Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 30739 

1 78 FR 4726 (Jan. 22, 2013). 

2The other rules include: Ability-to-Repay and 

Qualified Mortgage Standards under the Truth in 

Lending Act (Regulation Z) (2013 ATR Final Rule), 

78 FR 6407 (Jan. 30, 2013); High-Cost Mortgages 

and Homeownership Counseling Amendments to 

the Truth in Lending Act (Regulation Z) and 

Homeownership Counseling Amendments to the 

Real Estate Settlement Procedures Act (Regulation 

X) (2013 HOEPA Final Rule), 78 FR 6855 (Jan. 31, 

2013); Disclosure and Delivery Requirements for 

Copies of Appraisals and Other Written Valuations 

under the Equal Credit Opportunity Act (Regulation 

B) (2013 ECOA Appraisals Final Rule), 78 FR 7215 

(Jan. 31, 2013); Mortgage Servicing Rules Under the 

Real Estate Settlement Procedures Act (Regulation 

X) (2013 RESPA Servicing Final Rule), 78 FR 10695 

(Feb. 14, 2013); Mortgage Servicing Rules Under the 

Truth in Lending Act (Regulation Z) (2013 TILA 

Servicing Final Rule), 78 FR 10901 (Feb. 14, 2013); 

Appraisals for Higher-Priced Mortgage Loans 

(issued jointly with other agencies) (2013 

Interagency Appraisals Final Rule), 78 FR 10367 

(Feb. 13, 2013); and Loan Originator Compensation 

Requirements under the Truth in Lending Act 

(Regulation Z) (2013 Loan Originator Final Rule), 78 

FR 11279 (Feb. 15, 2013). On the same day that the 

Bureau issued the 2013 ATR Final Rule, it also 

issued a proposal to amend some aspects of it (2013 

ATR Concurrent Proposal), 78 FR 6621 (Jan. 30, 

2013). 

3The Bureau has received questions regarding the 

timing of the establishment of escrow accounts 

under § 1026.35. The Bureau understands that 

escrow accounts are arranged before consummation 

of a loan, and funded at consummation. Such 

procedures are in compliance with the regulation. 

In addition, the Bureau has received questions 

about loan modifications and would like to point 

out that the escrow requirement for HPMLs does 

not apply to modifications to existing loans, only 

refinances. For guidance on which changes to 

existing loans will be treated as refinances under 

Regulation Z, see 12 CFR 1026.20(a) and associated 

commentary. 

4The specific provisions that rely on the ‘‘rural’’ 

and ‘‘underserved’’ definitions are as follows: (1) 

the § 1026.35(b)(2)(iii) exemption to the 2013 

Escrows Final Rule’s escrow requirement for 

higher-priced mortgage loans; (2) the § 1026.43(f) 

allowance for balloon-payment qualified mortgages; 

(3) the § 1026.32(d)(1)(ii)(C) exemption from the 

balloon-payment prohibition on high-cost 

mortgages for balloon-payment qualified mortgages; 

and (4) the § 1026.35(c)(4)(vii)(H) exemption from 

the § 1026.35(c)(4)(i) HPML second appraisal 

requirement for credit transactions used to acquire 

property located in a rural county. 

the proposal. No comments were 

received. 

A small business guide on complying 

with fruit, vegetable, and specialty crop 

marketing agreements and orders may 

be viewed at: www.ams.usda.gov/ 

MarketingOrdersSmallBusinessGuide. 

Any questions about the compliance 

guide should be sent to Jeffrey Smutny 

at the previously mentioned address in 

the FOR FURTHER INFORMATION CONTACT

section. 

After consideration of all relevant 

matter presented, including the 

information and recommendation 

submitted by the Committee and other 

available information, it is hereby found 

that this action, as hereinafter set forth, 

will tend to effectuate the declared 

policy of the Act. 

It is further found that good cause 

exists for not postponing the effective 

date of this final rule until 30 days after 

publication in the Federal Register (5 

U.S.C. 553) because the 2013–2014 term 

of office will begin on June 1, 2013. 

Further, handlers are aware of this 

action, which was recommended at a 

public meeting. Also, a 60-day comment 

period was provided for in the proposed 

rule. 

List of Subjects in 7 CFR Part 948 

Marketing agreements, Potatoes, 

Reporting and recordkeeping 

requirements. 

For the reasons set forth in the 

preamble, 7 CFR part 948 is amended as 

follows: 

PART 948—IRISH POTATOES GROWN 

IN COLORADO 

■ 1. The authority citation for 7 CFR 

part 948 continues to read as follows: 

Authority: 7 U.S.C. 601–674. 

■ 2. In § 948.150, paragraph (a)(3) is 

revised to read as follows: 

§ 948.150 Reestablishment of committee 

membership. 

* * * * * 

(a) * * * 

(3) One (1) producer from either 

Conejos or Costilla County. 

* * * * * 

Dated: May 17, 2013. 

Rex A. Barnes, 

Associate Administrator, Agricultural 

Marketing Service. 

[FR Doc. 2013–12240 Filed 5–22–13; 8:45 am] 

BILLING CODE 3410–02–P 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Part 1026 

[Docket No. CFPB–2013–0009] 

RIN 3170–AA37 

Amendments to the 2013 Escrows 

Final Rule under the Truth in Lending 

Act (Regulation Z) 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Final rule; official 

interpretations. 

SUMMARY: The Bureau of Consumer 

Financial Protection (Bureau) is issuing 

clarifying and technical amendments to 

a final rule issued by the Bureau on 

January 10, 2013, which, among other 

things, lengthens the time for which a 

mandatory escrow account established 

for a higher-priced mortgage loan 

(HPML) must be maintained. The rule 

also established an exemption from the 

escrow requirement for certain creditors 

that operate predominantly in ‘‘rural’’ or 

‘‘underserved’’ areas. The amendments 

clarify the determination method for the 

‘‘rural’’ and ‘‘underserved’’ designations 

and keep in place certain existing 

protections for HPMLs until other 

similar provisions take effect in January 

2014. 

DATES: This rule is effective on June 1, 

2013, except for the addition of 

§ 1026.35(e), which will be effective 

from June 1, 2013 through January 9, 

2014. 

FOR FURTHER INFORMATION CONTACT: 

Whitney Patross, Attorney; Joseph 

Devlin and Richard Arculin, Counsels; 

Office of Regulations, at (202) 435–7700. 

SUPPLEMENTARY INFORMATION:

I. Summary of Final Rule 

In January 2013, the Bureau issued 

several final rules concerning mortgage 

markets in the United States pursuant to 

the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank 

Act), Public Law 111–203, 124 Stat. 

1376 (2010) (2013 Title XIV Final 

Rules). One of these rules was Escrow 

Requirements Under the Truth in 

Lending Act (Regulation Z) (2013 

Escrows Final Rule),1 issued on January 

10.2 The rule expanded on an existing 

Regulation Z requirement that creditors 

maintain escrow accounts for HPMLs 3

and created an exemption for certain 

loans made by certain creditors that 

operate predominantly in ‘‘rural’’ or 

‘‘underserved’’ areas. Three other of the 

2013 Title XIV Final Rules also contain 

provisions affecting certain loans made 

in ‘‘rural’’ or ‘‘underserved’’ areas. 

This final rule now makes certain 

clarifying and technical amendments to 

the provisions adopted in the 2013 

Escrows Final Rule, including 

clarification of how to determine 

whether a county is considered ‘‘rural’’ 

or ‘‘underserved’’ for the application of 

the escrows requirement and the other 

Dodd-Frank Act regulations.4

Specifically, the Bureau is clarifying 

how a county’s ‘‘rural’’ and 

‘‘underserved’’ status may be 

determined based on currently 

applicable Urban Influence Codes 

(UICs) established by the United States 

Department of Agriculture, Economic 

Research Service (USDA–ERS) (for 

‘‘rural’’) or based on Home Mortgage 

Disclosure Act (HMDA) data (for 


tkelley on DSK3SPTVN1PROD with RULES
30740 Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 

5Sections 1011 and 1021 of the Dodd-Frank Act, 

in title X, the ‘‘Consumer Financial Protection Act,’’ 

Public Law 111–203, sections 1001–1100H, codified 

at 12 U.S.C. 5491 and 5511. The Consumer 

Financial Protection Act is substantially codified at 

12 U.S.C. 5481–5603. Section 1029 of the DoddFrank Act excludes from this transfer of authority, 

subject to certain exceptions, any rulemaking 

authority over a motor vehicle dealer that is 

predominantly engaged in the sale and servicing of 

motor vehicles, the leasing and servicing of motor 

vehicles, or both. 12 U.S.C. 5519. 

