Vol. 78 Tuesday, 

No. 127 July 2, 2013 

Part IV 

Bureau of Consumer Financial Protection 

12 CFR Parts 1002, 1024, and 1026 

Amendments to the 2013 Mortgage Rules Under the Equal Credit 

Opportunity Act (Regulation B), Real Estate Settlement Procedures Act 

(Regulation X), and the Truth in Lending Act (Regulation Z); Proposed 

Rule 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
39902 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

1Specifically, on January 10, 2013, the Bureau 

issued Escrow Requirements Under the Truth in 

Lending Act (Regulation Z), 78 FR 4726 (Jan. 30, 

2013) (2013 Escrows Final Rule), High-Cost 

Mortgage and Homeownership Counseling 

Amendments to the Truth in Lending Act 

(Regulation Z) and Homeownership Counseling 

Amendments to the Real Estate Settlement 

Procedures Act (Regulation X), 78 FR 6856 (Jan. 31, 

2013) (2013 HOEPA Final Rule), and Ability to 

Repay and Qualified Mortgage Standards Under the 

Truth in Lending Act (Regulation Z), 78 FR 6407 

(Jan. 30, 2013) (2013 ATR Final Rule). The Bureau 

concurrently issued a proposal to amend the 2013 

ATR Final Rule, which was finalized on May 29, 

2013. See 78 FR 6621 (Jan. 10, 2013) and 78 FR 

35430 (June 12, 2013). On January 17, 2013, the 

Bureau issued the Real Estate Settlement 

Procedures Act (Regulation X) and Truth in 

Lending Act (Regulation Z) Mortgage Servicing 

Final Rules, 78 FR 10901 (Regulation Z) (Feb. 14, 

2013) and 78 FR 10695 (Regulation X) (Feb. 14, 

2013) (2013 Mortgage Servicing Final Rules). On 

January 18, 2013, the Bureau issued the Disclosure 

and Delivery Requirements for Copies of Appraisals 

and Other Written Valuations Under the Equal 

Credit Opportunity Act (Regulation B), 78 FR 7215 

(Jan. 31, 2013) (2013 ECOA Final Rule) and, jointly 

with other agencies, issued Appraisals for HigherPriced Mortgage Loans (Regulation Z), 78 FR 10367 

(Feb. 13, 2013). On January 20, 2013, the Bureau 

issued the Loan Originator Compensation 

Requirements under the Truth in Lending Act 

(Regulation Z), 78 FR 11279 (Feb. 15, 2013) (2013 

Loan Originator Compensation Final Rule). 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Parts 1002, 1024, and 1026 

[Docket No. CFPB–2013–0018] 

RIN 3170–AA37 

Amendments to the 2013 Mortgage 

Rules Under the Equal Credit 

Opportunity Act (Regulation B), Real 

Estate Settlement Procedures Act 

(Regulation X), and the Truth in 

Lending Act (Regulation Z) 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Proposed rule with request for 

public comment. 

SUMMARY: This rule proposes 

amendments to certain mortgage rules 

issued by the Bureau of Consumer 

Financial Protection (Bureau) in January 

2013. These proposed amendments 

focus primarily on clarifying, revising, 

or amending provisions on loss 

mitigation procedures under Regulation 

X’s servicing provisions, amounts 

counted as loan originator 

compensation to retailers of 

manufactured homes and their 

employees for purposes of applying 

points and fees thresholds under the 

Home Ownership and Equity Protection 

Act and the qualified mortgage rules in 

Regulation Z, exemptions available to 

creditors that operate predominantly in 

‘‘rural or underserved’’ areas for various 

purposes under the mortgage 

regulations, application of the loan 

originator compensation rules to bank 

tellers and similar staff, and the 

prohibition on creditor-financed credit 

insurance. The Bureau also is proposing 

to adjust the effective dates for certain 

provisions of the loan originator 

compensation rules. In addition, the 

Bureau is proposing technical and 

wording changes for clarification 

purposes to Regulations B, X, and Z. 

DATES: Comments must be received on 

or before July 22, 2013. 

ADDRESSES: You may submit comments, 

identified by Docket No. CFPB–2013– 

0018 or RIN 3170–AA37, by any of the 

following methods: 

• Electronic: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail/Hand Delivery/Courier: 

Monica Jackson, Office of the Executive 

Secretary, Consumer Financial 

Protection Bureau, 1700 G Street NW., 

Washington, DC 20552. 

Instructions: All submissions should 

include the agency name and docket 

number or Regulatory Information 

Number (RIN) for this rulemaking. 

Because paper mail in the Washington, 

DC area and at the Bureau is subject to 

delay, commenters are encouraged to 

submit comments electronically. In 

general, all comments received will be 

posted without change to 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 

generally will not be edited to remove 

any identifying or contact information. 

FOR FURTHER INFORMATION CONTACT: 

Whitney Patross, Attorney; Richard 

Arculin, Michael Silver, and Daniel 

Brown, Counsels; Marta Tanenhaus, 

Mark Morelli, Senior Counsels and Paul 

Ceja, Senior Counsel and Special 

Advisor, Office of Regulations, at (202) 

435–7700. 

SUPPLEMENTARY INFORMATION: 

I. Summary of Proposed Rule 

In January 2013, the Bureau issued 

several final rules concerning mortgage 

markets in the United States (2013 Title 

XIV Final Rules), pursuant to the DoddFrank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act), Public 

Law 111–203, 124 Stat. 1376 (2010).1

This document proposes several 

amendments to the provisions adopted 

by the 2013 Title XIV Final Rules to 

clarify or revise regulatory provisions 

and official interpretations primarily 

relating to the 2013 Mortgage Servicing 

Final Rules and the 2013 Loan 

Originator Compensation Final Rule, as 

described further below. This document 

also proposes modifications to the 

effective dates for provisions adopted by 

the 2013 Loan Originator Compensation 

Final Rule, and certain technical 

corrections and minor refinements to 

Regulations B, X, and Z. 

Specifically, the Bureau is proposing 

several modifications to the Regulation 

X loss mitigation provisions adopted by 

the 2013 Mortgage Servicing Final 

Rules, in § 1024.41. Two of the revisions 

concern the requirement in 

§ 1024.41(b)(2)(i) that servicers review a 

borrower’s loss mitigation application 

within five days and provide a notice to 

the borrower acknowledging receipt and 

informing the borrower whether the 

application is complete or incomplete. If 

the servicer does not deem the 

application complete, the servicer’s 

notice must also list the missing items 

and direct the borrower to provide the 

information by the earliest remaining 

date of four possible timeframes. The 

proposed changes would provide 

servicers more flexibility with regard to 

setting and describing the date by which 

borrowers should supply missing 

information and would set forth 

requirements and procedures for a 

servicer to follow in the event that an 

application is later found by the servicer 

to be missing information or 

documentation necessary to the 

evaluation process. Another proposed 

modification would provide servicers 

more flexibility in providing short-term 

payment forbearance plans based on an 

evaluation of an incomplete loss 

mitigation application. Other 

clarifications and revisions would 

address the content of notices required 

under § 1024.41(c)(1)(ii) and (d), which 

inform borrowers of the outcomes of 

their evaluation for loss mitigation and 

any appeal filed by the borrower. In 

addition, the proposed amendments 

would address the appropriate timelines 

to apply where a foreclosure sale has 

not been scheduled at the time the 

borrower submits a loss mitigation 

application or when a foreclosure sale is 

rescheduled, what actions are permitted 

while the general ban on proceeding to 

foreclosure before a borrower is 120 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 39903 

2 78 FR 35430 (May 29, 2013) 

3 78 FR 32547 (May 31, 2013). 

4Sections 1011 and 1021 of the Dodd-Frank Act, 

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

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

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

Protection Act is substantially codified at 12 U.S.C. 

5481–5603. Section 1029 of the Dodd-Frank Act 

excludes from this transfer of authority, subject to 

certain exceptions, any rulemaking authority over a 

motor vehicle dealer that is predominantly engaged 

in the sale and servicing of motor vehicles, the 

leasing and servicing of motor vehicles, or both. 12 

U.S.C. 5519. 

5 Dodd-Frank Act section 1400(c), 15 U.S.C. 1601 

note. 

days delinquent is in effect, and the 

application of the 120-day prohibition 

to foreclosures for certain reasons other 

than nonpayment. 

Second, the Bureau is proposing 

clarifications and revisions to the 

definition of points and fees for 

purposes of the qualified mortgage 

points and fees cap and the high-cost 

mortgage points and fees threshold, as 

adopted in the 2013 ATR Final Rule and 

the 2013 HOEPA Final Rule, 

respectively. In particular, the Bureau is 

proposing to add commentary to 

§ 1026.32(b)(1)(ii) to clarify for retailers 

of manufactured homes and their 

employees what compensation must be 

counted as loan originator 

compensation and thus included in the 

points and fees thresholds. 

Third, the Bureau is proposing to 

revise two exceptions available under 

the 2013 Title XIV Final Rules to small 

creditors operating in predominantly 

‘‘rural’’ or ‘‘underserved’’ areas while 

the Bureau re-examines the underlying 

definitions of ‘‘rural’’ or ‘‘underserved’’ 

over the next two years, as it recently 

announced it would do in Ability-toRepay and Qualified Mortgage 

Standards Under the Truth in Lending 

Act (Regulation Z) (May 2013 ATR Final 

Rule).2 First, the Bureau is proposing to 

extend an exception to the general 

prohibition on balloon features for highcost mortgages under 

§ 1026.32(d)(1)(ii)(C) to allow all small 

creditors, regardless of whether they 

operate predominantly in ‘‘rural’’ or 

‘‘underserved’’ areas, to continue 

originating balloon high-cost mortgages 

if the loans meet the requirements for 

qualified mortgages under 

§§ 1026.43(e)(6) or 1026.43(f). In 

addition, the Bureau is proposing to 

amend an exemption from the 

requirement to establish escrow 

accounts for higher-priced mortgage 

loans under the § 1026.35(b)(2)(iii)(A) 

for small creditors that extend more 

than 50 percent of their total covered 

transactions secured by a first lien in 

‘‘rural’’ or ‘‘underserved’’ counties 

during the preceding calendar year. To 

prevent creditors that qualified for the 

exemption in 2013 from losing 

eligibility in 2014 or 2015 because of 

changes in which counties are 

considered rural while the Bureau is reevaluating the underlying definition of 

‘‘rural,’’ the Bureau is proposing to 

amend this provision to allow creditors 

to qualify for the exemption if they 

extended more than 50 percent of their 

total covered transactions in rural or 

underserved counties in any of the 

previous three calendar years (assuming 

the other criteria for eligibility are also 

met). 

Fourth, the Bureau is proposing 

revisions, as well as general technical 

and wording changes to various 

provisions of the 2013 Loan Originator 

Compensation Final Rule in § 1026.36. 

These include revising the definition of 

‘‘loan originator’’ in the regulatory text 

and commentary, such as provisions 

addressing when employees (or 

contractors or agents) of a creditor or 

loan originator in certain administrative 

or clerical roles (e.g., tellers or greeters) 

may become ‘‘loan originators’’ and thus 

subject to the rule, upon providing 

contact information or credit 

applications for loan originators or 

creditors to consumers. It also proposes 

a number of clarifications to the 

commentary on prohibited payments to 

loan originators. 

Fifth, the Bureau is proposing to 

clarify and revise two aspects of the 

rules implementing the Dodd-Frank Act 

prohibition on creditors financing credit 

insurance premiums in connection with 

certain consumer credit transactions 

secured by a dwelling. The Bureau is 

proposing to add new § 1026.36(i)(2)(ii) 

to clarify what constitutes financing of 

such premiums by a creditor. The 

Bureau also is proposing to add new 

§ 1026.36(i)(2)(iii) to clarify when credit 

insurance premiums are considered to 

be calculated and paid on a monthly 

basis, for purposes of the statutory 

exclusion from the prohibition for 

certain credit insurance premium 

calculation and payment arrangements. 

Sixth, the Bureau is proposing to 

make certain provisions under the 2013 

Loan Originator Compensation Final 

Rule take effect on January 1, 2014, 

rather than January 10, 2014, as 

originally provided. The affected 

provisions would be the amendments to 

or additions of (as applicable) 

§ 1026.25(c)(2) (record retention), 

§ 1026.36(a) (definitions), § 1026.36(b) 

(scope), § 1026.36(d) (compensation), 

§ 1026.36(e) (anti-steering), § 1026.36(f) 

(qualifications), and § 1026.36(j) 

(compliance policies and procedures for 

depository institutions). The Bureau 

believes that this change would 

facilitate compliance because these 

provisions largely focus on 

compensation plan structures, 

registration and licensing, and hiring 

and training requirements that are often 

structured on an annual basis and 

typically do not vary from transaction to 

transaction. The Bureau is also seeking 

comment on whether to adjust the date 

for implementation of the ban on 

financing credit insurance under 

§ 1026.36(i), which the Bureau 

temporarily delayed and extended to 

January 10, 2014, to provide additional 

guidance on the issues discussed above. 

See Loan Originator Compensation 

Requirements under the Truth in 

Lending Act (Regulation Z); Prohibition 

on Financing Credit Insurance 

Premiums; Delay of Effective Date (2013 

Effective Date Final Rule).3

In addition to the proposed 

clarifications and amendments to 

Regulations X and Z discussed above, 

the Bureau is proposing technical 

corrections and minor clarifications to 

wording throughout Regulations B, X, 

and Z that are generally not substantive 

in nature. 

II. Background 

A. Title XIV Rulemakings Under the 

Dodd-Frank Act 

In response to an unprecedented cycle 

of expansion and contraction in the 

mortgage market that sparked the most 

severe U.S. recession since the Great 

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

on July 21, 2010. Pub. L. 111–203, 124 

Stat. 1376 (2010). In the Dodd-Frank 

Act, Congress established the Bureau 

and, under sections 1061 and 1100A, 

generally consolidated the rulemaking 

authority for Federal consumer financial 

laws, including the Equal Credit 

Opportunity Act (ECOA), Truth in 

Lending Act (TILA), and Real Estate 

Settlement Procedures Act (RESPA), in 

the Bureau.4 At the same time, Congress 

significantly amended the statutory 

requirements governing mortgage 

practices with the intent to restrict the 

practices that contributed to and 

exacerbated the crisis. Under the statute, 

most of these new requirements would 

have taken effect automatically on 

January 21, 2013, if the Bureau had not 

issued implementing regulations by that 

date.5 To avoid uncertainty and 

potential disruption in the national 

mortgage market at a time of economic 

vulnerability, the Bureau issued several 

final rules in a span of less than two 

weeks in January 2013 to implement 

these new statutory provisions and 

provide for an orderly transition. 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
39904 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

6 78 FR 10367. 

7 78 FR 6622; 78 FR 35430. 

8Consumer Financial Protection Bureau Lays Out 

Implementation Plan for New Mortgage Rules. Press 

Release. Feb. 13, 2013. 

9 12 U.S.C. 5581(a)(1). 

10Public Law 111–203, 124 Stat. 1376, section 

1061(b)(7); 12 U.S.C. 5581(b)(7). 

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

5481(14) (defining ‘‘Federal consumer financial 

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

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

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

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

include TILA), Dodd-Frank section 1400(b), 15 

U.S.C. 1601 note (defining ‘‘enumerated consumer 

laws’’ to include certain subtitles and provisions of 

Title XIV). 

On January 10, 2013, the Bureau 

issued the 2013 ATR Final Rule, the 

2013 Escrows Final Rule, and the 2013 

HOEPA Final Rule. On January 17, 

2013, the Bureau issued the 2013 

Mortgage Servicing Final Rules. On 

January 18, 2013, the Bureau issued 

Appraisals for Higher-Priced Mortgage 

Loans (Regulation Z) 6 (issued jointly 

with other agencies) and the 2013 ECOA 

Final Rule. On January 20, 2013, the 

Bureau issued the 2013 Loan Originator 

Compensation Final Rule. Most of these 

rules will become effective on January 

10, 2014. 

Concurrent with the 2013 ATR Final 

Rule, on January 10, 2013, the Bureau 

issued Proposed Amendments to the 

Ability to Repay Standards Under the 

Truth in Lending Act (Regulation Z) 

(2013 ATR Concurrent Proposal), which 

the Bureau finalized on May 29, 2013 

(May 2013 ATR Final Rule).7

B. Implementation Initiative for New 

Mortgage Rules 

On February 13, 2013, the Bureau 

announced an initiative to support 

implementation of its new mortgage 

rules (Implementation Plan),8 under 

which the Bureau would work with the 

mortgage industry and other 

stakeholders to ensure that the new 

rules can be implemented accurately 

and expeditiously. The Implementation 

Plan includes: (1) Coordination with 

other agencies, including to develop 

consistent, updated examination 

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

publication of additional corrections 

and clarifications of the new rules, as 

needed; (4) publication of readiness 

guides for the new rules; and (5) 

education of consumers on the new 

rules. 

This proposal concerns additional 

clarifications and revisions to the new 

rules. The purpose of these updates is 

to address important questions raised by 

industry, consumer groups, or other 

agencies. Priority for this set of updates 

has been given to issues that are 

important to a large number of 

stakeholders and critically affect loan 

originators’ and mortgage servicers’ 

implementation decisions. Additional 

updates will be issued as appropriate. 

III. Legal Authority 

The Bureau is issuing this proposed 

rule pursuant to its authority under 

ECOA, TILA, RESPA, and the DoddFrank Act. Section 1061 of the DoddFrank Act transferred to the Bureau the 

‘‘consumer financial protection 

functions’’ previously vested in certain 

other Federal agencies, including the 

Federal Reserve Board and the 

Department of Housing and Urban 

Development. 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.’’ 9 Section 1061 of the DoddFrank Act also transferred to the Bureau 

all of HUD’s consumer protections 

functions relating to RESPA.10 Title X of 

the Dodd-Frank Act, including section 

1061 of the Dodd-Frank Act, along with 

ECOA, TILA, RESPA, and certain 

subtitles and provisions of title XIV of 

the Dodd-Frank Act, are Federal 

consumer financial laws.11

A. ECOA 

Section 703(a) of ECOA authorizes the 

Bureau to prescribe regulations to carry 

out the purposes of ECOA. Section 

703(a) further states that such 

regulations may contain—but are not 

limited to—such classifications, 

differentiation, or other provision, and 

may provide for such adjustments and 

exceptions for any class of transactions 

as, in the judgment of the Bureau, are 

necessary or proper to effectuate the 

purposes of ECOA, to prevent 

circumvention or evasion thereof, or to 

facilitate or substantiate compliance. 15 

U.S.C. 1691b(a). 

B. RESPA 

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

2617(a), authorizes the Bureau to 

prescribe such rules and regulations, to 

make such interpretations, and to grant 

such reasonable exemptions for classes 

of transactions, as may be necessary to 

achieve the purposes of RESPA, which 

includes its consumer protection 

purposes. In addition, section 6(j)(3) of 

RESPA, 12 U.S.C. 2605(j)(3), authorizes 

the Bureau to establish any 

requirements necessary to carry out 

section 6 of RESPA, and section 

6(k)(1)(E) of RESPA, 12 U.S.C. 

2605(k)(1)(E), authorizes the Bureau to 

prescribe regulations that are 

appropriate to carry out RESPA’s 

consumer protection purposes. As 

identified in the 2013 RESPA Servicing 

Final Rule, the consumer protection 

purposes of RESPA include responding 

to borrower requests and complaints in 

a timely manner, maintaining and 

providing accurate information, helping 

borrowers avoid unwarranted or 

unnecessary costs and fees, and 

facilitating review for foreclosure 

avoidance options. 

C. TILA 

Section 105(a) of TILA, 15 U.S.C. 

1604(a), authorizes the Bureau to 

prescribe regulations to carry out the 

purposes of TILA. Under section 105(a), 

such regulations may contain such 

additional requirements, classifications, 

differentiations, or other provisions, and 

may provide for such adjustments and 

exceptions for all or any class of 

transactions, as in the judgment of the 

Bureau are necessary or proper to 

effectuate the purposes of TILA, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance 

therewith. A purpose of TILA is ‘‘to 

assure a meaningful disclosure of credit 

terms so that the consumer will be able 

to compare more readily the various 

credit terms available to him and avoid 

the uninformed use of credit.’’ TILA 

section 102(a), 15 U.S.C. 1601(a). In 

particular, it is a purpose of TILA 

section 129C, as amended by the DoddFrank Act, to assure that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay the loans and that 

are understandable and not unfair, 

deceptive, and abusive. Section 105(f) of 

TILA, 15 U.S.C. 1604(f), authorizes the 

Bureau to exempt from all or part of 

TILA any class of transactions if the 

Bureau determines that TILA coverage 

does not provide a meaningful benefit to 

consumers in the form of useful 

information or protection. Under TILA 

section 103(bb)(4), the Bureau may 

adjust the definition of points and fees 

for purposes of that threshold to include 

such charges that the Bureau determines 

to be appropriate. 

TILA section 129C(b)(3)(B)(i) provides 

the Bureau with authority to prescribe 

regulations that revise, add to, or 

subtract from the criteria that define a 

qualified mortgage upon a finding that 

such regulations are necessary or proper 

to ensure that responsible, affordable 

mortgage credit remains available to 

consumers in a manner consistent with 

the purposes of the ability-to-repay 

requirements; or are necessary and 

appropriate to effectuate the purposes of 


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12 Dodd-Frank Act section 1400(c)(3), 15 U.S.C. 

1601 note. 

13 Dodd-Frank Act section 1400(c)(1)(B), 15 

U.S.C. 1601 note. 

the ability-to-repay requirements, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance with 

TILA sections 129B and 129C. 15 U.S.C. 

1639c(b)(3)(B)(i). In addition, TILA 

section 129C(b)(3)(A) requires the 

Bureau to prescribe regulations to carry 

out the purposes of the qualified 

mortgage provisions, such as to ensure 

that responsible and affordable mortgage 

credit remains available to consumers in 

a manner consistent with the purposes 

of TILA section 129C. 15 U.S.C. 

1639c(b)(3)(A). 

D. The Dodd-Frank Act 

Section 1022(b)(1) of the Dodd-Frank 

Act authorizes the Bureau to prescribe 

rules ‘‘as may be necessary or 

appropriate to enable the Bureau to 

administer and carry out the purposes 

and objectives of the Federal consumer 

financial laws, and to prevent evasions 

thereof.’’ 12 U.S.C. 5512(b)(1). Title X of 

the Dodd-Frank Act is a Federal 

consumer financial law. Accordingly, 

the Bureau is exercising its authority 

under the Dodd-Frank Act section 

1022(b) to prescribe rules that carry out 

the purposes and objectives of ECOA, 

RESPA, TILA, title X, and the 

enumerated subtitles and provisions of 

title XIV of the Dodd-Frank Act, and 

prevent evasion of those laws. 

Section 1032(a) of the Dodd-Frank Act 

provides that the Bureau ‘‘may prescribe 

rules to ensure that the features of any 

consumer financial product or service, 

both initially and over the term of the 

product or service, are fully, accurately, 

and effectively disclosed to consumers 

in a manner that permits consumers to 

understand the costs, benefits, and risks 

associated with the product or service, 

in light of the facts and circumstances.’’ 

12 U.S.C. 5532(a). The authority granted 

to the Bureau in Dodd-Frank Act section 

1032(a) is broad, and empowers the 

Bureau to prescribe rules regarding the 

disclosure of the ‘‘features’’ of consumer 

financial products and services 

generally. Accordingly, the Bureau may 

prescribe rules containing disclosure 

requirements even if other Federal 

consumer financial laws do not 

specifically require disclosure of such 

features. 

Dodd-Frank Act section 1032(c) 

provides that, in prescribing rules 

pursuant to Dodd-Frank Act section 

1032, the Bureau ‘‘shall consider 

available evidence about consumer 

awareness, understanding of, and 

responses to disclosures or 

communications about the risks, costs, 

and benefits of consumer financial 

products or services.’’ 12 U.S.C. 5532(c). 

Accordingly, in proposing provisions 

authorized under Dodd-Frank Act 

section 1032(a), the Bureau has 

considered available studies, reports, 

and other evidence about consumer 

awareness, understanding of, and 

responses to disclosures or 

communications about the risks, costs, 

and benefits of consumer financial 

products or services. 

The Bureau is proposing to amend 

rules finalized in January 2013 that 

implement certain Dodd-Frank Act 

provisions. In particular, the Bureau is 

proposing to amend regulatory 

provisions adopted by the 2013 ECOA 

Final Rule, the 2013 Mortgage Servicing 

Final Rules, the 2013 HOEPA Final 

Rule, the 2013 Escrows Final Rule, the 

2013 Loan Originator Compensation 

Final Rule, and the 2013 ATR Final 

Rule. 

IV. Proposed Effective Dates 

A. For Provisions Other Than Those 

Related to the 2013 Loan Originator 

Compensation Final Rule or the 2013 

Escrows Final Rule 

In enacting the Dodd-Frank Act, 

Congress significantly amended the 

statutory requirements governing a 

number of mortgage practices. Under 

the Dodd-Frank Act, most of these new 

requirements would have taken effect 

automatically on January 21, 2013, if the 

Bureau had not issued implementing 

regulations by that date.12 Where the 

Bureau was required to prescribe 

implementing regulations, the DoddFrank Act further provided that those 

regulations must take effect not later 

than 12 months after the date of the 

regulations’ issuance in final form.13

The Bureau issued the 2013 Title XIV 

Final Rules in January 2013 to 

implement these new statutory 

provisions and provide for an orderly 

transition. To allow the mortgage 

industry sufficient time to comply with 

the new rules, the Bureau established 

January 10, 2014—one year after 

issuance of the earliest of the 2013 Title 

XIV Final Rules—as the baseline 

effective date for nearly all of the new 

requirements. In the preamble to certain 

of the various 2013 Title XIV Final 

Rules, the Bureau further specified that 

the new regulations would apply to 

transactions for which applications 

were received on or after January 10, 

2014. 

Except for the amendments regarding 

the 2013 Loan Originator Compensation 

Final Rule and the 2013 Escrows Final 

Rule discussed below, the Bureau 

proposes an effective date of January 10, 

2014 for the proposals in this document. 

The Bureau believes that having a 

consistent effective date across most of 

the 2013 Title XIV Final Rules will 

facilitate compliance. The Bureau 

requests public comment on this 

proposed effective date, including on 

any suggested alternatives. 

B. For Provisions Related to the 2013 

Escrows Final Rule 

While the Bureau established January 

10, 2014 as the baseline effective date 

for most of the 2013 Title XIV Final 

Rules, the Bureau identified certain 

provisions that it believed did not 

present significant implementation 

burdens for industry, including 

amendments to § 1026.35 adopted by 

the 2013 Escrows Final Rule. For these 

provisions, the Bureau set an earlier 

effective date of June 1, 2013. 

As discussed in the section-by-section 

analysis below, the Bureau is now 

proposing to amend one such provision, 

§ 1026.35(b)(2)(iii)(A), which provides 

an exemption from the higher-priced 

mortgage loan escrow requirement to 

creditors that extend more than 50 

percent of their total covered 

transactions secured by a first lien in 

‘‘rural’’ or ‘‘underserved’’ counties 

during the preceding calendar year and 

also meet other small creditor criteria, 

and do not otherwise escrow loans 

serviced by themselves or an affiliate. In 

light of recent changes to which 

counties meet the definition of ‘‘rural,’’ 

the Bureau is proposing to amend this 

provision to prevent creditors that 

qualified for the exemption in 2013 

from losing eligibility in 2014 or 2015 

because of these changes. The Bureau is 

proposing to amend this provision to 

allow creditors to qualify for the 

exemption if they qualified in any of the 

previous three calendar years (assuming 

the other criteria for eligibility are also 

met). In addition, the Bureau is 

proposing to amend 

§ 1026.35(b)(2)(iii)(D)(1) to prevent 

creditors that were previously ineligible 

for the exemption, but may now qualify 

in light of the proposed changes, from 

losing eligibility because they had 

established escrow accounts for firstlien higher-priced mortgage loans (for 

which applications were received after 

June 1, 2013), as required when the final 

rule took effect and prior to the 

proposed amendments taking effect. 

Because the § 1026.35(b)(2)(iii) 

exemption applies based on a calendar 

year, the Bureau believes it is 

appropriate to set a January 1, 2014 

effective date for these provisions. The 

Bureau notes that a January 1, 2014 

effective date is more beneficial to 

industry, because the amendment 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
39906 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

14After interpretive issues were raised concerning 

the credit insurance provision as discussed further 

below, the Bureau temporarily delayed and 

extended the effective date for § 1026.36(i) in the 

2013 Effective Date Final Rule until January 10, 

2014. 78 FR 32547 (May 31, 2013). 

would only expand eligibility for the 

exemption—thus an effective date of 

January 1, 2014, as opposed to January 

10, 2014, would mean that creditors are 

able to take advantage of this expanded 

exemption earlier. The Bureau thus 

proposes that the amendments to 

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

take effect for applications received on 

or after January 1, 2014. The Bureau 

invites comment on this approach, and 

specifically whether an effective date for 

transactions where applications were 

received on or after January 1, 2014 is 

appropriate, in light of the proposed 

changes to the calendar year exemption 

under § 1026.35(b)(2)(iii). 

C. For Provisions Related to the 2013 

Loan Originator Compensation Final 

Rule 

The proposed effective date for 

certain provisions in this proposal 

related to the 2013 Loan Originator 

Compensation Final Rule is January 1, 

2014 for the reasons discussed below. 

V. Proposal To Change the Effective 

Date of the 2013 Loan Originator 

Compensation Rule 

As described above, the Bureau 

established January 10, 2014 as the 

baseline effective date for nearly all of 

the provisions in the 2013 Title XIV 

Final Rules, including most provisions 

of the 2013 Loan Originator 

Compensation Final Rule. The Bureau 

believed that having a consistent 

effective date across nearly all of the 

2013 Title XIV Final Rules would 

facilitate compliance. However, the 

Bureau identified a few provisions that 

it believed did not present significant 

implementation burdens for industry, 

including § 1026.36(h) on mandatory 

arbitration clauses and waivers of 

certain consumer rights and § 1026.36(i) 

on financing credit insurance, as 

adopted by the 2013 Loan Originator 

Compensation Final Rule. For these 

provisions, the Bureau set an earlier 

effective date of June 1, 2013.14

Since issuing the 2013 Loan 

Originator Compensation Final Rule in 

January, the Bureau has received a 

number of questions about transition 

issues, particularly with regard to 

application of provisions under 

§ 1026.36(d) that generally prohibit 

basing loan originator compensation on 

transaction terms but permit creditors to 

award non-deferred profits-based 

compensation determined with 

reference to profits from mortgagerelated business so long as the 

compensation does not exceed 10 

percent of the loan originators’ total 

compensation or the loan originator 

does not engage in more than a specified 

number of transactions within a 12- 

month period. For instance, the Bureau 

has received inquiries about when the 

2013 Loan Originator Compensation 

Final Rule permits creditors and loan 

originator organizations to begin taking 

into account transactions for purposes 

of paying compensation under a nondeferred profits-based compensation 

plan pursuant to 

§ 1026.36(d)(1)(iv)(B)(1) (i.e., the 10- 

percent total compensation limit, or the 

10-percent limit). The Bureau also 

believes that, given the current effective 

date, some creditors and loan originator 

organizations intending to pay 

compensation under a non-deferred 

profits-based compensation plan 

pursuant to § 1026.36(d)(1)(iv)(B)(1) 

might believe that they must undertake 

a separate accounting for the period 

from January 1 through January 9, 2014, 

given that the effective date is January 

10, 2014, and is tied to when 

applications are received. 

While the profits-based compensation 

provisions present relatively 

complicated transition issues, the 

Bureau is also conscious of the fact that 

most other provisions in the 2013 Loan 

Originator Compensation Final Rule are 

simpler to implement because they 

largely recodify and clarify existing 

requirements that were previously 

adopted by the Federal Reserve Board in 

2010 with regard to loan originator 

compensation, and by various agencies 

under the Secure and Fair Enforcement 

for Mortgage Licensing Act of 2008, 12 

U.S.C. 5106–5116 (SAFE Act), with 

regard to loan originator qualification 

requirements. The provisions are also 

focused on compensation plan 

structures, registration and licensing, 

and hiring and training requirements 

that are often structured on an annual 

basis and typically do not vary from 

transaction to transaction. 

For all of these reasons, the Bureau 

proposes moving the general effective 

date for most provisions adopted by the 

2013 Loan Originator Compensation 

Final Rule to January 1, 2014. Although 

that would shorten the implementation 

period by nine days, the Bureau believes 

that the change would actually facilitate 

compliance and reduce implementation 

burden by providing a cleaner transition 

period that more closely aligns with 

changes to employers’ annual 

compensation structures and 

registration, licensing, and training 

requirements. In addition, because 

elements of the 2013 Loan Originator 

Compensation Final Rule concerning 

retention of records, definitions, scope, 

and implementing procedures affect 

multiple provisions, the Bureau is 

proposing to make the change with 

regard to the bulk of the 2013 Loan 

Originator Compensation Final Rule as 

described further below, rather than 

attempting to treat individual provisions 

in isolation. Finally, the Bureau is also 

proposing changes, discussed below, to 

the effective date for provisions on 

financing of credit insurance under 

§ 1026.36(i), in connection with 

proposing further clarifications and 

guidance on the Dodd-Frank Act 

requirements related to that provision. 

These proposed clarifications and 

amendments to the effective date 

require only minimal revisions to the 

rule text and commentary. They 

primarily would be reflected in the 

Dates caption and discussion of 

effective dates in the Supplementary 

Information of a rule finalizing this 

proposal. As amended by the DoddFrank Act, TILA section 105(a), 15 

U.S.C. 1604(a), directs the Bureau to 

prescribe regulations to carry out the 

purposes of TILA, and provides that 

such regulations may contain additional 

requirements, classifications, 

differentiations, or other provisions, and 

may provide for such adjustments and 

exceptions for all or any class of 

transactions, that the Bureau judges are 

necessary or proper to effectuate the 

purposes of TILA, to prevent 

circumvention or evasion thereof, or to 

facilitate compliance. Further, under 

Dodd-Frank Act section 1022(b)(1), 15 

U.S.C. 5512(b)(1), the Bureau has 

general authority to prescribe rules as 

may be necessary or appropriate to 

enable the Bureau to administer and 

carry out the purposes and objectives of 

the Federal consumer financial laws, 

and to prevent evasions thereof. The 

Bureau is proposing to change the 

effective date of the 2013 Loan 

Originator Compensation Final Rule 

with respect to those provisions 

described above pursuant to its TILA 

section 105(a) and Dodd-Frank Act 

section 1022(b)(1) authority. 

The Bureau believes these changes 

would facilitate compliance and help 

ensure that the 2013 Loan Originator 

Compensation Final Rule does not have 

adverse unintended consequences. The 

Bureau requests public comment on 

these proposed effective dates, 

including on any suggested alternatives. 

1. Effective Date for Amendments to 

§ 1026.36(d) 

The Bureau is proposing three 

specific changes to the effective date for 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
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15The Bureau recognizes that, under this 

proposed revision, creditors and loan originator 

organizations would still have to account separately 

for compensation under a non-deferred profitsbased compensation plan that is paid in 2014 but 

is earned in 2013 (e.g., a year-end bonus paid in 

January 2014 based on profits of a creditor’s 

mortgage-related business during calendar year 

2013). This approach is consistent with how 

compensation under a non-deferred profits-based 

compensation plan is treated generally for purposes 

of the 10-percent limit calculation under 

§ 1026.36(d)(1)(iv)(B)(1) (i.e., non-deferred profitsbased compensation that is earned during one time 

period but is actually paid during a second time 

period is excluded from the total compensation 

amount for the second time period, and may be 

included in total compensation for the first time 

period). See comment 36(d)(1)–3.v.C, as proposed 

to be revised. 

16The Bureau explained in the Supplementary 

Information to the 2013 Loan Originator 

Compensation Final Rule that it issued CFPB 

Bulletin 2012–2 (the Bulletin) to address questions 

regarding the application of § 1026.36(d)(1) to 

‘‘Qualified Plans’’ (as defined in the Bulletin). The 

Bureau noted in that Supplementary Information 

that until the final rule takes effect, the 

clarifications in CFPB Bulletin 2012–2 remain in 

effect and that the Bureau interprets ‘‘Qualified 

Plan’’ as used in the Bulletin to include the 

designated tax-advantaged plans described in the 

final rule. 

the amendments to § 1026.36(d). First, 

the Bureau is proposing that the 

provisions of the 2013 Loan Originator 

Compensation Final Rule revising 

§ 1026.36(d) would be effective January 

1, 2014, not January 10, 2014. The 

Bureau is concerned that an effective 

date of January 10, 2014, for the 

revisions to § 1026.36(d) may result in 

creditors and loan originator 

organizations believing that they have to 

account separately for the period from 

January 1 through January 9, 2014, 

when applying the new compensation 

restrictions under § 1026.36(d) (for 

example, if a creditor wishes to pay 

individual loan originators through nondeferred profits-based compensation 

plans pursuant to § 1026.36(d)(1)(iv), or 

if a loan originator organization wishes 

to pay to an individual loan originator 

compensation pursuant to 

§ 1026.36(d)(2)(i)(C)). The Bureau 

recognizes that this proposal would 

make certain aspects of the 2013 Loan 

Originator Compensation Final Rule 

effective nine days earlier than 

originally stated, meaning that creditors 

and loan originator organizations would 

have a slightly shorter implementation 

period. On balance, however, the 

Bureau believes this proposed change 

will ease compliance burdens for 

creditors and loan originator 

organizations by eliminating any 

concern about a need for separate 

accountings as described above. As 

noted above, the Bureau is also 

proposing to change the effective date 

for the addition of § 1026.25(c)(2) 

(records retention) from January 10, 

2014, to January 1, 2014. This proposed 

change dovetails with the proposal to 

change the effective date of § 1026.36(d) 

to January 1, 2014, to ensure that 

records on compensation paid between 

January 1 and January 10, 2014, are 

properly maintained. 

