders. The Bureau also indicated that it would revisit the Bureau’s regulatory definitions of small creditor and rural and underserved areas, promulgated in those rules and related amendments, through study and possibly through additional rulemaking. To that end, on January 29, 2015, the Bureau proposed several amendments to its 2013 Title XIV Final Rules to revise Regulation Z provisions and official interpretations relating to escrow requirements for higher-priced mortgage loans under the Bureau’s January 2013 Escrows Final Rule and ability-to-repay/ qualified mortgage requirements under the Bureau’s January 2013 ATR Final Rule and May 2013 ATR Final Rule. The Bureau’s proposal would also affect requirements under the Bureau’s 2013 HOEPA Final Rule.2 The proposed rule was published in the Federal Register on February 11, 2015. See Amendments Relating to Small Creditors and Rural or Underserved Areas Under the Truth in Lending Act (Regulation Z), 80 FR 7769 (Feb. 11, 2015). This final rule adopts, with some additional clarifications and technical revisions, the Bureau’s proposed rule. It reflects feedback received from stakeholders through this notice and comment rulemaking regarding the Bureau’s definitions of small creditor, and rural and underserved areas, as those definitions relate to special provisions and certain exemptions to requirements provided to small creditors under the Bureau’s 2013 Title XIV Final Rules and updates. Specifically, the final rule makes the following changes with regard to the definitions of small creditor and rural and underserved areas as currently (Regulation Z) and 78 FR 10695 (Feb. 14, 2013) (Regulation X). 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) and, jointly with other agencies, issued Appraisals for Higher-Priced Mortgage Loans, 78 FR 10367 (Feb. 13, 2013) (January 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). 2 The January 2013 Interagency Appraisals Final Rule provides an exemption from the requirement to obtain a second appraisal for certain higherpriced mortgage loans if the loan is secured by a property in a ‘‘rural county.’’ This final rule will not affect the scope of that exemption because it will not change the counties that are defined as ‘‘rural’’ under § 1026.35(b)(2)(iv)(A). PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 provided in the Bureau’s mortgage rules: 3 • Raises the loan origination limit for determining eligibility for small-creditor status from 500 originations of covered transactions secured by a first lien, to 2,000 such originations (referred to in this rule as ‘‘extensions of covered transactions’’), and excludes originated loans held in portfolio by the creditor and its affiliates from that limit. The final rule also establishes a grace period from calendar year to calendar year to allow a creditor that exceeded the origination limit in the preceding calendar year to operate, in certain circumstances, as a small creditor with respect to transactions with applications received before April 1 of the current calendar year. • Includes in the calculation of the $2 billion asset limit for small-creditor status the assets of the creditor’s affiliates that regularly extended covered transactions. The final rule also adds a grace period to the annual asset limit, to allow a creditor that exceeded the asset limit in the preceding calendar year to operate, in certain circumstances, as a small creditor with respect to transactions with applications received before April 1 of the current calendar year. • Adjusts the time period used in determining whether a creditor is operating predominantly in rural or underserved areas from any of the three preceding calendar years to the preceding calendar year. As with the origination and asset limits for smallcreditor status, the final rule adds a grace period to allow a creditor that fails to meet this threshold in the preceding calendar year, to continue operating, in certain circumstances, as if it had met this threshold with respect to transactions with applications received before April 1 of the current calendar year. • Amends the current exemption under § 1026.35(b)(2)(iii)(D)(1) provided to small creditors that operate predominantly in rural or underserved areas from the requirement for the establishment of escrow accounts for higher-priced mortgage loans. The final rule ensures that creditors who established escrow accounts solely to comply with the current rule will be eligible for the exemption if they meet the expanded definitions of small creditors operating predominantly in rural or underserved areas under the final rule. • Expands the definition of ‘‘rural’’ by adding census blocks that are not in an urban area as defined by the U.S. Census Bureau (Census Bureau) to the current county-based definition. • Conforms the definition of ‘‘underserved’’ to the proposals discussed above. The substance of the ‘‘underserved’’ definition is not changed. • Adds two new safe harbor provisions related to the rural or underserved definition for creditors that rely on automated tools provided: (1) On the Bureau’s Web site to allow creditors to determine whether 3 See §§ 1026.35(b)(2)(iii)(A), (B), (C), and (D), and 1026.35(b)(2)(iv)(A) and (B) and commentary, crossreferenced in §§ 1026.43(e)(5) and (e)(6), 1026.43(f)(1) and (f)(2) and commentary; and § 1026.32(d)(1)(ii)(C)). E:\FR\FM\02OCR2.SGM 02OCR2 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations properties are located in rural or underserved areas, or (2) on the Census Bureau’s Web site to assess whether a particular property is located in an urban area according to the Census Bureau’s definition. The final rule maintains the current safe harbor for lists of rural and underserved counties provided by the Bureau, with technical changes. The final rule also adds commentary clarifying the circumstances under which U.S. territories will be included on the lists. • Extends the current two-year transition period, which allows certain small creditors to make balloon-payment qualified mortgages (§ 1026.43(e)(6)) and balloon-payment highcost mortgages (§ 1026.32(d)(1)(ii)(C)), regardless of whether they operate predominantly in rural or underserved areas. The transition period will include covered transactions for which the application was received before April 1, 2016, rather than covered transactions consummated on or before January 10, 2016. In addition to the changes discussed above to the definitions of small creditor and rural and underserved areas, this final rule is also making a technical correction to the commentary to § 1026.36(a). This non-substantive change is discussed in the section-bysection analysis of the supplementary information section below. II. Background asabaliauskas on DSK5VPTVN1PROD with RULES 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, in the Bureau.4 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.5 4 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). 5 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.). VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 Under the statute, most of these new requirements would have taken effect automatically on January 21, 2013 if the Bureau had not issued implementing regulations by that date.6 To avoid uncertainty and potential disruption in the national mortgage market at a time of economic vulnerability, the Bureau issued several final rules (the 2013 Title XIV 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. These final rules include the January 2013 ATR Final Rule, the January 2013 Escrows Final Rule, the 2013 HOEPA Final Rule, and the January 2013 Interagency Appraisals Final Rule. Most of the mortgage rules released in January 2013 became effective on January 10, 2014. Concurrent with the January 2013 ATR Final Rule, on January 10, 2013, the Bureau issued the January 2013 ATR Proposal, which the Bureau adopted on May 29, 2013 in the May 2013 ATR Final Rule.7 The Bureau has issued additional corrections, revisions, and clarifications to the provisions adopted by the Bureau in the 2013 Title XIV Final Rules and the May 2013 ATR Final Rule over the past two years.8 This final rule concerns additional revisions to the 2013 Title XIV Final Rules related to provisions regarding small creditors and rural and underserved areas. 6 See section 1400(c) of the Dodd-Frank Act, 15 U.S.C. 1601 note. 7 78 FR 6621 (Jan. 30, 2013); 78 FR 35429 (June 12, 2013) (providing a two-year transition period during which small creditors that do not operate predominantly in rural or underserved areas can offer balloon-payment qualified mortgages if they hold the loans in portfolio). In May 2013, the Bureau also finalized amendments to the January 2013 Escrows Final Rule. Amendments to the 2013 Escrows Final Rule under the Truth in Lending Act (Regulation Z), 78 FR 30739 (May 23, 2013) (May 2013 Escrows Final Rule). 8 See, e.g., 78 FR 44685 (July 24, 2013) (clarifying, among other things, 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 60382 (Oct. 1, 2013) (revising, among other things, two exceptions available to small creditors operating predominantly in ‘‘rural’’ or ‘‘underserved’’ areas, pending the Bureau’s reexamination of the underlying definitions); 78 FR 62993 (Oct. 23, 2013) (clarifying the specific disclosures that must be provided before counseling for high cost mortgages can occur and proper compliance regarding servicing requirements when a consumer is in bankruptcy or sends a cease communication request under the Fair Debt Collection Practice Act). In the fall of 2014, the Bureau also made further amendments to the 2013 mortgage rules related to nonprofit entities and provided a cure mechanism for the points and fees limit that applies to qualified mortgages. 79 FR 65300 (Nov. 3, 2014). PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 59945 III. Summary of the Rulemaking Process On January 29, 2015, the Bureau issued, and on February 11, 2015, published in the Federal Register, its proposed rule entitled ‘‘Amendments Relating to Small Creditors and Rural or Underserved Areas Under the Truth in Lending Act (Regulation Z).’’ 9 The comment period closed on March 30, 2015. In response to the proposal, the Bureau received 90 comments from consumer groups, members of Congress, creditors, industry trade associations, and others. As discussed in more detail below, the Bureau has considered these comments in adopting this final rule. IV. Legal Authority The Bureau is issuing this final rule pursuant to its authority under TILA and the Dodd-Frank Act. 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.’’ 10 Title X of the Dodd-Frank Act, including section 1061 of the DoddFrank Act, along with TILA and certain subtitles and provisions of title XIV of the Dodd-Frank Act, are Federal consumer financial laws.11 A. TILA-Specific Statutory Grants of Authority TILA as amended by the Dodd-Frank Act provides two specific statutory bases for the changes in the Bureau’s final rule. TILA section 129D(c) authorizes the Bureau to exempt, by regulation, a creditor from the requirement (in section 129D(a)) that escrow accounts be established for higher-priced mortgage loans if the creditor operates predominantly in rural 9 80 FR 7769 (February 11, 2015). Act section 1061(a)(1)(A), 12 U.S.C. 5581(a)(1)(A). 11 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). 10 Dodd-Frank E:\FR\FM\02OCR2.SGM 02OCR2 59946 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations or underserved areas, retains its mortgage loans in portfolio, does not exceed (together with all affiliates) a total annual mortgage loan origination limit set by the Bureau, and meets any asset size threshold, and any other criteria, the Bureau may establish. TILA section 129C(b)(2)(E) authorizes the Bureau to provide, by regulation, that certain balloon-payment mortgages originated by small creditors receive qualified mortgage status, even though qualified mortgages are otherwise prohibited from having balloonpayment features. The creditor qualifications under TILA section 129C(b)(2)(E)(iv) are essentially the same as those for the higher-priced mortgage loan escrow exemption, including operating predominantly in rural or underserved areas, together with all affiliates not exceeding a total annual mortgage loan origination limit set by the Bureau, retaining the balloonpayment loans in portfolio, and meeting any asset size threshold, and any other criteria, the Bureau may establish. asabaliauskas on DSK5VPTVN1PROD with RULES B. Other Rulemaking and Exception Authority This final rule also relies on other rulemaking and exception authorities specifically granted to the Bureau by TILA and the Dodd-Frank Act, including the authorities discussed below. Truth in Lending Act As amended by the Dodd-Frank Act, 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 DoddFrank Act, to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive, or abusive. 15 U.S.C. 1639b(a)(2). VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 Historically, TILA section 105(a) has served as a broad source of authority for rules that promote the informed use of credit through required disclosures and substantive regulation of certain practices. Dodd-Frank Act section 1100A clarified the Bureau’s section 105(a) authority by amending that section to provide express authority to prescribe regulations that contain ‘‘additional requirements’’ that the Bureau finds are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance therewith. This amendment clarified the Bureau’s authority under TILA section 105(a) to prescribe requirements beyond those specifically listed in the statute that meet the standards outlined in section 105(a), which include effectuating all of TILA’s purposes. Therefore, the Bureau believes that its authority under TILA section 105(a) to make exceptions, adjustments, and additional provisions that the Bureau finds are necessary or proper to effectuate the purposes of TILA applies with respect to the purpose of section 129D. That purpose is to ensure that consumers understand and appreciate the full cost of homeownership. The purpose of TILA section 129D is also informed by the findings articulated in section 129B(a) that economic stabilization would be enhanced by the protection, limitation, and regulation of the terms of residential mortgage credit and the practices related to such credit, while ensuring that responsible and affordable mortgage credit remains available to consumers. See 15 U.S.C. 1639b(a). 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; are necessary and appropriate to effectuate the purposes of the ability-to-repay and residential mortgage loan origination requirements; prevent circumvention or evasion thereof; or 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). TILA section 105(a) grants the Bureau authority to make adjustments and exceptions to the requirements of TILA for all transactions subject to TILA, PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 except with respect to the substantive provisions of TILA section 129 that apply to high-cost mortgages. With respect to the high-cost mortgage provisions of TILA section 129, TILA section 129(p), 15 U.S.C. 1639(p), as amended by the Dodd-Frank Act, grants the Bureau authority to create exemptions to the restrictions on highcost mortgages and to expand the protections that apply to high-cost mortgages. Under TILA section 129(p)(1), the Bureau may exempt specific mortgage products or categories from any or all of the prohibitions specified in TILA section 129(c) through (i), if the Bureau finds that the exemption is in the interest of the borrowing public and will apply only to products that maintain and strengthen homeownership and equity protections. Among these referenced provisions of TILA is section 129(e), the prohibition on balloon payments for high-cost mortgages. The Dodd-Frank Act Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to prescribe rules ‘‘as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.’’ 12 U.S.C. 5512(b)(1). TILA and title X and certain enumerated subtitles and provisions of title XIV of the DoddFrank Act are Federal consumer financial laws. Accordingly, the Bureau is exercising its authority under DoddFrank Act section 1022(b) to issue rules that carry out the purposes and objectives of TILA, title X of the DoddFrank Act, and certain enumerated subtitles and provisions of title XIV of the Dodd-Frank Act, and to prevent evasion of those laws. V. Section-by-Section Analysis of the Proposed Rule Section 1026.35 Requirements for Higher-Priced Mortgage Loans 35(b) Escrow Accounts 35(b)(2) Exemptions 35(b)(2)(iii) Section 1026.35(b)(2)(iii) currently provides that an escrow account need not be established for a higher-priced mortgage loan by small creditors who operate predominantly in rural or underserved areas if four conditions identified in § 1026.35(b)(2)(iii)(A) through (D) are satisfied at the time of consummation.12 Section 12 Section 1026.35(b)(2)(v) excludes from the § 1026.35(b)(2)(iii) exception any first-lien higher- E:\FR\FM\02OCR2.SGM 02OCR2 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations 1026.35(b)(2)(iii)(A) provides a test for determining whether a creditor operates predominantly in rural or underserved areas; § 1026.35(b)(2)(iii)(B) sets an origination limit for small creditor status; § 1026.35(b)(2)(iii)(C) sets an asset limit for small creditor status; and § 1026.35(b)(2)(iii)(D) does not allow an exemption from the escrow requirement for creditors with existing escrow accounts, with certain exceptions. The Bureau proposed to make amendments to all of these conditions and, as discussed below, is adopting these amendments with some clarifications in this final rule. Because the predominantly-rural-orunderserved test and the origination and asset limits of § 1026.35(b)(2)(iii) are cross-referenced in the Bureau’s January 2013 ATR Final Rule and its 2013 HOEPA Final Rule, and amendments to those rules, they also affect eligibility for special provisions and exemptions provided in those rules, including the following: asabaliauskas on DSK5VPTVN1PROD with RULES • A qualified mortgage definition for certain loans made and held in portfolio (small creditor portfolio loans), by small creditors regardless of whether they operate predominantly in rural or underserved areas. These loans are not subject to the 43 percent debt-to-income ratio limit (or to ‘‘appendix Q’’ requirements in determining the debt and income of consumers) that applies to general qualified mortgage loans under § 1026.43(e)(2) (§ 1026.43(e)(5)). A first-lien qualified mortgage under this category also provides a safe harbor from ability-to-repay claims, if the mortgage’s annual percentage rate (APR) does not exceed the applicable Average Prime Offer Rate (APOR) by 3.5 or more percentage points. In contrast, general qualified mortgage loans under § 1026.43(e)(2) provide safe harbors if their APRs do not exceed the applicable APOR by 1.5 or more percentage points.13 • Two qualified mortgage definitions for small creditors making certain balloonpayment loans. One is a permanent definition for small creditors operating predominantly in rural or underserved areas. The other is a temporary definition for small creditors who do not operate predominantly in such areas. These definitions provide an exception from the limitation on balloonpayment features on general qualified priced mortgage loan that, at consummation, is subject to a commitment to be acquired by a person that does not satisfy the § 1026.35(b)(2)(iii) conditions. 13 Specifically, for purposes of determining whether a loan has a safe harbor with regard to 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 § 1026.43(e)(5), (e)(6) and (f) receive an APR threshold of the applicable APOR plus 3.5 percentage points, rather than plus 1.5 percentage points. VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 mortgage loans (§ 1026.43(e)(6) and (f)).14 These two qualified mortgage definitions are also subject to a higher APR threshold for defining a higher-priced covered transaction, allowing small creditors of such qualified mortgages to receive a safe harbor under the Bureau’s ability-to-repay rule. • An exception from the prohibition on balloon-payment features for certain highcost mortgages (§ 1026.32(d)(1)(ii)(C))—also on a permanent basis for small creditors operating predominantly in rural or underserved areas and a temporary basis for small creditors who do not operate predominantly in such areas.15 The Bureau adopted these special provisions and exemptions for small creditors because of the important role that small creditors play in providing mortgage credit to consumers. The Bureau believes that many small creditors use a lending model based on maintaining ongoing relationships with their customers and often limit their lending activities to a single community. They therefore may have a more comprehensive understanding of the financial circumstances of their customers and of the economic and other circumstances of that community.16 The special provisions and exemptions facilitate the ability of small creditors that operate predominantly in rural or underserved areas, as well as small creditors that operate in areas that are neither rural nor underserved, to provide access to mortgage credit for consumers they serve. 35(b)(2)(iii)(A) As discussed in detail below, the Bureau is adopting 14 Specifically these provisions allow: (1) On a permanent basis, balloon-payment qualified mortgage loans made and held in portfolio by certain small creditors operating predominantly in rural or underserved areas ((§ 1026.43(f)); and (2) for a temporary two year transition period—from January 10, 2014 to January 10, 2016—balloonpayment qualified mortgages originated by small creditors even if they do not operate predominantly in rural or underserved areas (this period is being extended under this final rule to cover transactions with applications received before April 1, 2016— see the section-by-section analysis below on § 1026.43(e)(6))). 15 Specifically, this provision allows: (1) On a permanent basis, small creditors that operate predominantly in rural or underserved areas to originate high-cost loans with balloon-payment features; and (2) for loans made on or before January 10, 2016 (extended by this final rule to cover transactions with applications received before April 1, 2016), small creditors to originate high-cost mortgages with balloon-payment features even if they do not operate predominantly in rural or underserved areas, under certain conditions. See § 1026.32(d)(1)(ii)(C). 16 Lending activities of many creditors that currently qualify as small are generally limited to a single community. However, creditors that will qualify as small with the adoption of the changes in this final rule generally lend and have branches (in the case of depository institutions) in several communities and counties. PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 59947 § 1026.35(b)(2)(iii)(A) substantially as proposed, with certain minor changes to enhance clarity. Accordingly, this final rule restores the one-year lookback period for determining whether the creditor is operating predominantly in rural or underserved areas as originally adopted by the January 2013 Escrows Final Rule. This final rule also adopts the proposed grace period that allows a creditor making a higher-priced mortgage loan based on an application received before April 1 to rely on its transactions from either the preceding calendar year or the next-to-last calendar year to meet the condition in § 1026.35(b)(2)(iii)(A). The Bureau’s Proposal The current test under § 1026.35(b)(2)(iii)(A) for determining whether a creditor operates predominantly in rural or underserved areas is that, during any of the three preceding calendar years, the creditor extended more than 50 percent of its total first-lien covered transactions, as defined by § 1026.43(b)(1),17 on properties that are located in counties that are either ‘‘rural’’ or ‘‘underserved’’ (the more than 50 percent test). The Bureau proposed to amend § 1026.35(b)(2)(iii)(A) and comment 35(b)(2)(iii)–1 to eliminate the threeyear lookback period in § 1026.35(b)(2)(iii)(A) and to establish the preceding calendar year as the relevant time period for assessing whether the more than 50 percent test is satisfied as a general matter. The Bureau also proposed a grace period to allow otherwise eligible creditors whose first-lien covered transactions in the preceding year failed to meet the more than 50 percent test to continue to operate with the benefit of the exemption for applications received before April 1 of the current calendar year if their first-lien covered transactions during the next-to-last calendar year met the test. The Bureau also proposed conforming and technical changes to the rule and commentary. Proposed comment 35(b)(2)(iii)–1.i was amended for consistency with the changes that the Bureau proposed to the regulation text in §§ 1026.35(b)(2)(iii)(A) and 1026.35(b)(2)(iv)(A), and to provide guidance on the one-year lookback and grace periods. The Bureau also proposed to remove from comment 35(b)(2)(iii)– 1.i all discussion of the lists that the 17 ‘‘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). E:\FR\FM\02OCR2.SGM 02OCR2 59948 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations asabaliauskas on DSK5VPTVN1PROD with RULES Bureau publishes of ‘‘rural’’ or ‘‘underserved’’ counties pursuant to § 1026.35(b)(2)(iv). The Bureau invited comment on whether it should eliminate the threeyear lookback period as proposed and whether it is appropriate to rely on the preceding calendar year in determining as a general matter whether the more than 50 percent test is met. The Bureau also sought feedback on whether it should provide a grace period to creditors that meet this test in one calendar year but fail to do so in the next calendar year and, if so, whether such a grace period should apply to all applications received before April 1 as proposed. For the reasons discussed below, the Bureau is adopting § 1026.35(b)(2)(iii)(A) and the accompanying commentary as proposed, with minor technical revisions. Comments The Bureau received comments from national and state associations of credit unions, a national association of community banks, and state associations of banks on the proposal to use the preceding calendar year, rather than any of the three preceding calendar years, as the relevant time period for assessing whether the more than 50 percent test is satisfied and on the proposed April 1 grace period. No comments were received on the related proposed changes to the commentary. Most of the commenters on the proposed lookback provision recommended that the Bureau maintain the three-year lookback. A national association of credit unions noted many credit unions develop their forwardlooking strategies with a two- or threeyear outlook and was concerned that the proposal will curtail a credit union’s ability to do such planning. For the same reason, this commenter suggested extending the effective date of this rulemaking to January 1, 2017 if the three-year lookback is replaced with a one-year period. A national association and a state association of banks both noted some of their members operate close to the 50 percent threshold and that a three-year lookback would prevent these lenders from abruptly halting their loan originations should they come close to approaching the loan threshold or otherwise become concerned that they may not meet the more than 50 percent test in a given year. The state banking association recommended a six-month grace period if the Bureau adopts the one-year lookback period to allow community banks to make necessary product and VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 system adjustments and train staff. Other commenters noted generally that the three-year lookback would provide creditors greater flexibility than a oneyear period would, but provided no specific details or examples. The majority of commenters on the proposed Apri1 1 grace period supported that provision, although a few commenters recommended extending the grace period to six months, and in one case, to one year. The commenters recommending an extension of the grace period generally cited the need for additional time to adjust systems and train staff. Final Rule The Bureau is finalizing § 1026.35(b)(2)(iii)(A) and its accompanying commentary generally as proposed but with minor changes to provide greater clarity. The Bureau considered comments requesting the continuation of the threeyear lookback but has not adopted this approach in the final rule. As originally adopted in the January 2013 Escrows Final Rule, § 1026.35(b)(2)(iii)(A) considered only the preceding year and established a one-year lookback period. The Bureau instituted the three-year lookback period to stabilize the escrow exemption during the period from 2013 to 2015 while the definitions were under review. 78 FR 60382, 60416 (Oct. 1, 2013). This change guaranteed eligibility for a creditor that was eligible during 2013 with respect to operating predominantly in rural or underserved areas and met the other applicable criteria through 2015. Stability in this specific period was a particular concern because during the definitional review the first year-to-year transition in the ‘‘rural’’ definition for purposes of this exemption was to coincide with the shift in the United States Department of Agriculture’s Economic Research Service’s (USDA–ERS) county Urban Influence Code (UIC) designations that occur once every decade. Once the definitional review period ends, the Bureau believes that using a three-year lookback period on a permanent basis would allow creditors to maintain eligibility even if their firstlien covered transactions do not meet the more than 50 percent test in most calendar years. That result would be contrary to the goal of identifying creditors that focus their activity in rural or underserved areas. Although the three-year lookback period provides creditors with certainty that they will be eligible for the exemption at least two years into the future, the Bureau does not believe that such extended notice will be necessary PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 once the revisions to the definitions are effective. As explained in the sectionby-section analysis of § 1026.35(b)(2)(iv)(A), below, the areas that are rural under the definition would only change once or twice a decade.18 While the counties defined as underserved could change each year, such shifts are unlikely to affect many creditors’ eligibility for the special provisions and exemptions because very few counties would be underserved but not rural under the Bureau’s definitions. Furthermore, creditors can monitor the first-lien covered transactions that they originate throughout the year using the Bureau’s automated tool and should generally be able to anticipate any change in their eligibility well before the end of the year. Any changes that would be made in the rural definition after each decennial census would be based on demographic shifts that have unfolded over the preceding decade and which may, in many instances, be evident to creditors serving those areas. The changes would be announced well before they become effective, allowing time for creditors to assess their status and make appropriate transitions. The Bureau therefore believes that the preceding calendar year is the appropriate time period to use as a general rule in assessing whether the more than 50 percent test is met. The Bureau acknowledges that in some cases, a creditor could find out on or close to December 31st that it was not operating predominantly in rural or underserved areas during that calendar year. Such a creditor might have difficulty transitioning from balloonpayment loans to adjustable-rate mortgages and complying with the higher-priced mortgage loan escrow requirements by January 1 if eligibility for the special provisions and exemptions is based solely on transactions in the preceding calendar year. The Bureau therefore is adopting the proposed grace period that allows a creditor making a higher-priced mortgage loan based on an application received before April 1 to rely on its transactions from either the preceding calendar year or the next-to-last 18 As noted in the discussion of comment 35(b)(2)(iv)–2 below, the Census Bureau released its list of urban areas based on the 2010 decennial census in 2012, and the USDA–ERS released its UIC designations based on the 2010 decennial census in 2013. If the USDA–ERS continues to incorporate decennial census results into its UIC county designations in a different year than the Census Bureau finalizes its rural-urban classification, as in 2012 and 2013, the effects of each decennial census would be incorporated into the Bureau’s proposed ‘‘rural’’ definition over the course of two years, which would afford additional transition time to some of the creditors affected by the changes. E:\FR\FM\02OCR2.SGM 02OCR2 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations calendar year to meet the more than 50 percent test in § 1026.35(b)(2)(iii)(A). A creditor that is otherwise eligible and that met the more than 50 percent test in calendar year one but fails to meet it in calendar year two remains eligible with respect to applications received before April 1 of calendar year three. The Bureau considered comments requesting longer grace periods of six months or one year, but the Bureau is adopting this provision as proposed. Most of the comments received favored the grace period as proposed, and the Bureau believes that a grace period of this nature facilitates the transition of creditors that no longer operate predominantly in rural or underserved areas and properly balances the importance of the substantive consumer protections provided by the higherpriced mortgage loan escrows requirement, the ability-to-repay requirement, and the high-cost mortgage requirements with concerns that have been raised regarding their potential impact on access to credit. asabaliauskas on DSK5VPTVN1PROD with RULES 35(b)(2)(iii)(B) The Bureau is adopting § 1026.35(b)(2)(iii)(B) and the accompanying commentary, substantially as proposed, with certain technical changes and commentary additions to enhance clarity, as discussed in further detail below. Accordingly, this final rule raises the origination limit for small creditor status from 500 covered transactions secured by a first-lien originated by the creditor and its affiliates, to 2,000 such loans. The final rule also excludes originated loans held in portfolio by the creditor or its affiliates from the limit. The final rule also adds a grace period to allow an otherwise eligible creditor that exceeded the origination limit in the preceding calendar year (but not in the calendar year before the preceding year) to continue to operate as a small creditor with respect to transactions with applications received before April 1 of the current calendar year. Background—Origination Limit As part of its rulemakings implementing title XIV of the DoddFrank Act, in January 2013, the Bureau adopted an annual origination limit for small creditor status of 500 first-lien covered transactions in the preceding calendar year (§ 1026.35(b)(2)(iii)(B).19 Specifically, the origination limit in § 1026.35 (b)(2)(iii)(B) provides that, during the preceding calendar year, 19 For a more detailed discussion of the Board’s and the Bureau’s past rulemaking efforts with regard to the small creditor origination limit, see the proposed rule. 80 FR 7769, 7776–7781. VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 creditors, together with their affiliates, must have originated 500 or fewer covered transactions, as defined by § 1026.43(b)(1), secured by a first lien. In adopting this limit the Bureau believed that an origination limit, in combination with other requirements, was the most accurate means of confining the special provisions and exemptions to the class of small creditors that focus primarily on a relationship-lending model, a business model the Bureau believed would best facilitate consumers’ access to responsible, affordable credit. However, prior to and after the effective dates of the 2013 Title XIV Final Rules, the Bureau heard repeated expressions of concern that the Bureau’s definition of small creditor was underinclusive and did not cover a significant number of institutions that met the rationale underlying the special provisions and exemptions. Accordingly, on May 6, 2014, in a Notice of Proposed Rulemaking with proposals addressing other elements of the 2013 Title XIV Final Rules, the Bureau also sought comment on the 500 total first-lien origination limit— including whether that limit is sufficient to serve the purposes of the small creditor designation.20 In response to the Bureau’s solicitation of comments regarding the origination limit in its May 6, 2014 proposal, industry commenters, including national and state associations of banks, and national and state associations of credit unions, generally supported an increase in the 500 loan origination limit. Consumer groups generally did not support an increase, absent clear evidence that the current limit was significantly harming consumers. These consumer-group commenters asserted that evidence of consumer harm does not exist. The Bureau’s Proposal The Bureau’s proposed rule reflected stakeholder feedback on the small creditor definition received during the period since the issuance of its 2013 Title XIV Final Rules. Specifically, the Bureau proposed to raise the origination limit in § 1026.35(b)(2)(iii)(B) from 500 covered transactions secured by a firstlien originated by the creditor and its affiliates to 2,000 such loans. The Bureau also proposed to exclude loans held in portfolio by the creditor or its affiliates from the limit, so that the limit would only apply to loans that were sold, assigned, or otherwise transferred 20 Amendments to the 2013 Mortgage Rules Under the Truth in Lending Act (Regulation Z), 79 FR 25730 (May 6, 2014). PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 59949 by the creditor or its affiliates to another person, or subject to a commitment to be acquired by another person. The Bureau also proposed to add a grace period from calendar year to calendar year to allow an otherwise eligible creditor that exceeded the origination limit in the preceding calendar year to continue to operate as a small creditor with respect to transactions with applications received before April 1 of the current calendar year if the creditor had not exceeded it in the calendar year before the preceding calendar year. Proposed comment 35(b)(2)(iii)–1.ii made clear that a loan transferred by a creditor to its affiliate is a loan not retained in portfolio (it is a loan transferred to ‘‘another person’’) and therefore is counted toward the 2,000 origination limit. The proposed comment also explained and added examples on applying the grace period to the origination limit. In issuing the proposed rule, the Bureau stated its belief that an adjustment of the current origination limit as proposed, given feedback received on the origination limit up to that point, is justified. The Bureau stated that small creditors serve a particularly critical function for consumers in rural and underserved areas, especially when these creditors make portfolio loans for which there may be no secondary market. At the same time, the Bureau recognized that an expansion of the origination limit could undermine the Bureau’s title XIV regulatory protections. The Bureau stated that it wanted to ensure that the origination limit is not set at a level that will allow larger creditors to take advantage of small-creditor status to avoid important regulatory requirements that protect consumers—regulatory requirements that those larger creditors, unlike many smaller creditors, have the capacity to implement effectively. For the reasons discussed below, the Bureau is adopting § 1026.35(b)(2)(iii)(B), and the accompanying commentary, as proposed, with several technical revisions, and commentary additions and clarifications. Comments Comments on the Bureau’s proposal to raise the origination limit were divided between industry stakeholders and consumer groups. Industry commenters generally expressed appreciation and support for the proposed rule changes, while consumer representatives and organizations opposed or expressed concern with the proposals. E:\FR\FM\02OCR2.SGM 02OCR2 asabaliauskas on DSK5VPTVN1PROD with RULES 59950 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations Increase limit to 2,000 loans. Industry commenters supported the proposed increase in the origination limit for small creditor status from 500 loans to 2,000 non-portfolio loans. Banks, and their national and state trade associations, were particularly supportive of the 2,000 origination limit. One national trade association stated, for example, that its internal analysis suggested that the Bureau approximated a good target through the proposed 2,000 origination limit. It stated further that from informal polling of its smaller community bank members, 1,000 loan originations per year is a common volume at banks of asset sizes below $1 billion, and that many may originate more. A state banking association agreed, stating that the Bureau’s proposal better aligned the origination limit with the asset limit. This commenter stated that the current rule limiting originations to 500 covered transactions for institutions with up to $2 billion in assets does not reflect the business models of most community banks. A national association of credit unions, in expressing support for increasing the origination limit to 2,000 loans, stated that, because a large number of its members with assets under $2 billion originate more than 500 first-lien mortgages, it had long sought an increase in the origination threshold. Another state banking association stated that the increased origination limit will qualify more institutions as small creditors and promote the availability of mortgage credit for their customers. While national and state credit union trade association commenters were supportive of the Bureau’s proposal to raise the limit, a number questioned how the Bureau arrived at 2,000 loans for the limit, and suggested the Bureau analyze increasing the proposed limit. One national association of credit unions, for example, encouraged the Bureau to provide impact analyses that demonstrate how communities, consumers, and creditors would be affected if the limit were raised to 2,500, 3,000, 3,500, or 4,000, as well as the proposed threshold of 2,000, so that stakeholders and the Bureau would have more informed comments regarding what the new limit should be. Some state associations of credit unions suggested that the Bureau raise the limit to 5,000 loans, stating that a threshold at that level is more in line with the reality of credit unions that continue to maintain the virtues of a small creditor, including an elevated level of service and personal attention to borrowers. Some state associations of credit unions suggested that the Bureau allow institutions with default rates of, for VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 example, less than 1 percent of covered transactions in the previous calendar year to make up to 4,000 mortgage loans per year and still qualify for the small creditor exemption. Consumer groups opposed or expressed concern regarding the proposed increase in the origination limit. Some cited a lack of an evidentiary basis to support the expansion of the origination limit, asserting that the Bureau did not provide any evidence that the current limit unreasonably constrains small creditors. Several consumer organizations in a joint comment expressed concern about the expansion of the origination limit to 2,000 loans, with a specific focus on past practices and lack of regulatory oversight with regard to non-depository institutions. They stated that, in the past, the absence of oversight by federal financial regulators, when combined with inconsistent or weaker state oversight, created an environment where non-depository institutions, in particular, had improper incentives to push consumers into mortgage loans with problematic features. The joint commenters encouraged the Bureau to limit the increase of the origination limit to depository institutions exclusively. Exclusion of portfolio loans from the limit. Industry commenters also supported the Bureau’s proposal to exclude portfolio loans from the origination limit. A national association of banks stated that this exclusion is consistent with the rule’s overall goals of ensuring safe lending while promoting credit accessibility. It stated that the success and livelihood of community banks are dependent upon repayment of their portfolio loans and that community banks carefully underwrite these loans based on knowledge of their communities and standards that meet local customer needs. It also noted the sound lending practices of ‘‘hometown banks’’ as demonstrated by their persistently low default and foreclosure rates, even through the recent mortgage crisis. These comments were echoed by several state banking associations. An organization of state bank supervisors stated that the Bureau’s proposal correctly acknowledges that portfolio lenders have strong incentives to consider a borrower’s ability to repay a loan. It also stated that raising the small creditor origination limit from 500 to 2,000 loans, and more importantly, excluding loans originated and held in portfolio from that threshold, will provide effective and significant PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 regulatory relief for community bank portfolio lenders. A coalition of mid-size banks stated that this aspect of the proposal rests on the understanding that a creditor retains the risk associated with its portfolio loans and therefore has a natural incentive to underwrite such loans deliberately and under conservative standards. It stated further that this incentive is magnified for small and mid-size banks, which have substantially lower capital cushions than their larger counterparts to absorb losses in connection with default. A state association of banks stated that the Bureau is moving in the ‘‘right direction’’ with many of its proposals, but recommended that the Bureau exclude from the origination limit loans transferred by a creditor to a whollyowned subsidiary. Grace period for transactions with applications received before April 1st of current calendar year. Industry commenters supported the Bureau’s proposal to allow a creditor that exceeded the origination limit in the preceding calendar year to operate, in certain circumstances, as a small creditor with respect to transactions with applications received before April 1 of the current calendar year. Some commenters, however, suggested that the grace period be extended, e.g., to 6 months. These commenters expressed concern that the proposed grace period was too brief for small banks and credit unions to track their originations and to change their operations in a timely manner. Final Rule Increase of origination limit to 2,000 loans. As discussed above, the Bureau believes that small creditors serve a critical function for consumers in rural and underserved areas, especially when these creditors make portfolio loans for which there may be no secondary market and that larger creditors may not be willing to make. Industry comments on the current small creditor origination limit indicate that it may be restricting the ability of such creditors with relationship lending models to provide needed credit to qualified borrowers in rural and underserved areas. The intent of the small creditor test is to facilitate lending by those small creditors that provide responsible, affordable credit to consumers, and to enable consumers in rural and underserved areas to access creditors with a lending model, operations, and products that may meet their particular needs. The Bureau has considered those industry comments that suggested raising the limit above 2,000 loans, or E:\FR\FM\02OCR2.SGM 02OCR2 asabaliauskas on DSK5VPTVN1PROD with RULES Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations raising the limit above 2,000 loans for institutions with lower default rates. The Bureau seeks to avoid setting the origination limit, however, at a level that will allow larger creditors to take advantage of small-creditor status. The Bureau’s primary goal in setting the limit is to draw the appropriate line between small and large creditors, and to strike the right balance between preserving consumer access to credit and maintaining effective consumer protections. The Bureau believes that the 2,000 non-portfolio loan limit strikes that balance. The Bureau is finalizing the origination limit as proposed, applying equally to depository institutions and non-depository institutions, as does the current rule. Excluding non-depository institutions from the changes to the origination limit, as suggested by some consumer groups, would require the Bureau to establish, and oversee, two different regulatory schemes for banks and non-banks. This introduction of complexity into the determination of small creditor status would subject similar regulated entities to different regulatory requirements, possibly creating creditor confusion regarding compliance, resulting in increased burden and compliance costs for such creditors. Moreover, the Dodd-Frank Act sets out as one of the objectives for the Bureau enforcing federal consumer financial law consistently without regard to charter type.21 Exclusion of portfolio loans from the limit. The Bureau’s proposal to exclude loans held in portfolio by the creditor and its affiliates recognizes that the interests of small portfolio lenders are more likely to be aligned with the interests of consumers because small portfolio lenders retain the credit risk for loans held in portfolio. The Bureau has also recognized that many small creditors use a lending model based on maintaining ongoing relationships with their customers and therefore may have a more comprehensive understanding of the financial circumstances of their customers. The Bureau’s exclusion of portfolio loans from the origination limit, therefore, is a recognition not only of the small creditor’s community-based focus and commitment to relationshipbased lending, but also of the inherent alignment of creditors’ and consumers’ interests associated with portfolio lending by smaller institutions. The Bureau is therefore adopting the 21 See section 1021(b)(4) of the Dodd-Frank Act, 12 U.S.C. 5511(b)(4), requiring the Bureau to ‘‘to ensure that Federal consumer financial law is enforced consistently, without regard to the status of a person as a depository institution, in order to promote fair competition.’’ (emphasis added). VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 exclusion of portfolio loans from the origination limit as proposed. The Bureau believes the final rule provides a bright-line approach for determining what is included in the 2,000-origination limit. The Bureau also believes that the bright-line nature of this rule would be undermined by the commenter’s recommendation described above that the Bureau not count toward the limit loans transferred by the creditor to its wholly-owned subsidiary. A transfer of a loan by a creditor to a subsidiary, or other affiliate, is not a loan held in the creditor’s portfolio. Rather, it is a loan that is sold, assigned, or otherwise transferred by the creditor to another legal entity in this particular situation (see § 1026.2(a)(22), the definition of ‘‘person’’ under Regulation Z). Making distinctions between whollyowned subsidiaries and other affiliates for purposes of the origination limit would create compliance and oversight complications for creditors, their affiliates, and regulators, for example, because whether a subsidiary is ‘‘wholly-owned’’ could be a complicated analysis in some circumstances. Grace period for transactions with applications received before April 1st of current calendar year. The Bureau is adopting its proposed grace period to allow a creditor that exceeded the origination limit in the preceding calendar year to operate, in certain circumstances, as a small creditor with respect to transactions with applications received before April 1 of the current calendar year. The Bureau has considered commenters’ suggestions for a longer grace period but believes the grace period should provide sufficient time for creditors to make any needed adjustments to come into compliance with the Bureau’s regulatory requirements upon exceeding the origination limit. Further, the focus of the grace period on transactions with applications received before April 1, rather than transactions consummated before April 1, will mean that creditors will be able to consummate as small creditors not only transactions that were pending in their pipeline at the beginning of the calendar year but also transactions well into the current calendar year, as long as the application for a transaction was received before April 1 of the current calendar year. For example, if a creditor received a loan application in mid-March of the current calendar year, it could consummate that loan transaction as a small creditor 60 or 90 days later, in mid-June or July of the current calendar year. This final rule is also making several additional technical and clarifying PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 59951 language changes to § 1026.35(b)(2)(iii)(B) from the proposed rule, for example, changing the phrase ‘‘originated . . . covered transactions’’ to ‘‘extended . . . covered transactions,’’ to make the language of that section consistent with the terminology generally used in Regulation Z. In addition, this final rule makes several technical and clarifying amendments to comment 35(b)(2)(iii)– 1.ii, including, for example, technical changes for purposes of consistency between the regulatory text at § 1026.35(b)(2)(iii)(B) and the commentary, and additional guidance regarding the definition of ‘‘affiliate.’’ The comment states that, for purposes of § 1026.35(b)(2)(iii)(B), ‘‘affiliate’’ has the same meaning as in § 1026.32(b)(5), which defines ‘‘affiliate’’ 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.).’’ The commentary also sets out the definition of ‘‘control’’ under the Bank Holding Company Act. The Bureau believes that this final rule sets the origination limit in an effective and responsible way. As discussed, the Bureau’s intent in setting the origination limit is to include small creditors that can provide responsible, affordable credit to consumers and enable consumers, particularly those in rural and underserved areas, to access creditors with a lending model, operations, and products that may meet their particular needs. As further discussed in the section 1022(b) analysis in part VII below, the Bureau estimates that expanding the origination limit to 2,000 originations, and not including portfolio loans in that originations count, will increase the number of small creditors by 700, from approximately 9,700 to approximately 10,400. The Bureau believes that this increase will include creditors with the size and responsible lending models that fit the purpose of small-creditor status that the Bureau intends. 35(b)(2)(iii)(C) As discussed in further detail below, the Bureau is adopting § 1026.35(b)(2)(iii)(C) and the accompanying commentary, substantially as proposed, with certain technical changes and commentary additions to enhance clarity. Accordingly, this final rule includes in the calculation of the asset limit for small-creditor status the assets of the creditor’s affiliates that regularly extended covered transactions secured by first liens during the applicable period. The final rule also adds a grace E:\FR\FM\02OCR2.SGM 02OCR2 59952 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations asabaliauskas on DSK5VPTVN1PROD with RULES period from calendar year to calendar year to allow an otherwise eligible creditor that exceeded the asset limit in the preceding calendar year (but not in the calendar year before the preceding year) to continue to operate as a small creditor with respect to transactions with applications received before April 1 of the current calendar year. The Bureau’s Proposal Currently, under § 1026.35(b)(2)(iii)(C), eligibility for small creditor status is limited to creditors with less than $2 billion in assets (or other current yearly adjusted limit) at the end of the preceding calendar year. The Bureau did not propose a change to the current $2 billion asset limit in § 1026.35(b)(2)(iii)(C). The Bureau, however, did propose to amend § 1026.35(b)(2)(iii)(C) to include in the calculation of the $2 billion asset limit the assets of the creditor’s affiliates that originate covered transactions secured by a first lien. Proposed comment 35(b)(2)(iii)–1.iii provided that, for purposes of § 1026.35(b)(2)(iii)(C), in addition to the creditor’s assets, only the assets of a creditor’s ‘‘affiliate’’ as defined in § 1026.32(b)(5) that originates covered transactions as defined by § 1026.43(b)(1) secured by a first lien would be counted toward the asset limit. In proposing this change, the Bureau noted that counting both the creditor’s assets and the assets of the creditor’s affiliates that originate mortgage loans would make the tests for determining small-creditor status consistent as between the asset limit in § 1026.35(b)(2)(iii)(C) and the origination limit in § 1026.35(b)(2)(iii)(B), which currently includes the originations of the creditor’s affiliates in determining whether the limit has been exceeded. The Bureau stated that this added consistency between the two tests could facilitate creditor compliance with the special provisions and exemptions for small creditors, including those that operate predominantly in rural or underserved areas. The Bureau also stated its belief, that given the proposed change to the origination limit to exclude the creditor’s and its affiliate’s portfolio loans from counting toward that limit, the proposed change to the asset limit is necessary to ensure that smallcreditor status does not become a means for larger creditors, through the development of affiliate relationships, to evade important consumer protections. The Bureau stated that it was interested in receiving comments on the VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 proposed change’s potential impact on creditors and access to credit. The Bureau also sought comment on the potential for larger creditors to obtain small-creditor status without this change and the possible impact on consumers. The Bureau also proposed to add a grace period to the $2 billion asset limit in § 1026.35(b)(2)(iii)(C), similar to the grace period proposed by the Bureau for the origination limit. This proposed grace period allowed an otherwise eligible creditor that exceeded the asset limit in the preceding calendar year to continue to operate as a small creditor with respect to transactions with applications received before April 1 of the current calendar year. This proposed grace period was available to creditors that exceeded the asset limit in the preceding calendar year but had not exceeded it in the calendar year before the preceding calendar year. The Bureau stated that it proposed the grace period to provide consistency in requirements for creditors seeking and maintaining small-creditor status. Proposed comment 35(b)(2)(iii)–1.iii explained that creditors meet the asset limit during calendar year 2016 if the creditors’ total assets (which include, in addition to the creditors’ assets, the assets of the creditors’ affiliates that originate mortgage loans) are under the applicable asset limit on December 31, 2015. The proposed comment explained further that creditors that did not satisfy the applicable asset limit on December 31, 2015 satisfy the asset limit during 2016 if the application for the loan was received before April 1, 2016 and the creditors had total assets under the applicable asset limit on December 31, 2014. The proposed comment also added the threshold for calendar year 2015 to the 2013 and 2014 asset limits currently listed in the comment. For the reasons discussed below, the Bureau is adopting § 1026.35(b)(2)(iii)(C), and the accompanying commentary as proposed, with several technical revisions, and commentary additions and clarifications. Comments Include the assets of the creditor’s mortgage affiliates in the asset limit calculation. In general, consumer groups strongly supported the Bureau’s proposal to include in the calculation of the asset limit for small creditor status the assets of the creditor’s affiliates that originate mortgage loans, citing it as an important ‘‘anti-evasion’’ measure. Specifically, a joint comment from three consumer organizations stated that as a result of the current rule’s exclusion of PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 affiliated assets in calculating the small creditor asset limit, very large financial institutions can create unlimited smaller affiliates and have each of them qualify as a small creditor under the rule. The comment stated further that this is a significant loophole that undermines the consumer protections created by the ability-to-repay rule and the accompanying qualified mortgage designation. Another consumer organization commenter stated that aggregating the loans for all affiliated lenders is an important anti-evasion device that preserves the ‘‘valuable’’ small creditor exemption, while preventing its abuse. Industry commenters opposed the change. Some stated that if the Bureau adopted the proposal, it needed to increase the asset limit correspondingly. Several commenters, including a national association of banks, recommended an increase in the asset limit to $10 billion. The proposal, these commenters asserted, effectively lowers the threshold limit for financial institutions with affiliates. Credit union commenters were concerned with the impact of the proposal on the eligibility of credit unions for small creditor status. A particular concern was regarding those credit unions with affiliated credit union service organizations (CUSOs), with some credit union commenters suggesting that the Bureau exclude CUSOs from treatment as ‘‘affiliates’’ for purposes of the asset limit. In support of different treatment for CUSOs, a credit union trade association commenter distinguished CUSOs from other affiliates, stating that they are limited in scope and purpose. This commenter alternatively requested clarification on how to calculate the asset limit in the case of a CUSO that is owned by multiple credit unions, if the Bureau adopted the proposal. Some credit unions pointed to the Bank Holding Company Act, and the reference to that Act in the Regulation Z definition of ‘‘affiliate’’ that was cited in the proposed rule, as a basis for excluding CUSOs from the asset limit calculation, stating that the Act does not apply to credit unions. A state association of banks recommended that the Bureau exclude from counting toward the asset limit loans originated by a creditor and/or its affiliates and held in portfolio— including loans held in portfolio by a wholly-owned subsidiary of either. This commenter stated that a ‘‘communitybased institution should not lose ‘small creditor’ status simply because it is successful with its portfolio-based E:\FR\FM\02OCR2.SGM 02OCR2 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations asabaliauskas on DSK5VPTVN1PROD with RULES strategy and crosses the $2 billion’’ asset limit. Add grace period for transactions with applications received before April 1st of current calendar year. Industry commenters supported the Bureau’s proposal to allow a creditor that exceeded the asset limit in the preceding calendar year to operate, in certain circumstances, as a small creditor with respect to transactions with applications received before April 1 of the current calendar year. As with the grace period for the origination limit, however, some commenters suggested that the grace period be extended, e.g., to 6 months. Final Rule Include the assets of the creditor’s mortgage affiliates in the asset limit calculation. The Bureau believes this change is an important anti-evasion measure that would limit the ability of larger entities to structure arrangements such that one or more affiliates can enjoy the benefits of small creditor status. This change would also make the asset limit calculation more consistent with the origination limit calculation, which currently includes the originations of the creditor’s affiliates. Accordingly, the Bureau is finalizing § 1026.35(b)(2)(iii)(C) as proposed but with several technical revisions. The final rule changes from the proposed rule the phrase ‘‘the creditor and its affiliates that originate covered transactions’’ to ‘‘the creditor and its affiliates that regularly extended covered transactions’’ in § 1026.35(b)(2)(iii)(C) to make the language of that section more consistent with the terminology generally used in Regulation Z. This change also provides greater clarity that, as stated in the proposed rule,22 only the assets of the creditor’s affiliates that originate covered transactions, and not the assets of other affiliates of the creditor, count toward the limit. The change also indicates that there is a difference between how the covered transactions of affiliates are counted for purposes of the originations limit and how the assets of affiliates are counted for purposes of the asset limit. The originations limit requires a creditor to count each affiliate’s first-lien covered transactions that were sold, assigned, or otherwise transferred to another person, or that were subject at the time of consummation to a commitment to be acquired by another person. For purposes of the asset limit, a creditor counts only the assets of those affiliates that regularly extended first-lien 22 80 FR 7769, 7781 (February 11, 2015). VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 covered transactions and not the assets of other affiliates. This difference prevents the assets of an affiliate that does not regularly extend covered transactions from having a significant impact on the asset limit for a creditor. To provide additional guidance, the final rule also makes several additions and clarifications to comment 35(b)(2)(iii)–1.iii. Comment 35(b)(2)(iii)– 1.iii.A states that only the assets of a creditor’s ‘‘affiliate’’ (as defined by § 1026.32(b)(5)) that regularly extended covered transactions (as defined by § 1026.43(b)(1)) secured by first liens, are counted toward the applicable annual asset threshold. Comment 35(b)(2)(iii)–1.iii.A also refers to comment 35(b)(2)(iii)–1.ii.C, which discusses the definition of affiliate under 1026.32(b)(5) and the definition of control under the Bank Holding Company Act referenced in that section. Comment 35(b)(2)(iii)–1.iii.B states that only the assets of creditors’ affiliates that regularly extended first-lien covered transactions during the applicable period for determining whether the creditor met the asset limit are included in calculating the creditor’s assets. Comment 35(b)(2)(iii)–1.iii.B then discusses the meaning of ‘‘regularly extended,’’ which is based on the number of times a person extends consumer credit for purposes of the definition of ‘‘creditor’’ in § 1026.2(a)(17), and provides examples on this point. Consistent with § 1026.2(a)(17)(v), because covered transactions are ‘‘transactions secured by a dwelling,’’ an affiliate ‘‘regularly extended’’ covered transactions if it extended more than five covered transactions in a calendar year. Also consistent with § 1026.2(a)(17)(v), because a covered transaction may be a high-cost mortgage subject to § 1026.32, an affiliate regularly extends covered transactions if, in any 12-month period, it extends more than one covered transaction that is subject to the requirements of § 1026.32 or one or more such transactions through a mortgage broker. Comment 35(b)(2)(iii)– 1.iii.C states that if multiple creditors share ownership of a company that regularly extended first-lien covered transactions, the assets of the company count toward the asset limit for a coowner creditor if the company is an ‘‘affiliate,’’ as defined in § 1026.32(b)(5), of the co-owner creditor. Comment 35(b)(2)(iii)–1.iii.C also states that if the co-owner creditor and the company are affiliates, the co-owner creditor counts all of the company’s assets toward the asset limit, regardless of the co-owner creditor’s ownership share. The PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 59953 comment also notes that because the coowner and the company are mutual affiliates, the company also would count all of the co-owner’s assets towards its own asset limit. While credit unions in their comments expressed concern about the impact of the proposal on credit unions affiliated with CUSOs, under the proposal only the assets of affiliates that regularly extended covered transactions are counted toward the creditor’s asset limit. As adopted under the Bureau’s final rule, therefore, only the assets of CUSOs that meet the definition of affiliate in Regulation Z (meeting the ‘‘control’’ test under the Bank Holding Company Act) and that regularly extend covered transactions during the applicable period will be counted toward the asset limit. The Bureau is not excluding CUSOs from possible treatment as affiliates because it remains concerned that a credit union could, under the current asset limit calculation, enter into a relationship with a CUSO or CUSOs to create a large entity that would be eligible for the special provisions and exemptions accorded small creditor status. The Bureau also notes that § 1026.32(b)(5) and its definition of ‘‘affiliate’’ references the Bank Holding Company Act only for the purposes of how control is determined under that Act, which is applicable to the determination of affiliate under Regulation Z regardless of the applicability of the Act to credit unions. As noted, the Bureau did not propose to change the current $2 billion asset limit. However, as discussed, some commenters suggested that the Bureau increase that limit to correspond with the Bureau’s proposed inclusion of the assets of a creditor’s affiliates in the asset limit calculation, with several commenters suggesting an increase to $10 billion. The Bureau established the current $2 billion asset limit based on its belief that an asset limit is important to preclude a very large creditor with relatively modest mortgage operations from taking advantage of provisions designed for much smaller creditors with much different characteristics and incentives and that lack the scale to make compliance less burdensome. The Bureau believes institutions that fall under the $2 billion asset limit are more likely to be engaged in relationshipbased community lending than larger institutions, with such small entities having a more in-depth understanding of the economic and other circumstances of their customers and community. The Bureau believes that allowing entities of up to $10 billion in size to take advantage of the exemptions E:\FR\FM\02OCR2.SGM 02OCR2 59954 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations and special provisions accorded to small creditors is inconsistent with the purposes of the special provisions and exemptions. The Bureau did not propose to exclude from the asset limit loans originated by a creditor or its affiliates and held in portfolio, or loans held in portfolio by a wholly-owned subsidiary of either. Given the final rule’s exclusion of portfolio loans from the origination limit, also excluding portfolio loans from the asset limit could potentially allow a large creditor with significantly more than $2 billion in assets due to the size of its loan portfolio, or the size of its affiliate’s loan portfolio, to take advantage of the special provisions and exemptions designed for smaller creditors. Such a change would run counter to the Bureau’s intent in establishing an asset limit and the Bureau’s intent to limit the ability of creditors who become large creditors through the development of affiliate relationships to circumvent consumer protections by obtaining small creditor status. Add grace period for transactions with applications received before April 1st of current calendar year: The Bureau is finalizing as proposed the addition of a grace period for the determination of the asset limit. It allows a creditor that exceeded the asset limit in the preceding calendar year, but that did not exceed it in the year before the preceding calendar year, to operate as a small creditor with respect to transactions with applications received before April 1 of the current calendar year. The Bureau has considered comments suggesting a longer grace period but, as with the grace period for the origination limit, believes the grace period for the asset limit as proposed should provide the time for creditors to make any needed adjustments to come into compliance with the Bureau’s regulatory requirements upon exceeding the asset limit in the previous year. asabaliauskas on DSK5VPTVN1PROD with RULES 35(b)(2)(iii)(D) As discussed in detail below, the Bureau is adopting § 1026.35(b)(2)(iii)(D) substantially as proposed, with a minor change to enhance clarity. Accordingly, this final rule substitutes January 1, 2016 for January 1, 2014 where it appears in § 1026.35(b)(2)(iii)(D)(1) and its commentary. This change prevents creditors from losing eligibility for the escrow exemption because of escrow accounts they established pursuant to requirements in effect before the effective date of this rule. VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 The Bureau’s Proposal In general, § 1026.35(b)(2)(iii)(D) prohibits any creditor from availing itself of the exemption from escrow requirements in § 1026.35(b)(2)(iii) if the creditor maintains escrow accounts for any extension of consumer credit secured by real property or a dwelling that it or its affiliate currently services. However, § 1026.35(b)(2)(iii)(D) currently also provides that a creditor may qualify for the exemption if such escrow accounts were established for first-lien higher-priced mortgage loans on or after April 1, 2010, and before January 1, 2014 or were established after consummation as an accommodation for distressed consumers.23 In light of the proposed expansion of the ‘‘small’’ and ‘‘rural’’ definitions in §§ 1026.35(b)(2)(iii)(B) and 1026.35(b)(2)(iv)(A), the Bureau proposed to substitute January 1, 2016 for January 1, 2014 where it appears in § 1026.35(b)(2)(iii)(D)(1) and comment 35(b)(2)(iii)(D)(1)–1. This change was proposed to prevent any creditors that are currently ineligible for the escrow exemption, but that would qualify if the proposed definitional changes were adopted, from losing eligibility for the escrow exemption because of escrow accounts they established for first-lien higher-priced mortgage loans pursuant to requirements in the current rule. The Bureau solicited comment on the Bureau’s proposed amendments to § 1026.35(b)(2)(iii)(D)(1) and comment 35(b)(2)(iii)(D)(1)–1, and specifically the exclusion of escrow accounts established on or after April 1, 2010 and before January 1, 2016 from the limitation in § 1026.35(b)(2)(iii)(D). In particular, the Bureau sought comment on the need for the proposed changes and the impact on consumers of extending the exemption to the escrow requirements in § 1026.35(b)(1). The Bureau is finalizing § 1026.35(b)(2)(iii)(D)(1) and comment 35(b)(2)(iii)(D)(1)–1 generally as proposed but with a minor change to conform the regulatory and commentary language. Comments The commenters on this subject, including a national association of credit unions and state associations of banks and credit unions, supported the provision to disregard escrow accounts that were maintained during a period a 23 Comment 35(b)(2)(iii)(D)(1)–1 clarifies that the date ranges provided in § 1026.35(b)(2)(iii)(D)(1) apply to transactions for which creditors received applications on or after April 1, 2010, and before January 1, 2014. PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 creditor was not exempt from the escrow requirement. Final Rule The Bureau has considered the comments received on this provision and is finalizing § 1026.35(b)(2)(iii)(D)(1) and comment 35(b)(2)(iii)(D)(1)–1 generally as proposed but with a minor change to include in the regulation the same language currently in the comment stating that the exemption applies to loans ‘‘for which the application was received’’ on or after April 1, 2010, and before January 1, 2016. The Bureau does not believe that creditors that maintain escrow accounts they were required to set up before the effective date of this rule should lose the exemption simply because they were required by applicable regulations to establish escrow accounts before January 1, 2016. As the Bureau discussed in the Supplementary Information to the January 2013 Escrows Final Rule and again in finalizing amendments to the January 2013 Escrows Final Rule made in the September 2013 Final Rule, the Bureau believes creditors should not be penalized for compliance with the current regulation.24 This final rule makes creditors eligible for the exemption provided under § 1026.35(b)(2)(iii) if they otherwise meet the requirements of § 1026.35(b)(2)(iii) and they do not establish new escrow accounts for transactions for which they receive applications on or after January 1, 2016, other than those described in § 1026.35(b)(2)(iii)(D)(2). A small number of commenters recommended additional exemption provisions, including exempting from the escrow requirement all loans held in portfolio if the APR does not exceed APOR by 3.5 percentage points or more. The Bureau notes, however, that the proposal did not address additional exemptions and thus such exemptions are outside the scope of this rulemaking. 