Federal Register / Vol. 78, No. 75 / Thursday, April 18, 2013 / Proposed Rules 23171 

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

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

Qualified Mortgage Standards under the Truth in 

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

78 FR 6407; High-Cost Mortgages and 

Homeownership Counseling Amendments to the 

Truth in Lending Act (Regulation Z) and 

Homeownership Counseling Amendments to the 

Real Estate Settlement Procedures Act (Regulation 

X) (2013 HOEPA Final Rule), 78 FR 6855; 

Disclosure and Delivery Requirements for Copies of 

Appraisals and Other Written Valuations under the 

Equal Credit Opportunity Act (Regulation B), 78 FR 

7215; Mortgage Servicing Rules Under the Real 

Estate Settlement Procedures Act (Regulation X), 78 

FR 10695; Mortgage Servicing Rules Under the 

Truth in Lending Act (Regulation Z), 78 FR 10901; 

Appraisals for Higher-Priced Mortgage Loans 

(issued jointly with other agencies) (2013 

Interagency Appraisals Final Rule), 78 FR 10367; 

Loan Originator Compensation Requirements under 

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

11279. 

Board, if the company is a U.S. 

company, this amount will be the 

average of the nonbank financial 

company’s total consolidated assets as 

reported for the assessment period on 

such regulatory or other reports as are 

applicable to the nonbank financial 

company determined by the Board; if 

the company is a foreign company, this 

amount will be the average of the 

nonbank financial company’s total 

combined assets of U.S. operations, net 

of intercompany balances and 

transactions between U.S. domiciled 

affiliates, branches and agencies, as 

reported for the assessment period on 

such regulatory or other reports as 

determined by the Board as applicable 

to the nonbank financial company. 

§ 246.5 Notice of Assessment and Appeal 

(a) Notice of Assessment. The Board 

shall issue a notice of assessment to 

each assessed company no later than 

July 15 of each calendar year following 

the assessment period. 

(b) Appeal Period. 

(1) Each assessed company will have 

thirty calendar days from July 15 to 

submit a written statement to appeal the 

Board’s determination (i) that the 

company is an assessed company; or (ii) 

of the company’s total assessable assets. 

(2) The Board will respond with the 

results of its consideration to an 

assessed company that has submitted a 

written appeal within 15 calendar days 

from the end of the appeal period. 

§ 246.6 Collection of Assessments; 

Payment of Interest. 

(a) Collection date. Each assessed 

company shall remit to the Federal 

Reserve the amount of its assessment 

using the Fedwire Funds Service by 

September 30 of the calendar year 

following the assessment period. 

(b) Payment of interest. 

(1) If the Board does not receive the 

total amount of an assessed company’s 

assessment by the collection date for 

any reason not attributable to the Board, 

the assessment will be delinquent and 

the assessed company shall pay to the 

Board interest on any sum owed to the 

Board according to this rule (delinquent 

payments). 

(2) Interest on delinquent payments 

will be assessed beginning on the first 

calendar day after the collection date, 

and on each calendar day thereafter up 

to and including the day payment is 

received. Interest will be simple 

interest, calculated for each day 

payment is delinquent by multiplying 

the daily equivalent of the applicable 

interest rate by the amount delinquent. 

The rate of interest will be the United 

State Treasury Department’s current 

value of funds rate (the ‘‘CVFR 

percentage’’); issued under the Treasury 

Fiscal Requirements Manual and 

published quarterly in the Federal 

Register. Each delinquent payment will 

be charged interest based on the CVFR 

percentage applicable to the quarter in 

which all or part of the assessment goes 

unpaid. 

By order of the Board of Governors of the 

Federal Reserve System, April 12, 2013. 

Robert deV. Frierson, 

Secretary of the Board. 

[FR Doc. 2013–09061 Filed 4–17–13; 8:45 am] 

BILLING CODE P 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Part 1026 

[Docket No. CFPB–2013–0009] 

RIN 3170–AA37 

Amendments to the 2013 Escrows 

Final Rule Under the Truth in Lending 

Act (Regulation Z) 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Proposed rule with request for 

public comment. 

SUMMARY: This rule proposes clarifying 

and technical amendments to a final 

rule issued by the Bureau of Consumer 

Financial Protection (Bureau) on 

January 10, 2013, which, among other 

things, lengthens the time for which a 

mandatory escrow account established 

for a higher-priced mortgage loan 

(HPML) must be maintained. The rule 

also established an exemption from the 

escrow requirement for certain creditors 

that operate predominantly in ‘‘rural’’ or 

‘‘underserved’’ areas. The amendments 

clarify the determination method for the 

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

and keep in place certain existing 

protections for HPMLs until other 

similar provisions take effect in January 

2014. 

DATES: Comments must be received on 

or before May 3, 2013. 

ADDRESSES: You may submit comments, 

identified by Docket No. CFPB–2013– 

0009 or RIN 3170–AA37, by any of the 

following methods: 

• Electronic: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail/Hand Delivery/Courier: 

Monica Jackson, Office of the Executive 

Secretary, Consumer Financial 

Protection Bureau, 1700 G Street NW., 

Washington, DC 20552. 

Instructions: All submissions should 

include the agency name and docket 

number or Regulatory Information 

Number (RIN) for this rulemaking. 

Because paper mail in the Washington, 

DC area and at the Bureau is subject to 

delay, commenters are encouraged to 

submit comments electronically. In 

general, all comments received will be 

posted without change to http:// 

www.regulations.gov. In addition, 

comments will be available for public 

inspection and copying at 1700 G Street 

NW., Washington, DC 20552, on official 

business days between the hours of 10 

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

make an appointment to inspect the 

documents by telephoning (202) 435– 

7275. 

All comments, including attachments 

and other supporting materials, will 

become part of the public record and 

subject to public disclosure. Sensitive 

personal information, such as account 

numbers or social security numbers, 

should not be included. Comments will 

not be edited to remove any identifying 

or contact information. 

FOR FURTHER INFORMATION CONTACT: 

Whitney Patross, Attorney; Joseph 

Devlin and Richard Arculin, Counsels; 

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

SUPPLEMENTARY INFORMATION: 

I. Summary of Proposed Rule 

In January 2013, the Bureau issued 

several final rules concerning mortgage 

markets in the United States pursuant to 

the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank 

Act) Public Law 111–203, 124 Stat. 1376 

(2010) (2013 Title XIV Final Rules). One 

of these rules was Escrow Requirements 

Under the Truth in Lending Act 

(Regulation Z) (2013 Escrows Final 

Rule),1 issued on January 10.2 The rule 

expanded on an existing Regulation Z 

requirement that creditors maintain 

escrow accounts for higher-priced 

mortgage loans and created an 

exemption for certain loans made by 


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23172 Federal Register / Vol. 78, No. 75 / Thursday, April 18, 2013 / Proposed Rules 

3The specific provisions that rely on the ‘‘rural’’ 

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

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

Escrows Final Rule’s escrow requirement for 

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

allowance for balloon-payment qualified mortgages; 

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

balloon payment prohibition on high-cost 

mortgages; and (4) the § 1026.35(c)(4)(vii)(H) 

exemption from the § 1026.35(c)(4)(i) HPML second 

appraisal requirement for credit transactions made 

by creditors located in a rural county. 

