Vol. 78 Wednesday, 

No. 113 June 12, 2013 

Part III 

Bureau of Consumer Financial Protection 

12 CFR Part 1026 

Ability-to-Repay and Qualified Mortgage Standards Under the Truth in 

Lending Act (Regulation Z); Final Rule 

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35430 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

1See title I subtitle B of the Riegle Community 

Development and Regulatory Improvement Act of 

1994, Public Law 103–325, 108 Stat. 2160 (Jan. 25, 

1994). 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Part 1026 

[Docket No. CFPB–2013–0002] 

RIN 3170–AA34 

Ability-to-Repay and Qualified 

Mortgage Standards Under the Truth in 

Lending Act (Regulation Z) 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Final rule; official 

interpretations. 

SUMMARY: The Bureau of Consumer 

Financial Protection (Bureau) is 

amending Regulation Z, which 

implements the Truth in Lending Act 

(TILA). Regulation Z generally prohibits 

a creditor from making a mortgage loan 

unless the creditor determines that the 

consumer will have the ability to repay 

the loan. The final rule provides an 

exemption to these requirements for 

creditors with certain designations, 

loans pursuant to certain programs, 

certain nonprofit creditors, and 

mortgage loans made in connection with 

certain Federal emergency economic 

stabilization programs. The final rule 

also provides an additional definition of 

a qualified mortgage for certain loans 

made and held in portfolio by small 

creditors and a temporary definition of 

a qualified mortgage for balloon loans. 

Finally, the final rule modifies the 

requirements regarding the inclusion of 

loan originator compensation in the 

points and fees calculation. 

DATES: This rule is effective January 10, 

2014. 

FOR FURTHER INFORMATION CONTACT: 

Jennifer B. Kozma or Eamonn K. Moran, 

Counsels; Thomas J. Kearney or Mark 

Morelli, Senior Counsels; or Stephen 

Shin, Managing Counsel, Office of 

Regulations, at (202) 435–7700. 

SUPPLEMENTARY INFORMATION: 

I. Summary of the Final Rule 

The Bureau is issuing this final rule 

to adopt certain exemptions, 

modifications, and clarifications to 

TILA’s ability-to-repay requirements. 

TILA section 129C, as added by sections 

1411, 1412, and 1414 of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act), 

generally requires creditors to make a 

reasonable, good faith determination of 

a consumer’s ability to repay a mortgage 

loan and creates a presumption of 

compliance with these ability-to-repay 

requirements for certain loans 

designated as ‘‘qualified mortgages.’’ On 

January 10, 2013, the Bureau issued a 

final rule (the 2013 ATR Final Rule) to 

implement these ability-to-repay 

requirements and qualified mortgage 

provisions. See 78 FR 6407 (Jan. 30, 

2013). At the same time, the Bureau 

issued a proposed rule (the 2013 ATR 

Proposed Rule or Bureau’s proposal) 

related to certain proposed exemptions, 

modifications, and clarifications to the 

ability-to-repay requirements. See 78 FR 

6621 (Jan. 30, 2013). This final rule 

addresses the issues put forth for public 

comment in the 2013 ATR Proposed 

Rule. See part II.B below and part II.B– 

F of the 2013 ATR Final Rule for a 

complete discussion of the statutory and 

regulatory background to the ability-torepay requirements. 

Loan Originator Compensation and the 

Points and Fees Calculation 

The Dodd-Frank Act generally 

provides that points and fees on a 

qualified mortgage may not exceed 3 

percent of the loan balance and that 

points and fees in excess of 5 percent 

will trigger the protections for high-cost 

mortgages under the Home Ownership 

and Equity Protection Act (HOEPA).1

The Dodd-Frank Act also included a 

provision requiring that loan originator 

compensation be counted toward these 

thresholds, even if it is not paid up-front 

by the consumer directly to the loan 

originator. 

The Bureau had solicited comment on 

how to apply the statutory requirements 

in situations in which payments pass 

from one party to another over the 

course of a mortgage transaction. The 

Bureau was particularly concerned 

about situations in which the creditor 

pays compensation to a mortgage broker 

or its own loan originator employees 

because there is no simple way to 

determine whether the compensation is 

paid from money the creditor collected 

from up-front charges to the consumer 

(which would already be counted 

against the points and fees thresholds) 

or from the interest rate on the loan 

(which would not be counted toward 

the thresholds). 

The final rule excludes from points 

and fees loan originator compensation 

paid by a consumer to a mortgage broker 

when that payment has already been 

counted toward the points and fees 

thresholds as part of the finance charge 

under § 1026.32(b)(1)(i). The final rule 

also excludes from points and fees 

compensation paid by a mortgage broker 

to an employee of the mortgage broker 

because that compensation is already 

included in points and fees as loan 

originator compensation paid by the 

consumer or the creditor to the mortgage 

broker. 

The final rule excludes from points 

and fees compensation paid by a 

creditor to its loan officers. The Bureau 

concluded that there were significant 

operational challenges to calculating 

individual employee compensation 

accurately early in the loan origination 

process, and that those challenges 

would lead to anomalous results for 

consumers. In addition, the Bureau 

concluded that structural differences 

between the retail and wholesale 

channels lessened risks to consumers. 

The Bureau will continue to monitor the 

market to determine if additional 

protections are necessary and evaluate 

whether there are different approaches 

for calculating retail loan officer 

compensation consistent with the 

purposes of the statute. 

The final rule retains an ‘‘additive’’ 

approach for calculating loan originator 

compensation paid by a creditor to a 

loan originator other than an employee 

of creditor. Under the additive 

approach, § 1026.32(b)(1)(ii) requires 

that a creditor include in points and fees 

compensation paid by the creditor to a 

mortgage broker, in addition to up-front 

charges paid by the consumer to the 

creditor that are included in points and 

fees under § 1026.32(b)(1)(i). 

Exemptions for Certain Creditors and 

Lending Programs 

Certain creditors and nonprofits. The 

final rule provides an exemption from 

the ability-to-repay requirements for 

extensions of credit made by certain 

types of creditors. Creditors designated 

by the U.S. Department of the Treasury 

as Community Development Financial 

Institutions and creditors designated by 

the U.S. Department of Housing and 

Urban Development as either a 

Community Housing Development 

Organization or a Downpayment 

Assistance Provider of Secondary 

Financing are exempt from the abilityto-repay requirements, under certain 

conditions. The final rule also generally 

exempts creditors designated as 

nonprofit organizations under section 

501(c)(3) of the Internal Revenue Code 

of 1986 (26 U.S.C. 501(c)(3)) that extend 

credit no more than 200 times annually, 

provide credit only to low-to-moderate 

income consumers, and follow their 

own written procedures to determine 

that consumers have a reasonable ability 

to repay their loans. 

Credit extended pursuant to certain 

lending programs. The final rule 

provides an exemption from the abilityto-repay requirements for extensions of 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35431 

2 Inside Mortg. Fin., The 2011 Mortgage Market 

Statistical Annual (2011). 

3There is evidence that some consumers who 

would have qualified for ‘‘prime’’ loans were 

steered into subprime loans as well. The Federal 

Reserve Board on July 18, 2011 issued a consent 

cease and desist order and assessed an $85 million 

civil money penalty against Wells Fargo & Company 

of San Francisco, a registered bank holding 

company, and Wells Fargo Financial, Inc., of Des 

Moines. The order addresses allegations that Wells 

Fargo Financial employees steered potential primeeligible consumers into more costly subprime loans 

and separately falsified income information in 

mortgage applications. In addition to the civil 

money penalty, the order requires that Wells Fargo 

compensate affected consumers. See Press Release, 

Federal Reserve Board (July 20, 2011), available at: 

http://www.federalreserve.gov/newsevents/press/ 

enforcement/20110720a.htm. 

4U.S. Fin. Crisis Inquiry Comm’n, The Financial 

Crisis Inquiry Report: Final Report of the National 

Commission on the Causes of the Financial and 

Economic Crisis in the United States at 215–217 

(Official Gov’t ed. 2011) (FCIC Report), available at: 

http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPOFCIC.pdf. 

5 FCIC Report at 215. CoreLogic Chief Economist 

Mark Fleming told the FCIC that the early payment 

default rate ‘‘certainly correlates with the increase 

in the Alt-A and subprime shares and the turn of 

the housing market and the sensitivity of those loan 

products.’’ Id. 

6 FCIC Report at 217. 

credit made pursuant to programs 

administered by a housing finance 

agency and for an extension of credit 

made pursuant to an Emergency 

Economic Stabilization Act program, 

such as extensions of credit made 

pursuant to a State Hardest Hit Fund 

program. 

Small Creditor Portfolio and BalloonPayment Qualified Mortgages 

The final rule contains several 

provisions that are designed to facilitate 

compliance and preserve access to 

credit from small creditors, which are 

defined as creditors with no more than 

$2 billion in assets that (along with 

affiliates) originate no more than 500 

first-lien mortgages covered under the 

ability-to-repay rules per year. The 

Bureau had previously exercised 

authority under the Dodd-Frank Act to 

allow certain balloon-payment 

mortgages to be designated as qualified 

mortgages if they were originated and 

held in portfolio by small creditors 

operating predominantly in rural or 

underserved areas. In this final rule, the 

Bureau is: 

• Adopting a new, fourth category of 

qualified mortgages for certain loans 

originated and held in portfolio for at 

least three years (subject to certain 

limited exceptions) by small creditors, 

even if they do not operate 

predominantly in rural or underserved 

areas. The loans must meet the general 

restrictions on qualified mortgages with 

regard to loan features and points and 

fees, and creditors must evaluate 

consumers’ debt-to-income ratio or 

residual income. However, the loans are 

not subject to a specific debt-to-income 

ratio as they would be under the general 

qualified mortgage definition. 

• Raising the threshold defining 

which qualified mortgages receive a safe 

harbor under the ability-to-repay rules 

for loans that are made by small 

creditors under the balloon-loan or 

small creditor portfolio categories of 

qualified mortgages. Because small 

creditors often have higher cost of 

funds, the final rule shifts the threshold 

separating qualified mortgages that 

receive a safe harbor from those that 

receive a rebuttable presumption of 

compliance with the ability-to-repay 

rules from 1.5 percentage points above 

the average prime offer rate (APOR) on 

first-lien loans to 3.5 percentage points 

above APOR. 

• Providing a two-year transition 

period during which small creditors that 

do not operate predominantly in rural or 

underserved areas can offer balloonpayment qualified mortgages if they 

hold the loans in portfolio. During the 

two-period transition period, the Bureau 

intends to study whether the definitions 

of ‘‘rural’’ or ‘‘underserved’’ should be 

adjusted and to work with small 

creditors to transition to other types of 

products, such as adjustable-rate 

mortgages, that satisfy other qualified 

mortgage definitions. 

The ability-to-repay rules as revised 

by this final rule will take effect on 

January 10, 2014, along with various 

other rules implementing new mortgage 

protections under the Dodd-Frank Act. 

II. Background 

A. Mortgage Market Background 

The mortgage market is the single 

largest market for consumer financial 

products and services in the United 

States. In 2007 and 2008 this market 

collapsed, greatly diminishing the 

wealth of millions of American 

consumers and sending the economy 

into a severe recession. A primary cause 

of the collapse was the steady 

deterioration of credit standards in 

mortgage lending. Evidence 

demonstrates that many mortgage loans 

were made solely against collateral and 

without consideration of ability to 

repay, particularly in the markets for 

‘‘subprime’’ and ‘‘Alt-A’’ products, 

which more than doubled from $400 

billion in originations in 2003 to $830 

billion in originations in 2006.2

Subprime products were sold primarily 

to consumers with poor or no credit 

history, while Alt-A loans were sold 

primarily to consumers who provided 

little or no documentation of income or 

other evidence of repayment ability.3

Because subprime and Alt-A loans 

involved additional risk, they were 

typically more expensive to consumers 

than ‘‘prime’’ mortgage loans, although 

many of them had very low introductory 

interest rates. While housing prices 

continued to increase, it was relatively 

easy for consumers to refinance their 

existing loans into more affordable 

products to avoid interest rate resets and 

other adjustments. When housing prices 

began to decline in 2005, however, 

refinancing became more difficult and 

delinquency rates on subprime and AltA products increased dramatically.4 By 

the summer of 2006, 1.5 percent of loans 

less than a year old were in default, and 

this figure peaked at 2.5 percent in late 

2007.5 As the economy worsened, the 

rates of serious delinquency (90 or more 

days past due or in foreclosure) for the 

subprime and Alt-A products began a 

steep increase from approximately 10 

percent in 2006, to 20 percent in 2007, 

to over 40 percent in 2010.6 Although 

the mortgage market is recovering, 

consumers today continue to feel the 

effects of the financial crisis. 

Community-Focused Lending Programs 

While governmental and nonprofit 

programs have always been an 

important source of assistance for lowto moderate-income (LMI) consumers, 

these programs have taken on even 

greater significance in light of current 

tight mortgage credit standards and 

Federal initiatives to stabilize the 

housing market. There are a variety of 

programs designed to assist LMI 

consumers with access to 

homeownership. These programs are 

generally offered through a nonprofit 

entity, local government, or a housing 

finance agency (HFA). These programs 

play an important role in the housing 

sector of the economy. 

Types of financial assistance 

available. Community-focused lending 

programs typically provide LMI 

consumers with assistance ranging from 

housing counseling services to full 

mortgage loan financing. Some 

programs offer financial assistance 

through land trust programs, in which 

the consumer leases the real property 

and takes ownership of only the 

improvements. Many organizations 

provide ‘‘downpayment assistance’’ in 

connection with mortgage loan 

financing. This can be a gift, grant, or 

loan to the consumer to assist with the 

consumer’s down payment, or to pay for 

some of the closing costs. These 

programs often rely on subsidies from 

Federal government funds, local 

government funds, foundations, or 

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35432 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

7Abigail Pound, Challenges and Changes in 

Community-Based Lending for Homeownership, 

NeighborWorks America, Joint Center for Housing 

Studies of Harvard University (Feb. 2011), available 

at: http://www.jchs.harvard.edu/sites/

jchs.harvard.edu/files/w11-2_pound.pdf. 

8The HOME Investment Partnerships Program is 

authorized under title II of the Cranston-Gonzalez 

National Affordable Housing Act of 1990, Public 

Law 101–625, 104 Stat. 4079 (1990). See 24 CFR 

92.1 through 92.618. 

9See http://www.mhp.net/homeownership/home

buyer/soft_second_works.php, describing the 

SoftSecond program offered by the Massachusetts 

Housing Partnership. 

10The first State housing finance agency was 

established in New York in 1960. See New York 

State Housing Finance Agency Act, 1960 Laws of 

New York, 183rd Session, Chap. 671. 

11For 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. 

12Bonds issued by HFAs are tax-exempt if the 

proceeds are used to provide assistance to first-time 

or LMI-homebuyers. See 26 U.S.C. 143. 

13See www.hud.gov/homeprogram. 

14The Tax Reform Act of 1986, Public Law 99– 

514, 100 Stat. 2085 (1986), included the LowIncome Housing Tax Credit Program. Under this 

program, the IRS provides tax credits to HFAs. 

HFAs may transfer these tax credits to developers 

of affordable housing. Developers then sell these 

credits to fund the development program. See 

http://portal.hud.gov/hudportal/HUD?src=/program

_offices/comm_planning/affordablehousing/

training/web/lihtc/basics. 

15The Massachusetts Affordable Housing Trust 

Fund provides funds to governmental subdivisions, 

nonprofit organizations, and other entities seeking 

to provide for the development of affordable 

housing. See www.masshousing.com. New York 

State’s Mitchell-Lama program provides subsidies 

such as property tax exemptions to affordable 

housing developers. See http://www.nyshcr.org/

Programs/mitchell-lama/. 

16National Council of State Housing Agencies, 

State HFA Factbook (2010), p. 33. 

17 Id. at 21–22, 35–36. 

18See State of New York Mortgage Agency 

(SONYMA) Credit and Property Underwriting 

Notes, available at: http://www.nyshcr.org/assets/ 

documents/1006.pdf. 

employer funding.7 For example, many 

of these programs rely on funds 

provided through the HUD Home 

Investment Partnerships Program 

(HOME Program).8

Some programs offer first-lien 

mortgage loans designed to meet the 

needs of LMI consumers. These firstlien mortgage loans may have a 

discounted interest rate or limited 

origination fees or may permit high 

loan-to-value ratios. Many programs 

offer subordinate financing. 

Subordinate-financing options may be 

simple, such as a relatively inexpensive 

subordinate-lien loan to pay for closing 

costs. Other methods of subordinate 

financing may be complex. For example, 

one HFA program offers a 30-year, 

fixed-rate, subordinate-lien mortgage 

loan through partner creditors, with 

interest-only payments for the first 11 

years of the loan’s term, and with an 

interest subsidy for the LMI consumer, 

resulting in a graduated monthly 

payment between the fifth and eleventh 

year of the loan; an additional 30-year 

deferred, 0 percent subordinate-lien 

mortgage loan is extended by the HFA 

equal to the amount of the subsidy.9

Some of the loans offered by these 

programs, whether first-lien or 

subordinate-financing, are structured as 

hybrid grant products that are 

commonly forgiven. 

Housing finance agencies. For over 50 

years, HFAs have provided LMI 

consumers with opportunities for 

affordable homeownership.10 HFAs are 

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.11 Many of the State 

and Federal programs HFAs administer 

do not provide administrative funds; 

others provide limited administrative 

funds. Most HFAs operate 

independently and do not receive State 

operating funds. These agencies are 

generally funded through tax-exempt 

bonds but may receive funding from 

Federal, State, or other sources.12 HFAs 

issue these tax-exempt bonds, also 

known as mortgage revenue bonds, and 

use the proceeds of the bond sale to 

finance affordable mortgage loans to 

LMI consumers. As of June 2012, the 51 

State HFAs (including the District of 

Columbia) had $107 billion in 

outstanding tax-free municipal debt 

available. These mortgage revenue 

bonds funded approximately 100,000 

first-time homeowners per year. HFAs 

may also receive funding through 

Federal programs, such as the HOME 

Program, which is the largest Federal 

block grant for affordable housing.13

HFAs employ several methods of 

promoting affordable homeownership. 

These agencies may partner with local 

governments to develop and implement 

long-term community-development 

strategies. For example, HFAs may 

provide tax credits to companies that 

build or rehabilitate affordable 

housing.14 These agencies may also 

administer affordable housing trust 

funds or other State programs to 

facilitate the affordable housing 

development.15 Many HFAs also 

provide education, counseling, or 

training courses to first-time or LMI 

consumers. 

HFAs also provide financial 

assistance directly to consumers. 

Typically, HFAs offer the first-lien 

mortgage loan, subordinate financing, 

and downpayment assistance programs 

described above. HFAs may also 

establish pooled loss reserves to selfinsure mortgage loans originated 

pursuant to the program, thereby 

permitting LMI consumers to avoid 

private mortgage insurance. HFAs may 

also provide other assistance to LMI 

consumers, such as mortgage loan 

payment subsidies or assistance with 

the up-front costs of a mortgage loan. In 

2010, HFAs provided about $10 billion 

in affordable financing.16 In 2010, 89 

percent of HFAs provided down 

payment assistance loan or grant 

assistance and 57 percent of HFAs 

provided assistance in conjunction with 

programs offered by the Federal 

Housing Administration (FHA) or the 

U.S. Department of Agriculture 

(USDA).17 However, HFAs generally do 

not provide direct financing to LMI 

consumers. Many HFAs are prohibited 

by law from directly extending credit in 

an effort by State governments to avoid 

competing with the private sector. HFAs 

generally partner with creditors, such as 

local banks, that extend credit pursuant 

to the HFA’s program guidelines. Most 

HFA programs are ‘‘mortgage purchase’’ 

programs in which the HFA establishes 

program requirements (e.g., income 

limits, purchase price limits, interest 

rates, points and term limits, 

underwriting standards, etc.), and agrees 

to purchase loans made by private 

creditors that meet these requirements. 

Many HFAs expand on the 

underwriting standards of GSEs or 

Federal government agencies by 

applying even stricter underwriting 

standards than these guidelines or the 

ability-to-repay requirements, such as 

requiring mandatory counseling for all 

first-time homebuyers and strong loan 

servicing. For example, the State of New 

York Mortgage Agency (SONYMA)’s 

underwriting requirements generally 

include a two-year, stable history of 

earned income, a monthly payment-toincome ratio not to exceed 40 percent, 

a monthly debt-to-income ratio not to 

exceed 45 percent, and review of the 

consumer’s entire credit profile to 

determine acceptable credit.18

HFAs extend credit only after 

conducting a lengthy and thorough 

analysis of a consumer’s ability to repay. 

HFAs generally employ underwriting 

requirements that are uniquely tailored 

to meet the needs of LMI consumers, 

and which often account for 

nontraditional underwriting criteria, 

extenuating circumstances, and other 

elements that are indicative of 

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19See Connecticut Housing Finance Agency 

Operating Manual, Section 5—Underwriting, 

available at: http://www.chfa.org/content/ 

CHFA%20Documents/Operating%20Manual%20- 

%20Section%2005%20Underwriting.pdf. 

20See Virginia Housing Development Authority 

Origination Guide, Section 2.3 Underwriting 

Requirements (Aug. 2011), available at: http:// 

www.vhda.com/BusinessPartners/Lenders/ 

LoanInfoGuides/ 

Loan%20Information%20and%20Guidelines/ 

OriginationGuide.pdf. 

21See id. 

22See http://www.irs.gov/Charities-&-Non-Profits/ 

Charitable-Organizations/Exemption-RequirementsSection-501(c)(3)-Organizations. 

23See http://www.irs.gov/Charities-&-Non-Profits/ 

Other-Non-Profits/Social-Welfare-Organizations. 24See 68 FR 5704 (Feb. 4, 2003). 

25See 12 CFR 1805.201(b). 

26 Id. Treasury Department eligibility 

requirements for CDFIs stipulate that an approved 

organization must: Be a legal entity at the time of 

certification application; have a primary mission of 

promoting community development; be a financing 

entity; primarily serve one or more target markets; 

provide development services in conjunction with 

its financing activities; maintain accountability to 

its defined target market; and be a non-government 

entity and not be under control of any government 

entity (Tribal governments excluded). 

27See http://www.cdfifund.gov/docs/ 

certification/cdfi/CDFI List-07-31-12.xls. 

28See 24 CFR 200.194. 

29 ‘‘Nonprofit organizations are important 

participants in HUD’s efforts to further affordable 

housing opportunities for low- and moderateincome persons through the FHA single family 

programs. FHA’s single family regulations recognize 

a special role for nonprofit organizations in 

conjunction with the . . . provision of secondary 

financing.’’ See 67 FR 39238 (June 6, 2002). 30 DAPs generally rely on FHA program 

guidelines for underwriting purposes, but have 

additional requirements for determining eligibility 

for assistance. For example, the Hawaii 

Homeownership Center is a HUD-approved DAP 

with separate eligibility criteria, available at: http:// 

www.hihomeownership.org/pdf/ 

DPAL5_FAQ_JAN2013.pdf. 31See http://portal.hud.gov/hudportal/HUD?src=/ 

program_offices/housing/sfh/np/sfhdap01. 32See https://entp.hud.gov/idapp/html/ 

f17npdata.cfm. 33 ‘‘It is vital that the Department periodically and 

uniformly assess the management and financial 

ability of participating nonprofit agencies to ensure 

they are not overextending their capabilities and 

increasing HUD’s risk of loss as a mortgage 

insurance provider.’’ 65 FR 9285, 9286 (Feb. 24, 

2000). 

34 ‘‘HUD continues to strongly encourage the 

participation of nonprofit organizations, including 

community and faith-based organizations, in its 

programs. This proposed rule is not designed to 

place particular burdens on participation by 

nonprofit organizations. Rather, the proposed rule 

is designed to ensure that nonprofit organizations 

have the capacity, experience, and interest to 

participate in HUD’s housing programs.’’ 69 FR 

7324, 7325 (Feb. 13, 2004). 

creditworthiness, ability to repay, and 

responsible homeownership. In certain 

circumstances, some HFAs require the 

consideration of compensating factors 

and other elements that are different 

from the factors required to be 

considered and verified under the 

ability-to-repay requirements. For 

example, the Connecticut Housing 

Finance Agency (CHFA)’s underwriting 

requirements require the consideration 

of certain compensating factors (e.g., 

ability to make a large down payment, 

demonstrated ability to accumulate 

savings, substantial documented cash 

reserves, etc.) for consumers with debt 

ratios that exceed the maximum CHFA 

monthly payment-to-income and debtto-income ratio limits.19 In addition, to 

be eligible for Virginia Housing 

Development Authority (VHDA) 

conventional financing, a consumer 

must demonstrate the willingness and 

ability to repay the mortgage debt and 

creditors must consider: Employment 

and income; credit history; sufficient 

funds to close; monthly housing 

expenses; and monthly payment-toincome and debt-to-income ratios.20

VHDA underwriting guidelines allow 

delegated underwriters to approve 

exceptions to the above debt-to-income 

ratios, provided that the ratios do not 

exceed 2 percent above the guidelines. 

The exceptions must be justified with 

strong compensating factors, which 

must indicate that the consumer can 

afford the repayment of the increased 

debt.21 Through careful and regular 

oversight, however, HFAs help ensure 

that their lenders follow the HFAs’ strict 

underwriting standards. 

Private organizations. While entities 

such as HFAs develop and finance 

affordable housing programs, these 

mortgage loans are generally extended 

by private organizations. These 

organizations often are structured as 

nonprofit 501(c)(3) organizations. Under 

Internal Revenue Code section 501(c)(3), 

the designation is for nonprofit, taxexempt, charitable organizations not 

operated for the benefit of private 

interests.22 Under Federal tax law, 

501(c)(3) organizations are restricted 

from lobbying activities, while 501(c)(4) 

organizations, which must exist to 

promote social welfare, may engage in 

political campaigning and lobbying.23

Most organizations that provide support 

to LMI consumers are structured as 

501(c)(3) organizations. However, some 

organizations are structured as nonprofit 

501(c)(4) organizations. 

Various Federal programs establish 

eligibility requirements and provide 

ongoing monitoring of specific types of 

creditors that receive Federal grants and 

other support. For example, Community 

Development Financial Institutions 

(CDFIs) are approved by the U.S. 

Department of the Treasury (Treasury 

Department) to receive monetary awards 

from the Treasury Department’s CDFI 

Fund, which was established to promote 

capital development and growth in 

underserved communities. Promoting 

homeownership and providing safe 

lending alternatives are among the 

Fund’s main goals. The Treasury 

Department created the CDFI 

designation to identify and support 

small-scale creditors that are committed 

to community-focused lending but have 

difficulty raising the capital needed to 

provide affordable housing services.24

CDFIs may operate on a for-profit or 

nonprofit basis, provided the CDFI has 

a primary mission of promoting 

community development.25 These 

programs are also subject to other 

eligibility requirements.26 As of July 

2012, there were 999 such organizations 

in the U.S., 62 percent of which were 

classified as Community Development 

(CD) Loan Funds and 22 percent as CD 

Credit Unions, while the rest were CD 

Banks, Thrifts, or CD Venture Capital 

Funds.27

The U.S. Department of Housing and 

Urban Development (HUD) may 

designate nonprofits engaging in 

affordable housing activities as 

Downpayment Assistance through 

Secondary Financing Providers 

(DAPs).28 HUD established this 

designation as part of an effort to 

promote nonprofit involvement in 

affordable housing programs.29 HUDapproved nonprofits may participate in 

FHA single-family programs that allow 

them to purchase homes at a discount, 

finance FHA-insured mortgages with the 

same terms and conditions as owneroccupants, or be able to finance 

secondary loans for consumers 

obtaining FHA-insured mortgages.30 A 

DAP must be approved by HUD if it is 

a nonprofit or nonprofit instrumentality 

of government that provides 

downpayment assistance as a lien in 

conjunction with an FHA first mortgage; 

government entity DAPs and gift 

programs do not require approval.31 As 

of May 2013 HUD listed 228 nonprofit 

agencies and nonprofit instrumentalities 

of government in the U.S. that are 

authorized to provide secondary 

financing.32 HUD performs field reviews 

and requires annual reports of 

participating nonprofit agencies. 

Additionally, HUD’s quality control 

plan requires periodic review for 

deficient policies and procedures and 

corrective actions. These approval and 

subsequent review procedures are 

intended to ensure that DAPs operate in 

compliance with HUD requirements and 

remain financially viable.33 However, 

HUD recognizes that these nonprofits 

have limited resources and gives 

consideration to DAP viability when 

crafting regulations.34

Creditors may also be certified by 

HUD as Community Housing 

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35See http://portal.hud.gov/hudportal/HUD?src=/ 

program_offices/comm_planning/ 

affordablehousing/programs/home. 

36 ‘‘The Department believes that there was 

specific statutory intent to create an entitlement for 

community-based nonprofit organizations that 

would own, sponsor or develop HOME assisted 

housing. While partnerships with State and local 

government are critical to the development of 

affordable housing, these organizations are viewed 

as private, independent organizations separate and 

apart from State or local governments. One of the 

major objectives of the Department’s technical 

assistance program is to increase the number of 

capable, successful CHDOs able and willing to use 

the CHDO set-aside [fund].’’ 61 FR 48736, 48737 

(Sept. 16, 1996). 

37See 24 CFR 92.300 through 92.303. 

38See 24 CFR 92.2. 

39For example, no more than 5 percent of a 

Participating Jurisdiction’s fiscal year HOME 

allocation may be used for CHDO operating 

expenses. 24 CFR 92.208(a). 

40See 24 CFR 92.550 through 92.552. 

41 ‘‘[Participating jurisdictions] have encountered 

new challenges in administering their programs and 

in managing their growing portfolios of older 

HOME projects. These challenges include reduced 

availability of states or local funding sources, 

reduced private lending, changes in housing 

property standards, and energy codes and 

reductions in states and local government 

workforces throughout the Nation. These challenges 

have been magnified by current housing and credit 

market conditions.’’ 76 FR 78343, 78345 (Dec. 16, 

2011). 42Neighborworks Anchorage, which is designated 

as both a CDFI and CHDO, requires letters of 

explanation regarding gaps in employment or 

derogatory credit history. See http:// 

www.nwanchorage.org/home-ownership/buyinghome/getting-loan-affordable-loans-lendingprograms. 

43The Community Development Corporation of 

Brownsville, which is designated as a CHDO, 

requires consumers to contribute 11 months of 

labor, or ‘‘sweat equity,’’ as part of the approval 

process. See http://www.cdcb.org/h-hprograms.html#programs2. St. Lucie Habitat for 

Humanity, which is designated as a CHDO, requires 

300 hours of labor as part of the approval process. 

See http://stluciehabitat.org/#. 

44Habitat for Humanity affiliates, many of which 

are designated as a CHDO or CDFI, consider 

references from current and former landlords, 

creditors, and others. See Habitat for Humanity 

Affiliate Operations Manual, available at: http:// 

www.medinahabitat.org/files/ 

AffilOpFamilySelect.pdf. 

45The Federal Home Loan Bank of Des Moines 

provides funds for member bank programs related 

to rural homeownership, urban first-time 

homebuyers, and Native American homeownership. 

See http://www.fhlbdm.com/communityinvestment/down-payment-assistance-programs/. 

The Federal Home Loan Bank of Chicago provides 

funds for member bank programs related to down 

payment and closing cost assistance or eligible 

rehabilitation costs for the purchase of a home. See 

http://ci.fhlbc.com/Grant_Pgms/DPP.shtml. 

46Fannie Mae offers first-lien mortgage loans 

through the My Community Mortgage program and 

subordinate-lien loans through the Community 

Seconds program. Freddie Mac offers both first- and 

subordinate-lien mortgage loans through the Home 

Possible program. 

47Under the Community Reinvestment Act (12 

U.S.C. 2901), depository institutions may meet 

community reinvestment goals by directly 

originating or purchasing mortgage loans provided 

to LMI consumers. See 12 CFR 228.22. 

Development Organizations (CHDOs) in 

connection with HUD’s HOME Program, 

which provides grants to fund a wide 

range of activities that promote 

affordable homeownership.35 HUD 

Participating Jurisdictions confer CHDO 

certification only on communityfocused nonprofits that are both 

dedicated to furthering a community’s 

affordable housing goals and capable of 

complying with the requirements of the 

HOME Program.36 Creditors designated 

as CHDOs are eligible to receive special 

CHDO set-aside funds from the HOME 

Program to fund local homebuyer 

assistance programs.37 Applicants 

seeking CHDO status must meet 

rigorous requirements. For example, a 

CHDO must be designated as a nonprofit 

under section 501(c)(3) or (c)(4) of the 

Internal Revenue Code, adhere to strict 

standards of financial accountability, 

have among its purposes the provision 

of decent and affordable housing for 

LMI consumers, maintain accountability 

to the community, and have a proven 

record of capably and effectively serving 

low-income communities.38 After the 

CHDO designation is obtained, CHDO 

creditors must operate under the 

supervision of a Participating 

Jurisdiction and in accordance with the 

requirements of the HOME Program.39

HUD conducts annual performance 

reviews to determine whether funds 

have been used in accordance with 

program requirements.40 While HUD 

continues to support affordable housing 

programs involving CHDOs, current 

market conditions have affected CHDO 

viability.41

CDFIs and CHDOs that provide 

mortgage loans generally employ 

underwriting guidelines tailored to the 

needs of LMI consumers. Unlike 

creditors that rely on industry-wide 

underwriting guidelines, which 

generally do not account for the unique 

credit characteristics of LMI consumers, 

CDFI and CHDO underwriting 

requirements include a variety of 

compensating factors. For example, 

these creditors often consider personal 

narratives explaining prior financial 

difficulties, such as gaps in employment 

or negative credit history.42 Others 

consider the amount of time a consumer 

spends working on the construction or 

rehabilitation of affordable homes.43

Some creditors also consider a 

consumer’s general reputation, relying 

on references from a landlord or persons 

with whom the consumer does 

business.44 In these transactions, a CDFI 

or CHDO may determine that the 

strength of these compensating 

characteristics outweigh weaknesses in 

other underwriting factors, such as 

negative credit history or irregular 

income. Including these compensating 

factors in the underwriting process 

enables CDFIs and CHDOs to more 

appropriately underwrite LMI 

consumers. 

Nonprofit creditors may engage in 

community-focused lending without 

obtaining one of the designations 

described above. Such nonprofits often 

rely on HFA or Federal programs for 

funding, lending guidelines, and other 

support. However, some nonprofits offer 

credit to LMI consumers independent of 

these State or Federal programs. For 

example, nonprofits may make mortgage 

loans in connection with a GSE 

affordable housing program. The 

Federal Home Loan Bank (FHLB) 

System, Federal National Mortgage 

Association (Fannie Mae), and Federal 

Home Loan Mortgage Corporation 

(Freddie Mac) offer several programs to 

support affordable housing by 

facilitating mortgage financing for LMI 

consumers. For example, the FHLB 

Affordable Housing Program provides 

grants to member banks to fund 

programs that assist with closing costs 

or down payments, buy down principal 

amounts or interest rates, refinance an 

existing loan, or assist with 

rehabilitation or construction costs.45

Fannie Mae and Freddie Mac also offer 

two programs focused on communityfocused lending.46

Other options exist for nonprofits 

seeking to develop and fund 

community-focused lending programs. 

For example, a nonprofit may originate 

mortgage loans to LMI consumers and 

subsequently sell the loans to a bank, 

credit union, or other investor as part of 

a Community Reinvestment Act 

partnership program.47 Other nonprofits 

may operate a limited affordable 

housing assistance fund, funded entirely 

by private donations, under which LMI 

consumers may obtain subordinate 

financing. Nonprofits such as these 

often rely on the underwriting 

performed by the creditor for the firstlien mortgage loan, which is often a 

bank or credit union, to process, 

underwrite, and approve the LMI 

consumer’s application. In addition, 

some nonprofits are self-supporting and 

offer full financing to LMI consumers. 

These nonprofits often establish lending 

programs with unique guidelines, such 

as requirements that LMI consumers 

devote a minimum number of hours 

towards the construction of affordable 

housing. 

Homeownership Stabilization and 

Foreclosure Prevention Programs 

During the early stages of the financial 

crisis the mortgage market significantly 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35435 

48A 2011 OCC survey shows that 56 percent of 

supervised banks participating in the survey 

tightened residential real estate underwriting 

requirements between 2007 and 2008, and 73 

percent tightened underwriting requirements 

between 2008 and 2009. See Office of the 

Comptroller of the Currency, Survey of Credit 

Underwriting Practices 2011, p. 11. 

49 ‘‘[W]ith house prices becoming flat or declining 

in many parts of the country during 2007, it has 

become increasingly difficult for many subprime 

ARM borrowers to refinance. While many such 

borrowers remain current on their loans or are still 

able to refinance at market rates or into FHA 

products, an increasing number have either fallen 

behind on their existing payments or face the 

prospect of falling behind when rates reset and they 

are unable to refinance.’’ Accelerating Loan 

Modifications, Improving Foreclosure Prevention 

and Enhancing Enforcement, 110th Cong. (Dec. 6, 

2007) (testimony of John C. Dugan, Comptroller, 

Office of the Comptroller of the Currency). 

50By the third quarter of 2007, the ratio of 

mortgage-related financial obligations (which is 

comprised of mortgage debt, homeowners’ 

insurance, and property tax) to disposable personal 

income reached an all-time high of 11.3 percent. 

See http://www.federalreserve.gov/releases/ 

housedebt/. 

51 ‘‘[A]nalysts are concerned that mortgage 

foreclosures will climb significantly higher and, 

along with falling housing prices, overwhelm the 

ability of mortgage markets to restructure or 

refinance loans for creditworthy borrowers.’’ 

Congressional Budget Office, Options for 

Responding to Short-Term Economic Weakness, p. 

21 (Jan. 2008). 

52 ‘‘[A] breakdown of mortgage markets could put 

the economy on a self-reinforcing downward spiral 

of less lending, weaker economic activity, lower 

house prices, more foreclosures, even less lending, 

and so on, either causing or significantly worsening 

a recession.’’ Id. pp. 21–22. 

53 12 U.S.C. 5201 et. seq.; Public Law 110–343 

(Oct. 3, 2008). 

54See Sec. 7002 of Public Law 111–5 (Jan. 6, 

2009). 

55 12 U.S.C. 5219(a)(1). 

56See www.makinghomeaffordable.gov. 

57See http://www.treasury.gov/initiatives/ 

financial-stability/TARP-Programs/housing/hhf/ 

Pages/default.aspx. 

58See Press Release, Treasury Department, Relief 

for Responsible Homeowners (Mar. 4, 2009), 

available at: http://www.treasury.gov/press-center/ 

press-releases/Pages/200934145912322.aspx. 

59 Generally speaking, a loan can be modified 

under HAMP only if it yields a positive net present 

value using series of tests involving ‘‘waterfalls.’’ 

Under the waterfall method, servicers must 

repeatedly project amortizations based on 

sequential decreases in the interest rate and, if 

necessary, principal forgiveness, until arriving at a 

potential loan modification with a target front-end 

DTI ratio of 31 percent. See United States 

Department of the Treasury, ‘‘Home Affordable 

Modification Program, Base Net Present Value 

(NPV) Model v5.02, Model Documentation’’ (April 

1, 2012), available at: https://www.hmpadmin.com/ 

portal/programs/docs/hamp_servicer/ 

npvmodeldocumentationv502.pdf. See also 

Consumer Compliance Outlook, Federal Reserve 

Bank of Philadelphia (Third Quarter 2009), 

available at: http://www.philadelphiafed.org/bankresources/publications/consumer-complianceoutlook/2009/third-quarter/q3_02.cfm. 

60See Troubled Asset Relief Program (TARP) 

Monthly Report to Congress—September 2009. 

61See United States Department of the Treasury 

Office of Financial Stability, ‘‘Troubled Asset Relief 

Program: Two Year Retrospective’’ (Oct. 2010). 

62See e.g., Supplemental Directive 10–02 (Mar. 

24, 2010), modifying HAMP, Supplemental 

Directive 11–07 (July 25, 2011), expanding 

eligibility for the Home Affordable Unemployment 

Program, and Supplemental Directive 12–02 (Mar. 

9, 2012), expanding HAMP eligibility. 

63Press Release, Treasury Department, Expanding 

our Efforts to Help More Homeowners and 

Strengthen Hard-hit Communities (Jan. 27, 2012), 

available at: http://www.treasury.gov/connect/blog/ 

Pages/Expanding-our-efforts-to-help-morehomeowners-and-strengthen-hard-hitcommunities.aspx. 

64 In addition to HAMP, the Second Lien 

Modification Program, and the Home Affordable 

Foreclosure Alternatives Program, the Treasury 

Department also operates the Principal Reduction 

Alternative Program and the Home Affordable 

Unemployment Program. 

65These programs are the FHA Home Affordable 

Modification Program, USDA Special Loan 

Servicing, Veterans Affairs Home Affordable 

Modification, FHA Second Lien Modification 

Program, and the FHA Short Refinance Program. 

66See March 2013 Making Home Affordable 

Program Performance Report. 

tightened mortgage loan underwriting 

requirements in response to uncertainty 

over the magnitude of potential losses 

due to delinquencies, defaults, and 

foreclosures.48 This restriction in credit 

availability coincided with increasing 

unemployment, falling home values, 

and the onset of subprime ARM resets. 

As a result, many subprime ARM 

consumers could not afford their 

mortgage payments and were not able to 

obtain refinancings. This led to 

increases in delinquencies and 

foreclosures, which prompted further 

tightening of underwriting standards. 

Other subprime ARM consumers were 

able to remain current, but were not able 

to refinance because of a decrease in 

their loan-to-value ratio or an increase 

in their debt-to-income ratio.49

However, these consumers devoted 

most of their disposable income to 

mortgage payments, thereby lowering 

overall consumer demand and further 

weakening the national economy.50

Policymakers became concerned that 

the losses incurred from foreclosures on 

subprime mortgage loans would 

destabilize the entire mortgage market.51

There was a particular concern that the 

uncertainty surrounding exposure to 

these losses would lead to a fearinduced downward economic spiral.52

As the crisis worsened, industry 

stakeholders attempted to stop this selfreinforcing cycle through a series of 

measures intended to stabilize 

homeownership and prevent 

foreclosure. Beginning in late 2008, the 

Federal government, Federal agencies, 

and GSEs implemented programs 

designed to facilitate refinancings and 

loan modifications. 

The Troubled Asset Relief Program. 

The U.S. government enacted and 

implemented several programs intended 

to promote economic recovery by 

stabilizing homeownership and 

preventing foreclosure. The Emergency 

Economic Stabilization Act of 2008,53 as 

amended by the American Recovery and 

Reinvestment Act of 2009,54 authorizes 

the Treasury Department to ‘‘use loan 

guarantees and credit enhancements to 

facilitate loan modifications to prevent 

avoidable foreclosures.’’ 55 Pursuant to 

this authority, the Treasury Department 

established the Troubled Asset Relief 

Program (TARP), under which two 

programs were created to provide 

financial assistance directly to 

homeowners in danger of losing their 

homes: the Making Home Affordable 

(MHA) program and the Hardest Hit 

Fund (HHF) program. The MHA 

program is operated by the Treasury 

Department and seeks to provide 

Federally-directed assistance to 

consumers who are at risk of default, 

foreclosure, or were otherwise harmed 

by the financial crisis.56 The HHF 

program provides funds to certain HFAs 

in States where the Treasury 

Department has determined that locallydirected stabilization programs are 

required.57

MHA began with the introduction of 

the Home Affordable Modification 

Program (HAMP) in March 2009.58

HAMP is intended to assist employed 

homeowners by replacing the 

consumer’s current mortgage loan with 

a more affordable mortgage loan.59

HAMP produced nearly 500,000 trial 

modifications during the first six 

months of the program.60 MHA offerings 

expanded with the creation of the 

Second Lien Modification Program in 

August 2009 and the Home Affordable 

Foreclosure Alternatives Program in 

November 2009.61 The Treasury 

Department subsequently modified 

these programs several times in 

response to the changing needs of 

distressed consumers and the mortgage 

market.62

MHA programs are currently 

scheduled to expire on December 31, 

2013, although there is continuing 

debate about whether to extend them.63

As of December 2012, ten programs 

have been established under MHA. The 

Treasury Department operates five MHA 

programs.64 The remaining five MHA 

programs are operated in conjunction 

with U.S. Department of Veterans 

Affairs (VA), FHA, or USDA programs.65

Many consumers facing default or 

foreclosure have received assistance 

under these programs. For example, 

from the beginning of the HAMP 

program to March 2013, over 1.1 million 

permanent HAMP modifications have 

been completed, saving distressed 

consumers an estimated $19.1 billion.66

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67See Hardest Hit Fund Program Guidelines 

Round 1, available at: http://www.treasury.gov/

initiatives/financial-stability/TARP-Programs/

housing/Documents/HFA_Proposal_Guidelines_-_

1st_Rd.pdf. 

68The HHF provides funds to HFAs located in 

Alabama, Arizona, California, Florida, Georgia, 

Illinois, Indiana, Kentucky, Michigan, Mississippi, 

Nevada, New Jersey, North Carolina, Ohio, Oregon, 

Rhode Island, South Carolina, Tennessee, and 

Washington, DC 

69See Troubled Asset Relief Program (TARP) 

Monthly Report to Congress—April 2013. 

70See Keep Your Home California 2012 Fourth 

Quarterly Report. 

71See Hardest Hit Fund Program Guidelines 

Round 1, available at: http://www.treasury.gov/

initiatives/financial-stability/TARP-Programs/

housing/Documents/HFA_Proposal_Guidelines_-_

1st_Rd.pdf. 

72From 2011–2012, the program agreements 

between the 19 HFAs and the Treasury Department 

were modified 55 times. See http://

www.treasury.gov/initiatives/financial-stability/

TARP-Programs/housing/hhf/Pages/Archivalinformation.aspx. 

73See Tenth Amendment to Commitment to 

Purchase Financial Instrument and HFA 

Participation Agreement, available at: http://

www.treasury.gov/initiatives/financial-stability/

TARP-Programs/housing/Pages/ProgramDocuments.aspx. 

74See Sec. 504 of the Veterans’ Benefits 

Improvement Act of 2008, Public Law 110–389 

(Oct. 10, 2008). 

75See HUD Mortgagee Letter 2009–07. Section 

1202(b) of the American Recovery and 

Reinvestment Act of 2009, Public Law 111–5 (Jan. 

6, 2009), authorized the Secretary of Housing and 

Urban Development to increase the loan limit. 

76The FHA Streamline Refinance Program 

contains reduced underwriting requirements for 

consumers with FHA mortgage loans seeking to 

refinance into a new FHA mortgage loan with a 

reduced interest rate. The FHA has offered 

streamline refinances for over thirty years. See HUD 

Mortgagee Letter 1982–23. 

77See HUD Mortgagee Letter 2010–23. 

78See 75 FR 52429 (Aug. 26, 2010). 

79See Rural Dev. Admin. Notice No. 4615 (1980– 

D) (Feb. 1, 2012). 

80This number represents FHA’s market share by 

dollar volume. By number of originations, the FHA 

controlled 6.5 percent of the refinance market, with 

312,385 refinances originated. See FHA-Insured 

Single-Family Mortgage Originations and Market 

Share Report 2012—Q2, available at: http://

portal.hud.gov/hudportal/documents/huddoc?id=

fhamktq2_2012.pdf. 

81See Hearing on FY13 Federal Housing 

Administration’s Budget Request, 112th Cong. (Mar. 

8, 2012) (testimony of Carol Galante, Acting 

Assistant Secretary for Housing/Federal Housing 

Administration Commissioner for the U.S. 

Department of Housing and Urban Development). 

82A total of 996,871 mortgage loans were 

endorsed under the FHA Streamline Refinance 

program from Fiscal Year 2009 through 2012. See 

FHA Outlook Reports for Fiscal Years 2009, 2010, 

2011, and 2012, available at: http://portal.hud.gov/ 

hudportal/HUD?src=/program_offices/housing/

rmra/oe/rpts/ooe/olmenu. 

83See Office of the Special Inspector General for 

the Troubled Asset Relief Program, Quarterly 

Report to Congress, p. 64 (Oct. 25, 2012). 

84See Press Release, FHFA, Statement of FHFA 

Director James B. Lockhart (Sept. 7, 2008), available 

at: http://www.fhfa.gov/webfiles/23/

FHFAStatement9708final.pdf. 

85See Press Release, FHFA, FHFA Announces 

Implementation Plans for Streamlined Loan 

Modification Program, (Dec. 18, 2008), available at: 

http://www.fhfa.gov/webfiles/267/SMP

implementation121808.pdf. 

In March 2010 the Treasury 

Department established the HHF 

program to enable the States most 

affected by the financial crisis to 

develop innovative assistance 

programs.67 Nineteen programs have 

been established under the HHF fund, 

which is currently scheduled to expire 

on December 31, 2017. These programs 

provide assistance to homeowners in 

the District of Columbia and the 18 

States most affected by the economic 

crisis.68 The HHF provides funds 

directly to HFAs in these States, which 

are used to create foreclosure-avoidance 

programs. As of April 2013, 

approximately $2.2 billion has been 

allocated to support the 63 programs 

established to assist distressed 

consumers in these localities.69 In 

California alone, nearly 17,000 

consumers have received over $166 

million in assistance since the 

beginning of the program.70

As with the MHA programs discussed 

above, these HHF programs have 

evolved over time. The Treasury 

Department originally encouraged HFAs 

to establish programs for mortgage 

modifications, principal forbearance, 

short sales, principal reduction for 

consumers with high loan-to-value 

ratios, unemployment assistance, and 

second-lien mortgage loan reduction or 

modification.71 No HFAs were able to 

establish all of these programs in the 

early stages of the HHF. However, 

through 2011 and 2012 State HHF 

programs were significantly modified 

and expanded.72 The 19 HFAs continue 

to modify these programs to develop 

more effective and efficient methods of 

providing assistance to at-risk 

consumers. For example, in September 

2012 the Nevada HHF program was 

amended for the tenth time.73

Federal agency programs. In response 

to the financial crisis, the FHA, the VA, 

and the USDA expanded existing 

programs and implemented new 

programs intended to facilitate 

refinancings for consumers at risk of 

delinquency or default. Some of these 

programs operate in conjunction with 

the Treasury Department’s MHA 

program, while others are run solely by 

the particular Federal agency. In 2008 

Congress expanded access to 

refinancings under the VA’s Interest 

Rate Reduction Refinancing Loan 

program by raising the maximum loanto-value ratio to 100 percent and 

increasing the maximum loan amount of 

loans eligible to be guaranteed under the 

program.74 In February 2009 HUD 

increased the maximum loan amount for 

FHA-insured mortgages.75 This change 

expanded access to refinancings 

available under the FHA’s Streamline 

Refinance Program.76 Several months 

later, the FHA created the Short 

Refinance Option program to assist 

consumers with non-FHA mortgage 

loans.77 This program, which operates 

in conjunction with TARP, permits 

underwater consumers to refinance if 

the current creditor agrees to write 

down 10 percent of the outstanding 

principal balance. Similarly, in August 

2010 the Rural Housing Service of the 

USDA (RHS) adopted rules intended to 

facilitate loan modifications for 

consumers struggling to make payments 

on USDA Guaranteed Loans.78 The 

USDA subsequently created the Single 

Family Housing Guaranteed Rural 

Refinance Pilot Program, which was 

intended to refinance USDA borrowers 

into more stable and affordable 

mortgage loans.79

These efforts have enabled many 

consumers to receive refinancings under 

these programs. In 2011, the FHA 

accounted for 5.6 percent of the 

mortgage refinance market, with 

originations totaling $59 billion.80

However, the number of consumers 

receiving assistance under these 

programs varies. For example, between 

April 2009 and December 2011, the 

FHA started 5.6 million mortgage loan 

modifications.81 During a similar time 

period, nearly 997,000 FHA Streamline 

Refinances were consummated.82 In 

contrast, between February 2010 and 

September 2012, only 1,772 mortgage 

loans were refinanced under the Short 

Refinance Option program.83 Efforts 

continue to develop and enhance these 

programs to assist distressed 

homeowners while improving the 

performance of existing mortgage loans 

owned, insured, or guaranteed by these 

agencies. 

HARP and other GSE refinancing 

programs. After the GSEs were placed 

into conservatorship in late 2008, the 

Federal Housing Finance Agency 

(FHFA) took immediate steps to reduce 

GSE losses by mitigating foreclosures.84

In November 2008 FHFA and the GSEs, 

in coordination with the Treasury 

Department and other stakeholders, 

announced the Streamlined 

Modification Program, which was 

intended to help delinquent consumers 

avoid foreclosure by affordably 

restructuring mortgage payments.85 This 

program was the precursor to the Home 

Affordable Refinance Program (HARP) 

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86See Press Release, Treasury Department, Relief 

for Responsible Homeowners (Mar. 4, 2009), 

available at: http://www.treasury.gov/press-center/

press-releases/Pages/200934145912322.aspx. 

87See Press Release, FHFA, FHFA Authorized 

Fannie Mae and Freddie Mac to Expand Home 

Affordable Refinance Program to 125 Percent Loanto-Value (July 1, 2009), available at: http://

www.fhfa.gov/webfiles/13495/125_LTV_release_

and_fact_sheet_7_01_09%5B1%5D.pdf. 

88See Press Release, FHFA, FHFA Extends 

Refinance Program By One Year (Mar. 1, 2010), 

available at: http://www.fhfa.gov/webfiles/15466/

HARPEXTENDED3110%5B1%5D.pdf. 

89See Treasury Department Press Release supra 

note 94. 

90See Press Release, FHFA, FHFA, Fannie Mae 

and Freddie Mac Announce HARP Changes to 

Reach More Borrowers (Oct. 24, 2011), available at: 

http://www.fhfa.gov/webfiles/22721/ 

HARP_release_102411_Final.pdf. 

91See Federal Housing Finance Agency Refinance 

Report (June 2012). 

92See Federal Housing Finance Agency Refinance 

Report (Sept. 2012). 

93 Id. 

94 ‘‘Today, we continue to meet with lenders to 

ensure HARP is helping underwater borrowers 

refinance at today’s historical low interest rates. As 

we continue to gain insight from the program we 

will make additional operational adjustments as 

needed to enhance access to this program.’’ Edward 

J. DeMarco, Acting Director Federal Housing 

Finance Agency, Remarks at the American Mortgage 

Conference (Sept. 10, 2012), available at: http:// 

www.fhfa.gov/webfiles/24365/ 

2012DeMarcoNCSpeechFinal.pdf. 

95See Press Release, FHFA, FHFA Extends HARP 

to 2015 (Apr. 11, 2013), available at: http:// 

www.fhfa.gov/webfiles/22721/ 

HARP_release_102411_Final.pdf. 

96 ‘‘[C]ommunity banks tend to base credit 

decisions on local knowledge and nonstandard data 

obtained through long-term relationships and are 

less likely to rely on the models-based underwriting 

used by larger banks.’’ Federal Deposit Insurance 

Corporation, FDIC Community Banking Study, p. 1– 

1 (Dec. 2012) (FDIC Community Banking Study). 

97See FCIC Report at 72. 

98See FCIC Report at 89. 

99Between 2005 and 2008, while loan 

originations at banks with assets in excess of $10 

billion fell by 51 percent, loan originations at banks 

with assets between $1 and $10 billion declined by 

31 percent, and loan originations at banks with less 

than $1 billion in assets declined by only 10 

percent. See Federal Reserve Bank of Kansas City, 

Financial Industry Perspectives (Dec. 2009). 

100 In December 2003, the ratio of mortgagebacked securities to total assets at credit unions was 

4.67 percent. By December 2006, this ratio had 

decreased to 3.21 percent. See Accelerating Loan 

Modifications, Improving Foreclosure Prevention 

and Enhancing Enforcement, 110th Cong. (Dec. 6, 

2007) (testimony of Gigi Hyland, Board Member of 

the National Credit Union Administration). 

that was announced in March 2009.86

The HARP program was originally set to 

expire in June 2010 and limited to 

consumers with a loan-to-value ratio 

that did not exceed 105 percent. 

However, HARP was modified over time 

to account for the deteriorating mortgage 

market. In July 2010 the maximum loanto-value ratio was increased from 105 

percent to 125 percent.87 Nine months 

later FHFA extended the HARP 

expiration date by one year, to June 30, 

2011.88

Many of the nearly five million 

eligible consumers were expected to 

receive refinancings under HARP.89

However, by mid-2011 fewer than one 

million consumers had received HARP 

refinances. Fannie Mae, Freddie Mac, 

and FHFA responded by significantly 

altering the HARP program.90 Perhaps 

most significantly, the maximum loanto-value ratio was removed, facilitating 

refinances for all underwater consumers 

who otherwise fit HARP’s criteria. More 

HARP refinances were completed 

during the first six months of 2012 than 

in all of 2011.91 These changes were 

especially effective in assisting 

consumers with high loan-to-value 

ratios. In September 2012, consumers 

with loan-to-value ratios in excess of 

125 percent received 26 percent of all 

HARP refinances.92

The GSEs have implemented other 

streamline refinance programs intended 

to facilitate the refinancing of existing 

GSE consumers into more affordable 

mortgage loans. These programs are 

available for consumers who are not 

eligible for a refinancing under HARP. 

For example, a consumer with a loan-tovalue ratio of less than 80 percent is 

eligible for a streamline refinancing 

through Fannie Mae’s Refi Plus program 

or Freddie Mac’s Relief Refinance 

program. These programs comprise a 

significant share of GSE refinancing 

activity. From January through 

September 2012, 45 percent of GSE 

streamline refinances were non-HARP 

refinances.93 FHFA and the GSEs 

remain committed to continue 

modifying these programs to enhance 

access to refinancing credit for 

distressed consumers.94 In April 2013, 

FHFA extended the HARP expiration 

date to December 31, 2015.95

The Mortgage Loan Market for Small 

Portfolio Creditors 

Traditionally, underwriting standards 

were determined at the branch or local 

bank level. These practices heavily 

emphasized the relationship between 

the bank and the consumer.96 Starting in 

the mid-1990s, much of the mortgage 

market began to move toward 

standardized underwriting practices 

based on quantifiable and verifiable data 

points, such as a consumer’s credit 

score.97 The shift toward standardized, 

electronic underwriting lowered costs 

for creditors and consumers, thereby 

increasing access to mortgage credit. 

Standardized loan-level data made it 

easier to analyze individual loans for 

compliance with underwriting 

requirements, which facilitated the 

expansion of private mortgage 

securitizations. This shift from 

portfolio-focused to securitizationfocused mortgage lending also altered 

the traditional risk calculations 

undertaken by creditors, as creditors no 

longer retained the risks associated with 

poorly underwritten loans.98

Additionally, in another departure from 

the traditional mortgage lending model, 

these creditors increasingly relied on 

the fees earned by originating and 

selling mortgage loans, as opposed to 

the interest revenue derived from the 

loan itself. 

Small community creditor access to 

the secondary mortgage market was 

limited. Many small creditors originated 

‘‘non-conforming’’ loans which could 

not be purchased by the GSEs. Also, 

many community creditors chose to 

retain the relationship model of 

underwriting, rather than fully adopting 

standardized data models popular with 

larger banks. Retaining these traditional 

business methods had important 

consequences during the subprime 

crisis. While large lending institutions 

generally depended on the secondary 

market for funding, small community 

banks and credit unions generally 

remained reliant on deposits to fund 

mortgage loans held in portfolio. As a 

result, community creditors were less 

affected by the contraction in the 

secondary mortgage market during the 

financial crisis.99 For example, the 

percentage of mortgage-backed 

securities in relation to the total assets 

of credit unions actually declined by 

more than 1.5 percent as subprime 

lending expanded.100

Furthermore, by retaining mortgage 

loans in portfolio community creditors 

also retain the risk of delinquency or 

default on those loans. The presence of 

portfolio lending within this market 

remains an important influence on the 

underwriting practices of community 

banks and credit unions. These 

institutions generally rely on long-term 

relationships with a small group of 

consumers. Therefore, the reputation of 

these community banks and credit 

unions is largely dependent on serving 

their community in ways that cause no 

harm. Thus, community creditors have 

an added incentive to engage in 

thorough underwriting to protect their 

balance sheet as well as their reputation. 

To minimize portfolio performance risk, 

small community creditors have 

developed underwriting standards that 

are different than those employed by 

larger institutions. Small creditors 

generally engage in ‘‘relationship 

banking,’’ in which underwriting 

decisions rely on qualitative 

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35438 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

101 ‘‘Many customers . . . value the intimate 

knowledge their banker has of their business and/ 

or total relationship and prefer dealing consistently 

with the same individuals whom they do not have 

to frequently reeducate about their own unique 

financial and business situations. Such customers 

are consequently willing to pay relatively more for 

such service. Relationship lending thus provides a 

niche for community institutions that many large 

banks find less attractive or are less capable of 

providing.’’ See Federal Reserve Bank of Atlanta, 

On the Uniqueness of Community Banks (Oct. 

2005). 

102See Allen N. Berger and Gregory F. Udell, 

Small Business Credit Availability and Relationship 

Lending: The Importance of Bank Organisational 

Structure, Economic Journal (2002). 

103 ‘‘Moreover, a comparison of loss rates on 

individual loan categories suggests that community 

banks may also do a better job of underwriting loans 

than noncommunity institutions (see Table 4.4).’’ 

FDIC Community Banking Study, p. 4–6. See also 

Sumit Agarwal, Brent W. Ambrose, Souphala 

Chomsisengphet, and Chunlin Liu, The Role of Soft 

Information in a Dynamic Contract Setting: 

Evidence from the Home Equity Market, 43 Journal 

of Money, Credit and Banking 633, 649 (Oct. 2011) 

(analyzing home equity lending, the authors ‘‘find 

that the lender’s use of soft information can 

successfully reduce the risks associated with ex 

post credit losses.’’). 

104 ‘‘In particular, we find evidence that selection 

and soft information prior to purchase are 

significantly associated with reduced delinquency 

and default. And, in line with relationship lending, 

we find that this effect is most pronounced for 

borrowers with compromised credit (credit scores 

below 660), who likely benefit the most from soft 

information in the lending relationship. This 

suggests that for higher risk borrowers, relationship 

with a bank may be about more than the mortgage 

transaction.’’ O. Emre Ergungor and Stephanie 

Moulton, Beyond the Transaction: Depository 

Institutions and Reduced Mortgage Default for LowIncome Homebuyers, Federal Reserve Bank of 

Cleveland Working Paper 11–15 (Aug. 2011). 

105Federal Reserve Board, Charge-Off and 

Delinquency Rates on Loans and Leases at 

Commercial Banks (Nov. 2012), available at: http:// 

www.federalreserve.gov/releases/chargeoff/ 

default.htm. These data show that residential real 

estate charge-offs were higher at large banks than 

small ones for 12 of the previous 87 quarters, dating 

to the start of the small bank survey in 1991. For 

example, in the fourth quarter of 2009 large banks 

had a 3.16 percent charge-off rate, while the rate at 

small banks was 1.2 percent. Delinquency rates 

demonstrate a similar effect. 

106 ‘‘In two retail loan categories—residential real 

estate loans and loans to individuals—community 

banks consistently reported lower average loss rates 

from 1991 through 2011, the period for which these 

data are available.’’ FDIC Community Banking 

Study, p. 4–6. 

