Vol. 78 Tuesday, 

No. 14 January 22, 2013 

Part III 

Bureau of Consumer Financial Protection 

12 CFR Part 1026 

Escrow Requirements Under the Truth in Lending Act (Regulation Z); Final 

Rule 


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4726 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 

1The ‘‘average prime offer rate’’ is derived from 

average interest rates, points, and other loan pricing 

terms currently offered to consumers by a 

representative sample of creditors for mortgage 

transactions that have low-risk pricing 

characteristics. The Bureau publishes average prime 

offer rates for a broad range of types of transactions 

in a table updated at least weekly, as well as the 

methodology the Bureau uses to derive these rates. 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Part 1026 

[Docket No. CFPB–2013–0001] 

RIN 3170–AA16 

Escrow Requirements 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 

publishing a final rule that amends 

Regulation Z (Truth in Lending) to 

implement certain amendments to the 

Truth in Lending Act made by the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank 

Act). Regulation Z currently requires 

creditors to establish escrow accounts 

for higher-priced mortgage loans 

secured by a first lien on a principal 

dwelling. The rule implements statutory 

changes made by the Dodd-Frank Act 

that lengthen the time for which a 

mandatory escrow account established 

for a higher-priced mortgage loan must 

be maintained. The rule also exempts 

certain transactions from the statute’s 

escrow requirement. The primary 

exemption applies to mortgage 

transactions extended by creditors that 

operate predominantly in rural or 

underserved areas, originate a limited 

number of first-lien covered 

transactions, have assets below a certain 

threshold, and do not maintain escrow 

accounts on mortgage obligations they 

currently service. 

DATES: Effective date: The rule is 

effective June 1, 2013. 

Applicability date: Its requirements 

apply to transactions for which creditors 

receive applications on or after that 

date. 

FOR FURTHER INFORMATION CONTACT: 

David Friend or Ebunoluwa Taiwo, 

Counsels, Office of Regulations, at (202) 

435–7700. 

SUPPLEMENTARY INFORMATION: 

I. Summary of the Final Rule 

In response to the recent mortgage 

crisis, Congress enacted the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act) to 

strengthen certain consumer protections 

under existing law. The Bureau of 

Consumer Financial Protection (Bureau) 

is issuing this final rule to implement 

provisions of the Dodd-Frank Act 

requiring creditors to establish escrow 

accounts for certain mortgage 

transactions to help ensure that 

consumers set aside funds to pay 

property taxes, and premiums for 

homeowners insurance, and other 

mortgage-related insurance required by 

the creditor. The final rule takes effect 

on June 1, 2013. 

The final rule has three main 

elements: 

• As directed by the Dodd-Frank Act, 

the rule amends existing regulations 

that require creditors to establish and 

maintain escrow accounts for at least 

one year after originating a ‘‘higherpriced mortgage loan’’ to require 

generally that the accounts be 

maintained for at least five years. 

• The rule creates an exemption from 

the escrow requirement for small 

creditors that operate predominately in 

rural or underserved areas. Specifically, 

to be eligible for the exemption, a 

creditor must: (1) Make more than half 

of its first-lien mortgages in rural or 

underserved areas; (2) have an asset size 

less than $2 billion; (3) together with its 

affiliates, have originated 500 or fewer 

first-lien mortgages during the 

preceding calendar year; and (4) 

together with its affiliates, not escrow 

for any mortgage it or its affiliates 

currently services, except in limited 

instances. Under the rule, eligible 

creditors need not establish escrow 

accounts for mortgages intended at 

consummation to be held in portfolio, 

but must establish accounts at 

consummation for mortgages that are 

subject to a forward commitment to be 

purchased by an investor that does not 

itself qualify for the exemption. 

• Finally, the rule expands upon an 

existing exemption from escrowing for 

insurance premiums (though not for 

property taxes) for condominium units 

to extend the partial exemption to other 

situations in which an individual 

consumer’s property is covered by a 

master insurance policy. 

II. Background 

A. TILA and Regulation Z 

Congress enacted the Truth in 

Lending Act (TILA), 15 U.S.C. 1601 et 

seq., based on findings that economic 

stability would be enhanced and 

competition among consumer credit 

providers would be strengthened by the 

informed use of credit resulting from 

consumers’ awareness of the cost of 

credit. One of the purposes of TILA is 

to provide meaningful disclosure of 

credit terms to enable consumers to 

compare credit terms available in the 

marketplace more readily and avoid the 

uninformed use of credit. TILA’s 

disclosures differ depending on whether 

credit is an open-end (revolving) plan or 

a closed-end (installment) transaction. 

TILA also contains certain procedural 

and substantive protections for 

consumers. 

With the enactment of the DoddFrank Act, general rulemaking authority 

under TILA transferred from the Board 

of Governors of the Federal Reserve 

System (Board) to the Bureau on July 21, 

2011. Pursuant to the Dodd-Frank Act 

and TILA, as amended, the Bureau 

published for public comment an 

interim final rule establishing a new 

Regulation Z, 12 CFR part 1026, 

implementing TILA (except with respect 

to persons excluded from coverage by 

section 1029 of the Dodd-Frank Act). 

See 76 FR 79768 (Dec. 22, 2011). This 

rule did not impose any new 

substantive obligations but did make 

technical and conforming changes to 

reflect the transfer of authority and 

certain other changes made by the 

Dodd-Frank Act. The Bureau’s 

Regulation Z took effect on December 

30, 2011. An official commentary 

interprets the requirements of 

Regulation Z. By statute, creditors that 

follow in good faith official 

interpretations contained in the 

commentary are insulated from civil 

liability, criminal penalties, and 

administrative sanction. 

On July 30, 2008, the Board published 

a final rule amending Regulation Z to 

establish new regulatory protections for 

consumers in the residential mortgage 

market pursuant to authority originally 

granted to the Board by the Home 

Ownership and Equity Protection Act of 

1994 (HOEPA). See 73 FR 44522 (July 

30, 2008) (2008 HOEPA Final Rule). 

Among other things, the 2008 HOEPA 

Final Rule defined a class of higherpriced mortgage loans that are subject to 

certain protections. A higher-priced 

mortgage loan was established by the 

2008 HOEPA Final Rule as a closed-end 

transaction secured by a consumer’s 

principal dwelling with an annual 

percentage rate that exceeds an ‘‘average 

prime offer rate’’ for a comparable 

transaction by 1.5 or more percentage 

points for transactions secured by a first 

lien, or by 3.5 or more percentage points 

for transactions secured by a 

subordinate lien.1 Under the 2008 

HOEPA Final Rule, such transactions 

are subject to a number of special 

requirements, including that creditors 


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2For a more in-depth discussion of the mortgage 

market, the financial crisis, and mortgage 

origination generally, see the Bureau’s 2013 ATR 

Final Rule, discussed below in part III.C. 3Sections 1011, 1021, and 1061 of title X of the 

Dodd-Frank Act, the ‘‘Consumer Financial 

Protection Act,’’ Public Law 111–203, sections 

1001–1100H, codified at 12 U.S.C. 5491, 5511, 

5581. The Consumer Financial Protection Act is 

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

4Credit Forecast 2012, Moody’s Analytics (2012), 

available at: http://www.economy.com/default.asp 

(reflects first-lien mortgage loans) (data service 

accessibly only through paid subscription). 

5 1 Inside Mortg. Fin., The 2012 Mortgage Market 

Statistical Annual 12 (2012). 

6Credit Forecast 2012; 1 Inside Mortg. Fin., The 

2012 Mortgage Market Statistical Annual 17 (2012). 

assess consumers’ ability to repay such 

transactions before extending credit, 

that creditors establish escrow accounts 

for higher-priced mortgage loans 

secured by a first lien on a principal 

dwelling (with some exceptions), and 

imposes significant restrictions on the 

use of prepayment penalties. 

Specifically with regard to escrows, the 

rule required that creditors establish 

and maintain escrow accounts for 

property taxes and premiums for 

mortgage-related insurance required by 

the creditor for a minimum of one year 

after originating a higher-priced 

mortgage loan secured by a first lien on 

a principal dwelling. The escrow 

requirement was effective on April 1, 

2010, for transactions secured by sitebuilt homes, and on October 1, 2010, for 

transactions secured by manufactured 

housing. 

B. The Dodd-Frank Act 

On July 21, 2010, Congress enacted 

the Dodd-Frank Act after a cycle of 

unprecedented expansion and 

contraction in the mortgage market 

sparked the most severe U.S. recession 

since the Great Depression.2 The DoddFrank Act created the Bureau and 

consolidated various rulemaking and 

supervisory authorities in the new 

agency, including the authority to 

implement HOEPA and TILA.3 At the 

same time, Congress significantly 

amended the statutory requirements 

governing mortgage practices with the 

intent to restrict the practices that 

contributed to the crisis. 

As part of these changes, the DoddFrank Act enacted several substantive 

requirements designed to address 

questionable practices in the mortgage 

market. Several of these provisions 

expanded upon elements of the 2008 

HOEPA Final Rule. For instance, among 

other provisions, title XIV of the DoddFrank Act amends TILA to establish 

certain requirements for escrow 

accounts for consumer credit 

transactions secured by a first lien on a 

consumer’s principal dwelling. Sections 

1461 and 1462 of the Dodd-Frank Act 

create new TILA section 129D, 15 U.S.C. 

1639d, which substantially codifies 

Regulation Z’s escrow requirement for 

higher-priced mortgage loans but 

lengthens the period for which escrow 

accounts are required, adjusts the rate 

threshold for determining whether 

escrow accounts are required for ‘‘jumbo 

loans,’’ whose principal amounts exceed 

the maximum eligible for purchase by 

the Federal Home Loan Mortgage 

Corporation (Freddie Mac), and adds 

two disclosure requirements. The new 

section also authorizes the Bureau to 

create an exemption from the escrow 

requirement for transactions originated 

and held in portfolio by creditors that 

operate predominantly in ‘‘rural or 

underserved’’ areas and meet certain 

other prescribed criteria. 

The Dodd-Frank Act also expanded 

upon the 2008 HOEPA Final Rule to 

require that creditors assess all 

consumers’ ability to repay mortgage 

transactions, even if they are not higherpriced mortgage loans. Sections 1411 

and 1412 set forth these ability-to-repay 

requirements and provide a 

presumption of compliance for certain 

‘‘qualified mortgages,’’ including certain 

balloon-payment mortgages originated 

and held in portfolio by creditors that 

operate predominantly in ‘‘rural or 

underserved’’ areas and meet certain 

other prescribed criteria. The provisions 

for balloon-payment qualified mortgages 

and for the potential escrow exemption 

are similar but not identical under the 

statute. 

In the spring of 2011, the Board 

issued two proposals to implement the 

escrow and ability-to-repay/qualified 

mortgage provisions. Specifically, on 

March 2, 2011, the Board published a 

proposed rule to implement the 

requirements of sections 1461 and 1462 

of the Dodd-Frank Act. 76 FR 11598 

(Mar. 2, 2011) (the Board’s 2011 

Escrows Proposal). The Board’s 2011 

Escrows Proposal would have amended 

the escrow requirement of Regulation Z, 

by creating an exemption for 

transactions by certain creditors 

operating in rural or underserved areas, 

and by establishing two new disclosure 

requirements relating to escrow 

accounts. The proposal also would have 

adjusted the threshold for ‘‘higherpriced mortgage loans’’ based on a 

loan’s ‘‘transaction coverage rate,’’ 

rather than its annual percentage rate 

(APR). This element of the proposal 

grew out of a separate initiative by the 

Board in which it had proposed to 

expand the definition of finance charge 

to include more fees and charges, and 

thus also generally to increase APRs, 

under Regulation Z to make disclosures 

more useful to consumers. Because 

those changes would have caused more 

transactions to exceed the thresholds for 

higher-priced mortgage loans, the Board 

proposed using a ‘‘transaction coverage 

rate’’ metric to keep coverage levels 

relatively constant. See 74 FR 43232 

(Aug. 26, 2009); 75 FR 58539, 58660–61 

(Sept. 24, 2010). 

On May 11, 2011, the Board 

published a proposal 2011 ATR 

Proposal to implement the ability-torepay/qualified mortgage provisions 

added to TILA by the Dodd Frank Act, 

as discussed above. See 76 FR 27390 

(May 11, 2011) (the Board’s 2011 ATR 

Proposal). The Board’s 2011 Escrows 

and 2011 ATR Proposals used similar 

definitions of ‘‘rural’’ and 

‘‘underserved’’ but varied with regard to 

certain other proposed provisions for 

the balloon-payment qualified mortgage 

and escrow exemptions. 

On July 21, 2011, section 1061 of the 

Dodd-Frank Act transferred to the 

Bureau the ‘‘consumer financial 

protection functions’’ previously vested 

in certain other Federal agencies, 

including the Board. On November 23, 

2012, the Bureau published a final rule 

that delays the implementation of 

certain disclosure requirements 

contained in title XIV of the Dodd-Frank 

Act, including those contained in TILA 

section 129D, as added by Dodd-Frank 

Act sections 1461 and 1462. See 77 FR 

70105 (Nov. 23, 2012). Consequently, 

the disclosure portions of the Board’s 

2011 Escrows Proposal will be the 

subject of future rulemaking by the 

Bureau and are not finalized in this rule. 

C. Size and Volume of the Current 

Mortgage Origination Market 

Even with the economic downturn 

and tightening of credit standards, 

approximately $1.28 trillion in mortgage 

loans were originated in 2011.4 In 

exchange for an extension of mortgage 

credit, consumers promise to make 

regular mortgage payments and provide 

their home or real property as collateral. 

The overwhelming majority of 

homebuyers continue to use mortgages 

to finance at least some of the purchase 

price of their property. In 2011, 93 

percent of all home purchases were 

financed with a mortgage credit 

transaction.5

Consumers may obtain mortgage 

credit to purchase a home, to refinance 

an existing mortgage, to access home 

equity, or to finance home 

improvement. Purchase transactions 

and refinancings together produced 6.3 

million new first-lien mortgage 

originations in 2011.6 The proportion of 


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7 Inside Mortg. Fin., Mortgage Originations by 

Product, Mortgage Market Statistical Annual (2012). 

8 Id. These percentages are based on the dollar 

amounts of the transactions. 

9Credit Forecast 2012. 

transactions that are for purchases as 

opposed to refinancings varies with the 

interest rate environment and other 

market factors. In 2011, 65 percent of 

the market was refinance transactions 

and 35 percent was purchase 

transactions, by volume.7 Historically 

the distribution has been more even. In 

2000, refinancings accounted for 44 

percent of the market while purchase 

transactions comprised 56 percent; in 

2005, the two products were split 

evenly.8

With a home equity transaction, a 

homeowner uses his or her equity as 

collateral to secure consumer credit. 

The credit proceeds can be used, for 

example, to pay for home 

improvements. Home equity credit 

transactions and home equity lines of 

credit resulted in an additional 1.3 

million mortgage originations in 2011.9

The market for higher-priced 

mortgage loans remains significant. Data 

reported under the Home Mortgage 

Disclosure Act (HMDA) show that in 

2011 approximately 332,000 

transactions, including subordinate 

liens, were reportable as higher-priced 

mortgage loans. Of these transactions, 

refinancings accounted for 

approximately 44 percent of the higherpriced mortgage loan market, and 90 

percent of the overall higher-priced 

mortgage loan market involved first-lien 

transactions. The median first-lien 

higher-priced mortgage loan was for 

$81,000, while the interquartile range 

(where one quarter of the transactions 

are below, and one quarter of the 

transactions are above) was $47,000 to 

$142,000. 

III. Summary of the Rulemaking 

Process 

A. The Board’s 2011 Escrows Proposal 

The Board’s 2011 Escrows Proposal 

would have made certain amendments 

to Regulation Z’s escrow requirement, in 

accordance with the Dodd-Frank Act. 

First, the Board’s 2011 Escrows Proposal 

would have expanded the minimum 

period for mandatory escrow accounts 

from one to five years, and under certain 

circumstances longer. Second, the 

Board’s 2011 Escrows Proposal would 

have extended the partial exemption for 

certain transactions secured by a 

condominium unit to planned unit 

developments and other, similar 

property types that have governing 

associations that maintain a master 

insurance policy. Third, the Board’s 

2011 Escrows Proposal would have 

created an exemption from the escrow 

requirement for any transaction 

extended by a creditor that makes most 

of its first-lien higher-priced mortgage 

loans in counties designated by the 

Board as ‘‘rural’’ or ‘‘underserved,’’ has 

annual originations (together with 

affiliates) of 100 or fewer first-lien 

mortgage transactions originated and 

retained servicing rights in either the 

current or prior year, and does not 

escrow for any mortgage obligation it 

services. The Board’s 2011 Escrows 

Proposal would have limited the 

definition of ‘‘rural’’ areas to those 

based on the ‘‘urban influence codes’’ 

numbered 7, 10, 11, and 12, maintained 

by the Economic Research Service (ERS) 

of the United States Department of 

Agriculture. Additionally, the Board’s 

2011 Escrows Proposal would also have 

designated a county as ‘‘underserved’’ 

where no more than two creditors 

extend consumer credit secured by a 

first lien on real property or a dwelling 

five or more times in that county during 

either of the two previous calendar 

years. 

The Board’s 2011 Escrows Proposal 

also would have established two new 

disclosure requirements relating to 

escrow accounts. One disclosure would 

have been required to be given three 

business days before consummation of a 

mortgage transaction for which an 

escrow account would have been 

established, explaining what an escrow 

account is, how it works, and the risks 

of not having an escrow account. The 

disclosure would also have contained 

the estimated amount of the first year’s 

disbursements, the amount to be paid at 

consummation to fund the escrow 

account initially, the amount of the 

consumer’s regular mortgage payments 

to be paid into the escrow account, as 

well as a statement that the amount of 

the regular escrow payment could 

change in the future. 

In addition, the Board’s 2011 Escrows 

Proposal would have created a second 

disclosure to be given for mortgage 

transactions where an escrow account 

would not be established or when an 

escrow account on an existing mortgage 

obligation was to be cancelled. This 

disclosure would have explained what 

an escrow account is, how it works, the 

risk of not having an escrow account, as 

well as the potential consequences of 

failing to pay home-related costs such as 

taxes and insurance in the absence of an 

escrow account. Further, it would have 

stated why there would be no escrow 

account or why it was being cancelled, 

as applicable, the amount of any fee 

imposed for not having an escrow 

account, and how the consumer could 

request that an escrow account be 

established or left in place, along with 

any deadline for such requests. The 

Board’s 2011 Escrows Proposal would 

have required that this disclosure be 

delivered at least three business days 

before consummation or cancellation of 

the existing escrow account, as 

applicable. 

B. Overview of Comments Received 

The Bureau reviewed the 

approximately 70 comment letters 

submitted to the Board and in one case 

directly to the Bureau concerning the 

Board’s 2011 Escrows Proposal. These 

comments came from mortgage 

creditors, banks, savings associations, 

credit unions, industry trade groups, 

Federal agencies and officials, 

individual consumers, and consumer 

advocates. In addition to this overview, 

comments received are discussed in 

more detail, where applicable, in part V 

below. 

Commenters generally supported the 

Board’s effort to implement the new 

Dodd-Frank Act escrow requirements. 

However, industry commenters 

expressed concerns about the costs of 

implementation, particularly with 

respect to the proposed disclosure 

requirements. In addition, several 

industry commenters recommended that 

the proposed exemptions from the 

escrow requirement for higher-priced 

mortgage loans be broadened to include: 

(1) Transactions a creditor holds in 

portfolio; (2) transactions made by 

community banks and local credit 

unions; (3) transactions made in broader 

areas than the Board’s proposed 

definitions of ‘‘rural’’ and 

‘‘underserved’’; and (4) transactions for 

certain chattel dwellings, including 

manufactured homes, trailers, and 

house boats. 

In contrast, consumer advocates were 

concerned that certain provisions could 

allow creditors to skirt the proposed 

rule. Consumer advocates suggested a 

narrower exemption than the one 

proposed by the Board to ensure that 

higher-priced mortgage loans made in 

well-served rural areas would be subject 

to the escrow requirement. 

C. Other Rulemakings 

In addition to this final rule, the 

Bureau is adopting several other final 

rules and issuing one proposal, all 

relating to mortgage credit to implement 

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

final rule jointly with other Federal 

agencies to implement requirements for 

mortgage appraisals in title XIV. Each of 

the final rules follows a proposal issued 

in 2011 by the Board or in 2012 by the 


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10 76 FR 27390 (May 11, 2011). 

11 77 FR 49090 (Aug. 15,2012). 

12 77 FR 57200 (Sept. 17, 2012) (RESPA); 77 FR 

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

13 77 FR 55272 (Sept. 7, 2012). 

14Specifically, the Board of Governors of the 

Federal Reserve System, the Office of the 

Comptroller of the Currency, the Federal Deposit 

Insurance Corporation, the National Credit Union 

Administration, and the Federal Housing Finance 

Agency. 

15 77 FR 54722 (Sept. 5, 2012). 

16 77 FR 50390 (Aug. 21, 2012). 

17 77 FR 51116 (Aug. 23, 2012). 

Bureau alone or jointly with other 

Federal agencies. Collectively, these 

proposed and final rules are referred to 

as the Title XIV Rulemakings. 

• Ability to Repay: The Bureau is 

finalizing a rule, following a May 2011 

proposal issued by the Board (the 

Board’s 2011 ATR Proposal),10 to 

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

determine that a consumer has a 

reasonable ability to repay covered 

transactions and establishing standards 

for compliance, such as by making a 

‘‘qualified mortgage,’’ and (2) 

establishing certain limitations on 

prepayment penalties, pursuant to TILA 

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

1414. 15 U.S.C. 1639c. The Bureau’s 

final rule is referred to as the 2013 ATR 

Final Rule. Simultaneously with the 

2013 ATR Final Rule, the Bureau is 

issuing a proposal to amend the final 

rule implementing the ability-to-repay 

requirements, including by the addition 

of exemptions for certain nonprofit 

creditors and certain homeownership 

stabilization programs and a definition 

of a ‘‘qualified mortgage’’ for certain 

mortgages made and held in portfolio by 

small creditors (the 2013 ATR 

Concurrent Proposal). The Bureau 

expects to act on the 2013 ATR 

Concurrent Proposal on an expedited 

basis, so that any exceptions or 

adjustments to the 2013 ATR Final Rule 

can take effect simultaneously with that 

rule. 

• HOEPA: Following its July 2012 

proposal (the 2012 HOEPA Proposal),11

the Bureau is issuing a final rule to 

implement Dodd-Frank Act 

requirements expanding protections for 

‘‘high-cost mortgages’’ under the 

Homeownership and Equity Protection 

Act (HOEPA), pursuant to TILA sections 

103(bb) and 129, as amended by DoddFrank Act sections 1431 through 1433. 

15 U.S.C. 1602(bb) and 1639. The 

Bureau also is finalizing rules to 

implement certain title XIV 

requirements concerning 

homeownership counseling, including a 

requirement that lenders provide lists of 

homeownership counselors to 

applicants for federally related mortgage 

loans, pursuant to RESPA section 5(c), 

as amended by Dodd-Frank Act section 

1450. 12 U.S.C. 2604(c). The Bureau’s 

final rule is referred to as the 2013 

HOEPA Final Rule. 

• Servicing: Following its August 

2012 proposals (the 2012 RESPA 

Servicing Proposal and 2012 TILA 

Servicing Proposal),12 the Bureau is 

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

information requests, and payment 

crediting, as well as requirements for 

mortgage loan periodic statements and 

adjustable-rate mortgage reset 

disclosures, pursuant to section 6 of 

RESPA and sections 128, 128A, 129F, 

and 129G of TILA, as amended or 

established by Dodd-Frank Act sections 

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

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

1639g. The Bureau also is finalizing 

rules on early intervention for troubled 

and delinquent borrowers, and loss 

mitigation procedures, pursuant to the 

Bureau’s authority under section 6 of 

RESPA, as amended by Dodd-Frank Act 

section 1463, to establish obligations for 

mortgage servicers that it finds to be 

appropriate to carry out the consumer 

protection purposes of RESPA, and its 

authority under section 19(a) of RESPA 

to prescribe rules necessary to achieve 

the purposes of RESPA. The Bureau’s 

final rule under RESPA with respect to 

mortgage servicing also establishes 

requirements for general servicing 

standards policies and procedures and 

continuity of contact pursuant to its 

authority under section 19(a) of RESPA. 

The Bureau’s final rules are referred to 

as the 2013 RESPA Servicing Final Rule 

and the 2013 TILA Servicing Final Rule, 

respectively. 

• Loan Originator Compensation: 

Following its August 2012 proposal (the 

2012 Loan Originator Proposal),13 the 

Bureau is issuing a final rule to 

implement provisions of the DoddFrank Act requiring certain creditors 

and loan originators to meet certain 

duties of care, including qualification 

requirements; requiring the 

establishment of certain compliance 

procedures by depository institutions; 

prohibiting loan originators, creditors, 

and the affiliates of both from receiving 

compensation in various forms 

(including based on the terms of the 

transaction) and from sources other than 

the consumer, with specified 

exceptions; and establishing restrictions 

on mandatory arbitration and financing 

of single premium credit insurance, 

pursuant to TILA sections 129B and 

129C as established by Dodd-Frank Act 

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

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

rule is referred to as the 2013 Loan 

Originator Final Rule. 