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

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

Public Law 111–203, secs. 1001–1100H, codified at 

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

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

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

excludes from this transfer of authority, subject to 

certain exceptions, any rulemaking authority over a 

motor vehicle dealer that is predominantly engaged 

in the sale and servicing of motor vehicles, the 

leasing and servicing of motor vehicles, or both. 12 

U.S.C. 5519. 

5 78 FR 4726 (Jan. 22, 2013). 

6Consumer Financial Protection Bureau Lays Out 

Implementation Plan for New Mortgage Rules. Press 

Release. Feb. 13, 2013. 

7 12 U.S.C. 5581(a)(1). 

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

5481(14) (defining ‘‘Federal consumer financial 

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

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

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

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

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

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

laws’’ to certain subtitles and provisions of title 

XIV). 

9 78 FR 4726 (January 22, 2013). 

10 78 FR 6856 (January 31, 2013). 

certain creditors that operate 

predominantly in ‘‘rural’’ or 

‘‘underserved’’ areas. Three other of the 

2013 Title XIV Final Rules also contain 

provisions affecting certain loans made 

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

The Bureau is now proposing certain 

clarifying and technical amendments to 

the 2013 Escrows Final Rule, including 

clarification of how to determine 

whether a county is considered ‘‘rural’’ 

or ‘‘underserved’’ for the application of 

the escrows requirement and the other 

Dodd-Frank Act regulations.3

Specifically, the Bureau is proposing 

changes to clarify how a county’s 

‘‘rural’’ and ‘‘underserved’’ status may 

be determined based on currently 

applicable Urban Influence Codes 

(UICs) established by the United States 

Department of Agriculture, Economic 

Research Service (USDA–ERS) (for 

‘‘rural’’) or based on Home Mortgage 

Disclosure Act (HMDA) data (for 

‘‘underserved’’) and to provide 

illustrations of the rule to facilitate 

compliance. 

In addition, the proposal would 

restore certain existing Regulation Z 

requirements related to the consumer’s 

ability to repay and prepayment 

penalties for HPMLs. The scope of these 

protections is being expanded in 

connection with the 2013 Title XIV 

Final Rules to apply to most mortgage 

transactions, rather than just HPMLs. 

For this reason, the 2013 Escrows Final 

Rule removed the regulatory text 

providing these protections solely to 

HPMLs. That final rule, however, takes 

effect on June 1, 2013, whereas the new 

ability-to-repay and prepayment penalty 

provisions do not take effect until 

January 10, 2014. To prevent any 

interruption in applicable protections, 

this proposal would establish a 

temporary provision to ensure the 

protections remain in place for HPMLs 

until the expanded provisions take 

effect in January 2014. 

In addition, the Bureau is making 

some technical corrections to enhance 

clarity. 

II. Background 

A. Title XIV Rulemakings Under the 

Dodd-Frank Act and the 2013 Escrows 

Final Rule 

In response to an unprecedented cycle 

of expansion and contraction in the 

mortgage market that sparked the most 

severe U.S. recession since the Great 

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

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

Congress established the Bureau and, 

under sections 1061 and 1100A, 

generally consolidated the rulemaking 

authority for Federal consumer financial 

laws, including the Truth in Lending 

Act (TILA), in the Bureau.4 At the same 

time, Congress significantly amended 

the statutory requirements governing 

mortgages with the intent to restrict the 

practices that contributed to and 

exacerbated the crisis. In January 2013, 

the Bureau issued the 2013 Title XIV 

Final Rules. The 2013 Escrows Final 

Rule,5 issued on January 10, was one of 

these rules. Among the 2013 Title XIV 

Final Rules in January were the 2013 

ATR Final Rule, 2013 HOEPA Final 

Rule, and 2013 Interagency Appraisals 

Final Rule. 

B. Implementation Plan for New 

Mortgage Rules 

On February 13, 2013, the Bureau 

announced an initiative to support 

implementation of the new mortgage 

rules (Implementation Plan),6 under 

which the Bureau would work with the 

mortgage industry to ensure that the 

2013 Title XIV Final Rules can be 

implemented accurately and 

expeditiously. The Implementation Plan 

included: (1) Coordination with other 

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

publication of additional interpretive 

guidance and other updates regarding 

the new rules as needed; (4) publication 

of readiness guides for the new rules; 

and (5) education of consumers on the 

new rules. 

This proposed rule is the first 

publication of additional guidance and 

updates regarding the 2013 Title XIV 

Final Rules. Priority for this first set of 

updates has been given to the 2013 

Escrows Final Rule because the effective 

date is June 1, 2013, and certainty 

regarding compliance is a matter of 

some urgency. Another update to 

certain of the 2013 Title XIV Final Rules 

will be proposed shortly, which will 

affect provisions that take effect in 

January 2014, and others will be issued 

as needed. 

III. Legal Authority 

The Bureau is issuing this proposed 

rule pursuant to its authority under 

TILA and the Dodd-Frank Act. Section 

1061 of the Dodd-Frank Act transferred 

to the Bureau the ‘‘consumer financial 

protection functions’’ previously vested 

in certain other Federal agencies, 

including the Federal Reserve Board 

(Board) and the Department of Housing 

and Urban Development (HUD). 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.’’ 7

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

certain subtitles and provisions of title 

XIV of the Dodd-Frank Act are Federal 

consumer financial laws.8 Accordingly, 

the Bureau has authority to issue 

regulations pursuant to TILA, title X, 

and the enumerated subtitles and 

provisions of title XIV. 

The Bureau is proposing to amend the 

2013 Escrows Final Rule.9 This 

proposed rule relies on the broad 

rulemaking authority specifically 

granted to the Bureau by TILA section 

105(a) and title X of the Dodd-Frank 

Act, as well as the exemption authority 

in TILA section 129D(c). Additionally, 

the proposed rule relies on the 

rulemaking authority used in 

connection with the 2013 HOEPA Final 

Rule,10 including RESPA section 19(a) 

and TILA section 129(p). 


