Vol. 77 Wednesday, 

No. 158 August 15, 2012 

Part III 

Bureau of Consumer Financial Protection 

12 CFR Parts 1024 and 1026 

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); 

Proposed Rule 


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49090 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

1For purposes of this notice of proposed 

rulemaking, the terms ‘‘high-cost mortgage,’’ 

‘‘HOEPA-covered loan’’ or ‘‘HOEPA loan’’ refer 

interchangeably to mortgages that meet HOEPA’s 

high-cost triggers. 

2 12 CFR part 1026. 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Parts 1024 and 1026 

[Docket No. CFPB–2012–0029] 

RIN 3170–AA12 

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) 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Proposed rule; request for 

public comment. 

SUMMARY: The Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(Dodd-Frank Act) amends the Truth in 

Lending Act by expanding the types of 

mortgage loans that are subject to the 

protections of the Home Ownership and 

Equity Protection Act of 1994 (HOEPA), 

by revising and expanding the triggers 

for coverage under HOEPA, and by 

imposing additional restrictions on 

HOEPA mortgage loans, including a preloan counseling requirement. The DoddFrank Act also amends the Truth in 

Lending Act and the Real Estate 

Settlement Procedures Act by imposing 

certain other requirements related to 

homeownership counseling. The Bureau 

of Consumer Financial Protection 

(Bureau) is proposing to amend 

Regulation Z (Truth in Lending) and 

Regulation X (Real Estate Settlement 

Procedures Act) to implement the DoddFrank Act’s amendments to the Truth in 

Lending Act and the Real Estate 

Settlement Procedures Act. 

DATES: Comments must be received on 

or before September 7, 2012, except that 

comments on the Paperwork Reduction 

Act analysis in part VIII of this Federal 

Register notice must be received on or 

before October 15, 2012. 

ADDRESSES: You may submit comments, 

identified by Docket No. CFPB–2012– 

0029 or RIN 3170–AA12, by any of the 

following methods: 

• Electronic: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail: Monica Jackson, Office of the 

Executive Secretary, Bureau of 

Consumer Financial Protection, 1700 G 

Street NW., Washington, DC 20552. 

• Hand Delivery/Courier in Lieu of 

Mail: Monica Jackson, Office of the 

Executive Secretary, Bureau of 

Consumer Financial Protection, 1700 G 

Street NW., Washington, DC 20552. 

All submissions must include the 

agency name and docket number or 

Regulatory Information Number (RIN) 

for this rulemaking. In general, all 

comments received will be posted 

without change to http:// 

www.regulations.gov. In addition, 

comments will be available for public 

inspection and copying at 1700 G Street 

NW., Washington, DC 20552, on official 

business days between the hours of 10 

a.m. and 5 p.m. Eastern Time. You can 

make an appointment to inspect the 

documents by telephoning (202) 435– 

7275. 

All comments, including attachments 

and other supporting materials, will 

become part of the public record and 

subject to public disclosure. Sensitive 

personal information, such as account 

numbers or Social Security numbers, 

should not be included. Comments will 

not be edited to remove any identifying 

or contact information. 

FOR FURTHER INFORMATION CONTACT: Paul 

Ceja, Senior Counsel & Special Advisor; 

Stephen Shin and Pavneet Singh, Senior 

Counsels; and Courtney Jean, Counsel, 

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

SUPPLEMENTARY INFORMATION: 

I. Summary of Proposed Rule 

Background 

The Home Ownership and Equity 

Protection Act (HOEPA) was enacted in 

1994 as an amendment to the Truth in 

Lending Act (TILA) to address abusive 

practices in refinancing and homeequity mortgage loans with high interest 

rates or high fees. Loans that meet 

HOEPA’s high-cost triggers are subject 

to special disclosure requirements and 

restrictions on loan terms, and 

borrowers in high-cost mortgages have 

enhanced remedies for violations of the 

law.1 The provisions of TILA, including 

HOEPA, are implemented in the 

Bureau’s Regulation Z.2

In response to the recent mortgage 

crisis, Congress through the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act) 

expanded HOEPA to apply to more 

types of mortgage transactions, 

including to purchase money mortgage 

loans and home-equity lines of credit. 

Congress also amended HOEPA’s 

existing high-cost triggers, added a 

prepayment penalty trigger, and 

expanded the protections associated 

with high-cost mortgages. The Bureau is 

now proposing to amend Regulation Z 

to implement the Dodd-Frank Act 

amendments to HOEPA. 

The proposal also would implement 

other homeownership counselingrelated requirements that Congress 

adopted in the Dodd-Frank Act, that are 

not amendments to HOEPA. The 

proposal would generally require 

lenders to distribute a list of 

homeownership counselors or 

counseling organizations to consumers 

within a few days after applying for any 

mortgage loan. The proposal also would 

implement a requirement that first-time 

borrowers receive homeownership 

counseling before taking out a 

negatively amortizing loan. 

Scope of HOEPA coverage 

The proposed rule would implement 

the Dodd-Frank Act’s amendments that 

expanded the universe of loans 

potentially covered by HOEPA. Under 

the proposed rule, most types of 

mortgage loans secured by a consumer’s 

principal dwelling, including purchase 

money mortgage loans, refinances, 

closed-end home-equity loans, and 

open-end credit plans (i.e., home-equity 

lines of credit, or HELOCs) are 

potentially subject to HOEPA coverage. 

Reverse mortgages would still be 

excluded. 

Revised HOEPA thresholds 

Under the Dodd-Frank Act, HOEPA 

protections would be triggered where: 

• A loan’s annual percentage rate 

(APR) exceeds the average prime offer 

rate by 6.5 percentage points for most 

first-lien mortgages and 8.5 percentage 

points for subordinate lien mortgages; 

• A loan’s points and fees exceed 5 

percent of the total transaction amount, 

or a higher threshold for loans below 

$20,000; or 

• The creditor may charge a 

prepayment penalty more than 36 

months after loan consummation or 

account opening, or penalties that 

exceed more than 2 percent of the 

amount prepaid. 

The proposed rule would implement 

the Dodd-Frank Act’s amendments to 

HOEPA’s triggers for determining 

coverage and would provide guidance 

on how to apply the triggers. For 

instance, for purposes of the APR 

trigger, the interest rate used to 

determine HOEPA coverage for variablerate loans or plans would generally be 

based on the maximum margin 

permitted at any time during the loan or 

plan, added to the index rate in effect 

at consummation or account opening. 

The average prime offer rate for openend credit plans would be determined 

based on the average prime offer rate for 

the most closely comparable closed-end 


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3See the Bureau’s 2012 TILA–RESPA Proposal, 

available at http://www.consumerfinance.gov/ 

notice-and-comment/. 

4 12 CFR part 1024. 

5HOEPA amended TILA by adding new sections 

103(aa) and 129, 15 U.S.C. 1602(aa) and 1639. 

mortgage loan. The definition of ‘‘points 

and fees’’ would conform closely to 

what has previously been proposed to 

implement requirements of the DoddFrank Act concerning assessment of 

consumers’ ability to repay mortgage 

loans, such as by including loan 

originator compensation for closed-end 

mortgage loans. 

The Bureau is also seeking comment 

on whether to adopt certain adjustments 

or accommodations in its HOEPA 

implementing regulations if it adopts a 

broader definition of ‘‘finance charge’’ 

under Regulation Z. That change, which 

the Bureau is proposing in connection 

with its proposal to integrate mortgage 

disclosures,3 would otherwise cause 

more loans to exceed the APR and 

points and fees triggers and be classified 

as high-cost mortgages under HOEPA. 

Restrictions on loan terms 

The proposed rule also would 

implement new Dodd-Frank Act 

restrictions and requirements 

concerning loan terms and origination 

practices for high-cost mortgages. For 

example: 

• Balloon payments would largely be 

banned, and creditors would be 

prohibited from charging prepayment 

penalties and financing points and fees. 

• Late fees would be restricted to four 

percent of the payment that is past due, 

fees for providing payoff statements 

would be restricted, and fees for loan 

modification or loan deferral would be 

banned. 

• Creditors originating open-end 

credit plans would be required to assess 

consumers’ ability to repay the loans. 

(Creditors originating high-cost, closedend mortgage loans already are required 

to assess consumers’ ability to repay.) 

• Creditors and mortgage brokers 

would be prohibited from 

recommending or encouraging a 

consumer to default on a loan or debt 

to be refinanced by a high-cost 

mortgage. 

• Before making a high-cost mortgage, 

creditors would be required to obtain 

confirmation from a federally certified 

or approved homeownership counselor 

that the consumer has received 

counseling on the advisability of the 

loan. 

Other counseling-related requirements 

In addition to the proposed changes 

discussed above, the Bureau’s proposal 

would implement two Dodd-Frank Act 

homeownership counseling-related 

provisions that are not amendments to 

HOEPA. 

• The proposed rule would amend 

Regulation X 4 to implement a 

requirement under the Real Estate 

Settlement Procedures Act (RESPA) that 

lenders provide a list of federally 

certified or approved homeownership 

counselors or organizations to 

consumers within three business days of 

applying for any mortgage loan. The 

Bureau expects to create a Web site 

portal to make it easy for lenders and 

consumers to obtain lists of 

homeownership counselors in their 

areas. 

• The proposed rule would amend 

Regulation Z to implement a 

requirement under TILA that creditors 

obtain confirmation that a first-time 

borrower has received homeownership 

counseling from a federally certified or 

approved homeownership counselor or 

counseling organization before making a 

negative amortization loan to the 

borrower. (A negative amortization loan 

is one in which the payment schedule 

can cause the loan’s principal balance to 

increase over time.) 

Effective date 

The Bureau’s proposal seeks comment 

on when a final rule should be effective. 

Because the final rule will provide 

important benefits to consumers, the 

Bureau seeks to make it effective as soon 

as possible. However, the Bureau 

understands that the final rule will 

require lenders and brokers to make 

systems changes and to retrain their 

staff. In addition, industry will at 

approximately the same time be 

implementing a number of other 

changes relating to other Dodd-Frank 

Act provisions, some of which will take 

effect within one year after issuance of 

final implementing rules. Therefore, the 

Bureau is seeking comment on how 

much time industry needs to make these 

changes. 

II. Background 

A. HOEPA 

HOEPA was enacted as part of the 

Riegle Community Development and 

Regulatory Improvement Act of 1994, 

Public Law 103–325, 108 Stat. 2160, in 

response to evidence concerning 

abusive practices in mortgage loan 

refinancing and home-equity lending.5

The statute applied generally to closedend mortgage credit, but excluded 

purchase money mortgage loans and 

reverse mortgages. Coverage was 

triggered where a loan’s APR exceeded 

comparable Treasury securities by 

specified thresholds for particular loan 

types, or where points and fees 

exceeded eight percent of the total loan 

amount or a dollar threshold. 

For high-cost loans meeting either of 

those thresholds, HOEPA required 

lenders to provide special pre-closing 

disclosures, restricted prepayment 

penalties and certain other loan terms, 

and regulated various lender practices, 

such as extending credit without regard 

to a consumer’s ability to repay the loan. 

HOEPA also provided a mechanism for 

consumers to rescind covered loans that 

included certain prohibited terms and to 

obtain higher damages than are allowed 

for other types of TILA violations. 

Finally, HOEPA amended TILA section 

131, 15 U.S.C. 1641, to provide for 

increased liability to purchasers of 

HOEPA loans. Purchasers and assignees 

of loans not covered by HOEPA 

generally are liable only for legal 

violations apparent on the face of the 

disclosure statements, whereas 

purchasers of HOEPA loans generally 

are subject to all claims and defenses 

against the original creditor with respect 

to the mortgage. 

The Board of Governors of the Federal 

Reserve System (Board) first issued 

regulations implementing HOEPA in 

1995. 60 FR 15463 (March 24, 1995). 

The Board published additional 

significant changes in 2001 that lowered 

HOEPA’s APR trigger for first-lien 

mortgage loans, expanded the definition 

of points and fees to include the cost of 

optional credit insurance and debt 

cancellation premiums, and enhanced 

the restrictions associated with HOEPA 

loans. See 66 FR 65604 (Dec. 20, 2001). 

In 2008, the Board exercised its 

authority under HOEPA to extend 

certain consumer protections 

concerning a consumer’s ability to repay 

and prepayment penalties to a new 

category of ‘‘higher-priced mortgage 

loans’’ with APRs that are lower than 

those prescribed for HOEPA loans but 

that nevertheless exceed the average 

prime offer rate by prescribed amounts. 

73 FR 44522 (July 30, 2008). 

With the enactment of the DoddFrank Act, general rulemaking authority 

for TILA, including HOEPA, transferred 

from the Board to the Bureau on July 21, 

2011. Pursuant to the Dodd-Frank Act 

and TILA, as amended, the Bureau 

published for public comment an 

interim final rule establishing a new 

Regulation Z, 12 CFR part 1026, 

implementing TILA (except with respect 

to persons excluded from the Bureau’s 

rulemaking authority by section 1029 of 

the Dodd-Frank Act). 76 FR 79768 (Dec. 

22, 2011). This rule did not impose any 

new substantive obligations but did 

make technical and conforming changes 

to reflect the transfer of authority and 


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49092 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

6For more discussion of the mortgage market, the 

financial crisis, and mortgage origination generally, 

see the Bureau’s 2012 TILA–RESPA Proposal. 

7Sections 1011 and 1021 of title X of the DoddFrank Act, the ‘‘Consumer Financial Protection 

Act,’’ Public Law 111–203, sections 1001–1100H, 

codified at 12 U.S.C. 5491, 5511. The Consumer 

Financial Protection Act is substantially codified at 

12 U.S.C. 5481–5603. 

8As amended, the HOEPA provisions of TILA 

will be codified at 15 U.S.C. 1602(bb) and 1639. See 

§ 1100A(1)(A) of the Dodd-Frank Act. 

9The Bureau notes that the Dodd-Frank Act 

renumbered existing TILA section 103(aa) 

concerning HOEPA’s triggers as section 103(bb), 15 

U.S.C. 1602(bb). See § 1100A(1)(A) of the DoddFrank Act. This proposal generally references TILA 

section 103(aa) to refer to the pre-Dodd-Frank 

provision, which is in effect until the Dodd-Frank 

Act’s amendments take effect, and TILA section 

103(bb) to refer to the provision as amended. 

10These statistics are drawn from Federal Reserve 

Bulletin articles that summarize the HMDA data 

each year. For the most recent of these annual 

articles, see www.federalreserve.gov/pubs/bulletin/ 

2011/pdf/2010_HMDA_final.pdf. 

certain other changes made by the 

Dodd-Frank Act. The Bureau’s 

Regulation Z took effect on December 

30, 2011. Sections 1026.31, 32 and 34 of 

the Bureau’s Regulation Z implement 

the HOEPA provisions of TILA. 

B. RESPA 

Congress enacted RESPA, 12 U.S.C. 

2601 et seq., in 1974 to provide 

consumers with greater and more timely 

information on the nature and costs of 

the residential real estate settlement 

process and to protect consumers from 

unnecessarily high settlement charges, 

including through the use of disclosures 

and the prohibition of kickbacks and 

referral fees. RESPA’s disclosure 

requirements generally apply to 

‘‘settlement services’’ for ‘‘federally 

related mortgage loans,’’ a term that 

includes virtually any purchase money 

or refinance loan secured by a first or 

subordinate lien on one-to-four family 

residential real property. 12 U.S.C. 

2602(1). Section 5 of RESPA generally 

requires that lenders provide potential 

borrowers of federally related mortgage 

loans a home buying information 

booklet containing information about 

the nature and costs of real estate 

settlement services, a good faith 

estimate of charges the borrower is 

likely to incur during the settlement 

process, and, as a new requirement 

pursuant to the Dodd-Frank Act, a list 

of certified homeownership counselors. 

Id. 2604. The booklet, good faith 

estimate, and list of homeownership 

counselors must be provided not later 

than three business days after the lender 

receives an application, unless the 

lender denies the application for credit 

before the end of the three-day period. 

Id. 2604(d). 

Historically, Regulation X of the 

Department of Housing and Urban 

Development (HUD), 24 CFR part 3500, 

has implemented RESPA. The DoddFrank Act transferred rulemaking 

authority for RESPA to the Bureau, 

effective July 21, 2011. See sections 

1061 and 1098 of the Dodd-Frank Act. 

Pursuant to the Dodd-Frank Act and 

RESPA, as amended, the Bureau 

published for public comment an 

interim final rule establishing a new 

Regulation X, 12 CFR part 1024, 

implementing RESPA. 76 FR 78978 

(Dec. 20, 2011). This rule did not 

impose any new substantive obligations 

but did make certain technical, 

conforming, and stylistic changes to 

reflect the transfer of authority and 

certain other changes made by the 

Dodd-Frank Act. The Bureau’s 

Regulation X took effect on December 

30, 2011. 

C. The Dodd-Frank Act 

Congress enacted the Dodd-Frank Act 

after a cycle of unprecedented 

expansion and contraction in the 

mortgage market sparked the most 

severe U.S. recession since the Great 

Depression.6 The Dodd-Frank Act 

created the Bureau and consolidated 

various rulemaking and supervisory 

authorities in the new agency, including 

the authority to implement HOEPA, 

TILA, and RESPA.7 At the same time, 

Congress significantly amended the 

statutory requirements governing 

mortgage practices with the intent to 

restrict the practices that contributed to 

the crisis. 

As part of these changes, sections 

1431 through 1433 of the Dodd-Frank 

Act significantly amended HOEPA to 

expand the types of loans potentially 

subject to HOEPA coverage, to revise the 

triggers for HOEPA coverage, and to 

strengthen and expand the restrictions 

that HOEPA imposes on those 

mortgages.8 Several provisions of the 

Dodd-Frank Act also require and 

encourage consumers to obtain 

homeownership counseling. Sections 

1433(e) and 1414 require creditors to 

obtain confirmation that a borrower has 

obtained counseling from a federally 

approved counselor prior to extending a 

high-cost mortgage under HOEPA or (in 

the case of first-time borrowers) a 

negatively amortizing loan. The DoddFrank Act also amended RESPA to 

require distribution of a housing 

counselor list as part of the general 

mortgage application process. The 

Bureau is proposing this rule to 

implement the HOEPA and counseling 

requirements.9

D. The Market for High-Cost Mortgages 

Historically, originations of high-cost 

mortgages have accounted for an 

extremely small percentage of the 

market. This may be due to a variety of 

factors, including the fact that HOEPA’s 

assignee liability provisions make the 

loans relatively unattractive to 

secondary market investors, as well as 

general compliance burden and stigma. 

Data collected under the Home 

Mortgage Disclosure Act (HMDA) 

further indicate that the percentage 

share of HOEPA loans has generally 

been declining since 2004, the first year 

that HMDA reporters were required to 

identify HOEPA loans. Between 2004 

and 2010, HOEPA loans typically 

comprised about 0.2 percent of 

originations of home-secured refinance 

or home-improvement loans made by 

lenders that report in HMDA. This 

percentage peaked at 0.44 percent in 

2005 when, of about 8.2 million 

originations potentially covered by 

HOEPA, approximately 36,000 HOEPA 

loans were made. The percentage fell to 

0.06 percent by 2010 when, of 5.3 

million originations potentially covered 

by HOEPA, about 3,400 HOEPA loans 

were made. Similarly, the number of 

HMDA-reporting lenders that originate 

HOEPA loans is relatively small. From 

2004 through 2009, about 1,000 to 2,300 

(roughly 12 to 24 percent) of such 

lenders extended HOEPA loans. The 

vast majority (i.e., 97 percent or more) 

of those lenders made fewer than ten 

HOEPA loans in each year between 

2004 and 2009. In 2010, only about 650 

lenders (roughly 8 percent of HMDA 

filers) reported any HOEPA loans, with 

just under 60 lenders accounting for 

about 60 percent of HOEPA lending.10

As discussed above, the Dodd-Frank Act 

expanded the types of loans potentially 

covered by HOEPA by including 

purchase money mortgage loans and 

HELOCs. Notwithstanding this 

expansion, the Bureau believes that 

HOEPA lending will continue to 

constitute a small percentage of the 

mortgage lending market. See part VII, 

below, for a detailed discussion of the 

likely impact of the Dodd-Frank Act’s 

amendments on HOEPA lending. 

E. Other Rulemakings 

In addition to this proposal, the 

Bureau currently is engaged in six other 

rulemakings relating to mortgage credit 

to implement requirements of the DoddFrank Act: 

• TILA–RESPA Integration: On the 

same day that this proposal is released 

by the Bureau, the Bureau is releasing 

a proposed rule and forms combining 

the TILA mortgage loan disclosures with 

the Good Faith Estimate (GFE) and 

settlement statement required under 


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RESPA pursuant to Dodd-Frank Act 

section 1032(f) as well as sections 4(a) 

of RESPA and 105(b) of TILA, as 

amended by Dodd-Frank Act sections 

1098 and 1100A, respectively (2012 

TILA–RESPA Proposal). 12 U.S.C. 

2603(a); 15 U.S.C. 1604(b). 

• Servicing: The Bureau is in the 

process of developing a proposal to 

implement Dodd-Frank Act 

requirements regarding force-placed 

insurance, error resolution, and 

payment crediting, as well as forms for 

mortgage loan periodic statements and 

‘‘hybrid’’ adjustable-rate mortgage reset 

disclosures, pursuant to sections 6 of 

RESPA and 128, 128A, 129F, and 129G 

of TILA, as amended or established by 

Dodd-Frank Act sections 1418, 1420, 

1463, and 1464. The Bureau has 

publicly stated that in connection with 

the servicing rulemaking the Bureau is 

considering proposing rules on 

reasonable information management, 

early intervention for troubled and 

delinquent borrowers, and continuity of 

contact, pursuant to the Bureau’s 

authority to carry out the consumer 

protection purposes of RESPA in section 

6 of RESPA, as amended by Dodd-Frank 

Act section 1463. 12 U.S.C. 2605; 15 

U.S.C. 1638, 1638a, 1639f, and 1639g. 

• Loan Originator Compensation: The 

Bureau is in the process of developing 

a proposal to implement provisions of 

the Dodd-Frank Act requiring certain 

creditors and mortgage loan originators 

to meet duty of care qualifications and 

prohibiting mortgage loan originators, 

creditors, and the affiliates of both from 

receiving compensation in various 

forms (including based on the terms of 

the transaction) and from sources other 

than the consumer, with specified 

exceptions, pursuant to TILA section 

129B as established by Dodd-Frank Act 

sections 1402 and 1403. 15 U.S.C. 

1639b. 

• Appraisals: The Bureau, jointly 

with Federal prudential regulators and 

other Federal agencies, is in the process 

of developing a proposal to implement 

Dodd-Frank Act requirements 

concerning appraisals for higher-risk 

mortgages, appraisal management 

companies, and automated valuation 

models, pursuant to TILA section 129H 

as established by Dodd-Frank Act 

section 1471, 15 U.S.C. 1639h, and 

sections 1124 and 1125 of the Financial 

Institutions Reform, Recovery, and 

Enforcement Act of 1989 (FIRREA) as 

established by Dodd-Frank Act sections 

1473(f), 12 U.S.C. 3353, and 1473(q), 12 

U.S.C. 3354, respectively. In addition, 

the Bureau is developing rules to 

implement section 701(e) of the Equal 

Credit Opportunity Act (ECOA), as 

amended by Dodd-Frank Act section 

1474, to require that creditors provide 

applicants with a free copy of written 

appraisals and valuations developed in 

connection with applications for loans 

secured by a first lien on a dwelling 

(collectively, Appraisals Rulemaking). 

15 U.S.C. 1691(e). 

• Ability to Repay: The Bureau is in 

the process of finalizing a proposal 

issued by the Board to implement 

provisions of the Dodd-Frank Act 

requiring creditors to determine that a 

consumer can repay a mortgage loan 

and establishing standards for 

compliance, such as by making a 

‘‘qualified mortgage,’’ pursuant to TILA 

section 129C as established by DoddFrank Act sections 1411 and 1412 

(Ability to Repay Rulemaking). 15 

U.S.C. 1639c. 

• Escrows: The Bureau is in the 

process of finalizing a proposal issued 

by the Board to implement provisions of 

the Dodd-Frank Act requiring certain 

escrow account disclosures and 

exempting from the higher-priced 

mortgage loan escrow requirement loans 

made by certain small creditors, among 

other provisions, pursuant to TILA 

section 129D as established by DoddFrank Act sections 1461 and 1462 

(Escrow Rulemaking). 15 U.S.C. 1639d. 

With the exception of the requirements 

being implemented in the TILA–RESPA 

rulemaking, the Dodd-Frank Act 

requirements referenced above generally 

will take effect on January 21, 2013, 

unless final rules implementing those 

requirements are issued on or before 

that date and provide for a different 

effective date. To provide an orderly, 

coordinated, and efficient comment 

process for these rulemakings, the 

Bureau is setting the deadline for 

comments on this proposed rule 60 days 

after the date the proposal is issued 

(September 7, 2012), instead of 60 days 

after this notice is published in the 

Federal Register. Because the precise 

date of publication cannot be predicted 

in advance, this method will allow 

interested parties that intend to 

comment on multiple proposals to plan 

accordingly and will ensure that the 

Bureau receives comments with 

sufficient time remaining to issue final 

rules by January 21, 2013. However, 

consistent with the requirements of the 

Paperwork Reduction Act, the comment 

period for the proposed analysis under 

that Act will end 60 days after 

publication of this notice in the Federal 

Register. 

The Bureau regards the foregoing 

rulemakings as components of a larger 

undertaking; many of them intersect 

with one or more of the others. 

Accordingly, the Bureau is coordinating 

carefully the development of the 

proposals and final rules identified 

above. Each rulemaking will adopt new 

regulatory provisions to implement the 

various Dodd-Frank Act mandates 

described above. In addition, each of 

them may include other provisions the 

Bureau considers necessary or 

appropriate to ensure that the overall 

undertaking is accomplished efficiently 

and that it ultimately yields a 

comprehensive regulatory scheme for 

mortgage credit that achieves the 

statutory purposes set forth by Congress, 

while avoiding unnecessary burdens on 

industry. Thus, many of the 

rulemakings listed above involve issues 

that extend across two or more 

rulemakings. In this context, each 

rulemaking may raise concerns that 

might appear unaddressed if that 

rulemaking were viewed in isolation. 

For efficiency’s sake, however, the 

Bureau is publishing and soliciting 

comment on proposed answers to 

certain issues raised by two or more of 

its mortgage rulemakings in whichever 

rulemaking is most appropriate, in the 

Bureau’s judgment, for addressing each 

specific issue. Accordingly, the Bureau 

urges the public to review this and the 

other mortgage proposals identified 

above, including those previously 

published by the Board, together. Such 

a review will ensure a more complete 

understanding of the Bureau’s overall 

approach and will foster more 

comprehensive and informed public 

comment on the Bureau’s several 

proposals, including provisions that 

may have some relation to more than 

one rulemaking but are being proposed 

for comment in only one of them. 

For example, as discussed in detail in 

the section-by-section analysis under 

proposed § 1026.32(a) and (b) below, the 

Bureau’s 2012 TILA–RESPA Proposal is 

proposing a simpler, more inclusive 

definition of the finance charge for 

closed-end, dwelling-secured credit 

transactions, similar to the definition 

that the Board proposed in its August 

2009 proposed rulemaking concerning 

closed-end credit. See 74 FR 43232, 

43241–45 (Aug. 26, 2009) (2009 ClosedEnd Proposal). The Board recognized at 

that time that the more inclusive finance 

charge would expand the coverage of 

HOEPA and similar State laws. Id. at 

43244–45. To address that issue, among 

others, the Board in 2010 proposed to 

retain the existing treatment of thirdparty charges in the points and fees 

definition for HOEPA, notwithstanding 

the proposed expansion of the finance 

charge for disclosure purposes. See 75 

FR 58539, 58637–38 (Sept. 24, 2010) 

(2010 Mortgage Proposal). Similarly, the 


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11 12 CFR 1026.35. 12 12 CFR 1026.35. 

Board’s 2010 Mortgage Proposal 

introduced a new metric for 

determining coverage of the ‘‘higherpriced mortgage loan’’ protections of 

Regulation Z11 to be used in place of a 

transaction’s APR, known as the 

‘‘transaction coverage rate’’ (TCR), 

which does not reflect the additional 

charges that are reflected in the 

disclosed APR under the more inclusive 

finance charge definition. Id. at 58660– 

62. 

The Bureau recognizes, as did the 

Board, that the proposed more inclusive 

finance charge could affect the coverage 

of higher-priced mortgage loan and 

HOEPA protections. The Bureau is also 

aware that, consequently, a more 

inclusive finance charge has 

implications for the HOEPA, Appraisals, 

Ability to Repay, and Escrows 

rulemakings identified above. Those 

impacts are analyzed in the 2012 TILA– 

RESPA Proposal, but the Bureau 

believes that it is also helpful to analyze 

potential impacts and modifications to 

particular regulatory triggers on a ruleby-rule basis. Accordingly, this proposal 

seeks comment on whether and how to 

account for the implications of the more 

inclusive finance charge on the scope of 

HOEPA coverage. See the section-bysection analysis to proposed 

§ 1026.32(a) and (b), below. 

F. The Board’s Proposals 

As noted above, the Bureau inherited 

rulemaking authority for Regulation Z 

from the Board in July 2011, including 

the authority to finalize several 

mortgage-related rulemakings that the 

Board proposed between 2009 and 2011 

in part to respond to the mortgage crisis 

and to begin implementing new DoddFrank Act requirements. Several of the 

Board’s pending mortgage-related 

proposals relate directly to provisions 

addressed in this proposal. As discussed 

in detail in the section-by-section 

analysis, below, this proposal republishes or otherwise incorporates 

certain portions of the Board’s 

proposals. 

2009 Closed-End Proposal. On August 

26, 2009, the Board published proposed 

amendments to Regulation Z containing 

comprehensive changes to the 

disclosures for closed-end credit 

secured by real property or a consumer’s 

dwelling. 74 FR 43232 (Aug. 26, 2009) 

(2009 Closed-End Proposal). In addition 

to the simpler, more inclusive definition 

of the finance charge discussed above, 

the Board’s 2009 Closed-End Proposal 

proposed to establish a new 

§ 1026.38(a)(5) for disclosure of 

prepayment penalties for closed-end 

mortgage loans. See id. at 43334, 43413. 

In doing so, the Board proposed several 

examples of prepayment penalties, 

including charges determined by 

treating the loan balance as outstanding 

for a period after prepayment in full and 

applying the interest rate to such 

‘‘balance,’’ a minimum finance charge in 

a simple-interest transaction, and 

charges that a creditor waives unless the 

consumer prepays the obligation. The 

Board also proposed loan guarantee fees 

and fees imposed for preparing a payoff 

statement or other documents in 

connection with a prepayment as 

examples of charges that are not 

prepayment penalties. 

2009 Open-End Proposal. On August 

26, 2009, the Board published proposed 

amendments to Regulation Z containing 

comprehensive changes to the 

disclosures for HELOCs. 74 FR 43428 

(Aug. 26, 2009) (2009 Open-End 

Proposal). Among other things, the 

Board’s 2009 Open-End Proposal 

addressed the types of charges that 

should be disclosed as prepayment 

penalties for home equity lines of credit. 

2010 Mortgage Proposal. On 

September 24, 2010, the Board proposed 

further amendments to Regulation Z 

regarding rescission rights, disclosure 

requirements in connection with 

modifications of existing mortgage 

loans, escrow requirements for higherpriced mortgage loans, and disclosures 

and requirements for reverse mortgage 

loans. This proposal was the second 

stage of the comprehensive review 

conducted by the Board of TILA’s rules 

for home-secured credit. 75 FR 58539 

(Sept. 24, 2010) (2010 Mortgage 

Proposal). As discussed above, the 

Board revisited in the 2010 Mortgage 

Proposal the effect of adopting a 

simpler, more inclusive definition of the 

finance charge for purposes of 

disclosing the APR to consumers. To 

ensure that loans would not be 

inappropriately classified as higherpriced mortgage loans under Regulation 

Z, the Board proposed to adopt the TCR. 

Under the proposal, the TCR would 

have been calculated solely to 

determine coverage under the Board’s 

higher-priced mortgage rule.12 As 

proposed, the TCR would have been 

calculated consistently with how the 

current APR is calculated, except that 

prepaid finance charges not paid to the 

creditor, its affiliate, or a mortgage 

broker would not have been included. 

Id. at 58660–62. 

The Board’s 2010 Mortgage Proposal 

also revisited the definition of 

prepayment penalty. The Board 

proposed to amend commentary to 

Regulation Z to clarify that, on a closedend transaction, assessing interest for a 

period after the loan balance has been 

paid in full is a prepayment penalty, 

even if the charge results from the 

normal interest accrual amortization 

method used on the transaction. The 

amendment was intended to clarify a 

question that had been raised in 

connection with FHA loans and other 

lending programs, which, for purposes 

of allocating a consumer’s payment to 

accrued interest and principal, treated 

all loan payments as being made on the 

scheduled due date even if payment was 

made prior to its scheduled due date. 

The amendment clarified that, in the 

case of a prepayment in full of any 

outstanding loan balance, such an 

interest accrual amortization method 

would be considered a prepayment 

penalty, even if it was the normal 

method for other payments on the 

transaction. See id. at 58586, 58756, 

58781. 

2011 Escrow Proposal. On March 2, 

2011, the Board proposed to amend 

Regulation Z to implement amendments 

made by sections 1461 and 1462 of the 

Dodd-Frank Act to TILA relating to 

escrow accounts. 76 FR 11598 (March 2, 

2011) (2011 Escrow Proposal). Among 

other things, the Board’s 2011 Escrow 

Proposal proposed escrow-related 

disclosure requirements for higherpriced mortgage loans. In doing so, the 

Board proposed to use the TCR 

proposed in the 2010 Mortgage Proposal 

to determine whether a transaction is a 

higher-priced mortgage loan. The Board 

also proposed to use the ‘‘average prime 

offer rate,’’ as defined in current 

§ 1026.35(a)(2), as the benchmark rate 

for higher-priced mortgage loan 

coverage See id. at 11609. 

2011 ATR Proposal. On May 11, 2011, 

the Board proposed amendments to 

Regulation Z to implement section 1411 

of the Dodd-Frank Act, which amended 

TILA to prohibit creditors from making 

mortgage loans without regard to the 

consumer’s ability to repay. 76 FR 

27390 (May 11, 2011) (2011 ATR 

Proposal). Section 1411 of the DoddFrank Act added section 129C to TILA, 

codified at 15 U.S.C. 1639c, which 

prohibits a creditor from making a 

mortgage loan unless the creditor makes 

a reasonable and good faith 

determination, based on verified and 

documented information, that the 

consumer will have a reasonable ability 

to repay the loan, including any 

mortgage-related obligations (such as 

property taxes). The Board’s 2011 ATR 

Proposal also proposed to implement 

section 1412 of the Dodd-Frank Act, 

which created a new type of closed-end, 

dwelling-secured mortgage—a 


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13 15 U.S.C. 1639c(b)(2)(C). 

14 Dodd-Frank Act section 1061(b)(7); 12 U.S.C. 

5581(b)(7). 

15 12 U.S.C. 5581(a)(1). 

16 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, HOEPA, and RESPA). 

17These subsections are: § 129(c) (No prepayment 

penalty); § 129(d) (Limitations after default); 

§ 129(e) (No balloon payments); § 129(f) (No 

negative amortization); § 129(g) (No prepaid 

payments); § 129(h) (Prohibition on extending 

credit without regard to payment ability of 

consumer); and § 129(i) (Requirements for payments 

under home improvement contracts). 

‘‘qualified mortgage’’—to which, among 

other things, certain restrictions on 

points and fees and prepayment 

penalties apply. The Board’s 2011 ATR 

Proposal also enumerated examples of 

prepayment penalties, drawing from 

both the 2009 Closed-End Proposal and 

the 2010 Mortgage Proposal. See id. at 

27415–16. The proposal also proposed 

to implement the statutory definition of 

points and fees to be used in 

determining whether a mortgage is a 

qualified mortgage, which in turn 

incorporates the definition of points and 

fees in HOEPA. Id. at 27398–406.13

As discussed in detail throughout the 

section-by-section analysis below, the 

current proposal of the Bureau to 

implement the Dodd-Frank HOEPA 

amendments draws on the Board’s 2009 

Closed-End Proposal, 2009 Open-End 

Proposal, 2010 Mortgage Proposal, 2011 

Escrow Proposal, and 2011 ATR 

Proposal. 

III. Legal Authority 

The Bureau is issuing this proposed 

rule pursuant to its authority under 

TILA, RESPA, and the Dodd-Frank Act. 

On July 21, 2011, section 1061 of the 

Dodd-Frank Act transferred to the 

Bureau all of the HUD Secretary’s 

consumer protection functions relating 

to RESPA.14 Accordingly, effective July 

21, 2011 the authority of HUD to issue 

regulations pursuant to RESPA 

transferred to the Bureau. Section 1061 

of the Dodd-Frank Act also transferred 

to the Bureau the ‘‘consumer financial 

protection functions’’ previously vested 

in certain other Federal agencies, 

including the 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.’’15

TILA, HOEPA (which is codified as part 

of TILA), RESPA, and title X of the 

Dodd-Frank Act are Federal consumer 

financial laws.16 Accordingly, the 

Bureau has authority to issue 

regulations pursuant to TILA, RESPA, 

and title X of the Dodd-Frank Act. 

A. RESPA 

Section 19(a) of RESPA, 12 U.S.C. 

2617(a), authorizes the Bureau to 

prescribe such rules and regulations and 

to make such interpretations and grant 

such reasonable exemptions for classes 

of transactions as may be necessary to 

achieve the purposes of RESPA. One 

purpose of RESPA is to effect certain 

changes in the settlement process for 

residential real estate that will result in 

more effective advance disclosure to 

home buyers and sellers of settlement 

costs. RESPA section 2(b), 12 U.S.C. 

2601(b). In addition, in enacting RESPA, 

Congress found that consumers are 

entitled to be ‘‘provided with greater 

and more timely information on the 

nature and costs of the settlement 

process and [to be] protected from 

unnecessarily high settlement charges 

caused by certain abusive practices 

* * * .’’ RESPA section 2(a), 12 U.S.C. 

2601(a). In the past, section 19(a) has 

served as a broad source of authority to 

prescribe disclosures and substantive 

requirements to carry out the purposes 

of RESPA. 

B. TILA 

As amended by the Dodd-Frank Act, 

TILA section 105(a), 15 U.S.C. 1604(a), 

directs the Bureau to prescribe 

regulations to carry out the purposes of 

the Act. Except with respect to the 

substantive restrictions on high-cost 

mortgages provided in TILA section 

129, TILA section 105(a) authorizes the 

Bureau to prescribe regulations that may 

contain additional requirements, 

classifications, differentiations, or other 

provisions, and may provide for such 

adjustments and exceptions for all or 

any class of transactions that the Bureau 

determines 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). 

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. However, 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. This 

amendment clarified the authority to 

exercise TILA section 105(a) to 

prescribe requirements beyond those 

specifically listed in the statute that 

meet the standards outlined in section 

105(a). The Dodd-Frank Act also 

clarified the Bureau’s rulemaking 

authority over high-cost mortgages 

pursuant to section 105(a). As amended 

by the Dodd-Frank Act, TILA section 

105(a) authority to make adjustments 

and exceptions to the requirements of 

TILA applies to all transactions subject 

to TILA, except with respect to the 

provisions of the TILA section 129 that 

apply to high-cost mortgages, as noted 

above. For the reasons discussed in this 

notice, the Bureau is proposing 

regulations to carry out TILA’s purposes 

and is proposing such additional 

requirements, adjustments, and 

exceptions as, in the Bureau’s judgment, 

are necessary and proper to carry out 

the purposes of TILA, prevent 

circumvention or evasion thereof, or to 

facilitate compliance. 

Pursuant to TILA section 103(bb)(2), 

15 U.S.C. 1602(bb)(2), the Bureau may 

prescribe regulations to adjust the 

statutory percentage points for the APR 

threshold to determine whether a 

transaction is covered as a high-cost 

mortgage, if the Bureau determines that 

such an increase or decrease is 

consistent with the statutory consumer 

protections for high-cost mortgages and 

is warranted by the need for credit. 

Under TILA section 103(bb)(4), the 

Bureau may adjust the definition of 

points and fees for purposes of that 

threshold to include such charges that 

the Bureau determines to be 

appropriate. 

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 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 subsections (c) through (i) 

of TILA section 129,17 if the Bureau 

finds that the exemption is in the 

interest of the borrowing public and will 


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18H.R. Rep. 103–652, at 162 (1994) (Conf. Rep.). 

19See section 1400(c)(2) of the Dodd-Frank Act. 

Where regulations have not been issued by January 

21, 2013 (i.e., the date that is 18 months after the 

‘‘designated transfer date’’), the effective date of the 

Dodd-Frank Act amendments is generally January 

21, 2013. See id. § 1400(c)(3). 

apply only to products that maintain 

and strengthen home ownership and 

equity protections. 

TILA section 129(p)(2) grants the 

Bureau the authority to prohibit acts or 

practices in connection with: 

• Mortgage loans that the Bureau 

finds to be unfair, deceptive, or 

designed to evade the provisions of 

HOEPA; and 

• Refinancing of mortgage loans the 

Bureau finds to be associated with 

abusive lending practices or that are 

otherwise not in the interest of the 

borrower. 

The authority granted to the Bureau 

under TILA section 129(p)(2) is broad. 

The provision is not limited to acts or 

practices by creditors. TILA section 

129(p)(2) authorizes protections against 

unfair or deceptive practices ‘‘in 

connection with mortgage loans,’’ and it 

authorizes protections against abusive 

practices ‘‘in connection with * * * 

refinancing of mortgage loans.’’ Thus, 

the Bureau’s authority is not limited to 

regulating specific contractual terms of 

mortgage loan agreements; it extends to 

regulating loan-related practices 

generally, within the standards set forth 

in the statute. The Bureau notes that 

TILA does not set forth a standard for 

what is unfair or deceptive, but those 

terms have settled meanings under other 

Federal and State consumer protection 

laws. The Conference Report for HOEPA 

indicates that, in determining whether a 

practice in connection with mortgage 

loans is unfair or deceptive, the Bureau 

should look to the standards employed 

for interpreting State unfair and 

deceptive trade practices statutes and 

the Federal Trade Commission Act, 

section 5(a), 15 U.S.C. 45(a).18

In addition, section 1433(e) of the 

Dodd-Frank Act created a new TILA 

section 129(u)(3), which authorizes the 

Bureau to implement pre-loan 

counseling requirements mandated by 

the Dodd-Frank Act for high-cost 

mortgages. Specifically, under TILA 

section 129(u)(3), the Bureau may 

prescribe regulations as the Bureau 

determines to be appropriate to 

implement TILA section 129(u)(1), 

which provides the Dodd-Frank Act’s 

pre-loan counseling requirement for 

high-cost mortgages. 

C. The Dodd-Frank Act 

Section 1405(b) of the Dodd-Frank 

Act provides that, ‘‘[n]otwithstanding 

any other provision of [title XIV of the 

Dodd-Frank Act], in order to improve 

consumer awareness and understanding 

of transactions involving residential 

mortgage loans through the use of 

disclosures, the [Bureau] may, by rule, 

exempt from or modify disclosure 

requirements, in whole or in part, for 

any class of residential mortgage loans 

if the [Bureau] determines that such 

exemption or modification is in the 

interest of consumers and in the public 

interest.’’ 15 U.S.C. 1601 note. Section 

1401 of the Dodd-Frank Act, which 

amended TILA section 103(cc), 15 

U.S.C. 1602(cc), generally defines 

residential mortgage loan as any 

consumer credit transaction that is 

secured by a mortgage on a dwelling or 

on residential real property that 

includes a dwelling other than an openend credit plan or an extension of credit 

secured by a consumer’s interest in a 

timeshare plan. Notably, the authority 

granted by section 1405(b) applies to 

‘‘disclosure requirements’’ generally, 

and is not limited to a specific statute 

or statutes. Accordingly, Dodd-Frank 

Act section 1405(b) is a broad source of 

authority to modify the disclosure 

requirements of TILA and RESPA. 

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). Section 

1022(b)(2) of the Dodd-Frank Act 

prescribes certain standards for 

rulemaking that the Bureau must follow 

in exercising its authority under section 

1022(b)(1). 12 U.S.C. 5512(b)(2). As 

discussed above, TILA and RESPA are 

Federal consumer financial laws. 

Accordingly, the Bureau proposes to 

exercise its authority under Dodd-Frank 

Act section 1022(b) to prescribe rules 

under TILA and RESPA that carry out 

the purposes and prevent evasion of 

those laws. See part VI for a discussion 

of the Bureau’s standards for rulemaking 

under Dodd-Frank Act section 

1022(b)(2). 

For the reasons discussed below in 

the section-by-section analysis, the 

Bureau is proposing regulations 

pursuant to its authority under TILA, 

RESPA, and title X of the Dodd-Frank 

Act. 

IV. Compliance Issues 

A. Implementation Period 

The Bureau expects to issue a final 

rule implementing the Dodd-Frank Act 

amendments addressed in the Bureau’s 

proposal by January 21, 2013. As 

discussed above, the Bureau is seeking 

comment on when a final rule should be 

effective. 

Under section 1400(c)(1) of the DoddFrank Act, regulations that are required 

to be issued to implement amendments 

under Title XIV by the Dodd-Frank Act 

take effect not later than one year from 

the date of the issuance of the final 

implementing regulations. The 

regulations proposed in this notice, 

while implementing amendments under 

Title XIV of the Dodd-Frank Act, are not 

regulations required to be issued by the 

Act. Therefore, the Dodd-Frank Act does 

not require the final regulation to be 

effective within one year from issuance 

of that final regulation. Title XIV 

amendments that are not required by the 

Dodd-Frank Act to be implemented by 

regulation take effect on the effective 

date established by the final regulations 

implementing the amendments.19

The Bureau recognizes the importance 

of the changes to be made by the 

Bureau’s final rule for consumer 

protection, and the need to put these 

changes into place for consumers. For 

example, including within HOEPA’s 

definition of ‘‘high-cost mortgage’’ high 

cost purchase money mortgages and 

HELOCs, will ensure that borrowers 

who obtain such high-cost mortgages 

will have the full benefit of the 

protections and enhanced remedies 

provided by HOEPA. In addition, for 

consumers applying for a high-cost 

mortgage, having the benefit of the 

advice of a homeownership counselor to 

assist them in understanding the terms 

of the mortgage, and how such a 

mortgage will fit in with their existing 

budget, will help consumers in fully 

assessing the possible consequences of 

such a mortgage. The Bureau believes 

consumers should have the benefit of 

the Dodd-Frank Act additional 

protections and requirements as soon as 

possible. 

The Bureau also recognizes, however, 

that lenders, brokers, and (where 

applicable) servicers will need time to 

make systems changes and to retrain 

their staff, in order to address the DoddFrank Act changes implemented 

through the Bureau’s final rule. In 

addition, the Bureau recognizes that 

industry will need to make changes to 

address a number of other requirements 

relating to other Dodd-Frank Act 

provisions, some of which, unlike the 

Bureau’s HOEPA rulemaking, are 

required by the Dodd-Frank Act to take 

effect within one year after issuance of 

final implementing rules. The Bureau 

believes that ensuring that industry has 

sufficient time to make the necessary 

changes will ultimately benefit 


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20Section 106(e) of the Housing and Urban 

Development Act of 1968 (12 U.S.C. 1701x(e)) 

requires that homeownership counseling provided 

under programs administered by the U.S. 

Department of Housing and Urban Development 

(HUD) can only be provided by organizations or 

individuals certified by HUD as competent to 

provide homeownership counseling. Section 106(e) 

also requires HUD to establish standards and 

procedures for testing and certifying counselors. 

21The Dodd-Frank Act also amends RESPA 

section 5(b) (12 U.S.C. 2604(b)) to require that the 

‘‘home buying information booklet’’ (the RESPA 

‘‘special information booklet,’’ prior to the DoddFrank Act), include ‘‘[i]nformation about 

homeownership counseling services made available 

pursuant to section 106(a)(4) of the Housing and 

Urban Development Act of 1968 (12 U.S.C. 

1701x(a)(4)), a recommendation that the consumer 

use such services, and notification that a list of 

certified providers of homeownership counseling in 

the area, and their contact information, is 

available.’’ 

22 12 U.S.C. 2602(1), 12 CFR 1024.2. 

23Currently, under Regulation X, the ‘‘special 

information booklet’’ must only be provided to 

applicants for first-lien purchase money mortgages, 

and not to applicants for refinancings, closed-end 

subordinate and home-equity loans, reverse 

mortgages, or open-end lines of credit (as long as 

a brochure issued by the Bureau regarding homeequity lines of credit is provided to the borrower). 

12 CFR 1024.2, 1024.6. For open-end credit plans, 

Regulation X provides that a lender or mortgage 

broker that provides the borrower with a copy of 

the brochure entitled ‘‘When Your Home is On the 

Line: What You Should Know About Home Equity 

Lines of Credit,’’ or a successor brochure issued by 

the Bureau, is deemed to be in compliance with the 

booklet requirement of Regulation X. See id. 

1024.6(a)(2). 

consumers through better industry 

compliance. 

The Bureau therefore seeks public 

comment on the time period that should 

be provided to implement the changes 

that will be required by the final rule, 

taking into account the factors discussed 

above. As discussed in the section-bysection analysis to proposed 

§ 1026.32(a)(1)(i) below, the Bureau also 

seeks comment on potential 

implementation periods relating to 

certain changes being proposed in the 

2012 TILA–RESPA Proposal to the 

definition of finance charge under 

Regulation Z, and related mitigation 

measures that the Bureau is proposing 

in this rule to address the impacts on 

HOEPA coverage. 

B. Corrections and Unintentional 

Violations of HOEPA 

Section 1433(f) of the Dodd-Frank Act 

added new section 129(v) to TILA, 15 

U.S.C. 1639(v), which allows a creditor 

or assignee of a high-cost mortgage in 

certain circumstances to correct a failure 

to comply, when acting in good faith, 

with HOEPA requirements. At this time 

the Bureau is not proposing to issue 

regulatory guidance concerning this 

provision. The Bureau solicits comment 

on the extent to which creditors or 

assignees are likely to invoke this 

provision, whether regulatory guidance 

would be useful, and if so what issues 

would be most important to address. 

V. Section-by-Section Analysis 

A. Regulation X 

Section 1024.20 List of Homeownership 

Counselors 

The Bureau is proposing a new 

§ 1024.20 to implement an amendment 

made by section 1450 of the Dodd-Frank 

Act to section 5 of RESPA, 12 U.S.C. 

2604. The amendment requires lenders 

to provide a list of homeownership 

counselors to potential borrowers of 

federally related mortgage loans. 

Specifically, the Dodd-Frank Act 

amended RESPA section 5(c) to require 

lenders to provide potential borrowers 

with a ‘‘reasonably complete or updated 

list of homeownership counselors who 

are certified pursuant to section 106(e) 

of the Housing and Urban Development 

Act of 1968 (12 U.S.C. 1701x(e)) and 

located in the area of the lender.’’ 20

The list of homeownership counselors 

is to be included with a ‘‘home buying 

information booklet’’ that the Bureau is 

directed to prepare ‘‘to help consumers 

applying for federally related mortgage 

loans to understand the nature and costs 

of real estate settlement services.’’ 21

The Dodd-Frank Act amended RESPA 

section 5(a) to direct the Bureau to 

distribute the booklet to all lenders that 

make federally related mortgage loans. 

The Dodd-Frank Act also amended 

section 5(a) to require the Bureau to 

distribute lists of homeownership 

counselors to such lenders. 

Under RESPA and its implementing 

regulations, a federally related mortgage 

loan includes purchase money mortgage 

loans, subordinate mortgages, 

refinancings, closed-end home-equity 

mortgage loans, home-equity lines of 

credit, and reverse mortgages.22 Under 

RESPA section 5(b), as amended by the 

Dodd-Frank Act, the prescribed contents 

of the booklets include information 

specific to refinancings and homeequity lines of credit, as well as ‘‘the 

costs incident to a real estate settlement 

or a federally related mortgage loan.’’ 

RESPA sections 5(a) and (b), as 

amended, indicate that Congress 

intended the booklet and list of 

counselors to be provided to all 

applicants for federally related mortgage 

loans. However, section 5(d) of RESPA, 

in language that was not amended by 

the Dodd-Frank Act, requires lenders to 

provide the home buying information 

booklet ‘‘to each person from whom [the 

lender] receives or for whom it prepares 

a written application to borrow money 

to finance the purchase of residential 

real estate.’’ The information booklet 

mandated by section 5 of RESPA before 

its amendment by the Dodd-Frank Act 

is only required by current Regulation X 

to be provided to applicants for 

purchase money mortgages.23

Section 19(a) of RESPA provides the 

Bureau with the authority to ‘‘prescribe 

such rules and regulations, to make 

such interpretations, and to grant such 

reasonable exemptions for classes of 

transactions, as may be necessary to 

achieve the purposes of the [RESPA].’’ 

Based on its reading of section 5 as a 

whole, and its understanding of the 

purposes of that section, the Bureau is 

proposing that the list of 

homeownership counselors be provided 

to all applicants for federally related 

mortgage loans (except for applicants for 

Home Equity Conversion Mortgages 

(HECMs), as discussed further below). 

Section 5(a) as amended: (1) 

Specifically references helping 

consumers applying for federally related 

mortgage loans understand the nature 

and costs of real estate settlement 

services; and (2) directs the Bureau to 

distribute the booklet and the lists of 

housing counselors to lenders that make 

federally related mortgage loans. 

Moreover, the prescribed content of the 

booklet is not limited to information on 

purchase money mortgage loans. 

Additionally, the Bureau believes that a 

trained counselor can be useful to any 

consumer considering any type of 

mortgage loan. Mortgage transactions 

beyond purchase money transactions, 

such as refinancings and open-end 

home-secured credit transactions, can 

entail significant risks and costs for 

consumers—risks and costs that a 

trained homeownership counselor can 

assist consumers in fully understanding. 

Therefore, the Bureau’s proposal would 

require the homeownership counselor 

list to be provided to applicants for 

refinancings and home-equity lines of 

credit, in addition to purchase money 

mortgages. The Bureau seeks comment 

from the public on the costs and 

benefits of the provision of the list of 

homeownership counselors to 

consumers who are applicants for 

refinances and home-equity lines of 

credit. The Bureau also solicits 

comment on the potential effect of the 

Bureau’s proposal on access to 

homeownership counseling generally by 

consumers, and the effect of increased 

consumer demand for counseling on 

existing counseling resources. In 

particular, the Bureau solicits comment 

on the effect on counseling resources of 

providing the list beyond applicants for 

purchase money mortgages. 


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24The Bureau proposes to exercise its exemption 

authority under section 19(a) of RESPA and its 

modification authority under section 1405(b) of the 

Dodd-Frank Act to allow the list to include, in 

addition to HUD-certified homeownership 

counselors required by section 1450 of the DoddFrank Act, HUD-certified ‘‘counseling 

organizations’’ and counselors and counseling 

organizations ‘‘otherwise approved by HUD.’’ It is 

the Bureau’s understanding that HUD, other than 

for its counseling program for HECMs, currently 

only approves housing counseling agencies and not 

individual counselors. However, the Bureau 

understands that HUD intends in the future to 

undertake a rulemaking to put requirements into 

place to certify individual counselors as competent 

to provide housing counseling in accordance with 

amendments to section 106 of the Housing and 

Urban Development Act of 1968 made by section 

1445 of the Dodd-Frank Act. The Bureau is 

proposing to exercise its exemption or modification 

authority to provide flexibility in order to facilitate 

the availability of competent housing counselors for 

placement on the list. Permitting the list to include 

HUD-certified counseling organizations and 

homeownership counselors and counseling 

organizations ‘‘otherwise approved by HUD’’ may 

help facilitate the effective functioning of this new 

RESPA disclosure. It may also, therefore, help carry 

out the purposes of RESPA for more effective 

advance cost disclosure for consumers, by 

informing loan applicants of counseling resources 

available for assisting them in understanding their 

prospective mortgage loans and settlement costs. 

For the same reason, the Bureau believes this 

proposed modification of the types of counselors 

and organizations that may be included in the list 

is in the interests of consumers and the public. The 

Bureau intends to work closely with HUD to 

facilitate operational coordination and consistency 

between the counseling and certification 

requirements HUD puts into place and the Bureau’s 

final rule. 25 12 U.S.C. 1715z–20(d)(2)(B). 

Proposed § 1024.20(a) requires a 

lender to provide to an applicant for a 

federally related mortgage loan a clear 

and conspicuous written list of five 

homeownership counselors or 

counseling organizations. The list 

provided by the lender pursuant to this 

requirement must include only 

homeownership counselors or 

counseling organizations from either the 

most current list of homeownership 

counselors or counseling organizations 

made available by the Bureau for use by 

lenders in complying with § 1024.20, or 

the most current list maintained by 

HUD of homeownership counselors or 

counseling organizations certified by 

HUD, or otherwise approved by HUD.24

Proposed § 1024.20(a) provides that 

the required list include five 

homeownership counselors or 

counseling organizations located in the 

zip code of the loan applicant’s current 

address, or, if there are not the requisite 

five counselors or counseling 

organizations in that zip code, then 

counselors or organizations within the 

zip code or zip codes closest to the loan 

applicant’s current address. The Bureau 

invites comment on this requirement 

and whether there are alternative 

methods of listing homeownership 

counselors or counseling organizations 

available to consumers that would serve 

the purposes of the statutory 

requirement and RESPA, in general. 

To facilitate compliance with the 

proposed list requirement, the Bureau is 

expecting to develop a Web site portal 

that would allow lenders to type in the 

loan applicant’s zip code to generate the 

requisite list, which could then be 

printed for distribution to the loan 

applicant. The Bureau believes that 

such an approach: (1) Could 

significantly mitigate any paperwork 

burden associated with requiring that 

the list be distributed to applicants for 

federally related mortgage loans; and (2) 

is consistent with the Dodd-Frank Act’s 

amendment to section 5(a) of RESPA 

requiring the Bureau to distribute to 

lenders ‘‘lists, organized by location, of 

homeownership counselors certified 

under section 106(e) of the Housing and 

Urban Development Act of 1968 (12 

U.S.C. 1701x(e)) for use in complying 

with the requirement under [section 

5(c)].’’ The Bureau solicits comment on 

whether such a portal would be useful 

and whether there are other 

mechanisms through which the Bureau 

can help facilitate compliance and 

provide lists to lenders and consumers. 

The Bureau also solicits comment on 

whether ‘‘five’’ is the appropriate 

number of counselors or organizations 

to be included on the list. The Bureau 

is aware that several State laws that 

impose requirements on creditors to 

provide consumers lists of housing 

counselors specify a list of five. See, 

e.g., NY Real Property Actions and 

Proceedings Law § 1304(2); Arizona 

Revised Statute § 6–1703(A)(1). The 

Bureau is concerned that requiring a list 

of too few counselors or organizations 

would provide inadequate options to 

consumers and could increase the risk 

for steering by lenders to particular 

counselors. The Bureau is also 

concerned, however, that requiring a list 

of too many counselors or organizations 

could be overwhelming for consumers. 

In addition, the Bureau solicits 

comment on whether there should be a 

limitation on the number of listed 

counselors from the same counseling 

organization. 

Proposed § 1024.20(a) requires that 

the list include: (1) each counselor’s or 

organization’s name, business address, 

telephone number and, if available from 

the Bureau or HUD, other contact 

information; and (2) contact information 

for the Bureau and HUD. 

Proposed § 1024.20(a) requires the 

lender to provide the list no later than 

three business days after the lender, 

mortgage broker or dealer receives a 

loan application (or information 

sufficient to complete an application), 

but allows a mortgage broker or dealer 

to provide the list to those applicants 

from whom it receives or for whom it 

prepares applications. Where a mortgage 

broker or dealer provides the list, the 

lender is not required to provide an 

additional list but remains responsible 

for ensuring that the list has been 

provided to the loan applicant and 

satisfies the requirements of proposed 

§ 1024.20. Proposed § 1024.20(a) sets 

out the requirements for providing the 

list to the loan applicant, i.e., in person, 

by mail, or by other means of delivery. 

The list may be provided to the loan 

applicant in electronic form, subject to 

the consumer consent and other 

applicable provisions of the Electronic 

Signatures in Global and National 

Commerce Act (ESIGN), 15 U.S.C. 7001 

et seq. The lender is not required to 

provide the list if, before the end of the 

three business day period, the lender 

denies the loan application or the loan 

applicant withdraws the application. 

For applications for open-end homesecured lines of credit covered under 

TILA, the timing and methods of 

delivery set out in Regulation Z, 12 CFR 

1026.40, for disclosures involving such 

loans may be used instead of the 

requirements in proposed § 1024.20. 

Proposed § 1024.20(a) also provides 

flexibility in the requirements for 

providing the list when there are 

multiple lenders and multiple 

applicants in a mortgage loan 

transaction. 

Proposed § 1024.20(c) would not 

require a lender to provide an applicant 

for a HECM, as that type of reverse 

mortgage is defined in 12 U.S.C. 1715z– 

20(b)(3), with the list required under 

proposed § 1024.20 if the lender is 

otherwise required by HUD to provide 

a list, and does provide a list, of HECM 

counselors or counseling agencies to the 

loan applicant. As discussed further in 

the section-by-section analysis below on 

the Bureau’s proposed pre-loan 

counseling requirement for high-cost 

mortgages, Federal law currently 

requires homeowners to receive 

counseling before obtaining a HECM 

reverse mortgage insured by the Federal 

Housing Administration (FHA),25 which 

is a part of HUD. HUD imposes various 

requirements related to HECM 

counseling, including requiring FHAapproved HECM mortgagees to provide 

prospective HECM borrowers with a list 

of HUD-approved HECM counseling 

agencies. The Bureau is concerned that 

a duplicative list requirement could 

cause confusion for consumers and 

unnecessary burden for lenders. 

Accordingly, the Bureau is proposing to 


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exercise its exemption authority under 

RESPA section 19(a) to allow lenders 

that provide a list under HUD’s HECM 

program to satisfy the requirements of 

proposed § 1024.20. 

In its 2012 TILA–RESPA Proposal, the 

Bureau proposes to adopt a new 

definition of ‘‘application’’ in 12 CFR 

1026.2(a)(3). The 2012 TILA–RESPA 

Proposal would create a new Loan 

Estimate to replace the RESPA GoodFaith Estimate (GFE) and the initial 

Truth in Lending Act disclosure. Like 

those disclosures and the list of 

homeownership counselors or 

counseling organizations, the Loan 

Estimate would be provided three 

business days after the lender’s receipt 

of an application. However, to 

encourage lenders to provide the loan 

term and cost information in the Loan 

Estimate earlier in the loan process, the 

2012 TILA–RESPA Proposal would 

propose to adopt a definition of 

application that differs from the 

definition of application in § 1024.2(b) 

of Regulation X by removing ‘‘any other 

information deemed necessary by the 

loan originator’’ from the § 1024.2(b) list 

of application elements. Thus, a lender 

would no longer be able to delay 

providing the statutorily required 

estimates by waiting to collect ‘‘other 

information.’’ Because consumers could 

benefit from receiving the list of 

homeownership counselors or 

counseling organizations at the same 

time as the Loan Estimate, the Bureau 

requests comment on whether to tie 

provision of the list to the definition of 

application in proposed § 1026.2(a)(3) 

instead of the definition in § 1024.2(b). 

B. Regulation Z 

Section 1026.1 Authority, Purpose, 

Coverage, Organization, Enforcement, 

and Liability 

1(d) Organization 

1(d)(5) 

Section 1026.1(d)(5) describes the 

organization of Subpart E of Regulation 

Z, which contains special rules for 

mortgage transactions. The Bureau 

proposes to revise § 1026.1(d)(5) to 

reflect the proposed amendments to 

§§ 1026.32 and 1026.34, which are 

discussed in detail below. Specifically, 

the Bureau proposes to revise 

§ 1026.1(d)(5) to include the term 

‘‘open-end credit plan’’ and remove the 

term ‘‘closed-end’’ where appropriate. 

In addition, the Bureau proposes to 

include a reference to the new 

prepayment penalties trigger for highcost mortgages added by the DoddFrank Act. 

Section 1026.31 General Rules 

31(c) Timing of Disclosure 

Section 1026.31(c) provides 

additional disclosure requirements for 

high-cost mortgages. As discussed in 

detail below, the Dodd-Frank Act 

expanded the types of loans potentially 

subject to HOEPA coverage. Therefore, 

the Bureau proposes to revise 

§ 1026.31(c) and related commentary for 

clarity and consistency. Specifically, the 

Bureau proposes to include the term 

‘‘account opening’’ in addition to 

‘‘consummation’’ to reflect the fact that 

the Dodd-Frank Act expanded the 

requirements for high-cost mortgages to 

open-end credit plans. 

Section 1026.32 Requirements for 

High-Cost Mortgages 

32(a)(1) Coverage 

The Bureau proposes to revise 

§ 1026.32(a)(1) to implement the 

definition of ‘‘high-cost mortgage’’ 

under TILA section 103(bb)(1), as 

amended by the Dodd-Frank Act. As 

discussed below, TILA section 

103(bb)(1) generally provides that the 

term ‘‘high-cost mortgage’’ means a 

consumer credit transaction that is 

secured by the consumer’s principal 

dwelling, other than a reverse mortgage 

transaction, if any of the prescribed 

thresholds are met. 

The Dodd-Frank Act amended 

existing TILA section 103(aa)(1) by 

removing the exclusion of a residential 

mortgage transaction and an open-end 

credit plan from HOEPA coverage. 

Under TILA section 103(bb)(1)(A), 

reverse mortgage transactions remain 

excluded from the definition of a highcost mortgage. Previously, the statutory 

protections for HOEPA loans were 

generally limited to closed-end 

refinancings and home-equity mortgage 

loans. The proposal, among other 

things, extends the statutory protections 

for high-cost mortgages to residential 

mortgage transactions, such as purchase 

money mortgage loans, and to open-end 

credit plans secured by the consumer’s 

principal dwelling, i.e., home-equity 

lines of credit. Accordingly, the Bureau 

proposes to reflect the revised scope of 

coverage and remaining statutory 

exclusion of reverse mortgage 

transactions in proposed § 1026.32(a)(1), 

to remove the list of exclusions 

provided in current § 1026.32(a)(2), and 

to amend § 1026.32(a)(2) for other 

purposes as discussed below. 

Accordingly, proposed § 1026.32(a)(1) 

defines ‘‘high-cost mortgage’’ to mean 

any consumer credit transaction, other 

than a reverse mortgage transaction as 

defined in § 1026.33(a), that is secured 

by the consumer’s principal dwelling 

and in which any one of the prescribed 

thresholds is met. Proposed comment 

32(a)(1)–1 clarifies that a high-cost 

mortgage includes both a closed-end 

mortgage loan and an open-end credit 

plan secured by the consumer’s 

principal dwelling. In particular, the 

comment further clarifies that with 

regard to determining coverage under 

§ 1026.32, an open-end transaction is 

the account opening of an open-end 

credit plan. Under the proposal, an 

individual advance of funds or a draw 

on the credit line under an open-end 

credit plan subsequent to account 

opening does not constitute a 

‘‘transaction.’’ Because HELOCs are 

open-end (revolving) lines of credit and 

the rate applicable to any advance of 

funds may vary under the plan, the 

Bureau believes this clarification is 

appropriate to permit creditors to 

determine coverage of an open-end 

credit plan as a high-cost mortgage at 

account opening. 

Threshold Triggers 

Prior to enactment of the Dodd-Frank 

Act, HOEPA coverage was triggered 

when a loan’s annual percentage rate 

(APR) or its points and fees exceeded 

certain thresholds as prescribed by 

current TILA section 103(aa), which is 

implemented by current § 1026.32(a)(1). 

The Dodd-Frank Act adjusted the two 

existing thresholds and added a third 

threshold based on the inclusion of 

certain prepayment penalties. Under 

TILA section 103(bb)(1)(A), the revised 

thresholds generally provide that a 

consumer credit transaction is a highcost mortgage if: 

• The annual percentage rate at 

consummation of the transaction 

exceeds the average prime offer rate 

(APOR) for a comparable transaction by 

(1) more than 6.5 percentage points for 

transactions secured by a first mortgage 

on the consumer’s principal dwelling or 

8.5 percentage points, if the dwelling is 

personal property and the total 

transaction amount is less than $50,000; 

or (2) 8.5 percentage points for 

transactions secured by a subordinate 

mortgage on the consumer’s principal 

dwelling; 

• The total points and fees payable in 

connection with the transaction, other 

than bona fide third party charges not 

retained by the mortgage originator, 

creditor, or an affiliate of either, exceed: 

(1) In the case of a transaction for 

$20,000 or more, 5 percent of the total 

transaction amount; or (2) in the case of 

a loan for less than $20,000, the lesser 

of 8 percent of the total transaction 

amount or $1,000 (adjusted for 

inflation); or 


sroberts on DSK5SPTVN1PROD with PROPOSALS
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26The revised definition would also affect 

calculation of HOEPA’s threshold based on points 

and fees. Those effects and potential 

accommodations are discussed further below. 