• Appraisals: The Bureau, jointly 

with other Federal agencies,14 is issuing 

a final rule implementing Dodd-Frank 

Act requirements concerning appraisals 

for higher-risk mortgages, pursuant to 

TILA section 129H as established by 

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

1639h. This rule follows the agencies’ 

August 2012 joint proposal (the 2012 

Interagency Appraisals Proposal).15 The 

agencies’ joint final rule is referred to as 

the 2013 Interagency Appraisals Final 

Rule. In addition, following its August 

2012 proposal (the 2012 ECOA 

Appraisals Proposal),16 the Bureau is 

issuing a final rule to implement 

provisions of the Dodd-Frank Act 

requiring that creditors provide 

applicants with a free copy of written 

appraisals and valuations developed in 

connection with applications for 

transactions secured by a first lien on a 

dwelling, pursuant to section 701(e) of 

the Equal Credit Opportunity Act 

(ECOA) as amended by Dodd-Frank Act 

section 1474. 15 U.S.C. 1691(e). The 

Bureau’s final rule is referred to as the 

2013 ECOA Appraisals Final Rule. 

The Bureau is not at this time 

finalizing proposals concerning various 

disclosure requirements that were 

added by title XIV of the Dodd-Frank 

Act, integration of mortgage disclosures 

under TILA and RESPA, or a simpler, 

more inclusive definition of the finance 

charge for purposes of disclosures for 

closed-end mortgage transactions under 

Regulation Z. The Bureau expects to 

finalize these proposals and to consider 

whether to adjust regulatory thresholds 

under the Title XIV Rulemakings in 

connection with any change in the 

calculation of the finance charge later in 

2013, after it has completed quantitative 

testing, and any additional qualitative 

testing deemed appropriate, of the forms 

that it proposed in July 2012 to combine 

TILA mortgage disclosures with the 

good faith estimate (RESPA GFE) and 

settlement statement (RESPA settlement 

statement) required under the Real 

Estate Settlement Procedures Act 

(RESPA), pursuant to Dodd-Frank Act 

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

RESPA and 105(b) of TILA, as amended 

by Dodd-Frank Act sections 1098 and 

1100A, respectively (the 2012 TILA– 

RESPA Proposal).17 Accordingly, the 

Bureau already has issued a final rule 

delaying implementation of various 


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4730 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 

18 77 FR 70105 (Nov. 23, 2012). 

19Of the several final rules being adopted under 

the Title XIV Rulemakings, six entail amendments 

to Regulation Z, with the only exceptions being the 

2013 RESPA Servicing Final Rule (Regulation X) 

and the 2013 ECOA Appraisals Final Rule 

(Regulation B); the 2013 HOEPA Final Rule also 

amends Regulation X, in addition to Regulation Z. 

The six Regulation Z final rules involve numerous 

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

parallel provisions. Thus, adopting some of those 

amendments without also adopting certain other, 

closely related provisions would create significant 

technical issues, e.g., new provisions containing 

cross-references to other provisions that do not yet 

exist, which could undermine the ability of 

creditors and other parties subject to the rules to 

understand their obligations and implement 

appropriate systems changes in an integrated and 

efficient manner. 

affected title XIV disclosure 

provisions.18 The Bureau’s approaches 

to coordinating the implementation of 

the Title XIV Rulemakings and to the 

finance charge proposal are discussed in 

turn below. 

Coordinated Implementation of Title 

XIV Rulemakings 

As noted in all of its foregoing 

proposals, the Bureau regards each of 

the Title XIV Rulemakings as 

components of a single, comprehensive 

undertaking; each of them affecting 

aspects of the mortgage industry and its 

regulation. Many of these rules intersect 

with one or more of the others. 

Accordingly, as noted in its proposals, 

the Bureau is coordinating carefully the 

Title XIV Rulemakings, both in terms of 

their interrelated substantive provisions 

and, in recognition thereof, particularly 

with respect to their effective dates. The 

Dodd-Frank Act requirements to be 

implemented by the Title XIV 

Rulemakings generally will take effect 

on January 21, 2013, unless final rules 

implementing those requirements are 

issued on or before that date and 

provide for a different effective date. See 

Dodd-Frank Act section 1400(c), 15 

U.S.C. 1601 note. In addition, some of 

the Title XIV Rulemakings are to take 

effect no later than one year after they 

are issued. Id. 

The comments on the appropriate 

implementation date for this final rule 

are discussed in detail below in part VI 

of this notice. In general, however, 

consumer advocates requested that the 

Bureau put the protections in the Title 

XIV Rulemakings into effect as soon as 

practicable. In contrast, the Bureau 

received some industry comments 

indicating that implementing so many 

new requirements at the same time 

would create a significant cumulative 

burden for creditors. In addition, many 

commenters also acknowledged the 

advantages of implementing multiple 

revisions to the regulations in a 

coordinated fashion.19 Thus, a tension 

exists between coordinating the 

adoption of the Title XIV Rulemakings 

and facilitating industry’s 

implementation of such a large set of 

new requirements. Some have suggested 

that the Bureau resolve this tension by 

adopting a sequenced implementation, 

while others have requested that the 

Bureau simply provide a longer 

implementation period for all of the 

final rules. 

The Bureau recognizes that many of 

the new provisions will require 

creditors to make changes to automated 

systems and, further, that most 

administrators of large systems are 

reluctant to make too many changes to 

their systems at once. At the same time, 

however, the Bureau notes that the 

Dodd-Frank Act established virtually all 

of these changes to institutions’ 

compliance responsibilities, and 

contemplated that they be implemented 

in a relatively short period of time. And, 

as already noted, the extent of 

interaction among many of the Title XIV 

Rulemakings necessitates that many of 

their provisions take effect together. 

Finally, notwithstanding commenters’ 

expressed concerns for cumulative 

burden, the Bureau expects that 

creditors actually may realize some 

efficiencies from adapting their systems 

for compliance with multiple new, 

closely related requirements at once, 

especially if given sufficient overall 

time to do so. 

Accordingly, the Bureau is requiring 

that, as a general matter, creditors and 

other affected persons begin complying 

with the final rules on January 10, 2014. 

As noted above, section 1400(c) of the 

Dodd-Frank Act requires that some 

provisions of the Title XIV Rulemakings 

take effect no later than one year after 

the Bureau issues them. Accordingly, 

the Bureau is establishing January 10, 

2014, one year after issuance of the 

Bureau’s 2013 ATR, Escrows, and 

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

the title XIV final rules), as the baseline 

effective date for most of the Title XIV 

Rulemakings. The Bureau believes that, 

on balance, this approach will facilitate 

the implementation of the rules’ 

provisions, while also affording 

creditors sufficient time to implement 

the more complex or resource-intensive 

new requirements. 

The Bureau has identified certain 

rulemakings or selected aspects thereof, 

however, that do not present significant 

implementation burdens for industry. 

Accordingly, the Bureau is setting 

earlier effective dates for those final 

rules or certain aspects thereof, as 

applicable. Those effective dates are set 

forth and explained in the Federal 

Register notices for those final rules. 

More Inclusive Finance Charge Proposal 

As noted above, the Bureau proposed 

in the 2012 TILA–RESPA Proposal to 

make the definition of finance charge 

more inclusive, thus rendering the 

finance charge and annual percentage 

rate a more useful tool for consumers to 

compare the cost of credit across 

different alternatives. 77 FR 51116, 

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

definition would include additional 

costs that are not currently counted, it 

would cause the finance charges and 

APRs on many affected transactions to 

increase. This in turn could cause more 

such transactions to become subject to 

various compliance regimes under 

Regulation Z. Specifically, the finance 

charge is central to the calculation of a 

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

in turn has been (and remains) a 

coverage threshold for the special 

protections afforded ‘‘high-cost 

mortgages’’ under HOEPA. Points and 

fees also will be subject to a 3-percent 

limit for purposes of determining 

whether a transaction is a ‘‘qualified 

mortgage’’ under the 2013 ATR Final 

Rule. Meanwhile, the APR serves as a 

coverage threshold for HOEPA 

protections as well as for certain 

protections afforded ‘‘higher-priced 

mortgage loans’’ under § 1026.35, 

including the mandatory escrow 

account requirements being amended by 

this final rule. Finally, because the 2013 

Interagency Appraisals Final Rule uses 

the same APR-based coverage test as is 

used for identifying higher-priced 

mortgage loans, the APR affects that 

rulemaking as well. Thus, the proposed 

more inclusive finance charge would 

have had the indirect effect of 

increasing coverage under HOEPA and 

the escrow and appraisal requirements 

for higher-priced mortgage loans, as 

well as decreasing the number of 

transactions that may be qualified 

mortgages—even holding actual loan 

terms constant—simply because of the 

increase in calculated finance charges, 

and consequently APRs, for closed-end 

mortgage transactions generally. 

As noted above, these expanded 

coverage consequences were not the 

intent of the more inclusive finance 

charge proposal. Accordingly, as 

discussed more extensively in the 

Escrows Proposal, the HOEPA Proposal, 

the ATR Proposal, and the Interagency 

Appraisals Proposal, the Board and 

subsequently the Bureau (and other 

agencies) sought comment on certain 

adjustments to the affected regulatory 

thresholds to counteract this 


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Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 4731 

20These notices extended the comment period on 

the more inclusive finance charge and 

corresponding regulatory threshold adjustments 

under the 2012 TILA–RESPA and HOEPA 

Proposals. It did not change any other aspect of 

either proposal. 

21 12 U.S.C. 5581(a)(1). 

22See Dodd-Frank Act section 1002(14), 12 U.S.C. 

5481(14) (defining ‘‘Federal consumer financial 

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

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

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

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

include TILA). 

unintended effect. First, the Board and 

then the Bureau proposed to adopt a 

‘‘transaction coverage rate’’ for use as 

the metric to determine coverage of 

these regimes in place of the APR. The 

transaction coverage rate would have 

been calculated solely for coverage 

determination purposes and would not 

have been disclosed to consumers, who 

still would have received only a 

disclosure of the expanded APR. The 

transaction coverage rate calculation 

would exclude from the prepaid finance 

charge all costs otherwise included for 

purposes of the APR calculation except 

charges retained by the creditor, any 

mortgage broker, or any affiliate of 

either. Similarly, the Board and Bureau 

proposed to reverse the effects of the 

more inclusive finance charge on the 

calculation of points and fees; the points 

and fees figure is calculated only as a 

HOEPA and qualified mortgage coverage 

metric and is not disclosed to 

consumers. The Bureau also sought 

comment on other potential mitigation 

measures, such as adjusting the numeric 

thresholds for particular compliance 

regimes to account for the general shift 

in affected transactions’ APRs. 

The Bureau’s 2012 TILA–RESPA 

Proposal sought comment on whether to 

finalize the more inclusive finance 

charge proposal in conjunction with the 

Title XIV Rulemakings or with the rest 

of the TILA–RESPA Proposal 

concerning the integration of mortgage 

disclosure forms. See 77 FR 51116, 

51125 (Aug. 23, 2012). Upon additional 

consideration and review of comments 

received, the Bureau decided to defer a 

decision whether to adopt the more 

inclusive finance charge proposal and 

any related adjustments to regulatory 

thresholds until it later finalizes the 

TILA–RESPA Proposal. See 77 FR 54843 

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

2012).20 Accordingly, this final rule as 

well as the 2013 HOEPA, ATR, and 

Interagency Appraisals Final Rules all 

are deferring any action on their 

respective proposed adjustments to 

regulatory thresholds. 

IV. Legal Authority 

The Bureau is issuing this final rule 

on January 10, 2013, in accordance with 

12 CFR 1074.1, pursuant to its authority 

under TILA and the Dodd-Frank Act. 

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

1604(a). On July 21, 2011, section 1061 

of the Dodd-Frank Act transferred to the 

Bureau the ‘‘consumer financial 

protection functions’’ previously vested 

in certain other Federal agencies, 

including the Board. The term 

‘‘consumer financial protection 

function’’ is defined to include ‘‘all 

authority to prescribe rules or issue 

orders or guidelines pursuant to any 

Federal consumer financial law, 

including performing appropriate 

functions to promulgate and review 

such rules, orders, and guidelines.’’ 21

TILA is defined as a Federal consumer 

financial law. 22 Accordingly, the 

Bureau has general authority to issue 

regulations pursuant to TILA. 

A. Escrow Provisions Under the DoddFrank Act 

As discussed above, the Dodd-Frank 

Act amended TILA to mandate escrow 

accounts for certain consumer credit 

transactions secured by a first lien on a 

consumer’s principal dwelling. Sections 

1461 and 1462 of the Dodd-Frank Act 

create new TILA section 129D, which 

establishes a minimum period for which 

escrows must be held for higher-priced 

mortgage loans, creates a rate threshold 

for determining whether escrow 

accounts are required for ‘‘jumbo 

loans,’’ whose principal amounts exceed 

the maximum eligible for purchase by 

Freddie Mac, and adds two disclosure 

requirements concerning escrow 

accounts. The Dodd-Frank Act further 

provides that the Bureau may exempt 

certain creditors from the escrow 

requirement by regulation. See TILA 

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

addition, the Dodd-Frank Act provides 

the Bureau with authority to prescribe 

regulations that revise, add to, or 

subtract from the criteria that describe 

when an escrow account is required 

upon a finding that such regulations are 

in the interest of the consumers and in 

the public interest. See 15 U.S.C. 1639d 

note. 

B. Other Rulemaking and Exception 

Authorities 

This final rule also relies on other 

rulemaking and exception authorities 

specifically granted to the Bureau by 

TILA and the Dodd-Frank Act, 

including the authorities discussed 

below. 

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.’’ Id. Thus, 

strengthened competition among 

financial institutions 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 

therewith. This amendment clarified the 

Bureau’s authority under TILA section 

105(a) to prescribe requirements beyond 

those specifically listed in the statute 

that meet the standards outlined in 

section 105(a), which include 

effectuating all of TILA’s purposes. 

Therefore, the Bureau believes that its 

authority under TILA section 105(a) to 

make exceptions, adjustments, and 

additional provisions that the Bureau 

finds are necessary or proper to 

effectuate the purposes of TILA applies 

with respect to the purpose of section 

129D. That purpose is to ensure that 

consumers understand and appreciate 

the full cost of home ownership. The 

purpose of TILA section 129D is also 

informed by the findings articulated in 

section 129B(a) that economic 

stabilization would be enhanced by the 


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4732 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 

23See Dodd-Frank Act section 1002(14), 12 U.S.C. 

5481(14) (defining ‘‘Federal consumer financial 

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

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

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

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

include TILA). 

24This section-by-section analysis discusses the 

Board’s 2011 Escrows Proposal by reference to the 

Board’s Regulation Z, 12 CFR part 226, which the 

Board proposed to amend, and discusses this final 

rule by reference to the Bureau’s Regulation Z, 12 

CFR part 1026, which this final rule amends. 

protection, limitation, and regulation of 

the terms of residential mortgage credit 

and the practices related to such credit, 

while ensuring that responsible and 

affordable mortgage credit remains 

available to consumers. See 15 U.S.C. 

1639b(a). 

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 therewith. 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 the purposes of TILA section 

129D, and the findings of TILA, 

including strengthening competition 

among financial institutions and 

promoting economic stabilization, and 

the findings of TILA section 129B(a)(1) 

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. 

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.23

Accordingly, in adopting this final rule, 

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 of the Dodd-Frank Act and 

prevent evasion of those laws. 

V. Section-by-Section Analysis 

Section 1026.19 Certain Mortgage and 

Variable-Rate Transactions 

In the 2011 Escrows Proposal, the 

Board proposed a new § 226.19(f) to 

implement the account disclosure 

requirements of TILA section 129D, as 

enacted by Sections 1461 and 1462 of 

the Dodd- Frank Act. Proposed 

§ 226.19(f) 24 would have required 

disclosures for the establishment or 

non-establishment of an escrow account 

in connection with consummation of a 

transaction secured by a first lien, but 

not a subordinate lien. As discussed 

above, on November 23, 2012, the 

Bureau published in the Federal 

Register a rule that delays the 

implementation of certain disclosure 

requirements contained in title XIV of 

the Dodd-Frank Act, including those 

contained in sections 1461 and 1462. 

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

Consequently, the Bureau will not be 

adopting a new § 1026.19(f) in this rule. 

Section 1026.20 Subsequent 

Disclosure Requirements 

In the 2011 Escrows Proposal, the 

Board proposed a new § 226.20(d) to 

implement the disclosure requirements 

of TILA sections 129D(j)(1)(B) and 

129D(j)(2), as enacted by section 1462 of 

the Dodd-Frank Act. TILA section 

129D(j)(1)(B) requires a creditor or 

servicer to provide the disclosures set 

forth in TILA section 129D(j)(2) when a 

consumer requests closure of an escrow 

account that was established in 

connection with a transaction secured 

by real property. Proposed § 226.20(d) 

would have directed the creditor or 

servicer to disclose the information 

about escrow accounts in accordance 

with certain format and timing 

requirements. As previously noted, the 

Bureau has delayed the implementation 

of certain disclosure requirements 

contained in title XIV of the Dodd-Frank 

Act, including those contained in 

sections 1461 and 1462. See 77 FR 

70105 (Nov. 23, 2012). Consequently, 

the Bureau will not be adopting a new 

§ 1026.20(d) in this rule. 

Section 1026.34 Prohibited Acts or 

Practices in Connection With High-Cost 

Mortgages 

34(a) Prohibited Acts or Practices for 

High-Cost Mortgages 34(a)(4)(i) 

Mortgage-Related Obligations 

In the 2011 Escrows Proposal, the 

Board proposed amendments to the 

definition of mortgage-related 

obligations in § 226.34(a)(4)(i) and 

comment 34(a)(4)(i)–1, which contained 

cross-references to the definition of 

mortgage-related insurance in 

§ 226.35(b)(3)(i). Because the Board 

proposed removing and reserving 

§ 226.35(b)(3)(i) and preserving the 

substance of that provision in the 

proposed new § 226.45(b)(1), the Board 

made conforming amendments to 

§ 226.34(a)(4)(i) and staff comment 

34(a)(4)(i))–1 to reflect the new crossreference. Section 1026.34(a)(4)(i) and 

staff comment 34(a)(4)(i)–1 are being 

amended under the 2013 HOEPA Final 

Rule to remove the cross-reference to 

§ 1026.35(b)(3)(i). Consequently, the 

Bureau will not be adopting conforming 

amendments in this rule. 

Section 1026.35 Requirements for 

Higher-Priced Mortgage Loans 

35(a) Definitions 

35(a)(1) 

As noted above, the Dodd-Frank Act 

substantially codified the Board’s 

escrow requirement for higher-priced 

mortgage loans, but with certain 

differences. One of those differences is 

the higher threshold above the average 

prime offer rate established by the 

Dodd-Frank Act for determining when 

escrow accounts are required for 

transactions that exceed the maximum 

principal balance eligible for sale to 

Freddie Mac (‘‘jumbo’’ transactions). In 

general, the coverage thresholds are 1.5 

percentage points above the average 

prime offer rate for first-lien 

transactions and 3.5 percentage points 

above the average prime offer rate for 

subordinate-lien transactions. Under 

section 1461 of the Dodd-Frank Act, 

however, Congress established a new 

threshold of 2.5 percentage points above 

the average prime offer rate for ‘‘jumbo’’ 

transactions. Under an interim final rule 

published concurrently with the Board’s 

2011 Escrows Proposal, the Board 

implemented this special coverage test 

for ‘‘jumbo’’ transactions by amending 

its existing escrow requirement for 

higher-priced mortgage loans in 

§ 226.35(b)(3). See 76 FR 11319 (Mar. 2, 

2011) (the Board’s 2011 ‘‘Jumbo’’ Final 

Rule). 

Under the Board’s 2011 Escrows 

Proposal, proposed § 226.45(a)(1) would 

have provided that a higher-priced 

mortgage loan is a consumer credit 

transaction secured by the consumer’s 

principal dwelling that exceeds the 

applicable pricing threshold as of the 

date the transaction’s rate is set. The 

Board’s proposed § 226.45(a)(1) 

incorporated the special, separate 

coverage threshold for ‘‘jumbo’’ 

transactions, as provided by the DoddFrank Act. In addition, as discussed 

above, the Board’s proposed 

§ 226.45(a)(1) would have based 

‘‘higher-priced mortgage loan’’ status on 

a comparison of the transaction’s 


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Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 4733 

25The Bureau may prescribe rules that revise, add 

to, or subtract from the criteria of section 129D(b) 

of TILA if the Bureau determines that such rules are 

in the interest of consumers and the public interest. 

See 15 U.S.C. 1639d note. These exceptions are also 

justified by section 105(a) of TILA which provides 

that the Bureau in its regulations to carry out the 

purposes of TILA 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. See 15 U.S.C. 1604(a). 

26The Bureau notes that open-end credit 

transactions are excluded from section 129D(a) of 

TILA under Dodd-Frank Act section 1461. See 15 

U.S.C. 1639d. 

27Reverse mortgages are also excluded from 

section 129D(a) of TILA under Dodd-Frank Act 

section 1461. See 15 U.S.C. 1639d. 

28See, e.g., Consumer Financial Protection 

Bureau, Reverse Mortgages: Report to Congress 

(June 28, 2012) available at: http:// 

files.consumerfinance.gov/a/assets/documents/ 

201206_cfpb_Reverse_Mortgage_Report.pdf. 

‘‘transaction coverage rate,’’ rather than 

its APR, to the average prime offer rate. 

A few commenters suggested that the 

proposed thresholds should be 

reconsidered. However, the Bureau 

believes the current thresholds capture 

the expansion intended by Congress and 

is therefore generally adopting proposed 

§ 226.45(a)(1) as § 1026.35(a)(1). As 

discussed above, however, the Bureau is 

suspending consideration of the 

transaction coverage rate until it 

considers the proposed expansion of the 

definition of finance charge in 

connection with the TILA–RESPA Final 

Rule. Accordingly, the final rule 

continues to base the definition of 

higher-priced mortgage loans on a 

comparison of the transaction’s APR to 

the average prime offer rate. The Bureau 

will consider comments received 

concerning the transaction coverage rate 

proposal in connection with the TILA– 

RESPA Final Rule. Comment 35(a)(1)–1 

clarifies how to determine if a 

transaction is a higher-priced mortgage 

loan by comparing the annual 

percentage rate to the average prime 

offer rate. Comment 35(a)(1)–2 clarifies 

when the comparison between the 

annual percentage rate and the average 

prime offer rate should occur. Comment 

35(a)(1)–3 clarifies how to determine 

whether a transaction is a higher-priced 

mortgage loan when the principal 

balance exceeds the limit in effect as of 

the date the transaction’s rate is set for 

the maximum principal obligation 

eligible for purchase by Freddie Mac. 

35(a)(2) 

The Bureau is not altering current 

§ 1026.35(a)(2), which defines the 

‘‘average prime offer rate’’ as the annual 

percentage rate derived from average 

interest rates, points, and other 

transaction pricing terms currently 

offered to consumers by a representative 

sample of creditors for mortgage 

transactions that have low-risk pricing 

characteristics. The Bureau is, however, 

adding comment 35(a)(2)–3 to clarify 

that the average prime offer rate in 

§ 1026.35 has the same meaning as in 

Regulation C, 12 CFR part 1003. See 12 

CFR 1003.4(a)(12)(ii). 

35(b) Escrow Accounts 

35(b)(1) 

As amended by the Dodd-Frank Act, 

TILA section 129D(a) contains the 

general requirement that an escrow 

account be established for any consumer 

credit transaction secured by a first lien 

on a consumer’s principal dwelling. 

TILA section 129D(b), however, restricts 

that general requirement to four 

specified circumstances: (1) Where an 

escrow account is required by Federal or 

State law; (2) where the transaction is 

made, guaranteed, or insured by a State 

or Federal agency; (3) where the 

transaction’s annual percentage rate 

exceeds the average prime offer rate by 

prescribed amounts; and (4) where an 

escrow account is ‘‘required pursuant to 

regulation.’’ 

The Board’s proposed § 226.45(b)(1) 

implemented only the third of the four 

circumstances, pursuant to TILA section 

129D(b)(3), because the other three 

either are self-effectuating or are 

effectuated by other agencies’ 

regulations. Nonetheless, the Bureau 

recognizes that those other three 

provisions may have implications for 

existing State and Federal credit 

programs, under which the applicable 

agencies may need to revise their own 

underlying guidelines to accommodate 

or otherwise reflect the statutory 

changes. Moreover, the Board’s 

proposed § 226.45(b)(1) would have 

stated that, for purposes of § 226.45(b), 

‘‘escrow account’’ has the same meaning 

as under Regulation X. This proposed 

provision paralleled existing 

§ 226.35(b)(3)(iv). 

No comments were received on the 

scope and structure of § 226.45(b)(1). 

The Bureau is adopting the proposed 

language with certain technical changes 

as § 1026.35(b)(1). 

35(b)(2) Exemptions 

Under existing regulations, certain 

categories of transactions are exempt 

from the escrow requirement. The Board 

proposed § 226.45(a)(3) and (b)(2)(i) and 

(ii) to reflect these provisions. The 

Board’s proposed § 226.45(a)(3) would 

have provided that a ‘‘higher-priced 

mortgage loan’’ does not include a 

transaction to finance the initial 

construction of a dwelling, a temporary 

or ‘‘bridge’’ transaction with a term of 

twelve months or less, a reverse 

mortgage transaction, or a home equity 

line of credit. This provision is identical 

to existing § 1026.35(a)(3) (adopted as 

§ 226.35(a)(3) in the 2008 HOEPA Final 

Rule), which provides that the term 

‘‘higher-priced mortgage loan’’ does not 

include a transaction to finance the 

initial construction of a dwelling, a 

temporary or ‘‘bridge’’ transaction with 

a term of twelve months or less, a 

reverse mortgage transaction, or a home 

equity line of credit. The Board’s 

proposed § 226.45(b)(2)(i) would have 

provided that escrow accounts need not 

be established for transactions secured 

by shares in a cooperative. This 

provision would track existing 

§ 1026.35(b)(3)(ii)(A). It also is 

consistent with new TILA section 

129D(e), as added by section 1461 of the 

Dodd-Frank Act. 

In light of the way in which the DoddFrank Act has expanded on various 

elements of the 2008 HOEPA Final Rule, 

the Bureau believes that a more tailored 

approach is appropriate to specify what 

types of transactions are exempt from 

specific substantive requirements in 

Regulation Z. Accordingly, with the 

exception of home equity lines of credit 

(HELOCs), the Bureau is using its 

exemption authority under TILA section 

129D 25 to recodify the exemptions that 

were formerly located in § 1026.35(a)(3) 

and § 1026.35(b)(3)(ii)(A) in the 

exemptions from coverage of the escrow 

requirement under new § 1026.35(b)(2). 

The separate exemption for HELOCs is 

no longer necessary because 

§ 1026.35(a)(1) has been modified to 

apply only to closed-end consumer 

credit transactions.26 The Bureau 

believes that the use of its exemption 

authority is appropriate given the nature 

of the transactions at issue and would 

benefit consumers and industry alike. 