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11See http://www.ers.usda.gov/data-products/ 

urban-influence-codes/documentation.aspx. 

IV. Section-by-Section Analysis 

Section 1026.35 Requirements for 

Higher-Priced Mortgage Loans 

35(b) Escrow Accounts 

35(b)(1) 

The Bureau is making a technical 

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

citation. 

35(b)(2) Exemptions 

‘‘Rural’’ or ‘‘Underserved’’ Designation 

Four of the Bureau’s January 2013 

mortgage rules included provisions that 

provide for special treatment under 

various Regulation Z requirements for 

certain credit transactions made by 

creditors operating predominantly in 

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

§ 1026.35(b)(2)(iii) provides an 

exemption to the 2013 Escrows Final 

Rule’s escrow requirement for HPMLs; 

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

originate balloon-payment qualified 

mortgages under the 2013 ATR Final 

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

an exemption from the balloon payment 

prohibition on high-cost mortgages 

under the 2013 HOEPA Final Rule; and 

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

exemption from a requirement to obtain 

a second appraisal for certain HPMLs 

under the 2013 Interagency Appraisals 

Final Rule. These provisions rely on the 

criteria for ‘‘rural’’ and/or 

‘‘underserved’’ counties set forth in 

§ 1026.35(b)(2)(iv)(A) and (B), 

respectively, of the 2013 Escrows Final 

Rule, which takes effect on June 1, 2013. 

Two special provisions for creditors 

operating predominantly in ‘‘rural’’ or 

‘‘underserved’’ areas were set forth in 

the Dodd-Frank Act amendments to 

TILA, but the terms were not defined by 

statute. TILA section 129D, as added 

and amended by Dodd-Frank Act 

sections 1461 and 1462 and 

implemented by § 1026.35(b), generally 

requires that creditors establish escrow 

accounts for HPMLs secured by a first 

lien on a consumer’s principal dwelling, 

but the statute also authorizes the 

Bureau to exempt from this requirement 

transactions by a creditor that, among 

other criteria, ‘‘operates predominantly 

in rural or underserved areas.’’ TILA 

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

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

criteria with regard to certain balloonpayment mortgages originated and held 

in portfolio by certain creditors that 

operate predominantly in rural or 

underserved areas, allowing those loans 

to be considered qualified mortgages. 

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

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

Escrows and ATR Final Rules, the 

Bureau implemented the HPML escrows 

requirement and the section 1412 

balloon-payment qualified mortgage 

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

and 1026.43(f), respectively. In addition, 

the Bureau adopted an exemption to the 

general prohibition of balloon payments 

for high-cost mortgages when those 

mortgages meet the criteria for balloonpayment qualified mortgages set forth in 

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

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

Finally, the Bureau and other Federal 

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

which provides an exemption from a 

requirement to obtain a second 

appraisal for certain HPMLs under the 

2013 Interagency Appraisals Final Rule 

for credit transactions made by creditors 

in rural counties. 

Through the 2013 Escrows Final Rule, 

the Bureau adopted 

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

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

for the purposes of the four rules 

discussed above that contain special 

provisions that use one or both of those 

terms. The 2013 Escrows Final Rule also 

provided comment 35(b)(2)(iv)–1 to 

clarify further the criteria for ‘‘rural’’ 

and ‘‘underserved’’ counties, and 

provided that the Bureau will annually 

update on its public Web site a list of 

counties that meet the definitions of 

rural and underserved in 

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

rule’s June 1 effective date, the Bureau 

is proposing to amend 

§ 1026.35(b)(2)(iv) and comment 

35(b)(2)(iv)–1 to clarify how to 

determine whether a county is rural or 

underserved for the purposes of these 

provisions. 

35(b)(2)(iii) 

The Bureau is proposing 

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

comment 35(b)(2)(iii)–1.i for 

clarification purposes and for 

consistency with other provisions. As 

adopted, § 1026.35(b)(2)(iii) and its 

commentary state that the Bureau will 

designate or determine which counties 

are rural or underserved for the 

purposes of the special provisions of the 

four rules discussed above. This was not 

the Bureau’s intent. Rather, the Bureau 

intended to require determinations of 

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

made by creditors as prescribed by 

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

intended for the Bureau to apply both 

tests to each U.S. county and publish an 

annual list of counties that satisfy either 

test for a given calendar year, which 

creditors may rely upon as a safe harbor. 

The Bureau is proposing modifications 

to § 1026.35(b)(2)(iii)(A) and comment 

35(b)(2)(iii)–1.i for the purposes of 

clarification and consistency with these 

provisions. 

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

‘‘Rural’’ 

As adopted, § 1026.35(b)(2)(iv)(A) 

defines ‘‘rural’’ based on currently 

applicable UICs established by the 

USDA–ERS. The UICs are based on the 

definitions of ‘‘metropolitan statistical 

area’’ and ‘‘micropolitan statistical area’’ 

as developed by the Office of 

Management and Budget (OMB), along 

with other factors reviewed by the ERS 

that place counties into twelve 

separately defined UICs depending, in 

part, on the size of the largest city and 

town in the county. Based on these 

definitions, § 1026.35(b)(2)(iv)(A) as 

adopted states that a county is ‘‘rural’’ 

during a calendar year if it is neither in 

a metropolitan statistical area nor in a 

micropolitan statistical area that is 

adjacent to a metropolitan statistical 

area, as those terms are defined by OMB 

and applied under currently applicable 

UICs. 

As adopted, comment 35(b)(2)(iv)–1.i 

explains that, for the purposes of the 

provision, the terms ‘‘metropolitan 

statistical areas’’ and ‘‘micropolitan 

statistical areas adjacent to a 

metropolitan statistical area’’ are given 

the same meanings used by USDA–ERS 

for the purposes of determining UICs. 

The USDA–ERS considers micropolitan 

counties as ‘‘adjacent’’ to a metropolitan 

statistical area for this purpose if they 

abut a metropolitan statistical area and 

have at least 2% of employed persons 

commuting to work in the core of the 

metropolitan statistical area.11 It is thus 

implicit in this comment that 

‘‘adjacent’’ is given the same meaning 

used by the USDA–ERS for the purposes 

of § 1026.35(b)(2)(iv)(A). 

Nevertheless, the Bureau believes 

additional commentary that explains the 

meaning of ‘‘adjacent’’ more directly 

would be useful to facilitate compliance 

with § 1026.35(b)(2)(iv) and the 

provisions that rely on it. Accordingly, 

the Bureau is proposing to amend 

comment 35(b)(2)(iv)–1.i. to state 

expressly that ‘‘adjacent’’ entails 

physical contiguity with a metropolitan 

statistical area where certain minimum 

commuting standards are also met, as 

defined by the USDA–ERS. The Bureau 

believes this is consistent with USDA– 

ERS’s use of ‘‘adjacent’’ and better 

explains the rule for compliance 

purposes. 

