Vol. 78 Thursday, 

No. 21 January 31, 2013 

Part II 

Bureau of Consumer Financial Protection 

12 CFR Parts 1024 and 1026 

High-Cost Mortgage and Homeownership Counseling Amendments to the 

Truth in Lending Act (Regulation Z) and Homeownership Counseling 

Amendments to the Real Estate Settlement Procedures Act (Regulation X); 

Final Rule 


srobinson on DSK4SPTVN1PROD with 
6856 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

1Mortgages covered by the HOEPA amendments 

have been referred to as ‘‘HOEPA loans,’’ ‘‘Section 

32 loans,’’ or ‘‘high-cost mortgages.’’ The DoddFrank Act now refers to these loans as ‘‘high-cost 

mortgages.’’ See Dodd-Frank Act section 1431; TILA 

section 103(bb). For simplicity and consistency, this 

final rule uses the term ‘‘high-cost mortgages’’ to 

refer to mortgages covered by the HOEPA 

amendments. 

2 12 CFR part 1026. 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Parts 1024 and 1026 

[Docket No. CFPB–2012–0029] 

RIN 3170–AA12 

High-Cost Mortgage and 

Homeownership Counseling 

Amendments to the Truth in Lending 

Act (Regulation Z) and 

Homeownership Counseling 

Amendments to the Real Estate 

Settlement Procedures Act 

(Regulation X) 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Final rule; official 

interpretations. 

SUMMARY: The Bureau of Consumer 

Financial Protection (Bureau) issues this 

final rule to implement the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act’s amendments to the 

Truth in Lending Act and the Real 

Estate Settlement Procedures Act. The 

final rule amends Regulation Z (Truth in 

Lending) by expanding the types of 

mortgage loans that are subject to the 

protections of the Home Ownership and 

Equity Protections Act of 1994 

(HOEPA), revising and expanding the 

tests for coverage under HOEPA, and 

imposing additional restrictions on 

mortgages that are covered by HOEPA, 

including a pre-loan counseling 

requirement. The final rule also amends 

Regulation Z and Regulation X (Real 

Estate Settlement Procedures Act) by 

imposing certain other requirements 

related to homeownership counseling, 

including a requirement that consumers 

receive information about 

homeownership counseling providers. 

DATES: The rule is effective January 10, 

2014. 

FOR FURTHER INFORMATION CONTACT: 

Richard Arculin and Courtney Jean, 

Counsels; and Pavneet Singh, Senior 

Counsel, Office of Regulations, at (202) 

435–7700. 

SUPPLEMENTARY INFORMATION: 

I. Summary of Final Rule 

The Home Ownership and Equity 

Protection Act (HOEPA) was enacted in 

1994 as an amendment to the Truth in 

Lending Act (TILA) to address abusive 

practices in refinancing and homeequity mortgage loans with high interest 

rates or high fees. Loans that meet 

HOEPA’s high-cost coverage tests are 

subject to special disclosure 

requirements and restrictions on loan 

terms, and borrowers in high-cost 

mortgages 1 have enhanced remedies for 

violations of the law. The provisions of 

TILA, including HOEPA, are 

implemented in the Bureau’s Regulation 

Z.2

In response to the recent mortgage 

crisis, Congress amended HOEPA 

through the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(Dodd-Frank Act) in order to expand the 

coverage of HOEPA and add protections 

for high-cost mortgages, including a 

requirement that borrowers receive 

homeownership counseling before 

obtaining a high-cost mortgage. In 

addition, several provisions of the 

Dodd-Frank Act also require or 

encourage consumers to obtain 

homeownership counseling for other 

types of loans. The Bureau is finalizing 

this rule to implement the HOEPA and 

homeownership counseling-related 

requirements. 

Scope of HOEPA Coverage 

The final rule implements the DoddFrank Act’s amendments that expanded 

the universe of loans potentially 

covered by HOEPA. Under the final 

rule, most types of mortgage loans 

secured by a consumer’s principal 

dwelling, including purchase-money 

mortgages, refinances, closed-end homeequity loans, and open-end credit plans 

(i.e., home equity lines of credit or 

HELOCs) are potentially subject to 

HOEPA coverage. The final rule retains 

the exemption from HOEPA coverage 

for reverse mortgages. In addition, the 

final rule adds exemptions from HOEPA 

coverage for three types of loans that the 

Bureau believes do not present the same 

risk of abuse as other mortgage loans: 

loans to finance the initial construction 

of a dwelling, loans originated and 

financed by Housing Finance Agencies, 

and loans originated through the United 

States Department of Agriculture’s 

(USDA) Rural Housing Service section 

502 Direct Loan Program. 

Revised HOEPA Coverage Tests 

The final rule implements the DoddFrank Act’s revisions to HOEPA’s 

coverage tests by providing that a 

transaction is a high-cost mortgage if 

any of the following tests is met: 

• The transaction’s annual percentage 

rate (APR) exceeds the applicable 

average prime offer rate by more than 

6.5 percentage points for most first-lien 

mortgages, or by more than 8.5 

percentage points for a first mortgage if 

the dwelling is personal property and 

the transaction is for less than $50,000; 

• The transaction’s APR exceeds the 

applicable average prime offer rate by 

more than 8.5 percentage points for 

subordinate or junior mortgages; 

• The transaction’s points and fees 

exceed 5 percent of the total transaction 

amount or, for loans below $20,000, the 

lesser of 8 percent of the total 

transaction amount or $1,000 (with the 

dollar figures also adjusted annually for 

inflation); or 

• The credit transaction documents 

permit the creditor to charge or collect 

a prepayment penalty more than 36 

months after transaction closing or 

permit such fees or penalties to exceed, 

in the aggregate, more than 2 percent of 

the amount prepaid. 

The final rule also provides guidance 

on how to apply the various coverage 

tests, such as how to determine the 

applicable average prime offer rate and 

how to calculate points and fees. 

Restrictions on Loan Terms 

The final rule also implements new 

Dodd-Frank Act restrictions and 

requirements concerning loan terms and 

origination practices for mortgages that 

fall within HOEPA’s coverage test. For 

example: 

• Balloon payments are generally 

banned, unless they are to account for 

the seasonal or irregular income of the 

borrower, they are part of a short-term 

bridge loan, or they are made by 

creditors meeting specified criteria, 

including operating predominantly in 

rural or underserved areas. 

• Creditors are prohibited from 

charging prepayment penalties and 

financing points and fees. 

• Late fees are restricted to four 

percent of the payment that is past due, 

fees for providing payoff statements are 

restricted, and fees for loan modification 

or payment deferral are banned. 

• Creditors originating HELOCs are 

required to assess consumers’ ability to 

repay. (Creditors originating high-cost, 

closed-end credit transactions already 

are required to assess consumers’ ability 

to repay under the Bureau’s 2013 

Ability-to-repay (ATR) Final Rule 

addressing a Dodd-Frank Act 

requirement that creditors determine 

that a consumer is able to repay a 

mortgage loan.) 

• Creditors and mortgage brokers are 

prohibited from recommending or 

encouraging a consumer to default on a 

loan or debt to be refinanced by a highcost mortgage. 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6857 

3HOEPA amended TILA by adding new sections 

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

• Before making a high-cost mortgage, 

creditors are required to obtain 

confirmation from a federally certified 

or approved homeownership counselor 

that the consumer has received 

counseling on the advisability of the 

mortgage. 

Other Counseling-Related Requirements 

The final rule implements two 

additional Dodd-Frank Act 

homeownership counseling-related 

provisions that are not amendments to 

HOEPA. 

• The final rule requires lenders to 

provide a list of homeownership 

counseling organizations to consumers 

within three business days after they 

apply for a mortgage loan, with the 

exclusion of reverse mortgages and 

mortgage loans secured by a timeshare. 

The final rule requires the lender to 

obtain the list from either a Web site 

that will be developed by the Bureau or 

data that will made available by the 

Bureau or the Department of Housing 

and Urban Development (HUD) for 

compliance with this requirement. 

• The final rule implements a new 

requirement under TILA that creditors 

must obtain confirmation that a firsttime borrower has received 

homeownership counseling from a 

federally certified or approved 

homeownership counselor or 

counseling organization before making a 

loan that provides for or permits 

negative amortization to the borrower. 

Effective Date 

The rule is effective January 10, 2014. 

II. Background 

A. HOEPA 

HOEPA was enacted as part of the 

Riegle Community Development and 

Regulatory Improvement Act of 1994, 

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

response to evidence concerning 

abusive practices in mortgage loan 

refinancing and home-equity lending.3

The statute did not apply to purchasemoney mortgages or reverse mortgages 

but covered other closed-end mortgage 

credit, e.g., refinances and closed-end 

home equity loans. Coverage was 

triggered where a loan’s APR exceeded 

comparable Treasury securities by 

specified thresholds for particular loan 

types, or where points and fees 

exceeded 8 percent of the total loan 

amount or a dollar threshold. 

For high-cost mortgages meeting 

either of those thresholds, HOEPA 

required lenders to provide special preclosing disclosures, restricted 

prepayment penalties and certain other 

loan terms, and regulated various lender 

practices, such as extending credit 

without regard to a consumer’s ability to 

repay the loan. HOEPA also provided a 

mechanism for consumers to rescind 

covered loans that included certain 

prohibited terms and to obtain higher 

damages than are allowed for other 

types of TILA violations, including 

finance charges and fees paid by the 

consumer. Finally, HOEPA amended 

TILA section 131, 15 U.S.C. 1641, to 

provide for increased liability to 

purchasers of high cost mortgages. 

Purchasers and assignees of loans not 

covered by HOEPA generally are liable 

only for violations of TILA which are 

apparent on the face of the disclosure 

statements, whereas purchasers of high 

cost mortgages generally are subject to 

all claims and defenses against the 

original creditor with respect to the 

mortgage. 

The Board of Governors of the Federal 

Reserve System (Board) first issued 

regulations implementing HOEPA in 

1995. See 60 FR 15463 (March 24, 

1995). The Board published additional 

significant changes in 2001 that lowered 

HOEPA’s APR trigger for first-lien 

mortgage loans, expanded the definition 

of points and fees to include the cost of 

optional credit insurance and debt 

cancellation premiums, and enhanced 

the restrictions associated with high 

cost mortgages. See 66 FR 65604 (Dec. 

20, 2001). In 2008, the Board exercised 

its authority under HOEPA to require 

certain consumer protections 

concerning a consumer’s ability to 

repay, prepayment penalties, and 

escrow accounts for taxes and insurance 

for a new category of ‘‘higher-priced 

mortgage loans’’ with APRs that are 

lower than those prescribed for high 

cost mortgages but that nevertheless 

exceed the average prime offer rate by 

prescribed amounts. 73 FR 44522 (July 

30, 2008) (the 2008 HOEPA Final Rule). 

Historically, the Board’s Regulation Z, 

12 CFR part 226, has implemented 

TILA, including HOEPA. Pursuant to 

the Dodd-Frank Act, general rulemaking 

authority for TILA, including HOEPA, 

transferred from the Board to the Bureau 

on July 21, 2011. See sections 1061, 

1096, and 1100A(2) of the Dodd-Frank 

Act. Accordingly, the Bureau published 

for public comment an interim final rule 

establishing a new Regulation Z, 12 CFR 

part 1026, implementing TILA (except 

with respect to persons excluded from 

the Bureau’s rulemaking authority by 

section 1029 of the Dodd-Frank Act). 76 

FR 79768 (Dec. 22, 2011). This rule did 

not impose any new substantive 

obligations but did make technical, 

conforming, and stylistic changes to 

reflect the transfer of authority and 

certain other changes made by the 

Dodd-Frank Act. The Bureau’s 

Regulation Z took effect on December 

30, 2011. Sections 1026.31, 1026.32, and 

1026.34 of the Bureau’s Regulation Z 

implement the HOEPA provisions of 

TILA. 

B. RESPA 

Congress enacted the Real Estate 

Settlement Procedures Act (RESPA), 12 

U.S.C. 2601 et seq., in 1974 to provide 

consumers with greater and timelier 

information on the nature and costs of 

the residential real estate settlement 

process and to protect consumers from 

unnecessarily high settlement charges, 

including through the use of disclosures 

and the prohibition of kickbacks and 

referral fees. RESPA’s disclosure 

requirements generally apply to 

‘‘settlement services’’ for ‘‘federally 

related mortgage loans,’’ a term that 

includes virtually any purchase-money 

or refinance loan secured by a first or 

subordinate lien on one-to-four family 

residential real property. 12 U.S.C. 

2602(1). Section 5 of RESPA generally 

requires that lenders provide applicants 

for federally related mortgage loans a 

home-buying information booklet 

containing information about the nature 

and costs of real estate settlement 

services and a good faith estimate of 

charges the borrower is likely to incur 

during the settlement process. Id. at 

2604. The booklet and good faith 

estimate must be provided not later than 

three business days after the lender 

receives an application, unless the 

lender denies the application for credit 

before the end of the three-day period. 

Id. at 2604(d). 

Historically, Regulation X of the 

Department of Housing and Urban 

Development (HUD), 24 CFR part 3500, 

has implemented RESPA. The DoddFrank Act transferred rulemaking 

authority for RESPA to the Bureau, 

effective July 21, 2011. See sections 

1061 and 1098 of the Dodd-Frank Act. 

Pursuant to the Dodd-Frank Act and 

RESPA, as amended, the Bureau 

published for public comment an 

interim final rule establishing a new 

Regulation X, 12 CFR part 1024, 

implementing RESPA. 76 FR 78978 

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

impose any new substantive obligations 

but did make certain technical, 

conforming, and stylistic changes to 

reflect the transfer of authority and 

certain other changes made by the 

Dodd-Frank Act. The Bureau’s 

Regulation X took effect on December 

30, 2011. 


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6858 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

4For more discussion of the mortgage market, the 

financial crisis, and mortgage origination generally, 

see the Bureau’s 2013 ATR Final Rule. 

5Sections 1011 and 1021 of title X of the DoddFrank Act, the ‘‘Consumer Financial Protection 

Act,’’ Public Law 111–203, sec. 1001–1100H, 124 

Stat. 1375 (2010) (codified at 12 U.S.C. 5491, 5511). 

The Consumer Financial Protection Act is 

substantially codified at 12 U.S.C. 5481–5603. 

6As amended, the HOEPA provisions of TILA 

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

Bureau notes that the Dodd-Frank Act amended 

existing TILA section 103(aa) and renumbered it as 

section 103(bb), 15 U.S.C. 1602(bb). See 

§ 1100A(1)(A) of the Dodd-Frank Act. This proposal 

generally references TILA section 103(aa) to refer to 

the pre-Dodd-Frank Act provision, which is in 

effect until the Dodd-Frank Act’s amendments take 

effect, and TILA section 103(bb) to refer to the 

amended and renumbered provision. 

C. The Dodd-Frank Act 

Congress enacted the Dodd-Frank Act 

after a cycle of unprecedented 

expansion and contraction in the 

mortgage market sparked the most 

severe U.S. recession since the Great 

Depression.4 The Dodd-Frank Act 

created the Bureau and consolidated 

various rulemaking and supervisory 

authorities in the new agency, including 

the authority to implement TILA 

(including HOEPA) and RESPA.5 At the 

same time, Congress significantly 

amended the statutory requirements 

governing mortgage practices with the 

intent to restrict the practices that 

contributed to the crisis. 

As part of these changes, sections 

1431 through 1433 of the Dodd-Frank 

Act significantly amended HOEPA to 

expand the types of loans potentially 

subject to HOEPA coverage, to revise the 

triggers for HOEPA coverage, and to 

strengthen and expand the restrictions 

that HOEPA imposes on those 

mortgages.6 Several provisions of the 

Dodd-Frank Act also require and 

encourage consumers to obtain 

homeownership counseling. Sections 

1433(e) and 1414 require creditors to 

obtain confirmation that a borrower has 

obtained counseling from a federally 

approved counselor prior to extending a 

high-cost mortgage under HOEPA or (in 

the case of first-time borrowers) a 

negative amortization loan. The DoddFrank Act also amended RESPA to 

require distribution of a housing 

counselor list as part of the general 

mortgage application process. The 

Bureau is finalizing this rule to 

implement the HOEPA and 

homeownership counseling-related 

requirements. 

D. The Market for High-Cost Mortgages 

Since the enactment of HOEPA, 

originations of mortgages covered by 

HOEPA have accounted for an 

extremely small percentage of the 

market. This may be due to a variety of 

factors, including the fact that HOEPA’s 

coverage thresholds were set relatively 

high, HOEPA’s assignee liability 

provisions make the loans relatively 

unattractive to secondary market 

investors, and general compliance 

burden and perceived stigma. Data 

collected under the Home Mortgage 

Disclosure Act (HMDA), 12 U.S.C. 2801 

et seq., further indicate that the 

percentage share of high-cost mortgages 

has generally been declining since 2004, 

the first year that HMDA reporters were 

required to identify high-cost mortgages. 

Between 2004 and 2011, high-cost 

mortgages typically comprised about 0.2 

percent of HMDA-reporters’ originations 

of refinance or home-improvement 

loans secured by a one-to-four family 

home (the class of mortgages generally 

covered by HOEPA). This percentage 

peaked at 0.45 percent in 2005 when, of 

about 8.0 million originations of such 

loans, there were approximately 36,000 

high-cost mortgages reported in HMDA. 

The percentage fell to 0.05 percent by 

2011 when nearly 2,400 high-cost 

mortgages were reported compared with 

roughly 4.5 million refinance or homeimprovement loans secured by a one- to 

four-family home. 

Similarly, the number of HMDAreporting creditors that originate highcost mortgages is relatively small. From 

2004 through 2009, between 1,000 to 

2,000 creditors that report under HMDA 

(between 12 to 22 percent of HMDAreporters in a given year) reported 

extending high-cost mortgages. In each 

year between 2004 and 2011, the vast 

majority of creditors—roughly 80–90 

percent of those that made any high-cost 

mortgages and 96 percent or more of all 

HMDA reporters—made fewer than 10 

high-cost mortgages. In 2010, only about 

650 creditors reported any high-cost 

mortgages. In 2011 fewer than 600 

creditors, or roughly 8 percent of HMDA 

filers, reported originating any high-cost 

mortgages, and about 50 creditors 

accounted for over half of 2011 HOEPA 

originations. As discussed above, the 

Dodd-Frank Act expanded the types of 

loans potentially covered by HOEPA by 

including purchase-money mortgages 

and HELOCs and also lowering the 

coverage thresholds. Notwithstanding 

this expansion, the Bureau believes that 

HOEPA lending will continue to 

constitute a small percentage of the 

mortgage lending market. See part VII 

below for a detailed discussion of the 

likely impact of the Bureau’s 

implementation of the Dodd-Frank Act 

amendments on HOEPA lending. 

III. Summary of the Rulemaking 

Process 

A. The Bureau’s Proposal 

The Bureau issued for public 

comment its proposal to amend 

Regulation Z to implement the DoddFrank Act amendments to HOEPA on 

July 9, 2012. This proposal was 

published in the Federal Register on 

August 15, 2012. See 77 FR 49090 

(August 15, 2012) (2012 HOEPA 

Proposal or the proposal). The proposal 

also would have implemented certain 

homeownership counseling-related 

requirements that Congress adopted in 

the Dodd-Frank Act, that are not 

amendments to HOEPA. 

The proposal would have 

implemented the Dodd-Frank Act’s 

amendments that expanded the universe 

of loans potentially covered by HOEPA 

to include most types of mortgage loans 

secured by a consumer’s principal 

dwelling. Reverse mortgages continued 

to be excluded. The proposal also would 

have implemented the Dodd-Frank Act’s 

amendments to HOEPA’s coverage tests, 

including adding a new threshold for 

prepayment penalties, and would have 

provided guidance on how to apply the 

coverage tests. In addition, the proposed 

rule also would have implemented new 

Dodd-Frank Act restrictions and 

requirements concerning loan terms and 

origination practices for high-cost 

mortgages. 

With respect to homeownership 

counseling-related requirements that are 

not amendments to HOEPA, under the 

proposal, lenders generally would have 

been required to distribute a list of five 

homeownership counselors or 

counseling organizations to a consumer 

applying for a federally related mortgage 

loan within three business days after 

receiving the consumer’s application. 

The proposal also would have 

implemented a new requirement that 

first-time borrowers receive 

homeownership counseling before 

taking out a negative amortization loan. 

B. Comments and Outreach 

The Bureau received over 150 

comments on its proposal from, among 

others, consumer groups, industry trade 

associations, banks, community banks, 

credit unions, financial companies, 

State housing finance authorities, 

counseling associations and 

intermediaries, a State Attorney 

General’s office, and individual 

consumers and academics. In addition, 

after the close of the original comment 

period, various interested parties 

including industry and consumer group 

commenters were required to submit 

written summaries of ex parte 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6859 

7The Bureau’s policy regarding ex parte 

communications can be found at http://files.

consumerfinance.gov/f/2011/08/Bulletin_

20110819_ExPartePresentationsRulemaking

Proceedings.pdf. 

8 76 FR 27390 (May 11, 2011). 

9 76 FR 11598 (Mar. 2, 2011). 

10 77 FR 57200 (Sept. 17, 2012) (RESPA); 77 FR 

57318 (Sept. 17, 2012) (TILA). 

11 77 FR 55272 (Sept. 7, 2012). 

12Specifically, the Board of Governors of the 

Federal Reserve System, the Office of the 

Comptroller of the Currency, the Federal Deposit 

Insurance Corporation, the National Credit Union 

Administration, and the Federal Housing Finance 

Agency. 

13 77 FR 54722 (Sept. 5, 2012). 

communications with the Bureau, 

consistent with the Bureau’s policy.7

Materials submitted were filed in the 

record and are publicly available at 

http://www.regulations.gov. With the 

exception of comments addressing 

proposed mitigating measures to 

account for a more inclusive finance 

charge, these comments and ex parte 

communications are discussed below in 

the section-by-section analysis of the 

final rule. 

As discussed in further detail below, 

the Bureau sought comment in its 

HOEPA proposal on whether to adopt 

certain adjustments or mitigating 

measures in its HOEPA implementing 

regulations if it were to adopt a broader 

definition of ‘‘finance charge’’ under 

Regulation Z. The Bureau has since 

published a notice in the Federal 

Register making clear that it will defer 

its decision whether to adopt the more 

inclusive finance charge proposal, and 

therefore any implementation thereof, 

until it finalizes the its proposal to 

TILA–RESPA Proposal, which is 

planned for later in 2013. 77 FR 54843 

(Sept. 6, 2012). Accordingly, this final 

rule is deferring discussion of any 

comments addressing proposed 

mitigating measures to account for a 

more inclusive finance charge under 

HOEPA. 

The Bureau has carefully considered 

the comments and ex parte 

communications and has decided to 

modify the proposal in certain respects 

and adopt the final rules as described 

below in the section-by-section analysis. 

C. Other Rulemakings 

In addition to this final rule, the 

Bureau is adopting several other final 

rules and issuing one proposal, all 

relating to mortgage credit to implement 

requirements of title XIV of the DoddFrank Act. The Bureau is also issuing a 

final rule jointly with other Federal 

agencies to implement requirements for 

mortgage appraisals in title XIV. Each of 

the final rules follows a proposal issued 

in 2011 by the Board or in 2012 by the 

Bureau alone or jointly with other 

Federal agencies. Collectively, these 

proposed and final rules are referred to 

as the Title XIV Rulemakings. 

• Ability-to-Repay: The Bureau is 

finalizing a rule, following a May 2011 

proposal issued by the Board (the 

Board’s 2011 ATR Proposal),8 to 

implement provisions of the DoddFrank Act (1) requiring creditors to 

determine that a consumer has a 

reasonable ability to repay covered 

mortgage loans and establishing 

standards for compliance, such as by 

making a ‘‘qualified mortgage,’’ and (2) 

establishing certain limitations on 

prepayment penalties, pursuant to TILA 

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

1414. 15 U.S.C. 1639c. The Bureau’s 

final rule is referred to as the 2013 ATR 

Final Rule. Simultaneously with the 

2013 ATR Final Rule, the Bureau is 

issuing a proposal to amend the final 

rule implementing the ability-to-repay 

requirements, including by the addition 

of exemptions for certain nonprofit 

creditors and certain homeownership 

stabilization programs and a definition 

of a ‘‘qualified mortgage’’ for certain 

loans made and held in portfolio by 

small creditors (the 2013 ATR 

Concurrent Proposal). The Bureau 

expects to act on the 2013 ATR 

Concurrent Proposal on an expedited 

basis, so that any exceptions or 

adjustments to the 2013 ATR Final Rule 

can take effect simultaneously with that 

rule. 

• Escrows: The Bureau is finalizing a 

rule, following a March 2011 proposal 

issued by the Board (the Board’s 2011 

Escrows Proposal),9 to implement 

certain provisions of the Dodd-Frank 

Act expanding on existing rules that 

require escrow accounts to be 

established for higher-priced mortgage 

loans and creating an exemption for 

certain loans held by creditors operating 

predominantly in rural or underserved 

areas, pursuant to TILA section 129D as 

established by Dodd-Frank Act sections 

1461. 15 U.S.C. 1639d. The Bureau’s 

final rule is referred to as the 2013 

Escrows Final Rule. 

• Servicing: Following its August 

2012 proposals (the 2012 RESPA 

Servicing Proposal and 2012 TILA 

Servicing Proposal),10 the Bureau is 

adopting final rules to implement DoddFrank Act requirements regarding forceplaced insurance, error resolution, 

information requests, and payment 

crediting, as well as requirements for 

mortgage loan periodic statements and 

adjustable-rate mortgage reset 

disclosures, pursuant to section 6 of 

RESPA and sections 128, 128A, 129F, 

and 129G of TILA, as amended or 

established by Dodd-Frank Act sections 

1418, 1420, 1463, and 1464. 12 U.S.C. 

2605; 15 U.S.C. 1638, 1638a, 1639f, and 

1639g. The Bureau also is finalizing 

rules on early intervention for troubled 

and delinquent borrowers, and loss 

mitigation procedures, pursuant to the 

Bureau’s authority under section 6 of 

RESPA, as amended by Dodd-Frank Act 

section 1463, to establish obligations for 

mortgage servicers that it finds to be 

appropriate to carry out the consumer 

protection purposes of RESPA, and its 

authority under section 19(a) of RESPA 

to prescribe rules necessary to achieve 

the purposes of RESPA. The Bureau’s 

final rule under RESPA with respect to 

mortgage servicing also establishes 

requirements for general servicing 

standards policies and procedures and 

continuity of contact pursuant to its 

authority under section 19(a) of RESPA. 

The Bureau’s final rules are referred to 

as the 2013 RESPA Servicing Final Rule 

and the 2013 TILA Servicing Final Rule, 

respectively. 

• Loan Originator Compensation: 

Following its August 2012 proposal (the 

2012 Loan Originator Proposal),11 the 

Bureau is issuing a final rule to 

implement provisions of the DoddFrank Act requiring certain creditors 

and loan originators to meet certain 

duties of care, including qualification 

requirements; requiring the 

establishment of certain compliance 

procedures by depository institutions; 

prohibiting loan originators, creditors, 

and the affiliates of both from receiving 

compensation in various forms 

(including based on the terms of the 

transaction) and from sources other than 

the consumer, with specified 

exceptions; and establishing restrictions 

on mandatory arbitration and financing 

of single premium credit insurance, 

pursuant to TILA sections 129B and 

129C as established by Dodd-Frank Act 

sections 1402, 1403, and 1414(a). 15 

U.S.C. 1639b, 1639c. The Bureau’s final 

rule is referred to as the 2013 Loan 

Originator Final Rule. 

• Appraisals: The Bureau, jointly 

with other Federal agencies,12 is issuing 

a final rule implementing Dodd-Frank 

Act requirements concerning appraisals 

for higher-risk mortgages, pursuant to 

TILA section 129H as established by 

Dodd-Frank Act section 1471. 15 U.S.C. 

1639h. This rule follows the agencies’ 

August 2012 joint proposal (the 2012 

Interagency Appraisals Proposal).13 The 

agencies’ joint final rule is referred to as 

the 2013 Interagency Appraisals Final 

Rule. In addition, following its August 

2012 proposal (the 2012 ECOA 


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6860 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

14 77 FR 50390 (Aug. 21, 2012). 

15 77 FR 51116 (Aug. 23, 2012). 

16 77 FR 70105 (Nov. 23, 2012). 

17Of the several final rules being adopted under 

the Title XIV Rulemakings, six entail amendments 

to Regulation Z, with the only exceptions being the 

2013 RESPA Servicing Final Rule (Regulation X) 

and the 2013 ECOA Appraisals Final Rule 

(Regulation B); the 2013 HOEPA Final Rule also 

amends Regulation X, in addition to Regulation Z. 

The six Regulation Z final rules involve numerous 

instances of intersecting provisions, either by crossreferences to each other’s provisions or by adopting 

parallel provisions. Thus, adopting some of those 

amendments without also adopting certain other, 

closely related provisions would create significant 

technical issues, e.g., new provisions containing 

cross-references to other provisions that do not yet 

exist, which could undermine the ability of 

creditors and other parties subject to the rules to 

understand their obligations and implement 

appropriate systems changes in an integrated and 

efficient manner. 

Appraisals Proposal),14 the Bureau is 

issuing a final rule to implement 

provisions of the Dodd-Frank Act 

requiring that creditors provide 

applicants with a free copy of written 

appraisals and valuations developed in 

connection with applications for loans 

secured by a first lien on a dwelling, 

pursuant to section 701(e) of the Equal 

Credit Opportunity Act (ECOA) as 

amended by Dodd-Frank Act section 

1474. 15 U.S.C. 1691(e). The Bureau’s 

final rule is referred to as the 2013 

ECOA Appraisals Final Rule. 

The Bureau is not at this time 

finalizing proposals concerning various 

disclosure requirements that were 

added by title XIV of the Dodd-Frank 

Act, integration of mortgage disclosures 

under TILA and RESPA, or a simpler, 

more inclusive definition of the finance 

charge for purposes of disclosures for 

closed-end credit transactions under 

Regulation Z. The Bureau expects to 

finalize these proposals and to consider 

whether to adjust regulatory thresholds 

under the Title XIV Rulemakings in 

connection with any change in the 

calculation of the finance charge later in 

2013, after it has completed quantitative 

testing, and any additional qualitative 

testing deemed appropriate, of the forms 

that it proposed in July 2012 to combine 

TILA mortgage disclosures with the 

good faith estimate (RESPA GFE) and 

settlement statement (RESPA settlement 

statement) required under the Real 

Estate Settlement Procedures Act, 

pursuant to Dodd-Frank Act section 

1032(f) and sections 4(a) of RESPA and 

105(b) of TILA, as amended by DoddFrank Act sections 1098 and 1100A, 

respectively (the 2012 TILA–RESPA 

Proposal).15 Accordingly, the Bureau 

already has issued a final rule delaying 

implementation of various affected title 

XIV disclosure provisions.16 The 

Bureau’s approaches to coordinating the 

implementation of the Title XIV 

Rulemakings and to the finance charge 

proposal are discussed in turn below. 

Coordinated Implementation of Title 

XIV Rulemakings 

As noted in all of its foregoing 

proposals, the Bureau regards each of 

the Title XIV Rulemakings as affecting 

aspects of the mortgage industry and its 

regulations. Accordingly, as noted in its 

proposals, the Bureau is coordinating 

carefully the Title XIV Rulemakings, 

particularly with respect to their 

effective dates. The Dodd-Frank Act 

requirements to be implemented by the 

Title XIV Rulemakings generally will 

take effect on January 21, 2013, unless 

final rules implementing those 

requirements are issued on or before 

that date and provide for a different 

effective date. See Dodd-Frank Act 

section 1400(c), 15 U.S.C. 1601 note. In 

addition, some of the Title XIV 

Rulemakings are to take effect no later 

than one year after they are issued. Id. 

The comments on the appropriate 

implementation date for this final rule 

are discussed in detail below in part VI 

of this notice. In general, however, 

consumer advocates requested that the 

Bureau put the protections in the Title 

XIV Rulemakings into effect as soon as 

practicable. In contrast, the Bureau 

received some industry comments 

indicating that implementing so many 

new requirements at the same time 

would create a significant cumulative 

burden for creditors. In addition, many 

commenters also acknowledged the 

advantages of implementing multiple 

revisions to the regulations in a 

coordinated fashion.17 Thus, a tension 

exists between coordinating the 

adoption of the Title XIV Rulemakings 

and facilitating industry’s 

implementation of such a large set of 

new requirements. Some have suggested 

that the Bureau resolve this tension by 

adopting a sequenced implementation, 

while others have requested that the 

Bureau simply provide a longer 

implementation period for all of the 

final rules. 

The Bureau recognizes that many of 

the new provisions will require 

creditors to make changes to automated 

systems and, further, that most 

administrators of large systems are 

reluctant to make too many changes to 

their systems at once. At the same time, 

however, the Bureau notes that the 

Dodd-Frank Act established virtually all 

of these changes to institutions’ 

compliance responsibilities, and 

contemplated that they be implemented 

in a relatively short period of time. And, 

as already noted, the extent of 

interaction among many of the Title XIV 

Rulemakings necessitates that many of 

their provisions take effect together. 

Finally, notwithstanding commenters’ 

expressed concerns for cumulative 

burden, the Bureau expects that 

creditors actually may realize some 

efficiencies from adapting their systems 

for compliance with multiple new, 

closely related requirements at once, 

especially if given sufficient overall 

time to do so. 

Accordingly, the Bureau is requiring 

that, as a general matter, creditors and 

other affected persons begin complying 

with the final rules on January 10, 2014. 

As noted above, section 1400(c) of the 

Dodd-Frank Act requires that some 

provisions of the Title XIV Rulemakings 

take effect no later than one year after 

the Bureau issues them. Accordingly, 

the Bureau is establishing January 10, 

2014, one year after issuance of the 

Bureau’s 2013 ATR, Escrows, and 

HOEPA Final Rules (i.e., the earliest of 

the title XIV final rules), as the baseline 

effective date for most of the Title XIV 

Rulemakings. The Bureau believes that, 

on balance, this approach will facilitate 

the implementation of the rules’ 

overlapping provisions, while also 

affording creditors sufficient time to 

implement the more complex or 

resource-intensive new requirements. 

The Bureau has identified certain 

rulemakings or selected aspects thereof, 

however, that do not present significant 

implementation burdens for industry. 

Accordingly, the Bureau is setting 

earlier effective dates for those final 

rules or certain aspects thereof, as 

applicable. Those effective dates are set 

forth and explained in the Federal 

Register notices for those final rules. 

More Inclusive Finance Charge Proposal 

As noted above, the Bureau proposed 

in the 2012 TILA–RESPA Proposal to 

make the definition of finance charge 

more inclusive, thus rendering the 

finance charge and annual percentage 

rate a more useful tool for consumers to 

compare the cost of credit across 

different alternatives. 77 FR 51116, 

51143 (Aug. 23, 2012). Because the new 

definition would include additional 

costs that are not currently counted, it 

would cause the finance charges and 

APRs on many affected transactions to 

increase. This in turn could cause more 

such transactions to become subject to 

various compliance regimes under 

Regulation Z. Specifically, the finance 

charge is central to the calculation of a 

transaction’s ‘‘points and fees,’’ which 

in turn has been (and remains) a 

coverage threshold for the special 

protections afforded ‘‘high-cost 

mortgages’’ under HOEPA. Points and 

fees also will be subject to a 3-percent 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6861 

18These notices extended the comment period on 

the more inclusive finance charge and 

corresponding regulatory threshold adjustments 

under the 2012 TILA–RESPA and HOEPA 

Proposals. It did not change any other aspect of 

either proposal. 

19 Dodd-Frank Act section 1061(b), 12 U.S.C. 

5581(b). 

20 12 U.S.C. 5581(a)(1). 

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

5481(14) (defining ‘‘Federal consumer financial 

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

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

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

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

include TILA, HOEPA, and RESPA). 

limit for purposes of determining 

whether a transaction is a ‘‘qualified 

mortgage’’ under the 2013 ATR Final 

Rule. Meanwhile, the APR serves as a 

coverage threshold for HOEPA 

protections as well as for certain 

protections afforded ‘‘higher-priced 

mortgage loans’’ under § 1026.35, 

including the mandatory escrow 

account requirements being amended by 

the 2013 Escrows Final Rule. Finally, 

because the 2013 Interagency Appraisals 

Final Rule uses the same APR-based 

coverage test as is used for identifying 

higher-priced mortgage loans, the APR 

affects that rulemaking as well. Thus, 

the proposed more inclusive finance 

charge would have had the indirect 

effect of increasing coverage under 

HOEPA and the escrow and appraisal 

requirements for higher-priced mortgage 

loans, as well as decreasing the number 

of transactions that may be qualified 

mortgages—even holding actual loan 

terms constant—simply because of the 

increase in calculated finance charges, 

and consequently APRs, for closed-end 

credit transactions generally. 

As noted above, these expanded 

coverage consequences were not the 

intent of the more inclusive finance 

charge proposal. Accordingly, as 

discussed more extensively in the 2011 

Escrows Proposal, the 2012 HOEPA 

Proposal, the Board’s 2011 ATR 

Proposal, and the Interagency 

Appraisals Proposal, the Board and 

subsequently the Bureau (and other 

agencies) sought comment on certain 

adjustments to the affected regulatory 

thresholds to counteract this 

unintended effect. First, the Board and 

then the Bureau proposed to adopt a 

‘‘transaction coverage rate’’ for use as 

the metric to determine coverage of 

these regimes in place of the APR. The 

transaction coverage rate would have 

been calculated solely for coverage 

determination purposes and would not 

have been disclosed to consumers, who 

still would have received only a 

disclosure of the expanded APR. The 

transaction coverage rate calculation 

would exclude from the prepaid finance 

charge all costs otherwise included for 

purposes of the APR calculation except 

charges retained by the creditor, any 

mortgage broker, or any affiliate of 

either. Similarly, the Board and Bureau 

proposed to reverse the effects of the 

more inclusive finance charge on the 

calculation of points and fees; the points 

and fees figure is calculated only as a 

HOEPA and qualified mortgage coverage 

metric and is not disclosed to 

consumers. The Bureau also sought 

comment on other potential mitigation 

measures, such as adjusting the numeric 

thresholds for particular compliance 

regimes to account for the general shift 

in affected transactions’ APRs. 

The Bureau’s 2012 TILA–RESPA 

Proposal sought comment on whether to 

finalize the more inclusive finance 

charge proposal in conjunction with the 

Title XIV Rulemakings or with the rest 

of the TILA–RESPA Proposal 

concerning the integration of mortgage 

disclosure forms. 77 FR 51116, 51125 

(Aug. 23, 2012). Upon additional 

consideration and review of comments 

received, the Bureau decided to defer a 

decision whether to adopt the more 

inclusive finance charge proposal and 

any related adjustments to regulatory 

thresholds until it later finalizes the 

TILA–RESPA Proposal. 77 FR 54843 

(Sept. 6, 2012); 77 FR 54844 (Sept. 6, 

2012).18 Accordingly, the 2013 Escrows, 

HOEPA, ATR, and Interagency 

Appraisals Final Rules all are deferring 

any action on their respective proposed 

adjustments to regulatory thresholds. 

IV. Legal Authority 

The final rule was issued on January 

10, 2013, in accordance with 12 CFR 

1074.1. The Bureau issued this final rule 

pursuant to its authority under TILA, 

RESPA, and the Dodd-Frank Act. On 

July 21, 2011, section 1061 of the DoddFrank Act transferred to the Bureau the 

‘‘consumer financial protection 

functions’’ previously vested in certain 

other Federal agencies, including the 

Board.19 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.’’ 20

TILA, HOEPA (which is codified as part 

of TILA), and RESPA are Federal 

consumer financial laws.21 Accordingly, 

the Bureau has authority to issue 

regulations pursuant to TILA and 

RESPA, including the disclosure 

requirements added to those statutes by 

title XIV of the Dodd-Frank Act. 

A. RESPA 

As amended by the Dodd-Frank Act, 

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

2617(a), authorizes the Bureau to 

prescribe such rules and regulations and 

to make such interpretations and grant 

such reasonable exemptions for classes 

of transactions as may be necessary to 

achieve the purposes of RESPA. One 

purpose of RESPA is to effect certain 

changes in the settlement process for 

residential real estate that will result in 

more effective advance disclosure to 

home buyers and sellers of settlement 

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

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

Congress found that consumers are 

entitled to be ‘‘provided with greater 

and more timely information on the 

nature and costs of the settlement 

process and [to be] protected from 

unnecessarily high settlement charges 

caused by certain abusive practices 

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

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

served as a broad source of authority to 

prescribe disclosures and substantive 

requirements to carry out the purposes 

of RESPA. 

B. TILA 

As amended by the Dodd-Frank Act, 

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

directs the Bureau to prescribe 

regulations to carry out the purposes of 

the TILA. Except with respect to the 

substantive restrictions on high-cost 

mortgages provided in TILA section 

129, TILA section 105(a) authorizes the 

Bureau to prescribe regulations that may 

contain additional requirements, 

classifications, differentiations, or other 

provisions, and may provide for such 

adjustments and exceptions for all or 

any class of transactions, that the 

Bureau determines are necessary or 

proper to effectuate the purposes of 

TILA, to prevent circumvention or 

evasion thereof, or to facilitate 

compliance therewith. A purpose of 

TILA is ‘‘to assure a meaningful 

disclosure of credit terms so that the 

consumer will be able to compare more 

readily the various credit terms 

available to him and avoid the 

uninformed use of credit.’’ TILA section 

102(a), 15 U.S.C. 1601(a). This stated 

purpose is tied to Congress’s finding 

that ‘‘economic stabilization would be 

enhanced and the competition among 

the various financial institutions and 

other firms engaged in the extension of 

consumer credit would be strengthened 

by the informed use of credit[.]’’ TILA 

section 102(a). Thus, strengthened 

competition among financial 

institutions is a goal of TILA, achieved 


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6862 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

22The referenced provisions of TILA section 129 

are: (c) (No prepayment penalty); (d) (Limitations 

after default); (e) (No balloon payments); (f) (No 

negative amortization); (g) (No prepaid payments); 

(h) (Prohibition on extending credit without regard 

to payment ability of consumer); and (i) 

(Requirements for payments under home 

improvement contracts). 

23H. Conf. Rept. 103–652, at 162 (1994). 

through the effectuation of TILA’s 

purposes. 

Historically, TILA section 105(a) has 

served as a broad source of authority for 

rules that promote the informed use of 

credit through required disclosures and 

substantive regulation of certain 

practices. However, Dodd-Frank Act 

section 1100A clarified the Bureau’s 

section 105(a) authority by amending 

that section to provide express authority 

to prescribe regulations that contain 

‘‘additional requirements’’ that the 

Bureau finds are necessary or proper to 

effectuate the purposes of TILA, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance. This 

amendment clarified the Bureau’s 

authority under TILA section 105(a) to 

prescribe requirements beyond those 

specifically listed in the statute that 

meet the standards outlined in section 

105(a). The Dodd-Frank Act also 

clarified the Bureau’s rulemaking 

authority over high-cost mortgages 

pursuant to section 105(a). As amended 

by the Dodd-Frank Act, TILA section 

105(a) grants the Bureau authority to 

make adjustments and exceptions to the 

requirements of TILA for all 

transactions subject to TILA, except 

with respect to the substantive 

provisions of TILA section 129 that 

apply to high-cost mortgages, as noted 

above. For the reasons discussed in this 

notice, the Bureau is proposing 

regulations to carry out TILA’s purposes 

and is proposing such additional 

requirements, adjustments, and 

exceptions as, in the Bureau’s judgment, 

are necessary and proper to carry out 

the purposes of TILA, prevent 

circumvention or evasion thereof, or to 

facilitate compliance. 

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

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

prescribe regulations to adjust the 

statutory percentage points for the APR 

threshold to determine whether a 

transaction is covered as a high-cost 

mortgage, if the Bureau determines that 

such an increase or decrease is 

consistent with the statutory consumer 

protections for high-cost mortgages and 

is warranted by the need for credit. 

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

Bureau may adjust the definition of 

points and fees for purposes of that 

threshold to include such charges that 

the Bureau determines to be 

appropriate. 

With respect to the high-cost mortgage 

provisions of TILA section 129, TILA 

section 129(p), 15 U.S.C. 1639(p), as 

amended by the Dodd-Frank Act, grants 

the Bureau authority to create 

exemptions to the restrictions on highcost mortgages and to expand the 

protections that apply to high-cost 

mortgages. Under TILA section 

129(p)(1), the Bureau may exempt 

specific mortgage products or categories 

from any or all of the prohibitions 

specified in TILA section 129(c) through 

(i),22 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. 

TILA section 129(p)(2) grants the 

Bureau authority to prohibit acts or 

practices in connection with: 

• Mortgage loans that the Bureau 

finds to be unfair, deceptive, or 

designed to evade the provisions of 

HOEPA; and 

• Refinancing of mortgage loans the 

Bureau finds to be associated with 

abusive lending practices or that are 

otherwise not in the interest of the 

borrower. 

The authority granted to the Bureau 

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

The provision is not limited to acts or 

practices by creditors. TILA section 

129(p)(2) authorizes protections against 

unfair or deceptive practices ‘‘in 

connection with mortgage loans,’’ and it 

authorizes protections against abusive 

practices ‘‘in connection with * * * 

refinancing of mortgage loans.’’ Thus, 

the Bureau’s authority is not limited to 

regulating specific contractual terms of 

mortgage loan agreements; it extends to 

regulating mortgage loan-related 

practices generally, within the standards 

set forth in the statute. The Bureau notes 

that TILA does not set forth a standard 

for what is unfair or deceptive, but those 

terms have settled meanings under other 

Federal and State consumer protection 

laws. The Conference Report for HOEPA 

indicates that, in determining whether a 

practice in connection with mortgage 

loans is unfair or deceptive, the Bureau 

should look to the standards employed 

for interpreting State unfair and 

deceptive trade practices statutes and 

section 5(a) of the Federal Trade 

Commission Act, 15 U.S.C. 45(a).23

In addition, section 1433(e) of the 

Dodd-Frank Act created a new TILA 

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

Bureau to implement pre-loan 

counseling requirements mandated by 

the Dodd-Frank Act for high-cost 

mortgages. Specifically, under TILA 

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

prescribe regulations as the Bureau 

determines to be appropriate to 

implement TILA section 129(u)(1), 

which establishes the Dodd-Frank Act’s 

pre-loan counseling requirement for 

high-cost mortgages. 

C. The Dodd-Frank Act 

Section 1405(b) of the Dodd-Frank 

Act provides that, ‘‘[n]otwithstanding 

any other provision of [title XIV of the 

Dodd-Frank Act], in order to improve 

consumer awareness and understanding 

of transactions involving residential 

mortgage loans through the use of 

disclosures, the [Bureau] may, by rule, 

exempt from or modify disclosure 

requirements, in whole or in part, for 

any class of residential mortgage loans 

if the [Bureau] determines that such 

exemption or modification is in the 

interest of consumers and in the public 

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

1401 of the Dodd-Frank Act, which 

added TILA section 103(cc), 15 U.S.C. 

1602(cc), generally defines residential 

mortgage loan as any consumer credit 

transaction that is secured by a mortgage 

on a dwelling or on residential real 

property that includes a dwelling other 

than an open-end credit plan or an 

extension of credit secured by a 

consumer’s interest in a timeshare plan. 

Notably, the authority granted by 

section 1405(b) applies to ‘‘disclosure 

requirements’’ generally, and is not 

limited to a specific statute or statutes. 

Accordingly, Dodd-Frank Act section 

1405(b) is a broad source of authority to 

modify the disclosure requirements of 

both TILA and RESPA. 

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

Act authorizes the Bureau to prescribe 

rules ‘‘as may be necessary or 

appropriate to enable the Bureau to 

administer and carry out the purposes 

and objectives of the Federal consumer 

financial laws, and to prevent evasions 

thereof.’’ 12 U.S.C. 5512(b)(1). TILA, 

RESPA, and title X of the Dodd-Frank 

Act are Federal consumer financial 

laws. Accordingly, the Bureau is 

exercising its authority under DoddFrank Act section 1022(b)(1) to 

prescribe rules that carry out the 

purposes and objectives of TILA and 

title X and prevent evasion of those 

laws. 

For the reasons discussed below in 

the section-by-section analysis, the 

Bureau is finalizing regulations 

pursuant to its authority under TILA, 

RESPA, and titles X and XIV of the 

Dodd-Frank Act. 


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24Section 106(e) of the Housing and Urban 

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

requires that homeownership counseling provided 

under programs administered by HUD can only be 

provided by organizations or individuals certified 

by HUD as competent to provide homeownership 

counseling. Section 106(e) also requires HUD to 

establish standards and procedures for testing and 

certifying counselors. 

25The Dodd-Frank Act also amends RESPA 

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

‘‘home buying information booklet’’ (the RESPA 

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

homeownership counseling services made available 

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

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

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

use such services, and notification that a list of 

certified providers of homeownership counseling in 

the area, and their contact information, is 

available.’’ 26 12 U.S.C. 2602(1); 12 CFR 1024.2. 

V. Section-by-Section Analysis 

A. Regulation X 

Section 1024.20 List of 

Homeownership Counseling 

Organizations 

The Dodd-Frank Act amended RESPA 

to create a new requirement that lenders 

provide a list of homeownership 

counselors to applicants for federally 

related mortgage loans. Specifically, 

section 1450 the Dodd-Frank Act 

amended RESPA section 5(c) to require 

lenders to provide applicants with a 

‘‘reasonably complete or updated list of 

homeownership counselors who are 

certified pursuant to section 106(e) of 

the Housing and Urban Development 

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

located in the area of the lender.’’ 24

The list of homeownership counselors 

is to be included with a ‘‘home buying 

information booklet’’ that the Bureau is 

directed to prepare ‘‘to help consumers 

applying for federally related mortgage 

loans to understand the nature and costs 

of real estate settlement services.’’ 25

Prior to the Dodd-Frank Act, HUD was 

charged with distributing the RESPA 

‘‘special information booklet’’ to lenders 

to help purchase-money mortgage 

borrowers understand the nature and 

costs of real estate settlement services. 

The Dodd-Frank Act amended RESPA 

section 5(a) to direct the Bureau to 

distribute the ‘‘home buying 

information booklet’’ to all lenders that 

make federally related mortgage loans. 

The Dodd-Frank Act also amended 

section 5(a) to require the Bureau to 

distribute lists of homeownership 

counselors to such lenders. 

The proposal would have 

implemented the Dodd-Frank Act’s 

requirement that a lender provide lists 

of homeownership counselors to 

applicants for federally related mortgage 

loans. Proposed § 1024.20 generally 

would have required a lender to provide 

an applicant for a federally related 

mortgage loan with a list of five 

homeownership counselors or 

counseling organizations in the location 

of the applicant, not later than three 

days after receiving an application. 

Proposed § 1024.20 also would have set 

forth additional requirements related to 

the content and delivery of the list. The 

Bureau is finalizing proposed § 1024.20 

with certain changes, as discussed in 

further detail below. 

20(a) Provision of List 

20(a)(1) 

Scope of Requirement 

As noted above, new RESPA section 

5(c) requires lenders to include a list of 

homeownership counselors located in 

the area of the lender with the home 

buying information booklet that is to be 

distributed to applicants. To implement 

RESPA section 5(c), the Bureau 

proposed in § 1024.20(a)(1) that the list 

of homeownership counselors or 

counseling agencies be provided to 

applicants for all federally related 

mortgage loans, except for Home Equity 

Conversion Mortgages (HECMs), as 

discussed in the section-by-section 

analysis of § 1024.20(c) below. Under 

RESPA and its implementing 

regulations, a federally related mortgage 

loan includes purchase-money mortgage 

loans, subordinate-lien mortgages, 

refinancings, closed-end home-equity 

mortgage loans, HELOCs, and reverse 

mortgages.26 Thus, proposed 

§ 1024.20(a)(1) would have required that 

lenders provide the list of 

homeownership counselors to 

applicants for numerous types of 

federally related mortgage loans beyond 

purchase-money mortgages. 

As the Bureau noted in the preamble 

of the proposal, based on its reading of 

section 5 of RESPA as amended, and its 

understanding of the purposes of that 

section, the Bureau believes that the 

amendments to RESPA indicate that 

Congress intended the booklet and list 

of counselors to be provided to 

applicants for all federally related 

mortgage loans and not just purchasemoney mortgage loans. The Bureau 

acknowledged that section 5(d) of 

RESPA, in language that was not 

amended by the Dodd-Frank Act, 

requires lenders to provide the home 

buying information booklet ‘‘to each 

person from whom [the lender] receives 

or for whom it prepares a written 

application to borrow money to finance 

the purchase of residential real estate.’’ 

However, the Bureau also noted that 

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

amended, indicate that the booklet and 

list of counselors are to be provided to 

applicants for all federally related 

mortgage loans. Section 5(a) as amended 

(1) specifically references helping 

consumers applying for federally related 

mortgage loans understand the nature 

and costs of real estate settlement 

services; and (2) directs the Bureau to 

distribute the booklet and the lists of 

housing counselors to lenders that make 

federally related mortgage loans. 

Moreover, the prescribed content of the 

booklet is not limited to information on 

purchase-money mortgages. Under 

RESPA section 5(b), as amended by the 

Dodd-Frank Act, the booklet must 

include information specific to 

refinancings and HELOCs, as well as 

‘‘the costs incident to a real estate 

settlement or a federally related 

mortgage loan.’’ 

Additionally, the Bureau noted in the 

preamble of the proposal its view that 

a trained counselor can be useful to any 

consumer considering any type of 

mortgage loan. Mortgage transactions 

beyond purchase-money transactions, 

such as refinancings and open-end 

home-secured credit transactions, can 

entail significant risks and costs for 

consumers—risks and costs that a 

trained homeownership counselor can 

assist consumers in fully understanding. 

Thus, for the reasons noted above, the 

Bureau proposed in § 1024.20(a)(1) to 

interpret the scope of the 

homeownership counselor list 

requirement to apply to all federally 

related mortgage loans pursuant to 

section 19(a) of RESPA, which provides 

the Bureau with the authority to 

‘‘prescribe such rules and regulations, to 

make such interpretations, and to grant 

such reasonable exemptions for classes 

of transactions, as may be necessary to 

achieve the purposes of the [RESPA].’’ 

The Bureau sought comment from the 

public on the costs and benefits of the 

provision of the list of homeownership 

counselors to applicants for refinancings 

and HELOCs. The Bureau also sought 

comment on the potential effect of the 

Bureau’s proposal on access to 

homeownership counseling generally by 

consumers, and the effect of increased 

consumer demand on existing 

counseling resources. In particular, the 

Bureau solicited comment on the effect 

on counseling resources of providing 

the list beyond applicants for purchasemoney mortgages. 

A number of industry commenters 

stated that lenders should not be 

required to provide counselor lists to 

applicants for refinancings or HELOCs. 

One large bank commenter, for example, 

asserted that the congressional intent to 

limit the requirement to purchaseVerDate Mar<15>2010 18:30 Jan 30, 2013 Jkt 229001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\31JAR2.SGM 31JAR2

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6864 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

money mortgages is clear. Some other 

commenters were concerned that 

applicants for refinancings or HELOCs 

would either ignore the list or be 

offended by the suggestion that they 

would benefit from counseling, because 

such applicants already understand how 

mortgages work. Comments from 

consumer groups and a State Attorney 

General’s office, however, supported the 

requirement to provide the counselor 

list to applicants for refinancings and 

HELOCs. Such commenters noted, for 

example, that consumers may find 

themselves in financial distress only 

after tapping into their home equity 

through a refinancing or a HELOC, in 

some cases repeatedly. 

The Bureau is generally finalizing in 

§ 1024.20(a)(1) the requirement to 

provide a list of counseling providers to 

applicants of federally related mortgage 

loans as proposed, for the reasons noted 

above. The Bureau continues to believe 

that the statutory language as a whole 

indicates Congress’s intent to require 

lenders to provide the counselor list to 

applicants of refinancings and HELOCs, 

as well as purchase-money mortgages. 

Moreover, the Bureau agrees with 

commenters that suggest applicants for 

refinancings or HELOCs may benefit 

from information about counseling, 

even though such applicants have 

previously obtained a mortgage. The 

Bureau is, however, also adopting 

certain exemptions from the 

requirement, as described in the 

discussion of § 1024.20(c) below. 

Content of List 

As discussed above, RESPA section 

5(c) requires that the list of 

homeownership counselors be 

comprised of homeownership 

counselors certified pursuant to section 

106(e) of the Housing and Urban 

Development Act of 1968 and located in 

the area of the lender. RESPA section 

5(c) does not specify any particular 

information about homeownership 

counselors that must be provided on the 

required list. Proposed § 1024.20(a)(1) 

would have provided that the list 

include five homeownership counselors 

or homeownership counseling 

organizations located in the zip code of 

the applicant’s current address or, if 

there were not the requisite five 

counselors or counseling organizations 

in that zip code, counselors or 

organizations within the zip code or zip 

codes closest to the loan applicant’s 

current address. Proposed 

§ 1024.20(a)(2) would have required 

lenders to include in the list only 

homeownership counselors or 

counseling organizations from either the 

most current list of homeownership 

counselors or counseling organizations 

made available by the Bureau for use by 

lenders in complying with § 1024.20, or 

the most current list maintained by 

HUD of homeownership counselors or 

counseling organizations certified or 

otherwise approved by HUD. Proposed 

§ 1024.20(a)(3) would have required that 

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

counseling organization’s name, 

business address, telephone number 

and, if available from the Bureau or 

HUD, other contact information; and (2) 

contact information for the Bureau and 

HUD. 

The Bureau stated in the preamble of 

the proposal that it expected to develop 

a Web site portal to facilitate 

compliance with the counselor list 

requirement. As the Bureau explained, 

such a Web site portal would allow 

lenders to type in the loan applicant’s 

zip code to generate the requisite list, 

which could then be printed for 

distribution to the loan applicant. The 

Bureau also stated its belief that such an 

approach: (1) Could significantly 

mitigate any paperwork burden 

associated with requiring that the list be 

distributed to applicants for federally 

related mortgage loans; and (2) is 

consistent with the Dodd-Frank Act’s 

amendment to section 5(a) of RESPA 

requiring the Bureau to distribute to 

lenders ‘‘lists, organized by location, of 

homeownership counselors certified 

under section 106(e) of the Housing and 

Urban Development Act of 1968 (12 

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

with the requirement under [section 

5(c)].’’ 

The Bureau solicited comment on the 

appropriate number of counselors or 

organizations to be included on the list 

and on whether there should be a 

limitation on the number of counselors 

from the same counseling agency. The 

Bureau also solicited comment on 

whether its planned Web site portal 

would be useful and whether there are 

other mechanisms through which the 

Bureau can help facilitate compliance 

and provide lists to lenders and 

consumers. 

A significant number of industry 

commenters objected to the proposed 

requirement to create individualized 

lists for borrowers as overly 

burdensome. Some commenters raised 

concerns that having to create these 

individualized lists would expose them 

to risk in the event of an error in 

compiling the list. Many industry 

commenters suggested that lenders 

should instead be permitted to comply 

with the requirement by providing 

Bureau and HUD contact information 

for the consumer to obtain information 

about counselors. Other commenters 

suggested it would be more beneficial to 

refer consumers to web databases 

containing all counselors in a state, or 

to provide a list based on an applicant’s 

state rather than zip code. Commenters 

argued that changing the provision to 

allow compliance through a static list 

would minimize costs, create greater 

efficiency, and be more accurate. Some 

commenters argued that locating the 

nearest zip code to a consumer’s home 

zip code would be overly burdensome. 

Several commenters objected to the 

requirement that the list be obtained 

from ‘‘the most current’’ lists of 

counselors or counseling organizations 

maintained by the Bureau or HUD, or 

suggested that ‘‘most current’’ should 

mean ‘‘monthly.’’ A number of 

consumer group commenters, however, 

supported the requirement for an 

individualized list because such a list 

would be most beneficial to consumers. 

One such commenter also noted that 

requiring lenders to retrieve a fresh list 

for each applicant will ensure the lists 

received by consumers are the most upto-date. 

Industry commenters were generally 

very supportive of the Bureau’s 

intention to create a Web site portal to 

facilitate compliance, particularly if the 

individualized list requirement were 

retained. Some industry commenters 

noted that the list requirement would 

not be difficult to comply with as 

proposed, if a Web site portal were 

available. A few commenters, while 

primarily supportive of a requirement to 

provide a static rather than an 

individualized list, alternatively favored 

the idea of the Web site portal to 

generate the list (including 

automatically selecting adjacent zip 

codes to an applicant’s zip code, if 

necessary). Some commenters requested 

a safe harbor for lenders providing a list 

generated through the Web site portal. 

Commenters proposed a number of 

additions or variations to the Web site 

portal. A number of industry 

commenters stated the Bureau should 

provide lenders with the option to 

import the data from the Web site portal 

directly into their systems, to ease 

compliance burden. Several industry 

commenters noted it would be essential 

that the Web site portal generate a list 

for lenders based on a simple zip code 

query. A few commenters suggested that 

the Web site portal should provide a 

randomized list in response to a zip 

code query, to avoid favoritism. Some 

commenters suggested the Web site 

portal should be made available to the 

public and publicized by the Bureau 

(e.g., though a public campaign in 

coordination with homeownership 


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27National intermediary organizations generally 

provide funding, training, and oversight of affiliated 

local counseling agencies, but may also provide 

counseling services directly to consumers. 

Christopher E. Herbert et al., Abt Assoc. Inc., The 

State of the Housing Counseling Industry, at xi, 2 

(U.S. Dep’t of Hous. & Urban Dev. 2008). 

28The Bureau also relies on its exemption and 

modification authority under RESPA section 19(a) 

and the Dodd-Frank Act section 1405(b). The 

Bureau believes that interpreting ‘‘located in the 

area of the lender’’ to mean the location of the 

applicant who is being served by the lender will 

help facilitate the effective functioning of this new 

RESPA disclosure. It will also, therefore, help carry 

out the purposes of RESPA for more effective 

advance cost disclosures for consumers, by 

providing information to loan applicants regarding 

counseling resources available for assisting them in 

understanding their prospective mortgage loans and 

settlement costs. In addition, because the Bureau 

believes that lists organized by the location of the 

applicant will be most useful to the applicants, the 

Bureau believes this interpretation is in the interest 

of consumers and in the public interest. 

29As the Bureau noted in the preamble of the 

proposal, the Bureau understands that HUD, other 

than for its counseling program for HECMs, 

currently only approves homeownership counseling 

agencies, rather than certifying these agencies or 

individual counselors, as it has not yet 

implemented section 1445 of the Dodd-Frank Act 

regarding certification of counseling providers. The 

Bureau also notes that permitting the list to include 

individual counselors could cause confusion for 

consumers, as an individual counselor may be 

Continued 

counseling organizations, counseling 

trade groups, and HUD), and that 

lenders should be required to make lists 

available through their Web sites, 

branch offices, and mortgage 

advertising. Several commenters stated 

that the Bureau should coordinate the 

development of its Web site portal with 

HUD, so lenders are not required to 

search two separate databases. 

A number of industry commenters 

raised concerns about the requirement 

to provide a list of five counselors or 

counseling agencies, asserting that five 

is an arbitrary number and that it would 

be a difficult requirement to meet in 

certain geographic locations. Some 

commenters noted, for example, that 

Alaska has only three counseling 

agencies statewide, and that Wyoming 

has only four. One commenter suggested 

that lenders should not have to disclose 

counselors from different states, if there 

are not five counselors in the 

consumer’s state. A few commenters 

suggested that the requirement be more 

flexible and require, for example, a list 

of ‘‘no fewer than three’’ counseling 

agencies. 

Several consumer advocacy and 

housing counselor advocacy groups 

commented that only homeownership 

counseling agencies, rather than 

individual homeownership counselors, 

should be permitted to appear on the 

list. These commenters noted that 

providing a list of individual counselors 

to consumers is neither practical nor 

efficient, as an individual counselor 

may not be available. A few commenters 

suggested that the list include agencies 

offering remote counseling services. For 

example, an alliance of counseling 

organizations suggested the list be 

required to include a minimum number 

of national counseling agencies or 

intermediaries 27 outside of a 

consumer’s zip code that can provide 

phone counseling. 

Several consumer advocacy and 

housing counselor advocacy 

commenters requested that additional 

information be required to be provided 

on the list. For example, they asked that 

the lists be required to include a 

counseling agency’s specialty (e.g., prepurchase, refinance, home equity, 

rental, reverse mortgage, etc.) and any 

foreign language capacity. Another 

commenter requested that the list 

include a description of the services that 

the counselor would provide and fees 

typically charged for such services. 

Based on the comments received 

concerning compliance burden and the 

potential operational difficulties 

associated with developing lists as 

envisioned in the proposal, the Bureau 

is revising § 1024.20(a)(1) to require 

lenders to fulfill the list obligation 

through use of either a Bureau Web site 

or data made available by the Bureau or 

HUD. Specifically, final § 1024.20(a)(1) 

allows lenders to distribute lists of 

counseling organizations providing 

relevant counseling services in the 

applicant’s location that are obtained up 

to 30 days in advance from either a Web 

site maintained by the Bureau or data 

made available by the Bureau or HUD 

for lenders to use in complying with the 

requirements of § 1024.20, provided that 

the data are used in accordance with 

instructions provided with the data. 

Because lenders will thus generate the 

required lists through either a Web site 

that will automatically provide the 

required content of the list based on 

certain inputs, or through data that is 

accompanied by instructions to generate 

lists consistent with the Web site, the 

final rule also eliminates proposed 

§ 1024.20(a)(1)(i) and (ii) and proposed 

§ 1024.20(a)(2) and (3) as unnecessary. 

The Bureau intends to create a Web 

site portal, in close coordination with 

HUD, that will require lenders to input 

certain required information (such as, 

for example, the applicant’s zip code 

and the type of mortgage product) in 

order to generate a list of 

homeownership counseling 

organizations that provide relevant 

counseling services in the loan 

applicant’s location. While the Bureau 

understands the concerns raised by 

commenters about the burden of 

generating zip-code based lists for 

potential borrowers, the Bureau notes 

that the statutory requirement indicates 

that the list should be comprised of 

counselors ‘‘located in the area of the 

lender.’’ The Bureau is interpreting this 

requirement to mean the location of the 

applicant who is being served by the 

lender. The Bureau continues to believe 

that a list of counseling resources 

available near the applicant’s location 

will be most useful to the applicant.28

The Bureau also believes that permitting 

lists to be generated based on larger 

geographic areas, such as an applicant’s 

state, would frequently result in an 

applicant receiving a list that is 

overwhelmingly lengthy. The Bureau 

notes, for example, that HUD’s Web site 

indicates that there are a significant 

number of states that are served by well 

over 20 homeownership counseling 

organizations. The Bureau notes, 

moreover, that the Web site portal will 

obviate the need for a lender to 

determine the closest zip codes to an 

applicant. 

The Bureau recognizes the concerns 

of industry commenters that requiring 

greater data inputs from lenders to 

generate a list will increase the burden 

on the lender. The Bureau intends to 

require as few data inputs as practicable 

to generate a relevant list for the 

applicant, in order to minimize 

compliance burden. The Bureau agrees 

with commenters that the Web site 

portal it develops should be made 

directly available to consumers, and the 

Bureau does intend to publicize the 

Web site portal to make consumers 

better aware of the counseling resources 

available. 

The Bureau also agrees with 

commenters who suggested the list 

should include only homeownership 

counseling organizations rather than 

individual counselors. The Bureau 

explained in the preamble of the 

proposal that it was proposing to allow 

the list to include counselors or 

counseling organizations certified or 

otherwise approved by HUD, pursuant 

to its exemption authority under section 

19(a) of RESPA and its modification 

authority under section 1405(b) of the 

Dodd-Frank Act. The Bureau is 

finalizing § 1024.20(a)(1) to require that 

the list contain only counseling 

organizations, pursuant to the same 

exemption authority, and anticipates 

that the Web site portal it develops may 

generate lists that include counseling 

organizations that are either certified or 

otherwise approved by HUD.29 Because 


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6866 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

unavailable. The Bureau is therefore exercising its 

exemption and modification authority under 

RESPA section 19(a) and the Dodd-Frank Act 

section 1405(b) to provide flexibility in order to 

facilitate the availability of competent counseling 

organizations for placement on the lists, so that 

counseling organizations that are either approved or 

certified by HUD may appear on the lists. 

Permitting the list to include HUD-approved or 

HUD-certified counseling organizations will help 

facilitate the effective functioning of this new 

RESPA disclosure. It will also, therefore, help carry 

out the purposes of RESPA for more effective 

advance cost disclosures for consumers, by 

providing information to loan applicants regarding 

counseling resources available for assisting them in 

understanding their prospective mortgage loans and 

settlement costs. The Bureau intends to work 

closely with HUD to facilitate operational 

coordination and consistency between the 

counseling and certification requirements HUD puts 

into place and the lists generated by the Bureau’s 

Web site portal. 

the Web site portal will automatically 

create lists that include the relevant 

homeownership counseling 

organizations, the Bureau is not 

finalizing proposed § 1024.20(a)(2). 

The Bureau believes that allowing 

lenders to obtain the list up to 30 days 

prior to providing it to the loan 

applicant strikes an appropriate balance 

between ensuring the information 

received by consumers is useful, and 

avoiding unnecessary burdens on 

lenders. The Bureau notes a lender may 

be able to keep counselor lists generated 

based on certain data inputs on file, and 

provide those stored lists to applicants 

as appropriate for up to 30 days, in 

order to avoid generating a new list for 

each applicant. 

With respect to the information that 

will appear on the lists of counseling 

organizations, the Bureau notes that 

rather than specify particular 

information, such as the counseling 

organization’s telephone number, that 

must appear on the list through 

regulation, the Bureau will design its 

Web site portal so that the appropriate 

information will automatically appear 

on the lists that are generated. The 

Bureau will also work to ensure that any 

data provided for compliance with the 

requirement is accompanied by 

instructions that will result in the 

creation of a list that is consistent with 

what would have been generated if the 

Web site portal had been used. 

Accordingly, the Bureau is not 

finalizing proposed § 1024.20(a)(3). The 

Bureau believes this will help ease 

compliance burden. The Bureau 

anticipates that the lists generated 

through its Web site portal or in 

accordance with its instructions will 

include contact information for the 

counseling organizations and may 

include additional information about 

the counseling organizations such as 

language capacity and areas of expertise. 

The Bureau also anticipates that the lists 

generated through its Web site portal 

will also include information enabling 

the consumer to access either the 

Bureau or the HUD list of 

homeownership counseling 

organizations, so that an applicant who 

receives the list can obtain information 

about additional counseling 

organizations if desired. 

Timing of the List 

As discussed above, RESPA section 

5(c) requires that the list be included 

with the home buying information 

booklet that is to be distributed to 

applicants no later than three business 

days after the lender receives a loan 

application. Proposed § 1024.20(a)(1) 

would have required a lender to provide 

the list no later than three business days 

after the lender, mortgage broker, or 

dealer receives an application (or 

information sufficient to complete an 

application). The definition of 

‘‘application’’ that would have applied 

appears in § 1024.2(b). The Bureau 

noted in the proposal that its 2012 

TILA–RESPA Proposal proposed to 

adopt a new definition of ‘‘application’’ 

under Regulation Z, and it sought 

comment on whether to tie the 

provision of the list to this proposed 

definition instead of the definition in 

§ 1024.2(b). Some industry commenters 

asked for greater flexibility with respect 

to the timing of the list requirement, so 

that a list could be provided later than 

three business days after the lender 

receives a loan application. A few 

consumer groups and a counseling 

association commenter objected to the 

timing of the list requirement on the 

basis that counseling should occur 

earlier in the shopping process, not at 

application. The Bureau received one 

comment in support of linking the 

timing requirement for the list with the 

good faith estimate required by RESPA. 

A few commenters noted that regardless 

of whether the list had to be provided 

at the same time as the RESPA good 

faith estimate, it should only have to be 

provided once per loan, even if a loan 

estimate had to be revised. 

The Bureau believes that the 

counselor list should be provided no 

later than the same time period as other 

applicable disclosures, in order to be 

most beneficial to consumers. The 

Bureau agrees with consumer group 

commenters that obtaining information 

about counseling at a point earlier than 

application could be beneficial to 

consumers. The Bureau notes, however, 

that the statutory requirement provides 

that the list of homeownership 

counselors be provided with the home 

buying booklet. The Bureau agrees with 

commenters that stated a lender should 

only be required to provide a single list 

in conjunction with an application, and 

notes that the final rule does not require 

that more than one list be provided. In 

addition, because the Bureau has not yet 

finalized the 2012 TILA–RESPA 

Proposal, the Bureau declines to provide 

a different definition of application in 

the final rule. The Bureau is therefore 

finalizing the timing requirement in 

§ 1024.20(a)(1) as proposed, consistent 

with the timing requirement of the 

booklet. 

20(a)(2) 

RESPA section 5(c) does not specify 

whether the required list of 

homeownership counselors can be 

combined with other disclosures. To 

afford lenders flexibility and ease 

compliance burden, proposed 

§ 1024.20(a)(4) would have allowed the 

list to be combined with other mortgage 

loan disclosures, unless otherwise 

prohibited. The Bureau did not receive 

any comments addressing this 

provision, and is finalizing it 

substantially as proposed, except that it 

is renumbering the provision as 

§ 1024.20(a)(2). 

20(a)(3) 

Under RESPA section 5(c), a lender 

must provide a list of homeownership 

counselors to an applicant. To afford 

flexibility and help ease compliance 

burden, proposed § 1024.20(a)(5) would 

have allowed a mortgage broker or 

dealer to provide the list to those 

applicants from whom it receives or for 

whom it prepares applications. Under 

proposed § 1024.20(a)(5), where a 

mortgage broker or dealer provides the 

list, the lender is not required to provide 

an additional list but remains 

responsible for ensuring that the list has 

been provided to the loan applicant and 

satisfies the requirements of proposed 

§ 1024.20. 

The Bureau received one comment 

objecting to the language that a mortgage 

broker or dealer ‘‘may’’ provide the list 

to a loan applicant from whom it 

receives for whom it prepares an 

application. This commenter suggested 

that this language be changed to ‘‘must,’’ 

to reflect that mortgage brokers and 

dealers are required to provide the list 

to their loan applicants. 

As discussed above however, under 

the language of proposed § 1024.20(a)(5) 

the lender would have been responsible 

for ensuring that the list of counseling 

organizations is provided to the loan 

applicant in accordance with the 

requirements of § 1024.20(a)(5). As a 

result, the provision would have 

required that a loan applicant receive 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6867 

30 15 U.S.C. 7001(c). 31 12 U.S.C. 1715z–20(d)(2)(B). 

the list, with the lender maintaining 

ultimate responsibility for ensuring that 

it is provided, regardless of who 

provides the list. Accordingly, the 

Bureau is finalizing proposed 

§ 1024.20(a)(5) substantially as 

proposed, except that it is renumbering 

the provision as § 1024.20(a)(3). 

20(a)(4) 

RESPA section 5(c) does not specify 

how the required list must be delivered. 

Proposed § 1024.20(a)(6) would have set 

out the requirements for providing the 

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

by mail, or by other means of delivery. 

As proposed, the list could have been 

provided to the loan applicant in 

electronic form, subject to the consumer 

consent and other applicable provisions 

of the Electronic Signatures in Global 

and National Commerce Act (E-Sign 

Act), 15 U.S.C. 7001 et seq. 

A few industry commenters asserted 

that because the list requirement 

permits electronic delivery under the ESign Act, the list should not be referred 

to as ‘‘written.’’ One consumer group 

commenter encouraged the Bureau to 

remove language permitting the 

electronic delivery of disclosures, 

arguing that this could lead to a greater 

chance the disclosure would not be 

received (e.g., if the lender used the 

incorrect email address). 

The Bureau does not believe that the 

requirement that the list be ‘‘written’’ 

conflicts with the provisions relating to 

delivery in electronic form pursuant to 

the E-Sign Act. In fact, the E-Sign Act 

itself specifically provides that the use 

of an electronic record to provide 

information can satisfy a requirement 

that certain information required to be 

made available to a consumer be 

provided in writing, subject to 

consumer consent provisions.30

Moreover, the Bureau believes it is 

important to retain the requirement that 

the list be in writing to provide for a 

retainable copy of the counseling 

organization names and contact 

information. In addition, the Bureau 

notes that permitting the electronic 

delivery of the disclosure is consistent 

with existing § 1024.23 of Regulation X, 

which provides for the applicability of 

the E-Sign Act to RESPA. For these 

reasons, the Bureau is finalizing 

§ 1024.20(a)(6) substantially as 

proposed, but is renumbering it as 

§ 1024.20(a)(4) for organizational 

purposes. 

20(a)(5) 

Proposed § 1024.20(a)(7) would have 

provided that the lender is not required 

to provide the list if, before the end of 

the three business day period, the 

lender denies the loan application or the 

loan applicant withdraws the 

application. The Bureau did not receive 

any comments addressing this 

provision. The Bureau is therefore 

finalizing § 1024.20(a)(7) substantially 

as proposed, but is renumbering it as 

§ 1024.20(a)(5). 

20(a)(6) 

Proposed § 1024.20(a)(8) would have 

provided flexibility related to the 

requirements for providing the list when 

there are multiple lenders and multiple 

applicants in a mortgage loan 

transaction. Under proposed 

§ 1024.20(a)(8), if a mortgage loan 

transaction involved more than one 

lender, only one list was to be given to 

the loan applicant, and the lenders were 

to agree among themselves which lender 

would provide the list. Proposed 

§ 1024.20(a)(8) also would have 

provided that if there were more than 

one loan applicant, the required list 

could be provided to any loan applicant 

that would have primary liability on the 

loan obligation. 

Industry commenters stated that it 

should be permissible for multiple 

lenders to provide the list for 

operational convenience. The Bureau 

notes that proposed § 1024.20(a)(8) is 

consistent with Regulation Z 

§ 1026.31(e), which also addresses 

disclosure requirements in the case of 

multiple creditors. The Bureau believes 

this consistency is appropriate, and that 

it could be confusing for consumers to 

receive multiple copies of a counselor 

list disclosure. Accordingly, the Bureau 

is finalizing § 1024.20(a)(8) as proposed, 

except for making minor edits for clarity 

and consistency and renumbering the 

provision as § 1024.20(a)(6). 

20(b) Open-End Lines of Credit (HomeEquity Plans) Under Regulation Z 

As noted above, RESPA section 5(c) 

requires that the list be included with 

the home buying information booklet 

that is to be distributed to applicants no 

later than three business days after the 

lender receives a loan application, and 

the Bureau proposed in § 1024.20(a)(1) 

to interpret the scope of the 

homeownership counselor list 

requirement to apply to all federally 

related loans, including HELOCs (except 

as described in the discussion of 

§ 1024.20(c) below). Proposed 

§ 1024.20(b) would have permitted a 

lender or broker, for an open-end credit 

plan subject to the requirements of 

§ 1024.20, to comply with the timing 

and delivery requirement of either 

§ 1024.20(a), or with the timing and 

delivery requirements set out in 

Regulation Z § 1026.40(b) for open-end 

disclosures. Several commenters noted 

that they appreciated this flexibility and 

asked the Bureau to retain this approach 

in the final rule. The Bureau agrees with 

commenters that the flexibility to 

provide the list under the timing 

requirements of § 1026.40(b) should be 

retained. The Bureau believes allowing 

this flexibility in timing will meet the 

purposes of the list requirement as well 

as help ease compliance burden. The 

Bureau is therefore adopting 

§ 1024.20(b) as proposed, with minor 

edits for clarity and consistency. 

20(c) Exemptions 

20(c)(1) Reverse Mortgage Transactions 

RESPA section 5(c) requires lenders to 

include a list of homeownership 

counselors with the home buying 

information booklet that is to be 

distributed to applicants. As noted 

above, the Bureau generally proposed in 

§ 1024.20(a)(1) to interpret the scope of 

the homeownership counselor list 

requirement to apply to applicants of all 

federally related mortgage loans 

pursuant to section 19(a) of RESPA. 

Proposed § 1024.20(c) would have 

exempted a lender from providing an 

applicant for a HECM, as that type of 

reverse mortgage is defined in 12 U.S.C. 

1715z–20(b)(3), with the list required by 

§ 1024.20 if the lender is otherwise 

required by HUD to provide a list, and 

does provide a list, of HECM counselors 

or counseling agencies to the loan 

applicant. As discussed further below in 

the section-by-section analysis of 

Regulation Z, § 1026.34(a)(5), the 

Bureau’s final pre-loan counseling 

requirement for high-cost mortgages, 

Federal law currently requires 

homeowners to receive counseling 

before obtaining a HECM reverse 

mortgage insured by the Federal 

Housing Administration (FHA),31 which 

is a part of HUD. HUD imposes various 

requirements related to HECM 

counseling, including requiring FHAapproved HECM mortgagees to provide 

HECM applicants with a list of HUDapproved HECM counseling agencies. 

The Bureau noted in the preamble of the 

proposal its concern that a duplicative 

list requirement could cause confusion 

for consumers and unnecessary burden 

for lenders. Accordingly, the Bureau 

proposed to exercise its exemption 

authority under RESPA section 19(a) to 

allow lenders that provide a list under 

HUD’s HECM program to satisfy the 

requirements of § 1024.20. 


srobinson on DSK4SPTVN1PROD with 
6868 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

32Consumer Financial Protection Bureau, Reverse 

Mortgage Report, at 10–11 (June 2012), available at 

http://files.consumerfinance.gov/a/assets/ 

documents/ 

201206_cfpb_Reverse_Mortgage_Report.pdf. 

33Commenters stated that typically if a consumer 

defaults, the only consequence is that the consumer 

loses the timeshare interest. 

A trade association for the reverse 

mortgage industry argued that lenders 

should not be obligated to provide a 

counselor list to applicants for HECM 

mortgages through § 1024.20. This 

commenter stated that HECM lenders 

are already required to provide a 

lengthier list of counselors specializing 

in reverse mortgage counseling. The 

commenter pointed out that in most 

instances a HECM lender cannot even 

complete a HECM application until they 

receive a HECM counseling certificate, 

except in limited circumstances under 

which HECM applicants can waive 

counseling requirements (e.g., for some 

types of refinancings from a HECM to 

another HECM). The commenter also 

argued that lenders should not have to 

provide applicants for non-HECM 

reverse mortgages the counseling list if 

the lender meets the HECM counseling 

disclosure requirements. 

The Bureau agrees that lenders should 

not have to provide a list of counselors 

to HECM applicants because the list is 

of limited value for such applicants, 

given that the majority of such 

applicants would already have been 

required to receive counseling prior to 

submitting an application for a HECM. 

In addition, upon further consideration, 

the Bureau believes that lenders should 

not have to provide applicants for any 

reverse mortgages subject to Regulation 

Z § 1026.33(a) with a list of housing 

counselors. Given that counseling for 

HECMs and other reverse mortgages is 

typically provided by specially trained 

counselors, the Bureau believes that any 

additional counseling requirements 

related to these products would be 

better addressed separately. As noted 

above, HECM mortgagees are already 

required to provide HECM applicants 

with a list of HUD-approved HECM 

counseling agencies. The Bureau notes 

that it anticipates undertaking a 

rulemaking in the future to address how 

title XIV requirements apply to reverse 

mortgages and to consider other 

consumer protection issues in the 

reverse mortgage market.32 That 

rulemaking will provide an opportunity 

to consider further issues related to 

counseling or counseling information on 

reverse mortgages. Because the Bureau 

concludes that requiring lenders to 

provide a list of counselors to reverse 

mortgage borrowers under § 1024.20 is 

largely duplicative of HECM 

requirements and may not provide 

additional, useful information for 

borrowers of other types of reverse 

mortgages, final § 1024.20(c)(1) provides 

an exemption for reverse mortgages 

pursuant to the Bureau’s authority 

under RESPA section 19(a). 

20(c)(2) Timeshare Plans 

The Bureau generally proposed in 

§ 1024.20(a)(1) to interpret the scope of 

the homeownership counselor list 

requirement to apply to applicants of all 

federally related loans pursuant to 

section 19(a) of RESPA, which would 

include applicants for a mortgage 

secured by a consumer’s interest in a 

timeshare. The Bureau did not propose 

any type of exemption from the list 

requirement for this category of 

applicants. Timeshare industry 

commenters argued that the requirement 

for a list of counselors should not apply 

to lenders receiving an application for a 

mortgage secured by a consumer’s 

interest in a timeshare. They asserted an 

exception is warranted for mortgages 

secured by timeshares because of their 

belief that there was no Congressional 

intent to require counseling for 

timeshare buyers due to unique 

characteristics of the timeshare 

industry, the lack of predatory lending 

in this market, the lower risk to 

consumers associated with default of a 

mortgage secured by a timeshare,33 the 

protections provided by State law, and 

the timeshare business model that relies 

upon purchase and financing 

documents being executed 

simultaneously. 

The Bureau agrees that lenders should 

not be obligated to provide a list of 

homeownership counselors to 

applicants for mortgages secured by a 

timeshare, and is therefore exercising its 

authority under section 19(a) of RESPA 

to provide an exemption for these 

transactions in final § 1024.20(c)(2). 

Although the Bureau believes that some 

form of counseling may be beneficial to 

such consumers, the Bureau is 

concerned that counselors at counseling 

agencies approved by HUD to counsel 

consumers on standard mortgage 

financing may not be trained to provide 

useful counseling addressing timeshare 

purchases. For that reason, the Bureau 

is concerned that the benefit of the list 

of counselors to a consumer purchasing 

a timeshare could be quite low. The 

Bureau has therefore determined that 

exempting timeshare purchases from the 

list requirement is reasonable, because it 

is unclear whether the list would 

provide helpful information to 

consumers. Accordingly, the final rule 

does not require a lender to provide an 

applicant for a mortgage loan secured by 

a timeshare, as described under 11 

U.S.C. 101(53D), with the list of 

homeownership counseling 

organizations required under § 1024.20. 

B. Regulation Z 

Section 1026.1 Authority, Purpose, 

Coverage, Organization, Enforcement, 

and Liability 

1(d) Organization 

1(d)(5) 

Section 1026.1(d)(5) describes the 

organization of subpart E of Regulation 

Z, which contains special rules for 

mortgage transactions, including highcost mortgages. The Bureau would have 

revised § 1026.1(d)(5) for consistency 

with the Bureau’s proposed 

amendments to §§ 1026.32 and 1026.34 

for high-cost mortgages. Specifically, the 

Bureau proposed to revise § 1026.1(d)(5) 

to include the term ‘‘open-end credit 

plan’’ and to remove the term ‘‘closedend’’ where appropriate. In addition, the 

Bureau proposed to include a reference 

to the new prepayment penalty coverage 

test for high-cost mortgages added by 

the Dodd-Frank Act. The Bureau did not 

receive any comments on proposed 

§ 1026.1(d)(5) and is finalizing the 

provision as proposed, with one nonsubstantive change to reflect the DoddFrank Act’s adoption of the term ‘‘highcost mortgage’’ to refer to a transaction 

that meets any of the coverage tests set 

forth in § 1026.32(a). 

Section 1026.31 General Rules 

31(c) Timing of Disclosure 

31(c)(1) Disclosures for High-Cost 

Mortgages 

Since the enactment of the original 

HOEPA legislation in 1994, TILA 

section 129(a) has set forth the 

information that creditors must provide 

in the additional disclosure for highcost mortgages, and TILA section 129(b) 

has described the timing requirements 

for this disclosure. Specifically, under 

TILA section 129(b)(1), the disclosure 

must be provided not less than three 

business days prior to consummation of 

the transaction. Pursuant to TILA 

section 129(b)(2)(A), if the terms of the 

transaction change after the disclosures 

have been provided in a way that makes 

the disclosure inaccurate, then a new 

disclosure must be given. TILA section 

129(b)(2)(B) provides that such new 

disclosures may be given by telephone 

if the consumer initiated the change and 

if, at consummation, the new disclosure 

is provided in writing and the consumer 

and creditor certify that the telephone 

disclosure was given at least three days 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6869 

34See 60 FR 15463, 15464–65 (Mar. 24, 1995). 35 15 U.S.C. 1639(v). 

before consummation. TILA section 

129(b)(2)(C) permitted the Board (now 

the Bureau) to prescribe regulations 

authorizing the modification or waiver 

of rights under TILA section 129(b) if 

such modification was necessary to 

permit consumers to meet a bona fide 

financial emergency. 

TILA section 129(b) is implemented 

in existing § 1026.31(c)(1). Section 

1026.31(c)(1) provides that the high-cost 

mortgage disclosure shall be provided at 

least three business days prior to 

consummation, and § 1026.31(c)(1)(i) 

sets forth the general rule for providing 

a new disclosure in the case of a change 

in terms. Section 1026.31(c)(1)(ii) 

permits the new disclosure for a change 

in terms to be provided by telephone in 

certain circumstances, and 

§ 1026.31(c)(1)(iii) sets forth the 

conditions pursuant to which a 

consumer is permitted to modify or 

waive the three-day waiting period for 

a disclosure for a bona fide personal 

financial emergency. 

The Dodd-Frank Act did not amend 

TILA section 129(b)(2) concerning the 

timing requirements for high-cost 

mortgage disclosures, except to clarify 

that authority under TILA section 

129(b)(2)(C) to permit a modification or 

waiver of rights for bona fide personal 

financial emergencies transferred from 

the Board to the Bureau. The Bureau 

thus proposed only limited revisions to 

§ 1026.31(c)(1) and related commentary 

that would have reflected the expanded 

types of loans potentially subject to 

HOEPA coverage as a result of the 

Dodd-Frank Act. For example, the 

proposal would have included the term 

‘‘account opening’’ in addition to 

‘‘consummation’’ to reflect the fact that 

the Dodd-Frank Act expanded the 

requirements for high-cost mortgages to 

HELOCs. 

The Bureau received one comment 

concerning proposed § 1026.31(c)(1). 

The commenter, a consumer advocacy 

organization, urged the Bureau to 

eliminate the language in 

§ 1026.31(c)(1)(ii) permitting telephone 

disclosures when a consumer initiates a 

change in the transaction after the 

creditor has provided the high-cost 

mortgage disclosure, and that change 

results in different terms. The 

commenter argued that permitting 

telephone disclosures would encourage 

sloppiness and inconsistency in the 

delivery of information and argued that 

the consumer would not be able to 

remember the information conveyed. As 

noted above, § 1026.31(c)(1)(ii) 

permitting telephone disclosures in the 

case of a change in terms implements a 

long-existing provision of TILA. The 

Bureau would need to use its authority 

under TILA section 105(a) to remove 

this provision. Given that the DoddFrank Act neither removed nor revised 

this provision, the Bureau declines to 

make such a change at this time. With 

respect to the commenter’s specific 

concerns, the Bureau notes that 

§ 1026.31(c)(1)(ii) requires a written 

disclosure at consummation or account 

opening that reflects any changed terms, 

along with a certification by the 

consumer and creditor that telephone 

disclosures reflecting those terms were 

made at the appropriate time prior to 

consummation or account opening. 

The commenter similarly urged the 

Bureau to eliminate the language in 

§ 1026.31(c)(1)(iii) permitting the 

consumer to modify the three-day 

waiting period for a bona fide personal 

financial emergency. The commenter 

stated that the urgency for financing for 

some consumers should not supplant 

protections for other consumers. The 

Bureau declines to remove or amend 

§ 1026.31(c)(1)(iii). The Board 

prescribed § 1026.31(c)(1)(iii) pursuant 

to its authority under TILA section 

129(b)(2)(C) when it first implemented 

HOEPA by final rule in 1995.34 The 

Bureau understands that there may be 

concerns about creditors abusing the 

waiver provision in certain 

circumstances, however the Bureau 

believes that the provision may benefit 

consumers who, for example, are facing 

imminent foreclosure. Absent specific 

information indicating that a change is 

warranted, the Bureau declines to 

modify this long-standing provision. 

The Bureau thus finalizes its 

amendments to § 1026.31(c)(1) generally 

as proposed (i.e., to reflect the 

provision’s expanded application to 

HELOCs), with only minor revisions for 

clarity. 

In addition, the Bureau is revising 

comment 31(c)(1)(i)–2 for clarification 

purposes and consistency with final 

§ 1026.34(a)(10). Upon further 

consideration of these provisions, the 

Bureau recognizes that the prohibition 

of financing points and fees in 

§ 1026.34(a)(10) prohibits the financing 

of any points and fees, as defined in 

§ 1026.32(b)(1) and (2), for all high-cost 

mortgages. This prohibition includes the 

financing of premiums or other charges 

for the optional products such as credit 

insurance described in proposed 

comment 31(c)(1)(i)–2. Section 

1026.34(a)(10) permits, however, the 

financing of charges not included in the 

definition of points and fees. For 

example, § 1026.34(a)(10) permits the 

financing of bona fide third-party 

charges, such as fees charged by a thirdparty counselor in connection with the 

consumer’s receipt of pre-loan 

counseling for a high-cost mortgage 

under § 1025.34(a)(5). Accordingly, 

proposed comment 31(c)(1)(i)–2 is 

revised for clarification purposes and 

consistency with these other provisions. 

31(h) Corrections and Unintentional 

Violations. 

Section 1433(f) of the Dodd-Frank Act 

added new section 129(v) to TILA, 15 

U.S.C. 1639(v), which prescribes certain 

conditions under which a creditor or 

assignee of a high-cost mortgage that has 

failed to comply with a HOEPA 

requirement, despite acting in good 

faith, will not be deemed to have 

violated the requirement. Section 129(v) 

permits the creditor or assignee to use 

this provision when either of the two 

following sets of conditions is satisfied: 

(1) ‘‘Within 30 days of the loan closing 

and prior to the institution of any 

action, the consumer is notified of or 

discovers the violation, appropriate 

restitution is made, and whatever 

adjustments are necessary are made to 

the loan to either, at the choice of the 

consumer—(A) make the loan satisfy the 

requirements of this chapter; or (B) in 

the case of a high-cost mortgage, change 

the terms of the loan in a manner 

beneficial to the consumer so that the 

loan will no longer be a high-cost 

mortgage’’; or (2) ‘‘within 60 days of the 

creditor’s discovery or receipt of 

notification of an unintentional 

violation or bona fide error and prior to 

the institution of any action, the 

consumer is notified of the compliance 

failure, appropriate restitution is made, 

and whatever adjustments are necessary 

are made to the loan to either, at the 

choice of the consumer—(A) make the 

loan satisfy the requirements of this 

chapter; or (B) in the case of a high-cost 

mortgage, change the terms of the loan 

in a manner beneficial so that the loan 

will no longer be a high-cost 

mortgage.’’ 35 The Bureau did not 

propose to issue regulatory guidance 

concerning this provision. The Bureau 

solicited comment on the extent to 

which creditors or assignees are likely 

to invoke this provision; whether 

regulatory guidance would be useful; 

and if so, what issues would be most 

important to address. 

The Bureau did not receive comments 

from industry suggesting that creditors 

or assignees would be likely to invoke 

the provision. However, the Bureau 

received a number of comments from 

industry and consumer groups that 

suggested the Bureau provide guidance 

on certain statutory terms. Both industry 


srobinson on DSK4SPTVN1PROD with 
6870 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

36See 15 U.S.C. 1635 and 1639(n). 

37When a statute is silent about how long a given 

action may take, Congress may be understood to 

have implicitly required the action to be completed 

in a reasonable time. See Norman J. Singer & J.D. 

Shambie Singer, 2B Sutherland Statutes and 

Statutory Construction, § 55.3 (7th ed.) (‘‘If a statute 

imposes a duty but is silent as to when it is to be 

performed, a reasonable time is implied.’’). 

and consumer groups asked for a 

definition of the statutory term ‘‘good 

faith’’ and also sought guidance on 

whether the statutory requirement that 

notice of an unintentional error be given 

‘‘prior to the institution of any action’’ 

applies only to lawsuits initiated by the 

consumer, or should be construed more 

broadly to include enforcement actions 

and various types of informal disputes 

between the borrower and creditor. 

Consumer groups also sought guidance 

and clarification as to how a creditor’s 

use of the statute to correct an 

unintentional violation will interplay 

with TILA rescission rights.36

In addition, both industry and 

consumer groups sought guidance on 

the operation of the 30- and 60-day 

periods set forth in sections 129(v)(1) 

and (2), respectively. These commenters 

expressed concern that the statute, as 

drafted, could be interpreted to require 

a creditor or assignee seeking the benefit 

of section 129(v) to provide notice to the 

consumer, receive the election of the 

consumer’s preferred adjustment, and 

implement the consumer’s election 

within the 30- or 60-day period. 

Industry and consumer groups stated 

that such a timeframe would be 

unworkable, and industry commenters 

suggested this would result in creditors 

and assignees not using the provision. 

Both industry and consumer groups 

offered suggestions for a more workable 

operational framework. Specifically, 

industry commenters suggested that the 

30- and 60-day time limits should refer 

only to the time in which the creditor 

or assignee must notify the consumer 

about the violation, but additional time 

should be afforded for the creditor to 

offer a choice of adjustments to the 

consumer, for the consumer to elect an 

adjustment, and the creditor to 

implement the consumer’s elected 

adjustment. Consumer groups also 

noted that a consumer may need 

substantial time to consider a creditor’s 

proposed adjustment in order to make 

an informed choice, and generally 

suggested that an additional 30 to 60 

days from the time of notice be given to 

consumers to make an election of 

adjustment. Similarly, industry 

commenters suggested an additional 

time period of 30 to 60 days be afforded 

to the creditor or assignee to implement 

the consumer’s elected adjustment and 

pay any restitution that may be 

appropriate. 

The Bureau recognizes that section 

129(v) is a complex provision, and 

agrees with public commenters that 

several of the features and terms of the 

provision are ambiguous. However, it is 

not yet clear what role section 129(v) 

will play in HOEPA’s scheme of 

regulation, particularly in light of the 

Dodd-Frank Act’s comprehensive 

amendments to HOEPA, and the lack of 

comments from industry suggesting that 

creditors or assignees will be likely to 

invoke this provision. The Bureau 

therefore declines at this point to issue 

detailed interpretive guidance regarding 

section 129(v). 

However, the Bureau agrees with 

industry and consumer groups that it is 

important to clarify how the 30- and 60- 

day periods operate. Comments 

suggested that implementing the 

consumer’s choice of adjustment— 

which may require the creditor or 

assignee to make changes to the 

documentation, disclosure, or terms of a 

transaction—may itself take more than 

30 days. It is thus not feasible to require 

creditors and assignees invoking the 

provision to also provide notice of the 

violation to the consumer and allow the 

consumer appropriate time to consider 

and elect an adjustment and to provide 

notice of that election to the creditor 

within that same 30 or 60 day period. 

The Bureau is adopting a new 

provision at § 1026.31(h) and 

accompanying comment 31(h)–1 

interpreting section 129(v) to address 

these issues. Section 1026.31(h) states 

that a creditor or assignee in a high-cost 

mortgage who, when acting in good 

faith, failed to comply with a 

requirement under section 129 of the 

Act will not be deemed to have violated 

such requirement if the creditor or 

assignee satisfies specified conditions. 

Those conditions include providing 

notice to the consumer within 30 or 60 

days (as appropriate) of the prescribed 

triggering conditions and implementing 

the consumer’s chosen adjustments and 

providing appropriate restitution within 

a reasonable time. 

In adopting new provision 

§ 1026.31(h), the Bureau is interpreting 

the language of section 129(v) to provide 

greater clarity with respect to these 

timeframes, which will assist creditors, 

assignees, and consumers seeking to use 

section 129(v). In the Bureau’s view, 

section 129(v) is ambiguous regarding 

whether the ‘‘within 30 [or 60] days’’ 

timing requirement encompasses all the 

events that must occur for a creditor or 

assignee to claim the provision’s 

benefit—including the implementation 

of the consumer’s choice of 

adjustment—or only the first step, the 

consumer’s notification or discovery of 

the violation. The Bureau believes 

Congress’s intent was to make it 

possible, under appropriate 

circumstances, for creditors and 

assignees to satisfy the conditions of 

section 129(v). If securing the protection 

of section 129(v) required a creditor or 

assignee to complete within 30 or 60 

days tasks that cannot reasonably be 

done in that time, creditors or assignees 

might never seek to use the provision. 

The Bureau thus believes that, to 

effectuate Congress’s intent, section 

129(v) should be interpreted, if possible, 

so that creditors and assignees can 

feasibly meet its conditions. The Bureau 

agrees with industry and consumer 

groups that it would be unworkable for 

a creditor to complete within 30 or 60 

days all the steps to qualify for section 

129(v) relief. Accordingly, the Bureau 

interprets the language of section 129(v) 

to mean that the 30- and 60-day 

statutory periods set forth the timeframe 

for providing notice of the violation to 

the consumer, but does not also require 

that the consumer elect an adjustment 

and that the creditor or assignee 

implement that adjustment, along with 

appropriate restitution, within the same 

timeframe. 

With respect to the remaining 

statutory conditions—the consumer’s 

election of an adjustment, the creditor 

or assignee’s implementation of that 

adjustment, and the creditor or 

assignee’s paying of any appropriate 

restitution—the Bureau believes that 

Congress intended this provision to 

encourage creditors and assignees who 

have acted in good faith to remediate 

their violations of HOEPA, and that 

additional time is necessary for them to 

do so. 

However, the Bureau stresses that, for 

a creditor or assignee to enjoy the 

benefit of section 129(v), the required 

adjustment must still be completed in a 

reasonable time. While the Bureau 

interprets the specified 30- or 60-day 

period to cover only notice of a 

violation to the consumer, the Bureau 

does not believe Congress intended to 

allow the remaining steps in section 

129(v) to take an arbitrarily long time. 

The Bureau believes Congress intended 

a creditor or assignee to make the 

appropriate restitution and complete the 

required section 129(v) modification 

within a reasonable time period.37 In the 

Bureau’s view, allowing a reasonable 

time for a creditor or assignee to carry 

out the steps necessary to benefit from 

section 129(v) would effectuate 

Congress’s purpose of encouraging 

creditors and assignees who have acted 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6871 

38 66 FR 65604, 65617 (Dec. 20, 2001). 

in good faith to remediate their 

violations of HOEPA. If a creditor could 

take any amount of time to fulfill the 

section 129(v) conditions, the creditor 

might wait without completing the 

required modification unless and until 

it faced liability for its violation. 