• The transaction provides for 

prepayment fees and penalties that (1) 

may be imposed more than 36 months 

after consummation or account opening 

or (2) exceed, in the aggregate, more 

than 2 percent of the amount prepaid. 

The Bureau proposes to revise the 

existing APR and points and fees 

thresholds in proposed § 1026.32(a)(1)(i) 

and (ii) and to add the new prepayment 

penalty threshold in proposed 

§ 1026.32(a)(1)(iii). These amendments 

are discussed in detail below. 

32(a)(1)(i) 

Implementation of Dodd-Frank Act 

Amendments 

Section 1431 of the Dodd-Frank Act 

amended the existing APR trigger in 

current TILA section 103(aa) by 

lowering the percentage point trigger 

and changing the APR benchmark. As 

noted above, amended TILA section 

103(bb)(1)(A)(i) generally provides that 

a consumer credit transaction is a highcost mortgage if the APR at 

consummation of the transaction 

exceeds the APOR for a comparable 

transaction by (1) more than 6.5 

percentage points for transactions 

secured by a first mortgage on the 

consumer’s principal dwelling or 8.5 

percentage points, if the dwelling is 

personal property and the total loan 

amount is less than $50,000; or (2) 8.5 

percentage points for transactions 

secured by a subordinate mortgage on 

the consumer’s principal dwelling. 

In addition to adjusting the 

percentage point triggers, TILA section 

103(bb)(1)(A), as added by section 1431 

of Dodd-Frank, also amends the 

benchmark for the APR trigger. The 

existing APR benchmark is the yield on 

Treasury securities having comparable 

periods of maturity. Under TILA section 

103(bb)(1)(A)(i), the APR benchmark is 

the ‘‘average prime offer rate,’’ as 

defined in TILA section 129C(b)(2)(B). 

This definition essentially codifies 

Regulation Z’s existing definition of 

‘‘average prime offer rate’’ in 

§ 1026.35(a)(2), which would become 

§ 1026.35(a)(2)(ii) in the Bureau’s rules. 

The Bureau is proposing two 

alternatives in proposed 

§ 1026.32(a)(1)(i) to implement the APR 

threshold for a high-cost mortgage under 

amended TILA section 103(bb)(1)(A)(i). 

Alternative 1 uses the APR as the rate 

to be compared to the APOR for 

determining HOEPA coverage for 

closed-end mortgage loans. Alternative 

2 is substantially identical except that it 

would substitute a ‘‘transaction 

coverage rate’’ for the ‘‘annual 

percentage rate’’ as the rate to be 

compared to the APOR for closed-end 

mortgage loans. As discussed further 

below, the Bureau is proposing 

Alternative 2 in connection with its 

proposal to simplify and broaden the 

general definition of finance charge 

under Regulation Z. See 2012 TILA– 

RESPA Proposal. The Bureau would not 

adopt Alternative 2 if it does not change 

the definition of finance charge. As 

discussed below, the Bureau is seeking 

comment on whether to adopt 

Alternative 2 if it does expand the 

definition of finance charge. Because the 

proposal to broaden the definition of 

finance charge does not apply to openend transactions, the Bureau proposes to 

retain the APR as the rate that will be 

compared to the APOR to determine 

whether an open-end credit plan is a 

high-cost mortgage under HOEPA. 

Both alternatives otherwise generally 

mirror the statutory language with some 

exceptions for clarity, organization, or 

consistency with existing Regulation Z 

and the Bureau’s other mortgage 

rulemakings as mandated by the DoddFrank Act. For example, the proposal 

refers to a ‘‘first-lien’’ or ‘‘subordinatelien’’ transaction, instead of a ‘‘first 

mortgage’’ or ‘‘subordinate or junior 

mortgage.’’ Further, for the reasons 

stated in the section-by-section analysis 

to proposed § 1026.32(a)(1)(ii) below, 

the proposal refers to ‘‘total loan 

amount’’ rather than ‘‘total transaction 

amount.’’ 

TILA section 103(bb)(2)(A) and (B) 

provides the Bureau with authority to 

adjust the percentage points referenced 

in the APR threshold if the Bureau 

determines that the increase or decrease 

is consistent with the statutory 

protections for high-cost mortgages and 

is warranted by the need for credit. The 

Bureau does not propose to make such 

a determination at this time, either in 

conjunction with general 

implementation of the Dodd-Frank Act 

or, as discussed further below, in 

conjunction with the proposed 

expansion of the definition of finance 

charge. Therefore, both alternatives 

retain the numeric triggers in the statute 

for both closed-end and open-end credit 

transactions. However, the Bureau seeks 

comment and data on whether any 

adjustments to the numeric triggers 

generally, and in particular for open-end 

credit transactions, would better protect 

consumers from the risks associated 

with high-cost mortgages or are 

warranted by the need for credit. 

In addition, the Bureau notes that the 

statute sets forth different threshold 

triggers for first-lien transactions 

depending on whether the transaction is 

secured by a dwelling that is personal 

property and the total loan amount is 

less than $50,000. The Bureau 

understands that first-lien transactions 

that are secured by a dwelling that is 

personal property, such as certain 

manufactured housing loans, often have 

higher APRs than other first-lien 

transactions secured by a dwelling that 

is not personal property. Accordingly, 

the Bureau also seeks comment or data 

specifically on the separate percentage 

point trigger for first-lien transactions 

that are secured by a dwelling that is 

personal property and for which the 

total loan amount is less than $50,000, 

and whether any adjustment to the 

percentage point or the total loan 

amount for such first-lien transactions 

would better protect consumers or is 

warranted by the need for credit. 

Potential Expansion of the Definition of 

Finance Charge 

Alternative 2 for proposed 

§ 1026.32(a)(1)(i) would account for the 

changes in the calculation of the finance 

charge (and thus APR) that the Bureau 

is separately considering in the 2012 

TILA–RESPA Proposal. Under that 

proposal, creditors would use a simpler, 

more inclusive definition of the finance 

charge for closed-end credit secured by 

real property or a dwelling, which is in 

turn used to compute the APR that is 

disclosed to consumers. As discussed in 

that proposal, the Bureau believes that 

the expanded definition could have 

significant benefits to consumers by 

making the APR a more useful and 

accurate tool for comparing the overall 

cost of credit. At the same time, the 

proposal could benefit creditors by 

reducing compliance burden and 

litigation risk because the finance 

charge calculation would be easier to 

perform. However, the Bureau 

recognizes that a more inclusive 

definition of the finance charge could 

expand the coverage of HOEPA because 

closed-end mortgage loans would have 

higher APRs, which would result in 

some additional loans being covered as 

high-cost mortgages.26 The Bureau is 

therefore seeking comment in this 

proposal on whether, if it adopts the 

broader definition of finance charge in 

the TILA–RESPA rulemaking, it should 

compensate for that change to 

approximately offset the impact of a 

broader definition of finance charge on 

HOEPA coverage levels. 

Currently, TILA and Regulation Z 

permit creditors to exclude several fees 

or charges from the finance charge, 

including most fees or charges imposed 

by third parties. Consumer groups, 


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27See, e.g., 75 FR 58660–62 and 76 FR 11609. 

creditors, and government agencies have 

long been dissatisfied with the ‘‘some 

fees in, some fees out’’ approach to the 

finance charge. The Board therefore 

proposed expanding the definition of 

finance charge in its 2009 Closed-End 

Proposal, see 74 FR 43232, 43243–45 

(Aug. 26, 2009), and the Bureau has 

after careful consideration decided to 

propose a similar change. Specifically, 

the 2012 TILA–RESPA Proposal would 

maintain TILA’s definition of a finance 

charge as a fee or charge payable 

directly or indirectly by the consumer 

and imposed directly or indirectly by 

the creditor. However, the proposal 

would require the finance charge to 

include additional creditor charges and 

most charges by third parties. The 

Bureau is proposing a revised definition 

of the finance charge pursuant to its 

authority under TILA sections 105(a) 

and (f), as well as other applicable 

statutory authority, because the Bureau 

believes that the simpler finance charge 

could effectuate the purposes of TILA 

and facilitate compliance by enhancing 

consumer understanding and reducing 

compliance costs. 

One effect of the expansion of the 

definition of finance charge, however, 

would be to expand the number of loans 

exceeding HOEPA’s APR trigger and 

other statutory and regulatory 

provisions that incorporate an APR 

threshold for coverage. As discussed in 

detail in the Board’s 2010 Mortgage 

Proposal, there are currently some 

differences between the APR and the 

APOR, which is the benchmark rate 

under the Dodd-Frank Act for 

determining HOEPA coverage. The 

APOR is generally calculated using data 

that includes only contract interest rate 

and points, but not other origination 

fees. See 75 FR 58539, 58660–62 (Sept. 

24, 2010). The current APR includes not 

only discount points and origination 

fees but also other charges the creditor 

retains and certain third-party charges. 

The proposed simpler, more inclusive 

finance charge, which would also 

include most third-party charges, would 

widen the disparity between the APR 

and the APOR and expand coverage of 

HOEPA. 

The Bureau notes that, in response to 

the Board’s 2009 Closed-End Proposal, 

most industry commenters raised 

significant concerns about loans being 

inappropriately covered by HOEPA and 

potential negative impacts on consumer 

access to credit. Consumer advocates 

and some other commenters, however, 

supported the more inclusive finance 

charge and the expanded coverage of 

HOEPA. They maintained that 

expanded HOEPA coverage was 

warranted because the more inclusive 

finance charge would be a more 

accurate measure of the cost of credit 

and, therefore, would render HOEPA 

coverage more accurate as well. 

During outreach conducted in 

conjunction with the Bureau’s 2012 

TILA–RESPA Proposal, similar concerns 

were expressed by both industry and 

consumer advocates. Participants in a 

Small Business Review Panel and other 

industry stakeholders expressed 

concerns that one unintended 

consequence of a more inclusive 

definition of finance charge could be 

that more loans would qualify as highcost loans subject to additional 

requirements under TILA section 129 

and under similar State laws. Industry 

stakeholders urged that the proposed 

revisions to the finance charge be 

viewed in the context of Dodd-Frank 

Act rulemakings revising the thresholds 

for HOEPA and other statutory regimes 

because of the relationship between the 

APR and those thresholds. Specifically, 

they noted that those thresholds are tied 

to the APR, such that any changes to the 

APR calculation could be costly to 

implement and should be done in 

conjunction with other related changes. 

Consumer advocates asserted that 

expanded HOEPA coverage is warranted 

because the more inclusive definition 

would provide a more accurate measure 

of the cost of credit. 

The Bureau does not currently have 

sufficient data to model the impact of 

the more expansive definition of finance 

charge on coverage under HOEPA or the 

impact of potential modifications that 

the Bureau could make to the triggers to 

more closely approximate existing 

coverage levels. As described in the 

Dodd-Frank Act section 1022 analysis 

below, the Bureau is working to secure 

data to assist in analyzing potential 

impacts. The Bureau seeks comment on 

its plans for data analysis as described 

below, as well as additional data and 

comment on the potential impacts of a 

broader finance charge definition on 

coverage under HOEPA and potential 

modifications to the triggers. 

In conjunction with its efforts to 

quantify the effect of an expanded 

definition of finance charge, the Bureau 

is carefully weighing whether 

modifications may be warranted to 

approximate coverage levels under the 

current definition. It is not clear from 

the legislative history of the Dodd-Frank 

Act whether Congress was aware of the 

Board’s 2009 Closed-End Proposal to 

expand the current definition of finance 

charge or whether Congress considered 

the interplay between an expanded 

definition and coverage under the highcost mortgage provision. In light of this 

fact and the concerns raised by 

commenters on the Board’s 2009 

Closed-End Proposal regarding effects 

on access to credit, the Bureau believes 

that it is appropriate to explore 

alternatives to implementation of the 

expanded finance charge definition for 

purposes of HOEPA coverage. 

As discussed below, the Bureau has 

considered two such modifications and 

is proposing one of them, the TCR, as 

Alternative 2 to proposed 

§ 1026.32(a)(1)(i). The Bureau seeks 

comments and data on these and any 

other potential modifications to 

HOEPA’s APR coverage thresholds. The 

Bureau also seeks comment on the 

timing of implementation for any 

change to the definition of finance 

charge and any related change to the 

HOEPA APR threshold, as discussed 

further below. 

Adjustment to numeric APR triggers. 

One method of modifying the triggers to 

maintain approximate current coverage 

would be to exercise the Bureau’s 

authority under TILA section 

103(bb)(2)(A) and (B) to adjust the 

percentage point triggers. As discussed 

above, TILA section 103(bb)(2)(A) and 

(B) permits certain adjustments to the 

percentage point triggers if the Bureau 

determines that the increase or decrease 

is consistent with the statutory 

protections for high-cost mortgages and 

is warranted by the need for credit. In 

determining whether to increase or 

decrease the number of percentage 

points in the high-cost mortgage trigger, 

the Bureau must consult with 

representatives of consumers, including 

low-income consumers, and lenders. 

Due to data limitations, however, the 

Bureau does not currently have 

sufficient information to propose a 

specific numeric adjustment to the 

percentage point triggers as a means of 

approximating current coverage levels 

in the event that the Bureau adopts the 

broader definition of finance charge. 

The Bureau also notes that the Board 

previously proposed and sought 

comment on use of the TCR, rather than 

adjustments to numeric thresholds.27

The Bureau therefore seeks comment on 

the advisability and grounds for using 

the percentage point mechanism to 

adjust for the adoption of a broader 

definition of finance charge, particularly 

if different types of modifications were 

adopted for other mortgage rulemakings 

involving APR thresholds. 

Transaction coverage rate. As 

discussed above, another alternative 

method of compensating for the broader 

definition of finance charge would be to 

replace the APR benchmark for closedend mortgage loans with the transaction 


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49102 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

28The Board proposed the TCR in the 2010 

Mortgage Proposal, see 75 FR 58660–62, and the 

2011 Escrow Proposal, see 76 FR 11609. The 

Board’s proposals would substitute the TCR for the 

APR for purposes of determining thresholds for 

higher-priced mortgage loans. 

29The wording of the Board’s proposed definition 

of ‘‘transaction coverage rate’’ varied slightly 

between the 2010 Mortgage Proposal and the 2011 

Escrow Proposal as to treatment of charges retained 

by mortgage broker affiliates. The Bureau proposes 

to use the 2011 Escrow Proposal version, which 

would apply to charges that will be retained by the 

creditor, a mortgage broker, or any affiliate of either. 

The Bureau believes that this approach is consistent 

with the rationale articulated by the Board in its 

earlier proposals and with certain other parts of the 

Dodd-Frank Act that distinguish between charges 

retained by the creditor, mortgage broker, or 

affiliates of either company. See, e.g., Dodd-Frank 

Act section 1403. 

30The Bureau’s authority under section 105(a) 

does not extend to the substantive protections 

contained in TILA section 129 that apply to highcost mortgages, but applies to all other provisions 

of TILA including the section that defines high-cost 

mortgages and APR. The Bureau is striving to 

develop a coverage framework across various 

rulemakings that is consistent with Congress’ intent 

in identifying specific, limited categories of covered 

transactions that are subject to various substantive 

protections, including the protections for high-cost 

mortgages. 

coverage rate (TCR). The Bureau has 

proposed this as Alternative 2 for 

proposed § 1026.32(a)(1)(i), for 

substantially the same reasons that the 

Board proposed adopting the TCR to 

address the impact of the expanded 

definition of finance charge upon other 

regulatory triggers.28 Specifically, the 

‘‘transaction coverage rate’’ would be 

defined as the rate used to determine 

whether a closed-end mortgage loan is 

a high-cost mortgage subject to 

§ 1026.32. (As discussed below, the 

Bureau does not propose to change the 

coverage metric for open-end credit 

plans.) As previously proposed by the 

Board in § 226.45(a)(2)(i) under the 2011 

Escrow Proposal (which would become 

§ 1026.35(a)(2)(i) in the Bureau’s rules), 

the TCR would be determined in 

accordance with the applicable rules of 

Regulation Z for the calculation of the 

APR for a closed-end transaction, except 

that the prepaid finance charge would 

include only charges that will be 

retained by the creditor, a mortgage 

broker, or any affiliate of either.29

The TCR would not reflect certain 

costs paid to third parties that would be 

disclosed to consumers as part of the 

finance charge under the current and 

proposed definitions. For example, the 

current finance charge reflects 

mandatory credit life insurance, and the 

proposed more inclusive finance charge 

would reflect such additional thirdparty charges as title insurance 

premiums. However, the TCR would not 

include either amount. See 75 FR 58539, 

58661 (Sept. 24, 2010); 76 FR 11598, 

11626 (Mar. 2, 2011). Thus, the TCR 

might result in some loans not being 

classified as high-cost mortgages that 

would otherwise qualify under an APR 

threshold. 

The Bureau is considering ways to 

supplement the data analysis described 

below to better assess this issue, and 

specifically seeks comment and data on 

the potential effect of the TCR relative 

to the APR calculated using both the 

current and proposed definitions of 

finance charge. While the Bureau is 

seeking data to assist it in evaluating 

alternatives, the Bureau expects that the 

margin of difference between the TCR 

and the current APR would be 

significantly smaller than the margin 

between the current APR and the APR 

calculated using the expanded finance 

charge definition. This expectation is 

due to the fact that the expanded 

finance charge definition would add in 

such large third-party charges as 

lender’s title insurance, whereas 

relatively few third-party fees would be 

excluded by the TCR approach that are 

not already excluded under current 

rules; mandatory credit life and 

disability insurance premiums would be 

in this category, for example, but such 

insurance typically is offered as 

voluntary coverage, which is already 

excluded under current rules. The 

Bureau consequently expects that, 

relative to current rules, the TCR would 

remove from HOEPA coverage fewer 

overall transactions than the expanded 

finance charge would add. 

Thus, the Bureau believes that the 

TCR may maintain the primary benefits 

of HOEPA while also offering other 

significant benefits. First, the Bureau 

believes that the TCR would be easier to 

calculate than the current APR, and 

could therefore result in reduced 

compliance burden and litigation costs 

for creditors. Second, the TCR has been 

proposed in two prior proposals of the 

Board relating to higher-priced mortgage 

loans. Thus, the TCR could provide an 

efficacious way of achieving a common 

framework for application of various 

regulatory thresholds. 

At the same time, the Bureau also 

seeks comment on the potential 

advantages and disadvantages to both 

consumers and creditors of using 

different metrics for purposes of 

disclosures and for purposes of 

determining coverage of various 

regulatory regimes. As discussed above, 

the Bureau believes that the potential 

compliance burden is mitigated with 

regard to TCR because both TCR and 

APR under the expanded definition of 

finance charge would be easier to 

compute than the APR today using the 

current definition. However, the Bureau 

seeks comment on the issue generally 

and in particular on whether use of the 

TCR or other modifications should be 

optional, so that creditors could use the 

broader definition of finance charge to 

calculate the APR and points and fees 

triggers if they would prefer. The 

Board’s 2010 Mortgage Proposal 

structured the TCR as a mandatory 

requirement out of concern that 

identical transactions extended by two 

different creditors could have 

inconsistent coverage under regulations 

governing higher-priced mortgage loans, 

but similarly sought comment on the 

issue. 

The Bureau has authority to modify 

the APR test in § 1026.32(a)(1)(i) under 

TILA section 105(a) to carry out the 

purposes of TILA. In its 2012 TILA– 

RESPA Proposal, the Bureau is 

proposing to amend the definition of 

finance charge to promote the informed 

use of credit and to facilitate creditors’ 

compliance with disclosure 

requirements under TILA. Should the 

Bureau finalize that aspect of the 

proposal, adoption of the TCR may 

ensure that the special protections 

provided under HOEPA are not 

expanded in a manner that Congress 

may not have intended or that could 

impair access to credit. 

Furthermore, the Bureau has authority 

pursuant to TILA section 105(a) to 

provide additional requirements, 

classifications, differentiations, or other 

provisions, and to provide for such 

adjustments and exceptions for all or 

any class of transactions as are 

necessary, in the Bureau’s judgment, to 

effectuate the purposes of TILA and 

facilitate compliance.30 The Bureau 

understands that most lenders currently 

do not make HOEPA loans, and 

previous comments received on the 

Board’s proposal suggest that some 

lenders may cease making loans that are 

defined as high-cost mortgages solely as 

a result of the proposed more inclusive 

finance charge. The Bureau is therefore 

evaluating whether the proposed use of 

the TCR could maintain the special 

protections for consumers of high-cost 

mortgages while ensuring that the 

effects of a more inclusive finance 

charge would not restrict the availability 

of credit. In addition, the Bureau 

believes that the proposal to use the 

TCR would facilitate compliance by 

substituting a simpler calculation for the 

finance charge for purposes of 

determining whether a transaction is a 

high-cost mortgage. Creditors would 

therefore have more certainty about the 

calculation for purposes of determining 

coverage of closed-end mortgage loans. 

Therefore, the Bureau believes that the 

proposed adjustment may effectuate the 


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31The methodology for deriving the APOR is 

based on Freddie Mac’s Primary Mortgage Market 

Survey, which does not provide any data on openend mortgage products, such as home-equity lines 

of credit. More detailed discussions of the 

determination of the APOR are provided in the 

Board’s 2008 HOEPA Final Rule, see 73 FR at 

44533–44536, and other publicly-available sources, 

see, e.g., http://www.ffiec.gov/ratespread/ 

default.aspx. 

purposes of TILA, as amended by 

HOEPA, and facilitate compliance 

without undermining consumer 

protections against abusive practices, 

the availability of credit, or the interest 

of the borrowing public. 

Open-end transactions. The proposal 

for a more inclusive finance charge 

applies only to closed-end transactions. 

Therefore, for purposes of the coverage 

trigger in § 1026.32(a)(1)(i), the Bureau 

proposes to use the TCR for closed-end 

transactions only. The Bureau believes 

that an adjustment for open-end 

transactions would not be necessary or 

appropriate because the APR for openend credit plans solely includes interest 

and not other fees or charges. 

Accordingly, the annual percentage rate 

would be used for open-end 

transactions. 

Effective dates. In addition to seeking 

comment on the issues raised above 

concerning potential modifications to 

the HOEPA APR triggers if the Bureau 

adopts a broader definition of finance 

charge, the Bureau seeks comment on 

the timing of implementation. As 

discussed above, the Bureau has 

proposed to expand the definition of 

finance charge as part of the 2012 TILA– 

RESPA Proposal, which has no statutory 

deadline for final rules. The Bureau 

expects that it may take some time to 

finalize the disclosures proposed in that 

rule, since it anticipates conducting 

quantitative testing of the forms. The 

Bureau does not necessarily have to 

wait until the disclosures are finalized 

to issue a final rule about whether to 

expand the definition of finance charge, 

and is specifically seeking comment in 

connection with that proposal about 

whether it should decide the finance 

charge issue (and finalize that aspect of 

the proposal) earlier in light of the 

potential impact on other rulemakings. 

The Bureau also seeks comment on 

effective dates as part of this 

rulemaking. The Bureau expects to issue 

a final rule regarding implementation of 

the Dodd-Frank Act amendments to 

HOEPA by January 21, 2013, since the 

statute will otherwise automatically take 

effect on that date. The Bureau also 

expects to issue several other final rules 

by January 21, 2013, to implement other 

provisions of title XIV of the DoddFrank Act that set similar thresholds for 

compliance based on mortgage loans’ 

APRs or points and fees. The Bureau is 

seeking comment on an appropriate 

implementation period for the final 

rules. 

The Bureau believes that it would be 

preferable for any change to the 

definition of finance charge and any 

related changes to regulatory thresholds 

to take effect at the same time, in order 

to provide for consistency and efficient 

systems modification. The Bureau also 

believes that it may be advantageous to 

consumers and creditors for these 

changes to occur at the same time that 

creditors are implementing new title 

XIV requirements involving APR and 

points and fees thresholds, rather than 

waiting until the Bureau finalizes other 

aspects of the 2012 TILA-RESPA final 

rule relating to disclosures. If the 

Bureau expands the definition of 

finance charge, this approach would 

likely provide the benefits to consumers 

of the final rule at an earlier date as well 

as avoid requiring creditors to make two 

sets of systems and procedures changes 

focused on determining which loans 

trigger particular regulatory 

requirements (e.g., one set of changes to 

implement amendments to the HOEPA 

triggers generally and another set of 

changes associated with any 

modifications related to the more 

inclusive finance charge). However, 

given that implementation of the 

disclosure-related elements of the 2012 

TILA-RESPA Proposal will also require 

systems and procedures changes, there 

may be advantages to delaying any 

change in the definition of finance 

charge and related adjustments to 

regulatory triggers until those changes 

occur. The Bureau therefore seeks 

comment on the benefits and costs to 

both consumers and industry of both 

approaches. 

Related commentary. Under 

Alternative 2, as discussed above, 

proposed comment 32(a)(1)(i)–1 clarifies 

the determination of the TCR for closedend mortgage loans. For consistency 

within Regulation Z regarding the 

determination of the TCR, the proposal 

cross-references guidance proposed 

under § 226.45(a)(2)(i) in the 2011 

Escrow Proposal, which would be 

renumbered as § 1026.35(a)(2)(i) for 

organizational purposes. Under 

Alternative 1, the Bureau notes that this 

proposed comment would be removed 

and proposed comments 32(a)(1)(i)–2 

and –3 below would be renumbered as 

comments 32(a)(1)(i)–1 and –2. 

Proposed comment 32(a)(1)(i)–2 

clarifies the determination of the 

average prime offer rate for closed-end 

mortgage loans. For consistency within 

Regulation Z regarding the 

determination of the average prime offer 

rate for closed-end credit, the proposal 

cross-references the guidance in current 

comments 35(a)(2)–1 through –4, which 

would be renumbered as comments 

35(a)(2)(ii)–1 through –4 for 

organizational purposes. 

Proposed comment 32(a)(1)(i)–3 

provides guidance on the determination 

of the average prime offer rate for openend credit plans by clarifying that 

creditors use the average prime offer 

rate for the most closely comparable 

closed-end mortgage loan based on 

applicable loan characteristics and other 

loan pricing terms. The proposal also 

provides illustrative examples to 

facilitate compliance. 

The Bureau believes this approach is 

consistent with TILA section 

103(bb)(1)(A)(i), which requires a 

comparison of mortgage transactions’ 

APRs to the average prime offer rate 

without distinguishing between closedend and open-end credit. The APOR is 

currently calculated only for closed-end 

mortgage products, and the Bureau is 

unaware of any publicly-available 

surveys of pricing data for open-end 

credit plans on which to calculate a 

separate APOR for open-end credit.31

Home-equity lines of credit with a 

variable rate feature reference an index 

to determine the interest rate, such as 

the average prime rate from a consensus 

of certain lenders as published by the 

Wall Street Journal (the ‘‘prime rate’’). 

Based on historical data, the Bureau 

understands that the average prime offer 

rate for one-year adjustable rate 

mortgages and the prime rate generally 

have been comparable. The Bureau 

further understands that many lenders 

use the prime rate as a reference index. 

Therefore, the Bureau believes that 

reliance on the APOR for the most 

closely comparable closed-end mortgage 

loan will provide a reasonable 

benchmark and facilitate compliance, 

since the tables for average prime offer 

rates are readily available and any rate 

spread calculators developed for closedend mortgages may be adapted to openend transactions as well. However, the 

Bureau solicits data or comment on any 

aspect of determining the average prime 

offer rate for open-end credit plans. In 

particular, the Bureau solicits comment 

on whether an alternative reference rate 

would better meet the objectives of the 

APR trigger for open-end credit and 

would facilitate compliance. 

As noted above, proposed 

§ 1026.32(a)(1)(i)(B) provides that the 

annual percentage rate threshold trigger 

is 8.5 percentage points over average 

prime offer rate for first-lien mortgages 

if the dwelling is personal property and 

the total loan amount is less than 

$50,000. Proposed comment 32(a)(1)(i)– 


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32The Bureau’s proposed inclusion in points and 

fees for high-cost mortgages of ‘‘the total points and 

fees payable in connection with the transaction’’ is 

consistent with the proposed inclusion in points 

and fees for qualified mortgages of ‘‘the total points 

and fees * * * payable in connection with the 

loan’’ in the Board’s 2011 ATR Proposal. See 76 FR 

27390, 27456 (May 11, 2011) (implementing TILA 

section 129C(b)(2)(A)(vii)). 

33 In this regard, the Bureau notes that section 

1412 of the Dodd-Frank Act retained the phrase 

‘‘total loan amount’’ for purposes of determining 

whether a closed-end mortgage complies with the 

points and fees restrictions applicable to qualified 

mortgages. See TILA section 129C(b)(2)(A)(vii). 

34The Dodd-Frank Act renumbered TILA section 

103(aa)(1)(B)(i)–(ii) concerning points and fees for 

high-cost mortgages as 103(bb)(1)(A)(ii)(I)–(II). 

However, the Dodd-Frank Act did not amend TILA 

section 103(aa)(3) (the provision that directs the 

points and fees dollar figure to be adjusted annually 

for inflation) to reflect this new numbering. To give 

meaning to the statute as amended, the Bureau 

interprets the authority provided to it in amended 

TILA section 103(bb)(3) as authority to adjust 

annually for inflation the dollar figure prescribed in 

amended TILA section 103(bb)(1)(A)(ii)(II). 

4 clarifies that the guidance for total 

loan amount under proposed 

§ 1026.32(a)(1)(i)(B) is consistent with 

the guidance addressing total loan 

amount that is provided in proposed 

§ 1026.32(b)(6) and comment 32(b)(6)–1. 

32(a)(1)(ii) 

Existing TILA section 103(aa)(1)(B) 

provides that a mortgage is subject to 

the restrictions and requirements of 

HOEPA if the total points and fees 

payable by the consumer at or before 

loan closing exceed the greater of eight 

percent of the total loan amount or 

$400. See 15 U.S.C. 1602(aa)(1)(B); 

§ 1026.32(a)(1)(ii). Prior to the transfer 

date under the Dodd-Frank Act, the 

Board adjusted the $400 figure annually 

for inflation since 1996. TILA section 

103(aa)(3), 15 U.S.C. 1602(aa)(3). For 

2012, the Board adjusted the $400 figure 

to $611 from $592, where it had been set 

for 2011. See 76 FR 35723, 35723–24 

(June 20, 2011); comment 32(a)(1)(ii)– 

2.xvii. 

Section 1431(a) of the Dodd-Frank Act 

amended TILA section 103(aa)(1)(B) to 

provide that a mortgage is a high-cost 

mortgage subject to HOEPA if the total 

points and fees payable in connection 

with the transaction exceed either five 

percent or eight percent of the total 

transaction amount, depending on the 

transaction. Specifically, under TILA 

section 103(bb)(1)(A)(ii)(I), a transaction 

with a total transaction amount of 

$20,000 or more is a high-cost mortgage 

if the total points and fees payable in 

connection with the transaction exceed 

five percent of the total transaction 

amount. Under TILA section 

103(bb)(1)(A)(ii)(II), a transaction with a 

total transaction amount of less than 

$20,000 is a high-cost mortgage if the 

total points and fees payable in 

connection with the transaction exceed 

eight percent of the total transaction 

amount or $1,000, whichever is less. 

The proposal implements the DoddFrank Act’s amendments to TILA’s 

points and fees trigger for high-cost 

mortgages in proposed 

§ 1026.32(a)(1)(ii)(A)–(B). 

Payable in Connection With the 

Transaction 

Section 1431(a) of the Dodd-Frank Act 

amended the high-cost mortgage points 

and fees trigger in TILA section 

103(aa)(1)(B), 15 U.S.C. 1602(aa)(1)(B), 

by providing for the inclusion in points 

and fees of ‘‘the total points and fees 

payable in connection with the 

transaction,’’ as opposed to ‘‘the total 

points and fees payable by the consumer 

at or before closing’’ (emphases added). 

The proposal implements this statutory 

change in proposed § 1026.32(a)(1)(ii). 

The Bureau notes that the practical 

result of this change is that any item 

listed in the points and fees definition 

under proposed § 1026.32(b)(1) and (3) 

must, unless otherwise specified, be 

counted toward the points and fees 

threshold for high-cost mortgages even 

if it is payable after consummation or 

account opening.32 See the section-bysection analysis to proposed 

§ 1026.32(b)(1) and (3), below, for 

further details concerning the definition 

of points and fees for high-cost 

mortgages. 

Total Transaction Amount 

Section 1431(a) of the Dodd-Frank Act 

amended TILA section 103(aa)(1)(B), 15 

U.S.C. 1602(aa)(1)(B), to provide that a 

mortgage is a high-cost mortgage if its 

total points and fees exceed a certain 

percentage of the ‘‘total transaction 

amount,’’ rather than the ‘‘total loan 

amount.’’ TILA section 103(bb)(1)(A)(ii). 

The Dodd-Frank Act did not define the 

term ‘‘total transaction amount.’’ 

However, the Bureau believes that the 

phrase reflects the fact that HOEPA, as 

amended, applies to both closed- and 

open-end credit transactions secured by 

a consumer’s principal dwelling.33

Notwithstanding the statutory change, 

for consistency with existing Regulation 

Z terminology, proposed 

§ 1026.32(a)(1)(ii) provides that a highcost mortgage is one for which the total 

points and fees exceed a certain 

percentage of the ‘‘total loan amount.’’ 

For organizational purposes, the Bureau 

proposes to move the definition of ‘‘total 

loan amount’’ in existing comment 

32(a)(1)(ii)–1 into proposed 

§ 1026.32(b)(6) and comment 

32(b)(6)(i)–1. As discussed below in the 

section-by-section analysis to proposed 

§ 1026.32(b)(6), the Bureau also 

proposes to amend the definition of 

‘‘total loan amount’’ for closed-end 

mortgage loans and to clarify the 

meaning of ‘‘total loan amount’’ for 

open-end credit plans. 

Annual Adjustment of $1,000 Amount 

The Bureau proposes to re-number 

existing comment 32(a)(1)(ii)–2 as 

proposed comment 32(a)(1)(ii)–1 for 

organizational purposes, as well as to 

revise it in several respects to reflect 

proposed revisions to § 1026.32(a)(1)(ii). 

First, proposed comment 32(a)(1)(ii)–1 

replaces references to the pre-DoddFrank statutory figure of $400 with 

references to the new statutory figure of 

$1,000.34 In addition, consistent with 

the Dodd-Frank Act’s transfer of 

rulemaking authority for HOEPA from 

the Board to the Bureau, proposed 

comment 32(a)(1)(ii)–1 states that the 

Bureau will publish and incorporate 

into commentary the required annual 

adjustments to the $1,000 figure after 

the June figures become available each 

year. Finally, the proposal retains in 

proposed comment 32(a)(1)(ii)–2 the 

paragraphs in existing comment 

32(a)(1)(ii)–2 enumerating the $400 

figure as adjusted for inflation from 

1996 through 2012. The Bureau believes 

that it is useful to retain the list of 

historical adjustments to the $400 figure 

for reference, notwithstanding that TILA 

section 103(bb)(1)(A)(ii)(II) increases the 

dollar figure from $400 to $1,000. 

32(a)(1)(iii) 

Existing TILA section 103(aa)(1), 15 

U.S.C. 1602(aa)(1), provides that a 

mortgage is a high-cost mortgage if 

either its APR or its total points and fees 

exceed certain statutorily prescribed 

thresholds. Section 1431(a) of the DoddFrank Act amended TILA to add that a 

transaction is also a high-cost mortgage 

if the credit transaction documents 

permit the creditor to charge or collect 

prepayment fees or penalties more than 

36 months after the transaction closing, 

or if such fees or penalties exceed, in 

the aggregate, more than two percent of 

the amount prepaid. TILA section 

103(bb)(1)(A)(iii). Proposed 

§ 1026.32(a)(1)(iii) implements TILA 

section 103(bb)(1)(A)(iii) with several 

minor clarifications. 

First, proposed § 1026.32(a)(1)(iii) 

provides that the determination as to 

whether the creditor can charge the 

specified prepayment penalty is to be 

made under the ‘‘terms of the loan 

contract or open-end credit agreement,’’ 

rather than under the ‘‘credit transaction 

documents.’’ This phrasing is proposed 

to reflect the application of proposed 

§ 1026.32(a)(1)(iii) to both closed- and 


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35The Dodd-Frank Act’s amendments include 

adding a prepayment penalty trigger for high-cost 

mortgages and prohibiting prepayment penalties for 

such mortgages (TILA sections 103(bb)(1)(A)(iii) 

and 129(c)), restricting or prohibiting prepayment 

penalties for most closed-end mortgage loans (TILA 

section 129C(c)), and including prepayment 

penalties in the points and fees calculations for 

high-cost mortgages and qualified mortgages (TILA 

sections 103(bb)(4) and 129C(b)(2)(C), respectively). 

See also the section-by-section analysis to proposed 

§ 1026.32(b)(1) and (3) and proposed 

§ 1026.32(b)(8), below. 

open-end transactions, and for 

consistency with Regulation Z. 

Proposed § 1026.32(a)(1)(iii) also crossreferences the definition of prepayment 

penalty in proposed § 1026.32(b)(8). 

Finally, proposed § 1026.32(a)(1)(iii) 

clarifies that the creditor must include 

any prepayment penalty that is 

permitted to be charged more than 36 

months ‘‘after consummation or account 

opening,’’ rather than after ‘‘transaction 

closing.’’ For consistency and clarity, 

the Bureau proposes using the terms 

‘‘consummation’’ and ‘‘account 

opening’’ instead of ‘‘transaction 

closing’’ for closed- and open-end 

transactions, respectively. 

Proposed comment 32(a)(1)(iii)–1 

explains how the prepayment penalty 

trigger for high-cost mortgages in 

proposed § 1026.32(a)(1)(iii) interacts 

with the ban on prepayment penalties 

for high-cost mortgages in amended 

TILA section 129(c), 15 U.S.C. 1639(c), 

which the Bureau proposes to 

implement in § 1026.32(d)(6). 

Specifically, proposed comment 

32(a)(1)(iii)–1 explains that § 1026.32 

implicates prepayment penalties in two 

main ways. First, under proposed 

§ 1026.32(a)(1)(iii), a closed- or openend transaction is a high-cost mortgage 

if, under the terms of the loan contract 

or credit agreement, a creditor can 

charge either (i) a prepayment penalty 

more than 36 months after 

consummation or account opening, or 

(ii) total prepayment penalties that 

exceed two percent of any amount 

prepaid. Second, if a transaction is a 

high-cost mortgage by operation of any 

of the triggers in proposed 

§ 1026.32(a)(1) (i.e., the APR, points and 

fees, or prepayment penalty triggers), 

then under proposed § 1026.32(d)(6), 

the transaction may not include a 

prepayment penalty. Proposed comment 

32(a)(1)(iii)–1 clarifies that proposed 

§ 1026.32(a)(1)(iii) thus effectively 

establishes a maximum period during 

which a prepayment penalty may be 

imposed, and a maximum prepayment 

penalty amount that may be imposed, 

on a transaction that may be subject to 

HOEPA coverage (i.e., a closed- or openend transaction secured by a consumer’s 

principal dwelling, other than a reverse 

mortgage transaction). 

Proposed comment 32(a)(1)(iii)–1 also 

cross-references proposed § 1026.43(g) 

(proposed § 226.43(g) in the Board’s 

2011 ATR Proposal), which proposes to 

implement new TILA section 129C(c) by 

(1) prohibiting prepayment penalties for 

most closed-end mortgages unless the 

transaction is a fixed-rate, qualified 

mortgage with an annual percentage rate 

that meets certain statutorily prescribed 

thresholds, and (2) restricting 

prepayment penalties even for such 

qualified mortgages to three percent, 

two percent and one percent of the 

amount prepaid during the first, second, 

and third years following 

consummation, respectively. See 76 FR 

27390, 27472–78 (May 11, 2011). As 

discussed further below in the sectionby-section analysis to proposed 

§ 1026.32(b)(8), the Bureau believes that 

the cumulative effect of the Dodd-Frank 

Act’s amendments to TILA concerning 

prepayment penalties may be to limit 

the amount of prepayment penalties that 

may be charged in connection with most 

closed-end mortgage loans to amounts 

that would be unlikely to reach the 

high-cost mortgage prepayment penalty 

trigger.35 The Bureau nonetheless 

requests comment on whether 

additional guidance concerning the 

calculation of prepayment penalties for 

purposes of proposed § 1026.32(b)(1)(iii) 

is needed. 

Proposed comment 32(a)(1)(iii)–2 

illustrates how to apply proposed 

§ 1026.32(a)(1)(iii) in the case of an 

open-end credit plan. To begin, 

proposed comment 32(a)(1)(iii)–2 

clarifies that, if the terms of an open-end 

credit agreement allow for a prepayment 

penalty that exceeds two percent of the 

initial credit limit for the plan, the 

agreement will be deemed to permit a 

creditor to charge a prepayment penalty 

that exceeds two percent of the ‘‘amount 

prepaid’’ within the meaning of 

proposed § 1026.32(a)(1)(iii). The 

comment provides three examples to 

illustrate the rule. 

Proposed comment 32(a)(1)(iii)–2.i 

explains that a home-equity line of 

credit with an initial credit limit of 

$10,000 is a high-cost mortgage under 

proposed § 1026.32(a)(1)(iii) if the terms 

of the plan permit the creditor to charge 

the consumer a flat fee of $500 if the 

consumer terminates the plan sooner 

than three years after opening the 

account. The $500 flat fee is a 

prepayment penalty (see proposed 

§ 1026.32(b)(8)(ii), below) that exceeds 

two percent of the total amount of the 

initial credit limit of $10,000, which is 

$200. 

Proposed comment 32(a)(1)(iii)–3.ii 

sets forth a second example. This 

example assumes a home-equity line of 

credit with an initial credit limit of 

$10,000 and a ten-year term. The terms 

of the plan permit the creditor to charge 

the consumer a $200 fee if the consumer 

terminates the plan prior to the 

expiration of the ten-year term. Even 

though the $200 prepayment penalty is 

less than two percent of the initial 

$10,000 credit limit, the home-equity 

line of credit is a high-cost mortgage 

under proposed § 1026.32(a)(1)(iii) 

because the terms of the plan permit the 

creditor to charge the penalty longer 

than three years after the consumer 

opens the account. 

Finally, proposed comment 

32(a)(1)(iii)–3.iii assumes that the terms 

of an open-end credit plan with an 

initial credit limit of $150,000 permit 

the creditor to charge the consumer for 

any closing costs paid by the creditor if 

the consumer terminates the plan less 

than 36 months after account opening. 

In the example, the creditor pays $1,000 

in closing costs. Of the $1,000, the 

creditor pays $800 to cover bona fide 

third-party charges and $200 to cover 

origination costs incurred by the 

creditor or its affiliates. Under proposed 

§ 1026.32(b)(8)(ii), the ability to charge 

the consumer $800 upon early 

termination to cover bona fide thirdparty charges is not a prepayment 

penalty, but the ability to charge $200 

for the creditor’s or its affiliate’s 

origination costs is a prepayment 

penalty. The total prepayment penalty 

of $200 is less than two percent of the 

plan’s initial $150,000 credit limit, and 

under the terms of the plan the penalty 

does not apply if the consumer 

terminates the plan more than 36 

months after account opening. Thus, the 

plan is not a high-cost mortgage under 

§ 1026.32(a)(1)(iii). 

32(a)(2) Determination of Transaction 

Coverage Rate or Annual Percentage 

Rate 

TILA section 103(bb)(1)(B) specifies 

the interest rate used to determine the 

annual percentage rate for purposes of 

the APR threshold under TILA section 

103(bb)(1)(A)(i). TILA section 

103(bb)(1)(B) requires that: (1) In 

connection with a fixed-rate transaction, 

the annual percentage rate must be 

based on the interest rate in effect on the 

date of consummation; (2) in connection 

with a transaction with a rate that varies 

solely in accordance with an index, the 

annual percentage rate must be based on 

the interest rate determined by adding 

the maximum margin permitted at any 

time during the loan agreement to the 

index rate in effect on the date of 

consummation; and (3) in connection 

with any other transaction in which the 


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rate may vary at any time during the 

term of the loan for any reason, the 

annual percentage rate must be based on 

the maximum interest rate that may be 

charged during the term of the loan. 

The Bureau proposes to implement 

these provisions in proposed 

§ 1026.32(a)(2). Specifically, proposed 

§ 1026.32(a)(2)(i) requires that for 

purposes of the APR trigger, the 

calculation of the transaction coverage 

rate or annual percentage rate, as 

applicable, for a fixed-rate transaction 

must be based on the interest rate in 

effect on the date of consummation or 

account opening. Proposed 

§ 1026.32(a)(2)(ii) requires that for a 

variable-rate transaction in which the 

interest rate may vary during the term 

of the loan or plan in accordance with 

an index outside the creditor’s control, 

the transaction coverage rate or annual 

percentage rate, as applicable, must be 

based on an interest rate that is 

determined by adding the maximum 

margin permitted at any time during the 

term of the loan or plan to the index rate 

in effect on the date of consummation 

or account opening. Proposed 

§ 1026.32(a)(2)(iii) requires that for a 

loan in which the interest rate may vary 

during the term of the loan, other than 

a loan as described in § 1026.32(a)(2)(ii), 

the transaction coverage rate or annual 

percentage rate, as applicable, must be 

based on the maximum interest rate that 

may be imposed during the term of the 

loan. 

As noted above, the Bureau proposes 

to reference in proposed § 1026.32(a)(2) 

the ‘‘transaction coverage rate’’ for 

consistency with Alternative 2 to 

proposed § 1026.32(a)(1)(i). The Bureau 

also notes that if the Bureau does not 

adopt Alternative 2, the references to 

‘‘transaction coverage rate’’ in proposed 

§ 1026.32(a)(2) would be removed 

accordingly. In addition, the Bureau 

proposes to incorporate references to 

‘‘account opening’’ in proposed 

§ 1026.32(a)(2) to clarify that the 

requirement is also applicable to openend credit plans. Furthermore, the 

Bureau proposes to clarify in proposed 

§ 1026.32(a)(2)(ii) that if an interest rate 

varies in accordance with an index, the 

index must be outside the creditor’s 

control. The Bureau believes this 

clarification is necessary and 

appropriate to effectuate the statutory 

distinction in treatment between rates 

that vary with an index and those that 

‘‘may vary at any time during the term 

of the loan for any reason.’’ 

Additionally, the Bureau is proposing to 

adopt this clarification pursuant to its 

authority under TILA 105(a) to prevent 

circumvention of coverage under 

HOEPA. The Bureau notes that if the 

index were in the creditor’s control, 

such as the creditor’s own prime 

lending rate, a creditor could set a low 

index rate for purposes of 

§ 1026.32(a)(2)(ii), which would not 

trigger coverage as a high-cost mortgage. 

However, subsequent to consummation, 

the creditor could set a higher index 

rate, at any time, which would have 

triggered coverage as a high-cost 

mortgage under § 1026.32(a)(2)(ii). 

Accordingly, the Bureau notes that if the 

interest rate varies in accordance with 

an index that is under the creditor’s 

control, the creditor would determine 

the annual percentage rate under 

§ 1026.32(a)(2)(iii), not 

§ 1026.32(a)(2)(ii). 

Proposed comment 32(a)(2)–1 clarifies 

that, notwithstanding the existing 

guidance in comment 17(c)–1 regarding 

the calculation of the annual percentage 

rate for discounted and premium 

variable-rate loans, § 1026.32(a)(2) 

requires a different calculation of the 

transaction coverage rate or annual 

percentage rate, as applicable, for 

purposes of the high-cost mortgage APR 

threshold. 

Proposed comment 32(a)(2)–2 clarifies 

that for purposes of § 1026.32(a)(2), the 

annual percentage rate for an open-end 

transaction must be determined in 

accordance with § 1026.32(a)(2), 

regardless of whether there is an 

advance of funds at account opening. 

Proposed comment 32(a)(2)–2 further 

clarifies that § 1026.32(a)(2) does not 

require the determination of the annual 

percentage rate for any extensions of 

credit subsequent to account opening. In 

other words, any draw on the credit line 

subsequent to account opening is not 

considered to be a separate open-end 

‘‘transaction’’ for purposes of 

determining annual percentage rate 

threshold coverage. 

Proposed comment 32(a)(2)–3 

provides additional guidance on the 

application of § 1026.32(a)(2)(ii) and (iii) 

to mortgage transactions with interest 

rates that vary. Specifically, proposed 

comment 32(a)(2)–3.i provides that 

§ 1026.32(a)(2)(ii) applies when the 

interest rate is determined by an index 

that is outside the creditor’s control. In 

addition, proposed comment 32(a)(2)– 

3.i clarifies that even if the transaction 

has a fixed-rate discounted introductory 

or initial interest rate, § 1026.32(a)(2)(ii) 

requires adding the contractual 

maximum margin to the fully indexed 

interest rate, and not the introductory 

rate. Furthermore, for purposes of 

determining the maximum margin, 

proposed comment 32(a)(2)–3.i clarifies 

that margins that might apply if a 

preferred rate is terminated must be 

used, such as where a specified higher 

margin will apply if the borrower’s 

employment with the creditor ends. 

Proposed comment 32(a)(2)–3.ii 

clarifies that § 1026.32(a)(2)(iii) applies 

when the interest rates applicable to a 

transaction may vary, except as 

described in § 1026.32(a)(2)(ii). 

Proposed comment 32(a)(2)–3.ii thus 

specifies that § 1026.32(a)(2)(iii) applies, 

for example, to a closed-end mortgage 

loan when interest rate changes are at 

the creditor’s discretion, or where 

multiple fixed rates apply to a 

transaction, such as a stepped-rate 

mortgage. 

Proposed comment 32(a)(2)–4 clarifies 

the application of § 1026.32(a)(2) for 

home-equity plans that offer fixed-rate 

and term payment options. The Bureau 

understands that some variable-rate 

HELOC plans may permit borrowers to 

repay a portion or all of the balance at 

a fixed-rate and over a specified period 

of time. Proposed comment 32(a)(2)–4 

thus provides that, if a HELOC has only 

a fixed rate during the draw period, a 

creditor must use that fixed rate to 

determine the plan’s APR, as required 

by proposed § 1026.32(a)(2)(i). If during 

the draw period, however, a HELOC has 

a variable rate but also offers a fixed-rate 

and -term payment option, a creditor 

must use the terms applicable to the 

variable-rate feature to determine the 

plan’s APR, as described in proposed 

§ 1026.32(a)(2)(ii). 

The Bureau seeks comment on its 

proposed rules for determining the APR 

for HOEPA coverage, including on 

whether any aspect of the proposal 

could result in unwarranted, overinclusive HOEPA coverage of HELOCs. 

In particular, the Bureau notes that 

§ 1026.40(f) and its commentary 

generally prohibit creditors from 

changing the APR on a HELOC unless 

the change is based on a publiclyavailable index outside the creditor’s 

control or unless the rate change is 

specifically set forth in the agreement, 

such as stepped-rate plans, in which 

specified fixed rates are imposed for 

specified periods. Therefore, the Bureau 

understands that these HELOC 

restrictions effectively limit the 

application of proposed 

§ 1026.32(a)(2)(iii) primarily to certain 

types of closed-end mortgage loans. The 

Bureau notes that applying proposed 

§ 1026.32(a)(2)(iii) to determine the APR 

for a variable-rate HELOC could result 

in over-inclusive coverage of HELOCs 

under HOEPA because the maximum 

possible interest rate for many variablerate HELOCs is pegged to the maximum 

interest rate permissible under State 

law. That interest rate, in turn, likely 

would cause the plan’s APR to exceed 

HOEPA’s APR threshold. Therefore, the 


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36The Dodd-Frank Act renumbered TILA section 

103(aa)(1)(B) concerning points and fees for highcost mortgages as 103(bb)(1)(A)(ii). However, the 

Dodd-Frank Act did not amend existing TILA 

section 103(aa)(4) (the provision that defines points 

and fees) to reflect this new numbering. Thus, as 

amended, TILA section 103(bb)(4) provides that 

‘‘[f]or purposes of paragraph (1)(B), points and fees 

shall include * * *’’ Amended TILA section 

103(bb)(1)(B), however, concerns the calculation of 

the annual percentage rate. To give meaning to the 

statute as amended, the Bureau interprets amended 

TILA section 103(bb)(4) as cross-referencing the 

points and fees trigger in amended TILA section 

103(bb)(1)(A)(ii)(II). 

37TILA section 129C(b)(2)(A)(vii). 

38More specifically, TILA section 129C(b)(2)(C)(i) 

cross-references the definition of points and fees in 

15 U.S.C. 1602(aa)(4), which the Dodd-Frank Act renumbered as TILA section 103(bb)(4), 15 U.S.C. 

1602(bb)(4). 

39The Board noted that its proposed amendments 

to § 1026.32(b)(1) and (2) were limited to the 

definition of points and fees and that the 2011 ATR 

Proposal was not proposing to implement any of the 

other high-cost mortgage amendments in TILA. See 

id. at 27398. Thus, the Board noted that, if its ATR 

Proposal were finalized prior to the rule on highcost mortgages, the calculation of the points and 

fees threshold for qualified mortgages and high-cost 

mortgages would be different, but the baseline 

definition of points and fees would be the same. See 

id. at 27399. For example, the Board’s 2011 ATR 

Proposal did not propose to implement the 

statutory changes to the points and fees threshold 

for high-cost mortgages that exclude from the 

threshold calculation ‘‘bona fide third-party charges 

not retained by the mortgage originator, creditor, or 

an affiliate of the creditor or mortgage originator’’ 

and that permit creditors to exclude certain ‘‘bona 

fide discount points,’’ even though the Board 

proposed to implement identical provisions in the 

Dodd-Frank Act defining the points and fees 

threshold for qualified mortgages. See 76 FR 27390, 

27398–99. 

Bureau solicits comment on whether 

there are any circumstances pursuant to 

which the terms of a variable-rate 

HELOC might warrant application of 

proposed § 1026.32(a)(2)(iii) and, if so, 

whether additional clarification is 

necessary to avoid unwarranted 

coverage of HELOCs under HOEPA. 

32(b) Definitions 

32(b)(1) 

Background 

Existing TILA section 103(aa)(4), 15 

U.S.C. 1602(aa)(4), defines the charges 

that must be included in points and fees 

for purposes of determining whether a 

transaction exceeds the HOEPA points 

and fees threshold. Section 1431(c)(1) of 

the Dodd-Frank Act revised and added 

certain items to this definition. See 

TILA section 103(bb)(4).36 At the same 

time, as noted above in part I.E, section 

1412 of the Dodd-Frank Act amended 

TILA to require creditors to consider 

consumers’ ability to repay and to create 

a new type of closed-end mortgage—a 

‘‘qualified mortgage.’’ Among other 

requirements, in order to be considered 

a qualified mortgage, points and fees 

payable in connection with the loan 

may not exceed 3 percent of the total 

loan amount.37 In turn, ‘‘points and 

fees’’ for purposes of qualified 

mortgages means ‘‘points and fees’’ as 

defined by HOEPA in existing TILA 

section 103(aa)(4). See TILA section 

129C(b)(2)(A)(vii) and (C)(i).38

As part of its 2011 ATR Proposal to 

implement new TILA section 

129C(b)(2)(C)(i) defining points and fees 

for qualified mortgages, the Board also 

proposed to implement the Dodd-Frank 

Act’s amendments to the definition of 

points and fees in existing TILA section 

103(aa)(4). Specifically, the Board 

proposed to amend § 226.32(b)(1) and 

(2) and to revise and add corresponding 

commentary. See 76 FR 27390, 27398– 

06, 27481–82, 27487–27489 (May 11, 

2011).39

The Board’s 2011 ATR Proposal 

transferred to the Bureau on July 21, 

2011 and its comment period closed on 

July 22, 2011. As noted above in part 

I.E, ‘‘Other Rulemakings,’’ the Bureau is 

in the process of finalizing the Board’s 

2011 ATR Proposal, including 

evaluating comments received 

concerning the Board’s proposed 

amendments to § 226.32(b)(1) and (2). 

The Bureau believes that issuing 

multiple, concurrent proposals to 

implement the Dodd-Frank Act’s 

amendments to existing TILA section 

103(aa)(4) concerning the definition of 

points and fees for high-cost mortgages 

and qualified mortgages has the 

potential to cause confusion. In order to 

minimize such confusion and for ease of 

reference, the Bureau republishes in this 

proposal the Board’s proposed 

amendments to § 226.32(b)(1) and (2) 

substantially as set forth in the Board’s 

2011 ATR Proposal, with adjustments 

only to reflect the application of the 

proposed provisions to high-cost 

mortgages, to coordinate this proposal 

with the other mortgage-related 

rulemakings currently underway at the 

Bureau, and to conform terminology to 

existing Regulation Z provisions. These 

adjustments are noted in the section-bysection analysis to proposed 

§ 1026.32(b)(1) and (2), below. The 

Bureau is particularly interested in 

comments concerning newly-proposed 

language and the application of the 

definitions in proposed § 1026.32(b)(1) 

and (2) to the high-cost mortgage 

context. 

Limitation to Closed-End Mortgage 

Loans 

The proposal proposes to amend 

existing § 1026.32(b)(1) to clarify that 

the charges listed in proposed 

§ 1026.32(b)(1)(i) through (vi) are the 

charges that must be included in the 

points and fees calculation for closedend mortgage loans. Proposed 

§ 1026.32(b)(3) sets forth a separate 

definition of points and fees for home 

equity lines of credit. See the sectionby-section analysis to proposed 

§ 1026.32(b)(3), below. 

32(b)(1)(i) 

Existing TILA section 103(aa)(4)(A), 

15 U.S.C. 1602(aa)(4)(A), provides that 

points and fees include all items 

included in the finance charge, except 

interest or the time-price differential. 

Existing TILA section 103(aa)(4)(A) is 

implemented in § 1026.32(b)(1)(i). The 

Dodd-Frank Act did not amend TILA 

section 103(aa)(4)(A), but the Board 

nevertheless proposed certain clarifying 

revisions to § 226.32(b)(1)(i) in its 2011 

ATR Proposal. See 76 FR 27390, 27400, 

27481, 27487–88 (May 11, 2011). In 

addition, the Board proposed to 

implement in new § 226.32(b)(1)(i)(B) 

new TILA section 103(bb)(1)(C), which 

excludes from the calculation of points 

and fees certain types and amounts of 

third-party insurance premiums. Id. at 

27400–02, 27481, 27487–88. The 

Bureau’s proposed § 1026.32(b)(1)(i) and 

comments 32(b)(1)(i)–1 through –4 

republish the Board’s proposed 

revisions and additions, with the 

changes discussed below. 

Changes To Accommodate the Bureau’s 

Proposed Simpler, More Inclusive 

Finance Charge 

As noted above in part I.E, ‘‘Other 

Rulemakings,’’ and the section-bysection analysis to proposed 

§ 1026.32(a)(1)(i), the Bureau’s 2012 

TILA–RESPA Proposal proposes to 

adopt a simpler, more inclusive 

definition of the finance charge for 

closed-end transactions secured by real 

property or a dwelling, similar to what 

the Board proposed in its 2009 ClosedEnd Proposal. See 74 FR 43232, 43241– 

45 (Aug. 26, 2009). Under the Bureau’s 

2012 TILA–RESPA Proposal, the 

following fees that currently are 

specifically excluded from the finance 

charge would be included for closedend credit transactions secured by real 

property or a dwelling: Closing agent 

charges, application fees charged to all 

applicants for credit (whether or not 

credit was extended), taxes or fees 

required by law and paid to public 

officials relating to security interests, 

premiums for insurance obtained in lieu 

of perfecting a security interest, taxes 

imposed as a condition of recording the 

instruments securing the evidence of 

indebtedness, and various real-estate 

related fees. Because the definition of 


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40 Voluntary credit insurance premiums and 

voluntary debt cancellation charges or premiums 

are additional charges that are not currently 

included in the finance charge, but that would be 

included for closed-end credit transactions secured 

by real property or a dwelling under the more 

inclusive finance charge. Such premiums, however, 

are already expressly included in points and fees 

pursuant to § 1026.32(b)(1)(iv). 

41As discussed in the section-by-section analysis 

to proposed § 1026.32(b)(3), below, the Bureau does 

not propose to incorporate the exclusion of 

mortgage insurance premiums into the definition of 

points and fees for open-end credit plans. 

points and fees includes, as its starting 

point, all items included in the finance 

charge, a potential consequence of 

adopting the more inclusive test for 

determining the finance charge is that 

more loans might exceed HOEPA’s 

points and fees threshold. See the 

Board’s 2009 Closed-End Proposal, 74 

FR 43232, 43241–45 (Aug. 26, 2009).40

In its 2010 Mortgage Proposal, 75 FR 

58539 (Sept. 24, 2010), the Board 

analyzed the potential impact that a 

more inclusive definition of finance 

charge might have on, among other 

things, the number of loans meeting 

HOEPA’s thresholds. After having 

reviewed comments received and other 

market data obtained following 

publication of the 2009 Closed-End 

Proposal, the Board in its 2010 Mortgage 

Proposal proposed to preserve existing 

HOEPA coverage, notwithstanding the 

proposed use of the more inclusive 

finance charge for disclosure purposes. 

See id. at 58637–38. For example, the 

Board proposed to retain the existing 

exclusion of certain reasonable thirdparty charges in the points and fees 

definition for purposes of determining 

HOEPA coverage, even though such fees 

would be included in the expanded 

finance charge for disclosure purposes. 

See id. 

For the reasons set forth in the 

Board’s 2010 Mortgage Proposal, the 

Bureau acknowledges that the more 

inclusive finance charge proposed in the 

Bureau’s 2012 TILA–RESPA Proposal 

could expand the number of closed-end 

transactions subject to HOEPA because 

of points and fees. As noted above, very 

few HOEPA loans are made, in part 

because assignees of HOEPA loans are 

subject to all claims and defenses a 

consumer could bring against the 

original creditor. The Bureau therefore 

seeks comment on whether to amend 

§ 1026.32(b)(1)(i) and comment 

32(b)(1)(i)–1 as proposed to prevent 

expansion of the types of charges 

included within the definition of points 

and fees for HOEPA coverage in the 

event that the Bureau adopts the more 

inclusive finance charge. 

Accordingly, as a starting point, 

proposed § 1026.32(b)(1)(i) includes in 

points and fees for closed-end mortgage 

loans all items included in the finance 

charge under § 1026.4(a) and (b). 

However, proposed § 1026.32(b)(1)(i) 

then expressly excludes from closedend points and fees the charges that 

would be brought into points and fees 

solely by operation of the more 

inclusive finance charge. Specifically, 

proposed § 1026.32(b)(1)(i) expressly 

excludes from points and fees the items 

described in § 1026.4(c) through (e), 

except to the extent that other 

paragraphs of § 1026.32(b)(1) 

specifically require those items to be 

included in points and fees. Proposed 

§ 1026.32(b)(1)(i)(A) and (B) retain the 

statutory exclusion from points and fees 

of interest or the time-price differential 

and premiums or other charges for 

certain mortgage insurance. Proposed 

comment 32(b)(1)(i)–1 clarifies that 

charges must be included in points and 

fees only if they are included in the 

finance charge under § 1026.4(a) and (b), 

without reference to any other provision 

of § 1026.4. 

The Bureau does not believe that this 

proposed amendment to the definition 

of points and fees for closed-end 

mortgage loans constitutes an 

adjustment or exemption requiring the 

Bureau to invoke its statutory authority 

under TILA section 105(a). Rather, it is 

the more inclusive finance charge 

proposal itself that amounts to an 

adjustment to TILA. Preserving 

Regulation Z’s existing treatment of 

points and fees for HOEPA coverage 

purposes would merely keep the 

regulation consistent with TILA in that 

regard, in spite of the adjustment to the 

finance charge that would be made for 

disclosure purposes. Indeed, the Bureau 

notes that the proposed amendment is 

consistent with the Dodd-Frank Act, 

which amended TILA section 103(aa)(1) 

to exclude ‘‘bona fide third party 

charges’’ from the points and fees 

calculation. The Bureau seeks comment 

on its proposed approach. The Bureau is 

considering and seeks comment on 

whether, if the proposed amendment 

were not adopted, the general exclusion 

of bona fide third-party charges from 

points and fees (see the section-bysection analysis to proposed 

§ 1026.32(b)(5), below) would be 

sufficient to retain the current scope of 

points and fees coverage for high-cost 

mortgages notwithstanding the Bureau’s 

proposed more inclusive finance charge. 

Proposed Amendments for Clarity and 

Consistency 

The Bureau proposes several 

additional changes to § 1026.32(b)(1)(i) 

and comments 32(b)(1)(i)–1 through –4 

for clarity and consistency. Among 

other non-substantive changes, the 

Bureau replaces a reference to loan 

‘‘closing’’ with a reference to 

‘‘consummation’’ in proposed 

§ 1026.32(b)(1)(i)(B)(3) for consistency 

with Regulation Z. In addition, 

proposed comment 32(b)(1)(i)–3.iii, 

which sets forth an example to clarify 

the types and amounts of upfront 

private mortgage insurance premiums 

that are excluded from points and fees 

under § 1026.32(b)(1)(i)(B), is amended 

to replace a reference to ‘‘covered 

transaction’’ proposed in the Board’s 

2011 ATR Proposal with a reference to 

‘‘closed-end mortgage loan.’’ This 

change reflects the fact that the phrase 

‘‘covered transaction’’ refers to those 

categories of closed-end transactions 

covered by the Board’s 2011 ATR 

Proposal, and it is not a defined term for 

purposes of § 1026.32.41

32(b)(1)(ii) 

Section 1431(c) of the Dodd-Frank Act 

amended TILA section 103(aa)(4)(B), 15 

U.S.C. 1602(aa)(4)(B), to provide that 

points and fees includes ‘‘all 

compensation paid directly or indirectly 

by a consumer or creditor to a mortgage 

originator from any source, including a 

mortgage originator that is also the 

creditor in a table-funded transaction.’’ 

This language replaced the phrase ‘‘all 

compensation paid to mortgage 

brokers.’’ The Board’s 2011 ATR 

Proposal proposed to implement this 

statutory change by revising existing 

§ 226.32(b)(1)(ii) and comment 

32(b)(1)(ii)–1 and by adding new 

comments 32(b)(1)(ii)–2 and –3. See 76 

FR 27390, 27402–04, 27481, 27488–89 

(May 11, 2011). The Bureau republishes 

the Board’s proposed revisions and 

additions substantially as proposed in 

the Board’s 2011 ATR Proposal. 

However, the Bureau’s proposed 

comment 32(b)(1)(ii)–2 replaces 

references to ‘‘covered transaction(s)’’ 

with references to ‘‘closed-end mortgage 

loan(s)’’ for the reasons discussed in the 

section-by-section analysis to proposed 

§ 1026.32(b)(1)(i), above. The Bureau’s 

proposal makes certain other, nonsubstantive edits for clarity and 

consistency. 

32(b)(1)(iii) 

TILA section 103(aa)(4)(C), 15 U.S.C. 

1602(aa)(4)(C), provides that points and 

fees include certain real estate-related 

charges listed in TILA section 106(e), 15 

U.S.C. 1605(e). TILA section 

103(aa)(4)(C) is implemented in existing 

§ 1026.32(b)(1)(iii). The Dodd-Frank Act 

did not amend TILA section 

103(aa)(4)(C), but the Board nevertheless 

proposed certain clarifying revisions to 


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42 In its 2011 ATR Proposal, the Board did not 

propose to implement in the definition of points 

and fees the provision in section 1431(c) of the 

Dodd-Frank Act that specifies that ‘‘insurance 

premiums or debt cancellation or suspension fees 

calculated and paid in full on a monthly basis shall 

not be considered financed by the creditor.’’ The 

Bureau proposes to implement this provision in 

proposed § 1026.34(a)(10) prohibiting the financing 

of points and fees for high-cost mortgages. See the 

section-by-section analysis to proposed 

§ 1026.34(a)(10), below. 