107 FDIC Community Banking Study, p. 3–6. 

108 FDIC Community Banking Study, p. 3–5. 

109 Id. 

110 FCIC Report at 72. 

111 FDIC Community Banking Study, p. 4–5; 

Government Accountability Office, Community 

Banks and Credit Unions: Impact of the DoddFrank Act Depends Largely on Future Rulemakings, 

p. 10 (Sept. 2012) (GAO Community Banks and 

Credit Unions Report). 

information gained from personal 

relationships between creditors and 

consumers.101 This qualitative 

information, often referred to as ‘‘soft’’ 

information, focuses on subjective 

factors such as consumer character and 

reliability, which ‘‘may be difficult to 

quantify, verify, and communicate 

through the normal transmission 

channels of a banking organisation.’’ 102

Evidence suggests that underwriting 

based on such ‘‘soft’’ information yields 

loan portfolios that perform better than 

those underwritten according to ‘‘hard’’ 

information, such as credit score and 

consumer income levels.103 For 

example, one recent study found that 

delinquency and default rates were 

significantly lower for consumers 

receiving mortgage loans from 

institutions relying on soft information 

for underwriting decisions.104 This is 

consistent with market-wide data 

demonstrating that mortgage loan 

delinquency and charge-off rates are 

significantly lower at smaller banks than 

larger ones.105 Current data also 

suggests that that these relationshipbased lending practices lead to more 

accurate underwriting decisions during 

cycles of both lending expansion and 

contraction.106

Although the number of community 

banks has declined in recent years, 

these institutions remain an important 

source of nonconforming credit and of 

mortgage credit generally in areas 

commonly considered ‘‘rural’’ or 

‘‘underserved.’’ The Bureau’s estimates 

based on Home Mortgage Disclosure Act 

(HMDA) and the Consolidated Report of 

Condition and Income (Call Report) data 

suggest that approximately one half of 

all nonconforming loans are originated 

by creditors with assets less than $2 

billion and approximately one quarter 

are originated by creditors with total 

assets less than $2 billion that originate 

fewer than 500 first-lien mortgages 

annually. In 2011, community banks 

held over 50 percent of all deposits in 

micropolitan areas and over 70 percent 

of all deposits held in rural areas.107

Similarly, in 2011, there were more than 

600 counties where community banks 

operated offices but where no 

noncommunity bank offices were 

present, and more than 600 additional 

counties where community banks 

operated offices but where fewer than 

three noncommunity bank offices were 

present.108 These counties have a 

combined population of more than 16 

million people and include both rural 

and metropolitan areas.109 It is 

important to note that the cost of credit 

offered by these community institutions 

is generally higher than the cost of 

similar products offered by larger 

institutions. One reason for this 

increased expense stems from the nature 

of relationship-based underwriting 

decisions. Such qualitative evaluations 

of creditworthiness tend to take more 

time, and therefore are more expensive, 

than underwriting decisions based on 

standardized points of data.110 Also, the 

cost of funds for community banks 

tends to be higher than the cost for 

larger institutions.111

B. Statutory and Regulatory Background 

For over 20 years, consumer 

advocates, legislators, and regulators 

have raised concerns about creditors 

originating mortgage loans without 

regard to the consumer’s ability to repay 

the loan. Beginning in about 2006, these 

concerns were heightened as mortgage 

delinquencies and foreclosure rates 

increased dramatically, caused in part 

by the gradual deterioration in 

underwriting standards. See 73 FR 

44524 (Jul. 30, 2008). For detailed 

background information, including a 

summary of the legislative and 

regulatory responses to this issue, which 

culminated in the enactment of the 

Dodd-Frank Act on July 21, 2010, the 

Board of Governors of the Federal 

Reserve System’s (the Board) issuance of 

a proposed rule on May 11, 2011 to 

implement certain amendments to TILA 

made by the Dodd-Frank Act, and the 

Bureau’s issuance of the 2013 ATR Final 

Rule, see the discussion in the 2013 

ATR Final Rule. See 78 FR 6410–6420 

(Jan. 30, 2013). 

The Bureau’s ATR Final Rule 

The Bureau’s 2013 ATR Final Rule 

implemented the ability-to-repay 

requirements under TILA section 129C. 

Consistent with the statute, the Bureau’s 

2013 ATR Final Rule adopted 

§ 1026.43(a), which applies the abilityto-repay requirements to any consumer 

credit transaction secured by a dwelling, 

except an open-end credit plan, 

timeshare plan, reverse mortgage, or 

temporary loan. 

As adopted, § 1026.43(c) provides that 

a creditor is prohibited from making a 

covered mortgage loan unless the 

creditor makes a reasonable and good 

faith determination, based on verified 

and documented information, that the 

consumer will have a reasonable ability 

to repay the loan, including any 

mortgage-related obligations (such as 

property taxes and mortgage insurance). 

Section 1026.43(c) describes certain 

requirements for making ability-to-repay 

determinations, but does not provide 

comprehensive underwriting standards 

to which creditors must adhere. At a 

minimum, however, the creditor must 

consider and verify eight underwriting 

factors: (1) Current or reasonably 

expected income or assets; (2) current 

employment status; (3) the monthly 

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112TILA section 129C(b)(2)(B) defines the average 

prime offer rate as ‘‘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.’’ 15 U.S.C. 1639c(b)(2)B). 

payment on the covered transaction; (4) 

the monthly payment on any 

simultaneous loan; (5) the monthly 

payment for mortgage-related 

obligations; (6) current debt obligations; 

(7) the monthly debt-to-income ratio or 

residual income; and (8) credit history. 

Section 1026.43(c)(3) generally 

requires the creditor to verify the 

information relied on in determining a 

consumer’s repayment ability using 

reasonably reliable third-party records, 

with special rules for verifying a 

consumer’s income or assets. Section 

1026.43(c)(5)(i) requires the creditor to 

calculate the monthly mortgage 

payment based on the greater of the 

fully indexed rate or any introductory 

rate, assuming monthly, fully 

amortizing payments that are 

substantially equal. Section 

1026.43(c)(5)(ii) provides special 

payment calculation rules for loans with 

balloon payments, interest-only loans, 

and negative amortization loans. 

Section 1026.43(d) provides special 

rules for complying with the ability-torepay requirements for a creditor 

refinancing a ‘‘non-standard mortgage’’ 

into a ‘‘standard mortgage.’’ This 

provision is based on TILA section 

129C(a)(6)(E), which contains special 

rules for the refinancing of a ‘‘hybrid 

loan’’ into a ‘‘standard loan.’’ The 

purpose of this provision is to provide 

flexibility for creditors to refinance a 

consumer out of a risky mortgage into a 

more stable one without undertaking a 

full underwriting process. Under 

§ 1026.43(d), a non-standard mortgage is 

defined as an adjustable-rate mortgage 

with an introductory fixed interest rate 

for a period of one year or longer, an 

interest-only loan, or a negative 

amortization loan. Under this option, a 

creditor refinancing a non-standard 

mortgage into a standard mortgage does 

not have to consider the eight specific 

underwriting criteria listed under 

§ 1026.43(c), if certain conditions are 

met. 

Section 1026.43(e) specifies 

requirements for originating ‘‘qualified 

mortgages,’’ as well as standards for 

when the presumption of compliance 

with ability-to-repay requirements can 

be rebutted. Section 1026.43(e)(1)(i) 

provides a safe harbor under the abilityto-repay requirements for loans that 

satisfy the definition of a qualified 

mortgage and are not higher-priced 

covered transactions (i.e., the APR does 

not exceed APOR112 plus 1.5 percentage 

points for first-lien loans or 3.5 

percentage points for subordinate-lien 

loans). Section 1026.43(e)(1)(ii) provides 

a rebuttable presumption for qualified 

mortgage loans that are higher-priced 

covered transactions (i.e., the APR 

exceeds APOR plus 1.5 percent for first 

lien or 3.5 percent for subordinate lien). 

Under the 2013 ATR Final Rule, 

§ 1026.43 also provides three options for 

creditors to originate a qualified 

mortgage: 

Qualified mortgage—general. Under 

the general definition for qualified 

mortgages in § 1026.43(e)(2), a creditor 

must satisfy the statutory criteria 

restricting certain product features and 

points and fees on the loan, consider 

and verify certain underwriting 

requirements that are part of the general 

ability-to-repay standard, and confirm 

that the consumer has a total (or ‘‘backend’’) debt-to-income ratio that is less 

than or equal to 43 percent. To 

determine whether the consumer meets 

the specific debt-to-income ratio 

requirement, the creditor must calculate 

the consumer’s monthly debt-to-income 

ratio in accordance with appendix Q. A 

loan that satisfies these criteria and is 

not a higher-priced covered transaction 

receives a legal safe harbor from the 

ability-to-repay requirements. A loan 

that satisfies these criteria and is a 

higher-priced covered transaction 

receives a rebuttable presumption of 

compliance with the ability-to-repay 

requirements. 

Qualified mortgage—special rules. 

The second option for originating a 

qualified mortgage provides a temporary 

alternative to the general definition in 

§ 1026.43(e)(2). This option is intended 

to avoid unnecessarily disrupting the 

mortgage market at a time when it is 

especially fragile, as a result of the 

recent mortgage crisis. Section 

1026.43(e)(4) provides that a loan is a 

qualified mortgage if it meets the 

statutory limitations on product features 

and points and fees, satisfies certain 

other requirements, and is eligible for 

purchase, guarantee, or insurance by 

one of the following entities: 

• Fannie Mae or Freddie Mac, while 

operating under the conservatorship or 

receivership of the Federal Housing 

Finance Agency pursuant to section 

1367 of the Federal Housing Enterprises 

Financial Safety and Soundness Act of 

1992; 

• Any limited-life regulatory entity 

succeeding the charter of either Fannie 

Mae or Freddie Mac pursuant to section 

1367(i) of the Federal Housing 

Enterprises Financial Safety and 

Soundness Act of 1992; 

• The U.S. Department of Housing 

and Urban Development under the 

National Housing Act (FHA); 

• The U.S. Department of Veterans 

Affairs (VA); 

• The U.S. Department of Agriculture 

(USDA); or 

• The U.S. Department of Agriculture 

Rural Housing Service (RHS). 

With respect to GSE-eligible loans, 

this temporary provision expires when 

conservatorship of the GSEs ends. With 

respect to each other category of loan, 

this provision expires on the effective 

date of a rule issued by each respective 

Federal agency pursuant to its authority 

under TILA section 129C(b)(3)(ii) to 

define a qualified mortgage. In any 

event, this temporary provision expires 

no later than January 10, 2021. 

Qualified mortgage—balloon-payment 

loans by certain creditors. The third 

option for originating qualified 

mortgages is included under 

§ 1026.43(f), which provides that a small 

creditor operating predominantly in 

rural or underserved areas can originate 

a balloon-payment qualified mortgage. 

The Dodd-Frank Act generally prohibits 

balloon-payment mortgages from being 

qualified mortgages. However, the 

statute creates a limited exception, with 

special underwriting rules, for loans 

made by a creditor that: (1) Operates 

predominantly in rural or underserved 

areas; (2) together with affiliates, has 

total annual residential mortgage loan 

originations that do not exceed a limit 

set by the Bureau; and (3) retains the 

balloon loans in portfolio. The purpose 

of this definition is to preserve credit 

availability in rural or underserved 

areas by assuring that small creditors 

offering loans that cannot be sold on the 

secondary market, and therefore must be 

placed on the creditor’s balance sheet, 

are able to use a balloon-payment 

structure as a means of controlling 

interest rate risk. 

Section 1026.43(f)(1)(vi) limits 

eligibility to creditors that originated 

500 or fewer covered transactions 

secured by a first-lien in the preceding 

calendar year and that have assets of no 

more than $2 billion (to be adjusted 

annually). In addition, to originate a 

balloon-payment qualified mortgage 

more than 50 percent of a creditor’s total 

first-lien covered transactions must have 

been secured by properties in counties 

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

designated by the Bureau. A county is 

‘‘rural’’ if, during a calendar year, it is 

located in neither a metropolitan 

statistical area nor a micropolitan 

statistical area adjacent to a 

metropolitan statistical area, as those 

terms are defined by the U.S. Office of 

Management and Budget. A county is 

‘‘underserved’’ if no more than two 

creditors extend covered transactions 

five or more times in that county during 

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35440 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

113The $2 billion threshold reflects the purposes 

of the proposed category and the structure of the 

mortgage lending industry. The Bureau’s choice of 

$2 billion in assets as a threshold for purposes of 

TILA section 129C does not imply that a threshold 

of that type or of that magnitude would be an 

appropriate way to distinguish small firms for other 

purposes or in other industries. 

a calendar year. Also, except as 

provided, the balloon-payment qualified 

mortgage must generally be held in 

portfolio for at least three years. Balloon 

loans by such creditors are eligible for 

qualified mortgage status if they meet 

the statutory limitations on product 

features and points and fees, and if the 

creditor follows certain other 

requirements that are part of the general 

ability-to-repay standard. 

The Bureau’s 2013 ATR Final Rule 

added two additional requirements to 

§ 1026.43. Section 1026.43(g) 

implements the Dodd-Frank Act limits 

on prepayment penalties. Section 

1026.43(h) prohibits a creditor from 

structuring a closed-end extension of 

credit as an open-end plan to evade the 

ability-to-repay requirements. 

III. Summary of the Rulemaking 

Process 

A. The Bureau’s Proposal 

As discussed above, TILA section 

129C, as added by sections 1411, 1412, 

and 1414 of the Dodd-Frank Act, 

generally requires creditors to make a 

reasonable, good faith determination of 

a consumer’s ability to repay the loan. 

On January 10, 2013, the Bureau issued 

the 2013 ATR Final Rule to implement 

these ability-to-repay requirements. See 

78 FR 6407 (Jan. 30, 2013). At the same 

time, the Bureau issued the 2013 ATR 

Proposed Rule related to certain 

proposed exemptions, modifications, 

and clarifications to the ability-to-repay 

requirements and qualified mortgage 

provisions. See 78 FR 6621 (Jan. 30, 

2013). The 2013 ATR Proposed Rule 

contained three major elements. 

First, the Bureau proposed certain 

exemptions from the ability-to-repay 

requirements for housing finance 

agencies, certain nonprofit creditors, 

certain homeownership stabilization 

and foreclosure prevention programs, 

and certain Federal agency and GSE 

refinancing programs. The Bureau was 

concerned that the ability-to-repay 

requirements were substantially 

different from the underwriting 

requirements employed by these 

creditors or required under these 

programs, which would discourage 

participation in and frustrate the 

purposes of these programs and 

significantly impair access to 

responsible, affordable credit for certain 

consumers. 

Second, the Bureau proposed 

modifications related to certain small 

creditors. Specifically, the Bureau 

proposed an additional definition of a 

qualified mortgage for certain loans 

made and held in portfolio by small 

creditors. The proposed new category 

would include certain loans originated 

by small creditors 113 that: (1) Have total 

assets of $2 billion or less at the end of 

the previous calendar year; and (2) 

together with all affiliates, originated 

500 or fewer first-lien covered 

transactions during the previous 

calendar year. The proposed new 

category would include only loans held 

in portfolio by these creditors. The loans 

also would have to conform to all of the 

requirements under the general 

definition of a qualified mortgage except 

the 43 percent limit on monthly debt-toincome ratio. The Bureau also proposed 

to allow small creditors and small 

creditors operating predominantly in 

rural and underserved areas to charge a 

higher annual percentage rate for firstlien qualified mortgages in the proposed 

new category and still benefit from a 

conclusive presumption of compliance 

or ‘‘safe harbor.’’ A qualified mortgage 

in the proposed new category would be 

conclusively presumed to comply if the 

annual percentage rate is equal to or less 

than APOR plus 3.5 percentage points 

for both first-lien and subordinate-lien 

loans. The Bureau also posed and 

solicited comment on a specific 

question regarding whether there is a 

need for transition mechanisms for 

existing balloon loans that may end 

soon after the new rule takes effect. 

Finally, the Bureau proposed several 

additional interpretive comments 

concerning the inclusion of loan 

originator compensation in the points 

and fees calculation under the qualified 

mortgage provisions and the high-cost 

mortgage provisions under HOEPA. The 

proposed comments addressed 

situations in which payments flow from 

one party to another over the course of 

a mortgage transaction and whether to 

count compensation separately where it 

may already have been counted toward 

points and fees under another element 

of the regulatory definition. In addition, 

the Bureau sought feedback on whether 

additional clarification was warranted 

in light of the Bureau’s separate 

rulemaking to implement provisions of 

the Dodd-Frank Act restricting certain 

loan originator compensation practices. 

B. Comments and Post-Proposal 

Outreach 

In response to the proposed rule, the 

Bureau received approximately 1,150 

letters from commenters, including 

members of Congress, creditors, 

consumer groups, trade associations, 

mortgage and real estate market 

participants, and individual consumers. 

The comments focused on all aspects of 

the proposal, including: 

• the calculation of loan originator 

compensation for inclusion in points 

and fees for the qualified mortgage and 

high-cost mortgage points and fees 

limits; 

• the proposed exemptions from the 

ability-to-repay requirements for 

housing finance agencies, certain 

nonprofit creditors, certain 

homeownership stabilization and 

foreclosure prevention programs, and 

certain Federal agency and GSE 

refinancing programs; 

• the proposed definition of a fourth 

category of qualified mortgages 

including loans originated and held in 

portfolio by certain small creditors; and 

• the proposed amendments to the 

definition of higher-priced covered 

transaction with respect to qualified 

mortgages that are originated and held 

in portfolio by small creditors and with 

respect to balloon-payment qualified 

mortgages originated and held in 

portfolio by small creditors operating 

predominantly in rural or underserved 

areas. 

Materials submitted were filed in the 

record and are publicly available at 

http://www.regulations.gov. The Bureau 

also elected to consider the comments 

received after the expiration of the 

comment period. As discussed in more 

detail below, the Bureau has considered 

these comments in adopting this final 

rule. 

IV. Legal Authority 

The Bureau is issuing this final rule 

pursuant to its authority under TILA 

and the Dodd-Frank Act. See 15 U.S.C. 

1604(a), 12 U.S.C. 5512(b)(1). 

A. TILA Ability-to-Repay and Qualified 

Mortgage Provisions 

As discussed above, the Dodd-Frank 

Act amended TILA to provide that, in 

accordance with regulations prescribed 

by the Bureau, no creditor may make a 

residential mortgage loan unless the 

creditor makes a reasonable and good 

faith determination based on verified 

and documented information that, at the 

time the loan is consummated, the 

consumer has a reasonable ability to 

repay the loan, according to its terms, 

and all applicable taxes, insurance 

(including mortgage guarantee 

insurance), and assessments. TILA 

section 129C(a)(1); 15 U.S.C. 

1639c(a)(1). As described below in part 

IV.B, the Bureau has authority to 

prescribe regulations to carry out the 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35441 

purposes of TILA pursuant to TILA 

section 105(a). 15 U.S.C. 1604(a). In 

particular, it is the purpose of TILA 

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

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay the loans and that 

are understandable and not unfair, 

deceptive, or abusive. TILA section 

129B(a)(2); 15 U.S.C. 1639b(a)(2). 

TILA, as amended by the Dodd-Frank 

Act, also provides creditors originating 

‘‘qualified mortgages’’ special protection 

from liability under the ability-to-repay 

requirements. TILA section 129C(b), 15 

U.S.C. 1639c(b). TILA generally defines 

a ‘‘qualified mortgage’’ as a residential 

mortgage loan for which: the loan does 

not contain negative amortization, 

interest-only payments, or balloon 

payments; the term does not exceed 30 

years; the points and fees generally do 

not exceed 3 percent of the loan 

amount; the income or assets are 

considered and verified; and the 

underwriting is based on the maximum 

rate during the first five years, uses a 

payment schedule that fully amortizes 

the loan over the loan term, and takes 

into account all mortgage-related 

obligations. TILA section 129C(b)(2), 15 

U.S.C. 1639c(b)(2). In addition, to 

constitute a qualified mortgage a loan 

must meet ‘‘any guidelines or 

regulations established by the Bureau 

relating to ratios of total monthly debt 

to monthly income or alternative 

measures of ability to pay regular 

expenses after payment of total monthly 

debt, taking into account the income 

levels of the borrower and such other 

factors as the Bureau may determine are 

relevant and consistent with the 

purposes described in [TILA section 

129C(b)(3)(B)(i)].’’ 

TILA, as amended by the Dodd-Frank 

Act, also provides the Bureau with 

authority to prescribe regulations that 

revise, add to, or subtract from the 

criteria that define a qualified mortgage 

upon a finding that such regulations are 

necessary or proper to ensure that 

responsible, affordable mortgage credit 

remains available to consumers in a 

manner consistent with the purposes of 

the ability-to-repay requirements; or are 

necessary and appropriate to effectuate 

the purposes of the ability-to-repay 

requirements, to prevent circumvention 

or evasion thereof, or to facilitate 

compliance with TILA sections 129B 

and 129C. TILA section 129C(b)(3)(B)(i), 

15 U.S.C. 1639c(b)(3)(B)(i). In addition, 

TILA section 129C(b)(3)(A) provides the 

Bureau with authority to prescribe 

regulations to carry out the purposes of 

the qualified mortgage provisions—to 

ensure that responsible, affordable 

mortgage credit remains available to 

consumers in a manner consistent with 

the purposes of TILA section 129C. 

TILA section 129C(b)(3)(A), 15 U.S.C. 

1939c(b)(3)(A). As discussed in the 

section-by-section analysis below, the 

Bureau is issuing certain provisions of 

this rule pursuant to its authority under 

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

In addition, for purposes of defining 

‘‘qualified mortgage,’’ TILA section 

129C(b)(2)(A)(vi) provides the Bureau 

with authority to establish guidelines or 

regulations relating to monthly debt-toincome ratios or alternative measures of 

ability to repay. As discussed in the 

section-by-section analysis below, the 

Bureau is issuing certain provisions of 

this rule pursuant to its authority under 

TILA sections 129C(b)(2)(A)(vi). 

B. Other Rulemaking and Exception 

Authorities 

This final rule also relies on the 

rulemaking and exception authorities 

specifically granted to the Bureau by 

TILA and the Dodd-Frank Act, 

including the authorities discussed 

below. 

TILA 

TILA section 105(a). 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 TILA, and provides 

that such regulations may contain 

additional requirements, classifications, 

differentiations, or other provisions, and 

may provide for such adjustments and 

exceptions for all or any class of 

transactions, that the Bureau judges are 

necessary or proper to effectuate the 

purposes of TILA, to prevent 

circumvention or evasion thereof, or to 

facilitate compliance 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 informed by 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 through the effectuation of 

TILA’s purposes. 

As amended by section 1402 of the 

Dodd-Frank Act, section 129B(a)(2) of 

TILA provides that a purpose of section 

129C of TILA is ‘‘to assure that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

the loans.’’ This stated purpose is 

informed by Congress’s finding that 

‘‘economic stabilization would be 

enhanced by the protection, limitation, 

and regulation of the terms of 

residential mortgage credit and the 

practices related to such credit, while 

ensuring that responsible, affordable 

mortgage credit remains available to 

consumers.’’ Thus, ensuring that 

responsible, affordable mortgage credit 

remains available to consumers is a goal 

of TILA, achieved 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 authority to 

exercise TILA section 105(a) to 

prescribe requirements beyond those 

specifically listed in the statute that 

meet the standards outlined in section 

105(a). The Dodd-Frank Act also 

clarified the Bureau’s rulemaking 

authority over certain high-cost 

mortgages pursuant to section 105(a). As 

amended by the Dodd-Frank Act, TILA 

section 105(a) authority to make 

adjustments and exceptions to the 

requirements of TILA applies to all 

transactions subject to TILA, except 

with respect to the provisions of TILA 

section 129, 15 U.S.C. 1639, that apply 

to the high-cost mortgages defined in 

TILA section 103(bb), 15 U.S.C. 

1602(bb). 

As discussed in the section-by-section 

analysis below, the Bureau is issuing 

regulations to carry out TILA’s 

purposes, including 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. In developing 

these aspects of the final rule pursuant 

to its authority under TILA section 

105(a), the Bureau has considered the 

purposes of TILA, including ensuring 

that consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

the loans, ensuring meaningful 

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114 78 FR 6856 (Jan. 31, 2013) (2013 HOEPA Final 

Rule). 

115The 2013 ATR and HOEPA Final Rules also 

adopted the special calculation, prescribed under 

TILA for high-cost mortgages, for completing the 

bona fide discount point calculation for loans 

secured by personal property. 

116The Dodd-Frank Act renumbered existing 

TILA section 103(aa), which contains the definition 

of ‘‘points and fees,’’ for the high-cost mortgage 

points and fees threshold, as section 103(bb). See 

section 1100A(1)(A) of the Dodd-Frank Act. 

However, in defining points and fees for the 

qualified mortgage points and fees limits, TILA 

section 129C(b)(2)(C) refers to TILA section 

103(aa)(4) rather than TILA section 103(bb)(4). To 

give meaning to this provision, the Bureau 

concluded that the reference to TILA section 

103(aa)(4) in TILA section 129C(b)(2)(C) is mistaken 

and therefore interpreted TILA section 

129C(b)(2)(C) as referring to the points and fees 

definition in renumbered TILA section 103(bb)(4). 

disclosures, facilitating consumers’ 

ability to compare credit terms, and 

helping consumers avoid the 

uninformed use of credit, and the 

findings of TILA, including regulating 

the terms of residential mortgage credit 

and the practices related to such credit 

to ensure that responsible, affordable 

mortgage credit remains available to 

consumers, strengthening competition 

among financial institutions, and 

promoting economic stabilization. 

TILA section 105(f). Section 105(f) of 

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

Bureau to exempt from all or part of 

TILA all or any class of transactions 

(other than transactions involving any 

mortgage described in TILA section 

103(aa), which are high-cost mortgages) 

if the Bureau determines that TILA 

coverage does not provide a meaningful 

benefit to consumers in the form of 

useful information or protection. In 

exercising this authority, the Bureau 

must consider the factors identified in 

section 105(f) of TILA and publish its 

rationale at the time it proposes an 

exemption for public comment. 

Specifically, the Bureau must consider: 

(a) The amount of the loan and 

whether the disclosures, right of 

rescission, and other provisions provide 

a benefit to the consumers who are 

parties to such transactions, as 

determined by the Bureau; 

(b) The extent to which the 

requirements of TILA complicate, 

hinder, or make more expensive the 

credit process for the class of 

transactions; 

(c) The status of the borrower, 

including— 

(1) Any related financial arrangements 

of the borrower, as determined by the 

Bureau; 

(2) The financial sophistication of the 

borrower relative to the type of 

transaction; and 

(3) The importance to the borrower of 

the credit, related supporting property, 

and coverage under TILA, as 

determined by the Bureau; 

(d) Whether the loan is secured by the 

principal residence of the consumer; 

and 

(e) Whether the goal of consumer 

protection would be undermined by 

such an exemption. 

As discussed in the section-by-section 

analysis below, the Bureau is adopting 

exemptions for certain classes of 

transactions from the requirements of 

TILA pursuant to its authority under 

TILA section 105(f). In determining 

which classes of transactions to exempt 

under TILA section 105(f), the Bureau 

has considered the relevant factors and 

determined that the exemptions are 

appropriate. 

The Dodd-Frank Act 

Dodd-Frank Act section 1022(b). 

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 and 

title X of the Dodd-Frank Act are 

Federal consumer financial laws. 

Accordingly, the Bureau is exercising its 

authority under Dodd-Frank Act section 

1022(b) to prescribe rules that carry out 

the purposes and objectives of TILA and 

title X and prevent evasion of those 

laws. 

V. Section-by-Section Analysis 

Section 1026.32 Requirements for 

High-Cost Mortgages 

32(b) Definitions 

32(b)(1) 

32(b)(1)(ii) 

Background 

TILA section 129C(b)(2)(A)(vii), as 

added by section 1412 of the DoddFrank Act, defines a ‘‘qualified 

mortgage’’ as a loan for which, among 

other things, the total ‘‘points and fees’’ 

payable in connection with the 

transaction generally do not exceed 3 

percent of the total loan amount. 

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 5 percent of the total 

transaction amount (for transactions of 

$20,000 or more), or the lesser of 8 

percent of the total transaction amount 

or $1,000 (for transactions of less than 

$20,000) or other prescribed amount. 

The Bureau finalized the Dodd-Frank 

Act’s amendments to TILA concerning 

the points and fees limit for qualified 

mortgages and the points and fees 

coverage threshold for high-cost 

mortgages in the 2013 ATR Final Rule 

and in the final rule implementing the 

Dodd-Frank Act’s amendments to 

HOEPA,114 respectively. 

Those rulemakings also adopted the 

Dodd-Frank Act’s amendments to TILA 

concerning the exclusion of certain bona 

fide third-party charges and up to two 

bona fide discount points from the 

points and fees calculation for both 

qualified mortgages and high-cost 

mortgages. With respect to bona fide 

discount points in particular, TILA 

sections 129C(b)(2)(C)(ii)(I) and 

103(dd)(1) provide for the exclusion of 

up to and including two bona fide 

discount points from points and fees for 

qualified mortgages and high-cost 

mortgages, respectively, 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, as defined in 

§ 1026.35(a)(2). Similarly, TILA sections 

129C(b)(2)(C)(ii)(II) and 103(dd)(2) 

provide for the exclusion of up to and 

including one bona fide discount point 

from points and fees, 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.115 The Bureau’s 

2013 ATR and HOEPA Final Rules 

implemented the bona fide discount 

point exclusions from points and fees in 

§ 1026.32(b)(1)(i)(E) and (F) (closed-end 

credit) and (b)(2)(i)(E) and (F) (open-end 

credit), respectively. 

TILA section 129C(b)(2)(C) defines 

‘‘points and fees’’ for qualified 

mortgages and high-cost mortgages to 

have the same meaning as set forth in 

TILA section 103(aa)(4) (renumbered as 

section 103(bb)(4)).116 Points and fees 

for the high-cost mortgage threshold are 

defined in § 1026.32(b)(1) (closed-end 

credit) and (2) (open-end credit), and 

§ 1026.43(b)(9) provides that, for a 

qualified mortgage, ‘‘points and fees’’ 

has the same meaning as in 

§ 1026.32(b)(1). 

Section 1431 of the Dodd-Frank 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) (emphases added). 

Prior to the amendment, TILA had 

provided that only compensation paid 

by a consumer to a mortgage broker at 

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117 ‘‘Mortgage originator’’ is generally defined to 

include ‘‘any person who, for direct or indirect 

compensation or gain, or in the expectation of 

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(cc)(2)(A). 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(cc)(2)(C) through (F). 

118 76 FR 27390 (May 11, 2011). 

119 77 FR 49090 (Aug. 15, 2012) (2012 HOEPA 

Proposal). 

or before closing should count toward 

the points and fees threshold for highcost mortgages. Under amended TILA 

section 103(bb)(4)(B), however, 

compensation paid to anyone that 

qualifies as a ‘‘mortgage originator’’ is to 

be included in points and fees for the 

points and fees thresholds for both 

qualified mortgages and high-cost 

mortgages.117 Thus, in addition to 

mortgage brokerage firms, other 

mortgage originators, including 

employees of a creditor (i.e., loan 

officers) or of a brokerage firm (i.e., 

individual brokers) are included in 

‘‘mortgage originator.’’ In addition, 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) and (C). 

The 2013 ATR Final Rule. The 

Bureau’s 2013 ATR Final Rule amended 

§ 1026.32(b)(1) to implement revisions 

to the definition of ‘‘points and fees’’ 

under section 1431 of the Dodd-Frank 

Act, for the purposes of both HOEPA 

and qualified mortgages. Among other 

things, the Dodd-Frank Act added loan 

originator compensation to the 

definition of ‘‘points and fees’’ that had 

previously applied to high-cost 

mortgages under HOEPA. Section 1431 

of the Dodd-Frank Act also amended 

TILA to provide that open-end credit 

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

HELOCs) are covered by HOEPA. The 

Bureau’s 2013 HOEPA Final Rule thus 

separately amended § 1026.32(b)(2) to 

provide for the inclusion of loan 

originator compensation in points and 

fees for HELOCs, to the same extent as 

such compensation is required to be 

counted for closed-end credit 

transactions. Under § 1026.32(b)(1)(ii) 

(for closed-end credit) and 

§ 1026.32(b)(2)(ii) (for open-end credit), 

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, is required to be included in 

points and fees. The commentary to 

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

2013 ATR Final Rule provides details 

for applying this requirement for closedend credit transactions (e.g., by 

clarifying when compensation must be 

known to be counted). The commentary 

to § 1026.32(b)(2)(ii) as adopted in the 

2013 HOEPA Final Rule crossreferences the commentary adopted in 

§ 1026.32(b)(1)(ii) for interpretive 

guidance. 

In the 2013 ATR Final Rule, the 

Bureau noted that, in response to the 

Board’s 2011 proposal (Board’s 2011 

ATR Proposal or Board’s proposal) 118

and the Bureau’s 2012 proposal to 

implement the Dodd-Frank Act’s 

amendments to HOEPA,119 the Bureau 

received extensive feedback regarding 

the inclusion of loan originator 

compensation in the qualified mortgage 

and high-cost mortgage points and fees 

calculation. In the context of both 

rulemakings, several industry 

commenters argued that including loan 

originator compensation in points and 

fees would result in ‘‘double-counting’’ 

because creditors often compensate loan 

originators with funds collected from 

consumers at consummation. The 

commenters argued that money 

collected in up-front charges to 

consumers should not be counted a 

second time toward the points and fees 

thresholds if it is passed on to a loan 

originator. Consumer advocates urged 

the Bureau not to assume that loan 

originator compensation is funded 

through up-front consumer payments to 

creditors rather than through the 

interest rate. They noted that, in the 

wholesale channel, if the parties to a 

transaction would like to fund loan 

originator compensation through upfront payments, a consumer can pay the 

mortgage broker directly instead of 

paying origination charges to the 

creditor and having the creditor pass 

through payments to the mortgage 

broker. 

The literal language of TILA section 

103(bb)(4) as amended by the DoddFrank Act defines points and fees to 

include all items included in the 

finance charge (except interest or the 

time-price differential), all 

compensation paid directly or indirectly 

by a consumer or creditor to a loan 

originator, ‘‘and’’ various other 

enumerated items. The 2013 ATR Final 

Rule noted that both the use of ‘‘and’’ 

and the reference to ‘‘all’’ compensation 

paid ‘‘directly or indirectly’’ and ‘‘from 

any source’’ supports counting 

compensation 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 stated that it believes the 

statute would be read to require that 

loan originator compensation be treated 

as additive to the other elements of 

points and fees and should be counted 

as it flows downstream from one party 

to another so that it is included in 

points and fees each time it reaches a 

loan originator, whatever the previous 

source. The Bureau indicated that it did 

not believe that an automatic literal 

reading of the statute in all cases would 

be in the best interest of either 

consumers or industry, but it did not 

believe that it yet had 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 all 

circumstances, given the multiple 

practical and complex policy 

considerations involved. Accordingly, 

the Bureau finalized the rule without a 

qualifying interpretation on this issue 

and included in the 2013 ATR Proposed 

Rule several comments to explain how 

to calculate loan originator 

compensation in connection with 

particular payment streams between 

particular parties. However, the 2013 

ATR Final Rule itself implemented the 

additive approach of the statute. 

The 2013 Loan Originator Final Rule. 

Earlier this year, the Bureau issued a 

final rule to implement various 

provisions of the Dodd-Frank Act that 

addressed compensation paid to loan 

originators. 78 FR 11280 (Feb. 15, 2013) 

(2013 Loan Originator Final Rule). As 

the Bureau noted, the Board had 

proposed rules in 2009, that, among 

other things, would have prohibited 

payments to a loan originator based on 

the transaction’s terms or conditions; 

prohibited a loan originator from 

receiving dual compensation (i.e., 

compensation from both a consumer 

and another person in the same 

transaction); and prohibited a loan 

originator from steering consumers to 

transactions not in their interest to 

increase the loan originator’s 

compensation. In section 1403 of the 

Dodd-Frank Act, Congress amended 

TILA section 129B to codify significant 

elements of the Board’s 2009 proposal. 

In a final rule issued in 2010, the Board 

finalized its proposed rules, while 

acknowledging that further rulemaking 

would be required to address certain 

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issues and adjustments made by the 

Dodd-Frank Act. 75 FR 58509 (Sept. 24, 

2010) (2010 Loan Originator Final Rule). 

As discussed below, the Bureau’s 2013 

Loan Originator Final Rule 

implemented certain provisions of TILA 

section 129B, including rules expanding 

and clarifying some of the prohibitions 

adopted by the Board in the 2010 Loan 

Originator Final Rule. 

The Bureau’s 2013 Loan Originator 

Final Rule clarified the scope of 

§ 1026.36(d)(1), which prohibits basing 

a loan originator’s compensation on any 

of the transaction’s terms. This 

provision was intended to eliminate 

incentives for the loan originator to, for 

example, persuade the consumer to 

accept a higher interest rate or a 

prepayment penalty, in exchange for the 

loan originator receiving higher 

compensation. The Bureau retained the 

core prohibition in § 1026.36(d)(1), but 

it clarified the meaning of a ‘‘term’’ of 

the transaction and clarified the 

standard for determining when 

compensation is impermissibly based 

on a proxy for a term of the transaction. 

It also permitted certain bonuses and 

retirement profit-sharing plans to be 

based on the terms of multiple loan 

originators’ transactions and permitted a 

loan originator to participate in a 

defined benefit plan without restrictions 

on whether the benefits may be based 

on the terms of a loan originator’s 

transactions. See § 1026.36(d)(1)(iii) and 

(iv). Consistent with the statute, the 

Bureau also revised § 1026.36(d)(1) so 

that it also applies in transactions in 

which the consumer pays a mortgage 

broker directly. 

The 2013 Loan Originator Final Rule 

also clarified the scope of 

§ 1026.36(d)(2), which prohibits a loan 

originator from receiving compensation 

from both the consumer and other 

persons in the same transaction. This 

provision was designed to address 

consumer confusion over mortgage 

broker loyalties when brokers received 

payments both from the consumer and 

the creditor. The 2013 Loan Originator 

Final Rule retained this prohibition but 

provided an exception to permit 

mortgage brokers to pay their employees 

or contractors commissions (although 

the commissions cannot be based on the 

terms of the loans they originate). 

In addition, the Bureau used its 

exception authority to adopt a complete 

exemption to the statutory ban on upfront fees set forth in TILA section 

129B(c)(2)(B)(ii). See § 1026.36(d)(2)(ii). 

That statutory ban would have 

permitted a loan originator to receive an 

origination fee or charge from someone 

other than the consumer only if: (1) The 

loan originator did not receive any 

compensation directly from the 

consumer; and (2) the consumer did not 

make an up-front payment of discount 

points, origination points, or fees (other 

than bona fide third-party charges not 

retained by the loan originator, creditor, 

or an affiliate of either). Thus, the 

Bureau’s exemption permits the 

consumer to pay origination charges or 

fees to the creditor in transactions in 

which the creditor is paying 

compensation to the mortgage broker. 

The Bureau also clarified the safe 

harbor for loan originators to comply 

with existing § 1026.36(e)(1), which 

prohibits a loan originator from steering 

a consumer to consummate a particular 

transaction so that the loan originator 

will receive greater compensation. The 

Bureau clarified how to determine 

which loans a creditor must offer to 

consumers to take advantage of the safe 

harbor. See § 1026.36(e)(3)(i)(C) and 

comment 36(e)(3)–3. The Bureau did 

not, however, implement the portion of 

section 1403 of the Dodd-Frank Act that 

requires the Bureau to prescribe 

additional regulations to prohibit 

certain types of steering, abusive or 

unfair lending practices, 

mischaracterization of credit histories or 

appraisals, and discouraging consumers 

from shopping with other mortgage 

originators. The Bureau noted that it 

intends to prescribe those regulations in 

a future rulemaking. See 78 FR 11292 

n.55. 

The 2013 ATR Proposed Rule 

In the 2013 ATR Proposed Rule, the 

Bureau proposed commentary to 

address situations in which loan 

originator compensation passes from 

one party to another. The Bureau 

indicated that it believed that Congress 

included loan originator compensation 

in points and fees because of concern 

that loans with high loan originator 

compensation may be more costly and 

riskier to consumers. Despite the 

statutory language, the Bureau 

questioned whether it would serve the 

statutory purpose to apply a strict 

additive rule that would automatically 

require that loan originator 

compensation be counted against the 

points and fees thresholds even if it has 

already been included in points and 

fees. The Bureau indicated that it did 

not believe that it is necessary or 

appropriate to count the same payment 

between a consumer and a mortgage 

broker firm twice, simply because it is 

both part of the finance charge and loan 

originator compensation. Similarly, the 

Bureau indicated that, where a payment 

from either a consumer or a creditor to 

a mortgage broker is counted toward 

points and fees, it would not be 

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 stated that it did not believe the 

purposes of the statute would be served 

by counting some or all of the funds a 

second time, and was concerned that 

doing so could have negative impacts on 

the price and availability of credit. 

Proposed comment 32(b)(1)(ii)–5.i 

thus would have provided that a 

payment from a consumer to a mortgage 

broker need not be counted toward 

points and fees twice because it is both 

part of the finance charge under 

§ 1026.32(b)(1)(i) and loan originator 

compensation under § 1026.32(b)(1)(ii). 

Similarly, proposed comment 

32(b)(1)(ii)–5.ii would have clarified 

that § 1026.32(b)(1)(ii) does not require 

a creditor to include payments by a 

mortgage broker to its individual loan 

originator employee in the calculation 

of points and fees. For example, assume 

a consumer pays a $3,000 fee to a 

mortgage broker, and the mortgage 

broker pays a $1,500 commission to its 

individual loan originator employee for 

that transaction. The $3,000 mortgage 

broker fee is included in points and 

fees, but the $1,500 commission is not 

included in points and fees because it 

has already been included in points and 

fees as part of the $3,000 mortgage 

broker fee. The Bureau stated that it 

believed that any costs to the consumer 

from loan originator compensation are 

adequately captured by counting the 

funds a single time against the points 

and fees cap. The Bureau sought 

comment regarding these proposed 

comments. 

The Bureau noted that determining 

the appropriate accounting method is 

significantly more complicated when 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. As described in the 2013 ATR 

Final Rule, a creditor can fund 

compensation to its own loan officer or 

to a mortgage broker in two different 

ways. First, the payment could be 

funded by origination charges paid by 

the consumer to the creditor. Second, 

the payment could be funded through 

the interest rate, in which case the 

creditor forwards funds to the loan 

originator at consummation which the 

creditor recovers through profit realized 

on the subsequent sale of the mortgage 

or, for portfolio loans, through payments 

by the consumer over time. Because 

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money is fungible, tracking how a 

creditor spends money it collects in upfront charges versus amounts collected 

through the rate to cover both loan 

originator compensation and its other 

overhead expenses would be 

extraordinarily complex and 

cumbersome. The Bureau stated that, to 

facilitate compliance, it believed it 

would be appropriate and necessary to 

adopt generalized rules regarding the 

accounting of various payments, but did 

not have sufficient information to make 

those choices in the 2013 ATR Final 

Rule. However, the 2013 ATR Final 

Rule itself implemented the additive 

approach of the statute. 

The Bureau noted in the 2013 ATR 

Proposed Rule that the potential 

downstream effects of different 

accounting methods may be significant. 

Under the ‘‘additive’’ approach where 

no netting of up-front consumer 

payments against creditor-paid loan 

originator compensation is allowed, 

some loans might be precluded from 

being qualified mortgages or may exceed 

the high-cost mortgage threshold 

because of the combination of loan 

originator compensation with other 

charges that are included in points and 

fees, such as fees paid to affiliates for 

settlement services. In other cases, 

creditors 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 to pay a lower interest rate over 

time in return for 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 an ‘‘additive’’ 

rule by increasing interest rates, this 

could increase the number of qualified 

mortgages that receive a rebuttable 

presumption of compliance, rather than 

a safe harbor from liability, under the 

ability-to-repay provisions adopted by 

the 2013 ATR Final Rule. 

The Bureau noted that one alternative 

would be to allow all consumer 

payments of up-front points and fees to 

be netted against creditor-paid loan 

originator compensation. However, this 

‘‘netting’’ 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. For example, a consumer could 

pay three percentage points in 

origination charges and be charged an 

interest rate sufficient to generate a 3 

percent loan originator commission, and 

the loan could still fall within the 3 

percent cap for qualified mortgages. The 

consumer could be charged five 

percentage points in origination charges 

and an interest rate sufficient to 

generate a 5 percent loan originator 

commission and still stay under the 

HOEPA points and fees trigger, thereby 

denying consumers the special 

protections afforded to loans with high 

up-front costs. In markets that are less 

competitive, this would create an 

opportunity for creditors or brokerage 

firms to take advantage of their market 

power to harm consumers. 

The Bureau sought comment on two 

alternative versions of proposed 

comment 32(b)(1)(ii)–5.iii. The first— 

the additive approach—would have 

explicitly precluded netting, consistent 

with the literal language of the statute, 

by specifying that § 1026.32(b)(1)(ii) 

requires a creditor to include 

compensation paid by a consumer or 

creditor to a loan originator in the 

calculation of points and fees in 

addition to any fees or charges paid by 

the consumer to the creditor. This 

proposed comment contained an 

example to illustrate this principle: 

Assume that a consumer pays to the 

creditor a $3,000 origination fee and 

that the creditor pays to its loan officer 

employee $1,500 in compensation 

attributed to the transaction. Assume 

further that the consumer pays no other 

charges to the creditor that are included 

in points and fees under 

§ 1026.32(b)(1)(i) and the loan officer 

receives no other compensation that is 

included in points and fees under 

§ 1026.32(b)(1)(ii). For purposes of 

calculating points and fees, the $3,000 

origination fee would be included in 

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

and the $1,500 in loan officer 

compensation would be included in 

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

equaling $4,500 in total points and fees, 

provided that no other points and fees 

are paid or compensation received. 

The second alternative—the netting 

approach—would have provided that, in 

calculating the amount of loan 

originator compensation to include in 

points and fees, creditors would be 

permitted to net consumer payments of 

up-front fees and points against creditor 

payments to the loan originator. 

Specifically, it would have provided 

that § 1026.32(b)(1)(ii) permits a creditor 

to reduce the amount of loan originator 

compensation included in the points 

and fees calculation under 

§ 1026.32(b)(1)(ii) by any amount paid 

by the consumer to the creditor and 

included in the points and fees 

calculation under § 1026.32(b)(1)(i). 

This proposed comment contained an 

example to illustrate this principle: 

Assume that a consumer pays to the 

creditor a $3,000 origination fee and 

that the creditor pays to the loan 

originator $1,500 in compensation 

attributed to the transaction. Assume 

further that the consumer pays no other 

charges to the creditor that are included 

in points and fees under 

§ 1026.32(b)(1)(i) and the loan originator 

receives no other compensation that is 

included in points and fees under 

§ 1026.32(b)(1)(ii). For purposes of 

calculating points and fees, the $3,000 

origination fee would be included in 

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

but the $1,500 in loan originator 

compensation need not be included in 

points and fees. If, however, the 

consumer pays to the creditor a $1,000 

origination fee and the creditor pays to 

the loan originator $1,500 in 

compensation, then the $1,000 

origination fee would be included in 

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

and $500 of the loan originator 

compensation would be included in 

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

equaling $1,500 in total points and fees, 

provided that no other points and fees 

are paid or compensation received. 

The Bureau solicited feedback 

regarding all aspects of both 

alternatives. In addition, the Bureau 

specifically requested feedback 

regarding whether there are differences 

in various types of loans, consumers, 

loan origination channels, or market 

segments which would justify applying 

different netting or additive rules to 

such categories. The Bureau also sought 

feedback as to whether, if netting were 

permitted, the creditor should be 

allowed to reduce the loan originator 

compensation by the full amount of 

points and fees included in the finance 

charge or whether the reduction should 

be limited to that portion of points and 

fees denominated as general origination 

charges. 

The Bureau also sought comment on 

the implications of each alternative on 

protecting consumers pursuant to the 

ability-to-repay requirements, qualified 

mortgage provisions, and the high-cost 

mortgage provisions of HOEPA. The 

Bureau also sought comment on the 

likely market reactions and impacts on 

the pricing of and access to credit of 

each alternative, particularly as to how 

such reactions might affect interest rate 

levels, the safe harbor and rebuttable 

presumption afforded to particular 

qualified mortgages, and application of 

the separate rate threshold for high-cost 

mortgages under HOEPA and whether 

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120For loans less than $100,000, the qualified 

mortgage points and fees limits are more than 3 

percent of the total loan amount. See 

§ 1026.43(e)(3). 

121For loans less than $20,000, the points and 

fees thresholds for high-cost mortgages are more 

than 5 percent of the loan amount. See 

§ 1026.32(a)(1)(ii). 

adjustment to the final rule would be 

appropriate. The Bureau further sought 

comment on the implications of both of 

the above proposed alternatives in light 

of the fact that both the qualified 

mortgage and HOEPA provisions allow 

certain bona fide discount points and 

bona fide third party charges to be 

excluded from the calculation of points 

and fees, but do not do so for affiliate 

charges. 

The Bureau adopted in the 2013 

HOEPA Final Rule a requirement that 

creditors include compensation paid to 

originators of open-end credit plans in 

points and fees, to the same extent that 

such compensation is required to be 

included for closed-end credit 

transactions. The Bureau did not receive 

comments in response to the 2012 

HOEPA Proposal indicating that 

additional or different guidance would 

be needed to calculate loan originator 

compensation in the open-end credit 

context. The Bureau noted in the 2013 

ATR Proposed Rule that it would be 

useful to provide the public with an 

additional opportunity to comment. 

Thus, the Bureau solicited input on 

what guidance, if any, beyond that 

provided for closed-end credit 

transactions, would be helpful for 

creditors in calculating loan originator 

compensation in the open-end credit 

context. 

Finally, the Bureau sought comment 

generally on whether additional 

guidance or regulatory approaches 

regarding the inclusion of loan 

originator compensation in points and 

fees would be useful to protect 

consumers and facilitate compliance. In 

particular, the Bureau sought 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 the ability-to-repay and HOEPA 

rulemakings and the provisions that the 

Bureau was separately finalizing in 

connection with the Bureau’s 2012 Loan 

Originator Proposal (since adopted in 

the 2013 Loan Originator Final Rule). 

For example, the Bureau sought 

comment on whether additional 

guidance would be useful with regard to 

treatment of compensation by persons 

who are ‘‘loan originators’’ but are not 

employed by a creditor or mortgage 

broker, given that the 2013 Loan 

Originator Final Rule implemented 

provisions of the Dodd-Frank Act that 

specify when employees of retailers of 

manufactured homes, servicers, and 

other parties are loan originators for 

Dodd-Frank Act purposes. 

Comments Received 

The Bureau received numerous 

comments regarding the calculation of 

loan originator compensation for 

inclusion in points and fees for the 

qualified mortgage and high-cost 

mortgage points and fees limits. Many of 

the comments were substantially similar 

letters submitted by mortgage brokers. 

Many of the comments responded to the 

Bureau’s proposed commentary 

regarding potential double counting of 

loan originator compensation. As 

described below, however, some 

comments also raised other issues 

regarding loan originator compensation. 

Few commenters addressed the 

Bureau’s proposed comments 

32(b)(1)(ii)–5.i and 32(b)(1)(ii)–5.ii, 

which would have provided that 

payments by consumers to mortgage 

brokers (where those payments already 

have been included in points and fees 

under § 1026.32(b)(1)(i)) and payments 

by mortgage brokers to their individual 

loan originator employees need not be 

counted as loan originator 

compensation and included in points 

and fees. Nearly all commenters that 

addressed these proposed comments 

supported them. One industry 

commenter, however, argued that the 

Bureau should not adopt the proposed 

comments unless the Bureau also 

excludes from points and fees 

compensation paid by creditors to their 

own loan officers. That commenter 

claimed that it would be inequitable to 

exclude from points and fees 

compensation paid to individual loan 

originators employed by a mortgage 

broker firm but not to exclude 

compensation paid to individual loan 

originators employed by the creditor. 

Many more commenters addressed 

the Bureau’s two alternatives for 

proposed comment 32(b)(1)(ii)–5.iii. 

Consumer advocates urged the Bureau 

to adopt an additive approach for 

transactions in the wholesale channel, 

i.e., transactions originated through a 

mortgage broker. They argued that the 

statutory provision was intended to 

limit the total up-front charges and loan 

originator compensation in loans 

designated as qualified mortgages (and 

to ensure that loans with charges and 

compensation above the threshold are 

subject to the special protection as highcost mortgages). They maintained that a 

netting rule would in essence double 

the points and fees thresholds for 

qualified mortgages and high-cost 

mortgages. As a result, loans of $100,000 

or more could have up-front charges of 

3 percent of the total loan amount and 

loan originator compensation paid by 

the creditor equal to another 3 percent, 

yet the loan could still be a qualified 

mortgage.120 Similarly, loans of $20,000 

or more could have up-front charges of 

5 percent of the total loan amount and 

creditor-paid compensation equal to 

another 5 percent, yet the loan would 

still not qualify as a high-cost 

mortgage.121

Some consumer advocates also argued 

that consumers have difficulty 

understanding and evaluating the cost 

of creditor-paid compensation to 

mortgage brokers. They contend that, as 

a result, creditor-paid compensation 

historically has resulted in more costly 

loans for consumers, with a higher risk 

of default, particularly when consumers 

also have made up-front payments. 

They argued that an additive rule 

provides important protection because 

the Bureau elected in the 2013 Loan 

Originator Final Rule to permit creditors 

to continue charging up-front fees to 

consumers when creditors compensate 

loan originators. They maintained that a 

netting rule would encourage creditors 

and mortgage brokers to combine 

creditor-paid compensation with upfront charges paid by consumers to 

creditors because such compensation 

then would not be included in points 

and fees. They argued that this 

combination is less transparent and 

more confusing to consumers than a 

model in which the consumer pays a 

mortgage broker directly or pays all 

charges through the rate. 

Some consumer advocates also argued 

that the additive approach was 

necessary to complement the 

protections contained in § 1026.36(d) 

and (e) prohibiting or restricting certain 

loan originator compensation practices. 

They contended that mortgage brokers 

could develop problematic business 

models that would not violate the 

prohibition in § 1026.36(d)(1) against 

basing compensation on loan terms and 

the prohibition in § 1026.36(e) against 

steering consumers to consummate 

particular transactions to maximize loan 

originator compensation. For example, 

some consumer advocates noted that, 

without violating these prohibitions, 

mortgage brokers could specialize in 

subprime transactions with high upfront charges and high interest rates and 

could induce creditors to compete for 

such transactions and offer high loan 

originator compensation, so long as the 

compensation did not vary with the 

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terms of individual loans. Alternatively, 

they suggested that mortgage brokers 

could do business with a mix of highcost creditors that pay high 

compensation and creditors offering 

more competitive loans that pay lower 

compensation to brokers. For consumers 

that mortgage brokers believe would be 

more likely to agree to more costly 

loans, mortgage brokers could take 

advantage of the safe harbor in the antisteering rules by providing three quotes 

from high-cost creditors but could 

continue providing other customers 

with more competitive loans through 

other creditors. Consumer advocates 

argued that an additive approach would 

deter such practices because creditors 

charging high up-front fees and paying 

high compensation to mortgage brokers 

would find it more difficult to remain 

below the qualified mortgage points and 

fees limits and the high-cost mortgage 

points and fees threshold. 

Some consumer advocates also argued 

that the Bureau lacks the authority to 

adopt a netting approach for high-cost 

mortgages under HOEPA. They claimed 

that the Bureau would need to use its 

exception authority to adopt the netting 

approach and that TILA section 105(a) 

does not permit the Bureau to use its 

exception authority to modify the items 

included in points and fees for high-cost 

mortgages. Thus, they argued that the 

Bureau can adopt a netting approach 

only for calculating loan originator 

compensation for the qualified mortgage 

points and fees limits. They maintained 

that creating different measures for loan 

originator compensation for qualified 

mortgages and high-cost mortgages 

would be confusing and create 

compliance difficulties. 

Some consumer advocates also argued 

that double-counting concerns could be 

addressed simply by having the 

consumer pay the mortgage broker 

directly. They noted that this approach 

to structuring mortgage pricing would 

permit a consumer to pay up-front 

charges to reduce the amount of the 

interest rate. The consumer payment to 

the broker would be counted in points 

and fees only one time. Some consumer 

advocates maintained that there is little 

justification for combining creditor-paid 

compensation to mortgage brokers with 

up-front charges paid by consumers. 

They claimed that, historically, the 

rationale for creditor-paid compensation 

for mortgage brokers was that it 

provided an option for consumers that 

did not have sufficient funds or did not 

want to pay a mortgage broker directly 

and instead preferred to pay such 

compensation through a higher interest 

rate. They noted that such a rationale 

does not make sense in a transaction in 

which creditor-paid compensation is 

combined with up-front charges paid by 

the consumer. Some consumer 

advocates also suggested that doublecounting concerns could be addressed 

by permitting creditors to net 

origination payments from consumers 

against loan originator compensation, so 

long as the creditors provided more 

detailed disclosures to consumers when 

such payments would be passed 

through as compensation to loan 

originators. 

Some consumer advocates argued that 

the Bureau should treat all loan 

originators the same and should 

therefore also adopt an additive rule for 

transactions in the retail channel. They 

maintained that, while problematic loan 

originator compensation practices 

historically may have been more 

prevalent in the wholesale channel, 

there were also similar problems in the 

retail channel. They also argued that, 

despite the prohibitions on steering and 

term-based compensation, creditors will 

find ways to encourage retail loan 

officers to steer consumers to highercost loans. For example, they suggested 

that creditors may use deferred 

compensation plans to provide some 

incentives for retail loan officers to steer 

consumers toward higher cost loans. 

They therefore argued that the same 

protections provided by an additive 

approach are necessary in the retail 

channel. 

Some consumer advocates, however, 

argued that the Bureau should adopt a 

different rule for transactions in the 

retail channel. They argued that 

Congress was particularly concerned 

with transactions with creditor-paid 

compensation to mortgage brokers and 

that such transactions historically 

tended to be more costly and to have 

higher rates of default. They claimed 

that the risks of consumer injury from 

loan originator compensation practices 

are significantly lower in the retail 

channel. They contended that, in the 

retail channel, creditors and their loan 

officers would have far greater 

difficulties in structuring their 

businesses to evade the prohibitions 

against steering and term-based 

compensation in § 1026.36(d)(1) and 

§ 1026.36(e). They noted that retail loan 

officers cannot pick and choose 

different loans from different creditors 

offering different levels of loan 

originator compensation. They also 

argued that mortgage brokers may be 

more successful in convincing 

consumers to accept more costly loans 

because consumers perceive that their 

mortgage broker is a trusted advisor and 

mistakenly believe that the broker is 

obligated to provide them with the 

lowest cost loan. 

Some consumer advocates also argued 

that the double-counting concerns are 

more pronounced in the retail channel 

because consumers do not have the 

option to pay retail loan officers 

directly. Under an additive approach, 

any loan originator compensation paid 

by the creditor to its loan officers would 

be included in points and fees in 

addition to any up-front charges paid by 

the consumer to the creditor. Because 

the consumer cannot pay up-front 

charges directly to the retail loan officer, 

the consumer would have less flexibility 

to pay up-front charges to receive a 

lower interest rate and still remain 

under the points and fees limits. 

In developing the final rule, the 

Bureau consulted with several Federal 

agencies, as required by section 

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

Three agencies, the Federal Deposit 

Insurance Corporation (FDIC), HUD, and 

the Office of the Comptroller of the 

Currency (OCC) submitted formal 

comment letters. The FDIC and HUD 

submitted a joint comment stating their 

view that compensation paid to 

mortgage brokers should be included in 

points and fees whether the consumer 

pays such compensation directly 

through up-front charges or indirectly 

through the creditor and funded through 

the interest rate. The FDIC and HUD 

stated that yield spread premiums 

(YSPs), i.e., compensation paid by a 

creditor and funded out of the interest 

rate, have been offered as a payment 

option for consumers that prefer lower 

up-front costs and a higher interest rate 

but that a consumer’s choice to use a 

YSP to compensate a broker should not 

affect the calculation of loan originator 

compensation for points and fees. The 

FDIC and HUD maintained that the 

netting approach would undercount 

points and fees. They also stated that a 

netting approach would create 

incentives for transactions to include 

both up-front origination charges and 

YSPs because the up-front charges could 

be netted against the YSPs to reduce or 

eliminate the loan originator 

compensation that would be included in 

points and fees. The FDIC and HUD 

argued that evidence shows that 

transactions with both up-front charges 

and ‘‘back-end’’ payments tend to be the 

most costly for consumers and are the 

most difficult for them to evaluate when 

shopping for a mortgage. 

The FDIC and HUD supported the 

proposal to exclude compensation paid 

by a mortgage broker to its employees 

but argued that the Bureau should also 

exclude compensation paid by a 

creditor to its employees. The FDIC and 

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HUD argued that including in points 

and fees compensation paid by a 

creditor to its employee would increase 

compliance costs and make it difficult 

for them to create compliant systems by 

the January 2014 effective date. They 

also stated that including such 

compensation in points and fees could 

result in variations in points and fees for 

loans with identical costs to the 

consumer, merely because, for example, 

one transaction involved a highperforming loan officer. They argued 

that excluding from points and fees 

compensation paid by a creditor to its 

employees would not compromise the 

consumer protection goals of the points 

and fees provision because of the loan 

originator compensation restrictions in 

§ 1026.36(d). They noted that employees 

of creditors have no ability to choose 

among creditors, further reducing the 

risk that consumers would be steered 

toward more costly loans. 

The OCC also submitted a comment 

stating its support for excluding from 

points and fees loan originator 

compensation paid by a consumer to a 

mortgage broker when that payment 

already is included in points and fees as 

part of the finance charge; excluding 

from points and fees compensation paid 

by a mortgage broker to its employees; 

excluding from points and fees 

compensation paid by a creditor to its 

employees; and using an additive 

approach to include in points and fees 

both origination charges paid by a 

consumer to a creditor and loan 

originator compensation paid by a 

creditor to a mortgage broker. The OCC 

stated that a netting approach would 

permit YSPs and origination fees to be 

charged in the same transaction without 

including both in points and fees and 

argued that this would not serve the 

interest of consumers or of a 

transparent, competitive mortgage 

market. The OCC noted that a netting 

approach would permit a qualified 

mortgage to have up-front charges equal 

to 3 percent of the loan amount and an 

interest rate sufficient to generate a 3 

percent loan origination commission; 

similarly, a netting approach would 

permit a mortgage loan to have up-front 

charges equal to 5 percent of the loan 

amount and an interest rate sufficient to 

generate a 5 percent loan origination 

commission. The OCC also maintained 

that including both origination charges 

and YSPs increases the complexity of 

mortgage transactions and confuses 

consumers, particularly those who are 

most vulnerable and have the fewest 

credit choices. 

As noted above, the OCC supported 

excluding from points and fees 

compensation paid by a creditor to its 

loan officers. The OCC noted that the 

banking industry expressed concerns 

about the operational burden of 

attempting to track compensation and 

about the potential uncertainty of 

whether, because of changes in loan 

originator compensation, a transaction 

would be a qualified mortgage. The OCC 

argued that excluding from points and 

fees compensation paid by a creditor to 

its loan officers would not adversely 

affect consumer protection. The OCC 

noted that individual employees in both 

the retail and wholesale channels are 

prohibited from steering a consumer to 

a more costly loan to increase their 

compensation but that there is an added 

layer of protection because a creditor’s 

loan officers generally do not have the 

ability to select from different creditors 

when presenting loan options to 

consumers. 

Repeating arguments they made in 

response to the Board’s 2011 ATR 

Proposal, many industry commenters, 

including creditors and their 

representatives and mortgage brokers 

and their representatives, again urged 

the Bureau to exclude loan originator 

compensation from points and fees 

altogether. They argued that loan 

originator compensation has little or no 

bearing on a consumer’s ability to repay 

a mortgage and that it therefore is 

unnecessary to include such 

compensation in points and fees. They 

also maintained that other regulatory 

protections, including the prohibition in 

§ 1026.36(d)(1) on compensating loan 

originators based on the terms of the 

transaction and the prohibition in 

§ 1026.36(e) on steering consumers to 

consummate particular transactions to 

increase loan originator compensation, 

are sufficient to protect consumers 

against problematic loan originator 

compensation practices. They claimed 

that including loan originator 

compensation in points and fees would 

impose a significant compliance burden 

and make it far more difficult to offer 

qualified mortgages, leading to higher 

costs for credit and reduced access to 

credit. 