6 78 FR 4726 (Jan. 22, 2013). 

7Consumer Financial Protection Bureau Lays Out 

Implementation Plan for New Mortgage Rules. Press 

Release. Feb. 13, 2013. 

8 78 FR 25638 (May 2, 2013). 

9 78 FR 27308 (May 10, 2013). 

10 12 U.S.C. 5581(a)(1). 

11 Dodd-Frank Act section 1002(14), 12 U.S.C. 

5481(14) (defining ‘‘Federal consumer financial 

law’’ to include the ‘‘enumerated consumer laws’’ 

and the provisions of title X of the Dodd-Frank Act); 

Dodd-Frank Act section 1002(12), 12 U.S.C. 

5481(12) (defining ‘‘enumerated consumer laws’’ to 

include TILA), Dodd-Frank section 1400(b), 12 

U.S.C. 5481 note (designating certain subtitles and 

provisions of title XIV of the Dodd-Frank Act as 

‘‘enumerated consumer laws’’). 

12 78 FR 4726 (Jan. 22, 2013). 

13 73 FR 44522 (July 30, 2008). 

‘‘underserved’’) and providing 

illustrations of the rule to facilitate 

compliance. 

In association with the issuance of 

this final rule providing clarifying 

amendments to the 2013 Escrows Final 

Rule, the Bureau is posting on its public 

Web site a final list of rural and 

underserved counties, for use with 

mortgages consummated from June 1, 

2013, through December 31, 2013. The 

final list is identical to the preliminary 

list posted on the Bureau’s public Web 

site on March 12, 2013. The Bureau will 

post the list for use in 2014 when the 

relevant data become available. 

In addition, the final rule restores 

certain existing Regulation Z 

requirements related to the consumer’s 

ability to repay and prepayment 

penalties for HPMLs. The scope of these 

protections is being expanded under the 

Dodd-Frank Act through the 2013 Title 

XIV Final Rules to apply to most 

mortgage transactions, rather than just 

HPMLs. For this reason, the 2013 

Escrows Final Rule removed the 

regulatory text providing these 

protections solely to HPMLs. That final 

rule, however, takes effect on June 1, 

2013, whereas the new ability-to-repay 

and prepayment penalty provisions do 

not take effect until January 10, 2014. To 

prevent any interruption in applicable 

protections, this final rule establishes a 

temporary provision to ensure the 

protections remain in place for HPMLs 

until the expanded provisions take 

effect in January 2014. 

In addition, the Bureau is making 

some technical corrections to enhance 

clarity. 

II. Background 

A. Title XIV Rulemakings under the 

Dodd-Frank Act and the 2013 Escrows 

Final Rule 

In response to an unprecedented cycle 

of expansion and contraction in the 

mortgage market that sparked the most 

severe U.S. recession since the Great 

Depression, Congress passed the DoddFrank Act, which was signed into law 

on July 21, 2010. In the Dodd-Frank Act, 

Congress established the Bureau and, 

under sections 1061 and 1100A, 

generally consolidated the rulemaking 

authority for Federal consumer financial 

laws, including the Truth in Lending 

Act (TILA), in the Bureau.5 At the same 

time, Congress significantly amended 

the statutory requirements governing 

mortgages with the intent to restrict the 

practices that contributed to and 

exacerbated the crisis. In January 2013, 

the Bureau issued the 2013 Title XIV 

Final Rules as described above. The 

2013 Escrows Final Rule,6 issued on 

January 10, was one of these rules. 

Among the other 2013 Title XIV Final 

Rules issued in January were the 2013 

ATR Final Rule, 2013 HOEPA Final 

Rule, and 2013 Interagency Appraisals 

Final Rule. 

B. Implementation Plan for New 

Mortgage Rules 

On February 13, 2013, the Bureau 

announced an initiative to support 

implementation of the new mortgage 

rules (Implementation Plan),7 under 

which the Bureau would work with the 

mortgage industry to ensure that the 

2013 Title XIV Final Rules could be 

implemented accurately and 

expeditiously. The Implementation Plan 

included: (1) Coordination with other 

agencies; (2) publication of plainlanguage guides to the new rules; (3) 

publication of additional interpretive 

guidance and other updates regarding 

the new rules as needed; (4) publication 

of readiness guides for the new rules; 

and (5) education of consumers on the 

new rules. 

This is the first final rule in 

connection with our planned issuances 

to clarify and provide additional 

guidance regarding the 2013 Title XIV 

Final Rules. Priority for this first set of 

updates was given to the 2013 Escrows 

Final Rule because its effective date is 

June 1, 2013, and certainty regarding 

compliance is a matter of some urgency. 

The Bureau has since issued a proposal 

concerning certain provisions of the 

ability-to-repay and servicing rules that 

take effect in January 2014,8 and a 

proposal to seek comment on whether to 

delay the June 1 implementation of a 

provision concerning the financing of 

credit insurance pending resolution of 

various interpretive issues under the 

statute and regulation.9 Other guidance 

and updates will be issued as needed. 

III. 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

TILA, title X of the Dodd-Frank Act, and 

certain subtitles and provisions of title 

XIV of the Dodd-Frank Act are Federal 

consumer financial laws.11 Accordingly, 

the Bureau has authority to issue 

regulations pursuant to TILA, title X, 

and the enumerated subtitles and 

provisions of title XIV. 

The Bureau is amending the changes 

made to Regulation Z by the 2013 

Escrows Final Rule.12 This final rule 

relies on the broad rulemaking authority 

specifically granted to the Bureau by 

TILA section 105(a) and title X of the 

Dodd-Frank Act, as well as the 

exemption authority in TILA section 

129D(c). Additionally, because this rule 

re-introduces language from a 2008 final 

rule of the Board amending Regulation 

Z (2008 HOEPA Final Rule),13 this rule 

relies on the authority used in 

connection with that rule including 

TILA section 129(p). 

IV. Section-by-Section Analysis 

Section 1026.35 Requirements for 

Higher-Priced Mortgage Loans 

35(b) Escrow Accounts 

35(b)(1) 

The Bureau proposed a technical 

correction to § 1026.35(b)(1) to update a 

citation. The Bureau did not receive 

comments on this correction, and 

adopts it as proposed. 