35(b)(2)(iv)(A) As discussed in detail below, the Bureau is adopting § 1026.35(b)(2)(iv)(A) substantially as proposed, amending the current definition of ‘‘rural,’’ with certain minor changes to enhance clarity. Accordingly, this final rule adds census blocks that are not in an urban area as defined by the U.S. Census Bureau to the current county-based definition in 24 January 2013 Escrows Final Rule, 78 FR 4725, 4739 (Jan. 22, 2013); see also September 2013 Final Rule, 78 FR 60382, 60416 (Oct. 01, 2013). E:\FR\FM\02OCR2.SGM 02OCR2 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations asabaliauskas on DSK5VPTVN1PROD with RULES § 1026.35(b)(2)(iv)(A) and broadens the definition of rural to apply to ‘‘an area’’ rather than ‘‘a county.’’ The Bureau’s Proposal Section 1026.35(b)(2)(iv)(A) currently defines a county as ‘‘rural’’ during a calendar year if it is neither in a metropolitan statistical area (MSA) nor in a micropolitan statistical area that is adjacent to an MSA, as those terms are defined by the U.S. Office of Management and Budget and as they are applied under currently applicable UICs, established by the USDA–ERS. The current rule further provides that a creditor may rely as a safe harbor on the list of counties published by the Bureau to determine whether a county qualifies as ‘‘rural’’ for a particular calendar year. The Bureau proposed to expand the ‘‘rural’’ definition in § 1026.35(b)(2)(iv)(A) to capture additional areas classified as ‘‘rural’’ by the Census Bureau, without affecting the status of any counties that would be deemed rural under the current rule. For technical reasons, the Bureau also proposed to move the discussion of the safe harbor list of counties provided by the Bureau that is currently in § 1026.35(b)(2)(iv)(A) and comment 35(b)(2)(iv)(A)–1 to new § 1026.35(b)(2)(iv)(C) and proposed comment 35(b)(2)(iv)(A)–1.iii, which are discussed below.25 The proposal added to the definition of ‘‘rural’’ those census blocks that are not designated as ‘‘urban’’ by the Census Bureau in the urban-rural classification it completes after each decennial census to the county-based definition in § 1026.35(b)(2)(iv)(A). To implement this change, proposed § 1026.35(b)(2)(iv)(A) provided that an area is rural during a calendar year if it is (1) a county that meets the Bureau’s current rural definition, or (2) a census block that is not in an urban area, as defined by the Census Bureau using the latest decennial census of the United States. The Bureau also proposed revisions to comment 35(b)(2)(iv)–1 that: (1) Conform to the changes made to § 1026.35(b)(2)(iv); (2) add a crossreference to comment 35(b)(2)(iii)–1; and (3) make technical changes for clarity. The Bureau further proposed to update the example provided in comment 35(b)(2)(iv)–2.i to reflect the Bureau’s proposal to add rural census blocks to the definition of rural area. Proposed comment 35(b)(2)(iv)–2.i 25 This proposed move was consistent with a similar move that the Bureau proposed with respect to the safe harbor discussion that currently appears with the ‘‘underserved’’ definition in § 1026.35(b)(2)(iv)(B). VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 explains that an area is considered ‘‘rural’’ for a given calendar year based on the most recent available UIC designations by the USDA–ERS and the most recent available delineations of urban areas by the Census Bureau that are available at the beginning of the calendar year. As the proposed comment noted, these designations and delineations are updated by the USDA– ERS and the Census Bureau respectively once every ten years. The comment provides an illustrative example. The Bureau solicited comment on whether it should add a second prong to the rural definition based on the Census Bureau’s urban-rural classification and, if so, whether it should make any modifications to the Census Bureau’s classification in doing so. Although the Bureau proposed to maintain the current county-based test as part of the new definition, the Bureau also solicited comment on whether the counties included in the current definition should be expanded, contracted, eliminated, or maintained as is. The Bureau also requested feedback on any alternative approaches to defining ‘‘rural’’ areas in § 1026.35(b)(2)(iv)(A) that commenters believe might be preferable to the Bureau’s proposal. For the reasons discussed below, the Bureau is adopting § 1026.35(b)(2)(iv)(A) and the accompanying commentary as proposed, with minor technical revisions. Comments Creditor commenters, including national and state associations of banks and credit unions and individual banks and credit unions, as well as noncreditor commenters, including national associations of home builders, realtors, and banking supervisors, generally supported the expanded definition of ‘‘rural.’’ For example, a national banking association stated that the Census Bureau’s urban-rural classification appeared to be the most suitable for the purposes and objectives of the regulations, and a regional association of credit unions referred to the proposed definition as a ‘‘common sense approach’’ that it urged the Bureau to adopt. Some of the commenters supporting the proposed change also noted the need to have an effective automated tool for determining whether a covered transaction is made in an area that is rural because of the difficulties inherent in considering millions of census blocks. These concerns are addressed below in the discussion of the Bureau’s automated tool. PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 59955 Other commenters, generally consumer groups, noted that the current definition has not been in place long enough for the Bureau to discern its effects and questioned whether data supported the proposed changes. These commenters recommended caution before adopting any changes because consumers may be harmed by a broader definition. They also recommended narrowly tailoring any changes to the definition to prevent non-rural lenders from taking advantage of the special provisions and exemptions. These commenters and a few others also argued that high-cost mortgages should not be eligible for qualified mortgage status under any circumstances. A few commenters also recommended alternative definitions. A state association of banks and a state association of credit unions recommended only excluding ‘‘urbanized areas’’ of 50,000 or more from the definition of rural. A national organization representing banking supervisors and one representing real estate brokers and agents both recommended the Bureau establish an application process under which a person who lives or does business in a state may apply to have an area designated as a rural area. A national nonprofit organization that supports affordable housing efforts in rural areas noted that a reliance on Census Bureau classifications for rural areas may allow rural area determinations for lending activity that is actually suburban in nature, which may have the unintended consequence of diverting credit away from truly rural communities and consumers. This commenter recommended using a sub-county designation of rural and small-town areas which incorporates measures of housing density and commuting at the Census tract level. Final Rule The Bureau is finalizing § 1026.35(b)(2)(iv)(A) generally as proposed with minor changes in the associated commentary to provide greater clarity and consistency with other changes made in this final rule.26 In developing the proposal, the Bureau 26 The addition of a census block prong in § 1026.35(b)(2)(iv)(A)’s ‘‘rural’’ definition does not affect the scope of the exemption from a requirement to obtain a second appraisal for certain higher-priced mortgage loans adopted by the January 2013 Interagency Appraisals Final Rule, as that exemption applies to credit transactions made by a creditor in a ‘‘rural county’’ as defined in § 1026.35(b)(2)(iv)(A). This definition of ‘‘rural county’’ is retained in § 1026.35(b)(2)(iv)(A) as § 1026.35(b)(2)(iv)(A)(1) and the reference to comment 35(b)(2)(iv)–1 in comment 35(c)(4)(vii)(H) is retained in comment 35(b)(2)(iv)–1.iii.A. E:\FR\FM\02OCR2.SGM 02OCR2 59956 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations considered a variety of possible approaches that could be used to identify areas that are smaller than counties and that may be rural in nature, and the Bureau considered the alternative definitions commenters recommended. Of these, the Bureau believes that the urban-rural classification completed by the Census Bureau every ten years is the most suitable for the Bureau’s current purposes. This classification is done at the level of the census block, which is the smallest geographic area for which the Census Bureau collects and tabulates decennial census data. While there are only about 3,000 counties in the United States, there are approximately 11 million census blocks.27 The Census Bureau delineates census blocks as ‘‘urban’’ or ‘‘rural’’ based on each decennial census and most recently released its list of urban areas based on the 2010 Census in 2012. For the 2010 Census, an urban area consists of ‘‘a densely settled core of census tracts and/or census blocks that meet minimum population density requirements, along with adjacent territory containing non-residential urban land uses as well as territory with low population density included to link outlying densely settled territory with the densely settled core.’’ 28 The Census Bureau identifies two types of urban areas: ‘‘urbanized areas’’ of 50,000 or more people, and ‘‘urban clusters’’ of at least 2,500 and less than 50,000 people. Under the Census Bureau’s classification, ‘‘rural’’ encompasses all population, housing, and territory not included within either type of urban area. The definition of ‘‘rural’’ in this final rule maintains the bright-line, easy-toapply county-based test from the current definition, while also bringing into the definition rural pockets within counties that are non-rural under the current rule.29 Because the Census Bureau’s asabaliauskas on DSK5VPTVN1PROD with RULES 27 Census Bureau, 2010 Census Tallies of Census Tracts, Block Groups & Blocks, https:// www.census.gov/geo/maps-data/data/tallies/ tractblock.html. 28 Census Bureau, 2010 Census Urban and Rural Classification and Urban Area Criteria, https:// www.census.gov/geo/reference/ua/urban-rural2010.html. To qualify as an urban area, the territory identified must encompass at least 2,500 people, of which at least 1,500 must reside outside institutional group quarters such as correctional facilities, group homes for juveniles, and mental (psychiatric) hospitals. 29 For example, Culpeper County, Virginia is part of the Washington-Arlington-Alexandria, DC-VAMD-WV MSA and does not currently qualify as ‘‘rural’’ under existing § 1026.35(b)(2)(iv)(A). Because the Census Bureau defined some census blocks within Culpeper County as rural in its most recent rural-urban classification, under this final rule, those portions of the county qualify as rural VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 classification is done at the census block level, it provides much more granularity than any county-based metric. To prepare the rural-urban classification, the Census Bureau uses measures based primarily on population counts and residential population density, but also considers a variety of criteria that account for nonresidential urban land uses, such as commercial, industrial, transportation, and open space that are part of the urban landscape.30 Since the 1950 Census, the Census Bureau has reviewed and revised these criteria as necessary for each decennial census. The Census Bureau completes its ruralurban classification every ten years based on the results of the decennial census, on roughly the same schedule that the USDA–ERS uses in updating its UIC designations, which should provide a relatively stable but up-to-date measure. The Bureau believes that use of the Census Bureau’s classifications provides consistency, certainty, stability, and objectivity to the ‘‘rural’’ definition. The Census Bureau’s classifications generally change only every ten years and, once established, provide a brightline test that is not subject to discretionary judgments and manipulation, which could result under some commenters’ more complex classification procedures, including those to establish an application process to have an area designated as a rural area. Used in conjunction with automated address search tools, as discussed more fully below, the Census Bureau’s classifications allow the use of an easy-to-apply test, as originally provided under the county-based definition, to continue, thereby avoiding regulatory and administrative complexity. 35(b)(2)(iv)(B) As discussed below, the Bureau is adopting § 1026.35(b)(2)(iv)(B) and (C) and comments 35(b)(2)(iv)–1, 35(b)(2)(iv)–1.iii, and 35(b)(2)(iv)–2.ii substantially as proposed, with certain minor changes to enhance clarity. Accordingly, this final rule makes minor technical and conforming changes to the definition of ‘‘underserved’’ and the regulation text and commentary discussed below. under § 1026.35(b)(2)(iv)(A) until the next Census Bureau rural-urban classification. 30 See Qualifying Urban Areas for the 2010 Census, 77 FR 18652 (March 27, 2012); Urban Area Criteria for the 2010 Census, 76 FR 53030 (Aug. 24, 2011); Proposed Urban Area Criteria for the 2010 Census, 75 FR 52174 (Aug. 24, 2010). PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 The Bureau’s Proposal Section 1026.35(b)(2)(iv)(B) defines a county as ‘‘underserved’’ during a calendar year if, according to Home Mortgage Disclosure Act (HMDA) data for the preceding calendar year, no more than two creditors extended covered transactions, as defined in § 1026.43(b)(1), secured by a first lien, five or more times in the county. It further provides that a creditor may rely as a safe harbor on the list of rural or underserved counties published by the Bureau to determine whether a county qualifies as ‘‘underserved’’ for a particular calendar year.31 For technical reasons, the Bureau proposed to move the discussion of the safe harbor county lists provided by the Bureau from § 1026.35(b)(2)(iv)(B) and comment 35(b)(2)(iv)–1 to § 1026.35(b)(2)(iv)(C) and comment 35(b)(2)(iv)–1.iii.A.32 The Bureau also proposed other technical changes to § 1026.35(b)(2)(iv)(B) and comments 35(b)(2)(iv)–1 and 35(b)(2)(iv)–2.ii and proposed to add a reference in comment 35(b)(2)(iv)–2.ii to the new grace period under § 1026.35(b)(2)(iii)(A). The Bureau did not propose a substantive change to the definition of underserved. Comments The Bureau did not receive comments regarding the proposed technical and conforming changes to § 1026.35(b)(2)(iv)(B), § 1026.35(b)(2)(iv)(C), comments 35(b)(2)(iv)–1, 35(b)(2)(iv)–2.ii, and 35(b)(2)(iv)–1.iii.A. Although the Bureau did not solicit comment regarding the definition of ‘‘underserved,’’ the Bureau received four comments suggesting the Bureau consider an alternative definition of ‘‘underserved.’’ These commenters suggested that the Bureau’s definition of ‘‘underserved’’ is under-inclusive. These commenters recommended that the Bureau consider expanding or changing the meaning of ‘‘underserved’’ to include the consideration of socioeconomic factors to determine underserved status. Specifically, they recommended that underserved areas include low- and moderate-income communities with limited credit options. 31 The rural and rural or underserved safe harbor lists are published on the Bureau’s Web site on the regulatory guidance page at http:// www.consumerfinance.gov/guidance/. 32 This proposed move is consistent with a similar move that the Bureau proposed with respect to the safe harbor discussion that currently appears with the ‘‘rural’’ definition in § 1026.35(b)(2)(iv)(A). E:\FR\FM\02OCR2.SGM 02OCR2 asabaliauskas on DSK5VPTVN1PROD with RULES Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations Final Rule For the reasons discussed below the Bureau is not substantively changing the definition of ‘‘underserved’’ in this final rule. The Bureau is adopting substantially as proposed the technical and conforming changes to § 1026.35(b)(2)(iv)(B) and comments 35(b)(2)(iv)–1 and 35(b)(2)(iv)–2.ii. In addition, the Bureau is adopting substantially as proposed § 1026.35(b)(2)(iv)(C) and comment 35(b)(2)(iv)–1.iii.A. As stated in the preamble to the proposed rule the current definition of ‘‘underserved’’ appropriately identifies areas where the withdrawal of a creditor from the market could leave no meaningful competition within that market. The designation of an area as ‘‘underserved’’ under the Bureau’s rules is intended to identify communities that have few creditors and, thus, may be subject to access to credit issues. The Bureau’s definition focuses on whether there is access to credit by looking at the number of creditors competing for mortgage business in an area. The economic-and demographic-based definitions suggested by commenters would introduce factors unrelated to competition for consumers’ mortgage business. The changes to the ‘‘rural’’ definition discussed above expand the term ‘‘rural or underserved’’ for purposes of the exemption to the escrow requirement for higher-priced mortgage loans in § 1026.35(b)(2)(iii), the allowance for balloon-payment qualified mortgages in § 1026.43(f), and the exemption from the balloon-payment prohibition on highcost mortgages in § 1026.32(d)(1)(ii)(C). Because these provisions reference ‘‘underserved’’ only in the alternative with ‘‘rural’’ (‘‘rural or underserved’’), the Bureau believes that the expansion of the ‘‘rural’’ definition in this final rule addresses concerns that have been raised by commenters about the overall coverage of ‘‘rural or underserved.’’ 33 The Bureau also notes that it did not propose or seek comment on substantive revisions to the definition of ‘‘underserved,’’ and that such changes to that definition are outside the scope of this rulemaking. The Bureau notes that comment 35(b)(2)(iv)–1.ii refers to several current HMDA provisions. The Bureau’s HMDA rulemaking proposed to modify the referenced provisions.34 The Bureau expects to issue a notice in the future 33 As discussed in the section 1022(b) analysis in Part VII below, the Bureau estimates that the number of rural small creditors will increase from approximately 2,400 to approximately 4,100. 34 79 FR 51732 (Aug. 29, 2014). VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 making conforming changes to comment 35(b)(2)(iv)–1.ii, should such change be necessary after issuance of the HMDA final rule. 35(b)(2)(iv)(C) As discussed in detail below, the Bureau is adopting the revisions related to the safe harbors § 1026.35(b)(2)(iv)(A) and (B) and § 1026.35(b)(2)(iv)(C)(1), (2) and (3) and comment 35(b)(2)(iv)–1, 35(b)(2)(iv)–1.iii.A, .B, and .C substantially as proposed, with certain minor changes to enhance clarity. Accordingly, this final rule adds two new safe harbor tools and makes minor conforming changes to the regulation text and commentary discussed below. The Bureau’s Proposal Section 1026.35(b)(2)(iv)(A) and (B) and comment 35(b)(2)(iv)–1 currently provide that a creditor may rely as a safe harbor on the list of counties published by the Bureau to determine whether a county qualifies as ‘‘rural’’ or ‘‘underserved’’ for a particular calendar year.35 As noted above, the Bureau proposed to move the discussion of these county lists to § 1026.35(b)(2)(iv)(C)(1) and comment 35(b)(2)(iv)–1.iii.A. To facilitate compliance under the expanded definition of ‘‘rural,’’ the Bureau also proposed to add two additional safe harbors in proposed §§ 1026.35(b)(2)(iv)(C)(2) and (3), for an automated address search tool on the Census Bureau’s Web site and an automated tool that may be provided on the Bureau’s Web site. The Bureau proposed technical changes to the safe harbor provision relating to its county lists and also proposed to publish its county lists in the Federal Register. Proposed comment 35(b)(2)(iv)–1.iii.A also stated that, to the extent that U.S. territories are treated by the Census Bureau as counties and are neither MSAs nor micropolitan statistical areas adjacent to MSAs, such territories will be included on these lists as rural areas in their entireties. Because the proposed changes to § 1026.35(b)(2)(iv) created the possibility that some counties would include both rural and non-rural areas, the Bureau also adjusted the discussion of the county lists in proposed comment 35(b)(2)(iv)–1.iii.A. to § 1026.35(b)(2)(iv)(C)(1) to make it clear that the lists would not include counties that are partially rural and partially nonrural. The Bureau does not believe it 35 A historical record of each year’s lists is available at: http://www.consumerfinance.gov/ guidance/#ruralunderserved. PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 59957 would be practical to publish lists of the census blocks that would qualify as rural under proposed § 1026.35(b)(2)(iv)(A)(2) because there are approximately 11 million census blocks in the United States. To assist creditors in implementing the proposed ‘‘rural’’ definition, the Bureau proposed to develop and maintain on its Web site a tool that allows creditors to enter property addresses, both individually and in batches, to determine whether a property is located in a ‘‘rural or underserved’’ area for the relevant calendar years. The Bureau stated in the preamble to the proposed rule that it did not anticipate that the Bureau’s automated tool would be available before the proposed effective date of the final rule, but it proposed that such a tool could provide a safe harbor if and when it becomes available. Specifically, proposed § 1026.35(b)(2)(iv)(C)(2) provided that a property shall be deemed to be in an area that is ‘‘rural or underserved’’ in a particular calendar year if the property is designated as rural or underserved for that calendar year by any automated tool that the Bureau provides on its Web site. In the preamble to the proposed rule, the Bureau noted that, until any automated tool that the Bureau may develop becomes available, the Bureau anticipated that creditors would use resources provided by the Census Bureau to determine whether proposed § 1026.35(b)(2)(iv)(A)(2), the new second prong of the proposed rural definition, is satisfied. The Bureau noted that the Census Bureau publishes maps, lists, and other reference materials on its Web site.36 The Bureau also discussed how the Census Bureau currently provides on its Web site an automated address search tool that allows users to enter a property address to obtain census information about the property, including a designation that the property is in an urban area if that is the case.37 The Bureau proposed that this automated tool or any similar automated address search tool provided 36 Census Bureau, 2010 Census Urban and Rural Classification and Urban Area Criteria, available at https://www.census.gov/geo/reference/ua/urbanrural-2010.html. 37 See generally Census Bureau, Frequently Asked Questions: How can I determine if my address is urban or rural?, available at https://ask.census.gov/ faq.php?id=5000&faqId=6405 (The 2010 Urban Areas can be viewed using Reference maps and the TIGERweb interactive web mapping system; See also Census Bureau, American FactFinder available at http://factfinder.census.gov/faces/nav/jsf/pages/ searchresults.xhtml?ref=addr&refresh=t (providing a link to an address search function that allows users to find Census data by entering a street address)). E:\FR\FM\02OCR2.SGM 02OCR2 59958 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations asabaliauskas on DSK5VPTVN1PROD with RULES by the Census Bureau could be relied on as a safe harbor. Specifically, proposed § 1026.35(b)(2)(iv)(C)(3) provided a safe harbor for a property not designated as located in an urban area as defined by the most recent delineation of urban areas announced by the Census Bureau through any automated address search tool that the Census Bureau provides on its public Web site for that purpose. Proposed comments 35(b)(2)(iv)–1.iii.B and .C discussed the safe harbors related to these online tools. Proposed comment 35(b)(2)(iv)–1.iii.C clarified the calendar years for which the Census Bureau’s automated address search tool can be used by noting that, for any calendar year that begins after the date on which the Census Bureau announced its most recent delineation of urban areas, a property is deemed to be in a ‘‘rural’’ area if the search results provided for the property by any such tool available on the Census Bureau’s public Web site do not designate the property as being in an urban area. This is consistent with proposed comment 35(b)(2)(iv)–2.i, which explains that an area is considered ‘‘rural’’ for a given calendar year based on the most recent available UIC designations by the USDA–ERS and the most recent available delineations of urban areas by the Census Bureau that are available at the beginning of the calendar year. The Bureau solicited comment on whether Regulation Z should provide a safe harbor for automated tools of this nature. The Bureau also requested feedback relating to how it could make the automated tool it is considering developing most useful to industry and other stakeholders as they implement the rural and underserved definitions. Comments The Bureau did not receive comments regarding the publication of the county lists to the Federal Register; clarification regarding the determination of ‘‘rural or underserved’’ status of U.S. territories; or the changes to proposed comment 35(b)(2)(iv)–1.iii.A. to conform to the proposed changes to § 1026.35(b)(2)(iv). The comments received focused on the proposed safe harbor tools. Most comments were in support of the Bureau’s proposed automated tool. Many commenters suggested the Bureau’s proposed automated tool with a batch feature is necessary for compliance if the Bureau finalizes the definition of ‘‘rural’’ as proposed because small creditors do not have the capacity (or they need more time) to develop tools to integrate the new census block typology. One state banking association commenter suggested that the Bureau delay the VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 effective date of the rule until the Bureau’s proposed automated tool is available because identifying ‘‘rural’’ areas under the proposed definition of ‘‘rural’’ would be difficult for small institutions and presents a compliance risk that these institutions may not be willing to take. A national banking association and several state banking associations recommended an extension of the two year transition period, under § 1026.43(e)(6), allowing small creditors to issue balloon-payment qualified mortgages and high-cost mortgages regardless of whether they operate predominantly in rural or underserved areas, until banks can access the Bureau’s automated tool. These commenters asserted that if the transition period is not extended until an automated tool is available, many small institutions would be incapable of ensuring compliance and may curtail or eliminate consumer mortgage financing. The Bureau also received several comments about the current usability of the Census Bureau’s automated address search tool. These commenters stated that the Census Bureau’s automated address search tool is not efficient for business use. One commenter criticized the accuracy and usability of the Census Bureau’s automated address search tool but did not provide examples of inaccuracies. The commenter suggested that the Bureau use housing density and commuter information on a census tract level to define rural areas because a scheme based on the census tract level is more accurate. The commenter believed the Bureau’s proposed automated tool would only add to the complexity of the proposed census block scheme used to determine ‘‘rural’’ status. The Bureau received one comment addressing the technical and conforming changes to the provisions discussing the safe harbors. The commenter was concerned about the change in language in § 1026.35(b)(2)(iv)(A) and (B) that states, ‘‘a creditor may rely as a safe harbor on * * *’’ to the conforming change in proposed § 1026.35(b)(2)(iv)(C) that states, ‘‘[a] property shall be deemed to be in an area that is ‘‘rural’’ or ‘‘underserved’’ in a particular calendar year . . . .’’ The commenter believed the Bureau’s use of the word shall makes the use of the safe harbor tools mandatory. Final Rule The Bureau is adopting these provisions substantially as proposed, moving the discussion of the safe harbor lists in § 1026.35(b)(2)(iv)(A) and (B) and comment 35(b)(2)(iv)–1 to PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 § 1026.35(b)(2)(iv)(C)(1) and comment 35(b)(2)(iv)–1.iii.A. The Bureau is revising § 1026.35(b)(2)(iv)(C)(1) and comment 35(b)(2)(iv)–1.iii.A to clarify that counties are rural or underserved under the Bureau’s definitions although they may contain census blocks that are designated by the Census Bureau as urban. This revision provides greater clarity on the effect of the list of rural or underserved counties, which is that a property in a listed county is deemed to be in a rural area even if the property is located in a census block that the Census Bureau designates as urban. The Bureau is also finalizing as proposed the addition of the two new safe harbor tool provisions in § 1026.35(b)(2)(iv)(C)(2) and (3), and new comments 35(b)(2)(iv)– 1.iii.B and .C, with minor changes to provide greater clarity. The Bureau is clarifying new comment 35(b)(2)(iv)–1.iii.B and .C, to facilitate compliance. For both the Bureau’s and the Census Bureau’s automated tools, the comments state that a printout or electronic copy from an automated tool designating a particular property as being in a rural or underserved area may be used as ‘‘evidence of compliance’’ that a property is in a rural or underserved area for purposes of the Regulation Z record retention requirements in § 1026.25. The Bureau is also adding new comment 35(b)(2)(iv)–1.iii.D to clarify that a property is deemed to be in a rural or underserved area if that designation is provided by any one of the safe harbors, even if that designation is not provided by any of the other safe harbors, and regarding proof of compliance without the use of the enumerated safe harbor tools in § 1026.35(b)(2)(iv)(C)(1) through (3). New comment 35(b)(2)(iv)–1.iii.D states that the enumerated safe harbor tools are not the exclusive means by which a creditor can demonstrate that a property is in a ‘‘rural or underserved’’ area as defined in § 1026.35(b)(2)(iv)(A) and (B). The comment states however, that creditors are required to retain ‘‘evidence of compliance’’ in accordance with § 1026.25, including determinations of whether a property is in a rural or underserved area as defined in § 1026.35(b)(2)(iv)(A) and (B). The Bureau considered the comment regarding the availability of the Bureau’s proposed automated tool by the proposed effective date, the concern that small institutions could not benefit from the expanded definition of ‘‘rural’’ because they do not have the capacity to determine the rural status of a property under the new definition of ‘‘rural,’’ and the suggestion that small institutions would not be willing to risk E:\FR\FM\02OCR2.SGM 02OCR2 asabaliauskas on DSK5VPTVN1PROD with RULES Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations a compliance breach by trying to determine rural status without the Bureau’s proposed automated tool. The Bureau also considered the comments recommending an extension of the two year transition period, under § 1026.43(e)(6), until creditors can access the Bureau’s automated tool. The Bureau expects that its automated tool will be available by the effective date of this final rule, which should address the concerns of these commenters. Further, the Bureau intends to provide guidance to industry stakeholders through implementation materials on how to access and use the Bureau’s automated tool. In addition, creditors may use the Census Bureau’s automated tool, or other means 38 besides the designated safe harbor tools, to determine the ‘‘rural’’ status of a property as long as the creditor retains ‘‘evidence of compliance’’ in accordance with § 1026.25 of whether a property is in a rural or underserved area as defined in § 1026.35(b)(2)(iv)(A) and (B). See comment 35(b)(2)(iv)–1.iii.B, .C, and .D discussed above. The Bureau also considered the commenters concerns about the Census Bureau’s automated address search tool and their requests that the Bureau make available its automated tool before the effective date of this rule. As noted above, the Bureau expects its automated tool will be ready by the effective date of this rule, which should address the usability concerns about the Census Bureau’s automated address search tool. Creditors are encouraged to use the Bureau’s automated tool, which will have a user-friendly interface and a batch upload feature. One commenter questioned the use of the Census Bureau’s automated address search tool and suggested the Bureau adopt a rural classification scheme based on the use of census tracts and factors such as housing density and commuting. The Bureau believes such a system would increase administrative burden and complexity and reduce the objectivity achieved by a definition of rural based on census blocks. Accordingly, the Bureau is not adopting such a classification scheme. Finally, one commenter believed the use of the word ‘‘shall’’ in § 1026.35(b)(2)(iv)(C) makes the use of the safe harbor tools mandatory. Creditors are not required to use the safe harbor tools. ‘‘Shall’’ is used in 38 As discussed above, creditors may use Census Bureau maps, lists, and other reference materials to demonstrate compliance with § 1026.35(b)(d)(iv)(A), but alternative methods do not have the benefit of a safe harbor and a creditor must retain ‘‘evidence of compliance’’ in accordance with § 1025.25. VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 § 1026.35(b)(2)(iv)(C) to convey that a creditor who uses one or both of the tools receives a conclusive presumption of compliance with the Bureau’s definition of ‘‘rural or underserved.’’ Using the word may in this context would cause uncertainty with regard to the effect of the safe harbor tool’s designation with respect to a particular property. Section 1026.36 Prohibited Acts or Practices and Certain Requirements for Credit Secured by a Dwelling 36(a) Definitions The commentary to § 1026.36(a) discusses the meaning of the term ‘‘loan originator.’’ The Bureau did not propose changes to this commentary. However, the Bureau discovered a technical error in comment 36(a)–1.i.A.3. This comment contains a reference to comment ‘‘36(a)z4.i.’’ The correct format for this reference is ‘‘36(a)–4.i.’’ Thus, the Bureau is adopting a technical amendment to comment 36(a)–1.i.A.3 to revise the incorrect format. No substantive change is intended. Section 1026.43 Minimum Standards for Transactions Secured by a Dwelling 43(e) Qualified Mortgages 43(e)(5) Qualified Mortgage Defined— Small Creditor Portfolio Loans As discussed in detail below, the Bureau is adopting comments 43(e)(5)– 4 and 43(e)(5)–8 substantially as proposed, with certain minor changes to enhance clarity. Accordingly, this final rule makes minor technical and conforming changes to this commentary to § 1026.43(e)(5) discussed below. The Bureau’s Proposal Section 1026.43(e)(5) defines a category of qualified mortgages originated by certain small creditors that enjoy special treatment under the ability-to-repay rules. These mortgages must be originated by creditors that meet the origination limit and asset limit in § 1026.35(b)(2)(iii)(B) and (C), and the creditors must hold the loans in portfolio for at least three years after consummation, with certain exceptions. Such a small creditor portfolio loan can be a qualified mortgage even if the borrower’s total debt-to-income ratio exceeds the 43 percent debt-to-income ratio limit that otherwise applies to general qualified mortgage loans under § 1026.43(e)(2). Qualified mortgages originated by small creditors are entitled to a safe harbor under the Bureau’s ability-to-repay rule if the loan’s APR does not exceed the applicable APOR by 3.5 or more percentage points—in contrast to the general qualified PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 59959 mortgage safe harbor which covers loans with APRs that do not exceed the applicable APOR by 1.5 or more percentage points. The Bureau proposed several changes to the commentary to § 1026.43(e)(5) to conform to the Bureau’s proposed changes to the origination limit and the asset limit in § 1026.35(b)(2)(iii)(B) and (C). Proposed comment 43(e)(5)–4 regarding creditor qualifications provides that to be eligible to make a qualified mortgage under § 1026.43(e)(5) the creditor has to satisfy the requirements of § 1026.35(b)(2)(iii)(B) and (C), including the Bureau’s proposed changes to the origination limit and the asset limit, respectively, and the addition of the grace periods. The Bureau proposed to revise comment 43(e)(5)–8, regarding the transfer of a qualified mortgage to another qualifying creditor prior to three years after consummation, to conform to the proposed origination limit and asset limit in § 1026.35(b)(2)(iii)(B) and (C). Final Rule The Bureau did not receive comments regarding the conforming changes to comments 43(e)(5)–4 and 43(e)(5)–8. The Bureau is finalizing as proposed, with minor technical revisions to provide greater clarity, comments 43(e)(5)–4 and 43(e)(5)–8. 43(e)(6) Qualified Mortgage Defined— Temporary Balloon-Payment Qualified Mortgage Rules 43(e)(6)(ii) As discussed in detail below, the Bureau is adopting § 1026.43(e)(6)(ii) as proposed. Accordingly, this final rule extends the temporary balloon-payment qualified mortgage provision to apply to covered transactions for which applications are received before April 1, 2016. The Bureau’s Proposal Section 1026.43(e)(6) provides for a temporary balloon-payment qualified mortgage that requires all of the same criteria to be satisfied as the balloonpayment qualified mortgage definition in § 1026.43(f) except the requirement that the creditor extend more than 50 percent of its total first-lien covered transactions in counties that are ‘‘rural’’ or ‘‘underserved.’’ Pursuant to § 1026.43(e)(6)(ii), this temporary provision currently applies only to covered transactions consummated on or before January 10, 2016 (the sunset date). The Bureau proposed to change § 1026.43(e)(6)(ii) to provide that the temporary provision applies to covered transactions for which the application was received before April 1, 2016. The E:\FR\FM\02OCR2.SGM 02OCR2 59960 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations asabaliauskas on DSK5VPTVN1PROD with RULES change was proposed to give small creditors more time to understand how any changes that the Bureau may make to the rural definition and lookback period will affect their status, if at all, and to make any required changes to their business practices.39 This proposed change to § 1026.43(e)(6)(ii) would have also affected the HOEPA balloon-loan provisions because the Bureau had extended the exception to the general prohibition on balloon features for high-cost mortgages under § 1026.32(d)(1)(ii)(C) to allow small creditors, regardless of whether they operate predominantly in ‘‘rural’’ or ‘‘underserved’’ areas, to continue originating balloon high-cost mortgages if the loans meet the requirements for qualified mortgages under §§ 1026.43(e)(6) or 1026.43(f). The Bureau solicited comment on whether it should change the sunset date in § 1026.43(e)(6)(ii) and whether § 1026.43(e)(6)(ii) should use the date the application was received or the consummation date in applying the sunset date. For the reasons discussed below, the Bureau is adopting § 1026.43(e)(6)(ii) as proposed. Comments Creditors, including national and state banking associations, individual banks, and national and state associations of credit unions, generally appreciated the proposed extension to cover applications received before April 1, 2016. However, these commenters recommended that either the provision should be extended indefinitely or, if not made permanent, extended for a longer period than proposed. Suggested extensions ranged from until the Bureau’s automated tool is operational to as much as two additional years. A comment from a state association of credit unions stated this provision should be extended indefinitely until such time as the Bureau has fully studied the benefits that loans with balloon payments provide to consumers and the impact on consumers if they were unable to obtain this type of loan. A national association of banks recommended a one-year extension to allow further study of the issue, and individual banks and credit unions stated a one-year extension would help them transition from balloon loans to adjustable-rate mortgage lending programs. A national banking organization and several state banking associations urged that the sunset be 39 Qualified mortgages consummated under § 1026.43(e)(6) based on applications received before April 1, 2016 would retain their qualified mortgage status after that date, as long as the other requirements of § 1026.43(e)(6) are met. VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 delayed until banks can access an official automated tool to identify rural areas, because without such an automated tool many small institutions would be incapable of ensuring compliance with the definitions, and may curtail or eliminate consumer mortgage financing. Final Rule The Bureau has considered the comments submitted on this provision and is finalizing § 1026.43(e)(6)(ii) as proposed. As stated in the May 2013 ATR Final Rule, the Bureau established a temporary provision because ‘‘the Bureau believes it is appropriate to use the two-year transition period to consider whether it can develop more accurate or precise definitions of rural and underserved. However, the Bureau believes that Congress made a deliberate policy choice in the Dodd-Frank Act not to extend qualified mortgage status to balloon-payment products outside of such [rural] areas.’’ 78 FR 35429, 35490 (June 12, 2013). The rule as amended here will permit creditors to continue to make balloon-payment qualified mortgages beyond April 1, 2016 as long as the application for the transaction is received before that date, and provides additional time beyond the original and expected sunset date for creditors to make necessary adjustments. With respect to the commenters that recommended an extension until an automated tool is available, as discussed above, the Bureau expects to have such an automated tool in place and operational upon the effective date of this final rule. 43(f) Balloon-Payment Qualified Mortgages Made by Certain Creditors As discussed below, the Bureau is adopting comments 43(f)(1)(vi)–1, 43(f)(1)(vi)–1.i.A and .B, and 43(f)(2)(ii)– 1 substantially as proposed, with certain minor changes to enhance clarity. Accordingly, this final rule makes minor technical and conforming changes to the commentary discussed below. The Bureau’s Proposal Section 1026.43(f)(1) provides an exemption to the general prohibition on qualified mortgages having balloonpayment features under § 1026.43(e)(2)(C) if the creditor satisfies the requirements stated in § 1026.35(b)(2)(iii)(A), (B), and (C) and other criteria are met. Pursuant to § 1026.43(f)(2), a qualified mortgage made under this section (a ‘‘balloonpayment qualified mortgage’’) immediately loses its qualified mortgage status upon transfer in the first three years after consummation, with certain PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 exceptions. The Bureau proposed to revise comments 43(f)(1)(vi)–1 and 43(f)(2)(ii)–1 to reflect the proposed revisions that are described in the section-by-section analysis of § 1026.35 above, including the new grace periods and expanded tests that the Bureau proposed in § 1026.35(b)(2)(iii)(A), (B), and (C), the broader rural definition that the Bureau proposed in § 1026.35(b)(2)(iv)(A), and the safe harbor provisions that the Bureau proposed in § 1026.35(b)(2)(iv)(C). Proposed comment 43(f)(1)(vi)–1.i.A and .B also included updated examples to reflect these changes in the regulation text. In lieu of listing out the asset limits for every year in comment 43(f)(1)(vi)– 1.iii, as the asset limit is adjusted for inflation each year, the Bureau also proposed to include a cross-reference in that comment indicating that the Bureau publishes notice of the new asset limit each year by amending comment 35(b)(2)(iii)–1.iii. The Bureau also proposed technical changes to comments 43(f)(1)(vi)–1, 43(f)(2)–2, and 43(f)(2)(ii)–1. Final Rule The Bureau did not receive comments that addressed the proposed revisions to comments 43(f)(1)(vi)–1, 43(f)(2)(ii)–1 and proposed comment 43(f)(1)(vi)– 1.i.A and .B. The Bureau is finalizing as proposed, with minor technical revisions to provide greater clarity, the aforementioned comments. VI. Effective Date As discussed in detail below, the Bureau is adopting the effective date for this final rule as proposed. The amendments in this final rule are effective January 1, 2016. The Bureau’s Proposal The Bureau proposed that all of the changes in its proposed rule take effect on January 1, 2016. Specifically, the Bureau proposed that its proposed amendments to § 1026.35(b)(2)(iii)(A), (B), (C), and (D) and its commentary, to § 1026.35(b)(2)(iv)(A), (B), and (C) and its commentary, to § 1026.43(e)(6), and to the commentary to §§ 1026.43(e)(5) and 1026.43(f)(1) and (f)(2), take effect for covered transactions consummated on or after January 1, 2016. The Bureau stated that it believed that this proposed effective date provided a date that is consistent with the end of the calendar year determinations required to be made with regard to the applicability of the special provisions and exemptions that apply to small creditors under the Bureau’s regulations, as amended by the Bureau’s proposal, and would therefore E:\FR\FM\02OCR2.SGM 02OCR2 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations facilitate compliance by creditors. The Bureau requested comment on whether the proposed effective date is appropriate, or whether the Bureau should adopt an alternative effective date. asabaliauskas on DSK5VPTVN1PROD with RULES Comments A community bank trade association commenter and several credit union commenters recommended that the final rule provide an earlier optional effective date—specifically, on publication of the final rule—so that banks eligible for small creditor and small creditor rural status under the expanded definitions in the rule could take earlier advantage of the special provisions and exemptions that would become available to them. One commenter suggested that, in addition to its suggestion for an optional effective date on publication, the mandatory compliance date for purposes of compliance with the final rule changes should be January 1, 2016. It stated that mandatory compliance should not be earlier for any banks that currently satisfy the requirements for small creditor status, but may not after the final rule takes effect. One state banking association commenter suggested that the Bureau delay the effective date of the rule until the Bureau’s proposed automated tool to assist creditors in determining whether a property securing a mortgage is in a rural or underserved area is available. This commenter asserted that identifying ‘‘rural’’ areas under the Bureau’s proposed definition of ‘‘rural’’ is difficult for small institutions and that it presents a compliance risk that these institutions may not be willing to take. Final Rule After considering the comments received on the effective date, the Bureau is finalizing the rule as proposed, with the amendments in the final rule taking effect for covered transactions consummated on or after January 1, 2016. The increased origination limit and the expanded definition of rural in this final rule, for example, apply only to covered transactions consummated on or after that date. The Bureau continues to believe that a January 1, 2016 effective date is the appropriate effective date for the final rule changes as it is consistent with the end of the calendar year determinations required to be made in order to determine a creditor’s eligibility for small creditor and small creditor rural or underserved (‘‘small rural creditor’’) status and for the April 1 grace period. The January 1, 2016 effective date will therefore make VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 determinations of small creditor and small rural creditor status easier going forward for creditors. It should also facilitate supervision of regulated entities for purposes of determination of compliance with the Bureau’s rules, i.e., whether a creditor was in fact small or small/rural/underserved and eligible for the special provisions and exemptions available to such creditors. An optional and mandatory effective date for the final rule changes, as suggested by some commenters, may create implementation and supervisory compliance oversight complications for the Bureau and other federal regulatory agencies—complications that may not be justified by any advantages that may be obtained by creditors seeking to operate as small or small rural creditors for the few remaining months of 2015. The Bureau believes that the January 1, 2016 effective date provides a bright line approach that will facilitate creditor compliance and avoid complexity in regulatory oversight. The commenter seeking a delay in the effective date of the rule until the Bureau’s automated tool is available may have been based on the Bureau’s statement in the proposed rule that it did not expect the proposed automated tool to be available by the effective date of the final rule. The Bureau now believes however that its automated tool will be available by the effective date of the final rule, which should address the concerns of this commenter. VII. Dodd-Frank Act Section 1022(b) Analysis A. Overview In developing the final rule, the Bureau has considered potential benefits, costs, and impacts.40 The Bureau has consulted, or offered to consult with, the prudential regulators, the Federal Housing Finance Agency, the Federal Trade Commission, the U.S. Department of Agriculture, the U.S. Department of Housing and Urban Development, the U.S. Department of the Treasury, the U.S. Department of Veterans Affairs, and the U.S. Securities and Exchange Commission, including regarding consistency with any prudential, market, or systemic objectives administered by such agencies. The Bureau has also consulted 40 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. PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 59961 with the Census Bureau on § 1026.35(b)(2)(iv)(A)(2) and (C)(3). As discussed in greater detail elsewhere throughout this Supplementary Information, the Bureau finalizes several amendments to the Bureau’s Regulation Z and official interpretations relating to escrow requirements for higher-priced mortgage loans under the Bureau’s January 2013 Escrows Final Rule and ability-to-repay/ qualified mortgage requirements under the Bureau’s January 2013 ATR Final Rule and May 2013 ATR Final Rule. Since publication of the 2013 Title XIV Final Rules, the Bureau has received extensive feedback on the definitions of ‘‘small creditor’’ and ‘‘rural and undeserved areas’’ with many commenters criticizing the Bureau for defining ‘‘rural’’ and ‘‘underserved’’ too narrowly and urging the Bureau to consider alternative definitions. This final rule reflects feedback from stakeholders regarding the Bureau’s definitions of small creditor and rural and underserved areas as those definitions relate to special provisions and certain exemptions provided to small creditors under the Bureau’s aforementioned rules. The discussion below considers the benefits, costs, and impacts of the following key provisions of the final rule (final provisions): • Raising the loan origination limit for determining eligibility for small-creditor status; • An expansion of the definition of ‘‘rural area’’ to include (1) a county that meets the current definition of rural county or (2) a census block that is not in an urban area as defined by the Census Bureau; and • An extension of the temporary two-year transition period that allows certain small creditors to make balloon-payment qualified mortgages and balloon-payment high cost mortgages regardless of whether they operate predominantly in rural or underserved areas. With respect to these provisions, the discussion considers costs and benefits to consumers and costs and benefits to covered persons. The discussion also addresses certain alternative provisions that were considered by the Bureau in the development of the proposed and of the final rule. The Bureau has chosen to evaluate the benefits, costs, and impacts of the final rule against the current state of the world.41 That is, the Bureau’s analysis below considers the benefits, costs, and impacts of the final provisions relative to the current regulatory regime, as set forth primarily in the January 2013 ATR 41 In particular, the Bureau compares the impacts of the final provisions against the state of the world after January 2016 if the final provisions do not come into effect. E:\FR\FM\02OCR2.SGM 02OCR2 59962 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations asabaliauskas on DSK5VPTVN1PROD with RULES Final Rule, the May 2013 ATR Final Rule, and the January 2013 Escrows Final Rule.42 The baseline considers economic attributes of the relevant market and the existing regulatory structure. The Bureau has relied on a variety of data sources to consider the potential benefits, costs and impacts of the final provisions, including the public comment record of various Board and Bureau rules.43 However, in some instances, the requisite data are not available or are quite limited. Data with which to quantify the benefits of the rule are particularly limited. As a result, portions of this analysis rely in part on general economic principles to provide a qualitative discussion of the benefits, costs, and impacts of the final rule. The primary source of data used in this analysis is 2013 data collected under HMDA. The empirical analysis also uses data from the 4th quarter 2013 bank and thrift Call Reports,44 and the 4th quarter 2013 credit union Call Reports from the NCUA, to identify financial institutions and their characteristics. Unless otherwise specified, the numbers provided include appropriate projections made to account for any missing information, for example, any institutions that do not report under HMDA. The Bureau also utilized the data from the Bureau’s Consumer Credit Panel.45 42 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. 43 The quantitative estimates in this analysis are based upon data and statistical analyses performed by the Bureau. To estimate counts and properties of mortgages for entities that do not report under HMDA, the Bureau has matched HMDA data to Call Report data and National Mortgage Licensing System data and has statistically projected estimated loan counts for those depository institutions that do not report these data either under HMDA or on the NCUA Call Report. The Bureau has projected originations of higher-priced mortgage loans in a similar fashion for depositories that do not report under HMDA. These projections use Poisson regressions that estimate loan volumes as a function of an institution’s total assets, employment, mortgage holdings, and geographic presence. 44 Every national bank, State member bank, and insured nonmember bank is required by its primary Federal regulator to file consolidated Reports of Condition and Income, also known as Call Reports, for each quarter as of the close of business on the last day of each calendar quarter (the report date). The specific reporting requirements depend upon the size of the bank and whether it has any foreign offices. For more information, see http:// www2.fdic.gov/call_tfr_rpts/. 45 The Consumer Credit Panel is a longitudinal, nationally representative sample of approximately 5 million deidentified credit records from one of the nationwide consumer reporting agencies. The sample provides tradeline-level information for all of the tradelines associated with each credit report record each month, including a commerciallyavailable credit score. This information was used VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 Especially in light of some of the comments received by the Bureau that were discussed in the section-by-section analysis, it is worth emphasizing that the Bureau analyzes data from all creditors, both the ones that report under HMDA and the ones that do not, with the exception of non-depository institutions that do not report under HMDA. For HMDA reporters, the Bureau uses the data reported. For HMDA non-reporters, the Bureau uses projections based on the match of the Call Report data with HMDA. The final provisions expand the number of institutions that are eligible to originate certain types of qualified mortgages and to take advantage of certain special provisions under the January 2013 ATR Final Rule, the May 2013 ATR Final Rule, the January 2013 Escrows Final Rule, and the 2013 HOEPA Final Rule.46 The first set of special provisions is tailored to creditors deemed as small (small creditors) without regard to the location of their originations. Small creditors can originate qualified mortgages without regard to the bright-line debt-to-income ratio limit that is otherwise required to meet the Bureau’s general qualified mortgage requirements (small creditor portfolio special provision). Qualified mortgages originated by small creditors are entitled to a safe harbor with an APR that is more than 1.5 percentage points over APOR, as long as these loans have an APR of less than 3.5 percentage points over APOR (small creditor portfolio QM special provision). The second set of special provisions applies only to small creditors that operate predominantly in rural or underserved areas (rural small creditors). Rural small creditors can originate qualified mortgages with balloon-payment features, as long as these loans are kept in portfolio (rural qualified mortgage balloon-payment special provision) and other requirements are met.47 These qualified mortgages with balloon-payment features are entitled to a safe harbor as long as these loans have an APR of less than 3.5 percentage points over APOR. Also, rural small creditors are generally allowed to originate higher-priced mortgage loans without setting up an escrow account for property taxes and insurance (rural higher-priced mortgage loan escrow special provision). Among other things, the final provisions expand the number of small creditors by changing the origination limit on the number of loans that a small creditor could have originated annually together with its affiliates from no more than 500 to no more than 2,000. The final rule’s origination limit also counts only loans not held in portfolio by the creditor and its affiliates that originate covered transactions secured by first liens toward that limit. Similar to the currently effective provisions, the final provisions include a requirement that creditors have less than $2 billion in total assets (adjusted annually), but under the final rule this threshold applies to the creditor’s assets combined with the assets of the creditor’s affiliates that originate covered transactions secured by first liens rather than just the creditor’s own assets.48 Based on 2013 data, the Bureau estimates that the number of small creditors will increase from approximately 9,700 to approximately 10,400 (out of the 11,150 creditors in the United States that the Bureau estimates are engaged in mortgage lending). In 2013, the approximately 700 additional creditors originated about 720,000 loans (roughly 10 percent of the overall residential mortgage market), of which about 175,000 were kept in portfolio. Of these 175,000 portfolio loans, the Bureau estimates that about 15,000 were portfolio higher-priced mortgage loans and 88 percent of those had an APR between 1.5 and 3.5 percentage points over APOR.49 The final provisions also expand the areas deemed rural for the purposes of for the analysis of how consumers’ credit scores differ depending on the size of the financial institution originating the consumers’ mortgage loans. 46 As explained in the section-by-section analysis above, the exception to the general prohibition on balloon-payment features for high-cost mortgages in the 2013 HOEPA Final Rule is also affected by the final provisions. However, the Bureau believes that the effect of the final rule on the rural balloonpayment provision in the 2013 HOEPA Final Rule is relatively small, in terms of both the consumers and covered persons affected, and thus the Bureau does not discuss this effect of the final rule in this 1022(b) analysis. 47 As discussed in the section-by-section analysis, there is also a temporary two-year provision that allows small creditors, regardless of whether they operate predominantly in rural or underserved areas, to originate qualified mortgage balloon- payment loans and high-cost mortgages with balloon-payment features. This final rule extends the end-date for that temporary provision. 48 All the numbers below are presented considering the affiliates’ assets to the extent that the affiliates’ assets are aggregated in the Call Reports, thus the number of newly exempted institutions and the number of loans that they originated could be slightly different from what the Bureau is reporting. The Bureau does not believe that aggregating assets of affiliates that originate covered transactions secured by first liens for the purposes of the $2 billion asset prong results in many, if any, creditors that are considered small under the currently effective rule, but will not be considered small under the final rule. 49 The percentage of loans with an APR that was 1.5 to 3.5 percentage points over APOR is based exclusively on HMDA data. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\02OCR2.SGM 02OCR2 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations the rural small creditor special provisions described above. Currently, areas deemed rural are counties that are neither in an MSA nor in a micropolitan statistical area that is adjacent to an MSA. In addition to the current definition, the final provisions also count as rural areas census blocks that are deemed rural by the Census Bureau.50 Based on 2013 data, the Bureau estimates that the number of rural small creditors will increase from about 2,400 to about 4,100.51 The additional 1,700 creditors originated about 220,000 loans, out of which 120,000 are estimated to be portfolio loans and about 26,000 of those are estimated to be higher-priced mortgage loans. The Bureau is not able to estimate currently what percentage of these 120,000 portfolio loans are balloonpayment loans. B. Potential Benefits and Costs to Consumers and Covered Persons Consumer Benefits asabaliauskas on DSK5VPTVN1PROD with RULES Consumer benefit from the final provisions is a potential expansion in access to credit. Access to credit concerns meant to be addressed by the rural small creditor provisions and the small creditor provisions are interrelated, thus the Bureau discusses them jointly in this subsection.52 50 As discussed further above, census blocks deemed rural are census blocks that are not in an urban area (i.e., neither in an urbanized area nor in an urban cluster) as defined by the Census Bureau. 51 The Bureau used data from several sources to estimate whether a given creditor would be considered rural in 2013 according to both the current state of the world and if the final rule were already effective. The Bureau used HMDA data for the creditors that report to the dataset. Since creditors only have to report the census tract of the property’s location, the Bureau assumed that a property in a particular census tract has the same chance of being rural as the percentage of that tract’s population that lives in rural census blocks (this information is available from the Census Bureau). For the depository institutions that did not report under HMDA, the Bureau is aware of the location of the creditors’ branches. The Bureau assumed that mortgage lending is spread equally across a creditor’s branches. The Bureau also assumed that if a branch is in a given county, then the same proportion of loans in this branch originated to consumers living in rural or underserved areas as the percentage of population living in rural or underserved areas in that county. Note that the 4,100 includes creditors that do not qualify as small but for the final rule. However, out of the 700 creditors that do not qualify as small but for the final rule, only around 10 percent will qualify as rural even when the final provisions expanding rural areas are effective. 52 Note that there is a difference in the current effect of the rules: currently, the creditors that are small, but not rural, enjoy the same special provisions as rural small creditors under the January 2013 ATR Final Rule and the May 2013 ATR Final Rule due to a temporary two-year provision in the May 2013 ATR Final Rule. This temporary provision is discussed in the section-bysection analysis above. VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 In general, most consumer protection regulations have two effects on consumers. Regulations restrict particular practices, or require firms to provide additional services, in order to make consumers better off. However, restricting firms’ practices or requiring additional services might result in firms increasing their prices or discontinuing certain product offerings, potentially resulting in reduced access to credit. The aforementioned small and rural small creditor special provisions were included in the January 2013 ATR Final Rule and the January 2013 Escrows Final Rule (along with the May 2013 ATR Final Rule) in order to alleviate potential access to credit concerns. Note that some of these provisions were Congressionally mandated. The final provisions expand the number of financial institutions that qualify for these special provisions. Accordingly, there are two effects on consumers that originate their mortgage loans with the creditors that are exempted by the final provisions: a potential benefit from an increase in access to credit and a potential cost from reduction of certain consumer protections. As noted above, the potential benefit of the final provisions for consumers is a potential increase in access to credit. The magnitude of this potential increase depends on whether, but for the provisions in the final rule affecting rural small creditors: (1) Financial institutions that are covered by the final provisions stop or curtail originating mortgage loans in particular market segments or increase the price of credit in those market segments in numbers sufficient to have an adverse impact on those market segments, (2) the financial institutions that remain in those market segments do not provide a sufficient quantum of mortgage loan origination at the non-increased price, and (3) there is not significant new entry into the market segments left by the departing institutions. If, but for the final rule, all three of these scenarios are realized, then the final rule increases access to credit. Analogously, the magnitude of this potential increase in access to credit depends on whether, in the absence of the provisions in the final rule affecting small creditors and escrow accounts:53 (1) Financial institutions that are covered by the final provisions have already stopped or curtailed originating mortgage loans in particular market 53 Note the difference in baselines: currently, due to the temporary two-year provision discussed in the section-by-section, all the small creditors are eligible for the special provisions that apply to rural small creditors, except for the provisions in the January 2013 Escrows Final Rule. PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 59963 segments or increased the price of credit in those market segments in numbers sufficient to have an adverse impact on those market segments, (2) the financial institutions that remained in those market segments do not provide a sufficient quantum of mortgage loan origination at the non-increased price, and (3) there has not been a significant new entry into the market segments left by the departed institutions. If, but for the final rule, all three of these scenarios are realized, then the final rule increases access to credit. The Bureau received comments suggesting that access to credit will indeed be curtailed but for the final provisions (or is already curtailed, but could be increased after these provisions become effective). These comments are discussed in the sectionby-section analysis. The evidence provided in these comments appears to be largely anecdotal. The Bureau’s data do not refute the commenters’ assertions; however, the Bureau does not have the direct evidence to estimate the degree to which the final provisions would increase access to credit. In a series of analyses, the Bureau did not find specific evidence that the final provisions would increase access to credit when analyzing data on various consumers’ characteristics (credit scores,54 loan amounts relative to income,55 availability of smaller amount loans,56 and pricing 57), collateral 54 Using the Bureau’s Consumer Credit Panel for 2013, the Bureau analyzed borrowers’ credit score distributions at creditors with various yearly origination counts. There was no significant difference between the creditors that qualify as small due to the final rule and larger creditors, including both the median credit scores and the lower tails of the distribution (for example, the 10th percentile of FICO scores). 