Section 1026.31(h) reflects this 

interpretation by requiring both 

appropriate restitution and the required 

adjustments to a loan to be completed 

within a reasonable time. What length of 

time is reasonable may depend on the 

circumstances, including the nature of 

the violation at stake. The Bureau 

therefore declines to provide detailed 

guidance on what periods would be 

reasonable. However, as the 

accompanying new comment 31(h)–1 

notes, the Bureau generally regards 30 

days after the consumer sends notice of 

the chosen adjustment as reasonable. 

Comment 31(h)–1 also provides a 

clarifying interpretation of the notice 

and election procedures. Section 129(v) 

is also ambiguous as to how consumers 

are to be notified that they have a choice 

of remedy and how they are to inform 

creditors of their choice. The Bureau 

believes that Congress intended for 

consumers to have a reasonable 

opportunity to make a choice under 

section 129(v). In the Bureau’s view, 

this purpose is effectuated by 

interpreting section 129(v) to require a 

creditor or assignee to provide adequate 

notice of the choices available to the 

consumer. Specifically, comment 31(h)– 

1 notes that the initial notice sent to the 

consumer should be in writing, should 

offer the consumer the proposed 

adjustments, and should state the time 

within which the consumer must 

choose an adjustment. Comment 31(h)– 

1 further explains that the Bureau 

regards 60 days as generally sufficient to 

provide adequate notice of the 

consumer’s right to make an election. 

Finally, the Bureau is clarifying in 

§ 1026.31(h) and its accompanying 

commentary certain statutory 

terminology for consistency with 

existing Regulation Z terminology, and 

to reflect the Dodd-Frank Act’s 

expansion of loans potentially subject to 

HOEPA coverage to include open-end 

credit plans. Thus, § 1026.31(h) and its 

accompanying commentary use the 

terms ‘‘consummation or account 

opening’’ and ‘‘loan or credit plan’’ to 

clarify that § 1026.31(h) applies to both 

closed-end and open-end credit. 

Section 1026.32 Requirements for 

High-Cost Mortgages 

32(a) Coverage 

32(a)(1) 

Prior to the Dodd-Frank Act, the 

statutory protections for high cost 

mortgages generally were limited to 

closed-end refinancings and homeequity mortgage loans with APRs or 

points and fees that exceeded the 

thresholds prescribed by TILA section 

103(aa), as implemented by existing 

§ 1026.32(a)(1). The Dodd-Frank Act 

expanded HOEPA’s coverage by 

providing in TILA section 103(bb)(1) 

that the term ‘‘high-cost mortgage’’ 

means any consumer credit transaction 

that is secured by the consumer’s 

principal dwelling, other than a reverse 

mortgage transaction, if any of the 

prescribed high-cost mortgage 

thresholds are met. As discussed in the 

section-by-section analysis of 

§ 1026.32(a)(1)(i) through (iii), below, 

the Dodd-Frank Act adjusted HOEPA’s 

existing APR and points and fees 

thresholds and added a third HOEPA 

coverage test based on a transaction’s 

prepayment penalties. 

The proposal would have revised 

§ 1026.32(a)(1) to implement TILA’s 

amended definition of ‘‘high-cost 

mortgage’’ by removing the coverage 

exclusions for residential mortgage 

transactions (i.e., purchase-money 

mortgage loans) and HELOCs while 

retaining the exclusion of reverse 

mortgage transactions. Specifically, the 

proposal would have defined ‘‘high-cost 

mortgage’’ in § 1026.32(a)(1) to mean 

any consumer credit transaction, other 

than a reverse mortgage transaction as 

defined in § 1026.33(a), that is secured 

by the consumer’s principal dwelling 

and in which any one of the high-cost 

APR, points and fees, or prepayment 

penalty coverage tests is met. Proposed 

comment 32(a)(1)–1 would have 

clarified that a high-cost mortgage 

includes both a closed- and open-end 

credit transaction secured by the 

consumer’s principal dwelling. The 

comment also would have clarified that, 

for purposes of determining coverage 

under § 1026.32, an open-end credit 

transaction is limited to account 

opening; an individual advance of funds 

or a draw on the credit line subsequent 

to account opening does not constitute 

a ‘‘transaction’’ for this purpose. As 

noted in the proposal, the Bureau 

believes that such a clarification is 

needed to permit creditors to determine 

whether a HELOC is a high-cost 

mortgage once (i.e., at account opening), 

rather than having to evaluate the 

HELOC for high-cost mortgage coverage 

each time the consumer draws on the 

credit line. 

The Bureau received numerous 

comments concerning the proposed 

expanded scope of loan types covered 

by HOEPA. The Bureau addresses those 

coverage-related comments in the 

section-by-section analysis of 

§ 1026.32(a)(2) below. One commenter 

expressed an overall concern that the 

Bureau is not coordinating its 2013 

HOEPA Final Rule with the 

implementation of other title XIV 

provisions, and suggested that HOEPA’s 

protections were not necessary given 

these other provisions. As discussed in 

Part III of this preamble, the Bureau is 

carefully coordinating its rules. The 

Bureau notes that the Dodd-Frank Act’s 

amendments to HOEPA are selfeffectuating in the absence of 

regulations. 

The Bureau received no comments 

concerning other aspects of proposed 

§ 1026.32(a)(1) or comment 32(a)(1)–1 

and adopts them generally as proposed, 

except that the Bureau retains for 

organizational purposes the existing 

structure of § 1026.32(a)(1), including its 

cross-reference to § 1026.32(a)(2) for 

exemptions from HOEPA coverage. 

32(a)(1)(i) 

Prior to the Dodd-Frank Act, TILA 

section 103(aa)(1)(A) provided that a 

transaction was covered by HOEPA if 

the APR at consummation of the 

transaction would exceed by more than 

10 percentage points the yield on 

Treasury securities having comparable 

periods of maturity (measured as of the 

fifteenth day of the month immediately 

preceding the month in which the 

application for the extension of credit 

was received by the creditor). Pursuant 

to its authority under TILA section 

103(aa)(2) (re-designated by the DoddFrank Act as section 103(bb)(2)), the 

Board in 2001 lowered the APR 

threshold for first-lien transactions to 8 

percentage points above the yield on 

comparable Treasury securities and 

retained the higher APR threshold of 10 

percentage points above the yield on 

comparable Treasury securities for 

subordinate-lien transactions, thus 

creating a two-tiered APR test for 

HOEPA coverage.38 The APR thresholds 

are implemented in existing 

§ 1026.32(a)(1)(i). 

TILA section 103(bb)(1)(A)(i), as 

added by section 1431 of the DoddFrank Act, essentially codifies the twotiered APR test for HOEPA coverage 

adopted by the Board in 2001, with 

certain changes. Specifically, TILA 

section 103(bb)(1)(A)(i): 


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6872 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

39See 77 FR 49091, 49100–03 (Aug. 15, 2012) 

(discussing the transaction coverage rate). 

40See 77 FR 54843 (Sept. 6, 2012) (discussing the 

TILA–RESPA Integration Proposal); 77 FR 54844 

(Sept. 6, 2012) (discussing the HOEPA Proposal). 

41See TILA sections 129C(a)(6)(D)(ii) and 

129C(c)(1)(B)(ii) (ability-to-repay and qualified 

mortgage requirements), 129D(b)(3) (escrow 

requirements), and 129H(f)(2) (appraisal 

requirements). 

42TILA section 128(a)(3) and (4) requires 

disclosure of the finance charge and the finance 

charge expressed as an ‘‘annual percentage rate,’’ 

for which the interest rate (along with other items 

in the finance charge) is a factor in the calculation. 

See § 1026.18(d) and (e). TILA section 127A(a), in 

contrast, provides that HELOC creditors must 

disclose the annual percentage rate along with a 

statement that the rate does not include costs other 

than interest. Thus, pursuant to §§ 1026.14(b) and 

.40, the APR to be disclosed for a HELOC—as for 

other types of open-end credit—is the periodic rate 

multiplied by the number of periods in a year under 

§ 1026.40. 

43See, e.g., 54 FR 24670 (June 9, 1989) (adopting 

HELOC disclosure rules to implement the Home 

Equity Loan Consumer Protection Act of 1988); 

§ 1026.14(b). 

• Changes the APR benchmark from 

the yield on comparable Treasury 

securities to the ‘‘average prime offer 

rate,’’ as defined in TILA section 

129C(b)(2)(B); 

• Revises the percentage-point 

thresholds for first- and subordinate-lien 

transactions; and 

• Creates a separate, higher 

percentage-point threshold for smallerdollar-amount, first-lien transactions 

secured by personal property. 

These changes, as implemented by the 

final rule, are discussed below, 

following a discussion of (1) the 

Bureau’s proposal to use the 

‘‘transaction coverage rate’’ as an 

alternative to the APR for purposes of 

determining HOEPA coverage under 

§ 1026.32(a)(1)(i), and (2) general 

comments concerning the use of the 

APR for testing for HOEPA coverage. 

Annual Percentage Rate versus 

Transaction Coverage Rate 

The Bureau proposed two alternatives 

in proposed § 1026.32(a)(1)(i) to 

implement the revised APR thresholds 

for HOEPA coverage under TILA section 

103(bb)(1)(A)(i). Alternative 1 would 

have used the APR as the metric to be 

compared to the average prime offer rate 

for determining HOEPA coverage for 

both closed- and open-end credit 

transactions. Alternative 2 would have 

been substantially identical to 

Alternative 1, but it would have 

substituted a ‘‘transaction coverage rate’’ 

for the APR as the metric to be 

compared to the average prime offer rate 

for closed-end credit transactions. The 

Bureau proposed Alternative 2 in 

connection with the Bureau’s 2012 

TILA–RESPA Integration Proposal, 

which would have broadened the 

general definition of finance charge for 

closed-end transactions under 

Regulation Z.39 In its HOEPA proposal, 

the Bureau solicited comment on 

whether to adopt Alternative 1 or 

Alternative 2 for closed-end 

transactions. The Bureau also noted that 

it would not adopt Alternative 2 if it did 

not change the definition of finance 

charge in connection with the 2012 

TILA–RESPA Integration Proposal. 

Proposed comment 32(a)(1)(i)–1 would 

have clarified how to determine the 

‘‘transaction coverage rate’’ for closedend transactions if Alternative 2 were 

adopted. 

As discussed in part II above, in 

August 2012, the Bureau extended the 

notice-and-comment period for 

comments relating to the proposed 

adoption of the more inclusive finance 

charge, including related aspects of the 

HOEPA proposal such as the transaction 

coverage rate. At that time, the Bureau 

noted that it would not be finalizing the 

more inclusive finance charge in 

January 2013.40 The Bureau therefore 

does not address in this rulemaking the 

numerous public comments that it 

received concerning the proposed 

alternatives for the APR coverage test. 

The Bureau instead will address such 

comments in connection with its 

finalization of the 2012 TILA–RESPA 

Integration Proposal, thus resolving that 

issue together with the Bureau’s 

determination whether to adopt the 

more inclusive finance charge. The final 

rule thus adopts Alternative 1 (i.e., use 

of APR) in § 1026.32(a)(1)(i). 

Use of the Annual Percentage Rate for 

HOEPA Coverage 

The Bureau received several 

comments generally discussing the use 

of the APR for determining HOEPA 

coverage. One State housing finance 

authority commenter suggested that the 

Bureau replace the APR-based coverage 

test for both closed- and open-end 

transactions with a simpler, interest 

rate-based test that would be easier to 

explain to consumers and would 

eliminate regional variations due to 

closing charges. Given that TILA clearly 

contemplates an APR-based coverage 

test for determining the applicability of 

HOEPA protections, as well as other 

types of special protections, the Bureau 

declines to adopt an interest rate-based 

test for high-cost mortgages in this 

rulemaking.41

The Bureau also declines to adopt in 

the final rule, as suggested by one 

consumer advocacy commenter, a 

requirement that non-interest finance 

charge items be included in the APR 

calculation for HELOCs for purposes of 

determining HOEPA coverage. As noted, 

the Dodd-Frank Act expanded HOEPA 

coverage to HELOCs in TILA section 

103(bb)(1)(A). In doing so, Congress did 

not set forth any special standards for 

applying the APR coverage test to openend credit. Under the HOEPA proposal, 

HELOC creditors thus would have 

tested HELOCs for HOEPA coverage by 

using the standard APR that creditors 

calculate for HELOC disclosures. 

Specifically, unlike for closed-end 

transactions, where the APR reflects 

costs other than interest, HELOC APRs 

include only interest.42 One consumer 

group commenter urged the Bureau to 

make the APR coverage test more 

consistent between closed- and openend credit by adopting a more inclusive 

APR calculation for HELOCs. The 

commenter argued that, under the 

Bureau’s proposal, a creditor could 

impose astronomical closing costs on a 

HELOC without meeting the APR 

coverage test, because such charges are 

not included in the APR calculation for 

HELOCs. The commenter expressed 

concern that the difference in the APR 

calculation for HELOCs versus closedend transactions will unduly encourage 

creditors to steer consumers toward 

HELOCs, and particularly to HELOCs 

with excessively high closing costs. 

The Bureau acknowledges that 

Regulation Z requires a different 

calculation of APR for closed-end 

transactions (interest rate plus other 

charges) than for HELOCs (interest rate 

only) for disclosure purposes. Using 

these existing APRs for HOEPA 

coverage necessarily means that noninterest charges will be reflected in the 

APR for closed-end, but not for openend, transactions. The Bureau declines 

at this time, however, to adopt a 

different APR for HELOCs. First, the 

Bureau notes that creditors have been 

required to use the (interest rate) APR 

for HELOC disclosures for more than 

twenty years, and this APR is consistent 

with the APR used for other open-end 

credit.43 Moreover, notwithstanding the 

commenter’s concern, the Bureau 

believes that the HOEPA points and fees 

coverage test should constrain HELOC 

creditors from imposing excessively 

high closing costs. As discussed in the 

section-by-section analysis of 

§ 1026.32(b)(2) below, the final rule 

adopts a points and fees definition that 

is the same in all material respects for 

closed- and open-end credit. Finally, the 

Bureau believes that introducing a new 

APR calculation for HELOC creditors 

solely for determining HOEPA coverage 

could impose additional compliance 

costs that would need to be carefully 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6873 

44 In this regard, the Bureau notes that it has 

inherited from the Board a proposal to amend the 

requirements for HELOC disclosures under current 

§ 1026.40 (§ 226.5b in the Board’s proposal). See 74 

FR 43428 (Aug. 26, 2009). The Bureau anticipates 

finalizing the Board’s proposal in the future. 

45See 73 FR 44522, 44534–36 (July 30, 2008). 

46Existing § 1026.35 contains repayment ability 

requirements and other restrictions for higherpriced mortgage loans. The Bureau’s 2013 ATR 

Final Rule is removing those requirements in 

connection with its implementation in § 1026.43 of 

the Dodd-Frank Act’s ability-to-repay and qualified 

mortgage provisions. However, § 1026.35 is being 

retained for escrow- and appraisal-related 

requirements for higher-priced mortgage loans, 

which are being implemented in the Bureau’s 2013 

Escrows Final Rule and the 2013 interagency 

appraisals rulemaking, respectively. 

47 In proposing to cross-reference Regulation Z’s 

existing guidance for average prime offer rates 

relating to higher-priced mortgage loans, the 

HOEPA proposal noted that Regulation Z’s existing 

comments 35(a)(2)–1 through –4 likely would be 

renumbered as comments 35(a)(2)(ii)–1 through –4 

for organizational purposes if and when the Bureau 

adopted the transaction coverage rate in § 1026.35 

in connection with a more inclusive finance charge 

definition. As discussed, the Bureau has postponed 

action with respect to the proposed more inclusive 

finance charge. However, as described in 

connection with the Bureau’s 2013 Escrows Final 

Rule, the Bureau is renumbering existing 

commentary to § 1026.35 concerning the average 

prime offer rate for other reasons. The crossreferences in commentary to § 1026.32(a)(2) in this 

final rule reflect the numbering that is being 

adopted in the 2013 Escrows Final Rule, rather than 

the numbering of existing commentary to section 

1026.35. 

48The PMMS contains pricing data for four types 

of closed-end transactions: one-year ARM, 5⁄1 ARM, 

30-year fixed-rate, and 15-year fixed-rate. The 

pricing data for those transactions is used to 

estimate average prime offer rates for the other 

fixed- and variable-rate loan products listed in the 

internet table. 

49The referenced guidance is available at http: 

//www.ffiec.gov/ratespread. The first factor to 

consider in determining a ‘‘comparable transaction’’ 

is whether the transaction under consideration is 

fixed-rate or variable-rate. (One table contains 

average prime offer rates for fixed-rate transactions, 

and one table contains average prime offer rates for 

variable-rate transactions.) The other information 

necessary for determining the most comparable 

transaction is (1) the date that the interest rate for 

the transaction was set; and (2) the term of the 

transaction. In the case of a fixed-rate transaction, 

the term is the transaction’s term to maturity. In the 

case of a variable-rate transaction, the term is the 

initial fixed-rate period, rounded to the nearest 

number of whole years (or, if the initial fixed-rate 

period is less than one year, the term is one year). 

50As already noted, the methodology for deriving 

the average prime offer rate is based on Freddie 

Mac’s Primary Mortgage Market Survey®, which 

does not provide any data on HELOCs. More 

detailed discussions of the average prime offer rate 

is provided in the Board’s 2008 HOEPA Final Rule 

and other publicly-available sources. See 73 FR 

44522, 44533–36 (July 30, 2008); http:// 

www.ffiec.gov/ratespread/default.aspx. 

51Section 1026.32(a)(3) as adopted in the final 

rule was proposed as § 1026.32(a)(2). 

analyzed. Thus, the Bureau believes that 

comments concerning the disparity 

between the APR for closed- and openend credit transactions are better 

considered as part of a broader 

reevaluation of the HELOC provisions of 

Regulation Z, rather than in the context 

of this rulemaking to implement section 

1431 of the Dodd-Frank Act.44

Average Prime Offer Rate as Benchmark 

As noted above, the Dodd-Frank Act 

amended HOEPA by changing the 

benchmark against which the APR must 

be measured to determine HOEPA 

coverage from the yield on comparable 

Treasury securities to the average prime 

offer rate, defined in TILA section 

129C(b)(2)(B) to mean the average prime 

offer rate for a comparable transaction as 

of the date on which the interest rate for 

the transaction is set, as published by 

the Bureau. TILA section 129C(b)(2)(B) 

essentially codifies the definition of 

average prime offer rate adopted by the 

Board in its 2008 HOEPA Final Rule 

and implemented in § 1026.35.45

Section 1026.35 prohibits certain acts 

or practices in connection with higherpriced mortgage loans. Higher-priced 

mortgage loans, in contrast to high-cost 

mortgages, are closed-end credit 

transactions with APRs that, in general, 

exceed the average prime offer rate for 

a comparable transaction as of the date 

the interest rate for the transaction is set 

by more than 1.5 or 3.5 percentage 

points for first- and subordinate-lien 

transactions, respectively.46

Section 1026.35(a)(2) provides that 

the average prime offer rate means an 

APR that is derived from the average 

interest rates, points and ‘‘other loan 

pricing terms’’ currently offered to 

consumers by a representative sample of 

creditors for fixed- and variable-rate 

closed-end credit transactions with lowrisk pricing characteristics. Section 

1026.35(a)(2) also indicates that a table 

with the average prime offer rates for a 

broad range of types of closed-end credit 

transactions is published on the internet 

and updated at least weekly. Existing 

comments 35(a)(2)–1 through –4 

provide further details concerning the 

calculation and use of the average prime 

offer rate.47 In relevant part: 

• Comment 35(a)(2)–1 states that data 

reported in the Freddie Mac Primary 

Mortgage Market Survey® (PMMS) is 

used to calculate the average prime offer 

rates reported in the internet table.48 For 

variable-rate transactions, the ‘‘other 

loan pricing terms’’ (i.e., other than 

interest rates and points) that are used 

to calculate the average prime offer rates 

include commonly used indices, 

margins, and initial fixed-rate periods. 

• Comment 35(a)(2)–2 notes that the 

published average prime offer rate tables 

indicate how to identify a ‘‘comparable 

transaction’’ for purposes of calculating 

the APR to average prime offer rate 

spread that is required to determine 

higher-priced mortgage loan coverage 

under § 1026.35.49

• Comment 35(a)(2)–3 provides that, 

for purposes of determining higherpriced mortgage loan coverage under 

§ 1026.35, a transaction’s APR is 

compared to the average prime offer rate 

as of the date the transaction’s interest 

rate is set (or ‘‘locked’’) before 

consummation. The comment specifies 

that if a creditor sets the interest rate 

initially and then sets it at a different 

level before consummation, the creditor 

should use the last date the interest rate 

is set before consummation. 

• Comment 35(a)(2)–4 restates that 

the average prime offer rate tables, along 

with the methodology for calculating 

average prime offer rates, are published 

on the internet. 

Proposed § 1026.32(a)(1)(i) would 

have implemented the change in the 

benchmark for HOEPA’s APR coverage 

test from the yield on comparable 

Treasury securities to the average prime 

offer rate. Proposed comment 

32(a)(1)(i)–2 would have clarified that 

creditors should determine the 

applicable average prime offer rate for 

closed-end transactions for purposes of 

§ 1026.32(a)(1)(i) pursuant to the same 

guidance set forth in § 1026.35(a)(2) and 

commentary thereto. Proposed comment 

32(a)(1)(i)–3 would have provided 

additional guidance for using the 

methodology set forth in § 1026.35(a)(2) 

to determine the applicable average 

prime offer rate for HELOCs. The 

Bureau believes that additional 

guidance for HELOCs is warranted 

because, as discussed in the preamble to 

the proposal, the average prime offer 

rate currently is calculated only for 

closed-end transactions. The Bureau is 

not aware of any publicly available and 

authoritative surveys of pricing data for 

HELOCs from which to calculate a 

separate average prime offer rate for 

open-end credit.50 Proposed comment 

32(a)(1)(i)–3 therefore would have 

instructed creditors to test HELOCs for 

HOEPA coverage by comparing the 

HELOC’s APR (calculated in accordance 

with proposed § 1026.32(a)(2) 51) to the 

average prime offer rate for ‘‘the most 

closely comparable closed-end loan’’ 

based on applicable loan characteristics 

and other loan pricing terms. Proposed 

comment 32(a)(1)(i)–3 would have 

provided illustrative examples to 

facilitate compliance. 

The proposal explained why the 

Bureau believes that it is reasonable to 

require HELOC creditors to use the 

average prime offer rate for the most 

closely-comparable closed-end loan 

when determining HELOC coverage. 

The Bureau noted its belief that market 


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6874 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

52Pursuant to § 1026.40(f)(1), a variable-rate 

HELOC can vary only in accordance with a 

publicly-available index that is outside of the 

creditor’s control, such as the Wall Street Journal 

prime rate. 

53As noted below, however, several industry 

commenters objected to using the same average 

prime offer rate for closed- and open-end credit 

transactions. 

54 In light of the adoption of Alternative 1 rather 

than Alternative 2, as discussed above, there is no 

need at present to finalize proposed comment 

32(a)(1)(i)–1, which would have provided guidance 

concerning the transaction coverage rate. 

Consequently, proposed comments 32(a)(1)(i)–2 and 

–3 concerning the average prime offer rate are 

finalized (with the additional clarifying changes 

noted herein) as comments 32(a)(1)(i)–1 and –2, 

respectively. 

55This cross-reference is to a new comment that 

the Bureau is finalizing in its 2013 Escrows Final 

Rule. The new comment clarifies that ‘‘average 

prime offer rate’’ as used in § 1026.35 has the same 

meaning as in Regulation C, 12 CFR part 1003, and 

it notes that additional guidance concerning the 

average prime offer rate is located both in the 

official commentary to Regulation C as well as on 

the FFIEC’s Web site. 

rates for HELOCs generally are based on 

a prime lending rate, such as the average 

prime rate as published in the Wall 

Street Journal.52 When the Bureau 

compared the prime rate published by 

the Board over a 12-year period to 

average prime offer rates for annuallyadjusting, closed-end credit transactions 

(i.e., one-year adjustable rate mortgages 

(ARMs)) for the same period, the Bureau 

found that the rates generally were 

comparable. Thus, the Bureau believes 

that using the average prime offer rate 

for the most closely-comparable closedend loan is a reasonable benchmark for 

HOEPA’s APR test for HELOCs. The 

Bureau further believes that requiring 

HELOC creditors to use this benchmark 

will facilitate compliance because 

HELOC creditors may use existing ratespread calculators on the FFIEC’s Web 

site to determine HOEPA coverage. 

Finally, the Bureau believes that 

requiring HELOC creditors to use the 

closed-end, average prime offer rate 

tables is appropriate under TILA section 

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

comparison of a mortgage transaction’s 

APR to the average prime offer rate 

without distinguishing between closedand open-end credit. The Bureau 

nevertheless solicited data or comment 

on all aspects of determining the 

average prime offer rate for HELOCs. In 

particular, the Bureau solicited 

comment on whether a benchmark other 

than the average prime offer rate for the 

most closely-comparable closed-end 

loan would better meet the objectives of 

HOEPA’s APR coverage test for HELOCs 

and facilitate compliance. 

Commenters generally did not object 

to changing the benchmark for HOEPA’s 

APR coverage test from the yield on 

Treasury securities to the average prime 

offer rate.53 Indeed, several industry 

commenters specifically supported the 

change, noting that the average prime 

offer rate tracks market prices better 

than the yield on Treasury securities. 

One such industry commenter noted 

that, under recent market conditions, 

the maximum APR for HOEPA coverage 

for a first-lien, 10-year, fixed-rate 

mortgage would be higher under the 

HOEPA Proposal (i.e., 6.5 percentage 

points over the average prime offer rate) 

than under existing § 1026.32(a)(1)(i) 

(i.e., eight percentage points over the 

yield on comparable Treasuries). 

Specifically, the commenter stated that, 

under the HOEPA Proposal, the 

maximum APR for HOEPA coverage for 

this transaction would be 10.42 percent, 

whereas the maximum APR under 

existing § 1026.32(a)(1)(i) would be 9.70 

percent. 

Another industry commenter 

observed that using the average prime 

offer rate as the benchmark will not be 

difficult because the average prime offer 

rate has been used for some time as the 

benchmark for determining coverage 

under Regulation Z’s higher-priced 

mortgage loan rules in existing 

§ 1026.35. The commenter, however, 

suggested that the Bureau work with the 

FFIEC to ensure that the rate-spread 

calculator currently employed for 

purposes of determining higher-priced 

mortgage loan coverage would be 

adjusted and usable for purposes of 

determining HOEPA coverage. 

Two commenters urged the Bureau to 

harmonize the methodologies for 

calculating the average prime offer rate 

and the APR for adjustable-rate 

mortgages under § 1026.32(a)(3). These 

commenters stated that, for example, if 

the APR for an adjustable-rate 

transaction for purposes of determining 

HOEPA coverage is determined under 

§ 1026.32(a)(3) based on the higher of 

the initial interest rate or the fullyindexed rate, then the applicable 

average prime offer rate should be 

calculated in the same way to ensure 

that there is a more accurate comparison 

for purposes of the HOEPA coverage 

calculation. 

Several industry commenters, while 

not objecting to the use of an average 

prime offer rate benchmark for HELOCs, 

urged the Bureau to specify in the final 

rule (or work to develop) a separate 

methodology for calculating the average 

prime offer rate for open-end credit 

transactions. The commenters stated 

that it is not sensible to apply the 

average prime offer rate for closed-end 

credit transactions to HELOCs, because 

closed- and open-end mortgage products 

have different risks, pricing, and loan 

characteristics. The commenters did not 

suggest an alternative benchmark or any 

alternatives for calculating an average 

prime offer rate for HELOCs. One 

commenter suggested, however, that if 

the Bureau adopted ‘‘the most closely 

comparable closed-end loan’’ standard 

as proposed, then the Bureau should 

specify how a creditor that originates a 

HELOC that could be comparable to 

multiple, different closed-end loans 

should determine which closed-end 

loan is the most closely comparable. 

Finally, one commenter requested 

guidance concerning the comparable 

maturity date for an ‘‘evergreen’’ HELOC 

(i.e., a HELOC with no scheduled 

maturity date) for which the interest rate 

may be fixed or adjustable. 

The Bureau is adopting the change in 

the APR benchmark from the yield on 

Treasury securities to the average prime 

offer rate as set forth in proposed 

§ 1026.32(a)(1)(i). The Bureau is 

finalizing proposed comments 

32(a)(1)(i)–2 and –3 as comments 

32(a)(1)(i)–1 and –2, respectively, for 

organizational purposes.54 The Bureau 

makes certain other non-substantive 

changes to the proposed commentary for 

purposes of clarification. Specifically, 

the comments are reorganized, a crossreference to comment 35(a)(2)–3 is 

added to comment 32(a)(1)(i)–2,55 and 

comment 32(a)(1)(i)–3 is added to cross 

reference guidance in comment 

35(a)(1)–2 on determining the date as of 

which creditors should compare a 

transaction’s APR to the average prime 

offer rate. Finally, as discussed further 

below, additional guidance concerning 

how a HELOC creditor should 

determine the most closely comparable 

closed-end mortgage loan is added to 

comment 32(a)(1)(i)–2. 

In response to commenters’ 

suggestions that the FFIEC rate-spread 

calculator be adapted for use in 

determining HOEPA coverage, the 

Bureau does not anticipate difficulties 

in using the calculator for this purpose. 

The calculator exists on the FFIEC Web 

site primarily for use in determining the 

‘‘rate spread’’ that must be reported, if 

any, under HMDA and Regulation C, 12 

CFR part 1003. Specifically Regulation 

C § 1003.4(a)(12) requires HMDA 

reporters to report the spread between a 

loan’s APR and the applicable average 

prime offer rate (determined identically 

to the determination for higher-priced 

mortgage loans under § 1026.35) if that 

spread exceeds 1.5 percentage points for 

a first-lien loan or 3.5 percentage points 

for a subordinate-lien loan. Those 

spreads match the spreads that 

historically have applied for higherpriced mortgage loan coverage 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6875 

56The higher-priced mortgage loan thresholds in 

§ 1026.35(a)(1) are being revised through a separate 

rulemaking to incorporate a separate, higher 

threshold of 2.5 percentage points above the average 

prime offer rate for first-lien ‘‘jumbo’’ transactions 

pursuant to Dodd-Frank Act section 1471. 

57Specifically, such a difference would occur 

only if an introductory rate lasted for an 

extraordinarily long portion of a transaction’s 

overall term, or if the introductory rate differed very 

substantially from the fully-indexed rate. See 

comment 17(c)(1)–10.i. 

58 In the case of a variable-rate evergreen HELOC 

(as for all other closed- and open-end, variable-rate 

mortgage products) creditors should look to the 

length of any initial, fixed-rate period. 59The published average prime offer rate tables 

contain average rates for fixed-rate loans with terms 

of up to 50 years. Historically, however, the average 

rates for loans with fixed-rate terms of 30 years have 

been the same as the average rates for loans with 

fixed-rate terms of longer than 30 years. 

60Commenters generally did not distinguish 

between the revised APR percentage-point 

thresholds for first- and subordinate-lien 

transactions. For purposes of this section-by-section 

analysis, however, the two thresholds are discussed 

separately. 

determinations under § 1026.35(a)(2), 

allowing creditors to use the calculator 

to determine whether a transaction is a 

higher-priced mortgage loan.56 Creditors 

may accomplish this by noting whether 

the calculator yields a rate spread for 

reporting under HMDA (which means 

the transaction is a higher-priced 

mortgage loan) or ‘‘N/A’’ for HMDA 

reporting purposes (which means the 

transaction is not a higher-priced 

mortgage loan). From there, it is a 

simple step further to note whether any 

rate spread the calculator yields for 

HMDA reporting purposes exceeds 6.5 

or 8.5 percentage points over the 

average prime offer rate, as applicable, 

to know whether the transaction is a 

high-cost mortgage under 

§ 1026.32(a)(1)(i). 

The Bureau acknowledges, as noted 

by a commenter, that the APR 

calculation required by § 1026.32(a)(3) 

for determining HOEPA coverage for a 

variable-rate transaction generally 

requires a creditor to use the fullyindexed rate, whereas blended APRs 

(i.e., APRs that take low introductory 

rates into consideration) are used to 

calculate average prime offer rates. The 

Bureau nevertheless finalizes the rule as 

proposed. The Bureau believes that 

APRs (and thus average prime offer 

rates) calculated pursuant to the 

blended method are unlikely in most 

cases to be significantly lower than 

APRs calculated using the fully-indexed 

rate.57 Moreover, the methodology for 

calculating the average prime offer rate 

was well-established when Congress 

passed the Dodd-Frank Act and 

affirmatively (1) incorporated the 

average prime offer rate as the 

benchmark for the APR trigger; and (2) 

required the use of the fully-indexed 

rate for determining the APR for 

variable-rate transactions. 

Finally, the Bureau does not at this 

time adopt a separate methodology for 

determining the average prime offer rate 

for HELOCs. Based on available data, 

the Bureau continues to believe that 

using the average prime offer rate for the 

most closely-comparable, closed-end 

credit transaction is a reasonable 

benchmark for HOEPA’s APR test for 

HELOCs. The fact that HELOCs are tied 

to a prime rate which, over a 12-year 

period, was generally comparable to the 

average prime offer rate for one-year 

ARMs informs the Bureau’s conclusion. 

In addition, as discussed above, the 

average prime offer rate tables are 

published with a rate-spread calculator 

that determines the average prime offer 

rate for the most comparable closed-end 

credit transaction and automatically 

compares it to a transaction’s APR and 

lien status to determine the transaction’s 

APR’s spread over the applicable 

average prime offer rate. This calculator 

can easily be used by creditors 

originating HELOCs. 

Specifically, as described in further 

detail in comment 32(a)(1)(i)–2, a 

HELOC creditor should use the 

published rate-spread calculator to 

identify the average prime offer rate for 

the most closely-comparable closed-end 

credit transaction by inputting the same 

terms that would be required to 

determine the most comparable 

transaction for any closed-end 

origination. These terms are: (1) 

Whether the HELOC is fixed- or 

variable-rate; (2) if the HELOC is fixedrate, the term to maturity; (3) if the 

HELOC is variable-rate, the duration of 

any initial, fixed-rate period; and (4) the 

date that the interest rate for the 

transaction is set. Finally, comment 

32(a)(1)(i)–2 clarifies that a creditor 

originating a fixed-rate, evergreen 

HELOC should enter a term of 30 

years.58 The Bureau believes that 30 

years is a reasonable proxy for the term 

of an evergreen HELOC given that 30 

years is the longest term to maturity for 

conventional mortgage loans.59

32(a)(1)(i)(A) 

As added by the Dodd-Frank Act, 

TILA section 103(bb)(1)(A)(i)(I) states 

that a consumer credit transaction 

secured by a first mortgage on a 

consumer’s principal dwelling is a highcost mortgage if the APR at 

consummation of the transaction will 

exceed the average prime offer rate for 

a comparable transaction by more than 

6.5 percentage points (or 8.5 percentage 

points, if the dwelling is personal 

property and the transaction is for less 

than $50,000). Thus, under TILA section 

103(bb)(1)(A)(i)(I), the APR percentagepoint threshold for HOEPA coverage for 

most first-lien transactions (i.e., all firstlien, real property-secured transactions, 

as well as first-lien, personal propertysecured transactions for $50,000 or 

more) is 6.5 percentage points over the 

average prime offer rate. 

Proposed § 1026.32(a)(1)(i)(A) (under 

either proposed Alternative 1 or 

Alternative 2) would have implemented 

the statutory 6.5 percentage-point APR 

threshold by generally mirroring the 

statutory language but also providing for 

certain non-substantive changes for 

clarity, organization, or consistency 

with existing Regulation Z and the 

Bureau’s other mortgage rulemakings as 

mandated by the Dodd-Frank Act. For 

example, proposed § 1026.32(a)(1)(i)(A) 

would have referred to a ‘‘first-lien 

transaction’’ instead of a ‘‘first 

mortgage.’’ 

As noted in part IV above, TILA 

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

the Bureau with authority to adjust 

HOEPA’s APR percentage-point 

thresholds if the Bureau determines that 

the increase or decrease is consistent 

with the statutory protections for highcost mortgages and is warranted by the 

need for credit. The Bureau did not 

propose any adjustments to the 6.5 

percentage-point APR threshold 

prescribed by the Dodd-Frank Act for 

either closed- or open-end transactions. 

However, the Bureau solicited comment 

and data on whether any such 

adjustment would better protect 

consumers from the risks associated 

with high-cost mortgages or would be 

warranted by the need for credit, 

particularly for HELOCs. 

General. Consumer groups generally 

did not comment on the revised APR 

percentage-point threshold in proposed 

§ 1026.32(a)(1)(i)(A). One consumer 

group commenter, however, advocated 

that the Bureau adopt a threshold of 3.5 

percentage points above the average 

prime offer rate. The commenter noted 

that, in the current rate environment, 

most first-lien transactions would not be 

covered under the revised APR test until 

their APRs reached approximately 10 

percent. This commenter stated that the 

threshold as proposed would allow 

unreasonably high rates to be imposed 

on vulnerable borrowers. 

Industry commenters and one State 

housing finance authority generally 

expressed concern that the revised APR 

percentage-point threshold in proposed 

§ 1026.32(a)(1)(i)(A) would inhibit 

access to credit and suggested various 

adjustments.60 For example, several 


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61See also the Board’s 2008 HOEPA Final Rule, 

73 FR 44522, 44534–36 (July 30, 2008) (adopting 

the average prime offer rate rather than the yield on 

Treasury securities for the higher-priced mortgage 

loan coverage test primarily because (1) the spread 

between Treasuries and mortgage rates can be 

volatile, even over a relatively short time frame, 

such that loans with the same risk characteristics 

but originated at different times may not be treated 

the same for coverage purposes and (2) matching a 

mortgage loan to a comparable Treasury security 

based on the length of the loan’s contract maturity 

creates distortions because few loans reach their 

full maturity). 

62Manufactured housing industry commenters 

also suggested various exemptions for 

manufactured home loans from HOEPA. Those 

comments are discussed in detail below in the 

section-by-section analysis of § 1026.32(a)(2). 

63See Selected Characteristics of New 

Manufactured Homes Placed by Region, 2011, at 

http://www.census.gov/construction/mhs/pdf/ 

char11.pdf. 

industry commenters urged the Bureau 

either to increase the threshold or to 

leave it at its existing (pre-Dodd-Frank 

Act) level. These commenters generally 

asserted that the existing threshold has 

worked well to date, that the Bureau has 

provided no empirical evidence 

demonstrating that the threshold needs 

to be adjusted, and that the enhanced 

HOEPA protections that the Bureau is 

finalizing in this rulemaking obviate any 

need to reduce the threshold. One 

industry commenter argued that 

increased coverage under the revised 

HOEPA coverage tests generally would 

interfere with the goal of the Bureau’s 

2012 TILA–RESPA Proposal by 

eliminating a consumer’s ability to shop 

for and obtain a mortgage near HOEPA’s 

amended thresholds. 

The Bureau adopts the 6.5 percentagepoint APR threshold for most first-lien 

transactions in § 1026.32(a)(1)(i)(A) as 

proposed. The Bureau has authority 

under TILA section 103(bb)(2)(A) to 

increase or decrease this APR threshold 

from the level set forth in the statute to 

a level between 6 and 10 percentage 

points above the average prime offer 

rate. However, prior to making such an 

adjustment, the Bureau must find that 

an increase or decrease from the 

statutory level is consistent with 

consumer protection and warranted by 

the need for credit. As noted, both 

consumer group and industry 

commenters suggested various 

adjustments to the threshold or 

suggested that the existing threshold 

should not be adjusted in light of 

protections. None of these commenters, 

however, provided data or other specific 

information to indicate how much of an 

adjustment from the level prescribed by 

Congress is warranted by a need for 

access to credit or to protect consumers 

from abusive lending. 

As to the consumer group comment 

suggesting that the Bureau decrease the 

APR threshold by several percentage 

points, the Bureau notes that, under 

TILA section 103(bb)(2)(B)(i), it does not 

have authority to reduce the threshold 

below 6 percentage points above the 

average prime offer rate. Even for 

adjustments that would lower the APR 

threshold within the permitted range 

(i.e., from the statutory 6.5 percentage 

points to an adjusted 6 percentage 

points above the average prime offer 

rate), the Bureau does not believe that 

it has sufficient information at this time 

to justify such a departure based on the 

need to protect consumers from abusive 

lending. 

As to industry commenters’ general 

argument that the Bureau should 

maintain the threshold at its existing 

(pre-Dodd-Frank) level or increase it, 

the Bureau believes that implementing 

the APR percentage-point threshold at 

its statutorily-prescribed level, without 

any adjustment, is particularly 

appropriate at this time given the 

simultaneous change in the benchmark 

for HOEPA coverage from the yield on 

Treasury securities to the average prime 

offer rate. The Bureau believes there are 

several advantages of using the average 

prime offer rate rather than the yield on 

Treasury securities including, as one 

industry commenter noted, that the 

average prime offer rate more closely 

tracks movements in mortgage rates 

than do yields on Treasury securities.61

With this change to the benchmark, 

then, it is not clear that revising the 

threshold from an eight percentagepoint spread to a 6.5 percentage-point 

spread will result in unwarranted 

HOEPA coverage. Indeed, as noted in 

the section-by-section analysis of 

§ 1026.32(a)(1)(i) above, one industry 

commenter observed that the maximum 

APR for HOEPA coverage may, 

depending on market conditions, be 

higher in certain circumstances under 

the final rule than under existing 

§ 1026.32(a)(1)(i). Of course, if the 

Bureau observes an increase in coverage 

to a degree that interferes with access to 

credit, the Bureau has authority to 

increase the threshold as appropriate at 

that time. 

Manufactured housing. Manufactured 

housing industry commenters in 

particular raised a number of objections 

to the APR thresholds.62 They noted 

that interest rates for manufactured 

home loans tend to be higher than for 

traditional mortgages for a variety of 

legitimate reasons. For example, the 

commenters stated that such loans tend 

to carry more credit risk and have not 

benefited from secondary market 

funding to the same degree as site-built 

housing, thus increasing creditors’ cost 

of funds. According to one commenter, 

an APR of 14.73 percent therefore is 

necessary to offer a manufactured home 

loan on a profitable basis. Industry 

commenters estimated that, under the 

HOEPA proposal, between 32 and 48 

percent of their recent manufactured 

home loan originations would have 

been covered by the APR thresholds if 

the Bureau adopted the thresholds as 

proposed. In contrast, these commenters 

stated that, if the Bureau adopted an 

APR threshold of 10 percentage points 

above the average prime offer rate for all 

home purchase transactions secured in 

whole or in part by manufactured 

housing, then only between 12 and 15 

percent of manufactured home loans 

would be covered under the APR test. 

They also stated that, if the Bureau 

adopted an APR threshold of 12 

percentage points above the average 

prime offer rate for all manufactured 

home loans, then only between 2 and 3 

percent of manufactured home loans 

would be covered. 

The Bureau acknowledges the 

concerns raised by manufactured 

housing industry commenters 

concerning HOEPA coverage. In the 

Bureau’s view, however, Congress 

weighed the interests of consumers and 

creditors concerning the costs and risks 

associated with manufactured housing 

loans by specifying a higher APR 

threshold of 8.5 percentage points above 

the average prime offer rate for personal 

property-secured loans with a loan 

amount of $50,000 or less. (At today’s 

rates, for a 10- or 15-year, fixed-rate 

loan, the 8.5 percentage-point threshold 

translates into an APR of approximately 

12.5 or 11.25 percent, respectively.) The 

Bureau thus declines to depart from the 

APR thresholds prescribed by Congress. 

The Bureau’s analysis was informed by 

the following considerations. 

First, the Bureau understands that 

manufactured homes may be titled 

either as personal property (in which 

case the consumer receives a personal 

property, or chattel, loan) or as real 

property (in which case the consumer 

receives a mortgage). Whether a 

manufactured home is titled as personal 

or real property does not perfectly 

correlate to whether the consumer owns 

the land on which the home is situated. 

Indeed, according to 2011 U.S. Census 

data, even though a majority (77 

percent) of new manufactured homes 

placed during 2011 were titled as 

personal property, only 26 percent were 

placed inside manufactured home (i.e., 

land-lease) communities, with the 

balance being placed on owned land.63

Instead, as noted by consumer group 

commenters, the laws in most States 


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64See, e.g., Ronald A. Wirtz, Home, sweet 

(manufactured?) home, Fedgazette (July 2005), 

available at http://www.minneapolisfed.org/ 

publications_papers/pub_display.cfm?id=1479 

(interest rates for chattel loans run 2 to 5 percentage 

points higher than for real estate loans). 

65With respect to the lack of a secondary market 

in particular, this has not always been the case for 

manufactured home loans. From the late 1980s 

through the mid-2000s, the manufactured housing 

industry underwent a boom-and-bust cycle that was 

a precursor to the larger mortgage market 

meltdown. Securitization of manufactured home 

loans increased from $184 million in 1987 to $15 

billion in 1999, before declining to virtually zero in 

2009. See Ann M. Burkhart, Bringing Manufactured 

Housing into the Real Estate Financing System, 37 

Pepp. L. Rev. 427, 438–41 (2010). The Bureau 

understands that the Federal Housing Finance 

Agency (FHFA) currently is evaluating methods to 

strengthen the secondary market support for real 

property-secured manufactured home loans. See, 

e.g., 75 FR 32099 (June 7, 2010) (FHFA notice of 

proposed rulemaking to implement section 1129 of 

the Housing and Economic Recovery Act of 2008 

(HERA), which established a duty for Fannie Mae 

and Freddie Mac to serve three specified 

underserved markets, including manufactured 

housing). 

66Proposed § 1026.32(b)(6) and comment 

32(b)(6)–1 are re-numbered as § 1026.32(b)(4) and 

comment 32(b)(4)–1 in the Bureau’s 2013 ATR and 

HOEPA Final Rules. 

provide an option for titling the 

manufactured home either as personal 

or real property. 

In seeking relief from the APR 

thresholds, industry commenters noted 

that the average price of a new 

manufactured home is approximately 

$60,600 and that the majority of their 

originations were secured by homes 

titled as personal property. The 

commenters, however, did not specify 

what portion of their loans would be 

subject to HOEPA coverage under the 

6.5 percentage-point APR threshold, as 

opposed to the 8.5 percentage-point 

threshold for smaller-dollar, personal 

property-secured transactions. Instead, 

they requested that the Bureau adopt an 

across-the-board APR threshold of 10 or 

12 percentage points above the average 

prime offer rate for all manufactured 

housing. (At today’s rates, these 

thresholds translate into APRs of 

roughly 13 and 15 percent for a 15-year, 

fixed-rate loan.) 

The Bureau understands that, as the 

commenters described, there tend to be 

greater costs associated with originating 

loans secured by manufactured housing, 

particularly when such loans secured 

solely by personal property. However, 

the Bureau does not have authority 

under HOEPA to increase the APR 

threshold for first-lien transactions to 

more than 10 percentage points above 

the average prime offer rate. Moreover, 

the higher threshold set forth by 

Congress for smaller-dollar, personal 

property loans appears to be consistent 

with the lower range of estimates of the 

increased rates that are associated with 

personal property loans.64

For first-lien loans other than those 

eligible for the higher threshold, the 

Bureau has been unable to determine 

from the commenters’ estimates what 

portion of the existing APRs for 

manufactured home loans is attributable 

to the factors cited by the commenters, 

such as credit risk and lack of a robust 

secondary market.65

The Bureau notes that in the current 

market, 10- or 15-year, fixed-rate 

manufactured home loans secured by 

real property (or by personal property 

where the loan amount is $50,000 or 

more) would not fall within HOEPA’s 

APR coverage threshold unless they had 

APRs of greater than approximately 10.5 

or 9.25 percent, respectively. The 

Bureau does not believe that it has 

sufficient data to determine whether an 

adjustment to this statutory threshold is 

needed to compensate for legitimate 

cost factors, or how large such an 

adjustment should be. 

Moreover, the Bureau is not certain 

that manufactured home creditors 

would cease originating loans even if a 

portion of those loans exceed the highcost mortgage APR threshold. Some 

industry commenters argued that they 

would not originate high-cost mortgages 

because complying with the restrictions 

and requirements (particularly the preloan counseling requirement) would be 

cost prohibitive. At the same time, 

however, industry commenters stated 

that manufactured home loans typically 

do not contain the types of loan terms 

that would be prohibited for high-cost 

mortgages. In addition, while the preloan counseling requirement will entail 

recordkeeping and data retention costs, 

the Bureau notes that creditors are not 

required to cover the cost of counseling. 

In sum, prior to adjusting the APR 

percentage point threshold for all 

manufactured home loans, the Bureau 

would need additional information 

showing why it is cost-prohibitive in 

today’s market for a manufactured home 

lender to originate a first-lien, real 

property-secured manufactured home 

(or a personal property-secured loan for 

greater than $50,000) with an APR of 

approximately 10.5 percent or less. For 

all of these reasons, the final rule adopts 

§ 1026.32(a)(1)(i)(A) as proposed. 

32(a)(1)(i)(B) 

As added by the Dodd-Frank Act, 

TILA section 103(bb)(1)(A)(i)(I) provides 

that, for first-lien transactions on a 

consumer’s principal dwelling where 

the loan amount is less than $50,000 

and is secured by personal property, a 

transaction is a high-cost mortgage if the 

APR at consummation will exceed the 

average prime offer rate for a 

comparable transaction by more than 

8.5 percentage points. As discussed in 

the section-by-section analysis of 

§ 1026.32(a)(1)(i)(A) above, the APR 

threshold in TILA section 

103(bb)(1)(A)(i)(I) for smaller first-lien 

loans secured by personal property thus 

establishes a higher threshold for such 

loans than the 6.5 percentage-point APR 

threshold for other first-lien 

transactions. 

Proposed § 1026.32(a)(1)(i)(B) would 

have implemented the APR threshold 

for smaller first-lien loans secured by 

personal property. Proposed 

§ 1026.32(a)(1)(i)(B) generally would 

have mirrored the statutory language 

with certain non-substantive changes for 

clarity, organization, or consistency 

with existing Regulation Z and the 

Bureau’s other mortgage rulemakings as 

mandated by the Dodd-Frank Act. For 

example, proposed § 1026.32(a)(1)(i)(B) 

would have referred to a ‘‘first-lien 

transaction’’ instead of a ‘‘first 

mortgage.’’ In addition, proposed 

§ 1026.32(a)(1)(i)(B) would have referred 

to the transaction’s ‘‘total loan amount’’ 

rather than its ‘‘total transaction 

amount.’’ Proposed comment 

32(a)(1)(i)–4 would have stated that the 

phrase ‘‘total loan amount’’ as used in 

§ 1026.32(a)(1)(i)(B) should be 

interpreted consistently with the 

guidance for ‘‘total loan amount’’ set 

forth in proposed § 1026.32(b)(6) and 

comment 32(b)(6)–1.66

The HOEPA proposal noted that firstlien transactions secured by personal 

property (which may often be 

manufactured housing loans) may have 

higher APRs than other first-lien 

transactions. The Bureau thus 

specifically solicited comment and data 

on the higher APR percentage point 

threshold in proposed 

§ 1026.32(a)(1)(i)(B), including on 

whether any adjustment either to the 

percentage point threshold or to the 

dollar amount cut-off for the threshold 

(i.e., $50,000) would better protect 

consumers or is warranted by the need 

for credit. 

The Bureau received several public 

comments concerning the higher APR 

percentage-point threshold in proposed 

§ 1026.32(a)(1)(i)(B). Industry 

commenters generally did not 

distinguish between the 6.5 and 8.5 

percentage-point APR thresholds for 

first-lien transactions, and those 

comments are addressed in the sectionby-section analysis of 

§ 1026.32(a)(1)(i)(A) above. However, at 

least one industry commenter requested 


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6878 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

67For example, State laws governing foreclosure 

procedures typically provide fewer protections to 

homes titled as personal property than to homes 

titled as real property, and RESPA only partially 

applies to personal property-secured loans. 

68The commenter did not state how many entities 

it sampled in its survey. Based on information that 

the commenter provided, respondents included a 

nonprofit lender in rural Montana, a nonprofit 

affordable housing developer in upstate New York, 

a Community Development Financial Institution in 

New Hampshire, and a credit union that makes 

manufactured home loans. 

69See National Conference of Commissioners on 

Uniform State Laws, Uniform Manufactured 

Housing Act (July 2012), at http://uniformlaws.org/ 

Act.aspx?title=Manufactured Housing Act. As noted 

in a comment to the uniform law, whether a 

manufactured home is titled as real or personal 

property ‘‘can affect the buyer’s financing and legal 

rights in the home, such as homestead protection 

and marital property rights, and taxation of the 

home. * * * Under the current system of 

manufactured home financing, sellers, including 

retailers, have incentives to steer buyers to chattel 

loans, rather than to mortgage loans. However, 

when a mortgage loan is available, it often is the 

better option for the buyer. Though the closing costs 

for a mortgage loan can be higher than for a chattel 

loan, the lower interest rate and longer term for a 

mortgage loan translate to substantially lower 

monthly payments. Financing with a mortgage loan 

also provides the owner of a manufactured home 

with the same legal protections as the owner of a 

site-built home. Therefore, subsection (b) prohibits 

seller steering.’’ 

that the Bureau adjust the $50,000 cutoff for the 8.5 percentage-point 

threshold to $125,000. 

Consumer groups generally urged the 

Bureau not to adopt the higher, statutory 

APR threshold as proposed in 

§ 1026.32(a)(1)(i)(B) unless and until the 

Bureau finds after further research that 

the higher threshold is necessary. 

Several of these commenters argued that 

the higher threshold is not sensible 

because it applies to loans that are most 

likely to be obtained by the most 

vulnerable and lowest-income 

consumers. In addition, certain 

commenters argued that the higher 

threshold could incentivize 

manufactured home creditors to steer 

consumers to title their manufactured 

homes as personal property in the 

approximately 42 States that permit a 

manufactured home owner to title the 

home as either personal or real property. 

The commenters stated that steering of 

this type would be harmful to 

consumers because loans secured by 

personal property tend to be more 

expensive than mortgages secured by 

real property, and loans secured by 

personal property also have fewer legal 

protections than other mortgages.67

Many of the consumer group 

commenters argued that, to promote a 

level playing field for low-income 

consumers and to prevent steering, all 

first-lien transactions should have the 

same APR threshold, irrespective of the 

amount borrowed and collateral type. 

In contrast, one consumer group 

commenter, while agreeing with 

concerns about steering, nevertheless 

believed that the higher APR for 

smaller-dollar-amount, personal 

property-secured loans was warranted 

given market conditions and creditors’ 

cost of funds. This commenter opposed 

any increase in the higher APR 

threshold beyond what is provided in 

the statute. This commenter based its 

recommendation on anecdotal evidence 

obtained by consulting with a sample of 

single-family manufactured home loan 

originators,68 all of whom opposed 

raising the APR threshold higher than 

8.5 percentage points above the average 

prime offer rate. 

As provided by TILA section 

103(bb)(1)(i)(A)(I), the final rule adopts 

in § 1026.32(a)(1)(i)(B) the higher APR 

threshold of 8.5 percentage points over 

the average prime offer rate for first-lien 

loans secured by personal property and 

with a loan amount of less than $50,000. 

The Bureau understands that this 

separate threshold was designed to 

reflect costs associated with smallerdollar, personal property loans. 

The Bureau shares commenters’ 

concerns that a higher percentage-point 

threshold for personal property-secured 

loans could, if set too high, exacerbate 

incentives for creditors to steer 

consumers into titling their homes as 

personal property. The Bureau 

understands that such steering can and 

does currently occur in the market. 

Indeed, the National Conference of 

Commissioners on Uniform State Laws 

approved in July 2012 a Uniform 

Manufactured Housing Act that would 

simplify and streamline State laws to 

convert manufactured homes titled as 

personal property to real property and 

would prohibit manufactured home 

sellers from steering consumers to 

chattel loans rather than mortgages.69 As 

noted, personal property-secured loans 

tend to offer consumers fewer legal 

protections, so a rule that permits 

HOEPA coverage to turn on how the 

loan is titled, and that therefore 

potentially incentivizes steering to 

personal property-secured loans, could 

be disadvantageous to some consumers. 

However, because personal propertysecured loans generally have had costs 

roughly 2 to 5 percent higher than 

mortgages (as noted in the section-bysection analysis of § 1026.32(a)(1)(i)(A) 

above) the Bureau does not believe that 

implementing the 2 percentage-point 

higher threshold for such loans will 

exacerbate any steering that may already 

be occurring in the market. On balance, 

then, the Bureau believes that it is 

appropriate to effectuate the higher APR 

threshold for smaller-dollar, personalproperty secured loans in light of the 

higher costs occurring in the market for 

such loans. In light of the fact that 

Congress set forth a clear line for this 

threshold, and in the absence of specific 

evidence demonstrating another line 

that would better protect consumers 

while maintaining access to credit, the 

Bureau declines to adjust the statutory 

threshold. 

The Bureau adopts proposed 

comment 32(a)(1)(i)–4 explaining how 

to determine the ‘‘loan amount’’ for 

purposes of the $50,000 cut-off, but renumbers it as comment 32(a)(1)(i)(B)–1 

for organizational purposes. In the final 

rule, the Bureau also clarifies that the 

$50,000 refers to the face amount of the 

note, rather than (as proposed) the ‘‘total 

loan amount.’’ The ‘‘total loan amount’’ 

is a defined term used in connection 

with calculating whether a transaction 

meets the percentage point thresholds in 

the points and fees coverage test. As 

discussed in the section-by-section 

analysis of § 1026.32(a)(1)(ii) below, the 

points and fees coverage test adopts the 

face of amount of the note as the 

relevant metric for determining whether 

a loan is above or below the $20,000 

cut-off between the 5 percent and 8 

percent points and fees tests. The face 

amount of the note is adopted in that 

context for consistency with the 

approach adopted in the points and fees 

provisions of the 2013 ATR Final Rule. 

The Bureau believes that a consistent 

approach to determining whether a 

transaction is above or below a 

particular dollar-value threshold will 

facilitate compliance with Regulation Z. 

Thus, upon further consideration, the 

Bureau specifies in the 2013 HOEPA 

Final Rule that the face amount of the 

note also is the appropriate amount for 

a creditor to reference in determining 

whether to apply the 6.5 or 8.5 APR 

percentage-point threshold for HOEPA 

coverage. 

32(a)(1)(i)(C) 

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

provides that a consumer credit 

transaction secured by a subordinate or 

junior mortgage on the consumer’s 

principal dwelling is a high-cost 

mortgage if the APR at consummation of 

the transaction will exceed the average 

prime offer rate for a comparable 

transaction by more than 8.5 percentage 

points. Proposed § 1026.32(a)(1)(i)(C) 

would have implemented the revised 

APR percentage point threshold for 

subordinate-lien transactions with one 

minor terminology change (referencing a 

‘‘subordinate-lien transaction’’ rather 

than a ‘‘subordinate or junior 


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70See 77 FR 69738 (Nov. 6, 2012) (adding 

comment 32(a)(1)(ii)–2.xviii). 

71TILA section 103(bb)(1)(A)(ii) also excludes 

from points and fees bona fide third-party charges 

not retained by the mortgage originator, the 

creditor, or an affiliate of either. This exclusion is 

implemented in § 1026.32(b)(1)(D) (closed-end 

credit transactions) and (b)(2)(D) (open-end credit 

plans). 

72 Industry and consumer groups also commented 

on the Bureau’s proposed implementation of the 

statutory change from requiring the inclusion in 

points and fees of items payable by the consumer 

‘‘at or before closing’’ to items ‘‘payable in 

connection with the transaction.’’ The Bureau 

addresses those comments in the section-by-section 

analysis of § 1026.32(b)(1) below. 

mortgage’’) for consistency with 

Regulation Z. 

Industry and consumer group 

commenters generally made the same 

comments concerning proposed 

§ 1026.32(a)(1)(i)(C) that they did for 

§ 1026.32(a)(1)(i)(A). That is, industry 

commenters generally expressed 

concern about the revised APR 

percentage-point threshold, argued that 

the existing (pre-Dodd-Frank Act) 

threshold is sufficient for consumer 

protection, and stated that revising the 

threshold would result in unwarranted 

coverage of loans as high-cost 

mortgages. Consumer group commenters 

generally suggested that the Bureau 

lower the proposed APR percentagepoint threshold. One consumer group 

commenter, for example, advocated that 

the Bureau adopt an APR threshold of 

5.5 percentage points above the average 

prime offer rate for subordinate-lien 

transactions. 

The commenters did not provide firm 

data or other specific information to 

indicate what adjustment from the level 

prescribed by Congress is warranted by 

a need for access to credit or to protect 

consumers from abusive lending. The 

final rule therefore adopts 

§ 1026.32(a)(1)(i)(C) as proposed, for all 

of the reasons articulated in the sectionby-section analysis of 

§ 1026.32(a)(1)(i)(A) above. With respect 

to the comment suggesting that the 

Bureau lower the APR percentage point 

threshold to 5.5 percentage points above 

the average prime offer rate, the Bureau 

notes that, even if it possessed data to 

warrant such a reduction (and it does 

not), the Bureau does not have authority 

under TILA section 103(bb)(2)(B)(ii) to 

reduce the APR percentage-point 

threshold for subordinate-lien 

transactions to less than eight 

percentage points above the average 

prime offer rate. 

32(a)(1)(ii) 

Numerical Coverage Thresholds for 

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 loan closing exceed the 

greater of 8 percent of the total loan 

amount or $400. Prior to the designated 

transfer date under the Dodd-Frank Act, 

the Board adjusted the $400 figure 

annually for inflation, in accordance 

with TILA section 103(aa)(3). For 2013, 

the Bureau adjusted the figure to $625 

from $611, where it had been set for 

2012.70

Section 1431(a) of the Dodd-Frank Act 

amended HOEPA’s 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 exceed either 5 percent or 8 

percent of the total transaction amount, 

depending on the size of the 

transaction.71 Specifically, under TILA 

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

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

mortgage if the total points and fees 

payable in connection with the 

transaction exceed 5 percent of the total 

transaction amount. Under TILA section 

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

less than $20,000 is a high-cost 

mortgage if the total points and fees 

payable in connection with the 

transaction exceed the lesser of 8 

percent of the total transaction amount 

or $1,000, or such other dollar amount 

as the Bureau shall prescribe by 

regulation. The Bureau proposed to 

implement the Dodd-Frank Act’s 

amendments to TILA’s points and fees 

coverage test for high-cost mortgages in 

proposed § 1026.32(a)(1)(ii)(A) and (B). 

As in the case of the APR coverage 

test, consumer group commenters urged 

the Bureau to apply the same points and 

fees threshold of 5 percent to all 

transactions, irrespective of the loan 

amount. These commenters argued that 

the higher, 8 percent points and fees 

threshold for smaller transactions (i.e., 

loans of less than $20,000) set forth in 

the statute disadvantages lower-income 

and more vulnerable consumers. 

The Bureau received a number of 

comments from industry expressing 

concern that the points and fees 

thresholds prescribed by the DoddFrank Act, like the amended APR 

thresholds, would restrict access to 

credit. Some industry commenters 

expressed particular concern about 

smaller transactions, including loans 

originated by Housing Finance Agencies 

and under the USDA Rural Housing 

Program. One such commenter argued 

that the 5 percent points and fees 

threshold would be most problematic 

for loan amounts below approximately 

$60,000 and stated that the threshold 

would drive creditors to impose strict 

minimum loan amounts on their 

mortgage originations. Industry 

commenters generally acknowledged a 

good deal of uncertainty in estimating 

the potential impact of the revised 

points and fees thresholds given that the 

Bureau had not yet finalized the DoddFrank Act’s amendments to the 

definition of points and fees. (As 

discussed in the section-by-section 

analysis of § 1026.32(b)(1) and (2) 

below, the Dodd-Frank Act amended the 

definition of points and fees to remove 

certain items that previously would 

have been counted (e.g., certain 

mortgage insurance premiums and bona 

fide discount points) and to add other 

items (e.g., the maximum prepayment 

penalties that may be charged). Industry 

commenters nevertheless suggested that 

the Bureau exercise its authority to 

leave the points and fees thresholds at 

their existing (i.e., pre-Dodd-Frank Act) 

levels.72

As in the case of the APR coverage 

test, manufactured housing industry 

commenters expressed concern about 

HOEPA coverage of manufactured home 

loans under the points and fees coverage 

test. These commenters estimated that 

anywhere from 24 to 51 percent of their 

manufactured home originations during 

2010 and 2011 would have been 

covered under the proposal’s points and 

fees threshold. (Commenters did not 

specify what percentage of their loans 

would have been subject to the 5 

percent or 8 percent thresholds.) 

Commenters explained that 

manufactured home loans, particularly 

those secured by personal property, 

tend to be for smaller amounts than real 

property-secured loans. However, 

according to these commenters, the cost 

of originating and servicing a loan of 

$200,000 and a loan of $20,000 is 

essentially the same in terms of absolute 

dollars. They asserted that because the 

cost of origination as a percentage of 

loan size thus is significantly higher for 

smaller loans, transactions with small 

loan amounts should not be treated the 

same for purposes of the points and fees 

test. Commenters suggested that 

adjusting the points and fees threshold 

for purchase-money mortgages secured 

in whole or in part by manufactured 

housing would ensure consumer 

protection while maximizing credit 

availability. For example, one 

commenter estimated that, if the Bureau 

applied a points and fees test of the 


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6880 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

73For example, the Bureau understands that 

lenders may set minimum loan amounts of $5,000. 

Points and fees of $3,000 on a $5,000 loan equal 60 

percent of the loan amount. One industry 

commenter, citing the American Housing Survey 

(AHS) noted that the median purchase price of a 

manufactured home (including new and existing 

home sales) is $27,000. Points and fees of $3,000 

on a $27,000 loan equal 11 percent of the loan 

amount. 

74Comment 32(a)(1)(ii)–3 explains that creditors 

must apply the allowable points and fees 

percentage to the ‘‘total loan amount’’ as defined in 

§ 1026.32(b)(4), which may be different than the 

face amount of the note. This approach also is 

consistent with the approach adopted for the points 

and fees test for qualified mortgages. See 

§ 1026.43(e)(3)(i) and comment 43(e)(3)(i)–2, as 

adopted in the 2013 ATR Final Rule. 

greater of (1) 5 percent of the total loan 

amount or $3,000, or (2) 5 percent of the 

total loan amount or $5,000, to all 

purchase-money mortgages secured in 

whole or in part by manufactured 

housing, then 41 percent or 22 percent 

of all manufactured housing loans, 

respectively, would be covered under 

the points and fees test. 

The Bureau finalizes the adjusted 

points and fees thresholds in 

§ 1026.32(a)(1)(ii)(A) and (B) as 

proposed. The Bureau recognizes that 

points and fees comprise, in part, a 

means of recovering costs that may 

constitute a larger percentage of the loan 

amount for smaller loans. However, as 

is the case of the APR coverage test, 

Congress already adjusted the points 

and fees test to account for this fact by 

setting the threshold for loans of less 

than $20,000 higher than the threshold 

for all other loans. The Bureau would 

need to exercise its exception authority 

under TILA section 105(a) to adjust the 

thresholds beyond what Congress 

provided and, in turn, would need data 

or specific information showing that a 

departure from the levels set by 

Congress is warranted. Commenters 

presented some information indicating 

that, in a significant percentage of 

smaller transactions made by some 

lenders, points and fees currently are 

charged that exceed the threshold 

established by Congress. However, 

neither this information nor any other 

data available to the Bureau establishes 

that application of the statutory 

threshold will cause these lenders to 

cease making these loans. Moreover, 

commenters did not provide, and the 

Bureau is not otherwise aware of data or 

other information that would support, 

specific numeric thresholds different 

than those provided by Congress. The 

Bureau understands commenters’ 

concerns that, if lenders choose to 

impose strict lending limits, that could 

have fair lending implications, because 

low- to moderate-income families and 

minorities could be more likely to suffer 

disproportionately. On the other hand, 

the Bureau is mindful of concerns raised 

by consumer groups that these are the 

very populations that need extra 

protections that are afforded by laws 

such as HOEPA. The Bureau believes 

that the points and fees coverage test is 

important in ensuring that loans with 

high upfront costs are subject to such 

special protections, and in the Bureau’s 

view, the commenters did not present a 

persuasive case that implementing the 

statutory thresholds would adversely 

affect credit availability. In addition, as 

discussed in the section-by-section 

analysis of § 1026.32(b)(1) and (2) 

below, the Bureau notes that it is 

adopting several limitations and 

clarifications to the definition of points 

and fees in response to industry 

commenters’ concerns (e.g., by 

specifying that only such fees that are 

known at or before consummation must 

be included in the calculation). The 

Bureau believes that those clarifications 

and limitations will address some of 

industry’s concerns regarding 

unwarranted coverage through points 

and fees. 

The Bureau similarly is not persuaded 

that a different, higher points and fees 

threshold should apply to manufactured 

home loans. As noted, manufactured 

housing industry commenters suggested 

that the Bureau implement a points and 

fees threshold for all loans secured in 

whole or in part by manufactured 

housing (i.e., for any real- or personal 

property-secured transaction) of (at 

least) the greater of 5 percent of the total 

loan amount or $3,000. Under this 

suggested approach, all loans secured by 

manufactured housing with loan 

amounts less than $60,000 could charge 

points and fees of $3,000 without 

triggering HOEPA coverage. The Bureau 

notes that the $3,000 amount becomes 

an increasingly large percent of the loan 

amount as the loan size decreases. Thus, 

for the smallest loans (i.e., those that 

would be expected, for example, to be 

made to the most vulnerable consumers 

purchasing used manufactured homes 

on land that they do not own) the 

suggested points and fees could reach 

up to 60 percent of the loan amount.73

Manufactured housing industry 

commenters argued, as did other 

industry commenters, that points and 

fees naturally comprise a larger percent 

of the loan amount as loan amounts 

decrease in size. However, they did not 

provide specific evidence indicating 

that smaller manufactured home loans 

(let alone all manufactured home loans) 

have characteristics that merit a 

different points and fees threshold than 

other, smaller transactions. In short, in 

light of the fact that Congress articulated 

a specific points and fees threshold for 

smaller transactions, and in the absence 

of specific evidence indicating a more 

appropriate threshold, the Bureau 

adopts in the final rule the points and 

fees thresholds as set forth in the 

statute. 

Determining the $20,000 Amount; 

Adjustment for Inflation 

As noted, a 5 percent points and fees 

coverage test applies to transactions of 

$20,000 or more, and an 8 percent test 

applies to transactions of less than 

$20,000. The Bureau’s 2012 HOEPA 

Proposal did not propose a specific 

methodology for determining whether a 

transaction was above or below the 

$20,000 amount. As noted in the 

section-by-section analysis of 

§ 1026.32(a)(1)(i)(B) above, in the 2013 

ATR Final Rule, the Bureau is providing 

that a creditor must determine which 

points and fees tier applies to a 

transaction for purposes of the qualified 

mortgage points and fees test by using 

the face amount of the note (i.e., the 

‘‘loan amount’’ as defined in 

§ 1026.43(b)(5)). See the section-bysection analysis of § 1026.43(e)(3)(i) in 

the 2013 ATR Final Rule. For 

consistency with the approach being 

adopted in the 2013 ATR Final and to 

ease compliance, the Bureau is adopting 

the same approach for determining 

whether a transaction is above or below 

the $20,000 amount for the HOEPA 

points and fees coverage test. The 

Bureau adopts this clarification in new 

comment 32(a)(1)(ii)–3.74

The Bureau also clarifies in 

§ 1026.32(a)(1)(ii) and new comment 

32(a)(1)(ii)–3 that the $20,000 amount in 

§ 1026.32(a)(1)(ii)(A) and (B) will be 

adjusted annually for inflation on 

January 1 by the annual percentage 

change in the CPI that was in effect on 

the preceding June 1. To make this 

adjustment, the Bureau invokes its 

authority under TILA section 105(a), 

which grants the Bureau authority to 

exempt all or any class of transactions 

where necessary or proper to effectuate 

the purposes of TILA, to prevent 

evasion, or to facilitate compliance. The 

Bureau believes adjusting the $20,000 

amount for inflation is necessary and 

proper to effectuate the purposes of, and 

to facilitate compliance with, TILA. The 

Bureau believes that failing to adjust the 

$20,000 amount would hinder access to 

credit without meaningfully enhancing 

consumer protection by failing to 

account for the effects of inflation. As 

noted above, the Bureau received a 


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75The Bureau also notes that adjusting the 

$20,000 amount for inflation is consistent with the 

approach adopted for the points and fees test for 

qualified mortgages in the Bureau’s 2013 ATR Final 

Rule. The Bureau believes that adopting a uniform 

approach in both the high-cost and qualified 

mortgage contexts will facilitate compliance with 

TILA. See § 1026.43(e)(3)(i) and (ii), as adopted in 

the 2013 ATR Final Rule. 

76 In this regard, the Bureau noted that section 

1412 of the Dodd-Frank Act retained the phrase 

‘‘total loan amount’’ for purposes of determining 

whether a closed-end credit transaction complied 

with the points and fees restrictions applicable to 

qualified mortgages. See TILA section 

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

77The Bureau is finalizing proposed 

§ 1026.32(b)(8) as § 1026.32(b)(6). 

significant number of comments 

expressing concern about the points and 

fees coverage test for smaller 

transactions. The Bureau believes that 

adopting this final rule without 

providing for the $20,000 to be adjusted 

for inflation would, over time, 

discourage some creditors from making 

smaller loans, to the detriment of 

consumers, without providing any 

meaningful corresponding consumer 

protection benefit. Accordingly, the 

Bureau believes that providing for the 

adjustment of the $20,000 amount will 

strengthen competition among financial 

institutions and promote economic 

stabilization.75

Total Transaction Amount 

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

provides that a mortgage is a high-cost 

mortgage if its total points and fees 

exceed (depending on transaction size) 

either 5 percent or 8 percent of the 

‘‘total transaction amount,’’ rather than 

the ‘‘total loan amount.’’ The DoddFrank Act did not define the term ‘‘total 

transaction amount.’’ However, the 

Bureau noted in its proposal that it 

believed the phrase reflected the fact 

that HOEPA, as amended, applies to 

both closed- and open-end credit 

transactions secured by a consumer’s 

principal dwelling.76 Notwithstanding 

the statutory change, for consistency 

with existing Regulation Z terminology, 

proposed § 1026.32(a)(1)(ii) would have 

provided that a high-cost mortgage is 

one for which the total points and fees 

exceed a certain percentage of the ‘‘total 

loan amount.’’ The Bureau received no 

comments concerning its adoption of 

the phrase ‘‘total loan amount’’ rather 

than ‘‘total transaction amount,’’ as set 

forth in the statute and thus adopts the 

language as proposed. See the sectionby-section analysis of § 1026.32(b)(4) 

below for a discussion of the definition 

of ‘‘total loan amount.’’ 

Annual Adjustment of $1,000 Amount 

As amended by the Dodd-Frank Act, 

HOEPA’s points and fees coverage test 

appears in TILA section 

103(bb)(1)(A)(ii)(I) and (II). Prior to 

being renumbered by Dodd-Frank, this 

test appeared in TILA section 

103(aa)(1)(B)(i) and (ii). The Dodd-Frank 

Act did not amend TILA section 

103(bb)(3), which requires the points 

and fees dollar figure to be adjusted 

annually for inflation, to reflect this new 

numbering. Instead, TILA section 

103(bb)(3) continues to cross-reference 

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

now sets forth the methodology for 

determining the APR for HOEPA 

coverage in transactions with rates that 

vary according to an index. To give 

meaning to the statute as amended, the 

2012 HOEPA Proposal interpreted the 

authority provided to it in TILA section 

103(bb)(3) as authority to continue to 

adjust annually for inflation the dollar 

figure prescribed in TILA section 

103(bb)(1)(A)(ii)(II), as has been done 

prior to the Dodd-Frank Act. 

The Bureau proposed to re-number 

existing comment 32(a)(1)(ii)–2 

concerning the annual adjustment of the 

points and fees dollar figure as comment 

32(a)(1)(ii)–1 for organizational 

purposes, as well as to revise it in 

several respects to reflect proposed 

revisions to § 1026.32(a)(1)(ii). First, 

proposed comment 32(a)(1)(ii)–1 would 

have replaced references to the preDodd-Frank Act statutory figure of $400 

with references to the new statutory 

figure of $1,000. In addition, consistent 

with the Dodd-Frank Act’s transfer of 

rulemaking authority for HOEPA from 

the Board to the Bureau, proposed 

comment 32(a)(1)(ii)–1 would have 

stated that the Bureau will publish and 

incorporate into commentary the 

required annual adjustments to the 

$1,000 figure after the June Consumer 

Price Index figures become available 

each year. 

Finally, the proposal would have 

retained in proposed comment 

32(a)(1)(ii)–2 the paragraphs in existing 

comment 32(a)(1)(ii)–2 enumerating the 

$400 figure as adjusted for inflation 

from 1996 through 2012. The proposal 

noted that it would be useful to retain 

the list of historical adjustments to the 

$400 figure for reference, 

notwithstanding that TILA section 

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

figure from $400 to $1,000. 

The Bureau received no comments on 

proposed comments 32(a)(1)(ii)–1 and 

–2. The Bureau adopts the comments as 

proposed. 

32(a)(1)(iii) 

Prior to the Dodd-Frank Act, a 

mortgage was classified as a high cost 

mortgage if either its APR or its total 

points and fees exceeded certain 

statutorily prescribed thresholds. 

Section 1431(a) of the Dodd-Frank Act 

amended TILA to add new section 

103(bb)(1)(A)(iii), which provides that a 

transaction is also a high-cost mortgage 

if the credit transaction documents 

permit the creditor to charge or collect 

prepayment fees or penalties more than 

36 months after the transaction closing 

or if such fees or penalties exceed, in 

the aggregate, more than two percent of 

the amount prepaid. 

Proposed § 1026.32(a)(1)(iii) would 

have implemented TILA section 

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

clarifications. First, proposed 

§ 1026.32(a)(1)(iii) would have replaced 

the statutory reference to prepayment 

penalties permitted by the ‘‘credit 

transaction documents’’ with a reference 

to such penalties permitted by the 

‘‘terms of the loan contract or open-end 

credit agreement.’’ This phrasing was 

proposed to reflect the application of 

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

open-end transactions, and for 

consistency with Regulation Z. 

Proposed § 1026.32(a)(1)(iii) also would 

have cross-referenced the definition of 

prepayment penalty in proposed 

§ 1026.32(b)(8).77 Finally, proposed 

§ 1026.32(a)(1)(iii) would have clarified 

that the creditor must include any 

prepayment penalty that is permitted to 

be charged more than 36 months ‘‘after 

consummation or account opening,’’ 

rather than after ‘‘transaction closing.’’ 

The Bureau proposed to use these terms 

for closed- and open-end transactions, 

respectively, for consistency with 

Regulation Z. 

Proposed comment 32(a)(1)(iii)–1 

would have explained how the coverage 

tests for high-cost mortgages in 

§ 1026.32(a)(1)(i) through (iii) interact 

with the ban on prepayment penalties 

for high-cost mortgages in amended 

TILA section 129(c), which the HOEPA 

proposal would have implemented in 

§ 1026.32(d)(6). Specifically, proposed 

comment 32(a)(1)(iii)–1 would have 

explained that § 1026.32 implicates 

prepayment penalties in two main ways. 

If a transaction is a high-cost mortgage 

by operation of any of the coverage tests 

in proposed § 1026.32(a)(1) (i.e., the 

APR, points and fees, or prepayment 

penalty tests), then the transaction must 

not include a prepayment penalty. 

Furthermore, under the prepayment 

penalty coverage test in 

§ 1026.32(a)(1)(iii), a transaction is a 

high-cost mortgage if, under the terms of 

the loan contract or credit agreement, a 

creditor can charge either (1) a 

prepayment penalty more than 36 

months after consummation or account 

opening, or (2) total prepayment 


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78See 76 FR 27390, 27472–78 (May 11, 2011). 

These provisions are being finalized in the Bureau’s 

2013 ATR Final Rule. 

79See the section-by-section analysis of 

§ 1026.32(b)(1) and (2) below. 

80 In addition to receiving comments concerning 

the prepayment penalty coverage test, the Bureau 

received various comments concerning its proposed 

definition of prepayment penalties for closed- and 

open-end transactions. Those comments are 

discussed in the section-by-section analysis of 

§ 1026.32(b)(6)(i) and (ii) below. 

penalties that exceed two percent of any 

amount prepaid. Taken together, 

§ 1026.32(a)(1)(iii) and § 1026.32(d)(6) 

effectively establish a maximum period 

during which a prepayment penalty 

may be imposed, and a maximum 

prepayment penalty amount that may be 

imposed, on a transaction secured by a 

consumer’s principal dwelling, other 

than a mortgage that is exempt from 

high-cost mortgage coverage under 

§ 1026.32(a)(2). 

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

cross-referenced proposed § 226.43(g) in 

the Board’s 2011 ATR Proposal. Under 

that proposal, § 226.43(g) would have 

implemented new TILA section 129C(c) 

by (1) prohibiting prepayment penalties 

altogether for most closed-end credit 

transactions unless the transaction is a 

fixed-rate, qualified mortgage with an 

APR that meets certain statutorilyprescribed thresholds; and (2) restricting 

prepayment penalties even for such 

qualified mortgages to three percent, 

two percent and one percent of the 

amount prepaid during the first, second, 

and third years following 

consummation, respectively.78

The Bureau’s HOEPA proposal noted 

that the cumulative effect of the DoddFrank Act’s amendments to TILA 

concerning prepayment penalties for 

closed-end transactions would be to 

limit the amount of prepayment 

penalties that may be charged in 

connection with most such transactions 

to amounts that would not meet the 

high-cost mortgage prepayment penalty 

coverage test. Specifically, the DoddFrank Act not only limited the amount 

of prepayment penalties as just 

described, but it also provided that 

prepayment penalties must be included 

in the points and fees calculations for 

high-cost mortgages and qualified 

mortgages. See TILA sections 103(bb)(4) 

and 129C(b)(2)(C).79

Proposed comment 32(a)(1)(iii)–2 

would have provided guidance 

concerning the calculation of 

prepayment penalties for HELOCs for 

purposes of proposed 

§ 1026.32(b)(1)(iii). Proposed comment 

32(a)(1)(iii)–2 provided that, if the terms 

of a HELOC agreement allow for a 

prepayment penalty that exceeds two 

percent of the initial credit limit for the 

plan, the agreement would be deemed to 

permit a creditor to charge a 

prepayment penalty that exceeds two 

percent of the ‘‘amount prepaid’’ within 

the meaning of proposed 

§ 1026.32(a)(1)(iii). Proposed comment 

32(a)(1)(iii)–2 provided three examples 

to illustrate the rule. 

The Bureau received comments 

addressing various aspects of proposed 

§ 1026.32(a)(1)(iii) and comments 

32(a)(1)(iii)–1 and –2. A few industry 

commenters either stated that the 36- 

month prepayment penalty restriction 

seemed reasonable or stated that the 

prepayment penalty test would not have 

a significant impact. Several other 

industry commenters, however, either 

objected entirely to the addition of a 

prepayment penalty coverage test for 

high-cost mortgages as unnecessary or 

stated that the Bureau should narrow 

the scope of the test. Two industry 

commenters expressed concern that 

including waived closing costs as 

prepayment penalties (see the sectionby-section analysis of § 1026.32(b)(6) 

below) would significantly increase the 

likelihood that many smaller 

transactions would become high-cost 

mortgages under the two percent 

prepayment penalty test. The 

commenters noted that such loans tend 

to serve low-income consumers and 

have costs that are waived at closing on 

the condition that the consumer does 

not prepay. The commenters thus 

suggested that the Bureau establish a 

different prepayment penalty test for 

smaller transactions. Finally, one 

commenter suggested that the Bureau 

specify that the prepayment penalty 

coverage test, like the APR and points 

and fees tests, is based on information 

known as of consummation or account 

opening.80

The Bureau is adopting 

§ 1026.32(a)(1)(iii) and its commentary 

substantially as proposed, with minor 

adjustments to reflect both the high-cost 

mortgage coverage exemptions in 

§ 1026.32(a)(2) and certain other renumbering in the final rule. 

Notwithstanding that a small number of 

commenters expressed general 

dissatisfaction with the addition of a 

prepayment penalty coverage test for 

high-cost mortgages, particularly for 

smaller-dollar-amount transactions, the 

Bureau declines to depart from the 

statutory requirement to add the test. 

These commenters did not provide data 

to support the need either for a 

wholesale departure from the statute or, 

in the case of smaller loans, to warrant 

the increased regulatory complexity that 

would come with adding a separate 

prepayment penalty test for such 

transactions. Furthermore, the Bureau 

notes that, even if it were to adopt a 

narrower prepayment penalty test for 

HOEPA coverage, prepayment penalties 

still would be restricted by the bans and 

limitations that the Bureau is adopting 

for most closed-end transactions in its 

2013 ATR Final Rule. 

As to the suggestion that the 

prepayment penalty test be based on 

information known as of consummation 

or account opening, the Bureau 

acknowledges that a creditor may not be 

able to determine whether a flat-rate 

prepayment penalty would exceed two 

percent of an ‘‘amount prepaid,’’ when 

the ‘‘amount prepaid’’ will not be 

known until the prepayment is made. 

However, the Bureau notes that, for a 

transaction with a prepayment penalty, 

creditors can ensure that they do not 

exceed the prepayment penalty coverage 

test by providing that any prepayment 

penalty (including any flat penalty) will 

not exceed 2 percent of the prepaid 

amount. 

Although the Bureau adopts the 

prepayment penalty coverage test in 

§ 1026.32(a)(1)(iii) substantially as 

proposed, the Bureau adopts in 

§ 1026.32(b)(6) a narrower definition of 

prepayment penalty. The final 

definition addresses comments 

concerning the inclusion of 

conditionally waived closing costs in 

prepayment penalties, particularly for 

smaller loans. The definition provides 

that certain conditionally-waived, bona 

fide third-party closing costs are not 

prepayment penalties. This approach 

ensures that bona fide third-party 

charges that would not be counted in 

points and fees if they were charged to 

the consumer upfront (see, e.g., the 

section-by-section analysis of 

§ 1026.32(b)(1)(i)(D)) also will not be 

counted in points and fees if they are 

waived on the condition that the 

consumer does not prepay the loan in 

full or terminate a HELOC during the 

first 36 months following 

consummation or account opening. This 

approach also should reduce the charges 

that count toward the high-cost 

mortgage prepayment penalty coverage 

test and at least partially address 

commenters’ concerns regarding 

unwarranted coverage of smaller loans. 

See also the section-by-section analysis 

of § 1026.32(b)(6) below. 

32(a)(2) 

Exemptions 

As noted in the section-by-section 

analysis of § 1026.32(a)(1) above, the 

Dodd-Frank Act expanded HOEPA 

coverage by providing in TILA section 


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81The HOEPA Proposal proposed to implement 

the Dodd-Frank Act’s amendments to HOEPA 

coverage exclusively in § 1026.32(a)(1) and to 

implement in § 1026.32(a)(2) the Dodd-Frank Act’s 

amendments to TILA setting forth a new method for 

calculating APRs for determining HOEPA coverage 

(TILA section 103(bb)(1)(B)). In the final rule, 

§ 1026.32(a)(2) is used for certain coverage 

exemptions and § 1026.32(a)(3) is used to 

implement the APR calculation for HOEPA 

coverage. Accordingly, the Bureau addresses 

comments received concerning proposed 

§ 1026.32(a)(2) in the section-by-section analysis of 

§ 1026.32(a)(3) below. 

82Many commenters expressed similar concerns 

about a decrease in access to credit that they believe 

will occur as a result of the potentially expanded 

scope of HOEPA coverage under the revised highcost mortgage coverage tests and/or the increased 

costs of complying with the enhanced prohibitions 

and protections for high cost mortgages. Those 

concerns are addressed in the section-by-section 

analyses of the applicable sections of this final rule. 

103(bb)(1) that the term ‘‘high-cost 

mortgage’’ means any consumer credit 

transaction that is secured by the 

consumer’s principal dwelling, other 

than a reverse mortgage transaction, if 

any of the prescribed high-cost mortgage 

thresholds are met. The proposal would 

have implemented TILA’s amended 

definition of ‘‘high-cost mortgage’’ by 

removing the pre-Dodd-Frank Act 

statutory exemptions for residential 

mortgage transactions (i.e., purchasemoney mortgage loans) and HELOCs, 

while retaining the exemption of reverse 

mortgage transactions.81

Consumer advocate commenters 

generally supported the expansion of 

HOEPA to cover the new loan types. 

Industry commenters, on the other 

hand, expressed concern about the 

expansion of HOEPA and the resulting 

decrease in access to credit that they 

argued would follow.82 Numerous 

industry commenters thus requested 

that the Bureau use its authority under 

TILA to exempt one or more categories 

of transactions from high-cost mortgage 

coverage. These comments are 

addressed in turn below. 

General 

Several commenters requested an 

exemption for HELOCs. They argued 

that exempting HELOCs would not 

interfere with the purpose of the highcost mortgage protections and that, 

particularly in light of current market 

conditions, the Bureau should use its 

authority to expand, rather than to 

constrain, credit availability. The 

commenters stated that they might stop 

offering HELOCs if too many are 

covered by the high-cost mortgage 

coverage tests. A small number of other 

industry commenters requested 

exemptions for purchase-money 

mortgage loans, loans held in portfolio, 

and loans originated by smaller lenders 

or small credit unions. 

The Bureau generally declines at this 

time to depart from Congress’s clear 

intent to expand HOEPA to apply to 

most closed- and open-end credit 

transactions secured by a consumer’s 

principal dwelling. In most cases, 

commenters expressed general concerns 

about the potential impact on access to 

credit of extending HOEPA to cover 

purchase-money mortgages and 

HELOCs. A number of commenters 

focused particularly on the potential 

impact on rural or underserved 

borrowers. However, they did not 

provide data to support any particular 

coverage exclusions. The Bureau notes 

that in order to make adjustments to 

HOEPA coverage, it must find that an 

adjustment is necessary and proper to 

effectuate the purposes of TILA, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance 

therewith. Without firm data or other 

specific information to support 

commenters’ claims regarding the effect 

of HOEPA expansion on access to 

credit, the Bureau does not believe that 

departures from TILA’s coverage 

provisions are warranted. The Bureau 

recognizes, however, that the expansion 

of HOEPA to cover purchase-money 

mortgage loans raises unique concerns 

for certain categories of transactions 

(e.g., construction loans) and addresses 

those unique transactions through the 

narrower coverage exemptions 

discussed below. In addition, the 

Bureau believes that certain, specific 

concerns regarding expanded high-cost 

mortgage coverage (e.g., preserving 

access to balloon payment loans in rural 

or underserved areas) may be addressed 

through more targeted measures on a 

provision-by-provision basis. Those 

measures are discussed below in the 

section-by-section analysis of §§ 1026.32 

and 1026.34. 

Manufactured Housing and Personal 

Property-Secured Transactions 

Prior to the Dodd-Frank Act, TILA 

excluded purchase-money mortgages 

from HOEPA coverage. The exclusion of 

purchase-money mortgages meant that 

specific types of lending were all but 

excluded from HOEPA coverage as a 

practical matter, if not by name. For 

example, refinancings of manufactured 

home loans and loans secured by other 

types of personal property (e.g., 

houseboats or recreational vehicles) 

historically were subject to HOEPA, but 

such loans are relatively rare. By 

amending TILA to remove the exclusion 

of purchase-money mortgages from 

HOEPA, the Dodd-Frank Act also 

removed the effective exclusion of 

manufactured home and personal 

property-secured loans from HOEPA. As 

discussed in the section-by-section 

analysis of § 1026.32(a)(1)(i)(A) and (B) 

above, Congress understood that 

expanding HOEPA to cover purchasemoney transactions implicated such 

loans, because it created a specific APR 

coverage threshold for personal 

property-secured first-liens with a 

transaction amount of $50,000 or less. 

The HOEPA proposal did not propose 

specific relief from HOEPA coverage for 

manufactured home or personal 

property-secured loans beyond 

proposing to implement the separate, 

higher APR threshold set forth in the 

statute. As already discussed in the 

section-by-section analysis of 

§ 1026.32(a)(1)(i)(B) and (ii) above, the 

Bureau received public comments from 

both industry and consumer groups 

urging the Bureau to adjust the high-cost 

mortgage coverage tests as applied to 

manufactured housing. Numerous 

participants in the manufactured 

housing industry also requested that the 

Bureau exempt manufactured home 

loans from HOEPA coverage altogether. 

A few industry commenters similarly 

recommended that the Bureau exempt 

loans secured by personal property, 

such as houseboats and recreational 

vehicles, from HOEPA coverage. 

Manufactured housing. Industry 

commenters expressed serious concerns 

about the impact that the HOEPA 

proposal might have on the 

manufactured housing industry and on 

lower-income and rural consumers who 

rely on the manufactured home for 

affordable housing. Both industry and 

consumer group commenters noted that 

manufactured home loans primarily 

serve low- and moderate-income 

consumers in rural areas where access 

to other housing options and credit may 

be limited. Specifically, the 

Manufactured Housing Institute (MHI) 

estimated in its comment letter that 

there are approximately 9 million 

American families living in 

manufactured homes, that the average 

sales price of a new manufactured home 

is approximately $60,600, and that 60 

percent of manufactured homes are 

located in rural areas. Moreover, 

according to 2011 census data as 

reported by MHI, in 2011 manufactured 

homes accounted for 46 percent of all 

new homes sold under $150,000, and 72 

percent of all new homes sold under 

$125,000. 

Industry commenters estimated that, 

taking the HOEPA proposal’s APR and 

points and fees thresholds together, 

between 44 and 75 percent of recent 

manufactured home loan originations 

would be covered by HOEPA. The 

commenters stated that they would not 

originate such loans. Commenters stated 


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83See Selected Characteristics of New 

Manufactured Homes Placed by Region, 2011, at 

http://www.census.gov/construction/mhs/pdf/ 

char11.pdf. 

that the cost of originating high cost 

mortgages (particularly the costs of 

making additional disclosures and the 

pre-loan counseling requirement), the 

ongoing costs of monitoring loans for 

compliance with HOEPA, and the legal, 

regulatory, and reputational risks 

associated with HOEPA would prevent 

them from originating high cost 

mortgages. At least one commenter 

stated that Congress’s inclusion of 

manufactured housing in HOEPA 

coverage must have been an oversight. 

Commenters thus suggested several 

ways that the Bureau might exempt 

manufactured housing from HOEPA 

coverage. Specifically, various 

commenters suggested exempting (1) All 

manufactured home loans, (2) purchasemoney manufactured home loans, (3) 

personal property-secured 

manufactured home loans, or (4) real or 

personal property-secured 

manufactured home loans that do not 

contain terms or practices prohibited by 

HOEPA (for example, negative 

amortization or prepayment penalties). 

Commenters stated that the last 

exemption would be useful because, as 

a general matter, manufactured home 

loans do not contain such loan terms. 

Thus, consumers taking out 

manufactured home loans already are 

adequately protected, and manufactured 

home creditors would be relieved of the 

burden of monitoring for high-cost 

mortgage status and the attendant 

disclosures and other requirements (e.g., 

counseling) that come with such status. 

In the alternative, commenters 

suggested that the Bureau provide a 

temporary exemption for manufactured 

housing until the Bureau obtains and 

analyzes data concerning the need for a 

permanent exemption. 

The Bureau is finalizing § 1026.32(a) 

without any categorical exclusions for 

manufactured housing. Contrary to 

some industry commenters’ suggestions, 

the plain language of HOEPA 

demonstrates that Congress specifically 

contemplated including manufactured 

home loans within HOEPA. The 

statutory definition of high-cost 

mortgage includes all consumer credit 

transactions secured by the consumer’s 

principal dwelling (other than reverse 

mortgages); there is no limitation to real 

estate-secured loans. In fact, Congress 

specifically included an accommodation 

for a category of loans that are 

overwhelmingly comprised by 

manufactured housing loans by 

including a special, higher APR 

threshold for smaller transactions 

secured by personal property. 

The Bureau acknowledges that, as 

described by industry commenters, 

manufactured home loans may not 

contain certain risky features that 

HOEPA is designed to combat. 

However, these or other risky or abusive 

practices could arise in manufactured 

home lending (as with most lending) in 

the future. In addition, the Bureau 

believes that it would be imprudent to 

exempt manufactured home loans from 

HOEPA coverage when HOEPA offers 

some of the strongest consumer 

protections for loans secured by a 

consumer’s principal dwelling, when 

that dwelling is personal property. As 

discussed in the section-by-section 

analysis of § 1026.32(a)(1)(i)(A), 

approximately 77 percent of 

manufactured homes placed in the U.S. 

during 2011 were titled as personal 

property.83 State and Federal laws 

generally provide fewer legal 

protections for personal propertysecured loans, including fewer required 

disclosures to assist consumers in 

understanding the terms of their credit 

transactions. For example, as discussed 

earlier, laws governing foreclosure 

procedures typically do not apply to 

loans secured by personal property, and 

RESPA only partially applies to such 

loans. The relative lack of protections 

for manufactured home loans 

distinguish manufactured housing from 

the other transaction types that this final 

rule exempts from HOEPA coverage, as 

discussed below. Moreover, consumers 

shopping for a manufactured home may 

have fewer financing options than those 

available for site-built dwellings, 

particularly when the home is titled as 

personal property. Lower-income 

consumers with limited financing 

options may be particularly susceptible 

to any abusive practices that might arise 

in the market. Finally, as discussed in 

the section-by-section analysis of 

§ 1026.32(a)(1)(i) and (ii) above, the 

Bureau is not persuaded that 

application of the HOEPA coverage 

thresholds will adversely affect access 

to manufactured home loans. The 

Bureau however, will monitor access to 

manufactured home credit. The Bureau 

believes that adjusting the coverage 

thresholds, if it obtains information 

indicating that such an adjustment is 

warranted, is more appropriate than 

adopting a wholesale exemption. 

Personal property loans. As noted, a 

few industry commenters urged the 

Bureau to exempt loans secured by 

personal property such as houseboats or 

recreational vehicles from coverage 

under the final high-cost mortgage rule, 

even if such property is the consumer’s 

principal dwelling. The commenters 

stated that financing personal property 

is a separate line of business from 

mortgage lending, with different risks 

and pricing, and that vendors that 

finance such property may not have the 

capacity to comply with HOEPA. For 

the reasons just discussed with respect 

to manufactured housing, the Bureau 

does not believe that it is appropriate to 

exempt loans secured by personal 

property from the high-cost mortgage 

rules. The Bureau believes that Congress 

has already balanced the competing 

considerations regarding coverage of 

this type of lending, and that this 

balance is reflected in the special APR 

threshold for smaller dollar, personal 

property-secured loans. 

32(a)(2)(i) 

Reverse Mortgages 

Prior to the Dodd-Frank Act, TILA 

section 103(aa)(1) exempted reverse 

mortgages from coverage under HOEPA. 

The Dodd-Frank Act retained this 

exemption in re-designated TILA 

section 103(bb)(1)(A), and the HOEPA 

proposal would have implemented it in 

§ 1026.32(a)(1) (i.e., moving it from 

existing § 1026.32(a)(2)(ii) but making 

no substantive changes). One consumer 

group commenter requested that the 

Bureau revisit the reverse mortgage 

exemption either in this rulemaking or 

in the near future, citing particular 

concerns about increased fees in reverse 

mortgages. The Bureau declines to 

depart in this rulemaking from 

Congress’s clear intent to retain the 

exemption of reverse mortgages from 

high-cost mortgage coverage. The 

Bureau notes that reverse mortgages 

currently are subject to additional 

disclosure rules under § 1026.33. The 

Bureau also notes that it anticipates 

undertaking a rulemaking to address 

how the Dodd-Frank Act Title XIV 

requirements apply to reverse 

mortgages, and any consumer protection 

issues in the reverse mortgage market 

may be addressed through such a 

rulemaking. Accordingly, the final rule 

adopts the proposed exemption for 

reverse mortgages as § 1026.32(a)(2)(i). 

32(a)(2)(ii) 

Construction Loans 

As previously noted, TILA section 

103(bb)(1), as amended by the DoddFrank Act, expanded HOEPA coverage 

to include purchase-money transactions. 

Proposed § 1026.32(a)(1) therefore 

would have expanded HOEPA coverage 

to all purchase-money transactions, 

including transactions to finance the 

initial construction of a consumer’s 

principal dwelling. These ‘‘construction 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6885 

loans’’ can take different forms. In some 

cases, creditors may provide 

‘‘construction-only’’ loans, where only 

the construction of the dwelling is 

financed by the creditor. These loans 

commonly contain balloon structures 

and are often refinanced into permanent 

loans after completion of the 

construction. In other cases, creditors 

may provide ‘‘construction-topermanent’’ loans, where both the 

construction and the permanent 

financing are extended by the same 

creditor. For these loans—which may be 

disclosed as two separate transactions or 

as a single transaction at the option of 

the creditor—the construction financing 

typically rolls into a permanent 

financing at the end of the construction 

phase. The Bureau did not propose 

different treatment of construction loans 

in the HOEPA proposal. 

The Bureau received numerous 

comments from industry groups and 

banks, including a number of 

community banks, expressing concern 

that the expansion of HOEPA to include 

construction loans would unduly 

restrict access to home construction 

financing for consumers, with little to 

no corresponding consumer benefit. 

These commenters urged the Bureau to 

create an exemption to § 1026.32 for 

construction-only loans and the 

construction phase of construction-topermanent loans, providing several 

bases for doing so. 