A trade group representing mortgage 

brokers and many individual mortgage 

brokers submitted substantially similar 

comments recommending that the 

Bureau exclude all compensation paid 

by creditors to loan originators. They 

argued that the Board’s 2010 Loan 

Originator Final Rule already restricted 

loan originator compensation to prevent 

steering of consumers to more costly 

mortgages. 

One industry commenter 

recommended that, if the Bureau 

declines to exclude all loan originator 

compensation from points and fees, the 

Bureau should consider whether 

compensation paid by a creditor to a 

mortgage broker should be included in 

points and fees only for higher-priced 

mortgage loans because competition 

may not be as robust for such loans. The 

commenter suggested that the Bureau 

consider excluding such compensation 

entirely from points and fees for 

mortgage loans in the prime market and 

excluding only a certain amount for 

higher-priced mortgage loans. 

Many industry commenters advocated 

that, if the Bureau declines to exclude 

loan originator compensation altogether, 

the Bureau should exclude from points 

and fees any compensation paid to loan 

originator employees. Many creditors 

and their representatives argued that 

compensation paid to loan originators 

employed by creditors, as well as loan 

originators employed by mortgage 

brokers, should be excluded from points 

and fees. They raised a number of 

different arguments to support 

excluding compensation paid to 

individual loan originators, including 

retail loan officers. 

First, they asserted that calculating 

loan originator compensation for 

individual loan originators would 

impose a substantial burden, 

particularly for employees of creditors. 

They noted that retail loan officers often 

receive a substantial part of their 

compensation after a mortgage loan is 

consummated, making it difficult to 

track and attribute compensation to a 

transaction before that transaction is 

consummated. They argued that, for 

retail loan officers, it would create 

significant compliance burdens to track 

compensation paid to each loan officer 

and attribute that compensation to each 

transaction. They noted that their 

existing systems are unable to track and 

attribute compensation for each loan 

officer for each transaction, and stated 

that they would have to develop new 

systems that could track compensation 

in real time and communicate with loan 

origination systems to calculate points 

and fees. They also asserted that it 

would impose substantial compliance 

risk because of the difficulty in 

accurately calculating such 

compensation. 

Second, they argued that calculating 

loan originator compensation at the time 

the interest rate is set would result in an 

inaccurate measure of compensation 

and would result in significant 

anomalies. They noted that various 

types of compensation, including salary 

and bonuses based on factors such as 

loan quality and customer satisfaction, 

would not be included in loan 

originator compensation because they 

cannot be attributed to a particular 

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transaction. However, they asserted that 

the amount of compensation that is 

included in points and fees may have 

little bearing on how much the 

consumer actually pays for a given 

transaction. For example, they noted 

that two transactions with identical 

interest rates and up-front charges may 

nevertheless have different loan 

originator compensation merely because 

one transaction involved an 

experienced, more highly compensated 

loan officer or because the interest rate 

in a transaction was set at the end of the 

month when a loan officer had qualified 

for a higher commission. 

Finally, they argued that employee 

compensation is merely another 

overhead cost that already is captured in 

the interest rate or in origination charges 

and has little, if any, bearing on a 

consumer’s ability to repay a mortgage. 

They argued that compensation 

typically is already captured in points 

and fees as origination charges and that 

including employee loan originator 

compensation would constitute double 

counting. 

One industry commenter 

recommended that, if the Bureau 

declines to exclude compensation paid 

to individual loan originators from 

points and fees, the Bureau should 

consider other methods to simplify the 

calculation of loan originator 

compensation. That commenter 

suggested that the Bureau permit a 

creditor to include as loan originator 

compensation a fixed amount based on 

average costs for loan originator 

compensation over a prior period of 

time. The commenter noted that such an 

approach would ease the burden and 

complexity of tracking compensation for 

each loan. 

A trade group representing mortgage 

brokers and many individual mortgage 

brokers submitted substantially similar 

comments urging the Bureau to include 

in points and fees only compensation 

received by the originating entity for 

loan origination activities. They argued 

that fees associated with creditors or 

wholesale lenders should not be 

included in points and fees. They also 

maintained that originators should be 

permitted to charge various percentages 

for their loan origination activities, 

provided they do not exceed the 

qualified mortgage 3 percent cap and 

that non-bank originators should be 

permitted to receive compensation from 

the consumer, creditor, or a 

combination of both, as long as total 

compensation does not exceed 3 percent 

of the loan amount. 

Many industry commenters argued 

that, if the Bureau elects not to exclude 

loan originator compensation from 

points and fees altogether, or to exclude 

compensation paid to loan originator 

employees, the Bureau should adopt the 

netting rule in proposed alternative 2 of 

comment 32(b)(1)(ii)–5.iii. They argued 

that the additive rule in proposed 

alternative 1 of comment 32(b)(1)(ii)– 

5.iii would result in significant double 

counting and could cause many loans to 

exceed the qualified mortgage points 

and fees limits and could cause some 

loans to exceed the high-cost mortgage 

threshold. 

One commenter asserted that the 

inclusion of loan originator 

compensation in points and fees, along 

with limitations on the number of 

discount points that may be excluded 

from points and fees, would limit the 

ability of nonprofit organizations to 

assist consumers in obtaining affordable 

mortgages. The commenter argued that 

the Bureau should adopt a rule 

permitting creditors to exclude 

payments to loan originators if the costs 

of such payments are absorbed by 

creditors and not passed along to 

consumers. As an alternative, the 

commenter supported comments 

32(b)(1)(ii)–5.i and 32(b)(1)(ii)–5.ii, and 

the second alternative of comment 

32(b)(1)(ii)–5.iii, arguing that these 

comments minimize double-counting. 

The commenter also urged the Bureau to 

permit consumers to exclude from 

points and fees more than two bona fide 

discount points, recommending that the 

Bureau exclude from points and fees 

any amounts used to buy down an 

interest rate that starts at or below the 

average 30-year fixed prime offer rate. 

Commenters also raised other issues 

related to loan originator compensation. 

Several industry and nonprofit 

commenters requested additional 

guidance regarding the calculation of 

loan originator compensation for 

transactions involving manufactured 

homes. They noted that, under 

§ 1026.36(a), as amended by the 

Bureau’s 2013 Loan Originator Final 

Rule, manufactured home retailers and 

their employees could qualify as loan 

originators. Industry commenters 

requested additional guidance on what 

activities would cause a manufactured 

home retailer and its employees to 

qualify as loan originators. They stated 

that it remains unclear what activities a 

retailer and its employees could engage 

in without qualifying as loan originators 

and causing their compensation to be 

included in points and fees. Industry 

commenters also noted that, because the 

creditor had limited knowledge of and 

control over the activities of the 

retailer’s employees, it would be 

difficult for the creditor to know 

whether the retailer and its employees 

had engaged in activities that would 

require their compensation to be 

included in points and fees. They 

therefore urged the Bureau to adopt a 

bright-line rule under which 

compensation would be included in 

points and fees only if paid to an 

employee of a creditor or a mortgage 

broker. 

Industry commenters also requested 

that the Bureau clarify what 

compensation must be included in 

points and fees when a manufactured 

home retailer and its employees qualify 

as loan originators. They argued that it 

is not clear whether the sales price or 

the sales commission in a transaction 

should be considered, at least in part, 

loan originator compensation. They 

urged the Bureau to clarify that 

compensation paid to a retailer and its 

employees in connection with the sale 

of a manufactured home should not be 

counted as loan originator 

compensation. 

Finally, a number of industry 

commenters again advocated excluding 

certain other items from points and fees. 

In particular, several industry 

commenters urged the Bureau to 

exclude from points and fees real-estate 

related charges paid to affiliates of the 

creditor and up-front charges to recover 

the costs of loan-level price adjustments 

(LLPAs) imposed by the GSEs. 

The Final Rule 

The Bureau addresses below various 

issues regarding the inclusion of loan 

originator compensation in points and 

fees. Specifically, the final rule provides 

that payments by consumers to 

mortgage brokers need not be counted as 

loan originator compensation where 

such payments already have been 

included in points and fees as part of 

the finance charge. In addition, 

compensation paid by a mortgage broker 

to its employees need not be included 

in points and fees. The Bureau also 

concludes that compensation paid by a 

creditor to its own loan officers need not 

be included in points and fees. The 

Bureau determines, however, that it 

should not use its exception authority to 

alter the requirement that compensation 

paid by a creditor to a mortgage broker 

is included in points and fees in 

addition to any origination charges paid 

by a consumer to the creditor. Finally, 

the Bureau provides further guidance on 

how to calculate the amount of loan 

originator compensation for transactions 

involving manufactured homes. 

Compensation paid by consumers to 

mortgage brokers. In the 2013 ATR 

Proposed Rule, the Bureau stated that 

the broad statutory language requiring 

inclusion of ‘‘all’’ compensation paid 

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122The consumer advocate commenters made this 

argument to oppose the Bureau’s using exception 

authority to exclude from points and fees (or use 

a netting approach for) compensation paid by 

creditors to loan originators. However, because this 

argument would also apply to the Bureau’s use of 

exception authority to exclude from points and fees 

compensation paid by a consumer to a mortgage 

broker or by a mortgage broker to its employees, the 

Bureau addresses this argument here with respect 

to this and other uses of its exception authority in 

this rulemaking to exclude certain loan originator 

compensation from points and fees. 

‘‘directly or indirectly’’ and ‘‘from any 

source’’ supports counting 

compensation in points and fees each 

time it is paid to a loan originator. Thus, 

the Bureau reads the express language of 

the statute as providing for the inclusion 

of loan originator compensation in 

points and fees, even if some or all of 

that compensation may already have 

been included in points and fees under 

other elements of the definition, and the 

2013 ATR Final Rule adopted this 

statutory approach. 

However, as noted in the 2013 ATR 

Proposed Rule, the Bureau does not 

believe it would be in the interest of 

consumers or industry to adhere to this 

‘‘additive’’ approach when it is clear 

that the compensation already has been 

captured in points and fees. Thus, as 

explained below, the Bureau is using its 

adjustment and exception authority and 

its authority to revise the criteria that 

define a qualified mortgage to eliminate 

double counting in such situations. 

As noted above, the Bureau proposed 

in the 2013 ATR Proposed Rule three 

different examples (one of which had 

two alternatives) for calculating loan 

originator compensation when such 

compensation may already have been 

included in points and fees. The first 

example, proposed comment 

32(b)(1)(ii)–5.i, would have provided 

that a consumer payment to a mortgage 

broker that is included in points and 

fees under § 1026.32(b)(1)(i) (because it 

is included in the finance charge) does 

not have to be counted in points and 

fees again under § 1026.32(b)(1)(ii) (as 

loan originator compensation). The 

Bureau noted in the 2013 ATR Proposed 

Rule that it did not believe that counting 

a single payment to a mortgage broker 

twice would advance the purpose of the 

points and fees limits. Few comments 

addressed this proposed example, and, 

with one exception, which is discussed 

below in connection with proposed 

comment 32(b)(1)(ii)–5.ii, those 

comments supported the Bureau’s 

proposal that such payments should not 

be included in points and fees under 

§ 1026.32(b)(1)(ii) if they already are 

included in points and fees under 

§ 1026.32(b)(1)(i). 

The Bureau is therefore adopting 

comment 32(b)(1)(ii)–5.i as proposed 

and renumbered as 32(b)(1)(ii)–4.i. The 

Bureau also is adopting new 

§ 1026.32(b)(1)(ii)(A) to provide that 

loan originator compensation paid by a 

consumer to a mortgage broker, as 

defined in § 1026.36(a)(2), is not 

included in points and fees if it already 

has been included in points and fees 

because it is included in the finance 

charge under § 1026.32(b)(1)(i). The 

term ‘‘mortgage broker’’ is defined in 

§ 1026.36(a)(2) to mean any loan 

originator other than an employee of a 

creditor. Under this definition, persons 

whose primary business is not 

originating mortgage loans may 

nevertheless be mortgage brokers if they 

qualify as a ‘‘loan originator’’ under 

§ 1026.36(a)(1) and are not employees of 

a creditor. The use of the term 

‘‘mortgage broker’’ in 

§ 1026.32(b)(1)(ii)(A) is appropriate 

because compensation is excluded from 

points and fees under 

§ 1026.32(b)(1)(ii)(A) only if such 

compensation already has been 

included in points and fees under 

§ 1026.32(b)(1)(i). 

The Bureau is adopting new 

§ 1026.32(b)(1)(ii)(A) pursuant to its 

authority under TILA section 105(a) to 

make such adjustments and exceptions 

for any class of transactions as the 

Bureau finds necessary or proper to 

facilitate compliance with TILA and to 

effectuate the purposes of TILA, 

including the purposes of TILA section 

129C of ensuring that consumers are 

offered and receive residential mortgage 

loans that reasonably reflect their ability 

to repay the loans. The Bureau’s 

understanding of this purpose is 

informed by the findings related to the 

purposes of section 129C of ensuring 

that responsible, affordable mortgage 

credit remains available to consumers. 

The Bureau believes that using its 

exception authorities to ensure that a 

single payment to a mortgage broker 

will not be counted twice in points and 

fees will facilitate compliance with the 

points and fees regulatory regime by 

allowing creditors to count the payment 

to a broker once without requiring 

further investigation into the mortgage 

broker’s employee compensation 

practices, and by making sure that all 

creditors apply the provision 

consistently. It will also effectuate the 

purposes of TILA by preventing the 

points and fees calculation from being 

artificially inflated, thereby helping to 

keep mortgage loans available and 

affordable by ensuring that they are 

subject to the appropriate regulatory 

framework with respect to qualified 

mortgages and the high-cost mortgage 

threshold. The Bureau is also invoking 

its authority under TILA section 

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

subtract from the criteria that define a 

qualified mortgage consistent with 

applicable standards. For the reasons 

explained above, the Bureau has 

determined that it is necessary and 

proper to ensure that responsible, 

affordable mortgage credit remains 

available to consumers in a manner 

consistent with the purposes of TILA 

section 129C and necessary and 

appropriate to effectuate the purposes of 

this section and to facilitate compliance 

with section 129C. With respect to its 

use of TILA section 129C(b)(3)(B) here 

and elsewhere in this section, the 

Bureau believes this authority includes 

adjustments and exceptions to the 

definitions of the criteria for qualified 

mortgages and that it is consistent with 

the purpose of facilitating compliance to 

extend use of this authority to the points 

and fees definitions for high-cost 

mortgage in order to preserve the 

consistency of the qualified mortgage 

and high-cost mortgage definitions. As 

noted above, by helping to ensure that 

the points and fees calculation is not 

artificially inflated by counting a single 

payment to a mortgage broker twice, the 

Bureau is helping to ensure that 

responsible, affordable mortgage credit 

remains available to consumers. 

Some consumer advocates argued that 

the Bureau lacks exception authority to 

exclude loan originator compensation 

from the points and fees calculation for 

the high-cost mortgage threshold under 

HOEPA.122 However, while the Bureau’s 

authority under TILA section 105(a) 

does not extend to the substantive 

protections for high-cost mortgages in 

TILA section 129, the provision that 

defines high-cost mortgages, including 

the points and fees definitions, is part 

of TILA section 103. Thus, although the 

Bureau cannot use its authority under 

TILA section 105(a) to alter the 

substantive protections accorded to 

high-cost mortgages under TILA section 

129, it can use that authority to adjust 

the criteria used to define a high-cost 

mortgage, including the method for 

calculating points and fees, as specified 

elsewhere in TILA. 

Compensation paid by mortgage 

brokers to their loan originator 

employees. The second example, 

proposed comment 32(b)(1)(ii)–5.ii, 

would have provided that compensation 

paid by a mortgage broker to its 

individual loan originator employees is 

not included in points and fees under 

§ 1026.32(b)(1)(ii). The Bureau stated in 

the 2013 ATR Proposed Rule that the 

exclusion from points and fees was 

warranted because a payment from 

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either a consumer or creditor to a 

mortgage broker firm already is counted 

in points and fees, and that it would not 

be necessary or appropriate to also 

include in points and fees any funds 

that the mortgage broker firm passes on 

to its individual loan originator 

employees. Again, few commenters 

addressed this example, and, with one 

exception, they supported the Bureau’s 

proposed comment. 

As noted above, one creditor argued 

that it would be unfair to adopt 

proposed comments 32(b)(1)(ii)–5.i and 

32(b)(1)(ii)–5.ii without adopting a 

similar exclusion for compensation paid 

by a creditor to its employee loan 

originators (i.e., its own loan officers). 

For the reasons set forth below, the 

Bureau is using its exception authority 

to permit creditors to exclude from 

points and fees compensation paid to 

their own loan officers. 

Accordingly, the Bureau is adopting 

comment 32(b)(1)(ii)–5.ii substantially 

as proposed and renumbered as 

32(b)(1)(ii)–4.ii, and is adopting new 

§ 1026.32(b)(1)(ii)(B) to provide that a 

payment from a mortgage broker, as 

defined in § 1026.36(a)(2), to a loan 

originator who is an employee of the 

mortgage broker is not included in 

points and fees. As noted above, the 

term ‘‘mortgage broker’’ is defined in 

§ 1026.36(a)(2) to mean any loan 

originator other than an employee of a 

creditor. Under this definition, persons 

whose primary business is not 

originating mortgage loans may 

nevertheless be mortgage brokers if they 

qualify as a ‘‘loan originator’’ under 

§ 1026.36(a)(1) and are not employees of 

a creditor. To qualify as a loan 

originator under § 1026.36(a)(1), a 

person must engage in loan origination 

activities in expectation of 

compensation. The use of the term 

‘‘mortgage broker’’ in 

§ 1026.32(b)(1)(ii)(B) is appropriate 

because, as discussed above, 

compensation that a mortgage broker 

receives from a consumer or creditor is 

included in points and fees, and this 

compensation provides the funds for 

any compensation that is paid by the 

mortgage broker to its employee. 

TILA section 103(bb)(4)(B) provides 

that compensation paid by a ‘‘consumer 

or creditor’’ to a loan originator is 

included in points and fees. The Bureau 

notes that a mortgage broker firm is 

neither a consumer nor a creditor, so the 

statute could plausibly be read so that 

points and fees would not include 

payments from a mortgage broker firm 

to loan originators who work for the 

firm. However, TILA section 

103(bb)(4)(B) provides that 

compensation must be included in 

points and fees if it is paid ‘‘directly or 

indirectly’’ by a consumer or creditor 

‘‘from any source.’’ Because 

compensation by a mortgage broker firm 

to its employees is funded from 

consumer or creditor payments, such 

compensation could be interpreted as 

being paid indirectly by a consumer or 

creditor. 

Given the ambiguity, the Bureau is 

also invoking its authority under TILA 

section 105(a) to make such adjustments 

and exceptions for a class of 

transactions as the Bureau finds 

necessary or proper to facilitate 

compliance with TILA and to effectuate 

the purposes of TILA, including the 

purposes of TILA section 129C of 

ensuring that consumers are offered and 

receive residential mortgage loans that 

reasonably reflect their ability to repay 

the loans. The Bureau’s understanding 

of this purpose is informed by the 

findings related to the purposes of 

section 129C of ensuring that 

responsible, affordable mortgage credit 

remains available to consumers. 

Because payments by mortgage brokers 

to their employees already have been 

captured in the points and fees 

calculation, excluding such payments 

will facilitate compliance with the 

points and fees regulatory regime by 

eliminating the need for further 

investigation into the mortgage brokers’ 

employee compensation practices, and 

by making sure that all creditors apply 

the provision consistently. It will also 

effectuate the purposes of TILA by 

preventing the points and fees 

calculation from being artificially 

inflated, thereby helping to keep 

mortgage loans available and affordable 

by ensuring that they are subject to the 

appropriate regulatory framework with 

respect to qualified mortgages and the 

high-cost mortgage threshold. The 

Bureau is also invoking its authority 

under TILA section 129C(b)(3)(B) to 

revise, add to, or subtract from the 

criteria that define a qualified mortgage 

consistent with applicable standards. 

For the reasons explained above, the 

Bureau has determined that it is 

necessary and proper to ensure that 

responsible, affordable mortgage credit 

remains available to consumers in a 

manner consistent with the purposes of 

TILA section 129C and necessary and 

appropriate to effectuate the purposes of 

this section and to facilitate compliance 

with section 129C. 

Compensation paid by creditors. As 

noted in the 2013 ATR Proposed Rule, 

it is significantly more complicated to 

devise a rule for calculating loan 

originator compensation when the 

consumer pays some up-front charges to 

the creditor and the creditor pays loan 

originator compensation to either its 

own loan officer or to a mortgage broker. 

That is because the creditor can fund 

the compensation in two different ways: 

either through origination charges paid 

by the consumer (which would be 

included in points and fees) or through 

the interest rate (which would not be 

included in points and fees). There is no 

practicable method for the Bureau to 

determine by rule the extent to which 

compensation paid by the creditor was 

funded through origination charges and, 

thereby, already captured in the points 

and fees calculation. The Bureau 

therefore indicated that it believed that 

bright-line rules would be necessary to 

facilitate compliance. 

As discussed below, the Bureau 

concludes that it is appropriate to apply 

different requirements to loan originator 

compensation paid by the creditor to its 

own loan officers and to compensation 

paid by the creditor to other loan 

originators. Specifically, the Bureau is 

using its exception authority to exclude 

from points and fees compensation paid 

by the creditor to its own loan officers. 

Compensation paid by the creditor to 

other loan originators is included in 

points and fees, and such compensation 

must be counted in addition to any upfront charges that are included in points 

and fees. 

Compensation paid by creditors to 

their own loan officers. In response to 

the Board’s 2011 ATR Proposal, many 

creditors and organizations representing 

creditors urged the Bureau to exclude 

all compensation paid to individual 

loan originators. Among other things, 

these commenters had argued that 

compensation paid to loan originators 

already is included in the cost of loan, 

either in the interest rate or in 

origination charges; that having to track 

individual loan originators’ 

compensation and attribute it to specific 

transactions would impose a significant 

compliance burden; and that including 

compensation paid to individual loan 

originators would cause anomalous 

results, with otherwise identical loans 

having different amounts of loan 

originator compensation included in 

points and fees because of the timing of 

the loan or the identity of the loan 

originator. See 78 FR 6433–34 (Jan. 30, 

2013). 

In the 2013 ATR Final Rule, the 

Bureau acknowledged the concerns 

about including in points and fees 

compensation paid to individual loan 

originators. Nevertheless, the Bureau 

declined to exclude such compensation, 

noting that the statutory language 

provided that points and fees include 

compensation paid to ‘‘mortgage 

originators,’’ which is defined to 

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35452 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

123Some creditors and organizations representing 

creditors had argued that it would be appropriate 

to exclude from points and fees compensation paid 

by creditors to their loan officers because 

compensation paid to loan originator employees of 

a mortgage brokerage firm would also be excluded. 

As noted above, compensation paid to employees 

of mortgage brokerage firms is excluded from points 

and fees because such compensation already is 

captured in points and fees in the payments by 

consumers or creditors to the mortgage brokerage 

firms. By contrast, as noted above, compensation 

paid to a retail loan officer may be funded either 

through origination charges or through the interest 

rate, so there is no guarantee that such 

compensation already has been included in points 

and fees. As discussed below, however, the Bureau 

concludes that additional factors justify excluding 

from points and fees compensation paid by 

creditors to their own loan officers. 

124The calculation of compensation paid by 

mortgage brokerage firms to their individual loan 

originator employees could be similarly 

complicated. However, as discussed above, the 

Bureau is excluding such compensation from points 

and fees because such compensation already has 

been captured in the points and fees calculation. 

125The Bureau recognizes that a more accurate 

measure of compensation could be calculated at the 

time of consummation. However, as noted in the 

2013 ATR Final Rule, creditors need to know in 

advance of consummation whether a transaction 

will be a qualified mortgage or a high-cost mortgage 

and therefore need to be able to calculate loan 

originator compensation, and points and fees 

generally, prior to consummation. Thus, the Bureau 

does not believe that is appropriate to require that 

loan originator compensation be calculated at 

consummation. 

include individual loan officers. Id. at 

6436. The Bureau also noted that 

excluding from points and fees 

compensation paid by creditors to their 

loan officers would exacerbate the 

differential treatment between the retail 

and wholesale channels, as creditors in 

retail transactions would not be 

required to include any loan originator 

compensation in points and fees, while 

creditors in wholesale transactions 

would be required to include in points 

and fees compensation paid by either 

consumers or creditors to mortgage 

brokers. Id. 

The Bureau notes that, in responding 

to the Board’s 2011 ATR Proposal, 

commenters did not have the benefit of 

considering how including loan 

originator compensation in points and 

fees would interact with the rules 

regarding loan originator compensation 

that were proposed by the Bureau in the 

2012 Loan Originator Proposal and 

finalized in the 2013 Loan Originator 

Final Rule. In response to the 2013 ATR 

Proposed Rule, the Bureau received 

detailed comments analyzing whether, 

in light of the protections in the 2013 

Loan Originator Final Rule, it would be 

appropriate to include various types of 

loan originator compensation in points 

and fees. The Bureau also received more 

extensive explanations from creditors 

and organizations representing creditors 

about the difficulties of calculating 

compensation paid by creditors to their 

own loan officers. 

After carefully considering the 

comments received in response to the 

2013 ATR Proposed Rule, the Bureau 

believes it is appropriate to reconsider 

whether compensation paid to 

individual loan originators should be 

excluded from points and fees. As noted 

above, the Bureau already has 

determined that compensation paid by a 

mortgage broker to its loan originator 

employees need not be included in 

points and fees. The Bureau concludes 

that it should use its exception authority 

to exclude the compensation that 

creditors pay to their loan officers from 

points and fees as well. As discussed in 

more detail below, the Bureau 

determines that including compensation 

paid by creditors to their loan officers in 

points and fees at this time not only 

would impose a severe compliance 

burden on the industry, but also would 

lead to distortions in the market for 

mortgage loans and produce anomalous 

results for consumers. The Bureau also 

believes that there are structural and 

operational reasons why not including 

in points and fees compensation paid to 

retail loan officers poses a limited risk 

of harm to consumers. As a result, the 

Bureau believes that including such 

compensation in points and fees would 

not effectuate the purposes of the statute 

and in fact would frustrate efforts to 

implement and comply with the points 

and fees limits and with the broader 

statutory and regulatory regime for 

qualified mortgages and high-cost 

mortgages that must be implemented by 

January 2014. The Bureau has decided 

at this time to exclude compensation 

paid by creditors to their own loan 

officers. The Bureau will continue to 

gather data to determine the need for 

and the best method for counting 

compensation paid by creditors to their 

loan officers consistent with the 

purpose of the statute. The Bureau will 

closely monitor the market as it 

considers this issue to determine if 

further action is warranted. 

As indicated above, several factors 

support this conclusion.123 Attributing 

overall individual loan officer 

compensation to specific transactions is 

an extraordinarily difficult task. The 

Bureau considered these difficulties in 

the 2013 ATR Final Rule, when it 

revised § 1026.32(b)(1)(ii) to provide 

that creditors must include in points 

and fees loan originator compensation 

that can be attributed to that transaction 

at the time the interest rate is set. The 

requirement that the compensation is 

included only if it can be attributed to 

the transaction at the time the interest 

rate is set was intended to permit 

creditors to calculate compensation 

sufficiently early in the process so that 

they could know well before 

consummation whether a loan would be 

a qualified mortgage or a high-cost 

mortgage. See 78 FR 6437 (Jan. 30, 

2013). This calculation is 

straightforward for compensation paid 

by creditors to mortgage brokers: For 

each transaction, creditors typically pay 

a commission to mortgage brokers 

pursuant to a pre-existing contract 

between the creditor and the broker, and 

that commission is known at the time 

the interest rate is set. Furthermore, 

because the commission structure is 

known in advance it can be built into 

the price of the loan, either through upfront charges or through the interest 

rate. 

The calculation of loan originator 

compensation is significantly more 

complicated for retail loan officers.124

As noted by industry commenters, 

compensation for retail loan officers 

often is not determined until after the 

end of the month or some other, longer 

time period (such as a quarter) and in 

many cases is based upon the number 

or dollar volume of the transactions that 

have been consummated during the 

preceding month or other time period. 

However, for purposes of determining 

whether a particular transaction is a 

qualified mortgage (or a high-cost 

mortgage), the calculation of points and 

fees (and thus loan originator 

compensation) must be performed prior 

to consummation. Thus, to calculate 

loan originator compensation for retail 

loan officers for purposes of applying 

the qualified mortgage and high-cost 

mortgage thresholds, creditors would 

have to determine, at the time the 

interest rate is set, what compensation 

a retail loan officer would be entitled to 

receive if a particular transaction were 

consummated. As noted above, this 

calculation often would be based on the 

number or dollar amount of transactions 

already consummated during the time 

period in which compensation is set 

(e.g., the month or quarter or other time 

period). This calculation may produce 

an artificial measure of compensation 

because, for the transaction for which 

compensation is being calculated, the 

date the interest rate is set may fall in 

a different time period than the date the 

transaction is consummated and actual 

compensation is set.125 If the interest 

rate were to be reset (if, for example, a 

rate lock expires or underwriting 

identifies risk factors which leads to an 

increase in the interest rate), the 

compensation would have to be 

recalculated. 

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126Moreover, the Bureau understands that some 

consumers prefer to float the interest rate and other 

consumers lock their interest rate but have the right 

to relock one time at a lower rate. Thus, in these 

circumstances, creditors would have to calculate (or 

recalculate) loan originator compensation later in 

the process. 

127Another arbitrary result could occur when a 

consumer relocks at a lower interest rate. At the 

time of the initial rate set, the creditor could 

calculate loan originator compensation and 

determine that points and fees do not exceed the 

qualified mortgage points and fees limit or the highcost mortgage threshold. However, after the rate is 

reset, the creditor would have to recalculate loan 

originator compensation, and, if the loan originator 

has satisfied a creditor’s monthly quota for 

obtaining a higher commission, it is possible that 

the higher loan originator compensation could 

cause the points and fees to exceed the qualified 

mortgage limits (or the high-cost mortgage 

threshold). 

The Bureau understands from 

industry comments that creditors’ 

existing systems generally do not track 

compensation for each loan officer for 

each specific transaction. Thus, 

creditors would have to develop new 

systems or reprogram existing systems 

to track and attribute compensation for 

each transaction. Depending on the 

compensation structure, these systems 

would have to be dynamic so that they 

could track at the time the interest rate 

is set what compensation a loan officer 

would be entitled to receive if a given 

transaction were consummated.126

Further, the systems would have to feed 

into the creditors’ origination systems so 

that the points-and-fee calculation could 

be made. The Bureau is also concerned 

that creditors may have difficulty in 

implementing these systems by January 

2014, when the ATR Final Rule 

becomes effective. 

In addition, the Bureau is concerned 

that requiring creditors to calculate loan 

originator compensation for their loan 

officers may create uncertainty about 

the points and fees calculations and 

thus about whether loans satisfy the 

standards for qualified mortgages and 

remain below the threshold for highcost mortgages. As noted above, if 

compensation paid to creditors’ loan 

officers were included in points and 

fees, creditors would have to calculate 

at the time the interest rate is set what 

compensation a loan officer would be 

entitled to receive in the future. This 

compensation often would depend on 

the timing of other loans (i.e., how many 

loans have been consummated or the 

dollar value of loans consummated by 

the loan officer at the time the interest 

rate is set), introducing complexity and 

potential for errors into the calculation. 

Moreover, counting retail compensation 

in points and fees would introduce 

significant uncertainty into transactions 

in which the interest rate is not locked 

well in advance of consummation. For 

instance, if the consumer elected at the 

time of application to allow the interest 

rate to float, the interest rate may not be 

set until several days before 

consummation. In such cases, the 

creditor might be uncertain as to 

whether the transaction was a qualified 

mortgage or a high-cost mortgage until 

that time. Similarly, even if the interest 

rate is locked in early in the process, it 

may subsequently be re-set, either 

because the rate lock expires or because 

the terms of the transaction are 

renegotiated after underwriting. In those 

cases, a transaction that was expected to 

be a qualified mortgage may lose that 

status because the loan originator 

compensation is recalculated at the time 

the interest rate is finally set. The 

uncertainty of calculating compensation 

highlights the difficulty creditors would 

face in complying with a rule that 

includes compensation to the creditors’ 

employees in points and fees, and the 

Bureau is concerned that this 

uncertainty could be disruptive to the 

market. 

The burden and uncertainty of 

requiring creditors to calculate loan 

originator compensation for their loan 

officers with respect to each individual 

transaction as of the time the interest 

rate is set are of particular concern 

because it does not appear that this 

calculation would further the purposes 

of the statute. The Bureau believes that 

Congress expanded the scope of loan 

originator compensation to be included 

in points and fees because of concerns 

that a loan with high loan originator 

compensation is likely to be more costly 

and may pose greater risk for 

consumers. However, for the reasons 

discussed below, the Bureau does not 

believe that calculating at the time the 

interest rate is set the compensation to 

be paid by creditors to their own loan 

officers is likely to be an accurate 

measure of the actual compensation the 

loan officer will receive if the loan is 

consummated or of the costs passed 

along to consumers. 

First, the compensation as calculated 

may be inaccurate and incomplete. As 

noted above, compensation would be 

calculated at the time the interest rate is 

set, so the actual compensation that a 

loan officer would receive may be 

different from the amount that would be 

included in points and fees. Moreover, 

various types of compensation, such as 

salary and bonuses for factors such as 

loan performance and customer 

satisfaction, cannot be attributed to 

specific transactions and therefore 

would not be included in loan 

originator compensation for calculating 

points and fees. As a result, the 

calculation would produce an 

incomplete measure of compensation, 

and creditors would have substantial 

flexibility to restructure their 

compensation systems to reduce the 

amount of loan originator compensation 

that they would have to include in 

points and fees. To the extent that 

increasing numbers of creditors were to 

restructure compensation to avoid the 

impact of the rules, the inclusion of loan 

originator compensation in points and 

fees would become even less 

meaningful or consistent over time. 

Second, because of the limitations on 

calculating compensation, counting 

retail loan originator compensation in 

points and fees would produce arbitrary 

outcomes because the amount of 

compensation that would be attributed 

to a particular transaction often will be 

unrelated to the costs or risks borne by 

the consumer. For example, two retail 

transactions with identical interest rates 

and up-front charges could have 

different loan originator compensation, 

and therefore different points and fees, 

simply because a senior, more highly 

compensated loan officer was involved 

in one of the transactions. Similarly, 

two transactions involving the same 

loan officer could have different loan 

originator compensation amounts 

depending on whether the interest rates 

are set at the end of the month, when 

the loan officer might qualify for a 

higher commission for meeting a 

monthly quota for loans closed, rather 

than at the beginning of the month, 

when such a quota is unlikely to have 

been met.127 By contrast, the costs to the 

consumer, as reflected in origination 

charges and the interest rate, are not 

likely to vary based on the seniority of 

the loan originator handling the 

transaction or the loan officer’s 

satisfaction of the creditor’s monthly 

quota for obtaining a higher 

commission. 

The Bureau is also concerned that 

including in points and fees 

compensation paid by a creditor to its 

own loan officer would place additional 

limits on consumers’ ability to structure 

their preferred combination of up-front 

charges and interest rate. The points and 

fees limits themselves restrict 

consumers’ ability to pay up-front 

charges and still obtain a qualified 

mortgage (or avoid a high-cost 

mortgage). However, these limits would 

permit even less flexibility in the retail 

channel because consumers cannot pay 

retail loan officers directly. For 

example, assume a consumer is seeking 

a $100,000 loan and wants to pay $2,500 

in up-front charges at closing rather 

than paying those costs through a higher 

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128 If the consumer’s payments satisfy the 

standards of § 1026.32(b)(1)(i)(E) or (F), the up-front 

fees could be excluded from points and fees as bona 

fide discount points. 

interest rate. Assume that the up-front 

charges would all be included in points 

and fees and that the transaction is 

being originated through a creditor’s 

loan officer, whose compensation is 

$1,500. Under an additive approach, if 

the consumer pays $2,500 in origination 

charges to the creditor and the creditor 

pays $1,500 to its loan officer, the points 

and fees would be $4,000 and the loan 

could not be a qualified mortgage. In 

contrast with a transaction originated 

through a mortgage broker, the 

consumer would not have the option of 

paying $1,500 directly to the loan 

officer. The $1,500 in loan originator 

compensation would count toward the 

points and fees limits, so the consumer 

therefore would not be able to pay all 

of the $2,500 up-front without 

exceeding the points and fees limit for 

a qualified mortgage.128 The consumer 

would have to pay other costs through 

a higher interest rate and the resulting 

higher monthly payments. Thus, under 

an additive rule, consumers in the retail 

channel would have less flexibility to 

pay up-front charges to achieve a lower 

interest rate and have the transaction 

remain below the points and fees limits 

for qualified mortgages and below the 

threshold for high-cost mortgages. For 

certain consumers, such as those who 

do not qualify for a higher interest rate, 

the impact could affect their access to 

credit. Excluding from points and fees 

loan originator compensation paid by a 

creditor to its loan officers would 

address this concern. 

The Bureau recognizes that creditors 

may earn greater profits when 

consumers receive more costly loans 

and that, in the absence of regulatory 

protections, creditors could adopt 

compensation arrangements that create 

incentives for their loan officers to 

originate loans that are more costly for 

consumers. Including loan officer 

compensation in points and fees would 

have imposed some limits on the ability 

of creditors to offer higher 

compensation to its loan officers. The 

Bureau believes, however, that the 

prohibition on terms-based 

compensation in § 1026.36(d)(1) will 

provide substantial protection against 

problematic loan originator 

compensation practices in the retail 

channel. The Bureau concludes that 

these protections will significantly 

diminish the risk of consumer injury 

from excluding from points and fees 

compensation paid by creditors to their 

retail loan officers. The prohibition in 

§ 1026.36(d)(1) prevents a creditor from 

paying higher compensation to its loan 

officer for a transaction that, for 

example, has a higher interest rate or 

higher up-front charges. Moreover, the 

Bureau agrees with consumer advocate 

commenters and comments by the FDIC 

and HUD and by the OCC that argue that 

retail loan officers would have greater 

difficulty than mortgage brokers in 

trying to maneuver around the margins 

of § 1026.36(d)(1). Unlike a mortgage 

broker, a retail loan officer works with 

only one creditor and therefore cannot 

choose among different creditors paying 

different compensation in deciding 

which loans to offer a consumer. 

As noted above, some consumer 

advocates argued that creditors would 

still be able to structure loan originator 

compensation to create incentives for 

their loan officers to direct consumers 

toward higher-cost loans. For example, 

they noted that the 2013 Loan 

Originator Final Rule adopted 

§ 1026.36(d)(1)(iii) and (iv), which 

permit creditors to offer, under certain 

conditions, deferred compensation 

plans and non-deferred profits-based 

compensation to their loan officers that 

otherwise would violate the prohibition 

on term-based compensation. They 

suggested that such arrangements could 

be structured to encourage loan officers 

to induce consumers to accept more 

costly loans. The Bureau is sensitive to 

the risk that unscrupulous creditors may 

look for gaps and loopholes in 

regulations; however, the Bureau notes 

that the referenced provisions of 

§ 1026.36(d)(1) were carefully crafted to 

attenuate any incentives for directing 

consumers to higher-cost loans to 

increase compensation. The Bureau 

recognizes that creditors have 

significant incentives to work around 

the margins of the rules and, as noted 

above, is committed to monitoring 

compensation practices closely for 

problematic developments that may 

require further action. 

In light of these concerns about the 

significant compliance burden and the 

questionable accuracy of the calculation 

for retail loan officer compensation, the 

Bureau believes it is appropriate at this 

time to exclude such compensation 

from points and fees. The Bureau will 

continue to monitor and gather 

information about loan originator 

compensation practices to determine if 

there are methods that are practicable 

and consistent with the purposes of the 

statute for including in points and fees 

loan originator compensation paid by 

creditors to their loan officers. As part 

of the Bureau’s ongoing monitoring of 

the mortgage market and for the 

purposes of the Dodd-Frank Act section 

1022(d) five-year review, the Bureau 

will assess how the exclusion from 

points and fees of compensation paid by 

creditors to their loan officers is 

affecting consumers. If the Bureau were 

to find that the exclusion for retail loan 

officer compensation was harming 

consumers, the Bureau could issue a 

new proposal to narrow or eliminate the 

exclusion. The Bureau is aware that 

problematic loan originator 

compensation practices occurred in the 

past in the retail channel and that 

questionable practices may occur again. 

The Bureau will carefully monitor the 

marketplace to respond to any such 

abusive practices, including through the 

use of its supervisory and enforcement 

authority. 

The Bureau stated in the 2013 ATR 

Final Rule that it was reluctant to 

exclude from points and fees 

compensation paid to individual loan 

originators because it would treat the 

retail and wholesale channels 

differently. As discussed above, 

however, after considering the 

information received in response to the 

2013 ATR Proposed Rule, the Bureau 

believes there are significant difficulties 

in calculating loan originator 

compensation in the retail channel. By 

contrast, in transactions involving 

mortgage brokers, there is little 

compliance burden in calculating loan 

originator compensation, and 

compensation typically can be 

calculated with relative ease and 

accuracy. Moreover, the Bureau believes 

that there is less risk of consumer injury 

from excluding loan originator 

compensation from points and fees in 

the retail channel. The Bureau is 

concerned that that mortgage brokers 

may have the flexibility to structure 

their business model to evade the 

prohibitions of § 1026.36(d)(1) and 

§ 1026.36(e) and that the risk of 

consumer injury from problematic loan 

originator compensation practices is 

therefore higher in the wholesale 

channel than in the retail channel. The 

Bureau is also concerned that 

unscrupulous creditors seeking to 

originate more costly loans could use 

the wholesale channel to expand their 

operations more rapidly and with 

limited investment. Historical evidence 

also suggests that the risks of consumer 

injury may be greater in the wholesale 

channel. As noted above, some 

consumer advocates cited evidence that, 

particularly in the subprime market, 

loans originated with mortgage brokers 

were on average more expensive and 

more likely to default than loans 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35455 

129See, e.g., Keith Ernst, Debbie Bocian, Wei Li, 

Ctr. for Responsible Lending, Steered Wrong: 

Brokers, Borrowers, and Subprime Loans (2008); 

Antje Berndt, Burton Hollifield, and Patrik Sandas, 

What Broker Charges Reveal About Mortgage Credit 

Risk, (2012); Susan E. Woodward, A Study of 

Closing Costs for FHA Mortgages available at http:// 

www.huduser.org/Publications/pdf/ 

FHA_closing_cost.pdf. The Bureau’s review of 

studies generally supports this view, though the 

evidence is not unequivocal. Wei Jiang, Ashlyn 

Aiko Nelson, and Edward Vytacil, Liar’s Loan? 

Effects of Origination Channel and Information 

Falsification on Mortgage Delinquency, SSRN 

working paper 142162 (2009) use a dataset from one 

bank with approximately 700,000 loans originated 

between 2004 and 2008. They report that ‘‘the 

Broker subsamples have delinquency probabilities 

that are 10–14 percentage points (or more than 

50%) higher than the Bank subsamples, a 

manifestation of the misalignment of incentives for 

brokers who issue loans on the bank’s behalf for 

commissions but do not bear the long-term 

consequences of low-quality loans.’’ They also 

show that loan pricing does not compensate for the 

loan performance differences. Michael LaCourLittle, The Pricing of Mortgages by Brokers: An 

Agency Problem?, J. of Real Estate Research, 31(2), 

235–263 (2009) showcases the agency problems in 

the brokerage channel, and provides a deep 

literature review. This paper’s results ‘‘suggest 

loans originated by brokers cost borrowers about 20 

basis points more, on average, than retail loans and 

that this premium is higher for lower-income and 

lower credit score borrowers.’’ In contrast, Amany 

El-Anshany, Gregory Elliehausen, and Yoshiaki 

Shimazaki, Mortgage Brokers and the Subprime 

Mortgage Market, Proceedings, Federal Reserve 

Bank of Chicago (2005), find that consumers buying 

through brokers paid less for their loans, by a 

similar magnitude as in the LaCour-Little paper. 

originated in the retail channel.129 Thus, 

for the reasons discussed above, the 

Bureau believes that it is necessary and 

proper to use its exception authority to 

exclude from points and fees 

compensation paid by creditors to their 

loan officers. 

The Bureau considered options other 

than excluding from points and fees 

compensation paid by a creditor to its 

loan officers. The Bureau considered 

adopting a netting rule for 

compensation paid by a creditor to its 

loan officers. This approach would have 

addressed the concern that an additive 

methodology would unduly restrict a 

consumers’ ability to structure their 

preferred combination of up-front 

charges and interest rate. However, a 

netting rule would not alleviate the 

compliance burden or address the other 

implementation concerns associated 

with including in points and fees 

compensation paid by creditors to their 

loan officers. One industry commenter 

recommended that, if the Bureau 

declines to exclude compensation paid 

to retail loan officers from points and 

fees, it should consider permitting 

creditors to include in points and fees 

an average measure of loan originator 

compensation over a prior period of 

time as an alternative to calculating 

compensation on a transaction-bytransaction basis. The Bureau 

considered such an approach as an 

alternative for alleviating the 

compliance burden and eliminating 

some of the anomalies between 

transactions. However, the Bureau has 

concerns about whether this approach is 

consistent with the statutory purpose of 

identifying transactions that, because of 

high up-front charges and high loan 

originator compensation, should not be 

eligible for the presumption of 

compliance of a qualified mortgage or 

that should receive the protections for 

high-cost mortgages. Moreover, 

permitting creditors to employ an 

average measure of loan originator 

compensation would raise significant 

issues. For example, the Bureau would 

have to determine what compensation 

would be included in the measure of 

average compensation, the period for 

which the average would be calculated, 

and whether the average would be for 

an entire firm, for a business unit, for a 

limited geographic area, or even for 

individual loan originators. In light of 

the limited time remaining before the 

effective date of the rules, the Bureau 

does not believe it would be practicable 

to attempt to implement this alternative. 

To implement the exclusion from 

points and fees of compensation paid by 

a creditor to its loan officers, the Bureau 

is adding new § 1026.32(b)(1)(ii)(C), 

which excludes compensation paid by a 

creditor to a loan originator that is an 

employee of the creditor. The Bureau 

also is adding language to comment 

32(b)(1)(ii)-1 to clarify that 

compensation paid by a creditor to a 

loan originator that is an employee of 

the creditor is not included in points 

and fees. 

As the Bureau noted in the 2013 ATR 

Final Rule, the Dodd-Frank Act 

provides that points and fees include all 

compensation paid by a consumer or 

creditor to a ‘‘mortgage originator.’’ In 

addition, as noted above, the Bureau 

reads the statutory language as requiring 

that loan originator compensation be 

included in points and fees in addition 

to any other items that are included in 

points and fees, even if the loan 

originator compensation may have been 

funded through charges that already are 

included in points and fees. Moreover 

the Bureau reads the statutory provision 

on compensation as meaning that 

compensation is added as it flows 

downstream from one party to another 

so that it is counted each time that it 

reached a loan originator, whatever its 

previous source. Given this statutory 

language, the Bureau believes that, to 

exclude from points and fees 

compensation paid by a creditor to its 

loan officers, the Bureau must use its 

exception authority. As provided in new 

§ 1026.32(b)(1)(ii)(C), the Bureau is 

excluding compensation paid by 

creditors to their loan officers pursuant 

to its authority under TILA section 

105(a) to make such adjustments and 

exceptions for a class of transactions as 

the Bureau finds necessary or proper to 

facilitate compliance with TILA and its 

purposes and to effectuate the purposes 

of TILA, including the purposes of TILA 

section 129C of ensuring that consumers 

are offered and receive residential 

mortgage loans that reasonably reflect 

their ability to repay the loans. The 

Bureau’s understanding of this purpose 

is informed by the findings related to 

the purposes of section 129C of ensuring 

that responsible, affordable mortgage 

credit remains available to consumers. 

The Bureau has determined that 

excluding compensation paid to retail 

loan officers will facilitate compliance 

with TILA and these purposes by 

helping to reduce the burden and 

uncertainty of calculating points and 

fees in the retail context and by helping 

to assure that, as of the effective date of 

the rule, creditors will have systems in 

place that are capable of making this 

calculation. At the same time, the 

Bureau has determined that excluding 

compensation paid to retail loan officers 

will effectuate the purposes of TILA by 

helping to ensure that loans are not 

arbitrarily precluded from satisfying the 

criteria for a qualified mortgage or 

arbitrarily designated as high-cost 

mortgages because of potential 

anomalies in how loan originator 

compensation would be calculated for 

the points and fees limits. Thus, the 

exclusion will help ensure the 

availability of reasonably repayable 

credit, given that the points and fees 

threshold will continue to provide 

limits, apart from compensation not 

included in finance charge, on costs 

related to loans. 

The Bureau is also relying upon its 

authority under TILA section 

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

subtract from the criteria that define a 

qualified mortgage consistent with 

applicable standards. For the reasons 

explained above, the Bureau has 

determined that it is necessary and 

proper to ensure that responsible, 

affordable mortgage credit remains 

available to consumers in a manner 

consistent with the purposes of TILA 

section 129C and necessary and 

appropriate to effectuate the purposes of 

this section and to facilitate compliance 

with section 129C. 

Certain commentary adopted in the 

2013 ATR Final Rule is no longer 

necessary in light of the Bureau’s 

decisions discussed above. Comment 

32(b)(1)(ii)–2 describes certain types of 

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35456 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

130As discussed above, the compliance burden of 

calculating compensation paid by creditors to their 

own loan officers is substantial and offsets the 

limited potential consumer protection benefits of 

including such compensation in points and fees. 

131As discussed below, the Bureau is adopting 

§ 1026.43(a)(3)(v), which exempts certain creditors, 

including certain nonprofit creditors, from the 

ability-to-repay requirements. 

compensation that would and would 

not be included in points and fees for 

individual loan originators. Portions of 

comment 32(b)(1)(ii)–3 discuss how the 

timing affects what compensation paid 

to individual loan originators must be 

included in points and fees. Comment 

32(b)(1)(ii)–4 provides examples for 

calculating compensation for individual 

loan originators. Because compensation 

paid by mortgage brokers to their 

individual loan originator employees 

and compensation paid by creditors to 

their loan officers is no longer included 

in points and fees, the guidance for 

calculating compensation for individual 

loan originators is no longer necessary. 

Accordingly, the Bureau is deleting 

portions of comments 32(b)(1)(ii)–2.ii 

and –3, and, the entirety of comment 

32(b)(1)(ii)–4. 

Compensation paid by creditors to 

mortgage brokers. In response to the 

Board’s 2011 ATR Proposal, many 

industry commenters urged the Bureau 

to exclude loan originator compensation 

from points and fees altogether. See 78 

FR 6433 (Jan. 30, 2013). Among other 

things, industry commenters had argued 

that compensation paid to loan 

originators already is included in the 

cost of the loan and has little, if any 

bearing on a consumer’s ability to repay 

a mortgage loan. They also argued that 

other statutory provisions and rules 

already provide adequate protection 

from abusive loan originator 

compensation practices and that it 

therefore is unnecessary to include loan 

originator compensation in points and 

fees. Finally, they argued that including 

loan originator compensation in points 

and fees would cause many loans to 

exceed the qualified mortgage points 

and fees limits, which would result in 

an increase in the cost of credit and 

diminished access to credit. 

In the 2013 ATR Final Rule, the 

Bureau acknowledged the concerns 

about including loan originator 

compensation in points and fees. 

However, the Bureau noted that, in light 

of the express statutory language and 

Congress’s evident concern with 

increasing consumer protections in 

connection with loan originator 

compensation practices, the Bureau did 

not believe it appropriate to use its 

exception authority to exclude loan 

originator compensation entirely from 

points and fees. In response to the 2013 

ATR Proposed Rule, many industry 

commenters, including mortgage 

brokers and their representatives and 

some creditors and their representatives, 

again urged the Bureau to exclude loan 

originator compensation from points 

and fees altogether (or to at least 

exclude from points and fees all 

compensation paid by creditors to loan 

originators). Repeating many of the 

same arguments made in response to the 

Board’s 2011 ATR Proposal, these 

commenters argued that loan originator 

compensation already is included in the 

cost of the loan and has little or no 

effect on consumers’ ability to repay the 

loan. They claimed that other 

protections adopted by the Bureau and 

the Board adequately protect consumers 

against harmful loan originator 

compensation practices and that it 

therefore is unnecessary to include loan 

originator compensation in points and 

fees. Finally, they argued that including 

loan originator compensation in points 

and fees would cause many loans to 

exceed the qualified mortgage points 

and fees cap or the high-cost mortgage 

threshold and that, as a result, many 

loans would not be made, including in 

particular smaller loans. 

The Bureau does not believe that it is 

consistent with the standards for its use 

of exception and adjustment authority 

to exclude from points and fees 

compensation paid by creditors to loan 

originators that are not employees of 

creditors. As noted above, in excluding 

from points and fees compensation paid 

by creditors to their loan originator 

employees, the Bureau invoked its 

exception and adjustment authority to 

facilitate compliance and, generally 

speaking, to meet purposes of ensuring 

that credit is available to consumers on 

reasonably repayable terms. These 

factors do not support excluding 

compensation paid by creditors to loan 

originators not employed by creditors. 

The compliance burden of calculating 

compensation paid by creditors to loan 

originators other than their own 

employees is minimal and does not 

provide a basis for exclusion based on 

a rationale related to facilitating 

compliance. As noted above, this 

calculation is straightforward for 

compensation paid by creditors to 

mortgage brokers: For each transaction, 

creditors typically pay a commission to 

mortgage brokers pursuant to a preexisting contract between the creditor 

and the broker, and that commission is 

known at the time the interest rate is 

set.130 Moreover, as discussed below, 

the Bureau believes that there remain 

some risks of consumer injury from 

business models in which mortgage 

brokers attempt to steer consumers to 

more costly transactions. Including in 

points and fees compensation paid by 

creditors to mortgage brokers should 

help reduce those risks. Accordingly, 

the Bureau declines to use its exception 

authority to exclude such compensation 

from points and fees. 

The Bureau also does not believe it is 

appropriate to use its exception 

authority to exclude loan originator 

compensation payments from creditors 

to mortgage brokers in certain types of 

transactions. As noted above, one 

industry commenter urged the Bureau to 

consider whether compensation paid by 

creditors to mortgage brokers should be 

included in points and fees only in 

subprime transactions. The commenter 

did not provide data or other evidence 

to support this approach. In addition, 

subprime transactions already have less 

flexibility than prime transactions under 

the points and fees limits because bona 

fide discount points may not excluded 

from points and fees for transactions 

with interest rates greater than 2 

percentage points above APOR, see 

§ 1026.32(b)(1)(i)(E) and (F), and the 

Bureau is concerned about widening the 

disparity in treatment under the points 

and fees limits. Accordingly, the Bureau 

does not believe it is appropriate to use 

its exception authority to create 

different requirements for loan 

originator compensation in the prime 

and subprime markets. Another 

commenter requested that, to avoid 

impairing affordable lending programs 

offered by nonprofit organizations, the 

Bureau exclude such payments when 

the creditor absorbs the costs of the 

payments and does not pass along the 

costs to consumers.131 The Bureau 

believes it would be difficult, if not 

impossible, to determine when a 

creditor was in fact not passing along 

loan origination costs to consumers and 

that any exemption, even if wellintentioned, could be susceptible to 

abuse. 

In the 2013 ATR Proposed Rule, the 

Bureau proposed two alternatives—an 

‘‘additive’’ approach and a ‘‘netting’’ 

approach— for calculating 

compensation. As discussed above, 

proposed alternative 1 of comment 

32(b)(1)(ii)–5.iii would have adopted an 

additive approach in which loan 

originator compensation would have 

been included in points and fees in 

addition to any charges paid by the 

consumer to the creditor. Proposed 

alternative 2 of comment 32(b)(1)(ii)– 

5.iii would have permitted creditors to 

net origination charges against loan 

originator compensation to calculate the 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35457 

132 It is doubtful that Congress contemplated this 

issue because, as noted above, absent the Bureau’s 

use of exception authority, TILA section 

129B(c)(2)(B)(ii) would have prohibited a creditor 

from imposing origination fees or charges if the 

creditor were compensating a loan originator. 

133The Bureau does not believe that the potential 

double counting of loan originator compensation 

and origination charges could be adequately 

addressed by permitting a netting approach in 

combination with more detailed disclosures to 

consumers. The Bureau notes that, because money 

is fungible, creditors could adjust their accounting 

so that they could disclose that they are recovering 

loan originator compensation through up-front 

charges and other origination costs through the 

interest rate. Thus, this disclosure-based approach 

would permit creditors to reduce the amount of 

loan originator compensation they include in points 

and fees without changing the amount of up-front 

fees or the interest rate they charge. Moreover, given 

the complex interaction between loan originator 

compensation, up-front charges, and the interest 

rate, the Bureau has concerns that consumers would 

not understand the disclosures. 

134As consumer advocates noted in their 

comments, mortgage brokers historically have 

defended arrangements in which creditors pay 

compensation to mortgage brokers by arguing that 

this approach permits consumers to obtain 

mortgage loans when they do not have sufficient 

funds to compensate mortgage brokers directly. See 

Nat’l Assoc. of Mortgage Brokers v. Fed. Reserve 

Bd., 773 F.Supp. 2d 151, 158 (D.D.C 2011). This 

rationale for creditors’ paying compensation to 

mortgage brokers has little if any force if the 

consumer is paying up-front charges to the creditor. 

amount of loan originator compensation 

that is included in points and fees. As 

discussed above, a creditor’s payments 

to a loan originator may be funded by 

up-front charges to the consumer, 

through the interest rate, or through 

some combination. The up-front charges 

to the consumer would be captured in 

points and fees, but compensation 

funded through the interest rate would 

not be captured. Thus, when a 

consumer pays up-front charges, it is 

not clear whether a creditor’s payments 

to a loan originator are captured in such 

points and fees.132

As noted above, the Bureau reads the 

statutory language as requiring that loan 

originator compensation be included in 

points and fees in addition to any other 

items that are included in points and 

fees, even if the loan originator 

compensation may have been funded 

through charges that already are 

included in points and fees. Moreover 

the Bureau reads the statutory provision 

on compensation as meaning that 

compensation is added as it flows 

downstream from one party to another 

so that it is counted each time that it 

reached a loan originator, whatever its 

previous source. After carefully 

considering the comments, the Bureau 

has determined that, for calculating 

compensation paid by creditors to 

mortgage brokers, it is not necessary or 

proper to revise the additive approach 

prescribed by the statute and adopted in 

the 2013 ATR Final Rule. 

For creditor payments to loan 

originators not employed by creditors, 

calculating loan originator 

compensation under an additive 

approach does not impose a significant 

compliance burden. As noted above, 

this calculation is straightforward for 

compensation paid by creditors to 

mortgage brokers: For each transaction, 

creditors typically pay a commission to 

mortgage brokers pursuant to a preexisting contract between the creditor 

and the broker, and that commission is 

known at the time the interest rate is set. 

For transactions in the wholesale 

channel, brokers and creditors can 

obviate double counting concerns by 

having consumers pay brokers 

directly.133 Under new comment 

32(b)(1)(ii)–5.i, the consumer’s payment 

to the mortgage broker would be 

included in points and fees only one 

time. For example, assume a consumer 

is seeking a $100,000 loan and wants to 

pay $2,500 in up-front charges at closing 

rather than paying those costs through 

a higher interest rate. The transaction is 

being originated through a mortgage 

broker firm, which charges $1,500. 

Under an additive approach, if the 

consumer pays $2,500 in origination 

charges to the creditor and the creditor 

pays $1,500 to the mortgage broker firm, 

the points and fees would be $4,000 and 

the loan could not be a qualified 

mortgage. However, if the consumer 

pays $1,500 directly to the mortgage 

broker firm and then pays $1,000 in 

origination charges to the creditor, then 

the points and fees would be $2,500 and 

would not prevent the loan from being 

a qualified mortgage. Moreover, if the 

consumer pays the mortgage broker 

directly, then the creditor would no 

longer be responsible for the cost of 

compensating the mortgage broker; as a 

result, the interest rate should be the 

same whether the consumer pays $1,500 

to the mortgage broker and $1,000 to the 

creditor or the consumer pays $2,500 to 

the creditor and the creditor pays $1,500 

to the mortgage broker. In light of the 

options that direct consumer payments 

provide in the wholesale channel, the 

Bureau believes that affordable credit 

will continue to be available in 

connection with wholesale loans and 

that use of adjustment authorities to 

achieve statutory purposes is not 

necessary. 

The Bureau is concerned that, as 

noted by the FDIC and HUD, by the 

OCC, and by some consumer advocate 

commenters, a netting rule in the 

wholesale channel could create 

incentives for mortgage brokers and 

creditors to structure transactions so 

that loan originator compensation is 

paid by the creditor to the mortgage 

broker, rather than by the consumer to 

the mortgage broker. Under a netting 

rule, creditors could impose origination 

charges on the consumer and net those 

charges against the compensation the 

creditor pays the mortgage broker when 

calculating points and fees. By contrast, 

in a transaction in which the consumer 

pays the mortgage broker directly, the 

consumer’s payment to the mortgage 

broker would be included in points and 

fees in addition to any origination 

charges imposed by the creditor. Thus, 

a netting rule likely would provide 

creditors with a greater ability to charge 

up-front fees and still remain under the 

points and fees limits.134 The Bureau 

believes it would be anomalous to treat 

wholesale transactions differently for 

purposes of the qualified mortgage and 

high-cost mortgage points and fees 

limits simply because in one transaction 

the consumer paid compensation 

directly to the mortgage broker and in 

another transaction the consumer paid 

the compensation indirectly. Such an 

anomaly would actually disserve the 

broad purposes of TILA to inform 

consumers because in the transaction 

that would be favored (i.e., the 

transaction in which the broker’s 

commission is bundled in the fees paid 

to the creditor or in the interest rate) the 

costs would be less transparent than in 

the disfavored transaction (i.e., the 

transaction in which the consumer paid 

the compensation directly to the 

broker). 

Finally, an additive approach would 

place some additional limits on the 

ability of mortgage brokers to obtain 

high compensation for loans that are 

more costly to consumers. As noted 

above, consumer advocates have 

identified two ways in which mortgage 

brokers potentially could extract high 

compensation for delivering loans that 

are more costly to consumers (and 

possibly more profitable for creditors) 

would not appear to violate the 

prohibitions on steering and 

compensating loan originators based on 

loan terms. First, mortgage brokers 

could specialize in providing creditors 

with loans that are more costly to 

consumers in exchange for high 

compensation, so long as that 

compensation does not vary based on 

the terms of individual loans. 

Second, mortgage brokers could do 

business with a mix of creditors, some 

offering more costly loans (and paying 

high compensation to mortgage brokers) 

and some offering loans with more 

favorable terms (and paying lower 

compensation to brokers). Mortgage 

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135Competitive market pressures and the 

difficulties of specializing in (or at least identifying 

and steering) vulnerable consumers may constrain 

mortgage brokers’ ability to exploit gaps in the 

regulatory structure. Nevertheless, the Bureau is 

concerned about the potential for consumer injury, 

particularly for consumers who are less 

sophisticated or less likely to shop for competitive 

terms. 

136The Bureau recognizes that an additive 

approach would not preclude creditors from paying 

mortgage brokers above-market compensation (up to 

the points and fees limits) and recovering the costs 

of compensating the mortgage brokers and other 

costs through an above-market interest rate. 

However, as consumer advocates noted in their 

comments, consumers may shop more effectively 

when comparing a single variable, such as the 

interest rate. 