Second, the Bureau is proposing that 

the revisions to § 1026.36(d) (other than 

the addition of § 1026.36(d)(1)(iii), as 

discussed below) would apply to 

transactions that are consummated and 

for which the creditor or loan originator 

organization paid compensation on or 

after January 1, 2014. The Bureau 

believes applying the effective date for 

the revisions to § 1026.36(d) based on 

application receipt, rather than based on 

transaction consummation and 

compensation payment, could present 

compliance challenges. This proposed 

change would permit transactions to be 

taken into account for purposes of 

compensating individual loan 

originators under the exceptions set 

forth in § 1026.36(d)(1)(iv) if the 

transactions were consummated and 

compensation was paid to the 

individual loan originator on or after 

January 1, 2014, even if the applications 

for those transactions were received 

prior to January 1, 2014. The Bureau 

believes this clarification, in 

conjunction with the proposed change 

to the effective date for the revisions to 

§ 1026.36(d) described above, will 

reduce compliance burdens on creditors 

and loan originator organizations by 

allowing them to take into account all 

transactions consummated in 2014 (and 

for which compensation is paid to 

individual loan originators in 2014) for 

purposes of paying compensation under 

§ 1026.36(d)(1)(iv) that is earned in 

2014. This proposed revision will also 

allow the consumer-paid compensation 

restrictions and exceptions thereto in 

the revisions to § 1026.36(d)(2) to be 

effective upon the consummation of any 

transaction where such compensation is 

paid in 2014 even if the application for 

that transaction was received in 2013. 

Making this proposed clarification 

would eliminate the concern that 

creditors and loan originator 

organizations would potentially have to 

undertake separate accountings 

depending on when the applications for 

the transactions were received.15

For example, assume a creditor 

utilizes a calendar-year accounting 

method and wishes, pursuant to the 

exception for non-deferred profits-based 

compensation in 

§ 1026.36(d)(1)(iv)(B)(1), to pay a bonus 

to an individual loan originator with 

reference to the profits of the creditor’s 

mortgage-related business during the 

first quarter of calendar year 2014. In 

applying the 10-percent limit under 

§ 1026.36(d)(1)(iv)(B)(1) to determine 

the maximum permissible amount of the 

quarterly bonus, a creditor could have 

interpreted the 2013 Loan Originator 

Compensation Final Rule’s effective 

date provision to mean that it would 

have to account separately for 

transactions that were consummated in 

2014 but where the applications were 

received in 2013 (i.e., by not counting 

them in the calculation of the 10- 

percent limit for the first quarter of 

2014). The Bureau’s proposal would 

alleviate this concern by allowing the 

creditor to calculate the bonus with 

reference to the creditor’s mortgagerelated business profits during the first 

quarter of 2014 without having to 

inquire into the particular details about 

the transactions on whose terms the 

compensation was based, such as when 

the applications for those transactions 

were received. 

Third, the Bureau is proposing that 

the provisions of § 1026.36(d)(1)(iii), 

which pertain to contributions to or 

benefits under designated taxadvantaged plans for individual loan 

originators, would apply to transactions 

for which the creditor or loan originator 

organization paid compensation on or 

after January 1, 2014, regardless of when 

the transactions were consummated or 

their applications were received. These 

changes regarding the effective date for 

the revisions to § 1026.36(d)(1)(iii) more 

clearly reflect the Bureau’s intent to 

permit payment of compensation related 

to designated tax-advantaged plans 

during both 2013 (as explained in CFPB 

Bulletin 2012–2 clarifying current 

§ 1026.36(d)(1)) 16 and thereafter (under 

the 2013 Loan Originator Compensation 

Final Rule). Without this proposed 

change, the Bureau believes there could 

be uncertainty about whether the 

clarification in the Bulletin, new 

§ 1026.36(d)(1)(iii), or neither would 

apply if a creditor or loan originator 

organization wished to pay 

compensation in 2014 in the form of 

contributions to or benefits under 

designated tax-advantaged plans where 

the compensation was determined based 

on the terms of transactions 

consummated during 2013. 

In addition to the three specific 

changes to the effective date described 

above, the Bureau solicits comment 

generally on whether the proposed 

changes to the effective date for the 

amendments to § 1026.36(d) are 

appropriate or whether other 

approaches should be considered. In 

particular, the Bureau solicits comment 

on whether the amendments to 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
39908 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

17For example, the 2013 Loan Originator 

Compensation Final Rule revised § 1026.36(d)(1)(i) 

and comment 36(d)(1)–2 to clarify how to 

determine whether a factor is a proxy for a term of 

a transaction, and § 1026.36(d)(1)(ii) now contains 

a definition of ‘‘term of a transaction.’’ Thus, there 

is a question as to whether, with respect to 

payments under a non-deferred profits-based 

compensation plan pursuant to 

§ 1026.36(d)(1)(iv)(B)(1), a creditor or loan 

originator organization would have to apply the 

new proxy provisions and definition of a term of 

a transaction retroactively in assessing whether 

compensation based on transactions consummated 

in 2013 can be paid in 2014. 

18For example, § 1026.36(j) requires that 

depository institutions establish written policies 

and procedures reasonably designed to ensure and 

monitor compliance with § 1026.36(d), (e), (f), and 

(g). 

§ 1026.36(d) should take effect on 

January 1, 2014, and apply to all 

payments of compensation made on or 

after that date, regardless of the date of 

consummation of the transactions on 

whose terms the compensation was 

based. The Bureau believes such an 

approach would create a bright line that 

the payment of compensation on or after 

January 1, 2014, would be subject to the 

new rule. However, this approach could 

raise complexity about how the new 

rule would apply to payments under 

non-deferred profits-based 

compensation plans pursuant to 

§ 1026.36(d)(1)(iv)(B)(1) made on or 

after January 1, 2014, where the 

compensation payments are based on 

the terms of transactions consummated 

in 2013, prior to the effect of the new 

rule.17 This approach also could 

incentivize creditors and loan originator 

organizations to structure their 

compensation programs for 2013 to pay 

non-deferred profits-based 

compensation earned during 2013 in 

early 2014, rather than in 2013 when the 

current rule would remain in effect 

(although the Bureau also notes that the 

10-percent limit would set an upper 

limit on such behavior). 

2. Effective Dates for Amendments to or 

Additions of § 1026.36(a), (b), (e), (f), (g), 

and (j) 

Rather than implementing the 

proposed change in effective dates for 

§ 1026.36(d) in isolation, the Bureau is 

also proposing to make the amendments 

to or additions of (as applicable) 

§ 1026.36(a) (definitions), § 1026.36(b) 

(scope), § 1026.36(e) (anti-steering 

provisions), § 1026.36(f) (loan originator 

qualification requirements) and 

§ 1026.36(j) (compliance policies and 

procedures for depository institutions) 

take effect on January 1, 2014. The 

Bureau is proposing not to tie the 

effective date to the receipt of a 

particular loan application, but rather to 

a date certain. Because these provisions 

rely on a common set of definitions and 

in some cases cross reference each 

other,18 the Bureau is proposing to make 

them effective on January 1, 2014, and 

without reference to receipt of 

applications to avoid a potential 

incongruity among the effective dates of 

those substantive provisions and the 

effective dates of the regulatory 

definitions and scope provisions 

supporting those substantive provisions. 

Thus, the Bureau believes this proposed 

revision would facilitate compliance. 

The Bureau is not, however, 

proposing to adjust the effective date for 

§ 1026.36(g), which requires that loan 

originators’ names and identifier 

numbers be provided on certain loan 

documentation, except to clarify and 

confirm that the provision takes effect 

with regard to any application received 

on or after January 10, 2014, by a 

creditor or a loan originator 

organization. Because this provision 

requires modifications to 

documentation for individual loans and 

the systems that generate such 

documentation, the Bureau believes it is 

appropriate to have it take effect with 

the other 2013 Title XIV Final Rules that 

affect individual loan processing. 

3. Effective Date for § 1026.36(i) 

As discussed in the 2013 Effective 

Date Final Rule and below, the Bureau 

initially adopted a June 1, 2013 effective 

date for § 1026.36(i), but later delayed 

the provision’s effective date to January 

10, 2014, while the Bureau considered 

addressing interpretive questions 

concerning the provision’s applicability 

to transactions other than those in 

which a lump-sum premium is added to 

the loan amount at consummation. As 

discussed in the section-by-section 

analysis below, the Bureau is now 

proposing amendments to § 1026.36(i), 

which will not be finalized until the 

Bureau has appropriately considered 

public comments and issued a final 

rule. The Bureau believes that creditors 

will need time to adjust certain credit 

insurance premium billing practices 

once the clarifications are finalized. 

However, the Bureau believes that the 

January 10, 2014 effective date adopted 

in the 2013 Effective Date Final Rule 

will allow sufficient time for 

compliance. This is consistent with the 

generally applicable effective date for 

the 2013 Title XIV Final Rules, 

including for several provisions the 

Bureau is proposing to amend through 

this notice. The Bureau requests 

comment on whether the effective date 

for § 1026.36(i) may be set earlier than 

January 10, 2014, upon finalization of 

any clarifications and amendments, and 

still permit sufficient time for creditors 

to adjust credit insurance premium 

practices as necessary. 

VI. Section-by-Section Analysis 

A. Regulation B 

Section 1002.14 Rules on Providing 

Appraisals and Other Valuations 

14(b) Definitions 

14(b)(3) Valuation 

The Bureau is proposing to amend 

commentary to § 1002.14 to clarify the 

definition of ‘‘valuation’’ as adopted by 

the 2013 ECOA Final Rule. Dodd-Frank 

Act section 1744 amended ECOA by, 

among other things, defining 

‘‘valuation’’ to include any estimate of 

the value of the dwelling developed in 

connection with a creditor’s decisions to 

provide credit. See ECOA section 

701(e)(6). Similarly, the 2013 ECOA 

Final Rule adopted § 1002.14(b)(3), 

which defines ‘‘valuation’’ as any 

estimate of the value of a dwelling 

developed in connection with an 

application for credit. Consistent with 

these provisions, the Bureau intended 

the term ‘‘valuation’’ to refer only to an 

estimate for purposes of the 2013 ECOA 

Final Rule’s newly adopted provisions. 

However, the 2013 ECOA Final Rule 

added two comments that refer to a 

valuation as an appraiser’s estimate or 

opinion of the value of the property: 

Comment 14(b)(3)–1.i, which gives 

examples of ‘‘valuations,’’ as defined by 

§ 1002.14(b)(3); and comment 14(b)(3)– 

3.v, which provides examples of 

documents that discuss or restate a 

valuation of an applicant’s property but 

nevertheless do not constitute 

‘‘valuations’’ under § 1002.14(b)(3). 

The Bureau did not intend by these 

two comments to alter the meaning of 

‘‘valuation’’ to become inconsistent with 

ECOA section 701(e)(6) and 

§ 1002.14(b)(3). Accordingly, the Bureau 

proposes to clarify comments 14(b)(3)– 

1.i and 14(b)(3)–3.v by removing the 

words ‘‘or opinion’’ from their texts. 

B. Regulation X 

General—Technical Corrections 

In addition to the proposed 

clarifications and amendments to 

Regulation X discussed below, the 

Bureau is proposing technical 

corrections and minor wording 

adjustments for the purpose of clarity 

throughout Regulation X that are not 

substantive in nature. The Bureau is 

proposing such technical and wording 

clarifications to regulatory text in 

§§ 1024.30, 1024.39, and 1024.41; and to 

commentary to §§ 1024.17, 1024.33 and 

1024.41. 


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Sections 1024.35 and .36, Error 

Resolution Procedures and Requests for 

Information 

The Bureau is proposing minor 

amendments to the error resolution and 

request for information provisions of 

Regulation X, adopted by the 2013 

Mortgage Servicing Final Rules. The 

error resolution procedures largely 

parallel the information request 

procedures (particularly in the areas in 

which amendments are proposed); thus 

the two sections are discussed together 

below. Section 1024.35 implements 

section 6(k)(1)(C) of RESPA, and 

§ 1024.36 implements section 6(k)(1)(D) 

of RESPA. To the extent the 

requirements under §§ 1024.35 and 

1024.36 are applicable to qualified 

written requests, these provisions also 

implement sections 6(e) and 6(k)(1)(B) 

of RESPA. As discussed in part V (Legal 

Authority), the Bureau proposes these 

amendments pursuant to its authority 

under RESPA sections 6(j), 6(k)(1)(E) 

and 19(a). As explained in more detail 

below, these amendments are necessary 

and appropriate to achieve the 

consumer protection purposes of 

RESPA, including ensuring 

responsiveness to consumer requests 

and complaints and the provision and 

maintenance of accurate and relevant 

information. 

35(c) and 36(b), Contact Information for 

Borrowers To Assert Errors and 

Information Requests 

The Bureau is proposing to amend the 

commentary to § 1024.35(c) and 

§ 1024.36(b) with respect to disclosure 

of the exclusive address (if a servicer 

chooses to establish one) when a 

servicer discloses contact information to 

the borrower for the purpose of 

assistance from the servicer. Section 

1024.35(c) states that a servicer may, by 

written notice provided to a borrower, 

establish an address that a borrower 

must use to submit a notice of error to 

a servicer in accordance with the 

procedures set forth in § 1024.35. 

Comment 35(c)–2 clarifies that, if a 

servicer establishes any such exclusive 

address, the servicer must provide that 

address to the borrower in any 

communication in which the servicer 

provides the borrower with contact 

information for assistance from the 

servicer. Similarly, § 1024.36(b) states 

that a servicer may, by written notice 

provided to a borrower, establish an 

address that a borrower must use to 

submit information requests to a 

servicer in accordance with the 

procedures set forth in § 1024.36. 

Comment 36(b)–2 clarifies that, if a 

servicer establishes any such exclusive 

address, a servicer must provide that 

address to the borrower in any 

communication in which the servicer 

provides the borrower with contact 

information for assistance from the 

servicer. 

The Bureau is concerned that 

comments 35(c)–2 and 36(b)–2 could be 

interpreted more broadly than the 

Bureau had intended. Section 

1024.35(c) and comment 35(c)–2, as 

well as § 1024.36(b) and comment 

36(b)–2, are intended to inform 

borrowers of the correct address for the 

borrower to use for purposes of 

submitting notices of error or 

information requests, so that borrowers 

do not inadvertently send these 

communications to other nondesignated servicer addresses (which 

would not provide the protections 

afforded by §§ 1024.35 and 1024.36, 

respectively). If interpreted literally, the 

existing comments would require the 

servicer to include the designated 

address for notices of error and requests 

for information when any contact 

information for the servicer is given to 

the borrower. However, if the servicer is 

merely including a phone number or 

web address (without a mailing 

address), there is no risk of the borrower 

mailing a notice of error or information 

request to a wrong address. Thus it 

would be unnecessary to mandate that 

the servicer provide the designated 

address every time a phone number or 

web address is given. The Bureau does 

not intend that the servicer be required 

to inform the borrower of the designated 

address in all communications with 

borrowers where any contact 

information whatsoever for assistance 

from the servicer is provided. 

Accordingly, the Bureau is proposing 

to amend comment 35(c)–2 to provide 

that, if a servicer establishes a 

designated error resolution address, the 

servicer must provide that address to a 

borrower in any communication in 

which the servicer provides the 

borrower with an address for assistance 

from the servicer. Similarly, the Bureau 

is proposing to amend comment 36(b)– 

2 to provide that if a servicer establishes 

a designated information request 

address, the servicer must provide that 

address to a borrower in any 

communication in which the servicer 

provides the borrower with an address 

for assistance from the servicer. The 

Bureau requests comment regarding this 

proposed revision to comments 35(c)–2 

and 36(b)–2, and in particular about 

whether these updated comments 

appropriately clarify when the address 

must be disclosed. 

35(g) and 36(f) Requirements Not 

Applicable 

35(g)(1)(iii)(B) and 36(f)(1)(v)(B) 

The Bureau is proposing amendments 

to § 1024.35(g)(1)(iii)(B) (untimely 

notices of error) and § 1024.36(f)(1)(v)(B) 

(untimely requests for information). 

Section 1024.35(g)(1)(iii)(B) provides 

that a notice of error is untimely if it is 

delivered to the servicer more than one 

year after a mortgage loan balance was 

paid in full. Similarly, 

§ 1024.36(f)(1)(v)(B) provides that an 

information request is untimely if it is 

delivered to the servicer more than one 

year after a mortgage loan balance was 

paid in full. 

The Bureau is proposing to replace 

the references to the date a mortgage 

loan balance is paid in full to the date 

the mortgage loan is discharged. This 

change would specifically address 

circumstances in which a loan is 

terminated without being paid in full, 

for example, because it was discharged 

through foreclosure or deed in lieu of 

foreclosure. This change would also 

align more closely with the 

§ 1024.38(c)(1) record retention 

requirements, which require a servicer 

to retain records that document actions 

taken with respect to a borrower’s 

mortgage loan account only until one 

year after the date a mortgage loan is 

discharged. The Bureau requests 

comment regarding these proposed 

changes. 

Section 1024.41 Loss Mitigation 

Procedures 

As discussed in part V (Legal 

Authority), the Bureau proposes 

amendments to § 1024.41 pursuant to its 

authority under sections 6(j)(3), 

6(k)(1)(E), and 19(a) of RESPA. The 

Bureau believes that these proposed 

amendments are necessary to achieve 

the consumer protection purposes of 

RESPA, including to facilitate the 

evaluation of borrowers for foreclosure 

avoidance options. Further, the 

proposed amendments implement, in 

part, a servicer’s obligation to take 

timely action to correct errors relating to 

avoiding foreclosure under section 

6(k)(1)(C) of RESPA by establishing 

servicer duties and procedures that 

must be followed where appropriate to 

avoid errors with respect to foreclosure. 

In addition, the Bureau relies on its 

authority pursuant to section 1022(b) of 

the Dodd-Frank Act to prescribe 

regulations necessary or appropriate to 

carry out the purposes and objectives of 

Federal consumer financial law, 

including the purpose and objectives 

under sections 1021(a) and (b) of the 

Dodd-Frank Act. The Bureau 


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19A ‘‘complete loss mitigation application’’ is 

defined in § 1024.41(b)(1) as ‘‘an application in 

connection with which a servicer has received all 

the information the servicer requires from a 

borrower in evaluating applications for the loss 

mitigation options available to the borrower.’’ 

additionally relies on its authority 

under section 1032(a) of the Dodd-Frank 

Act, which authorizes the Bureau to 

prescribe rules to ensure that the 

features of any consumer financial 

product or service both initially and 

over the terms of the product or service, 

are fully, accurately, and effectively 

disclosed to consumers in a manner that 

permits consumers to understand the 

costs, benefits, and risks associated with 

the product or service, in light of the 

facts and circumstances. 

41(b) Receipt of a Loss Mitigation 

Application 

41(b)(2) Review of Loss Mitigation 

Application Submission 

41(b)(2)(i) Requirements 

The Bureau is proposing to amend the 

commentary to § 1024.41(b)(2)(i) to 

clarify servicers’ obligations with 

respect to providing notices to 

borrowers regarding the review of loss 

mitigation applications. Section 

1024.41(b)(2)(i) requires a servicer that 

receives a loss mitigation application 45 

days or more before a foreclosure sale to 

review and evaluate the application 

promptly and determine, based on that 

review, whether the application is 

complete or incomplete.19 If the 

application is incomplete, the servicer 

must also determine what additional 

documentation and information are 

required to make it complete. The 

servicer then must notify the borrower 

within five days (excluding legal public 

holidays, Saturdays and Sundays) that 

the servicer acknowledges receipt of the 

application, and that the servicer has 

determined that the loss mitigation 

application is either complete or 

incomplete. If an application is 

incomplete, the notice must state the 

additional documents and information 

that the borrower must submit to make 

the loss mitigation application 

complete. In addition, servicers are 

obligated under § 1024.41(b)(1) to 

exercise reasonable diligence in 

obtaining documents and information 

necessary to complete an incomplete 

application, which may require, when 

appropriate, the servicer to contact the 

borrower and request such information 

as illustrated in comment 41(b)(1)–4.i. 

The Bureau believes that additional 

commentary is warranted to address 

situations in which a servicer 

determines additional information from 

the borrower is needed to complete an 

evaluation of a loss mitigation 

application after either (1) the servicer 

has provided notice to the borrower 

informing the borrower that the loss 

mitigation application is complete, or 

(2) the servicer has provided notice to 

the borrower identifying specific 

information or documentation necessary 

to complete the application and the 

borrower has furnished that 

documentation or information. The 

notice required by § 1024.41(b)(2)(i)(B) 

is intended to provide the borrower 

with timely notification that a loss 

mitigation application was received and 

either is considered complete by the 

servicer or is considered incomplete and 

that the borrower is required to take 

further action for the servicer to 

evaluate the loss mitigation application. 

The Bureau has received repeated 

questions concerning circumstances in 

which a borrower submits information 

that appears facially complete based on 

an initial review by the servicer, but the 

servicer, upon further evaluation, 

determines that it does not in fact have 

enough information to evaluate the 

borrower for a loss mitigation option 

pursuant to requirements imposed by an 

investor or guarantor of a mortgage loan. 

The Bureau is very conscious of 

concerns that servicers have prolonged 

loss mitigation processes by incomplete 

and inadequate document reviews that 

lead to repeated requests for 

supplemental information, and designed 

the rule to ensure an adequate up-front 

review. At the same time, the Bureau 

does not believe it is in the best interest 

of borrowers or servicers to create a 

system that leads to borrower 

applications being denied solely 

because they contain inadequate 

information and the servicer believes it 

may not request the additional 

information needed. 

The Bureau is therefore proposing 

three provisions to address these 

concerns. First, the Bureau is proposing 

new comment 41(b)(2)(i)(B)–1 to clarify 

that, notwithstanding that a servicer has 

informed a borrower that an application 

is complete (or notified the borrower of 

specific information necessary to 

complete an incomplete application), a 

servicer must request additional 

information from a borrower if the 

servicer determines, in the course of 

evaluating the loss mitigation 

application submitted by the borrower, 

that additional information is required. 

Second, the Bureau is proposing new 

comment 41(b)(2)(i)(B)–2, to clarify that 

except as provided in 

§ 1024.41(c)(2)(iv), the provisions and 

timelines triggered by a complete loss 

mitigation application in § 1024.41 are 

not triggered by an incomplete 

application. An application is 

considered complete only when a 

servicer has received all the information 

the servicer requires from a borrower in 

evaluating applications for the loss 

mitigation options available to the 

borrower, regardless of whether the 

servicer has sent a § 1024.41(b)(2)(i)(B) 

notification incorrectly informing the 

borrower that the loss mitigation 

application is complete or incorrectly 

informed the borrower of the 

information necessary to complete such 

application. The Bureau notes that the 

proposed clarifications do not allow 

servicers to inform borrowers that 

facially incomplete applications are 

complete or to incorrectly describe the 

information necessary to complete an 

application. Servicers are required 

under § 1024.41(b)(2)(i)(A) to review a 

loss mitigation application to determine 

whether it is complete or incomplete. In 

addition, servicers are subject to the 

§ 1024.38(b)(2)(iv) requirement to have 

policies and procedures reasonably 

designed to achieve the objectives of 

identifying documents and information 

that a borrower is required to submit to 

complete an otherwise incomplete loss 

mitigation application, and servicers are 

obligated under § 1024.41(b)(1) to 

exercise reasonable diligence in 

obtaining documents and information 

necessary to complete an incomplete 

application. 

Third, as described more fully below, 

the Bureau is proposing new 

§ 1024.41(c)(2)(iv) to require that, if a 

servicer creates a reasonable expectation 

that a loss mitigation application is 

complete but later discovers information 

is missing, the servicer must treat the 

application as complete for certain 

purposes until the borrower has been 

given a reasonable opportunity to 

complete the loss mitigation 

application. The Bureau believes the 

proposed rule would mitigate potential 

risks to consumers that could arise 

through a loss mitigation process 

prolonged by incomplete and 

inadequate document reviews and 

repeated requests for supplemental 

information. The Bureau believes these 

new provisions will provide flexibility 

to servicers who make good faith 

mistakes in conducting up-front reviews 

of loss mitigation applications for 

completeness, while ensuring that 

borrowers do not lose the protections 

under the rule due to such mistakes and 

that servicers have incentives to 

conduct rigorous up-front review of loss 

mitigation applications. However, the 

Bureau requests comment regarding 

whether proposed comments 

41(b)(2)(i)(B)–1 and –2, in connection 


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with proposed § 1024.41(c)(2)(iv), 

adequately balance the consumer 

interests in receipt of accurate notices. 

The Bureau also seeks comment 

regarding whether further provisions 

would be warranted to protect 

borrowers’ interests in reducing dual 

tracking and prolonged loss mitigation 

processing, and avoiding application 

denials for lack of adequate information, 

while also providing servicers strong 

incentives to conduct rigorous up-front 

reviews and appropriate flexibility in 

the event of good-faith and clerical 

mistakes in conducting such reviews. 

41(b)(2)(ii) Time Period Disclosure 

The Bureau is proposing to amend the 

§ 1024.41(b)(2)(ii) time period 

disclosure requirement, which requires 

a servicer to provide a date by which a 

borrower should submit any missing 

documents and information necessary to 

make a loss mitigation application 

complete. Section 1024.41(b)(2)(ii) 

requires a servicer to provide in the 

notice required pursuant to 

§ 1024.41(b)(2)(i)(B) the earliest 

remaining of four specific dates set forth 

in § 1024.41(b)(2)(ii). The four dates set 

forth in § 1024.41(b)(2)(ii) are: (1) The 

date by which any document or 

information submitted by a borrower 

will be considered stale or invalid 

pursuant to any requirements applicable 

to any loss mitigation option available 

to the borrower; (2) the date that is the 

120th day of the borrower’s 

delinquency; (3) the date that is 90 days 

before a foreclosure sale; and (4) the 

date that is 38 days before a foreclosure 

sale. 

In general, many of the protections 

afforded to a borrower by § 1024.41 are 

dependent on a borrower submitting a 

complete loss mitigation application a 

certain amount of time before a 

foreclosure sale, and such protections 

decrease as a foreclosure sale 

approaches. It is therefore in the interest 

of borrowers to complete loss mitigation 

applications as early in the delinquency 

and foreclosure process as possible. 

However, even if a borrower does not 

complete a loss mitigation application 

sufficiently early in the process to 

secure all the protections available 

under § 1024.41, that borrower may still 

benefit from some of the protections 

afforded. Borrowers should not be 

discouraged from completing loss 

mitigation applications merely because 

they cannot complete a loss mitigation 

application by the date that would be 

most advantageous in terms of securing 

the protections available under 

§ 1024.41. Accordingly, the goal of 

§ 1024.41(b)(2)(ii) is to inform borrowers 

of the time by which they should 

complete their loss mitigation 

applications to receive the greatest set of 

protections available, without 

discouraging later efforts if any such 

timeline is not met. The Bureau notes 

§ 1024.41(b)(2)(ii) requires servicers to 

inform borrowers of the date by which 

the borrower should make the loss 

mitigation application complete, as 

opposed to the date by which the 

borrower must make the loss mitigation 

application complete. 

The Bureau believes based on 

communications with consumer 

advocates, servicers, and trade 

associations that the requirement in 

§ 1024.41(b)(2)(ii) may be overprescriptive and may prevent a servicer 

from having the flexibility to suggest an 

appropriate date by which a borrower 

should complete a loss mitigation 

application. For example, if a borrower 

submits a loss mitigation application on 

the 114th day of delinquency, the 

servicer would have to inform him or 

her by the 119th day that the borrower 

should complete the loss mitigation 

application by the 120th day under the 

current provision. A borrower is 

unlikely to be able to assemble the 

missing information within one day, 

and would be better served by being 

advised to complete the loss mitigation 

application by a reasonable later date 

that would afford the borrower the 

benefits of the rule as well as enough 

time to gather the information. 

In response to these concerns, and in 

accordance with the goals of the 

provision, the Bureau is proposing to 

amend the requirement in 

§ 1024.41(b)(2)(ii). Specifically, the 

Bureau proposes to replace the 

requirement that a servicer disclose the 

earliest remaining date of the four 

specific dates set forth in 

§ 1024.41(b)(2)(ii) with a more flexible 

requirement that a servicer determine 

and disclose a reasonable date by which 

the borrower should submit the 

documents and information necessary to 

make the loss mitigation application 

complete. The Bureau proposes to 

clarify this amendment in proposed 

comment 41(b)(2)(ii)–1, which would 

clarify that, in determining a reasonable 

date, a servicer should select the 

deadline that preserves the maximum 

borrower rights under § 1024.41, except 

when doing so would be impracticable. 

Proposed comment 41(b)(2)(ii)–1 would 

further clarify that a servicer should 

consider the four deadlines previously 

set forth in § 1024.41(b)(2)(ii) as factors 

in selecting a reasonable date. Proposed 

comment 41(b)(2)(ii)–1 also would 

clarify that if a foreclosure sale is not 

scheduled, for the purposes of 

determining a reasonable date, a 

servicer may make a reasonable estimate 

of when a foreclosure sale may be 

scheduled. This proposal is intended to 

provide appropriate flexibility while 

also requiring that servicers consider the 

impact of the various timing 

requirements set forth in § 1024.41. The 

Bureau requests comment regarding the 

proposed revision to § 1024.41(b)(2)(ii). 

41(b)(3) Timelines 

The Bureau is proposing to add a new 

provision in § 1024.41(b)(3) addressing 

the timelines when no foreclosure sale 

is scheduled as of the date a complete 

loss mitigation application is received 

or a foreclosure sale is rescheduled after 

receipt of a complete application. As 

discussed above, § 1024.41 is structured 

to provide different procedural rights to 

borrowers and impose different 

requirements on servicers depending on 

the number of days remaining until a 

foreclosure sale is scheduled to occur, 

as of the time that a complete loss 

mitigation application is received. In 

particular, § 1024.41(e)(1) requires that, 

if a complete loss mitigation application 

is received 90 days or more before a 

foreclosure sale, a servicer may require 

that a borrower accept or reject an offer 

of a loss mitigation option no earlier 

than 14 days after the servicer provides 

the offer. Similarly, § 1024.41(h) 

provides borrowers with a right to 

appeal a denial of a loan modification 

option when a complete loss mitigation 

application is received 90 days or more 

in advance of a foreclosure sale. 

Alternatively, § 1024.41(e)(1) provides 

that if a complete loss mitigation 

application is received less than 90 but 

more than 37 days before a foreclosure 

sale, a servicer may require that a 

borrower accept or reject an offer of a 

loss mitigation option no earlier than 

seven days after the servicer provides 

such offer, and under § 1024.41(h), the 

borrower does not have a right to appeal 

denial of a loan modification option in 

this circumstance. Likewise, the 

prohibition on foreclosure sales in 

§ 1024.41(g) sets limitations on a 

servicer’s ability to move for judgment 

or order of sale or to conduct a 

foreclosure sale when a complete 

application is received more than 37 

days before a foreclosure sale. 

However, the provisions of § 1024.41 

do not expressly address situations in 

which a foreclosure sale is rescheduled, 

or has not yet been scheduled at the 

time a complete loss mitigation 

application is received. Since issuance 

of the final rule, the Bureau has received 

questions about the applicability of the 

timing provisions in such scenarios. 

Specifically, industry stakeholders have 

asked whether it is appropriate to use 


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estimated dates of foreclosure where a 

foreclosure sale has not been scheduled 

at the time a complete loss mitigation 

application is received, and have 

requested guidance on how to apply the 

timelines if no foreclosure is scheduled 

as of the date a complete loss mitigation 

application is received, but a foreclosure 

sale is subsequently scheduled less than 

90 days after receipt of such application, 

or if a foreclosure sale has been 

scheduled for less than 90 days after a 

complete application is received, but is 

then postponed to a date that is 90 days 

or more after the receipt date. 

The Bureau believes guidance in such 

situations is appropriate, and is 

proposing in § 1024.41(b)(3) to provide 

that, for purposes of § 1024.41, timelines 

based on the proximity of a foreclosure 

sale to the receipt of a complete loss 

mitigation application will be 

determined as of the date a complete 

loss mitigation application is received. 

Proposed comment 41(b)(3)–1 would 

clarify that if a foreclosure sale has not 

yet been scheduled as of the date that 

a complete loss mitigation application is 

received, the application shall be treated 

as if it were received at least 90 days 

before a foreclosure sale. Proposed 

comment 41(b)(3)–2 would clarify that 

such timelines would remain in effect 

even if at a later date, a foreclosure sale 

was rescheduled. 

The Bureau believes this approach 

would provide certainty to both 

servicers and borrowers as well as 

ensure that borrowers receive the 

broadest protections available under the 

rule in situations in which a foreclosure 

sale has not been scheduled at the time 

a borrower submits a complete loss 

mitigation application. The Bureau 

considered proposing a rule that would 

vary the applicable timelines depending 

on the number of days remaining until 

foreclosure sale at the time that a 

foreclosure sale is in fact scheduled 

even when the scheduling (or 

rescheduling) occurs after a complete 

loss mitigation application is received. 

Such an approach would have some 

advantages to both servicers (in 

reducing the risk of foreclosure sale 

delays compared to categorically 

applying the procedures applicable to 

applications received at least 90 days 

before a scheduled foreclosure sale 

when no foreclosure sale has yet been 

scheduled when a complete loss 

mitigation application is received) and 

to consumers (in providing appeal rights 

if a sale is initially scheduled to occur 

less than 90 days after receipt of a 

completed application but is later 

delayed). However, the Bureau was 

concerned that such a rule would have 

a number of disadvantages. First, it 

would add significant complexity and 

uncertainty to the existing timelines 

under the regulation. Second, it could 

create incentives for servicers to draw 

out their evaluation processes in the 

hope that a foreclosure sale would be 

scheduled in the intervening period, 

and disincentives for servicers to push 

off a previously scheduled foreclosure 

sale. Third, it could potentially create 

borrower confusion if changes to the 

timelines were permitted to occur after 

the servicer has provided the borrower 

with the notice required under 

§ 1024.41(c)(1)(ii) explaining whether 

the loss mitigation application has been 

approved and laying out applicable 

timelines for follow-up. Similarly, the 

Bureau was concerned that allowing 

servicers to estimate foreclosure dates 

where a complete loss mitigation 

application is received before a 

foreclosure sale is scheduled would be 

imprecise—the Bureau believes it is 

necessary to clearly define what rights 

a borrower is entitled to and does not 

believe it is appropriate for a borrower’s 

rights to turn on an estimated date. 

Thus, on balance, the Bureau believes 

that a straightforward rule under which 

deadlines are calculated as of the date 

of receipt of a complete loss mitigation 

application, and a complete loss 

mitigation application is treated as 

having been received 90 days or more 

before a foreclosure sale if no sale is 

scheduled as of the date the application 

is received, may be preferable because it 

would provide industry and borrowers 

with clarity regarding its application, 

without the unnecessary complexity 

that may arise from an approach where 

the timelines would vary based on the 

number of days remaining before a laterscheduled foreclosure sale and whether 

a notice has already been provided to 

the borrower. The Bureau recognizes 

that the proposed rule might in some 

cases require a servicer to delay a 

foreclosure sale to adhere to the 

specified time for the borrower to 

respond to a loss mitigation offer and to 

appeal the servicer’s denial of a loan 

modification option, where applicable. 

However, the Bureau believes that, in 

most circumstances, a foreclosure sale 

that is not scheduled at the time a 

complete application is received is 

unlikely to be subsequently scheduled 

to occur less than 90 days after the 

receipt date. The Bureau requests 

comment and supporting data regarding 

circumstances in which this may occur. 

Additionally, the Bureau believes 

borrowers should not lose certain 

protections of the rule because a 

servicer quickly schedules a foreclosure 

sale, particularly when a borrower has 

been informed by either the 

§ 1024.41(c)(1)(ii) notice or the 

§ 1024.41(h)(4) notice that he or she has 

such rights. The Bureau seeks comment 

on this provision addressing the 

calculation of timelines as of the date a 

complete loss mitigation application is 

received, or a scheduled foreclosure sale 

is subsequently rescheduled after 

receipt of a complete loss mitigation 

application. In particular the Bureau 

seeks comment as to whether the 

alternative approach that would vary 

the applicable timelines depending on 

the number of days remaining until 

foreclosure sale at the time that a 

foreclosure sale is in fact scheduled or 

subsequently rescheduled would be 

preferable and whether there are 

additional situations in which 

application of the timelines should be 

clarified or modified. 

41(c) Evaluation of Loss Mitigation 

Applications 

41(c)(1) Complete Loss Mitigation 

Application 

41(c)(1)(ii) 

The Bureau is proposing to amend 

§ 1024.41(c)(1)(ii) to state explicitly that 

the notice required by § 1024.41(c)(1)(ii) 

must state the deadline for accepting or 

rejecting a servicer’s offer of a loss 

mitigation option, in addition to the 

requirements currently in 

§ 1024.41(d)(2) to specify, where 

applicable, that the borrower may 

appeal the servicer’s denial of a loan 

modification option, the deadline for 

doing so, and any requirements for 

making an appeal. The Bureau intended 

that the § 1024.41(c)(1)(ii) notice would 

specify the time and procedures for the 

borrower to accept or to reject the 

servicer’s offer, in accordance with the 

timing requirements specified in 

§ 1024.41(e). Indeed, § 1024.41(e)(2) 

provides both that the servicer may 

deem the borrower to have rejected the 

offer if the borrower does not respond 

within the timelines specified under 

§ 1024.41(e)(1) and that the servicer 

must give the borrower a reasonable 

opportunity to complete documentation 

necessary to accept the offer if the 

borrower does not follow the specified 

procedures but begins making payments 

in accordance with the offer by the 

deadline specified in § 1024.41(e)(1). 