Given that reverse mortgages are unique 

transactions that are currently addressed 

by § 1026.33,27 the Bureau believes it is 

in the interest of consumers and the 

public interest to pursue a course 

involving further review of § 1026.33 

and to consider whether new or 

different protections would be 

appropriate for reverse mortgages at a 

later date.28 In addition, because of the 

nature of construction-only and bridge 

loan transactions, the Bureau believes 

that exempting these transactions is in 

the interest of consumers and the public 

interest. In both cases, the payments and 

amounts of property taxes and hazard 

insurance will depend on various timesensitive factors for loan transactions 

that generally do not exist for more than 

one or two years, making maintaining 


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4734 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 

an escrow account for a minimum of 

five years impractical. The 

recodification of the other exemptions 

from the escrows requirements is purely 

for organizational purposes and has no 

substantive effect. Exemptions from the 

new appraisal requirements are being 

finalized separately by the 2013 

Interagency Appraisals Final Rule, in 

§ 1026.35(c). 

35(b)(2)(i) 

The Board’s proposed § 226.45(b)(2)(i) 

would have provided that escrow 

accounts need not be established for 

transactions secured by shares in a 

cooperative, tracking the existing 

regulation, which is now located at 

§ 1026.35(b)(3)(ii)(A). The Bureau is 

adopting this proposal with certain 

conforming changes as 

§ 1026.35(b)(2)(i)(A). The Bureau is 

adopting the Board’s proposed 

exemption for transactions to finance 

the initial construction of a dwelling as 

§ 1026.35(b)(2)(i)(B). The Bureau is 

adopting the Board’s proposed 

exemption for ‘‘bridge’’ loan 

transactions as § 1026.35(b)(2)(i)(C). 

Finally, the Bureau is adopting the 

Board’s proposed exemption for reverse 

mortgage transactions as 

§ 1026.35(b)(2)(i)(D) with certain 

conforming changes. Comment 

35(b)(2)(i)–1 clarifies the operation of 

the exemption for transactions to 

finance the initial construction of a 

dwelling under § 1026.35(b)(2)(i)(B) in 

relation to a construction-to-permanent 

mortgage transaction, noting that where 

a transaction is determined to be a 

higher-priced mortgage loan, only the 

permanent phase of the transaction is 

subject to § 1026.35. 

35(b)(2)(ii) 

As added by section 1461 of the 

Dodd- Frank Act, new TILA section 

129D(e) codifies the current provision 

stating that escrow accounts that are 

established in connection with 

transactions secured by condominium 

units need not reserve funds to cover 

mortgage-related insurance, found in 

existing § 1026.35(b)(3)(ii)(B), and 

expands it to other, similar ownership 

arrangements involving governing 

associations that have an obligation to 

maintain a master insurance policy. The 

Board’s proposed § 226.45(b)(2)(ii) 

would have provided that insurance 

premiums need not be included in 

escrow accounts for transactions 

secured by dwellings in condominiums, 

planned unit developments (PUDs), or 

similar arrangements in which 

ownership requires participation in a 

governing association, where the 

governing association has an obligation 

to the dwelling owners to maintain a 

master policy insuring all dwellings. 

Several commenters suggested that 

even with this expanded definition 

other ownership structures might not be 

captured by the Board’s proposed 

exemption. The Bureau is responding to 

these comments by revising the 

proposed language to adopt the 

umbrella term ‘‘common interest 

community,’’ which one commenter had 

suggested would be sufficiently broad to 

capture the various arrangements under 

which a governing association has an 

obligation to the dwelling owners to 

maintain a master policy insuring all 

dwellings. The Bureau is adopting the 

Board’s proposed comment 45(b)(2)(ii)– 

1 as comment 35(b)(2)(ii)–1, which 

parallels existing comment 

35(b)(3)(ii)(B)–1, but with conforming 

amendments to reflect the expanded 

scope of the exemption. The Bureau also 

is adopting the Board’s proposed 

comment 45(b)(2)(ii)–2 as comment 

A22b)(2)(ii)–2 to provide details about 

the nature of PUDs and to clarify that 

the exemption is available for not only 

condominiums and PUDs but also any 

other type of property ownership 

arrangement that has a governing 

association with an obligation to 

maintain a master insurance policy. 

Following a request from one 

commenter, the Bureau additionally 

adds comment 35(b)(2)(ii)–3 to clarify 

that properties with multiple governing 

associations would also qualify for the 

limited exemption provided in 

§ 1026.35(b)(2)(ii). 

35(b)(2)(iii) 

As adopted by Dodd-Frank Act 

section 1461, TILA section 129D(c) 

authorizes the Bureau to exempt from 

the higher-priced mortgage loan escrow 

requirement a creditor that: 

(1) Operates predominantly in rural or 

underserved areas; (2) together with all 

affiliates, has total annual mortgage loan 

originations that do not exceed a limit 

set by the Bureau; (3) retains its 

mortgage obligations in portfolio; and 

(4) meets any asset-size threshold and 

any other criteria as the Bureau may 

establish. As discussed above, DoddFrank Act section 1412 ability-to-repay 

provisions contain a similar set of 

criteria with regard to certain balloonpayment mortgages originated and held 

in portfolio by creditors that operate 

predominantly in rural or underserved 

areas. The statute authorizes the Bureau 

to issue regulations permitting certain 

balloon-payment mortgages issued by 

the specified creditors to receive a 

presumption of compliance with the 

ability-to-repay requirements as 

‘‘qualified mortgages,’’ even though the 

general qualified mortgage criteria 

prohibit balloon-payment features. 

Specifically, in addition to having to 

meet certain transaction-specific 

features and underwriting requirements, 

balloon-payment qualified mortgages 

may be made only by a creditor that: 

(1) Operates predominantly in rural or 

underserved areas; (2) together with all 

affiliates, has total annual residential 

mortgage transaction originations that 

do not exceed a limit set by the Bureau; 

(3) retains the balloon-payment 

mortgages in portfolio; and (4) meets 

any asset-size threshold and any other 

criteria as the Bureau may establish. See 

TILA section 129C(b)(2)(E), 15 U.S.C. 

1639c(b)(2)(E). 

The Board interpreted the two 

provisions as serving similar but not 

identical purposes, and thus varied 

certain aspects of the proposals to 

implement the balloon qualified 

mortgage and escrow provisions. 

Specifically, the Board interpreted the 

escrow provision as being designed to 

exempt creditors that do not possess 

economies of scale to offset costeffectively the burden of establishing 

escrow accounts by maintaining a 

certain minimum portfolio size from 

being required to establish escrow 

accounts on higher-priced mortgage 

loans, and the balloon-payment 

qualified mortgage provision to ensure 

access to credit in rural and 

underserved areas where consumers 

may be able to obtain credit only from 

community banks offering balloonpayment mortgages. Accordingly, the 

two Board proposals would have used 

similar definitions of ‘‘rural’’ and 

‘‘underserved,’’ but did not provide 

uniformity in calculating and defining 

various other elements. Specifically, the 

Board’s proposed § 226.45(b)(2)(iii) 

would have implemented the escrow 

exemption in TILA section 129D(c) by 

requiring that the creditor have (1) in 

the prior year made more than 50 

percent of its first-lien higher-priced 

mortgage loans in rural or underserved 

areas, (2) together with all affiliates, 

originated and retained servicing rights 

to no more than 100 first-lien mortgage 

obligations in either the current or prior 

calendar year, and (3) together with all 

affiliates, not maintained an escrow 

account on any consumer credit 

transaction secured by real property or 

a dwelling that is currently serviced by 

the creditor or its affiliates. The Board 

also sought comment on whether to add 

a requirement for the creditor to meet an 

asset-size limit and what that size 

should be. 

In contrast, the Board’s proposal for 

balloon qualified mortgages would have 

required that the creditor (1) in the 


tkelley on DSK3SPTVN1PROD with 
Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 4735 

29Nathan B. Anderson and Jane B. Dokko, 

Liquidity Problems and Early Payment Default 

Among Subprime Mortgages, Finance and 

Economics Discussion Series, Federal Reserve 

Board (2011), available at: http:// 

www.federalreserve.gov/pubs/feds/2011/201109/ 

201109pap.pdf. 

30See Allen N. Berger and Gregory F. Udell, 

Small Business Credit Availability and Relationship 

Lending: The Importance of Bank Organizational 

Structure, Economic Journal (2002). 

31See 2013 ATR Concurrent Proposal; FDIC, 

Community Banking Study, December 2012, 

available at: http://www.fdic.gov/regulations/ 

resources/cbi/report/cbi-full.pdf. 

32The Bureau has similarly attempted to maintain 

consistency between the asset-size limit, annual 

originations threshold, and requirements 

concerning portfolio transactions as between the 

final rules that it is adopting with regard to balloon 

qualified mortgages and the escrow exemption and 

its separate proposal to create a new type of 

qualified mortgage originated and held by small 

Continued 

preceding calendar year, have made 

more than 50 percent of its balloonpayment mortgages in rural or 

underserved areas; and (2) have assets 

that did not exceed $2 billion. The 

Board proposed two alternatives for 

qualifications relating to (1) the total 

annual originations limit; and (2) the 

retention of balloon-payment mortgages 

in portfolio. 

In both cases, the Board proposed to 

use a narrow definition of rural based 

on the Economic Research Service (ERS) 

of the United States Department of 

Agriculture’s (USDA) ‘‘urban influence 

codes’’ (UICs). The UICs are based on 

the definitions of ‘‘metropolitan’’ and 

‘‘micropolitan’’ as developed by the 

Office of Management and Budget, along 

with other factors reviewed by the ERS 

that place counties into twelve 

separately defined UICs depending on 

the size of the largest city and town in 

the county. The Board’s proposal would 

have limited the definition of rural to 

certain ‘‘non-core’’ counties, which are 

areas outside of any metropolitan or 

micropolitan area, excluding those 

adjacent to a metropolitan area of at 

least one million residents or adjacent to 

a micropolitan area with a town of at 

least 2,500 residents. This definition 

corresponded with UICs of 7, 10, 11, 

and 12, which would have covered 

areas in which only 2.3 percent of the 

nation’s population lives. 

In light of the overlap in criteria 

between the escrow exemption and 

balloon qualified mortgage provisions, 

the Bureau considered comments 

responding to both proposals in 

determining how to finalize the 

particular elements of each rule as 

discussed further below. With regard to 

exercising the Bureau’s authority to 

create an escrows exemption in general, 

the bulk of the comments received 

asserted that the Bureau should exercise 

such authority but that the scope of the 

proposal was too limited and would 

lead to reduced access to credit or 

increased costs for consumers in rural 

areas because of increased compliance 

costs for creditors. Two industry 

commenters suggested a blanket 

exemption for community banks, but 

did not identify any criteria to define a 

community bank. Five industry 

commenters suggested the exemption 

should be based solely on loan-to-value 

ratio of the transaction being originated, 

ranging from 50 percent to 80 percent, 

without using any of the statutory 

requirements. Four trade association 

commenters suggested that the 

exemption should be based solely on 

whether the debt obligation was being 

kept in the creditor’s portfolio. One 

consumer advocacy group stated that 

the exemption was too broad because, 

under its reading of section 1461 of the 

Dodd-Frank Act, the exemption was not 

meant to protect access to credit but, 

rather, to protect communities that need 

credit but cannot find credit with terms 

better than the terms of higher-priced 

mortgage loans. 

The Bureau believes that escrows 

generally provide meaningful consumer 

protections, as consumers may not 

incorporate recurring costs related to the 

ownership of a dwelling to their 

monthly mortgage payments to 

anticipate the total costs associated with 

the dwelling. For consumers who 

struggle with their monthly mortgage 

payments, there is a higher probability 

of foreclosure as a result. Based on 

recent research,29 consumers that do not 

have an escrow account in the first year 

after consummation result in 0.35 

percent more foreclosures per year for 

first-lien, higher-priced mortgages. 

However, in rural and underserved 

areas where there are fewer creditors 

that may be willing to extend higherpriced mortgage loans, the number of 

providers could be further reduced 

when additional costs associated with 

establishing and maintaining escrow 

accounts are taken into account. The 

reduction in the number of providers 

could lead to some consumers being 

unable to obtain higher-priced mortgage 

loans, or to increase the costs of the 

higher-priced mortgage loans as a result 

of a concentrated market with limited 

competition to a point where the 

consumer would be unable to repay the 

higher-priced mortgage loan. 

There are also substantial data 

suggesting that the small portfolio 

creditors that are most likely to have 

difficulty maintaining escrow accounts 

(or to rely on balloon loan transactions 

to manage their interest rate risks) have 

a significantly better track record than 

larger creditors with regard to the 

performance of their mortgage 

transactions. As discussed in more 

depth in the 2013 ATR Concurrent 

Proposal, because small portfolio 

creditors retain a higher percentage of 

their transactions on their own books, 

they have strong incentives to engage in 

thorough underwriting. To minimize 

performance risk, small community 

creditors have developed underwriting 

standards that differ from those 

employed by larger institutions. Small 

creditors generally engage in 

‘‘relationship banking,’’ in which 

underwriting decisions rely at least in 

part on qualitative information gained 

from personal relationships between 

creditors and consumers. This 

qualitative 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 banking 

organization.’’ 30 While it is not possible 

to disaggregate the impact of each of the 

elements of the community banking 

model, the combined effect is highly 

beneficial. Moreover, where consumers 

have trouble paying their mortgage 

obligations, small portfolio creditors 

have stronger incentives to work with 

the consumers to get them back on 

track, to protect both the creditors’ 

balance sheets and their reputations in 

their local communities. Market-wide 

data demonstrate that mortgage 

delinquency and charge-off rates are 

significantly lower at smaller banks than 

at larger banks.31

The Bureau believes that Congress 

carefully weighed these considerations 

in authorizing the Bureau to establish an 

exemption in TILA section 129D(c) to 

ensure access to credit in rural and 

underserved areas where consumers 

may be able to obtain credit only from 

community banks that cannot maintain 

escrow accounts on a cost-effective 

basis. Thus, the Bureau concludes that 

exercising its authority is appropriate, 

but also that the exemption should 

implement the statutory criteria to 

ensure it effectuates Congress’s intent. 

Accordingly, as discussed in more detail 

below, the Bureau is adopting 

§ 1026.35(b)(2)(iii) largely as proposed, 

but with certain changes described 

below, to implement TILA section 

129D(c). 

In particular, the Bureau has 

concluded that it is appropriate to make 

the specific creditor qualifications much 

more consistent between the balloonpayment qualified mortgage and escrow 

exemptions than originally proposed by 

the Board.32 The Bureau believes that 


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4736 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 

portfolio creditors. The Bureau is seeking comment 

in that proposal on these elements and on whether 

other adjustments are appropriate to the existing 

rules to maintain continuity and reduce compliance 

burden. See the 2013 ATR Concurrent Proposal. 

this approach is justified by several 

considerations, including the very 

similar statutory language, the similar 

congressional intents underlying the 

two provisions, and the fact that 

requiring small creditors operating 

predominantly in rural or underserved 

areas to track overlapping but not 

identical sets of technical criteria for 

each separate provision could create 

unwarranted compliance burden that 

itself would frustrate the intent of the 

statutes. Although the Bureau has recast 

and loosened some of the criteria to 

promote consistency, the Bureau has 

carefully calibrated the changes to 

further the purpose of each rulemaking. 

Further, the Bureau believes that any 

risk to consumers from the 

modifications is minimal given the 

nature of the small creditors’ operations 

and in particular the fact that they are 

required to hold the affected 

transactions in portfolio (in this final 

rule’s case, indirectly, by virtue of the 

requirement that a transaction 

originated under the escrow exemption 

not be subject to a forward commitment 

at consummation). As discussed in more 

detail below and in the 2013 ATR 

Concurrent Proposal, which also 

proposes to adopt several of the criteria 

to define a new type of qualified 

mortgage, the creditors at issue have 

strong motivations to provide vigorous 

underwriting and high levels of 

customer service to protect their balance 

sheets and reputations in their local 

communities. This motivation is 

manifest in the fact that they have 

demonstrably lower credit losses on 

their mortgage originations than larger 

institutions. 

For the foregoing reasons, the Bureau 

is adopting § 1026.35(b)(2)(iii) to 

implement TILA section 129D(c) by 

providing that a transaction is exempt 

from the escrow account requirement 

otherwise applicable to a higher-priced 

mortgage loan if the creditor: (1) In the 

preceding calendar year made more 

than 50 percent of its first-lien covered 

transactions in counties designated by 

the Bureau as ‘‘rural’’ or ‘‘underserved’’; 

(2) together with all affiliates extended 

500 or fewer first-lien covered 

transactions in the preceding calendar 

year; and (3) has total assets that are less 

than $2 billion, adjusted annually for 

inflation. The final rule also creates 

greater parallelism with the balloon 

qualified mortgage provision with 

regard to the requirement that the 

affected transactions be held in portfolio 

by requiring in both rules that the 

transactions not be subject to a ‘‘forward 

commitment’’ agreement at the time of 

consummation. These qualifications and 

the other requirements under the final 

rule are discussed in more detail below. 

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

‘‘Operates Predominantly in Rural or 

Underserved Areas’’ 

Under TILA section 129D(c)(1), to 

qualify for the exemption, a creditor 

must ‘‘operate predominantly in rural or 

underserved areas.’’ The Board’s 2011 

Escrows Proposal would have required 

a creditor to have made during the 

preceding calendar year more than 50 

percent of its first-lien higher-priced 

mortgage loans in ‘‘rural or 

underserved’’ counties. One industry 

commenter agreed with the Board’s 

proposal. Numerous commenters to the 

Board’s proposal in this rule and the 

Board’s 2011 ATR Proposal objected to 

the proposed definition of ‘‘rural or 

undeserved’’ as discussed below, but 

commenters did not generally dispute 

the definition of ‘‘predominantly’’ as 

meaning more than 50 percent of 

originations of its first-lien higherpriced mortgage loans in rural or 

underserved counties. 

The Bureau believes Congress enacted 

the exemption in TILA section 

129D(c)(1) to ensure access to credit in 

rural and underserved areas where 

consumers may be able to obtain credit 

only from community banks or other 

small creditors serving those areas. The 

‘‘operates predominantly in’’ 

requirement serves to limit the 

exemption to these institutions. To 

remove this portion of the qualifications 

of the creditor would be to circumvent 

Congress’s stated requirement that the 

exemption was intended for creditors 

operating predominantly in rural or 

underserved areas. The Bureau believes 

that ‘‘predominantly’’ indicates a 

portion greater than half, hence the 

regulatory requirement of more than 50 

percent. 

Upon further analysis of the 

differences in the proposals for the 

escrows exemption and the balloonpayment qualified mortgage provisions, 

however, the Bureau believes that 

further harmonization between the two 

sets of requirements is warranted. The 

Board’s 2011 Escrows Proposal would 

have required creditors to track first-lien 

higher-priced mortgage loans by county, 

while the qualified mortgage proposal 

would have required creditors to track 

balloon-payment mortgages. Given that 

the underlying statutory language 

regarding ‘‘operates predominantly’’ is 

the same in each instance and that 

tracking each type of mortgage 

separately would increase 

administrative burden, the Bureau 

believes it is appropriate to base the 

threshold for both rules on the 

distribution of all first-lien ‘‘covered 

transactions’’ as defined in 

§ 1026.43(b)(1). As provided in the 2013 

ATR Final Rule, a covered transaction is 

defined in § 1026.43(b)(1) as a consumer 

credit transaction that is secured by a 

dwelling, as defined in § 1026.2(a)(19), 

other than a transaction exempt from 

coverage under § 1026.43(a). The Bureau 

believes that counting only first-lien 

transactions will facilitate compliance, 

as well as promote consistency in 

applying to creditors the two 

exemptions under both rulemakings, 

since both exemptions relate to first-lien 

transactions. Balloon-payment 

mortgages that will meet the 

qualifications of the balloon-payment 

qualified mortgage exemption will be 

first-lien covered transactions, as having 

subordinate financing along with the 

balloon-payment mortgage would be 

rare since it further constrains a 

consumers’ ability to build equity in the 

property and to refinance the balloonpayment mortgage when it becomes 

due. Subordinate-lien, higher-priced 

mortgage loans are not required to 

establish escrow accounts, as only firstlien higher priced mortgage loans must 

establish escrow accounts under 

§ 1026.35(b)(1). 

Accordingly, § 1026.35(b)(2)(iii)(A) 

provides that, during the preceding 

calendar year, a creditor must have 

made more than 50 percent of its total 

first-lien covered transactions in 

counties designated ‘‘rural’’ or 

‘‘underserved’’ as defined by 

§ 1026.35(b)(2)(iv), discussed below. 

Comment 35(b)(2)(iii)–1.i states that the 

Bureau publishes annually a list of 

counties that qualify as rural or 

underserved. 

35(b)(2)(iii)(B) 

Total Annual Mortgage Originations 

TILA section 129D(c)(3) provides that, 

to qualify for the exemption, a creditor 

together with its affiliates must have 

total annual mortgage originations that 

do not exceed a limit set by the Bureau. 

The Board’s proposed 

§ 226.45(b)(2)(iii)(B) required that the 

creditor and its affiliates, during either 

of the preceding two calendar years, 

have originated and retained servicing 

rights to 100 or fewer mortgage 

obligations secured by a first lien on real 

property or a dwelling. Although the 

Dodd-Frank Act requirement to 

establish escrow accounts applies only 


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Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 4737 

33A review of 2011 HMDA data shows creditors 

that otherwise meet the criteria of § 1026.43(f)(1)(vi) 

and originate between 200 and 500 or fewer firstlien covered transactions per year average 134 

transactions per year retained in portfolio. Over a 

five year period, the total portfolio for these 

creditors would average 670 mortgage obligations. 

to higher-priced mortgage loans that are 

secured by first liens, the Board 

reasoned that it was appropriate to base 

the threshold on all first-lien 

originations because creditors are free to 

establish escrow accounts for all of their 

first-lien mortgages voluntarily to 

achieve the scale necessary to escrow 

cost-effectively. The Board estimated 

that a minimum servicing portfolio size 

of 500 is necessary to escrow costeffectively, and assumed that the 

average life expectancy of a mortgage 

loan is about five years. Based on this 

reasoning, the Board believed that 

creditors would no longer need the 

benefit of the exemption if they 

originated and serviced more than 100 

first-lien transactions per year. In 

contrast, the Board did not propose a 

specific annual originations threshold in 

connection with the balloon-payment 

qualified mortgages, but rather sought 

comment on whether to adopt a 

threshold based on the number of 

transactions or dollar volume and what 

numeric threshold would be 

appropriate. 

In connection with the Board’s 2011 

Escrows Proposal, trade association and 

industry commenters generally said that 

the proposed maximum annual volume 

of originations would be insufficient to 

make the escrow accounts cost effective 

for creditors. No commenters provided 

information to support their suggestions 

for alternative thresholds or to refute the 

Board’s analysis that creditors can 

provide escrow accounts cost-effectively 

when they annually originate and retain 

servicing rights to more than 100 

mortgage obligations secured by a first 

lien on real property or a dwelling. 

Suggestions for higher thresholds 

ranged from 200 to 1,000 mortgage 

obligations per year originated and 

serviced. One consumer advocacy 

commenter suggested the proposed 

threshold was too high because it 

counted only first-lien mortgage 

transactions, instead of all mortgage 

obligations, but offered no specific 

alternative amount. Two industry 

commenters also suggested that the 

origination limit should measure only 

the number of higher-priced mortgage 

loans originated and serviced by the 

creditor and its affiliates. 

In response to the Board’s 2011 ATR 

Proposal, two trade associations and one 

group of State bank regulators, argued 

that other criteria, such as the asset-size 

limit or portfolio requirement, were 

sufficient and that neither a volume nor 

a total annual originations limit would 

be necessary. One industry trade 

association suggested combining the 

proposed alternatives and permitting 

creditors to elect under which limit they 

would operate. Other trade group and 

industry commenters indicated that the 

total annual originations limit would be 

preferable because of the varying dollar 

amount of transactions originated, 

which would constrain the number of 

consumers with limited credit options 

who could obtain balloon-payment 

mortgages in rural or underserved areas. 

Four trade group and industry 

commenters suggested a range for the 

total annual originations limit of 250 to 

1,000 transactions. 

The Bureau believes that the 

requirement of TILA section 129D(c)(2) 

reflects a recognition that larger 

creditors have the systems capability 

and operational scale to establish costefficient escrow accounts. Similarly, the 

Bureau believes the requirement of 

TILA section 129C(b)(2)(E)(iv)(II) 

reflects Congress’s recognition that 

larger creditors who operate in rural or 

underserved areas should be able to 

make credit available without resorting 

to balloon-payment mortgages. In light 

of the strong concerns expressed in both 

rulemakings about the potential 

negative impacts on small creditors in 

rural and underserved areas, the Bureau 

conducted further analysis to try to 

determine the most appropriate 

thresholds, although it was significantly 

constrained by the fact that data are 

limited with regard to mortgage 

originations in rural and underserved 

areas generally and in particular with 

regard to originations of balloonpayment mortgages. 

The Bureau started with the premise 

that it would be preferable to use the 

same annual originations threshold in 

both rules to reflect the consistent 

language in both statutory provisions 

focusing on total annual mortgage loan 

originations, to facilitate compliance by 

not requiring institutions to track 

multiple metrics and to promote 

consistent application of the two 

exemptions. This approach requires 

significant reconciliation between the 

two proposals, however, because the 

escrows proposal focused specifically 

on transactions originated and serviced 

to gauge creditors’ ability to maintain 

escrow accounts over time, while 

retention of servicing is not directly 

relevant to the balloon-payment 

qualified mortgage. However, to the 

extent that creditors chose to offer 

balloon-payment mortgages to manage 

their interest rate risk without having to 

undertake the compliance burdens 

involved in administering adjustable 

rate mortgages over time, the Bureau 

believes that both provisions are 

focused in a broad sense on 

accommodating creditors whose 

systems constraints might otherwise 

cause them to exit the market. 