Similarly, the Bureau is proposing 

language to specify under 

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


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12 73 FR 44522 (July 30, 2008). 

13Section 1022(b)(2)(A) of the Dodd-Frank Act, 

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

prescribing a rule under the Federal consumer 

financial laws, to consider the potential benefits 

and costs of regulation to consumers and covered 

persons, including the potential reduction of access 

by consumers to consumer financial products or 

services; the impact on insured depository 

institutions and credit unions with $10 billion or 

less in total assets as described in section 1026 of 

the Dodd-Frank Act; and the impact on consumers 

in rural areas. Section 1022(b)(2)(B) of the DoddFrank Act directs the Bureau to consult with 

appropriate prudential regulators or other Federal 

agencies regarding consistency with prudential, 

market, or systemic objectives that those agencies 

administer. 

14The special provisions that rely on the ‘‘rural’’ 

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

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

Escrows Final Rule’s escrow requirement for 

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

allowance for balloon-payment qualified mortgages; 

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

balloon payment prohibition on high-cost 

mortgages; and (4) the § 1026.35(c)(4)(vii)(H) 

exemption from the § 1026.35(c)(4)(i) HPML second 

appraisal requirement for credit transactions made 

by creditors located in a rural county. 

should be determined for a county that 

does not have a currently applicable 

UIC because it was created after the 

USDA–ERS last categorized counties by 

UIC. Because the USDA–ERS only 

updates UICs decennially based on the 

most recent census, it is possible that 

new counties may be created that will 

not have a designated UIC until after the 

next census. In such instances, 

clarification is needed to explain how 

‘‘rural’’ status would be determined. 

The Bureau is proposing to amend 

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

issue and explain that any such county 

is considered ‘‘rural’’ for the purposes of 

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

from which the new county’s land was 

taken are themselves rural under the 

rule. 

The Bureau is also proposing 

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

example of how ‘‘rural’’ status is 

determined. In addition, the Bureau is 

making small technical changes to the 

rule provision and commentary to 

enhance clarity. 

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

‘‘Underserved’’ 

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

an exemption from the HPML escrow 

requirement for transactions by 

creditors operating in rural or 

underserved counties, if they meet 

certain criteria involving the loans they 

originated during the preceding 

calendar year. Thus, the availability of 

the rural or underserved exemption 

always follows a year after the 

origination activity that makes a creditor 

eligible for the exemption. 

As adopted by the 2013 Escrows Final 

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

county is ‘‘underserved’’ during a 

calendar year if, ‘‘according to Home 

Mortgage Disclosure Act (HMDA) data 

for that year,’’ no more than two 

creditors extended covered transactions, 

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

a first lien, five or more times in the 

county. However, HMDA data typically 

are released for a given calendar year 

during the third or fourth quarter of 

each subsequent calendar year. It is thus 

not generally possible for creditors to 

make determinations concerning 

whether a county was underserved 

during the preceding calendar year 

based on that preceding year’s HMDA 

data, because such data likely will not 

be available until late in the following 

year. In wording § 1026.35(b)(2)(iv)(B) 

as it did, the Bureau did not intend to 

require the use of HMDA data that is not 

yet available at the time the 

determination of a county’s 

‘‘underserved’’ status is made; the 

Bureau’s intent was to provide for the 

use of the most recent HMDA data 

available at the time of the 

determination. 

The Bureau therefore is proposing to 

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

that a county is considered 

‘‘underserved’’ during a given calendar 

year based on HMDA data for ‘‘the 

preceding calendar year’’ as opposed to 

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

feature coordinates with the look-back 

feature in the exemption itself at 

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

would rely on the underserved status of 

a county based on HMDA data from two 

years previous to the use of the 

exemption, which are the most recent 

data available for use as the Bureau 

intended. The Bureau is also proposing 

to amend comment 35(b)(2)(iv)–1.ii to 

conform to this change, and to add 

proposed comment 35(b)(2)(iv)–2.ii to 

provide an example. 

1026.35(e) Repayment Ability, 

Prepayment Penalties 

The Bureau is proposing language in 

§ 1026.35(e) to keep in place existing 

requirements contained in § 1026.35(b) 

concerning assessment of consumers’ 

ability to repay an HPML and 

limitations on prepayment penalties for 

HPMLs. These provisions were 

originally adopted by the Board in 

2008,12 and will be supplanted by the 

Bureau’s new rules implementing 

similar Dodd-Frank requirements in 

§ 1026.43 on January 10, 2014. 

The 2013 Escrows Final Rule 

inadvertently removed the existing 

language of § 1026.35(b) between June 1, 

2013 and the January 10, 2014, effective 

date for the ability-to-repay and 

prepayment penalty provisions in 

§ 1026.43. This proposed rule would 

restore this language at § 1026.35(e) and 

keep it in effect during that intervening 

period. The Bureau is also proposing to 

update existing cross-references to the 

§ 1026.35(b) HPML provisions. 

V. Effective Date 

The Bureau contemplates making the 

proposed § 1026.35(e) effective from 

June 1, 2013, through and including 

January 9, 2014, and making the other 

proposed amendments effective on June 

1, 2013. Section 553(d) of the 

Administrative Procedure Act generally 

requires the effective date of a final rule 

to be at least 30 days after publication 

of a rule, except for (1) a substantive 

rule which grants or recognizes an 

exemption or relieves a restriction; (2) 

interpretive rules and statements of 

policy; or (3) as otherwise provided by 

the agency for good cause found and 

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

The Bureau believes the proposed 

amendments would likely fall under 

one or more of these exceptions to 

section 553(d). The Bureau particularly 

notes that making the proposed 

amendments effective on June 1, 2013, 

would ease compliance and reduce 

disruption in the market, and ensure 

that the protections of the rule are 

uninterrupted. 

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

A. Overview 

The Bureau is considering the 

potential benefits, costs, and impacts of 

the proposed rule.13 The Bureau 

requests comment on the preliminary 

analysis presented below as well as 

submissions of additional data that 

could inform the Bureau’s analysis of 

the benefits, costs, and impacts of the 

proposed rule. The Bureau has 

consulted, or offered to consult with, 

the prudential regulators, SEC, HUD, 

FHFA, the Federal Trade Commission, 

and the Department of the Treasury, 

including regarding consistency with 

any prudential, market, or systemic 

objectives administered by such 

agencies. 