The Bureau is therefore proposing to 

amend § 1024.41(c)(1)(ii) to state 

explicitly that the notice provided to the 

borrower under the provision must state 

the date and procedures by which the 

borrower is required to respond to an 

offer of a loss mitigation option, in 

addition to the information regarding 

appeals currently required to be 


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included in such notices under 

§ 1024.41(d)(2). 

41(c)(2) Incomplete Loss Mitigation 

Application Evaluation 

41(c)(2)(iii) Payment Forbearance 

The Bureau is proposing to modify 

the requirement in § 1024.41(c)(2) to 

allow servicers to offer certain shortterm forbearances to borrowers, 

notwithstanding the prohibition on 

servicers offering a loss mitigation 

option to a borrower based on the 

review of an incomplete loss mitigation 

application. The Bureau had 

intentionally drafted § 1024.41 with 

broad definitions of ‘‘loss mitigation 

option’’ and ‘‘loss mitigation 

application,’’ to provide a streamlined 

process in which a borrower will be 

evaluated for all available loss 

mitigation options at the same time, 

rather than having to apply multiple 

times to be evaluated for different 

options one at a time. Since publication 

of the final rule, however, both industry 

and consumer advocates have raised 

questions and concerns about how the 

rule applies in situations in which a 

borrower merely needs and requests 

short-term forbearance. For instance, a 

number of servicers have inquired about 

whether the rule would prevent them 

from granting a borrower’s request for 

waiver of late fees or other short-term 

relief after a natural disaster until the 

borrower submits all information 

necessary for evaluation of the borrower 

for long-term loss mitigation options. 

Additionally, both consumer advocates 

and servicers have raised concerns 

about whether a borrower’s request for 

short-term relief would later preclude a 

borrower from invoking the protections 

afforded by the rule if the borrower 

encounters a significant change in 

circumstances that warrants long-term 

loss mitigation alternatives. 

The Bureau is very conscious of the 

difficulties involved in distinguishing 

short-term forbearance programs from 

other types of loss mitigation and of the 

fact that some servicers have 

significantly exacerbated borrowers’ 

financial difficulties in the past by using 

short-term forbearance programs 

inappropriately instead of reviewing the 

borrowers for long-term options. 

Nevertheless, the Bureau believes that it 

may be possible to revise the rule to 

facilitate appropriate use of short-term 

payment forbearance programs without 

creating undue risk for borrowers who 

need to be evaluated for a full range of 

loss mitigation alternatives. 

At the outset, the Bureau notes that it 

does not construe the existing rule to 

require that servicers obtain a complete 

loss mitigation application prior to 

exercising their discretion to waive late 

fees. Additionally the Bureau notes that 

a servicer may offer any borrower any 

loss mitigation option if the borrower 

has not submitted a loss mitigation 

application or if the option is not based 

on an evaluation of information 

submitted by the borrower in 

connection with a loss mitigation 

application, as clarified in existing 

comment 41(c)(2)(i)–1. 

With regard to short-term forbearance 

programs that involve more than simply 

waiving late fees, such as where a 

servicer allows a borrower to forgo 

making two payments and then to catch 

up by spreading the cost over the next 

year, the Bureau believes that the issues 

raised by various stakeholders can most 

appropriately be addressed by providing 

more flexibility to servicers to provide 

such relief notwithstanding that a 

borrower has submitted an incomplete 

loss mitigation application. Thus, the 

Bureau is not proposing to change the 

current definition of loss mitigation 

option, which includes all forbearance 

programs, but rather to relax the 

prohibition in § 1024.41(c)(2)(i) against 

evading the requirement to evaluate a 

borrower’s complete loss mitigation 

application for all loss mitigation 

options available to the borrower by 

offering a loss mitigation option based 

upon an evaluation of an incomplete 

loss mitigation application. Specifically, 

the Bureau is proposing to add 

§ 1024.41(c)(2)(iii) to provide that a 

servicer may offer a short-term payment 

forbearance program to a borrower 

based upon an evaluation of an 

incomplete loss mitigation application. 

The proposed exemption in 

§ 1024.41(c)(2)(iii) would apply only to 

short-term payment forbearance 

programs. Proposed comment 

41(c)(2)(iii)–1 states that a payment 

forbearance program is a loss mitigation 

option for which a servicer allows a 

borrower to forgo making certain 

payments for a period of time. Payment 

forbearance programs are usually 

offered when a borrower is having a 

short-term difficulty brought on, for 

example, a natural disaster. In such 

cases, the servicer offers a short-term 

payment forbearance arrangement to 

assist the borrower in managing the 

hardship. The Bureau believes it is 

appropriate for servicers to have the 

flexibility to offer short-term payment 

forbearance programs prior to receiving 

a complete loss mitigation application 

for all available loss mitigation options. 

Proposed comment 41(c)(2)(iii)–1 also 

would explain how to determine 

whether a particular payment 

forbearance program is ‘‘short-term.’’ 

Specifically, it would provide that 

short-term programs allow the 

forbearance of payments due over 

periods of up to two months. Thus, if a 

borrower is allowed to forgo making 

payments due in January and February, 

but must make the monthly obligation 

due in March, such a program would be 

considered a two-month program. The 

proposed comment clarifies this would 

be considered a two-month payment 

forbearance, regardless of the amount of 

time the servicer provides the borrower 

to make up the forborne payments, and 

provides examples illustrating this 

principle. Different payment 

forbearance programs may have the 

borrower make up the payments at the 

end of the forbearance period, spread 

over a certain period of time (for 

example, over the next 12 payments) or 

may make the forgone payments due 

when the loan matures. The Bureau 

believes these all would be considered 

two-month payment forbearance 

programs despite the different 

repayment time periods because, under 

all of these scenarios, the borrower 

would resume making regular payments 

in March. 

The Bureau notes that, under the 

proposed approach, servicers that 

receive a request for a short-term 

payment forbearance and grant such 

requests would remain subject to the 

requirements triggered by the receipt of 

a loss mitigation application in 

§ 1024.41. Thus, as explained in 

proposed comment 41(c)(2)(iii)–2, if a 

servicer offers a payment forbearance 

program based on an incomplete loss 

mitigation application, the servicer is 

still required to review the application 

for completeness, to send the 

§ 1024.41(b)(2)(i)(B) notice to inform the 

borrower whether the application is 

complete or incomplete, and if 

incomplete what documents or 

additional information are required, and 

to use due diligence to complete the loss 

mitigation application. If a borrower 

submits a complete application, the 

servicer must evaluate it for all available 

loss mitigation options. The Bureau 

believes that maintaining these 

requirements is important to ensure that 

borrowers are not inappropriately 

diverted into short-term forbearance 

programs without access to the full 

protections of the regulation. At the 

same time, if a borrower in fact does not 

want an evaluation for long-term 

options, the borrower will simply fail to 

provide the additional information 

necessary to submit a complete 

application and the servicer will 

therefore not be required to conduct a 

full assessment for all options. 


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39914 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

To ensure that a borrower who is 

receiving an offer of short-term payment 

forbearance program understands the 

options available, proposed 

§ 1024.41(c)(2)(iii) would require a 

servicer offering a short-term payment 

forbearance program to a borrower 

based on an incomplete loss mitigation 

application to include in the 

§ 1024.41(b)(2)(i)(B) notice additional 

information, specifically that: (1) The 

servicer has received an incomplete loss 

mitigation application and on the basis 

of that application the servicer is 

offering a short-term payment 

forbearance program; (2) absent further 

action by the borrower, the servicer will 

not be reviewing the incomplete 

application for other loss mitigation 

options; and (3) if the borrower would 

like to be considered for other loss 

mitigation options, he or she must 

submit the missing documents and 

information required to complete the 

loss mitigation application. The Bureau 

believes that providing this more 

specific information, coupled with the 

proposed amendments under 

§ 1024.41(c)(2)(iii), is critical to ensure 

that the rule provides both flexibility to 

servicers and borrowers to avoid 

unwarranted delays and paperwork 

where short-term forbearance is 

appropriate and a safeguard against the 

misuse of short-term forbearance to 

avoid addressing long-term problems. 

For example, suppose a borrower 

submits information in connection with 

a request for a payment forbearance 

program, but such information is not a 

complete loss mitigation application as 

defined in § 1024.41(b)(1). Under 

proposed § 1024.41(c)(2)(iii), the 

servicer would be able to offer the 

borrower a payment forbearance 

program. However, the servicer would 

have to send the notice required by 

§ 1024.41(b)(2)(i)(B) notifying the 

borrower that his or her loss mitigation 

application is incomplete and stating 

the additional documents and 

information the borrower must submit 

to make the loss mitigation application 

complete. The borrower then would 

have the information needed to 

complete the loss mitigation application 

if he or she would like a full review for 

all loss mitigation options. However, if 

the borrower feels the payment 

forbearance program is sufficient, he or 

she would be able to decline to 

complete the loss mitigation application 

and the full § 1024.41 procedures would 

not be triggered. 

Finally, the Bureau proposes 

comment 41(c)(2)(iii)–3 clarifying 

servicers’ obligations on receipt of a 

complete loss mitigation application. 

The proposed comment states that, 

notwithstanding that a servicer offers a 

borrower a payment forbearance 

program after an evaluation of an 

incomplete loss mitigation application, 

a servicer must still comply with all 

requirements in § 1024.41 on receipt of 

a borrowers submission of a complete 

loss mitigation application. This 

comment is intended to clarify that, 

even though payment forbearance may 

be offered as short-term assistance to a 

borrower, a borrower is still entitled to 

submit a complete loss mitigation 

application and receive an evaluation of 

such application for all available loss 

mitigation options. Although payment 

forbearance may assist a borrower with 

a short-term hardship, a borrower 

should not be precluded from 

demonstrating a long-term inability to 

afford a mortgage, and being considered 

for long-term solutions, such as a loan 

modification, when that may be 

appropriate. 

Accordingly, the Bureau proposes to 

amend the loss mitigation provisions in 

§ 1024.41 by adding new 

§ 1024.41(c)(2)(iii) and new comments 

41(c)(2)(iii)–1, –2, and –3. The Bureau 

requests comment regarding all aspects 

of these proposed provisions, and in 

particular on whether the proposed 

amendments appropriately address 

concerns regarding servicers’ ability to 

work with borrowers by offering 

payment forbearance programs as 

appropriate, pending receipt and 

evaluation of complete loss mitigation 

applications. Additionally, the Bureau 

requests comment as to whether shortterm forbearance programs are 

appropriately defined and whether it 

might be appropriate to develop tailored 

definitions to address specific situations 

such as programs offered to victims of 

natural disasters or unemployment. 

Further, the Bureau seeks comment as to 

whether it would be helpful to require 

that additional language be added to the 

§ 1024.41(b)(2)(i)(B) notice when a 

servicer is offering a short-term payment 

forbearance program based on an 

incomplete loss mitigation application 

to encourage a borrower to assess 

realistically whether he or she is 

encountering short-term or long-term 

problems and to complete a loss 

mitigation application as appropriate. 

Finally, the Bureau seeks comment on 

whether additional safeguards would be 

appropriate or necessary to provide 

flexibility for appropriate use of shortterm forbearance programs without 

creating loopholes for abuse or 

disincentives to long-term loss 

mitigation activities. 

41(c)(2)(iv) Servicer Creates Reasonable 

Expectation That a Loss Mitigation 

Application Is Complete 

As discussed above, the Bureau is 

proposing new § 1024.41(c)(2)(iv) which 

states that if a servicer creates a 

reasonable expectation that a loss 

mitigation application is complete but 

later discovers that the application is 

incomplete, the servicer shall treat the 

application as complete as of the date 

the borrower had reason to believe the 

application was complete for purposes 

of applying paragraphs (f)(2) and (g) 

until the borrower has been given a 

reasonable opportunity to complete the 

loss mitigation application. This 

provision is designed to work in 

connection with proposed new 

comments 41(b)(2)(i)–1 and –2 as 

discussed above to address scenarios 

when a servicer determines that an 

application the servicer determined to 

be complete or to be missing particular 

information in fact is lacking additional 

information needed for evaluation. 

The Bureau has received questions 

about the impact of an error in the 

notice required by § 1024.41(b)(2)(i)(B), 

particularly in light of the short time 

period the servicer has to review the 

information submitted by the borrower. 

As discussed above the Bureau 

recognizes that, in certain 

circumstances, a borrower may submit 

information that appears facially 

complete, or that appears to be missing 

only specific information, but that a 

servicer, upon further evaluation, may 

determine that additional information is 

needed in order for the servicer to 

evaluate the borrower for all available 

loss mitigation options. The proposed 

commentary to § 1024.41(b)(2)(i) is 

intended to clarify that servicers are 

required to obtain the missing 

information in such situations. 

Proposed § 1024.41(c)(2)(iv) is intended 

to protect borrowers while a servicer 

requests the missing information. 

Proposed comment 41(c)(2)(iv)–1 

would clarify that a servicer creates a 

reasonable expectation that a loss 

mitigation application is complete when 

the servicer notifies the borrower in the 

§ 1024.41(b)(2)(i)(B) notice that the 

application is complete or when the 

servicer notifies the borrower in the 

§ 1024.41(b)(2)(i)(B) notice that certain 

items are missing and the borrower 

provides all the missing documents and 

information. The Bureau believes that a 

borrower would have a reasonable 

expectation that his or her loss 

mitigation application was complete in 

either of these situations. 

Where a servicer creates a reasonable 

expectation that a loss mitigation 


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Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 39915 

application is complete but later 

discovers that the application is 

incomplete, proposed § 1024.41(c)(2)(iv) 

would provide that the servicer shall 

treat the application as complete for 

certain purposes until the borrower has 

been given a reasonable opportunity to 

supply the missing information 

necessary to complete the loss 

mitigation application. Specifically, 

under this provision, the servicer would 

need to treat the application as complete 

for purposes of the foreclosure referral 

ban in § 1024.41(f)(2) and the 

foreclosure sale limitations in 

§ 1024.41(g). Proposed 

§ 1024.41(c)(2)(iv) would ensure that 

servicers that make good faith mistakes 

in making initial determinations of 

completeness need not be considered in 

violation of the rule, and that borrowers 

do not lose protections under the rule 

due to such mistake. The Bureau 

believes that, once a borrower is given 

reason to believe he or she has the 

benefit of certain protections (which are 

triggered by submission of a complete 

loss mitigation application), if the 

servicer discovers that an application is 

incomplete, the borrower should have a 

reasonable opportunity to complete the 

application before losing the benefit of 

such protections. 

Proposed comment 41(c)(2)(iv)–2 

gives guidance on what would be a 

reasonable opportunity for the borrower 

to complete a loss mitigation 

application. The comment states that a 

reasonable opportunity requires that the 

borrower be notified of what 

information is missing and be given 

sufficient time to gather the information 

and submit it to the servicer. The 

amount of time that is sufficient for this 

purpose will depend on the facts and 

circumstances. 

The Bureau believes proposed 

§ 1024.41(c)(2)(iv) would provide 

incentives to servicers to conduct 

rigorous up-front reviews, while 

providing servicers the ability to correct 

a good-faith mistake or clerical error. 

Further, servicers seeking relief under 

the provision need only give borrowers 

a reasonable opportunity to provide the 

missing information, thus allowing a 

servicer to continue the foreclosure 

process if a borrower does not provide 

such information. The Bureau seeks 

comment on all aspects of this proposed 

provision. In particular, the Bureau 

seeks comment as to if the additional 

information is supplied by the borrower, 

should the application be considered 

complete as of the date the borrower 

was given a reasonable belief it was 

complete, or as of the date it was 

actually completed. Additionally the 

Bureau seeks comment as to if other 

measures would be necessary or useful 

to clarify servicer obligations and risks 

regarding the § 1024.41(b)(2)(i)(B) 

notice. 

Section 1024.41(d) Denial of Loan 

Modification Options 

As discussed above, the Bureau is 

proposing to move the substance of 

§ 1024.41(d)(2) to § 1024.41(c)(1)(ii). 

Therefore, the Bureau is proposing to recodify § 1024.41(d)(1) as § 1024.41(d) 

and to re-designate the corresponding 

commentary accordingly. 

The Bureau is also proposing to 

clarify the requirement in 

§ 1024.41(d)(1), re-codified as 

§ 1024.41(d), that a servicer must 

disclose the reasons for the denial of 

any trial or permanent loan 

modification option available to the 

borrower. The Bureau believes it is 

appropriate to clarify that the 

requirement to disclose the reasons for 

denial focuses on only those 

determinations actually made by the 

servicer and does not require a servicer 

to continue evaluating additional factors 

after a decision has been established. 

Thus, when a servicer’s automated 

system uses a program that considers a 

borrower for a loan modification by 

proceeding through a series of questions 

and ends the process if the consumer is 

denied, the servicer need not modify the 

system to continue evaluating the 

borrower under additional criteria. For 

example, suppose a borrower must meet 

qualifications A, B, and C to receive a 

loan modification, but the borrower 

does not meet any of these 

qualifications. A servicer’s system may 

start by asking if the borrower meets 

qualification A, and on the failure of 

that qualification end the analysis for 

that specific loan modification option. If 

a servicer were required to disclose all 

potential reasons why the borrower may 

have been denied for that loan 

modification option (i.e., A, B, and C), 

it would need to consider a lengthy 

series of hypothetical scenarios: For 

example, if the borrower had met 

qualification A, would the borrower also 

have met qualification B? The Bureau 

did not intend such a requirement, 

which it believes would be potentially 

burdensome. 

The Bureau instead intended to 

require only the disclosure of the actual 

reason or reasons on which the 

borrower was evaluated and denied. 

Accordingly, the Bureau is proposing to 

amend § 1024.41(d) to require that a 

denial notice provided by the servicer 

must state the ‘‘specific reason or 

reasons’’ for the denial and also, where 

applicable, disclose that the borrower 

was not evaluated based on other 

criteria. The Bureau believes that this 

additional information will help 

borrowers understand the status of their 

application and the fact that they were 

not fully evaluated under all factors 

(where applicable). The Bureau is also 

proposing new comment 41(d)–4 stating 

that, if a servicer’s system reaches the 

first issue that causes a denial but does 

not evaluate borrowers for additional 

factors, a servicer need only provide the 

reason or reasons actually considered. 

Amended § 1024.41(d) would also 

require that the notice must state the 

servicer did not evaluate the borrower 

on other criteria. The notice is not 

required to list such criteria. Thus, a 

servicer would not be required to 

consider hypothetical situations to 

compile a complete list of potential 

reasons for denial of the loan 

modification option, but a borrower 

would not be given the false impression 

that the denial reason stated is the only 

grounds on which he or she might have 

been denied. The Bureau believes this 

proposed amendment appropriately 

balances potential concerns about 

compliance challenges with concerns 

about informing borrowers about the 

status of their applications and about 

information that is relevant to potential 

appeals. The Bureau seeks comment on 

this proposed amendment to the denial 

notification requirement. 

41(f) Prohibition on Foreclosure Referral 

The Bureau is proposing new 

comment 41(f)–1 to clarify what servicer 

actions are prohibited during the preforeclosure review period. Section 

1024.41(f) prohibits a servicer from 

making the first notice or filing required 

by applicable law for any judicial or 

non-judicial foreclosure process unless 

a borrower’s mortgage loan is more than 

120 days delinquent; a servicer is also 

prohibited from making such a notice or 

filing while a borrower’s complete loss 

mitigation application is being 

evaluated. The Bureau has received 

numerous questions about what is 

prohibited. Specifically, the Bureau has 

been asked if the first notice or filing 

includes the breach letters required by 

Fannie Mae (typically required at 60 

days delinquency). Additionally, the 

Bureau has been asked if the phrase 

‘‘first notice or filing’’ has the same 

interpretation as the Federal Housing 

Administration (FHA) uses to define the 

‘‘first public action,’’ which marks the 

initiation of the foreclosure process 

(which includes filing a complaint or 

petition, recording a notice of default or 

publication of a notice of sale, but not 

merely posting a notice on the 

property). In light of the requests for 

clarification of what is allowed under 


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this provision, the Bureau believes 

additional guidance is appropriate. 

The Bureau notes that the foreclosure 

process is a matter of State law, and is 

addressed differently in each State. 

Thus, the first notice or filing required 

by applicable law will be determined 

based on State law. In general, once a 

loan is delinquent, a servicer continues 

collection activity and will begin early 

intervention outreach. The Bureau 

believes that servicers frequently use 

demand or breach letters to notify 

borrowers of their delinquency at this 

stage. It is at this point that the Fannie 

Mae breach letter would typically be 

sent. At some point, many servicers will 

internally refer the loan to a foreclosure 

department or will send the loan to a 

foreclosure attorney. The formal 

foreclosure process will begin, 

generally, with a notice of default 

mailed to the borrower in a non-judicial 

State or with the onset of a legal action 

in a judicial State. It is at this point that 

the ‘‘first public action,’’ as FHA defines 

it, would typically occur. 

The Bureau designed the preforeclosure review period to mitigate the 

harms of dual tracking, by giving 

borrowers the opportunity to submit a 

complete loss mitigation application 

and have it considered without the 

pressure imposed by an active 

foreclosure process. Once a formal 

foreclosure process has begun, there is 

both more potential confusion on the 

part of borrowers due to dual tracking 

between foreclosure procedures and loss 

mitigation applications, and there is 

more pressure on the servicer to comply 

with State requirements and owner/ 

investor requirements and expectations 

to complete the foreclosure process in a 

timely fashion. The Bureau is concerned 

that defining ‘‘first notice or filing’’ to 

match the terms used by the FHA and 

Fannie Mae for purposes of managing 

their foreclosure processes would be 

inconsistent with the intent behind the 

pre-foreclosure review period under 

1024.41(f). In particular, the Bureau is 

concerned that the FHA ‘‘first public 

action’’ requirement could occur 

significantly later in the foreclosure 

process than the Bureau had intended 

under the ‘‘first notice or filing’’ 

standard because the term ‘‘first public 

action,’’ as defined by FHA, does not 

encompass notices to the borrower. The 

Bureau believes that interpreting the 

term ‘‘first notice or filing’’ consistent 

with the term ‘‘first public action’’ 

would allow activity the rule intended 

to delay until after the pre-foreclosure 

review period. 

The Bureau notes that the rule does 

not prohibit servicers from engaging in 

collection activity or communication 

with the borrower; in fact, other 

provisions of the rules affirmatively 

require that periodic statements with 

delinquency information be sent and 

that the servicer must engage in early 

intervention activities. The Bureau 

believes it would be appropriate for a 

servicer to send a breach letter at day 

60, if the letter were sent for the general 

purpose of notifying the borrower of his 

or her delinquency and encouraging 

discussions about potential cures and 

loss mitigation options. However, to the 

extent that the servicer is sending a 

breach letter at day 60 with the purpose 

of serving as the formal notification of 

default to begin foreclosure proceedings 

in a non-judicial State, that is the type 

of activity that the rule was intended to 

delay until after the pre-foreclosure 

review period. The Bureau is therefore 

proposing a new comment to clarify 

what is prohibited under § 1024.41(f). 

Proposed comment 41(f)–1 would state 

that whether a document is considered 

the first notice or filing is determined 

according to applicable State law. A 

document that would be used as 

evidence of compliance with foreclosure 

practices required pursuant to State law 

is considered the first notice or filing, 

and a servicer thus is prohibited from 

filing such a document during the preforeclosure review period. Documents 

that would not be used in this fashion 

are not considered the first notice or 

filing. Thus, a servicer is not prohibited 

from attempting to collect the debt, 

sending periodic statements, sending 

breach letters or any other activity 

during the pre-foreclosure review 

period, so long as such documents 

would not be used as evidence of 

complying with requirements applicable 

pursuant to State law in connection 

with a foreclosure process, and are not 

banned by other applicable law (e.g., the 

Fair Debt Collection Practices Act or 

bankruptcy law). Instead, the Bureau 

expects that, when a State requires the 

first step to begin the formal foreclosure 

process is that a notice of default must 

be mailed to the borrower, such a notice 

would be sent after the expiration of the 

pre-foreclosure review period because 

earlier notices could not be used for 

such purposes consistent with the 

regulation. 

Thus, under proposed comment 41(f)– 

1, to comply with the requirements of 

§ 1024.41(f), any document that would 

be used as evidence of compliance with 

a State law requirement to initiate the 

foreclosure process by providing the 

borrower with a notice of default must 

be provided after the pre-foreclosure 

review period required by § 1024.41(f). 

If a State law process mandates a notice 

to a borrower of the availability of 

mediation and such notice is a 

necessary prerequisite under State law 

to commence the foreclosure process, 

that notice is included in the definition 

of first notice or filing for the purposes 

of § 1024.41. 

The Bureau acknowledges that the 

provisions of § 1024.41 extend the 

timeline of a foreclosure by an 

additional 120 days. While the proposed 

clarifications may highlight that existing 

state procedures in connection with the 

Bureau’s rule may create delays in the 

foreclosure process that are longer than 

120 days, the Bureau notes this is not 

a new delay imposed by the proposed 

clarifications. The Bureau seeks to 

establish a rule that balances protecting 

consumers and encouraging 

communication between borrowers and 

servicers. The proposed rule would 

protect consumers by giving effect to the 

provisions in § 1024.41 intended to 

ensure a borrower is given sufficient 

time to submit a complete loss 

mitigation application and a servicer 

has time to work with the borrower 

without the pressure of a foreclosure 

practice. The rule would encourage 

communication by allowing the servicer 

to engage in any activity not being used 

as a prerequisite to State foreclosure 

practices. Further, the Bureau seeks to 

establish a workable rule that will 

clearly define what is and is not 

allowed, a goal that is complicated in 

light of both the varying foreclosure 

laws of different states, and the fact that 

a notice to the borrower may be sent for 

multiple reasons. The Bureau believes 

the proposed clarifications best balance 

these goals, but seeks comment on this 

topic. 

41(f)(1) Pre-Foreclosure Review Period 

The Bureau is proposing to amend the 

prohibition on referral to foreclosure 

until after the 120th day of delinquency 

by limiting the foreclosure ban in two 

scenarios: when the foreclosure is based 

on a borrower’s violation of a due-onsale clause, and when the servicer is 

joining the foreclosure action of a 

subordinate lienholder. Section 

1024.41(f)(1) requires a 120-day preforeclosure review period; A servicer 

may not make the first notice or filing 

required by applicable law for any 

judicial or non-judicial foreclosure 

process unless a borrower’s mortgage 

loan obligation is more than 120 days 

delinquent. This review period is 

intended to ensure a borrower’s loss 

mitigation application may be submitted 

and reviewed without the pressure of an 

active foreclosure process and to 

mitigate some of the consumer harms 

associated with dual tracking. However, 


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20 78 FR 30739 (May 23, 2013). 

21See 78 FR 6407; 78 FR 6856. The Bureau also 

addressed points and fees in the May 2013 ATR 

Final Rule. See 78 FR 35430. 

22Section 1026.43(b)(9) provides that, for the 

qualified mortgage points and fees cap, ‘‘points and 

fees’’ has the same meaning as in § 1026.32(b)(1). 

the Bureau notes that there may be some 

circumstances where a servicer 

forecloses for reasons that do not 

involve a borrower’s delinquency. In 

such scenarios, the Bureau 

acknowledges the protections for 

delinquent borrowers may not be 

appropriate or necessary. For example, 

if a borrower were current on his or her 

loan but transferred the property to 

another party (in breach of the loan 

contract), the rationale for the preforeclosure review of loss mitigation 

applications would not be applicable. 

Similarly, if a borrower were current on 

his or her first lien but was delinquent 

on a second lien mortgage, and the 

servicer for the second lien began a 

foreclosure action, it would be 

appropriate for the servicer of the first 

lien to join the foreclosure action, 

regardless of the fact that the borrower 

is current on the first lien mortgage. 

The Bureau believes it may be 

appropriate to include an exemption to 

the 120-day pre-foreclosure review 

period in certain scenarios and is 

proposing to amend § 1024.41(f)(1) to 

include exclusions to the 120-day 

foreclosure ban when the foreclosure is 

based on a borrower’s violation of a dueon-sale clause or when the servicer is 

joining the foreclosure action of a 

subordinate lienholder. The Bureau 

seeks comment on the proposed 

changes. Additionally, the Bureau seeks 

comment on whether other scenarios 

would appropriately be exempted from 

the 120-day foreclosure ban and on 

whether the exemption is appropriate in 

situations in which a borrower has 

submitted a complete loss mitigation 

application 

41(h) Appeal Process 

41(h)(4) Appeal Determination 

The Bureau is proposing to amend 

§ 1024.41(h)(4) to provide expressly that 

the notice informing a borrower of the 

determination of his or her appeal must 

also state the amount of time the 

borrower has to accept or reject an offer 

of a loss mitigation option after the 

notice is provided to the borrower. For 

the reasons discussed in the section-bysection analysis of § 1024.41(c)(1)(ii), 

which would require the 

§ 1024.41(b)(2)(i)(B) notice to include 

how long the borrower has to accept or 

reject an offer of a loss mitigation 

option, the Bureau believes it is 

important that borrowers be informed of 

their rights. The Bureau believes that a 

borrower who is offered a loss 

mitigation option should be informed of 

how long he or she has to accept that 

option regardless of whether the option 

is being offered in response to an initial 

evaluation of a loss mitigation 

application or after the conclusion of an 

appeal. The Bureau seeks comment on 

this amendment. 

41(j) Prohibition on Foreclosure Referral 

As discussed above, the Bureau is 

proposing to amend the prohibition on 

referral to foreclosure until after the 

120th day of delinquency by limiting 

the foreclosure ban in two situations: 

when the foreclosure is based on a 

borrower’s violation of a due-on-sale 

clause and when the servicer is joining 

the foreclosure action of a subordinate 

lienholder. For the same reasons, the 

Bureau believes it would be appropriate 

to make corresponding amendments to 

the provision in § 1024.41(j) prohibiting 

a small servicer from making the first 

notice or filing required by applicable 

law for any judicial or non-judicial 

foreclosure process unless a borrower’s 

mortgage loan obligation is more than 

120 days delinquent. Thus, the Bureau 

is proposing to amend § 1024.41(j) to 

allow foreclosure before the 120th day 

of delinquency when the foreclosure is 

based on a borrower’s violation of a dueon-sale clause and when the servicer is 

joining the foreclosure action of a 

subordinate lienholder, by incorporating 

a cross-reference to § 10124.41(f)(1). The 

Bureau seeks comment on this 

amendment. 

C. Regulation Z 

General—Technical Corrections 

In addition to the proposed 

clarifications and amendments to 

Regulation Z discussed below, the 

Bureau is also proposing technical 

corrections and minor clarifications to 

wording throughout Regulation Z that 

are not substantive in nature. The 

Bureau is proposing such technical and 

wording clarifications to regulatory text 

in §§ 1026.23, 1026.31, 1026.32, 

1026.35, and 1026.36 and to 

commentary to §§ 1026.25, 1026.32, 

1026.34, 1026.36, and 1026.41. 

Section 1026.23 Right of Rescission 

23(a) Consumer’s Right To Rescind 

23(a)(3)(ii) 

The Bureau is proposing to amend 

§ 1026.23(a)(3)(ii) to update a crossreference within that section from 

§ 1026.35(e)(2), as adopted by the 

Bureau’s Amendments to the 2013 

Escrows Final Rule under the Truth in 

Lending Act (Regulation Z) (May 2013 

Escrows Final Rule),20 to § 1026.43(g). 

The cross-reference in the Amendments 

to the 2013 Escrows Final Rule under 

the Truth in Lending Act (Regulation Z) 

is the correct cross-reference during the 

time period that rule will be in effect for 

transactions where applications are 

received on or after June 1, 2013, but 

prior to January 10, 2014. For 

transactions where applications are 

received on or after January 10, 2014, 

the correct cross-reference will be to 

§ 1026.43(g). For this reason, the Bureau 

is proposing to remove the crossreference to § 1026.35(e)(2) and replace 

it with a cross-reference to § 1026.43(g). 

Section 1026.32 Requirements for 

High-Cost Mortgages 

32(b) Definitions 

Two of the Bureau’s 2013 Title XIV 

Final Rules—the 2013 ATR Final Rule 

and the 2013 HOEPA Final Rule— 

contain provisions that relate to a 

transaction’s ‘‘points and fees.’’ 21

Specifically, § 1026.43(e)(2)(iii), as 

adopted by the 2013 ATR Final Rule, 

sets forth a cap on points and fees for 

a closed-end credit transaction to 

acquire qualified mortgage status. In 

addition, § 1026.32(a)(1)(ii), as adopted 

by the 2013 HOEPA Final Rule, sets 

forth a points and fees coverage 

threshold for both closed- and open-end 

credit transactions.22 These two final 

rules also adopted definitions of points 

and fees for closed- and open-end credit 

transactions. 

Section 1026.32(b)(1) defines ‘‘points 

and fees’’ for closed-end credit 

transactions, for purposes of both the 

qualified mortgage points and fees cap 

and the high-cost mortgage coverage 

threshold. Section 1026.32(b)(1)(i) 

defines points and fees for closed-end 

credit transactions to include all items 

included in the finance charge as 

specified under § 1026.4(a) and (b), with 

the exception of certain items 

specifically excluded under 

§ 1026.32(b)(1)(i)(A) through (F). These 

excluded items include interest or timeprice differential; certain types and 

amounts of mortgage insurance 

premiums; certain bona fide third-party 

charges not retained by the creditor, 

loan originator or an affiliate of either; 

and certain bona fide discount points 

paid by the consumer. Section 

1026.32(b)(1)(ii) through (vi) lists 

certain other items that are specifically 

included in points and fees, including 

compensation paid directly or indirectly 

by a consumer or creditor to a loan 

originator; certain real-estate related 

items listed in § 1026.4(c)(7); premiums 


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39918 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

for various forms of credit insurance, 

including credit life, credit disability, 

credit unemployment and credit 

property insurance; the maximum 

prepayment penalty, as defined in 

§ 1026.32(b)(6)(i), that may be charged 

or collected under the terms of the 

mortgage loan; and the total prepayment 

penalty as defined in § 1026.32(b)(6)(i) 

incurred by the consumer if the 

consumer refinances an existing 

mortgage loan with the current holder of 

the existing loan (or a servicer acting on 

behalf of the current holder, or an 

affiliate of either). 

Section 1026.32(b)(2), which defines 

points and fees for open-end credit 

plans for purposes of the high-cost 

mortgage thresholds, essentially follows 

the inclusions and exclusions set out in 

§ 1026.32(b)(1) for closed-end 

transactions, with several modifications 

and additional inclusions related to fees 

charged for open-end credit plans. 

32(b)(1) 

The Bureau is proposing to add new 

commentary to § 1026.32(b)(1) to clarify 

when charges paid by parties other than 

the consumer, including third parties, 

are included in points and fees. Prior to 

the Dodd-Frank Act, TILA section 

103(aa)(1)(B) provided that a mortgage is 

subject to the restrictions and 

requirements of HOEPA if the total 

points and fees ‘‘payable by the 

consumer at or before closing’’ 

(emphasis added) exceed the threshold 

amount. However, section 1431(a) of the 

Dodd-Frank Act amended the points 

and fees coverage test to provide in 

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

mortgage is a high-cost mortgage if the 

total points and fees ‘‘payable in 

connection with the transaction’’ 

(emphasis added) exceed newly 

established thresholds. Similarly, TILA 

section 129C(b)(2)(A)(vii) provides that 

points and fees ‘‘payable in connection 

with the loan’’ (emphasis added) are 

included in the points and fees 

calculation for qualified mortgages. 

The Bureau believes that additional 

clarification concerning the treatment of 

charges paid by parties other than the 

consumer, including third parties, for 

purposes of inclusion in or exclusion 

from points and fees would be 

beneficial to consumers and creditors 

and facilitate compliance with the rule. 

Specifically, the Bureau is proposing to 

add new comment 32(b)(1)–2 to clarify 

the treatment of charges imposed in 

connection with a closed-end credit 

transaction that are paid by a party to 

the transaction other than the consumer, 

for purposes of determining whether 

that charge is included in points and 

fees as defined in § 1026.32(b)(1). The 

proposed comment states that charges 

paid by third parties that fall within the 

definition of points and fees set forth in 

§ 1026.32(b)(1)(i) through (vi) are 

included in points and fees, and 

provides examples of third-party 

payments that are included and 

excluded. In discussing included 

charges, the proposed comment notes 

that a third-party payment of an item 

excluded from the finance charge under 

a provision of § 1026.4, while not 

included in points and fees under 

§ 1026.32(b)(1)(i), may be included 

under § 1026.32(b)(1)(ii) through (vi). In 

discussing excluded charges, the 

proposed comment states that a charge 

paid by a third party is not included in 

points and fees under § 1026.32(b)(1)(i) 

as a component of the finance charge if 

any of the exclusions from points and 

fees in § 1026.32(b)(1)(i)(A) through (F) 

applies. 

The proposed comment also discusses 

the treatment of ‘‘seller’s points,’’ as 

described in § 1026.4(c)(5) and 

commentary. The proposed comment 

states that seller’s points are excluded 

from the finance charge and thus are not 

included in points and fees under 

§ 1026.32(b)(1)(i), but also notes that 

charges paid by the seller may be 

included in points and fees if the 

charges are for items in 

§ 1026.32(b)(1)(ii) through (vi). Finally 

the proposed comment restates for 

clarification purposes that, pursuant to 

§ 1026.32(b)(1)(i)(A) and (ii), charges 

that are paid by the creditor, other than 

loan originator compensation paid by 

the creditor that is required to be 

included in points and fees under 

§ 1026.32(b)(1)(ii), are excluded from 

points and fees. To the extent that the 

creditor recovers the cost of such 

charges from the consumer, the cost is 

recovered through the interest rate, 

which is excluded from points and fees 

under § 1026.32(b)(1)(i)(A). Section 

1026.32(b)(1)(i) and (A) implements 

section 103(bb)(4)(A) of TILA to include 

in points and fees ‘‘[a]ll items included 

in the finance charge under 1026.4(a) 

and (b)’’ but specifically excludes 

‘‘interest and time-price differential.’’ 