§ 226.32(b)(1)(iii) in its 2011 ATR 

Proposal. See 76 FR 27390, 27404, 

27481, 27489 (May 11, 2011). The 

Bureau’s proposed § 1026.32(b)(1)(iii) 

and comment 32(b)(1)(iii)–1 republish 

the Board’s proposed revisions and 

make two other, minor changes. First, 

proposed § 1026.32(b)(1)(iii) replaces 

the term ‘‘closing’’ as proposed in the 

Board’s 2011 ATR Proposal with the 

term ‘‘consummation’’ for consistency 

with Regulation Z. Second, proposed 

comment 32(b)(1)(iii)–1 clarifies that a 

fee paid by the consumer for an 

appraisal performed by the creditor 

must be included in points and fees, but 

removes the phrase ‘‘even though the 

fee may be excludable from the finance 

charge if it is bona fide and reasonable 

in amount’’ to conform with the 

Bureau’s proposed simpler, more 

inclusive definition of the finance 

charge. A charge for an appraisal 

conducted by the creditor would be 

included in the simpler, more inclusive 

finance charge even if it is bona fide and 

reasonable in amount. See the sectionby-section analysis to proposed 

§ 1026.32(b)(1)(i), above. 

32(b)(1)(iv) 

Section 1431(c) of the Dodd-Frank Act 

amended TILA section 103(aa)(4), 15 

U.S.C. 1602(aa)(4), to provide that 

points and fees include certain credit 

insurance and debt cancellation or 

suspension coverage premiums payable 

at or before closing. See TILA section 

103(bb)(4)(D). In its 2011 ATR Proposal, 

the Board proposed to amend 

§ 226.32(b)(1)(iv), which already 

requires certain such charges to be 

included in points and fees, to reflect 

the statutory changes under the DoddFrank Act. See 76 FR 27390, 27404–05, 

27481, 27489 (May 11, 2011). The 

Bureau republishes the Board’s 

proposed revisions and additions to 

§ 226.32(b)(1)(iv) and comment 

32(b)(1)(iv)–1, as well as the Board’s 

new proposed comment 32(b)(1)(iv)–2, 

substantially as proposed in the Board’s 

2011 ATR Proposal.42 The Bureau’s 

proposed § 1026.32(b)(1)(iv) and 

proposed comment 32(b)(1)(iv)–1, 

however, replace the term ‘‘closing’’ 

with the term ‘‘consummation’’ for 

consistency with existing provisions of 

Regulation Z. In addition, proposed 

comment 32(b)(1)(iv)–1 clarifies that 

credit insurance premiums must be 

included in points and fees if they are 

paid at consummation, whether they are 

paid in cash or, if permitted by 

applicable law, financed. The Bureau 

believes the clarifying phrase ‘‘if 

permitted by applicable law’’ is 

necessary because section 1414 of the 

Dodd-Frank Act added to TILA new 

section 129C(d) prohibiting the 

financing of most types of credit 

insurance. See also the section-bysection analysis to proposed 

§ 1026.32(b)(6), below. 

32(b)(1)(v) 

Section 1431(c) of the Dodd-Frank Act 

amended TILA section 103(aa)(4), 15 

U.S.C. 1602(aa)(4), to require the 

inclusion in points and fees of the 

maximum prepayment fees and 

penalties which may be charged or 

collected under the terms of the credit 

transaction. See TILA section 

103(bb)(4)(E). The Board’s 2011 ATR 

Proposal proposed to implement this 

statutory change in new 

§ 226.32(b)(1)(v). See 76 FR 27390, 

27405, 27481 (May 11, 2011). The 

Bureau’s proposed § 1026.32(b)(1)(v) 

republishes the Board’s proposed 

§ 226.32(b)(1)(v), except that it replaces 

a cross-reference to the Board’s 

proposed definition of prepayment 

penalty for qualified mortgages (i.e., the 

Board’s proposed § 226.43(b)(10)) with a 

cross-reference to the definition of 

prepayment penalty for closed-end 

mortgage loans in proposed 

§ 1026.32(b)(8)(i). See the section-bysection analysis to proposed 

§ 1026.32(b)(8)(i), below. 

32(b)(1)(vi) 

Section 1431(c) of the Dodd-Frank Act 

amended TILA section 103(aa)(4), 15 

U.S.C. 1602(aa)(4), to require the 

inclusion in points and fees of all 

prepayment fees or penalties that are 

incurred by the consumer if the loan 

refinances a previous loan made or 

currently held by the same creditor or 

an affiliate of the creditor. See TILA 

section 103(bb)(4)(F). The Board’s 2011 

ATR Proposal proposed to implement 

this statutory change in new 

§ 226.32(b)(1)(vi). See 76 FR 27390, 

27405, 27481 (May 11, 2011). The 

Bureau’s proposed § 1026.32(b)(1)(vi) 

republishes the Board’s proposed 

§ 226.32(b)(1)(vi), except that it replaces 

a cross-reference to the Board’s 

proposed definition of prepayment 

penalty for qualified mortgages (i.e., the 

Board’s proposed § 226.43(b)(10)) with a 

cross-reference to the definition of 

prepayment penalty for closed-end 

mortgage loans in proposed 

§ 1026.32(b)(8)(i). See the section-bysection analysis for proposed 

§ 1026.32(b)(8)(i), below. 

32(b)(2) 

As noted in the section-by-section 

analysis to proposed § 1026.32(b)(1)(ii), 

above, section 1431(c) of the DoddFrank Act amended TILA section 

103(aa)(4)(B) to replace the term 

‘‘mortgage brokers’’ with ‘‘mortgage 

originators.’’ See TILA section 

103(bb)(4)(B). The Board’s 2011 ATR 

Proposal proposed to implement this 

statutory change in proposed 

§ 226.32(b)(1)(ii) utilizing the term ‘‘loan 

originator,’’ as defined in existing 

§ 1026.36(a)(1), rather than the statutory 

term ‘‘mortgage originator.’’ See 76 FR 

27390, 27402–04, 27481, 27488–89 

(May 11, 2011). In turn, the Board 

proposed new § 226.32(b)(2) to exclude 

from points and fees compensation paid 

to certain categories of persons 

specifically excluded from the 

definition of ‘‘mortgage originator’’ in 

amended TILA section 103. See id. at 

27405–06, 27481. The Bureau’s 

proposed § 1026.32(b)(2) republishes the 

Board’s proposed § 226.32(b)(2), except 

that the Bureau replaces a reference to 

‘‘covered transaction’’ with a reference 

to ‘‘closed-end mortgage loan’’ for the 

reasons set forth in the section-bysection analysis to proposed 

§ 1026.32(b)(1)(i), above. 

32(b)(3) 

Points and Fees; Open-End Credit Plans 

As discussed above in the section-bysection analysis to proposed 

§ 1026.32(a), section 1431(a) of the 

Dodd-Frank Act amended TILA to 

provide that a ‘‘high-cost mortgage’’ may 

include an open-end credit plan secured 

by a consumer’s principal dwelling. See 

TILA section 103(bb)(1)(A). Section 

1431(c) of the Dodd-Frank Act, in turn, 

amended TILA by adding new section 

103(bb)(5), which specifies how to 

calculate points and fees for open-end 

credit plans. Unlike TILA’s pre-existing 

points and fees definition for closed-end 

mortgage loans, which enumerates six 

specific categories of items that 

creditors must include in points and 

fees, the new open-end points and fees 

provision simply provides that points 

and fees for open-end credit plans are 

calculated by adding ‘‘the total points 

and fees known at or before closing, 

including the maximum prepayment 

penalties that may be charged or 

collected under the terms of the credit 

transaction, plus the minimum 

additional fees the consumer would be 

required to pay to draw down an 


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amount equal to the total credit line.’’ 

Thus, apart from identifying 

(1) maximum prepayment penalties and 

(2) fees to draw down an amount equal 

to the total credit line, the Dodd-Frank 

Act did not enumerate the specific items 

that should be included in ‘‘total points 

and fees’’ for open-end credit plans. For 

clarity and to facilitate compliance, the 

Bureau proposes to implement TILA 

section 103(bb)(5) in § 1026.32(b)(3) by 

defining points and fees for open-end 

credit plans to include the following 

categories of charges: (1) Each item 

required to be included in points and 

fees for closed-end mortgages under 

§ 1026.32(b)(1), to the extent applicable 

in the open-end credit context; 

(2) certain participation fees that the 

creditor may impose on a consumer in 

connection with an open-end credit 

plan; and (3) the minimum fee the 

creditor would require the consumer to 

pay to draw down an amount equal to 

the total credit line. Each of these items 

is discussed further below. 

32(b)(3)(i) 

Proposed § 1026.32(b)(3)(i) provides 

that all items included in the finance 

charge under § 1026.4(a) and (b), except 

interest or the time-price differential, 

must be included in points and fees for 

open-end credit plans, to the extent 

such items are payable at or before 

account opening. This provision 

generally mirrors proposed 

§ 1026.32(b)(1)(i) by providing for the 

inclusion of such charges in points and 

fees for closed-end mortgage loans, with 

the following differences. 

First, proposed § 1026.32(b)(3)(i) 

specifies that the items included in the 

finance charge under § 1026.4(a) and (b) 

must be included in points and fees 

only if they are payable at or before 

account opening. Proposed comment 

32(b)(3)(i)–1 clarifies this provision, 

which is intended to address the 

potential confusion that could arise 

from the fact that certain charges 

included in the finance charge under 

§ 1026.4(a) and (b) are transaction costs 

unique to open-end credit plans that 

often may not be known at account 

opening. Proposed comment 32(b)(3)(i)– 

1 thus explains that charges payable 

after the opening of an open-end credit 

plan, for example minimum monthly 

finance charges and service charges 

based either on account activity or 

inactivity, need not be included in 

points and fees for open-end credit 

plans, even if they are included in the 

finance charge under § 1026.4(a) and (b). 

Transaction fees generally are also not 

included in points and fees for openend credit plans, except as provided in 

proposed § 1026.32(b)(3)(vi). 

Second, in contrast to proposed 

§ 1026.32(b)(1)(i) for closed-end 

mortgage loans, proposed 

§ 1026.32(b)(3)(i) for open-end credit 

plans does not include any language to 

accommodate the simpler, more 

inclusive definition of the finance 

charge proposed in the Board’s 2009 

Closed-End Proposal. See the sectionby-section analysis to proposed 

§ 1026.32(b)(1)(i), above. Such language 

currently is unnecessary in the openend credit context, because the Bureau’s 

2012 TILA–RESPA Proposal proposes 

the more inclusive finance charge only 

for closed-end mortgage loans. 

Finally, the Bureau omits from 

proposed § 1026.32(b)(3)(i) as 

unnecessary the exclusion from points 

and fees set forth in amended TILA 

section 103(bb)(C) for premiums or 

guaranties for government-provided or 

certain private mortgage insurance. The 

statute provides that the specified 

charges shall be excluded from total 

points and fees ‘‘under paragraph (4)’’ 

(i.e., TILA section 103(bb)(4), not TILA 

section 103(bb)(5) concerning open-end 

points and fees), and the Bureau 

understands that such insurance 

products, which are designed to protect 

creditors originating high loan-to-value 

ratio loans, are inapplicable in the 

context of open-end credit plans. 

32(b)(3)(ii) 

Proposed § 1026.32(b)(3)(ii) provides 

for the inclusion in points and fees for 

open-end credit plans of all items listed 

in § 1026.4(c)(7) (other than amounts 

held for future payment of taxes) 

payable at or before account opening. 

However, any such charge may be 

excluded from points and fees if it is 

reasonable, the creditor receives no 

direct or indirect compensation in 

connection with the charge, and the 

charge is not paid to an affiliate of the 

creditor. Proposed § 1026.32(b)(3)(ii) 

mirrors proposed § 1026.32(b)(1)(iii) 

concerning the inclusion of such 

charges in points and fees for closedend mortgage loans. Proposed comment 

32(b)(3)(ii)–1 cross-references proposed 

comment 32(b)(1)(iii)–1 for guidance 

concerning the inclusion in points and 

fees of items listed in § 1026.4(c)(7). 

32(b)(3)(iii) 

Proposed § 1026.32(b)(3)(iii) provides 

for the inclusion in points and fees for 

open-end credit plans of premiums or 

other charges payable at or before 

account opening for any credit life, 

credit disability, credit unemployment, 

or credit property insurance, or any 

other life, accident, health, or loss-ofincome insurance, or any payments 

directly or indirectly for any debt 

cancellation or suspension agreement or 

contract. Proposed § 1026.32(b)(3)(iii) 

mirrors proposed § 1026.32(b)(1)(iv) 

concerning the inclusion of such 

charges for closed-end mortgage loans. 

Proposed comment 32(b)(3)(iii)–1 crossreferences proposed comments 

32(b)(1)(iv)–1 and –2 for guidance 

concerning the inclusion in points and 

fees of premiums for credit insurance 

and debt cancellation or suspension 

coverage. 

32(b)(3)(iv) 

Proposed § 1026.32(b)(3)(iv) provides 

for the inclusion in points and fees for 

open-end credit plans of the maximum 

prepayment penalty that may be 

charged or collected under the terms of 

the plan. This provision mirrors 

proposed § 1026.32(b)(1)(v) concerning 

the inclusion of maximum prepayment 

penalties for closed-end mortgage loans, 

except that proposed § 1026.32(b)(3)(iv) 

cross-references the definition of 

prepayment penalty provided for openend credit plans in proposed 

§ 1026.32(b)(8)(ii). 

32(b)(3)(v) 

Proposed § 1026.32(b)(3)(v) provides 

for the inclusion in points and fees for 

open-end credit plans of ‘‘any fees 

charged for participation in an open-end 

credit plan, as described in 

§ 1026.4(c)(4), whether assessed on an 

annual or other periodic basis.’’ The 

Bureau notes that the fees described in 

§ 1026.4(c)(4) (i.e., fees charged for 

participation in a credit plan) are 

excluded from the finance charge, and 

thus are not otherwise included in 

points and fees under proposed 

§ 1026.32(b)(3)(i). The Bureau believes, 

however, that such fees should be 

included in points and fees for openend credit plans because creditors 

extending open-end credit plans may 

commonly impose such fees on 

consumers as a pre-condition to 

maintaining access to their plans, and 

because creditors can calculate at 

account opening the amount of 

participation charges that the consumer 

will be required to pay to maintain 

access for the life of the plan. 

Proposed comment 32(b)(3)(v)–1 thus 

clarifies that proposed § 1026.32(b)(3)(v) 

requires the inclusion in points and fees 

of annual fees or other periodic 

maintenance fees that the consumer 

must pay to retain access to the openend credit plan. The comment clarifies 

that, for purposes of the points and fees 

test, a creditor should assume that any 

annual fee is charged each year for the 

original term of the plan. Thus, for 

example, if the terms of a home-equity 

line of credit with a ten-year term 


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require the consumer to pay an annual 

fee of $50, the creditor must include 

$500 in participation fees in its 

calculation of points and fees. 

The Bureau requests comment on the 

inclusion of fees described in 

§ 1026.4(c)(4) in points and fees for 

open-end credit plans, including on 

whether additional guidance is needed 

concerning how to calculate such fees 

for plans that do not have a definite 

plan length. 

32(b)(3)(vi) 

As noted above, new TILA section 

103(bb)(5) specifies, in part, that the 

calculation of points and fees for openend credit plans must include ‘‘the 

minimum additional fees the consumer 

would be required to pay to draw down 

an amount equal to the total credit 

line.’’ The Bureau proposes to 

implement this requirement in 

§ 1026.32(b)(3)(vi). Specifically, 

proposed § 1026.32(b)(3)(vi) provides 

for inclusion in the calculation of points 

and fees for open-end credit plans of 

any transaction fee, including any 

minimum fee or per-transaction fee, that 

will be charged for a draw on the credit 

line. Proposed § 1026.32(b)(3)(vi) 

clarifies that a transaction fee that is 

assessed when a consumer draws on the 

credit line must be included in points 

and fees whether or not the consumer 

draws the entire credit line. The Bureau 

believes that any transaction fee that 

would be charged for a draw on the 

credit line would include any 

transaction fee that would be charged to 

draw down an amount equal to the total 

credit line. 

The Bureau interprets the requirement 

in amended TILA section 103(bb)(5) to 

include the ‘‘minimum additional fees’’ 

that will be imposed on the consumer 

to draw an amount of credit equal to the 

total credit line as requiring creditors to 

assume that a consumer will make at 

least one such draw during the term of 

the credit plan. The Bureau recognizes 

that creditors will not know at account 

opening how many times (if ever) a 

consumer will draw the entire amount 

of the credit line. For clarity and ease of 

compliance, the Bureau interprets the 

statute to require the creditor to assume 

one such draw. Proposed comment 

32(b)(3)(vi)–1 clarifies this requirement 

by providing the following example: if 

the terms of the open-end credit plan 

permit the creditor to charge a $10 

transaction fee each time the consumer 

draws on the credit line, the creditor 

must include one $10 charge in the 

points and fees calculation. The Bureau 

solicits comment on the requirement to 

include in points and fees the charge 

assessed for one draw of the total credit 

line and on whether additional 

guidance is needed in the case of an 

open-end credit plan that sets a 

maximum amount per draw. 

Proposed comment 32(b)(3)(vi)–2 

clarifies that, if the terms of the openend credit plan permit a consumer to 

draw on the credit line using either a 

variable-rate feature or a fixed-rate 

feature, proposed § 1026.32(b)(3)(vi) 

requires the creditor to use the terms 

applicable to the variable-rate feature for 

determining the transaction fee that 

must be included in the points and fees 

calculation. 

Compensation Paid to Originators of 

Open-End Credit Plans 

The Bureau does not at this time 

propose to include in the calculation of 

points and fees for open-end credit 

plans compensation paid to originators 

of open-end plans. 

As discussed above in the section-bysection analysis to proposed 

§ 1026.32(b)(1)(ii), section 1431(c) of the 

Dodd-Frank Act amended TILA section 

103(aa)(4)(B) to require mortgage 

originator compensation to be included 

in the existing calculation of points and 

fees. At the same time, however, section 

1401 of the Dodd-Frank Act amended 

TILA section 103 to define a ‘‘mortgage 

originator’’ as a person who undertakes 

specified actions with respect to a 

‘‘residential mortgage loan application’’ 

or in connection with a ‘‘residential 

mortgage loan.’’ Section 1401 further 

defined the term ‘‘residential mortgage 

loan’’ to exclude a consumer credit 

transaction under an open-end credit 

plan. 

Given that the Dodd-Frank Act does 

not specify in amended TILA section 

103(bb)(5) concerning open-end points 

and fees that compensation paid to 

originators of open-end credit plans be 

included in the calculation of points 

and fees, the Bureau believes that it is 

reasonable to conclude that Congress 

did not intend for such compensation to 

be included. Accordingly, the Bureau is 

not proposing at this time to include in 

the calculation of points and fees for 

open-end credit plans compensation 

paid to originators of open-end credit 

plans. The Bureau believes that any 

incentive to evade the closed-end, highcost mortgage points and fees threshold 

by structuring a transaction as an openend credit plan can be addressed 

through the prohibition in TILA against 

structuring a transaction as an open-end 

credit plan to evade HOEPA. See TILA 

section 129(r). See also the section-bysection analysis to proposed 

§ 1026.34(b), below. 

The Bureau notes that amended TILA 

section 103(bb)(4)(G) grants the Bureau 

authority to include in points and fees 

such other charges that it determines to 

be appropriate. The Bureau thus 

requests comment on the proposed 

definition of points and fees for openend credit plans, including on whether 

any additional fees should be included 

in the definition. In particular, the 

Bureau requests comment on whether 

compensation paid to originators should 

be included in the calculation of points 

and fees from open-end credit plans. 

The Bureau recognizes that neither 

TILA nor Regulation Z currently 

addresses compensation paid to 

originators of open-end credit plans and 

accordingly requests comment on the 

operational issues that would be 

entailed in tracking such compensation 

for inclusion in the points and fees 

calculation. The Bureau also requests 

comment on whether the guidance and 

examples set forth in proposed 

§ 1026.32(b)(1)(ii) and comments 

32(b)(1)(ii)–1 and –2 concerning closedend loan originator compensation 

would provide sufficient guidance to 

creditors in open-end credit plans, or 

whether additional or different guidance 

would be of assistance in the open-end 

context. 

32(b)(4) 

Proposed § 1026.32(b)(4) excludes 

from points and fees for open-end credit 

plans any charge that would otherwise 

be included if the creditor waives the 

charge at or before account opening, 

unless the creditor may assess the 

charge after account opening. Proposed 

comment 32(b)(4)–1 provides an 

example of the rule. The example 

explains that a creditor that waives a 

$300 processing fee at the opening of an 

open-end credit plan with a ten-year 

term must include the $300 fee in points 

and fees if the terms of the open-end 

credit plan provide that the consumer 

must repay the fee if the consumer 

terminates the plan, e.g., within three 

years after account opening. The waived 

processing fee is a prepayment penalty 

as defined in proposed 

§ 1026.32(b)(8)(ii), because it is a fee 

that the creditor may impose and retain 

if the consumer terminates the plan 

prior to the expiration of its term. 

Proposed § 1026.32(b)(4) thus provides 

that the creditor must include the 

waived processing fee in points and fees 

under § 1026.32(b)(3)(iv). 

Proposed § 1026.32(b)(5)(i)–(ii) 

implements amended TILA section 

103(bb)(1)(A)(ii) and (ee), which 

excludes two categories of charges from 

points and fees for purposes of 

determining whether a transaction is a 

high-cost mortgage. The charges, 

discussed in turn below, are: (1) any 


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43Like the Board’s proposed § 1026.43(e)(3)(ii), 

76 FR 27390, 27465, 27485 (May 11, 2011), the 

Bureau’s proposed § 1026.32(b)(5)(i) uses the term 

‘‘loan originator’’ rather than ‘‘mortgage originator’’ 

for consistency with Regulation Z. 

bona fide third-party charge not retained 

by the creditor, loan originator, or an 

affiliate of either, subject to the 

limitation that premiums for private 

mortgage insurance must sometimes be 

included in points and fees for closedend mortgage loans pursuant to 

proposed § 1026.32(b)(1)(i)(B); and (2) 

up to one or two bona fide discount 

points paid by the consumer in 

connection with the transaction, but 

only if certain conditions are met. As 

noted below, the bona fide third-party 

charge and bona fide discount point 

exclusions from points and fees for 

high-cost mortgages under TILA section 

103(bb)(1)(A)(ii) and (ee) are nearly 

identical to the exclusion of such 

charges from points and fees for 

qualified mortgages under TILA section 

129C(b)(2)(C)(i) through (iv). For 

consistency and to ease compliance, 

proposed § 1026.32(b)(5)(i)–(ii) thus 

largely mirrors proposed 

§ 226.43(e)(3)(ii)(A) through (C) 

concerning bona fide third-party charges 

and bona fide discount points as set 

forth in the Board’s 2011 ATR Proposal. 

As discussed above in the section-bysection analysis to proposed 

§ 1026.32(b)(1) and (2), the Bureau 

currently is reviewing comments 

received in connection with the Board’s 

2011 ATR Proposal. In response to such 

comments, the Bureau may revise and 

provide further guidance concerning 

certain aspects of the Board’s proposed 

§ 226.43(e)(3)(ii)(A) through (C). 

32(b)(5)(i) Bona Fide Third-Party 

Charges 

Proposed § 1026.32(b)(5)(i) excludes 

from the points and fees calculation any 

bona fide third-party charge not retained 

by the creditor, loan originator, or an 

affiliate of either, unless the charge is a 

premium for private mortgage insurance 

that is required to be included in points 

and fees for closed-end mortgage loans 

under proposed § 1026.32(b)(1)(i)(B). 

Proposed § 1026.32(b)(5)(i) implements 

TILA section 103(bb)(1)(A)(ii), which 

specifically excludes from the high-cost 

mortgage points and fees calculation 

any bona fide third party charges not 

retained by the mortgage originator, 

creditor, or an affiliate of the creditor or 

mortgage originator. 15 U.S.C. 

1602(bb)(1)(A)(ii). 

For consistency and to facilitate 

compliance, proposed § 1026.32(b)(5)(i) 

mirrors, with one exception, proposed 

§ 226.43(e)(3)(ii)(A) as set forth in the 

Board’s 2011 ATR Proposal. The Board’s 

proposed § 226.43(e)(3)(ii)(A) would 

implement TILA section 129C(b)(2)(C), 

which excludes the same categories of 

bona fide third party charges from 

points and fees for qualified mortgages 

that TILA section 103(bb)(1)(A)(ii) 

excludes from points and fees for highcost mortgages. See 76 FR 27390, 27465 

(May 11, 2011). See also 15 U.S.C. 

1602(bb) and 15 U.S.C. 1639c(b)(2)(C) 

(providing for the exclusion of identical 

bona fide third-party charges from total 

points and fees in the high-cost 

mortgage and qualified mortgage 

contexts). 

Proposed § 1026.32(b)(5)(i) differs 

from the Board’s proposed 

§ 226.43(e)(3)(ii)(A) in one minor 

respect to address the application of 

HOEPA to open-end credit plans. 

Specifically, amended TILA section 

103(bb)(1)(A)(ii) excludes from points 

and fees for high-cost mortgages bona 

fide third-party charges ‘‘not retained by 

the creditor, mortgage originator,’’ or an 

affiliate of either. However, as discussed 

above in the section-by-section analysis 

to proposed § 1026.32(b)(3), originators 

of open-end credit plans are not 

‘‘mortgage originators’’ as that term is 

defined in amended TILA section 103. 

Thus, TILA section 103(bb)(1)(A)(ii) 

does not by its terms exclude from 

points and fees bona fide third-party 

charges not retained by an originator of 

an open-end credit plan. The Bureau 

believes bona fide third-party charges 

not retained by a loan originator should 

be excluded from points and fees 

whether the originator is originating a 

closed-end mortgage or an open-end 

credit plan. Accordingly, proposed 

§ 1026.32(b)(5)(i) states that, for 

purposes of § 1026.32(b)(5)(i), the term 

‘‘loan originator’’ means a loan 

originator as that term is defined in 

§ 1026.36(a)(1) (i.e., in general, an 

originator of any consumer credit 

transaction) and notwithstanding 

§ 1026.36(f), which otherwise limits the 

term ‘‘loan originator’’ to closed-end 

transactions.43

Proposed comment 32(b)(5)(i)–1 

clarifies that § 1026.36(a)(1) and 

comment 36(a)–1 provide additional 

guidance concerning the meaning of the 

term ‘‘loan originator’’ for purposes of 

§ 1026.32(b)(5)(i). Proposed comment 

32(b)(5)(i)–2 provides an example for 

purposes of determining whether a 

charge may be excluded from points and 

fees as a bona fide third-party charge. 

Proposed comment 32(b)(5)(i)–2 

assumes that, prior to loan 

consummation, a creditor pays $400 for 

an appraisal conducted by a third-party 

not affiliated with the creditor. At 

consummation, the creditor charges the 

consumer $400 and retains that amount 

as reimbursement for the fee that the 

creditor paid to the third-party 

appraiser. For purposes of determining 

whether the transaction is a high-cost 

mortgage, the creditor need not include 

in points and fees the $400 that it 

retains as reimbursement. 

Private Mortgage Insurance Premiums 

As discussed above in the section-bysection analysis to proposed 

§ 1026.32(b)(1)(i)(B), the Dodd-Frank 

Act amended TILA to add section 

103(bb)(1)(C)(ii), which excludes private 

mortgage insurance premiums that meet 

certain conditions from the closed-end 

points and fees calculation for high-cost 

mortgages. For consistency with TILA 

section 103(bb)(1)(C)(ii), as 

implemented by proposed 

§ 1026.32(b)(1)(i)(B), the Bureau 

proposes to implement TILA’s general 

exclusion of bona fide third-party 

charges from the points and fees 

calculation for high-cost mortgages in 

proposed § 1026.32(b)(5)(i) with the 

caveat that certain private mortgage 

insurance premiums must be included 

in points and fees for closed-end 

mortgage loans as set forth in proposed 

§ 1026.32(b)(1)(i)(B). See also the 

Board’s 2011 ATR Proposal, 76 FR 

27390, 27465 (May 11, 2011) (proposing 

the same caveat to bona fide third-party 

charges for qualified mortgages). 

Proposed comment 32(b)(5)(i)–3 

addressing private mortgage insurance 

premiums mirrors proposed comment 

43(e)(3)(ii)–2 in the Board’s 2011 ATR 

Proposal, except that proposed 

comment 32(b)(5)(i)–3 states that it 

applies for purposes of determining 

whether a mortgage is a high-cost 

mortgage, rather than a qualified 

mortgage. Proposed comment 

32(b)(5)(i)–3 also specifies that this 

approach to private mortgage insurance 

premiums is relevant only for closedend transactions, for the reasons 

discussed in the section-by-section 

analysis to proposed 

§ 1026.32(b)(1)(i)(B), above. 

32(b)(5)(ii) Bona Fide Discount Points 

Section 1431(d) of the Dodd-Frank 

Act added new section 103(dd) to TILA, 

which permits a creditor to exclude, 

under certain circumstances, up to two 

bona fide discount points from the 

calculation of points and fees for 

purposes of determining whether a 

transaction is a high-cost mortgage. 

Proposed § 1026.32(b)(5)(ii)(A) through 

(C) implement TILA section 103(dd), 

with certain clarifications discussed 

below. The Bureau notes that new TILA 

section 103(dd) is substantially similar 

to new TILA section 129C(b)(2)(C)(ii)– 

(iv), which provides for the exclusion of 


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certain bona fide discount points from 

points and fees for qualified mortgages, 

and which the Board’s 2011 ATR 

Proposal proposed to implement in 

§ 226.43(e)(3)(ii)(B) and (C) and 

§ 226.43(e)(3)(iv). See 76 FR 27465–67, 

27485. Generally, except for the 

differences noted below, proposed 

§ 1026.32(b)(5)(ii)(A) and (B) concerning 

the exclusion of up to one or two 

discount points for high-cost mortgages 

are consistent with the Board’s 

proposed § 226.43(e)(3)(ii)(B) and (C) for 

qualified mortgages. Likewise, proposed 

§ 1026.32(b)(5)(ii)(C), which describes 

how to determine whether a discount 

point is ‘‘bona fide,’’ cross-references 

proposed § 1026.43(e)(3)(iv) (i.e., the 

Board’s proposed § 226.43(e)(3)(iv)), 

which describes the same term for 

qualified mortgages. 

Exclusion of Up to Two Bona Fide 

Discount Points 

Proposed § 1026.32(b)(5)(ii)(A)(1) and 

(2) implements TILA section 103(dd)(1), 

which permits a creditor to exclude 

from the high-cost mortgage points and 

fees calculation up to two bona fide 

discount points payable by the 

consumer in connection with the 

transaction. 

Under proposed 

§ 1026.32(b)(5)(ii)(A)(1), a creditor 

generally may exclude from points and 

fees up to two bona fide discount points 

payable by the consumer, provided that 

the interest rate for the mortgage loan or 

open-end credit plan without such 

discount points does not exceed by 

more than one percentage point the 

‘‘average prime offer rate,’’ as defined in 

§ 1026.35(a)(2)(ii). Proposed 

§ 1026.32(b)(5)(ii)(A)(1) mirrors 

proposed § 226.43(e)(3)(ii)(B) for 

qualified mortgages as set forth in the 

Board’s 2011 ATR Proposal. See 76 FR 

at 27465–66, 27485, 27504. 

Under proposed 

§ 1026.32(b)(5)(ii)(A)(2), a creditor 

extending a mortgage loan or open-end 

credit plan secured by personal property 

may exclude from points and fees up to 

two bona fide discount points payable 

by the consumer, provided that the 

interest rate for the mortgage loan or 

open-end credit plan without such 

discount points does not exceed by 

more than one percentage point the 

average rate on loans insured under 

Title I of the National Housing Act (12 

U.S.C. 1702 et seq.). The Bureau 

requests comment on whether 

additional guidance is needed 

concerning the calculation of the 

average rate for loans insured under 

Title I of the National Housing Act. 

Exclusion of Up to One Bona Fide 

Discount Point 

Proposed § 1026.32(b)(5)(ii)(B) 

implements TILA section 103(dd)(2), 

which permits a creditor to exclude 

from the high-cost mortgage points and 

fees calculation up to one bona fide 

discount point payable by the consumer 

in connection with the transaction. 

Under proposed 

§ 1026.32(b)(5)(ii)(B)(1), a creditor 

generally may exclude from points and 

fees up to one bona fide discount point 

payable by the consumer, provided that 

interest rate for the mortgage loan or 

open-end credit plan without such 

discount points does not exceed by 

more than two percentage points the 

average prime offer rate, as defined in 

§ 1026.35(a)(2)(ii). Proposed 

§ 1026.32(b)(5)(ii)(B)(1) mirrors 

proposed § 226.43(e)(3)(ii)(C) for 

qualified mortgages as set forth in the 

Board’s 2011 ATR Proposal. See 76 FR 

at 27465–66, 27485, 27504. 

Under proposed 

§ 1026.32(b)(5)(ii)(B)(2), a creditor 

extending a mortgage loan or open-end 

credit plan secured by personal property 

may exclude from points and fees up to 

one bona fide discount point payable by 

the consumer, provided that interest 

rate for the mortgage loan or open-end 

credit plan without such discount 

points does not exceed by more than 

two percentage points the average rate 

on loans insured under Title I of the 

National Housing Act (12 U.S.C. 1702 et 

seq.). As for proposed 

§ 1026.32(b)(5)(ii)(A)(2), the Bureau 

requests comment on whether 

additional guidance is needed 

concerning the calculation of the 

average rate for loans insured under 

Title I of the National Housing Act. 

Average Prime Offer Rate 

Proposed comment 32(b)(5)(ii)–1 

clarifies how to determine, for purposes 

of the bona fide discount point 

exclusion in proposed 

§ 1026.32(b)(5)(ii)(A)(1) and (B)(1), 

whether a transaction’s interest rate 

meets the requirement not to exceed the 

average prime offer rate by more than 

one or two percentage points, 

respectively. Specifically, proposed 

comment 32(b)(5)(ii)–1 provides that the 

average prime offer rate for proposed 

§ 1026.32(b)(5)(ii)(A)(1) and (B)(1) is the 

average prime offer rate that applies to 

a comparable transaction as of the date 

the interest rate for the transaction is 

set. Proposed comment 32(b)(5)(ii)–1 

cross-references proposed comments 

32(a)(1)(i)–1 and –2 for closed- and 

open-end transactions, respectively, for 

guidance as to determining the 

applicable average prime offer rate. See 

also the section-by-section analysis to 

proposed § 1026.32(a)(1)(i), above. 

‘‘Bona Fide’’ Discount Point 

Proposed § 1026.32(b)(5)(ii)(C) crossreferences proposed § 1026.43(e)(3)(iv) 

(proposed § 1026.43(e)(3)(iv) as set forth 

in the Board’s 2011 ATR Proposal) for 

purposes of determining whether a 

discount point is ‘‘bona fide’’ and 

excludable from the high-cost mortgage 

points and fees calculation. See 76 FR 

27390, 27485 (May 11, 2011). Amended 

TILA sections 103(dd)(3) and (4) and 

129C(b)(2)(C)(iii) and (iv) provide the 

same methodology for high-cost 

mortgages and qualified mortgages, 

respectively, for determining whether a 

discount point is ‘‘bona fide.’’ Thus, 

under both the Board’s proposed 

§ 226.43(e)(3)(iv) for qualified mortgages 

and the Bureau’s proposed 

§ 1026.32(b)(5)(ii) for high-cost 

mortgages, a discount point is ‘‘bona 

fide’’ if it both (1) reduces the interest 

rate or time-price differential applicable 

to transaction based on a calculation 

that is consistent with established 

industry practices for determining the 

amount of reduction in the interest rate 

or time-price differential appropriate for 

the amount of discount points paid by 

the consumer and (2) accounts for the 

amount of compensation that the 

creditor can reasonably expect to 

receive from secondary market investors 

in return for the transaction. As noted 

above, the Bureau currently is 

developing a final rule to implement the 

Dodd-Frank Act’s provisions concerning 

qualified mortgages, including the 

provisions relating to bona fide discount 

points. The Bureau expects to provide 

further clarification concerning the 

exclusion of bona fide discount points 

from points and fees for qualified 

mortgages when it finalizes the Board’s 

2011 ATR Proposal. The Bureau will 

coordinate any such clarification 

appropriately across the ATR (qualified 

mortgage) and high-cost mortgage 

rulemakings. 

32(b)(6) 

As noted above in the section-bysection analysis to proposed 

§ 1026.32(a)(1)(ii), the Bureau proposes 

for organizational purposes (1) to move 

the existing definition of ‘‘total loan 

amount’’ for closed-end mortgage loans 

from comment 32(a)(1)(ii)–1 to proposed 

§ 1026.32(b)(6)(i), and (2) to move the 

examples showing how to calculate the 

total loan amount for closed-end 

mortgage loans from existing comment 

32(a)(1)(ii)–1 to proposed comment 

32(b)(6)(i)–1. The Bureau also proposes 

certain changes to the total loan amount 


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44Calculating the total loan amount by deducting 

financed points and fees from the amount of credit 

extended to the consumer is consistent with the 

existing total loan amount calculation in current 

comment 32(a)(1)(ii)–1. 

45Current § 1026.35(b)(2) restricts prepayment 

penalties for ‘‘higher-priced’’ mortgage loans in 

much the same way that current § 1026.32(d)(6) and 

(7) restricts such penalties for HOEPA loans. 

definition and commentary for closedend mortgage loans, below. Finally, the 

Bureau proposes to define ‘‘total loan 

amount’’ for open-end credit plans in 

proposed § 1026.32(b)(6)(ii). 

32(b)(6)(i) Closed-End Mortgage Loans 

The Bureau proposes to move existing 

comment 32(a)(1)(ii)–1 concerning 

calculation of the ‘‘total loan amount’’ to 

proposed § 1026.32(b)(6)(i) and 

comment 32(b)(6)(i)–1 and to specify 

that the calculation applies to closedend mortgage loans. The Bureau also 

proposes to amend the definition of 

‘‘total loan amount’’ so that the ‘‘amount 

financed,’’ as calculated pursuant to 

§ 1026.18(b), is no longer the starting 

point for the total loan amount 

calculation. The Bureau believes this 

amendment both streamlines the total 

loan amount calculation to facilitate 

compliance and is sensible in light of 

the more inclusive definition of the 

finance charge proposed in the Bureau’s 

2012 TILA–RESPA Proposal. One effect 

of the proposed more inclusive finance 

charge generally could be to reduce the 

‘‘amount financed’’ for many 

transactions. The Bureau thus proposes 

no longer to rely on the ‘‘amount 

financed’’ calculation as the starting 

point for the ‘‘total loan amount’’ in 

HOEPA. The Bureau instead proposes to 

define ‘‘total loan amount’’ as the 

amount of credit extended at 

consummation that the consumer is 

legally obligated to repay, as reflected in 

the loan contract, less any cost that is 

both included in points and fees under 

§ 1026.32(b)(1) and financed by the 

creditor. Proposed comment 32(b)(6)(i)– 

1 provides an example of the Bureau’s 

proposed ‘‘total loan amount’’ 

calculation. 

The Bureau requests comment on the 

appropriateness of its revised definition 

of ‘‘total loan amount,’’ particularly on 

whether additional guidance is needed 

in light of the prohibition against 

financing of points and fees for highcost mortgages. Specifically, the Bureau 

notes that, under this proposal, financed 

points are relevant for two purposes. 

First, financed points and fees must be 

excluded from the total loan amount for 

purposes of determining whether the 

closed-end mortgage loan is covered by 

HOEPA under the points and fees 

trigger. Second, if a mortgage loan is a 

high-cost mortgage through operation of 

any of the HOEPA triggers, the creditor 

is prohibited from financing points and 

fees by, for example, including points 

and fees in the note amount or financing 

them through a separate note. See the 

section-by-section analysis to proposed 

§ 1026.34(a)(10), below. 

Notwithstanding that the proposal 

bans the financing of points and fees for 

high-cost mortgages, the Bureau believes 

that, for purposes of determining 

HOEPA coverage (and thus whether the 

ban applies) creditors should be 

required to deduct from the amount of 

credit extended to the consumer any 

points and fees that the creditor would 

finance if the transaction were not 

subject to HOEPA.44 In this way, the 

percent limit on points and fees for 

determining HOEPA coverage will be 

based on the amount of credit extended 

to the borrower without taking into 

account any points and fees that would 

(if permitted) be financed. 

The following example illustrates 

how the provisions concerning financed 

points and fees in proposed 

§§ 1026.32(b)(6)(i) and 1026.34(a)(10) 

would work together. First, assume that, 

under the terms of the mortgage loan 

contract, the consumer is legally 

obligated to repay $50,000. A portion of 

that amount, $2,450, represents the total 

amount of points and fees (as defined 

under proposed § 1026.32(b)(1)) payable 

in connection with the transaction. If 

the $2,450 in financed points and fees 

were not excluded from the total loan 

amount, then the transaction would fall 

below the five percent points and fees 

threshold for high-cost mortgages 

($2,450 divided by $50,000 equals 4.9 

percent of the total loan amount) and 

none of HOEPA’s protections, including 

the ban on financing of points and fees, 

would apply. In contrast, under the 

Bureau’s proposal, the $2,450 in points 

and fees is deducted from the total 

amount of credit extended to the 

consumer to arrive at a total loan 

amount of $47,550, and the transaction 

is a high-cost mortgage pursuant to 

proposed § 1026.32(a)(1)(ii) ($2,450 

divided by $47,550 equals 5.15 percent 

of the total loan amount). Pursuant to 

proposed § 1026.34(a)(10), then, the 

creditor would be prohibited from 

including the points and fees in the note 

amount, or financing them through a 

separate note. See also proposed 

comment 34(a)(10)–2. 

32(b)(6)(ii) Open-End Credit Plans 

Proposed § 1026.32(b)(6)(ii) provides 

that the ‘‘total loan amount’’ for an 

open-end credit plan is the credit limit 

for the plan when the account is 

opened. The Bureau requests comment 

as to whether additional guidance is 

needed concerning the ‘‘total loan 

amount’’ for open-end credit plans. 

32(b)(7) 

The proposal re-numbers existing 

§ 1026.32(b)(2) defining the term 

‘‘affiliate’’ as proposed § 1026.32(b)(7) 

for organizational purposes. 

32(b)(8) 

HOEPA’s Current Approach to 

Prepayment Penalties 

Section 1026.32 currently addresses 

prepayment penalties in § 1026.32(d)(6) 

and (7). Existing § 1026.32(d)(6) 

implements existing TILA section 

129(c)(1) by defining the term 

‘‘prepayment penalty’’ for high-cost 

mortgages as a penalty for paying all or 

part of the principal before the date on 

which the principal is due, including by 

computing a refund of unearned 

scheduled interest in a manner less 

favorable than the actuarial method, as 

defined by section 933(d) of the Housing 

and Community Development Act of 

1992. 15 U.S.C. 1639(c)(1). Existing 

§ 1026.32(d)(7) implements TILA 

section 129(c)(2), 15 U.S.C. 1639(c)(2), 

by specifying when a creditor may 

impose a prepayment penalty in 

connection with a high-cost mortgage. 

Prior to the Dodd-Frank Act, the 

substantive limitations on prepayment 

penalties in TILA section 129(c)(1) and 

(2) were the only statutorily-prescribed 

limitations on prepayment penalties, 

other than certain disclosure 

requirements set forth in TILA section 

128(a)(11) and (12).45

The Dodd-Frank Act’s Amendments to 

TILA Relating to Prepayment Penalties 

Sections 1431 and 1432 of the DoddFrank Act (relating to high-cost 

mortgages) and section 1414 of the 

Dodd-Frank Act (relating to qualified 

mortgages) amended TILA to further 

restrict and, in many cases, prohibit the 

imposition of prepayment penalties in 

dwelling-secured credit transactions. 

The Dodd-Frank Act restricted 

prepayment penalties in three main 

ways. 

Qualified Mortgages. First, as the 

Board discussed in its 2011 ATR 

Proposal, the Dodd-Frank Act added 

new TILA section 129C(c)(1) relating to 

qualified mortgages, which generally 

provides that a covered transaction (i.e., 

in general, a closed-end, dwellingsecured credit transaction) may include 

a prepayment penalty only if it: (1) Is a 

qualified mortgage (as the Board defined 

that term in its proposed § 226.43(e)(2) 

or (f)), (2) has an APR that cannot 

increase after consummation, and (3) is 


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46New TILA section 129C(c)(3) limits 

prepayment penalties for fixed-rate, non-higherpriced qualified mortgages to three percent, two 

percent, and one percent of the amount prepaid 

during the first, second, and third years following 

consummation, respectively. However, amended 

TILA sections 103(bb)(1)(A)(iii) and 129(c)(1) for 

high-cost mortgages effectively prohibit prepayment 

penalties in excess of two percent of the amount 

prepaid at any time following consummation for 

most credit transactions secured by a consumer’s 

principal dwelling by providing that HOEPA 

protections (including a ban on prepayment 

penalties) apply to mortgage loans with prepayment 

penalties that exceed two percent of the amount 

prepaid. In order to comply with both the high-cost 

mortgage provisions and the qualified mortgage 

provisions, creditors originating most closed-end 

mortgage loans secured by a consumer’s principal 

dwelling would need to limit the prepayment 

penalty on the transaction to (1) No more than two 

percent of the amount prepaid during the first and 

second years following consummation, (2) no more 

than one percent of the amount prepaid during the 

third year following consummation, and (3) zero 

thereafter. 

47The preamble to the Board’s 2010 Mortgage 

Proposal explained that the proposed revisions to 

current Regulation Z commentary and the proposed 

comment 38(a)(5) from the Board’s 2009 Closed-End 

Proposal regarding interest accrual amortization 

were in response to concerns about the application 

of prepayment penalties to certain Federal Housing 

Administration (FHA) and other loans (i.e., when a 

consumer prepays an FHA loan in full, the 

consumer must pay interest through the end of the 

month in which prepayment is made). 

48The preamble to the Board’s 2011 ATR 

Proposal addressed why the Board chose to omit 

these two items. The Board reasoned that a 

minimum finance charge need not be included as 

an example of a prepayment penalty because such 

a charge typically is imposed with open-end, rather 

than closed-end, transactions. The Board stated that 

loan guarantee fees are not prepayment penalties 

because they are not charges imposed for paying all 

or part of a loan’s principal before the date on 

which the principal is due. See 76 FR 27390, 27416 

(May 11, 2011). 

not a higher-priced mortgage loan as 

defined in § 1026.35(a). The Board 

proposed to implement TILA section 

129C(c)(1) in § 226.43(g)(1). See 76 FR 

27390, 27486 (May 11, 2011). Under 

new TILA section 129C(c)(3), moreover, 

even loans that meet the statutorily 

prescribed criteria (i.e., fixed-rate, nonhigher-priced qualified mortgages) may 

not include prepayment penalties that 

exceed three percent, two percent, and 

one percent of the amount prepaid 

during the first, second, and third years 

following consummation, respectively 

(or any prepayment penalty after the 

third year following consummation). 

The Board proposed to implement TILA 

section 129C(c)(3) in § 226.43(g)(2). See 

id. 

High-Cost Mortgage Prepayment 

Penalty Trigger and Prohibition. 

Second, as discussed above in the 

section-by-section analysis to proposed 

§ 1026.32(a)(1)(iii), amended TILA 

section 103(bb)(1)(A)(iii) provides that 

any closed- or open-end consumer 

credit transaction secured by a 

consumer’s principal dwelling (other 

than a reverse mortgage transaction) 

with a prepayment penalty in excess of 

two percent of the amount prepaid or 

payable more than 36 months after 

consummation or account opening is a 

high-cost mortgage subject to §§ 1026.32 

and 1026.34. Under amended TILA 

section 129(c)(1), in turn, high-cost 

mortgages are prohibited from having a 

prepayment penalty. 

Prepayment Penalty Inclusion in 

Points and Fees. Third, both qualified 

mortgages and most closed-end 

mortgage loans and open-end credit 

plans secured by a consumer’s principal 

dwelling are subject to additional 

limitations on prepayment penalties 

through the inclusion of prepayment 

penalties in the definition of points and 

fees for qualified mortgages and highcost mortgages. See the section-bysection analysis to proposed 

§ 1026.32(b)(1)(v)–(vi) and (3)(iv) above. 

See also 76 FR 27390, 27474–75 (May 

11, 2011) (discussing the inclusion of 

prepayment penalties in the points and 

fees calculation for qualified mortgages 

pursuant to TILA section 

129C(b)(2)(A)(vii) and noting that most 

qualified mortgage transactions may not 

have total points and fees that exceed 

three percent of the total loan amount). 

Taken together, the Dodd-Frank Act’s 

amendments to TILA relating to 

prepayment penalties mean that most 

closed-end, dwelling-secured 

transactions (1) May provide for a 

prepayment penalty only if they are 

fixed-rate, qualified mortgages that are 

neither high-cost nor higher-priced 

under §§ 1026.32 and 1026.35; (2) may 

not, even if permitted to provide for a 

prepayment penalty, charge the penalty 

more than three years following 

consummation or in an amount that 

exceeds two percent of the amount 

prepaid;46 and (3) may be required to 

limit any penalty even further to comply 

with the points and fees limitations for 

qualified mortgages, or to stay below the 

points and fees trigger for high-cost 

mortgages. In the open-end credit 

context, no open-end credit plan 

secured by a consumer’s principal 

dwelling may provide for a prepayment 

penalty more than 3 years following 

account opening or in an amount that 

exceeds two percent of the initial credit 

limit under the plan. 

The Board’s Proposals Relating to 

Prepayment Penalties 

In its 2009 Closed-End Proposal, the 

Board proposed to establish a new 

§ 226.38(a)(5) for disclosure of 

prepayment penalties for closed-end 

mortgage transactions. See 74 FR 43232, 

43334, 43413 (Aug. 26, 2009). In 

proposed comment 38(a)(5)–2, the 

Board stated that examples of 

prepayment penalties include charges 

determined by treating the loan balance 

as outstanding for a period after 

prepayment in full and applying the 

interest rate to such ‘‘balance,’’ a 

minimum finance charge in a simpleinterest transaction, and charges that a 

creditor waives unless the consumer 

prepays the obligation. In addition, the 

Board’s proposed comment 38(a)(5)–3 

listed loan guarantee fees and fees 

imposed for preparing a payoff 

statement or other documents in 

connection with the prepayment as 

examples of charges that are not 

prepayment penalties. The Board’s 2010 

Mortgage Proposal included 

amendments to existing comment 

18(k)(1)–1 and proposed comment 

38(a)(5)–2 stating that prepayment 

penalties include ‘‘interest’’ charges 

after prepayment in full even if the 

charge results from interest accrual 

amortization used for other payments in 

the transaction. See 75 FR 58539, 58756, 

58781 (Sept. 24, 2010).47

The Board’s 2011 ATR Proposal 

proposed to implement the Dodd-Frank 

Act’s prepayment penalty-related 

amendments to TILA for qualified 

mortgages by defining ‘‘prepayment 

penalty’’ for most closed-end, dwellingsecured transactions in new 

§ 226.43(b)(10), and by cross-referencing 

proposed § 226.43(b)(10) in the 

proposed joint definition of points and 

fees for qualified and high-cost 

mortgages in § 226.32(b)(1)(v) and (vi). 

See 76 FR 27390, 27481–82 (May 11, 

2011). The definition of prepayment 

penalty proposed in the Board’s 2011 

ATR Proposal differed from the Board’s 

prior proposals and current guidance in 

the following respects: (1) Proposed 

§ 226.43(b)(10) defined prepayment 

penalty with reference to a payment of 

‘‘all or part of’’ the principal in a 

transaction covered by the provision, 

while § 1026.18(k) and associated 

commentary and the Board’s 2009 

Closed-End Proposal and 2010 Mortgage 

Proposal referred to payment ‘‘in full,’’ 

(2) the examples provided omitted 

reference to a minimum finance charge 

and loan guarantee fees,48 and (3) 

proposed § 226.43(b)(10) did not 

incorporate, and the Board’s 2011 ATR 

Proposal did not otherwise address, the 

language in § 1026.18(k)(2) and 

associated commentary regarding 

disclosure of a rebate of a precomputed 

finance charge, or the language in 

§ 1026.32(b)(6) and associated 

commentary concerning prepayment 

penalties for high-cost mortgages. 


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49116 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

The Bureau’s Proposal 

To provide guidance as to the 

meaning of ‘‘prepayment penalty’’ for 

§ 1026.32 that is consistent with the 

definition proposed in the Bureau’s 

2012 TILA–RESPA Proposal (which 

itself draws from the definitions 

proposed in the Board’s 2009 ClosedEnd Proposal, 2010 Mortgage Proposal, 

and 2011 ATR Proposal), as well as to 

provide guidance in the context of openend credit plans, the Bureau proposes 

new § 1026.32(b)(8) to define the term 

‘‘prepayment penalty’’ for purposes of 

§ 1026.32. 

32(b)(8)(i) 

Prepayment Penalty; Closed-End 

Mortgage Loans 

Consistent with TILA section 

129(c)(1), existing § 1026.32(d)(6), and 

the Board’s proposed § 226.43(b)(10) for 

qualified mortgages, proposed 

§ 1026.32(b)(8)(i) provides that, for a 

closed-end mortgage loan, a 

‘‘prepayment penalty’’ means a charge 

imposed for paying all or part of the 

transaction’s principal before the date 

on which the principal is due. 

Proposed comment 32(b)(8)–1.i 

through –1.iv gives the following 

examples of prepayment penalties: (1) A 

charge determined by treating the loan 

balance as outstanding for a period of 

time after prepayment in full and 

applying the interest rate to such 

‘‘balance,’’ even if the charge results 

from interest accrual amortization used 

for other payments in the transaction 

under the terms of the loan contract; (2) 

a fee, such as an origination or other 

loan closing cost, that is waived by the 

creditor on the condition that the 

consumer does not prepay the loan; (3) 

a minimum finance charge in a simple 

interest transaction; and (4) computing 

a refund of unearned interest by a 

method that is less favorable to the 

consumer than the actuarial method, as 

defined by section 933(d) of the Housing 

and Community Development Act of 

1992, 15 U.S.C. 1615(d). Proposed 

comment 32(b)(8)–1.i further clarifies 

that ‘‘interest accrual amortization’’ 

refers to the method by which the 

amount of interest due for each period 

(e.g., month) in a transaction’s term is 

determined and notes, for example, that 

‘‘monthly interest accrual amortization’’ 

treats each payment as made on the 

scheduled, monthly due date even if it 

is actually paid early or late (until the 

expiration of any grace period). The 

proposed comment also provides an 

example where a prepayment penalty of 

$1,000 is imposed because a full 

month’s interest of $3,000 is charged 

even though only $2,000 in interest was 

earned in the month during which the 

consumer prepaid. 

Proposed comment 32(b)(8)–3.i 

through –3.ii clarifies that a prepayment 

penalty does not include: (1) Fees 

imposed for preparing and providing 

documents when a loan is paid in full, 

or when an open-end credit plan is 

terminated, if the fees apply whether or 

not the loan is prepaid or the plan is 

terminated prior to the expiration of its 

term, such as a loan payoff statement, a 

reconveyance document, or another 

document releasing the creditor’s 

security interest in the dwelling that 

secures the loan; or (2) loan guarantee 

fees. 

The definition of prepayment penalty 

in proposed § 1026.32(b)(8)(i) and 

comments 32(b)(8)–1 and 32(b)(8)–3.i 

and .ii substantially incorporates the 

definitions of and guidance on 

prepayment penalties from the Board’s 

2009 Closed-End Proposal, 2010 

Mortgage Proposal, and 2011 ATR 

Proposal and, as necessary, reconciles 

their differences. For example, the 

Bureau is proposing to incorporate the 

language from the Board’s 2009 ClosedEnd Proposal and 2010 Mortgage 

Proposal but omitted in the Board’s 

2011 ATR Proposal listing a minimum 

finance charge as an example of a 

prepayment penalty and stating that 

loan guarantee fees are not prepayment 

penalties, because similar language is 

found in longstanding Regulation Z 

commentary. Based on the differing 

approaches taken by the Board in its 

recent mortgage proposals, however, the 

Bureau seeks comment on whether a 

minimum finance charge should be 

listed as an example of a prepayment 

penalty and whether loan guarantee fees 

should be excluded from the definition 

of prepayment penalty. 

The Bureau expects to coordinate the 

definition of prepayment penalty in 

proposed § 1026.32(b)(8)(i) with the 

definitions in the Bureau’s other 

pending rulemakings mandated by the 

Dodd-Frank Act concerning ability-torepay, TILA–RESPA mortgage 

disclosure integration, and mortgage 

servicing. To the extent consistent with 

consumer protection objectives, the 

Bureau believes that adopting a 

consistent definition of ‘‘prepayment 

penalty’’ across its various pending 

rulemakings affecting closed-end 

mortgages will facilitate compliance. 

32(b)(8)(ii) 

Prepayment Penalties; Open-End Credit 

Plans 

Proposed § 1026.32(b)(8)(ii) defines 

the term ‘‘prepayment penalty’’ for 

open-end credit plans. Specifically, 

proposed § 1026.32(b)(8)(ii) provides 

that, in connection with an open-end 

credit plan, the term ‘‘prepayment 

penalty’’ means any fee that may be 

imposed by the creditor if the consumer 

terminates the plan prior to the 

expiration of its term. 

Proposed comment 32(b)(8)–2 

clarifies that, for an open-end credit 

plan, the term ‘‘prepayment penalty’’ 

includes any charge imposed if the 

consumer terminates the plan prior to 

the expiration of its term, including, for 

example, if the consumer terminates the 

plan in connection with obtaining a new 

loan or plan with the current holder of 

the existing plan, a servicer acting on 

behalf of the current holder, or an 

affiliate of either. Proposed comment 

32(b)(8)–2 further clarifies that the term 

‘‘prepayment penalty’’ includes a 

waived closing cost that must be repaid 

if the consumer terminates the plan 

prior to the end of its term, except that 

the repayment of waived bona fide 

third-party charges if the consumer 

terminates the credit plan within 36 

months after account opening is not 

considered a prepayment penalty. The 

Bureau’s proposal provides for a 

threshold of 36 months to clarify that, 

if the terms of an open-end credit plan 

permit a creditor to charge a consumer 

for waived third-part closing costs 

when, for example, the consumer 

terminates the plan in year nine of a tenyear plan, such charges would be 

considered prepayment penalties and 

would cause the open-end credit plan to 

be classified as a high-cost mortgage. 

The Bureau believes that the 36-month 

time limit is consistent both with the 

prepayment penalty trigger and with 

industry practice in the open-end credit 

context. 

The Bureau notes that the proposal 

distinguishes the inclusion of waived 

closing costs in the open- and closedend credit contexts. In the open-end 

credit context, the Bureau’s proposal 

provides that waived third-party closing 

costs that must be repaid if the 

consumer terminates the open-end 

credit plan sooner than three years after 

account opening are not considered 

prepayment penalties for purposes of 

triggering HOEPA coverage, whereas 

such charges would be considered 

prepayment penalties for closed-end 

mortgage loans. The Bureau believes 

that a different treatment of such 

charges is an appropriate use of its 

authority under TILA section 105(a) to 

prescribe regulations that contain such 

differentiations as are necessary to 

facilitate compliance with the 

regulation. Specifically, the Bureau 

understands that, unlike for closed-end 

mortgage loans, waived closing costs are 


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a common feature of open-end credit 

plans and, in addition, that such plans 

with waived closing costs are beneficial 

to consumers because they lower the 

cost of opening an account. The Bureau 

also understands that, in the case of an 

open-end credit plan, a waived thirdparty closing cost would only be 

recouped by the creditor if the 

consumer terminated the plan in its 

entirety within three years after account 

opening. This is in contrast to a closedend mortgage loan, where a creditor 

potentially could provide that even a 

partial prepayment of the principal 

balance triggers a requirement to repay 

waived closing costs. 

Proposed comment 32(b)(8)–3.iii 

specifies that, in the case of an open-end 

transaction, the term ‘‘prepayment 

penalty’’ does not include fees that the 

creditor may impose on the consumer to 

maintain the open-end credit plan, 

when an event has occurred that 

otherwise would permit the creditor to 

terminate and accelerate the plan. The 

exclusion from prepayment penalties of 

fees that a creditor in an open-end 

transaction may impose in lieu of 

terminating and accelerating a plan 

mirrors the exclusion of such fees as 

prepayment penalties required to be 

disclosed to the consumer as proposed 

in the Board’s 2009 Open-End Proposal. 

See 74 FR 43428, 43481 (Aug. 26, 2009). 

The Bureau requests comment on its 

proposed definition of ‘‘prepayment 

penalty’’ for open-end credit plans and 

on whether any additional charges 

should be included in or excluded from 

the definition. 

32(c) Disclosures 

TILA section 129(a) requires 

additional disclosures for high-cost 

mortgages, and these requirements are 

implemented in § 1026.32(c). The 

Bureau proposes to amend § 1026.32(c) 

to provide clarification and further 

guidance on the application of these 

disclosure requirements to open-end 

credit plans. 

The Bureau proposes comment 

32(c)(2)–1 to clarify how to disclose the 

annual percentage rate for an open-end 

high-cost mortgage. Specifically, 

proposed comment 32(c)(2)–1 clarifies 

that creditors must comply with 

§ 1026.6(a)(1). In addition, the proposed 

comment states that if the transaction 

offers a fixed-rate for a period of time, 

such as a discounted initial interest rate, 

§ 1026.32(c)(2) requires a creditor to 

disclose the annual percentage rate of 

the fixed-rate discounted initial interest 

rate, and the rate that would apply 

when the feature expires. 

The Bureau proposes to clarify 

§ 1026.32(c)(3), which requires 

disclosure of the regular payment and 

the amount of any balloon payment. 

Balloon payments generally are no 

longer permitted for high-cost 

mortgages, except in certain narrow 

circumstances, as discussed below. 

Proposed § 1026.32(c)(3)(i) incorporates 

the requirement in current 

§ 1026.32(c)(3) for closed-end mortgage 

loans and clarifies that the balloon 

payment disclosure is required to the 

extent a balloon payment is specifically 

permitted under § 1026.32(d)(1). 

For open-end credit plans, a creditor 

may not be able to provide a disclosure 

on the ‘‘regular’’ payment applicable to 

the plan because the regular monthly (or 

other periodic) payment will depend on 

factors that will not be known at the 

time the disclosure is required, such as 

the amount of the extension(s) of credit 

on the line and the rate applicable at the 

time of the draw or the time of the 

payment. In order to facilitate 

compliance and to provide consumers 

with meaningful disclosures, the Bureau 

proposes § 1026.32(c)(3)(ii) to require 

creditors to disclose an example of a 

minimum periodic payment for openend high-cost mortgages. Accordingly, 

proposed § 1026.32(c)(3)(ii)(A) provides 

that for open-end credit plans, a creditor 

must disclose payment examples 

showing the first minimum periodic 

payment for the draw period, and if 

applicable, any repayment period and 

the balance outstanding at the beginning 

of any repayment period. Furthermore, 

this example must be must be based on 

the following assumptions: (1) The 

consumer borrows the full credit line, as 

disclosed in § 1026.32(c)(5)(B) at 

account opening and does not obtain 

any additional extensions of credit; (2) 

the consumer makes only minimum 

periodic payments during the draw 

period and any repayment period; and 

(3) the annual percentage rate used to 

calculate the sample payments will 

remain the same during the draw period 

and any repayment period. Proposed 

§ 1026.32(c)(3)(ii)(A)(3) further requires 

that the creditor provide the minimum 

periodic payment example based on the 

annual percentage rate for the plan, as 

described in § 1026.32(c)(2), except that 

if an introductory annual percentage 

rate applies, the creditor must use the 

rate that would otherwise apply to the 

plan after the introductory rate expires. 

As discussed in detail below, the 

Bureau is proposing § 1026.32(d)(1)(iii) 

to provide an exemption to the 

prohibition on balloon payments for 

certain open-end credit plans. 

Accordingly, to the extent permitted 

under § 1026.32(d)(1), proposed 

§ 1026.32(c)(3)(ii)(B) requires disclosure 

of that fact and the amount of the 

balloon payment based on the 

assumptions described in 

§ 1026.32(c)(3)(ii)(A). 

To reduce potential consumer 

confusion, proposed 

§ 1026.32(c)(3)(ii)(C) requires that a 

creditor provide a statement explaining 

the assumptions upon which the 

§ 1026.32(c)(3)(ii)(A) payment examples 

are based. Furthermore, for the same 

reason, proposed § 1026.32(c)(3)(ii)(D) 

requires a statement that the examples 

are not the consumer’s actual payments 

and that the consumer’s actual periodic 

payments will depend on the amount 

the consumer has borrowed and interest 

rate applicable to that period. The 

Bureau believes that without such 

statements, consumers could 

misunderstand the minimum payment 

examples. However, the Bureau solicits 

comment on these proposed statements 

and whether other language would be 

appropriate and beneficial to consumer. 

The Bureau proposes to revise 

comment 32(c)(3)–1 to reflect the 

expanded statutory restriction on 

balloon payments and to clarify that to 

the extent a balloon payment is 

permitted under § 1026.32(d)(1), the 

balloon payment must be disclosed 

under § 1026.32(c)(3)(i). In addition, the 

Bureau proposes to renumber current 

comment 32(c)(3)–1 as proposed 

comment 32(c)(3)(i)–1 for organizational 

purposes. 

In order to provide additional 

guidance on the application of 

§ 1026.32(c)(4) to open-end credit plans, 

the Bureau proposes to revise comment 

32(c)(4)–1. For an open-end credit plan, 

proposed comment 32(c)(4)–1 provides 

that the disclosure of the maximum 

monthly payment, as required under 

§ 1026.32(c)(4), must be based on the 

following assumptions: (1) The 

consumer borrows the full credit line at 

account opening with no additional 

extensions of credit; (2) the consumer 

makes only minimum periodic 

payments during the draw period and 

any repayment period; and (3) the 

maximum annual percentage rate that 

may apply under the payment plan, as 

required by § 1026.30, applies to the 

plan at account opening. Although 

actual payments on the plan may 

depend on various factors, such as the 

amount of the draw and the rate 

applicable at that time, the Bureau 

believes this approach is consistent with 

existing guidance to calculate the 

‘‘worst-case’’ payment example. 

The Bureau proposes to amend 

§ 1026.32(c)(5) to clarify the disclosure 

requirements for open-end credit plans. 

The Bureau notes that the amount 

borrowed can be ascertained in a closedend mortgage loan but typically is not 


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49118 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

known at account opening for an openend credit plan. Specifically, proposed 

§ 1026.32(c)(5)(ii) provides that for 

open-end transactions, a creditor must 

disclose the credit limit applicable to 

the plan. Because HELOCs are open-end 

(revolving) lines of credit, the amount 

borrowed depends on the amount 

drawn on the plan at any time. Thus, 

the Bureau believes that disclosing the 

credit limit is a more appropriate and 

meaningful disclosure to the consumer 

than the total amount borrowed. The 

Bureau also proposes technical 

revisions to the existing requirements 

for closed-end mortgage loans under 

§ 1026.32(c)(5) and to the guidance 

under comment 32(c)(5)–1. 

32(d) Limitations 

32(d)(1) 

The Dodd-Frank Act amended the 

restrictions on balloon payments under 

TILA section 129(e). Specifically, 

amended TILA section 129(e) provides 

that no high-cost mortgage may contain 

a scheduled payment that is more than 

twice as large as the average of earlier 

scheduled payments, except when the 

payment schedule is adjusted to the 

seasonal or irregular income of the 

consumer. The Bureau is proposing two 

alternatives in proposed 

§ 1026.32(d)(1)(i) to implement the 

balloon payment restriction under 

amended TILA section 129(e). Under 

Alternative 1, proposed 

§ 1026.32(d)(1)(i) incorporates the 

statutory language and defines balloon 

payment as a scheduled payment that is 

more than twice as large as the average 

of regular periodic payments. Under 

Alternative 2, the Bureau mirrors 

Regulation Z’s existing definition of 

‘‘balloon payment’’ in § 1026.18(s)(5)(i). 

Accordingly, proposed § 1026.32(d)(1)(i) 

provides that a balloon payment is ‘‘a 

payment schedule that is more than two 

times a regular periodic payment.’’ This 

definition is similar to the statutory 

definition under the Dodd-Frank Act, 

except that it uses as its benchmark any 

regular periodic payment, rather than 

the average of earlier scheduled 

payments. 

Because the existing regulatory 

definition is narrower than the statutory 

definition, the Bureau believes that a 

payment that is twice any one regular 

periodic payment would be equal to or 

less than a payment that is twice the 

average of earlier scheduled payments. 