55 A relationship lender might help consumers by, potentially, originating loans with a higher DTI ratio because, for example, the relationship lender is aware that the consumer is at a high DTI only temporarily. Using HMDA data, and analyzing the loan-to-income ratio as a proxy for DTI (since both variables are available in HMDA), shows that the median consumer of a small creditor has a loan-toincome ratio of 2.3. The figure is the same for larger creditors. 56 A commenter suggested that smaller creditors might be originating more loans for smaller amounts (the commenter suggested a threshold of $40,000). According to the Bureau’s analysis, while it might be true that smaller creditors make a disproportionate number of smaller amount loans, the majority of the smaller loans are made by larger creditors, and a sizable portion of smaller loans are made by creditors that already enjoy the special provisions under the currently effective rules. 57 Instead of extending more credit, relationship lenders might be extending cheaper credit if they believe that their consumers are, effectively, less risky. In that case, given similar credit-risk profiles, the Bureau could expect that smaller creditors provide cheaper loans. However, higher-priced mortgage loans comprise on average 8.3 percent of the portfolio of creditors that are deemed small due E:\FR\FM\02OCR2.SGM Continued 02OCR2 59964 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations asabaliauskas on DSK5VPTVN1PROD with RULES (census tracts with portfolio-only lending 58), and competition (number of creditors active in a county, even assuming that all the creditors that are small,59 or small and rural, due to the final rule would exit if the final rule did not become effective). However, the Bureau’s data are not complete and do not permit the Bureau to analyze various relevant hypotheses. For example, one possible theory that the Bureau’s data do not confirm or negate is that there might be a lack of access to credit due to the particular idiosyncrasies of a property despite the fact that other properties in the same census tract are eligible for governmentsponsored entity (GSE) backing. These idiosyncrasies could include, for instance, the absence of a septic tank on the property or the availability of running water only on some properties in that census tract. Note that the presence of competition raises an important point related to some of the industry comments provided to the Bureau. While many commenters asserted access to credit issues, the implicit proof was that some smaller financial institutions could be originating fewer loans. However, even if true, that could simply mean that the same consumer would get a loan from a larger creditor instead. The Bureau’s analysis of the data implies that this is at least a possibility.60 to the final rule and 22.2 percent of the portfolio of creditors that are deemed small and rural due to the final rule. In comparison, the figure for larger creditors is 4.0 percent. 58 If the area nearby a property is sparsely populated, a lack of comparable properties for appraisal can be a concern. In 2013, there were about 400 tracts where the only HMDA-reported loans originated were portfolio loans (out of the roughly 73,000 tracts in HMDA). About 200 of these tracts had more than one loan originated in 2013. These 400 tracts had fewer than 1,000 loans between them; of these loans, about 400 were made by creditors that originate over 5,000 loans a year and about 300 were made by creditors that made fewer than 500 loans a year. 59 The Bureau analyzed HMDA 2013 county-level data. For purposes of the statistics here and below, ‘‘counties’’ is used to refer to counties and county equivalents. The Bureau considered counties where there are currently at most five creditors operating, and at least one of these creditors would qualify as small only due to the final rule. The Bureau’s analysis shows that there are only a few counties like this, both for the purposes of the small creditor special provisions and for the purposes of the rural small creditor special provisions. The cutoff of five competitors is arguably enough to ensure a sufficient amount of competition for a close-to-homogenous product. However, the Bureau does not mean to imply that, for example, first-lien covered transactions in a county constitute a market in the antitrust sense. 60 To the extent that the effect of the already effective rules might shed light on this topic, the January 2013 Escrows Final Rule has a special provision allowing rural small creditors to originate higher-priced mortgage loans without providing an escrow account. Available evidence indicates that, VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 Similarly, many commenters raised concerns that smaller financial institutions lack the economies of scale necessary for effective compliance and implementation of, for example, adjustable-rate mortgage disclosures or escrows. While this might be true, to the extent that outsourcing and contracting have not alleviated this issue, this is only a concern to consumers to the extent that larger creditors would not originate these loans. In other words, the lack of economies of scale is a concern to consumers only to the extent that the market is less competitive than it will otherwise be when the final provisions become effective. Consumer Costs The potential cost to consumers of the final provisions is the reduction of certain consumer protections as compared to the baseline established by the January 2013 ATR Final Rule, the May 2013 ATR Final Rule, and the January 2013 Escrows Final Rule. These consumer protections include a consumer’s private cause of action against a creditor for violating the general ability-to-repay requirements and the requirement that every higherpriced mortgage loan have an associated escrow account for the payment of property taxes and insurance for five years. In addition, under the January 2013 ATR Final Rule, after January 10, 2016, creditors that do not meet the definition of ‘‘small’’ and ‘‘rural or underserved’’ will not be able to claim qualified mortgage status for any newlyoriginated balloon-payment loans. Classifying a loan as a qualified mortgage when it would not have been a qualified mortgage otherwise (based on the small creditor portfolio special provision or the rural qualified mortgage balloon-payment special provision) or making a loan a safe harbor qualified mortgage loan when it would have otherwise been a rebuttable presumption qualified mortgage (based on the small creditor portfolio QM special provision) makes it more difficult for consumers to sue their creditor successfully for failing to properly evaluate the consumers’ ability to repay while originating the loans. after the rule went into effect in June 2013, rural small creditors were just as likely to begin originating higher-priced mortgage loans as other creditors. Moreover, the counties where rural small creditors that started originating loans operate did not experience an increase in access to credit. See Alexei Alexandrov & Xiaoling Ang, Identifying a Suitable Control Group Based on Microeconomic Theory: The Case of Escrows in the Subprime Market, SSRN working paper (Dec. 30, 2014), available at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2462128. PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 A creditor may have an incentive to originate loans without considering ability to repay to the full extent. As the Bureau noted in the January 2013 ATR Final Rule, there are at least three reasons why these incentives exist. First, the creditor might re-sell the loan to the secondary market or might have at least a portion of the default risk insured by a third party. In this case, the creditor does not have the privately optimal incentive to verify ability to repay. The December 2014 Credit Risk Retention Final Rule’s requirement of ‘‘skin in the game’’ is designed to ameliorate this issue.61 Second, the loan officer might not have the right incentive to verify a consumer’s ability to repay due to internal organization issues: The loan officer might be benefiting from the creditor’s eventual profit due to the loan only proximately and, potentially, the loan officer might have a suboptimal compensation scheme (for example, compensating simply based on the volume originated). Third, the creditor is unlikely to consider a consumer’s private costs of foreclosure and the negative externality arising from the foreclosure process.62 In particular, since the Great Depression, balloon-payment loans have been seen by economists and consumer advocates as raising particular risks of foreclosure.63 The provision of a private cause of action solves, to an extent, this negative externality issue. Counting only the loans that are not kept in portfolio towards the origination limit ensures that a small creditor can always originate more portfolio loans without being concerned with the possibility of crossing the origination limit. The fact that a creditor keeps the loan in portfolio gives the creditor more incentives not to originate a loan that a consumer would not be able to repay: It potentially deals with the ‘‘skin in the game’’ issue described above. However, a creditor keeping a loan in portfolio does not fully ensure that the creditor will only originate loans that 61 79 FR 77602 (Dec. 24, 2014). John Y. Campbell et al., Consumer Financial Protection, 25(1) Journal of Economic Perspectives 91, 96 (2011). ‘‘[A] rationale for government mortgage policy is a public interest in reducing the incidence of foreclosures, which, as we mentioned, reduce not only the value of foreclosed properties, but also the prices of neighboring properties [. . .]. The negative effect on the neighborhood is an externality that will not be taken into account by private lenders even if their foreclosure decisions are privately optimal.’’ 63 Id. ‘‘In the late 1920s, the dominant mortgage form was a short-term balloon loan that required frequent refinancing. Low house prices and reduced bank lending capacity in the early 1930s prevented many homeowners from refinancing, causing a wave of foreclosures that exacerbated the Depression.’’ 62 See E:\FR\FM\02OCR2.SGM 02OCR2 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations asabaliauskas on DSK5VPTVN1PROD with RULES consumers are able to repay. First, as noted above, ‘‘the negative effect on the neighborhood is an externality that will not be taken into account by private lenders even if their foreclosure decisions are privately optimal.’’ 64 Second, it is important to note that a loan can be in portfolio (and thus eligible for special provisions provided by the final rule), yet fully or almost fully insured by a third party. In these cases, the creditor does not bear the risk for these loans even though the loan is in portfolio: There is no or little ‘‘skin in the game.’’ 65 Finally, the loan officer might not be compensated optimally, although advocates of relationship lending suggest that smaller creditors do not suffer from the internal organization problems described above to the same extent as larger creditors. Escrow accounts protect consumers from a financial shock (sometimes unexpected, especially for first-time buyers) of having to pay the first lumpsum property tax bill all at once, possibly soon after spending much of the household’s savings on the down payment and closing costs. Recent research argues that postponing that payment by nine months (which an escrow account approximates by spreading payments over time) decreases the probability of an early payment default by 3 to 4 percent.66 As noted in the January 2013 Escrows Final Rule, costs to consumers of not having escrow accounts also include the inconvenience of paying several bills instead of one; the lack of a budgeting device to enable consumers not to incur a major expense later on; and the possibility of underestimating the overall cost of maintaining a residence. The extent of the potential cost to consumers depends on whether, but for the final provisions expanding the special provisions of the January 2013 ATR Final Rule and May 2013 ATR Final Rule: (1) Creditors that qualify for special provisions solely due to the final provisions have incentives to originate loans that do not consider consumers’ ability to repay despite these loans being in the creditors’ portfolios; (2) consumers of these creditors who proved unable to repay are unable to secure effective loss mitigation options from the creditors that would leave 64 Id. at 96. that if the third party is, for example, the FHA, then the loan would currently be a qualified mortgage regardless of this final rule. 66 See Nathan B. Anderson & Jane Dokko, Liquidity Problems and Early Payment Default Among Subprime Mortgages, Federal Reserve’s Finance and Economics Discussion Series, available at http://www.federalreserve.gov/pubs/feds/2011/ 201109/201109pap.pdf. 65 Note VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 consumers as well off as they would have been without getting a loan that they proved to be unable to repay; and (3) absent the final provisions, these creditors would have stronger incentives to consider consumers’ ability to repay or the consumers would elect to sue their local lender, would succeed in obtaining counsel to represent them, and would prevail in such suits. The Bureau does not possess evidence to confirm or deny whether these conditions are satisfied. Anecdotal evidence suggests that smaller lenders’ loans performed better than larger lenders loans through the crisis. Similarly, the extent of the potential cost to consumers from expanding the special provisions of the January 2013 Escrows Final Rule depends on whether but for the final provisions: (1) The creditors that are exempted solely due to the final provisions would not provide escrow accounts for five years despite these loans being in the creditors’ portfolios; (2) consumers of these creditors who experienced a shock due to the first-time lump-sum payment and proved to be unable to repay were unable to secure effective loss mitigation options from the creditors that would leave the consumers as well off as they otherwise would have been with an escrow account; and (3) consumers of these creditors actually experience such shocks. As noted above, the Bureau estimates that the about 1,700 creditors that will be small and rural under the final provisions, but not under the currently effective rule, originated about 220,000 loans and 120,000 portfolio loans in 2013. Out of those 120,000 portfolio loans, 26,000 were portfolio higherpriced mortgage loans. The Bureau does not possess a good estimate of what percentage of these 120,000 portfolio loans are balloon-payment loans. Assuming HPML lending continued at the same level among these creditors, about 26,000 loans would lose the mandatory escrow protections; however, many of these creditors might extend escrow protections despite not being subject to a requirement to do so. The Bureau believes that the approximately 700 creditors that will be small under the final provisions, but not under the currently effective rule, originated 720,000 loans, including 175,000 portfolio loans, in 2013. Out of those 175,000 portfolio loans the Bureau estimates that about 15,000 were portfolio higher-priced mortgage loans and 88 percent of those had an APR between 1.5 and 3.5 percentage points PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 59965 over APOR.67 The Bureau believes that about 13,000 loans would be deemed safe harbor qualified mortgages due to the final provisions. The Bureau does not possess a good estimate of what percentage of these 175,000 portfolio loans would not have been qualified mortgages but for the small creditor special provision. Covered Person Benefits and Costs The creditors that will enjoy the special provisions experience benefits roughly symmetric to the protections that consumers lose. In particular, creditors that will qualify as rural small creditors will be able to originate qualified mortgage balloon-payment portfolio loans and pass the risk onto consumers, and small creditors could originate portfolio loans that would not be qualified mortgages or safe harbor qualified mortgages otherwise, resulting in a reduced probability of a successful lawsuit.68 Additionally, rural small creditors could reduce accounting and compliance costs of providing escrow accounts. To be eligible for these benefits, the firms might need to spend a nominal amount on checking whether they qualify for the special provision. Some of these firm benefits could be passed through to consumers in terms of lower prices or better service. Economic theory suggests that the pass-through rate should be higher the more competitive markets are, all else being equal.69 However, a market being competitive would suggest lesser access to credit concerns. The Bureau does not possess the data required to estimate the applicable pass-through rates, and will 67 The percentage of loans with an APR that was 1.5 to 3.5 percentage points over APOR is based exclusively on HMDA data. 68 There are two types of risk that creditors avoid by originating, for example, a succession of fiveyear balloon loans as opposed to a 30-year fixed rate loan. The first type of risk is the interest rate risk: Cost of funds may increase and the fixed rate will be too cheap, in a sense, for current market conditions. This type of risk is almost fully hedged by choosing an appropriate index for a 5/5 adjustable-rate mortgage. The second type of risk is the risk of the deterioration of the consumer’s idiosyncratic conditions. For example, if the consumer’s credit profile deteriorates or the consumer loses their job, their fixed rate will be too cheap for that consumer’s current conditions. Arguably, creditors can project this risk better than individual consumers and are the lowest costavoiders, especially if one assumes that moral hazard is not a major concern in this situation (that consumers are not more likely to lose a job simply because they know that their mortgage is a 30-year loan as opposed to a 5-year balloon loan). 69 See Alexei Alexandrov & Sergei Koulayev, Using the Economics of the Pass Through in Proving Antitrust Injury in Robinson-Patman Cases, SSRN working paper (Jan. 26, 2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_ id=2555952. E:\FR\FM\02OCR2.SGM 02OCR2 asabaliauskas on DSK5VPTVN1PROD with RULES 59966 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations therefore not discuss the pass-through possibilities further. The benefit of originating balloonpayment loans to the firms is cheaper risk management. Consumers might not realize the riskiness involved in balloon-payment loans, encouraging the creditor to pass on the risk to consumers. The Bureau does not possess a good estimate of what percentage of these creditors’ portfolio loans are balloon-payment loans. The Bureau believes that an additional 1,700 creditors will qualify as small and rural due to the final provisions. These creditors will not have to provide consumers with escrow accounts when originating higher-priced mortgage loans; however, the Bureau believes that about 1,300 of the 1,700 creditors already originate higher-priced mortgage loans, thus these savings might be small (or none) for these firms since these firms currently have to provide escrow accounts. Note, that the marginal costs of providing an escrow account are small, if not negative: For various reasons, a creditor that has an escrow system established generally prefers consumers to establish an escrow account even if one is not required by government regulations. Approximately 700 creditors will be deemed as small due to the final provisions. These creditors originated approximately 175,000 portfolio loans in 2013, out of which about 13,000 loans would be deemed safe harbor qualified mortgages due to the final provisions. The Bureau does not possess sufficient data to estimate what percentage of these loans would be qualified mortgages solely due to the final provisions. Loans being deemed qualified mortgages or safe harbor qualified mortgages imply a reduced risk of losing consumer-initiated abilityto-repay litigation. The Bureau previously estimated that this risk accounts for, at most, 0.1 percent of the loan amount. Note that all 700 creditors are currently not eligible for the small creditor special provision, and thus any sunk costs necessary to transition to originating non-qualified mortgage loans have already been incurred, except for those creditors that have decided not to originate any non-qualified mortgage loans. To be eligible for these benefits, the creditors might need to spend a nominal amount on checking whether they qualify for the special provisions. Since the final provisions are expanding special provisions and extending qualified mortgage status, covered persons will not experience any costs other than, potentially, a nominal VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 amount to check whether they qualify for the exemptions or extensions of qualified mortgage status. Temporary Balloon-Payment Qualified Mortgage Period—Benefits and Costs to Consumers and Covered Persons The Bureau is providing an extension of the two-year temporary special provision that effectively deemed all small creditors rural for the purposes of the rural qualified mortgage balloonpayment special provision. This temporary special provision, allowing these creditors to make qualified mortgage balloon-payment loans, is applicable (for transactions with mortgage applications received in the first three months of 2016) to any creditor that is currently small even if they do not operate predominantly in rural or underserved areas. The Bureau estimates that there are about 5,700 such creditors, and that they originated about 430,000 loans, out of which about 220,000 were portfolio loans in 2013. Note, that only the transactions with applications received in the first quarter of 2016 are eligible for this special provision. The Bureau does not possess a good estimate of what percentage of these portfolio loans are balloonpayment loans. The benefits and costs to consumers and to covered persons are identical to the ones discussed above during the discussion of the rural balloon-payment qualified mortgage special provision. Note that various property idiosyncrasies that might make access to credit an issue in rural areas are less likely for the consumers of these 5,700 creditors since they do not operate predominantly in rural areas, even as defined by the final rule. The Bureau is also finalizing an annual grace period for creditors that stop qualifying as either small creditors or small and rural creditors.70 Given the finalized origination limit, the Bureau believes that the number of these transitions is likely to be low from yearto-year: The number of the creditors that are close to the threshold of small is minimal in comparison to the total number qualified (approximately 10,400 70 Currently, creditors qualify as operating predominantly in rural or underserved areas based on a three-year lookback period: A creditor is considered as operating predominantly in rural or underserved areas as long as the creditor operated predominantly in rural or underserved areas in any of the three preceding years. Thus, this final provision could potentially deem a creditor that would be rural in January 2016 not rural. However, the Bureau believes that this possibility will not actually occur or, in other words, any small creditor that was operating in predominantly rural or underserved areas in any of the preceding three years according to the current definition qualifies as rural small under the final rule. PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 small creditors and approximately 4,100 rural small creditors) and rural areas change only after each decennial Census. Thus the Bureau does not estimate the effect of this provision in this 1022(b)(2) analysis. C. Impact on Covered Persons With No More Than $10 Billion in Assets The only covered persons affected by the final provisions are those with no more than $10 billion in assets. The effect on these covered persons is described above. D. Impact on Access to Credit The Bureau does not believe that there will be an adverse impact on access to credit resulting from the final provisions. Moreover, as described above, the Bureau received comments strongly suggesting that there will be an expansion of access to credit. E. Impact on Rural Areas The rural small creditor final provisions affect only creditors operating predominantly in rural or underserved areas, as defined according to the definition that the Bureau is proposing. These creditors predominantly originate loans to consumers that live in rural areas, thus the vast majority of the up to 120,000 consumers that will be affected by these provisions live in rural areas. The effect of these final provisions is described above. The creditors that will qualify as small due to the final provisions are about as well represented in rural as in non-rural areas, thus there will be no disproportionate effect on rural areas.71 F. Discussion of Significant Alternatives Instead of proposing (and finalizing) that a property is in a rural area if the property is either in one of the counties currently designated as rural by the Bureau or if the property is not in an urban area as designated by the Census Bureau, the Bureau considered proposing that a property is in a rural area only if the property is not in an urban area as designated by the Census Bureau. The effective difference between the two definitions is that under the finalized definition areas designated as urban areas by the Census Bureau that are located in counties currently designated as rural by the Bureau would be classified as rural, but these urban areas would not be classified as rural under the alternative. For example, Wise County in Virginia (population of about 40,000, density of 71 If anything, these creditors are overrepresented in non-rural counties. E:\FR\FM\02OCR2.SGM 02OCR2 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations asabaliauskas on DSK5VPTVN1PROD with RULES about 100 people per square mile) is currently designated as a rural area by the Bureau. Under the proposed (and finalized) definition the whole county remains rural. However, under the alternative definition, some census blocks in that county, including most of the census blocks that comprise the town of Wise, Virginia (population of about 3,000, density of about 1,000 people per square mile) would stop being classified as rural areas. A similar example is Gillespie County in Texas (population of about 25,000, density of about 25 people per square mile), which is rural under the current definition and under the proposed (and finalized) definition. Most of the city of Fredericksburg (population of about 11,000, density of about 1,500 people per square mile) in Gillespie County would not be considered rural under the alternative. Overall, about 22 percent of the U.S. population lives in areas that are deemed as rural under the final provisions. About 19 percent of the U.S. population lives in census blocks that are not in an urban area according to the Census Bureau. In comparison to this alternative, the final provisions allow several hundred small creditors to continue to enjoy the special provisions for creditors operating predominantly in rural or underserved areas. Under the alternative, these creditors would have to incur the cost of adapting to originating mortgages without enjoying the provisions that they currently enjoy. Moreover, under the alternative, compliance might become more burdensome for the remaining creditors that would have qualified as rural small creditors even if the final rule were not to become effective: They would not be able to simply check a list of rural counties (as they do now), since parts of these counties would cease to be rural. These costs, both the cost of adaptation for some creditors and the cost of more complicated compliance for others, are likely fixed, and economic theory suggests that these creditors would not pass these costs on to consumers. Other consumer benefits and costs and covered persons benefits and costs of these several hundred small creditors ceasing to qualify as rural are similar to the ones described above for the final provisions in general. VIII. Regulatory Flexibility Act Analysis The Regulatory Flexibility Act (RFA), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996, requires each agency to consider the potential impact of its regulations on small entities, including small VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 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 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.72 The Bureau also is subject to certain additional procedures under the RFA involving the convening of a panel to consult with small business representatives before proposing a rule for which an IRFA is required.73 In the Proposed Rule, the Bureau concluded that the proposal, if adopted, would not have a significant economic impact on a substantial number of small entities and that an initial regulatory flexibility analysis was therefore not required. This final rule adopts the Proposed Rule substantially as proposed. Therefore, a final regulatory flexibility analysis is not required. The final rule does not have a significant economic impact on any small entities.74 As noted in the Section 1022(b)(2) Analysis, above, the Bureau does not expect that the final rule will impose costs on covered persons, including small entities. All methods of compliance under current law remain available to small entities when these provisions become effective. Thus, a small entity that is in compliance with current law will not need to take any additional action under the final rule. Certification 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 before implementation. The collections of 72 5 U.S.C. 601 et seq. U.S.C. 609. 74 It is theoretically possible that a creditor qualifies as small under the current definition, but fails to qualify as small due to the final rule provision including in the calculation of the asset limit for small-creditor status the assets of the creditor’s affiliates that originate mortgage loans. The Bureau is unaware of any such creditors. 73 5 Frm 00025 information related to Regulation Z have been previously reviewed and approved by OMB in accordance with the PRA and assigned OMB Control Number 3170–0015 (Regulation Z). 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 final rule does 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. List of Subjects in 12 CFR Part 1026 Advertising, Consumer protection, Credit, Credit unions, Mortgages, National banks, Savings associations, Recordkeeping requirements, Reporting, Truth in lending. Authority and Issuance For the reasons set forth in the preamble, the Bureau amends Regulation Z, 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, 3353, 5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq. Subpart E—Special Rules for Certain Home Mortgage Transactions 2. Section 1026.35 is amended by revising paragraphs (b)(2)(iii)(A) through (D)(1) and (b)(2)(iv)(A) and (B) and adding paragraph (b)(2)(iv)(C) to read as follows: ■ Accordingly, the undersigned certifies that this final rule will not have a significant economic impact on a substantial number of small entities. PO 00000 59967 Fmt 4701 Sfmt 4700 § 1026.35 Requirements for higher-priced mortgage loans. * * * * * (b) * * * (2) * * * (iii) * * * (A) During the preceding calendar year, or, if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years, the creditor extended more than 50 percent of its total covered transactions, as defined by § 1026.43(b)(1), secured by first liens on properties that are located in areas that are either ‘‘rural’’ or ‘‘underserved,’’ as E:\FR\FM\02OCR2.SGM 02OCR2 asabaliauskas on DSK5VPTVN1PROD with RULES 59968 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations set forth in paragraph (b)(2)(iv) of this section; (B) During the preceding calendar year, or, if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years, the creditor and its affiliates together extended no more than 2,000 covered transactions, as defined by § 1026.43(b)(1), secured by first liens, that were sold, assigned, or otherwise transferred to another person, or that were subject at the time of consummation to a commitment to be acquired by another person; (C) As of the preceding December 31st, or, if the application for the transaction was received before April 1 of the current calendar year, as of either of the two preceding December 31sts, the creditor and its affiliates that regularly extended covered transactions, as defined by § 1026.43(b)(1), secured by first liens, together, had total assets of less than $2,000,000,000; this asset threshold shall adjust automatically each year, based on the year-to-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers, not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million dollars (see comment 35(b)(2)(iii)–1.iii for the applicable threshold); and (D) Neither the creditor nor its affiliate maintains an escrow account of the type described in paragraph (b)(1) of this section for any extension of consumer credit secured by real property or a dwelling that the creditor or its affiliate currently services, other than: (1) Escrow accounts established for first-lien higher-priced mortgage loans for which applications were received on or after April 1, 2010, and before January 1, 2016; or * * * * * (iv) * * * (A) An area is ‘‘rural’’ during a calendar year if it is: (1) A county that is neither in a metropolitan statistical area nor in a micropolitan statistical area that is adjacent to a metropolitan statistical area, as those terms are defined by the U.S. Office of Management and Budget and as they are applied under currently applicable Urban Influence Codes (UICs), established by the United States Department of Agriculture’s Economic Research Service (USDA–ERS); or (2) A census block that is not in an urban area, as defined by the U.S. Census Bureau using the latest decennial census of the United States. VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 (B) An area is ‘‘underserved’’ during a calendar year if, according to Home Mortgage Disclosure Act (HMDA) data for the preceding calendar year, it is a county in which no more than two creditors extended covered transactions, as defined in § 1026.43(b)(1), secured by first liens on properties in the county five or more times. (C) A property shall be deemed to be in an area that is rural or underserved in a particular calendar year if the property is: (1) Located in a county that appears on the lists published by the Bureau of counties that are rural or underserved, as defined by § 1026.35(b)(2)(iv)(A)(1) or § 1026.35(b)(2)(iv)(B), for that calendar year, (2) Designated as rural or underserved for that calendar year by any automated tool that the Bureau provides on its public Web site, or (3) Not designated as located in an urban area, as defined by the most recent delineation of urban areas announced by the Census Bureau, by any automated address search tool that the U.S. Census Bureau provides on its public Web site for that purpose and that specifically indicates the urban or rural designations of properties. * * * * * ■ 3. Section 1026.43 is amended by revising paragraph (e)(6) to read as follows: ■ § 1026.43 Minimum standards for transactions secured by a dwelling. 1. Requirements for exemption. Under § 1026.35(b)(2)(iii), except as provided in § 1026.35(b)(2)(v), a creditor need not establish an escrow account for taxes and insurance for a higher-priced mortgage loan, provided the following four conditions are satisfied when the higher-priced mortgage loan is consummated: i. During the preceding calendar year, or during either of the two preceding calendar years if the application for the loan was received before April 1 of the current calendar year, more than 50 percent of the creditor’s total first-lien covered transactions, as defined in § 1026.43(b)(1), are secured by properties located in areas that are either ‘‘rural’’ or ‘‘underserved,’’ as set forth in § 1026.35(b)(2)(iv). A. In general, whether this condition (the more than 50 percent test) is satisfied depends on the creditor’s activity during the preceding calendar year. However, if the application for the loan in question was received before April 1 of the current calendar year, the creditor may instead meet the more than 50 percent test based on its activity during the next-to-last calendar year. This provides creditors with a grace * * * * * (e) * * * (6) Qualified mortgage defined— temporary balloon-payment qualified mortgage rules. (i) Notwithstanding paragraph (e)(2) of this section, a qualified mortgage is a covered transaction: (A) That satisfies the requirements of paragraph (f) of this section other than the requirements of paragraph (f)(1)(vi); and (B) For which the creditor satisfies the requirements stated in § 1026.35(b)(2)(iii)(B) and (C). (ii) The provisions of this paragraph (e)(6) apply only to covered transactions for which the application was received before April 1, 2016. ■ 4. In Supplement I to Part 1026— Official Interpretations: ■ A. Under Section 1026.35— Requirements for Higher-Priced Mortgage Loans: ■ i. Under Paragraph 35(b)(2)(iii), paragraphs 1 introductory text and 1.i through iii are revised. ■ ii. Under Paragraph 35(b)(2)(iii)(D)(1), paragraph 1 is revised. PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 iii. Under Paragraph 35(b)(2)(iv), paragraphs 1 and 2 are revised. ■ B. Under Section 1026.36—Prohibited Acts or Practices and Certain Requirements for Credit Secured by a Dwelling, subheading 36(a) Definitions, paragraph 1.i.A.3 is revised. ■ C. Under Section 1026.43—Minimum Standards for Transactions Secured by a Dwelling: ■ i. Under Paragraph 43(e)(5), paragraphs 4 and 8 are revised. ■ ii. Under Paragraph 43(f)(1)(vi), paragraph 1 is revised. ■ iii. Under Paragraph 43(f)(2), paragraph 2 is revised. ■ iv. Under Paragraph 43(f)(2)(ii), paragraph 1 is revised. The revisions read as follows: Supplement I to Part 1026—Official Interpretations Subpart E—Special Rules for Certain Home Mortgage Transactions * * * * * Section 1026.35—Requirements for Higher-Priced Mortgage Loans * * * * * 35(b) Escrow accounts. * * * * * 35(b)(2) Exemptions. * * * * * Paragraph 35(b)(2)(iii). E:\FR\FM\02OCR2.SGM 02OCR2 asabaliauskas on DSK5VPTVN1PROD with RULES Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations period if their activity meets the more than 50 percent test (in § 1026.35(b)(2)(iii)(A)) in one calendar year but fails to meet it in the next calendar year. B. A creditor meets the more than 50 percent test for any higher-priced mortgage loan consummated during a calendar year if a majority of its firstlien covered transactions in the preceding calendar year are secured by properties located in rural or underserved areas. If the creditor’s transactions in the preceding calendar year do not meet the more than 50 percent test, the creditor meets this condition for a higher-priced mortgage loan consummated during the current calendar year only if the application for the loan was received before April 1 of the current calendar year and a majority of the creditor’s first-lien covered transactions during the next-to-last calendar year are secured by properties located in rural or underserved areas. The following examples are illustrative: 1. Assume that a creditor extended 180 first-lien covered transactions during 2016 and that 91 of these are secured by properties located in rural or underserved areas. Because a majority of the creditor’s first-lien covered transactions during 2016 are secured by properties located in rural or underserved areas, the creditor can meet this condition for exemption for any higher-priced mortgage loan consummated during 2017. 2. Assume that a creditor extended 180 first-lien covered transactions during 2016, including 90 transactions secured by properties that are located in rural or underserved areas. Assume further that the same creditor extended 200 first-lien covered transactions during 2015, including 101 transactions secured by properties that are located in rural or underserved areas. Assume further that the creditor consummates a higher-priced mortgage loan in 2017 for which the application was received in November 2017. Because the majority of the creditor’s first-lien covered transactions during 2016 are not secured by properties that are located in rural or underserved areas, and the application was received on or after April 1, 2017, the creditor does not meet this condition for exemption. However, assume instead that the creditor consummates a higher-priced mortgage loan in 2017 based on an application received in February 2017. The creditor meets this condition for exemption for this loan because the application was received before April 1, 2017, and the majority of the creditor’s first-lien covered transactions in 2015 are secured VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 by properties that are located in areas that were rural or underserved. ii. The creditor and its affiliates together extended no more than 2,000 covered transactions, as defined in § 1026.43(b)(1), secured by first liens, that were sold, assigned, or otherwise transferred by the creditor or its affiliates to another person, or that were subject at the time of consummation to a commitment to be acquired by another person, during the preceding calendar year or during either of the two preceding calendar years if the application for the loan was received before April 1 of the current calendar year. For purposes of § 1026.35(b)(2)(iii)(B), a transfer of a first-lien covered transaction to ‘‘another person’’ includes a transfer by a creditor to its affiliate. A. In general, whether this condition is satisfied depends on the creditor’s activity during the preceding calendar year. However, if the application for the loan in question is received before April 1 of the current calendar year, the creditor may instead meet this condition based on activity during the next-to-last calendar year. This provides creditors with a grace period if their activity falls at or below the threshold in one calendar year but exceeds it in the next calendar year. B. For example, assume that in 2015 a creditor and its affiliates together extended 1,500 loans that were sold, assigned, or otherwise transferred by the creditor or its affiliates to another person, or that were subject at the time of consummation to a commitment to be acquired by another person, and 2,500 such loans in 2016. Because the 2016 transaction activity exceeds the threshold but the 2015 transaction activity does not, the creditor satisfies this condition for exemption for a higher-priced mortgage loan consummated during 2017 if the creditor received the application for the loan before April 1, 2017, but does not satisfy this condition for a higher-priced mortgage loan consummated during 2017 if the application for the loan was received on or after April 1, 2017. C. For purposes of § 1026.35(b)(2)(iii)(B), extensions of first-lien covered transactions, during the applicable time period, by all of a creditor’s affiliates, as ‘‘affiliate’’ is defined in § 1026.32(b)(5), are counted toward the threshold in this section. ‘‘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.).’’ Under the Bank Holding Company Act, a PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 59969 company has control over a bank or another company if it ‘‘directly or indirectly or acting through one or more persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the bank or company’’; it ‘‘controls in any manner the election of a majority of the directors or trustees of the bank or company’’; or the Federal Reserve Board ‘‘determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company.’’ 12 U.S.C. 1841(a)(2). iii. As of the end of the preceding calendar year, or as of the end of either of the two preceding calendar years if the application for the loan was received before April 1 of the current calendar year, the creditor and its affiliates that regularly extended covered transactions secured by first liens, together, had total assets that are less than the applicable annual asset threshold. A. For purposes of § 1026.35(b)(2)(iii)(C), in addition to the creditor’s assets, only the assets of a creditor’s ‘‘affiliate’’ (as defined by § 1026.32(b)(5)) that regularly extended covered transactions (as defined by § 1026.43(b)(1)) secured by first liens, are counted toward the applicable annual asset threshold. See comment 35(b)(2)(iii)–1.ii.C for discussion of definition of ‘‘affiliate.’’ B. Only the assets of a creditor’s affiliate that regularly extended first-lien covered transactions during the applicable period are included in calculating the creditor’s assets. The meaning of ‘‘regularly extended’’ is based on the number of times a person extends consumer credit for purposes of the definition of ‘‘creditor’’ in § 1026.2(a)(17). Because covered transactions are ‘‘transactions secured by a dwelling,’’ consistent with § 1026.2(a)(17)(v), an affiliate regularly extended covered transactions if it extended more than five covered transactions in a calendar year. Also consistent with § 1026.2(a)(17)(v), because a covered transaction may be a high-cost mortgage subject to § 1026.32, an affiliate regularly extends covered transactions if, in any 12-month period, it extends more than one covered transaction that is subject to the requirements of § 1026.32 or one or more such transactions through a mortgage broker. Thus, if a creditor’s affiliate regularly extended first-lien covered transactions during the preceding calendar year, the creditor’s assets as of the end of the preceding calendar year, for purposes of the asset limit, take into account the assets of that E:\FR\FM\02OCR2.SGM 02OCR2 asabaliauskas on DSK5VPTVN1PROD with RULES 59970 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations affiliate. If the creditor, together with its affiliates that regularly extended firstlien covered transactions, exceeded the asset limit in the preceding calendar year—to be eligible to operate as a small creditor for transactions with applications received before April 1 of the current calendar year—the assets of the creditor’s affiliates that regularly extended covered transactions in the year before the preceding calendar year are included in calculating the creditor’s assets. C. If multiple creditors share ownership of a company that regularly extended first-lien covered transactions, the assets of the company count toward the asset limit for a co-owner creditor if the company is an ‘‘affiliate,’’ as defined in § 1026.32(b)(5), of the co-owner creditor. Assuming the company is not an affiliate of the co-owner creditor by virtue of any other aspect of the definition (such as by the company and co-owner creditor being under common control), the company’s assets are included toward the asset limit of the co-owner creditor only if the company is controlled by the co-owner creditor, ‘‘as set forth in the Bank Holding Company Act.’’ If the co-owner creditor and the company are affiliates (by virtue of any aspect of the definition), the coowner creditor counts all of the company’s assets toward the asset limit, regardless of the co-owner creditor’s ownership share. Further, because the co-owner and the company are mutual affiliates the company also would count all of the co-owner’s assets towards its own asset limit. See comment 35(b)(2)(iii)–1.ii.C for discussion of the definition of ‘‘affiliate.’’ D. A creditor satisfies the criterion in § 1026.35(b)(2)(iii)(C) for purposes of any higher-priced mortgage loan consummated during 2016, for example, if the creditor (together with its affiliates that regularly extended first-lien covered transactions) had total assets of less than the applicable asset threshold on December 31, 2015. A creditor that (together with its affiliates that regularly extended first-lien covered transactions) did not meet the applicable asset threshold on December 31, 2015 satisfies this criterion for a higherpriced mortgage loan consummated during 2016 if the application for the loan was received before April 1, 2016 and the creditor (together with its affiliates that regularly extended firstlien covered transactions) had total assets of less than the applicable asset threshold on December 31, 2014. E. Under § 1026.35(b)(2)(iii)(C), the $2,000,000,000 asset threshold adjusts automatically each year based on the year-to-year change in the average of the VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 Consumer Price Index for Urban Wage Earners and Clerical Workers, not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million dollars. The Bureau will publish notice of the asset threshold each year by amending this comment. For historical purposes: 1. For calendar year 2013, the asset threshold was $2,000,000,000. Creditors that had total assets of less than $2,000,000,000 on December 31, 2012, satisfied this criterion for purposes of the exemption during 2013. 2. For calendar year 2014, the asset threshold was $2,028,000,000. Creditors that had total assets of less than $2,028,000,000 on December 31, 2013, satisfied this criterion for purposes of the exemption during 2014. 3. For calendar year 2015, the asset threshold was $2,060,000,000. Creditors that had total assets of less than $2,060,000,000 on December 31, 2014, satisfied this criterion for purposes of any loan consummated in 2015 and, if the creditor’s assets together with the assets of its affiliates that regularly extended first-lien covered transactions during calendar year 2014 were less than that amount, for purposes of any loan consummated in 2016 for which the application was received before April 1, 2016. * * * * * Paragraph 35(b)(2)(iii)(D)(1) 1. Exception for certain accounts. Escrow accounts established for firstlien higher-priced mortgage loans for which applications were received on or after April 1, 2010, and before January 1, 2016, are not counted for purposes of § 1026.35(b)(2)(iii)(D). For applications received on and after January 1, 2016, creditors, together with their affiliates, that establish new escrow accounts, other than those described in § 1026.35(b)(2)(iii)(D)(2), do not qualify for the exemption provided under § 1026.35(b)(2)(iii). Creditors, together with their affiliates, that continue to maintain escrow accounts established for first-lien higher-priced mortgage loans for which applications were received on or after April 1, 2010, and before January 1, 2016, still qualify for the exemption provided under § 1026.35(b)(2)(iii) so long as they do not establish new escrow accounts for transactions for which they received applications on or after January 1, 2016, other than those described in § 1026.35(b)(2)(iii)(D)(2), and they otherwise qualify under § 1026.35(b)(2)(iii). * * * * * PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 Paragraph 35(b)(2)(iv) 1. Requirements for ‘‘rural’’ or ‘‘underserved’’ status. An area is considered to be ‘‘rural’’ or ‘‘underserved’’ during a calendar year for purposes of § 1026.35(b)(2)(iii)(A) if it satisfies either the definition for ‘‘rural’’ or the definition for ‘‘underserved’’ in § 1026.35(b)(2)(iv). A creditor’s extensions of covered transactions, as defined by § 1026.43(b)(1), secured by first liens on properties located in such areas are considered in determining whether the creditor satisfies the condition in § 1026.35(b)(2)(iii)(A). See comment 35(b)(2)(iii)–1. i. Under § 1026.35(b)(2)(iv)(A), an area is rural during a calendar year if it is: A county that is neither in a metropolitan statistical area nor in a micropolitan statistical area that is adjacent to a metropolitan statistical area; or a census block that is not in an urban area, as defined by the U.S. Census Bureau using the latest decennial census of the United States. Metropolitan statistical areas and micropolitan statistical areas are defined by the Office of Management and Budget and applied under currently applicable Urban Influence Codes (UICs), established by the United States Department of Agriculture’s Economic Research Service (USDA–ERS). For purposes of § 1026.35(b)(2)(iv)(A)(1), ‘‘adjacent’’ has the meaning applied by the USDA–ERS in determining a county’s UIC; as so applied, ‘‘adjacent’’ entails a county not only being physically contiguous with a metropolitan statistical area but also meeting certain minimum population commuting patterns. A county is a ‘‘rural’’ area if the USDA–ERS categorizes the county under UIC 4, 6, 7, 8, 9, 10, 11, or 12. Descriptions of UICs are available on the USDA–ERS Web site at http://www.ers.usda.gov/ data-products/urban-influence-codes/ documentation.aspx. A county for which there is no currently applicable UIC (because the county has been created since the USDA–ERS last categorized counties) is a rural area only if all counties from which the new county’s land was taken are themselves rural under currently applicable UICs. ii. Under § 1026.35(b)(2)(iv)(B), an area is underserved during a calendar year if, according to Home Mortgage Disclosure Act (HMDA) data for the preceding calendar year, it is a county in which no more than two creditors extended covered transactions, as defined in § 1026.43(b)(1), secured by first liens, five or more times on properties in the county. Specifically, a E:\FR\FM\02OCR2.SGM 02OCR2 asabaliauskas on DSK5VPTVN1PROD with RULES Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations county is an ‘‘underserved’’ area if, in the applicable calendar year’s public HMDA aggregate dataset, no more than two creditors have reported five or more first-lien covered transactions, with HMDA geocoding that places the properties in that county. For purposes of this determination, because only covered transactions are counted, all first-lien originations (and only first-lien originations) reported in the HMDA data are counted except those for which the owner-occupancy status is reported as ‘‘Not owner-occupied’’ (HMDA code 2), the property type is reported as ‘‘Multifamily’’ (HMDA code 3), the applicant’s or co-applicant’s race is reported as ‘‘Not applicable’’ (HMDA code 7), or the applicant’s or coapplicant’s sex is reported as ‘‘Not applicable’’ (HMDA code 4). The most recent HMDA data are available at http://www.ffiec.gov/hmda. iii. A. Each calendar year, the Bureau applies the ‘‘underserved’’ area test and the ‘‘rural’’ area test to each county in the United States. If a county satisfies either test, the Bureau will include the county on a published list of counties that are rural or underserved as defined by § 1026.35(b)(2)(iv)(A)(1) or § 1026.35(b)(2)(iv)(B) for a particular calendar year, even if the county contains census blocks that are designated by the Census Bureau as urban. To facilitate compliance with appraisal requirements in § 1026.35(c), the Bureau also creates a list of those counties that are rural under the Bureau’s definition without regard to whether the counties are underserved. To the extent that U.S. territories are treated by the Census Bureau as counties and are neither metropolitan statistical areas nor micropolitan statistical areas adjacent to metropolitan statistical areas, such territories will be included on these lists as rural areas in their entireties. The Bureau will post on its public Web site the applicable lists for each calendar year by the end of that year and publish such lists in the Federal Register, to assist creditors in ascertaining the availability to them of the exemption during the following year. Any county that the Bureau includes on its published lists of counties that are rural or underserved under the Bureau’s definitions for a particular year is deemed to qualify as a rural or underserved area for that calendar year for purposes of § 1026.35(b)(2)(iv), even if the county contains census blocks that are designated by the Census Bureau as urban. A property located in such a listed county is deemed to be located in a rural or underserved area, even if the VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 census block in which the property is located is designated as urban. B. A property is deemed to be in a rural or underserved area according to the definitions in § 1026.35(b)(2)(iv) during a particular calendar year if it is identified as such by an automated tool provided on the Bureau’s public Web site. A printout or electronic copy from the automated tool provided on the Bureau’s public Web site designating a particular property as being in a rural or underserved area may be used as ‘‘evidence of compliance’’ that a property is in a rural or underserved area, as defined in § 1026.35(b)(2)(iv)(A) and (B), for purposes of the record retention requirements in § 1026.25. C. The U.S. Census Bureau may provide on its public Web site an automated address search tool that specifically indicates if a property is located in an urban area for purposes of the Census Bureau’s most recent delineation of urban areas. For any calendar year that began after the date on which the Census Bureau announced its most recent delineation of urban areas, a property is deemed to be in a rural area if the search results provided for the property by any such automated address search tool available on the Census Bureau’s public Web site do not designate the property as being in an urban area. A printout or electronic copy from such an automated address search tool available on the Census Bureau’s public Web site designating a particular property as not being in an urban area may be used as ‘‘evidence of compliance’’ that the property is in a rural area, as defined in § 1026.35(b)(2)(iv)(A), for purposes of the record retention requirements in § 1026.25. D. For a given calendar year, a property qualifies for a safe harbor if any of the enumerated safe harbors affirms that the property is in a rural or underserved area or not in an urban area. For example, the Census Bureau’s automated address search tool may indicate a property is in an urban area, but the Bureau’s rural or underserved counties list indicates the property is in a rural or underserved county. The property in this example is in a rural or underserved area because it qualifies under the safe harbor for the rural or underserved counties list. The lists of counties published by the Bureau, the automated tool on its public Web site, and the automated address search tool available on the Census Bureau’s public Web site, are not the exclusive means by which a creditor can demonstrate that a property is in a rural or underserved area as defined in § 1026.35(b)(2)(iv)(A) and (B). However, creditors are required PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 59971 to retain ‘‘evidence of compliance’’ in accordance with § 1026.25, including determinations of whether a property is in a rural or underserved area as defined in § 1026.35(b)(2)(iv)(A) and (B). 2. Examples. i. An area is considered ‘‘rural’’ for a given calendar year based on the most recent available UIC designations by the USDA–ERS and the most recent available delineations of urban areas by the U.S. Census Bureau that are available at the beginning of the calendar year. These designations and delineations are updated by the USDA– ERS and the U.S. Census Bureau respectively once every ten years. As an example, assume a creditor makes firstlien covered transactions in Census Block X that is located in County Y during calendar year 2017. As of January 1, 2017, the most recent UIC designations were published in the second quarter of 2013, and the most recent delineation of urban areas was announced in the Federal Register in 2012, see U.S. Census Bureau, Qualifying Urban Areas for the 2010 Census, 77 FR 18652 (Mar. 27, 2012). To determine whether County Y is rural under the Bureau’s definition during calendar year 2017, the creditor can use USDA–ERS’s 2013 UIC designations. If County Y is not rural, the creditor can use the U.S. Census Bureau’s 2012 delineation of urban areas to determine whether Census Block X is rural and is therefore a ‘‘rural’’ area for purposes of § 1026.35(b)(2)(iv)(A). ii. A county is considered an ‘‘underserved’’ area for a given calendar year based on the most recent available HMDA data. For example, assume a creditor makes first-lien covered transactions in County Y during calendar year 2016, and the most recent HMDA data are for calendar year 2015, published in the third quarter of 2016. The creditor will use the 2015 HMDA data to determine ‘‘underserved’’ area status for County Y in calendar year 2016 for the purposes of qualifying for the ‘‘rural or underserved’’ exemption for any higher-priced mortgage loans consummated in calendar year 2017 or for any higher-priced mortgage loan consummated during 2018 for which the application was received before April 1, 2018. * * * * * Section 1026.36—Prohibited Acts or Practices and Certain Requirements for Credit Secured by a Dwelling 36(a) Definitions. 1. * * * i. * * * A. * * * E:\FR\FM\02OCR2.SGM 02OCR2 59972 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations 3. Assisting a consumer in obtaining or applying for consumer credit by advising on particular credit terms that are or may be available to that consumer based on the consumer’s financial characteristics, filling out an application form, preparing application packages (such as a credit application or preapproval application or supporting documentation), or collecting application and supporting information on behalf of the consumer to submit to a loan originator or creditor. A person who, acting on behalf of a loan originator or creditor, collects information or verifies information provided by the consumer, such as by asking the consumer for documentation to support the information the consumer provided or for the consumer’s authorization to obtain supporting documents from third parties, is not collecting information on behalf of the consumer. See also comment 36(a)–4.i through .iv with respect to applicationrelated administrative and clerical tasks and comment 36(a)–1.v with respect to third-party advisors. * * * * * Section 1026.43—Minimum Standards for Transactions Secured by a Dwelling * * * * * Paragraph 43(e)(5). asabaliauskas on DSK5VPTVN1PROD with RULES * * * * * 4. Creditor qualifications. To be eligible to make qualified mortgages under § 1026.43(e)(5), a creditor must satisfy the requirements stated in § 1026.35(b)(2)(iii)(B) and (C). Section 1026.35(b)(2)(iii)(B) requires that, during the preceding calendar year, or, if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years, the creditor and its affiliates together extended no more than 2,000 covered transactions, as defined by § 1026.43(b)(1), secured by first liens, that were sold, assigned, or otherwise transferred to another person, or that were subject at the time of consummation to a commitment to be acquired by another person. Section 1026.35(b)(2)(iii)(C) requires that, as of the preceding December 31st, or, if the application for the transaction was received before April 1 of the current calendar year, as of either of the two preceding December 31sts, the creditor and its affiliates that regularly extended, during the applicable period, covered transactions, as defined by § 1026.43(b)(1), secured by first liens, together, had total assets of less than $2 VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 billion, adjusted annually by the Bureau for inflation. * * * * * 8. Transfer to another qualifying creditor. Under § 1026.43(e)(5)(ii)(B), a qualified mortgage under § 1026.43(e)(5) may be sold, assigned, or otherwise transferred at any time to another creditor that meets the requirements of § 1026.43(e)(5)(i)(D). That section requires that a creditor together with all its affiliates, extended no more than 2,000 first-lien covered transactions that were sold, assigned, or otherwise transferred by the creditor or its affiliates to another person, or that were subject at the time of consummation to a commitment to be acquired by another person; and have, together with its affiliates that regularly extended covered transactions secured by first liens, total assets less than $2 billion (as adjusted for inflation). These tests are assessed based on transactions and assets from the calendar year preceding the current calendar year or from either of the two calendar years preceding the current calendar year if the application for the transaction was received before April 1 of the current calendar year. A qualified mortgage under § 1026.43(e)(5) transferred to a creditor that meets these criteria would retain its qualified mortgage status even if it is transferred less than three years after consummation. * * * * * 43(f) Balloon-payment qualified mortgages made by certain creditors. 43(f)(1) Exemption. * * * * * Paragraph 43(f)(1)(vi). 1. Creditor qualifications. Under § 1026.43(f)(1)(vi), to make a qualified mortgage that provides for a balloon payment, the creditor must satisfy three criteria that are also required under § 1026.35(b)(2)(iii)(A), (B) and (C), which require: i. During the preceding calendar year or during either of the two preceding calendar years if the application for the transaction was received before April 1 of the current calendar year, the creditor extended over 50 percent of its total first-lien covered transactions, as defined in § 1026.43(b)(1), on properties that are located in areas that are designated either ‘‘rural’’ or ‘‘underserved,’’ as defined in § 1026.35(b)(2)(iv), to satisfy the requirement of § 1026.35(b)(2)(iii)(A). Pursuant to § 1026.35(b)(2)(iv), an area is considered to be rural if it is: A county that is neither in a metropolitan statistical area, nor a micropolitan PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 statistical area adjacent to a metropolitan statistical area, as those terms are defined by the U.S. Office of Management and Budget; or a census block that is not in an urban area, as defined by the U.S. Census Bureau using the latest decennial census of the United States. An area is considered to be underserved during a calendar year if, according to HMDA data for the preceding calendar year, it is a county in which no more than two creditors extended covered transactions secured by first liens on properties in the county five or more times. A. The Bureau determines annually which counties in the United States are rural or underserved as defined by § 1026.35(b)(2)(iv)(A)(1) or § 1026.35(b)(2)(iv)(B) and publishes on its public Web site lists of those counties to assist creditors in determining whether they meet the criterion at § 1026.35(b)(2)(iii)(A). Creditors may also use an automated tool provided on the Bureau’s public Web site to determine whether specific properties are located in areas that qualify as ‘‘rural’’ or ‘‘underserved’’ according to the definitions in § 1026.35(b)(2)(iv) for a particular calendar year. In addition, the U.S. Census Bureau may also provide on its public Web site an automated address search tool that specifically indicates if a property address is located in an urban area for purposes of the Census Bureau’s most recent delineation of urban areas. For any calendar year that begins after the date on which the Census Bureau announced its most recent delineation of urban areas, a property is located in an area that qualifies as ‘‘rural’’ according to the definitions in § 1026.35(b)(2)(iv) if the search results provided for the property by any such automated address search tool available on the Census Bureau’s public Web site do not identify the property as being in an urban area. B. For example, if a creditor extended 100 first-lien covered transactions during 2016 and 90 first-lien covered transactions during 2017, the creditor meets this element of the exception for any transaction consummated during 2018 if at least 46 of its 2017 first-lien covered transactions are secured by properties that are located in one or more counties on the Bureau’s lists for 2017 or are located in one or more census blocks that are not in an urban area, as defined by the Census Bureau. C. Alternatively, if the creditor’s 2017 transactions do not meet the over 50 percent test (see comment 43(f)(1)(vi)– 1.i), the creditor satisfies this criterion for any transaction consummated during 2018 for which it received the E:\FR\FM\02OCR2.SGM 02OCR2 Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules and Regulations asabaliauskas on DSK5VPTVN1PROD with RULES application before April 1, 2018, if at least 51 of its 2016 first-lien covered transactions are secured by properties that are located in one or more counties on the Bureau’s lists for 2016 or are located in one or more census blocks that are not in an urban area. ii. During the preceding calendar year, or, if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years, the creditor together with its affiliates extended no more than 2,000 covered transactions, as defined by § 1026.43(b)(1), secured by first liens, that were sold, assigned, or otherwise transferred to another person, or that were subject at the time of consummation to a commitment to be acquired by another person, to satisfy the requirement of § 1026.35(b)(2)(iii)(B). iii. As of the preceding December 31st, or, if the application for the transaction was received before April 1 of the current calendar year, as of either of the two preceding December 31sts, the creditor and its affiliates that regularly extended covered transactions secured by first liens, together, had total assets that do not exceed the applicable asset threshold established by the Bureau, to satisfy the requirement of § 1026.35(b)(2)(iii)(C). The Bureau publishes notice of the asset threshold each year by amending comment 35(b)(2)(iii)–1.iii. VerDate Sep<11>2014 21:12 Oct 01, 2015 Jkt 238001 59973 * * * * 2. Application to subsequent transferees. The exceptions contained in § 1026.43(f)(2) apply not only to an initial sale, assignment, or other transfer by the originating creditor but to subsequent sales, assignments, and other transfers as well. For example, assume Creditor A originates a qualified mortgage under § 1026.43(f)(1). Six months after consummation, Creditor A sells the qualified mortgage to Creditor B pursuant to § 1026.43(f)(2)(ii) and the loan retains its qualified mortgage status because Creditor B complies with the conditions relating to operating in rural or underserved areas, asset size, and number of transactions. If Creditor B sells the qualified mortgage, it will lose its qualified mortgage status under § 1026.43(f)(1) unless the sale qualifies for one of the § 1026.43(f)(2) exceptions for sales three or more years after consummation, to another qualifying institution, as required by supervisory action, or pursuant to a merger or acquisition. * * * * * Paragraph 43(f)(2)(ii). 1. Transfer to another qualifying creditor. Under § 1026.43(f)(2)(ii), a balloon-payment qualified mortgage under § 1026.43(f)(1) may be sold, assigned, or otherwise transferred at any time to another creditor that meets the requirements of § 1026.43(f)(1)(vi). That section requires that a creditor: (1) Extended over 50 percent of its total first-lien covered transactions, as defined in § 1026.43(b)(1), on properties located in rural or underserved areas; (2) together with all affiliates, extended no more than 2,000 first-lien covered transactions that were sold, assigned, or otherwise transferred by the creditor or its affiliates to another person, or that were subject at the time of consummation to a commitment to be acquired by another person; and (3) have, together with its affiliates that regularly extended covered transactions secured by first liens, total assets less than $2 billion (as adjusted for inflation). These tests are assessed based on transactions and assets from the calendar year preceding the current calendar year or from either of the two calendar years preceding the current calendar year if the application for the transaction was received before April 1 of the current calendar year. A balloonpayment qualified mortgage under § 1026.43(f)(1) transferred to a creditor that meets these criteria would retain its qualified mortgage status even if it is transferred less than three years after consummation. * * * * * Dated: September 21, 2015. Richard Cordray, Director, Bureau of Consumer Financial Protection. 43(f)(2) Post-consummation transfer of balloon-payment qualified mortgage. * PO 00000 Frm 00031 Fmt 4701 Sfmt 9990 [FR Doc. 2015–24362 Filed 10–1–15; 8:45 am] BILLING CODE 4810–AM–P E:\FR\FM\02OCR2.SGM 02OCR2