35(b)(2) Exemptions 

Overview 

Four of the Bureau’s January 2013 

mortgage rules included provisions that 

provide for special treatment under 

various Regulation Z requirements for 


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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 30741 

14The Bureau notes that it has now posted the 

official list of rural and underserved counties on its 

public Web site for use with mortgages 

consummated from June 1, 2013, through December 

31, 2013. The final, official list is identical to the 

preliminary list posted on the Bureau’s public Web 

site on March 12, 2013. Creditors may rely as a safe 

harbor for compliance with the relevant regulations 

on the official lists of rural and underserved 

counties posted by the Bureau. The official list for 

use in 2014 will be posted when the necessary data 

become available. 

certain credit transactions in connection 

with ‘‘rural’’ or ‘‘underserved’’ areas: (1) 

§ 1026.35(b)(2)(iii) provides an 

exemption to the 2013 Escrows Final 

Rule’s escrow requirement for HPMLs; 

(2) § 1026.43(f) provides an allowance to 

originate balloon-payment qualified 

mortgages under the 2013 ATR Final 

Rule; (3) § 1026.32(d)(1)(ii)(C) provides 

an exemption from the balloon payment 

prohibition on high-cost mortgages 

under the 2013 HOEPA Final Rule for 

balloon-payment qualified mortgages; 

and (4) § 1026.35(c)(4)(vii)(H) provides 

an exemption from a requirement to 

obtain a second appraisal for certain 

HPMLs under the 2013 Interagency 

Appraisals Final Rule. These provisions 

rely on the criteria for ‘‘rural’’ and/or 

‘‘underserved’’ counties set forth in 

§ 1026.35(b)(2)(iv)(A) and (B), 

respectively, adopted in the 2013 

Escrows Final Rule, which takes effect 

on June 1, 2013. Two of the special 

provisions for creditors operating 

predominantly in ‘‘rural’’ or 

‘‘underserved’’ areas were set forth in 

the Dodd-Frank Act amendments to 

TILA, but the terms were not defined by 

statute. TILA section 129D, as added 

and amended by Dodd-Frank Act 

sections 1461 and 1462 and 

implemented by § 1026.35(b), generally 

requires that creditors establish escrow 

accounts for HPMLs secured by a first 

lien on a consumer’s principal dwelling, 

but the statute also authorizes the 

Bureau to exempt from this requirement 

transactions by a creditor that, among 

other criteria, ‘‘operates predominantly 

in rural or underserved areas.’’ TILA 

section 129D(c)(1). Similarly, the 

ability-to-repay provisions in DoddFrank Act section 1412 contain a set of 

criteria with regard to certain balloonpayment mortgages originated and held 

in portfolio by certain creditors that 

operate predominantly in rural or 

underserved areas, allowing those loans 

to be considered qualified mortgages. 

See TILA section 129C(b)(2)(E), 15 

U.S.C. 1639c(b)(2)(E). In the 2013 

Escrows and ATR Final Rules, the 

Bureau implemented the HPML escrows 

requirement and the section 1412 

balloon-payment qualified mortgage 

provision through §§ 1026.35(b)(2)(iii) 

and 1026.43(f), respectively. In addition, 

the Bureau adopted an exemption to the 

general prohibition of balloon payments 

for high-cost mortgages when those 

mortgages meet the criteria for balloonpayment qualified mortgages set forth in 

§ 1026.43(f), as part of the 2013 HOEPA 

Final Rule, in § 1026.32(d)(1)(ii)(C). 

Finally, the Bureau and other Federal 

agencies adopted § 1026.35(c)(4)(vii)(H), 

which provides an exemption from a 

requirement to obtain a second 

appraisal for certain HPMLs under the 

2013 Interagency Appraisals Final Rule 

for credit transactions used to acquire 

property in rural counties. 

Through the 2013 Escrows Final Rule, 

the Bureau adopted 

§ 1026.35(b)(2)(iv)(A) and (B) to define 

‘‘rural’’ and ‘‘underserved’’ respectively 

for the purposes of the four rules 

discussed above that contain special 

provisions that use one or both of those 

terms. The 2013 Escrows Final Rule also 

provided comment 35(b)(2)(iv)–1 to 

clarify further the criteria for ‘‘rural’’ 

and ‘‘underserved’’ counties, and 

provided that the Bureau will annually 

update on its public Web site a list of 

counties that meet the definitions of 

rural and underserved in 

§ 1026.35(b)(2)(iv). In advance of the 

rule’s June 1, 2013, effective date, the 

Bureau proposed to amend 

§ 1026.35(b)(2)(iv) and comment 

35(b)(2)(iv)–1 to clarify how to 

determine whether a county is rural or 

underserved for the purposes of these 

provisions. 

Comments 

The Bureau received several 

comments discussing the overall 

regulatory scheme regarding how 

‘‘rural’’ and ‘‘underserved’’ should be 

defined. Most of these comments argued 

for an expanded scope for the ‘‘rural’’ 

and ‘‘underserved’’ definitions. One 

industry trade association suggested that 

the rural definition should include all 

non-metropolitan counties, as well as 

communities with populations of less 

than 50,000. Other commenters 

suggested that the Bureau should use 

Census Bureau data differently, and one 

suggested that any place not within one 

of the Census Bureau’s ‘‘Urbanized 

Areas,’’ which contain 50,000 or more 

people, be considered rural. A credit 

union association suggested that credit 

unions with ‘‘rural’’ community charters 

should be exempt, and that only those 

creditors with a physical presence in an 

underserved area should be considered 

in relation to the underserved 

exemption. Some commenters felt that 

the rule was too confusing, making 

compliance difficult.14 One credit union 

was concerned about the impact the 

escrows rule would have on mobile 

home lending. One commenter stated 

that, although the clarification 

presented in the proposal was welcome, 

there is still too much confusion 

regarding the escrows rule, and that its 

effective date should be postponed to 

January 2014. In addition, two 

commenters suggested that the Bureau 

apply exemptions based solely on the 

size of a creditor, regardless of location. 

Although the Bureau has examined 

these comments, the proposed rule 

presented only very limited changes and 

clarifications to the 2013 Final Escrows 

Rule, and solicited comments on those 

narrow issues. Broader concerns such as 

those expressed by the foregoing 

commenters about preserving 

consumers’ access to credit will be 

addressed in the Bureau’s final rule 

under the 2013 ATR Concurrent 

Proposal, which the Bureau expects to 

issue shortly. The specific provisions 

included in the proposal are discussed 

below, along with comments responsive 

to those issues. 

35(b)(2)(iii) 

The Proposal 

The Bureau proposed modifications to 

§ 1026.35(b)(2)(iii) and comment 

35(b)(2)(iii)–1.i for clarification 

purposes and for consistency with other 

provisions. As adopted in January, 

§ 1026.35(b)(2)(iii) and its commentary 

stated that the Bureau would designate 

or determine which counties are rural or 

underserved for the purposes of the 

special provisions of the four rules 

discussed above. However, that was not 

the Bureau’s intent. Rather, the Bureau 

intended to require determinations of 

‘‘rural’’ or ‘‘underserved’’ status to be 

made by creditors as prescribed by 

§ 1026.35(b)(2)(iv)(A) and (B), but also 

intended for the Bureau to apply both 

tests to each U.S. county and publish an 

annual list of counties that satisfy either 

test for a given calendar year, which 

creditors may rely upon as a safe harbor. 

Therefore, the Bureau proposed 

modifications to § 1026.35(b)(2)(iii)(A) 

and comment 35(b)(2)(iii)–1.i for the 

purposes of clarification and 

consistency with these provisions. 

Comments and Final Rule 

All the comments the Bureau received 

on this specific provision supported the 

proposed change. For the reasons stated 

above, the provision is adopted as 

proposed. 

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

The Proposal 

As adopted in January 2013, 

§ 1026.35(b)(2)(iv)(A) defines ‘‘rural’’ 


tkelley on DSK3SPTVN1PROD with RULES
30742 Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 

15See http://www.ers.usda.gov/data-products/

urban-influence-codes/documentation.aspx. 

based on currently applicable UICs 

established by the USDA–ERS. The 

UICs are based on the definitions of 

‘‘metropolitan statistical area’’ and 

‘‘micropolitan statistical area’’ as 

developed by the Office of Management 

and Budget (OMB), along with other 

factors reviewed by the ERS that place 

counties into twelve separately defined 

UICs depending, in part, on the size of 

the largest city and town in the county. 

Based on these definitions, 

§ 1026.35(b)(2)(iv)(A) as adopted states 

that a county is ‘‘rural’’ during a 

calendar year if it 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 OMB 

and applied under currently applicable 

UICs. 

As adopted, comment 35(b)(2)(iv)–1.i 

explained that, for the purposes of the 

provision, the terms ‘‘metropolitan 

statistical areas’’ and ‘‘micropolitan 

statistical areas adjacent to a 

metropolitan statistical area’’ are given 

the same meanings used by USDA–ERS 

for the purposes of determining UICs. 