Under § 1026.32(b)(1)(ii), however, 

compensation paid by the creditor to 

loan originators, other than employees 

of the creditor, is included in points and 

fees. 

The Bureau believes this clarification 

of the treatment of charges paid by 

parties other than the consumer for 

points and fees purposes is consistent 

with the amendment to TILA made by 

section 1431(a) of the Dodd-Frank Act, 

discussed above. 

32(b)(1)(ii) and 32(b)(2)(ii) 

Section 1431(c)(1)(B) of the DoddFrank Act requires that points and fees 

include ‘‘all compensation paid directly 

or indirectly by a consumer or creditor 

to a mortgage originator from any source 

. . . . ’’ TILA section 103(bb)(4). The 

2013 ATR Final Rule implemented this 

statutory provision in amended 

§ 1026.32(b)(1)(ii), which provides that, 

for both the qualified mortgage points 

and fees limits and the high-cost 

mortgage points and fees threshold, 

points and fees include all 

compensation paid directly or indirectly 

by a consumer or creditor to a loan 

originator, as defined in § 1026.36(a)(1), 

that can be attributed to the transaction 

at the time the interest rate is set. The 

2013 HOEPA Final Rule implemented 

§ 1026.32(b)(2)(ii), which provides the 

same standard for including loan 

originator compensation in points and 

fees for open-end credit plans (i.e., a 

home equity line of credit, or HELOC). 

Concurrent with the 2013 ATR Final 

Rule, the Bureau also issued the 2013 

ATR Concurrent Proposal, which, 

among other things, proposed certain 

clarifications for calculating loan 

originator compensation for points and 

fees. The Bureau finalized the 2013 ATR 

Concurrent Proposal in the May 2013 

ATR Final Rule, which further amended 

§ 1026.32(b)(1)(ii) to exclude certain 

types of loan originator compensation 

from points and fees. In particular, the 

May 2013 ATR Final Rule excludes 

from points and fees loan originator 

compensation paid by a consumer to a 

mortgage broker when that payment has 

already been counted toward the points 

and fees thresholds as part of the 

finance charge under § 1026.32(b)(1)(i). 

See § 1026.32(b)(1)(ii)(A). It also 

excludes from points and fees 

compensation paid by a mortgage broker 

to an employee of the mortgage broker 

because that compensation is already 

included in points and fees as loan 

originator compensation paid by the 

consumer or the creditor to the mortgage 

broker. See § 1026.32(b)(1)(ii)(B). In 

addition, the May 2013 ATR Final Rule 

excludes from points and fees 

compensation paid by a creditor to its 

loan officers. See § 1026.32(b)(1)(ii)(C). 

The 2013 ATR Concurrent Proposal 

had requested comment on whether 

additional adjustment of the rules or 

additional commentary is necessary to 

clarify any overlapping definitions 

between the points and fees provisions 

in the 2013 ATR Final Rule and the 

2013 HOEPA Final Rule and the 

provisions adopted by the 2013 Loan 

Originator Compensation Final Rule. In 

particular, the Bureau sought comment 


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Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 39919 

on whether additional guidance would 

be useful regarding persons who are 

‘‘loan originators’’ under § 1026.36(a)(1) 

but are not employed by a creditor or 

mortgage broker, such as employees of 

a retailer of manufactured homes. 

In response to the 2013 ATR 

Concurrent Proposal, several industry 

and nonprofit commenters requested 

clarification of what compensation must 

be included in points and fees in 

connection with transactions involving 

manufactured homes. First, they 

requested additional guidance on what 

activities would cause a manufactured 

home retailer and its employees to 

qualify as loan originators. Second, they 

requested additional guidance on what 

compensation paid to manufactured 

home retailers and their employees 

would be counted as loan originator 

compensation and included in points 

and fees. The Bureau believes it is 

appropriate to provide additional 

opportunity for public comment on 

these issues. Accordingly, rather than 

provide additional guidance in the May 

2013 ATR Final Rule, the Bureau noted 

that it would propose and seek 

comment on additional guidance. 

The 2013 Loan Originator 

Compensation Final Rule had provided 

additional guidance on what activities 

would cause such a retailer and its 

employees to qualify as loan originators 

in light of language from the DoddFrank Act creating an exception from 

the definition of loan originator for 

employees of manufactured home 

retailers that engage in certain limited 

activities. See § 1026.36(a)(1)(i)(B) and 

comments 36(a)–1.i.A and 36(a)–4. 

Commenters responding to the 2013 

ATR Concurrent Proposal nevertheless 

argued that it remains unclear what 

activities a retailer and its employees 

could engage in without qualifying as 

loan originators and causing their 

compensation to be included in points 

and fees. Industry commenters also 

noted that, because a creditor has 

limited knowledge of and control over 

the activities of a manufactured home 

retailer and its employees, it would be 

difficult for the creditor to know 

whether the retailer and its employees 

had engaged in activities that would 

require their compensation to be 

included in points and fees. Industry 

commenters therefore urged the Bureau 

to adopt a bright-line rule under which 

compensation would be included in 

points and fees only if paid to an 

employee of a creditor or a mortgage 

broker. 

As noted in the May 2013 ATR Final 

Rule, the Bureau does not believe it is 

appropriate to use its exception 

authority to exclude from points and 

fees all compensation that may be paid 

to a manufactured home retailer. As a 

general matter, to the extent that the 

consumer or creditor is paying the 

retailer for loan origination activities, 

the retailer is functioning as a mortgage 

broker and compensation for the 

retailer’s loan origination activities 

should be captured in points and fees. 

As discussed below, the Bureau is 

proposing to clarify what compensation 

must be included in points and fees. As 

discussed in the SUPPLEMENTARY

INFORMATION describing proposed 

revisions and clarifications to the rule 

text and commentary defining ‘‘loan 

originator,’’ the Bureau is also proposing 

to clarify the circumstances in which 

employees of manufactured home 

retailers are loan originators, including 

a revision to § 1026.36(a)(i)(B). In 

addition, the Bureau is continuing to 

conduct outreach with the 

manufactured home industry and other 

interested parties to address concerns 

about what activities are permissible for 

a retailer and its employees without 

causing them to qualify as loan 

originators. 

Industry commenters responding to 

the 2013 ATR Concurrent Proposal also 

requested that the Bureau clarify what 

compensation must be included in 

points and fees when a retailer and its 

employees qualify as loan originators. 

They argued that it is not clear whether 

the sales price received by the retailer 

or the sales commission received by the 

retailer’s employee should be 

considered, at least in part, loan 

originator compensation. They urged 

the Bureau to clarify that compensation 

paid to a retailer and its employees in 

connection with the sale of a 

manufactured home should not be 

counted as loan originator 

compensation. 

Under § 1026.32(b)(1)(ii), loan 

originator compensation is included in 

points and fees only if it can be 

attributed to a transaction at the time 

the interest rate is set. The Bureau 

believes that the sales price would not 

include compensation that is paid for 

loan origination activities and that can 

be attributed to a specific transaction. 

The sales price of a manufactured home 

allows manufactured home retailers to 

recover their costs (including the costs 

of compensating salespersons and other 

employees) and earn a profit. The 

Bureau does not believe that 

manufactured home retailers charge a 

different sales price depending on 

whether or not the retailer engages in 

loan origination activities for that 

particular transaction. If the retailer 

does not increase the price to obtain 

compensation for loan origination 

activities, then it does not appear that 

the sales price would include loan 

originator compensation that could be 

attributed to that particular transaction. 

The Bureau acknowledges that it is 

theoretically possible that the sales 

price could include loan originator 

compensation that could be attributed to 

a particular transaction at the time the 

interest rate is set and that therefore 

should be included in points and fees. 

One approach for calculating loan 

originator compensation for 

manufactured home transactions would 

be to compare the sales price in a 

transaction in which the retailer 

engaged in loan origination activities 

and the sales prices in transactions in 

which the retailer did not do so (such 

as in cash transactions or in transactions 

in which the consumer arranged credit 

through another party). To the extent 

that there is a higher sales price in the 

transaction in which the retailer 

engaged in loan origination activities, 

then the difference in sales prices could 

be counted as loan originator 

compensation that can be attributed to 

that transaction and that therefore 

should be included in points and fees. 

However, the Bureau does not believe 

that it is workable for the creditor to use 

this comparative sales price approach to 

determine whether the sales price 

includes loan originator compensation 

that must be included in points and 

fees. The creditor is responsible for 

calculating loan originator 

compensation to be included in points 

and fees for the qualified mortgage and 

high-cost mortgage points and fees 

thresholds. Accordingly, under the 

comparative sales price approach, the 

creditor would have to analyze a 

manufactured home retailer’s prices to 

determine if there were differences in 

the prices that would have to be 

included in points and fees as loan 

originator compensation. This would 

appear to be an extremely difficult 

analysis for the creditor to perform. Not 

only would the creditor have to 

compare the sales prices from numerous 

transactions, it would have to determine 

whether any differences between the 

sales prices can be attributed to the loan 

origination activities of the retailer and 

not to other factors. 

As noted above, the Bureau does not 

believe that the sales price of a 

manufactured home includes loan 

originator compensation that can be 

attributed to a particular transaction. 

Moreover, the Bureau does not believe 

it is practicable for the creditor to 

attempt to analyze the sales price to 

determine if it does in fact include loan 

originator compensation that can be 

attributed to a particular transaction and 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
39920 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

23Commenters asserted that creditors may 

presume that the sales commissions should be 

treated as loan originator compensation and include 

such payments in points and fees. They maintain 

that doing so would prevent most loans from 

staying under the qualified mortgage points and 

fees limits and would cause many loans to exceed 

the high-cost mortgage points and fees thresholds. 

therefore must be included in points 

and fees. Accordingly, the Bureau is 

proposing guidance providing that the 

sales price of a manufactured home does 

not include loan originator 

compensation that can be attributed to 

the transaction at the time the interest 

rate is set and that the sales price 

therefore does not include loan 

originator compensation that must be 

included in points and fees under 

§ 1026.32(b)(1)(ii). The Bureau requests 

comment on this proposed guidance. In 

addition, the Bureau requests comment 

on whether the sales price of a 

manufactured home does include loan 

originator compensation that can be 

attributed to the transaction at the time 

the interest rate is set, and, if so, 

whether there are practicable ways for a 

creditor to measure that compensation 

so that it could be included in points 

and fees. 

With respect to employees of 

manufactured home retailers, the 

Bureau notes that the May 2013 ATR 

Final Rule added § 1026.32(b)(1)(ii)(B), 

which excludes from points and fees 

compensation paid by mortgage brokers 

to their loan originator employees. It 

appears to the Bureau that when an 

employee of a retailer would qualify as 

a loan originator, the retailer also would 

qualify as a loan originator and therefore 

would qualify as a mortgage broker. If 

the retailer qualifies as a mortgage 

broker, any compensation paid by the 

retailer to the employee would be 

excluded from points and fees under 

§ 1026.32(b)(1)(ii)(B). 

The Bureau notes, however, that if 

there were instances in which an 

employee of a manufactured home 

retailer would qualify as a loan 

originator but the retailer would not, the 

exclusion from points and fees in 

§ 1026.32(b)(1)(ii)(B) for compensation 

paid to an employee of a mortgage 

broker would not apply because the 

retailer would not be a mortgage broker. 

Nevertheless, the Bureau believes it may 

still be appropriate to exclude such 

compensation paid to an employee of a 

manufactured home retailer. As noted 

by some commenters responding to the 

2013 ATR Concurrent Proposal, it may 

be difficult for creditors to determine 

whether employees of a manufactured 

home retailer have engaged in loan 

origination activities and, if so, what 

compensation they received for doing 

so. The Bureau understands that a 

retailer typically pays a sales 

commission to its employees, so it may 

be difficult for a creditor to know 

whether a retailer has paid any 

compensation to its employees for loan 

origination activities, as distinct from 

compensation for sales activities.23

Accordingly, to prevent any such 

uncertainty, the Bureau is proposing 

new § 1026.32(b)(1)(ii)(D), which 

excludes from points and fees all 

compensation paid by manufactured 

home retailers to their employees. The 

Bureau requests comment on this 

proposed exclusion. The Bureau also 

requests comment on whether there are 

instances in which an employee of a 

manufactured home retailer would 

qualify as a loan originator but the 

retailer would not qualify as a loan 

originator. 

The Bureau notes that it is proposing 

to exclude from points and fees only 

compensation that is paid by a 

manufactured home retailer to its 

employees. To the extent that an 

employee of a manufactured home 

retailer receives from another source 

(such as the creditor) loan originator 

compensation that can be attributed to 

the transaction at the time the interest 

rate is set, then that compensation must 

be included in points and fees. 

As noted above, the Bureau is 

proposing new § 1026.32(b)(1)(ii)(D), 

which excludes from points and fees all 

compensation paid by manufactured 

home retailers to their employees. The 

Bureau is also proposing new 

§ 1026.32(b)(2)(ii)(D), which provides 

that, for open-end credit plans, 

compensation paid by manufactured 

home retailers to their employees is 

excluded from points and fees for 

purposes of the high-cost mortgage 

points and fees threshold. 

The Bureau is also proposing new 

comment 32(b)(1)(ii)–5, which explains 

what compensation is included in loan 

originator compensation that must be 

included in points and fees for 

manufactured home transactions. 

Proposed comment 32(b)(1)(ii)–5.i states 

that, if a manufactured home retailer 

receives compensation for loan 

origination activities and such 

compensation can be attributed to the 

transaction at the time the interest rate 

is set, then such compensation is loan 

originator compensation that is 

included in points and fees. Proposed 

comment 32(b)(1)(ii)–5.ii specifies that 

the sales price of the manufactured 

home does not include loan originator 

compensation that can be attributed to 

the transaction at the time the interest 

rate is set and therefore is not included 

in points and fees. Proposed comment 

32(b)(1)(ii)–5.iii specifies that, 

consistent with new 

§ 1026.32(b)(1)(ii)(D), compensation 

paid by a manufactured home retailer to 

its employees is not included in points 

and fees. 

The Bureau is proposing new 

§ 1026.32(b)(1)(ii)(D) and (b)(2)(ii)(D) 

pursuant to its authority under TILA 

section 105(a) to make such adjustments 

and exceptions for any class of 

transactions as the Bureau finds 

necessary or proper to facilitate 

compliance with TILA and to effectuate 

the purposes of TILA, including the 

purposes of TILA section 129C of 

ensuring that consumers are offered and 

receive residential mortgage loans that 

reasonably reflect their ability to repay 

the loans. The Bureau’s understanding 

of this purpose is informed by the 

findings related to the purposes of 

section 129C of ensuring that 

responsible, affordable mortgage credit 

remains available to consumers. The 

Bureau believes that using its TILA 

exception authorities will facilitate 

compliance with the points and fees 

regulatory regime by not requiring 

creditors to investigate the 

manufactured housing retailer’s 

employee compensation practices, and 

by making sure that all creditors apply 

the provision consistently. It will also 

effectuate the purposes of TILA by 

helping to keep mortgage loans available 

and affordable by ensuring that they are 

subject to the appropriate regulatory 

framework with respect to qualified 

mortgages and the high-cost mortgage 

threshold. The Bureau is also invoking 

its authority under TILA section 

129C(b)(3)(B) to revise, add to, or 

subtract from the criteria that define a 

qualified mortgage consistent with 

applicable standards. For the reasons 

explained above, the Bureau has 

determined that it is necessary and 

proper to ensure that responsible, 

affordable mortgage credit remains 

available to consumers in a manner 

consistent with the purposes of TILA 

section 129C and necessary and 

appropriate to effectuate the purposes of 

this section and to facilitate compliance 

with section 129C. With respect to its 

use of TILA section 129C(b)(3)(B), the 

Bureau believes this authority includes 

adjustments and exceptions to the 

definitions of the criteria for qualified 

mortgages and that it is consistent with 

the purpose of facilitating compliance to 

extend use of this authority to the points 

and fees definitions for high-cost 

mortgage in order to preserve the 

consistency of the qualified mortgage 

and high-cost mortgage definitions. As 


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Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 39921 

noted above, by helping to ensure that 

the points and fees calculation is not 

artificially inflated, the Bureau is 

helping to ensure that responsible, 

affordable mortgage credit remains 

available to consumers. 

The Bureau also has considered the 

factors in TILA section 105(f) and has 

concluded that, for the reasons 

discussed above, the proposed 

exemption is appropriate under that 

provision. Pursuant to TILA section 

105(f), the Bureau may exempt by 

regulation from all or part of this title all 

or any class of transactions for which in 

the determination of the Bureau 

coverage does not provide a meaningful 

benefit to consumers in the form of 

useful information or protection. In 

determining which classes of 

transactions to exempt, the Bureau must 

consider certain statutory factors. For 

the reasons discussed above, the Bureau 

is proposing to exclude from points and 

fees compensation paid by a retailer of 

manufactured homes to its employees 

because including such compensation 

in points and fees does not provide a 

meaningful benefit to consumers. The 

Bureau believes that the proposed 

exemption is appropriate for all affected 

consumers to which the proposed 

exemption applies, regardless of their 

other financial arrangements and 

financial sophistication and the 

importance of the loan to them. 

Similarly, the Bureau believes that the 

proposed exemption is appropriate for 

all affected loans covered under the 

proposed exemption, regardless of the 

amount of the loan and whether the 

loan is secured by the principal 

residence of the consumer. Furthermore, 

the Bureau believes that, on balance, the 

proposed exemption will simplify the 

credit process without undermining the 

goal of consumer protection, denying 

important benefits to consumers, or 

increasing the expense of the credit 

process. 

The Bureau also concludes that, to the 

extent that it determines that it would 

be appropriate to adopt a regulatory 

provision that excludes from points and 

fees any loan originator compensation 

in the sales price of a manufactured 

home, such an exclusion also would be 

appropriate under TILA section 105(f). 

The Bureau believes that including such 

compensation in points and fees does 

not provide a meaningful benefit to 

consumers. The Bureau believes that 

such an exemption would be 

appropriate for all affected consumers to 

which the exemption would apply, 

regardless of their other financial 

arrangements and financial 

sophistication and the importance of the 

loan to them. Similarly, the Bureau 

believes that the exemption would be 

appropriate for all affected loans, 

regardless of the amount of the loan and 

whether the loan is secured by the 

principal residence of the consumer. 

Furthermore, the Bureau believes that, 

on balance, the exemption would 

simplify the credit process without 

undermining the goal of consumer 

protection, denying important benefits 

to consumers, or increasing the expense 

of the credit process. 

32(b)(1)(vi) and 32(b)(2)(vi) 

The Bureau is proposing changes to 

§ 1026.32(b)(1)(vi) and (2)(vi) to 

harmonize more fully the definitions of 

‘‘total prepayment penalty’’ adopted in 

these two sections with the statutory 

requirement implemented by them. 

Section 1026.32(b)(1)(vi) and (2)(vi) 

implements section 1431(c) of the DoddFrank Act, which added new TILA 

section 103(bb)(4)(F). That provision 

requires that points and fees include 

‘‘all prepayment fees or penalties that 

are incurred by the consumer if the loan 

refinances a previous loan made or 

currently held by the same creditor or 

an affiliate of the creditor.’’ As adopted 

by the 2013 ATR Final Rule, 

§ 1026.32(b)(1)(vi) implements this 

provision as it relates to closed-end 

credit transactions, and provides that 

points and fees must include ‘‘[t]he total 

prepayment penalty, as defined in 

paragraph (b)(6)(i) of this section, 

incurred by the consumer if the 

consumer refinances the existing 

mortgage loan with the current holder of 

the existing loan, a servicer acting on 

behalf of the current holder, or an 

affiliate of either.’’ As adopted by the 

2013 HOEPA Final Rule, 

§ 1026.32(b)(2)(vi) implements this 

provision as it relates to open-end credit 

plans (i.e., a home equity line of credit, 

or HELOC), and provides that points 

and fees must include ‘‘[t]he total 

prepayment penalty, as defined in 

paragraph (b)(6)(ii) of this section, 

incurred by the consumer if the 

consumer refinances an existing closedend credit transaction with an open-end 

credit plan, or terminates an existing 

open-end credit plan in connection with 

obtaining a new closed- or open-end 

credit transaction, with the current 

holder of the existing plan, a servicer 

acting on behalf of the current holder, 

or an affiliate of either.’’ 

The Bureau intended these provisions 

to work in the same manner for closedend and open-end credit transactions: 

To include in points and fees any 

prepayment charges triggered by the 

refinancing of an existing loan or 

termination of a HELOC by obtaining a 

new credit transaction with the current 

holder of the existing closed-end 

mortgage loan or open-end credit plan. 

The Bureau believes that additional 

clarification as to when prepayment 

penalties are included in points and fees 

in connection with the refinancing of a 

closed-end mortgage loan or the 

termination and replacement of a 

HELOC with the holder of the existing 

loan or HELOC would be beneficial. 

The Bureau is proposing changes to 

§ 1026.32(b)(1)(vi) and (2)(vi) to clarify 

both provisions’ application. 

Specifically, the Bureau is proposing to 

state expressly that § 1026.32(b)(1)(vi) 

applies to instances where the consumer 

takes out a closed-end mortgage loan to 

pay off and terminate an existing openend credit plan held by the same 

creditor and the plan imposes a 

prepayment penalty (as defined in 

§ 1026.32(b)(6)(ii)) on the consumer. 

The Bureau also is proposing to strike 

from § 1026.32(b)(2)(vi) the reference to 

obtaining a new closed-end credit 

transaction because § 1026.32(b)(2)(vi) 

relates to points and fees only for openend credit plans and § 1026.32(b)(1)(vi) 

would apply instead. The Bureau is also 

proposing to insert in § 1026.32(b)(2)(vi) 

a reference to § 1026.32(b)(6)(i), the 

definition of prepayment penalties for 

closed-end credit transactions, to clarify 

that this definition applies in 

calculating the prepayment penalties 

included where a consumer refinances a 

closed-end mortgage loan with a HELOC 

with the creditor holding the closed-end 

mortgage loan (i.e., the closed-end 

mortgage loan’s prepayment penalties 

are included in calculating points and 

fees for the HELOC). The Bureau 

believes that these changes are 

consistent with the statutory provision 

implemented by this section and clarify 

the Bureau’s intended application of 

§ 1026.32(b)(1)(vi) and (2)(vi). 

32(b)(2) 

The Bureau is proposing the addition 

of a new comment 32(b)(2)–1 that 

directs readers for further guidance on 

the inclusion of charges paid by parties 

other than the consumer in points and 

fees for open-end credit plans to 

proposed comment 32(b)(1)–2 on 

closed-end credit transactions. 

32(d) Limitations 

32(d)(1) 

32(d)(1)(ii) Exceptions 

32(d)(1)(ii)(C) 

The Bureau is proposing to revise the 

exception to the prohibition on balloon 

payments for high-cost mortgages in 

§ 1026.32(d)(1)(ii)(c) for transactions 

that satisfy the criteria set forth in 

§ 1026.43(f), which implements a DoddVerDate Mar<15>2010 18:56 Jul 01, 2013 Jkt 229001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 E:\FR\FM\02JYP2.SGM 02JYP2

tkelley on DSK3SPTVN1PROD with PROPOSALS2
39922 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

24See e.g., U.S. Consumer Fin Prot. Bureau, 

Clarification of the 2013 Escrows Final Rule (May 

16, 2013), available at http:// 

www.consumerfinance.gov/blog/clarification-of-the2013-escrows-final-rule/. 

25Specifically, in the May 2013 ATR Final Rule, 

the Bureau adopted § 1026.43(e)(6), which provided 

for a temporary balloon-payment qualified mortgage 

that requires all of the same criteria be satisfied as 

the balloon-payment qualified mortgage definition 

in § 1026.43(f) except the requirement that the 

creditor extend more than 50 percent of its total 

first-lien covered transactions in counties that are 

‘‘rural’’ or ‘‘underserved.’’ This temporary balloonpayment qualified mortgage would sunset, 

however, after January 10, 2016. As discussed in the 

section-by-section analysis of § 1026.43(e)(6) in the 

May 2013 ATR Final Rule, the Bureau adopted this 

two-year transition period for small creditors to roll 

over existing balloon-payment loans as qualified 

mortgages, even if they do not operate 

predominantly in rural or underserved areas, 

because the Bureau believes it is necessary to 

preserve access to responsible, affordable mortgage 

credit for some consumers. The Bureau also noted 

that, during the two-year period for which 

§ 1026.43(e)(6) is in place, the Bureau intends to 

review whether the definitions of ‘‘rural’’ and 

‘‘underserved’’ should be adjusted further and to 

explore how it can best facilitate the transition of 

small creditors that do not operate predominantly 

in rural or underserved areas from balloon-payment 

loans to adjustable-rate mortgages. 78 FR 35430. 

Frank Act provision that allows certain 

balloon-payment mortgages made by 

small creditors operating predominantly 

in ‘‘rural or underserved areas’’ to be 

accorded status as qualified mortgages 

under the 2013 ATR Final Rule. The 

Bureau has received extensive comment 

on the definitions of ‘‘rural’’ and 

‘‘underserved’’ that it adopted for 

purposes of § 1026.43(f) and certain 

other purposes in the 2013 Title XIV 

Final Rules, and recently announced 

that it would reexamine those 

definitions over the next two years to 

determine whether further adjustments 

are appropriate particularly in light of 

access to credit concerns.24 The Bureau 

also amended the 2013 ATR Final Rule 

to add § 1026.43(e)(6) to allow small 

creditors during the period from January 

10, 2014, to January 10, 2016, to make 

balloon-payment qualified mortgages 

even if they do not operate 

predominantly in rural or underserved 

areas.25 In light of those actions, the 

Bureau is proposing to revise 

§ 1026.32(d)(1)(ii)(c) to expand the 

exception to the prohibition on balloon 

payments for high-cost mortgages for 

transactions that satisfy the criteria in 

either § 1026.43(f) or (e)(6). 

The balloon qualified mortgage 

provision in § 1026.43(f) implements a 

Dodd-Frank Act provision that appears 

to have been designed to promote access 

to credit. The Dodd-Frank Act generally 

prohibits balloon-payment loans from 

being accorded qualified mortgage 

status, but Congress appears to have 

been concerned that small creditors in 

rural areas might have sufficient 

difficulty converting from balloonpayment loans to adjustable rate 

mortgages that they would curtail 

mortgage lending if they could not 

obtain qualified mortgage status for their 

balloon-payment loans. As adopted in 

the 2013 ATR Final Rule, the exemption 

is available to creditors that extended 

more than 50 percent of their total 

covered transactions secured by a first 

lien in ‘‘rural’’ or ‘‘underserved’’ 

counties during the preceding calendar 

year. 

Because commenters raised similar 

concerns about the prohibition in 

HOEPA on high-cost mortgages having 

balloon-payment features, the Bureau 

decided in the 2013 HOEPA Final Rule 

to adopt § 1026.32(d)(1)(ii)(C) to allow 

balloon-payment features on loans that 

met the qualified mortgage 

requirements. The Bureau stated that, in 

its view, (1) allowing creditors in certain 

rural or underserved areas to extend 

high-cost mortgages with balloon 

payments will benefit consumers by 

expanding access to credit in these 

areas, and also will facilitate 

compliance for creditors who make 

these loans; and (2) allowing creditors 

that make high-cost mortgages in rural 

or underserved areas to originate loans 

with balloon payments if they satisfy 

the same criteria promotes consistency 

between the 2013 HOEPA Final Rule 

and the 2013 ATR Final Rule, and 

thereby facilitates compliance for 

creditors that operate in these areas. 

Because the Bureau has now decided 

to allow small creditors an additional 

two years to transition from balloonpayment loans to other products while 

it reevaluates the definitions of ‘‘rural’’ 

and ‘‘underserved,’’ the Bureau believes 

it is appropriate to carry over the 

flexibility provided by the revised May 

2013 ATR Final Rule into the HOEPA 

balloon loan provisions. Accordingly, 

the Bureau is proposing to amend 

§ 1026.32(d)(1)(ii)(C) to include the 

§ 1026.43(e)(6) exception. The Bureau is 

proposing to expand this exception 

pursuant to its authority under TILA 

section 129(p)(1), which grants it 

authority to exempt specific mortgage 

products or categories from any or all of 

the prohibitions specified in TILA 

section 129(c) through (i) if the Bureau 

finds that the exemption is in the 

interest of the borrowing public and will 

apply only to products that maintain 

and strengthen homeownership and 

equity protections. 

The Bureau believes expanding the 

balloon-payment exception for high-cost 

mortgages to allow certain small 

creditors operating in areas that do not 

qualify as ‘‘rural’’ or ‘‘underserved’’ to 

continue to originate high-cost 

mortgages with balloon payments is in 

the interest of the borrowing public and 

will strengthen homeownership and 

equity protection. The Bureau believes 

allowing greater access to credit in 

remote areas that nevertheless may not 

meet the definitions of ‘‘rural’’ or 

‘‘underserved’’ while creditors 

transition to adjustable rate mortgages 

(or the Bureau reconsiders those 

definitions) will help those consumers 

who otherwise may be able to obtain 

credit only from a limited number of 

creditors. Further, it will do so in a 

manner that balances consumer 

protections with access to credit. In the 

Bureau’s view, concerns about 

potentially abusive practices that may 

accompany balloon payments will be 

curtailed by the additional requirements 

set forth in § 1026.43(e)(6) and (f). 

Creditors that make these high-cost 

mortgages will be required to verify that 

the loans also satisfy the additional 

criteria discussed above, including some 

specific criteria required for qualified 

mortgages. Further, creditors that make 

balloon-payment high-cost mortgages 

under this exception will be required to 

hold the high-cost mortgages in 

portfolio for a specified time, which the 

Bureau believes also decreases the risk 

of abusive lending practices. 

Accordingly, for these reasons and for 

the purpose of consistency between the 

two rulemakings, the Bureau is 

proposing to amend the 2013 HOEPA 

Final Rule to include an exception to 

the § 1026.32(d)(1) balloon-payment 

restriction for high-cost mortgages 

where the creditor satisfies the 

conditions set forth in §§ 1026.43(f)(1)(i) 

through (vi) and 1026.43(f)(2) or the 

conditions set forth in § 1026.43(e)(6). 

Section 1026.35 Requirements for 

Higher-Priced Mortgage Loans 

35(b) Escrow Accounts 

35(b)(2) Exemptions 

35(b)(2)(iii) 

35(b)(2)(iii)(A) 

The Bureau is proposing to revise the 

exemption provided by 

§ 1026.35(b)(2)(iii) to the general 

requirement that creditors establish an 

escrow account for first lien higherpriced mortgage loans where a small 

creditor operates predominantly in rural 

or underserved areas and meets various 

other criteria. The Bureau has received 

extensive comment on the definitions of 

‘‘rural’’ and ‘‘underserved’’ that it 

adopted for purposes of § 1026.35(b)(2) 

and certain other purposes in the 2013 

Title XIV Final Rules and recently 

announced that it would re-examine 

those definitions over the next two years 


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26 78 FR 30739 (May 23, 2013). 

27The extent of such volatility in the transition 

from 2012 rural/non-rural status (for purposes of 

eligibility for the exemption during 2013) to 2013 

rural/non-rural status (for purposes of eligibility for 

the exemption during 2014) is likely far greater than 

during other year-to-year transitions. This is due to 

the fact that this first year-to-year transition under 

the Bureau’s ‘‘rural’’ definition happens to coincide 

with the redesignation by the USDA’s Economic 

Research Service of U.S. counties’ urban influence 

codes, on which the ‘‘rural’’ definition is generally 

based. This redesignation occurs only decennially, 

based on the most recent census data. Nevertheless, 

for purposes of eligibility for the exemption during 

2013 and 2014, the volatility is significant—just as 

creditors are first attempting to apply the 

exemption’s criteria. 

to determine whether further 

adjustments are appropriate particularly 

in light of access to credit concerns. In 

light of that coming re-examination, the 

Bureau is proposing to revise 

§ 1026.35(b) and its commentary to 

minimize volatility in the definitions 

while they are being re-evaluated. 

The exemption in § 1026.35(b)(2)(iii) 

implements a Dodd-Frank Act provision 

that appears to have been designed to 

promote access to credit by exempting 

small creditors in rural areas that might 

have sufficient difficulty maintaining 

escrow accounts that they would curtail 

making higher-priced mortgage loans 

rather than trigger the escrow account 

requirement. As adopted in the 2013 

Escrows Final Rule, and as amended by 

the Amendments to the 2013 Escrows 

Final Rule,26 the exemption is available 

to creditors that extended more than 50 

percent of their total covered 

transactions secured by a first lien on 

properties that are located in ‘‘rural’’ or 

‘‘underserved’’ counties during the 

preceding calendar year. In general, a 

county’s status as ‘‘rural’’ is defined in 

relation to Urban Influence Codes (UICs) 

established by the United States 

Department of Agriculture’s Economic 

Research Service. Due to updated 

information from the 2010 Census, 

however, the list of ‘‘rural’’ counties 

will change between 2013 and 2014, 

with a small number of new counties 

meeting the definition of rural and 

approximately 82 counties no longer 

meeting that definition. The Bureau 

estimates that approximately 200–300 

otherwise eligible creditors during 2013 

could lose their eligibility for 2014 

solely because of changes in the status 

of the counties in which they operate 

(assuming the geographical distribution 

of their mortgage originations does not 

change significantly over the relevant 

period).27 In light of the Bureau’s intent 

to review whether the definitions of 

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

adjusted further during the two-year 

transition period for balloon-payment 

mortgages discussed above, the Bureau 

also believes that subjecting small 

creditors that make higher-priced 

mortgage loans to such volatility in their 

eligibility for the exemption from the 

escrows requirement in the meanwhile 

could create significant burden for such 

creditors with little meaningful benefit 

to consumers in return. 

Accordingly, the Bureau is proposing 

to revise § 1026.35(b)(2)(iii)(A) to 

provide that, to qualify for the 

exemption, a creditor must have 

extended more than 50 percent of its 

total covered transactions secured by a 

first lien on properties located in 

‘‘rural’’ or ‘‘underserved’’ counties 

during any of the preceding three 

calendar years. As proposed, the 

provision thus would prevent a creditor 

from losing eligibility for the exemption 

under the ‘‘rural or underserved’’ 

element of the test unless it has failed 

to exceed the 50-percent threshold three 

years in a row. 

As discussed above in the section-bysection analysis of § 1026.32(d)(1)(ii)(C), 

the Bureau also is proposing to modify 

the exception from the prohibition on 

balloon payments for high-cost 

mortgages in that section. Section 

1026.32(d)(1)(ii)(C) provides an 

exception to the general prohibition on 

balloon payments for high-cost 

mortgages for balloon-payment qualified 

mortgages made by certain creditors 

operating predominantly in ‘‘rural’’ or 

‘‘underserved’’ areas. Believing that the 

same rationale for allowing balloonpayment qualified mortgages made by 

creditors in rural or underserved areas 

applies to high-cost mortgages, the 

Bureau adopted the 

§ 1026.32(d)(1)(ii)(C) exception in the 

2013 HOEPA Final Rule. As explained 

above, the Bureau believes the same 

underlying rationale for the two-year 

transition period for balloon-payment 

qualified mortgages described above 

applies equally to the 

§ 1026.32(d)(1)(ii)(C) exception from the 

high-cost mortgage balloon prohibition. 

Accordingly, the Bureau believes it is 

appropriate to extend this temporary 

framework to § 1026.32(d)(1)(ii)(C) and 

therefore is proposing to amend 

§ 1026.32(d)(1)(ii)(C) to include loans 

meeting the criteria under 

§ 1026.43(e)(6). Thus, for both balloonpayment qualified mortgages and for the 

high-cost mortgage balloon prohibition, 

the Bureau has adopted or is now 

proposing to adopt a two-year transition 

period during which the special 

treatment of balloon-payment loans 

does not depend on the creditor 

operating predominantly in rural or 

underserved areas. 

The Bureau considered taking the 

same approach with regard to the 

escrow requirement but concluded 

ultimately that a smaller adjustment was 

appropriate. Because higher-priced 

mortgage loans are already subject to an 

escrow requirement, all creditors are 

currently required to maintain escrow 

accounts for such loans. Implementation 

of the Dodd-Frank Act exemption will 

thus reduce burden for some creditors, 

but does not impose different 

requirements than the status quo except 

as to the length of time that an escrow 

account must be maintained. This is 

fundamentally different than the abilityto-repay and high-cost mortgage 

requirements, which would prohibit 

new balloon-payment loans from being 

accorded qualified mortgage status or 

from being made going forward absent 

implementation of the special 

exemptions. In addition, the Bureau 

may change the definition of rural or 

underserved areas as the result of its reexamination process, but does not 

anticipate lifting the requirement that 

creditors operate predominantly in rural 

or underserved areas to qualify for the 

exemption because Congress 

specifically contemplated that 

limitation on the escrows exemption. 

Accordingly, the Bureau believes it is 

appropriate to leave the definition in 

place, but to prevent volatility in the 

definition from negatively impacting 

creditors who have fallen within the 

existing definition while the Bureau reevaluates the underlying definitions. 

The Bureau believes that, as with the 

other two balloon-payment provisions 

for which the Bureau believes two-year 

transition periods are appropriate, this 

amendment will benefit consumers by 

expanding access to credit in certain 

areas that met the definitions of ‘‘rural’’ 

or ‘‘underserved’’ at some time in the 

preceding three calendar years and also 

will facilitate compliance for creditors 

that make these loans. The Bureau also 

believes that the proposed amendment 

will promote additional consistency 

between the 2013 HOEPA Final Rule, 

the 2013 ATR Final Rule, and the 2013 

Escrows Final Rule, thereby facilitating 

compliance for affected creditors. 