With this in mind, the Bureau 

ultimately decided to adopt a threshold 

of 500 or fewer annual originations of 

first-lien transactions for both rules. The 

Bureau believes that this threshold will 

provide greater flexibility and reduce 

concerns that the specific threshold that 

had been proposed in the Board’s 2011 

Escrows Proposal (100 higher-priced 

mortgage loans originated and serviced 

annually in either of the preceding two 

years) would reduce access to credit by 

excluding creditors that need special 

accommodations in light of their 

capacity constraints. At the same time, 

the increase is not as dramatic as it may 

first appear because the Bureau’s 

analysis of HMDA data suggests that 

even small creditors are likely to sell a 

significant number of their originations 

in the secondary market. Assuming that 

most mortgage transactions that are 

retained in portfolio are also serviced in 

house, the Bureau estimates that a 

creditor originating no more than 500 

first-lien transactions per year would 

maintain and service a portfolio of about 

670 mortgage obligations over time, 

assuming an average obligation life 

expectancy of five years.33 Thus, the 

higher threshold will help to ensure that 

creditors that are subject to the escrow 

requirement do in fact maintain 

portfolios of sufficient size to maintain 

the escrow accounts on a cost efficient 

basis over time, in the event that the 

Board’s estimate of a minimum portfolio 

of 500 transactions was too low. 

However, the Bureau believes that the 

500 annual originations threshold in 

combination with the other 

requirements will still ensure that the 

balloon-payment qualified mortgage and 

escrow exemptions are available only to 

small creditors that focus primarily on 

a relationship-lending model and face 

significant systems constraints. 

The Bureau also believes that it is 

appropriate to focus the annual 

originations threshold on all first-lien 

originations. Given that escrow accounts 

are typically not maintained for 

transactions secured by subordinate 

liens, the Bureau does not believe that 

it makes sense to count such 

transactions toward the threshold 

because they would not contribute to a 

creditor’s ability to achieve costefficiency. At the same time, the Bureau 

believes it is appropriate to count all 


tkelley on DSK3SPTVN1PROD with 
4738 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 

34The $2 billion threshold reflects the purposes 

of the exemption and the structure of the mortgage 

servicing industry. The Bureau’s choice of $2 

billion in assets as a threshold for purposes of TILA 

section 129D(c)(4) 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. 

first-lien transactions toward the 

threshold because creditors can 

voluntarily establish escrow accounts 

for such transactions to increase the 

cost-effectiveness of their program even 

though the mandatory account 

requirements under the Dodd-Frank Act 

apply only to first-lien, higher-priced 

mortgage loans. Focusing on all firstlien originations also provides a metric 

that is useful for gauging the relative 

scale of creditors’ operations for 

purposes of the balloon-payment 

qualified mortgages, while focusing 

solely on the number of higher-priced 

mortgage loan originations would not. 

Accordingly, the Bureau adopts 

§ 1026.35(b)(2)(iii)(B) requiring to 

creditor and its affiliates to have 

originated 500 or fewer covered 

transactions secured by a first lien. 

35(b)(2)(iii)(C) 

Asset-Size Threshold 

TILA section 129D(c)(4) provides that, 

to qualify for the exemption, a creditor 

must meet any asset-size threshold 

established by the Bureau. The Board’s 

2011 Escrows Proposal did not establish 

an asset-size threshold but did request 

comment on whether one should be 

added and, if so, what threshold level 

would be appropriate. In contrast, the 

Board proposed a $2 billion threshold 

for the balloon qualified mortgage 

exception. This number was based on 

the limited data available to the Board 

at the time of the proposal. Based on 

that limited information, the Board 

reasoned that none of the entities it 

identified as operating predominantly in 

rural or underserved areas had total 

assets as of the end of 2009 greater than 

$2 billion, and therefore, the limitation 

should be set at $2 billion. The Board 

expressly proposed setting the asset-size 

threshold at the highest level currently 

held by any of the institutions that 

appear to be smaller institutions that 

served areas with otherwise limited 

credit options. 

In response to the Board’s 2011 

Escrows Proposal, a group of State bank 

regulators and a trade association 

advocated including an asset-size 

prerequisite in the exemption. The 

group of State bank regulators suggested 

that the asset-size prerequisite be the 

sole requirement to obtain the 

exemption but did not propose a 

specific dollar threshold. The industry 

commenter suggested the asset-size be 

$1 billion in assets, but did not provide 

a rationale for the amount. 

Based on the Board’s 2011 ATR 

Proposal, one group of State bank 

regulators suggested that the asset-size 

threshold be included and be the only 

requirement for a creditor to qualify for 

the balloon-mortgage qualified mortgage 

exemption. Two trade association 

commenters suggested that a $2 billion 

asset-size threshold was appropriate, 

with one also suggesting that the assetsize threshold be the only requirement 

for a creditor to qualify for the balloonpayment qualified mortgage exemption. 

One industry commenter suggested that 

the asset-size threshold be $10 billion. 

For reasons discussed above, the 

Bureau is adopting an annual 

originations limit as contemplated by 

the statute. Given that limitation, 

restricting the asset size of institutions 

that can claim the exemption is of 

limited importance. Nonetheless, the 

Bureau believes that an asset-size 

limitation is still helpful because very 

large institutions should have sufficient 

resources to adapt their systems to make 

mortgages without a balloon payment 

and to establish and maintain escrow 

accounts even if the scale of their 

mortgage operations is relatively 

modest. A very large institution with a 

relatively modest mortgage operation 

also does not have the same type of 

reputational and balance-sheet 

incentives to maintain the same kind of 

relationship-banking model as a smaller 

community-based creditor. An asset-size 

limitation can guard against 

circumvention of the rule if a larger 

institution were to elect to enter a rural 

area to make a limited number of 

higher-priced mortgage loans or balloonpayment mortgages. Therefore, the 

Bureau believes that the $2 billion asset 

limitation proposed by the Board in the 

Board’s 2011 ATR Proposal remains an 

appropriate limitation and should be 

adopted in both this final rule and the 

2013 ATR Final Rule.34

Accordingly, the Bureau adopts 

§ 1026.35(b)(2)(iii)(C) to require 

creditors to have total assets as of the 

end of the preceding calendar year that 

are less than $2 billion and is effectively 

adopting the same threshold by crossreference to § 1026.35(b)(2)(iii) for 

purposes of the balloon-payment 

qualified mortgage exemption in the 

2013 ATR Final Rule. As provided in 

§ 1026.35(b)(2)(iii)(C), this threshold 

dollar amount will adjust automatically 

each year based on the year-to-year 

change in the average of the Consumer 

Price Index for Urban Wage Earners and 

Clerical Workers (CPI–W), not 

seasonally adjusted, for each 12-month 

period ending in November, with 

rounding to the nearest million dollars. 

Comment 35(b)(2)(iii)–1.iii recites this 

initial threshold and further clarifies 

that a creditor that had total assets 

below the threshold on December 31 of 

the preceding year satisfies this criterion 

for purposes of the exemption during 

the current calendar year. The comment 

also notes that the Bureau will publish 

notice of each year’s asset threshold by 

amending the comment. 

35(b)(2)(iii)(D) 

Creditor and Affiliates Do Not Maintain 

Escrows 

As adopted by section 1461 of the 

Dodd-Frank Act, TILA section 

129D(c)(4) provides that, to qualify for 

the exemption, a creditor must meet any 

other criteria established by the Bureau 

consistent with the provisions of TILA. 

The Board’s proposed 

§ 226.45(b)(2)(iii)(C) would have 

required that, to obtain the exemption, 

the creditor and its affiliates not 

maintain an escrow account for any 

mortgage they currently service through 

at least such mortgage obligation’s 

second installment due date. The Board 

used the second installment due date as 

a cutoff point because it recognized that 

a creditor may sometimes hold a 

mortgage obligation for a short period 

after consummation to take steps 

necessary before transferring and 

assigning the mortgage debt obligation 

to the intended investor. The Board 

recognized that the process of 

transferring and assigning the mortgage 

obligation could extend beyond the 

mortgage obligation’s first payment due 

date, especially when the first payment 

is due shortly after consummation. 

The Board believed this additional 

condition was necessary to effectuate 

the purpose of the exemption. The 

Board reasoned that, if a creditor 

already establishes and maintains 

escrow accounts, it has the capacity to 

escrow and therefore has no need for the 

exemption. Moreover, the Board 

concluded that a creditor’s capacity to 

escrow should reflect not only its own 

activities but those of any affiliate 

because it assumed that a creditor could 

rely on its affiliate to help meet the 

escrow requirement. The Board sought 

comment, however, on three aspects: 

first, whether affiliates’ capacities to 

escrow should be considered; second, 

whether the second payment due date is 

the appropriate cutoff point for whether 

a creditor has established an escrow 

account for purposes of the exemption; 

and third, whether the proposal should 

allow some de minimis number of 


tkelley on DSK3SPTVN1PROD with 
Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 4739 

35The ERS places counties into twelve separately 

defined UICs depending on the size of the largest 

city or town in the county or in adjacent counties. 

Descriptions of UICs can be found on the ERS Web 

site at http://www.ers.usda.gov/data-products/ 

urban-influence-codes/documentation.aspx. 

mortgage obligations for which escrows 

are maintained and, if so, what that 

number should be. 

Six trade association commenters, five 

industry commenters and a Federal 

agency submitted comments noting that 

many creditors had only begun to 

establish escrow accounts for mortgage 

transactions after the Board adopted the 

2008 HOEPA Final Rule, which took 

effect for most transactions in April 

2010. Many of the same commenters 

argued that it would be unfair to deny 

the exemption in TILA section 129D(c) 

to those creditors that established 

escrow accounts only to comply with 

the current escrow requirements. Two 

trade association commenters and one 

industry commenter suggested a de 

minimis number of mortgage obligations 

ranging from 10 to 50 mortgage 

obligations to address the exclusion of 

creditors currently escrowing that 

would otherwise qualify for the 

exemption. In addition, one industry 

commenter suggested that a creditor that 

establishes escrow accounts for 

distressed mortgage obligations should 

still be eligible for the exemption, as 

these creditors are doing so as an 

accommodation to the consumer to 

attempt to avoid foreclosure. No 

comments were received as to whether 

the second payment due date is the 

appropriate cutoff point for whether a 

creditor has established an escrow 

account for purposes of the exemption. 

The Bureau is adopting the Board’s 

proposal in § 1026.35(b)(2)(iii)(D), with 

the addition of two exceptions based on 

comments received. The Bureau agrees 

with the Board generally that creditors 

that currently provide escrow accounts 

can afford to establish and maintain 

escrow accounts for higher-priced 

mortgage loans. Thus, to qualify for the 

exemption, a creditor and its affiliates 

must not maintain escrow accounts for 

any extensions of consumer credit 

secured by real property or a dwelling 

that the creditor, or its affiliates, 

currently services through at least the 

second installment due date. However, 

the Bureau agrees with commenters that 

those creditors that would otherwise 

qualify for the exemption but for their 

compliance with the current regulation, 

and creditors that establish escrow 

accounts as an accommodation to 

distressed consumers, should still be 

able to qualify for the exemption in 

TILA section 129D(c). In particular, the 

Bureau notes that Congress’s decision to 

codify and expand upon the escrow 

requirement from the 2008 HOEPA 

Final Rule while simultaneously 

providing authority to exempt certain 

mortgage transactions by creditors 

operating predominantly in rural or 

underserved areas suggests that 

Congress intended to provide relief to 

creditors that were struggling to meet 

the existing requirements. Accordingly, 

the Bureau is adopting 

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

provide exceptions to the exemption’s 

general prerequisite that a creditor and 

its affiliates not maintain an escrow 

account. 

Comment 35(b)(2)(iii)–1.iv clarifies 

that the limitation excluding creditors 

and their affiliates who currently 

maintain escrow accounts for other 

mortgage obligations they service 

applies only to mortgage obligations 

serviced at the time a transaction 

purporting to invoke the escrows 

exemption is consummated. Thus, the 

exemption still could apply even if the 

creditor or its affiliates previously 

established and maintained escrows for 

mortgage obligations it no longer 

services. However, if a creditor or an 

affiliate escrows for mortgage 

obligations currently serviced, those 

institutions are ineligible to invoke the 

escrows exemption until the escrow 

accounts are no longer maintained. The 

comment also clarifies that a creditor or 

its affiliate ‘‘maintains’’ an escrow 

account for a mortgage obligation only 

if it services the mortgage obligation at 

least through the due date of the second 

periodic payment under the terms of the 

legal obligation. 

Comment 35(b)(2)(iii)(D)(1)–1 clarifies 

that escrow accounts created by a 

creditor and its affiliates established 

between April 1, 2010, and June 1, 2013 

are not counted for purposes of 

§ 1026.35(b)(2)(iii)(D). In addition, the 

comment clarifies that creditors that 

continue to maintain escrow accounts 

that were established between April 1, 

2010, and June 1, 2013 until the 

termination of those escrow accounts 

will still qualify for the exemption, so 

long as they or their affiliates do not 

establish escrow accounts for other 

mortgage obligations that the creditor 

and its affiliates service after June 1, 

2013 and they otherwise qualify under 

§ 1026.35(b)(2)(iii). Comment 

35(b)(2)(iii)(D)(2)–1 clarifies that escrow 

accounts established after 

consummation for distressed consumers 

are not considered to be maintaining 

escrow accounts for purposes of 

§ 1026.35(b)(2)(iii)(D), although 

creditors that establish escrow accounts 

after consummation as a regular 

business practice are considered to be 

maintaining escrow accounts and 

cannot qualify for the exception under 

§ 1026.35(b)(2)(iii). 

35(b)(2)(iv) 

‘‘Rural’’ and ‘‘Underserved’’ Defined 

As adopted in the Dodd-Frank Act, 

TILA section 129D(c)(1) requires, among 

other criteria for the escrows exemption, 

that the creditor operate predominantly 

in ‘‘rural’’ and ‘‘underserved’’ areas, but 

does not define either term. As 

discussed above, the Board proposed 

separate definitions for ‘‘rural’’ and 

‘‘underserved,’’ respectively, in both the 

Board’s 2011 Escrows Proposal and the 

2011 ATR Proposal, and the definitions 

for the two terms were similar across the 

two proposals. 

Commenters on the two proposals 

addressed the specific definitions 

themselves but not the necessity of 

creating a definition for ‘‘rural’’ that is 

separate from ‘‘underserved.’’ The 

Bureau is adopting the Board’s approach 

in § 1026.35(b)(2)(iv) which establishes 

a definition of rural that is separate from 

underserved. Thus, creditors’ activity in 

either type of area will count toward 

their eligibility for the escrows 

exemption and for making balloonpayment qualified mortgages. 

‘‘Rural.’’ As described above, the 

Board’s proposed definition of rural for 

purposes of both the balloon-payment 

qualified mortgage and escrows 

exemptions would have relied upon the 

ERS’s ‘‘urban influence codes’’ (UICs), 

which in turn are based on the 

definitions of ‘‘metropolitan statistical 

area’’ and ‘‘micropolitan statistical 

area.’’ 35 The Board’s proposal would 

have limited the definition of rural to 

certain ‘‘non-core’’ counties, which are 

areas outside of any metropolitan or 

micropolitan area that are not adjacent 

to a metropolitan area with at least one 

million residents or to a micropolitan 

area with a town of at least 2,500 

residents. This definition corresponded 

to UICs 7, 10, 11, and 12. The counties 

that would have been covered under the 

Board’s proposed definition contain 2.3 

percent of the United States population 

under the 2000 census. The Board 

believed this approach limited the 

definition of ‘‘rural’’ to those properties 

most likely to have only limited sources 

of mortgage credit because of their 

remoteness from urban centers and their 

resources. However, the Board sought 

comment on all aspects of this approach 

to defining rural, including whether the 

definition should be broader or 


tkelley on DSK3SPTVN1PROD with 
4740 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 

36A review of data from HMDA reporters 

indicates that there were 700 creditors in 2011 that 

otherwise meet the requirements of new 

§ 1026.35(b)(2)(iii), of which 391 originate higherpriced mortgage loans in counties that meet the 

definition of rural, compared to 2,110 creditors that 

otherwise meet the requirements of 

§ 1026.35(b)(2)(iii) that originate balloon-payment 

mortgages in counties that would not be rural. The 

391 creditors originated 12,921 higher-priced 

mortgage loans, representing 30 percent of their 

43,359 total mortgage loan originations. A review of 

data from credit unions indicates that there were 

830 creditors in 2011 that otherwise meet the 

requirements of § 1026.35(b)(2)(iii), of which 415 

originate balloon-payment and hybrid mortgages in 

counties that meet the definition of rural, compared 

to 3,551 creditors that otherwise meet the 

requirements of § 1026.35(b)(2)(iii) that originate 

balloon-payment mortgages in counties that would 

not be rural. The 415 creditors originated 4,980 

balloon-payment mortgage originations, 

representing 20 percent of their 24,968 total 

mortgage loan originations. 

narrower or based on information other 

than UIC codes. 

Many commenters to both the 2011 

ATR Proposal and the 2011 Escrows 

Proposal, including more than a dozen 

trade group commenters, several 

individual industry commenters, one 

association of State banking regulators, 

and a United States Senator, stated that 

the rural definition was too narrow. The 

trade association and industry 

commenters, and the group of State 

banking regulators, had various 

proposals to broaden the definition, 

from the addition of other UICs and a 

combination of county population and 

asset size to the adoption of other 

regulatory definitions of ‘‘rural,’’ such as 

those governing credit unions. The 

comment from a United States Senator 

suggested using the eligibility of a 

property to secure a single-family 

mortgage under the USDA’s Rural 

Housing Loan program as the definition 

of a rural property. 

The Bureau agrees that a broader 

definition of ‘‘rural’’ is appropriate to 

ensure access to credit with regard to 

both the escrows and balloon-payment 

qualified mortgage exemptions. In 

particular, the Bureau believes that all 

‘‘non-core’’ counties should be 

encompassed in the definition of rural, 

including counties adjacent to a 

metropolitan area of at least one million 

residents or a county with a town of at 

least 2,500 residents (i.e., counties with 

a UIC of 4, 6, or 9 in addition to the 

counties with the UICs included in the 

Board’s definition). The Bureau also 

believes that micropolitan areas that are 

not adjacent to a metropolitan area 

should be included within the 

definition of rural (i.e., counties with a 

UIC of 8), as these areas are not located 

adjacent to metropolitan areas that are 

served by many creditors. These 

counties have significantly fewer 

creditors originating higher-priced 

mortgage loans and balloon-payment 

mortgages than other counties.36

Including these counties within the 

definition of rural would result in 9.7 

percent of the U.S. population being 

located within rural areas. Under this 

definition, only counties in 

metropolitan areas or in micropolitan 

areas adjacent to metropolitan areas 

would be excluded from the definition 

of rural. 

The Bureau also considered adopting 

the definition of rural used to determine 

the eligibility of a property to secure a 

single-family mortgage under the 

USDA’s Rural Housing Loan program. 

This definition subdivides counties into 

rural and non-rural areas based upon 

whether certain areas are open country, 

or contain a town, village, city or place, 

with certain population criteria, and 

excludes areas associated with an urban 

area. Given the size of some counties, 

particularly in western States, this 

approach may provide a more nuanced 

measure of access to credit in some 

areas than a county-by-county metric. 

However, use of the Rural Housing Loan 

metrics would incorporate such 

significant portions of metropolitan and 

micropolitan counties that 37 percent of 

the United States population would be 

within areas defined as rural. Based on 

a review of HMDA data and the location 

of mortgage transactions originated by 

HMDA reporting entities, the average 

number of creditors in the areas that 

would meet the USDA’s Rural Housing 

Loan program definition of rural is ten. 

The Bureau believes that a wholesale 

adoption of the Rural Housing Loan 

definitions would therefore expand the 

definition of rural beyond the intent of 

the escrow and balloon-payment 

qualified mortgage exemptions under 

sections 1412 and 1461 of the DoddFrank Act by incorporating areas in 

which there is robust access to credit. 

Accordingly, the final rule 

implements § 1026.35(b)(2)(iv)(A) to 

provide that a county is rural if it is 

neither in a metropolitan statistical area, 

nor in a micropolitan statistical area that 

is adjacent to a metropolitan statistical 

area. The Bureau intends to continue 

studying over time the possible selective 

use of the Rural Housing Loan program 

definitions and tools provided on the 

USDA Web site to determine whether a 

particular property is located within a 

‘‘rural’’ area. For purposes of initial 

implementation, however, the Bureau 

believes that defining ‘‘rural’’ to include 

more UIC categories creates an 

appropriate balance to preserve access 

to credit and create a system that is easy 

for creditors to implement. 

‘‘Underserved.’’ The Board’s proposed 

§ 226.45(b)(2)(iv)(B) would have defined 

a county as ‘‘underserved’’ during a 

calendar year if no more than two 

creditors extend credit secured by a first 

lien on real property or a dwelling five 

or more times in that county. The 

definition was based on the Board’s 

judgment that, where no more than two 

creditors are significantly active, the 

inability of one creditor to offer a 

higher-priced mortgage loan would be 

detrimental to consumers who would 

have limited credit options because only 

one creditor, or no creditors, would be 

left to provide the higher-priced 

mortgage loan. Essentially, a consumer 

who could only qualify for a higherpriced mortgage loan would be required 

to obtain credit from the remaining 

creditor in that area or would be left 

with no credit options at all. Most of the 

same commenters that stated that the 

proposed definition of rural was too 

narrow, as discussed above, also stated 

that this definition of underserved was 

too narrow. The commenters proposed 

various different standards, including 

standards that considered the extent to 

which the property was in a rural area, 

as an alternate definition of 

underserved. 

The Bureau agrees with the Board that 

the purpose of the exemption is to 

permit creditors to continue to offer 

credit to consumers, rather than to 

refuse to make higher-priced mortgage 

loans if such creditors’ withdrawal 

would significantly limit consumers’ 

ability to obtain mortgage credit. In light 

of this rationale, the Bureau believes 

that ‘‘underserved’’ should be 

implemented in a way that protects 

consumers from losing meaningful 

access to mortgage credit and that it is 

appropriate to focus the definition on 

identifying areas where the withdrawal 

of a creditor from the market could 

leave no meaningful competition for 

consumers’ mortgage business. The 

Bureau notes that the final rule’s 

expanded definition of ‘‘rural,’’ as 

discussed above, will also address 

concerns about access to credit in many 

areas. Accordingly, the Bureau is 

adopting § 1026.35(b)(2)(iv)(B) to define 

a property as ‘‘underserved’’ if it is 

located in a county where no more than 

two creditors extend covered 

transactions secured by a first lien five 

or more times in that county during a 

calendar year, substantially consistent 

with the Board’s proposal. As adopted, 

§ 1026.35(b)(2)(iv)(B) also expressly 

states that the numbers of creditors and 

of their originations in counties for 

purposes of this definition is as reported 

in HMDA data for the year in question. 


tkelley on DSK3SPTVN1PROD with 
Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 4741 

37Section 1026.35(c) is being adopted separately 

by the Bureau jointly with other Federal agencies, 

to implement the new appraisal requirements in 

TILA section 129H, in the 2013 Interagency 

Appraisals Final Rule, as discussed in part III.C, 

above. That new section provides an exemption for 

creditors operating in rural, but not underserved, 

areas. Consequently, the single, combined list of all 

counties that are either rural or underserved that 

the Bureau will publish annually for purposes of 

the exemption from this final rule’s escrow 

requirement is inadequate for the analogous 

purpose under the new appraisal requirements in 

§ 1026.35(c). 

The Bureau adopted this definition 

based on HMDA data to provide an 

objective, easily administered rule and 

one that is consistent with the purpose 

of preserving credit access in 

underserved areas. Given that many 

smaller creditors may not be subject to 

HMDA reporting requirements, the 

Bureau recognizes that many counties 

may be underserved under the 

definition being adopted, because it is 

based on HMDA data, yet additional 

information (if it were available) could 

reveal that more than two creditors are 

significantly active in such counties. 

The Bureau may examine further 

whether a refinement to the 

underserved definition is warranted. 

Commentary guidance on ‘‘rural’’ and 

‘‘underserved’’ definitions. Comment 

35(b)(2)(iv)–1 clarifies that the Bureau 

will annually update on its Web site a 

list of counties deemed rural or 

underserved under the definitions of 

rural and underserved in 

§ 1026.35(b)(2)(iv). It also clarifies that 

the definition of rural corresponds to 

UICs 4, 6, 7, 8, 9, 10, 11, and 12, as 

determined by the Economic Research 

Service of the USDA. It further clarifies 

that the definition of underserved 

counties is based on HMDA data. 

Finally, the comment provides that the 

Bureau also publishes a list of only 

those counties that are rural but not also 

underserved, to facilitate compliance 

with § 1026.35(c).37 As this final rule 

takes effect on June 1, 2013, the Bureau 

expects to publish lists applicable for 

the current year within approximately 

four to six weeks after publication of 

this final rule, but in any event before 

this final rule takes effect. 

35(b)(2)(v) 

As established by the Dodd-Frank 

Act, TILA section 129D(c)(3) requires 

that the exemption from the escrow 

requirements apply only where a 

creditor ‘‘retains its mortgage loan 

originations in portfolio’’ and meets the 

other statutory requirements. Because 

the escrow requirements must be 

applied at the time that a transaction is 

consummated, while qualified mortgage 

status may continue for the life of the 

mortgage obligation, the Board did not 

propose to implement this requirement 

consistently with the 2011 ATR 

Proposal. The Board’s proposed 

§ 226.45(b)(2)(v) would have provided 

that the escrow exemption is not 

available for certain transactions that, at 

consummation, are subject to ‘‘forward 

commitments.’’ Forward commitments 

are agreements entered into at or before 

consummation of a transaction under 

which a purchaser is committed to 

acquire the mortgage obligation from the 

creditor after consummation. In 

addition, the Board included a proposed 

comment to § 226.45(b)(2)(v) which 

would have clarified that the forward 

commitment provision would have 

applied whether the forward 

commitment refers to the specific 

transaction or the higher-priced 

mortgage loan meets prescribed criteria 

of the forward commitment in order to 

address a potential method to avoid 

compliance. The Board’s 2011 ATR 

Proposal, in contrast, proposed two 

alternatives for comment, either 

prohibiting a creditor to qualify if it has 

sold any balloon-payment qualified 

mortgages at any time or prohibiting a 

creditor to qualify if it has sold any 

balloon-payment qualified mortgages in 

the current or prior calendar year. 