The USDA–ERS considers micropolitan 

counties as ‘‘adjacent’’ to a metropolitan 

statistical area for this purpose if they 

abut a metropolitan statistical area and 

have at least 2% of employed persons 

commuting to work in the core of the 

metropolitan statistical area.15 It was 

thus implicit in this comment that 

‘‘adjacent’’ is given the same meaning 

used by the USDA–ERS for the purposes 

of § 1026.35(b)(2)(iv)(A). 

Nevertheless, the Bureau believed that 

additional commentary explaining the 

meaning of ‘‘adjacent’’ more directly 

would be useful to facilitate compliance 

with § 1026.35(b)(2)(iv) and the 

provisions that rely on it. Accordingly, 

the Bureau proposed to amend comment 

35(b)(2)(iv)–1.i to state expressly that 

‘‘adjacent’’ entails physical contiguity 

with a metropolitan statistical area 

where certain minimum commuting 

standards are also met, as defined by the 

USDA–ERS. The Bureau believed that 

this would be consistent with USDA– 

ERS’s use of ‘‘adjacent’’ and better 

explain the rule for compliance 

purposes. 

Similarly, the Bureau proposed 

language to specify under 

§ 1026.35(b)(2)(iv)(A) how ‘‘rural’’ status 

should be determined for a county that 

does not have a currently applicable 

UIC because it was created after the 

USDA–ERS last categorized counties by 

UIC. Because the USDA–ERS only 

updates UICs decennially based on the 

most recent census, it is possible that 

new counties may be created that will 

not have a designated UIC until after the 

next census. In such instances, 

clarification was needed to explain how 

‘‘rural’’ status would be determined. 

The Bureau thus proposed to amend 

comment 35(b)(2)(iv)–1.i to address this 

issue and explain that any such county 

is considered ‘‘rural’’ for the purposes of 

§ 1026.35(b)(2)(iv) only if all counties 

from which the new county’s land was 

taken were themselves rural under the 

rule. 

The Bureau also proposed comment 

35(b)(2)(iv)–2.i to provide an example of 

how ‘‘rural’’ status would be 

determined. In addition, the Bureau 

proposed small technical changes to the 

rule provision and commentary to 

enhance clarity. 

Comments 

One industry commenter supported 

generally the clarifications provided in 

the rule. Other industry commenters 

chose to neither support nor oppose the 

‘‘adjacent’’ clarification, and asked that 

there be more analysis of the impact of 

excluding counties from the rural 

definition if they are ‘‘adjacent’’ to a 

metropolitan area. 

Industry commenters opposed the 

proposed method for determining the 

status of a new county, arguing that a 

new county should be considered rural 

if 50% of its land is taken from counties 

that were previously considered rural. 

Final Rule 

The Bureau is adopting the provisions 

as proposed. The definition of 

‘‘adjacent’’ was already implicit in the 

2013 Escrows Final Rule, and the 

Bureau’s earlier impact analyses already 

accounted for that definition. The 

present rule’s guidance provision 

merely clarifies what was adopted then. 

The Bureau considered the suggestion 

to allow rural status for new counties if 

at least 50% of the counties’ land comes 

from previously rural counties, but was 

concerned that making such 

determinations would be burdensome 

and inexact for compliance purposes 

and incongruent with the rule’s overall 

rural designations. Accordingly, the 

Bureau is adopting the clarification as 

proposed. 

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

The Proposal 

Section 1026.35(b)(2)(iii)(A) creates 

an exemption from the HPML escrow 

requirement for transactions by 

creditors operating in rural or 

underserved counties, if they meet 

certain criteria involving the loans they 

originated during the preceding 

calendar year. Thus, the availability of 

the rural or underserved exemption 

always follows a year after the 

origination activity that makes a creditor 

eligible for the exemption. 

As adopted by the 2013 Escrows Final 

Rule, § 1026.35(b)(2)(iv)(B) stated that a 

county would be ‘‘underserved’’ during 

a calendar year if, ‘‘according to Home 

Mortgage Disclosure Act (HMDA) data 

for that 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. However, HMDA data typically 

are released for a given calendar year 

during the third quarter of each 

subsequent calendar year. It is thus not 

generally possible for creditors to make 

determinations concerning whether a 

county was underserved during the 

preceding calendar year based on that 

preceding year’s HMDA data, because 

such data likely will not be available 

until late in the following year. In 

wording § 1026.35(b)(2)(iv)(B) as it did, 

the Bureau did not intend to require the 

use of HMDA data that would not be 

available at the time the determination 

of a county’s ‘‘underserved’’ status was 

made; the Bureau’s intent was to 

provide for the use of the most recent 

HMDA data available at the time of the 

determination. 

The Bureau therefore proposed to 

amend § 1026.35(b)(2)(iv)(B) to clarify 

that a county is considered 

‘‘underserved’’ during a given calendar 

year based on HMDA data for ‘‘the 

preceding calendar year’’ as opposed to 

‘‘that calendar year.’’ This look-back 

feature coordinates with the look-back 

feature in the exemption itself at 

§ 1026.35(b)(2)(iii)(A), so that a creditor 

would rely on the underserved status of 

a county based on HMDA data from two 

years previous to the use of the 

exemption, which are the most recent 

data available for use as the Bureau 

intended. The Bureau also proposed to 

amend comment 35(b)(2)(iv)–1.ii to 

conform to this change, and to add 

comment 35(b)(2)(iv)–2.ii to provide an 

example. 

Comments and Final Rule 

The only commenter to reference this 

provision, an industry trade group, 

supported it. For the reasons stated 

above, the provision is adopted as 

proposed. 

1026.35(e) Repayment Ability, 

Prepayment Penalties 

The Proposal 

The Bureau proposed language in 

§ 1026.35(e) to keep in place existing 

requirements contained in § 1026.35(b) 


tkelley on DSK3SPTVN1PROD with RULES
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 30743 

16 73 FR 44522 (July 30, 2008). 

17Section 1022(b)(2)(A) of the Dodd-Frank Act, 

12 U.S.C. 5521(b)(2), directs the Bureau, when 

prescribing a rule under the Federal consumer 

financial laws, to consider the potential benefits 

and costs of regulation to consumers and covered 

persons, including the potential reduction of access 

by consumers to consumer financial products or 

services; the impact on insured 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. Section 1022(b)(2)(B) of the DoddFrank Act directs the Bureau to consult with 

appropriate prudential regulators or other Federal 

agencies regarding consistency with prudential, 

market, or systemic objectives that those agencies 

administer. 

18The special provisions that rely on the ‘‘rural’’ 

and ‘‘underserved’’ definitions are as follows: (1) 

the § 1026.35(b)(2)(iii) exemption to the 2013 

Escrows Final Rule’s escrow requirement for 

higher-priced mortgage loans; (2) the § 1026.43(f) 

allowance for balloon-payment qualified mortgages; 

(3) the § 1026.32(d)(1)(ii)(C) exemption from the 

balloon payment prohibition on high-cost 

mortgages for balloon-payment qualified mortgages; 

and (4) the § 1026.35(c)(4)(vii)(H) exemption from 

the § 1026.35(c)(4)(i) HPML second appraisal 

requirement for credit transactions used to acquire 

property located in a rural county. 

19The Bureau has discretion in any rulemaking 

to choose an appropriate scope of analysis with 

respect to potential benefits and costs and an 

appropriate baseline. 

concerning assessment of consumers’ 

ability to repay an HPML and 

limitations on prepayment penalties for 

HPMLs. These provisions were 

originally adopted by the Board in 

2008,16 and will be supplanted by the 

Bureau’s new rules implementing 

similar Dodd-Frank requirements in 

§ 1026.43 on January 10, 2014. 

The 2013 Escrows Final Rule 

inadvertently removed the existing 

language of § 1026.35(b) between June 1, 

2013, and the January 10, 2014, effective 

date for the ability-to-repay and 

prepayment penalty provisions in 

§ 1026.43. The Bureau proposed 

restoring this language at § 1026.35(e) 

and keeping it in effect during that 

intervening period. The Bureau also 

proposed updating existing crossreferences to the § 1026.35(b) HPML 

provisions. 