First, industry groups and community 

banks argued that the short term nature 

of construction financing as well as 

typically higher interest and 

administrative fees associated with 

construction-only loans or the 

construction phase of a construction-topermanent loan would result in large 

numbers of these loans falling under the 

new HOEPA APR threshold. These 

commenters generally asserted that 

access to credit for these loans would be 

reduced because most creditors, as a 

matter of policy, do not make high-cost 

mortgages. They also noted that an 

additional barrier exists to making a 

construction-only loan as a high-cost 

mortgage, because construction-only 

loans are typically structured as 

balloons with terms of 1–2 years, and 

proposed § 1026.32(d)(1) would have 

prohibited any such balloon payments 

on high-cost mortgages. Thus, 

independent of the various reasons 

creditors typically refrain from making 

high-cost mortgages, creditors would be 

barred from making any such 

construction-only loan as a high-cost 

mortgage in its usual form. One large 

bank indicated that 20 percent of its 

2009–2012 construction-only loans 

would have been classified as high-cost 

mortgages under the new HOEPA APR 

criteria, and that it would not have 

made those loans had HOEPA applied. 

Industry groups and community 

banks also asserted that construction 

loans should not be covered by HOEPA, 

largely because the predatory lending 

and abusive practices that compelled 

the passage of HOEPA do not exist for 

construction loans. Industry groups 

emphasized that construction loans 

typically involve more sophisticated 

consumers than ordinary residential 

mortgage loans and require more 

extensive coordination between the 

creditor, the home builder, and the 

home buyer, which they believe reduces 

the risk of abusive credit practices. As 

support for this position, these 

commenters noted that construction 

loans do not have the same history of 

abusive credit practices as other 

mortgage loans. In addition, industry 

groups argued that many of the 

protections afforded to borrowers under 

HOEPA—such as restrictions on 

acceleration, charging of fees for loan 

modifications or payoff statements, and 

negative amortization features—are 

generally inapplicable to construction 

loans. 

The Bureau notes that these 

comments are consistent with the 

discussion in the Board’s 2008 HOEPA 

Final Rule, 73 FR 44522, 44539 (July 30, 

2008), which exempted construction 

loans from the higher-priced mortgage 

loan rules (see § 1026.35(a)(3)) for 

substantially the same reasons urged by 

industry. In that rule, the Board 

determined that construction loans 

typically have higher points, fees, and 

interest associated with them than other 

loan products, as well as shorter terms, 

which often results in construction 

loans having substantially higher APRs 

than other mortgage loan products. 

Thus, in the Board’s view, applying 

§ 1026.35 to construction loans would 

have resulted in an excessive number of 

construction loans being classified as 

higher-priced mortgage loans, which 

could discourage some creditors from 

extending such financing. In addition, 

the Board also found that construction 

loans do not present the same risk of 

abuse as other mortgage loans, and 

concluded that applying the higherpriced mortgage loan rules to 

construction loans could hinder some 

borrowers’ access to construction 

financing without meaningfully 

enhancing consumer protection. 73 FR 

at 44539. Upon careful consideration of 

the Board’s rulemaking and the public 

comments received on the Bureau’s 

2012 HOEPA Proposal, the Bureau 

similarly concludes that an exemption 

from HOEPA is warranted for 

construction loans. 

The Bureau is adopting 

§ 1026.32(a)(2)(ii) to exempt from 

HOEPA coverage loans to finance the 

initial construction of a consumer’s 

principal residence, which includes 

both construction-only loans and the 

construction phase of construction-topermanent loans. The Bureau is 

exempting such loans from coverage 

pursuant to its authority under TILA 

section 105(a), which grants the Bureau 

authority to exempt all or any class of 

transactions where necessary or proper 

to effectuate the purposes of TILA, to 

prevent evasion, or to facilitate 

compliance. The Bureau believes that 

exempting construction loans from the 

HOEPA restrictions set forth in 

§§ 1026.32 and 1026.34 is necessary and 

proper to effectuate the purposes of, and 

to facilitate compliance with, TILA, in 

accordance with TILA section 105(a). 

The Bureau believes that concerns 

discussed in the 2008 HOEPA Rule, 

such as hindering access to credit 

without meaningfully enhancing 

consumer protection, are equally 

applicable to construction financing 

transactions that otherwise would be 

high-cost mortgages. The Bureau further 

believes that adopting this final rule 

without an exemption for construction 

loans would discourage some creditors 

from participation in the construction 

financing business, thereby reducing 

competition to the detriment of 

consumers, without providing any 

meaningful corresponding consumer 

protection benefit. Accordingly, the 

Bureau believes that an exemption for 

construction loans will strengthen 

competition among financial 

institutions and promote economic 

stabilization. 

The Bureau also is adopting comment 

32(a)(2)(ii)–1 to provide further 

guidance on how the exemption applies 

to construction-to-permanent loans. 

Comment 32(a)(2)(ii)–1 explains that the 

§ 1026.32(a)(2)(ii) exemption applies to 

both a construction-only loan and to the 

construction phase of a construction-topermanent loan. However, the 

permanent financing that replaces a 

construction loan, whether extended by 

the same or a different creditor, is not 

exempt from HOEPA coverage. Under 

§ 1026.17(c)(6)(ii), a creditor has the 

option to treat a construction-topermanent loan as a single transaction 

or as multiple transactions for 

disclosure purposes, even when the 

same creditor extends both loans and a 

single closing occurs. Because only the 

construction phase is exempt from 

§ 1026.32, the Bureau recognizes that 

the rule could present an incentive to 


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6886 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

84Pursuant to 24 CFR 266.5, an HFA is defined 

as ‘‘any public body, agency, or instrumentality 

created by a specific act of a State legislature or 

local municipality empowered to finance activities 

designed to provide housing and related facilities, 

through land acquisition, construction or 

rehabilitation.’’ 

85For example, the Louisiana Housing 

Corporation administers affordable housing 

programs across all of Louisiana, while The Finance 

Authority of New Orleans administers programs 

only in Orleans Parish. See www.lhfa.state.la.us and 

www.financeauthority.org. 

86The vast majority of HFA loans are fixed-rate, 

fully-amortizing, fully-documented conforming 

loans. 

creditors to shift all or most upfront 

charges to the construction phase. 

However, the Bureau remains persuaded 

that construction loans do not present 

the same risk of abuse as do other loans. 

The Bureau also believes that market 

competition should minimize creditors’ 

ability to engage in such evasion 

because those creditors should be 

unable to capture much of the 

construction market where other 

creditors offering construction-only 

financing will tend to have superior 

pricing. Nevertheless, the Bureau 

intends to monitor the construction 

financing market going forward for signs 

that circumvention may be occurring 

and, if so, may take future action 

regarding the exclusion for the 

construction phase of construction-topermanent financing. 

32(a)(2)(iii) 

Housing Finance Agency Loans 

As noted above, Congress amended 

TILA to expand the types of loans 

subject to HOEPA coverage and to revise 

HOEPA’s coverage tests. In doing so, 

Congress did not provide any 

exemptions from HOEPA coverage for 

any State or other government agencies, 

either in TILA section 103(bb) or 129. 

However, until Congress changed the 

scope of HOEPA’s coverage, few if any 

of their activities were covered. 

Certain commenters, including an 

association of State housing finance 

authorities, urged the Bureau to exempt 

loans financed by Housing Finance 

Agencies (HFAs). These commenters 

observed that HFAs operate as public 

entities in every State and that, as 

agencies and instrumentalities of 

government, they have a unique mission 

to provide safe and affordable financing. 

In addition, the commenters stated, 

loans financed by HFAs tend to perform 

better than other loans. The commenters 

stated that many loans financed by 

HFAs would be unlikely to meet any of 

HOEPA’s coverage tests. On the other 

hand, according to the commenters, 

many HFAs offer smaller-loan-amount 

products that, for example, finance the 

purchase of manufactured homes in 

rural areas or support critical repairs 

and renovations. Because the principal 

amounts of such loans are so low, the 

commenters expressed concern that 

even reasonable fees to offset origination 

and administrative costs might make 

many of the loans high-cost mortgages, 

which in turn could prevent the HFAs 

from originating the loans. In turn, 

consumers might turn to financing 

through costlier forms of credit. The 

commenters stated that the risk of 

exempting loans originated under such 

programs from HOEPA coverage is low 

because sufficient protections are 

provided by HFAs’ normal lending 

practices. 

The Bureau adopts in the final rule an 

exemption from HOEPA for transactions 

that are directly financed by an HFA, as 

that term is defined in 24 CFR 266.5.84

The Bureau adopts this exemption 

pursuant to its authority under TILA 

section 105(a) to exempt all or any class 

of transactions where necessary or 

proper to effectuate the purposes of 

TILA, to prevent evasion, or to facilitate 

compliance. The Bureau believes that 

this exemption is necessary and proper 

to effectuate the purposes of TILA to 

avoid the uninformed use of credit by 

ensuring that borrowers seeking to 

obtain fair and affordable loans 

originated and financed directly by 

HFAs are not driven to other, costlier 

and riskier forms of credit. 

HFAs are quasi-governmental entities, 

chartered by either a State or a 

municipality, that engage in diverse 

housing financing activities for the 

promotion of affordable housing. Some 

HFAs are chartered to promote 

affordable housing goals across an entire 

State, while others’ jurisdiction extends 

to only particular cities or counties.85

Among other activities designed to 

promote affordable homeownership, 

HFAs provide financial assistance to 

consumers through first-lien mortgage 

loans, subordinate-loan financing, and 

down payment assistance programs 

(e.g., a loan to the consumer to assist 

with the consumer’s down payment, or 

to pay for some of the closing costs). 

The Bureau understands that HFA 

lending is characterized by low-cost 

financing, evaluation of a consumer’s 

repayment ability, and homeownership 

counseling.86

The Bureau understands that, in most 

cases, HFAs partner with creditors, such 

as local banks, that extend credit 

pursuant to the HFA program 

guidelines. HFAs generally do not 

provide direct financing to consumers. 

Nonetheless, the Bureau’s exemption of 

HFAs from HOEPA coverage extends 

only to those transactions where the 

HFA itself provides direct financing. 

Transactions made pursuant to a 

program administered by an HFA but 

that are financed by private creditors are 

still subject to HOEPA coverage. 

Although the details of HFA programs 

may differ from State to State, the 

Bureau believes that consumers in loans 

where a government-chartered agency is 

the creditor are sufficiently protected 

from the types of abuse that HOEPA was 

designed to address. The Bureau 

acknowledges that loans financed by 

private entities in partnership with 

HFAs may also have significant 

consumer protections, however the 

Bureau believes that it is important to 

retain HOEPA protections for such loans 

because the HFA does not directly 

control the transaction. 

32(a)(2)(iv) 

USDA Rural Loans 

As noted in the section-by-section 

analysis of § 1026.32(a)(2)(iii) above, 

Congress amended TILA to expand the 

types of loans subject to high-cost 

mortgage coverage and to revise the 

high-cost mortgage coverage tests. In 

doing so, Congress did not provide any 

exemptions from HOEPA coverage for 

loans originated by the Federal 

government, such as through the USDA 

Rural Housing Service, either in TILA 

section 103(bb) or 129. However, until 

Congress changed the scope of high-cost 

mortgage coverage, few if any of their 

activities were covered. 

The Bureau received one comment 

concerning USDA Rural Housing 

Service loans. Specifically, the industry 

commenter suggested that the Bureau 

exempt (or adjust the APR and points 

and fees thresholds for) loans issued 

under the USDA Guaranteed Rural 

Housing Program. This commenter 

noted that such loans carry enhanced 

consumer protections, such as 

maximum interest rates that must track 

closely to prime, and that they tend to 

be for small dollar amounts. The 

commenter expressed concern about the 

points and fees threshold because loans 

originated through the USDA Rural 

Housing Service program tend to be for 

smaller dollar amounts and thus a 

relatively higher percentage of their loan 

amount may be counted toward the 

points and fees threshold. 

The Bureau declines to exempt loans 

issued under the USDA Guaranteed 

Rural Housing Program. However, upon 

further consideration and for reasons 

similar to those discussed in the 

section-by-section analysis of 

§ 1026.32(a)(2)(iii) concerning loans 

originated by HFAs where the HFA is 

the creditor, the Bureau adopts in 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6887 

§ 1026.32(a)(2)(iv) in the final rule an 

exemption for loans originated through 

the USDA’s Rural Housing Service 

section 502 Direct Loan Program. The 

Bureau adopts this exemption pursuant 

to its authority under TILA section 

105(a) to exempt all or any class of 

transactions where necessary or proper 

to effectuate the purposes of TILA, to 

prevent evasion, or to facilitate 

compliance. The Bureau believes that 

this exemption is necessary and proper 

to effectuate the purposes of TILA to 

avoid the uninformed use of credit by 

ensuring that borrowers seeking to 

obtain fair and affordable loans through 

government programs are not driven to 

other, costlier forms of credit. The 

Bureau believes that the protections 

afforded consumers in the section 502 

Direct Loan Program, where the Federal 

government is the creditor, are 

sufficiently protected from the types of 

abuse that HOEPA was designed to 

address. As noted, however, the Bureau 

does not at this time adopt an 

exemption in § 1026.32(a)(2)(iv) to loans 

issued under the USDA Guaranteed 

Rural Housing Program. 

32(a)(3) Determination of Annual 

Percentage Rate 

Prior to the Dodd-Frank Act, TILA did 

not specify how to calculate the APR for 

purposes of HOEPA’s APR coverage test. 

The Dodd-Frank Act changed this by 

adding section 103(bb)(1)(B) to TILA. 

Section 103(bb)(1)(B) instructs creditors 

to use one of three methods to 

determine the interest rate for purposes 

of calculating the APR for high-cost 

mortgage coverage. The method that the 

creditor must use depends on whether 

the transaction is fixed- or variable-rate 

and, if the transaction is variable-rate, 

the manner in which the transaction’s 

rate may vary (i.e., in accordance with 

an index or otherwise). Under TILA 

section 103(bb)(1)(B)(i) through (iii), the 

APR for the high-cost mortgage APR 

coverage test shall be determined based 

on the following interest rates, 

respectively: (1) In the case of a fixedrate transaction in which the APR will 

not vary during the term of the loan, the 

interest rate in effect on the date of 

consummation of the transaction; (2) in 

the case of a transaction in which the 

rate of interest varies solely in 

accordance with an index, the interest 

rate determined by adding the index 

rate in effect on the date of 

consummation of the transaction to the 

maximum margin permitted at any time 

during the loan agreement; and (3) in 

the case of any other transaction in 

which the rate may vary at any time 

during the term of the loan for any 

reason, the interest charged on the 

transaction at the maximum rate that 

may be charged during the term of the 

loan. 

The Bureau proposed to implement 

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

§ 1026.32(a)(2) and related commentary. 

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

would have implemented TILA section 

103(bb)(1)(B)(i) concerning fixed-rate 

transactions; proposed 

§ 1026.32(a)(2)(ii) would have 

implemented TILA section 

103(bb)(1)(B)(ii) concerning transactions 

that vary with an index; and proposed 

§ 1026.32(a)(2)(iii) would have 

implemented TILA section 

103(bb)(1)(B)(i) concerning other 

transactions with rates that vary. As 

discussed in the section-by-section 

analysis of § 1026.32(a)(2) above, the 

Bureau retains existing § 1026.32(a)(2) 

in the final rule to provide certain 

categorical coverage exemptions. Thus, 

the Bureau adopts proposed 

§ 1026.32(a)(2) and comments 32(a)(2)– 

1 and –2 as § 1026.32(a)(3) and 

comments 32(a)(3)–1 and –2 in the final 

rule, with several revisions as discussed 

below. 

First, as noted above, TILA section 

103(bb)(1)(B) describes how to calculate 

the APR for the high-cost mortgage APR 

coverage test. Thus, the statute 

references the ‘‘annual percentage rate 

of interest.’’ Proposed § 1026.32(a)(2) 

would have implemented TILA section 

103(bb)(1)(B) by referencing both the 

‘‘annual percentage rate’’ and the 

‘‘transaction coverage rate,’’ as 

applicable. Proposed § 1026.32(a)(2) 

referenced both phrases because, as 

noted in the section-by-section analysis 

of proposed § 1026.32(a)(1)(i) above, the 

proposed APR coverage test contained 

two alternatives that would have 

required creditors to compare a 

transaction’s APR or transaction 

coverage rate, respectively, to the 

average prime offer rate. Because the 

Bureau is not finalizing the expanded 

finance charge in connection with its 

January 2013 rulemakings, the Bureau 

finalizes § 1026.32(a)(3) with references 

only to the APR, rather than to both the 

APR and the transaction coverage rate. 

Second, as noted above, TILA section 

103(bb)(1)(B) instructs creditors to 

calculate a transaction’s APR based on 

the interest rate (for a fixed-rate 

transaction) or index rate (for a 

transaction that varies with an index) in 

effect on the date of consummation of 

the transaction. Proposed § 1026.32(a)(2) 

would have referred not only to 

‘‘consummation,’’ but also to ‘‘account 

opening’’ to reflect the fact that the 

requirement also applies to HELOCs. 

The Bureau received no comments on 

its inclusion of the phrase ‘‘account 

opening’’ and therefore incorporates 

that phrase into final § 1026.32(a)(3) as 

proposed. 

The Bureau did, however, receive a 

number of comments stating that the 

proposal’s requirement to use the 

interest rate or (for variable-rate 

transactions) the index rate in effect as 

of consummation or account opening for 

purposes of calculating the APR for 

HOEPA coverage would be unworkable 

as a practical matter. These commenters 

noted that a creditor may not know until 

the last minute what index rate to use 

for purposes of determining HOEPA 

coverage, and if the index rate changed 

at the last minute such that the loan 

became a high-cost mortgage, closing 

would need to be delayed to comply 

with the requirement to provide the 

high-cost mortgage disclosures. The 

commenters further noted that a 

different standard—the index rate in 

effect as of the date the rate for the 

transaction is set—is used elsewhere in 

Regulation Z for similar APR 

determinations, including for 

determining coverage as a higher-priced 

mortgage loan under § 1026.35. 

Under TILA section 105(a), the 

Bureau’s 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. Pursuant to its 

authority to make adjustments to 

facilitate compliance with the TILA, the 

Bureau adopts in § 1026.32(a)(3)(i) and 

(ii), respectively, a requirement that 

creditors use the interest rate or index 

rate in effect as of the date the interest 

rate for the transaction is set (i.e., the 

rate-set date), rather than as of 

consummation as provided in TILA 

section 103(bb)(1)(B). The Bureau 

recognizes that, as commenters pointed 

out, it likely would not be practicable 

for creditors to wait until consummation 

or account opening to determine with 

certainty the applicable interest or index 

rate to be used for the high-cost 

mortgage coverage test. Creditors must 

be able to determine with certainty prior 

to this time whether a transaction is a 

high-cost mortgage. The Bureau further 

acknowledges that other coverage tests 

under Regulation Z, such as the test for 

higher-priced mortgage loans under 

§ 1026.35, require creditors to use the 

rate-set date and believes that it is 

useful to harmonize the HOEPA APR 

coverage test with those rules. Thus, 

providing that the interest or index rate 

be the rate in effect on the date that the 


srobinson on DSK4SPTVN1PROD with 
6888 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

rate for the transaction is set will 

facilitate compliance, consistent with 

TILA section 105(a). 

Proposed comment 32(a)(2)–1 would 

have made clear that creditors are 

required to use § 1026.32(a)(2), rather 

than existing guidance in comment 

17(c)(1)–10.i, to calculate the APR for 

discounted and premium variable-rate 

loans. Proposed comment 32(a)(2)–2 

would have clarified that the APR for a 

HELOC must be determined in 

accordance with § 1026.32(a)(2), 

regardless of whether there is an 

advance of funds at account opening. 

Proposed comment 32(a)(2)–2 further 

would have clarified that § 1026.32(a)(2) 

does not require HELOC creditors to 

calculate the APR for any extensions of 

credit subsequent to account opening. In 

other words, any draw on the credit line 

subsequent to account opening is not 

considered to be a separate open-end 

‘‘transaction’’ for purposes of 

determining whether the transaction is 

a high-cost mortgage under the APR 

coverage test. 

Proposed comment 32(a)(2)–4 would 

have clarified the application of 

§ 1026.32(a)(2) for home-equity plans 

that offer fixed-rate and -term 

repayment options. As noted in the 

proposal, some variable-rate HELOC 

plans may permit borrowers to repay a 

portion or all of their outstanding 

balance at a fixed-rate and over a 

specified period of time. Proposed 

comment 32(a)(2)–4 would have 

clarified that, if a HELOC has only a 

fixed rate during the draw period, the 

creditor must use that fixed rate to 

determine the plan’s APR, as required 

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

the draw period, however, a HELOC has 

a variable rate but also offers a fixed-rate 

and -term payment option, a creditor 

must use the terms applicable to the 

variable-rate feature to determine the 

plan’s APR, as described in proposed 

§ 1026.32(a)(2)(ii). The Bureau received 

no comments on proposed comments 

32(a)(2)–1, –2, or –4 and finalizes them 

as proposed, except that the Bureau renumbers the comments as 32(a)(3)–1, 

–2, and –5 in the final rule. 

32(a)(3)(i) 

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

that, in connection with a fixed-rate 

transaction in which the APR will not 

vary during the term of the loan, the 

APR must be based on the interest rate 

in effect on the date of consummation. 

As discussed above, proposed 

§ 1026.32(a)(2)(i) would have required 

that the calculation of the APR for a 

fixed-rate transaction be based on the 

interest rate in effect on the date of 

consummation or account opening. The 

Bureau received no comments 

specifically addressing proposed 

§ 1026.32(a)(2)(i). The Bureau thus 

finalizes § 1026.32(a)(3)(i) substantially 

as proposed, but with the clarification 

noted in the section-by-section analysis 

of § 1026.32(a)(3) above (i.e., that the 

interest rate is measured as of the date 

the interest rate for the transaction is 

set). 

32(a)(3)(ii) 

Proposed § 1026.32(a)(2)(ii) would 

have implemented TILA section 

103(bb)(1)(B)(ii)’s requirements for 

calculating APRs for transactions in 

which the interest rate varies solely in 

accordance with an index. As noted 

above, pursuant to TILA section 

103(bb)(1)(B)(ii), the APR for such 

transactions must be based on the 

interest rate that is determined by 

adding the maximum margin permitted 

at any time during the loan agreement 

to the index rate in effect on the date of 

consummation (i.e., the fully-indexed 

rate). Proposed § 1026.32(a)(2)(ii) would 

have implemented this provision with 

the additional qualification that it 

applies only in the case of a transaction 

in which the interest rate can vary 

during the term of the loan or plan in 

accordance with an index outside the 

creditor’s control. 

The Bureau believed that the 

proposed qualification would have 

helped to differentiate TILA section 

103(bb)(1)(B)(ii) concerning rates that 

vary with an index from TILA section 

103(bb)(1)(B)(iii) concerning rates that 

‘‘may vary at any time during the term 

of the loan for any reason.’’ See the 

section-by-section analysis of 

§ 1026.32(a)(3)(iii) below. Specifically, 

because interest rates for variable-rate 

HELOCs are prohibited under TILA 

section 137(a) (as implemented by 

§ 1026.40(f)) from varying pursuant to 

an index that is within the creditor’s 

control, the Bureau believed that adding 

the language ‘‘outside the creditor’s 

control’’ to proposed § 1026.32(a)(2)(ii) 

would have clarified that APRs for 

variable-rate HELOCs should be 

determined according to 

§ 1026.32(a)(2)(ii) rather than 

§ 1026(a)(2)(iii). 

Additionally, the Bureau proposed to 

adopt the clarification pursuant to its 

authority under TILA 105(a) to prevent 

circumvention of coverage under 

HOEPA. The Bureau noted that if the 

index were in the creditor’s control, 

such as the creditor’s own prime 

lending rate, a creditor might set a low 

index rate for purposes of 

§ 1026.32(a)(2)(ii) and thereby avoid 

classification as a high-cost mortgage. 

However, subsequent to consummation, 

the creditor could set a higher index 

rate, at any time, which would have 

triggered coverage as a high-cost 

mortgage under § 1026.32(a)(2)(ii) if it 

were in effect at consummation. 

Accordingly, the proposal would have 

provided that, if the interest rate varies 

in accordance with an index that is 

under the creditor’s control, the creditor 

would determine the APR under 

§ 1026.32(a)(2)(iii), not 

§ 1026.32(a)(2)(ii). 

Proposed comment 32(a)(2)–3 would 

have provided additional guidance on 

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

(iii) to mortgage transactions with 

interest rates that vary. Specifically, 

proposed comment 32(a)(2)–3.i would 

have provided that proposed 

§ 1026.32(a)(2)(ii) applies when the 

interest rate is determined by an index 

that is outside the creditor’s control. In 

addition, proposed comment 32(a)(2)– 

3.i would have clarified that even if the 

transaction has a fixed, discounted 

introductory or initial interest rate, 

proposed § 1026.32(a)(2)(ii) requires 

adding the contractual maximum 

margin to the index, without reflecting 

the introductory rate. Proposed 

comment 32(a)(2)–3.i also would have 

provided that the maximum margin 

means the highest margin that might 

apply under the terms of the credit 

transaction. For example, if the terms of 

the credit transaction provide that a 

borrower’s margin may increase by 2 

percentage points if the borrower’s 

employment with the creditor ends, 

then the creditor must add that higher 

margin to the index to determine 

HOEPA coverage. 

The Bureau received a number of 

comments on proposed 

§ 1026.32(a)(2)(ii) and (iii). Consumer 

groups generally advocated that the 

Bureau depart from the statute by 

requiring creditors to use the maximum 

rate permitted under the terms of the 

mortgage loan or HELOC for all variablerate transactions. The consumer groups 

observed that creditors have better 

information than consumers to predict 

when interest rates will increase and 

that, if a consumer could at any time 

during the term of the loan or credit 

plan be required to make payments 

based on an APR within the high-cost 

mortgage range, the consumer should 

receive the protections associated with 

such mortgages. 

One industry commenter objected to 

the requirement to recalculate a distinct 

variable-rate APR solely for purposes of 

high-cost mortgage coverage, rather than 

using the composite rate calculation set 

forth in existing § 1026.17(c)(1)–10.i. 

The commenter stated that performing 

an extra calculation would be extremely 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6889 

87See 76 FR 44226 (July 22, 2011). 

88 In this regard, the Bureau notes that the Board 

solicited comment on whether to prohibit the use 

of an index under a creditor’s control for a closedend ARM in connection with its 2010 Mortgage 

Proposal, 75 FR 58539 (Sept. 24, 2010). The Bureau 

has inherited the Board’s proposal as part of the 

transfer of authority for TILA under the Dodd-Frank 

Act. 

burdensome and would introduce 

additional opportunities for error into 

the loan origination process. 

Two industry commenters objected to 

the requirement that the index be 

‘‘outside the creditor’s control’’ for 

purposes of proposed § 1026.32(a)(2)(ii), 

noting that internal indices are used by 

certain closed-end creditors to price 

loans to reflect local economic 

conditions and by, for example, 

members of the Farm Credit System. 

Several industry commenters 

requested clarification about whether 

rate floors or caps would cause the 

index to vary in a manner within the 

creditor’s control, such that a creditor 

originating a loan or credit plan with 

such features would need to calculate 

the APR for HOEPA coverage using the 

maximum rate that could be imposed 

over the life of the loan under proposed 

§ 1026.32(a)(2)(iii). These commenters 

expressed particular concern about floor 

rates in HELOCs, noting that most 

variable-rate HELOCs provide for such a 

floor rate, even when the rate otherwise 

varies solely with an index outside the 

creditor’s control. Commenters stated 

that it would be inappropriate to require 

HELOC creditors to use the maximum 

rate applicable over the life of the 

HELOC under proposed 

§ 1026.32(a)(2)(iii) (which often may be 

the State usury cap) and thereby classify 

large numbers of HELOCs as high-cost 

mortgages merely because the credit 

plan provides for a rate floor. 

Other industry commenters requested 

that the Bureau specify that, if a 

transaction has an introductory rate that 

is higher than the fully-indexed rate, 

creditors must use the introductory rate 

for the APR calculation. Finally, some 

industry commenters expressed general 

concern about undue coverage of loans 

under HOEPA as a result of the 

requirement in proposed 

§ 1026.32(a)(2)(iii) to look to the 

maximum rate for certain variable-rate 

transactions and general uncertainty 

about the application of proposed 

§ 1026.32(a)(2) to HELOCs. 

The Bureau is renumbering proposed 

§ 1026.32(a)(2)(ii) as § 1026.32(a)(3)(ii), 

and finalizing follows. First, 

notwithstanding consumer groups’ 

comments, the Bureau declines to adopt 

a final rule that would require creditors 

generally to use the maximum rate 

applicable during the life of the loan 

(i.e., as opposed to the fully-indexed 

rate) for determining high-cost mortgage 

coverage. The Bureau understands that 

creditors originating variable-rate 

transactions are required to disclose the 

maximum rate possible during the loan 

term and that industry practice typically 

is to disclose the highest rate 

permissible under State law. The 

Bureau does not believe that Congress 

intended all such variable-rate 

transactions to be classified as high-cost 

mortgages and believes that the final 

rule strikes the appropriate balance 

between the concerns of industry and 

those of consumer groups. 

Second, notwithstanding industry’s 

complaints about the burdens of 

performing an additional calculation, 

the Bureau implements in the final rule 

the statutory requirement to calculate 

APRs for high-cost mortgage coverage 

pursuant to the requirements set forth in 

TILA section 103(bb)(1)(B)(ii) and (iii), 

rather than in accordance with the rules 

for composite APRs for disclosure 

purposes under § 1026.17. The Bureau 

acknowledges that the final rule may 

require creditors to conduct an 

additional calculation to determine 

high-cost mortgage coverage for 

variable-rate transactions. However, the 

Bureau believes that Congress made a 

deliberate decision to depart from the 

general APR calculation, to ensure that 

introductory rates not be given undue 

weight in determining whether a 

transaction is a high-cost mortgage. 

Despite the additional burden 

associated with a different calculation, 

the Bureau does not believe that 

avoidance of an additional calculation is 

a sufficient basis to use its exception 

authority to depart from the clear intent 

of the statute. 

Third, the Bureau does not adopt in 

the final rule the proposed requirement 

that variations in an index must be 

‘‘outside the creditor’s control’’ for 

§ 1026.32(a)(3)(ii) to apply. The Bureau 

is not certain, at present, that the risk of 

evasion requires adding this limitation. 

As noted, TILA section 137 and 

§ 1026.40(f) already prohibit variablerate HELOCs from employing an index 

that varies outside the creditor’s control. 

Use of internal indices is also restricted 

or prohibited for closed-end, variablerate transactions in many 

circumstances. Federal regulations 

significantly restrict the circumstances 

under which federally-chartered banks 

and thrifts may use an index within the 

creditor’s control. For example, Office of 

the Comptroller of the Currency 

regulations generally require national 

banks to use an index for ARMs that is 

‘‘readily available to, and verifiable by, 

the borrower and beyond the control of 

the bank.’’ 12 CFR 34.22(a). Singlefamily seller/servicer guides published 

by the Government Sponsored 

Enterprises (GSEs) also indicate that 

ARMs must be tied to publicly-available 

indices. Finally, the Alternative 

Mortgage Transactions Parity Act 

(AMTPA) provides restrictions on the 

use of internal indices. AMTPA 

authorizes state-licensed or -chartered 

housing creditors to make alternative 

mortgage transactions such as ARMs in 

compliance with Federal rather than 

State law, in order to establish parity 

and competitive equality between State 

and Federal lenders. However, AMTPA 

provides that an ARM cannot benefit 

from the preemptive effect of Federal 

law over more restrictive State law 

unless the transaction uses an index 

outside the creditor’s control or a 

formula or schedule identifying the 

amount by which the rate or finance 

charge can increase and when a change 

can occur.87 Finally, based on the public 

comments received, there appear to be 

legitimate, if infrequent, circumstances 

under which creditors use internallydefined indices. Adopting a requirement 

in this rule that effectively would 

require all creditors originating variablerate transactions to use an index outside 

the creditor’s control would cause 

disruption, for example, to Farm Credit 

System programs. The Bureau notes, 

however, that it will continue to 

monitor whether such a restriction 

would be sensible as a general matter for 

closed-end transactions and may revisit 

the issue in future rulemakings.88

Comment 32(a)(3)–3 provides 

guidance concerning the application of 

§ 1026.32(a)(3)(ii). Comment 32(a)(3)–3 

clarifies that the interest rate for a 

transaction varies solely in accordance 

with an index even if the transaction 

has an introductory rate that is higher or 

lower than the fully-indexed rate 

provided that, following the first rate 

adjustment, the interest rate for the 

transaction varies solely in accordance 

with an index. The comment specifies 

that, for transactions subject to 

§ 1026.32(a)(3)(ii), the interest rate 

generally is determined by adding the 

index rate in effect on the date that the 

interest rate for the transaction is set to 

the maximum margin for the 

transaction, as set forth in the agreement 

for the loan or plan. However, if a 

transaction subject to § 1026.32(a)(3)(ii) 

has an introductory rate that is higher 

than the index rate plus the maximum 

margin for the transaction as of the date 

the interest rate for the transaction is 

set, then the interest rate for the APR 

determination is the higher, initial (or 

‘‘premium’’) interest rate. 


srobinson on DSK4SPTVN1PROD with 
6890 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

89As noted in the preamble to the proposal, the 

Dodd-Frank Act renumbered TILA section 

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

Dodd-Frank Act did not amend existing TILA 

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

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

section 103(bb)(4) provides that ‘‘[f]or purposes of 

paragraph [103(bb)](1)(B), points and fees shall 

include . * * *’’ TILA section 103(bb)(1)(B), 

however, concerns the calculation of the APR for 

HOEPA coverage. To give meaning to the statute as 

amended, the Bureau interprets TILA section 

103(bb)(4) as cross-referencing the points and fees 

coverage test in TILA section 103(bb)(1)(A)(ii), 

rather than the APR calculation in TILA section 

103(bb)(1)(B). 

90See TILA section 129C(b)(2)(A)(vii) and (C)(i) 

(setting forth points and fees requirements for 

qualified mortgages). TILA section 129C(b)(2)(C)(i) 

cross-references the definition of points and fees in 

TILA section 103(aa)(4), which the Dodd-Frank Act 

re-designated as TILA section 103(bb)(4). 

91Whereas the Bureau’s Regulation Z is codified 

at 12 CFR part 1026, the Board’s Regulation Z was 

codified at 12 CFR part 226. 

92See 76 FR 27390, 27398–406, 27481–82, 

27487–89 (May 11, 2011). In its 2011 ATR Proposal, 

the Board noted that its proposed amendments to 

§ 226.32(b)(1) and (2) were limited to the definition 

of points and fees and that the 2011 ATR Proposal 

was not proposing to implement any of the other 

high-cost mortgage amendments in TILA. See id. at 

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

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

fees threshold for qualified mortgages and high-cost 

mortgages would be different, but the baseline 

definition of points and fees would be the same. See 

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

Proposal did not propose to implement the 

statutory changes to the points and fees threshold 

for high-cost mortgages that exclude from the 

threshold calculation ‘‘bona fide third-party charges 

not retained by the mortgage originator, creditor, or 

an affiliate of the creditor or mortgage originator’’ 

and that permit creditors to exclude certain ‘‘bona 

fide discount points,’’ even though the Board 

proposed to implement identical provisions of the 

Dodd-Frank Act defining the points and fees 

threshold for qualified mortgages. See id. at 27398– 

99. 

The Bureau agrees with comments 

received that use of the introductory 

rate is the appropriate measure under 

this circumstance and notes that this 

approach aligns with the definition of 

‘‘fully-indexed rate’’ as adopted in the 

Bureau’s 2013 ATR Final Rule. Section 

1026.43(c)(5) of that rule implements 

the payment calculation requirements of 

TILA section 129C(a), which contains 

the general requirement that a creditor 

determine a consumer’s ability to repay 

a mortgage loan. Specifically, 

§ 1026.43(c)(5) and comment 43(c)(5)(i)– 

2 of the 2013 ATR Final Rule explain 

that a creditor must determine a 

consumer’s repayment ability with 

respect to substantially equal, monthly, 

fully amortizing payments that are 

based on the greater of the fully indexed 

rate or any introductory interest rate. 

Comment 32(a)(3)–3.iii provides 

several examples to illustrate the rule. 

As described in the examples, creditors 

should use § 1026.32(a)(3)(ii) 

notwithstanding the existence of a rate 

floor or a rate cap on a variable-rate 

transaction that otherwise varies in 

accordance with an index. The Bureau 

believes that the clarification 

concerning rate floors and rate caps is 

useful and will promote clarity in 

applying the rule, notwithstanding the 

removal of the requirement that the 

index must be outside the creditor’s 

control for § 1026.32(a)(3)(ii) to apply. 

Comment 32(a)(3)–3.iii also notes by 

way of example that an open-end credit 

plan may not have a rate that varies 

other than in accordance with an index, 

pursuant to existing rules for homesecured open-end credit in § 1026.40(f). 

32(a)(3)(iii) 

Proposed § 1026.32(a)(2)(iii) would 

have required that, for a loan in which 

the interest rate may vary during the 

term of the loan, other than a loan as 

described in proposed § 1026.32(a)(2)(ii) 

(for credit where the rate may vary 

solely in accordance with an index), the 

annual percentage rate must be based on 

the maximum interest rate that may be 

imposed during the term of the loan. 

Proposed comment 32(a)(2)–3.ii would 

have clarified that § 1026.32(a)(2)(iii) 

applies when the interest rates 

applicable to a transaction may vary, 

except as described in proposed 

§ 1026.32(a)(2)(ii). Proposed comment 

32(a)(2)–3.ii thus would have specified 

that proposed § 1026.32(a)(2)(iii) would 

apply, for example, to a closed-end 

credit transaction when interest rate 

changes are at the creditor’s discretion 

or where multiple fixed rates apply to 

a transaction, such as a step-rate 

mortgage, in which specified fixed rates 

are imposed for specified periods. 

The Bureau sought comment on its 

proposals for determining the APR for 

HOEPA coverage, including on whether 

any aspect of the proposal could result 

in unwarranted, over-inclusive HOEPA 

coverage of HELOCs. In particular, the 

Bureau noted (as discussed above) that 

§ 1026.40(f) and its commentary 

generally prohibit creditors from 

changing the APR on a HELOC unless 

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

control or unless the rate change is 

specifically set forth in the agreement, 

such as step-rate plans. The proposal 

noted that Regulation Z’s HELOC 

restrictions would effectively limit the 

application of proposed 

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

types of closed-end credit transactions. 

The Bureau observed that applying 

proposed § 1026.32(a)(2)(iii) to 

determine the APR for a variable-rate 

HELOC could result in over-inclusive 

coverage of HELOCs under HOEPA 

because the maximum possible interest 

rate for many variable-rate HELOCs is 

pegged to the maximum interest rate 

permissible under State law. That 

interest rate, in turn, likely would cause 

the plan’s APR to exceed HOEPA’s APR 

threshold. Therefore, the Bureau 

solicited comment on whether there 

were any circumstances in which the 

terms of a variable-rate HELOC might 

warrant application of proposed 

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

additional clarification would be 

necessary to avoid unwarranted 

coverage of HELOCs under HOEPA. 

The Bureau received no comments on 

proposed § 1026.32(a)(2)(iii) apart from 

those addressed above in connection 

with § 1026.32(a)(3)(ii) and thus 

finalizes § 1026.32(a)(3)(iii) as proposed 

with minor revisions for clarity. 

32(b) Definitions 

32(b)(1) and (2) 

Points and Fees—General 

Section 1431(c)(1) of the Dodd-Frank 

Act revised and added certain items to 

the definition of points and fees for 

purposes of determining whether a 

transaction exceeds the HOEPA points 

and fees threshold. See TILA section 

103(bb)(4).89 As discussed in detail in 

the Bureau’s 2013 ATR Final Rule, 

section 1412 of the Dodd-Frank Act also 

amended TILA to add new provisions 

that require creditors to consider 

consumers’ ability to repay and that 

create a new type of closed-end credit 

transaction, a ‘‘qualified mortgage.’’ 

Among other requirements, under new 

TILA section 129C(b)(2)(A)(vii), to be a 

qualified mortgage, a transaction must 

have points and fees payable in 

connection with the loan that generally 

do not exceed three percent of the total 

loan amount. In turn, ‘‘points and fees’’ 

for purposes of qualified mortgages 

means ‘‘points and fees’’ as defined by 

HOEPA.90

As noted in the 2012 HOEPA 

Proposal, the Board proposed to 

implement the Dodd-Frank Act’s 

amendments to the definition of points 

and fees for both qualified mortgages 

and high-cost mortgages as part of its 

2011 ATR Proposal. Thus, for example, 

the 2011 ATR Proposal would have 

implemented the Dodd-Frank Act’s 

exclusion of certain private mortgage 

insurance (PMI) premiums from points 

and fees, as well as added loan 

originator compensation and 

prepayment penalties to that definition. 

The Board proposed to implement those 

changes in § 226.32(b)(1) and (2) 91 and 

to revise and add corresponding 

commentary.92


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6891 

93 In brief, these existing provisions require the 

inclusion in points and fees for high-cost mortgages 

of all non-interest items included in the finance 

charge (§ 1026.32(b)(1)(i)), all compensation paid to 

mortgage brokers (§ 1026.32(b)(1)(i)), real estaterelated charges paid to an affiliate of the creditor 

(§ 1026.32(b)(1)(iii)), and certain credit insurance 

and debt suspension and cancellation premiums 

(§ 1026.32(b)(1)(iv)). 

94The Bureau adopts proposed § 1026.32(b)(3) as 

§ 1026.32(b)(2) in this final rule. 

95Proposed § 1026.32(b)(3) defining points and 

fees for HELOCs is finalized as § 1026.32(b)(2) in 

the 2013 HOEPA Final Rule. See the section-bysection analysis of § 1026.32(b)(2) below. 

When the Bureau issued its 2012 

HOEPA Proposal, the Bureau was in the 

process of finalizing the Board’s 2011 

ATR Proposal, including evaluating 

comments received concerning the 

Board’s proposed amendments to the 

definition in Regulation Z of points and 

fees, § 226.32(b)(1) and (2). The Bureau 

believed that issuing separate, different 

proposals to implement the Dodd-Frank 

Act’s amendments to the definition of 

points and fees, one for high-cost 

mortgages and one for qualified 

mortgages, had the potential to cause 

compliance burden and uncertainty. 

The Bureau nevertheless needed to 

address in the 2012 HOEPA Proposal 

certain aspects of the points and fees 

definition, most significantly the 

interaction of points and fees with the 

Bureau’s proposed more inclusive 

definition of the finance charge, the 

application of points and fees to 

HELOCs, and the correction of certain 

internal cross-references. 

To address those issues while also 

attempting to minimize uncertainty, the 

Bureau republished in the 2012 HOEPA 

Proposal the Board’s proposed 

amendments to § 226.32(b)(1) and (2) 

substantially as set forth in the Board’s 

2011 ATR Proposal, with revisions only 

to address the issues noted above and to 

conform terminology to existing 

Regulation Z provisions. The Bureau 

noted in its 2012 HOEPA Proposal that 

it was particularly interested in 

receiving comments concerning any 

newly-proposed language and the 

application of the definitions in 

proposed § 1026.32(b)(1) and (2) to the 

high-cost mortgage context. 

The Bureau received numerous 

comments concerning proposed 

§ 1026.32(b)(1) and (2) from both 

industry and consumer groups, the 

majority of which did not specifically 

address newly-proposed language or to 

the application of the definition to the 

high-cost mortgage context. The 

comments largely reiterated comments 

that the Board and the Bureau had 

received in response to the 2011 ATR 

Proposal. For example, commenters 

generally requested greater clarity with 

respect to whether certain charges (e.g., 

charges not known at consummation) 

must be counted in points and fees. 

Industry commenters also requested that 

the Bureau either exclude or limit the 

amount of certain types of charges that 

must be included (e.g., affiliate charges 

and loan originator compensation). The 

Bureau addresses below the comments 

received in response to proposed 

§ 1026.32(b)(1) and (2) in the 2012 

HOEPA Proposal. Similarly, comments 

received concerning these same 

provisions as they relate to the Board’s 

2011 ATR Proposal are addressed in the 

Bureau’s 2013 ATR Final Rule. The 

Bureau is coordinating the 2013 HOEPA 

and 2013 ATR Final Rules to ensure a 

consistent and cohesive regulatory 

framework for points and fees. Thus, the 

2013 ATR Final Rule is publishing 

regulation text and commentary 

concerning the definition of points and 

fees for closed-end credit transactions, 

as adopted by that rulemaking in 

§ 1026.32(b)(1). Regulation text and 

commentary for § 1026.32(b)(1), though 

discussed in the section-by-section 

analysis below, is not republished in 

this Federal Register notice but instead 

is indicated with asterisks. 

32(b)(1) 

Closed-End Points and Fees 

Existing § 1026.32(b)(1) defines 

‘‘points and fees’’ by listing included 

charges in § 1026.32(b)(1)(i) through 

(iv).93 As discussed below, the Board’s 

2011 ATR Proposal would have revised 

§ 226.32(b)(1)(i) through (iv) to reflect 

amendments to TILA by the Dodd-Frank 

Act, and would have added new 

§ 226.32(b)(1)(v) and (vi) concerning the 

inclusion in points and fees of certain 

prepayment penalties. The Bureau’s 

2012 HOEPA Proposal would have 

amended existing § 1026.32(b)(1), as 

that provision was proposed in the 2011 

ATR Proposal, to clarify that the charges 

listed in proposed § 1026.32(b)(1) are 

the charges that must be included in the 

points and fees calculation for closedend credit transactions. (The Bureau’s 

2012 HOEPA Proposal would have set 

forth a separate definition of points and 

fees for HELOCs in proposed 

§ 1026.32(b)(3)).94 As discussed below, 

the Bureau is adopting proposed 

§ 1026.32(b)(1) in the 2013 ATR Final 

Rule with certain changes to respond to 

concerns raised by commenters. Final 

§ 1026.32(b)(1) as adopted in the 2013 

ATR Final Rule clarifies, as proposed, 

that the provision applies to closed-end 

credit transactions.95

Payable at or before consummation. 

Section 1431(a) of the Dodd-Frank Act 

amended the HOEPA points and fees 

coverage test in TILA section 

103(bb)(1)(A)(ii) by providing for the 

inclusion in points and fees for highcost mortgages of ‘‘the total points and 

fees payable in connection with the 

transaction,’’ as opposed to ‘‘the total 

points and fees payable by the consumer 

at or before closing’’ (emphases added). 

The 2012 HOEPA Proposal would have 

implemented this change in proposed 

§ 1026.32(a)(1)(ii). The Bureau noted in 

its 2012 HOEPA proposal that the 

practical result of this change would 

have been that—unless otherwise 

specified—any item listed in the points 

and fees definitions for closed- and 

open-end credit transactions would 

have been counted toward the points 

and fees threshold for high-cost 

mortgages even if the item were payable 

after consummation or account opening. 

The exceptions would have been certain 

mortgage insurance premiums and 

charges for credit insurance and debt 

cancellation and suspension coverage. 

TILA expressly states that those 

premiums and charges are included in 

points and fees only if payable at or 

before closing. See TILA section 

103(bb)(1)(C) (mortgage insurance) and 

TILA section 103(bb)(4)(D) (credit 

insurance and debt cancellation and 

suspension coverage). 

The Bureau’s proposed inclusion in 

points and fees for high-cost mortgages 

of ‘‘the total points and fees payable in 

connection with the transaction’’ was 

consistent with the proposed inclusion 

in points and fees for qualified 

mortgages of ‘‘the total points and fees 

* * * payable in connection with the 

loan’’ in the Board’s 2011 ATR Proposal. 

As discussed in the Bureau’s 2013 ATR 

Final Rule, the Board expressed concern 

in the 2011 ATR Proposal that some fees 

that occur after closing, such as fees to 

modify a loan, might be deemed to be 

points and fees under the new 

framework. The Board thus requested 

comment in the 2011 ATR Proposal on 

whether other fees (i.e., in addition to 

certain mortgage insurance premiums 

and charges for credit insurance and 

debt cancellation and suspension 

coverage) should be included in points 

and fees only if they are ‘‘payable at or 

before closing.’’ 

As discussed in greater detail in the 

Bureau’s 2013 ATR Final Rule, both 

industry and consumer group 

commenters expressed concern (either 

in response to the 2011 ATR Proposal, 

the 2012 HOEPA Proposal, or both) that 

the general requirement to include in 

points and fees charges ‘‘payable in 

connection with the transaction’’ 

introduced uncertainty into the points 

and fees calculation by, for example, 

making it unclear whether certain 

charges that might not be known (or 


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6892 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

96The Bureau is adopting the same interpretation 

for points and fees for qualified mortgages in the 

2013 ATR Final Rule. See the section-by-section 

analysis of § 1026.32(b)(1) therein. 

97A few industry commenters requested that the 

Bureau clarify that servicing charges are excluded 

from points and fees. The Bureau notes that the 

guidance in comment 32(b)(1)–1 as adopted in the 

2013 ATR Final Rule applies equally to these types 

of charges; thus, they must be included in points 

and fees only if known at or before consummation. 

98The Bureau notes that the inclusion of 

prepayment penalties in points and fees is an 

exception to the general rule that a creditor must 

count only those charges that the creditor knows 

will be imposed. This is a result of the fact that 

TILA expressly requires the maximum prepayment 

penalties that may be charged in connection with 

a transaction to be counted in points and fees. 

knowable) as of consummation would 

need to be included. One industry 

commenter thus recommended that the 

Bureau clarify that items included in the 

finance charge but paid after 

consummation are carved out of points 

and fees. One consumer group 

commenter suggested that the Bureau 

replace the ‘‘payable in connection with 

the transaction’’ phrasing with the 

general requirement to include in points 

and fees charges ‘‘known at or before’’ 

consummation or account opening. The 

commenter noted that the ‘‘known at or 

before’’ standard would (1) Clarify that 

charges financed through the loan 

amount are included in points and fees, 

(2) prevent creditors from evading the 

points and fees test by requiring 

consumers to pay charges after 

consummation, and (3) enable creditors 

to calculate the amount of points and 

fees with certainty at or before 

consummation. 

As discussed in the 2013 ATR Final 

Rule, the Dodd-Frank Act provides that 

for the points and fees tests for both 

high-cost mortgages and qualified 

mortgages, the charges ‘‘payable in 

connection with’’ the transaction are 

included in points and fees. See TILA 

sections 103(bb)(1)(A)(ii) (high-cost 

mortgages) and 129C(b)(2)(A)(vii) 

(qualified mortgages). The Bureau 

appreciates, however, that creditors 

need certainty in calculating points and 

fees so they can ensure that they are not 

exceeding the points and fees thresholds 

for high-cost mortgages (or that they are 

not exceeding the points and fees cap 

for qualified mortgages). The Bureau 

thus interprets the ‘‘in connection with’’ 

requirement in TILA section 

103(bb)(1)(A)(ii) for high-cost mortgages 

as limiting the universe of charges that 

need to be included in points and fees.96

Specifically, to clarify when charges or 

fees are ‘‘in connection with’’ a 

transaction, the Bureau is specifying in 

§ 1026.32(b)(1) in the 2013 ATR Final 

Rule that fees or charges are included in 

points and fees only if they are ‘‘known 

at or before consummation.’’ 

As discussed in detail in the 2013 

ATR Final Rule, the Bureau also is 

adding new comment 32(b)(1)–1 to 

explain when fees or charges are known 

at or before consummation. The 

comment explains that charges for a 

subsequent loan modification generally 

are not included in points and fees 

because, at consummation, the creditor 

would not know whether a consumer 

would seek to modify the loan and 

therefore would not know whether 

charges in connection with a 

modification would ever be imposed.97

Comment 32(b)(1)–1 also clarifies that 

the maximum prepayment penalties that 

may be charged or collected under the 

terms of a mortgage loan are known at 

or before consummation and are 

included in points and fees under 

§ 1026.32(b)(1)(iv), even though the 

consumer will pay them, if ever, 

sometime after consummation.98 In 

addition, comment 32(b)(1)–1 notes 

that, under § 1026.32(b)(1)(i)(C)(1) and 

(iii), certain premiums or other charges 

for PMI or credit insurance must be 

included in points and fees only if they 

are payable at or before consummation. 

Thus, even if the amounts of such 

premiums or other charges are known at 

or before consummation, they are 

included in points and fees only if they 

are payable at or before consummation. 

32(b)(1)(i) 

Prior to the Dodd-Frank Act, TILA 

section 103(aa)(4)(A) provided that 

points and fees includes all items 

included in the finance charge, except 

interest or the time-price differential. 

This provision (the finance charge prong 

of points and fees) is implemented in 

existing § 1026.32(b)(1)(i). The DoddFrank Act did not specifically amend 

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

Nevertheless, both the Board’s 2011 

ATR Proposal and the Bureau’s 2012 

HOEPA Proposal proposed several 

revisions to § 1026.32(b)(1)(i) and 

comment 32(b)(1)(i)–1. 

First, in its 2011 ATR Proposal, the 

Board proposed to revise existing 

language in Regulation Z that requires 

the inclusion in points and fees of ‘‘all 

items required to be disclosed under 

§ 1026.4(a) and 1026.4(b).’’ 12 CFR 

1032(b)(1)(i). Because § 1026.4 does not 

itself require disclosure of the finance 

charge, the Board proposed to revise 

this language to read: ‘‘all items 

considered to be a finance charge under 

§ [1026.4(a)] and [1026.4(b)].’’ The 

Board also proposed certain clarifying 

changes to comment 32(b)(1)(i)–1. 

In addition to re-publishing the 

Board’s proposed change to 

§ 1026.32(b)(1)(i), proposed 

§ 1026.32(b)(1)(i) in the Bureau’s 2012 

HOEPA Proposal would have amended 

the finance charge prong of the points 

and fees definition to ensure that 

additional charges were not included in 

points and fees as a result of the more 

inclusive definition of the finance 

charge proposed in the Bureau’s 2012 

TILA–RESPA Integration Proposal. The 

Bureau believed that the proposed 

amendment to § 1026.32(b)(1)(i) was 

necessary to avoid a potentially 

unwarranted expansion in HOEPA 

coverage through an increase in the 

finance charge. 

In response both to the Board’s 2011 

ATR Proposal and to Bureau’s 2012 

HOEPA Proposal, several industry 

commenters expressed concern that the 

proposed definition of points and fees 

was overbroad because it included all 

items considered to be a finance charge. 

The commenters asserted that several 

items that are included in the finance 

charge under § 1026.4(b) are vague or 

inapplicable in the context of mortgage 

transactions, or that they duplicate 

items specifically addressed in other 

provisions of the points and fees test, 

thus making the points and fees 

calculation internally inconsistent. 

Several industry commenters also 

requested clarification about whether 

specific fees and charges are included in 

points and fees. For example, at least 

two commenters asked that the Bureau 

clarify whether (and if so, to what 

extent) interest, real estate agents’ fees, 

settlement agent costs, hazard insurance 

premiums, property taxes, § 1026.4(c)(7) 

charges, appraisal fees, servicing fees, 

mortgage insurance premiums, 

discounts for payment other than by 

credit, and various optional charges, are 

included in points and fees. The Bureau 

responds to these comments below, but 

generally notes that the finance charge 

as defined in § 1026.4 continues to be 

the starting point for points and fees. 

Once a creditor has determined whether 

a charge would be included in points 

and fees as a finance charge that is 

known at or before consummation, then 

a creditor should apply the more 

specific points and fees provisions in 

§ 1026.32(b)(1)(i)(A) through (F) to 

determine whether the charge is 

excluded. Likewise, even if a creditor 

has determined that a charge is 

excluded from points and fees because 

it is not a finance charge, the creditor 

must apply the more specific points and 

fees provisions in § 1026.32(b)(1)(ii) 

through (vi) to determine whether the 

charge nonetheless must be included in 

points and fees. 

In response to the 2012 HOEPA 

Proposal, some industry commenters 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6893 

99These other items are discussed in the sectionby-section analysis of § 1026.32(b)(1)(i)(C) through 

(F) below. 

100See 76 FR 27390, 27400–02, 27481, 27487–88 

(May 11, 2011). The Board’s proposed 

§ 226.32(b)(1)(i)(B) also would have excluded 

certain PMI premiums from points and fees. Those 

exclusions are addressed in the section-by-section 

analysis of § 1026.32(b)(1)(i)(C) below. 

101 Id. at 27400–01. 

102As discussed in the section-by-section analysis 

of § 1026.(b)(1)(i)(C), however, the Bureau received 

comments concerning the different treatment for 

points and fees of government and PMI premiums. 

also generally urged the Bureau to 

clarify that additional charges would 

not be brought into points and fees 

merely by operation of the Bureau’s 

proposed more inclusive definition of 

the finance charge. Other commenters, 

particularly consumer groups, expressed 

dissatisfaction with the Bureau’s 

proposed method for addressing the 

more inclusive finance charge in 

§ 1026.32(b)(1)(i), generally stating that 

the Bureau’s approach was needlessly 

complicated and that the Dodd-Frank 

Act’s exclusion of bona fide third-party 

charges in TILA section 103(bb)(1)(A)(ii) 

adequately addressed any concerns 

about unwarranted fees being brought 

into the points and fees definition 

through the expanded finance charge. 

As discussed in part III above, the 

Bureau will be determining whether to 

adopt its proposed more inclusive 

finance charge definition when it 

finalizes the 2012 TILA–RESPA 

Integration Proposal, rather than in 

January 2013. Accordingly, the Bureau 

neither addresses comments relating to, 

nor finalizes in this rulemaking, the 

2012 HOEPA Proposal’s amendment to 

the definition of points and fees for 

closed-end credit transactions to 

address the more Bureau’s proposed 

more inclusive finance charge. 

The Bureau otherwise is adopting 

proposed § 1026.32(b)(1)(i) in the 2013 

ATR Final Rule substantially as 

proposed in the 2011 ATR Proposal and 

the 2012 HOEPA Proposal, but with 

certain additions and clarifications in 

the commentary to § 1026.32(b)(1)(i) (as 

well as in other parts of the points and 

fees calculation) to address commenters’ 

requests for clarification about whether 

certain fees are included in or excluded 

from the calculation. These additions 

and clarifications also are discussed in 

detail in the section-by-section analysis 

of § 1026.32(b)(1)(i) in the Bureau’s 2013 

ATR Final Rule. 

With respect to certain of the 

commenters’ specific concerns about 

whether particular items (e.g., discounts 

offered to induce payment for a 

purchase by cash and settlement agent 

charges), the Bureau notes that creditors 

should follow § 1026.4 for when such 

charges must be included in the finance 

charge. If they are not included in the 

finance charge, they would not be 

included in points and fees. Moreover, 

as discussed below and in new 

comment 32(b)(1)(i)(D)–1, certain 

settlement agent charges may also be 

excluded from points and fees as bona 

fide third-party charges that are not 

retained by the creditor, loan originator, 

or an affiliate of either. 

32(b)(1)(i)(A) 

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

historically has provided that points 

and fees includes all items included in 

the finance charge, except interest or the 

time-price differential. This provision 

(the finance charge prong of points and 

fees) is implemented in existing 

§ 1026.32(b)(1)(i). For organizational 

purposes, the Board in its 2011 ATR 

Proposal set forth new 

§ 226.32(b)(1)(i)(A) to implement the 

pre-existing exclusion of interest from 

points and fees. In its 2012 HOEPA 

Proposal, the Bureau republished the 

Board’s proposed § 226.32(b)(1)(i)(A) 

without change as § 1026.32(b)(1)(i)(A). 

The Bureau adopts proposed 

§ 1026.32(b)(1)(i)(A) in the 2013 ATR 

Final Rule, as proposed. 

32(b)(1)(i)(B) 

The Dodd-Frank Act did not amend 

TILA section 103(aa)(4)(A) concerning 

the inclusion in points and fees of noninterest items in the finance charge. 

However, the Dodd-Frank Act added 

several provisions to TILA that provide 

for the exclusion from points and fees 

of certain items that otherwise would be 

included in points and fees under the 

finance charge prong. One such item is 

premiums for government mortgage 

insurance.99 Specifically, section 1431 

of the Dodd-Frank Act added new TILA 

section 103(bb)(1)(C), which excludes 

all government mortgage insurance 

premiums from the calculation of points 

and fees. Because such premiums 

otherwise would be included in points 

and fees as an item included in the 

finance charge, the Board in its 2011 

ATR Proposal proposed to implement 

new TILA section 103(bb)(1)(C) in new 

§ 226.32(b)(1)(i)(B), as an exclusion from 

the finance charge prong of points and 

fees.100

In implementing the government 

mortgage insurance premium exclusion 

provided by new TILA section 

103(bb)(1)(C), the Board proposed to 

exclude from points and fees not only 

mortgage insurance premiums under 

government programs, but also charges 

for mortgage guaranties under 

government programs.101 The Board 

stated that it interpreted the statute to 

exclude such guaranties, and that its 

proposal was supported by its authority 

under TILA section 105(a) to make 

adjustments to facilitate compliance 

with and effectuate the purposes of 

TILA. Both the U.S. Department of 

Veterans Affairs (VA) and the USDA 

expressed concerns to the Board that, if 

charges for guaranties provided by those 

agencies and State agencies were 

included in points and fees, their loans 

might exceed high-cost mortgage 

thresholds and the cap for qualified 

mortgages, thereby disrupting these 

programs and jeopardizing an important 

source of credit for many consumers. 

The Bureau’s 2012 HOEPA Proposal 

would have implemented the exclusion 

from points and fees of government 

mortgage insurance premiums and 

guaranty fees as proposed by the Board 

in § 226.32(b)(1)(i)(B) and comment 

32(b)(1)(i)–2, with only minor wording 

changes for consistency with Regulation 

Z. In excluding guaranty fees, the 

Bureau, like the Board in its 2011 ATR 

Proposal, would have exercised its 

authority under TILA section 105(a) to 

make adjustments to facilitate 

compliance with and effectuate the 

purposes of TILA. For the same reasons 

stated by the Board in its 2011 ATR 

Proposal, and as further explained in 

the Bureau’s 2013 ATR Final Rule, the 

Bureau believes that exercising its 

authority under TILA section 105(a) to 

exclude government guaranty fees from 

points and fees is appropriate to ensure 

access to credit through Federal and 

State government programs. 

The Bureau did not receive any 

comments in response to its 2012 

HOEPA Proposal objecting to the 

exclusion from points and fees of 

government mortgage insurance 

premiums or guaranty fees.102 The 

Bureau is adopting these exclusions in 

the Bureau’s 2013 ATR Final Rule 

substantially as proposed in the 2011 

ATR and 2012 HOEPA Proposals, but 

with clarifying revisions that are 

discussed in greater detail in the 

section-by-section analysis of 

§ 1026.(b)(1)(i)(B) in the 2013 ATR Final 

Rule. For instance, the Bureau is adding 

an example to comment 32(b)(1)(i)(B)–1 

to clarify that mortgage guaranty fees 

under government programs, such as 

VA and USDA funding fees, are 

excluded from points and fees. 

32(b)(1)(i)(C) 

As added by the Dodd-Frank Act, 

TILA section 103(bb)(1)(C) excludes 

certain PMI premiums from points and 

fees for high-cost mortgages and 


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6894 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

103See 76 FR 27390, 27401–02 (May 11, 2011). 

104See Department of Housing and Urban 

Development, Mortgagee Letter 12–4 (Mar. 6, 2012), 

available at http://portal.hud.gov/hudportal/ 

documents/huddoc?id=12-04ml.pdf. 

qualified mortgages. Specifically, TILA 

section 103(bb)(1)(C)(ii) provides that 

points and fees shall exclude any 

amount of PMI premiums payable at or 

before consummation that is not in 

excess of the amount payable under 

policies in effect at the time of 

origination under section 203(c)(2)(A) of 

the National Housing Act, provided that 

the premium, charge, or fee is required 

to be refundable on a pro-rated basis 

and the refund is automatically issued 

upon notification of the satisfaction of 

the underlying mortgage loan. TILA 

section 103(bb)(1)(C)(iii) provides for 

the exclusion from points and fees of 

any mortgage insurance premium paid 

by the consumer after consummation. 

As with government mortgage insurance 

premiums and guarantees, because such 

PMI premiums otherwise would be 

included in points and fees as an item 

included in the finance charge, the 

Board proposed to implement the new 

exclusion in § 226.32(b)(1)(i)(B) and 

comments 32(b)(1)(i)–3 and –4, as an 

exclusion from the finance charge prong 

of points and fees.103

The 2012 HOEPA Proposal’s proposed 

§ 1026.32(b)(1)(i)(B) and comments 

32(b)(1)(i)–3 and –4 republished the 

Board’s proposed provisions concerning 

PMI premiums with only minor changes 

for consistency with Regulation Z. The 

Bureau’s 2012 HOEPA Proposal thus 

would have excluded from points and 

fees, as required by amended TILA 

section 103(bb)(1)(C): (1) All up-front 

PMI premiums, but only to the extent 

that such premiums did not exceed 

government-sponsored premiums and 

were refundable to the consumer on a 

pro rata basis, and (2) all PMI premiums 

payable after consummation. 

Several industry commenters objected 

to the 2012 HOEPA Proposal’s treatment 

of PMI premiums for closed-end points 

and fees. Industry commenters generally 

voiced the same objections to this 

provision that they voiced in response 

to the Board’s 2011 ATR Proposal. 

Specifically, some industry commenters 

criticized what they viewed as different 

treatment of PMI and government 

insurance premiums and argued that 

PMI premiums should be excluded from 

points and fees altogether, even if the 

premiums do not satisfy the statutory 

standard for exclusion. These 

commenters stated that PMI provides 

substantial benefits to consumers and 

noted that the 2012 HOEPA Proposal 

was likely to incentivize creditors to 

originate FHA loans rather than loans 

requiring PMI if FHA premiums are 

given more favorable treatment in points 

and fees. One such commenter stated 

that driving consumers to FHA loans 

would be problematic because FHA’s 

insurance book has already grown too 

large and is at risk of becoming 

actuarially unsound. Another 

commenter noted that comparing upfront mortgage insurance premiums for 

conventional loans to such premiums 

for FHA loans is problematic for 

consumers because FHA premiums are 

structured to have an up-front payment 

followed by monthly payments, whereas 

with PMI a consumer can elect to pay 

a single, up-front premium, to pay on a 

monthly basis, or to pay through rate. 

Under the proposal, the commenter 

argued, consumers would be less likely 

to be able to choose a single, up-front 

premium. One commenter argued that 

tying PMI premiums to up-front 

government premiums would require 

conventional lenders to become experts 

in FHA loans. Some such commenters 

suggested that all mortgage insurance 

premiums payable at or before 

consummation, whether government or 

private and regardless of amount, 

should be excluded from points and 

fees. 

Other industry commenters objected 

to the Bureau’s proposed 

implementation of the statutory 

distinction that would favor refundable 

PMI premiums over nonrefundable 

premiums. These commenters noted 

that nonrefundable premiums tend to be 

less expensive for consumers than 

refundable premiums. 

Finally, some commenters expressed 

uncertainty as to the precise rule for 

inclusion of PMI premiums payable at 

or before consummation in points and 

fees. It was noted that proposed 

§ 1026.32(b)(1)(i)(B)(2), as written, could 

have been interpreted to require 

inclusion of the entire PMI premium if 

it exceeded the FHA insurance 

premium, rather than merely the 

inclusion of the portion of the premium 

in excess of the FHA premium. A few 

commenters also expressed uncertainty 

about how to complete the FHA 

premium comparison when originating 

conventional loans, particularly loans 

that would not qualify for FHA 

insurance (e.g., because their principal 

balance is too high). 

These comments on the Bureau’s 2012 

HOEPA Proposal generally were 

consistent with concerns raised in 

response to the Board’s 2011 ATR 

Proposal. Thus, commenters’ concerns 

primarily are addressed in the sectionby-section analysis of 

§ 1026.32(b)(1)(i)(C) in the 2013 ATR 

Final Rule. As discussed in greater 

detail therein, the Bureau is finalizing 

proposed § 1026.32(b)(1)(i)(B) 

concerning PMI premiums in the 2013 

ATR Final Rule substantially as 

proposed in the 2011 ATR and 2012 

HOEPA Proposals. However, the Bureau 

finalizes the provision in 

§ 1026.32(b)(1)(i)(C) and divides it into 

two parts. The first part, 

§ 1026.32(b)(1)(i)(C)(1), addresses PMI 

premiums payable at or before 

consummation. The second part, 

§ 1026.32(b)(1)(i)(C)(2), addresses PMI 

premiums payable after consummation. 

As noted in the 2013 ATR Final Rule, 

with respect to the comments requesting 

that all PMI premiums be excluded from 

points and fees, the Bureau notes that 

Congress enacted TILA section 

103(bb)(1)(C), which created different 

treatment of government and PMI 

premiums and prescribed specific and 

detailed conditions for excluding PMI 

premiums (i.e., based on the amount of 

the premium and whether it is 

refundable). The Bureau does not 

believe it would be appropriate to 

exercise its exception authority to 

reverse Congress’s decision. 

The Bureau acknowledges, however, 

that there is a need for clarification as 

to what portion of any PMI premium 

payable at or before consummation must 

be included in points and fees. Thus, as 

discussed more fully in the 2013 ATR 

Final Rule, the Bureau adopts in that 

rulemaking clarifying changes that, 

among other things, specify that only 

the portion of a PMI premium payable 

at or before consummation that exceeds 

the government premium is included in 

points and fees. The Bureau also adopts 

clarifying changes that specify that 

creditors originating conventional 

loans—even such loans that are not 

eligible to be FHA loans (i.e., because 

their principal balance is too high)— 

should look to the permissible up-front 

premium amount for FHA loans, as 

implemented by applicable regulations 

and other written authorities issued by 

the FHA (such as Mortgagee Letters). 

For example, pursuant to HUD’s 

Mortgagee Letter 12–4 (published March 

6, 2012), the allowable up-front FHA 

premium for single-family homes is 1.75 

percent of the base loan amount.104

Finally, the Bureau clarifies that only 

the portion of the single or up-front PMI 

premium in excess of the allowable 

FHA premium (i.e., rather than any 

monthly premium or portion thereof) 

must be included in points and fees. 

32(b)(1)(i)(D) 

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

excludes from points and fees for 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6895 

105See 76 FR 27390, 27465 (May 11, 2011). 

106This was noted in § 1026.34(a)(5)(v) and 

comment 34(a)(5)(v)-1 of the 2012 HOEPA Proposal. 

107Proposed § 1026.32(b)(5)(i) in the 2012 

HOEPA Proposal would have differed from the 

proposed § 226.43(e)(3)(ii)(A) in the Board’s 2011 

ATR Proposal in one minor respect to address the 

application of HOEPA and, in turn, the bona fide 

third-party charge exclusion, to HELOCs. See the 

section-by-section analysis of § 1026.32(b)(2)(i)(D) 

below. 

108See id. (proposing the same caveat to the bona 

fide third-party charge exclusion for qualified 

mortgages). 

109This issue is also addressed in the section-bysection analysis of § 1026.32(b)(1)(iii) in the 2013 

ATR Final Rule. 

purposes of determining whether a 

transaction is a high-cost mortgage bona 

fide third-party charges not retained by 

the creditor, loan originator, or an 

affiliate of either. This bona fide thirdparty charge exclusion from points and 

fees for high-cost mortgages is identical 

to the exclusion of such charges from 

points and fees for qualified mortgages 

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

which the Board proposed to implement 

in its 2011 ATR Proposal in 

§ 226.43(e)(3)(ii)(A).105 Such a bona fide 

third-party charge would include, for 

example, a counseling fee paid by the 

consumer to a HUD-certified 

homeownership counseling 

organization to receive the counseling 

required for high-cost mortgages under 

§ 1026.34(a)(5).106 For consistency and 

to ease compliance, the Bureau 

proposed in its 2012 HOEPA Proposal to 

implement the bona fide third-party 

charge exclusion for high-cost mortgages 

in proposed § 1026.32(b)(5)(i) in a 

manner that mirrored in all significant 

respects the Board’s proposed 

§ 226.43(e)(3)(ii)(A) concerning such 

charges.107

Specifically, proposed 

§ 1026.32(b)(5)(i) in the 2012 HOEPA 

Proposal would have excluded from the 

points and fees calculation for high-cost 

mortgages any bona fide third-party 

charge not retained by the creditor, loan 

originator, or an affiliate of either, 

unless the charge was a PMI premium 

that was required to be included in 

closed-end points and fees under 

proposed § 1026.32(b)(1)(i)(B). As just 

discussed in the section-by-section 

analysis of § 1026.32(b)(1)(i)(C), the 

Dodd-Frank Act amended TILA to add 

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

only certain PMI premiums from the 

points and fees calculation for high-cost 

mortgages. Thus, the Bureau would 

have implemented TILA’s general 

exclusion of bona fide third-party 

charges from the points and fees 

calculation for high-cost mortgages in 

proposed § 1026.32(b)(5)(i) with the 

caveat that certain PMI premiums must 

be included in points and fees for 

closed-end credit transactions as set 

forth in proposed 

§ 1026.32(b)(1)(i)(B).108 In other words, 

where one portion of the statutory 

points and fees provision would 

exclude the charge (the general 

provision) and another would include it 

(the specific provision), the Bureau 

interpreted TILA to require the charge to 

be included in the calculation. 

Proposed comment 32(b)(5)(i)–1 

would have clarified that § 1026.36(a)(1) 

and comment 36(a)–1 provide 

additional guidance concerning the 

meaning of the term ‘‘loan originator’’ 

for purposes of § 1026.32(b)(5)(i). 

Proposed comment 32(b)(5)(i)–2 would 

have provided an example for purposes 

of determining whether a charge may be 

excluded from points and fees as a bona 

fide third-party charge. Proposed 

comment 32(b)(5)(i)–3 addressing PMI 

premiums mirrored proposed comment 

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

Proposal, except that proposed 

comment 32(b)(5)(i)–3 would have 

provided that it applies for purposes of 

determining whether a mortgage is a 

high-cost mortgage, rather than a 

qualified mortgage. Proposed comment 

32(b)(5)(i)–3 also would have specified 

that the comment applies to closed-end 

transactions. 

The Bureau received two main 

categories of comments concerning 

proposed § 1026.32(b)(5)(i). First, 

several industry commenters stated that 

Congress intended the ‘‘bona fide thirdparty charge’’ exclusion to establish a 

‘‘bona fide’’ standard, rather than a 

‘‘reasonable’’ standard, for the exclusion 

of all third-party charges from points 

and fees for high-cost mortgages (and 

qualified mortgages). These comments 

are addressed below in the section-bysection analysis of § 1026.32(b)(1)(iii), 

which deals with the inclusion in points 

and fees of certain real estate-related 

charges paid to the creditor or an 

affiliate of the creditor.109

Second, GSE commenters argued, as 

they did in comments submitted in 

response to the Board’s 2011 ATR 

Proposal, that loan-level price 

adjustments (LLPAs) should be 

excluded from points and fees for highcost mortgages as bona fide third-party 

charges. LLPAs are made by Fannie Mae 

and Freddie Mac when purchasing 

loans to offset perceived risks, such as 

a high loan-to-value ratio (LTV) or low 

credit score, among many other risk 

factors. The Board’s 2011 ATR Proposal 

solicited comment on whether such 

charges, including charges in 

connection with similar risk-based price 

adjustments for mortgages held in 

portfolio, should be excluded from 

points and fees for qualified mortgages. 

As discussed in detail in the 2013 ATR 

Final Rule, creditors may, but are not 

required to, increase the interest rate 

charged to the consumer so as to offset 

the impact of the LLPAs or increase the 

costs to the consumer in the form of 

points to offset the lost revenue 

resulting from the LLPAs. GSE 

commenters thus argued that these 

points should not be counted in points 

and fees for high-cost mortgages (or for 

qualified mortgages) under the 

exclusion for ‘‘bona fide third party 

charges not retained by the loan 

originator, creditor, or an affiliate of 

either’’ in TILA section 103(bb)(1)(A)(ii) 

(or TILA section 129C(b)(2)(C)(i) for 

qualified mortgages). The GSE 

commenters noted that LLPAs did not 

exist when § 1026.32 was originally 

adopted, so there has been no guidance 

on whether such charges should be 

included in, or excluded from, points 

and fees. The commenters stated that 

the lack of guidance is now an issue 

because of the revised points and fees 

definition and lower threshold for 

points and fees for high-cost mortgages 

following the Dodd-Frank Act. 

The GSE commenters, as well as 

certain industry commenters, worried 

that, without an exclusion for LLPAs, 

points and fees would quickly be 

consumed by these fees and loan 

originator compensation, such that 

loans could have trouble staying under 

the general 5 percent high-cost mortgage 

points and fees threshold. The GSE 

commenters stated that LLPAs meet the 

definition of a bona fide third-party 

charge as that term was proposed in the 

2011 ATR and 2012 HOEPA Proposals, 

because the creditor does not retain the 

charge. In addition, LLPAs are set fees 

that are transparent and accessible via 

the GSEs’ Web sites, so there is little 

risk of abuse. The commenters 

acknowledged that some creditors 

charge similar risk-based price 

adjustments to consumers even when 

holding loans in portfolio, but they 

argued that such risk-based price 

adjustments also could be excluded 

from points and fees if they were made 

publicly available, as the GSE’s charges 

are, or disclosed to consumers as a 

third-party fee on the Bureau’s proposed 

TILA–RESPA integrated disclosure 

form. Certain industry comments 

suggested that the Bureau clarify that 

LLPAs may be excluded from points 

and fees as bona fide discount points. 

Consumer groups did not comment on 

this issue. 


srobinson on DSK4SPTVN1PROD with 
6896 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

110The exclusion of bona fide third-party charges 

from points and fees for HELOCs, which also was 

proposed in § 1026.32(b)(5)(i) in the 2012 HOEPA 

Proposal, is finalized in § 1026.32(b)(2)(1)(D), as 

discussed below. 

111See TILA section 103(dd)(1)(A) (average prime 

offer rate) and (B) (average rate on loans insured 

under Title I). 

112See 76 FR 27390, 27465–67, 27485, 27504 

(May 11, 2011). 

To ensure a streamlined definition of 

points and fees in the high-cost 

mortgage and qualified mortgage 

contexts, the Bureau is adopting 

proposed § 226.43(e)(3)(ii)(A) (from the 

2011 ATR Proposal) and proposed 

§ 1026.32(b)(5)(i) as applied to closedend credit transactions (from the 2012 

HOEPA Proposal) in 

§ 1026.32(b)(1)(i)(D) in the 2013 ATR 

Final Rule.110 The Bureau believes that 

this placement is sensible in the context 

of both rulemakings given that the items 

excluded through the bona fide thirdparty charge exclusion would be 

counted in points and fees, if at all, as 

a finance charge. 

Section 1026.32(b)(1)(i)(D) as adopted 

in the 2013 ATR Final Rule retains the 

proposed caveat that the exclusion of 

bona fide third-party charges from 

points and fees is subject to the 

limitation that certain amounts of PMI 

premiums must sometimes be included 

in the calculation pursuant to 

§ 1026.32(b)(1)(i)(C). In addition, the 

2013 ATR Final Rule adopts 

§ 1026.32(b)(1)(i)(D) with two new 

comments reflecting that the exclusion 

for bona fide third-party charges also is 

subject to the more specific points and 

fees provisions in § 1026.32(b)(1)(iii) 

and (iv). As adopted in the 2013 ATR 

Final Rule, § 1026.32(b)(1)(i)(D) thus 

provides that a bona fide third-party 

charge not retained by the creditor, loan 

originator, or an affiliate of either is 

excluded from points and fees unless 

the charge is required to be included 

under § 1026.32(b)(1)(i)(C) (PMI 

premiums), (iii) (certain real estaterelated fees), or (iv) (credit insurance 

premiums). The final rule thus adheres 

to the approach that the specific 

statutory provisions regarding PMI 

(TILA section 103(bb)(1)(C)), certain real 

estate-related fees (TILA section 

103(bb)(4)(C)), and credit insurance 

premiums (TILA section 103(bb)(4)(D)) 

should govern whether these charges are 

included in points and fees, rather than 

the more general provisions regarding 

the exclusion of bona fide third-party 

charges in TILA sections 

103(bb)(1)(A)(ii) and 129C(b)(2)(C) for 

high-cost mortgages and qualified 

mortgages, respectively. 

As discussed in detail in the 2013 

ATR Final Rule, the Bureau 

acknowledges that TILA sections 

103(bb)(1)(A)(ii) and 129C(b)(2)(C) 

concerning bona fide third-party charges 

could be read to provide for a two-step 

calculation of points and fees. First, the 

creditor would calculate points and fees 

as defined in TILA section 103(bb)(4). 

Second, the creditor would exclude all 

bona fide third-party charges not 

retained by the mortgage originator, 

creditor, or an affiliate of either, as 

provided in TILA sections 

103(bb)(1)(A)(ii) and 129C(b)(2)(C). 

Under this reading, certain charges— 

such as for private mortgage insurance 

premiums—could initially, in step one, 

be included in points and fees. In step 

two, these charges would be excluded if 

they were bona fide third-party charges. 

However, to give meaning to the 

specific statutory provisions regarding 

mortgage insurance, real estate related 

fees, and credit insurance, the Bureau 

believes that the better reading is that 

these specific provisions should govern 

whether such charges are included in 

points and fees, rather than the general 

provisions excluding certain bona fide 

third-party charges. In support of this 

approach, the Bureau also invokes its 

authority under TILA section 105(a) to 

make such adjustments and exceptions 

as are necessary and proper to effectuate 

the purposes of TILA. The Bureau 

believes that Congress included specific 

provisions regarding these types of fees 

in part to deter the imposition of 

excessive fees. Allowing exclusion of 

these fees and charges if they are ‘‘bona 

fide’’—without meeting any of the other 

conditions specified by Congress— 

would undermine this purpose. 

Additionally, it would in effect nullify 

the specific conditions Congress set 

forth for exclusion from the points and 

fees calculation. 

As noted above, GSE commenters 

argued that points charged by creditors 

to offset LLPAs should be excluded 

from points and fees as bona fide thirdparty charges. In setting the purchase 

price for loans, the GSEs impose LLPAs 

to offset certain credit risks, and 

creditors may—but are not required to— 

recoup the revenue lost as a result of the 

LLPAs by increasing the costs to 

consumers in the form of points. As 

noted in the 2013 ATR Final Rule, the 

Bureau believes that the manner in 

which creditors respond to LLPAs is 

better viewed as a fundamental 

component of how the pricing of a 

mortgage loan is determined, rather than 

as a third-party charge. As the Board 

noted in its 2011 ATR Proposal, 

allowing creditors to exclude points 

charged to offset LLPAs could create 

market imbalances between loans sold 

on the secondary market and loans held 

in portfolio. While such imbalances 

could be addressed by excluding risk 

adjustment fees more broadly, including 

such fees charged by creditors for loans 

held in portfolio, the Bureau agrees with 

the Board that this could create 

compliance and enforcement 

difficulties. Thus, the Bureau concludes 

that, if points are charged to offset 

LLPAs, those points may not be 

excluded from points and fees as bona 

fide third-party charges. However, to the 

extent that creditors offer consumers the 

opportunity to pay points to lower the 

interest rate that the creditor would 

otherwise charge to recover the lost 

revenue from the LLPAs, such points 

may be excluded from points and fees 

as bona fide discount points if they 

satisfy the requirements of 

§ 1026.32(b)(1)(i)(E) or (F). 

In light of the foregoing 

considerations, the Bureau is finalizing 

the exclusion of bona fide third-party 

charges from closed-end points and fees 

in § 1026.32(b)(1)(i)(D) in the 2013 ATR 

Final Rule, with comments 

32(b)(1)(i)(D)–1 through –4 providing 

further guidance concerning the 

interaction of the bona fide third-party 

charge exclusion with other points and 

fees provisions. See comments 

32(b)(1)(i)(D)–1 (third-party settlement 

agent charges), –2 (PMI premiums), –3 

(real estate-related charges), and –4 

(credit insurance premiums). 

32(b)(1)(i)(E) 

Exclusion of Up to Two Bona Fide 

Discount Points 

Section 1431(d) of the Dodd-Frank 

Act added new section 103(dd)(1) to 

TILA, which permits a creditor to 

exclude from points and fees for highcost mortgages up to and including two 

bona fide discount points payable by the 

consumer in connection with the 

mortgage, but only if the interest rate 

from which the mortgage’s interest rate 

will be discounted does not exceed by 

more than one percentage point (1) the 

average prime offer rate or (2) for loans 

secured by personal property, the 

average rate on a loan for which 

insurance is provided under Title I of 

the National Housing Act.111 New TILA 

section 103(dd)(1) for high-cost 

mortgages is substantially similar to 

new TILA section 129C(b)(2)(C)(ii)(I). 

TILA section 129C(b)(2)(C)(ii)(I) 

provides for the exclusion of up to and 

including two bona fide discount points 

from points and fees for qualified 

mortgages, but only if the interest rate 

for the transaction before the discount 

does not exceed by more than one 

percentage point the average prime offer 

rate.112 The only difference between 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6897 

113 In its 2012 HOEPA Proposal, the Bureau 

proposed to implement the exclusion of up to one 

bona fide discount point from the points and fees 

calculation for high-cost mortgages in 

§ 1026.32(b)(5)(ii)(B)(1) and (2). See the section-bysection analysis of § 1026.32(b)(1)(i)(F) below. 

114The Bureau also received comment on its 

proposed definition of the phrase ‘‘bona fide.’’ 

Those comments are addressed in the section-bysection analysis of § 1026.32(b)(3) below. 

new TILA section 103(dd)(1) (high-cost 

mortgages) and new TILA section 

129C(b)(2)(C)(ii)(I) (qualified mortgages) 

is that the high-cost mortgage provision 

provides for a special calculation to 

determine whether discount points may 

be excluded from points and fees for 

loans secured by personal property. 

In the 2012 HOEPA Proposal, the 

Bureau proposed to implement the 

exclusion of up to two bona fide 

discount points from points and fees for 

high-cost mortgages in proposed 

§ 1026.32(b)(5)(ii)(A)(1) (loans secured 

by real property) and (2) (loans secured 

by personal property).113 The proposed 

provision generally would have been 

consistent with proposed 

§ 226.43(e)(3)(ii)(B) in the Board’s 2011 

ATR Proposal, which would have 

implemented new TILA section 

129C(b)(2)(C)(ii)(I) for qualified 

mortgages. Specifically, proposed 

§ 1026.32(b)(5)(ii)(A)(1) would have 

permitted a creditor to exclude from 

points and fees for high-cost mortgages 

up to two bona fide discount points 

payable by the consumer, provided that 

the interest rate for the closed- or openend credit transaction without such 

discount points would not exceed by 

more than one percentage point the 

average prime offer rate as defined in 

§ 1026.35(a)(2). Proposed 

§ 1026.32(b)(5)(ii)(A)(2) would have 

implemented the special calculation for 

determining whether up to two discount 

points could be excluded from the highcost mortgage points and fees 

calculation for transactions secured by 

personal property. Thus, under 

proposed § 1026.32(b)(5)(ii)(A)(2) a 

creditor extending credit secured by 

personal property could exclude from 

points and fees up to two bona fide 

discount points payable by the 

consumer, provided that the interest 

rate for the closed- or open-end credit 

transaction without such discount 

points would not exceed by more than 

one percentage point the average rate on 

loans insured under Title I of the 

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

seq.). 

Proposed comment 32(b)(5)(ii)–1 

would have clarified how to determine, 

for purposes of the bona fide discount 

point exclusion in proposed 

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

whether a transaction’s interest rate met 

the requirement not to exceed the 

average prime offer rate by more than 

one or two percentage points, 

respectively. Specifically, proposed 

comment 32(b)(5)(ii)–1 would have 

provided that the average prime offer 

rate for proposed 

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

average prime offer rate that applies to 

a comparable transaction as of the date 

the interest rate for the transaction is 

set. Proposed comment 32(b)(5)(ii)–1 

would have cross-referenced proposed 

comments 32(a)(1)(i)–1 and –2 for 

closed- and open-end credit 

transactions, respectively, for guidance 

as to determining the applicable average 

prime offer rate. Proposed comment 

32(b)(5)(ii)–1 also would have crossreferenced proposed comments 

43(e)(3)(ii)–3 and –4 for examples of 

how to calculate bona fide discount 

points for closed-end credit transactions 

secured by real property. 

The Bureau received several 

comments concerning the exclusion of 

discount points from points and fees for 

high-cost mortgages. The comments, 

which were from industry, generally 

requested that the Bureau use its 

authority to eliminate or loosen the 

requirement that the interest rate prior 

to the discount not exceed the average 

prime offer rate by the statutorilyprescribed amount. The commenters 

stated that the starting interest rate 

requirement is too restrictive and will 

mean that, in many cases, creditors will 

not be able to deduct any discount 

points from points and fees. Thus, for 

example, one commenter suggested that 

one percentage point be added to the 

margin above the average prime offer 

rate for jumbo loans and loans on 

second homes, which tend to have 

higher interest rates. A few industry 

commenters also requested that the 

Bureau clarify that discount points that 

meet the criteria are excluded from 

points and fees regardless of who pays 

them (i.e., the consumer, the seller, or 

another person, such as the consumer’s 

employer).114 The Bureau did not 

receive any comments specifically on 

proposed comment 32(b)(5)(ii)–1; 

however, one industry commenter 

requested that the Bureau clarify 

whether the examples in proposed 

comments 43(e)(3)(ii)–3 and –4 in the 

2011 ATR Proposal for performing the 

discount point calculation apply in the 

high-cost mortgage context. 

As noted in the 2013 ATR Final Rule, 

which received similar comments 

concerning the exclusion of bona fide 

discount points from the points and fees 

calculation for qualified mortgages, the 

starting interest rate limitations are 

prescribed in the statute. The Bureau 

recognizes that these limitations may 

circumscribe the ability of consumers to 

purchase more discount points to lower 

their interest rates. Nevertheless, 

Congress apparently concluded that 

there was a greater probability of 

consumer injury when consumers 

purchased more than two discount 

points or when consumers use discount 

points to buy down interest rates that 

exceed the average prime offer rate by 

more than two percentage points. In the 

absence of data or specific information 

suggesting a contrary conclusion, the 

Bureau declines to use its authority to 

adjust the statutory requirement. 

As to comments seeking guidance that 

discount points may be excluded if not 

directly paid by the consumer, the 

Bureau notes that creditors should 

continue to apply the basic rules of 

Regulation Z concerning whether points 

are included in the finance charge and, 

in turn, whether they are included in 

points and fees. For example, because 

seller’s points are excluded from the 

finance charge under existing 

§ 1026.4(c)(5), they are not included in 

points and fees, regardless of whether 

they meet the bona fide discount point 

test for exclusion. 

In light of the foregoing 

considerations, the Bureau adopts in the 

2013 ATR Final Rule the exclusion from 

points and fees of up to two bona fide 

discount points substantially as 

proposed in the 2011 ATR and 2012 

HOEPA Proposals (for qualified 

mortgages and high-cost mortgages, 

respectively). However, to ensure a 

streamlined definition of points and fees 

in the high-cost mortgage and qualified 

mortgage contexts, the Bureau is 

finalizing proposed § 226.43(e)(3)(ii)(B) 

(from the 2011 ATR Proposal) and 

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

(2) as applied to closed-end credit 

transactions (from the 2012 HOEPA 

Proposal) in § 1026.32(b)(1)(i)(E) in the 

2013 ATR Final Rule. Section 

1026.32(b)(1)(i)(E)(1) sets forth the 

general rule, and § 1026.32(b)(1)(i)(E)(2) 

sets forth the special rule under HOEPA 

for personal property-secured loans. The 

Bureau believes that this placement is 

sensible in the context of both 

rulemakings given that the points 

excluded through the bona fide discount 

point exclusion would be counted in 

points and fees, if at all, through the 

finance charge prong. 

The 2013 ATR Final Rule finalizes 

proposed comment 32(b)(5)(ii)–1 from 

the 2012 HOEPA Proposal as comment 

32(b)(1)(i)(E)–2, with certain nonsubstantive changes. The 2013 ATR 

Final Rule also adopts as comment 


srobinson on DSK4SPTVN1PROD with 
6898 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

115See TILA section 103(dd)(2)(A) (average prime 

offer rate) and (B) (average rate on loans insured 

under Title I). 

116See 76 FR 27390, 27465–67, 27485, 27504 

(May 11, 2011). 117See id. 

118Some commenters use the term ‘‘yield spread 

premium’’ to refer to any payment from a creditor 

to a mortgage broker that is funded by increasing 

the interest rate that would otherwise be charged to 

the consumer in the absence of that payment. These 

commenters generally assume that any payment to 

the brokerage firm by the creditor is funded out of 

the interest rate, reasoning that had the consumer 

paid the brokerage firm directly, the creditor would 

have had lower expenses and would have been able 

to charge a lower rate. Other commenters use the 

term ‘‘yield spread premium’’ more narrowly to 

refer only to a payment from a creditor to a 

mortgage broker that is based on the interest rate, 

i.e., the mortgage broker receives a larger payment 

if the consumer agrees to a higher interest rate. To 

avoid confusion, the Bureau is limiting its use of 

the term and is instead more specifically describing 

the payment at issue. 

119 ‘‘Mortgage originator’’ is generally defined to 

include ‘‘any person who, for direct or indirect 

compensation or gain, or in the expectation of 

32(b)(1)(i)(E)–1 a cross-reference to 

§ 1026.32(b)(3) for the definition of 

‘‘bona fide discount point,’’ and as 

comment 32(b)(1)(i)(E)–3 examples of 

how to calculate the exclusion of up to 

two bona fide discount points from 

points and fees. These comments are 

discussed in further detail in the 

section-by-section analysis of 

§ 1026.32(b)(1)(i)(E) in the 2013 ATR 

Final Rule. The Bureau notes that 

finalizing the bona fide discount point 

exclusion for both qualified mortgages 

and high-cost mortgages in 

§ 1026.32(b)(1) should streamline 

compliance and alleviate any concern 

that the rules would be applied 

differently in the high-cost and qualified 

mortgage contexts. 

32(b)(1)(i)(F) 

Exclusion of Up to One Bona Fide 

Discount Point 

Section 1431(d) of the Dodd-Frank 

Act added new section 103(dd)(2) to 

TILA, which permits a creditor to 

exclude from points and fees for highcost mortgages up to and including one 

bona fide discount point payable by the 

consumer in connection with the 

mortgage, but only if the interest rate 

from which the mortgage’s interest rate 

will be discounted does not exceed by 

more than two percentage points (1) the 

average prime offer rate or (2) for loans 

secured by personal property, the 

average rate on a loan for which 

insurance is provided under Title I of 

the National Housing Act.115 New TILA 

section 103(dd)(2) for high-cost 

mortgages is substantially similar to 

new TILA section 129C(b)(2)(C)(ii)(II) 

for qualified mortgages. TILA section 

129C(b)(2)(C)(ii)(II) provides for the 

exclusion of up to and including one 

bona fide discount point from points 

and fees for qualified mortgages, but 

only if the interest rate for the 

transaction before the discount does not 

exceed the average prime offer rate by 

more than two percentage points.116 The 

only difference between new TILA 

section 103(dd)(2) for high-cost 

mortgages and new TILA section 

129C(b)(2)(C)(ii)(II) for qualified 

mortgages is that the high-cost mortgage 

provision provides for a special 

calculation to determine whether 

discount points may be excluded from 

points and fees for loans secured by 

personal property. 

In the 2012 HOEPA Proposal, the 

Bureau proposed to implement the 

exclusion of up to one bona fide 

discount point from points and fees for 

high-cost mortgages in 

§ 1026.32(b)(5)(ii)(B)(1) (loans secured 

by real property) and (2) (loans secured 

by personal property). The proposed 

provision generally would have been 

consistent with proposed 

§ 226.43(e)(3)(ii)(C) in the Board’s 2011 

ATR Proposal, which would have 

implemented new TILA section 

129C(b)(2)(C)(ii)(II) for qualified 

mortgages.117 Specifically, proposed 

§ 1026.32(b)(5)(ii)(B)(1) would have 

permitted a creditor to exclude from 

points and fees for high-cost mortgages 

up to one bona fide discount point 

payable by the consumer, provided that 

the interest rate for the closed- or openend credit transaction without such 

discount point would not exceed by 

more than two percentage points the 

average prime offer rate, as defined in 

§ 1026.35(a)(2). Proposed 

§ 1026.32(b)(5)(ii)(B)(2) would have 

implemented the special calculation for 

determining whether up to one discount 

point could be excluded from points 

and fees for high-cost mortgages for 

transactions secured by personal 

property. 

The Bureau did not receive any 

comments on proposed 

§ 1026.32(b)(5)(ii)(B)(1) and (2) other 

than those addressed in the section-bysection analysis of § 1026.32(b)(1)(i)(E) 

above, concerning the exclusion of up to 

two bona fide discount points from 

points and fees. As with that exclusion, 

and to ensure a streamlined definition 

of points and fees in the high-cost 

mortgage and qualified mortgage 

contexts, the Bureau is finalizing in the 

2013 ATR Final Rule proposed 

§ 226.43(e)(3)(ii)(C) (from the 2011 ATR 

Proposal) and proposed 

§ 1026.32(b)(5)(ii)(B) as applied to 

closed-end credit transactions (from the 

2012 HOEPA Proposal) in 

§ 1026.32(b)(1)(i)(F). Section 

1026.32(b)(1)(i)(F)(1) sets forth the 

general rule, and § 1026.32(b)(1)(i)(F)(2) 

sets forth the special rule under HOEPA 

for personal property-secured loans. 

The 2013 ATR Final Rule also adopts 

in comment 32(b)(1)(i)(F)–1 a crossreference to comments 32(b)(1)(i)(E)–1 

and –2 for the definition of ‘‘bona fide 

discount point’’ and ‘‘average prime 

offer rate,’’ respectively, and in 

comment 32(b)(1)(i)(F)–3 an example of 

how to calculate the exclusion of up to 

one bona fide discount point from 

closed-end points and fees. These 

comments are discussed in further 

detail in the section-by-section analysis 

of § 1026.32(b)(1)(i)(F) in the 2013 ATR 

Final Rule. 

32(b)(1)(ii) 

When HOEPA was enacted in 1994, it 

required that ‘‘all compensation paid to 

mortgage brokers’’ be counted toward 

the threshold for points and fees that 

triggers special consumer protections 

under the statute. Specifically, TILA 

section 103(aa)(4) provided that charges 

are included in points and fees only if 

they are payable at or before 

consummation and did not expressly 

address whether ‘‘backend’’ payments 

from creditors to mortgage brokers 

funded out of the interest rate 

(commonly referred to as yield spread 

premiums) are included in points and 

fees.118 This requirement is 

implemented in existing 

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

all compensation paid by consumers 

directly to mortgage brokers be included 

in points and fees, but does not address 

compensation paid by creditors to 

mortgage brokers or compensation paid 

by any company to individual 

employees (such as loan officers who 

are employed by a creditor or mortgage 

broker). 

The Dodd-Frank Act substantially 

expanded the scope of compensation 

included in points and fees for both the 

high-cost mortgage threshold in HOEPA 

and the qualified mortgage points and 

fees limits. Section 1431 of the DoddFrank Act amended TILA to require that 

‘‘all compensation paid directly or 

indirectly by a consumer or creditor to 

a mortgage originator from any source, 

including a mortgage originator that is 

also the creditor in a table-funded 

transaction,’’ be included in points and 

fees. TILA section 103(bb)(4)(B) 

(emphasis added). Under amended 

TILA section 103(bb)(4)(B), 

compensation paid to anyone that 

qualifies as a ‘‘mortgage originator’’ is to 

be included in points and fees.119 Thus, 


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direct or indirect compensation or gain—(i) takes a 

residential mortgage loan application; (ii) assists a 

consumer in obtaining or applying to obtain a 

residential mortgage loan; or (iii) offers or negotiates 

terms of a residential mortgage loan.’’ TILA section 

103(dd)(2). The statute excludes certain persons 

from the definition, including a person who 

performs purely administrative or clerical tasks; an 

employee of a retailer of manufactured homes who 

does not take a residential mortgage application or 

offer or negotiate terms of a residential mortgage 

loan; and, subject to certain conditions, real estate 

brokers, sellers who finance three or fewer 

properties in a 12-month period, and servicers. 

TILA section 103(dd)(2)(C) through (F). 

120For more detailed discussions, see the 

Bureau’s 2012 Loan Originator Proposal and the 

final rule issued by the Board in 2010. 77 FR 55272, 

55276, 55290 (Sept. 7, 2012); 75 FR 58509, 5815– 

16, 58519–20 (Sept. 24, 2010) (2010 Loan Originator 

Final Rule). 

in addition to compensation paid to 

mortgage brokerage firms and individual 

brokers, points and fees also includes 

compensation paid to other mortgage 

originators, including employees of a 

creditor (i.e., loan officers). In addition, 

as noted above, the Dodd-Frank Act 

removed the phrase ‘‘payable at or 

before closing’’ from the high-cost 

mortgage points and fees test and did 

not apply the ‘‘payable at or before 

closing’’ limitation to the points and 

fees cap for qualified mortgages. See 

TILA sections 103(bb)(1)(A)(ii) and 

129C(b)(2)(A)(vii), (b)(2)(C). Thus, the 

statute appears to contemplate that even 

compensation paid to mortgage brokers 

and other loan originators after 

consummation should be counted 

toward the points and fees thresholds. 

This change is one of several 

provisions in the Dodd-Frank Act that 

focus on loan originator compensation 

and regulation, in apparent response to 

concerns that industry compensation 

practices contributed to the mortgage 

market crisis by creating strong 

incentives for brokers and retail loan 

officers to steer consumers into higherpriced loans. Specifically, loan 

originators were often paid a 

commission by creditors that increased 

with the interest rate on a transaction. 