The Bureau notes that the range of 

scheduled payment amounts under 

Alternative 2 is more limited and 

defined. For example, if the regular 

periodic payment on a high-cost 

mortgage is $200, a payment of greater 

than $400 would constitute a balloon 

payment. Under Alternative 1, however, 

the balloon payment amount could be 

greater than $400 if, for example, the 

regular periodic payments were 

increased by $100 each year. Under 

Alternative 1, the amount constituting a 

balloon payment could increase with 

the incremental increase of the average 

of earlier scheduled payments. 

The Bureau proposes Alternative 2 

pursuant to its authority under TILA 

section 129(p)(1). The Bureau may 

exempt specific mortgage products or 

categories of mortgages from certain 

prohibitions under TILA section 129 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 home 

ownership and equity protection. The 

Bureau believes that under Alternative 

2, consumers would have a better 

understanding of the highest possible 

regular periodic payment in a 

repayment schedule and may 

experience less ‘‘payment shock’’ as a 

result. Therefore, the Bureau believes 

that Alternative 2 would better protect 

consumers and be in their interest. In 

addition, the Bureau believes that the 

definition of balloon payment under 

Alternative 2 would facilitate and 

simplify compliance by providing 

creditors with a single definition within 

Regulation Z and alleviating the need to 

average earlier scheduled payments. 

The Bureau notes that a similar 

adjustment is proposed in the 2012 

TILA–RESPA Proposal. 

The Bureau solicits comment on both 

alternatives. Under either alternative, a 

high-cost mortgage generally must 

provide for fully amortizing payments. 

Therefore, for similar reasons as stated 

in the Board’s 2011 ATR Proposal, see 

76 FR 27390, 27455–56 (May 11, 2011), 

the Bureau solicits comment on whether 

the difference in wording between the 

statutory definition and the existing 

regulatory definition, as a practical 

matter, would yield a significant 

difference in what constitutes a 

‘‘balloon payment’’ in the high-cost 

mortgage context. 

Proposed comment 32(d)(1)(i)–1 

provides further guidance on the 

application of § 1026.32(d)(1)(i) under 

both proposed alternatives. Specifically, 

the Bureau proposes clarifying that for 

purposes of open-end transactions, the 

term ‘‘regular periodic payment’’ or 

‘‘periodic payment’’ means the required 

minimum periodic payment. 

The Bureau proposes to revise 

§ 1026.32(d)(1)(ii) consistent with the 

statutory exception under amended 

TILA section 129(e). Accordingly, 

proposed § 1026.32(d)(1)(ii) provides an 

exception to the balloon payment 

restrictions under § 1026.32(d)(1)(i) if 

the payment schedule is adjusted to the 

seasonal or irregular income of the 

consumer. 

The Bureau is proposing to exercise 

its authority pursuant to TILA section 

129(p)(1) to provide an exception to the 

balloon payment restrictions for 

HELOCs with a repayment period. The 

Bureau understands that HELOC plans 

may have a draw period, or borrowing 

period, during which a consumer may 

obtain funds and a repayment period 

during which no further draws may be 

taken and the consumer is required to 

pay the balance on the account. 

Depending on the payment terms 

applicable to the draw period and the 

repayment period, an increase in 

scheduled payments that occurs as a 

result of the transition to the repayment 

period could be considered a balloon 

payment under a literal reading of TILA 

section 129(e). In most cases, the 

balloon payment restrictions would 

generally require that the payment 

schedule during the draw period be 

fully amortizing in order to avoid a 

balloon payment. However, the Bureau 

understands that some HELOC plans 

offer flexible payment features during 

the draw period. For example, some 

HELOC plans offer a payment plan 

where a consumer would only be 

required to pay interest during the draw 

period or offer a fixed-rate or -term 

feature. Therefore, pursuant to TILA 

section 129(p)(1), the Bureau believes 

that it is appropriate to provide 

creditors and consumers with flexibility 

during the draw period of a high-cost 

HELOC plan and that the continued 

availability of certain product features 

would be beneficial to consumers. 

Accordingly, the Bureau is proposing 

§ 1026.32(d)(1)(iii) to provide that if the 

terms of an open-end transaction 

provide for any repayment period 

during which no further draws may be 

taken, the balloon payment limitations 

in § 1026.32(d)(1)(i) apply only to the 

payment features within the repayment 

period. Proposed § 1026.32(d)(1)(iii) 

also provides that if the terms of an 

open-end transaction do not provide for 

any repayment period, the balloon 

payment limitations apply to the draw 

period. Proposed comment 32(d)(1)(i)–2 

clarifies that if the terms of a high-cost 

HELOC plan do not provide for any 

repayment period, then the repayment 

schedule must fully amortize any 

outstanding principal balance in the 

draw period through regular periodic 

payments. However, the limitation on 

balloon payments in § 1026.32(d)(1)(i) 

does not preclude increases in regular 

periodic payments that result solely 


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from the initial or additional draws on 

the credit line during the draw period. 

Under the Bureau’s proposal, a 

creditor would have to fully amortize 

the outstanding balance during the draw 

period if there is no repayment period 

in order to satisfy the requirements of 

proposed § 1026.32(d)(1)(i). The Bureau 

believes that this restriction on a highcost HELOC plan may curtail the 

flexibility or availability of products 

without a fully-amortizing repayment 

period. For example, a creditor may no 

longer be able to offer flexible payment 

features for a plan. The Bureau solicits 

comment on this aspect of the proposal. 

32(d)(6) Prepayment Penalties 

As discussed in the section-by-section 

analysis to proposed § 1026.32(b)(8), 

above, TILA currently permits 

prepayment penalties for high-cost 

mortgages in certain circumstances. In 

particular, under section TILA 129(c)(2), 

which is implemented in existing 

§ 1026.32(d)(7), a high-cost mortgage 

may provide for a prepayment penalty 

so long as the penalty otherwise is 

permitted by law and, under the terms 

of the loan, the penalty does not apply: 

(1) To a prepayment made more than 24 

months after consummation, (2) if the 

source of the prepayment is a 

refinancing of the current mortgage by 

the creditor or an affiliate of the 

creditor, (3) if the consumer’s debt-toincome ratio exceeds fifty percent, or (4) 

if the amount of the periodic payment 

of principal or interest (or both) can 

change during the first four years after 

consummation of the loan. 

Section 1432(a) of the Dodd-Frank Act 

repealed TILA section 129(c)(2). Thus, 

prepayment penalties are no longer 

permitted for high-cost mortgages. The 

proposal implements this change 

consistent with the statute by removing 

and reserving existing § 1026.32(d)(7) 

and comment 32(d)(7). The proposal 

also amends existing § 1026.32(d)(6) to 

clarify that prepayment penalties are a 

prohibited term for high-cost mortgages. 

As already discussed, the proposal 

retains in proposed § 1026.32(b)(8)(i) 

and proposed comment 32(b)(8)–1.iv the 

definition of prepayment penalty 

contained in existing § 1026.32(d)(6) 

and comment 32(d)(6)–1. See the 

section-by-section analysis to proposed 

§ 1026.32(b)(8)(i), above. 

32(d)(8) Acceleration of Debt 

The Bureau is proposing a new 

§ 1026.32(d)(8) to implement the 

prohibition in new section 129(l) of 

TILA added by section 1433(a) of the 

Dodd-Frank Act. New section 129(l) of 

TILA prohibits a high-cost mortgage 

from containing a provision which 

permits the creditor to accelerate the 

loan debt, except when repayment has 

been accelerated: (1) In response to a 

default in payment; (2) ‘‘pursuant to a 

due-on-sale provision’’; or (3) ‘‘pursuant 

to a material violation of some other 

provision of the loan document 

unrelated to payment schedule.’’ 

Proposed § 1026.32(d)(8) replaces 

current § 1026.32(d)(8) which similarly 

prohibited due-on-demand clauses for 

high-cost mortgages except in cases of 

fraud or material misrepresentation in 

connection with the loan, a consumer’s 

failure to meet the repayment terms of 

the loan agreement for any outstanding 

balance, or a consumer’s action or 

inaction that adversely affects the 

creditor’s security for the loan or any 

right of the creditor in such security. 

Proposed § 1026.32(d)(8) prohibits an 

acceleration feature in the loan or openend credit agreement for a high-cost 

mortgage unless there is a default in 

payment under the agreement; the 

acceleration is pursuant to a due-on-sale 

clause; or there is a material violation of 

a provision of the agreement unrelated 

to the payment schedule. Proposed 

comments 32(d)(8)(i) and (iii), are 

similar to the commentary for current 

§ 1026.32(d)(8) and provide examples of 

when acceleration under proposed 

§ 1026.32(d)(8) is permitted. For 

example, proposed comment 32(d)(8)(i) 

makes clear that a creditor can 

accelerate the debt for a default in 

payment only if the consumer actually 

fails to make payments that result in a 

default under the agreement, and not 

where the consumer fails to make 

payments in error, such as sending the 

payment to the wrong office of the 

creditor. Proposed comment 32(d)(8)(iii) 

provides examples where the creditor 

may accelerate the debt based on a 

material violation, by the consumer, of 

some other provision of the agreement 

unrelated to the payment schedule, for 

example where: (1) The consumer’s 

action or inaction adversely affects the 

creditor’s security for the loan or openend credit plan, or any right of the 

creditor in the security; or (2) the 

consumer violates the agreement 

through fraud or material 

misrepresentation in connection with 

the loan or open-end credit plan. The 

Bureau seeks comment from the public 

on possible additional examples where 

a consumer’s material violation of the 

loan or open-end credit agreement, 

unrelated to the payment schedule, may 

warrant acceleration of the debt, and 

examples of when a consumer’s action 

or inaction does not warrant 

acceleration. 

Section 1026.34 Prohibited Acts or 

Practices in Connection With High-Cost 

Mortgages 

34(a) Prohibited Acts or Practices for 

High-Cost Mortgages 

The Bureau generally proposes 

clarifying revisions in proposed 

§ 1026.34(a)(1) through (3) and comment 

34(a)(3)–2 for consistency and clarity. 

34(a)(4) Repayment Ability for HighCost Mortgages 

TILA section 129(h) generally 

prohibits a creditor from engaging in a 

pattern or practice of extending credit to 

consumers under high-cost mortgages 

based on the consumers’ collateral 

without regard to the consumers’ 

repayment ability, including the 

consumers’ current and expected 

income, current obligations, and 

employment. TILA section 129(h) is 

implemented in current § 1026.34(a)(4). 

The Dodd-Frank Act did not amend 

TILA section 129(h); however, sections 

1411, 1412, and 1414 of Dodd-Frank, 

among other things, established new 

ability-to-repay requirements for any 

residential mortgage loan under new 

TILA section 129C. Specifically, TILA 

section 129C expands coverage of the 

ability-to-repay requirements to any 

consumer credit transaction secured by 

a dwelling, except an open-end credit 

plan, timeshare plan, reverse mortgage, 

or temporary loan. Residential mortgage 

loans that are high-cost mortgages, as 

defined in TILA section 103(bb), will be 

subject to the ability-to-repay 

requirements pursuant to TILA section 

129C and the Bureau’s forthcoming 

implementing regulations. Therefore, 

the existing requirements under 

§ 1026.34(a)(4) will no longer be 

necessary for closed-end mortgage 

loans. For consistency with TILA 

section 129C, proposed § 1026.34(a)(4) 

requires that, in connection with a 

closed-end high-cost mortgage, a 

creditor must comply with the 

repayment ability requirements to be set 

forth in § 1026.43. The Bureau, 

however, solicits comment on this 

aspect of the proposal. 

Because open-end credit plans are 

excluded from coverage of TILA section 

129C, the existing ability-to-repay 

requirements of TILA section 129(h) 

would still apply to open-end credit 

plans that are high-cost mortgages. To 

facilitate compliance, the Bureau 

proposes to implement TILA section 

129(h) as it applies to open-end credit 

plans in proposed § 1026.34(a)(4) by 

amending the existing mortgage 

repayment ability requirements in 

current § 1026.34(a)(4) to apply 

specifically to high-cost open-end credit 


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plans. The Bureau notes that in the 2008 

Higher-Priced Mortgage Rule, 73 FR 

44522 (July 30, 2008), the Board 

adopted a rule prohibiting individual 

HOEPA loans or higher-priced mortgage 

loans from being extended based on the 

collateral without regard to repayment 

ability, rather than simply prohibiting a 

pattern or practice of making extensions 

based on the collateral without regard to 

ability to repay. The existing 

requirements further create a 

presumption of compliance under 

certain conditions to provide creditors 

with more certainty about compliance 

and to mitigate potential increased 

litigation risk. 

The Board concluded that this 

regulatory structure was warranted 

based on the comments the Board 

received and additional information. 

Specifically, the Board exercised its 

authority under TILA section 129(l)(2) 

(renumbered as TILA section 129(p)(2) 

by the Dodd-Frank Act) to revise 

HOEPA’s restrictions on HOEPA loans 

based on a conclusion that the revisions 

were necessary to prevent unfair and 

deceptive acts or practices in 

connection with mortgage loans. See 73 

FR 44545 (July 30, 2008). In particular, 

the Board concluded a prohibition on 

making individual loans without regard 

for repayment ability was necessary to 

ensure a remedy for consumers who are 

given unaffordable loans and to deter 

irresponsible lending, which injures 

individual borrowers. The Board 

determined that imposing the burden to 

prove ‘‘pattern or practice’’ on an 

individual borrower would leave many 

borrowers with a lesser remedy, such as 

those provided under some State laws, 

or without any remedy, for loans made 

without regard to repayment ability. The 

Board further determined that removing 

this burden would not only improve 

remedies for individual borrowers, it 

would also increase deterrence of 

irresponsible lending. The Board 

concluded that the structure of its rule 

would also have advantages for 

creditors over a ‘‘pattern or practice’’ 

standard, which can create substantial 

uncertainty and litigation risk. In 

contrast, the Board rule provided a 

presumption of compliance where 

creditors follow the specified 

requirements for individual loans. 

For substantially the same reasons 

detailed in the 2008 Higher-Priced 

Mortgage Rule, the Bureau believes that 

it is necessary and proper to use its 

authority under TILA section 129(p)(2), 

as amended, to retain the existing 

§ 1026.34(a)(4) repayment ability 

requirements with respect to individual 

open-end credit plans that are high-cost 

mortgages, with a presumption of 

compliance as specified in the 

regulation, rather than merely 

prohibiting a ‘‘pattern or practice’’ of 

engaging in such transactions without 

regard for consumers’ ability to repay 

the loans. The Bureau believes that the 

concerns discussed in the 2008 HigherPriced Mortgage Rule, such as 

preventing unfair practices, providing 

remedies for individual borrowers, and 

providing more certainty to creditors, 

are equally applicable to open-end 

transactions that are high-cost 

mortgages. Furthermore, in light of the 

Board’s prior determination, the Bureau 

believes it would not be in creditors’ 

and borrowers’ interest if the proposal 

inserted the ‘‘pattern or practice’’ 

language or removed the presumption of 

compliance in existing § 1026.34(a)(4). 

Therefore, the Bureau believes that 

applying the existing repayment ability 

requirement in current § 1026.34(a)(4) to 

open-end high-cost mortgages is 

necessary to prevent unfair or deceptive 

acts or practices in connection with 

mortgage loans. See TILA section 

129(p)(2). 

Accordingly, the Bureau proposes to 

revise § 1026.34(a)(4) to provide that in 

connection with an open-end credit 

plan subject to § 1026.32, a creditor 

shall not open a plan for a consumer 

where credit is or will be extended 

based on the value of the consumer’s 

collateral without regard to the 

consumer’s repayment ability as of 

account opening, including the 

consumer’s current and reasonably 

expected income, employment, assets 

other than the collateral, current 

obligations, and mortgage-related 

obligations. In addition, the Bureau 

generally proposes additional clarifying 

revisions in proposed § 1026.32(a)(4) 

and its associated commentary for 

consistency, clarity, or organizational 

purposes. The Bureau discusses specific 

proposed revisions below. 

34(a)(4)(iii)(B) 

The Bureau proposes to revise current 

§ 1026.34(a)(4)(iii) to clarify the criteria 

that a creditor must satisfy in order to 

obtain a presumption of compliance 

with the repayment ability requirements 

for high-cost mortgages that are openend credit plans. In particular, current 

§ 1026.34(a)(4)(iii)(B) requires that a 

creditor determine the consumer’s 

repayment ability using the largest 

payment of principal and interest 

scheduled in the first seven years 

following consummation and taking 

into account current obligations and 

mortgage-related obligations. The 

Bureau believes that it is appropriate to 

determine the consumer’s repayment 

ability based on the largest periodic 

payment amount a consumer would be 

required to pay under the payment 

schedule. However, applying this 

requirement to open-end credit plans 

requires additional assumptions because 

a creditor may not know certain factors 

required to determine the largest 

required minimum periodic payment, 

such as the amount a consumer will 

borrow and the applicable annual 

percentage rate. Accordingly, the 

Bureau proposes revised 

§ 1026.34(a)(4)(iii)(B) to require a 

creditor to determine the consumer’s 

repayment ability taking into account 

current obligations and mortgage-related 

obligations as defined in 

§ 1026.34(a)(4)(i), and using the largest 

required minimum periodic payment. 

Furthermore, proposed 

§ 1026.34(a)(4)(iii)(B) requires a creditor 

to determine the largest required 

minimum periodic payment based on 

the following assumptions: (1) The 

consumer borrows the full credit line at 

account opening with no additional 

extensions of credit; (2) the consumer 

makes only required minimum periodic 

payments during the draw period and 

any repayment period; and (3) the 

maximum annual percentage rate that 

may apply under the payment plan, as 

required by § 1026.30, applies to the 

plan at account opening and will apply 

during the draw period and any 

repayment period. 

The proposal generally incorporates 

guidance in current comment 34(a)(4), 

with revisions for clarity and 

consistency. In addition, the proposal 

provides revisions for clarification, as 

discussed in detail below. 

Proposed comment 34(a)(4)–1 clarifies 

that the repayment ability requirement 

under § 1026.34(a)(4) applies to openend credit plans subject to § 1026.32; 

however, the repayment ability 

provisions of § 1026.43 apply to closedend credit transactions subject to 

§ 1026.32. Proposed comment 34(a)(4)– 

3 clarifies the current commentary to 

conform with proposed revisions and 

removes the current example. Proposed 

comment 34(a)(4)(iii)(B)–1 removes the 

examples in current comment 

34(a)(4)(iii)(B) as unnecessary or 

inapplicable. 

34(a)(5) Pre-Loan Counseling 

Section 1433(e) of the Dodd-Frank Act 

added new TILA section 129(u), which 

creates a counseling requirement for 

high-cost mortgages. Prior to extending 

a high-cost mortgage, TILA section 

129(u)(1) requires that a creditor receive 

certification that a consumer has 

obtained counseling on the advisability 

of the mortgage from a HUD-approved 

counselor, or at the discretion of HUD’s 


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49 In addition to the housing counseling 

requirement for high-cost mortgages, the DoddFrank Act now requires housing counseling for 

first-time borrowers of negative amortization loans. 

Section 1414(a) of the Dodd-Frank Act requires 

creditors to receive documentation from a first-time 

borrower demonstrating that the borrower has 

received homeownership counseling prior to 

extending a mortgage to the borrower that may 

result in negative amortization. This requirement is 

further discussed in the section-by-section analysis 

for proposed § 1026.36(k) below. 

50 In addition to the regulations in 24 CFR part 

214, HUD’s Housing Counseling Program is 

governed by the provisions of the HUD Housing 

Counseling Program Handbook 7610.1 and 

applicable Mortgagee letters. 

51 12 U.S.C. 1715z–20(d)(2)(B). 

52See HUD Housing Counseling Handbook 

7610.1 (05/2010), Chapter 4, available at http:// 

www.hud.gov/offices/adm/hudclips/handbooks/ 

hsgh/7610.1/76101HSGH.pdf (visited June 16, 

2012) (HUD Handbook). 

Secretary, a State housing finance 

authority. TILA section 129(u)(3) 

specifically authorizes the Bureau to 

prescribe regulations that it determines 

are appropriate to implement the 

counseling requirement. In addition to 

the counseling requirement, TILA 

section 129(u)(2) requires that a 

counselor verify prior to certifying that 

a consumer has received counseling on 

the advisability of the high-cost 

mortgage that the consumer has 

received each statement required by 

TILA section 129 (implemented in 

§ 1026.32(c)) or each statement required 

by RESPA with respect to the 

transaction.49 The Bureau is exercising 

its authority under TILA section 

129(u)(3) to implement the counseling 

requirement in a way that ensures that 

borrowers will receive meaningful 

counseling, and at the same time that 

the required counseling can be provided 

in a manner that minimizes operational 

challenges. 

Background 

HUD’s housing counseling program is 

authorized by section 106 of the 

Housing and Urban Development Act of 

1968 (12 U.S.C. 1701w and 1701x) and 

the regulations for the program are 

found in 24 CFR part 214. This program 

provides counseling to consumers on a 

broad array of topics, including seeking, 

financing, maintaining, renting, and 

owning a home. According to HUD, the 

purpose of the program is to provide a 

broad range of housing counseling 

services to homeowners and tenants to 

assist them in improving their housing 

conditions and in meeting the 

responsibilities of tenancy or 

homeownership. Counselors can also 

help borrowers evaluate whether 

interest rates may be unreasonably high 

or repayment terms unaffordable, and 

thus may help reduce the risk of 

defaults and foreclosures. 

HUD historically has implemented its 

housing counseling program by 

approving nonprofit agencies and 

monitoring and funding government 

agencies that provide counseling 

services. HUD has required counseling 

agencies to meet various program 

requirements and comply with program 

policies and regulations to participate in 

HUD’s housing counseling program.50

While HUD’ regulations establish 

training and experience requirements 

for the individual counselors employed 

by the counseling agency, to date, HUD 

has not approved individual counselors. 

Pursuant to amendments made to the 

housing counseling statute by section 

1445 of the Dodd-Frank Act, HUD must 

provide for the certification of 

individual housing counselors. Section 

106(e) of the housing counseling statute 

(12 U.S.C. 1701x(e)) provides that the 

standards and procedures for testing 

and certifying counselors must be 

established by regulation. The Bureau 

understands that HUD is undertaking a 

rulemaking to put these standards and 

procedures in place for individual 

counselors. 

Pre-loan housing counseling is 

available generally to prospective 

borrowers planning to purchase or 

refinance a home, but Federal and State 

laws specifically require that it be 

provided prior to origination of certain 

types of loans. For example, Federal law 

requires homeowners to receive 

counseling before obtaining a reverse 

mortgage insured by the Federal 

Housing Administration (FHA), known 

as a Home Equity Conversion Mortgage 

(HECM).51 HUD imposes various 

requirements related to HECM 

counseling, including, for example: 

requiring FHA-approved HECM 

mortgagees to provide prospective 

HECM borrowers with contact 

information for HUD-approved 

counseling agencies; delineating 

particular topics that need to be 

addressed through HECM counseling; 

and preventing HECM lenders from 

steering a prospective borrower to a 

particular counseling agency.52 The 

Dodd-Frank Act added similar 

counseling requirements prior to 

origination of high-cost mortgages and 

loans involving negative amortization. 

The Bureau’s Proposal 

The Bureau is proposing to 

implement the counseling requirement 

for high-cost mortgages contained in 

new TILA section 129(u) in proposed 

§ 1026.34(a)(5). Specifically, proposed 

§ 1026.34(a)(5)(i) requires certification 

of counseling, proposed 

§ 1026.34(a)(5)(ii) addresses the timing 

of counseling, and proposed 

§ 1026(a)(5)(iv) sets forth requirements 

for the content of certification. The 

Bureau’s proposal also sets forth several 

provisions concerning potential 

conflicts of interest. Proposed 

§ 1026(a)(5)(iii) prohibits the affiliation 

of the counselor with the creditor, 

proposed § 1026(a)(5)(v) addresses the 

payment of counseling fees, and 

proposed § 1026(a)(5)(vi) prohibits a 

creditor from steering a consumer to a 

particular counselor or counseling 

organization. Finally, proposed 

§ 1026(a)(5)(vii) requires creditors to 

provide a list of counselors to 

consumers for whom counseling is 

required. 

34(a)(5)(i) Certification of Counseling 

Required 

The Bureau proposes to implement 

the requirement of new TILA section 

129(u)(1) for certification of counseling 

in proposed § 1026.34(a)(5)(i). 

Specifically, proposed § 1026.34(a)(5)(i) 

provides that a creditor shall not extend 

a high-cost mortgage unless the creditor 

receives written certification that the 

consumer has obtained counseling on 

the advisability of the mortgage from a 

HUD-approved counselor, or a State 

housing finance authority, if permitted 

by HUD. The Bureau is proposing 

commentary related to proposed 

§ 1026.34(a)(5)(i) to provide creditors 

additional compliance guidance. 

State Housing Finance Authority 

Proposed comment 34(a)(5)–1 clarifies 

that for the purposes of this section, a 

State housing finance authority has the 

same meaning as a ‘‘State housing 

finance agency’’ provided in 24 CFR 

214.3 of HUD’s regulations 

implementing the housing counseling 

program. The Bureau is aware that 

similar definitions of ‘‘State housing 

finance authority’’ are referenced in new 

section 128 of TILA and in section 1448 

of the Dodd-Frank Act. The Bureau does 

not believe that the minor differences 

among these three definitions are 

substantive, but in order to provide 

clarity, the Bureau is proposing to use 

the definition contained in 24 CFR 

214.3 because it specifically addresses 

the ability of State housing finance 

authorities to provide or fund 

counseling, either directly or through an 

affiliate. However, the Bureau requests 

comment on whether either of the other 

definitions of a State housing finance 

authority would be more appropriate in 

this context. 

HUD-Approved Counselor 

The Bureau understands that other 

than for its HECM counseling program, 


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53HUD has stated that it ‘‘may require specialized 

training or certifications prior to approving certain 

housing counseling services, such as HECM 

counseling.’’ HUD Handbook at 3–2. 

54The HECM program requires counseling to 

occur before a HECM lender may ‘‘process’’ an 

application, meaning that the creditor may accept 

an application, but ‘‘may not order an appraisal, 

title search, or an FHA case number or in any other 

way begin the process of originating a HECM loan’’ 

before the consumer has received counseling. HUD 

Mortgagee Letter 2004–25 (June 23, 2004). However, 

the Bureau notes that HECM counselors are not 

required to verify the receipt of transaction-specific 

disclosures prior to issuing a certification of 

counseling. 

55The Bureau notes that as part of its 2012 TILA– 

RESPA Proposal, the Bureau is proposing requiring 

that a settlement disclosure combining the HUD–1 

and the final TILA disclosure be provided to a 

consumer prior to settlement. However, any such 

requirement likely would not take effect until after 

the effective date for the requirements for high-cost 

mortgages. 

56The Bureau notes that as part of its 2012 TILA– 

RESPA Proposal, the Bureau is proposing that the 

good faith estimate required by RESPA be combined 

with the early TILA disclosure. Proposed 

§ 1026.34(a)(5)(ii) is intended to permit both the 

current good faith estimate or a future combined 

disclosure to satisfy the requirement in order to 

trigger counseling. 

HUD currently approves housing 

counseling agencies and not individual 

housing counselors, but will be 

certifying housing counselors in the 

future to implement section 1445 of the 

Dodd-Frank Act. Proposed comment 

34(a)(5)(i)–1 clarifies that counselors 

approved by the Secretary of HUD are 

homeownership counselors that are 

certified pursuant to section 106(e) of 

the Housing and Urban Development 

Act of 1968 (12 U.S.C. 1701x(e)), or as 

otherwise determined by the Secretary 

of HUD. Although the Bureau believes 

that it is unclear whether any 

counselors currently would be 

considered as certified to provide 

counseling pursuant to section 106(e), 

the Bureau has alerted HUD to this 

requirement and continues to consult 

with HUD to address it. The proposed 

comment is intended to ensure that the 

Bureau’s regulations do not impede 

HUD from determining which 

counselors qualify as HUD-approved 

and to account for future decisions of 

HUD with respect to the approval of 

counselors.53

Processing Applications 

Proposed comment 34(a)(5)(i)–2 

addresses when a creditor may begin to 

process an application that will result in 

the extension of a high-cost mortgage. 

The proposed comment states that prior 

to receiving certification of counseling, 

a creditor may not extend a high-cost 

mortgage, but may engage in other 

activities, such as processing an 

application that will result in the 

extension of a high-cost mortgage (by, 

for example, ordering an appraisal or 

title search). The Bureau notes that 

nothing in the statutory requirement 

restricts a creditor from processing an 

application that will result in the 

extension of a high-cost mortgage prior 

to obtaining certification of counseling. 

Moreover, the Bureau believes this 

interpretation is consistent with the 

HOEPA counseling requirements as a 

whole.54 As discussed in greater detail 

below in the section-by section analysis 

addressing the timing of counseling, 

new TILA section 129(u)(2) requires a 

counselor to verify the consumer’s 

receipt of each statement required by 

either TILA section 129 (which sets 

forth the requirement for additional 

disclosures for high-cost mortgages and 

is implemented in § 1026.32(c)) or by 

RESPA prior to issuing certification of 

counseling. The additional disclosures 

for high-cost mortgages required under 

§ 1026.32(c) may be provided by the 

creditor up to three business days prior 

to consummation of the mortgage. 

RESPA requires lenders to provide 

borrowers several disclosures over the 

course of the mortgage transaction, such 

as the good faith estimate and the HUD– 

1. Currently, the HUD–1 may be 

provided by the creditor at settlement.55

The Bureau believes that proposed 

comment 34(a)(5)(i)–2 is necessary to 

address both the ability of a creditor to 

provide the required disclosures to the 

consumer to permit certification of 

counseling, and to address the 

likelihood that a creditor may receive 

the required certification of counseling 

only days before the consummation of 

the loan, at the earliest. 

The Bureau recognizes that some 

creditors may wish to receive an 

indication that a consumer has obtained 

counseling prior to taking certain steps 

to continue processing an application. 

As discussed in the section-by-section 

analysis for proposed § 1026.34(a)(5)(ii), 

the Bureau proposes that counseling on 

the advisability of the loan may occur 

separately from and prior to the 

verification of the required disclosures 

and issuance of the certification of 

counseling. The Bureau notes that 

nothing in the proposed regulation or 

commentary precludes a creditor from 

requesting evidence from a counselor or 

consumer that the consumer has 

received counseling on the advisability 

of the mortgage before the consumer 

receives the required high-cost mortgage 

disclosure or the disclosures required 

under RESPA and before the counselor 

has issued certification of the 

counseling, if the creditor prefers to 

receive such information prior to taking 

certain steps to process the high-cost 

mortgage. 

Form of Certification 

Proposed comment 34(a)(5)(i)–3 sets 

forth the methods whereby a 

certification form may be received by 

the creditor. The proposed comment 

clarifies that the written certification of 

counseling may be received by any 

method, such as mail, email, or 

facsimile, so long as the certification is 

in a retainable form. This would permit 

creditors to comply with the existing 

record retention requirements of 

§ 1026.25. 

34(a)(5)(ii) Timing of Counseling 

Proposed § 1026.34(a)(5)(ii) provides 

that the required counseling must occur 

after the consumer receives either the 

good faith estimate required under 

RESPA, or the disclosures required 

under § 1026.40 for open-end credit. 

The Bureau believes that permitting 

counseling to occur as early as possible 

allows consumers more time to consider 

whether to proceed with a high-cost 

mortgage and to shop for different 

mortgage terms. However, the Bureau 

believes that it is also important that 

counseling on a high-cost mortgage 

address the specific loan terms being 

offered to a consumer. Therefore, 

requiring the receipt of either of these 

transaction-specific documents prior to 

the consumer’s receipt of counseling on 

the advisability of the high-cost 

mortgage will best ensure that the 

counseling session can address the 

specific features of the high-cost 

mortgage, and that consumers will have 

an opportunity to ask questions about 

the loan terms offered. At the same time, 

given that these documents are provided 

to the consumer within a few days 

following application, the Bureau 

believes that the proposal permits 

counseling to occur early enough to give 

consumers sufficient time after 

counseling to consider whether to 

proceed with the high-cost mortgage 

transaction and to consider alternative 

options.56

Despite the verification requirement, 

the Bureau does not believe that it 

would make sense to wait until receipt 

of all disclosures referenced in the 

statute to permit counseling to occur. 

Accordingly, nothing in proposed 

§ 1026.34(a)(5)(ii) requires a counselor 

to wait for the receipt of either the 

§ 1026.32(c) or RESPA disclosures that 

must be verified prior to certification to 

provide counseling. As noted above, the 

§ 1026.32(c) high-cost mortgage 

disclosure is generally required to be 

provided to the consumer no later than 

three business days prior to 


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57 ‘‘Affiliate’’ is defined in § 1026.32(b)(2) to mean 

‘‘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.).’’ 

58State housing finance agencies ‘‘may provide 

direct counseling services or subgrant housing 

counseling funds, or both, to affiliated housing 

counseling agencies within the SHFA’s state.’’ 24 

CFR 214.3. 59HUD Handbook at 3–5. 

consummation of the loan, and one of 

the disclosures required under RESPA, 

the HUD–1, currently may be provided 

to the consumer at settlement. As a 

practical matter, this means that 

certification would not happen until 

right before closing. The Bureau does 

not believe that delaying counseling 

pending receipt of all disclosure would 

benefit consumers, because consumers 

may not be able to walk away from the 

transaction or seek better loan terms so 

late in the process. Accordingly, the 

Bureau believes that the best approach 

is a two stage process in which 

counseling would occur prior to and 

separately from the receipt of the highcost mortgage disclosures, after which 

the counselor would confirm receipt of 

the disclosures, answer any additional 

questions from the consumer, and issue 

the certification. Under these 

circumstances, a consumer obtaining a 

high-cost mortgage would have at least 

two separate contacts with his housing 

counselor, the first to receive counseling 

on the advisability of the high-cost 

mortgage, and the second to verify with 

the counselor that the consumer has 

received the applicable disclosure. The 

Bureau believes that a second contact 

may be beneficial to consumers because 

it gives consumers an opportunity to 

request that the counselor explain the 

disclosure, and to raise any additional 

questions or concerns they have, just 

prior to consummation. The Bureau 

solicits comment on this aspect of the 

proposal and whether a second contact 

helps facilitate compliance with the 

requirement for certification of 

counseling. 

Proposed comment 34(a)(5)(ii)–1 

clarifies that for open-end credit plans 

subject to § 1026.32, proposed 

§ 1026.34(a)(5)(ii) permits receipt of 

either the good faith estimate required 

by RESPA or the disclosures required 

under § 1026.40 to allow counseling to 

occur, because 12 CFR 1024.7(h) 

permits the disclosures required by 

§ 1026.40 to be provided in lieu of a 

good faith estimate, in the case of an 

open-end credit plan. The Bureau 

requests comment on whether it is 

appropriate to trigger the counseling 

period based on receipt of the disclosure 

under § 1026.40 for open-end credit 

plans. 

Proposed comment 34(a)(5)(ii)–2 

clarifies that counseling may occur after 

the consumer receives either an initial 

good faith estimate or a disclosure 

under § 1026.40, regardless of whether a 

revised disclosure is subsequently 

provided to the consumer. 

34(a)(5)(iii) Affiliation Prohibited 

Proposed § 1026.34(a)(5)(iii)(A) 

implements the general prohibition in 

new TILA section 129(u) that the 

counseling required for a high-cost 

mortgage shall not be provided by a 

counselor who is employed by or 

affiliated 57 with the creditor extending 

the high-cost mortgage. 

Pursuant to the Bureau’s authority 

under TILA 129(u)(3), proposed 

§ 1026.34(a)(5)(iii)(B) creates an 

exception from this general prohibition 

for a State housing finance authority 

that both extends a high-cost mortgage 

and provides counseling to a consumer, 

either itself or through an affiliate, for 

the same high-cost mortgage transaction. 

The Bureau understands that State 

housing finance authorities may make 

mortgage funds directly available to 

consumers for purposes such as 

emergency home repairs through 

programs for which counseling is 

required, and that such loans could be 

classified as high-cost mortgages based 

on their fees. At the same time, State 

housing finance authorities may provide 

direct counseling services or distribute 

housing counseling funds to affiliated 

counseling agencies.58 These programs 

can provide benefits to consumers, and 

the Bureau does not believe that 

allowing a State housing finance 

authority to both extend such mortgages 

and counsel the recipients of such 

mortgages, either itself or through an 

affiliate, should be prohibited. 

Accordingly, the Bureau is proposing to 

allow State housing finance authorities 

to continue lending activities including 

extending credit that may be classified 

as a high-cost mortgage without 

requiring consumers to obtain 

counseling from an unaffiliated 

counseling agency. The Bureau requests 

comment on the proposed general 

affiliation prohibition, and the 

exception provided for State housing 

finance authorities. The Bureau also 

requests comment on whether it should 

consider any other exceptions from the 

general affiliation prohibition, and 

specifically on whether nonprofit 

counseling agencies extend mortgages to 

consumers that could be classified as 

high-cost, either themselves or through 

nonprofit affiliates. 

34(a)(5)(iv) Content of Certification 

Proposed § 1026.34(a)(5)(iv) sets forth 

requirements for the certification form 

that is provided to the creditor. 

Specifically, proposed 

§ 1026.34(a)(5)(iv) provides that the 

certification form must include the 

name(s) of the consumer(s) who 

obtained counseling; the date(s) of 

counseling; the name and address of the 

counselor; a statement that the 

consumer(s) received counseling on the 

advisability of the high-cost mortgage 

based on the terms provided in either 

the good faith estimate or the 

disclosures required by § 1026.40; and a 

statement that the counselor has verified 

that the consumer(s) received the 

§ 1026.32(c) disclosures or the 

disclosures required by RESPA with 

respect to the transaction. 

In new comment 34(a)(5)(iv)–1, the 

Bureau proposes guidance addressing 

the meaning of the statement that a 

consumer has received counseling on 

the advisability of the high-cost 

mortgage. Specifically, the comment 

provides that a statement that a 

consumer has received counseling on 

the advisability of a high-cost mortgage 

means that the consumer has received 

counseling about key terms of the 

mortgage transaction, as set out in the 

disclosures provided to the consumer 

pursuant to RESPA or § 1026.40; the 

consumer’s budget, including the 

consumer’s income, assets, financial 

obligations, and expenses; and the 

affordability of the loan for the 

consumer. The comment further 

provides some examples of such key 

terms of the mortgage transaction that 

are included in the good faith estimate 

or the disclosures required under 

§ 1026.40 are provided to the consumer. 

The Bureau believes that requiring 

counseling on the high-cost mortgage to 

address terms of the specific high-cost 

mortgage transaction is consistent with 

both the language and purpose of the 

statute. The Bureau also believes that a 

requirement that counseling address the 

consumer’s budget and the affordability 

of the loan is appropriate, since these 

are factors that are relevant to the 

advisability of a mortgage transaction 

for the consumer. Moreover, HUD 

already requires counselors to analyze 

the financial situation of their clients 

and establish a household budget for 

their clients when providing housing 

counseling.59

New comment 34(a)(5)(iv)–1 further 

explains, however, that a statement that 

a consumer has received counseling on 

the advisability of the high-cost 


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60This is consistent with HUD’s guidance related 

to the certification of counseling provided for the 

HECM program, which indicates that the issuance 

of a HECM counseling certificate ‘‘attests ONLY to 

the fact that the client attended and participated in 

the required counseling and that the statutorily 

required counseling for a HECM was provided’’ and 

‘‘does NOT indicate whether the counseling agency 

recommends or does not recommend the client for 

a reverse mortgage.’’ HUD Handbook at 4–18 

(emphases in original). 

61 24 CFR 214.313(a), (b). 

62 24 CFR 214.313(e); 214.303. 63See 75 FR 58539, 58670 (Sept. 24, 2010). 64HUD Handbook at 4–11. 

mortgage does not require the counselor 

to have made a judgment or 

determination as to the appropriateness 

of the loan for the consumer. The 

proposal provides that such a statement 

means the counseling has addressed the 

affordability of the high-cost mortgage 

for the consumer, not that the counselor 

is required to have determined whether 

a specific loan is appropriate for a 

consumer or whether a consumer is able 

to repay the loan.60

Proposed comment 34(a)(5)(iv)–2 

clarifies that a counselor’s verification 

of either the § 1026.32(c) disclosures or 

the disclosures required by RESPA 

means that a counselor has confirmed, 

orally, in writing, or by some other 

means, receipt of such disclosures with 

the consumer. The Bureau notes that a 

counselor’s verification of receipt of the 

applicable disclosures would not 

indicate that the applicable disclosures 

provided to the consumer with respect 

to the transaction were complete, 

accurate, or properly provided by the 

creditor. 

34(a)(5)(v) Counseling Fees 

The Bureau notes that HUD generally 

permits housing counselors to charge 

reasonable fees to consumers for 

counseling services, if the fees do not 

create a financial hardship for the 

consumer.61 For most of its counseling 

programs, HUD also permits creditors to 

pay for counseling services, either 

through a lump sum or on a per case 

basis, but imposes certain requirements 

on this funding to minimize potential 

conflicts of interest. For example, HUD 

requires that the payment be 

commensurate with the services 

provided and be reasonable and 

customary for the area, the payment not 

violate the requirements of RESPA, and 

the payment and the funding 

relationship be disclosed to the 

consumer.62 In the HECM program, 

however, creditor funding of counseling 

is prohibited. Due to concerns that 

counselors may not be independent of 

creditors and may present biased 

information to consumers, section 

255(d)(2)(B) of the National Housing 

Act, as amended by section 2122 of the 

Housing and Economic Recovery Act of 

2008, prohibits mortgagees from paying 

for HECM counseling on behalf of 

mortgagors. 

The Bureau believes that counselor 

impartiality is essential to ensuring that 

counseling affords meaningful 

consumer protection. Without counselor 

impartiality, the counseling a consumer 

receives on the advisability of a highcost mortgage could be of limited value. 

However, the Bureau is also aware of 

concerns that housing counseling 

resources are limited, and that funding 

for counseling may not be adequate.63

Prohibiting creditor funding of 

counseling may make it more difficult 

for counseling agencies to maintain 

their programs and provide services so 

that consumers may meet the legal 

requirement to receive counseling prior 

to obtaining a high-cost mortgage. It may 

also create financial hardships for 

borrowers of high-cost mortgages who 

would otherwise be obligated to pay the 

counseling fee upfront or finance the 

counseling fee. 

Proposed § 1026.34(a)(5)(v) addresses 

the funding of counseling fees by 

permitting a creditor to pay the fees of 

a counselor or counseling organization 

for high-cost mortgage counseling. 

However, to address potential conflicts 

of interest, the Bureau is also proposing 

that a creditor may not condition the 

payment of these fees on the 

consummation of the high-cost 

mortgage. Moreover, the Bureau is 

proposing that if the consumer 

withdraws the application that would 

result in the extension of a high-cost 

mortgage after receiving counseling, a 

creditor may not condition payment of 

counseling fees on the receipt of 

certification from the counselor required 

by proposed § 1026.34(a)(5)(i). If a 

counseling agency’s collection of fees 

were contingent upon the 

consummation of the mortgage, or 

receipt of a certification, a counselor 

might have an incentive to counsel a 

consumer to accept a loan that is not in 

the consumer’s best interest. The Bureau 

recognizes, however, that a creditor may 

wish to confirm that a counselor has 

provided services to a consumer, prior 

to paying a counseling fee. Accordingly, 

proposed § 1026.34(a)(5)(v) also 

provides that a creditor may otherwise 

confirm that a counselor has provided 

counseling to a consumer prior to 

paying counseling fees. The Bureau 

believes that proposed § 1026.34(a)(5)(v) 

will help preserve the availability of 

counseling for high-cost mortgages, and 

at the same time help ensure counselor 

independence and prevent conflicts of 

interest that may otherwise arise from 

creditor funding of counseling. 

Proposed comment 34(a)(5)(v)–1 

addresses the financing of counseling 

fees. As noted above, the Bureau intends 

to preserve the availability of counseling 

for high-cost mortgages. The proposed 

comment clarifies that proposed 

§ 1026.34(a)(5)(v) does not prohibit a 

creditor from financing the counseling 

fee as part of the mortgage transaction, 

provided that the fee is a bona fide third 

party charge as defined by proposed 

§ 1026.32(b)(5)(i). The Bureau believes 

that the proposal would ensure that 

several options are available for the 

payment of any counseling fees, such as 

a consumer paying the fee directly to 

the counseling agency, the creditor 

paying the fee to the counseling agency, 

or the creditor financing the counseling 

fee for the consumer. 

The Bureau requests comment on 

whether to adopt additional or 

alternative restrictions on the 

compensation of counselors or 

counseling organizations for high-cost 

mortgage counseling services. 

34(a)(5)(vi) Steering Prohibited 

Proposed § 1026.34(a)(5)(vi) provides 

that a creditor that extends a high-cost 

mortgage shall not steer or otherwise 

direct a consumer to choose a particular 

counselor or counseling organization for 

the required counseling. The proposal is 

intended to help preserve counselor 

independence and prevent conflicts of 

interest that may arise when creditors 

refer consumers to particular counselors 

or counseling organizations. The Bureau 

notes that under the HECM program, 

lenders providing HECMs are prohibited 

from steering consumers to any 

particular counselor or counseling 

agency.64

The Bureau is similarly proposing to 

prohibit a creditor that extends highcost mortgages from steering or 

otherwise directing a consumer to 

choose a particular counselor or 

counseling organization for the required 

counseling on the high-cost mortgage. 

The Bureau believes that absent a 

steering prohibition, a creditor could 

direct the consumer to a counselor with 

whom the creditor has a tacit or express 

agreement to refer customers in 

exchange for favorable advice on the 

creditor’s products in the counseling 

session. 

Whether steering of this type has 

occurred is a case-by-case determination 

and may be difficult to discern. 

Accordingly, the Bureau is proposing 

comment 34(a)(5)(vi)–1 and 2, which 

provide an example of an action that 


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65See, e.g., NY Real Prop. Acts Law § 1304(2); 

Ariz. Rev. Stat. § 6–1703(A)(1). 

66An additional statutory basis for extending this 

prohibition to mortgage brokers is the authority 

provided under Section 129(p)(2)(A) of TILA, 

which requires the Bureau to ‘‘by regulation * * * 

prohibit acts or practices in connection with—(A) 

mortgage loans that the Bureau finds to be unfair, 

deceptive, or designed to evade the provisions of 

this section.’’ Under the practice prohibited by 

Section 129(j), the borrower may be deceived into 

stopping payment on their existing loan due to a 

misrepresentation made by a mortgage broker that 

to do so will be of no consequence to the 

borrower—even though the nonpayment will result 

in a default by that borrower, in effect forcing the 

borrower to take the high-cost loan offered by the 

mortgage broker to eliminate that default. This 

scenario would likely meet the basic elements of a 

deceptive act or practice: (1) A representation, 

omission or practice that is likely to mislead the 

consumer; (2) the consumer acted reasonably in the 

Continued 

constitutes steering, as well as an 

example of an action that does not 

constitute steering. The comment 

indicates that a creditor is engaged in 

steering if the creditor repeatedly 

highlights or otherwise distinguishes 

the same counselor in the notices it 

provides to consumers pursuant to 

proposed § 1026.34(a)(5)(vii), discussed 

below. In contrast, the comment 

clarifies that the rule would not prohibit 

a creditor from providing a consumer 

with objective information about a 

counselor, such as fees charged by the 

counselor. 

The Bureau solicits comment on the 

proposed approach to prevent steering 

of consumers to particular counselors or 

counseling organizations. The Bureau 

also requests comment on the 

usefulness of the illustrations in 

proposed comment 34(a)(5)(vi)–1 and 2, 

and on whether any additional 

examples of activities that would or 

would not constitute steering should be 

included. 

34(a)(5)(vii) List of Counselors 

In order to help consumers obtain 

information about resources for 

counseling, the Bureau is proposing to 

require creditors to provide consumers 

who will receive a high-cost mortgage 

with information about housing 

counseling resources. Proposed 

§ 1026.34(a)(5)(vii)(A) requires a 

creditor to provide to a consumer for 

whom counseling is required, a notice 

containing the Web site addresses and 

telephone numbers of the Bureau and 

HUD for access to information about 

housing counseling, and a list of five 

counselors or counseling organizations 

approved by HUD to provide high-cost 

mortgage counseling. Proposed 

§ 1026.34(a)(5)(vii)(A) also requires the 

notice to be provided to the consumer 

no later than the time when either the 

RESPA good faith estimate or the 

disclosure required by § 1026.40 in lieu 

of a good faith estimate, as applicable, 

must be provided. 

As discussed in the section-by-section 

analysis of proposed § 1024.20 in 

Regulation X, the Bureau is proposing 

that creditors will be required to 

provide a list of homeownership 

counselors to mortgage loan applicants 

generally. In order to facilitate 

compliance with proposed 

§ 1026.34(a)(5)(vii)(A), the Bureau is 

proposing a safe harbor in 

§ 1026.34(a)(5)(vii)(B) that provides that 

a creditor will be deemed to have 

complied with the requirements of 

paragraph (a)(5)(vii)(A) if the creditor 

provides the list of homeownership 

counselors or organizations required by 

12 CFR 1024.20 to a consumer for whom 

high-cost mortgage counseling is 

required. 

Proposed comment 34(a)(5)(vii)–1 

addresses the provision of the list of 

homeownership counselors in situations 

in which there may be multiple 

creditors or multiple consumers 

involved in a high-cost mortgage 

transaction by providing a crossreference to §§ 1026.5(d) and 1026.17(d) 

and their related commentary, which 

provide guidance on the provision of 

disclosures for open- and closed-end 

credit in such situations. 

The Bureau seeks comment on 

whether the requirement to provide 

Bureau, HUD, and counselor contact 

information is necessary or helpful. In 

addition, the Bureau solicits comment 

on whether requiring a list of five 

counseling organizations or counselors 

is appropriate. The Bureau is aware that 

several State laws that impose 

requirements on creditors to provide 

consumers lists of housing counselors 

specify a list of five as well.65 The 

Bureau is concerned that requiring a list 

of too few counselors or organizations 

would provide inadequate options to 

consumers, and could increase the risk 

for steering by creditors. The Bureau is 

also concerned, however, that requiring 

a list of too many counselors or 

organizations could be overwhelming to 

consumers, and could also create 

compliance challenges in certain 

geographic regions where there may be 

fewer counseling organizations. 

The Bureau also requests comment on 

whether the safe harbor proposed in 

§ 1026.24(a)(5)(vii)(B) is appropriate. 

The Bureau believes that most creditors 

will comply with the requirement to 

provide a list of counselors by fulfilling 

their obligations under 12 CFR 1024.20. 

However, the Bureau seeks comment on 

whether some creditors are likely to 

comply with this requirement 

independent of their obligations under 

RESPA, and if so, whether additional 

guidance would be helpful. 

34(a)(6) Recommended Default 

The Bureau is proposing a new 

§ 1026.34(a)(6) to implement the 

prohibition on a creditor recommending 

a consumer default in connection with 

a high cost mortgage in new section 

129(j) of TILA, which was added by 

section 1433(a) of the Dodd-Frank Act. 

Specifically, section 129(j) of TILA 

prohibits creditors from recommending 

or encouraging a consumer to default on 

an ‘‘existing loan or other debt prior to 

and in connection with the closing or 

planned closing of a high-cost mortgage 

that refinances all or any portion of such 

existing loan.’’ The Bureau, however, is 

proposing to use its authority under 

section 129(p)(2) of TILA to extend this 

prohibition in proposed § 1026.34(a)(6) 

to mortgage brokers, in addition to 

creditors. Section 129(p)(2) provides 

that the ‘‘Bureau by regulation * * * 

shall prohibit acts or practices in 

connection with—* * *(B) refinancing 

of mortgage loans the Bureau finds to be 

associated with abusive lending 

practices, or that are otherwise not in 

the interest of the borrower.’’ 

Section 129(j) prohibits a practice—in 

connection with a refinancing—that is 

abusive or ‘‘otherwise not in the interest 

of the borrower’’ whereby a creditor 

advises a consumer to stop making 

payments on an existing loan with the 

creditor knowing that the consumer, by 

taking that advice, will default on that 

loan. Following the creditor’s advice 

could therefore leave the consumer with 

no choice but to accept a high-cost 

mortgage originated by that creditor, 

with terms that are likely less favorable 

to the consumer, in order to refinance, 

and eliminate the default, on that 

existing loan. The Bureau believes that 

it is appropriate to extend the same 

prohibition against such creditor actions 

to mortgage brokers who often have 

significant interaction with consumers 

with regard to the refinancing of 

mortgage loans and could have similar 

incentives to encourage defaults that are 

not in the interest of the consumer. As 

stated by the Board in its final rule on 

higher-priced mortgage loans, 73 FR 

44522, 44529 (July 30, 2008), ‘‘[t]he 

authority granted to the Board under 

TILA [section 129(p)(2)] is broad * * *. 

[W]hile HOEPA’s statutory restrictions 

apply only to creditors and only to loan 

terms or lending practices, [section 

129(p)(2)] is not limited to creditors and 

only to loan terms or lending practices.’’ 

Proposed § 1026.34(a)(6) therefore 

prohibits this practice for both creditors 

and mortgage brokers.66


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circumstances; and (3) the representation, omission, 

or practice is ‘‘material,’’ i.e., is likely to affect the 

consumer’s conduct or decision with regard to a 

product or service (i.e., the accepting of a high-cost 

mortgage). See Board’s final rule on higher-priced 

mortgage loans, 73 FR 44522, 44528–29 (July 30, 

2008), citing to a letter from James C. Miller III, 

Chairman, Federal Trade Commission to Hon. John 

D. Dingell, Chairman, H. Comm. on Energy and 

Commerce (Oct. 14, 1983), in explaining the Board’s 

authority to prohibit unfair and deceptive practices 

under then Section 129(l)(2) of TILA. 

Proposed comment 34(a)(6) clarifies 

that whether a creditor or mortgage 

broker ‘‘recommends or encourages’’ a 

consumer to default on an existing loan 

depends on the relevant facts and 

circumstances, and provides examples. 

The Bureau solicits comment on the 

proposed examples and on additional 

possible examples where a creditor or 

mortgage broker may or may not be 

recommending or encouraging a 

consumer’s default. 

34(a)(7) Modification and Deferral Fees 

The Bureau is proposing a new 

§ 1026.34(a)(7) to implement the 

prohibition on modification and deferral 

fees for high-cost mortgages in new 

section 129(s) of TILA, as added by 

section 1433(b) of the Dodd-Frank Act. 

Specifically, section 129(s) of TILA 

prohibits a ‘‘creditor, successor in 

interest, assignee, or any agent’’ of these 

parties from charging a consumer ‘‘any 

fee to modify, renew, extend, or amend 

a high-cost mortgage, or to defer any 

payment due under the terms of such 

mortgage.’’ As proposed, § 1026.34(a)(7) 

closely follows the statutory language in 

its implementation of section 129(s). 

The Bureau seeks comment on the 

applicability of the prohibition to a 

refinancing of a high-cost mortgage, 

including where the refinancing would 

place the consumer in a non-high-cost 

mortgage. 

In order to ensure that the Bureau’s 

final rule, within the scope of the 

Bureau’s authorities, effectively protects 

and benefits consumers, the Bureau also 

seeks comment, in general, on the 

specific circumstances, including 

examples, under which the prohibition 

on modification and deferral fees is 

particularly needed to protect 

consumers. The Bureau further seeks 

information on the implications of the 

Bureau’s proposal on practices for openend credit, and specifically on the 

extent to which fees are charged for a 

consumer’s renewal or extension of the 

draw period under such open-end credit 

plans. 

34(a)(8) Late Fees 

Section 1433(a) of the Dodd-Frank Act 

added to TILA a new section 129(k) 

establishing limitations on late fees on 

high-cost mortgages. The proposal 

implements these limitations, with 

minor modifications for clarity, in 

proposed § 1026.34(a)(8). 

New TILA section 129(k)(1) generally 

provides that any late payment charge 

in connection with a high-cost mortgage 

must be specifically permitted by the 

terms of the loan contract or open-end 

credit agreement and must not exceed 4 

percent of the ‘‘amount of the payment 

past due.’’ No such late payment charge 

may be imposed more than once with 

respect to a single late payment, or prior 

to the expiration of certain statutorily 

prescribed grace periods (i.e., for 

transactions in which interest is paid in 

advance, no fee may be imposed until 

30 days after the date the payment is 

due; for all other transactions, no fee 

may be imposed until 15 days after the 

date the payment is due). Proposed 

§ 1026.34(a)(8)(i) and (ii) implements 

new TILA section 129(k)(1) consistent 

with the statute. 

New TILA section 129(k)(1) does not 

define the phrase ‘‘amount of the 

payment past due.’’ Proposed comment 

34(a)(8)(i)–1 explains that, for purposes 

of proposed § 1026.34(a)(8)(i), the 

‘‘payment past due’’ in an open-end 

credit plan is the required minimum 

periodic payment, as provided under 

the terms of the plan. This comment is 

intended to clarify that, for open-end 

credit plans, where monthly payment 

amounts can vary depending on the 

consumer’s use of the credit line, the 

‘‘payment past due’’ is the required 

minimum periodic payment that was 

due immediately prior to the assessment 

of the late payment fee. The Bureau 

seeks comment on the appropriateness 

of this definition. The Bureau also seeks 

comment on whether additional 

guidance is needed concerning the 

meaning of the phrase ‘‘amount of the 

payment past due’’ in the context either 

of closed-end mortgages or in the case 

of partial mortgage payments. 

34(a)(8)(iii) Multiple Late Charges 

Assessed on Payment Subsequently 

Paid 

New TILA section 129(k)(2) prohibits 

the imposition of a late charge in 

connection with a high-cost mortgage 

payment, when the only delinquency is 

attributable to late charges assessed on 

an earlier payment, and the payment is 

otherwise a full payment for the 

applicable period and is paid by its due 

date or within any applicable grace 

period. The Bureau proposes to 

implement this prohibition on late-fee 

pyramiding consistent with statutory 

language in § 1026.34(a)(8)(iii). The 

Bureau notes that proposed 

§ 1026.34(a)(8)(iii) is consistent with 

§ 1026.36(c)(1)(ii), which similarly 

prohibits late-fee pyramiding by 

servicers in connection with a consumer 

credit transaction secured by a 

consumer’s principal dwelling. 

Proposed comment 34(a)(8)(iii)–1 

illustrates the rule for a high-cost 

mortgage with regular periodic 

payments of $500 due by the 1st of each 

month (or before the expiration of a 15- 

day grace period), where a consumer 

makes a $500 payment on August 25 

and another $500 payment on 

September 1. Under proposed 

§ 1026.34(h)(2), it is impermissible to 

allocate any portion of the payment 

made on September 1 to cover a $10 late 

charge assessed on the payment made 

on August 25, such that the September 

1 payment, which otherwise complies 

with the terms of the loan contract, 

becomes delinquent. The Bureau 

requests comment as to whether 

additional guidance is needed 

concerning the application of proposed 

§ 1026.34(a)(8)(iii) to open-end credit 

plans. 

34(a)(8)(iv) Failure To Make Required 

Payment 

New TILA section 129(k)(3) provides 

that, if a past due principal balance 

exists on a high-cost mortgage as a result 

of a consumer’s failure to make one or 

more required payments, and if 

permitted by the terms of the loan 

contract or open-end credit agreement 

permit, subsequent payments may be 

applied first to the past due principal 

balance (without deduction due to late 

fees or related fees) until the default is 

cured. The Bureau generally proposes to 

implement new TILA section 129(k)(3) 

consistent with statutory language in 

§ 1026.34(a)(8)(iv), with modifications 

to clarify the application of the 

provision to open-end credit plans. 

Proposed comment 34(a)(8)(iv)–1 

illustrates the rule for a high-cost 

mortgage with regular periodic 

payments of $500 due by the 1st of each 

month (or before the expiration of a 15- 

day grace period), where a creditor 

imposes a $10 late fee after a consumer 

fails to make a timely payment on 

August 1 (or within the applicable grace 

period). If the consumer makes no 

payment until September 1, at which 

time the consumer makes a $500 

payment, then under proposed 

§ 1026.34(a)(8)(iv) (and if permitted by 

the terms of the loan contract), the 

creditor may apply that payment to 

satisfy the missed $500 payment that 

was due on August 1. The creditor may 

also impose a $10 late fee for the 

payment that was due on September 1 

(assuming that the consumer makes no 

other payment prior to the expiration of 


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67See current § 1026.36(c)(1)(iii), which prohibits 

a servicer ‘‘[i]n connection with a consumer credit 

transaction secured by a consumer’s principal 

dwelling’’ from failing ‘‘to provide within a 

reasonable period of time after receiving a request 

from the consumer * * * an accurate statement of 

the total outstanding balance * * *.’’ The 

commentary related to this section states that ‘‘it 

would be reasonable under most circumstances to 

provide the statement within five business days of 

receipt of a consumer’s request, and that ‘‘[t]his 

time frame might be longer, for example, when the 

servicer is experiencing an unusually high volume 

of refinancing requests.’’ See also new Section 129G 

of TILA added by section 1464 of the Dodd-Frank 

Act, which sets new timing requirements for the 

delivery of payoff statements for ‘‘home loans’’ but 

does not specifically address high-cost mortgages. It 

requires a ‘‘creditor or servicer of a home loan’’ to 

‘‘send an accurate payoff balance within a 

reasonable time, but in no case more than 7 

business days, after the receipt of a written request 

for such balance from or on behalf of the borrower.’’ 

The Bureau is implementing this provision in its 

rulemaking on mortgage servicing. 

any applicable grace period for the 

payment that was due on September 1). 

The Bureau requests comment on this 

example, including on whether 

additional guidance is needed 

concerning the application of proposed 

§ 1026.34(a)(8)(iv) to open-end credit 

plans. 

34(a)(9) Payoff Statements 

The Bureau is proposing a new 

§ 1026.34(a)(9) to implement new 

section 129(t) of TILA, added by section 

1433(d) of the Dodd-Frank Act, which: 

(1) specifically prohibits, with certain 

exceptions, a creditor or servicer from 

charging a fee for ‘‘informing or 

transmitting to any person the balance 

due to pay off the outstanding balance 

on a high-cost mortgage’’; and (2) 

requires payoff balances for high-cost 

mortgages to be provided within five 

business days of a request by a 

consumer or a person authorized by the 

consumer to obtain such information. 

Proposed § 1026.34(a)(9), in 

implementing section 129(t), prohibits a 

creditor or servicer from charging a fee 

to a consumer (or a person authorized 

by the consumer to receive such 

information) for providing a statement 

of an outstanding pay off balance due on 

a high-cost mortgage. It allows, 

however, as provided by section 129(t), 

the charging of a processing fee to cover 

the cost of providing a payoff statement 

by fax or courier, so long as such fees 

do not exceed an amount that is 

comparable to fees imposed for similar 

services provided in connection with a 

non-high-cost mortgage. The creditor or 

servicer is required to make the payoff 

statement available to a consumer by a 

method other than by fax or courier and 

without charge. Prior to charging a fax 

or courier processing fee, the creditor or 

servicer is required to disclose to the 

consumer (or a person authorized by the 

consumer to receive the consumer’s 

payoff information) that payoff 

statements are otherwise available for 

free. The proposal allows a creditor or 

servicer who has provided payoff 

statements on a high-cost mortgage to a 

consumer without charge (other than a 

processing fee for faxes or courier 

services) for four times during a 

calendar year to charge a reasonable fee 

for providing payoff statements during 

the remainder of the calendar year. 

Finally, the proposal requires payoff 

statements to be provided by a creditor 

or servicer within five business days 

after receiving a request by a consumer 

for such a statement (or a person 

authorized by the consumer to obtain 

such information).67

The Bureau seeks public comment on 

what additional guidance may be 

needed with regard to the fee and timing 

requirements for the provision of payoff 

statements for high-cost mortgages 

under proposed § 1026.34(a)(9). 

34(a)(10) Financing of Points and Fees 

Section 1433 of the Dodd-Frank Act 

added to TILA a new section 129(m) 

prohibiting the direct or indirect 

financing of (1) any points and fees; and 

(2) any prepayment penalty payable by 

the consumer in a refinancing 

transaction if the creditor or an affiliate 

of the creditor is the holder of the note 

being refinanced. The Bureau 

implements new TILA section 129(m) in 

proposed § 1026.34(a)(10). Proposed 

§ 1026.34(a)(10) implements all aspects 

of the statute, except that the Bureau 

omits from the proposal statutory 

language concerning the financing of 

prepayment penalties payable by the 

consumer in a refinancing transaction. 

The Bureau notes that such penalties are 

subsumed in the definition of points 

and fees for § 1026.32 in proposed 

§ 1026.32(b)(1)(vi) and (3)(iv). Thus, the 

prohibition against financing of ‘‘points 

and fees’’ necessarily captures the 

prohibition against financing of 

prepayment penalties payable in a 

refinancing transaction if the creditor or 

an affiliate of the creditor is the holder 

of the note being refinanced. Consistent 

with amended TILA section 

103(bb)(4)(D) concerning the financing 

of credit insurance premiums (which 

new TILA section 129C(d) generally 

bans), proposed § 1026.34(a)(10) 

specifies that credit insurance 

premiums are not considered financed 

when they are calculated and paid in 

full on a monthly basis. 

Proposed comment 34(a)(10)–1 

clarifies that ‘‘points and fees’’ for 

proposed § 1026.34(a)(10) means those 

items that are required to be included in 

the calculation of points and fees under 

proposed § 1026.32(b)(1) through (5). 

Proposed comment 34(a)(10)–1 specifies 

that, for example, in connection with 

the extension of credit under a high-cost 

mortgage, a creditor may finance a fee 

charged in connection with the 

consumer’s receipt of pre-loan 

counseling under § 1026.34(a)(5), 

because such a fee would be excluded 

from points and fees as a bona fide 

third-party charge pursuant to proposed 

§ 1026.32(b)(5)(i). 

Proposed comment 34(a)(10)–2 

provides examples of the prohibition on 

financing of points and fees. Proposed 

comment 34(a)(10)–2 explains that a 

creditor directly or indirectly finances 

points and fees in connection with a 

high-cost mortgage if, for example, such 

points or fees are added to the loan 

balance or financed through a separate 

note, if the note is payable to the 

creditor or to an affiliate of the creditor. 

In the case of an open-end credit plan, 

a creditor also finances points and fees 

if the creditor advances funds from the 

credit line to cover the fees. 

The Bureau requests comment on its 

proposed implementation of new TILA 

section 129(m). In particular, the Bureau 

requests comment on whether 

§ 1026.34(a)(10) should prohibit the 

financing of charges that are not 

included in the calculation of points 

and fees, such as bona-fide third party 

charges (including certain amounts of 

private mortgage insurance premiums). 

34(b) Prohibited Acts or Practices for 

Dwelling-Secured Loans; Structuring 

Loans To Evade High-Cost Mortgage 

Requirements 

The Bureau is proposing a new 

§ 1026.34(b) to implement the 

prohibition on structuring a loan 

transaction ‘‘for the purpose and with 

the intent’’ to evade the requirements 

for high-cost mortgages in new section 

129(r) of TILA, which was added by 

section 1433(b) of the Dodd-Frank Act. 

Section 129(r) of TILA specifically 

prohibits a creditor from taking ‘‘any 

action in connection with a high-cost 

mortgage’’ to: (1) ‘‘structure a loan as an 

open-end credit plan or another form of 

loan for the purpose and with the intent 

of evading the provisions of this title’’ 

which include the high-cost mortgage 

requirements; or (2) divide a loan into 

separate parts ‘‘for the purpose and with 

the intent’’ to evade the same 

provisions. 

Prior to the Dodd-Frank Act, openend credit plans were not within the 


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49128 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

68The Bureau proposes to exercise its authority 

under section 105(a) of TILA and section 1405(b) 

of the Dodd-Frank Act to allow the list to include, 

in addition to HUD-certified counselors or 

organizations required by section 1414(a) of the 

Dodd-Frank Act, HUD-approved counselors and 

organizations. The Bureau is proposing to exercise 

its authority to provide flexibility in order to 

facilitate the availability of competent housing 

counselors for placement on the list. See supra note 

24. 

scope of HOEPA’s coverage. Current 

§ 1026.34(b) prohibits structuring a 

home-secured loan as an open-end plan 

to evade the requirements of HOEPA. 