Comments and Final Rule 

The industry groups specifically 

commenting on this provision 

supported the proposal. To maintain 

consumer protections and avoid 

disruptions in the market, the provision 

is adopted as proposed. 

V. Effective Date 

This rule is effective June 1, 2013. 

Section 1026.35(e) of this rule is a 

temporary provision and will be 

effective from June 1, 2013, through 

January 9, 2014. Section 553(d) of the 

Administrative Procedure Act generally 

requires publication of a final rule not 

less than 30 days before its effective 

date, except for (1) a substantive rule 

which grants or recognizes an 

exemption or relieves a restriction; (2) 

interpretive rules and statements of 

policy; or (3) as otherwise provided by 

the agency for good cause found and 

published with the rule. 5 U.S.C. 553(d). 

At minimum, the Bureau believes the 

amendments fall under the third 

exception to section 553(d). The Bureau 

finds that there is good cause to make 

the amendments effective on June 1, 

2013, because doing so will ease 

compliance and reduce disruption in 

the market, and ensure that the 

protections of the rule are 

uninterrupted. Moreover, the final list of 

counties prepared using this rule is 

identical to the preliminary list, which 

was posted along with the proposal on 

the Bureau’s public Web site on March 

12, 2013. In addition, the effective date 

for the 2013 Escrows Final Rule, which 

this rule amends, is June 1, 2013, and 

failure to make this rule effective on the 

same day would make compliance more 

difficult and create more disruption in 

the market, not less. Therefore, the 

Bureau believes that the benefits from 

making this rule effective on June 1 

outweigh providing additional time to 

comply with this rule. 

VI. Section 1022(b)(2) of the DoddFrank Act 

A. Overview 

In developing the final rule, the 

Bureau has considered its potential 

benefits, costs, and impacts.17 The 

Bureau requested comment on its 

preliminary analysis as well as 

submissions of additional data that 

could inform the Bureau’s analysis. The 

Bureau has consulted, or offered to 

consult with, the prudential regulators, 

SEC, HUD, FHFA, the Federal Trade 

Commission, and the Department of the 

Treasury, including regarding 

consistency with any prudential, 

market, or systemic objectives 

administered by such agencies. 

The final rule clarifies how to 

determine whether a county is 

considered ‘‘rural’’ or ‘‘underserved’’ for 

the application of the special provisions 

adopted in certain of the 2013 Title XIV 

Final Rules.18 These changes do not 

have a material impact on consumers or 

covered persons. Nevertheless, two 

commenters requested that the Bureau 

analyze the impact of excluding 

counties from the rural definition if they 

are ‘‘adjacent’’ to a metropolitan area. 

However, the scope of the related 

clarification was limited to specifying 

that ‘‘adjacent’’ is given the same 

meaning used by the USDA–ERS for the 

purposes of § 1026.35(b)(2)(iv)(A), 

which was implicit in the 2013 Escrows 

Final Rule. The impacts of the stated 

definitions are discussed in the various 

2013 Title XIV Final Rules and the final 

list of rural and underserved counties 

for use during 2013 is being posted at 

the Bureau’s public Web site along with 

publication of this notice. 

Other provisions of the rule are 

related to underwriting and features of 

HPMLs. As described above, existing 

Regulation Z contains requirements 

related to the consumer’s ability to 

repay and prepayment penalties for 

HPMLs. The scope of these protections 

is being expanded in connection with 

the Dodd-Frank Act title XIV 

rulemakings to apply to most mortgage 

transactions, rather than just HPMLs. 

For this reason, the 2013 Escrows Final 

Rule removed the regulatory text 

providing these protections solely to 

HPMLs. That final rule, however, takes 

effect on June 1, 2013, whereas the new 

ability-to-repay and prepayment penalty 

provisions do not take effect until 

January 10, 2014. Without the correction 

provided by this final rule, the final 

rules issued in January would have 

inadvertently created an interruption in 

applicable protections for certain 

consumers obtaining HPMLs effective 

June 1, 2013, and a corresponding 

interruption of the requirements for 

lenders. This rule will establish a 

temporary provision to ensure the 

protections remain in place for HPMLs 

until the expanded provisions take 

effect in January 2014. Because the 

avoided interruption was inadvertent, 

the Bureau’s 1022 analyses in the 2013 

Title XIV Final Rules considered the 

impact of the protections at issue in this 

rule as if they were remaining in place, 

which they now are. 

B. Potential Benefits and Costs to 

Consumers and Covered Persons 

Compared to the baseline established 

by the issuance of the final rules in 

January 2013, this final rule will 

provide consumers who obtain HPMLs 

from June 1, 2013, through and 

including January 9, 2014, the benefit of 

the existing protections under 

Regulation Z regarding ability to repay 

and prepayment penalties.19 These 

provisions are designed to limit 

consumers’ exposure to collateral-based 

lending, potentially harmful 

prepayment penalties, and other harms. 

The price of HPMLs may be slightly 

higher than they would be in the 

absence of these protections; however, 

these effects are likely to be minimal. 


tkelley on DSK3SPTVN1PROD with RULES
30744 Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 

20 5 U.S.C. 601 et. seq. 

21 5 U.S.C. 603(a). For purposes of assessing the 

impacts of the rule on small entities, ‘‘small 

entities’’ is defined in the RFA to include small 

businesses, small not-for-profit organizations, and 

small government jurisdictions. 5 U.S.C. 601(6). A 

‘‘small business’’ is determined by application of 

Small Business Administration regulations and 

reference to the North American Industry 

Classification System (NAICS) classifications and 

size standards. 5 U.S.C. 601(3). A ‘‘small 

organization’’ is any ‘‘not-for-profit enterprise 

which is independently owned and operated and is 

not dominant in its field.’’ 5 U.S.C. 601(4). A ‘‘small 

governmental jurisdiction’’ is the government of a 

city, county, town, township, village, school 

district, or special district with a population of less 

than 50,000. 5 U.S.C. 601(5). 

22 5 U.S.C. 605(b). 

23 5 U.S.C. 605(c). 

24 5 U.S.C. 609. 

25The special provisions that rely on the ‘‘rural’’ 

and ‘‘underserved’’ definitions are as follows: (1) 

The § 1026.35(b)(2)(iii) exemption to the 2013 

Escrows Final Rule’s escrow requirement for 

higher-priced mortgage loans; (2) the § 1026.43(f) 

allowance for balloon-payment qualified mortgages; 

(3) the § 1026.32(d)(1)(ii)(C) exemption from the 

balloon payment prohibition on high-cost 

mortgages for balloon-payment qualified mortgages; 

and (4) the § 1026.35(c)(4)(vii)(H) exemption from 

the § 1026.35(c)(4)(i) HPML second appraisal 

requirement for credit transactions used to acquire 

property located in a rural county. 

26One commenter suggested that the RFA 

analysis omitted a consideration of the costs of 

compliance for this rule and the related 2013 Title 

XIV Final Rules more broadly. As noted, a 

discussion of the compliance costs for small entities 

under the RFA was included with the publication 

of the 2013 Title XIV Final Rules: This rule only 

clarifies or makes minor technical amendments to 

existing rules and does not impose the burdens 

noted by the commenter. 

Compared to the same baseline, 

covered persons issuing such mortgages 

during this time period will incur any 

costs related to the ability-to-pay 

requirements and the restrictions on 

certain prepayment penalties. These 

costs will include the costs of 

documenting and verifying the 

consumer’s ability to repay and some 

expected litigation-related costs. As 

noted above, the evidence to date is that 

these costs are quite limited. The 2013 

ATR Final Rule and the Board’s earlier 

2008 HOEPA Final Rule discuss these 

costs and benefits in greater detail. This 

rule simply extends these impacts from 

June 1, 2013, through and including 

January 9, 2014. The Bureau also 

believes that the rule will benefit both 

consumers and covered persons in 

limiting unnecessary and possibly 

disruptive changes in the regulatory 

regime. 