137Moreover, to the extent that consumers prefer 

to pay up-front charges to reduce the interest rate, 

creditors may be able to exclude as many as two 

bona fide discount points under 

§ 1026.32(b)(1)(i)(E) or (F). 

brokers could attempt to steer borrowers 

that are less sophisticated and less 

likely to shop for better terms to the 

creditors with more costly loans, and 

they potentially could evade the antisteering prohibition by offering quotes 

from at least three such creditors.135 An 

additive approach likely would reduce 

the potential consumer injury by 

limiting the ability of creditors to 

impose high up-front charges and pay 

high loan originator compensation, 

unless creditors are willing to exceed 

the qualified mortgage points and fees 

limits and, potentially, to bear the 

burden of originating high-cost 

mortgages under HOEPA.136

The Bureau recognizes that an 

additive approach makes it more 

difficult for creditors to impose up-front 

charges and still remain under the 

qualified mortgage points and fees 

limits and the high-cost mortgage 

threshold. Commenters provided 

limited data regarding the magnitude of 

the effects of an additive approach. 

Nevertheless, even in transactions in 

which a mortgage broker’s 

compensation is two percentage points 

of the loan amount—which the Bureau 

understands to be at the high end of 

mortgage broker commissions—the 

creditor would still be able to charge up 

to one point in up-front charges that 

would count toward the qualified 

mortgage points and fees limits. As 

noted above, the creditor may reduce 

the costs it needs to recover from 

origination charges or through the 

interest rate by having the consumer pay 

the mortgage broker directly. In 

addition, creditors in the wholesale 

channel that prefer to originate only 

qualified mortgages in many cases will 

have the flexibility to recover more of 

their origination costs through the 

interest rate to ensure that their 

transactions remain below the points 

and fees limits.137

For the reasons discussed above, the 

Bureau believes that it is neither 

necessary nor appropriate to deviate 

from the additive approach prescribed 

by the statute and adopted in the 2013 

ATR Final Rule to calculate 

compensation paid by creditors to 

mortgage brokers. The Bureau believes 

that affordable credit will continue to be 

available in connection with loans in 

the wholesale channel and that use of 

adjustment authorities to achieve 

statutory purposes is not necessary and 

proper. As noted above, the Bureau 

believes that, to the extent that the 

additive approach limits the ability of 

mortgage brokers to steer consumers 

toward more costly loans, the additive 

approach is consistent with the 

statutory purposes. Accordingly, the 

Bureau concludes that it should not 

exercise its exception authority to alter 

the additive approach prescribed by the 

statute. Accordingly, as adopted by this 

final rule, comment 32(b)(1)(ii)–4.iii 

clarifies that, for loan originators that 

are not employees of the creditor, (i.e., 

mortgage brokers, as defined in 

§ 1026.36(a)(2)) loan originator 

compensation is included in points and 

fees in addition to any origination 

charges that are paid by the consumer 

to the creditor. 

As noted above, the term ‘‘mortgage 

broker’’ is defined in § 1026.36(a)(2) to 

mean any loan originator other than an 

employee of a creditor. The Bureau 

believes that the additive approach is 

appropriate for all mortgage brokers, 

including persons whose primary 

business is not originating mortgage 

loans but who nevertheless qualify as a 

‘‘mortgage broker’’ under 

§ 1026.36(a)(2). In general, calculating 

compensation paid by a consumer or 

creditor to such persons for loan 

origination activities should be 

straightforward and would impose little 

compliance burden. However, as 

discussed below, the Bureau intends to 

provide additional guidance for 

calculating loan originator 

compensation for manufactured home 

transactions. 

Loan originator compensation for 

open-end credit plans. For the high-cost 

mortgage points and fees threshold, the 

2013 HOEPA Final Rule applied the 

same requirements for including loan 

originator compensation in points and 

fees in open-end credit plans as for 

closed-end credit transactions. In the 

2013 ATR Proposed Rule, the Bureau 

solicited comment about whether 

different or additional guidance is 

appropriate for calculating loan 

originator compensation for open-end 

credit plans. The Bureau received few 

comments that addressed open-end 

credit plans, and they did not advocate 

for different or additional guidance. 

Accordingly, the Bureau believes that it 

is appropriate to continue to apply the 

same requirements for calculating loan 

originator compensation for points and 

fees in closed-end credit transactions 

and open-end credit plans. The Bureau 

is therefore revising § 1026.32(b)(2)(ii), 

which addresses loan originator 

compensation for open-end credit plans, 

to incorporate the same exclusions from 

points and fees as those discussed above 

for closed-end credit transactions in 

§ 1026.32(b)(1)(ii). The Bureau is not 

adopting additional guidance for openend credit plans. 

Calculation of loan originator 

compensation for manufactured home 

transactions. As noted above, several 

industry and nonprofit commenters 

requested clarification of what 

compensation must be included in 

points and fees in connection with 

transactions involving manufactured 

homes. They requested additional 

guidance on what activities would cause 

a manufactured home retailer and its 

employees to qualify as loan originators. 

The 2013 Loan Originator Final Rule 

had provided additional guidance on 

what activities would cause such a 

retailer and its employees to qualify as 

loan originators in light of language in 

the Dodd-Frank Act creating an 

exception from the definition of loan 

originator for employees of 

manufactured home retailers performing 

certain limited activities. See 

§ 1026.36(a)(1)(i)(B) and comments 

36(a)-1.i.A and 36(a)-4. The commenters 

nevertheless argued that it remains 

unclear what activities a retailer and its 

employees could engage in without 

qualifying as loan originators and 

causing their compensation to be 

included in points and fees. Industry 

commenters also noted that, because a 

creditor has limited knowledge of and 

control over the activities of a retailer 

and its employees, it would be difficult 

for a creditor to know whether a retailer 

and its employees had engaged in 

activities that would require their 

compensation to be included in points 

and fees. Industry commenters therefore 

urged the Bureau to adopt a bright-line 

rule that would exclude from points and 

fees compensation paid to manufactured 

home retailers and their employees. 

They also requested that the Bureau 

clarify that, in any event, compensation 

received by the manufactured home 

retailer or its employee for the sale of 

the home should not be counted as loan 

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138The Bureau notes that the general 3 percent 

points and fees limit applies only to qualified 

mortgages and would not restrict the loan originator 

compensation paid to mortgage brokers in mortgage 

transactions that are not qualified mortgages. 

originator compensation and included 

in points and fees. 

The Bureau does not believe it is 

appropriate to exclude compensation 

that is paid to a manufactured home 

retailer for loan origination activities. In 

such circumstances, the retailer is 

functioning as a mortgage broker and 

compensation for the retailer’s loan 

origination activities should be captured 

in points and fees. The Bureau 

recognizes, however, that it may be 

difficult for a creditor to ascertain 

whether a retailer engages in loan 

origination activities and, if so, what 

compensation that retailer receives for 

those activities, at least when such 

compensation was not paid directly by 

the creditor itself. Accordingly, the 

Bureau intends to propose additional 

guidance on these issues prior to the 

effective date of the 2013 ATR Final 

Rule to facilitate compliance. 

With respect to employees of 

manufactured home retailers, the 

Bureau believes that, in most 

circumstances, new 

§ 1026.32(b)(1)(ii)(B) will make it 

unnecessary for creditors to determine 

whether employees of retailers have 

engaged in loan origination activities 

that would cause them to qualify as loan 

originators. As discussed above, 

§ 1026.32(b)(1)(ii)(B) excludes 

compensation paid by mortgage brokers 

to their loan originator employees. In 

the usual case, when an employee of a 

retailer would qualify as a loan 

originator, the retailer would qualify as 

a mortgage broker. If the retailer is a 

mortgage broker, any compensation paid 

by the retailer to the employee would be 

excluded from points and fees under 

§ 1026.32(b)(1)(ii)(B). Nevertheless, as 

part of its proposal to provide additional 

guidance as noted above, the Bureau 

intends to request comment on whether 

additional guidance is necessary for 

calculating loan originator 

compensation for employees of 

manufactured home retailers. 

Other issues related to points and 

fees. As noted above, many commenters 

requested that the Bureau reconsider 

whether certain items should be 

included in points and fees. In 

particular, many commenters urged that 

real-estate related charges paid to 

affiliates and up-front charges imposed 

by creditors on consumers to recover the 

costs of LLPAs should not be included 

in points and fees. Commenters also 

asked the Bureau to permit the creditor 

to exclude more than two bona fide 

discount points from points and fees. 

The Bureau is not reconsidering its 

decision that, as provided in the statute, 

real-estate related charges paid to 

affiliates of the creditor are included in 

points and fees. The Bureau also 

declines to reconsider its decision that, 

where a creditor recovers the costs of 

LLPAs through up-front charges to the 

consumer, those charges are included in 

points and fees. Finally, the Bureau is 

not reconsidering its decision that, as 

provided in the statute, creditors may 

exclude no more than two bona fide 

discount points from points and fees. 

Many individual mortgage brokers 

and a trade group representing mortgage 

brokers urged the Bureau to reconsider 

certain restrictions on loan originator 

compensation in § 1026.36(d)(1) and (2), 

arguing that these restrictions are 

unnecessary because the points and fees 

limits for qualified mortgages effectively 

cap loan origination compensation at 3 

percent of the loan amount.138 The 2013 

Loan Originator Final Rule clarified and 

expanded § 1026.36(d)(1) and (2), and 

the Bureau declines to revisit those 

provisions in this rulemaking. 

Section 1026.35 Prohibited Acts or 

Practices in Connection With HigherPriced Mortgage Loans 

35(b) Escrow Accounts 

35(b)(2) Exemptions 

35(b)(2)(iii) 

As discussed further below, the 

Bureau proposed § 1026.43(e)(5) to 

create a new type of qualified mortgage 

for certain portfolio loans originated and 

held by small creditors. The Bureau 

proposed to adopt the same parameters 

defining small creditor for purposes of 

the new category of qualified mortgage 

as it had used in implementing 

provisions of the Dodd-Frank Act that 

allow certain balloon loans to receive 

qualified mortgage status and an 

exemption from the requirement to 

maintain an escrow accounts for certain 

higher priced mortgage loans where 

such loans are made by small creditors 

operating predominantly in rural or 

underserved areas. The size thresholds 

for purposes of the rural balloon and 

escrow provisions are set forth in 

§ 1026.35(b)(2)(iii), as adopted by the 

2013 Escrows Final Rule, which 

provides that an escrow account need 

not be established in connection with a 

mortgage if the creditor, within 

applicable time periods, annually 

extends more than 50 percent of its 

covered first-lien transactions on 

properties that are located in rural or 

underserved counties, originates (with 

its affiliates) 500 or fewer first-lien 

covered transactions per year, and has 

total assets of less than $2 billion 

(adjusted annually for inflation), in 

addition to other escrow account 

limitations. 

The Bureau did not propose to make 

any specific amendments to the escrows 

provision in § 1026.35(b)(2), but 

indicated that if the provisions creating 

a new type of small creditor portfolio 

qualified mortgage in proposed 

§ 1026.43(e)(5) were adopted with 

changes inconsistent with 

§ 1026.35(b)(2), the Bureau would 

consider and might adopt parallel 

amendments to § 1026.35(b)(2) to keep 

these sections of the regulation 

consistent. 

The Bureau solicited comment on the 

advantages and disadvantages of 

maintaining consistency between 

§ 1026.35(b)(2) and § 1026.43(e)(5). 

Commenters did not specifically 

address the importance of consistency. 

However, several small creditors and a 

small creditor trade group raised 

concerns regarding the cost and burden 

associated with the escrow requirements 

and urged the Bureau to expand or 

adopt exceptions to those requirements. 

For example, commenters suggested 

broadening the § 1026.35(b)(2)(iii) 

exemption and exempting home 

improvement loans and loans secured 

by mobile homes. 

As discussed below in the section-bysection analysis of § 1026.43(e)(5), the 

Bureau is adopting § 1026.43(e)(5) 

consistent with existing § 1026.35(b)(2) 

with regard to the asset size and annual 

loan origination thresholds defining a 

small creditor. The Bureau did not 

propose and did not solicit comment 

regarding other amendments to the 

escrow provisions in § 1026.35(b)(2). 

The Bureau therefore is not 

reconsidering the issues raised by 

commenters at this time and is not 

adopting any changes to § 1026.35(b)(2) 

in this rulemaking. 

Section 1026.43 Minimum Standards 

for Transactions Secured by a Dwelling 

43(a) Scope 

43(a)(3) 

Background 

Section 129C(a)(1) of TILA, as added 

by section 1411 of the Dodd-Frank Act, 

states that, in accordance with 

regulations prescribed by the Bureau, no 

creditor may make a residential 

mortgage loan unless the creditor makes 

a reasonable and good faith 

determination based on verified and 

documented information that, at the 

time the loan is consummated, the 

consumer has a reasonable ability to 

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35460 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

repay the loan, according to its terms, 

and all applicable taxes, insurance 

(including mortgage guarantee 

insurance), and assessments. Section 

1401 of the Dodd-Frank Act adds new 

TILA section 103(cc)(5), which defines 

‘‘residential mortgage loan’’ to mean, 

with some exceptions, any consumer 

credit transaction secured by a 

mortgage, deed of trust, or other 

equivalent consensual security interest 

on ‘‘a dwelling or on residential real 

property that includes a dwelling.’’ 

TILA section 103(v) defines ‘‘dwelling’’ 

to mean a residential structure or mobile 

home which contains one- to fourfamily housing units, or individual 

units of condominiums or cooperatives. 

Thus, a ‘‘residential mortgage loan’’ 

generally includes all mortgage loans, 

except mortgage loans secured by a 

structure with more than four 

residential units. However, TILA section 

103(cc)(5) specifically excludes from the 

term ‘‘residential mortgage loan’’ an 

open-end credit plan and an extension 

of credit secured by an interest in a 

timeshare plan, for purposes of the 

ability-to-repay requirements under 

TILA section 129C as well as provisions 

concerning prepayment penalties and 

other restrictions. In addition, TILA 

section 129C(a)(8) exempts reverse 

mortgages and temporary or ‘‘bridge’’ 

loans with a term of 12 months or less 

from the ability-to-repay requirements. 

Thus, taken together, the ability-torepay requirements of TILA section 

129C(a) apply to all closed-end 

mortgage loans secured by a one- to 

four-unit dwelling, except loans secured 

by a consumer’s interest in a timeshare 

plan, reverse mortgages, or temporary or 

‘‘bridge’’ loans with a term of 12 months 

or less. 

The Bureau’s 2013 ATR Final Rule 

adopted provisions on scope that are 

substantially similar to the statute, 

which included modifications to 

conform to the terminology of 

Regulation Z. However, feedback 

provided to the Bureau suggested that 

the ability-to-repay requirements would 

impose an unsustainable burden on 

certain creditors, such as housing 

finance agencies (HFAs) and certain 

nonprofit organizations, offering 

mortgage loan programs for low- to 

moderate-income (LMI) consumers. The 

Bureau was concerned that the abilityto-repay requirements adopted in the 

2013 ATR Final Rule would undermine 

or frustrate application of the uniquely 

tailored underwriting requirements 

employed by these creditors and 

programs, and would require a 

significant diversion of resources to 

compliance, thereby significantly 

reducing access to credit. The Bureau 

was also concerned that some of these 

creditors would not have the resources 

to implement and comply with the 

ability-to-repay requirements, and may 

have ceased or severely limited 

extending credit to low- to moderateincome consumers, which would result 

in the denial of responsible, affordable 

mortgage credit. In addition, the Bureau 

was concerned that the ability-to-repay 

requirements may have frustrated the 

purposes of certain homeownership 

stabilization and foreclosure prevention 

programs, such as Hardest-Hit-Fund 

(HHF) programs and the Home 

Affordable Refinance Program (HARP). 

Accordingly, the Bureau proposed 

several exemptions intended to ensure 

that responsible, affordable mortgage 

credit remained available for LMI and 

financially distressed consumers. 

43(a)(3)(iv) 

The Bureau’s Proposal 

As discussed above, neither TILA nor 

Regulation Z provide an exemption to 

the ability-to-repay requirements for 

extensions of credit made pursuant to a 

program administered by a Housing 

Finance Agency (HFA), as defined 

under 24 CFR 266.5. However, the 

Bureau was concerned that the abilityto-repay requirements may 

unnecessarily impose additional 

requirements onto the underwriting 

requirements of HFA programs and 

impede access to credit available under 

these programs. The Bureau was 

especially concerned that the costs of 

implementing and complying with the 

requirements of § 1026.43(c) through (f) 

would endanger the viability and 

effectiveness of these programs. The 

Bureau was concerned that the burden 

could prompt some HFAs to severely 

curtail their programs and some private 

creditors that partner with HFAs to 

cease participation in such programs, 

both of which could reduce mortgage 

credit available to LMI consumers. The 

Bureau was also concerned that the 

ability-to-repay requirements may affect 

the ability of HFAs to apply customized 

underwriting criteria or offer 

customized credit products that are 

designed to meet the needs of LMI 

consumers while promoting long-term 

housing stability. 

Based on these concerns and to obtain 

additional information regarding these 

potential effects, the Bureau proposed 

an exemption and solicited feedback on 

several issues. Proposed 

§ 1026.43(a)(3)(iv) would have provided 

an exemption to the ability-to-repay 

requirements for credit extended 

pursuant to a program administered by 

an HFA. The Bureau solicited comment 

on every aspect of this approach. In 

particular, the Bureau sought comment 

on the premise that the ability-to-repay 

requirements could impose significant 

implementation and compliance 

burdens on HFA programs even if credit 

extended under the HFA programs were 

granted a presumption of compliance as 

qualified mortgages. The Bureau also 

sought comment on whether HFAs have 

sufficiently rigorous underwriting 

standards and monitoring processes to 

protect the interests of consumers in the 

absence of TILA’s ability-to-repay 

requirements. The Bureau also 

requested data related to the 

delinquency, default, and foreclosure 

rates of consumers participating in these 

programs. In addition, the Bureau 

solicited feedback regarding whether 

such an exemption could harm 

consumers, such as by denying 

consumers the ability to pursue claims 

arising under violations of § 1026.43(c) 

through (f) against creditors extending 

credit in connection with these 

programs. Finally, the Bureau also 

requested feedback on any alternative 

approaches that would preserve the 

availability of credit under HFA 

programs while ensuring that 

consumers receive mortgage loans that 

reasonably reflect consumers’ ability to 

repay. 

Comments Received 

In response to the proposed rule, 

some commenters completely opposed 

the proposed exemption from the 

ability-to-repay requirements for 

extensions of credit made pursuant to 

programs administered by HFAs. These 

commenters generally argued that the 

rules should apply equally to all 

creditors. These commenters contended 

that granting exemptions to certain 

creditors would create market 

distortions and steer consumers towards 

certain creditors, thereby reducing 

consumer choice and ability to shop. 

Other commenters suggested alternative 

modifications to address HFA programs. 

One industry commenter favored 

creating special ability-to-repay 

requirements tailored to the unique 

underwriting characteristics of LMI 

consumers. Another industry 

commenter supported some type of 

exemption from the ability-to-repay 

requirements but advocated for 

conditions or the provision of authority 

to HFAs to impose their own ability-torepay standards, as various Federal 

agencies (the Department of Housing 

and Urban Development, the 

Department of Veterans Affairs, and the 

Department of Agriculture), are 

authorized to do. The majority of 

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139For example, as of September 30, 2012, just 

3.7 percent of SONYMA’s single-family borrowers 

were 60 or more days delinquent, compared with 

10.9 percent of all borrowers. Data from the 

Pennsylvania Housing Finance Agency show that 

for the third quarter of 2012, its conventional loans 

had 90-plus day delinquency and foreclosure rates 

of 2.98 percent and .99 percent, respectively, which 

are well below the equivalent rates for all 

conventional loans in the State of Pennsylvania. 

Data from the Massachusetts Housing Partnership’s 

SoftSecond Program show that the foreclosure rate 

for program loans is substantially lower than the 

rate for prime loans in the State of Massachusetts 

(0.87 percent for SoftSecond loans as compared to 

1.72 percent for prime loans). FHA-insured loans 

purchased by the Connecticut Housing Finance 

Agency have lower foreclosure rates than 

comparable FHA loans in the northeast, and loans 

financed by the Delaware State Housing Authority 

and serviced by U.S. Bank have a 60 days or more 

delinquency rate of just over 2 percent, compared 

with a national 60 days or more rate of 8.3 percent. 

Finally, Virginia Housing Development Authority 

loan foreclosure rates on FHA and conventional 

loans both fall under 1 percent. This is 3.2 

percentage points under the national FHA 

foreclosure rate and 2.5 percentage points lower 

than the national foreclosure rate for conventional 

loans in New York State, according to the Mortgage 

Bankers Association. Prior to the recent mortgage 

crisis, SONYMA’s 60-plus day default rate had 

never exceeded 2 percent. 

industry and consumer group 

commenters, however, asserted that the 

proposed exemption to the ability-torepay requirements for credit extended 

pursuant to a program administered by 

an HFA is necessary because these 

programs meet the customized needs of 

LMI consumers who are creditworthy 

but may not otherwise qualify for 

mortgage credit under the Bureau’s 

ability-to-repay requirements. 

The latter group of commenters 

generally supported the Bureau’s goal of 

preserving access to affordable credit for 

LMI consumers and favored the 

Bureau’s proposal to exempt 

community-focused lending programs 

from the ATR requirements altogether. 

These commenters contended that HFA 

loan products balance access to 

residential mortgage credit for LMI 

consumers with a focus on the 

consumer’s ability to repay. Consumer 

group commenters argued that HFA 

lending programs typically offer lowcost mortgage products, require full 

documentation of income and 

demonstrated ability to repay, and often 

include extensive financial counseling 

with the consumer. Commenters argued 

that HFA homeowner assistance 

programs are tailored to the credit 

characteristics of LMI consumers that 

HFAs serve and noted that these 

organizations only extend credit after 

conducting their own lengthy and 

thorough analysis of an applicant’s 

ability to repay, which often account for 

nontraditional underwriting criteria, 

income sources that do not fall within 

typical mortgage underwriting criteria, 

extenuating circumstances, and other 

subjective factors that are indicative of 

responsible homeownership and ability 

to repay. An industry commenter noted 

that, for first-time homebuyer lending, 

HFAs use a combination of low-cost 

financing and traditional fixed-rate, 

long-term products; flexible, but 

prudent, underwriting with careful 

credit evaluation; diligent loan 

documentation and income verification; 

down payment and closing cost 

assistance; homeownership counseling; 

and proactive counseling and servicing. 

This commenter stated that many HFAs 

elaborate beyond the underwriting 

standards of Federal government 

agencies, such as FHA, USDA, or RHS 

loans, and that HFAs also oversee 

creditors involved in these programs 

carefully by ensuring the HFA’s strict 

underwriting standards and lending 

requirements are followed. Comments 

provided to the Bureau state that a New 

York State HFA considers the 

consumer’s entire credit history rather 

than consider only a consumer’s credit 

score, which allows it to help those 

consumers who may have a lower credit 

score due to a prior financial hardship. 

Whereas creditors do not need to engage 

in separate verification where a 

consumer’s application lists a debt that 

is not apparent from the consumer’s 

credit report pursuant to § 1026.43(c), 

comments provided to the Bureau also 

state that the Pennsylvania Housing 

Finance Agency’s underwriting 

standards require that the creditor 

provide a separate verification of that 

obligation, indicating the current 

balance, the monthly payment, and the 

payment history of the account. 

Commenters also provided data 

related to the relative performance of 

HFA loans as further justification to 

support the proposed exemption from 

the ability-to-repay requirements for 

extensions of credit made pursuant to a 

program administered by a HFA. 

Although comprehensive data for HFA 

loan performance are not available, 

commenters reported that the 

delinquency, default, and foreclosure 

statistics for consumers who receive 

mortgage loans from HFA programs are 

generally lower than for those of the 

general populace, which demonstrates 

that HFA programs ensure that 

consumers are extended credit on 

reasonably repayable terms.139

Commenters reported that a limited 

review of HFA loan data conducted by 

Fannie Mae in 2011 found that HFAfinanced loans performed significantly 

better than other Fannie Mae affordable 

housing loans. Also, comments cited a 

2011 National Council of State Housing 

Agencies (NCSHA) study of HFAfinanced and non-HFA-financed loans 

insured by FHA that found that, in a 

large majority of States, HFA-financed 

loans had lower long-term delinquency 

and foreclosure rates than non-HFA 

loans. 

A number of commenters argued that, 

in the absence of an exemption, HFA 

homeowner assistance programs would 

not be able to continue to meet the 

needs of LMI consumers or distressed 

borrowers as intended. Commenters 

generally stated that requiring HFAs to 

comply with the ability-to-repay 

requirements would be unduly 

burdensome and would have a negative 

impact on their ability to offer 

consumers loan products that fit their 

unique needs, thereby endangering the 

viability and effectiveness of these 

programs. Commenters also argued that 

HFAs, which are governmental entities 

chartered by either a State or a 

municipality and are taxpayersupported, may not have sufficient 

resources to implement and comply 

with the ability-to-repay requirements. 

According to commenters, some HFAs 

may respond to the burden by severely 

curtailing the credit offered under these 

programs and others may divert 

resources from lending to compliance, 

which may also reduce access to credit 

for LMI consumers. 

Commenters noted that, because most 

HFAs operate in partnership with 

private creditors who participate 

voluntarily in HFA programs, the 

Bureau’s proposed HFA exemption 

would help encourage eligible creditors 

to continue making loans that might not 

otherwise be originated due to 

constraints under, or concerns about, 

the Bureau’s ability-to-repay 

requirements. Commenters argued that 

the ability-to-repay requirements would 

impose significant implementation and 

compliance burdens on participating 

private creditors, and this would likely 

discourage creditors from participating 

in HFA programs and would result in 

the denial of mortgage credit to LMI 

consumers. 

A number of industry commenters 

argued that the proposed exemption 

from the ability-to-repay requirements is 

in the best interests of consumers and 

the nation as a whole, as the exemption 

will allow homeowners to remain in 

their homes and help stabilize 

communities that were harmed by the 

mortgage crisis and limit the degree to 

which future LMI consumers have 

difficulty obtaining access to credit. 

Creditors also generally supported 

clarifying that the exemption applies 

regardless of whether the credit is 

extended directly by an HFA to the 

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35462 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

consumer or through an intermediary 

that is operating pursuant to a program 

administered by an HFA, and to include 

all HFA programs regardless of structure 

(e.g., mortgage revenue bonds or 

mortgage credit certificates). 

The Final Rule 

Based on these comments and 

considerations, the Bureau believes that 

it is appropriate to exempt credit 

extended pursuant to an HFA program 

from the ability-to-repay requirements. 

The comments received confirm that 

HFA programs generally employ 

underwriting requirements that are 

uniquely tailored to meet the needs of 

LMI consumers, such that applying the 

more generalized statutory ability-torepay requirements would provide little 

or no net benefit to consumers and 

instead could be unnecessarily 

burdensome by diverting the focus of 

HFAs and their private creditor partners 

from mission activities to managing 

compliance and legal risk from two 

overlapping sets of underwriting 

requirements. The Bureau is concerned 

that absent an exemption, this diversion 

of resources would significantly reduce 

access to responsible mortgage credit for 

many LMI borrowers. 

As discussed above in part II.A, many 

HFAs expand on the underwriting 

standards of GSEs or Federal 

government agencies by applying even 

stricter underwriting standards than 

these guidelines, such as requiring 

mandatory counseling for all first-time 

homebuyers and strong loan servicing. 

As HFAs extend credit to promote longterm housing stability, rather than for 

profit, HFAs generally extend credit 

after performing a complex and lengthy 

analysis of a consumer’s ability to repay. 

As also discussed above in part II.A, the 

Bureau finds that, as compared to 

traditional underwriting criteria, under 

which LMI borrowers may be less likely 

to qualify for credit, the underwriting 

standards of some HFAs allow greater 

weight for (and sometimes require) the 

consideration of nontraditional 

underwriting elements, extenuating 

circumstances, and other subjective 

compensating factors that are indicative 

of responsible homeownership. The 

Bureau notes, however, that HFAs do 

conduct regular and careful oversight of 

their lenders, helping ensure that they 

follow the HFAs’ strict underwriting 

standards. 

The Bureau is concerned that HFAs, 

which are governmental entities and 

taxpayer-supported, may not have 

sufficient resources to implement and 

comply with the ability-to-repay 

requirements, or that the additional 

compliance burdens would at least 

significantly reduce the resources 

available to HFAs for the purpose of 

providing homeowner assistance. As 

discussed above in part II.A, many of 

the State and Federal programs that 

HFAs administer do not provide 

administrative funds; others provide 

limited administrative funds. Most 

HFAs operate independently and do not 

receive State operating funds. 

Consequently, HFAs may not have 

enough resources to increase 

compliance efforts without negatively 

impacting their missions. In the absence 

of an exemption from the ability-torepay requirements, HFAs would have 

to dedicate substantially more time and 

resources to ensure their programs and 

lending partners are in compliance. 

Moreover, because many HFAs must 

conduct their programs through 

partnerships with private creditors, the 

Bureau is concerned that absent an 

exemption private creditor volunteers 

would determine that complying with 

both the ability-to-repay requirements 

and the specialized HFA program 

requirements is too burdensome or the 

liability risks too great. For example, 

needing to comply with both the HFA 

underwriting requirements that often 

account for (and sometimes require the 

consideration of) nontraditional 

underwriting criteria, extenuating 

circumstances, and compensating 

factors, as discussed above in part II.A, 

and the ability-to-repay requirements 

may cause some private creditors to 

cease participation in such programs. 

This too would reduce access to 

mortgage credit to LMI consumers. 

With respect to the comment 

suggesting that a better approach would 

be to allow HFAs to establish their own 

ability-to-repay and qualified mortgage 

guidelines, the Bureau notes that 

Congress has the authority to determine 

which agencies and programs have the 

authority under TILA to prescribe rules 

related to the ability-to-repay 

requirements or the definition of 

qualified mortgage. The Bureau is 

mindful that Congress has not 

authorized HFAs to prescribe rules 

related to the ability-to-repay 

requirements or the definition of 

qualified mortgage. 

Regarding the comment favoring the 

creation of special ability-to-repay 

requirements tailored to the unique 

underwriting characteristics of LMI 

consumers, the Bureau does not believe 

it is appropriate to establish alternative 

conditions. HFA programs have strong 

but flexible ability-to-repay 

requirements tailored to the unique 

needs and credit characteristics of the 

LMI consumers they serve. The Bureau 

is concerned that imposing uniform 

alternative requirements by regulation 

would curtail this flexibility and 

ultimately reduce access to responsible 

and affordable credit for this 

population. 

No commenters addressed whether 

credit extended pursuant to a program 

administered by an HFA should be 

granted a presumption of compliance as 

qualified mortgages, and, if so, under 

what conditions. However, the Bureau 

does not believe that extending 

qualified mortgage status to these loans 

would be as effective in addressing the 

concerns raised above as an exemption. 

Even if credit extended under the HFA 

programs were granted a presumption of 

compliance as qualified mortgages, HFA 

programs could be impacted by 

significant implementation and 

compliance burdens. Furthermore, as 

discussed above, many loans extended 

under these programs would not appear 

to satisfy the qualified mortgage 

standards under § 1026.43(e)(2). Thus, a 

creditor extending such a mortgage loan 

would still be required to comply with 

the ability-to-repay requirements of 

§ 1026.43(c) and the potential liability of 

noncompliance would cease or severely 

curtail mortgage lending. 

The Bureau received a number of 

comments completely opposed to the 

proposed exemptions from the abilityto-repay requirements on the grounds 

that the rules should apply equally to all 

creditors. However, pursuant to section 

105(a) of TILA, the Bureau generally 

may prescribe regulations that 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, among 

other things. In addition, pursuant to 

TILA section 105(f) the Bureau may 

exempt by regulation from all or part of 

this title all or any class of transactions 

for which in the determination of the 

Bureau coverage does not provide a 

meaningful benefit to consumers in the 

form of useful information or protection, 

if certain conditions specified in that 

section are met. For the reasons 

discussed in each relevant section, the 

Bureau believes that the exemptions 

adopted in this final rule are necessary 

and proper to effectuate the purposes of 

TILA, which include purposes of 

section 129C, by ensuring that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay. 

Furthermore, without the exemptions 

the Bureau believes that consumers in 

these demographics are at risk of being 

denied access to the responsible, 

affordable credit offered under these 

programs, which is contrary to the 

purposes of TILA. 

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Accordingly, the Bureau believes that 

the proposed exemption for credit made 

pursuant to programs administered by 

an HFA is appropriate under the 

circumstances. The Bureau believes that 

consumers who receive extensions of 

credit made pursuant to a program 

administered by an HFA do so after a 

determination of ability to repay using 

specially tailored criteria. The 

exemption adopted by the Bureau is 

limited to creditors or transactions with 

certain characteristics and qualifications 

that ensure consumers are offered 

responsible, affordable credit on 

reasonably repayable terms. The Bureau 

thus finds that coverage under the 

ability-to-repay requirements provides 

little if any meaningful benefit to 

consumers in the form of useful 

protection, given the nature of the credit 

extended through HFAs. At the same 

time, the Bureau is concerned that the 

narrow class of creditors subject to the 

exemption may either cease or severely 

curtail mortgage lending if the ability-torepay requirements are applied to their 

transactions, resulting in a denial of 

access to credit. Accordingly, the 

Bureau is adopting § 1026.43(a)(3)(iv) as 

proposed, which provides that an 

extension of credit made pursuant to a 

program administered by an HFA, as 

defined under 24 CFR 266.5, is exempt 

from § 1026.43(c) through (f). 

The Bureau is adopting new comment 

43(a)(3)(iv)–1 to provide additional 

clarification which will facilitate 

compliance. As discussed above, the 

Bureau understands that most HFA 

programs are ‘‘mortgage purchase’’ 

programs in which the HFA establishes 

program requirements (e.g., income 

limits, purchase price limits, interest 

rates, points and term limits, 

underwriting standards, etc.), and agrees 

to purchase loans made by private 

creditors that meet these requirements. 

As a result, the success of these 

programs in large part depends upon the 

participation of private creditors. The 

Bureau intended the exemption to apply 

to both extensions of credit by HFAs 

and extensions of credit by private 

creditors under a mortgage purchase or 

similar HFA program. The comment 

clarifies that both extensions of credit 

made by HFAs directly to consumers as 

well as extensions of credit made by 

other creditors pursuant to a program 

administered by an HFA are exempt 

from the requirements of § 1026.43(c) 

through (f). In addition, as discussed 

above in part II.A, the Bureau 

understands that HFAs are generally 

funded through tax-exempt bonds (also 

known as mortgage revenue bonds), but 

may receive other types of funding, 

including funding through Federal 

programs such as the HOME Program, 

which is the largest Federal block grant 

for affordable housing. The Bureau 

intended the exemption to apply to 

extensions of credit made pursuant to a 

program administered by an HFA, 

regardless of the funding source. The 

comment clarifies that the creditor is 

exempt from the requirements of 

§ 1026.43(c) through (f) regardless of 

whether the program administered by 

an HFA receives funding from Federal, 

State, or other sources. 

Section 1026.43(a)(3)(iv) is adopted 

pursuant to the Bureau’s authority 

under section 105(a) and (f) of TILA. 

Pursuant to section 105(a) of TILA, the 

Bureau generally may prescribe 

regulations that 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, among 

other things. For the reasons discussed 

in more detail above, the Bureau 

believes that this exemption is 

necessary and proper to effectuate the 

purposes of TILA, which include 

purposes of section 129C, by ensuring 

that consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay. 

The Bureau believes that mortgage loans 

originated pursuant to programs 

administered by HFAs sufficiently 

account for a consumer’s ability to 

repay, and the exemption ensures that 

consumers are able to receive assistance 

under these programs. Furthermore, 

without the exemption the Bureau 

believes that consumers in this 

demographic are at risk of being denied 

access to the responsible, affordable 

credit offered under these programs, 

which is contrary to the purposes of 

TILA. This exemption is consistent with 

the findings of TILA section 129C by 

ensuring that consumers are able to 

obtain responsible, affordable credit 

from the creditors discussed above. 

The Bureau has considered the factors 

in TILA section 105(f) and believes that, 

for the reasons discussed above, an 

exemption is appropriate under that 

provision. Pursuant to TILA section 

105(f) the Bureau may exempt by 

regulation from all or part of this title all 

or any class of transactions for which in 

the determination of the Bureau 

coverage does not provide a meaningful 

benefit to consumers in the form of 

useful information or protection. In 

determining which classes of 

transactions to exempt the Bureau must 

consider certain statutory factors. For 

the reasons discussed above, the Bureau 

exempts an extension of credit made 

pursuant to a program administered by 

an HFA because coverage under the 

ability-to-repay regulations does not 

provide a meaningful benefit to 

consumers in the form of useful 

protection in light of the nature of the 

credit extended through HFAs. 

Consistent with its rationale in the 

proposed rule, the Bureau believes that 

the exemption is appropriate for all 

affected consumers to which the 

exemption would apply, regardless of 

their other financial arrangements, 

financial sophistication, or the 

importance of the loan to them. 

Similarly, the Bureau believes that the 

exemption is appropriate for all affected 

loans covered under the exemption, 

regardless of the amount of the loan and 

whether the loan is secured by the 

principal residence of the consumer. 

Furthermore, the Bureau believes that, 

on balance, the exemption will simplify 

the credit process without undermining 

the goal of consumer protection, 

denying important benefits to 

consumers, or increasing the expense of 

the credit process. Based on these 

considerations and the analysis 

discussed elsewhere in this final rule, 

the Bureau believes that the exemptions 

are appropriate. Therefore all credit 

extended through the Housing Finance 

Agencies is subject to the exemption. 

43(a)(3)(v) 

Background 

As discussed above, neither TILA nor 

Regulation Z provides an exemption to 

the ability-to-repay requirements for 

creditors, such as nonprofits, that 

primarily engage in community 

development lending. However, 

feedback provided to the Bureau 

suggested that the ability-to-repay 

requirements might impose an 

unsustainable burden on certain 

creditors offering mortgage loan 

programs for LMI consumers. The 

Bureau was concerned that these 

creditors would not have the resources 

to implement and comply with the 

ability-to-repay requirements, and 

would have ceased or severely limited 

extending credit to LMI consumers, 

which would result in the unavailability 

of responsible, affordable mortgage 

credit. Accordingly, the Bureau 

proposed several exemptions intended 

to ensure that responsible, affordable 

mortgage credit remained available for 

LMI consumers. 

Credit Extended by CDFIs, CHDOs, and 

DAPs 

The Bureau’s proposal. The Bureau 

proposed to exempt from the ability-torepay requirements several types of 

creditors that focus on extending credit 

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35464 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

140 24 CFR 200.194(d) provides that HUD 

certification as an approved nonprofit expires after 

two years, and nonprofits must reapply for approval 

prior to the expiration of the two year period. Also, 

on February 4, 2013 the CDFI Fund required 

recertification of most CDFIs. See http:// 

www.cdfifund.gov/news_events/CDFI-2013-06-

CDFI_Fund_Releases_Mandatory_

Recertification_Guidelines_for_CDFIs.asp. 

to LMI consumers. Proposed 

§ 1026.43(a)(3)(v)(A) would have 

exempted an extension of credit made 

by a creditor designated as a 

Community Development Financial 

Institution (CDFI), as defined under 12 

CFR 1805.104(h). Proposed 

§ 1026.43(a)(3)(v)(B) would have 

exempted an extension of credit made 

by a creditor designated as a 

Downpayment Assistance Provider of 

Secondary Financing (DAP) operating in 

accordance with regulations prescribed 

by the U.S. Department of Housing and 

Urban Development applicable to such 

persons. Proposed § 1026.43(a)(3)(v)(C) 

would have exempted an extension of 

credit made by a creditor designated as 

a Community Housing Development 

Organization (CHDO), as defined under 

24 CFR 92.2, operating in accordance 

with regulations prescribed by the U.S. 

Department of Housing and Urban 

Development applicable to such 

persons. The Bureau requested feedback 

regarding whether the requirements 

imposed in connection with obtaining 

and maintaining these designations 

were sufficient to ensure that such 

creditors provide consumers with 

responsible and affordable credit, and 

regarding whether unscrupulous or 

irresponsible creditors would be able to 

use these designations to evade the 

requirements of TILA, extend credit 

without regard to the consumer’s ability 

to repay, or otherwise harm consumers. 

Comments received. The Bureau 

received many comments addressing the 

proposed exemptions for creditors 

designated as a CDFI, CHDO, or DAP. A 

large number of industry commenters 

completely opposed the proposed 

exemptions. These commenters 

generally argued that the rules should 

apply equally to all creditors. However, 

many industry and consumer advocate 

commenters supported the proposed 

exemptions. Twenty-five commenters 

supported the proposed exemption for 

creditors designated as CDFIs. Also, in 

response to the Bureau’s request for 

feedback, several commenters provided 

data related to CDFI underwriting 

requirements and loan performance. 

Some commenters specifically 

discussed and supported the proposed 

exemption for CHDOs. While several 

commenters supported the proposed 

exemption for DAPs, the Bureau 

received no specific feedback related to 

these creditors. A few commenters 

asked the Bureau to consider 

exemptions for other types of 

designations or lending programs. For 

example, a few commenters requested 

that the Bureau provide a similar 

exemption for creditors that are 

chartered members of the 

NeighborWorks Network, while other 

commenters requested an exemption for 

creditors approved as Counseling 

Intermediaries by HUD. 

The Bureau received feedback from 

several industry commenters requesting 

that the Bureau provide an exemption 

for credit unions designated as lowincome credit unions (LICUs) by the 

National Credit Union Administration 

(NCUA). These commenters explained 

that the NCUA’s LICU designation is 

similar to the Treasury Department’s 

CDFI designation. However, these 

commenters stated that most credit 

unions choose to obtain the LICU 

designation instead of the CDFI 

designation. Some commenters 

suggested that many credit unions are 

not eligible for CDFI status. 

The final rule. The Bureau is adopting 

the exemptions in a form that is 

substantially similar to the version 

proposed. For the reasons discussed 

below, the Bureau has concluded that a 

creditor designated as a CDFI or DAP 

should be exempt from the ability-torepay requirements, provided these 

creditors meet certain other applicable 

requirements. As comments confirmed, 

creditors seeking these designations 

must undergo a screening process 

related to the ability of applicants to 

provide affordable, responsible credit to 

obtain the designation and must operate 

in accordance with the requirements of 

these programs, including periodic 

recertification.140 Comments provided 

to the Bureau also confirmed that the 

ability-to-repay requirements generally 

differ from the unique underwriting 

criteria which are related to the 

characteristics of the consumers served 

by these creditors. The ability-to-repay 

requirements primarily consist of 

quantitative underwriting 

considerations, such as an analysis of 

the consumer’s debt-to-income ratio. In 

contrast, as discussed in part II.A above, 

the Bureau understands that creditors 

with these designations typically engage 

in a lengthy underwriting process that is 

specifically tailored to the needs of 

these consumers by incorporating a 

variety of compensating factors. Also, 

although market-wide data is not 

available for the delinquency rates of 

credit extended by CHDOs, comments 

provided to the Bureau related to CDFI 

loan performance reflect the low default 

levels associated with these creditors’ 

programs, which strongly suggest that 

consumers are extended credit on 

reasonably repayable terms. Finally, 

commenters confirmed that these 

creditors serve consumers that have 

difficulty obtaining responsible and 

affordable credit, and that the burdens 

imposed by the ability-to-repay 

requirements would significantly impair 

the ability of these creditors to continue 

serving this market. Taken together, this 

feedback demonstrates that creditors 

with these designations provide 

residential mortgage loans on 

reasonably repayable terms, that these 

exemptions are necessary and proper to 

ensure that responsible, affordable 

mortgage credit remains available to 

consumers served by these creditors, 

and that the government approval and 

oversight associated with these 

designations ensures that there is little 

risk that consumers would be subject to 

abusive lending practices. Thus, the 

Bureau has determined that it is 

appropriate to adopt 

§ 1026.43(a)(3)(v)(A) and (B) as 

proposed. 

The Bureau has also concluded that a 

creditor designated as a CHDO should 

be exempt from the ability-to-repay 

requirements. Comments illustrated 

that, like CDFIs and DAPs, CHDOs 

generally extend credit on reasonably 

repayable terms and ensure that LMI 

consumers have access to responsible, 

affordable mortgage credit. However, 

HUD provided comments to the Bureau 

suggesting that the exemption be 

narrowed. A person may obtain a CHDO 

designation for reasons unrelated to 

residential mortgage lending, such as to 

acquire tax credits to assist in the 

development of affordable rental 

properties. The Bureau believes that it is 

appropriate to narrow the exemption to 

only those persons that obtain the 

CHDO designation for purposes of 

residential mortgage lending. A person 

seeking CHDO status to engage in 

residential mortgage lending must enter 

into a commitment with the 

participating jurisdiction developing the 

project under the HOME Program. The 

Bureau also believes that providing 

specific citations to the relevant 

regulations prescribed by HUD would 

facilitate compliance. Thus, the Bureau 

is adopting § 1026.43(a)(3)(v)(C) with 

language similar to that proposed, but 

with the additional condition that the 

creditor designated as a CHDO has 

entered into a commitment with a 

participating jurisdiction and is 

undertaking a project under the HOME 

Program, pursuant to the provisions of 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35465 

141 ‘‘The term predominantly is defined as a 

simple majority.’’ 12 CFR 701.34(a)(3). 

24 CFR 92.300(a), and as the terms 

community housing development 

organization, commitment, participating 

jurisdiction, and project are defined 

under 24 CFR 92.2. 

The Bureau acknowledges that 

creditors with other types of 

designations also provide valuable 

homeownership assistance to certain 

types of consumers or communities. 

However, the Bureau does not believe 

that it would be appropriate to provide 

exemptions for the designations 

suggested by commenters. For example, 

while Counseling Intermediaries must 

be approved by HUD, this approval is 

not related to the ability of an applicant 

to provide consumers with responsible 

and affordable mortgage credit. 

Furthermore, the Bureau is unaware of 

evidence suggesting that approval as a 

Counseling Intermediary is sufficient to 

ensure that consumers are offered and 

receive residential mortgage loans on 

reasonably repayable terms. With 

respect to the feedback suggesting that 

the Bureau consider providing an 

exemption for creditors that are 

chartered members of the 

NeighborWorks Network, the Bureau 

acknowledges that these creditors are 

also subject to government oversight 

and seem to provide responsible and 

affordable mortgage credit. However, the 

Bureau does not believe that providing 

an exemption to these creditors would 

be necessary to ensure access to 

responsible and affordable credit, as 

many of these creditors would qualify 

for one of the exemptions adopted in 

§ 1026.43(a)(3)(v)(A) through (D). 

Therefore, the Bureau declines to adopt 

exemptions for the other designations or 

lending programs suggested by 

commenters. 

In response to feedback provided 

regarding creditors designated as lowincome credit unions, the Bureau 

conducted additional research and 

analysis to determine whether an 

exemption for these creditors would be 

appropriate. LICUs, like CDFIs, provide 

credit to low-income consumers. 

However, NCUA regulations require 

LICUs to serve only ‘‘predominantly’’ 

low-income consumers, thereby 

permitting LICUs to extend credit to 

many consumers with higher 

incomes.141 Thus, such an exemption 

would be too broad and would affect 

consumers for whom access to credit is 

not a concern. In addition, the Bureau 

believes that the small creditor portfolio 

qualified mortgage loan provisions 

adopted in § 1026.43(e)(5) will address 

the concerns raised by commenters and 

accommodate the needs of small 

creditors, such as LICUs, while 

providing consumers with valuable 

protections. Therefore, the Bureau does 

not believe that it would be appropriate 

to provide an exemption for creditors 

with an LICU designation. 

Credit Extended by Certain Nonprofits 

The Bureau’s proposal. Proposed 

§ 1026.43(a)(3)(v)(D) would have 

exempted an extension of credit made 

by a creditor with a tax exemption 

ruling or determination letter from the 

Internal Revenue Service under section 

501(c)(3) of the Internal Revenue Code 

of 1986 (26 CFR 1.501(c)(3)–1), provided 

that certain other conditions were 

satisfied. Under proposed 

§ 1026.43(a)(3)(iv)(D)(1), the exemption 

would have been available only if the 

creditor extended credit secured by a 

dwelling no more than 100 times in the 

calendar year preceding receipt of the 

consumer’s application. Proposed 

§ 1026.43(a)(3)(v)(D)(2) would have 

further conditioned the exemption on 

the creditor, in the calendar year 

preceding receipt of the consumer’s 

application, extending credit secured by 

a dwelling only to consumers with 

income that did not exceed the 

qualifying limit for moderate-income 

families, as established pursuant to 

section 8 of the United States Housing 

Act of 1937 and amended from time to 

time by the U.S. Department of Housing 

and Urban Development. Proposed 

§ 1026.43(a)(3)(v)(D)(3) would have 

made the proposed exemption available 

only if the extension of credit was to a 

consumer with income that did not 

exceed this qualifying limit. Finally, 

proposed § 1026.43(a)(3)(v)(D)(4) would 

have made the proposed exemption 

contingent upon the creditor 

determining, in accordance with written 

procedures, that the consumer had a 

reasonable ability to repay the extension 

of credit. 

Proposed comment 43(a)(3)(v)(D)–1 

would have clarified that an extension 

of credit is exempt from the 

requirements of § 1026.43(c) through (f) 

if the credit is extended by a creditor 

described in § 1026.43(a)(3)(v)(D), 

provided the conditions specified in 

that section are satisfied. The conditions 

specified in § 1026.43(a)(3)(v)(D)(1) and 

(2) are determined according to activity 

that occurred in the calendar year 

preceding the calendar year in which 

the consumer’s application was 

received. Section 1026.43(a)(3)(v)(D)(2) 

provides that, during the preceding 

calendar year, the creditor must have 

extended credit only to consumers with 

income that did not exceed the 

qualifying limit then in effect for 

moderate-income families, as specified 

in regulations prescribed by HUD 

pursuant to section 8 of the United 

States Housing Act of 1937. For 

example, a creditor has satisfied the 

requirements of § 1026.43(a)(3)(v)(D)(2) 

if the creditor demonstrates that the 

creditor extended credit only to 

consumers with income that did not 

exceed the qualifying limit in effect on 

the dates the creditor received each 

consumer’s individual application. The 

condition specified in 

§ 1026.43(a)(3)(v)(D)(3), which relates to 

the current extension of credit, provides 

that the extension of credit must be to 

a consumer with income that does not 

exceed the qualifying limit specified in 

§ 1026.43(a)(3)(v)(D)(2) in effect on the 

date the creditor received the 

consumer’s application. For example, 

assume that a creditor with a tax 

exemption ruling under section 

501(c)(3) of the Internal Revenue Code 

of 1986 has satisfied the conditions 

identified in § 1026.43(a)(3)(v)(D)(1) and 

(2). If, on May 21, 2014, the creditor in 

this example extends credit secured by 

a dwelling to a consumer whose 

application reflected income in excess 

of the qualifying limit identified in 

§ 1026.43(a)(3)(v)(D)(2), the creditor has 

not satisfied the condition in 

§ 1026.43(a)(3)(v)(D)(3) and this 

extension of credit is not exempt from 

the requirements of § 1026.43(c) through 

(f). 

The Bureau solicited comment 

regarding whether the proposed 

exemption was appropriate. The Bureau 

also specifically requested feedback on 

whether the proposed 100 transaction 

limitation was appropriate, on the costs 

of implementing and complying with 

the ability-to-repay requirements that 

would be incurred by creditors that 

extend credit secured by a dwelling 

more than 100 times a year, the extent 

to which this proposed condition would 

affect access to responsible, affordable 

credit, and whether the limit of 100 

transactions per year should be 

increased or decreased. The Bureau also 

requested comment regarding the costs 

that nonprofit creditors would incur in 

connection with the ability-to-repay 

requirements, the extent to which these 

additional costs would affect the ability 

of nonprofit creditors to extend credit to 

LMI consumers, and whether consumers 

could be harmed by the proposed 

exemption. The Bureau solicited 

comment regarding whether the 

proposed exemption should be 

extended to creditors designated as 

nonprofits under section 501(c)(4) of the 

Internal Revenue Code of 1986. The 

Bureau also requested financial reports 

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35466 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

and mortgage lending activity data 

supporting the argument that the 

marginal cost of implementing and 

complying with the ability-to-repay 

requirements would cause 501(c)(4) 

nonprofit creditors to cease, or severely 

limit, extending credit to LMI 

consumers. 

Comments received. The Bureau 

received many comments addressing 

this proposed exemption. Many 

commenters completely opposed the 

proposed exemption for communityfocused creditors. These commenters 

generally argued that the rules should 

apply equally to all creditors. One 

industry commenter argued that a better 

approach would be to create special 

ability-to-repay requirements tailored to 

the unique underwriting characteristics 

of LMI consumers. Many other 

commenters approved of the proposed 

exemption, including the Bureau’s 

proposed conditions. Several 

commenters stated that an exemption 

for certain nonprofits was necessary, but 

requested various modifications. Most 

of the commenters that approved of the 

proposed exemption were concerned 

that the exemption could be used as a 

loophole to harm consumers and agreed 

that conditions were needed to address 

this potential risk. 

Many commenters, including 

industry, consumer advocate, and 

nonprofit commenters, explicitly 

supported the proposed limitation of 

100 extensions of credit. These 

commenters generally explained that 

the 100-extension limitation was an 

appropriate limit that would make it 

difficult for sham nonprofit creditors to 

harm consumers. However, several 

commenters asked the Bureau to raise 

the transaction limitation. The 

commenters were primarily concerned 

that the limitation would force 

nonprofits to limit certain types lending. 

For example, a few commenters stated 

that nonprofits that offer both homepurchase mortgage loans and smalldollar mortgage loans, such as for home 

energy improvement, would limit smalldollar lending to remain under the 100- 

extension limitation. One nonprofit 

commenter argued that, for creditors 

that provide first- and subordinate-lien 

financing to LMI consumers on the same 

transaction, the 100-extension limit is 

effectively a 50-transaction limit. 

Another nonprofit commenter suggested 

that the Bureau either apply the 100- 

extension limit to first-lien mortgage 

loans, or raise the limit to 500 for total 

transactions. One consumer advocate 

commenter suggested raising the limit to 

250 transactions per calendar year to 

address these concerns. A few 

commenters asked that the Bureau 

remove the limitation completely. For 

example, one commenter argued that 

the Bureau’s proposed limit of 100 

extensions of credit would harm LMI 

consumers by raising the cost of credit 

obtained from larger-scale nonprofit 

organizations. 

One commenter argued that the 

proposed exemption was too narrow 

and urged the Bureau to expand the 

exemption in several ways. First, this 

commenter argued that the exemption 

should not be limited to extensions of 

credit by creditors, but rather should be 

extended to all transactions in which a 

nonprofit organization dedicated to 

providing opportunities for affordable, 

long-term homeownership is involved, 

but is not the creditor. This commenter 

also asked the Bureau to provide noaction letters that would provide a safe 

harbor for certain mortgage lending 

programs. In addition, this commenter 

argued that the proposed references to 

the low- to moderate-income threshold 

under section 8 of the National Housing 

Act was inappropriate because use of 

the threshold would result in the denial 

of credit to consumers with income 

slightly above the threshold. 

Furthermore, this commenter asserted 

that it would be arbitrary and 

unjustified for the Bureau to extend an 

exemption to State HFAs but not 

provide an exemption to organizations 

that rely on underwriting criteria similar 

to those used by State HFAs, such as the 

consideration of a consumer’s life 

circumstances. Finally, this commenter 

disputed the Bureau’s justification for 

the proposed exemptions—that access 

to credit for LMI consumers would be 

impaired if certain creditors did not 

have the resources to implement and 

comply with the ability-to-repay 

requirements and ceased or severely 

limited extending credit—by arguing 

that LMI consumers are harmed when 

any creditor, regardless of size, spends 

money on regulatory compliance that 

would otherwise have been lent to LMI 

consumers. 

One consumer advocate group 

opposed providing an exemption for 

nonprofit creditors and instead 

suggested several modifications to the 

ability-to-repay requirements intended 

to address the Bureau’s concerns 

regarding nonprofits. This commenter 

argued that, rather than providing an 

exemption for the proposed categories 

of nonprofit creditor, the Bureau should 

provide a rebuttable presumption of 

compliance for these nonprofit 

creditors, without requiring the 

nonprofits to satisfy the requirements of 

§ 1026.43(c) through (f). Also, this 

commenter argued, these provisions 

should apply to only bona fide 

nonprofits, so that consumers would be 

provided legal recourse against 

unscrupulous creditors operating sham 

nonprofits. Further, this commenter 

suggested that the Bureau should 

expand the anti-evasion provisions of 

§ 1026.43(h) to include the adoption of 

nonprofit status for purposes of 

avoiding the ability-to-repay 

requirements. This commenter argued 

that such modifications would provide 

genuine nonprofits with relief from the 

regulatory and compliance burdens 

associated with the ability-to-repay 

requirements, while enabling consumers 

to seek recourse against abusive, sham 

nonprofits. 

The Bureau did not receive feedback 

regarding whether the proposed 

exemption should be extended to 

creditors designated as nonprofits under 

section 501(c)(4) of the Internal Revenue 

Code of 1986. However, several credit 

unions and State credit union 

associations requested that the Bureau 

expand the nonprofit exemption to all 

credit unions, as credit unions are 

designated as nonprofits under sections 

501(c)(1) and 501(c)(14) of the Internal 

Revenue Code of 1986. These 

commenters generally explained that 

credit unions, like the nonprofit 

creditors addressed in the Bureau’s 

proposal, are often small businesses that 

have difficulty complying with 

regulatory burdens. Industry 

commenters also requested an 

exemption for certain creditors that 

extend credit to LMI consumers, or for 

certain programs intended to facilitate 

access to credit for LMI consumers. For 

example, some commenters argued that 

the Bureau should provide an 

exemption for credit unions operating in 

certain areas, such as areas defined as 

‘‘underserved’’ under the Federal Credit 

Union Act, while others argued that the 

Bureau should provide an exemption for 

loans that meet the regulatory 

requirements of the Community 

Reinvestment Act or similar programs. 

These commenters generally argued that 

such an exemption would facilitate 

access to credit for LMI consumers by 

minimizing the regulatory burdens 

imposed by the ability-to-repay 

requirements. 

A few industry and consumer 

advocate commenters asked the Bureau 

to establish a publicly accessible 

database of all nonprofits that qualified 

for the exemption. These commenters 

argued that such a database would 

facilitate compliance and allow 

consumers to determine if nonprofit 

creditors were actually exempt from the 

requirements. A State attorney general 

expressed concern about potential abuse 

and asked the Bureau to consider 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35467 

142See 78 FR 6644 (Jan. 30, 2013). 

vigorous oversight of nonprofits eligible 

for the exemption. 

The final rule. The Bureau is adopting 

§ 1026.43(a)(3)(v)(D) in a form that is 

substantially similar to the version 

proposed, except that the Bureau is 

increasing the annual originations limit 

from 100 to 200 extensions of credit. For 

the reasons discussed below, the Bureau 

has concluded that the exemption 

should apply provided that, in 

additional to the annual originations 

limit: (1) The creditor is designated as 

a nonprofit organization under section 

501(c)(3) of the Internal Revenue Code; 

(2) the extension of credit is to a 

consumer with income that does not 

exceed the limit for low- and moderateincome households as established 

pursuant regulations prescribed by the 

U.S. Department of Housing and Urban 

Development; (3) during the calendar 

year preceding receipt of the consumer’s 

application the creditor extended credit 

only to consumers with income that did 

not exceed the above limit; and (4) the 

creditor determines, in accordance with 

written procedures, that the consumer 

has a reasonable ability to repay the 

extension of credit. Comments provided 

to the Bureau generally confirmed that 

these conditions were reasonable and 

appropriate measures to ensure that the 

exemption would not be used as a 

loophole to avoid the ability-to-repay 

requirements. Thus, the Bureau has 

determined that it is appropriate to 

adopt § 1026.43(a)(3)(v)(D)(2), (3), and 

(4) generally as proposed, but with 

technical modifications to paragraphs 

(a)(3)(v)(D)(2) and (3), as discussed 

below. 

However, upon further consideration 

of the comments received, the Bureau 

has determined that it is appropriate to 

raise the threshold in proposed 

§ 1026.43(a)(3)(v)(D)(1) from 100 to 200 

extensions of credit. Most commenters 

agreed with the rationale advanced in 

the 2013 ATR Proposed Rule that a 

limitation is necessary to prevent the 

exemption from being exploited by 

unscrupulous creditors seeking to harm 

consumers. The Bureau strongly 

believes that this risk outweighs the 

costs that a limitation may impose on 

some nonprofit creditors. While many 

commenters approved of the proposed 

100-extension limitation, the Bureau is 

concerned that this limitation could 

lead to unintended consequences. The 

Bureau is particularly concerned that 

nonprofit creditors providing primary 

and subordinate financing on the same 

transaction effectively would be limited 

to 50 transactions per year. The Bureau 

did not intend to propose such a strict 

limitation. The Bureau has concluded 

that a 200-extension limitation, 

doubling the 100-extension limit to 

capture creditors making first- and 

subordinate-lien loans on the same 

transaction, would address the concerns 

raised by commenters while achieving 

the original intent of the proposed 

condition. The Bureau does not agree 

with the suggestions proposed by some 

commenters that separate limits for firstand subordinate-lien loans should be 

implemented. The Bureau believes that 

such a restriction would be needlessly 

restrictive, and it would be more 

efficient to allow nonprofit creditors to 

determine the most efficient allocation 

of funds between primary and 

subordinate financing. Furthermore, the 

Bureau does not agree with the 

arguments raised by commenters that 

the threshold should be raised above 

200, such as to 500 transactions. As 

explained in the 2013 ATR Proposed 

Rule, the Bureau intended to narrowly 

tailor the exemption to small nonprofits 

that did not have the resources to bear 

the burdens associated with the abilityto-repay requirements, and solicited 

feedback regarding whether a 100 

extension of credit limit was indicative 

of such a resource limitation.142 While 

feedback indicated that a 200-extension 

limitation would more appropriately 

address the Bureau’s intentions, the 

Bureau received no feedback indicating 

that nonprofit creditors making more 

than 200 extensions of credit lacked the 

resources to implement and comply 

with the ability-to-repay requirements. 

The Bureau believes that creditors 

originating such a number of mortgage 

loans likely have the resources to bear 

the implementation and compliance 

burden associated with the ability-torepay requirements, unlike smaller 

nonprofit creditors that make fewer 

loans. Therefore, as adopted, 

§ 1026.43(a)(3)(v)(D)(1) conditions the 

exemption from the ability-to-repay 

requirements on the creditor extending 

credit secured by a dwelling no more 

than 200 times during the calendar year 

preceding receipt of the consumer’s 

application. 

As discussed above, one commenter 

argued that the Bureau should limit the 

exemption to bona fide nonprofit 

creditors. Adding a bona fide nonprofit 

condition would provide another 

avenue for consumers to seek redress 

against harmful lending practices, 

which may deter persons from using the 

exemption as a loophole. However, the 

Bureau believes that the requirements of 

§ 1026.43(a)(3)(v)(D) are narrowly 

tailored to protect consumers and limit 

the risk that an unscrupulous creditor 

could create a nonprofit for the purpose 

of extending credit in a harmful, 

reckless, or abusive manner. Therefore, 

the Bureau declines to adopt an 

additional bona fide nonprofit 

requirement at this time. As with the 

other exemptions to the ability-to-repay 

requirements, the Bureau will monitor 

the mortgage market and may reevaluate 

this issue if circumstances warrant 

reconsideration. 

As discussed above, one commenter 

suggested that the Bureau adopt a 

qualified mortgage definition with a 

rebuttable presumption of compliance 

instead of an exemption to the abilityto-repay requirements. The Bureau does 

not believe it is necessary to adopt a 

qualified mortgage definition for 

nonprofit creditors meeting the 

conditions of § 1026.43(a)(3)(v)(D). The 

Bureau believes that an exemption is a 

more effective method of addressing the 

concerns discussed above. The Bureau 

believes that a rebuttable presumption 

would re-introduce the compliance 

burdens on certain nonprofits that the 

Bureau seeks to alleviate. Furthermore, 

the line between a safe harbor and a 

rebuttable presumption was determined 

based on pricing thresholds and 

providing a rebuttable presumption 

based on other criteria is inconsistent 

with the approach taken in the 2013 

ATR Final Rule. Nor does the Bureau 

believe that modifying the anti-evasion 

provisions of § 1026.43(h) is necessary. 