The proposal would clarify how to 

determine whether a county is 

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

the application of the special provisions 

adopted in certain of the 2013 Title XIV 

Final Rules.14 These changes would not 

have a material impact on consumers or 

covered persons. 

Other provisions of the proposed rule 

are related to underwriting and features 

of HPMLs. As described above, existing 


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15The Bureau has discretion in any rulemaking 

to choose an appropriate scope of analysis with 

respect to potential benefits and costs and an 

appropriate baseline. 

16 5 U.S.C. 601 et. seq. 

17 5 U.S.C. 603(a). For purposes of assessing the 

impacts of the proposed rule on small entities, 

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

small businesses, small not-for-profit organizations, 

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

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

Small Business Administration regulations and 

reference to the North American Industry 

Classification System (NAICS) classifications and 

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

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

which is independently owned and operated and is 

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

governmental jurisdiction’’ is the government of a 

city, county, town, township, village, school 

district, or special district with a population of less 

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

18 5 U.S.C. 605(b). 

19 5 U.S.C. 605(c). 

20 5 U.S.C. 609. 

Regulation Z contains requirements 

related to the consumer’s ability to 

repay and prepayment penalties for 

HPMLs. The scope of these protections 

is being expanded in connection with 

the Dodd-Frank Act title XIV 

rulemakings to apply to most mortgage 

transactions, rather than just HPMLs. 

For this reason, the 2013 Escrows Final 

Rule removed the regulatory text 

providing these protections solely to 

HPMLs. That final rule, however, takes 

effect on June 1, 2013, whereas the new 

ability-to-repay and prepayment penalty 

provisions do not take effect until 

January 10, 2014. Absent a correction, as 

proposed, the final rules issued in 

January would inadvertently create an 

interruption in applicable protections 

for certain consumers obtaining HPMLs 

effective June 1, and a corresponding 

relaxation of the requirements for 

lenders. This proposal would establish 

a temporary provision to ensure the 

protections remain in place for HPMLs 

until the expanded provisions take 

effect in January 2014. Because this 

interruption was inadvertent, the 

Bureau’s 1022 analyses in the 2013 Title 

XIV Final Rules considered the impact 

of the protections at issue in this rule as 

if they were remaining in place. 

B. Potential Benefits and Costs to 

Consumers and Covered Persons 

Compared to the baseline established 

by the issuance of the final rules issued 

in January 2013, the proposed rule 

would offer consumers who obtain 

HPMLs from June 1, 2013 through and 

including January 9, 2014 the benefit of 

the existing protections under 

Regulation Z regarding ability-to-repay 

and prepayment penalties.15 These 

provisions are designed to limit 

consumers’ exposure to collateral-based 

lending, potentially harmful 

prepayment penalties and other harms. 

The price of HPMLs may be slightly 

higher than they would be in the 

absence of these protections; however, 

these effects are likely to be minimal. 

Compared to the same baseline, 

covered persons issuing such mortgages 

during this time period would incur any 

costs related to the ability-to-pay 

requirements and the restrictions on 

certain prepayment penalties. These 

costs would include the costs of 

documenting and verifying the 

consumer’s ability to repay and some 

expected litigation-related costs. As 

noted above, the evidence to date is that 

these costs are quite limited. The 2013 

ATR Final Rule and the Board’s earlier 

2008 HOEPA Final Rule (73 FR 44522 

(July 30, 2008)) discuss these costs and 

benefits in greater detail. This rule 

simply extends these impacts from June 

1, 2013 through and including January 

9, 2014. The Bureau also believes that 

the proposed rule would benefit both 

consumers and covered persons in 

limiting unnecessary and possibly 

disruptive changes in the regulatory 

regime. 

The proposed rule may have a small 

differential impact on depository 

institutions and credit unions with $10 

billion or less in total assets as 

described in Section 1026. To the extent 

that HPMLs comprise a larger 

percentage of originations at these 

institutions, the relative increase in 

costs may be higher relative to other 

lenders. 

The proposed rule would have some 

differential impacts on consumers in 

rural areas. In these areas, a greater 

fraction of loans are HPMLs. As such, to 

the extent that these added protections 

lead to additional lender costs, interest 

rates may be slightly higher on average; 

however, rural consumers will derive 

greater benefit from the proposed 

provisions than non-rural consumers. 

Given the small changes for the 

proposed rule, the Bureau does not 

believe that the proposed rule would 

meaningfully reduce consumers’ access 

to credit. 

VII. Regulatory Flexibility Act Analysis 

The Regulatory Flexibility Act (RFA) 

generally requires an agency to conduct 

an initial regulatory flexibility analysis 

(IRFA) and a final regulatory flexibility 

analysis (FRFA) of any rule subject to 

notice-and-comment rulemaking 

requirements.16 These analyses must 

‘‘describe the impact of the proposed 

rule on small entities.’’ 17 An IRFA or 

FRFA is not required if the agency 

certifies that the rule will not have a 

significant economic impact on a 

substantial number of small entities,18

or if the agency considers a series of 

closely related rules as one rule for 

purposes of complying with the IRFA or 

FRFA requirements.19 The Bureau also 

is subject to certain additional 

procedures under the RFA involving the 

convening of a panel to consult with 

small business representatives prior to 

proposing a rule for which an IRFA is 

required.20

This rulemaking is part of a series of 

rules that have revised and expanded 

the regulatory requirements for entities 

that offer HPMLs. In January 2013, the 

Bureau adopted the 2013 Escrows Final 

Rule and 2013 ATR Final Rule, along 

with other related rules mentioned 

above. Section VIII of the 

supplementary information to each of 

these rules set forth the Bureau’s 

analyses and determinations under the 

RFA with respect to those rules. See 78 

FR 4749, 78 FR 6575. The Bureau also 

notes because the potential interruption 

in applicable protections created by the 

issuance of the final rules in January 

was inadvertent, its Regulatory 

Flexibility analyses considered the 

impact of the protections at issue in this 

rule remaining in place for HPMLs until 

the expanded provisions take effect in 

January 2014. Because these rules 

qualify as ‘‘a series of closely related 

rules,’’ for purposes of the RFA, the 

Bureau relies on those analyses and 

determines that it has met or exceeded 

the IRFA requirement. 

In the alternative, the Bureau also 

concludes that the proposed rule would 

not have a significant impact on a 

substantial number of small entities. 