The Bureau notes that the mechanics 

of proposed § 1026.35(b)(2)(iii)(A) differ 

slightly from the express transition 

period ending on January 10, 2016, 

under § 1026.43(e)(6). Thus, this 

proposed amendment would not 

parallel the same transition period 

precisely, as does proposed 

§ 1026.32(d)(1)(ii)(C), which simply 

would incorporate § 1026.43(e)(6)’s 

conditions by cross-reference. Instead, 

proposed § 1026.35(b)(2)(iii)(A) would 

approximate a two-year transition 

period by extending from one to three 


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39924 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

years the time for which a creditor, once 

eligible for the exemption, cannot lose 

that eligibility because of changes in the 

rural (or underserved) status of the 

counties in which the creditor operates. 

Because the 2013 Escrows Final Rule 

took effect on June 1, 2013, the escrows 

provisions already have begun operating 

over seven months earlier than the 

provisions adopted by the 2013 HOEPA 

and ATR Final Rules (which take effect 

on January 10, 2014). Thus, whereas the 

two balloon-payment provisions 

specifically last through January 10, 

2016, the escrows-requirement 

exemption would guarantee eligibility 

(for a creditor that is eligible during 

2013) through 2015. Thus, the proposed 

§ 1026.35(b)(2)(iii) exemption would 

approximately, though not exactly, track 

the extension of the balloon exemption 

for qualified mortgages under 

§ 1026.43(e)(6), and the proposed 

extension of the HOEPA balloon 

exemption under proposed 

§ 1026.32(d)(1)(ii)(C). 

In addition to the proposed changes 

discussed above, the Bureau also is 

proposing to amend 

§ 1026.35(b)(2)(iii)(D)(1) and its 

commentary to conform to the proposed 

expansion of the exemption to creditors 

that may meet the section 

35(b)(2)(iii)(A) criteria for calendar year 

2014 based on loans made in ‘‘rural’’ or 

‘‘underserved’’ counties in calendar year 

2011, but not 2012 or 2013. Section 

§ 1026.35(b)(2)(iii)(D)(1) currently 

prohibits any creditor from availing 

itself of the exemption if it maintains 

escrow accounts for any extensions of 

consumer credit secured by real 

property or a dwelling that it or its 

affiliate currently service, unless the 

escrow accounts were established for 

first-lien higher-priced mortgage loans 

on or after April 1, 2010, and before 

June 1, 2013, or were established after 

consummation as an accommodation for 

distressed consumers. With respect to 

loans where escrows were established 

on or after April 1, 2010, and before 

June 1, 2013, the Supplementary 

Information to the 2013 Escrows Final 

Rule explained that the Bureau believes 

creditors should not be penalized for 

compliance with the then current 

regulation, which would have required 

any such loans to be escrowed after 

April 1, 2010, and prior to June 1, 

2013—the date the exemption took 

effect. 

The Bureau understands that creditors 

who did not make more than 50 percent 

of their first-lien higher-priced mortgage 

loans in ‘‘rural’’ or ‘‘underserved’’ 

counties in calendar year 2012 would 

have been ineligible for the exemption 

for calendar year 2013, and thus would 

have been required under § 1026.35(a) 

to escrow any higher-priced mortgage 

loans those creditors made after June 1, 

2013. However, it is possible in light of 

the proposed amendments that some of 

these same creditors may have met this 

criteria during calendar year 2011—and 

thus, should the Bureau finalize the 

proposal and allow creditors to qualify 

for the exemption (assuming they satisfy 

the other conditions set forth in 

§ 1026.35(b)(2)(iii)(B), (C), and (D))— 

such creditors may qualify for the 

exemption in 2014. However, there 

would be one barrier: For applications 

received on or after June 1, 2013, but 

before the date the proposed 

amendment takes effect (as proposed, 

January 1, 2014), such a creditor who 

made a first-lien higher-priced mortgage 

loan would have been required to 

escrow that loan, and thus would be 

deemed ineligible under 

§ 1026.35(b)(2)(iii)(D). 

The Bureau does not believe that such 

creditors should lose the exemption 

because they were ineligible prior to the 

proposed amendment taking effect and 

thus made loans with escrows from June 

1, 2013, through December 31, 2013. As 

the Bureau discussed in the 

Supplementary Information to the final 

rule, the Bureau believes creditors 

should not be penalized for compliance 

with the current regulation. The Bureau 

thus believes it is appropriate to amend 

§ 1026.35(b)(2)(iii)(D)(1) and comment 

35(b)(2)(iii)–1.iv to exclude escrow 

accounts established after April 1, 2010 

and before January 1, 2014. The Bureau 

invites comment on this approach, and 

specifically whether an effective date for 

transactions where applications were 

received on or after January 1, 2014 is 

appropriate, in light of the proposed 

change to the calendar year exemption 

under § 1026.35(b)(2)(iii). 

Section 1026.36 Loan Originator 

Compensation 

36(a) Definitions 

The Bureau is proposing several 

clarifications, revisions, and 

amendments to § 1026.36(a) and 

associated commentary to resolve 

inconsistencies in wording, to conform 

the comments to the intended operation 

of the regulation text, and to address 

issues raised during the regulatory 

implementation process. The Bureau 

proposes these changes pursuant to its 

TILA section 105(a) and Dodd-Frank 

Act section 1022(b)(1) authority. 

References to Credit Terms 

The Bureau is proposing to amend 

§ 1026.36(a) and its commentary to 

clarify the meaning of ‘‘credit terms’’ in 

those provisions. For example, 

§ 1026.36(a)(1)(i)(A) excludes from the 

definition of ‘‘loan originator’’ 

persons—i.e., a loan originator’s or 

creditor’s employees (or agents or 

contractors thereof) engaged in certain 

administrative and clerical tasks that are 

not considered to be loan originator 

activity under the rules. To be eligible 

for the exclusion, the person must not, 

among other things, offer or negotiate 

‘‘credit terms available from a creditor.’’ 

Likewise, comment 36(a)–4.i. provides 

that the definition of loan originator 

does not include persons who, among 

other things, do not discuss ‘‘specific 

credit terms or products available from 

a creditor with the consumer.’’ 

Similarly, comment 36(a)–4.ii.B 

provides that the definition of loan 

originator does not include an employee 

of a creditor or loan originator who 

provides loan originator or creditor 

contact information to a consumer, 

provided the employee does not, among 

other things, ‘‘discuss particular credit 

terms available from a creditor.’’ See 

also § 1026.36(a)(1)(i)(B) and comments 

36(a)–1.i.A.2 through –1.i.A.4 (other 

similar references to credit terms). As 

discussed below, the Bureau is 

proposing to revise comment 36(a)– 

4.ii.B to clarify that it applies to loan 

originator or creditor agents and 

contractors as well as employees. 

The Bureau intended the references to 

‘‘credit terms’’ in these provisions to 

refer to particular credit terms that are 

or may be made available to the 

consumer in light of the consumer’s 

financial characteristics. The Bureau 

believes that, when a loan originator’s or 

creditor’s employee (or agent or 

contractor thereof) is offering or 

discussing particular credit terms 

selected based on his or her assessment 

of the consumer’s financial 

characteristics, the person is acting in 

the role of a loan originator. However, 

this does not extend to a person’s 

discussion of general credit terms that a 

creditor makes available and advertises 

to the public at large, such as where 

such person merely states: ‘‘We offer 

rates as low as 3% to qualified 

consumers.’’ 

In light of inquiries from loan 

originators and creditors, the Bureau is 

concerned that the term ‘‘credit terms’’ 

could be construed too broadly and thus 

render any person that provides such 

general information a loan originator. 

This was not the Bureau’s intent. 

Accordingly, the Bureau is proposing to 

revise § 1026.36(a)(1)(i)(A) and (B), and 

comments 36(a)–1 and –4 to address 

several inconsistencies regarding the 

meaning of ‘‘credit terms’’ to clarify that 

any such activity must relate to 


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Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 39925 

‘‘particular credit terms that are or may 

be available from a creditor to that 

consumer selected based on the 

consumer’s financial characteristics,’’ 

not credit terms generally. Thus, a 

person who discusses with a consumer 

that, based on the consumer’s financial 

characteristics, a creditor should be able 

to offer the consumer an interest rate of 

3%, would be considered a loan 

originator. However, a person who 

merely states general information such 

as ‘‘we offer rates as low as 3% to 

qualified consumers’’ would not be 

considered a loan originator under the 

proposed rule because the person is not 

offering particular credit terms that are 

or may be available to that consumer 

selected based on the consumer’s 

financial characteristics. In addition, for 

clarification purposes the Bureau is 

proposing to move a parenthetical that 

explains ‘‘credit terms’’ includes rates, 

fees, and other costs to new 

§ 1026.36(a)(1)(i)(6). 

The Bureau believes these changes 

better align the scope of the loan 

originator definition with the intended 

scope of the 2013 Loan Originator 

Compensation Final Rule. The Bureau 

solicits comment on whether additional 

guidance concerning the meaning of 

particular credit terms that are or may 

be made available to the consumer in 

light of the consumer’s financial 

characteristics is necessary, and if so, 

what clarifications would be helpful. 

Application-Related Administrative and 

Clerical Tasks 

Comment 36(a)–4.i provides that the 

definition of loan originator does not 

include persons who (1) At the request 

of the consumer, provide an application 

form to the consumer; (2) accept a 

completed application form from the 

consumer; or (3) without assisting the 

consumer in completing the application, 

processing or analyzing the information, 

or discussing specific credit terms or 

products available from a creditor with 

the consumer, deliver the application to 

a loan originator or creditor. 

The Bureau is proposing to revise 

comment 36(a)–4.i to provide that the 

definition of loan originator does not 

include a person who, acting in his or 

her capacity as an employee (or agent or 

contractor), provides a credit 

application form from the entity for 

whom the person works to the 

consumer for the consumer to complete. 

In such a case, provided that the person 

does not assist the consumer in 

completing the application or otherwise 

influence his or her decision, the 

Bureau believes the person is 

performing an administrative task, not 

acting as a loan originator by engaging 

in a referral to a particular creditor or 

loan originator or assisting a consumer 

in obtaining or applying to obtain credit. 

As also discussed below with respect to 

persons who provide creditor or loan 

originator contact information, the 

Bureau believes ambiguity regarding the 

meaning of ‘‘in response to a consumer’s 

request’’ could cause unnecessary 

compliance challenges. Moreover, the 

Bureau notes that classifying such 

individuals as loan originators would 

subject them to the requirements 

applicable to loan originators with, in 

the Bureau’s view, little appreciable 

benefit for consumers in situations 

where the person is providing a credit 

application from the entity for whom 

the person works. The Bureau proposes 

to revise comment 36(a)–4.i accordingly, 

including removing the condition that 

the provision of the application must be 

‘‘at the request of the consumer.’’ 

As a result of these proposed 

revisions, employees (or agents or 

contractors) of manufactured home 

retailers who provide a credit 

application form from one particular 

creditor or loan originator organization 

that is not the entity for which they 

work would not qualify for the 

exclusion in § 1026.36(a)(1)(i)(B), but 

those who simply provide a credit 

application form from the entity for 

which they work would potentially be 

eligible for the exclusion if other 

conditions are met. An employee of a 

manufactured home retailer who simply 

provides a credit application form from 

one particular creditor or loan originator 

organization that is its employer would 

potentially be eligible for the exclusion 

in § 1026.36(a)(1)(i)(B). An agent or 

contractor of a manufactured home 

retailer who simply provides a credit 

application form from one particular 

creditor or loan originator organization 

it works for as agent or contractor would 

potentially be eligible for the exclusion 

discussed in comment 36(a)–4.i. The 

revisions would also clarify that 

someone who merely delivers a 

completed credit application form from 

the consumer to a creditor or loan 

originator would potentially be eligible 

for the exclusion if other conditions are 

met but would remove language that 

could have been misinterpreted to 

suggest that someone who accepts an 

application in the sense of taking or 

helping the consumer complete an 

application could be eligible for the 

exclusion. 

Responding to Consumer Inquiries and 

Providing General Information 

Employees (or agents or contractors) 

of a creditor or loan originator who 

provide loan originator or creditor 

contact information. Comment 36(a)– 

4.ii.B provides that the definition of 

loan originator does not include persons 

who, acting as employees of a creditor 

or loan originator, provide loan 

originator or creditor contact 

information to a consumer in response 

to the consumer’s request, provided that 

the employee does not discuss 

particular credit terms available from a 

creditor and does not direct the 

consumer, based on the employee’s 

assessment of the consumer’s financial 

characteristics, to a particular loan 

originator or creditor seeking to 

originate particular credit transactions 

to consumers with those financial 

characteristics. Similar to the 

clarifications regarding credit terms 

discussed above, the Bureau also is 

proposing to clarify that comment 

36(a)–4.ii.B applies to loan originator or 

creditor agents and contractors as well 

as employees. The Bureau notes this is 

consistent with comments 36(a)–1.i.B 

and 36(a)–4. 

In addition to making conforming 

technical revisions, the Bureau is 

proposing to remove the requirement 

that creditor or loan originator contact 

information must be provided ‘‘in 

response to the consumer’s request’’ for 

the exclusion to apply. The Bureau has 

received many inquiries on this topic 

from stakeholders expressing concern 

that, absent a clarifying amendment, the 

rule could be interpreted to require 

tellers, greeters, or other such 

employees (or contractors or agents) to 

be classified as loan originators for 

merely providing contact information to 

a consumer who did not clearly or 

explicitly ask for it. Stakeholders have 

further asserted that such persons 

should not be considered loan 

originators when their conduct is 

limited to following a script prompting 

them to ask whether the consumer is 

interested in a mortgage loan and the 

tellers are not able to engage in any 

independent assessment of the 

consumer. Moreover, stakeholders have 

asserted it would be very costly to 

implement the training and certification 

requirements under Regulation Z as 

amended by the 2013 Loan Originator 

Compensation Final Rule for employers 

with large numbers of administrative 

staff who interact with consumers on a 

day-to-day basis in the manner 

described. 

In light of these concerns, the Bureau 

is proposing a limited expansion of the 

existing exclusion that does not require 

the consumer to initiate a request for 

loan originator or creditor contact 

information as a prerequisite to its 

availability. The Bureau understands 

that basing the exclusion on the 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
39926 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

28Among other things, the 2013 TILA Servicing 

Final Rule implemented TILA sections 129F and 

129G added by section 1464 of the Dodd-Frank Act. 

The requirements in TILA section 129F concerning 

prompt crediting of payments apply to consumer 

credit transactions secured by a consumer’s 

principal dwelling. The requirements in TILA 

section 129G concerning payoff statements apply to 

creditors or servicers of a home loan. The 2013 

TILA Servicing Final Rule, however, did not 

substantively revise the existing late fee pyramiding 

requirement in § 1026.36(c) but instead 

redesignated the requirement as new paragraph 

36(c)(2) to accommodate the regulatory provisions 

implementing TILA sections 129F and 129G. 

consumer requesting contact 

information could cause those who 

work for creditor or loan originator 

organizations in administrative or 

clerical roles (e.g., tellers) to be treated 

as loan originators when simply 

attempting to explain generally what 

financing products the entity for which 

the person works offers. The Bureau 

also believes ambiguity regarding the 

meaning of ‘‘in response to a consumer’s 

request’’ could cause unnecessary 

compliance challenges. In such 

instances, the Bureau does not believe 

tellers or other such staff should be 

considered loan originators for merely 

providing loan originator or creditor 

contact information to the consumer, 

provided that the person does not 

discuss particular credit terms available 

from a creditor to the consumer and 

does not direct the consumer, based on 

his or her assessment of the consumer’s 

financial characteristics, to a particular 

loan originator or creditor seeking to 

originate credit transactions to 

consumers with those financial 

characteristics. The Bureau also notes 

that classifying such individuals as loan 

originators would subject them to the 

requirements applicable to loan 

originators with, in the Bureau’s view, 

little appreciable benefit for consumers. 

Accordingly, the Bureau is proposing 

to remove the qualifying phrase ‘‘in 

response to the consumer’s request’’ 

from comment 36(a)–4.ii.B. However, 

the Bureau is not proposing to exclude 

from the definition of ‘‘loan originator’’ 

employees (or agents or contractors) of 

creditors and loan originator 

organizations who, in the course of 

providing loan originator or creditor 

contact information to the consumer, 

direct that consumer to a particular loan 

originator or particular creditor based 

on his or her assessment of the 

consumer’s financial characteristics or 

discuss particular credit terms available 

from a creditor to the consumer. These 

actions can influence the credit terms 

that the consumer ultimately obtains, 

and the Bureau continues to believe 

these actions should result in 

application of the requirements imposed 

by the rule on loan originators. The 

Bureau believes this proposed 

amendment should enable creditors and 

loan originators to implement the rule 

with respect to persons acting under the 

controlled circumstances specified by 

the comment while still mitigating 

harmful steering outcomes the Bureau 

intended for the rule to address. 

Describing other product-related 

services. Comment 36(a)–4.ii.C provides 

that the definition of loan originator 

does not include persons who describe 

other product-related services. The 

Bureau is proposing to amend this 

comment to provide examples of 

persons who describe other productrelated services. The proposed new 

examples include persons who describe 

optional monthly payment methods via 

telephone or via automatic account 

withdrawals, the availability and 

features of online account access, the 

availability of 24-hour customer 

support, or free mobile applications to 

access account information. In addition, 

the proposed amendment to comment 

36(a)–4.iii.C would clarify that persons 

who perform the administrative task of 

coordinating the closing process are 

excluded, whereas persons who arrange 

credit transactions are not excluded. 

Amounts for Charges for Services 

That Are Not Loan Origination 

Activities. Comment 36(a)–5.iv.B 

provides that compensation includes 

any salaries, commissions, and any 

financial or similar incentive, regardless 

of whether it is labeled as payment for 

services that are not loan origination 

activities. The Bureau is proposing to 

revise this comment to provide that 

compensation includes any salaries, 

commissions, and any financial or 

similar incentive ‘‘to an individual loan 

originator,’’ regardless of whether it is 

labeled as payment for services that are 

not loan origination activities. The 

proposed wording change conforms this 

provision to the other provisions in 

comment 36(a)–5.iv that permit 

compensation paid to a loan originator 

organization under certain 

circumstances for services it performs 

that are not loan originator activities. 

The Bureau requests comment on these 

proposed clarifications generally and on 

whether other clarifications to 

comments 36(a)–4 and 36(a)–5 should 

be considered. 

36(b) Scope 

The Bureau is proposing to revise the 

scope of provisions in § 1026.36(b) to 

reflect the applicability of the servicing 

provisions in § 1026.36(c) regarding 

payment processing, pyramiding late 

fees, and payoff statements as modified 

by the 2013 TILA Servicing Final 

Rule.28 Current § 1026.36(b) and 

comment 36(b)–1 (relocated from 

§ 1026.36(f) and comment 36–1, 

respectively, by the 2013 Loan 

Originator Compensation Final Rule) 

provide that § 1026.36(c) applies to 

closed-end consumer credit transactions 

secured by a consumer’s principal 

dwelling. The new payment processing 

provisions in § 1026.36(c)(1) and the 

restrictions on pyramiding late fees in 

§ 1026.36(c)(2) both apply to consumer 

credit transactions secured by a 

consumer’s principal dwelling. The new 

payoff statement provisions in 

§ 1026.36(c)(3), however, apply more 

broadly to consumer credit transactions 

secured by a dwelling. 

The proposal would revise 

§ 1026.36(b) and comment 36(b)–1 to 

state that § 1026.36(c)(1) and (c)(2) 

apply to consumer credit transactions 

secured by a consumer’s principal 

dwelling. The proposed revisions also 

would provide that § 1026.36(c)(3) 

applies to a consumer credit transaction 

secured by a dwelling (even if it is not 

the consumer’s principal dwelling). 

The Bureau is proposing these 

revisions to § 1026.36(b) and comment 

36(b)–1 to conform them to 

modifications made to § 1026.36(c) by 

the 2013 Servicing Final Rules that 

changed the applicability of certain 

provisions in § 1026.36(c). The Bureau 

believes the proposed revisions are 

necessary to reflect the applicability of 

the provisions in § 1026.36(c) as 

modified by the 2013 Servicing Final 

Rules. 

The Bureau seeks comment on these 

proposed revisions generally. The 

Bureau also invites comment on 

whether additional revisions to 

§ 1026.36(b) and comment 36(b)–1 

should be considered to clarify further 

the applicability of the provisions in 

§ 1026.36(c) as modified by the 2013 

Servicing Final Rules. 

36(d) Prohibited Payments to Loan 

Originators 

36(d)(1) Payments Based on a Term of 

the Transaction 

36(d)(1)(i) 

The Bureau is proposing to revise 

comments 36(d)(1)–1.ii and 36(d)(1)– 

1.iii.D, which interpret 

§ 1026.36(d)(1)(i)–(ii), to improve the 

consistency of the wording across the 

regulatory text and commentary, and 

provide further interpretation of the 

intended meaning of the regulatory text. 

36(d)(1)(iii) 

The Bureau is proposing to revise the 

portions of comment 36(d)(1)–3 that 

interpret § 1026.36(d)(1)(iii) to improve 

the consistency of the wording across 


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Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 39927 

29The Bureau included these commentary 

provisions in the 2013 Loan Originator 

Compensation Final Rule based on its belief that 

creditors and loan originator organizations paying 

non-deferred profits-based compensation under 

§ 1026.36(d)(1)(iv)(B)(1) would potentially benefit 

from having the discretion to include the nondeferred profits-based compensation in the total 

compensation amount, which, if done, would 

increase the amount of non-deferred profits-based 

compensation that can be paid under the 10-percent 

limit (although this would make the calculation of 

total compensation somewhat more complex). The 

Bureau similarly provided discretion to creditors 

and loan originator organizations to include in total 

compensation the amount of any contributions by 

the creditor or loan originator organization to the 

individual loan originator’s accounts in designated 

tax-advantaged plans that are defined contribution 

plans. The Bureau believes the potential marginal 

increase in the non-deferred profits-based 

compensation that can be paid under 

§ 1026.36(d)(1)(iv)(B)(1) as a result of including 

these components of compensation in the total 

compensation amount does not raise a significant 

risk of steering incentives. See comment 36(d)(1)– 

3.v.F, as proposed to be revised, for an example of 

where including non-deferred profits-based 

compensation in total compensation affects the 

amount of non-deferred profits-based compensation 

that can be paid. 

the regulatory text and commentary, and 

provide further interpretation of the 

intended meaning of the regulatory text. 

36(d)(1)(iv) 

The Bureau is proposing revisions to 

the portions of comment 36(d)(1)–3 that 

interpret § 1026.36(d)(1)(iv). Section 

1026.36(d)(1)(iv) permits, under certain 

circumstances, the payment of 

compensation under a non-deferred 

profits-based compensation plan to an 

individual loan originator even if the 

compensation is directly or indirectly 

based on the terms of multiple 

transactions by multiple individual loan 

originators. Section 

1026.36(d)(1)(iv)(B)(1) permits this 

compensation if it does not exceed 10 

percent of the individual loan 

originator’s total compensation 

corresponding to the time period for 

which the compensation under a nondeferred profits-based compensation 

plan is paid. Comments 36(d)(1)–3.ii 

through –3.v further interpret 

§ 1026.36(d)(1)(iv)(B)(1). Section 

1026.36(d)(1)(iv)(B)(2) permits this type 

of compensation if the individual loan 

originator is a loan originator for ten or 

fewer consummated transactions during 

the 12-month period preceding the 

compensation determination. Comment 

36(d)(1)–3.vi further interprets 

§ 1026.36(d)(1)(iv)(B)(2). 

The Bureau is proposing to amend 

comment 36(d)(1)–3 to improve the 

consistency of the wording across the 

regulatory text and commentary, 

provide further interpretation as to the 

intended meaning of the regulatory text 

in § 1026.36(d)(1)(iv), and ensure that 

the examples included in the 

commentary accurately reflect the 

interpretations of the regulatory text 

contained elsewhere in the commentary. 

These proposed amendments include 

clarifying in comment 36(d)(1)–3.vi that, 

for purposes of determining whether an 

individual loan originator was the loan 

originator for ten or fewer transactions, 

only consummated transactions are 

counted, consistent with 

§ 1026.36(d)(1)(iv)(B)(2). Nearly all of 

the proposed revisions address the 

commentary sections that interpret the 

meaning of § 1026.36(d)(1)(iv)(B)(1) (i.e., 

setting forth the 10-percent total 

compensation limit) and not 

§ 1026.36(d)(1)(iv)(B)(2). 

The Bureau is proposing more 

extensive clarifications to two 

comments interpreting § 1026.36(d)(1). 

First, the Bureau proposes to revise 

comment 36(d)(1)–3.v.A, which clarifies 

the meaning of ‘‘total compensation’’ as 

used in § 1026.36(d)(1)(iv)(B)(1). The 

proposed revisions clarify that the first 

component of total compensation—all 

wages and tips reportable for Medicare 

tax purposes in box 5 on IRS form W– 

2 (or IRS form 1099–MISC, as 

applicable)—includes all such wages 

and tips that are actually paid during 

the relevant time period regardless of 

when they are earned, except for any 

compensation under a non-deferred 

profits-based compensation plan that is 

earned during a different time period. 

The Bureau is proposing these changes 

to comment 36(d)(1)–3.v.A in 

conjunction with proposed revisions, 

described below, to comment 36(d)(1)– 

3.v.C. The proposed revisions to the two 

comments cumulatively are intended to 

provide a more precise interpretation of 

the following language in 

§ 1026.36(d)(1)(iv)(B)(1): ‘‘total 

compensation corresponding to the time 

period for which the compensation 

under the non-deferred profits-based 

compensation plan is paid.’’ In 

particular, the Bureau believes that it is 

important to state more expressly in the 

commentary that compensation under a 

non-deferred profits-based 

compensation plan that is paid during a 

particular time period but is earned 

during a different time period (e.g., a 

bonus made with reference to mortgagerelated business profits for a calendar 

year that is paid in January of the 

following calendar year) is excluded 

from the total compensation amount for 

the particular time period in which the 

payment is made. This concept is 

discussed in an example in comment 

36(d)(1)–3.v.C, but the Bureau is 

concerned that failing to highlight the 

concept more generally could lead to 

the language being misinterpreted to 

apply only to the facts in the example. 

The Bureau is also proposing 

additional language in comment 

36(d)(1)–3.v.A to make clearer that 

compensation under the non-deferred 

profits-based compensation plan that is 

earned during a particular time period 

can be included in the total 

compensation amount for that time 

period at the election of the party 

paying the compensation. This 

interpretation of the meaning of ‘‘total 

compensation’’ was implied in several 

examples in the commentary to 

§ 1026.36(d)(1)(iv)(B)(1) (e.g., comment 

36(d)(1)–3.v.F.1); in this proposal, it is 

made more explicit.29 The Bureau also 

is proposing to clarify that, if the person 

elects to include in total compensation 

the amount of any creditor or loan 

originator organization contributions to 

accounts of individual loan originators 

in designated tax-advantaged plans that 

are defined contribution plans, the 

contributions must be actually made 

during the relevant time period (rather 

than earned during that time period but 

made during a different time period). 

The Bureau believes that these changes 

would facilitate compliance. 

Furthermore, the Bureau is proposing 

to revise comment 36(d)(1)–3.v.C to 

clarify the meaning of ‘‘time period’’ in 

§ 1026.36(d)(1)(iv)(B)(1). The Bureau is 

concerned that comment 36(d)(1)–3.v.C 

inadvertently conflates the two relevant 

time periods to be used for the 10- 

percent limit calculation: The time 

period for compensation under the nondeferred profits-based compensation 

plan, and the time period for the total 

compensation. The proposed revisions 

would clarify that: (1) The relevant time 

period for compensation paid under the 

non-deferred profits-based 

compensation plan is the time period 

for which a person makes reference to 

profits in determining the compensation 

(i.e., when the compensation was 

earned); and (2) the relevant time period 

for the total compensation is the same 

time period, but only certain types of 

compensation may be included in the 

total compensation amount for that time 

period, as explained in comment 

36(d)(1)–3.v.A. 

Collectively, the proposed revisions to 

comments 36(d)(1)–3.v.A and –3.v.C are 

intended to clarify that, while the time 

period used to determine both elements 

of the 10-percent limit ratio is the same: 

(1) The non-deferred profits-based 

compensation for the time period is 

whatever such compensation was 

earned during that time period, 

regardless of when it was actually paid; 

and (2) compensation that is actually 

paid during the time period, regardless 

of when it was earned, generally will be 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
39928 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

30 78 FR at 11390. 

included in the amount of total 

compensation for that time period, but 

whether the compensation is included 

ultimately depends on the type of 

compensation. The proposal also revises 

the examples in comment 36(d)(1)–3.v.C 

to reflect the proposed changes to 

comment 36(d)(1)–3.v.A and, to allay 

potential confusion about when the 

provisions take effect, remove reference 

to calendar year 2013. See part IV of this 

Supplementary Information for 

discussion more generally of the 

Bureau’s proposed changes to the 

effective date for the provisions of 

§ 1026.36(d)(1). The Bureau believes 

these changes would facilitate 

compliance. 

36(f) Loan Originator Qualification 

Requirements 

36(f)(3) 

The Bureau is proposing to change the 

dates referenced in § 1026.36(f)(3)(i) and 

(f)(3)(ii) and its associated commentary 

from January 10, 2014, to January 1, 

2014. These proposed changes coincide 

with the proposed revision of the 

effective date for § 1026.36(f). See part 

IV of the Supplementary Information for 

a discussion of the effective date for 

§ 1026.36(f). 

36(i) Prohibition on Financing Credit 

Insurance 

The Bureau is proposing to amend 

§ 1026.36(i) to clarify the scope of the 

prohibition on a creditor financing, 

directly or indirectly, any premiums for 

credit insurance in connection with a 

consumer credit transaction secured by 

a dwelling. Dodd-Frank Act section 

1414 added TILA section 129C(d), 

which generally prohibits a creditor 

from financing premiums or fees for 

credit insurance in connection with a 

closed-end consumer credit transaction 

secured by a dwelling, or an extension 

of open-end consumer credit secured by 

the consumer’s principal dwelling. The 

prohibition applies to credit life, credit 

disability, credit unemployment, credit 

property insurance, and other similar 

products, including debt cancellation 

and debt suspension contracts (defined 

collectively as ‘‘credit insurance’’ for 

purposes of this discussion). The same 

provision, however, excludes from the 

prohibition credit insurance premiums 

or fees that are ‘‘calculated and paid in 

full on a monthly basis.’’ 

Section 1026.36(i) as Adopted in the 

2013 Loan Originator Compensation 

Final Rule 

In the 2013 Loan Originator 

Compensation Final Rule, the Bureau 

implemented this prohibition by 

adopting the statutory provision without 

substantive change, in § 1026.36(i). The 

final rule provided an effective date of 

June 1, 2013 for § 1026.36(i), and 

clarified that the provision applies to 

transactions for which a creditor 

received an application on or after that 

date.30

In the preamble to the final rule, the 

Bureau responded to public comments 

on the regulatory text that the Bureau 

had included in its proposal. The public 

comments included requests from 

consumer groups for clarification on the 

applicability of the regulatory 

prohibition to certain factual scenarios 

where credit insurance premiums are 

charged periodically, rather than as a 

lump-sum that is added to the loan 

amount at consummation. In particular, 

they requested clarification on the 

meaning of the exclusion from the 

prohibition for credit insurance 

premiums or fees that are ‘‘calculated 

and paid in full on a monthly basis.’’ 

The Bureau did not receive any public 

comments from the credit insurance 

industry. The Bureau received a limited 

number of comments from creditors 

concerning the general prohibition, but 

these comments did not address 

specifically the applicability of the 

exclusion from the prohibition for 

premiums that are calculated and paid 

in full on a monthly basis. 

In their comments, the consumer 

groups described two practices that they 

believed should be prohibited by the 

regulatory provision. First, they 

described a practice in which some 

creditors charge credit insurance 

premiums on a monthly basis but add 

those premiums to the consumer’s 

outstanding principal. They stated that 

this practice does not meet the 

requirement that, to be excluded from 

the prohibition, premiums must be 

‘‘paid in full on a monthly basis.’’ They 

also stated that this practice constitutes 

‘‘financing’’ of credit insurance 

premiums, which is prohibited by the 

provision. Second, the consumer groups 

described a practice in which credit 

insurance premiums are charged to the 

consumer on a ‘‘levelized’’ basis, 

meaning that the premiums remain the 

same each month, even as the consumer 

pays down the outstanding balance of 

the loan. They stated that this practice 

does not meet the condition of the 

exclusion that premiums must be 

‘‘calculated . . . on a monthly basis,’’ 

and therefore violates the statutory 

prohibition. In the preamble of the final 

rule, the Bureau stated that it agreed 

that these practices do not meet the 

condition of the exclusion and violate 

the prohibition on creditors financing 

credit insurance premiums. 

Outreach during implementation 

period following publication of the final 

rule. After publication of the final rule, 

representatives of credit unions and 

credit insurers expressed concern to the 

Bureau about these statements in the 

preamble of the final rule. Credit union 

representatives questioned whether 

adding monthly premiums to a 

consumer’s loan balance should 

necessarily be considered prohibited 

‘‘financing’’ of the credit insurance 

premiums and indicated that, if it is 

considered financing, they would not be 

able to adjust their data processing 

systems before the June 1, 2013 effective 

date. 

Credit insurance company 

representatives stated that level and 

levelized credit insurance premiums are 

in fact ‘‘calculated . . . on a monthly 

basis.’’ (They use the term ‘‘levelized’’ 

premiums to refer to a flat monthly 

payment that is derived from a 

decreasing monthly premium payment 

arrangement and use the term ‘‘level’’ 

premium to refer to premiums for which 

there is no decreasing monthly premium 

payment arrangement available, such as 

for level mortgage life insurance.) The 

companies asserted that levelized 

premiums are, in fact, ‘‘calculated . . . 

on a monthly basis,’’ because an 

actuarially derived rate is multiplied by 

a fixed monthly principal and interest 

payment to derive the monthly 

insurance premium. They also asserted 

that level premiums are ‘‘calculated . . . 

on a monthly basis’’ because an 

actuarially derived rate is multiplied by 

the consumer’s original loan amount to 

derive the monthly insurance premium. 

Accordingly, they urged that level and 

levelized credit insurance premiums 

should be excluded from the prohibition 

on creditors financing credit insurance 

premiums so long as they are also paid 

in full on a monthly basis. Industry 

representatives have further stated that 

even if the Bureau concludes that level 

or levelized credit insurance premiums 

are not ‘‘calculated’’ on a monthly basis 

within the meaning of the exclusion 

from the prohibition, they are not 

‘‘financed’’ by a creditor and thus are 

not prohibited by the statutory 

provision. 

Delay of § 1026.36(i) Effective Date 

In light of these concerns, and the 

Bureau’s belief that, if the effective date 

were not delayed, creditors could face 

uncertainty about whether and under 

what circumstances credit insurance 

premiums may be charged periodically 

in connection with covered consumer 

credit transactions secured by a 


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Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 39929 

31 78 FR 32547 (May 31, 2013). 

dwelling, the Bureau issued the 2013 

Effective Date Final Rule delaying the 

June 1, 2013 effective date of 

§ 1026.36(i) to January 10, 2014.31 In 

that final rule, the Bureau stated its 

belief that this uncertainty could result 

in a substantial compliance burden to 

industry. However, the Bureau also 

stated that it would revisit the effective 

date of the provision in this proposal. 

Proposed Amendments to § 1026.36(i) 

The Bureau is now, as contemplated 

in the 2013 Effective Date Final Rule, 

proposing amendments to § 1026.36(i) 

to clarify the scope of the prohibition on 

a creditor financing, directly or 

indirectly, any premiums for credit 

insurance in connection with a 

consumer credit transaction secured by 

a dwelling. The Bureau believes from 

communications with consumer 

advocates, creditors, and trade 

associations that its statement in the 

final rule in response to consumer group 

public comments may have been 

overbroad and left ambiguity about 

when a creditor violates the prohibition 

on financing credit insurance 

premiums. 

As an initial, interpretive matter, the 

Bureau believes it is important to 

highlight the structure of § 1026.36(i). 

First, although the heading of the 

statutory prohibition emphasizes the 

prohibition on financing ‘‘singlepremium’’ credit insurance, which 

historically has been accomplished by 

adding a lump-sum premium to the 

consumer’s loan balance at 

consummation, the provision more 

broadly prohibits a creditor from 

‘‘financing’’ credit insurance premiums 

‘‘directly or indirectly’’ in connection 

with a covered consumer credit 

transaction secured by a dwelling. That 

is, it generally prohibits a creditor from 

financing credit insurance premiums at 

any time, not just at consummation. The 

Bureau is proposing to clarify the scope 

of the prohibition by striking the term 

‘‘single-premium’’ from the § 1026.36(i) 

heading, and by adding redesignated 

§ 1026.36(i)(2)(ii), as discussed below. 

Second, ‘‘credit insurance for which 

premiums or fees are calculated and 

paid in full on a monthly basis’’ is 

excluded from the general prohibition. 

However, the mere fact that, under a 

particular premium calculation and 

payment arrangement, credit insurance 

premiums do not meet the conditions of 

the exclusion that they be ‘‘calculated 

and paid in full on a monthly basis’’ 

does not mean that a creditor is 

necessarily financing them in violation 

of the prohibition. For example, it is 

possible that credit insurance premiums 

could be calculated and paid in full by 

a consumer directly to a credit insurer 

on a quarterly basis with no indicia that 

the creditor is financing the premiums. 

The Bureau is proposing to clarify the 

scope of this exclusion by adding 

§ 1026.36(i)(2)(iii), as discussed below. 

‘‘Financing’’ credit insurance. The 

Bureau believes that practices that 

constitute ‘‘financing’’ of credit 

insurance premiums or fees by a 

creditor are generally equivalent to an 

extension of credit to a consumer with 

respect to payment of the credit 

insurance premiums or fees. Under 

§ 1026.2(a)(14), credit means ‘‘the right 

to defer payment of debt or to incur debt 

and defer its payment.’’ Accordingly, as 

discussed above, financing of credit 

insurance premiums is not limited to 

addition of a single, lump-sum premium 

to the loan amount by the creditor at 

consummation. The Bureau believes 

that a creditor also finances credit 

insurance premiums within the 

meaning of the prohibition when it 

provides a consumer the right to defer 

payment of premiums or fees at other 

times, including when it adds a monthly 

credit insurance premium to the 

consumer’s principal balance. 