Agencies

[Federal Register Volume 80, Number 191 (Friday, October 2, 2015)]
[Rules and Regulations]
[Pages 59943-59973]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-24362]



[[Page 59943]]

Vol. 80

Friday,

No. 191

October 2, 2015

Part III





Bureau of Consumer Financial Protection





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12 CFR Part 1026





 Amendments Relating to Small Creditors and Rural or Underserved Areas 
Under the Truth in Lending Act (Regulation Z); Rules

Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Rules 
and Regulations

[[Page 59944]]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2015-0004]
RIN 3170-AA43


Amendments Relating to Small Creditors and Rural or Underserved 
Areas Under the Truth in Lending Act (Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule; official interpretations.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is 
amending certain mortgage rules issued by the Bureau in 2013. This 
final rule revises the Bureau's regulatory definitions of small 
creditor, and rural and underserved areas, for purposes of certain 
special provisions and exemptions from various requirements provided to 
certain small creditors under the Bureau's mortgage rules.

DATES: This final rule is effective on January 1, 2016. For additional 
discussion regarding the effective date of the rule see part VI of the 
SUPPLEMENTARY INFORMATION below.

FOR FURTHER INFORMATION CONTACT: Jeffrey Haywood, Paralegal Specialist; 
Nicholas Hluchyj, Senior Counsel, or Paul Ceja, Senior Counsel and 
Special Advisor, Office of Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

    In January 2013, the Bureau issued several final rules concerning 
mortgage markets in the United States (2013 Title XIV Final Rules), 
pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank Act), Public Law 111-203, 124 Stat. 1376 (2010).\1\ The 
Bureau has clarified and revised those rules over the past two years. 
The purpose of those updates was to address important questions raised 
by industry, consumer groups, or other stakeholders. The Bureau also 
indicated that it would revisit the Bureau's regulatory definitions of 
small creditor and rural and underserved areas, promulgated in those 
rules and related amendments, through study and possibly through 
additional rulemaking.
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    \1\ Specifically, on January 10, 2013, the Bureau issued Escrow 
Requirements Under the Truth in Lending Act (Regulation Z), 78 FR 
4725 (Jan. 22, 2013) (January 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). 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) 
and, jointly with other agencies, issued Appraisals for Higher-
Priced Mortgage Loans, 78 FR 10367 (Feb. 13, 2013) (January 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).
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    To that end, on January 29, 2015, the Bureau proposed several 
amendments to its 2013 Title XIV Final Rules to revise Regulation Z 
provisions and official interpretations relating to escrow requirements 
for higher-priced mortgage loans under the Bureau's January 2013 
Escrows Final Rule and ability-to-repay/qualified mortgage requirements 
under the Bureau's January 2013 ATR Final Rule and May 2013 ATR Final 
Rule. The Bureau's proposal would also affect requirements under the 
Bureau's 2013 HOEPA Final Rule.\2\ The proposed rule was published in 
the Federal Register on February 11, 2015. See Amendments Relating to 
Small Creditors and Rural or Underserved Areas Under the Truth in 
Lending Act (Regulation Z), 80 FR 7769 (Feb. 11, 2015).
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    \2\ The January 2013 Interagency Appraisals Final Rule provides 
an exemption from the requirement to obtain a second appraisal for 
certain higher-priced mortgage loans if the loan is secured by a 
property in a ``rural county.'' This final rule will not affect the 
scope of that exemption because it will not change the counties that 
are defined as ``rural'' under Sec.  1026.35(b)(2)(iv)(A).
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    This final rule adopts, with some additional clarifications and 
technical revisions, the Bureau's proposed rule. It reflects feedback 
received from stakeholders through this notice and comment rulemaking 
regarding the Bureau's definitions of small creditor, and rural and 
underserved areas, as those definitions relate to special provisions 
and certain exemptions to requirements provided to small creditors 
under the Bureau's 2013 Title XIV Final Rules and updates.
    Specifically, the final rule makes the following changes with 
regard to the definitions of small creditor and rural and underserved 
areas as currently provided in the Bureau's mortgage rules: \3\
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    \3\ See Sec. Sec.  1026.35(b)(2)(iii)(A), (B), (C), and (D), and 
1026.35(b)(2)(iv)(A) and (B) and commentary, cross-referenced in 
Sec. Sec.  1026.43(e)(5) and (e)(6), 1026.43(f)(1) and (f)(2) and 
commentary; and Sec.  1026.32(d)(1)(ii)(C)).

     Raises the loan origination limit for determining 
eligibility for small-creditor status from 500 originations of 
covered transactions secured by a first lien, to 2,000 such 
originations (referred to in this rule as ``extensions of covered 
transactions''), and excludes originated loans held in portfolio by 
the creditor and its affiliates from that limit. The final rule also 
establishes a grace period from calendar year to calendar year to 
allow a creditor that exceeded the origination limit in the 
preceding calendar year to operate, in certain circumstances, as a 
small creditor with respect to transactions with applications 
received before April 1 of the current calendar year.
     Includes in the calculation of the $2 billion asset 
limit for small-creditor status the assets of the creditor's 
affiliates that regularly extended covered transactions. The final 
rule also adds a grace period to the annual asset limit, to allow a 
creditor that exceeded the asset limit in the preceding calendar 
year to operate, in certain circumstances, as a small creditor with 
respect to transactions with applications received before April 1 of 
the current calendar year.
     Adjusts the time period used in determining whether a 
creditor is operating predominantly in rural or underserved areas 
from any of the three preceding calendar years to the preceding 
calendar year. As with the origination and asset limits for small-
creditor status, the final rule adds a grace period to allow a 
creditor that fails to meet this threshold in the preceding calendar 
year, to continue operating, in certain circumstances, as if it had 
met this threshold with respect to transactions with applications 
received before April 1 of the current calendar year.
     Amends the current exemption under Sec.  
1026.35(b)(2)(iii)(D)(1) provided to small creditors that operate 
predominantly in rural or underserved areas from the requirement for 
the establishment of escrow accounts for higher-priced mortgage 
loans. The final rule ensures that creditors who established escrow 
accounts solely to comply with the current rule will be eligible for 
the exemption if they meet the expanded definitions of small 
creditors operating predominantly in rural or underserved areas 
under the final rule.
     Expands the definition of ``rural'' by adding census 
blocks that are not in an urban area as defined by the U.S. Census 
Bureau (Census Bureau) to the current county-based definition.
     Conforms the definition of ``underserved'' to the 
proposals discussed above. The substance of the ``underserved'' 
definition is not changed.
     Adds two new safe harbor provisions related to the 
rural or underserved definition for creditors that rely on automated 
tools provided: (1) On the Bureau's Web site to allow creditors to 
determine whether

[[Page 59945]]

properties are located in rural or underserved areas, or (2) on the 
Census Bureau's Web site to assess whether a particular property is 
located in an urban area according to the Census Bureau's 
definition. The final rule maintains the current safe harbor for 
lists of rural and underserved counties provided by the Bureau, with 
technical changes. The final rule also adds commentary clarifying 
the circumstances under which U.S. territories will be included on 
the lists.
     Extends the current two-year transition period, which 
allows certain small creditors to make balloon-payment qualified 
mortgages (Sec.  1026.43(e)(6)) and balloon-payment high-cost 
mortgages (Sec.  1026.32(d)(1)(ii)(C)), regardless of whether they 
operate predominantly in rural or underserved areas. The transition 
period will include covered transactions for which the application 
was received before April 1, 2016, rather than covered transactions 
consummated on or before January 10, 2016.

    In addition to the changes discussed above to the definitions of 
small creditor and rural and underserved areas, this final rule is also 
making a technical correction to the commentary to Sec.  1026.36(a). 
This non-substantive change is discussed in the section-by-section 
analysis of the supplementary information section below.