These commissions were funded by 

creditors through the increased revenue 

received by the creditor as a result of the 

higher rate paid by the consumer and 

were closely tied to the price the 

creditor expected to receive for the loan 

on the secondary market as a result of 

that higher rate.120 In addition, many 

mortgage brokers charged consumers 

up-front fees to cover some of their costs 

at the same time that they accepted 

backend payments from creditors out of 

the rate. This may have contributed to 

consumer confusion about where the 

brokers’ loyalties lay. 

The Dodd-Frank Act took a number of 

steps to address loan originator 

compensation issues, including: (1) 

Adopting requirements that loan 

originators be ‘‘qualified’’ as defined by 

Bureau regulations; (2) generally 

prohibiting compensation based on rate 

and other terms (except for loan 

amount) and prohibiting a loan 

originator from receiving compensation 

from both consumers and other parties 

in a single transaction; (3) requiring the 

promulgation of additional rules to 

prohibit steering consumers to less 

advantageous transactions; (4) requiring 

the disclosure of loan originator 

compensation; and (5) restricting loan 

originator compensation under HOEPA 

and the qualified mortgage provisions 

by including such compensation within 

the points and fees calculations. See 

TILA sections 103(bb)(4)(A)(ii), (B); 

128(a)(18); 129B(b), (c); 

129C(b)(2)(A)(vii), (C)(i). 

The Board’s 2011 ATR Proposal 

proposed revisions to § 226.32(b)(1)(ii) 

to implement the inclusion of more 

forms of loan originator compensation 

into the points and fees thresholds. 

Those proposed revisions tracked the 

statutory language, with two exceptions. 

First, the Board’s proposed 

§ 226.32(b)(1)(ii) did not include the 

phrase ‘‘from any source.’’ The Board 

noted that the statute covers 

compensation paid ‘‘directly or 

indirectly’’ to the loan originator, and 

concluded that it would be redundant to 

cover compensation ‘‘from any source.’’ 

Second, for consistency with Regulation 

Z, the proposal used the term ‘‘loan 

originator’’ as defined in § 226.36(a)(1), 

rather than the term ‘‘mortgage 

originator’’ that appears in section 1401 

of the Dodd-Frank Act. See TILA section 

103(cc)(2). The Board explained that it 

interpreted the definitions of mortgage 

originator under the statute and loan 

originator under existing Regulation Z 

to be generally consistent, with one 

exception that the Board concluded was 

not relevant for purposes of the points 

and fees thresholds. Specifically, the 

statutory definition refers to ‘‘any 

person who represents to the public, 

through advertising or other means of 

communicating or providing 

information (including the use of 

business cards, stationery, brochures, 

signs, rate lists, or other promotional 

items), that such person can or will 

provide’’ the services listed in the 

definition (such as offering or 

negotiating loan terms), while the 

existing Regulation Z definition does 

not include persons solely on this basis. 

The Board concluded that it was not 

necessary to add this element of the 

definition to implement the points and 

fees calculations anyway, reasoning that 

the calculation of points and fees is 

concerned only with loan originators 

that receive compensation for 

performing defined origination 

functions in connection with a 

consummated loan. The Board noted 

that a person who merely represents to 

the public that such person can offer or 

negotiate mortgage terms for a consumer 

has not yet received compensation for 

that function, so there is no 

compensation to include in the 

calculation of points and fees for a 

particular transaction. 

In the proposed commentary, the 

Board explained what compensation 

would and would not have been 

included in points and fees under 

proposed § 226.32(b)(1)(ii). The Board 

proposed to revise existing comment 

32(b)(1)(ii)–1 to clarify that 

compensation paid by either a consumer 

or a creditor to a loan originator, as 

defined in § 1026.36(a)(1), would be 

included in points and fees. Proposed 

comment 32(b)(1)(ii)–1 also stated that 

loan originator compensation already 

included in points and fees because it 

is included in the finance charge under 

§ 226.32(b)(1)(i) would not be counted 

again under § 226.32(b)(1)(ii). 

Proposed comment 32(b)(1)(ii)–2.i 

stated that, in determining points and 

fees, loan originator compensation 

includes the dollar value of 

compensation paid to a loan originator 

for a specific transaction, such as a 

bonus, commission, yield spread 

premium, award of merchandise, 

services, trips, or similar prizes, or 

hourly pay for the actual number of 

hours worked on a particular 

transaction. Proposed comment 

32(b)(1)(ii)–2.ii clarified that loan 

originator compensation excludes 

compensation that cannot be attributed 

to a transaction at the time of 

origination, including, for example, the 

base salary of a loan originator that is 

also the employee of the creditor, or 

compensation based on the performance 

of the loan originator’s loans or on the 

overall quality of a loan originator’s loan 

files. Proposed comment 32(b)(1)(ii)–2.i 

also explained that compensation paid 

to a loan originator for a covered 

transaction must be included in the 

points and fees calculation for that 

transaction whenever paid, whether at 

or before closing or any time after 

closing, as long as the compensation 

amount can be determined at the time 

of closing. In addition, proposed 

comment 32(b)(1)(ii)–2.i provided three 

examples of compensation paid to a 

loan originator that would have been 

included in the points and fees 

calculation. 

Proposed comment 32(b)(1)(ii)–3 

stated that loan originator compensation 


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6900 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

includes amounts the loan originator 

retains and is not dependent on the 

label or name of any fee imposed in 

connection with the transaction. 

Proposed comment 32(b)(1)(ii)–3 offered 

an example of a loan originator 

imposing and retaining a ‘‘processing 

fee’’ and stated that such a fee is loan 

originator compensation, regardless of 

whether the loan originator expends the 

fee to process the consumer’s 

application or uses it for other expenses, 

such as overhead. 

The Bureau’s 2012 HOEPA Proposal 

largely republished the proposed 

revisions and additions to proposed 

§ 1026.32(b)(1)(ii) and related 

commentary in contained in the Board’s 

2011 ATR Proposal, with only nonsubstantive edits that, for example, 

clarified that the provisions would have 

applied to any closed-end credit 

transactions subject to § 1026.32. 

The Bureau received a large number 

of comments on proposed 

§ 1026.32(b)(1)(ii) and its related 

commentary in response to the 2012 

HOEPA Proposal. Most of the comments 

came from industry groups or 

individual institutions. As with other 

aspects of the definition of points and 

fees, industry commenters’ concerns 

regarding this provision were similar to 

those that were raised in response to the 

Board’s 2011 ATR Proposal, which are 

addressed in detail in the preamble of 

the Bureau’s 2013 ATR Final Rule. 

Industry commenters objected to the 

proposed inclusion of loan originator 

compensation in the points and fees 

calculation for high-cost mortgages for 

the following main reasons. 

Many industry commenters objected 

to the general requirement to include 

loan originator compensation in points 

and fees. Some of these commenters 

suggested that the Bureau should use its 

exception authority to exclude loan 

originator compensation from the 

calculation. Several commenters argued 

that consumers are already protected 

from harmful compensation practices by 

other Dodd-Frank Act rules, such as 

those proposed to be implemented in 

the Bureau’s 2012 Loan Originator 

Proposal. Some such commenters 

asserted that the HOEPA proposal, by 

requiring permissible compensation to 

be counted toward HOEPA points and 

fees coverage, would undercut the value 

derived from the payments deemed 

proper under the Bureau’s other rules. 

In addition, the commenters argued, 

including loan originator compensation 

in points and fees would constrain 

credit and harm consumers by, for 

example, increasing the number of loans 

that might exceed the HOEPA points 

and fees threshold. 

A number of industry commenters 

asserted, in particular, that loan 

originator compensation paid to 

individual employees should not be 

counted in points and fees. Some 

commenters stated that the proposed 

inclusion of loan originator 

compensation to employees is contrary 

to the intent of the statute, which the 

commenters argued was merely 

intended to cover business entities and 

not individuals. Other commenters 

stated, for example, that employee 

compensation is not a direct cost to the 

consumer and that it is 

indistinguishable from aspects of a 

company’s overall cost and expenditure 

structure, such expenses for rent, 

marketing, or office supplies, which are 

not counted in points and fees. 

A number of commenters noted that 

including compensation to individual 

loan originators in points and fees 

would constitute double-counting of 

costs, because loan originator 

compensation already is included in the 

cost of the loan, as an overhead charge. 

The commenters requested that the 

Bureau clarify, for example, that 

compensation paid by a lender to its 

own loan originator, which is not paid 

directly by the borrower but rather from 

the lender’s profits or post-closing sale 

of the loan, should not be counted in 

points and fees. Similarly, at least one 

commenter requested that the Bureau 

clarify that lenders can assume that a fee 

paid to a broker includes any 

compensation paid to the broker’s 

employees, and that the lender should 

have no responsibility to separately 

account for such payments. One 

commenter argued that, if compensation 

to mortgage broker employees is 

excluded, then compensation to retail 

loan officer employees should be 

excluded as well. 

Some industry commenters asserted 

that including loan originator 

compensation in points and fees is not 

only unnecessary in light of other 

Bureau rulemakings, but also that 

including it would lead to anomalous 

results, because otherwise identical 

loans may have different points and fees 

depending on which loan officer 

originates a loan (i.e., because better or 

more experienced loan originators tend 

to earn more compensation) or on when 

in the year a loan is originated (i.e., 

because compensation tends to increase 

throughout the year as periodic, 

volume-based bonus thresholds are 

met). Neither of these factors is 

indicative of the terms of the loan itself, 

but consumers’ access to credit could 

depends on such factors, because 

creditors likely would choose not to 

originate a loan if its associated loan 

originator compensation would cause its 

points and fees to exceed the HOEPA 

threshold. Commenters stated that the 

effects of such anomalous results could 

be felt within one company (i.e., as 

between an experienced and a more 

junior loan officer), or between 

companies (i.e., with one company that 

compensates its loan officers more than 

another company). 

Industry commenters also asserted 

that developing company-wide systems 

to track employee compensation on a 

loan-by-loan basis would be highly 

burdensome, with little consumer 

benefit. The system changes that would 

be required would be complex, because 

there are so many variations in how 

compensation may be paid. Creditors 

would continue to face practical 

challenges even after such systems were 

established. Many compensation plans 

pay bonuses at the end of the month, 

period, or year, so determining 

compensation to be included at 

origination would be difficult. One 

result, commenters asserted, would be 

that the amount of compensation 

included in points and fees could be 

easily second-guessed after the fact, 

which could be highly problematic 

(particularly for assignees) considering 

the risk of liability attendant to 

originating or purchasing a high-cost 

mortgage. For example, commenters 

asserted that such second-guessing 

could increase the risk that a loan might 

be determined to be a high-cost 

mortgage, even if it was not clear to the 

creditor at origination that it was a highcost mortgage. Finally, some 

commenters noted that a rule requiring 

accurate determination of compensation 

at origination would require wholesale 

changes in compensation practices, 

which is more appropriately addressed 

in other rulemakings. 

Not only would tracking 

compensation be burdensome, but 

commenters requested additional 

guidance concerning when particular 

types of compensation would be 

required to be included in the 

calculation. For example, several 

commenters stated that compensation 

often is tied to conditions, such as 

continued employment, that are not 

known as of consummation. Other 

conditions to which compensation 

might be tied include, for example, the 

customer service rating of the loan 

originator, or overall company 

performance for a particular period of 

time. Some commenters similarly noted 

that it was unclear how to count 

compensation awarded in tiered 

compensation plans where, for example, 

the amount of compensation increases 

as the loan originator’s total aggregate 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6901 

121Commenters raised these objections in 

response to the Bureau’s proposal to exclude loan 

originator compensation from the definition of 

points and fees for HELOCs. See the section-bysection analysis of § 1026.32(b)(2)(ii) below. 

volume increases. In such plans, 

commenters stated, the compensation 

tier cannot be determined until monthor quarter-end, and the rule as proposed 

is not clear about whether such 

compensation would need to be 

counted. 

Several commenters suggested that, if 

the Bureau were to adopt a rule 

including individual loan originator 

compensation in points and fees, then 

the Bureau should clearly exclude 

certain types of compensation, such as 

salary and hourly wages, from the 

calculation. The commenters asserted 

that these types of compensation 

generally are not tied to any specific 

loan transaction. The commenters stated 

that it would be difficult to determine 

how much of such compensation to 

count in the points and fees calculation 

before or at consummation, that 

establishing systems to make such a 

determination would be costly, and that 

including hourly wages would create an 

incentive for loan originators to spend 

less time on loans, to the detriment of 

consumers and in contrast to the overall 

goal of ensuring, for example, careful 

loan underwriting. 

A number of commenters requested 

additional guidance concerning the 

timing of the loan originator 

compensation calculation. The 

commenters stated that it would be 

impracticable to require compensation 

to be counted as of consummation. In 

this regard, several commenters asked 

whether compensation should be 

determined based on facts known at 

some earlier time, such as the rate-lock 

date. 

Some commenters also emphasized 

the importance of having clear guidance 

concerning the amount of loan 

originator compensation to be included 

in points and fees. The commenters 

stated that ambiguous rules would make 

it difficult to know how much 

compensation to count for a particular 

transaction and, in turn, difficult to 

discern whether a transaction exceeds 

the HOEPA points and fees threshold. A 

few commenters noted that this is of 

particular concern for entities looking to 

purchase loans, or for entities 

conducting due diligence reviews prior 

to purchase, since it is necessary to 

determine if points and fees are 

accurate, to avoid purchasing a highcost mortgage. 

Finally, a number of industry 

commenters urged the Bureau to 

provide additional guidance concerning 

who would be considered a loan 

originator for purposes of the points and 

fees test. Several commenters objected 

to the fact that the Bureau seemingly 

had not coordinated its proposed 

definitions of ‘‘loan originator’’ across 

its various title XIV rulemakings, or 

with the definition of that term as set 

forth in the Secure and Fair 

Enforcement for Mortgage Licensing Act 

of 2008. The commenters noted that the 

Bureau’s 2012 Loan Originator Proposal 

would have adopted a broad definition 

of loan originator. According to these 

commenters, a broad definition will be 

difficult to apply in the points and fees 

context, as it will require tracking 

compensation of anyone who, for 

compensation, takes an application, 

arranges, offers, negotiates, or otherwise 

obtains an extension of consumer credit 

for another person. 

Manufactured housing industry 

commenters expressed a related concern 

about the definition of loan originator as 

applied to employees of manufactured 

home retailers. Under TILA’s definition 

of loan originator, an ‘‘activities-based’’ 

test would apply in determining 

whether such a person was a loan 

originator. Thus, creditors would need 

to track the activities of manufactured 

home retailer employees to determine 

whether to count their compensation in 

points and fees. Commenters asserted 

that a manufactured home retailer has 

no way of knowing, or controlling, such 

activities for a given transaction. At 

least one commenter argued for a brightline exclusion from loan originator 

compensation for any manufactured 

home retailer or its employees. Other 

commenters argued for replacing the 

activities-based exclusion with a brightline test, such as an exclusion for 

retailer (or retailer employee) 

compensation that does not exceed what 

the retailer or its employee would have 

received in a comparable cash 

transaction. 

Consumer group commenters strongly 

supported the inclusion of loan 

originator compensation in points and 

fees. The commenters noted that 

outsized mortgage broker compensation 

was one of the primary drivers of the 

passage of HOEPA in the mid-1990’s. 

The commenters also noted that 

compensation schemes involving yield 

spread premiums later became another 

vehicle through which consumers were 

assessed costs they were wholly 

unaware existed, and that the DoddFrank Act sought to put such abuses to 

rest.121

Some consumer group commenters 

strongly opposed the Bureau’s proposal 

to apply, in the points and fees context, 

TILA’s activities-based test for 

determining whether an employee of a 

manufactured home retailer is a loan 

originator whose compensation must be 

counted. These commenters asserted 

that a test that attempts to distinguish 

between employees who, for example, 

take an application or advise on loan 

terms (i.e., loan originators), from 

employees who merely assist a 

consumer in obtaining or applying for a 

loan (i.e., not loan originators) would be 

unworkable. Commenters either argued 

that the activities listed in the activitiesbased test (i.e., taking an application, 

advising on loan terms, or offering loan 

terms) should be broadly defined, or 

that any compensation paid to an 

employee of a manufactured home 

retailer to arrange financing should be 

included. 

The Bureau has carefully considered 

the comments received in response to 

its 2012 HOEPA Proposal, as well as in 

response to the Board’s 2011 ATR 

Proposal, in light of the concerns about 

various issues with regard to loan 

originator compensation practices, the 

general concerns about the impacts of 

the ability-to-repay/qualified mortgage 

rule and revised HOEPA thresholds on 

a market in which access to mortgage 

credit is already extremely tight, 

differences between the retail and 

wholesale origination channels, and 

practical considerations regarding both 

the burdens of day-to-day 

implementation and the opportunities 

for evasion by parties who wish to 

engage in rent-seeking. As discussed 

further below, the Bureau is concerned 

about implementation burdens and 

anomalies created by the requirement to 

include loan originator compensation in 

points and fees, the impacts that it 

could have on pricing and access to 

credit, and the risks that rent-seekers 

will continue to find ways to evade the 

statutory scheme. Nevertheless, the 

Bureau believes that, in light of the 

historical record and of Congress’s 

evident concern with loan originator 

compensation practices, it would not be 

appropriate to waive the statutory 

requirement that loan originator 

compensation be included in points and 

fees. The Bureau has, however, worked 

to craft the rule that implements 

Congress’ judgment in a way that is 

practicable and that reduces potential 

negative impacts of the statutory 

requirement, as discussed below. The 

Bureau is also seeking comment in the 

concurrent proposal being published 

elsewhere in today’s Federal Register 

on whether additional measures would 

better protect consumers and reduce 

implementation burdens and 

unintended consequences. 


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6902 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

122See 2012 Loan Originator Proposal, 77 FR 

55283–88. 

Accordingly, the 2013 ATR Final Rule 

in adopting § 1026.32(b)(1)(ii) has 

generally tracked the statutory language 

and the Board’s proposal in the 

regulation text, but has expanded the 

commentary to provide more detailed 

guidance to clarify what compensation 

must be included in points and fees. 

The Dodd-Frank Act requires inclusion 

in points and fees of ‘‘all compensation 

paid directly or indirectly by a 

consumer or creditor to a mortgage 

originator from any source, including a 

mortgage originator that is also the 

creditor in a table-funded transaction.’’ 

See TILA section 103(bb)(4)(B). 

Consistent with the Board’s proposal, 

revised § 1026.32(b)(ii) as adopted in the 

2013 ATR Final Rule does not include 

the phrase ‘‘from any source.’’ The 

Bureau agrees that the phrase is 

unnecessary because the provision 

expressly covers compensation paid 

‘‘directly or indirectly’’ to the loan 

originator. Like the Board’s proposal, 

the final rule also uses the term ‘‘loan 

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

not the term ‘‘mortgage originator’’ 

under section 1401 of the Dodd-Frank 

Act. See TILA section 103(cc)(2). The 

Bureau agrees that the definitions are 

consistent in relevant respects and notes 

that it is in the process of amending the 

regulatory definition to harmonize it 

even more closely with the Dodd-Frank 

Act definition of ‘‘mortgage 

originator.’’ 122 Accordingly, the Bureau 

believes use of consistent terminology 

in Regulation Z will facilitate 

compliance. Finally, as revised, 

§ 1026.32(b)(1)(ii) also does not include 

the language in proposed 

§ 226.32(b)(1)(ii) that specified that the 

provision also applies to a loan 

originator that is the creditor in a tablefunded transaction. The Bureau has 

concluded that that clarification is 

unnecessary because a creditor in a 

table-funded transaction is already 

included in the definition of loan 

originator in § 1026.36(a)(1). To clarify 

what compensation must be included in 

points and fees, revised 

§ 1026.32(b)(1)(ii) specifies that 

compensation must be included if it can 

be attributed to the particular 

transaction at the time the interest rate 

is set. These limitations are discussed in 

more detail below. 

In adopting the general rule, the 

Bureau carefully considered arguments 

by industry commenters that loan 

originator compensation should not be 

included in points and fees because 

other statutory provisions and rules 

already regulate loan originator 

compensation, because loan originator 

compensation is already included in the 

costs of mortgage loans, and because 

including loan originator compensation 

in points and fees would push many 

loans over the 3 percent cap on points 

and fees for qualified mortgages (or even 

over the points and fees limits for 

determining whether a loan is a highcost mortgage under HOEPA), which 

would increase costs and impair access 

to credit. 

The Bureau views the fact that other 

provisions within the Dodd-Frank Act 

address other aspects of loan originator 

compensation and activity as evidence 

of the high priority that Congress placed 

on regulating such compensation. The 

other provisions pointed to by the 

commenters address specific 

compensation practices that created 

particularly strong incentives for loan 

originators to ‘‘upcharge’’ consumers on 

a loan-by-loan basis and particular 

confusion about loan originators’ 

loyalties. The Bureau believes that the 

inclusion of loan originator 

compensation in points and fees has 

distinct purposes. In addition to 

discouraging more generalized rentseeking and excessive loan originator 

compensation, the Bureau believes that 

Congress may have been focused on 

particular risks to consumers. Thus, 

with respect to qualified mortgages, 

including loan originator compensation 

in points and fees helps to ensure that, 

in cases in which high up-front 

compensation might otherwise cause 

the creditor and/or loan originator to be 

less concerned about long-term 

sustainability, the creditor is not able to 

invoke a presumption of compliance if 

challenged to demonstrate that it made 

a reasonable and good faith 

determination of the consumer’s ability 

to repay the loan. Similarly in HOEPA, 

the threshold triggers additional 

consumer protections, such as enhanced 

disclosures and housing counseling, for 

the loans with the highest up-front 

pricing. 

The Bureau recognizes that the 

method that Congress chose to 

effectuate these goals does not ensure 

entirely consistent results as to whether 

a loan is a qualified mortgage or a highcost transaction. For instance, loans that 

are identical to consumers in terms of 

up-front costs and interest rate may 

nevertheless have different points and 

fees based on the identity of the loan 

originator who handled the transaction 

for the consumer, since different 

individual loan originators in a retail 

environment or different brokerage 

firms in a wholesale environment may 

earn different commissions from the 

creditor without that translating in 

differences in costs to the consumer. In 

addition, there are anomalies 

introduced by the fact that ‘‘loan 

originator’’ is defined to include 

mortgage broker firms and individual 

employees hired by either brokers or 

creditors, but not creditors themselves. 

As a result, counting the total 

compensation paid to a mortgage broker 

firm will capture both the firm’s 

overhead costs and the compensation 

that the firm passes on to its individual 

loan officer. By contrast, in a retail 

transaction, the creditor would have to 

include in points and fees the 

compensation that it paid to its loan 

officer, but would continue to have the 

option of recovering its overhead costs 

through the interest rate, instead of an 

up-front charge, to avoid counting them 

toward the points and fees thresholds. 

Indeed, the Bureau expects that the new 

requirement may prompt creditors to 

shift certain other expenses into rate to 

stay under the thresholds. 

Nevertheless, to the extent there are 

anomalies from including loan 

originator compensation in points and 

fees, these anomalies appear to be the 

result of deliberate policy choices by 

Congress to expand the historical 

definition of points and fees to include 

all methods of loan originator 

compensation, whether derived from 

up-front charges or from the rate, 

without attempting to capture all 

overhead expenses by creditors or the 

gain on sale that the creditor can realize 

upon closing a mortgage. The Bureau 

agrees that counting loan originator 

compensation that is structured through 

rate toward the points and fees 

thresholds could cause some loans not 

to be classified as qualified mortgages 

and to trigger HOEPA protections, 

compared to existing treatment under 

HOEPA and its implementing 

regulation. However, the Bureau views 

this to be exactly the result that 

Congress intended. 

In light of the express statutory 

language and Congress’s evident 

concern with increasing consumer 

protections in connection with high 

levels of loan originator compensation, 

the Bureau does not believe that it is 

appropriate to use its exception or 

adjustment authority in TILA section 

105(a) to exclude loan originator 

compensation entirely from points and 

fees for qualified mortgages and 

HOEPA. As discussed below, however, 

the Bureau is attempting to implement 

the points and fees requirements with as 

much sensitivity as practicable to 

potential impacts on the pricing of and 

availability of credit, anomalies and 

unintended consequences, and 

compliance burdens. 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6903 

The Bureau also carefully considered 

comments urging it to exclude 

compensation paid to individual loan 

originators from points and fees, but 

ultimately concluded that such a result 

would be inconsistent with the plain 

language of the statute and could 

exacerbate the potential inconsistent 

effects of the rule on different mortgage 

origination channels. As noted above, 

many industry commenters argued that, 

even if loan originator compensation 

were not excluded altogether, at least 

compensation paid to individual loan 

originators should be excluded from 

points and fees. Under this approach, 

only payments to mortgage brokers 

would be included in points and fees. 

The commenters contended that it 

would be difficult to track 

compensation paid to individual loan 

originators, particularly when that 

compensation may be paid after 

consummation of the loan and that it 

would create substantial compliance 

problems. They also argued that 

including compensation paid to 

individual loan originators in points 

and fees would create anomalies, in 

which identical transactions from the 

consumer’s perspective (i.e., the same 

interest rate and up-front costs) could 

nevertheless have different points and 

fees because of loan originator 

compensation. 

As explained above, the Bureau does 

not believe it is appropriate to use its 

exception authority to exclude loan 

originator compensation from points 

and fees, and even using that exception 

authority more narrowly to exclude 

compensation paid to individual loan 

originators could undermine Congress’s 

apparent goal of providing stronger 

consumer protections in cases of high 

loan originator compensation. Although 

earlier versions of legislation focused 

specifically on compensation to 

‘‘mortgage brokers,’’ which is consistent 

with existing HOEPA, the Dodd-Frank 

Act refers to compensation to ‘‘mortgage 

originators,’’ a term that is defined in 

detail elsewhere in the statute to 

include individual loan officers 

employed by both creditors and brokers, 

in addition to the brokers themselves. 

To the extent that Congress believed 

that high levels of loan originator 

compensation evidenced additional risk 

to consumers, excluding individual loan 

originators from consideration appears 

inconsistent with this policy judgment. 

Moreover, the Bureau notes that using 

exception authority to exclude 

compensation paid to individual loan 

originators would exacerbate the 

differential treatment between the retail 

and wholesale channels concerning 

overhead costs. As noted above, 

compensation paid by the consumer or 

creditor to the mortgage broker 

necessarily will include amounts for 

both the mortgage broker’s overhead and 

profit and for the compensation the 

mortgage broker passes on to its loan 

officer. Excluding individual loan 

officer compensation on the retail side, 

however, would effectively exempt 

creditors from counting any loan 

originator compensation at all toward 

points and fees. Thus, for transactions 

that would be identical from the 

consumer’s perspective in terms of 

interest rate and up-front costs, the 

wholesale transaction could have 

significantly higher points and fees 

(because the entire payment from the 

creditor to the mortgage broker would 

be captured in points and fees), while 

the retail transaction might include no 

loan origination compensation at all in 

points and fees. Such a result would put 

brokerage firms at a disadvantage in 

their ability to originate qualified 

mortgages and put them at significantly 

greater risk of originating HOEPA loans. 

This in turn could constrict the supply 

of loan originators and the origination 

channels available to consumers to their 

detriment. 

The Bureau recognizes that including 

compensation paid to individual loan 

originators, such as loan officers, with 

respect to individual transactions may 

impose additional burdens. For 

example, creditors will have to track 

employee compensation for purposes of 

complying with the rule, and the 

calculation of points and fees will be 

more complicated. However, the Bureau 

notes that creditors and brokers already 

have to monitor compensation more 

carefully as a result of the 2010 Loan 

Originator Final Rule and the related 

Dodd-Frank Act restrictions on 

compensation based on terms and on 

dual compensation. The Bureau also 

believes that these concerns can be 

reduced by providing clear guidance on 

issues such as what types of 

compensation are covered, when 

compensation is determined, and how 

to avoid ‘‘double-counting’’ payments 

that are already included in points and 

fees calculations. The Bureau has 

therefore revised the Board’s proposed 

regulation and commentary to provide 

more detailed guidance, and is seeking 

comment in the proposal published 

elsewhere in the Federal Register today 

on additional guidance and potential 

implementation issues among other 

matters. 

As noted above, the Bureau is revising 

§ 1026.32(b)(1)(ii) to clarify that 

compensation must be counted toward 

the points and fees thresholds if it can 

be attributed to the particular 

transaction at the time the interest rate 

is set. The Bureau is also revising 

comment 32(b)(1)(ii)–1 to explain in 

general terms when compensation 

qualifies as loan originator 

compensation that must be included in 

points and fees. In particular, 

compensation paid by a consumer or 

creditor to a loan originator is included 

in the calculation of points and fees, 

provided that such compensation can be 

attributed to that particular transaction 

at the time the interest rate is set. The 

Bureau also incorporates part of 

proposed comment 32(b)(1)(ii)–3 into 

revised comment 32(b)(1)(ii)–1, 

explaining that loan originator 

compensation includes amounts the 

loan originator retains, and is not 

dependent on the label or name of any 

fee imposed in connection with the 

transaction. However, revised comment 

32(b)(1)(ii)–1 does not include the 

example from proposed comment 

32(b)(1)(ii)–3, which stated that, if a 

loan originator imposes a processing fee 

and retains the fee, the fee is loan 

originator compensation under 

§ 1026.32(b)(1)(ii) whether the originator 

expends the fee to process the 

consumer’s application or uses it for 

other expenses, such as overhead. That 

example may be confusing in this 

context because a processing fee paid to 

a loan originator likely would be a 

finance charge under § 1026.4 and 

would therefore already be included in 

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

Revised comment 32(b)(1)(ii)–2.i 

explains that compensation, such as a 

bonus, commission, or an award of 

merchandise, services, trips or similar 

prizes, must be included only if it can 

be attributed to a particular transaction. 

The requirement that compensation is 

included in points and fees only if it can 

be attributed to a particular transaction 

is consistent with the statutory 

language. The Dodd-Frank Act provides 

that, for the points and fees tests for 

both qualified mortgages and high-cost 

mortgages, only charges that are ‘‘in 

connection with’’ the transaction are 

included in points and fees. See TILA 

sections 103(bb)(1)(A)(ii) (high-cost 

mortgages) and 129C(b)(2)(A)(vii) 

(qualified mortgages). Limiting loan 

originator compensation to 

compensation that is attributable to the 

transaction implements the statutory 

requirement that points and fees are ‘‘in 

connection’’ with the transaction. This 

limitation also makes the rule more 

workable. Compensation is included in 

points and fees only if it can be 

attributed to a specific transaction to 

facilitate compliance with the rule and 

avoid over-burdening creditors with 


srobinson on DSK4SPTVN1PROD with 
6904 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

123 In contrast, the existing restrictions on 

particular loan originator compensation structures 

in § 1026.36 apply to all compensation such as 

salaries, hourly wages, and contingent bonuses 

because those restrictions apply only at the time 

such compensation is paid, and therefore they can 

be applied with certainty. Moreover, those rules 

also provide for different treatment of compensation 

that is not ‘‘specific to, and paid solely in 

connection with, the transaction,’’ where such a 

distinction is necessary for reasons of practical 

application of the rule. See comment 36(d)(2)–1 

(prohibition of loan originator receiving 

compensation directly from consumer and also 

from any other person does not prohibit consumer 

payments where loan originator also receives salary 

or hourly wage). 

complex calculations to determine, for 

example, the portion of a loan officer’s 

salary that should be counted in points 

and fees.123 For clarity, the Bureau has 

moved the discussion of the timing of 

loan originator compensation into new 

comment 32(b)(1)(ii)–3, and has added 

additional examples to 32(b)(1)(ii)–4, to 

illustrate the types and amount of 

compensation that should be included 

in points and fees. 

Revised comment 32(b)(1)(ii)–2.ii 

explains that loan originator 

compensation excludes compensation 

that cannot be attributed to a particular 

transaction at the time the interest rate 

is set, including, for example, 

compensation based on the long-term 

performance of the loan originator’s 

loans or on the overall quality of the 

loan originator’s loan files. The base 

salary of a loan originator is also 

excluded, although additional 

compensation that is attributable to a 

particular transaction must be included 

in points and fees. The Bureau has 

decided to seek further comment in the 

concurrent proposal regarding treatment 

of hourly wages for the actual number 

of hours worked on a particular 

transaction. The Board’s proposal would 

have included hourly pay for the actual 

number of hours worked on a particular 

transaction in loan originator 

compensation for purposes of the points 

and fees thresholds, and the Bureau 

agrees that such wages are attributable 

to the particular transaction. However, 

the Bureau is unclear as to whether 

industry actually tracks compensation 

this way in light of the administrative 

burdens. Moreover, while the general 

rule provides for calculation of loan 

originator compensation at the time the 

interest rate is set for the reasons 

discussed above, the actual hours of 

hours worked on a transaction would 

not be known at that time. The Bureau 

is therefore seeking comment on issues 

relating to hourly wages, including 

whether to require estimates of the 

hours to be worked between rate set and 

consummation. 

New comment 32(b)(1)(ii)–3 explains 

that loan originator compensation must 

be included in the points and fees 

calculation for a transaction whenever 

the compensation is paid, whether 

before, at or after closing, as long as that 

compensation amount can be attributed 

to the particular transaction at the time 

the interest rate is set. Some industry 

commenters expressed concern that it 

would be difficult to determine the 

amount of compensation that would be 

paid after consummation and that 

creditors might have to recalculate loan 

originator compensation (and thus 

points and fees) after underwriting if, 

for example, a loan officer became 

eligible for higher compensation 

because other transactions had been 

consummated. The Bureau appreciates 

that industry participants need certainty 

at the time of underwriting as to 

whether transactions will exceed the 

points and fees limits for qualified 

mortgages (and for high-cost mortgages). 

To address this concern, the comment 

32(b)(1)(ii)–3 explains that loan 

originator compensation should be 

calculated at the time the interest rate is 

set. The Bureau believes that the date 

the interest rate is set is an appropriate 

standard for calculating loan originator 

compensation. It would allow creditors 

to be able to calculate points and fees 

with sufficient certainty so that they 

know early in the process whether a 

transaction will be a qualified mortgage 

or a high-cost mortgage. 

As noted above, several industry 

commenters argued that including loan 

originator compensation in points and 

fees would result in double counting. 

They stated that creditors often will 

recover loan originator compensation 

costs through origination charges, and 

these charges are already included in 

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

However, the underlying statutory 

provisions as amended by the DoddFrank Act do not express any limitation 

on its requirement to count loan 

originator compensation toward the 

points and fees test. Rather, the literal 

language of TILA section 103(bb)(4) as 

amended by the Dodd-Frank Act defines 

points and fees to include all items 

included in the finance charge (except 

interest rate), all compensation paid 

directly or indirectly by a consumer or 

creditor to a loan originator, ‘‘and’’ 

various other enumerated items. The 

use of ‘‘and’’ and the references to ‘‘all’’ 

compensation paid ‘‘directly or 

indirectly’’ and ‘‘from any source’’ 

suggest that compensation should be 

counted as it flows downstream from 

one party to another so that it is counted 

each time that it reaches a loan 

originator, whatever the previous 

source. 

The Bureau believes the statute would 

be read to require that loan originator 

compensation be treated as additive to 

the other elements of points and fees. 

The Bureau believes that an automatic 

literal reading of the statute in all cases, 

however, would not be in the best 

interest of either consumers or industry. 

For instance, the Bureau does not 

believe that it is necessary or 

appropriate to count the same payment 

made by a consumer to a mortgage 

broker firm twice, simply because it is 

both part of the finance charge and loan 

originator compensation. Similarly, the 

Bureau does not believe that, where a 

payment from either a consumer or a 

creditor to a mortgage broker is counted 

toward points and fees, it is necessary 

or appropriate to count separately funds 

that the broker then passes on to its 

individual employees. In each case, any 

costs and risks to the consumer from 

high loan originator compensation are 

adequately captured by counting the 

funds a single time against the points 

and fees cap; thus, the Bureau does not 

believe the purposes of the statute 

would be served by counting some or all 

of the funds a second time, and is 

concerned that doing so could have 

negative impacts on the price and 

availability of credit. 

Determining the appropriate 

accounting rule is significantly more 

complicated, however, in situations in 

which a consumer pays some up-front 

charges to the creditor and the creditor 

pays loan originator compensation to 

either its own employee or to a mortgage 

broker firm. Because money is fungible, 

tracking how a creditor spends money it 

collects in up-front charges versus 

amounts collected through the rate to 

cover both loan originator compensation 

and its other overhead expenses would 

be extraordinarily complex and 

cumbersome. To facilitate compliance, 

the Bureau believes it is appropriate and 

necessary to adopt one or more 

generalized rules regarding the 

accounting of various payments. 

However, the Bureau does not believe it 

yet has sufficient information with 

which to choose definitively between 

the additive approach provided for in 

the statutory language and other 

potential methods of accounting for 

payments in light of the multiple 

practical and complex policy 

considerations involved. 

The potential downstream effects of 

different accounting methods are 

significant. Under the additive approach 

where no offsetting consumer payments 

against creditor-paid loan originator 

compensation is allowed, creditors 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6905 

124See TILA section 106(e)(1) (fees or premiums 

for title examination, title insurance, or similar 

purposes), (2) (fees for preparation of loan-related 

documents), (3) (escrows for future payment of 

taxes and insurance), (4) (fees for notarizing deeds 

and other documents), (5) (appraisal fees, including 

fees related to any pest infestation or flood hazard 

inspection conducted prior to closing), and (6) 

(credit reports). 

125See 76 FR 27390, 27404, 27481, 27489 (May 

11, 2011). 

whose combined loan originator 

compensation and up-front charges 

would otherwise exceed the points and 

fees limits would have strong incentives 

to cap their up-front charges for other 

overhead expenses under the threshold 

and instead recover those expenses by 

increasing interest rates to generate 

higher gains on sale. This would 

adversely affect consumers who prefer a 

lower interest rate and higher up-front 

costs and, at the margins, could result 

in some consumers being unable to 

qualify for credit. Additionally, to the 

extent creditors responded to a ‘‘no 

offsetting’’ rule by increasing interest 

rates, this could increase the number of 

qualified mortgages that receive a 

rebuttable rather than conclusive 

presumption of compliance. 

One alternative would be to allow all 

consumer payments to offset creditorpaid loan originator compensation. 

However, a ‘‘full offsetting’’ approach 

would allow creditors to offset much 

higher levels of up-front points and fees 

against expenses paid through rate 

before the heightened consumer 

protections required by the Dodd-Frank 

Act would apply. Particularly under 

HOEPA, this may raise tensions with 

Congress’s apparent intent. Other 

alternatives might use a hybrid 

approach depending on the type of 

expense, type of loan, or other factors, 

but would involve more compliance 

complexity. 

In light of the complex 

considerations, the Bureau believes it is 

necessary to seek additional notice and 

comment. The Bureau therefore is 

finalizing this rule without qualifying 

the statutory result and is proposing two 

alternative comments in the concurrent 

proposal, one of which would explicitly 

preclude offsetting, and the other of 

which would allow full offsetting of any 

consumer-paid charges against creditorpaid loan originator compensation. The 

Bureau is also proposing comments to 

clarify treatment of compensation paid 

by consumers to mortgage brokers and 

by mortgage brokers to their individual 

employees. The Bureau is seeking 

comment on all aspects of this issue, 

including the market impacts and 

whether adjustments to the final rule 

would be appropriate. In addition, the 

Bureau is seeking comment on whether 

it would be helpful to provide for 

additional adjustment of the rules or 

additional commentary to clarify any 

overlaps in definitions between the 

points and fees provisions in this 

rulemaking and the 2013 ATR Final 

Rule and the provisions that the Bureau 

is separately finalizing in connection 

with the Bureau’s 2012 Loan Originator 

Compensation Proposal. 

Finally, comment 32(b)(1)(ii)–4 

includes revised versions of examples in 

proposed comment 32(b)(1)(ii)–2, as 

well as additional examples to provide 

additional guidance regarding what 

compensation qualifies as loan 

originator compensation that must be 

included in points and fees. These 

examples illustrate when compensation 

can be attributed to a particular 

transaction at the time the interest rate 

is set. New comment 32(b)(1)(ii)–5 adds 

an example explaining how salary is 

treated for purposes of loan originator 

compensation for calculating points and 

fees. 

32(b)(1)(iii) 

Real Estate-Related Charges 

Since the enactment of HOEPA in 

1994, TILA section 103(aa)(4)(C) has 

provided that points and fees for 

HOEPA coverage include each charge 

listed in TILA section 106(e) (except 

escrow for the future payment of taxes), 

unless the charge is reasonable, the 

creditor receives no direct or indirect 

compensation in connection with the 

charge, and the charge is paid to a third 

party unaffiliated with the creditor.124 If 

any of the conditions are not met, then 

the charge must be included. Thus, such 

charges—i.e., TILA section 106(a) 

charges paid to affiliates of the creditor, 

except such charges that are escrowed 

for the future payment of taxes—have 

always been included in the calculation 

of points and fees for high-cost 

mortgages, even if they were not 

included in the finance charge. The 

long-standing statutory requirement to 

include such charges in points and fees 

is implemented in existing 

§ 1026.32(b)(1)(iii). 

As noted in the preamble of the 

Bureau’s 2012 HOEPA Proposal, the 

Dodd-Frank Act did not amend TILA 

section 103(aa)(4)(C). However, as also 

noted in the 2012 HOEPA Proposal, the 

Board nevertheless proposed certain 

clarifying revisions to § 226.32(b)(1)(iii) 

in its 2011 ATR Proposal. In brief, the 

Board’s proposed revisions would have 

added the phrase ‘‘payable at or before 

closing of the mortgage’’ loan. The 

Board’s proposal would have added this 

limiting language to clarify that, 

notwithstanding the Dodd-Frank Act’s 

amendments to TILA requiring the 

inclusion in points and fees of all 

charges payable ‘‘in connection with the 

transaction’’ (see the section-by-section 

analysis of § 1026.32(b)(1) above), the 

charges listed in § 1026.4(c)(7) would 

only need to be included if they were 

payable at or before consummation. For 

consistency with the Dodd-Frank Act, 

the Board’s proposal also would have 

enumerated separately as 

§ 1026.32(b)(1)(iii)(A) through (C) the 

three long-standing pre-conditions for 

excluding from points and fees the 

charges referred to in 

§ 226.32(b)(1)(iii).125

Proposed § 1026.32(b)(1)(iii) and 

comment 32(b)(1)(iii)–1 in the Bureau’s 

2012 HOEPA Proposal republished the 

revisions proposed in the 2011 ATR 

Proposal and only minor, nonsubstantive changes. Proposed 

§ 1026.32(b)(1)(iii) in the Bureau’s 2012 

HOEPA Proposal thus would have 

provided for the inclusion in points and 

fees for closed-end credit transactions 

‘‘all items listed in § 1026.4(c)(7) (other 

than amounts held for future payment of 

taxes) payable at or before 

consummation of the mortgage loan, 

unless: (A) The charge is reasonable; (B) 

the creditor receives no direct or 

indirect compensation in connection 

with the charge; and (C) the charge is 

not paid to an affiliate of the creditor.’’ 

Proposed comment 32(b)(1)(iii)–1 in 

the Bureau’s 2012 HOEPA Proposal 

would have republished this comment 

as set forth in the 2011 ATR Proposal, 

with one minor change. Specifically, the 

Bureau’s proposed comment 

32(b)(1)(iii)–1 would have provided that 

a fee paid by the consumer for an 

appraisal performed by the creditor 

must be included in points and fees 

under § 1026.32(b)(1)(iii), but the 

comment would have removed the 

phrase ‘‘even though the fee may be 

excludable from the finance charge if it 

is bona fide and reasonable in amount.’’ 

The Bureau would have made this 

proposed revision to comment 

32(b)(1)(iii)–1 for consistency with the 

Bureau’s proposed more inclusive 

definition of the finance charge, which 

would have included such appraisal 

fees in the finance charge in all cases 

(i.e., whether or not such fees were bona 

fide and reasonable in amount). 

In sum, neither the Board’s 2011 ATR 

Proposal, nor the Bureau’s 2012 HOEPA 

Proposal, would have expanded the 

scope of items to be included in points 

and fees under § 1026.32(b)(1)(iii), but 

only would have made certain clarifying 

changes. The Bureau nevertheless 

received a number of comments from 

industry in response to proposed 


srobinson on DSK4SPTVN1PROD with 
6906 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

126The commenters suggested that such fees 

payable in a comparable cash transaction be 

excluded from points and fees. 

127 In response to commenters’ questions 

concerning property taxes, the Bureau notes that 

escrowed taxes are excluded from the real estaterelated charges that must be included in points and 

fees under certain circumstances. 

128For qualified mortgages, the statutory 

counterpart to TILA section 103(bb)(1)(A)(ii) for 

high-cost mortgages is TILA section 

129C(b)(2)(C)(i), which excludes bona fide thirdparty charges not retained by a creditor or its 

affiliate from the calculation of points and fees for 

qualified mortgages. 

129The Bureau declines, however, to adopt a rule, 

as suggested by one industry commenter, that any 

fee permitted under the customary and reasonable 

appraisal fee rule in § 1026.42(f), is per se 

reasonable under § 1026.32(b)(1)(iii) and bona fide 

under § 1026.32(b)(1)(i)(D). Again, in the absence of 

evidence that the pre-existing reasonableness test in 

§ 1026.32(b)(1)(iii) has been unworkable, the Bureau 

declines to change it. 

§ 1026.32(b)(1)(iii) as set forth in the 

2012 HOEPA Proposal. 

Uncertainty Concerning the Definition 

of Points and Fees. First, the Bureau 

received several comments suggesting 

that commenters were uncertain as to 

the interaction of proposed 

§ 1026.32(b)(1)(i) (finance charge prong 

of points and fees) and (iii) (real estaterelated charges). Commenters noted that 

the Bureau’s proposed 

§ 1026.32(b)(1)(iii) would have required 

the inclusion in points and fees in 

certain circumstances of items that the 

Bureau’s proposed § 1026.32(b)(1)(i) 

otherwise would have excluded from 

points and fees through that provision’s 

reliance on the finance charge as the 

starting point for the points and fees 

calculation. Commenters stated that, for 

example, proposed § 1026.32(b)(1)(i) 

would not require the inclusion in 

points and fees of charges payable in a 

comparable cash transaction (because 

such charges are excluded from the 

definition of the finance charge), but 

that proposed § 1026.32(b)(1)(iii) 

nevertheless would require such charges 

to be included if they were among the 

items listed in § 1026.4(c)(7) and met 

any of the other conditions specified in 

§ 1026.32(b)(1)(iii) (e.g., the amount of 

the charge is unreasonable, the creditor 

receives direct or indirect compensation 

in connection with the charge, or the 

charge is paid to an affiliate of the 

creditor).126 Commenters similarly 

noted that § 1026.32(b)(1)(iii) would 

include in points and fees charges set 

forth in § 1026.4(c)(7) unless they are 

reasonable and paid to a third party, but 

that § 1026.4(c)(7) itself specifies a list 

of real estate-related fees that are 

excluded from the definition of the 

finance charge (and therefore arguably 

excluded from points and fees under 

§ 1026.32(b)(1)(i)). These commenters 

advocated either that the Bureau clarify 

whether the categories of charges 

discussed above are included in, or 

excluded from, points and fees, or that 

the Bureau clarify the points and fees 

definition by adopting a ‘‘plain English’’ 

approach. Finally, one commenter 

requested that the Bureau clarify 

whether property taxes are excluded 

from points and fees in all cases, 

regardless of whether they are 

reasonable in amount. 

As noted above, neither proposed 

1026.32(b)(1)(i) nor proposed 

§ 1026.32(b)(1)(iii) in the Bureau’s 2012 

HOEPA Proposal were intended to 

change the types of charges included in 

points and fees through these 

provisions, or the way that these 

provisions work together to define 

points and fees. The Bureau notes that 

much of the complexity that exists in 

the existing points and fees definition 

and about which industry commenters 

complained arises from the requirement 

in TILA to use the finance charge as the 

starting point for points and fees. 

To address any uncertainty, however, 

the Bureau notes that commentary to 

§ 1026.32(b)(1)(i) as adopted in the 2013 

ATR Final Rule provides an example of 

how § 1026.32(b)(1)(i) and (iii) work 

together. Specifically, comment 

32(b)(1)(i)–1, as adopted in that 

rulemaking, provides that, if an item 

meets the conditions for inclusion in 

points and fees specified in 

§ 1026.32(b)(1)(iii), then it must be 

included in points and fees irrespective 

of whether it constitutes a finance 

charge and, in turn, irrespective of 

whether it would have been included in 

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

(i.e., even if payable in a comparable 

cash transaction). In other words, the 

finance charge merely constitutes the 

starting point for points and fees.127

‘‘Reasonable’’ or ‘‘Bona Fide’’ 

Charges. As noted in the section-bysection analysis of § 1026.32(b)(1)(i)(D) 

above, several industry commenters 

argued that the Dodd-Frank Act adopted 

a ‘‘bona fide,’’ rather than a 

‘‘reasonable’’ standard for the exclusion 

from points and fees of third-party 

charges when it amended TILA section 

103(bb)(1)(A)(ii) (i.e., HOEPA’s points 

and fees coverage test) to exclude from 

points and fees bona fide third-party 

charges not retained by a creditor or its 

affiliate. These commenters objected to 

the requirement under proposed 

§ 1026.32(b)(1)(iii) that the third-party 

charges covered by that provision be 

‘‘reasonable’’ (as opposed to ‘‘bona 

fide’’) to be excluded from points and 

fees. 

The Bureau disagrees that Congress 

intended that a ‘‘bona fide’’ test apply 

in determining whether all third-party 

charges may be excluded from points 

and fees. As noted in the Bureau’s 2013 

ATR Final Rule, which interprets 

similar provisions of TILA for qualified 

mortgages,128 at the same time that 

Congress added the bona fide thirdparty charge language to TILA in section 

103(bb)(1)(A)(ii), it retained longstanding TILA section 103(aa)(4)(C), 

requiring that, as a pre-condition for 

excluding the third-party charges listed 

in § 1026.4(c)(7) from points and fees, 

that such charges be ‘‘reasonable.’’ The 

Bureau does not believe that the new 

‘‘bona fide’’ third-party charge exclusion 

renders the pre-existing ‘‘reasonable’’ 

third-party charge exclusion 

meaningless and, in the absence of any 

evidence that the ‘‘reasonable’’ 

provision has been unworkable, the 

Bureau declines to alter it. Instead, as 

discussed in the section-by-section 

analysis of § 1026.32(b)(1)(i)(D) above, 

the Bureau concludes, consistent with 

its determination in the 2013 ATR Final 

Rule, that § 1026.32(b)(1)(iii), which 

specifically addresses the exclusion of 

items listed in § 1026.4(c)(7), takes 

precedence over the more general 

exclusion for bona fide third-party 

charges. In response to commenters’ 

concerns that the ‘‘reasonableness’’ of 

third-party charges may be secondguessed, the Bureau notes its belief that 

the fact that a transaction for such 

services is conducted at arms-length 

ordinarily should be sufficient to ensure 

that the charge is reasonable.129

Charges of Affiliated Settlement 

Service Providers. Many industry 

commenters argued that the points and 

fees definition for high-cost mortgages 

should not distinguish between fees 

paid to affiliate and non-affiliate service 

providers. Commenters thus suggested 

that the Bureau use its exception 

authority to level the playing field either 

by excluding bona fide and reasonable 

affiliate fees from points and fees, or by 

requiring that all non-affiliated service 

provider fees be included. Commenters 

alternatively suggested that the Bureau 

require affiliate charges to be included 

in points and fees only to the extent that 

such charges are unreasonable or exceed 

the market price charged by unaffiliated 

service providers. Commenters 

advanced a number of arguments in 

support of these positions. 

Commenters argued that there is no 

basis for a distinction between affiliate 

and non-affiliate charges, 

notwithstanding that TILA contemplates 

just such a distinction for points and 

fees. These commenters stated that 

affiliate business arrangements are 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6907 

130Comment 32(b)(1)(iii)–1 is adopted in the 2013 

ATR Final Rule without the change proposed in the 

2012 HOEPA Proposal that would have accounted 

for the Bureau’s proposed more inclusive definition 

of the finance charge. As discussed, the Bureau 

plans to determine whether to finalize the more 

inclusive finance charge proposed in its 2012 

TILA–RESPA Integration Proposal at a later time, in 

conjunction with the finalization of that proposal. 

131See 76 FR 27390, 27404–05, 27481, 27489 

(May 11, 2011). 

132 In its 2011 ATR Proposal, the Board did not 

propose to implement in the definition of points 

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

Dodd-Frank Act that specifies that ‘‘insurance 

premiums or debt cancellation or suspension fees 

calculated and paid in full on a monthly basis shall 

not be considered financed by the creditor.’’ In its 

2012 HOEPA Proposal, the Bureau proposed to 

implement that provision in proposed 

§ 1026.34(a)(10) prohibiting the financing of points 

and fees for high-cost mortgages. See the section-bysection analysis of § 1026.34(a)(10) below. 

133 In general, TILA section 129C(d) provides that 

no creditor may finance, directly or indirectly, in 

connection with any residential mortgage loan or 

with any extension of credit under an open-end 

consumer credit plan secured by the principal 

dwelling of the consumer, any 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. TILA section 

129C(d)(1) specifies that insurance premiums or 

Continued 

expressly permitted and regulated by 

RESPA, that the Bureau has not 

articulated any policy purpose or 

consumer benefit to including affiliate 

fees in points and fees, and that the 

Bureau’s 2012 HOEPA Proposal would 

discourage the use of affiliates, which 

undercuts a goal of the Bureau’s 2012 

TILA–RESPA Integration Proposal to 

increase certainty around the cost of 

affiliate providers by providing for a 

zero tolerance for settlement charges of 

affiliated entities. The commenters 

further stated that affiliate charges, just 

like charges for services by unaffiliated 

service providers, are set largely by 

factors outside the creditor’s control, 

such as market price. 

Commenters similarly argued that the 

HOEPA proposal’s inclusion of 

affiliated third-party charges in points 

and fees would harm consumers while 

providing no countervailing benefit. The 

commenters asserted that roughly 26 

percent of the market uses affiliate 

service providers, and that these 

providers offer value, convenience, 

efficiency, and reliability to consumers 

by providing ‘‘one-stop shopping,’’ 

speeding up loan closings, and allowing 

creditors to control the quality of 

ancillary settlement services. 

Commenters pointed to studies 

demonstrating that affiliate settlement 

service providers are competitive in cost 

with unaffiliated service providers and 

argued that consumers would be 

harmed by reduced choice and by 

having to pay higher prices as a result 

of reduced competition as lenders 

avoided using affiliated service 

providers rather than risk high-cost 

mortgage coverage through the points 

and fees threshold. 

Certain commenters expressed 

particular concern about the inclusion 

in points and fees of affiliated title 

charges. These commenters stated that 

there is no rational basis for requiring 

affiliated title charges to be included in 

points and fees, because, for example, 

title insurance fees are regulated at the 

State level either through statutorilyprescribed rates, or through a 

requirement that title insurance 

premiums be publicly filed. 

Commenters noted that, as a result of 

State regulation, there is little variation 

in title insurance charges from provider 

to provider and such charges are not 

subject to manipulation. In a variation 

of the argument that the Bureau 

generally should exclude affiliate 

settlement charges from points and fees, 

some commenters suggested that the 

Bureau should adopt a specific carveout for affiliate title fees to the extent 

such fees are otherwise regulated at the 

State level, or to the extent that such 

charges are reasonable and do not 

exceed the cost for unaffiliated title 

insurance. 

The Bureau is adopting 

§ 1026.32(b)(1)(iii) and related 

commentary in the 2013 ATR Final Rule 

substantially as proposed in the 2011 

ATR and 2012 HOEPA Proposals.130

The rationale set forth in the section-bysection analysis of § 1026.32(b)(1)(iii) in 

the 2013 ATR Final Rule applies equally 

to this rulemaking. TILA section 

103(bb)(4) specifically mandates that 

fees paid to and retained by affiliates of 

the creditor be included in calculating 

points and fees for high-cost mortgages. 

To exclude such fees from points and 

fees for purposes of determining highcost mortgage coverage, the Bureau 

would have to use its exception 

authority under TILA section 105(a). 

The Bureau is aware of concerns that 

including fees paid to affiliates in points 

and fees could make it more difficult for 

creditors using affiliated service 

providers to stay under the points and 

fees threshold for high-cost mortgages. 

On the other hand, fees paid to an 

affiliate pose greater risks to the 

consumer, since affiliates of a creditor 

may not have to compete in the market 

with other providers of a service and 

thus may charge higher prices that get 

passed on to the consumer. The Bureau 

believes that Congress weighed these 

competing considerations and elected 

not to exclude fees paid to affiliates. 

Indeed, title XIV repeatedly 

differentiates between affiliates and 

independent, third-party service 

providers. See, e.g., Dodd-Frank Act 

sections 1403, 1411, 1412, 1414, and 

1431. The Bureau is not aware of any 

empirical evidence suggesting that 

Congress’s election, if implemented, 

would affect the availability of 

responsible credit, or otherwise harm 

consumers, and therefore does not 

believe that it would be appropriate to 

use its exception authority in this 

instance. 

32(b)(1)(iv) 

As noted in the Bureau’s 2013 ATR 

Final Rule, section 1431(c) of the DoddFrank Act amended TILA to add new 

TILA section 103(bb)(4)(D), which 

codifies, with a few adjustments, 

existing § 1026.32(b)(1)(iv). Section 

1026.32(b)(1)(iv) requires the inclusion 

in points and fees for high-cost 

mortgages of certain credit insurance 

and debt cancellation premiums. 

The Board’s 2011 ATR Proposal 

would have implemented TILA section 

103(bb)(4)(D) by amending existing 

§ 226.32(b)(1)(iv) to track the language 

set forth in the Dodd-Frank Act.131

Specifically, the 2011 ATR Proposal 

would have provided that points and 

fees include premiums payable at or 

before closing for any credit life, 

disability, 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. The 

2011 ATR Proposal also would have 

added new comment 32(b)(1)(iv)–2 to 

clarify that ‘‘credit property insurance’’ 

includes insurance against loss or 

damage to personal property such as a 

houseboat or manufactured home. 

Proposed § 1026.32(b)(1)(iv) in the 

Bureau’s 2012 HOEPA Proposal 

republished the Board’s proposed 

revisions and additions to 

§ 226.32(b)(1)(iv) and comment 

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

proposed new comment 32(b)(1)(iv)–2, 

substantially as proposed in the Board’s 

2011 ATR Proposal.132 In addition, 

proposed comment 32(b)(1)(iv)–1 would 

have clarified that credit insurance 

premiums must be included in points 

and fees if they are paid at 

consummation, whether they are paid in 

cash or, if permitted by applicable law, 

financed. The Bureau stated that the 

clarifying phrase ‘‘if permitted by 

applicable law’’ was necessary because 

section 1414 of the Dodd-Frank Act 

added to TILA new section 129C(d) 

prohibiting the financing of most types 

of credit insurance.133


srobinson on DSK4SPTVN1PROD with 
6908 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

debt cancellation or suspension fees calculated and 

paid in full on a monthly basis shall not be 

considered financed by the creditor, and (d)(2) 

provides that the prohibition does not apply to 

reasonable credit unemployment insurance that it 

not paid to the creditor or an affiliate of the 

creditor. 

134See 76 FR 27390, 27405, 27481 (May 11, 

2011). 

135The Bureau is finalizing proposed 

§ 1026.32(b)(8)(i) as § 1026.32(b)(6)(i) in the 2013 

ATR Final Rule. See the section-by-section analysis 

of § 1026.32(b)(6)(i) below. 

136See 76 FR 27390, 27405, 27481 (May 11, 

2011). 137As already noted, the Bureau is finalizing 

proposed § 1026.32(b)(8)(i) as § 1026.32(b)(6)(i) in 

the 2013 ATR Final Rule. See the section-by-section 

analysis for proposed § 1026.32(b)(6)(i), below. 

The Bureau did not receive many 

comments on proposed 

§ 1026.32(b)(1)(iv) as set forth in the 

2012 HOEPA Proposal. A few industry 

commenters requested that the Bureau 

clarify whether insurance premiums 

that are solely for the consumer’s 

benefit, such as homeowner’s insurance, 

must be included in points and fees. 

One such commenter specifically noted 

that certain types of voluntary insurance 

and service contract products for 

manufactured homes, like homeowner’s 

insurance, protect the consumer as 

beneficiary and not the creditor. This 

commenter requested that the Bureau 

clarify in commentary that such 

products are clearly excluded from the 

definition of credit property insurance. 

At least one industry commenter also 

stated that the statutory (and thus 

Regulation Z’s) definition of points and 

fees contradicts itself on whether hazard 

insurance premiums are included. The 

commenter stated that hazard insurance 

premiums are payable in comparable 

cash transactions, and therefore 

excluded under § 1026.32(b)(1)(i) (the 

finance charge prong of points and fees). 

The commenter argued that the 

regulation should be clear that hazard 

insurance premiums are excluded from 

points and fees in all cases because they 

are payable in a cash transaction. 

The Bureau is adopting 

§ 1026.32(b)(1)(iv) and comments 

32(b)(1)(iv)–1 and –2 in the 2013 ATR 

Final Rule substantially as proposed in 

the 2011 ATR and 2012 HOEPA 

Proposals. However, as noted in the 

2013 ATR Final Rule, § 1026.32(b)(1)(iii) 

is adopted in that rulemaking with the 

clarification in comment 32(b)(1)(iii)–3 

that premiums or other charges for ‘‘any 

other life, accident, health, or loss-ofincome insurance’’ need not be 

included in points and fees if the 

consumer is the sole beneficiary of the 

insurance. As with other charges that 

are specifically required to be included 

in points and fees, hazard insurance 

premiums (unless solely for the benefit 

of the consumer) are included even if 

they are not payable in a comparable 

cash transaction and thus not part of the 

finance charge. 

32(b)(1)(v) 

As noted in the Bureau’s 2013 ATR 

Final Rule, section 1431(c) of the DoddFrank Act amended TILA to add new 

TILA section 103(bb)(4)(E), which 

requires the inclusion in points and fees 

of the maximum prepayment fees and 

penalties which may be charged or 

collected under the terms of the credit 

transaction. The Board’s 2011 ATR 

Proposal proposed to implement this 

statutory change in new 

§ 226.32(b)(1)(v).134 Proposed 

§ 1026.32(b)(1)(v) in the Bureau’s 2012 

HOEPA Proposal republished the 

Board’s proposed § 226.32(b)(1)(v), 

except that it would have replaced a 

cross-reference to the Board’s proposed 

definition of prepayment penalty for 

qualified mortgages (i.e., the Board’s 

proposed § 226.43(b)(10)) with a crossreference to the definition of 

prepayment penalty for closed-end 

credit transactions set forth in the 

HOEPA Proposal’s § 1026.32(b)(8)(i).135

The Bureau received few comments 

on proposed § 1026.32(b)(1)(v). Several 

commenters observed that proposed 

§ 1026.32(b)(1)(v), when read together 

with the Bureau’s definition of 

prepayment penalty for closed-end 

credit transactions in proposed 

§ 1026.32(b)(8)(i), would have required 

the inclusion in points and fees of bona 

fide third-party charges waived by the 

creditor on the condition that the 

consumer did not prepay the loan, even 

though the Bureau’s proposal would 

have permitted certain such charges to 

be excluded from the definition of 

prepayment penalty (and, in turn, from 

points and fees) for HELOCs. Those 

comments are addressed in the sectionby-section analysis of § 1026.32(b)(6)(i) 

below. 

Proposed § 1026.32(b)(1)(v) requiring 

the inclusion in points and fees of the 

maximum prepayment fees and 

penalties which may be charged or 

collected under the terms of the credit 

otherwise is being adopted in the 2013 

ATR Final Rule substantially as 

proposed. 

32(b)(1)(vi) 

Section 1431(c) of the Dodd-Frank Act 

amended TILA to add new TILA section 

103(bb)(4)(F), which requires the 

inclusion in points and fees of all 

prepayment fees or penalties that are 

incurred by the consumer if the loan 

refinances a previous loan made or 

currently held by the same creditor or 

an affiliate of the creditor. The Board’s 

2011 ATR Proposal proposed to 

implement this statutory change in new 

§ 226.32(b)(1)(vi) by providing for the 

inclusion in points and fees of the total 

prepayment penalty incurred by the 

consumer if the consumer refinances an 

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.136 Proposed 

§ 1026.32(b)(1)(vi) in the Bureau’s 2012 

HOEPA Proposal republished the 

Board’s proposed § 226.32(b)(1)(vi), 

except that it would have replaced a 

cross-reference to the Board’s proposed 

definition of prepayment penalty for 

qualified mortgages (i.e., the Board’s 

proposed § 226.43(b)(10)) with a crossreference to the definition of 

prepayment penalty for closed-end 

credit transactions in proposed 

§ 1026.32(b)(8)(i).137 The Bureau did not 

receive any comments specifically in 

response to proposed § 1026.32(b)(1)(vi). 

Proposed § 1026.32(b)(1)(vi) is being 

adopted, substantially as proposed in 

the 2011 ATR and 2012 HOEPA 

Proposals, in § 1026.32(b)(1)(vi) in the 

2013 ATR Final Rule, with only minor 

changes for clarity. As noted in the 

preamble to the 2013 ATR Final Rule, 

the Bureau believes that it is appropriate 

for § 1026.32(b)(1)(vi) to apply to the 

current holder of the existing mortgage 

loan, the servicer acting on behalf of the 

current holder, or an affiliate of either 

(i.e., and not to the creditor that 

originally made the loan, if that creditor 

no longer holds the loan). The entities 

that are listed in § 1026.32(b)(1)(vi) are 

the entities that would refinance the 

transaction and, as a practical matter, 

gain from the prepayment penalties on 

the previous transaction. Accordingly, 

the Bureau is invoking its exception and 

adjustment authority under TILA 

section 105(a) with respect to the 

provision. The Bureau believes that 

adjusting the statutory language will 

more precisely target the entities in the 

current market environment that would 

benefit from refinancing loans with 

prepayment penalties, more effectively 

deter loan flipping to collect 

prepayment penalties, and help 

preserve consumers’ access to safe, 

affordable credit. It also will lessen the 

compliance burden on other entities 

that lack an incentive for loan flipping, 

such as a creditor that originated the 

existing loan but no longer holds the 

loan. For these reasons, the Bureau 

believes that use of its exception and 

adjustment authority is necessary and 

proper under TILA section 105(a) to 

effectuate the purposes of and facilitate 

compliance with TILA. 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6909 

138See 76 FR 27390, 27402–04, 27481, 27488–89 

(May 11, 2011). 

139See id. at 27405–06, 27481. 

32(b)(2) 

Proposed Provisions Not Adopted 

As noted in the section-by-section 

analysis of § 1026.32(b)(1)(ii) above, 

section 1431(c) of the Dodd-Frank Act 

amended TILA to require the inclusion 

in points and fees for high-cost 

mortgages (and qualified mortgages) of 

all compensation paid directly or 

indirectly by a consumer or a creditor to 

a ‘‘mortgage originator.’’ As also noted 

above, the Board’s 2011 ATR Proposal 

proposed to implement this statutory 

change in proposed § 226.32(b)(1)(ii) 

utilizing the term ‘‘loan originator,’’ as 

defined in existing § 1026.36(a)(1), 

rather than the statutory term ‘‘mortgage 

originator.’’ 138 In turn, the Board 

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

from points and fees compensation paid 

to certain categories of persons 

specifically excluded from the 

definition of ‘‘mortgage originator’’ in 

amended TILA section 103, namely 

employees of a retailer of manufactured 

homes under certain circumstances, 

certain real estate brokers, and 

servicers.139 The Bureau’s proposed 

§ 1026.32(b)(2) republished the Board’s 

proposed § 226.32(b)(2), with certain 

terminology changes to reflect the scope 

of transactions covered by § 1026.32, 

rather than only § 1026.43, as in the 

Board’s proposal. The Bureau received 

numerous comments concerning 

proposed § 1026.32(b)(2). These 

comments are discussed in the sectionby-section analysis of § 1026.32(b)(1)(ii) 

above. Instead, the Bureau finalizes the 

definition of points and fees for HELOCs 

in § 1026.32(b)(2). 

Points and Fees for HELOCs 

As discussed in the section-by-section 

analysis of § 1026.32(a) above, TILA 

section 103(bb)(1)(A) as amended by the 

Dodd-Frank Act provides that a ‘‘highcost mortgage’’ may include an openend credit plan secured by a consumer’s 

principal dwelling. Section 1431(c) of 

the Dodd-Frank Act, in turn, amended 

TILA by adding new section 103(bb)(5), 

which specifies how to calculate points 

and fees for HELOCs. Unlike TILA’s preexisting points and fees definition for 

closed-end credit transactions, which 

enumerates six specific categories of 

items that creditors must include in 

points and fees, the points and fees 

provision for HELOCs simply provides 

that points and fees for open-end credit 

plans are calculated by adding ‘‘the total 

points and fees known at or before 

closing, including the maximum 

prepayment penalties that may be 

charged or collected under the terms of 

the credit transaction, plus the 

minimum additional fees the consumer 

would be required to pay to draw down 

an amount equal to the total credit 

line.’’ Thus, apart from identifying (1) 

maximum prepayment penalties and (2) 

fees to draw down an amount equal to 

the total credit line, the Dodd-Frank Act 

did not enumerate the specific items 

that should be included in ‘‘total points 

and fees’’ for HELOCs. 

For clarity and to facilitate 

compliance, the 2012 HOEPA Proposal 

would have implemented TILA section 

103(bb)(5) in § 1026.32(b)(3) (i.e., 

separately from closed-end points and 

fees) and would have defined points 

and fees for HELOCs to include the 

following categories of charges: (1) Each 

item required to be included in points 

and fees for closed-end credit 

transactions under § 1026.32(b)(1), to 

the extent applicable in the open-end 

credit context; (2) certain participation 

fees that the creditor may impose on a 

consumer in connection with an openend credit plan; and (3) the minimum 

fee the creditor would require the 

consumer to pay to draw down an 

amount equal to the total credit line. 

Each of these items, along with certain 

modifications adopted in the final rule 

in response to comments received, is 

discussed below. 

32(b)(2)(i) 

Proposed § 1026.32(b)(3)(i) would 

have provided that all items included in 

the finance charge under § 1026.4(a) and 

(b), except interest or the time-price 

differential, must be included in points 

and fees for open-end credit plans, to 

the extent such items are payable at or 

before account opening. This provision 

generally would have mirrored 

proposed § 1026.32(b)(1)(i) for closedend credit transactions, with the 

following differences. 

First, proposed § 1026.32(b)(3)(i) 

would have specified that the items 

included in the finance charge under 

§ 1026.4(a) and (b) must be included in 

points and fees only if they are payable 

at or before account opening. Proposed 

comment 32(b)(3)(i)–1 would have 

clarified that this provision was 

intended to address the potential 

uncertainty that could arise from the 

fact that certain charges included in the 

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

are transaction costs unique to HELOCs 

that often may not be known at account 

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

1 thus would have explained that 

charges payable after the opening of a 

HELOC, for example minimum monthly 

finance charges and service charges 

based either on account activity or 

inactivity, need not be included in 

points and fees for HELOCs, even if they 

are included in the finance charge under 

§ 1026.4(a) and (b). Transaction fees 

generally are also not included in points 

and fees for HELOCs, except as 

provided in proposed 

§ 1026.32(b)(3)(vi). 

Second, in contrast to proposed 

§ 1026.32(b)(1)(i) for closed-end credit 

transactions, proposed § 1026.32(b)(3)(i) 

for HELOCs would not have addressed 

the more inclusive definition of the 

finance charge proposed in the Bureau’s 

2012 TILA–RESPA Integration Proposal. 

Such language was unnecessary in the 

open-end credit context, because the 

Bureau’s 2012 TILA–RESPA Proposal 

proposed to adopt the more inclusive 

finance charge only for closed-end 

credit transactions. 

Third, the Bureau would have omitted 

from proposed § 1026.32(b)(3)(i) as 

unnecessary the exclusion from points 

and fees set forth in amended TILA 

section 103(bb)(1)(C) for premiums or 

guaranties for government-provided or 

certain PMI premiums. The Bureau 

understands that such insurance 

products, which are designed to protect 

creditors originating loans with high 

loan-to-value ratios, are normally 

inapplicable in the context of HELOCs. 

The Bureau received several 

comments concerning proposed 

§ 1026.32(b)(3)(i). One industry 

commenter expressed concern that the 

different formulation of proposed 

§ 1026.32(b)(1)(i) for closed-end credit 

transactions and proposed 

§ 1026.32(b)(3)(i) for HELOCs reflected a 

substantive difference in the approach 

to points and fees in the closed- and 

open-end credit contexts. A consumer 

group commenter urged the Bureau to 

coordinate the closed- and open-end 

points and fees definitions to establish 

a clear and consistent rule in both 

contexts for when charges must be 

included in the calculation (i.e., 

whether points and fees includes any 

charges in connection with the 

transaction, charges ‘‘payable’’ at or 

before consummation or account 

opening, or charges ‘‘known’’ at or 

before consummation or account 

opening). Finally, the Bureau received 

one comment suggesting that it 

incorporate TILA section 103(bb)(1)(C) 

concerning mortgage insurance 

premiums into the points and fees 

definition for HELOCs as a prophylactic 

measure, even though such products 

typically are not associated with openend credit plans. 

The Bureau finalizes § 1026.32(b)(3)(i) 

substantially as proposed, in 

§ 1026.32(b)(2)(i). However, the Bureau 


srobinson on DSK4SPTVN1PROD with 
6910 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

140Like the Board’s proposed § 226.43(e)(3)(ii), 76 

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

Bureau’s proposed § 1026.32(b)(5)(i) would have 

used the term ‘‘loan originator’’ rather than 

‘‘mortgage originator’’ for consistency within 

Regulation Z. 

omits the proposed reference to charges 

‘‘payable’’ at or before account opening. 

As discussed in the section-by-section 

analysis of § 1026.32(b)(1) above, the 

final rule instead clarifies that each of 

the charges in the points and fees 

calculation for HELOCs must be 

included (as under final § 1026.32(b)(1) 

for closed-end credit transactions) only 

if it is ‘‘known’’ at or before account 

opening. The result of this change is 

consistency between the final rules for 

points and fees in § 1026.32(b)(1) for 

closed-end credit and § 1026.32(b)(2) for 

HELOCs. In addition, as suggested by 

one commenter, the Bureau is 

incorporating TILA’s provisions 

concerning mortgage insurance 

premiums into the definition of points 

and fees for HELOCs in 

§ 1026.32(b)(2)(i)(B) and (C). 

32(b)(2)(i)(B) 

The Bureau adopts 

§ 1026.32(b)(2)(i)(B) in the final rule to 

clarify that government mortgage 

insurance premiums and guarantees are 

excluded from points and fees for 

HELOCs, just as they are from points 

and fees for closed-end credit 

transactions. Thus, § 1026.32(b)(2)(i)(B) 

for HELOCs mirrors § 1026.32(b)(1)(i)(B) 

as adopted in the 2013 ATR Final Rule 

for closed-end credit transactions, and 

comment 32(b)(2)(i)(B) cross-references 

comment 32(b)(1)(i)(B) for further 

guidance. The Bureau’s 2012 HOEPA 

Proposal would not have incorporated 

this provision of TILA into the 

definition of points and fees for 

HELOCs. However, upon further 

consideration, the Bureau believes that 

even if such mortgage insurance is not 

common for HELOCs, it is useful to 

exclude these types of premiums and 

guarantees from the points and fees 

definition to accommodate the 

possibility of this product developing 

for HELOCs. Additionally, to ease 

compliance, the Bureau believes it is 

desirable for the definition of points and 

fees for closed-end credit transactions 

and HELOCs to be parallel to the 

greatest extent practicable. Accordingly, 

the Bureau interprets TILA section 

103(bb)(5) as containing an exclusion 

for government premiums and 

guarantees that is parallel to that for 

closed-end transactions, and is 

exercising its authority under TILA 

section 103(bb)(4)(G) to ensure 

consistent treatment. 

32(b)(2)(i)(C) 

The Bureau adopts 

§ 1026.32(b)(2)(i)(C) in the final rule to 

clarify that PMI premiums are excluded 

from points and fees for HELOCs to the 

same extent that they are excluded from 

points and fees for closed-end credit 

transactions. Thus, § 1026.32(b)(2)(i)(C) 

for HELOCs mirrors § 1026.32(b)(1)(i)(C) 

as adopted in the 2013 ATR Final Rule 

for closed-end credit transactions, and 

comment 32(b)(2)(i)(C) cross-references 

comments 32(b)(1)(i)(C)–1 and –2 for 

further guidance. The Bureau’s 2012 

HOEPA Proposal would not have 

incorporated this provision of TILA into 

the definition of points and fees for 

HELOCs. However, upon further 

consideration, the Bureau believes that 

even if such mortgage insurance is not 

common for HELOCs, it is useful to 

include it in the points and fees 

definition, as noted above. For the same 

reasons discussed above in connection 

with government premiums, the Bureau 

interprets TILA section 103(bb)(5) as 

containing an exclusion for PMI 

premiums that is parallel to that for 

closed-end transactions, and is 

exercising its authority under TILA 

section 103(bb)(4)(G) to ensure 

consistent treatment. 

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

As discussed in the section-by-section 

analysis of § 1026.32(b)(1)(i)(D) above, 

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

excludes from points and fees for highcost mortgages bona fide third-party 

charges not retained by the creditor, 

mortgage originator or an affiliate of 

either. The proposal would have 

implemented this provision for both 

closed- and open-end credit transactions 

in proposed § 1026.32(b)(5)(i), with a 

cross-reference to § 1026.36(a)(1) for the 

definition of loan originator.140

Proposed § 1026.32(b)(5)(i) would have 

specified, however, that ‘‘loan 

originator’’ as used in that provision 

meant a loan originator as that term is 

defined in § 1026.36(a)(1), 

notwithstanding § 1026.36(f). The 

Bureau believed that such a clarification 

was necessary for HELOCs because 

originators of open-end credit plans are 

not, strictly speaking, ‘‘mortgage 

originators’’ as that term is defined in 

amended TILA section 103. TILA 

section 103(cc)(2)(A) defines a mortgage 

originator as a person that performs 

specific activities with respect to a 

‘‘residential mortgage loan,’’ and TILA 

section 103(cc)(5) excludes consumer 

credit transactions under an open-end 

credit plan from the definition of 

residential mortgage loan. Thus, on its 

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

could be read not to exclude from points 

and fees bona fide third-party charges 

not retained by an originator of an 

HELOC. As stated in the proposal, the 

Bureau believes bona fide third-party 

charges not retained by a loan originator 

should be excluded from points and fees 

whether the originator is originating a 

closed- or open-end credit transaction. 

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

stated that, for purposes of 

§ 1026.32(b)(5)(i), the term ‘‘loan 

originator’’ means a loan originator as 

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

(i.e., in general, an originator of any 

consumer mortgage credit transaction) 

notwithstanding § 1026.36(f), which 

otherwise limits the term ‘‘loan 

originator’’ to persons originating 

closed-end credit transactions. 

The Bureau did not receive any 

comments concerning its proposal to 

treat originators of HELOCs and 

originators of closed-end credit 

transactions equally for purposes of the 

bona fide third-party charge exclusion 

from points and fees. Thus, the Bureau 

finalizes the provision substantially as 

proposed. However, in light of the fact 

that the Bureau is adopting the bona 

fide third-party charge exclusion for 

closed-end credit transactions in 

§ 1026.32(b)(1)(i)(D) in the 2013 ATR 

Final Rule (i.e., rather than in 

§ 1026.32(b)(5)(i) for both closed- and 

open-end credit transactions, as 

proposed), the Bureau adopts a separate 

exclusion for HELOCs in 

§ 1026.32(b)(2)(i)(D) of the 2013 HOEPA 

Final Rule, which mirrors the provision 

for closed-end credit transactions. Thus, 

the final rule for HELOCs reflects the 

fact that mortgage insurance premiums, 

certain real estate-related charges, and 

certain credit insurance premiums may 

sometimes be included in points and 

fees for HELOCs according to the 

specific requirements in 

§ 1026.32(b)(2)(i)(C), (ii), and (iii), even 

if those charges might otherwise have 

been excluded from points and fees as 

bona fide third-party charges. 

32(b)(2)(i)(E) and (F) 

As discussed in the section-by-section 

analysis of § 1026.32(b)(1)(i)(E) and (F) 

above, section 1431(d) of the DoddFrank Act added new section 103(dd) to 

TILA, which permits a creditor to 

exclude from the points and fees 

calculation for high-cost mortgages, if 

certain conditions are met, either: (1) Up 

to two bona fide discount points (TILA 

section 103(dd)(1)), or (2) up to one 

bona fide discount point (TILA section 

103(dd)(2)). The 2012 HOEPA Proposal 

would have implemented these bona 

fide discount point provisions for both 

closed- and open-end credit transactions 

in § 1026.32(b)(5)(ii)(A) (exclusion of up 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6911 

to two discount points) and (B) 

(exclusion of up to one discount point). 

Proposed § 1026.32(b)(5)(ii)(A) and 

(B) are being adopted in the 2013 ATR 

Final rule as § 1026.32(b)(1)(i)(E) and 

(F), respectively, as carve-outs in the 

finance charge prong of closed-end 

points and fees for closed-end credit 

transactions. Thus, the Bureau adopts 

§ 1026.32(b)(2)(i)(E) and (F) to provide 

for the exclusion of up to two bona fide 

discount points from the points and fees 

calculation for HELOCs. The Bureau 

notes that it did not receive any 

comments specifically concerning the 

application of the bona fide discount 

point exclusion to HELOCs. Thus, as 

adopted, the bona fide discount point 

exclusions for HELOCs mirror 

§ 1026.32(b)(1)(i)(E) and (F) for closedend credit transactions, and comments 

32(b)(2)(i)(E)–1 and 32(b)(2)(i)(F)–1 

cross-reference the commentary to those 

provisions for additional guidance. 

32(b)(2)(ii) 

The Bureau’s proposal did not 

include in the calculation of points and 

fees for HELOCs compensation paid to 

originators of open-end plans. As 

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

section 1431(c) of the Dodd-Frank Act 

amended TILA section 103(aa)(4)(B) to 

require mortgage originator 

compensation to be included in the 

existing calculation of points and fees. 

At the same time, however, section 1401 

of the Dodd-Frank Act amended TILA 

section 103 to define a ‘‘mortgage 

originator’’ as a person who undertakes 

specified actions with respect to a 

‘‘residential mortgage loan application’’ 

or in connection with a ‘‘residential 

mortgage loan.’’ Section 1401 further 

defined the term ‘‘residential mortgage 

loan’’ to exclude a consumer credit 

transaction under an open-end credit 

plan. Given that the Dodd-Frank Act did 

not specify in amended TILA section 

103(bb)(5) concerning HELOCs that 

compensation paid to originators of 

open-end credit plans must be included 

in the calculation of points and fees, the 

Bureau believed that it was reasonable 

to conclude that Congress did not 

intend for such compensation to be 

included. The Bureau believed that any 

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

by structuring a transaction as a HELOC 

could be addressed through the 

prohibition in TILA against structuring 

a transaction as an open-end credit plan 

to evade HOEPA. See TILA section 

129(r); § 1026.34(b), below. 

The Bureau did not propose to 

include loan originator compensation in 

points and fees for HELOCs, but the 

Bureau noted that amended TILA 

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

authority to include in points and fees 

such other charges that it determines to 

be appropriate. The Bureau thus 

requested comment on the proposed 

definition of points and fees for 

HELOCs, including on whether any 

additional fees should be included in 

the definition. In particular, the Bureau 

requested comment on whether 

compensation paid to originators should 

be included in the calculation of points 

and fees for HELOCs. The Bureau 

recognized that neither TILA nor 

Regulation Z currently addresses 

compensation paid to originators of 

HELOCs and accordingly requested 

comment on the operational issues that 

would be entailed in tracking such 

compensation for inclusion in the 

points and fees calculation. The Bureau 

also requested comment on whether the 

guidance and examples set forth in 

proposed § 1026.32(b)(1)(ii) and 

comments 32(b)(1)(ii)–1 and –2 

concerning closed-end loan originator 

compensation would provide sufficient 

guidance to creditors calculating such 

compensation for HELOCs, or whether 

additional or different guidance would 

be of assistance in the open-end context. 

The Bureau received comments from 

both industry and consumer groups 

concerning its proposal to omit loan 

originator compensation from points 

and fees for HELOCs. Industry 

commenters supported the exclusion, 

with some arguing (as discussed in the 

section-by-section analysis above) that 

the exclusion should be extended to 

closed-end credit transactions. 

Consumer groups strongly objected to 

the Bureau’s proposed exclusion of 

compensation to originators of HELOCs 

on the grounds that it would perpetuate 

an unwarranted distinction between 

closed- and open-end credit for 

purposes of HOEPA coverage, when 

Congress clearly intended that HELOCs 

be covered by HOEPA and subject to the 

same protections as closed-end credit 

transactions, including the provisions 

that the Dodd-Frank added to address 

perceived abuses in loan originator 

compensation. Consumer groups 

similarly argued that the Bureau’s 

proposal to rely on the anti-structuring 

provision in § 1026.34(b) was 

‘‘dangerously naı ̈ve.’’ No commenters 

provided information concerning the 

operational burdens that HELOC 

creditors might face in tracking loan 

originator compensation, or on whether 

closed-end guidance for calculating loan 

originator compensation would be 

sufficient to provide guidance to HELOC 

creditors. 

As discussed in the section-by-section 

analysis of § 1026.32(b)(1)(ii), the 

Bureau is adopting in the 2013 ATR 

Final Rule a requirement to include in 

points and fees compensation paid to 

loan originators, and is providing 

guidance for determining what types of 

compensation, and how much 

compensation, needs to be included. 

The Bureau is persuaded that requiring 

loan originator compensation to be 

included in points and fees for closedend credit, while exempting it for openend credit, could lead to undesirable 

results, such as creditors steering 

consumers to open-end credit where a 

closed-end product would be more 

appropriate. Accordingly, the Bureau is 

adopting in the final rule a requirement 

that creditors include compensation 

paid to originators of open-end credit 

plans, to the same extent that such 

compensation is required to be included 

for closed-end credit transactions. 

To provide the public with an 

additional opportunity to give feedback 

concerning what further guidance may 

be needed to calculate and include loan 

originator compensation for open-end 

credit in points and fees, the Bureau is 

soliciting comment on this issue in the 

concurrent proposal that is being 

published today. 

32(b)(2)(iii) 

Proposed § 1026.32(b)(3)(ii) would 

have provided for the inclusion in 

points and fees for HELOCs of the real 

estate-related charges listed in 

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

for future payment of taxes) payable at 

or before account opening. However, 

any such charge would have been 

excluded from points and fees if it is 

reasonable, the creditor receives no 

direct or indirect compensation in 

connection with the charge, and the 

charge is not paid to an affiliate of the 

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

thus would have mirrored proposed 

§ 1026.32(b)(1)(iii) concerning the 

inclusion of such charges in points and 

fees for closed-end credit transactions. 

Proposed comment 32(b)(3)(ii)–1 would 

have cross-referenced proposed 

comment 32(b)(1)(iii)–1 for guidance 

concerning the inclusion in points and 

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

Bureau did not receive any comments 

specifically addressing proposed 

§ 1026.32(b)(3)(ii) or its related 

commentary. The Bureau thus finalizes 

these provisions as proposed in 

§ 1026.32(b)(2)(iii). 

32(b)(2)(iv) 

Proposed § 1026.32(b)(3)(iii) would 

have provided for the inclusion in 

points and fees for HELOCs of 


srobinson on DSK4SPTVN1PROD with 
6912 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

premiums or other charges payable at or 

before account opening for any credit 

life, credit disability, credit 

unemployment, or credit property 

insurance, or any other life, accident, 

health, or loss-of-income insurance, or 

any payments directly or indirectly for 

any debt cancellation or suspension 

agreement or contract. Proposed 

§ 1026.32(b)(3)(iii) thus would have 

mirrored proposed § 1026.32(b)(1)(iv) 

concerning the inclusion of such 

charges for closed-end credit 

transactions. Proposed comment 

32(b)(3)(iii)–1 would have crossreferenced proposed comments 

32(b)(1)(iv)–1 and –2 for guidance 

concerning the inclusion in points and 

fees of premiums for credit insurance 

and debt cancellation or suspension 

coverage. 

The Bureau received few comments 

specifically addressing proposed 

§ 1026.32(b)(3)(iii) or its related 

commentary. The comments argued that 

the Bureau should specify, as for closedend points and fees, that hazard 

insurance premiums are excluded in all 

cases for HELOCs because they are 

payable in a comparable cash 

transaction. For the reasons discussed in 

the section-by-section analysis of 

closed-end points and fees, the Bureau 

disagrees and notes that the final rule 

includes hazard insurance premiums 

unless they are solely for the benefit of 

the consumer. The Bureau thus finalizes 

proposed § 1026.32(b)(3)(iii) and its 

related commentary generally as 

proposed, as § 1026.32(b)(2)(iv). The 

Bureau adds a new cross-reference to 

comment 32(b)(1)(iv)–3, which is being 

adopted in the 2013 ATR Final Rule. 

Comment 32(b)(1)(iv)–3 provides 

clarification concerning treatment of 

premiums solely for the benefit of the 

consumer. 

32(b)(2)(v) 

Proposed § 1026.32(b)(3)(iv) would 

have provided for the inclusion in 

points and fees for HELOCs the 

maximum prepayment penalty that may 

be charged or collected under the terms 

of the plan. This provision would have 

mirrored proposed § 1026.32(b)(1)(v) 

concerning the inclusion of maximum 

prepayment penalties for closed-end 

credit transactions, except that proposed 

§ 1026.32(b)(3)(iv) would have crossreferenced the definition of prepayment 

penalty provided for HELOCs in 

proposed § 1026.32(b)(8)(ii). 

The Bureau did not receive any 

comments specifically addressing 

proposed § 1026.32(b)(3)(iv). The 

Bureau thus finalizes this provision 

generally as proposed, as 

§ 1026.32(b)(2)(v). The Bureau replaces 

the proposed cross-reference to 

§ 1026.32(b)(8)(ii) with a cross-reference 

to § 1026.32(b)(6)(ii), where the 

definition of prepayment penalty for 

HELOCs is being finalized. 

32(b)(2)(vi) 

As discussed in the section-by-section 

analysis of § 1026.32(b)(1)(vi) above, 

section 1431(c) of the Dodd-Frank Act 

amended TILA to add new TILA section 

103(bb)(4)(F) to the general definition of 

points and fees. TILA section 

103(bb)(4)(F) requires the inclusion in 

points and fees of all prepayment fees 

or penalties that are incurred by the 

consumer if the loan refinances a 

previous loan made or currently held by 

the same creditor or an affiliate of the 

creditor. The HOEPA Proposal would 

not have included this item in its 

enumerated list of points and fees for 

HELOCs. However, proposed comment 

32(b)(8)–2 would have aligned the 

treatment of closed-end and open-end 

credit transactions by clarifying that for 

HELOCs, the term ‘‘prepayment 

penalty’’ includes a charge imposed if 

the consumer terminates the plan in 

connection with obtaining a new loan or 

plan with the current holder of the 

existing plan, a servicer acting on behalf 

of the current holder, or an affiliate of 

either. 

Upon further reflection, the Bureau 

believes that it is preferable to align the 

list of items in § 1026.32(b)(2) that 

should be included in points and fees 

for HELOCs with that for closed-end 

credit transactions in § 1026.32(b)(1). As 

a result, the Bureau is including the 

guidance contained in proposed 

comment 32(b)(8)–2 in 

§ 1026.32(b)(2)(vi). Section 

1026.32(b)(2)(vi) includes a requirement 

that the creditor include in points and 

fees for HELOCs the total prepayment 

penalty, as defined in § 1026.32(b)(6)(ii), 

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 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. 

32(b)(2)(vii) 

Proposed § 1026.32(b)(3)(v) would 

have provided for the inclusion in 

points and fees for HELOCs of ‘‘any fees 

charged for participation in an open-end 

credit plan, as described in 

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

annual or other periodic basis.’’ In the 

proposal, the Bureau noted that the fees 

described in § 1026.4(c)(4) (i.e., fees 

charged for participation in a credit 

plan) are excluded from the finance 

charge, and thus would not otherwise 

have been included in points and fees 

for HELOCs under proposed 

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

however, that such fees should be 

included in points and fees for HELOCs 

because creditors extending HELOCs 

may commonly impose such fees on 

consumers as a pre-condition to 

maintaining access to the plans, and 

because the Bureau believed that 

creditors generally could calculate at 

account opening the amount of 

participation charges that the consumer 

would be required to pay to maintain 

access for the life of the plan. 

Proposed comment 32(b)(3)(v)–1 thus 

would have clarified that 

§ 1026.32(b)(3)(v) requires the inclusion 

in points and fees of annual fees or 

other periodic maintenance fees that the 

consumer must pay to retain access to 

the open-end credit plan, as described 

in § 1026.4(c)(4). The comment would 

have clarified that, for purposes of the 

points and fees test, a creditor should 

assume that any annual fee is charged 

each year for the original term of the 

plan. Thus, for example, if the terms of 

a home-equity line of credit with a tenyear term require the consumer to pay 

an annual fee of $50, the creditor would 

be required to include $500 in 

participation fees in its calculation of 

points and fees. 

The Bureau requested comment on 

the inclusion of fees described in 

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

HELOCs, including on whether 

additional guidance was needed 

concerning how to calculate such fees 

for plans that do not have a definite 

plan length. 

The Bureau received several 

comments from industry concerning the 

proposed inclusion of participation fees 

in points and fees for HELOCs. Several 

commenters expressed concern that the 

definition would disproportionately 

impact HELOCs with lower 

commitment amounts and therefore 

adversely affect the availability of such 

products. Commenters also stated that 

TILA’s statutory language did not 

support the inclusion of participation 

fees in points and fees if the creditor 

waives the fees dependent on the 

consumer’s use of the credit plan, such 

as if the consumer carries an 

outstanding balance or if the line has 

been used during the year. Commenters 

observed that these conditions cannot 

be known at account opening, thus the 

amount of participation charge to be 

included in points and fees over the 

term of the HELOC cannot be known at 

account opening. Commenters suggested 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6913 

141See 76 FR 27390, 27485 (May 11, 2011). 

various alternatives for including 

participation fees in points and fees for 

HELOCs, such as requiring the fees to be 

included only if they are payable at or 

before account opening, or requiring 

them to be included only for the first 

three years of the account (after which 

the consumer could close the account 

without facing a prepayment penalty if 

the consumer objected to paying the 

fee). No commenters provided any 

suggestions for calculating the amount 

of participation fees to be included in 

points and fees for a HELOC without a 

specified account termination date. 

The Bureau adopts this provision as 

§ 1026.32(b)(2)(vii) with the limitation 

that creditors must include only those 

participation charges that are payable 

before or at account opening. The 

Bureau expects that this approach will 

provide a workable rule for creditors 

opening HELOCs with participation 

charges that may be waived depending 

on a consumer’s use of the account, as 

well as for HELOCs without a specified 

account termination date. 

32(b)(2)(viii) 

As noted above, new TILA section 

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

calculation of points and fees for 

HELOCs must include ‘‘the minimum 

additional fees the consumer would be 

required to pay to draw down an 

amount equal to the total credit line.’’ 

The Bureau proposed to implement this 

requirement in § 1026.32(b)(3)(vi). 

Specifically, proposed 

§ 1026.32(b)(3)(vi) would have provided 

for inclusion in the calculation of points 

and fees for HELOCs any transaction 

fee, including any minimum fee or pertransaction fee, that would be charged 

for a draw on the credit line. Proposed 

§ 1026.32(b)(3)(vi) would have clarified 

that a transaction fee that is assessed 

when a consumer draws on the credit 

line must be included in points and fees 

whether or not the consumer draws the 

entire credit line. In the proposal, the 

Bureau noted its belief that any 

transaction fee that would be charged 

for a draw on the credit line would 

include any transaction fee that would 

be charged to draw down an amount 

equal to the total credit line. 

The Bureau interprets the requirement 

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

include the ‘‘minimum additional fees’’ 

that will be imposed on the consumer 

to draw an amount of credit equal to the 

total credit line as requiring creditors to 

assume that a consumer will make at 

least one such draw during the term of 

the credit plan. The Bureau recognizes 

that creditors will not know at account 

opening how many times (if ever) a 

consumer will draw the entire amount 

of the credit line. For clarity and ease of 

compliance, the Bureau interprets the 

statute to require the creditor to assume 

one such draw. Proposed comment 

32(b)(3)(vi)–1 would have clarified this 

requirement with an example. Proposed 

comment 32(b)(3)(vi)–2 would have 

clarified that, if the terms of the HELOC 

permit a consumer to draw on the credit 

line using either a variable- or fixed-rate 

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

requires the creditor to use the terms 

applicable to the variable-rate feature for 

determining the transaction fee that 

must be included in the points and fees 

calculation. 

The Bureau solicited comment on the 

requirement to include in points and 

fees for HELOCs the charge assessed for 

one draw of the total credit line, and on 

whether additional guidance was 

needed for HELOCs with a maximum 

amount per draw. The Bureau did not 

receive any comments specifically 

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

or its related commentary. The Bureau 

thus finalizes these provisions as 

proposed, but renumbers them in the 

final rule as § 1026.32(b)(2)(viii) and 

comments 32(b)(2)(viii)–1 and –2. 

32(b)(3) 

Definition of Bona Fide Discount Point 

As discussed in the section-by-section 

analysis of § 1026.32(b)(2) above, the 

Bureau proposed to implement the 

calculation of points and fees for 

HELOCs in § 1026.32(b)(3). The Bureau 

is finalizing the calculation of points 

and fees for HELOCs in § 1026.32(b)(2). 

Thus, the Bureau is adopting in 

§ 1026.32(b)(3) the definition of bona 

fide discount point. The Bureau 

proposed to implement this definition 

in § 1026.32(b)(5)(ii) in the 2012 HOEPA 

Proposal. 

The Dodd-Frank Act added TILA 

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

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

same methodology for high-cost 

mortgages and qualified mortgages, 

respectively, for determining whether a 

discount point is ‘‘bona fide’’ and thus 

excludable from points and fees. 

Specifically, these sections provide that 

a discount point is ‘‘bona fide’’ if (1) the 

consumer knowingly pays it for the 

purpose of reducing, and the point in 

fact results in a bona fide reduction of, 

the interest rate or time-price 

differential applicable to the mortgage, 

and (2) the amount of the interest rate 

reduction purchased is reasonably 

consistent with established industry 

norms and practices for secondary 

mortgage market transactions. 

Under both the Board’s proposed 

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

and the Bureau’s proposed 

§ 1026.32(b)(5)(ii) for high-cost 

mortgages, a discount point would have 

been ‘‘bona fide’’ if it both (1) reduced 

the interest rate or time-price 

differential applicable to transaction 

based on a calculation that was 

consistent with established industry 

practices for determining the amount of 

reduction in the interest rate or timeprice differential appropriate for the 

amount of discount points paid by the 

consumer and (2) accounted for the 

amount of compensation that the 

creditor could reasonably expect to 

receive from secondary market investors 

in return for the transaction. 

Specifically, proposed 

§ 1026.32(b)(5)(ii)(C) in the 2012 

HOEPA Proposal simply would have 

cross-referenced proposed 

§ 226.43(e)(3)(iv) as set forth in the 

Board’s 2011 ATR Proposal for purposes 

of determining whether a discount point 

was ‘‘bona fide’’ and excludable from 

the high-cost mortgage points and fees 

calculation.141 The Bureau noted in the 

2012 HOEPA Proposal that it expected 

to provide further clarification 

concerning the exclusion of bona fide 

discount points from points and fees for 

qualified mortgages when it finalized 

the Board’s 2011 ATR Proposal. In the 

2012 HOEPA Proposal, the Bureau thus 

stated that it would coordinate any such 

clarification across the ATR and HOEPA 

Final Rules. 

The Bureau received several 

comments concerning its proposed 

definition of ‘‘bona fide discount point,’’ 

all from industry commenters. The 

comments generally repeated what 

commenters had stated in response to 

the Board’s 2011 ATR Proposal. 

Specifically, commenters stated that the 

proposed definition was both vague and 

overly restrictive, and that the 

secondary market does not create a 

meaningful benchmark for whether the 

amount of a given interest rate reduction 

is ‘‘bona fide.’’ Some commenters 

objected that they were not aware of 

‘‘established industry practices’’ related 

to loan pricing and that pricing 

strategies vary significantly from 

creditor to creditor. For example, one 

creditor’s ‘‘par rate’’ may be higher or 

lower than another’s based on whether 

the creditor absorbs secondary market 

costs such as LLPAs and processing fees 

or passes them on to the consumer. 

Such factors could impact the creditor’s 

discount point pricing. Certain other 

commenters requested guidance for how 

creditors making portfolio loans with 

discount points could establish that the 

discount point is ‘‘bona fide,’’ given that 


srobinson on DSK4SPTVN1PROD with 
6914 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

142Calculating the total loan amount by 

deducting financed points and fees from the 

amount of credit extended to the consumer is 

consistent with the existing total loan amount 

calculation in current comment 32(a)(1)(ii)–1. 

the proposed test would have been tied 

to the secondary market. 

As discussed at length in the Bureau’s 

2013 ATR Final Rule, the Bureau is 

adopting in that rulemaking a definition 

of ‘‘bona fide discount point’’ with 

certain modifications from what was 

proposed in the 2011 ATR and 2012 

HOEPA Final Rules. In brief, the Bureau 

is removing the proposed requirement 

that interest rate reductions take into 

account secondary market 

considerations. Instead, as revised, 

§ 1026.32(b)(3) requires only that the 

calculation of the interest rate reduction 

be consistent with established industry 

practices for determining the amount of 

reduction in the interest rate or timeprice differential appropriate for the 

amount of discount points paid by the 

consumer. As noted in the 2013 ATR 

Final Rule, the Bureau finds that 

removing the secondary market 

component of the ‘‘bona fide’’ discount 

point definition is necessary and proper 

under TILA section 105(a) to effectuate 

the purposes of and facilitate 

compliance with TILA. In particular, the 

exception is necessary and proper to 

permit creditors sufficient flexibility to 

demonstrate that they are in compliance 

with the requirement that discount 

points are bona fide. These same 

considerations regarding facilitating 

compliance apply equally in the highcost mortgage context. 