The proposal would establish a 

temporary provision to ensure the 

protections remain in place for HPMLs 

until the expanded provisions take 

effect in January 2014. Since the new 

requirements and liabilities that will 

take effect in January 2014 as applied to 

higher-priced mortgage loans are very 

similar in nature to those that exist 

under the pre-existing regulations, the 

gap absent the proposed correction 

would be short-lived and would affect 

only the higher-priced mortgage loan 

market. It is therefore very unlikely 

absent the proposed correction that 

covered persons would alter their 

behavior substantially in the intervening 

period. 

The proposal would also clarify how 

to determine whether a county is 

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

the application of the special provisions 

adopted in certain of the 2013 Title XIV 


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21The special provisions that rely on the ‘‘rural’’ 

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

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

Escrows Final Rule’s escrow requirement for 

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

allowance for balloon-payment qualified mortgages; 

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

balloon payment prohibition on high-cost 

mortgages; and (4) the § 1026.35(c)(4)(vii)(H) 

exemption from the § 1026.35(c)(4)(i) HPML second 

appraisal requirement for credit transactions made 

by creditors located in a rural county. 

Final Rules.21 These changes would not 

have a material impact on small entities. 

As such, the Bureau affirms that the 

proposal would not have a significant 

impact on a substantial number of small 

entities. 

VIII. Paperwork Reduction Act 

This proposed rule would amend 12 

CFR part 1026 (Regulation Z), which 

implements the Truth in Lending Act 

(TILA). Regulation Z currently contains 

collections of information approved by 

OMB. The Bureau’s OMB control 

number for Regulation Z is 3170–0015. 

However, the Bureau has determined 

that this proposed rule would not 

materially alter these collections of 

information nor impose any new 

recordkeeping, reporting, or disclosure 

requirements on the public that would 

constitute collections of information 

requiring approval under the Paperwork 

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

Comments on this determination may 

be submitted to the Bureau as instructed 

in the ADDRESSES section of this Notice 

and to the attention of the Paperwork 

Reduction Act Officer. 

List of Subjects in 12 CFR Part 1026 

Advertising, Consumer protection, 

Mortgages, Recordkeeping requirements, 

Reporting, Truth in lending. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Bureau proposes to 

further amend Regulation Z, 12 CFR 

part 1026, as amended by the final rule 

published on January 22, 2013, 78 FR 

4726, as set forth below: 

PART 1026—TRUTH IN LENDING 

(REGULATION Z) 

■ 1. The authority citation for part 1026 

continues to read as follows: 

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

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

U.S.C. 1601 et seq. 

Subpart C—Closed-End Credit 

■ 2. Section 1026.23 is amended by 

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

follows: 

§ 1026.23 Right of rescission. 

(a) * * * 

(3) * * * 

(ii) For purposes of this paragraph 

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

means the required disclosures of the 

annual percentage rate, the finance 

charge, the amount financed, the total of 

payments, the payment schedule, and 

the disclosures and limitations referred 

to in §§ 1026.32(c) and (d) and 

1026.35(e)(2). 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

■ 3. Section 1026.34 is amended by 

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

follows: 

§ 1026.34 Prohibited acts or practices in 

connection with high-cost mortgages. 

(a) * * * 

(4) * * * 

(i) Mortgage-related obligations. For 

purposes of this paragraph (a)(4), 

mortgage-related obligations are 

expected property taxes, premiums for 

mortgage-related insurance required by 

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

and similar expenses. 

■ 4. Section 1026.35 is amended by 

revising paragraphs (b)(1), (b)(2)(iii)(A) 

and (b)(iv)(A) and (B), and adding 

paragraph (e), to read as follows: 

§ 1026.35 Requirements for higher-priced 

mortgage loans. 

* * * * * 

(b) * * * For purposes of this 

paragraph (b), the term ‘‘escrow 

account’’ has the same meaning as 

under Regulation X (12 CFR 1024.17(b)), 

as amended. 

(2) Exemptions. Notwithstanding 

paragraph (b)(1) of this section: 

* * * * * 

(iii) Except as provided in paragraph 

(b)(2)(v) of this section, an escrow 

account need not be established for a 

transaction if, at the time of 

consummation: 

(A) During the preceding calendar 

year, the creditor extended more than 50 

percent of its total covered transactions, 

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

a first lien, on properties that are located 

in counties that are either ‘‘rural’’ or 

‘‘underserved,’’ as set forth in paragraph 

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

* * * * * 

(iv) For purposes of paragraph 

(b)(2)(iii)(A) of this section: 

(A) A county is ‘‘rural’’ during a 

calendar year if it is neither in a 

metropolitan statistical area nor in a 

micropolitan statistical area that is 

adjacent to a metropolitan statistical 

area, as those terms are defined by the 

U.S. Office of Management and Budget 

and as they are applied under currently 

applicable Urban Influence Codes 

(UICs), established by the United States 

Department of Agriculture’s Economic 

Research Service (USDA–ERS). A 

creditor may rely as a safe harbor on the 

list of counties published by the Bureau 

to determine whether a county qualifies 

as ‘‘rural’’ for a particular calendar year. 

(B) A county is ‘‘underserved’’ during 

a calendar year if, according to Home 

Mortgage Disclosure Act (HMDA) data 

for the preceding calendar year, no more 

than two creditors extended covered 

transactions, as defined in 

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

five or more times in the county. A 

creditor may rely as a safe harbor on the 

list of counties published by the Bureau 

to determine whether a county qualifies 

as ‘‘underserved’’ for a particular 

calendar year. 

* * * * * 

(e) Repayment ability, Prepayment 

penalties. Higher-priced mortgage loans 

are subject to the following restrictions: 

(1) Repayment ability. A creditor shall 

not extend credit based on the value of 

the consumer’s collateral without regard 

to the consumer’s repayment ability as 

of consummation as provided in 

§ 1026.34(a)(4). 

(2) Prepayment penalties. A loan may 

not include a penalty described by 

§ 1026.32(d)(6) unless: 

(i) The penalty is otherwise permitted 

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

loan is a mortgage transaction described 

in § 1026.32(a); and 

(ii) Under the terms of the loan: 

(A) The penalty will not apply after 

the two-year period following 

consummation; 

(B) The penalty will not apply if the 

source of the prepayment funds is a 

refinancing by the creditor or an affiliate 

of the creditor; and 

(C) The amount of the periodic 

payment of principal or interest or both 

may not change during the four-year 

period following consummation. 

(3) Sunset of requirements on 

repayment ability and prepayment 

penalties. The requirements described 

in paragraphs (e)(1) and (e)(2) of this 

section shall expire on January 10, 2014. 

■ 5. In Supplement I to Part 1026— 

Official Interpretations: 

■ A. Under Section 1026.32— 

Requirements for Certain Closed-End 

Home Mortgages, under Paragraph 32(d) 

Limitations, paragraph 1 is revised. 