II. Background

    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, in 
the Bureau.\4\ 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.\5\
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    \4\ 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).
    \5\ 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.).
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    Under the statute, most of these new requirements would have taken 
effect automatically on January 21, 2013 if the Bureau had not issued 
implementing regulations by that date.\6\ To avoid uncertainty and 
potential disruption in the national mortgage market at a time of 
economic vulnerability, the Bureau issued several final rules (the 2013 
Title XIV 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. These final rules include the January 2013 ATR Final Rule, 
the January 2013 Escrows Final Rule, the 2013 HOEPA Final Rule, and the 
January 2013 Interagency Appraisals Final Rule. Most of the mortgage 
rules released in January 2013 became effective on January 10, 2014.
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    \6\ See section 1400(c) of the Dodd-Frank Act, 15 U.S.C. 1601 
note.
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    Concurrent with the January 2013 ATR Final Rule, on January 10, 
2013, the Bureau issued the January 2013 ATR Proposal, which the Bureau 
adopted on May 29, 2013 in the May 2013 ATR Final Rule.\7\ The Bureau 
has issued additional corrections, revisions, and clarifications to the 
provisions adopted by the Bureau in the 2013 Title XIV Final Rules and 
the May 2013 ATR Final Rule over the past two years.\8\ This final rule 
concerns additional revisions to the 2013 Title XIV Final Rules related 
to provisions regarding small creditors and rural and underserved 
areas.
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    \7\ 78 FR 6621 (Jan. 30, 2013); 78 FR 35429 (June 12, 2013) 
(providing a two-year transition period during which small creditors 
that do not operate predominantly in rural or underserved areas can 
offer balloon-payment qualified mortgages if they hold the loans in 
portfolio). In May 2013, the Bureau also finalized amendments to the 
January 2013 Escrows Final Rule. Amendments to the 2013 Escrows 
Final Rule under the Truth in Lending Act (Regulation Z), 78 FR 
30739 (May 23, 2013) (May 2013 Escrows Final Rule).
    \8\ See, e.g., 78 FR 44685 (July 24, 2013) (clarifying, among 
other things, 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 60382 (Oct. 1, 
2013) (revising, among other things, two exceptions available to 
small creditors operating predominantly in ``rural'' or 
``underserved'' areas, pending the Bureau's reexamination of the 
underlying definitions); 78 FR 62993 (Oct. 23, 2013) (clarifying the 
specific disclosures that must be provided before counseling for 
high cost mortgages can occur and proper compliance regarding 
servicing requirements when a consumer is in bankruptcy or sends a 
cease communication request under the Fair Debt Collection Practice 
Act). In the fall of 2014, the Bureau also made further amendments 
to the 2013 mortgage rules related to nonprofit entities and 
provided a cure mechanism for the points and fees limit that applies 
to qualified mortgages. 79 FR 65300 (Nov. 3, 2014).
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III. Summary of the Rulemaking Process

    On January 29, 2015, the Bureau issued, and on February 11, 2015, 
published in the Federal Register, its proposed rule entitled 
``Amendments Relating to Small Creditors and Rural or Underserved Areas 
Under the Truth in Lending Act (Regulation Z).'' \9\ The comment period 
closed on March 30, 2015. In response to the proposal, the Bureau 
received 90 comments from consumer groups, members of Congress, 
creditors, industry trade associations, and others. As discussed in 
more detail below, the Bureau has considered these comments in adopting 
this final rule.
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    \9\ 80 FR 7769 (February 11, 2015).
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IV. Legal Authority

    The Bureau is issuing this final rule pursuant to its authority 
under TILA and the Dodd-Frank Act. Section 1061 of the Dodd-Frank Act 
transferred to the Bureau the ``consumer financial protection 
functions'' previously vested in certain other Federal agencies, 
including the 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.'' \10\ Title X of the Dodd-Frank Act, including 
section 1061 of the Dodd-Frank Act, along with TILA and certain 
subtitles and provisions of title XIV of the Dodd-Frank Act, are 
Federal consumer financial laws.\11\
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    \10\ Dodd-Frank Act section 1061(a)(1)(A), 12 U.S.C. 
5581(a)(1)(A).
    \11\ 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).
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A. TILA-Specific Statutory Grants of Authority

    TILA as amended by the Dodd-Frank Act provides two specific 
statutory bases for the changes in the Bureau's final rule. TILA 
section 129D(c) authorizes the Bureau to exempt, by regulation, a 
creditor from the requirement (in section 129D(a)) that escrow accounts 
be established for higher-priced mortgage loans if the creditor 
operates predominantly in rural

[[Page 59946]]

or underserved areas, retains its mortgage loans in portfolio, does not 
exceed (together with all affiliates) a total annual mortgage loan 
origination limit set by the Bureau, and meets any asset size 
threshold, and any other criteria, the Bureau may establish. TILA 
section 129C(b)(2)(E) authorizes the Bureau to provide, by regulation, 
that certain balloon-payment mortgages originated by small creditors 
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)(iv) are essentially the 
same as those for the higher-priced mortgage loan escrow exemption, 
including operating predominantly in rural or underserved areas, 
together with all affiliates not exceeding a total annual mortgage loan 
origination limit set by the Bureau, retaining the balloon-payment 
loans in portfolio, and meeting any asset size threshold, and any other 
criteria, the Bureau may establish.

B. Other Rulemaking and Exception Authority

    This final rule also relies on other rulemaking and exception 
authorities specifically granted to the Bureau by TILA and the Dodd-
Frank Act, including the authorities discussed below.

Truth in Lending Act

    As amended by the Dodd-Frank Act, 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, or abusive. 15 
U.S.C. 1639b(a)(2).
    Historically, TILA section 105(a) has served as a broad source of 
authority for rules that promote the informed use of credit through 
required disclosures and substantive regulation of certain practices. 
Dodd-Frank Act section 1100A clarified the Bureau's section 105(a) 
authority by amending that section to provide express authority to 
prescribe regulations that contain ``additional requirements'' that the 
Bureau finds are necessary or proper to effectuate the purposes of 
TILA, to prevent circumvention or evasion thereof, or to facilitate 
compliance therewith. This amendment clarified the Bureau's authority 
under TILA section 105(a) to prescribe requirements beyond those 
specifically listed in the statute that meet the standards outlined in 
section 105(a), which include effectuating all of TILA's purposes. 
Therefore, the Bureau believes that its authority under TILA section 
105(a) to make exceptions, adjustments, and additional provisions that 
the Bureau finds are necessary or proper to effectuate the purposes of 
TILA applies with respect to the purpose of section 129D. That purpose 
is to ensure that consumers understand and appreciate the full cost of 
homeownership. The purpose of TILA section 129D is also informed by the 
findings articulated in section 129B(a) that economic stabilization 
would be enhanced by the protection, limitation, and regulation of the 
terms of residential mortgage credit and the practices related to such 
credit, while ensuring that responsible and affordable mortgage credit 
remains available to consumers. See 15 U.S.C. 1639b(a).
    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; are 
necessary and appropriate to effectuate the purposes of the ability-to-
repay and residential mortgage loan origination requirements; prevent 
circumvention or evasion thereof; or 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).
    TILA section 105(a) grants the Bureau authority to make adjustments 
and exceptions to the requirements of TILA for all transactions subject 
to TILA, except with respect to the substantive provisions of TILA 
section 129 that apply to high-cost mortgages. With respect to the 
high-cost mortgage provisions of TILA section 129, TILA section 129(p), 
15 U.S.C. 1639(p), as amended by the Dodd-Frank Act, grants the Bureau 
authority to create exemptions to the restrictions on high-cost 
mortgages and to expand the protections that apply to high-cost 
mortgages. Under TILA section 129(p)(1), the Bureau may exempt specific 
mortgage products or categories from any or all of the prohibitions 
specified in TILA section 129(c) through (i), if the Bureau finds that 
the exemption is in the interest of the borrowing public and will apply 
only to products that maintain and strengthen homeownership and equity 
protections. Among these referenced provisions of TILA is section 
129(e), the prohibition on balloon payments for high-cost mortgages.

The Dodd-Frank Act

    Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to 
prescribe rules ``as may be necessary or appropriate to enable the 
Bureau to administer and carry out the purposes and objectives of the 
Federal consumer financial laws, and to prevent evasions thereof.'' 12 
U.S.C. 5512(b)(1). TILA and title X and certain enumerated subtitles 
and provisions of title XIV of the Dodd-Frank Act are Federal consumer 
financial laws. Accordingly, the Bureau is exercising its authority 
under Dodd-Frank Act section 1022(b) to issue rules that carry out the 
purposes and objectives of TILA, 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.

V. Section-by-Section Analysis of the Proposed Rule

Section 1026.35 Requirements for Higher-Priced Mortgage Loans

35(b) Escrow Accounts

35(b)(2) Exemptions

35(b)(2)(iii)

    Section 1026.35(b)(2)(iii) currently provides that an escrow 
account need not be established for a higher-priced mortgage loan by 
small creditors who operate predominantly in rural or underserved areas 
if four conditions identified in Sec.  1026.35(b)(2)(iii)(A) through 
(D) are satisfied at the time of consummation.\12\ Section

[[Page 59947]]

1026.35(b)(2)(iii)(A) provides a test for determining whether a 
creditor operates predominantly in rural or underserved areas; Sec.  
1026.35(b)(2)(iii)(B) sets an origination limit for small creditor 
status; Sec.  1026.35(b)(2)(iii)(C) sets an asset limit for small 
creditor status; and Sec.  1026.35(b)(2)(iii)(D) does not allow an 
exemption from the escrow requirement for creditors with existing 
escrow accounts, with certain exceptions. The Bureau proposed to make 
amendments to all of these conditions and, as discussed below, is 
adopting these amendments with some clarifications in this final rule.
---------------------------------------------------------------------------

    \12\ Section 1026.35(b)(2)(v) excludes from the Sec.  
1026.35(b)(2)(iii) exception any first-lien higher-priced mortgage 
loan that, at consummation, is subject to a commitment to be 
acquired by a person that does not satisfy the Sec.  
1026.35(b)(2)(iii) conditions.
---------------------------------------------------------------------------

    Because the predominantly-rural-or-underserved test and the 
origination and asset limits of Sec.  1026.35(b)(2)(iii) are cross-
referenced in the Bureau's January 2013 ATR Final Rule and its 2013 
HOEPA Final Rule, and amendments to those rules, they also affect 
eligibility for special provisions and exemptions provided in those 
rules, including the following:

     A qualified mortgage definition for certain loans made 
and held in portfolio (small creditor portfolio loans), by small 
creditors regardless of whether they operate predominantly in rural 
or underserved areas. These loans are not subject to the 43 percent 
debt-to-income ratio limit (or to ``appendix Q'' requirements in 
determining the debt and income of consumers) that applies to 
general qualified mortgage loans under Sec.  1026.43(e)(2) (Sec.  
1026.43(e)(5)). A first-lien qualified mortgage under this category 
also provides a safe harbor from ability-to-repay claims, if the 
mortgage's annual percentage rate (APR) does not exceed the 
applicable Average Prime Offer Rate (APOR) by 3.5 or more percentage 
points. In contrast, general qualified mortgage loans under Sec.  
1026.43(e)(2) provide safe harbors if their APRs do not exceed the 
applicable APOR by 1.5 or more percentage points.\13\
---------------------------------------------------------------------------

    \13\ Specifically, for purposes of determining whether a loan 
has a safe harbor with regard to 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 applicable APOR plus 3.5 
percentage points, rather than plus 1.5 percentage points.
---------------------------------------------------------------------------

     Two qualified mortgage definitions for small creditors 
making certain balloon-payment loans. One is a permanent definition 
for small creditors operating predominantly in rural or underserved 
areas. The other is a temporary definition for small creditors who 
do not operate predominantly in such areas. These definitions 
provide an exception from the limitation on balloon-payment features 
on general qualified mortgage loans (Sec.  1026.43(e)(6) and 
(f)).\14\ These two qualified mortgage definitions are also subject 
to a higher APR threshold for defining a higher-priced covered 
transaction, allowing small creditors of such qualified mortgages to 
receive a safe harbor under the Bureau's ability-to-repay rule.
---------------------------------------------------------------------------

    \14\ Specifically these provisions allow: (1) On a permanent 
basis, balloon-payment qualified mortgage loans made and held in 
portfolio by certain small creditors operating predominantly in 
rural or underserved areas ((Sec.  1026.43(f)); and (2) for a 
temporary two year transition period--from January 10, 2014 to 
January 10, 2016--balloon-payment qualified mortgages originated by 
small creditors even if they do not operate predominantly in rural 
or underserved areas (this period is being extended under this final 
rule to cover transactions with applications received before April 
1, 2016--see the section-by-section analysis below on Sec.  
1026.43(e)(6))).
---------------------------------------------------------------------------

     An exception from the prohibition on balloon-payment 
features for certain high-cost mortgages (Sec.  
1026.32(d)(1)(ii)(C))--also on a permanent basis for small creditors 
operating predominantly in rural or underserved areas and a 
temporary basis for small creditors who do not operate predominantly 
in such areas.\15\
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    \15\ Specifically, this provision allows: (1) On a permanent 
basis, small creditors that operate predominantly in rural or 
underserved areas to originate high-cost loans with balloon-payment 
features; and (2) for loans made on or before January 10, 2016 
(extended by this final rule to cover transactions with applications 
received before April 1, 2016), small creditors to originate high-
cost mortgages with balloon-payment features even if they do not 
operate predominantly in rural or underserved areas, under certain 
conditions. See Sec.  1026.32(d)(1)(ii)(C).

    The Bureau adopted these special provisions and exemptions for 
small creditors because of the important role that small creditors play 
in providing mortgage credit to consumers. The Bureau believes that 
many small creditors use a lending model based on maintaining ongoing 
relationships with their customers and often limit their lending 
activities to a single community. They therefore may have a more 
comprehensive understanding of the financial circumstances of their 
customers and of the economic and other circumstances of that 
community.\16\ The special provisions and exemptions facilitate the 
ability of small creditors that operate predominantly in rural or 
underserved areas, as well as small creditors that operate in areas 
that are neither rural nor underserved, to provide access to mortgage 
credit for consumers they serve.
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    \16\ Lending activities of many creditors that currently qualify 
as small are generally limited to a single community. However, 
creditors that will qualify as small with the adoption of the 
changes in this final rule generally lend and have branches (in the 
case of depository institutions) in several communities and 
counties.
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35(b)(2)(iii)(A)

    As discussed in detail below, the Bureau is adopting Sec.  
1026.35(b)(2)(iii)(A) substantially as proposed, with certain minor 
changes to enhance clarity. Accordingly, this final rule restores the 
one-year lookback period for determining whether the creditor is 
operating predominantly in rural or underserved areas as originally 
adopted by the January 2013 Escrows Final Rule. This final rule also 
adopts the proposed grace period that allows a creditor making a 
higher-priced mortgage loan based on an application received before 
April 1 to rely on its transactions from either the preceding calendar 
year or the next-to-last calendar year to meet the condition in Sec.  
1026.35(b)(2)(iii)(A).

The Bureau's Proposal

    The current test under Sec.  1026.35(b)(2)(iii)(A) for determining 
whether a creditor operates predominantly in rural or underserved areas 
is that, during any of the three preceding calendar years, the creditor 
extended more than 50 percent of its total first-lien covered 
transactions, as defined by Sec.  1026.43(b)(1),\17\ on properties that 
are located in counties that are either ``rural'' or ``underserved'' 
(the more than 50 percent test). The Bureau proposed to amend Sec.  
1026.35(b)(2)(iii)(A) and comment 35(b)(2)(iii)-1 to eliminate the 
three-year lookback period in Sec.  1026.35(b)(2)(iii)(A) and to 
establish the preceding calendar year as the relevant time period for 
assessing whether the more than 50 percent test is satisfied as a 
general matter. The Bureau also proposed a grace period to allow 
otherwise eligible creditors whose first-lien covered transactions in 
the preceding year failed to meet the more than 50 percent test to 
continue to operate with the benefit of the exemption for applications 
received before April 1 of the current calendar year if their first-
lien covered transactions during the next-to-last calendar year met the 
test.
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    \17\ ``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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    The Bureau also proposed conforming and technical changes to the 
rule and commentary. Proposed comment 35(b)(2)(iii)-1.i was amended for 
consistency with the changes that the Bureau proposed to the regulation 
text in Sec. Sec.  1026.35(b)(2)(iii)(A) and 1026.35(b)(2)(iv)(A), and 
to provide guidance on the one-year lookback and grace periods. The 
Bureau also proposed to remove from comment 35(b)(2)(iii)-1.i all 
discussion of the lists that the

[[Page 59948]]

Bureau publishes of ``rural'' or ``underserved'' counties pursuant to 
Sec.  1026.35(b)(2)(iv).
    The Bureau invited comment on whether it should eliminate the 
three-year lookback period as proposed and whether it is appropriate to 
rely on the preceding calendar year in determining as a general matter 
whether the more than 50 percent test is met. The Bureau also sought 
feedback on whether it should provide a grace period to creditors that 
meet this test in one calendar year but fail to do so in the next 
calendar year and, if so, whether such a grace period should apply to 
all applications received before April 1 as proposed.
    For the reasons discussed below, the Bureau is adopting Sec.  
1026.35(b)(2)(iii)(A) and the accompanying commentary as proposed, with 
minor technical revisions.

Comments

    The Bureau received comments from national and state associations 
of credit unions, a national association of community banks, and state 
associations of banks on the proposal to use the preceding calendar 
year, rather than any of the three preceding calendar years, as the 
relevant time period for assessing whether the more than 50 percent 
test is satisfied and on the proposed April 1 grace period. No comments 
were received on the related proposed changes to the commentary.
    Most of the commenters on the proposed lookback provision 
recommended that the Bureau maintain the three-year lookback. A 
national association of credit unions noted many credit unions develop 
their forward-looking strategies with a two- or three-year outlook and 
was concerned that the proposal will curtail a credit union's ability 
to do such planning. For the same reason, this commenter suggested 
extending the effective date of this rulemaking to January 1, 2017 if 
the three-year lookback is replaced with a one-year period. A national 
association and a state association of banks both noted some of their 
members operate close to the 50 percent threshold and that a three-year 
lookback would prevent these lenders from abruptly halting their loan 
originations should they come close to approaching the loan threshold 
or otherwise become concerned that they may not meet the more than 50 
percent test in a given year. The state banking association recommended 
a six-month grace period if the Bureau adopts the one-year lookback 
period to allow community banks to make necessary product and system 
adjustments and train staff. Other commenters noted generally that the 
three-year lookback would provide creditors greater flexibility than a 
one-year period would, but provided no specific details or examples.
    The majority of commenters on the proposed Apri1 1 grace period 
supported that provision, although a few commenters recommended 
extending the grace period to six months, and in one case, to one year. 
The commenters recommending an extension of the grace period generally 
cited the need for additional time to adjust systems and train staff.

Final Rule

    The Bureau is finalizing Sec.  1026.35(b)(2)(iii)(A) and its 
accompanying commentary generally as proposed but with minor changes to 
provide greater clarity.
    The Bureau considered comments requesting the continuation of the 
three-year lookback but has not adopted this approach in the final 
rule. As originally adopted in the January 2013 Escrows Final Rule, 
Sec.  1026.35(b)(2)(iii)(A) considered only the preceding year and 
established a one-year lookback period. The Bureau instituted the 
three-year lookback period to stabilize the escrow exemption during the 
period from 2013 to 2015 while the definitions were under review. 78 FR 
60382, 60416 (Oct. 1, 2013). This change guaranteed eligibility for a 
creditor that was eligible during 2013 with respect to operating 
predominantly in rural or underserved areas and met the other 
applicable criteria through 2015. Stability in this specific period was 
a particular concern because during the definitional review the first 
year-to-year transition in the ``rural'' definition for purposes of 
this exemption was to coincide with the shift in the United States 
Department of Agriculture's Economic Research Service's (USDA-ERS) 
county Urban Influence Code (UIC) designations that occur once every 
decade.
    Once the definitional review period ends, the Bureau believes that 
using a three-year lookback period on a permanent basis would allow 
creditors to maintain eligibility even if their first-lien covered 
transactions do not meet the more than 50 percent test in most calendar 
years. That result would be contrary to the goal of identifying 
creditors that focus their activity in rural or underserved areas.
    Although the three-year lookback period provides creditors with 
certainty that they will be eligible for the exemption at least two 
years into the future, the Bureau does not believe that such extended 
notice will be necessary once the revisions to the definitions are 
effective. As explained in the section-by-section analysis of Sec.  
1026.35(b)(2)(iv)(A), below, the areas that are rural under the 
definition would only change once or twice a decade.\18\ While the 
counties defined as underserved could change each year, such shifts are 
unlikely to affect many creditors' eligibility for the special 
provisions and exemptions because very few counties would be 
underserved but not rural under the Bureau's definitions. Furthermore, 
creditors can monitor the first-lien covered transactions that they 
originate throughout the year using the Bureau's automated tool and 
should generally be able to anticipate any change in their eligibility 
well before the end of the year. Any changes that would be made in the 
rural definition after each decennial census would be based on 
demographic shifts that have unfolded over the preceding decade and 
which may, in many instances, be evident to creditors serving those 
areas. The changes would be announced well before they become 
effective, allowing time for creditors to assess their status and make 
appropriate transitions. The Bureau therefore believes that the 
preceding calendar year is the appropriate time period to use as a 
general rule in assessing whether the more than 50 percent test is met.
---------------------------------------------------------------------------

    \18\ As noted in the discussion of comment 35(b)(2)(iv)-2 below, 
the Census Bureau released its list of urban areas based on the 2010 
decennial census in 2012, and the USDA-ERS released its UIC 
designations based on the 2010 decennial census in 2013. If the 
USDA-ERS continues to incorporate decennial census results into its 
UIC county designations in a different year than the Census Bureau 
finalizes its rural-urban classification, as in 2012 and 2013, the 
effects of each decennial census would be incorporated into the 
Bureau's proposed ``rural'' definition over the course of two years, 
which would afford additional transition time to some of the 
creditors affected by the changes.
---------------------------------------------------------------------------

    The Bureau acknowledges that in some cases, a creditor could find 
out on or close to December 31st that it was not operating 
predominantly in rural or underserved areas during that calendar year. 
Such a creditor might have difficulty transitioning from balloon-
payment loans to adjustable-rate mortgages and complying with the 
higher-priced mortgage loan escrow requirements by January 1 if 
eligibility for the special provisions and exemptions is based solely 
on transactions in the preceding calendar year. The Bureau therefore is 
adopting the proposed grace period that allows a creditor making a 
higher-priced mortgage loan based on an application received before 
April 1 to rely on its transactions from either the preceding calendar 
year or the next-to-last

[[Page 59949]]

calendar year to meet the more than 50 percent test in Sec.  
1026.35(b)(2)(iii)(A).
    A creditor that is otherwise eligible and that met the more than 50 
percent test in calendar year one but fails to meet it in calendar year 
two remains eligible with respect to applications received before April 
1 of calendar year three. The Bureau considered comments requesting 
longer grace periods of six months or one year, but the Bureau is 
adopting this provision as proposed. Most of the comments received 
favored the grace period as proposed, and the Bureau believes that a 
grace period of this nature facilitates the transition of creditors 
that no longer operate predominantly in rural or underserved areas and 
properly balances the importance of the substantive consumer 
protections provided by the higher-priced mortgage loan escrows 
requirement, the ability-to-repay requirement, and the high-cost 
mortgage requirements with concerns that have been raised regarding 
their potential impact on access to credit.

35(b)(2)(iii)(B)

    The Bureau is adopting Sec.  1026.35(b)(2)(iii)(B) and the 
accompanying commentary, substantially as proposed, with certain 
technical changes and commentary additions to enhance clarity, as 
discussed in further detail below. Accordingly, this final rule raises 
the origination limit for small creditor status from 500 covered 
transactions secured by a first-lien originated by the creditor and its 
affiliates, to 2,000 such loans. The final rule also excludes 
originated loans held in portfolio by the creditor or its affiliates 
from the limit. The final rule also adds a grace period to allow an 
otherwise eligible creditor that exceeded the origination limit in the 
preceding calendar year (but not in the calendar year before the 
preceding year) to continue to operate as a small creditor with respect 
to transactions with applications received before April 1 of the 
current calendar year.

Background--Origination Limit

    As part of its rulemakings implementing title XIV of the Dodd-Frank 
Act, in January 2013, the Bureau adopted an annual origination limit 
for small creditor status of 500 first-lien covered transactions in the 
preceding calendar year (Sec.  1026.35(b)(2)(iii)(B).\19\ Specifically, 
the origination limit in Sec.  1026.35 (b)(2)(iii)(B) provides that, 
during the preceding calendar year, creditors, together with their 
affiliates, must have originated 500 or fewer covered transactions, as 
defined by Sec.  1026.43(b)(1), secured by a first lien.
---------------------------------------------------------------------------

    \19\ For a more detailed discussion of the Board's and the 
Bureau's past rulemaking efforts with regard to the small creditor 
origination limit, see the proposed rule. 80 FR 7769, 7776-7781.
---------------------------------------------------------------------------

    In adopting this limit the Bureau believed that an origination 
limit, in combination with other requirements, was the most accurate 
means of confining the special provisions and exemptions to the class 
of small creditors that focus primarily on a relationship-lending 
model, a business model the Bureau believed would best facilitate 
consumers' access to responsible, affordable credit.
    However, prior to and after the effective dates of the 2013 Title 
XIV Final Rules, the Bureau heard repeated expressions of concern that 
the Bureau's definition of small creditor was under-inclusive and did 
not cover a significant number of institutions that met the rationale 
underlying the special provisions and exemptions. Accordingly, on May 
6, 2014, in a Notice of Proposed Rulemaking with proposals addressing 
other elements of the 2013 Title XIV Final Rules, the Bureau also 
sought comment on the 500 total first-lien origination limit--including 
whether that limit is sufficient to serve the purposes of the small 
creditor designation.\20\
---------------------------------------------------------------------------

    \20\ Amendments to the 2013 Mortgage Rules Under the Truth in 
Lending Act (Regulation Z), 79 FR 25730 (May 6, 2014).
---------------------------------------------------------------------------

    In response to the Bureau's solicitation of comments regarding the 
origination limit in its May 6, 2014 proposal, industry commenters, 
including national and state associations of banks, and national and 
state associations of credit unions, generally supported an increase in 
the 500 loan origination limit. Consumer groups generally did not 
support an increase, absent clear evidence that the current limit was 
significantly harming consumers. These consumer-group commenters 
asserted that evidence of consumer harm does not exist.

The Bureau's Proposal

    The Bureau's proposed rule reflected stakeholder feedback on the 
small creditor definition received during the period since the issuance 
of its 2013 Title XIV Final Rules. Specifically, the Bureau proposed to 
raise the origination limit in Sec.  1026.35(b)(2)(iii)(B) from 500 
covered transactions secured by a first-lien originated by the creditor 
and its affiliates to 2,000 such loans. The Bureau also proposed to 
exclude loans held in portfolio by the creditor or its affiliates from 
the limit, so that the limit would only apply to loans that were sold, 
assigned, or otherwise transferred by the creditor or its affiliates to 
another person, or subject to a commitment to be acquired by another 
person. The Bureau also proposed to add a grace period from calendar 
year to calendar year to allow an otherwise eligible creditor that 
exceeded the origination limit in the preceding calendar year to 
continue to operate as a small creditor with respect to transactions 
with applications received before April 1 of the current calendar year 
if the creditor had not exceeded it in the calendar year before the 
preceding calendar year.
    Proposed comment 35(b)(2)(iii)-1.ii made clear that a loan 
transferred by a creditor to its affiliate is a loan not retained in 
portfolio (it is a loan transferred to ``another person'') and 
therefore is counted toward the 2,000 origination limit. The proposed 
comment also explained and added examples on applying the grace period 
to the origination limit.
    In issuing the proposed rule, the Bureau stated its belief that an 
adjustment of the current origination limit as proposed, given feedback 
received on the origination limit up to that point, is justified. The 
Bureau stated that small creditors serve a particularly critical 
function for consumers in rural and underserved areas, especially when 
these creditors make portfolio loans for which there may be no 
secondary market. At the same time, the Bureau recognized that an 
expansion of the origination limit could undermine the Bureau's title 
XIV regulatory protections. The Bureau stated that it wanted to ensure 
that the origination limit is not set at a level that will allow larger 
creditors to take advantage of small-creditor status to avoid important 
regulatory requirements that protect consumers--regulatory requirements 
that those larger creditors, unlike many smaller creditors, have the 
capacity to implement effectively.
    For the reasons discussed below, the Bureau is adopting Sec.  
1026.35(b)(2)(iii)(B), and the accompanying commentary, as proposed, 
with several technical revisions, and commentary additions and 
clarifications.

Comments

    Comments on the Bureau's proposal to raise the origination limit 
were divided between industry stakeholders and consumer groups. 
Industry commenters generally expressed appreciation and support for 
the proposed rule changes, while consumer representatives and 
organizations opposed or expressed concern with the proposals.

[[Page 59950]]

    Increase limit to 2,000 loans. Industry commenters supported the 
proposed increase in the origination limit for small creditor status 
from 500 loans to 2,000 non-portfolio loans. Banks, and their national 
and state trade associations, were particularly supportive of the 2,000 
origination limit. One national trade association stated, for example, 
that its internal analysis suggested that the Bureau approximated a 
good target through the proposed 2,000 origination limit. It stated 
further that from informal polling of its smaller community bank 
members, 1,000 loan originations per year is a common volume at banks 
of asset sizes below $1 billion, and that many may originate more. A 
state banking association agreed, stating that the Bureau's proposal 
better aligned the origination limit with the asset limit. This 
commenter stated that the current rule limiting originations to 500 
covered transactions for institutions with up to $2 billion in assets 
does not reflect the business models of most community banks. A 
national association of credit unions, in expressing support for 
increasing the origination limit to 2,000 loans, stated that, because a 
large number of its members with assets under $2 billion originate more 
than 500 first-lien mortgages, it had long sought an increase in the 
origination threshold. Another state banking association stated that 
the increased origination limit will qualify more institutions as small 
creditors and promote the availability of mortgage credit for their 
customers.
    While national and state credit union trade association commenters 
were supportive of the Bureau's proposal to raise the limit, a number 
questioned how the Bureau arrived at 2,000 loans for the limit, and 
suggested the Bureau analyze increasing the proposed limit. One 
national association of credit unions, for example, encouraged the 
Bureau to provide impact analyses that demonstrate how communities, 
consumers, and creditors would be affected if the limit were raised to 
2,500, 3,000, 3,500, or 4,000, as well as the proposed threshold of 
2,000, so that stakeholders and the Bureau would have more informed 
comments regarding what the new limit should be. Some state 
associations of credit unions suggested that the Bureau raise the limit 
to 5,000 loans, stating that a threshold at that level is more in line 
with the reality of credit unions that continue to maintain the virtues 
of a small creditor, including an elevated level of service and 
personal attention to borrowers.
    Some state associations of credit unions suggested that the Bureau 
allow institutions with default rates of, for example, less than 1 
percent of covered transactions in the previous calendar year to make 
up to 4,000 mortgage loans per year and still qualify for the small 
creditor exemption.
    Consumer groups opposed or expressed concern regarding the proposed 
increase in the origination limit. Some cited a lack of an evidentiary 
basis to support the expansion of the origination limit, asserting that 
the Bureau did not provide any evidence that the current limit 
unreasonably constrains small creditors.
    Several consumer organizations in a joint comment expressed concern 
about the expansion of the origination limit to 2,000 loans, with a 
specific focus on past practices and lack of regulatory oversight with 
regard to non-depository institutions. They stated that, in the past, 
the absence of oversight by federal financial regulators, when combined 
with inconsistent or weaker state oversight, created an environment 
where non-depository institutions, in particular, had improper 
incentives to push consumers into mortgage loans with problematic 
features. The joint commenters encouraged the Bureau to limit the 
increase of the origination limit to depository institutions 
exclusively.
    Exclusion of portfolio loans from the limit. Industry commenters 
also supported the Bureau's proposal to exclude portfolio loans from 
the origination limit. A national association of banks stated that this 
exclusion is consistent with the rule's overall goals of ensuring safe 
lending while promoting credit accessibility. It stated that the 
success and livelihood of community banks are dependent upon repayment 
of their portfolio loans and that community banks carefully underwrite 
these loans based on knowledge of their communities and standards that 
meet local customer needs. It also noted the sound lending practices of 
``hometown banks'' as demonstrated by their persistently low default 
and foreclosure rates, even through the recent mortgage crisis. These 
comments were echoed by several state banking associations.
    An organization of state bank supervisors stated that the Bureau's 
proposal correctly acknowledges that portfolio lenders have strong 
incentives to consider a borrower's ability to repay a loan. It also 
stated that raising the small creditor origination limit from 500 to 
2,000 loans, and more importantly, excluding loans originated and held 
in portfolio from that threshold, will provide effective and 
significant regulatory relief for community bank portfolio lenders.
    A coalition of mid-size banks stated that this aspect of the 
proposal rests on the understanding that a creditor retains the risk 
associated with its portfolio loans and therefore has a natural 
incentive to underwrite such loans deliberately and under conservative 
standards. It stated further that this incentive is magnified for small 
and mid-size banks, which have substantially lower capital cushions 
than their larger counterparts to absorb losses in connection with 
default. A state association of banks stated that the Bureau is moving 
in the ``right direction'' with many of its proposals, but recommended 
that the Bureau exclude from the origination limit loans transferred by 
a creditor to a wholly-owned subsidiary.
    Grace period for transactions with applications received before 
April 1st of current calendar year. Industry commenters supported the 
Bureau's proposal to allow a creditor that exceeded the origination 
limit in the preceding calendar year to operate, in certain 
circumstances, as a small creditor with respect to transactions with 
applications received before April 1 of the current calendar year. Some 
commenters, however, suggested that the grace period be extended, e.g., 
to 6 months. These commenters expressed concern that the proposed grace 
period was too brief for small banks and credit unions to track their 
originations and to change their operations in a timely manner.

Final Rule

    Increase of origination limit to 2,000 loans. As discussed above, 
the Bureau believes that small creditors serve a critical function for 
consumers in rural and underserved areas, especially when these 
creditors make portfolio loans for which there may be no secondary 
market and that larger creditors may not be willing to make. Industry 
comments on the current small creditor origination limit indicate that 
it may be restricting the ability of such creditors with relationship 
lending models to provide needed credit to qualified borrowers in rural 
and underserved areas. The intent of the small creditor test is to 
facilitate lending by those small creditors that provide responsible, 
affordable credit to consumers, and to enable consumers in rural and 
underserved areas to access creditors with a lending model, operations, 
and products that may meet their particular needs.
    The Bureau has considered those industry comments that suggested 
raising the limit above 2,000 loans, or

[[Page 59951]]

raising the limit above 2,000 loans for institutions with lower default 
rates. The Bureau seeks to avoid setting the origination limit, 
however, at a level that will allow larger creditors to take advantage 
of small-creditor status. The Bureau's primary goal in setting the 
limit is to draw the appropriate line between small and large 
creditors, and to strike the right balance between preserving consumer 
access to credit and maintaining effective consumer protections. The 
Bureau believes that the 2,000 non-portfolio loan limit strikes that 
balance.
    The Bureau is finalizing the origination limit as proposed, 
applying equally to depository institutions and non-depository 
institutions, as does the current rule. Excluding non-depository 
institutions from the changes to the origination limit, as suggested by 
some consumer groups, would require the Bureau to establish, and 
oversee, two different regulatory schemes for banks and non-banks. This 
introduction of complexity into the determination of small creditor 
status would subject similar regulated entities to different regulatory 
requirements, possibly creating creditor confusion regarding 
compliance, resulting in increased burden and compliance costs for such 
creditors. Moreover, the Dodd-Frank Act sets out as one of the 
objectives for the Bureau enforcing federal consumer financial law 
consistently without regard to charter type.\21\
---------------------------------------------------------------------------

    \21\ See section 1021(b)(4) of the Dodd-Frank Act, 12 U.S.C. 
5511(b)(4), requiring the Bureau to ``to ensure that Federal 
consumer financial law is enforced consistently, without regard to 
the status of a person as a depository institution, in order to 
promote fair competition.'' (emphasis added).
---------------------------------------------------------------------------

    Exclusion of portfolio loans from the limit. The Bureau's proposal 
to exclude loans held in portfolio by the creditor and its affiliates 
recognizes that the interests of small portfolio lenders are more 
likely to be aligned with the interests of consumers because small 
portfolio lenders retain the credit risk for loans held in portfolio. 
The Bureau has also recognized that many small creditors use a lending 
model based on maintaining ongoing relationships with their customers 
and therefore may have a more comprehensive understanding of the 
financial circumstances of their customers. The Bureau's exclusion of 
portfolio loans from the origination limit, therefore, is a recognition 
not only of the small creditor's community-based focus and commitment 
to relationship-based lending, but also of the inherent alignment of 
creditors' and consumers' interests associated with portfolio lending 
by smaller institutions. The Bureau is therefore adopting the exclusion 
of portfolio loans from the origination limit as proposed.
    The Bureau believes the final rule provides a bright-line approach 
for determining what is included in the 2,000-origination limit. The 
Bureau also believes that the bright-line nature of this rule would be 
undermined by the commenter's recommendation described above that the 
Bureau not count toward the limit loans transferred by the creditor to 
its wholly-owned subsidiary. A transfer of a loan by a creditor to a 
subsidiary, or other affiliate, is not a loan held in the creditor's 
portfolio. Rather, it is a loan that is sold, assigned, or otherwise 
transferred by the creditor to another legal entity in this particular 
situation (see Sec.  1026.2(a)(22), the definition of ``person'' under 
Regulation Z). Making distinctions between wholly-owned subsidiaries 
and other affiliates for purposes of the origination limit would create 
compliance and oversight complications for creditors, their affiliates, 
and regulators, for example, because whether a subsidiary is ``wholly-
owned'' could be a complicated analysis in some circumstances.
    Grace period for transactions with applications received before 
April 1st of current calendar year. The Bureau is adopting its proposed 
grace period to allow a creditor that exceeded the origination limit in 
the preceding calendar year to operate, in certain circumstances, as a 
small creditor with respect to transactions with applications received 
before April 1 of the current calendar year. The Bureau has considered 
commenters' suggestions for a longer grace period but believes the 
grace period should provide sufficient time for creditors to make any 
needed adjustments to come into compliance with the Bureau's regulatory 
requirements upon exceeding the origination limit. Further, the focus 
of the grace period on transactions with applications received before 
April 1, rather than transactions consummated before April 1, will mean 
that creditors will be able to consummate as small creditors not only 
transactions that were pending in their pipeline at the beginning of 
the calendar year but also transactions well into the current calendar 
year, as long as the application for a transaction was received before 
April 1 of the current calendar year. For example, if a creditor 
received a loan application in mid-March of the current calendar year, 
it could consummate that loan transaction as a small creditor 60 or 90 
days later, in mid-June or July of the current calendar year.
    This final rule is also making several additional technical and 
clarifying language changes to Sec.  1026.35(b)(2)(iii)(B) from the 
proposed rule, for example, changing the phrase ``originated . . . 
covered transactions'' to ``extended . . . covered transactions,'' to 
make the language of that section consistent with the terminology 
generally used in Regulation Z. In addition, this final rule makes 
several technical and clarifying amendments to comment 35(b)(2)(iii)-
1.ii, including, for example, technical changes for purposes of 
consistency between the regulatory text at Sec.  1026.35(b)(2)(iii)(B) 
and the commentary, and additional guidance regarding the definition of 
``affiliate.'' The comment states that, for purposes of Sec.  
1026.35(b)(2)(iii)(B), ``affiliate'' has the same meaning as in Sec.  
1026.32(b)(5), which defines ``affiliate'' 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.).'' The commentary also sets out the definition of 
``control'' under the Bank Holding Company Act.
    The Bureau believes that this final rule sets the origination limit 
in an effective and responsible way. As discussed, the Bureau's intent 
in setting the origination limit is to include small creditors that can 
provide responsible, affordable credit to consumers and enable 
consumers, particularly those in rural and underserved areas, to access 
creditors with a lending model, operations, and products that may meet 
their particular needs. As further discussed in the section 1022(b) 
analysis in part VII below, the Bureau estimates that expanding the 
origination limit to 2,000 originations, and not including portfolio 
loans in that originations count, will increase the number of small 
creditors by 700, from approximately 9,700 to approximately 10,400. The 
Bureau believes that this increase will include creditors with the size 
and responsible lending models that fit the purpose of small-creditor 
status that the Bureau intends.

35(b)(2)(iii)(C)

    As discussed in further detail below, the Bureau is adopting Sec.  
1026.35(b)(2)(iii)(C) and the accompanying commentary, substantially as 
proposed, with certain technical changes and commentary additions to 
enhance clarity. Accordingly, this final rule includes in the 
calculation of the asset limit for small-creditor status the assets of 
the creditor's affiliates that regularly extended covered transactions 
secured by first liens during the applicable period. The final rule 
also adds a grace

[[Page 59952]]

period from calendar year to calendar year to allow an otherwise 
eligible creditor that exceeded the asset limit in the preceding 
calendar year (but not in the calendar year before the preceding year) 
to continue to operate as a small creditor with respect to transactions 
with applications received before April 1 of the current calendar year.

The Bureau's Proposal

    Currently, under Sec.  1026.35(b)(2)(iii)(C), eligibility for small 
creditor status is limited to creditors with less than $2 billion in 
assets (or other current yearly adjusted limit) at the end of the 
preceding calendar year.
    The Bureau did not propose a change to the current $2 billion asset 
limit in Sec.  1026.35(b)(2)(iii)(C). The Bureau, however, did propose 
to amend Sec.  1026.35(b)(2)(iii)(C) to include in the calculation of 
the $2 billion asset limit the assets of the creditor's affiliates that 
originate covered transactions secured by a first lien. Proposed 
comment 35(b)(2)(iii)-1.iii provided that, for purposes of Sec.  
1026.35(b)(2)(iii)(C), in addition to the creditor's assets, only the 
assets of a creditor's ``affiliate'' as defined in Sec.  1026.32(b)(5) 
that originates covered transactions as defined by Sec.  1026.43(b)(1) 
secured by a first lien would be counted toward the asset limit.
    In proposing this change, the Bureau noted that counting both the 
creditor's assets and the assets of the creditor's affiliates that 
originate mortgage loans would make the tests for determining small-
creditor status consistent as between the asset limit in Sec.  
1026.35(b)(2)(iii)(C) and the origination limit in Sec.  
1026.35(b)(2)(iii)(B), which currently includes the originations of the 
creditor's affiliates in determining whether the limit has been 
exceeded. The Bureau stated that this added consistency between the two 
tests could facilitate creditor compliance with the special provisions 
and exemptions for small creditors, including those that operate 
predominantly in rural or underserved areas.
    The Bureau also stated its belief, that given the proposed change 
to the origination limit to exclude the creditor's and its affiliate's 
portfolio loans from counting toward that limit, the proposed change to 
the asset limit is necessary to ensure that small-creditor status does 
not become a means for larger creditors, through the development of 
affiliate relationships, to evade important consumer protections.
    The Bureau stated that it was interested in receiving comments on 
the proposed change's potential impact on creditors and access to 
credit. The Bureau also sought comment on the potential for larger 
creditors to obtain small-creditor status without this change and the 
possible impact on consumers.
    The Bureau also proposed to add a grace period to the $2 billion 
asset limit in Sec.  1026.35(b)(2)(iii)(C), similar to the grace period 
proposed by the Bureau for the origination limit. This proposed grace 
period allowed an otherwise eligible creditor that exceeded the asset 
limit in the preceding calendar year to continue to operate as a small 
creditor with respect to transactions with applications received before 
April 1 of the current calendar year. This proposed grace period was 
available to creditors that exceeded the asset limit in the preceding 
calendar year but had not exceeded it in the calendar year before the 
preceding calendar year. The Bureau stated that it proposed the grace 
period to provide consistency in requirements for creditors seeking and 
maintaining small-creditor status.
    Proposed comment 35(b)(2)(iii)-1.iii explained that creditors meet 
the asset limit during calendar year 2016 if the creditors' total 
assets (which include, in addition to the creditors' assets, the assets 
of the creditors' affiliates that originate mortgage loans) are under 
the applicable asset limit on December 31, 2015. The proposed comment 
explained further that creditors that did not satisfy the applicable 
asset limit on December 31, 2015 satisfy the asset limit during 2016 if 
the application for the loan was received before April 1, 2016 and the 
creditors had total assets under the applicable asset limit on December 
31, 2014. The proposed comment also added the threshold for calendar 
year 2015 to the 2013 and 2014 asset limits currently listed in the 
comment.
    For the reasons discussed below, the Bureau is adopting Sec.  
1026.35(b)(2)(iii)(C), and the accompanying commentary as proposed, 
with several technical revisions, and commentary additions and 
clarifications.