To further assist creditors in the bona 

fide discount point calculation for highcost mortgages and qualified mortgages, 

the Bureau is adopting in the 2013 ATR 

Final Rule new comment 32(b)(3)–1, 

which provides examples of methods 

that a creditor can use to determine 

whether a discount point is ‘‘bona fide.’’ 

The examples are discussed in further 

detail in the section-by-section analysis 

of § 1026.32(b)(4) in the ATR Final Rule. 

32(b)(4) 

Proposed Provision Not Adopted 

Proposed § 1026.32(b)(4) in the 2012 

HOEPA Proposal would have excluded 

from points and fees for HELOCs any 

charge the creditor waived at or before 

account opening, unless the creditor 

could assess the charge after account 

opening. Proposed comment 32(b)(4)–1 

would have provided an example to 

illustrate the rule. The Bureau received 

several comments relating to whether 

and when conditionally-waived closing 

costs should be required to be included 

in points and fees through the 

prepayment penalty prong of the 

calculation. The Bureau is addressing 

issues concerning the treatment of 

conditionally-waived, third-party 

charges in the definition of prepayment 

penalty, and therefore is not finalizing 

proposed § 1026.32(b)(4). Public 

comments regarding these charges are 

addressed in the section-by-section 

analysis of § 1026.32(b)(6) below. 

Total Loan Amount for Points and Fees 

As noted in the section-by-section 

analysis of § 1026.32(a)(1)(ii) above, the 

Bureau’s 2012 HOEPA Proposal 

proposed for organizational purposes to 

move (1) the existing definition of ‘‘total 

loan amount’’ for closed-end credit 

transactions from comment 32(a)(1)(ii)– 

1 to proposed § 1026.32(b)(6)(i), and (2) 

the examples showing how to calculate 

the total loan amount for closed-end 

credit transactions from existing 

comment 32(a)(1)(ii)–1 to proposed 

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

proposed certain changes to the total 

loan amount definition and commentary 

for closed-end credit transactions, as 

discussed below. Finally, the Bureau 

proposed to define ‘‘total loan amount’’ 

for HELOCs in proposed 

§ 1026.32(b)(6)(ii). The definition of 

‘‘total loan amount’’ is being finalized in 

the 2013 ATR Final Rule. As adopted in 

that rulemaking, the definitions and 

accompanying guidance will appear in 

§ 1026.32(b)(4) and comment 

32(b)(4)(i)–1. Changes from what the 

Bureau proposed in its 2012 HOEPA 

Proposal are discussed below. 

32(b)(4)(i) 

As noted, the Bureau proposed to 

move existing comment 32(a)(1)(ii)–1 

concerning calculation of the ‘‘total loan 

amount’’ for points and fees to proposed 

§ 1026.32(b)(6)(i) and comment 

32(b)(6)(i)–1 and to specify that the 

calculation applies to closed-end credit 

transactions. The Bureau also proposed 

to amend the definition of ‘‘total loan 

amount’’ so that the ‘‘amount financed,’’ 

as calculated pursuant to § 1026.18(b), 

would no longer be the starting point for 

the total loan amount calculation. The 

Bureau proposed this amendment both 

because the Bureau believed that it 

would streamline the total loan amount 

calculation and because the Bureau 

believed the revisions were sensible in 

light of the more inclusive definition of 

the finance charge proposed in the 

Bureau’s 2012 TILA–RESPA Proposal. 

In the preamble of the HOEPA proposal, 

the Bureau noted that one effect of the 

proposed more inclusive finance charge 

generally could have been to reduce the 

‘‘amount financed’’ for many 

transactions. The Bureau thus proposed 

not to rely on the ‘‘amount financed’’ 

calculation as the starting point for the 

‘‘total loan amount’’ in HOEPA. The 

Bureau instead proposed to define ‘‘total 

loan amount’’ as the amount of credit 

extended at consummation that the 

consumer is legally obligated to repay, 

as reflected in the loan contract, less any 

cost that is both included in points and 

fees under § 1026.32(b)(1) and financed 

by the creditor. Proposed comment 

32(b)(6)(i)–1 would have provided an 

example of the Bureau’s proposed ‘‘total 

loan amount’’ calculation for closed-end 

credit transactions. 

The Bureau requested comment on 

the appropriateness of its revised 

definition of ‘‘total loan amount,’’ and 

particularly on whether additional 

guidance was needed in light of the 

prohibition against financing of points 

and fees for high-cost mortgages. 

Specifically, the Bureau noted that, 

under the 2012 HOEPA Proposal, 

financed points are relevant for two 

purposes. First, financed points and fees 

must be excluded from the total loan 

amount for purposes of determining 

whether a closed-end credit transaction 

is covered by HOEPA under the points 

and fees threshold. Second, if a 

transaction is a high-cost mortgage 

through operation of any of the HOEPA 

triggers, the creditor is prohibited from 

financing points and fees by, for 

example, including points and fees in 

the note amount or financing them 

through a separate note. See the sectionby-section analysis of § 1026.34(a)(10) 

below. 

The 2012 HOEPA Proposal noted that, 

notwithstanding HOEPA’s ban on the 

financing of points and fees for highcost mortgages, for purposes of 

determining HOEPA coverage (and thus 

whether the ban applies) creditors 

should be required to deduct from the 

amount of credit extended to the 

consumer any points and fees that the 

creditor would finance if the transaction 

were not subject to HOEPA.142 In this 

way, the percentage limit on points and 

fees for determining HOEPA coverage 

would be based on the amount of credit 

extended to the borrower without taking 

into account any points and fees that 

would (if permitted) be financed. The 

preamble to the 2012 HOEPA Proposal 

provided an example to illustrate how 

the provisions concerning financed 

points and fees in proposed 

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

would have worked together. 

The Bureau received numerous 

comments concerning its proposed 

amendment to the total loan amount 

calculation for closed-end credit 

transactions. The comments, from both 

industry and consumer groups, 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6915 

143Existing § 1026.35(b)(2) restricts prepayment 

penalties for higher-priced mortgage loans in much 

the same way that existing § 1026.32(d)(6) and (7) 

restricts such penalties for high-cost mortgages, but 

§ 1026.35(b)(2) was adopted before the specific 

prohibitions contained in the Dodd-Frank Act were 

enacted. The Bureau’s Escrows Final Rule is 

removing the restriction in § 1026.35(b)(2), in any 

event, in light of the broader prepayment penalty 

regulations being adopted both in this rulemaking 

and the 2013 ATR Final Rule. 

144The Bureau’s 2013 ATR Final Rule is 

finalizing the Board’s proposed implementation of 

TILA section 129C(c)(1) in new § 1026.43(g)(1). 

145The Bureau’s 2013 ATR Final Rule is 

finalizing the Board’s proposed implementation of 

TILA section 129C(c)(3) in new § 1026.43(g)(2), 

which provides that a prepayment penalty must not 

apply after the three-year period following 

consummation, and must not exceed 2 percent of 

the outstanding loan balance prepaid (during the 

first two years following consummation) or 1 

percent of the outstanding loan balance prepaid 

(during the third year following consummation). 

generally requested that the calculation 

be clarified prior to its finalization. The 

Bureau received no comments seeking 

further guidance or clarification 

concerning the interaction of the total 

loan amount calculation and the 

prohibition against financing of points 

and fees for high-cost mortgages. 

After further consideration, the 

Bureau has determined not to adopt at 

this time the proposed revisions to the 

total loan amount calculation for closedend credit transactions. The Bureau 

notes that it likely will revisit this 

subject when it issues a final rule 

concerning the proposed more inclusive 

finance charge. Thus, the Bureau adopts 

the total loan amount definition for 

closed-end credit transactions as 

separately finalized in connection with 

the 2013 ATR Final Rule. As finalized 

therein, the total loan amount for a 

closed-end credit transaction is 

calculated consistently with existing 

comment 32(a)(1)(ii)–1, except that the 

Bureau is adopting certain clarifications 

to reflect the operation of other, new 

provisions under TILA. For example, 

the total loan amount calculation 

examples, which discuss whether and 

when to subtract financed points and 

fees from the amount financed, are 

revised so that they no longer refer to 

the financing of credit life insurance, 

because the financing of most such 

insurance is prohibited under TILA 

section 129C(d). 

32(b)(4)(ii) 

Proposed § 1026.32(b)(6)(ii) in the 

2012 HOEPA Proposal would have 

provided that the ‘‘total loan amount’’ 

for a HELOC is the credit limit for the 

plan when the account is opened. The 

Bureau requested comment as to 

whether additional guidance was 

needed concerning the ‘‘total loan 

amount’’ for HELOCs. The Bureau 

received no comments concerning 

proposed § 1026.32(b)(6)(ii) and 

finalizes it in this rulemaking, as 

§ 1026.32(b)(4)(ii). 

32(b)(5) 

The 2012 HOEPA Proposal would 

have re-numbered existing 

§ 1026.32(b)(2) defining the term 

‘‘affiliate’’ as § 1026.32(b)(7) for 

organizational purposes. The Bureau 

received no comments on this 

provision. The Bureau finalizes this 

organizational change in the 2013 ATR 

Final Rule, by re-numbering existing 

§ 1026.32(b)(2) as § 1026.32(b)(5). 

32(b)(6) 

HOEPA’s Current Approach to 

Prepayment Penalties 

Existing § 1026.32 addresses 

prepayment penalties in § 1026.32(d)(6) 

and (7). Existing § 1026.32(d)(6) has 

implemented TILA section 129(c)(1) by 

defining the term ‘‘prepayment penalty’’ 

for high-cost mortgages as a penalty for 

paying all or part of the principal before 

the date on which the principal is due, 

including by computing a refund of 

unearned scheduled interest in a 

manner less favorable than the actuarial 

method, as defined by section 933(d) of 

the Housing and Community 

Development Act of 1992. Existing 

§ 1026.32(d)(7) has implemented TILA 

section 129(c)(2) by specifying when a 

creditor historically has been permitted 

to impose a prepayment penalty in 

connection with a high-cost mortgage. 

Prior to the Dodd-Frank Act, the 

substantive limitations on prepayment 

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

(2) were the only statutorily-prescribed 

limitations on prepayment penalties in 

TILA, other than certain disclosure 

requirements set forth in TILA section 

128(a)(11) and (12).143

The Dodd-Frank Act’s Amendments to 

TILA Relating to Prepayment Penalties 

As discussed in the 2012 HOEPA 

Proposal, sections 1431 and 1432 of the 

Dodd-Frank Act (high-cost mortgages) 

and section 1414 of the Dodd-Frank Act 

(qualified mortgages) amended TILA to 

further restrict (and often prohibit) 

prepayment penalties in dwellingsecured credit transactions. The DoddFrank Act restricted prepayment 

penalties in three main ways. 

Qualified Mortgages. First, as 

discussed in the 2013 ATR Final Rule, 

the Dodd-Frank Act added to TILA new 

section 129C(c)(1) relating to qualified 

mortgages, which generally provides 

that a residential mortgage loan (i.e., in 

general, a closed-end, dwelling-secured 

credit transaction) may include a 

prepayment penalty only if it: (1) Is a 

qualified mortgage (as the Bureau is 

defining that term in § 1026.43(e)(2), 

(e)(4), and (f)), (2) has an APR that 

cannot increase after consummation, 

and (3) is not a higher-priced mortgage 

loan as defined in § 1026.35(a).144

Under amended TILA section 

129C(c)(3), moreover, even loans that 

meet the statutorily-prescribed criteria 

just described (i.e., fixed-rate, nonhigher-priced qualified mortgages) may 

not include prepayment penalties that 

exceed three percent, two percent, and 

one percent of the amount prepaid 

during the first, second, and third years 

following consummation, respectively 

(or any prepayment penalty after the 

third year following consummation).145

High-Cost Mortgages. Second, as 

discussed above in the section-bysection analysis of § 1026.32(a)(1)(iii), 

amended TILA section 103(bb)(1)(A)(iii) 

provides that any closed- or open-end 

consumer credit transaction secured by 

a consumer’s principal dwelling (other 

than a reverse mortgage transaction) 

with a prepayment penalty in excess of 

2 percent of the amount prepaid or 

payable more than 36 months after 

consummation or account opening is a 

high-cost mortgage subject to §§ 1026.32 

and 1026.34. Under amended TILA 

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

mortgages are prohibited from having a 

prepayment penalty. 

Prepayment Penalty Inclusion in 

Points and Fees. Third, both qualified 

mortgages and most closed-end credit 

transactions and HELOCs secured by a 

consumer’s principal dwelling are 

subject to additional limitations on 

prepayment penalties through the 

inclusion of prepayment penalties in the 

definition of points and fees for both 

qualified mortgages and high-cost 

mortgages. See the section-by-section 

analysis of § 1026.32(b)(1)(v)–(vi) and 

(b)(2)(v)–(vi) above. See also the sectionby-section analysis of 

§§ 1026.32(b)(1)(v)–(vi) and .43(e)(3) in 

the Bureau’s 2013 ATR Final Rule 

(discussing the inclusion of prepayment 

penalties in the points and fees 

calculation for qualified mortgages 

pursuant to TILA section 

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

qualified mortgage transactions may not 

have total points and fees that exceed 

three percent of the total loan amount). 

Taken together, the Dodd-Frank Act’s 

amendments to TILA relating to 

prepayment penalties mean that most 


srobinson on DSK4SPTVN1PROD with 
6916 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

146New TILA section 129C(c)(3) limits 

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

percent, and one percent of the amount prepaid 

during the first, second, and third years following 

consummation, respectively. However, amended 

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

high-cost mortgages effectively prohibit prepayment 

penalties in excess of two percent of the amount 

prepaid at any time following consummation for 

most credit transactions secured by a consumer’s 

principal dwelling by providing that HOEPA 

protections (including a ban on prepayment 

penalties) apply to credit transactions with 

prepayment penalties that exceed two percent of 

the amount prepaid. To comply with both the highcost mortgage provisions and the qualified mortgage 

provisions, creditors originating most closed-end 

transactions secured by a consumer’s principal 

dwelling would need to limit the prepayment 

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

percent of the amount prepaid during the first and 

second years following consummation, (2) no more 

than one percent of the amount prepaid during the 

third year following consummation, and (3) zero 

thereafter. 

147See 75 FR 58539, 58756, 58781 (Sept. 24, 

2010). The preamble to the Board’s 2010 Mortgage 

Proposal explained that the proposed revisions to 

current Regulation Z commentary and proposed 

comment 38(a)(5)–2 from the Board’s 2009 ClosedEnd Proposal regarding interest accrual 

amortization were in response to concerns about the 

application of prepayment penalties to certain 

Federal Housing Administration (FHA) and other 

loans (i.e., when a consumer prepays an FHA loan 

in full, the consumer must pay interest through the 

end of the month in which prepayment is made). 

148See 76 FR 27390, 27481–82 (May 11, 2011). 

149The preamble to the Board’s 2011 ATR 

Proposal addressed why the Board chose to omit 

these two items. The Board reasoned that a 

minimum finance charge need not be included as 

an example of a prepayment penalty because such 

a charge typically is imposed with open-end, rather 

than closed-end, transactions. The Board stated that 

loan guarantee fees are not prepayment penalties 

because they are not charges imposed for paying all 

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

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

(May 11, 2011). 

closed-end, dwelling-secured 

transactions (1) may provide for a 

prepayment penalty only if they are 

fixed-rate, qualified mortgages that are 

neither high-cost nor higher-priced 

under §§ 1026.32 and 1026.35; (2) may 

not, even if permitted to provide for a 

prepayment penalty, charge the penalty 

more than three years following 

consummation or in an amount that 

exceeds two percent of the amount 

prepaid;146 and (3) may be required to 

limit any penalty even further to comply 

with the points and fees limitations for 

qualified mortgages, or to stay below the 

points and fees threshold for high-cost 

mortgages. In addition, in the open-end 

credit context, no HELOC secured by a 

consumer’s principal dwelling may 

provide for a prepayment penalty more 

than 3 years following account opening 

or in an amount that exceeds two 

percent of the initial credit limit under 

the plan. 

The Board’s and the Bureau’s Proposals 

Relating to Prepayment Penalties 

In its 2009 Closed-End Proposal, the 

Board proposed to establish a new 

§ 226.38(a)(5) for disclosure of 

prepayment penalties for closed-end 

credit transactions. See 74 FR 43232, 

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

proposed comment 38(a)(5)–2, the 

Board stated that examples of 

prepayment penalties include charges 

determined by treating the loan balance 

as outstanding for a period after 

prepayment in full and applying the 

interest rate to such ‘‘balance,’’ a 

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

creditor waives unless the consumer 

prepays the obligation. In addition, the 

Board’s proposed comment 38(a)(5)–3 

listed loan guarantee fees and fees 

imposed for preparing a payoff 

statement or other documents in 

connection with the prepayment as 

examples of charges that are not 

prepayment penalties. The Board’s 2010 

Mortgage Proposal included 

amendments to existing comment 

18(k)(1)–1 and proposed comment 

38(a)(5)–2 stating that prepayment 

penalties include ‘‘interest’’ charges 

after prepayment in full even if the 

charge results from interest accrual 

amortization used for other payments in 

the transaction.147

The Board’s 2011 ATR Proposal 

proposed to implement the Dodd-Frank 

Act’s prepayment penalty-related 

amendments to TILA for qualified 

mortgages by defining ‘‘prepayment 

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

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

proposed § 226.43(b)(10) in the 

proposed joint definition of points and 

fees for qualified and high-cost 

mortgages in § 226.32(b)(1)(v) and 

(vi).148 The definition of prepayment 

penalty proposed in the Board’s 2011 

ATR Proposal differed from the Board’s 

prior proposals and current guidance in 

the following respects: (1) Proposed 

§ 226.43(b)(10) defined prepayment 

penalty with reference to a payment of 

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

transaction covered by the provision, 

while § 1026.18(k) and associated 

commentary and the Board’s 2009 

Closed-End Proposal and 2010 Mortgage 

Proposal referred to payment ‘‘in full,’’ 

(2) the examples provided omitted 

reference to a minimum finance charge 

and loan guarantee fees,149 and (3) 

proposed § 226.43(b)(10) did not 

incorporate, and the Board’s 2011 ATR 

Proposal did not otherwise address, the 

language in § 1026.18(k)(2) and 

associated commentary regarding 

disclosure of a rebate of a precomputed 

finance charge, or the language in 

§ 1026.32(b)(6) and associated 

commentary concerning prepayment 

penalties for high-cost mortgages. 

The Bureau’s 2012 TILA–RESPA 

Proposal drew from the Board’s preexisting proposals concerning the 

definition of prepayment penalty for 

closed-end credit transactions, and 

reconciled their definitions in proposing 

a definition for closed-end credit 

disclosures. 

The Bureau’s 2012 HOEPA Proposal 

To provide guidance as to the 

meaning of ‘‘prepayment penalty’’ for 

closed-end credit transactions subject to 

§ 1026.32 that was consistent with the 

definition proposed in the Bureau’s 

2012 TILA–RESPA Proposal, as well as 

to provide guidance concerning 

prepayment penalties in the context of 

HELOCs, the Bureau’s 2012 HOEPA 

Proposal would have established a new 

§ 1026.32(b)(8) to define the term 

‘‘prepayment penalty’’ for purposes of 

closed- and open-end credit transactions 

subject to § 1026.32. Proposed 

§ 1026.32(b)(8)(i) defining ‘‘prepayment 

penalty’’ for closed-end credit 

transactions is finalized as 

§ 1026.32(b)(6)(i) in the 2013 ATR Final 

Rule, and proposed § 1026.32(b)(8)(ii) 

defining the term for HELOCs is 

finalized as § 1026.32(b)(6)(ii) in this 

final rule, with certain adjustments from 

the proposal discussed below. 

32(b)(6)(i) 

Prepayment Penalty; Closed-End Credit 

Transactions 

Consistent with TILA section 

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

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

qualified mortgages, proposed 

§ 1026.32(b)(8)(i) would have provided 

that, for a closed-end credit transaction, 

a ‘‘prepayment penalty’’ means a charge 

imposed for paying all or part of the 

transaction’s principal before the date 

on which the principal is due. Proposed 

comment 32(b)(8)–1.i through –1.iv 

would have given examples of 

prepayment penalties for closed-end 

credit transactions, including (among 

others) (1) a charge determined by 

treating the loan balance as outstanding 

for a period of time after prepayment in 

full and applying the interest rate to 

such ‘‘balance,’’ even if the charge 

results from interest accrual 

amortization used for other payments in 

the transaction under the terms of the 

loan contract; and (2) a fee, such as an 

origination or other loan closing cost, 

that is waived by the creditor on the 

condition that the consumer does not 

prepay the loan. Proposed comment 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6917 

150As noted in the Bureau’s 2013 ATR Final Rule, 

it would similarly mean that no future FHA loan 

could be a qualified mortgage absent a change in the 

accrual method, due to prepayment penalty 

limitations on qualified mortgages. In addition, the 

accrual method would be prohibited for nonqualified mortgages, which are not permitted to 

have any prepayment penalties. 

151 74 FR 43232, 43257, 43295, 43390, 43413 

(Aug. 26, 2009); 75 FR 58539, 58586 (Sept. 24, 

2010). 

32(b)(8)–1.i would have provided 

additional clarification concerning the 

treatment as prepayment penalties of 

charges imposed as a result of the 

interest accrual amortization method 

used in the transaction. 

Proposed comment 32(b)(8)–3.i 

through –3.ii would have applied to 

both closed- and open-end credit 

transactions and would have clarified 

that a prepayment penalty does not 

include: (1) Fees imposed for preparing 

and providing documents when a loan 

is paid in full, or when a HELOC is 

terminated, if the fees apply whether or 

not the loan is prepaid or the plan is 

terminated prior to the expiration of its 

term, such as a loan payoff statement, a 

reconveyance document, or another 

document releasing the creditor’s 

security interest in the dwelling that 

secures the loan; or (2) loan guarantee 

fees. 

The Bureau noted that its proposed 

definition of prepayment penalty in 

§ 1026.32(b)(8)(i) and comments 

32(b)(8)–1 and 32(b)(8)–3.i and .ii would 

have substantially incorporated the 

definitions of and guidance on 

prepayment penalties from the Board’s 

2009 Closed-End Proposal, 2010 

Mortgage Proposal, and 2011 ATR 

Proposal and, as necessary, reconciled 

their differences. For example, the 

definitions would have incorporated the 

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

Proposal (but that was omitted in the 

Board’s 2011 ATR Proposal) listing a 

minimum finance charge as an example 

of a prepayment penalty and stating that 

loan guarantee fees are not prepayment 

penalties, because similar language is 

found in longstanding Regulation Z 

commentary. Based on the differing 

approaches taken by the Board in its 

recent mortgage proposals, however, the 

Bureau’s HOEPA proposal sought 

comment on whether a minimum 

finance charge should be listed as an 

example of a prepayment penalty and 

whether loan guarantee fees should be 

excluded from the definition of 

prepayment penalty. 

The Bureau’s HOEPA proposal noted 

that it expected to coordinate the 

definition of prepayment penalty in 

proposed § 1026.32(b)(8)(i) with the 

definitions in the Bureau’s other 

pending rulemakings mandated by the 

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

disclosure integration, and mortgage 

servicing. To the extent consistent with 

consumer protection objectives, the 

Bureau believed that adopting a 

consistent definition of ‘‘prepayment 

penalty’’ across its various pending 

rulemakings affecting closed-end credit 

would facilitate compliance. 

The Bureau received several 

comments concerning its proposed 

definition for prepayment penalties in 

closed-end credit transactions. The 

comments related to two main aspects 

of the proposal: (1) The treatment as a 

prepayment penalty of the assessment of 

interest for periods after the borrower 

has paid in full; and (2) the inclusion of 

all conditionally-waived closing costs in 

the definition of prepayment penalty for 

closed-end credit transactions. The 

Bureau is adopting proposed 

§ 1026.32(b)(8)(i) as § 1026.32(b)(6)(i) in 

the 2013 ATR Final Rule, with certain 

changes from the 2012 HOEPA Proposal 

to address comments received, as 

discussed below. As adopted in the 

2013 ATR Final Rule and as discussed 

further therein, comments 32(b)(6)–1 

and -2 provide examples of payments 

that are (and are not) prepayment 

penalties in the case of closed-end 

credit transactions. 

Post-payoff interest charges. Several 

commenters expressed serious concern 

about the Bureau’s proposal to include 

in the definition of prepayment penalty 

for closed-end credit transactions the 

assessment of interest for periods after 

the borrower pays in full. Commenters 

voiced concern about the potential 

impact of this provision on FHA 

lending. FHA loans, based on a monthly 

interest accrual amortization method, 

are subject to a policy under which 

interest may accrue and be charged to 

the consumer for a partial month after 

a full payoff. Given that FHA loans can 

be paid off well beyond 36 months (the 

maximum time period during which a 

prepayment penalty may be imposed 

without triggering HOEPA), defining 

prepayment penalty to include such 

interest would effectively cause FHA 

loans to trigger HOEPA unless the FHA 

changes its policy going forward.150

Commenters stated that the Bureau 

should either define prepayment 

penalties to exclude interest payments 

that are imposed for the balance of a 

month in which a consumer repays a 

mortgage loan in full, or the Bureau 

should work with FHA prior to the 

change taking effect to avoid disruption 

to industry and, in turn, to borrowers. 

As discussed in the 2013 ATR Final 

Rule, the Bureau is not removing or 

substantively amending comment 

32(b)(6)–1.i, which specifies that the 

practice of charging a consumer interest 

after the consumer prepays the loan in 

full is a prepayment penalty. As noted 

in that rulemaking, the Bureau includes 

the interest calculation as an example of 

a prepayment penalty in comment 

32(b)(6)–1.i chiefly because such 

methodology penalizes the consumer by 

requiring the consumer to pay interest 

for a period after the loan has been paid 

in full. The inclusion of this example is 

also consistent with long-standing 

Regulation Z commentary 

accompanying § 1026.18 that requires 

such charges to be disclosed as 

prepayment penalties, as well as with 

Board Regulation Z proposals from 2009 

and 2010.151

However, with respect to FHA 

practices relating to monthly interest 

accrual amortization, the Bureau has 

consulted extensively with HUD in 

issuing this final rule as well as the 

2013 ATR Final Rule. Based on these 

consultations, the Bureau understands 

that HUD must engage in rulemaking to 

end its practice of imposing interest 

charges on consumers for the balance of 

the month in which consumers prepay 

in full. The Bureau further understands 

that HUD requires approximately 24 

months to complete its rulemaking 

process. Accordingly, in recognition of 

the important role that FHA-insured 

credit plays in the current mortgage 

market and to facilitate FHA creditors’ 

ability to comply with this aspect of the 

2013 HOEPA and ATR Final Rules, the 

Bureau is using its authority under TILA 

section 105(a) to provide for optional 

compliance until January 21, 2015 with 

§ 1026.32(b)(6)(i) and the official 

interpretation of that provision in 

comment 32(b)(6)–1.i regarding monthly 

interest accrual amortization. 

Specifically, § 1026.32(b)(6)(i) provides 

that interest charged consistent with the 

monthly interest accrual amortization 

method is not a prepayment penalty for 

FHA loans consummated before January 

21, 2015. FHA loans consummated on 

or after January 21, 2015 must comply 

with all aspects of the final rule. The 

Bureau is making this adjustment 

pursuant to its authority under TILA 

section 105(a), which provides that the 

Bureau’s 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 Bureau’s judgment 

are necessary or proper to effectuate the 

purposes of TILA, prevent 


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6918 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

152The proposal noted that exclusion of certain 

conditionally-waived closing costs from the 

definition of prepayment penalty for HELOCs 

would have been different from the proposal’s 

definition of prepayment penalty for closed-end 

credit transactions. As discussed in the section-bysection analysis of § 1026.32(b)(6)(i), the Bureau 

adopts a consistent treatment of conditionallywaived closing costs for closed-end credit 

transactions. 

circumvention or evasion thereof, or 

facilitate compliance therewith. 15 

U.S.C. 1604(a). The Bureau believes it is 

necessary and proper to make this 

adjustment to facilitate compliance with 

TILA and its purposes while mitigating 

the risk of disruption to the market. For 

purposes of this rulemaking, the Bureau 

specifically notes that the inclusion of 

interest charged consistent with the 

monthly interest accrual amortization 

method in the definition of prepayment 

penalty for purposes of determining 

whether a transaction has exceeded the 

high-cost mortgage prepayment penalty 

or points and fees coverage tests (and, 

in turn, whether the transaction has 

violated the prohibition against 

prepayment penalties for high-cost 

mortgages) applies only to transactions 

consummated on or after January 10, 

2014; for FHA loans, compliance with 

this aspect of the definition or 

prepayment penalties is optional for 

transactions consummated prior to 

January 21, 2015. 

Conditionally-waived closing costs. 

Several commenters expressed 

dissatisfaction with the proposed 

inclusion of conditionally-waived 

closing costs as prepayment penalties 

for closed-end credit transactions. The 

commenters noted that the 2012 HOEPA 

Proposal would have excluded such 

waived closing costs from the definition 

of prepayment penalty for HELOCs, 

provided that the costs represented bona 

fide third-party charges and were 

recouped only in the case of 

prepayments occurring within the first 

36 months after account opening. As 

with other aspects of the Proposal that 

applied different treatment to openversus closed-end credit, consumer 

groups argued that waived closing costs 

should be considered prepayment 

penalties in all cases. Some industry 

commenters, on the other hand, argued 

that all waived closing charges (i.e., not 

only bona fide third-party charges, and 

not only such charges that the creditor 

might recoup during the first three 

years) should be excluded from the 

definition of prepayment penalty for 

both closed- and open-end credit. Other 

industry commenters requested that the 

exemption from prepayment penalties 

for waived third-party charges proposed 

for HELOCs apply equally to closed-end 

subordinate-lien loans, because 

creditors commonly waive third-party 

fees on those loans as they do for 

HELOCs. One commenter suggested that 

the rule be clarified so that a charge, 

such as taxes, which would not be 

included in points and fees if the 

consumer paid it at closing would not 

be included in points and fees through 

the prepayment penalty prong if the 

creditor waived that charge but required 

it to be repaid if the consumer prepaid 

the loan or terminated the plan early. 

Another commenter noted that there is 

a practice of waiving closing costs on 

smaller transactions on the condition 

that the consumer does not prepay 

within three years of consummation or 

account opening. This commenter 

expressed concern that treatment of 

those costs as prepayment penalties 

would exceed the two percent HOEPA 

prepayment penalty trigger, thus 

unfairly burdening small-dollar-value 

lending. 

The Bureau is also adopting language 

and adding an example in the 2013 ATR 

Final Rule to comment 32(b)(6)–1.ii to 

clarify that, for closed-end credit 

transactions (as for HELOCs), the term 

‘‘prepayment penalty’’ does not include 

conditionally-waived, bona fide thirdparty closing charges that the creditor 

may impose on the consumer if the 

consumer prepays the loan in full 

within 36 months of consummation. 

The Bureau believes that excluding 

such charges from the definition of 

prepayment penalty for both closed- and 

open-end credit is the only practicable 

way to make the various provisions of 

HOEPA relating to prepayment 

penalties and points and fees work 

sensibly together. In this regard, the 

Bureau notes that bona fide third-party 

charges that the consumer pays upfront 

and that are not paid to or retained by 

the creditor or its affiliate are excluded 

from the definition of points and fees for 

closed-end credit transactions under 

§ 1026.32(b)(1)(i)(D). By contrast, if the 

same bona fide third-party charges, 

waived on the condition that the 

consumer does not prepay the loan in 

full, are defined as prepayment 

penalties, then such charges would be 

required to be included in points and 

fees (through the prepayment penalty 

prong) even though the consumer may 

never actually pay those fees. The 

Bureau believes that treating a 

conditionally-waived charge that would 

not otherwise be included in points and 

fee as a prepayment penalty would 

penalize the creditor for the conditional 

waiver and deter creditors from making 

these offers to the detriment of 

consumers. As noted in the 2013 ATR 

Final Rule, the Bureau recognizes that 

the creditor receives no profit from 

imposing or collecting such bona fide 

third-party charges, and the Bureau 

believes that treating such charges as a 

prepayment penalty might very well 

have the effect of reducing consumer 

choice without providing any 

commensurate consumer benefit. In an 

effort to provide a sensible way to 

permit a creditor to protect itself from 

losing money paid at closing to third 

parties on the consumer’s behalf, prior 

to such time as the creditor can 

otherwise recoup such costs through the 

interest rate on the mortgage loan, while 

balancing consumer protection interests, 

the Bureau has concluded that such fees 

should be permissible for a limited time 

after consummation for closed-end 

credit transactions. 

32(b)(6)(ii) 

Prepayment Penalties; HELOCs 

Proposed § 1026.32(b)(8)(ii) would 

have defined the term ‘‘prepayment 

penalty’’ for HELOCs. Specifically, 

proposed § 1026.32(b)(8)(ii) would have 

provided that, in connection with an 

open-end credit plan, the term 

‘‘prepayment penalty’’ means any fee 

that may be imposed by the creditor if 

the consumer terminates the plan prior 

to the expiration of its term. 

Proposed comment 32(b)(8)–2 would 

have clarified that, for an open-end 

credit plan, the term ‘‘prepayment 

penalty’’ includes any charge imposed if 

the consumer terminates the plan prior 

to the expiration of its term, including, 

for example, if the consumer terminates 

the plan in connection with obtaining a 

new loan or plan with the current 

holder of the existing plan, a servicer 

acting on behalf of the current holder, 

or an affiliate of either. Proposed 

comment 32(b)(8)–2 would have further 

clarified that the term ‘‘prepayment 

penalty’’ includes a waived closing cost 

that must be repaid if the consumer 

terminates the plan prior to the end of 

its term, except that the repayment of 

waived bona fide third-party charges if 

the consumer terminates the credit plan 

within 36 months after account opening 

is not considered a prepayment penalty. 

The Bureau’s proposal provided for a 

threshold of 36 months to clarify that, 

if the terms of an open-end credit plan 

permit a creditor to charge a consumer 

for waived third-part closing costs 

when, for example, the consumer 

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

considered prepayment penalties and 

would cause the open-end credit plan to 

be classified as a high-cost mortgage.152

Proposed comment 32(b)(8)–3.iii 

would have specified that, in the case of 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6919 

153The proposal noted that the exclusion from 

prepayment penalties of fees that a creditor may 

charge in a HELOC may impose in lieu of 

terminating and accelerating a plan is consistent 

with the exclusion of such fees as prepayment 

penalties required to be disclosed to the consumer 

as proposed in the Board’s 2009 Open-End 

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

an open-end transaction, the term 

‘‘prepayment penalty’’ does not include 

fees that the creditor may impose on the 

consumer to maintain the open-end 

credit plan, when an event has occurred 

that otherwise would permit the 

creditor to terminate and accelerate the 

plan.153

The Bureau received several 

comments from consumer groups 

concerning its proposed definition of 

prepayment penalties for HELOCs. 

These comments generally urged the 

Bureau to eliminate distinctions 

between the treatment of prepayment 

penalties in the closed- and open-end 

credit contexts because consumers do 

not distinguish between closed- and 

open-end products and thus they should 

not be treated differently. 

The Bureau finalizes 

§ 1026.32(b)(8)(ii) as § 1026.32(b)(6)(ii). 

For the reasons discussed in the sectionby-section analysis of § 1026.32(b)(6)(i) 

above, the Bureau has determined to 

exclude conditionally-waived, bona fide 

third-party closing costs from the 

definition of prepayment penalty for 

closed-end credit transactions where the 

terms of the transaction provide that the 

creditor may recoup those costs from 

the consumer if the consumer prepays 

the transaction in full sooner than 36 

months after consummation. With this 

change, the Bureau believes there is 

parity between closed- and open-end 

credit transactions for prepayment 

penalties. 

32(c) Disclosures 

TILA section 129(a) requires 

additional disclosures for high-cost 

mortgages, and these requirements are 

implemented in § 1026.32(c). The 

Bureau proposed to amend § 1026.32(c) 

to provide clarification and further 

guidance on the application of these 

disclosure requirements to open-end 

credit plans. 

The Bureau proposed comment 

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

annual percentage rate for an open-end 

high-cost mortgage. Specifically, 

proposed comment 32(c)(2)–1 would 

have clarified that creditors must 

comply with § 1026.6(a)(1), which sets 

forth the general requirements for 

determination and disclosure of finance 

charges associated with open-end credit 

plans. In addition, the proposed 

comment would have stated that if the 

transaction offers a fixed-rate for a 

period of time, such as a discounted 

initial interest rate, § 1026.32(c)(2) 

requires a creditor to disclose the 

annual percentage rate of the fixed-rate 

discounted initial interest rate, and the 

rate that would apply when the feature 

expires. 

The proposed rule would have made 

clarifications to § 1026.32(c)(3), which 

requires disclosure of the regular 

payment and the amount of any balloon 

payment. Balloon payments generally 

are no longer permitted for high-cost 

mortgages, except in certain narrow 

circumstances, as discussed below. 

Proposed § 1026.32(c)(3)(i) would have 

incorporated the requirement in current 

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

transactions and clarified that the 

balloon payment disclosure is required 

to the extent a balloon payment is 

specifically permitted under 

§ 1026.32(d)(1). 

For open-end credit plans, a creditor 

may not be able to provide a disclosure 

on the ‘‘regular’’ payment applicable to 

the plan because the regular monthly (or 

other periodic) payment will depend on 

factors that will not be known at the 

time the disclosure is required, such as 

the amount of the extension(s) of credit 

on the line and the rate applicable at the 

time of the draw or the time of the 

payment. To facilitate compliance and 

to provide consumers with meaningful 

disclosures, the Bureau proposed 

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

disclose an example of a minimum 

periodic payment for open-end highcost mortgages. Accordingly, proposed 

§ 1026.32(c)(3)(ii)(A) would have 

provided that, for open-end credit plans, 

a creditor must disclose payment 

examples showing the first minimum 

periodic payment for the draw period 

and, if applicable, any repayment period 

and the balance outstanding at the 

beginning of any repayment period. 

Furthermore, the proposal would have 

required this example to be based on the 

following assumptions: (1) The 

consumer borrows the full credit line, as 

disclosed pursuant to § 1026.32(c)(5)(ii) 

at account opening and does not obtain 

any additional extensions of credit; (2) 

the consumer makes only minimum 

periodic payments during the draw 

period and any repayment period; and 

(3) the annual percentage rate used to 

calculate the sample payments will 

remain the same during the draw period 

and any repayment period. Proposed 

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

have required that the creditor provide 

the minimum periodic payment 

example based on the annual percentage 

rate for the plan, as described in 

§ 1026.32(c)(2), except that if an 

introductory annual percentage rate 

applies, the creditor must use the rate 

that would otherwise apply to the plan 

after the introductory rate expires. 

As discussed in detail below, the 

Bureau proposed § 1026.32(d)(1)(iii) to 

provide an exemption to the prohibition 

on balloon payments for certain openend credit plans. Accordingly, to the 

extent permitted under § 1026.32(d)(1), 

proposed § 1026.32(c)(3)(ii)(B) would 

have required disclosure of that fact and 

the amount of the balloon payment 

based on the assumptions described in 

§ 1026.32(c)(3)(ii)(A). 

To reduce potential consumer 

confusion, proposed 

§ 1026.32(c)(3)(ii)(C) would have 

required that a creditor provide a 

statement explaining the assumptions 

upon which the § 1026.32(c)(3)(ii)(A) 

payment examples are based. 

Furthermore, for the same reason, 

proposed § 1026.32(c)(3)(ii)(D) would 

have required a statement that the 

examples are not the consumer’s actual 

payments and that the consumer’s 

actual periodic payments will depend 

on the amount the consumer has 

borrowed and interest rate applicable to 

that period. The Bureau believes that 

without such statements, consumers 

could misunderstand the minimum 

payment examples. 

The Bureau solicited comment on 

these proposed statements and whether 

other language would be appropriate 

and beneficial to consumer. The Bureau 

did not receive any comments 

addressing these issues. Accordingly, 

the Bureau is adopting § 1026.32(c)(3) as 

proposed. 

The Bureau also proposed to revise 

comment 32(c)(3)–1 to reflect the 

expanded statutory restriction on 

balloon payments and to clarify that to 

the extent a balloon payment is 

permitted under § 1026.32(d)(1), the 

balloon payment must be disclosed 

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

Bureau proposed to renumber current 

comment 32(c)(3)–1 as proposed 

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

purposes. The Bureau did not receive 

any comments addressing revised 

comment 32(c)(3)–1, and accordingly is 

adopting comment 32(c)(3)(i)–1 as 

proposed, with a minor revision for 

consistency with Regulation Z 

terminology. 

In order to provide additional 

guidance on the application of 

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

the Bureau proposed to revise comment 

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

comment 32(c)(4)–1 would have 

provided that the disclosure of the 

maximum monthly payment, as 

required under § 1026.32(c)(4), must be 


srobinson on DSK4SPTVN1PROD with 
6920 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

based on the following assumptions: (1) 

The consumer borrows the full credit 

line at account opening with no 

additional extensions of credit; (2) the 

consumer makes only minimum 

periodic payments during the draw 

period and any repayment period; and 

(3) the maximum annual percentage rate 

that may apply under the payment plan, 

as required by § 1026.30, applies to the 

plan at account opening. Although 

actual payments on the plan may 

depend on various factors, such as the 

amount of the draw and the rate 

applicable at that time, the Bureau 

believes this approach is consistent with 

existing guidance to calculate the 

‘‘worst-case’’ payment example. The 

Bureau received no comments on this 

aspect of the proposal, and accordingly 

is adopting comment 32(c)(4)–1 as 

proposed. 

The Bureau proposed to amend 

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

requirements for open-end credit plans. 

In the proposal, the Bureau noted that 

the amount borrowed can be ascertained 

in a closed-end credit transaction but 

typically is not known at account 

opening for an open-end credit plan. 

Specifically, proposed § 1026.32(c)(5)(ii) 

would have provided that for open-end 

transactions, a creditor must disclose 

the credit limit applicable to the plan. 

Because HELOCs are open-end 

(revolving) lines of credit, the amount 

borrowed depends on the amount 

drawn on the plan at any time. Thus, 

the Bureau believes that disclosing the 

credit limit is a more appropriate and 

meaningful disclosure to the consumer 

than the total amount borrowed. 

The Bureau also proposed technical 

revisions to the existing requirements 

for closed-end credit transactions under 

§ 1026.32(c)(5) and to the guidance 

under comment 32(c)(5)–1. Upon 

further consideration of these 

provisions, the Bureau recognizes that 

the prohibition of financing points and 

fees in final § 1026.34(a)(10) will 

prohibit the financing of any points and 

fees, as defined in § 1026.32(b)(1) and 

(2) for all high-cost mortgages. This 

prohibition thus includes the financing 

of optional credit insurance or debt 

cancellation coverage described in 

existing § 1026.32(c)(5), as well as 

‘‘premiums or other charges for any 

credit life, credit disability, credit 

unemployment, or credit property 

insurance, or any other life, accident, 

health, or loss-of-income insurance for 

which the creditor is the beneficiary, as 

well as any payments directly or 

indirectly for any debt cancellation or 

suspension agreement or contract’’ as 

described in existing comment 32(c)(5)– 

1. Accordingly, the disclosure for highcost mortgages required by 

§ 1026.32(c)(5) should not include 

premiums or other charges for debt 

cancellation coverage or other charges 

that are included in the calculation of 

points and fees, and thereby prohibited 

from being financed under 

§ 1026.34(a)(10). Section 34(a)(10) does 

not prohibit, however, the financing of 

certain bona fide third-party charges 

that are not considered ‘‘points and 

fees,’’ such as fees charged by a thirdparty counselor in connection with the 

consumer’s receipt of pre-loan 

counseling under § 1025.34(a)(5). 

Accordingly, the Bureau is adopting 

§ 1026.32(c)(5) with revisions for 

clarification and consistency with final 

§§ 1026.32(b)(2) and 1026.34(a)(10), and 

eliminating comment 32(c)(5)–1. 

32(d) Limitations 

32(d)(1) 

The Dodd-Frank Act amended the 

restrictions on balloon payments under 

TILA section 129(e). Specifically, 

amended TILA section 129(e) provides 

that no high-cost mortgage may contain 

a scheduled payment that is more than 

twice as large as the average of earlier 

scheduled payments, except when the 

payment schedule is adjusted to the 

seasonal or irregular income of the 

consumer. 

Definition of Balloon Payment 

The Bureau proposed two alternatives 

in proposed § 1026.32(d)(1)(i) to define 

balloon payments for purposes of 

implementing HOEPA’s new restrictions 

on these payments. Under Alternative 1, 

proposed § 1026.32(d)(1)(i) would have 

incorporated the statutory language and 

defined ‘‘balloon payment’’ as a 

scheduled payment that is more than 

twice as large as the average of regular 

periodic payments. Under Alternative 2, 

the rule would have mirrored 

Regulation Z’s existing definition of 

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

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

would have provided that a balloon 

payment is ‘‘a payment schedule with a 

payment that is more than two times a 

regular periodic payment.’’ This 

definition is similar to the statutory 

definition under the Dodd-Frank Act, 

except that it uses as its benchmark any 

regular periodic payment, rather than 

the average of earlier scheduled 

payments. 

The Bureau noted in the proposal 

that, in its view, Alternative 2 would 

better protect consumers and their 

interests, but solicited comment on both 

alternatives. As stated in the proposal, 

because the existing regulatory 

definition is narrower than the statutory 

definition, the Bureau believes that a 

payment that is twice any one regular 

periodic payment would be equal to or 

less than a payment that is twice the 

average of earlier scheduled payments. 

The Bureau noted that the range of 

scheduled payment amounts under 

Alternative 2 is more limited and 

defined. For example, if the regular 

periodic payment on a high-cost 

mortgage is $200, a payment of greater 

than $400 would constitute a balloon 

payment. Under Alternative 1, however, 

the balloon payment amount could be 

greater than $400 if, for example, the 

regular periodic payments were 

increased by $100 each year. Under 

Alternative 1, the amount constituting a 

balloon payment could increase with 

the incremental increase of the average 

of earlier scheduled payments. Under 

either alternative, a high-cost mortgage 

generally must provide for fully 

amortizing payments. 

The Bureau solicited comment on 

whether the difference in wording 

between the statutory definition and the 

existing regulatory definition, as a 

practical matter, would yield a 

significant difference in what 

constitutes a ‘‘balloon payment’’ in the 

high-cost mortgage context. The Bureau 

did not receive any comments that 

persuasively suggested Alternative 1 

was preferable to Alternative 2. 

The Bureau is adopting Alternative 2 

as proposed, pursuant to its authority 

under TILA section 129(p)(1). TILA 

section 129(p)(1) allows the Bureau to 

exempt specific mortgage products or 

categories of mortgages from certain 

prohibitions under TILA section 129 if 

the Bureau finds that the exemption is 

in the interest of the borrowing public 

and will apply only to products that 

maintain and strengthen 

homeownership and equity protection. 

The Bureau believes that under 

Alternative 2, consumers would have a 

better understanding of the highest 

possible regular periodic payment in a 

repayment schedule and may 

experience less ‘‘payment shock’’ as a 

result. Therefore, the Bureau believes 

that Alternative 2 would better protect 

consumers and be in their interest. In 

addition, the Bureau believes that the 

definition of balloon payment under 

Alternative 2 would facilitate and 

simplify compliance by providing 

creditors with a single definition within 

Regulation Z and alleviating the need to 

average earlier scheduled payments. 

The Bureau notes that a similar 

adjustment is being adopted in the 2013 

ATR Final Rule and was proposed in 

the 2012 TILA–RESPA Proposal. 

The Bureau also adopts proposed 

comment 32(d)(1)(i)–1, which provides 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6921 

further guidance on the application of 

§ 1026.32(d)(1)(i) under Alternative 2. 

Specifically, the comment clarifies that 

for purposes of open-end transactions, 

the term ‘‘regular periodic payment’’ or 

‘‘periodic payment’’ means the required 

minimum periodic payment. 

In addition, the Bureau is finalizing 

proposed § 1026.32(d)(1)(iii) with some 

changes for clarification purposes. 

Proposed § 1026.32(d)(1)(i) would have 

been applicable to open-end credit 

plans. However, for an open-end credit 

plan that has both a draw period and a 

repayment period during which no 

further draws may be taken—a structure 

the Bureau believes is common for 

open-end plans—proposed 

§ 1026.32(d)(1)(iii) would have made the 

limitations of§ 1026.32(d)(1)(i) 

applicable only to the repayment 

period. Given that § 1026.32(d)(1)(i) 

defines a balloon payment as any 

payment that is more than twice the 

regular periodic payment, any open-end 

credit plan that converts from smaller 

interest-only payments to larger fully 

amortizing payments could be 

considered a balloon payment if the 

post-conversion payment is more than 

twice the interest-only payment during 

the draw period. As stated in the 2012 

HOEPA Proposal, the purpose of the 

proposed exclusion of the draw period 

from the balloon limitation for this type 

of open-end plan was to provide 

creditors with flexibility to offer 

products with beneficial payment 

features. 

The Bureau is adopting proposed 

§ 1026.32(d)(1)(iii) with revisions to 

clarify that the exception to 

§ 1026.32(d)(1)(i) applies to any 

adjustment in the regular periodic 

payment that results solely from the 

credit plan’s transition from the draw 

period to the repayment period. The 

Bureau believes this revision alleviates 

any concern that proposed 

§ 1026.32(d)(1)(iii) would have allowed 

balloon payments during the draw 

period in other situations. The Bureau is 

also adding new comment 32(d)(1)–2 to 

provide further guidance on how the 

balloon payment restriction applies to 

open-end credit plans with both a draw 

and repayment period, including a 

clarification that the limitation in 

§ 1026.32(d)(1)(i) does not apply to any 

increases in regular periodic payments 

that result from the initial draw or 

additional draws on the credit line 

during the draw period. Finally, the 

Bureau is renumbering proposed 

comment 32(d)(1)–2 to comment 

32(d)(1)–3. 

‘‘Bridge’’ Loans 

As previously noted, the Bureau 

proposed to revise § 1026.32(d)(1)(ii) 

consistent with amended TILA section 

129(e). Accordingly, proposed 

§ 1026.32(d)(1)(ii) would have provided 

an exemption to the balloon payment 

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

if the payment schedule is adjusted to 

the seasonal or irregular income of the 

consumer. The proposal would have 

removed an exemption from current 

§ 1026.32(d)(1)(ii) to the restrictions on 

balloon payments for loans with 

maturity of less than one year, if the 

purpose of the loan is a ‘‘bridge’’ loan 

connected with the acquisition or 

construction of a dwelling intended to 

become the consumer’s principal 

dwelling. 

The Bureau received several 

comments from industry groups and 

banks that supported retaining the 

exemption for bridge loans in the final 

rule, and no comments that voiced 

opposition. Industry groups and some 

community banks pointed out that 

bridge loans are currently covered by 

HOEPA, and an exemption to the preDodd Frank Act restrictions on balloon 

payments was in place to prevent 

unnecessarily restricting access to shortterm bridge loans for consumers. In 

particular, commenters stated that, 

because all short-term bridge loans are 

structured with balloon payments, the 

effect of this removal would be to 

prohibit any bridge loan that is 

classified as a high-cost mortgage. Some 

commenters suggested that the Bureau 

retain the existing exemption for 

temporary or bridge loans of less than 

12 months as exists in current 

§ 1026.32(d)(1)(ii), while one 

commenter suggested that the Bureau 

provide an exemption for temporary 

bridge loans of 12 months or less. 

The Bureau agrees with these 

commenters that the proposed rule 

would have unnecessarily banned any 

short term bridge loans covered by 

HOEPA. Accordingly, final 

§ 1026.32(d)(1)(ii) retains an exemption 

to the restriction on balloon payments 

for short-term bridge loans made in 

connection with the acquisition of a 

new dwelling. In addition, because it is 

the Bureau’s understanding that 

temporary or short-term ‘‘bridge’’ loans 

are commonly structured as 12-month 

balloons, the Bureau is adopting the 

commenter’s suggestion of bridge loans 

of terms of 12 months or less. 

The Bureau is retaining this 

exemption as modified pursuant to its 

authority under TILA section 129(p), 

which grants the Bureau 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 this 

approach is in the interest of the 

borrowing public and will strengthen 

homeownership and equity protection, 

because it is consistent with the 

historical and current treatment of 

bridge loans under HOEPA and will not 

unduly restrict access to temporary 

bridge financing for consumers. The 

Bureau further believes that improving 

access to short-term bridge financing 

will strengthen homeownership and 

equity protection by better allowing 

homeowners who need to sell a current 

residence in order to purchase a new 

one access to short-term financing to do 

so. Finally, the Bureau believes that 

adopting an exemption for short-term 

bridge loans of 12 months or less, as 

opposed to the current exemption for 

short-term bridge loans of less than 12 

months, is also in the interest of the 

borrowing public because it will remove 

an unnecessary barrier to short-term 

financing in its usual 12-month form, at 

negligible if any cost to consumer 

protection. The Bureau does not believe 

that permitting a term of 12 months or 

less, as opposed to 11 months and 30 

days or less, presents an increased risk 

of abuse to consumers. In addition, 

permitting balloons for bridge loans 

with a term of 12 months or less is 

consistent with the 2013 ATR Final 

Rule and 2013 Escrows Final Rule. 

Balloon Payment Restrictions for 

Creditors in Rural or Underserved Areas 

As previously noted, proposed 

§ 1026.32(d)(1)(ii) would have provided 

an exemption to the balloon payment 

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

if the payment schedule is adjusted to 

the seasonal or irregular income of the 

consumer. The Bureau did not propose 

different treatment for loans made by 

creditors in rural or underserved areas. 

A significant number of industry 

commenters, especially community 

banks, objected generally to the balloon 

payment restriction. These commenters 

expressed concerns that the 2012 

HOEPA Proposal would have prohibited 

them from making balloon loans that 

fall within the new HOEPA thresholds, 

which may have a significant adverse 

effect on their businesses given that the 

thresholds for high-cost mortgages are 

being expanded by the statute. These 

commenters argued that balloon loans 

are important to serve the needs of their 

customers, especially in rural areas, and 


srobinson on DSK4SPTVN1PROD with 
6922 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

154The 2013 Escrows Final Rule defines the terms 

‘‘rural’’ and ‘‘underserved’’ for purposes of 

§ 1026.32(d)(1). See § 1026.35(b)(iv). 

banks in these areas use balloon loans 

to manage their risks and safety and 

soundness concerns. Commenters asked 

for various types of relief, including that 

the prohibition be lifted entirely; that 

community banks be exempt from the 

prohibition if the balloon loan is held in 

portfolio; or that balloon payments be 

permitted so long as they are only for a 

final payment. 

The Bureau notes that it is including 

an exemption to the balloon payment 

restrictions on qualified mortgages for 

certain loans made by creditors in 

‘‘rural’’ or ‘‘underserved’’ areas in the 

2013 ATR Final Rule. As more fully 

explained in that rule, the Bureau is 

allowing for certain qualified mortgages 

to contain balloon payments provided 

that (1) The loan meets all of the criteria 

for a qualified mortgage, with certain 

exceptions; (2) the creditor makes a 

determination that the consumer is able 

to make all scheduled payments, except 

the balloon payment, out of income or 

assets other than the collateral; (3) the 

loan is underwritten based on a 

payment schedule that fully amortizes 

the loan over a period of not more than 

30 years and takes into account all 

applicable mortgage-related obligations; 

(4) the loan is not originated in 

conjunction with a forward commitment 

and is held in portfolio for at least three 

years; and (5) the creditor meets 

prescribed qualifications. See 

§§ 1026.43(f)(1)(i)–(vi) and 1026.43(f)(2). 

Those qualifications are that the 

creditor: (1) Operates predominantly in 

rural or underserved areas; (2) together 

with all affiliates, has total annual 

residential mortgage loan originations 

that do not exceed 500 first-lien covered 

transactions per year; (3) retains the 

balloon payment loans in portfolio; and 

(4) has less than $2 billion in assets. See 

§§ 1026.43(f)(1)(vi) and 

1026.35(b)(2)(iii)(A), (B), (C).154

The Bureau agrees with commenters 

that allowing creditors in certain rural 

or underserved areas to extend high-cost 

mortgages with balloon payments could 

benefit consumers by expanding access 

to credit in these areas, and also would 

facilitate compliance for creditors who 

make these loans. The Bureau thus 

believes that balloon payments should 

not be prohibited for high-cost 

mortgages in rural or underserved areas, 

provided the creditor meets certain 

criteria that balance the need for access 

to credit with appropriate consumer 

protections. In the Bureau’s view, the 

2013 ATR Final Rule provides an 

appropriate framework for determining 

when a high-cost mortgage may be 

permitted to contain a balloon payment. 

Further, allowing creditors who 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 who operate in these areas. 

Thus, as adopted, § 1026.32(d)(1) grants 

a limited exemption from the balloon 

payment prohibition for creditors that 

make high-cost mortgages with balloon 

payments, but that also meet the 

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

through (vi) and 1026.43(f)(2), as 

adopted by the 2013 ATR Final Rule. 

The Bureau is providing this 

exemption 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 the balloon 

payment exemption for high-cost 

mortgages is in the interest of the 

borrowing public and will strengthen 

homeownership and equity protection. 

Allowing greater access to credit in rural 

or underserved areas will help those 

consumers who may be able to obtain 

credit only from a limited number of 

creditors obtain mortgages. 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(f)(1)(i) through (vi). Creditors 

who make these high-cost mortgages 

will be required to verify that the loans 

also satisfy a number of additional 

criteria, including some specific criteria 

required for qualified mortgages. 

Further, as fully discussed in the 2013 

ATR Final Rule, creditors that make 

balloon 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 amending 

the final rule to include an exemption 

to the § 1026.32(d)(1) balloon 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). 

32(d)(6) and (7) Prepayment Penalties 

As discussed in the section-by-section 

analysis of § 1026.32(b)(6) above, prior 

to the Dodd-Frank Act, TILA permitted 

prepayment penalties for high-cost 

mortgages in certain circumstances. In 

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

which historically has been 

implemented in § 1026.32(d)(7), prior to 

the Dodd-Frank Act a high-cost 

mortgage could provide for a 

prepayment penalty so long as the 

penalty was otherwise permitted by law 

and, under the terms of the loan, the 

penalty would not apply: (1) To a 

prepayment made more than 24 months 

after consummation, (2) if the source of 

the prepayment was a refinancing of the 

current mortgage by the creditor or an 

affiliate of the creditor, (3) if the 

consumer’s debt-to-income ratio 

exceeded fifty percent, or (4) if the 

amount of the periodic payment of 

principal or interest (or both) could 

change during the first four years after 

consummation of the loan. 

Section 1432(a) of the Dodd-Frank Act 

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

prepayment penalties are no longer 

permitted for high-cost mortgages. The 

proposal would have implemented this 

change consistent with the statute by 

removing and reserving existing 

§ 1026.32(d)(7) and comments 

32(d)(7)(iii)–1 through –3 and 

32(d)(7)(iv)–1 and –2. The proposal also 

would have amended existing 

§ 1026.32(d)(6) to clarify that 

prepayment penalties are a prohibited 

term for high-cost mortgages. As 

discussed in the section-by-section 

analysis of § 1026.32(b)(6)(i) above, the 

proposal would have retained in 

proposed § 1026.32(b)(8)(i) and 

proposed comment 32(b)(8)–1.iv the 

definition of prepayment penalty 

contained in existing § 1026.32(d)(6) 

and comment 32(d)(6)–1. 

The Bureau received few comments 

concerning its proposal to implement 

the Dodd-Frank Act provisions banning 

prepayment penalties for high-cost 

mortgages. One commenter objected as 

a general matter to the Dodd-Frank Act’s 

treatment of prepayment penalties for 

purposes of both qualified mortgages 

and high-cost mortgages. The Bureau 

does not find these comments 

persuasive, for the reasons discussed 

above in connection with 

§ 1026.32(a)(1)(iii), and the Bureau 

finalizes § 1026.32(d)(6) and (7) as 

proposed. 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6923 

32(d)(8) Acceleration of Debt 

The Bureau proposed a new 

§ 1026.32(d)(8) to implement the 

prohibition in new section 129(l) of 

TILA added by section 1433(a) of the 

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

TILA prohibits a high-cost mortgage 

from containing a provision which 

permits the creditor to accelerate the 

loan debt, except when repayment has 

been accelerated: (1) In response to a 

default in payment; (2) pursuant to a 

due-on-sale provision; or (3) pursuant to 

a material violation of some other 

provision of the loan document 

unrelated to payment schedule. 

Proposed § 1026.32(d)(8) would have 

replaced current § 1026.32(d)(8), which 

similarly prohibits due-on-demand 

clauses for high-cost mortgage except (1) 

In cases of fraud or material 

misrepresentation in connection with 

the loan; (2) a consumer’s failure to 

meet the repayment terms of the loan 

agreement for any outstanding balance; 

or (3) a consumer’s action or inaction 

that adversely affects the creditor’s 

security for the loan or any right of the 

creditor in such security. 

Proposed § 1026.32(d)(8) would have 

prohibited an acceleration feature in the 

loan or open-end credit agreement for a 

high-cost mortgage unless there is a 

default in payment under the 

agreement, the acceleration is pursuant 

to a due-on-sale clause, or there is a 

material violation of a provision of the 

agreement unrelated to the payment 

schedule. The Bureau also proposed 

comments to provide additional 

clarification and examples of when 

acceleration under proposed 

§ 1026.32(d)(8) would be permitted. The 

Bureau sought comment from the public 

on these aspects of the proposal, and in 

particular sought possible additional 

examples where a consumer’s material 

violation of the loan or open-end credit 

agreement may or may not warrant 

acceleration of the debt. 

The Bureau received two public 

comments from industry in response to 

this request, which generally requested 

additional guidance on the term 

‘‘material violation of the loan 

agreement,’’ and questioned whether the 

proposed rule would permit 

acceleration in circumstances other than 

failure to pay property taxes that may 

materially impair the creditor’s security 

interest, such as the examples that exist 

in the commentary to current 

§ 1026.32(d)(8). These commenters also 

suggested some additional examples of 

actions undertaken by the consumer 

that they believe could result in prior 

lien to a first mortgage being filed 

against the property in ‘‘material 

violation’’ of a loan term. These 

examples included failure to pay 

property taxes; failure to pay 

condominium fees, homeowner 

association dues or assessments, or 

utilities; and default on another lien on 

the subject property. The commenters 

also objected to the proposal’s removal 

of several of the existing comments to 

current § 1026.32(d)(8)(iii), on the 

ground that acceleration is justified in 

those situations, and is currently 

permitted. Specifically, the commenters 

objected to the removal of language in 

comment 32(d)(8)(iii)–2.i.E providing 

that a creditor may terminate and 

accelerate a high-cost mortgage in some 

instances if the consumer obligated on 

the credit dies. The commenters also 

objected to the proposal’s removal of an 

example in comment 32(d)(8)(iii)–2.i F 

providing that a creditor may terminate 

and accelerate a high-cost mortgage if 

the property is taken by eminent 

domain. 

In the Bureau’s view, section 129(l) 

essentially codified the substance of 

current § 1026.32(d)(8). The changes the 

Bureau proposed to § 1026.32(d)(8) and 

its commentary were primarily for 

clarity and organizational purposes. 

Upon further consideration and in light 

of the comments regarding the potential 

impact of removing certain examples, 

the Bureau has decided to implement a 

final rule and commentary that closely 

follow the current § 1026.32(d)(8) and 

commentary. The Bureau agrees that 

acceleration should not be deemed 

impermissible under Regulation Z in 

situations where it is currently 

permitted, and is including the 

examples set forth in current comments 

32(d)(8)(iii)–2.i.E and F the commentary 

to the final rule. The Bureau believes 

these revisions adequately and 

appropriately address industry’s 

comments by clarifying that acceleration 

may be permitted in certain 

circumstances where the creditor’s 

security interest is materially and 

adversely affected, such as when an 

action or inaction by the consumer 

results in a prior lien being filed against 

the property, or the property is taken by 

eminent domain. 

The Bureau declines to include the 

various other examples provided by 

industry commenters in the 

commentary. The Bureau notes that the 

examples set forth in comment 

32(d)(8)(iii)–2.i.A through G serve only 

as illustrations of instances where 

acceleration may be deemed permissible 

when the action or inaction by the 

consumer impairs the creditor’s security 

interest. These circumstances may, but 

do not always, adversely affect the 

creditor’s security interest, and the list 

of examples is not all-inclusive. While 

the Bureau agrees with industry 

commenters that other actions or 

inactions that may result in a prior lien 

being filed against the property could 

materially impair the creditor’s security 

interest, the Bureau does not believe the 

examples provided, such as failure to 

pay homeowner association dues or 

utilities, are likely to result in such an 

impairment in most circumstances. The 

Bureau thus declines to include these 

specific examples in the commentary to 

§ 1026.32(d)(8). 

In addition, the Bureau is adding 

comment 32(d)(8)(i)–1 to provide 

further guidance regarding acceleration 

of a loan for fraud or material 

misrepresentation, consistent with 

comment 40(f)(2)(i)–1 (concerning 

requirements for home equity plans). 

The Bureau believes that this guidance 

will be equally helpful to creditors 

seeking to accelerate a high-cost 

mortgage. Finally, the Bureau has made 

minor changes for clarification and in 

light of the expansion of the coverage of 

HOEPA to include open-end credit. 

Section 1026.34 Prohibited Acts or 

Practices in Connection With High-Cost 

Mortgages 34(a) Prohibited Acts or 

Practices for High-Cost Mortgages 

The Bureau is finalizing proposed 

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

34(a)(3)–2 with revisions for consistency 

and clarity. Proposed section 

1026.34(a)(1) and comment 34(a)(3)–2 

are revised to replace the terms ‘‘loan 

subject to section 226.32’’ with ‘‘highcost mortgage.’’ Sections 1026.34(a)(2) 

and (3) are revised to remove 

capitalization from ‘‘assignee’’ and 

‘‘within one year period,’’ for 

consistency purposes. 

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

TILA section 129(h) generally 

prohibits a creditor from engaging in a 

pattern or practice of extending credit to 

consumers under high-cost mortgages 

based on the consumers’ collateral 

without regard to the consumers’ 

repayment ability, including the 

consumers’ current and expected 

income, current obligations, and 

employment. 

TILA section 129(h) is implemented 

in current § 1026.34(a)(4). In 2008, the 

Board by regulation eliminated the 

‘‘pattern or practice’’ requirement under 

the HOEPA ability-to-repay provision 

and also applied the repayment ability 

requirement to higher-priced mortgage 

loans. The 2008 HOEPA Rule set forth 

the specific requirements for 

verification of repayment ability in 

§ 1026.34(a)(4)(ii). In addition, 


srobinson on DSK4SPTVN1PROD with 
6924 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

155 In the final rule, the Bureau is adding 

additional clarifying language to make clear that the 

§ 1026.34(a)(4)(iii) presumption only applies to 

open-end credit plans. 

156The safe harbor available for certain qualified 

mortgage transactions under § 1026.43(e)(1) will not 

be available for HOEPA transactions that otherwise 

meet the qualified mortgage criteria. As set forth in 

the 2013 ATR Final Rule, the safe harbor is only 

available for loans that are not higher-priced 

covered transactions, as defined in § 1026.43(b)(4). 

This will preclude any high-cost mortgage covered 

by HOEPA’s APR threshold from being eligible for 

a safe harbor. Similarly, any loan that triggers the 

HOEPA thresholds for limitations on points and 

fees and prepayment penalties will fail to satisfy the 

criteria for qualified mortgages, and thus will be 

ineligible for either the safe harbor or the rebuttable 

presumption of compliance available to qualified 

mortgages. See § 1026.43(e)(3) and (g). 

§ 1026.34(a)(4)(iii) provides for a 

presumption of compliance with the 

ability-to-repay requirements if the 

creditor follows certain procedures. See 

§ 1026.34(a)(4)(iii)–(iv) and comment 

34(a)(4)(iii)–1. However, the 2008 

HOEPA Final Rule makes clear that the 

presumption of compliance is 

rebuttable. See comment 34(a)(4)(iii)–1. 

The consumer can still rebut or 

overcome that presumption by showing 

that, despite following the procedures 

specified in § 1026.34(a)(4)(iii), the 

creditor nonetheless disregarded the 

consumer’s ability to repay the loan. For 

example, the consumer could present 

evidence that although the creditor 

assessed the consumer’s debt-to-income 

ratio or residual income, the debt-toincome ratio was very high or the 

residual income was very low. This 

evidence may be sufficient to overcome 

the presumption of compliance and 

demonstrate that the creditor extended 

credit without regard to the consumer’s 

ability to repay the loan. 

The Dodd-Frank Act did not amend 

TILA section 129(h); however, sections 

1411, 1412, and 1414 of Dodd-Frank, 

among other things, established new 

ability-to-repay requirements for all 

residential mortgage loans under new 

TILA section 129C. Specifically, the 

Bureau’s 2013 ATR Final Rule (which 

implements TILA section 129C) extends 

these new ability-to-repay requirements 

to any consumer credit transaction 

secured by a dwelling, except an openend credit plan, a transaction secured by 

a consumer’s interest in a timeshare 

plan, a reverse mortgage, or temporary 

loans such as construction loans and 

bridge loans with terms of 12 months or 

less. Closed-end credit transactions that 

are high-cost mortgages, as defined in 

TILA section 103(bb), will be subject to 

the ability-to-repay requirements 

pursuant to TILA section 129C and the 

Bureau’s implementing regulations at 

§ 1026.43. Open-end credit plans 

secured by the consumer’s principal 

dwelling that are high-cost mortgages 

will not be subject to the ability-to-pay 

requirements of Bureau’s 2013 ATR 

Final Rule, but will instead be subject 

to the existing ability-to-repay 

requirements of TILA section 129(h) and 

the Bureau’s implementing regulations 

at § 1026.34(a)(4). As discussed below, 

the Bureau is revising § 1026.34(a)(4) to 

account for these significant changes to 

the regulatory landscape with respect to 

repayment ability for closed-end credit 

transactions, and amending the existing 

repayment ability requirements in 

current § 1026.34(a)(4) to apply 

specifically to high-cost open-end credit 

plans. 

Closed-End High-Cost Mortgages 

For consistency with TILA section 

129C, proposed § 1026.34(a)(4) would 

have provided that, in connection with 

a closed-end high-cost mortgage, a 

creditor must comply with the 

repayment ability requirements in 

§ 1026.43 (to be established separately 

under the Bureau’s 2013 ATR Final 

Rule). Therefore, the existing 

requirements and the presumption of 

compliance under § 1026.34(a)(4)(i)–(iv) 

would no longer have applied to closedend credit transactions. Rather, as set 

forth in the Bureau’s 2013 ATR Final 

Rule, a creditor would have been 

required to consider specific criteria and 

records set forth in § 1026.43(c)(2) and 

(3) and, based on that criteria, make a 

‘‘reasonable and good faith 

determination at or before 

consummation that the consumer will 

have a reasonable ability to repay’’ the 

high-cost mortgage. See § 1026.43(c)(1) 

and comments 43(c)(1)–1 and 43(c)(2)– 

1. 

Thus, as set forth more fully in the 

2013 ATR Final Rule, for any closedend high-cost mortgage that does not 

meet the qualified mortgage criteria set 

forth in § 1026.43(e), there would have 

been no presumption of compliance 

available to creditors for the ability to 

repay requirement. The 2012 HOEPA 

Proposal stated that only open-end 

credit transactions are subject to the 

§ 1026.34(a)(4) ability-to-repay 

requirements, and thus would have 

removed the presumption of compliance 

currently available for any such highcost mortgage under § 1026.34(a)(4)(iii). 

See proposed comment 34(a)(4)–1.155

However, as also set forth in the 2013 

ATR Final Rule, the § 1026.43(e) 

rebuttable presumption of compliance 

with the ability-to-repay requirement 

would have been available for certain 

high-cost mortgages that meet the 

specific qualified mortgage criteria set 

forth in § 1026.43(e).156

The Bureau solicited comment on this 

aspect of the proposal, and received a 

few public comments from consumer 

groups that generally supported it. In 

particular, consumer groups agreed that 

requiring creditors to comply with the 

ability-to-repay requirements set forth in 

§ 1026.43 for all closed-end credit 

transactions, including high-cost 

mortgages, should benefit consumers by 

simplifying compliance and 

enforcement of the rules, provided that 

the final rule does not reduce the 

remedies available for high-cost 

mortgages. No commenters raised 

objections to this aspect of the proposal. 

However, as more fully discussed in the 

2013 ATR Final Rule, several consumer 

groups submitted comments in 

connection with the Board’s 2011 ATR 

Proposal requesting that high-cost 

mortgages be prohibited from receiving 

qualified mortgage status through the 

2013 ATR Final Rule. Those 

commenters noted that high-cost 

mortgages have been singled out by 

Congress as deserving of special 

regulatory treatment because of their 

potential to be abusive to consumers, 

and argued that it would seem 

incongruous for any high-cost mortgage 

to be given a presumption of 

compliance with the ability-to-repay 

rule. 

The Bureau is adopting this aspect of 

§ 1026.34(a)(4) as proposed, which is 

consistent with the statutory language of 

TILA section 129C. The Bureau notes 

that the 2013 ATR Final Rule does not 

prohibit a high-cost mortgage from being 

a qualified mortgage, but is mindful that 

allowing a high-cost mortgage to meet 

the qualified mortgage criteria set forth 

in § 1026.43 potentially raises concerns 

for consumer groups regarding HOEPA 

protections and remedies. However, the 

Bureau disagrees with consumer groups 

that suggest allowing certain high-cost 

mortgages to be ‘‘qualified mortgages’’— 

and thereby permitting a rebuttable 

presumption of compliance with the 

§ 1026.43(a) repayment ability 

requirements for these transactions—is 

incongruous with the underlying 

consumer protection purpose of 

HOEPA. Rather, the Bureau believes 

that the net effect of requiring creditors 

to comply with § 1026.43 for all closedend transactions, including those rules 

that pertain to the presumption of 

compliance available for qualified 

mortgages, should be enhanced 

consumer protection and facilitation of 

compliance. 

There are several considerations 

informing the Bureau’s treatment of 

repayment ability requirements. First, as 

discussed above, the Dodd-Frank Act 

does not prohibit high-cost mortgages 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6925 

from receiving qualified mortgage 

status. While the statute imposes a 

points and fees limit on qualified 

mortgages (3 percent, generally) that 

effectively prohibits loans that trigger 

the high-cost mortgage points and fee 

threshold from receiving qualified 

mortgage status, it does not impose an 

APR limit on qualified mortgages. 

Therefore, nothing in the statute 

prohibits a creditor from making a loan 

with an APR that triggers HOEPA 

coverage, while still meeting the criteria 

for a qualified mortgage. 

Second, although they are similar, the 

Bureau generally considers the abilityto-repay requirements set forth in 

§ 1026.43 to be more protective of 

consumers than the current ability-torepay criteria for high-cost mortgages set 

forth in current § 1026.34(a)(4)(i)–(iv). 

For example, § 1026.43 would require 

creditors to consider additional factors 

not currently included in 

§ 1026.34(a)(4), such as a consumer’s 

monthly debt-to-income ratio or 

residual income. The Bureau generally 

believes these criteria to be more 

rigorous than the current ability-torepay provisions. 

Third, the Bureau believes that, for 

high-cost mortgages that meet the 

qualified mortgage definition, there is 

reason to provide a presumption, 

subject to rebuttal, that the creditor had 

a reasonable and good faith belief in the 

consumer’s ability to repay 

notwithstanding the high interest rate. 

High-cost mortgages will be less likely 

to meet qualified mortgage criteria 

because the higher interest rate will 

generate higher monthly payments and 

thus require higher income to satisfy the 

debt-to-income test for a qualified 

mortgage. Where that test is satisfied— 

that is, where the consumer has an 

acceptable debt-to-income ratio 

calculated in accordance with qualified 

mortgage underwriting rules—there is 

no logical reason to exclude the loan 

from the definition of a qualified 

mortgage. 

The Bureau also disagrees with the 

concerns raised by consumer groups 

that allowing a rebuttable presumption 

of compliance for these high-cost 

mortgages will undermine consumer 

protection. Rather, the Bureau believes 

the final rule will provide greater 

consumer protection than the current 

ability-to-repay rules, which allow for a 

presumption of compliance for any 

high-cost mortgages. See current 

§ 1026.34(a)(4)(iii). As more fully set 

forth in the Bureau’s 2013 ATR Final 

Rule, for any high-cost mortgages that 

do not meet the qualified mortgage 

criteria set forth in § 1026.43(e), there 

will be no presumption of compliance 

available to creditors for the 

§ 1026.34(a)(4) ability-to-repay 

requirement. The Bureau believes this 

will provide greater consumer 

protection and facilitate, rather than 

hinder, challenges to creditors’ 

repayment ability determinations for 

these transactions. 

The Bureau also believes that 

allowing high-cost mortgages to be 

qualified mortgages could provide an 

incentive to creditors that make highcost mortgages to satisfy the qualified 

mortgage requirements, which would 

provide additional consumer 

protections. For example, creditors who 

make high-cost mortgages as qualified 

mortgages will need to have verified the 

consumer’s assets, liabilities, income 

and other criteria, and determined that 

the consumer’s debt-to-income ratio 

meets certain specified criteria. See 

§ 1026.43(e). Further protections and 

restrictions, such as restricting interestonly payments and limiting loan terms 

to 30 years, are not requirements under 

HOEPA, but are required to achieve 

qualified mortgage status. 

The Bureau believes that allowing 

high-cost, qualified mortgages may be 

particularly beneficial to consumers in 

certain small loan markets, where some 

creditors may need to exceed high-cost 

mortgage thresholds due to the unique 

structure of their business. The Bureau 

believes that these creditors are likely to 

make high-cost mortgages regardless of 

the various disincentives to high-cost 

lending, and allowing for a presumption 

of compliance for these high-cost 

mortgages could provide an incentive to 

these creditors to make these mortgages 

as qualified mortgages. As discussed 

above, the Bureau believes this would 

be in the interest of consumers by 

providing additional consumer 

protections. 

The Bureau also does not believe that 

allowing high-cost mortgages to be 

‘‘qualified mortgages’’ will deprive 

consumers of the substantive 

protections or remedies afforded by 

HOEPA or encourage creditors to engage 

in high-cost lending. Other than 

allowing for a presumption of 

compliance with the § 1026.43 

repayment ability requirements for 

those transactions that meet the criteria 

for qualified mortgages, the enhanced 

disclosure and counseling requirements, 

and the enhanced liability for HOEPA 

violations, are unaffected by the final 

rule. 

Finally, in addition to the various 

benefits to consumers described above, 

the Bureau believes that requiring the 

same standards for determining 

repayment ability and obtaining a 

rebuttable presumption of compliance 

for other closed-end credit transactions 

not covered by HOEPA and high-cost 

mortgages that are subject to the 

repayment ability requirements of 

§ 1026.43 will facilitate compliance by 

providing clarity and consistency 

between the 2013 ATR Final Rule and 

the 2013 HOEPA Final Rule. 

‘‘Bridge’’ Loans 

Because temporary or ‘‘bridge’’ loans, 

such as loans with maturity of 12 

months or less made in connection with 

the acquisition or construction of a 

dwelling intended to become the 

consumer’s principal dwelling are 

closed-end credit transactions, any such 

loan that is a high-cost mortgage will be 

subject to the ability-to-repay 

requirements pursuant to TILA section 

129C and the Bureau’s implementing 

regulations at § 1026.43. As discussed in 

the Bureau’s 2013 ATR Final Rule, 

temporary loans such as bridge loans 

with terms of 12 months or less 

(including high-cost mortgages) are 

exempt from the § 1026.43 ability-torepay requirements. The proposal 

nonetheless would have retained an 

exemption from the § 1026.34(a)(4) 

HOEPA ability-to-repay requirement 

that exists in current § 1026.34(a)(4)(v). 

The Bureau received no comments on 

this aspect of the proposal, and is 

retaining the exemption from the 

§ 1026.34(a)(4) ability-to-repay 

requirements for ‘‘bridge’’ loans as 

proposed. For clarity and organizational 

purposes, however, the Bureau is 

moving the exemption from proposed 

§ 1026.34(a)(4)(v) to § 1026.34(a)(4), 

which discusses ability-to-repay for 

closed-end credit transactions. 

The Bureau is retaining this 

exemption as consistent with TILA 

section 129C(a)(8), and pursuant to its 

authority under TILA section 129(p), 

which grants the Bureau 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 home ownership and equity 

protections. Retaining this exemption is 

consistent with the historical and 

current treatment of bridge loans under 

HOEPA’s ability-to-repay standards, and 

also is consistent with the TILA section 

129C(a)(8) exemption for bridge loans 

that apply to the general ability-to-repay 

requirements set forth in the 2013 ATR 

Final Rule. The Bureau believes this 

approach is in the interest of the 

borrowing public and will strengthen 

home ownership and equity protection 

because it will not unduly restrict 


srobinson on DSK4SPTVN1PROD with 
6926 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

access to temporary bridge financing for 

consumers. 

Open-End High-Cost Mortgages 

As previously noted, the existing 

ability-to-repay requirements of TILA 

section 129(h) will now apply to openend credit plans that are high-cost 

mortgages. To facilitate compliance, the 

Bureau proposed to implement TILA 

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

credit plans in proposed § 1026.34(a)(4) 

by amending the existing mortgage 

repayment ability requirements in 

current § 1026.34(a)(4) to apply 

specifically to high-cost open-end credit 

plans. The Bureau solicited public 

comment on this issue, but did not 

receive any comments that addressed it. 

The Bureau is revising § 1026.34(a)(4) 

to provide, as proposed, that in 

connection with an open-end credit 

plan subject to § 1026.32, a creditor 

shall not open a plan for a consumer 

where credit is or will be extended 

without regard to the consumer’s 

repayment ability as of account opening, 

including the consumer’s current and 

reasonably expected income, 

employment, assets other than the 

collateral, and current obligations, 

including any mortgage-related 

obligations. As discussed above, the 

Bureau notes that in the 2008 HOEPA 

Final Rule, the Board adopted a rule 

prohibiting individual high-cost 

mortgages or higher-priced mortgage 

loans from being extended based on the 

collateral without regard to repayment 

ability, in place of a prior rule 

prohibiting a pattern or practice of 

making extensions based on the 

collateral without regard to consumers’ 

ability to repay. The existing 

requirements further create a 

presumption of compliance under 

certain conditions to provide creditors 

with more certainty and to mitigate 

potential increased litigation risk. 

The Board concluded that this 

regulatory structure was warranted 

based on the comments the Board 

received and additional information. 

Specifically, the Board exercised its 

authority under TILA section 129(l)(2) 

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

by the Dodd-Frank Act) to revise the 

liability standard for high-cost 

mortgages based on a conclusion that 

the revisions were necessary to prevent 

unfair or deceptive acts or practices in 

connection with mortgage loans. See 73 

FR 44545, at 44539 (July 30, 2008). In 

particular, the Board concluded that a 

prohibition on making individual loans 

without regard for repayment ability 

was necessary to ensure a remedy for 

consumers who are given unaffordable 

loans and to deter irresponsible lending. 

The Board determined that imposing the 

burden to prove ‘‘pattern or practice’’ on 

an individual consumer would leave 

many borrowers with a lesser remedy, 

such as those provided under some 

State laws, or without any remedy, for 

loans made without regard to repayment 

ability. The Board further determined 

that removing this burden would not 

only improve remedies for individual 

borrowers, it would also increase 

deterrence of irresponsible lending. The 

Board concluded that the structure of its 

rule would also have advantages for 

creditors over a ‘‘pattern or practice’’ 

standard, which can create substantial 

uncertainty and litigation risk. While 

the Board’s rule removed the ‘‘pattern or 

practice’’ language from its rule, it 

provided certainty to creditors by 

including specific procedures for 

establishing a rebuttable presumption of 

compliance. 

For substantially the same reasons 

detailed by the Board in the 2008 

HOEPA Final Rule, the Bureau believes 

that it is necessary and proper to use its 

authority under TILA section 129(p)(2) 

to retain the existing § 1026.34(a)(4) 

repayment ability requirements with 

respect to individual open-end credit 

plans that are high-cost mortgages, with 

a presumption of compliance as 

specified in the regulation, rather than 

merely prohibiting a ‘‘pattern or 

practice’’ of engaging in such 

transactions without regard for 

consumers’ ability to repay the loans. 

The Bureau believes that the concerns 

discussed in the 2008 HOEPA Final 

Rule, such as preventing unfair 

practices, providing remedies for 

individual borrowers, and providing 

more certainty to creditors, are equally 

applicable to open-end transactions that 

are high-cost mortgages. Furthermore, 

also for these same reasons, the Bureau 

believes it would not be in creditors’ 

and borrowers’ interest to reinsert the 

‘‘pattern or practice’’ language and 

remove the presumption of compliance 

in existing § 1026.34(a)(4). Therefore, 

the Bureau believes that applying the 

existing repayment ability requirement 

in current § 1026.34(a)(4) to open-end 

high-cost mortgages is necessary to 

prevent unfair or deceptive acts or 

practices in connection with mortgage 

loans. See TILA section 129(p)(2). 

The Bureau is also revising several 

aspects of § 1026.34(a)(4) for 

consistency with the 2013 ATR Final 

Rule and for clarification purposes. The 

Bureau is removing § 1026.34(a)(4)(ii)(B) 

and accompanying comments 

34(a)(4)(ii)(B)–1 and –2, which the 

Bureau proposed to retain. This 

provision would have provided an 

affirmative defense for a creditor that 

can show that the amounts of the 

consumer’s income or assets that the 

creditor relied upon in determining the 

consumer’s repayment ability were not 

materially greater than the amounts the 

creditor could have verified using thirdparty records at or before 

consummation. The Bureau notes that 

the Board’s 2011 ATR Proposal solicited 

comment on whether it should have 

provided this provision in the § 1026.43 

repayment ability requirements which, 

while not specified under TILA, would 

have been consistent with the Board’s 

2008 HOEPA Final Rule. See 2011 ATR 

Proposal, 76 FR 27390, 27426 (May 11, 

2011); see also § 1026.34(a)(4)(ii)(B). 

As more fully discussed in the 2013 

ATR Final Rule, the Bureau received 

several responses from consumer groups 

in response to the Board’s 2011 ATR 

Proposal that generally opposed the 

affirmative defense. These commenters 

argued that the provision would 

undermine the income and asset 

verification requirement provided in 

proposed § 1026.43(c)(4). Other 

commenters noted that providing an 

affirmative defense might result in 

confusion, and possible litigation, over 

what the term ‘‘material’’ may mean, 

and that a rule permitting an affirmative 

defense would need to define 

materiality specifically, including from 

whose perspective materiality should be 

measured (i.e., the creditor’s or the 

consumer’s). 

As discussed in the 2013 ATR Final 

Rule, the Bureau is not adopting an 

affirmative defense as part of final 

§ 1026.43 because, in the Bureau’s view, 

such a defense could result in 

circumvention of the § 1026.43(c)(4) 

verification requirement. 

Upon further consideration of 

proposed § 1026.34(a)(4)(ii)(B), and in 

light of the 2013 ATR Final Rule, the 

Bureau believes that the same reasoning 

applies to the repayment ability 

requirements for open-end credit 

transactions. In the Bureau’s view, 

adopting the affirmative defense set 

forth in proposed § 1026.34(a)(4)(ii)(B) 

would create an unnecessary 

inconsistency between the repayment 

ability criteria in § 1026.43(c) and 

§ 1026.34(a)(4). Further, the Bureau 

believes the title XIV amendments to 

TILA provide a strong indication that 

creditors should be required to verify 

income, assets, and other relevant 

information as part of the repayment 

ability determination. This principle is 

reflected in the Bureau’s decision not to 

adopt this affirmative defense for the 

repayment ability requirements set forth 

in the 2013 ATR Final Rule. The Bureau 

believes that proposed 

§ 1026.34(a)(4)(ii)(B) could have 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6927 

157 In addition to the housing counseling 

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

first-time borrowers of negative amortization loans. 

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

creditors to receive documentation from a first-time 

borrower demonstrating that the borrower has 

received homeownership counseling prior to 

extending a mortgage to the borrower that may 

result in negative amortization. This requirement is 

further discussed in the section-by-section analysis 

for § 1026.36(k) below. 

encouraged some creditors to determine 

repayment ability for open-end credit 

plans without verifying a consumer’s 

income, assets, and other relevant 

information. Removing proposed 

§ 1026.34(a)(4)(ii)(B), on the other hand, 

will better protect consumers, facilitate 

compliance, and better harmonize the 

2013 HOEPA and ATR Final Rules. 

Accordingly, the Bureau is removing 

proposed § 1026.34(a)(4)(ii)(B) and 

renumbering the remainder of 

§ 1026.34(a)(4)(ii). 

The Bureau is also revising the 

definition of ‘‘mortgage-related 

obligations’’ to reflect the definition set 

forth in the 2013 ATR Final Rule, and 

clarifying that, with respect to open-end 

credit plans, ‘‘mortgage-related 

obligations’’ are obligations that are 

required by another credit obligation 

undertaken prior to or at account 

opening, and are secured by the same 

dwelling. See § 1026.43(b)(8). For clarity 

and consistency with this revised 

definition, the Bureau is also removing 

existing comment 34(a)(4)(i)–1, which 

had further defined the term using the 

previous definition. 

In addition, the Bureau is adopting 

clarifying revisions as proposed in 

§ 1026.32(a)(4) and its associated 

commentary, with several additional 

minor edits for consistency, clarity, or 

organizational purposes. The Bureau is 

removing proposed 

§ 1026.34(a)(4)(iv)(A), which would 

have excluded negatively amortizing 

transactions from the § 1026.34(a)(4) 

presumption of compliance. Given that 

negative amortization features are 

prohibited altogether for high-cost 

mortgages, and § 1026.34(a)(4)(iv) only 

applies only to open-end, high-cost 

mortgages, it is unnecessary to exclude 

such transactions from the 

§ 1026.34(a)(4)(iii) presumption of 

compliance. The Bureau is also revising 

comment 34(a)(4)–4 to reflect this 

change. 

The proposal generally incorporated 

guidance in current comments 34(a)(4)– 

1 through –5, with revisions for clarity 

and consistency. Proposed comment 

34(a)(4)–1 would have clarified that the 

repayment ability requirement under 

§ 1026.34(a)(4) applies to open-end 

credit plans subject to § 1026.32; 

however, the repayment ability 

provisions of § 1026.43 apply to closedend credit transactions subject to 

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

3 also would have clarified the current 

commentary to conform with proposed 

revisions and removed the current 

example. Finally, proposed comment 

34(a)(4)(iii)(B)–1 would have removed 

the examples in current comment 

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

inapplicable. The Bureau did not 

receive any comments addressing these 

aspects of the proposal. 

The Bureau is adopting these 

comments as proposed, with several 

changes for clarity and consistency. 

Comment 34(a)(4)–3 is amended to 

clarify that ‘‘other dwelling-secured 

obligations’’ includes any mortgagerelated obligations that are required by 

another credit obligation undertaken 

prior to or at account opening, and are 

secured by the same dwelling that 

secures the high-cost mortgage 

transaction. 

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

As noted above, because open-end 

credit plans are excluded from coverage 

of TILA section 129C, the existing 

ability-to-repay requirements of TILA 

section 129(h) and the Bureau’s 

implementing regulations at 

§ 1026.34(a)(4) would still apply to 

open-end credit plans that are high-cost 

mortgages. Moreover, because the 

presumption of compliance set forth in 

§ 1026.43(e) may only apply to qualified 

mortgages (which cannot include openend credit plans), the presumption of 

compliance set forth in 

§ 1026.34(a)(4)(iii) will still apply to 

open-end credit plans that are high-cost 

mortgages. 

The Bureau proposed to revise current 

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

that a creditor must satisfy to obtain a 

presumption of compliance with the 

repayment ability requirements for highcost mortgages that are open-end credit 

plans. In particular, current 

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

creditor determine the consumer’s 

repayment ability using the largest 

payment of principal and interest 

scheduled in the first seven years 

following consummation and taking 

into account current obligations and 

mortgage-related obligations. The 

Bureau believes that it is appropriate to 

determine the consumer’s repayment 

ability based on the largest periodic 

payment amount a consumer would be 

required to pay under the payment 

schedule. However, applying this 

requirement to open-end credit plans 

requires additional assumptions because 

a creditor may not know certain factors 

required to determine the largest 

required minimum periodic payment, 

such as the amount a consumer will 

borrow and the applicable annual 

percentage rate. Accordingly, the 

Bureau proposed revised 

§ 1026.34(a)(4)(iii)(B) to require a 

creditor to determine the consumer’s 

repayment ability taking into account 

current obligations and mortgage-related 

obligations as defined in 

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

required minimum periodic payment. 

Furthermore, proposed 

§ 1026.34(a)(4)(iii)(B) would have 

required a creditor to determine the 

largest required minimum periodic 

payment based on the following 

assumptions: (1) The consumer borrows 

the full credit line at account opening 

with no additional extensions of credit; 

(2) the consumer makes only required 

minimum periodic payments during the 

draw period and any repayment period; 

and (3) the maximum APR that may 

apply under the payment plan (as 

required to be included in the consumer 

credit contract under § 1026.30) applies 

to the plan at account opening and will 

apply during the draw period and any 

repayment period. The Bureau received 

no comments on these aspects of the 

proposal, and accordingly is adopting 

them as proposed. 

34(a)(5) Pre-Loan Counseling 

Summary of Dodd-Frank Act 

Amendments 

Section 1433(e) of the Dodd-Frank Act 

added new TILA section 129(u), which 

creates a counseling requirement for 

high-cost mortgages. Prior to extending 

a high-cost mortgage, TILA section 

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

certification that a consumer has 

obtained counseling on the advisability 

of the mortgage from a HUD-approved 

counselor, or at the discretion of HUD’s 

Secretary, a State housing finance 

authority. TILA section 129(u)(1) also 

prohibits such a counselor from being 

employed by or affiliated with the 

creditor. TILA section 129(u)(3) 

specifically authorizes the Bureau to 

prescribe regulations that it determines 

are appropriate to implement the 

counseling requirement. In addition to 

the counseling requirement, TILA 

section 129(u)(2) requires that a 

counselor verify, prior to certifying that 

a consumer has received counseling on 

the advisability of the high-cost 

mortgage, that the consumer has 

received each statement required by 

TILA section 129 (implemented in 

§ 1026.32(c)) or each statement required 

by RESPA with respect to the 

transaction.157 The Bureau is exercising 


srobinson on DSK4SPTVN1PROD with 
6928 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

158 In addition to the regulations in 24 CFR part 

214, HUD’s Housing Counseling Program is 

governed by the provisions of the HUD Housing 

Counseling Program Handbook 7610.1 and 

applicable Mortgagee letters. 

159 12 U.S.C. 1715z–20(d)(2)(B). 

160See HUD Housing Counseling Handbook 

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

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

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

20012) (HUD Handbook). 

its authority under TILA section 

129(u)(3) to implement the counseling 

requirement in a way that ensures that 

borrowers will receive meaningful 

counseling, and at the same time that 

the required counseling can be provided 

in a manner that minimizes operational 

challenges. 

Background Concerning HUD’s Housing 

Counseling Program 

HUD’s housing counseling program is 

authorized by section 106 of the 

Housing and Urban Development Act of 

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

which is implemented in 24 CFR part 

214. As described in the preamble of the 

proposal, this program provides 

counseling to consumers on a broad 

array of topics, including seeking, 

financing, maintaining, renting, and 

owning a home. According to HUD, the 

purpose of the program is to provide a 

broad range of housing counseling 

services to homeowners and tenants to 

assist them in improving their housing 

conditions and in meeting the 

responsibilities of tenancy or 

homeownership. Counselors can also 

help borrowers evaluate whether 

interest rates may be unreasonably high 

or repayment terms unaffordable, and 

thus may help reduce the risk of 

defaults and foreclosures. 

HUD historically has implemented its 

housing counseling program by issuing 

approvals of nonprofit agencies that 

meet its requirements for participation, 

monitoring these agencies, and 

awarding competitive grants to these 

agencies. HUD also provides counseling 

funds through State housing finance 

authorities and national and regional 

intermediaries, which provide 

oversight, support, and funding for 

affiliated local counseling agencies. 

HUD has required counseling agencies 

to meet various program requirements 

and comply with program policies and 

regulations to participate in HUD’s 

housing counseling program.158 While 

HUD’s regulations establish training and 

experience requirements for the 

individual counselors employed by the 

counseling agencies, to date, HUD 

generally has not approved individual 

counselors. Pursuant to amendments 

made to the housing counseling statute 

by section 1445 of the Dodd-Frank Act, 

HUD must provide for the certification 

of individual housing counselors going 

forward. Section 106(e) of the Housing 

and Urban Development Act (12 U.S.C. 

1701x(e)) provides that the standards 

and procedures for testing and certifying 

counselors must be established by 

regulation. The Bureau understands that 

HUD is undertaking a rulemaking to put 

these standards and procedures in place 

for individual counselors. 

Pre-loan housing counseling is 

available generally to prospective 

borrowers planning to purchase or 

refinance a home, but Federal and State 

laws specifically require that counseling 

be provided prior to origination of 

certain types of loans. For example, as 

previously discussed in connection with 

the Bureau’s amendment to Regulation 

X, Federal law requires homeowners to 

receive counseling before obtaining a 

reverse mortgage insured by the FHA 

(i.e., a HECM).159 HUD imposes various 

requirements related to HECM 

counseling, including, for example: 

Requiring FHA-approved HECM lenders 

to provide applicants with contact 

information for HUD-approved 

counseling agencies; delineating 

particular topics that need to be 

addressed through HECM counseling; 

and prohibiting HECM lenders from 

steering a prospective borrower to a 

particular counseling agency.160 As 

discussed and implemented in this final 

rule, the Dodd-Frank Act added 

counseling requirements for high-cost 

mortgages and certain loans involving 

negative amortization. 

Proposal 

The proposal would have 

implemented the Dodd-Frank Act’s 

requirement that a creditor receive 

written certification that a consumer has 

obtained counseling on the advisability 

of the mortgage prior to extending a 

high-cost mortgage to a consumer in 

proposed § 1026.34(a)(5) and 

accompanying commentary. As 

discussed in further detail below, the 

Bureau is adopting the pre-loan 

counseling requirement for high-cost 

mortgages in § 1026.34(a)(5), with 

several revisions. 

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

Required 

Consistent with the statute, proposed 

§ 1026.34(a)(5)(i) would have prohibited 

a creditor from extending a high-cost 

mortgage unless the creditor receives 

written certification that the consumer 

has obtained counseling on the 

advisability of the mortgage from a 

HUD-approved counselor, or a State 

housing finance authority, if permitted 

by HUD. 

While a significant number of both 

consumer group and industry 

commenters expressed support for the 

counseling requirement for high-cost 

mortgages, a few commenters objected 

to the counseling requirement generally. 

Some industry commenters were 

concerned that consumers would view 

counseling as an unnecessary burden 

due to its cost and inconvenience, or 

that the requirement for counseling 

could cause closings to be delayed. In 

addition, a nonprofit network that 

provides training to housing counselors 

objected to the counseling requirement 

out of concern that because counseling 

is only being required for consumers 

seeking the riskiest loans, counselors 

will be unable to influence the 

performance of the loans, which could 

cause others to question the value of 

counseling unfairly. This commenter 

instead recommended that counseling 

be required for all first-time borrowers 

seeking anything other than a 30 year, 

fixed-rate mortgage with fixed 

payments. One commenter urged that 

high-cost mortgages that finance 

manufactured housing be exempt from 

the counseling requirement, because the 

counseling fee would constitute a 

disproportionately large cost for these 

relatively small mortgages. 

The Bureau does not believe any of 

these concerns warrant departing from 

the statutory requirement for high-cost 

mortgage counseling. The Bureau does 

not agree with commenters that the 

counseling for high-cost mortgages is an 

unnecessary burden. Congress made the 

determination that mandatory 

counseling would be beneficial to 

consumers prior to obtaining certain 

types of riskier loans, and the Bureau is 

not persuaded that it should use its 

authority to depart from that 

determination. Although the Bureau 

understands concerns that counseling 

could be valuable for some first-time 

borrowers of loans other than those that 

are fixed-rate and with fixed payments, 

the Bureau proposed to require and 

solicited comment on counseling 

consistent with the statute, and does not 

believe that it has a basis to determine 

whether the benefits of mandatory 

counseling outweigh the costs for a 

broader group of consumers. With 

respect to concerns about the perceived 

efficacy of counseling due to the limited 

nature of the counseling requirements, 

the Bureau does not agree that a 

counselor will be unable to influence 

the outcome of the mortgage. The 

Bureau believes that a consumer may 

decide not to move forward with a highcost mortgage even after application, or 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6929 

161HUD has stated that it ‘‘may require 

specialized training or certifications prior to 

approving certain housing counseling services, such 

as HECM counseling.’’ HUD Handbook at 3–2. 162The HECM program requires counseling to 

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

application, meaning that the creditor may accept 

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

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

way begin the process of originating a HECM loan’’ 

before the consumer has received counseling. HUD 

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

the Bureau notes that HECM counselors are not 

required to verify the receipt of transaction-specific 

disclosures prior to issuing a certification of 

counseling. 

163The Bureau notes that as part of its 2012 

TILA–RESPA Proposal, the Bureau proposed 

requiring that a closing disclosure combining the 

RESPA settlement statement and the final TILA 

disclosure be provided to a consumer prior to 

settlement. However, the Bureau does not anticipate 

that any such requirement will take effect until after 

the effective date for the requirements for high-cost 

mortgages. 

may be able to shop or negotiate for 

different mortgage terms, based on 

counseling received on the advisability 

of the mortgage. Moreover, the Bureau 

believes that the requirement to provide 

a list of housing counselors under 

RESPA, discussed above, will encourage 

applicants for other types of mortgages 

to obtain homeownership counseling 

even if they are not required to do so. 