The final rule may have a small 

differential impact on depository 

institutions and credit unions with $10 

billion or less in total assets as 

described in Section 1026. To the extent 

that HPMLs comprise a larger 

percentage of originations at these 

institutions, the relative increase in 

costs may be higher relative to other 

lenders. 

The final rule will also have some 

differential impacts on consumers in 

rural areas. In these areas, a greater 

fraction of loans are HPMLs. For this 

reason, to the extent that these added 

protections lead to additional lender 

costs, interest rates may be slightly 

higher on average; however, rural 

consumers will derive greater benefit 

from the proposed provisions than nonrural consumers. 

Given the small changes implemented 

in this rule, the Bureau does not believe 

that the final rule will meaningfully 

reduce consumers’ access to credit. 

VII. Regulatory Flexibility Act Analysis 

The Regulatory Flexibility Act (RFA) 

generally requires an agency to conduct 

an initial regulatory flexibility analysis 

(IRFA) and a final regulatory flexibility 

analysis (FRFA) of any rule subject to 

notice-and-comment rulemaking 

requirements.20 These analyses must 

‘‘describe the impact of the proposed 

rule on small entities.’’ 21 An IRFA or 

FRFA is not required if the agency 

certifies that the rule will not have a 

significant economic impact on a 

substantial number of small entities,22

or if the agency considers a series of 

closely related rules as one rule for 

purposes of complying with the IRFA or 

FRFA requirements.23 The Bureau also 

is subject to certain additional 

procedures under the RFA involving the 

convening of a panel to consult with 

small business representatives prior to 

proposing a rule for which an IRFA is 

required.24

This rulemaking is part of a series of 

rules that have revised and expanded 

the regulatory requirements for entities 

that offer HPMLs. In January 2013, the 

Bureau adopted the 2013 Escrows Final 

Rule and 2013 ATR Final Rule, along 

with other related rules mentioned 

above. Section VIII of the 

supplementary information to each of 

these rules set forth the Bureau’s 

analyses and determinations under the 

RFA with respect to those rules. See 78 

FR 4749, 78 FR 6575. The Bureau also 

notes because the potential interruption 

in applicable protections created by the 

issuance of the final rules in January 

was inadvertent, its regulatory 

flexibility analyses considered the 

impact of the protections at issue in this 

rule remaining in place for HPMLs until 

the expanded provisions take effect in 

January 2014. Because these rules 

qualify as ‘‘a series of closely related 

rules,’’ for purposes of the RFA, the 

Bureau relies on those analyses and 

determines that it has met or exceeded 

the IRFA and FRFA requirements. 

In the alternative, the Bureau also 

concludes that the final rule will not 

have a significant impact on a 

substantial number of small entities. 

The rule will establish a temporary 

provision to ensure the protections 

remain in place for HPMLs until the 

expanded provisions take effect in 

January 2014. Since the new 

requirements and liabilities that will 

take effect in January 2014 as applied to 

HPMLs are very similar in nature to 

those that exist under the pre-existing 

regulations, the gap absent the rule’s 

correction would have been short-lived 

and would have affected only the 

higher-priced mortgage loan market. It is 

therefore very unlikely that, absent this 

correction, covered persons would have 

altered their behavior substantially in 

the intervening period. 

The rule also clarifies how to 

determine whether a county is 

considered ‘‘rural’’ or ‘‘underserved’’ for 

the application of the special provisions 

adopted in certain of the 2013 Title XIV 

Final Rules.25 These changes will not 

have a material impact on small 

entities.26

For these reasons, the Bureau affirms 

that this final rule will not have a 

significant impact on a substantial 

number of small entities. 

VIII. Paperwork Reduction Act 

This final rule will amend 12 CFR 

part 1026 (Regulation Z), which 

implements the Truth in Lending Act 

(TILA). Regulation Z currently contains 

collections of information approved by 

OMB. The Bureau’s OMB control 

number for Regulation Z is 3170–0015. 

However, the Bureau has determined 

that this rule will not materially alter 

these collections of information nor 

impose any new recordkeeping, 

reporting, or disclosure requirements on 

the public that would constitute 

collections of information requiring 

approval under the Paperwork 

Reduction Act, 44 U.S.C. 3501 et seq. 

List of Subjects in 12 CFR Part 1026 

Advertising, Consumer protection, 

Mortgages, 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: 


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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 30745 

Authority: 12 U.S.C. 2601; 2603–2605, 

2607, 2609, 2617, 5511, 5512, 5532, 5581; 15 

U.S.C. 1601 et seq. 

Subpart C—Closed-End Credit 

■ 2. Section 1026.23 is amended by 

revising paragraph (a)(3)(ii) to read as 

follows: 

§ 1026.23 Right of rescission. 

(a) * * * 

(3) * * * 

(ii) For purposes of this paragraph 

(a)(3), the term ‘‘material disclosures’’ 

means the required disclosures of the 

annual percentage rate, the finance 

charge, the amount financed, the total of 

payments, the payment schedule, and 

the disclosures and limitations referred 

to in §§ 1026.32(c) and (d) and 

1026.35(e)(2). 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

■ 3. Section 1026.34 is amended by 

revising paragraph (a)(4)(i) to read as 

follows: 

§ 1026.34 Prohibited acts or practices in 

connection with high-cost mortgages. 

(a) * * * 

(4) * * * 

(i) Mortgage-related obligations. For 

purposes of this paragraph (a)(4), 

mortgage-related obligations are 

expected property taxes, premiums for 

mortgage-related insurance required by 

the creditor as set forth in § 1026.35(b), 

and similar expenses. 

* * * * * 

■ 4. Section 1026.35, as amended by the 

final rule published on January 22, 

2013, 78 FR 4726, effective June 1, 2013, 

is further amended by revising the last 

sentence of paragraph (b)(1), revising 

paragraphs (b)(2)(iii)(A), and (b)(iv)(A) 

and (B), and adding paragraph (e) to 

read as follows: 

§ 1026.35 Requirements for higher-priced 

mortgage loans. 

* * * * * 

(b) * * * 

(1) For purposes of this paragraph (b), 

the term ‘‘escrow account’’ has the same 

meaning as under Regulation X (12 CFR 

1024.17(b)), as amended. 

(2) * * * 

(iii) * * * 

(A) During the preceding calendar 

year, the creditor extended more than 50 

percent of its total covered transactions, 

as defined by § 1026.43(b)(1), secured by 

a first lien, on properties that are located 

in counties that are either ‘‘rural’’ or 

‘‘underserved,’’ as set forth in paragraph 

(b)(2)(iv) of this section; 

* * * * * 

(iv) * * * 

(A) A county is ‘‘rural’’ during a 

calendar year if it 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). 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. 

(B) A county is ‘‘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. A 

creditor may rely as a safe harbor on the 

list of counties published by the Bureau 

to determine whether a county qualifies 

as ‘‘underserved’’ for a particular 

calendar year. 

* * * * * 

(e) Repayment ability, prepayment 

penalties. Higher-priced mortgage loans 

are subject to the following restrictions: 

(1) Repayment ability. A creditor shall 

not extend credit based on the value of 

the consumer’s collateral without regard 

to the consumer’s repayment ability as 

of consummation as provided in 

§ 1026.34(a)(4). 

(2) Prepayment penalties. A loan may 

not include a penalty described by 

§ 1026.32(d)(6) unless: 

(i) The penalty is otherwise permitted 

by law, including § 1026.32(d)(7) if the 

loan is a mortgage transaction described 

in § 1026.32(a); and 

(ii) Under the terms of the loan: 

(A) The penalty will not apply after 

the two-year period following 

consummation; 

(B) The penalty will not apply if the 

source of the prepayment funds is a 

refinancing by the creditor or an affiliate 

of the creditor; and 

(C) The amount of the periodic 

payment of principal or interest or both 

may not change during the four-year 

period following consummation. 

(3) Sunset of requirements on 

repayment ability and prepayment 

penalties. The requirements described 

in this paragraph (e) shall expire at 

11:59 p.m. on January 9, 2014. 