The Board considered requiring that a 

transaction be held in portfolio after 

consummation as a condition of the 

escrows exemption, but concluded that 

this approach would have raised 

operational problems. Whether a 

mortgage obligation is held in portfolio 

can be determined only after 

consummation, but a creditor making a 

higher-priced mortgage loan must know 

by consummation whether it is subject 

to the escrow requirement. The Board 

expressed concern that requiring an 

escrow account to be established 

sometime after consummation if the 

creditor in fact sells the mortgage 

obligation could put a significant 

burden on consumers, who may not 

have the money available to make a 

significant advance payment. In 

contrast, the Board reasoned that the 

forward commitment test would be easy 

to apply at consummation, and would 

be unlikely to be circumvented by small 

creditors because they would be 

reluctant to extend credit for 

transactions they do not intend to keep 

in portfolio unless they have the 

assurance of a committed buyer before 

extending the credit. Thus, proposed 

§ 226.45(b)(2)(v) would have served as a 

means of indirectly limiting the 

exemption to mortgage obligations that 

are to be held in portfolio. The Board 

sought comment, however, on whether 

institutions could easily evade the 

escrow requirement by making higherpriced mortgage loans without a forward 

commitment in place and thereafter 

selling them to non-exempt purchasers 

and how to address this possibility 

without relying on post-consummation 

events. 

Among the commenters, there was a 

divergence of opinion on how this 

provision would work in practice. One 

trade association commenter stated that 

the forward commitment requirement 

would prevent creditors from selling 

portfolio mortgage obligations in the 

future. This appears to be a misreading 

of the Board’s proposal, as it would not 

have restricted the sale of higher-priced 

mortgage loans. The Board’s proposed 

§ 226.45(b)(2)(v) instead merely 

provided that, so long as the higherpriced mortgage loan was not subject to 

a forward commitment at the time of 

consummation, the higher-priced 

mortgage loan could later be sold on the 

secondary market without requiring an 

escrow account to be established at that 

time. One consumer advocacy group, 

concerned about the possibility that 

creditors would use the provision to 

skirt the escrow requirements, suggested 

a blanket rule that higher-priced 

mortgage loans that are exempt must be 

maintained in the portfolio of the 

creditor or, alternatively, that upon sale 

secondary market purchasers be 

required to establish escrow accounts 

for such mortgage obligations. 

After reviewing the comments 

received, the Bureau believes that the 

Board’s proposal is an appropriate 

method to implement the requirements 

of TILA section 129D(c)(3), as both 

creditor and consumer benefit if an 

escrow account is established at 

consummation of the transaction, rather 

than months or years later. Indeed, 

allowing a consumer to avoid having to 

make a single large lump-sum payment 

after consummation is part of the basic 

purpose of establishing an escrow 

account. Accordingly, the Bureau is 

following the approach in the Board’s 

proposal by adopting § 1026.35(b)(2)(v) 

to require that for a higher-priced 

mortgage loan to be exempt from the 

requirements under § 1026.35(b)(1), the 

higher-priced mortgage loan must not be 

subject to a forward commitment to be 

acquired by a creditor that does not 

satisfy the conditions of 

§ 1026.35(b)(2)(iii). Comment 

35(b)(2)(v)–1 clarifies that a higherpriced mortgage loan that is subject to 

a forward commitment is subject to the 

escrow requirement under 

§ 1026.35(b)(1), whether the forward 

commitment refers to the specific 

transaction or the higher-priced 


tkelley on DSK3SPTVN1PROD with 
4742 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 

mortgage loan meets prescribed criteria 

of the forward commitment, along with 

an example. As discussed separately in 

the Bureau’s 2013 ATR Final Rule, the 

Bureau is also adopting language in 

§ 1026.43(f) to provide that qualified 

mortgage status is not available to 

balloon-payment mortgages that would 

otherwise qualify for the exemption if 

the transactions are subject to a forward 

commitment at the time of 

consummation. 

35(b)(3) Cancellation 

Under TILA section 129D(d), a 

creditor or servicer of a higher-priced 

mortgage loan must maintain an escrow 

account for a minimum of five years 

following consummation, unless the 

underlying debt obligation is terminated 

earlier under certain prescribed 

circumstances. In addition, even after 

five years have elapsed, TILA section 

129D(d) provides that an escrow 

account shall remain in existence unless 

and until the consumer is current on the 

obligation and has accrued sufficient 

equity in the dwelling securing the 

consumer credit transaction ‘‘so as to no 

longer be required to maintain private 

mortgage insurance.’’ 

The Board’s proposed § 226.45(b)(3) 

would have implemented TILA section 

129D(d) by permitting cancellation of 

the escrow account only upon the 

earlier of termination of the legal 

obligation or five years after 

consummation, provided that at least 20 

percent of the original value of the 

property securing the underlying debt 

obligation is unencumbered and the 

consumer currently is not delinquent or 

in default on the underlying debt 

obligation. The Board modeled its 

proposal after the prerequisites for 

cancellation of private mortgage 

insurance coverage under the 

Homeowners Protection Act of 1998 

(HPA), 12 U.S.C. 4901–4910. Under the 

HPA, the consumer may initiate 

cancellation of private mortgage 

insurance (PMI) once the outstanding 

balance of the mortgage obligation is 

first scheduled to reach 80 percent of 

the original value of the property, 

regardless of the outstanding balance, 

based on the amortization schedule or 

actual payments. In addition, servicers 

must automatically terminate PMI for 

residential mortgage transactions on the 

earliest date that the principal balance 

of the mortgage is first scheduled to 

reach 78 percent of the original value of 

the secured property securing the 

mortgage obligation, where the 

consumer is current. The Board sought 

comment on this proposal, as well as 

whether TILA section 129D(d)(1) should 

be interpreted narrowly to mean that, 

among consumers with escrow accounts 

required pursuant to proposed 

§ 226.45(b)(1), only those that in fact 

have private mortgage insurance must 

meet the minimum equity requirement 

under the HPA as a prerequisite for 

cancelling their escrow accounts. 

Commenters generally agreed with the 

Board’s approach of requiring the 80 

percent loan-to-value (LTV) ratio for 

consumer-requested PMI termination, 

rather than the 78 percent LTV ratio for 

automatic PMI termination. Several 

commenters remarked, however, that 

the proposed language defining the 

equity cancellation requirement as ‘‘at 

least 20% of the original value of the 

property securing the underlying debt 

obligation is unencumbered’’ was 

confusing, if not misleading. 

The final rule follows the general 

approach in the Board’s proposal by 

adopting § 1026.35(b)(3) to establish the 

cancellation criteria for escrow accounts 

as provided by TILA section 129D(d). In 

response to comments, § 1026.35(b)(3) 

contains revised language describing the 

equity necessary for cancellation as an 

unpaid principal balance that is less 

than 80 percent of the original value of 

the property securing the underlying 

debt obligation. Additionally, the 

Bureau is adopting the Board’s proposed 

comment 45(b)(3)–1 as comment 

35(b)(3)–1 to clarify that termination of 

the underlying credit obligation could 

include, among other things, repayment, 

refinancing, rescission, and foreclosure. 

Comment 35(b)(3)–2 clarifies that 

§ 1026.35(b)(3) does not affect the right 

or obligation of a creditor or servicer, 

pursuant to the terms of the legal 

obligation or applicable law, to offer or 

require an escrow account after the 

minimum period dictated by 

§ 1026.35(b)(3). Finally, comment 

35(b)(3)–3 notes that the term ‘‘original 

value’’ in § 1026.35(b)(3)(ii)(A), as 

adopted from section 2(12) of the HPA, 

12 U.S.C. 4901(12), means the lesser of 

the sales price reflected in the sales 

contract for the property, if any, or the 

appraised value of the property at the 

time the transaction was consummated. 

35(c) 

The Board proposed to reserve 

§ 226.45(c) for future use in 

implementing section 1471 of the DoddFrank Act, which creates new TILA 

section 129H to establish certain 

appraisal requirements applicable to 

‘‘higher-risk mortgages.’’ Consistent 

with that proposal, the Bureau is 

reserving § 1026.35(c) in this final rule, 

thus permitting that section to be 

finalized separately in the 2013 

Interagency Appraisals Final Rule, 

discussed above. As discussed in part 

III.C, the 2013 Interagency Appraisals 

Final Rule will take effect subsequent to 

this final rule. 

35(d) Evasion; Open-End Credit 

The Board’s proposed § 226.45(d) 

would have paralleled existing 

§ 1026.35(b)(4) in prohibiting a creditor 

from structuring a home-secured 

transaction as an open-end plan to 

evade the requirements of proposed 

§ 226.45 in connection with credit 

secured by a consumer’s principal 

dwelling that does not meet the 

definition of open-end credit in 

§ 226.2(a)(20). No comments were 

received regarding the scope or 

substance of this proposal. The Bureau 

has adopted the Board’s proposal in 

§ 1026.35(d), with certain technical 

edits. 

VI. Effective Date 

As indicated above, this final rule is 

effective June 1, 2013. Thus, compliance 

with this final rule will be mandatory 

over eight months earlier than the 

January 21, 2014 baseline mandatory 

compliance date that the Bureau is 

adopting for most of the Title XIV 

Rulemakings, as discussed above in part 

III.C. As that discussion notes, the 

Bureau is carefully coordinating the 

implementation of the Title XIV 

Rulemakings, including their effective 

dates. The Bureau is including this final 

rule, however, among a subset of the 

new requirements of the Title XIV 

Rulemakings that will have earlier 

effective dates because they do not 

present significant implementation 

burdens for industry. For the following 

reasons, the Bureau believes that this 

final rule presents little or no 

compliance burden for creditors and 

therefore that an accelerated 

implementation period is appropriate. 

Although the Board’s 2011 Escrows 

Proposal did not expressly solicit 

comment on an appropriate 

implementation period, four industry 

trade associations commented on this 

question. Of the four, one represents 

financial services companies, and three 

represent credit unions. All four 

expressed concern that sufficient time 

be afforded industry to implement the 

new requirements when finalized, either 

as a general matter or specifically 

because of system changes that would 

be required. The trade association 

representing financial services 

companies merely stated that sufficient 

time to implement the final rule would 

be necessary without stating any 

specific period. Of the other three trade 

associations, one recommended an 

implementation period of one year and 

two recommend 6 to 12 months. The 


tkelley on DSK3SPTVN1PROD with 
Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 4743 

38Section 1022(b)(2) 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 and 

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. 

39The Bureau notes that it is focused here on the 

fact that regulatory provisions that clarify statutory 

provisions mitigate certain compliance costs 

associated with uncertainty over what the statutory 

provisions require. While it is possible that some 

clarifications would put greater burdens on 

creditors as compared to what the statute would 

ultimately be found to mandate, the Bureau believes 

that the rule’s clarifying provisions generally 

mitigate burden. 

Bureau notes, however, that these 

commenters’ concerns regarding the 

implementation period, particularly 

those relating to necessary system 

changes, were largely centered around 

two aspects of the Board’s proposal: 

(1) The proposed new disclosures, and 

(2) the new ‘‘transaction coverage rate’’ 

proposed to be used instead of the 

annual percentage rate for determining 

whether a transaction is a higher-priced 

mortgage loan subject to the escrow 

requirements. As discussed above in the 

applicable section-by-section analyses, 

the Bureau is not adopting either of 

those aspects of the Board’s proposal in 

this final rule. 

The final rule does not expand either 

the universe of transactions to which 

the escrow requirements apply or the 

universe of creditors subject to them. 

Indeed, the new exemption adopted by 

this final rule for higher-priced 

mortgage loans extended by small 

creditors that operate in rural or 

underserved areas represents a 

reduction in compliance burden for 

creditors that meet the exemption’s 

prerequisites. Moreover, the expansion 

of the partial exemption for 

condominiums to other property types 

where the governing association has an 

obligation to maintain a master policy 

insuring all dwellings, such as planned 

unit developments, also represents 

additional compliance burden relief for 

creditors. 

The only expansion of substantive 

requirements under this final rule is the 

extension from one to five years of the 

minimum duration generally applicable 

to escrow accounts required by the rule. 

The Bureau believes that even this 

expansion of the protection afforded 

consumers by escrow accounts will 

impose at most a modest increase in 

compliance burden for creditors because 

it simply extends an otherwise already 

applicable requirement by four 

additional years. Even this minimal 

additional burden will not be 

encountered by any creditor until at 

least one year after the rule’s effective 

date, when cancellation of mandatory 

escrow accounts otherwise first would 

have become permissible for the earliest 

higher-priced mortgage loans to be made 

after this final rule takes effect. 

The Bureau believes that both the 

burden relief for certain small creditors 

and the expanded protection for 

consumers of maintaining escrows for 

four additional years warrant expedited 

implementation to avoid any 

unnecessary delay of either. Such 

expedited implementation especially is 

warranted given that, in particular 

where the Bureau is not adopting the 

two aspects of the Board’s proposal that 

commenters identified as requiring 

significant time to implement, little or 

no new compliance burden 

accompanies such implementation. For 

these reasons, the Bureau is limiting the 

implementation period for this final rule 

by making it effective on June 1, 2013. 

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

A. Overview 

In developing the final rule, the 

Bureau has considered potential 

benefits, costs, and impacts,38 and has 

consulted or offered to consult with the 

prudential regulators, the U.S. 

Department of Housing and Urban 

Development, and the Federal Trade 

Commission (FTC), including with 

respect to consistency with any 

prudential, market, or systemic 

objectives that may be administered by 

such agencies. The Bureau is issuing 

this final rule to finalize the Board’s 

2011 Escrows Proposal, which the 

Board issued prior to the transfer of 

rulemaking authority to the Bureau. As 

the Board was not subject to DoddFrank Act section 1022(b)(2)(B), the 

Board’s 2011 Escrows Proposal did not 

contain a proposed Dodd-Frank Act 

section 1022 analysis. The Board did 

generally request comment on projected 

implementation and compliance costs, 

although commenters provided little 

information in response. As discussed 

above, the Bureau’s final rule 

implements certain amendments to the 

Truth in Lending Act made by the 

Dodd-Frank Act. Specifically, the final 

rule lengthens the time for which a 

mandatory escrow account established 

for a higher-priced mortgage loan must 

be maintained from a minimum period 

of one year to five years. In addition, the 

final rule creates an exemption from the 

escrow requirement for certain 

transactions extended by a creditor that 

meets four conditions. Those conditions 

are that the creditor: (1) Makes most of 

its first-lien covered transactions in 

rural or underserved counties; (2) 

during the preceding calendar year, 

together with its affiliates, originated 

500 or fewer first-lien covered 

transactions; (3) has an asset size less 

than $2 billion; and (4) together with its 

affiliates, generally does not escrow for 

any mortgage obligation that it or its 

affiliates currently services, except in 

limited circumstances. For eligible 

creditors, the final rule provides the 

exemption from the escrow 

requirements for transactions held in 

portfolio, but not for transactions that, at 

consummation, are subject to a forward 

commitment to be purchased by an 

investor that does not itself qualify for 

the exemption. 

The analysis below considers the 

benefits, costs, and impacts of key 

provisions of the final rule. With respect 

to these provisions, the analysis 

considers costs and benefits to 

consumers and costs and benefits to 

covered persons. The analysis also 

considers certain alternative provisions 

that were considered by the Bureau in 

the development of the final rule. 

Because the Bureau’s final rule 

implements certain self-effectuating 

amendments to TILA, the costs and 

benefits of the final rule will arise 

largely from the statute and not from the 

final rule that implements them. The 

Bureau’s final rule would provide 

benefits compared to allowing these 

TILA amendments to take effect alone, 

however, by clarifying parts of the 

statute that call for interpretation and 

using the Bureau’s exemption authority 

to exempt certain creditors who would 

otherwise be required to implement the 

escrow provisions. Greater clarity on 

these amendments, as provided by the 

final rule, should reduce the compliance 

burdens on covered persons by, for 

example, reducing costs for attorneys 

and compliance officers as well as 

potential costs of over-compliance and 

unnecessary litigation.39 Exempting 

certain financial institutions from the 

escrow requirement should reduce 

compliance costs and regulatory 

burdens for such institutions as well as 

provide greater access to credit for 

consumers in rural and underserved 

areas. The Bureau notes that any costs 

that these provisions impose beyond the 

statute itself are likely to be minimal. 

Section 1022 of the Dodd-Frank Act 

permits the Bureau to consider the 

benefits, costs and impacts of the final 

rule solely compared the effects of the 

statute taking effect without an 

implementing regulation. To provide 

the public better information about the 

benefits and costs of the statute, 

however, the Bureau has chosen to 

consider the benefits, costs, and impacts 

of these major provisions of the 


tkelley on DSK3SPTVN1PROD with 
4744 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 

40The Home Mortgage Disclosure Act (HMDA), 

enacted by Congress in 1975, as implemented by 

the Bureau’s Regulation C requires lending 

institutions annually to report public loan-level 

data regarding mortgage originations. For more 

information, see http://www.ffiec.gov/hmda. It 

should be noted that not all mortgage creditors 

report HMDA data. The HMDA data capture 

roughly 90–95 percent of lending by the Federal 

Housing Administration and 75–85 percent of other 

first-lien home loan originations, in both cases 

including first liens on manufactured homes 

(transactions which also are subject to the final 

rule). U.S. Department of Housing and Urban 

Development, Office of Policy Development and 

Research (2011), A Look at the FHA’s Evolving 

Market Shares by Race and Ethnicity, U.S. Housing 

Market Conditions (May), pp. 6–12, Depository 

institutions (including credit unions) with assets 

less than $40 million (in 2011), for example, and 

those with branches exclusively in nonmetropolitan areas and those that make no home 

purchase originations or originations refinancing a 

home purchase obligations secured by a first lien 

on a dwelling are not required to report under 

HMDA. Reporting requirements for non-depository 

institutions depend on several factors, including 

whether the company made fewer than 100 home 

purchase loans or refinancings of home purchase 

loans, the dollar volume of mortgage lending as 

share of total lending, and whether the institution 

had at least five applications, originations, or 

purchased loans from metropolitan areas. Robert B. 

Avery, Neil Bhutta, Kenneth P. Brevoort & Glenn B. 

Canner, The Mortgage Market in 2011: Highlights 

from the Data Reported under the Home Mortgage 

Disclosure Act, 98 Fed. Res. Bull., December 2012, 

n.6. 

41Every national bank, State member bank, and 

insured nonmember bank is required by its primary 

Federal regulator to file consolidated Reports of 

Condition and Income, also known as Call Reports, 

for each quarter as of the close of business on the 

last day of each calendar quarter (the report date). 

The specific reporting requirements depend upon 

the size of the bank and whether it has any foreign 

offices. For more information, see http:// 

www2.fdic.gov/call_tfr_rpts/. 

42The Nationwide Mortgage Licensing System is 

a national registry of non-depository financial 

institutions including mortgage loan originators. 

Portions of the registration information are public. 

The Mortgage Call Report data are reported at the 

institution level and include information on the 

number and dollar amount of loans originated, and 

the number and dollar amount of loans brokered. 

proposed rule against a pre-statutory 

baseline (i.e., the benefits, costs, and 

impacts of the statute and the regulation 

combined). The Bureau notes at the 

outset that there are only limited data 

that are publicly available and 

representative of the full universe of 

mortgage credit, including in particular 

with respect to rural and underserved 

communities. Additionally, there are 

limited data regarding the use of escrow 

accounts subsequent to the Board’s 2008 

HOEPA Final Rule. 

B. Potential Benefits and Costs to 

Consumers and Covered Persons 

Congress enacted sections 1461 and 

1462 of the Dodd-Frank Act as 

amendments to TILA. As amended, 

TILA requires the establishment of 

escrow accounts for certain transactions, 

establishes minimum periods for which 

such required escrow accounts must be 

maintained, and requires certain 

disclosures relating to escrow accounts. 

The Bureau’s final rule implements 

certain of these requirements. In 

addition, the amendments authorize the 

Board, and now the Bureau, to create 

certain exemptions from the escrow 

requirements for transactions originated 

by creditors meeting certain prescribed 

criteria. These amendments are being 

adopted in furtherance of the Bureau’s 

charge to prescribe regulations to carry 

out the purposes of TILA, including 

promoting consumers’ awareness of the 

cost of credit and their informed use 

thereof. 

The Bureau has relied on a variety of 

data sources to analyze the potential 

benefits, costs, and impacts of the final 

rule. However, in some instances, the 

requisite data are not available or are 

quite limited. Data with which to 

quantify the benefits of the final rule are 

particularly limited. As a result, 

portions of this analysis rely in part on 

general economic principles to provide 

a qualitative discussion of the benefits, 

costs, and impacts of the final rule. The 

primary source of data used in this 

analysis is HMDA.40 Because the latest 

data available are for originations made 

in calendar year 2011, the empirical 

analysis generally uses the 2011 market 

as the baseline. Data from the fourth 

quarter 2011 bank and thrift Call 

Reports,41 the fourth quarter 2011 credit 

union call reports from the National 

Credit Union Administration (NCUA), 

and de-identified data from the National 

Mortgage Licensing System (NMLS) 

Mortgage Call Reports (MCR) 42 for the 

fourth quarter of 2011 were also used to 

identify financial institutions and their 

characteristics. The unit of observation 

in this analysis is the entity: If there are 

multiple subsidiaries of a parent 

company, then their originations are 

summed, and revenues are total 

revenues for all subsidiaries. 

The 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 

transaction 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 higher-priced mortgage 

loans for depositories that do not report 

HMDA in a similar fashion. These 

projections use Poisson regressions that 

estimate transaction volumes as a 

function of an institution’s total assets, 

employment, mortgage holdings and 

geographic presence. 

The discussion below describes four 

categories of benefits and costs. First, 

the Bureau reviews the benefits and 

costs to consumers whose creditors are 

subject to the escrow requirement. 

Second, the Bureau reviews the 

potential benefits and costs to those 

consumers whose creditors are exempt 

from the escrow requirements. Third, 

the Bureau analyzes the benefits and 

costs to creditors subject to the Bureau’s 

escrow requirements. Fourth, the 

Bureau outlines the benefits and costs to 

creditors exempt from the Bureau’s 

escrow requirements. 

1. Potential Costs and Benefits to 

Consumers of Non-Exempt Creditors 

For consumers whose mortgage 

transactions are originated by nonexempt creditors, the main effect of this 

final rule is that the creditor generally 

must provide an escrow account for four 

additional years, i.e., for five years 

instead of for one year. The Bureau 

estimates that these creditors originated 

217,260 first-lien higher-priced 

mortgage loans in 2011. The Bureau 

believes that the benefits for consumers 

of having mandatory escrow accounts 

established include: (1) The 

convenience of paying one bill instead 

of several; (2) a budgeting device to 

enable consumers not to incur a major 

expense later; and (3) a lower 

probability of default and possible 

foreclosure. Mandatory escrow accounts 

already must be established for higherpriced mortgage loans pursuant to 

existing Regulation Z requirements 

adopted in the Board’s 2008 HOEPA 

Final Rule, but to the extent such 

accounts are beneficial to consumers the 

extension of the accounts’ minimum 

durations enhances and extends those 

benefits. 

Consumers may find it more 

convenient to pay one mortgage bill 

instead of paying a mortgage bill, an 

insurance bill, and potentially several 

tax bills. Consumers then can address 

any questions or concerns about 

payment to a single company, the 

mortgage servicer, thus reducing 

transaction costs, and having a single 

bill to pay reduces the likelihood that 

the consumer forget to pay either the 

insurance or the tax bill. The servicer 

effectively assumes the burden of 

tracking whom to pay, how much, and 

when, across multiple payees. These 

benefits, and all the benefits and costs 

listed below unless specified otherwise, 

last for as long as the escrow account 

exists. Thus, the final rule simply 

extends the duration of these benefits 

and costs from one year to five. The 


tkelley on DSK3SPTVN1PROD with 
Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 4745 

43H. Liu, P. Chintagunta, & T. Zhu, 

Complementarities and the Demand for Home 

Broadband Internet Services, Marketing Science, 

29(4), 701–720 (2010). 

44Michael A. Barr & Jane B. Dokko, Paying to 

Save: Tax Withholding and Asset Allocation Among 

Low- and Moderate-Income Taxpayers, Finance and 

Economics Discussion Series, Federal Reserve 

Board (2008), available at: http:// 

www.federalreserve.gov/pubs/feds/2008/200811/ 

200811pap.pdf. 

45 Id. 

46Nathan B. Anderson and Jane B. Dokko, 

Liquidity Problems and Early Payment Default 

Among Subprime Mortgages, Finance and 

Economics Discussion Series, Federal Reserve 

Board (2011), available at: http:// 

www.federalreserve.gov/pubs/feds/2011/201109/ 

201109pap.pdf. 

47Nabil Al-Najjar, Sandeep Baliga, & David 

Besanko. Market forces meet behavioral biases: cost 

misallocation and irrational pricing, RAND Journal 

of Economics, 39(1), 214–237 (2008), available at: 

http://www.kellogg.northwestern.edu/faculty/ 

baliga/htm/sunkcost.pdf. 

48While small creditors operating predominantly 

in rural or underserved areas originate some higherpriced mortgage loans subject to a forward 

commitment, based on HMDA 2011 the Bureau 

believes that the magnitude of these transactions is 

small, relative to the overall higher-priced mortgage 

loan market. Moreover, if the transaction is subject 

to a forward commitment, then the creditor is likely 

to pass-through the escrow cost to the (eventual) 

buyer, and thus the creditor’s cost is not going to 

be affected significantly. On the other hand, for 

consumer benefits this is an unambiguously 

conservative assumption, see below. 

value of this benefit will vary across 

consumers, and there is no current 

research to estimate it. An 

approximation may be found, however, 

in a recent estimate of around $20 per 

month per consumer, depending on the 

household’s income, coming from the 

value of paying the same bill for phone, 

cable television, and Internet services 

(the ‘‘Bundle Study’’).43

Additionally, extending the duration 

of the mandatory escrow period ensures 

that the consumer does not face a 

sizable, unanticipated fee later, for the 

four additional years of escrow account 

provision. Recent research suggests that 

many consumers value the overwithholding of personal income taxes 

through periodic payroll deductions and 

receiving a check from the IRS in the 

spring despite foregoing the interest on 

the overpaid taxes throughout the 

previous year.44 A mortgage escrow 

account works in a similar fashion; 

consumers pay the same fixed amount, 

sometimes interest-free, throughout the 

year in return for not having to pay a 

large lump-sum payment in the end. 