As to the requested exclusion from 

counseling for high-cost mortgages that 

finance manufactured housing, the 

Bureau believes that counseling would 

be equally beneficial to a consumer 

financing a manufactured home through 

a high-cost mortgage as it would be for 

a consumer financing another type of 

dwelling. Finally, the Bureau notes that 

the counseling provisions would permit 

the cost of counseling to be financed or 

to be paid by the creditor, provided that 

the creditor does not condition payment 

on the closing of the loan. For all of 

these reasons, the Bureau is finalizing 

the requirement for certification of 

counseling in § 1026.34(a)(5)(i) as 

proposed. 

The Bureau also proposed 

commentary addressing a number of 

issues related to proposed 

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

additional compliance guidance. As 

discussed in detail below, the Bureau is 

also adopting this guidance as proposed, 

with certain revisions. 

TILA section 129(u) does not define 

the term ‘‘State housing finance 

authority.’’ Proposed comment 34(a)(5)– 

1 would have clarified that for the 

purposes of § 1026.34(a)(5), a State 

housing finance authority has the same 

meaning as a ‘‘State housing finance 

agency’’ provided in 24 CFR 214.3 of 

HUD’s regulations implementing the 

housing counseling program. The 

Bureau proposed to use the definition 

contained in 24 CFR 214.3 because it 

specifically addresses the ability of State 

housing finance authorities to provide 

or fund counseling, either directly or 

through an affiliate. The Bureau did not 

receive any comment regarding this 

definition and is finalizing it as 

proposed, except that the Bureau is 

renumbering it as 34(a)(5)(i)–2 for 

organizational purposes. 

The Bureau proposed comment 

34(a)(5)(i)–1 to clarify that counselors 

approved by the Secretary of HUD are 

homeownership counselors that are 

certified pursuant to section 106(e) of 

the Housing and Urban Development 

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

otherwise determined by the Secretary 

of HUD. The Bureau proposed this 

clarification because of its 

understanding that other than for its 

HECM counseling program, HUD 

currently approves housing counseling 

agencies and not individual counselors, 

but will be certifying housing 

counselors in the future to implement 

section 1445 of the Dodd-Frank Act. The 

proposed comment was intended to 

ensure that the Bureau’s regulations do 

not impede HUD from determining 

which counselors qualify as HUDapproved and to account for future 

decisions of HUD with respect to the 

approval of counselors.161 The Bureau 

did not receive any comments objecting 

to this guidance, and is adopting it as 

proposed. 

Proposed comment 34(a)(5)(i)–2 

would have provided that prior to 

receiving certification of counseling, a 

creditor may not extend a high-cost 

mortgage, but may engage in other 

activities, such as processing an 

application that will result in the 

extension of a high-cost mortgage (by, 

for example, ordering an appraisal or 

title search). As the Bureau discussed in 

the preamble of the proposal, nothing in 

the statutory requirement restricts a 

creditor from processing an application 

that will result in the extension of a 

high-cost mortgage prior to obtaining 

certification of counseling, and 

permitting the processing of the 

application is consistent with the highcost mortgage counseling requirements 

as a whole.162 Moreover, the Bureau 

believes that proposed comment 

34(a)(5)(i)–2 is necessary to address both 

the ability of a creditor to provide the 

required disclosures to the consumer to 

permit certification of counseling, and 

to address the likelihood that a creditor 

may receive the required certification of 

counseling only days before the 

consummation of the loan, at the 

earliest. As discussed in the preamble of 

the proposal, new TILA section 

129(u)(2) requires a counselor to verify 

the consumer’s receipt of each 

statement required by either TILA 

section 129 (which sets forth the 

requirement for additional disclosures 

for high-cost mortgages and is 

implemented in § 1026.32(c)) or by 

RESPA prior to issuing certification of 

counseling. The additional disclosures 

for high-cost mortgages required under 

§ 1026.32(c) may be provided by the 

creditor up to three business days prior 

to consummation of the mortgage. 

RESPA requires lenders to provide 

borrowers several disclosures over the 

course of the mortgage transaction, such 

as the good faith estimate and the 

settlement statement. Currently, the 

HUD–1 may be provided by the creditor 

at settlement.163 Commenters generally 

did not raise any objections to comment 

34(a)(5)(i)–2, and the Bureau is 

finalizing it as proposed, except that it 

is renumbering it as 34(a)(5)(i)–3 for 

organizational purposes. 

Proposed comment 34(a)(5)(i)–3 

would have set forth the methods 

whereby a certification form may be 

received by the creditor. The proposed 

comment clarifies that the written 

certification of counseling may be 

received by any method, such as mail, 

email, or facsimile, so long as the 

certification is in a retainable form. The 

Bureau did not receive any comments 

on this guidance, and except for 

renumbering it as 34(a)(5)(i)–4, is 

finalizing it as proposed. 

One counseling association requested 

clarification that the required 

certification of counseling is not an 

indication that a counselor has made a 

judgment about the appropriateness of a 

high-cost mortgage for a consumer. This 

commenter expressed its support for 

proposed comment 34(a)(5)(iv)–1, 

which similarly would have provided 

that a statement that a consumer has 

received counseling on the advisability 

of a high-cost mortgage does not require 

the counselor to have made a judgment 

as to the appropriateness of the highcost mortgage, as discussed below. The 

Bureau agrees that it would be useful to 

clarify that certification of counseling is 

not evidence of a counselor’s opinion of 

the loan for the consumer, but only that 

the consumer has received counseling. 

Accordingly, the Bureau has added new 

comment 34(a)(5)(i)–5 to address the 

purpose of certification in the final rule. 

A few commenters raised operational 

issues related to the certification 

process, including generally asking for 

more guidance and asking the Bureau to 

allow creditors to move forward with 

the consummation of a high-cost 

mortgage without a certification form if 

the counselor does not provide the form 


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6930 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

164The Bureau notes that as part of its 2012 

TILA–RESPA Proposal, the Bureau proposed that 

the good faith estimate required by RESPA be 

combined with the early TILA disclosure. Proposed 

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

current good faith estimate or a future combined 

disclosure to satisfy the requirement in order to 

trigger counseling. 

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

mean ‘‘any company that controls, is controlled by, 

or is under common control with another company, 

as set forth in the Bank Holding Company Act of 

1956 (12 U.S.C. 1841 et seq.).’’ 

to the creditor within a certain time 

period. The Bureau has not proposed 

additional guidance related to the 

certification process, in part because the 

Bureau believes that it is important to 

allow flexibility so that counselors and 

creditors can develop processes that 

work best. The Bureau also declines to 

permit a creditor to consummate a highcost mortgage without receiving 

certification of counseling, which is 

required by the statute. Such a result 

would be inconsistent with the basic 

statutory scheme, since absent 

certification, a creditor could not be 

certain that counseling occurred, that 

the counseling addressed the required 

elements, or that the counselor was able 

to verify receipt of the required 

disclosures. 

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

As noted above, TILA section 

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

certification of counseling prior to 

extending a high-cost mortgage to a 

consumer, but otherwise does not 

address when counseling should occur. 

Proposed § 1026.34(a)(5)(ii) would have 

required counseling to occur after the 

consumer receives either the good faith 

estimate required under RESPA or the 

disclosures required under § 1026.40 for 

open-end credit. The Bureau noted in 

the preamble to the proposal that 

permitting counseling to occur as early 

as possible allows consumers more time 

to consider whether to proceed with a 

high-cost mortgage and to shop or 

negotiate for different mortgage terms. 

However, the Bureau believes that it is 

also important that counseling on a 

high-cost mortgage address the specific 

loan terms being offered to a consumer. 

The Bureau therefore concluded that 

requiring the receipt of either of these 

transaction-specific documents prior to 

the consumer’s receipt of counseling on 

the advisability of the high-cost 

mortgage would best ensure that the 

counseling session can address the 

specific features of the high-cost 

mortgage and that consumers will have 

an opportunity to ask questions about 

the loan terms offered. At the same time, 

given that these documents are provided 

to the consumer within a few days 

following application, the Bureau 

believes that the proposal permits 

counseling to occur early enough to give 

consumers sufficient time after 

counseling to consider whether to 

proceed with the high-cost mortgage 

transaction and to consider alternative 

options.164

Despite the verification requirement, 

the Bureau does not believe that it 

would make sense to wait until receipt 

of all disclosures referenced in the 

statute to permit counseling to occur. 

Accordingly, nothing in proposed 

§ 1026.34(a)(5)(ii) would require a 

counselor to wait for the receipt of 

either the § 1026.32(c) disclosure or the 

full set of RESPA disclosures that must 

be verified prior to certification to 

provide counseling. As noted above, the 

§ 1026.32(c) high-cost mortgage 

disclosure is generally required to be 

provided to the consumer no later than 

three business days prior to 

consummation of the loan, and one of 

the disclosures required under RESPA, 

the HUD–1, currently may be provided 

to the consumer at settlement. As a 

practical matter, this means that 

certification would not happen until 

right before closing. The Bureau does 

not believe that delaying counseling 

pending receipt of all disclosures would 

benefit consumers, because consumers 

may not be able to walk away from the 

transaction or seek better loan terms so 

late in the process. Accordingly, the 

Bureau concluded that the best 

approach would be a two-stage process 

in which counseling would occur prior 

to and separately from the receipt of the 

high-cost mortgage disclosures, after 

which the counselor would confirm 

receipt of the disclosures, answer any 

additional questions from the consumer, 

and issue the certification. Under these 

circumstances, a consumer obtaining a 

high-cost mortgage would have at least 

two separate contacts with his housing 

counselor, the first to receive counseling 

on the advisability of the high-cost 

mortgage, and the second to verify with 

the counselor that the consumer has 

received the applicable disclosures. The 

Bureau noted its belief that a second 

contact may be beneficial to consumers 

because it gives consumers an 

opportunity to request that the 

counselor explain the disclosure and to 

raise any additional questions or 

concerns they have, just prior to 

consummation. 

Proposed comment 34(a)(5)(ii)–1 

clarified that for open-end credit plans 

subject to § 1026.32, proposed 

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

either the good faith estimate required 

by RESPA or the disclosures required 

under § 1026.40 to allow counseling to 

occur, because 12 CFR 1024.7(h) 

permits the disclosures required by 

§ 1026.40 to be provided in lieu of a 

good faith estimate, in the case of an 

open-end credit plan. 

Proposed comment 34(a)(5)(ii)–2 

clarified that counseling may occur after 

the consumer receives either an initial 

good faith estimate or a disclosure 

under § 1026.40, regardless of whether a 

revised disclosure is subsequently 

provided to the consumer. 

The Bureau solicited comment on the 

proposed timing requirements for 

counseling, including whether a second 

contact would help facilitate 

compliance with the requirement for 

certification of counseling. Most 

commenters were generally supportive 

of the timing proposed by the Bureau, 

and the accompanying guidance. 

Commenters noted that the Bureau’s 

proposal would allow counseling to 

occur early in the process, but also 

provide counselors with the ability to 

view specific disclosures. A few 

commenters, however, expressed a view 

that the counseling should occur earlier 

in the process, e.g., before a consumer 

shops for a property or a loan. 

The Bureau agrees that counseling 

earlier in the process may be beneficial 

to some consumers. However, the 

Bureau believes that for high-cost 

mortgage borrowers, it is also important 

that the consumer receive counseling on 

the terms of the mortgage the consumer 

is offered. The ability to view the 

mortgage specific disclosures will allow 

counselors to provide counseling that 

addresses the affordability of the 

specific loan the consumer is 

considering. Moreover, the Bureau notes 

that practically speaking, a creditor is 

not likely to know whether or not the 

consumer will be offered a high-cost 

mortgage prior to receiving the 

consumer’s application. For these 

reasons, the Bureau is finalizing 

§ 1026.34(a)(5)(ii) as proposed, with 

minor edits for clarity and consistency. 

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

Proposed § 1026.34(a)(5)(iii)(A) would 

have implemented the general 

prohibition in new TILA section 

129(u)(1) that the counseling required 

for a high-cost mortgage shall not be 

provided by a counselor who is 

employed by or affiliated 165 with the 

creditor extending the high-cost 

mortgage. Pursuant to the Bureau’s 

authority under TILA 129(u)(3), 

proposed § 1026.34(a)(5)(iii)(B) also 

would have created an exemption from 

this general prohibition for a State 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6931 

166See http://www.irs.gov/uac/IRS,-FTC-andState-Regulators-Urge-Care-When-Seeking-Helpfrom-Credit-Counseling-Organizations. 

167HUD Handbook at 3–5. 

168This is consistent with HUD’s guidance 

related to the certification of counseling provided 

for the HECM program, which indicates that the 

issuance of a HECM counseling certificate ‘‘attests 

ONLY to the fact that the client attended and 

participated in the required counseling and that the 

statutorily required counseling for a HECM was 

provided’’ and ‘‘does NOT indicate whether the 

counseling agency recommends or does not 

recommend the client for a reverse mortgage.’’ HUD 

Handbook at 4–18 (emphases in original). 

housing finance authority that both 

extends a high-cost mortgage and 

provides counseling to a consumer, 

either itself or through an affiliate, for 

the same high-cost mortgage transaction. 

The Bureau requested comment on 

the proposed general affiliation 

prohibition, the exemption provided for 

State housing finance authorities, and 

whether the Bureau should consider 

excepting any other entities from the 

general affiliation prohibition, including 

nonprofit counseling agencies. A 

number of commenters supported the 

general affiliation prohibition, and 

several commenters also supported the 

exemption to the affiliation prohibition 

for State housing finance authorities. A 

few commenters, including a consumer 

group and an association for nonprofit 

counseling organizations, urged the 

Bureau to also exempt nonprofit 

organizations with 501(c)(3) status from 

the affiliation prohibition because such 

entities also provide small loans for 

purposes such as emergency repair or 

foreclosure rescue that may be classified 

as high-cost. These commenters noted 

that organizations with 501(c)(3) status 

have a higher level of accountability 

than other entities. 

The Bureau is adopting 

§ 1026.34(a)(5)(iii)(A) substantially as 

proposed. However, because a 

transaction made by a Housing Finance 

Agency acting as the creditor is now 

exempt from HOEPA coverage, as 

discussed in the section-by-section 

analysis to § 1026.32(a)(1), the Bureau is 

not finalizing § 1026.34(a)(5)(iii)(B). The 

Bureau does not believe that an 

exemption from the affiliation 

prohibition is necessary for State 

housing finance authorities, given the 

general exemption from HOEPA for the 

transactions they make. With respect to 

the request for an exemption for loans 

originated by organizations with 

501(c)(3) status, the Bureau agrees that 

as with loans made by State housing 

finance authorities, such loans may be 

beneficial to consumers. However, the 

Bureau is concerned that an entity’s 

501(c)(3) status may not be sufficient to 

prevent potential abuses and that an 

entity could be motivated to obtain 

nonprofit status in order to avoid the 

affiliation prohibition, if it were to 

exempt such entities. The Bureau is 

aware, for example, of concerns that 

credit counseling organizations 

engaging in questionable activities have 

sought nonprofit status to circumvent 

consumer protection laws.166

Accordingly, the Bureau declines to 

create an exception to the affiliation 

prohibition for nonprofit organizations. 

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

As described above, TILA section 

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

certification that the consumer has 

received counseling on the advisability 

of the mortgage prior to extending the 

high-cost mortgage, and TILA section 

129(u)(2) requires a counselor to verify 

a consumer’s receipt of each statement 

required by TILA section 129 or RESPA 

in connection with the transaction prior 

to certifying the consumer has received 

counseling. Proposed § 1026.34(a)(5)(iv) 

would have set forth requirements for 

the certification form that is provided to 

the creditor. Specifically, proposed 

§ 1026.34(a)(5)(iv) would have provided 

that the certification form must include 

the name(s) of the consumer(s) who 

obtained counseling; the date(s) of 

counseling; the name and address of the 

counselor; a statement that the 

consumer(s) received counseling on the 

advisability of the high-cost mortgage 

based on the terms provided in either 

the good faith estimate or the 

disclosures required by § 1026.40; and a 

statement that the counselor has verified 

that the consumer(s) received the 

§ 1026.32(c) disclosures or the 

disclosures required by RESPA with 

respect to the transaction. 

TILA section 129(u) did not define the 

term ‘‘advisability.’’ The Bureau 

proposed guidance in comment 

34(a)(5)(iv)–1 that would have 

addressed the meaning of the statement 

that a consumer has received counseling 

on the advisability of the high-cost 

mortgage. Specifically, the Bureau 

proposed that a statement that a 

consumer has received counseling on 

the advisability of a high-cost mortgage 

means that the consumer has received 

counseling about key terms of the 

mortgage transaction, as set out in the 

disclosures provided to the consumer 

pursuant to RESPA or § 1026.40; the 

consumer’s budget, including the 

consumer’s income, assets, financial 

obligations, and expenses; and the 

affordability of the loan for the 

consumer. The Bureau further provided 

some examples of such key terms of the 

mortgage transaction that are included 

in the good faith estimate or the 

disclosures required under § 1026.40 

that are provided to the consumer. The 

Bureau noted in the preamble of the 

proposal that requiring counseling on 

the high-cost mortgage to address terms 

of the specific high-cost mortgage 

transaction is consistent with both the 

language and purpose of the statute, and 

that a requirement that counseling 

address the consumer’s budget and the 

affordability of the loan is appropriate, 

since these are factors that are relevant 

to the advisability of a mortgage 

transaction for the consumer. HUD 

already requires counselors to analyze 

the financial situation of their clients 

and establish a household budget for 

their clients when providing housing 

counseling.167

Proposed comment 34(a)(5)(iv)–1 

would have further explained, however, 

that a statement that a consumer has 

received counseling on the advisability 

of the high-cost mortgage does not 

require the counselor to have made a 

judgment or determination as to the 

appropriateness of the loan for the 

consumer. The proposal would have 

provided that such a statement means 

the counseling has addressed the 

affordability of the high-cost mortgage 

for the consumer, not that the counselor 

is required to have determined whether 

a specific loan is appropriate for a 

consumer or whether a consumer is able 

to repay the loan.168

Proposed comment 34(a)(5)(iv)–2 

would have clarified that a counselor’s 

verification of either the § 1026.32(c) 

disclosures or the disclosures required 

by RESPA means that a counselor has 

confirmed, orally, in writing, or by some 

other means, receipt of such disclosures 

with the consumer. The Bureau noted 

that a counselor’s verification of receipt 

of the applicable disclosures would not 

indicate that the applicable disclosures 

provided to the consumer with respect 

to the transaction were complete, 

accurate, or properly provided by the 

creditor. 

Commenters raised two main points 

concerning proposed § 1026.34(a)(5)(iv). 

First, a significant number of 

commenters raised concerns about the 

form of counseling and requested that 

the Bureau permit counseling to occur 

through means other than in person, 

such as by telephone, group classes, or 

self-study, particularly in rural areas 

where counseling resources may be 

more limited. A few commenters also 

raised concerns about proposed 

comment 34(a)(5)(iv)–1 and the 

guidance that a statement that a 

consumer has received counseling on 

the advisability of the high-cost 

mortgage does not require the counselor 


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6932 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

169 24 CFR 214.313(a), (b). 

170 24 CFR 214.313(e); 214.303. 

171See U.S. Department of Housing and Urban 

Development Office of Policy Development & 

Research, The State of the Housing Counseling 

Industry (Sept. 2008), at 22, 59, 156–57. 

to have determined whether a loan is 

appropriate for the consumer. These 

commenters believe that counselors 

should advise consumers on whether or 

not they should accept the high-cost 

mortgage and that advising consumers 

in this manner would be beneficial. 

The Bureau is finalizing proposed 

§ 1026.34(a)(5)(iv) and its associated 

commentary as proposed, with minor 

edits for clarity and consistency. The 

Bureau agrees that counseling for a 

high-cost mortgage should not be 

required to be received in person, and 

the Bureau notes that nothing in the 

proposed or final regulation or 

commentary would prohibit or prescribe 

any particular format for the required 

counseling. The Bureau also notes, 

however, that the requirement for a 

certification form completed by a 

counselor will necessitate that the 

counseling be provided by a counselor. 

As such, certain forms of counseling, 

such as self-study, cannot be used to 

satisfy the counseling requirement. 

The Bureau also agrees with 

commenters that consumers may benefit 

from a counselor’s judgment about 

whether a mortgage is appropriate for 

the consumer. However, the Bureau 

notes that nothing in the regulation or 

commentary would prohibit or restrict a 

counselor from advising a consumer 

whether or not to enter into the highcost mortgage. Under the proposal, a 

counselor would be permitted to advise 

the consumer in the manner the 

counselor deemed most helpful, in 

accordance with the requirements set 

forth by HUD, but a counselor would 

not be required to make a determination 

as to the appropriateness of the 

mortgage. 

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

TILA section 129(u) does not address 

the payment of fees for high-cost 

mortgage counseling. As the Bureau 

discussed in the preamble of the 

proposal, HUD generally permits 

housing counselors to charge reasonable 

fees to consumers for counseling 

services, if the fees do not create a 

financial hardship for the consumer.169

For most of its counseling programs, 

HUD also permits creditors to pay for 

counseling services, either through a 

lump sum or on a per case basis, but 

imposes certain requirements on this 

funding to minimize potential conflicts 

of interest. For example, HUD requires 

that the payment be commensurate with 

the services provided and be reasonable 

and customary for the area, the payment 

not violate the requirements of RESPA, 

and the payment and the funding 

relationship be disclosed to the 

consumer.170 In the HECM program, 

however, creditor funding of counseling 

is prohibited. Due to concerns that 

counselors may not be independent of 

creditors and may present biased 

information to consumers, section 

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

Act, as amended by section 2122 of the 

Housing and Economic Recovery Act of 

2008, prohibits mortgagees from paying 

for HECM counseling on behalf of 

mortgagors. 

As noted in the preamble, the Bureau 

believes that counselor impartiality is 

essential to ensuring that counseling 

affords meaningful consumer 

protection. Without counselor 

impartiality, the counseling a consumer 

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

However, the Bureau is also aware of 

concerns that housing counseling 

resources are limited and that funding 

for counseling may not be adequate.171

Prohibiting creditor funding of 

counseling may make it more difficult 

for counseling agencies to maintain 

their programs and provide services so 

that consumers may meet the legal 

requirement to receive counseling prior 

to obtaining a high-cost mortgage. It may 

also create financial hardships for 

borrowers of high-cost mortgages who 

would otherwise be obligated to pay the 

counseling fee upfront or finance the 

counseling fee. 

Proposed § 1026.34(a)(5)(v) would 

have addressed the funding of 

counseling fees by permitting a creditor 

to pay the fees of a counselor or 

counseling organization for high-cost 

mortgage counseling. However, to 

address potential conflicts of interest, 

the Bureau also proposed that a creditor 

may not condition the payment of these 

fees on the consummation of the highcost mortgage. Moreover, the Bureau 

proposed that if the consumer 

withdraws the application that would 

result in the extension of a high-cost 

mortgage after receiving counseling, a 

creditor may not condition payment of 

counseling fees on the receipt of 

certification from the counselor required 

by proposed § 1026.34(a)(5)(i). If a 

counseling agency’s collection of fees 

were contingent upon the 

consummation of the mortgage, or 

receipt of a certification, a counselor 

might have an incentive to counsel a 

consumer to accept a loan that is not in 

the consumer’s best interest. The Bureau 

recognized, however, that a creditor 

may wish to confirm that a counselor 

has provided services to a consumer, 

prior to paying a counseling fee. 

Accordingly, proposed 

§ 1026.34(a)(5)(v) also would have 

provided that a creditor may otherwise 

confirm that a counselor has provided 

counseling to a consumer prior to 

paying counseling fees. The Bureau 

believed proposed § 1026.34(a)(5)(v) 

would help preserve the availability of 

counseling for high-cost mortgages, and 

at the same time help ensure counselor 

independence and prevent conflicts of 

interest that may otherwise arise from 

creditor funding of counseling. 

The Bureau also proposed comment 

34(a)(5)(v)–1 to address the financing of 

counseling fees to likewise preserve the 

availability of counseling for high-cost 

mortgages. The proposed comment 

would have clarified that proposed 

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

creditor from financing the counseling 

fee as part of the mortgage transaction, 

provided that the fee is a bona fide third 

party charge as defined by proposed 

§ 1026.32(b)(5)(i). The proposal was 

intended to ensure that several options 

are available for the payment of any 

counseling fees, such as a consumer 

paying the fee directly to the counseling 

agency, the creditor paying the fee to the 

counseling agency, or the creditor 

financing the counseling fee for the 

consumer. 

Several commenters were supportive 

of the proposal to allow lender funding 

of counseling with the restriction that 

the funding cannot be contingent upon 

consummation of the high-cost 

mortgage. Other commenters raised 

general concerns about the lack of 

funding for counseling and the lack of 

counseling resources, particularly in 

rural areas. One commenter suggested 

that the Bureau address the lack of 

funding by amending the HUD–1 

settlement form to provide a line item 

for ‘‘counseling/education’’ fees, to 

legitimize the payment of counseling 

fees from closing costs. As noted in the 

preamble of the proposal, the Bureau is 

aware of concerns about the adequacy of 

funding for counseling. The Bureau is 

not persuaded, however, that it should 

take additional measures to address this 

concern beyond its proposal to ensure 

that several options are available for the 

payment of counseling fees in the 

context of this rulemaking. The Bureau 

is therefore adopting § 1026.34(a)(5)(v) 

and its associated commentary as 

proposed. 

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

TILA section 129(u) does not address 

potential steering of consumers by 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6933 

172HUD Handbook at 4–11. 

173An additional statutory basis for extending 

this prohibition to mortgage brokers is the authority 

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

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

prohibit acts or practices in connection with—(A) 

mortgage loans that the Bureau finds to be unfair, 

deceptive, or designed to evade the provisions of 

this section.’’ Under the practice prohibited by 

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

stopping payment on their existing loan due to a 

misrepresentation made by a mortgage broker that 

to do so will be of no consequence to the 

borrower—even though the nonpayment will result 

in a default by that borrower, in effect forcing the 

borrower to take the high cost mortgage offered by 

the mortgage broker to eliminate that default. This 

scenario would likely meet the basic elements of a 

deceptive act or practice: (1) A representation, 

omission or practice that is likely to mislead the 

consumer; (2) the consumer acted reasonably in the 

circumstances; and (3) the representation, omission, 

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

consumer’s conduct or decision with regard to a 

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

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

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

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

Chairman, Federal Trade Commission to Hon. John 

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

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

authority to prohibit unfair and deceptive practices 

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

creditors to particular counselors. 

Pursuant to its authority under TILA 

section 129(u)(3), proposed 

§ 1026.34(a)(5)(vi) would have provided 

that a creditor that extends a high-cost 

mortgage shall not steer or otherwise 

direct a consumer to choose a particular 

counselor or counseling organization for 

the required counseling. The Bureau 

proposed this restriction to help 

preserve counselor independence and 

prevent conflicts of interest that may 

arise when creditors refer consumers to 

particular counselors or counseling 

organizations. Under the HECM 

program, lenders providing HECMs are 

prohibited from steering consumers to 

any particular counselor or counseling 

agency.172 As the Bureau noted in the 

preamble to the proposal, absent a 

steering prohibition, a creditor could 

direct the consumer to a counselor with 

whom the creditor has a tacit or express 

agreement to refer customers in 

exchange for favorable advice on the 

creditor’s products in the counseling 

session. 

The Bureau also proposed comments 

34(a)(5)(vi)–1 and 2, to provide an 

example of an action that constitutes 

steering and an example of an action 

that does not constitute steering. 

The Bureau solicited comment on its 

proposed approach to prevent steering 

of consumers to particular counselors or 

counseling organizations and the 

examples proposed in comments 

34(a)(5)(vi)–1 and 2. The Bureau did not 

receive any comments addressing the 

steering prohibition or examples, and 

adopts them as proposed. 

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

Proposed Provisions Not Adopted 

Proposed § 1026.34(a)(5)(vii) would 

have added a requirement that a creditor 

provide to a consumer for whom 

counseling is required a notice 

containing a list of five counselors or 

counseling organizations approved by 

HUD to provide high-cost mortgage 

counseling. Proposed 

§ 1026.34(a)(5)(vii) would have further 

stated that a creditor will be deemed to 

have complied with the obligation to 

provide a counselor list if the creditor 

complied with the broader obligation 

proposed under Regulation X, § 1024.20, 

discussed above, to provide a counselor 

list to any applicant for a federally 

related mortgage loan. 

The Bureau sought comment on the 

content and form of the required 

counselor list. Comments addressing 

these aspects of the list are addressed 

above, in the discussion of § 1024.20. 

The Bureau also sought comment on 

whether some creditors would likely 

comply with the counselor list 

requirement in § 1026.34(a)(5)(vii) 

independent of their obligations under 

RESPA. The Bureau did not receive any 

comments indicating that creditors 

would likely comply with the high-cost 

mortgage counseling list requirement 

other than through the general 

obligation to provide a counseling list in 

§ 1024.20. 

As noted above, the Bureau is 

finalizing the counseling list 

requirement under § 1024.20 to apply 

broadly to all federally related mortgage 

loans, including open-end credit plans. 

Given the scope of this requirement, a 

creditor extending a high-cost mortgage 

to a consumer will always be obliged to 

provide a consumer with a notice about 

counseling resources under § 1024.20. 

As a result, because it would duplicate 

the requirement in § 1024.20, the 

Bureau is not adopting proposed 

§ 1026.34(a)(5)(vii) in the final rule. 

34(a)(6) Recommended Default 

Proposed § 1026.34(a)(6) would have 

implemented the prohibition on a 

creditor recommending that a consumer 

default on an existing obligation in 

connection with a high-cost mortgage, 

in new section 129(j) of TILA, which 

was added by section 1433(a) of the 

Dodd-Frank Act. Specifically, section 

129(j) of TILA prohibits creditors from 

recommending or encouraging a 

consumer to default on an ‘‘existing 

loan or other debt prior to and in 

connection with the closing or planned 

closing of a high-cost mortgage that 

refinances all or any portion of such 

existing loan.’’ The Bureau proposed to 

use its authority under section 129(p)(2) 

of TILA to extend this prohibition in 

proposed § 1026.34(a)(6) to mortgage 

brokers, in addition to creditors. Section 

129(p)(2) provides that the ‘‘Bureau by 

regulation * * * shall prohibit acts or 

practices in connection with * * * 

refinancing of mortgage loans the 

Bureau finds to be associated with 

abusive lending practices, or that are 

otherwise not in the interest of the 

borrower.’’ 

The proposal noted that section 129(j) 

prohibits a practice—in connection with 

a refinancing—that is abusive or 

‘‘otherwise not in the interest of the 

borrower’’ whereby a creditor advises a 

consumer to stop making payments on 

an existing loan knowing that if the 

consumer takes that advice, the 

consumer will default on the existing 

loan. Following the creditor’s advice 

could therefore leave the consumer with 

no choice but to accept a high-cost 

mortgage originated by that creditor, 

with terms that are likely less favorable 

to the consumer, to refinance and 

eliminate the default on the existing 

loan. As noted in the preamble of the 

proposed rule, the Bureau believes that 

it is appropriate to extend the same 

prohibition against such creditor actions 

to mortgage brokers, who often have 

significant interaction with consumers 

with regard to the refinancing of 

mortgage loans and could have similar 

incentives to encourage defaults that are 

not in the interest of the consumer. As 

stated by the Board in 2008 HOEPA 

Final Rule, 73 FR 44522, 44529 (July 30, 

2008), the exception authority under 

TILA section 129(p)(2) is broad, and is 

not limited to practices of creditors. 

Proposed § 1026.34(a)(6) therefore 

prohibits this practice for both creditors 

and mortgage brokers.173 The Bureau 

received comments from a few 

consumer groups that supported this 

extension and no comments that 

opposed it. Therefore, the Bureau is 

adopting § 1026.34(a)(6) as proposed. 

In addition, the Bureau proposed 

comments to § 1026.34(a)(6), which 

would have clarified that whether a 

creditor or mortgage broker 

‘‘recommends or encourages’’ a 

consumer to default on an existing loan 

depends on the relevant facts and 

circumstances, and provided examples. 

Specifically, the Bureau proposed 

comment 34(a)(6)–2, which explained 

that a creditor or mortgage broker 

‘‘recommends or encourages’’ default 

when the creditor or mortgage broker 

advises the consumer to stop making 

payments on an existing loan ‘‘knowing 

that the consumer’s cessation of 


srobinson on DSK4SPTVN1PROD with 
6934 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

payments will cause the consumer to 

default on the existing loan.’’ Proposed 

comment 34(a)(6)–2 also explained that 

a creditor or mortgage broker does not 

recommend or encourage default by 

‘‘advis[ing] a consumer, in good faith, to 

stop payment on an existing loan that is 

intended to be paid prior to the loan 

entering into default by the proceeds of 

a high-cost mortgage upon the 

consummation of that high-cost 

mortgage, if the consummation is 

delayed for reasons outside the control 

of the creditor or mortgage broker.’’ 

The Bureau solicited comment on the 

proposed examples and on additional 

possible examples where a creditor or 

mortgage broker may or may not be 

recommending or encouraging a 

consumer’s default. The Bureau 

received a few public comments 

addressing proposed comment 34(a)(6)– 

2. For example, one consumer group 

suggested that the proposed discussions 

of ‘‘knowledge’’ and ‘‘good faith’’ were 

vague and could undermine what it 

believed Congress intended to be a 

‘‘bright line’’ prohibition on any 

communication that may be viewed as 

a recommended default. Commenters 

did not suggest alternative language for 

the Bureau to use in place of this 

comment, but instead urged the Bureau 

to strike proposed comment 34(a)(6)–2 

altogether, or replace it with a general 

statement that any recommendation or 

encouragement of nonpayment violates 

the ban. 

The Bureau agrees with these 

commenters that the discussion of 

‘‘knowledge’’ and ‘‘good faith’’ in 

proposed comment 34(a)(6)–2 could be 

confusing to creditors or to consumers. 

However, the Bureau believes that a flat 

prohibition of communication between 

a creditor or broker and a consumer 

concerning the relationship between 

timing of the next payment due on the 

existing loan and the anticipated date of 

consummation of the new high-cost 

mortgage would be unnecessary and 

contrary to the interests of consumers. 

In particular, the Bureau believes that 

such a prohibition could result in 

consumers unnecessarily making 

payments on loans that will be paid off 

prior to the due date, and then needing 

to seek refunds after payoff. Such a 

result would be inefficient and contrary 

to the interests of consumers— 

particularly those with limited financial 

resources. On the other hand, the 

Bureau believes permitting limited 

communication from the creditor or 

broker to inform the borrower that the 

anticipated consummation date of the 

new high-cost mortgage will occur prior 

to the next payment due date on an 

existing loan to be refinanced by the 

high-cost mortgage will help prevent 

this inefficiency and benefit consumers. 

For these reasons, the Bureau believes 

that operational guidance would be 

helpful regarding certain situations 

where a consumer is scheduled to 

refinance an existing loan through a 

new high-cost mortgage, and that loan is 

scheduled to be consummated prior to 

the due date for the next payment due 

on the consumer’s existing loan. The 

Bureau is adopting a revised comment 

34(a)(6)–2, which addresses these 

concerns. Revised comment 34(a)(6)–2 

removes the references to ‘‘knowledge’’ 

and ‘‘good faith’’ and instead provides 

that a creditor or mortgage broker 

‘‘recommends or encourages’’ default 

when the creditor or mortgage broker 

advises the consumer to stop making 

payments on an existing loan in a 

manner that is likely to cause the 

consumer to default on the existing 

loan. The Bureau believes that this 

language will alleviate the consumer 

protection concerns raised by 

commenters without unnecessarily 

restricting communication between a 

borrower and a creditor or broker. 

Revised comment 34(a)(6)–2 further 

provides operational guidance on 

certain instances where delay of 

consummation of a high-cost mortgage 

occurs for reasons outside the control of 

a creditor or mortgage broker. In those 

circumstances, revised comment 

34(a)(6)–2 provides that a creditor or 

mortgage broker does not ‘‘recommend 

or encourage’’ default because the 

creditor or mortgage broker informs a 

consumer that the new high-cost 

mortgage is scheduled to be 

consummated prior to the due date for 

the next payment due on the consumer’s 

existing loan (which is intended to be 

paid by the proceeds of the new highcost mortgage) so long as the creditor or 

broker also informs the consumer that 

any delay of consummation of the new 

high-cost mortgage beyond the payment 

due date of the existing loan will not 

relieve the consumer of the obligation to 

make timely payment on that loan. For 

the reasons set forth above, the Bureau 

believes these revisions also address the 

consumer protection concerns raised by 

commenters without unnecessarily 

restricting communication between a 

borrower and a creditor or broker. 

34(a)(7) Modification and Deferral Fees 

The Bureau proposed a new 

§ 1026.34(a)(7) to implement the 

prohibition on modification and deferral 

fees for high-cost mortgages in new 

section 129(s) of TILA, as added by 

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

Specifically, section 129(s) of TILA 

prohibits a ‘‘creditor, successor in 

interest, assignee, or any agent’’ of these 

parties from charging a consumer ‘‘any 

fee to modify, renew, extend, or amend 

a high-cost mortgage, or to defer any 

payment due under the terms of such 

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

would have closely followed the 

statutory language in its implementation 

of section 129(s). 

The Bureau sought comment on the 

applicability of the prohibition to a 

refinancing of a high-cost mortgage, 

including where the refinancing would 

place the consumer in a non-high-cost 

mortgage. The Bureau also sought 

comment on the specific circumstances, 

including examples, under which the 

prohibition on modification and deferral 

fees is particularly needed to protect 

consumers. The Bureau further sought 

information on the implications of the 

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

extent to which fees are charged for a 

consumer’s renewal or extension of the 

draw period under such open-end credit 

plans. 

The Bureau received no public 

comments regarding the application of 

this proposal to open-end credit and 

fees for renewal or extension of draw 

periods. The Bureau received comments 

from several consumer groups 

expressing support for the prohibition. 

Consumer advocates also urged the 

Bureau to clarify that the prohibition 

covers certain practices, including 

forbearances and conditioning a 

modification on a consumer paying a 

portion of the amount in arrears. 

Industry commenters, including 

community banks, voiced general 

opposition to the prohibition on the 

basis that loan modifications and 

deferrals involve administrative costs 

for the lender and the prohibition on 

charging consumers for them will lead 

to increased costs for all consumers. 

One commenter suggested that the 

prohibition may discourage lenders 

from offering modifications or deferrals, 

and several suggested that it would 

discourage lenders from making highcost mortgages at all. Other industry 

commenters sought clarification on the 

specific types of fees and charges 

covered by the rule. 

The Bureau is adopting 

§ 1026.34(a)(7) as proposed. In the 

Bureau’s view, the language of section 

129(s) of TILA suggests that Congress 

intended the prohibition on loan 

modification and deferral fees to be 

broad. The statute specifically prohibits 

‘‘any fee to modify, renew, extend, or 

amend a high-cost mortgage’’ or ‘‘to 

defer any payment due under the terms 

of such mortgage.’’ The Bureau thus 

believes that the language of section 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6935 

129(s) is sufficiently broad to include 

forbearances and that further clarifying 

commentary is unnecessary. In addition, 

the Bureau recognizes that industry 

commenters argued that proposed 

§ 1026.34(a)(7) may lead to increased 

costs. However, industry’s general 

concerns do not provide an adequate 

basis to alter the unequivocal 

prohibition on modification and deferral 

fees set forth in the statute. Accordingly, 

the Bureau will adopt proposed 

§ 1026.34(a)(7) as proposed. 

34(a)(8) Late Fees 

Section 1433(a) of the Dodd-Frank Act 

added to TILA a new section 129(k) 

establishing limitations on late fees on 

high-cost mortgages. Proposed 

§ 1026.34(a)(8) would have 

implemented these limitations with 

minor modifications for clarity. 

New TILA section 129(k)(1) generally 

provides that any late payment charge 

in connection with a high-cost mortgage 

must be specifically permitted by the 

terms of the loan contract or open-end 

credit agreement and must not exceed 

four percent of the ‘‘amount of the 

payment past due.’’ No such late 

payment charge may be imposed more 

than once with respect to a single late 

payment, or prior to the expiration of 

certain statutorily prescribed grace 

periods (i.e., for transactions in which 

interest is paid in advance, no fee may 

be imposed until 30 days after the date 

the payment is due; for all other 

transactions, no fee may be imposed 

until 15 days after the date the payment 

is due). Proposed §§ 1026.34(a)(8)(i) and 

(ii) would have implemented new TILA 

section 129(k)(1) consistent with the 

statute. 

The Bureau sought comment on 

whether additional guidance is needed 

concerning the meaning of the phrase 

‘‘amount of the payment past due’’ or 

the application of § 1026.34(a)(8) to 

open-end credit plans. As discussed in 

detail below, the Bureau did not receive 

any comments addressing these issues. 

The Bureau received a small number of 

comments from industry objecting to the 

proposal’s implementation of the 

limitation on late fees. The commenters 

expressed concern that the limitation is 

inconsistent with current industry 

practices, which typically allow for a 5 

percent late charge. They also argued 

that a 4 percent limit is too low to cover 

lenders’ collection cost or adequately 

incentive timely payments. The Bureau 

acknowledges these concerns, but does 

not believe that they provide a 

principled basis to depart from the 

specific limits set forth by the statute. 

The Bureau is aware that some 

consumer groups believe that the new 

prohibition of late fees should be placed 

within section 32(d) as a limitation 

rather than within section 34 as a 

prohibited act or practice. For purposes 

of organization, the Bureau believes that 

the late fee prohibition is most 

appropriately contained within section 

34, and thus declines to depart from the 

proposal in this respect. 

Amount Past Due 

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

define the phrase ‘‘amount of the 

payment past due.’’ Proposed comment 

34(a)(8)(i)–1 would have explained that, 

for purposes of proposed 

§ 1026.34(a)(8)(i), the ‘‘payment past 

due’’ in an open-end credit plan is the 

required minimum periodic payment, as 

provided under the terms of the plan. 

This comment was intended to clarify 

that, for open-end credit plans, where 

monthly payment amounts can vary 

depending on the consumer’s use of the 

credit line, the ‘‘payment past due’’ is 

the required minimum periodic 

payment that was due immediately 

prior to the assessment of the late 

payment fee. The Bureau sought 

comment on the appropriateness of this 

definition. The Bureau also sought 

comment on whether additional 

guidance was needed concerning the 

meaning of the phrase ‘‘amount of the 

payment past due’’ in the context either 

of closed-end credit transactions or in 

the case of partial mortgage payments. 

The Bureau did not receive any 

comments addressing these aspects of 

the proposal. Accordingly, the Bureau is 

adopting §§ 1026.34(a)(8)(i) and (ii) as 

proposed. 

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

Assessed on Payment Subsequently 

Paid 

New TILA section 129(k)(2) prohibits 

the imposition of a late charge in 

connection with a high-cost mortgage 

payment, when the only delinquency is 

attributable to late charges assessed on 

an earlier payment, and the payment is 

otherwise a full payment for the 

applicable period and is paid by its due 

date or within any applicable grace 

period. The Bureau proposed to 

implement this prohibition on such latefee ‘‘pyramiding,’’ consistent with the 

statutory language, in 

§ 1026.34(a)(8)(iii). The Bureau noted 

that proposed § 1026.34(a)(8)(iii) is 

consistent with § 1026.36(c)(1)(ii), 

which similarly prohibits late-fee 

pyramiding by servicers in connection 

with a consumer credit transaction 

secured by a consumer’s principal 

dwelling. 

Proposed comment 34(a)(8)(iii)–1 

would have provided an illustration of 

the rule. The Bureau requested 

comment as to whether additional 

guidance was needed concerning the 

application of proposed 

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

plans. The Bureau did not receive any 

comments addressing these aspects of 

the proposal. Accordingly, the Bureau is 

adopting § 1026.34(a)(8)(iii) and 

comment 34(a)(8)(iii)–1 as proposed. 

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

Payment 

New TILA section 129(k)(3) provides 

that, if a past due principal balance 

exists on a high-cost mortgage as a result 

of a consumer’s failure to make one or 

more required payments, and if 

permitted by the terms of the loan 

contract or open-end credit agreement 

permit, subsequent payments may be 

applied first to the past due principal 

balance (without deduction due to late 

fees or related fees) until the default is 

cured. The Bureau generally proposed 

to implement new TILA section 

129(k)(3), consistent with the statutory 

language, in § 1026.34(a)(8)(iv), to 

clarify the application of the provision 

to open-end credit plans. 

Proposed comment 34(a)(8)(iv)–1 

would have provided an illustration of 

the rule. The Bureau requested 

comment on this example, including on 

whether additional guidance was 

needed concerning the application of 

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

credit plans. The Bureau did not receive 

comment specifically regarding 

proposed § 1026.34(a)(8)(iv), or 

proposed comment 34(a)(8)(iv)–1, and 

will adopt § 1026.34(a)(8)(iv) and 

comment 34(a)(8)(iv)–1 as proposed. 

34(a)(9) Payoff Statements 

The Bureau proposed a new 

§ 1026.34(a)(9) to implement new 

section 129(t) of TILA, added by section 

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

(1) specifically prohibits, with certain 

exceptions, a creditor or servicer from 

charging a fee for ‘‘informing or 

transmitting to any person the balance 

due to pay off the outstanding balance 

on a high-cost mortgage;’’ and (2) 

requires payoff balances for high-cost 

mortgages to be provided within five 

business days of a request by a 

consumer or a person authorized by the 

consumer to obtain such information. 

Proposed § 1026.34(a)(9), in 

implementing section 129(t), would 

have prohibited a creditor or servicer 

from charging a fee to a consumer (or a 

person authorized by the consumer to 

receive such information) for providing 

a statement of an outstanding pay off 

balance due on a high-cost mortgage. It 

would have allowed, however, as 


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6936 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

174See current § 1026.36(c)(1)(iii), which 

prohibits a servicer ‘‘[i]n connection with a 

consumer credit transaction secured by a 

consumer’s principal dwelling’’ from failing ‘‘to 

provide within a reasonable period of time after 

receiving a request from the consumer * * * an 

accurate statement of the total outstanding balance 

* * *.’’ The commentary related to this section 

states that ‘‘it would be reasonable under most 

circumstances to provide the statement within five 

business days of receipt of a consumer’s request, 

and that ‘‘[t]his time frame might be longer, for 

example, when the servicer is experiencing an 

unusually high volume of refinancing requests.’’ 

See also new Section 129G of TILA added by 

section 1464 of the Dodd-Frank Act, which sets new 

timing requirements for the delivery of payoff 

statements for ‘‘home loans’’ but does not 

specifically address high-cost mortgages. It requires 

a ‘‘creditor or servicer of a home loan’’ to ‘‘send an 

accurate payoff balance within a reasonable time, 

but in no case more than 7 business days, after the 

receipt of a written request for such balance from 

or on behalf of the borrower.’’ The Bureau is 

implementing this provision in its rulemaking on 

mortgage servicing. 

provided by section 129(t), the charging 

of a processing fee to cover the cost of 

providing a payoff statement by fax or 

courier, so long as such fees do not 

exceed an amount that is comparable to 

fees imposed for similar services 

provided in connection with a nonhigh-cost mortgage. The creditor or 

servicer would have been required to 

make the payoff statement available to 

a consumer by a method other than by 

fax or courier and without charge. Prior 

to charging a fax or courier processing 

fee, the creditor or servicer would have 

been required to disclose to the 

consumer (or a person authorized by the 

consumer to receive the consumer’s 

payoff information) that payoff 

statements are otherwise available for 

free. Under the proposal, a creditor or 

servicer who has provided payoff 

statements on a high-cost mortgage to a 

consumer without charge (other than a 

processing fee for faxes or courier 

services) for four times during a 

calendar year would have been 

permitted to charge a reasonable fee for 

providing payoff statements during the 

remainder of the calendar year. Finally, 

the proposal would have required 

payoff statements to be provided by a 

creditor or servicer within five business 

days after receiving a request by a 

consumer for such a statement (or a 

person authorized by the consumer to 

obtain such information).174

The Bureau sought public comment 

on what additional guidance would be 

needed with regard to the fee and timing 

requirements for the provision of payoff 

statements for high-cost mortgages 

under proposed § 1026.34(a)(9). The 

Bureau received a handful of comments 

from industry groups generally objecting 

to the prohibition against charging a fee 

to a consumer. Specifically, commenters 

pointed out that producing payoff 

statements involves an administrative 

cost for creditors and suggested that 

prohibiting such fees may lead to higher 

borrowing costs generally if creditors 

spread those costs to all borrowers. On 

the other hand, one consumer group 

suggested an additional requirement 

that the amount specified in the payoff 

statement must remain accurate for 15 

days after the statement is mailed. 

The Bureau is adopting 

§ 1026.34(a)(9) as proposed. In the 

Bureau’s view, these public comments 

provided no principled basis for 

substantive changes to the prohibition 

and exceptions set forth in the statute. 

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

Section 1433 of the Dodd-Frank Act 

added to TILA a new section 129(m) 

prohibiting the direct or indirect 

financing of (1) any points and fees; and 

(2) any prepayment penalty payable by 

the consumer in a refinancing 

transaction if the creditor or an affiliate 

of the creditor is the holder of the note 

being refinanced. Proposed 

§ 1026.34(a)(10) would have 

implemented new TILA section 129(m). 

Proposed § 1026.34(a)(10) would have 

implemented all aspects of the statute, 

except that the Bureau omitted the 

statutory language concerning the 

financing of prepayment penalties 

payable by the consumer in a 

refinancing transaction. The Bureau 

noted that such penalties are subsumed 

in the definition of points and fees for 

§ 1026.32 in proposed 

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

the prohibition against financing of 

‘‘points and fees’’ necessarily captures 

the prohibition against financing of 

prepayment penalties payable in a 

refinancing transaction if the creditor or 

an affiliate of the creditor is the holder 

of the note being refinanced. Consistent 

with amended TILA section 

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

of credit insurance premiums (which 

new TILA section 129C(d) generally 

bans), proposed § 1026.34(a)(10) would 

have specified that credit insurance 

premiums are not considered financed 

when they are calculated and paid in 

full on a monthly basis. 

Proposed comment 34(a)(10)–1 would 

have clarified that ‘‘points and fees’’ for 

proposed § 1026.34(a)(10) means those 

items that are required to be included in 

the calculation of points and fees under 

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

comment 34(a)(10)–1 specified that, for 

example, in connection with the 

extension of credit under a high-cost 

mortgage, a creditor may finance a fee 

charged in connection with the 

consumer’s receipt of pre-loan 

counseling under § 1026.34(a)(5) 

because such a fee would be excluded 

from points and fees as a bona fide 

third-party charge. 

Proposed comment 34(a)(10)–2 would 

have provided examples of prohibited 

financing of points and fees. The 

proposed comment explained that a 

creditor directly or indirectly finances 

points and fees in connection with a 

high-cost mortgage if, for example, such 

points or fees are added to the loan 

balance or financed through a separate 

note, if the note is payable to the 

creditor or to an affiliate of the creditor. 

In the case of an open-end credit plan, 

a creditor also finances points and fees 

if the creditor advances funds from the 

credit line to cover the fees. 

The Bureau requested comment on its 

proposed implementation of new TILA 

section 129(m). In particular, the Bureau 

requested comment on whether 

§ 1026.34(a)(10) should prohibit the 

financing of charges that are not 

included in the calculation of points 

and fees, such as bona-fide third party 

charges (including certain amounts of 

private mortgage insurance premiums). 

One commenter responded to the 

request for comments regarding whether 

to include bona-fide third party charges 

in the financing prohibition; the 

comment advised against it on the basis 

that it risked restricting access to credit. 

The Bureau also received comments 

from industry generally objecting to the 

prohibition on financing of points and 

fees. In particular, these commenters 

argued that the prohibition would 

restrict access to credit for low-income 

consumers without sufficient cash to 

pay up-front points and fees. 

Though the Bureau acknowledges 

industry’s concern regarding lowincome borrowers’ ability to pay upfront points and fees, it does not believe 

this provides a sufficient basis to alter 

the prohibition set forth in the statute. 

Moreover, the Bureau believes that the 

prohibition provides enhanced 

consumer protection because it will 

prohibit creditors from imposing 

excessive points and fees in connection 

with high-cost mortgages by rolling 

them into the loan balance. 

Accordingly, the Bureau is adopting 

§ 1026.34(a)(10) and comments 

34(a)(10)–1 and 34(a)(10)–2 as proposed. 

34(b) Prohibited Acts or Practices for 

Dwelling-Secured Loans; Structuring 

Loans To Evade High-Cost Mortgage 

Requirements 

The Bureau proposed revisions to 

§ 1026.34(b) to implement the 

prohibition on structuring a loan 

transaction ‘‘for the purpose and with 

the intent’’ to evade the requirements 

for high-cost mortgages in new section 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6937 

129(r) of TILA, which was added by 

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

Section 129(r) of TILA specifically 

prohibits a creditor from taking ‘‘any 

action in connection with a high-cost 

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

open-end credit plan or another form of 

loan for the purpose and with the intent 

of evading the provisions of this title,’’ 

which include the high-cost mortgage 

requirements; or (2) divide a loan into 

separate parts ‘‘for the purpose and with 

the intent’’ to evade the same 

provisions. 

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

scope of HOEPA’s coverage. Current 

§ 1026.34(b) prohibits structuring a 

home-secured loan as an open-end plan 

to evade the requirements of HOEPA. 

The Dodd-Frank Act amended TILA, 

however, to include open-end credit 

plans within the scope of coverage of 

HOEPA. Nevertheless, as noted, new 

section 129(r) prohibits the structuring 

of what would otherwise be a high-cost 

mortgage in the form of an open-end 

credit plan, or another form of loan, 

including dividing the loan into 

separate parts. Proposed § 1026.34(b) 

would have implemented this new 

section by prohibiting the structuring of 

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

including dividing any loan transaction 

into separate parts, for the purpose and 

intent to evade the requirements of 

HOEPA. 

Proposed comment 34(b)–1 would 

have provided examples of violations of 

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

has been divided into two separate 

loans, thereby dividing the points and 

fees for each loan so that the HOEPA 

thresholds are not met, with the specific 

intent to evade the requirements of 

HOEPA; and (2) the structuring of a 

high-cost mortgage as an open-end 

home-equity line of credit that is in fact 

a closed-end home-equity loan to evade 

the requirement to include loan 

originator compensation in points and 

fees for closed-end credit transactions 

under proposed § 1026.32(b)(1). 

The proposal renumbered existing 

comment 34(b)–1 as comment 34(b)–2 

for organizational purposes. 

Notwithstanding the Dodd-Frank Act’s 

expansion of coverage under HOEPA to 

include open-end credit plans, the 

Bureau believed that the guidance set 

forth in proposed comment 34(b)–2 

would be useful for situations where it 

appears that a closed-end credit 

transaction has been structured as an 

open-end credit plan to evade the 

closed-end HOEPA coverage thresholds. 

The Bureau proposed certain 

conforming amendments to proposed 

comment 34(b)–2, however, for 

consistency with the Bureau’s proposed 

amendment to the definition of ‘‘total 

loan amount’’ for closed-end mortgage 

loans. See the section-by-section 

analysis to proposed § 1026.32(b)(6)(i), 

above. 

The Bureau received several 

comments from consumer groups 

encouraging an expansive interpretation 

of the new section 129(r). One 

specifically suggested additional 

requirements that all loans that have 

been divided into two or more loans 

should be evaluated to determine if they 

should be considered covered by 

HOEPA and that all open-end loans 

should be evaluated in the same manner 

as closed-end loans if they meet certain 

criteria. Several commenters also 

expressed concern over loan terms, such 

as rate increase after default and 

‘‘performance based’’ rates that would 

allow a creditor to disclose an 

unrealistically low APR and avoid the 

high-cost mortgage requirements. 

Consumer advocates also described a 

practice in which a creditor extends to 

a consumer an initial, unsecured loan, 

the proceeds of which are used to pay 

points and fees associated with a 

subsequent mortgage loan. The Bureau 

considered these suggestions. With 

respect to the comments regarding the 

scope of the prohibition, the Bureau 

believes that the proposed language is 

sufficiently broad to cover loans 

structured to evade high-cost mortgage 

requirements. Other provisions in 

Regulation Z address APR 

determination and disclosure, and 

increased interest rates after default are 

impermissible under § 1026.32(d)(4). In 

response to the comment describing the 

practice of making an initial, unsecured 

loan, the proceeds of which are used to 

pay points and fees associated with a 

subsequent mortgage loan, the Bureau 

has slightly revised comment 34(b)–1.i 

to reflect that if a creditor structures a 

loan as two or more loans to evade 

HOEPA, those loans may constitute an 

evasion whether made consecutively or 

at the same time. 

The Bureau also received comments 

from GSEs expressing concern regarding 

the ability of secondary market 

purchasers to determine whether a loan 

has been divided into one or more parts 

to evade high-cost mortgage 

requirements. Specifically, these 

commenters argued that, if an entity 

purchases only first-lien loans, it does 

not routinely receive documentation 

regarding subordinate loans and may 

have difficulty in uncovering evasion. 

Particular concern was noted that GSEs 

are unable to discern a creditor’s 

‘‘intent’’ in making a given loan. The 

GSE commenters thus requested a rule 

limiting liability for assignees when 

they purchase only one obligation. 

The Bureau notes the GSEs’ concern, 

but is adopting § 1026.34(b) as 

proposed. The Bureau recognizes that 

the expansion of HOEPA coverage to 

include purchase-money transactions 

may increase the risk of assignee 

liability for GSEs and other secondary 

market purchasers. However, the Bureau 

does not believe this concern warrants 

departure from the statute. Since 

HOEPA’s inception, TILA has provided 

for assignee liability with respect to all 

claims and defenses the consumer could 

assert against the creditor unless the 

assignee could demonstrate, by a 

preponderance of the evidence, that ‘‘a 

reasonable person exercising due 

diligence’’ could not determine the loan 

at issue was a high-cost mortgage. See 

15 U.S.C. 1641(c). The Dodd-Frank Act 

did not alter this long-standing 

provision, but did, however, add the 

prohibition against dividing a 

transaction into separate parts for the 

purpose and with the intent of evading 

HOEPA. The Bureau thus believes that 

interpreting TILA section 129(r) to limit 

liability for GSE purchasers would be 

inconsistent with Congress’s intent to 

impose a special assignee liability rule 

for high-cost mortgage. 

In addition, the Bureau is not 

convinced that the GSEs will be unable 

to adequately control for risk of 

purchasing mortgages structured to 

evade HOEPA. While the GSEs raised 

concerns regarding increased risk of 

assignee liability, they also noted that 

creditors are currently required to 

identify loans with subordinate 

financing at the time of sale, and must 

represent and warrant that the 

subordinate lien loans comply with GSE 

requirements. In addition, they stated 

that GSEs are able to request additional 

documentation for subordinate liens. 

The Bureau believes these comments 

indicate that GSEs possess at least some 

capability to control for risk of 

purchasing loans that may have been 

structured to evade HOEPA through 

their own due diligence. 

With respect to the GSEs’ claim that 

there is no way for them to determine 

whether the creditor’s ‘‘intent’’ was to 

evade HOEPA, the Bureau is providing 

comment 34(b)–1i. to provide guidance 

on when loans may be deemed 

structured with the intent to evade 

HOEPA. Comment 34(b)–1i. provides 

that a creditor structures a transaction to 

evade HOEPA if, for example, the 

creditor structures a loan that would 

otherwise be a high-cost mortgage as 

two or more loans, whether made 

consecutively or at the same time, to 


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6938 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

175As noted in the preamble to the proposal, the 

Bureau is exercising its authority under section 

105(a) of TILA Act to allow counseling to be 

provided by HUD-approved counselors or 

organizations, in addition to HUD-certified 

counselors or organizations, as is specifically 

required by TILA section 129C(f)(2). The Bureau is 

proposing to exercise its authority to provide 

flexibility and to facilitate compliance by ensuring 

greater availability of competent housing counselors 

for the required counseling. 

divide the loan fees to avoid the points 

and fees threshold for high-cost 

mortgages. 

Finally, the final rule incorporates 

several additional changes. Because of 

changes to requirements regarding 

points and fees calculations for openand closed-end transactions, the final 

rule removes proposed comment 34(b)– 

1.ii as unnecessary. In light of the 

Bureau’s decision to create an 

exemption from HOEPA coverage for 

transactions to finance the initial 

construction of a dwelling, the Bureau 

is substituting a different comment 

34(b)–1.ii to clarify that a creditor does 

not structure a transaction in violation 

of § 1026.34(b) when a loan to finance 

the initial construction of a dwelling 

may be permanently financed by the 

same creditor, such as a ‘‘constructionto-permanent’’ loan, and the 

construction phase and the permanent 

phase are treated as separate 

transactions. The final rule adopts the 

other parts of § 1026.34(b) and related 

commentary as proposed. 

Section 1026.36 Prohibited Acts or 

Practices in Connection With Credit 

Secured by a Dwelling 

36(k) Negative Amortization Counseling 

The Dodd-Frank Act added two 

general requirements that creditors must 

fulfill prior to extending credit to a 

consumer secured by a dwelling or 

residential real property that includes a 

dwelling, other than a reverse mortgage, 

that may result in negative amortization. 

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

requires creditors to provide consumers 

with a disclosure that, among other 

things, describes negative amortization 

and states that negative amortization 

increases the outstanding principal 

balance of the account and reduces a 

consumer’s equity in the property. The 

Bureau is not implementing this 

requirement in the current rule, but is 

planning to implement it as part of its 

2012 TILA–RESPA proposal. The 

second provision, found in new TILA 

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

sufficient documentation demonstrating 

that a first-time borrower has received 

homeownership counseling from a 

HUD-certified organization or 

counselor, prior to extending credit in 

connection with a residential mortgage 

loan that may result in negative 

amortization. As noted in the preamble 

of the proposed HOEPA rule, because of 

the similarity of TILA 129C(f)(2) to the 

counseling requirement for high-cost 

mortgages, the Bureau is including the 

implementation of this counseling 

provision as part of this rule. 

The Bureau proposed § 1026.36(k) to 

implement the general counseling 

requirement for first-time borrowers of 

mortgages that may result in negative 

amortization consistent with the 

statutory language. In addition to the 

general counseling requirement in 

proposed § 1026.36(k)(1), pursuant to its 

authority under TILA section 105(a), the 

Bureau proposed to include two 

additional provisions in §§ 1026.36(k)(3) 

and (4), consistent with the 

requirements for high-cost mortgage 

counseling. Proposed § 1026.36(k)(3) 

would have addressed steering by 

creditors to particular counselors or 

counseling organizations and proposed 

§ 1026.36(k)(4) would have required the 

provision of a list of counselors to 

consumers. In addition to requesting 

comments on specific aspects of the 

counseling requirement for negative 

amortization loans, the Bureau 

requested comment on whether it would 

minimize compliance burdens if the 

Bureau conformed the counseling 

requirements for mortgages that may 

result in negative amortization with the 

counseling requirements for high-cost 

mortgages, despite differences in 

statutory language. The Bureau did not 

receive any comments suggesting that 

conforming the counseling requirements 

would be beneficial. As a result, the 

Bureau is finalizing § 1026.36(k) 

substantially as proposed, but with 

certain revisions, as discussed in greater 

detail below. 

36(k)(1) Counseling Required 

Proposed § 1026.36(k)(1) would have 

implemented the statutory requirement 

that a creditor shall not extend credit to 

a first-time borrower in connection with 

a residential transaction secured by a 

dwelling (with exceptions for reverse 

mortgages and mortgages secured by 

timeshare plans) that may result in 

negative amortization, unless the 

creditor receives documentation that the 

consumer has obtained counseling from 

a HUD-certified or approved counselor 

or counseling organization.175 The 

Bureau omitted from the proposal the 

statutory language limiting the 

requirement for counseling to a 

residential mortgage loan that may 

result in negative amortization ‘‘that is 

not a qualified mortgage’’ because a 

qualified mortgage by definition does 

not permit a payment schedule that 

results in an increase of the principal 

balance under new TILA 129C(b)(2)(A). 

Proposed comment 36(k)(1)–1 would 

have provided that counseling 

organizations or counselors certified or 

approved by HUD to provide the 

counseling required by § 1026.36(k)(1) 

include organizations and counselors 

that are certified or approved by HUD 

pursuant to section 106(e) of the 

Housing and Urban Development Act of 

1968 (12 U.S.C. 1701x(e)) or 24 CFR part 

214, unless HUD determines otherwise. 

The Bureau also proposed several 

additional comments to provide further 

clarification. Proposed comment 

36(k)(1)–2 would have addressed the 

content of counseling to ensure that the 

counseling is useful and meaningful to 

the consumer with regard to the 

negative amortization feature of the 

loan. Specifically, proposed comment 

36(k)(1)–2 would have required that 

homeownership counseling pursuant to 

§ 1026.36(k)(1) include information 

regarding the risks and consequences of 

negative amortization. The Bureau 

noted in the preamble of the proposal 

that it believes that a requirement that 

the counseling address the negative 

amortization feature of a loan is 

consistent with the purpose of the 

statute. 

To help facilitate creditor compliance 

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

comment 36(k)(1)–3 would have 

provided examples of documentation 

that demonstrate that a consumer has 

received the required counseling, such 

as a certificate, letter, or email from a 

HUD-certified or -approved organization 

or counselor indicating the consumer 

has received counseling. 

Finally, proposed comment 36(k)(1)– 

4 would have addressed when a creditor 

may begin to process the application for 

a mortgage that may result in negative 

amortization. As with high-cost 

mortgage counseling, the Bureau 

proposed that prior to receiving 

documentation of counseling a creditor 

may not extend a mortgage to a 

consumer that may result in negative 

amortization but may engage in other 

activities, such as processing an 

application for such a mortgage. 

The Bureau solicited comment on the 

proposed general requirement and 

accompanying comments. A significant 

number of consumer groups strongly 

objected to the proposed counseling 

requirement for first-time borrowers of 

negative amortization loans as 

inadequate. These commenters noted 

that negative amortization loans are very 

high-risk and difficult for consumers to 

understand. Commenters asked the 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6939 

176Section 1022(b)(2)(A) of the Dodd-Frank Act 

calls for the Bureau to consider the potential 

benefits and costs of a regulation to consumers and 

covered persons, including the potential reduction 

of access by consumers to consumer financial 

products or services; the impact on depository 

institutions and credit unions with $10 billion or 

less in total assets as described in section 1026 of 

the Dodd-Frank Act; and the impact on consumers 

in rural areas. 

Bureau to ban negative amortization 

loans entirely, or at least to ban negative 

amortization loans secured by a 

consumer’s principal dwelling. 

Alternatively, commenters asked the 

Bureau to require counseling for all 

borrowers of negative amortization 

loans, rather than just first-time 

borrowers. Some commenters also 

requested that the Bureau set further 

standards for negative amortization 

counseling, such as requiring the 

counseling to include review of loan 

terms and household finances. A few 

commenters asked the Bureau to ban 

negative amortization specifically for 

high-cost mortgages. 

The Bureau is finalizing 

§ 1026.36(k)(1) as proposed. While the 

Bureau agrees that negative amortization 

loans are inherently more risky than 

fully amortizing loans, the Bureau also 

notes that Congress considered the risks 

associated with these loans, but did not 

ban these loans in connection with the 

comprehensive mortgage reforms 

contained in title XIV of the Dodd-Frank 

Act. Instead, Congress has made the 

determination to address the increased 

risk associated with these mortgages by 

other means, such as requiring 

additional disclosures and counseling 

for first-time borrowers, and preventing 

loans containing negative amortization 

from being qualified mortgages. The 

Bureau does not believe it is appropriate 

to ban negative amortization loans more 

broadly in the context of this 

rulemaking to implement section 1414. 

At this time, the Bureau does not 

believe it is necessary to set any further 

standards for negative amortization 

counseling, beyond those in the 

proposal. As noted above, the Bureau 

proposed that the required counseling 

must address the risks and 

consequences of negative amortization, 

and the Bureau is now adopting that 

additional requirement in this final rule. 

Finally, in response to comments asking 

the Bureau to ban negative amortization 

for high-cost mortgages, the Bureau 

notes that high-cost mortgages are 

already prohibited from negatively 

amortizing, pursuant to § 1026.32(d)(2). 

36(k)(2) Definitions 

TILA section 129C(f) does not define 

the terms, ‘‘first-time borrower’’ and 

‘‘negative amortization.’’ To afford 

creditors guidance on the circumstances 

under which § 1026.36(k)(1) applies, 

proposed § 1026.36(k)(2) would have 

provided definitions of these two key 

terms. Specifically, proposed 

§ 1026.36(k)(2)(i) would have stated that 

a first-time borrower means a consumer 

who has not previously received a 

closed-end mortgage loan or open-end 

credit plan secured by a dwelling. 

Proposed § 1026.36(k)(2)(ii) would have 

provided that negative amortization 

means a payment schedule with regular 

periodic payments that cause the 

principal balance to increase. The 

Bureau did not receive comments on 

either of these definitions, and is 

finalizing them as proposed. 

36(k)(3) Steering Prohibited 

TILA section 129C(f)(2) does not 

address potential steering of consumers 

by creditors to particular counselors. 

Consistent with its proposal to prohibit 

steering for high-cost mortgage 

counseling in § 1026.34(a)(5)(vi), the 

Bureau proposed in § 1026.36(k)(3) to 

prohibit a creditor that extends 

mortgage credit that may result in 

negative amortization from steering or 

otherwise directing a consumer to 

choose a particular counselor or 

counseling organization for the 

counseling required by proposed 

§ 1026.36(k). The Bureau proposed this 

prohibition pursuant to its authority 

under TILA section 105(a). Proposed 

comment 36(k)(3)–1 references the 

proposed comments in 34(a)(5)(vi)–1 

and –2, which provide an example of an 

action that constitutes steering and an 

example of an action that does not 

constitute steering. The Bureau did not 

receive comment on this provision, and 

is therefore finalizing it as proposed. 

36(k)(4) List of Counselors 

Proposed Provisions Not Adopted 

Also consistent with its proposal in 

§ 1026.34(a)(5)(vii) for high-cost 

mortgage counseling, the Bureau 

proposed in § 1026.36(k)(4)(i) to add a 

requirement that a creditor provide a list 

of counselors to a consumer for whom 

counseling is required under proposed 

§ 1026.36(k) and proposed in 

§ 1026.36(k)(4)(ii) a safe harbor for a 

creditor that provides a list of 

counselors pursuant to the obligation in 

Regulation X § 1024.20. However, as 

with the parallel requirement related to 

high-cost mortgages, the Bureau is not 

finalizing this requirement because it 

will essentially duplicate the counseling 

list requirement finalized in § 1024.20, 

which will require a counseling list to 

be provided to all applicants of federally 

related mortgage loans, including 

negative amortization mortgages. 

VI. Effective Date 

This final rule is effective on January 

10, 2014. The rule applies to 

transactions for which the creditor or 

lender received an application on or 

after that date. As discussed above in 

part III, the Bureau believes that this 

approach is consistent with the 

timeframes established in section 

1400(c) of the Dodd-Frank Act and, on 

balance, will facilitate the 

implementation of the rules’ 

overlapping provisions, while also 

affording creditors sufficient time to 

implement the more complex or 

resource-intensive new requirements. 

In response to the proposal, the 

Bureau received a number of comments 

from industry referencing the other title 

XIV rules and indicating that 

implementing so many new 

requirements at the same time would 

create a significant cumulative burden 

for creditors. Many of these commenters 

suggested that the Bureau provide as 

late an effective date as possible, with 

many commenters suggesting periods of 

between18 and 24 months, in order to 

have time to adjust computerized 

systems, compliance procedures, and 

train staff. While a few commenters 

suggested sequenced implementation 

dates for all of the title XIV rulemakings, 

other commenters asked the Bureau to 

provide a longer implementation date 

but to avoid implementing the 

regulations in a piecemeal fashion. One 

industry association commenter 

suggested that the Bureau employ an 

approach similar to that taken for the 

2012 TILA–REPSA proposal, and issue 

a rule temporarily delaying 

implementation of the HOEPA rule. 

For the reasons already discussed 

above, the Bureau believes that an 

effective date of January 10, 2014 for 

this final rule and most provisions of 

the other title XIV final rules will ensure 

that consumers receive the protections 

in these rules as soon as reasonably 

practicable, taking into account the 

timeframes established by the DoddFrank Act, the need for a coordinated 

approach to facilitate implementation of 

the rules’ overlapping provisions, and 

the need to afford creditors and other 

affected entities sufficient time to 

implement the more complex or 

resource-intensive new requirements. 

VII. Dodd-Frank Act Section 1022(b)(2) 

In developing the final rule, the 

Bureau has considered the regulation’s 

potential benefits, costs, and impacts.176

The proposal set forth a preliminary 

analysis of these effects, and the Bureau 

requested and received comments on 

this analysis. In addition, the Bureau 


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6940 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

177Section 1022(b)(2)(B) of the Dodd-Frank Act 

requires the Bureau to engage in such consultation 

‘‘prior to proposing a rule and during the comment 

process.’’ 

178An exception is comments received on the 

proposed transaction coverage rate. Numerous 

commenters raised concerns regarding this 

provision. As discussed above, however, the Bureau 

is not implementing the proposed provisions 

relating to the transaction coverage rate in this final 

rule. Consequently, comments on the costs and 

benefits of the transaction coverage rate are not 

discussed below. 

179These restrictions and requirements include 

requiring that a creditor receive certification that a 

HOEPA consumer has received pre-loan counseling 

from an approved homeownership counseling 

organization; prohibiting creditors and brokers from 

recommending default on a loan to be refinanced 

with a high-cost mortgage; prohibiting creditors, 

servicers, and assignees from charging a fee to 

modify, defer, renew, extend, or amend a high-cost 

mortgage; limiting the fees that can be charged for 

a payoff statement; banning prepayment penalties; 

substantially limiting balloon payments; and 

requiring that a creditor assess a consumer’s ability 

to repay a HELOC. 

has consulted or offered to consult with 

the prudential regulators, the Federal 

Trade Commission, HUD, FHFA, and 

USDA in connection with this 

rulemaking, including regarding 

consistency with any prudential, 

market, or systemic objectives 

administered by such agencies.177

As discussed above, HOEPA currently 

addresses potentially harmful practices 

in refinancing and closed-end homeequity mortgages. Loans that meet 

HOEPA’s thresholds are subject to 

restrictions on loan terms as well as to 

special disclosure requirements 

intended to ensure that consumers in 

high-cost mortgages understand the 

features and implications of such loans. 

Borrowers with high-cost mortgages also 

have enhanced remedies for violations 

of the law. The Dodd-Frank Act 

expanded the types of loans potentially 

covered by HOEPA to include purchasemoney mortgages and HELOCs secured 

by a consumer’s principal dwelling. The 

Dodd-Frank Act also expanded the 

protections associated with high-cost 

mortgages, including by adding new 

restrictions on loan terms, extending the 

requirement that a creditor verify a 

consumer’s ability to repay to a HELOC, 

and adding a requirement that 

consumers receive homeownership 

counseling before high-cost mortgages 

may be extended. 

In this rulemaking, the Bureau is 

amending Regulation Z to implement 

the changes to HOEPA set forth in the 

Dodd-Frank Act. In addition to the 

amendments related to high-cost 

mortgages, the Bureau is also finalizing 

an amendment to Regulation Z and an 

amendment to Regulation X to 

implement amendments made by 

sections 1414(a) and 1450 of the DoddFrank Act to TILA and to RESPA related 

to homeownership counseling for other 

types of mortgages, respectively. 

In the proposal, the Bureau generally 

requested comment on the section 1022 

impact analysis set forth therein. Among 

other things, the Bureau requested 

comment on the use of the data 

described in the proposal and sought 

additional data regarding the potential 

benefits, costs, and impacts of the 

proposal. Industry commenters raised 

general concerns that expanding the set 

of loans potentially subject to HOEPA, 

changing the HOEPA coverage 

thresholds, and imposing additional 

restrictions on high-cost mortgages 

could decrease access to credit. Several 

commenters stated that few creditors are 

willing to make high-cost mortgages 

because of the reputational, regulatory, 

and legal risks so that expanding 

HOEPA coverage will reduce access to 

credit. In contrast, consumer groups 

generally did not raise similar concerns 

regarding access to credit as a result of 

expanding the set of loans potentially 

subject to HOEPA and changing the 

HOEPA coverage thresholds. Some 

consumer groups further suggested 

stronger protections for consumers with 

high-cost mortgages were warranted. 

Both industry and consumer groups 

commented that the Bureau should 

collect additional data to analyze the 

potential impacts of the proposed rule 

and to assess the empirical bases for 

implementing or deviating from 

statutory thresholds. For example, both 

manufactured housing industry 

commenters and consumer groups 

argued that the Bureau should collect 

additional data to inform its 

specification of APR and points-andfees thresholds that differ by collateral 

type and loan size. 

In addition to soliciting comment 

generally on the impact analysis, the 

proposal solicited comment on and 

suggestions for additional data regarding 

specific aspects of the proposal. For 

example, the Bureau requested 

information concerning how provisions 

in the rule may affect the share of 

HELOCs that would meet the HOEPA 

thresholds and the costs and benefits of 

requiring that the list of homeownership 

counseling providers for loans covered 

by Regulation X to be given to 

applicants for all federally related 

mortgages rather than to only applicants 

for purchase-money mortgages. In 

addition, the Bureau requested 

information and data on the proposal’s 

potential impact on consumers in rural 

areas specifically as well as the 

proposal’s potential impact on 

depository institutions and credit 

unions with total assets of $10 billion or 

less. The Bureau generally received 

limited detail and data in response to 

many of these specific requests. The 

comments are discussed throughout this 

preamble and below in the context of 

the analysis of the benefits and costs of 

the respective provisions of the final 

rule.178

A. Provisions To Be Analyzed 

The discussion below considers the 

potential benefits, costs, and impacts to 

consumers and covered persons of key 

provisions of the final rule, as well as 

certain alternatives considered, which 

include: 

1. Expanding the types of transactions 

potentially covered by HOEPA to 

include purchase-money mortgages and 

HELOCs; 

2. Revising the existing HOEPA APR 

and points-and-fees thresholds to 

implement Dodd-Frank Act 

requirements, as well as modifying the 

APR and points-and-fees calculations to 

determine whether a transaction is a 

high-cost mortgage; 

3. Adding a prepayment penalty 

coverage threshold; 

4. Adding and revising several 

restrictions and requirements on loan 

terms and practices for high-cost 

mortgages; 179 and 

5. Implementing two separate 

homeownership counseling-related 

provisions mandated by the Dodd-Frank 

Act, namely, generally requiring lenders 

to provide a list of homeownership 

counseling organizations to applicants 

for federally related mortgages subject to 

RESPA, and requiring creditors to 

obtain documentation that a first-time 

borrower of a negatively amortizing loan 

has received homeownership 

counseling. 

The analysis considers the benefits 

and costs of certain provisions together 

where there are substantially similar 

benefits and costs. For example, 

expanding the types of loans potentially 

subject to HOEPA coverage to include 

purchase-money mortgages and HELOCs 

would likely expand the number of 

high-cost mortgages. The overall impact 

of this expansion of coverage is 

generally discussed in the aggregate. In 

other cases, the analysis considers the 

costs and benefits of each provision 

separately. When relevant, the 

discussion of these five categories of 

provisions incorporates the comments 

and data the Bureau received in 

response to its proposal and considers 

the costs and benefits of changes made 

between the proposal and final rule. 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6941 

180The Bureau noted in its Summer 2012 

mortgage proposals that it sought to obtain 

additional data to supplement its consideration of 

the rulemakings, including additional data from the 

National Mortgage Licensing System (NMLS) and 

the NMLS Mortgage Call Report, loan file extracts 

from various lenders, and data from the pilot phases 

of the National Mortgage Database. Each of these 

data sources was not necessarily relevant to each of 

the rulemakings. The Bureau used the additional 

data from NMLS and NMLS Mortgage Call Report 

data to better corroborate its estimate of the 

contours of the non-depository segment of the 

mortgage market. The Bureau has received loan file 

extracts from three lenders, but at this point, the 

data from one lender is not usable and the data from 

the other two is not sufficiently standardized nor 

representative to inform consideration of the final 

rules. Additionally, the Bureau has thus far not yet 

received data from the National Mortgage Database 

pilot phases. The Bureau also requested that 

commenters submit relevant data. All probative 

data submitted by commenters are discussed in this 

document. 

181The Bureau chose as a matter of discretion to 

consider costs and benefits of provisions that are 

required by the Dodd-Frank Act to inform the 

rulemaking more completely. 

182Some States have anti-predatory lending 

statutes that provide additional restrictions on 

mortgage terms and features beyond those under 

HOEPA. See 74 FR 43232, 43244 (Aug. 26, 2009) 

(surveying State laws that are coextensive with 

HOEPA). In general, State statutes that overlap and/ 

or extend beyond the final rule would be expected 

to reduce both its costs and its benefits. 

The analysis relies on data that the 

Bureau has obtained, which include 

updated versions of data analyzed in the 

proposed rule such as data on 2011 

mortgages collected under HMDA that 

were released after publication of the 

proposed rule and revised data on 

nondepository mortgage originators 

from the National Mortgage Licensing 

System.180 The analysis also draws on 

evidence of the impact of State antipredatory lending statutes that often 

place additional or tighter restrictions 

on mortgages than those required by 

HOEPA prior to the Dodd-Frank Act 

amendments. However, the Bureau 

notes that, in some instances, there are 

limited data that are publicly available 

with which to quantify the potential 

costs, benefits, and impacts of the final 

rule. For example, data on the terms and 

features of HELOCs are more limited 

and less available than data on closedend mortgages. The Bureau is not aware 

of and commenters did not provide any 

systematic and representative data on 

the terms and features of HELOCs. 

Moreover, some potential costs and 

benefits, such as the value of 

homeownership counseling, or reduced 

likelihood of an unanticipated fee or 

change in payments, are extremely 

difficult to quantify and to measure. 

Therefore, the analysis generally 

provides a qualitative discussion of the 

benefits, costs, and impacts of the final 

rule. 

B. Baseline for Analysis 

The HOEPA amendments are selfeffectuating, and the Dodd-Frank Act 

does not require the Bureau to adopt a 

regulation to implement these 

amendments. Thus, many costs and 

benefits of the final rule considered 

below would arise largely or entirely 

from the statute, not from the final rule. 

The final rule would provide substantial 

benefits compared to allowing the 

HOEPA amendments to take effect alone 

by clarifying parts of the statute that call 

for interpretation, such as how to 

determine whether a HELOC is a highcost mortgage and by creating certain 

exemptions. Greater clarity on parts of 

the statute that call for interpretation 

should reduce the compliance burdens 

on covered persons by reducing costs 

for attorneys and compliance officers 

and also by reducing the litigation risk 

and potential liability creditors and 

assignees of high-cost mortgages would 

face in the absence of regulatory 

guidance. In addition, the Bureau 

believes that exempting construction 

loans, for example, should reduce 

burden on not only covered persons that 

originate these types of loans but also on 

consumers because potential HOEPA 

coverage of these loans may have led to 

sharper reductions (relative to other 

types of loans) in the availability of 

construction loans. In this light, the 

costs that the regulation would impose 

beyond those imposed by the statute 

itself are likely to be at most minimal. 

Section 1022 of the Dodd-Frank Act 

permits the Bureau to consider the 

benefits and costs of the rule solely 

compared to the state of the world in 

which the statute takes effect without an 

implementing regulation. The Bureau 

has nonetheless also considered the 

potential benefits, costs, and impacts of 

the major provisions of the final rule 

against a pre-statutory baseline (i.e., the 

benefits, costs, and impacts of the 

relevant provisions of the Dodd-Frank 

Act and the regulation combined).181

There is one exception: The Bureau 

does not discuss below the benefits and 

costs of determining whether a loan is 

a high-cost mortgage, e.g., the costs of 

computer systems and software, 

employee training, outside legal advice, 

and similar costs potentially necessary 

to determine whether a loan is a highcost mortgage.182 One trade association 

commenter asserted that the Bureau’s 

analysis of the compliance burden due 

to the expansion of HOEPA to purchasemoney mortgages and HELOCs is 

incomplete in part because it did not 

consider the costs of determining 

whether a loan is a high-cost mortgage. 

The trade association noted that these 

costs would now be incurred for all 

purchase-money mortgages and 

HELOCs, including those that are 

ultimately not originated or that are 

modified to avoid classification as a 

high-cost mortgage. As noted in its 

preliminary section 1022 analysis, the 

Bureau does not consider these benefits 

and costs because these changes are 

required by the Dodd-Frank Act’s 

amendments to HOEPA. The Bureau’s 

discretion to exempt broad categories of 

loans from HOEPA coverage is limited, 

and the Bureau does not believe such 

exemptions are consistent with the 

mandate of the statute. The Bureau has 

discretion in future rulemakings to 

choose the most appropriate baseline for 

each particular rulemaking. 

A few industry commenters argued 

that the analysis did not adequately 

consider the proposal’s costs and 

benefits in the context of related 

rulemakings including the cumulative 

effects of these rules on consumers and 

systemic risk. The Bureau, however, 

interprets the consideration required by 

section 1022(b)(2)(A) to be focused on 

the potential benefits, costs, and 

impacts of the particular rule at issue, 

and to not include those of other 

pending or potential rulemakings. 

Moreover, the commenters do not 

suggest a reliable method for assessing 

cumulative impacts of multiple 

rulemakings. The Bureau believes that 

there are multiple reasonable 

approaches for conducting the 

consideration called for by section 

1022(b)(2)(A) and that the approach it 

has taken in this analysis is reasonable 

and that, particularly in light of the 

difficulties of reliably estimating certain 

benefits and costs, it has discretion to 

decline to undertake additional or 

different forms of analysis. The Bureau 

notes that it has coordinated the 

development of the final rule with its 

other rulemakings and has, as 

appropriate, discussed some of the 

significant interactions of the 

rulemakings. 

One commenter stated that the Bureau 

did not sufficiently weigh the negative 

effects of the proposed rule against the 

likely benefits as measured by the goal 

of U.S. financial stability. The Bureau 

notes that, as discussed in this 

1022(b)(2) analysis and other parts of 

the preamble, it has carefully taken into 

account the potential negative effects of 

the proposed rule and has accordingly 

added exceptions and other provisions 

to mitigate these potential negative 

effects while preserving the benefits of 

the rule within the constraints 

mandated by Congress. 


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6942 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

183The Home Mortgage Disclosure Act (HMDA), 

enacted by Congress in 1975, as implemented by 

the Bureau’s Regulation C requires lending 

institutions annually to report public loan-level 

data regarding mortgage originations. For more 

information, see http://www.ffiec.gov/hmda. The 

illustration is not exact because not all mortgage 

creditors report under HMDA. The HMDA data 

capture roughly 90–95 percent of lending by the 

Federal Housing Administration and 75–85 percent 

of other first-lien home loans. Robert B. Avery, Neil 

Bhutta, Kenneth P. Brevoort & Glenn B. Canner, The 

Mortgage Market in 2011: Highlights from the Data 

Reported under the Home Mortgage Disclosure Act, 

Fed. Res. Bull. (forthcoming), at n.2. 

184As noted above, the analysis of the final rule 

uses updated data relative to the proposal. For 

example, the analysis of the proposal relied on 2010 

HMDA data, since 2011 HMDA were not yet 

available. 

185The share of closed-end originations reported 

under HMDA that were purchase-money mortgages 

was somewhat lower in 2011 than in most 

preceding years. The share ranged between 43 

percent and 47 percent of originations over the 

2004–2008 period before it fell to 31 percent in 

2009. The share changed more substantially in 

earlier years, when it declined from 59 percent in 

2000 to 26 percent in 2003. Robert B. Avery, Neil 

Bhutta, Kenneth P. Brevoort & Glenn B. Canner, The 

Mortgage Market in 2011: Highlights from the Data 

Reported under the Home Mortgage Disclosure Act, 

Fed. Res. Bull. (forthcoming), Table 3.B. 

186Experian-Oliver Wyman’s analysis of credit 

bureau data indicates that there were roughly 13 

percent as many HELOC originations in 2011 as 

there were originations of closed-end mortgage or 

home equity loans. Specifically, Experian-Oliver 

Wyman estimated that there were roughly 6.4 

million mortgages and 418,000 home equity loans 

originated in 2011 compared with about 909,000 

HELOC originations. The estimate of 42 percent 

assumes that the fraction of closed-end originations 

that were purchase-money mortgages among 

creditors that did not report under HMDA was 

comparable to the estimated 34 percent for HMDA 

reporters. More information about the ExperianOliver Wyman quarterly Market Intelligence Report 

is available at http:// 

www.marketintelligencereports.com. 

187The estimates of the shares of mortgages 

potentially subject to HOEPA exclude construction 

loans, which are not reported under HMDA. 

Similarly, the estimates likely exclude reverse 

mortgages because these mortgages generally are not 

reported under HMDA. 

188These estimates may overstate the extent to 

which high-cost mortgage lending may increase 

under the revised thresholds. In particular, the 

estimate of 0.04 percent of loans that are currently 

classified as high-cost mortgages in HMDA is based 

on the HOEPA flag in those data. This estimate of 

the current share of high-cost mortgages rises to 

nearly 0.06 percent if the fraction is estimated in 

an approach comparable to that for projection of the 

share of loans that exceed the revised thresholds. 

189Every national bank, State member bank, and 

insured nonmember bank is required by its primary 

Federal regulator to file consolidated Reports of 

Condition and Income, also known as Call Report 

data, for each quarter as of the close of business on 

the last day of each calendar quarter (the report 

date). The specific reporting requirements depend 

upon the size of the bank and whether it has any 

foreign offices. For more information, see http:// 

www2.fdic.gov/call_tfr_rpts/. 

190These estimates of creditors that make any or 

more than 10 high-cost mortgages under the final 

rule assume that some lenders avoid making highcost mortgage loans. In particular, these estimates 

assume that lenders that are estimated to have not 

made any high-cost mortgages 2009–2011 do not 

originate loans that exceed the revised HOEPA 

thresholds. 

C. Coverage of the Final Rule 

HOEPA. The provisions of the final 

rule that relate to high-cost mortgages 

apply to any consumer credit 

transaction that meets one of the 

HOEPA thresholds and that is secured 

by the consumer’s principal dwelling, 

including both closed-end credit 

transactions (including purchase-money 

mortgages) and open-end credit plans 

(i.e., home-equity lines of credit, or 

HELOCs), but not to reverse mortgages, 

transactions to finance the initial 

construction of a dwelling, transactions 

originated by a Housing Finance 

Agency, or transactions originated 

under the United States Department of 

Agriculture’s Rural Development 

Section 502 Direct Loan Program. 

In this part of this Supplementary 

Information, the term ‘‘creditor’’ is used 

generally to describe depository 

institutions, credit unions, and 

independent mortgage companies that 

extend mortgage loans, though in places 

the discussion distinguishes between 

these types of creditors. When 

appropriate, this part discusses affected 

persons other than creditors, such as 

mortgage brokers and servicers. For 

example, as required by the Dodd-Frank 

Act, the restrictions on loan 

modification or deferral fees and fees for 

payoff statements would apply to 

mortgage servicers. In addition, the 

Bureau is extending the prohibition on 

recommended default to mortgage 

brokers. 

Additional Counseling Provisions. 

The requirement that lenders provide 

mortgage applicants a list of 

homeownership counseling 

organizations applies to applications for 

a loan covered by RESPA including 

purchase-money mortgages, subordinate 

mortgages, refinancings, closed-end 

home-equity mortgages, and open-end 

credit plans. The negative amortization 

counseling provision applies only to 

closed-end credit transactions that are 

made to first-time borrowers, are 

secured by a dwelling, and may result 

in negative amortization. These 

counseling-related provisions do not 

apply to reverse mortgages or to 

transactions secured by a consumer’s 

interest in a timeshare plan (as 

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

D. Potential Benefits and Costs to 

Consumers and Covered Persons 

1. Expanding the Types of Loans 

Potentially Subject to HOEPA Coverage 

Expanding the types of loans 

potentially subject to HOEPA coverage 

to include purchase-money mortgages 

and HELOCs would increase the 

number of loans potentially subject to 

HOEPA coverage and as a result, almost 

certainly, the number of closed-end 

mortgages and HELOCs classified as 

high-cost mortgages. Data collected 

under HMDA offer a rough illustration 

of the scope of the expansion of loans 

potentially covered by HOEPA.183

Home-improvement and refinance loans 

accounted for 66 percent of closed-end 

mortgages secured by a principal 

dwelling reported in the 2011 HMDA 

data.184 Therefore, the data suggest that 

about 34 percent of home-secured 

closed-end mortgages in 2011 were not 

potentially subject to HOEPA coverage 

because they were purchase-money 

mortgages.185 If one additionally 

considers HELOCs, it is likely that 

closer to 42 percent of all mortgages 

(i.e., closed-end mortgages and HELOCs) 

in 2011 were not eligible for HOEPA 

coverage.186 The rule would expand the 

types of loans potentially subject to 

HOEPA coverage to essentially all 

closed-end mortgages and open-end 

credit plans secured by a principal 

dwelling, except reverse mortgage 

transactions, transactions to finance the 

initial construction of a dwelling, 

transactions originated by a Housing 

Finance Agency, or transactions 

originated under the United States 

Department of Agriculture’s Rural 

Development Section 502 Direct Loan 

Program.187

The Bureau expects, however, that 

only a small fraction of loans would 

qualify as high-cost mortgages under the 

final rule and that few creditors would 

make a large number of high-cost 

mortgages. The Bureau’s analysis of 

loans reported under HMDA suggests 

that the share of all closed-end 

mortgages for creditors that report under 

HMDA might increase from about 0.04 

percent under the current thresholds to 

between 0.1 to 0.3 percent of loans 

under the revised thresholds.188 Based 

on analysis of data from HMDA and 

from depositories’ Reports of Condition 

and Income (Call Reports) and statistical 

extrapolation to non-reporting entities, 

the Bureau estimates that about 6–7 

percent of depository institutions made 

any closed-end high-cost mortgages in 

2011 under the current HOEPA 

thresholds, and that this likely would 

have been approximately 10 percent if 

the revised thresholds had been in 

place.189 Many of these creditors are 

predicted to make few high-cost 

mortgages: The share of depository 

institutions that make ten or more highcost mortgages is estimated to increase 

from less than 1 percent under the 

current thresholds to about 2 percent 

under the final rule.190 Similarly, the 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6943 

191These estimates are based on the Bureau’s 

analysis of mortgage lending by non-depository 

institutions based on HMDA data and data from the 

National Mortgage Licensing System. 

192As discussed below, the Bureau believes that 

the magnitude of the benefits and costs of HOEPA 

coverage are generally expected to increase under 

the final rule due to, for instance, new and revised 

restrictions and requirements on loan terms and 

origination practices for high-cost mortgages. 

193The Bureau is not aware of in-depth empirical 

analyses of the benefits or costs to consumers of the 

current HOEPA provisions specifically. In contrast, 

several studies have assessed the impacts of State 

anti-predatory lending laws and, where relevant, 

findings of these studies are discussed below. 

194As discussed in the preamble as well as below, 

balloon payments are generally prohibited for highcost mortgages but would be permitted for shortterm bridge loans made in connection with the 

acquisition of a new dwelling and for certain loans 

made by specific categories of creditors serving 

rural or underserved areas. 

195Fannie Mae, ‘‘Mortgage Shopping: Are 

Borrowers Leaving Money on the Table?,’’ 

November 27, 2012 available at http:// 

www.fanniemae.com/resources/file/research/ 

housingsurvey/pdf/nhsq22012presentation.pdf. 

This finding is broadly consistent with information 

obtained from creditors through outreach and with 

earlier studies that suggest roughly 20–30 percent 

of consumers contacted only one creditor in 

shopping for a mortgage and that a similar fraction 

considered only two lenders. See, e.g., Jinkook Lee 

& Jeanne M. Hogarth, Consumer Information Search 

for Home Mortgages: Who, What, How Much, and 

What Else?, 9 Fin. Serv. Rev. 277 (2000); James M. 

Lacko & Janis K. Pappalardo, The Effect of Mortgage 

Broker Compensation Disclosures on Consumers 

and Competition: A Controlled Experiment (Federal 

Trade Commission Bureau of Economics Staff 

report, February 2004), http://www.ftc.gov/be/ 

workshops/mortgage/articles/ 

lackopappalardo2004.pdf. 

196Susan E. Woodward & Robert E. Hall, 

Diagnosing Consumer Confusion and Sub-Optimal 

Shopping Effort: Theory and Mortgage-Market 

Evidence (Nat’l Bureau of Econ. Research, Working 

Paper No. 16007, 2010), available at www.nber.org/ 

papers/w16007. 

197See Brian Bucks & Karen Pence, Do Borrowers 

Know Their Mortgage Terms?, 64 J. Urb. Econ. 218 

(2008); James M. Lacko & Janis K. Pappalardo, 

Improving Consumer Mortgage Disclosures: An 

Empirical Assessment of Current and Prototype 

Disclosure Forms (Federal Trade Commission 

Bureau of Economics Staff Report, June 2007), 

http://www.ftc.gov/os/2007/06/ 

P025505MortgageDisclosureReport.pdf and Fannie 

Mae, ‘‘Mortgage Shopping: Are Borrowers Leaving 

Money on the Table?,’’ November 27, 2012 

available at http://www.fanniemae.com/resources/ 

file/research/housingsurvey/pdf/ 

nhsq22012presentation.pdf. 

198See Brian Bucks & Karen Pence, Do Borrowers 

Know Their Mortgage Terms?, 64 J. Urb. Econ. 218 

(2008). 

199See James M. Lacko & Janis K. Pappalardo, 

Improving Consumer Mortgage Disclosures: An 

Empirical Assessment of Current and Prototype 

Disclosure Forms (Federal Trade Commission 

Bureau of Economics Staff Report, June 2007), 

http://www.ftc.gov/os/2007/06/ 

P025505MortgageDisclosureReport.pdf and Danna 

Moore, Survey of Financial Literacy in Washington 

State: Knowledge, Behavior, Attitudes, and 

Experiences (Washington State University, Social 

Continued 

share of non-depository creditors for 

which high-cost mortgages comprise 

more than 1 percent of all closed-end 

originations is estimated to rise from 5 

percent to 7 percent.191 Finally, 

although it is difficult to estimate 

precisely the share of HELOCs that will 

meet the HOEPA thresholds, the effect 

of the final rule on creditors’ businesses 

is likely limited because open-end 

lending generally comprises a small 

fraction of creditors’ lending portfolios. 

Based on the estimated shares of highcost mortgages for creditors, the Bureau 

considered creditors’ potential revenue 

losses under the assumption that 

creditors made no high-cost mortgages, 

which is likely a conservative 

assumption if lenders are able to 

substitute loans that do not exceed the 

HOEPA thresholds in place of a highcost mortgage. As discussed in more 

detail below, these estimates suggest 

that the effect of the final rule would be 

minor for the vast majority of creditors. 

Some industry commenters argued 

that, as a result of HOEPA’s expansion 

to include purchase-money transactions, 

HOEPA would apply to construction 

loans, a large fraction of which would 

be classified as high-cost mortgages 

because these loans typically have 

higher fees and APR. In addition, 

manufactured housing creditors 

expressed concerns that a substantial 

fraction of loans that they originate 

would exceed the HOEPA thresholds. 

Those concerns are addressed in detail 

below. 

a. Benefits and Costs to Consumers 

The Bureau believes that the benefits 

and costs of expanding the types of 

loans potentially subject to HOEPA 

coverage, and in turn the likely number 

of high-cost mortgages, should be 

similar qualitatively to the benefits and 

costs of current HOEPA provisions.192

The Bureau believes that these benefits 

likely include improving some 

applicants’ and consumers’ 

understanding of the terms and features 

of a given high-cost mortgage as a result 

of the enhanced disclosures required for 

high-cost mortgages and as a result of 

the counseling requirement.193 In 

addition, the rule would restrict or 

prohibit loan terms such as prepayment 

penalties and, in many cases, balloon 

payments whose risks may be difficult 

for some consumers to evaluate.194

Improving consumers’ understanding of 

loan terms and such restrictions on loan 

terms could reduce the likelihood that 

a HOEPA consumer faces a sizable, 

unanticipated fee or increase in 

payments. 

Improving consumers’ understanding 

of a given loan would likely increase 

some consumers’ ability—and 

potentially their propensity—to shop for 

a mortgage. A greater ability to shop 

could have additional benefits to 

consumers if, as a consequence, 

consumers shop more extensively and 

select a more favorable mortgage (which 

may be a loan that does not meet the 

HOEPA thresholds) or if consumers 

forgo taking out any mortgage, if none 

would likely be affordable. At least for 

some consumers, obtaining information 

in the process of choosing a mortgage 

may be costly. These costs could 

include the time and effort of obtaining 

additional mortgage offers, trying to 

understand a large number of loan 

terms, and—particularly for an 

adjustable-rate loan—assessing the 

likelihood of various future 

contingencies. 

A consumer who finds shopping for 

and understanding loan terms difficult 

or who needs to make a decision in a 

short timeframe, for example, may select 

a mortgage with less favorable loan 

terms than he or she could qualify for 

because the costs of shopping exceed 

what the consumer perceives to be the 

expected savings, reduced risk, or other 

benefits that could be realized if 

shopping resulted in the choice of 

another mortgage. The Bureau expects 

that the final rule would reduce the 

costs of understanding the loan terms 

for some high-cost loan applicants 

through enhanced disclosures and 

counseling. In doing so, the final rule 

could benefit applicants who opt, based 

on better information, not to take out a 

high-cost mortgage. 