Accordingly, the Bureau proposes to 

add redesignated § 1026.36(i)(2)(ii), 

which clarifies that a creditor finances 

credit insurance premiums or fees when 

it provides a consumer the right to defer 

payment of a credit insurance premium 

or fee owed by the consumer. However, 

the Bureau invites public comment on 

whether this clarification is appropriate. 

For example, the Bureau does not 

believe that a brief delay in receipt of 

the consumer’s premium or fee, such as 

might happen preceding a death or 

period of employment that the credit 

insurance is intended to cover, should 

cause immediate cancellation of the 

credit insurance. The Bureau also does 

not believe that refraining from 

cancelling or causing cancellation of 

credit insurance in such circumstances 

means that a creditor has provided the 

consumer a right to defer payment of the 

premium or fee, but the Bureau invites 

public comment on consequences of 

defining the term ‘‘finances’’ as 

proposed. In addition, some creditors 

have suggested that they may, as a 

purely mechanical matter, add a 

monthly credit insurance premium to 

the principal balance shown on a 

monthly statement but then subtract the 

premium from the principal balance 

immediately or as soon as the premium 

or fee is paid. Furthermore, under a 

provision of Regulation X (12 CFR 

1024.17(f)(4), a creditor servicing a loan 

and escrowing credit insurance 

premiums may permit a consumer to 

make additional monthly deposits over 

one or more months to eliminate an 

escrow deficiency, and if the deficiency 

is greater than or equal to one month’s 

escrow payment, cannot require 

elimination of the deficiency faster than 

through two or more equal monthly 

payments. Accordingly, the Bureau 

solicits comment on whether a creditor 

should instead be considered to have 

financed credit insurance premiums or 

fees only if it charges a ‘‘finance 

charge,’’ as defined in § 1026.4(a), on or 

in connection with the credit insurance 

premium or fee. 

Calculated and paid in full on a 

monthly basis. The Bureau proposes to 

clarify in § 1026.36(i)(2)(iii) that credit 

insurance premiums or fees are 

calculated on a monthly basis if they are 

determined mathematically by 

multiplying a rate by the monthly 

outstanding balance (e.g., the loan 

balance following the consumer’s most 

recent monthly payment). As discussed 

above, § 1026.36(i) excludes from the 

prohibition on a creditor financing 

credit insurance premiums or fees any 

‘‘credit insurance for which premiums 

or fees are calculated and paid in full on 

a monthly basis.’’ Although it has 

considered the concerns raised by 

industry following the issuance of the 

final rule, the Bureau continues to 

believe that the more straightforward 

interpretation of the statutory language 

regarding a premium or fee that is 

‘‘calculated . . . on a monthly basis’’ is 

a premium or fee that declines as the 

consumer pays down the outstanding 

principal balance. Credit insurance with 

this feature is often referred to as a 

‘‘monthly outstanding balance,’’ or 

M.O.B. credit insurance product. Level 

or levelized premiums or fees that are 

calculated by multiplying a rate by the 

initial loan amount or by a fixed 

monthly principal and interest payment 

are not calculated ‘‘on a monthly basis’’ 

in any meaningful way because the 

factors in the calculation do not change 

monthly (in contrast to the M.O.B. 

credit insurance product). Accordingly, 

under the proposed clarification, credit 

insurance cannot be categorically 

excluded from the scope of the 

prohibition on the ground that it is 

‘‘calculated and fully paid on a monthly 

basis’’ if its premium or fee does not 

decline as the consumer pays down the 

outstanding principal balance. The 

Bureau notes that even if a particular 

premium calculation and payment 

arrangement provides for credit 

insurance premiums to be calculated on 

a monthly basis within the meaning of 

the proposed clarification, it must also 


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32Specifically, section 1022(b)(2)(A) of the DoddFrank Act calls for the Bureau to consider the 

potential benefits and costs of a regulation to 

consumers and covered persons, including the 

potential reduction of access by consumers to 

consumer financial products or services; the impact 

on depository institutions and credit unions with 

$10 billion or less in total assets as described in 

section 1026 of the Dodd-Frank Act; and the impact 

on consumers in rural areas. 

33The Bureau has discretion in any rulemaking 

to choose an appropriate scope of analysis with 

respect to potential benefits and costs and an 

appropriate baseline. 

provide for the premiums to be paid in 

full on a monthly basis (rather than 

added to principal, for example) to be 

categorically excluded from § 1026.36(i). 

Financed by the creditor. The Bureau 

notes that the scope of the prohibition 

only extends to credit insurance 

premiums financed by the creditor. 

Thus, while a monthly credit insurance 

premium or fee that does not decline as 

the consumer pays down the 

outstanding principal balance may not 

be categorically excluded from the 

prohibition’s scope as ‘‘calculated and 

fully paid on a monthly basis,’’ a 

creditor only violates the prohibition if 

the creditor finances the credit 

insurance premium or fee. 

Accordingly, the Bureau’s statement 

implying in the final rule that levelized 

credit insurance premiums amount to a 

violation of the prohibition appears to 

have been overbroad. For example, 

credit insurance companies have 

described creditors as acting as passive 

conduits collecting and transmitting 

monthly premiums from the consumer 

to a credit insurer, rather than 

advancing funds to an insurer and 

collecting them subsequently from the 

consumer. Under such a scenario, the 

Bureau believes that a creditor would 

not likely be providing a consumer the 

right to defer payment of a credit 

insurance premium or fee owed by the 

consumer within the meaning of the 

proposal, as discussed above. Similarly, 

under an alternative interpretation that 

a creditor ‘‘finances’’ credit insurance 

only if it charges a ‘‘finance charge’’ on 

or in connection with the credit 

insurance premium or fee, as discussed 

above, a creditor that acts merely as a 

passive conduit for the payment of 

credit insurance premiums and fees to 

a credit insurer would not likely be 

charging such a finance charge. On the 

other hand, a creditor that does not act 

merely as a passive conduit, but instead 

achieves a levelized premium by 

deferring payments, or portions of 

payments, due to a credit insurer for a 

monthly outstanding balance credit 

insurance product (or by imposing a 

finance charge incident to such 

deferment, under the alternative 

interpretation discussed above) would 

likely be considered to be financing the 

credit insurance premiums or fees. 

The Bureau invites public comment 

on the extent to which creditors act 

other than as passive conduits in a 

manner that would constitute financing 

of credit insurance premiums or fees. 

The Bureau specifically invites public 

comment on what actions by a creditor 

should or should not be considered 

financing of debt cancellation or 

suspension contract fees, when the 

creditor is a party to the debt 

cancellation or suspension contract and 

payments for principal, interest, and the 

debt cancellation or suspension contract 

are retained by the creditor. 

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

A. Overview 

In developing the proposed rule, the 

Bureau has considered the potential 

benefits, costs, and impacts.32 The 

Bureau requests comment on the 

preliminary analysis presented below as 

well as submissions of additional data 

that could inform the Bureau’s analysis 

of the benefits, costs, and impacts. The 

Bureau has consulted, or offered to 

consult with, the prudential regulators, 

SEC, HUD, FHFA, the Federal Trade 

Commission, and the Department of the 

Treasury, including regarding 

consistency with any prudential, 

market, or systemic objectives 

administered by such agencies. 

As noted above, the proposed 

amendments focus primarily on 

clarifying or revising provisions on (1) 

Loss mitigation procedures under 

Regulation X’s servicing provisions; (2) 

amounts counted as loan originator 

compensation to retailers of 

manufactured homes and their 

employees for purposes of applying 

points and fees thresholds under 

HOEPA and the qualified mortgage rules 

in Regulation Z; (3) determination of 

which creditors operate predominantly 

in ‘‘rural’’ or ‘‘underserved’’ areas for 

various purposes under the mortgage 

regulations; (4) application of the loan 

originator compensation rules to bank 

tellers and similar staff; and (5) the 

prohibition on creditor-financed credit 

insurance. The Bureau also is proposing 

to adjust the effective dates for certain 

provisions adopted by the 2013 Loan 

Originator Compensation Final Rule and 

proposing technical and wording 

changes for clarification purposes to 

Regulations B, X, and Z. 

B. Potential Benefits and Costs to 

Consumers and Covered Persons 

The Bureau believes that, compared to 

the baseline established by the final 

rules issued in January 2013,33 the 

primary benefit of most of the 

provisions of the proposed rule to both 

consumers and covered persons is an 

increase in clarity and precision of the 

regulations and an accompanying 

reduction in compliance costs. 

As described above, the proposed 

modifications to the Regulation X loss 

mitigation provisions would help 

servicers by providing clarity as to what 

is required by certain provisions of the 

rule, including a servicer’s 

responsibility when it determines that a 

loss mitigation application that 

appeared facially complete in fact is 

lacking information necessary to 

complete review, how timelines are 

calculated when a foreclosure sale has 

not been scheduled or is rescheduled, 

and the actions prohibited during the 

pre-foreclosure review period. 

In addition, the Bureau proposed 

modifications to the Regulation X loss 

mitigation provisions, which include 

allowing servicers more flexibility 

regarding the disclosure of a date by 

which a borrower should complete an 

incomplete loss mitigation application; 

allowing servicers to accommodate 

borrowers in need of immediate, shortterm relief by offering short-term 

payment forbearance based on the 

evaluation of an incomplete loss 

mitigation application; the disclosure of 

certain information in the notices 

informing borrowers of the decisions of 

the evaluation of a loss mitigation 

application; and allowing servicers to 

foreclose before the 120th day of 

delinquency when the foreclosure is 

based on a borrower’s violation of a dueon-sale clause or a subordinate lien is 

foreclosing. 

The Bureau believes that servicers 

and consumers will benefit from these 

amendments because they will provide 

increased clarity, in part through 

reduced implementation costs. Further, 

the Bureau believes the proposed 

modifications to the loss mitigation 

rules would only minimally increase 

costs to servicers, and in many instances 

would reduce servicer burden. These 

modifications would improve the loss 

mitigation process for servicers by 

allowing them to provide more practical 

deadlines for borrowers to complete loss 

mitigation applications, and by allowing 

servicers to offer a short-term payment 

forbearance program based on an 

incomplete application. Further, the 

proposal would provide servicers a 

reasonable mechanism to seek 

additional information in situations in 

which a facially complete loss 

mitigation application is later 


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determined to lack information that is 

critical to completion of the servicer’s 

review, while providing appropriate 

protections for consumers to minimize 

dual tracking and provide strong 

incentives for servicers to conduct 

rigorous up-front reviews. 

The Bureau believes the proposed 

modifications to the servicing final rule 

should generally benefit borrowers by 

encouraging servicers to disclose to 

borrowers more useful information 

regarding the deadline to submit loss 

mitigation applications and to offer 

short-term forbearance without 

requiring borrowers to submit complete 

loss mitigation applications. The Bureau 

believes that such modifications could 

result in some cost to consumers if a 

servicer’s mistake in the 

§ 1024.41(b)(1)(i)(B) notice were to 

prolong or delay the loss mitigation 

process. However, the Bureau has 

sought to minimize this potential cost 

by providing incentives for servicers to 

conduct rigorous upfront review and 

preserving certain of the protections 

under the rule for borrowers in the 

event of servicer mistakes. The 

proposed amendments would impose 

some costs on consumers by making it 

easier for servicers to foreclose during 

the first 120 days of delinquency for 

certain reasons other than nonpayment 

of a debt. 

The Bureau does not currently have 

data regarding the incidence of the 

situations specifically covered by these 

provisions, e.g. how often servicers 

make mistakes regarding whether an 

application is complete or the 

information necessary to complete an 

incomplete application, and therefore 

cannot quantify these benefits. 

However, the nature of the benefits and 

costs of specific timelines, procedures 

and disclosures was considered in detail 

in the discussion of benefits, costs, and 

impacts in part VII of the 2013 Mortgage 

Servicing Final Rules. 

Two of the proposed sets of 

modifications to the Regulation Z 

provisions involve loan originator 

compensation. The Bureau is proposing 

to clarify for retailers of manufactured 

homes and their employees what 

compensation can be attributed to a 

transaction at the time the interest rate 

is set and must be included in the 

points and fees thresholds for qualified 

mortgages and high-cost mortgages 

under HOEPA. As discussed above, the 

proposal would exclude from points 

and fees of loan originator 

compensation paid by a retailer of 

manufactured homes to its employees 

and would clarify that the sales price of 

a manufactured home does not include 

loan originator compensation that must 

be included in points and fees. Both of 

these proposed changes would reduce 

the burden for creditors in 

manufactured home transactions by 

eliminating the need for them to attempt 

to determine what, if any, retailer 

employee compensation and what, if 

any, part of the sales price would count 

as loan originator compensation that 

must be included in points and fees. As 

a result, this amendment is likely to 

lower slightly the amount of money 

counted toward the points and fees 

thresholds on the covered loans. As a 

result, keeping all other provisions of a 

given loan fixed, this will result in a 

greater number of loans to be eligible to 

be qualified mortgages. For such loans, 

the costs of origination may be slightly 

lower as a result of the slightly 

decreased liability for the lender and 

any assignees and for possibly 

decreased compliance costs. Consumers 

may benefit from slightly increased 

access to credit and lower costs on the 

affected loans, however these 

consumers will also not have the added 

consumer protections that accompany 

loans made under the general ability-torepay provisions. The lower amount of 

points and fees may also lead fewer 

loans to be above the points and fees 

triggers for high-cost mortgages under 

HOEPA: This should make these loans 

both more available and offered at a 

lower cost to consumers, though 

consumers will not have the added 

consumer protections that apply to 

high-cost mortgages. A more detailed 

discussion of these effects is contained 

in the discussion of benefits, costs, and 

impacts in part VII of the 2013 ATR 

Final Rule and the 2013 HOEPA Final 

Rule. 

The Bureau also is proposing to revise 

when employees (or agents or 

contractors) of a creditor or loan 

originator in certain administrative or 

clerical roles (e.g., tellers or greeters) 

may become ‘‘loan originators’’ under 

the 2013 Loan Originator Compensation 

Rule, and therefore subject to that Rule’s 

requirements applicable to loan 

originators, such as qualification 

requirements and restrictions on certain 

compensation practices. As noted 

above, classifying such individuals as 

loan originators would subject them to 

the requirements applicable to loan 

originators with, in the Bureau’s view, 

little appreciable benefit for consumers. 

Removing them from this classification 

should lower compliance costs 

including those related to SAFE Act 

training, certification requirements, and 

compensation restrictions. 

The proposed provisions regarding 

credit insurance would clarify what 

constitutes financing of such premiums 

by a creditor, and is therefore generally 

prohibited under the Dodd-Frank Act. 

The proposal would also clarify when 

credit insurance premiums are 

considered to be calculated and paid on 

a monthly basis for purposes of a 

statutory exclusion from the prohibition 

for certain credit insurance premium 

calculation and payment arrangements. 

As noted earlier, the Bureau believes 

that language in the preamble to the 

2013 Loan Originator Compensation 

Final Rule led to some confusion among 

creditors and credit insurance providers 

regarding whether credit insurance 

products were prohibited under the rule 

based on how their premiums are 

calculated. The Bureau is now 

proposing to clarify that the prohibition 

only extends to creditors financing 

credit insurance premiums, and 

providing additional guidance on what 

constitutes creditor financing and what 

is excluded from the prohibition. The 

Bureau believes that increased clarity 

regarding the application of the rule to 

certain products—particularly to 

insurance with ‘‘level’’ or ‘‘levelized’’ 

premiums—should benefit both 

creditors and providers of credit 

insurance products. 

The proposal would also make two 

adjustments to provisions that provide 

certain exceptions for creditors 

operating predominantly in ‘‘rural’’ or 

‘‘underserved’’ areas during the next 

two years, while the Bureau reexamines 

the definition of ‘‘rural’’ or 

‘‘underserved’’ as it recently announced 

in the May 2013 ATR Final Rule. 

Specifically, the proposal would extend 

an exception to the general prohibition 

on balloon features for high-cost 

mortgages under the 2013 HOEPA Final 

Rule that is available to certain loans 

made by small creditors who operate 

predominantly in rural or underserved 

areas temporarily to all small creditors, 

regardless of their geographic 

operations. The proposal would also 

amend an exemption from the 

requirement to maintain escrows for 

higher-priced mortgage loans under the 

2013 Escrow Final Rule that is available 

to small creditors that extended more 

than 50 percent of their total covered 

transactions secured by a first lien in 

‘‘rural’’ or ‘‘underserved’’ counties 

during the preceding calendar year to 

allow small creditors to qualify for the 

exemption if they made more than 50 

percent of their covered transactions in 

‘‘rural’’ or ‘‘underserved’’ counties 

during any of the previous three 

calendar years. 

As noted above, the Bureau believes 

expanding the balloon-payment 

exception for high-cost mortgages to 

allow certain small creditors operating 


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39932 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

34 5 U.S.C. 601 et. seq. 

35 5 U.S.C. 603(a). For purposes of assessing the 

impacts of the proposed rule on small entities, 

‘‘small entities’’ is defined in the RFA to include 

small businesses, small not-for-profit organizations, 

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

A ‘‘small business’’ is determined by application of 

Small Business Administration regulations and 

reference to the North American Industry 

Classification System (NAICS) classifications and 

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

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

which is independently owned and operated and is 

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

governmental jurisdiction’’ is the government of a 

city, county, town, township, village, school 

district, or special district with a population of less 

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

36 5 U.S.C. 605(b). 

37 5 U.S.C. 605(c). 

38 5 U.S.C. 609. 39 78 FR 25638 (May 2, 2013). 

in areas that do not qualify as ‘‘rural’’ or 

‘‘underserved’’ to continue to originate 

certain high-cost mortgages with balloon 

payments during the next two years will 

benefit creditors who might be unable to 

convert to offering adjustable rate 

mortgages by the time the final rules 

take effect in January 2014. The 

proposal would also promote 

consistency between HOEPA 

requirements and the May 2013 ATR 

Final Rule, thereby facilitating 

compliance for creditors. The Bureau 

believes that the proposal would also 

benefit consumers by increasing access 

to credit relative to the 2013 HOEPA 

Final Rule. Although balloon loans can 

in some cases increase risks for 

consumers, the Bureau believes that 

those risks are appropriately mitigated 

in these circumstances because the 

balloon loans must meet the 

requirements for qualified mortgages in 

order to qualify for the exception. This 

includes certain restrictions on the 

amount of up-front points and fees and 

various loan features, as well as a 

requirement that the loans be held on 

portfolio by the small creditor. These 

requirements reduce the risk of 

potentially abusive lending practices 

and provide strong incentives for the 

creditor to underwrite the loan 

appropriately. 

The amendment to the qualifications 

for the exemption from the escrow 

requirements should minimize the 

disruptions from any changes in the 

categorization of certain counties while 

the Bureau is reevaluating the 

underlying definitions. This in turn 

should lower compliance costs for 

certain creditors during the interim 

period. Consumers may benefit from 

greater access to credit and lower costs, 

but in return would not receive the 

benefits of an escrow account. A more 

detailed discussion of these effects is 

contained in the discussion of benefits, 

costs, and impacts in part VII of the 

2013 Escrows Final Rule. 

C. Impact on Depository Institutions and 

Credit Unions With $10 Billion or Less 

in Total Assets, As Described in Section 

1026; the Impact of the Provisions on 

Consumers in Rural Areas; Impact on 

Access to Consumer Financial Products 

and Services 

The proposed rule is generally not 

expected to have a differential impact 

on depository institutions and credit 

unions with $10 billion or less in total 

assets as described in section 1026. The 

exceptions are those provisions related 

to the definition of rural and 

underserved which directly impact 

entities with under $2 billion in total 

assets. The proposed rule may have 

some differential impacts on consumers 

in rural areas. To the extent that 

manufactured housing loans, higherpriced mortgage loans, high-cost loans 

or balloon loans are more prevalent in 

these areas, the relevant provisions may 

have slightly greater impacts. As 

discussed above, costs for creditors in 

these areas should be reduced; 

consumers should benefit from 

increased access to credit and lower 

costs, though they will not have access 

to the heightened protections afforded 

by various provisions. Given the nature 

and limited scope of the changes in the 

proposed rule, the Bureau does not 

believe that the proposed rule would 

reduce consumers’ access to consumer 

products and services. 

VII. Regulatory Flexibility Act Analysis 

The Regulatory Flexibility Act (RFA) 

generally requires an agency to conduct 

an initial regulatory flexibility analysis 

(IRFA) and a final regulatory flexibility 

analysis (FRFA) of any rule subject to 

notice-and-comment rulemaking 

requirements.34 These analyses must 

‘‘describe the impact of the proposed 

rule on small entities.’’ 35 An IRFA or 

FRFA is not required if the agency 

certifies that the rule will not have a 

significant economic impact on a 

substantial number of small entities,36

or if the agency considers a series of 

closely related rules as one rule for 

purposes of complying with the IRFA or 

FRFA requirements.37 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.38

This rulemaking is part of a series of 

rules that have revised and expanded 

the regulatory requirements for entities 

that originate or service mortgage loans. 

As noted above, in January, 2013, the 

Bureau issued the 2013 ATR Final Rule, 

2013 Escrows Final Rule, 2013 HOEPA 

Final Rule, 2013 Mortgage Servicing 

Final Rules, and the 2013 Loan 

Originator Compensation Final Rule. 

Since January 2013, the Bureau also has 

issued the May 2013 ATR Final Rule, 

Amendments to the 2013 Escrows Final 

Rule, and the 2013 Effective Date Final 

Rule, along with Proposed Amendments 

to the 2013 Mortgage Rules under the 

Real Estate Settlement Procedures Act 

(Regulation X) and Truth in Lending Act 

(Regulation Z).39 The Supplementary 

Information to each of these rules set 

forth the Bureau’s analyses and 

determinations under the RFA with 

respect to those rules. Because these 

rules qualify as ‘‘a series of closely 

related rules,’’ for purposes of the RFA, 

the Bureau relies on those analyses and 

determines that it has met or exceeded 

the IRFA requirement. 

In the alternative, the Bureau also 

concludes that the proposed rule, if 

adopted, would not have a significant 

impact on a substantial number of small 

entities. As noted, the proposal 

generally clarifies the existing rule and 

to the extent any changes are 

substantive, these changes would not 

have a material impact on small entities. 

The provisions related to servicing do 

not apply to many small entities under 

the small servicer exemption (and to the 

extent that they do, small entities will 

benefit from the same increased 

flexibility under the proposed 

provisions as other servicers), while the 

provisions related to loan officer 

compensation and the ‘‘rural’’ and 

‘‘underserved’’ definitions lower the 

regulatory burden and possible 

compliance costs for affected entities. 

Therefore, the undersigned certifies that 

the proposed rule, if adopted, would not 

have a significant impact on a 

substantial number of small entities. 

VIII. Paperwork Reduction Act 

This proposed rule would amend 12 

CFR Part 1002 (Regulation B) which 

implements the Equal Credit 

Opportunity Act, 12 CFR Part 1026 

(Regulation Z), which implements the 

Truth in Lending Act (TILA), and 12 

CFR Part 1024 (Regulation X), which 

implements the Real Estate Settlement 

Procedures Act (RESPA). Regulations B, 

Z and X currently contain collections of 

information approved by OMB. The 

Bureau’s OMB control number for 

Regulation B is 3170–0013, for 

Regulation Z is 3170–0015 and for 

Regulation X is 3170–0016. However, 

the Bureau has determined that this 

proposed rule would not materially alter 

these collections of information or 


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impose any new recordkeeping, 

reporting, or disclosure requirements on 

the public that would constitute 

collections of information requiring 

approval under the Paperwork 

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

Comments on this determination may be 

submitted to the Bureau as instructed in 

the ADDRESSES section of this notice and 

to the attention of the Paperwork 

Reduction Act Officer. 

List of Subjects 

12 CFR Part 1002 

Aged, Banks, Banking, Civil rights, 

Consumer protection, Credit, Credit 

unions, Discrimination, Fair lending, 

Marital status discrimination, National 

banks, National origin discrimination, 

Penalties, Race discrimination, 

Religious discrimination, Reporting and 

recordkeeping requirements, Savings 

associations, Sex discrimination. 

12 CFR Part 1024 

Condominiums, Consumer protection, 

Housing, Mortgage servicing, Mortgages, 

Reporting and recordkeeping. 

12 CFR Part 1026 

Advertising, Consumer protection, 

Credit, Credit unions, Mortgages, 

National banks, Reporting and 

recordkeeping requirements, Savings 

associations, Truth in lending. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Bureau proposes to 

amend 12 CFR parts 1002, 1024, and 

1026 as set forth below: 

PART 1002—EQUAL CREDIT 

OPPORTUNITY ACT (REGULATION B) 

■ 1. The authority citation for part 1002 

continues to read as follows: 

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

1691b. 

■ 2. Appendix A to Part 1002 is 

amended by revising paragraph 2.d to 

read as follows: 

Appendix A to Part 1002—Federal 

Agencies To Be Listed in Adverse 

Action Notices 

* * * * * 

2. * * * 

d. Federal Credit Unions: National Credit 

Union Administration, Office of Consumer 

Protection, 1775 Duke Street, Alexandria, VA 

22314. 

* * * * * 

■ 3. In Supplement I to Part 1002, under 

Section 1002.14, under Paragraph 

14(b)(3) Valuation, as amended January 

31, 2013, at 78 FR 6407, effective 

January 18, 2014, paragraphs 1.i and 3.v 

are revised to read as follows: 

Supplement I to Part 1002—Official 

Interpretations 

* * * * * 

Section 1002.14 Rules on Providing 

Appraisals and Valuations 

* * * * * 

14(b)(3) Valuation. 

1. * * * 

i. A report prepared by an appraiser 

(whether or not licensed or certified) 

including the appraiser’s estimate of the 

property’s value. 

* * * * * 

3. * * * 

v. Reports reflecting property inspections 

that do not provide an estimate of the value 

of the property and are not used to develop 

an estimate of the value of the property. 

* * * * * 

PART 1024—REAL ESTATE 

SETTLEMENT PROCEDURES ACT 

(REGULATION X) 

■ 4. The authority citation for part 1024 

continues to read as follows: 

Authority: 12 U.S.C. 2603–2605, 2607, 

2609, 2617, 5512, 5532, 5581. 

Subpart A—General 

■ 5. Section 1024.30, as amended 

February 14, 2013, at 78 FR 10695, 

effective January 10, 2014, is amended 

by revising paragraph (a) to read as 

follows: 

§ 1024.30 Scope. 

(a) In general. Except as provided in 

paragraphs (b) and (c) of this section, 

this subpart applies to any mortgage 

loan, as that term is defined in 

§ 1024.31. 

* * * * * 

■ 6. Section 1024.35, as amended 

February 14, 2013, at 78 FR 10695, 

effective January 10, 2014, is amended 

by revising paragraph (g)(1)(iii)(B) to 

read as follows: 

§ 1024.35 Error resolution procedures. 

* * * * * 

(g) * * * 

(1) * * * 

(iii) * * * 

(B) The mortgage loan is discharged. 

* * * * * 

■ 7. Section 1024.36, as amended 

February 14, 2013, at 78 FR 10695, 

effective January 10, 2014, is amended 

by revising paragraph (f)(1)(v)(B) to read 

as follows: 

§ 1024.36 Requests for information. 

* * * * * 

(f) * * * 

(1) * * * 

(v) * * * 

(B) The mortgage loan is discharged. 

* * * * * 

■ 8. Section 1024.39, as amended 

February 14, 2013, at 78 FR 10695, 

effective January 10, 2014, is amended 

by revising paragraphs (b)(1) and (3) to 

read as follows: 

§ 1024.39 Early intervention requirements 

for certain borrowers. 

* * * * * 

(b) Written notice. (1) Notice required. 

Except as otherwise provided in this 

section, a servicer shall provide to a 

delinquent borrower a written notice 

with the information set forth in 

paragraph (b)(2) of this section not later 

than the 45th day of the borrower’s 

delinquency. A servicer is not required 

to provide the written notice more than 

once during any 180-day period. 

* * * * * 

(3) Model clauses. Model clauses MS– 

4(A), MS–4(B), and MS–4(C), in 

appendix MS–4 to this part may be used 

to comply with the requirements of this 

paragraph (b). 

* * * * * 

■ 9. Section 1024.41, as amended 

February 14, 2013, at 78 FR 10695, 

effective January 10, 2014, is amended 

by revising paragraphs (b)(2)(ii), 

(c)(1)(ii), (c)(2)(i), (d), (f)(1), (h)(4), (j) 

and adding paragraphs (b)(3), (c)(2)(iii), 

and (c)(2)(iv) to read as follows: 

§ 1024.41 Loss mitigation procedures. 

* * * * * 

(b) * * * 

(2) * * * 

(ii) Time period disclosure. The notice 

required pursuant to paragraph 

(b)(2)(i)(B) of this section must include 

a reasonable date by which the borrower 

should submit the documents and 

information necessary to make the loss 

mitigation application complete. 

(3) Timelines. For purposes of this 

section, timelines based on the 

proximity of a foreclosure sale to the 

receipt of a complete loss mitigation 

application will be determined as of the 

date a complete loss mitigation 

application is received. 

(c) * * * 

(1) * * * 

(ii) Provide the borrower with a notice 

in writing stating the servicer’s 

determination of which loss mitigation 

options, if any, it will offer to the 

borrower on behalf of the owner or 

assignee of the mortgage. The servicer 

shall include in this notice the amount 

of time the borrower has to accept or 

reject an offer of a loss mitigation 

program as provided for in paragraph (e) 

of this section, if applicable, and a 

notification, if applicable, that the 

borrower has the right to appeal the 

denial of any loan modification option 

as well as the amount of time the 


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borrower has to file such an appeal and 

any requirements for making an appeal 

as provided for in paragraph (h) of this 

section. 

(2) * * * 

(i) In general. Except as set forth in 

paragraphs (c)(2)(ii) and (iii) of this 

section, a servicer shall not evade the 

requirement to evaluate a complete loss 

mitigation application for all loss 

mitigation options available to the 

borrower by offering a loss mitigation 

option based upon an evaluation of any 

information provided by a borrower in 

connection with an incomplete loss 

mitigation application. 

* * * * * 

(iii) Payment forbearance. 

Notwithstanding paragraph (c)(2)(i) of 

this section, a servicer may offer a shortterm payment forbearance program to a 

borrower based upon an evaluation of 

an incomplete loss mitigation 

application. A servicer offering such a 

program to a borrower who has 

submitted an incomplete loss mitigation 

application must include in the notice 

of incomplete application required 

pursuant to paragraph (b)(2)(i)(B) of this 

section a statement that: 

(A) The servicer has received an 

incomplete loss mitigation application, 

and on the basis of that application the 

servicer is offering a payment 

forbearance program; 

(B) Absent further action by the 

borrower, the servicer will not review 

the incomplete application for other loss 

mitigation options; and 

(C) If the borrower would like to be 

considered for other loss mitigation 

options, the borrower must notify the 

servicer and submit the missing 

documents and information required to 

complete the loss mitigation 

application. 

(iv) Servicer creates reasonable 

expectation that a loss mitigation 

application is complete. If a servicer 

creates a reasonable expectation that a 

loss mitigation application is complete 

but the servicer later discovers that the 

application is incomplete, the servicer 

shall treat the application as complete 

as of the date the borrower had reason 

to believe the application was complete 

for purposes of paragraphs (f)(2) and (g) 

of this section until the borrower has 

been given a reasonable opportunity to 

complete the loss mitigation 

application. 

(d) Denial of loan modification 

options. If a borrower’s complete loss 

mitigation application is denied for any 

trial or permanent loan modification 

option available to the borrower 

pursuant to paragraph (c) of this section, 

a servicer shall state in the notice sent 

to the borrower pursuant to paragraph 

(c)(1)(ii) of this section the specific 

reason or reasons for the servicer’s 

determination for each such trial or 

permanent loan modification option, 

and a notification that the borrower was 

not evaluated on other criteria (if 

applicable). 

* * * * * 

(f) * * * 

(1) Pre-foreclosure review period. A 

servicer shall not make the first notice 

or filing required by applicable law for 

any judicial or non-judicial foreclosure 

process unless: 

(i) A borrower’s mortgage loan 

obligation is more than 120 days 

delinquent; 

(ii) The foreclosure is based on a 

borrower’s violation of a due-on-sale 

clause; or 

(iii) The servicer is joining the 

foreclosure action of a subordinate 

lienholder. 

* * * * * 

(h) * * * 

(4) Appeal determination. Within 30 

days of a borrower making an appeal, 

the servicer shall provide a notice to the 

borrower stating the servicer’s 

determination of whether the servicer 

will offer the borrower a loss mitigation 

option based upon the appeal, and, if 

applicable, how long the borrower has 

to accept or reject such an offer or a 

prior offer of a loss mitigation option, as 

provided for in this paragraph. A 

servicer may require that a borrower 

accept or reject an offer of a loss 

mitigation option after an appeal no 

earlier than 14 days after the servicer 

provides the notice to a borrower. A 

servicer’s determination under this 

paragraph is not subject to any further 

appeal. 

* * * * * 

(j) Small servicer requirements. A 

small servicer shall be subject to the 

prohibition on foreclosure referral in 

paragraph (f)(1) of this section. A small 

servicer shall not make the first notice 

or filing required by applicable law for 

any judicial or non-judicial foreclosure 

process and shall not move for 

foreclosure judgment or order of sale, or 

conduct a foreclosure sale, if a borrower 

is performing pursuant to the terms of 

an agreement on a loss mitigation 

option. 

■ 10. Appendix MS–3 to Part 1024, as 

amended February 14, 2013, at 78 FR 

10695, effective January 10, 2014, is 

amended by: 

■ a. Revising the entry for MS–3(D) in 

the table of contents at the beginning of 

the appendix, and 

■ b. Revising the heading of MS–3(D). 

The amendments read as follows: 

Appendix MS–3 to Part 1024 

* * * * * 

MS–3(D)—Model Form for Renewal or 

Replacement of Force-Placed Insurance 

Notice Containing Information Required By 

§ 1024.37(e)(2) 

* * * * * 

■ 11. In Supplement I to Part 1024, as 

amended February 14, 2013, at 78 FR 

10695, effective January 10, 2014,: 

■ a. Under Section 1024.17 the heading 

for 17(k)(5)(ii) is revised. 

■ b. Under Section 1024.33—Mortgage 

Servicing Transfers: 

■ i. Under Paragraph 33(a) Servicing 

Disclosure Statement, paragraph 1 is 

revised. 

■ ii. Under Paragraph 33(c)(1) Payments 

not considered late, paragraph 2 is 

revised. 

■ c. Under Section 1024.35—Error 

Resolution Procedures, Paragraph 35(c), 

paragraph 2 is revised. 

■ d. Under Section 1024.36—Request 

for Information, Paragraph 36(b), 

paragraph 2 is revised. 

■ e. The heading for Section 1024.41 is 

revised. 

■ f. Under Section 1024.41, Loss 

Mitigation Procedures; 

■ i. Paragraphs 41(b)(2), 41(b)(3), 

41(c)(2)(iii), and 41(c)(2)(iv) are added. 

■ ii. The heading for paragraphs 41(c) is 

revised. 

■ iii. Under newly designated 41(c), 

paragraph (c)(2)(iii) is added. 

■ iv. The heading Paragraph 41(d)(1) is 

removed. 

■ v. Under paragraph 41(d), paragraph 

3 is redesignated as Paragraph(c)(1), 

paragraph 4, and paragraph 4 is 

redesignated as paragraph 3. 

■ vii. Under paragraph 41(d), paragraph 

4 is added. 

■ viii. Under paragraph 41(f), new 

paragraph 1 is added. 

Supplement I to Part 1024—Official 

Bureau Interpretations 

* * * * * 

Subpart B—Mortgage Settlement and Escrow 

Accounts 

* * * * * 

Section 1024.17—Escrow Accounts 

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

* * * * * 

Subpart C—Mortgage Servicing 

* * * * * 

Section 1024.33—Mortgage Servicing 

Transfers 

* * * * * 

33(a) Servicing disclosure statement. 

1. Terminology. Although the servicing 

disclosure statement must be clear and 

conspicuous pursuant to § 1024.32(a), 

§ 1024.33(a) does not set forth any specific 


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rules for the format of the statement, and the 

specific language of the servicing disclosure 

statement in appendix MS–1 is not required 

to be used. The model format may be 

supplemented with additional information 

that clarifies or enhances the model language. 

* * * * * 

33(c) Borrower payments during transfer 

of servicing. 

33(c)(1) Payments not considered late. 

1. * * * 

2. Compliance with § 1024.39. A transferee 

servicer’s compliance with § 1024.39 during 

the 60-day period beginning on the effective 

date of a servicing transfer does not 

constitute treating a payment as late for 

purposes of § 1024.33(c)(1). 

Section 1024.35 Error Resolution 

Procedures 

* * * * * 

35(c) Contact information for borrowers 

to assert errors 

* * * * * 

2. Notice of an exclusive address. A notice 

establishing an address that a borrower must 

use to assert an error may be included with 

a different disclosure, such as on a notice of 

transfer, periodic statement, or coupon book. 

The notice is subject to the clear and 

conspicuous requirement in § 1024.32(a)(1). 

If a servicer establishes an address that a 

borrower must use to assert an error, a 

servicer must provide that address to the 

borrower in any communication in which the 

servicer provides the borrower with an 

address for assistance from the servicer. 