Either approach would increase 

regulatory complexity for these 

creditors, and may frustrate the goals 

the Bureau seeks to achieve in 

accommodating nonprofit creditors. The 

Bureau also has decided that it is 

inappropriate to provide no-action 

letters for certain creditors, as suggested 

by one commenter. For the reasons 

discussed in this section, the Bureau 

believes that the exemptions adopted in 

this final rule are the optimal approach 

for providing access to responsible, 

affordable credit while ensuring that 

consumers are offered and receive 

mortgage credit on reasonably repayable 

terms. 

The Bureau has also determined that 

it is appropriate to limit the exemption 

to creditors designated as nonprofits 

under section 501(c)(3), but not 

501(c)(4), of the Internal Revenue Code 

of 1986. The Bureau recognizes that 

these creditors also may be affected by 

the ability-to-repay requirements. 

However, the Bureau believes that this 

distinction is appropriate. As discussed 

in the 2013 ATR Proposed Rule, this 

exemption is premised on the belief that 

the additional costs imposed by the 

ability-to-repay requirements will force 

certain nonprofit creditors to cease 

extending credit, or substantially limit 

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35468 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

143See 78 FR 6645 (Jan. 30, 2013). 

144See 78 FR 6635–36 (Jan. 30, 2013). 

145 Id. at 6643. 

credit activities, thereby harming lowto moderate-income consumers.143 The 

Bureau solicited comment regarding 

whether the exemption should be 

extended to creditors designated as 

nonprofits under section 501(c)(4) of the 

Internal Revenue Code of 1986. The 

Bureau also requested financial reports 

and mortgage lending activity data 

supporting the argument that the 

marginal cost of implementing and 

complying with the ability-to-repay 

requirements would cause 501(c)(4) 

nonprofit creditors to cease, or severely 

limit, extending credit to low- to 

moderate-income consumers. The 

Bureau received no comment in 

response to this request. Thus, the 

Bureau concludes that it is appropriate 

to limit the exemption to creditors 

designated as nonprofits under section 

501(c)(3) of the Internal Revenue Code 

of 1986, and adopts § 1026.43(a)(3)(v)(D) 

as proposed. 

As noted above, the Bureau received 

a comment suggesting that the 

exemption should not be limited to 

extensions of credit by a creditor but, 

rather, should be extended to other 

transactions in which a nonprofit 

organization that is dedicated to 

providing opportunities for affordable, 

long-term homeownership is involved, 

but is not the creditor. While the Bureau 

believes that such organizations provide 

valuable assistance to LMI consumers, 

the Bureau has determined that it would 

be inappropriate to extend the 

exemption in this manner. The 

exemptions adopted by the Bureau are 

limited to creditors or transactions 

where the Bureau believes that 

consumers are offered and receive 

residential mortgage loans on 

reasonably repayable terms. The 

proposed exemption involves creditors 

with certain characteristics that ensure 

consumers are offered responsible, 

affordable credit on reasonably 

repayable terms. In these narrow 

circumstances the Bureau has 

determined that there is little risk of 

harm to consumers. However, adopting 

the approach suggested in this comment 

effectively would expand the exemption 

to all creditors, as any creditor could 

involve such a nonprofit organization in 

some capacity during the origination 

process. Such a broad expansion would 

not be necessary or proper to effectuate 

the purposes of TILA; to the contrary, it 

would instead exempt a potentially 

large number of creditors from the 

ability-to-repay requirements. The 

Bureau would not be able to determine 

if each potential creditor extended 

credit only on reasonably repayable 

terms and does not believe it would be 

appropriate to assume that any 

involvement by a nonprofit organization 

is sufficient to ensure that consumers 

were not harmed by the exemption. 

Therefore, the Bureau declines to extend 

the exemption to transactions involving 

nonprofit organizations that are 

dedicated to providing opportunities for 

affordable homeownership. 

With respect to the comment 

disputing the Bureau’s justification for 

the proposed exemptions, the Bureau 

believes that this criticism results from 

a misunderstanding of the Bureau’s 

rationale for the proposed exemptions. 

As explained in the 2013 ATR Proposed 

Rule, the Bureau may provide an 

exemption to the ability-to-repay 

requirements if the statutory conditions 

for the use of such an exemption are 

met.144 Providing an exemption for a 

particular class of creditors requires a 

careful balancing of considerations, 

including the nature of credit extended, 

safeguards or other factors that may 

protect consumers from harm, and the 

extent to which application of the 

regulatory requirements would affect 

access to responsible, affordable credit. 

As discussed in the Bureau’s proposal, 

the Bureau was concerned about 

creditors that would be forced to cease 

or severely limit lending to LMI 

consumers.145 Based on feedback 

provided in response to this question, 

the Bureau has adopted an exemption 

narrowly tailored to the situations 

where an exemption is necessary and 

proper. 

The Bureau also disagrees with the 

arguments advanced that limiting the 

exemption to creditors extending credit 

to consumers with income below the 

qualifying limit for moderate income 

families as established pursuant to 

section 8 of the United States Housing 

Act of 1937 is arbitrary. The Bureau 

acknowledges that there may be cases 

where a consumer with income slightly 

above the LMI threshold is unable to 

secure credit. However, most 

commenters agreed that these 

conditions helped ensure that the 

proposed exemption would not become 

a regulatory loophole by which 

consumers could be harmed. Thus, the 

Bureau believes that it is necessary to 

draw a line, and the section 8 income 

limitations are clear and well-known. 

Such an approach will facilitate 

compliance while ensuring that the 

exemption is narrowly tailored to 

address the consumers for whom access 

to credit is a concern. Therefore, the 

Bureau has concluded that it is 

appropriate to refer to these qualifying 

income limits. Furthermore, the Bureau 

intends to monitor these qualifying 

income limits in the future to ensure 

that the exemption remains narrowly 

tailored. The Bureau has determined 

that it is necessary to make a technical 

change to the proposed language. 

Although HUD’s qualifying income 

limits are colloquially referred to as 

‘‘section 8 limits,’’ the thresholds were 

established by section 102 of the 

Housing and Community Development 

Act of 1974, which amended the 

National Housing Act of 1937. The 

Bureau believes that it is appropriate to 

identify the thresholds by the exact 

statutory and regulatory reference. 

Accordingly, the Bureau is adopting 

§ 1026.43(a)(3)(v)(D)(2) and (3) generally 

as proposed, but with a technical 

modification that refers to the low- and 

moderate-income household limit as 

established pursuant to section 102 of 

the Housing and Community 

Development Act of 1974. 

As discussed above, several 

commenters asked the Bureau to remain 

engaged with the nonprofit community 

to ensure that the exemption is not used 

as a loophole to harm consumers. For 

example, some commenters asked the 

Bureau to establish a database of 

creditors that qualify for the 

§ 1026.43(a)(3)(v)(D) exemption. The 

Bureau intends to keep abreast of 

developments in the mortgage market, 

including lending programs offered by 

nonprofit creditors pursuant to this 

exemption. However, the Bureau does 

not believe that it is necessary to 

develop a formal oversight mechanism, 

such as a database of creditors eligible 

for this exemption, at this time. Instead, 

the Bureau will continue to collect 

information related to the effectiveness 

of the ability-to-repay requirements, 

including the § 1026.43(a)(3)(v)(D) 

exemption, and will pursue additional 

rulemakings or data collections if the 

Bureau determines in the future that 

such action is necessary. 

The Bureau has also carefully 

considered the comments requesting a 

full or limited exemption from the 

ability-to-repay requirements for certain 

creditors or for certain programs 

intended to facilitate access to credit for 

LMI consumers. For example, as 

discussed above, several industry 

commenters argued that the Bureau 

should provide an exemption for all 

credit unions, which are designated as 

nonprofit organizations under sections 

501(c)(1) and 501(c)(14) of the Internal 

Revenue Code of 1986. Other industry 

commenters argued that the Bureau 

should provide an exemption for credit 

unions operating in certain areas, such 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35469 

as areas defined as ‘‘underserved’’ under 

the Federal Credit Union Act. The 

Bureau agrees with the arguments 

advanced by commenters that credit 

unions were not the source of the 

financial crisis, have historically 

employed responsible underwriting 

requirements, and are often an 

important source of credit for LMI 

consumers. However, the Bureau does 

not believe that any of the requested 

exemptions for credit unions are 

necessary. The Bureau understands that 

many credit unions will qualify for the 

additional qualified mortgage 

definitions discussed below in the 

section-by-section analyses of 

§ 1026.43(e)(5) and (e)(6). Also, given 

the thoroughness of the traditional 

underwriting methods employed by 

credit unions, the Bureau does not 

believe that larger credit unions will 

have difficulty complying with the 

general ability-to-repay requirements or 

qualified mortgage provisions. Further, 

absent evidence suggesting that the 

ability-to-repay requirements would 

force these credit unions to cease or 

severely curtail extending credit to LMI 

consumers, the Bureau does not believe 

that an exemption would be 

appropriate. For similar reasons, the 

Bureau declines to expand the 

exemption to loans that meet the 

regulatory requirements of the 

Community Reinvestment Act or similar 

programs. The Bureau is not persuaded 

that such an expansive exemption is 

necessary to ensure that LMI consumers 

have access to responsible, affordable 

credit. 

To summarize, the Bureau has 

determined that an exemption to the 

ability-to-repay requirements is 

appropriate for certain nonprofit 

creditors. The Bureau has modified the 

proposed exemption in a manner that 

addressed the concerns raised by 

various commenters. As adopted, 

§ 1026.43(a)(3)(v)(D) exempts an 

extension of credit made by a creditor 

with a tax exemption ruling or 

determination letter from the Internal 

Revenue Service under section 501(c)(3) 

of the Internal Revenue Code of 1986 

(26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)– 

1), provided that all of the conditions in 

§ 1026.43(a)(3)(v)(D)(1) through (4) are 

satisfied. Section 1026.43(a)(3)(v)(D)(1) 

conditions the exemption on the 

requirement that, during the calendar 

year preceding receipt of the consumer’s 

application, the creditor extended credit 

secured by a dwelling no more than 200 

times. Section 1026.43(a)(3)(v)(D)(2) 

conditions the exemption on the 

requirement that, during the calendar 

year preceding receipt of the consumer’s 

application, the creditor extended credit 

secured by a dwelling only to 

consumers with income that did not 

exceed the low- and moderate-income 

household limit as established pursuant 

to section 102 of the Housing and 

Community Development Act of 1974 

(42 U.S.C. 5302(a)(20)) and amended 

from time to time by the U.S. 

Department of Housing and Urban 

Development, pursuant to 24 CFR 570.3. 

Section 1026.43(a)(3)(v)(D)(3) 

conditions the exemption on the 

requirement that the extension of credit 

is to a consumer with income that does 

not exceed the above limit. Section 

1026.43(a)(3)(v)(D)(4) conditions the 

exemption on the requirement that the 

creditor determines, in accordance with 

written procedures, that the consumer 

has a reasonable ability to repay the 

extension of credit. The Bureau is also 

adopting comment 43(a)(3)(v)(D)–1 

generally as proposed, but with 

technical modifications that reflect the 

appropriate references to HUD’s lowand moderate-income household limit, 

as described above. 

Legal Authority 

Section 1026.43(a)(3)(v) is adopted 

pursuant to the Bureau’s authority 

under section 105(a) and (f) of TILA. 

Pursuant to section 105(a) of TILA, the 

Bureau generally may prescribe 

regulations that provide for such 

adjustments and exceptions for all or 

any class of transactions that the Bureau 

judges are necessary and proper to 

effectuate the purposes of TILA, among 

other things. For the reasons discussed 

in more detail above, the Bureau has 

concluded that this exemption is 

necessary and proper to effectuate the 

purposes of TILA, which include the 

purposes of TILA section 129C. By 

ensuring the viability of the low- to 

moderate-income mortgage market, this 

exemption would ensure that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay. 

The Bureau also believes that mortgage 

loans originated by these creditors 

generally account for a consumer’s 

ability to repay. Without the exemption 

the Bureau believes that low- to 

moderate-income consumers are at risk 

of being denied access to the 

responsible and affordable credit offered 

by these creditors, which is contrary to 

the purposes of TILA. This exemption is 

consistent with the finding of TILA 

section 129C by ensuring that 

consumers are able to obtain 

responsible, affordable credit from the 

nonprofit creditors discussed above 

which inform the Bureau’s 

understanding of its purposes. 

The Bureau has considered the factors 

in TILA section 105(f) and has 

concluded that, for the reasons 

discussed above, an exemption is 

appropriate under that provision. 

Pursuant to TILA section 105(f) the 

Bureau may exempt by regulation from 

all or part of this title all or any class 

of transactions for which in the 

determination of the Bureau coverage 

does not provide a meaningful benefit to 

consumers in the form of useful 

information or protection. In 

determining which classes of 

transactions to exempt, the Bureau must 

consider certain statutory factors. For 

the reasons discussed above, the Bureau 

exempts an extension of credit made by 

the creditors and under conditions 

provided in § 1026.43(a)(3)(v) because 

coverage under the ability-to-repay 

requirements does not provide a 

meaningful benefit to consumers in the 

form of useful protection in light of the 

protection the Bureau believes that the 

credit extended by these creditors 

already provides to consumers. 

Consistent with its rationale in the 2013 

ATR Proposed Rule, the Bureau believes 

that the exemptions are appropriate for 

all affected consumers to which the 

exemption applies, regardless of their 

other financial arrangements and 

financial sophistication and the 

importance of the loan to them. 

Similarly, the Bureau believes that the 

exemptions are appropriate for all 

affected loans covered under the 

exemption, regardless of the amount of 

the loan and whether the loan is secured 

by the principal residence of the 

consumer. Furthermore, the Bureau 

believes that, on balance, the 

exemptions will simplify the credit 

process without undermining the goal of 

consumer protection, denying important 

benefits to consumers, or increasing the 

expense of the credit process. The 

Bureau recognizes that its exemption 

and exception authorities apply to a 

class of transactions, and has decided to 

apply these authorities to the loans 

covered under the final rule of the 

entities subject to the adopted 

exemptions. 

43(a)(3)(vi) 

The Bureau’s Proposal 

As discussed above, neither TILA nor 

Regulation Z provides an exemption to 

the ability-to-repay requirements for 

Federal programs designed to stabilize 

homeownership or mitigate the risks of 

foreclosure. However, the Bureau was 

concerned that the ability-to-repay 

requirements would inhibit the 

effectiveness of these Federal programs. 

As a result, the Bureau proposed 

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35470 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

146See United States Department of the Treasury, 

‘‘Home Affordable Modification Program, Base Net 

Present Value (NPV) Model v5.02, Model 

Documentation’’ (April 1, 2012). 147See http://www.makinghomeaffordable.gov/ 

programs/Pages/default.aspx. For example, the 

EESA PRA program contains several eligibility 

requirements in addition to program requirements. 

See http://www.makinghomeaffordable.gov/ 

programs/lower-payments/Pages/pra.aspx. 

148Consumers receiving assistance under EESA 

programs may have back-end DTI ratios in excess 

of 50 percent. See United States Department of the 

Treasury, Making Home Affordable Program 

Performance Report (March 2013), page 9, available 

at: http://www.treasury.gov/initiatives/financialstability/reports/Documents/ 

March%202013%20MHA%20Report%20Final.pdf. 

§ 1026.43(a)(3)(vi), which would have 

provided that an extension of credit 

made pursuant to a program authorized 

by sections 101 and 109 of the 

Emergency Economic Stabilization Act 

of 2008 (12 U.S.C. 5211; 5219) (EESA) 

is exempt from § 1026.43(c) through (f). 

Proposed comment 43(a)(3)(vi)–1 

would have explained that the 

requirements of § 1026.43(c) through (f) 

did not apply to a mortgage loan 

modification made in connection with a 

program authorized by sections 101 and 

109 of EESA. If a creditor is 

underwriting an extension of credit that 

is a refinancing, as defined by 

§ 1026.20(a), that will be made pursuant 

to a program authorized by sections 101 

and 109 of the Emergency Economic 

Stabilization Act of 2008, the creditor 

also need not comply with § 1026.43(c) 

through (f). Thus, a creditor need not 

determine whether the mortgage loan 

modification is considered a refinancing 

under § 1026.20(a) for purposes of 

determining applicability of § 1026.43; 

if the transaction is made in connection 

with these programs, the requirements 

of § 1026.43(c) through (f) do not apply. 

The Bureau solicited general feedback 

regarding whether this proposed 

exemption was appropriate. In 

particular, the Bureau sought comment 

regarding whether applicability of the 

ability-to-repay requirements would 

constrict the availability of credit 

offered under these programs and 

whether consumers have suffered 

financial loss or other harm by creditors 

participating in these programs. The 

Bureau also requested information on 

the extent to which the requirements of 

these Federal programs account for a 

consumer’s ability to repay. The Bureau 

also sought comment regarding whether, 

if the Bureau determined that a full 

exemption is not warranted, what 

modifications to the general ability-torepay standards would be warranted 

and whether qualified mortgage status 

should be granted instead, and, if so, 

under what conditions. 

Comments Received 

The Bureau received several 

comments addressing this proposed 

exemption. One consumer advocate 

commenter opposed the exemption and 

stated that these programs lack 

meaningful underwriting guidance. 

Many industry and consumer advocate 

commenters supported the exemption. 

These commenters generally argued that 

the ability-to-repay requirements would 

make these programs unworkable, 

which would frustrate the public policy 

purposes of EESA and harm consumers 

in need of assistance. A few industry 

commenters requested that the Bureau 

provide an exemption for 

homeownership stabilization and 

foreclosure prevention programs, other 

than those authorized by sections 101 

and 109 of EESA, such as a creditor’s 

proprietary program intended to provide 

assistance to consumers who have 

experienced a loss of employment or 

other financial difficulty. 

The Final Rule 

The Bureau is adopting 

§ 1026.43(a)(3)(vi) and comment 

43(a)(3)(vi)–1 as proposed. For the 

reasons discussed below, the Bureau has 

determined that an exemption from the 

ability-to-repay requirements is 

necessary and appropriate for 

extensions of credit made pursuant to a 

program authorized by sections 101 and 

109 of EESA. Commenters agreed with 

the Bureau that the ability-to-repay 

requirements would interfere with, or 

are inapplicable to, these programs, 

which are intended to address the 

unique underwriting requirements of 

certain consumers at risk of default or 

foreclosure. By significantly impairing 

the effectiveness of these programs, the 

Bureau believes that there is a 

considerable risk that the ability-torepay requirements would actually 

prevent at-risk consumers from 

receiving mortgage credit provided in an 

affordable and responsible manner. 

With respect to the feedback provided 

opposing this exemption, the Bureau 

believes that, based on the existence of 

Federal oversight and the EESA 

requirements, the risk of consumer harm 

is low. Additionally, as discussed in 

part II.A above, the Bureau understands 

that these EESA programs have highly 

detailed requirements, created and 

maintained by the Treasury Department, 

to determine whether EESA assistance 

will benefit distressed consumers.146 In 

addition to satisfying these Treasury 

Department requirements, consumers 

receiving assistance under an EESA 

program must meet EESA eligibility 

requirements and creditor program 

requirements.147 Thus, the Bureau 

believes that credit available under 

these programs is extended on 

reasonably repayable terms and 

conditions. 

Several industry commenters asked 

the Bureau to consider an exemption for 

proprietary foreclosure mitigation and 

homeownership stabilization programs. 

While the Bureau believes that these 

programs likely benefit many 

consumers, the Bureau has determined 

that an exemption from the ability-torepay requirements is inappropriate. 

Proprietary programs are not under the 

jurisdiction of the U.S. Department of 

the Treasury, as EESA programs are. 

This lack of accountability increases the 

risk that an unscrupulous creditor could 

harm consumers. Furthermore, EESA 

programs will expire by 2017 and are 

intended to provide assistance to a 

narrow set of distressed consumers. In 

contrast, the exemption suggested by 

commenters is potentially indefinite 

and indeterminate. Also, the Bureau 

believes that creditors seeking to 

provide assistance to consumers in 

distress without incurring the 

obligations associated with the abilityto-repay requirements may do so by 

providing a consumer with a workout or 

similar modification that does not 

constitute a refinancing under 

§ 1026.20(a). Thus, the Bureau declines 

to provide an exemption for these 

proprietary programs. 

No commenters addressed whether 

credit extended pursuant to an EESA 

program should be granted a 

presumption of compliance as qualified 

mortgages, and, if so, under what 

conditions. However, the Bureau does 

not believe that extending qualified 

mortgage status to these loans would be 

as effective in addressing the concerns 

raised above as an exemption. Even if 

credit extended under EESA programs 

were granted a presumption of 

compliance as qualified mortgages, 

creditors extending credit pursuant to 

these programs could be impacted by 

significant implementation and 

compliance burdens. Furthermore, as 

discussed above, many loans extended 

under these programs would not appear 

to satisfy the qualified mortgage 

standards under § 1026.43(e)(2). For 

example, consumers receiving 

assistance under EESA programs may 

have DTI ratios in excess of the 

§ 1026.43(e)(2)(vi) threshold.148 Thus, a 

creditor extending such a mortgage 

loan—assuming the loan does not 

qualify for another qualified mortgage 

definitions—would be required to 

comply with the ability-to-repay 

requirements of § 1026.43(c) and, in 

response to the potential liability for 

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noncompliance, would cease or severely 

curtail lending under the voluntary 

EESA programs. 

Accordingly, the Bureau believes that 

the proposed exemption for credit made 

pursuant to an EESA program is 

appropriate under the circumstances. 

The Bureau believes that consumers 

who receive extensions of credit made 

pursuant to an EESA program do so 

after a determination of ability to repay 

using criteria unique to the distressed 

consumers seeking assistance under the 

program. The exemption adopted by the 

Bureau is limited to creditors or 

transactions with certain characteristics 

and qualifications that ensure 

consumers are offered responsible, 

affordable credit on reasonably 

repayable terms. The Bureau thus finds 

that coverage under the ability-to-repay 

requirements provides little if any 

meaningful benefit to consumers in the 

form of useful protection, given the 

nature of the credit offered under EESA 

programs. At the same time, the Bureau 

is concerned that the narrow class of 

creditors subject to the exemption may 

either cease or severely curtail mortgage 

lending if the ability-to-repay 

requirements are applied to their 

transactions, resulting in a denial of 

access to credit. Accordingly, the 

Bureau is adopting § 1026.43(a)(3)(vi) as 

proposed. 

Section 1026.43(a)(3)(vi) is adopted 

pursuant to the Bureau’s authority 

under section 105(a) and (f) of TILA. 

Pursuant to section 105(a) of TILA, the 

Bureau generally may prescribe 

regulations that provide for such 

adjustments and exceptions for all or 

any class of transactions that the Bureau 

judges are necessary and proper to 

effectuate the purposes of TILA, among 

other things. As discussed in more 

detail above, the Bureau has concluded 

that this exemption is necessary and 

proper to effectuate the purposes of 

TILA, which include the purposes of 

TILA section 129C. This exemption 

would ensure that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay. In the Bureau’s 

judgment extensions of credit made 

pursuant to a program authorized by 

sections 101 and 109 of the Emergency 

Economic Stabilization Act of 2008 

sufficiently account for a consumer’s 

ability to repay, and the exemption 

ensures that consumers are able to 

receive assistance under these programs. 

Furthermore, without the exemption the 

Bureau believes that consumers at risk 

of default or foreclosure would be 

denied access to the responsible, 

affordable credit offered under these 

programs, which is contrary to the 

purposes of TILA. This exemption is 

consistent with the finding of TILA 

section 129C by ensuring that 

consumers are able to obtain 

responsible, affordable credit from the 

nonprofit creditors discussed above 

which inform the Bureau’s 

understanding of its purposes. 

The Bureau has considered the factors 

in TILA section 105(f) and has 

concluded that, for the reasons 

discussed above, an exemption is 

appropriate under that provision. 

Pursuant to TILA section 105(f) the 

Bureau may exempt by regulation from 

all or part of this title all or any class 

of transactions for which in the 

determination of the Bureau coverage 

does not provide a meaningful benefit to 

consumers in the form of useful 

information or protection. In 

determining which classes of 

transactions to exempt, the Bureau must 

consider certain statutory factors. The 

Bureau exempts an extension of credit 

pursuant to a program authorized by 

sections 101 and 109 of the Emergency 

Economic Stabilization Act of 2008 

because coverage under the ability-torepay requirements does not provide a 

meaningful benefit to consumers in the 

form of useful protection in light of the 

protection the Bureau believes that the 

credit extended through these programs 

already provides to consumers. 

Consistent with its rationale in the 2013 

ATR Proposed Rule, the Bureau believes 

that the exemptions are appropriate for 

all affected consumers to which the 

exemption applies, regardless of their 

other financial arrangements and 

financial sophistication and the 

importance of the loan to them. 

Similarly, the Bureau believes that the 

exemptions are appropriate for all 

affected loans covered under the 

exemption, regardless of the amount of 

the loan and whether the loan is secured 

by the principal residence of the 

consumer. Furthermore, the Bureau 

believes that, on balance, the 

exemptions will simplify the credit 

process without undermining the goal of 

consumer protection, denying important 

benefits to consumers, or increasing the 

expense of the credit process. The 

Bureau recognizes that its exemption 

and exception authorities apply to a 

class of transactions, and has decided to 

apply these authorities to the loans 

covered under the final rule of the 

entities subject to the adopted 

exemptions. 

43(a)(3)(vii) 

The Bureau’s Proposal 

As discussed above, neither TILA nor 

Regulation Z provide an exemption to 

the ability-to-repay requirements for 

refinancing programs offered by the 

Department of Housing and Urban 

Development (HUD), the Department of 

Veterans Affairs (VA), or the U.S. 

Department of Agriculture (USDA). 

However, comments provided to the 

Bureau during the development of the 

2013 ATR Final Rule suggested that the 

ability-to-repay requirements would 

restrict access to credit for consumers 

seeking to obtain a refinancing under 

certain Federal agency refinancing 

programs, that the ability-to-repay 

requirements adopted by the Bureau 

should account for the requirements of 

Federal agency refinancing programs, 

and that Federal agency refinancing 

programs should be exempt from several 

of the ability-to-repay requirements. 

TILA section 129C(b)(3)(B)(ii), as 

amended by section 1411 of the DoddFrank Act, requires these Federal 

agencies to prescribe rules related to the 

definition of qualified mortgage. These 

Federal agencies have not yet prescribed 

rules related to the definition of 

qualified mortgage. Section 1411 of the 

Dodd-Frank Act addresses refinancing 

of existing mortgage loans under the 

ability-to-repay requirements. As 

amended by the Dodd-Frank Act, TILA 

section 129C(a)(5) provides that Federal 

agencies may create an exemption from 

the income and verification 

requirements for certain streamlined 

refinancings of loans made, guaranteed, 

or insured by various Federal agencies. 

15 U.S.C. 1639(a)(5). These Federal 

agencies also have not yet prescribed 

rules related to the ability-to-repay 

requirements for refinancing programs. 

Section 1026.43(e)(4), as adopted in the 

2013 ATR Final Rule, provides 

temporary qualified mortgage status for 

mortgage loans eligible to be insured, 

guaranteed, or made pursuant to a 

program administered by one of these 

Federal agencies, until the effective date 

of the agencies’ qualified mortgage rules 

prescribed pursuant to TILA section 

129C(b)(3)(B)(ii). However, the Bureau 

was concerned that the ability-to-repay 

requirements would impede access to 

credit available under these programs. 

Based on these concerns and to gather 

more information about the potential 

effect of the ability-to-repay 

requirements on Federal agency 

refinancing programs, the Bureau 

proposed an exemption for certain 

refinancings under specified Federal 

programs and solicited feedback on 

several issues. 

Specifically, proposed 

§ 1026.43(a)(3)(vii) would have 

provided that an extension of credit that 

is a refinancing, as defined under 

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35472 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

§ 1026.20(a) but without regard for 

whether the creditor is the creditor, 

holder, or servicer of the original 

obligation, that is eligible to be insured, 

guaranteed, or made pursuant to a 

program administered by the FHA, VA, 

or USDA, is exempt from § 1026.43(c) 

through (f), provided that the agency 

administering the program under which 

the extension of credit is eligible to be 

insured, guaranteed, or made has not 

prescribed rules pursuant to section 

129C(a)(5) or 129C(b)(3)(B)(ii) of TILA. 

The Bureau solicited comment 

regarding whether this exemption is 

appropriate, whether there are any 

additional conditions that should be 

required, whether the ability-to-repay 

requirements would negatively affect 

the availability of credit offered under 

Federal agency programs, and whether 

consumers could be harmed by 

exempting these extensions of credit 

from the ability-to-repay requirements. 

Comments Received 

In response to the proposed rule, most 

commenters supported the proposed 

exemption. Industry commenters stated 

that the Federal agency refinancing 

programs have successfully provided 

significant benefits to many individual 

consumers and have helped stabilize the 

housing and real estate markets. 

Industry commenters and an association 

of State bankers noted that Federal 

agency refinancing programs are subject 

to comprehensive requirements and 

limitations that account for a 

consumer’s ability to repay (e.g., 

demonstrated payment history), and 

participating creditors must document 

and certify program compliance. These 

commenters also noted that these 

refinancing programs are in the interest 

of consumers because they specifically 

require a demonstrated consumer 

benefit such as a lower interest rate, 

lower payment amount, shorter loan 

term, or more stable mortgage product. 

Industry commenters and an association 

of State bankers argued that subjecting 

these Federal agency refinancing 

programs to the ability-to-repay 

requirements would conflict with the 

objectives of the programs, limit 

participation and access to these 

programs, and raise the cost for 

consumers. Without an exemption from 

the ability-to-repay requirements, they 

feared that most Federal agency 

refinancing programs would not be 

used, causing communities and 

homeowners to suffer. Industry 

commenters noted that the exemption 

from the ability-to-repay requirements 

for Federal agency refinancing programs 

would encourage broad participation in 

such programs, which are a critical 

component of the housing market 

recovery, and in light of the improving, 

but continued fragile state, of the 

housing market and broader economy, 

help support market stability. Industry 

commenters argued that the exemption 

would provide more certainty for 

creditors, which would lead to more of 

these types of loans being originated. 

Several commenters asked the Bureau 

to clarify which Federal agency 

refinancing programs would qualify, as 

programs change, may be replaced, and 

new programs may develop in the 

future. In addition, an industry 

commenter suggested clarifying that 

events occurring after closing of a loan 

would not remove the exemption from 

the ability-to-repay requirements, in 

order to provide greater certainty for 

creditors. An industry trade group 

commenter also argued that the Bureau 

should exempt not only loans that are 

eligible for a Federal agency refinancing 

program, but also loans that are or 

would be accepted into such program 

except for a good faith mistake, because 

otherwise creditors will underwrite to 

the ability-to-repay requirements in all 

cases and the benefits of exemption will 

be severely diminished, if not lost 

completely. 

No commenters addressed whether 

Federal agency refinancings should or 

should not be exempt from the abilityto-repay requirements given that FHA, 

VA, and USDA loans, including 

refinances, are afforded qualified 

mortgage status under the Bureau’s 2013 

ATR Final Rule. Specifically, no 

commenters addressed the premise that 

the ability-to-repay requirements could 

impose significant implementation and 

compliance burdens on the designated 

creditors and programs even if credit 

extended by the designated creditors or 

under the designated programs were 

granted a presumption of compliance as 

qualified mortgages. 

Some consumer advocate commenters 

were strongly opposed to the 

exemption, asserting that assessment of 

a consumer’s ability to repay is of 

paramount importance under the 

statutory scheme. These commenters 

contended that consumers could be 

harmed by exempting these extensions 

of credit from the ability-to-repay 

requirements. The primary arguments 

were that serial refinancings (and the 

resulting equity-stripping) were a root 

cause of the financial crisis, and that the 

proposed exemption would leave 

consumers with no recourse. These 

commenters argued that such serial 

refinancings were often not voluntarily 

chosen by the consumer, but, instead, 

were temporary measures that delayed 

foreclosure or were driven by a loan 

originator seeking more business. 

Consumer group commenters argued 

that Federal agency refinance guidelines 

do not contain adequate assurances of 

ability to repay, and asserted that FHA 

streamlined refinances are available 

with no requirement to underwrite for 

affordability and VA streamlined 

refinances are also available without 

any proof of income or appraisal. One 

consumer group commenter stressed 

that the ability-to-repay requirements 

were intended to protect consumers 

from equity-stripping or other forms of 

predatory refinancing practices that 

harmed so many consumers, and that 

refinancing an unaffordable loan with 

other loans that are not responsible or 

affordable does not help consumers. 

This commenter argued that consumers 

do not benefit when they receive loans 

they cannot afford, nor do they benefit 

when a refinance that costs money and 

strips the consumer of equity simply 

delays the inevitable reality that the 

consumer cannot afford his or her home. 

This commenter also stated that the 

proposed exemption would immunize 

creditors from TILA liability with 

respect to refinancings offered to some 

of the most vulnerable consumers, 

enabling unscrupulous creditors to 

engage in serial refinancings that harm 

consumers. This commenter also 

disputed the contention raised by others 

that the ability-to-repay requirements 

are costly and burdensome by asserting 

that the Bureau’s provisions comprise 

basic underwriting requirements that all 

creditors should consider before 

extending refinancing credit. This 

commenter argued that it is not difficult 

to determine a consumer’s ability to 

repay a loan, and that the Bureau’s 

ability-to-repay requirements are 

straightforward, streamlined, and 

should become the industry standard for 

all loans, whether purchase money or 

refinancings. A State attorney general 

also argued that the proposed 

exemption would affect a large segment 

of the mortgage market, thereby 

potentially placing a large number of 

consumers at risk while undermining 

the Bureau’s goal of providing uniform 

standards for the entire mortgage loan 

industry. 

Consumer group commenters and a 

State attorney general also observed that 

these Federal agencies have not yet 

prescribed rules related to the ability-torepay requirements for refinances, 

pursuant to TILA section 129C(a)(5), or 

the definition of qualified mortgage, 

pursuant to TILA section 

129C(b)(3)(B)(ii), but that they have 

nearly a year before the 2013 Final Rule 

goes into effect, which is ample time for 

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them to issue their own rules under the 

Dodd-Frank Act. Accordingly, the State 

attorney general argued that consumers’ 

access to credit will not be seriously 

prejudiced by a temporary application 

of the ability-to-repay requirements 

because these Federal agency rules are 

likely forthcoming. Consumer group 

commenters and the State attorney 

general argued that Federal agencies 

should be bound by the ability-to-repay 

requirements between now and the time 

they issue their own new rules. These 

commenters argued that exempting 

Federal agency refinancing programs 

from the ability-to-repay requirements 

before they have promulgated their own 

rules removes an incentive for the 

agencies to promulgate their own rules 

in a timely manner while opening up 

the possibility that creditors acting 

pursuant to Federal agency refinancing 

programs could originate loans that are 

not responsible or affordable in the 

interim, thereby endangering the most 

vulnerable consumers who receive these 

loans. 

The Final Rule 

The Bureau is withdrawing the 

proposed exemption for the reasons 

below. Upon further review and 

consideration of the comments received, 

the Bureau has determined that the 

proposed exemption would be 

inappropriate. As discussed in the 

Bureau’s proposal, the Bureau was 

concerned that the ability-to-repay 

requirements and qualified mortgage 

provisions would restrict access to 

credit for certain consumers seeking to 

obtain a refinancing. After performing 

additional analysis prompted by the 

comments received, the Bureau believes 

that the qualified mortgage provision 

under § 1026.43(e)(4), which generally 

provides qualified mortgage status to 

loans that are eligible for purchase, 

insurance, or guarantee by the specified 

Federal agencies, including 

refinancings, strikes the appropriate 

balance between preserving consumers’ 

rights to seek redress for violations of 

TILA and ensuring access to 

responsible, affordable credit during the 

current transition period. 

The Bureau agrees with the arguments 

raised by commenters that Federal 

agency refinancing programs have 

helped stabilize the housing and real 

estate markets. The Bureau also 

acknowledges that these programs are 

subject to comprehensive underwriting 

requirements that account for a 

consumer’s ability to repay, which helps 

ensure that consumers receive access to 

credit. Although many commenters 

approved of the proposed exemption for 

the above reasons, these commenters 

did not address the costs and benefits of 

the proposed exemption in light of the 

qualified mortgage status granted to 

loans that are eligible for purchase, 

insurance, or guarantee by the specified 

Federal agencies under the Bureau’s 

2013 ATR Final Rule. Specifically, even 

absent an exemption from the ability-torepay requirements, FHA, VA, and 

USDA loans, including refinancings, are 

given qualified mortgage status under 

the Bureau’s 2013 ATR Final Rule, 

which provides for a temporary category 

of qualified mortgages for loans that 

satisfy the underwriting requirements 

of, and are therefore eligible to be 

purchased, guaranteed, or insured by 

HUD, VA, USDA, or RHS. This 

temporary provision will expire when 

qualified mortgage regulations issued by 

the various Federal agencies become 

effective, and in any event after seven 

years. 

Section 1026.43(e)(4) addresses any 

inconsistencies that may occur between 

the general ability-to-repay and 

qualified mortgage provisions of the 

2013 ATR Final Rule and Federal 

agency requirements, which should 

maintain the status quo in the Federal 

agency refinancing market and ensure 

that consumers are able to obtain 

responsible, affordable refinancing 

credit under these programs. Under the 

temporary qualified mortgage provisions 

in § 1026.43(e)(4), for instance, creditors 

need only comply with the 

documentation and underwriting 

requirements established by the 

respective Federal agencies, and need 

not apply the 43 percent debt-to-income 

ratio or follow the documentation and 

underwriting procedures applicable to 

the general category of qualified 

mortgages under § 1026.43(e)(3) and 

appendix Q. Since the Federal agency 

eligibility generally satisfies the 

requirements of § 1026.43(e)(4), the 

Bureau does not believe that the 

qualified mortgage provisions are 

inconsistent with the requirements of 

Federal agency refinancing programs. 

Under the qualified mortgage 

provision in § 1026.43(e)(4), a loan that 

is eligible to be purchased, guaranteed, 

or insured by the specified Federal 

agencies would still need to meet 

certain minimum requirements imposed 

by the Dodd-Frank Act. To receive 

qualified mortgage status, in addition to 

Federal agency-eligibility, 

§ 1026.43(e)(4)(i)(A) provides that a 

mortgage loan may not include the 

higher-risk loan terms identified in 

§ 1026.43(e)(2)(i) (e.g., negative 

amortization and interest-only 

payments), may not have a loan term 

that exceeds 30 years, and may not 

impose points and fees in excess of the 

thresholds in § 1026.43(e)(3). However, 

while some Federal agency refinancings 

may not be eligible for qualified 

mortgage status, the Bureau does not 

believe that many Federal agency 

refinancings would fail to meet these 

minimum requirements. Although some 

Federal agency refinancings may 

contain the risky features identified in 

§ 1026.43(e)(2)(i) and provide for loan 

terms in excess of 30 years, the Bureau 

does not believe that many consumers 

receive such loans. Further, while 

market-wide data regarding points and 

fees on Federal agency refinancings is 

not available, the Bureau does not 

believe that many Federal agency 

refinancings would provide for points 

and fees in excess of the § 1026.43(e)(3) 

thresholds. Refinancings are usually less 

complicated than purchase transactions. 

Therefore, refinancings generally 

require fewer costs, which makes it 

unlikely that a Federal agency 

refinancing would exceed the points 

and fees thresholds and loans under 

these programs. In addition, the Bureau 

did not receive comment suggesting that 

points and fees on Federal agency 

refinancings exceed the § 1026.43(e)(3) 

thresholds. In any event, to the extent 

that eligibility for qualified mortgage 

status based upon these minimum 

requirements becomes an issue, the 

Bureau notes that the various Federal 

agencies can address any eligibility 

concerns when they prescribe their own 

detailed regulations concerning 

qualified mortgages and refinancings. 

Importantly, as discussed in the 2013 

ATR Final Rule, the Bureau believes 

that Congress intended for loans with 

these risky features, long loan terms, or 

high points and fees to be excluded 

from the scope of the qualified mortgage 

definition. As the Bureau believes that 

few Federal agency refinancings would 

fail to meet these minimum statutory 

requirements, the Bureau does not 

believe that a modification is necessary 

to ensure access to responsible, 

affordable credit. 

The Bureau believes that the 

temporary qualified mortgage provisions 

will help ensure that Federal agency 

refinancing programs will continue to 

be used and provide more certainty for 

creditors, which will lead to more of 

these types of loans being originated, 

and encourage broad participation in 

such programs, which will help support 

market stability. Thus, the Bureau 

disagrees with the concerns raised by 

some commenters that the withdrawal 

of the exemption would conflict with 

the objectives of the programs, limit 

participation and access to these 

programs, impair the effectiveness of 

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35474 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

149See, e.g., 12 CFR 1291.1; 74 FR 38514, 38516 

(Aug. 4, 2009). 

such programs, or raise the cost for 

consumers. The Bureau believes that it 

has provided a sufficient transition 

mechanism until the various Federal 

agencies can prescribe their own 

regulations concerning qualified 

mortgages and refinancings. 

In addition, the Bureau believes that 

the temporary qualified mortgage 

definition more appropriately balances 

risks to consumers than a full 

exemption until such time as the 

Federal agencies can address the 

concerns raised by commenters in their 

own detailed rulemakings. The Bureau 

agrees that the ability-to-repay 

requirements were intended, in part, to 

prevent harmful practices such as equity 

stripping and other forms of predatory 

refinancings. The Bureau’s temporary 

qualified mortgage provision provides 

additional protection to consumers and 

preserves potential claims in the event 

of abuse. For higher-priced qualified 

mortgages, consumers will still have the 

ability to assert a claim under TILA 

section 130(a) and (k) and prove that, 

despite the presumption of compliance 

attached to the qualified mortgage, the 

creditor nonetheless failed to comply 

with the ability-to-repay requirements. 

A consumer who prevails on such a 

claim may be able to recover special 

statutory damages equal to the sum of 

all finance charges and fees paid within 

the first three years after consummation, 

among other damages and costs, and 

may be able to assert the creditor’s 

failure to comply to obtain recoupment 

or setoff in a foreclosure action even 

after the statute of limitations for 

affirmative claims has passed. The 

Bureau received no persuasive evidence 

that the qualified mortgage provisions of 

§ 1026.43(e)(4) fail to strike the 

appropriate balance between consumer 

protection and the needs of the 

mortgage lending market during the 

current transition period. 

Based on these considerations, the 

Bureau has determined that the 

withdrawal of this proposed exemption 

would ensure that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay. Based on the 

qualified mortgage status, the Bureau 

does not believe that the ability-to-repay 

requirements would significantly 

interfere with requirements of these 

Federal agency refinancing programs, 

make it more difficult for many 

consumers to qualify for these programs, 

or increase the cost of credit for those 

who do. The Bureau believes that the 

temporary qualified mortgage definition 

for loans that are eligible for purchase, 

insurance, or guarantee by the specified 

Federal agencies adequately addresses 

concerns about overlapping 

underwriting requirements while also 

preserving consumers’ rights to seek 

redress if an abuse occurs. Accordingly, 

the Bureau concludes that this 

temporary exemption is not necessary to 

preserve access to affordable and 

responsible credit, and, therefore, is 

withdrawing the proposed exemption. 

As discussed above, several industry 

commenters requested various 

modifications to the proposed language. 

For example, some commenters asked 

the Bureau to clarify which Federal 

agency refinancing programs would 

qualify for the exemption from the 

ability-to-repay requirements, as 

programs change, may be replaced, and 

new programs may develop in the 

future. An industry commenter 

suggested clarifying that events 

occurring after closing of a loan would 

not remove the exemption from the 

ability-to-repay requirements, in order 

to provide greater certainty for creditors. 

In addition, an industry trade group 

commenter argued that the Bureau 

should exempt not only loans that are 

eligible for a Federal agency refinance 

program, but also loans that are or 

would be accepted into such program 

except for a good faith mistake. As the 

Bureau has decided to withdraw 

proposed § 1026.43(a)(3)(vii), the issues 

addressed in these and similar 

comments are moot. As discussed 

above, mortgage loans that are eligible 

for purchase, insurance, or guarantee by 

the specified Federal agencies receive 

the temporary qualified mortgage status 

under § 1026.43(e)(4), provided the 

requirements of that paragraph are met. 

43(a)(3)(viii) 

The Bureau’s Proposal 

As discussed above, neither TILA nor 

Regulation Z provides an exemption to 

the ability-to-repay requirements for 

particular lending programs. However, 

comments provided to the Bureau 

during the development of the 2013 

ATR Final Rule suggested that the 

ability-to-repay requirements would 

restrict access to credit for consumers 

seeking to obtain a refinancing under 

certain GSE programs for mortgage loans 

with high loan-to-value ratios or for 

consumers harmed by the financial 

crisis. These programs include HARP, 

which was defined as an ‘‘eligible 

targeted refinancing program’’ in 

regulations promulgated by FHFA, to 

replace high loan-to-value mortgage 

loans with affordable refinancings.149

To gather more information about the 

potential effect of the ability-to-repay 

requirements on programs such as 

HARP and explore a potential 

exemption, the Bureau proposed 

§ 1026.43(a)(3)(viii), which would have 

provided that an extension of credit that 

is a refinancing, as defined under 

§ 1026.20(a) but without regard for 

whether the creditor is the creditor, 

holder, or servicer of the original 

obligation, that is eligible for purchase 

or guarantee by Fannie Mae or Freddie 

Mac is exempt from § 1026.43(c) 

through (f). This proposed exemption 

would have applied provided that: (1) 

The refinancing is made pursuant to an 

eligible targeted refinancing program, as 

defined under 12 CFR 1291.1; (2) such 

entities are operating under the 

conservatorship or receivership of the 

FHFA pursuant to section 1367 of the 

Federal Housing Enterprises Financial 

Safety and Soundness Act of 1992 (12 

U.S.C. 4617(i)) on the date the 

refinancing is consummated; (3) the 

existing obligation satisfied and 

replaced by the refinancing is owned by 

Fannie Mae or Freddie Mac; (4) the 

existing obligation satisfied and 

replaced by the refinancing was not 

consummated on or after January 10, 

2014; and (5) the refinancing was not 

consummated on or after January 10, 

2021. 

Proposed comment 43(a)(3)(viii)-1 

would have explained that 

§ 1026.43(a)(3)(viii) provides an 

exemption from the requirements of 

§ 1026.43(c) through (f) for certain 

extensions of credit that are considered 

refinancings, as defined in § 1026.20(a) 

but without regard for whether the 

creditor is the creditor, holder, or 

servicer of the original obligation, that 

are eligible for purchase or guarantee by 

Fannie Mae or Freddie Mac. The 

comment would also have explained 

that the exemption provided by 

§ 1026.43(a)(3)(viii) would be available 

only while these entities remain in 

conservatorship. The proposed 

comment also contained illustrative 

examples of this provision. 

The Bureau expressed concern that 

unscrupulous creditors would be able to 

use the exemption to engage in loanflipping or other harmful practices. 

Thus, the Bureau requested feedback on 

whether this exemption was generally 

appropriate. In particular, the Bureau 

requested feedback regarding whether 

consumers could be harmed by the 

proposed exemption and whether this 

exemption would ensure access to 

responsible and affordable refinancing 

credit. The Bureau also requested 

feedback regarding the reference to 

eligible targeted refinancing programs 

under proposed § 1026.43(a)(3)(viii)(A). 

Specifically, the Bureau requested 

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150As of April, 2013, HARP refinancings offered 

by Fannie Mae may not include negative 

amortization or interest-only features. See Fannie 

Mae, Single-Family Selling Guide, Chapter 5 (April 

9, 2013), available at https://www.fanniemae.com/ 

content/guide/sel040913.pdf. Freddie Mac does not 

offer mortgage loans with interest-only features and 

prohibits negative amortization on refinancings 

made under its HARP program. See Freddie Mac, 

Single-Family Seller/Servicer Guide, Vol. I, 

Chapters 22.4 and A24.3, available at: http:// 

www.freddiemac.com/sell/guide/. 

151 Data on HARP loans with 40-year loan terms 

is not publicly available. See Federal Housing 

Finance Agency Refinance Report (June 2012), 

available at: http://www.fhfa.gov/webfiles/25164/ 

Feb13RefiReportFinal.pdf. 

152See 78 FR 6516–20 (Jan. 30, 2013). 

comment regarding whether it would be 

more appropriate to refer to another 

public method of identifying 

refinancing programs similar to HARP, 

and, if so, what method of public 

identification would be appropriate. 

The Bureau also solicited feedback 

regarding whether reference to a notice 

published by FHFA pursuant to 12 CFR 

1253.3 or 1253.4 would facilitate 

compliance more effectively than the 

proposed reference in 

§ 1026.43(a)(3)(viii)(A). 

Comments Received 

Many commenters supported the 

proposed exemption. Several industry 

commenters argued that the exemption 

was necessary to prevent the imposition 

of unnecessary costs on consumers. 

These commenters generally believed 

that the ability-to-repay requirements 

were too burdensome and that creditors 

would be forced to raise costs to comply 

with the regulations. One governmentsponsored enterprise commenter argued 

that the exemption was necessary to 

preserve access to credit for consumers 

eligible for a refinancing under HARP. 

This commenter argued that many 

HARP loans would be subject to the 

rebuttable presumption of compliance, 

and that industry would refuse to make 

any loans that fell outside of the safe 

harbor for qualified mortgages. Several 

industry commenters and a Federal 

agency commenter argued that the 

Bureau’s proposed reference to FHFA 

regulations was unnecessary. These 

commenters asserted that FHFA 

oversight was sufficient to ensure that 

consumers would not be harmed by 

creditors offering mortgage loans 

eligible for purchase or guarantee by the 

GSEs. For similar reasons, these 

commenters argued that the Bureau’s 

proposed date on which the exemption 

would expire was unnecessary, as 

consumers would always benefit from a 

GSE-eligible refinancing, regardless of 

when the consumer’s original loan was 

consummated or when the consumer 

obtained the refinancing. Finally, 

several industry commenters and a 

Federal agency commenter argued that 

limiting the refinancing exemption to 

HARP-eligible consumers was 

unnecessary, as all consumers could 

benefit from a GSE refinancing program 

and limiting the exemption to HARPeligible consumers would impose 

needless costs on all other consumers. 

Some of these commenters also asked 

the Bureau to define eligible 

refinancings by reference to the Fannie 

Mae or Freddie Mac selling or servicing 

guides, and some asked the Bureau to 

expand the exemption to include 

refinancings eligible for non-GSE 

streamlined refinancing programs. 

One consumer advocate commenter 

strongly opposed the proposed 

exemption. This commenter stressed 

that predatory refinancings were one of 

the primary causes of the financial crisis 

and that the ability-to-repay 

requirements were intended to protect 

consumers from the abusive equitystripping practices that harmed so many 

consumers. This commenter stated that 

the proposed exemption would 

immunize creditors from TILA liability 

with respect to refinancings offered to 

some of the most vulnerable consumers, 

enabling unscrupulous creditors to 

engage in serial refinancings that harm 

consumers. This commenter also 

disputed the contention raised by others 

that the ability-to-repay requirements 

are costly and burdensome by asserting 

that the Bureau’s provisions comprise 

basic underwriting requirements that all 

creditors should consider before 

extending refinancing credit. A State 

attorney general also opposed the 

proposed exemption for similar reasons. 

This commenter also argued that the 

proposed exemption would affect a 

large segment of the mortgage market, 

thereby potentially placing a large 

number of consumers at risk while 

undermining the Bureau’s goal of 

providing uniform standards for the 

entire mortgage loan industry. 

The Final Rule 

The Bureau is withdrawing the 

proposed exemption for the reasons 

discussed below. Upon further review 

and consideration of the comments 

received, the Bureau has determined 

that the proposed exemption would be 

inappropriate. As discussed in the 

Bureau’s proposal, the Bureau was 

concerned that the ability-to-repay 

requirements and qualified mortgage 

provisions would restrict access to 

credit for certain consumers seeking to 

obtain a refinancing. After performing 

additional analysis prompted by the 

comments received, the Bureau believes 

that the special qualified mortgage 

provision under § 1026.43(e)(4), which 

generally provides qualified mortgage 

status to GSE-eligible mortgage loans, 

including refinancings, strikes the 

appropriate balance between preserving 

consumers’ rights to seek redress for 

violations of TILA and ensuring access 

to responsible, affordable credit during 

the current transition period. 

The Bureau acknowledges that, under 

the qualified mortgage provision in 

§ 1026.43(e)(4), a HARP loan would still 

need to meet certain minimum 

requirements imposed by the DoddFrank Act. To receive qualified 

mortgage status, in addition to GSEeligibility, § 1026.43(e)(4)(i)(A) provides 

that a mortgage loan may not include 

the higher-risk loan terms identified in 

§ 1026.43(e)(2)(i) (e.g., negative 

amortization and interest-only 

payments), may not have a loan term 

that exceeds 30 years, and may not 

impose points and fees in excess of the 

thresholds in § 1026.43(e)(3). However, 

while some HARP refinancings may not 

be eligible for this qualified mortgage 

status, the Bureau does not believe that 

many HARP loans would fail to meet 

these minimum requirements. 

Currently, HARP refinancings generally 

may not contain the risky features 

identified in § 1026.43(e)(2)(i).150 While, 

HARP programs permit refinancings 

that provide for loan terms in excess of 

30 years, the Bureau does not believe 

that many consumers receive such 

loans.151 Furthermore, while marketwide data regarding points and fees on 

HARP loans is not available, the Bureau 

does not believe that many HARP loans 

would provide for points and fees in 

excess of the § 1026.43(e)(3) thresholds. 

Refinancings are usually less 

complicated than purchase transactions. 

Therefore, refinancings generally 

require fewer costs, which makes it 

unlikely that a HARP loan would 

exceed the points and fees thresholds, 

and loans under this program would not 

likely be subject to some types of 

pricing abuses related to refinancings 

generally. In addition, the Bureau did 

not receive comment suggesting that 

points and fees on HARP loans exceed 

the § 1026.43(e)(3) thresholds. 

Importantly, as discussed in the 2013 

ATR Final Rule, the Bureau believes 

that Congress intended for loans with 

these risky features, long loan terms, or 

high points and fees to be excluded 

from the scope of the qualified mortgage 

definition.152 As the Bureau believes 

that few HARP loans would fail to meet 

these minimum statutory requirements, 

the Bureau does not believe that a 

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modification is necessary to ensure 

access to responsible, affordable credit. 

Although many commenters approved 

of the proposed exemption, these 

commenters generally did not address 

the costs and benefits of the proposed 

exemption in light of the special 

qualified mortgage status granted to 

GSE-eligible loans under the Bureau’s 

January 2013 ATR Final Rule. For 

example, several commenters asserted 

that the ability-to-repay requirements 

were incompatible with HARP program 

requirements. However, given that GSE 

eligibility generally satisfies the 

requirements of § 1026.43(e)(4), the 

Bureau does not believe that the special 

qualified mortgage provisions are 

inconsistent with the requirements of 

HARP or similar programs. For the same 

reasons, the Bureau does not agree with 

the arguments advanced by several 

commenters that the ability-to-repay 

requirements would add costs that 

would make these programs 

unsustainable. These comments did not 

explain what additional costs would be 

imposed by the regulation beyond the 

costs creditors would incur in 

determining GSE eligibility, which 

would be required even in the absence 

of the Bureau’s requirements. Based on 

the comments provided, the Bureau 

does not believe that the requirements 

of § 1026.43(e)(4) impose any additional 

meaningful costs on creditors. Thus, it 

does not appear that the ability-to-repay 

requirements would impair the 

effectiveness of programs such as HARP. 

While one GSE commenter addressed 

the potential difference between the 

proposed exemption and the qualified 

mortgage provisions, the Bureau is not 

persuaded by the arguments that 

creditors would rather cease extending 

credit than make a qualified mortgage 

loan subject to the rebuttable 

presumption. As discussed above, as 

GSE eligibility generally satisfies the 

requirements of § 1026.43(e)(4), the 

Bureau does not believe that creditors 

making qualified mortgages would incur 

any meaningful additional risk by 

making mortgage loans pursuant to the 

eligibility requirements prescribed by 

GSEs. The Bureau believes that the 

ability-to-repay requirements and 

qualified mortgage provisions reflect 

standard industry underwriting 

practices, and that creditors that make a 

reasonable effort to determine a 

consumer’s ability to repay would not 

be concerned with potential litigation 

risk that may result from the rebuttable 

presumption. Thus, based on the 

feedback provided, the Bureau does not 

believe that a creditor would incur 

much, if any, additional cost by 

extending refinancing credit under the 

qualified mortgage provisions of 

§ 1026.43(e)(4) as opposed to the 

exemption under proposed 

§ 1026.43(a)(3)(viii). Absent evidence 

that the special qualified mortgage 

provisions for GSE-eligible loans impose 

significant costs on creditors, the 

Bureau does not believe that consumers 

are at risk of being denied responsible, 

affordable mortgage credit. 

On the other hand, there is a risk that 

consumers could be harmed by the 

proposed exemption. The Bureau is 

persuaded by the arguments that the 

proposed exemption could potentially 

enable unscrupulous creditors to harm 

consumers. The Bureau agrees that the 

ability-to-repay requirements were 

intended, in part, to prevent harmful 

practices such as equity-stripping. 

While the abuses of the past are 

seemingly absent from today’s mortgage 

market, the Bureau does not believe it 

would be appropriate to deny 

consumers the means to seek redress for 

TILA violations. As discussed above, 

the § 1026.43(e)(4) qualified mortgage 

provision provides additional protection 

to consumers and preserves potential 

claims in the event of abuse. For higherpriced qualified mortgages, consumers 

will still have the ability to assert a 

claim under TILA section 130(a) and (k) 

and prove that, despite the presumption 

of compliance attached to the qualified 

mortgage, the creditor nonetheless failed 

to comply with the ability-to-repay 

requirements. Thus the cost to 

consumers of an exemption could be 

significant, as opposed to the relatively 

insignificant costs associated with 

complying with the special qualified 

mortgage provisions. Furthermore, given 

the detailed GSE eligibility 

requirements, the Bureau does not 

believe it is likely that a creditor 

operating a legitimate mortgage lending 

operation would face meaningful 

litigation risk by originating qualified 

mortgages, even those subject to the 

rebuttable presumption. The Bureau 

received no persuasive comments 

contradicting the Bureau’s belief that 

the special qualified mortgage 

provisions of § 1026.43(e)(4) strikes the 

appropriate balance between consumer 

protection and the needs of the 

mortgage lending market during the 

current transition period. Absent 

persuasive evidence that the qualified 

mortgage provisions would endanger 

access to credit for the consumers 

addressed by the proposal, the Bureau 

does not believe that permitting this risk 

of consumer abuse is appropriate. Thus, 

the Bureau concludes that the proposed 

exemption is neither necessary nor 

proper, and proposed 

§ 1026.43(a)(3)(viii) is withdrawn. 

As discussed above, several industry 

commenters and a Federal agency 

commenter requested various 

modifications to the proposed language. 

For example, some commenters argued 

that the exemption should refer to the 

Fannie Mae or Freddie Mac selling 

guide, some commenters requested that 

the Bureau provide an exemption for all 

streamlined refinancing programs, and 

some commenters asked the Bureau to 

adopt the proposed exemption without 

the time limitations in proposed 

§ 1026.43(a)(3)(viii)(D) and (E). As the 

Bureau has decided to withdraw 

proposed § 1026.43(a)(3)(viii), the issues 

addressed in these and similar 

comments are moot. As discussed 

above, mortgage loans made under a 

streamlined refinancing program are 

eligible for the temporary qualified 

mortgage status under § 1026.43(e)(4), 

provided the requirements of that 

paragraph are met. 

43(b) Definitions 

43(b)(4) 

Background 

TILA section 129C(a)(1) through (4) 

and the Bureau’s rules thereunder, 

§ 1026.43(c), prohibit a creditor from 

making a residential mortgage loan 

unless the creditor makes a reasonable, 

good faith determination, based on 

verified and documented information, 

that the consumer has a reasonable 

ability to repay the loan. TILA section 

129C(b) provides a presumption of 

compliance with regard to these abilityto-repay requirements if a loan is a 

qualified mortgage. Creditors may view 

qualified mortgage status as important at 

least in part because TILA section 130(a) 

and (k) provide that, if a creditor fails 

to comply with the ability-to repay 

requirements, a consumer may be able 

to recover special statutory damages 

equal to the sum of all finance charges 

and fees paid within the first three years 

after consummation, among other 

damages and costs, and may be able to 

assert the creditor’s failure to comply to 

obtain recoupment or setoff in a 

foreclosure action even after the statute 

of limitations for affirmative claims has 

passed. TILA section 129C(b)(3)(B)(i) 

authorizes the Bureau to prescribe 

regulations that revise, add to, or 

subtract from the criteria that define a 

qualified mortgage upon a finding that 

such regulations are, among other 

things, necessary or proper to ensure 

that responsible, affordable credit 

remains available to consumers in a 

manner consistent with the purposes of 

TILA section 129C. 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35477 

Section 1026.43(e)(1) specifies the 

strength of presumption of compliance 

regardless of which regulatory 

definition of qualified mortgage applies. 

Under § 1026.43(e)(1)(i), a qualified 

mortgage that is not a higher-priced 

covered transaction as defined in 

§ 1026.43(b)(4) is subject to a conclusive 

presumption of compliance, or safe 

harbor. In contrast, under 

§ 1026.43(e)(1)(ii) a qualified mortgage 

that is a higher-priced covered 

transaction is subject to a rebuttable 

presumption of compliance. 

Section 1026.43(b)(4) defines a 

higher-priced covered transaction to 

mean a transaction within the scope of 

§ 1026.43 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 1.5 or 

more percentage points for a first-lien 

covered transaction or by 3.5 or more 

percentage points for a subordinate-lien 

covered transaction. The average prime 

offer rates are published weekly by the 

Federal Financial Institutions 

Examination Council based on a 

national survey of creditors, the Freddie 

Mac Primary Mortgage Market Survey®. 

The average prime offer rates estimate 

the national average APR for first-lien 

mortgages offered to consumers with 

good credit histories and low-risk 

transaction features (e.g., loan-to-value 

ratios of 80 percent or less). The higherpriced covered transaction thresholds 

generally conform to the thresholds for 

‘‘higher-priced mortgage loans’’ under 

§ 1026.35, which contains escrow 

requirements and other special 

protections adopted after the financial 

crisis for loans that have traditionally 

been considered subprime. 

Section 1026.43(e) and (f) defines 

three categories of qualified mortgages. 

First, § 1026.43(e)(2) provides a general 

definition of a qualified mortgage. 

Second, § 1026.43(e)(4) provides that 

loans that are eligible to be purchased, 

guaranteed, or insured by certain 

government agencies or Fannie Mae or 

Freddie Mac are qualified mortgages, 

subject to certain restrictions including 

restrictions on product features and 

points and fees. Section 1026.43(e)(4) 

expires after seven years and may expire 

sooner with respect to some loans if 

other government agencies exercise 

their rulemaking authority under TILA 

section 129C or if Fannie Mae or 

Freddie Mac exit conservatorship. 

Third, § 1026.43(f) provides that 

certain balloon-payment loans are 

qualified mortgages if they are made by 

a small creditor that: 

• Had total assets less than $2 billion 

(adjusted annually for inflation) as of 

the end of the preceding calendar year; 

• Together with all affiliates, 

extended 500 or fewer first-lien 

mortgages during the preceding 

calendar year; and 

• Extended more than 50 percent of 

its total mortgages secured by properties 

that are in rural or underserved areas 

during the preceding calendar year. 

Section 1026.43(f) includes only 

balloon-payment loans held in portfolio 

for at least three years by these small 

creditors, subject to certain exceptions. 