■ 5. In Supplement I to Part 1026— 

Official Interpretations: 

■ A. Under Section 1026.32— 

Requirements for Certain Closed-End 

Home Mortgages, under Paragraph 32(d) 

Limitations, paragraph 1 is revised. 

■ B. Under Section 1026.34—Prohibited 

Acts or Practices in Connection with 

High-Cost Mortgages: 

■ i. Under Paragraph 34(a)(4) 

Repayment ability for high-cost 

mortgages, paragraph 1 is revised. 

■ ii. Under Paragraph 34(a)(4)(i) 

Mortgage-Related Obligations, 

paragraph 1 is revised. 

■ C. Under Section 1026.35— 

Requirements for Higher-Priced 

Mortgage Loans, as amended by the 

final rule published on January 22, 

2013, 78 FR 4726, effective June 1, 2013, 

is further amended: 

■ i. Under Paragraph 35(b)(2)(iii), 

paragraphs 1 and i are revised. 

■ ii. Under Paragraph 35(b)(2)(iv), 

paragraph 1 is revised and paragraph 2 

is added. 

■ iii. The headings 35(e) Rules for 

Higher-Priced Mortgage Loans and 

Paragraph 35(e)(2)(ii)(C), and 

paragraphs 1 and 2 are added. 

The revisions and additions read as 

follows: 

Supplement I to Part 1026—Official 

Interpretations 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

* * * * * 

§ 1026.32—Requirements for Certain 

Closed-End Home Mortgages 

* * * * * 

Paragraph 32(d) Limitations 

1. Additional prohibitions applicable 

under other sections. Section 1026.34 sets 

forth certain prohibitions in connection with 

mortgage credit subject to § 1026.32, in 

addition to the limitations in § 1026.32(d). 

Further, § 1026.35 prohibits certain practices 

in connection with transactions that meet the 

coverage test in § 1026.35(a). Because the 

coverage test in § 1026.35(a) is generally 

broader than the coverage test in § 1026.32(a), 

most § 1026.32 mortgage loans are also 

subject to the prohibitions set forth in 

§ 1026.35 (such as escrows), in addition to 

the limitations in § 1026.32(d). 

* * * * * 

§ 1026.34—Prohibited Acts or Practices in 

Connection with High-Cost Mortgages 

* * * * * 

Paragraph 34(a)(4) Repayment Ability for 

High-Cost Mortgages 

1. Application of repayment ability rule. 

The § 1026.34(a)(4) prohibition against 

making loans without regard to consumers’ 

repayment ability applies to mortgage loans 

described in § 1026.32(a). In addition, the 

§ 1026.34(a)(4) prohibition applies to higherVerDate Mar<15>2010 15:47 May 22, 2013 Jkt 229001 PO 00000 Frm 00009 Fmt 4700 Sfmt 4700 E:\FR\FM\23MYR1.SGM 23MYR1

tkelley on DSK3SPTVN1PROD with RULES
30746 Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 

priced mortgage loans described in 

§ 1026.35(a). See § 1026.35(e)(1). 

* * * * * 

Paragraph 34(a)(4)(i) Mortgage-Related 

Obligations 

1. Mortgage-related obligations. A creditor 

must include in its repayment ability 

analysis the expected property taxes and 

premiums for mortgage-related insurance 

required by the creditor as set forth in 

§ 1026.35(b), as well as similar mortgagerelated expenses. Similar mortgage-related 

expenses include homeowners’ association 

dues and condominium or cooperative fees. 

* * * * * 

§ 1026.35—Requirements for Higher-Priced 

Mortgage Loans 

* * * * * 

Paragraph 35(b)(2)(iii) 

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, more 

than 50 percent of the creditor’s total firstlien covered transactions, as defined in 

§ 1026.43(b)(1), are secured by properties 

located in counties that are either ‘‘rural’’ or 

‘‘underserved,’’ as set forth in 

§ 1026.35(b)(2)(iv). Pursuant to that section, a 

creditor may rely as a safe harbor on a list 

of counties published by the Bureau to 

determine whether counties in the United 

States are rural or underserved for a 

particular calendar year. Thus, for example, 

if a creditor originated 90 covered 

transactions, as defined by § 1026.43(b)(1), 

secured by a first lien, during 2013, the 

creditor meets this condition for an 

exemption in 2014 if at least 46 of those 

transactions are secured by first liens on 

properties that are located in such counties. 

* * * * * 

Paragraph 35(b)(2)(iv) 

1. Requirements for ‘‘rural’’ or 

‘‘underserved’’ status. A county is considered 

to be ‘‘rural’’ or ‘‘underserved’’ for purposes 

of § 1026.35(b)(2)(iii)(A) if it satisfies either of 

the two tests in § 1026.35(b)(2)(iv). The 

Bureau applies both tests to each county in 

the United States. If a county satisfies either 

test, the Bureau will include the county on 

a published list of ‘‘rural’’ or ‘‘underserved’’ 

counties for a particular calendar year. To 

facilitate compliance with appraisal 

requirements in § 1026.35(c), the Bureau will 

also create a list of only those counties that 

are ‘‘rural’’ but excluding those that are only 

‘‘underserved.’’ The Bureau will post on its 

public Web site the applicable lists for each 

calendar year by the end of that year, thus 

permitting creditors to ascertain the 

availability to them of the exemption during 

the following year. For 2012, however, the 

list will be published before June 1, 2013. A 

creditor may rely as a safe harbor, pursuant 

to section 130(f) of the Truth in Lending Act, 

on the lists of counties published by the 

Bureau to determine whether a county 

qualifies as ‘‘rural’’ or ‘‘underserved’’ for a 

particular calendar year. A creditor’s 

originations of covered transactions, as 

defined by § 1026.43(b)(1), secured by a first 

lien, in such counties during that year are 

considered in determining whether the 

creditor satisfies the condition in 

§ 1026.35(b)(2)(iii)(A) and therefore will be 

eligible for the exemption during the 

following calendar year. 

i. Under § 1026.35(b)(2)(iv)(A), a county is 

rural during a calendar year if it is neither 

in a metropolitan statistical area nor in a 

micropolitan statistical area that is adjacent 

to a metropolitan statistical area. These 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). Accordingly, for purposes of 

§ 1026.35(b)(2)(iv)(A), ‘‘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. 

Specifically, a county is ‘‘rural’’ 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 rural 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), a county is 

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. Specifically, a county is 

‘‘underserved’’ 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. 

2. Examples. i. A county is considered 

‘‘rural’’ for a given calendar year based on the 

most recent available UIC designations, 

which are updated by the USDA–ERS once 

every ten years. As an example, assume a 

creditor makes first-lien covered transactions 

in County X during calendar year 2014, and 

the most recent UIC designations have been 

published in the second quarter of 2013. To 

determine ‘‘rural’’ status for County X during 

calendar year 2014, the creditor will use the 

2013 UIC designations. However, to 

determine ‘‘rural’’ status for County X during 

2012 or 2013, the creditor would use the UIC 

designations last published in 2003. 

ii. A county is considered ‘‘underserved’’ 

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 2013, and the most recent HMDA data 

is for calendar year 2012, published in the 

third quarter of 2013. To determine 

‘‘underserved’’ status for County Y in 

calendar year 2013 for the purposes of 

qualifying for the ‘‘rural or underserved’’ 

exemption in calendar year 2014, the creditor 

will use the 2012 HMDA data. 

* * * * * 

35(e) Rules for Higher-Priced Mortgage Loans 

Paragraph 35(e)(2)(ii)(C) 

1. Payment change. Section 1026.35(e)(2) 

provides that a loan subject to this section 

may not have a penalty described by 

§ 1026.32(d)(6) unless certain conditions are 

met. Section 1026.35(e)(2)(ii)(C) lists as a 

condition that the amount of the periodic 

payment of principal or interest or both may 

not change during the four-year period 

following consummation. For examples 

showing whether a prepayment penalty is 

permitted or prohibited in connection with 

particular payment changes, see comment 

32(d)(7)(iv)–1. Those examples, however, 

include a condition that § 1026.35(e)(2) does 

not include: The condition that, at 

consummation, the consumer’s total monthly 

debt payments may not exceed 50 percent of 

the consumer’s monthly gross income. For 

guidance about circumstances in which 

payment changes are not considered payment 

changes for purposes of this section, see 

comment 32(d)(7)(iv)–2. 