* * * * * 

Section 1024.36 Requests for Information 

* * * * * 

36(b) Contact information for borrowers 

to request information 

1. * * * 

2. Notice of an exclusive address. A notice 

establishing an address that a borrower must 

use to request information may be included 

with a different disclosure, such as on a 

notice of transfer, periodic statement, or 

coupon book. The notice is subject to the 

clear and conspicuous requirement in 

§ 1024.32(a)(1). If a servicer establishes an 

address that a borrower must use to request 

information, a servicer must provide that 

address to the borrower in any 

communication in which the servicer 

provides the borrower with an address for 

assistance from the servicer. 

* * * * * 

Section 1024.41—Loss Mitigation Procedures. 

41(b) Receipt of loss mitigation 

application 

* * * * * 

41(b)(2) Review of loss mitigation 

application submission 

41(b)(2)(i) Requirements 

Paragraph 41 (b)(2)(i)(B) 

1. Notification of complete application. 

Even if a servicer has informed a borrower 

that an application is complete (or notified 

the borrower of specific information 

necessary to complete an incomplete 

application), if the servicer determines, in the 

course of evaluating the loss mitigation 

application submitted by the borrower, that 

additional information is required, the 

servicer must request the additional 

information from a borrower pursuant to the 

§ 1024.41(b)(1) obligation to exercise 

reasonable diligence in obtaining such 

documents and information. 

2. Effect on timelines. Except as provided 

in § 1024.41(c)(2)(iv), the provisions and 

timelines triggered by a complete loss 

mitigation application in § 1024.41 will not 

be triggered by an incomplete application, 

regardless of whether a servicer has sent a 

§ 1024.41(b)(2)(i)(B) notification incorrectly 

informing the borrower that the loss 

mitigation application is complete or 

otherwise given the borrower reason to 

believe the application is complete. 

41(b)(2)(ii) Time period disclosure 

1. Reasonable date factors. Section 

1024.41(b)(2)(ii) requires that a notice 

informing a borrower that a loss mitigation 

application is incomplete must include a 

reasonable date by which the borrower 

should submit the documents and 

information necessary to make the loss 

mitigation application complete. In 

determining a reasonable date, a servicer 

should select the deadline that preserves the 

maximum borrower rights under § 1024.41, 

except when doing so would be 

impracticable. Thus, in setting a date, the 

factors listed below should be considered (if 

the date of a foreclosure sale is not known, 

a servicer may use a reasonable estimate of 

when a foreclosure sale may be scheduled): 

i. The date by which any document or 

information submitted by a borrower will be 

considered stale or invalid pursuant to any 

requirements applicable to any loss 

mitigation option available to the borrower; 

ii. The date that is the 120th day of the 

borrower’s delinquency; 

iii. The date that is 90 days before a 

foreclosure sale; 

iv. The date that is 38 days before a 

foreclosure sale. 

41(b)(3) Timelines 

1. Foreclosure sale not scheduled. If no 

foreclosure sale has been scheduled as of the 

date that a complete loss mitigation 

application is received, the application shall 

be treated as if it were received at least 90 

days before a scheduled foreclosure sale. 

2. Foreclosure sale re-scheduled. These 

timelines established as of the receipt of a 

complete loss mitigation application shall 

remain in effect, even if a foreclosure sale is 

later re-scheduled to occur earlier or later. 

41(c) Evaluation of loss mitigation 

applications 

* * * * * 

41(c)(2) Incomplete loss mitigation 

application evaluation 

41(c)(2)(iii) Payment forbearance 

1. Short-term payment forbearance 

program. The exemption in 

§ 1024.41(c)(2)(iii) applies to a short-term 

payment forbearance program. A payment 

forbearance program is a loss mitigation 

option for which a servicer allows a borrower 

to forgo making certain payments or portions 

of payments for a period of time. A shortterm payment forbearance program allows 

the forbearance of payments due over periods 

of no more than two months. Such a program 

would be short-term regardless of the amount 

of time a servicer allows the borrower to 

make up the missing payments. The 

examples below illustrate how the length of 

a payment forbearance program is calculated 

for purposes of § 1024.41(c)(2)(iii). 

i. A servicer allows a borrower to forgo 

payment for January, February and March, 

and the borrower must make these payments 

in addition to the April payment at the time 

the April payment is due. This is a threemonth forbearance program and thus would 

not be considered short-term. 

ii. A servicer allows a borrower to forgo 

payment for January and February, and the 

borrower must make the January and 

February payments in addition to the March 

payment, at the time the March payment is 

due. This is a two-month forbearance 

program, and thus would be considered 

short-term. 

iii. A servicer allows a borrower to forgo 

payment for January and February. These 

payments are spread over the next six 

months, and the borrower will make larger 

payments for March through August. This is 

a two-month forbearance program, and thus 

would be considered short-term. 

iv. A servicer allows a borrower to forgo 

payment for January and February. These 

payments are added to the last monthly 

payment at the end of the loan obligation. 

This is a two-month forbearance program, 

and thus would be considered short-term. 

2. Payment forbearance and incomplete 

applications. Section 1024.41(c)(2)(iii) allows 

a servicer to offer a borrower a short-term 

payment forbearance program based on an 

evaluation of an incomplete loss mitigation 

application. Such an incomplete loss 

mitigation application is still subject to the 

other obligations in § 1024.41, including the 

obligation in § 1024.41(b)(2) to review the 

application to determine if it is complete, the 

obligation in § 1024.41(b)(1) to exercise 

reasonable diligence in obtaining documents 

and information to complete a loss mitigation 

application, and the obligation to provide the 

borrower with the § 1024.41(b)(2)(ii) notice 

that the servicer acknowledges the receipt of 

the application and has determined the 

application is incomplete (and any other 

information required to be in such a notice). 

3. Payment forbearance and complete 

applications. Even if a servicer offers a 

borrower a payment forbearance program 

after an evaluation of an incomplete loss 

mitigation application, the servicer must still 

comply with all other requirements in 

§ 1024.41 on receipt of a borrower’s 

submission of a complete loss mitigation 

application. 

41(c)(2)(iv) Servicer creates reasonable 

expectation that a loss mitigation application 

is complete. 

1. Reasonable expectation. A servicer 

creates a reasonable expectation that a loss 

mitigation application is complete when: 

i. The servicer notifies the borrower in the 

§ 1024.41(b)(2)(i)(B) notice that the servicer 

has determined the application is complete. 

The borrower would have a reasonable 

expectation upon receipt of the notice that 

the application was complete as of the date 

the application was submitted. 

ii. The servicer notifies the borrower in the 

§ 1024.41(b)(2)(i)(B) notice that the servicer 


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has determined the application is incomplete 

and identifies information and 

documentation necessary to complete the 

application, and the borrower provides all 

the documents and information that were 

listed as missing in that notice within a 

reasonable time. The borrower would have a 

reasonable expectation that the application 

was complete as of the date the borrower 

submitted all the documents and information 

that were listed as missing. 

2. Reasonable opportunity. Section 

1024.41(c)(2)(iv) requires a servicer to treat as 

complete an application that the servicer has 

created a reasonable expectation is complete 

until a borrower has been given a reasonable 

opportunity to complete the loss mitigation 

application. A reasonable opportunity 

requires the servicer to notify the borrower of 

what information and documentation is 

missing, and afford the borrower sufficient 

time to gather the information and/or 

documentation necessary to complete the 

application and submit it to the servicer. The 

amount of time that is sufficient for this 

purpose will depend on the facts and 

circumstances. 

41(d) Denial of loan modification options 

* * * * * 

4. Reasons listed. A servicer is required to 

disclose the actual reason or reasons for the 

denial. If a servicer’s systems establish a 

hierarchy of eligibility criteria and reach the 

first criterion that causes a denial but do not 

evaluate the borrower based on additional 

criteria, a servicer complies with the rule by 

providing only the reason or reasons with 

respect to which the borrower was actually 

evaluated as well as notification that the 

borrower was not evaluated on other criteria. 

A servicer is not required to determine or 

disclose whether a borrower would have 

been denied on the basis of additional 

criteria if such criteria were not actually 

considered. 

41(f) Prohibition on foreclosure referral 

1. Prohibited activities. Section 1024.41(f) 

prohibits a servicer from making the first 

notice or filing required by applicable law for 

any judicial or non-judicial foreclosure 

process under certain circumstances. 

Whether a document is considered the first 

notice or filing is determined under 

applicable State law. Specifically, a 

document is considered the first notice or 

filing if it would be used by the servicer as 

evidence of compliance with foreclosure 

practices required pursuant to State law, but 

is not considered the first notice or filing if 

it is used solely for other purposes. Thus, a 

servicer is not prohibited from attempting to 

collect payments, sending periodic 

statements, sending breach letters, or 

engaging in any other activity during the preforeclosure review period, so long as such 

documents or activity would not be used as 

evidence of complying with requirements 

applicable pursuant to State law in 

connection with a foreclosure process, and 

are not banned by other applicable law (e.g., 

the Fair Debt Collection Practices Act or 

bankruptcy law). 

* * * * * 

PART 1026—TRUTH IN LENDING 

(REGULATION Z) 

■ 12. The authority citation for part 

1026 continues to read as follows: 

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

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

U.S.C. 1601 et seq. 

* * * * * 

Subpart C—Closed-End Credit 

■ 13. Section 1026.23 is amended by 

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

follows: 

§ 1026.23 Right of rescission. 

(a) * * * 

(3) * * * 

(ii) For purposes of this paragraph 

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

means the required disclosures of the 

annual percentage rate, the finance 

charge, the amount financed, the total of 

payments, the payment schedule, and 

the disclosures and limitations referred 

to in §§ 1026.32(c) and (d) and 

1026.43(g). 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

■ 14. Section 1026.31, as amended 

January 31, 2013, at 78 FR 6856, 

effective January 10, 2014, is amended 

by revising paragraphs (h)(1)(iii)(A) and 

(h)(2)(iii)(A) to read as follows: 

§ 1026.31 General rules. 

* * * * * 

(h) * * * 

(1) * * * 

(iii) * * * 

(A) Make the loan or credit plan 

satisfy the requirements of 15 U.S.C. 

1631–1651; or 

* * * * * 

(2) * * * 

(iii) * * * 

(A) Make the loan or credit plan 

satisfy the requirements of 15 U.S.C. 

1631–1651; or 

* * * * * 

■ 15. Section 1026.32 is amended by: 

■ a. Revising paragraph (a)(2)(iii), as 

amended January 31, 2013, at 78 FR 

6856, effective January 10, 2014; 

■ b. Revising paragraph (b)(1)(ii), as 

amended June 2, 2013, at 78 FR 35430, 

effective January 10, 2014; 

■ c. Revising paragraph (b)(1)(vi), as 

amended January 30, 2013, at 78 FR 

6408, effective January 10, 2014; 

■ d. Revising paragraph (b)(2)(ii), as 

amended June 12, 2013, at 78 FR 35430, 

effective January 10, 2014; and 

■ e. Revising paragraphs (b)(2)(vi), 

(b)(6)(ii), and (d)(1)(ii)(C), as amended 

January 31, 2013, at 78 FR 6856, 

effective January 10, 2014. 

The revisions read as follows: 

§ 1026.32 Requirements for high-cost 

mortgages. 

(a) * * * 

(2) * * * 

(iii) A transaction originated by a 

Housing Finance Agency, where the 

Housing Finance Agency is the creditor 

for the transaction; or 

(b) * * * 

(1) * * * 

(ii) All compensation paid directly or 

indirectly by a consumer or creditor to 

a loan originator, as defined in 

§ 1026.36(a)(1), that can be attributed to 

that transaction at the time the interest 

rate is set unless: 

(A) That compensation is paid by a 

consumer to a mortgage broker, as 

defined in § 1026.36(a)(2), and already 

has been included in points and fees 

under paragraph (b)(1)(i) of this section; 

(B) That compensation is paid by a 

mortgage broker, as defined in 

§ 1026.36(a)(2), to a loan originator that 

is an employee of the mortgage broker; 

(C) That compensation is paid by a 

creditor to a loan originator that is an 

employee of the creditor; or 

(D) That compensation is paid by a 

retailer of manufactured homes to its 

employee. 

* * * * * 

(vi) The total prepayment penalty, as 

defined in paragraph (b)(6)(i) or (ii) of 

this section, as applicable, incurred by 

the consumer if the consumer refinances 

the existing mortgage loan, or terminates 

an existing open-end credit plan in 

connection with obtaining a new 

mortgage loan, with the current holder 

of the existing loan or plan, a servicer 

acting on behalf of the current holder, 

or an affiliate of either. 

* * * * * 

(b) * * * 

(2) * * * 

* * * * * 

(ii) All compensation paid directly or 

indirectly by a consumer or creditor to 

a loan originator, as defined in 

§ 1026.36(a)(1), that can be attributed to 

that transaction at the time the interest 

rate is set unless: 

(A) That compensation is paid by a 

consumer to a mortgage broker, as 

defined in § 1026.36(a)(2), and already 

has been included in points and fees 

under paragraph (b)(2)(i) of this section; 

(B) That compensation is paid by a 

mortgage broker, as defined in 

§ 1026.36(a)(2), to a loan originator that 

is an employee of the mortgage broker; 

(C) That compensation is paid by a 

creditor to a loan originator that is an 

employee of the creditor; or 


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(D) That compensation is paid by a 

retailer of manufactured homes to its 

employee. 

* * * * * 

(vi) The total prepayment penalty, as 

defined in paragraph (b)(6)(i) or (ii) of 

this section, as applicable, incurred by 

the consumer if the consumer refinances 

an existing closed-end credit transaction 

with an open-end credit plan, or 

terminates an existing open-end credit 

plan in connection with obtaining a new 

open-end credit plan, with the current 

holder of the existing transaction or 

plan, a servicer acting on behalf of the 

current holder, or an affiliate of either; 

* * * * * 

(6) * * * 

(ii) Open-end credit. For an open-end 

credit plan, prepayment penalty means 

a charge imposed by the creditor if the 

consumer terminates the open-end 

credit plan prior to the end of its term, 

other than a waived, bona fide thirdparty charge that the creditor imposes if 

the consumer terminates the open-end 

credit plan sooner than 36 months after 

account opening. 

* * * * * 

(d) Limitations. A high-cost mortgage 

shall not include the following terms: 

(1) * * * 

(ii) * * * 

(C) A loan that meets the criteria set 

forth in §§ 1026.43(f)(1)(i) through (vi) 

and 1026.43(f)(2), or the conditions set 

forth in § 1026.43(e)(6). 

* * * * * 

■ 16. Section 1026.35 is amended by 

revising paragraphs (b)(2)(i)(D), 

(b)(2)(iii)(A), and (b)(2)(iii)(D)(1) to read 

as follows: 

§ 1026.35 Requirements for higher-priced 

mortgage loans. 

* * * * * 

(b) * * * 

(2) * * * 

(i) * * * 

(D) A reverse mortgage transaction 

subject to § 1026.33. 

* * * * * 

(iii) * * * 

(A) During any of the three preceding 

calendar years, the creditor extended 

more than 50 percent of its total covered 

transactions, as defined by 

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

on properties that are located in 

counties that are either ‘‘rural’’ or 

‘‘underserved,’’ as set forth in paragraph 

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

* * * * * 

(D) * * * 

(1) Escrow accounts established for 

first-lien higher-priced mortgage loans 

on or after April 1, 2010, and before 

January 1, 2014; or 

* * * * * 

■ 17. Section 1026.36, as amended 

February 15, 2013, at 78 FR 11280, 

effective January 10, 2014, is amended 

by revising paragraphs (a)(1)(i)(A) and 

(B), adding paragraph (a)(6), and 

revising paragraphs (b), (f)(3)(i) 

introductory text, (f)(3)(ii), (i), and (j)(2) 

to read as follows: 

§ 1026.36 Prohibited acts or practices and 

certain requirements for credit secured by 

a dwelling. 

(a) * * * 

(1) * * * 

(i) * * * 

(A) A person who does not take a 

consumer credit application or offer or 

negotiate credit terms available from a 

creditor to that consumer selected based 

on the consumer’s financial 

characteristics, but who performs purely 

administrative or clerical tasks on behalf 

of a person who does engage in such 

activities. 

(B) An employee of a manufactured 

home retailer who does not take a 

consumer credit application, offer or 

negotiate credit terms available from a 

creditor to that consumer selected based 

on the consumer’s financial 

characteristics, or advise a consumer on 

particular credit terms available from a 

creditor to that consumer selected based 

on the consumer’s financial 

characteristics. 

* * * * * 

(6) Credit terms. For purposes of this 

section, the term ‘‘credit terms’’ 

includes rates, fees, and other costs. 

* * * * * 

(b) Scope. Paragraphs (c)(1) and (2) of 

this section apply to closed-end 

consumer credit transactions secured by 

a consumer’s principal dwelling. 

Paragraph (c)(3) of this section applies 

to a consumer credit transaction secured 

by a dwelling. Paragraphs (d) through (i) 

of this section apply to closed-end 

consumer credit transactions secured by 

a dwelling. This section does not apply 

to a home equity line of credit subject 

to § 1026.40, except that paragraphs (h) 

and (i) of this section apply to such 

credit when secured by the consumer’s 

principal dwelling and paragraph (c)(3) 

applies to such credit when secured by 

a dwelling. Paragraphs (d) through (i) of 

this section do not apply to a loan that 

is secured by a consumer’s interest in a 

timeshare plan described in 11 U.S.C. 

101(53D). 

* * * * * 

(f) * * * 

(3) * * * 

(i) Obtain for any individual whom 

the loan originator organization hired on 

or after January 1, 2014 (or whom the 

loan originator organization hired before 

this date but for whom there were no 

applicable statutory or regulatory 

background standards in effect at the 

time of hire or before January 1, 2014, 

used to screen the individual) and for 

any individual regardless of when hired 

who, based on reliable information 

known to the loan originator 

organization, likely does not meet the 

standards under § 1026.36(f)(3)(ii), 

before the individual acts as a loan 

originator in a consumer credit 

transaction secured by a dwelling: 

* * * * * 

(ii) Determine on the basis of the 

information obtained pursuant to 

paragraph (f)(3)(i) of this section and 

any other information reasonably 

available to the loan originator 

organization, for any individual whom 

the loan originator organization hired on 

or after January 1, 2014 (or whom the 

loan originator organization hired before 

this date but for whom there were no 

applicable statutory or regulatory 

background standards in effect at the 

time of hire or before January 1, 2014, 

used to screen the individual) and for 

any individual regardless of when hired 

who, based on reliable information 

known to the loan originator 

organization, likely does not meet the 

standards under this paragraph (f)(3)(ii), 

before the individual acts as a loan 

originator in a consumer credit 

transaction secured by a dwelling, that 

the individual loan originator: 

* * * * * 

(i) Prohibition on financing credit 

insurance. (1) A creditor may not 

finance, directly or indirectly, any 

premiums or fees for credit insurance in 

connection with a consumer credit 

transaction secured by a dwelling 

(including a home equity line of credit 

secured by the consumer’s principal 

dwelling). This prohibition does not 

apply to credit insurance for which 

premiums or fees are calculated and 

paid in full on a monthly basis. 

(2) For purposes of this paragraph (i): 

(i) ‘‘Credit insurance’’: 

(A) Means credit life, credit disability, 

credit unemployment, or credit property 

insurance, or any other accident, loss-of 

income, life, or health insurance, or any 

payments directly or indirectly for any 

debt cancellation or suspension 

agreement or contract, but 

(B) Excludes credit unemployment 

insurance for which the unemployment 

insurance premiums are reasonable, the 

creditor receives no direct or indirect 

compensation in connection with the 

unemployment insurance premiums, 

and the unemployment insurance 


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39938 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

premiums are paid pursuant to a 

separate insurance contract and are not 

paid to an affiliate of the creditor; 

(ii) A creditor finances premiums or 

fees for credit insurance if it provides a 

consumer the right to defer payment of 

a credit insurance premium or fee owed 

by the consumer; and 

(iii) Credit insurance premiums or 

fees are calculated on a monthly basis 

if they are determined mathematically 

by multiplying a rate by the actual 

monthly outstanding balance. 

* * * * * 

(j) * * * 

(2) For purposes of this paragraph (j), 

‘‘depository institution’’ has the 

meaning in section 1503(3) of the SAFE 

Act, 12 U.S.C. 5102(3). For purposes of 

this paragraph (j), ‘‘subsidiary’’ has the 

meaning in section 3 of the Federal 

Deposit Insurance Act, 12 U.S.C. 1813. 

* * * * * 

■ 18. Appendix H to Part 1026, as 

amended February 14, 2013, at 78 FR 

10901, effective January 10, 2014, is 

amended by: 

■ a. Revising the entry for H–30(C) in 

the table of contents at the beginning of 

the appendix, and 

■ b. Revising the heading of H–30(C). 

The revision reads as follows: 

Appendix H to Part 1026—Closed-End 

Model Forms and Clauses 

* * * * * 

H–30(C) Sample Form of Periodic 

Statement for a Payment-Option Loan 

* * * * * 

■ 19. In Supplement I to Part 1026: 

■ a. Under Section 1026.25—Record 

Retention, under Paragraph 25(c)(2) 

Records related to requirements for loan 

originator compensation, as amended 

February 15, 2013, at 78 FR 11280, 

effective January 10, 2014, paragraph 1 

is revised. 

■ b. Under Section 1026.32 

Requirements for High Cost Mortgages: 

■ i. Under Paragraph 32(b)(1), as 

amended January 30, 2013, at 78 FR 

6408, effective January 10, 2014, 

paragraph 2 is added. 

■ ii. Under Paragraph 32(b)(1)(ii), as 

amended June 12, 2013, at 78 FR 35430, 

effective January 10, 2014, paragraph 5 

is added. 

■ iii. Paragraph 32(b)(2), as amended 

January 30, 2013, at 78 FR 6408, 

effective January 10, 2014, and 

paragraph 1 are added. 

■ iv. Under Paragraph 32(b)(2)(i), as 

amended January 30, 2013, at 78 FR 

6408, effective January 10, 2014, 

paragraph 1 is revised. 

■ v. Under Paragraph 32(b)(2)(i)(D), as 

amended January 30, 2013, at 78 FR 

6408, effective January 10, 2014, 

paragraph 1 is revised. 

■ vi. Under Paragraph 32(d)(8)(ii), as 

amended January 30, 2013, at 78 FR 

6408, effective January 10, 2014, 

paragraph 1 is revised. 

■ c. Under Section 1026.34—Prohibited 

Acts or Practices in Connection with 

High—Cost Mortgages, under Paragraph 

34(a)(5)(v), as amended January 30, 

2013, at 78 FR 6408, effective January 

10, 2014, paragraph 1 is revised. 

■ d. Under Section 1026.35— 

Requirements for Higher-Priced 

Mortgage Loans 

■ i. Under Paragraph 35(b)(2)(iii), 

paragraph 1 is revised. 

■ ii. Under Paragraph 35(b)(2)(iii)(D(1), 

paragraph 1 is revised. 

■ e. Under Section 1026.36—Prohibited 

Acts or Practices in Connection With 

Credit Secured by a Dwelling 

■ i. Under Paragraph 36(a), as amended 

February 14, 2013, at 78 FR 11280, 

effective January 10, 2014, paragraphs 1, 

4, and 5 are revised. 

■ ii. Under Paragraph 36(b), as 

amended February 14, 2013, at 78 FR 

11280, effective January 10, 2014, 

paragraph 1 is revised. 

■ iii. Under Paragraph 36(d)(1), as 

amended February 14, 2013, at 78 FR 

11280, effective January 10, 2014, 

paragraphs 1, 3, and 6 are revised. 

■ iv. Under Paragraph 36(f)(3)(i), as 

amended February 14, 2013, at 78 FR 

11280, effective January 10, 2014, 

paragraphs 1 and 2 are revised. 

■ v. Under Paragraph 36(f)(3)(ii), as 

amended February 14, 2013, at 78 FR 

11280, effective January 10, 2014, 

paragraphs 1and 2 are revised. 

■ f. Under Section 1026.41—Periodic 

Statements for Residential Mortgage 

Loans 

■ i. Under Paragraph 41(b), as amended 

February 14, 2013, at 78 FR 10901, 

effective January 10, 2014, paragraph 1 

is revised. 

■ ii. Under Paragraph 41(d), as 

amended February 14, 2013, at 78 FR 

10901, effective January 10, 2014, 

paragraph 3 is revised. 

■ iii. Under Paragraph 41(d)(4), as 

amended February 14, 2013, at 78 FR 

10901, effective January 10, 2014, 

paragraph 1 is revised. 

■ iv. Under Paragraph 41(e)(3), as 

amended February 14, 2013, at 78 FR 

10901, effective January 10, 2014, 

paragraph 1 is revised. 

■ v. Under Paragraph 41(e)(4)(iii), as 

amended February 14, 2013, at 78 FR 

10901, effective January 10, 2014, 

paragraph 1 is revised. 

The revisions read as follows: 

Supplement I to Part 1026—Official 

Interpretations 

* * * * * 

Subpart D—Miscellaneous 

Section 1026.25 Record Retention 

* * * * * 

25(c) Records related to certain 

requirements for mortgage loans. 

25(c)(2) Records related to requirements 

for loan originator compensation. 

1. * * * 

i. Records sufficient to evidence payment 

and receipt of compensation. Records are 

sufficient to evidence payment and receipt of 

compensation if they demonstrate the 

following facts: The nature and amount of the 

compensation; that the compensation was 

paid, and by whom; that the compensation 

was received, and by whom; and when the 

payment and receipt of compensation 

occurred. The compensation agreements 

themselves are to be retained in all 

circumstances consistent with 

§ 1026.25(c)(2)(i). The additional records that 

are sufficient necessarily will vary on a caseby-case basis depending on the facts and 

circumstances, particularly with regard to the 

nature of the compensation. For example, if 

the compensation is in the form of a salary, 

records to be retained might include copies 

of required filings under the Internal 

Revenue Code that demonstrate the amount 

of the salary. If the compensation is in the 

form of a contribution to or a benefit under 

a designated tax-advantaged plan, records to 

be maintained might include copies of 

required filings under the Internal Revenue 

Code or other applicable Federal law relating 

to the plan, copies of the plan and 

amendments thereto in which individual 

loan originators participate and the names of 

any loan originators covered by the plan, or 

determination letters from the Internal 

Revenue Service regarding the plan. If the 

compensation is in the nature of a 

commission or bonus, records to be retained 

might include a settlement agent ‘‘flow of 

funds’’ worksheet or other written record or 

a creditor closing instructions letter directing 

disbursement of fees at consummation. 

Where a loan originator is a mortgage broker, 

a disclosure of compensation or broker 

agreement required by applicable State law 

that recites the broker’s total compensation 

for a transaction is a record of the amount 

actually paid to the loan originator in 

connection with the transaction, unless 

actual compensation deviates from the 

amount in the disclosure or agreement. 

Where compensation has been decreased to 

defray the cost, in whole or part, of an 

unforeseen increase in an actual settlement 

cost over an estimated settlement cost 

disclosed to the consumer pursuant to 

section 5(c) of RESPA (or omitted from that 

disclosure), records to be maintained are 

those documenting the decrease in 

compensation and reasons for it. 

ii. Compensation agreement. For purposes 

of § 1026.25(c)(2), a compensation agreement 

includes any agreement, whether oral, 

written, or based on a course of conduct that 

establishes a compensation arrangement 

between the parties (e.g., a brokerage 

agreement between a creditor and a mortgage 

broker or provisions of employment contracts 

between a creditor and an individual loan 

originator employee addressing payment of 


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compensation). Where a compensation 

agreement is oral or based on a course of 

conduct and cannot itself be maintained, the 

records to be maintained are those, if any, 

evidencing the existence or terms of the oral 

or course of conduct compensation 

agreement. Creditors and loan originators are 

free to specify what transactions are governed 

by a particular compensation agreement as 

they see fit. For example, they may provide, 

by the terms of the agreement, that the 

agreement governs compensation payable on 

transactions consummated on or after some 

future effective date (in which case, a prior 

agreement governs transactions 

consummated in the meantime). For 

purposes of applying the record retention 

requirement to transaction-specific 

commissions, the relevant compensation 

agreement for a given transaction is the 

agreement pursuant to which compensation 

for that transaction is determined. 

* * * * * 

Subpart E—Special Rules for Certain Home 

Mortgage Transactions 

* * * * * 

Section 1026.32 Requirements for High-Cost 

Mortgages 

* * * * * 

32(b) Definitions. 

* * * * * 

Paragraph 32(b)(1) 

* * * * * 

2. Charges paid by parties other than the 

consumer. Under § 1026.32(b)(1), points and 

fees may include charges paid by third 

parties in addition to charges paid by the 

consumer. Specifically, charges paid by third 

parties that fall within the definition of 

points and fees set forth in § 1026.32(b)(1)(i) 

through (vi) are included in points and fees. 

i. Examples—included in points and fees. 

A creditor’s origination charge paid by a 

consumer’s employer on the consumer’s 

behalf that is included in the finance charge 

as defined in § 1026.4(a) or (b), must be 

included in points and fees under 

§ 1026.32(b)(1)(i), unless other exclusions 

under § 1026.4 or § 1026.32(b)(1)(i)(A) 

through (F) apply. In addition, consistent 

with comment 32(b)(1)(i)–1, a third-party 

payment of an item excluded from the 

finance charge under a provision of § 1026.4, 

while not included in the total points and 

fees under § 1026.32(b)(1)(i), may be 

included under § 1026.32(b)(1)(ii) through 

(vi). For example, a payment by a third party 

of a creditor-imposed fee for an appraisal 

performed by an employee of the creditor is 

included in points and fees under 

§ 1026.32(b)(1)(iii). See comment 32(b)(1)(i). 

ii. Examples—not included in points and 

fees. A charge paid by a third party is not 

included in points and fees under 

§ 1026.32(b)(1)(i) if the exclusions to points 

and fees in § 1026.32(b)(1)(i)(A) through (F) 

apply. For example, certain bona fide thirdparty charges not retained by the creditor, 

loan originator, or an affiliate of either are 

excluded from points and fees under 

§ 1026.32(b)(1)(i)(D), regardless of whether 

those charges are paid by a third party or the 

consumer. 

iii. Seller’s points. Seller’s points, as 

described in § 1026.4(c)(5) and commentary, 

are excluded from the finance charge and 

thus are not included in points and fees 

under § 1026.32(b)(1)(i). However, charges 

paid by the seller for items listed in 

§ 1026.32(b)(1)(ii) through (vi) are included 

in points and fees. 

iv. Creditor-paid charges. Charges that are 

paid by the creditor, other than loan 

originator compensation paid by the creditor 

that is required to be included in points and 

fees under § 1026.32(b)(1)(ii), are excluded 

from points and fees. See 

§ 1026.32(b)(1)(i)(A). 

* * * * * 

Paragraph 32(b)(1)(ii) 

* * * * * 

5. Loan originator compensation— 

calculating loan originator compensation in 

manufactured home transactions. i. If a 

manufactured home retailer qualifies as a 

loan originator under § 1026.36(a)(1), then 

compensation that is paid by a consumer or 

creditor to the retailer for loan origination 

activities and that can be attributed to the 

transaction at the time the interest rate is set 

must be included in points and fees. For 

example, assume a manufactured home 

retailer takes a residential mortgage loan 

application and is entitled to receive at 

consummation a $1,000 commission from the 

creditor for taking the mortgage loan 

application. The $1,000 commission is loan 

originator compensation that must be 

included in points and fees. 

ii. The sales price of the manufactured 

home does not include loan originator 

compensation that can be attributed to the 

transaction at the time the interest rate is set 

and therefore is not included in points and 

fees under § 1026.32(b)(1)(ii). 

iii. As provided in § 1026.32(b)(1)(ii)(D), 

compensation paid by a manufactured home 

retailer to its employees is not included in 

points and fees under § 1026.32(b)(1)(ii). 

* * * * * 

Paragraph 32(b)(2) 

1. See comment 32(b)(1)–2 for guidance 

concerning the inclusion in points and fees 

of charges paid by parties other than the 

consumer. 

* * * * * 

Paragraph 32(b)(2)(i). 

1. Finance charge. The points and fees 

calculation under § 1026.32(b)(2) generally 

does not include items that are included in 

the finance charge but that are not known 

until after account opening, such as 

minimum monthly finance charges or 

charges based on account activity or 

inactivity. Transaction fees also generally are 

not included in the points and fees 

calculation, except as provided in 

§ 1026.32(b)(2)(vi). See comments 32(b)(1)–1 

and 32(b)(1)(i)–1 for additional guidance 

concerning the calculation of points and fees. 

* * * * * 

Paragraph 32(b)(2)(i)(D) 

1. For purposes of § 1026.32(b)(2)(i)(D), the 

term loan originator means a loan originator 

as that term is defined in § 1026.36(a)(1), 

without regard to § 1026.36(a)(2). See 

comments 32(b)(1)(i)(D)–1 through –4 for 

further guidance concerning the exclusion of 

bona fide third-party charges from points and 

fees. 

* * * * * 

Paragraph 32(d)(8)(ii). 

1. Failure to meet repayment terms. A 

creditor may terminate a loan or open-end 

credit agreement and accelerate the balance 

when the consumer fails to meet the 

repayment terms resulting in a default in 

payment under the agreement; a creditor may 

do so, however, only if the consumer actually 

fails to make payments resulting in a default 

in the agreement. For example, a creditor 

may not terminate and accelerate if the 

consumer, in error, sends a payment to the 

wrong location, such as a branch rather than 

the main office of the creditor. If a consumer 

files for or is placed in bankruptcy, the 

creditor may terminate and accelerate under 

§ 1026.32(d)(8)(ii) if the consumer fails to 

meet the repayment terms resulting in a 

default of the agreement. Section 

1026.32(d)(8)(ii) does not override any State 

or other law that requires a creditor to notify 

a consumer of a right to cure, or otherwise 

places a duty on the creditor before it can 

terminate a 

* * * * * 

Section 1026.34 Prohibited Acts or 

Practices in Connection With High-Cost 

Mortgages 

* * * * * 

34(a)(5) Pre-Loan Counseling 

* * * * * 

Paragraph 34(a)(5)(v) Counseling fees. 

1. Financing. Section 1026.34(a)(5)(v) does 

not prohibit a creditor from financing the 

counseling fee as part of the transaction for 

a high-cost mortgage, if the fee is a bona fide 

third-party charge as provided by 

§ 1026.32(b)(1)(i)(D) and (b)(2)(i)(D). 

* * * * * 

Section 1026.35 Requirements for HigherPriced Mortgage Loans 

* * * * * 

35(b) Escrow accounts. 

* * * * * 

35(b)(2) Exemptions. 

* * * * * 

Paragraph 35(b)(2)(iii) 

1. Requirements for exemption. Under 

§ 1026.35(b)(2)(iii), except as provided in 

§ 1026.35(b)(2)(v), a creditor need not 

establish an escrow account for taxes and 

insurance for a higher-priced mortgage loan, 

provided the following four conditions are 

satisfied when the higher-priced mortgage 

loan is consummated: 

i. During any of the three preceding 

calendar years, more than 50 percent of the 

creditor’s total first-lien covered transactions, 

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

properties located in counties that are either 

‘‘rural’’ or ‘‘underserved,’’ as set forth in 

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

creditor may rely as a safe harbor on a list 

of counties published by the Bureau to 

determine whether counties in the United 

States are rural or underserved for a 

particular calendar year. Thus, for example, 

if a creditor originated 90 covered 

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


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39940 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

secured by a first lien, during 2011, 2012, or 

2013, the creditor meets this condition for an 

exemption in 2014 if at least 46 of those 

transactions in one of those three calendar 

years are secured by first liens on properties 

that are located in such counties. 

* * * * * 

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

1. Exception for certain accounts. Escrow 

accounts established for first-lien higherpriced mortgage loans on or after April 1, 

2010, and before January 1, 2014, are not 

counted for purposes of 

§ 1026.35(b)(2)(iii)(D). On and after January 1, 

2014, creditors, together with their affiliates, 

that establish new escrow accounts, other 

than those described in 

§ 1026.35(b)(2)(iii)(D)(2), do not qualify for 

the exemption provided under 

§ 1026.35(b)(2)(iii). Creditors, together with 

their affiliates, that continue to maintain 

escrow accounts established between April 1, 

2010, and January 1, 2014, still qualify for the 

exemption provided under 

§ 1026.35(b)(2)(iii) so long as they do not 

establish new escrow accounts for 

transactions consummated on or after 

January 1, 2014, other than those described 

in § 1026.35(b)(2)(iii)(D)(2), and they 

otherwise qualify under § 1026.35(b)(2)(iii). 

* * * * * 

Section 1026.36—Prohibited Acts or 

Practices in Connection With Credit Secured 

by a Dwelling 

36(a) Definitions. 

1. Meaning of loan originator. i. General. A. 

Section 1026.36(a) defines the set of activities 

or services any one of which, if done for or 

in the expectation of compensation or gain, 

makes the person doing such activities or 

performing such services a loan originator, 

unless otherwise excluded. The scope of 

activities covered by the term loan originator 

includes: 

1. Referring a consumer to any person who 

participates in the origination process as a 

loan originator. Referring includes any oral or 

written action directed to a consumer that 

can affirmatively influence the consumer to 

select a particular loan originator or creditor 

to obtain an extension of credit when the 

consumer will pay for such credit. See 

comment 36(a)–4 with respect to certain 

activities that do not constitute referring. 

2. Arranging a credit transaction, including 

initially contacting and orienting the 

consumer to a particular loan originator’s or 

creditor’s origination process or particular 

credit terms that are or may be available to 

that consumer selected based on the 

consumer’s financial characteristics, assisting 

the consumer to apply for credit, taking an 

application, offering particular credit terms 

to the consumer selected based on the 

consumer’s financial characteristics, 

negotiating credit terms, or otherwise 

obtaining or making an extension of credit. 