Further, it includes only loans that were 

not subject, at consummation, to a 

commitment to be acquired by any 

person other than another qualified 

small creditor. 

As discussed in the section-by-section 

analysis of § 1026.43(e)(5) below, the 

Bureau proposed and is adopting an 

additional fourth category of qualified 

mortgages that includes certain loans 

originated and held in portfolio by small 

creditors. Like § 1026.43(f), 

§ 1026.43(e)(5) includes loans originated 

and held in portfolio by creditors that 

had total assets less than $2 billion 

(adjusted annually for inflation) as of 

the end of the preceding calendar year 

and, together with all affiliates, 

extended 500 or fewer first-lien 

mortgages during the preceding 

calendar year. Unlike § 1026.43(f), new 

§ 1026.43(e)(5) is not limited to creditors 

that operate predominantly in rural or 

underserved areas and does not include 

loans with a balloon payment. 

Proposal Regarding Higher-Priced 

Covered Transactions 

The Bureau proposed to amend the 

definition of higher-priced covered 

transaction in § 1026.43(b)(4) with 

respect to qualified mortgages that are 

originated and held in portfolio by small 

creditors as described in § 1026.43(e)(5) 

and with respect to balloon-payment 

qualified mortgages originated and held 

in portfolio by small creditors operating 

predominantly in rural or underserved 

areas as described in § 1026.43(f). The 

Bureau proposed to amend 

§ 1026.43(b)(4) to provide that a firstlien loan that is a qualified mortgage 

under § 1026.43(e)(5) or (f) is a higherpriced covered transaction if the annual 

percentage rate exceeds APOR for a 

comparable transaction by 3.5 or more 

percentage points. This would have the 

effect of extending the qualified 

mortgage safe harbor described in 

§ 1026.43(e)(1)(i) to first-lien loans that 

are qualified mortgages under 

§ 1026.43(e)(5) or (f) that have an annual 

percentage rate between 1.5 and 3.5 

percentage points above APOR. As 

discussed in more detail below, the 

Bureau understands that small creditors 

often charge higher rates and fees than 

larger creditors for reasons including 

their higher cost of funds. The Bureau 

proposed this amendment to 

§ 1026.43(b)(4) because it believes that 

many loans made by small creditors will 

exceed the existing qualified mortgage 

safe harbor threshold. Without the 

proposed amendment to § 1026.43(b)(4), 

these loans would be considered higherpriced covered transactions and would 

fall under the rebuttable presumption of 

compliance described in 

§ 1026.43(e)(1)(ii). The Bureau was 

concerned that small creditors would be 

less likely to make such loans due to 

concerns about liability risk, thereby 

reducing access to responsible credit. 

Comments Received 

The Bureau solicited comment on 

several issues related to the proposed 

amendments to § 1026.43(b)(4). First, 

the Bureau solicited comment regarding 

whether the proposed amendments to 

§ 1026.43(b)(4) are necessary to preserve 

access to responsible, affordable 

mortgage credit and regarding any 

adverse effects the proposed 

amendments would have on consumers. 

Most commenters agreed that small 

creditors may charge more than larger 

creditors for legitimate business reasons; 

that amending the definition of higherpriced covered transaction for these 

types of qualified mortgages is necessary 

to preserve access to responsible, 

affordable mortgage credit; and that the 

rule would provide appropriate 

protection for consumers even with a 

higher interest rate threshold. 

Commenters expressing this view 

included some consumer advocacy 

organizations, coalitions of State 

regulators, national and State trade 

groups representing creditors, national 

and State mortgage bankers associations, 

a national association representing 

home builders, one very large creditor, 

and many small creditors. 

A much smaller number of 

commenters opposed the proposed 

amendments. These included other 

consumer advocacy organizations, a 

trade group representing very large 

creditors, a national organization 

representing mortgage brokers, a letter 

submitted in substantially similar form 

by several individual mortgage brokers, 

and one very large creditor. These 

commenters generally argued that a 

consumer’s ability to repay does not 

depend on the creditor’s size and that 

the same standards therefore should 

apply to all creditors. One of these 

commenters argued that small creditors 

do not need to charge higher rates and 

fees because their higher costs are offset 

by lower default rates. 

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The Bureau also solicited comment on 

the proposed 3.5 percentage point 

threshold and whether another 

threshold would be more appropriate. 

While many commenters supported the 

proposed 3.5 percentage point 

threshold, several commenters argued 

that the proposed 3.5 percentage point 

threshold was not sufficient and should 

be raised. Commenters expressing this 

view included a national trade group 

representing creditors, State bankers 

associations, and several small 

creditors. These commenters generally 

suggested thresholds between 4.0 and 

5.5 percentage points above APOR. 

Several of these commenters, including 

the national trade group, cited the 

traditional principle that small creditors 

generally must charge consumers 4.0 

percentage points above the creditor’s 

cost of funds in order to operate safely 

and soundly. 

Finally, the Bureau solicited comment 

on whether, to preserve access to 

mortgage credit, the Bureau also should 

raise the threshold for subordinate-lien 

covered transactions that are qualified 

mortgages under § 1026.43(e)(5) and (f), 

and, if so, what threshold would be 

appropriate for those loans. A small 

number of commenters, including a 

State bankers association and several 

small creditors, urged the Bureau to 

adopt a higher threshold for 

subordinate-lien covered transactions. 

These commenters generally argued that 

subordinate-lien loans entail inherently 

greater credit risk and that a higher 

threshold was needed to account for this 

additional risk. Most commenters did 

not address the threshold for 

subordinate-lien loans. 

The Final Rule 

The amendments to § 1026.43(b)(4) 

are adopted as proposed. The Bureau 

believes the amendments are warranted 

to preserve access to responsible, 

affordable mortgage credit for some 

consumers, including consumers who 

do not qualify for conforming mortgage 

credit and consumers in rural and 

underserved areas, as described below. 

As discussed above in part II.A, the 

Bureau understands that small creditors 

are a significant source of loans that do 

not conform to the requirements for 

government guarantee and insurance 

programs or purchase by entities such as 

Fannie Mae and Freddie Mac. The 

Bureau also understands that larger 

creditors may be unwilling to make at 

least some of these loans because the 

consumers or properties involved 

cannot be accurately assessed using the 

standardized underwriting criteria 

employed by larger creditors or are 

illiquid because they are nonconforming and therefore entail greater 

risk. For similar reasons, the Bureau 

understands that larger creditors may be 

unwilling to purchase such loans. Small 

creditors often are willing to evaluate 

the merits of unique consumers and 

properties using flexible underwriting 

criteria and make highly individualized 

underwriting decisions. Small creditors 

often hold these loans on their balance 

sheets, retaining the associated credit, 

liquidity, and other risks. 

The Bureau also understands that 

small creditors are a significant source 

of credit in rural and underserved areas. 

As discussed above in part II.A, small 

creditors are significantly more likely 

than larger creditors to operate offices in 

rural areas, and there are hundreds of 

counties nationwide where the only 

creditors are small creditors and 

hundreds more where larger creditors 

have only a limited presence. 

The Bureau also understands that 

small creditors, including those 

operating in rural and underserved 

areas, may charge consumers higher 

interest rates and fees than larger 

creditors for several legitimate business 

reasons. As discussed above in part II.A, 

small creditors may pay more for funds 

than larger creditors. Small creditors 

generally rely heavily on deposits to 

fund lending activities and therefore 

pay more in expenses per dollar of 

revenue as interest rates fall and the 

spread between loan yields and deposit 

costs narrows. Small creditors also may 

rely more on interest income than larger 

creditors, as larger creditors obtain 

higher percentages of their income from 

noninterest sources such as trading, 

investment banking, and fiduciary 

services. 

In addition, small creditors may find 

it more difficult to limit their exposure 

to interest rate risk than larger creditors 

and therefore may charge higher rates to 

compensate for that exposure. Similarly, 

any individual loan poses a 

proportionally more significant credit 

risk to a smaller creditor than to a larger 

creditor, and small creditors may charge 

higher rates or fees to compensate for 

that risk. Consumers obtaining loans 

that cannot readily be sold into the 

securitization markets also may pay 

higher interest rates and fees to 

compensate for the risk associated with 

the illiquidity of such loans. 

Small creditors, including those 

operating in rural and underserved 

areas, have repeatedly asserted to the 

Bureau and to other regulators that they 

are unable or unwilling to assume the 

risk of litigation associated with lending 

outside the qualified mortgage safe 

harbor. The Bureau does not believe that 

the regulatory requirement to make a 

reasonable and good faith determination 

based on verified and documented 

evidence that a consumer has a 

reasonable ability to repay would entail 

significant litigation risk for small 

creditors, especially where their loan 

meets a qualified mortgage definition 

and qualifies for a rebuttable 

presumption of compliance. As 

discussed in part II.A above, small 

creditors as a group have consistently 

experienced lower credit losses for 

residential mortgage loans than larger 

creditors. The Bureau believes this is 

strong evidence that small creditors 

have historically engaged in responsible 

mortgage underwriting that includes 

considered determinations of 

consumers’ ability to repay, at least in 

part because they bear the risk of default 

associated with loans held in their 

portfolios. The Bureau also believes that 

because many small creditors use a 

lending model based on maintaining 

ongoing relationships with their 

customers and have specialized 

knowledge of the community in which 

they operate, they therefore may have a 

more comprehensive understanding of 

their customers’ financial circumstances 

and may be better able to assess ability 

to repay than larger creditors. In 

addition, the Bureau believes that small 

creditors operating in limited 

geographical areas may face significant 

risk of harm to their reputation within 

their community if they make loans that 

consumers cannot repay. At the same 

time, because of the relationship small 

creditors have with their customers, the 

Bureau believes that the likelihood of 

litigation between a customer and his or 

her community bank or credit union is 

low. 

However, the Bureau acknowledges 

that due to their size small creditors 

may find even a remote prospect of 

litigation risk to be so daunting that they 

may change their business models to 

avoid it. The Bureau also believes that 

the exit of small creditors from the 

residential mortgage market could create 

substantial short-term access to credit 

issues. 

The Bureau continues to believe that 

raising the interest rate threshold as 

proposed is necessary and appropriate 

to preserve access to responsible, 

affordable credit for consumers that are 

unable to obtain loans from other 

creditors because they do not qualify for 

conforming loans or because they live in 

rural or underserved areas. The existing 

qualified mortgage safe harbor applies to 

first-lien loans only if the annual 

percentage rate is less than 1.5 

percentage points above APOR for 

comparable transactions. The Bureau 

believes that many loans made by small 

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153The FDIC Community Banking Study, to 

which the Bureau has referred as authority for the 

point that small creditors have historically incurred 

lower credit losses than larger creditors, indicates 

that despite their lower credit losses and lower noninterest expenses, community banks on average 

have lower (worse) pre-tax return on assets and a 

higher and increasing (worse and deteriorating) 

ratio of noninterest expense to net operating 

revenue than noncommunity banks. The study 

attributes these in large part to community banks’ 

reliance on interest income and the narrowing of 

the spread between asset yields and funding costs 

due to a prolonged period of historically low 

interest rates. FDIC Community Banking Study, p. 

IV–V, 4–1–4–11. See also GAO Community Banks 

and Credit Unions Report, p. 10–11. 

154See 78 FR 6514. 

155These adjustments are also consistent with the 

Bureau’s authority under TILA section 

129C(b)(3)(B)(i) to prescribe regulations that revise, 

add to, or subtract from the criteria that define a 

qualified mortgage upon a finding that such 

regulations are necessary or proper to ensure that 

responsible, affordable mortgage credit remains 

available to consumers in a manner consistent with 

Continued 

creditors, including those operating in 

rural and underserved areas, will exceed 

that threshold but will not pose risks to 

consumers. These small creditors have 

repeatedly asserted to the Bureau and 

other regulators that they will not 

continue to extend mortgage credit 

unless they can make loans that are 

covered by the qualified mortgage safe 

harbor. The Bureau therefore believes 

that, unless § 1026.43(b)(4) is amended 

as proposed, small creditors operating 

in rural and underserved areas may 

reduce the number of mortgage loans 

they make or stop making mortgage 

loans altogether, limiting the availability 

of nonconforming mortgage credit and 

of mortgage credit in rural and 

underserved areas. 

The Bureau is sensitive to concerns 

about the consistency of protections for 

all consumers and about maintaining a 

level playing field for market 

participants, but believes that a 

differentiated approach is justified here. 

The commenters who suggested that 

consumers’ interests are best served by 

subjecting all creditors to the same 

standards provided nothing substantive 

that refutes the points raised in the 

Bureau’s proposal regarding the lending 

track records and business models of 

small creditors, their concerns about 

litigation risk and compliance burden, 

and the potential access to credit 

problems the Bureau believes will arise 

if § 1026.43(b)(4) is not amended. For 

example, these commenters have not 

indicated that large creditors would be 

able and willing to fulfill the role 

currently played by small creditors in 

providing access to responsible, 

affordable nonconforming credit or 

credit in rural and underserved areas, 

nor have they provided evidence that 

the Bureau’s concerns about limitations 

on access to credit if the interest rate 

threshold is not raised are unfounded. 

One commenter asserted that small 

creditors’ lower credit losses are 

sufficient to offset their higher costs, 

making it unnecessary to raise the 

interest rate threshold. While the 

Bureau understands that small creditors 

have historically had lower credit 

losses, this commenter provided no 

evidence that these lower losses are 

sufficient to offset small creditors’ 

higher cost of funds and greater reliance 

on interest income and the greater risks 

associated with holding loans in a 

comparatively small portfolio, and the 

Bureau is not aware of any such 

evidence.153 In addition, these 

commenters have provided no evidence 

to challenge the Bureau’s view, as 

described in the proposal, above, and in 

the section-by-section analysis of 

§ 1026.43(e)(5) below, that the 

combination of the small creditors’ 

relationship lending model, local 

knowledge, and other characteristics 

and the inherent incentives of portfolio 

lending are sufficient to protect 

consumers. 

The Bureau does not believe, 

however, that it is necessary to raise the 

threshold for first-lien covered 

transactions above APOR plus 3.5 

percentage points for either first-lien or 

subordinate-lien loans as suggested by 

some commenters. The Bureau 

estimated the average cost of funds for 

small creditors from publicly available 

call reports filed by small creditors 

between 2000 and 2012. These estimates 

suggest that the majority of first-lien 

mortgage loans priced by a small 

creditor at the creditor’s cost of funds 

plus 4.0 percentage points, the 

traditional principle of small creditor 

safe and sound lending noted by several 

commenters, would fall below even the 

original threshold of APOR plus 1.5 

percentage points. However, the Bureau 

acknowledges that its estimates are 

averages that do not reflect individual or 

regional differences in cost of funds and 

do not reflect the additional credit risk 

associated with subordinate-lien loans. 

The Bureau believes that the additional 

2.0 percentage points afforded by the 

APOR plus 3.5 percentage point 

standard are sufficient to address these 

differences. The Bureau therefore 

believes that amending § 1026.43(b)(4) 

as proposed will allow small creditors 

to lend at a sustainable rate and still fall 

within the qualified mortgage safe 

harbor, thereby preserving access to 

affordable, responsible credit. 

As discussed below in the section-bysection analysis of § 1026.43(e)(6), the 

Bureau is providing a two-year 

transition period during which small 

creditors may make balloon-payment 

qualified mortgages regardless of 

whether they operate predominantly in 

rural or underserved areas. The Bureau 

therefore is amending § 1026.43(b)(4) to 

include references to § 1026.43(e)(6) and 

to provide that a first-lien loan that is a 

qualified mortgage under § 1026.43(e)(6) 

is a higher priced covered transaction if 

the annual percentage rate exceeds 

APOR for a comparable transaction by 

3.5 or more percentage points. This 

provision would apply to the same 

creditors and loans as § 1026.43(e)(5) 

and (f). The Bureau therefore believes 

that the rationales regarding raising the 

interest rate threshold for qualified 

mortgages under § 1026.43(e)(5) and (f) 

described above apply with equal force 

to qualified mortgages under this new 

provision. 

Accordingly, the Bureau is exercising 

its authority under TILA sections 105(a) 

to amend § 1026.43(b)(4) substantially 

as proposed, with conforming 

amendments as described above. 

Pursuant to TILA section 105(a) the 

Bureau generally may prescribe 

regulations that 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, among 

other things. In the 2013 ATR Final Rule 

the Bureau stated that it interpreted 

TILA section 129C(b)(1) to create a 

rebuttable presumption for qualified 

mortgages generally and exercised its 

adjustment authority under TILA 105(a) 

with respect to prime loans (loans with 

an APR that do not exceed APOR by 1.5 

percentage points for first liens and 3.5 

percentage points for second liens), to 

provide a conclusive presumption (e.g., 

safe harbor).154 In this final rule the 

Bureau uses its TILA section 105(a) 

adjustment authority to further expand 

the safe harbor to include certain 

covered transactions (those subject to 

the qualified mortgage definition under 

paragraph (e)(5), (e)(6) or (f)) that have 

an APR that exceeds the prime offer rate 

for a comparable transaction as of the 

date the interest rate is set by 3.5 

percentage points for a first-lien covered 

transaction. 

The Bureau believes that this 

adjustment to also provide a safe harbor 

for these loans is necessary and proper 

to facilitate compliance with and to 

effectuate the purposes of TILA, 

including to assure that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay the loans.155 As 

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35480 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

the purposes of this section, necessary and 

appropriate to effectuate the purposes of TILA 

section 129B and section 129C, to prevent 

circumvention or evasion thereof, or to facilitate 

compliance with such section. 

described above, the Bureau believes 

that, unless § 1026.43(b)(4) is amended, 

small creditors will be less likely to 

make residential mortgage loans. 

Because small creditors are a significant 

source of nonconforming mortgage 

credit and mortgage credit generally in 

rural or underserved areas, this would 

significantly limit access to mortgage 

credit for some consumers. The Bureau 

also believes that the relationship 

lending model, qualitative local 

knowledge, and size of small creditors, 

combined with the intrinsic incentives 

of portfolio lending, provide strong 

assurances that these creditors will 

make reasonable and good faith 

determinations of consumers’ ability to 

repay. Providing a safe harbor for these 

loans facilitates compliance with the 

ability-to-repay standards in a manner 

consistent with the purposes of TILA. 

43(e) Qualified Mortgages 

43(e)(1) Safe Harbor and Presumption of 

Compliance 

The Bureau is adopting two 

additional provisions regarding 

qualified mortgages, as discussed in the 

section-by-section analyses of 

§ 1026.43(e)(5) and (6) below. The 

Bureau therefore is adopting conforming 

changes to § 1026.43(e)(1) to include 

references to these new provisions. Like 

other qualified mortgages, qualified 

mortgages under § 1026.43(e)(5) and (6) 

are covered by the safe harbor described 

in § 1026.43(e)(1)(i) if they are not 

higher-priced covered transactions and 

are subject to the rebuttable 

presumption of compliance described in 

§ 1026.43(e)(1)(ii) if they are higherpriced covered transactions. However, 

the Bureau is adopting a different 

definition of higher-priced covered 

transaction to first-lien qualified 

mortgages under § 1026.43(e)(5) and (6). 

The section-by-section analysis of 

§ 1026.43(b)(4), above, describes the 

alternate definition of higher-priced 

covered transactions. 

43(e)(2) Qualified Mortgage Defined— 

General 

The Bureau is adopting conforming 

amendments to § 1026.43(e)(2) to 

include references to § 1026.43(e)(5) and 

(6), as described in the section-bysection analyses of those sections, 

below. 

43(e)(5) Qualified Mortgage Defined— 

Small Creditor Portfolio Loans 

Background 

TILA section 129C(a)(1) through (4) 

and the Bureau’s rules thereunder, 

§ 1026.43(c), prohibit a creditor from 

making a residential mortgage loan 

unless the creditor makes a reasonable, 

good faith determination, based on 

verified and documented information, 

that the consumer has a reasonable 

ability to repay the loan. TILA section 

129C(b) provides that a creditor or 

assignee may presume that a loan has 

met the ability-to-repay requirements if 

a loan is a qualified mortgage. Creditors 

may view qualified mortgage status as 

important at least in part because TILA 

section 130 provides that, if a creditor 

fails to comply with the ability-to-repay 

requirements, a consumer may be able 

to recover special statutory damages 

equal to the sum of all finance charges 

and fees paid within the first three years 

after consummation, among other 

damages and costs, and may be able to 

assert the creditor’s failure to comply to 

obtain recoupment or setoff in a 

foreclosure action even after the statute 

of limitations on affirmative claims has 

expired. TILA section 129C(b)(2)(A)(vi) 

authorizes, but does not require, the 

Bureau to establish limits on debt-toincome ratio or other measures of a 

consumer’s ability to pay regular 

expenses after making payments on 

mortgage and other debts. TILA section 

129C(b)(3)(B)(i) authorizes the Bureau to 

revise, add to, or subtract from the 

criteria that define a qualified mortgage 

upon a finding that such regulations are, 

among other things, necessary or proper 

to ensure that responsible, affordable 

credit remains available to consumers in 

a manner consistent with the purposes 

of TILA section 129C or necessary and 

appropriate to effectuate the purposes of 

TILA sections 129B and 129C. 

Section 1026.43(e) and (f) defines 

three categories of qualified mortgages. 

First, § 1026.43(e)(2) prescribes the 

general definition of a qualified 

mortgage. Second, § 1026.43(e)(4) 

provides that certain loans that are 

eligible to be purchased, guaranteed, or 

insured by certain Federal government 

agencies or Fannie Mae or Freddie Mac 

while operating under conservatorship 

are qualified mortgages. Section 

1026.43(e)(4) expires seven years after 

its effective date and may expire earlier 

with respect to certain loans if other 

Federal government agencies exercise 

their rulemaking authority under TILA 

section 129C or if the GSEs exit 

conservatorship. Third, § 1026.43(f) 

provides that certain loans with a 

balloon payment made by small 

creditors operating predominantly in 

rural or underserved areas are qualified 

mortgages. 

The Bureau’s Proposal 

The Bureau proposed to define a 

fourth category of qualified mortgages 

including loans originated and held in 

portfolio by certain small creditors in 

new § 1026.43(e)(5). This additional 

category of qualified mortgages would 

have been similar in several respects to 

§ 1026.43(f), which provides that certain 

balloon loans made by small creditors 

operating predominantly in rural or 

underserved areas are qualified 

mortgages. As under § 1026.43(f), the 

additional category would have 

included loans originated by small 

creditors, as defined by asset-size and 

transaction thresholds, and held in 

portfolio by those creditors for at least 

three years, subject to certain 

exceptions. However, proposed 

§ 1026.43(e)(5) would have included 

small creditors that do not operate 

predominantly in rural or underserved 

areas and would not have included 

loans with a balloon payment. 

Specifically, the new category would 

have included certain loans originated 

by creditors that: 

• Have total assets that do not exceed 

$2 billion as of the end of the preceding 

calendar year (adjusted annually for 

inflation); and 

• Together with all affiliates, 

extended 500 or fewer first-lien 

mortgages during the preceding 

calendar year. 

The proposed additional category 

would have included only loans held in 

portfolio by these creditors. Specifically, 

proposed § 1026.43(e)(5) would have 

provided that a loan would lose its 

qualified mortgage status under 

§ 1026.43(e)(5) if it is sold, assigned, or 

otherwise transferred, subject to 

exceptions for transfers that are made 

three or more years after consummation, 

to another qualifying institution, as 

required by a supervisory action, or 

pursuant to a merger or acquisition. In 

addition, proposed § 1026.43(e)(5) 

would have provided that a loan must 

not be subject at consummation to a 

commitment to be acquired by any 

person other than a person that also 

meets the above asset and origination 

criteria. 

The loan also would have had to 

conform to all of the requirements under 

the § 1026.43(e)(2) general definition of 

a qualified mortgage except with regard 

to debt-to-income ratio. In other words, 

the loan could not have: 

• Negative-amortization, interestonly, or balloon-payment features; 

• A term longer than 30 years; or 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35481 

156The Bureau has proposed certain revisions to 

Appendix Q. See 78 FR 25638–25662 (May 2, 2013). 

Comments on this proposal must be received on or 

before June 3, 2013. 

• Points and fees greater than 3 

percent of the total loan amount (or, for 

smaller loans, a specified amount). 

When underwriting the loan the 

creditor would have been required to 

take into account the monthly payment 

for any mortgage-related obligations, 

and: 

• Use the maximum interest rate that 

may apply during the first five years and 

periodic payments of principal and 

interest that will repay the full 

principal; 

• Consider and verify the consumer’s 

current and reasonably expected income 

or assets other than the value of the 

property securing the loan; and 

• Consider and verify the consumer’s 

current debt obligations, alimony, and 

child support. 

The creditor also would have been 

required to consider the consumer’s 

debt-to-income ratio or residual income 

and to verify the underlying information 

generally in accordance with 

§ 1026.43(c)(7). Section 1026.43(c)(7) 

describes how creditors must calculate 

a consumers’ debt-to-income ratio or 

residual income for purposes of 

complying with the ability-to-repay 

rules set forth in § 1026.43(c). Section 

1026.43(c)(7) specifies that a creditor 

must consider the ratio of or difference 

between a consumer’s total monthly 

debt obligations and total monthly 

income. Section 1026.43(c)(7)(i)(A) 

specifies that a consumer’s total 

monthly debt obligations includes the 

payment on the covered transaction as 

calculated according to § 1026.43(c)(5). 

However, for purposes of 

§ 1026.43(e)(5), the calculation of the 

payment on the covered transaction 

must be determined in accordance with 

§ 1026.43(e)(2)(iv) instead of 

§ 1026.43(c)(5). 

In contrast, the general definition of a 

qualified mortgage in § 1026.43(e)(2) 

requires a creditor to calculate the 

consumer’s debt-to-income ratio 

according to instructions in appendix 

Q 156 and specifies that the consumer’s 

debt-to-income ratio must be 43 percent 

or less. 

As with all qualified mortgages, a 

qualified mortgage under § 1026.43(e)(5) 

would have received either a rebuttable 

presumption of compliance with, or a 

safe harbor from liability for violating, 

the ability-to-repay requirements in 

§ 1026.43(c), depending on the annual 

percentage rate. However, as described 

above in the section-by-section analysis 

of § 1026.43(b)(4), the Bureau also 

proposed and is adopting an alternate 

definition of higher-priced covered 

transaction for first-lien covered 

transactions that are qualified mortgages 

under proposed § 1026.43(e)(5). 

Amended as proposed, § 1026.43(b)(4) 

provides that a first-lien covered 

transaction that is a qualified mortgage 

under proposed § 1026.43(e)(5) is a 

higher-priced covered transaction if the 

annual percentage rate exceeds APOR 

for a comparable transaction by 3.5 or 

more percentage points. This extends 

the qualified mortgage safe harbor 

described in § 1026.43(e)(1)(i) to firstlien qualified mortgages defined under 

proposed § 1026.43(e)(5) even if those 

loans have annual percentage rates 

between 1.5 and 3.5 percentage points 

higher than APOR. Without the 

amendment to § 1026.43(b)(4), such 

loans would have been covered by the 

rebuttable presumption of compliance 

described in § 1026.43(e)(1)(ii). 

The Bureau proposed ten comments 

to clarify the requirements described in 

proposed § 1026.43(e)(5). Proposed 

comment 43(e)(5)–1 would have 

provided additional guidance regarding 

the requirement to comply with the 

general definition of a qualified 

mortgage under § 1026.43(e)(2). The 

proposed comment would have restated 

the regulatory requirement that a 

covered transaction must satisfy the 

requirements of the § 1026.43(e)(2) 

general definition of qualified mortgage, 

except with regard to debt-to-income 

ratio, to be a qualified mortgage under 

§ 1026.43(e)(5). As an example, the 

proposed comment would have 

explained that a qualified mortgage 

under § 1026.43(e)(5) may not have a 

loan term in excess of 30 years because 

longer terms are prohibited for qualified 

mortgages under § 1026.43(e)(2)(ii). As 

another example, the proposed 

comment would have explained that a 

qualified mortgage under § 1026.43(e)(5) 

may not result in a balloon payment 

because § 1026.43(e)(2)(i)(C) provides 

that qualified mortgages may not have 

balloon payments except as provided 

under § 1026.43(f). Finally, the 

proposed comment would have clarified 

that a covered transaction may be a 

qualified mortgage under § 1026.43(e)(5) 

even though the consumer’s monthly 

debt-to-income ratio exceeds 43 percent, 

§ 1026.43(e)(2)(vi) notwithstanding. 

Proposed comment 43(e)(5)–2 would 

have clarified that § 1026.43(e)(5) does 

not prescribe a specific monthly debt-toincome ratio with which creditors must 

comply. Instead, creditors must 

consider a consumer’s debt-to-income 

ratio or residual income calculated 

generally in accordance with 

§ 1026.43(c)(7) and verify the 

information used to calculate the debtto-income ratio or residual income in 

accordance with § 1026.43(c)(3) and (4). 

The proposed comment would have 

explained that § 1026.43(c)(7) refers 

creditors to § 1026.43(c)(5) for 

instructions on calculating the payment 

on the covered transaction and that 

§ 1026.43(c)(5) requires creditors to 

calculate the payment differently than 

§ 1026.43(e)(2)(iv). The proposed 

comment would have clarified that, for 

purposes of the qualified mortgage 

definition in § 1026.43(e)(5), creditors 

must base their calculation of the 

consumer’s debt-to-income ratio or 

residual income on the payment on the 

covered transaction calculated 

according to § 1026.43(e)(2)(iv) instead 

of according to § 1026.43(c)(5). Finally, 

the proposed comment would have 

clarified that creditors are not required 

to calculate the consumer’s monthly 

debt-to-income ratio in accordance with 

appendix Q as is required under the 

general definition of qualified mortgages 

by § 1026.43(e)(2)(vi). 

Proposed comment 43(e)(5)–3 would 

have noted that the term ‘‘forward 

commitment’’ is sometimes used to 

describe a situation where a creditor 

originates a mortgage loan that will be 

transferred or sold to a purchaser 

pursuant to an agreement that has been 

entered into at or before the time the 

transaction is consummated. The 

proposed comment would have clarified 

that a mortgage that will be acquired by 

a purchaser pursuant to a forward 

commitment does not satisfy the 

requirements of § 1026.43(e)(5), whether 

the forward commitment provides for 

the purchase and sale of the specific 

transaction or for the purchase and sale 

of transactions with certain prescribed 

criteria that the transaction meets. 

However, the proposed comment also 

would have clarified that a forward 

commitment to another person that also 

meets the requirements of 

§ 1026.43(e)(5)(i)(D) is permitted. The 

proposed comment would have given 

the following example: Assume a 

creditor that is eligible to make qualified 

mortgages under § 1026.43(e)(5) makes a 

mortgage. If that mortgage meets the 

purchase criteria of an investor with 

which the creditor has an agreement to 

sell such loans after consummation, 

then the loan does not meet the 

definition of a qualified mortgage under 

§ 1026.43(e)(5). However, if the investor 

meets the requirements of 

§ 1026.43(e)(5)(i)(D), the mortgage will 

be a qualified mortgage if all other 

applicable criteria also are satisfied. 

Proposed comment 43(e)(5)–4 would 

have reiterated that, to be eligible to 

make qualified mortgages under 

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35482 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

§ 1026.43(e)(5), a creditor must satisfy 

the requirements of 

§ 1026.35(b)(2)(iii)(B) and (C). For ease 

of reference, the comment would have 

stated that § 1026.35(b)(2)(iii)(B) 

requires that, during the preceding 

calendar year, the creditor and its 

affiliates together originated 500 or 

fewer first-lien covered transactions and 

that § 1026.35(b)(2)(iii)(C) requires that, 

as of the end of the preceding calendar 

year, the creditor had total assets of less 

than $2 billion, adjusted annually for 

inflation. 

Proposed comment 43(e)(5)–5 would 

have clarified that creditors generally 

must hold a loan in portfolio to 

maintain the transaction’s status as a 

qualified mortgage under 

§ 1026.43(e)(5), subject to four 

exceptions. The proposed comment 

would have clarified that, unless one of 

these exceptions applies, a loan is no 

longer a qualified mortgage under 

§ 1026.43(e)(5) once legal title to the 

debt obligation is sold, assigned, or 

otherwise transferred to another person. 

Accordingly, unless one of the 

exceptions applies, the transferee could 

not benefit from the presumption of 

compliance for qualified mortgages 

under § 1026.43(e)(1) unless the loan 

also met the requirements of another 

qualified mortgage definition. Proposed 

comment 43(e)(5)–6 would have 

clarified that § 1026.43(e)(5)(ii) applies 

not only to an initial sale, assignment, 

or other transfer by the originating 

creditor but to subsequent sales, 

assignments, and other transfers as well. 

The proposed comment would have 

given the following example: Assume 

Creditor A originates a qualified 

mortgage under § 1026.43(e)(5). Six 

months after consummation, Creditor A 

sells the qualified mortgage to Creditor 

B pursuant to § 1026.43(e)(5)(ii)(B) and 

the loan retains its qualified mortgage 

status because Creditor B complies with 

the limits on asset size and number of 

transactions. If Creditor B sells the 

qualified mortgage, it will lose its 

qualified mortgage status under 

§ 1026.43(e)(5) unless the sale qualifies 

for one of the § 1026.43(e)(5)(ii) 

exceptions for sales three or more years 

after consummation, to another 

qualifying institution, as required by 

supervisory action, or pursuant to a 

merger or acquisition. 

Proposed comment 43(e)(5)–7 would 

have clarified that, under 

§ 1026.43(e)(5)(ii)(A), if a qualified 

mortgage under § 1026.43(e)(5) is sold, 

assigned, or otherwise transferred three 

years or more after consummation, the 

loan retains its status as a qualified 

mortgage under § 1026.43(e)(5) 

following the transfer. The proposed 

comment would have clarified that this 

is true even if the transferee is not itself 

eligible to originate qualified mortgages 

under § 1026.43(e)(5). The proposed 

comment would have clarified that, 

once three or more years after 

consummation have passed, the 

qualified mortgage will continue to be a 

qualified mortgage throughout its life, 

and a transferee, and any subsequent 

transferees, may invoke the 

presumption of compliance for qualified 

mortgages under § 1026.43(e)(1). 

Proposed comment 43(e)(5)–8 would 

have clarified that, under 

§ 1026.43(e)(5)(ii)(B), a qualified 

mortgage under § 1026.43(e)(5) may be 

sold, assigned, or otherwise transferred 

at any time to another creditor that 

meets the requirements of 

§ 1026.43(e)(5)(v). The proposed 

comment would have noted that section 

§ 1026.43(e)(5)(v) requires that a 

creditor, together with all affiliates 

during the preceding calendar year, 

originated 500 or fewer first-lien 

covered transactions and had total 

assets less than $2 billion (adjusted 

annually for inflation) at the end of the 

preceding calendar year. The proposed 

comment would have clarified that a 

qualified mortgage under § 1026.43(e)(5) 

that is transferred to a creditor that 

meets these criteria would retain its 

qualified mortgage status even if it is 

transferred less than three years after 

consummation. 

Proposed comment 43(e)(5)–9 would 

have clarified that § 1026.43(e)(5)(ii)(C) 

facilitates sales that are deemed 

necessary by supervisory agencies to 

revive troubled creditors and resolve 

failed creditors. The proposed comment 

would have noted that this section 

provides that a qualified mortgage under 

§ 1026.43(e)(5) retains its qualified 

mortgage status if it is sold, assigned, or 

otherwise transferred to: another person 

pursuant to a capital restoration plan or 

other action under 12 U.S.C. 1831o; the 

actions or instructions of any person 

acting as conservator, receiver or 

bankruptcy trustee; an order of a State 

or Federal government agency with 

jurisdiction to examine the creditor 

pursuant to State or Federal law; or an 

agreement between the creditor and 

such an agency. The proposed comment 

would have clarified that a qualified 

mortgage under § 1026.43(e)(5) that is 

sold, assigned, or otherwise transferred 

under these circumstances retains its 

qualified mortgage status regardless of 

how long after consummation it is sold 

and regardless of the size or other 

characteristics of the transferee. The 

proposed comment also would have 

clarified that § 1026.43(e)(5)(ii)(C) does 

not apply to transfers done to comply 

with a generally applicable regulation 

with future effect designed to 

implement, interpret, or prescribe law 

or policy in the absence of a specific 

order by or a specific agreement with a 

government agency described in 

§ 1026.43(e)(5)(ii)(C) mandating the sale 

of one or more qualified mortgages 

under § 1026.43(e)(5) held by the 

creditor, or one of the other 

circumstances listed in 

§ 1026.43(e)(5)(ii)(C). As an example, 

the proposed comment would have 

explained that a qualified mortgage 

under § 1026.43(e)(5) that is sold 

pursuant to a capital restoration plan 

under 12 U.S.C. 1831o would retain its 

status as a qualified mortgage following 

the sale. However, if the creditor simply 

chose to sell the same qualified 

mortgage as one way to comply with 

general regulatory capital requirements 

in the absence of supervisory action or 

agreement, the mortgage would lose its 

status as a qualified mortgage following 

the sale unless it qualifies under another 

definition of qualified mortgage. 

Proposed comment 43(e)(5)–10 would 

have clarified that a qualified mortgage 

under § 1026.43(e)(5) retains its 

qualified mortgage status if a creditor 

merges with or is acquired by another 

person regardless of whether the 

creditor or its successor is eligible to 

originate new qualified mortgages under 

§ 1026.43(e)(5) after the merger or 

acquisition. However, the proposed 

comment also would have clarified that 

the creditor or its successor can 

originate new qualified mortgages under 

§ 1026.43(e)(5) after the merger or 

acquisition only if the creditor or its 

successor complies with all of the 

requirements of § 1026.43(e)(5) at that 

time. The proposed comment would 

have provided the following example: 

Assume a creditor that originates 250 

covered transactions each year and 

originates qualified mortgages under 

§ 1026.43(e)(5) is acquired by a larger 

creditor that originates 10,000 covered 

transactions each year. Following the 

acquisition, the small creditor would no 

longer be able to originate 

§ 1026.43(e)(5) qualified mortgages 

because, together with its affiliates, it 

would originate more than 500 covered 

transactions each year. However, the 

§ 1026.43(e)(5) qualified mortgages 

originated by the small creditor before 

the acquisition would retain their 

qualified mortgage status. 

Comments Received 

A large number and broad range of 

commenters expressed support for 

proposed § 1026.43(e)(5). These 

commenters included national, State, 

and regional trade groups representing 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35483 

157Several commenters, including representatives 

of creditors that finance manufactured housing and 

two creditors that provide low-documentation 

mortgage loans predominantly to Asian immigrants 

in California, argued that the Bureau should adopt 

additional qualified mortgage definitions that 

would include their mortgage loan products. The 

Bureau did not propose and did not solicit 

comment regarding such additional qualified 

mortgage definitions and is not adopting such 

definitions at this time. 

banks and credit unions, more than 90 

small and mid-size creditors from more 

than two dozen States, one very large 

creditor, coalitions of State regulators, 

consumer advocacy organizations, a 

national trade group representing 

mortgage bankers, national trade groups 

representing homebuilders and real 

estate agents, a tribally designated 

housing entity, and representatives of 

the manufactured housing industry. 

These commenters generally agreed 

with the points made by the Bureau in 

its proposal. 

A much smaller number of 

commenters objected to proposed 

§ 1026.43(e)(5). These creditors 

included a consumer advocacy 

organization, a national trade group 

representing very large creditors, one 

very large creditor, a national trade 

group representing mortgage brokers, 

and several individual mortgage 

brokers. These commenters generally 

argued that the Bureau should not adopt 

special rules for small creditors because 

a consumer’s ability to repay does not 

depend on the size of the creditor. 

These commenters also raised other 

arguments, such as that proposed 

§ 1026.43(e)(5) would encourage 

regulatory arbitrage and charter 

shopping by creditors or that the 

Bureau’s proposal to provide an 

additional qualified mortgage definition 

is evidence that the ability-to-repay and 

qualified mortgage provisions of the 

Dodd-Frank Act are fundamentally 

flawed and should be abandoned in 

favor of further study. 

The Bureau solicited comments on a 

number of specific issues related to 

proposed § 1026.43(e)(5). First, the 

Bureau solicited comment on whether 

non-conforming mortgage credit is 

likely to be unavailable if the rule is not 

amended and whether amending the 

rule as proposed would ensure that such 

credit is made available in a 

responsible, affordable way. 

Commenters supporting proposed 

§ 1026.43(e)(5) generally agreed with the 

Bureau’s assessment that, without 

amendment, the ability-to-repay and 

qualified mortgage rules would 

significantly limit access to 

nonconforming credit and access to 

credit in rural and underserved areas. 

Many individual small creditors 

asserted that they would limit the 

number of residential mortgage loans 

they made or cease mortgage lending 

altogether if the rule was not amended 

and that this would severely limit 

access to credit in their communities. 

National and State trade groups 

representing creditors expressed similar 

views on behalf of their members. These 

commenters generally agreed that small 

creditors are uniquely able and have 

strong incentives to make accurate 

determinations of ability to repay, that 

the incentives to make these 

determinations accurately and 

conservatively are particularly strong 

with respect to portfolio loans, and that 

the combination of these factors would 

provide ample protection for 

consumers. Commenters opposing 

proposed § 1026.43(e)(5) did not refute 

the points raised by the Bureau in the 

proposal. These commenters did not 

offer evidence or substantive arguments 

that access to credit would be preserved 

without the proposed amendments, did 

not suggest meaningful alternative ways 

of preserving access to credit, and did 

not offer substantive arguments or 

evidence that credit made available 

pursuant to proposed § 1026.43(e)(5) 

likely would be irresponsible or 

unaffordable. One commenter argued 

that proposed § 1026.43(e)(5) would not 

preserve access to credit because it 

would not provide significant regulatory 

relief to small creditors and because it 

was limited to a small number of loans 

per small creditor and therefore would 

not benefit consumers. 

Second, the Bureau solicited 

comment on the following issues 

relating to the criteria describing small 

creditors: Whether the Bureau should 

adopt criteria consistent with those used 

in § 1026.35(b) and in the § 1026.43(f) 

definition of qualified mortgages which 

applies to certain balloon loans made by 

small creditors operating predominantly 

in rural or underserved areas; whether 

the proposed $2 billion asset limit is 

appropriate and whether the limit 

should be higher or lower; and whether 

to include a limitation on the number of 

first-lien covered transactions extended 

by the creditor and its affiliates and, if 

so, whether the proposed 500- 

transaction limit is appropriate. 

Most commenters urged the Bureau to 

expand the scope of proposed 

§ 1026.43(e)(5) by adjusting the asset or 

originations limits or both.157 Many 

commenters, including national and 

State trade groups representing banks 

and credit unions and many individual 

small creditors, asserted that 500 annual 

first-lien originations is more typical of 

a creditor with assets of $500 million 

than a creditor with assets of $2 billion. 

These commenters argued that the 500 

annual first-lien originations limit is 

significantly more restrictive than the $2 

billion asset limit and should therefore 

either be raised or be eliminated. 

Commenters suggested alternate limits 

such as 1,000 portfolio loans or between 

2,000 and 5,000 total first-lien 

originations. Some commenters, 

including trade groups representing 

creditors and individual small and midsize creditors, urged the Bureau to raise 

the $2 billion asset limit to $5 billion or 

$10 billion. These commenters argued 

that this change is necessary to facilitate 

access to nonconforming credit and 

access to credit in areas that are served 

only by mid-sized banks with assets 

greater than $2 billion. 

Third, the Bureau solicited comment 

regarding the requirement that loans be 

held in portfolio generally, including 

whether the proposed exemptions were 

appropriate and whether other criteria, 

guidance, or exemptions should be 

included regarding the requirement to 

hold loans in portfolio, either in lieu of 

or in addition to those included in the 

proposal. Commenters generally did not 

object to the requirement that loans be 

held in portfolio as described in 

proposed § 1026.43(e)(5) and the 

accompanying comments. In addition, 

many commenters agreed with the 

Bureau that the requirement that loans 

be held in portfolio provides important 

protections for consumers because it 

aligns consumers’ and creditors’ 

interests regarding ability to repay. One 

commenter, a consumer advocacy 

organization, argued against the 

proposed provision allowing loans to be 

transferred less than three years after 

origination because of a creditor’s 

bankruptcy or failure. This commenter 

argued that bankruptcy or failure may 

be indicative of poor underwriting 

leading to high default rates and that 

consumers therefore should retain the 

right to make claims against the creditor 

in bankruptcy, conservatorship, or 

receivership. 

Fourth, the Bureau solicited comment 

on the loan feature and underwriting 

requirements with which qualified 

mortgages under proposed 

§ 1026.43(e)(5) would have to comply. 

The Bureau solicited comment on 

whether qualified mortgages under 

proposed § 1026.43(e)(5) should be 

exempt from additional provisions of 

§ 1026.43(e)(2) or should be subject to 

any other loan feature or underwriting 

requirements, either in lieu of or in 

addition to those proposed. In 

particular, the Bureau solicited 

comment on whether these qualified 

mortgages should be exempt from the 

requirement to consider debt-to-income 

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35484 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

158One commenter, a consumer advocacy 

organization, urged the Bureau to adopt a lower 

debt-to-income ratio limit, such as 41 percent, for 

low-income borrowers for all qualified mortgages. 

In contrast, other commenters urged the Bureau to 

raise or eliminate the debt-to-income ratio limit for 

all qualified mortgages secured by property in 

Puerto Rico and Hawaii. These commenters argued 

that the 43 percent debt-to-income ratio limit would 

limit access to mortgage credit in Puerto Rico and 

Hawaii because debt-to-income ratios in these areas 

often are more than 43 percent. The Bureau did not 

propose and did not solicit comment regarding 

changes to the debt-to-income ratio limit for other 

categories of qualified mortgages and is not 

reconsidering this issue at this time. 

ratio calculated according to appendix 

Q and the prohibition on debt-to-income 

ratios in excess of 43 percent and 

whether other requirements related to 

debt-to-income ratio or residual income 

should be provided, either in lieu of or 

in addition to those proposed. Most 

commenters supported relaxing 

underwriting restrictions on portfolio 

loans made by small creditors generally 

and exempting these loans from both 

the requirement to consider debt-toincome ratio calculated according to 

appendix Q and the prohibition on debtto-income ratios in excess of 43 percent 

specifically.158 These commenters, 

including consumer advocacy 

organizations, national and State trade 

groups representing banks and credit 

unions, and many small creditors, 

agreed that small creditors are 

particularly able to make accurate 

determinations of ability to repay 

without a specific numeric limit and 

that the requirement to calculate debtto-income ratio according to appendix Q 

would present a significant burden to 

many small creditors with little or no 

corresponding benefit to consumers. In 

addition, many small creditors and 

national and State trade groups 

representing creditors argued that all 

small creditors should be eligible to 

make balloon-payment qualified 

mortgages if the loan is held in 

portfolio. 

Fifth, and last, the Bureau solicited 

comment on the following issue. 

Section 1026.43(e)(5) could provide 

different legal status to loans with 

identical terms based solely on the 

creditor’s size and intention to hold the 

loan in portfolio. The Bureau stated its 

belief that the size of and relationship 

lending model employed by small 

creditors provide significant assurances 

that the mortgage credit they extend will 

be responsible and affordable. However, 

to the extent that consumers may have 

a choice of creditors, some of whom are 

not small, it was not clear that 

consumers shopping for mortgage loans 

would be aware that their choice of 

creditor could significantly affect their 

legal rights. The Bureau solicited 

comment on the extent and significance 

of this risk generally. Specifically, the 

Bureau solicited comment on whether 

consumers who obtain small creditor 

portfolio loans likely could have 

obtained credit from other sources and 

on the extent to which a consumer who 

obtains a portfolio loan from a small 

creditor would be disadvantaged by the 

inability to make an affirmative claim of 

noncompliance with the ability-to-repay 

rules or to assert noncompliance in a 

foreclosure action. 

Most commenters, including national 

and State trade groups representing 

banks and credit unions, as well as 

many individual small creditors, stated 

that small creditors make portfolio loans 

almost exclusively to consumers who do 

not qualify for secondary market 

financing for reasons unrelated to ability 

to repay, including: comparable sales 

that are not sufficiently similar, too 

distant, or too old; irregular zoning, lack 

of zoning, or problems with land 

records; condominiums that do not 

comply with secondary market owneroccupancy requirements; loan-to-value 

ratio; self-employed and seasonallyemployed consumers who cannot prove 

continuance to the satisfaction of the 

secondary market; consumers with a 

new job; and small dollar loans that fall 

below secondary market thresholds. 

These commenters noted that these 

issues may be particularly problematic 

in rural areas but that they are common 

in suburban and urban areas as well. 

These commenters stated that 

consumers who qualify for secondary 

market financing generally obtain 

secondary market loans that are not held 

in portfolio and would be unaffected by 

proposed § 1026.43(e)(5). 

Two commenters, a national trade 

group representing very large creditors 

and a very large creditor, argued that 

consumers would be disadvantaged by 

proposed § 1026.43(e)(5) because the 

rule would apply even in geographic 

areas where there are other creditors 

and because consumers comparing 

loans from different creditors would 

have to compare different legal rights 

that are difficult to value. 

The Final Rule 

Section 1026.43(e)(5) and the related 

comments are adopted as proposed. For 

the reasons stated below, the Bureau 

believes that § 1026.43(e)(5) is necessary 

and appropriate to preserve access to 

responsible, affordable credit for some 

consumers, including consumers who 

do not qualify for conforming mortgage 

credit. 

Access to affordable, responsible 

credit. The Bureau continues to believe 

that § 1026.43(e)(5) is necessary to 

preserve access to credit for some 

consumers, including consumers who 

do not qualify for conforming mortgage 

credit, and will ensure that this credit 

is provided in a responsible, affordable 

way. 

As discussed above in part II.A and in 

the section-by-section analysis of 

§ 1026.43(b)(4), the Bureau understands 

that small creditors are a significant 

source of nonconforming mortgage 

credit. The Bureau believes that many of 

these loans would not be made by larger 

creditors because the consumers or 

properties involved are not accurately 

assessed by the standardized 

underwriting criteria used by larger 

creditors or because larger creditors are 

unwilling to make loans that cannot be 

sold to the securitization markets. The 

Bureau therefore believes that access to 

mortgage credit for some consumers 

would be restricted if small creditors 

stopped making nonconforming loans or 

significantly reduced the number of 

nonconforming loans they make. 

Such an impact could be particularly 

significant in rural areas, where small 

creditors are a significant source of 

credit. As discussed above in part II.A, 

small creditors are significantly more 

likely than larger creditors to operate 

offices in rural areas, and there are 

hundreds of counties nationwide where 

the only creditors are small creditors 

and hundreds more where larger 

creditors have only a limited presence. 

The Bureau also continues to believe 

that small creditors are particularly well 

suited to originate responsible, 

affordable mortgage credit. As discussed 

above in part II.A, the small creditors 

often are better able to assess ability to 

repay because they are more likely to 

base underwriting decisions on local 

knowledge and qualitative data and less 

likely to rely on standardized 

underwriting criteria. Because many 

small creditors use a lending model 

based on maintaining ongoing 

relationships with their customers, they 

often have a more comprehensive 

understanding of their customer’s 

financial circumstances. Small 

creditors’ lending activities often are 

limited to a single community, allowing 

the creditor to have an in-depth 

understanding of the economic and 

other circumstances of that community. 

In addition, because small creditors 

often consider a smaller volume of 

applications for mortgage credit, small 

creditors may be more willing and able 

to consider the unique facts and 

circumstances attendant to each 

consumer and property, and senior 

personnel are more likely to be able to 

bring their judgment to bear regarding 

individual underwriting decisions. 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35485 

Small creditors also have particularly 

strong incentives to make careful 

assessments of a consumer’s ability to 

repay because small creditors bear the 

risk of default associated with loans 

held in portfolio and because each loan 

represents a proportionally greater risk 

to a small creditor than to a larger one. 

In addition, small creditors operating in 

limited geographical areas may face 

significant risk of harm to their 

reputations within their communities if 

they make loans that consumers cannot 

repay. 

As many commenters reiterated, small 

creditors have repeatedly asserted that 

they will not lend outside the qualified 

mortgage safe harbor. The Bureau does 

not believe that small creditors face 

significant litigation risk from the 

ability-to-repay requirements. For the 

reasons stated above, the Bureau 

believes that small creditors as a group 

generally are better positioned to assess 

ability to repay than larger creditors, 

have particularly strong incentives to 

accurately assess ability to repay 

independent of the threat of ability-torepay litigation, and historically have 

been very successful at accurately 

assessing ability to repay, as 

demonstrated by their comparatively 

low credit losses. In addition, the 

Bureau believes that because many 

small creditors use a lending model 

based on maintaining ongoing 

relationships with their customers, 

those customers may be more likely to 

pursue alternatives to litigation in the 

event that difficulties with a loan arise. 

The Bureau therefore believes that it is 

unlikely that small creditors will face 

significant liability for claims of 

noncompliance filed by their customers 

or will be significantly disadvantaged by 

recoupment and setoff claims in 

foreclosure actions. 

However, the Bureau acknowledges 

that due to their size small creditors 

may find even a remote prospect of 

litigation risk to be so daunting that they 

may change their business models to 

avoid it. The Bureau also believes that 

the exit of small creditors from the 

residential mortgage market could create 

substantial short-term access to credit 

issues. 

The Bureau therefore believes that, 

absent an amendment to the ability-torepay and qualified mortgage rules, 

many small creditors will reduce or 

cease their mortgage lending activities, 

which would cause many consumers to 

face constraints on their access to credit 

that are entirely unrelated to their 

ability to repay. The Bureau believes 

that § 1026.43(e)(5) will preserve 

consumers’ access to credit and, because 

of the characteristics of small creditors 

and portfolio lending described above, 

the credit provided generally will be 

responsible and affordable. 

The Bureau is sensitive to concerns 

about the consistency of protections for 

all consumers and about maintaining a 

level playing field for market 

participants, but nevertheless believes 

that a differentiated approach is 

justified here. The commenters that 

suggested that consumers’ interests are 

best served by subjecting all creditors to 

the same standards provided nothing 

that refutes the points raised in the 

Bureau’s proposal regarding the low 

credit losses and unique business 

models of small creditors, their 

concerns about litigation risk and 

compliance burden, and the potential 

access to credit problems the Bureau 

believes will arise if the rule is not 

amended. The Bureau also disagrees 

that § 1026.43(e)(5) would not benefit 

consumers because it is limited to a 

small number of loans per creditor. 

Because there are thousands of small 

creditors as defined by § 1026.43(e)(5) in 

the United States, the Bureau believes 

that § 1026.43(e)(5) is likely to preserve 

access to affordable, responsible 

mortgage credit for hundreds of 

thousands of consumers annually. 

Asset and originations limits. Section 

1026.43(e)(5) includes portfolio loans 

made by creditors that have assets of $2 

billion or less (adjusted annually for 

inflation) and, together with all 

affiliates, originate 500 or fewer firstlien mortgages each year. The Bureau 

proposed these thresholds to maintain 

consistency with the § 1026.43(f) 

qualified mortgage definition, which 

includes certain balloon loans made and 

held in portfolio by small creditors 

operating predominantly in rural or 

underserved areas, and with thresholds 

used in § 1026.35 as adopted by the 

Bureau’s 2013 Escrows Final Rule. In 

the proposal, the Bureau emphasized 

the importance of maintaining 

consistent criteria, particularly between 

§ 1026.43(e)(5) and (f), to avoid creating 

undesirable regulatory incentives (such 

as an incentive to make balloon loans 

where a creditor has the capability of 

making other mortgages that better 

protect consumers’ interests) and to 

minimize compliance burdens by 

minimizing the number of metrics 

creditors must track to determine their 

eligibility for various regulatory 

provisions. The Bureau continues to 

believe that it is important to maintain 

consistency between these provisions. 

Many commenters urged the Bureau 

to raise the limit above 500 first-lien 

originations for § 1026.43(e)(5), for 

instance by changing the types of loans 

counted or the numeric threshold. A 

national trade group representing small 

creditors and several other commenters 

argued that the originations limit in 

§ 1026.43(e)(5) should be based on 

portfolio loans originated annually 

rather than all first-lien originations. 

These commenters argued that 

including loans sold to the secondary 

market in the origination threshold was 

not appropriate because the purpose of 

§ 1026.43(e)(5) is to encourage portfolio 

lending and thereby preserve 

consumers’ access to nonconforming 

credit. 

On its face, the rationale advanced by 

these commenters argues against any 

limitation on the number of portfolio 

loans, as any limit would discourage 

portfolio lending in excess of that limit 

and all portfolio loans appear to carry 

with them a greater inherent incentive 

to exercise care in determining ability to 

repay than loans sold to the secondary 

market. However, one of the lessons 

learned in the recent financial crisis is 

that in the heat of a housing bubble, 

even portfolio lending standards can 

become too lax and standards that 

ensure responsible, affordable lending 

may be threatened. 

Thus, the Bureau did not propose to 

provide qualified mortgage treatment to 

all portfolio loans, but rather only to 

portfolio loans made by small creditors 

on the theory that both the 

characteristics of the creditor—its small 

size, community-based focus, and 

commitment to relationship lending— 

and the inherent incentives associated 

with portfolio lending together would 

justify extending qualified mortgage 

status to a loan that would not meet the 

ordinary qualified mortgage criteria. 

Given this rationale, the Bureau does 

not believe it is appropriate to adopt an 

originations limit under which a 

creditor would be treated as a small, 

relationship-based creditor no matter 

how many loans it is selling to the 

secondary market. 

Using publicly available HMDA data 

and call report data, the Bureau 

estimated the impact of adopting a limit 

based on portfolio loan originations 

instead of total first-lien originations. 

This change would add nearly one 

thousand creditors to the scope of 

§ 1026.43(e)(5). These creditors appear 

to hold a significantly smaller 

percentage of the loans they originate in 

portfolio than creditors that would fall 

within § 1026.43(e)(5) as proposed, 

raising questions about the extent to 

which these creditors can be considered 

relationship lenders. This reinforces the 

point that the relationship lending 

model underlying the Bureau’s rationale 

for § 1026.43(e)(5) cannot be defined by 

reference only to a subset of a creditor’s 

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159See, e.g., FDIC Community Banking Study, p. 

1–1. 

160 FDIC Community Banking Study, p. 1–1—1– 

5. 

originations, but rather based on the 

nature of its overall operations. The 

Bureau therefore continues to believe 

that an originations limit based on total 

first-lien originations is the most 

appropriate way to ensure that the new 

category of qualified mortgages is 

appropriately cabined. 

In addition, many commenters 

recommended increasing the 

originations limit from 500 first-lien 

mortgages to between 2,000 and 5,000. 

The principal rationale offered by these 

commenters is that banks with assets 

over $500 million often originate more 

than 500 first-lien mortgages per year 

and that the limitation on originations is 

not consistent with (i.e., is significantly 

more restrictive than) the $2 billion 

asset limit. 

The Bureau intended and believes 

that both elements of the threshold play 

independent and important roles. The 

Bureau believes that an originations 

limit is the most accurate means of 

limiting § 1026.43(e)(5) to the class of 

small creditors the business model of 

which the Bureau believes will best 

assure that the qualified mortgage 

definition facilitates access only to 

responsible, affordable credit. However, 

the Bureau believes that an asset limit 

is nonetheless important to preclude a 

very large creditor with relatively 

modest mortgage operations from taking 

advantage of a provision designed for 

much smaller creditors with much 

different characteristics and incentives. 

Due to general scale, such a creditor 

would not have the same type of 

community focus and reputational and 

balance-sheet incentives to assess ability 

to repay with sufficient care as smaller, 

community-based creditors, and is 

generally better able from a systems 

perspective to handle compliance 

functions. 

Based on estimates from publicly 

available HMDA and call report data, 

the Bureau understands that, under the 

proposed criteria, the likelihood of 

falling within the scope of 

§ 1026.43(e)(5) decreases as a creditor’s 

size increases. The proposed limits 

include approximately 95 percent of 

creditors with less than $500 million in 

assets, approximately 74 percent of 

creditors with assets between $500 

million and $1 billion, and 

approximately 50 percent of creditors 

with assets between $1 billion and $2 

billion. These percentages are entirely 

consistent with the Bureau’s rationale 

for § 1026.43(e)(5), as described above. 

As the size of an institution increases, 

it is to be expected that the scale of its 

lending business will increase as well. 

As the scale of a creditor’s lending 

business increases, the likelihood that 

the institution is engaged in 

relationship-based lending and 

employing qualitative or local 

knowledge in its underwriting 

decreases. The Bureau therefore 

continues to believe that the proposed 

limit of 500 total first-lien originations 

is consistent with the rationale 

underlying § 1026.43(e)(5) and 

appropriate to ensure that consumers 

have access only to responsible, 

affordable mortgage credit. 

Finally, some commenters argued that 

the Bureau should increase the asset 

limit from $2 billion to $5 billion or $10 

billion. The Bureau does not believe this 

change is necessary to preserve access to 

credit. The traditional definition of a 

community bank has long been regarded 

as an institution with less than $1 

billion in assets.159 The Bureau’s 

estimates show that § 1026.43(e)(5) as 

proposed includes over 90 percent of 

institutions with assets less than $1 

billion. In its recent Community Bank 

Study, the FDIC employed a more 

complex definition that excluded a 

small number of institutions with assets 

under $1 billion based primarily on the 

nature of their assets and added a 

modest number of banks with assets 

greater than $1 billion based on a multifactor test including criteria such as the 

geographic scope of the institution’s 

operations and focus on core banking 

activities.160 The Bureau has concluded 

that the FDIC’s definition is too complex 

for regulatory purposes and no 

commenters advocated that the Bureau 

adopt it. However, the Bureau notes that 

the larger banks added by the FDIC’s 

more nuanced definition of community 

bank had average assets of $1.9 billion. 

In addition, the Bureau notes that a 

creditor with assets between $1 billion 

and $2 billion has, on average, 16 

branches, 252 employees, and 

operations in 5 counties. In contrast, a 

creditor with between $2 billion and 

$10 billion in assets has, on average, 34 

branches, 532 employees, and 

operations in 12 counties. As the staff 

and geographic scope of an institution 

increases, it becomes less and less likely 

that a creditor will engage in 

relationship lending or use qualitative 

or local knowledge in its underwriting. 

In addition, as an institution adds staff 

and branches, it is more likely from a 

systems perspective to handle 

compliance functions. The Bureau 

therefore believes that the proposed $2 

billion asset limit is consistent with the 

rationale underlying § 1026.43(e)(5) and 

appropriate to ensure that consumers 

have access only to affordable, 

responsible credit. 

Portfolio requirements. The Bureau 

continues to believe that the discipline 

imposed when small creditors make 

loans that they will hold in their 

portfolio is important to protect 

consumers’ interests and to prevent 

evasion. The Bureau proposed that 

qualified mortgages under 

§ 1026.43(e)(5) must be held in portfolio 

for three years to retain their status as 

qualified mortgages, thus matching the 

statute of limitations for affirmative 

claims for violations of the ability-torepay rules. If a small creditor holds a 

qualified mortgage in portfolio for three 

years, it retains all of the litigation risk 

for potential violations of the ability-torepay rules except in the event of a 

subsequent foreclosure. 

The Bureau is extending qualified 

mortgage status only to portfolio loans 

made by small creditors, rather than all 

portfolio loans, because, as discussed 

above, the Bureau believes that small 

creditors are a unique and important 

source of non-conforming mortgage 

credit and mortgage credit in rural areas 

for which there is no readily available 

replacement, that small creditors are 

likely to be particularly burdened by the 

litigation risk associated with the 

ability-to-repay requirements and are 

particularly likely to reduce or cease 

mortgage lending if subjected to these 

rules without accommodation, and that 

small creditors have both strong 

incentives and particular ability to make 

these loans in a way that ensures that 

consumers are able to repay that may 

not be present for larger creditors. 