Consequently, consumers with an 

escrow account are much less likely to 

experience potentially unexpected cost 

shocks associated with paying a large 

property tax and/or home insurance 

bills, that could lead other consumers to 

default on their mortgage. Based on 

recent research on the value of receiving 

a refund check from the IRS in the 

spring,45 the Bureau estimates that the 

average value of the benefit of overwithholding resulting from the 

extension of the escrow period for lowto moderate-income households is 2.65 

percent of the yearly amount paid for 

property taxes and insurance. The 

analogy is not exact because a tax 

refund can be used for other purposes 

whereas an escrow account is calibrated 

to meet only the consumer’s insurance 

and property tax obligations. However, 

the Bureau believes consumers may 

experience similar benefit from this 

forced-savings method because they are 

likely to use any forced savings from the 

tax refund for the most pressing needs 

first, and not paying property taxes on 

one’s dwelling can result in foreclosure. 

The Bureau recognizes that any benefit 

may not be the same for all consumers 

and that some consumers may prefer to 

manage their own payments. 

Finally, the final rule may lead to a 

lower probability of default (on average) 

resulting from the budgeting benefits of 

escrow accounts. However, based on 

recent research,46 this benefit may be 

most valuable in the first year after 

originating the mortgage and thus is 

already provided by the existing escrow 

requirement. The Bureau nevertheless 

believes that, although difficult to 

quantify, some further benefit of default 

and foreclosure avoidance extending 

into the second through fifth years 

exists for at least some consumers. 

At least for some consumers, the 

lengthening of the minimum period 

under which an escrow must be 

maintained may have certain costs. The 

Bureau believes these costs may include 

(1) foregone interest; (2) increased prices 

resulting from creditors passing-through 

their costs; and (3) potentially less 

access to credit. 

Under some State regulations, 

creditors are not required to pay interest 

on consumers’ funds held in escrow 

accounts. Therefore, consumers may be 

foregoing interest on such amounts. 

While, on average, consumers value the 

budgeting device described above, it is 

likely that at least some consumers 

would rather invest their funds and 

make their tax and insurance payments 

on their own. The Bureau, however, 

believes that any returns on amounts 

that would have been foregone under 

the escrow requirements are likely to be 

modest. 

The Bureau additionally notes that 

the servicing costs of maintaining an 

escrow account may be passed on to 

consumers, resulting in a greater overall 

cost to consumers of effecting the proper 

and timely payment of their tax and 

insurance obligations. The magnitude of 

this pass-through should be small, 

however, because the marginal increase 

in overall servicing costs resulting 

specifically from the escrow 

requirement is likely to be minor 

compared to those overall servicing 

costs. Some creditors might mistakenly 

allocate the fixed costs of escrow 

provisions (software changes, personnel 

training, and so on), to each consumer 

getting an escrow account, even though 

these costs should not affect the 

creditor’s profit-maximizing price. This 

results in a less-profitable pricing 

scheme, hurting both the creditor and 

the consumers.47

Finally, it is possible that some 

creditors might consider the additional 

four years for which escrow accounts 

must be maintained a sufficiently high 

burden to exit the market for higherpriced mortgage loans altogether. 

However, given that these creditors 

already provide escrows for the first 

year of a higher-priced mortgage loan, 

the Bureau believes it is unlikely that a 

significant number of creditors will exit 

the market for this reason and that, even 

if a creditor exits the market, consumers 

generally should be able to find other 

creditors. The Bureau believes that, 

overall, the final rule will not materially 

reduce consumers’ access to consumer 

financial products or services. 

2. Potential Costs and Benefits to 

Consumers of Exempt Creditors 

For consumers who get a higherpriced mortgage loan from an exempt 

creditor, the final rule will result in no 

escrow account being required, as 

opposed to the creditor being required 

to escrow for a year. The Bureau 

estimates that these creditors originated 

50,468 first-lien higher-priced mortgage 

loans in 2011. The Bureau 

acknowledges that it is likely some of 

these transactions were not eligible for 

the exemption, because they were 

subject to a forward commitment to be 

sold. To further its analysis, however, 

the Bureau conservatively assumes that 

none of the transactions were subject to 

a forward commitment.48

The Bureau believes these consumers 

may benefit from less restricted access 

to credit; lower prices resulting from 

creditors not passing through the cost of 

escrowing to the consumers; and the 

ability to invest their money and earn a 

return. As noted earlier, a small 

mortgage originator operating 

predominantly in rural or underserved 

areas may be better able to compete with 

incumbent originators who escrow 

because it will not have to incur the 


tkelley on DSK3SPTVN1PROD with 
4746 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 

49Nathan B. Anderson and Jane B. Dokko, 

Liquidity Problems and Early Payment Default 

Among Subprime Mortgages, Finance and 

Economics Discussion Series, Federal Reserve 

Board (2011), available at: http:// 

www.federalreserve.gov/pubs/feds/2011/201109/ 

201109pap.pdf. 

50Out of those, there are 3,235banks, 562 thrifts, 

1,372 credit unions, and 2,265 non-depository 

institutions. 

51A median bank or thrift originated 7 first lien 

higher-priced mortgage loans, a median credit 

union originated 3 first lien higher-priced mortgage 

loans, and a median non-depository institution 

originated 13 first lien higher-priced mortgage 

loans. 

costs of establishing and maintaining an 

escrow account. This may provide an 

extra incentive for small originators to 

enter the market, creating greater access 

to credit for consumers living in rural 

and underserved areas. The Bureau does 

not have the data to be able to estimate 

the magnitude of this effect. 

Additionally, the price for such 

consumers may be reduced as mortgage 

providers would not pass the costs of 

providing escrows to consumers. The 

magnitude of this pass-through should 

be small, because firms should 

optimally pass through only the 

increase in marginal costs that tend to 

be small for escrow provision, as 

opposed to the fixed (overhead) costs. 

However, some creditors might 

mistakenly spread the overhead costs of 

escrow provision over all consumers, 

resulting in higher prices to such 

consumers, lower mortgage transaction 

volume for the creditor, and lower 

creditor profit overall. 

Another benefit for consumers may be 

the ability to invest their money and 

earn a return on amounts that might, 

depending on State regulations, be 

forgone under an escrow. While, as 

discussed above, on average, consumers 

value the budgeting device that the 

escrow provides, it is likely that at least 

some consumers would rather have 

flexibility with regard to payment terms. 

The Bureau believes that any returns on 

amounts that would have been foregone 

under the escrow requirements are 

likely to be modest. The exemption 

allows certain creditors not to escrow 

for the first year after mortgage 

origination, thus the magnitude of this 

benefit is even smaller because the 

creditors would have cancelled the 

escrow right after one year otherwise. 

For some consumers, providing an 

exemption for creditors operating in 

rural or underserved communities 

would create certain costs. These costs 

include: The inconvenience of paying 

several bills instead of one; the lack of 

a budgeting device to enable consumers 

not to incur a major expense later; a 

higher probability of foreclosure; and 

the possibility of underestimating the 

overall cost of maintaining their 

residence. 

Because the consumer must pay not 

only a mortgage bill, but also an 

insurance bill and, potentially, several 

tax bills, there is a higher probability 

that the consumer may forget or neglect 

to pay one or more of the bills. 

Moreover, there may be higher 

transaction costs for the consumer who 

no longer has a single organization to 

consult regarding payments, but rather 

must deal with several organizations as 

payment questions arise. The value of 

this cost will vary across consumers, 

and there is no current research to 

estimate it. An approximation is a 

recent estimate of around $20 per month 

per consumer, depending on the 

household’s income, coming from the 

value of paying the same bill for phone, 

cable television, and Internet services as 

described in the Bundle Study, noted 

above. 

Additionally, without a budgeting 

device, consumers will need to selfmanage the payment of intermittent 

large bills. As described above, recent 

research suggests that many consumers 

value the over-withholding of personal 

income taxes through periodic payroll 

deductions and receiving a check from 

the IRS in the spring despite foregoing 

the interest on the overpaid taxes 

throughout the previous year. A 

mortgage escrow works in a similar 

fashion; consumers pay the same fixed 

amount, sometimes interest-free, 

throughout the year, without having to 

pay a large lump-sum payment in the 

end. Based on the recent research of the 

value of receiving a refund check from 

the IRS in the spring, the Bureau 

estimates the average value of having an 

escrow for low to moderate income 

households to be 2.65 percent of the 

yearly amount paid for property taxes 

and insurance. The cost will not be the 

same for all consumers as some 

consumers could find cost savings in 

managing payments on their own. 

However, for those consumers who do 

struggle with payments, there is a higher 

probability of foreclosure (on average) 

resulting from the lack of a budgeting 

device. Based on the recent research,49

consumers not having an escrow 

account in the first year after mortgage 

originations will result in 0.35 percent 

more foreclosures per year for the firstlien higher-priced mortgage loans. 

Having an escrow account for the first 

year of the mortgage obligation’s term 

appears to be particularly important for 

consumer protection considerations 

because often the consumer has 

depleted savings as a part of the 

mortgage origination process and may 

not have prepared adequately for the 

upcoming semi-annual or annual 

property tax and home insurance bills. 

Both of these effects, and thus the 

benefits of having (or the costs of not 

having) an escrow account, appear to 

diminish after the first year. As noted 

above, some consumers might be 

unaware of the amount of the property 

tax and home insurance that they will 

have to pay every year. Having an 

escrow illustrates to consumers exactly 

how much they have to pay per month 

for the mortgage, property tax, and 

home insurance. If consumers 

underestimate the cost of the property 

tax and the home insurance, then some 

consumers will buy a house that they 

cannot afford, or buy a more expensive 

house than they would ideally want. 

The Bureau does not have the data to 

estimate the magnitude of this cost. 

3. Potential Costs and Benefits for NonExempt Creditors 

For the non-exempt creditors, the 

main effect of the final rule is that 

creditors need to provide an escrow 

account for four additional years: for 

five years instead of for one year. The 

Bureau does not have the data on how 

many creditors do not already provide 

escrow accounts up to the fifth year 

after a mortgage origination. The Bureau 

estimates that there are 7,434 nonexempt creditors who originated any 

first-lien higher-priced mortgage loans 

in 2011.50 A median creditor in this 

group originated six first-lien higherpriced mortgage loans in 2011.51 The 

Bureau notes that some creditors who 

might otherwise qualify for the Bureau’s 

exemption may decide to continue to 

provide escrows for first-lien higherpriced mortgage loans. The Bureau 

cannot estimate the number of these 

creditors, and conservatively estimates 

this number to be insignificant. The 

benefits and costs described in this part 

of the analysis would also apply to these 

creditors. 

The two main benefits for this group 

of creditors are: Assurance that 

consumers have met their obligations; 

and the potential for interest earnings in 

the escrow account subject to State 

regulations. If consumers are late on 

their property taxes, the government 

often has the first claim on the dwelling 

that secures the transaction in case of 

consumer default. If consumers do not 

pay their home insurance premiums, 

then the creditor might end up with 

nothing if something happens to the 

dwelling that secures the transaction. 

Because of this potential, many 

creditors currently verify whether or not 

the consumer made the requisite 


tkelley on DSK3SPTVN1PROD with 
Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 4747 

52The Bureau is aware that some jurisdictions 

still process taxes by hand and/or impose fees on 

the creditors seeking access to the tax information, 

significantly adding to the burden of establishing 

escrow accounts in these jurisdictions. 

53Out of those, there are 2,112 banks, 141 thrifts, 

355 credit unions, and 4 non-depository 

institutions. The Bureau does not possess the 

information on whether HMDA non-reporting nondepository institutions are rural, and conservatively 

assumes that they are not. 

54A median bank or thrift originated 13, a median 

credit union originated 10, and a median nondepository institution originated 6 mortgage 

obligations. 

55The Bureau acknowledges that this creditor 

cost is also a consumer benefit. However, as 

described above, the Bureau believes the benefit per 

consumer is fairly modest. 

insurance premiums and tax payments 

every year even where the consumer did 

not set up an escrow account. The final 

rule will allow creditors to forego this 

verification process as the funds would 

be escrowed. 

Moreover, the creditor may be able to 

gain returns on the money that the 

consumers keep in their escrow 

account. Depending on the State, the 

creditor might not be required to pay 

interest on the money in the escrow 

account. The amount that the consumer 

is required to have in the consumer’s 

escrow account is generally limited to 

two months’ worth of property taxes 

and home insurance. However, some 

States require a fixed interest rate to be 

paid on escrow accounts, resulting in an 

additional cost to the creditors. This 

cost is higher if the required interest rate 

is not updated frequently and current 

interest rates are low compared to the 

rate set by the State. 

There are startup and operational 

costs of providing escrow accounts. 

Creditors are already required to 

provide the escrow account for a year, 

and thus the Bureau believes that there 

are few startup costs implicated by the 

final rule or that any startup costs are 

relatively minor given that these 

creditors probably have already set up a 

system capable of escrowing in response 

to the current regulation. There are, 

however, operating costs implicated in 

maintaining an escrow account for an 

additional four years. These costs vary 

widely with the size of the institution 

and the local jurisdictions served. For 

the bigger creditors, with up-to-date 

information technology systems, the 

Bureau believes the cost of maintaining 

escrows for four additional years is 

negligible, and that many of these 

creditors may already do so. For a small 

creditor, that does not invest as much in 

technology, and serves a jurisdiction 

that does not process taxes 

automatically, the cost of providing the 

escrow account could be larger.52

However, the Bureau believes that 

escrow accounts become cost-effective 

once operations reach a certain scale, 

and thus even this operating cost is 

relatively minor. The Board’s 

calculation and the Bureau’s subsequent 

adjustments to the minimal portfolio 

size necessary to escrow ensure that the 

non-exempt creditors with over 500 

originations per year can achieve the 

scale necessary for cost-efficient escrow 

provision. Additionally, the creditors 

can outsource escrowing to servicing 

firms and pass through at least some of 

these costs to the consumer. 

4. Potential Costs and Benefits for 

Exempt Creditors 

For the exempt creditors, the main 

effect of the final rule is that the creditor 

does not need to provide an escrow 

account at all for the first year after 

mortgage origination. The Bureau 

estimates that there are 2,612 exempt 

creditors who originated any first-lien 

higher-priced mortgage loans in 2011.53

A median creditor in this group 

originated 13 first-lien higher-priced 

mortgage loans in 2011. A median bank 

or thrift originated 13, a median credit 

union originated 10, and a median nondepository institution originated 6 

mortgage obligations.54

The main benefit for this group of 

creditors is in eliminating or greatly 

reducing the accounting and 

compliance costs of providing the 

escrow accounts. It is not clear whether 

this saving is significant, resulting from 

the fact that these creditors already 

provide escrows for the first year, and 

thus have already undertaken the effort 

to set up a system capable of escrowing. 

The exemption from the final rule is 

likely to lead to less employee time 

being devoted to complying with the 

regulation; however, the Bureau 

believes that benefit is likely to be 

negligible resulting from the number of 

first-lien higher-priced mortgage loans 

originated at a median institution. 

Because the creditors in this group 

who currently extend higher-priced 

mortgage loans have already expended 

the start-up costs of providing escrows, 

many of these creditors might be willing 

to continue providing escrows to their 

consumers if the ongoing costs of 

providing escrows are low. For these 

creditors the costs and benefits are akin 

to those described above for the nonexempt creditors, with the stipulation 

that the benefits of providing escrows 

for five years clearly outweigh the costs. 

However, there are several costs 

associated with this group of creditors, 

including: The uncertainty over whether 

a consumer has met his obligations, a 

higher probability of foreclosure, and 

foregoing the additional funds that 

escrows may provide. Because creditors 

that do not provide escrow accounts are 

not certain whether consumers have 

paid their property taxes and home 

insurance, they carry a considerable 

amount of risk. As noted previously, if 

consumers are late on their property 

taxes, the government often has the first 

claim on the dwelling that secures the 

transaction in case of consumer default. 

If consumers do not pay their home 

insurance premiums, then the creditor 

might end up with nothing if something 

happens to the dwelling that secures the 

transaction. 

Moreover, all else being equal, these 

consumers have a higher probability of 

defaulting. Consumers, on average, 

value a budgeting device to enable 

consumers not to incur a major expense 

later. As noted above, recent research 

suggests that many consumers value the 

over-withholding of personal income 

taxes through periodic payroll 

deductions and receiving a check from 

the IRS in the spring despite foregoing 

the interest on the overpaid taxes 

throughout the previous year. A 

mortgage escrow works in a similar 

fashion; consumers pay the same fixed 

amount, sometimes interest-free, 

throughout the year, without having to 

pay a large lump-sum payment in the 

end. As previously noted, research 

suggests that consumers not having an 

escrow in the first year after mortgage 

originations will result in 0.35 percent 

more foreclosures per year for first-lien 

higher-priced mortgage loans. 

Finally, creditors who do not escrow 

forego the opportunity to invest the 

money in the consumers’ escrow 

accounts. Depending on the State, the 

creditor might not have to pay interest 

on the money in the escrow account. 

The excess amount that the consumer is 

required to have in the consumer’s 

escrow account is generally limited to 

two months’ worth of property taxes 

and home insurance. However, some 

States require a fixed interest rate to be 

paid on escrow accounts. Laws setting 

rates may not be updated frequently 

enough, resulting in an additional cost 

to creditors, especially when the interest 

rates are exceptionally low.55

C. Impact of the Final Rule on 

Depository Institutions and Credit 

Unions With $10 Billion or Less in Total 

Assets, as Described in Section 1026 

The discussion below describes 

certain consequences of the final rule 

based on the particular characteristics of 

the creditor. First, the Bureau analyzes 

the impact of the final rule on creditors 

with $10 billion or less in total assets, 


tkelley on DSK3SPTVN1PROD with 
4748 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 

56These include 3,170 banks, 548 thrifts, and 

1,369 credit unions. 

which are subject to the Bureau’s 

escrow requirements. Then, the Bureau 

outlines the impact of the final rule on 

creditors with $10 billion or less in total 

assets, which are exempt from the 

Bureau’s escrow requirements. For both 

of these groups the benefits, the costs, 

and the median origination counts are 

identical to the discussion above. 

For the non-exempt creditors, the 

main effect of the final rule is that the 

creditor needs to provide an escrow 

account for four additional years: For 

five years instead of for one year. The 

Bureau estimates that there are 5,087 

non-exempt creditors with $10 billion 

or less in total assets, who originated 

any first-lien higher-priced mortgage 

loans in 2011.56 These creditors 

originated 91,142 first-lien higher-price 

mortgage loans in 2011. The Bureau 

additionally notes that some creditors 

who might otherwise qualify for the 

Bureau’s exemption may decide to 

continue to provide escrows for firstlien higher-priced mortgage loans. The 

Bureau cannot estimate the number of 

these creditors, and conservatively 

estimates this number to be 

insignificant. The benefits and costs 

described in this part of the analysis 

would also apply to these creditors. The 

impact described below would also 

apply to these creditors. 

For creditors that qualify for the new 

exemption for creditors that operate 

predominantly in rural or underserved 

areas, the regulation will allow them, 

post-effective date, to avoid having to 

comply with both the existing 

requirement to establish escrow 

accounts for covered higher-priced 

mortgage loans for at least one year and 

the new general requirement to establish 

accounts for at least five years for new 

consumer transactions if the creditors 

determine that it is in their best interest 

to do so. A creditor in this group could 

voluntarily require an escrow account 

for five years if they choose to, and thus 

this rule does not impose any significant 

costs on this group of creditors. These 

creditors originated 50,468 first-lien 

higher-priced mortgage loans in 2011. 

D. Impact of the Final Rule on 

Consumers in Rural Areas 

The Bureau expects that for the 

consumers in rural areas, the costs and 

benefits are largely the same as for the 

consumers in the not necessarily rural 

areas described above. The single 

biggest difference is the availability of 

credit; rural consumers have 

significantly fewer options for getting a 

higher-priced mortgage loan. Even for 

the densest counties included in the 

rural definition (UIC code 8 counties 

with micropolitans), the median county 

has only 10 creditors making higherpriced mortgage loans, as opposed to 16 

for the least dense UIC code not 

included in the rural definition (UIC 5). 

Given the scope of the rural and 

underserved exemption, the Bureau 

believes that any rural consumer can, 

but need not, get a mortgage transaction 

from an exempt creditor as opposed to 

getting a mortgage transaction from a 

non-exempt creditor, and that there will 

be sufficiently many creditors left in any 

given market to ensure a proper 

competitive process. As a result of the 

final rule, the Bureau believes that 

consumers in rural areas may benefit 

from greater access to credit, because 

there may be more competition between 

incumbent originators who escrow and 

smaller mortgage originators who may 

benefit from the Bureau’s exemption 

requirement. Some consumers might 

prefer to get a mortgage with an escrow, 

for all the benefits described above. 

However, the Bureau conservatively 

estimates that all rural consumers will 

choose to get their mortgages from an 

exempt creditor and that none of these 

consumers’ transactions will be subject 

to forward commitment. 

For these consumers, the final rule 

will result in no escrow account being 

required, as opposed to the creditor 

being required to escrow for a year. The 

Bureau estimates that there were 50,468 

first-lien higher-priced mortgage loans 

originated in rural areas in 2011. 

The Bureau believes these consumers 

may benefit from less restricted access 

to credit; lower prices resulting from 

creditors not passing through the cost of 

escrowing to the consumers; and the 

ability to invest their money and earn a 

return. Because a small mortgage 

originator operating predominantly in 

rural or underserved areas will not have 

to incur the costs of establishing and 

maintaining escrow accounts for higherpriced mortgage loans, it may be willing 

to keep making such transactions where 

it is not willing to do so under the 

current regulation. This may provide 

stronger incentives for small originators 

to continue making higher-priced 

mortgage loans (or to resume doing so 

where they have previously decided to 

stop), creating greater access to credit 

for consumers living in rural and 

underserved areas. The Bureau does not 

have the data to be able to estimate the 

magnitude of this effect. 

E. Consideration of Alternatives 

To implement the statutory changes 

the Bureau considered different 

definitions of rural and the size 

exemption, both for the asset size and 

for the number of originations. As 

described above, the definition of rural 

proposed in the Board’s 2011 Escrows 

Proposal included counties with 

USDA’s urban influence codes of 7, 10, 

11, and 12. Taking into account the 

comments received on the proposal, the 

Bureau believed this definition was too 

narrow to capture fully Congress’s 

apparent concern regarding access to 

credit. 

In finalizing the rule the Bureau 

considered using an alternative 

definition of rural that would have used 

the same definition as provided under 

USDA’s section 502 Rural Housing 

program. Under the USDA section 502 

Rural Housing definition of ‘‘rural’’, 

approximately 37 percent of the U.S. 

population lives in an area considered 

to be rural, compared to approximately 

10 percent according to the definition 

used in the final rule, which defines 

rural as counties with UICs 4, 6, 7, 8, 9, 

10, 11, and 12. The Bureau considered 

the trade-off of exempting more 

creditors and thus potentially mitigating 

consumer access to credit issues versus 

exempting fewer creditors and 

providing more consumers with the 

consumer protections represented by 

escrow accounts. The Bureau’s analysis 

of the 2011 HMDA data showed that, 

even with the definition of rural in the 

final rule that includes counties with 

codes of 4, 6, 7, 8, 9, 10, 11, and 12, a 

median county in the least dense county 

code that is not exempt (code 5) had 16 

creditors that extended any higherpriced mortgage loans in 2011. In light 

of these data, the Bureau believes that, 

even if some of these creditors exit the 

higher-priced mortgage loan market for 

lack of an exemption, there will still be 

enough competition in those counties, 

and therefore the risk of potential access 

to credit issues for consumers in these 

areas is mitigated. Consequently, the 

Bureau believes that expanding the 

definition of rural in the final rule to the 

USDA section 502 Rural Housing 

definition would have allowed creditors 

to originate mortgage obligations 

without the escrow protections 

mandated by the Congress, while access 

to credit would not be significantly 

improved. In light of these 

considerations, the Bureau believes the 

final rule reflects the Bureau’s judgment 

based upon all of the evidence it has 

obtained regarding the areas included, 

such as the urban influence, density of 

the population, and the number of 

higher-priced mortgage loan creditors in 

the county, in how best to effectuate the 

purposes of the law Congress enacted. 

In addition, the Bureau considered 

alternative origination thresholds. The 


tkelley on DSK3SPTVN1PROD with 
Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 4749 

57Consider, for example, a creditor that originates 

300 mortgage obligations, but services only 80 of 

them. 

58For purposes of assessing the impacts of the 

final rule on small entities, ‘‘small entities’’ is 

defined in the RFA to include small businesses, 

small not-for-profit organizations, and small 

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

business’’ is determined by application of Small 

Business Administration regulations and reference 

to the North American Industry Classification 

System (NAICS) classifications and size standards. 

5 U.S.C. 601(3). A ‘‘small organization’’ is any ‘‘notfor-profit enterprise which is independently owned 

and operated and is not dominant in its field.’’ 5 

U.S.C. 601(4). A ‘‘small governmental jurisdiction’’ 

is the government of a city, county, town, township, 

village, school district, or special district with a 

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

59 5 U.S.C. 609. 

60The current SBA size standards are found on 

SBA’s Web site at http://www.sba.gov/content/ 

table-small-business-size-standards. 

Board’s proposal extended the 

exemption to creditors that, together 

with their affiliates, originate and retain 

servicing rights to 100 or fewer first-lien 

mortgage obligations in either of the 

preceding two years. As discussed more 

fully above, the Board noted its belief 

from the available information that the 

economies of scale necessary to escrow 

cost-effectively, or else to satisfy the 

escrow requirement by outsourcing to a 

sub-servicer, generally exist when a 

mortgage servicer has a portfolio of at 

least 500 mortgage obligations. 