Comments

    Include the assets of the creditor's mortgage affiliates in the 
asset limit calculation. In general, consumer groups strongly supported 
the Bureau's proposal to include in the calculation of the asset limit 
for small creditor status the assets of the creditor's affiliates that 
originate mortgage loans, citing it as an important ``anti-evasion'' 
measure. Specifically, a joint comment from three consumer 
organizations stated that as a result of the current rule's exclusion 
of affiliated assets in calculating the small creditor asset limit, 
very large financial institutions can create unlimited smaller 
affiliates and have each of them qualify as a small creditor under the 
rule. The comment stated further that this is a significant loophole 
that undermines the consumer protections created by the ability-to-
repay rule and the accompanying qualified mortgage designation. Another 
consumer organization commenter stated that aggregating the loans for 
all affiliated lenders is an important anti-evasion device that 
preserves the ``valuable'' small creditor exemption, while preventing 
its abuse.
    Industry commenters opposed the change. Some stated that if the 
Bureau adopted the proposal, it needed to increase the asset limit 
correspondingly. Several commenters, including a national association 
of banks, recommended an increase in the asset limit to $10 billion. 
The proposal, these commenters asserted, effectively lowers the 
threshold limit for financial institutions with affiliates.
    Credit union commenters were concerned with the impact of the 
proposal on the eligibility of credit unions for small creditor status. 
A particular concern was regarding those credit unions with affiliated 
credit union service organizations (CUSOs), with some credit union 
commenters suggesting that the Bureau exclude CUSOs from treatment as 
``affiliates'' for purposes of the asset limit. In support of different 
treatment for CUSOs, a credit union trade association commenter 
distinguished CUSOs from other affiliates, stating that they are 
limited in scope and purpose. This commenter alternatively requested 
clarification on how to calculate the asset limit in the case of a CUSO 
that is owned by multiple credit unions, if the Bureau adopted the 
proposal. Some credit unions pointed to the Bank Holding Company Act, 
and the reference to that Act in the Regulation Z definition of 
``affiliate'' that was cited in the proposed rule, as a basis for 
excluding CUSOs from the asset limit calculation, stating that the Act 
does not apply to credit unions.
    A state association of banks recommended that the Bureau exclude 
from counting toward the asset limit loans originated by a creditor 
and/or its affiliates and held in portfolio--including loans held in 
portfolio by a wholly-owned subsidiary of either. This commenter stated 
that a ``community-based institution should not lose `small creditor' 
status simply because it is successful with its portfolio-based

[[Page 59953]]

strategy and crosses the $2 billion'' asset limit.
    Add grace period for transactions with applications received before 
April 1st of current calendar year. Industry commenters supported the 
Bureau's proposal to allow a creditor that exceeded the asset limit in 
the preceding calendar year to operate, in certain circumstances, as a 
small creditor with respect to transactions with applications received 
before April 1 of the current calendar year. As with the grace period 
for the origination limit, however, some commenters suggested that the 
grace period be extended, e.g., to 6 months.

Final Rule

    Include the assets of the creditor's mortgage affiliates in the 
asset limit calculation. The Bureau believes this change is an 
important anti-evasion measure that would limit the ability of larger 
entities to structure arrangements such that one or more affiliates can 
enjoy the benefits of small creditor status. This change would also 
make the asset limit calculation more consistent with the origination 
limit calculation, which currently includes the originations of the 
creditor's affiliates.
    Accordingly, the Bureau is finalizing Sec.  1026.35(b)(2)(iii)(C) 
as proposed but with several technical revisions. The final rule 
changes from the proposed rule the phrase ``the creditor and its 
affiliates that originate covered transactions'' to ``the creditor and 
its affiliates that regularly extended covered transactions'' in Sec.  
1026.35(b)(2)(iii)(C) to make the language of that section more 
consistent with the terminology generally used in Regulation Z. This 
change also provides greater clarity that, as stated in the proposed 
rule,\22\ only the assets of the creditor's affiliates that originate 
covered transactions, and not the assets of other affiliates of the 
creditor, count toward the limit. The change also indicates that there 
is a difference between how the covered transactions of affiliates are 
counted for purposes of the originations limit and how the assets of 
affiliates are counted for purposes of the asset limit. The 
originations limit requires a creditor to count each affiliate's first-
lien covered transactions that were sold, assigned, or otherwise 
transferred to another person, or that were subject at the time of 
consummation to a commitment to be acquired by another person. For 
purposes of the asset limit, a creditor counts only the assets of those 
affiliates that regularly extended first-lien covered transactions and 
not the assets of other affiliates. This difference prevents the assets 
of an affiliate that does not regularly extend covered transactions 
from having a significant impact on the asset limit for a creditor.
---------------------------------------------------------------------------

    \22\ 80 FR 7769, 7781 (February 11, 2015).
---------------------------------------------------------------------------

    To provide additional guidance, the final rule also makes several 
additions and clarifications to comment 35(b)(2)(iii)-1.iii. Comment 
35(b)(2)(iii)-1.iii.A states that only the assets of a creditor's 
``affiliate'' (as defined by Sec.  1026.32(b)(5)) that regularly 
extended covered transactions (as defined by Sec.  1026.43(b)(1)) 
secured by first liens, are counted toward the applicable annual asset 
threshold. Comment 35(b)(2)(iii)-1.iii.A also refers to comment 
35(b)(2)(iii)-1.ii.C, which discusses the definition of affiliate under 
1026.32(b)(5) and the definition of control under the Bank Holding 
Company Act referenced in that section. Comment 35(b)(2)(iii)-1.iii.B 
states that only the assets of creditors' affiliates that regularly 
extended first-lien covered transactions during the applicable period 
for determining whether the creditor met the asset limit are included 
in calculating the creditor's assets. Comment 35(b)(2)(iii)-1.iii.B 
then discusses the meaning of ``regularly extended,'' which is based on 
the number of times a person extends consumer credit for purposes of 
the definition of ``creditor'' in Sec.  1026.2(a)(17), and provides 
examples on this point. Consistent with Sec.  1026.2(a)(17)(v), because 
covered transactions are ``transactions secured by a dwelling,'' an 
affiliate ``regularly extended'' covered transactions if it extended 
more than five covered transactions in a calendar year. Also consistent 
with Sec.  1026.2(a)(17)(v), because a covered transaction may be a 
high-cost mortgage subject to Sec.  1026.32, an affiliate regularly 
extends covered transactions if, in any 12-month period, it extends 
more than one covered transaction that is subject to the requirements 
of Sec.  1026.32 or one or more such transactions through a mortgage 
broker. Comment 35(b)(2)(iii)-1.iii.C states that if multiple creditors 
share ownership of a company that regularly extended first-lien covered 
transactions, the assets of the company count toward the asset limit 
for a co-owner creditor if the company is an ``affiliate,'' as defined 
in Sec.  1026.32(b)(5), of the co-owner creditor. Comment 
35(b)(2)(iii)-1.iii.C also states that if the co-owner creditor and the 
company are affiliates, the co-owner creditor counts all of the 
company's assets toward the asset limit, regardless of the co-owner 
creditor's ownership share. The comment also notes that because the co-
owner and the company are mutual affiliates, the company also would 
count all of the co-owner's assets towards its own asset limit.
    While credit unions in their comments expressed concern about the 
impact of the proposal on credit unions affiliated with CUSOs, under 
the proposal only the assets of affiliates that regularly extended 
covered transactions are counted toward the creditor's asset limit. As 
adopted under the Bureau's final rule, therefore, only the assets of 
CUSOs that meet the definition of affiliate in Regulation Z (meeting 
the ``control'' test under the Bank Holding Company Act) and that 
regularly extend covered transactions during the applicable period will 
be counted toward the asset limit. The Bureau is not excluding CUSOs 
from possible treatment as affiliates because it remains concerned that 
a credit union could, under the current asset limit calculation, enter 
into a relationship with a CUSO or CUSOs to create a large entity that 
would be eligible for the special provisions and exemptions accorded 
small creditor status. The Bureau also notes that Sec.  1026.32(b)(5) 
and its definition of ``affiliate'' references the Bank Holding Company 
Act only for the purposes of how control is determined under that Act, 
which is applicable to the determination of affiliate under Regulation 
Z regardless of the applicability of the Act to credit unions.
    As noted, the Bureau did not propose to change the current $2 
billion asset limit. However, as discussed, some commenters suggested 
that the Bureau increase that limit to correspond with the Bureau's 
proposed inclusion of the assets of a creditor's affiliates in the 
asset limit calculation, with several commenters suggesting an increase 
to $10 billion. The Bureau established the current $2 billion asset 
limit based on its belief that an asset limit is important to preclude 
a very large creditor with relatively modest mortgage operations from 
taking advantage of provisions designed for much smaller creditors with 
much different characteristics and incentives and that lack the scale 
to make compliance less burdensome. The Bureau believes institutions 
that fall under the $2 billion asset limit are more likely to be 
engaged in relationship-based community lending than larger 
institutions, with such small entities having a more in-depth 
understanding of the economic and other circumstances of their 
customers and community. The Bureau believes that allowing entities of 
up to $10 billion in size to take advantage of the exemptions

[[Page 59954]]

and special provisions accorded to small creditors is inconsistent with 
the purposes of the special provisions and exemptions.
    The Bureau did not propose to exclude from the asset limit loans 
originated by a creditor or its affiliates and held in portfolio, or 
loans held in portfolio by a wholly-owned subsidiary of either. Given 
the final rule's exclusion of portfolio loans from the origination 
limit, also excluding portfolio loans from the asset limit could 
potentially allow a large creditor with significantly more than $2 
billion in assets due to the size of its loan portfolio, or the size of 
its affiliate's loan portfolio, to take advantage of the special 
provisions and exemptions designed for smaller creditors. Such a change 
would run counter to the Bureau's intent in establishing an asset limit 
and the Bureau's intent to limit the ability of creditors who become 
large creditors through the development of affiliate relationships to 
circumvent consumer protections by obtaining small creditor status.
    Add grace period for transactions with applications received before 
April 1st of current calendar year: The Bureau is finalizing as 
proposed the addition of a grace period for the determination of the 
asset limit. It allows a creditor that exceeded the asset limit in the 
preceding calendar year, but that did not exceed it in the year before 
the preceding calendar year, to operate as a small creditor with 
respect to transactions with applications received before April 1 of 
the current calendar year. The Bureau has considered comments 
suggesting a longer grace period but, as with the grace period for the 
origination limit, believes the grace period for the asset limit as 
proposed should provide the time for creditors to make any needed 
adjustments to come into compliance with the Bureau's regulatory 
requirements upon exceeding the asset limit in the previous year.

35(b)(2)(iii)(D)

    As discussed in detail below, the Bureau is adopting Sec.  
1026.35(b)(2)(iii)(D) substantially as proposed, with a minor change to 
enhance clarity. Accordingly, this final rule substitutes January 1, 
2016 for January 1, 2014 where it appears in Sec.  
1026.35(b)(2)(iii)(D)(1) and its commentary. This change prevents 
creditors from losing eligibility for the escrow exemption because of 
escrow accounts they established pursuant to requirements in effect 
before the effective date of this rule.

The Bureau's Proposal

    In general, Sec.  1026.35(b)(2)(iii)(D) prohibits any creditor from 
availing itself of the exemption from escrow requirements in Sec.  
1026.35(b)(2)(iii) if the creditor maintains escrow accounts for any 
extension of consumer credit secured by real property or a dwelling 
that it or its affiliate currently services. However, Sec.  
1026.35(b)(2)(iii)(D) currently also provides that a creditor may 
qualify for the exemption if such escrow accounts were established for 
first-lien higher-priced mortgage loans on or after April 1, 2010, and 
before January 1, 2014 or were established after consummation as an 
accommodation for distressed consumers.\23\ In light of the proposed 
expansion of the ``small'' and ``rural'' definitions in Sec. Sec.  
1026.35(b)(2)(iii)(B) and 1026.35(b)(2)(iv)(A), the Bureau proposed to 
substitute January 1, 2016 for January 1, 2014 where it appears in 
Sec.  1026.35(b)(2)(iii)(D)(1) and comment 35(b)(2)(iii)(D)(1)-1. This 
change was proposed to prevent any creditors that are currently 
ineligible for the escrow exemption, but that would qualify if the 
proposed definitional changes were adopted, from losing eligibility for 
the escrow exemption because of escrow accounts they established for 
first-lien higher-priced mortgage loans pursuant to requirements in the 
current rule.
---------------------------------------------------------------------------

    \23\ Comment 35(b)(2)(iii)(D)(1)-1 clarifies that the date 
ranges provided in Sec.  1026.35(b)(2)(iii)(D)(1) apply to 
transactions for which creditors received applications on or after 
April 1, 2010, and before January 1, 2014.
---------------------------------------------------------------------------

    The Bureau solicited comment on the Bureau's proposed amendments to 
Sec.  1026.35(b)(2)(iii)(D)(1) and comment 35(b)(2)(iii)(D)(1)-1, and 
specifically the exclusion of escrow accounts established on or after 
April 1, 2010 and before January 1, 2016 from the limitation in Sec.  
1026.35(b)(2)(iii)(D). In particular, the Bureau sought comment on the 
need for the proposed changes and the impact on consumers of extending 
the exemption to the escrow requirements in Sec.  1026.35(b)(1).
    The Bureau is finalizing Sec.  1026.35(b)(2)(iii)(D)(1) and comment 
35(b)(2)(iii)(D)(1)-1 generally as proposed but with a minor change to 
conform the regulatory and commentary language.

Comments

    The commenters on this subject, including a national association of 
credit unions and state associations of banks and credit unions, 
supported the provision to disregard escrow accounts that were 
maintained during a period a creditor was not exempt from the escrow 
requirement.

Final Rule

    The Bureau has considered the comments received on this provision 
and is finalizing Sec.  1026.35(b)(2)(iii)(D)(1) and comment 
35(b)(2)(iii)(D)(1)-1 generally as proposed but with a minor change to 
include in the regulation the same language currently in the comment 
stating that the exemption applies to loans ``for which the application 
was received'' on or after April 1, 2010, and before January 1, 2016.
    The Bureau does not believe that creditors that maintain escrow 
accounts they were required to set up before the effective date of this 
rule should lose the exemption simply because they were required by 
applicable regulations to establish escrow accounts before January 1, 
2016. As the Bureau discussed in the Supplementary Information to the 
January 2013 Escrows Final Rule and again in finalizing amendments to 
the January 2013 Escrows Final Rule made in the September 2013 Final 
Rule, the Bureau believes creditors should not be penalized for 
compliance with the current regulation.\24\ This final rule makes 
creditors eligible for the exemption provided under Sec.  
1026.35(b)(2)(iii) if they otherwise meet the requirements of Sec.  
1026.35(b)(2)(iii) and they do not establish new escrow accounts for 
transactions for which they receive applications on or after January 1, 
2016, other than those described in Sec.  1026.35(b)(2)(iii)(D)(2).
---------------------------------------------------------------------------

    \24\ January 2013 Escrows Final Rule, 78 FR 4725, 4739 (Jan. 22, 
2013); see also September 2013 Final Rule, 78 FR 60382, 60416 (Oct. 
01, 2013).
---------------------------------------------------------------------------

    A small number of commenters recommended additional exemption 
provisions, including exempting from the escrow requirement all loans 
held in portfolio if the APR does not exceed APOR by 3.5 percentage 
points or more. The Bureau notes, however, that the proposal did not 
address additional exemptions and thus such exemptions are outside the 
scope of this rulemaking.

35(b)(2)(iv)(A)

    As discussed in detail below, the Bureau is adopting Sec.  
1026.35(b)(2)(iv)(A) substantially as proposed, amending the current 
definition of ``rural,'' with certain minor changes to enhance clarity. 
Accordingly, this final rule adds census blocks that are not in an 
urban area as defined by the U.S. Census Bureau to the current county-
based definition in

[[Page 59955]]

Sec.  1026.35(b)(2)(iv)(A) and broadens the definition of rural to 
apply to ``an area'' rather than ``a county.''

The Bureau's Proposal

    Section 1026.35(b)(2)(iv)(A) currently defines a county as 
``rural'' during a calendar year if it is neither in a metropolitan 
statistical area (MSA) nor in a micropolitan statistical area that is 
adjacent to an MSA, as those terms are defined by the U.S. Office of 
Management and Budget and as they are applied under currently 
applicable UICs, established by the USDA-ERS. The current rule further 
provides that a creditor may rely as a safe harbor on the list of 
counties published by the Bureau to determine whether a county 
qualifies as ``rural'' for a particular calendar year. The Bureau 
proposed to expand the ``rural'' definition in Sec.  
1026.35(b)(2)(iv)(A) to capture additional areas classified as 
``rural'' by the Census Bureau, without affecting the status of any 
counties that would be deemed rural under the current rule. For 
technical reasons, the Bureau also proposed to move the discussion of 
the safe harbor list of counties provided by the Bureau that is 
currently in Sec.  1026.35(b)(2)(iv)(A) and comment 35(b)(2)(iv)(A)-1 
to new Sec.  1026.35(b)(2)(iv)(C) and proposed comment 35(b)(2)(iv)(A)-
1.iii, which are discussed below.\25\
---------------------------------------------------------------------------

    \25\ This proposed move was consistent with a similar move that 
the Bureau proposed with respect to the safe harbor discussion that 
currently appears with the ``underserved'' definition in Sec.  
1026.35(b)(2)(iv)(B).
---------------------------------------------------------------------------

    The proposal added to the definition of ``rural'' those census 
blocks that are not designated as ``urban'' by the Census Bureau in the 
urban-rural classification it completes after each decennial census to 
the county-based definition in Sec.  1026.35(b)(2)(iv)(A). To implement 
this change, proposed Sec.  1026.35(b)(2)(iv)(A) provided that an area 
is rural during a calendar year if it is (1) a county that meets the 
Bureau's current rural definition, or (2) a census block that is not in 
an urban area, as defined by the Census Bureau using the latest 
decennial census of the United States.
    The Bureau also proposed revisions to comment 35(b)(2)(iv)-1 that: 
(1) Conform to the changes made to Sec.  1026.35(b)(2)(iv); (2) add a 
cross-reference to comment 35(b)(2)(iii)-1; and (3) make technical 
changes for clarity. The Bureau further proposed to update the example 
provided in comment 35(b)(2)(iv)-2.i to reflect the Bureau's proposal 
to add rural census blocks to the definition of rural area. Proposed 
comment 35(b)(2)(iv)-2.i explains that an area is considered ``rural'' 
for a given calendar year based on the most recent available UIC 
designations by the USDA-ERS and the most recent available delineations 
of urban areas by the Census Bureau that are available at the beginning 
of the calendar year. As the proposed comment noted, these designations 
and delineations are updated by the USDA-ERS and the Census Bureau 
respectively once every ten years. The comment provides an illustrative 
example.
    The Bureau solicited comment on whether it should add a second 
prong to the rural definition based on the Census Bureau's urban-rural 
classification and, if so, whether it should make any modifications to 
the Census Bureau's classification in doing so. Although the Bureau 
proposed to maintain the current county-based test as part of the new 
definition, the Bureau also solicited comment on whether the counties 
included in the current definition should be expanded, contracted, 
eliminated, or maintained as is. The Bureau also requested feedback on 
any alternative approaches to defining ``rural'' areas in Sec.  
1026.35(b)(2)(iv)(A) that commenters believe might be preferable to the 
Bureau's proposal.
    For the reasons discussed below, the Bureau is adopting Sec.  
1026.35(b)(2)(iv)(A) and the accompanying commentary as proposed, with 
minor technical revisions.

Comments

    Creditor commenters, including national and state associations of 
banks and credit unions and individual banks and credit unions, as well 
as non-creditor commenters, including national associations of home 
builders, realtors, and banking supervisors, generally supported the 
expanded definition of ``rural.'' For example, a national banking 
association stated that the Census Bureau's urban-rural classification 
appeared to be the most suitable for the purposes and objectives of the 
regulations, and a regional association of credit unions referred to 
the proposed definition as a ``common sense approach'' that it urged 
the Bureau to adopt. Some of the commenters supporting the proposed 
change also noted the need to have an effective automated tool for 
determining whether a covered transaction is made in an area that is 
rural because of the difficulties inherent in considering millions of 
census blocks. These concerns are addressed below in the discussion of 
the Bureau's automated tool.
    Other commenters, generally consumer groups, noted that the current 
definition has not been in place long enough for the Bureau to discern 
its effects and questioned whether data supported the proposed changes. 
These commenters recommended caution before adopting any changes 
because consumers may be harmed by a broader definition. They also 
recommended narrowly tailoring any changes to the definition to prevent 
non-rural lenders from taking advantage of the special provisions and 
exemptions. These commenters and a few others also argued that high-
cost mortgages should not be eligible for qualified mortgage status 
under any circumstances.
    A few commenters also recommended alternative definitions. A state 
association of banks and a state association of credit unions 
recommended only excluding ``urbanized areas'' of 50,000 or more from 
the definition of rural. A national organization representing banking 
supervisors and one representing real estate brokers and agents both 
recommended the Bureau establish an application process under which a 
person who lives or does business in a state may apply to have an area 
designated as a rural area. A national nonprofit organization that 
supports affordable housing efforts in rural areas noted that a 
reliance on Census Bureau classifications for rural areas may allow 
rural area determinations for lending activity that is actually 
suburban in nature, which may have the unintended consequence of 
diverting credit away from truly rural communities and consumers. This 
commenter recommended using a sub-county designation of rural and 
small-town areas which incorporates measures of housing density and 
commuting at the Census tract level.

Final Rule

    The Bureau is finalizing Sec.  1026.35(b)(2)(iv)(A) generally as 
proposed with minor changes in the associated commentary to provide 
greater clarity and consistency with other changes made in this final 
rule.\26\ In developing the proposal, the Bureau

[[Page 59956]]

considered a variety of possible approaches that could be used to 
identify areas that are smaller than counties and that may be rural in 
nature, and the Bureau considered the alternative definitions 
commenters recommended. Of these, the Bureau believes that the urban-
rural classification completed by the Census Bureau every ten years is 
the most suitable for the Bureau's current purposes. This 
classification is done at the level of the census block, which is the 
smallest geographic area for which the Census Bureau collects and 
tabulates decennial census data. While there are only about 3,000 
counties in the United States, there are approximately 11 million 
census blocks.\27\ The Census Bureau delineates census blocks as 
``urban'' or ``rural'' based on each decennial census and most recently 
released its list of urban areas based on the 2010 Census in 2012. For 
the 2010 Census, an urban area consists of ``a densely settled core of 
census tracts and/or census blocks that meet minimum population density 
requirements, along with adjacent territory containing non-residential 
urban land uses as well as territory with low population density 
included to link outlying densely settled territory with the densely 
settled core.'' \28\ The Census Bureau identifies two types of urban 
areas: ``urbanized areas'' of 50,000 or more people, and ``urban 
clusters'' of at least 2,500 and less than 50,000 people. Under the 
Census Bureau's classification, ``rural'' encompasses all population, 
housing, and territory not included within either type of urban area.
---------------------------------------------------------------------------

    \26\ The addition of a census block prong in Sec.  
1026.35(b)(2)(iv)(A)'s ``rural'' definition does not affect the 
scope of the exemption from a requirement to obtain a second 
appraisal for certain higher-priced mortgage loans adopted by the 
January 2013 Interagency Appraisals Final Rule, as that exemption 
applies to credit transactions made by a creditor in a ``rural 
county'' as defined in Sec.  1026.35(b)(2)(iv)(A). This definition 
of ``rural county'' is retained in Sec.  1026.35(b)(2)(iv)(A) as 
Sec.  1026.35(b)(2)(iv)(A)(1) and the reference to comment 
35(b)(2)(iv)-1 in comment 35(c)(4)(vii)(H) is retained in comment 
35(b)(2)(iv)-1.iii.A.
    \27\ Census Bureau, 2010 Census Tallies of Census Tracts, Block 
Groups & Blocks, https://www.census.gov/geo/maps-data/data/tallies/tractblock.html.
    \28\ Census Bureau, 2010 Census Urban and Rural Classification 
and Urban Area Criteria, https://www.census.gov/geo/reference/ua/urban-rural-2010.html. To qualify as an urban area, the territory 
identified must encompass at least 2,500 people, of which at least 
1,500 must reside outside institutional group quarters such as 
correctional facilities, group homes for juveniles, and mental 
(psychiatric) hospitals.
---------------------------------------------------------------------------

    The definition of ``rural'' in this final rule maintains the 
bright-line, easy-to-apply county-based test from the current 
definition, while also bringing into the definition rural pockets 
within counties that are non-rural under the current rule.\29\ Because 
the Census Bureau's classification is done at the census block level, 
it provides much more granularity than any county-based metric. To 
prepare the rural-urban classification, the Census Bureau uses measures 
based primarily on population counts and residential population 
density, but also considers a variety of criteria that account for 
nonresidential urban land uses, such as commercial, industrial, 
transportation, and open space that are part of the urban 
landscape.\30\ Since the 1950 Census, the Census Bureau has reviewed 
and revised these criteria as necessary for each decennial census. The 
Census Bureau completes its rural-urban classification every ten years 
based on the results of the decennial census, on roughly the same 
schedule that the USDA-ERS uses in updating its UIC designations, which 
should provide a relatively stable but up-to-date measure.
---------------------------------------------------------------------------

    \29\ For example, Culpeper County, Virginia is part of the 
Washington-Arlington-Alexandria, DC-VA-MD-WV MSA and does not 
currently qualify as ``rural'' under existing Sec.  
1026.35(b)(2)(iv)(A). Because the Census Bureau defined some census 
blocks within Culpeper County as rural in its most recent rural-
urban classification, under this final rule, those portions of the 
county qualify as rural under Sec.  1026.35(b)(2)(iv)(A) until the 
next Census Bureau rural-urban classification.
    \30\ See Qualifying Urban Areas for the 2010 Census, 77 FR 18652 
(March 27, 2012); Urban Area Criteria for the 2010 Census, 76 FR 
53030 (Aug. 24, 2011); Proposed Urban Area Criteria for the 2010 
Census, 75 FR 52174 (Aug. 24, 2010).
---------------------------------------------------------------------------

    The Bureau believes that use of the Census Bureau's classifications 
provides consistency, certainty, stability, and objectivity to the 
``rural'' definition. The Census Bureau's classifications generally 
change only every ten years and, once established, provide a bright-
line test that is not subject to discretionary judgments and 
manipulation, which could result under some commenters' more complex 
classification procedures, including those to establish an application 
process to have an area designated as a rural area. Used in conjunction 
with automated address search tools, as discussed more fully below, the 
Census Bureau's classifications allow the use of an easy-to-apply test, 
as originally provided under the county-based definition, to continue, 
thereby avoiding regulatory and administrative complexity.

35(b)(2)(iv)(B)

    As discussed below, the Bureau is adopting Sec.  
1026.35(b)(2)(iv)(B) and (C) and comments 35(b)(2)(iv)-1, 35(b)(2)(iv)-
1.iii, and 35(b)(2)(iv)-2.ii substantially as proposed, with certain 
minor changes to enhance clarity. Accordingly, this final rule makes 
minor technical and conforming changes to the definition of 
``underserved'' and the regulation text and commentary discussed below.

The Bureau's Proposal

    Section 1026.35(b)(2)(iv)(B) defines a county as ``underserved'' 
during a calendar year if, according to Home Mortgage Disclosure Act 
(HMDA) data for the preceding calendar year, no more than two creditors 
extended covered transactions, as defined in Sec.  1026.43(b)(1), 
secured by a first lien, five or more times in the county. It further 
provides that a creditor may rely as a safe harbor on the list of rural 
or underserved counties published by the Bureau to determine whether a 
county qualifies as ``underserved'' for a particular calendar year.\31\
---------------------------------------------------------------------------

    \31\ The rural and rural or underserved safe harbor lists are 
published on the Bureau's Web site on the regulatory guidance page 
at http://www.consumerfinance.gov/guidance/.
---------------------------------------------------------------------------

    For technical reasons, the Bureau proposed to move the discussion 
of the safe harbor county lists provided by the Bureau from Sec.  
1026.35(b)(2)(iv)(B) and comment 35(b)(2)(iv)-1 to Sec.  
1026.35(b)(2)(iv)(C) and comment 35(b)(2)(iv)-1.iii.A.\32\ The Bureau 
also proposed other technical changes to Sec.  1026.35(b)(2)(iv)(B) and 
comments 35(b)(2)(iv)-1 and 35(b)(2)(iv)-2.ii and proposed to add a 
reference in comment 35(b)(2)(iv)-2.ii to the new grace period under 
Sec.  1026.35(b)(2)(iii)(A). The Bureau did not propose a substantive 
change to the definition of underserved.
---------------------------------------------------------------------------

    \32\ This proposed move is consistent with a similar move that 
the Bureau proposed with respect to the safe harbor discussion that 
currently appears with the ``rural'' definition in Sec.  
1026.35(b)(2)(iv)(A).
---------------------------------------------------------------------------

Comments

    The Bureau did not receive comments regarding the proposed 
technical and conforming changes to Sec.  1026.35(b)(2)(iv)(B), Sec.  
1026.35(b)(2)(iv)(C), comments 35(b)(2)(iv)-1, 35(b)(2)(iv)-2.ii, and 
35(b)(2)(iv)-1.iii.A. Although the Bureau did not solicit comment 
regarding the definition of ``underserved,'' the Bureau received four 
comments suggesting the Bureau consider an alternative definition of 
``underserved.'' These commenters suggested that the Bureau's 
definition of ``underserved'' is under-inclusive. These commenters 
recommended that the Bureau consider expanding or changing the meaning 
of ``underserved'' to include the consideration of socio-economic 
factors to determine underserved status. Specifically, they recommended 
that underserved areas include low- and moderate-income communities 
with limited credit options.

[[Page 59957]]

Final Rule

    For the reasons discussed below the Bureau is not substantively 
changing the definition of ``underserved'' in this final rule. The 
Bureau is adopting substantially as proposed the technical and 
conforming changes to Sec.  1026.35(b)(2)(iv)(B) and comments 
35(b)(2)(iv)-1 and 35(b)(2)(iv)-2.ii. In addition, the Bureau is 
adopting substantially as proposed Sec.  1026.35(b)(2)(iv)(C) and 
comment 35(b)(2)(iv)-1.iii.A.
    As stated in the preamble to the proposed rule the current 
definition of ``underserved'' appropriately identifies areas where the 
withdrawal of a creditor from the market could leave no meaningful 
competition within that market. The designation of an area as 
``underserved'' under the Bureau's rules is intended to identify 
communities that have few creditors and, thus, may be subject to access 
to credit issues. The Bureau's definition focuses on whether there is 
access to credit by looking at the number of creditors competing for 
mortgage business in an area. The economic-and demographic-based 
definitions suggested by commenters would introduce factors unrelated 
to competition for consumers' mortgage business.
    The changes to the ``rural'' definition discussed above expand the 
term ``rural or underserved'' for purposes of the exemption to the 
escrow requirement for higher-priced mortgage loans in Sec.  
1026.35(b)(2)(iii), the allowance for balloon-payment qualified 
mortgages in Sec.  1026.43(f), and the exemption from the balloon-
payment prohibition on high-cost mortgages in Sec.  
1026.32(d)(1)(ii)(C). Because these provisions reference 
``underserved'' only in the alternative with ``rural'' (``rural or 
underserved''), the Bureau believes that the expansion of the ``rural'' 
definition in this final rule addresses concerns that have been raised 
by commenters about the overall coverage of ``rural or underserved.'' 
\33\
---------------------------------------------------------------------------

    \33\ As discussed in the section 1022(b) analysis in Part VII 
below, the Bureau estimates that the number of rural small creditors 
will increase from approximately 2,400 to approximately 4,100.
---------------------------------------------------------------------------

    The Bureau also notes that it did not propose or seek comment on 
substantive revisions to the definition of ``underserved,'' and that 
such changes to that definition are outside the scope of this 
rulemaking.
    The Bureau notes that comment 35(b)(2)(iv)-1.ii refers to several 
current HMDA provisions. The Bureau's HMDA rulemaking proposed to 
modify the referenced provisions.\34\ The Bureau expects to issue a 
notice in the future making conforming changes to comment 35(b)(2)(iv)-
1.ii, should such change be necessary after issuance of the HMDA final 
rule.
---------------------------------------------------------------------------

    \34\ 79 FR 51732 (Aug. 29, 2014).
---------------------------------------------------------------------------

35(b)(2)(iv)(C)

    As discussed in detail below, the Bureau is adopting the revisions 
related to the safe harbors Sec.  1026.35(b)(2)(iv)(A) and (B) and 
Sec.  1026.35(b)(2)(iv)(C)(1), (2) and (3) and comment 35(b)(2)(iv)-1, 
35(b)(2)(iv)-1.iii.A, .B, and .C substantially as proposed, with 
certain minor changes to enhance clarity. Accordingly, this final rule 
adds two new safe harbor tools and makes minor conforming changes to 
the regulation text and commentary discussed below.

The Bureau's Proposal

    Section 1026.35(b)(2)(iv)(A) and (B) and comment 35(b)(2)(iv)-1 
currently provide that a creditor may rely as a safe harbor on the list 
of counties published by the Bureau to determine whether a county 
qualifies as ``rural'' or ``underserved'' for a particular calendar 
year.\35\ As noted above, the Bureau proposed to move the discussion of 
these county lists to Sec.  1026.35(b)(2)(iv)(C)(1) and comment 
35(b)(2)(iv)-1.iii.A. To facilitate compliance under the expanded 
definition of ``rural,'' the Bureau also proposed to add two additional 
safe harbors in proposed Sec. Sec.  1026.35(b)(2)(iv)(C)(2) and (3), 
for an automated address search tool on the Census Bureau's Web site 
and an automated tool that may be provided on the Bureau's Web site.
---------------------------------------------------------------------------

    \35\ A historical record of each year's lists is available at: 
http://www.consumerfinance.gov/guidance/#ruralunderserved.
---------------------------------------------------------------------------

    The Bureau proposed technical changes to the safe harbor provision 
relating to its county lists and also proposed to publish its county 
lists in the Federal Register. Proposed comment 35(b)(2)(iv)-1.iii.A 
also stated that, to the extent that U.S. territories are treated by 
the Census Bureau as counties and are neither MSAs nor micropolitan 
statistical areas adjacent to MSAs, such territories will be included 
on these lists as rural areas in their entireties.
    Because the proposed changes to Sec.  1026.35(b)(2)(iv) created the 
possibility that some counties would include both rural and non-rural 
areas, the Bureau also adjusted the discussion of the county lists in 
proposed comment 35(b)(2)(iv)-1.iii.A. to Sec.  1026.35(b)(2)(iv)(C)(1) 
to make it clear that the lists would not include counties that are 
partially rural and partially non-rural. The Bureau does not believe it 
would be practical to publish lists of the census blocks that would 
qualify as rural under proposed Sec.  1026.35(b)(2)(iv)(A)(2) because 
there are approximately 11 million census blocks in the United States.
    To assist creditors in implementing the proposed ``rural'' 
definition, the Bureau proposed to develop and maintain on its Web site 
a tool that allows creditors to enter property addresses, both 
individually and in batches, to determine whether a property is located 
in a ``rural or underserved'' area for the relevant calendar years. The 
Bureau stated in the preamble to the proposed rule that it did not 
anticipate that the Bureau's automated tool would be available before 
the proposed effective date of the final rule, but it proposed that 
such a tool could provide a safe harbor if and when it becomes 
available.
    Specifically, proposed Sec.  1026.35(b)(2)(iv)(C)(2) provided that 
a property shall be deemed to be in an area that is ``rural or 
underserved'' in a particular calendar year if the property is 
designated as rural or underserved for that calendar year by any 
automated tool that the Bureau provides on its Web site.
    In the preamble to the proposed rule, the Bureau noted that, until 
any automated tool that the Bureau may develop becomes available, the 
Bureau anticipated that creditors would use resources provided by the 
Census Bureau to determine whether proposed Sec.  
1026.35(b)(2)(iv)(A)(2), the new second prong of the proposed rural 
definition, is satisfied. The Bureau noted that the Census Bureau 
publishes maps, lists, and other reference materials on its Web 
site.\36\ The Bureau also discussed how the Census Bureau currently 
provides on its Web site an automated address search tool that allows 
users to enter a property address to obtain census information about 
the property, including a designation that the property is in an urban 
area if that is the case.\37\ The Bureau proposed that this automated 
tool or any similar automated address search tool provided

[[Page 59958]]

by the Census Bureau could be relied on as a safe harbor. Specifically, 
proposed Sec.  1026.35(b)(2)(iv)(C)(3) provided a safe harbor for a 
property not designated as located in an urban area as defined by the 
most recent delineation of urban areas announced by the Census Bureau 
through any automated address search tool that the Census Bureau 
provides on its public Web site for that purpose. Proposed comments 
35(b)(2)(iv)-1.iii.B and .C discussed the safe harbors related to these 
online tools. Proposed comment 35(b)(2)(iv)-1.iii.C clarified the 
calendar years for which the Census Bureau's automated address search 
tool can be used by noting that, for any calendar year that begins 
after the date on which the Census Bureau announced its most recent 
delineation of urban areas, a property is deemed to be in a ``rural'' 
area if the search results provided for the property by any such tool 
available on the Census Bureau's public Web site do not designate the 
property as being in an urban area. This is consistent with proposed 
comment 35(b)(2)(iv)-2.i, which explains that an area is considered 
``rural'' for a given calendar year based on the most recent available 
UIC designations by the USDA-ERS and the most recent available 
delineations of urban areas by the Census Bureau that are available at 
the beginning of the calendar year.
---------------------------------------------------------------------------

    \36\ Census Bureau, 2010 Census Urban and Rural Classification 
and Urban Area Criteria, available at https://www.census.gov/geo/reference/ua/urban-rural-2010.html.
    \37\ See generally Census Bureau, Frequently Asked Questions: 
How can I determine if my address is urban or rural?, available at 
https://ask.census.gov/faq.php?id=5000&faqId=6405 (The 2010 Urban 
Areas can be viewed using Reference maps and the TIGERweb 
interactive web mapping system; See also Census Bureau, American 
FactFinder available at http://factfinder.census.gov/faces/nav/jsf/pages/searchresults.xhtml?ref=addr&refresh=t (providing a link to an 
address search function that allows users to find Census data by 
entering a street address)).
---------------------------------------------------------------------------

    The Bureau solicited comment on whether Regulation Z should provide 
a safe harbor for automated tools of this nature. The Bureau also 
requested feedback relating to how it could make the automated tool it 
is considering developing most useful to industry and other 
stakeholders as they implement the rural and underserved definitions.

Comments

    The Bureau did not receive comments regarding the publication of 
the county lists to the Federal Register; clarification regarding the 
determination of ``rural or underserved'' status of U.S. territories; 
or the changes to proposed comment 35(b)(2)(iv)-1.iii.A. to conform to 
the proposed changes to Sec.  1026.35(b)(2)(iv). The comments received 
focused on the proposed safe harbor tools. Most comments were in 
support of the Bureau's proposed automated tool. Many commenters 
suggested the Bureau's proposed automated tool with a batch feature is 
necessary for compliance if the Bureau finalizes the definition of 
``rural'' as proposed because small creditors do not have the capacity 
(or they need more time) to develop tools to integrate the new census 
block typology. One state banking association commenter suggested that 
the Bureau delay the effective date of the rule until the Bureau's 
proposed automated tool is available because identifying ``rural'' 
areas under the proposed definition of ``rural'' would be difficult for 
small institutions and presents a compliance risk that these 
institutions may not be willing to take. A national banking association 
and several state banking associations recommended an extension of the 
two year transition period, under Sec.  1026.43(e)(6), allowing small 
creditors to issue balloon-payment qualified mortgages and high-cost 
mortgages regardless of whether they operate predominantly in rural or 
underserved areas, until banks can access the Bureau's automated tool. 
These commenters asserted that if the transition period is not extended 
until an automated tool is available, many small institutions would be 
incapable of ensuring compliance and may curtail or eliminate consumer 
mortgage financing.
    The Bureau also received several comments about the current 
usability of the Census Bureau's automated address search tool. These 
commenters stated that the Census Bureau's automated address search 
tool is not efficient for business use. One commenter criticized the 
accuracy and usability of the Census Bureau's automated address search 
tool but did not provide examples of inaccuracies. The commenter 
suggested that the Bureau use housing density and commuter information 
on a census tract level to define rural areas because a scheme based on 
the census tract level is more accurate. The commenter believed the 
Bureau's proposed automated tool would only add to the complexity of 
the proposed census block scheme used to determine ``rural'' status.
    The Bureau received one comment addressing the technical and 
conforming changes to the provisions discussing the safe harbors. The 
commenter was concerned about the change in language in Sec.  
1026.35(b)(2)(iv)(A) and (B) that states, ``a creditor may rely as a 
safe harbor on * * *'' to the conforming change in proposed Sec.  
1026.35(b)(2)(iv)(C) that states, ``[a] property shall be deemed to be 
in an area that is ``rural'' or ``underserved'' in a particular 
calendar year . . . .'' The commenter believed the Bureau's use of the 
word shall makes the use of the safe harbor tools mandatory.

Final Rule

    The Bureau is adopting these provisions substantially as proposed, 
moving the discussion of the safe harbor lists in Sec.  
1026.35(b)(2)(iv)(A) and (B) and comment 35(b)(2)(iv)-1 to Sec.  
1026.35(b)(2)(iv)(C)(1) and comment 35(b)(2)(iv)-1.iii.A. The Bureau is 
revising Sec.  1026.35(b)(2)(iv)(C)(1) and comment 35(b)(2)(iv)-1.iii.A 
to clarify that counties are rural or underserved under the Bureau's 
definitions although they may contain census blocks that are designated 
by the Census Bureau as urban. This revision provides greater clarity 
on the effect of the list of rural or underserved counties, which is 
that a property in a listed county is deemed to be in a rural area even 
if the property is located in a census block that the Census Bureau 
designates as urban. The Bureau is also finalizing as proposed the 
addition of the two new safe harbor tool provisions in Sec.  
1026.35(b)(2)(iv)(C)(2) and (3), and new comments 35(b)(2)(iv)-1.iii.B 
and .C, with minor changes to provide greater clarity.
    The Bureau is clarifying new comment 35(b)(2)(iv)-1.iii.B and .C, 
to facilitate compliance. For both the Bureau's and the Census Bureau's 
automated tools, the comments state that a printout or electronic copy 
from an automated tool designating a particular property as being in a 
rural or underserved area may be used as ``evidence of compliance'' 
that a property is in a rural or underserved area for purposes of the 
Regulation Z record retention requirements in Sec.  1026.25. The Bureau 
is also adding new comment 35(b)(2)(iv)-1.iii.D to clarify that a 
property is deemed to be in a rural or underserved area if that 
designation is provided by any one of the safe harbors, even if that 
designation is not provided by any of the other safe harbors, and 
regarding proof of compliance without the use of the enumerated safe 
harbor tools in Sec.  1026.35(b)(2)(iv)(C)(1) through (3). New comment 
35(b)(2)(iv)-1.iii.D states that the enumerated safe harbor tools are 
not the exclusive means by which a creditor can demonstrate that a 
property is in a ``rural or underserved'' area as defined in Sec.  
1026.35(b)(2)(iv)(A) and (B). The comment states however, that 
creditors are required to retain ``evidence of compliance'' in 
accordance with Sec.  1026.25, including determinations of whether a 
property is in a rural or underserved area as defined in Sec.  
1026.35(b)(2)(iv)(A) and (B).
    The Bureau considered the comment regarding the availability of the 
Bureau's proposed automated tool by the proposed effective date, the 
concern that small institutions could not benefit from the expanded 
definition of ``rural'' because they do not have the capacity to 
determine the rural status of a property under the new definition of 
``rural,'' and the suggestion that small institutions would not be 
willing to risk

[[Page 59959]]

a compliance breach by trying to determine rural status without the 
Bureau's proposed automated tool. The Bureau also considered the 
comments recommending an extension of the two year transition period, 
under Sec.  1026.43(e)(6), until creditors can access the Bureau's 
automated tool. The Bureau expects that its automated tool will be 
available by the effective date of this final rule, which should 
address the concerns of these commenters. Further, the Bureau intends 
to provide guidance to industry stakeholders through implementation 
materials on how to access and use the Bureau's automated tool. In 
addition, creditors may use the Census Bureau's automated tool, or 
other means \38\ besides the designated safe harbor tools, to determine 
the ``rural'' status of a property as long as the creditor retains 
``evidence of compliance'' in accordance with Sec.  1026.25 of whether 
a property is in a rural or underserved area as defined in Sec.  
1026.35(b)(2)(iv)(A) and (B). See comment 35(b)(2)(iv)-1.iii.B, .C, and 
.D discussed above.
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    \38\ As discussed above, creditors may use Census Bureau maps, 
lists, and other reference materials to demonstrate compliance with 
Sec.  1026.35(b)(d)(iv)(A), but alternative methods do not have the 
benefit of a safe harbor and a creditor must retain ``evidence of 
compliance'' in accordance with Sec.  1025.25.
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    The Bureau also considered the commenters concerns about the Census 
Bureau's automated address search tool and their requests that the 
Bureau make available its automated tool before the effective date of 
this rule. As noted above, the Bureau expects its automated tool will 
be ready by the effective date of this rule, which should address the 
usability concerns about the Census Bureau's automated address search 
tool. Creditors are encouraged to use the Bureau's automated tool, 
which will have a user-friendly interface and a batch upload feature. 
One commenter questioned the use of the Census Bureau's automated 
address search tool and suggested the Bureau adopt a rural 
classification scheme based on the use of census tracts and factors 
such as housing density and commuting. The Bureau believes such a 
system would increase administrative burden and complexity and reduce 
the objectivity achieved by a definition of rural based on census 
blocks. Accordingly, the Bureau is not adopting such a classification 
scheme.
    Finally, one commenter believed the use of the word ``shall'' in 
Sec.  1026.35(b)(2)(iv)(C) makes the use of the safe harbor tools 
mandatory. Creditors are not required to use the safe harbor tools. 
``Shall'' is used in Sec.  1026.35(b)(2)(iv)(C) to convey that a 
creditor who uses one or both of the tools receives a conclusive 
presumption of compliance with the Bureau's definition of ``rural or 
underserved.'' Using the word may in this context would cause 
uncertainty with regard to the effect of the safe harbor tool's 
designation with respect to a particular property.

Section 1026.36 Prohibited Acts or Practices and Certain Requirements 
for Credit Secured by a Dwelling

36(a) Definitions

    The commentary to Sec.  1026.36(a) discusses the meaning of the 
term ``loan originator.'' The Bureau did not propose changes to this 
commentary. However, the Bureau discovered a technical error in comment 
36(a)-1.i.A.3. This comment contains a reference to comment 
``36(a)z4.i.'' The correct format for this reference is ``36(a)-4.i.'' 
Thus, the Bureau is adopting a technical amendment to comment 36(a)-
1.i.A.3 to revise the incorrect format. No substantive change is 
intended.

Section 1026.43 Minimum Standards for Transactions Secured by a 
Dwelling

43(e) Qualified Mortgages

43(e)(5) Qualified Mortgage Defined--Small Creditor Portfolio Loans
    As discussed in detail below, the Bureau is adopting comments 
43(e)(5)-4 and 43(e)(5)-8 substantially as proposed, with certain minor 
changes to enhance clarity. Accordingly, this final rule makes minor 
technical and conforming changes to this commentary to Sec.  
1026.43(e)(5) discussed below.