■ B. Under Section 1026.34— 

Repayment Ability 

■ i. Under Paragraph 34(a)(4) 

Repayment ability for high-cost 

mortgages, paragraph 1 is revised. 

■ ii. Under Paragraph 34(a)(4)(i) 

Mortgage-Related Obligations, 

paragraph 1 is revised. 


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■ C. Under Section 1026.35— 

Requirements for Higher-Priced 

Mortgage Loans: 

■ i. Under Paragraph 35(b)(2)(iii), 

paragraphs 1 and i are revised. 

■ ii. Under Paragraph 35(b)(2)(iv), 

paragraphs 1, i, ii, 2, i, and ii are 

revised. 

■ iii. The headings 35(e) Rules for 

Higher-Priced Mortgage Loans and 

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

paragraphs 1 and 2 are added. 

Supplement I to Part 1026—Official 

Interpretations 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

* * * * * 

§ 1026.32—Requirements for Certain 

Closed-End Home Mortgages 

* * * * * 

Paragraph 32(d) Limitations. 

1. Additional prohibitions applicable 

under other sections. Section 1026.34 

sets forth certain prohibitions in 

connection with mortgage credit subject 

to § 1026.32, in addition to the 

limitations in § 1026.32(d). Further, 

§ 1026.35 prohibits certain practices in 

connection with transactions that meet 

the coverage test in § 1026.35(a). 

Because the coverage test in § 1026.35(a) 

is generally broader than the coverage 

test in § 1026.32(a), most § 1026.32 

mortgage loans are also subject to the 

prohibitions set forth in § 1026.35 (such 

as escrows), in addition to the 

limitations in § 1026.32(d). 

* * * * * 

§ 1026.34—Prohibited Acts or Practices 

in Connection with High-Cost Mortgages 

* * * * * 

Paragraph 34(a)(4) Repayment Ability. 

1. Application of repayment ability 

rule. The § 1026.34(a)(4) prohibition 

against making loans without regard to 

consumers’ repayment ability applies to 

mortgage loans described in 

§ 1026.32(a). In addition, the 

§ 1026.34(a)(4) prohibition applies to 

higher-priced mortgage loans described 

in § 1026.35(a). See § 1026.35(e)(1). 

* * * * * 

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

Obligations. 

1. Mortgage-related obligations. A 

creditor must include in its repayment 

ability analysis the expected property 

taxes and premiums for mortgagerelated insurance required by the 

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

well as similar mortgage-related 

expenses. Similar mortgage-related 

expenses include homeowners’ 

association dues and condominium or 

cooperative fees. 

* * * * * 

§ 1026.35—Requirements for HigherPriced Mortgage Loans 

* * * * * 

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

1. Requirements for exemption. Under 

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

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

establish an escrow account for taxes 

and insurance for a higher-priced 

mortgage loan, provided the following 

four conditions are satisfied when the 

higher-priced mortgage loan is 

consummated: 

i. During the preceding calendar year, 

more than 50 percent of the creditor’s 

total first-lien covered transactions, as 

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

by properties located in counties that 

are either ‘‘rural’’ or ‘‘underserved,’’ as 

set forth in § 1026.35(b)(2)(iv). Pursuant 

to that section, a creditor may rely as a 

safe harbor on a list of counties 

published by the Bureau to determine 

whether counties in the United States 

are rural or underserved for a particular 

calendar year. Thus, for example, if a 

creditor originated 90 covered 

transactions, as defined by 

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

during 2013, the creditor meets this 

condition for an exemption in 2014 if at 

least 46 of those transactions are 

secured by first liens on properties that 

are located in such counties. 

* * * * * 

Paragraph 35(b)(2)(iv). 

1. Requirements for ‘‘rural’’ or 

‘‘underserved’’ status. A county is 

considered to be ‘‘rural’’ or 

‘‘underserved’’ for purposes of 

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

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

The Bureau applies both tests to each 

county in the United States. If a county 

satisfies either test, the Bureau will 

include the county on a published list 

of ‘‘rural’’ or ‘‘underserved’’ counties for 

a particular calendar year. To facilitate 

compliance with appraisal requirements 

in § 1026.35(c), the Bureau will also 

create a list of only those counties that 

are ‘‘rural’’ but excluding those that are 

only ‘‘underserved.’’ The Bureau will 

post on its public Web site the 

applicable lists for each calendar year 

by the end of that year, thus permitting 

creditors to ascertain the availability to 

them of the exemption during the 

following year. For 2012, however, the 

list will be published before June 1, 

2013. A creditor may rely as a safe 

harbor, pursuant to section 130(f) of the 

Truth in Lending Act, on the lists of 

counties published by the Bureau to 

determine whether a county qualifies as 

‘‘rural’’ or ‘‘underserved’’ for a 

particular calendar year. A creditor’s 

originations of covered transactions, as 

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

first lien, in such counties during that 

year are considered in determining 

whether the creditor satisfies the 

condition in § 1026.35(b)(2)(iii)(A) and 

therefore will be eligible for the 

exemption during the following 

calendar year. 

i. Under § 1026.35(b)(2)(iv)(A), a 

county is rural during a calendar year if 

it is neither in a metropolitan statistical 

area nor in a micropolitan statistical 

area that is adjacent to a metropolitan 

statistical area. These areas are defined 

by the Office of Management and 

Budget and applied under currently 

applicable Urban Influence Codes 

(UICs), established by the United States 

Department of Agriculture’s Economic 

Research Service (USDA–ERS). 

Accordingly, for purposes of 

§ 1026.35(b)(2)(iv)(A), ‘‘adjacent’’ has 

the meaning applied by the USDA–ERS 

in determining a county’s UIC; as so 

applied, ‘‘adjacent’’ entails a county not 

only being physically contiguous with a 

metropolitan statistical area but also 

meeting certain minimum population 

commuting patterns. Specifically, a 

county is ‘‘rural’’ if the USDA–ERS 

categorizes the county under UIC 4, 6, 

7, 8, 9, 10, 11, or 12. Descriptions of 

UICs are available on the USDA–ERS 

Web site at http://www.ers.usda.gov/ 

data-products/urban-influence-codes/ 

documentation.aspx. A county for 

which there is no currently applicable 

UIC (because the county has been 

created since the USDA–ERS last 

categorized counties) is rural only if all 

counties from which the new county’s 

land was taken are themselves rural 

under currently applicable UICs. 

ii. Under § 1026.35(b)(2)(iv)(B), a 

county is underserved during a calendar 

year if, according to Home Mortgage 

Disclosure Act (HMDA) data for the 

preceding calendar year, no more than 

two creditors extended covered 

transactions, as defined in 

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

five or more times in the county. 