Consequently, the Board proposed 

setting the cut-off at 100 or fewer firstlien mortgage obligations originated and 

for which servicing rights are retained, 

assuming an average of five years until 

an institution’s mortgage obligations are 

paid off. After reviewing the comments 

submitted by many creditors in rural 

areas regarding the adverse conditions 

they face, such as idiosyncratic 

accounting systems (including 

calculations by hand) employed by 

some of the jurisdictions, the Bureau 

believes that many such creditors may 

need a larger number of mortgage 

obligations in portfolio to be able to 

provide escrow accounts costeffectively. The Bureau has expanded 

the exemption to include creditors that, 

together with their affiliates, originate 

500 or fewer first-lien covered 

transactions. The Bureau believes that 

defining the limit in terms of originated 

transactions, as opposed to transactions 

originated and serviced, facilitates 

compliance by not requiring institutions 

to track multiple metrics for purposes of 

this final rule and the 2013 ATR Final 

Rule and to promote consistent 

application of the two exemptions. 

However, this change by itself would 

have severely restricted the scope of the 

exemption, as there are more creditors 

that originate and service 100 or fewer 

transactions than there are creditors that 

simply originate 100 or fewer.57 Based 

on 2011 HMDA data, setting the annual 

originations limit at 500 ensures that 

89.5% of the creditors that originated 

and serviced 100 transactions are also 

under the 500 first-lien origination 

limit. 

Because of the changes in the 

originations limit, the Bureau 

considered whether an asset-size limit 

would be appropriate, to prevent larger 

creditors with sophisticated information 

technology systems and the capacity to 

escrow from taking unintended 

advantage of the exemption. As noted 

above, in the Board’s 2011 Escrows 

Proposal, no asset-size limit was 

proposed, although the Board solicited 

comment on whether such a limit was 

appropriate. The Bureau initially 

considered a $1 billion asset-size limit, 

believing organizations of at least that 

size had the capacity to implement the 

escrow requirements. However, in 

accordance with its goal to harmonize 

the final rule as much as practicable 

with the 2013 ATR Final Rule, 

discussed above, the Bureau has 

adopted a $2 billion asset-size limit. 

Based on a review of HMDA data, the 

Bureau believes that there is an 

insignificant number of creditors that 

operate predominantly in rural or 

underserved areas, have fewer than 500 

first-lien originations, and have between 

$1 and $2 billion in assets. 

Consequently, the Bureau believes that 

harmonizing the approaches between 

the two final rules will simplify 

compliance and reduce associated 

compliance costs, while having a 

negligible impact on the scope of the 

exemptions. 

VIII. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

generally requires an agency to conduct 

an initial regulatory flexibility analysis 

(IRFA) and a final regulatory flexibility 

analysis (FRFA) of any rule subject to 

notice-and-comment rulemaking 

requirements, unless the agency certifies 

that the rule will not have a significant 

economic impact on a substantial 

number of small entities.58 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.59 An entity is considered 

‘‘small’’ if it has $175 million or less in 

assets for the banks, and $7 million or 

less in revenue for non-bank mortgage 

creditors, mortgage brokers, and 

mortgage servicers.60 In the Board’s 

2011 Escrows Proposal, the Board 

conducted an initial regulatory 

flexibility analysis (IRFA) and 

concluded that the proposed rule would 

have a significant economic impact on 

a substantial number of small entities. 

The Board solicited comments on the 

number of small entities likely to be 

affected by the proposal, as well as the 

costs, compliance requirements, and 

any changes in operating procedures 

arising from the application of the 

proposed rules to small businesses. The 

Board additionally solicited comments 

regarding a number of proposed 

provisions that could minimize 

compliance burdens on small entities by 

relying on other disclosure requirements 

with which they already must comply 

and/or exempting certain classes of 

small creditors from the proposed 

regulations. The Board also welcomed 

comment on any significant alternatives 

that would minimize the impact of the 

proposed rules on small entities. 

The Bureau has reviewed the 

comments on the Board’s IRFA and the 

broader Notice of Proposed Rulemaking 

addressing the burden imposed by the 

proposed rule and potential mitigation 

measures and alternatives. As described 

further below, the Bureau carefully 

considered the comments received and 

performed its own independent analysis 

of the potential impacts of the final rule 

on small entities and alternatives to the 

final rule. Based on the comments 

received, the Bureau’s own analysis, 

and for the reasons stated in section 4 

below, the undersigned certifies that 

this final rule will not have a significant 

economic impact on a substantial 

number of small entities. Nevertheless, 

to better inform the rulemaking, the 

Bureau has prepared the following final 

regulatory flexibility analysis. 

1. Statement of the Need for, and 

Objectives of, the Final Rule 

The Bureau is publishing final rules 

to implement certain amendments to 

TILA made by the Dodd-Frank Act. 

Congress enacted TILA based on 

findings that economic stability would 

be enhanced and competition among 

consumer credit providers would be 

strengthened by the informed use of 

credit resulting from consumers’ 

awareness of the cost of credit. The 

Bureau’s final rule requires creditors to 

establish escrow accounts for taxes and 

insurance for at least five years after 

consummation. The final rule also 

creates an exemption from the escrow 

requirement for certain mortgage 

transactions extended by a creditor that 

meets four conditions. Those conditions 

are that the creditor: (1) Makes most of 

its first-lien covered transactions in 

rural or underserved counties; (2) 


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together with all affiliates, has annual 

originations of 500 or fewer first-lien 

covered transactions; (3) has an asset 

size less than $2 billion; and (4) together 

with its affiliates, does not escrow for 

any mortgage that it or its affiliates 

currently services, except in limited 

instances. 

These amendments are intended to 

improve consumers’ understanding of 

the overall costs of a given higher-priced 

mortgage loan and, in turn, facilitate 

their ability to shop for mortgages. 

Moreover, requiring escrow accounts for 

certain higher-priced mortgage loans 

may reduce the likelihood that a 

consumer faces a sizable, unanticipated 

fee or increase in payments. 

2. Summary of Significant Issues Raised 

by Comments in Response to the Initial 

Regulatory Flexibility Analysis 

In accordance with section 3(a) of the 

RFA, 5 U.S.C. 603(a), the Board 

prepared an IRFA in connection with 

the proposed rule, and acknowledged 

that the projected reporting, 

recordkeeping, and other compliance 

requirements of the proposed rule on 

the whole would have a significant 

economic impact on a substantial 

number of small entities, including 

small mortgage creditors and servicers. 

In addition, the Board recognized that 

the precise compliance costs would be 

difficult to ascertain because they would 

depend on a number of unknown 

factors, including, among other things, 

the specifications of the current systems 

used by small entities to prepare and 

provide disclosures and/or solicitations 

and to administer and maintain 

accounts. The Board sought information 

and comment on any costs, compliance 

requirements, or changes in operating 

procedures arising from the application 

of the proposed rule to small businesses. 

The Bureau reviewed comments 

submitted by various financial 

institutions and trade organizations in 

order to ascertain the economic impact 

of the proposed rule on small entities. 

Although only a few commenters 

focused on the Board’s IRFA analysis, 

such commenters expressed concern 

that the Board had underestimated the 

costs of compliance. In one comment 

letter a trade organization noted that one 

large creditor implementing the 

Regulation Z amendments that became 

effective October 1, 2009, indicated that 

it required over 70,000 hours to change 

its systems. Smaller financial 

institutions also suggested that 

compliance costs would be significant 

given the need to change systems and 

train personnel. In addition, the Office 

of Advocacy of the U.S. Small Business 

Administration (Advocacy) submitted a 

comment on the Board’s IRFA. 

Advocacy expressed concern about 

the level of information the Board 

provided in its IRFA regarding the 

impact of the proposed rule on small 

entities and it encouraged the Board to 

provide additional information. 

Advocacy also raised concerns 

concerning the scope of the exception 

and made suggestions to ease burdens in 

connection with the proposed 

disclosures. For the reasons stated 

below, the Bureau believes that the 

Board’s IRFA complied with the 

requirements of the RFA and the Bureau 

has modified certain aspects of the 

proposal in order to mitigate some of the 

impact on small entities, including 

some identified by Advocacy. 

Section 3(a) of the RFA requires 

agencies to publish for comment an 

IRFA which shall describe the impact of 

the proposed rule on small entities. See 

5 U.S.C. 603(a). In addition, section 3(b) 

requires the IRFA to contain certain 

information including a description of 

the projected reporting, recordkeeping 

and other compliance requirements of 

the proposed rule, including an estimate 

of the classes of small entities which 

will be subject to the requirement and 

the type of professional skills necessary 

for preparation of the report or record. 

See 5 U.S.C. 603(b). The Bureau believes 

that the Board’s IRFA complied with the 

requirements of the RFA. The Board 

described the impact of the proposed 

rule on small entities by describing the 

rule’s proposed requirements in detail 

throughout the supplementary 

information for the proposed rule. 

Additionally, the Board described the 

projected compliance requirements of 

the rule in its IRFA, noting the need for 

small entities to update systems, 

operating procedures, and disclosures 

under the proposed rule. In the 

proposal, the Board described the 

projected impact of the proposed rule 

and sought comments from small 

entities specifically regarding the effect 

the proposed rule would have on their 

activities. In their comments, small 

entities have described to varying 

degrees the increased costs associated 

with the Board’s proposed rules 

particularly with respect to the 

proposed disclosure requirements 

concerning escrow accounts. 

As a result of the Bureau’s review of 

Advocacy’s and other comments 

regarding the potential compliance 

burdens of adopting the disclosure 

portions of the Board’s 2011 Escrows 

Proposal before resolution of the 

Bureau’s TILA–RESPA integration 

rulemaking, the final rule does not 

adopt the Board’s proposed disclosures 

provisions. In addition, as discussed 

further below, the Bureau has also 

considered additional measures as 

suggested by Advocacy to broaden the 

proposed exemption so that more small 

entities can qualify. 

3. Description and Estimate of Small 

Entities to Which the Final Rule Would 

Apply 

The final rule applies generally to 

institutions and entities that engage in 

originating or extending home-secured 

credit, as well as servicers of these 

mortgage obligations. The Board 

acknowledged in its IRFA the lack of a 

reliable source for the total number of 

small entities likely to be affected by the 

proposal, because the credit provisions 

of TILA and Regulation Z have broad 

applicability to individuals and 

businesses that originate, extend and 

service even small numbers of homesecured transactions. The Board 

identified through data from Reports of 

Condition and Income (Call Reports) 

approximate numbers of small entities 

that would be subject to the proposed 

rules. The summary of institutions 

considered small according to the 

criteria described above, regardless of 

whether they are exempt from the rule, 

is in the table below. 


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61This figure includes 1,432 banks, 203 thrifts, 

817 credit unions, and 1,325 non-depository 

institutions. 

62The median first-lien higher-priced mortgage 

loan by institution is as follows: 5 for banks and 

thrifts; 2 for credit unions; and 5 for non-depository 

institutions. 

63National Association of Federal Credit Unions, 

Top 10 Questions about Mortgage Subservicing 

(Podcast), available at: http://www.nafcu.org/ 

NSCTertiary.aspx?id=23703. 

64Mortgage Bankers Association, Residential 

Mortgage Servicing for the 21st Century, May 2011. 

Amy Crews Cutts & Richard K. Green, Innovative 

Servicing Technology: Smart Enough to Keep 

People in Their Houses? Freddie Mac Working 

Paper #04–03 (2004). Prime Alliance Loan 

Servicing, Re-Thinking Loan Servicing, (2010). 

Adam Levitin & Tara Twomey, Mortgage Servicing, 

28 Yale J. on Reg. 1 (2011). 65Breaking this down by small creditor type, 85 

percent of banks originate less than 14, and 85 

percent of thrifts originate less than 9 higher-priced 

mortgage loans, 85 percent of credit unions 

originate less than 10 higher-priced mortgage loans, 

and 85 percent of non-depository institutions 

originate less than 16 higher-priced mortgage loans. 66Revenue has been used in other analyses of 

economic impacts under the RFA. For purposes of 

this analysis, the Bureau uses revenue as a measure 

of economic impact. In the future, the Bureau will 

consider whether an alternative quantifiable or 

numerical measure may be available that would be 

more appropriate for financial firms. 67The ratio is below 0.5 percent for 85 percent 

of the creditors among any of the four small creditor 

types. 

The Bureau estimates that there are 

3,777 non-exempt creditors who 

originated any first-lien higher-priced 

mortgage loans in 2011.61 A median 

creditor in this group originated four 

first-lien higher-priced mortgage loans 

in 2011.62 The Bureau does not have 

data on how many creditors do not 

already provide escrow accounts up to 

the fifth year after a mortgage 

origination. Moreover, no commenters 

submitted nationally-representative data 

including this information. The Bureau 

additionally notes that some creditors 

who might otherwise qualify for the 

Bureau’s exemption may decide 

voluntarily to continue to provide 

escrows for first-lien higher-priced 

mortgage loans. The Bureau cannot 

estimate the number of these creditors, 

and conservatively estimates this 

number to be insignificant, but notes 

that the impacts described in this part 

of the analysis would also apply to these 

creditors. 

4. Reporting, Recordkeeping, and Other 

Compliance Requirements 

The costs to the non-exempt creditors 

are described in the section 1022 

analysis above, and mainly include the 

ongoing operating costs of extending the 

escrow account provision from one to 

four years. For the creditors who are 

processing escrows in-house, this cost is 

negligible, given that these creditors 

probably have already set up a system 

capable of escrowing in response to the 

current regulation. For the creditors that 

outsource escrowing, the fixed cost of 

contracting has already been incurred. 

The creditors that operate 

predominantly in rural or underserved 

areas are exempted, unless they have 

reached the scale at which the Bureau 

believes that it is cost-efficient to set up 

escrow accounts. 

The Bureau does not possess 

nationally representative information 

regarding this cost. However, the cost of 

escrowing is a part of the overall 

servicing cost of a mortgage obligation. 

The most recent estimate of the 

servicing cost of a mortgage obligation is 

$100 per transaction per year, if the 

servicing is outsourced.63 The Bureau 

does not possess reliable information on 

what fraction of the $100 is attributable 

to maintaining escrow accounts. 

However, none of the several examined 

industry, regulatory, and academic 

studies of servicing singled out 

escrowing as the first or the main 

component of the overall servicing 

costs.64 Thus, the Bureau conservatively 

assumes that the cost of this rule per 

transaction is at most $50, and over the 

four years is at most $200. According to 

the Bureau’s projections, 85 percent of 

the affected non-exempt small 

institutions originate less than 14 

higher-priced mortgage loans, resulting 

in an at most a $2800 cost per 

institution.65 Therefore, the Bureau 

believes that the rule will not have a 

significant impact on small entities. 

Examining the ratios of these costs to 

the revenues 66 of the institutions, for 

85% of small creditors these costs 

represent less than 0.3% of their 

revenues.67

If there are creditors who have not 

already implemented the Board’s 2008 

HOEPA Final Rule and would not be 


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68Consider, for example, a creditor who 

originates 300 transactions, but services only 80 of 

them. 

eligible for the exemption for creditors 

who operate predominantly in rural or 

underserved areas, there may be a need 

for the creditors’ staff to develop new 

professional skills and new 

recordkeeping regimes to comply with 

the revised requirements. These costs 

will depend on a number of unknown 

factors, including, among other things, 

the specifications of the current systems 

used by such entities. The Bureau 

believes that the number of such 

institutions would be small and does 

not affect its judgment that the rule will 

not impose a significant impact on a 

substantial number of small entities. 

Finally, as discussed above, the rule 

allows exempted creditors to stop 

establishing escrow accounts even for 

the first year of the mortgage obligation, 

which will allow creditors to eliminate 

the compliance costs of their current 

programs for new loans going forward if 

they decide it makes sense to do so. 

5. Steps Taken To Minimize the 

Economic Impact on Small Entities 

The steps the Bureau has taken to 

minimize the economic impact and 

compliance burden on small entities, 

including the factual, policy, and legal 

reasons for selecting the alternatives 

adopted and why each one of the other 

significant alternatives was not 

accepted, are described above in the 

section-by-section analysis, in part VII, 

and in the summary of issues raised by 

the public comments in response to the 

proposal’s IRFA. The final rule’s 

modifications from the proposed rule 

that minimize economic impact on 

small entities are discussed below. 

Additionally, the Bureau considered 

significant alternatives to most of the 

dimensions of the small creditor 

exemption: the definition of rural, the 

transaction origination limit, and the 

asset-size threshold. 

First, the Bureau has declined to 

implement at this time the amendments 

to TILA concerning certain new 

disclosure requirements concerning 

escrows accounts. The Bureau believes 

that this decision to coordinate these 

disclosures with the finalization of the 

TILA–RESPA integration rulemaking 

will decrease the economic impact of 

the final rule on small entities by 

limiting their compliance costs. 

Moreover, the Bureau believes that 

harmonizing certain title XIV required 

disclosures may provide greater clarity 

to the market and better fulfill TILA’s 

stated purpose of enabling consumers to 

better understand the cost of credit. 

Second, upon reviewing public 

comment, the Bureau has expanded the 

exemption for creditors who operate 

predominantly in rural or underserved 

areas to include a broader range of areas 

than previously identified in the 

proposal. The Bureau believes that will 

decrease the number of small entities 

covered by the regulation. The Bureau 

considered different definitions of 

‘‘rural’’ and the size exemption, both for 

the asset size and for the number of 

originations. 

In finalizing the rule the Bureau 

considered using an alternative 

definition of rural that would have used 

the same definition as provided under 

USDA’s section 502 Rural Housing 

program. Under the USDA section 502 

Rural Housing definition of ‘‘rural’’, 

approximately 37 percent of the U.S. 

population lives in an area considered 

to be rural, compared to approximately 

10 percent according to the definition 

used in the final rule, which defines 

rural as counties with UICs 4, 6, 7, 8, 9, 

10, 11, 12. The Bureau considered the 

trade-off of exempting more creditors 

and thus potentially mitigating 

consumer access to credit issues versus 

exempting fewer creditors and 

providing consumers with the consumer 

protections represented by escrow 

accounts. The Bureau’s analysis of the 

2011 HMDA data showed that, even 

with the definition of rural in the final 

rule that includes counties with codes 

of 4, 6, 7, 8, 9, 10, 11, and 12, a median 

county in the least dense county code 

that is not exempt (code 5) had 16 

creditors that extended any higherpriced mortgage loans in 2011. In light 

of these data, the Bureau believes that, 

even if some of these creditors exit the 

higher-priced mortgage loan market for 

lack of an exemption, there will still be 

enough competition in those counties, 

and therefore the risk of potential access 

to credit issues for consumers in these 

areas is mitigated. The Bureau believes 

that the current definition better reflects 

the intention of the statute’s 

authorization to create a rural exception, 

and facts about the areas included, such 

as the urban influence, density of the 

population, and the number of higherpriced mortgage loan creditors in the 

county. 

In addition, the Bureau considered 

alternative origination thresholds. The 

Board’s 2011 Escrows Proposal would 

have extended the exemption to 

creditors that, together with their 

affiliates, originated and retained 

servicing rights to 100 or fewer mortgage 

obligations secured by a first-lien on 

real property or a dwelling. In the 

Board’s 2011 Escrows Proposal the 

Board noted its belief from the available 

information that the economies of scale 

necessary to escrow cost-effectively, or 

else to satisfy the escrow requirement by 

outsourcing to a sub-servicer, generally 

exist when a mortgage servicer has a 

portfolio of at least 500 mortgage 

obligations. Consequently, the Board 

proposed setting the cut-off at 100 or 

fewer first-lien mortgage obligations 

originated annually and for which 

servicing rights are retained, assuming 

an average of five years until an 

institution’s mortgage obligations are 

paid off. The Bureau has expanded the 

exemption to include creditors that, 

together with their affiliates, originate 

500 or fewer first-lien covered 

transactions annually. The Bureau 

believes that defining the limit in terms 

of originated transactions, as opposed to 

transactions originated and serviced, 

facilitates compliance by not requiring 

institutions to track multiple metrics for 

the escrow and qualified mortgage rules 

and to promote consistent application of 

the two exemptions. However, this 

change by itself would have severely 

restricted the scope of the exemption, as 

there are more creditors that originate 

and service less than 100 transactions 

than there are creditors that simply 

originate 100 transactions.68 From the 

2011 HMDA data, setting the new limit 

at 500 transactions ensures that 89.5 

percent of the creditors that originated 

and serviced 100 transactions are under 

the new 500 first-lien origination limit. 

However, as discussed more fully above, 

to prevent larger creditors with 

sophisticated information technology 

systems from taking unintended 

advantage of this exemption and to 

further the benefits from coordinated 

compliance across this final rule and the 

2013 ATR Final Rule, the Bureau 

decided to adopt the $2 billion assetsize limit in both final rules. 

The Bureau notes that by expanding 

the exemption for certain transactions 

and deferring implementation of the 

escrow disclosure requirements the 

Bureau has largely addressed the areas 

where small entity commenters 

expressed concern about the costs of 

compliance. The Bureau believes that 

these changes minimize the economic 

impact on small entities while still 

meeting the stated objectives of TILA 

and the Dodd-Frank Act. 

The small creditor exemption is 

partially designed to mitigate the rule’s 

costs to small creditors. Providing 

escrows cost-effectively requires a scale 

that small creditors do not have, and the 

500 first-lien origination limit allows 

the creditors to reach that scale before 

they are required to provide escrows. 

This scale might be much lower in more 

urban areas, but the Bureau believes that 


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because many creditors in rural areas 

face adverse conditions, such as 

idiosyncratic accounting systems 

(including calculations by hand) 

employed by some of the jurisdictions, 

such institutions would especially need 

this number of originations, and 

consequently a large number of 

mortgage obligations to be able to 

provide escrow accounts costeffectively. 

6. Impact on Small Business Credit 

The Bureau does not believe that the 

final rule will result in an increase in 

the cost of business credit for small 

entities. Instead, the final rule will 

apply only to mortgage transactions 

obtained by consumers primarily for 

personal, family, or household purposes 

and the final rule will not apply to 

transactions obtained primarily for 

business purposes. Given that the final 

rule does not increase the cost of credit 

for small entities, the Bureau has not 

taken additional steps to minimize the 

cost of credit for small entities. 

IX. Paperwork Reduction Act 

The Bureau may not conduct or 

sponsor, and a respondent is not 

required to respond to, an information 

collection unless it displays a currently 

valid OMB control number. The Board’s 

2011 Escrows Proposal contained 

information collection requirements 

under the Paperwork Reduction Act 

(PRA), which have been previously 

approved by OMB under the following 

OMB control number issued to the 

Board: 7100–0199. There are no new 

information collection requirements in 

the Bureau’s final rule. 

On March 2, 2011, a notice of the 

proposed rulemaking was published in 

the Federal Register. As discussed 

above, the Board proposed certain new 

disclosures for escrow accounts 

including format, timing, and content 

requirements as well as proposed 

certain model forms regarding escrow 

accounts for closed-end mortgages 

secured by a first lien on real property 

or a dwelling. The Board invited 

comment on: (1) Whether the proposed 

collection of information is necessary 

for the proper performance of agency 

functions, including whether the 

information has practical utility; (2) the 

accuracy of the estimate of the burden 

of the proposed information collection, 

including the cost of compliance; (3) 

ways to enhance the quality, utility, and 

clarity of the information to be 

collected; and (4) ways to minimize the 

burden of information collection on 

respondents, including through the use 

of automated collection techniques or 

other forms of information technology. 

The comment period for the proposed 

rule expired on May 2, 2011. 

The Bureau reviewed the comments 

received regarding the merits of various 

aspects of the Board’s 2011 Escrows 

Proposal, including the burden of 

compliance generally, and whether the 

proposed disclosure requirements 

should be finalized. Commenters in 

particular contended that the new 

disclosure requirements would be 

redundant of existing information 

collections and would likely be of 

limited utility given the Bureau’s 

mandate to integrate the TILA–RESPA 

disclosures. Given the potential 

compliance burden of integrating new 

disclosures in piecemeal fashion, on 

November 23, 2012, the Bureau 

published in the Federal Register a rule 

that delays the implementation of 

certain disclosure requirements 

contained in title XIV of the Dodd-Frank 

Act, including those contained in 

sections 1461 and 1462. See 77 FR 

70105 (Nov. 23, 2012). Accordingly, 

because this final rule does not 

implement the disclosure amendments, 

the Bureau has determined that this 

final rule does not impose any new 

recordkeeping, reporting or disclosure 

requirements on covered entities or 

members of the public that would be 

collections of information requiring 

OMB approval under 44 U.S.C. 3501, et 

seq. 

List of Subjects in 12 CFR Part 1026 

Advertising, Consumer protection, 

Mortgages, Recordkeeping requirements, 

Reporting, Truth in lending. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Bureau amends 

Regulation Z, 12 CFR part 1026, 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, 5581; 15 U.S.C. 

1601 et seq. 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

■ 2. Section 1026.35 is revised to read 

as follows: 

§ 1026.35 Requirements for higher-priced 

mortgage loans. 

(a) Definitions. For purposes of this 

section: 

(1) ‘‘Higher-priced mortgage loan’’ 

means a closed-end consumer credit 

transaction secured by the consumer’s 

principal dwelling with an annual 

percentage rate that exceeds the average 

prime offer rate for a comparable 

transaction as of the date the interest 

rate is set: 

(i) By 1.5 or more percentage points 

for loans secured by a first lien with a 

principal obligation at consummation 

that does not exceed the limit in effect 

as of the date the transaction’s interest 

rate is set for the maximum principal 

obligation eligible for purchase by 

Freddie Mac; 

(ii) By 2.5 or more percentage points 

for loans secured by a first lien with a 

principal obligation at consummation 

that exceeds the limit in effect as of the 

date the transaction’s interest rate is set 

for the maximum principal obligation 

eligible for purchase by Freddie Mac; or 

(iii) By 3.5 or more percentage points 

for loans secured by a subordinate lien. 

(2) ‘‘Average prime offer rate’’ means 

an annual percentage rate that is derived 

from average interest rates, points, and 

other loan pricing terms currently 

offered to consumers by a representative 

sample of creditors for mortgage 

transactions that have low-risk pricing 

characteristics. The Bureau publishes 

average prime offer rates for a broad 

range of types of transactions in a table 

updated at least weekly as well as the 

methodology the Bureau uses to derive 

these rates. 

(b) Escrow accounts—(1) Requirement 

to escrow for property taxes and 

insurance. Except as provided in 

paragraph (b)(2) of this section, a 

creditor may not extend a higher-priced 

mortgage loan secured by a first lien on 

a consumer’s principal dwelling unless 

an escrow account is established before 

consummation for payment of property 

taxes and premiums for mortgagerelated insurance required by the 

creditor, such as insurance against loss 

of or damage to property, or against 

liability arising out of the ownership or 

use of the property, or insurance 

protecting the creditor against the 

consumer’s default or other credit loss. 