It appears that many consumers do 

not shop extensively when selecting a 

mortgage. A 2012 survey by Fannie Mae 

found that nearly 40 percent of mortgage 

consumers received offers from only one 

creditor when selecting their current 

mortgage.195 Given the estimated 

benefits to a consumer from shopping, 

this suggests that consumers find the 

time and effort of additional shopping 

costly; they underestimate the potential 

value from shopping; or both.196

Some mortgage consumers appear to 

have difficulty understanding or at least 

recalling details of their mortgage, 

particularly the terms and features of 

adjustable-rate mortgages.197 Improved 

information about loan terms may be 

especially beneficial in the case of highcost mortgages. At least along some 

dimensions, the types of consumers 

who may be less certain about their 

mortgage terms are also the types of 

consumers who are more likely to have 

taken out a subprime loan.198 In 

addition, focus groups suggest that 

many subprime consumers perceive 

their choice set as limited or experience 

a sense of desperation.199 Consumers 


srobinson on DSK4SPTVN1PROD with 
6944 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

and Economic Sciences Research Center, Technical 

Report 03–39, 2003), http://www.sesrc.wsu.edu/ 

sesrcsite/Papers/files/dfi-techreport-FINAL2-16- 

04.pdf. 

200Freddie Mac, ‘‘National Mortgage Database, 

Phase 2 National Survey of Mortgage Borrowers,’’ 

(May 2011). 

201See, e.g., Colin Camerer, Samuel Issacharoff, 

George Loewenstein, Ted O’Donoghue, & Matthew 

Rabin, Regulation for Conservatives: Behavioral 

Economics and the Case for ‘‘Asymmetric 

Paternalism,’’ 151 U. Pa. L. Rev. 1211 (2003). 

202These studies have generally found that State 

laws typically have only small effects on the 

volume of subprime lending overall. Similarly, 

more restrictive State laws are associated with 

higher interest rates, but the evidence suggests this 

is the case only for fixed-rate loans and that the 

effect is modest. Nevertheless, the stronger laws 

were associated with a clearer reduction on the 

amount of subprime lending, and prohibitions of 

specific loan features such as prepayment penalties 

appear to reduce the prevalence of the prohibited 

feature. See Raphael W. Bostic, Souphala 

Chomsisengphet, Kathleen C. Engel, Patricia A. 

McCoy, Anthony Pennington-Cross, & Susan M. 

Wachter, Mortgage Product Substitution and State 

Anti-Predatory Lending Laws: Better Loans and 

Better Borrowers? (U. Pa. Inst. L. Econ., Research 

Paper No. 09–27, 2009), available at http:// 

papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=1460871; Lei Ding, Roberto 

G. Quercia, Carolina K. Reid, and Alan M. White 

(2011), ‘‘State Anti-Predatory Lending Laws and 

Neighborhood Foreclosure Rates,’’ Journal of Urban 

Affairs, Volume 33, Number 4, pages 451–467. 

203See Raphael W. Bostic, Souphala 

Chomsisengphet, Kathleen C. Engel, Patricia A. 

McCoy, Anthony Pennington-Cross, & Susan M. 

Wachter, Mortgage Product Substitution and State 

Anti-Predatory Lending Laws: Better Loans and 

Better Borrowers? (U. Pa. Inst. L. Econ., Research 

Paper No. 09–27, 2009), available at http:// 

papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=1460871. 

204 It is possible that some borrowers would 

receive a less favorable mortgage if, for example, 

lenders avoid making high-cost mortgages and, 

consequently, competition in lending to some 

consumers is reduced. 

205 Ding, Roberto G. Quercia, Carolina K. Reid, 

and Alan M. White (2011), ‘‘State Anti-Predatory 

Lending Laws and Neighborhood Foreclosure 

Rates,’’ Journal of Urban Affairs, Volume 33, 

Number 4, pages 451–467. 

who wish to obtain a mortgage and 

believe that they have few options may 

be more likely to accept loan terms 

offered to them and, in turn, less likely 

to consider terms of the mortgage in 

depth. Similarly, consumers seeking a 

mortgage to alleviate short-term 

financial pressures may focus on nearterm features of the mortgage, rather 

than on the risk of, for example, a large 

payment increase at some later point 

due to a teaser rate expiring or to 

fluctuations in interest rates. 

Clearer or more readily accessible 

information about loan terms may also 

be particularly beneficial for consumers 

that take out a purchase-money 

mortgage. A recent survey of mortgage 

borrowers suggests that purchase-money 

mortgage consumers are less likely to be 

familiar with the mortgage process and 

with mortgage terms such as interest 

rates and fees, down payments, and 

money for closing.200 The final rule 

would expand HOEPA coverage to 

purchase-money mortgages so that the 

potential benefits of improved 

information may now accrue for the first 

time to this set of high-cost mortgage 

consumers. 

These benefits to consumers arise 

from making information less costly, but 

the potential benefits to consumers may 

be even greater if at least some 

consumers make systematic errors in 

processing information. For example, 

some studies find that some consumers 

may not accurately gauge the probability 

of uncertain events.201 Thus, it is 

possible that, in assessing the expected 

costs of a mortgage offer, some 

consumers underestimate the likelihood 

of circumstances that lead, for example, 

to incurring a late-payment fee or the 

likelihood of moving or refinancing and 

thus of incurring a prepayment penalty. 

The final rule could increase the cost 

of credit or curtail access to credit for 

a small share of HELOC consumers and 

purchase-money consumers because, as 

detailed below, creditors may be 

reluctant to make high-cost mortgages 

and may no longer offer loans that they 

currently make but that would meet the 

new HOEPA thresholds. Studies of State 

anti-predatory mortgage lending laws, 

however, indicate these impacts of 

extending HOEPA coverage may be 

limited, as the State laws typically have 

only modest effects on the volume of 

subprime lending overall and on 

interest rates for loans that meet the 

State-law thresholds.202

The arguably muted response of 

origination volume to passage of State 

anti-predatory lending laws appears to 

reflect, in part, the fact that the market 

substituted other products that did not 

trigger restrictions or requirements of 

the statute, for example, loans with 

lower initial promotional interest rates 

and longer promotional-rate periods.203

It is possible that some consumers 

would receive a more-favorable loan if 

creditors respond to the expansion of 

the types of loans potentially subject to 

HOEPA coverage by substituting 

mortgage terms that would not trigger 

HOEPA coverage. It is also possible, 

however, that some consumers would 

receive a less-favorable loan or no loan 

at all.204

The Bureau is unaware of data that 

would allow for strong inferences 

regarding the extent to which such 

substitution in creditors’ mortgage 

product offerings leads to consumers 

taking out more favorable loans. Studies 

of State anti-predatory mortgage lending 

statutes, however, suggest that stronger 

State statutes are associated with lower 

neighborhood-level mortgage default 

rates.205 On the one hand, this finding 

might be seen as consistent with the 

possibility that at least some consumers 

receive more beneficial loans. On the 

other hand, it might reflect the 

possibility that access to credit is more 

limited in States with comparatively 

strong anti-predatory statutes, i.e., that 

consumers that are more likely to 

default may be less likely to receive a 

mortgage in these states. This latter 

interpretation, however, is arguably 

more difficult to reconcile with the 

finding that strong State statutes are 

estimated to have only a limited effect 

on the volume of subprime lending. 

b. Benefits and Costs to Covered Persons 

Expanding the types of loans 

potentially subject to HOEPA coverage 

to include purchase-money mortgages 

and HELOCs would likely require 

creditors to generate and to provide 

HOEPA disclosures to a greater number 

of consumers than today. It is difficult 

to predict the extent to which creditors 

may avoid making newly eligible loans 

under the final rule. The Bureau’s 

estimation methodology in analyzing 

the paperwork burden associated with 

the final rule implies that on the order 

of 25,000–30,000 loans might qualify as 

high-cost mortgages or high-cost 

HELOCs. Regardless, the Bureau expects 

that the share of consumers that receive 

a high-cost mortgage would remain a 

small fraction of all mortgage consumers 

(by the Bureau’s estimates, likely about 

0.3 percent of all closed-end and openend originations). Creditors would 

likely also incur costs (e.g., the costs of 

time involved in receiving the 

certification and data retention costs) to 

comply with the final rule’s requirement 

that a creditor obtain certification that a 

consumer has received homeownership 

counseling prior to extending a highcost mortgage. 

A small number of creditors may also 

lose a small fraction of revenue as a 

greater number of loans are subject to 

HOEPA. Based on outreach, the Bureau 

understands that some creditors believe 

they will be negatively perceived if they 

make high-cost mortgages. This belief 

coupled with the restrictions and 

liability provisions associated with 

high-cost mortgages and limited 

secondary market demand for high-cost 

mortgages may reduce creditors’ ability 

or willingness to make high-cost 

purchase-money mortgages and 

HELOCs. Creditors may also be 

reluctant to make high-cost purchasemoney mortgages that they previously 

would have extended because of the 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6945 

206 In addition, the Bureau notes that the Board 

concluded that, at least historically, there have been 

fewer concerns regarding potentially abusive 

lending practices for construction loans compared 

with other mortgages. 

general inability to sell high-cost 

mortgages in the current market, 

primarily because of assignee liability. 

If creditors were indeed unwilling to 

make the likely small fraction of loans 

that newly meet the revised HOEPA 

thresholds and did not substitute other 

loan terms, they would lose the full 

revenue from any loans that they choose 

not to originate. A second possibility is 

that creditors restrict high-cost mortgage 

lending in part by substituting 

alternative terms that do not meet the 

HOEPA thresholds. Even if all potential 

high-cost mortgages were modified in 

this way so that the number of 

originations was unaffected, the 

alternative loans would presumably be 

less profitable (or at most equally 

profitable), since a creditor could have 

offered the same loan contract prior to 

the expansion of HOEPA. Thus, even 

when creditors substitute alternative 

loan products, creditors likely would 

incur some revenue loss. 

c. Scale of Affected Consumers and 

Covered Persons 

Despite expanding the types of loans 

potentially subject to HOEPA coverage, 

which likely would result in an increase 

in the number and share of loans that 

are classified as high-cost mortgages, 

high-cost mortgages are expected to 

continue to account for a small fraction 

of both closed-end mortgages and 

HELOCs. Thus, the final rule would be 

expected to have no direct impact on 

the vast majority of creditors, because, 

as noted above, at most about 10 percent 

of creditors are predicted to make loans 

that would be classified under the final 

rule, and few creditors are expected to 

make significant numbers of high-cost 

mortgages. Similarly, the final rule 

would not be expected to affect directly 

the vast majority of consumers—those 

who do not apply for or obtain a highcost mortgage. As noted above, the 

Bureau estimates that the share of all 

closed-end mortgages for creditors that 

report under HMDA might increase 

from about 0.04 percent under the 

current thresholds to about 0.1 to 0.3 

percent of loans under the revised 

thresholds. The estimated proportion of 

purchase-money mortgages that would 

qualify as high-cost mortgages is slightly 

greater, 0.5 percent, but is still a small 

fraction of all such loans. 

One trade association argued that the 

Bureau’s analysis of the compliance 

burden was incomplete because it did 

not properly consider the costs of 

determining whether a purchase-money 

mortgage or a HELOC is a high-cost 

mortgage. In particular, the trade 

association asserted that, in general, 

most creditors as a matter of course seek 

to avoid high-cost mortgages, due to the 

reputational stigma and liability risks 

associated with making these loans. 

According to this commenter, creditors 

thus incur costs to identify potential 

high-cost mortgage s in order to avoid 

making such loans. But, the commenter 

asserted, now that HOEPA has been 

expanded to include both purchasemoney transactions and open-end credit 

transactions, creditors will incur new 

costs to identify (and avoid making) 

these types of loans that may potentially 

fall under the HOEPA thresholds as 

well. The Bureau believes that these 

costs include, for example, the costs of 

changing or upgrading software or 

computer systems, costs of legal and 

compliance review of how HOEPA 

applies to HELOCs, and the costs of 

training staff that may have previously 

originated only purchase-money 

mortgages or HELOCs so that they did 

not previously need to be familiar with 

HOEPA. In the trade association’s view, 

the Bureau did not properly account for 

these new costs in its analysis. 

However, the Bureau’s Section 1022 

analysis does not consider the benefits 

and costs of determining whether 

purchase-money mortgages and HELOCs 

exceed the HOEPA thresholds because, 

as noted in the discussion of the 

baseline, these benefits and costs arise 

directly from the statute. 

The final rule addresses commenters’ 

concerns, discussed above, that 

expanding HOEPA coverage to 

purchase-money mortgages would apply 

to transactions to finance the initial 

construction of a dwelling (construction 

loans)—which typically have higher 

fees and interest rates than other homesecured loans—and, consequently 

would unduly reduce access to such 

credit with little benefit to consumers. 

One industry commenter estimated that 

about one-fifth of its construction-only 

loans originated in recent years would 

have exceeded the HOEPA thresholds. 

The benefits to consumers of extending 

HOEPA coverage to construction loans 

may be smaller than for other types of 

loans because many restrictions on 

high-cost mortgages are generally 

inapplicable to construction loans 

including restrictions on acceleration, 

fees for loan modifications or payoff 

statements, and negative amortization 

features.206 The Bureau is exempting 

transactions to finance the initial 

construction of a dwelling from the final 

rule. Thus, the final rule should have no 

direct costs or benefits to consumers 

that seek such financing or to covered 

persons insofar as they originate these 

transactions. As compared with the 

proposed rule, the final rule will result 

in lower costs for construction loan 

creditors. 

Some commenters argued that the 

Bureau incorrectly concluded that only 

a small fraction of manufactured home 

loans would be covered. However, the 

Bureau notes that it concluded based on 

available data that the proposed rule 

was expected to have little direct impact 

on the vast majority of consumers and 

creditors (not manufactured-home 

borrowers specifically), and that the 

share of high-cost mortgages would 

likely be higher for loans secured by 

manufactured housing than for loans 

secured by other types of homes. Under 

the current thresholds, the share of 

home improvement or refinance loans 

(those types of loans currently covered 

by HOEPA) that are identified as highcost mortgage s in the 2011 HMDA data 

is about 2 percent for loans secured by 

a manufactured home compared with 

about 0.04 percent of loans secured by 

other types of 1–4 family homes, for 

example. 

The Bureau recognized that HMDA 

data that form the basis of these 

estimates likely under-represent 

mortgages extended in rural areas, 

where manufactured housing is more 

common. The Bureau requested 

additional data on the share of 

manufactured housing mortgages that 

would qualify as high-cost mortgages 

and on the proposed rule’s effects on 

rural areas. By and large, however, the 

data the Bureau received in response to 

these requests came from entities that 

report in HMDA. Thus, although the 

commenters’ analysis and data broadly 

aligned with the Bureau’s analysis of 

data reported by these creditors under 

HMDA, the request for data did not 

yield information on loans extended by 

creditors that do not report under 

HMDA. 

The benefits and costs to consumers 

who would potentially seek a mortgage 

to finance the purchase of a 

manufactured home and the costs to 

covered persons of extending HOEPA 

coverage to purchase-money mortgages 

depends critically on the source of these 

differences in the share of loans that 

qualify as high-cost mortgages. On the 

one hand, industry commenters argued 

that the differences reflect manufactured 

housing creditors’ higher cost of funds 

(due, at least in part, to a lack of 

secondary market funding for mortgages 

on manufactured homes) as well as 

manufactured-home purchasers’ 

typically lower income and credit scores 


srobinson on DSK4SPTVN1PROD with 
6946 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

207Roughly 15 percent of 2011 originations of 

mortgages secured by single-family, owneroccupied homes reported by lenders under HMDA 

were for amounts less than $80,000 and about 9 

percent were for less than $61,500. 

than mortgage consumers as a whole. In 

addition, mortgages for manufactured 

housing tend to be for smaller amounts, 

so these loans may be more likely to 

exceed the points-and fees thresholds, 

particularly if origination costs are fixed 

or do not fall in line with loan size. On 

the other hand, consumer group 

commenters raised concerns that higher 

interest rates and points and fees on 

manufactured-home purchase-money 

mortgages may reflect limited 

competition or harmful lending 

practices applied to disproportionately 

to vulnerable consumers. 

Available data cannot distinguish the 

extent to which the factors suggested by 

commenters underlie the comparatively 

large fraction of manufactured housing 

mortgages that meet the existing HOEPA 

thresholds. Analyzing data for the 

subset of creditors that report under 

HMDA, manufactured home loans are 

more likely than other mortgages to be 

flagged as high-cost mortgages, and this 

conclusion still holds after controlling 

for differences in loan size, consumer 

income, and other factors reported in 

HMDA that may differ systematically 

between owners of manufactured 

housing and other homeowners. Even 

so, the remaining gap in the probability 

that a mortgage has a relatively high 

interest rate could conceivably reflect 

differences in consumers’ credit scores, 

collateral value, predicted loan 

performance, or other factors that are 

not measured in HMDA. 

Without comprehensive data on a 

range of manufactured housing 

creditors, including the credit 

characteristics of their consumers, 

points and fees, and loan performance, 

it is difficult to determine the extent to 

which each of these hypothesized 

factors contribute to the observed 

differences in loan terms. Such data, in 

turn, would allow stronger inferences 

regarding both the costs and benefits of 

the final rule to consumers and covered 

persons alike. If the generally lessfavorable terms on manufactured home 

loans reflected harmful lending 

practices, then HOEPA’s disclosure and 

counseling requirements and borrower 

protections may have considerable 

benefit for consumers. In addition, some 

creditors that extend credit for the 

purchase of manufactured homes could 

gain market share from creditors that 

engage in harmful lending practices. If 

the higher interest rates and points and 

fees (as a percent of loan amount) on 

mortgages for manufactured homes 

instead reflect differences in, for 

example, default rates or creditors’ 

costs, then subjecting a larger share of 

manufactured-home mortgages to 

HOEPA restrictions and requirements 

may reduce access to credit for potential 

manufactured home buyers and the 

revenue of creditors that specialize in 

manufactured home loans. The Bureau 

notes that, in this scenario, the benefits 

and costs may vary across consumers 

and more comprehensive data would be 

required to gauge the extent of this 

variation in costs and benefits. Some 

borrowers that previously could have 

obtained a manufactured home 

mortgage would no longer be able to do 

so and may be worse off. At the same 

time, other borrowers that cannot 

finance the purchase of a manufactured 

home could be better off if the only loan 

that would have been available to them 

was a high-cost mortgage. Finally, 

borrowers who are able to obtain a highcost loan with substantially similar 

terms under the existing and final rules 

may benefit from the additional HOEPA 

disclosures and protections. If creditors 

are able to avoid making high-cost 

mortgages by adjusting loan terms to 

avoid the thresholds, as may be the case 

particularly if there is a lack of 

competition, some borrowers may 

receive a loan with a lower rate or 

points and fees than they would have if 

HOEPA did not apply to purchasemoney mortgages. 

2. Revised APR and Points-and-Fees 

Thresholds 

The statute, and therefore the final 

rule, revise the APR and points-and-fees 

thresholds. These revisions would likely 

result in an increase in the number of 

high-cost mortgages. The Bureau 

estimates, for example, that these 

changes in the APR thresholds along 

with the change in the benchmark 

interest rate from Treasuries to average 

prime offer rate would increase the 

fraction of refinance and home 

improvement loans that are high-cost 

mortgages made by creditors that 

reported in the 2011 HMDA data from 

about 0.06 percent of loans to roughly 

0.2 percent of loans. The Dodd-Frank 

Act also expanded the definition of 

points and fees to include new charges, 

including some costs that may be 

payable after consummation or account 

opening. The expanded definition of 

points and fees is expected to reinforce 

the effect of the revised points-and-fees 

threshold and to result in a greater 

number of loans that exceed the new 

points-and-fees threshold. 

One trade association commenter 

drew on a survey of its members to 

argue that many mortgages for small 

dollar amounts would exceed the 

points-and fees-threshold. According to 

the trade association, its survey 

respondents indicated that all mortgages 

for amounts of $61,500 or less exceeded 

the points-and-fees threshold and 67 

percent of loans for $80,000 or less 

exceeded the threshold.207 The Bureau 

welcomed the additional information 

provided by this trade association’s 

survey of its membership. Nonetheless, 

without additional detail about the 

survey design, for example, the Bureau 

believes the summary results may be 

illustrative but cannot be assumed to be 

representative. 

a. Benefits and Costs to Consumers 

The Dodd-Frank Act revisions to the 

thresholds may benefit consumers by 

increasing the number of credit 

transactions classified as high-cost 

mortgages. As a result, the benefits and 

costs to consumers discussed above in 

the context of expanding HOEPA 

coverage are likely similar, at least 

qualitatively, to the benefits and costs of 

revising the thresholds to capture a 

greater share of credit transactions. As a 

result of the revised thresholds, these 

benefits and costs would apply to a 

larger set of transactions, although as 

noted above, the Bureau believes that 

high-cost mortgages would likely 

remain a small fraction of all mortgages. 

The Bureau believes that, in some cases, 

these benefits likely include a better 

understanding of the risks associated 

with the transaction, which in turn may 

reduce the likelihood that a consumer 

takes out a mortgage he or she cannot 

afford; better loan terms due to 

increased shopping; and an absence of 

loan features whose associated risks 

may be difficult for consumers to 

understand. 

Nonetheless, the final rule could 

impose costs on a small number of 

consumers by raising the cost of credit 

or curtailing access to credit if creditors 

choose not to make loans that meet the 

revised thresholds. As discussed above, 

however, available evidence based on 

State anti-predatory lending statutes 

suggests that tighter restrictions and 

more expansive definitions of high-cost 

mortgages typically have only a limited 

impact on the cost of credit and on 

originations. 

For closed-end loans, the definition of 

points and fees in the final rule is 

narrower than in the proposal in several 

respects. First, compared with the 

proposal, the final rule specifies that 

charges are included in points and fees 

only if it is known at or before 

consummation that the consumer will 

incur the charges. The final rule also 

provides that waived third-party charges 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6947 

208As noted above, a trade association commenter 

stated, based on a survey of its members, that many 

mortgages for comparatively small dollar amounts 

would exceeded the points-and-fees threshold. For 

example, the survey respondents indicated that 

about two-thirds of loans for $80,000 or less would 

exceed the threshold. The Bureau notes that loans 

of this size comprise about 15 percent of homesecured, single-family, owner-occupied loans 

reported the 2011 HMDA data and, presumably, a 

similar small fraction of revenue. Further, the 

Bureau believes that without additional detail 

regarding, for example, the survey design and 

question wording, the summary results from the 

survey may be illustrative, but cannot be assumed 

to be representative. 

209 In dollar-weighted terms, loans purchased by 

Fannie Mae or Freddie Mac accounted for about 

two-thirds of 2011 mortgage originations, and FHA/ 

VA loans comprised roughly 22 percent of 

originations. Figures for 2010 are similar. Inside 

Mortgage Finance ‘‘The 2012 Mortgage Market 

Statistical Annual, Volume 1: The Primary Market,’’ 

(2012) at 17. See also Tamara Keith, ‘‘What’s Next 

for Fannie, Freddie? Hard To Say,’’ February 10, 

2011, available at http://www.npr.org/2011/02/10/ 

133636987/whats-next-for-fannie-freddie-hard-tosay. 

210The Bureau notes that a trade association 

noted in its comments that all but one of its 

members that it surveyed regarding the effects of 

Continued 

that the creditor may recoup if the 

consumer prepays the loan in full 

during the first three years following 

consummation will not be included in 

points and fees as prepayment penalties. 

The Bureau expects that, to the extent 

these differences result in fewer closedend credit transactions that meet the 

points-and-fees thresholds, both the 

benefits and costs to consumers would 

be reduced relative to the proposal. 

The definition of points and fees for 

open-end credit plans in the final rule 

also differs from that in the proposal 

along two dimensions. First, loan 

originator compensation (defined 

identically to compensation for closedend loans) will be included in points 

and fees under the final rule, whereas 

the proposal would have excluded these 

payments. This change is expected to 

increase the number of HELOCs that 

qualify as high-cost mortgages and, 

accordingly, the costs and benefits to 

consumers and to covered persons. By 

contrast, the final rule’s inclusion of 

participation fees payable at or before 

account opening—rather than for the 

life of the loan, as proposed—is 

expected to decrease the number of 

HELOCs that qualify as high-cost 

mortgages. 

In calculating the APR for variablerate transactions, the final rule specifies 

that this rate is based on the fullyindexed rate and relevant margin if the 

rate can vary based only on an index, 

even if that index is the creditor’s own 

index. The proposal would have 

required that the APR be calculated 

based on the maximum rate that could 

be charged over the life of the loan if the 

relevant index was under the creditors’ 

control. Thus, the proposal would 

potentially have led to a greater number 

of loans that exceed the APR threshold. 

For this reason as well, the Bureau 

expects that the benefits and costs to 

consumers would be reduced relative to 

the proposal. As discussed above, 

however, the Bureau expects that only 

a small number of variable-rate, closedend credit transactions would employ 

an index in the creditor’s control, so this 

revision to the proposal should not 

result in a significant change to the 

benefits and costs to consumers. 

The final rule does not implement the 

measures contained in the proposed 

rule that were intended approximately 

to offset an increase in HOEPA coverage 

as a result of the more expansive finance 

charge definition contained in the 

Bureau’s 2012 TILA–RESPA Proposal. 

Since the alternative measures would 

have been crafted so that the number of 

high-cost mortgages would have been 

approximately unchanged, the Bureau 

expects that this difference between the 

proposed and final rules would not 

appreciably alter the potential costs and 

benefits to consumers. 

b. Benefits and Costs to Covered Persons 

The benefits and costs to covered 

persons of revising the statutory HOEPA 

thresholds would likely be expected to 

be similar, at least qualitatively, to those 

that would result from expanding the 

types of credit transactions potentially 

subject to HOEPA coverage to purchasemoney mortgages and HELOCs. For 

example, creditors would likely incur 

costs associated with generating and 

providing HOEPA disclosures for 

additional transactions that would be 

covered by the revised HOEPA 

thresholds, as well as costs associated 

with obtaining certification that a 

consumer has received homeownership 

counseling prior to taking out a highcost mortgage. As discussed above, the 

Bureau estimates that a small number of 

creditors may also lose a modest 

fraction of revenue if they are reluctant 

to make high-cost mortgages and cannot 

offer alternatives that are as profitable as 

a high-cost mortgage.208

Again, the final rule differs from the 

proposal in its more limited definitions 

of points and fees for closed- and openend credit transactions and its use of the 

fully indexed rate (rather than 

maximum allowable rate) in calculating 

the APR for certain variable-rate 

transactions. The Bureau expects that, to 

the extent these differences result in 

fewer loans that meet the points-andfees or APR thresholds, benefits and 

costs to covered persons would be 

reduced relative to the proposal, just as 

for consumers. At the same time, the 

clarifying changes made to points and 

fees (e.g., changes noting when loan 

originator compensation must be 

included) will reduce covered persons’ 

compliance burden; the definition of 

loan originator compensation is 

identical to the definition adopted in 

the Bureau’s qualified-mortgage 

rulemaking. 

The final rule does not implement the 

alternative proposal to adopt a 

Transaction Coverage Rate (TCR) in the 

event that a more expansive definition 

of finance charge were finalized in 

connection with the Bureau’s 2012 

TILA–RESPA Proposal. The Bureau is 

therefore not addressing at this time 

commenters’ concerns with respect to 

the costs that may be associated with 

calculating a TCR. 

3. New Prepayment-Penalty Test 

The Dodd-Frank Act added a new 

HOEPA coverage test for loans with a 

prepayment penalty. Under the DoddFrank Act, HOEPA protections would be 

triggered where the creditor may charge 

a prepayment penalty more than 36 

months after consummation, or if the 

penalty is greater than 2 percent of the 

amount prepaid. High-cost mortgages, in 

turn, are prohibited from having 

prepayment penalties, so the 

prepayment penalty test effectively caps 

both the time period after 

consummation during which such a 

penalty may be charged and the amount 

of any such penalty. 

As discussed below, due to data 

limitations, the Bureau cannot fully 

quantify the benefits and costs to 

consumers and the costs to covered 

persons. Nevertheless, the Bureau 

believes that the number of credit 

transactions that might qualify as highcost mortgages because of the 

prepayment penalty test is likely small. 

Trends and aggregate statistics suggest 

that mortgages originated in recent years 

are very unlikely to have prepayment 

penalties for two reasons. First, 

prepayment penalties were most 

common on subprime and near-prime 

mortgages, a market that has 

disappeared. Second, a roughly 90 

percent of dollar-weighted mortgage 

originations in recent years were 

purchased by Fannie Mae or Freddie 

Mac or were FHA or VA loans.209

Fannie Mae and Freddie Mac purchase 

very few loans with prepayment 

penalties—in a random sample of 

mortgages from the FHFA’s Historical 

Loan Performance data, a very small 

percentage of mortgages originated 

between 1997 and 2011 had a 

prepayment penalty.210


srobinson on DSK4SPTVN1PROD with 
6948 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

the proposed rule would be unaffected by the new 

prepayment penalty test. The Bureau observes, 

however, that the representativeness and weight of 

this finding from the survey cannot be assessed 

without additional detail such as the context and 

wording of the questionnaire, the number and 

characteristics of the creditors that responded to the 

survey, and information on how these respondents 

differ from the population of creditors that extend 

mortgages as a whole. 

211See 15 U.S.C. 1639c. 

212Further, the Bureau notes that a trade 

association noted in its comments that all but one 

of its members that it surveyed regarding the effects 

of the proposed rule would be unaffected by the 

new prepayment penalty test. The Bureau further 

notes, nonetheless, that the representativeness and 

weight of this finding from the survey cannot be 

assessed without additional detail such as the 

context and wording of the questionnaire, the 

number and characteristics of the creditors that 

responded to the survey, and information on how 

these respondents differ from the population of 

creditors that extend mortgages as a whole. 

213At least for subprime loans, loans with a 

prepayment penalty tend to have lower interest 

rates. See, e.g., Oren Bar-Gill, The Law, Economics 

and Psychology of Subprime Mortgage Contracts, 94 

Cornell L. Rev. 1073–1152 (2009). 

Further, the Bureau observes that the 

prevalence of prepayment penalties, in 

general, could be reduced over time by 

other Dodd-Frank Act provisions related 

to ability-to-repay requirements that 

separately restrict such penalties for 

closed-end credit transactions that are 

not qualified mortgages.211 For example, 

under the Dodd-Frank Act, most closedend, dwelling-secured mortgages will 

generally be prohibited from having a 

prepayment penalty unless they are 

fixed-rate, non-higher-priced, qualified 

mortgages. Moreover, under the DoddFrank Act, even such qualifying closedend mortgages may not have a 

prepayment penalty that exceeds 3 

percent, 2 percent, or 1 percent of the 

amount prepaid during the first, second, 

and third years following 

consummation, respectively (and no 

prepayment penalty thereafter). Finally, 

under the Dodd-Frank Act, prepayment 

penalties are included in the points and 

fees calculation for qualified mortgages. 

For qualified mortgages, points and fees 

are capped at 3 percent of the total loan 

amount, so unless a creditor originating 

a qualified mortgage can forgo some or 

all of the other charges that are included 

in the definition of points and fees, it 

necessarily will need to limit the 

amount of prepayment penalties that 

may be charged in connection with the 

transaction.212

a. Benefits and Costs to Consumers 

The final rule would potentially 

benefit a small number of consumers by 

potentially making it easier to refinance 

a high-cost mortgage. Prepayment 

penalties can prevent a consumer from 

refinancing in circumstances where it 

would be advantageous for the 

consumer to do so as would be true if, 

for example, interest rates fall or if the 

consumer’s credit score improves. The 

prepayment penalty test coupled with 

the prohibition on prepayment penalties 

would remove this barrier to obtaining 

a more favorable loan. 

The final rule may be particularly 

beneficial to consumers who, in taking 

out a mortgage, underestimate the 

likelihood that they will move or that 

more favorable terms might be available 

in the future so that refinancing would 

be advantageous. Likewise, eliminating 

prepayment penalties could benefit 

consumers that select a loan based on 

terms that are immediately relevant or 

certain rather than costs and benefits of 

the loan terms that are uncertain or in 

the future. 

Nevertheless, the final rules regarding 

prepayment penalties would potentially 

result in some consumers taking out a 

mortgage that is less favorable than they 

would if the rule were not implemented. 

For example, this would be true for a 

consumer who is unlikely to move or 

refinance and may be willing to accept 

a prepayment penalty in exchange for a 

lower interest rate if a creditor offered 

mortgage products with such a tradeoff.213 The final rules regarding 

prepayment penalties could, more 

generally, reduce access to credit for 

some potential applicants if creditors 

that previously used such penalties to 

manage prepayment and interest-rate 

risk reduce lending or increase interest 

rates or fees as a result of the final rule. 

At this time, the Bureau cannot 

quantify the extent to which creditors 

may restrict lending or increase fees or 

interest rates as a result of the final rule. 

To do so would require, among other 

information, comprehensive data on the 

terms and features—including details of 

any prepayment penalties—of mortgage 

contracts that creditors offer. Similarly, 

the Bureau cannot quantify the share of 

consumers or the costs to consumers 

who may receive a less-favorable 

mortgage than if the final rule did not 

restrict prepayment penalties. 

Estimating these quantities would 

require not only data on the alternative 

mortgage contracts that consumers 

might be offered but also information on 

how consumers value each of the 

alternative contracts. 

b. Costs to Covered Persons 

The final rule could increase the risk 

and, in turn, the costs that the likely 

small number of creditors that would 

make high-cost mortgages would 

assume in making such a loan. 

Prepayment penalties are one tool that 

creditors can use to manage prepayment 

and interest rate risk and to increase the 

likelihood that creditors recoup the 

costs of making the loan. The final rule 

would limit creditors’ ability to manage 

prepayment and interest rate risk in this 

way, although creditors might be 

expected to adjust the contracts that 

they offer to at least partially offset any 

associated revenue loss. The Bureau 

notes that the costs to creditors 

associated with this component of the 

final rule could be muted by the effect 

of the other provisions of the DoddFrank Act that limit prepayment 

penalties, as discussed above. 

4. New and Revised Restrictions and 

Requirements for High-Cost Mortgages 

The final rule also tightens existing 

restrictions for high-cost mortgages, 

including on balloon payments, 

acceleration clauses, and loan 

structuring to evade HOEPA and, as 

discussed above, bans prepayment 

penalties for high-cost mortgages. 

Further, the final rule adds new 

restrictions including limiting fees for 

late payments and fees for transmission 

of payoff statements; prohibiting fees for 

loan modification, payment deferral, 

renewal or extension; prohibiting 

financing of points and fees; and 

prohibiting recommended default. 

Finally, the rule provides for an 

expansion of the existing ability-torepay requirement to open-end credit 

plans and adds a requirement that a 

creditor receive certification that a 

consumer has received pre-loan 

homeownership counseling prior to 

extending a high-cost mortgage. 

a. Benefits and Costs to Consumers 

Taken together, the final rule’s 

requirements and restrictions provide a 

variety of potential benefits to the likely 

small number of consumers with a highcost mortgage. These potential benefits 

include reducing the likelihood that a 

consumer would face unexpected 

payment increases, increasing the 

likelihood a consumer can refinance, 

and improving a consumer’s ability to 

obtain a mortgage that is affordable and 

otherwise meets their needs. 

The restrictions on acceleration 

clauses, late fees, and fees for loan 

modification, payment deferral, renewal 

or similar actions each reduce the 

likelihood of unanticipated payment 

increases. Steady, predictable payments 

may simplify consumers’ budgeting and 

may particularly benefit consumers with 

high-cost mortgages if, as might be 

expected, these consumers tend to have 

fewer resources to draw upon to meet 

unanticipated payment increases. 

Similarly, the final rule generally 

prohibits balloon payments for high-cost 


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mortgages except in certain limited 

circumstances. Although scheduled 

balloon payments may be more 

predictable than, for example, a late fee, 

balloon payments may typically be 

much larger. The final rule’s limits on 

balloon payments may reduce the 

likelihood that a consumer with 

insufficient financial assets to make the 

balloon payment feels pressure to 

refinance the loan, potentially at a 

higher interest rate or with new fees. In 

contrast to the proposal, which would 

have exempted from the balloon 

restriction only mortgage transactions 

with payment schedules adjusted to the 

seasonal income of the consumer, the 

final rule also exempts certain shortterm bridge loans (which generally are 

structured with balloon payments) and 

high-cost mortgages originated by 

specific categories of creditors serving 

rural or underserved areas that also 

meet other prescribed conditions set 

forth in the 2013 ATR Final Rule. 

Consumers with a high-cost short-term 

bridge loan or with a mortgage that 

meets these specific criteria would not 

benefit from avoiding the potential 

contingency of facing pressure to 

refinance a high-cost mortgage in order 

to avoid a scheduled balloon payment. 

Several of the requirements and 

restrictions may help consumers to 

select the mortgage that best suits their 

needs. First, the requirement that the 

creditor assess the repayment ability of 

an applicant for a high-cost HELOC may 

help to ensure that the HELOC is 

affordable for the consumer. Second, the 

provision that prohibits a creditor from 

recommending that a consumer default 

on an existing loan in connection with 

closing a high-cost mortgage that 

refinances the existing loan would make 

it less likely that, because of a pending 

default, a consumer is pressured or 

constrained to consummate a mortgage, 

particularly one whose terms had 

changed unfavorably after the initial 

application. Third, prohibiting loan 

modification fees and restricting fees for 

payoff statements would reduce the 

costs to borrowers of obtaining a more 

favorable loan through modification or 

refinancing. Fourth, by prohibiting 

financing of points and fees (including 

a prepayment penalty as part of a 

refinance), the final rule could improve 

consumers’ ability to assess the costs of 

a given mortgage. In particular, the costs 

of points and fees or of a prepayment 

penalty may be less salient to 

consumers if they are financed, because 

the cost is spread out over many years. 

When points and fees are instead paid 

up front, the costs may be more 

transparent for some consumers, and 

consequently the consumer may more 

readily recognize a relatively high fee. 

Fifth, pre-loan counseling would 

potentially improve applicants’ 

mortgage decision-making by improving 

applicants’ understanding of loan terms. 

This benefit is qualitatively similar to 

the benefits of the HOEPA disclosure. 

Moreover, counseling may benefit a 

consumer by, for example, improving 

the consumer’s assessment of his or her 

ability to meet the scheduled loan 

payments and by making the consumer 

aware of other alternatives (such as 

purchasing a different home or a 

different mortgage product). Finally, 

some applicants may find information 

on loan terms and features to be more 

useful or effective when delivered in a 

counseling setting rather than in paper 

form. Counseling could also 

complement the HOEPA disclosure by 

providing applicants an opportunity to 

resolve questions regarding information 

on the disclosure itself. In addition, in 

weighing the feasibility or merits of a 

loan, applicants may focus on the loan 

features that are most easily understood, 

most immediately relevant, or most 

certain; homeownership counseling 

could mitigate any bias in an applicant’s 

decision-making by focusing either on 

less understood or less immediate, but 

still important, provisions. 

It is possible, however, that creditors 

would respond to the tighter restrictions 

on high-cost mortgages by increasing the 

cost of credit or even no longer 

extending loans to these consumers. As 

noted above, however, to date the 

evidence suggests that, in general, 

restrictions on high-cost lending may 

have only modest effects on the cost of 

credit and on the supply of credit, at 

least as measured by mortgage 

originations. 

As discussed above, however, the 

Bureau agreed with commenters that 

prohibiting balloon payments on a highcost mortgage could reduce consumers’ 

access to credit more substantially in 

some specific instances and therefore 

impose greater costs on some consumers 

with a high-cost mortgage. In light of 

this, the final rule exempts certain 

short-term bridge loans and mortgages 

extended by creditors serving rural or 

underserved communities from the 

general prohibition of balloon payments 

for high-cost mortgages. 

Finally, the pre-loan counseling 

requirement could impose costs on 

consumers. Not only might the 

consumer have to pay for counseling, 

but the need to obtain counseling could 

conceivably delay the closing process, 

and such delay may be costly for some 

consumers. 

b. Benefits and Costs to Covered Persons 

Creditors that already assess a 

HELOC-consumer’s ability to repay may 

benefit from the final rule’s requirement 

by gaining market share as their 

competitors incur costs to meet this 

requirement. The requirement that a 

creditor receive certification that a 

consumer obtaining a high-cost 

mortgage has received pre-loan 

homeownership counseling may benefit 

creditors by reducing the time that a 

creditor would need to spend to help a 

consumer select a mortgage or to answer 

a consumer’s questions. 

In light of the tighter restrictions and 

requirements on high-cost mortgages, 

creditors may be less willing to make 

high-cost mortgages. If so, then some 

creditors’ revenues may decline by a 

likely small proportion either because 

they do not extend any credit to a 

consumer to whom they would have 

previously made a high-cost mortgage, 

or because they extend an alternative 

loan that does not qualify as a high-cost 

mortgage but that results in lower 

revenue. In addition, as commenters 

stated, restrictions such as limiting fees 

for payoff statements and prohibiting 

loan modification fees would result in 

higher costs to all mortgage borrowers. 

One community bank commented that 

current restrictions on high-cost 

mortgages had already driven 

creditworthy customers to seek credit 

from less-regulated creditors. 

In some instances the potential 

impacts of these restrictions may extend 

beyond creditors. The rule would 

extend the prohibition on recommended 

default to brokers as well as creditors, 

for example. This prohibition is 

expected to have little impact on 

covered persons because the Bureau 

believes that few, if any, creditors or 

brokers have a business model premised 

on recommending default on a loan to 

be refinanced as a high-cost mortgage. 

The limits on various fees, detailed 

above, apply to servicers as well as 

creditors. Both of these sets of covered 

persons could incur revenue losses or 

greater costs if such fees are important 

risk management tools. 

The Bureau believes creditors would 

incur recordkeeping and data retention 

costs due to the final requirement that 

a creditor receive certification that a 

consumer received pre-loan counseling. 

Based on the estimation methodology 

for analyzing the paperwork burden 

associated with the final rule, the 

Bureau estimates that the total ongoing 

costs for all creditors that make any 

high-cost mortgages to be about $43,000 

annually. These costs may be small 

relative to the quantity of other 


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6950 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

214 Data from the 2010 Survey of Consumer 

Finances (SCF), the most recent survey year 

information that must be retained and 

that, under the proposed 2012 TILA– 

RESPA rule, would generally be 

required to be retained in machinereadable format. 

5. Counseling-Related Provisions for 

RESPA-Covered Loans and NegativeAmortization Loans 

The final rule, like the proposal, 

would include two additional 

provisions required by the Dodd-Frank 

Act related to homeownership 

counseling that apply to loans with 

negative amortization and loans covered 

by RESPA. First, the final rule would 

require lenders to provide a list of 

homeownership counseling 

organizations to applicants for all 

mortgages covered by RESPA except for 

reverse mortgages and transactions 

secured by a consumer’s interest in a 

timeshare plan. 

Several industry commenters, 

including community banks, objected to 

the requirement that the RESPA 

homeownership counseling list be 

provided to refinance or HELOC 

applicants. Consumer groups 

commented that the counseling list 

requirement should apply to all 

federally related mortgages because 

concerns regarding potentially abusive 

lending practices and borrower 

confusion also exist for refinancings and 

HELOCs, not just for purchase-money 

mortgages. The Bureau agrees that the 

potential benefits of homeownership 

counseling are not limited to purchasemoney mortgage consumers. 

Commenters suggested that 

compliance burden would be lower if 

creditors were not required to provide 

an applicant-specific counseling list. 

Alternatives that commenters suggested 

include State-specific lists and a 

uniform document with general 

information regarding homeownership 

counseling along with information on 

internet or telephone resources to 

identify homeownership counseling 

resources. The Bureau agrees that 

requiring creditors to provide a list of 

homeownership counseling resources 

that is not tailored to each applicant’s 

location would reduce lenders’ 

compliance burden. However, the 

Bureau also believes that a more-generic 

list would reduce the likelihood that at 

least some mortgage applicants obtain 

and potentially benefit from 

homeownership counseling. Moreover, 

the Bureau notes that the Dodd-Frank 

Act specifies that applicants receive a 

list of counseling resources organized by 

location, and the Bureau notes that it 

interprets this statutory prescription to 

mean the location of the applicant who 

is being served by the lender. 

The proposal would also have 

required that both consumers with a 

high-cost mortgage and first-time 

borrowers with a loan that may result in 

negative amortization receive a list of 

homeownership counselors or 

counseling organizations, but the final 

rule does not include this requirement. 

These proposed requirements that 

consumers with a HOEPA or negativeamortization mortgage receive a list of 

homeownership counseling resources 

would have been satisfied by complying 

with the RESPA counseling list 

requirement since RESPA covers both 

sets of loans. Therefore, there would 

have been no additional costs and 

benefits from the proposed requirements 

for HOEPA and negative-amortization 

mortgages. Similarly, removing the 

requirements for these sets of loans in 

the final rule does not alter the 

regulation’s costs and benefits. 

With respect to first-time borrowers 

with a loan that could have negative 

amortization, the final rule would 

require that a creditor receive 

documentation that the consumer 

received homeownership counseling. 

The final rule would not specify any 

particular elements that must be 

included in the documentation. 

a. Benefits and Costs to Consumers 

The two non-HOEPA homeownership 

counseling provisions included in the 

final rule would generally have benefits 

to consumers that are similar in nature 

to those of requiring that creditors to 

receive certification that a consumer 

with a high-cost mortgage has received 

homeownership counseling. In 

particular, as discussed above, 

homeownership counseling may 

improve consumers’ understanding of 

their mortgages, it may complement the 

information provided in disclosures, 

and it could counteract any tendency 

among consumers to consider only loan 

features that are most certain, most 

easily understood, most immediately 

relevant, or most clearly highlighted by 

creditors. 

The final rule would not mandate 

counseling for potential consumers of 

mortgages covered by RESPA, but 

requiring creditors to provide the list of 

homeownership counseling 

organizations may prompt some 

consumers who were unaware of these 

resources (or of their geographic 

proximity) to seek homeownership 

counseling. This may especially be the 

case for consumers who feel confused or 

overwhelmed by the information and 

disclosures provided by the creditor. 

In contrast, the final rule would 

require that a creditor receive 

documentation that a first-time 

borrower that has applied for a loan that 

could have negative amortization has 

received homeownership counseling. 

First-time borrowers may particularly 

benefit from homeownership counseling 

if they have greater difficulty, relative to 

other consumers, in understanding or 

assessing loan terms and features 

because they do not have experience 

with obtaining or paying on a mortgage. 

The Bureau believes that requiring 

applicants of loans covered by RESPA to 

receive a list of homeownership 

counseling organizations should not 

result in costs to consumers beyond 

those passed on by creditors. More 

specifically, the information contained 

on the list should be readily 

understandable, the time required of the 

consumer to receive the disclosure 

should be minimal, and consumers may 

choose not to follow up on this 

information. 

First-time borrowers with a loan that 

may have negative amortization may 

have to pay for the counseling, either 

upfront or by financing the fee. In 

addition, counseling may be costly, at 

least in terms of time, for consumers 

who do not find it helpful. In addition, 

the counseling requirement may impose 

delays on loan closing, which could be 

costly, for example, for a consumer who 

is contractually obligated to close on a 

home by a certain date. 

b. Benefits and Costs to Covered Persons 

The Bureau believes that covered 

persons would incur costs from 

providing potential consumers of loans 

covered by RESPA with a list of 

homeownership counseling 

organizations. The Bureau estimates that 

these costs are likely less than one 

dollar per application but recognizes 

that creditors would have to provide the 

list with each of well over 10 million 

applications each year. The Bureau 

expects that the list would be a single 

page and that it would be provided with 

other materials that the creditor is 

required to provide. In addition, the 

Bureau will create a Web site portal for 

lenders to use in generating the required 

lists of homeownership counseling 

organizations. 

The Bureau also believes that the 

costs of obtaining documentation that a 

first-time borrower with a negativeamortization loan has obtained 

counseling are likely small because such 

loans will most likely be very rare. Not 

only are loans with negativeamortization features uncommon, but 

also the provision would apply only to 

first-time borrowers for such loans.214


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6951 

available at the time this analysis was conducted, 

indicate that only 0.8 percent of first-lien mortgages 

in 2010 reportedly had negative-amortization 

features. This estimate is only suggestive because it 

is only for first-lien mortgages and it is an estimate 

of the stock, rather than the flow, of mortgages with 

such features. The 2010 estimate is higher than the 

corresponding estimate in the 2007 SCF, but it is 

lower than estimates from the six waves of the SCF 

between 1989 and 2004, for which the estimate 

fraction of first-lien mortgages with negativeamortization features ranged from 1.3 percent to 2.3 

percent. 

215The Bureau notes that the balloon payment 

restrictions included an exemption for seasonal or 

irregular income. 

216Estimates are three-year estimates from the 

2009–2011 American Community Surveys (http://

factfinder2.census.gov/faces/tableservices/jsf/

pages/productview.xhtml?pid=ACS_11_3YR_

GCT2501.US26&prodType=table). 

217For purposes of assessing the impacts of the 

final rule on small entities, ‘‘small entities’’ is 

Continued 

Further, the creditor would only be 

required to receive the documentation 

of counseling. For these reasons, the 

Bureau believes that the burden to 

creditors would be minimal. 

In the preamble of the proposal, the 

Bureau noted that the proposed 

counseling requirements for high-cost 

mortgages differed from those for 

mortgages that may result in negative 

amortization. The Bureau solicited 

comment on whether conforming these 

requirements to one another would 

reduce compliance burdens. The Bureau 

notes that it received no data from 

commenters on this point. 

Creditors may benefit from these two 

counseling-related provisions by gaining 

market share relative to creditors that 

currently do not provide clear and 

complete information to consumers 

regarding loan terms. This could occur 

if, as a result of counseling, applicants 

to such a creditor obtained a better 

understanding of the loan offer and 

were less likely to accept it. 

E. Potential Specific Impacts of the 

Final Rule 

1. Depository Institutions and Credit 

Unions with $10 Billion or Less in Total 

Assets, As Described in Section 1026 

The Bureau does not expect the final 

rule to have a unique impact on 

depository institutions and credit 

unions with $10 billion or less in total 

assets as described in section 1026. As 

noted above, although not all creditors 

report under HMDA, those data suggest 

that the vast majority of creditors do not 

make any high-cost mortgages. The 

Bureau expects this would be the case 

under the final rule as well, so few 

institutions would likely be directly 

impacted by the final rule. As might be 

expected given the fact that the vast 

majority of depository institutions that 

make mortgages are estimated to have 

less than $10 billion in total assets, the 

estimated share of these creditors in 

HMDA that currently make any closedend high-cost mortgages, 8 percent, is 

essentially identical to the estimate for 

all depository institutions. Likewise, 

nearly 16 percent of all depository 

institutions and credit unions that 

report under HMDA and of those with 

$10 billion or less in total assets that 

report in HMDA are predicted to make 

any high-cost mortgages under the final 

rule. The impact of the final rule on 

depository institutions and credit 

unions may vary based on the types of 

loans that an institution makes currently 

including, for example, the share of 

mortgage lending comprised of 

purchase-money mortgages and HELOCs 

relative to closed-end refinance and 

home-improvement loans. 

2. Impact of the Provisions on 

Consumers in Rural Areas 

Data on mortgage lending in rural 

areas are comparatively sparse. In 

particular, the HMDA data, which 

inform the analysis of the final rule, 

only include creditors that have a 

branch in a metropolitan statistical area, 

so these data are unlikely to be 

representative of rural mortgage 

transactions. Thus, it is difficult to 

quantify how the final rule may affect 

rural consumers differently from 

consumers and applicants in urban 

areas. Nonetheless, in qualitative terms, 

one might expect that the impact of the 

final rule on consumers in rural areas 

could differ from those for consumers 

located in urban areas for several 

reasons. First, rural consumers may 

have fewer creditors that they readily 

comparison shop among and fewer 

nearby counseling resources. A 

potential reduction in lending for newly 

classified high-cost mortgages may 

therefore have a greater impact in rural 

areas, and a rural consumer that is 

offered a high-cost mortgage may be less 

able to obtain a mortgage from a 

different creditor that is not a high-cost 

mortgage. Similarly, consumers in rural 

areas may have fewer in-person 

counseling resources available in their 

immediate vicinity. 

Second, the Bureau understands that 

creditors in rural areas are more likely 

to extend balloon loans. One reason for 

this is that smaller creditors in these 

areas may be less likely to be able to 

securitize their mortgages, at least in the 

current market environment. These 

smaller creditors therefore bear the 

interest rate risk for these loans, and 

they may rely on balloon-payment 

mortgages to manage this risk. To 

mitigate potential reductions in access 

to credit, the final rule allows an 

exemption from the balloon payment 

prohibition for creditors that make highcost mortgages with balloon payments, 

but that also meet the conditions set 

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

and 1026.43(f)(2), as adopted by the 

2013 ATR Final Rule. This provision 

would reduce the burden of the final 

rule for rural creditors that offer highcost loans with balloon payments. 

Third, the share of loans that qualify 

as high-cost mortgages may differ in 

rural areas relative to urban areas due to 

geographic differences in the housing 

stock and home values. The Bureau 

believes that mortgages in rural areas are 

more likely to be non-conforming 

because of, for example, seasonal or 

irregular income.215 In addition, home 

values tend to be lower in rural areas, 

a pattern that has potentially ambiguous 

implications for the likelihood that a 

rural loan would qualify as a high-cost 

mortgage. Specifically, some mortgages 

in these areas may be more likely to 

qualify as high-cost mortgages because 

they have comparatively high points 

and fees as a percentage of the loan 

amount. At the same time, rural 

mortgages are also more likely to be for 

less than $20,000 and thus subject to the 

higher points-and-fees threshold. 

Finally, manufactured homes are 

more common in rural areas; about 15 

percent of housing units in rural areas 

are manufactured homes compared to 

less than four percent of housing units 

in urban areas.216 As noted above, 

mortgages secured by manufactured 

housing typically have higher interest 

rates and smaller loan amounts so they 

are more likely to meet the APR and 

points-and-fees thresholds. Since 

manufactured-home residents 

disproportionately reside in rural areas 

and loans secured by manufactured 

homes are more likely to exceed the 

HOEPA thresholds, the benefits of 

HOEPA protections and disclosures may 

be more likely to accrue to mortgage 

borrowers and applicants in rural areas 

as would the potential costs to 

consumers such as potentially higher 

cost of credit or more limited access to 

credit. 

VIII. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

generally requires an agency to conduct 

an initial regulatory flexibility analysis 

(IRFA) and a final regulatory flexibility 

analysis (FRFA) of any rule subject to 

notice-and-comment rulemaking 

requirements, unless the agency certifies 

that the rule will not have a significant 

economic impact on a substantial 

number of small entities.217 The Bureau 


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6952 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

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 ‘‘notfor-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). 

218 5 U.S.C. 609. 

219The Bureau received comments addressing the 

impact of the final rule generally. These comments 

are addressed throughout this preamble, and in the 

context of its final section 1022 analysis. 

220 In its analysis of a proposed change to the 

definition of finance charge, the Board noted that, 

at least as of 2009, only Illinois, Maryland, and 

Washington, DC had APR thresholds below the 

then-existing HOEPA APR threshold for first-lien 

mortgage loans. 74 FR 43232, 43244 (Aug. 26, 

2009). 

221The Bureau notes that the HOEPA 

amendments of the Dodd-Frank Act are selfeffectuating and that the Dodd-Frank Act does not 

require the Bureau to promulgate a regulation. 

Viewed from this perspective, the final rule reduces 

burdens by clarifying statutory ambiguities that may 

impose costs such as increased costs for attorneys 

and compliance officers, over-compliance, and 

unnecessary litigation. 

222The Home Mortgage Disclosure Act (HMDA), 

enacted by Congress in 1975, as implemented by 

the Bureau’s Regulation C requires lending 

institutions annually to report public loan-level 

data regarding mortgage originations. For more 

information, see http://www.ffiec.gov/hmda. 

223 Depository institutions with assets less than 

$40 million (in 2011), for example, and those with 

branches exclusively in non-metropolitan areas and 

those that make no purchase money mortgage loans 

are not required to report to HMDA. Reporting 

requirements for non-depository institutions 

depend on several factors, including whether the 

company made fewer than 100 purchase-money or 

refinance loans, the dollar volume of mortgage 

lending as share of total lending, and whether the 

institution had at least five applications, 

originations, or purchased loans from metropolitan 

areas. 

224The Nationwide Mortgage Licensing System is 

a national registry of non-depository financial 

institutions including mortgage loan originators. 

Portions of the registration information are public. 

The Mortgage Call Report data are reported at the 

institution level and include information on the 

number and dollar amount of loans originated, the 

number and dollar amount of loans brokered, and 

on HOEPA originations. The analysis in this part 

draws on HMDA and MCR data by classifying nondepository institutions with similar reported 

amounts of originations and of HOEPA lending in 

the two data sets. 

225The Bureau assumes that few if any non-DIs 

originate HELOCs due to lack of funding for lines 

of credit and lack of access to the payment system. 

226Trends and aggregate statistics suggest that 

loans originated in recent years are very unlikely to 

have prepayment penalties for two reasons. First, 

prepayment penalties were most common on 

subprime and near-prime loans, a market that has 

disappeared. Second, by one estimate, nearly 90 

percent of 2010 originations were purchased by 

Fannie Mae or Freddie Mac or were FHA or VA 

loans (Tamara Keith, ‘‘What’s Next for Fannie, 

Freddie? Hard to Say,’’ February 10, 2011, available 

at http://www.npr.org/2011/02/10/133636987/ 

whats-next-for-fannie-freddie-hard-to-say). Fannie 

Mae and Freddie Mac purchase very few loans with 

prepayment penalties—in a random sample of loans 

from the FHFA’s Historical Loan Performance data, 

a very small percentage of loans originated between 

1997 and 2011 had a prepayment penalty. 

227Revenue has been used in other analyses of 

economic impacts under the RFA. For purposes of 

this analysis, the Bureau uses revenue as a measure 

of economic impact. In the future, the Bureau will 

consider whether a feasible alternative numerical 

measure would be more appropriate for financial 

firms. 

228By the same token, the analysis also implicitly 

assumes that creditors that do not currently make 

high-cost mortgages will not rethink their policies 

and make high-cost mortgages in the future. 

Although it seems the less likely concern, the 

Bureau notes that creditors could change their 

policies if a large share of creditors’ originations 

would now meet the HOEPA thresholds. 

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.218

The Bureau is certifying the final rule. 

Therefore, a FRFA is not required for 

this rule because it will not have a 

significant economic impact on a 

substantial number of small entities. 

A. Overview of Analysis and Data 

The analysis below evaluates the 

potential economic impact of the final 

rule on small entities as defined by the 

RFA.219 It considers effects of the 

revised APR and points-and-fees 

coverage thresholds and of the 

extension of HOEPA coverage to 

purchase money mortgages and 

HELOCs. In addition, the analysis 

considers the impact of the two nonHOEPA counseling-related provisions 

which are being implemented as part of 

the final rule. The analysis does not 

consider the interaction between State 

anti-predatory lending laws and 

HOEPA. The Bureau notes that State 

statutes that place tighter restrictions on 

high-cost mortgages than either current 

or amended HOEPA may reduce the 

economic impact of the final rule.220

The analysis below uses a pre-statute 

baseline, except for the extension of 

HOEPA coverage to purchase-money 

mortgages and HELOCs. As noted in its 

section 1022 analysis, the Bureau does 

not consider these benefits and costs 

because these changes are required by 

the Dodd-Frank Act’s amendments to 

HOEPA.221 The Bureau’s discretion to 

exempt broad categories of loans from 

HOEPA coverage is limited, and the 

Bureau does not believe such 

exemptions are consistent with the 

mandate of the statute. Creditors today 

generally have processes and often 

software systems to determine whether 

a transaction is a high-cost mortgage. 

Creditors will have to update these 

processes and systems to determine 

whether a purchase money mortgage or 

HELOC is a high-cost mortgage. The cost 

of determining whether a transaction is 

a high-cost mortgage is therefore 

unavoidable under the statute. 

The analysis considers the impact of 

the final rule’s revisions to HOEPA on 

closed-end lending by depository 

institutions (DIs), closed-end lending by 

non-depositories (non-DIs), and 

HELOCs separately because these 

components of the analysis necessarily 

rely on different data sources. The 

starting point for much of the analysis 

of closed-end lending is loan-level data 

reported under the Home Mortgage 

Disclosure Act (HMDA).222 The HMDA 

data include information on high-cost 

mortgage lending under the current 

HOEPA thresholds, but some creditors 

are exempt from reporting to HMDA.223

For exempt DIs, the Bureau estimates 

the extent of creditors’ high-cost, closedend lending under the current and postDodd Frank Act thresholds based on 

Call Report data (which are available for 

all DIs). For exempt non-DIs, the Bureau 

supplements data on non-depositories 

that report in HMDA with data from the 

Nationwide Mortgage Licensing System 

and Registry Mortgage Call Report 

(‘‘MCR’’).224 The Bureau does not have 

comprehensive loan-level data for 

HELOCs comparable to the HMDA data 

for closed-end mortgages, and this 

portion of the analysis draws on Call 

Report data as well as data from the 

2010 Survey of Consumer Finances 

(SCF).225 Finally, in all cases the Bureau 

notes that it is not aware of 

representative quantitative data on 

prepayment penalties, but available 

evidence suggests that this new 

threshold would have little impact on 

HOEPA coverage.226

As a measure of the potential impact 

of the final rule, the analysis considers 

the potential share of revenue a creditor 

may forgo if it were to make no highcost mortgages.227 The Bureau believes 

that this approach very likely provides 

a conservative upper bound on the 

effects on creditors’ revenues, since 

some of the new loans potentially 

subject to HOEPA coverage might still 

be made (either as high-cost mortgages 

or with alternative terms to avoid the 

HOEPA thresholds). The Bureau notes 

that at least some creditors currently 

extend high-cost mortgages. Further, 

creditors may still make some loans that 

might otherwise meet the new HOEPA 

thresholds by changing the loan terms to 

avoid being a high-cost mortgage 

(though perhaps with a partial revenue 

loss).228 Moreover, this approach is 

consistent with the possibility that some 


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229The information on whether a loan was a highcost mortgage has been collected in HMDA since 

2004. 

230These percentages correspond to nearly 36,000 

loans in 2005 and roughly 2,400 loans in 2011. 

231The statistics for 2004–2010 are drawn from 

Federal Reserve Bulletin articles that summarize the 

HMDA data each year. In contrast, the 2011 

numbers are based on the analysis of 2011 HMDA 

data and may differ slightly from those presented 

in the Bulletin article that summarizes the 2011 

HMDA data due to subsequent data revisions and 

small differences in definitions (e.g., not counting 

a loan as a high-cost mortgage even if it is flagged 

as a high-cost mortgage if it appears ineligible to be 

a high-cost mortgage because the property is not 

owner-occupied.) 

232The estimates in this analysis are based upon 

data and statistical analyses performed by the 

Bureau. To estimate counts and properties of 

mortgages for entities that do not report under 

HMDA, the Bureau has matched HMDA data to Call 

Report data and NMLS and has statistically 

projected estimated loan counts for those 

depository institutions that do not report these data 

either under HMDA or on the NCUA call report. 

These projections use Poisson regressions that 

estimate loan volumes as a function of an 

institution’s total assets, employment, mortgage 

holdings and geographic presence. 

233The Bureau expects that the economic impact 

of the final rule on mortgage brokers that are small 

entities (for example, the provision prohibiting 

brokers from recommending default) would not be 

significant. 

234The HMDA data contain a flag which indicates 

whether a loan was classified as a high-cost 

mortgage as well as a variable that reports the 

spread between the loan’s APR and the APOR for 

higher-priced mortgage loans. Higher-priced 

mortgage loans are first-liens for which this spread 

is at least 1.5 percentage points and subordinate 

liens with a spread of 3.5 percentage points or 

greater. Importantly, the ‘‘higher-priced’’ mortgage 

Continued 

creditors may be less willing to make 

high-cost mortgages in the future due to 

new and revised restrictions on highcost mortgages, but the Bureau believes 

that any such effect on creditors’ 

willingness to extend high-cost 

mortgages likely is small. 

B. Overview of Market for High-Cost 

Mortgages 

High-cost mortgages comprise a small 

share of total mortgages. HMDA data 

indicate that less than one percent of 

loans meet the current HOEPA 

thresholds and that this share has 

generally declined over time.229

Between 2004 and 2011, high-cost 

mortgages typically comprised about 0.2 

percent of originations of home-secured 

refinance or home-improvement loans 

made by creditors that report in HMDA. 

This fraction peaked at 0.44 percent in 

2005 and fell to 0.05 percent by 2011.230

Similarly, few creditors originate highcost mortgages. The number of creditors 

extending high-cost mortgages ranged 

between about 1,000 and 2,300 over the 

2004 and 2009 period, or between 12 

and 27 percent of creditors. The number 

of creditors extending high-cost 

mortgages fell in 2010 and 2011, and 

only about 570 creditors (roughly 8 

percent) filing HMDA data reported any 

high-cost mortgages in 2011.231

C. Number and Classes of Affected 

Entities 

Greater than half of commercial banks 

and about 40 percent of thrifts meet the 

Small Business Administration’s 

definition of small entities, and the large 

majority of these institutions originate 

mortgages (Table 1). By comparison, not 

quite 80 percent of credit unions are 

small entities, but about 40 percent of 

credit unions and nearly half of credit 

unions that are small entities have no 

closed-end mortgage originations.232

About 90 percent of non-DI mortgage 

originators have revenues below the 

relevant Small Business Administration 

threshold.233

D. Impact of Revised Thresholds on 

Depository Institutions 

1. Closed-End HOEPA Lending by Small 

Depository Institutions 

To assess the final rule’s impacts, the 

analysis aims to estimate the 

counterfactual set of loans that would 

have met the definition of a high-cost 

mortgage if the revised thresholds had 

been in effect in 2011.234 One can 


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6954 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

loan thresholds are well below the APR thresholds 

for HOEPA. The spread is calculated as of the date 

the loan’s rate was set. Based on these variables, the 

analysis defines as a high-cost mortgage any HMDA 

loan that is either flagged as a high-cost mortgage 

or that has an estimated APR spread that exceeds 

the relevant HOEPA threshold. The current HOEPA 

APR threshold is relative to a comparable Treasury 

security, but the reported spread in HMDA is 

relative to APOR, so it is not possible to determine 

with certainty whether a HMDA loan meets the 

current APR threshold, and not all loans that are 

estimated to be above the APR threshold are flagged 

as high-cost mortgages. The Bureau also considered 

a narrower definition of a high-cost mortgage, 

namely, any loan that was identified as a high-cost 

mortgage in the HMDA data. Conclusions based on 

this alternative definition are qualitatively similar 

to those under the primary, more conservative 

definition described above. 

235The statistical model captures the effect of the 

changes in the APR thresholds through the fact that 

the gap between the thresholds and APR would 

generally narrow, which increases the estimated 

probability that a loan would have been flagged as 

a high-cost mortgage. Modeling the probability as a 

function of loan size indirectly approximates the 

effect of the Dodd-Frank Act revisions to the pointsand-fees thresholds. More specifically, the pointsand-fees threshold is defined, in part, based on 

points and fees as a percentage of the loan amount, 

so that, given two loans with identical points and 

fees, the loan with a smaller loan amount should 

be more likely to be flagged as a high-cost mortgage. 

Indeed, high-cost mortgages are more prevalent for 

loans with smaller loan amounts in HMDA. Thus, 

this appears to provide a reasonable approach to 

capturing variation in the likelihood that a loan is 

a high-cost mortgage. The Bureau solicited public 

comment seeking information or data (including 

data on points and fees or on prepayment penalties) 

from interested parties that could be used to refine 

or evaluate this approximation, but the Bureau did 

not receive any such information or data. 

236Loans potentially subject to HOEPA coverage 

in this context are loans for non-business purposes 

secured by a lien on an owner-occupied 1–4 family 

property, including manufactured homes. In 

addition, the estimate of the share of loans subject 

to HOEPA coverage currently excludes purchase 

money mortgages, which are included in the 

estimate of this share under the final rule. The 

estimated share of loans currently classified as 

high-cost mortgages is about 0.06 percent if 

purchase-money mortgages are included in the set 

of loans considered. 

237The estimates of the share of loans that would 

be classified as high-cost mortgages if the revised 

thresholds had been in place are, more precisely, 

estimates of the number of loans potentially 

classified as high-cost mortgages and do not 

account for lenders’ decision to originate or not 

originate a loan based on high-cost mortgage status. 

If some lenders avoid making high-cost mortgages, 

this estimate would be an upper bound on the 

number of high-cost mortgages that might be 

originated under the revised thresholds. The 

estimated number of high-cost mortgages in the 

absence of lenders’ responses is the relevant 

estimate for gauging the maximum loss in revenue 

that could occur for a lender that chose to make no 

high-cost mortgages under the revised thresholds. 

238The share of small DIs estimated to make any 

high-cost mortgages under the revised HOEPA 

thresholds is substantially higher in this analysis 

than in the analysis conducted at the proposal 

stage. This primarily reflects a difference in how the 

results are reported. The previous analysis only 

counted lenders that were estimated to make at 

least one high-cost mortgage under the revised 

thresholds as making a high-cost mortgage. This 

analysis counts lenders that are estimated to have 

a small, but non-zero, probability of making a highcost mortgage, weighted by that probability. Note 

that this does not increase the share of small DIs 

estimated to make 10 or more high-cost mortgages. 

These and other estimates in this analysis can of 

course differ from estimates presented in the 

proposal due to, for example, refinements in the 

estimation methodology and the incorporation of 

updated data. 

239 Data on interest and fee income are not 

available in the credit union Call Report data. This 

calculation assumes that interest and fee income for 

HOEPA and non-high-cost mortgages are 

comparable at banks and thrifts and assumes that 

the share of outstanding balances accounted for by 

mortgages is a reasonable proxy for the share of 

mortgage revenue for a given credit union. 

identify 2011 HMDA loans that would 

have met the revised APR thresholds 

based on information in the HMDA 

data. In contrast, the Bureau is not 

aware of an approach to directly 

determine whether a loan in the 2011 

HMDA data would meet the revised 

points-and-fees threshold and, hence, 

whether the loan would have been 

flagged as a high-cost mortgage. To 

overcome this data limitation, the 

Bureau modeled the probability that a 

loan would have been flagged as a highcost mortgage in HMDA as a function of: 

(i) the loan amount and (ii) the 

difference between the loan’s APR and 

the APR threshold.235

The changes to the APR and pointsand-fees thresholds are estimated to 

increase the share of loans made by 

HMDA-reporters and potentially subject 

to HOEPA that are classified as highcost mortgages from 0.09 percent of 

loans to 0.4 percent.236 Under the 

current HOEPA regulations, fewer than 

5 percent of small depository 

institutions are estimated to make any 

high-cost mortgages, and only about 0.2 

percent of small DIs are estimated to 

have made at least 10 high-cost 

mortgages in 2011 (Table 2). As 

expected, the estimates imply that the 

shares of lenders would have been 

larger if the revised thresholds had been 

in place.237 Nevertheless, by these 

estimates, high-cost mortgages would 

have remained a small fraction of 

closed-end originations by small DIs, 

and the majority of small DIs would 

have made no high-cost mortgages 

under the revised thresholds.238

TABLE 2—ESTIMATED NUMBER OF SMALL DIS THAT ORIGINATE ANY HIGH-COST MORTGAGES OR 10 OR MORE HIGHCOST MORTGAGES UNDER THE CURRENT AND REVISED HOEPA THRESHOLDS

Pre-Dodd-Frank Act Post-Dodd-Frank Act 

Estimated number that make any high-cost mortgages ......................................................... 501 1710 

Percent of small depository institutions ............................................................................ 4.9% 16.6% 

Estimated number that make 10 or more high-cost mortgages ............................................. 22 48 

Percent of small depository institutions ............................................................................ 0.2% 0.5% 

2. Costs to Small Depository Institutions 

From Changes in Closed-End 

Originations 

To gauge the potential effect of the 

Dodd-Frank Act amendments to HOEPA 

related to closed-end high-cost 

mortgages, the Bureau approximates the 

potential revenue loss to DIs that report 

in HMDA based on the estimated share, 

from HMDA, of home-secured loan 

originations that would be high-cost 

mortgages and the share of total income 

(for banks and thrifts) or total 

outstanding balances (for credit unions) 

accounted for by mortgages based on 

Call Report data.239

The Bureau estimates that high-cost 

closed-end mortgages account for just a 

fraction of revenue for most small DIs 

under both the current and revised 

thresholds (Table 3). The Bureau 

estimates that, post-Dodd-Frank Act, 6.8 

percent of small DIs might lose more 

than 1 percent of revenue, compared 

with 2.2 percent of small DIs under the 

current thresholds. At most, about two 

percent of small DIs would have 

revenue losses greater than 3 percent if 

these creditors chose to make no closedend high-cost mortgages. 


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240Seven of the 5,297 commercial banks and 

savings institutions with outstanding revolving 

mortgage receivables reported neither outstanding 

closed-end receivables nor originations in HMDA. 

Five of these were small depositories. 

241The share of high-cost HELOCs that meet the 

APR threshold arguably might be greater or less 

than the share for closed-end high-cost mortgages. 

On the one hand, HELOCs tend to be for smaller 

amounts, so points and fees may tend to be a larger 

percent of loan size. On the other hand, the Bureau 

believes that points and fees may be less prevalent 

for HELOCs than for closed-end mortgages. 

TABLE 3—ESTIMATED REVENUE SHARES ATTRIBUTABLE TO CLOSED-END HIGH-COST MORTGAGE LENDING FOR SMALL

DIS PRE- AND POST-DODD-FRANK ACT

Pre-Dodd-Frank Act Post-Dodd-Frank Act 

Number with HOEPA revenue share >1% a ............................................................................ 229 696 

Percent of small depositories ........................................................................................... 2.2% 6.8% 

Number with HOEPA revenue share >3% a ............................................................................ 76 225 

Percent of small depositories ........................................................................................... 0.7% 2.2% 

a Revenue shares for commercial banks and savings institutions are based on interest and fee income from loans secured by 1–4 family 

homes (including HELOCst, which cannot be distinguished) as a share of total interest and non-interest income. NCUA Call Report data for credit unions do not contain direct measures of income from mortgages and other sources, so the mortgage revenue share is assumed to be proportional to the dollar value of closed- and open-end real-estate loans and lines of credit as a share of total outstanding balances on loans and 

leases. 

3. Open-End HOEPA Lending by Small 

Depository Institutions 

Call Report data for banks and thrifts 

indicate that nearly all banks and thrifts 

that make home-equity lines of credit 

also make closed-end mortgages, so the 

estimated numbers of affected entities 

are essentially identical to those shown 

in the first two rows of Table 1 when 

considering institutions that make either 

open- or closed-end mortgages.240 Based 

on the credit union Call Report data, the 

Bureau estimates that 248 credit 

unions—all but two of which were 

small entities—originated HELOCs but 

no closed-end mortgages in 2011. Thus, 

the Bureau estimates that 4,426 credit 

unions and 3,486 small credit unions 

would potentially be affected by either 

the changes to closed-end thresholds or 

the extension of HOEPA to HELOCs. 

With regard to non-DIs, the Bureau 

estimates that few, if any, non-DIs that 

are small entities make HELOCs because 

non-DIs generally are less likely to be 

able to fund lines of credit and to have 

access to the payment system. 

4. Effect of the Dodd-Frank Act on 

Open-End HOEPA Lending 

HELOCs account for more than ten 

percent of the value of outstanding 

loans and leases for about 12–13 percent 

of small DIs, and they comprise more 

than one-quarter of outstanding 

balances on loans and leases for only 

about 2–3 percent of small DIs (Table 4). 

TABLE 4—HELOCS REPRESENT A MODEST PORTION OF MOST SMALL DEPOSITORIES’ LENDING

Percent of DIs a Number of DIs a

HELOCs > 10% of all loans/leases ............................................................................................................. 11.6–13.2 1,196–1,354 

HELOCs > 25% of all loans/leases ............................................................................................................. 2.3–3.0 233–304 

a First-lien HELOCs cannot be distinguished from other first liens in the credit union Call Report data. The ranges reflect alternative assumptions on the value of credit union’s HELOC receivables: the lower bound assumes that no first liens are HELOCs, and the upper bound assumes 

that all adjustable-rate first liens with an adjustment period of one year or less are HELOCs. 

5. Direct Costs Associated With the 

Dodd-Frank Act for Open-End HighCost Mortgages 

Data from SCF indicate that an 

estimated 3.2 percent of outstanding 

HELOCs would potentially meet the 

APR thresholds. The analysis of closedend mortgages for HMDA reporters 

imply that about 55 percent of loans that 

meet any HOEPA threshold meet the 

APR threshold. Thus, combining these 

estimates suggests that about 5.8 percent 

of HELOCs might meet the HOEPA 

thresholds.241

The SCF is the only source of 

nationally representative data on 

interest rates on consummated HELOCs 

that the Bureau is aware of, but the 

Bureau acknowledges that the SCF 

provides a small sample of HELOCs. 

Thus, in addition to the approximation 

error in extrapolating from closed-end 

mortgages to HELOCs due to data 

limitations, the SCF-based estimate of 

3.2 percent is likely imprecisely 

estimated but reflects the best available 

estimate given existing data. Given these 

caveats, the analysis considers how the 

conclusions would differ if one assumed 

that a greater fraction of HELOCs would 

meet the HOEPA thresholds. For 

context, as noted above, the Bureau 

estimates that roughly 0.4 percent of 

closed-end mortgages reported in 

HMDA would be high-cost mortgages, a 

percentage that is about one-fifteenth of 

the estimate for HELOCs, which might 

suggest that the HELOC estimate is 

conservative. 

The Bureau estimates that, if the 

rough estimate of 5.8 percent described 

above were accurate, about 600 small 

DIs (about six percent of small DIs) 

would experience a revenue loss that 

exceeds one percent (Table 5). If the 

actual proportion of high-cost HELOCs 

were a bit more than 50 percent higher 

than the Bureau estimates, i.e., at 9 

percent, then the estimated share of 

small depositories that might experience 

a 1 percent revenue loss increases to not 

quite 11 percent, and about 1.4 percent 

of small DIs might experience a loss 

greater than 3 percent of revenue by 

these estimates. Under the even more 

conservative assumption that 12 percent 

of HELOCs are high-cost mortgages (i.e., 

more than double the SCF-based 

estimate), about 14 percent of small DIs 

might be expected to lose greater than 

1 percent of revenue, and less than 3 

percent of DIs would have estimated 

losses that exceed 3 percent of revenue. 


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242This calculation is based on estimating the 

potential revenue loss on HELOCs for each 

depository based on information in the Call Report 

data. This estimate is combined with an estimate of 

losses on closed-end mortgages for HMDA 

reporters. The Bureau then estimates the probability 

that a DI that does not report in HMDA would have 

a combined revenue loss of more than one percent 

based on the institution type, assets, and the 

estimated potential percentage revenue loss on 

HELOCs. 

243The corresponding estimates for all DIs are 

comparable. 

244Over half of non-DI originators also broker 

loans. Revenue from brokering or other sources may 

mitigate the potential revenue losses of the DoddFrank Act amendments on those creditors. 

245Unlike the Call Report data for DIs, however, 

the Bureau cannot currently match the MCR data 

to HMDA to project HOEPA lending under the postDodd-Frank Act thresholds by non-DIs that do not 

report in HMDA. 

246The extrapolation is done based on the 

number of originations and whether the non-DI 

originated any HOEPA loans in 2011 under the 

current HOEPA thresholds. 

247These estimates are based in part on modeling 

revenue, and therefore the likelihood that a non-DI 

is a small entity, because data on revenue are 

missing for the majority of originators in the MCR 

data. 

TABLE 5—ESTIMATED SHARES OF REVENUE FROM POST-DODD-FRANK ACT HIGH-COST HELOCS FOR SMALL

DEPOSITORY INSTITUTIONS

Assumed share of post-DFA high-cost HELOCS 

5.8 percent 9 percent 12 percent 

Number with HOEPA revenue share >1% a .............................................................. 606 1,110 1,473 

Percent of small depository institutions .............................................................. 5.9% 10.8% 14.3% 

Number with HOEPA revenue share >3% a .............................................................. 31 139 300 

Percent of small depository institutions .............................................................. 0.3% 1.4% 2.9% 

aFirst-lien HELOCs cannot be distinguished from other first liens in the credit union Call Report data. The estimated revenue shares assume 

all adjustable-rate first liens with an adjustment period of one year or less are HELOCs (corresponding to the upper bound estimates in Table 4). 

For depository institutions, the 

potential loss in revenue due to the 

Dodd-Frank Act revisions to HOEPA 

comprises the losses from both closedand open-end lending. To assess the 

potential revenues losses for DIs from 

both sources, the Bureau first estimates 

the combined loss based on the 

assumption that 12 percent of HELOCs 

would be high-cost mortgages.242 Under 

this quite conservative assumption, the 

Bureau estimates that roughly 22 

percent of small DIs would lose more 

than one percent of revenue if these 

creditors made neither closed-end nor 

open-end high-cost mortgages, and 

fewer than 6 percent of small DIs would 

lose 3 percent of revenue under this 

scenario. The Bureau believes that this 

estimate provides an extremely 

conservative upper bound on the 

revenue losses that a small DI might 

incur for at least three reasons. First, the 

estimate assumes that all of these small 

DIs cease making all loans that will be 

covered; in fact, lenders may continue 

to extend these loans, especially if they 

constitute an important source of 

revenue. Second, rather than forgo 

making these loans entirely, lenders 

may offer alternative loans that do not 

exceed the HOEPA thresholds. This may 

result in some loss of revenue, relative 

to loans above the thresholds, but not all 

of the revenue associated with the loan. 

Finally, the SCF-based estimate is the 

best available estimate of the current 

share of HELOCs that might meet the 

HOEPA threshold, but it is likely quite 

imprecisely estimated. The Bureau 

notes that the share of HELOCs that 

might exceed the APR threshold in the 

three prior waves of the SCF was below 

2 percent, versus the 3.2 percent 

estimate from the 2010 SCF. If the share 

of HELOCs that might exceed the APR 

threshold is in fact 2 percent, that 

would substantially reduce the 

estimated share of small DIs that would 

experience 1 percent or 3 percent 

reductions in revenue. 

If instead 9 percent of HELOCs were 

high-cost mortgages—a proportion more 

than 50 percent greater than the 

estimate based on the SCF and therefore 

still conservative—the Bureau estimates 

approximately 19 percent of small DIs 

would have combined losses that 

exceed 1 percent of revenue, and about 

4 percent of small DIs would lose more 

than 3 percent of revenue.243

E. Impact of Revised Thresholds on 

Non-Depository Institutions Closed-End 

HOEPA Lending by Small NonDepository Institutions 

The Bureau estimates based on the 

MCR data that 2,294 out of 2,787 total 

non-depository mortgage originators are 

small entities (Table 1). According to 

the MCR data, many non-DI creditors 

originate just a few loans. Just less than 

one-third of nonbank creditors are 

estimated to have originated ten or 

fewer loans, for example, and over 40 

percent of non-DIs made at most 25 

loans. These fractions are even greater 

for small non-DIs as well.244

The Bureau estimates that the number 

of high-cost mortgages originated by 

non-DIs that report in HMDA would 

increase from fewer than 200 loans 

under the current thresholds to over 

12,000 if the post-Dodd-Frank Act 

thresholds applied.245 The Bureau notes 

that this is a substantial increase. 

However, even with this large estimated 

increase in the absolute number of highcost mortgages, the Bureau estimates 

that this number corresponds to less 

than 0.8 percent of all closed-end credit 

transactions potentially subject to 

HOEPA coverage originated by non-DIs 

that report in HMDA. Moreover, roughly 

80 percent of the estimated increase is 

driven by two creditors that made no 

loans in 2011 that were flagged as highcost mortgages in HMDA but that 

account for the majority of the new 

high-cost mortgages. Three additional 

creditors account for another roughly 5 

percent of the new high-cost mortgages. 

The majority of originations by these 

five creditors were mortgages on 

manufactured homes, particularly 

purchase-money mortgages. Based on 

the number of originations, the Bureau 

believes that the largest creditors for 

manufactured homes are not small 

entities. The increase in the number of 

loans covered therefore very likely 

overstates the impact on small entities. 

In estimating the effects of the DoddFrank Act revisions to HOEPA on nonDIs’ revenues, the Bureau assumes that 

the share of revenue from HOEPA 

lending is the same as the share of 

HOEPA originations for a given creditor. 

Thus, to examine the impact of the final 

rule on revenue for non-DIs, the Bureau 

estimates the probability that high-cost 

mortgages comprise more than 1 

percent, 3 percent, or 5 percent of all 

originations for non-DIs that report in 

the 2010 HMDA data and extrapolates 

these estimates for non-DIs that do not 

report in HMDA.246

Under this assumption, the MCR data 

indicate that high-cost mortgages 

accounted for more than 1 percent of 

revenue for about 5 percent of small 

non-DIs in 2011 (Table 6) and for more 

than 5 percent of revenue for a slightly 

smaller fraction.247 Roughly one fifth of 


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248The extrapolation from non-DIs that report in 

HMDA to non-DIs that do not report in HMDA 

assumes that patterns of lending among nonreporters are similar to patterns at reporters that 

have comparable originations and that did or did 

not make high-cost mortgages. The extrapolation is 

subject to the caveat that, in classifying lenders 

based on origination volumes, it does not 

distinguish between originations of purchasemoney mortgages compared with refinance or 

home-improvement loans. As noted, the post-DoddFrank Act revisions to HOEPA may particularly 

increase the share of high-cost mortgages among 

creditors that specialize in home purchase loans, 

including creditors that specialize in loans for 

purchasing manufactured homes. 249For context, the comparable shares of loans 

that allowed for negative amortization in the 1989– 

2004 SCFs varied between 1.3–2.3 percent of loans, 

and the 2007 SCF estimate was 0.3 percent. These 

percentages are based on the share of mortgage 

borrowers who said their payment did not change 

when the interest rate on their adjustable-rate 

mortgage changed. 

small non-DIs are estimated to have 

more than1 percent of revenue from 

high-cost mortgages under the new APR 

and points-and-fees thresholds, and 

about 11 percent and 7 percent of small 

non-DIs are estimated to have more than 

3 percent of revenue or 5 percent of 

revenue, respectively, from high-cost 

mortgages.248

TABLE 6—ESTIMATED SHARES OF HIGH-COST MORTGAGE ORIGINATIONS FOR SMALL NON-DIS PRE- AND POST-DODDFRANK ACT a

Pre-DFA Post-DFA 

Number Percent Number Percent 

High-cost mortgages > 1% of all loans ................................... 116 5.1 461 20.1 

High-cost mortgages > 3% of all loans ................................... 116 5.1 258 11.3 

High-cost mortgages > 5% of all loans ................................... 115 5.0 161 7.0 

a Number and percent of post-Dodd-Frank Act HOEPA originations are projected based on estimated post-Dodd-Frank Act originations of highcost mortgages by HMDA-reporting non-DIs, conditional on total originations in 2011 and on origination of any pre-Dodd-Frank Act high-cost 

mortgages in 2011. In particular, in projecting the probability that a creditor made more than a given percent of high-cost mortgages post-DoddFrank Act, the Bureau controls for whether the creditor made any pre-Dodd-Frank Act high-cost mortgages in 2011. To estimate the number of 

small entities, revenue for entities that did not report revenue is estimated based on the dollar value and number of loans originated and the dollar value and number of loans brokered. 

F. TILA and RESPA Counseling-Related 

Provisions 

The final rule also implements two 

Dodd-Frank Act provisions related to 

homeownership counseling. The Bureau 

expects that neither of these provisions 

will result in a sizable revenue loss for 

small creditors. The first requires that a 

creditor obtain sufficient documentation 

to demonstrate that a borrower received 

homeownership counseling before 

extending a negative-amortization 

mortgage to a first-time borrower. This 

requirement will likely apply to only a 

small fraction of mortgages: only 0.8 

percent of first-liens in the 2010 SCF 

reportedly had negative-amortization 

features, and by definition this is an 

upper bound on the share of negativeamortization first-lien mortgages held by 

first-time borrowers.249 Moreover, the 

provision only requires a creditor to 

obtain documentation, which the 

Bureau expects to be a comparatively 

low burden. For these reasons, the 

Bureau believes that the burden to 

creditors would be minimal, as noted in 

Parts VII and IX. 

The second provision is a new 

requirement that lenders provide loan 

applicants a list of homeownership 

counseling agencies from either a Web 

site maintained by the Bureau or data 

made available by the Bureau or HUD 

for lenders to use in complying with 

this requirement. Under the final rule, 

this requirement would apply to all 

applicants for a federally related 

mortgage (except for applicants for a 

reverse mortgage transaction or a 

mortgage secured by a timeshare) and so 

would apply to a large number of 

applications—under the Bureau’s 

estimation methodology in analyzing 

the paper work burden, nearly 15 

million applications for mortgages and 

HELOCs. Nevertheless, the Bureau 

believes the burden is likely to be 

minimal—less than $ 1 per 

application—because it should be 

straightforward to obtain and to provide 

the required information from the Web 

site or data made available to the lender. 

Further, the list will likely be provided 

with other documents that the applicant 

must receive from the lender. 

G. Conclusion 

The Bureau estimates that, under the 

final rule, only a small fraction of 

depository institutions would be 

expected to lose more than three or even 

more than one percent of revenue even 

under the conservative assumption that 

creditors forgo making any high-cost 

mortgages. For example, under the 

assumption that 9 percent of HELOCs 

fell within the HOEPA thresholds—a 

proportion more than 50 percent higher 

than the estimate based on the SCF and 

therefore quite conservative—the 

Bureau estimates that about 19 percent 

of small DIs would have combined 

losses that exceed one percent of 

revenue, and about 4 percent of small 

DIs would lose more than three percent 

of revenue. In all cases, the TILA and 

RESPA counseling provisions noted 

above would have little impact on these 

impact estimates. 

For non-depository institutions, about 

20 percent of small non-DIs are 

estimated to have more than 1 percent 

of revenue from high-cost mortgages 

under the new APR and points-and-fees 

thresholds, and about 11 percent of 

small non-DIs are estimated to have 

more than three percent of revenue from 

high-cost mortgages.250 In all cases, the 

TILA and RESPA counseling provisions 

noted above would have little impact on 

these impact estimates. 

Certification 

Accordingly, the undersigned certifies 

that this rule will not have a significant 

economic impact on a substantial 

number of small entities. 

IX. Paperwork Reduction Act 

Certain provisions of this final rule 

contain ‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3501 et seq.) (Paperwork 

Reduction Act or PRA). Under the PRA, 

the Bureau may not conduct or sponsor 

a collection of information unless OMB 

approved the collection under the PRA 

and the OMB control number obtained 

is displayed. Further, notwithstanding 

any other provision of law, no person is 

required to comply with, or is subject to 

any penalty for failure to comply with, 

a collection of information does not 

display a currently valid OMB control 

number (44 U.S.C. 3512). The Bureau’s 

OMB control number for Regulation X is 


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6958 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

251For purposes of this PRA analysis, references 

to ‘‘creditors’’ or ‘‘lenders’’ shall be deemed to refer 

collectively to commercial banks, savings 

institutions, credit unions, and mortgage companies 

(i.e., non-depository lenders), unless otherwise 

stated. Moreover, reference to ‘‘respondents’’ shall 

generally mean all categories of entities identified 

in the sentence to which this footnote is appended, 

except as otherwise stated or if the context indicates 

otherwise. 

3170–0016 and for Regulation Z is 

3170–0015. 

This Final Rule contains an 

information collection requirement that 

has not been approved by the OMB and, 

therefore, is not effective until OMB 

approval is obtained. The unapproved 

information collection requirement is 

contained in § 1024.20 of the regulation. 

The Bureau will publish a separate 

notice in the Federal Register 

announcing the submission of this 

information collection requirement to 

OMB as well as OMB’s action on this 

submission including the OMB control 

number and expiration date. The Final 

Rule also comprises information 

collections contained in §§ 1026.32, 

1026.34(a)(5), and 1026.36(k) of the 

regulation that have been pre-approved. 

On August 15, 2012, notice of the 

proposed rule was published in the 

Federal Register (FR). The Bureau 

invited comment on: 

(1) Whether the proposed collection 

of information is necessary for the 

proper performance of the Bureau’s 

functions, including whether the 

information has practical utility; 

(2) The accuracy of the Bureau’s 

estimate of the burden of the proposed 

information collection, including the 

cost of compliance; 

(3) Ways to enhance the quality, 

utility, and clarity of the information to 

be collected; and 

(4) Ways to minimize the burden of 

information collection on respondents, 

including through the use of automated 

collection techniques or other forms of 

information technology. 

The comment period for the final rule 

expired on October 15, 2012. 

In conjunction with the proposal, the 

Bureau received comments on the 

merits of various aspects of the final 

rule, including the burden of 

compliance generally. These comments 

relate to core issues in the proposal, and 

the Bureau’s consideration of these 

comments is discussed above. Several 

commenters stated generally that the 

Bureau underestimated the compliance 

burden. However, very few comments 

specifically addressed specific 

estimates, assumptions or calculations 

used to derive the paperwork burden 

estimates for the Bureau’s amendments 

to Regulation Z. One commenter did 

provide an alternative specific 

estimate—6400 hours for each lender— 

of the time cost for legal and compliance 

staff to review the rule (including both 

the Regulation X and Regulation Z 

components). The commenter did not 

detail the basis for this estimate, and the 

Bureau believes it overestimates, 

possibly to a substantial degree, the time 

required for legal and compliance staff 

to review the rule. The Bureau also 

notes that its methodology estimating 

the time cost of reviewing regulations 

bears similarities to those taken by other 

agencies. The Bureau is largely restating 

its burden estimates from the proposed 

rule for Regulation Z, though, to provide 

better public information, the analysis 

includes revised estimates that reflect, 

e.g., updated data. 

The Bureau also received a few 

comments addressing the paperwork 

burden of providing a list of 

homeownership counseling 

organizations in connection with each 

mortgage loan application, as required 

by the Bureau’s amendments to 

Regulation X. For example, one large 

bank stated that the new counselor list 

requirement would require manually 

generating a separate list for each 

applicant. The commenter argued that 

hundreds of hours per day would be 

required to generate and provide the 

disclosure lists and that the proposal 

could result in as many as 42,000 

versions of the disclosure. Other 

commenters generally asserted that the 

Bureau underestimated the paperwork 

burden that will accompany generating 

and providing a counselor list in 

connection with every mortgage 

application. As discussed in the 

analysis of § 1024.20 above, some 

commenters provided suggestions for 

minimizing their compliance burden, 

which also impact their paperwork 

burden. The Bureau is modifying 

§ 1024.20 in response to these 

comments by, for example, exempting 

some types of loans from the list 

requirement, reducing uncertainty 

regarding compliance with the 

requirement for lenders through the use 

the Web site portal that the Bureau will 

provide, and giving lenders the option 

to comply through the use of data they 

can import into their systems to create 

the list. 

This final rule amends 12 CFR part 

1024 (Regulation X) and 12 CFR part 

1026 (Regulation Z). Both Regulations X 

and Z currently contain collections of 

information approved by OMB. RESPA 

and Regulation X are intended to 

provide consumers with greater and 

timelier information on the nature and 

costs of the residential real estate 

settlement process. As previously 

discussed, the final rule amends the 

information collections currently 

required by Regulation X by requiring 

that lenders distribute to applicants for 

most federally related mortgage loans a 

list of homeownership counseling 

organizations located in the area of the 

applicant. See the section-by-section 

analysis to § 1024.20, above. TILA and 

Regulation Z are intended to ensure 

effective disclosure of the costs and 

terms of credit to consumers. As 

previously discussed, the final rule 

amends the information collections 

currently required by Regulation Z by 

expanding the categories of loans for 

which a special HOEPA disclosure is 

required and requiring creditors to 

receive and review confirmation that 

prospective borrowers of high-cost 

mortgages and, in the case of first-time 

borrowers, negatively amortizing 

mortgage loans have received required 

pre-loan counseling. See generally the 

section-by-section analysis to 

§ 1026.32(a)(1) and (c), § 1026.34(a)(5), 

and § 1026.36(k). 

The information collection in the final 

rule is required to provide benefits for 

consumers and is mandatory. See 15 

U.S.C. 1601 et seq.; 12 U.S.C. 2601 et 

seq. Because the Bureau does not collect 

any information under the final rule, no 

issue of confidentiality arises. The likely 

respondents would be depository 

institutions (i.e., commercial banks/ 

savings institutions and credit unions) 

and non-depository institutions (i.e., 

mortgage companies or other non-bank 

lenders) subject to Regulation X or the 

high-cost mortgage requirements or 

negative amortization loan counseling 

requirements of Regulation Z.251

Under the final rule, the Bureau 

accounts for the entire paperwork 

burden for respondents under 

Regulation X. The Bureau generally also 

accounts for the paperwork burden 

associated with Regulation Z for the 

following respondents pursuant to its 

administrative enforcement authority: 

insured depository institutions with 

more than $10 billion in total assets, 

their depository institution affiliates, 

privately insured credit unions, and 

certain non-depository lenders. The 

Bureau and the FTC generally both have 

enforcement authority over nondepository institutions for Regulation Z. 

Accordingly, the Bureau has allocated to 

itself half of the estimated burden to 

non-depository institutions, and the 

Bureau has also allocated to itself half 

of the estimated burden for privately 

insured credit unions. Other Federal 

agencies are responsible for estimating 

and reporting to OMB the total 

paperwork burden for the institutions 

for which they have administrative 

enforcement authority. They may, but 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6959 

252There are 153 depository institutions (and 

their depository affiliates) that are subject to the 

Bureau’s administrative enforcement authority. In 

addition there are 146 privately insured credit 

unions that are subject to the Bureau’s 

administrative enforcement authority. For purposes 

of this PRA analysis, the Bureau’s respondents 

under Regulation Z are 136 depository institutions 

that originate either open or closed-end mortgages; 

90 privately insured credit unions that are 

estimated to originate either open- or closed-end 

mortgages; and an estimated 2,787 non-depository 

institutions that are subject to the Bureau’s 

administrative enforcement authority. Unless 

otherwise specified, all references to burden hours 

and costs for the Bureau respondents for the 

collection under Regulation Z are based on a 

calculation of half of the estimated 2,787 

nondepository institutions and 90 privately insured 

credit unions. 

253The burden-hour estimate of training assumes 

that a total of 30 minutes is required for training 

on all aspects of the proposed rule. For simplicity, 

these time estimates assume that an equal amount 

of time is spent on each of the four provisions, but 

the Bureau expects the proportion of time allocated 

to each topic in the 30 minute total training time 

may vary. The estimation methodology also 

assumes that a trainer will spend an hour for every 

ten hours of trainee time. 

254The estimated ongoing costs reflect the 

Bureau’s expectation that producing the list of 

housing counseling organizations will require only 

a limited number of pieces of information and that 

the required information will be readily obtainable 

(e.g., the ZIP code of the applicant). In the proposed 

rule, the Bureau estimated the ongoing costs under 

the assumption that the housing counseling 

organization disclosure would be produced and 

provided by a loan officer. In contrast, the estimated 

ongoing costs of providing the disclosure in the 

final rule are based on the assumption that the 

disclosure is prepared by a loan processor. 

Accordingly, the estimated one-time training costs 

associated with this information collection reflects 

training costs for not only loan officers (as in the 

proposed rule) but also loan processors. The Bureau 

believes it is more likely that a loan processor will 

produce and provide the disclosure along with 

other documents that are typically prepared by loan 

processors and provided to mortgage applicants. 

255 In the case of high-cost mortgages, TILA 

defines ‘‘creditor’’ as a person that, in any 12 month 

period, originates two or more high-cost mortgages, 

or one or more high-cost mortgage through a broker. 

For purposes of determining the universe of 

relevant providers for this provision, the Bureau 

does not attempt to calculate how many of the 

respondents that have made HOEPA loans in the 

past made only one HOEPA loan. Thus, the number 

of relevant providers used to calculate the 

paperwork burden for this provision may be an 

overestimate. 

are not required to, use the Bureau’s 

burden estimation methodology. 

Using the Bureau’s burden estimation 

methodology, the total estimated burden 

under the changes to Regulation X for 

all of the nearly 15,000 institutions 

subject to the final rule, would be 

approximately 28,000 hours for onetime changes and nearly 250,000 hours 

annually. Using the Bureau’s burden 

estimation methodology, the total 

estimated burden under the changes to 

Regulation Z for the roughly 3,000 

institutions, including Bureau 

respondents,252 that are estimated to 

make high-cost mortgages subject to the 

final rule would be approximately 

23,000 hours of one-time costs and 

about 1,800 hours annually. 

The aggregate estimates of total 

burdens presented in this part VIII are 

based on estimated costs that are 

weighted averages across respondents. 

The Bureau expects that the amount of 

time required to implement each of the 

changes for a given institution may vary 

based on the size, complexity, and 

practices of the respondent. 

A. Information Collection Requirements 

The Bureau believes the following 

aspects of the final rule would be 

information collection requirements 

under the PRA. 

1. Provision of List of Homeownership 

Counselors 

The Bureau estimates one-time and 

ongoing costs to respondents of 

complying with the housing counselor 

disclosure requirements in § 1024.20 as 

follows. 

One-time costs. The Bureau estimates 

that covered persons would incur onetime costs associated with reviewing the 

regulation and training relevant 

employees. Specifically, the Bureau 

estimates that, for each covered person, 

one attorney and one compliance officer 

would each take 7.5 minutes (15 

minutes in total) to read and review the 

sections of the regulation that describe 

the housing counseling disclosures, 

based on the length of the sections. The 

Bureau also estimates that each loan 

officer or other loan originator and an 

equal number of loan processors will 

need to receive 7.5 minutes of training 

concerning the disclosures.253 The 

Bureau estimates the total one-time 

costs across all relevant providers of 

reviewing the relevant portions of the 

regulation and conducting training to be 

about 28,000 hours and $1,200,000, or 

about $240,000 per year if annualized 

over five years. Table 1, below, shows 

the Bureau’s estimate of the total onetime paperwork burden to all 

respondents to comply with the housing 

counselor disclosure requirements in 

§ 1024.20. 