The Dodd-Frank Act amended TILA, 

however, to include open-end credit 

plans within the scope of coverage of 

HOEPA (see Section 1431(a) of the 

Dodd-Frank Act amending section 

103(aa) of TILA). Nevertheless, as noted, 

new section 129(r) prohibits the 

structuring of what would otherwise be 

a high-cost mortgage in the form of an 

open-end credit plan, or another loan 

form of loan, including dividing the 

loan into separate parts. Proposed 

§ 1026.34(b) implements this new 

section by prohibiting the structuring of 

a transaction that is otherwise a highcost mortgage as another form of loan, 

including dividing any loan transaction 

into separate parts, for the purpose and 

intent to evade the requirements of 

HOEPA. 

New proposed comment 34(b)–1 

provides examples of violations of 

proposed § 1026.34(b): (1) a loan that 

has been divided into two separate 

loans, thereby dividing the points and 

fees for each loan so that the HOEPA 

thresholds are not met, with the specific 

intent to evade the requirements of 

HOEPA; and (2) the structuring of a 

high-cost mortgage as an open-end 

home-equity line of credit that is in fact 

a closed-end home-equity loan in order 

to evade the requirement to include loan 

originator compensation in points and 

fees for closed-end mortgages under 

proposed § 1026.32(b)(1). 

The proposal re-numbers existing 

comment 34(b)–1 as comment 34(b)–2 

for organizational purposes. 

Notwithstanding the Dodd-Frank Act’s 

expansion of coverage under HOEPA to 

include open-end credit plans, the 

Bureau believes that the guidance set 

forth in proposed comment 34(b)–2 

remains useful for situations where it 

appears that a closed-end mortgage loan 

has been structured as an open-end 

credit plan to evade the closed-end 

HOEPA triggers. The Bureau proposes 

certain conforming amendments to 

proposed comment 34(b)–2, however, 

for consistency with the Bureau’s 

proposed amendment to the definition 

of ‘‘total loan amount’’ for closed-end 

mortgage loans. See the section-bysection analysis to proposed 

§ 1026.32(b)(6)(i), above. 

Section 1026.36 Prohibited Acts or 

Practices in Connection With Credit 

Secured by a Dwelling 36(k) Negative 

Amortization Counseling 

Section 1414 of the Dodd-Frank Act 

added new TILA section 129C(f)(2), 

which creates a counseling requirement 

for certain mortgages that may result in 

negative amortization. TILA section 

129C(f)(2) requires creditors to obtain 

documentation from a first-time 

borrower sufficient to demonstrate that 

the borrower has obtained 

homeownership counseling from a 

HUD-certified organization or counselor 

prior to extending credit to the borrower 

in connection with a closed-end 

transaction secured by a dwelling (other 

than a reverse mortgage subject to 

§ 1026.33 or a transaction secured by a 

consumer’s interest in a timeshare plan 

described in 11 U.S.C. 101(53D)) that 

may result in negative amortization. 

Background 

The Dodd-Frank Act added two 

general requirements that creditors must 

fulfill prior to extending credit to a 

consumer secured by a dwelling or 

residential real property that includes a 

dwelling, other than a reverse mortgage, 

that may result in negative amortization. 

The first, found in new TILA 129C(f)(1), 

requires creditors to provide consumers 

with a disclosure that, among other 

things, describes negative amortization 

and states that negative amortization 

increases the outstanding principal 

balance of the account and reduces a 

consumer’s equity in the property. The 

Bureau is not implementing this 

requirement in the current proposal, but 

is planning to implement it as part of its 

2012 TILA–RESPA proposal. The 

second provision, found in new TILA 

129C(f)(2), requires creditors to obtain 

sufficient documentation demonstrating 

that a first-time borrower has received 

homeownership counseling from a 

HUD-certified organization or 

counselor, prior to extending credit in 

connection with a residential mortgage 

loan that may result in negative 

amortization. 

Because of the similarity of the 

second provision to the counseling 

requirement for high-cost mortgages, the 

Bureau is including the implementation 

of this counseling provision as part of 

this proposal. General background 

regarding HUD’s housing counseling 

program can be found in the section-bysection analysis addressing high-cost 

mortgage counseling above. 

The Bureau’s Proposal 

The Bureau is proposing to 

implement the counseling requirement 

for mortgages that may result in negative 

amortization created by new TILA 

section 129C(f)(1) in proposed 

§ 1026.36(k). The Bureau is proposing to 

implement the general counseling 

requirement for first-time borrowers of 

mortgages that may result in negative 

amortization consistent with the 

statutory language. In addition to the 

general counseling requirement, 

pursuant to its authority under TILA 

section 105(a), the Bureau is proposing 

to include two additional provisions, 

the first to address steering by creditors 

to particular counselors or counseling 

organizations and the second to require 

the provision of a list of counselors to 

consumers. Both of these provisions are 

consistent with the requirements 

proposed for high-cost mortgage 

counseling discussed above. The Bureau 

notes, however, that it is not including 

certain additional provisions that the 

Bureau is proposing for high-cost 

mortgage counseling, due to differences 

in statutory language between the two 

counseling requirements. In addition to 

seeking comments on the proposed 

provisions below, the Bureau is also 

requesting comment on whether it 

would minimize compliance burdens if 

the Bureau conformed the counseling 

requirements for mortgages that may 

result in negative amortization with the 

counseling requirements for high-cost 

mortgages, despite differences in the 

statutory language. 

36(k)(1) Counseling Required 

The proposal implements the 

counseling requirement for negative 

amortization loans from TILA section 

129C(f)(2) through § 1026.36(k)(1). 

Specifically, proposed § 1026.36(k)(1) 

provides that a creditor shall not extend 

credit to a first-time borrower in 

connection with a residential 

transaction secured by a dwelling (with 

exceptions for reverse mortgages and 

mortgages related to timeshare plans) 

that may result in negative amortization, 

unless the creditor receives 

documentation that the consumer has 

obtained counseling from a HUDcertified or approved counselor or 

counseling organization.68 The Bureau 

is omitting from the proposal the 

statutory language limiting the 

requirement for counseling to a 

residential mortgage loan that may 

result in negative amortization ‘‘that is 

not a qualified mortgage.’’ The Bureau 

believes this language is unnecessary 

because a qualified mortgage by 

definition does not permit a payment 

schedule that results in an increase of 


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69Specifically, 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 Act; and the impact on 

consumers in rural areas. 

the principal balance under new TILA 

129C(b)(2)(A). 

Proposed comment 36(k)(1)–1 

provides that counseling organizations 

or counselors certified or approved by 

HUD to provide the counseling required 

by proposed § 1026.36(k)(1) include 

organizations and counselors that are 

certified or approved by HUD pursuant 

to section 106(e) of the Housing and 

Urban Development Act of 1968 (12 

U.S.C. 1701x(e)) or 24 CFR part 214, 

unless HUD determines otherwise. This 

provision would allow currently 

approved counseling organizations to 

provide the counseling required by 

proposed § 1026.36(k)(1), but would be 

broad enough to account for future 

changes in HUD policy concerning 

eligibility to provide the required 

counseling. 

The next proposed comment, 

comment 36(k)(1)–2, addresses the 

content of counseling to ensure that the 

counseling is useful and meaningful to 

the consumer with regard to the 

negative amortization feature of the 

loan. Specifically, comment 36(k)(1)–2 

states that the homeownership 

counseling required pursuant to 

proposed § 1026.36(k)(1) must include 

information regarding the risks and 

consequences of negative amortization. 

The Bureau believes that a requirement 

that the counseling address the negative 

amortization feature of a loan is 

consistent the purpose of the statute. 

Absent any discussion of negative 

amortization, the particular concern 

reflected in the requirement that firsttime borrowers of a mortgage that may 

result in negative amortization receive 

homeownership counseling would not 

necessarily be addressed. 

To help facilitate creditor compliance 

with proposed § 1026.36(k)(1), proposed 

comment 36(k)(1)–3 provides examples 

of documentation that demonstrate that 

a consumer has received the required 

counseling, such as a certificate, letter, 

or email from a HUD-certified or 

approved organization or counselor 

indicating the consumer has received 

counseling. 

Proposed comment 36(k)(1)–4 

addresses when a creditor may begin to 

process the application for a mortgage 

that may result in negative amortization. 

As with high-cost mortgage counseling, 

the Bureau proposes that prior to 

receiving documentation of counseling, 

a creditor may not extend a mortgage to 

a consumer that may result in negative 

amortization, but may engage in other 

activities, such as processing an 

application for such a mortgage. 

The Bureau solicits comment on the 

proposed general requirement and 

proposed comments, including whether 

the proposed guidance is adequate, or 

whether any additional guidance is 

needed. 

36(k)(2) Definitions 

Proposed § 1026(k)(2) provides 

guidance on the meanings of two key 

terms used in proposed § 1026.36(k)(1), 

‘‘first-time borrower’’ and ‘‘negative 

amortization.’’ Specifically, proposed 

§ 1026.36(k)(2)(i) provides that a firsttime borrower means a consumer who 

has not previously received a closedend mortgage loan or open-end credit 

plan secured by a dwelling. Proposed 

§ 1026.36(k)(2)(ii) provides that negative 

amortization means a payment schedule 

with regular periodic payments that 

cause the principal balance to increase. 

The Bureau solicits comment on both of 

these definitions, and whether any 

changes to these definitions would be 

appropriate. 

36(k)(3) Steering Prohibited 

Consistent with its proposal to 

prohibit steering for high-cost mortgage 

counseling, the Bureau is proposing in 

§ 1026.36(k)(3) to prohibit a creditor that 

extends mortgage credit that may result 

in negative amortization from steering 

or otherwise directing a consumer to 

choose a particular counselor or 

counseling organization for the 

counseling required by proposed 

§ 1026.36(k). Proposed comment 

36(k)(3)–1 references the proposed 

comments in 34(a)(5)(vi)–1 and –2, 

which provide an example of an action 

that constitutes steering, as well as an 

example of an action that does not 

constitute steering. The Bureau again 

solicits comment on whether any 

additional examples of activities that do 

or do not constitute steering should be 

included in the proposed comment. 

36(k)(4) List of Counselors 

Also consistent with its proposal for 

high-cost mortgage counseling, the 

Bureau is proposing in § 1026.36(k)(4)(i) 

to require a creditor to provide to a 

consumer for whom counseling is 

required under proposed § 1026.36(k), a 

notice containing the Web site addresses 

and phone numbers of the Bureau and 

HUD for access to information about 

homeownership counseling, and a list of 

five counselors or counseling 

organizations certified or approved by 

HUD to provide the required 

counseling. Proposed § 1026.36(k)(4)(i) 

also requires the notice to be provided 

to the consumer no later than the time 

that the RESPA good faith estimate must 

be provided. Consistent with the safe 

harbor proposed for the provision of a 

list of counselors for consumers 

required to receive high-cost mortgage 

counseling, proposed § 1026.36(k)(4)(ii) 

creates a safe harbor for compliance 

with the requirement to provide a list of 

counselors or counseling organizations 

if creditors provide the list of 

homeownership counselors or 

organizations required by 12 CFR 

1024.20 to consumers for whom 

counseling is required under 

§ 1026.36(k). 

Proposed comment 36(k)(4)–1 

addresses the provision of the list of 

homeownership counselors in situations 

in which there may be multiple 

creditors or multiple consumers 

involved in a mortgage transaction that 

may result in negative amortization, 

consistent with the comment proposed 

for high-cost mortgage counseling. 

The Bureau seeks comment on 

whether the requirement to provide 

Bureau, HUD, and counselor contact 

information is appropriate, and whether 

it is appropriate to require the list to 

contain contact information for five 

counselors or counseling organizations. 

The Bureau also requests comment on 

whether the safe harbor for complying 

with the similar notice obligation under 

RESPA is appropriate. As with the 

requirement related to high-cost 

mortgages, the Bureau believes that 

most creditors will comply with this 

requirement to provide a list of 

counselors by fulfilling their obligations 

under proposed 12 CFR 1024.20. 

However, the Bureau again seeks 

comment on whether some creditors are 

likely to comply with this requirement 

independent of their obligations under 

RESPA, and if so, whether additional 

guidance would be helpful. 

VI. Section 1022(b)(2) Analysis 

In developing the proposed rule, the 

Bureau has considered potential 

benefits, costs, and impacts, and has 

consulted or offered to consult with the 

prudential regulators, the Federal Trade 

Commission, and HUD, including 

regarding consistency with any 

prudential, market, or systemic 

objectives administered by such 

agencies.69

As discussed above, HOEPA currently 

addresses potentially harmful practices 

in refinancing and closed-end homeequity mortgage loans. Loans that meet 

HOEPA’s triggers are subject to 

restrictions on loan terms as well as to 


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49130 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

70These restrictions and requirements include 

requiring that a creditor receive certification that a 

HOEPA borrower has received pre-loan counseling 

from an approved homeownership counselor; 

prohibiting creditors and brokers from 

recommending default on a loan to be refinanced 

with a high-cost mortgage; prohibiting creditors, 

servicers, and assignees from charging a fee to 

modify, defer, renew, extend, or amend a high-cost 

mortgage; limiting the fees that can be charged for 

a payoff statement; banning prepayment penalties; 

substantially limiting balloon payments; and 

requiring that a creditor assess a borrower’s ability 

to repay a home equity line of credit. 

71The Bureau chose as a matter of discretion to 

consider costs and benefits of provisions that are 

required by the Dodd-Frank Act to better inform the 

rulemaking. 

72Some states have anti-predatory lending 

statutes that provide additional restrictions on 

mortgage terms and features beyond those under 

HOEPA. See 74 FR 43232, 43244 (Aug. 26, 2009) 

(surveying State laws that are coextensive with 

HOEPA). In general, State statutes that overlap and/ 

or extend beyond the proposed rule would be 

expected to reduce both the costs and benefits. 

special disclosure requirements 

intended to ensure that borrowers in 

high-cost mortgages understand the 

features and implications of such loans. 

Borrowers with HOEPA loans also have 

enhanced remedies for violations of the 

law. The Dodd-Frank Act expanded the 

types of loans potentially covered by 

HOEPA to include purchase money 

mortgage loans and home-equity lines of 

credit secured by a consumer’s principal 

dwelling. The Dodd-Frank Act also 

expanded the protections associated 

with HOEPA loans, including by adding 

new restrictions on loan terms, 

extending the requirement that a 

creditor verify a consumer’s ability to 

repay to a home equity line of credit, 

and adding a requirement that 

consumers receive homeownership 

counseling before high-cost mortgages 

may be extended. 

In addition to the amendments related 

to high-cost mortgages, the Bureau is 

also proposing an amendment to 

Regulation Z and an amendment to 

Regulation X to implement amendments 

made by Sections 1414(a) and 1450 of 

the Dodd-Frank Act to TILA and to 

RESPA related to homeownership 

counseling for other types of mortgage 

loans, respectively. 

A. Provisions To Be Analyzed 

The discussion below considers the 

potential benefits, costs, and impacts to 

consumers and covered persons of key 

provisions of the proposed rule, as well 

as certain alternatives proposed, which 

include: 

1. Expanding the types of loans 

potentially covered by HOEPA to 

include purchase money mortgage loans 

and HELOCs; 

2. Revising the existing HOEPA APR 

and points-and-fees triggers to 

implement Dodd-Frank Act 

requirements, as well as modifying the 

APR and points-and-fees calculations to 

determine whether a closed-end 

mortgage loan is a HOEPA loan; 

3. Adding a prepayment penalty 

trigger; 

4. Adding and revising several 

restrictions and requirements on loan 

terms and origination practices for 

HOEPA loans; 70 and 

5. Implementing two separate 

homeownership counseling-related 

provisions mandated by the Dodd-Frank 

Act, namely, requiring lenders to 

provide a list of homeownership 

counselors or counseling organizations 

to applicants for loans covered by 

RESPA, and requiring creditors to 

obtain documentation that a first-time 

borrower of a negatively amortizing loan 

has received homeownership 

counseling. 

The analysis considers the benefits and 

costs of certain provisions together 

where there are substantially similar 

benefits and costs. For example, 

expanding the types of loans potentially 

subject to HOEPA coverage to include 

purchase money mortgage loans and 

HELOCs would likely expand the 

number of high-cost mortgages. The 

overall impact of this expansion of 

coverage is generally discussed in the 

aggregate. In other cases, the analysis 

considers the costs and benefits of each 

provision separately. 

The analysis also addresses certain 

alternative provisions in the proposed 

rule. As discussed in the section-bysection analysis, the Bureau requests 

comment on these proposed 

alternatives. The Bureau also seeks 

comment on the benefits, costs, and 

impacts of these alternatives for 

purposes of this analysis. 

The analysis relies on data that the 

Bureau has obtained. The analysis also 

draws on evidence of the impact of State 

anti-predatory lending statutes that 

often place additional or tighter 

restrictions on mortgage loans than 

those required by HOEPA prior to the 

Dodd-Frank Act amendments. However, 

the Bureau notes that, in some 

instances, there are limited data that are 

publicly available with which to 

quantify the potential costs, benefits, 

and impacts of the proposed rule. For 

example, data on the terms and features 

of HELOCs are more limited and less 

available than data on closed-end 

mortgage loans, and the Bureau is not 

aware of any systematic and 

representative data on the prevalence of 

prepayment penalties or on points and 

fees on either closed-end mortgage loans 

or HELOCs. Moreover, some potential 

costs and benefits, such as the value of 

homeownership counseling, or reduced 

odds of an unanticipated fee or change 

in payments, are difficult to quantify. 

Therefore, the analysis generally 

provides a qualitative discussion of the 

benefits, costs, and impacts of the 

proposed rule. 

B. Baseline for Analysis 

The HOEPA amendments are selfeffectuating, and the Dodd-Frank Act 

does not require the Bureau to adopt a 

regulation to implement these 

amendments. Thus, many costs and 

benefits of the proposed rule considered 

below would arise largely or entirely 

from the statute, not from the proposed 

rule. The proposed rule would provide 

substantial benefits compared to 

allowing the HOEPA amendments to 

take effect alone by clarifying parts of 

the statute that are ambiguous, such as 

how to determine whether a HELOC is 

a high-cost mortgage. Greater clarity on 

these issues should reduce the 

compliance burdens on covered persons 

by reducing costs for attorneys and 

compliance officers as well as potential 

costs of over-compliance and 

unnecessary litigation. Moreover, the 

costs that the regulation would impose 

beyond those imposed by the statute 

itself are likely to be minimal. 

Section 1022 of the Dodd-Frank Act 

permits the Bureau to consider the 

benefits and costs of the rule solely 

compared to the state of the world in 

which the statute takes effect without an 

implementing regulation. To provide 

the public better information about the 

benefits and costs of the statute, 

however, the Bureau has nonetheless 

chosen to consider the benefits, costs, 

and impacts of the major provisions of 

the proposed rule against a pre-statutory 

baseline (i.e., the benefits, costs, and 

impacts of the relevant provisions of the 

Dodd-Frank Act and the regulation 

combined).71 There is one exception: 

the Bureau does not discuss below the 

benefits and costs of determining 

whether a loan is a high-cost mortgage, 

e.g., the costs of computer systems and 

software, employee training, outside 

legal advice, and similar costs 

potentially necessary to determine 

whether a loan is defined as a high-cost 

mortgage.72 The discussion does not 

consider these benefits and costs 

because these changes are required by 

the Dodd-Frank Act and the Bureau 

lacks discretion to waive these 

requirements. The Bureau has discretion 

in future rulemakings to choose the 

most appropriate baseline for that 

particular rulemaking. 


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73The Home Mortgage Disclosure Act (HMDA), 

enacted by Congress in 1975, as implemented by 

the Bureau’s Regulation C requires lending 

institutions annually to report public loan-level 

data regarding mortgage originations. For more 

information, see http://www.ffiec.gov/hmda. The 

illustration is not exact because not all mortgage 

lenders report in HMDA. The HMDA data capture 

roughly 90–95 percent of lending by the Federal 

Housing Administration and 75–85 percent of other 

first-lien home loans. Robert B. Avery, Neil Bhutta, 

Kenneth P. Brevoort & Glenn B. Canner, The 

Mortgage Market in 2010: Highlights from the Data 

Reported under the Home Mortgage Disclosure Act, 

97 Fed. Res. Bull., December 2011, at 1, 1 n.2. 

74The share of closed-end originations that were 

purchase money mortgages was lower in 2010 than 

in most preceding years. The share ranged between 

42 percent and 47 percent of originations over the 

2004–2008 period before it fell to 31 percent in 

2009. 

75Experian-Oliver Wyman’s analysis of credit 

bureau data indicates that there were roughly 12 

percent as many HELOC originations in 2010 as 

there were originations of closed-end mortgage or 

home equity loans. Specifically, Experian-Oliver 

Wyman estimated that there were roughly 7.6 

million mortgages and 434,000 home equity loans 

originated in 2010 compared with about 948,000 

HELOC originations. The estimate of 40 percent 

assumes that the fraction of closed-end originations 

that were purchase money mortgages among lenders 

that did not report in HMDA was comparable to the 

estimated 32 percent for HMDA reporters. More 

information about the Experian-Oliver Wyman 

quarterly Market Intelligence Report is available at 

http://www.marketintelligencereports.com. 

76Every 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 Report 

data, 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/. 

77These estimates are based on the Bureau’s 

analysis of mortgage lending by non-depository 

institutions based on HMDA data and data from the 

National Mortgage Licensing System. 

78The Bureau is not aware of in-depth empirical 

analyses of the benefits or costs to consumers of the 

current HOEPA provisions specifically. In contrast, 

several studies have assessed the impacts of State 

anti-predatory lending laws, and, where relevant, 

findings of these studies are discussed below. 

C. Coverage of the Proposal 

HOEPA. The provisions of the 

proposed rule that relate to high-cost 

mortgages apply to any consumer credit 

transaction that meets one of the 

HOEPA thresholds and that is secured 

by the consumer’s principal dwelling, 

including both closed-end mortgage 

loans (including purchase money 

mortgages) and open-end credit plans 

(i.e., home-equity lines of credit, or 

HELOCs), but not reverse mortgages. 

In general in this section, the term 

‘‘creditor’’ is used to describe depository 

institutions, credit unions, and 

independent mortgage companies that 

extend mortgage loans, though in places 

the discussion distinguishes between 

these types of creditors. When 

appropriate, this section discusses 

covered persons other than creditors or 

lenders, such as mortgage brokers and 

servicers. For example, as required by 

the Dodd-Frank Act, the restrictions on 

loan modification or deferral fees and 

fees for payoff statements would apply 

to mortgage servicers. In addition, the 

Bureau is proposing to extend the 

prohibition on recommended default to 

mortgage brokers. 

Additional Counseling Provisions. 

The proposed requirement that lenders 

provide mortgage applicants a list of 

homeownership counselors applies to 

applications for a loan covered by 

RESPA (i.e., purchase money mortgages, 

subordinate mortgages, refinancings, 

closed-end home-equity mortgages, 

open-end credit plans and reverse 

mortgages) except for lenders who 

comply with the similar list requirement 

under the HECM program. The negative 

amortization counseling provision 

applies only to closed-end mortgage 

loans that are made to first-time 

borrowers, that may result in negative 

amortization, and that are secured by a 

dwelling (other than a reverse mortgage 

or a transaction secured by a consumer’s 

interest in a timeshare plan described in 

11 U.S.C. 101(53D)). 

D. Potential Benefits and Costs to 

Consumers and Covered Persons 

1. Expanding the Types of Loans 

Potentially Subject to HOEPA Coverage 

Expanding the types of loans 

potentially subject to HOEPA coverage 

to include purchase money mortgage 

loans and HELOCs would increase the 

number of loans potentially subject to 

HOEPA coverage and as a result, almost 

certainly, the number of closed-end 

mortgage loans and HELOCs classified 

as high-cost mortgages. Data collected 

under the Home Mortgage Disclosure 

Act (HMDA) offer a rough illustration of 

the scope of the expansion of loans 

potentially covered by HOEPA.73 Homeimprovement and refinance loans 

accounted for 68 percent of closed-end 

mortgage loans secured by a principal 

dwelling reported in the 2010 HMDA 

data. Put differently, the data suggest 

that about 32 percent of home-secured 

closed-end mortgage loans in 2010 were 

not potentially subject to HOEPA 

coverage because they were purchase 

money mortgage loans.74 If one 

additionally considers HELOCs, it is 

likely that closer to 40 percent of closedend mortgage loans and HELOCs in 

2010 were not eligible for HOEPA 

coverage.75 The proposed rule would 

expand the types of loans potentially 

subject to HOEPA coverage to 

essentially all closed-end mortgage 

loans and open-end credit plans secured 

by a principal dwelling, except reverse 

mortgage transactions. 

The Bureau expects, however, that 

only a small fraction of loans under the 

proposed rule would qualify as HOEPA 

loans and that few lenders would make 

a large number of HOEPA loans. The 

Bureau’s analysis of loans reported in 

HMDA suggests that the share of all 

closed-end mortgage loans for lenders 

that report in HMDA might increase 

from roughly 0.04 percent under the 

current triggers to about 0.3 percent of 

loans under the revised triggers. Based 

on analysis of data from HMDA and Call 

Reports and statistical extrapolation to 

non-reporting entities, the Bureau 

estimates that the number of depository 

institutions that make any closed-end 

HOEPA loans would increase from 

about 6–7 percent of depository 

institutions to approximately 10–11 

percent.76 Many of these creditors are 

predicted to make few HOEPA loans: 

The share of depository institutions that 

make ten or more HOEPA loans is 

estimated to increase from about 0.5 

percent under the current triggers to 

about 1.5 percent under the proposed 

rule. Similarly, the share of nondepository creditors for which HOEPA 

loans comprise more than three percent 

of all closed-end originations is 

estimated to rise from under five 

percent to just over seven percent.77

Finally, although it is difficult to 

precisely estimate the share of HELOCs 

that will meet the HOEPA triggers, the 

effect of the proposed rule on creditors’ 

business is likely limited because openend lending generally comprises a small 

fraction of creditors’ lending portfolio. 

The Bureau’s analysis of Call Report 

data suggest that HELOCs comprise 

more than half of all home-secured 

loans for only about 5–6 percent of 

depository institutions, and those 

meeting the HOEPA triggers would be a 

small fraction of those portfolios. Taken 

together, these estimates suggest that the 

effect of the proposed rule would be 

minor for the vast majority of lenders. 

a. Benefits and Costs to Consumers 

The Bureau believes that the benefits 

and costs of expanding the types of 

loans potentially subject to HOEPA 

coverage, and in turn the likely number 

of HOEPA loans, should be similar 

qualitatively to the benefits and costs of 

current HOEPA provisions.78

These benefits may include improving 

applicants’ and borrowers’ 

understanding of the terms and features 

of a given high-cost mortgage and, in 

turn, facilitating their ability to shop for 

mortgages. The rule would also restrict 

or prohibit loan terms such as 

prepayment penalties and balloon 


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49132 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

79See, e.g., Jinkook Lee & Jeanne M. Hogarth, 

Consumer Information Search for Home Mortgages: 

Who, What, How Much, and What Else?, 9 Fin. 

Serv. Rev. 277 (2000) and James M. Lacko & Janis 

K. Pappalardo, The Effect of Mortgage Broker 

Compensation Disclosures on Consumers and 

Competition: A Controlled Experiment (Federal 

Trade Commission Bureau of Economics Staff 

report, February 2004), http://www.ftc.gov/be/ 

workshops/mortgage/articles/ 

lackopappalardo2004.pdf. This survey evidence is 

broadly consistent with information obtained from 

lenders through outreach. 

80Susan E. Woodward & Robert E. Hall, 

Diagnosing Consumer Confusion and Sub-Optimal 

Shopping Effort: Theory and Mortgage-Market 

Evidence (Nat’l Bureau of Econ. Research, Working 

Paper No. 16007, 2010), available at www.nber.org/ 

papers/w16007. 

81See Brian Bucks & Karen Pence, Do Borrowers 

Know Their Mortgage Terms?, 64 J. Urb. Econ. 218 

(2008) and James M. Lacko & Janis K. Pappalardo, 

Improving Consumer Mortgage Disclosures: An 

Empirical Assessment of Current and Prototype 

Disclosure Forms (Federal Trade Commission 

Bureau of Economics Staff Report, June 2007), 

http://www.ftc.gov/os/2007/06/ 

P025505MortgageDisclosureReport.pdf. 

82See Brian Bucks & Karen Pence, Do Borrowers 

Know Their Mortgage Terms?, 64 J. Urb. Econ. 218 

(2008). 

83See James M. Lacko & Janis K. Pappalardo, 

Improving Consumer Mortgage Disclosures: An 

Empirical Assessment of Current and Prototype 

Disclosure Forms (Federal Trade Commission 

Bureau of Economics Staff Report, June 2007), 

http://www.ftc.gov/os/2007/06/ 

P025505MortgageDisclosureReport.pdf and Danna 

Moore, Survey of Financial Literacy in Washington 

State: Knowledge, Behavior, Attitudes, and 

Experiences (Washington State University, Social 

and Economic Sciences Research Center, Technical 

Report 03–39, 2003), http://www.dfi.wa.gov/news/ 

finlitsurvey.pdf. 

84See, e.g., Colin Camerer, Samuel Issacharoff, 

George Loewenstein, Ted O’Donoghue, & Matthew 

Rabin, Regulation for Conservatives: Behavioral 

Economics and the Case for ‘‘Asymmetric 

Paternalism,’’ 151 U. Pa. L. Rev. 1211 (2003). 

85These studies have generally found that State 

laws typically have only small effects on the 

volume of subprime lending overall. Similarly, 

more restrictive State laws are associated with 

higher interest rates, but the evidence suggests this 

is the case only for fixed-rate loans and that the 

effect is modest. Nevertheless, the stronger laws 

were associated with a clearer reduction on the 

amount of subprime lending, and prohibitions of 

specific loan features such as prepayment penalties 

appear to reduce the prevalence of the prohibited 

feature. See Raphael W. Bostic, Souphala 

Chomsisengphet, Kathleen C. Engel, Patricia A. 

McCoy, Anthony Pennington-Cross, & Susan M. 

Wachter, Mortgage Product Substitution and State 

Anti-Predatory Lending Laws: Better Loans and 

Better Borrowers? (U. Pa. Inst. L. Econ., Research 

Paper No. 09–27, 2009), available at http:// 

papers.ssrn.com/sol3/papers.cfm

?abstract_id=1460871; Lei Ding, Roberto G. 

Quercia, Carolina K. Reid, and Alan M. White 

(2011), ‘‘State Anti-Predatory Lending Laws and 

Neighborhood Foreclosure Rates,’’ Journal of Urban 

Affairs, Volume 33, Number 4, pages 451–467. 

payments whose risks may be difficult 

for some borrowers to evaluate. Both of 

these factors could reduce the 

likelihood that a HOEPA borrower faces 

a sizable, unanticipated fee or increase 

in payments. 

Improving borrowers’ understanding 

of a given loan may increase borrowers’ 

ability to shop, which could have 

additional benefits to consumers if, as a 

consequence, borrowers select a more 

favorable loan (which may be a loan that 

does not meet the HOEPA triggers) or if 

borrowers forgo taking out any 

mortgage, if none would likely be 

affordable. At least for some borrowers, 

obtaining information in the process of 

choosing a mortgage loan may be costly. 

These costs could include the time and 

effort of obtaining additional mortgage 

offers, trying to understand a large 

number of loan terms, and—particularly 

for an adjustable-rate loan—assessing 

the likelihood of various future 

contingencies. 

A borrower who finds shopping for 

and understanding loan terms difficult 

or who needs to make a decision in a 

short timeframe, for example, may select 

a mortgage with less favorable loan 

terms than he or she could qualify for 

because the costs of shopping exceed 

the expected savings, reduced risk, or 

other benefits from another mortgage. 

The proposed rule would reduce the 

costs of understanding the loan terms. 

In doing so, the proposed rule would 

benefit not only applicants who opt, 

based on better information, not to take 

out a high-cost mortgage, but also highcost mortgage borrowers, since these 

borrowers will have incurred lower 

costs in choosing a mortgage. 

It appears that many consumers do 

not shop extensively when selecting a 

mortgage. Surveys of mortgage 

borrowers suggest that roughly 20–30 

percent of borrowers contact one lender 

and a similar fraction consider only two 

lenders.79 Given the estimated benefits 

to a consumer from shopping, this 

suggests that borrowers find the time 

and effort of additional shopping costly, 

they underestimate the potential value 

from shopping, or both.80

Some mortgage borrowers appear to 

have difficulty understanding or at least 

recalling details of their mortgage, 

particularly the terms and features of 

adjustable-rate mortgages.81 Improved 

information about loan terms may be 

especially beneficial in the case of highcost mortgages. At least along some 

dimensions, the types of borrowers who 

may be less certain about their mortgage 

terms are also the types of borrowers 

who are more likely to have taken out 

a subprime loan.82 In addition, focus 

groups suggest that many subprime 

borrowers perceive their choice set as 

limited or experience a sense of 

desperation.83 Borrowers with this 

perspective might be expected to focus 

on near-term features of the mortgage, 

rather than on the risk of, for example, 

a large payment increase due to a teaser 

rate expiring or to fluctuations in 

interest rates. 

These benefits to consumers arise 

from making information less costly, but 

the potential benefits to consumers may 

be even greater if at least some 

borrowers make systematic errors in 

processing information. For example, 

consumers may not accurately gauge the 

probability of uncertain events.84 Thus, 

it is possible that, in assessing the 

expected costs of a mortgage offer, some 

borrowers underestimate the likelihood 

of circumstances that lead, for example, 

to incurring a late-payment fee or the 

likelihood of moving or refinancing and 

thus of incurring a prepayment penalty. 

The proposed rule could increase the 

cost of credit or curtail access to credit 

for a small share of HELOC borrowers 

and purchase money borrowers because, 

as detailed below, creditors may be 

reluctant to make HOEPA loans and 

may no longer offer loans that they 

currently make but that would meet the 

new HOEPA triggers. Studies of State 

anti-predatory mortgage lending laws, 

however, indicate these impacts of 

extending HOEPA coverage may be 

limited, as the State laws typically have 

only modest effects on the volume of 

subprime lending overall and on 

interest rates for loans that meet the 

State-law triggers.85


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Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 49133 

86See Raphael W. Bostic, Souphala 

Chomsisengphet, Kathleen C. Engel, Patricia A. 

McCoy, Anthony Pennington-Cross, & Susan M. 

Wachter, Mortgage Product Substitution and State 

Anti-Predatory Lending Laws: Better Loans and 

Better Borrowers? (U. Pa. Inst. L. Econ., Research 

Paper No. 09–27, 2009), available at http:// 

papers.ssrn.com/sol3/papers.cfm

?abstract_id=1460871. 

87 Lei Ding, Roberto G. Quercia, Carolina K. Reid, 

and Alan M. White (2011), ‘‘State Anti-Predatory 

Lending Laws and Neighborhood Foreclosure 

Rates,’’ Journal of Urban Affairs, Volume 33, 

Number 4, pages 451–467. 

87Lei Ding, Roberto G. Quercia, Carolina K. Reid, 

and Alan M. White (2011), ‘‘State Anti-Predatory 

Lending Laws and Neighborhood Foreclosure 

Rates,’’ Journal of Urban Affairs, Volume 33, 

Number 4, pages 451–467. 

The arguably muted response of 

origination volume to passage of State 

anti-predatory lending laws appears to 

reflect, in part, the fact that the market 

substituted other products that did not 

trigger restrictions or requirements of 

the statute, for example, loans with 

lower initial promotional interest rates 

and longer promotional-rate periods.86

It is possible that some borrowers would 

receive a more favorable loan if 

creditors respond to the expansion of 

the types of loans potentially subject to 

HOEPA coverage by substituting 

mortgage products that would not 

trigger HOEPA coverage, but it is also 

possible that some borrowers would 

receive less favorable loans or no loan 

at all. 

The Bureau is unaware of data that 

would allow for strong inferences 

regarding the extent to which such 

substitution in creditors’ mortgage 

product offerings leads to borrowers 

taking out more favorable loans. Studies 

of State anti-predatory mortgage lending 

statutes, however, suggest that stronger 

State statutes are associated with lower 

neighborhood-level mortgage default 

rates.87 On the one hand, this finding 

might be seen as consistent with the 

possibility that at least some borrowers 

receive more beneficial loans. On the 

other hand, it might also reflect that 

access to credit is more limited in States 

with comparatively strong antipredatory statutes, i.e., that borrowers 

that are more likely to default may be 

less likely to receive a mortgage in these 

states. This latter interpretation, 

however, is arguably more difficult to 

reconcile with the finding that strong 

State statutes are estimated to have only 

a limited effect on the volume of 

subprime lending. 

b. Benefits and Costs to Covered Persons 

Expanding the types of loans 

potentially subject to HOEPA coverage 

to include purchase money mortgage 

loans and HELOCs would likely require 

creditors to generate and to provide 

HOEPA disclosures to a greater number 

of borrowers than today. It is difficult to 

predict the extent to which lenders may 

avoid making newly eligible loans 

under the proposed rule. However, the 

Bureau’s estimation methodology in 

analyzing the paperwork burden 

associated with the proposed rule 

implies that on the order of 24,000 loans 

might qualify as high-cost mortgages or 

high-cost HELOCs. Nevertheless, the 

Bureau expects that the share of 

borrowers that receive a high-cost 

mortgage would remain a small fraction 

of all mortgage borrowers (by the 

Bureau’s estimates, likely about 0.3 

percent of all closed-end and open-end 

originations). Creditors would likely 

also incur costs to comply with the 

proposed rule that a creditor obtain 

certification that a HOEPA borrower has 

received homeownership counseling. 

A small number of creditors may also 

lose a small fraction of revenue as a 

greater number of loans are subject to 

HOEPA. Based on outreach, the Bureau 

understands that some lenders have a 

negative perception of HOEPA loans. 

This perception coupled with the 

restrictions and liability provisions 

associated with HOEPA loans may 

reduce creditors’ ability or willingness 

to make high-cost purchase money 

mortgage loans and HELOCs. Creditors 

may also be reluctant to make high-cost 

purchase money mortgage loans that 

they previously would have extended 

because of the general inability to sell 

HOEPA loans in the current market, 

primarily due to assignee liability. 

If creditors were indeed unwilling to 

make the likely small fraction of loans 

that meet the revised HOEPA triggers 

and did not substitute other loan 

products, they would lose the full 

revenue from any loans that they choose 

to no longer originate. A second 

possibility is that creditors restrict highcost mortgage lending in part by 

substituting alternative products that do 

not meet the HOEPA triggers. Even if all 

potential HOEPA loans were modified 

in this way so that the number of 

originations was unaffected, the 

alternative loans would presumably be 

less profitable (or at most equally 

profitable), since a creditor could have 

offered the same loan contract prior to 

the expansion of HOEPA. Thus, even 

when creditors substitute alternative 

loan products, creditors likely would 

incur some revenue loss. 

The Bureau believes that expanding 

the types of loans potentially subject to 

HOEPA coverage to include purchase 

money mortgage loans and HELOCs 

could benefit covered persons that 

currently provide effective disclosures 

by leveling the playing field with 

competitors that fail to do so. It is 

possible that some creditors that 

currently originate purchase money 

mortgage loans or HELOCs that would 

be covered by expanded HOEPA do not 

currently provide applicants with clear 

information regarding the terms and 

features of those loans. By extending 

HOEPA to cover such transactions, 

borrowers will receive additional 

disclosures and homeownership 

counseling that may improve their 

understanding of the loan offer. This 

could allow creditors that currently 

provide effective disclosures to compete 

on more equal footing. 

c. Scale of Affected Consumers and 

Covered Persons 

Despite expanding the types of loans 

potentially subject to HOEPA coverage, 

which likely would result in an increase 

in the number and share of loans that 

are classified as HOEPA loans, HOEPA 

loans are expected to continue to 

account for a small fraction of both 

closed-end mortgage loans and HELOCs. 

Thus, the proposed rule would be 

expected to have no direct impact on 

the vast majority of creditors, since, as 

noted above, at most about ten percent 

of creditors are predicted to make 

HOEPA loans under the proposed rule, 

and few creditors are expected to make 

significant numbers of HOEPA loans. 

Similarly, the proposed rule would not 

be expected to directly affect the vast 

majority of borrowers—those who do 

not apply for or obtain a high-cost 

mortgage. As noted above, the Bureau 

estimates that the share of all closed-end 

mortgage loans for lenders that report in 

HMDA might increase from roughly 

0.04 percent under the current triggers 

to about 0.3 percent of loans under the 

revised triggers. The estimated 

proportion of purchase-money mortgage 

loans that would qualify as high-cost 

mortgages is a bit higher, 0.4 percent, 

but still a small fraction of all such 

loans. 

2. Revised APR and Points-and-Fees 

Triggers and Potential Use of 

Transaction Coverage Rate 

The statute, and therefore the 

proposed rule, revise the APR and 

points-and-fees triggers, which would 

likely result in an increase in the 

number of high-cost mortgages. The 

Bureau estimates, for example, that 

these changes in the triggers would 

increase the fraction of refinance and 

home improvement loans that are highcost mortgages made by lenders that 

reported in the 2010 HMDA data from 

about 0.06 percent of loans to 0.24 

percent of loans. The Dodd-Frank Act 

also expanded the definition of points 


sroberts on DSK5SPTVN1PROD with PROPOSALS
49134 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

88 In its 2009 Closed-End Proposal, the Board 

relied on a 2008 survey of closing costs conducted 

by Bankrate.com that contains data for hypothetical 

$200,000 loans in urban areas. Based on that data, 

the Board estimated that the share of first-lien 

refinance and home improvement loans that are 

subject to HOEPA would increase by .6 percent if 

the definition of finance charge was expanded. The 

Board also looked at the impact on two states and 

the District of Columbia because their antipredatory lending laws had triggers below the level 

of the historical HOEPA APR threshold, which is 

benchmarked to U.S. Treasury securities. The Board 

concluded that the percentage of first-lien loans 

subject to those laws would increase by 2.5% in the 

District of Columbia and 4.0% in Illinois, but would 

not increase in Maryland. The Bureau is 

considering the 2010 version of the Bankrate.com 

survey, but as described in this notice the Bureau 

is also seeking additional data that would provide 

more representative information regarding closing 

and settlement costs that would allow for a more 

refined analysis of the proposals. 

89As discussed above, the Bureau believes that 

the margin of differences between the TCR and 

current APR is significantly smaller than the margin 

between the current APR and the APR calculated 

using the expanded finance charge definition 

because relatively few third-party fees would be 

excluded by the TCR that are not already excluded 

under current rules. The Bureau is considering 

ways to supplement the data analysis described 

above to better assess this issue, and seeks comment 

and data regarding the potential impacts of the TCR 

relative to APR calculated using the current and 

proposed definitions of finance charge. 

and fees to include new charges, 

including some costs that may be 

payable after consummation or account 

opening. The expanded definition of 

points and fees is expected to reinforce 

the effect of the revised points-and-fees 

trigger and to result in a greater number 

of loans that meet the new points-andfees threshold. 

In addition, as noted in the sectionby-section analysis above, the Bureau is 

proposing in its 2012 TILA–RESPA 

Proposal a simpler, more inclusive 

definition of the finance charge. Because 

the APR and the calculation of points 

and fees both depend in part on the 

finance charge, the broader definition of 

finance charge would likely increase the 

number of closed-end mortgage loans 

that would meet the two triggers. The 

Bureau is seeking comment on whether 

to adopt modifications to approximately 

offset this increase, and has proposed 

two such measures specifically. One 

would use a transaction coverage rate 

(TCR) instead of the APR to determine 

whether a closed-end mortgage loan is 

a high-cost mortgage. The other would 

exclude the additional fees that would 

be captured by the broader definition of 

finance charge from being counted 

toward the points and fees trigger for 

high-cost mortgages. 

As discussed in the Bureau’s 2012 

TILA–RESPA Proposal, in the sectionby-section analysis above for proposed 

§ 1026.32(a)(1)(i) and (b)(1)(i), and 

below in part VII, the Bureau does not 

currently have sufficient data to model 

the impact of the more expansive 

definition of finance charge on HOEPA 

and other affected regulatory regimes or 

the impact of potential modifications 

that the Bureau could make to the 

triggers to more closely approximate 

existing coverage levels.88 The Bureau is 

working to obtain such data prior to 

issuing a final rule and is seeking 

comment on its plans for data analysis, 

as well as additional data and comment 

on the potential impacts of a broader 

finance charge definition and potential 

modifications to the triggers. The 2012 

TILA–RESPA Proposal provides a 

qualitative assessment of the benefits 

and costs of expanding the finance 

charge definition, if the Bureau made no 

modifications to the triggers for HOEPA 

or other regimes. In order to facilitate 

rule-by-rule consideration of potential 

modifications, this notice provides a 

qualitative assessment of the impact of 

potential changes to the APR and 

points-and-fees calculations for HOEPA. 

a. Benefits and Costs to Consumers 

The Dodd-Frank Act revisions to the 

triggers may benefit consumers by 

increasing the number of loans 

classified as high-cost mortgages. As a 

result, the benefits and costs to 

consumers discussed above in the 

context of expanding HOEPA coverage 

are likely similar, at least qualitatively, 

to the benefits and costs of revising the 

triggers to capture a greater share of 

loans. As a result of the revised triggers, 

these benefits and costs would apply to 

a larger set of loans, although as noted 

above, the Bureau believes that highcost loans would likely remain a small 

fraction of all loans. These benefits 

could include a better understanding of 

the risks associated with the loan 

which, in turn, may reduce the 

likelihood that a borrower takes out a 

mortgage he or she cannot afford; better 

loan terms due to increased shopping 

and an absence of loan features whose 

associated risks may be difficult for 

borrowers to understand. 

Nonetheless, the proposed rule could 

impose costs on a small number of 

borrowers by raising the cost of credit or 

curtailing access to credit if creditors 

choose not to make loans that meet the 

revised triggers. As discussed above, 

however, available evidence based on 

State anti-predatory lending statutes 

suggests that tighter restrictions and 

more expansive definitions of high-cost 

mortgages typically have only a limited 

impact on the cost of credit and on 

originations. 

With regard to the Bureau’s separate 

proposal to expand the definition of 

finance charge, that change would also 

be expected to increase the number of 

loans classified as high-cost mortgages, 

as discussed in the 2012 TILA–RESPA 

Proposal. The Bureau is seeking 

comment in this proposal on whether to 

adopt specific measures that would 

approximately offset the impact on 

HOEPA coverage levels of an expanded 

definition of finance charge. Were the 

Bureau to adopt the proposed changes, 

the additional benefits and costs to 

consumers from further increasing the 

number of loans classified as high-cost 

mortgages would not occur. In addition, 

because the TCR excludes fees to nonaffiliated third-parties, the TCR might 

result in some loans not being classified 

as high-cost mortgages that would 

qualify under an APR threshold using 

the current definition of finance 

charge.89 The benefits and costs to 

consumers with such loans would be 

the inverse of those described above; the 

consumers would not receive the 

benefits of the additional disclosures, 

the limitations on certain terms and 

practices for high-cost mortgages, or 

enhanced remedies under HOEPA. 

However, consumers would also not 

face the potential increases in the cost 

of credit or potential restrictions on 

access to credit that may accompany 

expanded HOEPA coverage. 

b. Benefits and Costs to Covered Persons 

The benefits and costs to covered 

persons of revising the statutory HOEPA 

triggers would likely be expected to be 

similar, at least qualitatively, to those 

that would result from expanding the 

types of loans potentially subject to 

HOEPA coverage to purchase money 

mortgages and HELOCs. For example, 

creditors would likely incur costs 

associated with generating and 

providing HOEPA disclosures for 

additional loans that would be covered 

by the revised HOEPA triggers, as well 

as costs associated with obtaining 

certification that a HOEPA borrower has 

received homeownership counseling. As 

discussed above, a small number of 

creditors may also lose a very small 

fraction of revenue if they are reluctant 

to make high-cost mortgages and cannot 

offer alternatives that are as profitable as 

a HOEPA loan. 

As discussed in connection with 

expanding the types of loans potentially 

subject to HOEPA coverage to include 

purchase money mortgages and 

HELOCs, revising the interest rate and 

points-and-fees triggers could benefit 

some covered persons by restricting 

practices of their competitors to 

obfuscate product costs. Some creditors 

may gain market share from competitors 

that do not currently provide complete 


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Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 49135 

90At least for subprime loans, loans with a 

prepayment penalty tend to have lower interest 

rates. See, e.g., Oren Bar-Gill, The Law, Economics 

and Psychology of Subprime Mortgage Contracts, 94 

Cornell L. Rev. 1073–1152 (2009). 

91See 15 U.S.C. 1639c. 

or clear information on loan terms if the 

HOEPA disclosures and counseling 

requirements, discussed below, allow 

applicants to better understand the costs 

and risks of their mortgages and thus 

allow creditors that successfully provide 

more effective disclosures to compete 

on more equal footing. 

Again, as discussed in the 2012 TILA– 

RESPA Proposal, expanding the 

definition of finance charge would be 

expected to increase the number of 

loans classified as high-cost mortgages, 

with similar benefits and costs to 

covered persons as described above. The 

Bureau has proposed two modifications 

to approximately offset the impact of an 

expanded definition of finance charge. 

Were the Bureau to adopt the measures 

proposed in this rule, the benefits and 

costs of coverage under Federal 

regulatory regimes described above 

would likely not occur although there 

might still be effects on the coverage of 

various State mortgage laws and 

regulations. Using the TCR for the 

HOEPA APR test might also result in 

some loans not being classified as highcost mortgages that would qualify under 

an APR threshold using the current 

definition of finance charge. The 

benefits and costs to providers of such 

loans would be the inverse of those 

described above; creditors would not 

incur the costs of compliance with the 

high-cost mortgage requirements or 

impact on revenue from offering 

alternative loans, or the potential 

benefits of restrictions on competitors 

that offer loans that would be excluded 

from HOEPA coverage using the TCR for 

the HOEPA APR test. 

To adopt the proposed modifications, 

creditors might be required to update 

compliance systems to reflect changes to 

the finance charge calculation. These 

updates might involve one-time costs 

associated with software updates, legal 

expenses, and personnel training time. 

As discussed above, if the Bureau 

adopts the proposal, it expects to 

provide an implementation period that 

would coincide either with 

implementation of the disclosure 

modifications or with implementation 

of certain changes to coverage of 

HOEPA and other regulatory regimes 

that would be affected by the change in 

definition. Accordingly, the Bureau 

believes that software changes and other 

expenses would be incurred as part of 

the overall software and compliance 

system revisions required to comply 

with the other simultaneous changes, 

and therefore would not impose a 

substantial additional burden. 

Using different metrics for purposes 

of disclosures and determining coverage 

of various regulatory regimes may also 

impose some ongoing complexity and 

compliance burden. As discussed above, 

the Bureau believes that any such effects 

with regard to transaction coverage rate 

would be mitigated by the fact that both 

TCR and APR would be easier to 

compute under the expanded definition 

of finance charge than the APR today 

using the current definition. In addition, 

the Bureau is seeking comment on 

whether use of the TCR or other trigger 

modifications should be optional, so 

that creditors could use the broader 

definition of finance charge to calculate 

APR and points and fees triggers if they 

would prefer. 

The Bureau believes adoption of the 

proposed modifications would as a 

whole reduce the economic impacts on 

creditors of the more expansive 

definition of finance charge proposed in 

the 2012 TILA–RESPA Proposal. 

3. New Prepayment-Penalty Trigger 

The Dodd-Frank Act added a new 

HOEPA trigger for loans with a 

prepayment penalty. Under the DoddFrank Act, HOEPA protections would be 

triggered where the creditor may charge 

a prepayment penalty more than 36 

months after consummation, or if the 

penalty is greater than 2 percent of the 

amount prepaid. High-cost mortgages, in 

turn, are prohibited from having 

prepayment penalties, so the 

prepayment penalty trigger effectively 

caps both the time period after 

consummation during which such a 

penalty may be charged and the amount 

of any such penalty. 

a. Benefits and Costs to Consumers 

The proposed rule would potentially 

benefit a small number of consumers by 

potentially making it easier to refinance 

a high-cost mortgage. Prepayment 

penalties can prevent consumers from 

refinancing in circumstances where it 

would be advantageous for the 

consumer to do so as would be true if, 

for example, interest rates fall or the 

borrowers’ credit score improves. The 

prepayment penalty trigger coupled 

with the prohibition on prepayment 

penalties would remove this barrier to 

obtaining a more favorable loan. 

The proposed rule may be particularly 

beneficial to borrowers that, in taking 

out a mortgage, under-estimate the 

likelihood that they will move or that 

more favorable terms might be available 

in the future so that refinancing would 

be advantageous. Likewise, eliminating 

prepayment penalties could benefit 

borrowers that select a loan based on 

terms that are immediately relevant or 

certain rather than costs and benefits of 

the loan terms that are uncertain or in 

the future. 

Nevertheless, the proposed rules 

regarding prepayment penalties would 

potentially result in some borrowers 

taking out a mortgage that is less 

favorable than they would if the 

proposed rule were not implemented. 

For example, this would be true for a 

borrower who is unlikely to move or 

refinance and may be willing to accept 

a prepayment penalty in exchange for a 

lower interest rate if a lender offered 

mortgage products with such a tradeoff.90 The proposed rules regarding 

prepayment penalties could, more 

generally, reduce access to credit for 

some potential applicants if creditors 

that previously used such penalties to 

manage prepayment and interest-rate 

risk reduce lending or increase interest 

rates or fees as a result of the proposed 

rule. 

At this time, the Bureau cannot 

quantify the extent to which lenders 

may restrict lending or increase fees or 

interest rates as a result of the proposed 

rule. To do so would require, among 

other information, comprehensive data 

on the terms and features—including 

details of any prepayment penalties—of 

mortgage contracts that creditors offer. 

The Bureau does not currently have 

such data. Similarly, the Bureau cannot 

quantify the share of borrowers or the 

costs to borrowers who may receive a 

less-favorable mortgage than if the 

proposed rule did not restrict 

prepayment penalties. Estimating these 

quantities would require not only data 

on the alternative mortgage contracts 

that borrowers might be offered but also 

information on how consumers value 

each of the alternative contracts. 

The Bureau believes that the potential 

benefits and costs to consumers of the 

high-cost mortgage prepayment penalty 

trigger, however, could be muted by 

other Dodd-Frank Act provisions related 

to ability-to-repay requirements that 

separately restrict such penalties for 

closed-end mortgage loans that are not 

qualified mortgages.91 For example, 

under the Dodd-Frank Act, most closedend, dwelling-secured mortgage loans 

will generally be prohibited from having 

a prepayment penalty unless they are 

fixed-rate, non-higher-priced, qualified 

mortgages. Moreover, under the DoddFrank Act, even such qualifying closedend mortgage loans may not have a 

prepayment penalty that exceeds three 

percent, two percent, or one percent of 

the amount prepaid during the first, 

second, and third years following 


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49136 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

consummation, respectively (and no 

prepayment penalty thereafter). Finally, 

under the Dodd-Frank Act, prepayment 

penalties are included in the points and 

fees calculation for qualified mortgages. 

For qualified mortgages, points and fees 

are capped at three percent of the total 

loan amount, so unless a creditor 

originating a qualified mortgage can 

forgo some or all of the other charges 

that are included in the definition of 

points and fees, it necessarily will need 

to limit the amount of prepayment 

penalties that may be charged in 

connection with the loan. 

b. Costs to Covered Persons 

The proposed rule could increase the 

risk and, in turn, the costs that the likely 

small number of creditors that would 

make high-cost mortgages would 

assume in making such a loan. 

Prepayment penalties are one tool that 

creditors can use to manage prepayment 

and interest rate risk and to increase the 

likelihood that creditors recoup the 

costs of making the loan. The proposed 

rule would limit creditors’ ability to 

manage prepayment and interest rate 

risk in this way, although creditors 

might be expected to adjust the 

contracts that they offer to at least 

partially offset any associated revenue 

loss. The Bureau notes that the costs to 

creditors associated with this 

component of the proposed rule could 

be muted by the effect of the other 

provisions of the Dodd-Frank Act that 

limit prepayment penalties, as 

discussed above. 

4. New and Revised Restrictions and 

Requirements for High-Cost Mortgages 

The proposed rule also tightens 

existing restrictions for high-cost 

mortgages, including on balloon 

payments, acceleration clauses, and 

loan structuring to evade HOEPA and, 

as discussed above, bans prepayment 

penalties for high-cost mortgages. 

Further, the proposed rule adds new 

restrictions including limiting fees for 

late payments and fees for transmission 

of payoff statements; prohibiting fees for 

loan modification, payment deferral, 

renewal, or extension; prohibiting 

financing of prepayment penalties in a 

refinancing or of points and fees; and 

prohibiting recommended default. 

Finally, the rule provides for an 

expansion of the existing ability-torepay requirement to open-end credit 

plans and adds a requirement that a 

creditor receive certification that a 

borrower with a high-cost mortgage has 

received pre-loan homeownership 

counseling. 

a. Benefits and Costs to Consumers 

Taken together, the proposed rules’ 

requirements and restrictions would 

potentially have a variety of benefits to 

the likely small number of borrowers 

with a high-cost mortgage. These 

potential benefits include reducing the 

likelihood that a borrower would face 

unexpected payment increases, 

increasing the likelihood a borrower can 

refinance, and improving a borrower’s 

ability to obtain a mortgage that is 

affordable and otherwise meets their 

needs. 

The restrictions on acceleration 

clauses, late fees, and fees for loan 

modification, payment deferral, 

renewal, or similar actions each reduce 

the likelihood of unanticipated payment 

increases. Steady, predictable payments 

may simplify consumers’ budgeting and 

may particularly benefit borrowers with 

high-cost mortgages if, as might be 

expected, these borrowers tend to have 

fewer resources to draw upon to meet 

unanticipated payment increases. 

Although scheduled balloon payments 

may be more predictable than, say, a 

late fee, balloon payments may typically 

be much larger. The proposed rule’s 

limits on balloon payments may reduce 

the likelihood that a borrower with 

insufficient financial assets to make the 

balloon payment feels pressure to 

refinance the loan, potentially at a 

higher interest rate or with new fees. 

Several of the requirements and 

restrictions may help borrowers to select 

the mortgage that best suits their needs. 

First, the requirement that the creditor 

assess the repayment ability of an 

applicant for a high-cost HELOC may 

help to ensure that the HELOC is 

affordable for the borrower. Second, the 

provision that prohibits a creditor from 

recommending that a consumer default 

on an existing loan in connection with 

closing a high-cost mortgage that 

refinances the existing loan would make 

it less likely that, because of a pending 

default, a borrower is pressured or 

constrained to consummate a mortgage, 

particularly one whose terms had 

changed unfavorably after the initial 

application. Third, by prohibiting 

financing of points and fees or a 

prepayment penalty as part of a 

refinance, the proposed rule could 

improve borrowers’ ability to assess the 

costs of a given mortgage. In particular, 

the costs of points and fees or of a 

prepayment penalty may be less salient 

to borrowers if they are financed, 

because the cost is spread out over 

many years. When points and fees are 

instead paid up front, the costs may be 

more transparent for some borrowers, 

and consequently the borrower may 

more readily recognize a relatively high 

fee. Fourth, pre-loan counseling would 

potentially improve applicants’ 

mortgage decision-making by improving 

applicants’ understanding of loan terms. 

This benefit is qualitatively similar to 

the benefits of the HOEPA disclosure. 

Moreover, counseling may benefit a 

borrower by, for example, improving the 

borrower’s assessment of his or her 

ability to meet the scheduled loan 

payments and by making the borrower 

aware of other alternatives (such as 

purchasing a different home or a 

different mortgage product). Finally, 

some applicants may find information 

on loan terms and features to be more 

useful or effective when delivered in a 

counseling setting rather than in paper 

form. Counseling could also 

complement the HOEPA disclosure by 

providing applicants an opportunity to 

resolve questions regarding information 

on the disclosure itself. In addition, in 

weighing the feasibility or merits of a 

loan, applicants may focus on the loan 

features that are most easily understood, 

most immediately relevant, or most 

certain; homeownership counseling 

could mitigate any bias in an applicant’s 

decision-making by focusing either on 

less understood or less immediate, but 

still important, provisions. 

It is possible, however, that creditors 

would respond to the tighter restrictions 

on high-cost mortgages by increasing the 

cost of credit or even no longer 

extending loans to these borrowers. As 

noted above, however, to date the 

evidence suggests that restricting highcost lending may have only modest 

effects on the cost of credit and on the 

supply of credit, at least as measured by 

mortgage originations. Further, the preloan counseling requirement could 

impose costs on borrowers. Not only 

might the borrower have to pay for 

counseling, but the need to obtain 

counseling could conceivably delay the 

closing process, and such delay may be 

costly for some borrowers. 

b. Benefits and Costs to Covered Persons 

Creditors that already assess a 

HELOC-borrower’s ability to repay may 

benefit from the proposed rule’s 

requirement that all creditors do so if 

creditors that currently do so gain 

market share as their competitors incur 

costs to meet this requirement. The 

requirement that a creditor receive 

certification that a borrower with a highcost mortgage has received pre-loan 

homeownership counseling may benefit 

creditors by reducing the time that a 

creditor would need to spend to help a 

borrower select a mortgage or to answer 

a borrower’s questions. 


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In light of the tighter restrictions and 

requirements on high-cost mortgages, 

lenders may be less willing to make 

HOEPA loans. If so, then some creditors’ 

revenues may decline by a likely small 

proportion either because they do not 

extend any credit to a borrower to 

whom they would have previously 

made a high-cost loan, or because they 

extend an alternative loan that does not 

qualify as a high-cost loan but that 

results in lower revenue. 

The Bureau seeks comment on the 

two proposed alternative definitions of 

balloon payments. Information provided 

by interested parties may inform the 

analysis of the impacts of this provision 

under the finalized rule. 

In some instances the potential 

impacts of these restrictions may extend 

beyond creditors. The proposed rule 

would extend the prohibition on 

recommended default to brokers as well 

as creditors, for example. This 

prohibition is expected to have little 

impact on covered persons because the 

Bureau believes that few, if any, 

creditors or brokers have a business 

model premised on recommending 

default on a loan to be refinanced as a 

HOEPA loan. The limits on various fees, 

detailed above, apply to servicers as 

well as creditors. Both of these sets of 

covered persons could incur revenue 

losses or greater costs if such fees are 

important risk management tools. 

The Bureau believes creditors would 

incur recordkeeping and data retention 

costs due to the proposed requirement 

that a creditor receive certification that 

a borrower received pre-loan 

counseling. Based on the estimation 

methodology for analyzing the 

paperwork burden associated with the 

proposed rule, the Bureau estimates that 

these costs to be roughly $600 in total 

for all creditors that make any high-cost 

mortgages. These costs may be small 

relative to the quantity of other 

information that must be retained and 

that, under the proposed 2012 TILA– 

RESPA rule, would generally be 

required to be retained in machinereadable format. 

5. Counseling-Related Provisions for 

RESPA-Covered Loans and NegativeAmortization Loans 

The proposed rule would include two 

additional provisions required by the 

Dodd-Frank Act related to 

homeownership counseling that apply 

to loans with negative amortization and 

loans covered by RESPA. First, the 

proposed rule would require lenders to 

provide a list of HUD-certified or 

-approved homeownership counselors 

or counseling organizations to 

applicants for all mortgages covered by 

RESPA, except where the lender has 

provided a list under HUD’s HECM 

program. HECMs are currently subject to 

counseling and counselor-list 

requirements, so to avoid duplication 

and potential borrower confusion, the 

proposed rule’s counselor-list 

requirement would not be applied to 

these mortgages. 

The proposed rule would also require 

that both HOEPA borrowers as well as 

first-time borrowers of loans that may 

result in negative amortization similarly 

receive a counselor list. However, 

HOEPA loans and negative-amortization 

loans are a subset of loans covered by 

RESPA, and the proposed counselor-list 

requirement for these types of loans 

would be satisfied by complying with 

the RESPA requirement. Therefore, 

there are no additional costs and 

benefits from the counselor-list 

requirements for either HOEPA loans or 

negative-amortization loans for firsttime borrowers. 

With respect to first-time borrowers 

with a loan that could have negative 

amortization, the proposed rule would 

require that a creditor receive 

documentation that the borrower 

received homeownership counseling. 

The proposed rule would not specify 

any particular elements that must be 

included in the documentation. 

a. Benefits and Costs to Consumers 

The two non-HOEPA homeownership 

counseling provisions included in the 

proposed rule would generally have 

benefits to consumers that are similar in 

nature to those of requiring that 

creditors receive certification that a 

borrower with a high-cost mortgage has 

received homeownership counseling. In 

particular, as discussed above, 

homeownership counseling may 

improve borrowers’ understanding of 

their mortgages, it may complement the 

information provided in disclosures, 

and it could counteract any tendency 

among borrowers to consider only loan 

features that are most easily understood, 

most immediately relevant, or most 

certain. 

The proposed rule would not mandate 

counseling for potential borrowers of 

mortgages covered by RESPA, but 

requiring lenders to provide the list of 

homeownership counselors or 

counseling organizations may prompt 

some borrowers who were unaware of 

these resources (or of their geographic 

proximity) to seek homeownership 

counseling. This may especially be the 

case for borrowers who feel confused or 

overwhelmed by the information and 

disclosures provided by the lender. 

In contrast, the proposed rule would 

require that a creditor receive 

documentation that a first-time 

borrower that has applied for a loan that 

could have negative amortization has 

received homeownership counseling. 

First-time borrowers may particularly 

benefit from homeownership counseling 

if they have greater difficulty, relative to 

other borrowers, in understanding or 

assessing loan terms and features 

because they do not have experience 

with obtaining or paying on a mortgage. 

The Bureau believes that requiring 

applicants of loans covered by RESPA to 

receive a list of HUD-certified or 

-approved homeownership counselors 

or counseling organizations should not 

result in costs to consumers beyond 

those passed on by creditors. More 

specifically, the information contained 

on the list should be readily 

understandable, the time required of the 

borrower to receive the disclosure 

should be minimal, and borrowers may 

choose to not follow up on this 

information. 

First-time borrowers with a loan that 

may have negative amortization will 

likely have to pay for the counseling, 

either upfront or by financing the fee. In 

addition, counseling may be costly, at 

least in terms of time, for borrowers who 

do not find it helpful. In addition, the 

counseling requirement may impose 

delays on loan closing, which could be 

costly, for example, for a borrower who 

is contractually obligated to close on a 

home by a certain date. 

b. Benefits and Costs to Covered Persons 

The Bureau believes that covered 

persons would incur costs from 

providing potential borrowers of loans 

covered by RESPA with a list of HUDcertified or approved homeownership 

counselors or counseling organizations 

but that these costs are likely less than 

one dollar per application. The Bureau 

expects that the list would be a single 

page and that it would be provided with 

other materials that the lender is 

required to provide. In addition, the 

Bureau expects to create a Web site 

portal to make it easy for lenders and 

consumers to obtain lists of 

homeownership counselors in their 

areas, and the Bureau solicits comments 

on alternative measures that the Bureau 

could take to minimize the compliance 

burden associated with producing and 

providing the counselor list. 

The Bureau also believes that the 

costs of obtaining documentation that a 

first-time borrower with a negativeamortization loan has obtained 

counseling are likely small because such 

loans should be quite rare. Not only are 

loans with negative-amortization 

features uncommon, but also the 

provision would apply only to first-time 


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49138 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

92 Data from the 2007 Survey of Consumer 

Finances (SCF), the most recent survey year 

available at the time this analysis was conducted, 

indicate that only 0.3 percent of mortgages in 2007 

reportedly had negative-amortization features. This 

estimate is only suggestive because it is an estimate 

of the stock, rather than the flow, of mortgages with 

such features. That said, given changes in the 

mortgage market since 2007, the Bureau believes it 

is likely the case that mortgages that may 

potentially negatively amortize likely have become 

even rarer since 2007. The 2007 estimate is lower 

than estimates from the prior six waves of the SCF, 

which ranged from 1.3 to 2.3 percent. 

93Estimates are five-year estimates from the 

2006–2010 American Community Surveys (http://

factfinder2.census.gov/faces/tableservices/jsf/

pages/productview.xhtml?pid=ACS_10_5YR_

GCT2501.US26&prodType=table). 

borrowers for such loans.92 Further, the 

creditor would only be required to 

receive the documentation of 

counseling. For these reasons, the 

Bureau believes that the burden to 

creditors would be minimal. 

As discussed in the section-by-section 

analysis above, the proposed counseling 

requirements for high-cost mortgage 

borrowers differ from the counseling 

requirements for mortgages that may 

result in negative amortization. For 

creditors that extend both high-cost 

mortgages and loans that may negatively 

amortize, the Bureau recognizes that 

creditors may incur costs from having to 

ensure compliance with differing 

counseling requirements. These costs 

may include requiring additional staff 

training. The Bureau solicits comment 

on whether conforming the counseling 

requirements for mortgages that may 

result in negative amortization with the 

counseling requirements for high-cost 

mortgages would help ease compliance 

burdens on creditors. 