The Bureau's Proposal

    Section 1026.43(e)(5) defines a category of qualified mortgages 
originated by certain small creditors that enjoy special treatment 
under the ability-to-repay rules. These mortgages must be originated by 
creditors that meet the origination limit and asset limit in Sec.  
1026.35(b)(2)(iii)(B) and (C), and the creditors must hold the loans in 
portfolio for at least three years after consummation, with certain 
exceptions. Such a small creditor portfolio loan can be a qualified 
mortgage even if the borrower's total debt-to-income ratio exceeds the 
43 percent debt-to-income ratio limit that otherwise applies to general 
qualified mortgage loans under Sec.  1026.43(e)(2). Qualified mortgages 
originated by small creditors are entitled to a safe harbor under the 
Bureau's ability-to-repay rule if the loan's APR does not exceed the 
applicable APOR by 3.5 or more percentage points--in contrast to the 
general qualified mortgage safe harbor which covers loans with APRs 
that do not exceed the applicable APOR by 1.5 or more percentage 
points.
    The Bureau proposed several changes to the commentary to Sec.  
1026.43(e)(5) to conform to the Bureau's proposed changes to the 
origination limit and the asset limit in Sec.  1026.35(b)(2)(iii)(B) 
and (C). Proposed comment 43(e)(5)-4 regarding creditor qualifications 
provides that to be eligible to make a qualified mortgage under Sec.  
1026.43(e)(5) the creditor has to satisfy the requirements of Sec.  
1026.35(b)(2)(iii)(B) and (C), including the Bureau's proposed changes 
to the origination limit and the asset limit, respectively, and the 
addition of the grace periods. The Bureau proposed to revise comment 
43(e)(5)-8, regarding the transfer of a qualified mortgage to another 
qualifying creditor prior to three years after consummation, to conform 
to the proposed origination limit and asset limit in Sec.  
1026.35(b)(2)(iii)(B) and (C).

Final Rule

    The Bureau did not receive comments regarding the conforming 
changes to comments 43(e)(5)-4 and 43(e)(5)-8. The Bureau is finalizing 
as proposed, with minor technical revisions to provide greater clarity, 
comments 43(e)(5)-4 and 43(e)(5)-8.

43(e)(6) Qualified Mortgage Defined--Temporary Balloon-Payment 
Qualified Mortgage Rules

43(e)(6)(ii)

    As discussed in detail below, the Bureau is adopting Sec.  
1026.43(e)(6)(ii) as proposed. Accordingly, this final rule extends the 
temporary balloon-payment qualified mortgage provision to apply to 
covered transactions for which applications are received before April 
1, 2016.

The Bureau's Proposal

    Section 1026.43(e)(6) provides for a temporary balloon-payment 
qualified mortgage that requires all of the same criteria to be 
satisfied as the balloon-payment qualified mortgage definition in Sec.  
1026.43(f) except the requirement that the creditor extend more than 50 
percent of its total first-lien covered transactions in counties that 
are ``rural'' or ``underserved.'' Pursuant to Sec.  1026.43(e)(6)(ii), 
this temporary provision currently applies only to covered transactions 
consummated on or before January 10, 2016 (the sunset date). The Bureau 
proposed to change Sec.  1026.43(e)(6)(ii) to provide that the 
temporary provision applies to covered transactions for which the 
application was received before April 1, 2016. The

[[Page 59960]]

change was proposed to give small creditors more time to understand how 
any changes that the Bureau may make to the rural definition and 
lookback period will affect their status, if at all, and to make any 
required changes to their business practices.\39\ This proposed change 
to Sec.  1026.43(e)(6)(ii) would have also affected the HOEPA balloon-
loan provisions because the Bureau had extended the exception to the 
general prohibition on balloon features for high-cost mortgages under 
Sec.  1026.32(d)(1)(ii)(C) to allow small creditors, regardless of 
whether they operate predominantly in ``rural'' or ``underserved'' 
areas, to continue originating balloon high-cost mortgages if the loans 
meet the requirements for qualified mortgages under Sec. Sec.  
1026.43(e)(6) or 1026.43(f). The Bureau solicited comment on whether it 
should change the sunset date in Sec.  1026.43(e)(6)(ii) and whether 
Sec.  1026.43(e)(6)(ii) should use the date the application was 
received or the consummation date in applying the sunset date. For the 
reasons discussed below, the Bureau is adopting Sec.  1026.43(e)(6)(ii) 
as proposed.
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    \39\ Qualified mortgages consummated under Sec.  1026.43(e)(6) 
based on applications received before April 1, 2016 would retain 
their qualified mortgage status after that date, as long as the 
other requirements of Sec.  1026.43(e)(6) are met.
---------------------------------------------------------------------------

Comments

    Creditors, including national and state banking associations, 
individual banks, and national and state associations of credit unions, 
generally appreciated the proposed extension to cover applications 
received before April 1, 2016. However, these commenters recommended 
that either the provision should be extended indefinitely or, if not 
made permanent, extended for a longer period than proposed. Suggested 
extensions ranged from until the Bureau's automated tool is operational 
to as much as two additional years.
    A comment from a state association of credit unions stated this 
provision should be extended indefinitely until such time as the Bureau 
has fully studied the benefits that loans with balloon payments provide 
to consumers and the impact on consumers if they were unable to obtain 
this type of loan. A national association of banks recommended a one-
year extension to allow further study of the issue, and individual 
banks and credit unions stated a one-year extension would help them 
transition from balloon loans to adjustable-rate mortgage lending 
programs. A national banking organization and several state banking 
associations urged that the sunset be delayed until banks can access an 
official automated tool to identify rural areas, because without such 
an automated tool many small institutions would be incapable of 
ensuring compliance with the definitions, and may curtail or eliminate 
consumer mortgage financing.

Final Rule

    The Bureau has considered the comments submitted on this provision 
and is finalizing Sec.  1026.43(e)(6)(ii) as proposed. As stated in the 
May 2013 ATR Final Rule, the Bureau established a temporary provision 
because ``the Bureau believes it is appropriate to use the two-year 
transition period to consider whether it can develop more accurate or 
precise definitions of rural and underserved. However, the Bureau 
believes that Congress made a deliberate policy choice in the Dodd-
Frank Act not to extend qualified mortgage status to balloon-payment 
products outside of such [rural] areas.'' 78 FR 35429, 35490 (June 12, 
2013). The rule as amended here will permit creditors to continue to 
make balloon-payment qualified mortgages beyond April 1, 2016 as long 
as the application for the transaction is received before that date, 
and provides additional time beyond the original and expected sunset 
date for creditors to make necessary adjustments. With respect to the 
commenters that recommended an extension until an automated tool is 
available, as discussed above, the Bureau expects to have such an 
automated tool in place and operational upon the effective date of this 
final rule.

43(f) Balloon-Payment Qualified Mortgages Made by Certain Creditors

    As discussed below, the Bureau is adopting comments 43(f)(1)(vi)-1, 
43(f)(1)(vi)-1.i.A and .B, and 43(f)(2)(ii)-1 substantially as 
proposed, with certain minor changes to enhance clarity. Accordingly, 
this final rule makes minor technical and conforming changes to the 
commentary discussed below.

The Bureau's Proposal

    Section 1026.43(f)(1) provides an exemption to the general 
prohibition on qualified mortgages having balloon-payment features 
under Sec.  1026.43(e)(2)(C) if the creditor satisfies the requirements 
stated in Sec.  1026.35(b)(2)(iii)(A), (B), and (C) and other criteria 
are met. Pursuant to Sec.  1026.43(f)(2), a qualified mortgage made 
under this section (a ``balloon-payment qualified mortgage'') 
immediately loses its qualified mortgage status upon transfer in the 
first three years after consummation, with certain exceptions. The 
Bureau proposed to revise comments 43(f)(1)(vi)-1 and 43(f)(2)(ii)-1 to 
reflect the proposed revisions that are described in the section-by-
section analysis of Sec.  1026.35 above, including the new grace 
periods and expanded tests that the Bureau proposed in Sec.  
1026.35(b)(2)(iii)(A), (B), and (C), the broader rural definition that 
the Bureau proposed in Sec.  1026.35(b)(2)(iv)(A), and the safe harbor 
provisions that the Bureau proposed in Sec.  1026.35(b)(2)(iv)(C). 
Proposed comment 43(f)(1)(vi)-1.i.A and .B also included updated 
examples to reflect these changes in the regulation text.
    In lieu of listing out the asset limits for every year in comment 
43(f)(1)(vi)-1.iii, as the asset limit is adjusted for inflation each 
year, the Bureau also proposed to include a cross-reference in that 
comment indicating that the Bureau publishes notice of the new asset 
limit each year by amending comment 35(b)(2)(iii)-1.iii. The Bureau 
also proposed technical changes to comments 43(f)(1)(vi)-1, 43(f)(2)-2, 
and 43(f)(2)(ii)-1.

Final Rule

    The Bureau did not receive comments that addressed the proposed 
revisions to comments 43(f)(1)(vi)-1, 43(f)(2)(ii)-1 and proposed 
comment 43(f)(1)(vi)-1.i.A and .B. The Bureau is finalizing as 
proposed, with minor technical revisions to provide greater clarity, 
the aforementioned comments.

VI. Effective Date

    As discussed in detail below, the Bureau is adopting the effective 
date for this final rule as proposed. The amendments in this final rule 
are effective January 1, 2016.

The Bureau's Proposal

    The Bureau proposed that all of the changes in its proposed rule 
take effect on January 1, 2016. Specifically, the Bureau proposed that 
its proposed amendments to Sec.  1026.35(b)(2)(iii)(A), (B), (C), and 
(D) and its commentary, to Sec.  1026.35(b)(2)(iv)(A), (B), and (C) and 
its commentary, to Sec.  1026.43(e)(6), and to the commentary to 
Sec. Sec.  1026.43(e)(5) and 1026.43(f)(1) and (f)(2), take effect for 
covered transactions consummated on or after January 1, 2016. The 
Bureau stated that it believed that this proposed effective date 
provided a date that is consistent with the end of the calendar year 
determinations required to be made with regard to the applicability of 
the special provisions and exemptions that apply to small creditors 
under the Bureau's regulations, as amended by the Bureau's proposal, 
and would therefore

[[Page 59961]]

facilitate compliance by creditors. The Bureau requested comment on 
whether the proposed effective date is appropriate, or whether the 
Bureau should adopt an alternative effective date.

Comments

    A community bank trade association commenter and several credit 
union commenters recommended that the final rule provide an earlier 
optional effective date--specifically, on publication of the final 
rule--so that banks eligible for small creditor and small creditor 
rural status under the expanded definitions in the rule could take 
earlier advantage of the special provisions and exemptions that would 
become available to them. One commenter suggested that, in addition to 
its suggestion for an optional effective date on publication, the 
mandatory compliance date for purposes of compliance with the final 
rule changes should be January 1, 2016. It stated that mandatory 
compliance should not be earlier for any banks that currently satisfy 
the requirements for small creditor status, but may not after the final 
rule takes effect.
    One state banking association commenter suggested that the Bureau 
delay the effective date of the rule until the Bureau's proposed 
automated tool to assist creditors in determining whether a property 
securing a mortgage is in a rural or underserved area is available. 
This commenter asserted that identifying ``rural'' areas under the 
Bureau's proposed definition of ``rural'' is difficult for small 
institutions and that it presents a compliance risk that these 
institutions may not be willing to take.

Final Rule

    After considering the comments received on the effective date, the 
Bureau is finalizing the rule as proposed, with the amendments in the 
final rule taking effect for covered transactions consummated on or 
after January 1, 2016. The increased origination limit and the expanded 
definition of rural in this final rule, for example, apply only to 
covered transactions consummated on or after that date. The Bureau 
continues to believe that a January 1, 2016 effective date is the 
appropriate effective date for the final rule changes as it is 
consistent with the end of the calendar year determinations required to 
be made in order to determine a creditor's eligibility for small 
creditor and small creditor rural or underserved (``small rural 
creditor'') status and for the April 1 grace period. The January 1, 
2016 effective date will therefore make determinations of small 
creditor and small rural creditor status easier going forward for 
creditors. It should also facilitate supervision of regulated entities 
for purposes of determination of compliance with the Bureau's rules, 
i.e., whether a creditor was in fact small or small/rural/underserved 
and eligible for the special provisions and exemptions available to 
such creditors.
    An optional and mandatory effective date for the final rule 
changes, as suggested by some commenters, may create implementation and 
supervisory compliance oversight complications for the Bureau and other 
federal regulatory agencies--complications that may not be justified by 
any advantages that may be obtained by creditors seeking to operate as 
small or small rural creditors for the few remaining months of 2015. 
The Bureau believes that the January 1, 2016 effective date provides a 
bright line approach that will facilitate creditor compliance and avoid 
complexity in regulatory oversight.
    The commenter seeking a delay in the effective date of the rule 
until the Bureau's automated tool is available may have been based on 
the Bureau's statement in the proposed rule that it did not expect the 
proposed automated tool to be available by the effective date of the 
final rule. The Bureau now believes however that its automated tool 
will be available by the effective date of the final rule, which should 
address the concerns of this commenter.

VII. Dodd-Frank Act Section 1022(b) Analysis

A. Overview

    In developing the final rule, the Bureau has considered potential 
benefits, costs, and impacts.\40\ The Bureau has consulted, or offered 
to consult with, the prudential regulators, the Federal Housing Finance 
Agency, the Federal Trade Commission, the U.S. Department of 
Agriculture, the U.S. Department of Housing and Urban Development, the 
U.S. Department of the Treasury, the U.S. Department of Veterans 
Affairs, and the U.S. Securities and Exchange Commission, including 
regarding consistency with any prudential, market, or systemic 
objectives administered by such agencies. The Bureau has also consulted 
with the Census Bureau on Sec.  1026.35(b)(2)(iv)(A)(2) and (C)(3).
---------------------------------------------------------------------------

    \40\ 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.
---------------------------------------------------------------------------

    As discussed in greater detail elsewhere throughout this 
Supplementary Information, the Bureau finalizes several amendments to 
the Bureau's Regulation Z and official interpretations relating to 
escrow requirements for higher-priced mortgage loans under the Bureau's 
January 2013 Escrows Final Rule and ability-to-repay/qualified mortgage 
requirements under the Bureau's January 2013 ATR Final Rule and May 
2013 ATR Final Rule. Since publication of the 2013 Title XIV Final 
Rules, the Bureau has received extensive feedback on the definitions of 
``small creditor'' and ``rural and undeserved areas'' with many 
commenters criticizing the Bureau for defining ``rural'' and 
``underserved'' too narrowly and urging the Bureau to consider 
alternative definitions. This final rule reflects feedback from 
stakeholders regarding the Bureau's definitions of small creditor and 
rural and underserved areas as those definitions relate to special 
provisions and certain exemptions provided to small creditors under the 
Bureau's aforementioned rules.
    The discussion below considers the benefits, costs, and impacts of 
the following key provisions of the final rule (final provisions):

     Raising the loan origination limit for determining 
eligibility for small-creditor status;
     An expansion of the definition of ``rural area'' to 
include (1) a county that meets the current definition of rural 
county or (2) a census block that is not in an urban area as defined 
by the Census Bureau; and
     An extension of the temporary two-year transition 
period that allows certain small creditors to make balloon-payment 
qualified mortgages and balloon-payment high cost mortgages 
regardless of whether they operate predominantly in rural or 
underserved areas.

    With respect to these provisions, the discussion considers costs 
and benefits to consumers and costs and benefits to covered persons. 
The discussion also addresses certain alternative provisions that were 
considered by the Bureau in the development of the proposed and of the 
final rule.
    The Bureau has chosen to evaluate the benefits, costs, and impacts 
of the final rule against the current state of the world.\41\ That is, 
the Bureau's analysis below considers the benefits, costs, and impacts 
of the final provisions relative to the current regulatory regime, as 
set forth primarily in the January 2013 ATR

[[Page 59962]]

Final Rule, the May 2013 ATR Final Rule, and the January 2013 Escrows 
Final Rule.\42\ The baseline considers economic attributes of the 
relevant market and the existing regulatory structure.
---------------------------------------------------------------------------

    \41\ In particular, the Bureau compares the impacts of the final 
provisions against the state of the world after January 2016 if the 
final provisions do not come into effect.
    \42\ 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.
---------------------------------------------------------------------------

    The Bureau has relied on a variety of data sources to consider the 
potential benefits, costs and impacts of the final provisions, 
including the public comment record of various Board and Bureau 
rules.\43\ However, in some instances, the requisite data are not 
available or are quite limited. Data with which to quantify the 
benefits of the rule are particularly limited. As a result, portions of 
this analysis rely in part on general economic principles to provide a 
qualitative discussion of the benefits, costs, and impacts of the final 
rule.
---------------------------------------------------------------------------

    \43\ The quantitative estimates in this analysis are based upon 
data and statistical analyses performed by the Bureau. To estimate 
counts and properties of mortgages for entities that do not report 
under HMDA, the Bureau has matched HMDA data to Call Report data and 
National Mortgage Licensing System data and has statistically 
projected estimated loan counts for those depository institutions 
that do not report these data either under HMDA or on the NCUA Call 
Report. The Bureau has projected originations of higher-priced 
mortgage loans in a similar fashion for depositories that do not 
report under HMDA. These projections use Poisson regressions that 
estimate loan volumes as a function of an institution's total 
assets, employment, mortgage holdings, and geographic presence.
---------------------------------------------------------------------------

    The primary source of data used in this analysis is 2013 data 
collected under HMDA. The empirical analysis also uses data from the 
4th quarter 2013 bank and thrift Call Reports,\44\ and the 4th quarter 
2013 credit union Call Reports from the NCUA, to identify financial 
institutions and their characteristics. Unless otherwise specified, the 
numbers provided include appropriate projections made to account for 
any missing information, for example, any institutions that do not 
report under HMDA. The Bureau also utilized the data from the Bureau's 
Consumer Credit Panel.\45\
---------------------------------------------------------------------------

    \44\ Every national bank, State member bank, and insured 
nonmember bank is required by its primary Federal regulator to file 
consolidated Reports of Condition and Income, also known as Call 
Reports, for each quarter as of the close of business on the last 
day of each calendar quarter (the report date). The specific 
reporting requirements depend upon the size of the bank and whether 
it has any foreign offices. For more information, see http://www2.fdic.gov/call_tfr_rpts/.
    \45\ The Consumer Credit Panel is a longitudinal, nationally 
representative sample of approximately 5 million deidentified credit 
records from one of the nationwide consumer reporting agencies. The 
sample provides tradeline-level information for all of the 
tradelines associated with each credit report record each month, 
including a commercially-available credit score. This information 
was used for the analysis of how consumers' credit scores differ 
depending on the size of the financial institution originating the 
consumers' mortgage loans.
---------------------------------------------------------------------------

    Especially in light of some of the comments received by the Bureau 
that were discussed in the section-by-section analysis, it is worth 
emphasizing that the Bureau analyzes data from all creditors, both the 
ones that report under HMDA and the ones that do not, with the 
exception of non-depository institutions that do not report under HMDA. 
For HMDA reporters, the Bureau uses the data reported. For HMDA non-
reporters, the Bureau uses projections based on the match of the Call 
Report data with HMDA.
    The final provisions expand the number of institutions that are 
eligible to originate certain types of qualified mortgages and to take 
advantage of certain special provisions under the January 2013 ATR 
Final Rule, the May 2013 ATR Final Rule, the January 2013 Escrows Final 
Rule, and the 2013 HOEPA Final Rule.\46\ The first set of special 
provisions is tailored to creditors deemed as small (small creditors) 
without regard to the location of their originations. Small creditors 
can originate qualified mortgages without regard to the bright-line 
debt-to-income ratio limit that is otherwise required to meet the 
Bureau's general qualified mortgage requirements (small creditor 
portfolio special provision). Qualified mortgages originated by small 
creditors are entitled to a safe harbor with an APR that is more than 
1.5 percentage points over APOR, as long as these loans have an APR of 
less than 3.5 percentage points over APOR (small creditor portfolio QM 
special provision).
---------------------------------------------------------------------------

    \46\ As explained in the section-by-section analysis above, the 
exception to the general prohibition on balloon-payment features for 
high-cost mortgages in the 2013 HOEPA Final Rule is also affected by 
the final provisions. However, the Bureau believes that the effect 
of the final rule on the rural balloon-payment provision in the 2013 
HOEPA Final Rule is relatively small, in terms of both the consumers 
and covered persons affected, and thus the Bureau does not discuss 
this effect of the final rule in this 1022(b) analysis.
---------------------------------------------------------------------------

    The second set of special provisions applies only to small 
creditors that operate predominantly in rural or underserved areas 
(rural small creditors). Rural small creditors can originate qualified 
mortgages with balloon-payment features, as long as these loans are 
kept in portfolio (rural qualified mortgage balloon-payment special 
provision) and other requirements are met.\47\ These qualified 
mortgages with balloon-payment features are entitled to a safe harbor 
as long as these loans have an APR of less than 3.5 percentage points 
over APOR. Also, rural small creditors are generally allowed to 
originate higher-priced mortgage loans without setting up an escrow 
account for property taxes and insurance (rural higher-priced mortgage 
loan escrow special provision).
---------------------------------------------------------------------------

    \47\ As discussed in the section-by-section analysis, there is 
also a temporary two-year provision that allows small creditors, 
regardless of whether they operate predominantly in rural or 
underserved areas, to originate qualified mortgage balloon-payment 
loans and high-cost mortgages with balloon-payment features. This 
final rule extends the end-date for that temporary provision.
---------------------------------------------------------------------------

    Among other things, the final provisions expand the number of small 
creditors by changing the origination limit on the number of loans that 
a small creditor could have originated annually together with its 
affiliates from no more than 500 to no more than 2,000. The final 
rule's origination limit also counts only loans not held in portfolio 
by the creditor and its affiliates that originate covered transactions 
secured by first liens toward that limit. Similar to the currently 
effective provisions, the final provisions include a requirement that 
creditors have less than $2 billion in total assets (adjusted 
annually), but under the final rule this threshold applies to the 
creditor's assets combined with the assets of the creditor's affiliates 
that originate covered transactions secured by first liens rather than 
just the creditor's own assets.\48\
---------------------------------------------------------------------------

    \48\ All the numbers below are presented considering the 
affiliates' assets to the extent that the affiliates' assets are 
aggregated in the Call Reports, thus the number of newly exempted 
institutions and the number of loans that they originated could be 
slightly different from what the Bureau is reporting. The Bureau 
does not believe that aggregating assets of affiliates that 
originate covered transactions secured by first liens for the 
purposes of the $2 billion asset prong results in many, if any, 
creditors that are considered small under the currently effective 
rule, but will not be considered small under the final rule.
---------------------------------------------------------------------------

    Based on 2013 data, the Bureau estimates that the number of small 
creditors will increase from approximately 9,700 to approximately 
10,400 (out of the 11,150 creditors in the United States that the 
Bureau estimates are engaged in mortgage lending). In 2013, the 
approximately 700 additional creditors originated about 720,000 loans 
(roughly 10 percent of the overall residential mortgage market), of 
which about 175,000 were kept in portfolio. Of these 175,000 portfolio 
loans, the Bureau estimates that about 15,000 were portfolio higher-
priced mortgage loans and 88 percent of those had an APR between 1.5 
and 3.5 percentage points over APOR.\49\
---------------------------------------------------------------------------

    \49\ The percentage of loans with an APR that was 1.5 to 3.5 
percentage points over APOR is based exclusively on HMDA data.
---------------------------------------------------------------------------

    The final provisions also expand the areas deemed rural for the 
purposes of

[[Page 59963]]

the rural small creditor special provisions described above. Currently, 
areas deemed rural are counties that are neither in an MSA nor in a 
micropolitan statistical area that is adjacent to an MSA. In addition 
to the current definition, the final provisions also count as rural 
areas census blocks that are deemed rural by the Census Bureau.\50\ 
Based on 2013 data, the Bureau estimates that the number of rural small 
creditors will increase from about 2,400 to about 4,100.\51\ The 
additional 1,700 creditors originated about 220,000 loans, out of which 
120,000 are estimated to be portfolio loans and about 26,000 of those 
are estimated to be higher-priced mortgage loans. The Bureau is not 
able to estimate currently what percentage of these 120,000 portfolio 
loans are balloon-payment loans.
---------------------------------------------------------------------------

    \50\ As discussed further above, census blocks deemed rural are 
census blocks that are not in an urban area (i.e., neither in an 
urbanized area nor in an urban cluster) as defined by the Census 
Bureau.
    \51\ The Bureau used data from several sources to estimate 
whether a given creditor would be considered rural in 2013 according 
to both the current state of the world and if the final rule were 
already effective. The Bureau used HMDA data for the creditors that 
report to the dataset. Since creditors only have to report the 
census tract of the property's location, the Bureau assumed that a 
property in a particular census tract has the same chance of being 
rural as the percentage of that tract's population that lives in 
rural census blocks (this information is available from the Census 
Bureau). For the depository institutions that did not report under 
HMDA, the Bureau is aware of the location of the creditors' 
branches. The Bureau assumed that mortgage lending is spread equally 
across a creditor's branches. The Bureau also assumed that if a 
branch is in a given county, then the same proportion of loans in 
this branch originated to consumers living in rural or underserved 
areas as the percentage of population living in rural or underserved 
areas in that county. Note that the 4,100 includes creditors that do 
not qualify as small but for the final rule. However, out of the 700 
creditors that do not qualify as small but for the final rule, only 
around 10 percent will qualify as rural even when the final 
provisions expanding rural areas are effective.
---------------------------------------------------------------------------

B. Potential Benefits and Costs to Consumers and Covered Persons 
Consumer Benefits

    Consumer benefit from the final provisions is a potential expansion 
in access to credit. Access to credit concerns meant to be addressed by 
the rural small creditor provisions and the small creditor provisions 
are interrelated, thus the Bureau discusses them jointly in this 
subsection.\52\
---------------------------------------------------------------------------

    \52\ Note that there is a difference in the current effect of 
the rules: currently, the creditors that are small, but not rural, 
enjoy the same special provisions as rural small creditors under the 
January 2013 ATR Final Rule and the May 2013 ATR Final Rule due to a 
temporary two-year provision in the May 2013 ATR Final Rule. This 
temporary provision is discussed in the section-by-section analysis 
above.
---------------------------------------------------------------------------

    In general, most consumer protection regulations have two effects 
on consumers. Regulations restrict particular practices, or require 
firms to provide additional services, in order to make consumers better 
off. However, restricting firms' practices or requiring additional 
services might result in firms increasing their prices or discontinuing 
certain product offerings, potentially resulting in reduced access to 
credit.
    The aforementioned small and rural small creditor special 
provisions were included in the January 2013 ATR Final Rule and the 
January 2013 Escrows Final Rule (along with the May 2013 ATR Final 
Rule) in order to alleviate potential access to credit concerns. Note 
that some of these provisions were Congressionally mandated. The final 
provisions expand the number of financial institutions that qualify for 
these special provisions. Accordingly, there are two effects on 
consumers that originate their mortgage loans with the creditors that 
are exempted by the final provisions: a potential benefit from an 
increase in access to credit and a potential cost from reduction of 
certain consumer protections.
    As noted above, the potential benefit of the final provisions for 
consumers is a potential increase in access to credit. The magnitude of 
this potential increase depends on whether, but for the provisions in 
the final rule affecting rural small creditors: (1) Financial 
institutions that are covered by the final provisions stop or curtail 
originating mortgage loans in particular market segments or increase 
the price of credit in those market segments in numbers sufficient to 
have an adverse impact on those market segments, (2) the financial 
institutions that remain in those market segments do not provide a 
sufficient quantum of mortgage loan origination at the non-increased 
price, and (3) there is not significant new entry into the market 
segments left by the departing institutions. If, but for the final 
rule, all three of these scenarios are realized, then the final rule 
increases access to credit.
    Analogously, the magnitude of this potential increase in access to 
credit depends on whether, in the absence of the provisions in the 
final rule affecting small creditors and escrow accounts:\53\ (1) 
Financial institutions that are covered by the final provisions have 
already stopped or curtailed originating mortgage loans in particular 
market segments or increased the price of credit in those market 
segments in numbers sufficient to have an adverse impact on those 
market segments, (2) the financial institutions that remained in those 
market segments do not provide a sufficient quantum of mortgage loan 
origination at the non-increased price, and (3) there has not been a 
significant new entry into the market segments left by the departed 
institutions. If, but for the final rule, all three of these scenarios 
are realized, then the final rule increases access to credit.
---------------------------------------------------------------------------

    \53\ Note the difference in baselines: currently, due to the 
temporary two-year provision discussed in the section-by-section, 
all the small creditors are eligible for the special provisions that 
apply to rural small creditors, except for the provisions in the 
January 2013 Escrows Final Rule.
---------------------------------------------------------------------------

    The Bureau received comments suggesting that access to credit will 
indeed be curtailed but for the final provisions (or is already 
curtailed, but could be increased after these provisions become 
effective). These comments are discussed in the section-by-section 
analysis. The evidence provided in these comments appears to be largely 
anecdotal. The Bureau's data do not refute the commenters' assertions; 
however, the Bureau does not have the direct evidence to estimate the 
degree to which the final provisions would increase access to credit.
    In a series of analyses, the Bureau did not find specific evidence 
that the final provisions would increase access to credit when 
analyzing data on various consumers' characteristics (credit 
scores,\54\ loan amounts relative to income,\55\ availability of 
smaller amount loans,\56\ and pricing \57\), collateral

[[Page 59964]]

(census tracts with portfolio-only lending \58\), and competition 
(number of creditors active in a county, even assuming that all the 
creditors that are small,\59\ or small and rural, due to the final rule 
would exit if the final rule did not become effective).
---------------------------------------------------------------------------

    \54\ Using the Bureau's Consumer Credit Panel for 2013, the 
Bureau analyzed borrowers' credit score distributions at creditors 
with various yearly origination counts. There was no significant 
difference between the creditors that qualify as small due to the 
final rule and larger creditors, including both the median credit 
scores and the lower tails of the distribution (for example, the 
10th percentile of FICO scores).
    \55\ A relationship lender might help consumers by, potentially, 
originating loans with a higher DTI ratio because, for example, the 
relationship lender is aware that the consumer is at a high DTI only 
temporarily. Using HMDA data, and analyzing the loan-to-income ratio 
as a proxy for DTI (since both variables are available in HMDA), 
shows that the median consumer of a small creditor has a loan-to-
income ratio of 2.3. The figure is the same for larger creditors.
    \56\ A commenter suggested that smaller creditors might be 
originating more loans for smaller amounts (the commenter suggested 
a threshold of $40,000). According to the Bureau's analysis, while 
it might be true that smaller creditors make a disproportionate 
number of smaller amount loans, the majority of the smaller loans 
are made by larger creditors, and a sizable portion of smaller loans 
are made by creditors that already enjoy the special provisions 
under the currently effective rules.
    \57\ Instead of extending more credit, relationship lenders 
might be extending cheaper credit if they believe that their 
consumers are, effectively, less risky. In that case, given similar 
credit-risk profiles, the Bureau could expect that smaller creditors 
provide cheaper loans. However, higher-priced mortgage loans 
comprise on average 8.3 percent of the portfolio of creditors that 
are deemed small due to the final rule and 22.2 percent of the 
portfolio of creditors that are deemed small and rural due to the 
final rule. In comparison, the figure for larger creditors is 4.0 
percent.
    \58\ If the area nearby a property is sparsely populated, a lack 
of comparable properties for appraisal can be a concern. In 2013, 
there were about 400 tracts where the only HMDA-reported loans 
originated were portfolio loans (out of the roughly 73,000 tracts in 
HMDA). About 200 of these tracts had more than one loan originated 
in 2013. These 400 tracts had fewer than 1,000 loans between them; 
of these loans, about 400 were made by creditors that originate over 
5,000 loans a year and about 300 were made by creditors that made 
fewer than 500 loans a year.
    \59\ The Bureau analyzed HMDA 2013 county-level data. For 
purposes of the statistics here and below, ``counties'' is used to 
refer to counties and county equivalents. The Bureau considered 
counties where there are currently at most five creditors operating, 
and at least one of these creditors would qualify as small only due 
to the final rule. The Bureau's analysis shows that there are only a 
few counties like this, both for the purposes of the small creditor 
special provisions and for the purposes of the rural small creditor 
special provisions.
    The cutoff of five competitors is arguably enough to ensure a 
sufficient amount of competition for a close-to-homogenous product. 
However, the Bureau does not mean to imply that, for example, first-
lien covered transactions in a county constitute a market in the 
antitrust sense.
---------------------------------------------------------------------------

    However, the Bureau's data are not complete and do not permit the 
Bureau to analyze various relevant hypotheses. For example, one 
possible theory that the Bureau's data do not confirm or negate is that 
there might be a lack of access to credit due to the particular 
idiosyncrasies of a property despite the fact that other properties in 
the same census tract are eligible for government-sponsored entity 
(GSE) backing. These idiosyncrasies could include, for instance, the 
absence of a septic tank on the property or the availability of running 
water only on some properties in that census tract.
    Note that the presence of competition raises an important point 
related to some of the industry comments provided to the Bureau. While 
many commenters asserted access to credit issues, the implicit proof 
was that some smaller financial institutions could be originating fewer 
loans. However, even if true, that could simply mean that the same 
consumer would get a loan from a larger creditor instead. The Bureau's 
analysis of the data implies that this is at least a possibility.\60\
---------------------------------------------------------------------------

    \60\ To the extent that the effect of the already effective 
rules might shed light on this topic, the January 2013 Escrows Final 
Rule has a special provision allowing rural small creditors to 
originate higher-priced mortgage loans without providing an escrow 
account. Available evidence indicates that, after the rule went into 
effect in June 2013, rural small creditors were just as likely to 
begin originating higher-priced mortgage loans as other creditors. 
Moreover, the counties where rural small creditors that started 
originating loans operate did not experience an increase in access 
to credit. See Alexei Alexandrov & Xiaoling Ang, Identifying a 
Suitable Control Group Based on Microeconomic Theory: The Case of 
Escrows in the Subprime Market, SSRN working paper (Dec. 30, 2014), 
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2462128.
---------------------------------------------------------------------------

    Similarly, many commenters raised concerns that smaller financial 
institutions lack the economies of scale necessary for effective 
compliance and implementation of, for example, adjustable-rate mortgage 
disclosures or escrows. While this might be true, to the extent that 
outsourcing and contracting have not alleviated this issue, this is 
only a concern to consumers to the extent that larger creditors would 
not originate these loans. In other words, the lack of economies of 
scale is a concern to consumers only to the extent that the market is 
less competitive than it will otherwise be when the final provisions 
become effective.

Consumer Costs

    The potential cost to consumers of the final provisions is the 
reduction of certain consumer protections as compared to the baseline 
established by the January 2013 ATR Final Rule, the May 2013 ATR Final 
Rule, and the January 2013 Escrows Final Rule. These consumer 
protections include a consumer's private cause of action against a 
creditor for violating the general ability-to-repay requirements and 
the requirement that every higher-priced mortgage loan have an 
associated escrow account for the payment of property taxes and 
insurance for five years.
    In addition, under the January 2013 ATR Final Rule, after January 
10, 2016, creditors that do not meet the definition of ``small'' and 
``rural or underserved'' will not be able to claim qualified mortgage 
status for any newly-originated balloon-payment loans. Classifying a 
loan as a qualified mortgage when it would not have been a qualified 
mortgage otherwise (based on the small creditor portfolio special 
provision or the rural qualified mortgage balloon-payment special 
provision) or making a loan a safe harbor qualified mortgage loan when 
it would have otherwise been a rebuttable presumption qualified 
mortgage (based on the small creditor portfolio QM special provision) 
makes it more difficult for consumers to sue their creditor 
successfully for failing to properly evaluate the consumers' ability to 
repay while originating the loans.
    A creditor may have an incentive to originate loans without 
considering ability to repay to the full extent. As the Bureau noted in 
the January 2013 ATR Final Rule, there are at least three reasons why 
these incentives exist. First, the creditor might re-sell the loan to 
the secondary market or might have at least a portion of the default 
risk insured by a third party. In this case, the creditor does not have 
the privately optimal incentive to verify ability to repay. The 
December 2014 Credit Risk Retention Final Rule's requirement of ``skin 
in the game'' is designed to ameliorate this issue.\61\ Second, the 
loan officer might not have the right incentive to verify a consumer's 
ability to repay due to internal organization issues: The loan officer 
might be benefiting from the creditor's eventual profit due to the loan 
only proximately and, potentially, the loan officer might have a 
suboptimal compensation scheme (for example, compensating simply based 
on the volume originated). Third, the creditor is unlikely to consider 
a consumer's private costs of foreclosure and the negative externality 
arising from the foreclosure process.\62\ In particular, since the 
Great Depression, balloon-payment loans have been seen by economists 
and consumer advocates as raising particular risks of foreclosure.\63\ 
The provision of a private cause of action solves, to an extent, this 
negative externality issue.
---------------------------------------------------------------------------

    \61\ 79 FR 77602 (Dec. 24, 2014).
    \62\ See John Y. Campbell et al., Consumer Financial Protection, 
25(1) Journal of Economic Perspectives 91, 96 (2011). ``[A] 
rationale for government mortgage policy is a public interest in 
reducing the incidence of foreclosures, which, as we mentioned, 
reduce not only the value of foreclosed properties, but also the 
prices of neighboring properties [. . .]. The negative effect on the 
neighborhood is an externality that will not be taken into account 
by private lenders even if their foreclosure decisions are privately 
optimal.''
    \63\ Id. ``In the late 1920s, the dominant mortgage form was a 
short-term balloon loan that required frequent refinancing. Low 
house prices and reduced bank lending capacity in the early 1930s 
prevented many homeowners from refinancing, causing a wave of 
foreclosures that exacerbated the Depression.''
---------------------------------------------------------------------------

    Counting only the loans that are not kept in portfolio towards the 
origination limit ensures that a small creditor can always originate 
more portfolio loans without being concerned with the possibility of 
crossing the origination limit. The fact that a creditor keeps the loan 
in portfolio gives the creditor more incentives not to originate a loan 
that a consumer would not be able to repay: It potentially deals with 
the ``skin in the game'' issue described above.
    However, a creditor keeping a loan in portfolio does not fully 
ensure that the creditor will only originate loans that

[[Page 59965]]

consumers are able to repay. First, as noted above, ``the negative 
effect on the neighborhood is an externality that will not be taken 
into account by private lenders even if their foreclosure decisions are 
privately optimal.'' \64\ Second, it is important to note that a loan 
can be in portfolio (and thus eligible for special provisions provided 
by the final rule), yet fully or almost fully insured by a third party. 
In these cases, the creditor does not bear the risk for these loans 
even though the loan is in portfolio: There is no or little ``skin in 
the game.'' \65\ Finally, the loan officer might not be compensated 
optimally, although advocates of relationship lending suggest that 
smaller creditors do not suffer from the internal organization problems 
described above to the same extent as larger creditors.
---------------------------------------------------------------------------

    \64\ Id. at 96.
    \65\ Note that if the third party is, for example, the FHA, then 
the loan would currently be a qualified mortgage regardless of this 
final rule.
---------------------------------------------------------------------------

    Escrow accounts protect consumers from a financial shock (sometimes 
unexpected, especially for first-time buyers) of having to pay the 
first lump-sum property tax bill all at once, possibly soon after 
spending much of the household's savings on the down payment and 
closing costs. Recent research argues that postponing that payment by 
nine months (which an escrow account approximates by spreading payments 
over time) decreases the probability of an early payment default by 3 
to 4 percent.\66\ As noted in the January 2013 Escrows Final Rule, 
costs to consumers of not having escrow accounts also include the 
inconvenience of paying several bills instead of one; the lack of a 
budgeting device to enable consumers not to incur a major expense later 
on; and the possibility of underestimating the overall cost of 
maintaining a residence.
---------------------------------------------------------------------------

    \66\ See Nathan B. Anderson & Jane Dokko, Liquidity Problems and 
Early Payment Default Among Subprime Mortgages, Federal Reserve's 
Finance and Economics Discussion Series, available at http://www.federalreserve.gov/pubs/feds/2011/201109/201109pap.pdf.
---------------------------------------------------------------------------

    The extent of the potential cost to consumers depends on whether, 
but for the final provisions expanding the special provisions of the 
January 2013 ATR Final Rule and May 2013 ATR Final Rule: (1) Creditors 
that qualify for special provisions solely due to the final provisions 
have incentives to originate loans that do not consider consumers' 
ability to repay despite these loans being in the creditors' 
portfolios; (2) consumers of these creditors who proved unable to repay 
are unable to secure effective loss mitigation options from the 
creditors that would leave consumers as well off as they would have 
been without getting a loan that they proved to be unable to repay; and 
(3) absent the final provisions, these creditors would have stronger 
incentives to consider consumers' ability to repay or the consumers 
would elect to sue their local lender, would succeed in obtaining 
counsel to represent them, and would prevail in such suits. The Bureau 
does not possess evidence to confirm or deny whether these conditions 
are satisfied. Anecdotal evidence suggests that smaller lenders' loans 
performed better than larger lenders loans through the crisis.
    Similarly, the extent of the potential cost to consumers from 
expanding the special provisions of the January 2013 Escrows Final Rule 
depends on whether but for the final provisions: (1) The creditors that 
are exempted solely due to the final provisions would not provide 
escrow accounts for five years despite these loans being in the 
creditors' portfolios; (2) consumers of these creditors who experienced 
a shock due to the first-time lump-sum payment and proved to be unable 
to repay were unable to secure effective loss mitigation options from 
the creditors that would leave the consumers as well off as they 
otherwise would have been with an escrow account; and (3) consumers of 
these creditors actually experience such shocks.
    As noted above, the Bureau estimates that the about 1,700 creditors 
that will be small and rural under the final provisions, but not under 
the currently effective rule, originated about 220,000 loans and 
120,000 portfolio loans in 2013. Out of those 120,000 portfolio loans, 
26,000 were portfolio higher-priced mortgage loans. The Bureau does not 
possess a good estimate of what percentage of these 120,000 portfolio 
loans are balloon-payment loans. Assuming HPML lending continued at the 
same level among these creditors, about 26,000 loans would lose the 
mandatory escrow protections; however, many of these creditors might 
extend escrow protections despite not being subject to a requirement to 
do so.
    The Bureau believes that the approximately 700 creditors that will 
be small under the final provisions, but not under the currently 
effective rule, originated 720,000 loans, including 175,000 portfolio 
loans, in 2013. Out of those 175,000 portfolio loans the Bureau 
estimates that about 15,000 were portfolio higher-priced mortgage loans 
and 88 percent of those had an APR between 1.5 and 3.5 percentage 
points over APOR.\67\ The Bureau believes that about 13,000 loans would 
be deemed safe harbor qualified mortgages due to the final provisions. 
The Bureau does not possess a good estimate of what percentage of these 
175,000 portfolio loans would not have been qualified mortgages but for 
the small creditor special provision.
---------------------------------------------------------------------------

    \67\ The percentage of loans with an APR that was 1.5 to 3.5 
percentage points over APOR is based exclusively on HMDA data.
---------------------------------------------------------------------------

Covered Person Benefits and Costs

    The creditors that will enjoy the special provisions experience 
benefits roughly symmetric to the protections that consumers lose. In 
particular, creditors that will qualify as rural small creditors will 
be able to originate qualified mortgage balloon-payment portfolio loans 
and pass the risk onto consumers, and small creditors could originate 
portfolio loans that would not be qualified mortgages or safe harbor 
qualified mortgages otherwise, resulting in a reduced probability of a 
successful lawsuit.\68\ Additionally, rural small creditors could 
reduce accounting and compliance costs of providing escrow accounts. To 
be eligible for these benefits, the firms might need to spend a nominal 
amount on checking whether they qualify for the special provision.
---------------------------------------------------------------------------

    \68\ There are two types of risk that creditors avoid by 
originating, for example, a succession of five-year balloon loans as 
opposed to a 30-year fixed rate loan. The first type of risk is the 
interest rate risk: Cost of funds may increase and the fixed rate 
will be too cheap, in a sense, for current market conditions. This 
type of risk is almost fully hedged by choosing an appropriate index 
for a 5/5 adjustable-rate mortgage. The second type of risk is the 
risk of the deterioration of the consumer's idiosyncratic 
conditions. For example, if the consumer's credit profile 
deteriorates or the consumer loses their job, their fixed rate will 
be too cheap for that consumer's current conditions. Arguably, 
creditors can project this risk better than individual consumers and 
are the lowest cost-avoiders, especially if one assumes that moral 
hazard is not a major concern in this situation (that consumers are 
not more likely to lose a job simply because they know that their 
mortgage is a 30-year loan as opposed to a 5-year balloon loan).
---------------------------------------------------------------------------

    Some of these firm benefits could be passed through to consumers in 
terms of lower prices or better service. Economic theory suggests that 
the pass-through rate should be higher the more competitive markets 
are, all else being equal.\69\ However, a market being competitive 
would suggest lesser access to credit concerns. The Bureau does not 
possess the data required to estimate the applicable pass-through 
rates, and will

[[Page 59966]]

therefore not discuss the pass-through possibilities further.
---------------------------------------------------------------------------

    \69\ See Alexei Alexandrov & Sergei Koulayev, Using the 
Economics of the Pass Through in Proving Antitrust Injury in 
Robinson-Patman Cases, SSRN working paper (Jan. 26, 2015), available 
at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2555952.
---------------------------------------------------------------------------

    The benefit of originating balloon-payment loans to the firms is 
cheaper risk management. Consumers might not realize the riskiness 
involved in balloon-payment loans, encouraging the creditor to pass on 
the risk to consumers. The Bureau does not possess a good estimate of 
what percentage of these creditors' portfolio loans are balloon-payment 
loans.
    The Bureau believes that an additional 1,700 creditors will qualify 
as small and rural due to the final provisions. These creditors will 
not have to provide consumers with escrow accounts when originating 
higher-priced mortgage loans; however, the Bureau believes that about 
1,300 of the 1,700 creditors already originate higher-priced mortgage 
loans, thus these savings might be small (or none) for these firms 
since these firms currently have to provide escrow accounts. Note, that 
the marginal costs of providing an escrow account are small, if not 
negative: For various reasons, a creditor that has an escrow system 
established generally prefers consumers to establish an escrow account 
even if one is not required by government regulations.
    Approximately 700 creditors will be deemed as small due to the 
final provisions. These creditors originated approximately 175,000 
portfolio loans in 2013, out of which about 13,000 loans would be 
deemed safe harbor qualified mortgages due to the final provisions. The 
Bureau does not possess sufficient data to estimate what percentage of 
these loans would be qualified mortgages solely due to the final 
provisions. Loans being deemed qualified mortgages or safe harbor 
qualified mortgages imply a reduced risk of losing consumer-initiated 
ability-to-repay litigation. The Bureau previously estimated that this 
risk accounts for, at most, 0.1 percent of the loan amount.
    Note that all 700 creditors are currently not eligible for the 
small creditor special provision, and thus any sunk costs necessary to 
transition to originating non-qualified mortgage loans have already 
been incurred, except for those creditors that have decided not to 
originate any non-qualified mortgage loans.
    To be eligible for these benefits, the creditors might need to 
spend a nominal amount on checking whether they qualify for the special 
provisions. Since the final provisions are expanding special provisions 
and extending qualified mortgage status, covered persons will not 
experience any costs other than, potentially, a nominal amount to check 
whether they qualify for the exemptions or extensions of qualified 
mortgage status.