Specifically, a county is ‘‘underserved’’ 

if, in the applicable calendar year’s 

public HMDA aggregate dataset, no 

more than two creditors have reported 

five or more first-lien covered 

transactions with HMDA geocoding that 

places the properties in that county. For 

purposes of this determination, because 

only covered transactions are counted, 


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all first-lien originations (and only firstlien originations) reported in the HMDA 

data are counted except those for which 

the owner-occupancy status is reported 

as ‘‘Not owner-occupied’’ (HMDA code 

2), the property type is reported as 

‘‘Multifamily’’ (HMDA code 3), the 

applicant’s or co-applicant’s race is 

reported as ‘‘Not applicable’’ (HMDA 

code 7), or the applicant’s or coapplicant’s sex is reported as ‘‘Not 

applicable’’ (HMDA code 4). The most 

recent HMDA data are available at 

http://www.ffiec.gov/hmda. 

2. Examples. i. A county is considered 

‘‘rural’’ for a given calendar year based 

on the most recent available UIC 

designations, which are updated by the 

USDA–ERS once every ten years. As an 

example, assume a creditor makes firstlien covered transactions in County X 

during calendar year 2014, and the most 

recent UIC designations have been 

published in the second quarter of 2013. 

To determine ‘‘rural’’ status for County 

X during calendar year 2014, the 

creditor will use the 2013 UIC 

designations. However, to determine 

‘‘rural’’ status for County X during 2012 

or 2013, the creditor would use the UIC 

designations last published in 2003. 

ii. A county is considered 

‘‘underserved’’ for a given calendar year 

based on the most recent available 

HMDA data. For example, assume a 

creditor makes first-lien covered 

transactions in County Y during 

calendar year 2013, and the most recent 

HMDA data is for calendar year 2012, 

published in the third quarter of 2013. 

To determine ‘‘underserved’’ status for 

County Y in calendar year 2013 for the 

purposes of qualifying for the ‘‘rural or 

underserved’’ exemption in calendar 

year 2014, the creditor will use the 2012 

HMDA data. 

* * * * * 

35(e) Rules for Higher-Priced Mortgage 

Loans 

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

1. Payment change. Section 

1026.35(e)(2) provides that a loan 

subject to this section may not have a 

penalty described by § 1026.32(d)(6) 

unless certain conditions are met. 

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

condition that the amount of the 

periodic payment of principal or 

interest or both may not change during 

the four-year period following 

consummation. For examples showing 

whether a prepayment penalty is 

permitted or prohibited in connection 

with particular payment changes, see 

comment 32(d)(7)(iv)–1. Those 

examples, however, include a condition 

that § 1026.35(e)(2) does not include: 

the condition that, at consummation, 

the consumer’s total monthly debt 

payments may not exceed 50 percent of 

the consumer’s monthly gross income. 

For guidance about circumstances in 

which payment changes are not 

considered payment changes for 

purposes of this section, see comment 

32(d)(7)(iv)–2. 

2. Negative amortization. Section 

1026.32(d)(2) provides that a loan 

described in § 1026.32(a) may not have 

a payment schedule with regular 

periodic payments that cause the 

principal balance to increase. Therefore, 

the commentary to § 1026.32(d)(7)(iv) 

does not include examples of payment 

changes in connection with negative 

amortization. The following examples 

show whether, under § 1026.35(e)(2), 

prepayment penalties are permitted or 

prohibited in connection with particular 

payment changes, when a loan 

agreement permits negative 

amortization: 

i. Initial payments for a variable-rate 

transaction consummated on January 1, 

2010, are $1,000 per month and the loan 

agreement permits negative 

amortization to occur. Under the loan 

agreement, the first date that a 

scheduled payment in a different 

amount may be due is January 1, 2014, 

and the creditor does not have the right 

to change scheduled payments prior to 

that date even if negative amortization 

occurs. A prepayment penalty is 

permitted with this mortgage 

transaction provided that the other 

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

is: provided that the prepayment 

penalty is permitted by other applicable 

law, the penalty expires on or before 

December 31, 2011, and the penalty will 

not apply if the source of the 

prepayment funds is a refinancing by 

the creditor or its affiliate. 

ii. Initial payments for a variable-rate 

transaction consummated on January 1, 

2010 are $1,000 per month and the loan 

agreement permits negative 

amortization to occur. Under the loan 

agreement, the first date that a 

scheduled payment in a different 

amount may be due is January 1, 2014, 

but the creditor has the right to change 

scheduled payments prior to that date if 

negative amortization occurs. A 

prepayment penalty is prohibited with 

this mortgage transaction because the 

payment may change within the fouryear period following consummation. 

* * * * * 

Dated: April 11, 2013. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2013–09058 Filed 4–17–13; 8:45 am] 

BILLING CODE 4810–AM–P 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

24 CFR Parts 5 and 202 

[Docket No. FR–5536–P–01] 

RIN 2502–AJ00 

Federal Housing Administration (FHA) 

Approval of Lending Institutions and 

Mortgagees: Streamlined Reporting 

Requirements for Small Supervised 

Lenders and Mortgagees 

AGENCY: Office of the Assistant 

Secretary for Housing—Federal Housing 

Commissioner, HUD. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule would 

streamline the FHA financial statement 

reporting requirements for lenders and 

mortgagees who are supervised by 

federal banking agencies and whose 

consolidated assets do not meet the 

thresholds set by their supervising 

federal banking agencies for submission 

of audited financial statements 

(currently set at $500 million in 

consolidated assets). HUD’s regulations 

currently require all supervised lenders 

and mortgagees to submit annual 

audited financial statements as a 

condition of FHA lender approval and 

recertification. Through this proposed 

rule, in lieu of the annual audited 

financial statements, small supervised 

lenders and mortgagees would be 

required to submit the unaudited 

financial regulatory reports that align 

with their fiscal year ends and are 

required to be submitted to their 

supervising federal banking agencies. 

Small supervised lenders and 

mortgagees would only be required to 

submit audited financial statements if 

HUD determines that the supervised 

lenders or mortgagees pose heightened 

risk to the FHA insurance fund. 

This rule does not impact FHA’s 

annual audited financial statements 

submission requirement for 

nonsupervised and large supervised 

lenders and mortgagees. The rule also 

does not impact those supervised 

lenders and mortgagees with 

consolidated assets in an amount that 

requires that lenders or mortgagees 

submit audited financial statements to 

their respective supervising federal 

banking agencies. Finally, HUD has 


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