Creditors may benefit from these two 

counseling-related provisions by gaining 

market share relative to creditors that do 

not provide clear and complete 

information to borrowers regarding loan 

terms. This could occur if, as a result of 

counseling, applicants to such a creditor 

obtained a better understanding of the 

loan offer and were less likely to accept 

it. 

E. Potential Specific Impacts of the 

Proposed Rule 

1. Depository Institutions and Credit 

Unions with $10 Billion or Less in Total 

Assets, As Described in Section 1026 

The Bureau does not expect the 

proposed rule to have a unique impact 

on depository institutions and credit 

unions with $10 billion or less in total 

assets as described in Section 1026. As 

noted above, although not all creditors 

report in HMDA, those data suggest that 

the vast majority of creditors do not 

make any HOEPA loans. The Bureau 

expects this would be the case under the 

proposed rule as well, so few 

institutions would likely be directly 

impacted by the proposed rule. As 

might be expected given the fact that 

most depository institutions that make 

mortgage loans (almost 99 percent of the 

universe of depository institutions that 

make any closed-end mortgage loans or 

HELOCs) are estimated to have less than 

$10 billion in total assets, the estimated 

share of these lenders that currently 

make any closed-end HOEPA loans of 

6–7 percent is essentially identical to 

the estimate for all depository 

institutions. Likewise, about 9–10 

percent of depository institutions and 

credit unions with $10 billion or less in 

total assets are predicted to make any 

HOEPA loans under the proposed rule, 

a fraction just a bit below the estimated 

10–11 percent for all depository 

institutions and credit unions. The 

impact of the proposed rule on 

depository institutions and credit 

unions may vary based on the types of 

loans that an institution makes currently 

including, for example, the share of 

mortgage lending comprised of purchase 

money mortgages and HELOCs relative 

to closed-end refinance and homeimprovement loans. 

2. Impact of the Proposed Provisions on 

Consumers in Rural Areas 

The impact of the proposed rule on 

consumers in rural areas may differ 

from those for consumers located in 

urban areas for several reasons. First, 

rural borrowers may have fewer 

creditors that they readily comparison 

shop among. A potential reduction in 

lending for newly classified HOEPA 

loans may therefore have a greater 

impact in rural areas, and a rural 

borrower that is offered a high-cost 

mortgage may be less able to obtain a 

non-HOEPA loan from a different 

lender. Moreover, mobile homes are 

more common in rural areas; nearly 16 

percent of housing units in rural areas 

are mobile homes compared to less than 

four percent of housing units in urban 

areas.93 From outreach, the Bureau 

understands that loans for manufactured 

housing typically have higher interest 

rates and therefore may be more likely 

than other mortgages to exceed the 

revised interest rate trigger. HMDA data 

suggest this is likely to be the case, since 

the share of home improvement or 

refinance loans (those types of loans 

currently covered by HOEPA) that are 

identified as HOEPA loans in those data 

is about 2–3 percent for loans secured 

by a manufactured home compared with 

about 0.05 percent of loans secured by 

other types of 1–4 family homes, for 

example. In addition, the HMDA data 

do not include lenders that do not have 

a branch in a metropolitan statistical 

area. These data, which inform the 

analysis of the proposed rule, are 

therefore unlikely to be representative of 

rural mortgage transactions. For these 

reasons, the Bureau requests that 

interested parties provide data or 

information on the impact of the 

proposed rule on consumers in rural 

areas. 

F. Additional Analysis Being 

Considered and Request for Information 

The Bureau will further consider the 

benefits, costs and impacts of the 

proposed provisions and additional 

proposed modifications before finalizing 

the proposal. As noted above, there are 

a number of areas where additional 

information would allow the Bureau to 

better estimate the benefits, costs, and 

impacts of this proposal and more fully 

inform the rulemaking. The Bureau asks 

interested parties to provide comment 

or data on various aspects of the 

proposed rule, as detailed in the 

section-by-section analysis. The most 

significant of these include information 

or data addressing: 

• Measures to account for potential 

adoption of a broader definition of 

finance charge, as separately proposed 

in the Bureau’s 2012 TILA–RESPA 

Proposal; 

• The two proposed alternative 

definitions of a balloon payment; 

• Whether conforming the counseling 

requirements for negative-amortization 

loans with those for high-cost mortgages 

would reduce compliance burdens; 

• Whether data speak to the 

distribution of loan terms and features 

of HELOCs as well as information or 

data on how provisions in the proposed 

rule may affect the share of HELOCs that 

meet the post-Dodd-Frank Act triggers 

compared to the share of closed-end 

mortgage loans that meet these triggers; 

• Whether certain types of 

compensation paid to originators of 

open-end credit plans should be 

included in the definition of points and 

fees for open-end credit plans; and 

• Whether the homeownership 

counselor list for loans covered by 

Regulation X should be required to be 

given to applicants for all federally 

related mortgage loans, i.e., including 

refinances and home-equity lines of 

credit, in addition to applicants for 

purchase money mortgages. 

Information provided by interested 

parties regarding these and other aspects 

of the proposed rule may be considered 

in the analysis of the costs and benefits 

of the final rule. 

To supplement the information 

discussed in in this preamble and any 


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94More information about the Mortgage Call 

Report can be found at http:// 

mortgage.nationwidelicensingsystem.org/slr/ 

common/mcr/Pages/default.aspx. 

information that the Bureau may receive 

from commenters, the Bureau is 

currently working to gather additional 

data that may be relevant to this and 

other mortgage related rulemakings. 

These data may include additional data 

from the National Mortgage License 

System (NMLS) and the NMLS Mortgage 

Call Report, loan file extracts from 

various lenders, and data from the pilot 

phases of the National Mortgage 

Database. The Bureau expects that each 

of these datasets will be confidential. 

This section now describes each dataset 

in turn. 

First, as the sole system supporting 

licensure/registration of mortgage 

companies for 53 agencies for states and 

territories and mortgage loan originators 

under the Secure and Fair Enforcement 

for Mortgage Licensing Act of 2008 

(SAFE Act), NMLS contains basic 

identifying information for nondepository mortgage loan origination 

companies. Firms that hold a State 

license or State registration through 

NMLS are required to complete either a 

standard or expanded Mortgage Call 

Report (MCR). The Standard MCR 

includes data on each firm’s residential 

mortgage loan activity including 

applications, closed loans, individual 

mortgage loan originator activity, line of 

credit and other data repurchase 

information by state. It also includes 

financial information at the company 

level. The expanded report collects 

more detailed information in each of 

these areas for those firms that sell to 

Fannie Mae or Freddie Mac.94 To date, 

the Bureau has received basic data on 

the firms in the NMLS and de-identified 

data and tabulations of data from the 

Mortgage Call Report. These data were 

used, along with data from HMDA, to 

help estimate the number and 

characteristics of non-depository 

institutions active in various mortgage 

activities. In the near future, the Bureau 

may receive additional data on loan 

activity and financial information from 

the NMLS including loan activity and 

financial information for identified 

lenders. The Bureau anticipates that 

these data will provide additional 

information about the number, size, 

type, and level of activity for nondepository lenders engaging in various 

mortgage origination and servicing 

activities. As such, it supplements the 

Bureau’s current data for non-depository 

institutions reported in HMDA and the 

data already received from NMLS. For 

example, these new data will include 

information about the number and size 

of closed-end first and second loans 

originated, fees earned from origination 

activity, levels of servicing, revenue 

estimates for each firm and other 

information. The Bureau may compile 

some simple counts and tabulations and 

conduct some basic statistical modeling 

to better model the levels of various 

activities at various types of firms. In 

particular, the information from the 

NMLS and the MCR may help the 

Bureau refine its estimates of benefits, 

costs, and impacts for each of the 

revisions to the GFE and HUD–1 

disclosure forms, changes to the HOEPA 

thresholds, changes to requirements for 

appraisals, updates to loan originator 

compensation rules, proposed new 

servicing requirements and the new 

ability to pay standards. 

Second, the Bureau is working to 

obtain a random selection of loan-level 

data from a handful of lenders. The 

Bureau intends to request loan file data 

from lenders of various sizes and 

geographic locations to construct a 

representative dataset. In particular, the 

Bureau will request a random sample of 

‘‘GFEs’’ and ‘‘HUD–1’’ forms from loan 

files for closed-end mortgage loans. 

These forms include data on some or all 

loan characteristics including settlement 

charges, origination charges, appraisal 

fees, flood certifications, mortgage 

insurance premiums, homeowner’s 

insurance, title charges, balloon 

payment, prepayment penalties, 

origination charges, and credit charges 

or points. Through conversations with 

industry, the Bureau believes that such 

loan files exist in standard electronic 

formats allowing for the creation of a 

representative sample for analysis. The 

Bureau may use these data to further 

measure the impacts of certain proposed 

changes. Calculations of various 

categories of settlement and origination 

charges may help the Bureau calculate 

the various impacts of proposed changes 

to the definitions of finance charges and 

other aspects of the proposal, including 

proposed changes in the number and 

characteristics of loans that exceed the 

HOEPA thresholds, loans that would 

meet the high rate or high risk 

definitions mandating additional 

consumer protections, and loans that 

meet the points and fees thresholds 

contained in the ability-to-repay 

provisions of the Dodd-Frank Act. 

Third, the Bureau may also use data 

from the pilot phases of the National 

Mortgage Database (NMDB) to refine its 

proposals and/or its assessments of the 

benefits costs and impacts of these 

proposals. The NMDB is a 

comprehensive database, currently 

under development, of loan-level 

information on first lien single-family 

mortgages. It is designed to be a 

nationally representative sample (1 

percent) and contains data derived from 

credit reporting agency data and other 

administrative sources along with data 

from surveys of mortgage borrowers. 

The first two pilot phases, conducted 

over the past two years, vetted the data 

development process, successfully 

pretested the survey component and 

produced a prototype dataset. The 

initial pilot phases validated that credit 

repository data are both accurate and 

comprehensive and that the survey 

component yields a representative 

sample and a sufficient response rate. A 

third pilot is currently being conducted 

with the survey being mailed to holders 

of five thousand newly originated 

mortgages sampled from the prototype 

NMDB. Based on the 2011 pilot, a 

response rate of fifty percent or higher 

is expected. These survey data will be 

combined with the credit repository 

information of non-respondents, and 

then deidentified. Credit repository data 

will be used to minimize non-response 

bias, and attempts will be made to 

impute missing values. The data from 

the third pilot will not be made public. 

However, to the extent possible, the data 

may be analyzed to assist the CFPB in 

its regulatory activities and these 

analyses will be made publically 

available. 

The survey data from the pilots may 

be used by the Bureau to analyze 

consumers shopping behavior regarding 

mortgages. For instance, the Bureau may 

calculate the number of consumers who 

use brokers, the number of lenders 

contacted by borrowers, how often and 

with what patterns potential borrowers 

switch lenders, and other behaviors. 

Questions may also assess borrowers 

understanding of their loan terms and 

the various charges involved with 

origination. Tabulations of the survey 

data for various populations and simple 

regression techniques may be used to 

help the Bureau with its analysis. 

In addition to the comment solicited 

elsewhere in this proposed rule, the 

Bureau requests commenters to submit 

data and to provide suggestions for 

additional data to assess the issues 

discussed above and other potential 

benefits, costs, and impacts of the 

proposed rule. The Bureau also requests 

comment on the use of the data 

described above. Further, the Bureau 

seeks information or data on the 

proposed rule’s potential impact on 

consumers in rural areas as compared to 

consumers in urban areas. The Bureau 

also seeks information or data on the 

potential impact of the proposed rule on 

depository institutions and credit 


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95 5 U.S.C. 601 et seq. 

96 5 U.S.C. 609. 

97For purposes of assessing the impacts of the 

proposed rule on small entities, ‘‘small entities’’ is 

defined in the RFA to include small businesses, 

small not-for-profit organizations, and small 

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

business’’ is determined by application of Small 

Business Administration regulations and reference 

to the North American Industry Classification 

System (‘‘NAICS’’) classifications and size 

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

is any ‘‘not-for-profit enterprise which is 

independently owned and operated and is not 

dominant in its field.’’ 5 U.S.C. 601(4). A ‘‘small 

governmental jurisdiction’’ is the government of a 

city, county, town, township, village, school 

district, or special district with a population of less 

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

98 In its analysis of a proposed change to the 

definition of finance charge, the Board noted that, 

at least as of 2009, only Illinois, Maryland, and 

Washington, DC had APR triggers below the thenexisting HOEPA APR trigger for first-lien mortgage 

loans. 74 FR 43232, 43244 (Aug. 26, 2009). 99The Bureau notes that the HOEPA amendments 

of the Dodd-Frank Act are self-effectuating and that 

the Dodd-Frank Act does not require the Bureau to 

promulgate a regulation. Viewed from this 

perspective, the proposal reduces burdens by 

clarifying statutory ambiguities that may impose 

costs such as increased costs for attorneys and 

compliance officers, over-compliance, and 

unnecessary litigation. 

100The Home Mortgage Disclosure Act (HMDA), 

enacted by Congress in 1975, as implemented by 

the Bureau’s Regulation C requires lending 

institutions annually to report public loan-level 

data regarding mortgage originations. For more 

information, see http://www.ffiec.gov/hmda. 

101 Depository institutions with assets less than 

$39 million (in 2010), for example, and those with 

branches exclusively in non-metropolitan areas and 

those that make no purchase money mortgage loans 

are not required to report to HMDA. Reporting 

requirements for non-depository institutions 

depend on several factors, including whether the 

company made fewer than 100 purchase money or 

refinance loans, the dollar volume of mortgage 

lending as share of total lending, and whether the 

institution had at least five applications, 

originations, or purchased loans from metropolitan 

areas. 

102The Nationwide Mortgage Licensing System is 

a national registry of non-depository financial 

institutions including mortgage loan originators. 

Portions of the registration information are public. 

The Mortgage Call Report data are reported at the 

institution level and include information on the 

number and dollar amount of loans originated, the 

number and dollar amount of loans brokered, and 

on HOEPA originations. The analysis in this part 

draws on HMDA and NMLS/MCR data by 

classifying non-depository institutions with similar 

reported amounts of originations and of HOEPA 

lending in the two data sets. 

103The Bureau assumes that few, if any, non-DIs 

originate HELOCs due to lack of funding for lines 

of credit and lack of access to the payment system. 

Data from the 2010 SCF will be available for 

analysis in connection with the final rule. 

104Trends and aggregate statistics suggest that 

loans originated in recent years are very unlikely to 

have prepayment penalties for two reasons. First, 

prepayment penalties were most common on 

subprime and near-prime loans, a market that has 

disappeared. Second, by one estimate, nearly 90 

percent of 2010 originations were purchased by 

Fannie Mae or Freddie Mac or were FHA or VA 

loans (Tamara Keith, ‘‘What’s Next for Fannie, 

Freddie? Hard to Say,’’ February 10, 2011, available 

at http://www.npr.org/2011/02/10/133636987/ 

whats-next-for-fannie-freddie-hard-to-say). Fannie 

Mae and Freddie Mac purchase very few loans with 

prepayment penalties—in a random sample of loans 

from the FHFA’s Historical Loan Performance data, 

a very small percentage of loans originated between 

1997 and 2011 had a prepayment penalty. Finally, 

the Bureau believes that prepayment penalties that 

would trigger HOEPA coverage would be rare, 

because other Dodd-Frank Act provisions 

concerning ability to repay requirements and 

‘‘qualified mortgages’’ will separately restrict such 

penalties. 

105Revenue has been used in other analyses of 

economic impacts under the RFA. For purposes of 

this analysis, the Bureau uses revenue as a measure 

of economic impact. In the future, the Bureau will 

consider whether a feasible alternative numerical 

measure would be more appropriate for financial 

firms. 

unions with total assets of $10 billion or 

less as described in Dodd-Frank Act 

section 1026 as compared to depository 

institutions and credit unions with 

assets that exceed this threshold and 

their affiliates. 

VII. Regulatory Flexibility 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, unless the agency certifies 

that the rule will not have a significant 

economic impact on a substantial 

number of small entities.95 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.96

An IRFA is not required for this 

proposal because the proposal, if 

adopted, would not have a significant 

economic impact on a substantial 

number of small entities. 

A. Overview of Analysis and Data 

The analysis below evaluates the 

potential economic impact of the 

proposed rule on small entities as 

defined by the RFA.97 It considers 

effects of the revised APR and pointsand-fees triggers and of the extension of 

HOEPA coverage to purchase money 

mortgages and HELOCs. In addition, the 

analysis considers the impact of the two 

non-HOEPA counseling-related 

provisions which would be 

implemented as part of the proposed 

rule. The analysis does not consider the 

interaction between State anti-predatory 

lending laws and HOEPA. The Bureau 

notes that State statutes that place 

tighter restrictions on high-cost 

mortgages than either current or 

amended HOPEA may reduce the 

economic impact of the proposed rule.98

The analysis below uses a pre-statute 

baseline—except for one of the aspects 

of the rule over which the Bureau lacks 

discretion.99 The Bureau does not have 

discretion over whether to extend 

HOEPA to purchase money mortgage 

loans and HELOCs. Lenders today 

generally have processes and often 

software systems to determine whether 

a loan is a HOEPA loan. Lenders will 

have to update these processes and 

systems to determine whether a 

purchase money mortgage loan or 

HELOC is a HOEPA loan. The cost of 

determining whether a loan is a HOEPA 

loan is therefore unavoidable under the 

statute. 

The analysis considers the impact of 

the proposed rule’s revisions to HOEPA 

on closed-end lending by depository 

institutions (DIs), closed-end lending by 

non-depositories (non-DIs), and home 

equity lines of credit separately because 

these components of the analysis 

necessarily rely on different data 

sources. The starting point for much of 

the analysis of closed-end lending is 

loan-level data reported under the Home 

Mortgage Disclosure Act (HMDA).100

The HMDA data include information on 

high-cost mortgage lending under the 

current HOEPA triggers, but some 

creditors are exempt from reporting to 

HMDA.101 For exempt DIs, the Bureau 

estimates the extent of creditors’ highcost, closed-end lending under the 

current and post-Dodd Frank Act 

triggers based on Call Report data 

(which are available for all DIs). For 

exempt non-DIs, the Bureau 

supplements data on non-depositories 

that report in HMDA with data from the 

Nationwide Mortgage Licensing System 

and Registry Mortgage Call Report 

(NMLS/MCR).102 The Bureau does not 

have comprehensive loan-level data for 

HELOCs comparable to the HMDA data 

for closed-end mortgage loans, and this 

portion of the analysis draws on Call 

Report data as well as data from the 

2007 Survey of Consumer Finances 

(SCF).103 Finally, in all cases the Bureau 

notes that it is not aware of 

representative quantitative data on 

prepayment penalties, but available 

evidence suggests that this new trigger 

would have little impact on HOPEA 

coverage.104

As a measure of the potential impact 

of the proposed rule, the analysis 

considers the potential share of revenue 

a creditor may forgo if it were to make 

no high-cost mortgages.105 The Bureau 

believes that this approach very likely 

provides a conservative upper bound on 

the effects on creditors’ revenues, since 

some of the new loans potentially 

subject to HOEPA coverage might still 

be made (either as high-cost mortgages 

or with alternative terms to avoid the 

HOEPA triggers). The Bureau notes that 


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106By the same token, the analysis also implicitly 

assumes that creditors that do not currently make 

HOEPA loans will not rethink their policies and 

make HOEPA loans in the future. Although it seems 

the less likely concern, the Bureau notes that 

creditors could change their policies if a large share 

of creditors’ originations would now meet the 

HOEPA thresholds. 

107The Bureau has proposed separately in the 

2012 TILA–RESPA Proposal to expand the 

definition of the finance charge. If that change is 

adopted, it would be expected to increase the 

number of loans classified as high-cost mortgages 

under HOEPA’s APR and points-and-fees tests 

separate and independent from the statutory 

changes to the APR triggers. The Bureau notes that 

it has accounted for the impacts of this potential 

change in the 2012 TILA–RESPA Proposal, 

including in that Proposal’s Initial Regulatory 

Flexibility Analysis and Small Business Review 

Panel Process. In connection with the proposed 

definition change, the Bureau seeks comment in 

this proposal on whether to modify the triggers, 

including by using the TCR in place of the APR, to 

approximately offset the impact of a broader 

definition of finance charge on HOEPA coverage 

levels. As discussed in the Dodd-Frank Act section 

1022 analysis, adoption of those adjustments might 

impose some one-time implementation costs and 

compliance complexity, but the Bureau believes 

adoption of the proposed modifications would as a 

whole reduce the economic impacts on creditors of 

the more expansive definition of finance charge 

proposed in the 2012 TILA–RESPA Proposal. 

108The information on whether a loan was a 

HOEPA loan has been collected in HMDA since 

2004. 

109These percentages correspond to nearly 36,000 

loans in 2005 and roughly 3,400 loans in 2010. 

110The statistics for 2004–2009 are drawn from 

Federal Reserve Bulletin articles that summarize the 

HMDA data each year. In contrast, the 2010 

numbers are based on the analysis of 2010 HMDA 

data and may differ slightly from those presented 

in the Bulletin article that summarizes the 2010 

HMDA data due to subsequent data revisions and 

small differences in definitions (e.g., not counting 

a loan as a HOEPA loan even if it is flagged as a 

HOEPA loan if it appears ineligible to be a HOEPA 

loan because the property is not owner-occupied.) 

111The Bureau expects that the economic impact 

of the proposed rule on mortgage brokers that are 

small entities (for example, from prohibiting 

brokers from recommending default) would not be 

significant. 

112The HMDA data contain a flag which indicates 

whether a loan was classified as a HOEPA loan as 

well as a variable that reports the spread between 

the loan’s APR and the APOR for higher-priced 

mortgage loans. Higher-priced mortgage loans are 

first-liens for which this spread is at least 1.5 

percentage points and subordinate liens with a 

Continued 

at least some creditors currently extend 

HOEPA loans. Further, creditors may 

still make some loans that might 

otherwise meet the new HOEPA triggers 

by changing the loan terms to avoid 

being a high-cost mortgage (though 

perhaps with a partial revenue loss).106

Moreover, this approach is consistent 

with the possibility that some creditors 

may be less willing to make high-cost 

mortgages in the future due to new and 

revised restrictions on HOEPA loans, 

but the Bureau believes that any such 

effect on creditors’ willingness to extend 

HOEPA loans likely is small.107

B. Overview of Market for High-Cost 

Mortgages 

HOEPA loans comprise a small share 

of total mortgage loans. HMDA data 

indicate that less than one percent of 

loans meet the current HOEPA triggers 

and that this share has generally 

declined over time.108 Between 2004 

and 2010, HOEPA loans typically 

comprised about 0.2 percent of 

originations of home-secured refinance 

or home-improvement loans made by 

creditors that report in HMDA. This 

fraction peaked at 0.44 percent in 2005 

and fell to 0.06 percent by 2010.109

Similarly, few creditors originate 

HOEPA loans. The number of creditors 

extending HOEPA loans ranged between 

about 1,000 and 2,300 over the 2004 and 

2009 period, or between 12 and 27 

percent of creditors. However, only 

about 650 creditors in HMDA, or 

roughly eight percent of creditors in 

HMDA, reported any HOEPA loans in 

2010.110

C. Number and Classes of Affected 

Entities 

Around half of commercial banks and 

thrifts meet the Small Business 

Administration’s definition of small 

entities, and the large majority of these 

institutions originate mortgages (Table 

1). By comparison, almost 90 percent of 

credit unions are small entities, but 

about 40 percent of credit unions have 

no closed-end mortgage originations. 

About 90 percent of non-DI mortgage 

originators have revenues below the 

relevant Small Business Administration 

threshold.111

TABLE 1—ESTIMATED NUMBER OF AFFECTED ENTITIES AND SMALL ENTITIES BY NAICS CODE

NAICS Small entity threshold Total 

entities 

Small 

entities 

Entities that originate closedend mortgages 

Total Small 

Depository institutions .................... ............................................... ........................ ........................ ........................ ........................

Commercial banks ......... 522110 $175M assets ....................... 6,596 3,764 6,362 3,597 

Savings institutions a ...... 522120 $175M assets ....................... 1,145 491 1138 487 

Credit unions b ............... 522130 $175M assets ....................... 7,491 6,569 4,359 3,441 

Non-depository institutions .................... ............................................... ........................ ........................ ........................ ........................

Mortgage companies c ... 522292 $7M revenues ....................... 2,515 2,282 2,515 2,282 

aAsset size obtained from December 2010 Call Report data as compiled by SNL Financial. Savings institutions include thrifts, savings banks, 

mutual banks, and similar institutions. Estimated number of creditors originating any closed-end mortgages based on 2010 HMDA data and, for 

entities that do not report to HMDA, loan counts are projected based on Call Report data. bAsset size and engagement in closed-end mortgage loans obtained from December 2010 National Credit Union Administration Call Report. 

Count of credit unions engaged in closed-end mortgage transactions may include some institutions that make only first-lien open-end loans. cEstimates are based on the NMLS/MCR data for Q2 and Q3 of 2011. Entities that report to MCR are considered to originate mortgages if 

they report either: (1) Originating at least one closed-end mortgage; or (2) a positive dollar value of originated loans. To estimate the number of 

small entities, revenue for entities that did not report revenue is estimated based on the dollar value and number of loans originated and the dollar value and number of loans brokered. Revenue is not reported for 78 percent of mortgage companies in the MCR data, so the estimated number of small entities may contain substantial estimation uncertainty and may be more sensitive to model specification than if revenue were available for a larger fraction of entities. 

D. Impact of Revised Triggers on 

Depository Institutions 

1. Closed-End HOEPA Lending by Small 

Depository Institutions 

To assess the proposed rule’s impacts, 

the analysis aims to estimate the 

counterfactual set of loans that would 

have met the definition of a HOEPA 

loan if the revised triggers had been in 

effect in 2010.112 One can readily 


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spread of 3.5 percentage points or greater. 

Importantly, the ‘‘higher-priced’’ mortgage loan 

thresholds are well below the APR triggers for 

HOEPA. The spread is calculated as of the date the 

loan’s rate was set. Based on these variables, the 

analysis defines as a high-cost mortgage any HMDA 

loan that is either flagged as a HOEPA loan or that 

has an estimated APR spread that exceeds the 

relevant HOEPA trigger. The current HOEPA APR 

trigger is relative to a comparable Treasury security, 

but the reported spread in HMDA is relative to 

APOR, so it is not possible to determine with 

certainty whether a HMDA loan meets the current 

APR trigger, and not all loans that are estimated to 

be above the APR trigger are flagged as HOEPA 

loans. The Bureau also considered a narrower 

definition of a high-cost mortgage, namely, any loan 

that was identified as a HOEPA loan in the HMDA 

data. Conclusions based on this alternative 

definition are qualitatively similar to those under 

the primary, more conservative definition described 

above. 

113The statistical model also includes creditorspecific fixed effects, which are intended to capture 

systematic unobserved differences across creditors 

that affect the share of a creditor’s total loans that 

are HOEPA loans. The model captures the effect of 

the changes in the APR triggers through the fact that 

the gap between the triggers and APR would 

generally narrow, which increases the estimated 

probability that a loan would have been flagged as 

a high-cost loan. Modeling the probability as a 

function of loan size indirectly approximates the 

effect of the Dodd-Frank Act revisions to the pointsand-fees triggers. More specifically, the points-andfees trigger is defined, in part, based on points and 

fees as a percentage of the loan amount, so that, 

given two loans with identical points and fees, the 

loan with a smaller loan amount should be more 

likely to be flagged as a HOEPA loan. Indeed, 

HOEPA loans are more prevalent for loans with 

smaller loan amounts in HMDA. Thus, this appears 

to provide a reasonable approach to capturing 

variation in the likelihood that a loan is a HOEPA 

loan. Nonetheless, the Bureau solicits information 

or data (including data on points and fees or on 

prepayment penalties) from interested parties that 

could be used to refine or evaluate this 

approximation. 

114Loans potentially subject to HOEPA coverage 

in this context are loans for non-business purposes 

secured by a lien on an owner-occupied 1–4 family 

property, including manufactured homes. In 

addition, the estimate of the share of loans subject 

to HOEPA coverage currently excludes purchase 

money mortgages, which are included in the 

estimate of this share under the proposed rule. 

115 Data on interest and fee income are not 

available in the credit union Call Report data. This 

calculation assumes that interest and fee income for 

HOEPA and non-HOEPA loans are comparable at 

banks and thrifts and assumes that the share of 

outstanding balances accounted for by mortgages is 

a reasonable proxy for the share of mortgage 

revenue for a given credit union. 

identify 2010 HMDA loans that would 

have met the revised APR triggers based 

on information in the HMDA data. In 

contrast, the Bureau is not aware of an 

approach to directly determine whether 

a loan in the 2010 HMDA data would 

meet the revised points-and-fees trigger 

and, hence, whether the loan would 

have been flagged as a HOEPA loan. To 

overcome this data limitation, the 

Bureau modeled the probability that a 

loan would have been flagged as a 

HOEPA loan in HMDA as a function of: 

(i) the loan amount and (ii) the 

difference between the loan’s APR and 

the APR trigger.113

The changes to the APR and pointsand-fees triggers are estimated to 

increase the share of loans made by 

HMDA-reporters and potentially subject 

to HOEPA that are classified as highcost mortgages from 0.06 percent of 

loans to 0.3 percent.114 Under the 

current HOEPA regulations, fewer than 

five percent of small depository 

institutions are estimated to make any 

HOEPA loans, and only about 0.2 

percent of small DIs are estimated to 

have made at least 10 HOEPA loans in 

2010 (Table 2). As expected, the 

estimates imply that the shares of 

lenders would have been larger if the 

revised triggers had been in place. 

Nevertheless, by these estimates, 

HOEPA loans would have remained a 

small fraction of closed-end originations 

by small DIs, and the vast majority of 

small DIs would have made no HOEPA 

loans under the revised triggers. 

TABLE 2—ESTIMATED NUMBER OF SMALL DIS THAT ORIGINATE ANY HOEPA LOANS OR 10 OR MORE HOEPA LOANS

UNDER THE CURRENT AND REVISED HOEPA TRIGGERS

Pre-DoddFrank Act Post-DoddFrank Act 

Estimated number that make any HOEPA loans .................................................................... 505 655 

Percent of small depository institutions ............................................................................ 4.7% 6.1% 

Estimated number that make 10 or more HOEPA loans ........................................................ 24 50 

Percent of small depository institutions ............................................................................ 0.2% 0.5% 

2. Costs to Small Depository Institutions 

From Changes in Closed-End 

Originations 

To gauge the potential effect of the 

Dodd-Frank Act amendments to HOEPA 

related to high-cost, closed-end 

mortgage loans, the Bureau 

approximates the potential revenue loss 

to DIs that report in HMDA based on the 

estimated share, from HMDA, of homesecured loan originations that would be 

high-cost mortgage loans and the share 

of total income (for banks and 

thrifts) or total outstanding balances 

(for credit unions) accounted for by 

mortgage loans based on Call Report 

data.115

The Bureau estimates that high-cost 

closed-end mortgage loans account for 

just a fraction of revenue for most small 

DIs under both the current and revised 

triggers (Table 3). The Bureau estimates 

that, post-Dodd-Frank Act, four percent 

of small DIs might lose more than one 

percent of revenue, compared with 1.5 

percent of small DIs under the current 

triggers. At most, about one percent of 

small DIs would have revenue losses 

greater than three percent if these 

creditors chose to make no high-cost, 

closed-end mortgage loans. 

TABLE 3—ESTIMATED REVENUE SHARES ATTRIBUTABLE TO HIGH-COST, CLOSED-END MORTGAGE LENDING FOR SMALL

DIS PRE- AND POST-DODD-FRANK ACT

Pre-DoddFrank Act Post-DoddFrank Act 

Number with HOEPA revenue share >1% a ............................................................................ 162 429 

Percent of small depositories ........................................................................................... 1.5% 4.0% 

Number with HOEPA revenue share >3% a ............................................................................ 36 102 


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116Nine of the 5,512 commercial banks and 

savings institutions with outstanding revolving 

mortgage receivables reported no outstanding 

closed-end receivables and are estimated to have 

made no closed-end loans. Five of these were small 

depositories. 

117The share of high-cost, HELOCs that meet the 

APR trigger arguably might be greater or less than 

the share for high-cost, closed-end mortgage loans. 

On the one hand, HELOCs tend to be for smaller 

amounts, so points and fees may tend to be a larger 

percent of loan size. On the other hand, based on 

outreach, the Bureau believes that points and fees 

may be less prevalent for HELOCs than for closedend mortgage loans. 

118The Bureau solicits information or data from 

interested parties on interest rates on home-equity 

lines of credit, particularly information on interest 

rates for HELOC originations. 

TABLE 3—ESTIMATED REVENUE SHARES ATTRIBUTABLE TO HIGH-COST, CLOSED-END MORTGAGE LENDING FOR SMALL

DIS PRE- AND POST-DODD-FRANK ACT—Continued 

Pre-DoddFrank Act Post-DoddFrank Act 

Percent of small depositories ........................................................................................... 0.3% 0.9% 

a Revenue shares for commercial banks and savings institutions are based on interest and fee income from loans secured by 1–4 family 

homes (including home equity lines of credit, which cannot be distinguished) as a share of total interest and non-interest income. NCUA Call Report data for credit unions do not contain direct measures of income from mortgages and other sources, so the mortgage revenue share is assumed to be proportional to the dollar value of closed- and open-end real-estate loans and lines of credit as a share of total outstanding balances on loans and leases. 

3. Open-End HOEPA Lending by Small 

Depository Institutions 

Call Report data for banks and thrifts 

indicate that nearly all banks and thrifts 

that make home-equity lines of credit 

also make closed-end mortgage loans, so 

the estimated numbers of affected 

entities are essentially identical to those 

shown in the first two rows of Table 

1.116 Based on the credit union Call 

Report data, the Bureau estimates that 

268 credit unions—all of which were 

small entities—originated HELOCs but 

no closed-end mortgage loans in 2010. 

Thus, the Bureau estimates that 4,627 

credit unions and 3,709 small credit 

unions would potentially be affected by 

either the changes to closed-end triggers 

or the extension of HOEPA to home 

equity lines of credit. With regard to 

non-DIs, the Bureau estimates that few, 

if any, non-DIs that are small entities 

make HELOCs because non-DIs 

generally are less likely to be able to 

fund lines of credit and to have access 

to the payment system. 

4. Effect of the Dodd-Frank Act on 

Open-End HOEPA Lending 

HELOCs account for more than ten 

percent of the value of outstanding 

loans and leases for about 12–13 percent 

of small DIs, and they comprise more 

than one-quarter of outstanding 

balances on loans and leases for only 

about 2–3 percent of small DIs (Table 4). 

TABLE 4—HELOCS REPRESENT A MODEST PORTION OF MOST SMALL DEPOSITORIES’ LENDING

Percent of DIs a Number of DIs a

HELOCs > 10% of all loans/leases ............................................................................................................. 11.9–13.4 1,286–1,451 

HELOCs > 25% of all loans/leases ............................................................................................................. 2.3–2.9 251–319 

aFirst-lien HELOCs cannot be distinguished from other first liens in the credit union Call Report data. The ranges reflect alternative assumptions on the value of credit union’s HELOC receivables: the lower bound assumes that no first liens are HELOCs, and the upper bound assumes 

that all adjustable-rate first liens with an adjustment period of one year or less are HELOCs. 

5. Direct Costs Associated With the 

Dodd-Frank Act for Open-End HOEPA 

Loans 

Data from SCF indicate that an 

estimated 1.2 percent of outstanding 

HELOCs would potentially meet the 

proposed APR triggers. The analysis of 

closed-end mortgage loans for HMDA 

reporters imply that roughly half of 

loans that meet any HOEPA trigger meet 

the APR trigger. Thus, combining these 

estimates suggests that about 2.4 percent 

of HELOCs might meet the HOEPA 

triggers.117

The SCF is the only source of 

nationally representative data on 

interest rates on consummated HELOCs 

that the Bureau is aware of, but the 

Bureau acknowledges that the SCF 

provides a small sample of HELOCs.118

Thus, in addition to the approximation 

error in extrapolating from closed-end 

mortgage loans to HELOCs due to data 

limitations, the SCF-based estimate of 

1.2 percent is likely imprecisely 

estimated but reflects the best available 

estimate given existing data. Given these 

caveats, the analysis considers how the 

conclusions would differ if one assumed 

that a greater fraction of HELOCs would 

meet the HOEPA triggers. For context, 

as noted above, the Bureau estimates 

that roughly 0.3 percent of closed-end 

mortgage loans would be high-cost 

mortgages, a percentage one-eighth the 

estimate for HELOCs, which might 

suggest that the HELOC estimate is 

conservative. 

The Bureau estimates that, if the 

rough estimate of 2.4 percent described 

above were accurate, fewer than 100 

small DIs (less than one percent of small 

DIs) would experience a revenue loss 

that exceeds one percent (Table 5). If the 

actual proportion of high-cost HELOCs 

were a bit more than twice as high as 

the Bureau estimates, i.e., at five 

percent, then the estimated share of 

small depositories that might experience 

a one percent revenue loss increases to 

not quite five percent, and about 0.1 

percent of small DIs might experience a 

loss greater than three percent of 

revenue by these estimates. Under the 

relatively conservative assumption that 

ten percent of HELOCs are high-cost 

mortgages (i.e., over four times the SCFbased estimate), about 13 percent of 

small DIs might be expected to lose 

greater than one percent of revenue, and 

less than two percent of DIs would have 

estimated losses that exceed three 

percent of revenue. 


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119This calculation is based on combining the 

estimated revenue loss on closed-end mortgage 

loans for HMDA-reporters and the estimated loss on 

HELOCs, which is available for all DIs (since it 

draws only on the Call Report data). The Bureau 

then estimates the probability that a DI that does 

not report in HMDA would have a combined 

revenue loss of more than one percent based on the 

institution type, assets, and estimated percentage 

revenue loss on HELOCs. 

120The corresponding estimates for all DIs are 

comparable. 

121Over half of non-DI originators also broker 

loans. Revenue from brokering or other sources may 

mitigate the potential revenue losses of the DoddFrank Act amendments on those creditors. 

122Unlike the Call Report data for DIs, however, 

the Bureau cannot currently match the NMLS/MCR 

data to HMDA to project HOEPA lending under the 

post-Dodd-Frank Act triggers by non-DIs that do not 

report in HMDA. 123The extrapolation is done based on the 

number of originations and whether HOEPA loans 

accounted for more than one or three percent of 

2010 originations under the current HOEPA 

triggers. 

124These estimates are based in part on modeling 

revenue, and therefore the likelihood that a non-DI 

is a small entity, because data on revenue are 

missing for the majority of originators in NMLS/ 

MCR. 

125The extrapolation from non-DIs that report in 

HMDA to non-DIs that do not report in HMDA 

assumes that patterns of lending among nonreporters are similar to patterns at reporters that 

have comparable originations and similar pre-DoddFrank Act HOEPA shares. This extrapolation for 

creditors that specialize in manufactured-housing 

mortgages is subject to two caveats. First, as noted, 

the post-Dodd-Frank Act revisions to HOEPA may 

particularly increase the share of HOEPA loans 

among creditors that specialize in loans on 

manufactured homes, particularly for home 

purchase. Second, the NMLS/MCR data do not 

include information on the extent of manufacturedhome lending, so the Bureau cannot directly 

estimate how many non-DI manufactured-housing 

specialists do not report in HMDA. 

TABLE 5—ESTIMATED SHARES OF REVENUE FROM POST-DODD-FRANK ACT HIGH-COST HELOCS FOR SMALL

DEPOSITORY INSTITUTIONS

Assumed share of post-DFA high-cost HELOCS 

2.4 percent 5 percent 10 percent 

Number with HOEPA revenue share >1%a ................................................................................ 80 507 1,390 

Percent of small depository institutions ................................................................................ 0.7% 4.7% 12.8% 

Number with HOEPA revenue share >3%a ................................................................................ 0 15 200 

Percent of small depository institutions ................................................................................ 0% 0.1% 1.8% 

aFirst-lien HELOCs cannot be distinguished from other first liens in the credit union Call Report data. The estimated revenue shares assume 

all adjustable-rate first liens with an adjustment period of one year or less are HELOCs (corresponding to the upper bound estimates in Table 4). 

For depository institutions, the 

potential loss in revenue due to the 

Dodd-Frank Act revisions to HOEPA 

comprises the losses from both closedand open-end lending. To assess the 

potential revenues losses for DIs from 

both sources, the Bureau first estimates 

the combined loss based on the 

assumption that ten percent of HELOCs 

would be HOEPA loans.119 Under this 

conservative assumption, the Bureau 

estimates that roughly 17 percent of 

small DIs would lose more than one 

percent of revenue if these creditors 

made neither closed-end nor open-end 

HOEPA loans, and about three percent 

of small DIs would lose three percent of 

revenue under this scenario. If instead 

five percent of HELOCs were HOEPA 

loans—a proportion more than twice the 

estimate based on the SCF and therefore 

still conservative—the Bureau estimates 

approximately ten percent of small DIs 

would have combined losses that 

exceed one percent of revenue, and 

about one percent of small DIs would 

lose more than three percent of 

revenue.120

E. Impact of Revised Triggers on NonDepository Institutions 

Closed-End HOEPA Lending by Small 

Non-Depository Institutions 

The Bureau estimates based on the 

NMLS/MCR data that 2,282 out of 2,515 

total non-depository mortgage 

originators are small entities (Table 1). 

According to the NMLS/MCR data, 

many non-DI creditors originate just a 

few loans. Just less than one-quarter of 

nonbank creditors are estimated to have 

originated ten or fewer loans, for 

example, and about 40 percent of nonDIs made at most 25 loans. These 

fractions are similar for small non-DIs as 

well.121

The Bureau estimates that the number 

of HOEPA loans originated by non-DIs 

that report in HMDA would increase 

from fewer than 100 loans under the 

current triggers to over 7,000 under the 

post-Dodd-Frank Act triggers.122 The 

Bureau notes that this is a substantial 

increase. However, even with this large 

estimated increase in the absolute 

number of HOEPA loans, the Bureau 

estimates that less than 0.4 percent of all 

closed-end mortgage loans originated by 

non-DIs that report in HMDA would be 

HOEPA loans. Moreover, over threequarters of the estimated increase is 

driven by two creditors that made no 

loans in 2010 that were flagged as 

HOEPA loans in HMDA but that 

account for the majority of the new 

HOEPA loans. Two additional creditors 

account for another roughly nine 

percent of the new HOEPA loans. The 

vast majority of originations by these 

four creditors were mortgages on 

manufactured homes, particularly 

purchase money mortgage loans. Based 

on the number of originations and 

revenue, the Bureau believes that the 

largest creditors for manufactured 

homes are not small entities. The 

increase in the number of loans covered 

therefore very likely overstates the 

impact on small entities. 

In estimating the effects of the DoddFrank Act revisions to HOEPA on nonDIs’ revenues, the Bureau assumes that 

the share of revenue from HOEPA 

lending is the same as the share of 

HOEPA originations for a given creditor. 

Thus, to examine the impact of the 

proposed rule on revenue for non-DIs, 

the Bureau estimates the probability that 

HOEPA loans comprise more than one 

percent or three percent of all 

originations for non-DIs that report in 

the 2010 HMDA data and extrapolates 

these estimates for non-DIs that do not 

report in HMDA.123

Under this assumption, the NMLS/ 

MCR data indicate that HOEPA loans 

accounted for more than one percent of 

revenue for about five percent of small 

non-DIs in 2010 (Table 6) and for more 

than three percent of revenue for a 

slightly smaller fraction.124 Less than 

ten percent of small non-DIs are 

estimated to have more than one percent 

of revenue from HOEPA loans under the 

new APR and points-and-fees triggers, 

and roughly seven percent of small nonDIs are estimated to have more than 

three percent of revenue from HOEPA 

loans.125


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126For context, the comparable shares of loans 

that allowed for negative amortization in the 1989– 

2004 SCFs varied between 1.3–2.3 percent of loans. 

These percentages are based on the share of 

mortgage borrowers who said their payment did not 

change when the interest rate on their adjustablerate mortgage changed. 127See Table 6, supra. 

TABLE 6—ESTIMATED SHARES OF HOEPA LOAN ORIGINATIONS FOR SMALL NON-DIS PRE- AND POST-DODD-FRANK ACT a

Pre-DFA Post-DFA 

Number Percent Number Percent 

HOEPA loans > 1% of all loans ...................................................................................... 121 5.3 207 9.1 

HOEPA loans > 3% of all loans ...................................................................................... 113 5.0 170 7.4 

a Number and percent of post-Dodd-Frank Act HOEPA originations are projected based on estimated post-Dodd-Frank Act originations of 

HOEPA loans by HMDA-reporting non-DIs, conditional on total originations in 2010 and on pre-Dodd-Frank Act HOEPA loans as a share of 2010 

originations. In particular, in projecting the probability that a creditor made more than one (three) percent HOEPA loans post-Dodd-Frank Act, the 

Bureau controls for whether pre-Dodd-Frank Act HOEPA loans comprised more than one (three) percent of originations. To estimate the number 

of small entities, revenue for entities that did not report revenue is estimated based on the dollar value and number of loans originated and the 

dollar value and number of loans brokered. The estimated probability that a non-DI that reports to HMDA is a small entity is projected from the 

MCR data based on the number of originations. 

F. TILA and RESPA Counseling-Related 

Provisions 

The proposed rule would also 

implement two Dodd-Frank Act 

provisions related to homeownership 

counseling. The Bureau expects that 

neither of these provisions would result 

in a sizable revenue loss for small 

creditors. The first requires that a 

creditor obtain sufficient documentation 

to demonstrate that a borrower received 

homeownership counseling before 

extending a negative-amortization 

mortgage to a first-time borrower. This 

requirement will likely apply to only a 

small fraction of mortgages: only 0.3 

percent of mortgages in the 2007 SCF 

reportedly had negative-amortization 

features, and by definition this is an 

upper bound on the share of negativeamortization mortgages held by firsttime borrowers.126 Moreover, the 

provision only requires a creditor to 

obtain documentation, which the 

Bureau expects to be a comparatively 

low burden. For these reasons, the 

Bureau believes that the burden to 

creditors would be minimal, as noted in 

parts VI and VIII. 

The second provision is a new 

requirement that lenders provide loan 

applicants a list of HUD-certified or 

-approved homeownership counselors 

or counseling agencies located in the 

area of the lender. Under the proposed 

rule, this requirement would apply to 

all applicants for a federally related 

mortgage loan (except for HECM 

applicants where the lender complies 

with the similar HECM list requirement) 

and so would apply to a large number 

of applications—under the Bureau’s 

estimation methodology in analyzing 

the paper work burden, nearly 16 

million applications for mortgages and 

HELOCs. Nevertheless, the Bureau 

believes the burden is likely to be 

minimal—less than 1 dollar per 

application—because it should be 

straightforward to obtain and to provide 

the geographically specific information 

on certified or approved 

homeownership counselors or 

counseling organizations. Further, the 

list will likely be provided with other 

documents that the applicant must 

receive from the lender. 

G. Conclusion 

The Bureau estimates that, under the 

proposed rule, only a small fraction of 

depository institutions would be 

expected to lose more than three or even 

more than one percent of revenue even 

under the conservative assumption that 

lenders forgo making any HOEPA loans. 

For example, under the assumption that 

five percent of HELOCs fell within the 

HOEPA triggers—a proportion more 

than twice the estimate based on the 

SCF and therefore still conservative— 

the Bureau estimates that about ten 

percent of small DIs would have 

combined losses that exceed one 

percent of revenue, and roughly one 

percent of small DIs would lose more 

than three percent of revenue. In all 

cases, the TILA and RESPA counseling 

provisions noted above would have 

little impact on these impact estimates. 

For non-depository institutions, less 

than ten percent of small non-DIs are 

estimated to have more than one percent 

of revenue from HOEPA loans under the 

new APR and points-and-fees triggers, 

and about seven percent of small nonDIs are estimated to have more than 

three percent of revenue from HOEPA 

loans.127 In all cases, the TILA and 

RESPA counseling provisions noted 

above would have little impact on these 

impact estimates. 

Certification 

Accordingly, the undersigned certifies 

that this proposal, if adopted, would not 

have a significant economic impact on 

a substantial number of small entities. 

The Bureau requests comment on the 

analysis above and requests any relevant 

data. 

VIII. Paperwork Reduction Act 

The collection of information 

contained in this notice of proposed 

rulemaking, and identified as such, has 

been submitted to the Office of 

Management and Budget (OMB) for 

review under section 3507(d) of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3501 et seq.) (Paperwork 

Reduction Act or PRA). Under the PRA, 

the Bureau may not conduct or sponsor, 

and a person is not required to respond 

to, this information collection unless the 

information collection displays a 

currently valid control number. 

This proposed rule would amend 12 

CFR part 1024 (Regulation X) and 12 

CFR part 1026 (Regulation Z). Both 

Regulations X and Z currently contain 

collections of information approved by 

OMB. The Bureau’s OMB control 

number for Regulation X is 3170–0016 

and for Regulation Z is 3170–0015. 

As described below, the proposed rule 

would amend the collections of 

information currently in Regulation X 

and Regulation Z. RESPA and 

Regulation X are intended to provide 

consumers with greater and more timely 

information on the nature and costs of 

the residential real estate settlement 

process. As previously discussed, the 

proposed rule would amend the 

information collections currently 

required by Regulation X by requiring 

that lenders distribute to prospective 

borrowers of virtually all federally 

related mortgage loans a list of federally 

certified or approved homeownership 

counselors or counseling organizations 

located in the area of the lender. See the 

section-by-section analysis to proposed 

§ 1024.20, above. TILA and Regulation Z 

are intended to ensure effective 

disclosure of the costs and terms of 

credit to consumers. As previously 

discussed, the proposed rule would 

amend the information collections 

currently required by Regulation Z by 


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49146 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

128For purposes of this PRA analysis, references 

to ‘‘creditors’’ or ‘‘lenders’’ shall be deemed to refer 

collectively to commercial banks, savings 

institutions, credit unions, and mortgage companies 

(i.e., non-depository lenders), unless otherwise 

stated. Moreover, reference to ‘‘respondents’’ shall 

generally mean all categories of entities identified 

in the sentence to which this footnote is appended, 

except as otherwise stated or if the context indicates 

otherwise. 

129There are 154 depository institutions (and 

their depository affiliates) that are subject to the 

Bureau’s administrative enforcement authority. For 

purposes of this PRA analysis, the Bureau’s 

respondents under Regulation Z are 130 depository 

institutions that originate either open or closed-end 

mortgages and an estimated 2,515 non-depository 

institutions that are subject to the Bureau’s 

administrative enforcement authority. Unless 

otherwise specified, all references to burden hours 

and costs for the Bureau respondents for the 

collection under Regulation Z are based on a 

calculation of half of the estimated 2,515 nondepository institutions. 

130The burden-hour estimate of training assumes 

that a total of 30 minutes is required for training 

on all aspects of the proposed rule. For simplicity, 

these time estimates assume that an equal amount 

of time is spent on each of the four provisions, but 

the Bureau expects the proportion of time allocated 

to each topic in the 30 minute total training time 

may vary. The estimation methodology also 

assumes that a trainer will spend an hour for every 

ten hours of trainee time. 

(1) Expanding the categories of loans for 

which a special HOEPA disclosure is 

required, (2) requiring that creditors 

distribute a list of federally approved 

housing counselors to prospective 

borrowers of high-cost mortgages and 

(in the case of first-time borrowers) 

negatively amortizing mortgage loans, 

and (3) requiring creditors to receive 

and review confirmation that 

prospective borrowers of high-cost 

mortgages and (in the case of first-time 

borrowers) negatively amortizing 

mortgage loans have received required 

pre-loan counseling. See generally the 

section-by-section analysis to proposed 

§ 1026.32(a)(1) and (c), § 1026.34(a)(5), 

and § 1026.36(k), above. 

The information collection in the 

proposed rule is required to provide 

benefits for consumers and would be 

mandatory. See 15 U.S.C. 1601 et seq.; 

12 U.S.C. 2601 et seq. Because the 

Bureau does not collect any information 

under the proposed rule, no issue of 

confidentiality arises. The likely 

respondents would be depository 

institutions (i.e., commercial banks/ 

savings institutions and credit unions) 

and non-depository institutions (i.e., 

mortgage companies or other non-bank 

lenders) subject to Regulation X or the 

high-cost mortgage requirements or 

negative amortization loan counseling 

requirements of Regulation Z.128

Under the proposed rule, the Bureau 

would account for the entire paperwork 

burden for respondents under 

Regulation X. The Bureau generally 

would also account for the paperwork 

burden associated with Regulation Z for 

the following respondents pursuant to 

its administrative enforcement 

authority: insured depository 

institutions with more than $10 billion 

in total assets, their depository 

institution affiliates, and certain nondepository lenders. The Bureau and the 

FTC generally both have enforcement 

authority over non-depository 

institutions for Regulation Z. 

Accordingly, the Bureau has allocated to 

itself half of the estimated burden to 

non-depository institutions. Other 

Federal agencies are responsible for 

estimating and reporting to OMB the 

total paperwork burden for the 

institutions for which they have 

administrative enforcement authority. 

They may, but are not required to, use 

the Bureau’s burden estimation 

methodology. 

Using the Bureau’s burden estimation 

methodology, the total estimated burden 

under the proposed changes to 

Regulation X for all of the nearly 15,000 

institutions subject to the proposed rule, 

would be approximately 16,400 hours 

for one-time changes and 260,000 hours 

annually. Using the Bureau’s burden 

estimation methodology, the total 

estimated burden under the proposed 

changes to Regulation Z for the roughly 

5,200 institutions, including Bureau 

respondents,129 that are estimated to 

make high-cost mortgages subject to the 

proposed rule would be approximately 

38,300 hours of one-time costs and 

about 1,600 hours annually. 

The aggregate estimates of total 

burdens presented in this part VIII are 

based on estimated costs that are 

weighted averages across respondents. 

The Bureau expects that the amount of 

time required to implement each of the 

proposed changes for a given institution 

may vary based on the size, complexity, 

and practices of the respondent. 

A. Information Collection Requirements 

The Bureau believes the following 

aspects of the proposed rule would be 

information collection requirements 

under the PRA. 

1. Provision of List of Federally 

Approved Housing Counselors 

The Bureau estimates one-time and 

ongoing costs to respondents of 

complying with the housing counselor 

disclosure requirements in proposed 

§§ 1024.20, 1026.34(a)(5)(vii), 

1026.36(k)(4) as follows. First, the 

Bureau assumes that lenders who are 

required to comply with proposed 

§ 1026.34(a)(5)(vii) and § 1026.36(k)(4) 

would comply with those provisions by 

satisfying the disclosure obligation in 

proposed § 1024.20, as permitted by the 

proposed rule. Thus, the Bureau does 

not aggregate the burden to respondents 

of providing the counselor list 

disclosures in proposed 

§ 1026.34(a)(5)(vii) (high-cost mortgages) 

and § 1026.36(k)(4) (negative 

amortization loans to first-time 

borrowers). However, the Bureau does 

aggregate burden for reviewing the 

relevant portions of the regulations and 

training relevant employees. 

One-time costs. The Bureau estimates 

that covered persons would incur onetime costs associated with reviewing the 

regulation and training relevant 

employees. Specifically, the Bureau 

estimates that, for each covered person, 

one attorney and one compliance officer 

would each take 7.5 minutes (15 

minutes in total) to read and review the 

sections of the proposed regulation that 

describe the housing counseling 

disclosures, based on the length of the 

sections. The Bureau also estimates that 

each loan officer or other loan originator 

will need to receive 7.5 minutes of 

training concerning the disclosures.130

The Bureau estimates the total one-time 

costs across all relevant providers of 

reviewing the relevant portions of the 

proposed regulation and conducting 

training to be about 16,400 hours and 

roughly $869,000, or about $174,000 per 

year if annualized over five years. Table 

1, below, shows the Bureau’s estimate of 

the total one-time paperwork burden to 

all respondents to comply with the 

housing counselor disclosure 

requirements in proposed §§ 1024.20, 

1026.34(a)(5)(vii), and § 1026.36(k)(4). 

Ongoing costs. On an ongoing basis, 

the Bureau estimates that producing and 

providing the required housing 

counselor disclosures to an applicant 

will take approximately one minute and 

that the cost of producing the required 

disclosures will be $0.10 per disclosure. 

The estimated ongoing paperwork 

burden to all Bureau respondents taken 

together is approximately 258,700 

burden hours and about $13.4 million 

annually, or less than 1 dollar per loan 

application. Table 2, below, shows the 

Bureau’s estimates of the total ongoing 

annual paperwork burden to all Bureau 

respondents to comply with the 

requirement to provide mortgage loan 

applicants with a list of federally 

approved housing counselors. 

2. Receipt of Certification of Counseling 

for High-Cost Mortgages 

The Bureau estimates one-time and 

ongoing costs to respondents of 

complying with the requirement to 

receive the high-cost mortgage 

counseling certification, as required by 

proposed § 1026.34(a)(5)(i) and (v), as 


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131 In the case of high-cost mortgages, TILA 

defines ‘‘creditor’’ as a person that, in any 12 month 

period, originates two or more high-cost mortgages, 

or one or more high-cost mortgage through a broker. 

For purposes of determining the universe of 

relevant providers for this provision, the Bureau 

does not attempt to calculate how many of the 

respondents that have made HOEPA loans in the 

past made only one HOEPA loan. Thus, the number 

of relevant providers used to calculate the 

paperwork burden for this provision may be an 

overestimate. 

follows. The Bureau estimates that 54 

depository institutions and 354 nondepository institutions subject to the 

Bureau’s administrative enforcement 

authority would originate high-cost 

mortgages.131 The Bureau estimates that 

this universe of relevant providers 

would each incur a one-time burden of 

24 minutes for compliance or legal staff 

to read and review the relevant sections 

of the regulation (12 minutes for each of 

two compliance or legal staff members). 

The Bureau also estimates that this 

universe of relevant providers would 

incur a one-time burden of 7.5 minutes 

each to conduct initial training for each 

loan officer or other loan originator 

concerning the receipt of certification of 

counseling. The Bureau estimates that 

the total one-time burden across all 

relevant providers of complying with 

the high-cost mortgage housing 

counseling certification requirement 

would be about 2,100 hours and roughly 

$98,000. 

On an ongoing basis, the Bureau 

estimates that respondents would incur 

a burden of 2 minutes per origination to 

receive and review the certification 

form. In addition, the Bureau estimates 

that, on average, a creditor would incur 

a cost of $0.025 to retain the 

certification form. The Bureau estimates 

that the total ongoing burden across all 

relevant providers of complying with 

the high-cost mortgage housing 

counseling certification requirement 

would be about 400 hours and $20,000 

annually. The Bureau’s estimates of the 

total one-time and ongoing annual 

paperwork burden to all Bureau 

respondents to comply with the 

requirement to receive certification of 

high-cost mortgage counseling are set 

forth in Tables 1 and 2, below. 

3. Receipt of Documentation of 

Counseling for Negative Amortization 

Loans 

The Bureau does not separately 

estimate the paperwork burden to 

respondents of complying with the 

requirement to receive documentation 

that first-time borrowers in negatively 

amortizing loans have received pre-loan 

homeownership counseling, as required 

by proposed § 1026.36(k). The Bureau 

believes that any such burden will be 

minimal. The universe of respondents 

for this provision is negligible. Based on 

data from the 2007 Survey of Consumer 

Finances, the Bureau estimates that only 

0.3 percent of all outstanding mortgages 

in 2007 had negative amortization 

features. This estimate is an upper 

bound on the share of negatively 

amortizing loans held by first-time 

borrowers. Further, the Bureau believes 

that few if any mortgages originated 

currently could potentially negatively 

amortize. Moreover, the Bureau believes 

that the burden to respondents of 

complying with the provision would be 

de minimis since the required elements 

of the documentation are minimal, and 

the provision would require creditors 

only to receive and retain this 

documentation as part of the loan file. 

4. HOEPA Disclosure Form 

The Bureau believes that respondents 

will incur certain one-time and ongoing 

paperwork burden pursuant to proposed 

§ 1026.32(a)(1), which implements 

Dodd-Frank’s extension of HOEPA 

coverage to purchase money mortgage 

loans and open-end credit plans. As a 

result of proposed § 1026.32(a)(1), 

respondents that extend purchase 

money mortgage loans or open-end 

credit plans that are high-cost mortgages 

would be required to provide borrowers 

the special HOEPA disclosure required 

by § 1026.32(c). The Bureau has 

identified the following paperwork 

burdens in connection with proposed 

§ 1026.32(a)(1). 

a. Revising the HOEPA Disclosure Form 

First, the Bureau estimates the burden 

to creditors originating high-cost 

purchase money mortgage loans and 

high-cost HELOCs of revising the 

HOEPA disclosure required by 

§ 1026.32(c). The Bureau believes that 

respondents making high-cost purchase 

money mortgage loans would incur 

minimal or no additional burden, 

because the Bureau expects that these 

respondents would provide the same 

HOEPA disclosures used for refinance 

and closed-end home-equity loans 

subject to § 1026.32. 

As discussed in the section-by-section 

analysis to proposed § 1026.32(c), 

however, the calculation of certain of 

the required disclosures differs between 

the open-end and closed-end credit 

contexts. Therefore, the Bureau 

separately estimates the burden for 

revising the HOEPA disclosure for 

respondents likely to make high-cost 

HELOCs. The Bureau estimates that 45 

depository institutions for which it has 

administrative enforcement authority 

would be likely to originate a high-cost 

HELOC. Because non-depository 

institutions are generally less able to 

fund lines of credit and to have access 

to the payment system, the Bureau 

believes that few, if any, non-depository 

institutions originate open-end credit 

plans. 

The Bureau believes that respondents 

that are likely to make high-cost 

HELOCs would incur a one-time 

burden, but no ongoing burden, in 

connection with revising the HOEPA 

disclosure. The one-time burden 

includes a total estimated burden of less 

than 1,900 hours across all relevant 

providers to update their software and 

information technology systems to 

generate the HOEPA disclosure form 

appropriate for open-end credit plans. 

This estimate combines the burdens for 

large creditors and a fraction of smaller 

creditors whom the Bureau assumes 

would develop the necessary software 

and systems internally. The Bureau 

assumes that the remainder of smaller 

creditors would rely on third-party 

vendors to obtain a revised disclosure 

form for high-cost HELOCs; these small 

creditors are assumed to incur the dollar 

costs passed on from a vendor that 

offers the product but no hours burden. 

In addition, the Bureau assumes that 

respondents that are likely to make 

high-cost HELOCs would spend 7.5 

minutes each training a subset of loan 

officers or other loan originators that 

may make such loans. The Bureau 

estimates that the training burden across 

all relevant providers would total nearly 

1,300 hours. The total one-time burden 

across all relevant providers to revise 

the HOEPA disclosure is therefore about 

3,100 hours. The Bureau estimates the 

corresponding dollar-cost burden is 

roughly $169,000, corresponding to 

about $34,000 per year for all 

respondents if this one-time cost were 

annualized over five years. The 

estimated total one-time burden is 

summarized in Table 1, below. 

b. Providing the HOEPA Disclosure 

Form 

Respondents that make any high-cost 

mortgage would incur costs to review 

the provisions of the regulation related 

to the HOEPA disclosure. These costs 

could vary considerably across 

creditors. A creditor that currently 

makes high-cost mortgages might be 

expected to have lower costs to review 

the relevant section of the regulation 

than would a creditor that has not 

previously made high-cost mortgages 

but now expects to make such loans as 

a result of, for example, the revised 

triggers and extension of HOEPA to 

purchase money mortgage loans and 

HELOCs. The Bureau’s estimates are 

averages of these costs across lenders. 


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One-time costs. Based on the length of 

the proposed section, the Bureau 

estimates the one-time burden across all 

relevant providers to read and review 

the HOEPA disclosure provision and to 

obtain any necessary legal guidance 

would be slightly more than 30 minutes 

for each of two legal or compliance staff 

members. Across all relevant providers, 

the Bureau assumes an average one-time 

burden of 7.5 minutes each per loan 

officer or other loan originator for initial 

training concerning the disclosure. 

Under these assumptions, the total onetime burden across all relevant 

providers is estimated to be about 2,200 

hours and approximately $110,000, or 

about $22,000 annually if the costs were 

divided equally over five years. 

Ongoing costs. On an ongoing basis, 

the Bureau estimates that producing and 

providing the required disclosures to an 

applicant will take approximately 2 

minutes and that the cost of producing 

the required disclosures will be $0.10 

per disclosure. The Bureau assumes 

that, on average, the cost of retaining a 

copy of the disclosure for recordkeeping 

will cost $0.025 per disclosure. The 

Bureau estimates that, taken together, 

the production, provision, and recordretention costs for across all relevant 

providers would total approximately 

400 hours and nearly $21,000 annually. 

TABLE 1—ONE-TIME COSTS FOR ALL CFPB RESPONDENTS

Information collection Hours Dollars 

Provision of list of Federally approved housing counselors .................................................................................... 16,400 869,000 

Receipt of certification of counseling for high-cost mortgages ............................................................................... 2,100 98,000 

Revision of HOEPA disclosure for applicability to open-end credit ........................................................................ 3,100 169,000 

Provision of HOEPA disclosure ............................................................................................................................... 2,200 110,000 

Total burden, All Respondents ......................................................................................................................... 23,900 1,246,000 

TABLE 2—ONGOING COSTS FOR ALL CFPB RESPONDENTS

Information collection Hours Dollars 

Provision of list of Federally approved housing counselors .................................................................................... 258,700 13,406,000 

Receipt of certification of counseling for high-cost mortgages ............................................................................... 400 20,000 

Revision of HOEPA disclosure for applicability to open-end credit ........................................................................ — — 

Provision of special HOEPA disclosure .................................................................................................................. 400 21,000 

Total annual burden, All Respondents ............................................................................................................. 259,600 13,447,000 

B. Comments 

Comments are specifically requested 

concerning: (i) Whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Bureau, including 

whether the information will have 

practical utility; (ii) the accuracy of the 

estimated burden associated with the 

proposed collections of information; (iii) 

how to enhance the quality, utility, and 

clarity of the information to be 

collected; and (iv) how to minimize the 

burden of complying with the proposed 

collections of information, including the 

application of automated collection 

techniques or other forms of information 

technology. Comments on the collection 

of information requirements should be 

sent to the Office of Management and 

Budget (OMB), Attention: Desk Officer 

for the Consumer Financial Protection 

Bureau, Office of Information and 

Regulatory Affairs, Washington, DC, 

20503, or by the internet to http:// 

oira_submission@omb.eop.gov, with 

copies to the Bureau at the Consumer 

Financial Protection Bureau (Attention: 

PRA Office), 1700 G Street NW., 

Washington, DC 20552, or by the 

internet to CFPB_Public_PRA@cfpb.gov. 

List of Subjects 

12 CFR Part 1024 

Condominiums, Consumer protection, 

Housing, Mortgagees, Mortgages, 

Mortgage servicing, Recordkeeping 

requirements, Reporting. 

12 CFR Part 1026 

Advertising, Consumer protection, 

Credit, Credit unions, Mortgages, 

National banks, Reporting and 

recordkeeping requirements, Savings 

associations, Truth in lending. 

Text of Proposed Revisions 

Certain conventions have been used 

to highlight the proposed revisions. 

New language is shown inside bold 

arrows, and language that would be 

deleted is shown inside bold brackets. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Bureau proposes to 

amend Regulation X, 12 CFR part 1024, 

and Regulation Z, 12 CFR part 1026, as 

set forth below. 

PART 1024—REAL ESTATE 

SETTLEMENT PROCEDURES ACT 

(REGULATION X) 

1. The authority citation for part 1024 

continues to read as follows: 

Authority: 12 U.S.C. 2603–2605, 2607, 

2609, 2617, 5512, 5581. 

2. A new § 1024.20 is added to read 

as follows: 

fl§ 1024.20 List of homeownership 

counselors. 

(a) Provision of list. (1) Except as 

otherwise provided in this section, not 

later than three business days after a 

lender, mortgage broker, or dealer 

receives an application, or information 

sufficient to complete an application, 

the lender must provide the loan 

applicant with a clear and conspicuous 

written list of five homeownership 

counselors or counseling organizations 

located: 

(i) Within the zip code of the loan 

applicant’s current address; or 

(ii) If five counselors or counseling 

organizations are not within the zip 

code of the loan applicant’s current 

address, then within the zip code or zip 

codes closest to the loan applicant’s 

current address. 