As the Bureau acknowledged in the 

proposal, limitations on the ability of a 

creditor to sell loans in its portfolio may 

limit the creditor’s ability to manage its 

regulatory capital levels by adjusting the 

value of its assets, may affect the 

creditor’s ability to manage interest rate 

risk by preventing sales of seasoned 

loans, and may present other safety and 

soundness concerns. The Bureau has 

consulted with prudential regulators on 

these issues and continues to believe the 

proposed exceptions address these 

concerns without sacrificing the 

consumer protection provided by the 

portfolio requirement. 

One commenter, a consumer 

advocacy organization, argued that the 

Bureau should not adopt the proposed 

exception that would allow a qualified 

mortgage under § 1026.43(e)(5) to retain 

its qualified mortgage status if it is 

transferred less than three years after 

origination because of a bank failure. 

The commenter argued that the need for 

supervisory action strongly suggests that 

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loans should not be entitled to the 

presumption of compliance associated 

with qualified mortgage status. The 

commenter further asserted that 

agencies charged with resolving failed 

creditors have sufficient authority to 

protect transferees from consumers’ 

claims. The Bureau understands that 

creditors fail for many different reasons, 

many of which are entirely unrelated to 

underwriting practices for residential 

mortgage loans. The Bureau also 

continues to believe that this exception 

is necessary to ensure that resolutions 

are not impeded. The Bureau therefore 

declines to adopt the commenter’s 

suggestion. 

Underwriting requirements and debtto-income ratio. Qualified mortgages 

under § 1026.43(e)(5) differ from 

qualified mortgages under the 

§ 1026.43(e)(2) general definition in two 

key respects. First, as discussed above 

in the section-by-section analysis of 

§ 1026.43(b)(4), qualified mortgages 

under § 1026.43(e)(5) are subject to a 

higher annual percentage rate threshold 

for the qualified mortgage safe harbor. 

Second, creditors are required to 

consider the consumer’s debt-to-income 

ratio or residual income and to verify 

the underlying information generally in 

accordance with § 1026.43(c), but are 

not required to calculate the consumer’s 

debt-to-income ratio according to 

appendix Q and there is no numeric 

limit on the consumers’ debt-to-income 

ratio. 

The Bureau continues to believe that 

consideration of debt-to-income ratio or 

residual income is fundamental to any 

determination of ability to repay. A 

consumer is able to repay a loan if he 

or she has sufficient funds to pay his or 

her other obligations and expenses and 

still make the payments required by the 

terms of the loan. Arithmetically 

comparing the funds to which a 

consumer has recourse with the amount 

of those funds the consumer has already 

committed to spend or is committing to 

spend in the future is necessary to 

determine whether sufficient funds 

exist. 

However, for the same reasons that 

the Bureau declined to impose a specific 

43-percent threshold for balloonpayment qualified mortgages under the 

balloon loan provision in § 1026.43(f), 

the Bureau does not believe it is 

necessary to impose a specific debt-toincome ratio or residual income 

threshold for this category of qualified 

mortgages. As discussed above, the 

Bureau believes that small creditors 

often are particularly able to make 

highly individualized determinations of 

ability to repay that take into 

consideration the unique characteristics 

and financial circumstances of a 

particular consumer. While the Bureau 

believes that many creditors can make 

mortgage loans with consumer debt-toincome ratios above 43 percent that 

consumers are able to repay, the Bureau 

also believes that portfolio loans made 

by small creditors are particularly likely 

to be made responsibly and to be 

affordable for the consumer even if such 

loans exceed the 43-percent threshold. 

The Bureau therefore believes that it is 

appropriate to presume compliance 

even above the 43-percent threshold for 

small creditors who meet the criteria set 

forth in § 1026.43(e)(5). The Bureau 

believes that the discipline imposed 

when small creditors make loans that 

they will hold in their portfolio is 

sufficient to protect consumers’ interests 

in this regard. Because the Bureau is not 

adopting a specific limit on consumers’ 

debt-to-income ratio, the Bureau does 

not believe it is necessary to require 

creditors to calculate debt-to-income 

ratio in accordance with a particular 

standard such as that set forth in 

appendix Q. 

The Bureau does not believe it is 

appropriate to permit all small creditors 

to make balloon-payment qualified 

mortgages under § 1026.43(e)(5) as 

suggested by some commenters. The 

Bureau believes that Congress clearly 

indicated in the Dodd-Frank Act that 

only small creditors operating 

predominantly in rural or underserved 

areas should be eligible to originate 

balloon-payment qualified mortgages. 

However, as discussed below in the 

section-by-section analyses of 

§ 1026.43(e)(6) and (f), the Bureau is 

providing a two-year transition period 

during which all small creditors may 

originate balloon-payment qualified 

mortgages. This transition period will 

allow the Bureau to study the existing 

definitions of rural and underserved to 

determine whether they adequately 

preserve consumers’ access to 

responsible, affordable mortgage credit 

and will facilitate creditors’ transition to 

alternatives to balloon-payment 

mortgages, such as adjustable-rate 

mortgages. 

Valuation of legal rights by 

consumers. Finally, the Bureau is 

convinced that small creditor portfolio 

loans covered by § 1026.43(e)(5) are 

unlikely to be provided to consumers 

who qualify for secondary market 

financing or who can otherwise obtain 

mortgage credit. The Bureau therefore 

concludes that the risk that comparison 

shopping consumers will be unable to 

assess the value of the right to sue in the 

event of default or foreclosure is 

unlikely to be significant in practice. 

Also, as discussed above, the Bureau 

believes that small creditors’ historically 

low credit losses demonstrate that the 

size and other characteristics of and 

relationship lending model employed 

by small creditors provide significant 

assurances that the mortgage credit they 

extend will be responsible and 

affordable. Because consumers are 

unlikely to receive loans from small 

creditors that result in default or 

foreclosure, it appears unlikely that 

consumers will be significantly 

disadvantaged by the inability to make 

an affirmative claim of noncompliance 

with the ability-to-repay rules or to 

assert noncompliance in a foreclosure 

action. The Bureau therefore believes 

that this issue is not sufficient to 

outweigh the significant benefit of 

§ 1026.43(e)(5) in preserving access to 

credit. 

Legal authority. Accordingly, the 

Bureau is exercising its authority under 

TILA sections 105(a), 129C(b)(2)(vi), and 

129C(b)(3)(B)(i) to adopt § 1026.43(e)(5) 

as proposed for the reasons summarized 

below and discussed in more detail 

above. Under TILA section 105(a) the 

Bureau generally may prescribe 

regulations that provide for such 

adjustments and exceptions for all or 

any class of transactions that the Bureau 

judges are necessary and proper to 

effectuate the purposes of TILA, which 

include the purposes of TILA 129C, and 

facilitate compliance with these 

purposes, among other things. The 

Bureau believes that these amendments 

are necessary and proper to ensure that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

the loans. This provision is consistent 

with the findings of TILA section 129C 

by ensuring that consumers are able to 

obtain responsible affordable credit, 

which informs the Bureau’s 

understanding of its purposes. 

Furthermore, the Bureau revises the 

qualified mortgage criteria in the statute 

to adopt this new definition by finding 

that this provision is necessary and 

proper to ensure that responsible, 

affordable mortgage credit remains 

available to consumers in a manner 

consistent with the purposes of TILA 

section 129C, necessary and appropriate 

to effectuate the purposes of TILA 

section 129C and to facilitate 

compliance with TILA section129C. As 

described above, the Bureau believes 

that, unless § 1026.43(e)(5) is adopted, 

small creditors will be less likely to 

make residential mortgage loans. 

Because small creditors are a significant 

source of nonconforming mortgage 

credit nationally and mortgage credit 

generally in rural or underserved areas, 

this would significantly limit access to 

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mortgage credit for some consumers. 

The Bureau also believes that the 

relationship lending model, qualitative 

local knowledge, and size of small 

creditors, combined with the intrinsic 

incentives of portfolio lending, provide 

strong assurances that these creditors 

typically will make reasonable and good 

faith determinations of consumers’ 

ability to repay when originating loans 

pursuant to § 1026.43(e)(5). This 

provision is also necessary and proper 

to facilitate compliance with the 

purposes of TILA by easing the ability 

of small creditors to make qualified 

mortgages. The Bureau also believes that 

the provisions of § 1026.43(e)(5) relating 

to debt-to-income ratio or residual 

income are authorized by TILA section 

129C(b)(2)(vi), which authorizes, but 

does not require, the Bureau to adopt 

guidelines or regulations relating to 

debt-to-income ratio or alternative 

measures of ability to pay regular 

expenses after payment of total monthly 

debt. 

43(e)(6) Qualified Mortgage Defined— 

Temporary Balloon-Payment Qualified 

Mortgage Rules Background 

As discussed above, TILA section 

129C(b) and the Bureau’s rules 

thereunder, § 1026.43(e), provide that a 

creditor or assignee may presume that a 

loan has met the ability-to-repay 

requirements described in TILA section 

129C(a)(1) through (4) and the Bureau’s 

rules thereunder, § 1026.43(c), if a loan 

is a qualified mortgage. TILA section 

129C(b)(2)(A)(ii) provides that qualified 

mortgages generally cannot include a 

balloon payment. Accordingly, 

§ 1026.43(e)(2) of the Bureau’s rules 

provides a general qualified mortgage 

definition that excludes loans with a 

balloon payment. In addition, 

§ 1026.43(e)(4) provides a temporary 

qualified mortgage definition that also 

excludes balloon-payment loans. 

However, TILA section 129C(b)(2)(E) 

permits the Bureau to provide by 

regulation an alternate qualified 

mortgage definition that includes 

certain balloon payment mortgages 

originated and held in portfolio by small 

creditors operating predominantly in 

rural or underserved areas. The Bureau 

exercised this authority in adopting 

§ 1026.43(f). Section 1026.43(f) allows 

creditors with less than $2 billion in 

assets that originate, together with all 

affiliates, fewer than 500 first-lien 

mortgages annually to originate balloonpayment qualified mortgages if the 

creditor operates predominantly in rural 

or underserved areas and if certain other 

requirements are met. The Bureau 

adopted definitions of rural and 

underserved in § 1026.35(b)(2)(iv). 

As discussed above in the section-bysection analysis of § 1026.43(e)(5), the 

Bureau proposed and is adopting a 

fourth category of qualified mortgage 

which includes loans originated and 

held in portfolio by small creditors that 

meet the same asset and originations 

criteria regardless of whether they 

operate predominantly in rural and 

underserved areas. Qualified mortgages 

in this category are subject to different, 

more relaxed requirements regarding 

debt-to-income ratio and are covered by 

the regulatory safe harbor at a higher 

annual percentage rate than other 

qualified mortgages. However, because 

TILA section 129C(b)(2)(A)(ii) specifies 

that qualified mortgages generally may 

not have a balloon payment, 

§ 1026.43(e)(5) does not include 

mortgages with a balloon payment. 

The Bureau’s Proposal and Comments 

Received 

Prohibition on balloon payments 

generally. As discussed above, in 

proposing the new category of qualified 

mortgage for certain small creditor 

portfolio loans under § 1026.43(e)(5), 

the Bureau solicited comment regarding 

the loan feature and underwriting 

requirements with which qualified 

mortgages under proposed 

§ 1026.43(e)(5) would have to comply. 

Specifically, the Bureau solicited 

comment on whether qualified 

mortgages under proposed 

§ 1026.43(e)(5) should be exempt from 

provisions of § 1026.43(e)(2) in addition 

to those related to debt-to-income ratio 

or should be subject to any other loan 

feature or underwriting requirements, 

either in lieu of or in addition to those 

proposed. 

A large number of commenters, 

including national and State trade 

groups representing creditors and many 

individual small creditors, argued that 

§ 1026.43(e)(5) would not have the 

intended effect of preserving access to 

nonconforming mortgage credit and 

mortgage credit in rural areas unless 

§ 1026.43(e)(5) permitted small creditors 

to make balloon-payment mortgages 

within the qualified mortgage safe 

harbor regardless of whether they 

operate predominantly in rural or 

underserved areas. 

These commenters argued that small 

creditors rely on balloon-payment 

provisions to manage interest rate risk 

for the overwhelming majority of their 

residential mortgage portfolio loans. 

One national trade group representing 

small creditors estimated that 75 

percent of all residential mortgages in 

small creditors’ portfolios have a 

balloon-payment feature. Many small 

creditors who reported information 

regarding their own portfolios reported 

that between 90 and 100 percent of their 

portfolio mortgage loans include a 

balloon-payment feature. 

These commenters also stated that 

small creditors that rely on balloonpayment features generally do not have 

the capability at this time to originate 

and service adjustable-rate mortgages, 

also known as ARMs. Adjustable-rate 

mortgages would serve as an alternate 

way to manage interest rate risk and are 

permissible under § 1026.43(e)(5) as 

proposed and finalized. However, 

commenters expressed concerns that 

adjustable-rate mortgages are more 

difficult for small creditors to originate 

and service because of the systems and 

disclosures required. 

Finally, these commenters reiterated 

that small creditors generally will be 

unwilling or unable to lend outside the 

qualified mortgage safe harbor because 

of the associated litigation risk. As such, 

argued these commenters, the 

prohibition on balloon-payments under 

§ 1026.43(e)(5) would cause a significant 

reduction in consumers’ access to 

nonconforming credit. 

These commenters also asserted that 

small creditors have been originating 

balloon-payment loans for many years 

without significant harm to consumers 

and that balloon-payment loans made 

by small creditors generally have very 

low default rates that are a fraction of 

average default rates for mortgage loans 

generally. These commenters added that 

portfolio mortgage loans are a 

significant portion of assets and a 

significant revenue stream for most 

small creditors. Therefore, the 

commenters argued, the inability to 

make balloon-payment loans within the 

qualified mortgage safe harbor will 

cause serious financial harm to many 

small creditors, further reducing 

consumers’ access to nonconforming 

and other mortgage credit. 

Rollover balloons. The Bureau also 

solicited comment regarding consumers 

with balloon-payment loans originated 

before the January 10, 2014, effective 

date of the 2013 ATR Final Rule for 

which the balloon payment will become 

due after the effective date. The Bureau 

noted that small creditors that use 

balloon-payment loans to manage 

interest rate risk generally refinance the 

remaining principal when the balloon 

payment becomes due. In other words, 

the small creditors who follow this 

practice generally use the balloon 

payment feature as an opportunity to 

adjust the loan’s interest rate, not 

because they expect the consumer will 

repay the loan in full before the balloon 

payment becomes due. 

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In the proposal, the Bureau stated its 

belief that the balloon-payment 

qualified mortgage provision in 

§ 1026.43(f) and the small creditor 

portfolio exemption in proposed 

§ 1026.43(e)(5) would be adequate to 

facilitate refinancing of balloonpayment loans for which the balloonpayment becomes due after January 10, 

2014. However, the Bureau solicited 

feedback regarding whether these 

provisions were adequate for this 

purpose or whether creditors would 

need additional time beyond the 

January 10, 2014, effective date or 

would require any additional 

accommodations, modifications, or 

exemptions. 

Several commenters, including small 

creditors and creditor trade groups, 

specifically acknowledged the 

difficulties presented by balloonpayment loans originated before the 

effective date. These commenters stated 

the balloon-payment mortgages offered 

by small creditors generally have 

payments (other than the balloon) that 

amortize the loan over 30 years. These 

commenters stated that consumers most 

often take these loans not because they 

expect to repay the loan before the 

balloon payment becomes due but based 

on creditors’ assurances that they will 

be able to refinance the loan, albeit at 

a different rate. In other words, these 

commenters confirmed that small 

creditors use balloons in a way that is 

functionally similar to a long-term 

adjustable-rate mortgage. These 

commenters asserted that small 

creditors generally are committed to 

refinancing these loans for their 

customers. They stated, however, that 

they will be unable or unwilling to do 

so after the effective date unless changes 

are made to permit them to originate 

new balloon-payment loans within the 

qualified mortgage safe harbor. 

These commenters stated that, if the 

small creditors who originated these 

loans are unable or unwilling to 

refinance them, consumers will be 

forced to seek refinancing elsewhere. 

According to these commenters, 

consumers with balloon-payment loans 

from small creditors generally do not 

qualify for secondary market financing, 

and many of these consumers therefore 

will have difficulty finding other 

refinancing or restructuring options. 

The commenters asserted that in 

extreme circumstances some consumers 

who are unable to refinance or make the 

balloon payment might face foreclosure 

if they were unable to secure 

refinancing. 

Commenters who raised this issue 

generally argued that the Bureau should 

exempt loans that refinance a balloonpayment loan originated before the 

effective date from the ability-to-repay 

and qualified mortgage rules or 

significantly broaden the ability of 

creditors to make balloon loans within 

the qualified mortgage safe harbor such 

that a greater portion of these 

refinancing loans would be covered. 

The Final Rule 

The Bureau is adopting new 

§ 1026.43(e)(6), which provides a twoyear transition period during which 

small creditors as defined by 

§ 1026.43(e)(5) can originate balloonpayment qualified mortgages even if 

they do not operate predominantly in 

rural or underserved areas. The Bureau 

is adopting new § 1026.43(e)(6) because 

it believes that doing so is necessary to 

preserve access to responsible, 

affordable mortgage credit for some 

consumers. As discussed further below 

and in connection with § 1026.43(f), 

during the two-year period in which 

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

intends to review whether the 

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

should be further adjusted for purposes 

of the qualified mortgage rule and to 

explore how it can best facilitate the 

transition of small creditors’ who do not 

operate predominantly in rural or 

underserved areas from balloonpayment loans to adjustable-rate 

mortgages as Congress intended under 

the Dodd-Frank Act. At the end of the 

period, however, the Bureau expects 

that the statutory framework will take 

full effect such that balloon-payment 

loans are treated as qualified mortgages 

only where originated by small creditors 

operating predominantly in rural or 

underserved areas under § 1026.43(f). 

New § 1026.43(e)(6) defines an 

additional category of qualified 

mortgages that, like § 1026.43(e)(5), 

includes loans originated and held in 

portfolio by creditors that: 

• Have total assets that do not exceed 

$2 billion as of the end of the preceding 

calendar year (adjusted annually for 

inflation); and 

• Together with all affiliates, 

extended 500 or fewer first-lien covered 

transactions during the preceding 

calendar year. 

New § 1026.43(e)(6) is not limited to 

small creditors operating predominantly 

in rural or underserved areas. However, 

the new provision incorporates by 

reference all other requirements under 

the § 1026.43(f) balloon-payment 

qualified mortgage definition. The loan 

therefore cannot have: 

• Payments that result in an increase 

of the principal balance; 

• A term longer than 30 years; and 

• Points and fees greater than 3 

percent of the total loan amount (or, for 

smaller loans, a specified amount). 

The creditor must consider and verify 

the consumer’s current or reasonably 

expected income or assets (other than 

the dwelling and attached real property 

that secure the loan) and the consumer’s 

current debt obligations, alimony, and 

child support. The creditor also must 

consider the consumer’s monthly debtto-income ratio or residual income. As 

with § 1026.43(e)(5) and (f), there is no 

numeric limit on a consumer’s debt-toincome ratio and creditors are not 

required to calculate debt-to-income 

ratio according to appendix Q. In 

addition, the loan must provide for 

scheduled payments that are 

substantially equal and calculated using 

an amortization period that does not 

exceed 30 years, an interest rate that 

does not increase over the term of the 

loan, and a term of 5 years or longer. 

A loan must not be subject at 

consummation to a commitment to be 

acquired by any person other than a 

person that also meets the above assetsize and number of transactions criteria. 

A loan loses its qualified mortgage 

status under § 1026.43(e)(6) if it is sold, 

assigned, or otherwise transferred, 

subject to exceptions for transfers that 

are made three or more years after 

consummation, to another qualifying 

institution, as required by a supervisory 

action, or pursuant to a merger or 

acquisition. 

As with all qualified mortgages, a 

qualified mortgage under § 1026.43(e)(6) 

receives either a rebuttable or 

conclusive presumption of compliance 

with the ability-to repay requirements in 

§ 1026.43(c), depending on the annual 

percentage rate. However, as described 

above in the section-by-section analysis 

of § 1026.43(b)(4), the Bureau is 

adopting an alternate definition of 

higher-priced covered transaction for 

first-lien covered transactions that are 

qualified mortgages under 

§ 1026.43(e)(5) and (f). As also is 

discussed above in the section-bysection analysis of § 1026.43(b)(4), this 

alternate definition applies to qualified 

mortgages under § 1026.43(e)(6) as well. 

As such, § 1026.43(b)(4) provides that a 

first-lien covered transaction that is a 

qualified mortgage under proposed 

§ 1026.43(e)(6) is a higher-priced 

covered transaction if the annual 

percentage rate exceeds APOR for a 

comparable transaction by 3.5 or more 

percentage points. This extends the 

qualified mortgage safe harbor described 

in § 1026.43(e)(1)(i) to first-lien 

qualified mortgages defined under 

proposed § 1026.43(e)(6) even if those 

loans have annual percentage rates 

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35490 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

between 1.5 and 3.5 percentage points 

higher than APOR. Such loans 

otherwise would be covered by the 

rebuttable presumption of compliance 

described in § 1026.43(e)(1)(ii). 

As discussed below, § 1026.43(e)(6) is 

intended to provide a temporary 

transition period during which small 

creditors that do not operate 

predominantly in rural and underserved 

areas can originate balloon-payment 

qualified mortgages. Section 

1026.43(e)(6) therefore applies only to 

loans consummated on or before 

January 10, 2016, two years after the 

effective date of the 2013 ATR Final 

Rule. Qualified mortgages originated 

under § 1026.43(e)(6) on or before 

January 10, 2016, will retain their 

qualified mortgage status after January 

10, 2016, as long as all other 

requirements, such as the requirement 

to retain the loan in portfolio subject to 

certain exceptions, are met. 

The Bureau believes § 1026.43(e)(6) 

appropriately balances consumer 

protection and access to credit issues. 

As discussed above in the section-bysection analyses of § 1026.43(b)(4) and 

(e)(5), the Bureau believes that small 

creditors are an important source of 

mortgage credit, including 

nonconforming mortgage credit, and 

that there would be a significant 

reduction in consumers’ access to credit 

if small creditors were to substantially 

reduce the number of residential 

mortgage loans they make or cease 

mortgage lending altogether. The Bureau 

also understands that small creditors 

generally do not originate long-term 

fixed-rate portfolio loans because of the 

associated interest rate risk, that many 

small creditors do not offer ARMs 

because they do not have the 

compliance and other systems in place 

to originate and service them, and that 

many small creditors have expressed 

reluctance to offer balloon-payment 

mortgages outside the qualified 

mortgage safe harbor because of the 

associated litigation risk. The Bureau 

also understands that some consumers 

may find it more inconvenient, more 

costly, or more difficult to refinance 

their existing balloon-payment loans if 

small creditors are unable or unwilling 

to refinance these loans because these 

consumers would have to seek financing 

from other creditors. The Bureau also is 

sensitive to concerns that some 

consumers may be unable to find 

alternative financing and therefore 

could face foreclosure. 

Commenters’ preferred solution is for 

the Bureau to significantly and 

permanently broaden the ability of all 

small creditors to make balloonpayment mortgages that are either 

exempt from the ability-to-repay rules or 

within the qualified mortgage safe 

harbor. As discussed further below with 

regard to § 1026.43(f), the Bureau 

believes it is appropriate to use the twoyear transition period to consider 

whether it can develop more accurate or 

precise definitions of rural and 

underserved. However, the Bureau 

believes that Congress made a deliberate 

policy choice in the Dodd-Frank Act not 

to extend qualified mortgage status to 

balloon-payment products outside of 

such areas. The Bureau believes that 

with appropriate transition time, and 

perhaps implementation support, small 

creditors can develop adjustable-rate 

mortgage products that will enable them 

to manage interest rate risk in a manner 

that poses less risk for consumers. 

Accordingly, the Bureau also will focus 

during the two-year transition period on 

facilitating small creditors’ conversion 

to adjustable-rate mortgage products. 

The Bureau understands that 

adjustable-rate mortgages offered today 

by many creditors would fall within that 

qualified mortgage safe harbor and 

incorporate interest rate adjustment 

features similar to those of the balloonpayment mortgages used by many small 

creditors. For example, the interest rate 

of a 5/5 ARM adjusts five years after 

consummation and every five years 

thereafter for the duration of the loan 

term, paralleling the interest rate 

adjustment terms of an amortizing 5- 

year balloon-payment mortgage that is 

expected to be refinanced until it is paid 

off. The Bureau also understands that 

there are differences between 

adjustable-rate and balloon-payment 

mortgages that may be significant for 

some creditors. Interest rate adjustments 

for adjustable-rate mortgages are tied to 

changes in an index rate, and commonly 

used index rates (e.g., the London 

Interbank Offered Rate or ‘‘LIBOR’’) may 

not track small creditors’ cost of funds. 

Interest rates for adjustable-rate 

mortgages generally are capped at a 

certain amount above the initial rate, 

and this cap makes managing interest 

rate risk more complex. In addition, 

creditors that do not currently originate 

ARMs are likely to incur costs for 

developing the capability to do so (such 

as by purchasing additional modules for 

existing lending platforms), and there 

are additional expenses associated with 

servicing adjustable-rate mortgages, as 

consumers must be notified before each 

interest rate adjustment and servicing 

systems must be equipped to adjust the 

interest rate and payment amount. 

However, adjustable-rate mortgages 

also pose significantly less risk to 

consumers. The Bureau believes that 

balloon-payment mortgages are 

particularly risky for consumers because 

the consumer must rely on the creditors’ 

nonbinding assurances that the loan 

will be refinanced before the balloon 

payment becomes due. Even a creditor 

with the best of intentions may find 

itself unable to refinance a loan when a 

balloon payment becomes due. Changes 

in the consumer’s credit profile may 

affect the creditor’s willingness to 

refinance or the price of the loan, and 

consumers may be unable to anticipate 

the new rate that will be offered and 

suddenly find that they are unable to 

afford it. Consumers with balloonpayment mortgages therefore face the 

periodic possibility of losing their 

property even if they perform their 

obligations under the terms of the loan. 

Adjustable-rate mortgages present less 

risk to consumers because they do not 

require refinancing and because interest 

rate adjustments are calibrated over the 

life of the loan and therefore are more 

predictable. 

Publicly available data from reports 

filed with the National Credit Union 

Administration indicate that around 20 

percent of small credit unions, 

including some with assets below $150 

million, originate adjustable-rate 

mortgages and only 18 percent of small 

credit unions originate balloon-payment 

mortgages but not adjustable-rate 

mortgages. This suggests that small 

creditors can manage interest rate risk, 

lend safely and soundly, and afford the 

expense and compliance burden 

associated with originating adjustablerate mortgages. 

The Bureau believes that Congress 

made a clear policy choice in the DoddFrank Act that small creditors not 

operating predominantly in rural or 

underserved areas must ultimately 

conduct their residential mortgage 

business using adjustable-rate mortgages 

or other alternatives to balloon-payment 

mortgages. However, as discussed below 

in the section-by-section analysis of 

§ 1026.43(f), the Bureau believes that 

further study of the existing definitions 

of rural and underserved is warranted. 

In addition, the Bureau acknowledges 

that many small creditors are not 

equipped to offer alternatives to 

balloon-payment mortgages today and 

are unlikely to be so equipped by the 

January 10, 2014, effective date. If small 

creditors are unable or unwilling to 

originate new loans as of that date, the 

Bureau believes there will be 

deleterious effects on access to 

nonconforming credit and possible 

harm to consumers with balloonpayment mortgages originated before the 

effective date that expect to refinance 

their loans with the same creditor when 

the balloon payment becomes due. 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35491 

The Bureau therefore believes that, in 

order to preserve access to affordable, 

responsible credit, it is necessary and 

appropriate to provide small creditors, 

as defined in § 1026.43(e)(5), with a 

two-year transition period after the 

effective date during which they can 

continue to originate balloon loans. The 

Bureau believes that this two-year 

period will enable the Bureau to reexamine the definitions of rural or 

underserved to determine, among other 

things, whether these definitions 

accurately identify communities in 

which there are limitations on access to 

credit and whether it is possible to 

develop definitions that are more 

accurate or more precise. The Bureau 

may consider proposing changes to the 

definitions of rural or underserved 

based on the results of its inquiry. The 

two-year transition period also will 

facilitate small creditors’ conversion to 

adjustable-rate mortgage products or 

other alternatives to balloon-payment 

loans. 

Accordingly, the Bureau is exercising 

its authority under TILA sections 105(a), 

129C(b)(2)(vi), and 129C(b)(3)(B)(i) to 

adopt § 1026.43(e)(6) for the reasons 

summarized below and discussed in 

more detail above. Under TILA section 

105(a) the Bureau generally may 

prescribe regulations that provide for 

such adjustments and exceptions for all 

or any class of transactions that the 

Bureau judges are necessary and proper 

to effectuate the purposes of TILA, 

which include the purposes of TILA 

129C, and facilitate compliance with 

these purposes, among other things. The 

Bureau believes that these amendments 

are necessary and proper to ensure that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

the loans. This provision is consistent 

with the findings of TILA section 129C 

by ensuring that consumers are able to 

obtain responsible affordable credit, 

which informs the Bureau’s 

understanding of its purposes. 

Furthermore, the Bureau revises the 

qualified mortgage criteria in the statute 

to adopt this new definition by finding 

that this provision is necessary and 

proper to ensure that responsible, 

affordable mortgage credit remains 

available to consumers in a manner 

consistent with the purposes of TILA 

section 129C, necessary and appropriate 

to effectuate the purposes of TILA 

section 129C and to facilitate 

compliance with TILA section129C. As 

described above, the Bureau believes 

that, unless § 1026.43(e)(6) is adopted, 

small creditors will be less likely to 

make residential mortgage loans. 

Because small creditors are a significant 

source of nonconforming mortgage 

credit nationally and mortgage credit 

generally in rural or underserved areas, 

this would significantly limit access to 

mortgage credit for some consumers. 

The Bureau also believes that the 

relationship lending model, qualitative 

local knowledge, and size of small 

creditors, combined with the intrinsic 

incentives of portfolio lending, provide 

strong assurances that these creditors 

typically will make reasonable and good 

faith determinations of consumers’ 

ability to repay when originating loans 

pursuant to § 1026.43(e)(6). This 

provision is also necessary and proper 

to facilitate compliance with the 

purposes of TILA by easing the ability 

of small creditors to make qualified 

mortgages. The Bureau also believes that 

the provisions of § 1026.43(e)(6) relating 

to debt-to-income ratio or residual 

income are authorized by TILA section 

129C(b)(2)(vi), which authorizes, but 

does not require, the Bureau to adopt 

guidelines or regulations relating to 

debt-to-income ratio or alternative 

measures of ability to pay regular 

expenses after payment of total monthly 

debt. 

43(f) Balloon-Payment Qualified 

Mortgages Made by Certain Creditors 

Section 1026.43(f) provides that 

certain balloon loans made and held in 

portfolio by certain small creditors 

operating predominantly in rural or 

underserved areas are qualified 

mortgages. The Bureau did not propose 

specific amendments to § 1026.43(f), but 

explained that if proposed 

§ 1026.43(e)(5) were adopted with 

changes inconsistent with § 1026.43(f), 

the Bureau would consider and might 

adopt parallel amendments to 

§ 1026.43(f) in order to keep these 

sections of the regulation consistent. 

The Bureau solicited comment on the 

advantages and disadvantages of 

maintaining consistency between 

§ 1026.43(e)(5) and (f). Commenters 

generally did not specifically discuss 

the importance of consistency, although 

most commenters advocating for 

changes to § 1026.43(e)(5) stated that 

conforming changes should be made to 

§ 1026.43(f) as well. However, many 

commenters raised concerns regarding 

the scope of the Bureau’s definitions of 

rural and underserved under 

§ 1026.43(f). Commenters including 

national and State trade groups 

representing creditors and dozens of 

small creditors argued that the Bureau’s 

definitions of rural and underserved are 

too restrictive and do not adequately 

preserve consumers’ access to credit. 

Commenters were particularly critical of 

the Bureau’s definition of ‘‘rural,’’ 

which they asserted excluded many 

communities that are considered rural 

under other legal or regulatory 

definitions or that are commonly 

viewed as rural because of their small, 

isolated, agricultural or undeveloped 

characteristics. Some of these 

commenters proposed that the Bureau 

adopt alternate definitions of ‘‘rural,’’ 

such as those used by the U.S. 

Department of Agriculture’s Rural 

Housing Loan Program or the Farm 

Credit System. Others suggested that all 

creditors or all small creditors should be 

eligible to make balloon-payment 

qualified mortgages if the loan is held in 

portfolio, or that a balloon-payment 

mortgage should be considered a 

qualified mortgage if the consumer and 

property have certain characteristics 

that suggest the loan would not be 

eligible for sale to the secondary market. 

Other commenters raised concerns 

about the requirement that balloonpayment qualified mortgages have a 

loan term of five years or longer. These 

commenters asserted that many small 

creditors currently originate balloonpayment loans with shorter terms and 

would be unable to manage interest rate 

risk using balloon-payment loans with a 

five-year term. 

One commenter, a consumer 

advocacy organization, argued that all 

qualified mortgages should be longterm, fixed-rate loans and that the 

§ 1026.43(f) definition of balloonpayment qualified mortgages should be 

abandoned. 

As discussed above in the section by 

section analysis of § 1026.43(e)(5), 

§ 1026.43(e)(5) as adopted is consistent 

with existing § 1026.43(f). The Bureau 

did not propose and did not solicit 

comment regarding amendments 

§ 1026.43(f) except with respect to 

preserving consistency with 

§ 1026.43(e)(5), and the Bureau is not 

reconsidering the definitions of rural 

and underserved and the § 1026.43(f) 

restrictions on the terms of balloonpayment qualified mortgages at this 

time. The Bureau is therefore not 

adopting any changes to § 1026.43(f) in 

this rulemaking. 

However, the Bureau is sensitive to 

concerns expressed by commenters that 

the existing definitions of rural and 

underserved may not include some 

communities in which there are 

limitations on access to credit related to 

the community’s rural character or the 

small number of creditors operating in 

the community. For example, the 

Bureau is aware that there are 

drawbacks to a county-based system for 

defining ‘‘rural’’ and ‘‘undeserved,’’ 

such as in western States where 

counties may cover extremely large 

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35492 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

161See 78 FR 6555 (Jan. 30, 2013). 

162Specifically, section 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. 

areas. As discussed above in the sectionby-section analysis of § 1026.43(e)(6), 

the Bureau is providing a two-year 

transition period during which small 

creditors can originate balloon payment 

qualified mortgages even if they do not 

operate predominantly in rural or 

underserved areas. In addition to 

providing time for small creditors to 

further develop their capacity to offer 

adjustable-rate mortgages, the Bureau 

expects to re-examine the definitions of 

rural or underserved during this time to 

determine, among other things, whether 

these definitions accurately identify 

communities in which there are 

limitations on access to credit and 

whether it is possible to develop 

definitions that are more accurate or 

more precise. The Bureau may consider 

proposing changes to the definitions of 

rural or underserved based on the 

results of its inquiry. 

43(g) Prepayment Penalties 

The Bureau is adopting conforming 

amendments to § 1026.43(g) to include 

references to § 1026.43(e)(5) and (6), as 

described in the section-by-section 

analyses of those sections, above. 

VI. Effective Date 

This final rule is effective on January 

10, 2014. The rule applies to 

transactions for which the creditor 

received an application on or after that 

date. The Bureau received several 

comments requesting various delays in 

the effective date. For example, one 

commenter asked the Bureau to delay 

the effective date for all of § 1026.43 by 

six months to provide sufficient time to 

implement the processes, procedures, 

and systems changes needed to comply 

with the ability-to-repay requirements. 

The Bureau has considered these 

comments, but declines to delay the 

effective date. The Bureau 

acknowledges the challenges identified 

by commenters, but believes that an 

effective date of January 10, 2014 

provides sufficient time to implement 

the required changes. Also, as discussed 

in the 2013 ATR Final Rule, the Bureau 

believes that this effective date will 

ensure that consumers receive the 

protections in these rules as soon as 

reasonably practicable, taking into 

account the timeframes established in 

section 1400(c) of the Dodd-Frank Act, 

the overlapping provisions of the other 

title XIV final rules, the Bureau’s efforts 

at facilitating regulatory 

implementation, and the need to afford 

creditors, other affected entities, and 

other industry participants sufficient 

time to implement the more complex or 

resource-intensive new requirements.161

VII. Dodd-Frank Act Section 1022(b)(2) 

Analysis 

In developing the final rule, the 

Bureau has considered potential 

benefits, costs, and impacts.162 In 

addition, 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 Bureau also held 

discussions with or solicited feedback 

from the United States Department of 

Agriculture, Rural Housing Service, the 

Federal Housing Administration, and 

the Department of Veterans Affairs 

regarding the potential impacts of the 

final rule on those entities’ loan 

programs. 

The Bureau is issuing this final rule 

to adopt certain exemptions, 

modifications, and clarifications to 

TILA’s ability-to-repay rule. On January 

10, 2013, the Bureau issued the 2013 

ATR Final Rule to implement the 

ability-to-repay requirements of the 

Dodd-Frank Act that generally require a 

creditor to make a reasonable, good faith 

determination of a consumer’s ability to 

repay a mortgage loan and other 

statutory provisions. See 78 FR 6407 

(Jan. 30, 2013). At the same time, the 

Bureau issued the 2013 ATR Proposed 

Rule related to certain proposed 

exemptions, modifications, and 

clarifications to the ability-to-repay rule. 

See 78 FR 6621 (Jan. 30, 2013). 

The final rule provides exceptions to 

the 2013 ATR Final Rule, which 

implements the statute’s inclusion of 

loan originator compensation in points 

and fees. Specifically, in the final rule, 

payments by consumers to mortgage 

brokers need not be counted as loan 

originator compensation where such 

payments already have been included in 

points and fees as part of the finance 

charge. In addition, compensation paid 

by a mortgage broker to its employee 

loan originator need not be included in 

points and fees, nor does compensation 

paid by a creditor to its own loan 

originator employees. However, 

consistent with the statute and 2013 

ATR Final Rule, compensation paid by 

a creditor to a mortgage broker 

continues to be included in points and 

fees in addition to any origination 

charges paid by a consumer to the 

creditor. 

The final rule also provides certain 

exemptions from the ATR requirements. 

These include exemptions for 

extensions of credit made by certain 

types of creditors, in accordance with 

applicable conditions, including 

creditors designated by the U.S. 

Department of the Treasury as 

Community Development Financial 

Institutions; creditors designated by the 

U.S. Department of Housing and Urban 

Development as either a Community 

Housing Development Organization or a 

Downpayment Assistance Provider of 

Secondary Financing; and certain 

creditors designated as nonprofit 

organizations under section 501(c)(3) of 

the Internal Revenue Code. The final 

rule also exempts from the ability-torepay requirements extensions of credit 

made pursuant to a program 

administered by a housing finance 

agency (HFA) and extensions of credit 

made pursuant to an Emergency 

Economic Stabilization Act program. 

The final rule creates two new 

definitions for loans that can be 

qualified mortgages. The final rule 

creates a new category of qualified 

mortgages that includes, among other 

conditions, certain loans originated and 

held on portfolio by creditors that have 

total assets of less than $2 billion at the 

end of the previous calendar year and, 

together with all affiliates, originated 

500 or fewer first-lien covered 

mortgages during the previous calendar 

year. In addition, the final rule creates 

a two-year transition period during 

which balloon loans originated and held 

on portfolio by small creditors (as 

defined above) who do not operate 

predominantly in rural or underserved 

areas can be qualified mortgages under 

defined conditions. Such loans would 

not be eligible for qualified mortgage 

status under section 1026.43(f) because 

under the statute, that provision is 

limited to creditors that operate 

predominantly in rural or underserved 

areas. The final rule also allows small 

creditors to charge a higher annual 

percentage rate of 3.5 percentage points 

above the Average Prime Offer Rate for 

first-lien qualified mortgages, and still 

benefit from a conclusive presumption 

of compliance (or safe harbor). This 

higher threshold applies to the new 

small creditor portfolio qualified 

mortgages just described, to first-lien 

balloon-payment qualified mortgages 

originated by small creditors operating 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35493 

163The Bureau has discretion in future 

rulemakings to choose the relevant provisions to 

discuss and to choose the most appropriate baseline 

for that particular rulemaking. 

164 In conducting the interagency consultation 

process under section 1022(b)(2)(B), the Bureau 

received communications for the public record 

regarding the proposed rule. The FDIC, HUD, and 

OCC wrote the Bureau regarding the proposed 

provisions on loan originator compensation and 

FHFA and HUD wrote the Bureau regarding the 

proposed exemptions from the ability-to-repay 

requirements. These comments are discussed in 

more detail in the section-by-section analyses 

above. 

165The ability to cover up-front costs in the 

interest rate depends on the characteristics of the 

borrower and the loan. The interest rate threshold 

for high-cost mortgages under HOEPA could also 

potentially limit this option. 

predominantly in rural or underserved 

areas and, to balloon mortgages 

originated by other small creditors 

during the two-year transition period. 

This analysis generally examines the 

benefits, costs, and impacts of the final 

rule against the baseline of the January 

2013 ATR Rule.163 For the analyses 

considered here, the Bureau believes 

that the baseline of the 2013 ATR Final 

Rule is the most appropriate and 

informative. Because the final rule 

includes amendments and clarifications 

to the January 2013 ATR Rule, a 

comparison to the January baseline 

focuses precisely on the impacts of such 

provisions. The analyses in this section 

rely on data that the Bureau have 

obtained, the record including 

comments received in the proposed 

rule, and the record established by the 

Board and Bureau during the 

development of the 2013 ATR Final 

Rule. However, the Bureau notes that for 

some analyses, there are limited data 

available with which to quantify the 

potential costs, benefits, and impacts of 

the proposal. Still, general economic 

principles together with the limited data 

that are available provide insight into 

the benefits, costs, and impacts and in 

these cases, the analysis provides a 

qualitative discussion of the benefits, 

costs, and impacts of the final rule. 

Commenters on the proposed rule did 

not submit comments specifically 

addressing the analyses under Section 

1022 contained in the Supplemental 

Information accompanying the proposal. 

However, several did address the overall 

benefits, costs and impacts of the 

proposal.164 The comments are 

discussed throughout the section-bysection analyses above. 

A. Potential Benefits and Costs to 

Consumers and Covered Persons 

1. Points and Fees Calculation 

In the final rule, payments by 

consumers to mortgage brokers need not 

be counted as loan originator 

compensation where such payments 

already have been included in points 

and fees as part of the finance charge. 

In addition, compensation paid by a 

mortgage broker to its employee loan 

originator need not be included in 

points and fees, nor does compensation 

paid by a creditor to its own loan 

originator employees. However, 

compensation paid by a creditor to a 

mortgage broker is included in points 

and fees in addition to any origination 

charges paid by a consumer to the 

creditor. 

As noted above, the Bureau believes 

that the most appropriate baseline 

against which to consider these changes 

is the 2013 ATR Final Rule. Consistent 

with the literal language of the statute, 

the 2013 ATR Final Rule provided that 

loan originator compensation be treated 

as additive to other elements of points 

and fees and that compensation is 

added as it flows downstream to the 

loan originator. As discussed in the 

section-by-section analyses above, the 

Bureau is now invoking its exception 

and revision authorities to alter the 

statutory additive approach to exclude 

certain compensation. 

At a general level, the exclusion 

(inclusion) of additional sources of 

compensation in the points and fees 

calculation decreases (increases) the 

total amount of points and fees. As 

explained in the 2013 ATR Final Rule, 

keeping all other provisions of a given 

loan fixed, calculations that exclude 

additional amounts of compensation 

will result in a greater number of loans 

being eligible as qualified mortgages. 

Conversely, calculations that include 

additional amounts of compensation are 

less likely to achieve qualified mortgage 

status. For loans that are not eligible to 

be qualified mortgages, the costs of 

origination may be slightly higher as a 

result of the slightly increased liability 

for the lender and any assignees and of 

possibly increased compliance costs 

related to the origination and 

documentation of the loan. If these costs 

are passed along, consumers’ costs for 

these loans may also increase. However, 

these consumers will also have the 

added consumer protections that 

accompany loans made under the 

general ability-to-repay provisions. In 

some instances, such up-front points 

and fees could be folded into the 

interest rate in order to maintain loans’ 

status as qualified mortgages, which in 

turn could move loans out of the safe 

harbor and into the rebuttable 

presumption. The 2013 ATR Final Rule 

discussed the impacts of the ability-torepay/qualified mortgage regime on 

consumers in depth including the 

nature of the liability regime. To the 

extent that the impact of various 

provisions of this rule on consumers is 

essentially to expand or contract 

coverage of the ability-to-repay/ 

qualified mortgage regime, the general 

discussion of the impacts from the 

January 2013 rule is informative for 

each of the various provisions. 

The exclusion (inclusion) of 

additional loan originator compensation 

amounts in points and fees may 

similarly lead fewer (more) loans to 

exceed the points and fees triggers and 

rate triggers for high-cost mortgages 

under HOEPA. Based on the history of 

high-cost mortgage loans, the Bureau 

believes that loans exceeding the highcost thresholds are less likely to be 

offered unless they can be restructured 

with lower up front points and fees. 

Consumers who are offered and accept 

loans above the high-cost mortgage 

threshold will have the added consumer 

protections that accompany high-cost 

mortgage loans; other consumers may 

still able to take out their loan by paying 

a higher interest rate and less upfront.165 The January 2013 HOEPA rule 

discussed the impacts of the high-cost 

mortgage regime on consumers in depth 

including the nature of the liability 

regime. To the extent that the impact of 

various provisions of this rule on 

consumers is essentially to expand or 

contract coverage of the high cost 

mortgage regime, the general discussion 

of the impacts from the January 2013 

HOEPA rule is informative for each of 

the various provisions. 

Measured against the 2013 ATR Final 

Rule baseline, the final rule excludes 

certain compensation from the points 

and fees calculation in both the 

wholesale and retail channels. In the 

wholesale channel, two types of 

compensation are excluded: Payments 

by consumers to mortgage brokers 

where such payments are already 

included in points and fees as part of 

the finance charge and compensation 

paid by a mortgage broker to its 

employee loan originator. In the retail 

channel, compensation paid by a 

creditor to its own loan originator 

employees is also excluded. Because of 

these exclusions, more loans will satisfy 

the points and fees threshold for 

qualified mortgages and fewer loans will 

exceed the points and fees threshold for 

high-cost mortgages. As described 

above, for covered persons, the costs of 

supplying such loans should be slightly 

reduced; consumers with such loans 

should therefore benefit from greater 

access to credit and lower costs, but 

would have a more restricted ability to 

challenge violations of the ability-torepay rules and would not benefit from 

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35494 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

166The precise magnitudes of the effects depend 

critically on whether third-party charges are 

provided by an affiliate of the loan originator. 

Assuming that affiliates are not involved in the 

transaction, the rule has almost no effect, with 

fewer than 0.5% of loans in this sample dropping 

below the relevant thresholds. Under the 

assumption that affiliates provided all settlement 

services, roughly 6% of loans that would exceed the 

limits are projected to no longer do so once loan 

originator compensation is excluded. However, this 

figure is very likely an overestimate: Even for those 

creditors that use affiliates, it is rare that all 

settlement charges would be provided by affiliated 

third parties. 

167The extent that payments from creditors to 

brokerage firms must cover overhead, which is not 

included in payments from creditor to their own 

employees, limits the degree to which this 

alternative could achieve a fully equal impact. 

168The wholesale channel does not experience 

nearly the same burden due to this rule. Both the 

creditor to broker and the consumer to creditor fees 

are already routinely calculated by the industry. 

the protections afforded to high-cost 

mortgages. 

The magnitude of both of these 

effects—changes in the status of loans as 

qualified mortgages or high cost 

mortgages and the extent to which 

lenders may adjust pricing and 

compensation practices in response to 

such provisions—will determine the 

costs, benefits, and impacts on covered 

persons and consumers. As noted 

earlier, comprehensive and 

representative data that include points 

and fees as well as loan originator 

compensation is not readily available. 

The Bureau did receive some data, 

however, in response to its requests 

included in the proposed rule. In a 

communication that has been made part 

of the record, one industry trade group 

submitted data to the Bureau that 

contained loan-level information for 

three anonymous retail lenders. These 

data included information on points and 

fees and estimates of loan originator 

compensation. Based on the limited 

data in this submission, excluding 

compensation paid by retail lenders to 

their loan officers has a minor impact on 

the number of loans below the qualified 

mortgage points and fees or high-cost 

mortgage thresholds.166 The Bureau is 

not able to determine precisely how 

representative these data are of the 

overall retail mortgage market, however. 

The Bureau therefore did not rely on 

these data, although the overall patterns 

in these data and the general 

magnitudes of any effects align with the 

Bureau’s general understanding of the 

level of loan originator compensation 

and the level of up-front charges in the 

market. This general understanding 

informs the Bureau’s analysis and leads 

the Bureau to believe that the economic 

impact of these outcomes should be 

small. On the whole, the final rule will 

slightly reduce costs related to 

supplying these loans as well as 

compliance costs for covered persons as 

compared to the 2013 ATR Final Rule. 

The Bureau believes that consumers 

will benefit from slightly increased 

access to credit and lower costs on the 

affected loans, but in return will not 

receive the protections afforded to loans 

originated under the general ability-torepay standards or to high-cost 

mortgages. 

This provision of the rule may also 

alter the competitive dynamics between 

the wholesale channel and the retail 

channel. As noted above, the Bureau 

recognizes that an additive approach 

makes it more difficult for creditors to 

impose up-front charges and still remain 

under the qualified mortgage points and 

fees limits and the high-cost mortgage 

threshold. For certain loans originated 

through the brokerage channel, the 

inclusion of compensation paid by the 

creditor to the brokerage firm in the 

points and fees calculation may have 

the effect of denying the loan qualified 

mortgage status while a loan ostensibly 

similar in terms of interest rate and upfront charges but that has no broker 

commission because it is offered 

through the retail channel might be a 

qualified mortgage. However, for loans 

in the brokerage channel, this impact 

could be mitigated by having the 

consumer pay the broker directly, by 

shifting other origination charges into 

the rate, and/or by shifting from a 

settlement services provider affiliated 

with the creditor to a non-affiliated 

provider. 

The major alternative that the Bureau 

considered to address the competitive 

impact of the final rule was including in 

points and fees compensation from 

creditors to their loan originator 

employees in retail transactions (either 

under an additive or netting approach). 

This alternative, however, also could 

have altered the nature of competition 

between retail and the wholesale 

channels. On the one hand, if this 

alternative had been implemented, 

fewer loans made through the retail 

channel would have fallen within the 

regulatory points and fees thresholds.167

On the other hand, the compliance 

burden on creditors originating retail 

transactions would have been 

significant, which could have given the 

wholesale channel a competitive 

advantage over the retail channel due to 

the cost of complying with this 

alternative. As noted above, the 

Bureau’s general understanding of the 

market suggests that this alternative 

would not materially change which 

loans are qualified mortgages in the 

retail channel. However, the Bureau 

received numerous industry comments 

asserting that counting loan officer 

compensation in retail transactions 

would impose a significant burden on 

the retail channel.168 Each creditor 

originating loans through the retail 

channel would have to devise internal 

policies and systems regarding which 

components of loan officers’ 

compensation (and that of any other 

employees occasionally performing 

some of the loan officers’ functions) to 

include under the rule and a method of 

tracking such compensation in real time 

for the purpose of determining whether 

a particular loan is eligible for the 

qualified mortgage status or is a highcost mortgage. The Bureau believes that 

the labor and investments to develop 

such systems would be substantial. As 

described above, the Bureau was also 

concerned that this alternative would 

have provided little benefit to 

consumers, in part due to the anomalies 

in counting individual loan originator 

compensation that is specific to the 

retail transaction as of the time that the 

interest rate is set. 

The other major alternative discussed 

in the proposed rule would have 

permitted creditors to net origination 

charges against loan originator 

compensation paid to brokers (and 

creditors’ own loan originator 

employees) to calculate the amount of 

loan originator compensation that is 

included in points and fees. As noted, 

under such an approach (as compared to 

the final rule), fewer loans originated 

through the wholesale channel would 

exceed the qualified mortgage and highcost points and fees thresholds. In the 

wholesale context, comprehensive data 

that includes points and fees as well as 

loan originator compensation is also not 

readily available. However, as discussed 

above, the Bureau was concerned that 

such an approach would reduce the 

benefits to consumers of the qualified 

mortgage status and high-cost mortgage 

protections by allowing higher 

combined loan originator compensation 

and up-front points and fees. 

Particularly in markets that are not fully 

competitive or in transactions involving 

less sophisticated consumers or 

consumers who are less likely to shop 

for competitive pricing, the Bureau was 

concerned that the netting approach 

would provide greater flexibility to 

structure loan originator compensation 

to provide incentives for mortgage 

brokers to deliver more costly loans. In 

addition, the Bureau was concerned that 

such an approach would have created 

strong incentives for creditors and 

mortgage brokers to structure loan 

originator compensation to be paid 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35495 

169The liability regime extends beyond creditors. 

As amended by section 1413 of the Dodd-Frank Act, 

TILA provides that when a creditor, an assignee, 

other holder or their agent initiates a foreclosure 

action, a consumer may assert a violation of TILA 

section 129C(a) ‘‘as a matter of defense by 

recoupment or setoff.’’ TILA section 130(k). There 

is no time limit on the use of this defense and the 

amount of recoupment or setoff is limited, with 

respect to the special statutory damages, to no more 

than three years of finance charges and fees. The 

impacts of the liability regime applicable to covered 

mortgages are discussed in more detail in the 1022 

analysis for the 2013 ATR Final Rule. 

170See U.S. Dep’t of the Treas., Community 

Development Financial Institutions Fund, http://

www.cdfifund.gov/docs/certification/cdfi/CDFI List 

-07-31-12.xls. 

171See U.S. Dep’t of Hous. and Urban 

Development: Nonprofits, https://entp.hud.gov/

idapp/html/f17npdata.cfm. 

172 Includes 2011 data for institutions with CHDO 

reservations and CHDO loans without a rental 

tenure type. See U.S. Dep’t of Hous. and Urban 

Development: HOME Participating Jurisdiction’s 

Open Activities Reports, http://www.hud.gov/ 

offices/cpd/affordablehousing/reports/open/. 

173 Includes data for institutions shown to offer 

secondary financing. See U.S. Dep’t of Hous. and 

Urban Development: Nonprofits, https:// 

entp.hud.gov/idapp/html/f17npdata.cfm. 

174See National Council of State Housing 

Agencies, State HFA Factbook (2010), http:// 

www.ncsha.org/story/ncsha-releasescomprehensive-survey-hfa-program-activity. 

175See U.S. Dep’t of the Treas., Community 

Development Financial Institutions Fund: 

Awardees/Allocatees, http://www.cdfifund.gov/

awardees/db/basicSearchResults.asp. 

176See U.S. Dep’t of Hous. and Urban 

Development: HOME Participating Jurisdiction’s 

Open Activities Reports, http://www.hud.gov/

offices/cpd/affordablehousing/reports/open. 

through the creditor to take advantage of 

the netting approach, which is not 

available where the consumer pays the 

mortgage broker directly. 

Other combinations of the additive 

approach, the netting approach, and the 

approach of excluding all compensation 

in either channel are also possible; the 

impacts are derived as combinations of 

the ones discussed here. 

2. Exemptions From Ability-to-Repay 

Requirements 

As described in the Section 1022 

Analysis of the 2013 ATR Final Rule, 

there are a number of situations where 

creditors may engage in lending with 

too little regard for the consumer’s 

ability to repay. The 2013 Final ATR 

Rule is designed to minimize such 

activity by ensuring proper 

documentation and verification related 

to extensions of credit and by requiring 

consideration of a number of factors 

including the consumer’s debt-toincome ratio and credit history. 

Creditors who fail to follow any of these 

requirements, or who extend credit 

without a ‘‘reasonable and good faith 

determination’’ of the consumer’s ability 

to repay, are subject to liability.169

However, as described above, the 

Bureau was concerned that the abilityto-repay requirements adopted in the 

2013 ATR Final Rule would undermine 

or frustrate application of the uniquely 

tailored underwriting requirements 

employed by certain creditors and 

programs, and would require a 

significant diversion of resources to 

compliance, thereby significantly 

reducing access to credit. The Bureau 

was also concerned that some of these 

creditors would not have the resources 

to implement and comply with the 

ability-to-repay requirements, and may 

have ceased or severely limited 

extending credit to low- to moderateincome consumers, which would result 

in the denial of responsible, affordable 

mortgage credit. The exemptions from 

the ability-to-repay requirements are 

designed to eliminate these 

requirements and thereby to limit 

creditors’ costs and protect credit 

availability in carefully defined 

circumstances, namely loans or loan 

programs that serve certain consumers 

or communities and that typically assess 

repayment ability in ways that do not 

necessarily comport with the 

requirements of the Act and the 2013 

ATR Final Rule. 

As described earlier, mortgage lending 

by community-focused creditors, 

programs operated by housing finance 

agencies, nonprofit organizations, and 

housing stabilization programs, varies 

widely in the form of financing, the 

products offered, and the precise nature 

of underwriting. In particular, the 

Bureau understands that many of these 

creditors do not use documentation and 

verification procedures closely aligned 

with the requirements of the 2013 ATR 

Final Rule or consider all of the 

underwriting factors specified in the 

rule. The benefits of the final rule derive 

from eliminating the costs of imposing 

these requirements on these particular 

extensions of credits and assuring that 

credit remains available through these 

programs without regard to the rule’s 

underwriting factors. Access to credit is 

a specific concern for the populations 

generally served by these lenders and 

programs. 

As explained in the 2013 ATR Final 

Rule, in general, consumers and others 

could be harmed by this action as it 

removes particular consumer 

protections and could allow some 

deleterious lending to occur. However, 

in all of the cases discussed above, the 

Bureau believes that the communityfocused mission of the creditor 

organizations and/or programs through 

which credit is extended, the close 

interaction between creditors and 

consumers in these instances, and other 

safeguards (including government 

monitoring of certain categories and the 

origination thresholds for the general 

nonprofit category) should mitigate any 

potential harms to consumers and costs 

from the rule. 

Data regarding the exact scope of 

lending through these channels are 

limited, as are data regarding the 

performance of these loans. There are 51 

HFAs and approximately 1,000 CDFIs, 

62 percent of which are classified as 

Community Development (CD) Loan 

Funds, 22 percent as CD Credit Unions, 

while the rest are CD Banks, Thrifts, or 

CD Venture Capital Funds.170 There are 

233 501(c)(3) nonprofit agencies and 

nonprofit instrumentalities of 

government in the U.S. that are 

authorized to provide secondary 

financing,171 267 creditors certified by 

HUD as Community Housing 

Development Organizations (CHDOs) in 

connection with HUD’s HOME 

Investment Partnership Program,172 and 

231 organizations certified as 

Downpayment Assistance through 

Secondary Financing Providers.173 The 

Bureau is not aware and commenters 

did not provide a comprehensive list of 

these institutions. However, the Bureau 

believes that there may be substantial 

overlap among these institutions. A 

large number of creditors participate in 

the housing stabilization programs 

covered by the final rule. 

Data regarding the number or volume 

of loans made by housing finance 

agencies and community-focused 

lending programs is limited. There is 

some data suggesting that HFA bonds 

funded approximately 67,000 loans in 

2010 with a value of just over $8 

billion.174 Data regarding CDFIs indicate 

that these institutions funded just under 

$4 billion in loans; however, data on the 

type of housing supported is 

unavailable.175 Lending at CHDOs 

totaled $64 million in 2011 with just 

under 500 loans.176

The Bureau had proposed an 

exemption to the ability-to-repay 

requirements for refinancing programs 

offered by the Department of Housing 

and Urban Development (HUD), the 

Department of Veterans Affairs (VA), or 

the U.S. Department of Agriculture 

(USDA). Similarly, the Bureau had 

proposed an exemption to the ability-torepay requirements for certain GSE 

refinancing programs. However, as 

noted above, the Bureau has concluded 

after further deliberation that the 

proposed exemptions from the abilityto-repay requirements are unnecessary 

because, even absent an exemption from 

the ability-to-repay requirements, FHA, 

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35496 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

177For example, the final rule requires that small 

creditors assess either the debt-to-income ratio or 

the residual income of the borrower, but does not 

require that the consumer’s DTI not exceed 43 

percent as determined pursuant to appendix Q nor 

that the loan be eligible for purchase, guarantee, or 

insurance by the GSEs or by specified federal 

agencies. 

178To the extent that the cost advantage is 

material, this provision could give some smaller 

institutions a slight advantage over lenders not 

eligible to make qualified mortgages using this 

definition. 

179The possibility that small creditors qualifying 

for this exemption can make certain mortgages as 

qualified mortgages, while their larger competitors 

can only make these loans subject to the ability-torepay provisions, may allow them to offer these 

loans at lower rates. However, as discussed in the 

2013 ATR Final Rule, any effects on pricing are 

likely to be small. 

180The 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 MCR data 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. 

The Bureau has projected originations of higherpriced mortgage loans for depositories that do not 

report HMDA in a similar fashion. These 

projections use Poisson regressions that estimate 

loan volumes as a function of an institution’s total 

assets, employment, mortgage holdings, and 

geographic presence. Neither HMDA nor the Call 

Report data have loan level estimates of the DTI. To 

estimate these figures, the Bureau has matched the 

HMDA data to data on the HLP dataset provided by 

the FHFA. This allows estimation of coefficients in 

a probit model to predict DTI using loan amount, 

income, and other variables. This model is then 

used to estimate DTI for loans in HMDA. 

VA, and USDA loans, including 

refinancings, as well as GSE 

refinancings, are given qualified 

mortgage status under the Bureau’s 2013 

ATR Final Rule. Under the temporary 

category of qualified mortgages in 

§ 1026.43(e)(4), the final rule already 

incorporates the refinancing programs’ 

specific underwriting criteria and 

affords these loans a presumption (in 

some cases, conclusive) of compliance 

with the ability-to-repay requirements, 

so long as they meet certain product 

feature requirements and limitations on 

points and fees. The small difference 

between the proposed exemption and 

the 2013 ATR Final Rule temporary 

category for QMs involves loan features 

(e.g., negative amortization and interest 

only features) and the cap on points and 

fees under § 1026.43(e)(2). Under the 

2013 ATR Final Rule, loans with those 

features or above the points and fees 

threshold (that otherwise meet the 

conditions of the QM definition) cannot 

be originated as qualified mortgages and 

therefore must meet the ability-to-repay 

requirements, while under the proposed 

exemption they would have been 

exempted from those requirements as 

well. The Bureau believes that very few 

refinancings would be excluded on 

these grounds and therefore that these 

restrictions should not impose any 

additional meaningful costs on creditors 

or impede consumers’ access to 

responsible, affordable mortgage credit. 

Qualified mortgage refinancings that 

trigger the threshold for higher-priced 

mortgage loans are also another small 

area of difference: under the 2013 ATR 

Final Rule, these loans have a rebuttable 

presumption of compliance with the 

ability-to-repay requirements while 

under the exemption there would have 

been no such requirements. As 

described, costs for covered persons 

offering these loans could be slightly 

higher. However, as discussed above, in 

light of the history of refinancings, the 

Bureau believes that it is a meaningful 

benefit to consumers to preserve their 

ability to seek redress in the event of 

abuse. 

3. Extension of Qualified Mortgage 

Status 

The benefits to covered persons from 

extending qualified mortgage status to 

certain loans made by smaller creditors 

and held on portfolio also derive from 

maintaining access to credit and 

limiting potential increases in the costs 

of these loans. By granting creditors that 

qualify under the new qualified 

mortgage definition a conclusive or 

rebuttable presumption of compliance 

with the ability-to-repay provisions, the 

final rule limits the legal liability of 

these creditors and most expected 

litigation costs. The final rule may also 

provide greater flexibility with regard to 

certain documentation, verification, and 

underwriting practices in certain 

circumstances.177 These cost reductions 

in turn could enhance the willingness of 

such creditors to make these loans or 

reduce the amount the creditors would 

otherwise charge for these loans.178

Consumers, too, will benefit to the 

extent that the expanded qualified 

mortgage status makes creditors more 

willing to continue extending such 

credit and to do so at a lower price than 

they might charge for non-qualified 

mortgages under the new regulations. In 

return, however, consumers will have 

narrower grounds on which to challenge 

any violations of the ability-to-repay 

rules as discussed in more detail in the 

Section 1022 analysis of the 2013 Final 

ATR Rule. 