Temporary Balloon-Payment Qualified Mortgage Period--Benefits and Costs 
to Consumers and Covered Persons

    The Bureau is providing an extension of the two-year temporary 
special provision that effectively deemed all small creditors rural for 
the purposes of the rural qualified mortgage balloon-payment special 
provision. This temporary special provision, allowing these creditors 
to make qualified mortgage balloon-payment loans, is applicable (for 
transactions with mortgage applications received in the first three 
months of 2016) to any creditor that is currently small even if they do 
not operate predominantly in rural or underserved areas. The Bureau 
estimates that there are about 5,700 such creditors, and that they 
originated about 430,000 loans, out of which about 220,000 were 
portfolio loans in 2013. Note, that only the transactions with 
applications received in the first quarter of 2016 are eligible for 
this special provision. The Bureau does not possess a good estimate of 
what percentage of these portfolio loans are balloon-payment loans.
    The benefits and costs to consumers and to covered persons are 
identical to the ones discussed above during the discussion of the 
rural balloon-payment qualified mortgage special provision. Note that 
various property idiosyncrasies that might make access to credit an 
issue in rural areas are less likely for the consumers of these 5,700 
creditors since they do not operate predominantly in rural areas, even 
as defined by the final rule.
    The Bureau is also finalizing an annual grace period for creditors 
that stop qualifying as either small creditors or small and rural 
creditors.\70\ Given the finalized origination limit, the Bureau 
believes that the number of these transitions is likely to be low from 
year-to-year: The number of the creditors that are close to the 
threshold of small is minimal in comparison to the total number 
qualified (approximately 10,400 small creditors and approximately 4,100 
rural small creditors) and rural areas change only after each decennial 
Census. Thus the Bureau does not estimate the effect of this provision 
in this 1022(b)(2) analysis.
---------------------------------------------------------------------------

    \70\ Currently, creditors qualify as operating predominantly in 
rural or underserved areas based on a three-year lookback period: A 
creditor is considered as operating predominantly in rural or 
underserved areas as long as the creditor operated predominantly in 
rural or underserved areas in any of the three preceding years. 
Thus, this final provision could potentially deem a creditor that 
would be rural in January 2016 not rural. However, the Bureau 
believes that this possibility will not actually occur or, in other 
words, any small creditor that was operating in predominantly rural 
or underserved areas in any of the preceding three years according 
to the current definition qualifies as rural small under the final 
rule.
---------------------------------------------------------------------------

C. Impact on Covered Persons With No More Than $10 Billion in Assets

    The only covered persons affected by the final provisions are those 
with no more than $10 billion in assets. The effect on these covered 
persons is described above.

D. Impact on Access to Credit

    The Bureau does not believe that there will be an adverse impact on 
access to credit resulting from the final provisions. Moreover, as 
described above, the Bureau received comments strongly suggesting that 
there will be an expansion of access to credit.

E. Impact on Rural Areas

    The rural small creditor final provisions affect only creditors 
operating predominantly in rural or underserved areas, as defined 
according to the definition that the Bureau is proposing. These 
creditors predominantly originate loans to consumers that live in rural 
areas, thus the vast majority of the up to 120,000 consumers that will 
be affected by these provisions live in rural areas. The effect of 
these final provisions is described above.
    The creditors that will qualify as small due to the final 
provisions are about as well represented in rural as in non-rural 
areas, thus there will be no disproportionate effect on rural 
areas.\71\
---------------------------------------------------------------------------

    \71\ If anything, these creditors are overrepresented in non-
rural counties.
---------------------------------------------------------------------------

F. Discussion of Significant Alternatives

    Instead of proposing (and finalizing) that a property is in a rural 
area if the property is either in one of the counties currently 
designated as rural by the Bureau or if the property is not in an urban 
area as designated by the Census Bureau, the Bureau considered 
proposing that a property is in a rural area only if the property is 
not in an urban area as designated by the Census Bureau. The effective 
difference between the two definitions is that under the finalized 
definition areas designated as urban areas by the Census Bureau that 
are located in counties currently designated as rural by the Bureau 
would be classified as rural, but these urban areas would not be 
classified as rural under the alternative.
    For example, Wise County in Virginia (population of about 40,000, 
density of

[[Page 59967]]

about 100 people per square mile) is currently designated as a rural 
area by the Bureau. Under the proposed (and finalized) definition the 
whole county remains rural. However, under the alternative definition, 
some census blocks in that county, including most of the census blocks 
that comprise the town of Wise, Virginia (population of about 3,000, 
density of about 1,000 people per square mile) would stop being 
classified as rural areas. A similar example is Gillespie County in 
Texas (population of about 25,000, density of about 25 people per 
square mile), which is rural under the current definition and under the 
proposed (and finalized) definition. Most of the city of Fredericksburg 
(population of about 11,000, density of about 1,500 people per square 
mile) in Gillespie County would not be considered rural under the 
alternative. Overall, about 22 percent of the U.S. population lives in 
areas that are deemed as rural under the final provisions. About 19 
percent of the U.S. population lives in census blocks that are not in 
an urban area according to the Census Bureau.
    In comparison to this alternative, the final provisions allow 
several hundred small creditors to continue to enjoy the special 
provisions for creditors operating predominantly in rural or 
underserved areas. Under the alternative, these creditors would have to 
incur the cost of adapting to originating mortgages without enjoying 
the provisions that they currently enjoy. Moreover, under the 
alternative, compliance might become more burdensome for the remaining 
creditors that would have qualified as rural small creditors even if 
the final rule were not to become effective: They would not be able to 
simply check a list of rural counties (as they do now), since parts of 
these counties would cease to be rural. These costs, both the cost of 
adaptation for some creditors and the cost of more complicated 
compliance for others, are likely fixed, and economic theory suggests 
that these creditors would not pass these costs on to consumers.
    Other consumer benefits and costs and covered persons benefits and 
costs of these several hundred small creditors ceasing to qualify as 
rural are similar to the ones described above for the final provisions 
in general.

VIII. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA), as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996, requires each 
agency to consider the potential impact 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 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.\72\ The Bureau also is subject to certain additional 
procedures under the RFA involving the convening of a panel to consult 
with small business representatives before proposing a rule for which 
an IRFA is required.\73\
---------------------------------------------------------------------------

    \72\ 5 U.S.C. 601 et seq.
    \73\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    In the Proposed Rule, the Bureau concluded that the proposal, if 
adopted, would not have a significant economic impact on a substantial 
number of small entities and that an initial regulatory flexibility 
analysis was therefore not required. This final rule adopts the 
Proposed Rule substantially as proposed. Therefore, a final regulatory 
flexibility analysis is not required.
    The final rule does not have a significant economic impact on any 
small entities.\74\ As noted in the Section 1022(b)(2) Analysis, above, 
the Bureau does not expect that the final rule will impose costs on 
covered persons, including small entities. All methods of compliance 
under current law remain available to small entities when these 
provisions become effective. Thus, a small entity that is in compliance 
with current law will not need to take any additional action under the 
final rule.
---------------------------------------------------------------------------

    \74\ It is theoretically possible that a creditor qualifies as 
small under the current definition, but fails to qualify as small 
due to the final rule provision including in the calculation of the 
asset limit for small-creditor status the assets of the creditor's 
affiliates that originate mortgage loans. The Bureau is unaware of 
any such creditors.
---------------------------------------------------------------------------

Certification

    Accordingly, the undersigned certifies that this final rule will 
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 before implementation. The collections of information 
related to Regulation Z have been previously reviewed and approved by 
OMB in accordance with the PRA and assigned OMB Control Number 3170-
0015 (Regulation Z). 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 final rule does 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.

List of Subjects in 12 CFR Part 1026

    Advertising, Consumer protection, Credit, Credit unions, Mortgages, 
National banks, Savings associations, Recordkeeping requirements, 
Reporting, Truth in lending.

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau amends 
Regulation Z, 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, 3353, 
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
2. Section 1026.35 is amended by revising paragraphs (b)(2)(iii)(A) 
through (D)(1) and (b)(2)(iv)(A) and (B) and adding paragraph 
(b)(2)(iv)(C) to read as follows:


Sec.  1026.35  Requirements for higher-priced mortgage loans.

* * * * *
    (b) * * *
    (2) * * *
    (iii) * * *
    (A) During the preceding calendar year, or, if the application for 
the transaction was received before April 1 of the current calendar 
year, during either of the two preceding calendar years, the creditor 
extended more than 50 percent of its total covered transactions, as 
defined by Sec.  1026.43(b)(1), secured by first liens on properties 
that are located in areas that are either ``rural'' or ``underserved,'' 
as

[[Page 59968]]

set forth in paragraph (b)(2)(iv) of this section;
    (B) During the preceding calendar year, or, if the application for 
the transaction was received before April 1 of the current calendar 
year, during either of the two preceding calendar years, the creditor 
and its affiliates together extended no more than 2,000 covered 
transactions, as defined by Sec.  1026.43(b)(1), secured by first 
liens, that were sold, assigned, or otherwise transferred to another 
person, or that were subject at the time of consummation to a 
commitment to be acquired by another person;
    (C) As of the preceding December 31st, or, if the application for 
the transaction was received before April 1 of the current calendar 
year, as of either of the two preceding December 31sts, the creditor 
and its affiliates that regularly extended covered transactions, as 
defined by Sec.  1026.43(b)(1), secured by first liens, together, had 
total assets of less than $2,000,000,000; this asset threshold shall 
adjust automatically each year, based on the year-to-year change in the 
average of the Consumer Price Index for Urban Wage Earners and Clerical 
Workers, not seasonally adjusted, for each 12-month period ending in 
November, with rounding to the nearest million dollars (see comment 
35(b)(2)(iii)-1.iii for the applicable threshold); and
    (D) Neither the creditor nor its affiliate maintains an escrow 
account of the type described in paragraph (b)(1) of this section for 
any extension of consumer credit secured by real property or a dwelling 
that the creditor or its affiliate currently services, other than:
    (1) Escrow accounts established for first-lien higher-priced 
mortgage loans for which applications were received on or after April 
1, 2010, and before January 1, 2016; or
* * * * *
    (iv) * * *
    (A) An area is ``rural'' during a calendar year if it is:
    (1) A county that is neither in a metropolitan statistical area nor 
in a micropolitan statistical area that is adjacent to a metropolitan 
statistical area, as those terms are defined by the U.S. Office of 
Management and Budget and as they are applied under currently 
applicable Urban Influence Codes (UICs), established by the United 
States Department of Agriculture's Economic Research Service (USDA-
ERS); or
    (2) A census block that is not in an urban area, as defined by the 
U.S. Census Bureau using the latest decennial census of the United 
States.
    (B) An area is ``underserved'' during a calendar year if, according 
to Home Mortgage Disclosure Act (HMDA) data for the preceding calendar 
year, it is a county in which no more than two creditors extended 
covered transactions, as defined in Sec.  1026.43(b)(1), secured by 
first liens on properties in the county five or more times.
    (C) A property shall be deemed to be in an area that is rural or 
underserved in a particular calendar year if the property is:
    (1) Located in a county that appears on the lists published by the 
Bureau of counties that are rural or underserved, as defined by Sec.  
1026.35(b)(2)(iv)(A)(1) or Sec.  1026.35(b)(2)(iv)(B), for that 
calendar year,
    (2) Designated as rural or underserved for that calendar year by 
any automated tool that the Bureau provides on its public Web site, or
    (3) Not designated as located in an urban area, as defined by the 
most recent delineation of urban areas announced by the Census Bureau, 
by any automated address search tool that the U.S. Census Bureau 
provides on its public Web site for that purpose and that specifically 
indicates the urban or rural designations of properties.
* * * * *

0
3. Section 1026.43 is amended by revising paragraph (e)(6) to read as 
follows:


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

* * * * *
    (e) * * *
    (6) Qualified mortgage defined--temporary balloon-payment qualified 
mortgage rules.
    (i) Notwithstanding paragraph (e)(2) of this section, a qualified 
mortgage is a covered transaction:
    (A) That satisfies the requirements of paragraph (f) of this 
section other than the requirements of paragraph (f)(1)(vi); and
    (B) For which the creditor satisfies the requirements stated in 
Sec.  1026.35(b)(2)(iii)(B) and (C).
    (ii) The provisions of this paragraph (e)(6) apply only to covered 
transactions for which the application was received before April 1, 
2016.

0
4. In Supplement I to Part 1026--Official Interpretations:
0
A. Under Section 1026.35--Requirements for Higher-Priced Mortgage 
Loans:
0
i. Under Paragraph 35(b)(2)(iii), paragraphs 1 introductory text and 
1.i through iii are revised.
0
ii. Under Paragraph 35(b)(2)(iii)(D)(1), paragraph 1 is revised.
0
iii. Under Paragraph 35(b)(2)(iv), paragraphs 1 and 2 are revised.
0
B. Under Section 1026.36--Prohibited Acts or Practices and Certain 
Requirements for Credit Secured by a Dwelling, subheading 36(a) 
Definitions, paragraph 1.i.A.3 is revised.
0
C. Under Section 1026.43--Minimum Standards for Transactions Secured by 
a Dwelling:
0
i. Under Paragraph 43(e)(5), paragraphs 4 and 8 are revised.
0
ii. Under Paragraph 43(f)(1)(vi), paragraph 1 is revised.
0
iii. Under Paragraph 43(f)(2), paragraph 2 is revised.
0
iv. Under Paragraph 43(f)(2)(ii), paragraph 1 is revised.
    The revisions read as follows:

Supplement I to Part 1026--Official Interpretations

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

Section 1026.35--Requirements for Higher-Priced Mortgage Loans

* * * * *

35(b) Escrow accounts.

* * * * *

35(b)(2) Exemptions.

* * * * *

Paragraph 35(b)(2)(iii).

    1. Requirements for exemption. Under Sec.  1026.35(b)(2)(iii), 
except as provided in Sec.  1026.35(b)(2)(v), a creditor need not 
establish an escrow account for taxes and insurance for a higher-priced 
mortgage loan, provided the following four conditions are satisfied 
when the higher-priced mortgage loan is consummated:
    i. During the preceding calendar year, or during either of the two 
preceding calendar years if the application for the loan was received 
before April 1 of the current calendar year, more than 50 percent of 
the creditor's total first-lien covered transactions, as defined in 
Sec.  1026.43(b)(1), are secured by properties located in areas that 
are either ``rural'' or ``underserved,'' as set forth in Sec.  
1026.35(b)(2)(iv).
    A. In general, whether this condition (the more than 50 percent 
test) is satisfied depends on the creditor's activity during the 
preceding calendar year. However, if the application for the loan in 
question was received before April 1 of the current calendar year, the 
creditor may instead meet the more than 50 percent test based on its 
activity during the next-to-last calendar year. This provides creditors 
with a grace

[[Page 59969]]

period if their activity meets the more than 50 percent test (in Sec.  
1026.35(b)(2)(iii)(A)) in one calendar year but fails to meet it in the 
next calendar year.
    B. A creditor meets the more than 50 percent test for any higher-
priced mortgage loan consummated during a calendar year if a majority 
of its first-lien covered transactions in the preceding calendar year 
are secured by properties located in rural or underserved areas. If the 
creditor's transactions in the preceding calendar year do not meet the 
more than 50 percent test, the creditor meets this condition for a 
higher-priced mortgage loan consummated during the current calendar 
year only if the application for the loan was received before April 1 
of the current calendar year and a majority of the creditor's first-
lien covered transactions during the next-to-last calendar year are 
secured by properties located in rural or underserved areas. The 
following examples are illustrative:
    1. Assume that a creditor extended 180 first-lien covered 
transactions during 2016 and that 91 of these are secured by properties 
located in rural or underserved areas. Because a majority of the 
creditor's first-lien covered transactions during 2016 are secured by 
properties located in rural or underserved areas, the creditor can meet 
this condition for exemption for any higher-priced mortgage loan 
consummated during 2017.
    2. Assume that a creditor extended 180 first-lien covered 
transactions during 2016, including 90 transactions secured by 
properties that are located in rural or underserved areas. Assume 
further that the same creditor extended 200 first-lien covered 
transactions during 2015, including 101 transactions secured by 
properties that are located in rural or underserved areas. Assume 
further that the creditor consummates a higher-priced mortgage loan in 
2017 for which the application was received in November 2017. Because 
the majority of the creditor's first-lien covered transactions during 
2016 are not secured by properties that are located in rural or 
underserved areas, and the application was received on or after April 
1, 2017, the creditor does not meet this condition for exemption. 
However, assume instead that the creditor consummates a higher-priced 
mortgage loan in 2017 based on an application received in February 
2017. The creditor meets this condition for exemption for this loan 
because the application was received before April 1, 2017, and the 
majority of the creditor's first-lien covered transactions in 2015 are 
secured by properties that are located in areas that were rural or 
underserved.
    ii. The creditor and its affiliates together extended no more than 
2,000 covered transactions, as defined in Sec.  1026.43(b)(1), secured 
by first liens, that were sold, assigned, or otherwise transferred by 
the creditor or its affiliates to another person, or that were subject 
at the time of consummation to a commitment to be acquired by another 
person, during the preceding calendar year or during either of the two 
preceding calendar years if the application for the loan was received 
before April 1 of the current calendar year. For purposes of Sec.  
1026.35(b)(2)(iii)(B), a transfer of a first-lien covered transaction 
to ``another person'' includes a transfer by a creditor to its 
affiliate.
    A. In general, whether this condition is satisfied depends on the 
creditor's activity during the preceding calendar year. However, if the 
application for the loan in question is received before April 1 of the 
current calendar year, the creditor may instead meet this condition 
based on activity during the next-to-last calendar year. This provides 
creditors with a grace period if their activity falls at or below the 
threshold in one calendar year but exceeds it in the next calendar 
year.
    B. For example, assume that in 2015 a creditor and its affiliates 
together extended 1,500 loans that were sold, assigned, or otherwise 
transferred by the creditor or its affiliates to another person, or 
that were subject at the time of consummation to a commitment to be 
acquired by another person, and 2,500 such loans in 2016. Because the 
2016 transaction activity exceeds the threshold but the 2015 
transaction activity does not, the creditor satisfies this condition 
for exemption for a higher-priced mortgage loan consummated during 2017 
if the creditor received the application for the loan before April 1, 
2017, but does not satisfy this condition for a higher-priced mortgage 
loan consummated during 2017 if the application for the loan was 
received on or after April 1, 2017.
    C. For purposes of Sec.  1026.35(b)(2)(iii)(B), extensions of 
first-lien covered transactions, during the applicable time period, by 
all of a creditor's affiliates, as ``affiliate'' is defined in Sec.  
1026.32(b)(5), are counted toward the threshold in this section. 
``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.).'' Under the Bank Holding Company Act, a company 
has control over a bank or another company if it ``directly or 
indirectly or acting through one or more persons owns, controls, or has 
power to vote 25 per centum or more of any class of voting securities 
of the bank or company''; it ``controls in any manner the election of a 
majority of the directors or trustees of the bank or company''; or the 
Federal Reserve Board ``determines, after notice and opportunity for 
hearing, that the company directly or indirectly exercises a 
controlling influence over the management or policies of the bank or 
company.'' 12 U.S.C. 1841(a)(2).
    iii. As of the end of the preceding calendar year, or as of the end 
of either of the two preceding calendar years if the application for 
the loan was received before April 1 of the current calendar year, the 
creditor and its affiliates that regularly extended covered 
transactions secured by first liens, together, had total assets that 
are less than the applicable annual asset threshold.
    A. For purposes of Sec.  1026.35(b)(2)(iii)(C), in addition to the 
creditor's assets, only the assets of a creditor's ``affiliate'' (as 
defined by Sec.  1026.32(b)(5)) that regularly extended covered 
transactions (as defined by Sec.  1026.43(b)(1)) secured by first 
liens, are counted toward the applicable annual asset threshold. See 
comment 35(b)(2)(iii)-1.ii.C for discussion of definition of 
``affiliate.''
    B. Only the assets of a creditor's affiliate that regularly 
extended first-lien covered transactions during the applicable period 
are included in calculating the creditor's assets. The meaning of 
``regularly extended'' is based on the number of times a person extends 
consumer credit for purposes of the definition of ``creditor'' in Sec.  
1026.2(a)(17). Because covered transactions are ``transactions secured 
by a dwelling,'' consistent with Sec.  1026.2(a)(17)(v), an affiliate 
regularly extended covered transactions if it extended more than five 
covered transactions in a calendar year. Also consistent with Sec.  
1026.2(a)(17)(v), because a covered transaction may be a high-cost 
mortgage subject to Sec.  1026.32, an affiliate regularly extends 
covered transactions if, in any 12-month period, it extends more than 
one covered transaction that is subject to the requirements of Sec.  
1026.32 or one or more such transactions through a mortgage broker. 
Thus, if a creditor's affiliate regularly extended first-lien covered 
transactions during the preceding calendar year, the creditor's assets 
as of the end of the preceding calendar year, for purposes of the asset 
limit, take into account the assets of that

[[Page 59970]]

affiliate. If the creditor, together with its affiliates that regularly 
extended first-lien covered transactions, exceeded the asset limit in 
the preceding calendar year--to be eligible to operate as a small 
creditor for transactions with applications received before April 1 of 
the current calendar year--the assets of the creditor's affiliates that 
regularly extended covered transactions in the year before the 
preceding calendar year are included in calculating the creditor's 
assets.
    C. If multiple creditors share ownership of a company that 
regularly extended first-lien covered transactions, the assets of the 
company count toward the asset limit for a co-owner creditor if the 
company is an ``affiliate,'' as defined in Sec.  1026.32(b)(5), of the 
co-owner creditor. Assuming the company is not an affiliate of the co-
owner creditor by virtue of any other aspect of the definition (such as 
by the company and co-owner creditor being under common control), the 
company's assets are included toward the asset limit of the co-owner 
creditor only if the company is controlled by the co-owner creditor, 
``as set forth in the Bank Holding Company Act.'' If the co-owner 
creditor and the company are affiliates (by virtue of any aspect of the 
definition), the co-owner creditor counts all of the company's assets 
toward the asset limit, regardless of the co-owner creditor's ownership 
share. Further, because the co-owner and the company are mutual 
affiliates the company also would count all of the co-owner's assets 
towards its own asset limit. See comment 35(b)(2)(iii)-1.ii.C for 
discussion of the definition of ``affiliate.''
    D. A creditor satisfies the criterion in Sec.  
1026.35(b)(2)(iii)(C) for purposes of any higher-priced mortgage loan 
consummated during 2016, for example, if the creditor (together with 
its affiliates that regularly extended first-lien covered transactions) 
had total assets of less than the applicable asset threshold on 
December 31, 2015. A creditor that (together with its affiliates that 
regularly extended first-lien covered transactions) did not meet the 
applicable asset threshold on December 31, 2015 satisfies this 
criterion for a higher-priced mortgage loan consummated during 2016 if 
the application for the loan was received before April 1, 2016 and the 
creditor (together with its affiliates that regularly extended first-
lien covered transactions) had total assets of less than the applicable 
asset threshold on December 31, 2014.
    E. Under Sec.  1026.35(b)(2)(iii)(C), the $2,000,000,000 asset 
threshold adjusts automatically each year based on the year-to-year 
change in the average of the Consumer Price Index for Urban Wage 
Earners and Clerical Workers, not seasonally adjusted, for each 12-
month period ending in November, with rounding to the nearest million 
dollars. The Bureau will publish notice of the asset threshold each 
year by amending this comment. For historical purposes:
    1. For calendar year 2013, the asset threshold was $2,000,000,000. 
Creditors that had total assets of less than $2,000,000,000 on December 
31, 2012, satisfied this criterion for purposes of the exemption during 
2013.
    2. For calendar year 2014, the asset threshold was $2,028,000,000. 
Creditors that had total assets of less than $2,028,000,000 on December 
31, 2013, satisfied this criterion for purposes of the exemption during 
2014.
    3. For calendar year 2015, the asset threshold was $2,060,000,000. 
Creditors that had total assets of less than $2,060,000,000 on December 
31, 2014, satisfied this criterion for purposes of any loan consummated 
in 2015 and, if the creditor's assets together with the assets of its 
affiliates that regularly extended first-lien covered transactions 
during calendar year 2014 were less than that amount, for purposes of 
any loan consummated in 2016 for which the application was received 
before April 1, 2016.
* * * * *

Paragraph 35(b)(2)(iii)(D)(1)

    1. Exception for certain accounts. Escrow accounts established for 
first-lien higher-priced mortgage loans for which applications were 
received on or after April 1, 2010, and before January 1, 2016, are not 
counted for purposes of Sec.  1026.35(b)(2)(iii)(D). For applications 
received on and after January 1, 2016, creditors, together with their 
affiliates, that establish new escrow accounts, other than those 
described in Sec.  1026.35(b)(2)(iii)(D)(2), do not qualify for the 
exemption provided under Sec.  1026.35(b)(2)(iii). Creditors, together 
with their affiliates, that continue to maintain escrow accounts 
established for first-lien higher-priced mortgage loans for which 
applications were received on or after April 1, 2010, and before 
January 1, 2016, still qualify for the exemption provided under Sec.  
1026.35(b)(2)(iii) so long as they do not establish new escrow accounts 
for transactions for which they received applications on or after 
January 1, 2016, other than those described in Sec.  
1026.35(b)(2)(iii)(D)(2), and they otherwise qualify under Sec.  
1026.35(b)(2)(iii).
* * * * *

Paragraph 35(b)(2)(iv)

    1. Requirements for ``rural'' or ``underserved'' status. An area is 
considered to be ``rural'' or ``underserved'' during a calendar year 
for purposes of Sec.  1026.35(b)(2)(iii)(A) if it satisfies either the 
definition for ``rural'' or the definition for ``underserved'' in Sec.  
1026.35(b)(2)(iv). A creditor's extensions of covered transactions, as 
defined by Sec.  1026.43(b)(1), secured by first liens on properties 
located in such areas are considered in determining whether the 
creditor satisfies the condition in Sec.  1026.35(b)(2)(iii)(A). See 
comment 35(b)(2)(iii)-1.
    i. Under Sec.  1026.35(b)(2)(iv)(A), an area is rural during a 
calendar year if it is: A county that is neither in a metropolitan 
statistical area nor in a micropolitan statistical area that is 
adjacent to a metropolitan statistical area; or a census block that is 
not in an urban area, as defined by the U.S. Census Bureau using the 
latest decennial census of the United States. Metropolitan statistical 
areas and micropolitan statistical areas are defined by the Office of 
Management and Budget and applied under currently applicable Urban 
Influence Codes (UICs), established by the United States Department of 
Agriculture's Economic Research Service (USDA-ERS). For purposes of 
Sec.  1026.35(b)(2)(iv)(A)(1), ``adjacent'' has the meaning applied by 
the USDA-ERS in determining a county's UIC; as so applied, ``adjacent'' 
entails a county not only being physically contiguous with a 
metropolitan statistical area but also meeting certain minimum 
population commuting patterns. A county is a ``rural'' area if the 
USDA-ERS categorizes the county under UIC 4, 6, 7, 8, 9, 10, 11, or 12. 
Descriptions of UICs are available on the USDA-ERS Web site at http://www.ers.usda.gov/data-products/urban-influence-codes/documentation.aspx. A county for which there is no currently applicable 
UIC (because the county has been created since the USDA-ERS last 
categorized counties) is a rural area only if all counties from which 
the new county's land was taken are themselves rural under currently 
applicable UICs.
    ii. Under Sec.  1026.35(b)(2)(iv)(B), an area is underserved during 
a calendar year if, according to Home Mortgage Disclosure Act (HMDA) 
data for the preceding calendar year, it is a county in which no more 
than two creditors extended covered transactions, as defined in Sec.  
1026.43(b)(1), secured by first liens, five or more times on properties 
in the county. Specifically, a

[[Page 59971]]

county is an ``underserved'' area if, in the applicable calendar year's 
public HMDA aggregate dataset, no more than two creditors have reported 
five or more first-lien covered transactions, with HMDA geocoding that 
places the properties in that county. For purposes of this 
determination, because only covered transactions are counted, all 
first-lien originations (and only first-lien originations) reported in 
the HMDA data are counted except those for which the owner-occupancy 
status is reported as ``Not owner-occupied'' (HMDA code 2), the 
property type is reported as ``Multifamily'' (HMDA code 3), the 
applicant's or co-applicant's race is reported as ``Not applicable'' 
(HMDA code 7), or the applicant's or co-applicant's sex is reported as 
``Not applicable'' (HMDA code 4). The most recent HMDA data are 
available at http://www.ffiec.gov/hmda.
    iii. A. Each calendar year, the Bureau applies the ``underserved'' 
area test and the ``rural'' area test to each county in the United 
States. If a county satisfies either test, the Bureau will include the 
county on a published list of counties that are rural or underserved as 
defined by Sec.  1026.35(b)(2)(iv)(A)(1) or Sec.  1026.35(b)(2)(iv)(B) 
for a particular calendar year, even if the county contains census 
blocks that are designated by the Census Bureau as urban. To facilitate 
compliance with appraisal requirements in Sec.  1026.35(c), the Bureau 
also creates a list of those counties that are rural under the Bureau's 
definition without regard to whether the counties are underserved. To 
the extent that U.S. territories are treated by the Census Bureau as 
counties and are neither metropolitan statistical areas nor 
micropolitan statistical areas adjacent to metropolitan statistical 
areas, such territories will be included on these lists as rural areas 
in their entireties. The Bureau will post on its public Web site the 
applicable lists for each calendar year by the end of that year and 
publish such lists in the Federal Register, to assist creditors in 
ascertaining the availability to them of the exemption during the 
following year. Any county that the Bureau includes on its published 
lists of counties that are rural or underserved under the Bureau's 
definitions for a particular year is deemed to qualify as a rural or 
underserved area for that calendar year for purposes of Sec.  
1026.35(b)(2)(iv), even if the county contains census blocks that are 
designated by the Census Bureau as urban. A property located in such a 
listed county is deemed to be located in a rural or underserved area, 
even if the census block in which the property is located is designated 
as urban.
    B. A property is deemed to be in a rural or underserved area 
according to the definitions in Sec.  1026.35(b)(2)(iv) during a 
particular calendar year if it is identified as such by an automated 
tool provided on the Bureau's public Web site. A printout or electronic 
copy from the automated tool provided on the Bureau's public Web site 
designating a particular property as being in a rural or underserved 
area may be used as ``evidence of compliance'' that a property is in a 
rural or underserved area, as defined in Sec.  1026.35(b)(2)(iv)(A) and 
(B), for purposes of the record retention requirements in Sec.  
1026.25.
    C. The U.S. Census Bureau may provide on its public Web site an 
automated address search tool that specifically indicates if a property 
is located in an urban area for purposes of the Census Bureau's most 
recent delineation of urban areas. For any calendar year that began 
after the date on which the Census Bureau announced its most recent 
delineation of urban areas, a property is deemed to be in a rural area 
if the search results provided for the property by any such automated 
address search tool available on the Census Bureau's public Web site do 
not designate the property as being in an urban area. A printout or 
electronic copy from such an automated address search tool available on 
the Census Bureau's public Web site designating a particular property 
as not being in an urban area may be used as ``evidence of compliance'' 
that the property is in a rural area, as defined in Sec.  
1026.35(b)(2)(iv)(A), for purposes of the record retention requirements 
in Sec.  1026.25.
    D. For a given calendar year, a property qualifies for a safe 
harbor if any of the enumerated safe harbors affirms that the property 
is in a rural or underserved area or not in an urban area. For example, 
the Census Bureau's automated address search tool may indicate a 
property is in an urban area, but the Bureau's rural or underserved 
counties list indicates the property is in a rural or underserved 
county. The property in this example is in a rural or underserved area 
because it qualifies under the safe harbor for the rural or underserved 
counties list. The lists of counties published by the Bureau, the 
automated tool on its public Web site, and the automated address search 
tool available on the Census Bureau's public Web site, are not the 
exclusive means by which a creditor can demonstrate that a property is 
in a rural or underserved area as defined in Sec.  1026.35(b)(2)(iv)(A) 
and (B). However, creditors are required to retain ``evidence of 
compliance'' in accordance with Sec.  1026.25, including determinations 
of whether a property is in a rural or underserved area as defined in 
Sec.  1026.35(b)(2)(iv)(A) and (B).
    2. Examples. i. An area is considered ``rural'' for a given 
calendar year based on the most recent available UIC designations by 
the USDA-ERS and the most recent available delineations of urban areas 
by the U.S. Census Bureau that are available at the beginning of the 
calendar year. These designations and delineations are updated by the 
USDA-ERS and the U.S. Census Bureau respectively once every ten years. 
As an example, assume a creditor makes first-lien covered transactions 
in Census Block X that is located in County Y during calendar year 
2017. As of January 1, 2017, the most recent UIC designations were 
published in the second quarter of 2013, and the most recent 
delineation of urban areas was announced in the Federal Register in 
2012, see U.S. Census Bureau, Qualifying Urban Areas for the 2010 
Census, 77 FR 18652 (Mar. 27, 2012). To determine whether County Y is 
rural under the Bureau's definition during calendar year 2017, the 
creditor can use USDA-ERS's 2013 UIC designations. If County Y is not 
rural, the creditor can use the U.S. Census Bureau's 2012 delineation 
of urban areas to determine whether Census Block X is rural and is 
therefore a ``rural'' area for purposes of Sec.  1026.35(b)(2)(iv)(A).
    ii. A county is considered an ``underserved'' area for a given 
calendar year based on the most recent available HMDA data. For 
example, assume a creditor makes first-lien covered transactions in 
County Y during calendar year 2016, and the most recent HMDA data are 
for calendar year 2015, published in the third quarter of 2016. The 
creditor will use the 2015 HMDA data to determine ``underserved'' area 
status for County Y in calendar year 2016 for the purposes of 
qualifying for the ``rural or underserved'' exemption for any higher-
priced mortgage loans consummated in calendar year 2017 or for any 
higher-priced mortgage loan consummated during 2018 for which the 
application was received before April 1, 2018.
* * * * *

Section 1026.36--Prohibited Acts or Practices and Certain Requirements 
for Credit Secured by a Dwelling

36(a) Definitions.

    1. * * *
    i. * * *
    A. * * *

[[Page 59972]]

    3. Assisting a consumer in obtaining or applying for consumer 
credit by advising on particular credit terms that are or may be 
available to that consumer based on the consumer's financial 
characteristics, filling out an application form, preparing application 
packages (such as a credit application or pre-approval application or 
supporting documentation), or collecting application and supporting 
information on behalf of the consumer to submit to a loan originator or 
creditor. A person who, acting on behalf of a loan originator or 
creditor, collects information or verifies information provided by the 
consumer, such as by asking the consumer for documentation to support 
the information the consumer provided or for the consumer's 
authorization to obtain supporting documents from third parties, is not 
collecting information on behalf of the consumer. See also comment 
36(a)-4.i through .iv with respect to application-related 
administrative and clerical tasks and comment 36(a)-1.v with respect to 
third-party advisors.
* * * * *

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

* * * * *

Paragraph 43(e)(5).

* * * * *
    4. Creditor qualifications. To be eligible to make qualified 
mortgages under Sec.  1026.43(e)(5), a creditor must satisfy the 
requirements stated in Sec.  1026.35(b)(2)(iii)(B) and (C). Section 
1026.35(b)(2)(iii)(B) requires that, during the preceding calendar 
year, or, if the application for the transaction was received before 
April 1 of the current calendar year, during either of the two 
preceding calendar years, the creditor and its affiliates together 
extended no more than 2,000 covered transactions, as defined by Sec.  
1026.43(b)(1), secured by first liens, that were sold, assigned, or 
otherwise transferred to another person, or that were subject at the 
time of consummation to a commitment to be acquired by another person. 
Section 1026.35(b)(2)(iii)(C) requires that, as of the preceding 
December 31st, or, if the application for the transaction was received 
before April 1 of the current calendar year, as of either of the two 
preceding December 31sts, the creditor and its affiliates that 
regularly extended, during the applicable period, covered transactions, 
as defined by Sec.  1026.43(b)(1), secured by first liens, together, 
had total assets of less than $2 billion, adjusted annually by the 
Bureau for inflation.
* * * * *
    8. Transfer to another qualifying creditor. Under Sec.  
1026.43(e)(5)(ii)(B), a qualified mortgage under Sec.  1026.43(e)(5) 
may be sold, assigned, or otherwise transferred at any time to another 
creditor that meets the requirements of Sec.  1026.43(e)(5)(i)(D). That 
section requires that a creditor together with all its affiliates, 
extended no more than 2,000 first-lien covered transactions that were 
sold, assigned, or otherwise transferred by the creditor or its 
affiliates to another person, or that were subject at the time of 
consummation to a commitment to be acquired by another person; and 
have, together with its affiliates that regularly extended covered 
transactions secured by first liens, total assets less than $2 billion 
(as adjusted for inflation). These tests are assessed based on 
transactions and assets from the calendar year preceding the current 
calendar year or from either of the two calendar years preceding the 
current calendar year if the application for the transaction was 
received before April 1 of the current calendar year. A qualified 
mortgage under Sec.  1026.43(e)(5) transferred to a creditor that meets 
these criteria would retain its qualified mortgage status even if it is 
transferred less than three years after consummation.
* * * * *

43(f) Balloon-payment qualified mortgages made by certain creditors.

43(f)(1) Exemption.

* * * * *

Paragraph 43(f)(1)(vi).

    1. Creditor qualifications. Under Sec.  1026.43(f)(1)(vi), to make 
a qualified mortgage that provides for a balloon payment, the creditor 
must satisfy three criteria that are also required under Sec.  
1026.35(b)(2)(iii)(A), (B) and (C), which require:
    i. During the preceding calendar year or during either of the two 
preceding calendar years if the application for the transaction was 
received before April 1 of the current calendar year, the creditor 
extended over 50 percent of its total first-lien covered transactions, 
as defined in Sec.  1026.43(b)(1), on properties that are located in 
areas that are designated either ``rural'' or ``underserved,'' as 
defined in Sec.  1026.35(b)(2)(iv), to satisfy the requirement of Sec.  
1026.35(b)(2)(iii)(A). Pursuant to Sec.  1026.35(b)(2)(iv), an area is 
considered to be rural if it is: A county that is neither in a 
metropolitan statistical area, nor a micropolitan statistical area 
adjacent to a metropolitan statistical area, as those terms are defined 
by the U.S. Office of Management and Budget; or a census block that is 
not in an urban area, as defined by the U.S. Census Bureau using the 
latest decennial census of the United States. An area is considered to 
be underserved during a calendar year if, according to HMDA data for 
the preceding calendar year, it is a county in which no more than two 
creditors extended covered transactions secured by first liens on 
properties in the county five or more times.
    A. The Bureau determines annually which counties in the United 
States are rural or underserved as defined by Sec.  
1026.35(b)(2)(iv)(A)(1) or Sec.  1026.35(b)(2)(iv)(B) and publishes on 
its public Web site lists of those counties to assist creditors in 
determining whether they meet the criterion at Sec.  
1026.35(b)(2)(iii)(A). Creditors may also use an automated tool 
provided on the Bureau's public Web site to determine whether specific 
properties are located in areas that qualify as ``rural'' or 
``underserved'' according to the definitions in Sec.  1026.35(b)(2)(iv) 
for a particular calendar year. In addition, the U.S. Census Bureau may 
also provide on its public Web site an automated address search tool 
that specifically indicates if a property address is located in an 
urban area for purposes of the Census Bureau's most recent delineation 
of urban areas. For any calendar year that begins after the date on 
which the Census Bureau announced its most recent delineation of urban 
areas, a property is located in an area that qualifies as ``rural'' 
according to the definitions in Sec.  1026.35(b)(2)(iv) if the search 
results provided for the property by any such automated address search 
tool available on the Census Bureau's public Web site do not identify 
the property as being in an urban area.
    B. For example, if a creditor extended 100 first-lien covered 
transactions during 2016 and 90 first-lien covered transactions during 
2017, the creditor meets this element of the exception for any 
transaction consummated during 2018 if at least 46 of its 2017 first-
lien covered transactions are secured by properties that are located in 
one or more counties on the Bureau's lists for 2017 or are located in 
one or more census blocks that are not in an urban area, as defined by 
the Census Bureau.
    C. Alternatively, if the creditor's 2017 transactions do not meet 
the over 50 percent test (see comment 43(f)(1)(vi)-1.i), the creditor 
satisfies this criterion for any transaction consummated during 2018 
for which it received the

[[Page 59973]]

application before April 1, 2018, if at least 51 of its 2016 first-lien 
covered transactions are secured by properties that are located in one 
or more counties on the Bureau's lists for 2016 or are located in one 
or more census blocks that are not in an urban area.
    ii. During the preceding calendar year, or, if the application for 
the transaction was received before April 1 of the current calendar 
year, during either of the two preceding calendar years, the creditor 
together with its affiliates extended no more than 2,000 covered 
transactions, as defined by Sec.  1026.43(b)(1), secured by first 
liens, that were sold, assigned, or otherwise transferred to another 
person, or that were subject at the time of consummation to a 
commitment to be acquired by another person, to satisfy the requirement 
of Sec.  1026.35(b)(2)(iii)(B).
    iii. As of the preceding December 31st, or, if the application for 
the transaction was received before April 1 of the current calendar 
year, as of either of the two preceding December 31sts, the creditor 
and its affiliates that regularly extended covered transactions secured 
by first liens, together, had total assets that do not exceed the 
applicable asset threshold established by the Bureau, to satisfy the 
requirement of Sec.  1026.35(b)(2)(iii)(C). The Bureau publishes notice 
of the asset threshold each year by amending comment 35(b)(2)(iii)-
1.iii.

43(f)(2) Post-consummation transfer of balloon-payment qualified 
mortgage.

* * * * *
    2. Application to subsequent transferees. The exceptions contained 
in Sec.  1026.43(f)(2) apply not only to an initial sale, assignment, 
or other transfer by the originating creditor but to subsequent sales, 
assignments, and other transfers as well. For example, assume Creditor 
A originates a qualified mortgage under Sec.  1026.43(f)(1). Six months 
after consummation, Creditor A sells the qualified mortgage to Creditor 
B pursuant to Sec.  1026.43(f)(2)(ii) and the loan retains its 
qualified mortgage status because Creditor B complies with the 
conditions relating to operating in rural or underserved areas, asset 
size, and number of transactions. If Creditor B sells the qualified 
mortgage, it will lose its qualified mortgage status under Sec.  
1026.43(f)(1) unless the sale qualifies for one of the Sec.  
1026.43(f)(2) exceptions for sales three or more years after 
consummation, to another qualifying institution, as required by 
supervisory action, or pursuant to a merger or acquisition.
* * * * *

Paragraph 43(f)(2)(ii).

    1. Transfer to another qualifying creditor. Under Sec.  
1026.43(f)(2)(ii), a balloon-payment qualified mortgage under Sec.  
1026.43(f)(1) may be sold, assigned, or otherwise transferred at any 
time to another creditor that meets the requirements of Sec.  
1026.43(f)(1)(vi). That section requires that a creditor: (1) Extended 
over 50 percent of its total first-lien covered transactions, as 
defined in Sec.  1026.43(b)(1), on properties located in rural or 
underserved areas; (2) together with all affiliates, extended no more 
than 2,000 first-lien covered transactions that were sold, assigned, or 
otherwise transferred by the creditor or its affiliates to another 
person, or that were subject at the time of consummation to a 
commitment to be acquired by another person; and (3) have, together 
with its affiliates that regularly extended covered transactions 
secured by first liens, total assets less than $2 billion (as adjusted 
for inflation). These tests are assessed based on transactions and 
assets from the calendar year preceding the current calendar year or 
from either of the two calendar years preceding the current calendar 
year if the application for the transaction was received before April 1 
of the current calendar year. A balloon-payment qualified mortgage 
under Sec.  1026.43(f)(1) transferred to a creditor that meets these 
criteria would retain its qualified mortgage status even if it is 
transferred less than three years after consummation.
* * * * *

    Dated: September 21, 2015.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2015-24362 Filed 10-1-15; 8:45 am]
BILLING CODE 4810-AM-P