(2) The list of homeownership 

counselors or counseling organizations 

distributed to each loan applicant under 

this section shall include only 

homeownership counselors and 

counseling organizations listed on 

either: 


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(i) The most current list of 

homeownership counselors or 

counseling organizations made available 

by the Bureau to lenders for use in 

complying with the requirements of this 

section; or 

(ii) The most current list maintained 

by HUD of homeownership counselors 

or counseling organizations who are 

certified by the Secretary of HUD 

pursuant to section 106(e) of the 

Housing and Urban Development Act of 

1968 (12 U.S.C. 1701x(e)), or are 

otherwise approved by HUD. 

(3) The list of homeownership 

counselors or counseling organizations 

provided under this section must 

include: 

(i) The name, business address, 

telephone number, and, if available 

from the Bureau or HUD, the email 

address and Web site of each listed 

homeownership counselor or 

counseling organization; and 

(ii) The Web site addresses and 

telephone numbers of the Bureau and 

HUD where applicants can access 

information on homeownership 

counseling. 

(4) The list of homeownership 

counselors or counseling organizations 

provided under this section may be 

combined and provided with other 

mortgage loan disclosures required 

pursuant to Regulation Z or this part 

unless prohibited by Regulation Z or 

this part. 

(5) A mortgage broker or dealer may 

provide the list of homeownership 

counselors or counseling organizations 

required under this section to any loan 

applicant from whom it receives or for 

whom it prepares an application. If the 

mortgage broker or dealer has provided 

the required list of homeownership 

counselors or counseling organizations, 

the lender is not required to provide an 

additional list. The lender is responsible 

for ensuring that the list of 

homeownership counselors or 

counseling organizations is provided to 

a loan applicant in accordance with this 

section. 

(6) If the lender, mortgage broker, or 

dealer does not provide the list of 

homeownership counselors or 

counseling organizations required under 

this section to the loan applicant in 

person, the lender must mail or deliver 

the list to the loan applicant by other 

means. The list may be provided in 

electronic form, subject to compliance 

with the consumer consent and other 

applicable provisions of the Electronic 

Signatures in Global and National 

Commerce Act (ESIGN) (15 U.S.C. 7001 

et seq.). 

(7) The lender is not required to 

provide the list of homeownership 

counselors or counseling organizations 

required under this section if, before the 

end of the three-business-day period 

provided in paragraph (a)(1) of this 

section, the lender denies the 

application or the loan applicant 

withdraws the application. 

(8) If a mortgage loan transaction 

involves more than one lender, only one 

list of homeownership counselors or 

counseling organizations required under 

this section must be given to the loan 

applicant and the lenders shall agree 

among themselves which lender must 

comply with the requirements that this 

section imposes on any or all of them. 

If there is more than one loan applicant, 

the required list of homeownership 

counselors or counseling organizations 

may be provided to any loan applicant 

with primary liability on the mortgage 

loan obligation. 

(b) Open-end lines of credit (homeequity plans) under Regulation Z. For a 

federally related mortgage loan that is a 

home-equity line of credit under 

Regulation Z, a lender or mortgage 

broker that provides the loan applicant 

with the list of homeownership 

counselors or counseling organizations 

required under this section may comply 

with the timing and delivery 

requirements set out in either paragraph 

(a) of this section or 12 CFR 1026.40(b). 

(c) Home Equity Conversion 

Mortgages. A lender is not required to 

provide an applicant for a Home Equity 

Conversion Mortgage, as defined in 12 

U.S.C. 1715z–20(b)(3), the list of 

homeownership counselors or 

counseling organizations required under 

this section, if the lender is required by 

HUD to provide, and does provide, a list 

of counselors or counseling agencies 

specializing in counseling on such 

mortgages to the applicant.fi 

PART 1026—TRUTH IN LENDING 

(REGULATION Z) 

3. The authority citation for part 1026 

is revised to read as follows: 

Authority: 12 U.S.C. fl2601; 2603–2605, 

2607, 2609, 2617, 5511,fi 5512, fl5532,fi 

5581; 15 U.S.C. 1601 et seq. 

Subpart A—General 

4. Section 1026.1 is amended by 

revising paragraph (d)(5) to read as 

follows: 

§ 1026.1 Authority, purpose, coverage, 

organization, enforcement, and liability. 

* * * * * 

(d) * * * 

(5) Subpart E contains special rules 

for mortgage transactions. Section 

1026.32 requires certain disclosures and 

provides limitations for closed-end 

loans fland open-end credit plansfi 

that have rates or fees above specified 

amounts flor certain prepayment 

penaltiesfi. Section 1026.33 requires 

special disclosures, including the total 

annual loan cost rate, for reverse 

mortgage transactions. Section 1026.34 

prohibits specific acts and practices in 

connection with [closed-end] mortgage 

transactions that are subject to 

§ 1026.32. Section 1026.35 prohibits 

specific acts and practices in connection 

with closed-end higher-priced mortgage 

loans, as defined in § 1026.35(a). 

Section 1026.36 prohibits specific acts 

and practices in connection with an 

extension of credit secured by a 

dwelling. 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

5. Section 1026.31 is amended by 

revising paragraph (c)(1) to read as 

follows: 

§ 1026.31 General rules. 

* * * * * 

(c) Timing of disclosure. (1) 

Disclosures for certain øclosed-end¿ 

home mortgages. The creditor shall 

furnish the disclosures required by 

§ 1026.32 at least three business days 

prior to consummation flor account 

openingfi of a flhigh-cost mortgage as 

defined in § 1026.32(a)fi ømortgage 

transaction covered by § 1026.32¿. 

(i) Change in terms. After complying 

with paragraph (c)(1) of this section and 

prior to consummation flor account 

openingfi, if the creditor changes any 

term that makes the disclosures 

inaccurate, new disclosures shall be 

provided in accordance with the 

requirements of this subpart. 

(ii) Telephone disclosures. A creditor 

may provide new disclosures by 

telephone if the consumer initiates the 

change and if, flprior to orfi at 

consummation flor account openingfi: 

(A) The creditor provides new written 

disclosures; and 

(B) The consumer and creditor sign a 

statement that the new disclosures were 

provided by telephone at least three 

days prior to consummation flor prior 

to account opening, as applicablefi. 

(iii) Consumer’s waiver of waiting 

period before consummation flor 

account openingfi. The consumer may, 

after receiving the disclosures required 

by paragraph (c)(1) of this section, 

modify or waive the three-day waiting 

period between delivery of those 

disclosures and consummation flor 

account openingfi if the consumer 

determines that the extension of credit 

is needed to meet a bona fide personal 


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49150 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

financial emergency. To modify or 

waive the right, the consumer shall give 

the creditor a dated written statement 

that describes the emergency, 

specifically modifies or waives the 

waiting period, and bears the signature 

of all the consumers entitled to the 

waiting period. Printed forms for this 

purpose are prohibited, except when 

creditors are permitted to use printed 

forms pursuant to § 1026.23(e)(2). 

* * * * * 

6. Section 1026.32 is amended by: 

A. Revising the section heading; 

B. Revising paragraph (a); 

C. Revising paragraph (b); 

D. Revising paragraphs (c)(3), (4) and 

(5); 

E. Revising paragraph (d) introductory 

text, paragraph (d)(1), and paragraphs 

(d)(6) through (8). 

The additions and revisions read as 

follows: 

§ 1026.32 Requirements for flhigh-costfi 

øcertain closed-end] home mortgages. 

(a) flHigh-cost mortgagesfi 

øCoverage.¿ (1) flCoverage. For 

purposes of this subpart, high-cost 

mortgage means any consumer credit 

transaction, other than a reversemortgage transaction as defined in 

§ 1026.33(a), that is secured by the 

consumer’s principal dwelling, and in 

which:fi øExcept as provided in 

paragraph (a)(2) of this section, the 

requirements of this section apply to a 

consumer credit transaction that is 

secured by the consumer’s principal 

dwelling, and in which either:¿ 

Alternative 1—Paragraph (a)(1)(i) 

(i) flThe annual percentage rate 

applicable to the transaction, as 

described in paragraph (a)(2) of this 

section, will exceed the average prime 

offer rate, as defined in 

§ 1026.35(a)(2)(ii), for a comparable 

transaction by more than: 

(A) 6.5 percentage points for a firstlien transaction, other than as described 

in paragraph (a)(1)(i)(B) of this section; 

(B) 8.5 percentage points for a firstlien transaction if the dwelling is 

personal property and the total loan 

amount is less than $50,000; or 

(C) 8.5 percentage points for a 

subordinate-lien transaction; orfi øThe 

annual percentage rate at consummation 

will exceed by more than 8 percentage 

points for first-lien loans, or by more 

than 10 percentage points for 

subordinate-lien loans, the yield on 

Treasury securities having comparable 

periods of maturity to the loan maturity 

as of the fifteenth day of the month 

immediately preceding the month in 

which the application for the extension 

of credit is received by the creditor; or¿ 

Alternative 2—Paragraph (a)(1)(i) 

(i) flThe transaction coverage rate, as 

defined in § 1026.35(a)(2)(i), applicable 

to the closed-end mortgage loan or the 

annual percentage rate applicable to the 

open-end credit plan, as provided in 

paragraph (a)(2) of this section, will 

exceed the average prime offer rate, as 

defined in § 1026.35(a)(2)(ii), for a 

comparable transaction by more than: 

(A) 6.5 percentage points for a firstlien transaction, other than as described 

in paragraph (a)(1)(i)(B) of this section; 

(B) 8.5 percentage points for a firstlien transaction if the dwelling is 

personal property and the total loan 

amount is less than $50,000; or 

(C) 8.5 percentage points for a 

subordinate-lien transaction; orfi øThe 

annual percentage rate at consummation 

will exceed by more than 8 percentage 

points for first-lien loans, or by more 

than 10 percentage points for 

subordinate-lien loans, the yield on 

Treasury securities having comparable 

periods of maturity to the loan maturity 

as of the fifteenth day of the month 

immediately preceding the month in 

which the application for the extension 

of credit is received by the creditor; or¿ 

(ii) The total points and fees payable 

øby the consumer at or before loan 

closing will exceed¿ flin connection 

with the transaction, as described in 

paragraphs (b)(1) through (5) of this 

section, will exceed: 

(A) 5 percent of the total loan amount 

for a transaction with a total loan 

amount of $20,000 or more; or 

(B) The lesser of 8 percent of the total 

loan amount or $1,000 for a transaction 

with a total loan amount of less than 

$20,000fi øthe greater of 8 percent of 

the total loan amount, or $400¿; the 

fl$1,000fi ø$400¿ figure shall be 

adjusted annually on January 1 by the 

annual percentage change in the 

Consumer Price Index that was reported 

on the preceding June 1ø.¿ fl; or 

(iii) Under the terms of the loan 

contract or open-end credit agreement, 

the creditor can charge a prepayment 

penalty, as defined in paragraph (b)(8) 

of this section, more than 36 months 

after consummation or account opening, 

or prepayment penalties that can 

exceed, in total, more than two percent 

of the amount prepaid.fi 

(2) flDetermination of transaction 

coverage rate or annual percentage rate. 

For purposes of paragraph (a)(1)(i) of 

this section, a creditor shall determine 

the transaction coverage rate or annual 

percentage rate, as applicable, for a 

transaction based on the following: 

(i) For a fixed-rate transaction in 

which the annual percentage rate will 

not vary during the term of the loan or 

plan, the interest rate in effect on the 

date of consummation or account 

opening of the transaction; 

(ii) For a variable-rate transaction in 

which the interest rate may vary during 

the term of the loan or plan in 

accordance with an index that is not 

under the creditor’s control, the interest 

rate that results from adding the 

maximum margin permitted at any time 

during the term of the loan or plan to 

the value of the index rate in effect on 

the date of the consummation or 

account opening of the transaction; and 

(iii) For a transaction in which the 

interest rate may vary during the term 

of the loan or plan, other than a 

transaction described in paragraph 

(a)(2)(ii) of this section, the maximum 

interest rate that may be imposed during 

the term of the loan or plan.fi øThis 

section does not apply to the following: 

(i) A residential mortgage transaction. 

(ii) A reverse mortgage transaction 

subject to § 1026.33. 

(iii) An open-end credit plan subject 

to subpart B of this part.¿ 

(b) Definitions. For purposes of this 

subpart, the following definitions apply: 

(1) For purposes of paragraph (a)(1)(ii) 

of this section, flin connection with a 

closed-end mortgage loan,fi points and 

fees means: 

(i) All items ørequired to be disclosed 

under § 1026.4(a) and 1026.4(b), except 

interest or the time-price differential;¿ 

flincluded in the finance charge under 

§ 1026.4(a) and (b), but excluding items 

described in § 1026.4(c) through (e) 

(except to the extent otherwise included 

by this paragraph (b)(1)) and also 

excluding: 

(A) Interest or the time-price 

differential; 

(B) Any premium or other charge for 

any guaranty or insurance protecting the 

creditor against the consumer’s default 

or other credit loss to the extent that the 

premium or charge is: 

(1) Assessed in connection with any 

Federal or State agency program; 

(2) Not in excess of the amount 

payable under policies in effect at the 

time of origination under section 

203(c)(2)(A) of the National Housing Act 

(12 U.S.C. 1709(c)(2)(A)), provided that 

the premium or charge is required to be 

refundable on a pro rata basis and the 

refund is automatically issued upon 

notification of the satisfaction of the 

underlying mortgage loan; or 

(3) Payable after consummation.fi 

(ii) All compensation paid fldirectly 

or indirectly by a consumer or creditor 

to a loan originator, as defined in 

§ 1026.36(a)(1), including a loan 

originator that is also the creditor in a 

table-funded transactionfi øto mortgage 

brokers¿; 


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(iii) All items listed in § 1026.4(c)(7) 

(other than amounts held for future 

payment of taxes) flpayable at or before 

consummation, unless:fi øunless the 

charge is reasonable, the creditor 

receives no direct or indirect 

compensation in connection with the 

charge, and the charge is not paid to an 

affiliate of the creditor; and¿ 

(A) The charge is reasonable; 

(B) The creditor receives no direct or 

indirect compensation in connection 

with the charge; and 

(C) The charge is not paid to an 

affiliate of the creditor;fi 

(iv) flPremiums or other charges 

payable at or before consummation for 

any credit life, credit disability, credit 

unemployment, or credit property 

insurance, or any other life, accident, 

health, or loss-of-income insurance, or 

any payments directly or indirectly for 

any debt cancellation or suspension 

agreement or contract;fi øPremiums or 

other charges for credit life, accident, 

health, or loss-of-income insurance, or 

debt-cancellation coverage (whether or 

not the debt-cancellation coverage is 

insurance under applicable law) that 

provides for cancellation of all or part 

of the consumer’s liability in the event 

of the loss of life, health, or income or 

in the case of accident, written in 

connection with the credit transaction.¿ 

fl(v) The maximum prepayment 

penalty, as defined in paragraph (b)(8)(i) 

of this section, that may be charged or 

collected under the terms of the 

mortgage loan; and 

(vi) The total prepayment penalty, as 

defined in paragraph (b)(8)(i) of this 

section, incurred by the consumer if the 

consumer refinances the existing 

mortgage loan with the current holder of 

the existing loan, a servicer acting on 

behalf of the current holder, or an 

affiliate of either.fi 

(2) flFor purposes of paragraph 

(b)(1)(ii) of this section, the term points 

and fees does not include compensation 

paid to: 

(i) An employee of a retailer of 

manufactured homes who does not take 

a residential mortgage loan application, 

offer or negotiate terms of a residential 

mortgage loan, or advise a consumer on 

loan terms (including rates, fees, and 

other costs) but who, for compensation 

or other monetary gain, or in 

expectation of compensation or other 

monetary gain, assists a consumer in 

obtaining or applying to obtain a 

residential mortgage loan; 

(ii) A person that only performs real 

estate brokerage activities and is 

licensed or registered in accordance 

with applicable State law, unless such 

person is compensated by a creditor or 

loan originator, as defined in 

§ 1026.36(a)(1), or by any agent of the 

creditor or loan originator; or 

(iii) A servicer or servicer employees, 

agents, and contractors, including but 

not limited to those who offer or 

negotiate terms of a transaction for 

purposes of renegotiating, modifying, 

replacing, and subordinating principal 

of existing mortgages where borrowers 

are behind in their payments, in default, 

or have a reasonable likelihood of being 

in default or falling behind. 

(3) For purposes of paragraph (a)(1)(ii) 

of this section, in connection with an 

open-end credit plan, points and fees 

means: 

(i) All items included in the finance 

charge under § 1026.4(a) and (b) and 

payable at or before account opening, 

except interest or the time-price 

differential; 

(ii) All items listed in § 1026.4(c)(7) 

(other than amounts held for future 

payment of taxes) payable at or before 

account opening, unless: 

(A) The charge is reasonable; 

(B) The creditor receives no direct or 

indirect compensation in connection 

with the charge; and 

(C) The charge is not paid to an 

affiliate of the creditor; 

(iii) Premiums or other charges 

payable at or before account opening for 

any credit life, credit disability, credit 

unemployment, or credit property 

insurance, or any other life, accident, 

health, or loss-of-income insurance, or 

any payments directly or indirectly for 

any debt cancellation or suspension 

agreement or contract; 

(iv) The maximum prepayment 

penalty, as defined in paragraph 

(b)(8)(ii) of this section, that may be 

charged or collected under the terms of 

the open-end credit plan; 

(v) Any fees charged for participation 

in an open-end credit plan, as described 

in § 1026.4(c)(4), whether assessed on 

an annual or other periodic basis; and 

(vi) Any transaction fee, including 

any minimum fee or per-transaction fee, 

that will be charged for a draw on the 

credit line. 

(4) For purposes of paragraph (b)(3) of 

this section, the term points and fees 

does not include any fees or charges that 

the creditor waives at or before account 

opening unless such fees or charges may 

be imposed on the consumer after 

account opening. 

(5) For purposes of paragraphs (b)(1) 

and (3) of this section, the term points 

and fees does not include: 

(i) Bona fide third-party charges. Any 

bona fide third-party charge not retained 

by the creditor, loan originator, or an 

affiliate of either, except to the extent 

that the charge is required to be 

included in points and fees under 

paragraph (b)(1)(i)(B) of this section. For 

purposes of this paragraph (b)(5)(i), the 

term loan originator means a loan 

originator as that term is defined in 

§ 1026.36(a)(1), notwithstanding 

§ 1026.36(f). 

(ii) Bona fide discount points. (A) Up 

to two bona fide discount points paid by 

the consumer in connection with the 

transaction if the interest rate for the 

loan or plan without such points does 

not exceed: 

(1) The average prime offer rate, as 

defined in § 1026.35(a)(2)(ii), by more 

than one percentage point; or 

(2) In the case of a transaction secured 

by personal property, the average rate 

for a loan insured under Title I of the 

National Housing Act (12 U.S.C. 1702 et 

seq.) by more than one percentage point. 

(B) If two bona fide discount points 

have not been excluded under 

paragraph (b)(5)(ii)(A) of this section, up 

to one bona fide discount point paid by 

the consumer in connection with the 

transaction if the interest rate for the 

loan or plan without such points does 

not exceed: 

(1) The average prime offer rate, as 

defined in § 1026.35(a)(2)(ii), by more 

than two percentage points; or 

(2) In the case of a transaction secured 

by personal property, the average rate 

for a loan insured under Title I of the 

National Housing Act (12 U.S.C. 1702 et 

seq.) by more than two percentage 

points. 

(C) For purposes of this paragraph 

(b)(5)(ii), the term bona fide discount 

point has the same meaning as in 

§ 1026.43(e)(3)(iv). 

(6) Total loan amount. (i) Closed-end 

mortgage loans. The total loan amount 

for a closed-end mortgage loan is 

calculated by taking the amount of 

credit extended at consummation that 

the consumer is legally obligated to 

repay, as reflected in the loan contract, 

and deducting any cost that is both 

included in points and fees under 

§ 1026.32(b)(1) and financed by the 

creditor. 

(ii) Open-end credit plan. The total 

loan amount for an open-end credit plan 

is the credit limit for the plan when the 

account is opened. 

(7)fi Affiliate means any company 

that controls, is controlled by, or is 

under common control with another 

company, as set forth in the Bank 

Holding Company Act of 1956 (12 

U.S.C. 1841 et seq.). 

fl(8) Prepayment penalty. (i) Closedend mortgage loans. For a closed-end 

mortgage loan, prepayment penalty 

means a charge imposed for paying all 

or part of the transaction’s principal 

before the date on which the principal 

is due. 


sroberts on DSK5SPTVN1PROD with PROPOSALS
49152 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

(ii) Open-end credit plans. For an 

open-end credit plan, prepayment 

penalty means a charge imposed by the 

creditor if the consumer terminates the 

open-end credit plan prior to the end of 

its term.fi 

(c) * * * 

(3) Regular payment; flminimum 

periodic payment example;fi balloon 

payment. fl(i) For a closed-end loan, 

thefiø The¿ amount of the regular 

monthly (or other periodic) payment 

and the amount of any balloon payment 

flprovided in the credit contract, if 

permitted under paragraph (d)(1) of this 

sectionfi. The regular payment 

disclosed under this paragraph shall be 

treated as accurate if it is based on an 

amount borrowed that is deemed 

accurate and is disclosed under 

paragraph (c)(5) of this section. 

fl(ii) For an open-end credit plan: 

(A) An example showing the first 

minimum periodic payment for the 

draw period, the first minimum periodic 

payment for any repayment period, and 

the balance outstanding at the beginning 

of any repayment period. The example 

must be based on the following 

assumptions: 

(1) The consumer borrows the full 

credit line, as disclosed in paragraph 

(c)(5) of this section, at account opening 

and does not obtain any additional 

extensions of credit; 

(2) The consumer makes only 

minimum periodic payments during the 

draw period and any repayment period; 

and 

(3) The annual percentage rate used to 

calculate the example payments remains 

the same during the draw period and 

any repayment period. The creditor 

must provide the minimum periodic 

payment example based on the annual 

percentage rate for the plan, as 

described in paragraph (c)(2) of this 

section, except that if an introductory 

annual percentage rate applies, the 

creditor must use the rate that will 

apply to the plan after the introductory 

rate expires. 

(B) If the credit contract provides for 

a balloon payment under the plan as 

permitted under paragraph (d)(1) of this 

section, a disclosure of that fact and an 

example showing the amount of the 

balloon payment based on the 

assumptions described in paragraph 

(c)(3)(ii)(A) of this section. 

(C) A statement that the example 

payments show the first minimum 

periodic payments at the current annual 

percentage rate if the consumer borrows 

the maximum credit available when the 

account is opened and does not obtain 

any additional extensions of credit, or a 

substantially similar statement. 

(D) A statement that the example 

payments are not the consumer’s actual 

payments and that the actual minimum 

periodic payments will depend on the 

amount the consumer borrows, the 

interest rate applicable to that period, 

and whether the consumer pays more 

than the required minimum periodic 

payment, or a substantially similar 

statement.fi 

(4) Variable-rate. For variable-rate 

transactions, a statement that the 

interest rate and monthly payment may 

increase, and the amount of the single 

maximum monthly payment, based on 

the maximum interest rate required to 

be flincluded in the contract byfi 

ødisclosed under¿§ 1026.30. 

(5) Amount borrowed fl; credit limit. 

(i) For a closed-end mortgage loanfi 

øFor a mortgage refinancing¿, the total 

amount the consumer will borrow, as 

reflected by the face amount of the note; 

and where the amount borrowed 

includes premiums or other charges for 

optional credit insurance or debtcancellation coverage, that fact shall be 

stated, grouped together with the 

disclosure of the amount borrowed. The 

disclosure of the amount borrowed shall 

be treated as accurate if it is not more 

than $100 above or below the amount 

required to be disclosed. 

fl(ii) For an open-end credit plan, the 

credit limit for the plan when the 

account is opened.fi 

(d) Limitations. A flhigh-cost 

mortgagefi ømortgage transaction 

subject to this section¿ shall not include 

the following terms: 

Alternative 1—Paragraph (d)(1)(i) 

(1)(i) Balloon payment. flExcept as 

provided by paragraphs (d)(1)(ii) and 

(iii) of this section, a payment schedule 

with a payment that is more than twice 

as large as the average of regular 

periodic payments.fi øFor a loan with 

a term of less than five years, a payment 

schedule with regular periodic 

payments that when aggregated do not 

fully amortize the outstanding principal 

balance.¿ 

Alternative 2—Paragraph (d)(1)(i) 

(1)(i) Balloon payment. flExcept as 

provided by paragraphs (d)(1)(ii) and 

(iii) of this section, a payment schedule 

with a payment that is more than two 

times a regular periodic payment.fi 

øFor a loan with a term of less than five 

years, a payment schedule with regular 

periodic payments that when aggregated 

do not fully amortize the outstanding 

principal balance.¿ 

(ii) Exception. The limitations in 

paragraph (d)(1)(i) of this section do not 

apply to fla mortgage transaction with 

a payment schedule that is adjusted to 

the seasonal or irregular income of the 

consumer. 

(iii) Open-end credit plans. If the 

terms of an open-end credit plan 

provide for a repayment period during 

which no further draws may be taken, 

the limitations in paragraph (d)(1)(i) of 

this section apply only to the repayment 

period. If the terms of an open-end 

credit plan do not provide for any 

repayment period, the limitations in 

paragraph (d)(1)(i) of this section apply 

to the draw period.fi øloans with 

maturities of less than one year, if the 

purpose of the loan is a ‘‘bridge’’ loan 

connected with the acquisition or 

construction of a dwelling intended to 

become the consumer’s principal 

dwelling.¿ 

* * * * * 

(6) Prepayment penalties. flA 

prepayment penalty, as defined in 

paragraph (b)(8) of this section.fi 

øExcept as allowed under paragraph 

(d)(7) of this section, a penalty for 

paying all or part of the principal before 

the date on which the principal is due. 

A prepayment penalty includes 

computing a refund of unearned interest 

by a method that is less favorable to the 

consumer than the actuarial method, as 

defined by section 933(d) of the Housing 

and Community Development Act of 

1992, 15 U.S.C. 1615(d).¿ 

(7) fl[Reserved.]fi øPrepayment 

penalty exception. A mortgage 

transaction subject to this section may 

provide for a prepayment penalty 

(including a refund calculated according 

to the rule of 78s) otherwise permitted 

by law if, under the terms of the loan: 

(i) The penalty will not apply after the 

two-year period following 

consummation; 

(ii) The penalty will not apply if the 

source of the prepayment funds is a 

refinancing by the creditor or an affiliate 

of the creditor; 

(iii) At consummation, the consumer’s 

total monthly debt payments (including 

amounts owed under the mortgage) do 

not exceed 50 percent of the consumer’s 

monthly gross income, as verified in 

accordance with § 1026.34(a)(4)(ii); and 

(iv) The amount of the periodic 

payment of principal or interest or both 

may not change during the four-year 

period following consummation.¿ 

(8)flAcceleration of debt.fi øDue-ondemand clause.¿ A demand feature that 

permits the creditor to flaccelerate the 

indebtedness by terminating the highcost mortgagefi øterminate the loan¿ in 

advance of the original maturity date 

and to demand repayment of the entire 

outstanding balance, except in the 

following circumstances: 

fl(i) The consumer fails to meet the 

repayment terms for any outstanding 

balance that results in a default in 


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payment under the loan or open-end 

credit agreement; 

(ii) The acceleration is pursuant to a 

due-on-sale clause in the loan or openend credit agreement; or 

(iii) The consumer materially violates 

some other provision of the loan or 

open-end credit agreement unrelated to 

the payment schedule.fi 

ø(i) There is fraud or material 

misrepresentation by the consumer in 

connection with the loan; 

(ii) The consumer fails to meet the 

repayment terms of the agreement for 

any outstanding balance; or 

(iii) There is any action or inaction by 

the consumer that adversely affects the 

creditor’s security for the loan, or any 

right of the creditor in such security.¿ 

7. Section 1026.34 is amended by 

revising paragraphs (a) and (b) to read 

as follows: 

§ 1026.34 Prohibited acts or practices in 

connection with high-cost mortgages. 

(a) Prohibited acts or practices for 

high-cost mortgages. øA creditor 

extending mortgage credit subject to 

§ 1026.32 shall not:¿ (1) Home 

improvement contracts. flA creditor 

shall not payfi øPay¿ a contractor 

under a home improvement contract 

from the proceeds of a flhigh-cost 

mortgagefi ømortgage covered by 

§ 1026.32¿, other than: 

(i) By an instrument payable to the 

consumer or jointly to the consumer and 

the contractor; or 

(ii) At the election of the consumer, 

through a third-party escrow agent in 

accordance with terms established in a 

written agreement signed by the 

consumer, the creditor, and the 

contractor prior to the disbursement. 

(2) Notice to assignee. flA creditor 

may not sellfi øSell¿ or otherwise 

assign a flhigh-cost mortgagefi 

ømortgage subject to § 1026.32¿ without 

furnishing the following statement to 

the purchaser or assignee: ‘‘Notice: This 

is a mortgage subject to special rules 

under the Federal Truth in Lending Act. 

Purchasers or assignees of this mortgage 

could be liable for all claims and 

defenses with respect to the mortgage 

that the borrower could assert against 

the creditor.’’ 

(3) Refinancings within one-year 

period. Within one year of having 

extended fla high-cost mortgage, a 

creditor shall not refinance any highcost mortgage to the same borrower into 

another high-cost mortgagefi øcredit 

subject to § 1026.32, refinance any loan 

subject to § 1026.32 to the same 

borrower into another loan subject to 

§ 1026.32¿, unless the refinancing is in 

the borrower’s interest. An assignee 

holding or servicing fla high-cost 

mortgagefi øan extension of mortgage 

credit subject to § 1026.32,– shall not, 

for the remainder of the one-year period 

following the date of origination of the 

credit, refinance any flhigh-cost 

mortgagefi øloan subject to § 1026.32¿ 

to the same borrower into another 

flhigh-cost mortgagefi øloan subject to 

§ 1026.32¿, unless the refinancing is in 

the borrower’s interest. A creditor (or 

assignee) is prohibited from engaging in 

acts or practices to evade this provision, 

including a pattern or practice of 

arranging for the refinancing of its own 

loans by affiliated or unaffiliated 

creditorsfl.fi ø, or modifying a loan 

agreement (whether or not the existing 

loan is satisfied and replaced by the 

new loan) and charging a fee,¿ 

(4) Repayment ability flfor high-cost 

mortgages. In connection with a closedend, high-cost mortgage, a creditor must 

comply with the repayment ability 

requirements set forth in § 1026.43. In 

connection with an open-end, high-cost 

mortgage, a creditor shall not open a 

plan for a consumer where credit is or 

will be extendedfi øExtend credit 

subject to § 1026.32 to a consumer¿ 

based on the value of the consumer’s 

collateral without regard to the 

consumer’s repayment ability as of 

flaccount openingfi øconsummation¿, 

including the consumer’s current and 

reasonably expected income, 

employment, assets other than the 

collateral, current obligations, and 

mortgage-related obligations. 

(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)(3)(i), and similar expenses. 

(ii) Verification of repayment ability. 

Under this paragraph (a)(4) a creditor 

must verify the consumer’s repayment 

ability as follows: 

(A) A creditor must verify amounts of 

income or assets that it relies on to 

determine repayment ability, including 

expected income or assets, by the 

consumer’s Internal Revenue Service 

Form W–2, tax returns, payroll receipts, 

financial institution records, or other 

third-party documents that provide 

reasonably reliable evidence of the 

consumer’s income or assets. 

(B) Notwithstanding paragraph 

(a)(4)(ii)(A), a creditor has not violated 

paragraph (a)(4)(ii) if the amounts of 

income and assets that the creditor 

relied upon in determining repayment 

ability are not materially greater than 

the amounts of the consumer’s income 

or assets that the creditor could have 

verified pursuant to paragraph 

(a)(4)(ii)(A) at the time flof account 

openingfi øthe loan was 

consummated¿. 

(C) A creditor must verify the 

consumer’s current obligations. 

(iii) Presumption of compliance. A 

creditor is presumed to have complied 

with this paragraph (a)(4) with respect 

to a transaction if the creditor: 

(A) Verifies the consumer’s repayment 

ability as provided in paragraph 

(a)(4)(ii); 

(B) flDetermines the consumer’s 

repayment ability taking into account 

current obligations and mortgage-related 

obligations as defined in paragraph 

(a)(4)(i) of this section, and using the 

largest required minimum periodic 

payment based on the following 

assumptions: 

(1) The consumer borrows the full 

credit line at account opening with no 

additional extensions of credit; 

(2) The consumer makes only 

required minimum periodic payments 

during the draw period and any 

repayment period; 

(3) If the annual percentage rate may 

increase during the plan, the maximum 

annual percentage rate that is included 

in the contract, as required by § 1026.30, 

applies to the plan at account opening 

and will apply during the draw period 

and any repayment period.fi 

øDetermines the consumer’s repayment 

ability using the largest payment of 

principal and interest scheduled in the 

first seven years following 

consummation and taking into account 

current obligations and mortgage-related 

obligations as defined in paragraph 

(a)(4)(i); and¿ 

(C) Assesses the consumer’s 

repayment ability taking into account at 

least one of the following: The ratio of 

total debt obligations to income, or the 

income the consumer will have after 

paying debt obligations. 

(iv) Exclusions from presumption of 

compliance. Notwithstanding the 

previous paragraph, no presumption of 

compliance is available for a transaction 

for which: 

(A) The regular periodic payments 

[for the first seven years] would cause 

the principal balance to increase; or 

(B) The [term of the loan is less than 

seven years and the] regular periodic 

payments when aggregated do not fully 

amortize the outstanding principal 

balance flexcept as otherwise provided 

by § 1026.32(d)(1)(ii)fi. 

(v) Exemption. This paragraph (a)(4) 

does not apply to temporary or ‘‘bridge’’ 

loans with terms of twelve months or 

less, such as a loan to purchase a new 

dwelling where the consumer plans to 

sell a current dwelling within twelve 

months. 


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fl(5) Pre-loan counseling. (i) 

Certification of counseling required. A 

creditor shall not extend a high-cost 

mortgage to a consumer unless the 

creditor receives written certification 

that the consumer has obtained 

counseling on the advisability of the 

mortgage from a counselor that is 

approved to provide such counseling by 

the Secretary of the U.S. Department of 

Housing and Urban Development or, if 

permitted by the Secretary, by a State 

housing finance authority. 

(ii) Timing of counseling. The 

counseling required under this 

paragraph (a)(5) must occur after the 

consumer receives either the good faith 

estimate required by the Real Estate 

Settlement Procedures Act of 1974 (12 

U.S.C. 2601 et seq.) or the disclosures 

required by § 1026.40. 

(iii) Affiliation prohibited. (A) 

General. The counseling required under 

this paragraph (a)(5) shall not be 

provided by a counselor who is 

employed by or affiliated with the 

creditor. 

(B) Exception. The prohibition under 

paragraph (a)(5)(iii)(A) does not apply to 

a State housing finance authority that 

both extends a high-cost mortgage to a 

consumer and provides, either itself or 

through an affiliate, counseling to the 

consumer on the high-cost mortgage. 

(iv) Content of certification. The 

certification of counseling required 

under paragraph (a)(5)(i) must include: 

(A) The name(s) of the consumer(s) 

who obtained counseling; 

(B) The date(s) of counseling; 

(C) The name and address of the 

counselor; 

(D) A statement that the consumer(s) 

received counseling on the advisability 

of the high-cost mortgage based on the 

terms provided in either the good faith 

estimate or the disclosures required by 

§ 1026.40; and 

(E) A statement that the counselor has 

verified that the consumer(s) received 

the disclosures required by either 

§ 1026.32(c) or the Real Estate 

Settlement Procedures Act of 1974 (12 

U.S.C. 2601 et seq.) with respect to the 

transaction. 

(v) Counseling fees. A creditor may 

pay the fees of a counselor or counseling 

organization for providing counseling 

required under this paragraph (a)(5) but 

may not condition the payment of such 

fees on the consummation or accountopening of a mortgage transaction. If the 

consumer withdraws the application 

that would result in the extension of a 

high-cost mortgage, a creditor may not 

condition the payment of such fees on 

the receipt of certification from the 

counselor required by paragraph (a)(5)(i) 

of this section. A creditor may, however, 

confirm that a counselor has provided 

counseling to the consumer pursuant to 

this paragraph (a)(5) prior to paying the 

fee of a counselor or counseling 

organization. 

(vi) Steering prohibited. A creditor 

that extends a high-cost mortgage shall 

not steer or otherwise direct a consumer 

to choose a particular counselor or 

counseling organization for the 

counseling required under this 

paragraph (a)(5). 

(vii) List of counselors. (A) General. A 

creditor must provide to a consumer for 

whom counseling is required under this 

paragraph (a)(5), a notice containing the 

Web site addresses and telephone 

numbers of the Bureau and the U.S. 

Department of Housing and Urban 

Development for access to information 

about housing counseling, and a list of 

five counselors or counseling 

organizations approved by the Secretary 

of the U.S. Department of Housing and 

Urban Development to provide the 

counseling required under paragraph 

(a)(5) of this section. The notice must be 

provided no later than the time when 

either the good faith estimate required 

by the Real Estate Settlement 

Procedures Act of 1974 (12 U.S.C. 2601 

et seq.) or the disclosures required by 

§ 1026.40, as applicable, must be 

provided. 

(B) Safe harbor. A creditor is deemed 

to have complied with the requirements 

of paragraph (a)(5)(vii)(A) if the creditor 

provides the list of homeownership 

counselors required by 12 CFR 1024.20 

to a consumer for whom counseling is 

required under this paragraph (a)(5). 

(6) Recommended default. A creditor 

or mortgage broker, as defined in section 

1026.36(a)(2), may not recommend or 

encourage default on an existing loan or 

other debt prior to and in connection 

with the consummation or account 

opening of a high-cost mortgage that 

refinances all or any portion of such 

existing loan or debt. 

(7) Modification and deferral fees. A 

creditor, successor-in-interest, assignee, 

or any agent of such parties may not 

charge a consumer any fee to modify, 

renew, extend or amend a high-cost 

mortgage, or to defer any payment due 

under the terms of such mortgage. 

(8) Late fees. (i) General. Any late 

payment charge imposed in connection 

with a high-cost mortgage must be 

specifically permitted by the terms of 

the loan contract or open-end credit 

agreement and may not exceed four 

percent of the amount of the payment 

past due. No such charge may be 

imposed more than once for a single late 

payment. 

(ii) Timing. A late payment charge 

may be imposed in connection with a 

high-cost mortgage only if the payment 

is not received by the end of the 15-day 

period beginning on the date the 

payment is due or, in the case of a highcost mortgage on which interest on each 

installment is paid in advance, the end 

of the 30-day period beginning on the 

date the payment is due. 

(iii) Multiple late charges assessed on 

payment subsequently paid. A late 

payment charge may not be imposed in 

connection with a high-cost mortgage 

payment if any delinquency is 

attributable only to a late payment 

charge imposed on an earlier payment, 

and the payment otherwise is a full 

payment for the applicable period and 

is paid by the due date or within any 

applicable grace period. 

(iv) Failure to make required 

payment. The terms of a high-cost 

mortgage agreement may provide that 

any payment shall first be applied to 

any past due balance. If the consumer 

fails to make a timely payment by the 

due date and subsequently resumes 

making payments but has not paid all 

past due payments, the creditor may 

impose a separate late payment charge 

for any payment(s) outstanding (without 

deduction due to late fees or related 

fees) until the default is cured. 

(9) Payoff statements. (i) Fee 

prohibition. In general, a creditor or 

servicer (as defined in 12 CFR 1024.2(b)) 

may not charge a fee for providing to a 

consumer, or a person authorized by the 

consumer to obtain such information, a 

statement of the amount due to pay off 

the outstanding balance of a high-cost 

mortgage. 

(ii) Processing fee. A creditor or 

servicer may charge a processing fee to 

cover the cost of providing a payoff 

statement, as described in paragraph 

(a)(9)(i) of this section, by fax or courier, 

provided that such fee may not exceed 

an amount that is comparable to fees 

imposed for similar services provided in 

connection with consumer credit 

transactions that are secured by the 

consumer’s principal dwelling and are 

not high-cost mortgages. A creditor or 

servicer shall make a payoff statement 

available to a consumer, or a person 

authorized by the consumer to obtain 

such information, by a method other 

than by fax or courier and without 

charge pursuant to paragraph (a)(9)(i) of 

this section. 

(iii) Processing fee disclosure. Prior to 

charging a processing fee for provision 

of a payoff statement by fax or courier, 

as permitted pursuant to paragraph 

(a)(9)(ii) of this section, a creditor or 

servicer shall disclose to a consumer or 

a person authorized by the consumer to 

obtain the consumer’s payoff statement 

that payoff statements, as described in 


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paragraph (a)(9)(i) of this section, are 

available for free pursuant to paragraph 

(a)(9)(i) of this section. 

(iv) Fees permitted after multiple 

requests. A creditor or servicer that has 

provided a payoff statement, as 

described in paragraph (a)(9)(i) of this 

section, to a consumer, or a person 

authorized by the consumer to obtain 

such information, without charge, other 

than the processing fee permitted under 

paragraph (a)(9)(ii) of this section, four 

times during a calendar year, may 

thereafter charge a reasonable fee for 

providing such statements during the 

remainder of the calendar year. Fees for 

payoff statements provided to a 

consumer in a subsequent calendar year 

are subject to the requirements of this 

section. 

(v) Timing of delivery of payoff 

statements. A payoff statement, as 

described in paragraph (a)(9)(i) of this 

section, for a high-cost mortgage shall be 

provided by a creditor or servicer within 

five business days after receiving a 

request for such statement by a 

consumer or a person authorized by the 

consumer to obtain such statement. 

(10) Financing of points and fees. A 

creditor that extends credit under a 

high-cost mortgage may not finance any 

points and fees, as that term is defined 

in § 1026.32(b)(1) through (5). Credit 

insurance premiums or debt 

cancellation or suspension fees that are 

required to be included in points and 

fees under § 1026.32(b)(1)(iv) or (3)(iii) 

shall not be considered financed by the 

creditor when they are calculated and 

paid in full on a monthly basis.fi 

(b) Prohibited acts or practices for 

dwelling-secured loans; øopen-end 

credit. In connection with credit 

secured by the consumer’s dwelling that 

does not meet the definition in 

§ 1026.2(a)(20), a creditor shall not 

structure a home-secured loan as an 

open-end plan to evade the 

requirements of 

§ 1026.32.¿flstructuring loans to evade 

high-cost mortgage requirements. A 

creditor shall not structure any 

transaction that is otherwise a high-cost 

mortgage in a form, for the purpose, and 

with the intent to evade the 

requirements of a high-cost mortgage 

subject to this subpart, including by 

dividing any loan transaction into 

separate parts.fi 

8. Section 1026.36 is revised to add 

new paragraphs (g), (h), (i), (j), and (k) 

as follows: 

§ 1026.36 Prohibited acts or practices in 

connection with credit secured by a 

dwelling. 

* * * * * 

fl(g) [Reserved.] 

(h) [Reserved.] 

(i) [Reserved.] 

(j) [Reserved.] 

(k) Negative amortization counseling. 

(1) Counseling required. A creditor shall 

not extend credit to a first-time 

borrower in connection with a closedend transaction secured by a dwelling, 

other than a reverse mortgage 

transaction subject to § 1026.33 or a 

transaction secured by a consumer’s 

interest in a timeshare plan described in 

11 U.S.C. 101(53D), that may result in 

negative amortization for the loan, 

unless the creditor receives 

documentation that the consumer has 

obtained homeownership counseling 

from a counseling organization or 

counselor certified or approved by the 

U.S. Department of Housing and Urban 

Development to provide such 

counseling. 

(2) Definitions. For the purposes of 

this paragraph (k), the following 

definitions apply: 

(i) A ‘‘first-time borrower’’ means a 

consumer who has not previously 

received a closed-end mortgage loan or 

open-end credit plan secured by a 

dwelling. 

(ii) ‘‘Negative amortization’’ means a 

payment schedule with regular periodic 

payments that cause the principal 

balance to increase. 

(3) Steering prohibited. A creditor that 

extends credit to a first-time borrower in 

connection with a closed-end 

transaction secured by a dwelling, other 

than a reverse mortgage transaction 

subject to § 1026.33 or a transaction 

secured by a consumer’s interest in a 

timeshare plan described in 11 U.S.C. 

101(53D), that may result in negative 

amortization shall not steer or otherwise 

direct a consumer to choose a particular 

counselor or counseling organization for 

the counseling required under this 

paragraph (k). 

(4) List of counselors. (i) General. A 

creditor must provide to a consumer for 

whom counseling is required under this 

paragraph (k), a notice containing the 

Web site addresses and telephone 

numbers of the Bureau and the U.S. 

Department of Housing and Urban 

Development for access to information 

about homeownership counseling, and a 

list of five counselors or counseling 

organizations certified or approved by 

the U.S. Department of Housing and 

Urban Development to provide 

homeownership counseling. The notice 

must be provided no later than the time 

when the good faith estimate required 

by the Real Estate Settlement 

Procedures Act of 1974 (12 U.S.C. 2601 

et seq.) must be provided. 

(ii) Safe harbor. A creditor is deemed 

to have complied with the requirements 

of paragraph (k)(4)(i) of this section if 

the creditor provides the list of 

homeownership counselors required by 

12 CFR 1024.20 to a consumer for whom 

counseling is required under this 

paragraph (k).fi 

9. In Supplement I to Part 1026— 

Official Interpretations: 

A. Under Section 1026.31—General 

Rules: 

i. The subheading 31(c)(1) Disclosures 

for certain closed-end home mortgages 

and paragraph 1. under that subheading 

are revised. 

ii. Under subheading 31(c)(1)(i) 

Change in terms, paragraph 2. is revised. 

iii. Under subheading 31(c)(1)(ii) 

Telephone disclosures, paragraph 1. is 

revised. 

iv. The subheading 31(c)(1)(iii) 

Consumer’s waiver of waiting period 

before consummation is revised. 

B. Under Section 1026.32— 

Requirements for Certain Closed-End 

Home Mortgages: 

i. The heading Section 1026.32— 

Requirements for Certain Closed-End 

Home Mortgages is revised. 

ii. The subheading 32(a) Coverage is 

revised. 

iii. The subheading 32(a)(1) Coverage 

and paragraph 1. under that subheading 

are added. 

iv. Under new subheading 32(a)(1) 

Coverage: 

a. Under subheading Paragraph 

32(a)(1)(i), paragraphs 1., 2., 3., and 4. 

are revised. 

b. Under subheading Paragraph 

32(a)(1)(ii), paragraph 1. is re-designated 

and revised as paragraph 1. under 

subheading 32(b)(6) Total loan amount, 

subheading 32(b)(6)(i) Closed-end 

mortgage loans, paragraph 2. is redesignated as paragraph 1. under 

subheading Paragraph 32(a)(1)(ii) and 

new paragraph 2. is added. 

c. The subheading Paragraph 

32(a)(1)(iii) and paragraphs 1. and 2. 

under that subheading are added. 

v. The subheading Paragraph 32(a)(2) 

and paragraph 1. under that subheading 

are revised and paragraphs 2., 3., and 4. 

are added. 

vi. Under subheading 32(b) 

Definitions: 

a. Under subheading Paragraph 

32(b)(1)(i), paragraph 1. is revised and 

paragraphs 2., 3., and 4. are added. 

b. Under subheading Paragraph 

32(b)(1)(ii), paragraph 1. is revised, 

paragraph 2. is re-designated and 

revised under subheading Paragraph 

32(b)(1)(iii), paragraph 1. and new 

paragraphs 2. and 3. are added under 

subheading Paragraph 32(b)(1)(ii). 

c. Under subheading Paragraph 

32(b)(1)(iv), paragraph 1. is revised and 

paragraph 2. is added. 


sroberts on DSK5SPTVN1PROD with PROPOSALS
49156 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

d. The subheading Paragraph 

32(b)(3)(i) and paragraph 1. under that 

subheading are added. 

e. The subheading Paragraph 

32(b)(3)(ii) and paragraph 1. under that 

subheading are added. 

f. The subheading Paragraph 

32(b)(3)(iii) and paragraph 1. under that 

subheading are added. 

g. The subheading Paragraph 

32(b)(3)(v) and paragraph 1. under that 

subheading are added. 

h. The subheading Paragraph 

32(b)(3)(vi) and paragraphs 1. and 2. 

under that subheading are added. 

i. The subheading Paragraph 32(b)(4) 

and paragraph 1. under that subheading 

are added. 

j. The subheading Paragraph 32(b)(5), 

the subheading 32(b)(5)(i) Bona fide 

third-party charges and paragraphs 1., 

2., and 3. under that subheading, and 

the subheading 32(b)(5)(ii) Bona fide 

discount points and paragraph 1. under 

that subheading are added. 

k. The subheading 32(b)(8) 

Prepayment penalty and paragraphs 1., 

2., and 3. under that subheading are 

added. 

vii. Under subheading 32(c) 

Disclosures: 

a. The subheading 32(c)(2) Annual 

percentage rate and paragraph 1. under 

that subheading are added. 

b. The subheading 32(c)(3) Regular 

payment; balloon payment is revised, 

paragraph 1. is re-designated as 

subheading Paragraph 32(c)(3)(i), 

paragraph 1., and new paragraph 1. is 

added under subheading 32(c)(3) 

Regular payment; balloon payment. 

c. Under subheading 32(c)(4) 

Variable-rate, paragraph 1. is revised. 

d. The subheading 32(c)(5) Amount 

borrowed and paragraph 1. under that 

subheading are revised. 

viii. Under subheading 32(d) 

Limitations: 

a. Paragraph 1. is revised. 

b. Under subheading 32(d)(1)(i) 

Balloon payment, paragraph 1. is 

revised and paragraph 2. is added. 

c. Under subheading 32(d)(2) Negative 

amortization, paragraph 1. is revised. 

d. Under subheading 32(d)(6) 

Prepayment penalties, paragraph 1. is 

removed and reserved. 

e. The subheading 32(d)(7) 

Prepayment penalty exception and 

paragraph 1. under that subheading are 

removed and reserved. 

f. Under the subheading 32(d)(7) 

Prepayment penalty exception, the 

subheading Paragraph 32(d)(7)(iii) and 

paragraphs 1., 2., and 3. under that 

subheading are removed, and the 

subheading Paragraph 32(d)(7)(iv) and 

paragraphs 1. and 2. under that 

subheading are removed. 

g. The subheading 32(d)(8) Due-ondemand clause is revised. 

h. The subheading Paragraph 

32(d)(8)(ii) and paragraph 1. under that 

subheading are revised. 

i. Under the subheading Paragraph 

32(d)(8)(iii), paragraphs 1. and 2. are 

revised and paragraph 3. is added. 

C. Under Section 1026.34—Prohibited 

Acts or Practices in Connection with 

High-Cost Mortgages: 

i. The subheading 34(a)(2) Notice to 

Assignee is revised. 

ii. Under the subheading 34(a)(3) 

Refinancings within one-year period, 

paragraph 2. is revised. 

iii. Under the subheading 34(a)(4) 

Repayment ability: 

a. Paragraphs 1., 2., 3., 4., and 5. are 

revised. 

b. Under the subheading Paragraph 

34(a)(4)(ii)(B), paragraph 2. is revised. 

c. Under the subheading Paragraph 

34(a)(4)(ii)(C), paragraph 1. is revised. 

d. Under the subheading 34(a)(4)(iii) 

Presumption of compliance, paragraph 

1. is revised. 

e. Under the subheading Paragraph 

34(a)(4)(iii)(B), paragraph 1. is revised. 

iv. New 34(a)(5) Pre-loan counseling, 

34(a)(6) Recommended default, 34(a)(7) 

Modification and deferral fees, 34(a)(8) 

Late fees, 34(a)(9) Payoff statements and 

34(a)(10) Financing of points and fees 

are added. 

v. The subheading 34(b) Prohibited 

acts or practices for dwelling-secured 

loans; open-end credit and paragraphs 

1. and 2. under that subheading are 

revised. 

D. Under Section 1026.36—Prohibited 

Acts or Practices in Connection with 

Credit Secured by a Dwelling: 

i. New 36(k) Negative amortization 

counseling is added. 

The revisions, removals, and 

additions read as follows: 

SUPPLEMENT I TO PART 1026— 

OFFICIAL INTERPRETATIONS 

* * * * * 

Subpart E—Special Rules for Certain Home 

Mortgage Transactions 

Section 1026.31—General Rules 

* * * * * 

31(c)(1) Disclosures for certain øclosedend¿ home mortgages. 

1. Pre-consummation flor account 

openingfi waiting period. A creditor must 

furnish § 1026.32 disclosures at least three 

business days prior to consummation flfor a 

closed-end, high-cost mortgage and at least 

three business days prior to account opening 

for an open-end, high-cost mortgagefi. 

Under § 1026.32, ‘‘business day’’ has the 

same meaning as the rescission rule in 

comment 2(a)(6)–2—all calendar days except 

Sundays and the Federal legal holidays listed 

in 5 U.S.C. 6103(a). However, while the 

disclosure rule under §§ 1026.15 and 1026.23 

extends to midnight of the third business 

day, the rule under § 1026.32 does not. For 

example, under § 1026.32, if disclosures were 

provided on a Friday, consummation flor 

account openingfi could occur any time on 

Tuesday, the third business day following 

receipt of the disclosures. If the timing of the 

rescission rule were to be used, 

consummation flor account openingfi 

could not occur until after midnight on 

Tuesday. 

31(c)(1)(i) Change in terms. 

* * * * * 

2. Sale of optional products at 

consummation flor account openingfi. If 

the consumer finances the purchase of 

optional products such as credit insurance 

and as a result the monthly payment differs 

from what was previously disclosed under 

§ 1026.32, redisclosure is required and a new 

three-day waiting period applies. (See 

comment 32(c)(3)–1 on when optional items 

may be included in the regular payment 

disclosure.) 

31(c)(1)(ii) Telephone disclosures. 

1. Telephone disclosures. Disclosures by 

telephone must be furnished at least three 

business days prior to consummation fland 

prior to account openingfi, calculated in 

accord with the timing rules under 

§ 1026.31(c)(1). 

31(c)(1)(iii) Consumer’s waiver of waiting 

period before consummation flor account 

openingfi. 

* * * * * 

Section 1026.32—Requirements for 

flHigh-CostfiøCertain Closed-End Home¿ 

Mortgages 

32(a) flHigh-Cost 

Mortgages.fiøCoverage.¿ 

fl32(a)(1) Coverage. 

1. The term high-cost mortgage includes 

both a closed-end mortgage loan and an 

open-end credit plan secured by the 

consumer’s principal dwelling. For purposes 

of determining coverage under § 1026.32, an 

open-end consumer credit transaction is the 

account opening of an open-end credit plan. 

An advance of funds or a draw on the credit 

line under an open-end credit plan 

subsequent to account opening does not 

constitute an open-end ‘‘transaction.’’fi 

Paragraph 32(a)(1)(i). 

1. flTransaction coverage rate. The 

transaction coverage rate is calculated solely 

for purposes of determining whether a 

closed-end transaction is subject to § 1026.32. 

The creditor is not required to disclose the 

transaction coverage rate to the consumer. 

The creditor determines the transaction 

coverage rate in the same manner as the 

transaction’s annual percentage rate under 

§ 1026.32(a)(2) except that, for purposes of 

calculating the transaction coverage rate and 

determining coverage under § 1026.32, the 

amount of the prepaid finance charge is 

modified in accordance with 

§ 1026.35(a)(2)(i). For guidance on 

determining the transaction coverage rate, see 

commentary to § 1026.35(a)(2)(i). The 

transaction coverage rate that results from 

these special rules must be compared to the 

average prime offer rate to determine whether 

the closed-end transaction is subject to 

§ 1026.32.fiøApplication date. An 


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Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 49157 

application is deemed received when it 

reaches the creditor in any of the ways 

applications are normally transmitted. (See 

§ 1026.19(a).) For example, if a borrower 

applies for a 10-year loan on September 30 

and the creditor counteroffers with a 7-year 

loan on October 10, the application is 

deemed received in September and the 

creditor must measure the annual percentage 

rate against the appropriate Treasury security 

yield as of August 15. An application 

transmitted through an intermediary agent or 

broker is received when it reaches the 

creditor, rather than when it reaches the 

agent or broker. (See comment 19(b)–3 to 

determine whether a transaction involves an 

intermediary agent or broker.)¿ 

2. flAverage prime offer rate; closed-end 

credit. The term ‘‘average prime offer rate’’ is 

defined in § 1026.35(a)(2)(ii). High-cost 

mortgages include consumer credit 

transactions secured by the consumer’s 

principal dwelling with a transaction 

coverage rate or an annual percentage rate, as 

applicable, that exceeds the average prime 

offer rate for a comparable transaction as of 

the date the interest rate is set by the 

specified amount. The published table of 

average prime offer rates indicates how to 

identify the comparable transaction. For 

guidance on determining the average prime 

offer rate for closed-end credit for purposes 

of this section, see comments 35(a)(2)(ii)–1 

through –4._ fiøWhen fifteenth not a 

business day. If the 15th day of the month 

immediately preceding the application date 

is not a business day, the creditor must use 

the yield as of the business day immediately 

preceding the 15th.¿ 

3. flAverage prime offer rate; open-end 

credit plans. Section 1026.32(a)(1)(i) requires 

a creditor to identify a ‘‘comparable 

transaction’’ when determining the average 

prime offer rate for an open-end credit plan. 

The published table of average prime offer 

rates lists average prime offer rates for a wide 

variety of types of closed-end loans. 

Accordingly, § 1026.32(a)(1)(i) requires a 

creditor to determine the average prime offer 

rate for an open-end credit plan by reference 

to the average prime offer rate for the most 

closely comparable closed-end loan, based on 

applicable loan characteristics and other loan 

pricing terms. For example, if a home-equity 

line of credit has a variable-rate feature, a 

creditor must utilize the appropriate, 

corresponding rate table for adjustable rates 

for closed-end loans. If the variable-rate 

feature has a fixed-rate period (i.e., the period 

until the rate adjusts) that is not in whole 

years, a creditor must use the table for the 

loans using the number of whole years 

closest to the actual term. For example, if a 

variable-rate feature has an initial fixed-rate 

period of 20 months, a creditor must use the 

table for two-year adjustable rate loans. If the 

variable-rate feature has no initial fixed-rate 

period or has an initial fixed-rate period of 

less than one year, a creditor must use the 

applicable table for one-year adjustable rate 

loans. For example, if the initial fixed-rate 

period is six months, a creditor must use the 

applicable one-year annual percentage rate. 

fiøCalculating annual percentage rates for 

variable-rate loans and discount loans. 

Creditors must use the rules set out in the 

commentary to § 1026.17(c)(1) in calculating 

the annual percentage rate for variable-rate 

loans (assume the rate in effect at the time 

of disclosure remains unchanged) and for 

discount, premium, and stepped-rate 

transactions (which must reflect composite 

annual percentage rates).¿ 

4. flTotal loan amount less than $50,000. 

See § 1026.32(b)(6) and comment 32(b)(6)–1 

for guidance on total loan amount for 

purposes of § 1026.32(a)(1)(i).fiøTreasury 

securities. To determine the yield on 

comparable Treasury securities for the 

annual percentage rate test, creditors may use 

the yield on actively traded issues adjusted 

to constant maturities published in the 

Federal Reserve Board’s ‘‘Selected Interest 

Rates’’ (statistical release H–15). Creditors 

must use the yield corresponding to the 

constant maturity that is closest to the loan’s 

maturity. If the loan’s maturity is exactly 

halfway between security maturities, the 

annual percentage rate on the loan should be 

compared with the yield for Treasury 

securities having the lower yield. In 

determining the loan’s maturity, creditors 

may rely on the rules in § 1026.17(c)(4) 

regarding irregular first payment periods. For 

example: 

i. If the H–15 contains a yield for Treasury 

securities with constant maturities of 7 years 

and 10 years and no maturity in between, the 

annual percentage rate for an 8-year mortgage 

loan is compared with the yield of securities 

having a 7-year maturity, and the annual 

percentage rate for a 9-year mortgage loan is 

compared with the yield of securities having 

a 10-year maturity. 

ii. If a mortgage loan has a term of 15 years, 

and the H–15 contains a yield of 5.21 percent 

for constant maturities of 10 years, and also 

contains a yield of 6.33 percent for constant 

maturities of 20 years, then the creditor 

compares the annual percentage rate for a 15- 

year mortgage loan with the yield for 

constant maturities of 10 years. 

iii. If a mortgage loan has a term of 30 

years, and the H–15 does not contain a yield 

for 30-year constant maturities, but contains 

a yield for 20-year constant maturities, and 

an average yield for securities with remaining 

terms to maturity of 25 years and over, then 

the annual percentage rate on the loan is 

compared with the yield for 20-year constant 

maturities.¿ 

Paragraph 32(a)(1)(ii). 

1. øTotal loan amount. For purposes of the 

‘‘points and fees’’ test, the total loan amount 

is calculated by taking the amount financed, 

as determined according to § 1026.18(b), and 

deducting any cost listed in 

§ 1026.32(b)(1)(iii) and § 1026.32(b)(1)(iv) 

that is both included as points and fees under 

§ 1026.32(b)(1) and financed by the creditor. 

Some examples follow, each using a $10,000 

amount borrowed, a $300 appraisal fee, and 

$400 in points. A $500 premium for optional 

credit life insurance is used in one example. 

i. If the consumer finances a $300 fee for 

a creditor-conducted appraisal and pays $400 

in points at closing, the amount financed 

under § 1026.18(b) is $9,900 ($10,000 plus 

the $300 appraisal fee that is paid to and 

financed by the creditor, less $400 in prepaid 

finance charges). The $300 appraisal fee paid 

to the creditor is added to other points and 

fees under § 1026.32(b)(1)(iii). It is deducted 

from the amount financed ($9,900) to derive 

a total loan amount of $9,600. 

ii. If the consumer pays the $300 fee for the 

creditor-conducted appraisal in cash at 

closing, the $300 is included in the points 

and fees calculation because it is paid to the 

creditor. However, because the $300 is not 

financed by the creditor, the fee is not part 

of the amount financed under § 1026.18(b). In 

this case, the amount financed is the same as 

the total loan amount: $9,600 ($10,000, less 

$400 in prepaid finance charges). 

iii. If the consumer finances a $300 fee for 

an appraisal conducted by someone other 

than the creditor or an affiliate, the $300 fee 

is not included with other points and fees 

under § 1026.32(b)(1)(iii). The amount 

financed under § 1026.18(b) is $9,900 

($10,000 plus the $300 fee for an 

independently-conducted appraisal that is 

financed by the creditor, less the $400 paid 

in cash and deducted as prepaid finance 

charges). 

iv. If the consumer finances a $300 fee for 

a creditor-conducted appraisal and a $500 

single premium for optional credit life 

insurance, and pays $400 in points at closing, 

the amount financed under § 1026.18(b) is 

$10,400 ($10,000, plus the $300 appraisal fee 

that is paid to and financed by the creditor, 

plus the $500 insurance premium that is 

financed by the creditor, less $400 in prepaid 

finance charges). The $300 appraisal fee paid 

to the creditor is added to other points and 

fees under § 1026.32(b)(1)(iii), and the $500 

insurance premium is added under 

1026.32(b)(1)(iv). The $300 and $500 costs 

are deducted from the amount financed 

($10,400) to derive a total loan amount of 

$9,600. 

2.¿flAnnual adjustment of $1,000 

amount.fiøAnnual adjustment of $400 

amount. A mortgage loan is covered by 

§ 1026.32 if the total points and fees payable 

by the consumer at or before loan 

consummation exceed the greater of $400 or 

8 percent of the total loan amount. The $400 

figure¿ flThe $1,000 figure in 

§ 1026.32(a)(1)(ii)(B)fi is adjusted annually 

on January 1 by the annual percentage 

change in the CPI that was in effect on the 

preceding June 1. The Bureau will publish 

adjustments after the June figures become 

available each year. øThe adjustment for the 

upcoming year will be included in any 

proposed commentary published in the fall, 

and incorporated into the commentary the 

following spring. The adjusted figures are:¿ 

fl2. Historical adjustment of $400 amount. 

Prior to [DATE THAT THE FINAL RULE 

TAKES EFFECT], a mortgage loan was 

covered by § 1026.32 if the total points and 

fees payable by the consumer at or before 

loan consummation exceeded the greater of 

$400 or 8 percent of the total loan amount. 

The $400 figure was adjusted annually on 

January 1 by the annual percentage change in 

the CPI that was in effect on the preceding 

June 1, as follows:fi 

i. For 1996, $412, reflecting a 3.00 percent 

increase in the CPI–U from June 1994 to June 

1995, rounded to the nearest whole dollar. 

ii. For 1997, $424, reflecting a 2.9 percent 

increase in the CPI–U from June 1995 to June 

1996, rounded to the nearest whole dollar. 


sroberts on DSK5SPTVN1PROD with PROPOSALS
49158 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

iii. For 1998, $435, reflecting a 2.5 percent 

increase in the CPI–U from June 1996 to June 

1997, rounded to the nearest whole dollar. 

iv. For 1999, $441, reflecting a 1.4 percent 

increase in the CPI–U from June 1997 to June 

1998, rounded to the nearest whole dollar. 

v. For 2000, $451, reflecting a 2.3 percent 

increase in the CPI–U from June 1998 to June 

1999, rounded to the nearest whole dollar. 

vi. For 2001, $465, reflecting a 3.1 percent 

increase in the CPI–U from June 1999 to June 

2000, rounded to the nearest whole dollar. 

vii. For 2002, $480, reflecting a 3.27 

percent increase in the CPI–U from June 2000 

to June 2001, rounded to the nearest whole 

dollar. 

viii. For 2003, $488, reflecting a 1.64 

percent increase in the CPI–U from June 2001 

to June 2002, rounded to the nearest whole 

dollar. 

ix. For 2004, $499, reflecting a 2.22 percent 

increase in the CPI–U from June 2002 to June 

2003, rounded to the nearest whole dollar. 

x. For 2005, $510, reflecting a 2.29 percent 

increase in the CPI–U from June 2003 to June 

2004, rounded to the nearest whole dollar. 

xi. For 2006, $528, reflecting a 3.51 percent 

increase in the CPI–U from June 2004 to June 

2005, rounded to the nearest whole dollar. 

xii. For 2007, $547, reflecting a 3.55 

percent increase in the CPI–U from June 2005 

to June 2006, rounded to the nearest whole 

dollar. 

xiii. For 2008, $561, reflecting a 2.56 

percent increase in the CPI–U from June 2006 

to June 2007, rounded to the nearest whole 

dollar. 

xiv. For 2009, $583, reflecting a 3.94 

percent increase in the CPI–U from June 2007 

to June 2008, rounded to the nearest whole 

dollar. 

xv. For 2010, $579, reflecting a 0.74 

percent decrease in the CPI–U from June 

2008 to June 2009, rounded to the nearest 

whole dollar. 

xvi. For 2011, $592, reflecting a 2.2 percent 

increase in the CPI–U from June 2009 to June 

2010, rounded to the nearest whole dollar. 

xvii. For 2012, $611, reflecting a 3.2 

percent increase in the CPI–U from June 2010 

to June 2011, rounded to the nearest whole 

dollar. 

flParagraph 32(a)(1)(iii). 

1. Maximum period and amount. Section 

1026.32(a)(1)(iii) provides that a closed-end 

mortgage loan or an open-end credit plan is 

a high-cost mortgage if, under the terms of 

the loan contract or open-end credit 

agreement, a creditor can charge either (i) a 

prepayment penalty more than 36 months 

after consummation or account opening, or 

(ii) total prepayment penalties that exceed 

two percent of any amount prepaid. Section 

1026.32(a)(1)(iii) applies only for purposes of 

determining whether a transaction is subject 

to the high-cost mortgage requirements and 

restrictions in § 1026.32(c) and (d) and 

§ 1026.34. However, if a transaction is subject 

to those requirements and restrictions by 

operation of any provision of § 1026.32(a)(1), 

including by operation of § 1026.32(a)(1)(iii), 

then the transaction may not include a 

prepayment penalty. See § 1026.32(d)(6). As 

a result, § 1026.32(a)(1)(iii) effectively 

establishes a maximum period during which 

a prepayment penalty may be imposed, and 

a maximum prepayment penalty amount that 

may be imposed, on a closed-end mortgage 

loan (other than a reverse mortgage) or openend credit plan secured by a consumer’s 

principal dwelling. Closed-end mortgage 

loans are subject to the additional 

prepayment penalty restrictions set forth in 

§ 1026.43(g). 