3. Assisting a consumer in obtaining or 

applying for consumer credit by advising on 

particular credit terms that are or may be 

available to that consumer based on the 

consumer’s financial characteristics, filling 

out an application form, preparing 

application packages (such as a credit 

application or pre-approval application or 

supporting documentation), or collecting 

application and supporting information on 

behalf of the consumer to submit to a loan 

originator or creditor. A person who, acting 

on behalf of a loan originator or creditor, 

collects information or verifies information 

provided by the consumer, such as by asking 

the consumer for documentation to support 

the information the consumer provided or for 

the consumer’s authorization to obtain 

supporting documents from third parties, is 

not collecting information on behalf of the 

consumer. See also comment 36(a)–4.i 

through iv with respect to application-related 

administrative and clerical tasks and 

comment 36(a)–1.v with respect to thirdparty advisors. 

4. Presenting particular credit terms for the 

consumer’s consideration that are selected 

based on the consumer’s financial 

characteristics, or communicating with a 

consumer for the purpose of reaching a 

mutual understanding about prospective 

credit terms. 

* * * * * 

4. * * * 

i. Application-related administrative and 

clerical tasks. The definition of loan 

originator does not include a loan originator’s 

or creditor’s employee (or agent or 

contractor) who provides a credit application 

form from the entity for which the person 

works to the consumer for the consumer to 

complete or, without assisting the consumer 

in completing the credit application, 

processing or analyzing the information, or 

discussing particular credit terms or 

particular credit products available from a 

creditor to that consumer selected based on 

the consumer’s financial characteristics, 

deliver the credit application from a 

consumer to a loan originator or creditor. A 

person does not assist the consumer in 

completing the application if the person 

explains to the consumer filling out the 

application the contents of the application or 

where particular consumer information is to 

be provided, or generally describes the credit 

application process to a consumer without 

discussion of particular credit terms or 

particular products available from a creditor 

to that consumer selected based on the 

consumer’s financial characteristics. 

ii. Responding to consumer inquiries and 

providing general information. The definition 

of loan originator does not include persons 

who: 

A. * * * 

B. As employees (or agents or contractors) 

of a creditor or loan originator, provide loan 

originator or creditor contact information to 

a consumer, provided that the person does 

not discuss particular credit terms that are or 

may be available from a creditor to that 

consumer selected based on the consumer’s 

financial characteristics and does not direct 

the consumer, based on his or her assessment 

of the consumer’s financial characteristics, to 

a particular loan originator or particular 

creditor seeking to originate credit 

transactions to consumers with those 

financial characteristics; 

C. Describe other product-related services 

(for example, persons who describe optional 

monthly payment methods via telephone or 

via automatic account withdrawals, the 

availability and features of online account 

access, the availability of 24-hour customer 

support, or free mobile applications to access 

account information); or 

D. * * * 

iii. Loan processing. The definition of loan 

originator does not include persons who, 

acting on behalf of a loan originator or a 

creditor: 

A. * * * 

B. * * * 

C. Coordinate consummation of the credit 

transaction or other aspects of the credit 

transaction process, including by 

communicating with a consumer about 

process deadlines and documents needed at 

consummation, provided that any 

communication that includes a discussion 

about credit terms available from a creditor 

to that consumer selected based on the 

consumer’s financial characteristics only 

confirms credit terms already agreed to by 

the consumer; 

iv. Underwriting, credit approval, and 

credit pricing. The definition of loan 

originator does not include persons who: 

A. * * * 

B. Approve particular credit terms or set 

particular credit terms available from a 

creditor to that consumer selected based on 

the consumer’s financial characteristics in 

offer or counter-offer situations, provided 

that only a loan originator communicates to 

or with the consumer regarding these credit 

terms, an offer, or provides or engages in 

negotiation, a counter-offer, or approval 

conditions; or 

* * * * * 

5. Compensation. 

* * * * * 

iv. Amounts for charges for services that 

are not loan origination activities. A. * * * 

B. Compensation includes any salaries, 

commissions, and any financial or similar 

incentive to an individual loan originator, 

regardless of whether it is labeled as payment 

for services that are not loan origination 

activities. 

* * * * * 

36(b) Scope. 

1. Scope of coverage. Section 1026.36(c)(1) 

and (c)(2) applies to closed-end consumer 

credit transactions secured by a consumer’s 

principal dwelling. Section 1026.36(c)(3) 

applies to a consumer credit transaction, 

including home equity lines of credit under 

§ 1026.40, secured by a consumer’s dwelling. 

Paragraphs (h) and (i) of § 1026.36 apply to 

home equity lines of credit under § 1026.40 

secured by a consumer’s principal dwelling. 

Paragraphs (d), (e), (f), (g), (h), and (i) of 

§ 1026.36 apply to closed-end consumer 

credit transactions secured by a dwelling. 

Closed-end consumer credit transactions 

include transactions secured by first or 

subordinate liens, and reverse mortgages that 

are not home equity lines of credit under 

§ 1026.40. See § 1026.36(b) for additional 

restrictions on the scope of § 1026.36, and 

§§ 1026.1(c) and 1026.3(a) and corresponding 

commentary for further discussion of 

extensions of credit subject to Regulation Z. 

* * * * * 


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36(d) Prohibited payments to loan 

originators. 

* * * * * 

36(d)(1) Payments based on a term of a 

transaction. 

1. * * * 

ii. Single or multiple transactions. The 

prohibition on payment and receipt of 

compensation under § 1026.36(d)(1)(i) 

encompasses compensation that directly or 

indirectly is based on the terms of a single 

transaction of a single individual loan 

originator, the terms of multiple transactions 

by that single individual loan originator, or 

the terms of multiple transactions by 

multiple individual loan originators. 

Compensation to an individual loan 

originator that is based upon profits 

determined with reference to a mortgagerelated business is considered compensation 

that is based on the terms of multiple 

transactions by multiple individual loan 

originators. For clarification about the 

exceptions permitting compensation based 

upon profits determined with reference to 

mortgage-related business pursuant to either 

a designated tax-advantaged plan or a nondeferred profits-based compensation plan, 

see comment 36(d)(1)–3. For clarification 

about ‘‘mortgage-related business,’’ see 

comments 36(d)(1)–3.v.B and –3.v.E. 

A. Assume that a creditor pays a bonus to 

an individual loan originator out of a bonus 

pool established with reference to the 

creditor’s profits and the profits are 

determined with reference to the creditor’s 

revenue from origination of closed-end 

consumer credit transactions secured by a 

dwelling. In such instance, the bonus is 

considered compensation that is based on the 

terms of multiple transactions by multiple 

individual loan originators. Therefore, the 

bonus is prohibited under § 1026.36(d)(1)(i), 

unless it is otherwise permitted under 

§ 1026.36(d)(1)(iv). 

B. Assume that an individual loan 

originator’s employment contract with a 

creditor guarantees a quarterly bonus in a 

specified amount conditioned upon the 

individual loan originator meeting certain 

performance benchmarks (e.g., volume of 

originations monthly). A bonus paid 

following the satisfaction of those contractual 

conditions is not directly or indirectly based 

on the terms of a transaction by an individual 

loan originator, the terms of multiple 

transactions by that individual loan 

originator, or the terms of multiple 

transactions by multiple individual loan 

originators under § 1026.36(d)(1)(i) as 

clarified by this comment 36(d)(1)–1.ii, 

because the creditor is obligated to pay the 

bonus, in the specified amount, regardless of 

the terms of transactions of the individual 

loan originator or multiple individual loan 

originators and the effect of those terms of 

multiple transactions on the creditor’s 

profits. Because this type of bonus is not 

directly or indirectly based on the terms of 

multiple transactions by multiple individual 

loan originators, as described in 

§ 1026.36(d)(1)(i) (as clarified by this 

comment 36(d)(1)–1.ii), it is not subject to the 

10-percent total compensation limit 

described in § 1026.36(d)(1)(iv)(B)(1). 

iii. * * * 

* * * * * 

D. The fees and charges described above in 

paragraphs B and C can only be a term of a 

transaction if the fees or charges are required 

to be disclosed in the Good Faith Estimate, 

the HUD–1, or the HUD–1A (and 

subsequently in any integrated disclosures 

promulgated by the Bureau under TILA 

section 105(b) (15 U.S.C. 1604(b)) and RESPA 

section 4 (12 U.S.C. 2603) as amended by 

sections 1098 and 1100A of the Dodd-Frank 

Act). 

* * * * * 

3. Interpretation of § 1026.36(d)(1)(iii) and 

(iv). Subject to certain restrictions, 

§ 1026.36(d)(1)(iii) and § 1026.36(d)(1)(iv) 

permit contributions to or benefits under 

designated tax-advantaged plans and 

compensation under a non-deferred profitsbased compensation plan even if the 

contributions, benefits, or compensation, 

respectively, are based on the terms of 

multiple transactions by multiple individual 

loan originators. 

i. Designated tax-advantaged plans. 

Section 1026.36(d)(1)(iii) permits an 

individual loan originator to receive, and a 

person to pay, compensation in the form of 

contributions to a defined contribution plan 

or benefits under a defined benefit plan 

provided the plan is a designated taxadvantaged plan (as defined in 

§ 1026.36(d)(1)(iii)), even if contributions to 

or benefits under such plans are directly or 

indirectly based on the terms of multiple 

transactions by multiple individual loan 

originators. In the case of a designated taxadvantaged plan that is a defined 

contribution plan, § 1026.36(d)(1)(iii) does 

not permit the contribution to be directly or 

indirectly based on the terms of that 

individual loan originator’s transactions. A 

defined contribution plan has the meaning 

set forth in Internal Revenue Code section 

414(i), 26 U.S.C. 414(i). A defined benefit 

plan has the meaning set forth in Internal 

Revenue Code section 414(j), 26 U.S.C. 414(j). 

ii. Non-deferred profits-based 

compensation plans. As used in 

§ 1026.36(d)(1)(iv), a ‘‘non-deferred profitsbased compensation plan’’ is any 

compensation arrangement where an 

individual loan originator may be paid 

variable, additional compensation based in 

whole or in part on the mortgage-related 

business profits of the person paying the 

compensation, any affiliate, or a business 

unit within the organizational structure of 

the person or the affiliate, as applicable (i.e., 

depending on the level within the person’s 

or affiliate’s organization at which the nondeferred profits-based compensation plan is 

established). A non-deferred profits-based 

compensation plan does not include a 

designated tax-advantaged plan or other 

forms of deferred compensation that are not 

designated tax-advantaged plans, such as 

those created pursuant to Internal Revenue 

Code section 409A, 26 U.S.C. 409A. Thus, if 

contributions to or benefits under a 

designated tax-advantaged plan or 

compensation under another form of deferred 

compensation plan are determined with 

reference to the mortgage-related business 

profits of the person making the contribution, 

then the contribution, benefits, or other 

compensation, as applicable, are not 

permitted by § 1026.36(d)(1)(iv) (although, in 

the case of contributions to or benefits under 

a designated tax-advantaged plan, the 

benefits or contributions may be permitted by 

§ 1026.36(d)(1)(iii)). Under a non-deferred 

profits-based compensation plan, the 

individual loan originator may, for example, 

be paid directly in cash, stock, or other nondeferred compensation, and the 

compensation under the non-deferred profitsbased compensation plan may be determined 

by a fixed formula or may be at the discretion 

of the person (e.g., the person may elect not 

to pay compensation under a non-deferred 

profits-based compensation plan in a given 

year), provided the compensation is not 

directly or indirectly based on the terms of 

the individual loan originator’s transactions. 

As used in § 1026.36(d)(1)(iv) and this 

commentary, non-deferred profits-based 

compensation plans include, without 

limitation, bonus pools, profits pools, bonus 

plans, and profit-sharing plans. 

Compensation under a non-deferred profitsbased compensation plan could include, 

without limitation, annual or periodic 

bonuses, or awards of merchandise, services, 

trips, or similar prizes or incentives where 

the bonuses, contributions, or awards are 

determined with reference to the profitability 

of the person, business unit, or affiliate, as 

applicable. As used in § 1026.36(d)(1)(iv) and 

this commentary, a business unit is a 

division, department, or segment within the 

overall organizational structure of the person 

or the person’s affiliate that performs discrete 

business functions and that the person or the 

affiliate treats separately for accounting or 

other organizational purposes. For example, 

a creditor that pays its individual loan 

originators bonuses at the end of a calendar 

year based on the creditor’s average net 

return on assets for the calendar year is 

operating a non-deferred profits-based 

compensation plan under § 1026.36(d)(1)(iv). 

A bonus that is paid to an individual loan 

originator from a source other than a nondeferred profits-based compensation plan (or 

a deferred compensation plan where the 

bonus is determined with reference to 

mortgage-related business profits), such as a 

retention bonus budgeted for in advance or 

a performance bonus paid out of a bonus 

pool set aside at the beginning of the 

company’s annual accounting period as part 

of the company’s operating budget, does not 

violate the prohibition on payment of 

compensation based on the terms of multiple 

transactions by multiple individual loan 

originators under § 1026.36(d)(1)(i), as 

clarified by comment 36(d)(1)–1.ii; therefore, 

§ 1026.36(d)(1)(iv) does not apply to such 

bonuses. 

iii. Compensation that is not directly or 

indirectly based on the terms of multiple 

transactions by multiple individual loan 

originators. The compensation arrangements 

addressed in § 1026.36(d)(1)(iii) and (iv) are 

permitted even if they are directly or 

indirectly based on the terms of multiple 

transactions by multiple individual loan 

originators. See comment 36(d)(1)–1 for 

additional interpretation. If a loan originator 

organization’s revenues are exclusively 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
39942 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

derived from transactions subject to 

§ 1026.36(d) (whether paid by creditors, 

consumers, or both) and that loan originator 

organization pays its individual loan 

originators a bonus under a non-deferred 

profits-based compensation plan, the bonus 

is not directly or indirectly based on the 

terms of multiple transactions by multiple 

individual loan originators if 

§ 1026.36(d)(1)(i) is otherwise complied with. 

iv. Compensation based on terms of an 

individual loan originator’s transactions. 

Under both § 1026.36(d)(1)(iii), with regard to 

contributions made to a defined contribution 

plan that is a designated tax-advantaged plan, 

and § 1026.36(d)(1)(iv)(A), with regard to 

compensation under a non-deferred profitsbased compensation plan, the payment of 

compensation to an individual loan 

originator may not be directly or indirectly 

based on the terms of that individual loan 

originator’s transaction or transactions. 

Consequently, for example, where an 

individual loan originator makes loans that 

vary in their interest rate spread, the 

compensation payment may not take into 

account the average interest rate spread on 

the individual loan originator’s transactions 

during the relevant calendar year. 

v. Compensation under non-deferred 

profits-based compensation plans. Assuming 

that the conditions in § 1026.36(d)(1)(iv)(A) 

are met, § 1026.36(d)(1)(iv)(B)(1) permits 

certain compensation to an individual loan 

originator under a non-deferred profits-based 

compensation plan. Specifically, if the 

compensation is determined with reference 

to the profits of the person from mortgagerelated business, compensation under a nondeferred profits-based compensation plan is 

permitted provided the compensation does 

not, in the aggregate, exceed more than 10 

percent of the individual loan originator’s 

total compensation corresponding to the time 

period for which compensation under the 

non-deferred profits-based compensation 

plan is paid. The compensation restrictions 

under § 1026.36(d)(1)(iv)(B)(1) are sometimes 

referred to in this commentary as the ‘‘10- 

percent total compensation limit or the ‘‘10- 

percent limit.’’ 

A. Total compensation. For purposes of 

§ 1026.36(d)(1)(iv)(B)(1), the individual loan 

originator’s total compensation consists of 

the sum total of: (1) All wages and tips 

reportable for Medicare tax purposes in box 

5 on IRS form W–2 (or, if the individual loan 

originator is an independent contractor, 

reportable compensation on IRS form 1099– 

MISC) that are actually paid during the 

relevant time period (regardless of when the 

wages and tips are earned), except for any 

compensation under a non-deferred profitsbased compensation plan that is earned 

during a different time period (see comment 

36(d)(1)–3.v.C); (2) at the election of the 

person paying the compensation, all 

contributions that are actually made during 

the relevant time period by the creditor or 

loan originator organization to the individual 

loan originator’s accounts in designated taxadvantaged plans that are defined 

contribution plans (regardless of when the 

contributions are earned); and (3) at the 

election of the person paying the 

compensation, all compensation under a 

non-deferred profits-based compensation 

plan that is earned during the relevant time 

period, regardless of whether the 

compensation is actually paid during that 

time period (see comment 36(d)(1)–3.v.C). If 

an individual loan originator has some 

compensation that is reportable on the W–2 

and some that is reportable on the 1099– 

MISC, the total compensation is the sum total 

of what is reportable on each of the two 

forms. 

B. Profits of the Person. Under 

§ 1026.36(d)(1)(iv), a plan is a non-deferred 

profits-based compensation plan if 

compensation is paid, based in whole or in 

part, on the profits of the person paying the 

compensation. As used in § 1026.36(d)(1)(iv), 

‘‘profits of the person’’ include, as applicable 

depending on where the non-deferred profitsbased compensation plan is set, the profits of 

the person, the business unit to which the 

individual loan originators are assigned for 

accounting or other organizational purposes, 

or any affiliate of the person. Profits from 

mortgage-related business are profits 

determined with reference to revenue 

generated from transactions subject to 

§ 1026.36(d). Pursuant to § 1026.36(b) and 

comment 36(b)–1, § 1026.36(d) applies to 

closed-end consumer credit transactions 

secured by dwellings. This revenue includes, 

without limitation, and as applicable based 

on the particular sources of revenue of the 

person, business unit, or affiliate, origination 

fees and interest associated with dwellingsecured transactions for which individual 

loan originators working for the person were 

loan originators, income from servicing of 

such transactions, and proceeds of secondary 

market sales of such transactions. If the 

amount of the individual loan originator’s 

compensation under non-deferred profitsbased compensation plans paid for a time 

period does not, in the aggregate, exceed 10 

percent of the individual loan originator’s 

total compensation corresponding to the 

same time period, compensation under nondeferred profits-based compensation plans 

may be paid under § 1026.36(d)(1)(iv)(B)(1) 

regardless of whether or not it was 

determined with reference to the profits of 

the person from mortgage-related business. 

C. Time period for which the compensation 

under the non-deferred profits-based 

compensation plan is paid and to which the 

total compensation corresponds. Under 

§ 1026.36(d)(1)(iv)(B)(1), determination of 

whether payment of compensation under a 

non-deferred profits-based compensation 

plan complies with the 10-percent limit 

requires a calculation of the ratio of the 

compensation under the non-deferred profitsbased compensation plan (i.e., the 

compensation subject to the 10-percent limit) 

and the total compensation corresponding to 

the relevant time period. For compensation 

subject to the 10-percent limit, the relevant 

time period is the time period for which a 

person makes reference to profits in 

determining the compensation (i.e., when the 

compensation was earned). It does not matter 

whether the compensation is actually paid 

during that particular time period. For total 

compensation, the relevant time period is the 

same time period, but only certain types of 

compensation may be included in the total 

compensation amount for that time period 

(see comment 36(d)(1)–3.v.A). For example, 

assume that during calendar year 2014 a 

creditor pays an individual loan originator 

compensation in the following amounts: 

$80,000 in commissions based on the 

individual loan originator’s performance and 

volume of loans generated during the 

calendar year; and $10,000 in an employer 

contribution to a designated tax-advantaged 

defined contribution plan on behalf of the 

individual loan originator. The creditor 

desires to pay the individual loan originator 

a year-end bonus of $10,000 under a nondeferred profits-based compensation plan. 

The commissions are paid and employer 

contributions to the designated taxadvantaged defined contribution plan are 

made during calendar year 2014, but the 

year-end bonus will be paid in January 2015. 

For purposes of the 10-percent total 

compensation limit, the year-end bonus is 

counted toward the 10-percent limit for 

calendar year 2014, even though it is not 

actually paid until 2015. Therefore, for 

calendar year 2014 the individual loan 

originator’s compensation that is subject to 

the 10-percent limit would be $10,000 (i.e., 

the year-end bonus) and the total 

compensation would be $100,000 (i.e., the 

sum of the commissions, the designated taxadvantaged plan contribution (assuming the 

creditor elects to include it in total 

compensation for calendar year 2014), and 

the bonus (assuming the creditor elects to 

include it in total compensation for calendar 

year 2014)); the bonus would be permissible 

under § 1026.36(d)(1)(iv) because it does not 

exceed 10 percent of total compensation. The 

determination of total compensation 

corresponding to 2014 also would not take 

into account any compensation subject to the 

10-percent limit that is actually paid in 2014 

but is earned during a different calendar year 

(e.g., an annual bonus determined with 

reference to mortgage-related business profits 

for calendar year 2013 that is paid in January 

2014). If the employer contribution to the 

designated tax-advantaged plan is earned in 

2014 but actually made in 2015, however, it 

may not be included in total compensation 

for 2014. A company, business unit, or 

affiliate, as applicable, may pay 

compensation subject to the 10-percent limit 

during different time periods falling within 

its annual accounting period for keeping 

records and reporting income and expenses, 

which may be a calendar year or a fiscal year 

depending on the annual accounting period. 

In such instances, however, the 10-percent 

limit applies both as to each time period and 

cumulatively as to the annual accounting 

period. For example, assume that a creditor 

uses a calendar-year accounting period. If the 

creditor pays an individual loan originator a 

bonus at the end of each quarter under a nondeferred profits-based compensation plan, 

the payment of each quarterly bonus is 

subject to the 10-percent limit measured with 

respect to each quarter. The creditor can also 

pay an annual bonus under the non-deferred 

profits-based compensation plan that does 

not exceed the difference of 10 percent of the 

individual loan originator’s total 

compensation corresponding to the calendar 

year and the aggregate amount of the 

quarterly bonuses. 


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D. Awards of merchandise, services, trips, 

or similar prizes or incentives. If any 

compensation paid to an individual loan 

originator under § 1026.36(d)(1)(iv) consists 

of an award of merchandise, services, trips, 

or similar prize or incentive, the cash value 

of the award is factored into the calculation 

of the 10-percent total compensation limit. 

For example, during a given calendar year, 

individual loan originator A and individual 

loan originator B are each employed by a 

creditor and paid $40,000 in salary, and 

$45,000 in commissions. The creditor also 

contributes $5,000 to a designated taxadvantaged defined contribution plan for 

each individual loan originator during that 

calendar year, which the creditor elects to 

include in the total compensation amount. 

Neither individual loan originator is paid any 

other form of compensation by the creditor. 

In December of the calendar year, the creditor 

rewards both individual loan originators for 

their performance during the calendar year 

out of a bonus pool established with 

reference to the profits of the mortgage 

origination business unit. Individual loan 

originator A is paid a $10,000 cash bonus, 

meaning that individual loan originator A’s 

total compensation is $100,000 (assuming the 

creditor elects to include the bonus in the 

total compensation amount). Individual loan 

originator B is paid a $7,500 cash bonus and 

awarded a vacation package with a cash 

value of $3,000, meaning that individual loan 

originator B’s total compensation is $100,500 

(assuming the creditor elects to include the 

reward in the total compensation amount). 

Under § 1026.36(d)(1)(iv)(B)(1), individual 

loan originator A’s $10,000 bonus is 

permissible because the bonus would not 

constitute more than 10 percent of the 

individual loan originator A’s total 

compensation for the calendar year. The 

creditor may not pay individual loan 

originator B the $7,500 bonus and award the 

vacation package, however, because the total 

value of the bonus and the vacation package 

would be $10,500, which is greater than 10 

percent (10.45 percent) of individual loan 

originator B’s total compensation for the 

calendar year. One way to comply with 

§ 1026.36(d)(1)(iv)(B)(1) would be if the 

amount of the bonus were reduced to $7,000 

or less or the vacation package were 

structured such that its cash value would be 

$2,500 or less. 

E. Compensation determined only with 

reference to non-mortgage-related business 

profits. Compensation under a non-deferred 

profits-based compensation plan is not 

subject to the 10-percent total compensation 

limit under § 1026.36(d)(1)(iv)(B)(1) if the 

non-deferred profits-based compensation 

plan is determined with reference only to 

profits from business other than mortgagerelated business, as determined in 

accordance with reasonable accounting 

principles. Reasonable accounting principles 

reflect an accurate allocation of revenues, 

expenses, profits, and losses among the 

person, any affiliate of the person, and any 

business units within the person or affiliates, 

and are consistent with the accounting 

principles applied by the person, the affiliate, 

or the business unit with respect to, as 

applicable, its internal budgeting and 

auditing functions and external reporting 

requirements. Examples of external reporting 

and filing requirements that may be 

applicable to creditors and loan originator 

organizations are Federal income tax filings, 

Federal securities law filings, or quarterly 

reporting of income, expenses, loan 

origination activity, and other information 

required by government-sponsored 

enterprises. As used in 

§ 1026.36(d)(1)(iv)(B)(1), profits means 

positive profits or losses avoided or 

mitigated. 

F. Additional examples. 1. Assume that, 

during a given calendar year, a loan 

originator organization pays an individual 

loan originator employee $40,000 in salary 

and $125,000 in commissions, and makes a 

contribution of $15,000 to the individual 

loan originator’s 401(k) plan. At the end of 

the year, the loan originator organization 

wishes to pay the individual loan originator 

a bonus based on a formula involving a 

number of performance metrics, to be paid 

out of a profit pool established at the level 

of the company but that is determined in part 

with reference to the profits of the company’s 

mortgage origination unit. Assume that the 

loan originator organization derives revenues 

from sources other than transactions covered 

by § 1026.36(d). In this example, the 

performance bonus would be directly or 

indirectly based on the terms of multiple 

individual loan originators’ transactions as 

described in § 1026.36(d)(1)(i), because it is 

being determined with reference to profits 

from mortgage-related business. Assume, 

furthermore, that the loan originator 

organization elects to include the bonus in 

the total compensation amount for the 

calendar year. Thus, the bonus is permissible 

under § 1026.36(d)(1)(iv)(B)(1) if it does not 

exceed 10 percent of the loan originator’s 

total compensation, which in this example 

consists of the individual loan originator’s 

salary, commissions, contribution to the 

401(k) plan (if the loan originator 

organization elects to include the 

contribution in the total compensation 

amount), and the performance bonus. 

Therefore, if the loan originator organization 

elects to include the 401(k) contribution in 

total compensation for these purposes, the 

loan originator organization may pay the 

individual loan originator a performance 

bonus of up to $20,000 (i.e., 10 percent of 

$200,000 in total compensation). If the loan 

originator organization does not include the 

401(k) contribution in calculating total 

compensation, or the 401(k) contribution is 

actually made in January of the following 

calendar year (in which case it cannot be 

included in total compensation for the initial 

calendar year), the bonus may be up to 

$18,333.33. If the loan originator organization 

includes neither the 401(k) contribution nor 

the performance bonus in the total 

compensation amount, the bonus may not 

exceed $16,500. 

2. Assume that the compensation during a 

given calendar year of an individual loan 

originator employed by a creditor consists of 

only salary and commissions, and the 

individual loan originator does not 

participate in a designated tax-advantaged 

defined contribution plan. Assume further 

that the creditor uses a calendar-year 

accounting period. At the end of the calendar 

year, the creditor pays the individual loan 

originator two bonuses: A ‘‘performance’’ 

bonus based on the individual loan 

originator’s aggregate loan volume for a 

calendar year that is paid out of a bonus pool 

determined with reference to the profitability 

of the mortgage origination business unit, 

and a year-end ‘‘holiday’’ bonus in the same 

amount to all company employees that is 

paid out of a company-wide bonus pool. 

Because the performance bonus is paid out 

of a bonus pool that is determined with 

reference to the profitability of the mortgage 

origination business unit, it is compensation 

that is determined with reference to 

mortgage-related business profits, and the 

bonus is therefore subject to the 10-percent 

total compensation limit. If the companywide bonus pool from which the ‘‘holiday’’ 

bonus is paid is derived in part from profits 

of the creditor’s mortgage origination 

business unit, then the combination of the 

‘‘holiday’’ bonus and the performance bonus 

is subject to the 10-percent total 

compensation limit. The ‘‘holiday’’ bonus is 

not subject to the 10-percent total 

compensation limit if the bonus pool is 

determined with reference only to the profits 

of business units other than the mortgage 

origination business unit, as determined in 

accordance with reasonable accounting 

principles. If the ‘‘performance’’ bonus and 

the ‘‘holiday’’ bonus in the aggregate do not 

exceed 10 percent of the individual loan 

originator’s total compensation, the bonuses 

may be paid under § 1026.36(d)(1)(iv)(B)(1) 

without the necessity of determining from 

which bonus pool they were paid or whether 

they were determined with reference to the 

profits of the creditor’s mortgage origination 

business unit. 

G. Reasonable reliance by individual loan 

originator on accounting or statement by 

person paying compensation. An individual 

loan originator is deemed to comply with its 

obligations regarding receipt of compensation 

under § 1026.36(d)(1)(iv)(B)(1) if the 

individual loan originator relies in good faith 

on an accounting or a statement provided by 

the person who determined the individual 

loan originator’s compensation under a nondeferred profits-based compensation plan 

pursuant to § 1026.36(d)(1)(iv)(B)(1) and 

where the statement or accounting is 

provided within a reasonable time period 

following the person’s determination. 

vi. Individual loan originators who 

originate ten or fewer transactions. Assuming 

that the conditions in § 1026.36(d)(1)(iv)(A) 

are met, § 1026.36(d)(1)(iv)(B)(2) permits 

compensation to an individual loan 

originator under a non-deferred profits-based 

compensation plan even if the payment or 

contribution is directly or indirectly based on 

the terms of multiple individual loan 

originators’ transactions if the individual is a 

loan originator (as defined in 

§ 1026.36(a)(1)(i)) for ten or fewer 

consummated transactions during the 12- 

month period preceding the compensation 

determination. For example, assume a loan 

originator organization employs two 

individual loan originators who originate 

transactions subject to § 1026.36 during a 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
39944 Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 

given calendar year. Both employees are 

individual loan originators under 

§ 1026.36(a)(1)(ii), but only one of them 

(individual loan originator B) acts as a loan 

originator in the normal course of business, 

while the other (individual loan originator A) 

is called upon to do so only occasionally and 

regularly performs other duties (such as 

serving as a manager). In January of the 

following calendar year, the loan originator 

organization formally determines the 

financial performance of its mortgage 

business for the prior calendar year. Based on 

that determination, the loan originator 

organization on February 1 decides to pay a 

bonus to the individual loan originators out 

of a company bonus pool. Assume that, 

between February 1 of the prior calendar year 

and January 31 of the current calendar year, 

individual loan originator A was the loan 

originator for eight consummated 

transactions, and individual loan originator B 

was the loan originator for 15 consummated 

transactions. The loan originator organization 

may award the bonus to individual loan 

originator A under § 1026.36(d)(1)(iv)(B)(2). 

The loan originator organization may not 

award the bonus to individual loan originator 

B relying on the exception under 

§ 1026.36(d)(1)(iv)(B)(2) because it would not 

apply, although it could award a bonus 

pursuant to the 10-percent total 

compensation limit under 

§ 1026.36(d)(1)(iv)(B)(1) if the requirements 

of that provision are complied with. 

* * * * * 

6. Periodic changes in loan originator 

compensation and terms of transactions. 

Section 1026.36 does not limit a creditor or 

other person from periodically revising the 

compensation it agrees to pay a loan 

originator. However, the revised 

compensation arrangement must not result in 

payments to the loan originator that are based 

on the terms of a credit transaction. A 

creditor or other person might periodically 

review factors such as loan performance, 

transaction volume, as well as current market 

conditions for originator compensation, and 

prospectively revise the compensation it 

agrees to pay to a loan originator. For 

example, assume that during the first six 

months of the year, a creditor pays $3,000 to 

a particular loan originator for each loan 

delivered, regardless of the terms of the 

transaction. After considering the volume of 

business produced by that originator, the 

creditor could decide that as of July 1, it will 

pay $3,250 for each loan delivered by that 

particular originator, regardless of the terms 

of the transaction. No violation occurs even 

if the loans made by the creditor after July 

1 generally carry a higher interest rate than 

loans made before that date, to reflect the 

higher compensation. 

* * * * * 

36(f) Loan originator qualification 

requirements. 

* * * * * 

Paragraph 36(f)(3). 

* * * * * 

Paragraph 36(f)(3)(i). 

1. Criminal and credit histories. Section 

1026.36(f)(3)(i) requires the loan originator 

organization to obtain, for any of its 

individual loan originator employees who is 

not required to be licensed and is not 

licensed as a loan originator pursuant to the 

SAFE Act, a criminal background check, a 

credit report, and information related to any 

administrative, civil, or criminal 

determinations by any government 

jurisdiction. The requirement applies to 

individual loan originator employees who 

were hired on or after January 1, 2014 (or 

whom the loan originator organization hired 

before this date but for whom there were no 

applicable statutory or regulatory background 

standards in effect at the time of hire or 

before January 1, 2014, used to screen the 

individual). A credit report may be obtained 

directly from a consumer reporting agency or 

through a commercial service. A loan 

originator organization with access to the 

NMLSR can meet the requirement for the 

criminal background check by reviewing any 

criminal background check it receives upon 

compliance with the requirement in 12 CFR 

1007.103(d)(1) and can meet the requirement 

to obtain information related to any 

administrative, civil, or criminal 

determinations by any government 

jurisdiction by obtaining the information 

through the NMLSR. Loan originator 

organizations that do not have access to these 

items through the NMLSR may obtain them 

by other means. For example, a criminal 

background check may be obtained from a 

law enforcement agency or commercial 

service. Information on any past 

administrative, civil, or criminal findings 

(such as from disciplinary or enforcement 

actions) may be obtained from the individual 

loan originator. 

2. Retroactive obtaining of information not 

required. Section 1026.36(f)(3)(i) does not 

require the loan originator organization to 

obtain the covered information for an 

individual whom the loan originator 

organization hired as a loan originator before 

January 1, 2014, and screened under 

applicable statutory or regulatory background 

standards in effect at the time of hire. 

However, if the individual subsequently 

ceases to be employed as a loan originator by 

that loan originator organization, and later 

resumes employment as a loan originator by 

that loan originator organization (or any other 

loan originator organization), the loan 

originator organization is subject to the 

requirements of § 1026.36(f)(3)(i). 

* * * * * 

Paragraph 36(f)(3)(ii). 

1. Scope of review. Section 1026.36(f)(3)(ii) 

requires the loan originator organization to 

review the information that it obtains under 

§ 1026.36(f)(3)(i) and other reasonably 

available information to determine whether 

the individual loan originator meets the 

standards in § 1026.36(f)(3)(ii). Other 

reasonably available information includes 

any information the loan originator 

organization has obtained or would obtain as 

part of a reasonably prudent hiring process, 

including information obtained from 

application forms, candidate interviews, 

other reliable information and evidence 

provided by a candidate, and reference 

checks. The requirement applies to 

individual loan originator employees who 

were hired on or after January 1, 2014 (or 

whom the loan originator organization hired 

before this date but for whom there were no 

applicable statutory or regulatory background 

standards in effect at the time of hire or 

before January 1, 2014, used to screen the 

individual). 

2. Retroactive determinations not required. 

Section 1026.36(f)(3)(ii) does not require the 

loan originator organization to review the 

covered information and make the required 

determinations for an individual whom the 

loan originator organization hired as a loan 

originator on or before January 1, 2014 and 

screened under applicable statutory or 

regulatory background standards in effect at 

the time of hire. However, if the individual 

subsequently ceases to be employed as a loan 

originator by that loan originator 

organization, and later resumes employment 

as a loan originator by that loan originator 

organization (or any other loan originator 

organization), the loan originator 

organization employing the individual is 

subject to the requirements of 

§ 1026.36(f)(3)(ii). 

* * * * * 

Section 1026.41—Periodic Statements for 

Residential Mortgage Loans 

* * * * * 

41(b) Timing of the periodic statement. 

1. Reasonably prompt time. Section 

1026.41(b) requires that the periodic 

statement be delivered or placed in the mail 

no later than a reasonably prompt time after 

the payment due date or the end of any 

courtesy period. Delivering, emailing or 

placing the periodic statement in the mail 

within four days of the close of the courtesy 

period of the previous billing cycle generally 

would be considered reasonably prompt. 

* * * * * 

41(d) Content and layout of the periodic 

statement. 

* * * * * 

3. Terminology. A servicer may use 

terminology other than that found on the 

sample periodic statements in appendix H– 

30, so long as the new terminology is 

commonly understood. For example, 

servicers may take into consideration 

regional differences in terminology and refer 

to the account for the collection of taxes and 

insurance, referred to in § 1026.41(d) as the 

‘‘escrow account,’’ as an ‘‘impound account.’’ 

* * * * * 

41(d)(4) Transaction Activity. 

1. Meaning. Transaction activity includes 

any transaction that credits or debits the 

amount currently due. This is the same 

amount that is required to be disclosed under 

§ 1026.41(d)(1)(iii). Examples of such 

transactions include, without limitation: 

* * * * * 

41(e)(3) Coupon book exemption. 

1. Fixed rate. For guidance on the meaning 

of ‘‘fixed rate’’ for purpose of § 1026.41(e)(3), 

see § 1026.18(s)(7)(iii) and its commentary. 

* * * * * 

41(e)(4) Small servicers. 

* * * * * 

41(e)(4)(iii) Small servicer determination. 

1. Loans obtained by merger or acquisition. 

Any mortgage loans obtained by a servicer or 


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Federal Register / Vol. 78, No. 127 / Tuesday, July 2, 2013 / Proposed Rules 39945 

an affiliate as part of a merger or acquisition, 

or as part of the acquisition of all of the assets 

or liabilities of a branch office of a creditor, 

should be considered mortgage loans for 

which the servicer or an affiliate is the 

creditor to which the mortgage loan is 

initially payable. A branch office means 

either an office of a depository institution 

that is approved as a branch by a Federal or 

State supervisory agency or an office of a forprofit mortgage lending institution (other 

than a depository institution) that takes 

applications from the public for mortgage 

loans. 

* * * * * 

Dated: June 24, 2013. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2013–15466 Filed 6–27–13; 4:15 pm] 

BILLING CODE 4810–AM–P 


tkelley on DSK3SPTVN1PROD with PROPOSALS2