2. Negative amortization. Section 

1026.32(d)(2) provides that a loan described 

in § 1026.32(a) may not have a payment 

schedule with regular periodic payments that 

cause the principal balance to increase. 

Therefore, the commentary to 

§ 1026.32(d)(7)(iv) does not include examples 

of payment changes in connection with 

negative amortization. The following 

examples show whether, under 

§ 1026.35(e)(2), prepayment penalties are 

permitted or prohibited in connection with 

particular payment changes, when a loan 

agreement permits negative amortization: 

i. Initial payments for a variable-rate 

transaction consummated on January 1, 2010, 

are $1,000 per month and the loan agreement 

permits negative amortization to occur. 

Under the loan agreement, the first date that 

a scheduled payment in a different amount 

may be due is January 1, 2014, and the 

creditor does not have the right to change 

scheduled payments prior to that date even 

if negative amortization occurs. A 

prepayment penalty is permitted with this 

mortgage transaction provided that the other 

§ 1026.35(e)(2) conditions are met, that is: 

Provided that the prepayment penalty is 


tkelley on DSK3SPTVN1PROD with RULES
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules and Regulations 30747 

1 16 U.S.C. 824o(d)(5) (2006). 

permitted by other applicable law, the 

penalty expires on or before December 31, 

2011, and the penalty will not apply if the 

source of the prepayment funds is a 

refinancing by the creditor or its affiliate. 

ii. Initial payments for a variable-rate 

transaction consummated on January 1, 2010 

are $1,000 per month and the loan agreement 

permits negative amortization to occur. 

Under the loan agreement, the first date that 

a scheduled payment in a different amount 

may be due is January 1, 2014, but the 

creditor has the right to change scheduled 

payments prior to that date if negative 

amortization occurs. A prepayment penalty is 

prohibited with this mortgage transaction 

because the payment may change within the 

four-year period following consummation. 

Dated: May 16, 2013. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2013–12125 Filed 5–22–13; 8:45 am] 

BILLING CODE 4810–AM–P 

DEPARTMENT OF ENERGY 

Federal Energy Regulatory 

Commission 

18 CFR Part 40 

[Docket No. RM12–22–000; Order No. 779] 

Reliability Standards for Geomagnetic 

Disturbances 

AGENCY: Federal Energy Regulatory 

Commission. 

ACTION: Final rule. 

SUMMARY: Under section 215 of the 

Federal Power Act, the Federal Energy 

Regulatory Commission (Commission) 

directs the North American Electric 

Reliability Corporation (NERC), the 

Commission-certified Electric 

Reliability Organization, to submit to 

the Commission for approval proposed 

Reliability Standards that address the 

impact of geomagnetic disturbances 

(GMD) on the reliable operation of the 

Bulk-Power System. The Commission 

directs NERC to implement the directive 

in two stages. In the first stage, NERC 

must submit, within six months of the 

effective date of this Final Rule, one or 

more Reliability Standards that require 

owners and operators of the Bulk-Power 

System to develop and implement 

operational procedures to mitigate the 

effects of GMDs consistent with the 

reliable operation of the Bulk-Power 

System. In the second stage, NERC must 

submit, within 18 months of the 

effective date of this Final Rule, one or 

more Reliability Standards that require 

owners and operators of the Bulk-Power 

System to conduct initial and on-going 

assessments of the potential impact of 

benchmark GMD events on Bulk-Power 

System equipment and the Bulk-Power 

System as a whole. The Second Stage 

GMD Reliability Standards must 

identify benchmark GMD events that 

specify what severity GMD events a 

responsible entity must assess for 

potential impacts on the Bulk-Power 

System. If the assessments identify 

potential impacts from benchmark GMD 

events, the Reliability Standards should 

require owners and operators to develop 

and implement a plan to protect against 

instability, uncontrolled separation, or 

cascading failures of the Bulk-Power 

System, caused by damage to critical or 

vulnerable Bulk-Power System 

equipment, or otherwise, as a result of 

a benchmark GMD event. The 

development of this plan cannot be 

limited to considering operational 

procedures or enhanced training alone, 

but will, subject to the potential impacts 

of the benchmark GMD events identified 

in the assessments, contain strategies for 

protecting against the potential impact 

of GMDs based on factors such as the 

age, condition, technical specifications, 

system configuration, or location of 

specific equipment. These strategies 

could, for example, include 

automatically blocking geomagnetically 

induced currents from entering the 

Bulk-Power System, instituting 

specification requirements for new 

equipment, inventory management, 

isolating certain equipment that is not 

cost effective to retrofit, or a 

combination thereof. 

DATES: This rule will become effective 

July 22, 2013. 

FOR FURTHER INFORMATION CONTACT: 

Regis Binder (Technical Information), 

Office of Electric Reliability, Division 

of Reliability Standards and Security, 

Federal Energy Regulatory 

Commission, 888 First Street NE., 

Washington, DC 20426, (301) 665– 

1601, Regis.Binder@ferc.gov. 

Matthew Vlissides (Legal Information), 

Office of the General Counsel, Federal 

Energy Regulatory Commission, 888 

First Street NE., Washington, DC 

20426, (202) 502–8408, 

Matthew.Vlissides@ferc.gov. 

SUPPLEMENTARY INFORMATION: 

143 FERC ¶ 61,147 

United States of America 

Federal Energy Regulatory Commission 

Before Commissioners: 

Jon Wellinghoff, Chairman; 

Philip D. Moeller, John R. Norris, Cheryl A. 

LaFleur, and Tony Clark. 

Final Rule 

Issued May 16, 2013. 

1. Pursuant to section 215(d)(5) of the 

Federal Power Act (FPA),1 the 

Commission directs the North American 

Electric Reliability Corporation (NERC), 

the Commission-certified Electric 

Reliability Organization (ERO), to 

submit for approval Reliability 

Standards (GMD Reliability Standards) 

that address the risks posed by 

geomagnetic disturbances (GMD) to the 

reliable operation of the Bulk-Power 

System. 

2. The Commission directs NERC to 

implement the directive in two stages. 

In the first stage, NERC must submit, 

within six months of the effective date 

of this Final Rule, one or more 

Reliability Standards that require 

owners and operators of the Bulk-Power 

System to develop and implement 

operational procedures to mitigate the 

effects of GMDs consistent with the 

reliable operation of the Bulk-Power 

System. In the second stage, NERC must 

submit, within 18 months of the 

effective date of this Final Rule, one or 

more Reliability Standards that require 

owners and operators of the Bulk-Power 

System to conduct initial and on-going 

assessments of the potential impact of 

benchmark GMD events on Bulk-Power 

System equipment and the Bulk-Power 

System as a whole. The Second Stage 

GMD Reliability Standards must 

identify ‘‘benchmark GMD events’’ that 

specify what severity GMD events a 

responsible entity must assess for 

potential impacts on the Bulk-Power 

System. The benchmark GMD events 

must be technically justified because the 

benchmark GMD events will define the 

scope of the Second Stage GMD 

Reliability Standards (i.e., responsible 

entities should not be required to assess 

GMD events more severe than the 

benchmark GMD events). If the 

assessments identify potential impacts 

from benchmark GMD events, the 

Reliability Standards should require 

owners and operators to develop and 

implement a plan to protect against 

instability, uncontrolled separation, or 

cascading failures of the Bulk-Power 

System, caused by damage to critical or 

vulnerable Bulk-Power System 

equipment, or otherwise, as a result of 

a benchmark GMD event. The plan 

cannot be limited to considering 

operational procedures or enhanced 

training alone. Rather, the plan must, 

subject to the potential impacts of the 

benchmark GMD events identified in 

the assessments, contain strategies for 

protecting against the potential impact 


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