2. Examples; open-end credit plans. If the 

terms of an open-end credit agreement allow 

for a prepayment penalty that exceeds two 

percent of the initial credit limit for the plan, 

the agreement will be deemed to permit a 

creditor to charge a prepayment penalty that 

exceeds two percent of the ‘‘amount prepaid’’ 

within the meaning of § 1026.32(a)(1)(iii). 

The following examples illustrate how to 

calculate whether the terms of an open-end 

credit agreement comply with the maximum 

prepayment penalty period and amounts 

described in comment 32(a)(1)(iii). 

i. Assume that the terms of a home-equity 

line of credit with an initial credit limit of 

$10,000 require the consumer to pay a $500 

flat fee if the consumer terminates the plan 

less than 36 months after account opening. 

The $500 fee constitutes a prepayment 

penalty under § 1026.32(b)(8)(ii), and the 

penalty is greater than two percent of the 

$10,000 initial credit limit, which is $200. 

Under § 1026.32(a)(1)(iii), the plan is a highcost mortgage subject to the requirements and 

restrictions set forth in §§ 1026.32 and 

1026.34. 

ii. Assume that the terms of a home-equity 

line of credit with an initial credit limit of 

$10,000 and a ten-year term require the 

consumer to pay a $200 flat fee if the 

consumer terminates the plan prior to its 

normal expiration. The $200 prepayment 

penalty does not exceed two percent of the 

initial credit limit, but the terms of the 

agreement permit the creditor to charge the 

fee more than 36 months after account 

opening. Thus, under § 1026.32(a)(1)(iii), the 

plan is a high-cost mortgage subject to the 

requirements and restrictions set forth in 

§§ 1026.32 and 1026.34. 

iii. Assume that, under the terms of a 

home-equity line of credit with an initial 

credit limit of $150,000, the creditor may 

charge the consumer any closing costs 

waived by the creditor if the consumer 

terminates the plan less than 36 months after 

account opening. Assume also that the 

creditor waived closing costs of $1,000. Bona 

fide third-party charges comprised $800 of 

the $1,000 in waived closing costs, and 

origination charges retained by the creditor 

or its affiliate comprised the remaining $200. 

Under § 1026.32(b)(8)(ii), the $800 in bona 

fide third-party charges is not a prepayment 

penalty, while the $200 for the creditor’s own 

originations costs is a prepayment penalty. 

The total prepayment penalty of $200 is less 

than two percent of the initial $150,000 

credit limit, and the penalty does not apply 

if the consumer terminates the plan more 

than 36 months after account opening. Thus, 

the plan is not a high-cost mortgage under 

§ 1026.32(a)(1)(iii).fi 

øParagraph¿ 32(a)(2) flDetermination of 

transaction coverage rate or annual 

percentage rate.fi 

1. øExemption limited. Section 

1026.32(a)(2) lists certain transactions 

exempt from the provisions of § 1026.32. 

Nevertheless, those transactions may be 

subject to the provisions of § 1026.35, 

including any provisions of § 1026.32 to 

which § 1026.35 refers. See § 1026.35(a).¿ 

flDetermining interest rate for transaction 

coverage rate or annual percentage rate. The 

guidance set forth in the commentary to 

§ 1026.17(c)(1) addresses calculation of the 

annual percentage rates disclosures for 

discounted and premium variable-rate loans. 

Section 1026.32(a)(2) requires a different 

calculation of the annual percentage rate or 

transaction coverage rate, as applicable, 

solely to determine coverage under 

§ 1026.32(a)(1)(i). 

2. Open-end credit plan. The annual 

percentage rate for an open-end credit plan 

must be determined in accordance with 

§ 1026.32(a)(2), regardless of whether there is 

an advance of funds at account opening. 

Section 1026.32(a)(2) does not require the 

calculation of the annual percentage rate for 

any extensions of credit subsequent to 

account opening. Any draw on the credit line 

subsequent to account opening is not treated 

as a separate transaction for purposes of 

determining annual percentage rate threshold 

coverage. 

3. Rates that vary. i. Section 

1026.32(a)(2)(ii) applies when the interest 

rate is determined by an index that is outside 

the creditor’s control and the maximum 

margin is set forth in the agreement. A 

creditor must use the rules that apply to 

variable-rate transactions to determine the 

annual percentage rate even if the transaction 

also has a discounted fixed rate for a period 

of time, such as an initial interest rate if the 

rate that applies after the expiration of the 

fixed rate is variable. Accordingly, in 

determining the interest rate under 

§ 1026.32(a)(2)(ii), a creditor must disregard 

the fixed initial interest rate and use the 

fully-indexed rate using the maximum 

margin that could apply. In determining the 

maximum margin, a creditor must consider 

the maximum margin that might apply, e.g., 

a specified higher margin such as when a 

preferred rate is terminated, if the borrower’s 

employment with the creditor ends. 

ii. Section 1026.32(a)(2)(iii) applies when 

the interest rates applicable to a transaction 

may vary, except as described in 

§ 1026.32(a)(2)(ii). For example, 

§ 1026.32(a)(2)(iii) applies to a closed-end 

mortgage loan when interest rate changes are 

at the creditor’s discretion, such as when the 

index is internally defined (for example, by 

that creditor’s prime rate). Section 

1026.32(a)(2)(iii) also applies where multiple 

fixed rates apply to a transaction, such as a 

stepped-rate mortgage. For example, assume 

the following rates will apply to a 

transaction: Three percent for the first six 

months, four percent for the next 10 years, 

and five percent for the remaining loan term. 

In this example, § 1026.32(a)(2)(iii) would be 

used to determine the interest rate and five 

percent would be the maximum interest rate 

applicable to the transaction. 

4. Fixed-rate and term-payment options. If 

an open-end credit plan only has a fixed-rate 

during the draw period, a creditor must use 

the interest rate applicable to that feature to 

determine the annual percentage rate, as 


sroberts on DSK5SPTVN1PROD with PROPOSALS
Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 49159 

required by § 1026.32(a)(2)(i). However, if an 

open-end credit plan has a variable-rate and 

offers a fixed-rate and term-payment option 

during the draw period, § 1026.32(a)(2) 

requires a creditor to use the terms applicable 

to the variable-rate feature for determining 

the annual percentage rate, as described in 

§ 1026.32(a)(2)(ii).fi 

32(b) Definitions. 

Paragraph 32(b)(1)(i). 

1. General. Section 1026.32(b)(1)(i) 

includes in the total ‘‘points and fees’’ items 

ødefined as finance charges under 

§§ 1026.4(a) and 1026.(4)(b). Items excluded 

from the finance charge under other 

provisions of § 1026.4 are not included in the 

total ‘‘points and fees’’ under paragraph 

32(b)(1)(i), but may be included in ‘‘points 

and fees’’ under paragraphs 32(b)(1)(ii) and 

32(b)(1)(iii). Interest, including per-diem 

interest, is excluded from ‘‘points and fees’’ 

under § 1026.32(b)(1).¿flincluded in the 

finance charge under § 1026.4(a) and (b), but 

excludes items described in § 1026.4(c) 

through (e) (except to the extent otherwise 

included by § 1026.32(b)(1)); interest, 

including per-diem interest; and certain 

mortgage insurance premiums, as discussed 

in comments 32(b)(1)(i)–2 through –4. For 

purposes of § 1026.32(b)(1)(i), ‘‘items 

included in the finance charge under 

§ 1026.4(a) and (b)’’ means only those items 

included under § 1026.4(a) and (b), without 

reference to any other provisions of § 1026.4, 

including § 1026.4(g). To illustrate: A fee 

imposed by the creditor for an appraisal 

performed by an employee of the creditor 

meets the definition of ‘‘finance charge’’ 

under § 1026.4(a) as ‘‘any charge payable 

directly or indirectly by the consumer and 

imposed directly or indirectly by the creditor 

as an incident to or a condition of the 

extension of credit.’’ However, 

§ 1026.4(c)(7)(iv) lists appraisal fees. 

Therefore, under the general rule regarding 

the charges that must be counted as points 

and fees, a fee imposed by the creditor for an 

appraisal performed by an employee of the 

creditor would not be counted in points and 

fees. Section 1026.32(b)(1)(iii), however, 

expressly re-includes in points and fees items 

listed in § 1026.4(c)(7) (including appraisal 

fees) if the creditor receives compensation in 

connection with the charge. A creditor would 

receive compensation for an appraisal 

performed by its own employee. Thus, the 

appraisal fee in this example must be 

included in the calculation of points and 

fees. 

2. Upfront Federal and State mortgage 

insurance premiums and guaranty fees. 

Under § 1026.32(b)(1)(i)(B)(1) and (3), upfront 

mortgage insurance premiums or guaranty 

fees in connection with a Federal or State 

agency program are not ‘‘points and fees,’’ 

even though they are finance charges under 

§ 1026.4(a) and (b). For example, if a 

consumer is required to pay a $2,000 

mortgage insurance premium before or at 

closing for a loan insured by the U.S. Federal 

Housing Administration, the $2,000 must be 

treated as a finance charge but is not counted 

in ‘‘points and fees.’’ 

3. Upfront private mortgage insurance 

premiums. i. Under § 1026.32(b)(1)(i)(B)(2) 

and (3), upfront private mortgage insurance 

premiums are not ‘‘points and fees,’’ even 

though they are finance charges under 

§ 1026.4(a) and (b)—but only to the extent 

that the premium amount does not exceed 

the amount payable under policies in effect 

at the time of origination under section 

203(c)(2)(A) of the National Housing Act (12 

U.S.C. 1709(c)(2)(A)). 

ii. In addition, to qualify for the exclusion 

from points and fees, upfront private 

mortgage insurance premiums must be 

required to be refunded on a pro rata basis 

and the refund must be automatically issued 

upon notification of the satisfaction of the 

underlying mortgage loan. 

iii. To illustrate: Assume that a $3,000 

upfront private mortgage insurance premium 

charged on a closed-end mortgage loan is 

required to be refunded on a pro rata basis 

and automatically issued upon notification of 

the satisfaction of the underlying mortgage 

loan. Assume also that the maximum upfront 

premium allowable under the National 

Housing Act is $2,000. In this case, the 

creditor could exclude $2,000 from ‘‘points 

and fees’’ but would have to include the 

$1,000 that exceeds the allowable premium 

under the National Housing Act. However, if 

the $3,000 upfront private mortgage 

insurance premium were not required to be 

refunded on a pro rata basis and 

automatically issued upon notification of the 

satisfaction of the underlying mortgage loan, 

the entire $3,000 premium must be included 

in ‘‘points and fees.’’ 

4. Method of paying private mortgage 

insurance premiums. Upfront private 

mortgage insurance premiums that do not 

qualify for an exclusion from ‘‘points and 

fees’’ under § 1026.32(b)(1)(i)(B)(2) must be 

included in ‘‘points and fees’’ for purposes of 

this section whether paid before or at closing, 

in cash or financed, and whether the 

insurance is optional or required. Such 

charges are also included whether the 

amount represents the entire premium or an 

initial payment.fi 

Paragraph 32(b)(1)(ii). 

1. flLoan originator compensation— 

generalfiøMortgage broker fees¿. In 

determining ‘‘points and fees’’ for purposes 

of fl§ 1026.32fiøthis section¿, 

compensation paid by a consumer flor 

creditorfi to a flloan originatorfiømortgage 

broker (directly or through the creditor for 

delivery to the broker)¿ is included in the 

calculation whether or not the amount is 

disclosed as a finance charge. øMortgage 

broker fees that are not paid by the consumer 

are not included.¿ flLoan 

originatorfiøMortgage broker¿ fees already 

included in the flpoints and feesfi 

calculation as finance charges under 

§ 1026.32(b)(1)(i) need not be counted again 

under § 1026.32(b)(1)(ii). 

fl2. Loan originator compensation— 

examples. 

i. In determining ‘‘points and fees’’ under 

§ 1026.32, loan originator compensation 

includes the dollar value of compensation 

paid to a loan originator for a closed-end 

mortgage loan, such as a bonus, commission, 

yield spread premium, award of 

merchandise, services, trips, or similar 

prizes, or hourly pay for the actual number 

of hours worked on a particular transaction. 

Compensation paid to a loan originator for a 

closed-end mortgage loan must be included 

in the ‘‘points and fees’’ calculation for that 

loan whenever paid, whether before, at, or 

after closing, as long as that compensation 

amount can be determined at the time of 

closing. Thus, loan originator compensation 

for a closed-end mortgage loan includes 

compensation that will be paid as part of a 

periodic bonus, commission, or gift, if a 

portion of the dollar value of the bonus, 

commission, or gift can be attributed to that 

loan. The following examples illustrate the 

rule: 

A. Assume that, according to a creditor’s 

compensation policies, the creditor awards 

its loan officers a bonus every year based on 

the number of loan applications taken by the 

loan officer that result in consummated 

transactions during that year, and that each 

consummated transaction increases the 

bonus by $100. In this case, the $100 bonus 

must be counted in the amount of loan 

originator compensation that the creditor 

includes in ‘‘points and fees.’’ 

B. Assume that, according to a creditor’s 

compensation policies, the creditor awards 

its loan officers a year-end bonus equal to a 

flat dollar amount for each of the 

consummated transactions originated by the 

loan officer during that year. Assume also 

that the per-transaction dollar amount is 

determined at the end of the year, based on 

the total dollar value of consummated 

transactions originated by the loan officer. If 

at the time a mortgage transaction is 

consummated the loan officer has originated 

total volume that qualifies the loan officer to 

receive a $300 bonus per transaction, the 

$300 bonus is loan originator compensation 

that must be included in ‘‘points and fees’’ 

for the transaction. 

C. Assume that, according to a creditor’s 

compensation policies, the creditor awards 

its loan officers a bonus every year based on 

the number of consummated transactions 

originated by the loan officer during that 

year. Assume also that for the first 10 

transactions originated by the loan officer in 

a given year, no bonus is awarded; for the 

next 10 transactions originated by the loan 

officer up to 20, a bonus of $100 per 

transaction is awarded; and for each 

transaction originated after the first 20, a 

bonus of $200 per transaction is awarded. In 

this case, for the first 10 transactions 

originated by a loan officer during a given 

year, no amount of loan originator 

compensation need be included in ‘‘points 

and fees.’’ For any mortgage transaction made 

after the first 10, up to the 20th transaction, 

$100 must be included in ‘‘points and fees.’’ 

For any mortgage transaction made after the 

first 20, $200 must be included in ‘‘points 

and fees.’’ 

ii. In determining ‘‘points and fees’’ under 

this section, loan originator compensation 

excludes compensation that cannot be 

attributed to a particular transaction at the 

time of origination, including, for example: 

A. Compensation based on the long-term 

performance of the loan originator’s loans. 

B. Compensation based on the overall 

quality of a loan originator’s loan files. 

C. The base salary of a loan originator who 

is also the employee of the creditor, not 


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49160 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

accounting for any bonuses, commissions, 

pay raises, or other financial awards based 

solely on a particular transaction or the 

number or amount of closed-end mortgage 

loans originated by the loan originator. 

3. Name of fee. Loan originator 

compensation includes amounts the loan 

originator retains and is not dependent on 

the label or name of any fee imposed in 

connection with the transaction. For 

example, if a loan originator imposes a 

‘‘processing fee’’ and retains the fee, the fee 

is loan originator compensation under 

§ 1026.32(b)(1)(ii) whether the originator 

expends the fee to process the consumer’s 

application or uses it for other expenses, 

such as overhead. 

Paragraph 32(b)(1)(iii). 

1. Other charges.fiø2. Example.¿ Section 

1026.32(b)(1)(iii) defines ‘‘points and fees’’ to 

include all items listed in § 1026.4(c)(7), 

other than amounts held for the future 

payment of taxes. An item listed in 

§ 1026.4(c)(7) may be excluded from the 

‘‘points and fees’’ calculation, however, if the 

charge is reasonable, the creditor receives no 

direct or indirect compensation from the 

charge, and the charge is not paid to an 

affiliate of the creditor. For example, a 

reasonable fee paid by the consumer to an 

independent, third-party appraiser may be 

excluded from the ‘‘points and fees’’ 

calculation (assuming no compensation is 

paid to the creditor flor its affiliatefi). flBy 

contrast, afiøA¿ fee paid by the consumer 

for an appraisal performed by the creditor 

must be included in the calculationø, even 

though the fee may be excluded from the 

finance charge if it is bona fide and 

reasonable in amount¿. 

Paragraph 32(b)(1)(iv). 

1. flCredit insurance and debt 

cancellation or suspension 

coverage.fiøPremium amount.¿ In 

determining ‘‘points and fees’’ for purposes 

of fl§ 1026.32fiøthis section¿, premiums 

øpaid at or before closing¿ for credit 

insurance flor any debt cancellation or 

suspension agreement or contract are 

included in points and fees if they are paid 

at or before consummation, whether they are 

paid in cash or, if permitted by applicable 

law, financed. Such charges are also included 

whether the amount represents the entire 

premium for the coverage or an initial 

payment.fiøare included whether they are 

paid in cash or financed, and whether the 

amount represents the entire premium for the 

coverage or an initial payment.¿ 

fl2. Credit property insurance. Credit 

property insurance includes insurance 

against loss of or damage to personal 

property, such as a houseboat or 

manufactured home. Credit property 

insurance covers the creditor’s security 

interest in the property. Credit property 

insurance does not include homeowners 

insurance, which, unlike credit property 

insurance, typically covers not only the 

dwelling but its contents, and designates the 

consumer, not the creditor, as the 

beneficiary. 

Paragraph 32(b)(3)(i). 

1. Finance charge. The points and fees 

calculation under § 1026.32(b)(3) generally 

does not include items that are included in 

the finance charge but that are payable after 

account opening, such as minimum monthly 

finance charges or charges based on either 

account activity or inactivity. Transaction 

fees also generally are not included in the 

points and fees calculation, except as 

provided in § 1026.32(b)(3)(vi). 

Paragraph 32(b)(3)(ii). 

1. Other charges. See comment 

32(b)(1)(iii)–1 for further guidance 

concerning the inclusion of items listed in 

§ 1026.4(c)(7) in points and fees for open-end 

credit plans. 

Paragraph 32(b)(3)(iii). 

1. Credit insurance and debt cancellation 

or suspension coverage. See comments 

32(b)(1)(iv)–1 and –2 for further guidance 

concerning the inclusion of premiums for 

credit insurance and debt cancellation or 

suspension coverage in points and fees for 

open-end credit plans. 

Paragraph 32(b)(3)(v). 

1. Participation fees. Fees charged for 

participation in a credit plan, whether 

assessed on an annual or other periodic basis, 

must be included in the points and fees 

calculation for purposes of § 1026.32. These 

fees include annual fees or other periodic 

fees that must be paid as a condition of 

access to the plan itself. See commentary to 

§ 1026.4(c)(4) for a description of these fees. 

For purposes of the points and fees 

calculation, the creditor must assume that 

any annual fee is charged each year for the 

original term of the plan. For example, 

assume that the terms of an open-end credit 

plan with a ten-year term permit the creditor 

to impose an annual fee of $50 for the 

consumer to maintain access to the plan. 

Section 1026.32(b)(3)(v) requires the creditor 

to include in points and fees the $500 that 

the consumer will pay in annual fees over the 

ten-year term of the plan. 

Paragraph 32(b)(3)(vi). 

1. Transaction fees to draw down the credit 

line. Section 1026.32(b)(3)(vi) requires 

creditors in open-end credit plans to include 

in points and fees any transaction fee, 

including any per-transaction fee, that will be 

charged for a draw on the credit line. Section 

1026.32(b)(3)(vi) requires the creditor to 

assume that the consumer will make at least 

one draw during the term of the credit plan. 

Thus, if the terms of the open-end credit plan 

permit the creditor to charge a $10 

transaction fee each time the consumer draws 

on the credit line, § 1026.32(b)(3)(vi) requires 

the creditor to include one $10 charge in the 

points and fees calculation. 

2. Fixed-rate loan option. If the terms of an 

open-end credit plan permit a consumer to 

draw on the credit line using either a 

variable-rate feature or a fixed-rate feature, 

§ 1026.32(b)(3)(vi) requires the creditor to use 

the terms applicable to the variable-rate 

feature for determining the transaction fee 

that must be included in the points and fees 

calculation. 

Paragraph 32(b)(4). 

1. Fees or charges waived at or before 

account opening. Under § 1026.32(b)(4), a 

charge that the creditor waives at or before 

account opening may be excluded from 

points and fees for an open-end credit plan 

unless the creditor may impose the charge 

after account opening. For example, a charge 

that a creditor waives at or before account 

opening must be included in points and fees 

as a prepayment penalty under 

§ 1026.32(b)(3)(iv) if the creditor can impose 

the charge if the consumer terminates the 

open-end credit plan prior to the end of its 

term. To illustrate, assume that, in opening 

an open-end credit plan with a ten-year term, 

a creditor waives a $300 processing fee. Also 

assume that the terms of the open-end credit 

plan provide that the consumer must repay 

the fee if the consumer terminates the plan 

within three years after account opening. The 

waived processing fee is a prepayment 

penalty as defined in § 1026.32(b)(8)(ii), 

because it is a fee that the creditor may 

impose and retain if the consumer terminates 

the plan prior to the end of its term. Under 

§ 1026.32(b)(4), the creditor must include the 

waived processing fee in points and fees 

under § 1026.32(b)(3)(iv). 

Paragraph 32(b)(5). 

32(b)(5)(i) Bona fide third-party charges. 

1. Section 1026.36(a)(1) and comment 

36(a)–1 provide guidance about the term loan 

originator as used in § 1026.32(b)(5)(i). 

2. Example. Assume that, prior to loan 

consummation, a creditor pays $400 for an 

appraisal conducted by a third-party not 

affiliated with the creditor. At 

consummation, the creditor charges the 

consumer $400 and retains that amount as 

reimbursement for the fee that the creditor 

paid to the third-party appraiser. For 

purposes of determining whether the 

transaction is a high-cost mortgage, the 

creditor need not include in points and fees 

the $400 it retains as reimbursement. 

3. Private mortgage insurance. For 

purposes of determining whether a closedend mortgage loan is a high-cost mortgage, 

the exclusion for bona fide third party 

charges not retained by the creditor, loan 

originator, or an affiliate of either is limited 

by § 1026.32(b)(1)(i)(B) in the general 

definition of points and fees. Section 

1026.32(b)(1)(i)(B) requires inclusion in 

points and fees for closed-end mortgage loans 

of premiums or other charges payable at or 

before consummation for any private 

guaranty or insurance protecting the creditor 

against the consumer’s default or other credit 

loss to the extent that the premium or charge 

exceeds the amount payable under policies 

in effect at the time of origination under 

section 203(c)(2)(A) of the National Housing 

Act (12 U.S.C. 1709(c)(2)(A)). These 

premiums or charges must also be included 

if the premiums or charges are not required 

to be refundable on a pro-rated basis, or the 

refund is not required to be automatically 

issued upon notification of the satisfaction of 

the underlying mortgage loan. Under these 

circumstances, even if the premiums or other 

charges are not retained by the creditor, loan 

originator, or an affiliate of either, they must 

be included in the points and fees calculation 

for purposes of determining whether a 

transaction is a high-cost mortgage. See 

comments 32(b)(1)(i)–3 and –4 for further 

discussion of including upfront private 

mortgage insurance premiums in the points 

and fees calculation for closed-end mortgage 

loans. 

32(b)(5)(ii) Bona fide discount points. 

1. Average prime offer rate. For purposes 

of § 1026.32(b)(5)(ii)(A)(1) and (B)(1), the 


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average prime offer rate used is the same 

average prime offer rate that applies to a 

comparable transaction as of the date the 

discounted interest rate for the transaction is 

set. See comment 32(a)(1)(i)–1 for guidance 

on determining the applicable average prime 

offer rate for a comparable transaction for a 

closed-end mortgage loan. See comment 

32(a)(1)(i)–2 for guidance on determining the 

applicable average prime offer rate for a 

comparable transaction for an open-end 

credit plan. See comments 43(e)(3)(ii)–3 and 

–4 for examples of how to calculate bona fide 

discount points for closed-end mortgage 

loans secured by real property. 

32(b)(6) Total loan amount. 

32(b)(6)(i) Closed-end mortgage loans. 

1. Total loan amount; example. The 

following example illustrates how to 

calculate the total loan amount for closedend mortgage loans. Assume that the face 

amount of a closed-end mortgage note is 

$100,000. If the consumer pays a $300 fee for 

a creditor-conducted appraisal by having it 

deducted from loan proceeds and pays $400 

in points in cash at consummation, the total 

loan amount is $99,700. Because the $300 

appraisal fee is paid to the creditor, it is 

included in points and fees under 

§ 1026.32(b)(1)(iii). Because it is included in 

points and fees and is financed by the 

creditor, it is deducted from the face amount 

of the note ($100,000) to derive a total loan 

amount of $99,700, pursuant to 

§ 1026.32(b)(6)(i). 

32(b)(8) Prepayment penalty. 

1. Examples of prepayment penalties; 

closed-end mortgage loans. For purposes of 

§ 1026.32(b)(8)(i), the following are examples 

of prepayment penalties: 

i. A charge determined by treating the loan 

balance as outstanding for a period of time 

after prepayment in full and applying the 

interest rate to such ‘‘balance,’’ even if the 

charge results from interest accrual 

amortization used for other payments in the 

transaction under the terms of the loan 

contract. ‘‘Interest accrual amortization’’ 

refers to the method by which the amount of 

interest due for each period (e.g., month) in 

a transaction’s term is determined. For 

example, ‘‘monthly interest accrual 

amortization’’ treats each payment as made 

on the scheduled, monthly due date even if 

it is actually paid early or late (until the 

expiration of any grace period). Thus, under 

the terms of a loan contract providing for 

monthly interest accrual amortization, if the 

amount of interest due on May 1 for the 

preceding month of April is $3,000, the loan 

contract will require payment of $3,000 in 

interest for the month of April whether the 

payment is made on April 20, on May 1, or 

on May 10. In this example, if the consumer 

prepays the loan in full on April 20 and if 

the accrued interest as of that date is $2,000, 

then assessment of a charge of $3,000 

constitutes a prepayment penalty of $1,000 

because the amount of interest actually 

earned through April 20 is only $2,000. 

ii. A fee, such as an origination or other 

loan closing cost, that is waived by the 

creditor on the condition that the consumer 

does not prepay the loan. 

iii. A minimum finance charge in a simple 

interest transaction. 

iv. Computing a refund of unearned 

interest by a method that is less favorable to 

the consumer than the actuarial method, as 

defined by section 933(d) of the Housing and 

Community Development Act of 1992, 15 

U.S.C. 1615(d). For purposes of computing a 

refund of unearned interest, if using the 

actuarial method defined by applicable State 

law results in a refund that is greater than the 

refund calculated by using the method 

described in section 933(d) of the Housing 

and Community Development Act of 1992, 

creditors should use the State law definition 

in determining if a refund is a prepayment 

penalty. 

2. Examples of prepayment penalties; 

open-end credit plans. For purposes of 

§ 1026.32(b)(8)(ii), the term prepayment 

penalty includes a charge, including a 

waived closing cost, imposed by the creditor 

if the consumer terminates the open-end 

credit plan prior to the end of its term. This 

includes a charge imposed if the consumer 

terminates the plan outright or, for example, 

if the consumer terminates the plan in 

connection with obtaining a new loan or plan 

with the current holder of the existing plan, 

a servicer acting on behalf of the current 

holder, or an affiliate of either. However, the 

term prepayment penalty does not include a 

waived bona fide third-party charge imposed 

by the creditor if the consumer terminates the 

open-end credit plan during the first 36 

months after account opening. 

3. Fees that are not prepayment penalties. 

For purposes of § 1026.32(b)(8)(i) and (ii), 

fees which are not prepayment penalties 

include, for example: 

i. Fees imposed for preparing and 

providing documents when a loan is paid in 

full or when an open-end credit plan is 

terminated, if such fees are imposed whether 

or not the loan is prepaid or the consumer 

terminates the plan prior to the end of its 

term. Examples include a loan payoff 

statement, a reconveyance document, or 

another document releasing the creditor’s 

security interest in the dwelling that secures 

the loan or line of credit. 

ii. Loan guarantee fees. 

iii. In the case of an open-end credit plan, 

fees that are not prepayment penalties also 

include any fee that the creditor may impose 

in lieu of termination and acceleration under 

comment 40(f)(2)–2.fi 

32(c) Disclosures. 

* * * * * 

fl32(c)(2) Annual percentage rate. 

1. Disclosing annual percentage rate for 

open-end high-cost mortgages. In disclosing 

the annual percentage rate for an open-end, 

high-cost mortgage under § 1026.32(c)(2), 

creditors must comply with § 1026.6(a)(1). If 

a fixed-rate, discounted introductory or 

initial interest rate is offered on the 

transaction, § 1026.32(c)(2) requires a 

creditor to disclose the annual percentage 

rate of the fixed-rate, discounted introductory 

or initial interest rate feature, and the rate 

that would apply when the feature expires.fi 

32(c)(3) Regular payment; flminimum 

periodic payment example;fiballoon 

payment. 

1. flBalloon payment. Except as provided 

in § 1026.32(d)(1)(ii) and (iii), a mortgage 

transaction subject to this section may not 

include a payment schedule that results in a 

balloon payment. 

Paragraph 32(c)(3)(i) 

1.fi General. The regular payment is the 

amount due from the borrower at regular 

intervals, such as monthly, bimonthly, 

quarterly, or annually. There must be at least 

two payments, and the payments must be in 

an amount and at such intervals that they 

fully amortize the amount owed. In 

disclosing the regular payment, creditors may 

rely on the rules set forth in § 1026.18(g); 

however, the amounts for voluntary items, 

such as credit life insurance, may be 

included in the regular payment disclosure 

only if the consumer has previously agreed 

to the amounts. 

i. If the loan has more than one payment 

level, the regular payment for each level must 

be disclosed. For example: 

A. In a 30-year graduated payment 

mortgage where there will be payments of 

$300 for the first 120 months, $400 for the 

next 120 months, and $500 for the last 120 

months, each payment amount must be 

disclosed, along with the length of time that 

the payment will be in effect. 

B. If interest and principal are paid at 

different times, the regular amount for each 

must be disclosed. 

C. In discounted or premium variable-rate 

transactions where the creditor sets the 

initial interest rate and later rate adjustments 

are determined by an index or formula, the 

creditor must disclose both the initial 

payment based on the discount or premium 

and the payment that will be in effect 

thereafter. Additional explanatory material 

which does not detract from the required 

disclosures may accompany the disclosed 

amounts. For example, if a monthly payment 

is $250 for the first six months and then 

increases based on an index and margin, the 

creditor could use language such as the 

following: ‘‘Your regular monthly payment 

will be $250 for six months. After six months 

your regular monthly payment will be based 

on an index and margin, which currently 

would make your payment $350. Your actual 

payment at that time may be higher or 

lower.’’ 

1. Calculating ‘‘worst-case’’ payment 

example. flFor a closed-end mortgage loan, 

creditorsfiøCreditors¿ may rely on 

instructions in § 1026.19(b)(2)(viii)(B) for 

calculating the maximum possible increases 

in rates in the shortest possible timeframe, 

based on the face amount of the note (not the 

hypothetical loan amount of $10,000 

required by § 1026.19(b)(2)(viii)(B)). The 

creditor must provide a maximum payment 

for each payment level, where a payment 

schedule provides for more than one 

payment level and more than one maximum 

payment amount is possible. flFor an openend credit plan, the maximum monthly 

payment must be based on the following 

assumptions: 

i. The consumer borrows the full credit 

line at account opening with no additional 

extensions of credit. 

ii. The consumer makes only minimum 

periodic payments during the draw period 

and any repayment period. 

iii. If the annual percentage rate may 

increase during the plan, the maximum 


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49162 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

annual percentage rate that is included in the 

contract, as required by § 1026.30, applies to 

the plan at account opening.fi 

32(c)(5) Amount borrowedfl; credit 

limitfi. 

1. Optional insurance; debt-cancellation 

coverage. flFor closed-end mortgage loans, 

thisfiøThis¿ disclosure is required when the 

amount borrowed in a refinancing includes 

premiums or other charges for credit life, 

accident, health, or loss-of-income insurance, 

or debt-cancellation coverage (whether or not 

the debt-cancellation coverage is insurance 

under applicable law) that provides for 

cancellation of all or part of the consumer’s 

liability in the event of the loss of life, health, 

or income or in the case of accident. See 

comment 4(d)(3)–2 and comment app. G and 

H–2 regarding terminology for debtcancellation coverage. 

32(d) Limitations. 

1. Additional prohibitions applicable 

under other sections. Section 1026.34 sets 

forth certain prohibitions in connection with 

flhigh-cost mortgagesfiømortgage credit 

subject to § 1026.32¿, in addition to the 

limitations in § 1026.32(d). Further, 

§ 1026.35(b) prohibits certain practices in 

connection with flclosed-endfi 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 ø§ 1026.32¿ flclosed-end 

high-cost mortgagesfi ømortgage loans¿ are 

also subject to the prohibitions set forth in 

§ 1026.35(b) (such as escrows), in addition to 

the limitations in § 1026.32(d). 

32(d)(1)(i) Balloon payment. 

Alternative 1—Paragraph 32(d)(1)(i) 

1. Regular periodic payments. The 

repayment schedule for a ø§ 1026.32¿flhighcostfi mortgage loan øwith a term of less 

than five years¿ must fully amortize the 

outstanding principal balance through 

‘‘regular periodic payments.’’ A payment is a 

‘‘regular periodic payment’’ if it is not more 

than twice the øamount of other 

payments¿flaverage of earlier scheduled 

payments. For purposes of open-end credit 

plans, the term ‘‘regular periodic payment’’ 

or ‘‘periodic payment’’ means the required 

minimum periodic payment.fi 

Alternative 2—Paragraph 32(d)(1)(i) 

1. Regular periodic payments. The 

repayment schedule for a ø§ 1026.32¿flhighcostfi mortgage loan øwith a term of less 

than five years¿ must fully amortize the 

outstanding principal balance through 

‘‘regular periodic payments.’’ A payment is a 

‘‘regular periodic payment’’ if it is not more 

than øtwice¿ fltwo timesfi the amount of 

other payments. flFor purposes of open-end 

credit plans, the term ‘‘regular periodic 

payment’’ or ‘‘periodic payment’’ means the 

required minimum periodic payment. 

2. No repayment period. If the terms of an 

open-end credit plan do not provide for a 

repayment period, the repayment schedule 

must fully amortize any outstanding 

principal balance in the draw period through 

regular periodic payments. However, the 

limitation on balloon payments in 

§ 1026.32(d)(1)(i) does not preclude increases 

in regular periodic payments that result 

solely from the initial draw or additional 

draws on the credit line during the draw 

period.fi 

32(d)(2) Negative amortization. 

1. Negative amortization. The prohibition 

against negative amortization in a flhighcost mortgagefi[mortgage covered by 

§ 1026.32] does not preclude reasonable 

increases in the principal balance that result 

from events permitted by the legal obligation 

unrelated to the payment schedule. For 

example, when a consumer fails to obtain 

property insurance and the creditor 

purchases insurance, the creditor may add a 

reasonable premium to the consumer’s 

principal balance, to the extent permitted by 

the legal obligation. 

* * * * * 

32(d)(6) fl[Reserved.]fiøPrepayment 

penalties. 

1. State law. For purposes of computing a 

refund of unearned interest, if using the 

actuarial method defined by applicable state 

law results in a refund that is greater than the 

refund calculated by using the method 

described in section 933(d) of the Housing 

and Community Development Act of 1992, 

creditors should use the state law definition 

in determining if a refund is a prepayment 

penalty.¿ 

32(d)(7) fl[Reserved.]fiøPrepayment 

penalty exception. 

Paragraph 32(d)(7)(iii). 

1. Calculating debt-to-income ratio. ‘‘Debt’’ 

does not include amounts paid by the 

borrower in cash at closing or amounts from 

the loan proceeds that directly repay an 

existing debt. Creditors may consider 

combined debt-to-income ratios for 

transactions involving joint applicants. For 

more information about obligations and 

inflows that may constitute ‘‘debt’’ or 

‘‘income’’ for purposes of § 1026.32(d)(7)(iii), 

see comment 34(a)(4)–6 and comment 

34(a)(4)(iii)(C)–1. 

2. Verification. Creditors shall verify 

income in the manner described in 

§ 1026.34(a)(4)(ii) and the related comments. 

Creditors may verify debt with a credit 

report. However, a credit report may not 

reflect certain obligations undertaken just 

before or at consummation of the transaction 

and secured by the same dwelling that 

secures the transaction. Section 1026.34(a)(4) 

may require creditors to consider such 

obligations; see comment 34(a)(4)–3 and 

comment 34(a)(4)(ii)(C)–1. 

3. Interaction with Regulation B. Section 

1026.32(d)(7)(iii) does not require or permit 

the creditor to make inquiries or verifications 

that would be prohibited by Regulation B, 12 

CFR part 1002. 

Paragraph 32(d)(7)(iv). 

1. Payment change. Section 1026.32(d)(7) 

sets forth the conditions under which a 

mortgage transaction subject to this section 

may have a prepayment penalty. Section 

1026.32(d)(7)(iv) 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. 

The following examples show whether 

prepayment penalties are permitted or 

prohibited under § 1026.32(d)(7)(iv) in 

particular circumstances. 

i. Initial payments for a variable-rate 

transaction consummated on January 1, 2010 

are $1,000 per month. Under the loan 

agreement, the first possible date that a 

payment in a different amount may be due 

is January 1, 2014. A prepayment penalty is 

permitted with this mortgage transaction 

provided that the other § 1026.32(d)(7) 

conditions are met, that is: provided that the 

prepayment penalty is permitted by other 

applicable law, the penalty expires on or 

before December 31, 2011, the penalty will 

not apply if the source of the prepayment 

funds is a refinancing by the creditor or its 

affiliate, and at consummation the 

consumer’s total monthly debts do not 

exceed 50 percent of the consumer’s monthly 

gross income, as verified. 

ii. Initial payments for a variable-rate 

transaction consummated on January 1, 2010 

are $1,000 per month. Under the loan 

agreement, the first possible date that a 

payment in a different amount may be due 

is December 31, 2013. A prepayment penalty 

is prohibited with this mortgage transaction 

because the payment may change within the 

four-year period following consummation. 

iii. Initial payments for a graduatedpayment transaction consummated on 

January 1, 2010 are $1,000 per month. Under 

the loan agreement, the first possible date 

that a payment in a different amount may be 

due is January 1, 2014. A prepayment penalty 

is permitted with this mortgage transaction 

provided that the other § 1026.32(d)(7) 

conditions are met, that is: provided that the 

prepayment penalty is permitted by other 

applicable law, the penalty expires on or 

before December 31, 2011, the penalty will 

not apply if the source of the prepayment 

funds is a refinancing by the creditor or its 

affiliate, and at consummation the 

consumer’s total monthly debts do not 

exceed 50 percent of the consumer’s monthly 

gross income, as verified. 

iv. Initial payments for a step-rate 

transaction consummated on January 1, 2010 

are $1,000 per month. Under the loan 

agreement, the first possible date that a 

payment in a different amount may be due 

is December 31, 2013. A prepayment penalty 

is prohibited with this mortgage transaction 

because the payment may change within the 

four-year period following consummation. 

2. Payment changes excluded. Payment 

changes due to the following circumstances 

are not considered payment changes for 

purposes of this section: 

i. A change in the amount of a periodic 

payment that is allocated to principal or 

interest that does not change the total amount 

of the periodic payment. 

ii. The borrower’s actual unanticipated late 

payment, delinquency, or default; and 

iii. The borrower’s voluntary payment of 

additional amounts (for example when a 

consumer chooses to make a payment of 

interest and principal on a loan that only 

requires the consumer to pay interest).¿ 

32(d)(8) flAcceleration of debtfiøDue-ondemand clause¿. 

Paragraph fl32(d)(8)(i)fiø32(d)(8)(ii)¿. 

1. Failure to meet repayment terms. A 

creditor may terminate a loan flor open-end 

credit agreementfi and accelerate the 

balance when the consumer fails to meet the 

repayment terms flresulting in a default in 

payment under the agreementfiøprovided 

for in the agreement¿; a creditor may do so, 

however, only if the consumer actually fails 


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to make payments flresulting in a default in 

the agreementfi. For example, a creditor 

may not terminate and accelerate if the 

consumer, in error, sends a payment to the 

wrong location, such as a branch rather than 

the main office of the creditor. If a consumer 

files for or is placed in bankruptcy, the 

creditor may terminate and accelerate under 

fl§ 1026.32(d)(8)(i)fiøthis provision¿ if the 

consumer fails to meet the repayment terms 

flresulting in a defaultfi of the agreement. 

Section 

fl1026.32(d)(8)(i)fiø1026.32(d)(8)(ii)¿ does 

not override any State or other law that 

requires a creditor to notify a borrower of a 

right to cure, or otherwise places a duty on 

the creditor before it can terminate a loan 

flor open-end credit agreementfi and 

accelerate the balance. 

Paragraph 32(d)(8)(iii). 

1. flMaterial violation of agreement. A 

creditor may terminate a loan or open-end 

credit agreement and accelerate the balance 

based on a material violation of some other 

provision of the agreement unrelated to the 

payment schedule. See comments 

32(d)(8)(iii)–2 and –3 for examples of 

material violations of an agreement that 

would permit a creditor to terminate and 

accelerate.fiøImpairment of security. A 

creditor may terminate a loan and accelerate 

the balance if the consumer’s action or 

inaction adversely affects the creditor’s 

security for the loan, or any right of the 

creditor in that security. Action or inaction 

by third parties does not, in itself, permit the 

creditor to terminate and accelerate.¿ 

2. øExamples.¿flMaterial impairment of 

security for the loan. A creditor may 

terminate a loan or open-end credit 

agreement and accelerate the balance based 

on a material violation of the agreement if the 

consumer’s action or inaction adversely 

affects the creditor’s security for the loan or 

open-end credit plan, or any right of the 

creditor in that security. Action or inaction 

by third parties does not, in itself, permit the 

creditor to terminate a loan or open-end 

credit agreement and accelerate the 

balance.fi 

i. flExamples.fi A creditor may terminate 

and accelerate, for example, if: 

A. øThe consumer transfers title to the 

property or sells the property without the 

permission of the creditor. 

B.¿ The consumer fails to maintain 

required insurance on the dwelling. 

øC.¿flB.fi The consumer fails to pay 

taxes on the property. 

øD.¿flC.fi The consumer permits the 

filing of a lien senior to that held by the 

creditor. 

øE.¿ flD.fi øThe sole consumer obligated 

on the credit dies. 

F. The property is taken through eminent 

domain. 

G¿. A prior lienholder forecloses. 

ii. By contrast, the filing of a judgment 

against the consumer would flbe cause 

forfiøpermit¿ termination and acceleration 

only if the amount of the judgment and 

collateral subject to the judgment is such that 

the creditor’s security is adversely fland 

materiallyfi affected flin violation of the 

loan or open-end credit agreementfi. If the 

consumer commits waste or otherwise 

destructively uses or fails to maintain the 

property fl, including demolishing or 

removing structures from the property,fi 

such that the action adversely affects the 

security flin a material wayfi, the loan flor 

open-end credit agreementfi may be 

terminated and the balance accelerated. 

Illegal use of the property by the consumer 

would permit termination and acceleration if 

it subjects the property to seizure. øIf one of 

two consumers obligated on a loan dies, the 

creditor may terminate the loan and 

accelerate the balance if the security is 

adversely affected.¿ If the consumer moves 

out of the dwelling that secures the loan and 

that action adversely affects the security flin 

a material wayfi, the creditor may terminate 

a loan flor open-end credit agreementfi and 

accelerate the balance. 

fl3. Fraud or material misrepresentation. 

A creditor may terminate a loan or open-end 

credit agreement and accelerate the balance 

based on a material violation of the 

agreement if the consumer violates the 

agreement through fraud or material 

misrepresentation in connection with the 

loan or open-end credit agreement. What 

constitutes fraud or misrepresentation is 

determined by applicable State law.fi 

Section 1026.34—Prohibited Acts or 

Practices in Connection with High-Cost 

Mortgages 

34(a) Prohibited acts or practices for highcost mortgages. 

34(a)(1) Home-improvement contracts. 

* * * * * 

34(a)(2) Notice to flassignee.fiøAssignee¿ 

* * * * * 

34(a)(3) Refinancings within one-year 

period. 

* * * * * 

2. Application of the one-year refinancing 

prohibition to creditors and assignees. The 

prohibition in § 1026.34(a)(3) applies where 

fla high-cost mortgagefiøloan extension of 

credit subject to § 1026.32¿ is refinanced into 

another flhigh-cost mortgagefiøloan subject 

to § 1026.32¿. The prohibition is illustrated 

by the following examples. Assume that 

Creditor A makes a flhigh-cost 

mortgagefiøloan subject to § 1026.32¿ on 

January 15, 2003, secured by a first lien; this 

loan is assigned to Creditor B on February 15, 

2003: 

i. Creditor A is prohibited from refinancing 

the January 2003 loan (or any other flhighcost mortgagefiøloan subject to § 1026.32¿ to 

the same borrower) into a flhigh-cost 

mortgagefiøloan subject to § 1026.32¿, until 

January 15, 2004. Creditor B is restricted 

until January 15, 2004, or such date prior to 

January 15, 2004 that Creditor B ceases to 

hold or service the loan. During the 

prohibition period, Creditors A and B may 

make a subordinate lien loan that does not 

refinance a flhigh-cost mortgagefiøloan 

subject to § 1026.32¿. Assume that on April 

1, 2003, Creditor A makes but does not assign 

a second-lien flhigh-cost mortgagefiøloan 

subject to § 1026.32¿. In that case, Creditor A 

would be prohibited from refinancing either 

the first-lien or second-lien loans (or any 

other flhigh-cost mortgagefi loans to that 

borrower øsubject to § 1026.32¿) into another 

flhigh-cost mortgagefiøloan subject to 

§ 1026.32¿ until April 1, 2004. 

ii. The loan made by Creditor A on January 

15, 2003 (and assigned to Creditor B) may be 

refinanced by Creditor C at any time. If 

Creditor C refinances this loan on March 1, 

2003 into a new flhigh-cost 

mortgagefiøloan subject to § 1026.32¿, 

Creditor A is prohibited from refinancing the 

loan made by Creditor C (or any other 

flhigh-cost mortgagefiøloan subject to 

§ 1026.32¿ to the same borrower) into 

another flhigh-cost mortgagefiøloan subject 

to § 1026.32¿ until January 15, 2004. Creditor 

C is similarly prohibited from refinancing 

any flhigh-cost mortgagefiøloan subject to 

§ 1026.32¿ to that borrower into another until 

March 1, 2004. (The limitations of 

§ 1026.34(a)(3) no longer apply to Creditor B 

after Creditor C refinanced the January 2003 

loan and Creditor B ceased to hold or service 

the loan.) 

34(a)(4) Repayment ability flfor high-cost 

mortgagesfi. 

1. Application of repayment ability rule. 

The § 1026.34(a)(4) prohibition against 

making loans without regard to consumers’ 

repayment ability applies to flopen-end, 

high-cost mortgagesfiømortgage loans 

described in § 1026.32(a)¿. flThe § 1026.43 

repayment ability provisions apply to closedend, high-cost mortgages. Accordingly, in 

connection with a closed-end, high-cost 

mortgage, § 1026.34(a)(4) requires a creditor 

to comply with the repayment ability 

requirements set forth in § 1026.43.fiøIn 

addition, the § 1026.34(a)(4) prohibition 

applies to higher-priced mortgage loans 

described in § 1026.35(a). See 

§ 1026.35(b)(1).¿ 

2. General prohibition. Section 

1026.34(a)(4) prohibits a creditor from 

flextending credit under a high-cost, openend credit plan fiøextending credit subject 

to § 1026.32 to a consumer¿ based on the 

value of the consumer’s collateral without 

regard to the consumer’s repayment ability as 

of flaccount openingfiøconsummation¿, 

including the consumer’s current and 

reasonably expected income, employment, 

assets other than the collateral, current 

obligations, and property tax and insurance 

obligations. A creditor may base its 

determination of repayment ability on 

current or reasonably expected income from 

employment or other sources, on assets other 

than the collateral, or both. 

3. Other dwelling-secured obligations. For 

purposes of § 1026.34(a)(4), current 

obligations include another credit obligation 

of which the creditor has knowledge 

undertaken prior to or at flaccount 

openingfiøconsummation of the 

transaction¿ and secured by the same 

dwelling that secures the flhigh-cost 

mortgagefi transactionøsubject to § 1026.32 

or § 1026.35¿. øFor example, where a 

transaction subject to § 1026.35 is a first-lien 

transaction for the purchase of a home, a 

creditor must consider a ‘‘piggyback’’ secondlien transaction of which it has knowledge 

that is used to finance part of the down 

payment on the house.¿ 

4. Discounted introductory rates and nonamortizing or negatively-amortizing 

payments. A credit agreement may determine 


sroberts on DSK5SPTVN1PROD with PROPOSALS
49164 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

a consumer’s initial payments using a 

temporarily discounted interest rate or 

permit the consumer to make initial 

payments that are non-amortizing øor 

negatively amortizing¿. (Negative 

amortization is permissible for loans covered 

by § 1026.35(a), but not § 1026.32). In such 

cases the creditor may determine repayment 

ability using the assumptions provided in 

§ 1026.34(a)(4)(iv). 

5. Repayment ability as of flaccount 

openingfiøconsummation¿. Section 

1026.34(a)(4) prohibits a creditor from 

disregarding repayment ability based on the 

facts and circumstances known to the 

creditor as of flaccount 

openingfiøconsummation¿. In general, a 

creditor does not violate this provision if a 

consumer defaults because of a significant 

reduction in income (for example, a job loss) 

or a significant obligation (for example, an 

obligation arising from a major medical 

expense) that occurs after flaccount 

openingfiøconsummation¿. However, if a 

creditor has knowledge as of flaccount 

openingfiøconsummation¿ of reductions in 

income, for example, if a consumer’s written 

application states that the consumer plans to 

retire within twelve months without 

obtaining new employment, or states that the 

consumer will transition from full-time to 

part-time employment, the creditor must 

consider that information. 

* * * * * 

Paragraph 34(a)(4)(ii)(B). 

1. * * * 

2. Materially greater than. Amounts of 

income or assets relied on are not materially 

greater than amounts that could have been 

verified at øconsummation¿flaccount 

openingfi if relying on the verifiable 

amounts would not have altered a reasonable 

creditor’s decision to extend credit or the 

terms of the credit. 

Paragraph 34(a)(4)(ii)(C). 

1. In general. A credit report may be used 

to verify current obligations. A credit report, 

however, might not reflect an obligation that 

a consumer has listed on an application. The 

creditor is responsible for considering such 

an obligation, but the creditor is not required 

to independently verify the obligation. 

Similarly, a creditor is responsible for 

considering certain obligations undertaken 

just before or at flaccount 

openingfiøconsummation of the 

transaction¿ and secured by the same 

dwelling that secures the transaction (for 

example, a ‘‘piggy back’’ loan), of which the 

creditor knows, even if not reflected on a 

credit report. See comment 34(a)(4)–3. 

34(a)(4)(iii) Presumption of compliance. 

1. In general. A creditor is presumed to 

have complied with § 1026.34(a)(4) if the 

creditor follows the three underwriting 

procedures specified in paragraph 

34(a)(4)(iii) for verifying repayment ability, 

determining the payment obligation, and 

measuring the relationship of obligations to 

income. The procedures for verifying 

repayment ability are required under 

fl§ 1026.34(a)(4)(ii)fi øparagraph 

34(a)(4)(ii)¿; the other procedures are not 

required but, if followed along with the 

required procedures, create a presumption 

that the creditor has complied with 

§ 1026.34(a)(4). The consumer may rebut the 

presumption with evidence that the creditor 

nonetheless disregarded repayment ability 

despite following these procedures. For 

example, evidence of a very high debt-toincome ratio and a very limited residual 

income could be sufficient to rebut the 

presumption, depending on all of the facts 

and circumstances. If a creditor fails to 

follow one of the non-required procedures set 

forth in fl§ 1026.34(a)(4)(iii)fi øparagraph 

34(a)(4)(iii)¿, then the creditor’s compliance 

is determined based on all of the facts and 

circumstances without there being a 

presumption of either compliance or 

violation. 

Paragraph 34(a)(4)(iii)(B) 

1. Determination of payment schedule. To 

retain a presumption of compliance under 

§ 1026.34(a)(4)(iii), a creditor must determine 

the consumer’s ability to pay the principal 

and interest obligation based on the 

maximum scheduled payment øin the first 

seven years following consummation¿. In 

general, a creditor should determine a 

payment schedule for purposes of 

§ 1026.34(a)(4)(iii)(B) based on the guidance 

in the commentary to ø§ 1026.17(c)(1)¿ 

fl§ 1026.32(c)(3)fi. øExamples of how to 

determine the maximum scheduled payment 

in the first seven years are provided as 

follows (all payment amounts are rounded): 

i. Balloon-payment loan; fixed interest 

rate. A loan in an amount of $100,000 with 

a fixed interest rate of 8.0 percent (no points) 

has a 7-year term but is amortized over 30 

years. The monthly payment scheduled for 7 

years is $733 with a balloon payment of 

remaining principal due at the end of 7 years. 

The creditor will retain the presumption of 

compliance if it assesses repayment ability 

based on the payment of $733. 

ii. Fixed-rate loan with interest-only 

payment for five years. A loan in an amount 

of $100,000 with a fixed interest rate of 8.0 

percent (no points) has a 30-year term. The 

monthly payment of $667 scheduled for the 

first 5 years would cover only the interest 

due. After the fifth year, the scheduled 

payment would increase to $772, an amount 

that fully amortizes the principal balance 

over the remaining 25 years. The creditor 

will retain the presumption of compliance if 

it assesses repayment ability based on the 

payment of $772. 

iii. Fixed-rate loan with interest-only 

payment for seven years. A loan in an 

amount of $100,000 with a fixed interest rate 

of 8.0 percent (no points) has a 30-year term. 

The monthly payment of $667 scheduled for 

the first 7 years would cover only the interest 

due. After the seventh year, the scheduled 

payment would increase to $793, an amount 

that fully amortizes the principal balance 

over the remaining 23 years. The creditor 

will retain the presumption of compliance if 

it assesses repayment ability based on the 

interest-only payment of $667. 

iv. Variable-rate loan with discount for five 

years. A loan in an amount of $100,000 has 

a 30-year term. The loan agreement provides 

for a fixed interest rate of 7.0 percent for an 

initial period of 5 years. Accordingly, the 

payment scheduled for the first 5 years is 

$665. The agreement provides that, after 5 

years, the interest rate will adjust each year 

based on a specified index and margin. As of 

consummation, the sum of the index value 

and margin (the fully-indexed rate) is 8.0 

percent. Accordingly, the payment scheduled 

for the remaining 25 years is $727. The 

creditor will retain the presumption of 

compliance if it assesses repayment ability 

based on the payment of $727. 

v. Variable-rate loan with discount for 

seven years. A loan in an amount of $100,000 

has a 30-year term. The loan agreement 

provides for a fixed interest rate of 7.125 

percent for an initial period of 7 years. 

Accordingly, the payment scheduled for the 

first 7 years is $674. After 7 years, the 

agreement provides that the interest rate will 

adjust each year based on a specified index 

and margin. As of consummation, the sum of 

the index value and margin (the fullyindexed rate) is 8.0 percent. Accordingly, the 

payment scheduled for the remaining years is 

$725. The creditor will retain the 

presumption of compliance if it assesses 

repayment ability based on the payment of 

$674. 

vi. Step-rate loan. A loan in an amount of 

$100,000 has a 30-year term. The agreement 

provides that the interest rate will be 5 

percent for two years, 6 percent for three 

years, and 7 percent thereafter. Accordingly, 

the payment amounts are $537 for two years, 

$597 for three years, and $654 thereafter. To 

retain the presumption of compliance, the 

creditor must assess repayment ability based 

on the payment of $654.¿ 

* * * * * 

fl34(a)(5) Pre-loan counseling. 

1. State housing finance authority. For 

purposes of § 1026.34(a)(5), a ‘‘State housing 

finance authority’’ has the same meaning as 

‘‘State housing finance agency’’ provided in 

24 CFR 214.3. 

34(a)(5)(i) Certification of counseling 

required. 

1. HUD-approved counselor. For purposes 

of § 1026.34(a)(5), counselors approved by 

the Secretary of the U.S. Department of 

Housing and Urban Development are 

homeownership counselors certified 

pursuant to section 106(e) of the Housing and 

Urban Development Act of 1968 (12 U.S.C. 

1701x(e)), or as otherwise determined by the 

Secretary. 

2. Processing applications. Prior to 

receiving certification of counseling, a 

creditor may not extend a high-cost mortgage, 

but may engage in other activities, such as 

processing an application that will result in 

the extension of a high-cost mortgage (by, for 

example, ordering an appraisal or title 

search). 

3. Form of certification. The written 

certification of counseling required by 

§ 1026.34(a)(5)(i) may be received by mail, 

email, facsimile, or any other method, so long 

as the certification is in a retainable form. 

34(a)(5)(ii) Timing of counseling. 

1. Disclosures for open-end credit plans. 

Section 1026.34(a)(5)(ii) permits receipt of 

either the good faith estimate required by 

RESPA or the disclosures required under 

§ 1026.40 to allow counseling to occur. 

Pursuant to 12 CFR 1024.7(h), the disclosures 

required by § 1026.40 can be provided in lieu 

of a good faith estimate for open-end credit 

plans. 


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Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 49165 

2. Initial disclosure. Counseling may occur 

after receipt of either an initial good faith 

estimate required by RESPA or a disclosure 

form pursuant to § 1026.40, regardless of 

whether a revised good faith estimate or 

revised disclosure form pursuant to § 1026.40 

is subsequently provided to the consumer. 

34(a)(5)(iv) Content of certification. 

1. Statement of counseling on advisability. 

A statement that a consumer has received 

counseling on the advisability of the highcost mortgage means that the consumer has 

received counseling about key terms of the 

mortgage transaction, as set out in either the 

RESPA good faith estimate or the disclosures 

provided to the consumer pursuant to 

§ 1026.40; the consumer’s budget, including 

the consumer’s income, assets, financial 

obligations, and expenses; and the 

affordability of the mortgage transaction for 

the consumer. Examples of such terms of the 

mortgage transaction include the initial 

interest rate, the initial monthly payment, 

whether the payment may increase, how the 

minimum periodic payment will be 

determined, and fees imposed by the 

creditor, as may be reflected in the applicable 

disclosure. A statement that a consumer has 

received counseling on the advisability of the 

high-cost mortgage does not require the 

counselor to have made a judgment or 

determination as to the appropriateness of 

the mortgage transaction for the consumer. 

2. Statement of verification. A statement 

that a counselor has verified that the 

consumer has received the disclosures 

required by either § 1026.32(c) or by RESPA 

for the high-cost mortgage means that a 

counselor has confirmed, orally, in writing, 

or by some other means, receipt of such 

disclosures with the consumer. 

34(a)(5)(v) Counseling fees. 

1. Financing. Section 1026.34(a)(5)(v) does 

not prohibit a creditor from financing the 

counseling fee as part of the transaction for 

a high-cost mortgage, if the fee is a bona fide 

third-party charge as provided by 

§ 1026.32(b)(5)(i). 

34(a)(5)(vi) Steering prohibited. 

1. An example of an action that constitutes 

steering would be when a creditor repeatedly 

highlights or otherwise distinguishes the 

same counselor in the notices the creditor 

provides to consumers pursuant to 

§ 1026.34(a)(5)(vii). 

2. Section 1026.34(a)(5)(vi) does not 

prohibit a creditor from providing a 

consumer with objective information related 

to counselors or counseling organizations in 

response to a consumer’s inquiry. An 

example of an action that would not 

constitute steering would be when a 

consumer asks the creditor for information 

about the fees charged by a counselor, and 

the creditor responds by providing the 

consumer information about fees charged by 

the counselor to other consumers that 

previously obtained counseling pursuant to 

§ 1026.34(a)(5). 

34(a)(5)(vii) List of counselors. 

1. Multiple creditors; multiple consumers. 

In the event of a high-cost mortgage 

transaction that involves multiple creditors 

or multiple consumers, see §§ 1026.5(d) and 

1026.17(d) and related commentary for 

guidance. 

34(a)(6) Recommended default. 

1. Facts and circumstances. Whether a 

creditor or mortgage broker ‘‘recommends or 

encourages’’ default for purposes of 

§ 1026.34(a)(6) depends on all of the relevant 

facts and circumstances. 

2. Examples. i. A creditor or mortgage 

broker ‘‘recommends or encourages’’ default 

when the creditor or mortgage broker advises 

the consumer to stop making payments on an 

existing loan knowing that the consumer’s 

cessation of payments will cause the 

consumer to default on the existing loan. 

ii. A creditor or mortgage broker does not 

‘‘recommend or encourage’’ default if the 

creditor or mortgage broker advises a 

consumer, in good faith, to stop payment on 

an existing loan that is intended to be paid 

prior to the loan entering into default by the 

proceeds of a high-cost mortgage upon the 

consummation of that high-cost mortgage, if 

the consummation is delayed for reasons 

outside the control of the creditor or 

mortgage broker. 

34(a)(8) Late fees. 

34(a)(8)(i) General. 

1. For purposes of § 1026.34(a)(8), in 

connection with an open-end credit plan, the 

amount of the payment past due is the 

required minimum periodic payment as 

provided under the terms of the open-end 

credit agreement. 

34(a)(8)(iii) Multiple late charges assessed 

on payment subsequently paid. 

1. Section 1026.34(a)(8)(iii) prohibits the 

pyramiding of late fees or charges in 

connection with a high-cost mortgage 

payment. For example, assume that a 

consumer’s regular periodic payment of $500 

is due on the 1st of each month. On August 

25, the consumer makes a $500 payment 

which was due on August 1, and as a result, 

a $10 late charge is assessed. On September 

1, the consumer makes another $500 

payment for the regular periodic payment 

due on September 1, but does not pay the $10 

late charge assessed on the August payment. 

Under § 1026.34(a)(8)(iii), it is impermissible 

to allocate $10 of the consumer’s September 

1 payment to cover the late charge, such that 

the September payment becomes delinquent. 

In short, because the $500 payment made on 

September 1 is a full payment for the 

applicable period and is paid by its due date 

or within any applicable grace period, no late 

charge may be imposed on the account in 

connection with the September payment. 

34(a)(8)(iv) Failure to make required 

payment. 

1. Under § 1026.34(a)(8)(iv), if a consumer 

fails to make one or more required payments 

and then resumes making payments but fails 

to bring the account current, it is permissible, 

if permitted by the terms of the loan contract 

or open-end credit agreement, to apply the 

consumer’s payments first to the past due 

payment(s) and to impose a late charge on 

each subsequent required payment until the 

account is brought current. To illustrate: 

Assume that a consumer’s regular periodic 

payment of $500 is due on the 1st of each 

month, or before the expiration of a 15-day 

grace period. Also assume that the consumer 

fails to make a timely installment payment by 

August 1 (or within the applicable grace 

period), and a $10 late charge therefore is 

imposed. The consumer resumes making 

monthly payments on September 1. Under 

§ 1026.34(a)(8)(iv), if permitted by the terms 

of the loan contract, the creditor may apply 

the $500 payment made on September 1 to 

satisfy the missed $500 payment that was 

due on August 1. If the consumer makes no 

other payment prior to the end of the grace 

period for the payment that was due on 

September 1, the creditor may also impose a 

$10 late fee for the payment that was due on 

September 1. 

34(a)(10) Financing of points and fees. 

1. Points and fees. For purposes of 

§ 1026.34(a)(10), ‘‘points and fees’’ means 

those items that are required to be included 

in the calculation of points and fees under 

§ 1026.32(b)(1) and (3). Thus, for example, in 

connection with the extension of credit 

under a high-cost mortgage, a creditor may 

finance a fee charged by a third-party 

counselor in connection with the consumer’s 

receipt of pre-loan counseling under 

§ 1026.34(a)(5), because, pursuant to 

§ 1026.32(b)(5)(i), such a fee is excluded from 

the calculation of points and fees as a bona 

fide third-party charge. 

2. Examples of financing points and fees. 

For purposes of § 1026.34(a)(10), points and 

fees are financed if, for example, they are 

added to the loan balance or financed 

through a separate note, if the note is payable 

to the creditor or to an affiliate of the 

creditor. In the case of an open-end credit 

plan, a creditor also finances points and fees 

if the creditor advances funds from the credit 

line to cover the fees.fi 

34(b) Prohibited acts or practices for 

dwelling-secured loans; øopen-end credit¿ 

flstructuring loans to evade high cost 

mortgage requirementsfi 

1. flExamples. A creditor structures a 

transaction in violation of § 1026.34(b) if, for 

example: 

i. The creditor structures a loan that would 

otherwise be a high-cost mortgage as two 

loans, for example, to divide the loan fees in 

order to avoid the points and fees threshold 

for high-cost mortgages in § 1026.32(a)(1)(ii). 

ii. The creditor structures a high-cost 

mortgage as an open-end home-equity line of 

credit that is in fact a closed-end homeequity loan in order to evade the requirement 

under § 1026.32(b)(1) to include loan 

originator compensation in the points and 

fees calculation for closed-end mortgage 

loans. 

2. fiAmount of credit extended. Where a 

loan is documented as open-end credit but 

the features and terms or other circumstances 

demonstrate that it does not meet the 

definition of open-end credit, the loan is 

subject to the rules for closed-end creditfl.fi 

ø, including § 1026.32 if the rate or fee trigger 

is met. In¿ flThus, in determining the ‘‘total 

loan amount’’ for purposes offi applying the 

triggers under § 1026.32, øthe ‘‘amount 

financed,’’ including the ‘‘principal loan 

amount’’ must be determined. In making the 

determination¿, the amount of credit that 

would have been extended if the loan had 

been documented as a closed-end loan is a 

factual determination to be made in each 

case. Factors to be considered include the 

amount of money the consumer originally 

requested, the amount of the first advance or 


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49166 Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / Proposed Rules 

the highest outstanding balance, or the 

amount of the credit line. The full amount of 

the credit line is considered only to the 

extent that it is reasonable to expect that the 

consumer might use the full amount of 

credit. 

Section 1026.36—Prohibited Acts or 

Practices in Connection With Credit Secured 

by a Dwelling 

* * * * * 

fl36(k) Negative amortization counseling. 

36(k)(1) Counseling required. 

1. HUD-certified or -approved counselor or 

counseling organization. For purposes of 

§ 1026.36(k), organizations or counselors 

certified or approved by the U.S. Department 

of Housing and Urban Development (HUD) to 

provide the homeownership counseling 

required by § 1026.36(k) include counselors 

and counseling organizations that are 

certified or approved pursuant to section 

106(e) of the Housing and Urban 

Development Act of 1968 (12 U.S.C. 

1701x(e)) or 24 CFR part 214, unless HUD 

determines otherwise. 

2. Homeownership counseling. The 

counseling required under § 1026.36(k) must 

include information regarding the risks and 

consequences of negative amortization. 

3. Documentation. Examples of 

documentation that demonstrate a consumer 

has received the counseling required under 

§ 1026.36(k) include a certificate of 

counseling, letter, or email from a HUDcertified or -approved counselor or 

counseling organization indicating that the 

consumer has received homeownership 

counseling. 

4. Processing applications. Prior to 

receiving documentation that a consumer has 

received the counseling required under 

§ 1026.36(k), a creditor may not extend credit 

to a first-time borrower in connection with a 

closed-end transaction secured by a dwelling 

that may result in negative amortization, but 

may engage in other activities, such as 

processing an application for such a 

transaction (by, for example, ordering an 

appraisal or title search). 

36(k)(3) Steering prohibited. 

1. See comments 34(a)(5)(vi)-1 and -2 for 

guidance concerning steering. 

36(k)(4) List of counselors. 

1. Multiple creditors; multiple consumers. 

In the event of a closed-end transaction 

secured by a dwelling that may result in 

negative amortization that involves multiple 

creditors or multiple first-time borrows, see 

§ 1026.17(d) and related commentary for 

guidance.fi 

Dated: July 9, 2012. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2012–17059 Filed 8–7–12; 4:15 pm] 

BILLING CODE 4810–AM–P 


sroberts on DSK5SPTVN1PROD with PROPOSALS