For purposes of this paragraph (b), the 

term ‘‘escrow account’’ has the same 

meaning as under Regulation X (24 CFR 

3500.17(b)), as amended. 

(2) Exemptions. Notwithstanding 

paragraph (b)(1) of this section: 

(i) An escrow account need not be 

established for: 

(A) A transaction secured by shares in 

a cooperative; 

(B) A transaction to finance the initial 

construction of a dwelling; 

(C) A temporary or ‘‘bridge’’ loan with 

a loan term of twelve months or less, 

such as a loan to purchase a new 

dwelling where the consumer plans to 


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sell a current dwelling within twelve 

months; or 

(D) A reverse mortgage transaction 

subject to § 1026.33(c). 

(ii) Insurance premiums described in 

paragraph (b)(1) of this section need not 

be included in escrow accounts for 

loans secured by dwellings in 

condominiums, planned unit 

developments, or other common interest 

communities in which dwelling 

ownership requires participation in a 

governing association, where the 

governing association has an obligation 

to the dwelling owners to maintain a 

master policy insuring all dwellings. 

(iii) Except as provided in paragraph 

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

account need not be established for a 

transaction if, at the time of 

consummation: 

(A) During the preceding calendar 

year, the creditor extended more than 50 

percent of its total covered transactions, 

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

a first lien, on properties that are located 

in counties designated either ‘‘rural’’ or 

‘‘underserved’’ by the Bureau, as set 

forth in paragraph (b)(2)(iv) of this 

section; 

(B) During the preceding calendar 

year, the creditor and its affiliates 

together originated 500 or fewer covered 

transactions, as defined by 

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

and 

(C) As of the end of the preceding 

calendar year, the creditor had total 

assets of less than $2,000,000,000; this 

asset threshold shall adjust 

automatically each year, 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, for each 12-month 

period ending in November, with 

rounding to the nearest million dollars 

(see comment 35(b)(2)(iii)–1.iii for the 

current threshold); and 

(D) Neither the creditor nor its 

affiliate maintains an escrow account of 

the type described in paragraph (b)(1) of 

this section for any extension of 

consumer credit secured by real 

property or a dwelling that the creditor 

or its affiliate currently services, other 

than: 

(1) Escrow accounts established for 

first-lien higher-priced mortgage loans 

on or after April 1, 2010, and before 

June 1, 2013; or 

(2) Escrow accounts established after 

consummation as an accommodation to 

distressed consumers to assist such 

consumers in avoiding default or 

foreclosure. 

(iv) For purposes of paragraph 

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

(A) A county is ‘‘rural’’ during a 

calendar year if it is neither in a 

metropolitan statistical area nor in a 

micropolitan statistical area that is 

adjacent to a metropolitan statistical 

area, as those terms are defined by the 

U.S. Office of Management and Budget 

and applied under currently applicable 

Urban Influence Codes (UICs), 

established by the United States 

Department of Agriculture’s Economic 

Research Service (USDA–ERS). A 

creditor may rely as a safe harbor on the 

list of counties published by the Bureau 

to determine whether a county qualifies 

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

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

a calendar year if, according to Home 

Mortgage Disclosure Act (HMDA) data 

for that year, no more than two creditors 

extend covered transactions, as defined 

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

five or more times in the county. A 

creditor may rely as a safe harbor on the 

list of counties published by the Bureau 

to determine whether a county qualifies 

as ‘‘underserved’’ for a particular 

calendar year. 

(v) Notwithstanding paragraph 

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

account must be established pursuant to 

paragraph (b)(1) of this section for any 

first-lien higher-priced mortgage loan 

that, at consummation, is subject to a 

commitment to be acquired by a person 

that does not satisfy the conditions in 

paragraph (b)(2)(iii) of this section, 

unless otherwise exempted by this 

paragraph (b)(2). 

(3) Cancellation—(i) General. Except 

as provided in paragraph (b)(3)(ii) of 

this section, a creditor or servicer may 

cancel an escrow account required in 

paragraph (b)(1) of this section only 

upon the earlier of: 

(A) Termination of the underlying 

debt obligation; or 

(B) Receipt no earlier than five years 

after consummation of a consumer’s 

request to cancel the escrow account. 

(ii) Delayed cancellation. 

Notwithstanding paragraph (b)(3)(i) of 

this section, a creditor or servicer shall 

not cancel an escrow account pursuant 

to a consumer’s request described in 

paragraph (b)(3)(i)(B) of this section 

unless the following conditions are 

satisfied: 

(A) The unpaid principal balance is 

less than 80 percent of the original value 

of the property securing the underlying 

debt obligation; and 

(B) The consumer currently is not 

delinquent or in default on the 

underlying debt obligation. 

(c) [Reserved] 

(d) Evasion; open-end credit. In 

connection with credit secured by a 

consumer’s principal dwelling that does 

not meet the definition of open-end 

credit in § 1026.2(a)(20), a creditor shall 

not structure a home-secured loan as an 

open-end plan to evade the 

requirements of this section. 

3. In Supplement I to Part 1026— 

Official Interpretations: 

A. The heading for Section 1026.35— 

Prohibited Acts or Practices in 

Connection with Higher-Priced 

Mortgage Loans is revised. 

B. Under newly designated Section 

1026.35—Requirements for HigherPriced Mortgage Loans: 

i. Under 35(a) Higher-Priced Mortgage 

Loans: 

a. Paragraph 35(a)(1) and paragraphs 

1, 2, and 3 are added. 

b. Under Paragraph 35(a)(2), 

paragraphs 2 and 3 are revised, and 

paragraph 4 is removed. 

ii. The heading for 35(b) Rules for 

higher-priced mortgage loans is revised. 

iii. Under newly designated 35(b) 

Escrow accounts: 

a. Paragraph 1 is revised. 

b. 35(b)(1) Requirement to escrow for 

property taxes and insurance and 

paragraphs 1, 2, and 3 are added. 

c. 35(b)(2) Exemptions is added. 

d. Paragraph 35(b)(2)(i) and paragraph 

1 are added. 

e. Paragraph 35(b)(2)(ii) and 

paragraphs 1, 2, and 3 are added. 

f. Paragraph 35(b)(2)(ii)(C) and 

paragraphs 1 and 2 are removed. 

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

paragraph 1 are added. 

h. Paragraph 35(b)(2)(iii)(D)(1) and 

paragraph 1 are added. 

i. Paragraph 35(b)(2)(iii)(D)(2) and 

paragraph 1 are added. 

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

paragraph 1 are added. 

k. Paragraph 35(b)(2)(v) and 

paragraph 1 are added. 

iv. The heading for 35(b)(3) Escrows is 

revised. 

v. Under newly designated 35(b)(3) 

Cancellation: 

a. Paragraphs 1, 2, and 3 are added. 

b. 35(b)(3)(i) Failure to escrow for 

property taxes and insurance and 

paragraphs 1, 2, and 3 are removed. 

c. Paragraph 35(b)(3)(ii)(B) and 

paragraph 1 are removed. 

d. 35(b)(3)(v) ‘‘Jumbo’’ loans and 

paragraphs 1 and 2 are removed. 

The revisions and additions read as 

follows: 

Supplement I to Part 1026—Official 

Interpretations 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

* * * * * 


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Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 4755 

§ 1026.35—Requirements for HigherPriced Mortgage Loans 

35(a) Definitions. 

Paragraph 35(a)(1). 

1. Comparable transaction. A higherpriced mortgage loan is a consumer 

credit transaction secured by the 

consumer’s principal dwelling with an 

annual percentage rate that exceeds the 

average prime offer rate for a 

comparable transaction as of the date 

the interest rate is set by the specified 

margin. The table of average prime offer 

rates published by the Bureau indicates 

how to identify the comparable 

transaction. 

2. Rate set. A transaction’s annual 

percentage rate is compared to the 

average prime offer rate as of the date 

the transaction’s interest rate is set (or 

‘‘locked’’) before consummation. 

Sometimes a creditor sets the interest 

rate initially and then re-sets it at a 

different level before consummation. 

The creditor should use the last date the 

interest rate is set before consummation. 

3. Threshold for ‘‘jumbo’’ loans. 

Section 1026.35(a)(1)(ii) provides a 

separate threshold for determining 

whether a transaction is a higher-priced 

mortgage loan subject to § 1026.35 when 

the principal balance exceeds the limit 

in effect as of the date the transaction’s 

rate is set for the maximum principal 

obligation eligible for purchase by 

Freddie Mac (a ‘‘jumbo’’ loan). The 

Federal Housing Finance Agency 

(FHFA) establishes and adjusts the 

maximum principal obligation pursuant 

to rules under 12 U.S.C. 1454(a)(2) and 

other provisions of federal law. 

Adjustments to the maximum principal 

obligation made by FHFA apply in 

determining whether a mortgage loan is 

a ‘‘jumbo’’ loan to which the separate 

coverage threshold in § 1026.35(a)(1)(ii) 

applies. 

Paragraph 35(a)(2). 

* * * * * 

2. Bureau table. The Bureau publishes 

on the Internet, in table form, average 

prime offer rates for a wide variety of 

transaction types. The Bureau calculates 

an annual percentage rate, consistent 

with Regulation Z (see § 1026.22 and 

appendix J), for each transaction type 

for which pricing terms are available 

from a survey. The Bureau estimates 

annual percentage rates for other types 

of transactions for which direct survey 

data are not available based on the loan 

pricing terms available in the survey 

and other information. The Bureau 

publishes on the Internet the 

methodology it uses to arrive at these 

estimates. 

3. Additional guidance on 

determination of average prime offer 

rates. The average prime offer rate has 

the same meaning in § 1026.35 as in 

Regulation C, 12 CFR part 1003. See 12 

CFR 1003.4(a)(12)(ii). Guidance on the 

average prime offer rate under 

§ 1026.35(a)(2), such as when a 

transaction’s rate is set and 

determination of the comparable 

transaction, is provided in the official 

commentary under Regulation C, the 

publication entitled ‘‘A Guide to HMDA 

Reporting: Getting it Right!’’, and the 

relevant ‘‘Frequently Asked Questions’’ 

on Home Mortgage Disclosure Act 

(HMDA) compliance posted on the 

FFIEC’s Web site at http:// 

www.ffiec.gov/hmda. 

35(b) Escrow Accounts. 

1. Principal dwelling. Section 

1026.35(b)(1) applies to principal 

dwellings, including structures that are 

classified as personal property under 

State law. For example, an escrow 

account must be established on a 

higher-priced mortgage loan secured by 

a first lien on a manufactured home, 

boat, or trailer used as the consumer’s 

principal dwelling. See the commentary 

under §§ 1026.2(a)(19) and(24), 1026.15, 

and 1026.23. Section 1026.35(b)(1) also 

applies to a higher-priced mortgage loan 

secured by a first lien on a 

condominium if it is in fact used as the 

consumer’s principal dwelling. But see 

§ 1026.35(b)(2) for exemptions from the 

escrow requirement that may apply to 

such transactions. 

35(b)(1) Requirement to escrow for 

property taxes and insurance. 

1. Administration of escrow accounts. 

Section 1026.35(b)(1) requires creditors 

to establish an escrow account for 

payment of property taxes and 

premiums for mortgage-related 

insurance required by the creditor 

before the consummation of a higherpriced mortgage loan secured by a first 

lien on a principal dwelling. Section 6 

of RESPA, 12 U.S.C. 2605, and 

Regulation X, 12 CFR 1024.17, address 

how escrow accounts must be 

administered. 

2. Optional insurance items. Section 

1026.35(b)(1) does not require that an 

escrow account be established for 

premiums for mortgage-related 

insurance that the creditor does not 

require in connection with the credit 

transaction, such as earthquake 

insurance or credit life insurance, even 

if the consumer voluntarily obtains such 

insurance. 

3. Transactions not subject to 

§ 1026.35(b)(1). Section 1026.35(b)(1) 

requires a creditor to establish an 

escrow account before consummation of 

a first-lien higher-priced mortgage loan. 

This requirement does not affect a 

creditor’s ability, right, or obligation, 

pursuant to the terms of the legal 

obligation or applicable law, to offer or 

require an escrow account for a 

transaction that is not subject to 

§ 1026.35(b)(1). 

35(b)(2) Exemptions. 

Paragraph 35(b)(2)(i). 

1. Construction-permanent loans. 

Under § 1026.35(b)(2)(ii)(B), § 1026.35 

does not apply to a transaction to 

finance the initial construction of a 

dwelling. Section 1026.35 may apply, 

however, to permanent financing that 

replaces a construction loan, whether 

the permanent financing is extended by 

the same or a different creditor. When 

a construction loan may be permanently 

financed by the same creditor, 

§ 1026.17(c)(6)(ii) permits the creditor to 

give either one combined disclosure for 

both the construction financing and the 

permanent financing, or a separate set of 

disclosures for each of the two phases 

as though they were two separate 

transactions. See also comment 

17(c)(6)–2. Section 1026.17(c)(6)(ii) 

addresses only how a creditor may elect 

to disclose a construction-permanent 

transaction. Which disclosure option a 

creditor elects under § 1026.17(c)(6)(ii) 

does not affect the determination of 

whether the permanent phase of the 

transaction is subject to § 1026.35. 

When the creditor discloses the two 

phases as separate transactions, the 

annual percentage rate for the 

permanent phase must be compared to 

the average prime offer rate for a 

transaction that is comparable to the 

permanent financing to determine 

whether the transaction is a higherpriced mortgage loan under 

§ 1026.35(a). When the creditor 

discloses the two phases as a single 

transaction, a single annual percentage 

rate, reflecting the appropriate charges 

from both phases, must be calculated for 

the transaction in accordance with 

§ 1026.22(a)(1) and appendix D to part 

1026. This annual percentage rate must 

be compared to the average prime offer 

rate for a transaction that is comparable 

to the permanent financing to determine 

the transaction is a higher-priced 

mortgage loan under § 1026.35(a). If the 

transaction is determined to be a higherpriced mortgage loan, only the 

permanent phase is subject to the 

requirement of § 1026.35(b)(1) to 

establish and maintain an escrow 

account, and the period for which the 

escrow account must remain in place 

under § 1026.35(b)(3) is measured from 

the time the conversion to the 

permanent phase financing occurs. 

Paragraph 35(b)(2)(ii). 

1. Limited exemption. A creditor is 

required to escrow for payment of 

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4756 Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 

priced mortgage loans secured by 

condominium, planned unit 

development, or similar dwellings or 

units regardless of whether the creditor 

escrows for insurance premiums for 

such dwellings or units. 

2. Planned unit developments. 

Planned unit developments (PUDs) are 

a form of property ownership often used 

in retirement communities, golf 

communities, and similar communities 

made up of homes located within a 

defined geographical area. PUDs usually 

have a homeowners’ association or some 

other governing association, analogous 

to a condominium association and with 

similar authority and obligations. Thus, 

as with condominiums, PUDs often 

have master insurance policies that 

cover all units in the PUD. Under 

§ 1026.35(b)(2)(ii), if a PUD’s governing 

association is obligated to maintain such 

a master insurance policy, an escrow 

account required by § 1026.35(b)(1) for a 

transaction secured by a unit in the PUD 

need not include escrows for insurance. 

This exemption applies not only to 

condominiums and PUDs but also to 

any other type of property ownership 

arrangement that has a governing 

association with an obligation to 

maintain a master insurance policy. 

3. More than one governing 

association associated with a dwelling. 

The limited exemption provided 

pursuant to § 1026.35(b)(2)(ii) applies to 

each master insurance policy for 

properties with multiple governing 

associations, to the extent each 

governing association has an obligation 

to maintain a master insurance policy. 

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

1. Requirements for exemption. Under 

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

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

establish an escrow account for taxes 

and insurance for a higher-priced 

mortgage loan, provided the following 

four conditions are satisfied when the 

higher-priced mortgage loan is 

consummated: 

i. During the preceding calendar year, 

more than 50 percent of the creditor’s 

total first-lien covered transactions, as 

defined in § 1026.43(b)(1), on properties 

located in counties that are either 

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

§ 1026.35(b)(2)(iv). Pursuant to that 

section, the Bureau determines annually 

which counties in the United States are 

rural or underserved and publishes a list 

of those counties to enable creditors to 

determine whether they meet this 

condition for the exemption. Thus, for 

example, if a creditor originated 90 firstlien covered transactions, as defined by 

§ 1026.43(b)(1), during 2013, the 

creditor meets this condition for an 

exemption in 2014 if at least 46 of those 

transactions are secured by first liens on 

properties that are located in counties 

that are on the Bureau’s lists of rural or 

underserved counties for 2013. 

ii. The creditor and its affiliates 

together originated 500 or fewer firstlien covered transactions, as defined in 

§ 1026.43(b)(1), during the preceding 

calendar year. 

iii. As of the end of the preceding 

calendar year, the creditor had total 

assets that are less than the asset 

threshold for the relevant calendar year. 

For calendar year 2013, the asset 

threshold is $2,000,000,000. Creditors 

that had total assets of less than 

$2,000,000,000 on December 31, 2012, 

satisfy this criterion for purposes of the 

exemption during 2013. This asset 

threshold shall adjust automatically 

each year 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, for each 12-month period 

ending in November, with rounding to 

the nearest million dollars. The Bureau 

will publish notice of the asset 

threshold each year by amending this 

comment. 

iv. The creditor and its affiliates do 

not maintain an escrow account for any 

mortgage transaction being serviced by 

the creditor or its affiliate at the time the 

transaction is consummated, except as 

provided in § 1026.35(b)(2)(iii)(D)(1) 

and (2). Thus, the exemption applies, 

provided the other conditions of 

§ 1026.35(b)(2)(iii) are satisfied, even if 

the creditor previously maintained 

escrow accounts for mortgage loans, 

provided it no longer maintains any 

such accounts except as provided in 

§ 1026.35(b)(2)(iii)(D)(1) and (2). Once a 

creditor or its affiliate begins escrowing 

for loans currently serviced other than 

those addressed in 

§ 1026.35(b)(2)(iii)(D)(1) and (2), 

however, the creditor and its affiliate 

become ineligible for the exemption in 

§ 1026.35(b)(2)(iii) on higher-priced 

mortgage loans they make while such 

escrowing continues. Thus, as long as a 

creditor (or its affiliate) services and 

maintains escrow accounts for any 

mortgage loans, other than as provided 

in § 1026.35(b)(2)(iii)(D)(1) and (2), the 

creditor will not be eligible for the 

exemption for any higher-priced 

mortgage loan it may make. For 

purposes of § 1026.35(b)(2)(iii), a 

creditor or its affiliate ‘‘maintains’’ an 

escrow account only if it services a 

mortgage loan for which an escrow 

account has been established at least 

through the due date of the second 

periodic payment under the terms of the 

legal obligation. 

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

1. Exception for certain accounts. 

Escrow accounts established for firstlien higher-priced mortgage loans on or 

after April 1, 2010, and before June 1, 

2013, are not counted for purposes of 

§ 1026.35(b)(2)(iii)(D). On and after June 

1, 2013, creditors, together with their 

affiliates, that establish new escrow 

accounts, other than those described in 

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

for the exemption provided under 

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

with their affiliates, that continue to 

maintain escrow accounts established 

between April 1, 2010, and June 1, 2013, 

still qualify for the exemption provided 

under § 1026.35(b)(2)(iii) so long as they 

do not establish new escrow accounts 

for transactions consummated on or 

after June 1, 2013, other than those 

described in § 1026.35(b)(2)(iii)(D)(2), 

and they otherwise qualify under 

§ 1026.35(b)(2)(iii). 

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

1. Exception for post-consummation 

escrow accounts for distressed 

consumers. An escrow account 

established after consummation for a 

distressed consumer does not count for 

purposes of § 1026.35(b)(2)(iii)(D). 

Distressed consumers are consumers 

who are working with the creditor or 

servicer to attempt to bring the loan into 

a current status through a modification, 

deferral, or other accommodation to the 

consumer. A creditor, together with its 

affiliates, that establishes escrow 

accounts after consummation as a 

regular business practice, regardless of 

whether consumers are in distress, does 

not qualify for the exception described 

in § 1026.35(b)(2)(iii)(D)(2). 

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

1. Requirements for ‘‘rural’’ or 

‘‘underserved’’ status. A county is 

considered to be ‘‘rural’’ or 

‘‘underserved’’ for purposes of 

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

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

The Bureau applies both tests to each 

county in the United States and, if a 

county satisfies either test, the Bureau 

will include the county on a published 

list of ‘‘rural’’ or ‘‘underserved’’ 

counties for a particular calendar year. 

To facilitate compliance with 

§ 1026.35(c), the Bureau also creates a 

list of only those counties that are 

‘‘rural’’ but not also ‘‘underserved.’’ The 

Bureau will post on its public Web site 

the applicable lists for each calendar 

year by the end of that year. A creditor 

may rely as a safe harbor, pursuant to 

section 130(f) of the Truth in Lending 

Act, on the lists of counties published 

by the Bureau to determine whether a 

county qualifies as ‘‘rural’’ or 

‘‘underserved’’ for a particular calendar 

year. A creditor’s originations of 


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Federal Register / Vol. 78, No. 14 / Tuesday, January 22, 2013 / Rules and Regulations 4757 

covered transactions, as defined by 

§ 1026.43(b)(1), in such counties during 

that year are considered in determining 

whether the creditor satisfies the 

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

therefore will be eligible for the 

exemption during the following 

calendar year. 

i. Under § 1026.35(b)(2)(iv)(A), a 

county is rural during a calendar year if 

it is neither in a metropolitan statistical 

area nor in a micropolitan statistical 

area that is adjacent to a metropolitan 

statistical area. These areas are defined 

by the Office of Management and 

Budget and applied under currently 

applicable Urban Influence Codes 

(UICs), established by the United States 

Department of Agriculture’s Economic 

Research Service (USDA–ERS). 

Specifically, the Bureau classifies a 

county as ‘‘rural’’ if the USDA–ERS 

categorizes the county under UIC 4, 6, 

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

UICs are available on the USDA–ERS 

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

data-products/urban-influence-codes/ 

documentation.aspx. 

ii. Under § 1026.35(b)(2)(iv)(B), a 

county is underserved during a calendar 

year if, according to Home Mortgage 

Disclosure Act (HMDA) data for that 

year, no more than two creditors extend 

first-lien covered transactions, as 

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

first lien five or more times in the 

county. These areas are defined by 

reference to the specific calendar year’s 

HMDA data. Specifically, a county is 

‘‘underserved’’ if, in the applicable 

calendar year’s public HMDA aggregate 

dataset, no more than two creditors have 

reported five or more first-lien covered 

transactions with HMDA geocoding that 

places the properties in that county. For 

purposes of this determination, because 

only covered transactions are counted, 

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

data are counted except those for which 

the owner-occupancy status is reported 

as ‘‘Not owner-occupied’’ (HMDA code 

2), the property type is reported as 

‘‘Multifamily’’ (HMDA code 3), the 

applicant’s or co-applicant’s race is 

reported as ‘‘Not applicable’’ (HMDA 

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

applicable’’ (HMDA code 4). The most 

recent HMDA data are available at 

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

Paragraph 35(b)(2)(v). 

1. 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 

loan is consummated. Such an 

agreement is sometimes known as a 

‘‘forward commitment.’’ Even if a 

creditor is otherwise eligible for the 

exemption in § 1026.35(b)(2)(iii), a firstlien higher-priced mortgage loan that 

will be acquired by a purchaser 

pursuant to a forward commitment is 

subject to the requirement to establish 

an escrow account under § 1026.35(b)(1) 

unless the purchaser is also eligible for 

the exemption in § 1026.35(b)(2)(iii) or 

the transaction is otherwise exempt 

under § 1026.35(b)(2). The escrow 

requirement applies to any such 

transaction, whether the forward 

commitment provides for the purchase 

and sale of the specific transaction or for 

the purchase and sale of mortgage 

obligations with certain prescribed 

criteria that the transaction meets. For 

example, assume a creditor that 

qualifies for the exemption in 

§ 1026.35(b)(2)(iii) makes a higherpriced mortgage loan that meets the 

purchase criteria of an investor with 

which the creditor has an agreement to 

sell such mortgage obligations after 

consummation. If the investor is 

ineligible for the exemption in 

§ 1026.35(b)(2)(iii), an escrow account 

must be established for the transaction 

before consummation in accordance 

with § 1026.35(b)(1) unless the 

transaction is otherwise exempt (such as 

a reverse mortgage or home equity line 

of credit). 

35(b)(3) Cancellation. 

1. Termination of underlying debt 

obligation. Section 1026.35(b)(3)(i) 

provides that, in general, an escrow 

account required by § 1026.35(b)(1) may 

not be cancelled until the underlying 

debt obligation is terminated or the 

consumer requests cancellation at least 

five years after consummation. Methods 

by which an underlying debt obligation 

may be terminated include, among other 

things, repayment, refinancing, 

rescission, and foreclosure. 

2. Minimum durations. Section 

1026.35(b)(3) establishes minimum 

durations for which escrow accounts 

established pursuant to § 1026.35(b)(1) 

must be maintained. This requirement 

does not affect a creditor’s right or 

obligation, pursuant to the terms of the 

legal obligation or applicable law, to 

offer or require an escrow account 

thereafter. 

3. Less than eighty percent unpaid 

principal balance. The term ‘‘original 

value’’ in § 1026.35(b)(3)(ii)(A) means 

the lesser of the sales price reflected in 

the sales contract for the property, if 

any, or the appraised value of the 

property at the time the transaction was 

consummated. In determining whether 

the unpaid principal balance has 

reached less than 80 percent of the 

original value of the property securing 

the underlying debt, the creditor or 

servicer shall count any subordinate 

lien of which it has reason to know. If 

the consumer certifies in writing that 

the equity in the property securing the 

underlying debt obligation is 

unencumbered by a subordinate lien, 

the creditor or servicer may rely upon 

the certification in making its 

determination unless it has actual 

knowledge to the contrary. 

* * * * * 

Dated: January 10, 2013. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2013–00734 Filed 1–16–13; 11:15 am] 

BILLING CODE 4810–AM–P 


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