Given the lower default and 

delinquency rates at these smaller 

community-focused institutions, the 

avoided costs related to liability and 

litigation are likely small. However, the 

lower default and delinquency rates at 

these institutions, the relationship 

lending that they engage in, and 

restrictions on reselling the loans on the 

secondary market for at least three 

years, together also suggest that the risk 

of consumer harm (and therefore the 

costs of this provisions) are also very 

small.179 While the mathematical 

impacts of litigation costs/risks may be 

limited, the Bureau believes that the 

broader impacts on access to credit 

could be significant particularly in 

individual communities. 

Based on data from 2011, roughly 

9,200 institutions with approximately 

450,000 loans on portfolio are likely to 

be affected by the extension of qualified 

mortgages for certain small creditors.180

Based on the Bureau’s estimates, on 

average, 16.7 percent of portfolio loans 

at these institutions are estimated to 

have a DTI ratio above 43 percent. For 

the subset of these loans that also do not 

contain any of the prohibited features 

for the general definition for qualified 

mortgages (assuming other conditions 

are met), the final rule grants the 

creditor a conclusive or rebuttable 

presumption of compliance with the 

ability-to-repay requirements. The 

Bureau is unable to estimate the 

percentage of these loans that would not 

qualify for the temporary expansion of 

the qualified mortgage definition in the 

final rule under § 1026.43(e)(4). 

Similarly, the Bureau is unable to 

estimate the number of balloon 

mortgages originated by lenders not 

operating in rural areas that are eligible 

for qualified mortgage status under the 

final rule’s temporary provision. 

Similar tradeoffs are involved in the 

increase in the qualified mortgage 

threshold from 1.5 percentage points 

above the average prime offer rate 

(APOR) to 3.5 percentage points above 

APOR for first lien mortgages originated 

and held by small creditors and for the 

qualified balloon mortgages originated 

and held by small creditors 

predominantly operating in rural or 

underserved areas. For loans in this 

APR range, whether they meet the 

definition of qualified mortgage under 

the 2013 Final ATR Rule or under the 

new definitions provided in this final 

rule, the presumption of compliance 

with the ability-to-repay requirements 

would be strengthened. The Bureau 

estimates that roughly 8–10 percent of 

portfolio loans at these institutions are 

likely to be affected by this change. 

Strengthening the presumption of 

compliance for these loans will benefit 

consumers and/or covered persons to 

the extent doing so improves credit 

access or reduces costs. Strengthening 

the presumption will have a cost to 

consumers to the extent consumers who 

find themselves unable to afford their 

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Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 35497 

181Relationship lending refers to underwriting 

decisions predicated on more tacit information and 

personal relationships, in particular, relative to 

more automated and formula-based forms of 

underwriting. 

182 5 U.S.C. 601 et. seq. 

183 5 U.S.C. 603(a); 5 U.S.C. 604(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-forprofit 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). 

184 5 U.S.C. 605(b). 

185 5 U.S.C. 609. 

mortgage, and would otherwise be able 

to make out a claim and recover their 

losses, would be unable to do so under 

the expanded safe harbor. 

B. Potential Specific Impacts of the 

Final Rule 

1. Potential Impact on Consumer Access 

to Consumer Financial Products or 

Services 

The Bureau does not anticipate that 

the final rule would reduce consumers’ 

access to consumer financial products 

and services. Rather, as discussed 

above, the Bureau believes that the final 

rule would in fact enhance certain 

consumers’ access to mortgage credit as 

compared to the 2013 ATR Final Rule. 

The Bureau believes that the exclusion 

of certain compensation from the 

calculation of points and fees allows 

more mortgages under the qualified 

mortgage and high-cost mortgage 

thresholds; the exemption from the 

ability-to-repay requirements should 

facilitate lending under various 

programs and by various creditors; and, 

the new and expanded qualified 

mortgage definitions should also expand 

responsible lending. 

2. Depository Institutions and Credit 

Unions With $10 Billion or Less in Total 

Assets, as Described in Section 1026 

The Bureau believes the final rule will 

have differential impacts on some 

depository institutions and credit 

unions with $10 billion or less in total 

assets as described in Section 1026. The 

depository institutions and credit 

unions that are CDFIs, and are therefore 

covered under the exemption from the 

ability-to-repay requirements, and the 

institutions covered by new definition 

of qualified mortgages and the higherrate threshold for small creditor 

portfolio loans are all in this group and 

are therefore uniquely impacted by the 

rule as discussed above. 

3. Impact of the Provisions on 

Consumers in Rural Areas 

The final rule will have some 

differential impacts on consumers in 

rural areas. In these areas, a greater 

fraction of loans are made by smaller 

institutions and carried on portfolio and 

therefore the small creditor portfolio 

exemption would be likely to have 

greater impacts. The Bureau 

understands that mortgage loans in 

these areas and by these institutions are 

less standardized and often cannot be 

sold into the secondary market. These 

differences may result in slightly higher 

interest rates on average for loans to 

rural consumers and more higher priced 

mortgage loans. By making it easier for 

loans held in portfolio by certain 

institutions to receive qualified 

mortgage status and by raising the 

rebuttable presumption threshold for 

those loans, the final rule will likely 

have a greater relative effect on rural 

consumers than on their non-rural 

counterparts: more loans will meet the 

definitions for qualified mortgages and 

within that group, more loans will have 

the safe harbor presumption of 

compliance with the ability-to-repay 

requirements. To the extent that these 

changes expand access to credit, rural 

consumers will benefit. While the 

relationship model of lending prevalent 

in this area makes both delinquency and 

litigation less likely overall, these 

changes will also limit some of the 

protections for these consumers as 

well.181

VIII. Regulatory Flexibility Act 

Analysis 

A. Overview 

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.182 These analyses must 

‘‘describe the impact of the proposed 

rule on small entities.’’ 183 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.184

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.185

The final rule amends Regulation Z, 

which implements the Truth in Lending 

Act (TILA) and is related to a final rule 

published in the Federal Register in 

January 2013 (78 FR 6408) (2013 ATR 

Final Rule). That final rule implements 

certain amendments to TILA that were 

added by sections 1411, 1412, and 1414 

of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (DoddFrank Act), which created new TILA 

section 129C. These changes were made 

in response to the recent foreclosure 

crisis to address certain lending 

practices (such as low- or nodocumentation loans or underwriting 

mortgages without including any 

principal repayments in the 

underwriting determination) that led to 

consumers having mortgages they could 

not afford, thereby contributing to high 

default and foreclosure rates. Among 

other things, the Dodd-Frank Act 

requires creditors to make a reasonable, 

good faith determination of a 

consumer’s ability to repay any 

consumer credit transaction secured by 

a dwelling (excluding an open-end 

credit plan, timeshare plan, reverse 

mortgage, or temporary loan) and 

establishes certain protections from 

liability under this provision for 

‘‘qualified mortgages.’’ 

As discussed above, the Bureau 

believes that the 2013 ATR Final Rule 

should be modified to address potential 

adverse consequences on certain 

narrowly-defined categories of lending 

programs. Specifically, the final rule 

adopts certain amendments to the 2013 

ATR Final Rule implementing these 

requirements, including exemptions for 

certain nonprofit and communityfocused lending creditors and certain 

homeownership stabilization and 

foreclosure prevention programs. The 

final rule also creates a new category of 

qualified mortgages, similar to the one 

for rural balloon-payment loans, for 

loans without balloon-payment features 

that are originated and held on portfolio 

by small creditors. The new category 

will not be limited to creditors that 

operate predominantly in rural or 

underserved areas, but will use the same 

general size thresholds and other 

criteria as the rural or underserved 

balloon-payment rules. In light of the 

fact that small creditors often have 

higher costs of funds than larger 

creditors, the final rule also increases 

the threshold separating safe harbor and 

rebuttable presumption qualified 

mortgages for balloon-payment qualified 

mortgages, the new small portfolio 

qualified mortgages, and balloonpayment qualified mortgages originated 

under the new temporary two-year 

balloon mortgage provision. Finally, the 

final rule provides additional 

clarifications and exclusions regarding 

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186 78 FR 6663–6666. 

187 5 U.S.C. 601(3). The current SBA size 

standards are located on the SBA’s Web site at 

http://www.sba.gov/content/table-small-businesssize-standards. 

188See U.S. Dep’t of Hous. and Urban 

Development: Nonprofits, https://entp.hud.gov/

idapp/html/f17npdata.cfm. 

the inclusion of loan originator 

compensation in the points and fees 

calculation for all categories of qualified 

mortgage. 

In the proposal, the Bureau certified 

that the rule would not have a 

significant economic impact on a 

substantial number of small entities and 

therefore did not prepare an IRFA. 

Approximately 100 commenters argued 

that the Bureau should conduct a 

SBREFA panel to learn more about how 

the rule will impact the thousands of 

small business entities that originate 

mortgage loans. These commenters 

noted that while the Bureau stated that 

an initial regulatory flexibility analysis 

(IRFA) was not necessary under the 

Regulatory Flexibility Act (RFA) 

because the proposal would not have a 

significant economic impact on a 

substantial number of small entities, the 

Bureau’s own methodology showed that 

the rule would apply to 9,373 small 

entities out of 14,194 total entities that 

originate mortgage loans. These 

commenters contended that the Bureau 

use its authority under the Dodd-Frank 

Act to delay the effective date of the 

2013 ATR Final Rule and conduct 

further analysis of the mortgage loan 

origination market and how loan 

originators are currently assessing and 

determining consumers’ ability to 

repay.186

While the Bureau acknowledges that 

the exemption applies to many small 

entities, this does not imply that it has 

a significant impact on a substantial 

number of small entities. Further, the 

commenters provided little reasoning 

and no data to support the claim that 

the rule would have such an effect. The 

Bureau believes that the final rule will 

not have a significant impact on a 

substantial number of small entities and 

therefore neither a SBREFA panel nor a 

FRFA is required. 

The analysis below evaluates the 

potential economic impact of the final 

rule on small entities as defined by the 

RFA. The analysis generally examines 

the regulatory impact of the provisions 

of the final rule against the baseline of 

the 2013 ATR Final Rule published in 

January 2013, however some of the 

discussion includes consideration of 

alternative baselines. As a result of this 

analysis, the Bureau certifies that the 

final rule would not have a significant 

economic impact on a substantial 

number of small entities. 

B. Number and Classes of Affected 

Entities 

The final rule will apply to all 

creditors that extend closed-end credit 

secured by a dwelling, including real 

property attached to a dwelling, subject 

to certain exemptions. All small entities 

that extend these loans are potentially 

subject to at least some aspects of the 

final rule. This rule may impact small 

businesses, small nonprofit 

organizations, and small government 

jurisdictions. A ‘‘small business’’ is 

determined by application of SBA 

regulations and reference to the North 

American Industry Classification 

System (NAICS) classifications and size 

standards.187 Under such standards, 

depository institutions with $175 

million or less in assets are considered 

small; other financial businesses are 

considered small if such entities have 

average annual receipts (i.e., annual 

revenues) that do not exceed $7 million. 

Thus, commercial banks, savings 

institutions, and credit unions with 

$175 million or less in assets are small 

businesses, while other creditors 

extending credit secured by real 

property or a dwelling are small 

businesses if average annual receipts do 

not exceed $7 million. 

The Bureau can identify through data 

under the Home Mortgage Disclosure 

Act, Reports of Condition and Income 

(Call Reports), and data from the 

National Mortgage Licensing System 

(NMLS) the approximate numbers of 

small depository institutions that will 

be subject to the final rule. Origination 

data is available for entities that report 

in HMDA, NMLS or the credit union 

call reports; for other entities, the 

Bureau has estimated their origination 

activities using statistical projection 

methods. 

The following table provides the 

Bureau’s estimate of the number and 

types of entities to which the rule will 

apply: 

Category NAICS 

Code 

Total 

entities 

Small entities 

Entities that 

originate 

any mortgage loans b

Small 

entities that 

originate 

any mortgage loans 

Commercial Banking ................................................................................ 522110 6,505 3,601 a 6,307 a 3,466 

Savings Institutions .................................................................................. 522120 930 377 a 922 a 373 

Credit Unions c ......................................................................................... 522130 7,240 6,296 a 4,178 a 3,240 

Real Estate Credit d e ............................................................................... 522292 2,787 2,294 2,787 a 2,294 

Total .................................................................................................. .................... 17,462 12,568 14,194 9,373 

Source: 2011 HMDA, Dec 31, 2011 Bank and Thrift Call Reports, Dec 31, 2011 NCUA Call Reports, Dec 31, 2011 NMLSR Mortgage Call Reports. aFor HMDA reporters, loan counts from HMDA 2011. For institutions that are not HMDA reporters, loan counts projected based on Call Report 

data fields and counts for HMDA reporters. bEntities are characterized as originating loans if they make one or more loans. 

c Does not include cooperativas operating in Puerto Rico. The Bureau has limited data about these institutions or their mortgage activity. d NMLSR Mortgage Call Report (MCR) for 2011. All MCR reporters that originate at least one loan or that have positive loan amounts are considered to be engaged in real estate credit (instead of purely mortgage brokers). For institutions with missing revenue values, the probability that 

institution was a small entity is estimated based on the count and amount of originations and the count and amount of brokered loans. e Data do not distinguish nonprofit from for-profit organizations, but Real Estate Credit presumptively includes nonprofit organizations. 

It is difficult to determine the number 

of small nonprofits that would be 

subject to the regulation. Nonprofits do 

not generally file Call Reports or HMDA 

reports. As explained in part II above, as 

of November 2012 there are 233 

nonprofit agencies and nonprofit 

instrumentalities of government in the 

U.S. that are authorized by HUD to 

provide secondary financing,188 267 

institutions designated as Community 

Housing Development Organizations 

that provided credit in 2011, and 231 

institutions designated as 

Downpayment Assistance through 

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189See U.S. Dep’t of the Treas., Community 

Development Financial Institutions Fund, http://

www.cdfifund.gov/docs/certification/cdfi/CDFIList07–31–12.xls. 

190The Bureau notes that the ability-to-repay 

requirements as well as the rules applying to highcost mortgages generally apply to creditors and not 

to other classes of small entities including mortgage 

brokers. 

Secondary Financing Providers. A 

comprehensive list of these institutions 

is not available; however the Bureau 

believes that there may be substantial 

overlap among these institutions and 

that most of these institutions would 

qualify as small entities. 

Also, as of July 2012 there were 999 

organizations designated by the 

Treasury Department as CDFIs, 356 of 

which are depository institutions or 

credit unions counted above. Among the 

remaining, some are nonprofits and 

most likely small.189

C. Clarification Regarding Loan 

Originator Compensation in the Points 

and Fees Calculation 

As discussed in detail above, the 

Dodd-Frank Act requires creditors to 

include 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, in the calculation of points 

and fees. The statute does not express 

any limitation on this requirement, and 

thus, the Bureau adopted in the 2013 

ATR Final Rule that loan originator 

compensation be treated as additive to 

up-front charges paid by the consumer 

and the other elements of points and 

fees and that compensation is added as 

it flows downstream to the loan 

originator. 

The final rule provides that payments 

by consumers to mortgage brokers need 

not be counted as loan originator 

compensation where such payments 

already have been included in points 

and fees as part of the finance charge. 

The final rule also provides that 

compensation paid by a mortgage broker 

to its employee loan originator need not 

be included in points and fees. In the 

final rule, compensation paid by a 

creditor to a mortgage broker is included 

in points and fees in addition to any 

origination charges paid by a consumer 

to the creditor. Compensation paid by a 

creditor to its own loan originator 

employees need not be included in 

points and fees. 

The statute requires loan originator 

compensation to be treated as additive 

to the other elements of points and fees 

and the 2013 ATR Final Rule adopted 

this approach. This places a burden on 

small creditors, since it makes it more 

likely that mortgage loans will not be 

eligible as qualified mortgages under the 

ability-to-repay rules or will be 

classified as high-cost mortgages for 

purposes of HOEPA. The Bureau’s 

exercise of its exception and adjustment 

authority in the final rule, however, will 

reduce burden on small entities and 

facilitate compliance. Compared to the 

January 2013 baseline, where such 

compensation is included in the points 

and fees calculation, the final rule 

reduces burden on certain small 

entities: for retail originators, fewer 

loans will exceed the points and fees 

limits for qualified mortgages and high 

cost mortgages, and firms will face 

lowered compliance costs.190

D. Exemptions from the Ability-to-Repay 

Requirements 

The provisions related to communityfocused lending programs discussed 

above all provide exemptions from the 

ability-to-repay requirements. Measured 

against the baseline of the Bureau’s 2013 

ATR Final Rule, these provisions 

impose either no or insignificant 

additional burdens on small entities. 

More specifically, these provisions will 

reduce the burdens associated with 

implementation costs, additional 

underwriting costs, and compliance 

costs stemming from the ability-to-repay 

requirements. 

Section 1026.43(a)(3)(iv) provides that 

an extension of credit made pursuant to 

a program administered by a housing 

finance agency, as defined by 24 CFR 

266.5, is exempt from the requirements 

of § 1026.43(c) through (f). For any 

housing finance agencies and their 

partner creditors that meet the 

definition of ‘‘small entity,’’ this 

provision will remove the burden of 

having to modify the underwriting 

practices associated with these 

programs to implement the ability-torepay requirements. This provision will 

also remove the burden to small entities 

of having to develop and maintain 

policies and procedures to monitor 

compliance with the ability-to-repay 

requirements. 

The final rule also exempts from the 

ability-to-repay requirements an 

extension of credit made by a creditor 

designated as a Community 

Development Financial Institution, a 

Downpayment Assistance through 

Secondary Financing Provider, or a 

Community Housing Development 

Organization (CHDO) if the CHDO meets 

certain additional criteria. This 

provision will remove the burden to 

small entities of having to implement 

the ability-to-repay requirements. This 

provision will also remove the burden 

to small entities of having to develop 

and maintain policies and procedures to 

monitor compliance with the ability-torepay requirements. Regulatory burdens 

may be associated with obtaining and 

maintaining one of the designations 

required to qualify for the exemption. 

However, this decision is voluntary and 

the Bureau presumes that a small entity 

would not do so unless the burden 

reduction resulting from the exemption 

outweighed the additional burden 

imposed by obtaining and maintaining 

the designation. Thus, additional 

burdens would still be part of an overall 

burden reduction. 

The final rule also exempts from the 

ability-to-repay requirements extensions 

of credit made by a creditor with a tax 

exemption ruling or determination letter 

from the Internal Revenue Service under 

section 501(c)(3) of the Internal Revenue 

Code of 1986 (26 U.S.C. 501(c)(3) 

provided that: during the calendar year 

preceding receipt of the consumer’s 

application, the creditor extended credit 

secured by a dwelling no more than 200 

times; during the calendar year 

preceding receipt of the consumer’s 

application, the creditor extended credit 

secured by a dwelling only to 

consumers with income that did not 

exceed the low- and moderate-income 

household limits; the extension of credit 

is to a consumer with income that does 

not exceed the above limit; and, the 

creditor determines, in accordance with 

written procedures, that the consumer 

has a reasonable ability to repay the 

extension of credit. 

For eligible entities, this provision 

will remove the burden of complying 

with the ability-to-repay requirements. 

This provision will also remove the 

burden to small entities of having to 

develop and maintain policies and 

procedures to monitor compliance with 

the ability-to-repay requirements in the 

2013 ATR Final Rule. While eligible 

nonprofit creditors will need to 

maintain documentation of their own 

procedures regarding the determination 

of a consumer’s ability to repay, the 

Bureau believes that such small 

nonprofits already have written policies 

and procedures. In any case, the 

decision to use the exemption is 

voluntary and entities are expected to 

use it only if reduces overall burden. 

Regulatory burdens may be associated 

with obtaining and maintaining the 

501(c)(3) designation required to qualify 

for the exemption. However, this 

decision is voluntary and the Bureau 

presumes that a small entity would not 

do so unless the burden reduction 

resulting from the exemption 

outweighed the additional burden 

imposed by obtaining and maintaining 

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35500 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

the designation. Thus, additional 

burdens would still be part of an overall 

burden reduction. 

The final rule provides that an 

extension of credit made pursuant to a 

program authorized by sections 101 and 

109 of the Emergency Economic 

Stabilization Act of 2008 is exempt from 

the ability-to-repay requirements. This 

provision will remove the burden to 

participating small entities of having to 

modify the underwriting practices 

associated with these programs to 

implement the ability-to-repay 

requirements. This provision will also 

remove the burden to small entities of 

having to develop and maintain policies 

and procedures to monitor compliance 

with these ability-to-repay 

requirements. 

E. Portfolio Loans Made by Small 

Creditors and Balloon-Payment 

Qualified Mortgages 

As discussed above, the Bureau is 

finalizing certain amendments to the 

2013 ATR Final Rule, including an 

additional definition of a qualified 

mortgage for certain loans made and 

held in portfolio by small creditors. The 

new category includes certain loans 

originated by small creditors that: (1) 

Have total assets less than $2 billion at 

the end of the previous calendar year; 

and (2) together with all affiliates, 

originated 500 or fewer covered 

transactions, secured by first-liens 

during the previous calendar year. The 

$2 billion asset threshold in the 

definition will be adjusted annually 

based on the year-to-year change in the 

average of the Consumer Price Index for 

Urban Wage Earners and Clerical 

Workers, not seasonally adjusted. These 

loans must generally conform to the 

requirements under the general 

definition of a qualified mortgage in 

§ 1026.43(e)(2), except that a loan with 

a consumer debt-to-income ratio higher 

than 43 percent could be a qualified 

mortgage if all other criteria are met. 

Small creditors are required to consider 

the consumer’s debt-to-income ratio or 

residual income in underwriting the 

loans, but are not required to follow 

appendix Q or subject to any specific 

threshold. 

This provision would reduce burden 

on small creditors by removing the 43 

percent debt-to-income limitation for 

qualified mortgages, as well as 

providing more flexibility in the 

assessment of debt-to-income ratios. At 

the small creditors identified, 16.7 

percent of mortgage loans on portfolio 

are estimated to have a debt to income 

ratios above 43 percent. For these loans, 

the final rule grants creditors a 

presumption of compliance with the 

ability-to-repay requirements; rough 

estimates indicate that three quarters of 

these loans will gain a conclusive 

presumption and the remaining loans 

will gain the rebuttable presumption. 

The final rule also temporarily allows 

small creditors that do not operate 

predominantly in rural or underserved 

areas to offer balloon-payment qualified 

mortgages, with the same presumptions 

of compliance, if they hold the loans in 

portfolio. 

The Bureau also is allowing small 

creditors to charge a higher annual 

percentage rate for first-lien qualified 

mortgages in the new category and still 

benefit from a conclusive presumption 

of compliance or ‘‘safe harbor.’’ In 

addition, the Bureau also is allowing 

small creditors operating predominantly 

in rural or underserved areas to offer 

first-lien balloon loans with a higher 

annual percentage rate and still benefit 

from a conclusive presumption of 

compliance with the ability-to-repay 

rules or ‘‘safe harbor.’’ The increase in 

the threshold from the average prime 

offer rate (APOR) plus 1.5 percentage 

points to APOR plus 3.5 percentage 

points will reduce burden for the loans 

at these institutions between these rates, 

as these loans will now qualify for a 

conclusive, rather than a rebuttable 

presumption. 

The regulatory requirement to make a 

reasonable and good faith determination 

based on verified and documented 

evidence that a consumer has a 

reasonable ability to repay may entail 

litigation risk for small creditors. It is 

difficult to estimate the reduction in 

potential future liability costs associated 

with the changes. However, the Bureau 

notes that lending practices at smaller 

institutions are often based on a more 

personal relationship based model and 

that historically, delinquency rates on 

mortgages at smaller institutions are 

lower than the average in the industry. 

The Bureau believes that small creditors 

have historically engaged in responsible 

mortgage underwriting that includes 

thorough and thoughtful determinations 

of consumers’ ability to repay, at least 

in part because they bear the risk of 

default associated with loans held in 

their portfolios. The Bureau also 

believes that because small creditors’ 

lending model is based on maintaining 

ongoing, mutually beneficial 

relationships with their customers, they 

therefore have a more comprehensive 

understanding of their customers’ 

financial circumstances and are better 

able to assess ability to repay than larger 

creditors. As such, the expected 

litigation costs from the ability-to-repay 

provisions of the 2013 ATR Final Rule, 

and therefore the reduced burden from 

this final rule, should be small. 

The Bureau acknowledges the 

possibility that this final rule may 

increase small creditor burden to the 

extent that creditors need to maintain 

records relating to eligibility for the 

exemption, but the Bureau believes that 

these costs are negligible, as creditor 

asset size and origination activity are 

data that all depository institutions and 

credit unions are likely to maintain for 

routine business or supervisory 

purposes. Thus, the Bureau believes that 

the burden reduction stemming from a 

reduction in liability costs would 

outweigh any potential recordkeeping 

costs, resulting in overall burden 

reduction. Small entities for which such 

cost reductions are outweighed by 

additional record keeping costs may 

choose not to utilize the exemption. 

F. Conclusion 

Each element of this final rule results 

in an economic burden reduction for 

these small entities. The exemptions for 

nonprofit creditors would lessen any 

economic impact resulting from the 

ability-to-repay requirements. The 

exemptions for homeownership 

stabilization and foreclosure prevention 

programs would also soften any 

economic impact on small entities 

extending credit pursuant to those 

programs. The new categories of 

qualified mortgage would make it easier 

for small entities to originate qualified 

mortgages. The Bureau’s clarifications 

ensuring consumer-paid compensation 

to brokers is counted only once and the 

exclusion of retail loan officer and 

broker employee compensation will 

reduce burden on small entities and 

make it more likely that mortgage loans 

will be eligible for a presumption of 

compliance as qualified mortgages 

under the ability-to-repay rules and not 

be classified as high-cost mortgages for 

purposes of HOEPA. While all of these 

provisions may entail some additional 

recordkeeping costs, the Bureau believes 

that these costs are minimal and 

outweighed by the cost reductions 

resulting from the final rule. Small 

entities for which such cost reductions 

are outweighed by additional record 

keeping costs may choose not to utilize 

the exemptions. 

Certification 

Accordingly, the undersigned certifies 

that this proposal will not have a 

significant economic impact on a 

substantial number of small entities. 

IX. Paperwork Reduction Act Analysis 

Certain provisions of this final rule 

contain ‘‘collection of information’’ 

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191For 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. 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3501 et seq.) (Paperwork 

Reduction Act or PRA). On January 30, 

2013, the Bureau published notice of the 

proposed rule in the Federal Register 

(78 FR 6622). The Bureau received no 

PRA-related comments on the 

information collections in § 1026.43(c). 

This final rule amends 12 CFR part 

1026 (Regulation Z), which implements 

the Truth in Lending Act (TILA). 

Regulation Z currently contains 

collections of information approved by 

the Office of Management and Budget 

(OMB). The Bureau’s OMB control 

number for Regulation Z is 3170–0015. 

The PRA (44 U.S.C. 3507(a), (a)(2) and 

(a)(3)) requires that a Federal agency 

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 provisions of law, no person is 

required to comply with, or is subject to 

any penalty for failure to comply with, 

a collection of information that does not 

display a currently valid OMB control 

number (44 U.S.C. 3512). The collection 

of information contained in this rule, 

and identified as such, has been 

submitted to OMB for review under 

section 3507(d) of the PRA. 

A. Overview 

As described below, the final rule 

amends the collections of information 

currently in Regulation Z to implement 

amendments to TILA made by the 

Dodd-Frank Act. This final rule is 

related to the Ability-to-Repay/Qualified 

Mortgage final rule (2013 ATR Final 

Rule) published in the Federal Register 

in January 2013 (78 FR 6408). The 2013 

ATR Final Rule implements sections 

1411, 1412, and 1414 of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (the Dodd-Frank Act), 

which creates new TILA section 129C. 

Among other things, the Dodd-Frank 

Act requires creditors to make a 

reasonable, good faith determination, 

based on verified and documented 

information, that the consumer will 

have a reasonable ability to repay any 

consumer credit transaction secured by 

a dwelling (excluding an open-end 

credit plan, timeshare plan, reverse 

mortgage, or temporary loan), including 

any mortgage-related obligations (such 

as property taxes), and establishes 

certain protections from liability under 

this requirement for ‘‘qualified 

mortgages.’’ TILA section 129C(a); 15 

U.S.C. 1639c(a). The stated purpose of 

the Dodd-Frank Act ability-to-repay 

requirement is to assure that consumers 

are offered and receive residential 

mortgage loans on terms that reasonably 

reflect their ability to repay the loans 

and that are not understandable and not 

unfair, deceptive or abusive. TILA 

section 129B(a)(2); 15 U.S.C. 

1639b(a)(2). Prior to the Dodd-Frank 

Act, existing Regulation Z provided 

ability-to-repay requirements for highcost and higher-priced mortgage loans. 

The Dodd-Frank Act expanded the 

scope of the ability-to-repay 

requirement to cover all residential 

mortgage loans with its scope. 

The 2013 ATR Final Rule establishes 

standards for complying with the 

ability-to-repay requirement, including 

defining ‘‘qualified mortgage.’’ In 

addition to the ability-to-repay and 

qualified mortgage provisions, the 2013 

ATR Final Rule implements the DoddFrank Act limits on prepayment 

penalties and lengthens the time 

creditors must retain records that 

evidence compliance with the ability-torepay and prepayment penalty 

provisions. 

This final rule adopts certain 

amendments to the 2013 ATR Final 

Rule implementing these ability-torepay requirements, including 

exemptions for certain communityfocused creditors, housing finance 

agencies, nonprofit organizations and 

housing stabilization programs; an 

additional definition of a qualified 

mortgage for certain loans made and 

held in portfolio by small creditors that 

have total assets less than $2 billion at 

the end of the previous calendar year 

and, together with all affiliates, 

originated 500 or fewer first-lien 

covered transactions during the 

previous calendar year. The final rule 

also temporarily allows small creditors 

that do not operate predominantly in 

rural or underserved areas to offer 

balloon-payment qualified mortgages if 

they hold the loans in portfolio. The 

Bureau also is allowing small creditors 

to charge a higher annual percentage 

rate for first-lien qualified mortgages in 

the new category and still benefit from 

a conclusive presumption of compliance 

or ‘‘safe harbor,’’ and to allow small 

creditors operating predominantly in 

rural or underserved areas to offer firstlien balloon loans with a higher annual 

percentage rate and still benefit from a 

conclusive presumption of compliance 

with the ability-to-repay rules or ‘‘safe 

harbor.’’ 

The final rule also provides 

exceptions to the 2013 ATR Final Rule, 

which implements the statute’s 

inclusion of loan originator 

compensation in points and fees. 

Specifically, in the final rule, payments 

by consumers to mortgage brokers need 

not be counted as loan originator 

compensation where such payments 

already have been included in points 

and fees as part of the finance charge. 

In addition, compensation paid by a 

mortgage broker to its employee loan 

originator need not be included in 

points and fees, nor does compensation 

paid by a creditor to its own loan 

originator employees. However, 

consistent with the statute and 2013 

ATR Final Rule, compensation paid by 

a creditor to a mortgage broker 

continues to be included in points and 

fees in addition to any origination 

charges paid by a consumer to the 

creditor. 

The information collection in the final 

rule is required to provide benefits for 

consumers and would be mandatory. 

See 15 U.S.C. 1601 et seq.; 12 U.S.C. 

2601 et seq. Because the Bureau does 

not collect any information under the 

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 nonbank creditors) subject to Regulation 

Z.191

Under the final rule, the Bureau 

generally 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 and their depository 

institution affiliates; privately insured 

credit unions; and certain 

nondepository creditors. 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. Other 

Federal agencies are responsible for 

estimating and reporting to OMB the 

total paperwork burden for the 

institutions for which they have 

administrative enforcement authority. 

They may, but are not required to, use 

the Bureau’s burden estimation 

methodology. 

Using the Bureau’s burden estimation 

methodology, there is no change to the 

total estimated burden under Regulation 

Z as a result of the final rule. 

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B. Information Collection Requirements 

Ability-to-Repay Verification and 

Documentation Requirements 

As discussed above, the 2013 ATR 

Final Rule published in January 2013 

contains specific criteria that a creditor 

must consider in assessing a consumer’s 

repayment ability while different 

verification requirements apply to 

qualified mortgages. As described in the 

relevant sections of the final rule, the 

Bureau does not believe that the 

verification and documentation 

requirements of the final rule result in 

additional ongoing costs for most 

covered persons. However, for some 

creditors, notably the communityfocused lending programs, housing 

finance agencies, and not-for profit 

organizations exempted in the final rule, 

lending can vary widely, in the form of 

financing, the products offered and the 

precise nature of underwriting. These 

processes may not involve the more 

traditional products covered by the 

qualified mortgage definition nor do 

these creditors use documentation and 

verification procedures closely aligned 

with the requirements of the 2013 ATR 

Final Rule. 

For these creditors, the final rule 

should eliminate any costs from 

imposing these requirements on these 

particular extensions of credits. The 

Bureau estimates one-time and ongoing 

costs to respondents of complying with 

the final rule as follows. 

One-time costs. The Bureau estimates 

that covered persons will incur one-time 

costs associated with reviewing the 

relevant sections of the Federal Register 

and training relevant employees. In 

general, the Bureau estimates these costs 

to include, for each covered person, the 

costs for one attorney and one 

compliance officer to read and review 

the sections of the final rule that 

describe the verification and 

documentation requirements for loans, 

the exemptions from the ability-to-repay 

requirements, and the costs for each 

loan officer or other loan originator to 

receive training concerning the 

requirements. However, the Bureau 

believes that respondents will review 

the relevant sections of this final rule 

along with the 2013 ATR Final Rule to 

best understand any new regulatory 

requirements and their coverage. As 

such, there is no additional one-time 

burden attributed to the final rule. 

Ongoing costs. The exemptions for the 

covered institutions should reduce any 

burden related to these provisions. 

However, in the 2013 ATR Final Rule, 

the Bureau did not attribute any 

paperwork burden to these provisions 

on the assumption that the verification 

and documentation requirements of the 

2013 ATR Final Rule will not result in 

additional ongoing costs for most 

covered persons. As such, it would be 

inappropriate to credit any reduction in 

burden to the final rule. 

C. Summary of Burden Hours 

As noted, the Bureau does not believe 

the final rule results in any changes in 

the burdens under Regulation Z 

associated with information collections 

for Bureau respondents under the PRA. 

D. Comments 

The Consumer Financial Protection 

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 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 in 12 CFR Part 1026 

Advertising, Consumer protection, 

Mortgages, Reporting and recordkeeping 

requirements, Truth in Lending. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Bureau amends 

Regulation Z, 12 CFR part 1026, as 

amended by the final rules published on 

January 30, 2013 (78 FR 6408), and 

January 31, 2013 (78 FR 6962), 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 E—Special Rules for Certain 

Home Mortgage Transactions 

■ 2. Section 1026.32 is amended by 

revising paragraphs (b)(1)(ii) and 

(b)(2)(ii) to read as follows: 

§ 1026.32 Requirements for high-cost 

mortgages. 

* * * * * 

(b) * * * 

(1) * * * 

(ii) All compensation paid directly or 

indirectly by a consumer or creditor to 

a loan originator, as defined in 

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

that transaction at the time the interest 

rate is set unless: 

(A) That compensation is paid by a 

consumer to a mortgage broker, as 

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

has been included in points and fees 

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

(B) That compensation is paid by a 

mortgage broker, as defined in 

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

is an employee of the mortgage broker; 

or 

(C) That compensation is paid by a 

creditor to a loan originator that is an 

employee of the creditor. 

* * * * * 

(2) * * * 

(ii) All compensation paid directly or 

indirectly by a consumer or creditor to 

a loan originator, as defined in 

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

that transaction at the time the interest 

rate is set unless: 

(A) That compensation is paid by a 

consumer to a mortgage broker, as 

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

has been included in points and fees 

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

(B) That compensation is paid by a 

mortgage broker, as defined in 

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

is an employee of the mortgage broker; 

or 

(C) That compensation is paid by a 

creditor to a loan originator that is an 

employee of the creditor. 

* * * * * 

■ 3. Section 1026.43 is amended by 

revising paragraphs (a)(3)(ii) and (iii), 

(b)(4), (e)(1), (e)(2), and (g)(1)(ii)(B), and 

adding new paragraphs (a)(3)(iv) 

through (vi), (e)(5) and (e)(6), to read as 

follows: 

§ 1026.43 Minimum standards for 

transactions secured by a dwelling. 

(a) * * * 

(3) * * * 

(ii) A temporary or ‘‘bridge’’ loan with 

a term of 12 months or less, such as a 

loan to finance the purchase of a new 

dwelling where the consumer plans to 

sell a current dwelling within 12 

months or a loan to finance the initial 

construction of a dwelling; 

(iii) A construction phase of 12 

months or less of a construction-topermanent loan; 

(iv) An extension of credit made 

pursuant to a program administered by 

a Housing Finance Agency, as defined 

under 24 CFR 266.5; 

(v) An extension of credit made by: 

(A) A creditor designated as a 

Community Development Financial 

Institution, as defined under 12 CFR 

1805.104(h); 

(B) A creditor designated as a 

Downpayment Assistance through 

Secondary Financing Provider, pursuant 

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to 24 CFR 200.194(a), operating in 

accordance with regulations prescribed 

by the U.S. Department of Housing and 

Urban Development applicable to such 

persons; 

(C) A creditor designated as a 

Community Housing Development 

Organization provided that the creditor 

has entered into a commitment with a 

participating jurisdiction and is 

undertaking a project under the HOME 

program, pursuant to the provisions of 

24 CFR 92.300(a), and as the terms 

community housing development 

organization, commitment, participating 

jurisdiction, and project are defined 

under 24 CFR 92.2; or 

(D) A creditor with a tax exemption 

ruling or determination letter from the 

Internal Revenue Service under section 

501(c)(3) of the Internal Revenue Code 

of 1986 (26 U.S.C. 501(c)(3); 26 CFR 

1.501(c)(3)–1), provided that: 

(1) During the calendar year preceding 

receipt of the consumer’s application, 

the creditor extended credit secured by 

a dwelling no more than 200 times; 

(2) During the calendar year preceding 

receipt of the consumer’s application, 

the creditor extended credit secured by 

a dwelling only to consumers with 

income that did not exceed the low- and 

moderate-income household limit as 

established pursuant to section 102 of 

the Housing and Community 

Development Act of 1974 (42 U.S.C. 

5302(a)(20)) and amended from time to 

time by the U.S. Department of Housing 

and Urban Development, pursuant to 24 

CFR 570.3; 

(3) The extension of credit is to a 

consumer with income that does not 

exceed the household limit specified in 

paragraph (a)(3)(v)(D)(2) of this section; 

and 

(4) The creditor determines, in 

accordance with written procedures, 

that the consumer has a reasonable 

ability to repay the extension of credit. 

(vi) An extension of credit made 

pursuant to a program authorized by 

sections 101 and 109 of the Emergency 

Economic Stabilization Act of 2008 (12 

U.S.C. 5211; 5219); 

(b) * * * 

(4) Higher-priced covered transaction 

means a covered transaction 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 1.5 or more 

percentage points for a first-lien covered 

transaction, other than a qualified 

mortgage under paragraph (e)(5), (e)(6), 

or (f) of this section; by 3.5 or more 

percentage points for a first-lien covered 

transaction that is a qualified mortgage 

under paragraph (e)(5), (e)(6), or (f) of 

this section; or by 3.5 or more 

percentage points for a subordinate-lien 

covered transaction. 

* * * * * 

(e) Qualified mortgages. (1) Safe 

harbor and presumption of compliance. 

(i) Safe harbor for loans that are not 

higher-priced covered transactions. A 

creditor or assignee of a qualified 

mortgage, as defined in paragraphs 

(e)(2), (e)(4), (e)(5), (e)(6), or (f) of this 

section, that is not a higher-priced 

covered transaction, as defined in 

paragraph (b)(4) of this section, 

complies with the repayment ability 

requirements of paragraph (c) of this 

section. 

(ii) Presumption of compliance for 

higher-priced covered transactions. (A) 

A creditor or assignee of a qualified 

mortgage, as defined in paragraph (e)(2), 

(e)(4), (e)(5), (e)(6), or (f) of this section, 

that is a higher-priced covered 

transaction, as defined in paragraph 

(b)(4) of this section, is presumed to 

comply with the repayment ability 

requirements of paragraph (c) of this 

section. 

(B) To rebut the presumption of 

compliance described in paragraph 

(e)(1)(ii)(A) of this section, it must be 

proven that, despite meeting the 

prerequisites of paragraph (e)(2), (e)(4), 

(e)(5), (e)(6), or (f) of this section, the 

creditor did not make a reasonable and 

good faith determination of the 

consumer’s repayment ability at the 

time of consummation, by showing that 

the consumer’s income, debt 

obligations, alimony, child support, and 

the consumer’s monthly payment 

(including mortgage-related obligations) 

on the covered transaction and on any 

simultaneous loans of which the 

creditor was aware at consummation 

would leave the consumer with 

insufficient residual income or assets 

other than the value of the dwelling 

(including any real property attached to 

the dwelling) that secures the loan with 

which to meet living expenses, 

including any recurring and material 

non-debt obligations of which the 

creditor was aware at the time of 

consummation. 

(2) Qualified mortgage defined— 

general. Except as provided in 

paragraph (e)(4), (e)(5), (e)(6), or (f) of 

this section, a qualified mortgage is a 

covered transaction: 

* * * * * 

(5) Qualified mortgage defined—small 

creditor portfolio loans. (i) 

Notwithstanding paragraph (e)(2) of this 

section, a qualified mortgage is a 

covered transaction: 

(A) That satisfies the requirements of 

paragraph (e)(2) of this section other 

than the requirements of paragraph 

(e)(2)(vi) and without regard to the 

standards in appendix Q to this part; 

(B) For which the creditor considers 

at or before consummation the 

consumer’s monthly debt-to-income 

ratio or residual income and verifies the 

debt obligations and income used to 

determine that ratio in accordance with 

paragraph (c)(7) of this section, except 

that the calculation of the payment on 

the covered transaction for purposes of 

determining the consumer’s total 

monthly debt obligations in paragraph 

(c)(7)(i)(A) shall be determined in 

accordance with paragraph (e)(2)(iv) of 

this section instead of paragraph (c)(5) 

of this section; 

(C) That is not subject, at 

consummation, to a commitment to be 

acquired by another person, other than 

a person that satisfies the requirements 

of paragraph (e)(5)(i)(D) of this section; 

and 

(D) For which the creditor satisfies the 

requirements stated in 

§ 1026.35(b)(2)(iii)(B) and (C). 

(ii) A qualified mortgage extended 

pursuant to paragraph (e)(5)(i) of this 

section immediately loses its status as a 

qualified mortgage under paragraph 

(e)(5)(i) if legal title to the qualified 

mortgage is sold, assigned, or otherwise 

transferred to another person except 

when: 

(A) The qualified mortgage is sold, 

assigned, or otherwise transferred to 

another person three years or more after 

consummation of the qualified 

mortgage; 

(B) The qualified mortgage is sold, 

assigned, or otherwise transferred to a 

creditor that satisfies the requirements 

of paragraph (e)(5)(i)(D) of this section; 

(C) The qualified mortgage is sold, 

assigned, or otherwise transferred to 

another person pursuant to a capital 

restoration plan or other action under 12 

U.S.C. 1831o, actions or instructions of 

any person acting as conservator, 

receiver, or bankruptcy trustee, an order 

of a State or Federal government agency 

with jurisdiction to examine the creditor 

pursuant to State or Federal law, or an 

agreement between the creditor and 

such an agency; or 

(D) The qualified mortgage is sold, 

assigned, or otherwise transferred 

pursuant to a merger of the creditor with 

another person or acquisition of the 

creditor by another person or of another 

person by the creditor. 

(6) Qualified mortgage defined— 

temporary balloon-payment qualified 

mortgage rules. (i) Notwithstanding 

paragraph (e)(2) of this section, a 

qualified mortgage is a covered 

transaction: 

(A) That satisfies the requirements of 

paragraph (f) of this section other than 

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the requirements of paragraph (f)(1)(vi); 

and 

(B) For which the creditor satisfies the 

requirements stated in 

§ 1026.35(b)(2)(iii)(B) and (C). 

(ii) The provisions of this paragraph 

(e)(6) apply only to covered transactions 

consummated on or before January 10, 

2016. 

* * * * * 

(g) * * * 

(1) * * * 

(ii) * * * 

(B) Is a qualified mortgage under 

paragraph (e)(2), (e)(4), (e)(5), (e)(6), or 

(f) of this section; and 

* * * * * 

■ 4. In Supplement I to Part 1026— 

Official Interpretations: 

■ A. Under Section 1026.32— 

Requirements for High-Cost Mortgages: 

■ i. Under 32(b) Definitions: 

■ a. Under Paragraph 32(b)(1)(ii), 

paragraphs 1, 2, 3, and 4 are revised. 

■ B. Under Section 1026.43—Minimum 

Standards for Transactions Secured by 

a Dwelling: 

■ i. Under 43(a) Scope: 

■ a. Paragraph 43(a)(3)(iv) and 

paragraph 1 are added. 

■ b. Paragraph 43(a)(3)(v)(D) and 

paragraph 1 are added. 

■ c. Paragraph 43(a)(3)(vi) and 

paragraph 1 are added. 

■ ii. Under 43(e) Qualified Mortgages: 

■ a. Paragraph 43(e)(5) and paragraphs 

1 through 10 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 

* * * * * 

Section 1026.32—Requirements for High-Cost 

Mortgages 

* * * * * 

32(b) Definitions. 

* * * * * 

Paragraph 32(b)(1)(ii). 

1. Loan originator compensation—general. 

Compensation paid by a consumer or creditor 

to a loan originator, other than an employee 

of the creditor, is included in the calculation 

of points and fees for a transaction, provided 

that such compensation can be attributed to 

that particular transaction at the time the 

interest rate is set. Compensation paid to an 

employee of a creditor is not included in 

points and fees. 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. 

2. Loan originator compensation— 

attributable to a particular transaction. Loan 

originator compensation is compensation 

that is paid by a consumer or creditor to a 

loan originator that can be attributed to that 

particular transaction. The amount of 

compensation that can be attributed to a 

particular transaction is the dollar value of 

compensation that the loan originator will 

receive if the transaction is consummated. As 

explained in comment 32(b)(1)(ii)–3, the 

amount of compensation that a loan 

originator will receive is calculated as of the 

date the interest rate is set and includes 

compensation that is paid before, at, or after 

consummation. 

3. Loan originator compensation—timing. 

Compensation paid to a loan originator that 

can be attributed to a transaction must be 

included in the points and fees calculation 

for that loan regardless of whether the 

compensation is paid before, at, or after 

consummation. The amount of loan 

originator compensation that can be 

attributed to a transaction is determined as of 

the date the interest rate is set. Thus, loan 

originator compensation for a transaction 

includes compensation that can be attributed 

to that transaction at the time the creditor 

sets the interest rate for the transaction, even 

if that compensation is not paid until after 

consummation. 

4. Loan originator compensation— 

calculating loan originator compensation in 

connection with other charges or payments 

included in the finance charge or made to 

loan originators. i. Consumer payments to 

mortgage brokers. As provided in 

§ 1026.32(b)(1)(ii)(A), consumer payments to 

a mortgage broker already included in the 

points and fees calculation under 

§ 1026.32(b)(1)(i) need not be counted again 

under § 1026.32(b)(1)(ii). For example, 

assume a consumer pays a mortgage broker 

a $3,000 fee for a transaction. The $3,000 

mortgage broker fee is included in the 

finance charge under § 1026.4(a)(3). Because 

the $3,000 mortgage broker fee is already 

included in points and fees under 

§ 1026.32(b)(1)(i), it is not counted again 

under § 1026.32(b)(1)(ii). 

ii. Payments by a mortgage broker to its 

individual loan originator employee. As 

provided in § 1026.32(b)(1)(ii)(B), 

compensation paid by a mortgage broker to 

its individual loan originator employee is not 

included in points and fees under 

§ 1026.32(b)(1)(ii). For example, assume a 

consumer pays a $3,000 fee to a mortgage 

broker, and the mortgage broker pays a 

$1,500 commission to its individual loan 

originator employee for that transaction. The 

$3,000 mortgage broker fee is included in 

points and fees, but the $1,500 commission 

is not included in points and fees because it 

has already been included in points and fees 

as part of the $3,000 mortgage broker fee. 

iii. Creditor’s origination fees—loan 

originator not employed by creditor. 

Compensation paid by a consumer or creditor 

to a loan originator who is not employed by 

the creditor is included in the calculation of 

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

Such compensation is included in points and 

fees in addition to any origination fees or 

charges paid by the consumer to the creditor 

that are included in points and fees under 

§ 1026.32(b)(1)(i). For example, assume that a 

consumer pays to the creditor a $3,000 

origination fee and that the creditor pays a 

mortgage broker $1,500 in compensation 

attributed to the transaction. Assume further 

that the consumer pays no other charges to 

the creditor that are included in points and 

fees under § 1026.32(b)(1)(i) and that the 

mortgage broker receives no other 

compensation that is included in points and 

fees under § 1026.32(b)(1)(ii). For purposes of 

calculating points and fees, the $3,000 

origination fee is included in points and fees 

under § 1026.32(b)(1)(i) and the $1,500 in 

loan originator compensation is included in 

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

equaling $4,500 in total points and fees, 

provided that no other points and fees are 

paid or compensation received. 

* * * * * 

Section 1026.43—Minimum Standards for 

Transactions Secured by a Dwelling 

43(a) Scope. 

* * * * * 

Paragraph 43(a)(3)(iv). 

1. General. The requirements of 

§ 1026.43(c) through (f) do not apply to an 

extension of credit made pursuant to a 

program administered by a Housing Finance 

Agency, as defined under 24 CFR 266.5. 

Under the exemption, the requirements of 

§ 1026.43(c) through (f) do not apply to 

extensions of credit made by housing finance 

agencies and extensions of credit made by 

intermediaries (e.g., private creditors) 

pursuant to a program administered by a 

housing finance agency. For example, if a 

creditor is extending credit, including a 

subordinate-lien covered transaction, that 

will be made pursuant to a program 

administered by a housing finance agency, 

the creditor is exempt from the requirements 

of § 1026.43(c) through (f). Similarly, the 

creditor is exempt from the requirements of 

§ 1026.43(c) through (f) regardless of whether 

the program administered by a housing 

finance agency is funded by Federal, State, or 

other sources. 

Paragraph 43(a)(3)(v)(D). 

1. General. An extension of credit is 

exempt from the requirements of § 1026.43(c) 

through (f) if the credit is extended by a 

creditor described in § 1026.43(a)(3)(v)(D), 

provided the conditions specified in that 

section are satisfied. The conditions specified 

in § 1026.43(a)(3)(v)(D)(1) and (2) are 

determined according to activity that 

occurred in the calendar year preceding the 

calendar year in which the consumer’s 

application was received. Section 

1026.43(a)(3)(v)(D)(2) provides that, during 

the preceding calendar year, the creditor 

must have extended credit only to consumers 

with income that did not exceed the limit 

then in effect for low- and moderate-income 

households, as specified in regulations 

prescribed by the U.S. Department of 

Housing and Urban Development pursuant to 

24 CFR 570.3. For example, a creditor has 

satisfied the requirement in 

§ 1026.43(a)(3)(v)(D)(2) if the creditor 

extended credit only to consumers with 

incomes that did not exceed the limit in 

effect on the dates the creditor received each 

consumer’s individual application. The 

condition specified in 

§ 1026.43(a)(3)(v)(D)(3), which relates to the 

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current extension of credit, provides that the 

extension of credit must be to a consumer 

with income that does not exceed the limit 

specified in § 1026.43(a)(3)(v)(D)(2) in effect 

on the date the creditor received the 

consumer’s application. For example, assume 

that a creditor with a tax exemption ruling 

under section 501(c)(3) of the Internal 

Revenue Code of 1986 has satisfied the 

conditions identified in 

§ 1026.43(a)(3)(v)(D)(1) and (2). If, on May 21, 

2014, the creditor in this example extends 

credit secured by a dwelling to a consumer 

whose application reflected income in excess 

of the limit identified in 

§ 1026.43(a)(3)(v)(D)(2) in effect on the date 

the creditor received that consumer’s 

application, the creditor has not satisfied the 

condition in § 1026.43(a)(3)(v)(D)(3) and this 

extension of credit is not exempt from the 

requirements of § 1026.43(c) through (f). 

Paragraph 43(a)(3)(vi). 

1. General. The requirements of 

§ 1026.43(c) through (f) do not apply to a 

mortgage loan modification made in 

connection with a program authorized by 

sections 101 and 109 of the Emergency 

Economic Stabilization Act of 2008. If a 

creditor is underwriting an extension of 

credit that is a refinancing, as defined by 

§ 1026.20(a), that will be made pursuant to a 

program authorized by sections 101 and 109 

of the Emergency Economic Stabilization Act 

of 2008, the creditor also need not comply 

with § 1026.43(c) through (f). A creditor need 

not determine whether the mortgage loan 

modification is considered a refinancing 

under § 1026.20(a) for purposes of 

determining applicability of § 1026.43; if the 

transaction is made in connection with these 

programs, the requirements of § 1026.43(c) 

through (f) do not apply. In addition, if a 

creditor underwrites a new extension of 

credit, such as a subordinate-lien mortgage 

loan, that will be made pursuant to a program 

authorized by sections 101 and 109 of the 

Emergency Economic Stabilization Act of 

2008, the creditor need not comply with the 

requirements of § 1026.43(c) through (f). 

* * * * * 

43(e) Qualified mortgages. 

* * * * * 

Paragraph 43(e)(5). 

1. Satisfaction of qualified mortgage 

requirements. For a covered transaction to be 

a qualified mortgage under § 1026.43(e)(5), 

the mortgage must satisfy the requirements 

for a qualified mortgage under 

§ 1026.43(e)(2), other than the requirements 

regarding debt-to-income ratio. For example, 

a qualified mortgage under § 1026.43(e)(5) 

may not have a loan term in excess of 30 

years because longer terms are prohibited for 

qualified mortgages under § 1026.43(e)(2)(ii). 

Similarly, a qualified mortgage under 

§ 1026.43(e)(5) may not result in a balloon 

payment because § 1026.43(e)(2)(i)(C) 

provides that qualified mortgages may not 

have balloon payments except as provided 

under § 1026.43(f). However, a covered 

transaction need not comply with 

§ 1026.43(e)(2)(vi), which prohibits consumer 

monthly debt-to-income ratios in excess of 43 

percent. A covered transaction therefore can 

be a qualified mortgage under § 1026.43(e)(5) 

even though the consumer’s monthly debt-toincome ratio is greater than 43 percent. 

2. Debt-to-income ratio or residual income. 

Section 1026.43(e)(5) does not prescribe a 

specific monthly debt-to-income ratio with 

which creditors must comply. Instead, 

creditors must consider a consumer’s debt-toincome ratio or residual income calculated 

generally in accordance with § 1026.43(c)(7) 

and verify the information used to calculate 

the debt-to-income ratio or residual income 

in accordance with § 1026.43(c)(3) and (4). 

However, § 1026.43(c)(7) refers creditors to 

§ 1026.43(c)(5) for instructions on calculating 

the payment on the covered transaction. 

Section 1026.43(c)(5) requires creditors to 

calculate the payment differently than 

§ 1026.43(e)(2)(iv). For purposes of the 

qualified mortgage definition in 

§ 1026.43(e)(5), creditors must base their 

calculation of the consumer’s debt-to-income 

ratio or residual income on the payment on 

the covered transaction calculated according 

to § 1026.43(e)(2)(iv) instead of according to 

§ 1026.43(c)(5). Creditors are not required to 

calculate the consumer’s monthly debt-toincome ratio in accordance with appendix Q 

to this part as is required under the general 

definition of qualified mortgages by 

§ 1026.43(e)(2)(vi). 

3. Forward commitments. A creditor may 

make a mortgage loan that will be transferred 

or sold to a purchaser pursuant to an 

agreement that has been entered into at or 

before the time the transaction is 

consummated. Such an agreement is 

sometimes known as a ‘‘forward 

commitment.’’ A mortgage that will be 

acquired by a purchaser pursuant to a 

forward commitment does not satisfy the 

requirements of § 1026.43(e)(5), whether the 

forward commitment provides for the 

purchase and sale of the specific transaction 

or for the purchase and sale of transactions 

with certain prescribed criteria that the 

transaction meets. However, a forward 

commitment to another person that also 

meets the requirements of 

§ 1026.43(e)(5)(i)(D) is permitted. For 

example, assume a creditor that is eligible to 

make qualified mortgages under 

§ 1026.43(e)(5) makes a mortgage. If that 

mortgage meets the purchase criteria of an 

investor with which the creditor has an 

agreement to sell loans after consummation, 

then the loan does not meet the definition of 

a qualified mortgage under § 1026.43(e)(5). 

However, if the investor meets the 

requirements of § 1026.43(e)(5)(i)(D), the 

mortgage will be a qualified mortgage if all 

other applicable criteria also are satisfied. 

4. Creditor qualifications. To be eligible to 

make qualified mortgages under 

§ 1026.43(e)(5), a creditor must satisfy the 

requirements stated in § 1026.35(b)(2)(iii)(B) 

and (C). Section 1026.35(b)(2)(iii)(B) requires 

that, during the preceding calendar year, the 

creditor and its affiliates together originated 

500 or fewer first-lien covered transactions. 

Section 1026.35(b)(2)(iii)(C) requires that, as 

of the end of the preceding calendar year, the 

creditor had total assets of less than $2 

billion, adjusted annually by the Bureau for 

inflation. 

5. Requirement to hold in portfolio. 

Creditors generally must hold a loan in 

portfolio to maintain the transaction’s status 

as a qualified mortgage under § 1026.43(e)(5), 

subject to four exceptions. Unless one of 

these exceptions applies, a loan is no longer 

a qualified mortgage under § 1026.43(e)(5) 

once legal title to the debt obligation is sold, 

assigned, or otherwise transferred to another 

person. Accordingly, unless one of the 

exceptions applies, the transferee could not 

benefit from the presumption of compliance 

for qualified mortgages under § 1026.43(e)(1) 

unless the loan also met the requirements of 

another qualified mortgage definition. 

6. Application to subsequent transferees. 

The exceptions contained in 

§ 1026.43(e)(5)(ii) apply not only to an initial 

sale, assignment, or other transfer by the 

originating creditor but to subsequent sales, 

assignments, and other transfers as well. For 

example, assume Creditor A originates a 

qualified mortgage under § 1026.43(e)(5). Six 

months after consummation, Creditor A sells 

the qualified mortgage to Creditor B pursuant 

to § 1026.43(e)(5)(ii)(B) and the loan retains 

its qualified mortgage status because Creditor 

B complies with the limits on asset size and 

number of transactions. If Creditor B sells the 

qualified mortgage, it will lose its qualified 

mortgage status under § 1026.43(e)(5) unless 

the sale qualifies for one of the 

§ 1026.43(e)(5)(ii) exceptions for sales three 

or more years after consummation, to another 

qualifying institution, as required by 

supervisory action, or pursuant to a merger 

or acquisition. 

7. Transfer three years after 

consummation. Under § 1026.43(e)(5)(ii)(A), 

if a qualified mortgage under § 1026.43(e)(5) 

is sold, assigned, or otherwise transferred 

three years or more after consummation, the 

loan retains its status as a qualified mortgage 

under § 1026.43(e)(5) following the transfer. 

The transferee need not be eligible to 

originate qualified mortgages under 

§ 1026.43(e)(5). The loan will continue to be 

a qualified mortgage throughout its life, and 

the transferee, and any subsequent 

transferees, may invoke the presumption of 

compliance for qualified mortgages under 

§ 1026.43(e)(1). 

8. Transfer to another qualifying creditor. 

Under § 1026.43(e)(5)(ii)(B), a qualified 

mortgage under § 1026.43(e)(5) may be sold, 

assigned, or otherwise transferred at any time 

to another creditor that meets the 

requirements of § 1026.43(e)(5)(v). That 

section requires that a creditor, during the 

preceding calendar year, together with all 

affiliates, 500 or fewer first-lien covered 

transactions and had total assets less than $2 

billion (as adjusted for inflation) at the end 

of the preceding calendar year. A qualified 

mortgage under § 1026.43(e)(5) transferred to 

a creditor that meets these criteria would 

retain its qualified mortgage status even if it 

is transferred less than three years after 

consummation. 

9. Supervisory sales. Section 

1026.43(e)(5)(ii)(C) facilitates sales that are 

deemed necessary by supervisory agencies to 

revive troubled creditors and resolve failed 

creditors. A qualified mortgage under 

§ 1026.43(e)(5) retains its qualified mortgage 

status if it is sold, assigned, or otherwise 

transferred to another person pursuant to: A 

capital restoration plan or other action under 

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35506 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Rules and Regulations 

12 U.S.C. 1831o; the actions or instructions 

of any person acting as conservator, receiver 

or bankruptcy trustee; an order of a State or 

Federal government agency with jurisdiction 

to examine the creditor pursuant to State or 

Federal law; or an agreement between the 

creditor and such an agency. A qualified 

mortgage under § 1026.43(e)(5) that is sold, 

assigned, or otherwise transferred under 

these circumstances retains its qualified 

mortgage status regardless of how long after 

consummation it is sold and regardless of the 

size or other characteristics of the transferee. 

Section 1026.43(e)(5)(ii)(C) does not apply to 

transfers done to comply with a generally 

applicable regulation with future effect 

designed to implement, interpret, or 

prescribe law or policy in the absence of a 

specific order by or a specific agreement with 

a governmental agency described in 

§ 1026.43(e)(5)(ii)(C) directing the sale of one 

or more qualified mortgages under 

§ 1026.43(e)(5) held by the creditor or one of 

the other circumstances listed in 

§ 1026.43(e)(5)(ii)(C). For example, a 

qualified mortgage under § 1026.43(e)(5) that 

is sold pursuant to a capital restoration plan 

under 12 U.S.C. 1831o would retain its status 

as a qualified mortgage following the sale. 

However, if the creditor simply chose to sell 

the same qualified mortgage as one way to 

comply with general regulatory capital 

requirements in the absence of supervisory 

action or agreement it would lose its status 

as a qualified mortgage following the sale 

unless it qualifies under another definition of 

qualified mortgage. 

10. Mergers and acquisitions. A qualified 

mortgage under § 1026.43(e)(5) retains its 

qualified mortgage status if a creditor merges 

with, is acquired by, or acquires another 

person regardless of whether the creditor or 

its successor is eligible to originate new 

qualified mortgages under § 1026.43(e)(5) 

after the merger or acquisition. However, the 

creditor or its successor can originate new 

qualified mortgages under § 1026.43(e)(5) 

only if it complies with all of the 

requirements of § 1026.43(e)(5) after the 

merger or acquisition. For example, assume 

a creditor that originates 250 covered 

transactions each year and originates 

qualified mortgages under § 1026.43(e)(5) is 

acquired by a larger creditor that originates 

10,000 covered transactions each year. 

Following the acquisition, the small creditor 

would no longer be able to originate 

§ 1026.43(e)(5) qualified mortgages because, 

together with its affiliates, it would originate 

more than 500 covered transactions each 

year. However, the § 1026.43(e)(5) qualified 

mortgages originated by the small creditor 

before the acquisition would retain their 

qualified mortgage status. 

* * * * * 

Dated: May 29, 2013. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2013–13173 Filed 6–11–13; 8:45 am] 

BILLING CODE 4810–AM–P 

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