Ongoing costs. On an ongoing basis, 

the Bureau estimates that producing and 

providing the required list of housing 

counseling organizations to an applicant 

will take approximately one minute and 

that the cost of producing the required 

disclosures (e.g., paper and printing 

costs) will be $0.10 per disclosure.254

The estimated ongoing paperwork 

burden to all Bureau respondents taken 

together is approximately 246,000 

burden hours and about $7.8 million 

annually, or less than 55 cents per loan 

application. Table 2, below, shows the 

Bureau’s estimates of the total ongoing 

annual paperwork burden to all Bureau 

respondents to comply with the 

requirement to provide mortgage loan 

applicants with a list of homeownership 

counseling organizations. 

2. Receipt of Certification of Counseling 

for High-Cost Mortgages 

The Bureau estimates one-time and 

ongoing costs to respondents of 

complying with the requirement to 

receive the high-cost mortgage 

counseling certification, as required by 

§ 1026.34(a)(5)(i) and (iv), as follows. 

The Bureau estimates that 40 depository 

institutions and 436 non-depository 

institutions subject to the Bureau’s 

administrative enforcement authority 

would originate high-cost mortgages.255

The Bureau estimates that this universe 

of relevant providers would each incur 

a one-time burden of 24 minutes for 

compliance or legal staff to read and 

review the relevant sections of the 

regulation (12 minutes for each of two 

compliance or legal staff members). The 

Bureau also estimates that this universe 

of relevant providers would incur a onetime burden of 7.5 minutes each to 

conduct initial training for each loan 

officer or other loan originator 

concerning the receipt of certification of 

counseling. The Bureau estimates that 

the total one-time burden across all 

relevant providers of complying with 

the high-cost mortgage housing 

counseling certification requirement 

would be about 1,400 hours and roughly 

$68,000. 

On an ongoing basis, the Bureau 

estimates that respondents would incur 

a burden of 2 minutes per origination to 

receive and review the certification 

form. In addition, the Bureau estimates 

that, on average, a creditor would incur 

a cost of $0.025 to retain the 

certification form. The Bureau estimates 

that the total ongoing burden across all 

relevant providers of complying with 

the high-cost mortgage housing 

counseling certification requirement 

would be about 500 hours and $25,000 

annually. The Bureau’s estimates of the 

total one-time and ongoing annual 

paperwork burden to all Bureau 

respondents to comply with the 

requirement to receive certification of 

high-cost mortgage counseling are set 

forth in Tables 1 and 2, below. 


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6960 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

3. Receipt of Documentation of 

Counseling for Negative Amortization 

Loans 

The Bureau does not separately 

estimate the paperwork burden to 

respondents of complying with the 

requirement to receive documentation 

that first-time borrowers in negatively 

amortizing loans have received pre-loan 

homeownership counseling, as required 

by § 1026.36(k). The Bureau believes 

that any such burden will be minimal. 

The universe of respondents for this 

provision is negligible. Based on data 

from the 2010 Survey of Consumer 

Finances, the Bureau estimates that only 

0.8 percent of all outstanding mortgages 

in 2010 had negative amortization 

features. This estimate is an upper 

bound on the share of negatively 

amortizing loans held by first-time 

borrowers. Further, the Bureau believes 

that few if any mortgages originated 

currently could potentially negatively 

amortize. Moreover, the Bureau believes 

that the burden to respondents of 

complying with the provision would be 

minimal since the required elements of 

the documentation are minimal, and the 

provision would require creditors only 

to receive and retain this documentation 

as part of the loan file. 

4. HOEPA Disclosure Form 

The Bureau believes that respondents 

will incur certain one-time and ongoing 

paperwork burden pursuant to 

§ 1026.32(a)(1), which implements 

Dodd-Frank’s extension of HOEPA 

coverage to purchase money mortgage 

loans and open-end credit plans. As a 

result of § 1026.32(a)(1), respondents 

that extend purchase money mortgage 

loans or open-end credit plans that are 

high-cost mortgages would be required 

to provide borrowers the special HOEPA 

disclosure required by § 1026.32(c). The 

Bureau has identified the following 

paperwork burdens in connection with 

§ 1026.32(a)(1). 

a. Revising the HOEPA Disclosure Form 

First, the Bureau estimates the burden 

to creditors originating high-cost 

purchase money mortgage loans and 

high-cost HELOCs of revising the 

HOEPA disclosure required by 

§ 1026.32(c). The Bureau believes that 

respondents making high-cost purchase 

money mortgage loans would incur 

minimal or no additional burden, 

because the Bureau expects that these 

respondents would provide the same 

HOEPA disclosures used for refinance 

and closed-end home-equity loans 

subject to § 1026.32. 

As discussed in the section-by-section 

analysis to § 1026.32(c), however, the 

calculation of certain of the required 

disclosures differs between the openend and closed-end credit contexts. 

Therefore, the Bureau separately 

estimates the burden for revising the 

HOEPA disclosure for respondents 

likely to make high-cost HELOCs. The 

Bureau estimates that 37 depository 

institutions for which it has 

administrative enforcement authority, 

including 3 privately insured credit 

unions, would be likely to originate a 

high-cost HELOC. Because nondepository institutions are generally less 

able to fund lines of credit and to have 

access to the payment system, the 

Bureau believes that few, if any, nondepository institutions originate openend credit plans. 

The Bureau believes that respondents 

that are likely to make high-cost 

HELOCs would incur a one-time 

burden, but no ongoing burden, in 

connection with revising the HOEPA 

disclosure. The one-time burden 

includes a total estimated burden of 

about 1,800 hours across all relevant 

providers to update their software and 

information technology systems to 

generate the HOEPA disclosure form 

appropriate for open-end credit plans. 

This estimate combines the burdens for 

large creditors and a fraction of smaller 

creditors whom the Bureau assumes 

would develop the necessary software 

and systems internally. The Bureau 

assumes that the remainder of smaller 

creditors would rely on third-party 

vendors to obtain a revised disclosure 

form for high-cost HELOCs; these small 

creditors are assumed to incur the dollar 

costs passed on from a vendor that 

offers the product but no hours burden. 

In addition, the Bureau assumes that 

respondents that are likely to make 

high-cost HELOCs would spend 7.5 

minutes each training a subset of loan 

officers or other loan originators that 

may make such loans. The Bureau 

estimates that the training burden across 

all relevant providers would total nearly 

1,100 hours. The total one-time burden 

across all relevant providers to revise 

the HOEPA disclosure is therefore about 

2,900 hours. The Bureau estimates the 

corresponding dollar-cost burden is 

roughly $170,000, corresponding to 

about $34,000 per year for all 

respondents if this one-time cost were 

annualized over five years. The 

estimated total one-time burden is 

summarized in Table 1, below. 

b. Providing the HOEPA Disclosure 

Form 

Respondents that make any high-cost 

mortgage would incur costs to review 

the provisions of the regulation related 

to the HOEPA disclosure. These costs 

could vary considerably across 

creditors. A creditor that currently 

makes high-cost mortgages might be 

expected to have lower costs to review 

the relevant section of the regulation 

than would a creditor that has not 

previously made high-cost mortgages 

but now expects to make such loans as 

a result of, for example, the revised 

triggers and extension of HOEPA to 

purchase money mortgage loans and 

HELOCs. The Bureau’s estimates are 

averages of these costs across lenders. 

One-time costs. Based on the length of 

the section, the Bureau estimates the 

one-time burden across all relevant 

providers to read and review the 

HOEPA disclosure provision and to 

obtain any necessary legal guidance 

would be 30 minutes for each of two 

legal or compliance staff members. 

Across all relevant providers, the 

Bureau assumes an average one-time 

burden of 7.5 minutes each per loan 

officer or other loan originator for initial 

training concerning the disclosure. 

Under these assumptions, the total onetime burden across all relevant 

providers is estimated to be about 1,500 

hours and approximately $81,000, or 

somewhat greater than $16,000 annually 

if the costs were divided equally over 

five years. 

Ongoing costs. On an ongoing basis, 

the Bureau estimates that producing and 

providing the required disclosures to an 

applicant will take approximately 2 

minutes and that the cost of producing 

the required disclosures will be $0.10 

per disclosure. The Bureau assumes 

that, on average, the cost of retaining a 

copy of the disclosure for recordkeeping 

will cost $0.025 per disclosure. The 

Bureau estimates that, taken together, 

the production, provision, and recordretention costs for across all relevant 

providers would total approximately 

500 hours and about $27,000 annually. 

TABLE 1—ONE-TIME COSTS FOR ALL CFPB RESPONDENTS

Information collection Hours Dollars 

Provision of list of housing counselors ........................................................................................................ 28,000 1,200,000 

Receipt of certification of counseling for high-cost mortgages ................................................................... 1,400 68,000 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6961 

TABLE 1—ONE-TIME COSTS FOR ALL CFPB RESPONDENTS—Continued 

Information collection Hours Dollars 

Revision of HOEPA disclosure for applicability to open-end credit ............................................................ 2,900 170,000 

Provision of HOEPA disclosure ................................................................................................................... 1,500 81,000 

Total burden, All Respondents ............................................................................................................. 34,000 1,520,000 

TABLE 2—ONGOING COSTS FOR ALL CFPB RESPONDENTS

Information collection Hours Dollars 

Provision of list of housing counselors ........................................................................................................ 246,000 7,790,000 

Receipt of certification of counseling for high-cost mortgages ................................................................... 500 25,000 

Revision of HOEPA disclosure for applicability to open-end credit ............................................................ .............................. ..............................

Provision of special HOEPA disclosure ...................................................................................................... 500 27,000 

Total annual burden, All Respondents ................................................................................................. 247,000 7,840,000 

The Bureau has a continuing interest 

in the public’s opinions of our 

collections of information. At any time, 

comments regarding the burden 

estimate, or any other aspect of this 

collection of information, including 

suggestions for reducing the burden, 

may be sent to: The Office of 

Management and Budget (OMB), 

Attention: Desk Officer for the 

Consumer Financial Protection Bureau, 

Office of Information and Regulatory 

Affairs, Washington, DC 20503, or by 

the Internet to http:// 

oira_submission@omb.eop.gov, with 

copies to the Bureau at the Consumer 

Financial Protection Bureau (Attention: 

PRA Office), 1700 G Street NW., 

Washington, DC 20552, or by the 

Internet to CFPB_Public_PRA@cfpb.gov. 

List of Subjects 

12 CFR Part 1024 

Condominiums, Consumer protection, 

Housing, Mortgagees, Mortgages, 

Mortgage servicing, Recordkeeping 

requirements, Reporting. 

12 CFR Part 1026 

Advertising, Consumer protection, 

Mortgages, Reporting and recordkeeping 

requirements, Truth in lending. 

Authority and Issuance 

For the reasons stated in the 

preamble, the Bureau amends 

Regulation X, 12 CFR part 1024, and 

Regulation Z, 12 CFR part 1026, as set 

forth below: 

PART 1024—REAL ESTATE 

SETTLEMENT PROCEDURES ACT 

(REGULATION X) 

■ 1. The authority citation for part 1024 

continues to read as follows: 

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

2609, 2617, 5512, 5581. 

■ 2. Section 1024.20 is added to read as 

follows: 

§ 1024.20 List of homeownership 

counseling organizations. 

(a) Provision of list. (1) Except as 

otherwise provided in this section, not 

later than three business days after a 

lender, mortgage broker, or dealer 

receives an application, or information 

sufficient to complete an application, 

the lender must provide the loan 

applicant with a clear and conspicuous 

written list of homeownership 

counseling organizations that provide 

relevant counseling services in the loan 

applicant’s location. The list of 

homeownership counseling 

organizations distributed to each loan 

applicant under this section shall be 

obtained no earlier than 30 days prior to 

the time when the list is provided to the 

loan applicant from either: 

(i) The Web site maintained by the 

Bureau for lenders to use in complying 

with the requirements of this section; or 

(ii) Data made available by the Bureau 

or HUD for lenders to use in complying 

with the requirements of this section, 

provided that the data is used in 

accordance with instructions provided 

with the data. 

(2) The list of homeownership 

counseling organizations provided 

under this section may be combined and 

provided with other mortgage loan 

disclosures required pursuant to 

Regulation Z, 12 CFR part 1026, or this 

part unless prohibited by Regulation Z 

or this part. 

(3) A mortgage broker or dealer may 

provide the list of homeownership 

counseling organizations required under 

this section to any loan applicant from 

whom it receives or for whom it 

prepares an application. If the mortgage 

broker or dealer has provided the 

required list of homeownership 

counseling organizations, the lender is 

not required to provide an additional 

list. The lender is responsible for 

ensuring that the list of homeownership 

counseling organizations is provided to 

a loan applicant in accordance with this 

section. 

(4) If the lender, mortgage broker, or 

dealer does not provide the list of 

homeownership counseling 

organizations required under this 

section to the loan applicant in person, 

the lender must mail or deliver the list 

to the loan applicant by other means. 

The list may be provided in electronic 

form, subject to compliance with the 

consumer consent and other applicable 

provisions of the Electronic Signatures 

in Global and National Commerce Act 

(E-Sign Act), 15 U.S.C. 7001 et seq. 

(5) The lender is not required to 

provide the list of homeownership 

counseling organizations required under 

this section if, before the end of the 

three-business-day period provided in 

paragraph (a)(1) of this section, the 

lender denies the application or the loan 

applicant withdraws the application. 

(6) If a mortgage loan transaction 

involves more than one lender, only one 

list of homeownership counseling 

organizations required under this 

section shall be given to the loan 

applicant and the lenders shall agree 

among themselves which lender will 

comply with the requirements that this 

section imposes on any or all of them. 

If there is more than one loan applicant, 

the required list of homeownership 

counseling organizations may be 

provided to any loan applicant with 

primary liability on the mortgage loan 

obligation. 

(b) Open-end lines of credit (homeequity plans) under Regulation Z. For a 

federally related mortgage loan that is a 

home-equity line of credit subject to 

Regulation Z, 12 CFR 1026.40, a lender 

or mortgage broker that provides the 


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6962 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

loan applicant with the list of 

homeownership organizations required 

under this section may comply with the 

timing and delivery requirements set 

out in either paragraph (a) of this 

section or 12 CFR 1026.40(b). 

(c) Exemptions. (1) Reverse mortgage 

transactions. A lender is not required to 

provide an applicant for a reverse 

mortgage transaction subject to 12 CFR 

1026.33(a) the list of homeownership 

counseling organizations required under 

this section. 

(2) Timeshare plans. A lender is not 

required to provide an applicant for a 

mortgage loan secured by a timeshare, 

as described under 11 U.S.C. 101(53D), 

the list of homeownership counseling 

organizations required under this 

section. 

PART 1026—TRUTH IN LENDING 

(REGULATION Z) 

■ 3. 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 A—General 

■ 4. Section 1026.1 is amended by 

revising paragraph (d)(5) to read as 

follows: 

§ 1026.1 Authority, purpose, coverage, 

organization, enforcement, and liability. 

* * * * * 

(d) * * * 

(5) Subpart E contains special rules 

for mortgage transactions. Section 

1026.32 requires certain disclosures and 

provides limitations for closed-end 

credit transactions and open-end credit 

plans that have rates or fees above 

specified amounts or certain 

prepayment penalties. Section 1026.33 

requires special disclosures, including 

the total annual loan cost rate, for 

reverse mortgage transactions. Section 

1026.34 prohibits specific acts and 

practices in connection with high-cost 

mortgages, as defined in § 1026.32(a). 

Section 1026.35 prohibits specific acts 

and practices in connection with closedend higher-priced mortgage loans, as 

defined in § 1026.35(a). Section 1026.36 

prohibits specific acts and practices in 

connection with an extension of credit 

secured by a dwelling. 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

■ 5. Section 1026.31 is amended by 

revising paragraph (c)(1) and adding 

paragraph (h) to read as follows: 

§ 1026.31 General rules. 

* * * * * 

(c) Timing of disclosure. (1) 

Disclosures for high-cost mortgages. The 

creditor shall furnish the disclosures 

required by § 1026.32 at least three 

business days prior to consummation or 

account opening of a high-cost mortgage 

as defined in § 1026.32(a). 

(i) Change in terms. After complying 

with this paragraph (c)(1) and prior to 

consummation or account opening, if 

the creditor changes any term that 

makes the disclosures inaccurate, new 

disclosures shall be provided in 

accordance with the requirements of 

this subpart. 

(ii) Telephone disclosures. A creditor 

may provide new disclosures required 

by paragraph (c)(1)(i) of this section by 

telephone if the consumer initiates the 

change and if, prior to or at 

consummation or account opening: 

(A) The creditor provides new written 

disclosures; and 

(B) The consumer and creditor sign a 

statement that the new disclosures were 

provided by telephone at least three 

days prior to consummation or account 

opening, as applicable. 

(iii) Consumer’s waiver of waiting 

period before consummation or account 

opening. The consumer may, after 

receiving the disclosures required by 

this paragraph (c)(1), modify or waive 

the three-day waiting period between 

delivery of those disclosures and 

consummation or account opening if the 

consumer determines that the extension 

of credit is needed to meet a bona fide 

personal financial emergency. To 

modify or waive the right, the consumer 

shall give the creditor a dated written 

statement that describes the emergency, 

specifically modifies or waives the 

waiting period, and bears the signature 

of all the consumers entitled to the 

waiting period. Printed forms for this 

purpose are prohibited, except when 

creditors are permitted to use printed 

forms pursuant to § 1026.23(e)(2). 

* * * * * 

(h) Corrections and unintentional 

violations. A creditor or assignee in a 

high-cost mortgage, as defined in 

§ 1026.32(a), who, when acting in good 

faith, failed to comply with any 

requirement under section 129 of the 

Act will not be deemed to have violated 

such requirement if the creditor or 

assignee satisfies either of the following 

sets of conditions: 

(1)(i) Within 30 days of 

consummation or account opening and 

prior to the institution of any action, the 

consumer is notified of or discovers the 

violation; 

(ii) Appropriate restitution is made 

within a reasonable time; and 

(iii) Within a reasonable time, 

whatever adjustments are necessary are 

made to the loan or credit plan to either, 

at the choice of the consumer: 

(A) Make the loan or credit plan 

satisfy the requirements of this chapter; 

or 

(B) Change the terms of the loan or 

credit plan in a manner beneficial to the 

consumer so that the loan or credit plan 

will no longer be a high-cost mortgage. 

(2)(i) Within 60 days of the creditor’s 

discovery or receipt of notification of an 

unintentional violation or bona fide 

error and prior to the institution of any 

action, the consumer is notified of the 

compliance failure; 

(ii) Appropriate restitution is made 

within a reasonable time; and 

(iii) Within a reasonable time, 

whatever adjustments are necessary are 

made to the loan or credit plan to either, 

at the choice of the consumer: 

(A) Make the loan or credit plan 

satisfy the requirements of this chapter; 

or 

(B) Change the terms of the loan or 

credit plan in a manner beneficial to the 

consumer so that the loan or credit plan 

will no longer be a high-cost mortgage. 

■ 6. Section 1026.32 is amended by: 

■ A. Revising paragraph (a); 

■ B. Adding paragraphs (b)(2), (b)(3)(ii), 

(b)(4)(ii), and (b)(6)(ii); 

■ C. Revising paragraphs (c)(3) through 

(5); and 

■ D. Revising paragraph (d) introductory 

text, revising paragraphs (d)(1) and (6), 

removing and reserving paragraph 

(d)(7), and revising paragraph (d)(8). 

The additions and revisions read as 

follows: 

§ 1026.32 Requirements for high-cost 

mortgages. 

(a) Coverage. (1) The requirements of 

this section apply to a high-cost 

mortgage, which is any consumer credit 

transaction that is secured by the 

consumer’s principal dwelling, other 

than as provided in paragraph (a)(2) of 

this section, and in which: 

(i) The annual percentage rate 

applicable to the transaction, as 

determined in accordance with 

paragraph (a)(3) of this section, will 

exceed the average prime offer rate, as 

defined in § 1026.35(a)(2), for a 

comparable transaction by more than: 

(A) 6.5 percentage points for a firstlien transaction, other than as described 

in paragraph (a)(1)(i)(B) of this section; 

(B) 8.5 percentage points for a firstlien transaction if the dwelling is 

personal property and the loan amount 

is less than $50,000; or 

(C) 8.5 percentage points for a 

subordinate-lien transaction; or 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6963 

(ii) The transaction’s total points and 

fees, as defined in paragraphs (b)(1) and 

(2) of this section, will exceed: 

(A) 5 percent of the total loan amount 

for a transaction with a loan amount of 

$20,000 or more; the $20,000 figure 

shall be adjusted annually on January 1 

by the annual percentage change in the 

Consumer Price Index that was reported 

on the preceding June 1; or 

(B) The lesser of 8 percent of the total 

loan amount or $1,000 for a transaction 

with a loan amount of less than $20,000; 

the $1,000 and $20,000 figures shall be 

adjusted annually on January 1 by the 

annual percentage change in the 

Consumer Price Index that was reported 

on the preceding June 1; or 

(iii) Under the terms of the loan 

contract or open-end credit agreement, 

the creditor can charge a prepayment 

penalty, as defined in paragraph (b)(6) 

of this section, more than 36 months 

after consummation or account opening, 

or prepayment penalties that can 

exceed, in total, more than 2 percent of 

the amount prepaid. 

(2) Exemptions. This section does not 

apply to the following: 

(i) A reverse mortgage transaction 

subject to § 1026.33; 

(ii) A transaction to finance the initial 

construction of a dwelling; 

(iii) A transaction originated by a 

Housing Finance Agency, where the 

Housing Finance Agency is the creditor 

for the transaction; 

(iv) A transaction originated pursuant 

to the United States Department of 

Agriculture’s Rural Development 

Section 502 Direct Loan Program. 

(3) Determination of annual 

percentage rate. For purposes of 

paragraph (a)(1)(i) of this section, a 

creditor shall determine the annual 

percentage rate for a closed- or open-end 

credit transaction based on the 

following: 

(i) For a transaction in which the 

annual percentage rate will not vary 

during the term of the loan or credit 

plan, the interest rate in effect as of the 

date the interest rate for the transaction 

is set; 

(ii) For a transaction in which the 

interest rate may vary during the term 

of the loan or credit plan in accordance 

with an index, the interest rate that 

results from adding the maximum 

margin permitted at any time during the 

term of the loan or credit plan to the 

value of the index rate in effect as of the 

date the interest rate for the transaction 

is set, or the introductory interest rate, 

whichever is greater; and 

(iii) For a transaction in which the 

interest rate may or will vary during the 

term of the loan or credit plan, other 

than a transaction described in 

paragraph (a)(3)(ii) of this section, the 

maximum interest rate that may be 

imposed during the term of the loan or 

credit plan. 

(b) * * * 

(2) In connection with an open-end 

credit plan, points and fees means the 

following fees or charges that are known 

at or before account opening: 

(i) All items included in the finance 

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

that the following items are excluded: 

(A) Interest or the time-price 

differential; 

(B) Any premium or other charge 

imposed in connection with any Federal 

or State agency program for any 

guaranty or insurance that protects the 

creditor against the consumer’s default 

or other credit loss; 

(C) For any guaranty or insurance that 

protects the creditor against the 

consumer’s default or other credit loss 

and that is not in connection with any 

Federal or State agency program: 

(1) If the premium or other charge is 

payable after account opening, the 

entire amount of such premium or other 

charge; or 

(2) If the premium or other charge is 

payable at or before account opening, 

the portion of any such premium or 

other charge that is not in excess of the 

amount payable under policies in effect 

at the time of account opening under 

section 203(c)(2)(A) of the National 

Housing Act (12 U.S.C. 1709(c)(2)(A)), 

provided that the premium or charge is 

required to be refundable on a pro rata 

basis and the refund is automatically 

issued upon notification of the 

satisfaction of the underlying mortgage 

transaction; 

(D) Any bona fide third-party charge 

not retained by the creditor, loan 

originator, or an affiliate of either, 

unless the charge is required to be 

included in points and fees under 

paragraphs (b)(2)(i)(C), (b)(2)(iii) or 

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

(E) Up to two bona fide discount 

points payable by the consumer in 

connection with the transaction, 

provided that the conditions specified 

in paragraph (b)(1)(i)(E) of this section 

are met; and 

(F) Up to one bona fide discount point 

payable by the consumer in connection 

with the transaction, provided that no 

discount points have been excluded 

under paragraph (b)(2)(i)(E) of this 

section and the conditions specified in 

paragraph (b)(1)(i)(F) of this section are 

met; 

(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; 

(iii) All items listed in § 1026.4(c)(7) 

(other than amounts held for future 

payment of taxes) unless: 

(A) The charge is reasonable; 

(B) The creditor receives no direct or 

indirect compensation in connection 

with the charge; and 

(C) The charge is not paid to an 

affiliate of the creditor; 

(iv) Premiums or other charges 

payable at or before account opening for 

any credit life, credit disability, credit 

unemployment, or credit property 

insurance, or any other life, accident, 

health, or loss-of-income insurance for 

which the creditor is a beneficiary, or 

any payments directly or indirectly for 

any debt cancellation or suspension 

agreement or contract; 

(v) The maximum prepayment 

penalty, as defined in paragraph 

(b)(6)(ii) of this section, that may be 

charged or collected under the terms of 

the open-end credit plan; 

(vi) The 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; 

(vii) Any fees charged for 

participation in an open-end credit 

plan, payable at or before account 

opening, as described in § 1026.4(c)(4); 

and 

(viii) Any transaction fee, including 

any minimum fee or per-transaction fee, 

that will be charged for a draw on the 

credit line, where the creditor must 

assume that the consumer will make at 

least one draw during the term of the 

plan. 

(3) * * * 

(ii) Open-end credit. The term bona 

fide discount point means an amount 

equal to 1 percent of the credit limit for 

the plan when the account is opened, 

paid by the consumer, and that reduces 

the interest rate or time-price 

differential applicable to the transaction 

based on a calculation that is consistent 

with established industry practices for 

determining the amount of reduction in 

the interest rate or time-price 

differential appropriate for the amount 

of discount points paid by the 

consumer. See comment 32(b)(3)(i)-1 for 

additional guidance in determining 

whether a discount point is bona fide. 

(4) * * * 


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6964 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

(ii) Open-end credit. The total loan 

amount for an open-end credit plan is 

the credit limit for the plan when the 

account is opened. 

* * * * * 

(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. 

(c) * * * 

(3) Regular payment; minimum 

periodic payment example; balloon 

payment. (i) For a closed-end credit 

transaction, the amount of the regular 

monthly (or other periodic) payment 

and the amount of any balloon payment 

provided in the credit contract, if 

permitted under paragraph (d)(1) of this 

section. The regular payment disclosed 

under this paragraph shall be treated as 

accurate if it is based on an amount 

borrowed that is deemed accurate and is 

disclosed under paragraph (c)(5) of this 

section. 

(ii) For an open-end credit plan: 

(A) An example showing the first 

minimum periodic payment for the 

draw period, the first minimum periodic 

payment for any repayment period, and 

the balance outstanding at the beginning 

of any repayment period. The example 

must be based on the following 

assumptions: 

(1) The consumer borrows the full 

credit line, as disclosed in paragraph 

(c)(5) of this section, at account opening 

and does not obtain any additional 

extensions of credit; 

(2) The consumer makes only 

minimum periodic payments during the 

draw period and any repayment period; 

and 

(3) The annual percentage rate used to 

calculate the example payments remains 

the same during the draw period and 

any repayment period. The creditor 

must provide the minimum periodic 

payment example based on the annual 

percentage rate for the plan, as 

described in paragraph (c)(2) of this 

section, except that if an introductory 

annual percentage rate applies, the 

creditor must use the rate that will 

apply to the plan after the introductory 

rate expires. 

(B) If the credit contract provides for 

a balloon payment under the plan as 

permitted under paragraph (d)(1) of this 

section, a disclosure of that fact and an 

example showing the amount of the 

balloon payment based on the 

assumptions described in paragraph 

(c)(3)(ii)(A) of this section. 

(C) A statement that the example 

payments show the first minimum 

periodic payments at the current annual 

percentage rate if the consumer borrows 

the maximum credit available when the 

account is opened and does not obtain 

any additional extensions of credit, or a 

substantially similar statement. 

(D) A statement that the example 

payments are not the consumer’s actual 

payments and that the actual minimum 

periodic payments will depend on the 

amount the consumer borrows, the 

interest rate applicable to that period, 

and whether the consumer pays more 

than the required minimum periodic 

payment, or a substantially similar 

statement. 

(4) Variable-rate. For variable-rate 

transactions, a statement that the 

interest rate and monthly payment may 

increase, and the amount of the single 

maximum monthly payment, based on 

the maximum interest rate required to 

be included in the contract by § 1026.30. 

(5) Amount borrowed; credit limit. (i) 

For a closed-end credit transaction, the 

total amount the consumer will borrow, 

as reflected by the face amount of the 

note. Where the amount borrowed 

includes financed charges that are not 

prohibited under § 1026.34(a)(10), that 

fact shall be stated, grouped together 

with the disclosure of the amount 

borrowed. The disclosure of the amount 

borrowed shall be treated as accurate if 

it is not more than $100 above or below 

the amount required to be disclosed. 

(ii) For an open-end credit plan, the 

credit limit for the plan when the 

account is opened. 

(d) Limitations. A high-cost mortgage 

shall not include the following terms: 

(1)(i) Balloon payment. Except as 

provided by paragraphs (d)(1)(ii) and 

(iii) of this section, a payment schedule 

with a payment that is more than two 

times a regular periodic payment. 

(ii) Exceptions. The limitations in 

paragraph (d)(1)(i) of this section do not 

apply to: 

(A) A mortgage transaction with a 

payment schedule that is adjusted to the 

seasonal or irregular income of the 

consumer; 

(B) A loan with maturity of 12 months 

or less, if the purpose of the loan is a 

‘‘bridge’’ loan connected with the 

acquisition or construction of a dwelling 

intended to become the consumer’s 

principal dwelling; or 

(C) A loan that meets the criteria set 

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

and 1026.43(f)(2). 

(iii) Open-end credit plans. If the 

terms of an open-end credit plan 

provide for a repayment period during 

which no further draws may be taken, 

the limitations in paragraph (d)(1)(i) of 

this section do not apply to any 

adjustment in the regular periodic 

payment that results solely from the 

credit plan’s transition from the draw 

period to the repayment period. If the 

terms of an open-end credit plan do not 

provide for any repayment period, the 

limitations in paragraph (d)(1)(i) of this 

section apply to all periods of the credit 

plan. 

* * * * * 

(6) Prepayment penalties. A 

prepayment penalty, as defined in 

paragraph (b)(6) of this section. 

(7) [Reserved] 

(8) Acceleration of debt. A demand 

feature that permits the creditor to 

accelerate the indebtedness by 

terminating the high-cost mortgage in 

advance of the original maturity date 

and to demand repayment of the entire 

outstanding balance, except in the 

following circumstances: 

(i) There is fraud or material 

misrepresentation by the consumer in 

connection with the loan or open-end 

credit agreement; 

(ii) The consumer fails to meet the 

repayment terms of the agreement for 

any outstanding balance that results in 

a default in payment under the loan; or 

(iii) There is any action or inaction by 

the consumer that adversely affects the 

creditor’s security for the loan, or any 

right of the creditor in such security. 

* * * * * 

■ 7. Section 1026.34 is revised to read 

as follows: 

§ 1026.34 Prohibited acts or practices in 

connection with high-cost mortgages. 

(a) Prohibited acts or practices for 

high-cost mortgages. (1) Home 

improvement contracts. A creditor shall 

not pay a contractor under a home 

improvement contract from the 

proceeds of a high-cost mortgage, other 

than: 

(i) By an instrument payable to the 

consumer or jointly to the consumer and 

the contractor; or 

(ii) At the election of the consumer, 

through a third-party escrow agent in 

accordance with terms established in a 

written agreement signed by the 

consumer, the creditor, and the 

contractor prior to the disbursement. 

(2) Notice to assignee. A creditor may 

not sell or otherwise assign a high-cost 

mortgage without furnishing the 

following statement to the purchaser or 

assignee: ‘‘Notice: This is a mortgage 

subject to special rules under the 

Federal Truth in Lending Act. 

Purchasers or assignees of this mortgage 

could be liable for all claims and 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6965 

defenses with respect to the mortgage 

that the consumer could assert against 

the creditor.’’ 

(3) Refinancings within one-year 

period. Within one year of having 

extended a high-cost mortgage, a 

creditor shall not refinance any highcost mortgage to the same consumer into 

another high-cost mortgage, unless the 

refinancing is in the consumer’s 

interest. An assignee holding or 

servicing a high-cost mortgage shall not, 

for the remainder of the one-year period 

following the date of origination of the 

credit, refinance any high-cost mortgage 

to the same consumer into another highcost mortgage, unless the refinancing is 

in the consumer’s interest. A creditor (or 

assignee) is prohibited from engaging in 

acts or practices to evade this provision, 

including a pattern or practice of 

arranging for the refinancing of its own 

loans by affiliated or unaffiliated 

creditors. 

(4) Repayment ability for high-cost 

mortgages. In connection with an openend, high-cost mortgage, a creditor shall 

not open a plan for a consumer where 

credit is or will be extended without 

regard to the consumer’s repayment 

ability as of account opening, including 

the consumer’s current and reasonably 

expected income, employment, assets 

other than the collateral, and current 

obligations including any mortgagerelated obligations that are required by 

another credit obligation undertaken 

prior to or at account opening, and are 

secured by the same dwelling that 

secures the high-cost mortgage 

transaction. The requirements set forth 

in § 1026.34(a)(4)(i) through (iv) apply 

to open-end high-cost mortgages, but do 

not apply to closed-end high-cost 

mortgages. In connection with a closedend, high-cost mortgage, a creditor must 

comply with the repayment ability 

requirements set forth in § 1026.43. 

Temporary or ‘‘bridge’’ loans with terms 

of twelve months or less, such as a loan 

to purchase a new dwelling where the 

consumer plans to sell a current 

dwelling within twelve months, are 

exempt from this repayment ability 

requirement. 

(i) Mortgage-related obligations. For 

purposes of this paragraph (a)(4), 

mortgage-related obligations are 

property taxes; premiums and similar 

charges identified in § 1026.4(b)(5), (7), 

(8), and (10) that are required by the 

creditor; fees and special assessments 

imposed by a condominium, 

cooperative, or homeowners association; 

ground rent; and leasehold payments. 

(ii) Basis for determination of 

repayment ability. Under this paragraph 

(a)(4) a creditor must determine the 

consumer’s repayment ability in 

connection with an open-end, high cost 

mortgage as follows: 

(A) A creditor must verify amounts of 

income or assets that it relies on to 

determine repayment ability, including 

expected income or assets, by the 

consumer’s Internal Revenue Service 

Form W–2, tax returns, payroll receipts, 

financial institution records, or other 

third-party documents that provide 

reasonably reliable evidence of the 

consumer’s income or assets. 

(B) A creditor must verify the 

consumer’s current obligations, 

including any mortgage-related 

obligations that are required by another 

credit obligation undertaken prior to or 

at account opening, and are secured by 

the same dwelling that secures the highcost mortgage transaction. 

(iii) Presumption of compliance. For 

an open-end, high cost mortgage, a 

creditor is presumed to have complied 

with this paragraph (a)(4) with respect 

to a transaction if the creditor: 

(A) Determines the consumer’s 

repayment ability as provided in 

paragraph (a)(4)(ii); 

(B) Determines the consumer’s 

repayment ability taking into account 

current obligations and mortgage-related 

obligations as defined in paragraph 

(a)(4)(i) of this section, and using the 

largest required minimum periodic 

payment based on the following 

assumptions: 

(1) The consumer borrows the full 

credit line at account opening with no 

additional extensions of credit; 

(2) The consumer makes only 

required minimum periodic payments 

during the draw period and any 

repayment period; 

(3) If the annual percentage rate may 

increase during the plan, the maximum 

annual percentage rate that is included 

in the contract, as required by § 1026.30, 

applies to the plan at account opening 

and will apply during the draw period 

and any repayment period. 

(C) Assesses the consumer’s 

repayment ability taking into account at 

least one of the following: The ratio of 

total current obligations, including any 

mortgage-related obligations that are 

required by another credit obligation 

undertaken prior to or at account 

opening, and are secured by the same 

dwelling that secures the high-cost 

mortgage transaction, to income, or the 

income the consumer will have after 

paying current obligations. 

(iv) Exclusions from presumption of 

compliance. Notwithstanding the 

previous paragraph, no presumption of 

compliance is available for an open-end, 

high-cost mortgage transaction for 

which the regular periodic payments 

when aggregated do not fully amortize 

the outstanding principal balance 

except as otherwise provided by 

§ 1026.32(d)(1)(ii). 

(5) Pre-loan counseling. (i) 

Certification of counseling required. A 

creditor shall not extend a high-cost 

mortgage to a consumer unless the 

creditor receives written certification 

that the consumer has obtained 

counseling on the advisability of the 

mortgage from a counselor that is 

approved to provide such counseling by 

the Secretary of the U.S. Department of 

Housing and Urban Development or, if 

permitted by the Secretary, by a State 

housing finance authority. 

(ii) Timing of counseling. The 

counseling required under this 

paragraph (a)(5) must occur after the 

consumer receives either the good faith 

estimate required by section 5(c) of the 

Real Estate Settlement Procedures Act of 

1974 (12 U.S.C. 2604(c)) or the 

disclosures required by § 1026.40. 

(iii) Affiliation prohibited. The 

counseling required under this 

paragraph (a)(5) shall not be provided 

by a counselor who is employed by or 

affiliated with the creditor. 

(iv) Content of certification. The 

certification of counseling required 

under paragraph (a)(5)(i) must include: 

(A) The name(s) of the consumer(s) 

who obtained counseling; 

(B) The date(s) of counseling; 

(C) The name and address of the 

counselor; 

(D) A statement that the consumer(s) 

received counseling on the advisability 

of the high-cost mortgage based on the 

terms provided in either the good faith 

estimate required by section 5(c) of the 

Real Estate Settlement Procedures Act of 

1974 (12 U.S.C. 2604(c)) or the 

disclosures required by § 1026.40; and 

(E) A statement that the counselor has 

verified that the consumer(s) received 

the disclosures required by either 

§ 1026.32(c) or the Real Estate 

Settlement Procedures Act of 1974 (12 

U.S.C. 2601 et seq.) with respect to the 

transaction. 

(v) Counseling fees. A creditor may 

pay the fees of a counselor or counseling 

organization for providing counseling 

required under this paragraph (a)(5) but 

may not condition the payment of such 

fees on the consummation or accountopening of a mortgage transaction. If the 

consumer withdraws the application 

that would result in the extension of a 

high-cost mortgage, a creditor may not 

condition the payment of such fees on 

the receipt of certification from the 

counselor required by paragraph (a)(5)(i) 

of this section. A creditor may, however, 

confirm that a counselor has provided 

counseling to the consumer pursuant to 

this paragraph (a)(5) prior to paying the 


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6966 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

fee of a counselor or counseling 

organization. 

(vi) Steering prohibited. A creditor 

that extends a high-cost mortgage shall 

not steer or otherwise direct a consumer 

to choose a particular counselor or 

counseling organization for the 

counseling required under this 

paragraph (a)(5). 

(6) Recommended default. A creditor 

or mortgage broker, as defined in section 

1026.36(a)(2), may not recommend or 

encourage default on an existing loan or 

other debt prior to and in connection 

with the consummation or account 

opening of a high-cost mortgage that 

refinances all or any portion of such 

existing loan or debt. 

(7) Modification and deferral fees. A 

creditor, successor-in-interest, assignee, 

or any agent of such parties may not 

charge a consumer any fee to modify, 

renew, extend or amend a high-cost 

mortgage, or to defer any payment due 

under the terms of such mortgage. 

(8) Late fees. (i) General. Any late 

payment charge imposed in connection 

with a high-cost mortgage must be 

specifically permitted by the terms of 

the loan contract or open-end credit 

agreement and may not exceed 4 

percent of the amount of the payment 

past due. No such charge may be 

imposed more than once for a single late 

payment. 

(ii) Timing. A late payment charge 

may be imposed in connection with a 

high-cost mortgage only if the payment 

is not received by the end of the 15-day 

period beginning on the date the 

payment is due or, in the case of a highcost mortgage on which interest on each 

installment is paid in advance, the end 

of the 30-day period beginning on the 

date the payment is due. 

(iii) Multiple late charges assessed on 

payment subsequently paid. A late 

payment charge may not be imposed in 

connection with a high-cost mortgage 

payment if any delinquency is 

attributable only to a late payment 

charge imposed on an earlier payment, 

and the payment otherwise is a full 

payment for the applicable period and 

is paid by the due date or within any 

applicable grace period. 

(iv) Failure to make required 

payment. The terms of a high-cost 

mortgage agreement may provide that 

any payment shall first be applied to 

any past due balance. If the consumer 

fails to make a timely payment by the 

due date and subsequently resumes 

making payments but has not paid all 

past due payments, the creditor may 

impose a separate late payment charge 

for any payment(s) outstanding (without 

deduction due to late fees or related 

fees) until the default is cured. 

(9) Payoff statements. (i) Fee 

prohibition. In general, a creditor or 

servicer (as defined in 12 CFR 1024.2(b)) 

may not charge a fee for providing to a 

consumer, or a person authorized by the 

consumer to obtain such information, a 

statement of the amount due to pay off 

the outstanding balance of a high-cost 

mortgage. 

(ii) Processing fee. A creditor or 

servicer may charge a processing fee to 

cover the cost of providing a payoff 

statement, as described in paragraph 

(a)(9)(i) of this section, by fax or courier, 

provided that such fee may not exceed 

an amount that is comparable to fees 

imposed for similar services provided in 

connection with consumer credit 

transactions that are secured by the 

consumer’s principal dwelling and are 

not high-cost mortgages. A creditor or 

servicer shall make a payoff statement 

available to a consumer, or a person 

authorized by the consumer to obtain 

such information, by a method other 

than by fax or courier and without 

charge pursuant to paragraph (a)(9)(i) of 

this section. 

(iii) Processing fee disclosure. Prior to 

charging a processing fee for provision 

of a payoff statement by fax or courier, 

as permitted pursuant to paragraph 

(a)(9)(ii) of this section, a creditor or 

servicer shall disclose to a consumer or 

a person authorized by the consumer to 

obtain the consumer’s payoff statement 

that payoff statements, as described in 

paragraph (a)(9)(i) of this section, are 

available by a method other than by fax 

or courier without charge. 

(iv) Fees permitted after multiple 

requests. A creditor or servicer that has 

provided a payoff statement, as 

described in paragraph (a)(9)(i) of this 

section, to a consumer, or a person 

authorized by the consumer to obtain 

such information, without charge, other 

than the processing fee permitted under 

paragraph (a)(9)(ii) of this section, four 

times during a calendar year, may 

thereafter charge a reasonable fee for 

providing such statements during the 

remainder of the calendar year. Fees for 

payoff statements provided to a 

consumer, or a person authorized by the 

consumer to obtain such information, in 

a subsequent calendar year are subject 

to the requirements of this section. 

(v) Timing of delivery of payoff 

statements. A payoff statement, as 

described in paragraph (a)(9)(i) of this 

section, for a high-cost mortgage shall be 

provided by a creditor or servicer within 

five business days after receiving a 

request for such statement by a 

consumer or a person authorized by the 

consumer to obtain such statement. 

(10) Financing of points and fees. A 

creditor that extends credit under a 

high-cost mortgage may not finance 

charges that are required to be included 

in the calculation of points and fees, as 

that term is defined in § 1026.32(b)(1) 

and (2). Credit insurance premiums or 

debt cancellation or suspension fees that 

are required to be included in points 

and fees under § 1026.32(b)(1)(iv) or 

(2)(iv) shall not be considered financed 

by the creditor when they are calculated 

and paid in full on a monthly basis. 

(b) Prohibited acts or practices for 

dwelling-secured loans; structuring 

loans to evade high-cost mortgage 

requirements. A creditor shall not 

structure any transaction that is 

otherwise a high-cost mortgage in a 

form, for the purpose, and with the 

intent to evade the requirements of a 

high-cost mortgage subject to this 

subpart, including by dividing any loan 

transaction into separate parts. 

■ 8. Section 1026.36 is amended by 

adding and reserving paragraphs (g) and 

(j) and adding paragraph (k) to read as 

follows: 

* * * * * 

§ 1026.36 Prohibited acts or practices in 

connection with credit secured by a 

dwelling. 

* * * * * 

(g) [Reserved] 

* * * * * 

(j) [Reserved] 

(k) Negative amortization counseling. 

(1) Counseling required. A creditor shall 

not extend credit to a first-time 

borrower in connection with a closedend transaction secured by a dwelling, 

other than a reverse mortgage 

transaction subject to § 1026.33 or a 

transaction secured by a consumer’s 

interest in a timeshare plan described in 

11 U.S.C. 101(53D), that may result in 

negative amortization, unless the 

creditor receives documentation that the 

consumer has obtained homeownership 

counseling from a counseling 

organization or counselor certified or 

approved by the U.S. Department of 

Housing and Urban Development to 

provide such counseling. 

(2) Definitions. For the purposes of 

this paragraph (k), the following 

definitions apply: 

(i) A ‘‘first-time borrower’’ means a 

consumer who has not previously 

received a closed-end credit transaction 

or open-end credit plan secured by a 

dwelling. 

(ii) ‘‘Negative amortization’’ means a 

payment schedule with regular periodic 

payments that cause the principal 

balance to increase. 

(3) Steering prohibited. A creditor that 

extends credit to a first-time borrower in 

connection with a closed-end 


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Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6967 

transaction secured by a dwelling, other 

than a reverse mortgage transaction 

subject to § 1026.33 or a transaction 

secured by a consumer’s interest in a 

timeshare plan described in 11 U.S.C. 

101(53D), that may result in negative 

amortization shall not steer or otherwise 

direct a consumer to choose a particular 

counselor or counseling organization for 

the counseling required under this 

paragraph (k). 

■ 9. In Supplement I to Part 1026— 

Official Interpretations: 

■ A. Under Section 1026.31—General 

Rules: 

■ i. Under 31(c) Timing of disclosure: 

■ a. Under 31(c)(1), the heading is 

revised. 

■ b. Under newly designated 31(c)(1), 

paragraph 1 is revised. 

■ c. Under 31(c)(1)(i) Change in terms, 

paragraph 2 is revised. 

■ d. Under 31(c)(1)(ii) Telephone 

disclosures, paragraph 1 is revised. 

■ e. Under 31(c)(1)(iii), the heading is 

revised. 

■ ii. 31(h) Corrections and unintentional 

violations and paragraphs 1 and 2 are 

added. 

■ B. Under Section 1026.32— 

Requirements for High-Cost Mortgages: 

■ i. Under 32(a) Coverage: 

■ a. Paragraph 32(a)(1) and paragraph 1 

are added. 

■ b. Under Paragraph 32(a)(1)(i), 

paragraphs 1, 2, and 3 are revised, and 

paragraph 4 is removed. 

■ c. Paragraph 32(a)(1)(i)(B) and 

paragraph 1 are added. 

■ d. Under Paragraph 32(a)(1)(ii), 

paragraph 1 and the introductory text of 

paragraph 2 are revised, and paragraph 

3 is added. 

■ e. Paragraph 32(a)(1)(iii) and 

paragraphs 1 and 2 are added. 

■ f. Under Paragraph 32(a)(2), the 

heading is revised. 

■ g. Paragraph 32(a)(2)(ii) and 

paragraph 1 are added. 

■ h. Paragraph 32(a)(2)(iii) and 

paragraph 1 are added. 

■ i. 32(a)(3) Determination of annual 

percentage rate and paragraphs 1, 2, 3, 

4, and 5 are added. 

■ ii. Under 32(b) Definitions: 

■ a. Paragraph 32(b)(2), Paragraph 

32(b)(2)(i), and paragraph 1 are added. 

■ b. Paragraph 32(b)(2)(i)(B) and 

paragraph 1 are added. 

■ c. Paragraph 32(b)(2)(i)(C) and 

paragraph 1 are added. 

■ d. Paragraph 32(b)(2)(i)(D) and 

paragraph 1 are added. 

■ e. Paragraph 32(b)(2)(i)(E) and 

paragraph 1 are added. 

■ f. Paragraph 32(b)(2)(i)(F) and 

paragraph 1 are added. 

■ g. Paragraph 32(b)(2)(ii) and 

paragraph 1 are added. 

■ h. Paragraph 32(b)(2)(iii) and 

paragraph 1 are added. 

■ i. Paragraph 32(b)(2)(iv) and 

paragraph 1 are added. 

■ j. Paragraph 32(b)(2)(vii) and 

paragraph 1 are added. 

■ k. Paragraph 32(b)(2)(viii) and 

paragraphs 1 and 2 are added. 

■ l. Under Paragraph 32(b)(6), as added 

elsewhere in this issue of the Federal 

Register, paragraphs 3 and 4 are added. 

■ iii. Under 32(c) Disclosures: 

■ a. 32(c)(2) Annual percentage rate and 

paragraph 1 are added. 

■ b. Under 32(c)(3), the heading is 

revised. 

■ c. Under newly designated 32(c)(3), 

paragraph 1 is revised. 

■ d. Paragraph 32(c)(3)(i) and paragraph 

1 are added. 

■ e. Under 32(c)(4) Variable rate, 

paragraph 1 is revised. 

■ iv. Under 32(d) Limitations: 

■ a. Paragraph 1 is revised. 

■ b. Under 32(d)(1)(i) Balloon payment, 

paragraph 1 is revised and paragraphs 2 

and 3 are added. 

■ c. Under 32(d)(2) Negative 

Amortization, paragraph 1 is revised. 

■ d. 32(d)(6) Prepayment Penalties and 

paragraph 1 are removed. 

■ e. 32(d)(7) Prepayment Penalty 

Exception, Paragraph 32(d)(7)(iii) and 

paragraphs 1, 2, and 3, and Paragraph 

32(d)(7)(iv) and paragraphs 1 and 2 are 

removed. 

■ f. Under 32(d)(8), the heading is 

revised. 

■ g. Under newly designated 32(d)(8), 

Paragraph 32(d)(8)(i) and paragraph 1 

are added. 

■ h. Under Paragraph 32(d)(8)(ii), 

paragraph 1 is revised. 

■ i. Under Paragraph 32(d)(8)(iii), 

paragraphs 1 and 2.ii are revised. 

■ C. Under Section 1026.34—Prohibited 

Acts or Practices for High-Cost 

Mortgages: 

■ i. Under 34(a) Prohibited Acts or 

Practices for High-Cost Mortgages: 

■ a. Under 34(a)(4) Repayment ability, 

paragraphs 1 through 5 are revised. 

■ b. Under Paragraph 34(a)(4)(ii)(B), 

paragraph 1 is revised and paragraph 2 

is removed. 

■ c. Paragraph 34(a)(4)(ii)(C) and 

paragraph 1 are removed. 

■ d. Under 34(a)(4)(iii) Presumption of 

compliance, paragraph 1 is revised. 

■ e. Under Paragraph 34(a)(4)(iii)(B), 

paragraph 1 is revised. 

■ f. 34(a)(5) Pre-loan counseling, 

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

required, and paragraphs 1 through 5 

are added. 

■ g. 34(a)(5)(ii) Timing of counseling 

and paragraphs 1 and 2 are added. 

■ h. 34(a)(5)(iv) Content of certification 

and paragraphs 1 and 2 are added. 

■ i. 34(a)(5)(v) Counseling fees and 

paragraph 1 are added. 

■ j. 34(a)(5)(vi) Steering prohibited and 

paragraphs 1 and 2 are added. 

■ k. 34(a)(6) Recommended default and 

paragraphs 1 and 2 are added. 

■ l. 34(a)(8) Late Fees, 34(a)(8)(i) 

General, and paragraph 1 are added. 

■ m. 34(a)(8)(iii) Multiple late charges 

assessed on payment subsequently paid 

and paragraph 1 are added. 

■ n. 34(a)(8)(iv) Failure to make 

required payment and paragraph 1 are 

added. 

■ o. 34(a)(10) Financing of points and 

fees and paragraphs 1 and 2 are added. 

■ ii. Under 34(b) Prohibited Acts or 

Practices for Dwelling-Secured Loans; 

Open-End Credit, the heading is revised. 

■ iii. Under revised 34(b) Prohibited 

acts or practices for dwelling-secured 

loans; structuring loans to evade highcost mortgage requirements, paragraph 1 

is revised and paragraph 2 is added. 

■ D. Under Section 1026.36—Prohibited 

Acts or Practices in Connection with 

Credit Secured by a Dwelling: 

■ i. 36(k) Negative amortization 

counseling is added. 

■ a. 36(k)(1)Counseling required and 

paragraphs 1 through 4 are added. 

■ b. 36(k)(3) Steering prohibited and 

paragraph 1 are added. 

The revisions and additions read as 

follows: 

Supplement I to Part 1026—Official 

Interpretations 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

§ 1026.31 General Rules 

* * * * * 

31(c)(1) Disclosures for high-cost 

mortgages. 

1. Pre-consummation or account 

opening waiting period. A creditor must 

furnish § 1026.32 disclosures at least 

three business days prior to 

consummation for a closed-end, highcost mortgage and at least three business 

days prior to account opening for an 

open-end, high-cost mortgage. Under 

§ 1026.32, ‘‘business day’’ has the same 

meaning as the rescission rule in 

comment 2(a)(6)–2—all calendar days 

except Sundays and the Federal legal 

holidays listed in 5 U.S.C. 6103(a). 

However, while the disclosure rule 

under §§ 1026.15 and 1026.23 extends 

to midnight of the third business day, 

the rule under § 1026.32 does not. For 

example, under § 1026.32, if disclosures 

were provided on a Friday, 

consummation or account opening 

could occur any time on Tuesday, the 

third business day following receipt of 


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6968 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

the disclosures. If the timing of the 

rescission rule were to be used, 

consummation or account opening 

could not occur until after midnight on 

Tuesday. 

31(c)(1)(i) Change in terms. 

* * * * * 

2. Premiums or other charges 

financed at consummation or account 

opening. If the consumer finances the 

payment of premiums or other charges 

as permitted under § 1026.34(a)(10), and 

as a result the monthly payment differs 

from what was previously disclosed 

under § 1026.32, redisclosure is 

required and a new three-day waiting 

period applies. 

31(c)(1)(ii) Telephone disclosures. 

1. Telephone disclosures. Disclosures 

by telephone must be furnished at least 

three business days prior to 

consummation or account opening, as 

applicable, calculated in accordance 

with the timing rules under 

§ 1026.31(c)(1). 

31(c)(1)(iii) Consumer’s waiver of 

waiting period before consummation or 

account opening. 

* * * * * 

31(h) Corrections and unintentional 

violations. 

1. Notice requirements. Notice of a 

violation pursuant to § 1026.31(h)(1) or 

(2) should be in writing. The notice 

should make the consumer aware of the 

choices available under 

§ 1026.31(h)(1)(iii) and (2)(iii). For 

notice to be adequate, the consumer 

should have at least 60 days in which 

to consider the available options and 

communicate a choice to the creditor or 

assignee. 

2. Reasonable time. To claim the 

benefit of § 1026.31(h), a creditor or 

assignee must implement appropriate 

restitution and the consumer’s elected 

adjustment within a reasonable time 

after the consumer provides notice of 

that election to the creditor or assignee. 

What length of time is reasonable will 

depend on what changes to a loan or 

credit plan’s documentation, disclosure, 

or terms are necessary to effectuate the 

adjustment. In general, implementing 

appropriate restitution and completing 

an adjustment within 30 days of the 

consumer’s providing notice of the 

election can be considered reasonable. 

§ 1026.32 Requirements for High-Cost 

Mortgages 

32(a) Coverage. 

Paragraph 32(a)(1). 

1. The term high-cost mortgage 

includes both a closed-end credit 

transaction and an open-end credit plan 

secured by the consumer’s principal 

dwelling. For purposes of determining 

coverage under § 1026.32, an open-end 

consumer credit transaction is the 

account opening of an open-end credit 

plan. An advance of funds or a draw on 

the credit line under an open-end credit 

plan subsequent to account opening 

does not constitute an open-end 

‘‘transaction.’’ 

Paragraph 32(a)(1)(i). 

1. Average prime offer rate. High-cost 

mortgages include closed- and open-end 

consumer credit transactions secured by 

the consumer’s principal dwelling with 

an annual percentage rate that exceeds 

the average prime offer rate for a 

comparable transaction as of the date 

the interest rate is set by the specified 

amount. The term ‘‘average prime offer 

rate’’ is defined in § 1026.35(a)(2). 

2. Comparable transaction. Guidance 

for determining a comparable 

transaction is set forth in comments 

35(a)(1)–1 and 35(a)(2)–2 and –3, which 

direct creditors to published tables of 

average prime offer rates for fixed- and 

variable-rate closed-end credit 

transactions. Creditors opening openend credit plans must compare the 

annual percentage rate for the plan to 

the average prime offer rate for the most 

closely comparable closed-end 

transaction. To identify the most closely 

comparable closed-end transaction, the 

creditor should identify whether the 

credit plan is fixed- or variable-rate; if 

the plan is fixed-rate, the term of the 

plan to maturity; if the plan is variablerate, the duration of any initial, fixedrate period; and the date the interest rate 

for the plan is set. If a fixed-rate plan 

has no definite plan length, a creditor 

must use the average prime offer rate for 

a 30-year fixed-rate loan. If a variablerate plan has an optional, fixed-rate 

feature, a creditor must use the rate 

table for variable-rate transactions. If a 

variable-rate plan has an initial, fixedrate period that is not in whole years, a 

creditor must identify the most closelycomparable transaction by using the 

number of whole years closest to the 

actual fixed-rate period. For example, if 

a variable-rate plan has an initial fixedrate period of 20 months, a creditor 

must use the average prime offer rate for 

a two-year adjustable-rate loan. If a 

variable-rate plan has no initial fixedrate period, or if it has an initial fixedrate period of less than one year, a 

creditor must use the average prime 

offer rate for a one-year adjustable-rate 

loan. Thus, for example, if the initial 

fixed-rate period is six months, a 

creditor must use the average prime 

offer rate for a one-year adjustable-rate 

loan. 

3. Rate set. Comment 35(a)(1)–2 

provides guidance for determining the 

average prime offer rate in effect on the 

date that the interest rate for the 

transaction is set. 

Paragraph 32(a)(1)(i)(B). 

1. Loan amount less than $50,000. 

The creditor must determine whether to 

apply the APR threshold in 

§ 1026.32(a)(1)(i)(B) based on the loan 

amount, which is the face amount of the 

note. 

Paragraph 32(a)(1)(ii). 

1. Annual adjustment of $1,000 

amount. The $1,000 figure in 

§ 1026.32(a)(1)(ii)(B) is adjusted 

annually on January 1 by the annual 

percentage change in the CPI that was 

in effect on the preceding June 1. The 

Bureau will publish adjustments after 

the June figures become available each 

year. 

2. Historical adjustment of $400 

amount. Prior to January 10, 2014, a 

mortgage loan was covered by § 1026.32 

if the total points and fees payable by 

the consumer at or before loan 

consummation exceeded the greater of 

$400 or 8 percent of the total loan 

amount. The $400 figure was adjusted 

annually on January 1 by the annual 

percentage change in the CPI that was 

in effect on the preceding June 1, as 

follows: 

* * * * * 

3. Applicable threshold. For purposes 

of § 1026.32(a)(1)(ii), a creditor must 

determine the applicable points and fees 

threshold based on the face amount of 

the note (or, in the case of an open-end 

credit plan, the credit limit for the plan 

when the account is opened). However, 

the creditor must apply the allowable 

points and fees percentage to the ‘‘total 

loan amount,’’ as defined in 

§ 1026.32(b)(4). For closed-end credit 

transactions, the total loan amount may 

be different than the face amount of the 

note. The $20,000 amount in 

§ 1026.32(a)(1)(ii)(A) and (B) is adjusted 

annually on January 1 by the annual 

percentage change in the CPI that was 

in effect on the preceding June 1. 

Paragraph 32(a)(1)(iii). 

1. Maximum period and amount. 

Section 1026.32(a)(1)(iii) provides that a 

closed-end credit transaction or an 

open-end credit plan is a high-cost 

mortgage if, under the terms of the loan 

contract or open-end credit agreement, a 

creditor can charge either a prepayment 

penalty more than 36 months after 

consummation or account opening, or 

total prepayment penalties that exceed 2 

percent of any amount prepaid. Section 

1026.32(a)(1)(iii) applies only for 

purposes of determining whether a 

transaction is subject to the high-cost 

mortgage requirements and restrictions 

in § 1026.32(c) and (d) and § 1026.34. 

However, if a transaction is subject to 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6969 

those requirements and restrictions by 

operation of any provision of 

§ 1026.32(a)(1), including by operation 

of § 1026.32(a)(1)(iii), then the 

transaction may not include a 

prepayment penalty. See 

§ 1026.32(d)(6). As a result, 

§ 1026.32(a)(1)(iii) effectively 

establishes a maximum period during 

which a prepayment penalty may be 

imposed, and a maximum prepayment 

penalty amount that may be imposed, 

on a closed-end credit transaction or 

open-end credit plan (other than such a 

mortgage as described in § 1026.32(a)(2)) 

secured by a consumer’s principal 

dwelling. Closed-end credit transactions 

covered by § 1026.43 are subject to the 

additional prepayment penalty 

restrictions set forth in § 1026.43(g). 

2. Examples; open-end credit. If the 

terms of an open-end credit agreement 

allow for a prepayment penalty that 

exceeds 2 percent of the initial credit 

limit for the plan, the agreement will be 

deemed to be a transaction with a 

prepayment penalty that exceeds 2 

percent of the ‘‘amount prepaid’’ within 

the meaning of § 1026.32(a)(1)(iii). The 

following examples illustrate how to 

calculate whether the terms of an openend credit agreement comply with the 

maximum prepayment penalty period 

and amounts described in 

§ 1026.32(a)(1)(iii). 

i. Assume that the terms of a homeequity line of credit with an initial 

credit limit of $10,000 require the 

consumer to pay a $500 flat fee if the 

consumer terminates the plan less than 

36 months after account opening. The 

$500 fee constitutes a prepayment 

penalty under § 1026.32(b)(6)(ii), and 

the penalty is greater than 2 percent of 

the $10,000 initial credit limit, which is 

$200. Under § 1026.32(a)(1)(iii), the plan 

is a high-cost mortgage subject to the 

requirements and restrictions set forth 

in §§ 1026.32 and 1026.34. 

ii. Assume that the terms of a homeequity line of credit with an initial 

credit limit of $10,000 and a ten-year 

term require the consumer to pay a $200 

flat fee if the consumer terminates the 

plan prior to its normal expiration. The 

$200 prepayment penalty does not 

exceed 2 percent of the initial credit 

limit, but the terms of the agreement 

permit the creditor to charge the fee 

more than 36 months after account 

opening. Thus, under 

§ 1026.32(a)(1)(iii), the plan is a highcost mortgage subject to the 

requirements and restrictions set forth 

in §§ 1026.32 and 1026.34. 

iii. Assume that, under the terms of a 

home-equity line of credit with an 

initial credit limit of $150,000, the 

creditor may charge the consumer any 

closing costs waived by the creditor if 

the consumer terminates the plan less 

than 36 months after account opening. 

Assume also that the creditor waived 

closing costs of $1,000. Bona fide thirdparty charges comprised $800 of the 

$1,000 in waived closing costs, and 

origination charges retained by the 

creditor or its affiliate comprised the 

remaining $200. Under 

§ 1026.32(b)(6)(ii), the $800 in bona fide 

third-party charges is not a prepayment 

penalty, while the $200 for the 

creditor’s own originations costs is a 

prepayment penalty. The total 

prepayment penalty of $200 is less than 

2 percent of the initial $150,000 credit 

limit, and the penalty does not apply if 

the consumer terminates the plan more 

than 36 months after account opening. 

Thus, the plan is not a high-cost 

mortgage under § 1026.32(a)(1)(iii). 

32(a)(2) Exemptions. 

* * * * * 

Paragraph 32(a)(2)(ii). 

1. Construction-permanent loans. 

Section 1026.32 does not apply to a 

transaction to finance the initial 

construction of a dwelling. This 

exemption applies to a constructiononly loan as well as to the construction 

phase of a construction-to-permanent 

loan. Section 1026.32 may apply, 

however, to permanent financing that 

replaces a construction loan, whether 

the permanent financing is extended by 

the same or a different creditor. When 

a construction loan may be permanently 

financed by the same creditor, 

§ 1026.17(c)(6)(ii) permits the creditor to 

give either one combined disclosure for 

both the construction financing and the 

permanent financing, or a separate set of 

disclosures for each of the two phases 

as though they were two separate 

transactions. See also comment 

17(c)(6)–2. Section 1026.17(c)(6)(ii) 

addresses only how a creditor may elect 

to disclose a construction to permanent 

transaction. Which disclosure option a 

creditor elects under § 1026.17(c)(6)(ii) 

does not affect the determination of 

whether the permanent phase of the 

transaction is subject to § 1026.32. 

When the creditor discloses the two 

phases as separate transactions, the 

annual percentage rate for the 

permanent phase must be compared to 

the average prime offer rate for a 

transaction that is comparable to the 

permanent financing to determine 

coverage under § 1026.32. Likewise, a 

single amount of points and fees, also 

reflecting the appropriate charges from 

the permanent phase, must be 

calculated and compared with the total 

loan amount to determine coverage 

under § 1026.32. When the creditor 

discloses the two phases as a single 

transaction, a single annual percentage 

rate, reflecting the appropriate charges 

from both phases, must be calculated for 

the transaction in accordance with 

§ 1026.32(a)(3) and appendix D to part 

1026. This annual percentage rate must 

be compared to the average prime offer 

rate for a transaction that is comparable 

to the permanent financing to determine 

coverage under § 1026.32. Likewise, a 

single amount of points and fees, also 

reflecting the appropriate charges from 

both phases of the transaction, must be 

calculated and compared with the total 

loan amount to determine coverage 

under § 1026.32. If the transaction is 

determined to be a high-cost mortgage, 

only the permanent phase is subject to 

the requirements of §§ 1026.32 and 

1026.34. 

Paragraph 32(a)(2)(iii). 

1. Housing Finance Agency. For 

purposes of § 1026.32(a)(2)(iii), a 

Housing Finance Agency means a 

housing finance agency as defined in 24 

CFR 266.5. 

32(a)(3) Determination of annual 

percentage rate. 

1. In general. The guidance set forth 

in the commentary to § 1026.17(c)(1) 

and in § 1026.40 addresses calculation 

of the annual percentage rate 

disclosures for closed-end credit 

transactions and open-end credit plans, 

respectively. Section 1026.32(a)(3) 

requires a different calculation of the 

annual percentage rate solely to 

determine coverage under 

§ 1026.32(a)(1)(i). 

2. Open-end credit. The annual 

percentage rate for an open-end credit 

plan must be determined in accordance 

with § 1026.32(a)(3), regardless of 

whether there is an advance of funds at 

account opening. Section 1026.32(a)(3) 

does not require the calculation of the 

annual percentage rate for any 

extensions of credit subsequent to 

account opening. Any draw on the 

credit line subsequent to account 

opening is not treated as a separate 

transaction for purposes of determining 

annual percentage rate threshold 

coverage. 

3. Rates that vary; index rate plus 

maximum margin. i. Section 

1026.32(a)(3)(ii) applies in the case of a 

closed- or open-end credit transaction 

when the interest rate for the transaction 

varies solely in accordance with an 

index. For purposes of 

§ 1026.32(a)(3)(ii), a transaction’s 

interest rate varies in accordance with 

an index even if the transaction has an 

initial rate that is not determined by the 

index used to make later interest rate 

adjustments provided that, following 

the first rate adjustment, the interest rate 


srobinson on DSK4SPTVN1PROD with 
6970 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

for the transaction varies solely in 

accordance with an index. 

ii. In general, for transactions subject 

to § 1026.32(a)(3)(ii), the annual 

percentage rate is determined by adding 

the index rate in effect on the date that 

the interest rate for the transaction is set 

to the maximum margin for the 

transaction, as set forth in the agreement 

for the loan or plan. In some cases, a 

transaction subject to § 1026.32(a)(3)(ii) 

may have an initial rate that is a 

premium rate and is higher than the 

index rate plus the maximum margin as 

of the date the interest rate for the 

transaction is set. In such cases, the 

annual percentage rate is determined 

based on the initial ‘‘premium’’ rate. 

iii. The following examples illustrate 

the rule: 

A. Assume that the terms of a closedend, adjustable-rate mortgage loan 

provide for a fixed, initial interest rate 

of 2 percent for two years following 

consummation, after which the interest 

rate will adjust annually in accordance 

with an index plus a 2 percent margin. 

Also assume that the applicable index is 

3 percent as of the date the interest rate 

for the transaction is set, and a lifetime 

interest rate cap of 15 percent applies to 

the transaction. Pursuant to 

§ 1026.32(a)(3)(ii), for purposes of 

determining the annual percentage rate 

for § 1026.32(a)(1)(i), the interest rate for 

the transaction is 5 percent (3 percent 

index rate plus 2 percent margin). 

B. Assume the same transaction terms 

set forth in paragraph 3.iii.A, except that 

an initial interest rate of 6 percent 

applies to the transaction. Pursuant to 

§ 1026.32(a)(3)(ii), for purposes of 

determining the annual percentage rate 

for § 1026.32(a)(1)(i), the interest rate for 

the transaction is 6 percent. 

C. Assume that the terms of an openend credit agreement with a five-year 

draw period and a five-year repayment 

period provide for a fixed, initial 

interest rate of 2 percent for the first 

year of the repayment period, after 

which the interest rate will adjust 

annually pursuant to a publiclyavailable index outside the creditor’s 

control, in accordance with the 

limitations applicable to open-end 

credit plans in § 1026.40(f). Also assume 

that, pursuant to the terms of the openend credit agreement, a margin of 2 

percent applies because the consumer is 

employed by the creditor, but that the 

margin will increase to 4 percent if the 

consumer’s employment with the 

creditor ends. Finally, assume that the 

applicable index rate is 3.5 percent as of 

the date the interest rate for the 

transaction is set, and a lifetime interest 

rate cap of 15 percent applies to the 

transaction. Pursuant to 

§ 1026.32(a)(3)(ii), for purposes of 

determining the annual percentage rate 

for § 1026.32(a)(1)(i), the interest rate for 

the transaction is 7.5 percent (3.5 

percent index rate plus 4 percent 

maximum margin). 

D. Assume the same transaction terms 

set forth in paragraph 3.iii.C, except that 

an initial interest rate of 8 percent 

applies to the transaction. Pursuant to 

§ 1026.32(a)(3)(ii), for purposes of 

determining the annual percentage rate 

for § 1026.32(a)(1)(i), the interest rate for 

the transaction is 8 percent. 

4. Rates that vary other than in 

accordance with an index. Section 

1026.32(a)(3)(iii) applies when the 

interest rate applicable to a closed- or 

open-end transaction may or will vary, 

except as described in 

§ 1026.32(a)(3)(ii). Section 

1026.32(a)(3)(iii) thus applies where 

multiple fixed rates apply to a 

transaction, such as in a step-rate 

mortgage. For example, assume the 

following interest rates will apply to a 

transaction: 3 percent for the first six 

months, 4 percent for the next 10 years, 

and 5 percent for the remaining loan 

term. In this example, 

§ 1026.32(a)(3)(iii) would be used to 

determine the interest rate, and 5 

percent would be the maximum interest 

rate applicable to the transaction used to 

determine the annual percentage rate for 

purposes of § 1026.32(a)(1)(i). Section 

1026.32(a)(3)(iii) also applies to any 

other adjustable-rate loan where the 

interest rate may vary but according to 

a formula other than the sum of an 

index and a margin. 

5. Fixed-rate and -term payment 

options. If an open-end credit plan has 

only a fixed rate during the draw period, 

a creditor must use the interest rate 

applicable to that feature to determine 

the annual percentage rate, as required 

by § 1026.32(a)(3)(i). However, if an 

open-end credit plan has a variable rate, 

but also offers a fixed-rate and -term 

payment option during the draw period, 

§ 1026.32(a)(3) requires a creditor to use 

the terms applicable to the variable-rate 

feature for determining the annual 

percentage rate, as described in 

§ 1026.32(a)(3)(ii). 

32(b) Definitions. 

* * * * * 

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 and –2 for 

additional guidance concerning the 

calculation of points and fees. 

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

1. See comment 32(b)(1)(i)(B)–1 for 

further guidance concerning the 

exclusion of mortgage insurance 

premiums payable in connection with 

any Federal or State agency program. 

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

1. See comment 32(b)(1)(i)(C)–1 and 

–2 for further guidance concerning the 

exclusion of mortgage insurance 

premiums payable for any guaranty or 

insurance that protects the creditor 

against the consumer’s default or other 

credit loss and that is not in connection 

with any Federal or State agency 

program. 

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, –3, and –4 

for further guidance concerning the 

exclusion of bona fide third-party 

charges from points and fees. 

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

1. See comments 32(b)(1)(i)(E)–1 

through –3 for further guidance 

concerning the exclusion of up to two 

bona fide discount points from points 

and fees. 

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

1. See comments 32(b)(1)(i)(F)–1 and 

–2 for further guidance concerning the 

exclusion of up to one bona fide 

discount point from points and fees. 

Paragraph 32(b)(2)(ii). 

1. For purposes of § 1026.32(b)(2)(ii), 

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 the commentary to 

§ 1026.32(b)(1)(ii) for additional 

guidance concerning the inclusion of 

loan originator compensation in points 

and fees. 

Paragraph 32(b)(2)(iii). 

1. Other charges. See comment 

32(b)(1)(iii)–1 for further guidance 

concerning the inclusion of items listed 

in § 1026.4(c)(7) in points and fees. 

Paragraph 32(b)(2)(iv). 

1. Credit insurance and debt 

cancellation or suspension coverage. 

See comments 32(b)(1)(iv)–1 through –3 

for further guidance concerning the 

inclusion of premiums for credit 

insurance and debt cancellation or 

suspension coverage in points and fees. 

Paragraph 32(b)(2)(vii). 

1. Participation fees. Fees charged for 

participation in a credit plan must be 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6971 

included in the points and fees 

calculation for purposes of § 1026.32 if 

payable at or before account opening. 

These fees include annual fees or other 

periodic fees that must be paid as a 

condition of access to the plan itself. 

See commentary to § 1026.4(c)(4) for a 

description of these fees. 

Paragraph 32(b)(2)(viii). 

1. Transaction fees to draw down the 

credit line. Section 1026.32(b)(2)(viii) 

requires creditors in open-end credit 

plans to include in points and fees any 

transaction fee, including any pertransaction fee, that will be charged for 

a draw on the credit line. Section 

1026.32(b)(2)(viii) requires the creditor 

to assume that the consumer will make 

at least one draw during the term of the 

credit plan. Thus, if the terms of the 

open-end credit plan permit the creditor 

to charge a $10 transaction fee each time 

the consumer draws on the credit line, 

§ 1026.32(b)(2)(viii) requires the creditor 

to include one $10 charge in the points 

and fees calculation. 

2. Fixed-rate loan option. If the terms 

of an open-end credit plan permit a 

consumer to draw on the credit line 

using either a variable-rate feature or a 

fixed-rate feature, § 1026.32(b)(2)(viii) 

requires the creditor to use the terms 

applicable to the variable-rate feature for 

determining the transaction fee that 

must be included in the points and fees 

calculation. 

* * * * * 

32(b)(6) Prepayment penalty. 

* * * * * 

3. Examples of prepayment penalties; 

open-end credit. For purposes of 

§ 1026.32(b)(6)(ii), the term prepayment 

penalty includes a charge, including a 

waived closing cost, imposed by the 

creditor if the consumer terminates the 

open-end credit plan prior to the end of 

its term. This includes a charge imposed 

if the consumer terminates the plan 

outright or, for example, if the consumer 

terminates the plan in connection with 

obtaining a new loan or plan with the 

current holder of the existing plan, a 

servicer acting on behalf of the current 

holder, or an affiliate of either. 

However, the term prepayment penalty 

does not include a waived bona fide 

third-party charge imposed by the 

creditor if the consumer terminates the 

open-end credit plan during the first 36 

months after account opening. 

4. Fees that are not prepayment 

penalties; open-end credit. For purposes 

of § 1026.32(b)(6)(ii), fees that are not 

prepayment penalties include, for 

example: 

i. Fees imposed for preparing and 

providing documents when an open-end 

credit plan is terminated, if such fees 

are imposed whether or not the 

consumer terminates the plan prior to 

the end of its term. Examples include a 

payoff statement, a reconveyance 

document, or another document 

releasing the creditor’s security interest 

in the dwelling that secures the line of 

credit. 

ii. Loan guarantee fees. 

iii. Any fee that the creditor may 

impose in lieu of termination and 

acceleration under comment 40(f)(2)–2. 

32(c) Disclosures. 

* * * * * 

32(c)(2) Annual percentage rate. 

1. Disclosing annual percentage rate 

for open-end high-cost mortgages. In 

disclosing the annual percentage rate for 

an open-end, high-cost mortgage under 

§ 1026.32(c)(2), creditors must comply 

with § 1026.6(a)(1). If a fixed-rate, 

discounted introductory or initial 

interest rate is offered on the 

transaction, § 1026.32(c)(2) requires a 

creditor to disclose the annual 

percentage rate of the fixed-rate, 

discounted introductory or initial 

interest rate feature, and the rate that 

would apply when the feature expires. 

32(c)(3) Regular payment; minimum 

periodic payment example; balloon 

payment. 

1. Balloon payment. Except as 

provided in § 1026.32(d)(1)(ii) and (iii), 

a mortgage transaction subject to this 

section may not include a payment 

schedule that results in a balloon 

payment. 

Paragraph 32(c)(3)(i). 

1. General. The regular payment is the 

amount due from the consumer at 

regular intervals, such as monthly, 

bimonthly, quarterly, or annually. There 

must be at least two payments, and the 

payments must be in an amount and at 

such intervals that they fully amortize 

the amount owed. In disclosing the 

regular payment, creditors may rely on 

the rules set forth in § 1026.18(g); 

however, the amounts for voluntary 

items, such as credit life insurance, may 

be included in the regular payment 

disclosure only if the consumer has 

previously agreed to the amounts. 

i. If the loan has more than one 

payment level, the regular payment for 

each level must be disclosed. For 

example: 

A. In a 30-year graduated payment 

mortgage where there will be payments 

of $300 for the first 120 months, $400 

for the next 120 months, and $500 for 

the last 120 months, each payment 

amount must be disclosed, along with 

the length of time that the payment will 

be in effect. 

B. If interest and principal are paid at 

different times, the regular amount for 

each must be disclosed. 

C. In discounted or premium variablerate transactions where the creditor sets 

the initial interest rate and later rate 

adjustments are determined by an index 

or formula, the creditor must disclose 

both the initial payment based on the 

discount or premium and the payment 

that will be in effect thereafter. 

Additional explanatory material which 

does not detract from the required 

disclosures may accompany the 

disclosed amounts. For example, if a 

monthly payment is $250 for the first 

six months and then increases based on 

an index and margin, the creditor could 

use language such as the following: 

‘‘Your regular monthly payment will be 

$250 for six months. After six months 

your regular monthly payment will be 

based on an index and margin, which 

currently would make your payment 

$350. Your actual payment at that time 

may be higher or lower.’’ 

32(c)(4) Variable-rate. 

1. Calculating ‘‘worst-case’’ payment 

example. For a closed-end credit 

transaction, creditors may rely on 

instructions in § 1026.19(b)(2)(viii)(B) 

for calculating the maximum possible 

increases in rates in the shortest 

possible timeframe, based on the face 

amount of the note (not the hypothetical 

loan amount of $10,000 required by 

§ 1026.19(b)(2)(viii)(B)). The creditor 

must provide a maximum payment for 

each payment level, where a payment 

schedule provides for more than one 

payment level and more than one 

maximum payment amount is possible. 

For an open-end credit plan, the 

maximum monthly payment must be 

based on the following assumptions: 

i. The consumer borrows the full 

credit line at account opening with no 

additional extensions of credit. 

ii. The consumer makes only 

minimum periodic payments during the 

draw period and any repayment period. 

iii. If the annual percentage rate may 

increase during the plan, the maximum 

annual percentage rate that is included 

in the contract, as required by § 1026.30, 

applies to the plan at account opening. 

* * * * * 

32(d) Limitations. 

1. Additional prohibitions applicable 

under other sections. Section 1026.34 

sets forth certain prohibitions in 

connection with high-cost mortgages, in 

addition to the limitations in 

§ 1026.32(d). Further, § 1026.35(b) 

prohibits certain practices in connection 

with closed-end transactions that meet 

the coverage test in § 1026.35(a). 

Because the coverage test in § 1026.35(a) 

is generally broader than the coverage 

test in § 1026.32(a), most closed-end 

high-cost mortgages are also subject to 


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6972 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

the prohibitions set forth in § 1026.35(b) 

(such as escrows), in addition to the 

limitations in § 1026.32(d). 

* * * * * 

32(d)(1)(i) Balloon payment. 

1. Regular periodic payments. The 

repayment schedule for a high-cost 

mortgage must fully amortize the 

outstanding principal balance through 

‘‘regular periodic payments.’’ A 

payment is a ‘‘regular periodic 

payment’’ if it is not more than two 

times the amount of other payments. For 

purposes of open-end credit plans, the 

term ‘‘regular periodic payment’’ or 

‘‘periodic payment’’ means the required 

minimum periodic payment. 

2. Repayment period. If the terms of 

an open-end credit plan provide for a 

repayment period during which no 

further draws may be taken, the 

limitations in § 1026.32(d)(1)(i) apply to 

regular periodic payments required by 

the credit plan during the draw period, 

but do not apply to any adjustment in 

the regular periodic payment that 

results from the transition from the 

credit plan’s draw period to its 

repayment period. Further, the 

limitation on balloon payments in 

§ 1026.32(d)(1)(i) does not preclude 

increases in regular periodic payments 

that result solely from the initial draw 

or additional draws on the credit line 

during the draw period. 

3. No repayment period. If the terms 

of an open-end credit plan do not 

provide for a repayment period, the 

repayment schedule must fully amortize 

any outstanding principal balance in the 

draw period through regular periodic 

payments. However, the limitation on 

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

does not preclude increases in regular 

periodic payments that result solely 

from the initial draw or additional 

draws on the credit line during the draw 

period. 

32(d)(2) Negative amortization. 

1. Negative amortization. The 

prohibition against negative 

amortization in a high-cost mortgage 

does not preclude reasonable increases 

in the principal balance that result from 

events permitted by the legal obligation 

unrelated to the payment schedule. For 

example, when a consumer fails to 

obtain property insurance and the 

creditor purchases insurance, the 

creditor may add a reasonable premium 

to the consumer’s principal balance, to 

the extent permitted by applicable law 

and the consumer’s legal obligation. 

* * * * * 

32(d)(8) Acceleration of debt. 

Paragraph 32(d)(8)(i). 

1. Fraud or material 

misrepresentation. A creditor may 

terminate a loan or open-end credit 

agreement and accelerate the balance if 

there has been fraud or material 

misrepresentation by the consumer in 

connection with the loan or open-end 

credit agreement. What constitutes fraud 

or misrepresentation is determined by 

applicable State law and may include 

acts of omission as well as overt acts, as 

long as any necessary intent on the part 

of the consumer exists. 

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

1. Failure to meet repayment terms. A 

creditor may terminate a loan or openend 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)(i) if the consumer 

fails to meet the repayment terms 

resulting in a default of the agreement. 

Section 1026.32(d)(8)(i) 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 loan or open-end credit 

agreement and accelerate the balance. 

Paragraph 32(d)(8)(iii). 

1. Impairment of security. A creditor 

may terminate a loan or open-end credit 

agreement and accelerate the balance if 

the consumer’s action or inaction 

adversely affects the creditor’s security 

for the loan, or any right of the creditor 

in that security. Action or inaction by 

third parties does not, in itself, permit 

the creditor to terminate and accelerate. 

2. * * * 

ii. By contrast, the filing of a judgment 

against the consumer would be cause for 

termination and acceleration only if the 

amount of the judgment and collateral 

subject to the judgment is such that the 

creditor’s security is adversely and 

materially affected in violation of the 

loan or open-end credit agreement. If 

the consumer commits waste or 

otherwise destructively uses or fails to 

maintain the property, including 

demolishing or removing structures 

from the property, such that the action 

adversely affects the security in a 

material way, the loan or open-end 

credit agreement may be terminated and 

the balance accelerated. Illegal use of 

the property by the consumer would 

permit termination and acceleration if it 

subjects the property to seizure. If one 

of two consumers obligated on a loan 

dies, the creditor may terminate the loan 

and accelerate the balance if the security 

is adversely affected. If the consumer 

moves out of the dwelling that secures 

the loan and that action adversely 

affects the security in a material way, 

the creditor may terminate a loan or 

open-end credit agreement and 

accelerate the balance. 

* * * * * 

§ 1026.34 Prohibited Acts or Practices in 

Connection with High-Cost Mortgages 

* * * * * 

34(a)(4) Repayment ability for highcost mortgages. 

1. Application of repayment ability 

rule. The § 1026.34(a)(4) prohibition 

against making loans without regard to 

consumers’ repayment ability applies to 

open-end, high-cost mortgages. The 

§ 1026.43 repayment ability provisions 

apply to closed-end, high-cost 

mortgages. Accordingly, in connection 

with a closed-end, high-cost mortgage, 

§ 1026.34(a)(4) requires a creditor to 

comply with the repayment ability 

requirements set forth in § 1026.43. 

2. General prohibition. Section 

1026.34(a)(4) prohibits a creditor from 

extending credit under a high-cost, 

open-end credit plan based on the value 

of the consumer’s collateral without 

regard to the consumer’s repayment 

ability as of account opening, including 

the consumer’s current and reasonably 

expected income, employment, assets 

other than the collateral, current 

obligations, and property tax and 

insurance obligations. A creditor may 

base its determination of repayment 

ability on current or reasonably 

expected income from employment or 

other sources, on assets other than the 

collateral, or both. 

3. Other dwelling-secured obligations. 

For purposes of § 1026.34(a)(4), current 

obligations include another credit 

obligation of which the creditor has 

knowledge undertaken prior to or at 

account opening and secured by the 

same dwelling that secures the high-cost 

mortgage transaction. 

4. Discounted introductory rates and 

non-amortizing payments. A credit 

agreement may determine a consumer’s 

initial payments using a temporarily 

discounted interest rate or permit the 

consumer to make initial payments that 

are non-amortizing. In such cases the 

creditor may determine repayment 

ability using the assumptions provided 

in § 1026.34(a)(4)(iv). 

5. Repayment ability as of account 

opening. Section 1026.34(a)(4) prohibits 

a creditor from disregarding repayment 

ability based on the facts and 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6973 

circumstances known to the creditor as 

of account opening. In general, a 

creditor does not violate this provision 

if a consumer defaults because of a 

significant reduction in income (for 

example, a job loss) or a significant 

obligation (for example, an obligation 

arising from a major medical expense) 

that occurs after account opening. 

However, if a creditor has knowledge as 

of account opening of reductions in 

income (for example, if a consumer’s 

written application states that the 

consumer plans to retire within twelve 

months without obtaining new 

employment, or states that the consumer 

will transition from full-time to parttime employment), the creditor must 

consider that information. 

* * * * * 

34(a)(4)(ii) Verification of Repayment 

Ability. 

* * * * * 

Paragraph 34(a)(4)(ii)(B). 

1. In general. A credit report may be 

used to verify current obligations. A 

credit report, however, might not reflect 

an obligation that a consumer has listed 

on an application. The creditor is 

responsible for considering such an 

obligation, but the creditor is not 

required to independently verify the 

obligation. Similarly, a creditor is 

responsible for considering certain 

obligations undertaken just before or at 

account opening and secured by the 

same dwelling that secures the 

transaction (for example, a ‘‘piggy back’’ 

loan), of which the creditor knows, even 

if not reflected on a credit report. See 

comment 34(a)(4)–3. 

34(a)(4)(iii) Presumption of 

compliance. 

1. In general. A creditor is presumed 

to have complied with § 1026.34(a)(4) if 

the creditor follows the three 

underwriting procedures specified in 

paragraph 34(a)(4)(iii) for verifying 

repayment ability, determining the 

payment obligation, and measuring the 

relationship of obligations to income. 

The procedures for verifying repayment 

ability are required under 

§ 1026.34(a)(4)(ii); the other procedures 

are not required but, if followed along 

with the required procedures, create a 

presumption that the creditor has 

complied with § 1026.34(a)(4). The 

consumer may rebut the presumption 

with evidence that the creditor 

nonetheless disregarded repayment 

ability despite following these 

procedures. For example, evidence of a 

very high debt-to-income ratio and a 

very limited residual income could be 

sufficient to rebut the presumption, 

depending on all of the facts and 

circumstances. If a creditor fails to 

follow one of the non-required 

procedures set forth in 

§ 1026.34(a)(4)(iii), then the creditor’s 

compliance is determined based on all 

of the facts and circumstances without 

there being a presumption of either 

compliance or violation. 

Paragraph 34(a)(4)(iii)(B). 

1. Determination of payment 

schedule. To retain a presumption of 

compliance under § 1026.34(a)(4)(iii), a 

creditor must determine the consumer’s 

ability to pay the principal and interest 

obligation based on the maximum 

scheduled payment. In general, a 

creditor should determine a payment 

schedule for purposes of 

§ 1026.34(a)(4)(iii)(B) based on the 

guidance in the commentary to 

§ 1026.32(c)(3). 

* * * * * 

34(a)(5) Pre-loan counseling. 

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

required. 

1. HUD-approved counselor. For 

purposes of § 1026.34(a)(5), counselors 

approved by the Secretary of the U.S. 

Department of Housing and Urban 

Development are homeownership 

counselors certified pursuant to section 

106(e) of the Housing and Urban 

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

1701x(e)), or as otherwise determined 

by the Secretary. 

2. State housing finance authority. For 

purposes of § 1026.34(a)(5), a ‘‘State 

housing finance authority’’ has the same 

meaning as ‘‘State housing finance 

agency’’ provided in 24 CFR 214.3. 

3. Processing applications. Prior to 

receiving certification of counseling, a 

creditor may not extend a high-cost 

mortgage, but may engage in other 

activities, such as processing an 

application that will result in the 

extension of a high-cost mortgage (by, 

for example, ordering an appraisal or 

title search). 

4. Form of certification. The written 

certification of counseling required by 

§ 1026.34(a)(5)(i) may be received by 

mail, email, facsimile, or any other 

method, so long as the certification is in 

a retainable form. 

5. Purpose of certification. 

Certification of counseling indicates that 

a consumer has received counseling as 

required by § 1026.34(a)(5), but it does 

not indicate that a counselor has made 

a judgment or determination as to the 

appropriateness of the transaction for 

the consumer. 

34(a)(5)(ii) Timing of counseling. 

1. Disclosures for open-end credit 

plans. Section 1026.34(a)(5)(ii) permits 

receipt of either the good faith estimate 

required by section 5(c) of RESPA or the 

disclosures required under § 1026.40 to 

allow counseling to occur. Pursuant to 

12 CFR 1024.7(h), the disclosures 

required by § 1026.40 can be provided 

in lieu of a good faith estimate for openend credit plans. 

2. Initial disclosure. Counseling may 

occur after receipt of either an initial 

good faith estimate required by section 

5(c) of RESPA or a disclosure form 

pursuant to § 1026.40, regardless of 

whether a revised good faith estimate or 

revised disclosure form pursuant to 

§ 1026.40 is subsequently provided to 

the consumer. 

34(a)(5)(iv) Content of certification. 

1. Statement of counseling on 

advisability. A statement that a 

consumer has received counseling on 

the advisability of the high-cost 

mortgage means that the consumer has 

received counseling about key terms of 

the mortgage transaction, as set out in 

either the good faith estimate required 

by section 5(c) of RESPA or the 

disclosures provided to the consumer 

pursuant to § 1026.40; the consumer’s 

budget, including the consumer’s 

income, assets, financial obligations, 

and expenses; and the affordability of 

the mortgage transaction for the 

consumer. Examples of such terms of 

the mortgage transaction include the 

initial interest rate, the initial monthly 

payment, whether the payment may 

increase, how the minimum periodic 

payment will be determined, and fees 

imposed by the creditor, as may be 

reflected in the applicable disclosure. A 

statement that a consumer has received 

counseling on the advisability of the 

high-cost mortgage does not require the 

counselor to have made a judgment or 

determination as to the appropriateness 

of the mortgage transaction for the 

consumer. 

2. Statement of verification. A 

statement that a counselor has verified 

that the consumer has received the 

disclosures required by either 

§ 1026.32(c) or by RESPA for the highcost mortgage means that a counselor 

has confirmed, orally, in writing, or by 

some other means, receipt of such 

disclosures with the consumer. 

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

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

does not prohibit a creditor from 

financing the counseling fee as part of 

the transaction for a high-cost mortgage, 

if the fee is a bona fide third- party 

charge as provided by § 1026.32(b)(5)(i). 

34(a)(5)(vi) Steering prohibited. 

1. An example of an action that 

constitutes steering would be when a 

creditor repeatedly highlights or 

otherwise distinguishes the same 

counselor in the notices the creditor 

provides to consumers pursuant to 

§ 1026.34(a)(5)(vii). 


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6974 Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 

2. Section 1026.34(a)(5)(vi) does not 

prohibit a creditor from providing a 

consumer with objective information 

related to counselors or counseling 

organizations in response to a 

consumer’s inquiry. An example of an 

action that would not constitute steering 

would be when a consumer asks the 

creditor for information about the fees 

charged by a counselor, and the creditor 

responds by providing the consumer 

information about fees charged by the 

counselor to other consumers that 

previously obtained counseling 

pursuant to § 1026.34(a)(5). 

34(a)(6) Recommended default. 

1. Facts and circumstances. Whether 

a creditor or mortgage broker 

‘‘recommends or encourages’’ default for 

purposes of § 1026.34(a)(6) depends on 

all of the relevant facts and 

circumstances. 

2. Examples. i. A creditor or mortgage 

broker ‘‘recommends or encourages’’ 

default when the creditor or mortgage 

broker advises the consumer to stop 

making payments on an existing loan in 

a manner that is likely to cause the 

consumer to default on the existing 

loan. 

ii. When delay of consummation of a 

high-cost mortgage occurs for reasons 

outside the control of a creditor or 

mortgage broker, that creditor or 

mortgage broker does not ‘‘recommend 

or encourage’’ default because the 

creditor or mortgage broker informed a 

consumer that: 

A. The consumer’s high-cost mortgage 

is scheduled to be consummated prior 

to the due date for the next payment due 

on the consumer’s existing loan, which 

is intended to be paid by the proceeds 

of the new high-cost mortgage; and 

B. Any delay of consummation of the 

new high-cost mortgage beyond the 

payment due date of the existing loan 

will not relieve the consumer of the 

obligation to make timely payment on 

that loan. 

34(a)(8) Late fees. 

34(a)(8)(i) General. 

1. For purposes of § 1026.34(a)(8), in 

connection with an open-end credit 

plan, the amount of the payment past 

due is the required minimum periodic 

payment as provided under the terms of 

the open-end credit agreement. 

34(a)(8)(iii) Multiple late charges 

assessed on payment subsequently paid. 

1. Section 1026.34(a)(8)(iii) prohibits 

the pyramiding of late fees or charges in 

connection with a high-cost mortgage 

payment. For example, assume that a 

consumer’s regular periodic payment of 

$500 is due on the 1st of each month. 

On August 25, the consumer makes a 

$500 payment which was due on 

August 1, and as a result, a $10 late 

charge is assessed. On September 1, the 

consumer makes another $500 payment 

for the regular periodic payment due on 

September 1, but does not pay the $10 

late charge assessed on the August 

payment. Under § 1026.34(h)(2), it is 

impermissible to allocate $10 of the 

consumer’s September 1 payment to 

cover the late charge, such that the 

September payment becomes 

delinquent. In short, because the $500 

payment made on September 1 is a full 

payment for the applicable period and 

is paid by its due date or within any 

applicable grace period, no late charge 

may be imposed on the account in 

connection with the September 

payment. 

34(a)(8)(iv) Failure to make required 

payment. 

1. Under § 1026.34(a)(8)(iv), if a 

consumer fails to make one or more 

required payments and then resumes 

making payments but fails to bring the 

account current, it is permissible, if 

permitted by the terms of the loan 

contract or open-end credit agreement, 

to apply the consumer’s payments first 

to the past due payment(s) and to 

impose a late charge on each subsequent 

required payment until the account is 

brought current. To illustrate: Assume 

that a consumer’s regular periodic 

payment of $500 is due on the 1st of 

each month, or before the expiration of 

a 15-day grace period. Also assume that 

the consumer fails to make a timely 

installment payment by August 1 (or 

within the applicable grace period), and 

a $10 late charge therefore is imposed. 

The consumer resumes making monthly 

payments on September 1. Under 

§ 1026.34(a)(8)(iv), if permitted by the 

terms of the loan contract, the creditor 

may apply the $500 payment made on 

September 1 to satisfy the missed $500 

payment that was due on August 1. If 

the consumer makes no other payment 

prior to the end of the grace period for 

the payment that was due on September 

1, the creditor may also impose a $10 

late fee for the payment that was due on 

September 1. 

34(a)(10) Financing of points and 

fees. 

1. Points and fees. For purposes of 

§ 1026.34(a)(10), ‘‘points and fees’’ 

means those items that are required to 

be included in the calculation of points 

and fees under § 1026.32(b)(1) and (2). 

Thus, for example, in connection with 

the extension of credit under a high-cost 

mortgage, a creditor may finance a fee 

charged by a third-party counselor in 

connection with the consumer’s receipt 

of pre-loan counseling under 

§ 1026.34(a)(5), because, pursuant to 

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

such a fee is excluded from the 

calculation of points and fees as a bona 

fide third-party charge. 

2. Examples of financing points and 

fees. For purposes of § 1026.34(a)(10), 

points and fees are financed if, for 

example, they are added to the loan 

balance or financed through a separate 

note, if the note is payable to the 

creditor or to an affiliate of the creditor. 

In the case of an open-end credit plan, 

a creditor also finances points and fees 

if the creditor advances funds from the 

credit line to cover the fees. 

34(b) Prohibited acts or practices for 

dwelling-secured loans; structuring 

loans to evade high-cost mortgage 

requirements. 

1. Examples. i. A creditor structures a 

transaction in violation of § 1026.34(b) 

if, for example, the creditor structures a 

loan that would otherwise be a high-cost 

mortgage as two or more loans, whether 

made consecutively or at the same time, 

for example, to divide the loan fees to 

avoid the points and fees threshold for 

high-cost mortgages in 

§ 1026.32(a)(1)(ii). 

ii. A creditor does not structure a 

transaction in violation of § 1026.34(b) 

when a loan to finance the initial 

construction of a dwelling may be 

permanently financed by the same 

creditor, such as a ‘‘construction-topermanent’’ loan, and the construction 

phase and the permanent phase are 

treated as separate transactions. Section 

1026.17(c)(6)(ii) permits the creditor to 

give either one combined disclosure for 

both the construction financing and the 

permanent financing, or a separate set of 

disclosures for each of the two phases 

as though they were two separate 

transactions. See also comment 

17(c)(6)–2. 

2. Amount of credit extended. Where 

a loan is documented as open-end credit 

but the features and terms or other 

circumstances demonstrate that it does 

not meet the definition of open-end 

credit, the loan is subject to the rules for 

closed-end credit. Thus, in determining 

the ‘‘total loan amount’’ for purposes of 

applying the triggers under § 1026.32, 

the amount of credit that would have 

been extended if the loan had been 

documented as a closed-end loan is a 

factual determination to be made in 

each case. Factors to be considered 

include the amount of money the 

consumer originally requested, the 

amount of the first advance or the 

highest outstanding balance, or the 

amount of the credit line. The full 

amount of the credit line is considered 

only to the extent that it is reasonable 

to expect that the consumer might use 

the full amount of credit. 

* * * * * 


srobinson on DSK4SPTVN1PROD with 
Federal Register / Vol. 78, No. 21 / Thursday, January 31, 2013 / Rules and Regulations 6975 

§ 1026.36 Prohibited Acts or Practices in 

Connection with Credit Secured by a 

Dwelling 

* * * * * 

36(k) Negative amortization 

counseling. 

36(k)(1) Counseling required. 

1. HUD-certified or -approved 

counselor or counseling organization. 

For purposes of § 1026.36(k), 

organizations or counselors certified or 

approved by the U.S. Department of 

Housing and Urban Development (HUD) 

to provide the homeownership 

counseling required by § 1026.36(k) 

include counselors and counseling 

organizations that are certified or 

approved pursuant to section 106(e) of 

the Housing and Urban Development 

Act of 1968 (12 U.S.C. 1701x(e)) or 24 

CFR part 214, unless HUD determines 

otherwise. 

2. Homeownership counseling. The 

counseling required under § 1026.36(k) 

must include information regarding the 

risks and consequences of negative 

amortization. 

3. Documentation. Examples of 

documentation that demonstrate a 

consumer has received the counseling 

required under § 1026.36(k) include a 

certificate of counseling, letter, or email 

from a HUD-certified or -approved 

counselor or counseling organization 

indicating that the consumer has 

received homeownership counseling. 

4. Processing applications. Prior to 

receiving documentation that a 

consumer has received the counseling 

required under § 1026.36(k), a creditor 

may not extend credit to a first-time 

borrower in connection with a closedend transaction secured by a dwelling 

that may result in negative amortization, 

but may engage in other activities, such 

as processing an application for such a 

transaction (by, for example, ordering an 

appraisal or title search). 

36(k)(3) Steering prohibited. 

1. See comments 34(a)(5)(vi)–1 and –2 

for guidance concerning steering. 

* * * * * 

Dated: January 10, 2013. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2013–00740 Filed 1–18–13; 11:15 am] 

BILLING CODE 4810–AM–P 


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